10-K 1 o122413010k.htm FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2013 o122413010k.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549 
FORM 10-K
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended September 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)
(I.R.S. Employer
Identification No.)
300 South Hyde Park Avenue, Suite 210
Tampa, Florida 33606
(Address of principal executive offices) (Zip Code)
(813) 864-2554
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No   x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x
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 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
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 Act).    Yes  ¨    No  x
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 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  ¨
The aggregate market value of the voting common stock held by non-affiliates of the registrant, computed by reference to the closing price as of the last business day of the registrant’s most recently completed second fiscal quarter, March 29, 2013, was approximately $6.7 million.  The registrant has no non-voting common stock.  On July 9, 2013, as a result of the registrant’s plan of reorganization becoming effective, the registrant’s common stock ceased being quoted on the OTCQB Market.
 
The number of shares of the registrant’s common stock outstanding as of December 27, 2013 was 100,000,000 shares of common stock, all of one class.
 
DOCUMENTS INCORPORATED BY REFERENCE: NONE

 
 
 
 
Forward-Looking Statements
 
Statements in this Annual Report on Form 10-K 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 under the caption “Risk Factors” in “ITEM 1A. RISK FACTORS” in this Annual Report on Form 10-K for the fiscal year ended September 30, 2013 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.
 
 
 
 
 
 
 
 
 
 
PART I
 
ITEM  1.
BUSINESS
 
In this Annual Report on Form 10-K, unless the context indicates otherwise, references to “Biovest,” “the Company,” “our Company,” “we,” “us,” and similar references refer to Biovest International, Inc. and its wholly-owned subsidiaries, Biovest Europe, Ltd. and ViraCell Advanced Products, LLC.  All references to years in this Annual Report on Form 10-K, unless otherwise noted, refer to our fiscal years, which end on September 30. For example, a reference to “2013” or “fiscal 2013” means the 12-month period ended September 30, 2013.
 
Overview
 
Biovest is a biotechnology company focused on developing and commercializing BiovaxIDTM, as a personalized therapeutic cancer vaccine for the treatment of B-cell blood cancers; the continued development, commercialization, manufacture and sale of AutovaxID® and other instruments and disposables; and the commercial sale and production of cell culture products and services. We were incorporated in Minnesota in 1981, under the name Endotronics, Inc. In 1993, our name was changed to Cellex Biosciences, Inc. In 2001, we changed our corporate name to Biovest International, Inc. and changed our state of incorporation from Minnesota to Delaware.
 
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 Phase 2 clinical trial in patients with in MCL. 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, on June 13, 2012 we filed our formal notice of intent to file a marketing authorization application (“MAA”) with the European Medicines Agency (“EMA”) which began the EU marketing approval application process.  Subsequently, on December 3, 2013, we submitted an MAA with the EMA for BiovaxID.  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 also conducted a formal guidance meeting with the U.S. Food and Drug Administration (“FDA”) in order to discuss the path for our filing of a biologics licensing application (“BLA”) for BiovaxID’s U.S. regulatory/marketing approval. As a result of this guidance meeting, we plan to 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 our BLA for BiovaxID.  We are preparing to initiate this second Phase 3 clinical trial, subject to required funding.
 
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 a fully automated, reusable instrument that employs a fully disposable, closed-system cell-growth chamber incorporating a hollow fiber cell-growth cartridge called AutovaxID. 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. We are collaborating with the U.S. Department of Defense (“DoD”) and others to further develop AutovaxID and related hollow fiber systems and to explore potential production of additional vaccines, including vaccines for viral indications such as influenza and other contagious diseases.  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.
 
 
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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 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 have filed our periodic and other reports with the Securities and Exchange Commission (“SEC”) following Accentia’s investment. As a result of the 2013 Bankruptcy Case (discussed below), as of July 9, 2013 (the effective date of the Company’s First Amended Plan of Reorganization; the “Effective Date”), Accentia retains no equity ownership or debt interest in Biovest and all of our common stock previously issued and outstanding was cancelled.  In accordance with the Plan, new common stock of the Reorganized Company was issued as of the Effective Date to secured and unsecured creditors with allowed claims in the 2013 Bankruptcy Case.
 
The 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 on November 17, 2012, we filed a voluntary petition to reorganize under Chapter 11 of the Bankruptcy Code, Case No.8:13-bk-2892-KRM, with the Bankruptcy Court (“the 2013 Bankruptcy Case”).  During the pendency of the Chapter 11 proceedings, we operated our business as a debtor-in-possession in accordance with the provisions of Chapter 11.
 
On June 10, 2013, the Company filed its First Modification to the First Amended Plan of Reorganization (the “Plan”) with the support of its senior, secured lenders.   The Plan provided for, among other things, the cancellation of all outstanding common stock, options and warrants in the Company.  In addition, the Plan provided 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, would 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 would be converted and exchanged for new equity representing seven percent (7%) of the issued and outstanding common stock in the reorganized Company.
 
On June 27, 2013 an evidentiary hearing was held to determine the validity of an unsecured claim filed by Accentia, our former majority shareholder and parent corporation.  The Company had originally classified our intercompany obligation due to Accentia as a “debt subject to compromise” through our 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 United States Bankruptcy Court for the Middle District of Florida (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 2013 Bankruptcy Case. 
 
On June 28, 2013, the Bankruptcy Court entered an Order Confirming our 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 of the Effective Date, pursuant to the Confirmation Order, common shares, options, and warrants or other rights to purchase or acquire common shares which existed prior to Effective Date were cancelled without further liability, payment or compensation in respect thereof.  Our Certificate of Incorporation was amended and restated to authorize the issuance of up to 50,000,000 shares of preferred stock and up to 300,000,000 shares of new common stock (“Reorganized Biovest Common Stock”).  Pursuant to the Plan, we issued 100,000,000 shares of Reorganized Biovest Common Stock as follows:
 
 
·
to the holders of allowed secured claims – 93 million shares
 
·
to the holders of allowed unsecured claims – 7 million shares

Also on the Effective Date, we appointed Ronald Osman, Esq. as the Chairman of our Board of Directors and Eugene Grin as a member of our board of directors.  Effective as of the Effective Date, Samuel Duffey, Esq. resigned as our CEO and President and we appointed Carlos F. Santos, Ph.D. as CEO.  In July 2013 we formed a wholly-owned subsidiary, ViraCell Advanced Products, LLC., and Mr. Duffey was appointed as CEO and President of that subsidiary.  On December 1, 2013 we appointed Robert E. Farrell, J.D. as our CFO; since that date, Brian D. Bottjer, CPA, who had been our Acting CFO and Controller, has continued in his role as our Controller.  On September 15, 2013, Mark Hirschel, Ph.D. resigned as our Chief Scientific Officer.
 
 
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PRODUCTS
 
BIOVAXID- Personalized Therapeutic Cancer Vaccine
 
The Human Immune System
 
The immune system functions as the body’s natural defense mechanism for identifying and killing or eliminating disease-causing pathogens, such as bacteria, viruses, or other foreign microorganisms. However, with regard to cancer, including lymphomas, the immune system’s natural defense mechanism is believed to be largely thwarted by natural immune system mechanisms which seek to protect “self-cells” from attack. In humans, the primary disease fighting function of the immune system is carried out by white blood cells (leukocytes), which mediate two types of immune responses: innate immunity and adaptive immunity. Innate immunity refers to the broad first-line immune defense that recognizes and eliminates certain pathogens prior to the initiation of a more specific adaptive immune response. While the cells of the innate immune system provide a first line of defense, they cannot always eliminate or recognize infectious organisms. In some cases, new infections may not always be recognized or detected by the innate immune system. In these cases, the adaptive immune response has evolved to provide a highly-specific and versatile means of defense which also provides long-lasting protection (immune memory) against subsequent re-infection by the same pathogen. This adaptive immune response facilitates the use of preventative vaccines that protect against viral and bacterial infections such as measles, polio, diphtheria, and tetanus. We believe that BiovaxID creates an adaptive immune response to cancerous B-cells.
 
Adaptive immunity is mediated by a subset of white blood cells called lymphocytes, which are divided into two types: B-cells and    T-cells. In the bloodstream, B-cells and T-cells recognize antigens, which are molecules that are capable of triggering a response in the immune system. Antigens are molecules from bacterial, viral, or fungal origin, foreign (non-self) proteins, and in some cases, tumor-derived proteins that can stimulate an immune response. The human body makes millions of different types of B-cells that circulate in the blood and lymphatic systems and perform immune surveillance. Each B-cell has a unique receptor protein (immunoglobulin) on its surface that binds to one particular antigen. Once a B-cell recognizes its specific antigen and receives additional signals from a T-helper cell, it can proliferate and become activated in order to secrete antibodies (immunoglobulins; Ig) which can neutralize the antigen and target it for destruction. T-cells may also recognize antigens on foreign cells, whereby they can promote the activation of other white blood cells or initiate destruction of the targeted cells directly. A person’s B-cells and T-cells can collectively recognize a wide variety of antigens, but each individual B-cell or T-cell will recognize only one specific antigen. Consequently, in each person’s bloodstream, only a relatively few lymphocytes will recognize the same antigen.
 
Since B-cell cancers such as NHL are tumors arising from a single malignant transformed B-cell, the tumor cells in NHL maintain on their surface the original malignant B-cell’s immunoglobulin (collectively referred to as, the “tumor idiotype”) that is distinct from those found on normal B-cells. The tumor idiotype maintained on the surface of each B-cell lymphoma serves as the tumor-specific antigen for the BiovaxID cancer vaccine.
 
In many cases, including in NHL, cancer cells produce molecules known as tumor-associated antigens, which may or may not be present in normal cells but may be over-produced in cancer cells. T-cells and B-cells have receptors on their surfaces that enable them to recognize the tumor associated antigens. While cancer cells may naturally trigger a B- or T-cell-based immune response during the initial appearance of the disease, this response may be only weakly specific or attenuated in such a way that it does not fully eradicate all tumor cells. Subsequently, tumor cells gradually evolve and escape from this weak immune response and are able to grow into larger tumors. In addition, because cancer cells arise from normal tissue cells, they are often able to exploit or increase existing immune tolerance mechanisms to suppress the body’s immune response which would normally destroy them. In other cases, chemotherapy or other treatment regimens used to treat the cancer may themselves weaken the immune response and render it unable to reject and kill tumor cells. Even with an activated immune system; however, the number and size of tumors can often overwhelm the immune system.
 
In the case of cancer and other diseases, immunotherapies are designed to activate a person’s immune system in an attempt to combat the disease. There are two forms of immunotherapy used to treat diseases: passive and active. Passive immunotherapy is exemplified by the intravenous infusion into a patient of antibodies specific to the particular antigen. While passive immunotherapies have shown clinical benefits in some cancers, they require repeated infusions and can cause the destruction of normal cells in addition to cancer cells. An example of passive immunotherapy to treat lymphoma is monoclonal antibodies such as rituximab. An active immunotherapy, on the other hand, seeks to generate a durable adaptive immune response by introducing an antigen into a patient, often in combination with other components that can enhance an immune response to the antigen. BiovaxID is an example of active specific immunotherapy. Although active immunotherapies have been successful in preventing many infectious diseases, their ability to combat cancers of various types has been limited by a variety of factors, including the inability of tumor antigens to elicit an effective immune response, difficulty in identifying suitable target tumor antigens, inability to manufacture tumor antigens in sufficiently pure form, and inability to manufacture sufficient quantities of tumor antigens.
 
 
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Nevertheless, in 2010 one active immunotherapy, Provenge® (sipuleucel-T) developed by Dendreon Corporation, received marketing approval from the FDA for the treatment of asymptomatic or minimally symptomatic metastatic castrate resistant (hormone refractory) prostate cancer. This represents the first case of an active immunotherapy to successfully gain marketing approval in the U.S. In March 2011, a second active immunotherapy, Yervoy® (ipilimumab), developed by Bristol-Myers Squibb received marketing approval from the FDA, for the treatment of late-stage metastatic melanoma. In addition to BiovaxID, there are a number of other active immunotherapeutics for cancer in various stages of clinical trials that have demonstrated promising results.
 
A number of features of the NHLs make these tumors particularly suitable for treatment with a therapeutic cancer vaccine. The malignant B-cell lymphocytes of NHL express a unique, identifiable tumor-specific antigen which is not expressed by other (healthy) cells in the body. In contrast, the majority of human cancers typically lack strong ubiquitous expression of tumor-specific antigens to distinguish them from normal cells, or they express a potentially widely-varying mix of antigens which can be difficult to identify and formulate into a successful therapeutic vaccine.
 
Non-Hodgkin’s Lymphoma
 
Non-Hodgkin’s lymphoma (“NHL”) is a heterogeneous group of malignancies of the lymphatic system with differing clinical behaviors and responses to treatment. BiovaxID has been studied in two distinct forms of NHL, namely, FL and MCL. NHL was the seventh most common type of cancer in the U.S. in 2011 (Lymphoma and Leukemia Society- Facts 2012), with an estimated prevalence of 484,336 cases in 2011 in the U.S. (Surveillance, Epidemiology, and End Results- SEER Stat Fact Sheets: Non-Hodgkin’s Lymphoma). NHL accounts for 3% of all cancer deaths in the U.S. (American Cancer Society- Facts and Figures 2012). NHL is one of the few malignancies in which there continues to be a rise in incidence. Since the early 1970’s, incidence rates for NHL have nearly doubled. Moreover, in spite of recent advances in the standard of care, the overall five-year survival rate remains at approximately 63%. In 2012, it is estimated that 70,130 new cases of NHL will be diagnosed and 18,940 Americans will die from the disease (American Cancer Society- Facts and Figures 2012), with a comparable number estimated in Europe.
 
NHL is usually classified for clinical purposes as being either “indolent” or “aggressive,” depending on how quickly the cancer cells are likely to grow and spread. The indolent, or slow-growing, form of NHL has a very slow growth rate and may need little or no treatment for months or possibly years. The aggressive, or fast-growing, form of NHL tends to grow and spread quickly and cause severe symptoms, and patients with aggressive NHL have shorter overall survival (“OS”).
 
Follicular Lymphoma
 
Indolent (slow growing) and aggressive (fast growing) NHL each constitute approximately half of all newly diagnosed B-cell NHL, and roughly half of the indolent B-cell NHL is follicular lymphoma (“FL”). Accordingly, approximately 22% of new cases of NHL fall into the category of disease known as indolent FL, which translates in about 106,550 cases in 2011 in the U.S. (Surveillance, Epidemiology, and End Results- SEER Stat Fact Sheets: Non-Hodgkin’s Lymphoma). We have conducted a Phase 2 clinical trial followed by a Phase 3 clinical trial in FL under our IND. FL is a form of NHL that is derived from a type of cell known as a follicle center cell. Despite its slow progression, FL is almost invariably fatal. According to data from 2003-2009 from 18 SEER areas, the 5-year relative survival rate in FL patients is 85.4%. According to a recent publication based on data from patients treated at Stanford University during 1997-2003 (Tan et al., Blood 2013), after the introduction of rituximab OS in patients with grade 1-2 FL (i.e., indolent lymphoma) reached 72% at 10-years. This improvement in OS was attributed to better supportive care and effective therapies for relapsed disease.
 
The current standard of care for treatment of advanced, bulky FL (bulky Stage II, Stage III-IV) as specified by the National Comprehensive Cancer Network (“NCCN”) includes initial treatment of newly-diagnosed patients with rituximab-containing chemotherapy. Rituximab is a monoclonal antibody (an immune protein capable of selectively recognizing and binding to a molecule) which targets a protein primarily found on the surface of both healthy and cancerous B-cells, known as CD20. Accordingly, rituximab seeks to bind and destroy all B-cells, including healthy B-cells, as a means of controlling the progression of FL in treated patients.
 
Rituximab and other biologics currently approved for lymphoma are characterized as “passive immunotherapies”. Following administration, rituximab exerts its effects primarily through an unselective and near total destruction of a patient’s B-cells, including malignant as well as healthy B-cells. Rituximab and other passive immunotherapies are often administered in sequential, repeated doses to achieve their effect, and following cessation of administration are over time eliminated from the patient’s circulation by normal bodily functions. Rituximab is characterized as a targeted therapy since it targets CD20, which is present on both healthy and tumor cells. Rituximab is manufactured in bulk and is not considered to be a personalized therapy.

 
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By comparison, BiovaxID is characterized as an “active immunotherapy”. Active immunotherapies attempt to stimulate the patient’s immune system to respond to a disease. “Specific active immunotherapies” such as BiovaxID, specifically seek to induce cellular and/or humoral immune responses focused on specific antigens present on a diseased cell (such as a tumor cell). As a specific, active immunotherapy, BiovaxID targets only the cancerous B-cells while sparing healthy B-cells. Accordingly, BiovaxID is highly targeted. BiovaxID is manufactured specifically and entirely for each patient and is considered to be a highly “personalized therapy”. If approved, BiovaxID will represent the only specific active immunotherapeutic approved for the treatment of FL and therefore will represent a new class of drugs that provides a new therapeutic option for patients with lymphoma.
 
In February 2011, the NCCN issued treatment guidelines recognizing “consolidation therapy” as a defined treatment category for FL in first remission. Current consolidation therapy options differ from induction therapies in that they primarily seek to prolong first remission duration by consolidating the effects of induction therapy, which primarily seeks to reduce active, bulky tumor masses. The following anti-CD20 monoclonal antibody drug products are currently approved for the first-line consolidation or extended dosing in FL: Rituxan® and Zevalin® (See Figure 1). All of these treatment options are passive immunotherapies that result in profound B-cell depletion. Following the results of the Eastern Cooperative Oncology Group E4402 protocol, also called RESORT (Rituximab Extended Schedule or Re-treatment Trial), reported at the 2011 annual meeting of the American Society of Hematology (“ASH”), the NCCN revised its clinical practice guidelines on FL. The revised 2012 NCCN guidelines, which were unchanged in 2013, consider Rituxan maintenance therapy and Zevalin consolidation therapy as ‘optional’ therapeutic approaches post-induction therapy, rather than ‘recommended’ therapeutic approaches.

 
Figure 1
 
Figure 1.  BiovaxID targets tumor-specific idiotype, a protein unique to the tumor and not found on healthy (non-malignant) B-cells. In contrast, current monoclonal antibody-based therapies for NHL, including rituximab (Rituxan®), and ibritumomab tiuxetan (Zevalin®) target CD20, a cell-surface protein expressed by both tumor and healthy B-cells. As such, through its unique mode of action, BiovaxID represents a new therapeutic approach to treating FL.
 
Current U.S. Approved Consolidation Therapies for NHL and Urgent Need for Alternative Treatment Options
 
Rituxan® (rituximab): Rituximab maintenance consists of administration of the anti-CD20 antibody rituximab administered at a dose of 375 mg/m2 every 8 weeks for 24 months (12 injections) administered by IV infusion every 8 weeks starting 8 weeks ± 7 days after the last induction treatment (whether immuno-chemotherapy or rituximab, whichever is later). Administration of rituximab (and other anti-CD20 agent) maintenance extends the profound immunosuppression achieved by induction therapy, as it targets the pan-B-cell CD20 protein. This continued dosing of the induction agent induces profound B-cell depletion for the two-year duration of the regimen.
 
Zevalin® (ibritumomab tiuxetan): Zevalin is an immunoconjugate resulting from covalently-bonded anti-CD20 antibody ibritumomab and the linker-chelator tiuxetan [N-[2-bi(carboxymethyl)amino]-3-(p-isothiocyanatophenyl)-propyl]-[N-[2-bis(carboxymethylamino]-2-(methyl)-ethyl]glycine. This linker-chelator provides a high affinity, conformationally restricted chelation site for Indium-111 or Yttrium-90. Administration follows induction rituximab and requires preliminary dosimetry and imaging administration of In-111 (Day 1) followed by administration of Y-90 Zevalin on Day 7, 8, or 9. The maximum allowable dose of Y-90 Zevalin is 32.0 mCi (1184) MBq and physicians and patients receiving the agent must exercise radiation exposure precautions upon administering or handling the agent.

 
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Urgent Need for New Consolidation Treatment Option for NHL: The currently approved consolidation agents are no longer recommended therapeutic options post-induction therapy by the NCCN clinical practice guidelines. Following the results of the Eastern Cooperative Oncology Group E4402 protocol, also called RESORT (Rituximab Extended Schedule or Re-treatment Trial), reported at the 2011 annual meeting of ASH, the 2012 NCCN revised guidelines include rituximab maintenance and radioimmunotherapy as ‘optional’ therapeutic options post-induction. BiovaxID is expected to offer a non-immunosuppressive alternative to rituximab maintenance as a consolidation therapy for FL and MCL. By its mechanism of action, BiovaxID is not riddled with the risk of development of rituximab-resistance. Thus, BiovaxID represents a potential novel option for consolidation therapy that is safe and effective, compatible with current induction regimens,  and unlikely to interfere with future therapies while potentially increasing the utility of other therapies.
 
Mantle Cell Lymphoma
 
Mantle cell lymphoma (“MCL”) is a rare, aggressive subtype of NHL characterized by short remissions and rapid progression similar to aggressive lymphomas and successive relapses, reflecting incurability similar to indolent lymphomas. The median OS for MCL has been cited as 5-7 years (Perez-Galan et al. Mantle cell lymphoma: biology, pathogenesis, and the molecular basis of treatment in the genomic era. Blood, 2011, 117:26-38). MCL represents approximately 6% of all NHL cases and worldwide there are approximately 7,800 new cases each year of which, approximately, one half are in the U.S. (see “Current treatment approaches for mantle-cell lymphoma” J Clin Oncol. Sep 10 2005 and “New approach to classifying non-Hodgkin’s lymphomas: clinical features of the major histologic subtypes.” J Clin Oncol. Aug 1998).
 
The majority of MCL patients have disseminated disease and bone marrow involvement at diagnosis. Patients’ clinical outcomes from currently available therapies are poor. Although many therapeutic regimens are capable of rendering high initial response rates, these responses are of short duration (i.e., about 20 months) and the relative survival rates of MCL patients are among the lowest compared to other types of NHL. After a patient’s first relapse, the expected disease course and prognosis is very poor, with an expected median OS of about 1-2 years. No currently available therapeutic regimens are curative.
 
While there are several therapeutic regimens available to treat MCL patients, there currently exists no consensus standard of care for treatment of first-line relapsed MCL. As such, MCL remains incurable and it is generally considered that additional treatment options are required given this significant unmet medical need.
 
Currently, upon first diagnosis MCL patients are often evaluated for eligibility for autologous stem cell transplantation (“autoSCT”). Stem cell transplantation, an aggressive treatment protocol consisting of high-dose chemotherapy, immunotherapy and full-body radiation, aims to treat the patient’s tumor and purge the bone marrow of lymphoma cells. MCL patients who are eligible for autoSCT receive either R-CHOP (rituximab, cyclophophamide, doxorubicin, vincristine, prednisone) followed by autoSCT or R-HyperCVAD (rituximab, cyclophosphamide, vincristine, doxorubicin, and dexamethasone alternating with rituximab plus high dose methotrexate and cytarabine) followed by observation. Although these therapeutic approaches do yield high response rates, they are associated with high rates of adverse events and treatment discontinuation, high risk of myelodysplastic syndrome, and high mortality rates. Consequently, the considerable toxicity associated with these regimens largely limits these options primarily to a select subset of the MCL patients who are younger and better fit to tolerate these high-intensity treatments. However, even this subset ultimately gains only modest benefits from existing treatment options. Moreover, the use of these more aggressive regimens appears not to result in superior OS as compared to standard therapies. Given that the median age for newly diagnosed MCL patients is 60 years, less aggressive therapeutic approaches are needed.

 
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Development Status of BiovaxID
 
Preliminary studies demonstrated that treatment of patients with NHL with an active immunotherapy could allow a patient’s immune system generate clinically significant immune responses. These studies have been published in The New England Journal of Medicine (October 1992), Blood (May 1997), and Nature Medicine (October 1999). In the treatment of cancer, residual tumor cells remaining in the patient after completion of surgery or anti-tumor therapy are often the cause of tumor relapse. These residual tumor cells cannot always be detected by standard imaging techniques but their destruction may be feasible by active immunotherapy. The use of such vaccines differs from traditional cancer treatment in that the ultimate mechanism of action against the tumor is indirect: the anti-tumor immunity induced by vaccination, rather than the vaccine itself, is ultimately responsible for treatment benefit.
 
In 1994, the NCI filed for initiation of an IND for the purpose of conducting clinical trial(s) investigating the use of BiovaxID in NHL. Under this IND and also in 1994, the NCI began the Phase 2 clinical trial in FL; in 1999, the Phase 3 clinical trial in FL; and in 2000 a Phase 2 clinical trial in MCL. The NCI selected us to produce BiovaxID for the initial Phase 2 clinical trial in FL. In 2001, we entered into a formal cooperative research and development agreement (“CRADA”) with the NCI which formalized our collaboration with the NCI. In April 2004, the IND filed by the NCI was formally transferred to us, which made our Company the exclusive sponsor of the IND with full rights to complete the NCI-initiated Phase 3 clinical trial in FL and the NCI-initiated Phase 2 clinical trial in MCL, to communicate and negotiate with the FDA relating to marketing approval for BiovaxID and to conduct other clinical studies in NHL under the IND.
 
BiovaxID Clinical Trials
 
Phase 2 Clinical Trial of BiovaxID for Treatment of FL
 
In 1994, the Phase 2 clinical trial (NCT00878488) was commenced by the NCI to evaluate the ability of BiovaxID to eradicate residual lymphoma cells in 20 patients with FL who were in chemotherapy-induced first clinical complete remission (“CR”). All 11 patients with a detectable lymphoma gene sequence (translocation) in their primary tumors had cells from the malignant clone detectable in their blood by DNA polymerase chain reaction (“PCR”) analysis both at diagnosis and after chemotherapy, despite being in CR. In this clinical trial, molecular remission was defined as patients lacking any detectable residual cancer cells bearing the translocation as determined by a very sensitive PCR technique. After vaccination, 8 of these 11 patients converted to lacking cells in their blood from the malignant lymphoma clone detectable by PCR. Anti-tumor T-cell responses were found in the vast majority of the patients (19 of 20 patients), whereas anti-tumor antibodies were detected, but apparently were not required for molecular remission. Vaccination was thus associated with clearance of residual tumor cells from the blood and long-term disease-free survival. The demonstration of molecular remissions besides uniform, specific T-cell responses against lymphoma tumor targets, as well as the addition of granulocyte-monocyte colony-stimulating factor (“GM-CSF”) to the vaccine formulation provided the rationale for the initiation of a larger Phase 3 clinical trial at the NCI in 2000. These results were published in Nature Medicine (October 1999). After a median of 9.17 years, 45% of these patients were still in continuous first CR, the median disease free survival (“DFS”) for the cohort is 96.5 months, and OS is 95% (Santos et al., ASH 2005). At the latest data follow-up after a median of 167.9 months (range: 10.0- 214.3 months) median DFS was 62.5 months (Figure 1A below) and median OS was not reached and 80% of the patients were still alive.
 
 
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Figure 1A: Disease free survival
 

 
Phase 2 Clinical Trial of BiovaxID for Treatment of MCL
 
In 2000, the NCI initiated a Phase 2 open-label clinical trial (NCT00020215) of BiovaxID for the treatment of MCL. This Phase 2 clinical trial was based upon the NCI’s Phase 2 clinical trial in FL. The primary objective of this Phase 2 clinical trial was to study BiovaxID in treatment-naïve patients with MCL and to determine the safety and efficacy of BiovaxID following a rituximab-based immunotherapy. Twenty-six patients with untreated, mostly (92%) stage IV MCL, were enrolled. All patients received 6 cycles of EPOCH-R (which is a chemo-immunotherapy consisting of etoposide, prednisone, vincristine, cyclophosphamide, doxorubicin, rituximab); 92% of the patients achieved CR and 8% achieved partial response (“PR”). All but 3 patients (i.e., due to disease progression or inability to manufacture the vaccine) received BiovaxID together with keyhole limpet hemocyanin (“KLH”), an immunogenic carrier protein, on day 1, along with GM-CSF (100 µg/m2/day) on days 1-4 at 1, 2, 3, 4, and 6 months starting at least 3 months post-chemotherapy.

 
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The results of our MCL Phase 2 clinical trial were reported in Nature Medicine (August 2005). As reported in Nature Medicine, after a median follow-up of 46 months, the OS was 89%, the median event-free survival (“EFS”) was 22 months, and 5 patients remained in continuous first CR. Antibody responses to immunization were detected in 30% of the patients, following a delayed pattern (i.e., detected mostly after the 4-5th vaccination) which paralleled the peripheral blood B-cell recovery. Most importantly, specific CD4+ and CD8+ T-cell responses were detected in 87% of patients post-vaccine, and in 7 of 9 patients tested these responses were detected after the 3rd vaccination when peripheral B-cells were by and large undetectable. The detected cytokine release response included GM-CSF, INF-g, and TNF-a (type I). In this study, BiovaxID induced both humoral and cellular immune responses following almost complete depletion of B-cells following rituximab-containing chemotherapy. The adverse events observed in this clinical trial were minimal and were limited mostly to injection site reactions. The results of the latest follow-up of these patients performed in 2011 were presented at the 2011 annual meeting of ASH (Grant et al., ASH 2011 Abstract #2707).
 
At a median follow-up of 99 months (range, 15.2 - 131.0 months), median PFS was 24.1 months, median OS was 99.04 months, and median TTNT was 37.8 months.  This median PFS of 24.1 months is longer than the median PFS for combination chemotherapy (16 - 17 months) (Dreyling et al, 2005; Mangel et al, 2004) or CHOP-R chemotherapy (21 months) (Lenz et al, 2005). Similarly, the median OS of 99.04 months greatly exceeds the 5- 6 years obtained with current therapies (Dreyling & Hiddemann, 2009), and raises the possibility that BiovaxID vaccination modified the natural history of MCL.
 
The association between OS and TTNT and tumor-specific GM-CSF cytokine induction observed at this long-term follow-up and presented at the 2011 annual meeting of the ASH and at the 2012 annual meeting of the American Society of Clinical Oncology (“ASCO”) suggests that the mechanism of action of BiovaxID is T-cell mediated and not B-cell (humoral) mediated. Patients with pre-vaccine-adjusted increases in tumor-specific normalized GM-CSF cytokine induction > 4 had a significantly longer median OS (not reached vs. 78.72 months, P= 0.006; Figure 2) and longer median TTNT (68.89 vs. 27.83 months, P = 0.026; Figure 3) compared to patients with pre-vaccine-adjusted increases in tumor-specific normalized GM-CSF cytokine induction < 4. There was no association between OS and specific anti-Id B-cell (humoral) responses or any other type of specific cellular responses. Additionally, the high impact of GM-CSF cytokine response mediated by antitumor T-cells on OS and TTNT suggest that anti-tumor immune responses significantly delayed tumor growth. 
 
 

 
 
Figure 2. Overall Survival by GM-CSF Cytokine Response (< and > than median)

 
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Figure 3. Time to next treatment by GM-CSF Cytokine Response (< and > than median)

 
Phase 3 Clinical Trial of BiovaxID for Treatment of FL
 
Overview and Objectives. In January 2000, the Phase 3 clinical trial in FL (NCT00091676) was initiated by the NCI. The Phase 3 clinical trial was a multi-center, double-blind, randomized, controlled clinical trial that was designed to confirm the results reported in the NCI’s Phase 2 clinical trial.
 
As studied in the Phase 3 clinical trial, BiovaxID consisted of the patient-specific idiotype protein (Id) derived from the patient’s cancer cells conjugated or combined with KLH and administered with GM-CSF which is a biological response enhancer. The comparator studied in the Phase 3 clinical trial was a control vaccine consisting of KLH and administered with GM-CSF. Accordingly, the only difference between BiovaxID and the control vaccine was the inclusion of the idiotype protein from the patient’s own tumor in BiovaxID. BiovaxID or the control vaccine was administered following chemotherapy (also referred to as induction therapy) with a drug combination, of prednisone, doxorubicin, cyclophosphamide, etoposide (referred to as “PACE”). Induction therapy represents the “first-line” treatment for FL patients and attempts to induce complete tumor remission as defined by radiological evidence (“CT scans”). In FL, patients treated with the current standard of care often achieve complete remission but these remissions almost always are of limited duration and most treated patients must eventually be re-treated for their disease. In the majority of cases, however, even with re-treatment, the disease often relapses and develops resistance to therapy, leading to a need for bone marrow transplant and eventually resulting in the death of the patient. In the Phase 3 clinical trial, patients who achieved complete response following induction therapy were assigned to a limited waiting period prior to vaccination to allow for immune reconstitution following the induction chemotherapy. Patients who relapsed during this immune reconstitution period did not receive either BiovaxID or control treatment. Patients who maintained their complete remission following this immune recovery period received either BiovaxID or control administered as 5 subcutaneous injections monthly over a six month period (one month was skipped).
 
 
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The primary objective of the Phase 3 clinical trial was to definitively confirm the safety and efficacy of FNHLId1 (autologous immunoglobulin follicular lymphoma idiotype vaccine [Dasiprotimut-T Biovest]) assessed by significant prolongation of clinical DFS following Dasiprotimut-T Biovest immunization with GM-CSF in FL patients achieving a CR with standard dose chemotherapy, when compared to DFS following administration of KLH-KLH and GM-CSF.
 
The secondary objectives of the Phase 3 clinical trial included:
 
 
(1)
to determine the ability of BiovaxID to produce a molecular CR in subjects in clinical CR, but with PCR evidence of residual disease after standard chemotherapy;
 
 
(2)
to determine the impact of BiovaxID on molecular remission in FL patients;
 
 
(3)
to evaluate the ability of BiovaxID to generate an immune response against autologous tumor;
 
 
(4)
to determine and compare the OS of subjects randomized to receive either treatment assignment; and
 
 
(5)
to evaluate the safety of BiovaxID administered with GM-CSF.
 
Biopsy, Chemotherapy, and Immune Recovery. Prior to chemotherapy, a small tumor biopsy was performed to obtain tissue for tumor classification and characterization, and to provide starting material necessary to manufacture BiovaxID. Following this biopsy patients were initially treated with PACE chemotherapy in order to induce a CR or a complete response unconfirmed (“CRu”) as measured by CT scans.
 
The clinical trial protocol stipulated that for all patients, an immune recovery period of approximately 6 months following completion of chemotherapy was required to be completed without relapse (“Immune Recovery Period”) before vaccination. The Immune Recovery Period was required in order to maximize the potential for immune response to vaccine and to avoid confounding factors from any potential lingering immunosuppressive effects of chemotherapy.
 
Randomization to Immune Recovery Followed by BiovaxID or Control. When the NCI designed the Phase 3 clinical trial in FL protocol, a decision was made to randomize patients, immediately after completion of chemotherapy and not to wait for the completion of the Immune Recovery Period in an effort to avoid expending NCI resources to manufacture patient-specific vaccines for patients who were not anticipated to receive the vaccine (e.g., control patients). In the Phase 3 clinical trial, of the 234 patients initially enrolled into the clinical trial, 177 patients completed chemotherapy, achieved CR/ CRu, and were randomized.
 
As per the design of the Phase 3 clinical trial, patients who relapsed during the Immune Recovery Period were excluded from treatment with BiovaxID or control notwithstanding the fact that they had been randomized. In the Phase 3 clinical trial, of the 177 initially randomized patients, 117 remained eligible to be treated with either BiovaxID (76 patients) or control (41 patients) at the end of the Immune Recovery Period. Sixty patients of the 177 randomized patients and were not treated with either BiovaxID or control mostly due to relapse during the immune recovery period (see Figure 4).
 
 
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Figure 4. Enrollment, randomization, and treatment, Two hundred thirty-four patients were enrolled, and 177 patients were randomized to receive at least one dose of the blinded vaccine; 76 patients received Id-vaccine and 41 received control vaccine.
 
Trial Enrollment and the Use of Rituximab-Containing Induction Chemotherapy. During the course of the Phase 3 clinical trial, the standard of care for induction chemotherapy in FL changed to include rituximab, which reduced the ability to recruit and enroll patients into the study. In order to facilitate enrollment in the clinical trial, we amended the study protocol in 2007 to permit the use of a rituximab-containing chemotherapy regimen (“CHOP-R”), as induction therapy. However, the FDA requested that we abstain from vaccinating any patients who received CHOP-R and we did not vaccinate any of the patients who received CHOP-R chemotherapy under the Phase 3 clinical trial protocol.

 
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Due to the protracted enrollment, the Phase 3 clinical trial’s Independent Data Monitoring Committee (“DMC”; a committee responsible for reviewing the available unblinded clinical trial data in the study and responsible for recommendations to the sponsor and the FDA) recommended an interim analysis of the clinical trial’s endpoints and overall safety profile which resulted in the termination and halting of the trial in 2008.
 
As of April 15, 2008, when the Phase 3 clinical trial was officially closed, a total of 234 subjects had been enrolled and 177 subjects had been randomized.  The total number of subject was less than the original planned sample size which called for 629 subjects to be enrolled and 540 to be randomized. While the termination of the Phase 3 clinical trial before completion of the planned accrual resulted in a smaller sample size than was originally intended, we believe that the randomized nature of our Phase 3 clinical trial yields a valid conclusion because the baseline characteristics of the patients in the 2 groups were balanced, the allocation to treatment arms was concealed, and the study was double-blinded.
 
Results of Phase 3 Clinical Trial.
 
Of the 177 randomized patients in the ITT (intent to treat) population, 60 were censored due to ineligibility post-randomization due to the following:  pre-vaccine relapse (n = 51, 28.8%), vaccine manufacturing hold (n = 6, 3.4%), and 1 each (0.6%) for lost to follow-up, withdrawal prior to vaccination, and transformation to diffuse large B-cell lymphoma. Importantly, relapse events that disqualified 51 patients for post-randomization treatment occurred in a blinded manner and were independent of external factors and were a consequence of each patient’s disease.  Post-randomization relapse was equivalent between the two treatment groups:  29.7% versus 27.1%, active (BiovaxID+GM-CSF) to control (KLH-KLH+GM-CSF), respectively. Due to vaccine manufacturing failure, 5 patients who were randomized to receive active treatment (i.e., BiovaxID+GM-CSF) actually received control treatment (i.e., KLH-KLH+GM-CSF), as per the prospective protocol provisions. In the ITT population there were statistically significant differences in demographics and baseline characteristics between the treatment arms.

At a median follow-up of 56.6 months (range: 4.2 – 92.0 months), median DFS in the ITT population was 46.0 months for patients in the active treatment group (BiovaxID+GM-CSF) versus 30.6 months for patients in the control treatment group (KLH-KLH+GM-CSF) (log rank P = 0.029, controlled for FLIPI risk group and number of chemotherapy cycles). BiovaxID vaccination therefore resulted in a 42% decrease in risk of relapse compared to control vaccination (HR= 0.58; %95CI: 0.370- 0.960).
Median OS was not reached in either arm.
 

 
 
Figure 5. Disease-free survival (DFS) according to treatment arm for ITT Population (N = 177).
 
 
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Analysis of Patients by Isotype. A typical antibody (“immunoglobulin”), including the lymphoma immunoglobulin expressed on the surface of each cancerous lymphoma cell, is composed of protein “heavy chains” and “light chains”. In humans, the heavy chains are classified as IgG, IgM, IgA, IgD and IgE, and the light chains are classified as either kappa or lambda. The Id protein expressed on the surface of FL cells is characteristic of the single B-cell from which the tumor arose. The immunoglobulin protein contains a region known as the “heavy chain” and a region known as the “light chain” (see Figure 7). Almost always in FL, the heavy chain region is characterized as either an IgM-isotype or an IgG-isotype. Figure 7 illustrates the dramatic differences in the structure of immunoglobulin protein characterized as an IgM-isotype as opposed that characterized as an IgG-isotype. Accordingly, an antibody may be referred to as IgG-isotype or IgM-isotype depending on its heavy-chain classification. In the normal immune response, antibody isotypes may have different roles and may help direct the appropriate immune response. The small region at the tip of the antibody is known as the “variable region”, or antibody binding site, and the balance of the isotype is known as the “constant region”. When we manufacture BiovaxID, we screen each patient’s tumor cells obtained by biopsy for the isotype. Approximately, 60% of patients with FL are diagnosed with tumors expressing an IgM isotype and approximately 40% of patients bear tumors expressing an IgG isotype. In rare cases (<1%), patients are diagnosed with another isotype (e.g. IgA). Infrequently, the patient’s tumor also contains cells with one or more isotype (a heterogenous or “mixed” isotype); in these patients we select either an IgG or IgM isotype for manufacture of BiovaxID. Each patient’s tumor isotype can be readily determined by standard analytical techniques (flow cytometry) at the time of the patient’s tumor biopsy. In both the Phase 2 and Phase 3 clinical trials in FL patients, the determination of tumor heavy-chain isotype determined the specific manufacturing and purification process used to make that patient’s vaccine. For patients who have tumors expressing an IgG (or an IgG-containing “mixed” isotype), we manufacture an IgG isotype vaccine and for patients determined to have tumors expressing an IgM (or an IgM-containing “mixed” isotype), we manufacture an IgM vaccine. Due to our manufacturing process (rescue fusion hybridoma), the isotype (IgG or IgM) of the tumor is entirely reproduced in each patient’s vaccine so that each patient’s BiovaxID vaccine matches the patient’s original tumor isotype (IgG or IgM).
 
 
 
Figure 7. The Id protein expressed on the surface of FL cells is an immunoglobulin protein characteristic of the single B-cell from which the tumor arose.
 
 
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Preclinical data indicates that the ability to develop an immune response differs between IgM-isotype and IgG-isotype idiotypes (De Grootx, 2008; Reitan, 1995; Reitan, 2002); however, we do not currently have immune response data from human clinical trials to confirm this preclinical data. The IgG-isotype idiotype was reported to be tolerogenic, meaning that the immune response against the specific tumor target is suppressed. On the other hand, the IgM-isotype idiotype was reported to be highly immunogenic, meaning that it induces an ample, persistent immune response against the specific tumor target. A feature of our Phase 3 clinical trial was the manufacturing and administration of tumor-matched isotype idiotype vaccines which, allowed us to investigate whether these preclinical data translate into differential clinical efficacy of the two isotype vaccines in our clinical trial.
In an unplanned subgroup analyses, DFS was analyzed by tumor Ig heavy chain isotypes (IgM and IgG). Five patients from the ITT population were excluded from these analyses because their tumors isotype was mixed IgM/ or IgD. The IgM subgroup included 94 patients (N= 61 active, N= 33 control), and the IgG subgroup included 78 patients (N= 55 active, N= 23 control). In both isotype subgroups there were no statistically significant differences in baseline patient characteristics between experimental and control arms. Among patients receiving an IgM-Id vaccine, median time to relapse after randomization was 52.9 months versus 28.7 months in IgM tumor isotype control-treated patients (P= 0.004; HR= 0.33; 95% CI: 0.157- 0.727). Among patients receiving IgG-Id vaccine, median time to relapse after randomization was 36.2 months versus 32.4 months in IgG tumor isotype control-treated patients (P= 0.703; HR= 1.19; 95% CI: 0.472- 3.036). Cox proportional hazard modeling including the main effects of treatment arm and tumor isotype,, adjusted for FLIPI risk group and the number of chemotherapy cycles received, supports a differential effect of treatment by isotype as indicated by the P value of the interaction term between treatment and tumor Ig isotype (P= 0.062).
 

In an unplanned analysis, we compared DFS of Id-vaccinated patients with control patients by tumor Ig isotype and its analysis was highly consistent with the manufacturing process, which requires isotype identification prior to initiation of vaccine manufacture due to the need for isotype specific vaccine purification. To address whether there was a differential treatment effect on DFS depending on Ig isotype, we used Cox proportional hazards modeling where the interaction term between treatment and Ig  isotype was estimated adjusting for main effect and for International PrognosticIndex and number of chemotherapy cycles as covariates.

We also analyzed DFS of vaccinated patients by tumor Ig heavy and light chain isotypes. For IgM and IgG heavy chain isotype groups, there were no statistically significant differences in baseline patient characteristics between experimental and control arms (IgM isotype, N= 35 vs N= 25; IgG-isotype, N= 40 vs. N= 15 for Id-vaccine and control arms, respectively). In patients presenting with an IgM tumor isotype and receiving an IgM-Id vaccine, median time to relapse after randomization was 52.9 months versus 28.7 months in IgM tumor isotype control-treated patients (P= 0.001) and 30.6 months in all controls (Figure 8). Among patients receiving IgG-Id vaccine, median time to relapse after randomization was 35.1 months versus 32.4 months in IgG tumor isotype control-treated patients (P= 0.807) (Figure 9). Cox proportional hazard modeling supports an interaction between treatment arm and Ig isotype (P=0.039). When patients were grouped by light chain type, there was no difference in DFS (data not shown).
 
 
Figure 8.  Disease free survival in IgM isotype patients

 
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Figure 9.  Disease free survival in IgG isotype patients
 
Our Phase 3 clinical trial had two unique manufacturing features, where: (a) the vaccine consists of the full structure of the idiotype protein (that is, both the variable and the constant regions of the immunoglobulin) and (b) the idiotype of the vaccine matches the idiotype of the patient’s own tumor. These unique features allowed us to be the first to investigate the clinical efficacy implications of the two tumor isotypes. The prior Phase 3 clinical trials of FL idiotype vaccines conducted by Genitope Corporation (“Genitope”) and Favrille, Inc. (“Favrille”) used a manufacturing process known as recombinant manufacturing that universally linked the patient’s variable region of the idiotype into an IgG isotype without regard to the actual isotype of each patient’s tumor. We believe that the use of an IgG isotype was due to the comparative ease of manufacture and purification of IgG proteins as well as to their relatively long half-life. There are two implications of the manufacturing processes used by these prior clinical trials: (1) clinical efficacy cannot be compared by isotype group; and (2) the lack of clinical efficacy observed in these clinical trials may be due to the tolerogenic effect of the universal IgG isotype used in the vaccine manufacturing. As such, we believe that our analysis by tumor isotype may provide profound insight into the efficacy of BiovaxID and may also suggest methods by which cancer vaccines in general could be developed in the future.
 
 
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BiovaxID Regulatory and Marketing Status
 
Under our IND for BiovaxID, two Phase 2 clinical trials and one Phase 3 clinical trial have been completed studying BiovaxID for the indications of FL and MCL. We believe that these clinical trials demonstrate the safety and efficacy of BiovaxID and we have presented comprehensive summaries of the clinical development and clinical data to regulatory authorities in the EU, Canada and the U.S.
 
Based on our scientific advice meetings with multiple EU-Member national medicines agencies, on June 13, 2012, we filed our formal notice of intent to file a MAA with the EMA, which began the EU marketing approval application process.  In response to our notice of intent to file for marketing approval, the EMA notified us that we were eligible to submit our planned MAA for BiovaxID under the EMA’s centralized procedure, as an orphan medicinal product for the treatment of FL.  Under the EMA centralized procedure, the marketing approval of BiovaxID can be simultaneously obtained throughout all EU-member countries with a single MAA.  Also, as part of the EMA’s centralized procedure, our MAA for BiovaxID will be assessed by the EMA’s Committee for Medicinal Products for Human Use (“CHMP”), which designates from within its membership, a Rapporteur and Co-Rapporteur, as well as a Pharmacovigilance Risk Assessment Committee (“PRAC”) Rapporteur and Co-Rapporteur.  The Rapporteur and Co-Rapporteur are assigned with the primary responsibility of preparing and delivering an approvability evaluation report, supported by a team of assessors from their National Authority.  In 2012, the PRAC Rapporteur and Co-Rapporteur was implemented, after the latest revisions to the EMA safety requirements on Pharmacovigilance and Risk Assessment Plan, with the primary responsibility of preparing and delivering an approvability evaluation report specifically with regards to safety. The EMA has also notified us regarding the EMA’s official designation of the Rapporteur and Co-Rapporteur, and PRAC Rapporteur and Co-Rapporteur to our planned MAA for BiovaxID.  We conducted our EMA Pre-submission Meeting for the MAA on September 12, 2012, during which our planned application dossier was validated.  Subsequently, on December 3, 2013, we submitted an MAA with the EMA for BiovaxID.
 
Additionally, based on a scientific advice meeting conducted with Health Canada, we have announced plans to file a NDS seeking regulatory approval in Canada.
 
We conducted a formal guidance meeting with the FDA in order to discuss the path for our filing of a BLA for BiovaxID’s U.S. regulatory/marketing approval. As a result of this guidance meeting, we plan to 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 our BLA for BiovaxID.  We are preparing to initiate this second Phase 3 clinical trial subject to required funding.
 
As we continue to advance our efforts to comply with various regulatory validations and comparability requirements related to our manufacturing process and facility, no assurances can be given that substantial additional requirements will not be imposed by any regulatory agencies, including the EMA, Health Canada, and the FDA for the regulatory/marketing approval of BiovaxID.
 
Subsequent regulatory/marketing approval of BiovaxID, if any, may require us to perform additional clinical studies as a condition to approval or continued marketing of BiovaxID, which may result in additional clinical trial expenses. Once received, there can be no assurances that we will receive continued regulatory/marketing approval. Our ability to timely access required financing will continue to be essential to support the ongoing efforts to pursue the development and potential regulatory/marketing approval and commercialization efforts of BiovaxID.
 
 
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Proprietary Rights to BiovaxID
 
As a result of the FDA’s Orphan Drug designation of BiovaxID for the treatment of FL, MCL and Waldenstrom's Macroglobulinemia, a rare B-cell subtype of NHL, we have 7 years of market exclusivity in the U.S. from the date of the FDA’s marketing approval for these three B-cell subtypes of NHL. We also have 10 years of market exclusivity in the EU as a result of EMA’s Orphan Medicinal Product designation of BiovaxID for the treatment of FL and MCL.
 
In addition, the regulations adopted in both the U.S. and the EU governing “biosimilar” products (the term adopted to describe generic biologic pharmaceutical products) provide us with “data exclusivity” (i.e., no biosimilar could reference the BiovaxID clinical data) for 12 years in the U.S. and 8 years in the EU.  Those same biosimilar regulations make it extremely difficult to qualify as a “biosimilar”, and even for those products which can clear that hurdle independent clinical data is required prior to licensure.
 
In addition to market exclusivity based on governmental regulation, we rely on proprietary rights provided by a combination of an exclusive world-wide license to the cell line that is used in the production of BiovaxID, patent protection, trade secret protection, and our ongoing innovation. Although the composition of BiovaxID, in its current form, is not patentable, we have filed U.S. and foreign patent applications relating to methods of treatment using BiovaxID. We have also filed an international patent application (“PCT”) and a provisional application relating to methods for producing and selecting idiotype vaccines for treatment of B-cell cancers. Also, we have filed a provisional application covering the use of a biomarker for predicting cancer vaccine effectiveness and patient outcomes.  In addition, we have filed U.S. and foreign patent applications relating to certain features of the AutovaxID® instrument used in the production of BiovaxID. The AutovaxID instrument is our proprietary production system which is fully enclosed, automated and has disposable components for each patient’s personalized vaccine. We believe that, without the availability of an automated production system, the methods used to produce a patient-specific immunotherapy are time-consuming and labor-intensive, resulting in a very expensive process that would be difficult to scale up. Following the findings related to the apparent role of the IgM isotype in clinical benefit from the vaccine, we filed a broad range of patent applications covering various applications of these findings. We have re-filed for U.S. registration of the trademark BiovaxID and have registered BiovaxID® as a Community Trademark in the EU. BiovaxID is manufactured with a proprietary cell line, which we have licensed on a worldwide exclusive basis from Stanford University (“Stanford”). We believe that the use of any cell line other than our exclusively licensed cell line, in the production of a similar idiotype vaccine would require filing a separate IND application and undergoing clinical testing evaluation by the FDA.
 
BiovaxID Manufacturing Process and Facility
 
Manufacturing Process
 
The BiovaxID manufacturing production process begins when a sample of the patient’s tumor is extracted by a biopsy and the sample is shipped refrigerated to our facility in Minneapolis (Coon Rapids), Minnesota. At our facility, we identify the idiotype that is expressed on the surface of the patient’s tumor cells through laboratory analysis. Additionally, we identify whether the isotype is IgM or IgG. In NHL, the tumor B-cells bear the surface idiotype (immunoglobulin or antibody) derived from the original transformed malignant B-cell, but do not typically secrete it in an amount suitable for vaccine production. In order to make sufficient quantities of idiotype for vaccination, the patient’s tumor cells are then fused with an exclusively licensed cell line (mouse/human heterohybridoma cell line, K6H6) from Stanford to create a hybridoma or hybrid cell.
 
After the creation of the hybridoma, we determine which hybridoma cells display the same antigen idiotype as the patient’s tumor cells, and those cells are selected to produce the vaccine. The selected hybridoma cells are then seeded into our proprietary hollow fiber bioreactors, where they are cultured and where they secrete or produce idiotype antigen. The secreted idiotype is then collected from the cells growing in the hollow fiber bioreactor. After a sufficient amount of idiotype is collected for the production of an appropriate amount of the vaccine, the patient’s idiotype is purified using multi-step purification processes (see Figure 10a).
 
 
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Figure 10a. Individualized Manufacturing Process for BiovaxID Immunotherapy: (Clockwise) Beginning with an excisional (>2cm) lymph node biopsy, tumor cells are fused with our proprietary mouse/human heterohybridoma in order to induce secretion of normally surface-bound tumor immunoglobulin (idiotype). Id-secreting clones are identified by comparing their unique idiotype sequence to the tumor’s after which they are cultured (expanded) in a proprietary hollow fiber bioreactor system (not shown). During culture, supernatant (containing idiotype) is collected until sufficient amounts have been produced to yield adequate dosage of vaccine. This supernatant is purified by affinity chromatography and conjugated (bonded) to KLH carrier protein, resulting in a finished vaccine that can be shipped and administered to patients. In our Phase 3 clinical trial, manufacturing success was approximately 95% of treated patients. (Fig. reprinted from Neelapu, et al. Exp. Opin Biol Ther 2007).

 
 
Figure 10b. Hollow fiber perfusion to produce the cell cultures used in the manufacture of BiovaxID.
 
 
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We use a method known as “hollow fiber perfusion” to produce the cell cultures used in the manufacture of BiovaxID (see Figure 10b). Hollow fiber perfusion, as compared to other cell culture methods, seeks to grow cells to higher densities more closely approaching the density of cells naturally occurring in body tissue. The hollow fiber perfusion method involves using hair-like plastic fibers with hollow centers which are intended to simulate human capillaries. Thousands of these fibers are inserted in a cartridge, which we refer to as a bioreactor. The cells are grown on the outside of the hollow fibers while nutrient media used to support cell growth is delivered through the hollow centers of the fibers. The fiber walls have small pores, allowing nutrients to pass from the hollow center to the cells. The fibers act as filters and yield concentrated secreted products. Because the cells are immobilized in the bioreactor, the concentrated product can be harvested during the ongoing cell growth process. We believe that hollow fiber technology permits the harvest of cell culture products with generally higher purities than stirred-tank fermentation, a common alternative cell culture method, thereby reducing the cost of purification as compared to stirred tank fermentation. Additionally, the technology associated with the hollow fiber process generally minimizes the amount of costly nutrient media required for cell growth as opposed to other cell culturing techniques.
 
After manufacture and purification, the resulting purified idiotype is then conjugated, or joined together, with KLH, to create the vaccine. KLH is a foreign carrier protein that is used to improve the immunogenicity, or ability to evoke an immune response, of the tumor-specific idiotype. The BiovaxID vaccine is then frozen and shipped to the treating physician. At the treating physician’s office, the vaccine is thawed and injected into the patient.
 
BiovaxID is administered in conjunction with GM-CSF, a natural immune system growth factor that is administered with the idiotype vaccine to stimulate the immune system and increase the response to the idiotype vaccine. In the Phase 2 and Phase 3 clinical trials FL patients were administered 5 monthly BiovaxID injections in the amount of 0.5 milligram of idiotype per injection, with the injections being given over a 6-month period of time in which the fifth month is skipped. Through this process, the patient-specific idiotype is used to stimulate the patient’s immune system into targeting and destroying malignant B-cells bearing the same idiotype.
 
We estimate that an average of 2 to 3 months is required to manufacture each vaccine, which for most patients may overlap the time period when induction chemotherapy is being administered. While the manufacturing process for BiovaxID is highly personalized to each patient, we consider it to be highly controlled and predictable. The most common reason for a failure to successfully produce a patient’s vaccine was the presence of rare idiotype variants as opposed to the failure of a step in the manufacturing process. During the Phase 3 clinical trial, we experienced approximately 95% success rate in manufacturing our BiovaxID vaccines.
 
Manufacturing Facility
 
BiovaxID is a personalized medicine which is produced separately for each individual patient through a laboratory-type process based on the patient’s own tumor cells derived by biopsy. Following regulatory/marketing approval of BiovaxID, we plan to initially produce BiovaxID in our existing leasehold space in Minneapolis (Coon Rapids), Minnesota. In order to facilitate the regulatory/marketing approval process, we have completed a dedicated pilot scale suite of laboratory clean rooms especially designed to produce BiovaxID. As the regulatory/marketing approval process advances toward completion and subject to availability of funding, we anticipate expanding our current leasehold space or adding new manufacturing facilities as required to, meet the anticipated commercialization requirements. During our Phase 3 clinical trial, BiovaxID was produced at our facility in Worcester, Massachusetts. Because, we have relocated the site of the manufacturing process to our Minneapolis (Coon Rapids), Minnesota facility following the Phase 3 clinical trials and because we are expanding this facility, we are currently in the process of demonstrating to the national and/or international regulatory agencies that the BiovaxID vaccine produced under these new conditions is comparable to the BiovaxID vaccine that was the produced subject of earlier clinical testing. This requirement will also apply to future expansions of the facility, such as the possible expansion to additional facilities that may be required for successful commercialization of BiovaxID. There is also a requirement for validation of the manufacturing process for BiovaxID utilizing our AutovaxID® instrument. A showing of comparability requires data demonstrating that the BiovaxID vaccine produced continues to be safe, pure, and potent and may be based on chemical, physical, and biological assays and, in some cases, other non-clinical data.
 
 
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INSTRUMENTS AND DISPOSABLES
 
We provide a range of cell culture systems that are used to produce small, research and development-scale through large, production-scale quantities of cell culture products. Our cell culture systems all incorporate perfusion technology and hollow fiber cartridges. This segment of our business represented approximately $1.6 million (approximately 39%) and $0.8 million (approximately 22%) of our total revenues for the years ended September 30, 2013 and 2012, respectively.  Because of these shared characteristics, all of our cell culture systems listed below can be used to culture a variety of cell lines (hybridomas, CHO, MDCK, BHK and others) to produce a range of cell-based products, such as monoclonal antibodies, other secreted proteins, virus, virus-like particles, vaccines, and whole cells. Our smaller cell culture systems can be scaled-up to any of our larger cell culture systems.  Our cell culture system product line, in order of increasing capacity, includes:
 
HF PRIMER™: The HF Primer is a low-cost cell culture system capable of producing small, research and development quantities of the cell culture products from mammalian cell lines. The HF Primer also provides a relatively inexpensive option to evaluate the efficacy of new cell lines or applications in perfusion technology that can then be scaled-up to any of our larger cell culture systems. HF Primer is a single-use, fully disposable product that requires no investment in custom equipment.
 
MULTI-6™: The Multi-6 is a low-cost cell culture system capable of simultaneously producing small, research and development -scale quantities of six different cell culture products. Optionally, the Multi-6 can be used to produce one cell culture product at a rate that is six-fold higher than the HF Primer. This flexibility allows a researcher to operate one Multi-6 instead of managing six separate HF Primer systems running side-by-side. Multi-6 applications can be scaled-up to our larger AutovaxID® or other cell culture systems listed below, if the need arises. Multi-6 is a single-use, fully disposable product that requires no investment in custom equipment.
 
AUTOVAXID®: The AutovaxID is our most advanced, fully automated cell culture system. Its setup and operation requires very little technician expertise and labor in comparison to competing cell culture system technologies and even our other cell culture systems listed below. The AutovaxID was designed from the beginning to: enable multi-product facilities, capture most all production information into its CFR 21 Part 11-compliant electronic records system, and operate as a fully closed-system biologics-manufacturing platform. The AutovaxID allows supervisors to implement built-in software controls to ensure technicians adhere to strictly defined production protocols for cGMP environments or remove this feature when it is not needed, such as in research and development operations. There are four single-use AutovaxID disposables to provide researchers the needed flexibility to go from research and development- through pilot-scale production. One of the disposable options even allows the simultaneous culturing of three different cell lines to produce three different products in small quantities. When needed, one cell line can then be scaled-up to AutovaxID’s larger-capacity disposables. We plan to utilize AutovaxID’s advanced capabilities to streamline commercial manufacture of BiovaxID. AutovaxID is the first cell culture system that enables production of personalized cell-based treatments economically and in compliance with cGMP standards. Additionally, we have contracted with the DoD and others to further develop the AutovaxID and related hollow fiber bioreactor systems to explore potential production of additional vaccines, including vaccines for viral indications such as influenza and other contagious diseases.
 
ACUSYST-MINIMAX®: The miniMAX is an economical system that provides the flexibility and technology needed to support optimization studies and research- through pilot-scale production of the cell culture products listed above. The miniMax is a tabletop instrument that uses simple, but robust, microprocessors to automatically control pH, incubator temperature, fluid-flow dynamics, and seven process pumps. This system offers two single-use disposables options to meet varying production requirements. Optimization results determined in the miniMAX can be transferred to our larger systems listed below. The production capacity is equivalent to an AutovaxID, but the miniMAX does not have the advanced features, controls, simpler setup and ease of operation available through the AutovaxID.
 
ACUSYST-MAXIMIZER®: The Maximizer is an economical system with a design that is similar to the miniMAX system. This system has all of the features of miniMAX, using single-use disposables that either match or double the production capacity of the miniMAX system. The Maximizer is an economical system for process development and routine productions. The Maximizer offers the flexibility of four single-use disposables to meet varying production requirements. Production processes determined in the Maximizer can be scaled-up to our largest cell culture system, AcuSyst-Xcellerator®.
 
ACUSYST-XCELLERATOR®: The Xcellerator is a freestanding, production-scale cell culture system that has been used for production of a FDA-licensed biologic. The Xcellerator contains an incubator, a refrigerator, a built-in computer that has a CFR 21 Part 11-compliant electronic records system, numerous process pumps, and a touch screen for local control. The Xcellerator supports remote monitoring and/or control via standard web browsers. The system supports two independent single-use disposables and, therefore, can simultaneously culture two different cell lines to produce two products. The Xcellerator has a production capacity that is equivalent to a 20x scale-up of AutovaxID’s capacity.
 
 
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In addition to instrument and disposables sales, we have recurring revenue from the sale of hollow fiber bioreactors, cultureware, tubing sets and other disposable products and supplies for use with our cell culture system instrument product line.
 
Currently, we assemble, validate and package the instruments and disposables, cell culture products and services which we sell. Customers for our instruments and disposables are the same potential customers targeted for our contract cell culture products and services which include biopharmaceutical and biotechnology companies, medical schools, universities, research facilities, hospitals and public and private laboratories.
 
Proprietary Rights to Instruments and Disposables
 
We own several patents covering various aspects of our hollow fiber perfusion process, instruments and proprietary cell culturing methods. We own U.S. Patent No. 6,001,585, which protects the HF Primer™ cell culture system and its use in screening cell lines and process conditions.  Although the HF Primer is impractical for large-scale vaccine production, it may be used as an efficient screening tool to cost-effectively determine how well a cell line will perform in a hollow fiber system, such as the AutovaxID® instrument, which is used in the production of BiovaxID.  U.S. Patent No. 6,001,585 will expire in November 2017.
 
We have also filed U.S. and foreign patent applications relating to certain features of the AutovaxID instrument. Several patents have been granted in the EU covering the AutovaxID’s extra-capillary (“EC”) fluid cycling system, which enables control of fluid volumes in the hollow fiber bioreactor during manufacture of BiovaxID in a closed, contamination-free environment. These EU patents will remain in force until 2027.
 
We have filed (a) a PCT application covering the use of AutovaxID instrumentation for rapid, large-scale production of virus, virus-like particles, and viral vaccines at a high yield, (b) a PCT application concerning an integrated apparatus and method for production and purification of antibodies, and (c) a provisional application concerning cultureware modules and biomanufacturing suites for large-scale production of cells and cell-derived products such as antibodies, proteins, virus, and virus-like particles.
 
CELL CULTURE PRODUCTS AND SERVICES
 
We manufacture mammalian cell culture products such as, whole cells, recombinant and secreted proteins, and monoclonal antibodies. Additionally, we provide related services as a contract resource to assist our customers in developing cell production process protocols, cell line optimization, cell culture production optimization, media evaluation and other related services. This segment of our business represented approximately $1.6 million (approximately 39%) and $0.8 million (approximately 22%) of our total revenues for the years ended September 30, 2013 and 2012, respectively.
 
With our focus on pre-launch therapeutics and marketed diagnostics production, we serve all the manufacturing needs of our customers. From process development to regulatory support, our one-stop comprehensive approach provides solutions for clients that have chosen to temporarily or permanently outsource any or all stages of drug development.  If needed, commercial production capacity for product launch is seamless, we provide all the required regulatory support, including biocompatibility studies.
 
With nearly 30 years of expert experience in cell culture, we formulate the optimal strategy for our customers’ biologics manufacturing. By accurately matching the level of hollow fiber bioreactor production technology to our customers’ phase of product development, our customers can manage their overall investment risk. Only as products advance to the next stage of development do we scale to higher-output production systems.  Customers of our cell culture products and services are biopharmaceutical and biotechnology companies, medical schools, universities, research facilities, hospitals and public and private laboratories. We generally produce cell culture products pursuant to contracts which specify the customer’s requirements for the cell culture products to be produced or the services to be performed.
 
 
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There are various processes commonly used to expand mammalian cells generally used for the production of antibodies. These may include hollow fiber bioreactor perfusion, stirred tank fermentation, roller bottle and other processes. We primarily use hollow fiber bioreactor technology to expand customer provided cell lines and produce the respective monoclonal antibodies. This technology grows cells to higher densities which more closely mimics mammalian physiology. We have significant expertise with in vitro (outside the living body) cell culture methods for a wide variety of mammalian cells. Mammalian cells are complicated and dynamic, with constantly changing needs. A primary component of hollow fiber bioreactors is fibers made of plastic polymers. The fibers are hair-like with hollow centers which simulate human capillaries. Thousands of these fibers are inserted in a cartridge, which we refer to as a bioreactor. The cells are grown on the outside of the hollow fibers while nutrient media used to support cell growth is perfused through the lumen of the fibers. The fiber walls have small pores, allowing nutrients to pass from the hollow center to the cells. The fibers act as filters and yield concentrated secreted products. Because the cells are immobilized in the bioreactor, the concentrated product can be harvested during the ongoing cell growth process. Hollow fiber technology permits harvests of cell culture products with generally higher purities thereby reducing the cost of downstream purification processes. This technology generally minimizes the amount of costly nutrient media required for cell growth.
 
The most generally used process for mammalian cell production is stirred tank fermentation. Hollow fiber bioreactor technology can be contrasted with the competitive stirred tank fermentation process which takes place in tanks of various sizes. Cells are grown inside the tanks in culture medium which is maintained under controlled conditions and continuously stirred to stimulate growth. At the end of the growing process, as opposed to incrementally during the growth process, cells are separated from the medium and the protein of interest is isolated through a series of complex purification processes. The size of the tanks generally result in stirred tank fermentation facilities requiring significantly more start-up costs, space and infrastructure than comparable production facilities using hollow fiber technology. While stirred tank fermentation and hollow fiber technology are both used for cell production of various quantities, we believe that the stirred tank fermentation process is currently more commonly used for larger scale commercial production requirements. We believe that hollow fiber technology has advantages in scalability, start-up time and cost in the early development of antibody production.
 
Our patented hollow fiber technology is the key to optimizing our customers’ biologics manufacturing. For Phase I, Phase II and Phase III cGMP production, our hollow fiber bioreactor perfusion technology provides economic advantages through largely automated culture of a relatively large, densely packed population of cells in a small space. Additionally, the low molecular weight cut-off of the fiber membrane allows more expensive media components to be conserved, while less expensive basal media is continuously perfused through the bioreactor. As a result, this automated approach can be more cost-effective than conventional platforms generally used for maintenance of large cell populations. In the expanding field of personalized medicine where patient specific drugs and therapeutics are frequently envisioned, such as BiovaxID, we believe that hollow fiber technology may be the appropriate cell culture production technology.
 
COMPETITION FOR BIOVAXID
 
Biotechnology has experienced, and is expected to continue to experience, rapid and significant change. The use of monoclonal antibodies as initial or induction therapy, and increasingly for maintenance therapy, has become well-established and generally accepted. Products that are well-established or accepted, including monoclonal antibodies such as Rituxan®, may constitute significant barriers to market penetration and regulatory approval which may be expensive, difficult or even impossible to overcome. New developments in biotechnological processes are expected to continue at a rapid pace in both industry and academia, and these developments are likely to result in commercial applications competitive with BiovaxID. We expect to encounter intense competition from a number of companies that offer products in our targeted application area. We anticipate that our competitors in these areas will consist of both well-established and development-stage companies and will include:
 
 
•
healthcare companies;
 
 
•
chemical and biotechnology companies;
 
 
•
biopharmaceutical companies; and
 
 
•
companies developing drug discovery technologies.
 
We expect to compete on, among other things, the safety and efficacy of our product candidates and more desirable treatment regimens, combined with the effectiveness of our experienced management team. Competing successfully will depend on our continued ability to attract and retain skilled and experienced personnel, to identify and secure the rights to and develop pharmaceutical products and compounds and to exploit these pharmaceutical products and compounds commercially before others are able to develop competitive products.
 
 
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If approved, BiovaxID will be required to compete with currently approved therapies, as well as therapies which may be approved in the future. There are currently no approved active immunotherapeutic drugs which seek to induce an adaptive, specific and durable immune response to identify and eradicate the residual lymphoma cells remaining after a patient achieves remission in an effort to extend that remission or avoid relapse. BiovaxID is a therapy designed to be administered to lymphoma patients who have achieved complete remission after initial chemotherapy treatment. If approved, BiovaxID would represent a new class of drugs available to treat FL and potentially offering a new treatment option for FL patients.
 
BiovaxID is the only personalized cancer vaccine for treatment of FL that has demonstrated significant clinical benefit in a Phase 3 clinical trial. Two other vaccines, MyVaxTM developed by Genitope and Specifid™ developed by Favrille which were studied in Phase 3 clinical trials in FL patients did not report statistically significant clinical benefit and we believe are no longer under development. There are fundamental structural differences between BiovaxID and the cancer vaccines developed by Genitope and Favrille; Genitope and Favrille manufactured their respective vaccines with IgG isotypes without regard to the patient’s actual isotype and their clinical trial designs under which the clinical efficacy of these vaccines were tested were different, which we believe explain why BiovaxID achieved significant clinical benefit while Genitope and Favrille’s vaccines did not.
 
Chemotherapy and monoclonal antibodies are widely used for the treatment of FL. Although chemotherapy and monoclonal antibodies can substantially reduce the tumor mass and in most instances achieve clinical remission, the remission is generally of limited duration. FL patients generally relapse and the cancer usually becomes increasingly resistant to further chemotherapy treatments. The patient’s response to therapy becomes briefer and weaker with each additional course of therapy, such that eventually further chemotherapy would offer no clinical benefit.
 
A number of passive immunotherapies, such as rituximab and radioimmunotherapeutic agents (radioisotopes linked to monoclonal antibodies), are approved by the FDA for the treatment of FL. A monoclonal antibody is a type of antibody produced in large quantity that is specific to an antigen that is expressed by tumor cells and also by some normal cells. These therapies have been used as primary treatment and also as part of combination induction therapy including chemotherapy and rituximab based therapy is considered to be the standard of care to treat FL. In an effort to prolong the duration of the clinical remission monoclonal antibodies have increasingly been used as maintenance therapies.
 
If approved to treat FL, BiovaxID will face competition from other approved drugs, including rituximab maintenance. Penetrating a market and achieving usage by physicians and patients in the face of an established standard of care is anticipated to represent a significant marketing challenge.
 
If approved to treat MCL, BiovaxID will be required to compete with other approved and/or development therapies for the treatment of MCL. There is currently no consensus standard of care for the first line treatment of MCL; however, there are a number of FDA-approved agents used for the treatment of MCL both in first line settings and in patients in relapse.
 
COMPETITION FOR AUTOVAXID®
 
There are many kinds of technologies for the manufacture of cell-based products.  The technology relied upon by our instruments and disposables referred to as hollow fiber perfusion which is not widely accepted for large-scale manufacturing and, notwithstanding our development efforts, may not become widely accepted in the future. Our hollow fiber bioreactors must compete with many other kinds of cell-based manufacturing instruments including, but not limited to, stirred-tank reactors; airlift fermentors; roller bottles; packed bed reactors; two-chamber reactors; ceramic matrix systems; batch fermentation techniques; and WAVE bioreactors.  There can be no assurance that our hollow fiber systems will gain widespread acceptance competing with other established technologies marketed by industry leaders such as General Electric, Lonza, 3M, Sartorius Stedim, Thermo Scientific and Sandoz Biopharmaceuticals.
 
Competition for cell-based instruments is intense. Most of the developers, manufacturers and marketers of cell-based manufacturing instruments are much larger, more entrenched with potential customers and better financed than us which places us at a competitive disadvantage.
 
 
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PATENTS, TRADEMARKS AND PROTECTION OF PROPRIETARY TECHNOLOGY
 
We are pursuing a number of methods to establish and maintain market exclusivity for our product candidates to the greatest extent possible, including seeking patent protection, the use of statutory market exclusivity provisions, and otherwise protecting our intellectual property.
 
Our success depends in part on our ability to obtain and maintain proprietary protection for our product candidates, technology, and know-how; to operate without infringing the proprietary rights of others; and to prevent others from infringing on our proprietary rights. Our policy is to seek to protect our proprietary position by, among other methods, filing U.S. and foreign patent applications when possible relating to our proprietary technology, inventions, and improvements that are important to our business. We also rely on trade secrets, know-how, continuing technological innovation, and in-licensing opportunities to develop and maintain our proprietary position. The following is information regarding our owned and licensed patents and patent applications that we consider material to our business:
 
We own several patents covering various aspects of our hollow fiber perfusion process, instruments and proprietary cell culturing methods. Our patents also cover aspects of our therapeutic vaccine production process. We plan to continue pursuing patent and other intellectual property protection for our product candidates, our technology and know-how. Currently, we have three issued U.S. patents. Additionally, we have several patent applications that are pending. Our presently issued U.S. patents will expire in November 2017 and July 2029. A list of our U.S. and foreign patents and published patent applications are as follows:
 
 
Patent No.
  
Title and Inventor(s)
  
Filing Date/Issue Date
  
Expiration Date
             
6,001,585
  
MICRO HOLLOW FIBER BIOREACTOR by Michael J. Gramer
  
Nov. 14, 1997/Dec 14,  1999
  
Nov. 14, 2017
             
8,383,397
  
Method and System for the Production of Cells and Cell Products and Applications Thereof by Robert J. Wojciechowski et al.
  
Nov. 20, 2008/February 26, 2013
  
July 30, 2029
             
8,540,499
  
Extra-Capillary Fluid Cycling System and Method for a Cell Culture Device by Darrell P. Page et al.
  
Nov. 20, 2008/Sept. 24, 2013
  
July 4, 2029
 
  
Foreign Patent No.
  
Title and Inventor(s)
  
Filing Date/Issue Date
  
Expiration
Date
EP 2027247 (UK)
  
EXTRA-CAPILLARY FLUID CYCLING SYSTEM AND METHOD FOR A CELL CULTURE DEVICE by Darrell P. Page et al.
  
Nov. 20, 2008/Jan. 26, 2011
  
May 21, 2027
             
DE602007012238D (Germany)
  
EXTRA-CAPILLARY FLUID CYCLING SYSTEM AND METHOD FOR A CELL CULTURE DEVICE by Darrell P. Page et al.
  
Nov. 20, 2008/Jan. 26, 2011
  
May 21, 2027
             
AT2027247 (Austria)
  
EXTRA-CAPILLARY FLUID CYCLING SYSTEM AND METHOD FOR A CELL CULTURE DEVICE by Darrell P. Page et al.
  
Nov. 20, 2008/Jan. 26, 2011
  
May 21, 2027
             
P2027247 (Switzerland)
  
EXTRA-CAPILLARY FLUID CYCLING SYSTEM AND METHOD FOR A CELL CULTURE DEVICE by Darrell P. Page et al.
  
Nov. 20, 2008/Jan. 26, 2011
  
May 21, 2027
             
FR2027247 (France)
  
EXTRA-CAPILLARY FLUID CYCLING SYSTEM AND METHOD FOR A CELL CULTURE DEVICE by Darrell P. Page et al.
  
   Nov. 20, 2008/Jan. 26, 2011
  
May 21, 2027
             
GB2027247 (Great Britain)
  
EXTRA-CAPILLARY FLUID CYCLING SYSTEM AND METHOD FOR A CELL CULTURE DEVICE by Darrell P. Page et al.
  
May 21, 2007/Jan. 26, 2011
  
May 21, 2027
             
HK1166343 (Hong Kong)
  
METHOD AND SYSTEM FOR THE PRODUCTION OF CELLS AND CELL PRODUCTS AND APPLICATIONS THEREOF by Robert J. Wojciechowski et al.
  
May 21, 2007/October 26, 2012
    
 
 
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Application
Publication No.
  
Title and Inventor(s)
  
Filing Date/Publication Date
  
Countries/Regions
WO 2012/021840
  
MATERIALS AND METHODS FOR DESIGNING AUTOLOGOUS IDIOTYPE VACCINES AND TREATMENT OF B-CELL MALIGNANCIES by
Carlos F. Santos, Ph.D. et al.
  
Aug. 12, 2011/Feb. 16, 2012
  
International
             
WO 2012/064760
  
MATERIALS AND METHODS FOR DIRECTING AN IMMUNE RESPONSE AGAINST AN EPITOPE by Carlos F. Santos, Ph.D. et al.
  
Nov. 9, 2011/May 18, 2012
  
International
             
EP 2637691
  
MATERIALS AND METHODS FOR DIRECTING AN IMMUNE RESPONSE TO AN EPITOPE by
Carlos F. Santos, Ph.D. et al.
  
Nov. 8, 2011/Sept. 18, 2013
  
Europe
             
WO 2012/171026
  
METHOD AND APPARATUS FOR VIRUS AND VACCINE PRODUCTION by Mark Hirschel et al.
  
June 11, 2012/Dec. 13, 2012
  
International
             
WO 2013/086418
  
TUMOR-SPECIFIC GM-CSF CYTOKINE RESPONSE AS PREDICTOR OF CANCER VACCINE EFFECTIVENESS by Wyndham H. Wilson et al.
  
Dec. 7, 2012/June 13, 2013
  
International
             
US 2013/0058907
  
METHOD AND SYSTEM FOR THE PRODUCTION OF CELLS AND CELL PRODUCTS AND APPLICATIONS THEREOF by Robert J. Wojciechowski et al.
  
October 30, 2012/March 7, 2013
  
United States
             
WO 2012/171030
  
METHOD AND APPARATUS FOR ANTIBODY PRODUCTION AND PURIFICATION by Mark Hirschel et al.
  
June 11, 2012/Dec. 13, 2012
  
International
 
We have filed PCT applications based on or related to various aspects of our analyses of clinical benefit based on isotype, and to sequencing results matching vaccine to antigen coverage for the development of a companion diagnostic and to use of the AutovaxID® instrument for the production of viruses, virus-like particles, and antiviral vaccines such as those targeting influenza and other contagious diseases.  In addition to its independent research and development programs, it is anticipated that our collaborations with industry and research partners will generate additional valuable intellectual property, which will be wholly-owned, jointly owned and/or licensed to us.
 
We also possess licensed intellectual property used in the development and manufacture of BiovaxID.  BiovaxID is manufactured with a proprietary cell line, which we have licensed on a world-wide exclusive basis from Stanford. This is significant, because we believe that the use of any cell line other than our exclusively licensed cell line, in the production of a similar idiotype vaccine, would require filing a separate IND application and undergoing clinical testing evaluation by the FDA.
 
Additionally, we consider trademarks to be important to our business. We have established trademarks covering various aspects of our hollow fiber perfusion process, instruments and proprietary cell culturing methods (AutovaxID®, Acusyst-Maximizer® and Acusyst-Xcell®). We have applied for the U.S. and foreign registration of the trademark BiovaxID in connection with our therapeutic cancer vaccine and Autovax™ in connection with our instrument used in the manufacture of BiovaxID. We plan to continue aggressively pursuing trademark and other proprietary protection for our therapeutic vaccine technology and instrumentation, both nationally and internationally.
 
Our ability to maintain and solidify our proprietary position for our technology will depend on our success in obtaining effective claims and enforcing those claims once granted. We do not know whether any of our patent applications or those patent applications that we license will result in the issuance of any patents. Our issued patents and those that may issue in the future, or those licensed to us, may be challenged, invalidated, or circumvented, which could limit our ability to stop competitors from marketing related products or the length of term of patent protection that we may have for our product candidates. In addition, the rights granted under any issued patents may not provide us with proprietary protection or competitive advantages against competitors with similar technology. Furthermore, our competitors may independently develop similar technologies or duplicate any technology developed by us. Because of the extensive time required for development, testing and regulatory review of a potential product, it is possible that, before any of our product candidates can be commercialized, any related patent may expire or remain in force for only a short period following commercialization, thereby reducing any advantage of the patent.
 
 
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We rely in some circumstances on trade secrets to protect our technology, particularly with respect to certain aspects of our BiovaxID manufacturing process. However, trade secrets are difficult to protect. We seek to protect our proprietary technology and processes, in part, by confidentiality agreements with our employees, consultants, scientific advisors, and other contractors. These agreements may be breached, and we may not have adequate remedies for any breach. In addition, our trade secrets may otherwise become known or be independently discovered by competitors. To the extent that our employees, consultants, or contractors use intellectual property owned by others in their work for us, disputes may arise as to the rights in related or resulting know-how and inventions.

GOVERNMENT REGULATION
 
Government authorities in the U.S. at the federal and state local levels and in foreign countries extensively regulate, among other things, the research, development, testing, manufacture, labeling, promotion, advertising, distribution, sampling, marketing, and import and export of pharmaceutical products, biologics, and medical devices. All of our product candidates in development will require regulatory and/or marketing approval by government agencies prior to commercialization. In particular, human therapeutic products are subject to rigorous preclinical and clinical trials and other approval procedures of the FDA and similar regulatory authorities in foreign countries. Various federal, state, local, and foreign statutes and regulations also govern testing, manufacturing, safety, labeling, storage, and record-keeping related to such products and their marketing. The process of obtaining these approvals and the subsequent process of maintaining substantial compliance with appropriate federal, state, local, and foreign statutes and regulations require the expenditure of substantial time and financial resources. The FDA regulates drugs and well-characterized biologics under the Federal Food, Drug, and Cosmetic Act (“FDCA”), and implementing regulations that are adopted under the FDCA. In the case of biologics, the FDA regulates such products under the Public Health Service Act. If we fail to comply with the applicable requirements under these laws and regulations at any time during the product development process, approval process, or after approval, we may become subject to administrative or judicial sanctions. These sanctions could include the FDA’s refusal to approve pending applications, withdrawals of approvals, clinical holds, warning letters, product recalls, product seizures, total or partial suspension of its operations, injunctions, fines, civil penalties or criminal prosecution. Any agency enforcement action could have a material adverse effect on us. The FDA also administers certain controls over the export of drugs and biologics from the U.S.  Any failure by us, our suppliers of manufactured drug product, collaborators or licensees to obtain or maintain, or any delay in obtaining, regulatory approvals could adversely affect the marketing of our product candidates and our ability to receive product revenue, license revenue or profit sharing payments. In addition, statutes, rules, regulations, and policies may change and new legislation or regulations may be issued that could delay such approvals.
 
The FDA has extensive regulatory authority over biopharmaceutical products (drugs and diagnostic products produced from biologic processes). The principal FDA regulations that pertain to our cell production activity include, but are not limited to 21CFR Parts 600 and 610 – General Biological Products and Standards; 21 CFR Parts 210 and 211 – current Good Manufacturing Practices for Finished Pharmaceuticals; 21 CFR Part 820 – Quality System Regulations (medical devices); and 21 CFR Part 58 – Good Laboratory Practice for Non-Clinical Laboratory Studies. FDA’s guidelines include controls over procedures and systems related to the production of mammalian proteins and quality control testing of any new biological drug or product intended for use in humans (including, to a somewhat lesser degree, in vivo biodiagnostic products). FDA guidelines are intended to assure that the biological drug or product meets the requirements through rigorous testing with respect to safety, efficacy, and meet the purity characteristics for identity and strength. FDA approvals for the use of new biological drugs or products (that can never be assured) require several rounds of extensive preclinical testing and clinical investigations conducted by the sponsoring pharmaceutical company prior to sale and use of the product. At each stage, the approvals granted by the FDA include the manufacturing process utilized to produce the product. Accordingly, our cell culture systems used for the production of therapeutic or biotherapeutic products (biological drug or product) are subject to significant regulation by the FDA under the FDCA.
 
Our cell culture systems used to produce cells for diagnostic uses are regulated under the FDCA as Class I medical devices. Medical devices are classified by the FDA into three classes (Class I, Class II and Class III) based upon the potential risk to the consumer posed by the medical device (Class I medical devices pose the least amount of risk, while Class III medical devices and “new” devices are presumed to inherently pose the greatest amount of risk). As Class I medical devices, our systems must be manufactured in accordance with cGMP guidelines. Sales of such systems to customers using them to manufacture materials for clinical studies and licensure do not require prior FDA approval.
 
The process of complying with FDA guidelines and obtaining approvals from the FDA of applications to market biopharmaceutical drugs and products is costly, time consuming and subject to unanticipated delays. There is no assurance that our customers will be able to obtain FDA approval for biological drugs and products produced with our systems, and failure to receive such approvals may adversely affect the demand for our services.
 
Under the FDCA, our customers must establish and validate standard operating procedures (“SOPs”) utilizing our cell culture technologies in their drug master files. We provide assistance in operational, validation, calibration and preventive maintenance SOPs to customers, as needed, to support their product development and commercialization processes. For example, we will typically provide existing and prospective customers who are utilizing our contract production services or constructing production facilities based on our cell culture technologies with information to enable such customers to comply with the FDA’s guidelines required for facility layout and design. This information may be provided either in a drug/biologic master file that we give permission to customers to cross reference in their submission to the FDA, or provided to customers to include in their FDA submissions.
 
 
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As we currently do business in a significant number of countries, in addition to the requirements of the FDA, we are subject to the regulations of other countries and their governmental agencies which apply to our goods and services when sold in their jurisdiction.
 
We are subject to various regulations regarding handling and disposal of potentially hazardous materials, wastes and chemicals such as cells and their secreted waste products, including those enforced by the U.S. Environmental Protection Agency (“EPA”) and various state and local agencies.
 
Pharmaceutical Product Regulation
 
Regulation by governmental authorities in the U.S. and other countries is a significant factor in the manufacture and marketing of pharmaceuticals and in our ongoing research and development activities. Most, if not all, of our product candidates require regulatory approval by governmental agencies prior to commercialization. In the case of biologics, they are subject to rigorous preclinical testing and clinical trials and other pre-marketing approval requirements by the FDA and foreign regulatory authorities.
 
Each of these three phases is discussed further below.
 
Preclinical Phase
 
The activities required before a product may be marketed in the U.S. and other countries begin with preclinical testing not involving human subjects.  The development of a new pharmaceutical agent begins with the discovery or synthesis of a new molecule or well-characterized biologic. These agents are screened for pharmacological activity using various animal and tissue models, with the goal of selecting a lead agent for further development. Additional studies are conducted to confirm pharmacological activity, to generate safety data, and to evaluate prototype dosage forms for appropriate release and activity characteristics. Once the pharmaceutically active molecule is fully characterized, an initial purity profile of the agent is established. During this and subsequent stages of development, the agent is analyzed to confirm the integrity and quality of material produced. In addition, development and optimization of the initial dosage forms to be used in clinical trials are completed, together with analytical models to determine product stability and degradation. A bulk supply of the active ingredient to support the necessary dosing in initial clinical trials must be secured. Upon successful completion of preclinical safety and efficacy studies in animals, an IND submission is prepared and provided to the FDA for review prior to commencement of human clinical trials. The IND consists of the initial chemistry, analytical, formulation, and animal testing data generated during the preclinical phase. In general, the review period for an IND submission is 30 days, after which, if no comments are made by the FDA, the product candidate can be studied in Phase 1 clinical trials.
 
Clinical Phase
 
Following successful submission of an IND, the sponsor is permitted to conduct clinical trials involving the administration of the investigational product candidate to human subjects under the supervision of qualified investigators in accordance with good clinical practice. Typically, clinical evaluation involves the following time-consuming and costly three-phase sequential process:
 
 
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Phase 1. Phase 1 clinical trials are conducted in a limited number of healthy individuals to determine the drug or biologics’ safety and tolerability and include biological analyses to determine the availability and metabolization of the active ingredient following administration. The total number of subjects and patients included in Phase 1 clinical trials varies, but are generally in the range of 20 to 80 people.
 
 
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Phase 2. Phase 2 clinical trials involve administering the drug to individuals who suffer from the target disease or condition to determine the drug or biologics’ potential efficacy and ideal dose. These clinical trials are typically well controlled, closely monitored, and conducted in a relatively small number of patients, usually involving no more than several hundred subjects. These clinical trials require scale up for manufacture of increasingly larger batches of bulk chemical. These batches require validation analysis to confirm the consistent composition of the drug or biologics.
 
 
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Phase 3. Phase 3 clinical trials are performed after preliminary evidence suggesting effectiveness of a drug or biologics has been obtained and safety (toxicity), tolerability, and an ideal dosing regimen have been established. Phase 3 clinical trials are intended to gather additional information about the effectiveness and safety that is needed to evaluate the overall benefit-risk relationship of the drug or biologics and to complete the information needed to provide adequate instructions for the use of the drug or biologics, also referred to as the Official Product Information. Phase 3 clinical trials usually include from several hundred to several thousand subjects.
 
Throughout the clinical phase, samples of the product made in different batches are tested for stability to establish shelf life constraints. In addition, large-scale production protocols and written standard operating procedures for each aspect of commercial manufacture and testing must be developed.
 
 
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Phase 1, 2, and 3 testing may not be completed successfully within any specified time period, if at all. The FDA closely monitors the progress of each of the three phases of clinical trials that are conducted under an IND and may, at its discretion, reevaluate, alter, suspend, or terminate the testing based upon the data accumulated to that point and the FDA’s assessment of the risk/benefit ratio to the patient. The FDA may suspend or terminate clinical trials at any time for various reasons, including a finding that the subjects or patients are being exposed to an unacceptable health risk. The FDA can also request additional clinical trials be conducted as a condition to product approval. Additionally, new government requirements may be established that could delay or prevent regulatory and marketing approval of our product candidates under development. Furthermore, institutional review boards, which are independent entities constituted to protect human subjects in the institutions in which clinical trials are being conducted, have the authority to suspend clinical trials at any time for a variety of reasons, including safety issues.
 
New Drug Application or Biologics License Application
 
After the successful completion of Phase 3 clinical trials, the sponsor of the new drug submits a NDA or BLA, in the case of biologics, to the FDA requesting approval to market the product for one or more indications. A NDA, or BLA, is a comprehensive, multi-volume application that includes, among other things, the results of all preclinical and clinical studies, information about the drug’s composition, and the sponsor’s plans for producing, packaging, and labeling the drug. Under the Pediatric Research Equity Act of 2003, an application also is required to include an assessment, generally based on clinical study data, on the safety and efficacy of drugs for all relevant pediatric populations before the NDA is submitted. The statute provides for waivers or deferrals in certain situations. In most cases, the NDA or BLA must be accompanied by a substantial user fee. In return, the FDA assigns a goal of 10 months from acceptance of the NDA or BLA to return of a first “complete response,” in which the FDA may approve the product or request additional information.  
 
The submission of the application is no guarantee that the FDA will find it complete and accept it for filing. The FDA reviews all NDAs and BLAs submitted before it accepts them for filing. It may refuse to file the application and request additional information rather than accept the application for filing, in which case, the application must be resubmitted with the supplemental information. After application is deemed filed by the FDA, the FDA reviews an NDA or BLA to determine, among other things, whether a product is safe and effective for its intended use. The FDA has substantial discretion in the approval process and may disagree with an applicant’s interpretation of the data submitted in its NDA or BLA. Drugs that successfully complete NDA or BLA review may be marketed in the U.S., subject to all conditions imposed by the FDA. Prior to granting approval, the FDA generally conducts an inspection of the facilities, including outsourced facilities, which will be involved in the manufacture, production, packaging, testing and control of the drug product for cGMP compliance. The FDA will not approve the application unless cGMP compliance is satisfactory. If the FDA determines that the marketing application, manufacturing process, or manufacturing facilities are not acceptable, it will outline the deficiencies in the submission and will often request additional testing or information. Notwithstanding the submission of any requested additional information, the FDA ultimately may decide that the marketing application does not satisfy the regulatory criteria for approval and refuse to approve the application by issuing a “not approvable” letter or a “complete response” letter requiring additional steps to be completed before approval.
 
Biologics (such as BiovaxID) differ from other drugs for human use in that they must include more detailed chemistry and manufacturing information. This is necessary to help ensure the purity and quality of the product, for example to help ensure that it is not contaminated by an undesired microorganism or by another contaminant.  The sponsoring company’s manufacturing facility must also supply product specific facility information that outlines the method of manufacture of the biologic in significant detail, since slight variations can result in a different final product. Further, an inspection of the manufacturing facility is completed to assess the production process and facility since these aspects also have a significant impact on the safety and efficacy of the product. 
 
Post-Approval Phase
 
If the FDA approves the NDA or BLA, as applicable, the pharmaceutical product becomes available for physicians to prescribe in the U.S. After approval, the product is still subject to continuing regulation by FDA, including record keeping requirements, submitting periodic reports to the FDA, reporting of any adverse experiences with the product, and complying with drug sampling and distribution requirements. In addition, the sponsor is required to maintain and provide updated safety and efficacy information to the FDA. The sponsor is also required to comply with requirements concerning advertising and promotional labeling. In that regard, advertising and promotional materials must be truthful and not misleading. The sponsor is also prohibited from promoting any non-FDA approved or “off-label” indications of products. Failure to comply with those requirements could result in significant enforcement action by the FDA, including warning letters, orders to pull the promotional materials, and substantial fines. Also, quality control and manufacturing procedures must continue to conform to cGMP after approval.
 
 
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Drug and biologics manufacturers and their subcontractors are required to register their facilities and products manufactured annually with FDA and certain state agencies and are subject to periodic unannounced inspections by the FDA to assess compliance with cGMP regulations. Facilities may also be subject to inspections by other federal, foreign, state, or local agencies. In addition, approved biological drug products may be subject to lot-by-lot release testing by the FDA before these products can be commercially distributed. Accordingly, manufacturers must continue to expend time, money, and effort in the area of production and quality control to maintain compliance with cGMP and other aspects of regulatory compliance.
 
In addition, following FDA approval of a product, discovery of problems with a product or the failure to comply with requirements may result in restrictions on a product, manufacturer, or holder of an approved marketing application, including withdrawal or recall of the product from the market or other voluntary or FDA-initiated action that could delay further marketing. Newly discovered or developed safety or effectiveness data may require changes to a product’s approved labeling, including the addition of new warnings and contraindications. Also, the FDA may require post-market testing and surveillance to monitor the product’s safety or efficacy, including additional clinical studies, known as Phase 4 clinical trials, to evaluate long-term effects.
 
Orphan Drug Designation and Exclusivity
 
Pursuant to the U.S. Orphan Drug Act, a sponsor may request that the FDA designate a drug intended to treat a "rare disease or condition" as an "orphan drug." The term "orphan drug" can refer to either a drug or biologic. A rare disease or condition is defined as one which affects less than 200,000 people in the U.S., or which affects more than 200,000 people, but for which the cost of developing and making available the product is not expected to be recovered from sales of the product in the U.S. In the U.S., Orphan Drug designation must be requested before submitting a NDA or BLA.  Upon the approval of the first NDA or BLA for a drug designated as an orphan drug for a specified indication, the sponsor of that NDA or BLA is entitled to seven years of exclusive marketing rights in the U.S. for the orphan drug for the same indication unless the sponsor cannot assure the availability of sufficient quantities of the drug to meet the needs of persons with the disease. However, orphan drug status is particular to the approved indication and does not prevent another company from seeking approval of an off-patent drug that has other labeled indications that are not under orphan or other exclusivities. The period of orphan exclusivity is concurrent with any patent or other exclusivity that relates to the drug or biologic. Orphan drugs may also be eligible for federal income tax credits for costs associated with the drugs' development. In order to increase the development and marketing of drugs for rare disorders, regulatory agencies outside the U.S., such as the EU (which has a ten year exclusivity marketing period) have enacted regulations similar to the Orphan Drug Act.
 
Orphan Drug designation does not convey any advantage in, or shorten the duration of, the regulatory review and approval process. If a product which has an Orphan Drug designation subsequently receives the first FDA approval for the indication for which it has such designation, the product is entitled to a marketing exclusivity. For seven years, the FDA may not approve any other application, including NDAs or BLAs, to market the “same drug” for the same indication. The only exceptions are (i) where the second product is shown to be “clinically superior” to the product with Orphan Drug exclusivity, as that phrase is defined by the FDA and (ii) if there is an inadequate supply.
 
Manufacturing
 
Among the conditions for regulatory/marketing approval the regulatory agency, such as the FDA, the EMA and Health Canada, requires that the prospective manufacturer's quality control and manufacturing procedures continually conform to cGMP regulations (which are regulations governing the manufacture, processing, packing, storage and testing of drugs and biologics intended for human use). In complying with cGMP, manufacturers must devote extensive time, money and effort in the area of production and quality control and quality assurance to maintain full technical compliance. Manufacturing facilities and company records are subject to periodic inspections by the regulatory agency to ensure compliance. If a manufacturing facility is not in substantial compliance with these requirements, regulatory enforcement action may be taken by the regulatory agency, which may include seeking an injunction against shipment of products from the facility and recall of products previously shipped from the facility.  Changes to the manufacturing process or site during or following the completion of clinical trials requires sponsors to demonstrate to the regulatory agency that the product under new conditions is comparable to the product that was the subject of earlier clinical testing. This requirement applies to relocations or expansions of manufacturing facilities, or additional facilities that may be required upon successful commercialization of the product. A showing of comparability requires data demonstrating that the product continues to be safe, pure, and potent and may be based on chemical, physical, and biological assays and, in some cases, other non-clinical data.
 
 
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Medical Device Regulation
 
New medical devices are also subject to FDA approval and extensive regulation under the FDCA. Under the FDCA, medical devices are classified into one of three classes: Class I, Class II, or Class III. The classification of a device into one of these three classes generally depends on the degree of risk associated with the medical device and the extent of control needed to ensure safety and effectiveness.
 
Class I devices are those for which safety and effectiveness can be assured by adherence to a set of general controls. These general controls include compliance with the applicable portions of the FDA’s Quality System Regulation (“QSR”), which sets forth good manufacturing practice requirements; facility registration and product reporting of adverse medical events listing; truthful and non-misleading labeling; and promotion of the device only for its cleared or approved intended uses. Class II devices are also subject to these general controls, and any other special controls as deemed necessary by the FDA to ensure the safety and effectiveness of the device. Review and clearance by the FDA for these devices is typically accomplished through the so-called 510(k) pre-market notification procedure. A Class III device requires approval of a premarket application (“PMA”), an expensive, lengthy and uncertain process requiring many years to complete.
 
When 510(k) clearance is sought, a sponsor must submit a pre-market notification demonstrating that the proposed device is substantially equivalent to a previously approved device. If the FDA agrees that the proposed device is substantially equivalent to the predicate device, then 510(k) clearance to market will be granted. After a device receives 510(k) clearance, any modification that could significantly affect its safety or effectiveness, or that would constitute a major change in its intended use, requires a new 510(k) clearance or could require pre-market approval. Our instruments and disposables used for the production of cell cultures are generally regulated as Class I devices exempt from the 510(k) clearance process.
 
Clinical trials are almost always required to support a PMA and are sometimes required for a 510(k) pre-market notification. These clinical trials generally require submission of an application for an investigational device exemption (“IDE”). An IDE must be supported by pre-clinical data, such as animal and laboratory testing results, which show that the device is safe to test in humans and that the study protocols are scientifically sound. The IDE must be approved in advance by the FDA for a specified number of patients, unless the product is deemed a non-significant risk device and is eligible for more abbreviated IDE requirements.
 
Both before and after a medical device is commercially distributed, manufacturers and marketers of the device have ongoing responsibilities under FDA regulations. The FDA reviews design and manufacturing practices, labeling and record keeping, and manufacturers’ required reports of adverse experiences and other information to identify potential problems with marketed medical devices. Device manufacturers are subject to periodic and unannounced inspection by the FDA for compliance with the QSR, cGMP requirements that govern the methods used in, and the facilities and controls used for, the design, manufacture, packaging, servicing, labeling, storage, installation, and distribution of all finished medical devices intended for human use.  
 
If the FDA finds that a manufacturer has failed to comply or that a medical device is ineffective or poses an unreasonable health risk, it can institute or seek a wide variety of enforcement actions and remedies, ranging from a public warning letter to more severe actions such as: fines, injunctions, and civil penalties; recall or seizure of products; operating restrictions, partial suspension or total shutdown of production; refusing requests for 510(k) clearance or PMA approval of new products; withdrawing 510(k) clearance or PMA approvals already granted; and criminal prosecution.
 
The FDA also has the authority to require repair, replacement or refund of the cost of any medical device.
 
The FDA also administers certain controls over the export of medical devices from the U.S., as international sales of medical devices that have not received FDA approval are subject to FDA export requirements. Additionally, each foreign country subjects such medical devices to its own regulatory requirements. In the EU, a single regulatory approval process has been created, and approval is represented by the “CE” Mark.
 
 
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Other Regulation in the United States
 
The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act (2010) (collectively, the “PPACA”).  Enacted in March 2010, the PPACA, makes changes that could significantly impact the development and commercialization and of our product candidates.  Significant measures contained in the PPACA include, for example, coordination and promotion of research on comparative clinical effectiveness of different technologies and procedures, initiatives to revise Medicare payment methodologies, such as bundling of payments across the continuum of care by providers and physicians, and initiatives to promote quality indicators in payment methodologies. The PPACA also includes significant new fraud and abuse measures, including required disclosures of financial arrangements with physician customers, lower thresholds for violations and increasing potential penalties for such violations. In addition, the PPACA establishes an Independent Payment Advisory Board (“IPAB”), to reduce the per capita rate of growth in Medicare spending. The IPAB has broad discretion to propose policies to reduce expenditures, which may have a negative impact on payment rates for services or therapeutics, including therapeutics like BiovaxID.  In addition to the PPACA, the effect of which cannot presently be fully quantified given its relatively recent enactment, various healthcare reform proposals have also emerged from federal and state governments. Changes in healthcare policy could substantially impact the development and commercialization of BiovaxID.  We cannot predict whether future healthcare initiatives will be implemented at the federal or state level or in countries outside of the U.S. in which we may do business, or the effect any future legislation or regulation will have on us. The taxes imposed by the new federal legislation and the expansion in government's role in the U.S. healthcare industry may result in decreased profits to us, lower reimbursements by payers for our product candidates or reduced medical procedure volumes, all of which may adversely affect our business, financial condition and results of operations, possibly materially.
 
The Biologics Price Competition and Innovation Act (2010).  The Biologics Price Competition and Innovation Act, establishes an abbreviated approval pathway for “biosimilar” biological products. Among the provisions potentially applicable to our product candidates are (1) innovator manufacturers of reference biological products (such as BiovaxID) are granted 12 years of exclusive use before biosimilars can be approved for marketing in the U.S. and (2) an application for a biosimilar product may not be submitted to the FDA until 4 years after the date on which the BLA for the reference product was first approved. FDA is still early in the process of developing regulations to implement the provisions of this legislation.
 
Toxic Substances Control Act. The EPA has promulgated regulations under Section 5 of the Toxic Substances Control Act (“TSCA”), which require notification procedures for review of certain so-called intergeneric microorganisms before they are introduced into commerce. Intergeneric microorganisms are those formed by deliberate combinations of genetic material from organisms classified in different taxonomic genera, which are types of animal or plant groups. The regulations provide exemptions from the reporting requirements for new microorganisms used for research and development when the researcher or institution is in mandatory compliance with the National Institutes of Health Guidelines for Research Involving Recombinant DNA Molecules (“NIH Guidelines”). Those researchers voluntarily following the NIH Guidelines can, by documenting their use of the NIH Guidelines, satisfy EPA’s requirements for testing in contained structures. The EPA may enforce the TSCA through enforcement actions such as seizing noncompliant substances, seeking injunctive relief, and assessing civil or criminal penalties. We believe that our research and development activities involving intergeneric microorganisms comply with the TSCA, but there can be no assurance that restrictions, fines or penalties will not be imposed on us in the future.
 
Health Care Coverage and Reimbursement. Commercial success in marketing and selling our product candidates depends, in part, on the availability of adequate coverage and reimbursement from third-party health care payers, such as government and private health insurers and managed care organizations. Third-party payers are increasingly challenging the pricing of medical products and services. Government and private sector initiatives to limit the growth of health care costs, including price regulation, competitive pricing, coverage and payment policies, and managed-care arrangements, are continuing in many countries where we do business, including the U.S. These changes are causing the marketplace to put increased emphasis on the delivery of more cost-effective medical products.
 
Government programs, including Medicare and Medicaid, private health care insurance and managed-care plans have attempted to control costs by limiting the amount of reimbursement they will pay for particular procedures or treatments. This has created an increasing level of price sensitivity among customers for our product candidates. Examples of how limits on drug coverage and reimbursement in the U.S. may cause drug price sensitivity include the growth of managed care, changing Medicare reimbursement methodologies, and drug rebates and price controls. Some third-party payers must also approve coverage for new or innovative devices or therapies before they will reimburse health care providers who use the medical devices or therapies. Even though a new medical product may have been cleared for commercial distribution, we may find limited demand for the product until reimbursement approval has been obtained from governmental and private third-party payers.
 
 
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Anti-Kickback Laws. In the U.S., there are federal and state anti-kickback laws that prohibit the payment or receipt of kickbacks, bribes or other remuneration to induce the purchase, order or recommendation of health care products and services. These laws constrain the sales, marketing and other promotional activities of pharmaceutical companies, such as us, by limiting the kinds of financial arrangements we may have with prescribers, purchasers, dispensers and users of drugs and biologics. The U.S. Department of Health and Human Services (“HHS”) Office of Inspector General (“OIG”) has issued “Compliance Guidance” for pharmaceutical manufacturers which, among other things, identifies manufacturer practices implicating the federal anti-kickback law (42 U.S.C. §1320a-7b(b)) and describes elements of an effective compliance program. The OIG Compliance Guidance is voluntary, and we have not adopted a formal compliance program modeled after the one described in the OIG Compliance Guidance. Although none of our practices have been subject to challenge under any anti-kickback laws, due to the breadth of the statutory provisions of some of these laws, it is possible that some of our practices might be challenged under one or more of these laws in the future. Violations of these laws can lead to civil and criminal penalties, including imprisonment, fines and exclusion from participation in federal health care programs. Any such violations could have a material adverse effect on our business, financial condition, results of operations or cash flows.
 
Health Information Privacy and Security. Individually identifiable health information is subject to an array of federal and state regulation. Federal rules promulgated pursuant to the Health Information Portability and Accountability Act of 1996 (“HIPAA”) regulate the use and disclosure of health information by “covered entities” (which includes individual and institutional providers from which we may receive individually identifiable health information). These regulations govern, among other things, the use and disclosure of health information for research purposes, and require the covered entity to obtain the written authorization of the individual before using or disclosing health information for research. Failure of the covered entity to obtain such authorization (absent obtaining a waiver of the authorization requirement from an Institutional Review Board) could subject the covered entity to civil and criminal penalties. As the implementation of this regulation is still in its early phases, we may experience delays and complex negotiations as we deal with each entity’s differing interpretation of the regulations and what is required for compliance. Further, HIPAA’s criminal provisions are not limited in their applicability to “covered persons,” but apply to any “person” that knowingly and in violation of the statute obtains or discloses individually identifiable health information. Also, where its customers or contractors are covered entities, including hospitals, universities, physicians or clinics, we may be required by the HIPAA regulations to enter into “business associate” agreements that subject us to certain privacy and security requirements, including making its books and records available for audit and inspection by HHS and implementing certain health information privacy and security safeguards. In addition, many states have laws that apply to the use and disclosure of health information, and these laws could also affect the manner in which we conduct its research and other aspects of its business. Such state laws are not preempted by the federal privacy law where they afford greater privacy protection to the individual. While activities to assure compliance with health information privacy laws are a routine business practice, we are unable to predict the extent to which its resources may be diverted in the event of an investigation or enforcement action with respect to such laws.
 
Foreign Regulation
 
Whether or not we obtain FDA approval for a product, we may choose to seek approval of our product candidates by the comparable regulatory authorities of foreign countries.  Like in the U.S., before we can commence clinical trials or marketing of our product candidates in a foreign country, we must submit a new drug application in that country. The requirements governing the conduct of clinical trials, product licensing, pricing, and reimbursement vary greatly from country to country. Although governed by the applicable country, clinical trials conducted outside of the U.S. typically are administered under a three-phase sequential process similar to that discussed above for pharmaceutical products.  Clinical trials conducted in the EU must comply with the EU Clinical Trial Regulations and are monitored and inspected by each EU Member State.   Clinical trials conducted in Canada must comply with the Health Canada Regulations and are approved and monitored by an independent committee of doctors, scientists, advocates and others to ensure safety and ethical standards.  In addition, regulatory approval of pricing/marketing of the product candidate is required in most countries other than the U.S.  We face the risk that the pricing, which results from the regulatory approval process, would be insufficient to generate an acceptable return to us or our collaborators.
 
The regulatory/marketing approval process varies from country to country, and the approval time may be longer or shorter than that required for FDA approval.  However, foreign countries are similar in that they generally require, as part of any new drug submission/application process, sufficient evidence to support the safety, efficacy and quality of the product candidate. 
 
 
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Under EU regulatory systems, the manufacture and sale of new drugs are controlled by the EMA.  MAAs are submitted under either a centralized or decentralized procedure for most products. The centralized procedure, which is the pathway for BiovaxID, is available for medicines produced by biotechnology or which are highly innovative and provides single marketing authorization that is valid for all EU member states. Under European Commission Regulation 726/2004, the centralized authorization procedure is required for all biotechnology-derived medicinal products developed through recombinant DNA technology, controlled expression of genes coding for biologically active proteins, and hybridoma and monoclonal antibody methods. It is also required for designated orphan medicinal products and all new active substances indicated for the treatment of AIDS, cancer, neurodegenerative disorder, or diabetes. Under the EMA centralized procedure, the marketing approval of BiovaxID can be simultaneously obtained throughout all EU-member countries with a single MAA.  As part of the EMA’s centralized procedure, the MAA is assessed by the EMA’s CHMP, which designates from within its membership, a Rapporteur and Co-Rapporteur, as well as a PRAC Rapporteur and Co-Rapporteur.  The Rapporteurs and Co-Rapporteurs are assigned with the primary responsibility of preparing and delivering an approvability evaluation report, supported by a team of assessors from their National Authority.  On December 3, 2013, we submitted an MAA under a centralized procedure with the EMA for BiovaxID.
 
Under Canadian regulatory systems, the manufacture and sale of new drugs are controlled by Health Canada.  NDSs are be submitted for regulatory approval in Canada.  Upon sufficient evidence to support safety, efficacy or quality claims for a NDS, a product is issued a Notice of Compliance (“NOC”) and a Drug Identification Number (“DIN”) indicating that the biologic is approved for sale in Canada.  All drugs that are marketed in Canada are subject to the Food and Drugs Act and Regulations. The Biologics and Genetic Therapies Directorate is responsible for the review and approval of all types of drug submissions for Biological (Schedule D) and Radiopharmaceutical (Schedule C) drug products, including, but not limited to NDSs. For the regulatory requirements specific to Biological (Schedule D to the Act) drugs, please refer to Divisions 4, of Part C of the Regulations. For general regulatory requirements concerning all drugs, including Good Manufacturing Practices, please refer to Divisions 1, 1a, 2, 5 and 8 of Part C of the Regulations.
 
Third-Party Reimbursement and Pricing Controls
 
In the U.S. and in international markets, sales of pharmaceutical products depend in significant part on the availability of reimbursement to the consumer from third-party payers, such as government and private insurance plans. Third-party payers are increasingly challenging the prices charged for medical products and services. It will be time-consuming and expensive for us to go through the process of seeking reimbursement from Medicare and private payers. Our product candidates may not be considered cost effective, and coverage and reimbursement may not be available or sufficient to allow us to sell our product candidates on a competitive and profitable basis. The passage of the Medicare Prescription Drug and Modernization Act of 2003 imposes new requirements for the distribution and pricing of prescription drugs which may affect the marketing of our product candidates.
 
In many foreign markets, including the member states of the EU, pricing of pharmaceutical products is subject to governmental control, mainly through pricing and reimbursement regulations under the centralized healthcare systems in place in EU member states.  In some EU jurisdictions, an approved medication cannot be marketed until an agreed-upon price structure is in place.  Various forms of pricing controls tend to exert downward pressure on pricing of pharmaceutical products in the EU.   In the U.S., there have been, and we expect that there will continue to be, a number of federal and state proposals to implement similar governmental pricing control. While we cannot predict whether such legislative or regulatory proposals will be adopted, the adoption of such proposals could have a material adverse effect on our business, financial condition and profitability.  
 
Liability Insurance
 
We may be exposed to potential product liability claims by users of our product candidates. Our business segments may expose us to potential risk of liability.  We seek to obtain agreements from contract production customers to mitigate such potential liability and to indemnify us under certain circumstances. The terms and conditions of our sales and instruments include provisions which are intended to limit our liability for indirect, special, incidental or consequential damages. There can be no assurance, however, that we will be successful in obtaining such agreements or that such indemnification, if obtained, will adequately protect us against potential claims.  The terms and conditions of our sales and instruments include provisions which are intended to limit our liability for indirect, special, incidental or consequential damages.  We presently maintain product liability insurance coverage in the aggregate and per occurrence of $2.0 million, in connection with our product candidates and our products and services, in amounts which we believe to be adequate and on acceptable terms.
 
Although, we believe that our current level of coverage is adequate to protect our business from foreseeable product liability claims, we may seek to increase our insurance coverage in the future in the event that we significantly increase our level of contract product and services and/or the initiation of any clinical trial program. There can be no assurance; however, that we will be able to maintain our existing coverage or obtain additional coverage on acceptable terms, or that such insurance will provide adequate coverage against all potential claims to which we may be exposed. A successful partially or completely uninsured claim against us could have a material adverse effect on our operations.
 
 
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EMPLOYEES
 
As of September 30, 2013, we had 45 employees (4 of whom are part-time employees). Advanced degrees and certifications of our staff include four Ph.D.s, one M.D., one CPA, and two JDs. From time to time, we employ and supplement our staff with temporary employees and consultants, as required. We believe that our relations with employees are satisfactory. None of our employees are covered by a collective bargaining agreement.  Each of our employees has entered into confidentiality, intellectual property assignment and non-competition agreements with us.
 
Our ability to continue to develop and improve marketable products and to establish and maintain our competitive position in light of technological developments will depend, in part, upon our ability to attract and retain qualified technical personnel.
 
CORPORATE INFORMATION
 
We are incorporated in the State of Delaware. Our principal executive offices are located at 300 South Hyde Park Avenue, Suite 210, Tampa, Florida 33606, and our telephone number at that address is (813) 864-2554. Our website is www.biovest.com.
 
ADDITIONAL INFORMATION AND WHERE TO FIND IT
 
Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are filed with the SEC.  Such reports and other information that we file with the SEC are available free of charge on our website (www.biovest.com) as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.  The public may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549, on official business days during the hours of 10:00 a.m. to 3:00 p.m.  The public may obtain information on the operations of the Public Reference Room by calling the SEC at 1-800-SEC-0330.  The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at http://www.sec.gov.  The contents of these websites are not incorporated into this filing.  Further, the foregoing references to the URLs for these websites are intended to be inactive textual references only.
 
ITEM 1A. RISK FACTORS
                      
Statements in this Annual Report on Form 10-K 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.
 
Factors that could cause actual results to differ materially from what is expressed or forecasted in our forward-looking statements include, but are not limited to, the following:
 
Risk Related to Our Business
 
We have a history of operating losses and expect to incur further losses.
 
We have never been profitable and we have incurred significant losses and cash flow deficits. For the years ended September 30, 2013 and 2012 we reported negative cash flows from operating activities of $5.7 million and $4.3 million, respectively. We anticipate that operations may continue to show losses and negative cash flow, particularly with the expenses associated with our continued interim analyses and efforts to seek regulatory approval for BiovaxID™. There is no assurance that the additional required funds can be obtained on terms acceptable or favorable to us, if at all. The audit opinion issued by our independent auditors with respect to our consolidated financial statements for fiscal 2013 indicates that there is substantial doubt about our ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. We expect to receive a similar audit opinion from our independent auditors with respect to our consolidated financial statements for fiscal 2014.
 
Our ability to achieve and sustain profitability is to a large degree dependent on obtaining regulatory/marketing approval for BiovaxID. We may not be successful in our efforts to develop and commercialize BiovaxID. We may not be successful in our efforts and even if successful, we may not be able to profitably commercialize any of our drug products.
 
 
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Our independent registered public accountants have expressed substantial doubt as to our ability to continue as a going concern.
 
We expect to continue to incur substantial net operating losses at least until BiovaxID receives marketing approval and acceptance, which may never occur. Continued operating losses will impair our ability to continue operations. We may not be able to generate sufficient product revenue to become profitable on a sustained basis, or at all. We have operating and liquidity concerns due to our significant net losses and negative cash flows from operations. As a result of these and other factors, our independent registered public accountants, Cherry Bekaert LLP, have indicated, in their report to our 2013 consolidated financial statements, that there is substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is dependent upon generating sufficient cash flow to conduct operations and obtaining additional capital and financing. Any financing activity is likely to result in significant dilution to current shareholders. Our consolidated financial statements have been prepared assuming we will continue as a going concern and do not include any adjustments that might result from the outcome of this uncertainty. In addition, our projected cash receipts from operations for fiscal 2014 are anticipated to be insufficient to finance operations without funding from other sources. Historically, we have had difficulty in meeting our cash requirements. We have, in part, met our cash requirements through proceeds from our cell culture and instrument manufacturing activities, various financing transactions, the use of cash on hand, short-term borrowings (primarily from affiliates), and by trade-vendor credit. There can be no assurances that management will obtain the necessary funding, reduce the level of historical losses or achieve successful commercialization of product candidates. Continuation as a going concern is ultimately dependent upon achieving profitable operations and positive operating cash flows sufficient to pay all obligations as they come due.
 
Our operating results may fluctuate widely between reporting periods.
 
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 of increased research and development and sales and marketing expenditures, the timing and size of contracts and whether we introduce to the market new products or processes. Consequently, revenues, profits or losses may vary significantly from quarter-to-quarter or year-to-year, and revenue, profits or losses in any period will not necessarily be indicative of results in subsequent periods. These period-to-period fluctuations in financial results may have a significant impact on the market price, if any, of our securities.

Because our consolidated financial statements for the year ended September 30, 2013 reflect fresh-start accounting adjustments made on emergence from bankruptcy and because of the effects of the transactions that became effective pursuant to the Plan, financial information in our current and future financial statements will not be comparable to our financial information from prior periods.
 
In connection with our emergence from bankruptcy, we adopted fresh-start accounting as of July 1, 2013 in accordance with ASC 852-10. The adoption of fresh-start accounting resulted in our becoming a new entity for financial reporting purposes. As required by fresh-start accounting, our assets and liabilities have been adjusted to fair value, and certain assets not previously recognized in our financial statements have been recognized. In addition to fresh-start accounting, our financial statements reflect all effects of the transactions implemented by the Plan. Accordingly, the financial statements prior to July 1, 2013 are not comparable with the financial statements for periods on or after July 1, 2013. Furthermore, the estimates and assumptions used to implement fresh-start accounting are inherently subject to significant uncertainties beyond our control. Accordingly, we cannot provide assurance that the estimates, assumptions, and values reflected in the valuations will be realized, and actual results could vary materially. For further information about fresh-start accounting, see Note 4 — “Fresh-Start reporting” in Notes to Consolidated Financial Statements.
 
We anticipate that we will need substantial additional funding in the future, and if we are unable to raise capital when needed, we would be forced to delay, reduce, or eliminate our product development programs or commercialization efforts.
 
Developing biopharmaceutical products, conducting clinical trials, establishing manufacturing capabilities, and marketing developed products is expensive. We anticipate that we will need to raise substantial additional capital in the future in order to complete the commercialization of our product candidates, to continue to pursue the submission of regulatory/marketing approval applications in various jurisdictions, for our product candidates and to fund the development and commercialization of our product candidates. Further, as a result of our formal guidance meeting with the FDA, we anticipate that we will need to raise substantial additional capital in order to conduct the second Phase 3 clinical trial for BiovaxID. Additional sources of funding have not been established.  Additional financing is currently being sought from a number of sources, including the sale of equity or debt securities, strategic collaborations, recognized research funding programs, as well as domestic and/or foreign licensing of BiovaxID, however, we may not be successful in obtaining such additional financing.
 
We have received a report from our independent auditors on our consolidated financial statements for our years ended September 30, 2013 and 2012, in which our auditors have included explanatory paragraphs indicating that our significant historical and expected future net losses cause substantial doubt about our ability to continue as a going concern.
 
 
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We expect to seek additional financing from a number of sources, including but not limited to public or private equity offerings, debt financings, or corporate collaboration and licensing arrangements. To the extent that we raise additional funds by issuing equity securities, our stockholders may experience additional dilution, and debt financing, if available, may involve restrictive covenants. If we raise funds through the issuance of equity securities, our current shareholders’ equity interests could be substantially diminished. If we raise additional funds through collaboration and licensing arrangements, it may be necessary to relinquish some of our rights to our technologies or our product candidates or grant licenses on terms that are not favorable to us. We cannot be certain that additional funding will be available on acceptable terms, or at all. If adequate funds are not available from the foregoing sources, we may consider additional strategic financing options, including sales of assets or business units, or we may be required to delay, reduce the scope of, or eliminate one or more of our research or development programs or curtail some of our commercialization efforts.
 
We may be unable to obtain necessary additional financing.
 
The capital requirements for our operations have been and will continue to be significant. Our ability to generate cash from operations is dependent upon, among other things, increased demand for our product candidates and services and the successful development of direct marketing and product distribution capabilities. Our ability to obtain required funding from debt or equity funding is dependent on numerous factors and is considered uncertain.  There can be no assurance that we will have sufficient capital resources to implement our business plan and we may need additional external debt and/or equity financing to fund our future operations.
 
We are largely dependent on the success of BiovaxID and we may not be able to successfully commercialize BiovaxID.
 
We have expended and will continue to expend significant time, money, and effort on the development of BiovaxID and our other product candidates. We will incur significant costs and may never generate significant revenues from commercial sales of BiovaxID, if approved and our other product candidates. BiovaxID has not been approved for marketing in any jurisdiction, and it may never be commercialized.  Before we can market and sell BiovaxID in the U.S., we will need to complete a second Phase 3 clinical trial, and we do not currently have funding for a second Phase 3 clinical trial.
 
If we fail to successfully commercialize BiovaxID, we may be unable to generate sufficient revenue to sustain and grow our business, and our business, financial condition, and results of operations will be adversely affected.
 
Before regulatory/marketing approval can be sought in the U.S. for BiovaxID we must successfully complete additional clinical trials, outcomes of which are uncertain.
 
In July 2012, we conducted a formal clinical meeting with the FDA in order to define the path for BiovaxID’s U.S. regulatory approval.  As a result of this guidance meeting, we plan to 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 the filing of our BLA for BiovaxID.  We are preparing to initiate this second Phase 3 clinical trial subject to availability of funding.
 
Conducting clinical trials is a lengthy, time-consuming, and expensive process, and the results of these trials are inherently uncertain. The time required to complete necessary clinical trials is often difficult, if not impossible, to predict. Our commencement and rate of completion of clinical trials may be delayed by many factors, including:
 
 
•
ineffectiveness of our product candidate or perceptions by physicians that the product candidate is not safe or effective for a particular indication;
 
 
•
inability to manufacture sufficient quantities of the product candidate for use in clinical trials;
 
 
•
delay or failure in obtaining approval of our clinical trial protocols from the FDA or institutional review boards;
 
 
•
slower than expected rate of patient recruitment and enrollment;
 
 
•
inability to adequately follow and monitor patients after treatment;
 
 
•
difficulty in managing multiple clinical sites;
 
 
•
unforeseen safety issues;
 
 
•
government or regulatory delays; and
 
 
•
clinical trial costs that are greater than we currently anticipate.  
 
Even if we achieve positive interim results in clinical trials, these results do not necessarily predict final results, and positive results in early clinical trials may not be indicative of success in later clinical trials. A number of companies in the pharmaceutical industry have suffered significant setbacks in advanced clinical trials, even after promising results in earlier clinical trials. Negative or inconclusive results or adverse medical events during a clinical trial could cause us to repeat or terminate a clinical trial or require us to conduct additional clinical trials. We do not know whether any future clinical trials will demonstrate safety and efficacy sufficiently to result in marketable product candidates. Our clinical trials may be suspended at any time for a variety of reasons, including if the FDA or we believe the patients participating in our clinical trials are exposed to unacceptable health risks or if the FDA finds deficiencies in the conduct of these clinical trials.
 
 
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Failures or perceived failures in our clinical trials will directly delay our product development and regulatory approval process, damage our business prospects, make it difficult for us to establish collaboration and partnership relationships, and negatively affect our reputation and competitive position in the pharmaceutical community.
 
If we fail to obtain regulatory and/or marketing approval of BiovaxID or any of our product candidates, we will be unable to commercialize these products.
 
Development, testing, manufacturing and marketing of pharmaceutical products are subject to extensive regulation by numerous governmental authorities in the U.S. and in other foreign countries. The process of obtaining FDA regulatory approval of pharmaceutical products is costly and time consuming. Any new pharmaceutical product must undergo rigorous preclinical and clinical testing and an extensive regulatory approval process mandated by the FDA. Such regulatory review includes the determination of manufacturing capability and product performance.  
 
We intend to seek regulatory approval from the FDA for BiovaxID; however, we do not plan on filing a BLA in the U.S. until after the completion of our second Phase 3 clinical trial which is expected to require a number of years to complete.  In addition to seeking regulatory approval from the FDA for BiovaxID, we intend to seek the regulatory and marketing approval required to market BiovaxID in the EU, Canada and potentially additional countries and territories. Marketing of BiovaxID in these countries, and in most other countries, is not permitted until we have obtained required approvals or exemptions in each Member State in the EU and each province in Canada.  The approval requirements and conditions (i.e., additional development and clinical trials to satisfy regulatory requirements) which each regulatory agency may require could delay or completely frustrate approval.  The regulatory approval process for any new drug or biologic, particularly including BiovaxID is considered robust, challenging and uncertain.
 
In addition, patient-specific active immunotherapies such as BiovaxID are complex, and regulatory agencies have limited experience with them. To date, the FDA has only approved for marketing two active immunotherapies for treating cancer. This limited precedent and experience may lengthen the regulatory review process and impede our ability to obtain timely FDA approval for BiovaxID, if it is approved at all. Even if BiovaxID is approved by the FDA, the FDA’s limited precedent and experience with respect to a patient-specific active idiotype vaccine may increase our development costs and otherwise delay or prevent commercialization.
 
There can be no assurance that the products currently in development, or those products acquired or in-licensed by us, will be approved by the FDA or any foreign regulatory agency. In addition, there can be no assurance that all necessary approvals will be granted for future products or that regulatory review or actions will not involve delays caused by such regulatory agency’s request for additional information or testing that could adversely affect the time to market and sale of the products.
 
Any delay in any approval or any failure to obtain approval of a product could delay or impair our ability to commercialize that product and to generate revenue, as well as increase costs for that product.
 
If we do not obtain and maintain regulatory/marketing approval of our product candidates, we will be unable to sell our product candidates.
 
Changes in law, government regulations and/or policies can have a significant impact on our results of operations.  The discovery, preclinical development, clinical trials, manufacturing, risk evaluation and mitigation strategies, marketing and labeling of pharmaceuticals and biologics are all subject to extensive laws and regulations, including without limitation, the U.S. Federal Food, Drug and Cosmetic Act, the U.S. Public Health Service Act, the Medicare Modernization Act, the Food and Drug Administration Amendments Act, the U.S. Foreign Corrupt Practices Act, the Sherman Antitrust Act, patent laws, environmental laws, privacy laws and other federal and state statutes, including anti-kickback, antitrust and false claims laws, as well as similar laws in foreign jurisdictions.  Enforcement of and changes in laws, government regulations and/or policies can have a significant adverse impact on our ability to commercialize our product candidates and to introduce new products to the market, which would adversely affect our results of operations.
 
If we or our agents, contractors or collaborators are delayed in receiving, or are unable to obtain all, necessary governmental approvals, we will be unable to effectively market our product candidates.
 
The testing, marketing and manufacturing of our product candidates requires regulatory/marketing approval, including approval from the FDA or other U.S. governmental authorities and other governmental authorities outside of the U.S. that perform similar roles, including the EMA, and Health Canada.
 
The regulatory/marketing approval process presents a number of risks to us, principally:

 
•
 In general, preclinical tests and clinical trials can take many years, and require the expenditure of substantial resources, and the data obtained from these tests and trials can be susceptible to varying interpretation that could delay, limit or prevent regulatory/marketing approval;
 
 
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•
Delays or rejections may be encountered during any stage of the regulatory process based upon the failure of the clinical or other data to demonstrate compliance with, or upon the failure of the product to meet, a regulatory agency's requirements for safety, efficacy and quality or, in the case of a product seeking an orphan drug indication, because another designee received approval first or received approval of other labeled indications;
 
 
•
 Requirements for regulatory/marketing approval may become more stringent due to changes in regulatory agency policy or the adoption of new regulations or legislation;
 
 
•
 The scope of any regulatory/marketing approval, when obtained, may significantly limit the indicated uses for which a product may be marketed and reimbursed and may impose significant limitations in the nature of warnings, precautions and contra-indications that could materially affect the sales and profitability of the drug;
 
 
•
 Approved products, as well as their manufacturers, are subject to continuing and ongoing review, and discovery of previously unknown problems with these products or the failure to adhere to manufacturing or quality control requirements may result in restrictions on their manufacture, sale or use or in their withdrawal from the market;
 
 
•
 Regulatory authorities and agencies of the U.S., the EU, Canada or other foreign governments may promulgate additional regulations restricting the sale of our product candidates, including specifically tailored risk evaluation and mitigation strategies;
 
 
•
 Guidelines and recommendations published by various governmental and non-governmental organizations can reduce the use of our product candidates;
 
 
•
 Once a product candidate receives regulatory/marketing approval, we may not market that product candidate for broader or different applications, and the FDA may not grant us approval with respect to separate product applications that represent extensions of our basic technology. In addition, the FDA may withdraw or modify existing approvals in a significant manner or promulgate additional regulations restricting the sale of our present or proposed product candidates. The FDA may also request that we perform additional clinical trials or change the labeling of product candidates if we or others identify side effects after our product candidates are on the market; and
 
 
•
 Our risk evaluation and mitigation strategies, labeling and promotional activities relating to our product candidates as well as our post-marketing activities will be regulated by the FDA, the Federal Trade Commission, the U.S. Department of Justice, the Drug Enforcement Agency, state regulatory agencies and foreign regulatory agencies and are subject to associated risks. In addition, individual states, acting through their attorneys general, have become active as well, seeking to regulate the marketing of prescription drugs under state consumer protection and false advertising laws. If we fail to comply with regulations regarding the promotion and sale of our product candidates, appropriate distribution of our product candidates under our restricted distribution systems, prohibition on off-label promotion and the promotion of unapproved products, such agencies may bring enforcement actions against us that could inhibit our commercial capabilities as well as result in significant penalties.
 
Other matters that may be the subject of governmental or regulatory action which could adversely affect our business include:
 
 
•
 changes in laws and regulations, including without limitation, patent, environmental, privacy, health care and competition laws;
 
 
•
 importation of prescription drugs from outside the U.S. at prices that are regulated by the governments of various foreign countries;
 
 
•
 additional restrictions on interactions with healthcare professionals; and
 
 
•
 privacy restrictions that may limit our ability to share data from foreign jurisdictions.
 
We have incurred significant costs in our development efforts to date and may never generate significant revenue from commercial sales of BiovaxID and our product candidates, if approved.
 
We expended significant time and funds in conducting the Phase 3 clinical trial in BiovaxID and the development of our other product candidates.  We expect to continue to expend significant sums in our development efforts of our product candidates. We expect to continue to incur significant operating expenses and capital expenditures as we:
 
 
•
conduct clinical trials;
 
 
•
conduct research and development on existing and new product candidates;
 
 
•
seek regulatory/marketing approvals for our product candidates;
 
 
•
commercialize our product candidates, if approved;
 
 
•
hire additional clinical, scientific, sales and marketing and management personnel; and
 
 
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•
identify and license additional product candidates.
 
If our product candidates fail in clinical trials or do not gain regulatory/marketing approval or gain regulatory/marketing approval for more restricted indications than we have anticipated, we may not generate significant revenues from any of our product candidates. In addition, we may continue to experience net losses for the foreseeable future, in which case our accumulated deficit will continue to increase, and we may exhaust our resources and be unable to complete the development of our product candidates. If we are unable to fund the continuing development of our product candidates or if we fail to generate significant revenues from any of our product candidates, our shareholders could lose all or part of their investment in our Company.
 
Even if approved, BiovaxID may be subject to promotional limitations.
 
We may not be able to obtain the labeling claims necessary or desirable for the promotion of our product candidates. The FDA has the authority to impose significant restrictions on an approved product through the product label and allowed advertising, promotional and distribution activities. The FDA also may approve a product for fewer indications than are requested or may condition approval on the performance of post-approval clinical studies. We may also be required to undertake post-marketing clinical trials. There may be monetary penalties if post-approval requirements are not fulfilled. If the results of such post-marketing studies are not satisfactory, the FDA may withdraw regulatory authorization or may condition continued marketing on commitments from us that may be expensive and/or time consuming to fulfill. Even if we receive FDA and/or other foreign regulatory/marketing approvals, if we or others identify adverse side effects after any of our product candidates are on the market, or if manufacturing problems occur, regulatory/marketing approval may be withdrawn and reformulation of our product candidates, additional clinical trials, changes in labeling of our product candidates and additional regulatory/marketing applications may be required.
 
There is a high risk of failure because we are trying to develop a new anti-cancer vaccine.
 
We are pursuing a novel patient-specific cancer therapy. Commercialization requires governmental approval, establishment of cost effective production capability, distribution capability and market acceptance. BiovaxID  is subject to all of the risks of failure that are inherent in developing products based on new technologies and the risks generally associated with drug development. These risks include the possibility that:
 
 
•
our technology or the product based on our technology will be ineffective or toxic, or otherwise fail to receive necessary regulatory/marketing approvals;
 
 
•
future products based on our technology will be difficult to manufacture on a large scale or at all or will prove to be uneconomical to produce or market;
 
 
•
proprietary rights of third parties will prevent us or our collaborators from marketing products;
 
 
•
third parties will market superior or equivalent products;
 
 
•
technology advances will render our technology or product outdated or less attractive; and
 
 
•
the products will not attain market acceptance.
 
Drug development, including clinical trials required for domestic and foreign governmental approval, is expensive and new drugs have a high risk of failure. Based on results at any stage of development, including later-stage clinical trials and our inability to bear the related costs associated with product development or product production or marketing, we may decide to discontinue development or clinical trial at any time.
 
Preparing for and processing the MAA, NDS and BLA for BiovaxID will be expensive and time consuming. The regulatory agencies responses to any application are uncertain may be rejected or denied, or may impose additional requirements. Such additional requirements may be expensive and/or time consuming, and meeting these additional requirements may be difficult or impossible.
 
We might be unable to manufacture our drug candidates on a commercial scale, even if approved.
 
Assuming approval of BiovaxID, manufacturing, supply and quality control problems could arise as we, either alone or with subcontractors, attempt to scale-up manufacturing capabilities for products under development. We might be unable to scale-up in a timely manner or at a commercially reasonable cost. Problems could lead to delays or pose a threat to the ultimate commercialization of our product candidates and cause us to fail.
 
Manufacturing facilities, and those of any future contract manufacturers, are or will be subject to periodic regulatory inspections by U.S. federal and state and foreign regulatory agencies and these facilities are subject to the particular regulatory agency’s quality system standards and regulations.  If we or our third-party manufacturers fail to maintain facilities in accordance with the particular regulatory agency’s quality system standards and regulations, then the manufacture process could be suspended or terminated, which would harm us.  
 
 
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We currently have only a pilot scale manufacturing facility.  If approved in the EU and Canada, we anticipate that we may need additional manufacturing capacity.  Adding manufacturing capacity will be expensive, time consuming and subject to significant regulatory requirements.
 
Because we have limited experience, we might be unsuccessful in our efforts to develop, obtain approval for, commercially produce or successfully market BiovaxID and/or any of our product candidates.
 
The extent to which we develop and commercialize BiovaxID and/or any of our product candidates will depend on our ability to:
 
 
•
complete required clinical trials;
 
 
•
obtain necessary regulatory/marketing approvals;
 
 
•
establish, or contract for, required manufacturing capacity; and
 
 
•
establish, or contract for, sales and marketing resources.
 
We have limited experience with these activities and might not be successful in the clinical trials, product development or commercialization.
 
Competing technologies may adversely affect us.
 
Rituximab is currently part of the standard of care for the treatment of FL. We believe that rituximab containing therapies are well accepted by both physicians and patients and may constitute a significant competitive challenge for our drug candidate if approved.
 
Biotechnology has experienced, and is expected to continue to experience, rapid and significant change. The use of monoclonal antibodies as initial or induction therapy, and increasingly for maintenance therapy, has become well-established and generally accepted. Products that are well-established or accepted, including monoclonal antibodies such as Rituxan®, including its expanded approval as a NHL maintenance therapy, may constitute significant barriers to market penetration and regulatory approval which may be expensive, difficult or even impossible to overcome. New developments in biotechnological processes are expected to continue at a rapid pace in both industry and academia, and these developments are likely to result in commercial applications competitive with our product candidates. We expect to encounter intense competition from a number of companies that offer products in our targeted application area.
 
We anticipate that our competitors in these areas will consist of both well-established and development-stage companies and will include:
 
 
•
healthcare companies;
 
 
•
chemical and biotechnology companies;
 
 
•
biopharmaceutical companies; and
 
 
•
companies developing drug discovery technologies.
 
 
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The cell culture production and technology business is also intensely competitive and is in many areas dominated by large service providers. In many instances, our competitors have substantially greater financial, technical, research and other resources and larger, more established marketing, sales, distribution and service organizations than us. Moreover, these competitors may offer broader product lines and have greater name recognition than us and may offer discounts as a competitive tactic.

Competitors might succeed in developing, marketing, or obtaining regulatory/marketing approval for technologies, products, or services that are more effective or commercially attractive than those we offer or are developing, or that render our product candidates or services obsolete.  As these companies develop their technologies, they might develop proprietary positions, which might prevent us from successfully commercializing products. Also, we might not have the financial resources, technical expertise or marketing, distribution or support capabilities to compete successfully in the future.
 
Our competitors may develop products that are less expensive, safer, or more effective, which may diminish or eliminate the commercial success of any future products that we may commercialize.
 
We compete with several biopharmaceutical companies, and our competitors may:
 
 
•
develop product candidates and market products that are less expensive or more effective than our future product;
 
 
•
commercialize competing products before we or our partners can launch any products developed from our product candidates;
 
 
•
initiate or withstand substantial price competition more successfully than we can;
 
 
•
have greater success in recruiting skilled scientific workers from the limited pool of available talent;
 
 
•
more effectively negotiate third-party licenses and strategic relationships; and
 
 
•
take advantage of acquisition or other opportunities more readily than we can.
 
We will compete for market share against large pharmaceutical and biotechnology companies and smaller companies that are collaborating with larger pharmaceutical companies, new companies, academic institutions, government agencies and other public and private research organizations. Many of these competitors, either alone or together with their partners, may develop new product candidates that will compete with ours, and these competitors may, and in certain cases do, operate larger research and development programs or have substantially greater financial resources than we do.  
 
If our competitors market products that are less expensive, safer or more effective than our potential products, or that reach the market sooner than our potential product candidates, we may not achieve commercial success. In addition, the life sciences industry is characterized by rapid technological change. Because our research approach integrates many technologies, it may be difficult for us to stay abreast of the rapid changes in each technology. If we fail to stay at the forefront of technological change, we may be unable to compete effectively. Our competitors may render our technologies obsolete by advances in existing technological approaches or the development of new or different approaches, potentially eliminating the advantages in our drug discovery process that we believe we derive from our research approach and proprietary technologies.
 
If we fail to comply with the extensive regulations enforced by the EMA, Health Canada, the FDA and other national and international agencies, the sale of our product candidates would be prevented or delayed.
 
Research, pre-clinical development, clinical trials, manufacturing, and marketing of our product candidates are subject to extensive regulation by various national and international government authorities. We have not received regulatory/marketing approval from any regulatory agency BiovaxID.  The process of obtaining EMA, Health Canada, FDA, and other required regulatory/marketing approvals is lengthy and expensive, and the time required for such approvals is uncertain. The regulatory/marketing approval process is affected by such factors as:
 
 
•
the severity of the disease;
 
 
•
the quality of submission;
 
 
•
the clinical efficacy and safety;
 
 
•
the strength of the chemistry and manufacturing control of the process;
 
 
•
the manufacturing facility compliance;
 
 
•
the availability of alternative treatments;
 
 
•
the risks and benefits demonstrated in clinical trials; and
 
 
•
the patent status and marketing exclusivity rights of certain innovative products.
 
 
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Any regulatory/marketing approvals that we or our partners receive for our product candidates may also be subject to limitations on the indicated uses for which the product candidate may be marketed or contain requirements for potentially costly post-marketing follow-up studies. The subsequent discovery of previously unknown problems with the product candidate, including adverse events of unanticipated severity or frequency, may result in restrictions on the marketing of the product candidate, and could include withdrawal of the product candidate from the market.
 
Our U.S. manufacturing, labeling, storage, and distribution activities also are subject to strict regulation and licensing by all applicable regulatory agencies. Our biopharmaceutical manufacturing facilities are subject to periodic inspection by the FDA, the EMA, Health Canada and the regulatory agencies of any other jurisdiction where our product candidate may in the future be marketed.  We may receive notices of deficiencies from these agencies as a result of such inspections. Our failure or the failure of our biopharmaceutical manufacturing facilities to continue to meet regulatory standards or to remedy any deficiencies could result in corrective action regulatory agencies, including the interruption or prevention of marketing, closure of our biopharmaceutical manufacturing facilities, and fines and/or penalties.
 
Regulatory authorities also will require post-marketing surveillance to monitor and report to them potential adverse effects of our product candidates. The U.S. Congress or the FDA in specific situations can modify the regulatory process. Once approved, a product’s failure to comply with applicable regulatory requirements could, among other things, result in warning letters, fines, suspension or revocation of regulatory approvals, product recalls or seizures, operating restrictions, injunctions, and criminal prosecutions.
 
The policies of all other applicable regulatory agency, may change and additional government regulations may be enacted that could prevent or delay regulatory/marketing approval of our product candidates. We cannot predict the likelihood, nature or extent of adverse government regulation that may arise from future legislation or administrative action, either in the U.S. or abroad. If we are not able to maintain regulatory compliance, we might not be permitted to market our product candidates and our business could suffer.
 
Distribution of our product candidates outside the U.S. is subject to extensive government regulation. These regulations, including the requirements for approvals or clearance to market, the time required for regulatory review and the sanctions imposed for violations, vary from country to country. There can be no assurance that we will obtain regulatory approvals in such countries or that we will not be required to incur significant costs in obtaining or maintaining these regulatory approvals. In addition, the export by us of certain of our product candidates that have not yet been cleared for domestic commercial distribution may be subject to FDA export restrictions. Failure to obtain necessary regulatory approvals, the restriction, suspension or revocation of existing approvals or any other failure to comply with regulatory requirements would impair our ability to generate revenue, increase our compliance costs, and have a material adverse effect on our future business, financial condition, and results of operations.  
 
Because the product development and the regulatory/marketing approval process for BiovaxID and/or any of our product candidates is expensive and its outcome is uncertain, we must incur substantial expenses that might not result in any viable product, and the process could take longer than expected.
 
Regulatory/marketing approval of a pharmaceutical product is a lengthy, time-consuming and expensive process. Before obtaining regulatory/marketing approvals for the commercial sale of our product candidates, we must demonstrate to the satisfaction of the applicable regulatory agencies that BiovaxID is safe and effective for use in humans. This is expected to result in substantial expense and require significant time.
 
Historically, the results from pre-clinical testing and early clinical trials often have not been predictive of results obtained in later clinical trials. A number of new drugs have shown promising results in clinical trials, but subsequently failed to establish sufficient safety and efficacy data to obtain necessary regulatory/marketing approvals. Data obtained from pre-clinical and clinical activities are susceptible to varying interpretations, which could delay, limit or prevent regulatory/marketing approval. In addition, regulatory delays or rejections could be encountered as a result of many factors, including changes in regulatory policy during the period of product development.
 
Clinical trials conducted by us or by third parties on our behalf might not be accepted by the EMA, Health Canada, the FDA or other international regulatory agencies as being a sufficient demonstration of safety, efficacy or statistical significance to support the acceptance, processing or approval of our applications to obtain the requisite regulatory approval to market for our product candidates. In such an event, regulatory authorities might require us to conduct additional clinical trials which would be both expensive and time consuming or in the alternative might not permit us to undertake any additional clinical trials for our product candidates.

 
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We have completed a single Phase 3 clinical trial for BiovaxID and the FDA has advised us that it will require a second Phase 3 clinical trial as a condition for regulatory approval. BiovaxID is considered highly personalized because it is manufactured for each patient using material obtained by biopsy from that patient. Personalized drugs are considered unique which may create regulatory uncertainty. We do not have an understanding or agreement with the EMA, Health Canada, the FDA, or other international regulatory agencies as to the adequacy of our personalized manufacturing process, or the sufficiency, design or size of the BiovaxID Phase 3 clinical trial or the appropriate design, protocol or endpoints for our second Phase 3 clinical trial. Further, we do not know the ultimate impact on the regulatory process which may result from the early stoppage of our initial Phase 3 clinical trial before all planned patients were enrolled, the appropriateness of analyzing only patients treated with BiovaxID or control which is considered a modified intent to treat population, the impact of analyzing sub-populations of the treated patients such as patients based on the characteristics of the patient’s tumor isotype or any other factor of the BiovaxID Phase 3 clinical trial. Our initial BiovaxID Phase 3 clinical trial spanned approximately eight years and the completion of a second Phase 3 clinical trial and any other required clinical trials (which could potentially require a different trial design) will likely take a significant number of years and funding which we currently do not have. The length of time for a clinical trial generally varies substantially according to the type, complexity, novelty and intended use of the product candidate. Although for planning purposes, we forecast the commencement and completion of clinical development, and have included many of those forecasts in reports filed with the SEC and in other public disclosures, the actual timing of these events can vary dramatically. For example, we have experienced delays in our clinical development program in the past as a result of slower than anticipated patient enrollment and as a result of our twice undergoing reorganization under Chapter 11 of the U.S. Bankruptcy Code. Additional delays may occur. Our rate of completion of development efforts also could be delayed by many factors: the timing of meetings with regulatory agencies; the requirements, cost and time necessary to prepare for regulatory meetings; and the time, expense and ability to satisfy requests or requirements made by regulatory agencies is uncertain and may vary depending on numerous circumstances and as a result of the analysis of available data. In addition, we may need to delay or suspend this regulatory process if we are unable to obtain additional funding when needed. Moreover, we have limited experience in vaccine development and the regulatory process.
 
Risks Related to Our Industry
 
Our proprietary rights may not adequately protect our technologies and product candidates.
 
Our commercial success will depend in part on obtaining and maintaining patent protection and trade secret protection of our technologies and product candidates as well as successfully defending these patents against third-party challenges. We will only be able to protect our technologies and product candidates from unauthorized use by third parties to the extent that valid and enforceable patents or trade secrets cover them. Furthermore, the degree of future protection of our proprietary rights is uncertain because legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep our competitive advantage.
 
For BiovaxID, we hold the patent relating to the method of producing BiovaxID and we have filed additional patent applications for BiovaxID. There are filed patent applications for AutovaxID® as well.
 
The patent positions of life sciences companies can be highly uncertain and involve complex legal and factual questions for which important legal principles remain unresolved. No consistent policy regarding the breadth of claims allowed in such companies’ patents has emerged to date in the U.S. The patent situation outside the U.S. is even more uncertain. Changes in either the patent laws or in interpretations of patent laws in the U.S. or other countries may diminish the value of our intellectual property. Accordingly, we cannot predict the breadth of claims that may be allowed or enforced in our patents or in third-party patents. For example:
 
 
•
we or our licensors might not have been the first to make the inventions covered by each of our pending patent applications and issued patents;
 
 
•
we or our licensors might not have been the first to file patent applications for these inventions;
 
 
•
others may independently develop similar or alternative technologies or duplicate any of our technologies;
 
 
•
it is possible that none of our pending patent applications or the pending patent applications of our licensors will result in issued patents;
 
 
•
our issued patents and the issued patents of our licensors may not provide a basis for commercially viable products, or may not provide us with any competitive advantages, or may be challenged and invalidated by third parties;
 
 
•
we may not develop additional proprietary technologies or product candidates that are patentable; or
 
 
•
the patents of others may have an adverse effect on our business.
 
 
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We also rely on trade secrets to protect our technology, especially where we do not believe patent protection is appropriate or obtainable. However, trade secrets are difficult to protect. While we use reasonable efforts to protect our trade secrets, our strategic partners’ employees, consultants, contractors, or scientific and other advisors may unintentionally or willfully disclose our information to competitors. If we were to enforce a claim that a third party had illegally obtained (misappropriated) and was using our trade secrets, it would be expensive and time consuming, and the outcome would be unpredictable. In addition, courts outside the U.S. are sometimes less willing to protect trade secrets. Moreover, if our competitors independently develop equivalent knowledge, methods, and know-how, it will be more difficult for us to enforce our patent rights and our business could be harmed.
 
If we are not able to defend the patent or trade secret protection position of our technologies and product candidates, then we will not be able to exclude competitors from developing or marketing competing products, and we may not generate enough revenue from product sales to justify the cost of development of our product candidates and to achieve or maintain profitability.  
 
If we are unable to adequately protect or enforce our rights to intellectual property or secure rights to third-party patents, we may lose valuable rights, experience reduced market share, assuming any, or incur costly litigation to, enforce, maintain or protect such rights.
 
Our success depends, in part, on our ability to obtain and enforce patents, protect trade secrets, obtain licenses to technology owned by third parties and conduct our business without infringing upon the proprietary rights of others. The patent positions of pharmaceutical and biopharmaceutical companies, including ours, can be uncertain and involve complex legal and factual questions including those related to our risk evaluation and mitigation strategies. In addition, the coverage sought in a patent application can be significantly reduced before the patent is issued.
 
Consequently, we do not know whether any of our owned or licensed pending patent applications, which have not already been allowed, will result in the issuance of patents or, if any patents are issued, whether they will be dominated by third-party patent rights, whether they will provide significant proprietary protection or commercial advantage or whether they will be circumvented, opposed, invalidated, rendered unenforceable or infringed by others. Further, we are aware of third-party U.S. patents that relate to, for example, the use of certain technologies and cannot be assured as to any impact to our potential products, or guarantee that our patents or pending applications will not be involved in, or be defeated as a result of, opposition proceedings before a foreign patent office or any interference proceedings before the U.S. Patent & Trademark Office (“USPTO”).
 
With respect to patents and patent applications we have in-licensed, there can be no assurance that additional patents will be issued to any of the third parties from whom we have licensed patent rights, or that, if any new patents are issued, such patents will not be opposed, challenged, invalidated, infringed or dominated or provide us with significant proprietary protection or commercial advantage. Moreover, there can be no assurance that any of the existing licensed patents will provide us with proprietary protection or commercial advantage. Nor can we guarantee that these licensed patents will not be infringed, invalidated or circumvented by others, or that the relevant agreements will not be terminated. Any termination of material licenses granted to us could have a material adverse effect on our business, financial condition and results of operations.
 
Because (1) patent applications filed in the U.S. on or before November 28, 2000 are maintained in secrecy until patents issue, (2) patent applications filed in the U.S. on or after November 29, 2000 are not published until approximately 18 months after their earliest claimed priority date, (3) U.S. patent applications that are not filed outside the U.S. may not publish at all until issued and (4) publication of discoveries in the scientific or patent literature often lag behind actual discoveries, we cannot be certain that we, or our licensors, were the first to make the inventions covered by each of the issued patents or pending patent applications or that we, or our licensors, were the first to file patent applications for such inventions. In the event a third party has also filed a patent for any of our inventions, we, or our licensors, may have to participate in interference proceedings before the USPTO to determine priority of invention, which could result in the loss of a U.S. patent or loss of any opportunity to secure U.S. patent protection for the invention. Even if the eventual outcome is favorable to us, such interference proceedings could result in substantial cost to us.
 
Competitors have chosen and in the future may choose to file oppositions to patent applications, which have been deemed allowable by foreign patent examiners. Furthermore, even if our owned or licensed patents are determined to be valid and enforceable, there can be no assurance that competitors will not be able to challenge the validity or our patent claims in post-grant proceedings, or to design around such patents and compete with us using the resulting alternative technology. Additionally, for these same reasons, we cannot be sure that patents of a broader scope than ours may be issued and thereby create freedom to operate issues. If this occurs we may need to reevaluate pursuing such technology, which is dominated by others' patent rights, or alternatively, seek a license to practice our own invention, whether or not patented.

 
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Our intellectual property rights will further be affected in ways that are difficult to anticipate by the provisions of the America Invents Act (2011).
 
Enacted in September 2011, the America Invents Act is the first major overhaul of the U.S. patent system since 1952, and includes a number of changes to established practices. The most significant changes include the transition to a modified first-to-file system, the availability of new post-grant review for issued patents, various procedural changes including the third-party submission of prior art and the availability of derivation proceedings and supplemental examination, and an expanded prior commercial user rights defense to a claim of patent infringement. The scope of these changes and the lack of experience with their practical implementation, suggest a transitional period with some uncertainty over the next few years. For example, while some provisions have already taken effect, others will take effect up to 18 months from enactment. The USPTO is still in the process of publishing regulations concerning the implementation of the America Invents Act. Several provisions of the America Invents Act will likely be tested in U.S. federal courts over time.
 
The changes to the U.S. patent system in the America Invents Act will have an impact on our intellectual property rights and how business is conducted in general. For example, the modified first-to-file system places premium on filing as early as possible and appears to increase what is available as prior art, by changing the applicable definitions. In the future, in addition to patents and printed publications, we may be required to deal with unfamiliar prior art categories such as art that is “otherwise available to the public”. For patent applications filed on or after March 16, 2013, we may expect post-grant review challenges initiated up to nine months after the corresponding patent issues.
 
While the America Invents Act was intended to make the resolution of intellectual property disputes easier and less expensive, we may in the future have to prove that we are not infringing patents or we may be required to obtain licenses to such patents. However, we do not know whether such licenses will be available on commercially reasonable terms, or at all. Prosecution of patent applications, post-grant opposition proceedings, and litigation to establish the validity and scope of patents, to assert patent infringement claims against others and to defend against patent infringement claims by others will be expensive and time-consuming. There can be no assurance that, in the event that claims of any of our owned or licensed patents are challenged by one or more third parties, any court or patent authority ruling on such challenge will determine that such patent claims are valid and enforceable. An adverse outcome in such litigation or post grant proceeding could cause us to lose exclusivity relating to the subject matter delineated by such patent claims and may have a material adverse effect on our business. If a third party is found to have rights covering products or processes used by us, we could be forced to cease using the products or processes covered by the disputed rights, be subject to significant liabilities to such third party and/or be required to license technologies from such third party.
 
Our intellectual property rights will further be affected in ways that are difficult to anticipate by the procedures of the foreign countries in which we seek patent protection.
 
Different countries have different procedures for obtaining patents, and patents issued by different countries provide different degrees of protection against the use of a patented invention by others. There can be no assurance, therefore, that the issuance to us in one country of a patent covering an invention will be followed by the issuance in other countries of patents covering the same invention or that any judicial interpretation of the validity, enforceability or scope of the claims in a patent issued in one country will be similar to the judicial interpretation given to a corresponding patent issued in another country.
 
The uncertainty of patent and proprietary technology protection and our potential inability to license technology from third parties may adversely affect us.
 
Our success will depend in part on obtaining and maintaining meaningful patent protection on our inventions, technologies and discoveries. The patent position of biotechnology and pharmaceutical firms is highly uncertain and involves many complex legal and technical issues. There is no clear policy involving the breadth of claims allowed, or the degree of protection afforded, under patents in this area. Our ability to compete effectively will depend on our ability to develop and maintain proprietary aspects of our technology, as well as to operate without infringing, or, if necessary, to obtain rights to, the proprietary rights of others. Our pending patent applications might not result in the issuance of patents. Our patent applications might not have priority over others’ applications and, even if issued, our patents might not offer protection against competitors with similar technologies. Any patents issued to us might be challenged, invalidated or circumvented and the rights created thereunder may not afford us a competitive advantage. Furthermore, patents that we own or license may not enable us to preclude competitors from commercializing products, and consequently may not provide us with any meaningful competitive advantage.
 
 
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Our commercial success also depends in part on our neither infringing patents or proprietary rights of third parties nor breaching any licenses that we have obtained from third parties permitting us to incorporate technology into our product candidates. It is possible that we might infringe these patents or other patents or proprietary rights of third parties. In the future we might receive notices claiming infringement from third parties. Any legal action against us or our collaborative partners claiming infringement and damages or seeking to enjoin commercial activities relating to our product candidates and processes may require us or our collaborative partners to alter our product candidates, cease certain activities and/or obtain licenses in order to continue to manufacture or market the affected products and processes. In addition, these actions may subject us to potential liability for damages. We or our collaborative partners might not prevail in an action, and any license required under a patent might not be made available on commercially acceptable terms, or at all.
 
There are many U.S. and foreign patents and patent applications held by third parties in our areas of interest, and we believe that there may be significant litigation in the industry regarding patent and other intellectual property rights. Potential future litigation could result in substantial costs and the diversion of management’s efforts regardless of the merits or result of the litigation. Additionally, from time to time we may engage in the defense and prosecution of interference proceedings before the USPTO, and related administrative proceedings that can result in our patent position being limited or in substantial expense to us and significant diversion of effort by our technical and management personnel. In addition, laws of some foreign countries do not protect intellectual property to the same extent as do laws in the U.S., which could subject us to additional difficulties in protecting our intellectual property in those countries.
 
We also rely on unpatented technology, trade secrets, technical know-how, confidential information and continuing inventions to develop and maintain our competitive position. Others might independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets or disclose our technology, and we may not be able to protect our rights to our trade secrets. We seek to protect our technology and patents, in part, by confidentiality agreements with our employees and contractors. Our employees might breach their existing proprietary information, inventions and dispute resolution agreements. Accordingly, these agreements may not protect our intellectual property, and our employees’ breaches of those agreements could have a material adverse effect on us.
 
If we are sued for infringing intellectual property rights of third parties, such litigation will be costly and time consuming, and an unfavorable outcome would have a significant adverse effect on our business.
 
Our ability to commercialize our product candidates depends on our ability to sell such products without infringing the patents or other proprietary rights of third parties. Numerous U.S. and foreign issued patents and pending patent applications, which are owned by third parties, exist in the various areas in which we have products or are seeking to create products, including patents relating to specific antifungal formulations and methods of using the formulations to treat infections, as well as patents relating to serum-based vaccines and methods for detection of cancer. The interpretation of patent claims is complex and uncertain. The legal standards governing claim interpretations are evolving and changing. Thus, any significant changes in the legal standards would impact the way that we interpret the claims of third-party patents in our product candidate areas. In addition, because patent applications can take several years to issue, there may be currently pending applications, unknown to us, which may later result in issued patents that our product candidates may infringe. There could also be existing patents of which we are not aware that our product candidates may inadvertently infringe.
 
If a third party claims that we infringe on their patents or other proprietary rights, we could face a number of issues that could seriously harm our competitive position, including:
 
 
•
infringement and other intellectual property claims which, with or without merit, can be costly and time consuming to litigate and can delay the regulatory approval process and divert management’s attention from our core business strategy;
 
 
•
substantial damages for past infringement which we may have to pay if a court determines that our product candidates or technologies infringe upon a competitor’s patent or other proprietary rights;
 
 
•
a court prohibiting us from selling or licensing our product candidates or technologies unless the holder licenses the patent or other proprietary rights to us, which it is not required to do;
 
 
•
if a license is available from a holder, we may have to pay substantial royalties or grant cross licenses to our patents or other proprietary rights; and
 
 
•
redesigning our process so that it does not infringe, which may not be possible or may require substantial time and expense.
 
Such actions could harm our competitive position and our ability to generate revenue and could result in increased costs.

 
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We may not be able to maintain sufficient product liability insurance to cover claims against us.
 
Product liability insurance for the biopharmaceutical industry is generally expensive to the extent it is available at all. There can be no assurance that we will be able to maintain such insurance on acceptable terms or that we will be able to secure increased coverage if the commercialization of our product candidates’ progress, or that existing or future claims against us will be covered by our product liability insurance. Moreover, there can be no assurance that the existing coverage of our liability insurance policy and/or any rights of indemnification and contribution that we may have will offset existing or future claims. We maintain product liability insurance in the aggregate of $2.0 million per occurrence. We believe that this coverage is currently adequate based on current and projected business activities and the associated risk exposure.  We expect a need to increase this coverage as our business activities and associated risks grow, but it may not be commercially feasible to do so. A successful claim against us with respect to uninsured liabilities or in excess of insurance coverage and not subject to any indemnification or contribution could have a material adverse effect on our future business, financial condition, and results of operations.
 
The market may not be receptive to our product candidates upon their introduction.
 
The biopharmaceutical products that we may develop may not achieve market acceptance among physicians, patients, health care payers, and the medical community. The degree of market acceptance will depend upon a number of factors, including
 
 
•
the receipt of regulatory/marketing approvals;
 
 
•
limited indications of regulatory/marketing  approvals;
 
 
•
the establishment and demonstration in the medical community of the clinical efficacy and safety of our product candidates and their potential advantages over existing treatment methods;
 
 
•
the prices of such products;
 
 
•
reimbursement policies of government and third-party payers;
 
 
•
market acceptance of patient-specific active immunotherapies, in the case of BiovaxID;
 
 
•
the prevalence and severity of any side effects;
 
 
•
potential advantages over alternative treatments;
 
 
•
ability to produce our product candidates at a competitive price;
 
 
•
stocking and distribution;
 
 
•
relative convenience and ease of administration;
 
 
•
the strength of marketing and distribution support; and
 
 
•
sufficient third-party coverage or reimbursement.
 
The failure of our product candidates to gain market acceptance could impair our ability to generate revenue, which could have a material adverse effect on our future business, financial condition and results of operations.
 
Health care policy changes, including recently enacted legislation reforming the U.S. healthcare system, may have material adverse effects on our commercialization of our product candidates.
 
The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act, (collectively, the “PPACA”) enacted in March 2010 makes changes that could significantly impact the development and commercialization of our products.  Significant measures contained in the PPACA include, for example, coordination and promotion of research on comparative clinical effectiveness of different technologies and procedures, initiatives to revise Medicare payment methodologies, such as bundling of payments across the continuum of care by providers and physicians, and initiatives to promote quality indicators in payment methodologies. The PPACA also includes significant new fraud and abuse measures, including required disclosures of financial arrangements with physician customers, lower thresholds for violations and increasing potential penalties for such violations. In addition, the PPACA establishes an IPAB, to reduce the per capita rate of growth in Medicare spending. The IPAB has broad discretion to propose policies to reduce expenditures, which may have a negative impact on payment rates for services or therapeutics, including therapeutics like BiovaxID and/or any of our product candidates.  In addition to the PPACA, the effect of which cannot presently be fully quantified given its relatively recent enactment, various healthcare reform proposals have also emerged from federal and state governments. Changes in healthcare policy could substantially impact the development and commercialization of our product candidates.  We cannot predict whether future healthcare initiatives will be implemented at the federal or state level or in countries outside of the U.S., in which we may do business, or the effect any future legislation or regulation will have on us. The taxes imposed by the new federal legislation and the expansion in government's role in the U.S. healthcare industry may result in decreased profits to us, lower reimbursements by payers for our product candidates or reduced medical procedure volumes, all of which may adversely affect our business, financial condition and results of operations, possibly materially.
 
 
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The insurance coverage and reimbursement status of newly approved products is uncertain and failure to obtain or maintain adequate coverage and reimbursement for new or current products could limit our ability to market those products and decrease our ability to generate revenue.
 
There is significant uncertainty related to the insurance coverage and reimbursement of newly approved products. The commercial success of our product candidates in both domestic and international markets is substantially dependent on whether third-party coverage and reimbursement is available for the ordering of our product candidates by the medical profession for use by their patients. Medicare, Medicaid, health maintenance organizations, and other third-party payers are increasingly attempting to contain healthcare costs by limiting both coverage and the level of reimbursement of new products, and, as a result, they may not cover or provide adequate payment for our product candidates. Our product candidates could, if approved, face declining revenues if competitor products are perceived as providing a substantially equivalent therapeutic effect at a lower cost to the payer. They may not view our product candidates as cost-effective and reimbursement may not be available to consumers or may not be sufficient to allow our product candidates to be marketed on a competitive basis. Likewise, legislative or regulatory efforts to control or reduce healthcare costs or reform government healthcare programs could result in lower prices or rejection of our product candidates. Changes in coverage and reimbursement policies or healthcare cost containment initiatives that limit or restrict reimbursement for our product candidates may cause our revenue to decline.
 
Sales of our products candidates will be significantly reduced if access to and reimbursement for our products candidates by governmental and other third-party payers is reduced or terminated.
 
Sales of our product candidates will depend, in part, on the extent to which the costs of our product candidates will be paid by health maintenance, managed care, pharmacy benefit and similar health care management organizations, or reimbursed by government health administration authorities, private health coverage insurers and other third-party payers. Generally, in the EU, Canada and other countries outside the U.S., the government-sponsored healthcare system is the primary payer of healthcare costs of patients. These health care management organizations and third-party payers are increasingly challenging the prices charged for medical products and services. Additionally, the Health Care Reform Act of 2010 (“Health Care Reform Act”), which became effective in January 2011, has provided sweeping health care reform in the U.S., which may impact the prices of drugs. In addition to the federal legislation, state legislatures and foreign governments have also shown significant interest in implementing cost-containment programs, including price controls, restrictions on reimbursement and requirements for substitution of generic products. The establishment of limitations on patient access to our product candidates, adoption of price controls and cost-containment measures in new jurisdictions or programs, and adoption of more restrictive policies in jurisdictions with existing controls and measures, including the impact of the Health Care Reform Act, could adversely impact our business and future results. If these organizations and third-party payers do not consider our product candidates to be cost-effective compared to other available therapies, they may not reimburse providers or consumers of our product candidates or, if they do, the level of reimbursement may not be sufficient to allow us to sell our product candidates on a profitable basis.
 
Reimbursement in the EU and Canada involves decisions, applications and compliance with various Member States in the instance of the EU and various provinces in the instance of Canada.  Such non-centralized reimbursement requirements may result in delays, added expense and limitations on marketing access. Outside the U.S., international operations are generally subject to extensive governmental price controls and other market regulations, and we believe the increasing emphasis on cost-containment initiatives in the EU, Canada, and other countries has and will continue to put pressure on the pricing and usage of our product candidates. Although we cannot predict the extent to which our business may be affected by future cost-containment measures or other potential legislative or regulatory developments, additional foreign price controls or other changes in pricing regulation could restrict the amount that we are able to charge for our product candidates, which could adversely affect our revenue and results of operations.
 
 
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The availability and amount of reimbursement for our product candidates and the manner in which government and private payers may reimburse for our product candidates is uncertain.
 
In many of the markets where we may do business in the future, the prices of pharmaceutical products are subject to direct price controls pursuant to applicable law or regulation and to drug reimbursement programs with varying price control mechanisms.
 
We expect that many of the patients who seek treatment with our product candidates, if approved for marketing will be eligible for Medicare benefits. Other patients may be covered by private health plans or uninsured. The Medicare program is administered by the Centers for Medicare & Medicaid Services (“CMS”), an agency within the HHS. Coverage and reimbursement for products and services under Medicare are determined pursuant to regulations promulgated by CMS and pursuant to CMS’s subregulatory coverage and reimbursement determinations. It is difficult to predict how CMS may apply those regulations and subregulatory determinations to newly approved products, especially novel products such as ours, and those regulations and interpretive determinations are subject to change.
 
Moreover, the methodology under which CMS makes coverage and reimbursement determinations is subject to change, particularly because of budgetary pressures facing the Medicare program. For example, the Medicare Modernization Act, enacted in December 2003, provides for a change in reimbursement methodology that reduces the Medicare reimbursement rates for many drugs, including oncology therapeutics, which may adversely affect reimbursement for our product candidates, if it is approved for sale. If we are unable to obtain or retain adequate levels of reimbursement from Medicare or from private health plans, our ability to profitably sell our product candidates will be adversely affected. Medicare regulations and interpretive determinations also may determine who may be reimbursed for certain services. This may adversely affect our ability to profitably market or sell our product candidates, if approved.
 
In addition, government and private health plans persistently challenge the price and cost-effectiveness of therapeutic products. Accordingly, these third parties may ultimately not consider our product candidates to be cost-effective, which could result in products not being covered under their health plans or covered only at a lower price. Any of these initiatives or developments could prevent us from successfully marketing and selling any of our potential products on a profitable basis. We are unable to predict what impact the Medicare Modernization Act or other future regulation or third party payer initiatives, if any, relating to reimbursement for our product candidates will have on sales of our product candidates, if approved for sale.
 
In the EU, each Member State influences the price of pharmaceutical products through their pricing and reimbursement rules and control of national health care systems that fund a large part of the cost of such products to consumers. The approach taken varies from Member State to Member State. Some jurisdictions operate positive and/or negative list systems under which products may only be marketed once a reimbursement price has been agreed. Other EU Member States allow companies to fix their own prices for medicines, but monitor and control company profits. The downward pressure on health care costs in general, particularly prescription drugs, has become very intense. As a result, increasingly high barriers are being erected to the entry of new products, as exemplified by the role of the National Institute for Health and Clinical Excellence in the United Kingdom which evaluates the data supporting new medicines and passes reimbursement recommendations to the government. In addition, in some countries cross-border imports from low-priced markets (parallel imports) exert commercial pressure on pricing within a country. All of these factors could adversely impact our ability to successfully commercialize our product candidates in these jurisdictions.
 
We could be negatively impacted by the application or enforcement of federal and state fraud and abuse laws, including anti-kickback laws and other federal and state anti-referral laws.
 
We are subject to various federal and state laws pertaining to healthcare fraud and abuse, including anti-kickback laws and physician self-referral laws. Violations of these laws are punishable by criminal and civil sanctions, including, in some instances, imprisonment and exclusion from participation in federal and state healthcare programs, including the Medicare, Medicaid and Veterans Administration health programs. Because of the far-reaching nature of these laws, we may be required to alter or discontinue one or more of our practices to be in compliance with these laws. Healthcare fraud and abuse regulations are complex, and even minor irregularities can potentially give rise to claims that a statute or prohibition has been violated. Any violations of these laws, or any action against us for violation of these laws, even if we successfully defend against it, could result in a material adverse effect on our business, financial condition and results of operations. If there is a change in law, regulation or administrative or judicial interpretations, we may have to change or discontinue our business practices or our existing business practices could be challenged as unlawful, which could have a material adverse effect on our business, financial condition and results of operations. In addition, we could become subject to false claims litigation under federal statutes, which can lead to treble damages based on the reimbursements by federal health care programs, civil money penalties (including penalties levied on a per false claim basis), restitution, criminal fines and imprisonment, and exclusion from participation in Medicare, Medicaid and other federal and state healthcare programs. These false claims statutes include the False Claims Act, which allows any person to bring suit on behalf of the federal government alleging the submission of false or fraudulent claims, or causing to present such false or fraudulent claims, under federal programs or contracts claims or other violations of the statute and to share in any amounts paid by the entity to the government in fines or settlement. These suits against biotechnology companies have increased significantly in recent years and have increased the risk that a healthcare company will have to defend a false claim action, pay fines or restitution, or be excluded from the Medicare, Medicaid or other federal and state healthcare programs as a result of an investigation arising out of such action. We cannot assure you that we will not become subject to such litigation or, if we are not successful in defending against such actions, that such actions will not have a material adverse effect on our business, financial condition and results of operations. In addition, we cannot assure you that the costs of defending claims or allegations under the False Claims Act will not have a material adverse effect on our business, financial condition and results of operations.  
 
 
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Risks Related to our Business Segments
 
Our clinical trials for BiovaxID were not regarded by the FDA as conclusive and the FDA has required us to conduct a second Phase 3 clinical trial for this product candidate.
 
In July 2012, we conducted a formal clinical meeting with the FDA in order to discuss the path for BiovaxID’s U.S. marketing approval. As a result of this guidance meeting, we plan to 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 the filing of our BLA for BiovaxID.  We are preparing to initiate this second Phase 3 clinical trial subject to availability of funding. We continue to advance our efforts to comply with various regulatory validations and comparability requirements related to our manufacturing process and facility.  However, no assurance can be given that substantial additional requirements will not be imposed by the FDA for the approval of BiovaxID.    We will experience significant additional costs and delay due to our second Phase 3 clinical trial, which may frustrate, delay, or render impossible marketing approval or commercialization.
 
The NCI is not precluded from working with other companies on developing products that are competitive with BiovaxID.
 
BiovaxID is based on research and studies conducted at the NCI. The concept of producing a patient-specific anti-cancer vaccine through the hybridoma method from a patient’s own cancer cells has been discussed in a variety of publications over a period of many years, and, accordingly, the general method and concept of such a vaccine is not eligible to be patented by us, the NCI, or any other party. Until November 2006, we were a party to a Cooperative Research and Development Agreement (“CRADA”) with the NCI for the development of a hybridoma-based patient-specific idiotypic vaccine for the treatment of indolent FL. Although the NCI transferred sponsorship of the IND for BiovaxID to us in 2004, and although there are certain confidentiality protections for information generated pursuant to the CRADA, the CRADA does not prevent the NCI from working with other companies on other hybridoma-based idiotypic vaccines for indolent FL or other forms of cancer, and the NCI or its future partners may be able to utilize certain technology developed under our prior CRADA. If the NCI chooses to work with other companies in connection with the development of such a vaccine, such other companies may also develop technology and know-how that may ultimately enable such companies to develop products that compete with BiovaxID.
 
Additionally, through their partnership with the NCI, these companies could develop immunotherapies for other forms of cancer that may serve as barriers to any future product candidates that we may develop for such indications.
 
We have been dependent on a sole-source supplier for KLH, a critical raw material used in the manufacture of BiovaxID, and physicians who administer BiovaxID depend on a sole-source supplier for GM-CSF, an immune system stimulant administered with BiovaxID.
 
We have been dependent on a sole-source supplier for KLH, a critical raw material used in the manufacture of BiovaxID, and physicians who administer BiovaxID depend on a sole-source supplier for GM-CSF, an immune system stimulant administered with BiovaxID. In particular, the manufacture of BiovaxID requires KLH, a foreign carrier protein. We have historically purchased KLH from BioSyn Arzneimittel GmbH (“BioSyn”), which was a single source supplier. We had entered into a supply agreement with BioSyn during our Phase 3 clinical trial of BiovaxID, pursuant to which BioSyn agreed to supply us with KLH. That supply agreement has terminated, and we are currently evaluating a potential agreement with BioSyn to supply us with the amounts of KLH necessary for commercialization. Additionally, we have become aware of alternative suppliers who now market KLH and is also currently evaluating these potential suppliers and determining the steps necessary to confirm the equivalence of their product with the KLH supplied by BioSyn.  However, we have not yet established a relationship with these suppliers and we have not completed testing to insure that the KLH supplied by them is suitable for use in the BiovaxID production process.
 
 
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When BiovaxID is administered, the administering physician uses a cytokine to enhance the patient’s immune response, and this cytokine is administered concurrently with BiovaxID. The cytokine used by physicians for this purpose is GM-CSF. GM-CSF is a substance that is purchased by the administering physician and is administered with an antigen to enhance or increase the immune response to that antigen. The physicians who administer BiovaxID will rely on Genzyme Corporation (“Genzyme”), as a supplier of GM-CSF, and these physicians will generally not have the benefit of a long-term supply contract. Currently, GM-CSF is not commercially available from other sources in the U.S. While KLH and GM-CSF are generic products, Biovest may purchase and include GM-CSF in its product packaging and if so would be responsible for regulatory compliance issues.
 
Establishing additional or replacement suppliers for these materials or components may require a substantial amount of time. In addition, we may have difficulty obtaining similar components from other suppliers that are acceptable to the specific regulatory agencies.
 
If we have to switch to a replacement supplier, we may face additional regulatory delays and the manufacture and delivery of BiovaxID could be interrupted for an extended period of time, which may delay commercialization of BiovaxID. If, we are unable to obtain adequate amounts of these components, we may be required to obtain regulatory clearance from the specific regulatory agencies to use different components that may not be as safe or as effective. As a result, regulatory/marketing approval of BiovaxID may be suspended or delayed or may not be received at all. All these delays could cause delays in commercialization of BiovaxID, delays in our ability to generate revenue from BiovaxID, and increased costs.
 
GM-CSF is not approved for commercial sale outside of the U.S. Therefore, if foreign regulatory agencies require GM-CSF to be administered along with BiovaxID, then GM-CSF must  also be approved in those particular foreign countries.
 
To enhance or increase a patient’s immune response, GM-CSF is administered by the patient’s physician concurrently with BiovaxID.  If a foreign regulatory agency requires the administration of GM-CSF concurrently with BiovaxID to approve our marketing approval application, then in order to achieve marketing approval for BiovaxID in that foreign market, GM-CSF must also receive regulatory/marketing approval in that foreign market.  GM-CSF is currently only approved for sale in the U.S., and is currently not approved for sale in any foreign markets.  As a result, foreign regulatory/marketing approval of BiovaxID may be suspended or delayed or may not be received at all. These delays could cause delays in the foreign commercialization of BiovaxID, delays in our ability to generate revenue from BiovaxID, and increased costs.  We may purchase and include GM-CSF in our product packaging, and if so, would be responsible for regulatory compliance issues.
 
We may experience difficulties in manufacturing BiovaxID or in obtaining regulatory/marketing approval of the change in our manufacturing site or process from the FDA or international regulatory agencies, which could prevent or delay us in the commercialization of BiovaxID.
 
Manufacturing BiovaxID is complex and requires coordination internally among our employees, as well as externally with physicians, hospitals and third-party suppliers and carriers. This process involves several risks that may lead to failures or delays in manufacturing BiovaxID, including:
 
 
•
difficulties in obtaining adequate tumor samples from physicians;
 
 
•
difficulties in timely shipping of tumor samples to us or in the shipping of BiovaxID to the treating physicians due to errors by third-party carriers, transportation restrictions, or other reasons;
 
 
•
destruction of, or damage to, tumor samples or BiovaxID during the shipping process due to the improper handling by third-party carriers, hospitals, physicians or us;
 
 
•
destruction of, or damage to, tumor samples or BiovaxID during storage at our facility; and
 
 
•
difficulties in ensuring the availability, quality, and consistency of materials provided by our suppliers.
 
If we experience any difficulties in manufacturing BiovaxID, the commercialization of BiovaxID may be delayed, resulting in delays in generating revenue and increased costs.
 
In addition, because we have relocated the site of the manufacturing process to our Minneapolis, MN facility following the BiovaxID Phase 3 clinical trial, we are required to demonstrate to the FDA that the product developed under new conditions is comparable to the product that was the subject of earlier clinical testing. This requirement applies to the relocation at the Minneapolis facility, as well as future expansion of the manufacturing facility, such as the possible expansion to additional facilities that may be required for successful regulatory/marketing approvals or commercialization of the vaccine, resulting in increased costs. There is also a requirement for validation of the manufacturing process for BiovaxID utilizing our AutovaxID® instrument.
 
 
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A showing of comparability requires data demonstrating that the product is consistent with that produced for the clinical trial and continues to be safe, pure, and potent and may be based on chemical, physical, and biological assays and, in some cases, other non-clinical data. This demonstration is based on various methods, as recommended in the FDA and International Conference of Harmonisation (“ICH”) regulatory guidelines.  If we demonstrate chemistry, manufacturing and controls (“CMC”) comparability, additional clinical safety and/or efficacy trials with the new product may not be needed. The FDA will determine if comparability data are sufficient to demonstrate that additional clinical studies are unnecessary. If the FDA requires additional clinical safety or efficacy trials to demonstrate comparability, our clinical trials or FDA approval of BiovaxID may be delayed, which would cause delays in generating revenue and increased costs.  
 
The ongoing detailed analyses being performed in our clinical trials for BiovaxID may produce negative or inconclusive results and may delay our efforts to obtain regulatory/marketing approval for this product.
 
We are currently engaged in performing additional detailed analyses of the safety and efficacy data generated by our Phase 2 and Phase 3 clinical trials of BiovaxID in FL and our Phase 2 clinical trial of BiovaxID in MCL. We cannot predict with certainty the results of the analyses, and if the results are negative or inconclusive we may decide, or regulators may require us, to conduct additional clinical and/or preclinical testing for this product candidate or cease our clinical trials. If this happens, we may not be able to obtain regulatory/marketing approval for BiovaxID for FL, MCL or both, or the anticipated time to market for this product may be substantially delayed, and we may also experience significant additional development costs.
 
Inability to obtain regulatory/marketing approval for our manufacturing facility or to manufacture on a commercial scale may delay or disrupt our commercialization efforts.
 
Before we can obtain domestic or foreign regulatory/marketing approval for any new drug, the manufacturing facility for the drug must be inspected and approved by the particular regulatory agency. We plan to establish a dedicated BiovaxID manufacturing facility within our existing Minneapolis (Coon Rapids), Minnesota leasehold space. Therefore, before we can obtain the regulatory agency’s approval necessary to allow us to begin commercially manufacturing BiovaxID, we must pass a pre-approval inspection of our BiovaxID manufacturing facility by the particular regulatory agency. In order to obtain approval, we will need to ensure that all of our processes, methods, and equipment are compliant with the cGMP, and perform extensive audits of vendors, contract laboratories, and suppliers. The cGMP requirements govern quality control of the manufacturing process and documentation policies and procedures. We have undertaken steps towards achieving compliance with these regulatory requirements required for commercialization. In complying with cGMP, we will be obligated to expend time, money, and effort in production, record keeping, and quality control to assure that BiovaxID meets applicable specifications and other requirements. If we fail to comply with these requirements, we could experience product liability claims from patients receiving BiovaxID, we might be subject to possible regulatory action and we may be limited in the jurisdictions in which we are permitted to sell BiovaxID.
 
In order to commercialize BiovaxID, we will need to develop and qualify one or more additional manufacturing facilities. Preparing a facility for commercial manufacturing may involve unanticipated delays, and the costs of complying with state, federal and foreign regulatory authorities’ regulations may be higher than we anticipate. In addition, any material changes we make to the manufacturing process may require approval by the state, federal, and foreign regulatory authorities. Obtaining these approvals is a lengthy, involved process, and we may experience delays. Such delays could increase costs and adversely affect our business. In general, the domestic and foreign regulatory authorities view cGMP standards as being more rigorously applied as products move forward in development and commercialization. In seeking to comply with these standards, we may encounter problems with, among other things, controlling costs and quality control and assurance. It may be difficult to maintain compliance with cGMP standards as the development and commercialization of BiovaxID progresses, if it progresses.
 
We and our product candidates are subject to comprehensive regulation by the domestic and foreign regulatory agencies. These regulatory agencies and other federal and state entities regulate, among other things, the preclinical and clinical testing, safety, approval, manufacture, labeling, marketing, export, storage, record keeping, advertising and promotion of our product candidates. If we violate regulatory requirements at any stage, whether before or after regulatory/marketing approval is obtained, we may be subject to forced removal of a product from the market, product seizure, civil and criminal penalties and other adverse consequences.
 
The BiovaxID clinical trials may demonstrate that certain side effects may be associated with this treatment and ongoing or future clinical trials may reveal additional unexpected or unanticipated side effects.
 
We cannot guarantee that our current or future clinical trials for BiovaxID will not demonstrate additional adverse side effects that may delay or even preclude regulatory/marketing approval. Even if BiovaxID receives regulatory/marketing approval from any jurisdiction, if we or others identify previously unknown side effects following approval, regulatory/marketing approval could be withdrawn and sales of BiovaxID could be significantly reduced.
 
 
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We are not able to prevent third parties, including potential competitors, from developing and selling an anti-cancer vaccine for NHL having the same composition of matter as BiovaxID.
 
Our BiovaxID vaccine is based on research and studies conducted the NCI. As a result of published studies, the concept of the vaccine and its composition are in the public domain and cannot be patented by us, the NCI, or any other party. We have filed U.S. and foreign patents applications on certain features of the integrated production and purification system used to produce and purify the vaccine in an automated closed system. We have obtained an exclusive worldwide license from Stanford for use of a proprietary cell line which we use to manufacture BiovaxID, but we cannot be certain that we will be successful in preventing others from utilizing this cell line or will be able to maintain and enforce the exclusive license in all jurisdictions. We cannot prevent other companies using different manufacturing processes from developing active immunotherapies that directly compete with BiovaxID. However, as a result of the FDA’s Orphan Drug designation for the treatment of FL, MCL and Waldenstrom’s Macroglobulinemia, we have seven years of market exclusivity in the U.S. from the date of FDA marketing approval for these three subtypes of B-cell NHL. We have ten years of market exclusivity in the EU as a result of the EMA’s Orphan Medicinal Product designation for the treatment of FL and MCL.
 
Several companies, such as Spectrum Pharmaceutical, Inc., GlaxoSmithKline, Genentech, Inc., Corixa Corporation, Biogen Idec, and Immunomedics, Inc., are involved in the development of passive immunotherapies for NHL. These passive immunotherapies include Rituxan®, a monoclonal antibody, and Zevalin®, which are passive radioimmunotherapy products. Passive immunotherapies, particularly Rituxan, are well accepted and established in the treatment of NHL and as such will impact both regulatory considerations and market penetration.
 
We are developing cell-based manufacturing instruments. The development of such instruments is subject to numerous risks and uncertainties.
 
We are developing cell-based manufacturing instruments. The development of such instruments is subject to numerous risks and uncertainties including the availability of funds required to support ongoing engineering, development and marketing; the ability of our instruments to meet the requirements or expectations of potential customers; our ability to meet the requirements of agencies of the DoD that currently support ongoing development efforts; the acceptance of our instruments by potential customers and various risks associated with engineering and developing new instruments. In our efforts to develop cell-based instruments, we have to a large degree relied upon contracts and CRADAs with various agencies of the DoD. Our ability to obtain additional contracts and or agreements from such agencies and/or our ability to perform existing and future arrangements to the satisfaction of such agencies is uncertain and therefore represents a risk associated with our development efforts.
 
There are many kinds of technologies for the manufacture of cell-based products.  The technology relied upon by our instruments and development efforts is referred to as hollow fiber perfusion which is not widely accepted for large-scale manufacturing and, notwithstanding our development efforts, may not become widely accepted in the future. Our hollow fiber bioreactors must compete with many other kinds of cell-based manufacturing instruments including, but not limited to, stirred-tank reactors; airlift fermentors; roller bottles; packed bed reactors; two-chamber reactors; ceramic matrix systems; batch fermentation techniques; and WAVE bioreactors.  There can be no assurance that our hollow fiber systems will gain widespread acceptance competing with these other established technologies marketed by industry leaders such as General Electric, Lonza, 3M, Sartorius Stedim, Thermo Scientific and Sandoz Biopharmaceuticals.
 
Competition to for cell-based instruments is intense. Most of the developers, manufacturers and marketers of cell-based manufacturing instruments are much larger, more entrenched with potential customers and better financed than us which places us at a competitive disadvantage.
 
Our contract cell production services are subject to the potential of product liability claims.
 
The contract production services for therapeutic products that we offer expose us to a potential risk of liability as the proteins or other substances manufactured by us, at the request of and to the specifications of our customers, could potentially cause adverse effects. We, generally obtain agreements from our contract production customers indemnifying and defending us from any potential liability arising from such risk. There can be no assurance; however, that we will be successful in obtaining such agreements in the future or, that such indemnification agreements will adequately protect us against potential claims relating to such contract production services. We may also be exposed to potential product liability claims by users of our product candidates. We may seek to increase our liability insurance coverage in the future in the event of any significant increases in our level of contract production services. There can be no assurance that we will be able to maintain our existing coverage or obtain additional coverage on commercially reasonable terms, or at all, or that such insurance will provide adequate coverage against all potential claims to which we might be exposed. A successful partially or completely uninsured claim against us would have a material adverse effect on our operations.
 
 
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Our contract cell production business is subject to intense competition.
 
The contract cell production business is highly competitive. Customers can select other cell production facilities, other cell production methods and other cell production instruments. We consider our business environment to be competitive. Many of our competitors are better established with greater capital resources. Historically, our cell production facilities, method and equipment have been primarily used to produce relatively small batches, such as those used in research and development. While we are seeking broader acceptance of our cell production facilities, method and equipment for larger and commercial scale production, we may not be successful in cost effectively penetrating these larger markets.
 
We use hazardous materials in our business. Any claims relating to improper handling, storage or disposal of these materials could be costly and time consuming.
 
Our manufacturing, clinical laboratory, and research and development processes involve the storage, use and disposal of hazardous substances, including hazardous chemicals and biological hazardous materials. Because we handle bio-hazardous waste with respect to our contract production services, we are required to conform to our customers’ procedures and processes to the standards set by the EPA, as well as those of local environmental protection authorities. Accordingly, we are subject to federal, state and local regulations governing the use, manufacture, storage, handling and disposal of materials and waste products. Although we believe that our safety and environmental management practices and procedures for handling and disposing of these hazardous materials are in accordance with good industry practice and comply with applicable laws, permits, licenses and regulations, the risk of accidental environmental or human contamination or injury from the release or exposure of hazardous materials cannot be completely eliminated. In the event of an accident, we could be held liable for any damages that result, including environmental clean-up or decontamination costs, and any such liability could exceed the limits of, or fall outside the coverage of, our insurance. We may not be able to maintain insurance on acceptable terms, or at all. We could be required to incur significant costs to comply with current or future environmental and public and workplace safety and health laws and regulations.

The success of our instruments and disposables business may be dependent in large part upon the continued provision of development services to governmental agencies.

We are collaborating with government agencies to further develop our AutovaxID® system and explore the potential production of additional vaccines, including vaccines for viral indications such as influenza.  These development activities are being undertaken pursuant to contracts, such as CRADA, with government agencies.  Accordingly, these development activities are subject to the inherent risks associated with government contracts, including complying with the government contracting process and the government budgeting process.  The success of our instruments and disposables business for the foreseeable future may depend in large part on continued development activities and contracts with government agencies.
 
Risks Related to Our Operations
 
The failure to attract and retain skilled personnel could impair our product development and commercialization efforts.
 
The success of our business depends, in large part, on the performance of our senior management and key scientific, manufacturing and technical personnel. The loss of the services of any member of our senior management, or our scientific, manufacturing or technical staff may significantly delay or prevent the achievement of product development and other business objectives by diverting management’s attention to transition matters and identification of suitable replacements, and could have a material adverse effect on our business, operating results, and financial condition. We do not maintain key man life insurance for any of our senior management and key scientific, manufacturing and technical personnel. We are not aware of any plans by our senior management and key scientific, manufacturing and technical personnel to retire or leave us in the near future.
 
We also rely on consultants and advisors to assist us in formulating our research and development strategy. All of our consultants and advisors are either self-employed or employed by other organizations, and they may have conflicts of interest or other commitments, such as consulting or advisory contracts with other organizations, that may affect their ability to contribute to us.
 
In addition, we believe that we will need to recruit additional senior management and scientific, manufacturing, and technical personnel. There is currently intense competition for skilled executives and employees with relevant scientific, manufacturing and technical expertise, and this competition is likely to continue. The inability to attract and retain sufficient scientific, manufacturing, technical, and managerial personnel could limit or delay our product development efforts, which would adversely affect the development of our product candidates and the commercialization of our potential products and the growth of our business.
 
 
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We expect to expand our development, clinical research, and marketing capabilities, and as a result, we may encounter difficulties in managing our growth, which could disrupt our operations.
 
We expect to have significant growth in our expenditures, the number of our employees and the scope of our operations, in particular with respect to those product candidates that we elect to commercialize independently or together with a partner. To manage our anticipated future growth, we must continue to implement and improve our managerial, operational, and financial systems, expand our facilities, and continue to recruit and train additional qualified personnel. Due to our limited resources, we may not be able to effectively manage the expansion of our operations or recruit and train additional qualified personnel. The physical expansion of our operations may lead to significant costs and may divert our management and business development resources. Any inability to manage growth could delay the execution of our business plans or disrupt our operations.
 
We occasionally become subject to commercial disputes that could harm our business by distracting our management from the operation of our business, by increasing our expenses and, if we do not prevail, by subjecting us to potential monetary damages and other remedies.
 
From time to time we are engaged in disputes regarding our commercial transactions. These disputes could result in monetary damages or other remedies that could adversely impact our financial position or operations. Even if we prevail in these disputes, they may distract our management from operating our business and the cost of defending these disputes would reduce our operating results. If we do not prevail in these litigation matters or if we are required to expend a significant amount of resources defending such claims, our operating results, financial position, and cash flows could be adversely impacted.
 
A breakdown or breach of our information technology systems could subject us to liability or interrupt the operation of our business.
 
We rely upon our information technology systems and infrastructure for our business. The size and complexity of our computer systems make them potentially vulnerable to breakdown, malicious intrusion and random attack. Likewise, data privacy breaches by employees and others who access our systems may pose a risk that sensitive data may be exposed to unauthorized persons or to the public. While we believe that we have taken appropriate security measures to protect our data and information technology systems, there can be no assurance that our efforts will prevent breakdowns or breaches in our systems that could adversely affect our business.
 
Risks Related to Our Common Stock
 
Our common stock is not currently quoted on any trading market.
 
Our shares are not currently listed on any exchange and all shares are subject to a Lock-up provision contained in our Plan of Reorganization which became effective on July 9, 2013.  Until the Lock-up restriction expires, and the shares are listed for trading on an exchange, there may be little or no ability to transfer our common stock.  An active and liquid trading market for our common stock may not ever develop or be sustained.  Moreover, no assurance can be given that a holder of our common stock will be able to sell such securities in the future or as to the price at which such securities might trade.  The liquidity of the market for such securities and the prices at which such securities trade will depend upon the number of holders thereof, the interest of securities dealers in maintaining a market in such securities and other factors beyond our control.
 
Our principal stockholders are able to exert significant influence over matters submitted to stockholders for approval.
 
As of December 20, 2013, a 93% majority of our outstanding shares of common stock were owned by entities which formerly were the senior secured creditors of our company and are now members of our Board of Directors.  These controlling shareholders can exert significant influence in determining the outcome of corporate actions requiring stockholder approval and that otherwise control our business. This control could have the effect of delaying or preventing a change in control of us and, consequently, could adversely affect the value of our common stock.
 
Penny stock regulations may impose certain restrictions on the marketability of our securities.
 
The SEC has adopted regulations which generally define a “penny stock” to be any equity security that has a market price of less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions.  If our common stock is listed on an exchange, and the market price per share is less than $5.00, the shares will be “penny stocks” and subject to rules that impose additional sales practice requirements on broker dealers who sell such securities to persons other than established customers and accredited investors (generally those with assets in excess of $1.0 million or annual income exceeding $0.2 million or $0.3 million together with their spouse).  For transactions covered by such rules, the broker dealer must make a special suitability determination for the purchase of such securities and have received the purchaser’s written consent to the transaction prior to the purchase.  Additionally, for any transaction involving a penny stock, unless exempt, the rules require the delivery, prior to the transaction, of a risk disclosure document mandated by the SEC relating to the penny stock market.  The broker dealer must also disclose the commission payable to both the broker dealer and the registered representative, current quotations for the securities and, if the broker dealer is the sole market maker, the broker dealer must disclose this fact and the broker dealer’s presumed control over the market.  Finally, monthly statements must be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.  Broker-dealers must wait two business days after providing buyers with disclosure materials regarding a security before effecting a transaction in such security.  Consequently, the “penny stock” rules restrict the ability of broker dealers to sell our securities and affect the ability of investors to sell our securities in the secondary market and the price at which such purchasers can sell any such securities, thereby affecting the liquidity of the market for our common stock.
 
 
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Stockholders should be aware that, according to the SEC, the market for penny stocks has suffered in recent years from patterns of fraud and abuse.  Such patterns include:
 
 
•
control of the market for the security by one or more broker-dealers that are often related to the promoter or issuer;
 
 
•
manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases;
 
 
•
“boiler room” practices involving high pressure sales tactics and unrealistic price projections by inexperienced sales persons;
 
 
•
excessive and undisclosed bid-ask differentials and markups by selling broker-dealers; and
 
 
•
the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the inevitable collapse of those prices with consequent investor losses.
 
Our management is aware of the abuses that have occurred historically in the penny stock market.
 
 
 
 
 
 
 
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The further issuances of additional authorized shares of our common stock and preferred stock may adversely affect the market for our common stock.
 
As of December 20, 2013, there were 100,000,000 shares of common stock outstanding. The Second Amended and Restated Certificate of Incorporation, which was filed on July 10, 2013 authorizes us to issue up to 300 million shares of common stock with a par value $0.01 per share. The number of authorized shares of common stock provides us with the flexibility to issue more shares in the future, which would dilute our shareholders. In addition, the total number of shares of our common stock issued and outstanding does not include common stock shares reserved in anticipation of the exercise of outstanding stock options. To the extent such stock options are exercised, the holders of our common stock may experience further dilution.
 
Moreover, in the event that any future financing should be in the form of, be convertible into or exchangeable for, equity securities, and upon the exercise of stock options, investors would experience additional dilution. Finally, in addition to the above referenced shares of authorized common stock which may be issued without shareholder approval, we have 50 million authorized but undesignated shares of preferred stock, the terms of which may be fixed by our Board of Directors.
 
The financial and operational projections that we may make from time to time are subject to inherent risks.
 
The projections that our management may provide from time to time (including, but not limited to, those relating to potential peak sales amounts, product approval, production and supply dates, commercial launch dates, and other financial or operational matters) reflect numerous assumptions made by management, including assumptions with respect to our specific as well as general business, economic, market and financial conditions and other matters, all of which are difficult to predict and many of which are beyond our control. Accordingly, there is a risk that the assumptions made in preparing the projections, or the projections themselves, will prove inaccurate. There will be differences between actual and projected results, and actual results may be materially different from than those contained in the projections. The inclusion (or incorporation by reference) of the projections in this Annual Report on Form 10-K should not be regarded as an indication that we or our management or representatives considered or consider the projections to be a reliable prediction of future events, and the projections should not be relied upon as such.
 
We do not expect to pay any dividends.
 
We have not declared or paid cash dividends since our inception. We currently intend to retain all of our earnings to finance future growth and therefore, do not expect to declare or pay cash dividends in the foreseeable future.
 
Our tax-loss carryforwards are subject to restrictions.
 
As of September 30, 2013, we had substantial net operating loss (“NOLs”) carry-forwards for federal income tax purposes of approximately $104.4 million which will be available to offset future taxable income. As a result of certain changes in ownership and pursuant to Section 382 of the Internal Revenue Code of 1986, as amended, utilization of NOLs may be limited after an ownership change, as defined in Section 392. Due to the various changes in our ownership, and as a result of our Chapter 11 proceeding, a significant portion of these carry-forwards may be subject to significant restrictions with respect to our ability to use those amounts to offset future taxable income. Use of our NOLs may be further limited as a result of future equity transactions.

 
ITEM   1B. UNRESOLVED STAFF COMMENTS
 
None.
            
ITEM  2.
 PROPERTIES
 
We lease approximately 35,000 square feet in Minneapolis (Coon Rapids), Minnesota, which we use for office, laboratory, manufacturing, and warehousing facility space to support (1) our development, potential commercialization, and production of BiovaxID, (2) the production of our instruments and disposables, and (3) production of our contract cell culture products and services. The lease expires on July 30, 2021.  We have the right to extend the term of the lease for two additional five year periods at the greater of (a) the base rent in effect at the end of the initial ten year lease term, or (b) market rates in effect at the end of the initial ten year lease term.
 
As of April 10, 2013, we entered into a new lease for approximately 1,300 square feet of office space in Tampa, Florida and utilize the space for our administrative offices. The lease expires on December 31, 2014 and is cancelable by either party with 90 days prior notice.
 
We plan to continue to evaluate our facility requirements during fiscal 2014.  We anticipate that as development of our product candidates advance  and as we prepare for the future commercialization of our products, our facilities requirements will continue to change on an ongoing basis.
 
 
58
 
 
ITEM  3.
LEGAL PROCEEDINGS
 
On March 6, 2013, as a result of our inability to pay approximately $30 million of our senior secured debt which had become due on November 17, 2012, we 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;  both appeals were dismissed for lack of prosecution and mootness, as the Equity Committee had been dissolved as of the effectiveness of the Plan and no party had taken action to be substituted in to continue to pursue these appeals. This Chapter 11 case was concluded via Final Decree by the Bankruptcy Court entered on September 30, 2013. 
 
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 (the “Class Action”).  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 the 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. On December 4, 2013 the District Court entered an Order consolidating the Class Action cases and appointing a group of lead plaintiffs, beginning a 45-day period during which a Consolidated Complaint must be filed and served. Although the time to respond to this Class Action complaint is still underway, our officers and directors believe this litigation to be without merit, deny any wrongdoing or liability and intend to vigorously defend the alleged claims.
 
We are not 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 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  4.
MINE SAFETY DISCLOSURES
 
Not Applicable.

 
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PART II
 
ITEM   5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
Market for Registrant’s Common Stock
 
From February 18, 2009 until July 12, 2010, our stock traded on the Pink Sheets under the symbol, “BVTI”. On July 12, 2010, our common stock opened for trading on the OTCQB™ Market under the symbol, “BVTI”.   Upon the Effective Date, all of our outstanding common stock was cancelled and ceased trading on the OTCQB Market.   Consequently, the stockholders of Biovest prior to the Effective Date no longer have any interest as stockholders of Biovest.  On the Effective Date we issued Reorganized Biovest Common Stock to the secured and unsecured creditors having allowed claims in our 2013 Bankruptcy Case.  Currently, there is no active trading market for the Company’s issued and outstanding common stock.
 
Number of Common Shareholders
 
As of December 27, 2013, we had 100 million shares of common stock outstanding, which were held by 135 shareholders of record.
 
Quarterly High/Low Bid Quotations – BVTI
 
The following table sets forth the range of high and low bid quotations for our common stock for each of the quarterly periods indicated and as reported by the OTCQB Market. Bid quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions.
 
   
High
    
Low
  
Year Ended September 30, 2013:
            
First Quarter
   $0.24     $0.11  
Second Quarter
   $0.19     $0.02  
Third Quarter
   $0.11     $0.02  
Fourth Quarter(1)
   $0.03     $0.01  
             
Year Ended September 30, 2012:
            
First Quarter
   $0.46     $0.32  
Second Quarter
   $0.77     $0.32  
Third Quarter
   $0.60     $0.37  
Fourth Quarter
   $0.43     $0.11  
 
 
(1)
Quotations for the Fourth Quarter of the fiscal year ended September 30, 2013 were given only between July 1, 2013 and July 9, 2013, the date that our common stock ceased trading on the OTCQBTM Market.
 
Dividends
 
We have never declared or paid any cash dividends and do not anticipate paying cash dividends in the foreseeable future. Although there are no contractual restrictions on our ability to pay dividends, we currently anticipate that all future earnings will be retained for use in our business. Any future determination to pay dividends will be at the discretion of our Board of Directors and will depend upon our financial condition, results of operations, capital requirements, restrictions contained in future financing instruments, and other factors.
 
Equity Compensation Plan Information
 
Securities authorized for issuance under our equity compensation plans which have been approved by our shareholders, as of September 30, 2013:
 
 Plan category
  
Number of
securities to
be issued
upon
exercise of
outstanding
ptions
    
Weighted-
average
exercise
price of
outstanding
options
    
Number of
securities
remaining  available
for future issuance
under equity
compensation plans
  
Equity compensation plans approved by security holders
     500,000     $ 1.00       39,500,000  
Total
     500,000               39,500,000  
 
 
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ITEM  6.
SELECTED FINANCIAL DATA
 
Not Applicable.
 
 
 
 
 
 
 
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ITEM  7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
When you read this section of this Annual Report on Form 10-K, it is important that you also read the financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This section of this Annual Report on Form 10-K 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 this Annual Report on Form 10-K for the fiscal year ended September 30, 2013 and other risks and uncertainties discussed in our other filings with the Securities and Exchange Commission.
 
Biovest is a biotechnology company focused on developing and commercializing 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 other instruments and disposables; and the commercial sale and production of cell culture products and services. We were incorporated in Minnesota in 1981, under the name Endotronics, Inc. In 1993, our name was changed to Cellex Biosciences, Inc. In 2001, we changed our corporate name to Biovest International, Inc. and changed our state of incorporation from Minnesota to Delaware.
 
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. 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, on June 13, 2012, we filed our formal notice of intent to file a marketing authorization application (“MAA”) with the European Medicines Agency (“EMA”), which began the EU marketing approval application process.  Subsequently, on December 3, 2013, we submitted an MAA with the EMA for BiovaxID.  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 also conducted a formal guidance meeting with the U.S. Food and Drug Administration (“FDA”) in order to discuss the path for our filing of a biologics licensing application (“BLA”) for BiovaxID’s U.S. regulatory/marketing approval. As a result of this guidance meeting, we plan to 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 the filing of our BLA for BiovaxID.  We are preparingto initiate this second Phase 3 clinical trial, subject to availability of funding.
 
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 a fully automated, reusable instrument that employs a fully disposable, closed-system cell-growth chamber incorporating a hollow fiber cell-growth cartridge called AutovaxID. 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. We are collaborating with the U.S. Department of Defense (“DoD”) and others to further develop AutovaxID and related hollow fiber systems and to explore potential production of additional vaccines, including vaccines for viral indications such as influenza and other contagious diseases.
 
 
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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 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 filed periodic and other reports with the Securities and Exchange Commission (“SEC”).  On July 9, 2013, as a result of the 2013 Bankruptcy case (discussed below), Accentia retains no equity ownership or debt interest in Biovest and all Biovest common stock previously issued and outstanding was cancelled.  In accordance with the Plan, we issued new common stock as of July 9, 2013 (the “Effective Date”) to secured and unsecured creditors with allowed claims in our 2013 Bankruptcy Case.
 
The 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 on November 17, 2012, we filed a voluntary petition to reorganize under Chapter 11 of the Bankruptcy Code, Case No.8:13-bk-2892-KRM, with the Bankruptcy Court (“the 2013 Bankruptcy Case”).  During the pendency of the Chapter 11 proceedings, we operated our business as a debtor-in-possession in accordance with the provisions of Chapter 11, and were subject to the jurisdiction of the bankruptcy court.
 
On June 10, 2013, the Company filed its First Modification to the First Amended Plan of Reorganization (the “Plan”) with the support of its senior, secured lenders.   The Plan provided for, among other things, the cancellation of all outstanding common stock, options and warrants in Biovest.  In addition, the Plan provided for the conversion of virtually all pre-petition debt into new common stock of the reorganized Company (‘Reorganized Biovest Common Stock”) as follows: (i) all outstanding indebtedness due to our senior secured lenders, totaling in excess of $41.0 million, would be converted into new equity representing ninety three percent (93%) of the newly issued Reorganized Biovest Common Stock and; (ii) approximately $5.4 million of unsecured indebtedness outstanding under our prepetition unsecured debt obligations would be converted and exchanged for new equity representing seven percent (7%) of the newly issued Reorganized Biovest Common Stock.
 
On June 27, 2013 an evidentiary hearing was held to determine the validity of an unsecured claim filed by Accentia, our former majority shareholder and parent corporation.  We had originally classified our intercompany obligation due to Accentia as a “debt subject to compromise” through our Chapter 11 proceeding and 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 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 our 2013 Bankruptcy Case. 
 
On June 28, 2013, the court entered an order confirming the Plan (the "Confirmation Order”).  The Plan became effective on July 9, 2013 (the “Effective Date”).  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
 
Common shares, options, and warrants or other rights to purchase or acquire common shares which existed prior to Effective Date were cancelled as of the Effective Date without further liability, payment or compensation in respect thereof.  We amended and restated our Certificate of Incorporation to authorize the issuance of up to 50,000,000 shares of preferred stock and up to 300,000,000 shares of Reorganized Biovest Common Stock.  Pursuant to the Plan, we issued 100,000,000 shares of Reorganized Biovest Common Stock 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 connection with the 2013 Bankruptcy Case as well as a rent cure claim for past amounts due under the lease for our manufacturing facility located in Minneapolis, Minnesota.  The majority of the legal fees as well as the rent cure claim were paid, in cash, shortly after the Effective Date.  A portion of the legal fees (approximately $0.18 million) will remain accrued and become due, in cash, at later dates, but no later than March 31, 2014.
 
 
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Priority Claims
Priority Claims consist of pre-petition wages due to our employees in the approximate amount of $0.12 million.  Priority wage claims were paid, in cash, shortly after the Effective Date.
 
DIP Financing Claims
 
During our reorganization proceedings, the court approved a $5.7 million post-petition line of credit facility (the “DIP Financing”) from Corps Real, LLC (“Corps Real”), 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”).  The LV Entities and Corps Real represent the Company’s pre-petition senior secured lenders (the “Senior Secured Lenders”) originally secured by a security interest in and lien on all of our assets.

Pursuant to the terms of the Plan, the DIP Financing claims were deemed fully paid and any liens and security interests granted in favor of Corps Real and the LV Entities under the DIP Financing documents were released and terminated.  As a result of the Plan, the Senior Secured Lenders are no longer creditors of Biovest, but instead major shareholders of the Company, holding 93% of the Reorganized Biovest Common Stock.  Furthermore, as of Effective Date, approximately $2.6 million remained available under the DIP Financing for working capital without payment of any further consideration by Biovest.  From the period following the Effective Date through September 30, 2013, Biovest drew down approximately $1.9 million of the $2.6 million remaining.  These draws were recorded as in increase to additional paid in capital on the Successor Company (as defined below) balance sheet as of September 30, 2013 and are shown as “additional investment from shareholders” on the Successor Company Cash Flow Statement and Statement of Stockholders’ Equity.
 
Secured Claims
 
In addition to the DIP Financing claims discussed above, the allowed secured claims in our reorganization proceeding consisted of the following:
 
 
·
The Corps Real Claims (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 (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.
 
·
The Minnesota Promissory Notes (approximately $0.33 million):  On the Effective Date, the obligations due under the Minnesota Promissory Notes were affirmed.  On July 16, 2013, we issued a cash payment in the approximate amount of $1 thousand representing the cumulative balance of the missed monthly principal and interest payments due during the reorganization proceedings.  Following the Effective Date, Reorganized Biovest resumed its obligations under the original terms of Minnesota Promissory Note documents.
 
Unsecured Claims
 
The allowed unsecured claims in our reorganization proceedings totaled approximately $5.4 million and consisted of the following:
 
 
·
The November 2010 Convertible Notes (see Sources of Liquidity below) totaling approximately $1.4 million (including interest)
 
·
The March 2014 Obligations (see Sources of Liquidity below) totaling approximately $3.3 million (including interest)
 
·
Other accrued pre-petition liabilities totaling approximately $0.7 million

On the Effective Date, the holders of 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 the Effective Date in full and final satisfaction of all allowed unsecured claims.  Each holder of an allowed unsecured claim received a pro-rata share of the seven million shares available to all allowed unsecured claims.
 
 
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Fresh-Start reporting
 
Upon the Effective Date of our Plan for Reorganization, we were required to adopt fresh-start reporting in accordance with Accounting Standards Codification No. 852 – Reorganization.  We elected to apply fresh-start accounting on a convenience date of July 1, 2013 (the “Convenience Date”) after concluding that operating results between the Effective Date and the Convenience Date did not result in a material difference.  Material adjustments resulting from the reorganization and the application of fresh-start reporting have therefore been reflected in the September 30, 2013 consolidated balance sheet as well as the statement of operations for the three months ended September 30, 2013.  Given that the adoption of fresh-start reporting resulted in a new entity for financial reporting purposes, Biovest is referred to as the “Predecessor Company” for all periods preceding the Convenience Date, and the “Successor Company” for all periods subsequent to the Convenience Date.  See Note 4 – Fresh-Start Reporting in the notes to the Consolidated Financial Statements for further details.
 
Results of Operations
 
Year Ended September 30, 2013 Compared to the Year Ended September 30, 2012
 
For comparative purposes, we have combined the results of the Predecessor Company and the Successor Company for the year ended September 30, 2013.  Where specific income statement items have been impacted significantly as compared to our historical results by the reorganization plan or by the adjustments required by the fresh-start reporting process, we have provided explanations of such in the discussion.
 
Revenue. Total revenues for the year ended September 30, 2013 were $4.1 million, compared to $3.9 million for the year ended September 30, 2012. While revenue from cell culture contract services increased considerably year over year (by $0.76 million or 90%), this was offset, in part, by a decrease in instrument and disposable revenues (a decrease of $0.58 million or 20%).   The increase in cell culture contract services revenue was due primarily to one project for $0.6 million that was completed, start to finish, during fiscal 2013.  While we completed approximately the same number of cell culture contracts in the prior fiscal year, they were smaller jobs in comparison, with no single contract in excess of $0.25 million.  As discussed, instrument and disposable revenue decreased by $0.58 million when compared to the prior year, due to a reduction in the number of hollow fiber cell culture bioreactors sold.  While unit sales for our disposable cultureware increased year over year (540 units in the current year, versus 521 units in fiscal 2012), we sold 4 bioreactor systems in the current year, compared to 22 systems for the year ended September 30, 2012.  Also included in product revenue for the prior fiscal year is $0.1 million resulting from a data sharing agreement which required us to share our data set resulting from our Phase 3 clinical trial for BiovaxID.  The current year’s results do not contain comparable revenue.
 
Gross Margin. The overall gross margin as a percentage of sales for the year ended September 30, 2013 increased from 29% to 30% when compared to the year ended September 30, 2012.
 
Operating Costs and Expenses. Research and development expenses were relatively unchanged compared to the year ended September 30, 2012. During the current fiscal year we continued our analyses of the available data from our BiovaxID clinical trials and aggregated this data in the form of a Marketing Authorization Application for BiovaxID, which we filed with the European Medicines Agency on December 3, 2013.  These efforts resulted in significant fees for consulting services, travel expenses, wages and cost of laboratory supplies and equipment.
 
General and Administrative Expenses. General and administrative expenses have decreased by $2.1 million when compared to the prior fiscal year.  For the year ended September 30, 2012, non-cash stock compensation expense aggregated to $2.6 million.  As a result of our plan of reorganization, all incentive stock options issued to our employees prior to the Effective Date were cancelled, thus no further expense relating to these options will be recorded on the Successor Company.  Prior to the cancellation of these options, we recognized $0.08 million in stock compensation expense on the Predecessor Company for the nine month period ending June 30, 2013.  Furthermore, as part of our restructuring, we reduced administrative overhead through a reduction in our administrative workforce as well as through the rejection of our lease for administrative office space located in Tampa, FL.  During the current year, we entered into a new lease for office space in Tampa, FL at a significantly reduced rate.
 
Other Expense. Other expense for the years ended September 30, 2013 and 2012 includes contractual interest charges and amortization of discounts in connection with the Laurus/Valens Term A and Term B Notes, the Corps Real Note, the Exit Financing, the Accentia promissory demand note, and other long term notes issued to our unsecured creditors as a result of the Plan, as described below.   As a result of our restructuring, our pre-petition debt was either disallowed through the bankruptcy proceedings, or converted to shares of Reorganized Biovest Common Stock pursuant to our Plan (see the 2013 Bankruptcy Case above).  As a result, interest expense on the Successor Company has decreased considerably.  For the three month period ending September 30, 2013, the Successor Company has recorded $6 thousand in interest expense, representing interest which has accrued on the Minnesota Promissory Notes, the obligations of which were affirmed in our reorganization proceedings.
 
Other expense for the Predecessor Company also include a gain on derivative liabilities of $0.85 million for the nine month period ended June 30, 2013 and a gain of $1.14 million for the year ended September 30, 2012. These gains resulted from the change in fair value of the secured convertible notes issued in our Exit Financing related to our 2008 Bankruptcy Case, which were convertible into shares of our Predecessor common stock, as well as Predecessor common stock purchase warrants we issued which had contingent exercise provisions.  The convertible notes and common stock purchase warrants were required to be recorded at fair value; the values of which varied directly with the trading price of our Predecessor Company outstanding common stock.   As a result of our Plan, these liabilities were extinguished.
 
 
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Reorganization Items
 
Gain on Reorganization. We have recognized gains of $10.3 million and $0.2 million on the Predecessor Company for the nine months ended June 30, 2013 and the year ended September 30, 2012, respectively, as a result of the settlement of our prepetition claims through our Chapter 11 proceedings. The gains upon reorganization have been presented separately in the consolidated statements of operations and are as follows:

   
Successor
    
Predecessor
  
   
For the Period from
July 1 through
September 30, 2013
    
For the Period
from October 1,
2012 through
June 30, 2013
    
Year Ended
September 30,
2012
  
Gain on conversion of secured claims to common stock(a)
   $ —     $ 4,530,000       —  
Gain on conversion of unsecured claims to common stock(a)
     —       853,000       —  
Gain on disallowance of Accentia intercompany claim
     —       4,544,000       —  
Gain on disallowance of other unsecured claims
     —       360,000       —  
Gain from previous plan of reorganization(b)
     —       —       222,000  
    $ —     $ 10,287,000     $ 222,000  
 
 
(a)
The gains upon conversion to common stock were calculated by charging the carrying value of the Predecessor’s pre-petition liabilities against the fair value of Reorganized Biovest Common Shares issued to settle the associated liabilities pursuant to the Plan.
 
 
(b)
November 17, 2010 marked the effective date of our previously confirmed plan of reorganization (case 8:08-bk-17795-KRM filed on November 10, 2008, the “2008 Bankruptcy”).  Pursuant to the confirmed plan of reorganization resulting from the 2008 Bankruptcy, holders of existing voting shares immediately before the confirmation received more than 50% of the voting shares of the emerging entity, thus we did not adopt fresh-start reporting upon emergence from the 2008 Bankruptcy. We instead followed the guidance as described in Accounting Standard Codification (“ASC”) 852-45-29 for entities which do not qualify for fresh-start reporting. Liabilities compromised by the plan were stated at present values of amounts to be paid, and forgiveness of debt has been reported as an extinguishment of debt resulting in the gain on reorganization.
 
Professional Fees. $0.07 million and $1.0 million were incurred on the Successor Company for the three months ended September 30, 2013 and on the Predecessor Company for the nine months ended June 30, 2013, respectively, for legal fees and U.S. Trustee fees paid as a result of our Chapter 11 proceedings. On September 30, 2013, the Bankruptcy Court entered a Final Decree closing our Chapter 11 proceedings. As a result, we anticipate professional fees related to our past reorganization proceeding to be minimal in the future.
 
 
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Liquidity and Capital Resources
 
Sources of Liquidity
 
We emerged from reorganization in July 2013 and continue to operate as a going concern.  At September 30, 2013, we had cash of $0.7 million and working capital of $0.8 million.  As of September 30, 2013, we had approximately $0.7 million available under the DIP Financing.   On December 16, 2013, we entered into a Secured Promissory Note with our Senior Secured Lenders in a maximum principal amount of $3.5 million having a five year maturity.  Interest accrues at twelve percent per annum on the outstanding principal amount and is payable on the maturity of the note unless previously prepaid.  We intend to draw down upon the note as and when needed to fund the Company’s operations and commercialization efforts.  We anticipate that the DIP Financing and the Secured Promissory Note will fund the Company’s operations and commercialization efforts through the earlier of (a) obtaining significant additional external funding and (b) May, 2014.
 
Through September 30, 2013 we have been primarily engaged in developing BiovaxID.  In the course of these activities, we have sustained losses and expect such losses to continue through at least 2014.  Our ability to fund the additional confirmatory Phase 3 clinical trial required for FDA approval and to continue our detailed analyses of BiovaxID™’s clinical trial results is dependent on our ability to obtain significant additional 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 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 we determine it to otherwise be in the Company’s best interest, we may be required to delay, reduce the scope of, or eliminate one or more of our research or development programs,  sell our assets, or curtail some or all of our commercialization efforts.
 
During fiscal 2013, we financed our operations primarily through secured promissory notes issued to our Senior 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 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 accrued interest at 16% per annum with all interest due at maturity – December 3, 2013 and was secured by a first priority lien on all of the Company’s assets.
 
On March 5, 2013 we 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 accrued interest at 16% per annum with all interest due at maturity – March 5, 2014 and was secured by a first priority lien of all the Company’s assets.

As of July 9, 2013, the Effective Date of our Plan, any obligations due under the Corps Real Notes have been extinguished in return for 26% of the total issued and outstanding shares of Reorganized Biovest Common Stock as of the Effective Date.
 
Debtor-in-Possession Financing:
 
As discussed above, during the Company’s reorganization proceedings, the Bankruptcy Court approved the DIP Financing, representing a post-petition line of credit facility in the amount of $5.7 million from the Company’s Senior Secured Lenders.  As of September 30, 2013, the Company had approximately $0.7 million available to draw down under the DIP Financing.  As of the Effective Date, amounts due under the DIP Financing were extinguished in return for Reorganized Biovest Common Stock.

 Net Cash Flows from Operating Activities
 
 
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Successor Company:
 
During the three months ended September 30, 2013, we incurred a net loss of $1.5 million. Due to the fact that virtually all of our debt was either disallowed or converted to shares of Reorganized Biovest Common Stock through the Plan, a number of non-cash adjustments to net income, such as the amortization of discounts on debt, are no longer present on the Successor Company cash flows from operating activities.  After adjusting the Successor Company net loss for items such as depreciation on our property and equipment, as well as the payment of professional fees relating to our reorganization proceedings, which had previously been accrued for on the Predecessor Company financial statements, the net cash deficit from operating activities was $1.4 million for the three months ended September 30, 2013.
 
Predecessor Company:
 
For the nine months ended June 30, 2013, we reported net income of $2.5 million, as a result of gains recorded upon the elimination and conversion of our debt pursuant to our Plan.  Also included in the net income figure are several other non-cash transactions, described as follows:
 
 
•
Interest charges resulting from amortization of discounts on outstanding debt in the amount of $1.6 million.
 
 
•
An increase of $1.8 million in the balance of accrued interest on pre-petition debt.
 
Adjusting our net income for these and other non-cash items resulted in a net cash deficit from operating activities in the amount of $4.3 million for the nine months ended June 30, 2013.
 
During the year ended September 30, 2012, we incurred a net loss of $11.8 million. Included in this loss are several non-cash transactions, described as follows:
 
 
•
Interest charges resulting from amortization of discounts on outstanding debt in the amount of $2.2 million.
 
 
•
An increase of $2.8 million in the balance of accrued interest on outstanding debt.
 
 
•
A charge in the amount of $2.6 million for employee share-based compensation.
 
Adjusting our net loss for these and other non-cash items resulted in a net cash deficit from operating activities in the amount of $4.3 million for the year ended September 30, 2012.
 
Net Cash Flows from Investing Activities
 
Successor Company:
 
Investing activities for the three months ending September 30, 2013 consist entirely of the purchase of laboratory equipment in the amount of $9 thousand for use in our manufacturing facility in Minneapolis, MN.
 
Predecessor Company:
 
Investing activities for the nine months ended June 30, 2013 and the year ended September 30, 2012 were $0.5 million and $80 thousand, respectively, and consisted of the purchase of laboratory and computer equipment for use in our operations.
 
Net Cash Flows from Financing Activities
 
Successor Company:
 
Financing activities for the three months ended September 30, 2013 were as follows:
 
 
•
The repayment of principal due under the Minnesota Promissory Notes in the amount of eight thousand dollars.
 
 
•
The repayment of principal due under capital lease arrangements for laboratory equipment used in our Minneapolis, MN facility in the amount of twelve thousand dollars.
 
 
•
Proceeds of $1.9 million drawn on the DIP Financing discussed above.
 
Predecessor Company:
 
Financing activities for the nine months ended June 30, 2013, include the following:
 
 
•
Advances under the DIP Financing and Corps Real II and III Notes in the amount of $5.6 million.
 
 
•
The repayment of approximately $0.44 million on the intercompany balance payable to our former parent company, Accentia.
 
 
•
The repayment of approximately $75 thousand on other notes payable and long term debt.
 
 
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Financing activities for the year ended September 30, 2012, include the following:
 
 
•
Advances (mostly from Accentia) in the amount of $4.0 million in the form of cash to fund operations, allocated inter-company expenses, accrued interest, and payments directly to third parties on our behalf.
 
 
•
The repayment of approximately $50 thousand on notes payable and long term debt.
 
 
•
Proceeds of $0.2 million through the exercise of options and warrants to purchase shares of our common stock.
 
Critical Accounting Policies and Estimates
 
Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with the U.S. generally accepted accounting principles (“GAAP”). The preparation of these financial statements requires us to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses and related disclosure of contingent assets and liabilities. We evaluate our estimates, including those related to bad debts, inventories, intangible assets, contingencies and litigation on an ongoing basis. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
 
The accounting policies previously discussed are considered by our management to be critical to an understanding of our consolidated financial statements because their application depends on management’s judgment, with financial reporting results relying on estimates and assumptions about the effect of matters that are inherently uncertain. On an ongoing basis, we evaluate our estimates and assumptions. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. For all of these policies, management cautions that future events rarely develop exactly as forecast and that best estimates routinely require adjustment. Accordingly, actual results may differ from our estimates under different assumptions or conditions and could materially impact our financial condition or results of operations.
 
While our significant accounting policies are more fully described in our consolidated financial statements appearing at the end of this Annual Report on Form 10-K, we believe that the following critical accounting policies involve the more significant judgments and estimates used in the preparation of our consolidated financial statements and are the most critical to aid you in fully understanding and evaluating our reported financial results:
 
 
•
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. Because of the inherent uncertainties in estimating costs, it is at least reasonably possible that the estimates used will change in the near term.  
 
 
•
Contract costs related to cell culture production include all direct material, subcontract and labor costs and those indirect costs related to contract performance, such as indirect labor, insurance, supplies and tools. We believe that actual costs incurred in contract cell production services is the best indicator of the performance of the contractual obligations, because the costs relate primarily to the amount of labor incurred to perform such services. The deliverables inherent in each of our cell culture production contracts are not output driven, but rather are driven by a pre-determined production run. The duration of our cell culture production contracts range typically from 2 to 14 months.
 
 
•
We maintain provisions for estimated losses resulting from the inability of our customers to make required payments. If the condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.
 
 
•
Inventories are recorded at the lower of cost or market. Write-downs of inventories to market value are based upon contractual provisions and obsolescence, as well as assumptions about future demand and market conditions. If assumptions about future demand change and/or actual market conditions are less favorable than those projected by management, additional write-downs of inventories may be required.
 
 
•
In assessing the recoverability of our amounts recorded as intangible assets, significant assumptions regarding the estimated future cash flows and other factors to determine the fair value of the respective assets must be made, as well as the related estimated useful lives. If these estimates or their related assumptions change in the future as a result of changes in strategy and/or market conditions, we may be required to record impairment charges.
 
 
•
We account for stock-based compensation based on ASC Topic 718 – Stock Compensation, which requires expensing of stock options and other share-based payments based on the fair value of each option awarded. The fair value of each option is estimated on the date of grant using the Black-Scholes valuation model. This model requires management to estimate the expected volatility, expected dividends, and expected term as inputs to the valuation model.
 
 
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•
The consolidated financial statements represent the consolidation of wholly-owned companies and interests in joint ventures where we have had a controlling financial interest or have been determined to be the primary beneficiary under ASC Topic 810 – Consolidation. All significant inter-company balances and transactions have been eliminated.
 
 
•
We do not use derivative financial instruments to hedge exposures to cash-flow, market or foreign-currency risks. However, we and our consolidated subsidiaries have 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.
 
 
•
In selecting the appropriate technique(s) to measure the fair values of our derivative financial instruments, management considers, among other factors, the nature of the instrument, the market risks that it embodies and the expected means of settlement. For less complex derivative instruments, such as free-standing warrants, we use 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 calculate the fair value of these instruments. For forward contracts that contingently require net-cash settlement as the principal means of settlement, management projects and discounts future expected cash flows to multiple possible outcomes. Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates 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 our trading market price which has high-historical volatility. Since derivative financial instruments classified as liabilities are initially and subsequently carried at fair value, our income will reflect the volatility in these estimate and assumption changes.
 
 
•
Upon implementation of fresh-start accounting, the Successor Company’s asset values were re-measured and allocated in conformity with ASC 805-20, Business Combinations.  The going concern enterprise value of the Successor Company’s operations for purposes of fresh start accounting was estimated to be $41.6 million.  Upon implementation of fresh-starting accounting, we allocated the estimated reorganization value to our various assets and liabilities based on their estimated fair values and eliminated our deficit and additional paid-in-capital. 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. We also recorded the Successor Company’s debt and equity at the fair value estimated through this process.   See Note 4 to the consolidated financial statements for further information on fresh-start reporting.  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 enterprise value.
 
Revenue Recognition
 
We recognize revenue as follows:
 
Products. Net sales of cell culture instruments and disposables are recognized in the period in which the risk and rewards of ownership have passed (at point of shipment) to the buyer. We do not provide our customers with a right of return; however, deposits made by customers must be returned to customers in the event of non-performance by us.
 
Actual product returns, chargebacks, and other sales allowances incurred are dependent upon future events and may be different than our estimates. We continually monitor the factors that influence sales allowance estimates and make adjustments to these provisions when management believes that actual product returns, chargebacks, and other sales allowances may differ from established allowances.
 
Services. Service revenue is generated primarily by fixed-price contracts for cell culture production and consulting services. Such revenue is recognized over the contract term in accordance with the percentage-of-completion method based on the percentage of service cost incurred during the period compared to the total estimated service cost to be incurred over the entire contract. The nature and scope of our contracts often require us to make judgments and estimates in recognizing revenues.
 
Estimates of total contract revenues and costs are continuously monitored during the term of the contract, and recorded revenues and costs are subject to revision as each contract progresses. Such revisions may result in increases or decreases to revenues and income and are reflected in the consolidated financial statements in the periods in which they are first identified. Each month, we accumulate costs on each contract and compare them to the total current estimated costs to determine the percentage of completion. We then apply this percentage to the total contract value to determine the amount of revenue that can be recognized. Each month, we review the total current estimated costs on each contract to determine if these estimates are still accurate and, if necessary, we adjust the total estimated costs for each contract. As the work progresses, we might decide that original estimates were incorrect due to, among other things, revisions in the scope of work, and a contract modification might be negotiated with the customer to cover additional costs. If a contract modification is not agreed to, we could bear the risk of cost overruns. Losses on contracts are recognized during the period in which the loss first becomes probable and reasonably estimable. Reimbursements of contract-related costs are included in revenues. An equivalent amount of these reimbursable costs is included in cost of sales. Because of the inherent uncertainties in estimating costs, it is at least reasonably possible that the estimates used will change within the near term.
 
 
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Service costs related to cell culture production include all direct materials and subcontract and labor costs and those indirect costs related to contract performance, such as indirect labor, insurance, supplies, and tools. We believe that actual cost incurred in contract cell production services is the best indicator of the performance of the contractual obligations, because the costs relate primarily to the amount of labor incurred to perform such services. The deliverables inherent in each of our cell culture production contracts are not output driven, but rather are driven by a pre-determined production run. The duration of our cell culture production contracts range typically from two to fourteen months.
 
 
 
 
 
 
 
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Service costs relating to our consulting services consist primarily of internal labor expended in the fulfillment of our consulting projects and, to a lesser extent, outsourced research services. Service costs on a specific project may also consist of a combination of both internal labor and outsourced research service. Our consulting projects are priced and performed in phases, and the projects are managed by phase. As part of the contract bidding process, we develop an estimate of the total number of hours of internal labor required to generate each phase of the customer deliverable (for example, a manuscript or database), and the labor cost is then computed by multiplying the hours dedicated to each phase by a standard hourly labor rate. We also determine whether we need services from an outside research or data collection firm and include those estimated outsourced costs in our total contract cost for the phase. At the end of each month, we collect the cumulative total hours worked on each contract and apply a standard labor cost rate to arrive at the total labor cost incurred to date. This amount is divided by the total estimated contract cost to arrive at the percentage of completion, which is then applied to the total estimated contract revenues to determine the revenue to be recognized through the end of the month. Accordingly, as hours are accumulated against a project and the related service costs are incurred, we concurrently fulfill our contract obligations. The duration of our consulting service contracts range typically from 1 to 12 months. Certain other professional service revenues, such as revenues from maintenance services on cell culture equipment, are recognized as the services are performed.  
 
In our consolidated financial statements, unbilled receivables represents revenue that is recognizable under the percentage-of-completion method due to the performance of services for which billings have not been generated as of the balance sheet date. In general, amounts become billable pursuant to contractual milestones or in accordance with predetermined payment schedules. Under our consulting services contracts, the customer is required to pay for contract hours worked by us (based on the standard hourly rate used to calculate the contract price) even if the customer cancels the contract and elects not to proceed to completion of the project. Unearned revenues represent customer payments in excess of revenue earned under the percentage-of-completion method. Such payments are made in accordance with predetermined payment schedules set forth in the contract.
 
Valuation of goodwill and intangible assets.  Our intangible assets include goodwill and in-process research and development, which are accounted for based on ASC Topic 350 Intangibles-Goodwill and Other. As described below, goodwill and intangible assets that have indefinite useful lives are not amortized but are tested at least annually for impairment or more frequently if events or changes in circumstances indicate that the asset might be impaired. Goodwill is tested for impairment by comparing the carrying amount to the estimated fair value, in accordance with GAAP. Impairment exists if the carrying amount is less than its estimated fair value, resulting in a write-down equal to the difference between the carrying amount and the estimated fair value. The values recorded for goodwill and other intangible assets represent fair values calculated by accepted valuation methods. Such valuations require critical estimates and assumptions derived from and which include, but are not limited to (i) information included in our business plan, (ii) estimated cash flows, (iii) discount rates, (iv) patent expiration information, (vi) terms of license agreements, and (vii) expected timelines and costs to complete any in-process research and development projects to commercialize our product candidates under development.
 
Impairment testing.  Our goodwill impairment testing is calculated at the reporting unit level. Our annual impairment test has two steps. The first identifies potential impairments by comparing the fair value of the reporting unit with its carrying value. If the fair value exceeds the carrying amount, goodwill is not impaired and the second step is not necessary. If the carrying value exceeds the fair value, the second step calculates the possible impairment loss by comparing the implied fair value of goodwill with the carrying amount. If the implied fair value of goodwill is less than the carrying amount, a write-down is recorded.
 
In-process research and development (“IPR&D”) represent intangible assets related to our development of that were recognized upon adoption of fresh-start accounting on July 1, 2013.  As we have not yet gained regulatory approval for BiovaxID, this asset is evaluated for impairment at least annually or whenever an indication of impairment exists.  In the course of the evaluation of the potential impairment of IPR&D, either a qualitative or a quantitative assessment may be performed. If a qualitative evaluation determines that no impairment exists, then no further analysis is performed. If a qualitative evaluation is unable to determine whether impairment has occurred, a quantitative evaluation is performed.  We have not recorded any impairment losses as a result of these evaluations.  Should we begin generating revenue following regulatory approval of BiovaxID, IPR&D will be amortized as a finite-lived intangible asset over its estimated useful life.
 
 
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We predominately use a discounted cash flow model derived from internal budgets in assessing fair values for our impairment testing. Factors that could change the result of our impairment test include, but are not limited to, different assumptions used to forecast future net sales, expenses, capital expenditures, and working capital requirements used in our cash flow models. In addition, selection of a risk-adjusted discount rate on the estimated undiscounted cash flows is susceptible to future changes in market conditions, and when unfavorable, can adversely affect our original estimates of fair values. In the event that our management determines that the value of intangible assets have become impaired using this approach, we will record an accounting charge for the amount of the impairment.
 
Share-based compensation.  We account for stock-based compensation based on ASC Topic 718-Stock Compensation which requires expensing of stock options and other share-based payments based on the fair value of each stock option awarded. The fair value of each stock option is estimated on the date of grant using the Black-Scholes valuation model. This model requires management to estimate the expected volatility, expected dividends, and expected term as inputs to the valuation model.
 
In applying the Black-Scholes options-pricing model for the three month period ending September 30, 2013 (Successor Company), we assumed no dividend yield, a risk-free interest rate of 0.30%, an expected option term of 2.5 years, a volatility factor of 65.5%, and a share price and an exercise price of $0.19.
 
In applying the Black-Scholes options-pricing model for the nine month period ending June 30, 2013 (Predecessor Company), we assumed no dividend yield, a risk-free interest rate of 0.75%, an expected option term of 2.5 years, a volatility factor of 62.2%, and a share price and an exercise price of $0.42.
 
We recorded stock-based compensation of approximately $32 thousand for the three months ended September 30, 2013 (Successor Company), $77 thousand for the nine months ended June 30, 2013 (Predecessor Company)  and $2.6 million in the year ended September 30, 2012 (Predecessor Company). For all periods, stock-based compensation is classified in both general and administrative and research and development expense in the accompanying consolidated statements of operations.
 
Derivative instruments - Fair value of financial assets and liabilities.  We measure 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).
 
We generally do not use derivative financial instruments to hedge exposures to cash-flow, market or foreign-currency risks. However, we and our consolidated subsidiaries have 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.
 
We estimate fair values of all derivative instruments, such as free-standing common stock purchase warrants, and embedded conversion features utilizing Level 2 inputs. We use 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 fair value 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 our 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, our income will reflect the volatility in these estimate and assumption changes.
 
We reported our derivative liabilities at fair value on the accompanying consolidated balance sheets as of September 30, 2012. Pursuant to the Plan, all derivative liabilities were cancelled as of the Effective Date.  As such, there were no derivative liabilities as of September 30, 2013.
 
 
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Income Taxes.  We incurred net operating losses (“NOLs”) for the years ended September 30, 2013 and 2012, and consequently did not or will not be required to pay federal or foreign income taxes, but we did pay nominal state taxes in several states where we have operations. We have a federal NOL carryover of approximately $104.7 million as of September 30, 2013, which will expire, beginning in 2020. Under Section 382 and 383 of the Internal Revenue Code, if an ownership occurred change occurs with respect to a “loss corporation”, as defined, there are annual limitations on the amount of the NOL and other deductions which are available to us. The portion of the NOLs incurred prior to June 17, 2003 ($3.4 million) is subject to this limitation. As such, these NOLs are limited to approximately $0.2 million per year. NOLs incurred after June 17, 2003 may also subject to restriction.
 
Our ability to realize our deferred tax assets depends on our future taxable income as well as the limitations on usage discussed above. For financial reporting purposes, a deferred tax asset must be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized prior to its expiration. Because we believe the realization of our deferred tax assets is uncertain, we have recorded a valuation allowance to fully offset them.
 
Impact of foreign sales. A significant amount of our operating revenue has historically been derived from export sales. While we invoice our customers in U.S. dollars, we will be subject to risks associated with foreign sales, including the difficulty of maintaining cross-cultural distribution relationships, economic or political instability, shipping delays, fluctuations in foreign currency exchange ratios and foreign patent infringement claims, all of which could have a significant impact on our ability to deliver products on a timely and competitive basis. This has not been a significant factor in prior years. In addition, future imposition of, or significant increases in, the level of customs duties, export quotas or other trade restrictions could have an adverse effect on our business.
 
Effects of inflation.  Our assets are primarily liquid in nature and are not significantly affected by inflation. However, the rate of inflation affects our expenses, including employee compensation, raw materials and occupancy, which may not be readily recoverable through charges for services provided by us.
 
Funding requirements.  We expect to devote substantial resources to further our development and commercialization efforts for our product candidates Our future funding requirements and our ability to raise additional capital will depend on factors that include:
 
 
•
the timing and amount of expense incurred to complete our clinical trials;
 
 
•
the costs and timing of the regulatory process as we seek approval of our product candidates in development;
 
 
•
the advancement of our product candidates in development;
 
 
•
the timing, receipt and amounts of milestone payments to our existing development partners;
 
 
•
our ability to generate new relationships with industry partners whose business plans seek long-term commercialization opportunities which allow for up-front deposits or advance payments in exchange for license agreements;
 
 
•
the timing, receipt and amount of sales, if any, from our product candidates in development;
 
 
•
the cost of manufacturing (paid to third parties) of our licensed product candidates
 
 
•
the cost of marketing and sales activities of those product candidates;
 
 
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•
the continued willingness of our vendors to provide trade credit on historical terms;
 
 
•
the costs of prosecuting, maintaining, and enforcing patent claims, if any claims are made;  
 
 
•
our ability to maintain existing collaborative relationships and establish new relationships as we advance our product candidates in development;
 
 
•
 our ability to maintain our assets or cash flow so that they are sufficient to fully repay the principal owed under our outstanding debt instruments, either upon maturity or immediately upon demanded acceleration, upon the current event of default or any other events of default;

 
•
 our ability to refinance or restructure our outstanding matured debt instruments; and
 
 
•
the receptivity of the financial market to biotechnology companies.
 
Off-Balance Sheet Arrangements.  We do not maintain any off-balance sheet financing arrangements.
 
Fluctuations and Operating Results.  We anticipate that our results of operations will fluctuate from quarter-to-quarter or year-to-year for several reasons, including:
 
 
•
the timing of the development and commercialization of our product candidates;
 
 
•
the timing and extent of our clinical trials for our product candidates that we may develop in the future;
 
 
•
the timing and outcome of our regulatory/marketing approval applications both nationally and internationally, for our product candidates;
 
 
•
the timing and outcome of our marketing of the AutovaxID® instrument;
 
 
•
the timing and size of orders for instruments and disposables and instrumentation and the sale and production of cell culture products and services;
 
 
•
the timing and extent of our adding new employees and infrastructure; and
 
 
•
the timing of any milestone payments, license fees, or royalty payments that we may be required to make.
 
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.
 
Recent Accounting Pronouncements
 
See Note 2 to our consolidated financial statements.
 
ITEM  7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
 
Not Applicable.
 
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
Our consolidated financial statements: See “Index to Consolidated Financial Statements” on Page F-1 immediately following the signature page of this report.
 
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
 
None.
 
 
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ITEM 9A.
CONTROLS AND PROCEDURES
 
Management’s Report on Internal Control Over Financial Reporting
 
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) promulgated under the Exchange Act. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that:
 
 
•
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
 
 
•
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and our directors; and
 
 
•
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Our management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the criteria set forth in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation under the Internal Control – Integrated Framework, management concluded that our internal control over financial reporting was effective as of September 30, 2013.
 
This Annual Report on Form 10-K does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to rules of the SEC that permit non-accelerated filers like us to provide only management’s report.
 
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 Exchange Act. Based on this evaluation, our chief executive officer (principal executive officer) and chief financial officer (principal financial officer) concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Annual Report on Form 10-K 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 SEC’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 (principal executive officer) and chief financial officer (principal financial officer), as appropriate to allow timely decisions regarding required disclosure.
 
Changes in Internal Control Over Financial Reporting
 
There have been no changes in our internal control over financial reporting identified in connection with this evaluation that occurred during the quarter ended September 30, 2013, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
ITEM  9B.
OTHER INFORMATION
 
None.
 
 
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PART III
 
ITEM  10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
 
Executive Officers and Directors of the Registrant
 
Name
Age
Position
Carlos F. Santos, Ph.D.
36
Chief Executive Officer,
(Principal Executive Officer)
     
Brian D. Bottjer, CPA.
39
Acting Chief Financial Officer and Controller
(Principal Financial Officer)(1)
     
Robert E. Farrell, J.D.
63
Chief Financial Officer (Principal Financial Officer)(2)
     
Ronald E. Osman, Esq.
66
Chairman and Director
     
Edmund C. King
78
Director, Chairman of the Audit Committee
     
John Sitilides
51
Director, Chairman of the Compensation Committee
     
Jeffrey A. Scott, M.D.
54
Director
     
Eugene Grin
56
Director
     
Peter J. Pappas, Sr.
73
Director
     
Raphael J. Mannino, Ph.D.
65
Director
     
 
 
(1)
Mr. Bottjer served as Acting Chief Financial Officer and Controller of the Company, and the Company’s Principal Financial Officer, during the fiscal year ended September 30, 2013.  Effective December 1, 2013, Robert Farrell replaced Mr. Bottjer as Chief Financial Officer of the Company.  Mr. Bottjer continues to serve as Controller of the Company.
 
(2)
Mr. Farrell was hired effective December 1, 2013 to serve as Chief Financial Officer of the Company, and the Company’s Principal Financial Officer.
 
Carlos F. Santos, Ph.D. On July 8, 2013 Dr. Santos was appointed as our Chief Executive Officer. Prior to July 8, 2013, Dr. Santos has served as our Senior Vice President, Product Development & Regulatory Affairs since March 2009. In that role, Dr. Santos managed all key aspects of our personalized immunotherapy platform, including our clinical and regulatory affairs, while also leading the development of our 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 (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 a large-scale automated search and summarization engines for biomedical documents at the University of Michigan’s National Center for Integrative Biomedical Informatics. From 1998 to 2001, he was a researcher at Washington University’s Institute for Biomedical Computing (now the Center for Computational Biology). We believe that Dr. Santos’ experience and skills make him a qualified and valuable member of our management and product development teams.
 
Brian D. Bottjer, CPA was appointed to serve as our Acting Chief Financial Officer and designated to serve as our Principal Financial Officer and Principal Accounting Officer in January 2011, and served in those roles until December 1, 2013.  Mr. Bottjer has served as our Controller since June 2007, and continues to serve in that role. From September 2006 to May 2007, Mr. Bottjer was our Senior Accountant. Prior to that time, from August 2005 to August 2006, Mr. Bottjer was employed as a Controller for Stewart Title Guaranty Company, a provider of title insurance and related services to the real estate and mortgage industries. From March 2003 to August 2005, Mr. Bottjer served at Raymond James & Associates, Inc., a full service brokerage firm headquartered in St. Petersburg, Florida in a number of roles, including that of manager of financial reporting for certain of that company’s business units. Mr. Bottjer has also served in a variety of financial reporting and administrative roles at the Home Shopping Network and Allstate Insurance Corporation. Mr. Bottjer is a licensed Certified Public Accountant and received his B.S. in business administration from the State University of New York at Buffalo in 1997. We believe that Mr. Bottjer’s experience and skills make him a qualified and valuable member of our management team.
 
 
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Robert E. Farrell, Esq. was appointed as our Chief Financial Officer and designated to serve as our Principal Financial Officer and Principal Accounting Officer effective December 1, 2013. Prior to that time, Mr. Farrell served as Chief Financial Officer of Sanovas, Inc., a medical device company from 2012 to 2013, and before that was employed by Titan Pharmaceuticals, Inc., a diversified public biotechnology company, where he served as President and Chief Executive Officer from 2008 to 2010 and as Executive Vice President and Chief Financial Officer from 1996 to 2008. From 1990 to 1996, Mr. Farrell served as Corporate Group Vice President and Chief Financial Officer of Fresenius USA. From 1982 to 1990 Mr. Farrell was employed by Genstar Corporation, serving as Vice President of Marketing within Genstar’s Financial Services Division from 1982 to 1989, and as President of TXL Securities from 1987 to 1990. Mr. Farrell also served as Associate General Counsel of Brae Corporation from 1979 to 1982 and as an Associate Attorney for Crane & Hawkins from 1977 to 1979. Mr. Farrell received a J.D. from University of California, Hastings College of Law and a Bachelor of Arts degree in Government and Economics with a Minor in Accounting from University of Notre Dame. Mr. Farrell is a Member of the California Bar.
 
Ronald E. Osman, Esq. was appointed as the Chairman of our Board of Directors on July 8, 2013. Mr. Osman has been a Director of our 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 and Dongola, Illinois. After receiving a Bachelor of Science degree in Agriculture/Economics from the University of Illinois in 1968, Mr. Osman joined the U.S. 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. We believe that Mr. Osman’s experience and skills make him a qualified and valuable member of our Board of Directors. Specifically, Mr. Osman’s entrepreneurial expertise and knowledge of the law, especially in health related fields, is extremely valuable in driving the direction of the business and make him a valuable member of and resource on our Board of Directors. He also has previous experience in founding and selling business enterprises and has been an active participant in the financing activities of our Company.
 
Edmund C. King has been a Director our Company since June 2010.  From 1974 to 1992, Mr. King was a partner at Ernst & Young, an international accounting and consulting firm. While at Ernst & Young, Mr. King was that firm’s southern California senior healthcare partner. Prior to that, Mr. King directed the southern California healthcare practice for Arthur Young & Company, one of the predecessor firms of Ernst & Young. During his 30 years with Ernst & Young, Mr. King counseled clients in structuring acquisitions and divestitures; advised on the development of strategic plans; directed the preparation of feasibility studies; assisted with operational and financial restructuring; directed and supervised audits of client financial statements; and provided expert witness testimony and technical Securities and Exchange Commission consultation. Mr. King has served as Chief Financial Officer and Director of Invisa, Inc., a small publicly held safety company, since November 2000 and as President and Chief Executive Officer since November 2007. In 1999, Mr. King became a financial consultant to SmartGate, L.C., a manufacturer of safety sensors for parking and barrier gates.  In 2003, SmartGate, L.C. merged with Invisa, Inc.  Mr. King is also a member of the board of directors of LTC Properties, Inc., a NYSE listed real estate investment trust. Mr. King is a graduate of Brigham Young University, has served on the National Advisory Council of Brigham Young University’s Marriott School of Management, and has completed a Harvard University management course sponsored by Ernst & Young. Mr. King also has served as Chairman of the MPMA’s Long-Term Care Committee (Los Angeles Chapter) and is a past member of the National Association of Corporate Directors. We believe that Mr. King’s experience and background make him a qualified and valuable member of our Board of Directors. Specifically, Mr. King’s background in accounting and finance make him a valuable member of and resource on our Board of Directors.
 
John Sitilides has been has been a Director of our Company since March 2005. Mr. Sitilides is a government relations strategist and international affairs specialist, serving since 2005 as Principal at Trilogy Advisors, LLC, a federal government affairs and public policy firm in McLean, Virginia. In strategic partnership with former Members of Congress, he manages a client portfolio including environmental regulation, private property rights, energy technology, natural resources, and real estate issues. Current projects include Clean Water Act wetlands permitting, Army Corps budget authorization and water infrastructure projects, and clean-coal power generation. Mr. Sitilides is also an advisor to the State Department and manages professional development of senior U.S. diplomats in Greece and Cyprus, in conjunction with the Turkey program. Twice recognized by the State Department for expertise in public policy and international relations, he is a professional speaker on American politics and geopolitical risk at investor and business conferences, and before government, military and intelligence community audiences. He has testified before Congress and is regularly interviewed on global affairs and national politics by broadcast, print and new media. In 1998, Mr. Sitilides launched the Western Policy Center, a respected international relations institute, and as CEO oversaw strategic planning, policy analysis, political and corporate communications, and financial management until he negotiated its 2004 merger with the Woodrow Wilson International Center for Scholars, where he was board chairman of the Southeast Europe Project. Previously, he served as federal affairs strategist for one of California’s largest land development corporations, and as a communications and legislative aide to Senator Alfonse D’Amato of New York, including on two successful re-election campaigns. He was an informal policy advisor to the 1996 Dole/Kemp presidential campaign, and was appointed in 2003 to the Commerce Department’s Joint Science and Technology Cooperation Advisory Council (Initiative for Technology Cooperation in the Balkans). He serves on the Board of Trustees of International Orthodox Christian Charities, a global humanitarian organization, and Leadership 100, a national Greek Orthodox endowment, and is a member of the Federalist Society for Law and Public Policy Studies, and the Association of Former Senate Aides. Mr. Sitilides received his Master’s Degree in International Affairs at the Columbia University School of International and Public Affairs in 1986, with specialization in International Security Policy, International Political Economy, and Western European Affairs, and his Bachelor’s Degree in Political Science from Queens College in 1983. We believe that Mr. Sitilides’ experience and skills make him a qualified and valuable member of and resource on our Board of Directors. Specifically, he has extensive experience in federal and governmental relations and interaction with administrative and regulatory agencies of U.S. and foreign governments.
 
 
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Jeffrey A. Scott, M.D has been a Director of our Company since March 2004. Dr. Scott, whose specialty is oncology, currently is General Manager/Senior Vice President for P4 Healthcare, a division of Cardinal Health Specialty Solutions, which is a division of Cardinal Health.  He is also a member of Cardinal Health’s Operating Committee. Prior to the 2010 sale of P4 Healthcare to Cardinal Health, Dr. Scott was the Founder, President and Chief Executive Officer of P4 Healthcare, since its inception in 2006. P4 Healthcare was a multimedia Healthcare Marketing and Education Company with a focus in Oncology. From 1998 to 2002, Dr. Scott served as the National Medical Director and President of the International Oncology Network (ION), a network of more than 4000 U.S. private practice oncologists headquartered in Baltimore, Maryland. In 2002, ION became a subsidiary of Amerisource Bergen Corporation upon its sale. Dr. Scott continued to serve as President and General Manager for ION until 2005. Dr. Scott was a practicing physician, Founding Partner and Chief Financial Officer of Georgia Cancer Specialists located in Atlanta, Georgia from 1990 to 2000. During Dr. Scott’s tenure as Chief Financial Officer of Georgia Cancer Specialists the physician practice had over $100 million in revenue and Dr. Scott was responsible for development of financial programs of practice after the merger and corporate buyout by Phymatrix. Also at the Georgia Cancer Specialists, Dr. Scott took responsibility for the development of an extensive clinical research program. From 1998 to 2000, he also served as Medical Chief of Staff at Emory Northlake Regional Medical Center in Atlanta, Georgia. Dr. Scott’s biotechnology experience includes his role as a Consultant to NexStar Pharmaceuticals, Inc. (“NexStar”) of Boulder, Colorado.  Prior to NexStar’s 1999 merger Gilead Sciences, Inc. it was engaged in the discovery, development, manufacture, and commercialization of products to treat serious and life-threatening illnesses, As a consultant to NexStar, Dr. Scott was responsible for assisting and educating the sales force in dealing with physician networks and consulting with investment advisors regarding potential investments in other biotechnology companies. Dr. Scott’s educational background includes a B.S. degree in Microbiology from the University of Michigan, Ann Arbor, Michigan, a medical education at Wayne State University, Detroit, Michigan, and a fellowship in Oncology at University of Texas Health Sciences, San Antonio, Texas. Dr. Scott has Board Certifications from the American Board of Internal Medicine, Internal Medicine, September 1987, and the American Board of Internal Medicine, Medical Oncology, November 1989. He has extensive research and publication credits in the oncology field. We believe that Dr. Scott’s experience and skills make him a qualified and valuable member of our Board of Directors. Specifically, Dr. Scott’s background in the oncology field and his experience in management and on boards of directors of drug development companies make him a valuable member of and resource on our Board of Directors.
 
Eugene Grin has been a Director of our Company since July 2013.  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.  We believe that Mr. Grin’s experience and skills make him a qualified and valuable member of and resource on our Board of Directors.
 
Peter J. Pappas, Sr. has been a Director of our Company since March 2003. Mr. Pappas has for more than the last five years been the President and CEO of P.J. Mechanical Corp., a major air conditioning contractor in the New York City metropolitan area. In addition to his vast experience in construction for the past forty years, Mr. Pappas is a prime real estate developer and investor around the country. He attended New York University as a business administration major. A noted philanthropist, Mr. Pappas is an Archon of the Greek Orthodox Church. He serves the Archdiocesan National Council and as trustee of the privileged Leadership 100 Endowment trust. He is a board member of the Western Policy Center in Washington, DC, a member of the Board of The Cyprus/American Chamber of Commerce, and the National Chairman of the Cyprus Children’s Fund, a sponsorship program and scholarship award endowment. Mr. Pappas has extensive business experience in the construction and real estate industry and extensive involvement in complex financial dealings, and has been instrumental in participating in and facilitating our Company’s capital raises. He has also served on a number of public and non-publicly traded companies’ and organizations’ boards of directors. We believe that Mr. Pappas’ experience and skills make him a qualified and valuable member of and resource on our Board of Directors.
 
 
79
 
 
Raphael J. Mannino, Ph.D. has been a Director of our Company since June 2003. Dr. Mannino was the Executive Vice President and Chief Scientific Officer of BDSI from October 2000 to September 2009, and a director from October 2001 to June 2007. Dr. Mannino previously served as President, Chief Executive Officer, Chief Scientific Officer, and a Director of BioDelivery Sciences, Inc., predecessor to BDSI, since its incorporation in 1995. Dr. Mannino’s previous experience includes positions as Associate Professor at the University of Medicine and Dentistry of New Jersey (1990 to present), Assistant, then Associate Professor, Albany Medical College (1980 to 1990), and Instructor then Assistant Professor, Rutgers Medical School (1977 to 1980). His postdoctoral training was from 1973 to 1977 at the Biocenter in Basel, Switzerland. Dr. Mannino received his Ph.D. in Biological Chemistry in 1973 from the Johns Hopkins University, School of Medicine. We believe that Dr. Mannino’s experience and skills make him a qualified and valuable member of our Board of Directors. Specifically, Dr. Mannino’s background in pharmaceutical research and development and clinical trials make him a valuable member of and resource on our Board of Directors.
 
Audit Committee. We have a separately-designated standing Audit Committee, which was established in accordance with section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
 
Messrs. King, Scott and Mannino are members of the Audit Committee.  The Board has determined that Mr. King is the “audit committee financial expert” as that term is defined in SEC regulations and that Mr. King is “independent” as independence for audit committee members is defined under the applicable NASDAQ rules.
 
Section 16(a) Beneficial Ownership Reporting Compliance
 
Under Section 16(a) of the Exchange Act, as amended, an officer, director, or beneficial owner of more than 10% of any class of equity securities of the Company must file a Form 4 reporting the acquisition or disposition of our Company’s equity securities with the SEC no later than the end of the second business day after the day the transaction occurred unless certain exceptions apply. Transactions not reported on Form 4 must be reported on Form 5 within 45 days after the end of the fiscal year. Such persons must also file initial reports of ownership on Form 3 upon becoming an officer, director, or greater-than-10% shareholder. Based solely upon a review of copies of Section 16(a) reports and representations received by us from reporting persons, and without conducting any independent investigation of our own, during the year ended September 30, 2013, we believe that all required Forms 3, 4 and 5 were timely filed with the SEC by such reporting persons, other than late Form 4s filed by Brian D. Bottjer, Douglas W. Calder, Christopher C. Chapman, Samuel S. Duffey, Mark D. Hirschel, Edmund King, Raphael J. Mannino, Francis E. O’Donnell, Jr., Ronald E. Osman, Peter J. Pappas, Carlos F. Santos, Ph.D., Jeffrey Scott, and John Sitilides on August 23, 2013, each of which reported the cancellation of all outstanding common stock, options, and warrants of the Company held by such person, pursuant to the Plan of Reorganization that became effective on July 9, 2013, late Form 4s filed on December 27, 2013 by Carlos F. Santos, Ph.D. reporting the grant of 5,038 shares of common stock, Samuel S. Duffey reporting the grant of 184,007 shares of common stock, and Peter J. Pappas reporting the grant of 1,559,480 shares of common stock, and a Form 4 that was not filed by Douglas Calder to report a grant of 133 shares of common stock.
 
Code of Business Conduct and Ethics
 
The Board has adopted a Code of Business Conduct and Ethics that is applicable to all of our employees and directors and all of the employees and directors of our subsidiaries. The text of the Code of Business Conduct and Ethics is posted on our website at www.biovest.com in the “Investor Relations” section of the website.
 
 
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ITEM  11.
EXECUTIVE COMPENSATION
 
Summary Compensation
 
The following table sets forth all compensation paid to our named executive officers for years ended September 30, 2013 and 2012. Individuals we refer to as our “named executive officers” include our Principal Executive Officer and our two most highly compensated executive officers (other than our Principal Executive Officer) who were serving as executive officers at the end of the fiscal year ended September 30, 2013 (and up to two additional individuals who would be included pursuant to the foregoing, but for the fact that they were not serving as an executive officer of the company at the end of the fiscal year ended September 30, 2013) whose total compensation for services rendered in all capacities exceeded $0.1 million during the year ended September 30, 2013 (“fiscal 2013”).  Effective December 1, 2013 Robert E. Farrell, J.D. was hired as our Chief Financial Officer.  No compensation information is provided for Mr. Farrell as he did not serve as an employee at any point during the fiscal years ended September 30, 2013 or 2012.
 
SUMMARY COMPENSATION TABLE
 
Name and principal position
Year
  
Salary
($)
    
Option
Awards(a)
($)
    
Bonus(a)
($)
    
All Other
Compensation
($)
    
Total
($)
  
Carlos F. Santos, Ph.D.
2013
     197,000       —       —       10,000 (1)     207,000  
Chief Executive Officer
2012
     135,000       281,000       50,000       —       466,000  
                                           
Samuel S. Duffey, Esq.
2013
     286,000       32,000       —       10,000 (2)     328,000  
Former President, Former Chief Executive
Officer and Former General Counsel
2012
     238,000       442,000       109,000       —       789,000  
                                           
Mark D. Hirschel, Ph.D.
2013
     190,000       —       —       6,000 (3)     196,000  
Former Chief Science Officer
2012
     215,000       200,000       75,000       8,000 (3)     498,000  
                                           
Brian D. Bottjer, CPA
2013
     136,000       —       —       12,000 (4)     148,000  
Former Acting Chief Financial Officer
(Principal Financial Officer)
2012
     140,000       113,000       —       14,000 (4)     267,000  
 
                         
(a)
All option awards (none of which had been exercised) and bonuses (which had been accrued but not yet paid) granted in 2012 were cancelled pursuant to our Plan on the Effective Date.
(1)
In fiscal 2013, Dr. Santos was paid $10,000 in other compensation which consisted of payments related to medical, dental and life insurance and long and short term disability insurance.
(2)
In fiscal 2013, Mr. Duffey was paid $10,000 in other compensation which consisted of payments related to medical, dental and life insurance and long and short term disability insurance.
(3)
Dr. Hirschel was paid $6,000 and $8,000 in fiscal 2013 and 2012 in other compensation which consisted of payments related to medical, dental and life insurance and long and short term disability insurance.
(4)
Mr. Bottjer was paid $12,000 and $14,000 in fiscal 2013 and 2012 in other compensation which consisted of payments related to medical, dental, and life insurance and long and short term disability insurance.
 
Salary. Drs. Hirschel and Santos and Mr. Duffey have not entered into any employment agreement with us and they continue their employment on an “at-will” basis. During fiscal 2013, we did not establish specific performance objectives for these executive officers and their total compensation for services rendered was based on their overall performances.  All of our executive officers have entered into confidentiality, intellectual property assignment and non-competition agreements with us.
 
Cash Bonuses and Incentives. On March 30, 2012, the Board approved compensation arrangements for the executive officers as a result of an annual compensation review by the Board and its Compensation Committee.  Although approved, the payment of the cash bonuses for the executive officers was postponed due to our then financial position.  As a result of our Plan, which became effective on July 9, 2013, these bonuses were cancelled.
 
 
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Option Awards. The amounts in the “Option Awards” column represent the aggregate grant date fair value computed in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 718. The fair value of the stock options will likely vary from the actual value the holder receives because the actual value depends on the number of options exercised and the market price of shares of our common stock on the date of exercise. Assumptions used in the calculation of these amounts are described in Note 16 to our consolidated financial statements herein. A description of our 2010 Equity Incentive Plan to which these Option Awards were awarded is discussed in Note 18 to our consolidated financial statements.
 
Perquisites. Consistent with our philosophy to preserve cash, we have sought to limit perquisites. Perquisites paid to our named executive officers are discussed in the footnotes to the Summary Compensation Table above. Our policy for paying medical and dental insurance is to pay 75% of the insurance premium. Our policy for paying life insurance, long-term and short-term disability insurances and accidental death and dismemberment insurance is to pay 100% of the insurance premiums. Our policy with regard to unused vacation for our executive group is to pay at the base salary rate for vacation not used in the prior fiscal year.
 
Outstanding Equity Awards
 
The following table summarizes the outstanding unexercised stock options and unvested equity incentive plan awards held by each of our named executive officers as of September 30, 2013.
 
OUTSTANDING EQUITY AWARDS AT 2013 FISCAL YEAR END
 
 
Name
  
Number of
Securities
Underlying
Unexercised
Options - (#) 
Exercisable
  
Number of
Securities
Underlying
Unexercised
Options - (#) 
Unexercisable
  
Option
Exercise
Price 
($)
  
Option
Expiration
Date
Samuel S. Duffey, Esq.
  
500,000
  
—
  
1.00
  
09/05/2018
 
   
Option Grants. In fiscal 2013, we granted stock options to purchase 500,000 shares of Reorganized Biovest Common Stock under the terms of our 2010 Equity Incentive Plan to our former Chief Executive Officer, Samuel S. Duffey as severance for his prior service with our Company.
 
The option grant vested immediately, however, pursuant to our Plan, may not be exercised until May 1, 2014.
 
 
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Compensation of Directors
 
DIRECTOR COMPENSATION FOR FISCAL YEAR ENDED SEPTEMBER 30, 2013
 
During fiscal 2013, the members of the Board did not receive any compensation for their service as members of the Board or as members or chairmen of the various committees of the Board.
 
 
 
 
 
 
 
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ITEM  12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
 
Equity Compensation Plan Information
 
The information required by this Item 12 relating to equity compensation plans is incorporated by reference from Part II, Item 5 of this Annual Report on Form 10-K.
 
Beneficial Ownership of Common Stock
 
The following table sets forth certain information regarding the beneficial ownership of shares of our common stock as of November 30, 2013 by:
 
 
•
each person known by us to beneficially own more than 5% of our common stock;
 
 
•
each of our directors;
 
 
•
each of our executive officers; and
 
 
•
all of our directors and executive officers as a group.
 
Information with respect to beneficial ownership has been furnished by each director, officer and beneficial owner of more than 5% of our common stock. Beneficial ownership is determined in accordance with the rules of the SEC and generally requires that such person have voting or investment power with respect to the securities. In computing the number of shares beneficially owned by a person listed below and the percentage ownership of such person, shares of common stock underlying options, warrants or convertible securities held by each such person that are exercisable or convertible within 60 days of November 30, 2013 are deemed outstanding, but are not deemed outstanding for computing the percentage ownership of any other person.  As of December 27, 2013, 100,000,000 shares of our common stock were outstanding.
 
Except as otherwise indicated in the footnote to this table, each of the beneficial owners listed has, to our knowledge, sole voting and investment power with respect to the indicated shares of common stock.  Unless otherwise indicated, the address for each individual listed below is c/o Biovest International, Inc., 300 South Hyde Park Avenue, Suite 210, Tampa, Florida 33606.

             
   
Shares Beneficially Owned
  
Name of Beneficial Owner
  
Number
    
Percentage
  
5% Shareholders
            
Laurus Master Fund, Ltd. (In Official Liquidation)(1)
     3,045,637       3.05 %
Calliope Capital Corporation(1)
     1,211,869       1.21 %
Corps Real, LLC(2)
     17,360,000       17.36 %
Pabeti, Inc(2).
     8,680,000       8.68 %
Valens Offshore SPV I, Ltd.(3).
     24,488,567       24.49 %
Valens Offshore SPV II, Corp.(3).
     22,783,263       22.78 %
Valens U.S. SPV I, LLC(3).
     7,722,949       7.72 %
PSource Structured Debt Limited (in liquidation)(3).
     7,707,715       7.71 %
                 
Executive Officers and Directors
                
  Samuel S. Duffey, Esq.(4)
     684,007          *
  Carlos F. Santos, Ph.D.(5)
     5,038          *
  Douglas W. Calder(6)
     133          *
  Ronald E. Osman, Esq.(2)
     26,040,000       26.04 %
  Eugene Grin(3)
     62,702,494       62.70 %
  Peter J. Pappas, Sr.(7)
     1,559,480       1.56 %
  All executive officers and directors as a group (6 persons)
     95,248,658       90.99 %

* 
Less than 1.0%
 
(1)
Laurus Master Fund, Ltd. (In Official Liquidation) (the “Fund”) and its wholly-owned subsidiary Calliope Capital Corporation (“Calliope”) own an aggregate of 4,257,506 Shares.  The Fund is in official liquidation under the supervision of the Grand Court of the Cayman Islands. The Joint Official Liquidators (“JOLs”) are Chris Johnson of Chris Johnson Associates, Ltd. and Russell Smith of BDO CRI. The JOLs have discretion over the management of the Fund and Calliope and the disposition of their respective assets. The JOLs share voting and investment power over the securities owned by the Fund and Calliope.
 
The address for the Fund and Calliope is c/o The Joint Official Liquidators at their respective offices of Chris Johnson, Elizabethan Square, 80 Shedden Road, George Town, Grand Cayman, Cayman Islands KY1-1104 and Russell Smith, 2nd Floor, Building 3 Governors Square, 23 Lime Tree Bay Avenue, Grand Cayman, Cayman Islands KY1-1205.
 
 
84
 
 
The immediately preceding information in this footnote is based solely on the Schedule 13G filed with the SEC on July 22, 2013 by the JOLs.
 
(2)
Ronald E. Osman, the Chairman of our board of directors, is not the record holder of any shares of common stock, but has sole voting and investment power over the shares of common stock owned by Corps Real, LLC and Pabeti, Inc., on behalf of their underlying beneficial holders (individuals and trusts of the Osman family).
 
The 26,040,000 shares of common stock beneficially owned in the aggregate by Mr. Osman represent 26.04% of the 100,000,000 shares of common stock issued and outstanding.
 
The address for each of Corps Real, LLC and Pabeti, Inc. is 1602 W. Kimmel St., Marion, IL 62959.
 
The immediately preceding information in this footnote is based solely on the Schedule 13D filed with the SEC on July 30, 2013 by Mr. Osman.
 
(3)
Valens Offshore SPV I, Ltd. owns an aggregate of 24,488,567 Shares, and Valens Offshore SPV II, Corp., a wholly-owned subsidiary of Valens Offshore SPV I, Ltd., owns an aggregate of 22,783,263 Shares.  Voting and dispositive power with respect to the Shares owned by Valens Offshore SPV I, Ltd. and Valens Offshore SPV II, Corp. is shared with Valens Capital Management, LLC, who acts as investment manager, and Eugene Grin, the Principal of Valens Capital Management, LLC.  Valens U.S. SPV I, LLC owns an aggregate of 7,722,949 Shares.  Voting and dispositive power with respect to the Shares owned by Valens U.S. SPV I, LLC is shared with Valens Capital Management, LLC, who acts as investment manager, and Eugene Grin, the Principal of Valens Capital Management, LLC.  PSource Structured Debt Limited (in liquidation) owns an aggregate of 7,707,715 Shares.  Voting and dispositive power with respect to the Shares owned by PSource Structured Debt Limited (in liquidation) is shared with Laurus Capital Management, LLC, who provides investment management services, and Eugene Grin, the Principal of Laurus Capital Management, LLC.  PSource Structured Debt Limited (in liquidation) is in the process of winding-up and liquidating its assets.
 
 
The address for each of Valens Offshore SPV I, Ltd., Valens Offshore SPV II, Corp. and Valens U.S. SPV I, LLC is c/o Valens Capital Management, LLC, 230 Park Avenue, Suite 1152, New York, NY 10169. The address for PSource Structured Debt Limited is c/o Grant Thornton Limited, PO Box 313, Lefebvre House, Lefebvre Street, St. Peter Port, Guernsey, GY1 3TF Channel Islands.
 
 
The immediately preceding information in this footnote is based solely on the Schedule 13D filed with the SEC on July 18, 2013.
 
(4)
Mr. Duffey was our Chief Executive Officer, President and General Counsel until July 9, 2013. Mr. Duffey’s beneficial ownership consists of 500,000 shares of common stock issuable pursuant to options held by Mr. Duffey that are currently exercisable or that are exercisable within 60 days of November 30, 2013 as well as 184,007 shares of common stock held by Mr. Duffey as of November 30, 2013.
 
(5)
Dr. Santos is our Chief Executive Officer.  Beneficial ownership includes 5,038 shares of common stock held by Dr. Santos as of November 30, 2013.
 
(6)
Mr. Calder was our Vice President, Strategic Planning & Capital Markets until he separated from the Company effective July 16, 2013. Mr. Calder’s beneficial ownership includes 133 shares of common stock held by Mr. Calder as of November 30, 2013.
 
(7)
Mr. Pappas is a Director on our Board.   Beneficial ownership includes 1,559,480 shares of common stock held by Mr. Pappas as of November 30, 2013.
 
ITEM  13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
 
Certain Relationships and Related Transactions
 
During the years ended September 30, 2013 and 2012, we were a party to the following transactions with certain of our executive officers, directors, holders of more than 5% of our voting securities, and their respective affiliates. We believe that the terms of these transactions were no less favorable to us than the terms that could have been obtained from unaffiliated third parties. In some instances transactions which occurred in prior years are also described in order to provide proper background.
 
Relationship to Parent
 
As of September 30, 2012, Accentia owned approximately 59% of our common stock and our financial statements reflected that Accentia had loaned us approximately $4.0 million (the “Accentia Intercompany Payable”).  The Accentia Intercompany Payable  was due upon demand and accrued interest at the prime rate (3.25% at September 30, 2012). As a result of our Chapter 11 proceedings and the Plan of Reorganization which became effective on July 9, 2013, all of Accentia’s ownership interest in us was canceled and extinguished and all debt reflected by the Accentia Intercompany Payable was canceled.
 
 
85
 
 
Relationships to Affiliates
 
Corps Real, LLC and Pabeti, Inc.
 
On November 17, 2010, we issued a secured convertible promissory note in the amount of approximately $2.3 million (the “Corps Real Note”) to Corps Real. Corps Real and the majority owner of Corps Real, MRB&B, LLC, are both managed by Ronald E. Osman, a shareholder and the Executive Chairman of our Company.  Mr. Osman is also the President and a majority owner of Pabeti, Inc.  On October 9, 2012 and under the terms of the Corps Real Note, Corps Real elected to loan to us an additional $0.7 million. During the year ended September 2012, we made interest payments to Corps Real of approximately $0.15 million.  On June 6, 2012, the Corps Real Note was amended to suspend and defer our monthly interest payments beginning with the payment due on June 1, 2012.  The deferred interest amount instead became due and payable on upon maturity. 
 
Because we were unable to pay the amount due under the Corps Real Note on November 17, 2012, an event of default occurred.  Effective November 17, 2012, we entered into a standstill agreement with Corps Real pursuant to which (i) the maturity date of the Corps Real Note was extended from November 17, 2012 to January 31, 2013 and (ii) Corps Real granted us a forbearance (until January 31, 2013) from its exercise of the rights and/or remedies available to it under the Corps Real Note.  The standstill agreement allowed us the time and opportunity to negotiate with Corps Real a potential restructuring of the Corps Real Note. 
 
Effective December 3, 2012, we issued an additional secured promissory note to Corps Real, which provided us with a revolving line of credit in the principal amount of up to $1.5 million (the “Corps Real LOC”).  The Corps Real LOC accrued interest at the rate of 16% per annum and matured on the first anniversary of the closing of the Corps Real LOC.  The Corps Real LOC was secured by a first priority lien of all our assets.  Pursuant to our Plan of Reorganization, effective as of July 9, 2013 all of our obligations and indebtedness due to Corps Real under the Corps Real Note and the Corps Real LOC was extinguished and deemed paid through issuance to Corps Real of approximately 28 million shares of our common stock.
 
Mr. Osman is also the President and a majority owner of Pabeti, Inc.  On December 16, 2013 we issued to Pabeti, Inc. (along with three Valens entities as described below)  a Secured Promissory Note in an amount of up to $3.5 million (the “Pabeti/Valens Secured Note”).  As of December 20, 2013, the balance due under the Pabeti/Valens Secured Note was $0.4 million.
 
Laurus/Valens:
 
On July 9, 2013, in accordance with our Plan of Reorganization, we issued common stock to Laurus, PSource, Valens Offshore I, Valens Offshore SPV II, Corp. (“Valens Offshore II”), Valens U.S., and LV Administrative Services, Inc.  (“LV”) (collectively, “Laurus/Valens”) in full payment of all outstanding debt owed to those entities.  Laurus/Valens is now the beneficial owner of more than 65% of our common stock. 
 
On December 16, 2013 we issued to Valens Offshore II, and Valens US (along with Pabeti, Inc as described above)  a Secured Promissory Note in an amount of up to $3.5 million (the “Pabeti/Valens Secured Note”).  As of December 20, 2013, the balance due under the Pabeti/Valens Secured Note was $0.4 million.
 
Royalty Interests:
 
On July 9, 2013, in accordance with our Plan of Reorganization, our Company, Corps Real , Pabeti and Laurus/Valens, entered into agreements whereby the aggregate royalty obligation on BiovaxID and our other biologic products (totaling 6.25%.) was redistributed to each of those entities in proportion to their respective equity ownership interest in the Company.
 
Director Independence
 
The Board has determined that five of its members are “independent directors” as defined under the applicable rules of The NASDAQ Stock Market (the “NASDAQ”) and the SEC. These five “independent directors” are Edmund C. King, Jeffrey A. Scott, M.D., Raphael J. Mannino, Ph.D., Peter J. Pappas, Sr. and John Sitilides. In making its determination of independence, the Board considered questionnaires completed by each director and all ordinary course transactions between our Company and all the entities with which the director is employed and affiliated. With regard to Mr. King, the Board considered their relationship as directors of Accentia, our former majority shareholder. Additionally, because of Ronald E. Osman, Esq. and Eugene Grin’s common stock ownership in our Company, through their affiliates, the Board determined that they are not independent.
 
 
86
 
 
Board Committees and Committee Member Independence
 
The Board has an Audit Committee, a Compensation Committee, and a Governance and Nominating Committee. Messrs. King, Scott, and Mannino are members of the Audit Committee. Messrs. Grin, Sitilides, and King,  are members of the Compensation Committee. Messrs. Sitilides and Mannino are members of the Governance and Nominating Committee. The Board has determined that each of the Directors serving on the Audit Committee, the Compensation Committee, and the Governance and Nominating Committee, except for Mr.  Grin (who is not an independent director), are also independent under the NASDAQ independence standards applicable to members of such committees.
 
The NASDAQ rules provide that the compensation of a company’s chief executive officer and all other executive officers (i.e., those officers covered in Rule 16a-1(f) under the Exchange Act of 1934 must be determined, or recommended to the Company’s board of directors for determination, either by independent directors constituting a majority of the board’s independent directors in a vote in which only independent directors participate or a compensation committee comprised solely of independent directors. The NASDAQ rules also provide an exception to these requirements that permits the appointment to the compensation committee of one director who is not independent as defined in the NASDAQ rules and is not a current officer or employee or a family member (as defined in the NASDAQ rules) of an officer or employee, in circumstances in which a compensation committee is comprised of at least three members, if the board of directors determines that such individual’s membership on the committee is required by the best interests of the company and its shareholders. As noted above, Mr. Grin, a member of the Compensation Committee, is not considered an independent director under the NASDAQ rules. Consequently, we relied on the foregoing exception in appointing Mr. Grin (who is not a current officer or employee or a family member of an officer or employee) to the Compensation Committee. We believe that as a result of his knowledge and expertise, Mr. Grin is essential to the ability of our Compensation Committee to fulfill its obligations and Mr. Grin’s membership on the Compensation Committee is in the best interests of our Company and shareholders.
 
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
 
Audit and Related Fees
 
We engaged Cherry Bekaert LLP (“Cherry Bekaert”), our independent registered public accounting firm, to perform the audits of our consolidated financial statements as of the year ended September 30, 2013 and 2012 and for the three months ended September 30, 2013, the nine months ended June 30, 2013 and the year ended September 30, 2012. We also engaged Cherry Bekaert to prepare our 2013 and 2012 Federal and State income tax returns.
 
The following table provides information relating to the fees billed by Cherry Bekaert for the years ended September 30, 2013 and 2012:
 
   
2013
    
2012
  
Audit fees
   $ 90,000     $ 87,500  
Tax fees
     12,500       12,500  
 
 
Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditors
 
The Audit Committee of the Board has established pre-approval policies for all audit and permissible non-audit services provided by our independent auditors in order to assure that the provision of such services does not impair the auditor’s independence. These services may include audit services, audit-related services, tax services and other services. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to the particular service or category of services and is generally subject to a specific budget. Our management is required to periodically report to the Audit Committee regarding the extent of services provided by the independent auditors in accordance with this pre-approval, and the fees for the services performed to date. All such services provided and associated fees incurred in fiscal 2013 and fiscal 2012 were pre-approved by the Audit Committee.
 
 
87
 
 
PART IV
 
ITEM  15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
 
(a) The following documents are filed as part of this Annual Report on Form 10-K:
 
(1) Financial Statements
 
See Index to Financial Statements on page F-1.
 
(2) Supplemental Schedules
 
Schedule II – Valuation and Qualifying Accounts (see last page of Consolidated Financial Statements)
 
All other schedules have been omitted because the required information is not present in amounts sufficient to require submission of the schedule, or because the required information is included in the consolidated financial statements or notes thereto.
 
(3) Exhibits
 
The following exhibits are filed as part of, or are incorporated by reference into, this Annual Report on Form 10-K:
 
Exhibit
Number
  
Description
     
3.1
  
Second Amended and Restated Articles of Incorporation of Biovest International, Inc. (filed as Exhibit 3.1 to Biovest’s Form 8-K filed July 15, 2013 and incorporated herein by reference)
     
3.2
  
Second Amended and Restated Bylaws of Biovest International, Inc. (filed as Exhibit 3.2 to Biovest’s Form 8-K filed July 15, 2013 and incorporated herein by reference)
     
10.1
  
Lease Between Biovest and JMS Holdings, LLC, dated December 2, 2010 (filed as Exhibit 10.1 to Biovest’s Form 8-K filed December 8, 2010 and incorporated herein by reference)
     
10.2(a)
  
Biovest’s 2010 Equity Incentive Plan (filed as Exhibit 10.187 to Biovest’s Annual Report on Form 10-K for the year ended September 30, 2010, filed December 14, 2010 and incorporated herein by reference)
     
10.3(a)
  
Amended and Restated Biovest International, Inc. 2006 Equity Incentive Plan (filed as Exhibit 4.2 to Biovest’s Form S-8 filed March 25, 2011 and incorporated herein by reference)
     
10.4
 
  
Contingent Payment Agreement, dated November 17, 2010, between Biovest and Valens Offshore SPV I, Ltd. (filed as Exhibit 10.16 to Biovest’s Form 10-Q filed February 11, 2011 and incorporated herein by reference)
 
 
88
 
 
Exhibit
Number
  
Description
     
10.5
  
License Agreement effective September 17, 2004 between Biovest International, Inc. and the Board of Trustees of the Leland Stanford Junior University (filed as Exhibit 99.1 to Biovest’s Form 8-K filed February 15, 2011 and incorporated herein by reference)
     
10.6
  
Mortgage, dated November 16, 2010, between City of Coon Rapids and JMS Holdings (filed as Exhibit 10.2 to Biovest’s Form 10-Q filed May 13, 2011 and incorporated herein by reference)
     
10.7
  
Agreement for Loan of Minnesota Investment Fund, dated November 16, 2010, between City of Coon Rapids and Biovest (filed as Exhibit 10.3 to Biovest’s Form 10-Q filed May 13, 2011 and incorporated herein by reference)
     
10.8
  
Promissory Note, dated December 7, 2010, between the Economic Development Authority in and for the City of Coon Rapids, JMS Holdings and Biovest (filed as Exhibit 10.5 to Biovest’s Form 10-Q filed May 13, 2011 and incorporated herein by reference)
     
10.9
  
Mortgage, dated December 7, 2010, between the Economic Development Authority in and for the City of Coon Rapids and JMS Holdings (filed as Exhibit 10.6 to Biovest’s Form 10-Q filed May 13, 2011 and incorporated herein by reference)
     
10.10
  
Loan Agreement, dated December 7, 2010, between the Economic Development Authority in and for the City of Coon Rapids and Biovest (filed as Exhibit 10.7 to Biovest’s Form 10-Q filed May 13, 2011 and incorporated herein by reference)
     
10.11
  
Security Agreement, dated December 7, 2010, between the Economic Development Authority in and for the City of Coon Rapids and Biovest (filed as Exhibit 10.8 to Biovest’s Form 10-Q filed May 13, 2011 and incorporated herein by reference)
     
10.12
  
Business Subsidy Agreement, dated December 7, 2010, between the Economic Development Authority in and for the City of Coon Rapids and Biovest (filed as Exhibit 10.9 to Biovest’s Form 10-Q filed May 13, 2011 and incorporated herein by reference)
     
10.13
  
Interim 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 The Debtor To Obtain Postpetition Financing and Grant Senior Liens and Superpriority Administrative Expense Status; (II) Authorizing The Debtor 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 of the United States Bankruptcy Court Middle District of Florida Case No. 8:13-bk-02892-KRM, dated March 14, 2013. (filed as Exhibit 10.1 to Biovest’s Form 8-K filed March 20, 2013 and incorporated herein by reference)
     
10.14
  
Secured Promissory Note, dated March 4, 2013, between Biovest and Corps Real, LLC (filed as Exhibit 10.1 to Biovest’s Form 10-Q filed May 15, 2013 and incorporated herein by reference)
     
10.15
  
Security Agreement, dated March 4, 2013, between Biovest and Corps Real, LLC (filed as Exhibit 10.2 to Biovest’s Form 10-Q filed May 15, 2013 and incorporated herein by reference)
     
10.16
  
300 S Hyde Park Center Office Lease Agreement, dated April 8, 2013 between Biovest and Myrback Enterprises LLC (filed as Exhibit 10.3 to Biovest’s Form 10-Q filed May 15, 2013 and incorporated herein by reference)
     
10.17
  
Final Order 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 the Debtor to Obtain Postpetition Financing and Grant Senior Liens and Superpriority Administrative Expense Status; (II) Authorizing the Debtor 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, dated April 10, 2013 (filed as Exhibit 10.4 to Biovest’s Form 10-Q filed May 15, 2013 and incorporated herein by reference)
     
10.18
  
Engagement Agreement, dated April 17, 2013, between Biovest and Ferghana Securities, Inc. (filed as Exhibit 10.5 to Biovest’s Form 10-Q filed May 15, 2013 and incorporated herein by reference)
     
10.19
  
Debtor-In-Possession Credit and Security Agreement by and among Biovest and Corps Real, LLC and Plan Secured Promissory Note, dated November 17, 2010, between Biovest and Corps Real, LLC and PSource Structured Debt Limited, Valens U.S. SPV I, LLC, Valens Offshore SPV I, Ltd., Valens Offshore SPV II, Corp., Laurus Master Fund, Ltd. (in liquidation), Calliope Corporation and LV Administrative Services, Inc. as of April 18, 2013 (filed as Exhibit 10.6 to Biovest’s Form 10-Q filed May 15, 2013 and incorporated herein by reference)
 
 
89
 
 
Exhibit
Number
  
Description
     
10.20
  
First Amended Plan of Reorganization of Biovest International, Inc., Under Chapter 11 of Title 11, United States Code (filed as Exhibit 10.1 to Biovest’s Form 8-K filed July 5, 2013 and incorporated herein by reference)
     
10.21
  
First Modification to First Amended Plan of Reorganization of Biovest International, Inc., Under Chapter 11 of Title 11, United States Code (filed as Exhibit 10.2 to Biovest’s Form 8-K filed July 5, 2013 and incorporated herein by reference)
     
10.22
  
Order Confirming First Amended Plan of Reorganization of Biovest International, Inc. Under Chapter 11 of Title 11, United States Code dated as of June 28, 2013, as Modified, Pursuant to 11 U.S.C. §1129 (filed as Exhibit 10.3 to Biovest’s Form 8-K filed July 5, 2013 and incorporated herein by reference)
     
10.23
  
The Company’s Balance Sheet dated March 31, 2013 (unaudited) (filed as Exhibit 10.4 to Biovest’s Form 8-K filed July 5, 2013 and incorporated herein by reference)
     
10.24
  
Agreed Order Resolving Response and Limited Objection by the Official Committee of Unsecured Creditors to First Modification to First Amended Plan of Reorganization (filed as Exhibit 10.1 to Biovest’s Form 8-K filed July 15, 2013 and incorporated herein by reference)
     
10.25
  
Notice of Effective Date (filed as Exhibit 10.2 to Biovest’s Form 8-K filed July 15, 2013 and incorporated herein by reference)
     
10.26
  
Employment Agreement, dated December 1, 2013, between Biovest International, Inc. and Robert Farrell (filed as Exhibit 10.1 to Biovest’s Form 8-K filed December 5, 2013 and incorporated herein by reference)
     
10.27
  
Amendment to Contingent Payment Agreement, dated August 2, 2013, between Biovest International, Inc. and Valens Offshore SPV I, Ltd.
     
10.28
  
Contingent Payment Agreement, dated August 2, 2013, between Biovest International, Inc. and Corps Real, LLC.
     
10.29
  
Credit and Security Agreement, dated December 18, 2013, among Biovest International, Inc., Pabeti, Inc., Valens U.S. SPV I, LLC, Valens Offshore SPV II, Corp. and LV Administrative Services, Inc.
     
10.30
  
Secured Promissory Note, dated December 18, 2013, between Biovest International, Inc. and Pabeti, Inc.
     
10.31
  
Secured Promissory Note, dated December 18, 2013, between Biovest International, Inc. and Valens U.S. SPV I, LLC
     
10.32
  
Secured Promissory Note, dated December 18, 2013, between Biovest International, Inc. and Valens Offshore SPV II, Corp.
     
10.33
   
Intellectual Property Security Agreement, dated December 18, 2013, between Biovest International,Inc. and LV Administrative Services, Inc.
     
21.1
  
Subsidiaries of Biovest
     
31.1
  
Certifications of Chief Executive Officer (Principal Executive Officer) pursuant to Rule 13a-14(a)/15d-14(a)
     
31.2
  
Certifications of Chief Financial Officer (Principal Financial Officer) pursuant to Rule 13a-14(a)/15d-14(a)
   
 
90
 
 
Exhibit
Number
  
Description
     
32.1
  
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
     
32.2
  
Certificate of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
     
101
  
The following financial information from Biovest International, Inc.’s Annual Report on Form 10-K for the year ended September 30, 2013, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of September 30, 2013 and September 30, 2012, (ii) Consolidated Statements of Operations for the years ended September 30, 2013 and 2012, (iii) Consolidated Statements of Stockholders’ Deficit for the years ended September 30, 2013 and 2012, (iv) Consolidated Statements of Cash Flows for the years ended September 30, 2013 and 2012, and (v) the Notes to Consolidated Financial Statements.3
                         
 
(a) Indicates our compensatory plan(s).
 
 
 
 
 
 
91
 
 
SIGNATURES
 
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
 
BIOVEST INTERNATIONAL, INC.
  
         
   By: /s/
Carlos F. Santos, Ph.D.
  
     
Carlos F. Santos, Ph.D.
  
     
Chief Executive Officer
  
      (Principal Executive Officer)  

  By: /s/ Robert E. Farrell, J.D.  
     
Robert E. Farrell, J.D.
  
     
Chief Financial Officer
  
      (Principal Financial Officer)  
 
Date: December 27, 2013
 
 
 
 
 
 
 
92
 
 
Pursuant to the requirements of the Exchange Act, this report has been signed below by the following persons on behalf of the Company and in the capacities and as of the date indicated:
 
 
Signature
  
Title
  
Date
           
By: 
/s/ Carlos F. Santos, Ph.D.
  
Chief Executive Officer
  
December 27, 2013
 
Carlos F. Santos, Ph.D.
  
(Principal Executive Officer)
    
           
By: 
/s/ Robert E. Farrell, J.D.
  
Chief Financial Officer
  
December 27, 2013
 
Robert E. Farrell, J.D.
  
(Principal Financial Officer)
    
           
By: 
/s/ Ronald Osman
  
Executive Chairman of the Board; Director
  
December 27, 2013
 
Ronald Osman
        
           
By: 
/s/ Edmund C. King
  
Director
  
December 27, 2013
 
Edmund C. King
        
           
By: 
/s/ John Sitilides
  
Director
  
December 27, 2013
 
John Sitilides
        
           
By: 
/s/ Jeffrey A. Scott
  
Director
  
December 27, 2013
 
Jeffrey A. Scott, M.D.
        
           
By: 
/s/ Peter J. Pappas, Sr.
  
Director
  
December 27, 2013
 
Peter J. Pappas, Sr.
        
           
By: 
/s/ Raphael J. Mannino
  
Director
  
December 27, 2013
 
Raphael J. Mannino, Ph.D.
        
           
By: 
/s/ Eugene Grin
  
Director
  
December 27, 2013
 
Eugene Grin
        
 
 
93
 
 
BIOVEST INTERNATIONAL, INC.
 
INDEX TO FINANCIAL STATEMENTS
 
   
 
Page
   
F-1
   
F-2
   
F-3
   
F-4
   
F-5
   
F-6
 
 
 
 
 
 
 
 
 
 
 

Board of Directors and Shareholders
Biovest International, Inc. and Subsidiaries
Tampa, Florida
 
We have audited the accompanying consolidated balance sheets of Biovest International, Inc. and Subsidiaries as of September 30, 2013 (Successor) and 2012 (Predecessor) and the related consolidated statements of operations, stockholders’ equity/deficit, and cash flows for the period from July 1, 2013 through September 20, 2013 (Successor), the period from October 1, 2012 through June 30, 2013 (Predecessor), and the year ended September 20, 2012 (Predecessor). These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
 
We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States of America). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis of designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Biovest International, Inc. and Subsidiaries as of September 30, 2013 (Successor) and 2012 (Predecessor), and their consolidated results of operations and their cash flows for the period from July 1, 2013 through September 20, 2013 (Successor), the period from October 1, 2012 through June 30, 2013 (Predecessor), and the year ended September 20, 2012 (Predecessor) in conformity with accounting principles generally accepted in the United States of America.
 
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 5 to the consolidated financial statements, the Company incurred cumulative net losses since inception of approximately $172 million including the Predecessor and Successor discussed in Note 4.  Furthermore, the Company expects to continue to incur net losses through at least fiscal year 2014 and has limited working capital at September 30, 2013.  These factors, among others as discussed in Note 5 to the consolidated financial statements, raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regards to these matters are also described in Note 5. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 
/s/ CHERRY BEKAERT LLP

Tampa, Florida
December 27, 2013
 
 
F-1
 
 
CONSOLIDATED BALANCE SHEETS
             
   
Successor
    
Predecessor
  
   
September 30,
2013
    
September 30,
2012
  
ASSETS
            
Current assets:
            
Cash
   $ 734,000     $ 72,000  
Accounts receivable, net of $12,000 and $8,000 allowance for doubtful accounts at
     September 30, 2013 and 2012, respectively
     530,000       221,000  
Costs and estimated earnings in excess of billings on uncompleted contracts
     240,000       28,000  
Inventories
     329,000       400,000  
Prepaid expenses and other current assets
     208,000       152,000  
Total current assets
     2,041,000       873,000  
Property and equipment, net
     1,391,000       935,000  
Patents and Trademarks, net
     —       202,000  
In-process research and development
     35,779,000       —  
Goodwill
     3,897,000       2,131,000  
Other assets
     516,000       598,000  
Total assets
   $ 43,624,000     $ 4,739,000  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
                
Current liabilities:
                
Accounts payable
   $ 754,000     $ 736,000  
Accrued liabilities
     346,000       5,069,000  
Customer deposits
     4,000       —  
Derivative liabilities
     —       857,000  
Notes payable, related party
     —       5,936,000  
Current maturities of capital lease obligations
     133,000       —  
Current maturities of long term debt
     14,000       28,889,000  
Total current liabilities
     1,251,000       41,487,000  
Capital lease obligations, less current maturities
     86,000       —  
Long term debt, less current maturities
     305,000       2,833,000  
Accrued interest
     —       437,000  
Other
     10,000       98,000  
Total liabilities
     1,652,000       44,855,000  
Commitments and contingencies (Note 22)
     —       —  
Stockholders’ equity (deficit):
                
Preferred stock, $.01 par, 50,000,000 shares authorized; no shares issued and outstanding
     —       —  
Common stock, $.01 par, 300,000,000 and 500,000,000 shares authorized at September 30,
2013 and 2012, respectively; 100,000,000 and 146,436,893 issued and outstanding at
September 30, 2013 and 2012, respectively
     1,000,000       1,464,000  
Additional paid-in capital
     42,449,000       131,307,000  
Accumulated deficit
     (1,477,000 )    
(172,887,000
 )
Total stockholders’ equity (deficit)
     41,972,000      
(40,116,000
 )
Total liabilities and stockholders’ equity (deficit)
   $ 43,624,000     $ 4,739,000  
 
The accompanying footnotes are an integral part of these consolidated financial statements.
 
 
F-2
 
 
CONSOLIDATED STATEMENTS OF OPERATIONS
 
   
Successor
    
Predecessor
  
   
For the Period from
July 1 through
September 30, 2013
    
For the Period
from October 1,
2012 through
June 30, 2013
    
Year Ended
September 30,
2012
  
Revenue:
                  
Products
   $ 819,000     $ 1,646,000     $ 3,047,000  
Services
     682,000       913,000       839,000  
Total revenue
     1,501,000       2,559,000       3,886,000  
Operating costs and expenses:
                        
Cost of revenue:
                        
Products
     639,000       1,219,000       1,874,000  
Services
     259,000       728,000       896,000  
Research and development expense
     1,376,000       2,703,000       4,139,000  
General and administrative expense
     630,000       2,070,000       4,779,000  
Total operating costs and expenses
     2,904,000       6,720,000       11,688,000  
Loss from operations
     (1,403,000 )     (4,161,000 )     (7,802,000 )
                         
Other income (expense):
                        
Interest expense
     (6,000 )     (3,413,000 )     (5,271,000 )
Gain on derivative liabilities
     —       851,000       1,136,000  
Other income (expense), net
     1,000       —       (14,000 )
Total other income (expenses)
     (5,000 )     (2,562,000 )     (4,149,000 )
Loss before reorganization items and income taxes
     (1,408,000 )     (6,723,000 )    
(11,951,000
 )
Reorganization items:
                        
Gain on reorganization
     —       10,287,000       222,000  
Professional fees
     (69,000 )     (1,028,000 )     (23,000 )
Total reorganization items
     (69,000 )     9,259,000       199,000  
Net (loss) income
   $ (1,477,000 )   $ 2,536,000     $
(11,752,000
 )
(Loss) Income per common share:
                        
Basic and diluted
   $ (0.01 )   $ 0.02     $ (0.08 )
Weighted average shares outstanding:
                        
Basic and diluted
     100,000,000       146,505,676       145,227,530  
 
 
The accompanying footnotes are an integral part of these consolidated financial statements.
 
 
F-3
 
 
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
 
   
Common Stock
                    
   
Shares
    
Amount
    
Additional
Paid-in Capital
    
Accumulated
Deficit
    
Total
  
Predecessor:
                              
Balances at October 1, 2011
     143,966,460     $ 1,440,000     $ 127,149,000     $ (161,135,000 )   $ (32,546,000 )
Issuance of common shares for
interest on outstanding debt
     251,816       2,000       98,000       —       100,000  
Shares issued pursuant to plan of
reorganization
     1,379,589       13,000       1,214,000       —       1,227,000  
Shares issued upon conversion of
Exit Financing
     57,845       1,000       30,000       —       31,000  
Employee share-based
compensation
     —       —       2,643,000       —       2,643,000  
Shares issued upon exercise of
warrants
     771,183       8,000       172,000       —       180,000  
Shares issued upon exercise of
options
     10,000       —       1,000       —       1,000  
Net Loss
     —       —       —       (11,752,000 )     (11,752,000 )
Balances at September 30, 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 income
     —       —       —       2,536,000       2,536,000  
Balances at June 30, 2013
     146,510,818     $ 1,465,000     $ 131,398,000     $ (170,351,000 )   $ (37,488,000 )
                                         
Successor:
                                        
Cancellation of Predecessor
common stock and fresh start
adjustments
     (146,510,818 )     (1,465,000 )     (131,398,000 )     170,351,000       37,488,000  
Issuance of 100 million shares of
common stock pursuant to plan
of reorganization (Note 4)
     100,000,000       1,000,000       40,562,000       —       41,562,000  
Additional investment from
shareholders
     —       —       1,855,000       —       1,855,000  
Employee share-based
compensation
     —       —       32,000       —       32,000  
Net Loss
     —       —       —       (1,477,000 )     (1,477,000 )
Balances at September 30, 2013
     100,000,000     $ 1,000,000     $ 42,449,000     $ (1,477,000 )   $ 41,972,000  
 
The accompanying footnotes are an integral part of these consolidated financial statements.
 
 
F-4
 
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
   
Successor
    
Predecessor
  
   
For the Period
 from July 1
through
September 30,
2013
    
For the Period
from October 1,
2012 through
June 30, 2013
    
For the Year
Ended
September 30,
2012
  
Cash flows from operating activities:
                  
Net (loss) income
   $ (1,477,000 )   $ 2,536,000     $ (11,752,000 )
Adjustments to reconcile net loss to net cash flows from operating activities:
                        
Depreciation
     43,000       123,000       135,000  
Amortization of patents
     —       22,000       30,000  
Employee share-based compensation
     32,000       76,000       2,643,000  
Amortization of discounts on notes payable
     —       1,565,000       2,239,000  
Amortization of deferred loan costs
     —       9,000       100,000  
Loss on common shares issued for interest on outstanding debt
     —       1,000       13,000  
Gain on derivative liabilities
     —       (851,000 )     (1,136,000 )
Increase (decrease) in cash resulting from changes in:
                        
Accounts receivable
     (67,000 )     (242,000 )     174,000  
Costs and estimated earnings in excess of billings
 on uncompleted contracts
     (90,000 )     (122,000 )     (28,000 )
Inventories
     353,000       (161,000 )     132,000  
Prepaid expenses and other current assets
     130,000       (72,000 )     70,000  
Accrued interest
     (1,000 )     1,819,000       2,761,000  
Accounts payable and accrued liabilities
     19,000       714,000       696,000  
Customer deposits
     2,000       2,000       (116,000 )
Billings in excess of costs and estimated earnings
 on uncompleted contracts
     (73,000 )     73,000       —  
Net cash flows from operating activities before reorganization items
     (1,129,000 )     5,492,000       (4,039,000 )
                         
Reorganization items:
                        
Change in accrued professional fees
     (275,000 )     491,000       —  
Gain on reorganization plan
     —       (10,287,000 )     (222,000 )
Net cash flows from operating activities
     (1,404,000 )     (4,304,000 )     (4,261,000 )
Cash flows from investing activities:
                        
Purchase of property and equipment
     (9,000 )     (492,000 )     (80,000 )
Net cash flows from investing activities
     (9,000 )     (492,000 )     (80,000 )
Cash flows from financing activities:
                        
Repayment of notes payable and long-term debt
     (8,000 )     (75,000 )     (46,000 )
Capital lease payments
     (12,000 )     —       —  
Additional investment from shareholders (Note 3)
     1,855,000       —       —  
Advances (to) from related party
     —       (447,000 )     4,078,000  
Proceeds from long-term debt
     —       5,558,000       —  
Proceeds from exercise of stock options and warrants
     —       —       180,000  
Net cash flows from financing activities
     1,835,000       5,036,000       4,212,000  
Net change in cash
     422,000       240,000       (129,000 )
Cash at beginning of period
     312,000       72,000       201,000  
Cash at end of period
   $ 734,000     $ 312,000     $ 72,000  
Supplemental cash flow information:
                        
Non-cash financing and investing transactions:
                        
Issuance of shares for payment of principal and interest on outstanding debt
   $ —     $ 16,000     $ 131,000  
Issuance of shares to settle pre-petition claims
     —       —       1,227,000  
Increase in March 2014 Obligations
     —       —       63,000  
Purchase of equipment with promissory notes
     121,000       —       220,000  
Issuance of common stock pursuant to plan of reorganization (Note 4)
     37,488,000       —    
—­
  
Cash paid for interest during the year
   $ 5,000     $ 3,000     $ 163,000  
 
The accompanying footnotes are an integral part of these consolidated financial statements.
 
 
F-5
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
          
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; 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. 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, on December 3, 2013 the Company filed its marketing authorization application (“MAA”) with the European Medicines Agency (“EMA”), which began 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. 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 discuss the path for the Company’s filing of a biologics licensing application (“BLA”) for BiovaxID’s U.S. regulatory/marketing approval. As a result of this guidance meeting, the Company plans to conduct a confirmatory second Phase 3 clinical trial to complete the clinical data gained through the first Phase 3 clinical trial.  The Company is preparing to initiate this second Phase 3 clinical trial, subject to availability of funding.
 
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 patent specific immunotherapies.

 
F-6
 
BIOVEST INTERNATIONAL, INC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
        
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 a result of the 2013 Bankruptcy case (discussed below), as of July 9, 2013 (the effective date of the Company’s First Amended Plan of Reorganization; the “Effective Date”), Accentia retains no equity ownership or debt interest in the Company and all Company common stock previously issued and outstanding was cancelled.  In accordance with the Plan, new common stock of the Company was issued as of Effective Date to secured and unsecured creditors with allowed claims in the 2013 Bankruptcy Case.

Also on the Effective Date, the Company appointed Ronald Osman, Esq. as the Chairman of our Board of Directors and Eugene Grin as a member of our board of directors.  Effective as of the Effective Date, Samuel Duffey, Esq. resigned as our CEO and President and we appointed Carlos F. Santos, Ph.D. as CEO.  In July 2013 we formed a wholly-owned subsidiary, ViraCell Advanced Products, LLC., and Mr. Duffey was appointed as CEO and President of that subsidiary.  On December 1, 2013 we appointed Robert E. Farrell as our CFO; and on that same date Brian D. Bottjer, CPA, who had been our Acting CFO, resumed his former role as our Controller.  On September 15, 2013, Mark Hirschel, Ph.D. resigned as our Chief Scientific Officer.
 
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 operated its business as a debtor-in-possession in accordance with the provisions of Chapter 11, and was subject to the jurisdiction of the Bankruptcy Court.
 
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 “Plan”) in the case with the support of its senior, secured lenders.   The Plan provides for, among other things, the cancellation of all outstanding common stock, options and warrants in the Company.  In addition, the 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.
 
On June 27, 2013 an evidentiary hearing was held to determine the validity of an unsecured claim filed by Accentia, our former majority shareholder and parent corporation.  The Company had originally classified our intercompany obligation due to Accentia as a “debt subject to compromise” through our 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 our Chapter 11 Case. 
 
 
F-7
 
BIOVEST INTERNATIONAL, INC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
       
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.  See Note 3 for additional information regarding the Plan.
 
2. Significant accounting policies
 
Principles of consolidation:
 
The consolidated financial statements include Biovest Europe, Limited and Viracell Advanced Products, LLC.  Biovest Europe Limited is a wholly-owned subsidiary of the Company which was incorporated in the United Kingdom on June 29, 2011. Viracell Advanced Products, LLC, is an 85% owned subsidiary of the Company which was incorporated in the State of Texas on July 18, 2013.
 
All significant inter-company balances and transactions have been eliminated.
 
Accounting for reorganization proceedings:
 
Financial Accounting Standards Board (‘FASB”) Accounting Standards Codification (“ASC”) Topic 852 - Reorganizations, 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. The balance sheet must also 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 through July 1, 2013.
 
On Effective Date, Biovest’s confirmed Plan of Reorganization became effective, which, among other things, eliminated approximately $44 million in secured and unsecured debt in exchange for new common shares of Biovest.  Also upon the Effective Date, all previously-existing equity interests in Biovest were canceled and extinguished.  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.  As a result of the recapitalization of the Company, Biovest was required to adopt fresh-start accounting in accordance with ASC Topic 852 - Reorganizations based upon the fact that; (a) total post-petition liabilities and allowed claims exceeded the reorganization value; and (b) pre-petition shareholders received less than 50% of the new common shares issued under the reorganization plan, thereby resulting in a substantive change in control.  Biovest applied fresh start accounting on July 1, 2013 (the “Convenience Date”) after concluding that the operating results between the Convenience Date and the Effective Date did not result in a material difference.  Given that the reorganization and adoption of fresh-start accounting resulted in a new entity for financial reporting purposes, Biovest is referred to as the “Predecessor Company” for all periods preceding the Convenience Date, and the “Successor Company” for all periods subsequent to the Convenience Date.  Overall, the implementation of fresh-start accounting resulted in: (i) a comprehensive revaluation of the Predecessor Company’s assets and liabilities to their estimated fair values and; (ii) the elimination of the Predecessor Company’s accumulated deficit and additional paid-in capital.  Due to the fact that these changes are material to Biovest’s consolidated financial statements, the results of the Successor Company may not be comparable in certain respects to those of the Predecessor Company.
 
Use of estimates in the preparation of consolidated financial statements:
 
The preparation of 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
 
Cash and cash equivalents:
 
Both the Predecessor and Successor Company consider all highly-liquid investments purchased with an original maturity of three months or less to be cash equivalents.
 
 
F-8
 
BIOVEST INTERNATIONAL, INC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
            
Inventories:
 
Inventories consist primarily of supplies and parts used in instrumentation assembly and related materials. Inventories are stated at the lower of cost or market with cost determined using the first-in first-out (FIFO) method on both the Predecessor and Successor Company.
 
Property and equipment:
 
For both the Predecessor and Successor Company, 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:
 
In connection with the Company’s adoption of fresh-start accounting on July 1, 2013, the Company recorded goodwill in the Successor Company Consolidated Balance Sheet representing the portion of the estimated reorganization value which could not be attributed to specific tangible or indentified intangible assets of the emerging entity (Note 4).  Goodwill is evaluated for impairment at least annually or whenever indications of impairment exist. In the course of the evaluation of the potential impairment of goodwill, either a qualitative or a quantitative assessment may be performed. If a qualitative evaluation determines that no impairment exists, then no further analysis is performed. If a qualitative evaluation is unable to determine whether impairment has occurred, a quantitative evaluation is performed.  The Company has not recorded any impairment losses as a result of these evaluations.
 
In-process research and development:
 
In-process research and development (“IPR&D”) represent intangible assets related to the Company’s development of BiovaxID for the treatment of non-Hodgkin’s Lymphoma that were recognized upon adoption of fresh-start accounting on July 1, 2013 (Note 4).  As the Company has not yet gained regulatory approval for BiovaxID, this asset is evaluated for impairment at least annually or whenever an indication of impairment exists.  In the course of the evaluation of the potential impairment of IPR&D, either a qualitative or a quantitative assessment may be performed. If a qualitative evaluation determines that no impairment exists, then no further analysis is performed. If a qualitative evaluation is unable to determine whether impairment has occurred, a quantitative evaluation is performed.  The Company has not recorded any impairment losses as a result of these evaluations.  Should the Company begin generating revenue following regulatory approval of BiovaxID, IPR&D will be amortized as a finite-lived intangible asset over its estimated useful life.
 
Patents and trademarks:
 
Patent and trademark costs are recorded at historical cost. Patent and trademark costs were being amortized on the Predecessor Company using the straight-line method over their estimated useful lives of six years for patents and twenty years for trademarks.  Such amounts were eliminated upon the adoption of fresh start accounting on July 1, 2013 (Note 4).
 
Carrying value of property and equipment:
 
The carrying values of the Company’s property and equipment 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 these assets to determine possible impairment by comparing the carrying value to projected undiscounted future cash flows of the related assets. During the period ended September 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.
 
Financial instruments:
 
The carrying values of certain of the Predecessor and Successor Company’s financial instruments, including accounts receivable and accounts payable approximates fair value due to their short maturities.  The fair values of the Company’s long-term obligations are based on assumptions concerning the amount and timing of estimated future cash flows and assumed discount rates reflecting varying degrees of risk.  The carrying values of the Company’s long term obligations approximate their fair values.
 
Fair value of financial assets and liabilities:
 
Both the Predecessor and Successor Company measure 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.
 
 
F-9
 
BIOVEST INTERNATIONAL, INC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                
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)
 
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.
 
Research and development expenses:
 
Both the Predecessor and Successor 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 related to research and development activities to (a) assist us in the Company’s analyses of the data obtained from the Company’s clinical trials and (b) update the Company’s manufacturing facility to facilitate the Company’s compliance with various regulatory validations and comparability requirements related to the Company’s manufacturing process and facility, as the Company continues its advancement toward seeking marketing/regulatory approval from the EMA, Health Canada, the FDA and other foreign regulatory agencies  The Company incurred total research and development expenses of approximately $1.4 million for the period from July 1, 2013 to September 30, 2013 (the Successor Company) and $2.7 million for the period from October 1, 2012 through June 30, 2013 (Predecessor Company) for a total of $4.1 million for the year ending September 30, 2013.  The Predecessor Company incurred total research and development expenses of $4.1 million for the year ending September 30, 2012.
 
Shipping and handling costs:
 
Shipping and handling costs are included as a component of cost of revenue in the accompanying consolidated statements of operations.
 
Income taxes:
 
Deferred tax assets and liabilities are recognized for future tax consequences attributed to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases and are measured using enacted rates that are expected to apply to the differences in the periods that they are expected to reverse. Management has evaluated the guidance relating to accounting for uncertainty in income taxes and has determined that the Predecessor and Successor Company had no uncertain income tax positions that could have a significant effect on the consolidated financial statements for the years ended September 30, 2013 and 2012.
 
The Company’s tax returns subsequent to 2010 are subject to examination by the Internal Revenue Service and state tax authorities, generally for three years after the tax returns were filed.
 
Stock-based compensation:
 
Both the Predecessor and Successor 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.  The Predecessor and Successor Company have not paid any dividends on common stock since their inception and the Successor Company does not anticipate paying dividends on its common stock in the foreseeable future.
 
 
F-10
 
BIOVEST INTERNATIONAL, INC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
           
Income (loss) per common share
 
Basic income (loss) per share is computed using the weighted average number of common shares outstanding.
 
Diluted income (loss) per share assumes conversion of all potentially dilutive outstanding stock options, common stock purchase warrants, or other convertible financial instruments. Potential common shares outstanding are excluded from the calculation of diluted income (loss) per share if their effect is anti-dilutive. As such, dilutive income (loss) per share is the same as basic loss per share for all periods presented as the effect of all potential common stock shares outstanding, if any, is anti-dilutive.
 
The following potentially dilutive securities have been excluded from the computations of diluted weighted-average shares outstanding as of September 30, 2012 and September 30, 2013, as they would be anti-dilutive:
 
   
September 30,
  
   
2013
    
2012
  
Options and Warrants to purchase common stock
     500,000       61,351,732  
Convertible Debt Instruments
     —       4,869,930  
      500,000       66,221,662  
 
As of June 30, 2013 there were no potentially dilutive securities outstanding due to the cancellation of all such securities in connection with the Plan (Note 3).
 
Recent Accounting Pronouncements
 
In July 2013, the FASB issued guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. This guidance requires the unrecognized tax benefit to be presented in the financial statements as a reduction to a deferred tax asset. When a deferred tax asset is not available, or the asset is not intended to be used for this purpose, an entity should present the unrecognized tax benefit in the financial statements as a liability.  The guidance will become effective for us at the beginning of our second quarter of fiscal 2014. We do not expect the adoption of this guidance will have a material impact on our financial statements.
 
In January 2013, the FASB issued guidance clarifying the scope of disclosure requirements for offsetting assets and liabilities. The amended guidance limits the scope of balance sheet offsetting disclosures to derivatives, repurchase agreements, and securities lending transactions to the extent that they are offset in the financial statements or subject to an enforceable master netting arrangement or similar agreement. The guidance will become effective for us at the beginning of our first quarter of fiscal 2014. We do not expect the adoption of this guidance will have a material impact on our financial statements.

 
F-11
 
BIOVEST INTERNATIONAL, INC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS      
 
3. Reorganization plan
 
As described above in Note 1, 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.  The Company’s confirmed Plan became effective 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
 
Common shares, options, and warrants or other rights to purchase or acquire common shares which existed prior to Effective Date were cancelled without further liability, payment or compensation in respect thereof.  The Successor Company amended and restated its Certificate of Incorporation to authorize the Company to issue up to 50,000,000 shares of preferred stock and up to 300,000,000 shares of new common stock (“Reorganized Biovest Common Stock”).  Pursuant to the Plan, Biovest issued 100,000,000 shares of Reorganized Biovest Common Stock 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 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
 
During the Company’s Reorganization proceedings, the Bankruptcy Court approved a $5.7 million post-petition line of credit facility (the “DIP Financing”) from Corps Real, LLC (“Corps Real”), 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”).  The LV Entities and Corps Real represent the Company’s pre-petition senior secured lenders (the “Senior Secured Lenders”) originally secured by a security interest in and lien on all assets and properties of the Company.

Pursuant to the terms of the Plan, the DIP Financing claims were deemed fully paid and any liens and security interests granted in favor of Corps Real and the LV Entities under the DIP Financing documents were released and terminated.  As a result of the  Plan, the Senior Secured Lenders are no longer creditors of Biovest, but instead major shareholders of the Company, holding 93% of the outstanding common shares as of Effective Date.  Furthermore, as of Effective Date, approximately $2.6 million remained available to the Company for working capital without payment of any further consideration by the Company.  From the period following Effective Date through September 30, 2013, Biovest drew down approximately $1.9 million of the $2.6 million remaining.  These draws were recorded as in increase to additional paid-in capital on the Successor balance sheet as of September 30, 2013 and are shown as “additional investment from shareholders” on the Successor Cash Flow Statement and Statement of Stockholders’ Equity.
 
Secured Claims
 
In addition to the DIP Financing claims discussed above, the allowed secured claims in the Company’s reorganization proceeding consist of the following:
 
 
·
The Corps Real Claims (approximately $8.0 million): On 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 (approximately $33.7 million):  On 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.
 
·
The Minnesota Promissory Notes (approximately $0.33 million):  On Effective Date, the obligations due under the Minnesota Promissory Notes were affirmed.  On July 16, 2013, the Company issued cash payment in the approximate amount of $1 thousand representing the cumulative balance of the missed monthly principal and interest payments due while the Company was in reorganization.  Following the Effective Date, Reorganized Biovest resumed its obligations under the original terms of Minnesota Promissory Note documents.
 
 
F-12
 
BIOVEST INTERNATIONAL, INC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
    
Unsecured Claims
 
The allowed unsecured claims in the Company’s reorganization proceedings totaled approximately $5.4 million and consisted of the following:
 
 
·
The November 2010 Convertible Notes (Note 13) totaling approximately $1.4 million (including interest)
 
·
The March 2014 Obligations (Note 13) totaling approximately $3.3 million (including interest)
 
·
Other accrued pre-petition liabilities totaling approximately $0.7 million

On the Effective Date, all holders of 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 the Effective Date in full and final satisfaction of all allowed unsecured claims.  Each holder of an allowed unsecured claim received a pro-rata share of the seven million shares available to all allowed unsecured claims.
 
The Predecessor Company recorded gains resulting from the discharge of its prepetition liabilities through the Plan.  The gains upon reorganization have been presented separately in the consolidated statements of operations and are as follows:

   
Successor
    
Predecessor
  
   
For the Period from
July 1 through
September 30, 2013
    
For the Period
from October 1,
2012 through
June 30, 2013
    
Year Ended
September 30,
2012
  
Gain on conversion of secured claims to common stock(a)
   $ —     $ 4,530,000     $ —  
Gain on conversion of unsecured claims to common stock(a)
     —       853,000       —  
Gain on disallowance of Accentia intercompany claim (Note 1)
     —       4,544,000       —  
Gain on disallowance of other unsecured claims
     —       360,000       —  
Gain from previous plan of reorganization(b)
     —       —       222,000  
    $ —     $ 10,287,000     $ 222,000  
 
 
(c)
The gains upon conversion to common stock were calculated by charging the carrying value of the Predecessor’s pre-petition liabilities against the fair value of Reorganized Biovest Common Shares issued to settle the associated liabilities pursuant to the Plan.
 
 
(d)
November 17, 2010 marked the effective date of Biovest’s previously confirmed plan of reorganization (case 8:08-bk-17795-KRM filed on November 10, 2008, the “2008 Bankruptcy”).  Pursuant to the confirmed plan of reorganization resulting from the 2008 Bankruptcy, holders of existing voting shares immediately before the confirmation received more than 50% of the voting shares of the emerging entity, thus Biovest did not adopt fresh-start reporting upon emergence from the 2008 Bankruptcy. The Company instead followed the guidance as described in Accounting Standard Codification (“ASC”) 852-45-29 for entities which do not qualify for fresh-start reporting. Liabilities compromised by the plan were stated at present values of amounts to be paid, and forgiveness of debt has been reported as an extinguishment of debt resulting in the gain on reorganization.
 
4. 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.  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 the 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  
Reorganization Value
     (41,562,000 )
Excess of liabilities over reorganization value
   $ 7,173,000  
 
 
F-13
 
BIOVEST INTERNATIONAL, INC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
     
Accordingly, the Company adopted 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 did not result in a material difference.
 
In accordance with the requirements of fresh-start accounting, the Successor Company’s asset values were re-measured and allocated in conformity with ASC 805-20, Business Combinations.  Fresh-start accounting also requires all liabilities be stated at fair value.  The Company’s reorganization value was determined through a variety of factors.  Through the course of the Company’s Chapter 11 Case, the Court 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.
 
Based upon the Court’s ruling, the Company engaged a valuation firm to assess the Company’s reorganization value, which was specifically determined based upon the intangible asset values related to the Company’s in-process research and development with respect to the potential commercialization of BiovaxID (the “Vaccine Segment”), as well as the ongoing value of the Company’s hollow fiber instrumentation and cell culture manufacturing operations (the “Instrumentation Segment”).  The estimated fair value with respect to the potential commercialization of BiovaxID was determined using discounted cash flow models which were prepared based upon projections from management regarding a number of estimates including those relating to: the potential market size for BiovaxID, the probability of obtaining regulatory approval in each of three jurisdictions (the EU, Canada, and the United States), and the anticipated cost to manufacture and distribute the vaccine.  Weight was also given to the probability of failure (i.e. zero value).  Based upon this approach, the conclusion of fair value for the Vaccine segment was determined to be $37.4 million.
 
Estimated fair value with respect to the Company’s hollow fiber instrumentation and cell culture manufacturing operation was determined using a weighting of an income approach (discounted cash flows) and a market approach (guideline public company method).   Each approach was weighted equally resulting in a conclusion of fair value for the Instrumentation Segment of $4.2 million.
 
Discount rates (weighted average cost of capital) of 33% (Vaccine Segment) and 17% (Instrumentation Segment) were used in applying the discounted cash flow approaches, and were calculated as follows:

   
Vaccine Segment
  
Instrumentation Segment
Risk-free rate
     3.2 %     3.2 %
Equity Risk premium
     10.3 %     7.3 %
Market risk premium for size
     4.3 %     4.3 %
Other risk factors
     18.0 %     3.0 %
Cost of equity
     35.8 %     17.8 %
After-tax cost of debt
     4.9 %     4.9 %
Discount rate – weighted ave cost of capital
(weighted 90% common equity and 10% debt),
rounded
     33.0 %     17.0 %
Terminal cash flow growth rate
     3.0 %     3.0 %

The values derived from the approaches described above were based upon significant inputs and assumptions and thus represent a Level 3 measurement as defined in ASC 820, Fair Value Measurement.
 
Upon implementation of fresh-starting accounting, the Company allocated the total estimated reorganization value of $41.6 million (the combined value of the two segments) 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 only identifiable intangible asset which was assigned value was the technology supporting the vaccine segment.  Due to the fact that the Company’s ongoing development of BiovaxID both has substance and is incomplete, it has been classified as In-Process Research and Development, which was valued using a specific form of the income approach known as the Multi-Period Excess Earnings Method (“MPEEM”).  Under the MPEEM, cash flows from the asset being valued are forecasted over the expected remaining useful life of the asset (in this case 14 years), with adjustments made to deduct contributory asset charges for other assets that support the asset being valued (in this case, net working capital, net fixed assets, and assembled work force).  The conclusion of fair value for In-Process Research and Development using the MPEEM approach was estimated to be $35.8 million.
 
 
F-14
 
BIOVEST INTERNATIONAL, INC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
     
The excess of the reorganization value over and above the identifiable net asset values resulted in goodwill of $3.9 million. 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.
 
The following fresh-start Consolidated Balance Sheet presents the financial effects on the Successor Company following implementation of the Plan and the adoption of fresh-start accounting.  The effect of the consummation of the transactions contemplated in the Plan include the settlement of liabilities, cancellation of common stock outstanding prior to the Effective Date, and the issuance of Reorganized Biovest Common Stock on the Effective Date.
     
Adjustments upon Effective Date
  
 
Predecessor
June 30, 2013
  
Conversion of Debt for
Equity
    
Fresh Start
      
Successor
July 1, 2013
  
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     —       121,000  
(a)
     681,000  
Prepaid expenses and other current assets
   291,000     —       —         291,000  
Total current assets
   1,778,000     —       121,000         1,899,000  
Property and equipment
   1,304,000     —       —         1,304,000  
Patents and Trademarks
   179,000     —       (179,000 )
(b)
     —  
In-process research and development
   —     —       35,779,000  
(b)
     35,779,000  
Goodwill
   2,131,000     —       1,766,000  
(c)
     3,897,000  
Other assets
   536,000     —       —         536,000  
Total assets
 $ 5,928,000   $ —     $ 37,487,000       $ 43,415,000  
                               
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)                              
Liabilities not subject to compromise:
                              
      Current liabilities:
                              
Accounts payable
 $ 787,000   $
–­
     $ –       $ 787,000  
Accrued liabilities
   844,000     (208,000 )
(d)
   –         636,000  
Customer deposits
   2,000     –       –         2,000  
Billing in excess of costs and estimated earnings
   73,000     –       –         73,000  
Notes payable, related party
   3,033,000     (3,033,000 )
(e)
   –         –  
Current maturities of long term debt
   —     18,000  
(f)
   –         18,000  
     Total current liabilities
   4,739,000     (3,223,000 )     –         1,516,000  
Long term debt, less current maturities
   —     311,000  
(g)
   –         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 )
(f)(g)(h)
   –         –  
Total liabilities
   49,115,000     (47,262,000 )     –         1,853,000  
Stockholders’ Equity (Deficit):
                              
Preferred stock
   –     –       –         –  
Predecessor common stock
   1,465,000     (1,465,000 )
(i)
   –         –  
Predecessor additional paid-in capital
   131,398,000     –       (131,398,000 )
(j)
     –  
Successor common stock
   –     1,000,000  
(d)(h)
   –         1,000,000  
Successor additional paid-in capital
   –     40,562,000  
(d)(h)
   –         40,562,000  
Accumulated deficit
   (176,050,000 )   7,165,000  
(d)(e)(h)(i)
   168,885,000  
(j)
     –  
Total stockholders’ equity (deficit)
   (43,187,000 )   47,262,000       37,487,000         41,562,000  
Total liabilities and stockholders’ equity (deficit)
 $ 5,928,000   $ –     $ 37,487,000       $ 43,415,000  
 
 
F-15
 
BIOVEST INTERNATIONAL, INC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
     
Notes to conversion of debt to new equity and fresh-start adjustments
 
 
(a)
To adjust inventory from lower of cost or market to fair value (expected selling price).
 
(b)
Adjustment to reflect the portion of the reorganization value which was attributed to identified intangible assets.
 
(c)
To record the excess of the reorganization value over the amount assigned to identifiable net assets.
 
(d)
To record the issuance of Reorganized Biovest Common Stock for unsecured debt.
 
(e)
To record the extinguishment of DIP Financing claims.
 
(f)
To record the affirmation of the current obligations due under the Minnesota Promissory Notes.
 
(g)
To record the affirmation of the non-current obligations due under the Minnesota Promissory Notes.
 
(h)
To record the discharge of liabilities subject to compromise pursuant to the Plan and the issuance of Reorganized Biovest Common Stock in satisfaction of such claims.
 
(i)
To record the cancellation of the Predecessor Company’s common stock.
 
(j)
To reset Predecessor additional paid-in capital and accumulated deficit to zero and record net fresh-start adjustments.
 
5. Liquidity
 
The Successor Company emerged from reorganization in July 2013 and continues to operate as a going concern.  At September 30, 2013, Biovest had cash of $0.7 million and working capital of $0.9 million.  As of September 30, 2013, the Company has approximately $0.7 million available under the DIP Financing. On December 16, 2013, the Company entered into a Secured Promissory Note with our Senior Secured Lenders in a maximum principal amount of $3.5 million having a five year maturity.  Interest accrues at twelve percent per annum on the outstanding principal amount and is payable on the maturity of the note unless previously prepaid.  The Company intends to draw down upon the note as and when needed to fund the Company’s operations and commercialization efforts.  The DIP Financing and the Secured Promissory Note are anticipated to fund the Company’s operations and commercialization efforts through the earlier of (a) obtaining significant additional external funding and (b) May, 2014.
 
Through September 30, 2013 the Company has been primarily engaged in developing BiovaxID.  In the course of these activities, Biovest has sustained losses and expects such losses to continue through at least 2014.  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 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.
 
During fiscal 2013, Biovest financed its operations primarily through secured promissory notes issued to the Senior 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 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 accrued interest at 16% per annum with all interest due at maturity – December 3, 2013 and was 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 accrued interest at 16% per annum with all interest due at maturity – March 5, 2014 and was secured by a first priority lien of all the Company’s assets.

As of July 9, 2013, the Effective Date of the Company’s Plan, any obligations due under the Corps Real Notes have been extinguished in return for Reorganized Biovest Common Stock as discussed in Notes 3 and 4 above.
 
Debtor-in-Possession Financing:
 
As discussed in Note 3, during the Company’s reorganization proceedings, the Bankruptcy Court approved the DIP Financing, representing a post-petition line of credit facility in the amount of $5.7 million from the Company’s Senior Secured Lenders.  As of September 30, 2013, the Company had approximately $0.7 million available to draw down under the DIP Financing.  As of the Effective Date, amounts due under the DIP Financing were extinguished in return for Reorganized Biovest Common Stock.
 
6. 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. The Company maintains its cash with one major U.S. domestic bank. Such amounts are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $0.25 million per institution. At September 30, 2013, the Company held cash at this institution in excess of insured amounts totaling $0.5 million.  The terms of these deposits are on demand to minimize risk.  The Company has not incurred losses related to these deposits.
 
 
F-16
 
BIOVEST INTERNATIONAL, INC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
          
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 allowance for doubtful accounts as of September 30, 2013, is adequate. However, actual write-offs might exceed the recorded allowance.
 
Predecessor - major customer information is as follows:
 
 
·
Two customers accounted for 43% of revenues for the period from October 1, 2012 through June 30, 2013.
 
 
·
Two customers accounted for 35% of revenues for the year ended September 30, 2012.
 
 
·
Three customers accounted for 71% of trade accounts receivable as of September 30, 2012.
 
Successor - major customer information is as follows:
 
 
·
Three customers accounted for 76% of revenues for the period from July 1, 2013 through September 30, 2013.
 
 
·
Three customers accounted for 72% of trade accounts receivable as of September 30, 2013.
 
A significant amount of the Company’s revenue has been derived from export sales. Details on the Company’s export sales are as follows:
 
Predecessor – export sales information is as follows:
 
 
·
The Company’s export sales were 39% of revenues for the year ended September 30, 2012.
 
 
·
The Company’s export sales were 48% of revenues for the period from October 1, 2012 through June 30, 2013.
 
 
·
For the year ended September 30, 2012, sales to customers in the United Kingdom accounted for 24% of total revenue, while sales to customers in Canada accounted for 15% of total revenue.
 
 
·
For the period from October 1, 2012 through June 30, 2013, sales to customers in the United Kingdom accounted for 32% of total revenue, while sales to customers in Canada accounted for 15% of total revenue.
 
Successor – export sales information is as follows:
 
 
·
The Company’s export sales were 44% of revenues for the period from July 1, 2013 through September 30, 2013.
 
 
·
For the period from July 1, 2013 through September 30, 2013, sales to customers in the United Kingdom accounted for 38% of total revenue.
 
7. Inventories
 
Inventories consist of the following:
 
             
   
Successor
    
Predecessor
  
   
Sep 30, 2013
    
Sep 30, 2012
  
Raw materials
   $ 281,000      $ 320,000  
Finished goods
     48,000        80,000  
    $ 329,000      $ 400,000  

8. Minnesota facility lease
 
The Company leases approximately 35,000 square feet in Minneapolis (Coon Rapids), Minnesota, which it uses for office, laboratory, manufacturing, and warehousing space to support its development, potential commercialization, and production of BiovaxID, production of its instruments and disposables, and contract cell culture products and services. The lease expires on July 30, 2021.  The Company has the right to extend the term of the lease for two additional five year periods at the greater of the base rent in effect at the end of the initial ten year lease term or market rates in effect at the end of the initial ten year lease term. Payments due under the terms of the lease are as follows:
 
 
F-17
 
BIOVEST INTERNATIONAL, INC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
       
       
Year ending September 30,
      
2014
   $ 431,000  
2015
     431,000  
2016
     442,000  
2017
     501,000  
2018
     501,000  
thereafter
     1,419,000  
    $ 3,725,000  
 
The lease contains provisions regarding a strategic collaboration whereby the landlord agreed to construct certain capital improvements in the amount of $1.5 million to the leased premises to allow the Company to perform cGMP manufacturing of biologic products in the facility, including the manufacture of BiovaxID and for potential future expansion to the facility to permit additional BiovaxID production capacity when required.  These improvements were completed in September 2011 and were financed by the Company through a combination of cash on hand (approximately $0.175 million), promissory notes from the City of Coon Rapids, Minnesota and the State of Minnesota in the aggregate amount of $0.353 million (collectively, the “Minnesota Promissory Notes”) (as described herein), and an increase to the base rent charged in order to recoup the costs of construction incurred by the landlord (approximately, $1.0 million) over the initial term of the lease.  As a result of these transactions, the Company recorded deferred rent in connection with the common stock purchase warrant issued to the landlord (approximately, $0.825 million), and leasehold improvements in the amount of $0.55 million. Although any rights to exercise the warrant were cancelled pursuant to the Company’s Plan, the Company continues to carry the unamortized deferred rent on the Successor consolidated balance sheet at September 30, 2013 at amortized cost (amortized over the initial ten year term of the lease).  The carrying value of this asset was $0.598 million as of September 30, 2013.
 
9. Costs and estimated earnings on uncompleted contracts
 
Costs and estimated earnings on uncompleted contracts consist of the following:
 
   
Successor
    
Predecessor
  
   
Sep 30, 2013
    
Sep 30, 2012
  
Costs incurred on uncompleted contracts
   $ 553,000     $ 136,000  
Estimated earnings
     1,005,000       364,000  
      1,558,000       500,000  
Less billings to date
     (1,318,000 )     (472,000 )
    $ 240,000     $ 28,000  
 
10. Property and equipment
 
Property and equipment consist of the following:
 
   
Successor
    
Predecessor
  
   
Sep 30, 2013
    
Sep 30, 2012
  
Furniture and fixtures
   $ 5,000     $ 41,000  
Leasehold improvements
     436,000       692,000  
Machinery and equipment
     993,000       1,560,000  
      1,434,000       2,293,000  
Less accumulated depreciation and amortization
     (43,000 )     (1,358,000 )
    $ 1,391,000     $ 935,000  
 
11. Intangible assets and goodwill
 
As described in Note 4, on July 1, 2013 the Successor Company recorded $35.8 million in identifiable intangible assets in connection with the implementation of fresh-start accounting, which were related to the technology supporting BiovaxID.  Furthermore, goodwill of $3.9 million was also recorded on July 1, 2013 representing the excess of the reorganization value over the amounts assigned to identifiable net assets. The Successor Company was determined to have two reporting units: BiovaxID vaccine development and Instrumentation/Cell Culture manufacturing.  Goodwill was attributed to each reporting unit as follows:
 
 
F-18
 
BIOVEST INTERNATIONAL, INC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
      
   
Sep 30, 2013
  
Vaccine Development
   $ 2,840,000  
Instrumentation/Cell Culture manufacturing
     1,057,000  
    $ 3,897,000  

Management conducted the Successor Company’s impairment tests related to IPR&D and goodwill as of September 30, 2013 using a qualitative assessment regarding any factors which may have changed or caused reorganization value or the IPR&D of the Successor Company to have changed since July 1, 2013, the date at which fresh-start accounting was implemented.  Based upon this qualitative evaluation, goodwill and IPR&D were determined not to be impaired as of September 30, 2013.
 
12. Related party transactions
 
As part of the Plan, the following related party notes recorded on the Predecessor consolidated balance sheet as of September 30, 2012 were either discharged or exchanged for common shares of the Successor Company.  For further information regarding the discharge of these liabilities, see Note 3 - Reorganization Plan.
 
Notes payable, related party consisted of the following:
 
   
Successor
    
Predecessor
  
   
Sep 30, 2013
    
Sep 30, 2012
  
Corps Real I Note
   $ —       2,292,000  
Unamortized discount on Corps Real I Note
     —       (397,000 )
Accentia Intercompany Payable
     —       4,041,000  
    $ —     $ 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 was secured by a first priority lien on all of the Company’s assets. As of the Effective Date, any obligations due under the Corps Real I Note have been extinguished in return for Reorganized Biovest Common Stock.
 
Accentia Intercompany Payable:
 
The Accentia intercompany payable consisted mainly of advances to the Predecessor Company from Accentia in the form of cash, interest, payments directly to third parties on the Predecessor Company’s behalf, and allocated inter-company expenses for items such as payroll, insurance, and shared facility expenses.  The Predecessor Company had originally classified the intercompany obligation due to Accentia as a “debt subject to compromise” at the outset of the 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 our 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 Predecessor Company’s Consolidated Statements of Operations for the period from October 1, 2012 through June 30, 2013.
 
13. Long-term debt:
 
As part of the Plan, the March 2014 Obligations, the November 2010 Convertible Notes, and the LV Entities Term A and Term B Notes (as defined below) were exchanged for Reorganized Biovest Common Stock.  Also, through the Plan, any obligations due under the Minnesota Promissory Notes were affirmed under their original terms.  For further information regarding the modification of these liabilities through the Plan, see Note 3 - Reorganization Plan.
 
Long-term debt consists of the following
 
 
F-19
 
BIOVEST INTERNATIONAL, INC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
        
   
Successor
    
Predecessor
  
   
September 30,
2013
    
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
     319,000       344,000  
LV Entities Term A Notes
     —       23,467,000  
LV Entities Term B Notes
     —       4,160,000  
      319,000       31,722,000  
Less: current maturities
     (14,000 )     (28,889,000 )
    $ 305,000     $ 2,833,000  
 
March 2014 Obligations:
 
On November 17, 2010, in conjunction with the 2008 Bankruptcy, the Company became obligated to pay certain of its unsecured creditors the aggregate principal amount of approximately $2.8 million in cash together with interest at 5% per annum to be paid in one installment on March 27, 2014 (the “March 2014 Obligations”).   As of the Effective Date, any obligations due under the March 2014 Obligations have been extinguished in return for Reorganized Biovest Common Stock.
 
November 2010 Convertible Notes:
 
On November 17, 2010, in conjunction with the 2008 Bankruptcy, the Company issued convertible notes (the “November 2010 Convertible Notes”) in the original aggregate principal amount of $7.04 million.  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 Predecessor 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 held 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 of the Effective Date, any obligations due under the November 2010 Convertible Notes have been extinguished in return for Reorganized Biovest Common Stock.
 
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 the Effective Date, the obligations due under the Minnesota Promissory Notes were affirmed.  On July 16, 2013, the Company issued payment in the amount of one thousand dollars representing the cumulative balance of the missed monthly principal and interest payments due while the Company was in reorganization.  The Company has resumed the monthly amortizing payments due under the original terms of the notes.
 
 
F-20
 
BIOVEST INTERNATIONAL, INC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
         
LV Entities Term A and Term B Notes:
 
On November 17, 2010, the Predecessor 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 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.
 
As of the Effective Date, any obligations due under the LV Entities Term A and B Notes have been extinguished in return for Reorganized Biovest Common Stock.

14. Accrued interest:
 
Interest accrued on the Company’s outstanding debt is listed in the table below.  As of the Effective Date, all interest obligations listed for the Predecessor Company in the table below (excluding the $1,000 due under the Minnesota Promissory Notes, the terms of which were affirmed under the Plan (Note 13)), have been extinguished in return for Reorganized Biovest Common Stock.  See Note 3 for further information regarding the Plan and the Company’s capital structure upon Effective Date of the Plan.
 
 
 
   
Successor
    
Predecessor
  
   
September 30, 2013
    
September 30, 2012
  
Corps Real Note
   $ —     $ 358,000  
Exit Financing
     —       7,000  
Laurus/Valens Term A Notes
     —       3,518,000  
Laurus/Valens Term B Notes
     —       624,000  
March 2014 Obligations
     —       437,000  
Minnesota Promissory Notes
     1,000       1,000  
Total accrued interest
   $ 1,000     $ 4,945,000  
                 
Current (a)
   $ 1,000     $ 4,508,000  
Non-Current
   $ —     $ 437,000  
 
 
(a)
The current portion of accrued interest has been recorded in accrued liabilities on the accompanying consolidated balance sheets.  
15. Capital leases
 
The Company has entered into various capital lease arrangements for the use of laboratory equipment in our Coon Rapids, Minnesota facility.  The following is an analysis of the leased property under capital leases by major classes:
 

   
Successor
    
Predecessor
  
Class of Property
  
September 30, 2013
    
September 30, 2012
  
   Laboratory equipment
   $ 315,000     $ —  
   Less accumulated depreciation
     (13,000 )     —  
    $ 302,000     $ —  

The following is a schedule by years of future minimum lease payments under capital leases together with the present value of the net minimum lease payments as of September 30, 2013.

Year ending September 30,
      
2014
   $ 150,000  
2015
     53,000  
2016
     43,000  
Total minimum lease payments
     246,000  
Less amount representing interest
     (27,000 )
Present value of minimum lease payments(a)
   $ 219,000  

 
(a)
Reflected in the balance sheet as current and noncurrent capital lease obligations of $133,000 and $86,000, respectively.

 
F-21
 
BIOVEST INTERNATIONAL, INC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
      
16. Derivative liabilities
 
The Company does not use derivative financial instruments to hedge exposures to cash-flow, market or foreign-currency risks. However, the Predecessor Company entered into certain other financial instruments and contracts, such as debt financing arrangements and freestanding common stock purchase warrants with features that were 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 were required to be carried as derivative liabilities, at fair value.
 
The Company used 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 were initially and subsequently carried at fair value, the Company’s operating results reflected the volatility in these estimates and assumption changes.
 
The following table discloses the fair value of the Predecessor Company’s derivative liabilities and their location in the consolidated balance sheets as of September 30, 2013 and 2012. The Successor Company held no asset or liability derivatives on September 30, 2013.
 
   
Liability Derivatives
  
   
Successor - September 30, 2013
    
Predecessor - September 30, 2012
  
   
Balance Sheet
Location
    
Fair
Value
    
Balance Sheet
Location
  
Fair
Value
  
Derivatives not designated as hedging instruments
                      
Series A Exchange Warrants
     N/A     $ —    
Derivative Liabilities
   $ 857,000  
Total derivatives not designated as hedging instruments
           $ —         $ 857,000  
 
The following table summarizes liabilities measured at fair value on a recurring basis for the periods presented:
 
   
Successor - September 30, 2012
    
Predecessor - September 30, 2012
  
Fair Value Measurements Using:
  
Level 1
    
Level 2
    
Level 3
    
Total
    
Level 1
    
Level 2
    
Level 3
    
Total
  
Liabilities
                                                
Derivative Liabilities
   $ —     $ —     $ —     $ —     $ —     $ 857,000     $ —     $ 857,000  

As of the Effective Date, any obligations due under the Series A Exchange Warrants have been extinguished.  See Note 3 for further information regarding the Plan and the Company’s capital structure upon the Effective Date of the Plan.
 
17. Stockholders’ equity
 
Preferred stock:
 
The Company has authorized 50 million shares of preferred stock. As of the years ended September 30, 2013 and 2012, no preferred shares were issued or outstanding.
 
Common stock:
 
Pursuant to the Company’s Amended and Restated Certificate of Incorporation filed on the Effective Date, Biovest is authorized to issue up to 300 million shares of common stock. Each share of common stock carries equal voting rights, dividend preferences, and a par value of $0.01 per share.
 
Successor Company:
 
 
•
On Effective Date, Biovest issued 100 million shares of common stock (see Note 3 for further details).
 
Predecessor Company:
 
 
• 
As described in Note 3, all shares of the Predecessor Company common stock were cancelled on the Effective Date.
 
 
F-22
 
BIOVEST INTERNATIONAL, INC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
       
Trading of Common Stock
 
The Predecessor’s common stock ceased trading on the OTCQX July 9, 2013.  Upon the Effective Date, the outstanding common stock of the Predecessor Company was cancelled. Consequently, the Predecessor’s stockholders prior to the Effective Date no longer have any interest as stockholders of the Predecessor Company by virtue of their ownership of the Predecessor’s common stock prior to the emergence from bankruptcy.  The Successor Company common stock currently does not trade on any trading market, as the Successor Company’s shares are not listed on any exchange and all shares are subject to a lock-up provision contained in the Plan.
 
18. Common stock options and warrants
 
Stock Option Plans - Predecessor Company:
 
Prior to the Effective Date, the Predecessor Company maintained stock-based incentive compensation plans for employees and directors of the Company. On the Effective Date, all outstanding option grants made under the 2000 Stock Option Plan, the Amended and Restated 2006 Equity Incentive Plan and the 2010 Equity Incentive Plan were terminated and will no longer be of any force or effect.  The ten-year term of the 2000 Stock Option Plan has expired.  However, shares issuable pursuant to both the Amended & Restated 2006 Equity Incentive Plan and the 2010 Equity Incentive Plan remain available for future option grants of the Successor Company.
 
Stock Option Plan - Successor Company:
 
The Company’s Amended and Restated 2006 Equity Incentive Plan (the “2006 Plan”) was approved by the Company’s Board of Directors (the “Board”) on November 2, 2006, and by the written consent of holders of a majority of the Company’s shares of common stock on October 4, 2007. The 2010 Equity Incentive Plan (the “2010 Plan”)  was approved by the Company’s Board of Directors on November 10, 2010, and by holders of the majority of the Company’s shares of common stock on January 18, 2011 (collectively the 2006 Plan and the 2010 Plan are referred to hereafter as the “Stock Option Plan”). The purpose of the Stock Option Plan is to create incentives designed to motivate employees to significantly contribute toward the Company’s growth and profitability, to provide the Company’s executives, directors, employees, and persons who, by their position, ability and diligence, are able to make important contributions to the Company’s growth and profitability, with an incentive to assist the Company in achieving its long-term corporate objectives, to attract and retain persons of outstanding competence, and to provide such persons with an opportunity to acquire an equity interest in the Company.
 
The Stock Option Plan is administered by a committee appointed by the Board or by the full Board of Directors. All members of such a committee must be non-employee directors and outside directors, as defined in the Stock Option Plan. Subject to the limitations set forth in the Stock Option Plan, the administrator has the authority to grant options and to determine the purchase price of the shares of the Company’s common stock covered by each option, the term of each option, the number of shares of the Company’s common stock to be covered by each option, to establish vesting schedules, to designate options as incentive stock options or non-qualified stock options, and to determine the persons to whom grants are to be made.
 
The Stock Option Plan provides for the issuance of qualified and non-qualified options as those terms are defined by the Internal Revenue Code.  The options issued pursuant to the Stock Option Plan cannot have a term greater than ten years.  The Company may, at any time, amend or modify the Stock Option Plan without limitation.  The options granted under the Stock Option Plan vest over periods established in the stock option agreement.
 
The 2006 Plan provides for the issuance of options to purchase up to 20.0 million shares of common stock, and as of September 30, 2013 no options were issued pursuant to the 2006 Plan.  The 2010 Plan provides for the issuance of options to purchase up to 20.0 million shares of common stock.  As of September 30, 2013, there were 19.5 million options available for issuance under the 2010 Plan.
 
The fair value of the options granted are measured on the date of grant and this amount is recognized as compensation expense ratably over the service period, which generally corresponds with the vesting period. Stock appreciation rights granted under the Stock Option Plan must be settled in common stock. Therefore, stock appreciation rights granted under the Stock Option Plan will receive the same accounting treatment as options. The cash the Company receives upon the exercise of stock options will be reflected as an increase in the Company’s capital. No additional compensation expense will be recognized at the time stock options are exercised, although the issuance of shares of common stock upon exercise may reduce basic earnings per share, as more shares of the Company’s common stock would then be outstanding.
 
In the case of a grant of restricted stock, the fair value of the restricted stock award at the date of grant will be determined and this amount will be recognized over the requisite service period of the award, usually the vesting period. The fair value of a restricted stock award is equal to the fair market value of the Company’s common stock on the date of grant.
 
 
F-23
 
BIOVEST INTERNATIONAL, INC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
Stock option activity for the years ended September 30, 2013 and 2012 is as follows:
 
   
Shares
    
Weighted
Average
Exercise
Price
    
Weighted
Average
Contractual
Life
    
Weighted
Average Grant
Date Fair Value
    
Aggregate
Intrinsic
Value
  
Predecessor:
                              
Outstanding at October 1, 2011
     27,081,886     $ 0.56       7.41     $ 0.37     $ 2,273,550  
Exercisable at October 1, 2011
     25,656,886       0.54       7.32       0.34       2,272,550  
Granted
     9,507,122       0.44                          
Exercised
     (10,000 )     0.06                          
Cancelled
     (114,449 )     1.11                          
Outstanding at September 30, 2012
     36,464,559       0.53       6.86       0.35       1,314,688  
Exercisable at September 30, 2012
     34,042,298       0.52       6.80       0.34       1,126,892  
Granted
     250,000       0.18                          
Exercised
     —       —                          
Cancelled
     (143,802 )     0.40                          
Cancelled pursuant to Plan
     (36,570,757 )     0.40       6.12       0.35          
Outstanding and Exercisable at
June 30, 2013
     —     $ —       —     $ —     $ —  
                                         
Successor:
                                        
Outstanding at July 1, 2013
     —     $ —       —     $ —     $ —  
Exercisable at July 1, 2013
     —       —       —       —       —  
Granted
     500,000       1.00                          
Exercised
     —       —                          
Cancelled
     —       —                          
Outstanding at September 30, 2013
     500,000       1.00       4.93     $ 0.06       —  
Exercisable at September 30, 2013
     500,000     $ 1.00       4.93     $ 0.06     $ —  
 
The following assumptions were used to determine the fair value of the stock option grants:
 
 
   
Successor
    
Predecessor
  
   
Period from July 1
 through September 30,
2013
    
Period from
October 1, 2012
through June 30,
2013
    
Year ended
September 30, 2012
  
Expected volatility
    62%     66%     61% - 88%  
Expected life
  
2.5 years
    
2.5 years
    
2.5 to 5.3 years
  
Risk-free interest rates
    0.75%      0.30%     0.33% - 1.04%  
Dividend yields
  
none
    
none
    
None
  
 
 
On September 5, 2013, the Company issued 0.5 million stock options to our former President and Chief Executive Officer, Samuel S. Duffey.  The options vested immediately and have an exercise price of $1.00 per share.  Pursuant to the terms of the Plan, the options may not be exercised until May 1, 2014.  The fair value of the grant (approximately $0.03 million) was charged to administrative expense on the date of the grant.
 
 
F-24
 
BIOVEST INTERNATIONAL, INC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
          
The Predecessor Company recognized $2.6 million in total stock-based compensation expense for the year ended September 30, 2012 and $0.08 million for the period from October 1, 2012 through June 30, 2013. The Successor Company recognized $0.03 million in total stock-based compensation expense for the period from July 1, 2013 through September 30, 2013.  A summary of the status of the Company’s non-vested employee stock options as of September 30, 2013, and changes during the two years then ended is presented below:
Non-Vested Options - Predecessor
  
Shares
    
Weighted Ave
Grant-Date
Fair Value
  
Non-vested at October 1, 2011
     1,425,000     $ 0.81  
Granted
     9,507,122       0.25  
Vested
     (8,509,861 )     0.32  
Cancelled
     —       —  
                 
Non-vested at September 30, 2012
     2,422,261       0.46  
Granted
     250,000       0.08  
Vested
     (866,428 )     0.08  
Cancelled
     —       —  
Cancelled pursuant to Plan
     (1,805,833 )     0.59  
Non-Vested at June 30, 2013
     —     $ —  
                 
Non-vested Options - Successor
                
Non-vested at July 1, 2013
     —     $ —  
Granted
     500,000       0.06  
Vested
     (500,000 )     0.06  
Cancelled
     —       —  
Non-vested at September 30, 2013
     —     $ —  
 
As of September 30, 2013, there was no unrecognized compensation cost related to non-vested share-based compensation.
 
Stock warrants issued, exercised and outstanding as of September 30, 2013 and 2012 are summarized as follows:
 
Warrants - Predecessor
  
Shares
    
Exercise Price
  
Outstanding at October 1, 2011
     26,966,815     $ 0.84  
Exercisable at October 1, 2011
     26,966,815       0.84  
                 
Issued
     —       —  
Exercised
     (1,865,907 )     0.32  
Cancelled
     (213,735 )     1.05  
                 
Outstanding at September 30, 2012
     24,887,173       0.87  
Exercisable at September 30, 2012
     24,887,173       0.87  
                 
Issued
     —       —  
Exercised
     —       —  
Cancelled
     (2,214,960 )     0.36  
Cancelled pursuant to Plan
     (22,672,213 )     0.92  
Outstanding and Exercisable at June 30, 2013
     —     $ —  
                 
Warrants - Successor
                
Outstanding at September 30, 2013
     —       —  
Exercisable at September 30, 2013
     —     $ —  
 
 
19. Segment information
 
The Company operates in two identifiable industry segments. The Company’s Instrumentation 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 in the production and contract manufacturing of biologic drugs and cell production for research institutions worldwide. The Vaccine Segment is focused on developing BiovaxID.
 
 
F-25
 
BIOVEST INTERNATIONAL, INC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
         
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. Segment information is as follows:

   
Successor
For the Period from July 1, 2013 through September 30, 2013
  
   
Instrumentation
    
Vaccine
    
Total
  
Revenues:
                  
Products
   $ 819,000     $ —     $ 819,000  
Services
     682,000       —       682,000  
Total Revenues
     1,501,000       —       1,501,000  
Costs and Expenses:
                        
Cost of revenue
     (898,000 )     —       (898,000 )
Research and development
     (17,000 )     (1,359,000 )     (1,376,000 )
Operating income (loss) including segment identifiable expenses
   $ 586,000     $ (1,359,000 )     (773,000 )
General and administrative expense
                     (630,000 )
Reorganization items
                     (69,000 )
Other expense, net
                     (5,000 )
Loss before income taxes
                     (1,477,000 )
Income taxes
                     —  
Net loss
                   $ (1,477,000 )

   
Predecessor
For the Period from October 1, 2012 through June 30, 2013
  
   
Instrumentation
    
Vaccine
    
Total
  
Revenues:
                  
Products
   $ 1,646,000     $ —     $ 1,646,000  
Services
     913,000       —       913,000  
Total Revenues
     2,559,000       —       2,559,000  
Costs and Expenses:
                        
Cost of revenue
     (1,947,000 )     —       (1,947,000 )
Research and development
     (271,000 )     (2,432,000 )     (2,703,000 )
Operating income (loss) including segment identifiable
expenses
   $ 341,000     $ (2,432,000 )     (2,091,000 )
General and administrative expense
                     (2,070,000 )
Reorganization items
                     9,259,000  
Other expense, net
                     (2,562,000 )
Income before income taxes
                     2,536,000  
Income taxes
                     —  
Net income
                   $ 2,536,000  
 
   
Predecessor
For the Year ended September 30, 2012
  
   
Instruments and
Disposables
    
Therapeutic
Vaccine
    
Total
  
Revenues:
                        
Products
   $ 2,947,000     $ 100,000     $ 3,047,000  
Services
     839,000       —       839,000  
Total Revenues
     3,786,000       100,000       3,886,000  
Costs and Expenses:
                        
Cost of revenue
     (2,770,000 )     —       (2,770,000 )
Research and development
     (157,000 )     (3,982,000 )     (4,139,000 )
Operating income (loss) including segment identifiable
expenses
   $ 859,000     $ (3,882,000 )     (3,023,000 )
General and administrative expense
                     (4,779,000 )
Reorganization items
                     199,000  
Other expense, net
                     (4,149,000 )
Loss before income taxes
                     (11,752,000 )
Income taxes
                     —  
Net loss
                   $ (11,752,000 )
 
 
F-26
 
BIOVEST INTERNATIONAL, INC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
    
20. Income taxes
 
The significant income components of the Company’s net deferred total assets are as follows:

   
Successor
    
Predecessor
  
   
September 30, 2013
    
September 30, 2012
  
Basis difference in fixed assets
   $ 190,000     $ 299,000  
Stock option compensation
     —       2,940,000  
Net operating loss carryover
     39,635,000       37,466,000  
Loss on derivative liabilities
     —       372,000  
Interest due on outstanding debt
     —       1,877,000  
Other
     233,000       268,000  
      40,173,000       43,222,000  
Less: valuation allowance
     (26,476,000 )     (43,222,00 )
      13,582,000       —  
Deferred Tax Liabilities:
                
In Process Research and Development
     (13,582,000 )     —  
Net Deferred Tax Asset
   $ —     $ —  

 
The components of the provision (benefit) for income taxes consist of the following:
 
   
Successor
    
Predecessor
  
   
September 30, 2013
    
September 30, 2012
  
Current Tax:
            
  Federal
   $ —     $ —  
  State
     —       —  
     Total Current
     —       —  
                 
Deferred tax:
                
  Deferred
     3,165,000       4,288,000  
  Decrease in valuation allowance
     (3,165,000 )     (4,288,000 )
     Total Deferred
     —       —  
Total provision (benefit) for income taxes
   $ —     $ —  
 
ASC Topic 740 requires that a deferred tax amount be reduced by a valuation allowance if, based on the weight of available evidence it is more likely than not (a likelihood of more than 50%) that some portion or all of the deferred tax assets will not be realized. The valuation allowance should be sufficient to reduce the deferred tax asset to the amount that is more likely than not to be realized. The Company considered both positive and negative evidence in determining the future realization of deferred tax assets.  While the Company has emerged from bankruptcy and substantially all of the Company’s outstanding debt obligations were converted to equity in accordance with the Plan, the Company (including both Predecessor and Successor) has had historical tax losses, and for the foreseeable future, expects additional tax losses.  As a result, the Company recorded a valuation allowance with respect to all the Company’s net deferred tax assets.
 
 
F-27
 
BIOVEST INTERNATIONAL, INC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
      
The Company has a federal net operating loss (“NOLs”) of approximately $104.4 million as of September 30, 2013. Under Sections 382 and 383 of the Internal Revenue Code, if an ownership occurred change occurs with respect to a “loss corporation”, as defined, there are annual limitations on the amount of the NOL and other deductions which are available to the Company. Section 382 contains rules which govern a loss corporation that was under the jurisdiction of the Bankruptcy Court immediately before an ownership change.  These rules do not impose an annual limitation on the amount of the NOLs that may be used to offset taxable income.  However, if another ownership change, as defined, occurs within a two-year period, the annual limitation at the date of the second change will be zero, except in certain circumstances in which a loss corporation realizes a built in gain within applicable periods, as defined.  Therefore, loss carry-forwards generated prior to that second ownership change would be severely limited.  As of this filing, the Company plans to avail itself of these rules and therefore there will be no additional limitations on the use of the current NOLs except that the prior restriction on the NOLs generated before June 17, 2003 will still be in effect.  In addition, in fiscal 2014, the Company will be required to reduce its NOLs by approximately $10 million for cancellation of debt income generated by the Plan and there will be an additional reduction for a portion of the NOs related to interest charged in certain periods prior to the ownership change caused by the Plan.  The portion of the NOLs incurred prior to June 17, 2003 ($3.4 million) is subject to this limitation.  As such, these NOLs are limited to approximately $0.2 million per year.  NOLs incurred after June 17, 2003 may also be subject to restriction.  Some of these losses may be subject to these limitations.

A reconciliation of the U.S. Federal statutory rate to the effective rate is as follows:
 
   
Successor
    
Predecessor
  
   
September 30, 2013
    
September 30, 2012
  
Federal statutory rate
     (34)%       (34)%  
State taxes
     (4)%       (4)%  
Permanent items
     33%       (6)%  
Effect of valuation allowance
     5%       44%  
Net actual effective rate
     —%       —%  
 
21. Employee benefit plan
 
The Biovest 401(k) and Profit Sharing Plan (the “Employee Benefit Plan”) was established effective July 1, 2004, as a defined contribution plan. The Employee Benefit Plan is subject to the provisions of the Employee Retirement Income Security Act of 1974 (ERISA). The Employee Benefit Plan includes eligible employees of Biovest and its affiliates including the Company. Employees of the Company who have completed one month of service are eligible to participate in the Employee Benefit Plan. Participants are permitted to make annual pre-tax salary reduction contributions of up to 50% of their compensation subject to certain limitations. Employer and participant contributions are invested at the direction of the participant in various money market funds or pooled/mutual funds. Employer matching and profit sharing contributions are based upon discretionary amounts and percentages authorized by the Board. For the years ended September 30, 2013 and 2012, the Company made no employer contributions to the Employee Benefit Plan.
 
22. Commitments and contingencies
 
Legal proceedings:
 
On March 6, 2013, as a result of the Company’s inability to pay approximately $30 million of senior secured debt which had become due on November 17, 2012, the Company 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 the First Amended Plan of Reorganization, (as amended and modified, the “Plan”), and entered an Order Confirming the Plan on June 28, 2013.  The 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;  both appeals were dismissed for lack of prosecution and mootness, as the Equity Committee had been dissolved as of the effectiveness of the Plan and no party had taken action to be substituted in to continue to pursue these appeals. This Chapter 11 case was concluded via Final Decree by the Bankruptcy Court entered on September 30, 2013. 
 
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 Biovest’s former parent corporation, Accentia, and several current and former directors and officers of Biovest and Accentia (the “Class Action”).  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 the 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. On December 4, 2013 the District Court entered an Order consolidating the Class Action cases and appointing a group of lead plaintiffs, beginning a 45-day period during which a Consolidated Complaint must be filed and served. Although the time to respond to this Class Action complaint is still underway, our officers and directors believe this litigation to be without merit, deny any wrongdoing or liability and intend to vigorously defend the alleged claims.
 
 
F-28
 
BIOVEST INTERNATIONAL, INC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
     
The Company is not 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 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.
 
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 July 30, 2021 (Note 8).   The Company has the right to extend the term of the lease.
 
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.  Future minimum lease payments related to this lease total $30 thousand and $7 thousand during the years ending September 30, 2014 and 2015, respectively.
 
The Company plans to continue to evaluate its requirements for facilities during fiscal 2014. 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.
 
Stanford University Agreement:
 
In September 2004, the Company entered into an agreement, and amended on September 6, 2012, (collectively, the “Stanford Agreement”) with Stanford University (“Stanford”).   The Stanford Agreement provides the Company with worldwide rights to use two proprietary hybridoma cell lines, which are used in the production of the BiovaxID through 2025.  Under the Stanford Agreement, the Company is obligated to pay an annual maintenance fee of $0.01 million. The Stanford Agreement also provides that the Company pays Stanford $0.1 million within one year following FDA approval of BiovaxID.  Following FDA approval until September 17, 2019, Stanford will receive a royalty of the greater of $50 per patient or 0.05% of BiovaxID net sales revenue, after September 18, 2019, Stanford will receive a royalty of the greater of $85 per patient or 0.10% of BiovaxID net sales revenue. This running royalty will be creditable against the yearly maintenance fee. The Stanford Agreement obligates the Company to, diligently develop, manufacture, market, and sell BiovaxID and to provide progress reports to Stanford regarding these activities. The Company can terminate the Stanford Agreement at any time upon 30 days prior written notice, and Stanford can terminate the Stanford Agreement upon a breach of the agreement by the Company that remains uncured for 30 days after written notice of the breach from Stanford.
 
Royalty Agreements:
 
The aggregate royalty obligation on BiovaxID (including the Stanford royalty above) and the Company’s other biologic products is 6.30% of BiovaxID net sales revenue.
 
Food and Drug Administration:
 
The FDA has extensive regulatory authority over biopharmaceutical products (drugs and biological products), manufacturing protocols and procedures and the facilities in which mammalian proteins will be manufactured. Any new bioproduct intended for use in humans (including, to a somewhat lesser degree, in vivo biodiagnostic products), is subject to rigorous testing requirements imposed by the FDA with respect to product efficacy and safety, possible toxicity and side effects. FDA approval for the use of new bioproducts (which can never be assured) requires several rounds of extensive preclinical testing and clinical investigations conducted by the sponsoring pharmaceutical company prior to sale and use of the product. At each stage, the approvals granted by the FDA include the manufacturing process utilized to produce the product. Accordingly, the Company’s cell culture systems used for the production of therapeutic or biotherapeutic products are subject to significant regulation by the FDA under the Federal Food, Drug and Cosmetic Act, as amended.
 
Product liability:
 
The contract production services for therapeutic products offered exposes an inherent risk of liability as the proteins or other substances manufactured, at the request and to the specifications of customers, could foreseeably cause adverse effects. The Company obtains agreements from contract production customers indemnifying and defending the Company from any potential liability arising from such risk. There can be no assurance, however, that the Company will be successful in obtaining such agreements in the future or that such indemnification agreements will adequately protect the Company against potential claims relating to such contract production services. The Company may also be exposed to potential product liability claims by users of its products. A successful partial or completely uninsured claim against the Company could have a material adverse effect on the Company’s operations.
 
 
F-29
 
BIOVEST INTERNATIONAL, INC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
       
23. Subsequent events
 
Further Advances under DIP Financing:
 
During the period from October 1, 2013 through November 12, 2013 the Company drew an additional $0.7 million on what was previously the DIP Financing, bringing the total amount advanced to $5.7 million as of November 12, 2013, representing the full amount committed under the financing.  As discussed in Note 4, pursuant to the Plan, the DIP Financing claims were deemed fully paid and any liens and security interests granted in favor of Corps Real and the LV Entities under the DIP Financing documents were released and terminated on the Effective Date. As a result of the Plan, the Senior Secured Lenders are no longer creditors of Biovest, but instead major shareholders of the Company, holding 93% of the outstanding common shares as of Effective Date.  The Company has not, nor will pay any further consideration to the Senior Secured Lenders as a result of these additional draws under the DIP Financing.
 
Secured Note Financing:
 
Effective on December 18, 2013, the Company entered into a Secured Note transaction with Pabeti, Inc., an entity controlled by the Company’s Chairman, Ronald E. Osman, Esq., Valens Offshore SPV II Corp, and Valens U.S. SPV I, LLC, entities controlled by a member of the Company’s Board of Directors, Eugene Grin.   Details of that Secured Note transaction are set forth in Note 5.
 
On December 3, 2013, the Company submitted its marketing authorization application (MAA) with the European Medicines Agency (EMA) for BiovaxID (submitted to EMA as “dasiprotimut-T”), its personalized cancer vaccine for treatment of Non-Hodgkin’s follicular lymphoma. The MAA submission begins the formal EMA review process intended to secure approval to market BiovaxID in the European Union and allow prescription and sale of BiovaxID for the treatment of Non-Hodgkin’s follicular lymphoma.

 Effective December 1, 2013, the Company hired Robert E. Farrell as Chief Financial Officer of the Company.  Before Mr. Farrell’s appointment as Chief Financial Officer of the Company, he served as Chief Financial Officer of Sanovas, Inc., a medical device company from 2012 to 2013.  Prior to that, Mr. Farrell was employed by Titan Pharmaceuticals, Inc., a diversified public biotechnology company, where he served as President and Chief Executive Officer from 2008 to 2010, and as Executive Vice President and Chief Financial Officer from 1996 to 2008.  From 1990 to 1996, Mr. Farrell served as Corporate Group Vice President and Chief Financial Officer of Fresenius USA.  From 1982 to 1990 Mr. Farrell was employed by Genstar Corporation, serving as Vice President of Marketing within Genstar’s Financial Services Division from 1982 to 1989, and as President of TXL Securities from 1987 to 1990.  Mr. Farrell also served as Associate General Counsel of Brae Corporation from 1979 to 1982 and as an Associate Attorney for Crane & Hawkins from 1977 to 1979  Mr. Farrell received a J.D. from University of California, Hastings College of Law and a Bachelor of Arts degree in Government and Economics with a Minor in Accounting from University of Notre Dame.  Mr. Farrell is a Member of the California Bar.  Mr. Farrell is 63 years of age.
 
 
F-30