10-Q 1 d351855d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended June 30, 2012

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             .

Commission file number 0-11480

 

 

BIOVEST INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   41-1412084

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification Number)

324 South Hyde Park Avenue, Suite 350

Tampa, Florida 33606

(Address of principal executive offices) (Zip Code)

(813) 864-2554

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨    Smaller reporting company   x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a Bankruptcy Plan confirmed by the Bankruptcy Court.    Yes  x    No  ¨

As of July 31, 2012, there were 145,986,284 shares of the registrant’s common stock outstanding.

 

 

 


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Forward-Looking Statements

Statements in this Quarterly Report on Form 10-Q that are not strictly historical in nature are forward-looking statements. These statements may include, but are not limited to, statements about: the timing of the commencement, enrollment, and completion of our clinical trials for our product candidates; the progress or success of our product development programs; the status of regulatory approvals for our product candidates; the timing of product launches; our ability to protect our intellectual property and operate our business without infringing upon the intellectual property rights of others; and our estimates for future performance, anticipated operating losses, future revenues, capital requirements, and our needs for additional financing. In some cases, you can identify forward-looking statements by terms such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would,” “goal,” or other variations of these terms (including their use in the negative) or by discussions of strategies, plans or intentions. These statements are only predictions based on current information and expectations and involve a number of risks and uncertainties. The underlying information and expectations are likely to change over time. Actual events or results may differ materially from those projected in the forward-looking statements due to various factors, including, but not limited to, those set forth in “ITEM 1A. RISK FACTORS” of our Annual Report on Form 10-K for the fiscal year ended September 30, 2011 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.

 

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INDEX

BIOVEST INTERNATIONAL, INC.

 

          Page  

PART I.

  

FINANCIAL INFORMATION

  

ITEM 1.

  

Financial Statements

     4   
  

Condensed Consolidated Balance Sheets as of June 30, 2012 (unaudited) and September 30, 2011

     4   
  

Condensed Consolidated Statements of Operations for the Three and Nine Months Ended June 30, 2012 and 2011 (unaudited)

     5   
  

Condensed Consolidated Statement of Stockholders’ Deficit for the Nine Months Ended June 30, 2012 (unaudited)

     6   
  

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2012 and 2011 (unaudited)

     7   
  

Notes to Condensed Consolidated Financial Statements

     8   

ITEM 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     24   

ITEM 3.

  

Quantitative and Qualitative Disclosures About Market Risk

     30   

ITEM 4.

  

Controls and Procedures

     31   

PART II.

  

OTHER INFORMATION

  

ITEM 1.

  

Legal Proceedings

     31   

ITEM 1A.

  

Risk Factors

     31   

ITEM 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

     32   

ITEM 3.

  

Defaults Upon Senior Securities

     32   

ITEM 4.

  

Mine Safety Disclosures

     32   

ITEM 5.

  

Other Information

     32   

ITEM 6.

  

Exhibits

     33   

Signatures

     34   

 

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PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

BIOVEST INTERNATIONAL, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

     June 30,  2012
(Unaudited)
    September 30,
2011
 
ASSETS     

Current assets:

    

Cash

   $ 47,000      $ 201,000   

Accounts receivable, net of $8,000 allowance for doubtful accounts at June 30, 2012 and September 30, 2011

     359,000        395,000   

Costs and estimated earnings in excess of billings on uncompleted contracts

     74,000        —     

Inventories

     454,000        532,000   

Prepaid expenses and other current assets

     168,000        476,000   
  

 

 

   

 

 

 

Total current assets

     1,102,000        1,604,000   

Property and equipment, net

     975,000        771,000   

Patents and trademarks, net

     209,000        231,000   

Goodwill

     2,131,000        2,131,000   

Other assets

     619,000        681,000   
  

 

 

   

 

 

 

Total assets

   $ 5,036,000      $ 5,418,000   
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ DEFICIT     

Liabilities not subject to compromise:

    

Current liabilities:

    

Accounts payable

   $ 576,000      $ 371,000   

Accrued liabilities

     3,616,000        178,000   

Customer deposits

     2,000        116,000   

Derivative liabilities

     1,820,000        2,117,000   

Notes payable, related party

     4,321,000        —     

Current maturities of long term debt

     24,289,000        1,063,000   
  

 

 

   

 

 

 

Total current liabilities

     34,624,000        3,845,000   

Long term debt, less current maturities

     7,316,000        30,849,000   

Long term debt, related party

     —          496,000   

Accrued interest

     941,000        2,330,000   

Other

     123,000        —     
  

 

 

   

 

 

 

Total liabilities not subject to compromise

     43,004,000        37,520,000   

Liabilities subject to compromise (Note 10)

     —          444,000   
  

 

 

   

 

 

 

Total liabilities

     43,004,000        37,964,000   

Commitments and contingencies (Note 14)

     —          —     

Stockholders’ deficit:

    

Preferred stock, $0.01 par value, 50,000,000 shares authorized; no shares issued and outstanding

     —          —     

Common stock, $0.01 par value, 500,000,000 shares authorized; 145,966,322 and 143,966,460 issued and outstanding at June 30, 2012 and September 30, 2011, respectively

     1,460,000        1,440,000   

Additional paid-in capital

     130,871,000        127,149,000   

Accumulated deficit

     (170,299,000     (161,135,000
  

 

 

   

 

 

 

Total stockholders’ deficit

     (37,968,000     (32,546,000
  

 

 

   

 

 

 

Total liabilities and stockholders’ deficit

   $ 5,036,000      $ 5,418,000   
  

 

 

   

 

 

 

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

 

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BIOVEST INTERNATIONAL, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

     Three Months Ended
June 30,
    Nine Months Ended
June 30,
 
     2012     2011     2012     2011  

Revenue:

        

Products

   $ 712,000      $ 660,000      $ 2,550,000      $ 1,811,000   

Services

     192,000        407,000        635,000        1,069,000   

Qualified Therapeutic Discovery Project Grant

     —          —          —          244,000   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     904,000        1,067,000        3,185,000        3,124,000   

Operating costs and expenses:

        

Cost of revenue:

        

Products

     476,000        387,000        1,464,000        1,110,000   

Services

     252,000        243,000        698,000        729,000   

Research and development expense

     919,000        546,000        3,059,000        1,144,000   

General and administrative expense

     738,000        1,852,000        3,937,000        9,521,000   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating costs and expenses

     2,385,000        3,028,000        9,158,000        12,504,000   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (1,481,000     (1,961,000     (5,973,000     (9,380,000
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense):

        

Interest expense, net

     (1,371,000     (1,039,000     (3,568,000     (3,743,000

Gain (loss) on derivative liabilities

     1,082,000        703,000        190,000        (672,000

Other (expense) income, net

     (2,000     (3,000     (10,000     18,000   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense)

     (291,000     (339,000     (3,388,000     (4,397,000

Loss before reorganization items and income taxes

     (1,772,000     (2,300,000     (9,361,000     (13,777,000

Reorganization items:

        

Gain on reorganization

     —          476,000        222,000        608,000   

Professional fees

     —          —          (25,000     (253,000
  

 

 

   

 

 

   

 

 

   

 

 

 

Total reorganization items

     —          476,000        197,000        355,000   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (1,772,000   $ (1,824,000   $ (9,164,000   $ (13,422,000
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss per common share:

        

Basic and diluted

   $ (0.01   $ (0.01   $ (0.06   $ (0.10

Weighted average shares outstanding:

        

Basic and diluted

     145,669,967        142,744,667        144,902,554        133,536,894   

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

 

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BIOVEST INTERNATIONAL, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT

NINE MONTHS ENDED JUNE 30, 2012

(Unaudited)

 

     Common Stock      Additional
Paid-
in Capital
     Accumulated
Deficit
    Total  
     Shares      Amount          

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

     165,602         2,000         75,000         —          77,000   

Shares issued pursuant to plan of reorganization

     1,053,077         10,000         942,000         —          952,000   

Employee share-based compensation

     —           —           2,532,000         —          2,532,000   

Shares issued upon exercise of warrants

     771,183         8,000         172,000           180,000   

Shares issued upon exercise of employee options

     10,000         —           1,000         —          1,000   

Net Loss

     —           —           —           (9,164,000     (9,164,000
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Balances at June 30, 2012

     145,966,322       $ 1,460,000       $ 130,871,000       $ (170,299,000   $ (37,968,000
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

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

 

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BIOVEST INTERNATIONAL, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

     Nine Months Ended June 30,  
     2012     2011  

Cash flows from operating activities:

    

Net loss

   $ (9,164,000   $ (13,422,000

Adjustments to reconcile net loss to net cash flows from operating activities before reorganization items:

    

Depreciation

     96,000        42,000   

Amortization of patents

     22,000        22,000   

Employee share-based compensation

     2,532,000        7,426,000   

Amortization of discount on notes payable

     1,295,000        380,000   

Amortization of deferred loan costs

     89,000        1,056,000   

Loss on common shares issued for interest on outstanding debt

     12,000        429,000   

(Gain) loss on derivative liabilities

     (190,000     673,000   

Changes in cash resulting from changes in:

    

Operating assets

     80,000        (148,000

Operating liabilities

     2,184,000        1,276,000   
  

 

 

   

 

 

 

Net cash flows from operating activities before reorganization items

     (3,044,000     (2,266,000
  

 

 

   

 

 

 

Reorganization items:

    

Gain on reorganization plan

     (222,000     (607,000

Change in accrued professional fees

     —          —     
  

 

 

   

 

 

 

Net change in cash flows from reorganization items

     (222,000     (607,000
  

 

 

   

 

 

 

Net cash flows from operating activities

     (3,266,000     (2,873,000
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchase of property, plant and equipment

     (300,000     (648,000
  

 

 

   

 

 

 

Net cash flows from investing activities

     (300,000     (648,000

Cash flows from financing activities:

    

Repayment of notes payable and long-term debt

     (21,000     (2,026,000

Advances from (to) related party

     3,033,000        (598,000

Proceeds from long-term debt

     —          7,353,000   

Proceeds from exercise of stock options and warrants

     181,000        6,000   

Proceeds from equipment financing

     219,000        —     

Payment of deferred financing costs

     —          (755,000
  

 

 

   

 

 

 

Net cash flows from financing activities

     3,412,000        3,980,000   
  

 

 

   

 

 

 

Net change in cash

     (154,000     459,000   

Cash at beginning of period

     201,000        206,000   
  

 

 

   

 

 

 

Cash at end of period

   $ 47,000      $ 665,000   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

Non-cash financing and investing transactions:

    

Issuance of warrants (Note 8)

   $ —        $ 7,376,000   

Issuance of shares for payment of principal and interest on outstanding debt (Note 8)

   $ 77,000      $ 6,186,000   

Issuance of shares to settle pre-petition claims (Note 8)

   $ 952,000      $ 53,475,000   

Increase in March 2014 Obligations (Note 8)

   $ 63,000      $ —     

Cash paid for interest during period

   $ 161,000      $ 134,000   

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

 

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BIOVEST INTERNATIONAL, INC AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED JUNE 30, 2012 AND 2011

1. Description of the Company:

The Company’s business consists of three primary business segments: development of BiovaxID for B-cell blood cancers; the manufacture and sale of AutovaxID® and other instruments and consumables; and commercial production of cell culture products and related services.

As a result of Biovest International, Inc.’s (the “Company” or “Biovest”) collaboration with the National Cancer Institute (“NCI”), Biovest is 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 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 MCL patients. BiovaxID has demonstrated statistically significant Phase 3 clinical benefit by prolonging disease-free survival in FL patients treated with BiovaxID. The Company believes that these clinical trials demonstrate the safety and efficacy of BiovaxID.

To support the Company’s planned commercialization of BiovaxID, the Company developed an automated cell culture instrument called AutovaxID. The Company believes that AutovaxID has significant potential application in the production of a broad range of patient-specific medicines, such as BiovaxID, and potentially for various vaccines, including vaccines for influenza and other contagious diseases. The Company is collaborating with the U.S. Department of Defense (“DoD”) to further develop AutovaxID and to explore potential production of additional vaccines, including vaccines for viral indications such as influenza. AutovaxID is automated and computer controlled to improve cell production reliability and to maximize cell production. AutovaxID uses a disposable production unit which provides for robust and dependable manufacturing while complying with the industry current good manufacturing practices (“cGMP”) standards. AutovaxID has a small footprint and supports scalable production.

The Company also manufactures instruments and disposables used in the hollow-fiber production of cell culture products. Biovest’s hollow-fiber cell culture products and instruments are used by biopharmaceutical and biotechnology companies, medical schools, universities, research facilities, hospitals and public and private laboratories. The Company also produces mammalian and insect cells, monoclonal antibodies, recombinant and secreted proteins and other cell culture products using The Company’s unique capability, expertise and proprietary advancements in the cell production process known as hollow fiber perfusion.

The Company successfully completed reorganization and formally exited reorganization under Chapter 11 of the United States Bankruptcy Code (“Chapter 11”) as a fully restructured company in 2010. Through the provisions of the Company’s bankruptcy plan (as amended) (the “Plan”), effective on November 17, 2010, the Company was able to restructure the majority of its debt into a combination of long-term notes and equity. The Company’s Plan has been substantially consummated under Section 1101(2) of the Bankruptcy Code and the administration of the Company’s Chapter 11 estate has been completed. On March 19, 2012, the U.S. Bankruptcy Court for the Middle District of Florida, Tampa Division (the “Bankruptcy Court”) entered a Final Decree closing the Company’s Chapter 11 proceedings.

As of July 31, 2012, the Company’s parent, Accentia Biopharmaceuticals, Inc. (“Accentia”) owned approximately 59% of the Company’s outstanding common stock.

2. Significant accounting policies:

Basis of presentation:

The accompanying unaudited condensed consolidated financial statements have been derived from unaudited interim financial information prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) for quarterly financial statements. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”) have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information presented not misleading. The interim financial statements of the Company, in the opinion of management, include all normal and recurring adjustments necessary for a fair presentation of results as of the dates and for the periods covered by the interim financial statements.

 

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BIOVEST INTERNATIONAL, INC AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED JUNE 30, 2012 AND 2011

 

2. Significant accounting policies (continued):

 

Operating results for the three and nine months ended June 30, 2012, are not necessarily indicative of the results that may be expected for the entire fiscal year. The accompanying condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern. These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2011. For further information, refer to the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2011.

Principles of consolidation:

The unaudited condensed consolidated financial statements include Biovest Europe, Limited, a wholly-owned subsidiary of the Company. Biovest Europe, Limited was incorporated in the United Kingdom on June 29, 2011.

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 beginning in the quarter ended December 31, 2008. The balance sheet must distinguish prepetition liabilities subject to compromise from both those prepetition liabilities that are not subject to compromise and from post-petition liabilities. Liabilities that may be affected by a plan of reorganization must be reported at the amounts expected to be allowed by the Bankruptcy Court, even if they may be settled for lesser amounts. In addition, cash provided by reorganization items must be disclosed separately in the statement of cash flows. The Company became subject to ASC Topic 852 effective on November 10, 2008, emerged from Chapter 11 protection on November 17, 2010 and has segregated those items as outlined above for all reporting periods between such dates.

Pursuant to the Plan, holders of existing voting shares of the Company’s common stock immediately before Plan confirmation received more than 50% of the voting shares of the emerging entity, thus the Company did not adopt fresh-start reporting upon emergence from Chapter 11. The Company instead followed the guidance as described in 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 was reported as an extinguishment of debt and classified in accordance with ASC Topic 225.

Use of estimates in the preparation of financial statements:

The preparation of condensed consolidated financial statements in conformity with GAAP require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures about contingent assets and liabilities at the dates of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

Inventories:

Inventories are recorded at the lower of cost or market with cost determined using the first-in, first-out (“FIFO”) method.

Property and equipment:

Property and equipment are recorded at cost. Depreciation for property and equipment is computed using the straight-line method over the estimated useful lives of three to seven years. Leasehold improvements are amortized over the shorter of their economic lives or the lease term.

 

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BIOVEST INTERNATIONAL, INC AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED JUNE 30, 2012 AND 2011

 

2. Significant accounting policies (continued):

 

Goodwill:

Goodwill relates to the Company’s cell culture and instrument manufacturing segments located in Minneapolis (Coon Rapids), Minnesota, which continue to be profitable segments of the Company. Goodwill is tested for impairment annually or whenever there is an impairment indication. The Company has not recorded any impairment losses as a result of these evaluations.

Patents and trademarks:

Costs incurred in relation to patent applications are capitalized as deferred patent costs. If and when a patent is issued, the related patent application costs are transferred to the patent account and amortized over the estimated useful life of the patent. If it is determined that a patent will not be issued, the related patent application costs are charged to expense at the time such determination is made. Patent and trademark costs are recorded at historical cost. Patent and trademark costs are being amortized using the straight-line method over their estimated useful lives of six years for patents and twenty years for trademarks.

Deferred financing costs:

Deferred financing costs include fees paid in cash or through the issuance of warrants in conjunction with obtaining notes payable and long-term debt and are amortized over the term of the related financial instrument.

Carrying value of long-lived assets:

The carrying values of the Company’s long-lived assets are evaluated whenever events or changes in circumstances indicate that the carrying amount might not be recoverable. This assessment may be based upon management’s experience in the industry, historical and projected sales, current backlog, and expectations of undiscounted future cash flows. The Company reviews the valuation and amortization of those long-lived assets to determine possible impairment by comparing the carrying value to projected undiscounted future cash flows of the related assets. During the quarter ended June 30, 2012, 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:

Financial instruments, as defined in ASC Topic 825, consist of cash, evidence of ownership in an entity and contracts that both (i) impose on one entity a contractual obligation to deliver cash or another financial instrument to a second entity, or to exchange other financial instruments on potentially unfavorable terms with the second entity and (ii) conveys to that second entity a contractual right (a) to receive cash or another financial instrument from the first entity or (b) to exchange other financial instruments on potentially favorable terms with the first entity. Accordingly, the Company’s condensed consolidated financial instruments consist of cash, accounts receivable, accounts payable, accrued liabilities, notes payable, long-term debt, and derivative financial instruments.

The Company carries cash, accounts receivable, accounts payable, and accrued liabilities at historical costs. The respective estimated fair values of these assets and liabilities approximate carrying values due to their current nature. The Company also carries notes payable and long-term debt at historical cost less discounts from warrants issued as loan financing costs; however, fair values of these debt instruments are estimated for disclosure purposes based upon the present value of the estimated cash flows at market interest rates applicable to similar instruments.

Fair value of financial assets and liabilities:

The Company measures the fair value of financial assets and liabilities in accordance with GAAP which defines fair value, establishes a framework for measuring fair value, and requires certain disclosures about fair value measurements.

GAAP defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. GAAP also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. GAAP describes three levels of inputs that may be used to measure fair value:

Level 1 – quoted prices in active markets for identical assets or liabilities

Level 2 – quoted prices for similar assets and liabilities in active markets or inputs that are observable

Level 3 – inputs that are unobservable (for example cash flow modeling inputs based on assumptions)

 

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BIOVEST INTERNATIONAL, INC AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED JUNE 30, 2012 AND 2011

 

2. Significant accounting policies (continued):

 

The Company generally does not use derivative financial instruments to hedge exposures to cash-flow, market or foreign-currency risks. However, the Company and its consolidated subsidiary 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.

The Company uses the Black-Scholes option valuation technique because it embodies all of the requisite assumptions (including trading volatility, estimated terms and risk free rates) necessary to measure the fair value of these instruments. Estimating fair values of derivative financial instruments requires the development of significant and subjective inputs that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, option-based techniques are highly volatile and sensitive to changes in the Company’s trading market price and the trading market price of various peer companies, which have historically had high volatility. Since derivative financial instruments are initially and subsequently carried at fair value, the Company’s income will reflect the volatility in these estimate and assumption changes.

The Company reports its derivative liabilities at fair value on the accompanying condensed consolidated balance sheets as of June 30, 2012 and September 30, 2011 (Note 9).

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.

Grant revenue:

Grant revenue is the result of the Company being awarded the Qualifying Therapeutic Discovery Program Grant from the federal government. In accordance with the terms of the Qualifying Therapeutic Discovery Program Grant, grant revenue is recognized up to 50% of the reimbursable expenses incurred during 2011.

Research and development expenses:

The Company expenses research and development expenditures as incurred. Such costs include payroll and related costs, facility costs, consulting and professional fees, equipment rental and maintenance, lab supplies, and certain other indirect cost allocations that are directly related to research and development activities.

Shipping and handling costs:

Shipping and handling costs are included as a component of cost of revenue in the accompanying condensed consolidated statements of operations.

 

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BIOVEST INTERNATIONAL, INC AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED JUNE 30, 2012 AND 2011

 

2. Significant accounting policies (continued):

 

Stock-based compensation:

The Company has accounted for stock-based compensation under the provisions of ASC Topic 718—Stock Compensation, 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 (warrants and options). The fair value of each 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 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.

Recent accounting pronouncements:

In September 2011, the FASB issued Accounting Standards Update (“ASU”) 2011-08, Intangibles—Goodwill and Other (Topic 350), Testing Goodwill for Impairment (“ASU 2011-08”), to allow entities to use a qualitative approach to test goodwill for impairment. ASU 2011-08 permits an entity to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If it is concluded that this is the case, it is necessary to perform the currently prescribed two-step goodwill impairment test. Otherwise, the two-step goodwill impairment test is not required. ASU 2011-08 is effective for the Company beginning October 1, 2012, and earlier adoption is permitted. The Company does not expect the adoption to have a material impact on its condensed consolidated financial statements.

In July 2012, the FASB issued ASU 2012-02—Testing Indefinite-Lived Intangible Assets for Impairment (“ASU 2012-02”) in order to reduce the cost and complexity of performing an impairment test for indefinite-lived intangible assets by simplifying how an entity tests those assets for impairment and to improve consistency in impairment testing guidance. The new guidance allows an entity the option to make a qualitative assessment about the likelihood that an indefinite-lived intangible asset is impaired to determine whether it should perform a quantitative impairment test. ASU 2012-02 becomes effective for the Company on October 1, 2012, and earlier adoption is permitted. The Company does not expect the adoption of the guidance to have a material impact on its condensed consolidated financial statements.

3. Liquidity:

Cash and cash equivalents at June 30, 2012 were approximately $0.05 million. The Company’s independent registered public accounting firm’s report included a “going concern” qualification on the financial statements for the year ended September 30, 2011, citing significant losses and working capital deficits at that date, which raised substantial doubt about the Company’s ability to continue as a going concern.

Outstanding Indebtedness:

 

     Outstanding
Balance
as of
June 30, 2012
(in 000’s)
     Interest
Rate
(per annum)
    Maturity
Date
   Total Aggregate
Number of
Warrants Issued
     Exercise
Price
     Expiration
Date
 

Exit Financing

   $ 1,266         7.0   11/17/2012      8,733,096       $ 1.20         11/17/2017   

Corps Real Note

   $ 2,292         16.0   11/17/2012      —           —           —     

Laurus/Valens Term A Notes

   $ 23,467         8.0   11/17/2012      —           —           —     

Laurus/Valens Term B Notes

   $ 4,160         8.0   11/17/2013      —           —           —     

March 2014 Obligations

   $ 2,833         5.0   03/17/2014      —           —           —     

Accentia Promissory Notes

   $ 2,967         3.3   On demand      —           —           —     

August 2012 Notes

   $ 253         7.0   08/17/2012      —           —           —     

Coons Rapids Economic Development Authority Loans

   $ 338         4.1   05/01/2021      —           —           —     

See Notes 7 and 8 below for more information on the outstanding debt listed in the table above.

 

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BIOVEST INTERNATIONAL, INC AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED JUNE 30, 2012 AND 2011

 

3. Liquidity (continued):

 

Additional expected financing activity:

It is the Company’s intention to meet its cash requirements through proceeds from its cell culture and instrument manufacturing activities, the use of cash on hand, trade vendor credit, short-term borrowings, debt and equity financings, and strategic transactions such as collaborations and licensing. The Company’s ability to continue present operations, to continue its detailed analyses of BiovaxID’s clinical trial results, to meet the Company’s debt obligations as they mature (discussed below), and to pursue ongoing development and commercialization of BiovaxID and AutovaxID® including potentially seeking marketing approval, is dependent upon the Company’s ability to obtain significant external funding in the immediate 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 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 the Company’s products. The Company is currently in the process of exploring these various financing alternatives. There can be no assurance that the Company will be successful in securing such financing at acceptable terms, if at all. 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 consider additional strategic financing options, including sales of assets, or 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.

4. Accounts receivable, concentrations of credit risk and major customers:

Financial instruments that subject the Company to concentrations of credit risk include cash and accounts receivable.

Accounts receivable are customer obligations due under normal trade terms for products sold to distributors and retail customers. The Company performs ongoing credit evaluations of customers’ financial condition, but does not require collateral or any other security to support amounts due. Management reviews accounts receivable on a monthly basis to determine if any receivables will potentially be uncollectible. The allowance for doubtful accounts contains a specific accrual for accounts receivable balances that are considered potential bad debts and a general accrual for remaining possible bad debts. Any accounts receivable balances that are determined to be uncollectible are written off to the allowance. Based on the information available, management believes that the allowance for doubtful accounts as of June 30, 2012 is adequate. However, actual write-offs might exceed the recorded allowance.

Four customers accounted for 67% of revenues for the three months ended June 30, 2012, while three customers accounted for 45% of revenues for the same period in the previous fiscal year. For the nine months ended June 30, 2012, one customer accounted for 21% of revenues and three customers accounted for 42% of revenues, respectively. Three customers accounted for 64% of trade accounts receivable as of June 30, 2012, compared to five customers that accounted for 69% of trade accounts receivable as of September 30, 2011.

A significant amount of the Company’s revenue has been derived from export sales. The Company’s export sales were 39% and 21% of total revenues for the nine months ended June 30, 2012 and 2011, respectively, and 48% and 18% of total revenues for the three months ended June 30, 2012 and 2011, respectively. For the nine months ended June 30, 2012 and 2011, sales to customers in the United Kingdom accounted for 21% and 16% of total revenue, while sales to customers in Canada accounted for 17% of total revenue for the nine months ended June 30, 2012. Sales to Canadian customers were minimal for the nine months ended June 30, 2011.

5. Inventories:

Inventories consist of the following:

 

     June 30, 2012
(Unaudited)
     September 30,
2011
 

Raw materials

   $ 347,000       $ 462,000   

Work-in-process

     87,000         —     

Finished goods

     20,000         70,000   
  

 

 

    

 

 

 
   $ 454,000       $ 532,000   
  

 

 

    

 

 

 

 

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BIOVEST INTERNATIONAL, INC AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED JUNE 30, 2012 AND 2011

 

6. Minnesota facility lease:

On December 2, 2010, the Company entered into a Lease Agreement (the “Lease”) with JMS Holdings, LLC (the “Landlord”) for continued use and occupancy of the Company’s existing facility in Minneapolis (Coon Rapids), Minnesota. The Lease contains provisions regarding a strategic collaboration whereby the Landlord agreed to construct certain capital improvements to the leased premises to allow the Company to perform GMP manufacturing of biologic products in the Minneapolis (Coon Rapids) facility, including the manufacture of BiovaxID. As of September 30, 2011, the $1.5 million in improvements were completed. These improvements 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), 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 (ten years) of the Lease. In connection with the Lease, the Company issued to the Landlord a warrant to purchase up to one million shares of the Company’s common stock. As a result of these transactions, the Company recorded an asset for the fair value of the warrant issued to the Landlord (approximately $0.825 million), and leasehold improvements in the amount of $0.55 million. These costs are being amortized over the ten year term of the lease. The respective carrying values of these assets are $0.702 million and $0.491 million, as of June 30, 2012.

7. Related party transactions:

Related party debt consists of the following:

 

     June 30, 2012
(Unaudited)
    September 30,
2011
 

Accentia promissory demand notes

   $ 2,967,000      $ —     

Corps Real Note

     2,292,000        2,292,000   

Unamortized discount on Corps Real Note

     (938,000     (1,796,000
  

 

 

   

 

 

 
   $ 4,321,000      $ 496,000   
  

 

 

   

 

 

 

Corps Real Note:

On November 17, 2010, the Company issued a secured convertible promissory note (the “Corps Real Note”) in the principal amount of $2,291,560 to Corps Real, LLC (“Corps Real”). Corps Real and the majority owner of Corps Real are both managed by Ronald E. Osman, a shareholder and a director of the Company. Under the terms of the Corp Real Note, Corps Real may elect to invest an additional $0.9 million. The Corps Real Note matures on November 17, 2012 and all principal and accrued but unpaid interest is due on such date. Interest accrues and is payable on the outstanding principal amount of the Corps Real Note at a fixed rate of 16% per annum, with interest in the amount of 10% to be paid monthly and interest in the amount of 6% to accrue and be paid on November 17, 2012. On June 6, 2012, the Corps Real Note was amended to suspend the Company’s monthly interest payments for a three-month period beginning June 1, 2012. The interest, which totals approximately $0.06 million, will be deferred during the three-month period and will instead become due and payable on November 17, 2012.

The Company may prepay the Corps Real Note in full, without penalty, at any time, and Corps Real may convert all or a portion of the outstanding balance of the Corps Real Note into shares of the Company’s common stock at a conversion rate of $0.75 per share. The Corps Real Note is secured by a first priority lien on all of the Company’s assets. The principal balance on the Corps Real Note, at June 30, 2012, was approximately $2.3 million.

The Corps Real Note was evaluated under the provisions of ASC 470-20, and was recorded at an initial discount of $2.1 million charged to additional paid-in capital representing the intrinsic value of the beneficial conversion feature associated with the Corps Real Note. The discount has been and will be amortized to interest expense using the effective interest method over the two year term of the Corps Real Note.

 

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BIOVEST INTERNATIONAL, INC AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED JUNE 30, 2012 AND 2011

 

7. Related party transactions (continued):

 

Accentia promissory demand note:

At June 30, 2012, Accentia had advanced approximately $3.0 million to the Company in the form of cash loans, interest, payments directly to third parties on the Company’s behalf and allocated inter-company expenses. The note is due upon demand and accrues interest at the prime rate (3.25% at June 30, 2012).

8. Long-term debt:

Long-term debt consists of the following:

 

     June 30,  2012
(Unaudited)
    September 30,
2011
 

March 2014 Obligations

   $ 2,832,000      $ 2,770,000   

August 2012 Notes

     253,000        1,049,000   

Exit Financing ($1.266 million principal less $0.711 million discount)

     555,000        118,000   

Coon Rapids Economic Development Authority Loans

     338,000        348,000   

Laurus/Valens Term A Notes

     23,467,000        23,467,000   

Laurus/Valens Term B Notes

     4,160,000        4,160,000   
  

 

 

   

 

 

 
     31,605,000        31,912,000   

Less: current maturities

     (24,289,000     (1,063,000
  

 

 

   

 

 

 
   $ 7,316,000      $ 30,849,000   
  

 

 

   

 

 

 

Future maturities of long-term debt are as follows:

 

Years ending June 30,

      

2013

   $ 25,000,000   

2014

     7,007,000   

2015

     15,000   

2016

     15,000   

2017 and thereafter

     278,000   
  

 

 

 

Total maturities

     32,315,000   

Less unamortized discount

     (710,000
  

 

 

 
   $ 31,605,000   
  

 

 

 

March 2014 Obligations:

On November 17, 2010, the Company became obligated to certain of its unsecured creditors in the aggregate principal amount of approximately $2.7 million in cash together with interest at 5% per annum to be paid in one installment on March 27, 2014 (the “March 2014 Obligations”). The aggregate principal balance of the March 2014 Obligations, increased by approximately $0.12 million due to the allowance of a previously unfiled unsecured claim, as well as an amendment to the amount owed on a separate, unsecured claim. As the allowed balance on March 2014 Obligations differed from the previously recorded estimate of amounts potentially due under the March 2014 Obligations, the Company recorded a $0.07 million gain on reorganization for the nine months ended June 30, 2012.

 

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BIOVEST INTERNATIONAL, INC AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED JUNE 30, 2012 AND 2011

 

8. Long-term debt (continued):

 

August 2012 Notes:

On November 17, 2010, the Company became obligated to certain of its unsecured creditors in the aggregate principal amount of approximately $2.0 million. Each such unsecured creditor received an amount equal to 100% of such unsecured creditors’ allowed unsecured claim (including post-petition interest under the Plan at the rate of 3% per annum) in a combination of debt and equity resulting in the issuance of a total of $1.8 million in new notes (the “August 2012 Notes”), as well as 0.2 million shares of the Company’s common stock, using an effective conversion rate equal to $1.66 per share. The August 2012 Notes mature on August 17, 2012 and accrue interest at 7% per annum. The August 2012 Notes are convertible into shares of the Company’s common stock in seven quarterly installments beginning on February 17, 2011. The following are the material terms and conditions of the August 2012 Notes:

 

   

provided that the average of the volume weighted average prices for the Company’s common stock for the ten consecutive trading days immediately preceding each quarterly conversion date (“Ten Day VWAP”) is at least $1.00 per share, one-eighth of the August 2012 Notes plus accrued interest will be automatically converted into shares of the Company’s common stock at a conversion rate equal to the Ten Day VWAP;

 

   

should the Ten Day VWAP be less than $1.00 per share, the August 2012 Notes will not automatically convert into shares of the Company’s common stock, but will instead become payable on August 17, 2012, unless the August 2012 Note holder elects to convert one-eighth of its August 2012 Notes plus accrued interest into shares of the Company’s common stock at a conversion rate equal to $1.00 per share;

 

   

any principal and unpaid interest outstanding on August 17, 2012, will be due and payable in full, at the Company’s election in either cash or in shares of the Company’s common stock at a conversion rate equal to the Ten Day VWAP;

 

   

if, at any time prior to August 17, 2012, the Ten Day VWAP is at least $1.50 per share, an August 2012 Note holder, at its option, may convert any or all of its August 2012 Note plus the then accrued and unpaid interest into shares of the Company’s common stock at a conversion rate equal to $1.66 per share; and

 

   

if, at any time prior to August 17, 2012, the Ten Day VWAP is at least $1.88 per share for thirty consecutive trading days, the Company, at its option, may require the conversion of the then aggregate outstanding balance of the August 2012 Notes plus any accrued and unpaid interest at a conversion rate equal to $1.66 per share.

At each quarterly conversion date, from February 17, 2011 and through May 17, 2012 with the Ten Day VWAP at less than $1.00 per share, the holders of the August 2012 Notes elected to convert one-eighth of the August 2012 Notes plus accrued interest into shares of the Company’s common stock at a conversion rate equal to $1.00 per share, resulting in the aggregate issuance of 1,748,472 shares of the Company’s common stock. The aggregate principal balance of the August 2012 Notes, at June 30, 2012, was approximately $0.25 million.

Exit Financing:

On October 19, 2010, the Company completed a financing (the “Exit Financing”) as part of its Plan. The Company issued (a) secured convertible notes in the original aggregate principal amount of $7.0 million (the “Initial Notes”) and (b) two separate types of warrants to purchase shares of the Company’s common stock to the holders of the Exchange Notes, Series A Warrants (the “Initial Series A Warrants”) and Series B Warrants (the “Initial Series B Warrants”).

On November 17, 2010 and pursuant to the Plan: (a) the Initial Notes were exchanged for new unsecured convertible notes (the “Exchange Notes”) in the original aggregate principal amount of $7.04 million, (b) the Initial Series A Warrants were exchanged for new warrants to purchase a like number of shares of Company common stock (the “Series A Exchange Warrants”), and (c) the Initial Series B Warrants were exchanged for new warrants to purchase a like number of shares of the Company’s common stock (the “Series B Exchange Warrants”). On December 22, 2010, the Series B Exchange Warrants were exercised on a cashless basis and an aggregate of 1,075,622 shares of the Company’s common stock were issued to the Series B Exchange Warrant holders.

 

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BIOVEST INTERNATIONAL, INC AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED JUNE 30, 2012 AND 2011

 

8. Long-term debt (continued):

 

Exit Financing (continued):

 

The following are the material terms and conditions of the Exchange Notes:

 

   

they mature on November 17, 2012, and all principal and accrued but unpaid interest is due on such date;

 

   

interest accrues monthly and is payable on the outstanding principal amount of the Exchange Notes at a fixed rate of 7% per annum (with a 15% per annum default rate), and is payable monthly in arrears;

 

   

the Company may elect to pay monthly interest in either cash or subject to certain specified conditions, in shares of the Company’s common stock;

 

   

the Company may from time to time, subject to certain conditions, redeem all or any portion of the outstanding principal amount of the Exchange Notes for an amount, in cash, equal to 110% of the sum of the principal amount being redeemed and certain make-whole interest payments;

 

   

the holders of the Exchange Notes may convert all or a portion of the outstanding balance of the Exchange Notes into shares of the Company’s common stock at a conversion rate of $0.91 per share, subject to anti-dilution adjustments in certain circumstances; and

 

   

in the event that the average of the daily volume weighted average price of the Company’s common stock is at least 150% of the then-effective conversion price for any ten consecutive trading days, the Company, at its option, may upon written notice to the Buyers, convert the then outstanding balance of the Exchange Notes into shares of the Company’s common stock at the conversion price then in effect under the Exchange Notes.

The following are the material terms and conditions of the Series A Exchange Warrants:

 

   

the holders of the Series A Exchange Warrants have a right to purchase an aggregate of 8,733,096 shares of the Company’s common stock;

 

   

have an exercise price of $1.20 per share and expire on November 17, 2017; and

 

   

if the Company issues or sells any options or convertible securities after the issuance of the Series A Exchange Warrants that are convertible into or exchangeable or exercisable for shares of common stock at a price which varies or may vary with the market price of the shares of common stock, including by way of one or more reset(s) to a fixed price, the Series A Exchange Warrants holders have the right to substitute any of the applicable variable price formulations for the exercise price upon exercise of the warrants held.

As of June 30, 2012, a total of $5.8 million in principal on the Exchange Notes had been converted to the Company’s common stock, resulting in the issuance to the Exchange Note holders of 6.9 million shares of the Company’s common stock. The aggregate principal balance of the Exchange Notes, at June 30, 2012, was approximately $1.3 million.

The Exchange Notes and Series A Exchange Warrants contain conversion and adjustment features properly classified as derivative instruments required to be recorded at fair value (Note 9). As a result, the Exchange Notes have been recorded at a discount which will be amortized to interest expense over two years.

Coon Rapids Economic Development Authority Loans:

On May 6, 2011, the Company closed two financing transactions with the Economic Development Authority for the City of Coon Rapids and the Minnesota Investment Fund, 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 (the “Notes”). The 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

 

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BIOVEST INTERNATIONAL, INC AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED JUNE 30, 2012 AND 2011

 

8. Long-term debt (continued):

 

Coon Rapids Economic Development Authority Loans (continued):

 

The Company may prepay the Notes at any time prior to maturity without penalty. Proceeds from the transaction in the amount of $0.353 million were used to fund capital improvements made to the Company’s existing manufacturing facility in Minneapolis (Coon Rapids), Minnesota.

Laurus/Valens Term A and Term B Notes:

On November 17, 2010, the Company issued two types of notes – one type in the aggregate principal amount of $24.9 million (the “Term A Notes”) and one type in the aggregate principal amount of $4.2 million (the “Term B Notes”) to Laurus Master Fund, Ltd. (in liquidation), PSource Structured Debt Limited, Valens Offshore SPV I, Ltd., Valens Offshore SPV II, Corp., Valens U.S. SPV I, LLC, and LV Administrative Services, Inc. ( collectively, “Laurus/Valens”) in compromise and satisfaction of secured claims prior to November 17, 2010. The following are the material terms and conditions of the Term A Notes:

 

   

due in one installment of principal and interest due at maturity on November 17, 2012;

 

   

interest accrues at the rate of 8% per annum (with a 12% percent per annum default rate), and is payable at the time of any principal payment or prepayment of principal; and

 

   

the Company may prepay the Term A Notes, without penalty, at any time.

On November 18, 2010, the Company prepaid the Term A Notes in an amount equal to $1.4 million from the proceeds received in the Exit Financing.

The following are the material terms and conditions of the Term B Notes:

 

   

due in one installment of principal and interest due at maturity on November 17, 2013;

 

   

interest accrues at the rate of 8% per annum (with a 12% per annum default rate), and is payable at the time of any principal payment or prepayment of principal; and

 

   

the Company may prepay the Term B Notes, without penalty, at any time.

The Term A Notes and the Term B Notes are secured by a lien on all of the Company’s assets, junior only to the lien granted to Corps Real and to certain permitted liens. The Term A Notes and the Term B Notes are guaranteed by Accentia (the “Accentia Guaranty”), up to a maximum amount of $4,991,360. The Accentia Guaranty is secured by Accentia’s pledge of 20,115,818 shares of the Company’s common stock owned by Accentia. The aggregate principal plus accrued interest balance of the Term A Notes and Term B Notes, at June 30, 2012, was approximately $31.2 million.

On May 10, 2012, the Company entered into an agreement with Laurus/Valens relating to the indebtedness and the Company’s common stock held by Laurus/Valens (the “Paydown Agreement”). The Paydown Agreement provides that, if the Company or a designee pays $30.9 million (the “Buy Out Amount”) to Laurus/Valens on or before August 15, 2012, Laurus/Valens will (i) assign the Term A Notes and Term B Notes to the Company or the Company’s designee, (ii) assign back to the Company an aggregate of 10,232,132 shares of the Company’s common stock held by Laurus/Valens (out of a total of 14,834,782 shares held as May 10, 2012), and (iii) assign back to the Company one-half of Laurus/Valens’ royalty interest in BiovaxID® and the Company’s other biologic products (such assignment to consist of a 3.125% royalty interest).

If on or before August 15, 2012, Laurus/Valens is paid less than $30.9 million but at least $20.0 million (the “Minimum Paydown Amount”), then (i) Laurus/Valens agrees to amend the Term A Notes and Term B Notes to extend the maturity dates to December 31, 2014, (ii) the Company will be permitted to eliminate or amend the mandatory prepayment and board-representation provisions of the Laurus/Valens indebtedness, (iii) the Company will be permitted to issue new indebtedness that is pari passu with the Laurus/Valens indebtedness in an amount of up to $12.0 million above the amount actually paid down by the Company (the “Actual Paydown Amount”), and (iv) Laurus/Valens will assign back to the Company a pro rata portion of the above-described shares and royalty interests based on the percentage of the Buy Out Amount represented by the Actual Paydown Amount. If, within 90 days following the payment of the Actual Paydown Amount, the Company is able to pay the remaining balance under the Term A Notes and Term B Notes, then the remaining number of shares and royalty interests otherwise subject to assignment under the Paydown Agreement will be assigned to the Company, as though the Company originally paid the full Buyout Amount on or before August 15, 2012.

 

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BIOVEST INTERNATIONAL, INC AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED JUNE 30, 2012 AND 2011

 

8. Long-term debt (continued):

 

Laurus/Valens Term A and Term B Notes (continued):

 

In addition to the foregoing, under the Paydown Agreement, Laurus/Valens has agreed to limit any sales of the Company’s common stock held by Laurus/Valens between May 10, 2012 and August 15, 2012 to 1% of the Company’s outstanding common stock. Also, in the event that the Buy Out Amount or Minimum Paydown Amount is received on or before August 15, 2012, Laurus/Valens will agree to a lock-up of up to two years on 3.0 million shares of the Company’s common stock held by Laurus/Valens (or in the case of a Minimum Paydown Amount, a pro rata portion thereof based on the Actual Paydown Amount) and will grant the Company the right to purchase such shares during such lock-up period for a purchase price of $0.50 per share.

9. Derivative liabilities:

The Company does not use derivative financial instruments to hedge exposures to cash-flow, market or foreign-currency risks. However, the Company and its consolidated subsidiary 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.

The following table discloses the fair value of the Company’s derivative liabilities and their location in the condensed consolidated balance sheets as of June 30, 2012 and September 30, 2011. The Company held no asset derivatives at either reporting date.

 

     Liability Derivatives  
     June 30, 2012
(unaudited)
     September 30, 2011  
     Balance Sheet Location    Fair Value      Balance Sheet Location    Fair Value  

Derivatives not designated as hedging instruments

           

Series A Exchange Warrants (Note 8)

   Derivative Liabilities    $ 1,792,000       Derivative Liabilities    $ 1,998,000   

Conversion option on Exit Financing (Note 8)

   Derivative Liabilities      —         Derivative Liabilities      1,000   

Shares due per compromise order

   Derivative Liabilities      28,000       Derivative Liabilities      118,000   
     

 

 

       

 

 

 

Total derivatives not designated as hedging instruments

      $ 1,820,000          $ 2,117,000   
     

 

 

       

 

 

 

Shares due per compromise order:

On November 17, 2010 and pursuant to the Plan, one of the holders of the Company’s 2008 secured debentures elected to convert the entire outstanding principal balance of $0.3 million plus accrued interest into 550,000 shares of the Company’s common stock, issuable in eight quarterly installments of 68,750 shares, beginning on November 17, 2010. As of June 30, 2012, 68,750 shares of the Company’s common stock remain issuable under this compromise order. The commitment to issue these shares has been recorded as a derivative liability at fair value on the Company’s condensed consolidated balance sheet, as of June 30, 2012.

The following table summarizes assets and liabilities measured at fair value on a recurring basis for the periods presented:

 

     June 30, 2012
(unaudited)
     September 30, 2011  

Fair Value Measurements Using:

   Level 1      Level 2      Level 3      Total      Level 1      Level 2      Level 3      Total  

Liabilities

                       

Derivative Liabilities

   $ —         $ 1,820,000       $ —         $ 1,820,000       $ —         $ 2,117,000       $ —         $ 2,117,000   

10. Liabilities subject to compromise:

On February 1, 2012, the Company settled the last of its pre-petition claims. The claimant, Clinstar, LLC (“Clinstar”) had filed two identical proofs of claim in the amount of $0.385 million, one against the Company, in its Chapter 11 proceeding and another against the Company’s majority shareholder, Accentia, in Accentia’s Chapter 11 proceeding. Through an order by the Bankruptcy Court, Clinstar’s claim against the Company was denied, and Clinstar’s claim against Accentia was allowed, resulting in Accentia’s issuance of 283,186 shares of Accentia common stock in full satisfaction of the claim. The Company has recorded the settlement of this claim in the accompanying condensed, consolidated financial statements, resulting in a $0.16 million gain on reorganization for the nine months ending June 30, 2012, and an increase of $0.15 million to the balance of the Accentia promissory demand note (Note 7), representing the Company’s intent to reimburse Accentia for the fair value of the shares Accentia issued to settle the claim.

 

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BIOVEST INTERNATIONAL, INC AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED JUNE 30, 2012 AND 2011

 

11. Accrued interest:

Interest accrued on the Company’s outstanding debt is as follows:

 

     June 30, 2012
(Unaudited)
     September 30, 2011  

Corps Real Note

   $ 265,000       $ 141,000   

Exit Financing

     7,000         7,000   

Laurus/Valens Term A Notes

     3,045,000         1,636,000   

Laurus/Valens Term B Notes

     540,000         290,000   

March 2014 Obligations

     401,000         288,000   

August 2012 Notes

     3,000         9,000   

Coon Rapids Economic Development Authority Loans

     1,000         1,000   
  

 

 

    

 

 

 

Total accrued interest

   $ 4,262,000       $ 2,372,000   

Current

   $ 3,321,000       $ 42,000   

Non-Current

   $ 941,000       $ 2,330,000   

The current portion of accrued interest has been recorded in current accrued liabilities on the accompanying condensed consolidated balance sheets.

12. Stock based compensation:

The fair value of each 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 company stock due to the limited trading history of the Company’s common stock, as well as other factors estimated over the expected term of the 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. This method is used because the Company does not currently have adequate historical option exercise or forfeiture information as a basis to determine expected 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.

On March 30, 2012, the Company granted the issuance of approximately 5.8 million stock options to employees and directors of the Company under the terms of the Company’s 2010 Equity Incentive Plan (the “March 2012 Options”). The March 2012 Options vested immediately and have an exercise price of $0.57 per share; as a result, approximately $2.3 million was charged to operating expense for the quarter ended March 31, 2012.

On May 14, 2012, the Company granted the issuance of approximately 0.7 million stock options to certain employees of the Company under the terms of the Company’s 2010 Equity Incentive Plan (the “May 2012 Options”). The May 2012 Options will vest upon those certain employees’ achievements with respect to the submission of an application for the marketing approval of BiovaxID and have an exercise price of $0.41 per share. The fair value of the May 2012 Options at grant date (approximately $0.2 million) will be charged to operating expense over the 8 month period ending December 31, 2012, the anticipated vesting date of all these option grants.

Common stock options outstanding and exercisable as of June 30, 2012 are as follows:

 

     Shares     Weighted
Ave.

Exercise
Price
     Weighted  Ave
Contractual
Life (yrs)
     Aggregate
Intrinsic  Value
 

Outstanding at October 1, 2011

     27,081,886      $ 0.56         7.41       $ 2,273,550   

Granted

     6,611,540        0.55         

Exercised

     (10,000     0.06         

Cancelled

     (114,449     1.11         
  

 

 

         

Outstanding at June 30, 2012

     33,568,977        0.55         7.28         2,147,350   
  

 

 

         

Exercisable at June 30, 2012

     31,736,477      $ 0.55         7.18       $ 2,145,350   

 

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BIOVEST INTERNATIONAL, INC AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED JUNE 30, 2012 AND 2011

 

12. Stock based compensation (continued):

 

Non-vested employee stock options:

 

     Shares     Weighted  Avg.
Grant-Date
Fair Value
     Aggregate  Intrinsic
Value
 

Non-vested at October 1, 2011

     1,425,000      $ 0.81      

Granted

     800,000        0.28      

Vested

     (392,500     0.76      

Cancelled

     —          —        
  

 

 

      

Non-vested at June 30, 2012

     1,832,500      $ 0.59       $ 2,000   
  

 

 

      

Approximately $0.2 million in compensation expense will be recognized over the next year as a result of the vesting of options.

Common stock warrants outstanding and exercisable as of June 30, 2012 are as follows:

 

     Shares     Weighted
Avg. Price
     Aggregate  Intrinsic
Value
 

Outstanding at October 1, 2011

     26,966,815      $ 0.84      

Issued

     —          —        

Exercised

     (1,865,907     0.32      

Cancelled

     (38,636     0.82      
  

 

 

      

Outstanding at June 30, 2012

     25,062,272        0.88       $ 529,943   
  

 

 

      

Exercisable at June 30, 2012

     25,062,272      $ 0.88       $ 529,943   

13. Segment information:

The Company operates in three identifiable industry segments. The Company’s Cell Culture Products and Services segment is engaged in the production and contract manufacturing of biologics and cell production for research institutions worldwide. The Instruments and Disposables segment is engaged in the development, manufacture and marketing of patented cell culture systems, equipment and consumable parts to pharmaceutical, diagnostic and biotechnology companies, as well as leading research institutions worldwide. The Therapeutic Vaccine segment is focused on developing BiovaxID and received a federal grant in the amount of approximately $0.244 million under the Qualified Therapeutic Discovery Project, for the nine months ended June 30, 2011. For the nine months ended June 30, 2012, the Company recognized $0.1 million as a result of a sharing agreement involving the data from the Company’s Phase 3 clinical trial for BiovaxID. The Company has met all obligations required under the data sharing agreement and does not anticipate earning any further revenue under the agreement.

The Company’s facilities expenses and other assets are not distinguished among the identifiable segments. Revenue and cost of sales information about the Company’s segments are as follows:

 

     Three Months ended June 30,     Nine Months ended June 30,  
     2012     2011     2012     2011  

Revenues

        

Instruments and Disposables

   $ 712,000      $ 660,000      $ 2,550,000      $ 1,811,000   

Cell Culture Services

     192,000        407,000        635,000        1,069,000   

Therapeutic Vaccine

     —          —          —          244,000   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Revenues

     904,000        1,067,000        3,185,000        3,124,000   

Cost of Sales

        

Instruments and Disposables

     476,000        387,000        1,464,000        1,110,000   

Cell Culture Services

     252,000        243,000        698,000        729,000   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Cost of Sales

     728,000        630,000        2,162,000        1,839,000   

Gross Margin ($)

   $ 176,000      $ 437,000      $ 1,023,000      $ 1,285,000   

Gross Margin (%)

     19     41     32     41

 

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BIOVEST INTERNATIONAL, INC AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED JUNE 30, 2012 AND 2011

 

14. Commitments and contingencies:

Bankruptcy proceedings:

On November 10, 2008, the Company filed a voluntary petition for reorganization under Chapter 11. On August 16, 2010, the Company filed its First Amended Joint Plan of Reorganization, and on October 25, 2010, the Company filed the First Modification to the First Amended Joint Plan of Reorganization. On November 2, 2010, the in the Bankruptcy Court entered an Order Confirming Debtors’ First Amended Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy Code. The Company emerged from Chapter 11 protection, and the Plan became effective, on November 17, 2010. The Plan has been substantially consummated under Section 1101(2) of the Bankruptcy Code, and the administration of the Company’s Chapter 11 estate has been completed. On March 19, 2012, the Bankruptcy Court entered a Final Decree closing the Company’s Chapter 11 proceeding.

Other proceedings:

Except for the foregoing, the Company is not party to any material legal proceedings, and management is not aware of any threatened legal proceedings that could cause a material adverse impact on the Company’s business, assets, or results of operations. Further, from time to time the Company is subject to various legal proceedings in the normal course of business, some of which are covered by insurance.

Facility leases:

The Company leases approximately 35,000 square feet facility in Minneapolis (Coon Rapids), Minnesota, which is used for offices, a laboratory, manufacturing, and warehousing areas to support the production of perfusion cell culture equipment and contract cell culture services. The lease agreement (the “Lease”) provided for certain capital improvements to the facility, which were financed and performed principally by the landlord, as well as through government grant loans from city and state agencies in Minnesota. These improvements were completed as of September 30, 2011 and included the construction of a good manufacturing practices vaccine manufacturing space. Total rent payments for years 1-5 under the Lease will be $0.4 million per year. Total rent payments for years 6-10 under the Lease will be $0.5 million per year. The Lease expires on December 2, 2020. The Company also has the right to extend the term of the Lease for two additional five year periods at the greater of base rent in effect at the end of the ten year initial lease term, or market rates in effect at the end of the ten year initial lease term.

The Company also shares office space with Accentia, and utilizes the space as the Company’s principal executive and administrative offices. Accentia leases approximately 7,400 square feet of office space in Tampa, Florida. The lease expires on December 31, 2014 and is cancelable by either party with 120 days prior notice.

The Company plans to continue to evaluate its requirements for facilities during fiscal 2012. The Company anticipates that as its development of BiovaxID and AutovaxID® advances and as the Company prepares for the future commercialization of its products, its facilities requirements will increase.

Cooperative Research and Development Agreement:

In September 2001, the Company entered into a definitive cooperative research and development agreement (“CRADA”) with the NCI for the development and ultimate commercialization of patient-specific vaccines for the treatment of non-Hodgkin’s low-grade follicular lymphoma. The terms of the CRADA, as amended, included, among other things, a requirement to pay $0.5 million quarterly to NCI for expenses incurred in connection with the Company’s Phase 3 clinical trial. Since the transfer to the Company of the IND for development of this vaccine, which occurred in April 2004, these payments to NCI have been reduced to a small fraction of this original obligation (approximately $0.2 million per year). Under the terms of the CRADA, the Company is obligated to continue to provide vaccine to the NCI at no charge for purposes of the NCI’s studies that are within the scope of the CRADA if the Company were to abandon work on the vaccine.

 

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BIOVEST INTERNATIONAL, INC AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED JUNE 30, 2012 AND 2011

 

14. Commitments and contingencies (continued):

 

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.

Stanford University Agreement:

In September 2004, the Company entered into an agreement with Stanford University (“Stanford”) allowing exclusive worldwide rights to use two proprietary hybridoma cell lines that are used in the production of BiovaxID through 2019 (“Stanford Agreement”). 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 pay Stanford $0.1 million within one year following FDA approval of BiovaxID, and following approval, the Company is required to pay Stanford a running royalty of the higher of $50 per patient or 0.05% of revenues received by the Company for each BiovaxID patient treated using this cell line. 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 this 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.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

When you read this section of this Quarterly Report on Form 10-Q, it is important that you also read the financial statements and related notes included elsewhere in this Form 10-Q. This section of this Quarterly Report contains forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations, and intentions. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including the matters discussed under the caption “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2011 and other risks and uncertainties discussed in our other filings with the Securities and Exchange Commission.

Overview

Our business consists of three primary business segments: the development of BiovaxID for B-cell blood cancers; the manufacture and sale of AutovaxID® and other instruments and consumables; and the commercial production of cell culture products and related services.

As a result of our collaboration with the National Cancer Institute (“NCI”), we are developing BiovaxID as a personalized therapeutic cancer vaccine for the treatment of non-Hodgkin’s lymphoma (“NHL”), a B-cell cancer; specifically follicular lymphoma (“FL”) and mantle cell lymphoma (“MCL”), and potentially other B-cell cancers. Both FL and MCL are generally considered to be incurable with currently approved therapies. These generally fatal diseases arise from the lymphoid tissue and are characterized by an uncontrolled proliferation and spread throughout the body of mature B-cells, which are a type of white blood cell. Three clinical trials conducted under our investigational new drug application (“IND”) have studied BiovaxID in NHL. These studies include a Phase 2 clinical trial and a Phase 3 clinical trial in patients with FL, as well as a Phase 2 clinical trial in MCL patients. BiovaxID has demonstrated statistically significant Phase 3 clinical benefit by prolonging disease-free survival in FL patients treated with BiovaxID. We believe that these clinical trials demonstrate the safety and efficacy of BiovaxID.

To support our planned commercialization of BiovaxID, we developed an automated cell culture instrument called AutovaxID. We believe that AutovaxID has significant potential application in the production of a broad range of patient-specific medicines, such as BiovaxID, and potentially for various vaccines, including vaccines for influenza and other contagious diseases. We are collaborating with the U.S. Department of Defense (“DoD”) to further develop AutovaxID and to explore potential production of additional vaccines, including vaccines for viral indications such as influenza. AutovaxID is automated and computer controlled to improve cell production reliability and to maximize cell production. AutovaxID uses a disposable production unit which provides for robust and dependable manufacturing while complying with the industry current good manufacturing practices (“cGMP”) standards. AutovaxID has a small footprint and supports scalable production.

We also manufacture instruments and disposables used in the hollow-fiber production of cell culture products. Our hollow-fiber cell culture products and instruments are used by biopharmaceutical and biotechnology companies, medical schools, universities, research facilities, hospitals and public and private laboratories. We also produce mammalian and insect cells, monoclonal antibodies, recombinant and secreted proteins and other cell culture products using our unique capability, expertise and proprietary advancements in the cell production process known as hollow-fiber perfusion.

 

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Corporate Overview

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.

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 then representing approximately 81% of our equity outstanding immediately after the investment. The aggregate investment commitment initially received from Accentia was $20 million. We continued to be a reporting company under Section 12(g) of the Securities Exchange Act of 1934 following the investment of Accentia. As of July 31, 2012, Accentia owned approximately 59% of our issued and outstanding common stock.

We successfully completed reorganization and formally exited reorganization under Chapter 11 of the United States Bankruptcy Code (“Chapter 11”) as a fully restructured company in 2010. Through the provisions of our bankruptcy plan (as amended) (the “Plan”), effective on November 17, 2010, we were able to restructure the majority of our debt into a combination of long-term notes and equity. Our Plan has been substantially consummated under Section 1101(2) of the Bankruptcy Code and the administration of our Chapter 11 estate has been completed. On March 19, 2012, the U.S. Bankruptcy Court for the Middle District of Florida, Tampa Division (the “Bankruptcy Court”) entered a Final Decree closing our Chapter 11 proceedings.

Regulatory Strategy

BiovaxID

Under our IND for BiovaxID, two Phase 2 clinical trials and one Phase 3 clinical trial have been completed studying BiovaxID for the indication of FL and MCL. BiovaxID has demonstrated statistically significant Phase 3 clinical benefit by prolonging disease-free survival in FL patients treated with BiovaxID compared to vaccinated controls. We believe that these clinical trials demonstrate the safety and efficacy of BiovaxID.

Based on our scientific advice meetings with multiple European Union (“EU”)-Member national medicines agencies, we filed our formal notice of intent to file a Marketing Authorization Application (“MAA”) with the European Medicines Agency (“EMA”), which begins the EU marketing application process. In response to our notice of intent to file for marketing approval, the EMA notified us that we are 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. As part of the EMA’s centralized procedure, our planned 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. 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. The EMA has also notified us regarding the EMA’s official designation of the Rapporteur and Co-Rapporteur to our planned MAA for BiovaxID. Subsequent to completion of the pre-submission process, we could receive a decision regarding EU marketing approval for BiovaxID within 12 months after the MAA submission, assuming its pre-submission, formal marketing application and the rigorous review process advance forward in a timely and positive manner.

Additionally, based on a scientific advice meeting conducted with Health Canada, we have announced plans to file a New Drug Submission (“NDS”) seeking marketing approval in Canada.

 

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We conducted a formal clinical meeting with the U.S. Food and Drug Administration (“FDA”) in order to define the path for BiovaxID’s U.S. registration. In its guidance, the FDA recommended that we conduct a second Phase 3 clinical trial to complete the clinical data gained through our Phase 3 clinical trial and our BiovaxID development program to support the filing of a biologics licensing application (“BLA”). Further, in its guidance, the FDA offered to meet with us to discuss specific design aspects of this confirmatory second Phase 3 clinical trial. We plan to meet with the FDA within the next several months to advance the clinical development of BiovaxID and to discuss a clinical trial protocol that meets FDA’s requirements and to establish agreed-upon endpoints. Concurrent with complying with the FDA’s guidance, we will continue to advance seeking marketing approvals for BiovaxID in the EU and Canada with those planned filings of an MAA and NDS, respectively, supported by evidence of clinical benefit from the three human clinical trials conducted to date in collaboration with the NCI.

We continue to advance our efforts to comply with various regulatory validations and comparability requirements related to our manufacturing process and facility. No assurance can be given that substantial additional requirements will not be imposed by the FDA for the approval of BiovaxID. We also anticipate conducting separate discussions with the various regulatory agencies regarding regulatory approval for BiovaxID for the treatment of MCL and Waldenstrom’s Macroglobulinemia, a rare B-cell subtype of NHL.

Should we seek accelerated or conditional approval, such regulatory pathway may require us to perform additional clinical studies as a condition to continued marketing of BiovaxID, which may result in additional clinical trial expenses. There can be no assurances that we will seek, or be permitted to seek, accelerated or conditional approval in any jurisdiction. There can be no assurances that we will receive approval, including accelerated or conditional 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 approval of BiovaxID and commercialization efforts.

AutovaxID®

AutovaxID is a fully automated, reusable instrument that employs a fully disposable, closed-system cell-growth chamber incorporating a hollow-fiber cell-growth cartridge. Since it is fully enclosed, computer controlled and automated, AutovaxID requires limited supervision and manpower to operate compared to manual instruments. AutovaxID is suitable for growing antibody-secreting cell lines, including hybridomas and Chinese hamster ovary (CHO) cells which are among the leading kinds of cell lines used for commercial therapeutic protein manufacture. AutovaxID has a small footprint and supports scalable production. We plan to utilize the AutovaxID technology to streamline commercial manufacture of our proprietary anti-cancer vaccine, BiovaxID. AutovaxID is the first cell culture system that enables production of personalized cell-based treatments economically and in compliance with cGMP standards. We are collaborating with the DoD to further develop AutovaxID and to explore potential production of additional vaccines, including vaccines for viral indications such as influenza.

Results of Operations

Three Months Ended June 30, 2012 Compared to the Three Months Ended June 30, 2011

Revenues. Total revenues for the three months ended June 30, 2012 were $0.9 million, compared to revenues of $1.1 million for the three months ended June 30, 2011. Instrument sales for the three month period ended June 30, 2012 were relatively unchanged from that of the three month period ended June 30, 2011, while cell culture service revenue decreased by $0.2 million from last year due to the number of contracts completed or in-process year over year.

Gross Margin. The overall gross margin as a percentage of sales for the three months ended June 30, 2012 decreased from 41% to 19% when compared to the three months ended June 30, 2011. While revenues have decreased year over year, as discussed above, there was not a corresponding decrease in cost of sales as a relatively high percentage of costs are of a fixed nature.

Operating Expenses. Research and development expenses have increased by $0.4 million for the three months ended June 30, 2012 compared to three months ended June 30, 2011. This is attributable to an increase in outsourced consulting services, travel expenses associated with our regulatory strategy, wages, and the cost of laboratory supplies as we continue to analyze the available data from our clinical trials and prepare to seek approval, including accelerated and/or conditional approval with the FDA, Health Canada and the EMA.

General and administrative expenses for the three months ended June 30, 2012 decreased by $1.1 million compared to the three months ended June 30, 2011. Upon emerging from reorganization, a number of incentive stock options previously issued to our employees and directors became vested, resulting in a non-cash charge of approximately $1.1 million to general and administrative expense for the three months ending June 30, 2011. There was no comparable charge for the same period in the current fiscal year.

 

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Other Expense. Other expense for the three months ended June 30, 2012, includes contractual interest charges and amortization of discounts regarding the Laurus/Valens Term A and Term B Notes, the Corps Real Note, the Exit Financing, the Accentia note and other long term notes issued to our unsecured creditors as a result of our Plan, all of which are described below.

Other expense also includes gains of $1.1 million and $0.7 million on derivative liabilities for the three months ended June 30, 2012 and 2011, respectively. In connection with our emergence from Chapter 11, we entered into the Exit Financing, which consisted of secured notes which are convertible into shares of our common stock, as well as warrants which have contingent exercise provisions, all as described below. The conversion features associated with the Exit Financing have been recorded as a derivative liability, which we are required to record at fair value. The values of these liabilities vary directly with the trading price of our outstanding common stock, accounting for the current and previous year derivative gains.

Nine Months Ended June 30, 2012 Compared to the Nine Months Ended June 30, 2011

Revenues. Total revenues for the nine months ended June 30, 2012 were $3.2 million, compared to revenues of $3.1 million for the nine months ended June 30, 2011. Included in product revenue for the current 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 prior year’s results do not contain comparable revenue. We have met all obligations required under the data sharing agreement and do not anticipate earning any further revenue under the agreement.

In November 2010, we received from the U.S. Internal Revenue Service, a federal grant award in the amount of approximately $0.24 million. The federal grant was granted under the Qualifying Therapeutic Discovery Project, under new section 48D of the Internal Revenue Code, enacted as part of the Patient Protection and Affordable Care Act of 2010. Under the Qualifying Therapeutic Discovery Project, the grants are awarded to therapeutic discovery projects that show a reasonable potential to: (a) result in new therapies to treat areas of unmet medical need or prevent, detect or treat chronic or acute diseases and conditions, (b) reduce the long-term growth of health care costs in the U.S., or (c) significantly advance the goal of curing cancer within 30 years. Allocation of the grants takes into consideration which projects show the greatest potential to create and sustain high-quality, high-paying U.S. jobs and to advance U.S. competitiveness in life, biological and medical sciences. We were awarded the federal grant to support the advancement of BiovaxID.

Gross Margin. The overall gross margin as a percentage of sales for the nine months ended June 30, 2012 decreased from 41% to 32% when compared to the nine months ended June 30, 2011. This was primarily due to the mix of long-term contract manufacturing projects in process or completed during the period.

Operating Expenses. Research and development expenses increased by $1.9 million for the nine months ended June 30, 2012 compared to nine months ended June 30, 2011. This is attributable to an increase in outsourced professional services, travel expenses associated with our regulatory strategy, wages and the cost of laboratory supplies as we continue to analyze the available data from our clinical trials and prepare to seek approval, including accelerated and/or conditional approval with the FDA, Health Canada, and the EMA. We have also expanded our manufacturing facility in Minneapolis (Coon Rapids), Minnesota, financing over $1.5 million in facility improvements which will provide us increased capacity in the manufacture of biologic products, including the manufacture of BiovaxID. As a result, our facility lease costs have increased from the prior year. Furthermore, on March 30, 2012, we granted stock options to our employees and directors under the terms of our 2010 Equity Incentive Plan. The options vested immediately, resulting in a charge of approximately $0.44 million to research and development expense in the nine months ended June 30, 2012.

General and administrative expenses for the nine months ended June 30, 2012 decreased by $5.6 million compared to the nine months ended June 30, 2011. Upon emerging from reorganization, a number of incentive stock options previously issued to our employees and directors became vested, resulting in a non-cash charge of approximately $7.4 million to general and administrative expense for the nine months ending June 30, 2011. Stock compensation expense for the current fiscal year was approximately $2.0 million.

 

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Other Income (Expense). Other expense for the nine months ended June 30, 2012, includes contractual interest charges and amortization of discounts regarding the Laurus/Valens Term A and Term B Notes, the Corps Real Note, the Exit Financing, the Accentia note, and other long term notes issued to our unsecured creditors as a result of our Plan, which are described below.

Other expense also includes a gain of $0.2 million and a loss of $0.7 million on derivative liabilities for the nine months ended June 30, 2012 and 2011, respectively. In connection with our emergence from Chapter 11, we entered into the Exit Financing, which consisted of secured notes which are convertible into shares of our common stock, as well as warrants which have contingent exercise provisions, as described below. The conversion features associated with the Exit Financing have been recorded as a derivative liability, which we are required to record at fair value. The values of these liabilities vary directly with the trading price of our outstanding common stock, accounting for the current and previous year gain and loss on derivative liabilities.

Reorganization Items.

Gain on Reorganization: We recognized a gain of $0.22 million and $0.6 million for the nine months ended June 30, 2012 and 2011, respectively, as a result of the settlement of our prepetition claims through our Chapter 11 proceedings. Pursuant to our Plan, holders of existing voting shares immediately before confirmation received more than 50% of the voting shares of the emerging entity, thus we did not adopt fresh-start reporting upon emergence from Chapter 11. We instead followed the guidance as described in ASC 852-45-29 for entities which do not qualify for fresh-start reporting. Liabilities compromised by our 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: $0.03 million and $0.25 million were incurred for the nine months ended June 30, 2012 and 2011, respectively, for legal fees and U.S. Trustee fees paid as a result of our Chapter 11 proceedings. On March 19, 2012, 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.

Liquidity and Capital Resources

Sources of Liquidity

Our goal is to meet our cash requirements through proceeds from our cell culture and instrument manufacturing activities, the use of cash on hand, trade vendor credit, short-term borrowings, debt and equity financings, and strategic transactions such as collaborations and licensing. Our ability to continue present operations, to continue our detailed analyses of BiovaxID’s clinical trial results, to meet our debt obligations as they mature (discussed below), and to pursue ongoing development and commercialization of BiovaxID and AutovaxID® including potentially seeking marketing approval, is dependent upon our ability to obtain significant external funding in the immediate term, which raises substantial doubt about our ability to continue as a going concern. Cash and cash equivalents at June 30, 2012 were approximately $0.05 million. Additional sources of funding have not been established; however, additional financing is currently being sought by us 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 our products. We are currently in the process of exploring various financing alternatives. There can be no assurance that we will be successful in securing such financing at acceptable terms, if at all. If adequate funds are not available from the foregoing sources in the immediate term, or if we determine it to otherwise be in our best interest, we may consider additional strategic financing options, including sales of assets, 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 or all of our commercialization efforts.

Outstanding Indebtedness

 

   

Exit Financing: On November 17, 2010, we issued convertible notes in the aggregate principal amount of approximately $7.0 million (“Exit Financing”). The notes mature on November 17, 2012, and the outstanding principal together with all accrued but unpaid interest, which accrues at a fixed rate of 7% per annum (15% default rate), is due on such date. Interest is payable monthly and Biovest has elected to pay the accrued monthly interest in shares of Biovest common stock. Pursuant to the Exit Financing, we issued warrants to purchase up to an aggregate of approximately, 8.7 million shares of our common stock, at an exercise price of $1.20 per share. These warrants expire on November 17, 2017. As of June 30, 2012, certain holders of the Exit Financing have converted an aggregate principal amount of $5.8 million into shares of our common stock, resulting in the issuance of 6.9 million shares of our common stock. The aggregate principal balance of the Exit Financing, at June 30, 2012, was approximately $1.3 million.

 

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Corps Real: On November 17, 2010, we issued a secured convertible promissory note in the amount of approximately $2.3 million to Corps Real, LLC (the “Corps Real Note”). Under the terms of the Corp Real Note, Corps Real, LLC may elect to invest an additional $0.9 million. The Corps Real Note matures on November 17, 2012 and accrues interest at a fixed rate of 16% per annum, with interest in the amount of 10% paid monthly and interest in the amount of 6% to accrue until and be paid at maturity. On June 6, 2012, the Corps Real Note was amended to suspend our monthly interest payments for a three-month period beginning June 1, 2012. The deferred interest amount will become due and payable on November 17, 2012. The Corps Real Note is secured by a first priority lien on all of our assets. The aggregate principal balance under the Corps Real Note, at June 30, 2012, was approximately $2.3 million.

 

   

Laurus/Valens: On November 17, 2010, we issued two types of term notes – one type in the aggregate principal amounts of approximately $24.9 million (the “Term A Notes”) and one type in the aggregate principal amount of $4.2 million (the “Term B Notes”) to Laurus Master Fund, Ltd. (in liquidation) , PSource Structured Debt Limited, Valens Offshore SPV I, Ltd., Valens Offshore SPV II, Corp., Valens U.S. SPV I, LLC, and LV Administrative Services, Inc. (collectively, “Laurus/Valens”). The maturity date for the Term A Notes is November 17, 2012 and the maturity date for the Term B Notes is November 17, 2013. The Term A and Term B Notes accrue interest at the rate of 8% per annum (with a 12% per annum default rate). The Term A and Term B Notes are secured by a lien on all of our assets, junior only to the priority lien to Corps Real, LLC and to certain permitted liens. The Term A Notes were prepaid in an amount equal to $1.4 million from the proceeds received from the Exit Financing. The aggregate principal balance on the Term A Notes and the Term B Notes, at June 30, 2012, was approximately $27.6 million.

On May 10, 2012, we entered into an agreement with Laurus/Valens relating to the indebtedness and the Biovest common stock held by Laurus/Valens (the “Paydown Agreement”). The Paydown Agreement provides that, if we or our designee pays $30.9 million (the “Buy Out Amount”) to Laurus/Valens on or before August 15, 2012, Laurus/Valens will (i) assign the Term A Notes and Term B Notes to Biovest or Biovest’s designee, (ii) assign back to us an aggregate of 10,232,132 shares of our common stock held by Laurus/Valens (out of a total of 14,834,782 shares held as May 10, 2012), and (iii) assign back to us one-half of Laurus/Valens’ royalty interest in BiovaxID® and our other biologic products (such assignment to consist of a 3.125% royalty interest).

If on or before August 15, 2012, Laurus/Valens is paid less than $30.9 million but at least $20.0 million (the “Minimum Paydown Amount”), then (i) Laurus/Valens agrees to amend the Term A Notes and Term B Notes to extend the maturity dates to December 31, 2014, (ii) we will be permitted to eliminate or amend the mandatory prepayment and board-representation provisions of the Laurus/Valens indebtedness, (iii) we will be permitted to issue new indebtedness that is pari passu with the Laurus/Valens indebtedness in an amount of up to $12.0 million above the amount actually paid down by us (the “Actual Paydown Amount”), and (iv) Laurus/Valens will assign back to us a pro rata portion of the above-described shares and royalty interests based on the percentage of the Buy Out Amount represented by the Actual Paydown Amount. If, within 90 days following the payment of the Actual Paydown Amount, Biovest is able to pay the remaining balance under the Term A Notes and Term B Notes, then the remaining number of shares and royalty interests otherwise subject to assignment under the Paydown Agreement will be assigned to us, as though we originally paid the full Buyout Amount on or before August 15, 2012.

 

   

March 2014 Obligations: On November 17, 2010, we became obligated under the Plan to pay certain of our unsecured creditors approximately $2.7 million in cash together with interest at 5% per annum to be paid in one installment on March 17, 2014. The aggregate principal balance of the obligations has since increased by approximately $0.12 million due to the allowance of a previously unfiled unsecured claim as well as an amendment to the amount owed on a separate, unsecured claim. The aggregate principal balance of the obligations, at June 30, 2012, was approximately $2.8 million.

 

   

August 2012 Notes: On November 17, 2010, we issued notes to certain of our unsecured creditors in the aggregate principal amount of approximately $1.8 million. The notes (a) accrue interest at 7%, (b) have a maturity date of August 17, 2012, and (c) are convertible into shares of our common stock in seven quarterly installments beginning on February 17, 2011. We have no obligation to pay the notes in cash at maturity, and instead may pay the notes with shares of Biovest common stock. The holders of the notes may elect to convert their principal and accrued interest in shares of our common stock. As of June 30, 2012, approximately $1.5 million in principal had been converted, resulting in the issuance of approximately 1.7 million shares of our common stock to the holders of the notes. The aggregate principal balance outstanding of the notes, at June 30, 2012, was approximately $0.3 million.

 

   

Accentia promissory demand note: Accentia has loan us approximately $3.0 million as of June 30, 2012. This balance is comprised of advances from Accentia in the form of cash loans, interest, payments directly to third parties on our behalf and allocated inter-company expenses. The note is due upon demand and accrues interest at the prime rate (3.25% at June 30, 2012).

 

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Minneapolis, Minnesota Facility Lease: On December 2, 2010, we entered into a lease agreement with JMS Holdings, LLC (the “Landlord”) for continued use and occupancy of our existing facility in Minneapolis (Coon Rapids), Minnesota (the “Lease”). The Lease contains provisions regarding a strategic collaboration whereby the Landlord agreed to construct certain capital improvements to the leased premises to allow us to perform cGMP manufacturing of biologic products in the Minneapolis facility, including the manufacture of BiovaxID. As of September 30, 2011, the $1.5 million in improvements were completed. These improvements were financed by us 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 (as described below), 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 (ten years) of the Lease.

 

   

Coon Rapids Economic Development Authority Loans: On May 6, 2011, we closed two financing transactions with the Economic Development Authority for the City of Coon Rapids and the Minnesota Investment Fund (State of Minnesota), which provide capital to help add workers and retain high-quality jobs in the State of Minnesota. We 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. Proceeds from the transaction in the amount of $0.350 million were used to fund the capital improvements made to our existing manufacturing facility in Minneapolis (Coon Rapids), Minnesota.

Cash Flows for the Nine Months Ended June 30, 2012

Our net loss for the nine months ended June 30, 2012 was $9.2 million. We have adjusted the net loss on our cash flow statement for certain non-cash expenses including compensation of $2.5 million paid to our employees and directors in the form of stock options, as well as an adjustment of $1.3 million representing the amortization of discounts associated with our outstanding debt. Furthermore, the change in operating liabilities accounted for an adjustment of $2.2 million to net loss to arrive at cash flows from operating activities. This change is primarily attributable to the increase in accrued interest on our outstanding debt obligations. After these and other non-cash adjustments to our net loss, cash used in operating activities was $3.3 million for the nine months ended June 30, 2012.

For the nine months ended June 30, 2012, we invested approximately $0.3 million in software and equipment for our manufacturing facility in Minneapolis (Coon Rapids), Minnesota.

Net cash flows from financing activities were $3.4 million for the nine months ended June 30, 2012. Financing activities for the period included the repayment of $0.01 million in principal on the Coon Rapids Economic Development Authority Loans and advances from Accentia in the amount of $3.0 million (in the form of cash and non-cash allocations for shared facilities and personnel). We also received approximately $0.2 million through the exercise of options and warrants to purchase our common stock. Finally, we financed equipment for use in our manufacturing facility in Minneapolis (Coon Rapids), Minnesota, which resulted in an increase of approximately $0.2 million to cash flows from financing activities.

Fluctuations in Operating Results

Our operating results may vary significantly from quarter to quarter or year to year, depending on factors such as timing of biopharmaceutical development and commercialization of products by our customers, the timing and size of orders for instrumentation and cultureware, and the timing of increased research and development of BiovaxID, and will be impacted by our planned marketing launch of the AutovaxID instrument. 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.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not Applicable.

 

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ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our chief executive officer (principal executive officer) and chief financial officer (principal financial officer), we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on this evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report on Form 10-Q to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. These disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed by us in the reports we file or submit is accumulated and communicated to management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting identified in connection with this evaluation that occurred during the quarter ended June 30, 2012, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

Bankruptcy proceedings:

On November 10, 2008, we, along with our subsidiaries, filed a voluntary petition for reorganization under Chapter 11 in the Bankruptcy Court. On August 16, 2010, we filed our First Amended Joint Plan of Reorganization, and, on October 25, 2010, we filed the First Modification to the First Amended Joint Plan of Reorganization (collectively and as amended and supplemented, the “Plan”). On November 2, 2010, the Bankruptcy Court entered an Order Confirming Debtors’ First Amended Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy Code, which approved and confirmed the Plan. We emerged from Chapter 11 protection, and the Plan became effective, on November 17, 2010. The Plan has been substantially consummated under Section 1101(2) of the Bankruptcy Code and the administration of our Chapter 11 estate has been completed. On March 19, 2012, the Bankruptcy Court entered a Final Decree closing our Chapter 11 proceedings.

Other proceedings:

On August 4, 2008, we were served with a summons and complaint filed in California Superior Court on behalf of Clinstar LLC (“Clinstar”) for breach of contract for non-payment of certain fees for clinical trial studies and pass-through expenses in the amount of $0.385 million. Upon the filing of our Chapter 11 petition on November 10, 2008, this litigation was automatically stayed pursuant to provisions of federal bankruptcy law. Clinstar filed two identical proofs of claim regarding its breach of contract for non-payment litigation in the amount of $0.385 million, one against us in our Chapter 11 proceeding and another against Accentia, in its Chapter 11 proceeding. We, along with Accentia, objected to Clinstar’s filing of Clinstar’s proofs of claim. On February 1, 2012, by order of the Bankruptcy Court, Clinstar’s proof of claim against us was denied and Clinstar’s proof of claim against Accentia was allowed. Accentia issued 283,186 shares of Accentia common stock at a conversion price of $1.36 per share as required by Accentia’s bankruptcy plan, in full satisfaction of Clinstar’s allowed proof of claim against Accentia. Clinstar has no further claims against us or Accentia for breach of contract for non-payment.

Except for the foregoing, we are not party to any material legal proceedings, and management is not aware of any threatened legal proceedings that could cause a material adverse impact on our business, assets, or results of operations. Further, from time to time we are subject to various legal proceedings in the normal course of business, some of which are covered by insurance.

 

ITEM 1A. RISK FACTORS

There have been no material changes from the risk factors disclosed in Item 1A of Part I of our Form 10-K for the year ended September 30, 2011.

 

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

During the three months ended June 30, 2012, we issued the following securities, which were not registered under the Securities Act of 1933, as amended (the “Securities Act”):

 

  1. Pursuant to our Plan and Section 1145 of the United States Bankruptcy Code, from April 1, 2012 to June 1, 2012, we issued an aggregate of 383,653 shares of our common stock in satisfaction of allowed claims under our Plan, with conversion prices ranging from $0.33 to $1.00 per share.

 

  2. On May 14, 2012, we issued stock option awards (“Option Awards”) to certain of our employees under our 2010 Equity Incentive Plan. The Option Awards granted options to purchase an aggregate of 700,000 shares of our common stock at an exercise price of $0.41 per share. The Option Awards will vest upon the achievement of certain milestones.

 

  3. On June 25, 2012, we issued to Alan Pearce an aggregate of 109,090 shares of our common stock, at an exercise price of $0.32 per share, upon his exercise of his June 26, 2007 Common Stock Purchase Warrant.

We claimed exemption from registration under the Securities Act for the issuances of securities in the transactions described in paragraph 1 above by virtue of Section 1145(a) of the United States Bankruptcy Code in that such issuances were made under our Plan in exchange for claims against, or interests in, our Company.

We claimed exemption from registration under the Securities Act for the sales and issuances of securities in the transactions described in paragraph 2 above by virtue of Section 4(2) of the Securities Act and by virtue of Rule 701 promulgated under the Securities Act, in that they were offered and sold either pursuant to a written compensatory plan or pursuant to a written contract relating to compensation, as provided by Rule 701. Such sales and issuances did not involve any public offering and were made without general solicitation or advertising. Each purchaser represented his or her intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof, and appropriate legends were (or will be) affixed to the share certificates and instruments issued (or to be issued) in such transactions. The recipients have adequate access, through their relationships with us, to information about us.

We claimed exemption from registration under the Securities Act for the sale and issuance of securities in the transaction described in paragraph 3 above by virtue of Section 4(2) of the Securities Act in that such sales and issuance did not involve a public offering. The recipient of the securities represented his intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof. An appropriate legend was affixed to the share certificates and instruments issued. The recipient had adequate access, through his relationship with us, to information about us.

No underwriters were employed in any of the above transactions.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

Not Applicable

 

ITEM 5. OTHER INFORMATION

None.

 

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ITEM 6. EXHIBITS

The following exhibits are filed as part of, or are incorporated by reference into, this Quarterly Report on Form 10-Q.

 

Exhibit

Number

  

Description of Document

  31.1

   Rule 13a-14(a)/15d-14(a) Certifications of Chief Executive Officer (Principal Executive Officer).

  31.2

   Rule 13a-14(a)/15d-14(a) Certifications of Acting Chief Financial Officer (Principal Financial Officer).

  32.1

   18 U.S.C. Section 1350 Certifications of Chief Executive Officer.

  32.2

   18 U.S.C. Section 1350 Certifications of Acting Chief Financial Officer.

  101

   The following financial information from Biovest International, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012 (unaudited), formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets as of June 30, 2012 and September 30, 2011, (ii) Condensed Consolidated Statements of Operations for the three and nine months ended June 30, 2012 and 2011 (unaudited), (iii) Condensed Consolidated Statements of Stockholders’ Deficit for the nine months ended June 30, 2012 (unaudited), (iv) Condensed Consolidated Statements of Cash Flows for the nine months ended June 30, 2012 and 2011 (unaudited), and (v) the Notes to Condensed Consolidated Financial Statements.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized.

 

    BIOVEST INTERNATIONAL, INC.
    (Registrant)
Date: August 14, 2012    

/s/ Samuel S. Duffey

    Samuel S. Duffey, Esq.
    President; Chief Executive Officer
    (Principal Executive Officer)
Date: August 14, 2012    

/s/ Brian D. Bottjer

    Brian D. Bottjer, CPA
    Acting Chief Financial Officer; Controller
    (Principal Financial Officer and Principal Accounting Officer)

 

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