10-Q 1 o2714210q.htm FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2013 o2714210q.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
     
 
FORM 10-Q
     
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended December 31, 2013
 
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from              to             .
 
Commission file number 0-11480
     
 
BIOVEST INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
     
 
Delaware
41-1412084
(State or other jurisdiction of
incorporation or organization)
(IRS Employer
Identification Number)
 
300 S. Hyde Park Ave., Suite 210, Tampa, FL 33606
(Address of principal executive offices) (Zip Code)
 
(813) 864-2554
(Registrant’s telephone number, including area code)
     
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No   ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
¨
Accelerated filer
¨
       
Non-accelerated filer
¨
Smaller reporting company
x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.).    Yes  ¨    No  x
 
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a Bankruptcy Plan confirmed by the Bankruptcy Court.    Yes  x    No  ¨
 
The number of shares of the registrant’s common stock outstanding as of February 10, 2014 was 100,000,000 shares of common stock, all of one class.
BIOVEST INTERNATIONAL, INC.
 
     
   
Page
PART I. FINANCIAL INFORMATION
  
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PART II. OTHER INFORMATION
  
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PART I. FINANCIAL INFORMATION
 
(Unaudited)
 
   
Successor Company
  
   
December 31, 2013
(Unaudited)
    
September 30,
2013 
 
ASSETS
            
Current assets:
            
Cash
   $ 533,000     $ 734,000  
Accounts receivable, net of $12,000 allowance for doubtful accounts at December 31,
2013 and September 30, 2013
     291,000       530,000  
Costs and estimated earnings in excess of billings on uncompleted contracts
     92,000       240,000  
Inventories
     384,000       329,000  
Prepaid expenses and other current assets
            218,000       208,000  
Total current assets
     1,518,000       2,041,000  
Property and equipment, net
     1,519,000       1,391,000  
In-process research and development
     35,779,000       35,779,000  
Goodwill
     3,897,000       3,897,000  
Other assets
     495,000       516,000  
Total assets
   $ 43,208,000     $ 43,624,000  
LIABILITIES AND STOCKHOLDERS’ EQUITY
                
Current liabilities:
                
Accounts payable
   $ 714,000     $ 754,000  
Accrued liabilities
     335,000       346,000  
Customer deposits
     1,000       4,000  
Billing in excess of costs and estimated earnings on uncompleted contracts
     70,000       —  
Current maturities of capital lease obligations
     140,000       133,000  
Current maturities of long term debt
     15,000       14,000  
Total current liabilities
     1,275,000       1,251,000  
Capital lease obligations, less current maturities
     146,000       86,000  
Long term debt related parties
     700,000       —  
Long term debt, less current maturities
     302,000       305,000  
Other
     116,000       10,000  
Total liabilities
     2,539,000       1,652,000  
Commitments and contingencies (Note 14)
                
Stockholders’ equity:
                
Preferred stock, $0.01 par value, 50,000,000 shares authorized; no shares issued and
outstanding
     —       —  
Common stock, $0.01 par value, 300,000,000 shares authorized; 100,000,000 shares issued
and outstanding at December 31, 2013 and September 30, 2013
     1,000,000       1,000,000  
Additional paid-in capital
     43,244,000       42,449,000  
Accumulated deficit
     (3,570,000 )     (1,477,000 )
Total stockholders’ equity attributable to Biovest International, Inc.
     40,674,000       41,972,000  
Noncontrolling interests
     (5,000 )     —  
Total stockholders' equity
     40,669,000       41,972,000  
Total liabilities and stockholders’ equity
   $ 43,208,000     $ 43,624,000  
 
The accompanying footnotes are an integral part of these condensed consolidated financial statements.
 
 
(Unaudited)
 
   
Successor
    
Predecessor
  
   
Three months ended
December 31, 2013
    
Three months ended
December 31, 2012
  
Revenue:
            
Products
   $ 288,000     $ 410,000  
Services
     234,000       139,000  
Total revenue
     522,000       549,000  
Operating costs and expenses:
                
Cost of revenue:
                
Products
     274,000       373,000  
Services
     111,000       208,000  
Research and development expense
     1,445,000       722,000  
General and administrative expense
     780,000       669,000  
Total operating costs and expenses
     2,610,000       1,972,000  
Loss from operations
     (2,088,000 )     (1,423,000 )
Other income (expense):
                
Interest expense, net
     (10,000 )     (2,487,000 )
Gain on derivative liabilities
     —       645,000  
Other expense, net
     —       (1,000 )
Total other expense
     (10,000 )     (1,843,000 )
Net loss including noncontrolling interests
     (2,098,000 )     (3,266,000 )
Net loss attributable to noncontrolling interests
     (5,000 )     —  
Net loss attributable to Biovest International, Inc.
   $ (2,093,000 )   $ (3,266,000 )
Loss per common share:
                
Basic and diluted
   $ (0.02 )   $ (0.02 )
Weighted average shares outstanding:
                
Basic and diluted
     100,000,000       146,495,560  

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

 
(Unaudited)
 
   
Common Stock
                          
Successor:
  
Shares
    
Amount
    
Additional
Paid-
in Capital
    
Accumulated
Deficit
    
Non-Controlling
Interests
    
Total
  
Balances October 1, 2013
     100,000,000     $ 1,000,000     $ 42,449,000     $ (1,477,000 )   $ —     $ 41,972,000  
Additional investment from
shareholders
     —       —       787,000       —       —       787,000  
Employee share-based
compensation
     —       —       8,000       —       —       8,000  
Net loss
     —       —       —       (2,093,000 )     (5,000 )     (2,098,000 )
Balances December 31, 
2013
     100,000,000     $ 1,000,000     $ 43,244,000     $ (3,570,000 )   $ (5,000 )   $ 40,669,000  
 
The accompanying footnotes are an integral part of these condensed consolidated financial statements.
 
 
 
 
 
 

(Unaudited)
 
             
   
Successor
    
Predecessor
  
   
Three months ended
 December 31, 2013
    
Three months ended
 December 31, 2012
  
Cash flows from operating activities:
            
Net loss
   $
(2,098,000
 )   $ (3,266,000 )
Adjustments to reconcile net loss to net cash flows from operating activities before
reorganization items:
                
Depreciation
     69,000       40,000  
Amortization of patents
     —       7,000  
Employee share-based compensation
     8,000       73,000  
Amortization of discount on notes payable
     —       1,565,000  
Amortization of deferred loan costs
     —       9,000  
Shares issued for interest on outstanding debt
     —       1,000  
Gain on derivative liabilities
     —       (645,000 )
Changes in cash resulting from changes in:
                
Operating assets
     343,000       13,000  
Operating liabilities
     125,000       1,344,000  
Net cash flows from operating activities
     (1,553,000 )     (859,000 )
Cash flows from investing activities:
                
Acquisition of furniture and equipment
     (75,000 )     (5,000 )
Net cash flows from investing activities
     (75,000 )     (5,000 )
                 
Cash flows from financing activities:
                
Repayment of notes payable and long-term debt
     (3,000 )     (26,000 )
Capital lease payments
     (57,000 )     —  
Additional investment from shareholders (Note 4)
     787,000       —  
Proceeds from notes payable and long-term debt
     —       1,585,000  
Advances from/(payments to) related party
     700,000       (414,000 )
Net cash flows from financing activities
     1,427,000       1,145,000  
                 
Net change in cash
     (201,000 )     281,000  
Cash at beginning of period
     734,000       72,000  
Cash at end of period
   $ 533,000     $ 353,000  
                 
Supplemental disclosure of cash flow information:
                
Non-cash financing and investing transactions:
                
Issuance of shares for payment of interest on outstanding debt
   $ —     $ 16,000  
Purchase of equipment with promissory notes
     122,000       —  
Cash paid for interest during period
   $ 2,000     $ 2,000  
 
The accompanying footnotes are an integral part of these condensed consolidated financial statements.
 
 
BIOVEST INTERNATIONAL, INC. AND SUBSIDIARIES
 
 
1. Description of the Company:
 
Overview:
 
Biovest International, Inc. (the “Company” or “Biovest”) is a biotechnology company focused on: the continued development and future commercialization of BiovaxID™, as a personalized therapeutic cancer vaccine for the treatment of B-cell blood cancers; the continued development, commercialization, manufacture and sale of AutovaxID® and its other instruments and disposables; and the commercial sale and production of cell culture products and related services.
 
As a result of Biovest’s collaboration with the National Cancer Institute (“NCI”), Biovest is developing BiovaxID, a personalized therapeutic cancer vaccine for the treatment of non-Hodgkin’s lymphoma (“NHL”), a B-cell cancer, specifically, follicular lymphoma (“FL”) and mantle cell lymphoma (“MCL”), and potentially other B-cell blood cancers. Both FL and MCL are generally considered to be incurable with currently approved therapies. These generally fatal diseases arise from the lymphoid tissue and are characterized by an uncontrolled proliferation and spread throughout the body of mature B-cells, which are a type of white blood cell. Three clinical trials conducted under the Company’s investigational new drug application (“IND”) have studied BiovaxID in NHL. These studies include a Phase 2 clinical trial and a Phase 3 clinical trial in patients with FL, as well as a Phase 2 clinical trial in patients with MCL.
 
Based on the Company’s scientific advice meetings with multiple European Union (“EU”) Member national medicines agencies, on December 3, 2013 the Company filed its marketing authorization application (“MAA”) with the European Medicines Agency (“EMA”).  The Company was formally notified the application had been validated by the EMA on January 7, 2014, confirming that the submission was complete, and beginning the formal EMA review process intended to secure approval to market BiovaxID in the EU and to allow prescription and sale of BiovaxID for the treatment of non-Hodgkin’s lymphoma in patients who have achieved a first complete remission.  Additionally, based on a scientific advice meeting conducted with Health Canada, the Company plans to file a new drug submission application (“NDS”) seeking regulatory approval in Canada. No assurance can be given that BiovaxID will receive marketing/regulatory approval from the regulatory authorities in any jurisdiction, including but not limited to the EU or Canada.
 
The Company also conducted a formal guidance meeting with the U.S. Food and Drug Administration (“FDA”) in order to define the path for the Company’s filing of a biologics licensing application (“BLA”) for BiovaxID’s U.S. regulatory/marketing approval. As a result of this guidance meeting, the Company plans to conduct a confirmatory second Phase 3 clinical trial to complete the clinical data gained through the first Phase 3 clinical trial.  The Company is preparing to initiate this second Phase 3 clinical trial, subject to availability of funding.
 
To support the Company’s planned commercialization of BiovaxID and to support the products of personalized medicine and particularly, patient specific oncology products, the Company developed and commercialized the AutovaxID bioreactor, a fully automated cell culture instrument that employs a fully disposable, closed-system cell-growth chamber incorporating a hollow fiber cell-growth cartridge.  Since it is fully enclosed, computer controlled and automated, AutovaxID requires limited supervision and manpower to operate compared to manual instruments. AutovaxID is suitable for growing antibody-secreting cell lines, including hybridomas and Chinese hamster ovary (“CHO”) cells, which are among the leading kinds of cell lines used for commercial therapeutic protein manufacture. AutovaxID has a small footprint and supports scalable production. The Company plans to utilize the AutovaxID technology to streamline the commercial manufacture of BiovaxID.  The Company believes that AutovaxID is the first cell culture system that enables production of personalized cell-based treatments economically.   AutovaxID uses a disposable production unit which provides for robust and dependable manufacturing while complying with the industry current good manufacturing practices (“cGMP”) standards. The Company also manufactures instruments and disposables used in the hollow fiber production of cell culture products.
 
The Company manufactures mammalian cell culture products such as whole cells, recombinant and secreted proteins, and monoclonal antibodies for third parties, primarily researchers.  The Company has produced over 7,000 cell based products for an estimated 2,500 researchers around the world.  The Company considers its vast experience in manufacturing small batches of different cell based products, together with its expertise in designing and manufacturing instruments for personalized medicines as important competencies supporting the Company’s development of patent specific immunotherapies.
 
 
7
 
BIOVEST INTERNATIONAL, INC. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
1. Description of the company (continued)
 
Corporate Overview:
 
As a result of the 2013 Bankruptcy Case (discussed below), new common stock of the Company was issued on July 9, 2013 (the effective date of the Company’s First Amended Plan of Reorganization; the “Effective Date”) to secured and unsecured creditors with allowed claims in the 2013 Bankruptcy Case.  All common stock issued and outstanding prior to Effective Date was cancelled.
 
2. The 2013 Bankruptcy Case:
 
On March 6, 2013 (the “Petition Date”), as a result of the Company’s inability to pay approximately $30 million in secured debt which had become due on November 17, 2012, the Company filed a voluntary petition to reorganize under Chapter 11of the Bankruptcy Code, Case No.8:13-bk-2892-KRM, with the Bankruptcy Court (“the 2013 Bankruptcy Case”).
 
On June 10, 2013, the Company filed its First Modification to the First Amended Plan of Reorganization (the “Plan”) in the case with the support of its senior, secured lenders.   The Plan provided for, among other things, the cancellation of all outstanding common stock, options and warrants in the Company.  In addition, the Plan provided for the conversion of virtually all pre-petition debt into new common stock of the reorganized Company as follows: (i) all outstanding indebtedness due to the Company’s senior secured lenders, totaling in excess of $41.0 million, was to be converted into new equity representing ninety three percent (93%) of the issued and outstanding common stock in the reorganized Company and; (ii) approximately $5.4 million of unsecured indebtedness outstanding under the Company’s prepetition unsecured debt obligations was to be converted and exchanged for new equity representing seven percent (7%) of the issued and outstanding common stock in the reorganized Company.
 
On June 28, 2013, the Bankruptcy Court entered an Order Confirming the Company’s First Amended Plan of Reorganization Under Chapter 11 of the Bankruptcy Code (the "Confirmation Order"), which approved and confirmed the Plan.  The occurrence of the Plan’s Effective Date was subject to satisfaction or waiver of certain conditions precedent, including no modification or stay of the Confirmation Order or entry of other court order prohibiting the consummation of the transactions contemplated by the Plan, and all other actions and documents necessary to implement the Plan shall have been effected or executed. Each of the foregoing conditions to the effectiveness of the Plan were satisfied or waived, and the Effective Date occurred on July 9, 2013.
 
See Note 4 for additional information regarding the Plan.

3. Significant accounting policies:
 
Basis of presentation:
 
The accompanying unaudited condensed consolidated financial statements have been derived from unaudited interim financial information prepared in accordance with the rules and regulations of the SEC for quarterly financial statements. Certain information and note disclosures normally included in financial statements prepared in accordance the U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information presented not misleading. The interim financial statements of the Company, in the opinion of management, include all normal and recurring adjustments necessary for a fair presentation of results as of the dates and for the periods covered by the interim financial statements.
 
Operating results for the three months ended December 31, 2013 are not necessarily indicative of the results that may be expected for the entire fiscal year. The accompanying unaudited condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern.  These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2013. The accompanying condensed consolidated balance sheet at September 30, 2013 has been derived from the audited financial statements at that date, but does not include all information and footnotes required by GAAP for complete financial statements.
 
Principles of consolidation:
 
The unaudited condensed consolidated financial statements include those of Biovest Europe, Limited and Viracell Advanced Products, LLC.  Biovest Europe Limited is a wholly-owned subsidiary of the Company which was incorporated in the United Kingdom on June 29, 2011. Viracell Advanced Products, LLC, is an 85% owned subsidiary of the Company which was incorporated in the State of Texas on July 18, 2013.
 
All significant inter-company balances and transactions have been eliminated.
 
 
8
 
BIOVEST INTERNATIONAL, INC. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
Accounting for reorganization proceedings:
 
On the Effective Date, the terms of Biovest’s confirmed Plan of Reorganization eliminated approximately $44 million in secured and unsecured debt in exchange for new common shares of Biovest.  Also upon the Effective Date, all previously-existing equity interests in Biovest were canceled and extinguished.  As a result of the recapitalization of the Company, Biovest was required to adopt fresh-start accounting in accordance with ASC Topic 852 - Reorganizations based upon the fact that; (a) total post-petition liabilities and allowed claims exceeded the reorganization value; and (b) pre-petition shareholders received less than 50% of the new common shares issued under the reorganization plan, thereby resulting in a substantive change in control.  Biovest applied fresh start accounting on July 1, 2013 (the “Convenience Date”) after concluding that the operating results between the Convenience Date and the Effective Date did not result in a material difference.  Given that the reorganization and adoption of fresh-start accounting resulted in a new entity for financial reporting purposes, Biovest is referred to as the “Predecessor Company” for all periods preceding the Convenience Date, and the “Successor Company” for all periods subsequent to the Convenience Date.  Overall, the implementation of fresh-start accounting resulted in: (i) a comprehensive revaluation of the Predecessor Company’s assets and liabilities to their estimated fair values and; (ii) the elimination of the Predecessor Company’s accumulated deficit and additional paid-in capital.  Due to the fact that these changes are material to Biovest’s consolidated financial statements, the results of the Successor Company may not be comparable in certain respects to those of the Predecessor Company.
 
Use of estimates in the preparation of 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.
 
 
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BIOVEST INTERNATIONAL, INC. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
Fair value of financial assets and liabilities:
 
Both the Predecessor Company and Successor Company measure the fair value of financial assets and liabilities in accordance with GAAP which defines fair value, establishes a framework for measuring fair value, and requires certain disclosures about fair value measurements.
 
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)
 
 
10
 
BIOVEST INTERNATIONAL, INC. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
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.
 
Recent Accounting Pronouncements
 
In July 2013, the FASB issued guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. This guidance requires the unrecognized tax benefit to be presented in the financial statements as a reduction to a deferred tax asset. When a deferred tax asset is not available, or the asset is not intended to be used for this purpose, an entity should present the unrecognized tax benefit in the financial statements as a liability.  The guidance will become effective for us at the beginning of our second quarter of fiscal 2014. We do not expect the adoption of this guidance will have a material impact on our financial statements.
 
In January 2013, the FASB issued guidance clarifying the scope of disclosure requirements for offsetting assets and liabilities. The amended guidance limits the scope of balance sheet offsetting disclosures to derivatives, repurchase agreements, and securities lending transactions to the extent that they are offset in the financial statements or subject to an enforceable master netting arrangement or similar agreement. The guidance became effective for us on October 1, 2013.  The adoption of this guidance has not had a material impact on our financial statements.
 
4. Reorganization plan
 
As described above in Note 2, on June 28, 2013, the Bankruptcy Court entered an Order Confirming the Company’s First Amended Plan of Reorganization under Chapter 11 of the Bankruptcy Code.  The Company’s confirmed Plan became effective on July 9, 2013.  The following is a summary of the material terms of the Plan as confirmed.  This summary highlights only certain substantive provisions of the Plan and is not intended to be a complete description of the Plan.
 
 
11
 
BIOVEST INTERNATIONAL, INC. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
Equity Interests and New Capital Structure
 
Common shares, options, and warrants or other rights to purchase or acquire common shares which existed prior to Effective Date were cancelled without further liability, payment or compensation in respect thereof.  The Successor Company amended and restated its Certificate of Incorporation to authorize the Company to issue up to 50,000,000 shares of preferred stock and up to 300,000,000 shares of new common stock (“Reorganized Biovest Common Stock”).  Pursuant to the Plan, Biovest issued 100,000,000 shares of Reorganized Biovest Common Stock as follows:
 
 
·
to the holders of allowed secured claims – 93 million shares
 
·
to the holders of allowed unsecured claims – 7 million shares
 
Administrative Expenses
 
Administrative expenses consisted primarily of legal fees incurred in the case as well as a rent cure claim for past amounts due under the lease for our manufacturing facility located in Coon Rapids, Minnesota.  The majority of the legal fees as well as the rent cure claim have been paid by the Company, in cash, shortly after the Effective Date.  A portion of the legal fees (approximately $0.08 million) will remain accrued and become due by the Company, in cash, on March 31, 2014.

Priority Claims
 
Priority Claims consisted of pre-petition wages due to the Company’s employees in the approximate amount of $0.12 million.  Priority wage claims were paid by the Company, in cash, shortly after the Effective Date.
 
DIP Financing Claims
 
During the Company’s Reorganization proceedings, the Bankruptcy Court approved a $5.7 million post-petition line of credit facility (the “DIP Financing”) from Corps Real, LLC (“Corps Real”), Laurus Master Fund Ltd., Calliope Corporation, Valens U.S. SPV I, LLC, Psource Structured Debt Limited, Valens Offshore SPV II, Corp, and Valens Offshore SPV I, Ltd, acting collectively through their agent, LV Administrative Services, Inc. (collectively, the “LV Entities”).  The LV Entities and Corps Real represent the Company’s pre-petition senior secured lenders (the “Senior Secured Lenders”) originally secured by a security interest in and lien on all assets and properties of the Company.

Pursuant to the terms of the Plan, the DIP Financing claims were deemed fully paid and any liens and security interests granted in favor of Corps Real and the LV Entities under the DIP Financing documents were released and terminated as of the Effective Date.  As a result of the Plan, the Senior Secured Lenders converted any amounts due under their DIP Financing Claims into Reorganized Biovest Common Stock, and hold 93% of the outstanding common shares as of the Effective Date.  Furthermore, as of the Effective Date, approximately $2.6 million remained available to the Company for working capital without payment of any further consideration by the Company.  From the period following Effective Date through December 31, 2013, Biovest drew down the remaining $2.6 million available to the Company, of which $0.787 million was drawn in the three months ended December 31, 2013.  These draws were recorded as in increase to additional paid-in capital on the Successor balance sheet as of December 31, 2013 and are shown as “additional investment from shareholders” on the Successor Cash Flow Statement and Statement of Stockholders’ Equity.
 
Secured Claims
 
In addition to the DIP Financing claims discussed above, the allowed secured claims in the Company’s reorganization proceeding consisted of the following:
 
 
·
The Corps Real Claims (approximately $8.0 million): On the Effective Date, the Corps Real Claims were exchanged for approximately 26 million shares of Reorganized Biovest Common Stock, representing approximately 26% of the total issued and outstanding shares of Reorganized Biovest Common Stock as of the Effective Date, in full and final satisfaction of all allowed Corps Real claims.
 
 
·
The LV Entities Claims (approximately $33.7 million):  On the Effective Date, the LV Entities Claims were exchanged for approximately 67 million shares of Reorganized Biovest Common Stock, representing approximately 67% of the total issued and outstanding shares of Reorganized Biovest Common Stock as of the Effective Date, in full and final satisfaction of all allowed LV Entities claims.
 
 
·
The Minnesota Promissory Notes (approximately $0.33 million):  On the Effective Date, the obligations due under the Minnesota Promissory Notes were affirmed.  On July 16, 2013, the Company issued cash payment in the approximate amount of $1 thousand representing the cumulative balance of the missed monthly principal and interest payments due while the Company was in reorganization.  Following the Effective Date, Reorganized Biovest resumed its obligations under the original terms of Minnesota Promissory Note documents.
 
 
12
 
BIOVEST INTERNATIONAL, INC. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
Unsecured Claims
 
The allowed unsecured claims in the Company’s reorganization proceedings totaled approximately $5.4 million.  On the Effective Date, all holders of allowed unsecured claims were entitled to an aggregate of seven million shares of Reorganized Biovest Common Stock, representing 7% of the total issued and outstanding shares of Reorganized Biovest Common Stock as of the Effective Date in full and final satisfaction of all allowed unsecured claims.  Each holder of an allowed unsecured claim received a pro-rata share of the seven million shares available to all allowed unsecured claims.
 
5. Fresh-Start reporting
 
Fresh-start reporting requires that the reporting entity allocate the reorganization value to its assets and liabilities in relation to their fair values upon emergence from Chapter 11 if (i) the value of the assets of the emerging entity immediately before the date of confirmation is less than the total of all post-petition liabilities and allowed claims; and (ii) holders of existing voting shares immediately before confirmation receive less than 50% of the voting shares of the emerging entity.  Adopting fresh-start reporting results in a new reporting entity with no beginning retained earnings or deficit.

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

Post petition current liabilities
   $ 1,652,000  
Post petition non-current liabilities
     339,000  
Allowed claims
     46,744,000  
Total post-petition liabilities and allowed claims
     48,735,000  
Reorganization Value
     (41,562,000 )
Excess of liabilities over reorganization value
   $ 7,173,000  

Accordingly, the Company adopted fresh-start reporting as of the Convenience Date after concluding that the operating results between the Convenience Date and the Effective Date did not result in a material difference.
 
In accordance with the requirements of fresh-start accounting, the Successor Company’s asset values were re-measured and allocated in conformity with ASC 805-20, Business Combinations.  Fresh-start accounting also requires all liabilities be stated at fair value.  The Company’s reorganization value was determined through a variety of factors.  Through the course of the Company’s Chapter 11 Case, the Court approved an undertaking to enter into the sale of all assets of the Company in accordance with Section 363 and Section 365 of the Bankruptcy Code (the “Sale Order”).  Pursuant to the Sale Order, an investment banking firm was retained to perform the marketing and facilitation of the potential sale and an Asset Purchase Agreement was entered with the Secured Lenders of the Company to act as a “stalking horse” purchase bid.  Any qualifying bidder was afforded the opportunity to place a bid to either purchase the Company’s assets, or to sponsor an alternative reorganization plan which would provide equal or better treatment to all impaired classes of claims, with the initial bid established as the total of all outstanding secured debt of the Company plus the administrative expenses associated with the Chapter 11 Case, in the approximate amount of $43.0 million.  In the event that any qualifying bidders had submitted bids prior to the Sale Order deadline, an auction would have taken place.  No bids were submitted and as a result the Bankruptcy Court found and ruled in its Confirmation Order that the value of the Company at the time of Confirmation of the Company’s Plan was equal to or less than the total of the outstanding Secured Debt plus administrative expenses.
 
Based upon the Court’s ruling, the Company engaged a valuation firm to assess the Company’s reorganization value, which was specifically determined based upon the intangible asset values related to the Company’s in-process research and development with respect to the potential commercialization of BiovaxID (the “Vaccine Segment”), as well as the ongoing value of the Company’s hollow fiber instrumentation and cell culture manufacturing operations (the “Instrumentation Segment”).  The estimated fair value with respect to the Company’s Vaccine Segment was determined using discounted cash flow models which were prepared based upon projections from management regarding a number of estimates including those relating to: the potential market size for BiovaxID, the probability of obtaining regulatory approval in each of three jurisdictions (the EU, Canada, and the United States), and the anticipated cost to manufacture and distribute the vaccine.  Weight was also given to the probability of failure (i.e. zero value).  Based upon this approach, the conclusion of fair value for the Vaccine Segment was determined to be $37.4 million.
 
An estimated fair value with respect to the Company’s Instrumentation Segment was determined using a weighting of an income approach (discounted cash flows) and a market approach (guideline public company method).   Each approach was weighted equally resulting in a conclusion of fair value for the Instrumentation Segment of $4.2 million.
 
 
13
 
BIOVEST INTERNATIONAL, INC. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
Discount rates (weighted average cost of capital) of 33% (Vaccine Segment) and 17% (Instrumentation Segment) were used in applying the discounted cash flow approaches.  The values derived from the approaches described above were based upon significant inputs and assumptions and thus represent a Level 3 measurement as defined in ASC 820, Fair Value Measurement.
 
Upon implementation of fresh-starting accounting, the Company allocated the total estimated reorganization value of $41.6 million (the combined value of the two segments) to the various assets and liabilities based on their estimated fair values and eliminated the accumulated deficit and additional paid-in-capital balances. The reorganization value was first assigned to tangible and identifiable intangible assets. The only identifiable intangible asset which was assigned value was the technology supporting the Vaccine Segment.  Due to the fact that the Company’s ongoing development of BiovaxID both has substance and is incomplete, it has been classified as In-Process Research and Development, which was valued using a specific form of the income approach known as the Multi-Period Excess Earnings Method (“MPEEM”).  Under the MPEEM, cash flows from the asset being valued are forecasted over the expected remaining useful life of the asset (in this case 14 years), with adjustments made to deduct contributory asset charges for other assets that support the asset being valued (in this case, net working capital, net fixed assets, and assembled work force).  The conclusion of fair value for In-Process Research and Development using the MPEEM approach was estimated to be $35.8 million.
 
The excess of the reorganization value over and above the identifiable net asset values resulted in goodwill of $3.9 million. The Successor Company’s debt and equity was also recorded at the fair value estimated through this process. As the estimated enterprise value is dependent on the achievement of future financial results and various assumptions, there is no assurance that financial results will be realized to support the estimated reorganization value.
 
6. Liquidity:
 
The Successor Company emerged from reorganization in July 2013 and continues to operate as a going concern.  On December 31, 2013, Biovest had cash of $0.5 million and working capital of $0.2 million.  On December 16, 2013, the Company issued Secured Promissory Notes to Pabeti, Inc. in the principal amount of up to $0.98 million, Valens Offshore SPV II, Corp in the principal amount of up to $2.2 million, and Valens U.S. SPV I, LLC in the principal amount of up to $0.35 million (the “Senior Secured Notes”).  The Senior Secured Notes have an aggregate maximum principal amount of $3.5 million, mature on December 18, 2018, and are secured by all of the Company’s assets.  Interest accrues at twelve percent per annum on the outstanding principal amount and is payable upon the maturity of the notes unless previously prepaid.  Should the Company have funds in excess of $5 million available for use as working capital on the last day of any month that the Senior Secured Notes are outstanding, the amount of funds that are in excess of $5 million shall be applied as mandatory repayment of any principal plus outstanding interest accrued on the Senior Secured Notes.
 
The Company intends to draw upon the Senior Secured Notes as and when needed to fund the Company’s operations and commercialization efforts.  Through January 30, 2014, the Company had drawn down approximately $1.3 million on the Senior Secured Notes.  The amount available to be drawn down under Senior Secured Notes (approximately $2.2 million) is anticipated to be sufficient to fund the Company’s operations and commercialization efforts through the earlier of (a) obtaining significant additional external funding or (b) April, 2014.
 
Ronald E. Osman, the Chairman of the Company’s Board of Directors has the sole voting and investment power of Pabeti, Inc. and Corps Real, LLC.  Mr. Osman is the beneficial owner of 26.04% of the Company’s outstanding shares as of December 31, 2013 through his investments in Corps Real, LLC and Pabeti, Inc.
 
Valens Offshore SPV II, Corp, Valens Offshore SPV I, Ltd, and Valens U.S. SPV I, LLC (collectively, the “Valens Funds”) together hold a combined 54.99% of the Company’s outstanding shares as of December 31, 2013.  Voting and dispositive power with respect to the shares owned by the Valens Funds is shared with Valens Capital Management, LLC, who acts as investment manager, and Eugene Grin, the Principal of Valens Capital Management, LLC, who is also a member of Biovest’s Board of Directors.
 
Through December 31, 2013 the Company has been primarily engaged in developing BiovaxID.  In the course of these activities, Biovest has sustained losses and expects such losses to continue through at least the end of 2014.  The Company’s ability to fund the additional confirmatory Phase 3 clinical trial required for FDA approval and to continue its detailed analyses of BiovaxID’s clinical trial results is dependent on the Company’s ability to obtain significant additional external funding in the near term, which raises substantial doubt about the Company’s ability to continue as a going concern. Additional sources of funding have not been established; however, additional financing is currently being sought by the Company through strategic collaborations, recognized research funding programs, domestic and/or foreign licensing of the Company’s product candidates and future potential issuances of debt or equity securities.  If adequate funds are not available from the foregoing sources in the immediate term, or if the Company determines it to otherwise be in the Company’s best interest, the Company may be required to delay, reduce the scope of, or eliminate one or more of its research or development programs or curtail some or all of its commercialization efforts.
 
 
14
 
BIOVEST INTERNATIONAL, INC. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

7. Accounts receivable, concentrations of credit risk and major customers:
 
Major customer information is as follows:
 
 
·
Two customers accounted for 40% of revenues for the three months ended December 31, 2013.
 
 
·
Two customers accounted for 46% of revenues for the three months ended December 31, 2012.
 
 
·
One customer accounted for 61% of trade accounts receivable as of December 31, 2013.
 
 
·
Three customers accounted for 72% of trade accounts receivable as of September 30, 2013.
 
A significant amount of the Company’s revenue has been derived from export sales. Details on the Company’s export sales are as follows:
 
 
·
The Company’s export sales as a percentage of total sales equaled 19% for the three months ended December 31, 2013.  The Company’s sales to the United Kingdom totaled 11% of total revenues for this period.
 
 
·
The Company’s sales to the United Kingdom and Canada were 28% and 22% of revenues respectively for the three months ended December 31, 2012.
 
8. Inventories:
 
Inventories consist of the following:
 
   
December 31, 2013
(Unaudited)
    
September 30, 2013
  
Raw materials
   $ 106,000     $ 281,000  
Work-in-process
     14,000       —  
Finished goods
     264,000       48,000  
    $ 384,000     $ 329,000  
 
9. Intangible assets and goodwill
 
On July 1, 2013 the Successor Company recorded $35.8 million in identifiable intangible assets in connection with the implementation of fresh-start accounting, which were related to the technology supporting BiovaxID.  Furthermore, goodwill of $3.9 million was also recorded on July 1, 2013 representing the excess of the reorganization value over the amounts assigned to identifiable net assets. The Successor Company was determined to have two reporting units: BiovaxID vaccine development and Instrumentation/Cell Culture manufacturing.  Goodwill was attributed to each reporting unit as follows:
 
Vaccine Development
   $ 2,840,000  
Instrumentation/Cell Culture manufacturing
     1,057,000  
    $ 3,897,000  

 
15
 
BIOVEST INTERNATIONAL, INC. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

10. Long term debt:
 
Long term debt, related parties consist entirely of the principal balance outstanding on the Senior Secured Notes discussed in Note 6 – Liquidity, above.
 
Long term debt is presented in the table below.
 
   
December 31,
2013
(Unaudited)
    
September 30,
2013
  
Minnesota Promissory Notes
   $ 317,000     $ 319,000  
      317,000       319,000  
Less: current maturities
     (15,000 )     (14,000 )
    $ 302,000     $ 305,000  
 
Minnesota Promissory Notes:
 
On May 6, 2011, the Company closed two financing transactions with the Economic Development Authority in and for the City of Coon Rapids (the “EDA”) and the Minnesota Investment Fund (the “MIF”), which provide capital to help add workers and retain high-quality jobs in the State of Minnesota. The Company issued two secured promissory notes in the aggregate amount of $0.353 million, which amortize over 240 months, with a balloon payment of $0.199 million due on May 1, 2021 (collectively, the “Minnesota Promissory Notes”). The Company may prepay the Minnesota Promissory Notes at any time prior to maturity without penalty. The entirety of the proceeds from the transaction were used to fund capital improvements made to the Company’s existing manufacturing facility in Minneapolis (Coon Rapids), Minnesota.  The Minnesota Promissory Notes bear interest as follows (yielding an effective interest rate of 4.1%):
 
 
•
Months 1-60 at 2.5% interest
 
 
•
Months 61-80 at 5.0% interest
 
 
•
Months 81-100 at 7.0% interest
 
 
•
Months 101-120 at 9.0% interest
 
As of the Effective Date, the obligations due under the Minnesota Promissory Notes were affirmed.  On July 16, 2013, the Company issued payment in the amount of one thousand dollars representing the cumulative balance of the missed monthly principal and interest payments due while the Company was in reorganization.  The Company has resumed the monthly amortizing payments due under the original terms of the notes.
 
11. Capital leases
 
The Company has entered into various capital lease arrangements for the use of laboratory equipment in our Minneapolis, Minnesota facility.  The following is an analysis of the leased property under capital leases by major classes:
 
Class of Property
  
December 31, 2013
(unaudited)
    
September 30, 2013
  
Laboratory equipment
   $ 437,000     $ 315,000  
Less accumulated depreciation
     (35,000 )     (13,000 )
    $ 402,000     $ 302,000  
 
 
16
 
BIOVEST INTERNATIONAL, INC. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
The following is a schedule by years of future minimum lease payments under capital leases together with the present value of the net minimum lease payments as of December 31, 2013.
 
Year ending December 31,
      
2014
   $ 163,000  
2015
     84,000  
2016
     79,000  
Total minimum lease payments
     326,000  
Less amount representing interest
     (40,000 )
Present value of minimum lease payments(a)
   $ 286,000  
 
 
(a)
Reflected in the December 31, 2013 balance sheet as current and noncurrent capital lease obligations of $140,000 and $146,000, respectively.

12. Common stock options and warrants:
 
Common stock options outstanding and exercisable as of December 31, 2013 are as listed in the tables below. The Company expects to recognize $2.1 million in stock compensation expense through December 31, 2016 as a result of stock options currently outstanding.
 
   
Shares
    
Weighted
Avg.
Exercise
Price
    
Weighted Avg.
Contractual
Life (yrs)
    
Aggregate
Intrinsic Value
  
Outstanding at October 1, 2013
     500,000     $ 1.00       4.93     $ —  
Granted
     12,849,999       1.00       5.97       —  
Exercised
     —       —       —       —  
Cancelled
     —       —       —       —  
Outstanding at December 31, 2013
     13,349,999       1.00       5.92       —  
Exercisable at December 31, 2013
     500,000     $ 1.00       4.68     $ —  
 
 
Non-vested employee stock options:

   
Shares
    
Weighted Avg.
Grant-Date
Fair Value
    
Aggregate Intrinsic
Value
  
Non-vested at October 1, 2013
     —     $ —     $ —  
Granted
     12,849,999       0.16       —  
Vested
     —       —       —  
Cancelled
     —       —       —  
Non-vested at December 31, 2013
     12,849,999     $ 0.16     $ —  
 
 
The Company did not have any Common stock warrants outstanding as of December 31, 2013.
 
13. Segment information:
 
The Company operates in two identifiable industry segments. The Company’s Instrumentation Segment is engaged in the development, manufacture and marketing of patented cell culture systems, equipment and consumable parts to pharmaceutical, diagnostic and biotechnology companies as well as in the production and contract manufacturing of biologic drugs and cell production for research institutions worldwide. The Vaccine Segment is focused on developing BiovaxID and has not generated any revenues to date.
 
The Company defines its segment operating results as earnings/(loss) before general and administrative costs, interest expense, interest income, other income, and income taxes. Under the Company’s shared resources concept, assets of the Company are common to the segments listed below and thus not segregated for reporting purposes. Segment information is as follows:
 
 
BIOVEST INTERNATIONAL, INC. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
   
For the three months ended December 31, 2013 (Successor)
  
   
Instrumentation
    
Vaccine
    
Total
  
Revenue
                  
Products
   $ 288,000     $ —     $ 288,000  
Services
     234,000       —       234,000  
Total Revenue
     522,000       —       522,000  
                         
Cost of Revenue
                        
Products
     274,000       —       274,000  
Services
     111,000       —       111,000  
Total Cost of Revenue
     385,000       —       385,000  
Gross Margin ($)
   $ 137,000     $ —     $ 137,000  
Gross Margin (%)
     26 %     —       26 %
 
 
 
   
For the three months ended December 31, 2012 (Predecessor)
  
   
Instrumentation
    
Vaccine
    
Total
  
Revenue
                  
Products
   $ 410,000     $ —     $ 410,000  
Services
     139,000       —       139,000  
Total Revenue
     549,000       —       549,000  
                         
Cost of Revenue
                        
Products
     373,000       —       373,000  
Services
     208,000       —       208,000  
Total Cost of Revenue
     581,000       —       581,000  
                         
Gross Margin ($)
   $ (32,000 )   $ —     $ (32,000 )
Gross Margin (%)
     (6 %)     —       (6 %)
 
 
18
 
BIOVEST INTERNATIONAL, INC. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
14. Commitments and contingencies:
 
Legal proceedings:
 
On July 24, 2013 and August 5, 2013, purported class actions were filed in the United States District Court for the Middle District of Florida (Tampa Division) against Biovest’s former parent corporation, Accentia Biopharmaceuticals, Inc., and several current and former directors and officers of Biovest and Accentia (the “Class Action”).  Biovest was not named as a defendant in either complaint. The complaints allege that the defendants violated federal securities laws by making or causing Accentia and/or Biovest to make false statements, and by failing to disclose or causing Accentia and/or Biovest to fail to disclose material information, concerning the results of the Phase III clinical trial of BiovaxID and status of its approval by the FDA. Plaintiffs seek damages in an unspecified amount on behalf of shareholders who purchased common stock of Accentia or Biovest between July 24, 2008 and August 14, 2012 and were damaged as a result of the decline in the price of common stock allegedly attributable to the claimed violations. On December 4, 2013 the District Court entered an Order consolidating the Class Action cases and appointing a group of lead plaintiffs.  On January 21, 2014, an Amended Consolidated Complaint was filed and served, with responsive pleading by defendants required in March 2014.   Although the time to respond to this Class Action complaint is still underway, our officers and directors believe this litigation to be without merit, deny any wrongdoing or liability and intend to vigorously defend the alleged claims.
 
The Company is not party to any material legal proceedings, and management is not aware of any other, threatened legal proceedings that could cause a material adverse impact on our business, assets, or results of operations. Further, from time to time we are subject to various legal proceedings in the normal course of business.
 
Facility leases:
 
The Company leases approximately 35,000 square feet in Minneapolis, Minnesota, which the Company uses for offices, laboratory, manufacturing, and warehousing space to support its development, potential commercialization, and production of BiovaxID™, the production of the Company’s perfusion cell culture equipment, and the Company’s contract cell culture services. The lease expires on July 30, 2021.   The Company has the right to extend the term of the lease.
 
The Company also leases approximately 1,300 square feet of office space in Tampa, Florida and utilizes the space as the Company’s principal executive and administrative offices. The lease expires on December 31, 2014 and is cancelable by either party with 90 days prior notice.
 
The Company plans to continue to evaluate its requirements for facilities during fiscal 2014. The Company anticipates that as its development of its product candidates advances and as the Company prepares for the future commercialization of its products, its facilities requirements will change.
 
Stanford University Agreement:
 
In September 2004, the Company entered into an agreement, and amended on September 6, 2012, (collectively, the “Stanford Agreement”) with Stanford University (“Stanford”).   The Stanford Agreement provides the Company with worldwide rights to use two proprietary hybridoma cell lines, which are used in the production of the BiovaxID, through 2025.  Under the Stanford Agreement, the Company is obligated to pay an annual maintenance fee of $0.01 million. The Stanford Agreement also provides that the Company pay Stanford $0.1 million within one year following FDA approval of BiovaxID.  Following FDA approval until September 17, 2019, Stanford will receive a royalty of the greater of $50 per patient or 0.05% of BiovaxID net sales revenue, after September 18, 2019, Stanford will receive a royalty of the greater of $85 per patient or 0.10% of BiovaxID net sales revenue. This running royalty will be applied against the balance due on the yearly maintenance fee. The Stanford Agreement obligates the Company to diligently develop, manufacture, market, and sell BiovaxID and to provide progress reports to Stanford regarding these activities. The Company can terminate the Stanford Agreement at any time upon 30 days prior written notice, and Stanford can terminate the Stanford Agreement upon a breach of the agreement by the Company that remains uncured for 30 days after written notice of the breach from Stanford.
 
Royalty Agreements:
 
The current aggregate royalty obligation on BiovaxID (including the Stanford royalty above) and the Company’s other biologic products is 6.30% of BiovaxID net sales revenue.
 
 
19
 
BIOVEST INTERNATIONAL, INC. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
Food and Drug Administration:
 
The FDA has extensive regulatory authority over biopharmaceutical products (drugs and biological products), manufacturing protocols and procedures and the facilities in which mammalian proteins will be manufactured. Any new bioproduct intended for use in humans (including, to a somewhat lesser degree, in vivo biodiagnostic products), is subject to rigorous testing requirements imposed by the FDA with respect to product efficacy and safety, possible toxicity and side effects. FDA approval for the use of new bioproducts (which can never be assured) requires several rounds of extensive preclinical testing and clinical investigations conducted by the sponsoring pharmaceutical company prior to sale and use of the product. At each stage, the approvals granted by the FDA include the manufacturing process utilized to produce the product. Accordingly, the Company’s cell culture systems used for the production of therapeutic or bio-therapeutic products are subject to significant regulation by the FDA under the Federal Food, Drug and Cosmetic Act, as amended.
 
Product liability:
 
The contract production services for therapeutic products offered exposes an inherent risk of liability as the proteins or other substances manufactured, at the request and to the specifications of customers, could foreseeably cause adverse effects. The Company obtains agreements from contract production customers indemnifying and defending the Company from any potential liability arising from such risk. There can be no assurance, however, that the Company will be successful in obtaining such agreements in the future or that such indemnification agreements will adequately protect the Company against potential claims relating to such contract production services. The Company may also be exposed to potential product liability claims by users of its products. A successful partial or completely uninsured claim against the Company could have a material adverse effect on the Company’s operations.
 
License to ViraCell Advanced Products, LLC:
 
Effective on July 29, 2013, the Company entered into a License Agreement (the “ViraCell License”) with its majority-owned subsidiary, ViraCell Advanced Products, LLC. (“ViraCell”). The ViraCell License grants to ViraCell an exclusive, perpetual, worldwide, royalty free license to use, purchase and sell the Company’s hollow-fiber instruments for the limited purpose of producing vaccines, reagents and products for biodefense, infectious diseases, virus like particles, stem cells, zoonotic agents including rabies, and adenoviruses.  The ViraCell License also grants ViraCell a non-exclusive license for use of the Company’s instruments for research, development and production of products in the cancer field.
 
Employment Agreements:
 
On December 1, 2013, the Company entered into an employment agreement with its Chief Financial Officer, Robert E. Farrell whereby the Company agreed to employ Mr. Farrell through December 1, 2014 at a base compensation of $250,000 annually.  Mr. Farrell shall also be entitled to a bonus equal to $125,000 upon the closing of any debt or equity financing(s) resulting in aggregate gross proceeds to the Company in an amount equal or greater than $5 million.  Mr. Farrell was also granted options to purchase 750,000 shares of the Company’s common stock at an exercise price of $1.00 per share pursuant to the employment agreement.  The options have a six-year term and vest over a three year period.  The agreement may be terminated by either party upon thirty days written notice.  In the event the agreement is terminated by the Company, termination payments shall be made to Mr. Farrell in an amount equal to one-half of Mr. Farrell’s base compensation, which shall be paid in monthly increments beginning with the date of termination and ending on December 1, 2014.
 
 
20
 
BIOVEST INTERNATIONAL, INC. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
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 condensed consolidated financial statements and related notes included elsewhere in this Form 10-Q, our Annual Report on Form 10-K for the fiscal year ended September 30, 2013 and the “Description of our Business” attached as exhibit 99.1 to this filing on 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, 2013 and other risks and uncertainties discussed in our other filings with the Securities and Exchange Commission.
 
Overview
 
Biovest is a biotechnology company focused on developing and commercializing BiovaxID, as a personalized therapeutic cancer vaccine for the treatment of B-cell blood cancers; the continued development, commercialization, manufacture and sale of AutovaxID® and other instruments and disposables; and the commercial sale and production of cell culture products and services. We were incorporated in Minnesota in 1981, under the name Endotronics, Inc. In 1993, our name was changed to Cellex Biosciences, Inc. In 2001, we changed our corporate name to Biovest International, Inc. and changed our state of incorporation from Minnesota to Delaware.
 
As a result of our collaboration with the National Cancer Institute (“NCI”), we are developing BiovaxID as a personalized therapeutic cancer vaccine for the treatment of non-Hodgkin’s lymphoma (“NHL”), a B-cell cancer, specifically, follicular lymphoma (“FL”) and mantle cell lymphoma (“MCL”), and potentially other B-cell cancers. Both FL and MCL are generally considered to be incurable with currently approved therapies. These generally fatal diseases arise from the lymphoid tissue and are characterized by an uncontrolled proliferation and spread throughout the body of mature B-cells, which are a type of white blood cell. Three clinical trials conducted under our investigational new drug application (“IND”) have studied BiovaxID in NHL. These studies include a Phase 2 clinical trial and a Phase 3 clinical trial in patients with FL, as well as a Phase 2 clinical trial in patients with MCL. We believe that these clinical trials demonstrate the safety and efficacy of BiovaxID.
 
Based on our scientific advice meetings with multiple European Union (“EU”) Member national medicines agencies, on December 3, 2013 we filed our marketing authorization application (“MAA”) with the European Medicines Agency (“EMA”).  We were formally notified the application had been validated by the EMA on January 7, 2014, confirming that the submission was complete, and beginning the formal EMA review process intended to secure approval to market BiovaxID in the EU and to allow prescription and sale of BiovaxID for the treatment of non-Hodgkin’s lymphoma in patients who have achieved a first complete remission. Additionally, based on a scientific advice meeting conducted with Health Canada, we plan to file a new drug submission application (“NDS”) seeking regulatory approval in Canada. No assurance can be given that BiovaxID will receive marketing/regulatory approval from the regulatory authorities in any jurisdiction, including but not limited to the EU or Canada.
 
We also conducted a formal guidance meeting with the U.S. Food and Drug Administration (“FDA”) in order to define the path for our filing of a biologics licensing application (“BLA”) for BiovaxID’s U.S. regulatory/marketing approval. As a result of this guidance meeting, we plan to conduct a second Phase 3 clinical trial to complete the clinical data gained through our first Phase 3 clinical trial and our BiovaxID development program to support the filing of a BLA for BiovaxID.  We are preparing to initiate this second Phase 3 clinical trial, subject to availability of funding.
 
To support our planned commercialization of BiovaxID and to support the products of personalized medicine and particularly patient specific oncology products, we developed and commercialized a fully automated, reusable instrument that employs a fully disposable, closed-system cell-growth chamber incorporating a hollow fiber cell-growth cartridge called AutovaxID. Since it is fully enclosed, computer controlled and automated, AutovaxID requires limited supervision and manpower to operate, compared to manual instruments. AutovaxID is suitable for growing antibody-secreting cell lines, including hybridomas and Chinese hamster ovary (“CHO”) cells, which are among the leading kinds of cell lines used for commercial therapeutic protein manufacture. AutovaxID has a small footprint and supports scalable production. We plan to utilize the AutovaxID technology to streamline the commercial manufacture of BiovaxID.  We believe that AutovaxID is the first cell culture system that enables production of personalized cell-based treatments economically.   AutovaxID uses a disposable production unit which provides for robust and dependable manufacturing while complying with the industry current good manufacturing practices (“cGMP”) standards. We are collaborating with the U.S. Department of Defense (“DoD”) and others to further develop AutovaxID and related hollow fiber systems and to explore potential production of additional vaccines, including vaccines for viral indications such as influenza and other contagious diseases, and we have formed a majority-owned subsidiary, ViraCell Advanced Products, LLC., to advance these efforts.
 
 
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BIOVEST INTERNATIONAL, INC. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
We also manufacture instruments and disposables used in the hollow fiber production of cell culture products. We manufacture mammalian cell culture products such as whole cells, recombinant and secreted proteins, and monoclonal antibodies for third parties, primarily researchers.  We have produced over 7,000 cell based products for an estimated 2,500 researchers around the world.  We consider our vast experience in manufacturing small batches of different cell based products, together with our expertise in designing and manufacturing instruments for personalized medicines, as important competencies supporting our development of patient specific immunotherapies.
 
Corporate Overview
 
On June 28, 2013 we formally exited reorganization under Chapter 11 of the U.S. Bankruptcy Code (Case No.8:13-bk-02892-KRM the “2013 Bankruptcy Case”) as a fully restructured company.  Our First Modification to the First Amended Plan of Reorganization (the “Plan”) became effective on July 9, 2013 (the “Effective Date”).  The following is a summary of the material terms of the Plan as confirmed.  This summary highlights only certain substantive provisions of the Plan and is not intended to be a complete description of the Plan.
 
Equity Interests and New Capital Structure
 
Common shares, options, and warrants or other rights to purchase or acquire common shares which existed prior to the Effective Date were cancelled as of the Effective Date without further liability, payment or compensation in respect thereof.  We amended and restated our Certificate of Incorporation to authorize the issuance of up to 50,000,000 shares of preferred stock and up to 300,000,000 shares of common stock (“Reorganized Biovest Common Stock”).  Pursuant to the Plan, we issued 100,000,000 shares of Reorganized Biovest Common Stock as follows:
 
 
·
to the holders of allowed secured claims – 93 million shares
 
·
to the holders of allowed unsecured claims – 7 million shares
 
Administrative Expenses
 
Administrative expenses consisted primarily of legal fees incurred in connection with the 2013 Bankruptcy Case as well as a rent cure claim for past amounts due under the lease for our manufacturing facility located in Minneapolis, Minnesota.  The majority of the legal fees as well as the rent cure claim were paid, in cash, shortly after the Effective Date.  A portion of the legal fees (approximately $0.08 million) will remain accrued and become due, in cash, on March 31, 2014.

Priority Claims
 
Priority Claims consisted of pre-petition wages due to our employees in the approximate amount of $0.12 million.  Priority wage claims were paid, in cash, shortly after the Effective Date.
 
DIP Financing Claims
 
During our Reorganization proceedings, the Bankruptcy Court approved a $5.7 million post-petition line of credit facility (the “DIP Financing”) from Corps Real, LLC (“Corps Real”), Laurus Master Fund Ltd., Calliope Corporation, Valens U.S. SPV I, LLC, Psource Structured Debt Limited, Valens Offshore SPV II, Corp, and Valens Offshore SPV I, Ltd, acting collectively through their agent, LV Administrative Services, Inc. (collectively, the “LV Entities”).  The LV Entities and Corps Real represent our pre-petition senior secured lenders (the “Senior Secured Lenders”) originally secured by a security interest in and lien on all of our assets.
 
Pursuant to the terms of the Plan, the DIP Financing claims were deemed fully paid and any liens and security interests granted in favor of Corps Real and the LV Entities under the DIP Financing documents were released and terminated as of the Effective Date.  As a result of the Plan, the Senior Secured Lenders converted any amounts due under their DIP Financing Claims into Reorganized Biovest Common Stock, and hold 93% of the outstanding common shares as of the Effective Date.  Furthermore, as of the Effective Date, approximately $2.6 million remained available to us for working capital without payment of any further consideration by us.  From the period following Effective Date through December 31, 2013, we drew down the remaining $2.6 million available, of which $0.787 million was drawn in the three months ended December 31, 2013.  These draws were recorded as in increase to additional paid-in capital on the Successor balance sheet as of December 31, 2013 and are shown as “additional investment from shareholders” on the Successor Cash Flow Statement and Statement of Stockholders’ Equity.
 
Secured Claims
 
Along with the DIP Financing claims discussed above, the allowed secured claims in our reorganization proceeding consisted of the following:
 
 
·
The Corps Real Claims (approximately $8.0 million): On the Effective Date, the Corps Real Claims were exchanged for approximately 26 million shares of Reorganized Biovest Common Stock, representing approximately 26% of the total issued and outstanding shares of Reorganized Biovest Common Stock as of the Effective Date, in full and final satisfaction of all allowed Corps Real claims.
 
 
22
 
BIOVEST INTERNATIONAL, INC. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 
·
The LV Entities Claims (approximately $33.7 million):  On the Effective Date, the LV Entities Claims were exchanged for approximately 67 million shares of Reorganized Biovest Common Stock, representing approximately 67% of the total issued and outstanding shares of Reorganized Biovest Common Stock as of the Effective Date, in full and final satisfaction of all allowed LV Entities claims.
 
 
·
The Minnesota Promissory Notes (approximately $0.33 million):  On the Effective Date, the obligations due under the Minnesota Promissory Notes were affirmed.  On July 16, 2013, we issued cash payment in the approximate amount of $1 thousand representing the cumulative balance of the missed monthly principal and interest payments due while we were in reorganization.  Following the Effective Date, we resumed our obligations under the original terms of Minnesota Promissory Note documents.
 
Unsecured Claims
 
The allowed unsecured claims in our reorganization proceedings totaled approximately $5.4 million.  On the Effective Date, all holders of allowed unsecured claims were entitled to an aggregate of seven million shares of Reorganized Biovest Common Stock, representing 7% of the total issued and outstanding shares of Reorganized Biovest Common Stock as of the Effective Date in full and final satisfaction of all allowed unsecured claims.  Each holder of an allowed unsecured claim received a pro-rata share of the seven million shares available to all allowed unsecured claims.
 
Fresh-Start reporting
 
Upon the Effective Date of our Plan for Reorganization, we were required to adopt fresh-start reporting in accordance with Accounting Standards Codification No. 852 – Reorganization.  We elected to apply fresh-start accounting on a convenience date of July 1, 2013 (the “Convenience Date”) after concluding that operating results between the Effective Date and the Convenience Date did not result in a material difference.  Material adjustments resulting from the reorganization and the application of fresh-start reporting have therefore been reflected in the September 30, 2013 consolidated balance sheet as well as the statement of operations for the three months ended September 30, 2013.  Given that the adoption of fresh-start reporting resulted in a new entity for financial reporting purposes, Biovest is referred to as the “Predecessor Company” for all periods preceding the Convenience Date, and the “Successor Company” for all periods subsequent to the Convenience Date.  See Note 5 – Fresh-Start Reporting in the notes to the Consolidated Financial Statements for further details.
 
Results of Operations
 
Three Months Ended December 31, 2013 Compared to the Three Months Ended December 31, 2012
 
For comparative purposes, we have compared the results of the Predecessor Company (three months ended December 31, 2012) and the Successor Company (three months ended December 31, 2013).  Where specific income statement items have been impacted significantly as compared to our historical results by the reorganization plan or by the adjustments required by the fresh-start reporting process, we have provided explanations of such in the discussion.
 
Revenues
 
Total revenues for the three months ended December 31, 2013 were $0.5 million, which was comparable to the same period in the prior fiscal year.  Instrument sales for the three month period ended December 31, 2013 were approximately $0.3 million representing a decrease of $0.1 million over the same quarter in the prior fiscal year, primarily a result of fewer unit sales of our cultureware, tubing sets, and other disposable products and supplies for use with our instrument product line.  Service revenues from contract manufacturing activities for the current year were $0.2 million representing an increase of $0.1 million compared to the prior year, primarily due to the timing of work performed on one long-term project during the period.   
 
Gross Margin
 
The gross margin as a percentage of sales for the three months ended December 31, 2013 was 26% as compared to a deficit of (6%) for the three months ended December 31, 2012.  In the first quarter of fiscal 2013, we re-assessed the manner in which we allocate shared personnel and facility costs between research and development expense, general and administrative expense, as well as cost of sales.  Due to the increase in resources devoted to filing our marketing authorization application (“MAA”) with the European Medicines Agency (“EMA”) on December 3, 2013, a larger percentage of these shared costs were allocated to research and development expense in the current quarter when compared to previous periods.  The resulting decrease in fixed costs allocated to cost of sales, combined with the increase in our service revenue, contributed to the improved gross margin for the current quarter.
 
 
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BIOVEST INTERNATIONAL, INC. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
Operating Expenses
 
Research and development expenses have increased by $0.7 million for the three months ended December 31, 2013 when compared to the same period in the prior fiscal year. As described in gross margin above, we incurred significant additional research and development costs as we finalized and filed our MAA on December 3, 2013.  These included wages for additional research and development personnel, professional fees for ongoing testing and support in filing our application, as well as non-cash charges for depreciation expense associated with additional laboratory equipment purchased to assist us in running the required assays and other tests in support of our MAA.
 
General and administrative expenses for the three months ended December 31, 2013 increased by $0.1 million when compared to the three months ended December 31, 2012.  This increase was attributable to an increase in professional fees associated with our efforts to find partnering candidates as well as additional sources of capital for the Company, and fees associated with the hiring of our new Chief Financial Officer, Robert F. Farrell, on December 1, 2013.
 
Other Income (Expense)
 
Other expense for the three months ended December 31, 2012 included contractual interest charges and amortization of discounts in connection with our various pre-petition notes issued to our secured and unsecured creditors.   As a result of our restructuring, our pre-petition debt was either disallowed through the bankruptcy proceedings, or converted to shares of Reorganized Biovest Common Stock pursuant to our Plan (see the Corporate Overview above).  As a result, interest expense for the three months ended December 31, 2013 has decreased considerably.  For the three month period ending December 31, 2013, the Successor Company has recorded $0.01 million in interest expense, representing interest which has accrued on the Minnesota Promissory Notes (the obligations of which were affirmed in our reorganization proceedings), as well as interest on the Senior Secured Notes (see Liquidity below).
 
Other expense for the Predecessor Company also include a gain on derivative liabilities of $0.65 million for the three month period ended December 31, 2012.  As a result of our Plan, these liabilities were extinguished and we will no longer be required to record gains or losses relating to these derivative liabilities on the Successor Company financial statements.
 
Liquidity
 
The Successor Company emerged from reorganization in July 2013 and continues to operate as a going concern.  On December 31, 2013, we had cash of $0.5 million and working capital of $0.2 million.  On December 16, 2013, the Company issued Secured Promissory Notes to Pabeti, Inc. in the principal amount of up to $0.98 million, Valens Offshore SPV II, Corp in the principal amount of up to $2.2 million, and Valens U.S. SPV I, LLC in the principal amount of up to $0.35 million (the “Senior Secured Notes”).  The Senior Secured Notes have a maximum principal amount of $3.5 million, mature on December 18, 2018, and are secured by all of the Company’s assets.  Interest accrues at twelve percent per annum on the outstanding principal amount and is payable upon the maturity of the notes unless previously prepaid.  Should we have funds in excess of $5 million available for use as working capital on the last day of any month that the Senior Secured Notes are outstanding, the amount of funds that are in excess of $5 million shall be applied as mandatory repayment of any principal plus outstanding interest accrued on the Senior Secured Notes.
 
We intend to draw upon the Senior Secured Notes as and when needed to fund our operations and commercialization efforts.  Through January 30, 2014, we had drawn approximately $1.3 million on the Senior Secured Notes.  The remaining amount available to be drawn under the Senior Secured Notes (approximately $2.2 million) is anticipated to be sufficient to fund our operations and commercialization efforts through the earlier of (a) obtaining significant additional external funding or (b) April, 2014.
 
Ronald E. Osman, the Chairman of the Company’s Board of Directors has the sole voting and investment power of Pabeti, Inc. and Corps Real, LLC.  Mr. Osman is the beneficial owner of 26.04% of the Company’s outstanding shares as of December 31, 2013 through his investments in Corps Real, LLC and Pabeti, Inc.
 
Valens Offshore SPV II, Corp, Valens Offshore SPV I, Ltd, and Valens U.S. SPV I, LLC (collectively, the “Valens Funds”) together hold a combined 54.99% of the Company’s outstanding shares as of December 31, 2013.  Voting and dispositive power with respect to the shares owned by Valens Funds is shared with Valens Capital Management, LLC, who acts as investment manager, and Eugene Grin, the Principal of Valens Capital Management, LLC, who is also a member of Biovest’s Board of Directors.
 
 
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BIOVEST INTERNATIONAL, INC. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
Through December 31, 2013 we have been primarily engaged in developing BiovaxID.  In the course of these activities, Biovest has sustained losses and expects such losses to continue through at least the end of 2014.  Our ability to fund the additional confirmatory Phase 3 clinical trial required for FDA approval and to continue our detailed analyses of BiovaxID’s clinical trial results is dependent upon our  ability to obtain significant additional external funding in the near term, which raises substantial doubt about our ability to continue as a going concern. Additional sources of funding have not been established; however, additional financing is currently being sought through strategic collaborations, recognized research funding programs, domestic and/or foreign licensing of the Company’s product candidates and future potential issuances of debt or equity securities.  If adequate funds are not available from the foregoing sources in the immediate term, 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.
 
Cash Flows for the Three Months Ended December 31, 2013
 
Our net loss for the three months ended December 31, 2013 was $2.1 million. We have adjusted the net loss on our cash flow statement for certain non-cash expenses including the depreciation of laboratory and computer equipment in the amount of $0.07 million, as well as the decrease in operating assets in the amount of $0.3 million (primarily in trade receivables) over the three months ending December 31, 2013.  After these and other non-cash adjustments to our net loss, cash used in operating activities was $1.6 million for the three months ended December 31, 2013 as compared to $0.9 million for the three months ended December 31, 2012.
 
Net cash outflows from investing activities include the purchase of approximately $0.08 million in laboratory equipment for our manufacturing facility in Minnesota.
 
Net cash inflows from financing activities were $1.4 million for the three months ended December 31, 2013. As discussed above, we have financed our operations over the three months ended December 31, 2013 through the proceeds from the Senior Secured Notes ($0.7 million) as well as the DIP Financing ($0.8 million).  Financing activities for the period also included the repayment of principal due under capital lease arrangements for laboratory equipment ($0.06 million) used in our Minneapolis, MN facility.
 
Fluctuations in Operating Results
 
Our operating results may vary significantly from quarter-to-quarter or year-to-year, depending on factors such as timing of biopharmaceutical development and commercialization of products by our customers, the timing and size of orders for instrumentation and cultureware, and the timing of increased research and development of BiovaxID. Consequently, revenues, profits or losses may vary significantly from quarter to quarter or year to year, and revenue or profits or losses in any period will not necessarily be indicative of results in subsequent periods.
 
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, 2013 and those set forth in our other filings with the Securities and Exchange Commission. Except as required by law, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
 
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Not Applicable.
 
 
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BIOVEST INTERNATIONAL, INC. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
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 December 31, 2013, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION
 
LEGAL PROCEEDINGS
 
Legal proceedings:
 
On July 24, 2013 and August 5, 2013, purported class actions were filed in the United States District Court for the Middle District of Florida (Tampa Division) against Biovest’s former parent corporation, Accentia, and several current and former directors and officers of Biovest and Accentia (the “Class Action”).  Biovest was not named as a defendant in either complaint. The complaints allege that the defendants violated federal securities laws by making or causing Accentia and/or Biovest to make false statements, and by failing to disclose or causing Accentia and/or Biovest to fail to disclose material information, concerning the results of the Phase III clinical trial of BiovaxID and status of its approval by the FDA. Plaintiffs seek damages in an unspecified amount on behalf of shareholders who purchased common stock of Accentia or Biovest between July 24, 2008 and August 14, 2012 and were damaged as a result of the decline in the price of common stock allegedly attributable to the claimed violations. On December 4, 2013 the District Court entered an Order consolidating the Class Action cases and appointing a group of lead plaintiffs.   On January 21, 2014, an Amended Consolidated Complaint was filed and served, with responsive pleading by defendants required in March 2014. Although the time to respond to this Class Action complaint is still underway, our officers and directors believe this litigation to be without merit, deny any wrongdoing or liability and intend to vigorously defend the alleged claims.
 
The Company is not party to any material legal proceedings, and management is not aware of any other, threatened legal proceedings that could cause a material adverse impact on our business, assets, or results of operations. Further, from time to time we are subject to various legal proceedings in the normal course of business.
 
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
             
None.
 
DEFAULTS UPON SENIOR SECURITIES
 
None.
 
MINE SAFETY DISCLOSURES
 
Not Applicable
 
OTHER INFORMATION
 
None.  

 
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BIOVEST INTERNATIONAL, INC. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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
     
  10.1
  
Employment Agreement, dated December 1, 2013, between Biovest International, Inc. and Robert Farrell (filed as Exhibit 10.1 to Biovest’s Form 8-K filed December 5, 2013, and incorporated herein by reference).
     
  10.2
  
Credit and Security Agreement, dated December 18, 2013, among Biovest International, Inc., Pabeti, Inc., Valens U.S. SPV I, LLC, Valens Offshore SPV II, Corp. and LV Administrative Services, Inc. (filed as Exhibit 10.29 to Biovest’s Form 10-K filed December 27, 2013, and incorporated herein by reference).
     
  10.3
  
Secured Promissory Note, dated December 18, 2013, between Biovest International, Inc. and Pabeti, Inc. (filed as Exhibit 10.30 to Biovest’s Form 10-K filed December 27, 2013, and incorporated herein by reference).
     
  10.4
  
Secured Promissory Note, dated December 18, 2013, between Biovest International, Inc. and Valens U.S. SPV I, LLC (filed as Exhibit 10.31 to Biovest’s Form 10-K filed December 27, 2013, and incorporated herein by reference).
     
  10.5
  
Secured Promissory Note, dated December 18, 2013, between Biovest International, Inc. and Valens Offshore SPV II, Corp. (filed as Exhibit 10.32 to Biovest’s Form 10-K filed December 27, 2013 and incorporated herein by reference).
     
  10.6
  
Intellectual Property Security Agreement, dated December 18, 2013, between Biovest International, Inc. and LV Administrative Services, Inc. (filed as Exhibit 10.33 to Biovest’s Form 10-K filed December 27, 2013, and incorporated herein by reference).
     
  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 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 Chief Financial Officer.
     
      99.1       Description of Our Business
     
   101
  
The following financial information from Biovest International, Inc.’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2013 (unaudited), formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets as of December 31, 2013 and September 30, 2013, (ii) Condensed Consolidated Statements of Operations for the three months ended December 31, 2013 and 2012 (unaudited), (iii) Condensed Consolidated Statements of Stockholders’ Equity for the three months ended December 31, 2013 (unaudited), (iv) Condensed Consolidated Statements of Cash Flows for the three months ended December 31, 2013 and 2012 (unaudited), and (v) the Notes to Condensed Consolidated Financial Statements.
 
 
27
 
BIOVEST INTERNATIONAL, INC. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 
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: February 14, 2014
/s/ Carlos F. Santos
 
Carlos F. Santos, Ph.D.
 
Chief Executive Officer
 
(Principal Executive Officer)
   
Date: February 14, 2014
/s/ Robert E. Farrell
 
Robert E. Farrell, J.D.
 
Chief Financial Officer
 
(Principal Financial Officer)
 
 
 
 
 
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