a21213110q.htm

Statements in this Quarterly Report on Form 10-Q that are not strictly historical in nature are forward-looking statements. These statements may include, but are not limited to, statements about: the timing of the commencement, enrollment, and completion of our clinical trials for our product candidates; the progress or success of our product development programs; the status of regulatory approvals for our product candidates; the timing of product launches; our ability to protect our intellectual property and operate our business without infringing upon the intellectual property rights of others; and our estimates for future performance, anticipated operating losses, future revenues, capital requirements, and our needs for additional financing. In some cases, you can identify forward-looking statements by terms such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would,” “goal,” or other variations of these terms (including their use in the negative) or by discussions of strategies, plans or intentions. These statements are only predictions based on current information and expectations and involve a number of risks and uncertainties. The underlying information and expectations are likely to change over time. Actual events or results may differ materially from those projected in the forward-looking statements due to various factors, including, but not limited to, those set forth in “ITEM 1A. RISK FACTORS” of our Annual Report on Form 10-K for the fiscal year ended September 30, 2012 and those set forth in our other filings with the Securities and Exchange Commission. Except as required by law, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

	December 31, 2012 (Unaudited)			September 30, 2012
ASSETS
Current assets:
Cash and cash equivalents	$	353,000		$	72,000
Accounts receivable, net of $8,000 allowance for doubtful accounts at December 31, 2012 and September 30, 2012		200,000			221,000
Costs and estimated earnings in excess of billings on uncompleted contracts		30,000			28,000
Inventories		402,000			400,000
Prepaid expenses and other current assets		169,000			152,000
Total current assets		1,154,000			873,000
Property and equipment, net		900,000			935,000
Patents and trademarks, net		194,000			202,000
Goodwill		2,131,000			2,131,000
Other assets		578,000			598,000
Total assets	$	4,957,000		$	4,739,000

LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	912,000		$	736,000
Accrued liabilities		6,137,000			5,069,000
Customer deposits		4,000			—
Billing in excess of costs and estimated earnings		14,000			—
Derivative liabilities		211,000			857,000
Notes payable, related party		8,419,000			5,936,000
Current maturities of long term debt		29,174,000			28,889,000
Total current liabilities		44,871,000			41,487,000

Long term debt, less current maturities		2,833,000			2,833,000
Accrued interest		473,000			437,000
Other		73,000			98,000
Total liabilities		48,250,000			44,855,000
Commitments and contingencies (Note 13)		—			—
Stockholders’ deficit:
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; 146,510,818 and 146,436,893 issued and outstanding at December 31, 2012 and September 30, 2012		1,465,000			1,464,000
Additional paid-in capital		131,395,000			131,307,000
Accumulated deficit		(176,153,000	)		(172,887,00	)
Total stockholders’ deficit		(43,293,000	)		(40,116,000	)
Total liabilities and stockholders’ deficit	$	4,957,000		$	4,739,000

	Three Months Ended December 31,
	2012			2011
Revenue:
Products	$	410,000		$	846,000
Services		139,000			217,000
Total revenue		549,000			1,063,000

Operating costs and expenses:
Cost of revenue:
Products		373,000			431,000
Services		208,000			208,000
Research and development expense		722,000			774,000
General and administrative expense		669,000			627,000
Total operating costs and expenses		1,972,000			2,040,000
Loss from operations		(1,423,000	)		(977,000	)

Other income (expense):
Interest expense, net		(2,487,000	)		(1,045,000	)
Gain on derivative liabilities		645,000			340,000
Other (expense), net		(1,000	)		(2,000	)
Total other expense		(1,843,000	)		(707,000	)
Loss before reorganization items		(3,266,000	)		(1,684,000	)
Reorganization items:
Gain on reorganization		—			222,000
Professional fees		—			(18,000	)
Total reorganization items		—			204,000
Net loss	$	(3,266,000	)	$	(1,480,000	)

Loss per common share:
Basic and diluted	$	(0.02	)	$	(0.01	)
Weighted average shares outstanding:
Basic and diluted		146,495,560			144,169,225

	Common Stock
	Shares		Amount		Additional Paid- in Capital		Accumulated Deficit			Total
Balances October 1, 2012		146,436,893	$	1,464,000	$	131,307,000	$	(172,887,000	)	$	(40,116,000	)
Issuance of common shares for interest on outstanding debt		73,925		1,000		15,000		—			16,000
Employee share-based compensation		—		—		73,000		—			73,000
Net loss		—		—		—		(3,266,000	)		(3,266,000	)
Balances December 31, 2012		146,510,818	$	1,465,000	$	131,395,000	$	(176,153,000	)	$	(43,293,000	)


	Three Months Ended December 31,
	2012			2011
Cash flows from operating activities:
Net loss	$	(3,266,000	)	$	(1,480,000	)
Adjustments to reconcile net loss to net cash flows from operating activities before reorganization items:
Depreciation		40,000			29,000
Amortization of patents		7,000			7,000
Employee share-based compensation		73,000			72,000
Amortization of discount on notes payable		1,565,000			279,000
Amortization of deferred loan costs		9,000			30,000
Shares issued for interest on outstanding debt		1,000			2,000
Gain on derivative liabilities		(645,000	)		(340,000	)
Changes in cash resulting from changes in:
Operating assets		13,000			(122,000	)
Operating liabilities		1,344,000			845,000
Net cash flows from operating activities before reorganization items		(859,000	)		(678,000	)

Reorganization items:
Gain on reorganization plan		—			(222,000	)
Net change in cash flows from reorganization items		—			(222,000	)
Net cash flows from operating activities		(859,000	)		(900,000	)
Cash flows from investing activities:
Acquisition of furniture, equipment and leasehold improvements		(5,000	)		(94,000	)
Net cash flows from investing activities		(5,000	)		(94,000	)

Cash flows from financing activities:
Repayment of notes payable and long-term debt		(26,000	)		(3,000	)
Proceeds from notes payable and long-term debt		1,585,000			—
(Payments to)/advances from related party		(414,000	)		866,000
Proceeds from equipment financing		—			77,000
Net cash flows from financing activities		1,145,000			940,000

Net change in cash		(281,000	)		(54,000	)
Cash at beginning of period		72,000			201,000
Cash at end of period	$	353,000		$	147,000

Supplemental disclosure of cash flow information:
Non-cash financing and investing transactions:
Issuance of shares for payment of interest on outstanding debt	$	16,000		$	25,000
Issuance of shares to settle pre-petition claims		—			298,000
Increase in March 2014 Obligations		—			63,000
Cash paid for interest during period	$	2,000		$	60,000

Biovest International, Inc.’s (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. Biovest was incorporated in Minnesota in 1981, under the name Endotronics, Inc. In 1993, the Company’s corporate name was changed to Cellex Biosciences, Inc. In 2001, the Company changed its corporate name to Biovest International, Inc. and changed its state of incorporation from Minnesota to Delaware.

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

Based on the Company’s scientific advice meetings with multiple European Union (“EU”)-Member national medicines agencies, the Company filed its formal notice of intent to file a marketing authorization application (“MAA”) with the European Medicines Agency (“EMA”), which begins the EU marketing approval application process. Additionally, based on a scientific advice meeting conducted with Health Canada, the Company announced plans to file a new drug submission application (“NDS”) seeking regulatory approval in Canada. Biovest could receive a decision regarding EU marketing and Canadian regulatory approvals for BiovaxID within 12 months after the submission of the Company’s MAA and NDS assuming that the rigorous review process advances forward in a timely and positive manner and no substantial regulatory issues or problems are encountered. The Company also conducted a formal guidance meeting with the U.S. Food and Drug Administration (“FDA”) in order to define the path for the Company’s filing of a biologics licensing application (“BLA”) for BiovaxID’s U.S. regulatory/marketing approval. Further in its guidance, the FDA required that the Company conduct a confirmatory second Phase 3 clinical trial to complete the clinical data gained through its first Phase 3 clinical trial and its BiovaxID development program to support the Company’s filing of a BLA for BiovaxID. The Company is preparing, subject to required funding, to initiate this second Phase 3 clinical trial to advance BiovaxID toward the U.S. market.

To support the Company’s planned commercialization of BiovaxID and to support the products of personalized medicine and particularly, patient specific oncology products, the Company developed and commercialized a fully automated cell culture 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. 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 is collaborating with the U.S. Department of Defense (“DoD”) and others to further develop AutovaxID and the Company’s related hollow fiber systems and to explore potential production of additional vaccines, including vaccines for viral indications such as influenza and other contagious diseases.

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.

In April 2003, the Company entered into an investment agreement with Accentia Biopharmaceuticals, Inc. (“Accentia”). As a result of this agreement, in June 2003, the Company became a subsidiary of Accentia through the sale of shares of the Company’s authorized but unissued common and preferred stock representing approximately 81% of the Company’s equity outstanding immediately after the investment. The aggregate investment commitment initially received from Accentia was $20 million. Following Accentia’s investment, the Company continued to be a reporting company under Section 12(g) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and the Company files periodic and other reports with the Securities and Exchange Commission (“SEC”). As of December 31, 2012, Accentia owned approximately 59% of the Company’s outstanding common stock.

In November 2010, the Company completed and formally exited reorganization under Chapter 11 of the U.S. Bankruptcy Code (“Chapter 11”) as a fully restructured company. On March 19, 2012, the U.S. Bankruptcy Court for the Middle District of Florida, Tampa Division (the “Bankruptcy Court”) entered a Final Decree closing the Company’s Chapter 11 proceedings. Through the provisions of the Company’s bankruptcy plan (as amended) (the “Plan”), effective on November 17, 2010 (the “Effective Date”), the Company restructured its debts into a combination of new debt and equity.

On November 17, 2012, an aggregate of approximately $27.7 million in principal, became due under the Corps Real Note, Laurus/Valens Term A Notes, and the Exchange Notes issued to the holders under the Exit Financing (collectively, the “Matured Obligations”) (see Notes 7 and 8). Because the Company was unable to pay the amount due on November 17, 2012, an event of default occurred. On December 19, 2012, a majority of the holders of the outstanding Exchange Notes issued in the Exit Financing commenced a breach of contract action (the “Whitebox Litigation”) to secure monetary judgment(s) against the Company for the outstanding defaulted principal and interest owed to them in the aggregate amount of approximately $1.2 million, in the State of Minnesota. In response, the Company filed a Motion to Dismiss, for the reason that the venue in which the Whitebox Litigation was filed was improper. Pursuant to the terms of the Exchange Notes, the proper venue is New York City, in the Borough of Manhattan. The Company has not been notified of an event of default by any other holder(s) of the outstanding Exchange Notes. As a result of this event of default, the Company has accrued interest on the Exchange Notes at a default rate of 15% per annum.

On November 17, 2012, the Company, Corps Real and Laurus/Valens entered into a standstill agreement, whereby (i) the maturity dates of the Corps Real Note and the Term A Notes were extended from November 17, 2012 to January 31, 2013 and (ii) Corps Real and Laurus/Valens granted the Company a forbearance until January 31, 2013 from exercising their rights and/or remedies available to them under the Corps Real Note, Term A Notes and Term B Notes. Although the standstill agreement has expired, the Company, Corps Real and Laurus/Valens are continuing to negotiate the potential restructuring of the Corps Real Note, Term A Notes, and Term B Notes. Upon notification of an event of default by Corps Real, Corps Real will have the right to foreclose upon its first priority security interest in all of the Company’s assets. Upon notification of an event of default by Laurus/Valens, Laurus/Valens (a) will have right to foreclose upon their lien on all of the Company’s assets (which is subordinate only to the security interest of Corps Real) and (b) may appoint one-third of the total membership of the Company’s Board of Directors. The Company has not been notified of an event of default by either Corps Real and/or Laurus/Valens.

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

Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 852—Reorganizations, which is applicable to companies in Chapter 11, generally does not change the manner in which financial statements are prepared. However, it does require that the financial statements for periods subsequent to the filing of the Chapter 11 petition distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Revenues, expenses, realized gains and losses, and provisions for losses that can be directly associated with the reorganization and restructuring of the business must be reported separately as reorganization items in the statements of operations beginning in the quarter ending December 31, 2008. The balance sheet must distinguish prepetition liabilities subject to compromise from both those prepetition liabilities that are not subject to compromise and from post-petition liabilities. Liabilities that may be affected by a plan of reorganization must be reported at the amounts expected to be allowed by the Bankruptcy Court, even if they may be settled for lesser amounts. In addition, cash provided by reorganization items must be disclosed separately in the statement of cash flows. The Company became subject to ASC Topic 852 effective on November 10, 2008, emerged from Chapter 11 protection on November 17, 2010, and has segregated those items as outlined above for all reporting periods between such dates.

Pursuant to the Plan, holders of existing voting shares of the Company’s common stock immediately before the Plan confirmation received more than 50% of the voting shares of the emerging entity, thus the Company did not adopt fresh-start reporting upon emergence from Chapter 11. The Company instead followed the guidance as described in ASC 852-45-29 for entities which do not qualify for fresh-start reporting. Liabilities compromised by the Plan were stated at present values of amounts to be paid, and forgiveness of debt was reported as an extinguishment of debt and classified in accordance with ASC Topic 225. On March 19, 2012, the Bankruptcy Court entered a Final Decree closing the Company’s Chapter 11 proceedings.

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.

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

The carrying values of the Company’s long-lived assets are evaluated whenever events or changes in circumstances indicate that the carrying amount might not be recoverable. This assessment may be based upon management’s experience in the industry, historical and projected sales, current backlog, and expectations of undiscounted future cash flows. The Company reviews the valuation and amortization of those long-lived assets to determine possible impairment by comparing the carrying value to projected undiscounted future cash flows of the related assets. During the three months ended December 31, 2012, the Company noted no events that would give it reason to believe that impairment on the Company’s long-lived assets is necessary.

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

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

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:

The Company generally does not use derivative financial instruments to hedge exposures to cash-flow, market or foreign-currency risks. However, the Company and its consolidated subsidiary have entered into certain other financial instruments and contracts, such as debt financing arrangements and freestanding warrants with features that are either (i) not afforded equity classification, (ii) embody risks not clearly and closely related to host contracts, or (iii) may be net-cash settled by the counterparty. These instruments are required to be carried as derivative liabilities, at fair value.

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

Instruments and disposables sales are recognized in the period in which the applicable products are delivered. The Company does not provide its customers with a right of return; however, deposits made by customers must be returned to customers in the event of non-performance by the Company and, as such, are not recognized as revenue until product delivery. Revenues from contract cell production services are recognized using the percentage-of-completion method, measured by the percentage of contract costs incurred to date to the estimated total contract costs for each contract. Contract costs include all direct material, subcontract and labor costs and those indirect costs related to contract performance, such as indirect labor, insurance, supplies and tools. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions, estimated profitability and final contract settlements may result in revisions to revenues, costs and profits and are recognized in the period such revisions are determined. Because of the inherent uncertainties in estimating costs, it is at least reasonably possible that the estimates used will change in the near term. The asset “costs and estimated earnings in excess of billings on uncompleted contracts” represents revenues recognized in excess of amounts billed. Such revenues are expected to be billed and collected within one year on uncompleted contracts. The liability “billings in excess of costs and estimated earnings on uncompleted contracts” represents billings in excess of revenue recognized.

The Company expenses research and development expenditures as incurred. Such costs include payroll and related costs, facility costs, equipment rental and maintenance, professional fees, outsourced consulting services, travel expenses associated with the Company’s regulatory strategy, the cost of laboratory supplies, and certain other indirect cost allocations that are directly related to research and development activities to (a) assist the Company in its analyses of the data obtained from the Company’s clinical trials and (b) update the Company’s manufacturing facility to facilitate its compliance with various regulatory validations and comparability requirements related to the Company’s manufacturing process and its facility, as the Company continues its advancement toward seeking marketing/regulatory approval from the EMA, Health Canada, the FDA and other foreign regulatory agencies.

The Company has accounted for stock-based compensation under the provisions of ASC Topic 718 – Stock Compensation which requires the use of the fair-value based method to determine compensation for all arrangements under which employees and others receive shares of stock or equity instruments (stock options and common stock purchase warrants). The fair value of each stock option award is estimated on the date of grant using the Black-Scholes valuation model that uses assumptions for expected volatility, expected dividends, expected term, and the risk-free interest rate. Expected volatilities are based on historical volatility of peer companies and other factors estimated over the expected term of the stock options. The expected term of options granted is derived using the “simplified method” which computes expected term as the average of the sum of the vesting term plus the contract term. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for the period of the expected term.

In September 2011, the FASB issued Accounting Standards Updates (“ASU”) 2011-08, Intangibles—Goodwill and Other (Topic 350), Testing Goodwill for Impairment (“ASU 2011-08”), to allow entities to use a qualitative approach to test goodwill for impairment. ASU 2011-08 permits an entity to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If it is concluded that this is the case, it is necessary to perform the currently prescribed two-step goodwill impairment test. Otherwise, the two-step goodwill impairment test is not required. The Company adopted ASU 2011-08 beginning October 1, 2012 and was adopted during the three months ended December 31, 2012. It did not have a material impact on the Company’s condensed consolidated financial statements.

In July 2012, the FASB issued ASU 2012-02 – Testing Indefinite-Lived Intangible Assets for Impairment (“ASU 2012-02”) in order to reduce the cost and complexity of performing an impairment test for indefinite-lived intangible assets by simplifying how an entity tests those assets for impairment and to improve consistency in impairment testing guidance. The new guidance allows an entity the option to make a qualitative assessment about the likelihood that an indefinite-lived intangible asset is impaired to determine whether it should perform a quantitative impairment test. ASU 2012-02 is effective for the Company beginning October 1, 2012, and earlier adoption is permitted. The Company adopted ASU 2012-02 beginning October 1, 2012 and was adopted during the three months ended December 31, 2012. It did not have a material impact on the Company’s condensed consolidated financial statements.

The accompanying unaudited condensed consolidated financial statements have been prepared on a going concern basis, which assumes the Company will realize its assets and discharge its liabilities in the normal course of business. As reflected in the accompanying condensed consolidated financial statements, as of December 31, 2012 the Company had an accumulated deficit of approximately $176.2 million and working capital deficit of approximately $43.7 million. Cash and cash equivalents, at December 31, 2012, were approximately $0.4 million. The Company’s independent auditors issued a “going concern” uncertainty report on the consolidated financial statements for the year ended September 30, 2012, citing significant losses and working capital deficits at that date, which raised substantial doubt about the Company’s ability to continue as a going concern.

Effective December 3, 2012, the Company issued a secured promissory note to Corps Real, which provides the Company with a revolving line of credit in the principal amount of up to $1.5 million (the “Corps Real LOC”). The advances under the Corps Real LOC are to be used only to sustain the Company’s business operations. The Corps Real LOC accrues interest at the rate of 16% per annum with all interest due at maturity of the Corps Real LOC on December 3, 2013. The Corps Real LOC is secured by a first priority lien of all the Company’s assets. Laurus/Valens has agreed to subordinate the Term A Notes and Term B Notes in right of payment and priority, to the payment in full of the Corps Real LOC. As of December 31, 2012, Corps Real has advanced approximately $0.89 million under the Corps Real LOC.

	Outstanding Principal (in 000’s)		Interest Rate (per annum)		Maturity Date	Total Aggregate Number of Warrants Issued		Exercise Price		Expiration Date
Exit Financing	$	1,216		15.0%	On demand		8,733,096	$	1.20	11/17/2017
Corps Real Note		2,292		16.0%	01/31/2013		—		—		—
Corps Real LOC		885		16.0%	12/03/2013		—		—		—
Laurus/Valens Term A Notes		23,467		8.0%	01/31/2013		—		—		—
Laurus/Valens Term B Notes		4,160		8.0%	11/17/2013		—		—		—
March 2014 Obligations		2,833		5.0%	03/17/2014		—		—		—
Accentia Promissory Demand Note		4,542		3.3%	On demand		—		—		—
Minnesota Promissory Notes	$	331		4.1%	05/01/2021		—		—		—

On November 17, 2012, an aggregate of approximately $27.7 million in principal became due under the Corps Real Note, Laurus/Valens Term A Notes, and the Exchange Notes issued to the holders under the Exit Financing (collectively, the “Matured Obligations”). Because the Company was unable to pay the amount due on November 17, 2012, an event of default occurred. On December 19, 2012, a majority of the holders of the outstanding Exchange Notes commenced a breach of contract action (the “Whitebox Litigation”) to secure monetary judgment(s) against the Company for the outstanding defaulted principal and interest owed to them in the aggregate amount of approximately $1.2 million, in the State of Minnesota. In response, the Company filed a Motion to Dismiss, for the reason that the venue in which the Whitebox Litigation was filed was improper. Pursuant to the terms of the Exchange Notes, the proper venue is New York City, in the Borough of Manhattan. The Company has not been notified of an event of default by any other holder(s) of the outstanding Exchange Notes. As a result of this event of default, the Company has accrued interest on the Exchange Notes at rate of 15% per annum.

On November 17, 2012, the Company, Corps Real, and Laurus/Valens entered into a standstill agreement, whereby (i) the maturity dates of the Corps Real Note and the Term A Notes were extended from November 17, 2012 to January 31, 2013 and (ii) Corps Real and Laurus/Valens granted the Company a forbearance until January 31, 2013 from exercising their rights and/or remedies available to them under the Corps Real Note, Term A Notes and Term B Notes. Although the standstill agreement has expired, the Company, Corps Real and Laurus/Valens are continuing to negotiate the potential restructuring of the Corps Real Note, Term A Notes, and Term B Notes. Upon notification of an event of default by Corps Real, Corps Real will have the right to foreclose upon its first priority security interest in all of the Company’s assets. Upon notification of an event of default by Laurus/Valens, Laurus/Valens (a) will have right to foreclose upon their lien on all of the Company’s assets (which is subordinate only to the security interest of Corps Real) and (b) may appoint one-third of the total membership of the Company’s Board of Directors. The Company has not been notified of an event of default by either Corps Real and/or Laurus/Valens.

It is the Company’s intention to meet its cash requirements through proceeds from its instrument and disposables and cell culture products and service manufacturing activities, the use of cash on hand, trade vendor credit, short-term borrowings, debt and equity financings, the modification of existing cash commitments, and strategic transactions such as collaborations, partnering, and licensing. As of December 31, 2012, the Company has approximately $0.6 million available under the Corps Real LOC and has drawn down these funds to fund the Company’s operations during 2013. The Company’s ability to continue present operations, to continue its detailed analyses of BiovaxID™’s clinical trial results, to meet the Company’s debt obligations as they mature (discussed below), to pursue ongoing development and commercialization of BiovaxID and AutovaxID®, including potentially seeking regulatory/marketing approval with national and international regulatory agencies, is dependent upon the Company’s ability to obtain additional significant external funding in the immediate term, which raises substantial doubt about the Company’s ability to continue as a going concern. Additional sources of funding have not been established; however, additional financing is currently being sought by the Company from a number of sources, including the sale of equity or debt securities, strategic collaborations, recognized research funding programs, as well as domestic and/or foreign licensing of the Company’s product candidates. The Company is currently in the process of exploring these various financing alternatives. There can be no assurance that the Company will be successful in securing such financing at acceptable terms, if at all. If adequate funds are not available from the foregoing sources in the immediate term, or if the Company determines it to otherwise be in the Company’s best interest, the Company may consider additional strategic financing options, including sales of assets, or the Company may be required to delay, reduce the scope of, or eliminate one or more of its research or development programs or curtail some or all of its commercialization efforts.

The Company’s liquid assets and cash flow are not sufficient to fully repay the principal owed under its outstanding debt instruments. Further, the Company cannot assure its shareholders that the Company can extend or restructure the Matured Obligations. The Company has not established access to additional capital or debt to repay the Matured Obligations. Further, the Company cannot assure its shareholders that the Company will be able to obtain needed funding to repay or restructure the Matured Obligations.

If, as or when required, the Company is unable to repay, refinance or restructure its indebtedness under the Company’s secured or unsecured debt instruments, or amend the covenants contained therein, the lenders and/or holders under such secured or unsecured debt instruments could elect to terminate their commitments thereunder, cease making further loans, and/or institute foreclosure proceedings or other actions against the Company’s assets. Under such circumstances, the Company could be forced into bankruptcy or liquidation. In addition, any event of default or declaration of acceleration under one of the Company’s debt instruments could also result in an event of default under one or more of the Company’s other debt instruments. The Company may have to seek protection under the U.S. Bankruptcy Code from the Matured Obligations and its other debt instruments. This would have a material adverse impact on the Company’s liquidity, financial position and results of operations.

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

A significant amount of the Company’s revenue has been derived from export sales. The Company’s export sales were 52% and 34% of revenues for the three months ended December 31, 2012 and 2011, respectively. For the three months ended December 31, 2012 and 2011, sales to customers in the United Kingdom accounted for 28% and 27% of total revenue, respectively. Sales to Canadian customers accounted for 22% of revenues for the three months ended December 31, 2012 and were minimal for the three months ended December 31, 2011.

The Company leases approximately 35,000 square feet in Minneapolis (Coon Rapids), Minnesota, which it uses for office, laboratory, manufacturing, and warehousing space to support its development, potential commercialization, and production of BiovaxID™, production of its instruments and disposables, and contract cell culture products and services. The lease expires on December 31, 2020. The Company has the right to extend the term of the lease for two additional five year periods at the greater of the base rent in effect at the end of the initial ten year lease term or market rates in effect at the end of the initial ten year lease term.

The lease contains provisions regarding a strategic collaboration whereby, the landlord agreed to construct certain capital improvements in the amount of $1.5 million to the leased premises to allow the Company to perform cGMP manufacturing of biologic products in the facility, including the manufacture of BiovaxID™ and for potential future expansion to the facility to permit additional BiovaxID production capacity when required. These improvements were completed in September 2011 and were financed by the Company through a combination of cash on hand (approximately $0.175 million), the Minnesota Promissory Notes (in the aggregate amount of $0.353 million) (see Note 8), and an increase to the base rent charged in order to recoup the costs of construction incurred by the landlord (approximately, $1.0 million) over the initial ten year term of the lease. As a result of these transactions, the Company recorded an asset for the fair value of the common stock purchase warrant issued to the landlord (approximately, $0.825 million), and leasehold improvements in the amount of $0.55 million. These costs will be amortized over the initial ten year term of the lease. The respective carrying values of these assets are $0.660 million and $0.464 million as of December 31, 2012.

Effective December 3, 2012, the Company issued a secured promissory note to Corps Real, which provides the Company with a revolving line of credit in the principal amount of up to $1.5 million (the “Corps Real LOC”). The advances under the Corps Real LOC are to be used only to sustain the Company’s business operations. The Corps Real LOC accrues interest at the rate of 16% per annum with all interest due at maturity on December 3, 2013. The Corps Real LOC is secured by a first priority lien of all the Company’s assets. Laurus/Valens has agreed to subordinate the Term A Notes and Term B Notes in right of payment and priority, to the payment in full of the Corps Real LOC. As of December 31, 2012, Corps Real has advanced approximately $0.89 million under the Corps Real LOC.

On November 17, 2010, the Company issued a secured convertible promissory note (as amended) (the “Corps Real Note”) in an original principal amount of $2.3 million to Corps Real, LLC (“Corps Real”). Corps Real is an affiliate of Ronald E. Osman. Corps Real is a shareholder and senior secured lender of the Company and a shareholder and the secured lender to Accentia. Corps Real and the majority owner of Corps Real, MRB&B, LLC, are both managed by Mr. Osman. Mr. Osman is a shareholder and director of the Company and a shareholder of Accentia. The Corps Real Note accrues interest and is payable on the outstanding principal amount of the Corps Real Note at a fixed rate of 16% per annum due at maturity. On October 9, 2012, and under the terms of the Corps Real Note, Corps Real elected to loan to the Company an additional $0.7 million. As a result of the additional loan, the outstanding principal balance under the Corps Real Note increased from approximately, $2.3 million to $3.0 million. The Corps Real Note is secured by a first priority lien on all of the Company’s assets.

Because the Company was unable to pay the amount due under the Corps Real Note on November 17, 2012, an event of default occurred. On November 17, 2012, the Company and Corps Real entered into a standstill agreement, whereby (i) the maturity date of the Corps Real Note was extended from November 17, 2012 to January 31, 2013 and (ii) Corps Real granted the Company a forbearance until January 31, 2013 from exercising its rights and/or remedies available to it under the Corps Real Note. Although the standstill agreement has expired, the Company and Corps Real are continuing to negotiate a potential restructuring of the Corps Real Note. Upon notification of an event of default by Corps Real, Corps Real will have the right to foreclose upon its first priority security interest in all of the Company’s assets. The Company has not been notified of an event of default by Corps Real.

The Corps Real Note was evaluated under the provisions of ASC 470-20, and was recorded at an initial discount of $2.1 million charged to additional paid-in capital representing the intrinsic value of the beneficial conversion feature associated with the Corps Real Note. The discount has been amortized to interest expense using the effective interest method over the original term of the note, represented by the two year period ending November 17, 2012.

As of December 31, 2012, Accentia has loaned the Company approximately $4.5 million (the “Accentia Promissory Demand Note”). The Accentia Promissory Demand Note is due upon demand and accrues interest at the prime rate (3.25% at December 31, 2012). On October 9, 2012, as consideration for an additional $0.7 million loaned to the Company under the terms of the Corps Real Note, Accentia agreed: (a) to amend the expiration date of its June 13, 2011 common stock purchase warrant issued to Corps Real, LLC from June 13, 2016 to June 13, 2021; (b) to amend its security agreements with Corps Real, LLC and Pabeti, Inc. to include and cross-collateralize all of Accentia’s collateral securing Accentia’s obligations to Corps Real, LLC and Pabeti, Inc.; and (c) to issue to Corps Real a new common stock purchase warrant to purchase 5.5 million shares of Accentia’s common stock for an exercise price of $0.14 per share. As a result of the modification to the existing Accentia warrant, as well and the issuance of the new Accentia warrant, a total of $0.9 million was added to the outstanding principal balance of the Accentia Promissory Demand Note in October 2012. This $0.9 million was recorded as a discount to the Corps Real Note and amortized to interest expense through the original term of the note (November 17, 2012).

	December 31, 2012 (Unaudited)			September 30, 2012
March 2014 Obligations	$	2,833,000		$	2,833,000
Exit Financing, net of discount of zero and $0.288 million at December 31, 2012 and September 30, 2012, respectively		1,216,000			928,000
Minnesota Promissory Notes		331,000			344,000
Laurus/Valens Term A Notes		23,467,000			23,467,000
Laurus/Valens Term B Notes		4,160,000			4,160,000
		32,007,000			31,722,000
Less: current maturities		(29,174,000	)		(28,889,000	)
	$	2,833,000		$	2,833,000

On November 17, 2010, the Company became obligated to pay certain of its unsecured creditors the aggregate principal amount of approximately $2.7 million in cash together with interest at 5% per annum to be paid in one installment on March 27, 2014 (the “March 2014 Obligations”). The aggregate principal balance of the March 2014 Obligations, increased by approximately $0.12 million due to the allowance of a previously unfiled unsecured claim, as well as an amendment to the amount owed on a separate, unsecured claim in fiscal 2012. The aggregate principal balance of the March 2014 Obligations, at December 31, 2012, was approximately $2.8 million.

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

On November 17, 2010, the Initial Notes were exchanged for new unsecured convertible notes (the “Exchange Notes”) in the original aggregate principal amount of $7.04 million, with interest accrued monthly, payable on the outstanding principal amount of the Exchange Notes at a fixed rate of 7% per annum. The Company has paid the Exchange Notes’ monthly interest in shares of the Company’s common stock. The holders of the Exchange Notes have the option to convert all or a portion of the outstanding balance of the Exchange Notes into shares of the Company’s common stock at a conversion rate of $0.91 per share. As of December 31, 2012, a total of $5.8 million in principal on the Exchange Notes had been converted to the Company’s common stock, resulting in the issuance to the Exchange Note holders of 6.9 million shares of the Company’s common stock. The aggregate principal balance of the Exchange Notes, at December 31, 2012, was approximately $1.2 million.

Because the Company was unable to pay the amounts due under the outstanding Exchange Notes on November 17, 2012, an event of default occurred. On December 19, 2012, Whitebox Credit Arbitrage Partners, LP, Whitebox Special Opportunities Fund Series B Partners, LP, Pandora Select Partners, LP, Whitebox Multi-Strategy Partners, LP, Whitebox Concentrated Convertible Arbitrage Partners, LP, who hold a majority of the outstanding Exchange Notes, commenced a breach of contract action to secure monetary judgment(s) against the Company for the outstanding defaulted principal and interest owed to them in the aggregate amount of approximately $1.2 million in the State of Minnesota. In response, the Company filed a Motion to Dismiss, for the reason that the venue in which the Whitebox Litigation was filed was improper. Pursuant to the terms of the Exchange Notes, the proper venue is New York City, in the Borough of Manhattan. The Company has not been notified of an event of default by any other holder(s) of the outstanding Exchange Notes. As a result of this event of default, the Company has accrued interest on the Exchange Notes at the default rate of 15% per annum.

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%):

Because the Company was unable to pay the amounts due under the Matured Obligations and pursuant to cross-default provisions contained in the Minnesota Promissory Notes, the EDA and/or the MIF may declare the Minnesota Promissory Notes to be in default. The Company has not been notified of an event of default by the EDA and/or the MIF. Due to the cross-default provisions contained in the notes, the aggregate principal balance due as of December 31, 2012 ($0.331 million) has been classified as a current liability on the December 31, 2012 balance sheet.

Because the Company was unable to pay the amount due under the Term A Notes on November 17, 2012, an event of default occurred. Pursuant to cross-default provisions contained the Term B Notes Laurus/Valens may declare the Term B Notes to be in default as well. On November 17, 2012, the Company and Laurus/Valens entered into a standstill agreement, whereby (i) the maturity dates of the Term A Notes were extended from November 17, 2012 to January 31, 2013 and (ii) Laurus/Valens granted the Company a forbearance until January 31, 2013 from exercising its rights and/or remedies available to it under the Term A Notes and Term B Notes. Although the standstill agreement has expired, the Company and Laurus/Valens are continuing to negotiate the potential restructuring of the Term A Notes and Term B Notes. Upon notification of an event of default by Laurus/Valens, Laurus/Valens (a) will have right to foreclose upon their lien on all of the Company’s assets (which is subordinate only to the security interest of Corps Real) and (b) may appoint one-third of the total membership of the Company’s Board of Directors. The Company has not been notified of an event of default by Laurus/Valens. Accordingly, the aggregate principal balance of both the Term A Notes and Term B Notes, at December 31, 2012 (approximately $27.6 million), have been classified as current liabilities on the Company’s December 31, 2012 balance sheet.

The Company does not use derivative financial instruments to hedge exposures to cash-flow, market or foreign-currency risks. However, the Company has entered into certain other financial instruments and contracts, such as debt financing arrangements and freestanding common stock purchase warrants with features that are either (i) not afforded equity classification, (ii) embody risks not clearly and closely related to host contracts, or (iii) may be net-cash settled by the counterparty. These instruments are required to be carried as derivative liabilities, at fair value.

On November 17, 2012, an event of default occurred under the Exchange Notes issued under the Exit Financing as a result of the Company’s failure to repay the approximate amount of $1.2 million due under the outstanding Exchange Notes. Pursuant to the terms of the Exchange Notes, in an event of default, the default interest rate on the Exchange Notes shall increase from 7% to 15% per annum. Furthermore, the Exchange Notes have a default redemption amount equal to 110% of any outstanding principal and interest balance due at the time the event of default occurs. As a result, the Company has accrued this additional interest due as of December 31, 2012.

The fair value of each option award is estimated on the date of grant using the Black-Scholes valuation model that uses assumptions for expected volatility, expected dividends, expected term, and the risk-free interest rate. Expected volatilities are based on historical volatility of peer company stock due to the limited trading history of the Company’s common stock, as well as other factors estimated over the expected term of the options. The expected term of options granted is derived using the “simplified method” which computes expected term as the average of the sum of the vesting term plus the contract term. This method is used because the Company does not currently have adequate historical option exercise or forfeiture information as a basis to determine expected term. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for the period of the expected term.

The Company operates in three identifiable industry segments. The Company’s Cell Culture Products and Services segment is engaged in the production and contract manufacturing of biologic drugs and cell production for research institutions worldwide. The Instruments and Disposables segment is engaged in the development, manufacture and marketing of patented cell culture systems, equipment and consumable parts to pharmaceutical, diagnostic and biotechnology companies, as well as leading research institutions worldwide. The Therapeutic Vaccine segment is focused on the development and commercialization of BiovaxID™.

The Company defines its segment operating results as earnings/(loss) before general and administrative costs, interest expense, interest income, other income, and income taxes. Under the Company’s shared resources concept, assets of the Company are common to the segments listed below and thus not segregated for reporting purposes. The Company’s facilities expenses and other assets are not distinguished among the identifiable segments. Revenue and cost of sales information about the Company’s segments are as follows:

	Three Months Ended December 31,
	2012			2011
Revenues
Instruments and Disposables	$	410,000		$	746,000
Cell Culture Services		139,000			217,000
Therapeutic Vaccine		—			100,000
Total Revenues	$	549,000		$	1,063,000

Cost of Sales
Instruments and Disposables	$	373,000		$	431,000
Cell Culture Services		208,000			208,000
Therapeutic Vaccine		—			—
Total Cost of Sales	$	581,000		$	639,000
Gross (deficit) Margin ($)	$	(32,000	)	$	424,000
Gross (deficit) Margin (%)		(6)%			40%

On November 10, 2008, the Company filed a voluntary petition for reorganization under Chapter 11 in the U.S. Bankruptcy Court for the Middle District of Florida, Tampa Division (the “Bankruptcy Court”). On August 16, 2010, the Company filed its First Amended Joint Plan of Reorganization, and on October 25, 2010, the Company filed the First Modification to the First Amended Joint Plan of Reorganization (collectively, the “Plan”). On November 2, 2010, the in the Bankruptcy Court entered an Order Confirming Debtors’ First Amended Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy Code. The Company emerged from Chapter 11 protection, and the Plan became effective, on November 17, 2010. On March 19, 2012, the Bankruptcy Court entered a Final Decree closing the Company’s Chapter 11 proceeding.

On December 19, 2012, Whitebox Credit Arbitrage Partners, LP, Whitebox Special Opportunities Fund Series B Partners, LP, Pandora Select Partners, LP, Whitebox Multi-Strategy Partners, LP, Whitebox Concentrated Convertible Arbitrage Partners, LP, a majority of the holders of the outstanding Exchange Notes issued in the Exit Financing commenced a breach of contract action to secure monetary judgment(s) against the Company for the outstanding defaulted principal and interest owed to them in the aggregate amount of approximately $1.2 million in the State of Minnesota. In response, the Company filed a Motion to Dismiss, for the reason that the venue in which the Whitebox Litigation was filed was improper. Pursuant to the terms of the Exchange Notes, the proper venue is New York City, in the Borough of Manhattan.

On November 17, 2012, the Company, Corps Real and Laurus/Valens entered into a standstill agreement, whereby (i) the maturity dates of the Corps Real Note and the Term A Notes were extended from November 17, 2012 to January 31, 2013 and (ii) Corps Real and Laurus/Valens granted the Company a forbearance until January 31, 2013 from exercising their rights and/or remedies available to them under the Corps Real Note, Term A Notes and Term B Notes. Although the standstill agreement has expired, the Company, Corps Real and Laurus/Valens are continuing to negotiate the potential restructuring of the Corps Real Note, Term A Notes, and Term B Notes. Upon notification of an event of default by Corps Real, Corps Real will have the right to foreclose upon its first priority security interest in all of the Company’s assets. Upon notification of an event of default by Laurus/Valens, Laurus/Valens (a) will have right to foreclose upon their lien on all of the Company’s assets (which is subordinate only to the security interest of Corps Real) and (b) may appoint one-third of the total membership of the Company’s Board of Directors. The outcome of the continuing negotiations relating to the restructuring of the Matured Obligations, which may include the remainder of the Company’s outstanding debt, may negatively affect Accentia’s ownership interest in the Company and cause Accentia’s potential deconsolidation/loss of control in the Company. The Company has not been notified of an event of default by either Corps Real and/or Laurus/Valens.

The Company leases approximately 35,000 square feet in Minneapolis (Coon Rapids), Minnesota, which the Company uses for offices, laboratory, manufacturing, and warehousing space to support its development, potential commercialization, and production of BiovaxID™, the production of the Company’s perfusion cell culture equipment, and the Company’s contract cell culture services. The lease expires on December 31, 2020. The Company has the right to extend the term of the lease for two additional five year periods at the greater of base rent in effect at the end of the ten year initial lease term or market rates in effect at the end of the ten year initial lease term. The lease contains provisions regarding a strategic collaboration whereby, the landlord agreed to construct certain capital improvements to the leased premises to allow the Company to perform cGMP manufacturing of biologic products in the facility, including the manufacture of BiovaxID and for potential future expansion to the facility to permit additional BiovaxID production capacity when required. The $1.5 million in improvements were completed in September 2011. The landlord, along with the EDA and the MIF, agreed to fund and amortize the capital improvements to the leased premises. Total rent payments for years 1-5 under the lease will be $0.4 million per year. Total rent payments for years 6-10 under the lease will be $0.5 million per year.

In September 2001, the Company entered into a definitive cooperative research and development agreement (“CRADA”) with the NCI for the development and ultimate commercialization of patient-specific vaccines for the treatment of follicular lymphoma. The terms of the CRADA, as amended, included, among other things, a requirement to pay $0.5 million quarterly to NCI for expenses incurred in connection with the Company’s Phase 3 clinical trial. Since the transfer to the Company of the IND for development of this vaccine, which occurred in April 2004, these payments to NCI have been reduced to a small fraction of this original obligation (approximately $0.2 million per year). Under the terms of the CRADA, the Company is obligated to continue to provide vaccine to the NCI at no charge for purposes of the NCI’s studies that are within the scope of the CRADA if the Company were to abandon work on the vaccine. As the Company is actively developing the vaccine for commercialization and intends to do so to its completion, no estimated costs have been accrued as of December 31, 2012.

In September 2004, the Company entered into an agreement (as amended) (the “Stanford Agreement”) with Stanford University (“Stanford”). The Stanford Agreement provides the Company with worldwide rights to use two proprietary hybridoma cell lines, which are used in the production of the BiovaxID™ through 2025. Under the Stanford Agreement, the Company is obligated to pay an annual maintenance fee of $0.01 million. The Stanford Agreement also provides that the Company pays Stanford $0.1 million within one year following the FDA’s regulatory/marketing approval of BiovaxID. Following the FDA’s regulatory/marketing approval until September 17, 2019, Stanford will receive a royalty of the greater of $50 per patient or 0.05%, after September 18, 2019, Stanford will receive a royalty of the greater of $85 per patient or 0.10% of the amount received by the Company for each BiovaxID patient treated using these cell lines. This running royalty will be creditable against the yearly maintenance fee. The Stanford Agreement obligates the Company to, diligently develop, manufacture, market, and sell BiovaxID and to provide progress reports to Stanford regarding these activities. The Company can terminate the Stanford Agreement at any time upon 30 days prior written notice, and Stanford can terminate the Stanford Agreement upon a breach of the agreement by the Company that remains uncured for 30 days after written notice of the breach from Stanford.

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 regulatory/marketing approval for the use of new bioproducts (which can never be assured) requires several rounds of extensive preclinical testing and clinical investigations conducted by the sponsoring pharmaceutical company prior to sale and use of the product. At each stage, the approvals granted by the FDA include the manufacturing process utilized to produce the product. Accordingly, the Company’s cell culture systems used for the production of therapeutic or biotherapeutic products are subject to significant regulation by the FDA under the Federal Food, Drug and Cosmetic Act, as amended.

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.

When you read this section of this Quarterly Report on Form 10-Q, it is important that you also read the condensed consolidated financial statements and related notes included elsewhere in this Form 10-Q and in conjunction with our Annual Report on Form 10-K for the fiscal year ended September 30, 2012. This section of this Quarterly Report contains forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations, and intentions. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including the matters discussed under the caption “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2012 and other risks and uncertainties discussed in our other filings with the Securities and Exchange Commission.

Biovest International, Inc. (“Biovest”) is a biotechnology company focused on: the continued development and future commercialization of BiovaxID™, as a personalized therapeutic cancer vaccine for the treatment of B-cell blood cancers; the continued development, commercialization, manufacture and sale of AutovaxID® and our other instruments and disposables; and the commercial sale and production of cell culture products and services. We were incorporated in Minnesota in 1981, under the name Endotronics, Inc. In 1993, our corporate 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. BiovaxID has demonstrated statistically significant Phase 3 clinical benefit by prolonging disease-free survival in FL patients treated with BiovaxID. We believe that these clinical trials demonstrate the safety and efficacy of BiovaxID.

Based on our scientific advice meetings with multiple European Union (“EU”)-Member national medicines agencies, we filed our formal notice of intent to file a marketing authorization application (“MAA”) with the European Medicines Agency (“EMA”), which begins the EU marketing approval application process. Additionally, based on a scientific advice meeting conducted with Health Canada, we announced plans to file a new drug submission application (“NDS”) seeking regulatory approval in Canada. We could receive a decision regarding EU marketing and Canadian regulatory approval for BiovaxID within 12 months after the submission and acceptance of our MAA and NDS assuming that the rigorous review process advances forward in a timely and positive manner and no substantial regulatory issues or problems are encountered. We also conducted a formal guidance meeting with the U.S. Food and Drug Administration (“FDA”) in order to define the path for our filing of a biologics licensing application (“BLA”) for BiovaxID’s U.S. regulatory/marketing approval. Further in its guidance, the FDA required that we conduct a second Phase 3 clinical trial to complete the clinical data gained through our first Phase 3 clinical trial and our BiovaxID development program to support our filing of the BLA for BiovaxID. We are preparing, subject to required funding, to initiate this second Phase 3 clinical trial to advance BiovaxID toward the U.S. market.

To support our planned commercialization of BiovaxID and to support the products of personalized medicine and particularly patient specific oncology products, we developed and commercialized 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 our related hollow fiber systems and to explore potential production of additional vaccines, including vaccines for viral indications such as influenza and other contagious diseases.

We also manufacture instruments and disposables used in the hollow fiber production of cell culture products. We manufacture mammalian cell culture products such as whole cells, recombinant and secreted proteins, and monoclonal antibodies for third parties, primarily researchers. We have produced over 7,000 cell based products for an estimated 2,500 researchers around the world. We consider our vast experience in manufacturing small batches of different cell based products, together with our expertise in designing and manufacturing instruments for personalized medicines as important competencies supporting our development of patient specific immunotherapies

In April 2003, we entered into an investment agreement with Accentia Biopharmaceuticals, Inc. (“Accentia”). As a result of this agreement, in June 2003, we became a subsidiary of Accentia through the sale of shares of our authorized but unissued common and preferred stock representing approximately 81% of our equity outstanding immediately after the investment. The aggregate investment commitment initially received from Accentia was $20 million. As of December 31, 2012, Accentia owned approximately 59% of our outstanding common stock. Following Accentia’s investment, we continued to be a reporting company under Section 12(g) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and we file periodic and other reports with the Securities and Exchange Commission (“SEC”).

In November 2010, we completed reorganization and formally exited reorganization under Chapter 11 of the U.S. Bankruptcy Code (“Chapter 11”) as a fully restructured company. On March 19, 2012, the U.S. Bankruptcy Court for the Middle District of Florida, Tampa Division (the “Bankruptcy Court”) entered a Final Decree closing our Chapter 11 proceedings. Through the provisions of our bankruptcy plan (as amended) (the “Plan”), effective on November 17, 2010, we restructured our debt into a combination of new debt and equity.

On November 17, 2012, an aggregate of approximately $27.7 million in principal became due under the Corps Real Note, Laurus/Valens Term A Notes, and the Exchange Notes issued to the holders under the Exit Financing (collectively, the “Matured Obligations”). Because we were unable to pay the amount due on November 17, 2012, an event of default occurred. On December 19, 2012, a majority of the holders of the outstanding Exchange Notes commenced a breach of contract action (the “Whitebox Litigation”) to secure monetary judgment(s) against us for the outstanding defaulted principal and interest owed to them in the aggregate amount of approximately $1.2 million, in the State of Minnesota. In response, we filed a Motion to Dismiss, for the reason that the venue in which the Whitebox Litigation was filed was improper. Pursuant to the terms of the Exchange Notes, the proper venue is New York City, in the Borough of Manhattan. We have not been notified of an event of default by any other holder(s) of the outstanding Exchange Notes. As a result of this event of default, we have accrued interest on the Exchange Notes at rate of 15% per annum.

On November 17, 2012, we entered into a standstill agreement with Corps Real and Laurus/Valens, whereby (i) the maturity dates of the Corps Real Note and the Term A Notes were extended from November 17, 2012 to January 31, 2013 and (ii) Corps Real and Laurus/Valens granted us a forbearance until January 31, 2013 from exercising their rights and/or remedies available to them under the Corps Real Note, Term A Notes and Term B Notes. Although the standstill agreement has expired, we are continuing to negotiate with Corps Real and Laurus/Valens the potential restructuring of the Corps Real Note, Term A Notes, and Term B Notes. Upon notification of an event of default by Corps Real, Corps Real will have the right to foreclose upon its first priority security interest in all of our assets. Upon notification of an event of default by Laurus/Valens, Laurus/Valens (a) will have right to foreclose upon their lien on all of our assets (which is subordinate only to the security interest of Corps Real) and (b) may appoint one-third of the total membership of our Board of Directors. We have not been notified of an event of default by either Corps Real and/or Laurus/Valens. The outcome of the continuing negotiations relating to the restructuring of the Matured Obligations, which may include the remainder of our outstanding debt, may negatively affect Accentia’s ownership interest in us and cause Accentia’s potential deconsolidation/loss of control in us.

Revenues. Total revenues for the three months ended December 31, 2012 were $0.5 million, compared to revenues of $1.1 million for the three months ended December 31, 2011. Included in product revenue in the prior fiscal year is $0.1 million resulting from a shared agreement involving the data from our Phase 3 clinical trial for BiovaxID®, while current year results do not contain comparable revenue. Instrument sales for the three month period ended December 31, 2012 were approximately $0.4 million representing a decrease of $0.34 million over the same quarter in the prior fiscal year. $0.2 million of this decrease is a result of fewer unit sales of instruments in the current year compared with the prior year, with the remaining decrease a result of fewer unit sales of cultureware, tubing sets and other disposable products and supplies for use with our instrument product line compared with the prior year. Service revenues from contract manufacturing activities for the current year were $0.14 million representing a decrease of $0.08 million compared to the prior year.

Gross Margin. The overall gross (deficit) margin as a percentage of sales for the three months ended December 31, 2012 was (6%) as compared to 40% for the three months ended December 31, 2011. A relatively high percentage of our costs are of a fixed nature. This, combined with the reduction in our service revenue and an overall decrease in product unit sales, resulted in our total revenues falling short of covering our fixed costs contributing to a negative gross margin for the current quarter.

Other expense also includes gains of $0.65 million and $0.34 million on derivative liabilities for the three months ended December 31, 2012 and 2011, respectively. In connection with our emergence from Chapter 11, we entered into the Exit Financing, which consisted of unsecured notes which are convertible into shares of our common stock, as well as warrants which have contingent exercise provisions. The conversion features associated with the Exit Financing have been recorded as a derivative liability, which we are required to record at fair value. The values of these liabilities vary directly with the trading price of our outstanding common stock, accounting for the current and previous year derivative gains.

Our goal is to meet our cash requirements through proceeds from our instrument and disposables and cell culture product and services manufacturing activities, the use of cash on hand, trade vendor credit, short-term borrowings, debt and equity financings, the modification of existing cash commitments, and strategic transactions such as collaborations, partnering, and licensing. As of December 31, 2012, we have $0.6 million available under the Corps Real LOC (discussed herein) and anticipate drawing down these funds to fund our business operations through February 2013. Our ability to continue present operations, to continue our detailed analyses of BiovaxID™’s clinical trial results, to meet our debt obligations as they mature (discussed herein), to pursue ongoing development and commercialization of BiovaxID and AutovaxID® including potentially seeking regulatory/marketing approval(s) with national and international regulatory agencies, is dependent upon our ability to obtain significant external funding in the immediate term, which raises substantial doubt about our ability to continue as a going concern. Cash and cash equivalents, at December 31, 2012, were approximately $0.35 million. Additional sources of funding have not been established; however, additional financing is currently being sought by us from a number of sources, including the sale of equity or debt securities, strategic collaborations, recognized research funding programs, as well as domestic and/or foreign licensing of our product candidates. We are currently in the process of exploring various financing alternatives. There can be no assurance that we will be successful in securing such financing at acceptable terms, if at all. If adequate funds are not available from the foregoing sources in the immediate term, or if we determine it to otherwise be in our best interest, we may consider additional strategic financing options, including sales of assets, or we may be required to delay, reduce the scope of, or eliminate one or more of our research or development programs or curtail some or all of our commercialization efforts.

On November 17, 2012, an aggregate of approximately $27.7 million in principal became due under (1) the Corps Real Note with an aggregate principal balance of $3.0 million, (2) the Laurus/Valens Term A Notes with an aggregate principal balance of $23.5 million, and (3) the Exchange Notes issued to the holders of the Exit Financing with an aggregate principal balance of $1.2 million (collectively, the “Matured Obligations”). Because we were unable to pay the amount due on November 17, 2012, an event of default occurred under the Matured Obligations. On December 19, 2012, a majority of the holders of the outstanding Exchange Notes commenced a breach of contract action (the “Whitebox Litigation”) to secure monetary judgment(s) against us for the outstanding defaulted principal and interest owed to them in the aggregate amount of approximately $1.2 million, in the State of Minnesota. In response, we filed a Motion to Dismiss, for the reason that the venue in which the Whitebox Litigation was filed was improper. Pursuant to the terms of the Exchange Notes, the proper venue is New York City, in the Borough of Manhattan. We have not been notified of an event of default by any other holder(s) of the outstanding Exchange Notes. As a result of this event of default, we have accrued interest on the Exchange Notes at rate of 15% per annum.

Our liquid assets and cash flow are not sufficient to fully repay the principal owed under our outstanding debt instruments. Further, we cannot assure our shareholders that we can extend or restructure the Matured Obligations. We have not established access to additional capital or debt to repay the Matured Obligations. Further, we cannot assure our shareholders that we will be able to obtain needed funding to repay or restructure the Matured Obligations and our other debt instruments.

If, as or when required, we are unable to repay, refinance or restructure our indebtedness under our secured or unsecured debt instruments, or amend the covenants contained therein, the lenders and/or holders under such secured or unsecured debt instruments could elect to terminate their commitments thereunder cease making further loans and institute foreclosure proceedings or other actions against our assets. Under such circumstances, we could be forced into bankruptcy or liquidation. In addition, any event of default or declaration of acceleration under one of our debt instruments could also result in an event of default under one or more of our other debt instruments. We may have to seek protection under the U.S. Bankruptcy Code from the Matured Obligations. We cannot assure our shareholders that such a proceeding, if voluntarily or involuntarily instituted, would be successful in protection our shareholders. This would have a material adverse impact on our liquidity, financial position and results of operations.

Effective December 3, 2012, we issued a secured promissory note to Corps Real, which provides us with a revolving line of credit in the principal amount of up to $1.5 million (the “Corps Real LOC”). The advances under the Corps Real LOC are to be used only to sustain our business operations. The Corps Real LOC accrues interest at the rate of 16% per annum with all interest due at maturity of the Corps Real LOC on December 3, 2013. The Corps Real LOC is secured by a first priority lien of all our assets. Laurus/Valens has agreed to subordinate the Term A Notes and Term B Notes in right of payment and priority, to the payment in full of the Corps Real LOC. As of December 31, 2012, Corps Real had advanced approximately $0.9 million under the Corps Real LOC.

	Outstanding Principal (in 000’s)		Interest Rate (per annum)		Maturity Date	Total Aggregate Number of Warrants Issued		Exercise Price		Expiration Date
Exit Financing	$	1,216		15.0%	On demand		8,733,096	$	1.20	11/17/2017
Corps Real Note		2,992		16.0%	01/31/2013		—		—		—
Corps Real LOC		885		16.0%	12/03/2013		—		—		—
Laurus/Valens Term A Notes		23,467		8.0%	01/31/2013		—		—		—
Laurus/Valens Term B Notes		4,160		8.0%	11/17/2013		—		—		—
March 2014 Obligations		2,833		5.0%	03/17/2014		—		—		—
Accentia Promissory Demand Note		4,542		3.3%	On demand		—		—		—
Minnesota Promissory Notes	$	331		4.1%	05/01/2021		—		—		—

Our net loss for the three months ended December 31, 2012 was approximately $3.3 million. We have adjusted the net loss on our cash flow statement for certain non-cash expenses including compensation of $0.07 million paid to our employees and directors in the form of stock options, as well as an adjustment of $1.6 million representing the amortization of discounts associated with our outstanding debt. Furthermore, changes in operating liabilities accounted for an adjustment of $1.3 million (primarily due to an increase in accrued interest on our outstanding debt) to net loss to arrive at our net cash used in operating activities. After these and other non-cash adjustments to our net loss, cash used in operating activities was approximately $0.9 million for the three months ended December 31, 2012.

Net cash flows from financing activities for the three months ended December 31, 2012 was approximately $1.1 million. Financing activities for the period included the repayment of $0.4 million in principal on the Accentia Promissory Demand Note. We also received a total aggregate amount of approximately, $1.6 million from Corps Real (under the terms of the Corps Real Note and Corps Real LOC), which were used to fund our business operations three months ended December 31, 2012.

Our operating results may vary significantly from quarter-to-quarter or year-to-year, depending on factors such as timing of biopharmaceutical development and commercialization of products by our customers, the timing and size of orders for instrumentation and cultureware, and the timing of increased research and development of BiovaxID™, and will be impacted by our planned marketing launch of the AutovaxID® instrument. Consequently, revenues, profits or losses may vary significantly from quarter to quarter or year to year, and revenue or profits or losses in any period will not necessarily be indicative of results in subsequent periods.

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.

On November 10, 2008, we, along with our subsidiaries, filed a voluntary petition for reorganization under Chapter 11 in the U.S. Bankruptcy Court for the Middle District of Florida, Tampa Division (the “Bankruptcy Court”). On August 16, 2010, we filed our First Amended Joint Plan of Reorganization, and, on October 25, 2010, we filed our First Modification to the First Amended Joint Plan of Reorganization. On November 2, 2010, the Bankruptcy Court entered an Order Confirming Debtors’ First Amended Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy Code. We emerged from Chapter 11 protection, and the Plan became effective, November 17, 2010. On March 19, 2012, the Bankruptcy Court entered a Final Decree closing our Chapter 11 proceeding.

On December 19, 2012, Whitebox Credit Arbitrage Partners, LP, Whitebox Special Opportunities Fund Series B Partners, LP, Pandora Select Partners, LP, Whitebox Multi-Strategy Partners, LP, Whitebox Concentrated Convertible Arbitrage Partners, LP, a majority of the holders of the outstanding Exchange Notes issued in the Exit Financing commenced a breach of contract action (the “Whitebox Litigation”) to secure monetary judgment(s) against us for the outstanding defaulted principal and interest owed to them, in the approximate aggregate amounts of $1.2 million, in the State of Minnesota. In response, the Company filed a Motion to Dismiss, for the reason that the venue in which the Whitebox Litigation was filed was improper. Pursuant to the terms of the Exchange Notes, the proper venue is New York City, in the Borough of Manhattan. We intend to seek the dismissal of this litigation and plan to defend these claims vigorously.

On November 17, 2012, an aggregate of approximately $27.7 million in principal became due under (1) the Corps Real Note with an aggregate principal balance of $3.0 million, (2) the Laurus/Valens Term A Notes with an aggregate principal balance of $23.5 million, and (3) the Exchange Notes issued to the holders of the Exit Financing with an aggregate principal balance of $1.2 million (collectively, the “Matured Obligations”). Because we were unable to pay the amount due on November 17, 2012, an event of default occurred. With the exception of the Whitebox Litigation (described herein), we have not been notified of an event of default by the other holders of the outstanding Exchanges Notes. Pursuant to cross-default provisions contained in the Laurus/Valens Term B Notes and the Minnesota Promissory Notes, in the approximate aggregate amount of $4.5 million, the holders may also declare those notes to be in default. We have not been notified of an event of default by any of the holders of the notes.

On November 17, 2012, we entered into a standstill agreement with Corps Real and Laurus/Valens, whereby (i) the maturity dates of the Corps Real Note and the Term A Notes were extended from November 17, 2012 to January 31, 2013 and (ii) Corps Real and Laurus/Valens granted us a forbearance until January 31, 2013 from exercising their rights and/or remedies available to them under the Corps Real Note, Term A Notes and Term B Notes. Although the standstill agreement has expired, we are continuing to negotiate with Corps Real and Laurus/Valens, the potential restructuring of the Corps Real Note, Term A Notes, and Term B Notes. Upon notification of an event of default by Corps Real, Corps Real will have the right to foreclose upon its first priority security interest in all of our assets. Upon notification of an event of default by Laurus/Valens, Laurus/Valens (a) will have right to foreclose upon their lien on all of our assets (which is subordinate only to the security interest of Corps Real) and (b) may appoint one-third of the total membership of our Board of Directors. We have not been notified of an event of default from either Corps Real and/or Laurus/Valens.

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

Exhibit Number		Description of Document
31.1		Rule 13a-14(a)/15d-14(a) Certifications of Chief Executive Officer (Principal Executive Officer).

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

32.1		18 U.S.C. Section 1350 Certifications of Chief Executive Officer.

32.2		18 U.S.C. Section 1350 Certifications of Acting Chief Financial Officer.

101**+		The following financial information from Biovest International, Inc.’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2012 (unaudited), formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets as of December 31, 2012 and September 30, 2012, (ii) Condensed Consolidated Statements of Operations for the three months ended December 31, 2012 and 2011 (unaudited), (iii) Condensed Consolidated Statements of Stockholders’ Deficit for the three months ended December 31, 2012 (unaudited), (iv) Condensed Consolidated Statements of Cash Flows for the three months ended December 31, 2012 and 2011 (unaudited), and (v) the Notes to Condensed Consolidated Financial Statements.


Delaware	41-1412084
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification Number)

Large accelerated filer	¨	Accelerated filer	¨

Non-Accelerated filer	¨	Smaller reporting company	x

		Page
PART I. FINANCIAL INFORMATION
ITEM 1.	Financial Statements	4
	Condensed Consolidated Balance Sheets as of December 31, 2012 (unaudited) and September 30, 2012	4
	Condensed Consolidated Statements of Operations for the Three Months Ended December 31, 2012 and 2011 (unaudited)	5
	Condensed Consolidated Statement of Stockholders’ Deficit for the Three Months Ended December 31, 2012 (unaudited)	6
	Condensed Consolidated Statements of Cash Flows for the Three Months Ended December 31, 2012 and 2011 (unaudited)	7
	Notes to Condensed Consolidated Financial Statements	8
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	32
ITEM 4.	Controls and Procedures	32
PART II. OTHER INFORMATION
ITEM 1.	Legal Proceedings	32
ITEM 1A.	Risk Factors	33
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	33
ITEM 3.	Defaults Upon Senior Securities	33
ITEM 4.	Mine Safety Disclosures	34
ITEM 5.	Other Information	34
ITEM 6.	Exhibits	34
Signatures		35

	December 31, 2011 (Unaudited)		September 30, 2012
Corps Real Note		2,992,000		2,292,000
Unamortized discount on Corps Real Note		—		(397,000	)
Accentia Promissory Demand Note	$	4,542,000	$	4,041,000
Corps Real LOC		885,000		—
	$	8,419,000	$	5,396,000

	Liability Derivatives
	December 31, 2012 (unaudited)			September 30, 2012
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivatives not designated as hedging instruments
Series A Exchange Warrants	Derivative Liabilities	$	211,000	Derivative Liabilities	$	857,000
Total derivatives not designated as hedging instruments		$	211,000		$	857,000


	December 31, 2012 (Unaudited)		September 30, 2012
Raw materials	$	351,000	$	320,000
Work-in-process		8,000		—
Finished goods		43,000		80,000
	$	402,000	$	400,000

Years ending December 31,
2013	$	29,174,000
2014		2,833,000
Total maturities	$	32,007,000

	December 31, 2012 (unaudited)								September 30, 20121
Fair Value Measurements Using:	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Liabilities
Derivative Liabilities	$	—	$	211,000	$	—	$	211,000	$	—	$	857,000	$	—	$	857,000

	Shares		Weighted Avg. Exercise Price		Weighted Avg. Contractual Life (yrs)		Aggregate Intrinsic Value
Outstanding at October 1, 2012		36,464,559	$	0.53		6.86	$	1,314,688
Granted		250,000		0.18		5.0		—
Exercised		—
Cancelled		—
Outstanding at December 31, 2012		36,714,559		0.52		6.60		1,314,688
Exercisable at December 31, 2012		34,783,726	$	0.52		6.51	$	421,350

	Shares			Weighted Avg. Grant-Date Fair Value		Aggregate Intrinsic Value
Non-vested at October 1, 2012		2,422,261		$	0.46
Granted		250,000			0.08
Vested		(741,428	)		0.08
Cancelled		—			—
Non-vested at December 31, 2012		1,930,833		$	0.56	$	893,338

	Shares			Weighted Avg. Price		Aggregate Intrinsic Value
Outstanding at October 1, 2012		24,887,173		$	0.87
Issued		—			—
Exercised		—			—
Cancelled		(112,500	)		1.10
Outstanding at December 31, 2012		24,774,673			0.87	$	—
Exercisable at December 31, 2012		24,774,673		$	0.87	$	—


			BIOVEST INTERNATIONAL, INC.
			(Registrant)

Date: February 15, 2013			/s/ Samuel S. Duffey
			Samuel S. Duffey, Esq.
			Chief Executive Officer; President; General Counsel
			(Principal Executive Officer)

Date: February 15, 2013			/s/ Brian D. Bottjer
			Brian D. Bottjer, CPA
			Acting Chief Financial Officer; Controller
			(Principal Financial Officer and Principal Accounting Officer)