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EX-31.1 - SECTION 302 CERTIFICATION OF CEO - ACCENTIA BIOPHARMACEUTICALS INCdex311.htm
EX-32.1 - SECTION 906 CERTIFICATION OF CEO - ACCENTIA BIOPHARMACEUTICALS INCdex321.htm
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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended June 30, 2011

OR

 

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

For the transition period from                      to                     

Commission File Number 000-51383

 

 

ACCENTIA BIOPHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Florida   04-3639490

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

324 South Hyde Park Ave., Suite 350

Tampa, Florida 33606

(Address of principal executive offices) (Zip Code)

(813) 864-2554

(Registrant’s telephone number, including area code)

 

 

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

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

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

 

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

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

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

As of July 31, 2011, there were 70,892,864 shares of the registrant’s Common Stock outstanding.

 

 

 


Table of Contents

Forward-Looking Statements

Statements in this Quarterly Report on Form 10-Q that are not strictly historical in nature are forward-looking statements. These statements may include, but are not limited to, statements about: the timing of the commencement, enrollment, and completion of our clinical trials for our product candidates; the progress or success of our product development programs; the status of regulatory approvals for our product candidates; the timing of product launches; our ability to protect our intellectual property and operate our business without infringing upon the intellectual property rights of others; and our estimates for future performance, anticipated operating losses, future revenues, capital requirements, and our needs for additional financing. In some cases, you can identify forward-looking statements by terms such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would,” “goal,” and similar expressions intended to identify forward-looking statements. 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 Form 10-K for the fiscal year ended September 30, 2010 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.


Table of Contents

INDEX

ACCENTIA BIOPHARMACEUTICALS, INC.

 

             Page      

PART I.

  FINANCIAL INFORMATION   

ITEM 1.

  Financial Statements   
  Condensed Consolidated Balance Sheets as of June 30, 2011 (unaudited) and September 30, 2010      2   
  Condensed Consolidated Statements of Operations for the Three and Nine Months Ended June 30, 2011 and 2010 (unaudited)      4   
  Condensed Consolidated Statement of Stockholders’ Deficit for the Nine Months Ended June 30, 2011 (unaudited)      6   
  Condensed Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2011 and 2010 (unaudited)      8   
  Notes to Condensed Consolidated Financial Statements      10   

ITEM 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      38   

ITEM 3.

  Quantitative and Qualitative Disclosures About Market Risk      51   

ITEM 4.

  Controls and Procedures      51   

PART II.

  OTHER INFORMATION   

ITEM 1.

  Legal Proceedings      51   

ITEM 1A.

  Risk Factors      51   

ITEM 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      52   

ITEM 3.

  Defaults Upon Senior Securities      52   

ITEM 4.

  (Removed and Reserved)      52   

ITEM 5.

  Other Information      52   

ITEM 6.

  Exhibits      53   

Signatures

     54   


Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ACCENTIA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

         June 30, 2011    
(Unaudited)
         September 30,    
2010
 
ASSETS      

Current assets:

     

Cash and cash equivalents

     $ 1,368,405         $ 558,452   

Accounts receivable:

     

Trade, net of allowance for doubtful accounts of $8,000 at June 30, 2011 and September 30, 2010

     1,215,492         1,287,363   

Inventories

     459,729         417,087   

Unbilled receivables

     203,886         151,303   

Deferred finance costs

     118,173         16,077   

Prepaid expenses and other current assets

     314,760         243,998   
  

 

 

    

 

 

 

Total current assets

     3,680,445         2,674,280   

Goodwill

     893,000         893,000   

Intangible assets

     739,870         1,083,962   

Furniture, equipment and leasehold improvements, net

     760,264         142,276   

Deferred finance costs, less current portion

     19,696           

Other assets

    

 

721,372

 

  

 

    

 

216,791

 

  

 

  

 

 

    

 

 

 
     $ 6,814,647         $ 5,010,309   
  

 

 

    

 

 

 

 

(Continued)

 

2


Table of Contents
         June 30, 2011    
(Unaudited)
        September 30,    
2010
 
LIABILITIES AND STOCKHOLDERS’ DEFICIT     

Liabilities not subject to compromise:

    

Current liabilities:

    

Current maturities of convertible long-term debt

    $ 6,681,258        $   

Current maturities of other long-term debt

     4,415,052      

Accounts payable

     885,984         1,139,817   

Accrued expenses

     597,141         1,269,395   

Accrued interest

     763,556           

Reserve for unresolved claims

     6,210,430           

Unearned revenues

     113,019         263,778   

Notes payable, related parties

            2,041,005   

Customer deposits

     10,440         134,613   

Derivative liability

     3,258,046         1,844,200   
  

 

 

   

 

 

 

Total current liabilities

     22,934,926         6,692,808   
  

 

 

   

 

 

 

Long-term convertible promissory notes, net of current maturities

     25,730,317           

Convertible promissory notes, related party

     364,288           

Other long-term debt

     41,650,384           

Long-term accrued interest

     2,138,114          

Liabilities subject to compromise

    

 

 

  

 

   

 

143,570,128 

 

 

 

  

 

 

   

 

 

 

Total liabilities

     92,818,029         150,262,936   
  

 

 

   

 

 

 

Commitments and contingencies

              

Series A convertible redeemable preferred stock, $1.00 par value; no shares issued and outstanding and 8,950 authorized as of June 30, 2011; 7,529 shares issued and outstanding and 8,950 authorized as of September 30, 2010

            7,528,640   

Stockholders’ deficit:

    

Common stock, $0.001 par value; 300,000,000 shares authorized; 72,441,000 shares issued and 70,892,864 shares outstanding at June 30, 2011, and 58,243,115 shares issued and 58,048,208 shares outstanding at September 30, 2010

     72,442         58,048    

Treasury stock, 1,548,136 and 194,907 shares, June 30, 2011 and September 30, 2010

     (1,496,417     (170,057

Additional paid-in capital

     287,829,974         203,828,364   

Accumulated deficit

     (331,173,240     (325,882,720
  

 

 

   

 

 

 

Total stockholders’ deficit attributable to Accentia Biopharmaceuticals, Inc.

     (44,767,241     (122,166,365

Non-controlling interests

    

 

(41,236,141

 

 

   

 

(30,614,902

 

 

  

 

 

   

 

 

 

Total stockholders’ deficit

     (86,003,382     (152,781,267
  

 

 

   

 

 

 
    $ 6,814,647        $ 5,010,309   
  

 

 

   

 

 

 

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

 

3


Table of Contents

ACCENTIA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

     For the Three Months Ended
June 30,
     For the Nine Months Ended
June 30,
 
     2011      2010      2011      2010  

Net Sales:

           

Products

       $ 659,210            $ 1,273,875            $ 1,810,560            $ 3,234,405    

Services

     1,409,511          1,219,871          4,315,953          5,053,221    

Grant revenue

                     319,667           
  

 

 

    

 

 

    

 

 

    

 

 

 

Total net sales

     2,068,721          2,493,746          6,446,180          8,287,626    
  

 

 

    

 

 

    

 

 

    

 

 

 

Cost of sales:

           

Products

     385,922          607,228          1,037,689          1,475,865    

Services

     1,074,731          1,024,308          3,263,262          4,134,366    

Grants

                     72,011           
  

 

 

    

 

 

    

 

 

    

 

 

 

Total cost of sales (exclusive of amortization of acquired product rights)

     1,460,653          1,631,536          4,372,962          5,610,231    
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross margin

     608,068          862,210          2,073,218          2,677,395    
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating expenses:

           

Research and development

     657,230          335,961          1,368,877          961,504    

Sales and marketing

     37,526          35,703          92,229          90,357    

Royalties

                     30,000           

General and administrative

     3,228,943          1,246,516          19,521,140          4,036,340    

Impairment of intangible assets

                             394,570    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total operating expenses

     3,923,699          1,618,180          21,012,246          5,482,771    
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating loss

     (3,315,631)         (755,970)         (18,939,028)         (2,805,376)   

Other income (expense):

           

Interest expense

     (1,868,603)         (1,671,442)         (6,315,535)         (13,778,456)   

Derivative gain (loss)

     816,212          14,110,782          581,804          (22,432,346)   

Loss on deconsolidation of insolvent subsidiary

                             (845,314)   

Other income (expense)

     (17,037)         (3,925)         10,124          588,405    
  

 

 

    

 

 

    

 

 

    

 

 

 

Income (loss) before reorganization items, non-controlling interest in losses from variable interest entities, and income taxes

     (4,385,059)         11,679,445          (24,662,635)         (39,273,087)   

Reorganization items:

           

Gain on reorganization

     650,052                 12,796,494           

Professional Fees

     —           (207,510)         (357,059)         (678,584)   

Provision for indemnity agreements

     —           —           —           2,061,818    
  

 

 

    

 

 

    

 

 

    

 

 

 
     650,052          (207,510)         12,439,435          1,383,234    

Loss before income taxes and non-controlling interest

     (3,735,007)         11,471,935          (12,223,200)         (37,889,853)   

 

(Continued)

 

4


Table of Contents

ACCENTIA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(Continued)

 

     For the Three Months Ended
June 30,
     For the Nine Months Ended
June 30,
 
     2011      2010      2011      2010  

Income taxes

       $           $ 1,400           $           $ (3,156)   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net (loss) income

     (3,735,007)         11,473,335         (12,223,200)         (37,893,009)   

Loss (income) from non-controlling interest from variable interest entities and subsidiary

     917,354         (412,930)         3,367,138         3,056,702   

Net (loss) income attributable to Accentia Biopharmaceuticals, Inc.

     (2,817,653)         11,060,405         (8,856,062)         (34,836,307)   

Preferred stock dividend

             (699,758)                 (2,099,252)   

(Loss) income attributable to common shareholders

     (2,817,653)         10,360,647         (8,856,062)         (36,935,559)   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average shares outstanding, basic and diluted

     70,172,994         58,048,208         67,287,208         58,048,208   
  

 

 

    

 

 

    

 

 

    

 

 

 

Per share amounts, basic and diluted:

           

(Loss) income attributable to common stockholders per common share

       $ (0.04)           $ 0.18           $ (0.13)           $ (0.64)   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

5


Table of Contents

ACCENTIA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT

(Unaudited)

 

    Common Stock                                
    Shares       Amount       Additional
Paid
In Capital
    Treasury
Stock
    Accumulated
Deficit
    Non-Controlling
Interests
    Total  

Balances, October 1, 2010

    58,048,208       $ 58,048       $ 203,828,364          $ (170,057)        $ (325,882,720)        $ (30,614,902)        $ (152,781,267)   

Reclassification upon dissolution of variable interest entities

    —           —           —           —           3,565,534        (3,565,534)        —      

Share-based compensation

    1,566,000        1,566        16,024,608        —          —          —          16,026,174   

Reclassification of derivative liability to equity

    —           —           35,259,336        —           —           —           35,259,336   

Accentia shares issued on effective date upon the conversion of debt

    10,072,644        10,073        13,698,945        —           —           —           13,709,018   

Accentia shares issued upon the conversion of promissory notes

    1,891,055        1,892        1,361,885        —           —           —           1,363,777   

Accentia shares issued for services

    56,250        56        40,444        —           —           —           40,500   

Accentia shares issued in resolution of disputed claims

    806,843        807        419,834        —           —           —           420,641   

Accentia warrants issued with financing transaction

    —           —           696,049       —           —           —           696,049   

Reclassification of Accentia beneficial conversion feature to equity

    —           —           303,951        —           —           —           303,951   

Treasury shares received on effective date

    —           —           —           (1,326,360)        8        —           (1,326,352)   

 

(Continued)

 

6


Table of Contents

ACCENTIA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT

(Unaudited)

(Continued)

 

    Common Stock                                
    Shares       Amount       Additional
Paid
In Capital
    Treasury
Stock
    Accumulated
Deficit
    Non-Controlling
Interests
    Total  

Biovest warrants issued

    —           —           1,247,582        —           —           —           1,247,582   

Biovest shares issued on effective date for conversion of debt

    —           —           6,631,156        —           —           —           6,631,156   

Reclassification of Biovest beneficial conversion feature to equity

    —           —           2,138,789        —           —           —           2,138,789   

Biovest shares issued upon conversion of debt

    —           —           1,117,108        —           —           —           1,117,108   

Biovest shares issued for interest

    —           —           434,415        —           —           —           434,415   

Biovest shares issued upon the conversion of employee stock options

    —           —           6,000        —           —           —           6,000   

Accentia owned Biovest shares tendered in payment of Accentia debt

    —           —           932,941        —           —           —           932,941   

Adjustment to non-controlling interests for change in ownership percentage of majority-owned subsidiary

    —           —           3,688,567        —           —           (3,688,567)        —      

Net loss for the period

    —           —           —           —           (8,856,062)        (3,367,138)        (12,223,200)   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances, June 30, 2011

    72,441,000       $ 72,442        $ 287,829,974       $ (1,496,417)        $ (331,173,240)        $ (41,236,141)        $ (86,003,382)   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

7


Table of Contents

ACCENTIA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

     For the Nine Months Ending
June 30,
 
     2011      2010  

Cash flows from operating activities:

     

Net loss

       $ (12,223,200)         $ (37,893,009)   

Adjustments to reconcile net loss to net cash flows from operating activities:

     

Change in fair market value adjustment of convertible debentures

             2,134,133    

Depreciation

     65,740          243,232    

Amortization

     344,092          203,693    

Share-based compensation

     16,026,174          450,029    

Accretion of capitalized finance costs

     937,795          1,025,171    

Accretion of debt discounts

     1,416,492          5,773,181    

Accretion of royalty liability

             457,260    

Derivative (gain) loss

     (581,804)         22,432,346    

Impairment of intangible assets

             394,570    

Issuance of common stock shares for services

     40,500            

Issuance of common stock warrants for finance costs

     1,247,582            

Issuance of common stock shares for interest expense

     434,415            

Gain on settlement

     (827,196)         (342,001)   

Cash proceeds from settlement

             2,500,000    

Increase (decrease) in cash resulting from changes in:

     

Accounts receivable

     71,871          247,015    

Inventories

     (42,642)         38,861    

Unbilled receivables

     (52,583)         1,223,309    

Prepaid expenses and other current assets

     (61,899)         62,776    

Other assets

     (504,581)         59,944    

Accounts payable

     502,866          (887,255)   

Accrued expenses

     2,145,928          3,037,325    

Unearned revenues

     (150,759)         (691,365)   

Customer deposits

     (124,173)         (81,850)   
  

 

 

    

 

 

 

Net cash flows from operating activities before reorganization items

     8,664,618          387,365    

Reorganization items:

     

Gain on reorganization plan

     (12,795,522)           

Decrease in accrued professional fees

     (325,333)           

Decrease in provision for indemnity agreement

               
  

 

 

    

 

 

 
     (13,120,855)           
  

 

 

    

 

 

 

Net cash flows from operating activities

     (4,456,237)         387,365    
  

 

 

    

 

 

 

Cash flows from investing activities:

     

Acquisition of property, plant and equipment

     (683,729)         (42,707)   
  

 

 

    

 

 

 

Net cash flows from investing activities

       $ (683,729)         $ (42,707)   
  

 

 

    

 

 

 

 

(Continued)

 

8


Table of Contents

ACCENTIA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Continued)

 

     For the Nine Months Ending
June 30,
 
     2011      2010  

Cash flows from financing activities:

     

Proceeds from long-term convertible notes

   $ 7,353,000       $   

Payments of long-term debt

     (1,569,035)      

Payment of deferred financing costs

     (1,059,587)         (40,000)   

Proceeds from the exercise of stock options

     6,000            

Proceeds from notes payable, related party

     1,250,000          140,000    

Payments made (to) from related party, net

     (30,459)         119,835    
  

 

 

    

 

 

 

Net cash flows from financing activities

     5,949,919          219,835    
  

 

 

    

 

 

 

Net change in cash and cash equivalents

     809,953          564,493    
  

 

 

    

 

 

 

Cash and cash equivalents at beginning of period

     558,452          325,350    
  

 

 

    

 

 

 

Cash and cash equivalents at end of period

     1,368,405          889,843    
  

 

 

    

 

 

 

Supplemental cash flow information:

     

Cash paid for:

     

Interest

   $       $   

Income taxes

             3,156    

Supplemental disclosure of non-cash financing activity:

     

Reclassification of derivative to equity

   $ 35,259,336        $   

Cumulative effect of change in accounting principal

     

Accentia common stock issued on effective date upon the conversion of debt

     13,709,018          2,906,785    

Accentia common stock issued for services

     40,500            

Accentia common stock issued upon the conversion of promissory notes

     1,363,777            

Accentia common stock issued in resolution of disputed claims

     420,641            

Accentia owned Biovest shares tendered in payment of Accentia debt

     932,941            

Biovest common stock issued on effective date upon the conversion of debt

     6,631,156            

Reclassification of Biovest beneficial conversion feature to equity

     2,138,789            

Reclassification of Accentia beneficial conversion feature to equity

     696,049       

Biovest shares issued for interest

     434,415            

Biovest shares issued upon the conversion of Biovest debt

     1,117,108            

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

 

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ACCENTIA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED JUNE 30, 2011 AND 2010

1. Description and history of the company:

Headquartered in Tampa, Florida, Accentia Biopharmaceuticals, Inc. (OTCQB: “ABPI”) (the “Company” or “Accentia”) is a biotechnology company that is developing Revimmune™ as a comprehensive system of care for the treatment of autoimmune diseases. Additionally, through the Company’s majority-owned subsidiary, Biovest International, Inc., (OTCQB: “BVTI”) (“Biovest”), the Company is developing BiovaxID® as a therapeutic cancer vaccine for treatment of follicular non-Hodgkin’s lymphoma (“FL”) and mantle cell lymphoma (“MCL”). Through the Company’s wholly-owned subsidiary, Analytica International, Inc. (“Analytica”), the Company conducts a health economics research and consulting business which Analytica markets to the pharmaceutical and biotechnology industries, using Analytica’s operating cash flow to support the Company’s corporate administration and product development activities.

Revimmune™ is being developed under a license with Johns Hopkins University as a treatment for various autoimmune diseases. The approximately 80 known autoimmune diseases generally arise from an overactive immune response against substances and/or tissue normally present in the body. As a system of care, Revimmune consists of administering high, pulsed doses of an FDA-approved drug, cyclophosphamide, over a four-day interval as part of an integrated risk management system including a panel of preventive tests, monitoring and medications which are intended to minimize risks while seeking to maximize the clinical benefit.

Through collaboration with the National Cancer Institute (“NCI”), Biovest has developed a patient-specific cancer vaccine, BiovaxID®, which has demonstrated statistically significant Phase 3 clinical benefit by prolonging disease-free survival in FL patients treated with BiovaxID. As of June 30, 2011, Biovest is a 62% owned subsidiary of Accentia and Biovest has a significant number of options and convertible instruments which may cause a dilution of the Company’s ownership percentage in the short-term, if converted.

Additionally, through the Company’s wholly-owned subsidiary, Analytica, a Florida corporation with its offices located in New York, N.Y., the Company conducts a global research and strategy consulting business that provides professional services to the pharmaceutical and biotechnology industries. Since 1997, Analytica has expertly directed research studies and projects, including traditional health economic modeling projects, database studies, structured reviews, health technology assessments, reimbursement analyses, and value dossiers.

On November 10, 2008, the Company and its wholly-owned subsidiaries, Analytica, TEAMM Pharmaceuticals, Inc. d/b/a Accentia Pharmaceuticals (“TEAMM” or “Accentia Pharmaceuticals”), AccentRx, Inc. (“AccentRx”), and Accentia Specialty Pharmacy (“ASP”) (collectively, the “Debtors”) filed voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code (“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 and as amended and supplemented, the “Plan”). On November 2, 2010, the Bankruptcy Court entered an Order Confirming Debtors’ First Amended Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy Code (the “Confirmation Order”). The Company emerged from Chapter 11 protection, and the Plan became effective, on November 17, 2010 (the “Effective Date”).

2. Significant accounting policies and consolidation policy:

Basis of presentation

The accompanying condensed consolidated financial statements have been derived from unaudited interim financial information prepared in accordance with the rules and regulations of the Securities and Exchange Commission for quarterly financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate so that the information presented is not misleading. The condensed consolidated 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 condensed consolidated financial statements.

Operating results for the three and nine months ended June 30, 2011 are not necessarily indicative of the results that may be expected for the entire fiscal year. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2010.

 

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ACCENTIA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED JUNE 30, 2011 AND 2010

 

2. Significant accounting policies and consolidation policy (continued):

 

Consolidation policy

Principles of consolidation

The Company consolidates all entities controlled by ownership of a majority interest and, effective February 27, 2007, has consolidated a variable interest entity of which the Company is the primary beneficiary. The consolidated financial statements include Accentia Biopharmaceuticals, Inc. and its wholly-owned subsidiaries, Analytica, TEAMM, AccentRx, and ASP; its majority owned subsidiary, Biovest (and its consolidated entities), and Revimmune, LLC, an entity in which the Company has a controlling financial interest and has been determined to be the primary beneficiary. All significant intercompany balances and transactions have been eliminated in consolidation.

Voluntary Petition for Bankruptcy:

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, 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 on November 10, 2008, and emerged from Chapter 11 protection on November 17, 2010. The Company has segregated those items as outlined above for all reporting periods between such dates.

Financial instruments:

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

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

Fair Value of Financial Assets and Liabilities:

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

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

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

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

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

 

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ACCENTIA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED JUNE 30, 2011 AND 2010

 

2. Significant accounting policies and consolidation policy (continued):

 

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

The Company estimates fair values of all derivative instruments, such as free-standing warrants, and embedded conversion features utilizing Level 2 inputs. The Company generally uses the Black-Scholes-Merton option valuation technique because it embodies all of the requisite assumptions (including trading volatility, estimated terms and risk free rates) necessary to fair value these instruments. Estimating fair values of derivative financial instruments requires the development of significant and subjective inputs that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, option-based techniques are highly volatile and sensitive to changes in the Company’s trading market price and the trading market price of various peer companies, which have historically had high volatility. Since derivative financial instruments are initially and subsequently carried at fair value, the Company’s income will reflect the volatility in these estimate and assumption changes.

The Company reports its derivative liabilities at fair value on the accompanying consolidated balance sheets as of June 30, 2011 and September 30, 2010.

Grant revenue:

Grant revenue is the result of the Company and Biovest being awarded the Qualifying Therapeutic Discovery Program Grant from the federal government during 2010. In accordance with the terms of the Qualifying Therapeutic Discovery Program Grant, grant revenue is recognized up to 50% of the reimbursable expenses incurred during 2011 and 2010 for both the Company and Biovest.

Recent accounting pronouncements:

In June 2008, the FASB issued new guidance for determining whether an equity-linked financial instrument (or embedded feature) is indexed to an entity’s own stock. The Company adopted this new guidance effective October 1, 2009. Certain of the Company’s outstanding warrants and convertible debt contain features fell under the scope of this guidance resulting in a decrease of $2.2 million and $0.8 million to the October 1, 2009 balances of additional paid-in capital and accumulated deficit respectively.

In June 2009, the FASB issued new guidance amending the existing pronouncement related to the consolidation of variable interest entities. This new guidance requires the reporting entities to evaluate former Qualifying Special Purpose Entity for consolidation, changes the approach to determine a variable interest entity’s primary beneficiary from a quantitative assessment to a qualitative assessment designed to identify a controlling financial interest, and increases the frequency of required assessments to determine whether the Company is the primary beneficiary of any variable interest entities which it is a party to. This new guidance was not effective for the Company until October 1, 2010 and earlier adoption was prohibited. This new guidance became effective for the Company on October 1, 2010 and did not have a material impact on the Company’s consolidated financial statements.

In December 2010, the FASB issued Accounting Standards Update (“ASU”) 2010-27 “Fees Paid to the Federal Government by Pharmaceutical Manufacturers” amending Accounting Standards Codification (“ASC”) 720 “Other Expenses” to address questions concerning how pharmaceutical manufacturers should recognize the annual fees imposed by the Patient Protection and Affordable Care Act for each calendar year beginning January 1, 2011. The ASU requires that the liability related to the annual fee be estimated and recorded in full upon the first qualifying sale with a corresponding deferred cost that is amortized to expense over the calendar year that it is payable. The amendment is effective commencing with the quarter ended March 31, 2011 and did not have a significant impact on the Company’s consolidated financial statements.

In December 2010, the FASB issued ASU 2010-28 “Intangibles – Goodwill and Other”, which modifies the goodwill impairment test for reporting units with zero or negative carrying amounts as required by ASC Topic 350. Under the amendment, an entity with reporting units that have carrying amounts that are zero or negative is required to assess whether it is more likely than not that the reporting units’ goodwill is impaired. If this determination is made, the entity should perform Step 2 of the goodwill impairment test for those reporting unit(s). This update became effective beginning with the quarter ended March 31, 2011 and did not have a material impact on the Company’s financial statements.

 

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ACCENTIA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED JUNE 30, 2011 AND 2010

 

2. Significant accounting policies and consolidation policy (continued):

 

ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820) - Improving Disclosures About Fair Value Measurements, requires expanded disclosures related to fair value measurements including (i) the amounts of significant transfers of assets or liabilities between Levels 1 and 2 of the fair value hierarchy and the reasons for the transfers, (ii) the reasons for transfers of assets or liabilities in or out of Level 3 of the fair value hierarchy, with significant transfers disclosed separately, (iii) the policy for determining when transfers between levels of the fair value hierarchy are recognized and (iv) for recurring fair value measurements of assets and liabilities in Level 3 of the fair value hierarchy, a gross presentation of information about purchases, sales, issuances and settlements. ASU 2010-06 further clarifies that (i) fair value measurement disclosures should be provided for each class of assets and liabilities (rather than major category), which would generally be a subset of assets or liabilities within a line item in the statement of financial position and (ii) companies should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements for each class of assets and liabilities included in Levels 2 and 3 of the fair value hierarchy. The disclosures related to the gross presentation of purchases, sales, issuances and settlements of assets and liabilities included in Level 3 of the fair value hierarchy was required for the Company beginning January 1, 2011. The remaining disclosure requirements and clarifications made by ASU 2010-06 became effective for the Company on January 1, 2010.

In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”). ASU 2011-04 is intended to result in convergence between U.S. GAAP and International Financial Reporting Standards (“IFRS”) requirements for measurement of and disclosures about fair value. The amendments are not expected to have a significant impact on companies applying U.S. GAAP. Key provisions of the amendment include: a prohibition on grouping financial instruments for purposes of determining fair value, except when an entity manages market and credit risks on the basis of the entity’s net exposure to the group; an extension of the prohibition against the use of a blockage factor to all fair value measurements (that prohibition currently applies only to financial instruments with quoted prices in active markets); and a requirement that for recurring Level 3 fair value measurements, entities disclose quantitative information about unobservable inputs, a description of the valuation process used and qualitative details about the sensitivity of the measurements. In addition, for items not carried at fair value but for which fair value is disclosed, entities will be required to disclose the level within the fair value hierarchy that applies to the fair value measurement disclosed. ASU 2011-04 is effective for interim and annual periods beginning after December 15, 2011. The Company will adopt these standards on January 1, 2012 and does not expect the adoption to have a material impact on its condensed consolidated financial statements.

3. Liquidity and management’s plans:

During the nine months ended June 30, 2011, the Company had a net loss of $12.2 million. On June 30, 2011, the Company had an accumulated deficit of approximately $331.2 million and a working capital deficit of approximately $19.3 million. Cash and cash equivalents at June 30, 2011 was $1.4 million, of which $0.7 million was attributable to Biovest. The Company’s independent registered public accounting firm’s report included a “going concern” uncertainty on the financial statements for the year ended September 30, 2010, 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.

Regulatory strategy and commercialization expenditures:

While there have been a number of published reports of High-Dose Pulsed Cyclophosphamide as a potential therapy for certain autoimmune diseases, cyclophosphamide is not currently FDA-approved for the treatment of any autoimmune diseases. These prior studies of High-Dose Pulsed Cyclophosphamide in the United States have been conducted at a limited number of large academic research hospitals and have featured non-uniform inclusion criteria and/or administration schedules. It is generally recognized that there may be significant potential risks of infection or other side effects when High-Dose Pulsed Cyclophosphamide is not administered by highly-qualified personnel in a controlled and regulated clinical setting. While the previous studies are important to the Company’s Revimmune™ development plan, they may not be sufficient to support regulatory approval. At the core of the Company’s Revimmune development plan is the expansion of the FDA approved label to include various autoimmune diseases which is anticipated to require controlled and randomized clinical trials to demonstrate the efficacy of High-Dose Pulsed Cyclophosphamide to the satisfaction of the FDA and that safety will be an important regulatory and clinical concern which the Company believes will require an FDA approved formal Risk Evaluation and Mitigation Strategies (“REMS”).

 

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ACCENTIA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED JUNE 30, 2011 AND 2010

 

3. Liquidity and management’s plans (continued):

 

There are approximately 80 recognized autoimmune diseases. Subject to the Company’s capital availability, it plans to undertake clinical trials of Revimmune for the treatment of autoimmune diseases, which we anticipate may initially include multiple sclerosis (“MS”).

The Company has conducted a meeting with the Federal Food and Drug Administration (“FDA”) regarding its proposed design of a clinical trial for Revimmune to treat MS which the Company considered to be constructive. The Company anticipates pursuing a 505(b)(2) regulatory pathway.

Biovest completed its Phase 3 clinical trial of BiovaxID® for the indication of FL. Under Biovest’s current regulatory strategy, Biovest is performing in-depth analyses of the available clinical trial data in preparation for submission of the data to the Federal Food and Drug Administration (“FDA”) and the European Medicines Agency (“EMA”). Based upon a recommendation from the independent Data Monitoring Committee (“DMC”) which monitors the safety and efficacy profile of the clinical trial and Biovest’s analysis of the available clinical trial data, Biovest plans to seek accelerated and conditional approval of BiovaxID with the FDA, EMA, and other international agencies, for the indication of FL. Pending the outcome of these anticipated applications for accelerated and conditional approval, Biovest has ceased enrolling new patients in its Phase 3 clinical trial and has discontinued most clinical trial activities, which had the effect of decreasing clinical trial expenses compared to those recorded for prior periods. Accelerated or conditional approval would require Biovest to perform additional clinical studies as a condition to continued marketing of BiovaxID. Accordingly, should Biovest receive accelerated and/or conditional approval, clinical trial activities and related expenses may return to the levels experienced in periods prior to the application for conditional approval until any such clinical trial activity is completed. There can be no assurances Biovest will receive accelerated or conditional approval. Biovest’s ability to timely access required financing will continue to be essential to support the ongoing commercialization efforts. Biovest’s inability to obtain required funds or any substantial delay in obtaining required funds will have a material adverse effect on the ongoing commercialization efforts

Additional expected financing activity:

Management intends to attempt to meet its cash requirements through proceeds from its global research and strategy consulting business, the use of cash on hand, trade vendor credit, short-term borrowings, debt and equity financings, and strategic transactions such as collaborations and licensing. The Company’s ability to continue present operations, pay its liabilities as they become due, and meet its obligations for product development is dependent upon the Company’s ability to obtain additional funding in the near term. Additional sources of funding have not been established; however, the Company anticipates seeking additional financing potentially from a number of sources, including the sale of equity or debt securities, strategic collaborations and recognized research funding programs. There can be no assurance that the Company will be successful in securing such financing at acceptable terms, if at all. Accordingly, the Company’s ability to continue present operations the Company’s ability to pay its existing liabilities as they become due is dependent upon the Company’s ability to obtain significant external funding, which raises substantial doubt about the Company’s ability to continue as a going concern. If adequate funds are not available from the foregoing sources when required, or if the Company determines it to otherwise be in the Company’s best interest, the Company may consider additional strategic financing options, including sales of assets, or the Company may be required to delay, reduce the scope of, or eliminate one or more of its research or development programs or curtail some or all of its commercialization efforts.

4. Inventories:

Inventories (of continuing operations) consist of the following:

 

         June 30, 2011    
(Unaudited)
         September 30,    
2010
 

Finished goods, other

    $ 51,462         $ 104,155   

Work-in-process

     86,710            

Raw materials

     321,557          312,932   
  

 

 

    

 

 

 
    $ 459,729         $ 417,087   
  

 

 

    

 

 

 

 

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ACCENTIA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED JUNE 30, 2011 AND 2010

 

5. Intangible assets:

Intangible assets consist of the following:

 

        June 30, 2011    
(Unaudited)
        September 30,    
2010
    Weighted
Average
     Amortization    

Period
 

Amortizable intangible assets:

     

Noncompete agreements

  $ 2,104,000      $ 2,104,000        3.5 years   

Patents

    103,244        103,244        3.0 years   

Purchased customer relationships

    666,463        666,463        10.0 years   

Product rights

    28,321        28,321        18.4 years   

Software

    438,329        438,329        3.5 years   

Trademarks

    1,285,960        1,285,960        3.0 years   
 

 

 

   

 

 

   
    4,626,317        4,626,317     

Less accumulated amortization

    (3,886,447     (3,542,355  
 

 

 

   

 

 

   

Total intangible assets

  $ 739,870      $ 1,083,962     
 

 

 

   

 

 

   

6. Reserve for unresolved claims:

Reserve for unresolved claims consists of disputed amounts in the Company’s Plan. These claims remain outstanding before the Bankruptcy Court, and the Company anticipates each claim will be resolved by the second quarter of 2012.

7. Notes payable:

Notes payable of approximately $0.1 million, consisting primarily of priority and convenience claims to be paid within six months of the Effective Date were paid during the nine months ended June 30, 2011. All notes payable at September 30, 2010 had been classified as ‘Liabilities subject to compromise’ in the Company’s condensed consolidated balance sheet as of September 30, 2010, as a result of the Company’s Chapter 11 filings on November 10, 2008 (Note 1).

8. Convertible long-term debt:

Convertible promissory notes consist of the following:

 

in thousands            
      June 30, 2011         September 30, 2010    

Accentia Class 3 Plan Notes

    2,802         —     

Accentia Class 5 Plan Debentures

    945         —     

Accentia Class 6 Plan Debentures

    6,860         —     

Accentia Class 9 Plan Debentures

    16,433         —     

Accentia Class 13 Plan Notes

    3,999         —     

Biovest Class 8 Option C Promissory Note

    1,303         —     

Biovest Empery Promissory Notes

    70         —     
 

 

 

   

 

 

 
    32,412         —     

Less current maturities

    (6,681)         —     
 

 

 

   

 

 

 
  $ 25,731       $ —     
 

 

 

   

 

 

 

 

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ACCENTIA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED JUNE 30, 2011 AND 2010

 

8. Convertible long-term debt (continued):

 

Accentia Class 3 Plan Note:

Effective as of November 17, 2010, the effective date of the Company’s Plan (the “Effective Date”), the Company issued, a new promissory note in an original principal amount of $4,483,284 (the “Class 3 Plan Note”) to Dennis Ryll, the holder by assignment of the Company’s previously-issued secured note to Southwest Bank, as payment of the Company’s obligation to Southwest Bank prior to the Effective Date. The Company is not obligated to pay the Class 3 Plan Note in cash, and instead may pay through quarterly conversions into shares of the Company’s common stock or, subject to certain conditions, by exchanging the quarterly conversion amounts into shares of Biovest common stock owned by the Company. The following are the material terms and conditions of the Class 3 Plan Note:

 

   

the Class 3 Plan Note matures on August 17, 2012;

 

   

interest accrues and is payable on the outstanding principal balance of the Class 3 Plan Note from time to time (the “Class 3 Interest”) at a fixed rate of six percent (6%) per annum;

 

   

on November 17, 2010 and on each of the following seven (7) quarterly anniversaries of the Effective Date (each, a “Class 3 Automatic Conversion Date”), provided that the average of the trading price of the Company’s common stock (as determined in accordance with the Class 3 Plan Note and the Plan) for the ten (10) consecutive trading days ending on the trading day that is immediately preceding the then applicable Class 3 Automatic Conversion Date (the “Class 3 Automatic Conversion Price”) is at least $1.00 per share, one-eighth (1/8th) of the original principal balance of the Class 3 Plan Note plus the Class 3 Interest as of the Class 3 Automatic Conversion Date (the “Class 3 Automatic Conversion Amount”) will be automatically converted into shares of the Company’s common stock at a conversion rate equal to the Class 3 Automatic Conversion Price per share of the Company’s common stock;

 

   

the Class 3 Plan Note is secured by a lien on 15 million shares of Biovest common stock owned by the Company (the “Class 3 Pledged Shares”), subject to the incremental release of a designated portion of such security upon each quarterly payment under the Class 3 Plan Note. As of June 30, 2011, there remains approximately 9.4 million Class 3 Pledged Shares;

 

   

if, on any Class 3 Automatic Conversion Date, the Class 3 Automatic Conversion Price is less than $1.00 per share, Mr. Ryll may, at his election, may convert the Class 3 Automatic Conversion Amount into shares of the Company’s common stock at a conversion rate equal to $1.00 per share of the Company’s common stock; and

 

   

if, on any Class 3 Automatic Conversion Date, the Class 3 Automatic Conversion Price is less than $1.00 per share, and Mr. Ryll does not elect to convert the Class 3 Automatic Conversion Amount into shares of the Company’s common stock at a conversion rate equal to $1.00 per share of the Company’s common stock, then Company, at its election and upon written notice to Mr. Ryll, may either deliver the Class 3 Automatic Conversion Amount by one of the following four methods of payment or combination thereof:

 

  (i) the number of shares of the Company’s common stock determined by dividing the Class 3 Automatic Conversion Amount by $1.00 plus after the payment, the difference between (a) the Class 3 Automatic Conversion Amount and (b) the product of the Class 3 Automatic Conversion Price on the Class 3 Automatic Conversion Date and the number of shares of the Company’s common stock issued (as determined above); or

 

  (ii) the number of shares of our common stock determined by dividing the Class 3 Automatic Conversion Amount by $1.00 plus in order to pay the shortfall in the Class 3 Automatic Conversion Amount after the payment (as determined above), that number of the Class 3 Pledged Shares that has a value equal to the remaining unpaid portion of the Class 3 Automatic Conversion Amount (as determined above), using a conversion rate equal to the average of the trading price of shares of Biovest common stock for the ten (10) consecutive trading days prior to the Class 3 Automatic Conversion Date (the “Biovest VWAP Price”); or

 

  (iii) the number of shares of our common stock determined by dividing the Class 3 Automatic Conversion Amount by $1.00 plus cash in an amount equal to the shortfall in the Class 3 Automatic Conversion Amount after the payment (as determined above); or

 

  (iv) the number of the Class 3 Pledged Shares that has a value equal to the Class 3 Automatic Conversion Amount, using a conversion rate equal to the Biovest VWAP Price., i.e., dividing the Automatic Conversion Amount by the Biovest VWAP Price.

 

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ACCENTIA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED JUNE 30, 2011 AND 2010

 

8. Convertible long-term debt (continued):

 

Accentia Class 3 Plan Note (continued):

 

As of June 30, 2011, approximately $1.7 million in Class 3 Plan Debentures principal and approximately $0.1 million in accrued interest had been converted into a combination of the Conversion Shares and Class 3 Pledged Shares at a conversion price equal to $0.54 to $1.36 per share and $0.71 per share, respectively, resulting in the delivery 1,542,887 shares of the Company’s common stock and 869,686 shares of Biovest common stock owned by the Company.

Accentia Class 5 Plan Debenture and Warrants:

On the Effective Date, the Company issued, in satisfaction of the secured debentures dated September 29, 2006, outstanding prior to the Effective Date, new debentures (the “Class 5 Plan Debentures”) in the original principal amount of $3,109,880. The Company is not obligated to pay the Class 5 Plan Debentures in cash, and instead may pay through the conversion by the holders into shares of the Company’s common stock or, subject to certain conditions, by exchanging the Class 5 Plan Debentures for shares of Biovest common stock owned by the Company during the term of the Class 5 Plan Debentures which mature on May 17, 2012.

The following are the material terms and conditions of the Class 5 Plan Debentures:

 

   

the Class 5 Plan Debentures mature on May 17, 2012 (provided, however, in the event that the average of the trading price of shares of Biovest common stock (as determined in accordance with the Class 5 Plan Debentures and the Plan) for the ten (10) consecutive trading days ending on the trading day that is immediately preceding such maturity date is below $0.75, then the maturity date will automatically be extended for an additional twelve (12) months [May 17, 2013]), and the outstanding principal together with all accrued but unpaid interest is due on such maturity date;

 

   

interest accrues and is payable on the outstanding principal amount under the Class 5 Plan Debentures at a fixed rate of eight and one-half percent (8.50%) per annum;

 

   

each of the Class 5 Plan Debentures is secured by a lien on certain shares of Biovest common stock owned by the Company;

 

   

at the option of a holder of Class 5 Plan Debentures, all or any portion of the then outstanding balance of such holder’s Class 5 Plan Debentures may be converted into shares of the Company’s common stock or exchanged for shares of Biovest common stock at the applicable conversion or exchange rate set forth in such holder’s Class 5 Plan Debenture;

 

   

commencing on August 15, 2011, if the trading price of the Company’s common stock (determined in accordance with the Class 5 Plan Debentures and the Plan) is at least 150% of the fixed conversion price for a holder of Class 5 Plan Debentures for any ten (10) consecutive trading days (in the case of a conversion into the Company’s common stock), or the trading price of shares of Biovest common stock (determined in accordance with the Class 5 Plan Debentures and the Plan) is at least $1.25 for any ten (10) consecutive trading days (in the case of an exchange for shares of Biovest common stock), the Company, at its option, may (a) convert the then outstanding balance of all of the Class 5 Plan Debentures into shares of the Company’s common stock at a conversion rate equal to the fixed conversion price for each holder of Class 5 Plan Debentures, or (b) exchange the then outstanding balance of all of the Class 5 Plan Debentures into shares of Biovest common stock owned by the Company at a rate equal to $0.75 per share of Biovest common stock (with certain exceptions set forth in the Class 5 Plan Debentures and the Plan); and

 

   

if a holder of Class 5 Plan Debentures elects to receive shares of Biovest common stock during the period of November 17, 2010 through February 17, 2011, then such holder would have been subject to certain restrictions set forth in the Class 5 Plan Debentures and the Plan regarding the shares of Biovest common stock.

On the Effective Date, the Company also executed and delivered warrants (the “Class 5 Plan Warrants”) to purchase up to 2,508,960 shares of the Company’s common stock or up to 14.4 million shares of Biovest common stock owned by the Company. The Class 5 Plan Warrants (a) have an exercise price of $1.50 per share with a expiration date of November 17, 2013, (b) can only be exercised for cash (no cashless exercise), and (c) are subject to certain call provisions set forth in the Class 5 Plan Warrants and the Plan.

As of June 30, 2011, approximately $1.1 million in Class 5 Plan Debentures principal and $25,653 in accrued interest had been converted into Biovest common stock at a conversion price equal to $0.75 per share, resulting in the delivery of 1,198,184 shares of Biovest common stock owned by the Company to certain Class 5 Plan Debenture holders. Additionally, approximately $3.3 million converted on the Effective Date into approximately 1.3 million shares of the Company’s common stock at a conversion price of $2.67 per share. The principal balance at June 30, 2011 was $2,024,950, net of a discount of $1,079,284.

 

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ACCENTIA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED JUNE 30, 2011 AND 2010

 

8. Convertible long-term debt (continued):

 

Accentia Class 6 Plan Debentures and Warrants:

On the Effective Date, the Company issued, in satisfaction of the secured debentures dated June 17, 2008, outstanding prior to the Effective Date, new debentures (the “Class 6 Plan Debentures”) in the original principal amount of $9,730,459. The Class 6 Plan Debentures mature on November 17, 2013, and the outstanding principal together with all accrued but unpaid interest is due in cash on such date.

The following are the material terms and conditions of the Class 6 Plan Debentures:

 

   

interest accrues and is payable on the outstanding principal under the Class 6 Plan Debentures at a fixed rate of eight and one-half percent (8.50%) per annum and each of the Class 6 Plan Debentures is secured by a lien on certain assets of the Company;

 

   

at the option of a holder of Class 6 Plan Debentures, such holder may elect to convert all of the then outstanding balance of its Class 6 Plan Debentures into shares of the Company’s common stock at a conversion rate equal to $1.10 per share of the Company’s common stock; and

 

   

commencing on May 15, 2011, if the trading price of the Company’s common stock (as determined in accordance with the Class 6 Plan Debentures and the Plan) is at least 150% of $1.10 per share for any ten (10) consecutive trading days, the Company, at its option, may convert the then outstanding balance of all of the Class 6 Plan Debentures into shares of the Company’s common stock at a conversion rate equal to $1.10 per share of the Company’s common stock.

On the Effective Date, the Company also executed and delivered warrants (the “Class 6 Plan Warrants”) to purchase up to 2,979,496 shares of the Company’s common stock. The Class 6 Plan Warrants (a) have an exercise price of $1.50 per share with a expiration date of November 17, 2013, (b) can only be exercised for cash (no cashless exercise), and (c) are subject to certain call provisions set forth in the Class 6 Plan Warrants and the Plan.

As of June 30, 2011, approximately $2.9 million in Class 6 Plan Debentures had been converted into the Company’s common stock at a conversion price equal to $1.10 per share, resulting in the issuance of approximately 2.6 million shares of the Company’s common stock.

Accentia Class 9 Plan Debentures and Warrants:

On the Effective Date, the Company issued, in satisfaction of the debentures dated, February 28, 2007, outstanding prior to the Effective Date, new debentures (the “Class 9 Plan Debentures”) in the original principal amount of $19,109,554. The Company is not obligated to pay the Class 9 Plan Debentures in cash, and instead may pay through the conversion by the holders into shares of the Company’s common stock. The Class 9 Plan Debentures mature on November 17, 2012 (the “Class 9 Plan Debenture Maturity Date”) and no interest will accrue on the outstanding principal balance of the Class 9 Plan Debentures.

The following are the material terms and conditions of the Class 9 Plan Debentures:

 

   

on the Effective Date and on each of the following seven (7) quarterly anniversaries of the Effective Date (each, a “Class 9 Automatic Conversion Date”) provided that the average of the trading price of the Company’s common stock (as determined in accordance with the Class 9 Plan Debentures and the Plan) for the ten (10) consecutive trading days ending on the trading day that is immediately preceding the then applicable Class 9 Automatic Conversion Date (the “Class 9 Automatic Conversion Price”) is at least $1.00 per share, one-eighth (1/8th) of the original principal balance of the Class 9 Plan Debentures (the “Class 9 Automatic Conversion Amount”) will be automatically converted into shares of the Company’s common stock at a conversion rate equal to the lesser of $1.25 per share or the Class 9 Automatic Conversion Price per share;

 

   

if, on any Class 9 Automatic Conversion Date, the Class 9 Automatic Conversion Price is less than $1.00 per share and therefore the automatic conversion described above does not occur, a holder of Class 9 Plan Debentures may elect to convert the Class 9 Automatic Conversion Amount into shares of the Company’s common stock at a conversion rate equal to $1.00 per share;

 

   

any principal amount outstanding under the Class 9 Plan Debentures at the Class 9 Plan Debenture Maturity Date will be due and payable in full, at the election of the Company, in either cash or shares of the Company’s common stock at a conversion rate equal to the average trading price of the Company’s common stock (as determined in accordance with the Class 9 Plan Debentures and the Plan) for the ten (10) consecutive trading days ending on the trading day that is immediately preceding the Class 9 Plan Debenture Maturity Date (provided that the average trading price for such period is at least $.50 per share);

 

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ACCENTIA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED JUNE 30, 2011 AND 2010

 

8. Convertible long-term debt (continued):

 

Accentia Class 9 Plan Debentures and Warrants (continued):

 

 

   

if, at any time during the term of the Class 9 Plan Debentures, the trading price of the Company’s common stock (as determined in accordance with the Class 9 Plan Debentures and the Plan) is at least $1.50 per share for ten (10) consecutive trading days, a holder of the Class 9 Debentures, at its option, may convert any or all of the then outstanding principal balance of its Class 9 Plan Debenture into shares of the Company’s common stock at a conversion rate equal to the Class 9 Automatic Conversion Price used for the initial conversion on the Effective Date but not to exceed $1.25 per share; and

 

   

if, at any time during the term of the Class 9 Plan Debentures, the trading price of the Company’s common stock (as determined in accordance with the Class 9 Plan Debentures and the Plan) is at least $1.88 per share for thirty (30) consecutive trading days, the Company, at its option, may require the conversion of up to $5.0 million of the then aggregate outstanding principal balance of the Class 9 Plan Debentures at a conversion rate equal to the Class 9 Automatic Conversion Price used for the initial conversion on the Effective Date but not to exceed $1.25 per share.

On the Effective Date, the Company also executed and delivered warrants (the “Class 9 Plan Warrants”) to purchase up to 3,154,612 shares of the Company’s common stock. The Class 9 Plan Warrants (a) have an exercise price of $1.50 per share with a expiration date of November 17, 2013, (b) can only be exercised for cash (no cashless exercise), and (c) are subject to certain call provisions set forth in the Class 9 Plan Warrants and the Plan.

As of June 30, 2011, a total of approximately $2.7 million of the original principal amount of the Class 9 Plan Debentures had been converted into Company common stock at an average conversion price of $1.22 per share, resulting in the issuance of approximately 2.2 million shares of the Company’s common stock.

Accentia Class 13 Plan Note and Warrants:

On the Effective Date, the Company issued, in satisfaction of the convertible preferred stock outstanding prior to the Effective Date of the Plan, new promissory notes (the “Class 13 Plan Notes”) in the original principal amount of $4,903,644. The Class 13 Plan Notes mature on November 17, 2012 (the “Class 13 Plan Notes Maturity Date”), and no interest will accrue on the outstanding principal balance of the Class 13 Plan Notes. The Company has no obligation to pay the Class 13 Plan Notes in cash at maturity, and instead may pay through the conversions by the holders into shares of the Company’s common stock.

The following are the material terms and conditions of the Class 13 Plan Notes:

 

   

on the Effective Date and on each of the following seven (7) quarterly anniversaries of the Effective Date (each, a “Class 13 Automatic Conversion Date”), provided that the average of the trading price of the Company’s common stock (as determined in accordance with the Class 13 Plan Notes and the Plan) for the ten (10) consecutive trading days ending on the trading day that is immediately preceding the then applicable Class 13 Automatic Conversion Date (the “Class 13 Automatic Conversion Price”) is at least $1.00 per share, one-eighth (1/8th) of the original balance of the Class 13 Plan Notes (the “Class 13 Automatic Conversion Amount”) will be automatically converted into shares of the Company’s common stock at a conversion rate equal to the Class 13 Automatic Conversion Price per share;

 

   

if, on any Class 13 Automatic Conversion Date, the Class 13 Automatic Conversion Price is less than $1.00 per share and therefore the automatic conversion described above does not occur, a holder of Class 13 Plan Notes may elect to convert the Class 13 Automatic Conversion Amount into shares of the Company’s common stock at a conversion rate equal to $1.00 per share;

 

   

any principal amount outstanding under the Class 13 Plan Notes at the Class 13 Plan Note Maturity Date will be due and payable in full, at the election of the Company, in either cash or shares of the Company’s common stock at a conversion rate equal to the greater of the average of the trading price of the Company’s common stock (as determined in accordance with the Class 13 Plan Notes and the Plan) for the ten (10) consecutive trading days ending on the trading day that is immediately preceding the Class 13 Plan Notes Maturity Date or $1.00;

 

   

if, at any time during the term of the Class 13 Plan Notes, the trading price of the Company’s common stock (as determined in accordance with the Class 13 Plan Notes and the Plan) is at least 125% of $1.25 per share for ten (10) consecutive trading days, a holder of Class 13 Plan Notes, at its option, may convert any or all of the then outstanding principal balance of its Class 13 Plan Notes into shares of the Company’s common stock at a conversion rate equal to the Class 13 Automatic Conversion Price used for the initial conversion on the Effective Date; and

 

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ACCENTIA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED JUNE 30, 2011 AND 2010

 

8. Convertible long-term debt (continued):

 

Accentia Class 13 Plan Note and Warrants (continued):

 

 

   

if, at any time during the term of the Class 13 Plan Notes, the trading price of the Company’s common stock (as determined in accordance with the Class 13 Plan Notes and the Plan) is at least 150% of $1.25 per share for thirty (30) consecutive trading days, the Company, at its option, may require the conversion of all or any portion of the then aggregate outstanding principal balance of the Class 13 Plan Notes at a conversion rate equal to the Class 13 Automatic Conversion Price used for the initial conversion on the Effective Date.

On the Effective Date, the Company also executed and delivered warrants (the “Class 13 Plan Warrants”) to purchase up to 1,072,840 shares of the Company’s common stock. The Class 13 Plan Warrants (a) have an exercise price of $1.50 per share with a expiration date of November 17, 2013, (b) can only be exercised for cash (no cashless exercise), and (c) are subject to certain call provisions set forth in the Class 13 Plan Warrants and the Plan.

As of June 30, 2011, a total of approximately $3.5 million of the outstanding principal amount of the Class 13 Plan Notes had been converted into the Company’s common stock at an average conversion price of $2.05 per share, resulting in the issuance of approximately 1.7 million shares of the Company’s common stock.

Biovest Class 8 Option C Notes:

On November 17, 2010, the effective date (the “Biovest Effective Date”) of Biovest’s First Amended Plan of Reorganization (the “Biovest Plan”) Biovest became obligated to certain of its unsecured creditors in the principal amount of approximately $2.0 million. Each such unsecured creditor received an amount equal to 100% of such unsecured creditor’s allowed Class 8 unsecured claim (including post-petition interest under the Biovest Plan at the rate of three percent (3%) per annum) in a combination of debt and equity resulting in the issuance of a total of $1.8 million in new notes (the “Option C Notes”), as well as, 0.2 million shares of Biovest common stock, using an effective conversion rate equal to $1.66 per share. The Option C Notes bear interest at seven percent (7%) and are convertible into shares of Biovest common stock in seven (7) quarterly installments beginning on February 17, 2011 as follows:

 

   

provided that the average of the volume weighted average prices for shares of Biovest common stock for the ten (10) consecutive trading days immediately preceding each quarterly conversion date (“Ten Day VWAP”) is at least $1.00 per share, one-eighth (1/8th) of the Option C Notes plus accrued interest will be automatically converted into shares of Biovest common stock at a conversion rate equal to the Ten Day VWAP;

 

   

should the Ten Day VWAP be less than $1.00 per share, the Option C Notes will not automatically convert into shares of Biovest common stock, but will instead become payable at maturity (August 17, 2012), unless an Option C Notes holder elects to convert one-eighth (1/8th) of its Option C Notes plus accrued interest into shares of Biovest common stock at a conversion rate equal to $1.00 per share;

 

   

any portion of the Option C Notes and any Option C interest that are outstanding at maturity (August 17, 2012) will be due and payable in full, at Biovest’s election, in either cash or in shares of Biovest common stock at a conversion rate equal to the Ten Day VWAP;

 

   

if, at any time prior to August 17, 2012, the Ten Day VWAP is at least $1.50 per share, an Option C Notes holder, at its option, may convert any or all of its Option C Notes, plus the then accrued and unpaid interest into shares of Biovest common stock at a conversion rate equal to the Ten Day VWAP used for the initial conversion on the Biovest Effective Date ($1.66 per share); and

 

   

if, at any time prior to August 17, 2012, the volume weighted average price for Biovest common stock is at least $1.88 per share for thirty (30) consecutive trading days, Biovest, at its option, may require the conversion of the then aggregate outstanding balance of the Option C Notes plus the then accrued and unpaid Option C interest at a conversion rate equal to the Ten Day VWAP used for the initial conversion on the Biovest Effective Date ($1.66 per share).

On February 17, 2011 and again on May 17, 2011, with Biovest’s Ten Day VWAP at less than $1.00 per share, the Option C Notes holder elected to convert one-eighth of the Option C Notes plus accrued interest into shares of Biovest common stock at a conversion rate equal to $1.00 per share, resulting in the issuance of 635,028 shares of Biovest common stock.

 

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ACCENTIA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED JUNE 30, 2011 AND 2010

 

8. Convertible long-term debt (continued):

 

Biovest Exit Financing and Warrant Transaction:

 

On October 19, 2010, Biovest completed a financing as part of the Biovest Plan (the “Exit Financing”). Pursuant to the Exit Financing, Biovest issued an aggregate of $7.0 million in principal amount of Debtor-In-Possession Secured Convertible Notes (the “Initial Notes”) and warrants to purchase shares of Biovest common stock (the “Initial Warrants”) to twelve (12) accredited investors (the “Buyers”). Biovest issued two separate types of Initial Warrants to the Buyers, Series A Warrants (the “Initial Series A Warrants”) and Series B Warrants (the “Initial Series B Warrants”).

On the Biovest Effective Date: (a) the Initial Notes were exchanged pursuant to the terms of the Biovest Plan for new unsecured notes (the “Exchange Notes”) in the aggregate principal amount of $7.04 million, (b) the Initial Series A Warrants were exchanged pursuant to the terms of the Biovest Plan for new warrants to purchase a like number of shares of Biovest common stock (the “Series A Exchange Warrants”), and (c) the Initial Series B Warrants were exchanged pursuant to the terms of the Biovest Plan for new warrants to purchase a like number of shares of Biovest common stock (the “Series B Exchange Warrants”).

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

 

   

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

 

   

interest accrues and is payable on the outstanding principal amount of the Exchange Notes at a fixed rate of seven percent (7%) per annum (with a fifteen percent (15%) per annum default rate), and is payable monthly in arrears. The first interest payment was paid on December 1, 2010;

 

   

interest payments are payable at Biovest’s election in either cash or subject to certain specified conditions, in shares of Biovest common stock;

 

   

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

 

   

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

 

   

in the event that the average of the daily volume weighted average price of Biovest common stock is at least 150% of the then-effective conversion price for any ten (10) consecutive trading days, Biovest, at its option, may upon written notice to the holders of the Exchange Notes, convert the then outstanding balance of the Exchange Notes into shares of Biovest common stock at the conversion price then in effect under the Exchange Notes.

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

 

   

the Series A Exchange Warrants give the Buyers the right to purchase an aggregate of 8,733,096 shares of Biovest common stock;

 

   

the Series A Exchange Warrants have an exercise price of $1.20 per share and expire on November 17, 2017; and

 

   

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

On December 22, 2010, the Series B Exchange Warrants were exercised by a cashless exercise and 1,075,622 shares of Biovest common stock were issued to the Buyers.

As of June 30, 2011, a total of $5.8 million in principal on the Exchange Notes had been converted to common stock, resulting in the issuance to the Buyers of 6.9 million shares of the Biovest common stock. The remaining principal balance outstanding on the Exchange Notes is $1.3 million as of June 30, 2011.

 

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ACCENTIA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED JUNE 30, 2011 AND 2010

 

8. Convertible long-term debt (continued):

 

Biovest Exit Financing and Warrant Transaction (continued):

 

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

Future maturities of convertible debt are as follows:

 

in thousands  

12 Months ending June 30,

 

2012

   $ 7,968    

2013

     11,192    

2014

     16,414     
  

 

 

 

Total maturities

     35,574    

Less unamortized discount:

     (3,162)    
  

 

 

 
   $     32,412     
  

 

 

 

9. Other long-term debt:

Other long-term debt consists of the following:

 

in thousands            
      June 30, 2011         September 30, 2010    

Accentia Class 2 Laurus/Valens Term Note

  $ 8,800       $ —     

Accentia Class 4 Promissory Note

    4,343         —     

Accentia Class 10 Plan Distributions

    2,231         —     

Biovest Laurus/Valens Term Notes

    27,627         —     

Biovest Class 8 Plan Distributions

    2,711         —     

Coon Rapids Economic Development Authority Loan

    353         —     
 

 

 

   

 

 

 
    46,065         —     

Less current maturities

    (4,415)       —     
 

 

 

   

 

 

 
  $ 41,650       $ —     
 

 

 

   

 

 

 

 

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ACCENTIA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED JUNE 30, 2011 AND 2010

 

9. Other long-term debt (continued):

 

Accentia Class 2 Laurus/Valens Term Note:

 

On the Effective Date, the Company issued security agreements and term notes to Laurus Master Fund, Ltd. (in liquidation), PSource Structured Debt Limited (“PSource”), Valens Offshore SPV I, Ltd. (“Valens I”), Valens Offshore SPV II, Corp. (“Valens II”), Valens U.S. SPV I, LLC (“Valens U.S.”), and LV Administrative Services, Inc. (“Laurus/Valens”), in the original principal amount of $8.8 million (the “Laurus/Valens Term Notes”) in satisfaction of allowed claims prior to the Effective Date. The following are the material terms and conditions of the Laurus/Valens Term Notes:

 

   

the Laurus/Valens Term Notes mature on November 17, 2012 and may be prepaid at any time without penalty;

 

   

interest accrues on the Laurus/Valens Term Notes at the rate of eight and one-half percent (8.5%) per annum (with a twelve and one-half percent (12.5%) per annum default rate), and is payable at the time of any principal payment or prepayment of principal;

 

   

the Company is required to make mandatory prepayments under the Laurus/Valens Term Notes as follows:

 

   

on May 17, 2012, a payment of principal, in cash, in the amount of $4.4 million, less the amount of any prior optional prepayments of principal by the Company and the amount of any other mandatory prepayments of principal under the Laurus/Valens Term Notes; and

 

   

a prepayment equal to thirty percent (30%) of the net proceeds (i.e., the gross proceeds received less any investment banking or similar fees and commissions and legal costs and expenses incurred by the Company) of certain capital raising transactions (with certain exclusions);

 

   

the Laurus/Valens Term Notes are secured by:

 

   

a first lien on all of the assets of the Company, junior only to the liens granted under the Plan to holders of the Class 6 Plan Debentures, in the original aggregate principal amount of $8,906,098, and certain permitted liens;

 

   

a pledge by the Company to Laurus/Valens of (a) all of the Company’s equity interests in Analytica, and (b) 20,115,818 shares of Biovest common stock owned by the Company;

 

   

all of the assets of Analytica, which secure a guaranty of Analytica as to the entire indebtedness under the Laurus/Valens Term Notes;

and

 

   

with the prior written consent of Laurus/Valens, the Company may convert all or any portion of the outstanding principal and accrued interest under the Laurus/Valens Term Notes into a number of shares of the Company’s common stock (the “Laurus/Valens Conversion Shares”) equal to (a) the aggregate portion of the principal and accrued but unpaid interest outstanding under the Laurus/Valens Term Note being converted, divided by (b) ninety percent (90%) of the average closing price publicly reported for the Company’s common stock for the ten (10) trading days immediately preceding the date of the notice of conversion.

Accentia Class 4 Promissory Note:

On the Effective Date, the Company issued, a new promissory note in the original principal amount of $4,342,771 (the “Class 4 Plan Note”) to McKesson Corporation (“McKesson”) in satisfaction of McKesson’s approved pre-Effective Date secured claims. The Class 4 Plan Note is payable in cash in one installment on March 17, 2014 (unless earlier accelerated), and the outstanding principal together with all accrued but unpaid interest is due on such date. The following are the material terms and conditions of the Class 4 Plan Note:

 

   

interest accrues and is payable on the outstanding principal amount under the Class 4 Plan Note at a fixed rate of five percent (5%) per annum (with a ten percent (10%) per annum default rate);

 

   

the Company may prepay all or any portion of the Class 4 Plan Note, without penalty, at any time; and

 

   

the Class 4 Plan Note is secured by a lien on 6,102,408 shares of Biovest common stock owned by the Company.

 

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ACCENTIA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED JUNE 30, 2011 AND 2010

 

9. Other long-term debt (continued):

 

Accentia Class 10 Plan Distributions:

On the Effective Date, the Company became obligated required to pay approximately $2.4 million in cash on March 17, 2014, to unsecured creditors holding Class 10 claims under the Plan (the “Class 10 Plan Distributions”).

The Class 10 Plan Distributions mature on March 17, 2014, and the outstanding principal together with all accrued but unpaid interest is due on such date. Interest accrues and is payable on the outstanding principal amount under the Class 10 Plan Distributions at a fixed rate of five percent (5%) per annum.

Unsecured creditors holding an aggregate total of $3,287,695 in Class 10 claims elected to convert those Class 10 claims into shares of the Company’s common stock valued at the average market price for the Company’s common stock over the ten (10) trading days preceding the Effective Date.

As of June 30, 2011, the Company had issued approximately 2.4 million shares of the Company’s common stock to these Class 10 unsecured creditors at a conversion price equal to $1.36 per share.

Biovest Laurus/Valens Term Notes:

On the Biovest Effective Date and pursuant to the Biovest Plan, Biovest issued two new types of notes (the “Laurus/Valens Term A Notes” and the “Laurus/Valens Term B Notes”) in the aggregate original principal amount of $29.06 million to Laurus/Valens in compromise, and satisfaction of secured claims prior to the Effective Date.

The following are the material terms and conditions of the Laurus/Valens Term A Notes:

 

   

the original principal amount of the Laurus/Valens Term A Notes was $24.9 million;

 

   

the Laurus/Valens Term A Notes are due in one installment of principal and interest due at maturity on November 17, 2012;

 

   

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

 

   

Biovest may prepay the Laurus/Valens Term A Notes, without penalty, at any time; and

 

   

Biovest is required to make mandatory prepayments under the Laurus/Valens Term A Notes as follows:

 

   

a prepayment equal to thirty percent (30%) of the net proceeds (i.e., the gross proceeds received less any investment banking or similar fees and commissions and legal costs and expenses incurred by Biovest) of certain capital raising transactions (with certain exclusions), but only up to the then outstanding principal and accrued interest under the Laurus/Valens Term A Notes;

 

   

from any intercompany funding by the Company to Biovest (with certain exceptions and conditions); and

 

   

a prepayment equal to fifty percent (50%) of the positive net cash flow of Biovest for each fiscal quarter after the Biovest Effective Date, less the amount of certain capital expenditures on certain biopharmaceutical products of Biovest made during such fiscal quarter or during any prior fiscal quarter ending after November 17, 2010.

 

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ACCENTIA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED JUNE 30, 2011 AND 2010

 

9. Other long-term debt (continued):

 

Biovest Laurus/Valens Term Notes (continued):

 

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

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

 

   

The original principal amount of the Laurus/Valens Term B Notes was $4.16 million;

 

   

the Laurus/Valens Term B Notes mature on November 17, 2013;

 

   

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

 

   

Biovest may prepay the Laurus/Valens Term B Notes, without penalty, at any time; and

 

   

provided that the Laurus/Valens Term A Notes have been paid in full, Biovest is required to make mandatory prepayments under the Laurus/Valens Term B Notes from any intercompany funding by the Company to Biovest (with certain exceptions and conditions), but only up to the amount of the outstanding principal and accrued interest under the Laurus/Valens Term B Notes.

With the prior written consent of Laurus/Valens, Biovest may convert all or any portion of the outstanding principal and accrued interest under either the Laurus/Valens Term A Notes or the Laurus/Valens Term B Notes into shares of Biovest common stock. The number of shares of Biovest common stock issuable on such a conversion is equal to (a) an amount equal to the aggregate portion of the principal and accrued and unpaid interest thereon outstanding under the applicable Laurus/Valens Term A Notes or the Laurus/Valens Term B Notes being converted, divided by (b) ninety percent (90%) of the average closing price publicly reported (or reported by Pink Sheets, LLC) for shares of Biovest common stock for the ten (10) trading days immediately preceding the date of the notice of conversion.

The Laurus/Valens Term A Notes and the Laurus/Valens Term B Notes are secured by a first lien on all of the assets of Biovest and its subsidiaries, junior only to the lien granted to Corp Real and to certain permitted liens. The Laurus/Valens Term A Notes and the Laurus/Valens Term B Notes are guaranteed by the Company (the “Accentia Guaranty”), up to a maximum amount of $4,991,360. The Accentia Guaranty is secured by a pledge by the Company of 20,115,818 shares of Biovest common stock owned by the Company and by the assets of the Company’s subsidiary, Analytica.

The Laurus/Valens Term A and the Laurus/Valens Term B Notes have replaced the following obligations due to Laurus and its affiliates:

 

   

the $7.799 million note payable to Laurus originated in March 2006;

 

   

the $0.250 million note payable to Valens II originated in October 2007;

 

   

the $0.245 million note payable to Valens U.S. originated in October 2007;

 

   

the $3.6 million note payable to Valens II originated in December 2007;

 

   

the $4.9 million note payable to Valens U.S. originated in December 2007;

 

   

the $7.5 million minimum royalty due on sales of AutovaxID™ instrumentation originated in April 2007; and

 

   

the $4.4 million loan modification fee, originated in July 2008, in consideration for modifying the terms of all the then outstanding debt due to Laurus/Valens.

The fair value of the Laurus/Valens Term A and the Laurus/Valens Term B Notes was recorded against the combined carrying value of the obligations listed above resulting in a $6.7 million gain on reorganization for the nine months ended June 30, 2011.

Biovest Class 8 Option A Obligations:

On the Biovest Effective Date and under the Biovest Plan, Biovest became obligated to pay to the Biovest unsecured creditors approximately $2.7 million in cash together with interest at five percent (5%) per annum to be paid in one installment on March 27, 2014. These unsecured claims include, but is not limited to the Pulaski Bank notes, the Southwest Bank note, and the guarantor indemnities. The fair value of the Option A Obligations was recorded against the carrying value of each claim holder electing an Option A distribution as of the Effective Date, resulting in a $0.5 million gain on reorganization for the nine months ended June 30, 2011.

 

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ACCENTIA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED JUNE 30, 2011 AND 2010

 

9. Other long-term debt (continued):

 

Coon Rapids Economic Development Authority Loans:

On May 6, 2011, Biovest closed two financing transactions with the Economic Development Authority for the City of Coon Rapids, Minnesota and the Minnesota Investment Fund, which provide capital to help add workers and retain high-quality jobs in the State of Minnesota. Biovest issued two secured promissory notes in the aggregate amount of $0.353 million, which amortize over 240 months, with a balloon payment of $0.199 million due on May 1, 2021. The notes bear interest as follows, yielding an effective interest rate of 4.1%:

 

   

Months 1-60 at 2.5% interest

 

   

Months 61-80 at 5.0% interest

 

   

Months 81-100 at 7.0% interest

 

   

Months 101-120 at 9.0% interest

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

Future maturities of other long-term debt are as follows:

 

in thousands       

12 Months ending June 31,

      

2012

   $ 4,415   

2013

     27,881   

2014

     13,460   

2015

     15   

thereafter

     294   
  

 

 

 
   $ 46,065   
  

 

 

 

10. Derivative liabilities:

The following tabular presentation reflects the components of derivative financial instruments:

 

      June 30, 2011  
(unaudited)
      September 30, 2010(1)    

Embedded derivative instruments, bifurcated

  $ —        $ 18,224,001     

Freestanding derivatives:

   

Warrants issued with convertible debt

    —          10,020,236     

Warrants issued with note payable

    —          7,594,600     

Warrants issued with preferred stock

    —          1,077,118     

Warrants issued with other debt

    —          467,564     

Warrants issued with settlement

    590,800          1,844,200     

Default and investment put options, Biovest

    —          219,700     

Investment put option, Accentia

    —          2,928,838     

Biovest investor share distribution

    171,874          —     

Biovest warrants issued with convertible debt

    2,489,806          —     

Biovest debt conversion option

    5,566          —     
 

 

 

   

 

 

 
  $ 3,258,046        $ 42,376,257   
 

 

 

   

 

 

 
  (1) As a result of the Company’s Chapter 11 proceedings, some derivative liabilities listed in the table above became prepetition indebtedness under the Plan. Accordingly, these obligations have been classified as ‘Liabilities subject to compromise’ in the Company’s condensed consolidated balance sheet at September 30, 2010. Only warrants issued with settlement were classified as derivative liabilities at September 30, 2010.

 

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ACCENTIA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED JUNE 30, 2011 AND 2010

 

10. Derivative liabilities (continued):

 

Derivative gains (losses) in the accompanying statements of operations relate to the individual derivatives as follows:

 

      June 30, 2011  
(unaudited)
      June 30, 2010  
(unaudited)
 

Embedded derivative instruments, bifurcated

  $ (2,995,771   $ (6,994,502

Freestanding derivatives:

   

Warrants issued with convertible debentures

    3,475,104        (6,958,068

Warrants issued with term note payable

    (1,583,088     (7,062,578

Warrants issued with preferred stock

    —          (867,914

Warrants issued with other debt

    —          (430,941

Default and investment put options, Biovest

    (3,030     (16,855

Investment put option, Accentia

    —          1,136,712   

Investor share distribution, Biovest

    435,189        —     

Warrants issued for settlement

    1,253,400        (1,238,200
 

 

 

   

 

 

 
  $ (581,804   $ (22,432,346
 

 

 

   

 

 

 

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

 

    June 30, 2011
(unaudited)
     September 30, 2010  

Fair value measurements:

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

Liabilities

                      

Derivative liabilities

        $    —           $ 3,258,046             $    —           $ 3,258,046             $    —           $ 42,376,257             $    —           $ 42,376,257   

 

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ACCENTIA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED JUNE 30, 2011 AND 2010

 

11. Related party transactions:

Accentia Corps Real Convertible Note:

On June 13, 2011, the Company entered into a convertible debt financing transaction with Corps Real, LLC (“Corps Real”) providing for aggregate loans to the Company in the maximum amount of $4.0 million. Corp Real is a shareholder and the senior secured lender to Biovest, the Company’s majority-owned subsidiary. Corps Real, as well as the majority owner of Corps Real, are both managed by Ronald E. Osman, Esq., a shareholder of the Company, who is also a shareholder and Director of Biovest. The Company executed a secured promissory note, payable to Corps Real, in the maximum principal amount of $4.0 million (the “Note”), under which Corps Real advanced $1.0 million to the Company on June 13, 2011 and agreed to advance an additional $1.0 million to the Company on each of August 1, 2011, November 15, 2011, and January 15, 2012. The other material terms and conditions of the Note are as follows:

 

   

The Note will mature on June 13, 2016, at which time all indebtedness under the Note will be due and payable;

 

   

Interest on the outstanding principal amount of the Note accrues and will be payable at a fixed rate of five percent (5%) per annum. Interest began accruing on June 13, 2011 and will be payable on a quarterly basis in arrears (as to the principal amount then outstanding) Interest payments may be paid in cash or, at the election of the Company, may be paid in shares of the Company’s common stock based on the volume-weighted average trading price of the Company’s common stock during the last ten trading days of the quarterly interest period;

 

   

At Corps Real’s option, at any time prior to the earlier to occur of (a) the date of the prepayment of the Note in full or (b) the maturity date of the Note, Corps Real may convert all or a portion of the outstanding balance of the Note (including any accrued and unpaid interest) into shares of the Company’s common stock at a conversion rate equal to $0.34 per share;

 

   

If the Company’s common stock trades at $2.00 per share for ten (10) consecutive trading days, then the Company may, within three (3) trading days after the end of any such period, cause Corps Real to convert all or part of the then outstanding principal amount of the Note at the then conversion price, plus accrued but unpaid interest;

 

   

Subject to certain exceptions, if the Company wishes to complete a follow-on equity linked financing during the 12 month period following June 13, 2011 at a price per share that is less than the conversion price under the Note, then the Company’s full board of directors must first confer with Mr. Osman, the manager of Corps Real, and the Company must offer Corps Real the first right of refusal to provide or to participate in such equity linked financing;

 

   

The Company will not be permitted to effect a conversion of the Note and Corps Real will not be permitted to convert the Note to the extent that, after giving effect to an issuance after a conversion of the Note, Corps Real (together with Corps Real’s affiliates and any other person or entity acting as a group together with Corps Real or any of Corps Real’s affiliates) would beneficially own in excess of 9.99% of the number of shares of the Company’s common stock outstanding immediately after giving effect to the issuance of shares of the Company’s common stock issuable upon conversion of the Note;

 

   

The Company may prepay the Note, in full, at any time without penalty, provided that the Company must provide ten (10) days advance written notice to Corps Real of the date for any such prepayment, during which period Corps Real may exercise its right to convert into shares of the Company’s common stock; and

 

   

Corps Real may, among other things, declare the entire outstanding principal amount, together with all accrued interest and all other sums due under the Note, to be immediately due and payable upon the failure of the Company to pay, when due, any amounts due under the Note if such amounts remain unpaid for five (5) business days after the due date or upon the occurrence of any other event of default described in the Security Agreement (as defined below).

To secure payment of the Note, the Company and Corps Real also entered into a Security Agreement on June 13, 2011 (the “Security Agreement”). Under the Security Agreement, all obligations under the Note are secured by a first security interest in (a) 12 million shares of Biovest common stock owned by the Company, (b) all of the Company’s contractual rights pertaining to the first product for which a NDA is filed containing BEMA Granisetron following the date of the Company’s settlement agreement (dated December 30, 2009) with BioDelivery Sciences International, Inc (“BDSI”); provided, however, that if BEMA Granisetron is not the first BEMA-based product for which an NDA is filed with the FDA by or on behalf of BDSI following that date, then the applicable product shall be the first BEMA-based product for which an NDA is filed with the FDA by or on behalf of BDSI following the date of the settlement agreement, and (c) all attachments, additions, replacements, substitutions, and accessions and all proceeds thereof in any form.

 

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ACCENTIA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED JUNE 30, 2011 AND 2010

 

11. Related party transactions (continued):

 

Accentia Corps Real Convertible Note (continued):

 

As part of the financing transaction, on June 13, 2011, the Company also issued to Corps Real a Common Stock Purchase Warrant to purchase 5,882,353 shares of the Company’s common stock (the “Warrant”) for an exercise price of $0.47 per share (subject to adjustment for stock splits, stock dividends, and the like). The other material terms and conditions of the Warrant are as follows:

 

   

The Warrant was exercisable beginning on June 13, 2011 and will continue to be exercisable until the close of business on June 13, 2016;

 

   

If the fair market value of one share of the Company’s common stock is greater than the exercise price, in lieu of exercising the Warrant for cash, Corps Real may elect to utilize the cashless exercise provisions of the Warrant; and

 

   

The Company will not be permitted to effect any exercise of the Warrant, and Corps Real will not be permitted to exercise any portion of the Warrant, to the extent that, after giving effect to such issuance after exercise, Corps Real (together with Corps Real’s affiliates and any other person or entity acting as a group together with Corps Real or any of Corps Real’s affiliates) would beneficially own in excess of 9.99% of the number of shares of the Company’s common stock outstanding immediately after giving effect to the issuance of the shares of the Company’s common stock issuable upon exercise of the Warrant.

As of June 30, 2011, none of the principal of the Note had been converted into the Company’s common stock. The discounted value of the Note is classified as convertible notes payable, related party on the accompanying condensed consolidated balance sheets. An additional $1.0 million was received as scheduled on August 1, 2011. The June 2011 investment of $1.0 million did not meet the prepayment requirements of the Laurus/Valens Notes. However, the August 2011 investment triggered a prepayment to Laurus/Valens of principal and accrued interest of approximately $0.1 million.

Biovest Claims of Ronald E. Osman:

On the Biovest Effective Date, the holder of Biovest’s May 9, 2008 promissory note, Ronald E. Osman, a shareholder and director of Biovest, elected to convert the entire outstanding principal balance under the note (approximately $1.0 million) plus accrued interest into shares of Biovest common stock at a conversion rate equal to $1.66 per share, resulting in the issuance of 608,224 shares of Biovest common stock.

Corps Real, LLC-Biovest:

On the Biovest Effective Date, pursuant to the Biovest Plan, Biovest executed and delivered in favor of Corps Real, a secured convertible promissory note (the “DIP Lender Plan Note”), in an original principal amount equal to $2,291,560 and allows Biovest to draw up to an additional $0.9 million on the note. The DIP Lender Plan Note replaces the $3.0 million secured line of credit promissory note dated December 22, 2008, which was previously executed in favor of Corps Real. The DIP Lender Plan Note matures on November 17, 2012 and all principal and accrued but unpaid interest is payable in cash on such date. Interest accrues and is payable on the outstanding principal amount of the DIP Lender Plan Note at a fixed rate of sixteen percent (16%) per annum, with interest in the amount of ten percent (10%) to be paid monthly and interest in the amount of six percent (6%) to accrue and be paid on the maturity date. Biovest may prepay the DIP Lender Plan Note in full, without penalty, at any time, and Corps Real may convert all or a portion of the outstanding balance of the DIP Lender Plan Note into shares of Biovest common stock at a conversion rate of $0.75 per share of Biovest common stock. The DIP Lender Plan Note is secured by a first priority lien on all of Biovest’s assets.

 

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ACCENTIA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED JUNE 30, 2011 AND 2010

 

11. Related party transactions (continued):

 

BDSI/Arius Settlement:

On February 17, 2010, the Bankruptcy Court entered an Order approving an Emezine Settlement Agreement (the “Settlement Agreement”) between the Company and BDSI, entered into as of December 30, 2009. Parties to the Settlement Agreement are the Company, the Company’s wholly-owned subsidiary, TEAMM, BDSI, and BDSI’s wholly-owned subsidiary, Arius Pharmaceuticals, Inc. (“Arius”).

The purpose of the Settlement Agreement is to memorialize the terms and conditions of a settlement between the Company and BDSI regarding claims relating to a Distribution Agreement dated March 12, 2004 between Arius and TEAMM (the “Distribution Agreement”) related to the marketing and distribution of Emezine, a product licensed by Arius from Reckitt Benckiser Healthcare (UK) Limited. Following the issuance in February 2006 by the FDA of a non-approvable letter with respect to the NDA for Emezine, BDSI ceased its Emezine-related development efforts and on December 17, 2008, the Distribution Agreement was terminated. The Settlement Agreement resolves the Company’s claims against BDSI under the terminated Distribution Agreement.

The Settlement Agreement provides that the parties mutually release all claims that either may have against each other and, in connection therewith, the Company:

 

  (a) received $2.5 million from BDSI (the “$2.5 Million Payment”); and

 

  (b) received the following royalty rights (the “Product Rights”) from BDSI with respect to BDSI’s BEMA Granisetron product candidate (“BEMA Granisetron”) (or in the event it is not BEMA Granisetron, the third BDSI product candidate, excluding BEMA Bupremorphine, as to which BDSI files an NDA, which, together with BEMA Granisetron, shall be referred to hereinafter as the “Product”):

 

  (i) 70/30 split (BDSI/Company) of royalty received if a third party sells the Product and 85/15 split on net sales if BDSI sells the Product; and

 

  (ii) BDSI will, from the sale of the Product, fully recover amounts equal to (1) all internal and external worldwide development costs of the Product (“Costs”) plus interest (measured on weighted average prime interest rate from first dollar spent until Product launch) and (2) the $2.5 Million Payment plus interest (measured on weighted average prime interest rate from the time of payment until Product launch) before the Company begins to receive its split as described in (b)(i) above; and

 

  (c) issued to BDSI a warrant (the “Warrant”) to purchase two (2) million shares of Biovest common stock held by the Company, with an exercise price of $0.84 and an expiration date of March 4, 2017. During the initial two (2) year exercise period, any exercise of the Warrant by BDSI will be subject to approval by Biovest.

In the event that BDSI receives any sublicensing or milestone payments associated with the Product up to and including the NDA approval, BDSI will apply 30% of such payments toward payback of the Costs of the Product plus interest and the $2.5 Million Payment plus the interest.

In the event of a proposed sale of BDSI or its assets, BDSI has the right to terminate its Product Right payment obligations to the Company under the Settlement Agreement upon the payment to the Company of an amount equal to the greater of: (i) $4.5 million; or (ii) the fair market value of the Product Rights as determined by an independent third party appraiser. Further, if the Product Right is terminated, the Warrant described above will be terminated if not already exercised, and, if exercised, an amount equal to the strike price will, in addition to the amount in (i) or (ii) above, be paid to the Company.

The fair value of the Warrant was estimated on the date of grant using the Black-Scholes-Merton valuation model that uses assumptions for expected volatility, expected dividends, expected term, and the risk-free interest rate. The value included in derivative liability is adjusted quarterly and the change is recorded to derivative gain or loss. The value on the grant date was approximately $1.0 million. The value at the end of current period was approximately $0.6 million. The derivative gain for the nine months ended June 30, 2011 was approximately $1.3 million. The fair value is recorded as a derivative liability as of June 30, 2011 on accompanying balance sheet.

 

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ACCENTIA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED JUNE 30, 2011 AND 2010

 

12. Liabilities subject to compromise:

As a result of the Company’s Chapter 11 filings, the payment of prepetition indebtedness was subject to compromise or other treatment under the Plan prior to the Effective Date. ASC Topic 852 requires prepetition liabilities that are subject to compromise to be reported at the amounts expected to be allowed, even if they may be settled for lesser amounts.

The following table reflects liabilities subject to compromise prior to November 17, 2010:

 

 

     September 30, 2010    

Accounts payable and accrued expenses

     $      15,232,863    

Hybrid financial instrument

     3,608,674    

Convertible debentures

     28,626,149    

Laurus term note

     8,800,000    

Valens 15% convertible note, Biovest

     926,300    

Secured promissory notes payable to Laurus and the Valens Funds, Biovest

     28,522,108    

Unsecured promissory notes payable to Pulaski Bank and Trust Company

     1,161,900    

Unsecured promissory note payable to Southwest Bank of St. Louis

     228,330    

Southwest line of credit

     4,000,000    

Notes payable, related parties

     2,313,623    

Other notes payable

     610,683    

Minimum royalty due to Laurus on net sales of AutovaxID instrumentation

     6,318,233    

Derivative liabilities

     40,532,057    

Dividend payable

     479,452    

Other

     2,209,756    
  

 

 

 
               $    143,570,128    
  

 

 

 

13. Stockholders’ equity:

Stock options and warrants

The fair value of each option award is estimated on the date of grant using the Black-Scholes-Merton 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 a peer company’s stock and other factors estimated over the expected term of the options. The expected term of options granted is derived using the “simplified method” which computes expected term as the average of the sum of the vesting term plus the contract term. 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. Company does not currently have adequate historical option exercise or forfeiture information as a basis to determine expected term. The Company has also issued performance based awards, the vesting of which are tied to Company’s achievement of specific pre-defined goals. The Company estimates the likelihood of success at time of grant to determine inputs to the Black-Scholes-Merton valuation model. 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.

 

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ACCENTIA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED JUNE 30, 2011 AND 2010

 

13. Stockholders’ equity (continued):

 

Stock options and warrants (continued)

 

Stock options and warrants issued, terminated/forfeited and outstanding as of June 30, 2011 are as follows:

 

     Shares      Average Exercise
Price Per Share
     Intrinsic
Value
 

Options:

        

Outstanding, October 1, 2010

     24,255,580       $ 0.81       $ 13,084,010    

Granted

     900,000         0.78         —      

Terminated or forfeited

     (38,582)        2.16         —      

Exercised

     —            —            —      
  

 

 

       

Outstanding June 30, 2011

     25,116,998        $ 0.81       $ 1,825,343    
  

 

 

       

Exercisable options at June 30, 2011

     19,966,500           $ 1,797,443    
  

 

 

       

Warrants:

        

Outstanding, October 1, 2010

     20,280,800       $ 2.51       $ —     

Granted

     5,882,353          0.47          —     

Terminated or forfeited

     (8,236,936)         1.89         —     

Exercised

     —          —           —     
  

 

 

       

Outstanding June 30, 2011

     17,926,217       $ 1.38       $ —     
  

 

 

       

A summary of the status of the Company’s nonvested stock options as of June 30, 2011, and changes during the nine months then ended, is summarized as follows:

 

 

Nonvested Shares

   Shares      Weighted-
Average Grant-
Date Fair Value
     Intrinsic
Value
 

Nonvested at September 30, 2010

     20,897,833        $ 0.36      

Granted

     900,000          1.42      

Vested

     (19,978,286)         0.35      

Forfeited

     (32,814)         1.22      
  

 

 

       

Nonvested at June 30, 2011

     1,786,733       $ 0.61       $ —     
  

 

 

    

 

 

    

 

 

 

Stock compensation expense was $16.0 million for the nine months ended June 30, 2011 and $1.8 million for the quarter ended June 30, 2011. Approximately $0.3 million in stock compensation expense will be recognized over the next four (4) quarters, as a result of the vesting of shares.

14. Segment information:

During 2004, the Company through its subsidiary, Analytica, made an insignificant acquisition of a foreign entity, IMOR. This subsidiary ceased operations during the quarter ended March 31, 2010. Therefore, segment information on a geographic basis is only presented below for the nine months ended June 30, 2010:

 

 

     Nine months ended June 30, 2010  
     Domestic     International
(Europe)
    Total  

Net sales

   $ 7,344,372      $ 943,254      $ 8,287,626   

Net (loss) income

     (34,528,328     (307,979     (34,836,307

Total Assets

     5,735,959        —          5,735,959   

Goodwill

     893,000        —          893.000   

 

 

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ACCENTIA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED JUNE 30, 2011 AND 2010

 

15. Commitments and contingencies:

Legal proceedings:

Bankruptcy proceedings:

On November 10, 2008, the Company filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code (“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 and as amended and supplemented, the “Plan”). On November 2, 2010, the Bankruptcy Court entered an Order Confirming Debtors’ First Amended Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy Code (the “Confirmation Order”). The Company emerged from Chapter 11 protection, and the Plan became effective, on November 17, 2010 (the “Effective Date”). Notwithstanding the effectiveness of the Plan, the Bankruptcy Court retains jurisdiction to adjudicate any remaining issues regarding, inter alia, the validity, amount, and method of payment of claims filed in connection with the Company’s Chapter 11 proceeding. Accordingly, the Company anticipates that there may be ongoing proceedings before the Bankruptcy Court to resolve any filed objections or disputes as to claims filed in the Chapter 11 proceeding.

Biovest litigation:

On August 4, 2008, Biovest was served with a summons and complaint filed in California Superior Court on behalf of Clinstar LLC for breach of contract for non-payment of certain fees for clinical trial studies and pass-through expenses in the amount of $0.385 million. Biovest intends to seek the dismissal of this litigation and plan to defend these claims vigorously. Upon the filing of Biovest’s Chapter 11 petition on November 10, 2008, this litigation was automatically stayed pursuant to provisions of federal bankruptcy law. The Company anticipates that the claims involved in this litigation will be contested and resolved by the Bankruptcy Court as part of an objection to claim which the Company expects to file shortly.

Other proceedings:

Further, from time to time we are subject to various legal proceedings in the normal course of business, some of which are covered by insurance.

Cooperative Research and Development Agreement:

In September 2001, Biovest entered into a definitive Cooperative Research and Development Agreement (“CRADA”) with the NCI for the development and ultimate commercialization of patient-specific vaccines for the treatment of non-Hodgkin’s low-grade follicular lymphoma. The terms of the CRADA, as amended, included, among other things, a requirement to pay $0.5 million quarterly to NCI for expenses incurred in connection with the ongoing Phase 3 clinical trials. Since the transfer to Biovest 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). On September 25, 2006, Biovest provided written notice to the NCI in accordance with the terms of the CRADA to terminate the CRADA at the end of the sixty day notice period. Under the terms of the CRADA, Biovest 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 Biovest were to abandon work on the vaccine.

Food and Drug Administration:

The FDA has extensive regulatory authority over biopharmaceutical products (drugs and biological products), manufacturing protocols and procedures and the facilities in which mammalian proteins will be manufactured. Any new bioproduct intended for use in humans (including, to a somewhat lesser degree, in vivo biodiagnostic products) is subject to rigorous testing requirements imposed by the FDA with respect to product efficacy and safety, possible toxicity and side effects. FDA approval for the use of new bioproducts (which can never be assured) requires several rounds of extensive preclinical testing and clinical investigations conducted by the sponsoring pharmaceutical company prior to sale and use of the product. At each stage, the approvals granted by the FDA include the manufacturing process utilized to produce the product. Accordingly, our 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 “FD&C Act”).

 

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ACCENTIA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED JUNE 30, 2011 AND 2010

 

15. Commitments and contingencies (continued):

 

Product liability:

The contract production services for therapeutic products offered exposes an inherent risk of liability as the proteins or other substances manufactured, at the request and to the specifications of customers, could foreseeably cause adverse effects. The Company obtains agreements from contract production customers indemnifying and defending the Company from any potential liability arising from such risk. There can be no assurance, however, that the Company will be successful in obtaining such agreements in the future or that such indemnification agreements will adequately protect the Company against potential claims relating to such contract production services. The Company may also be exposed to potential product liability claims by users of its products. A successful partial or completely uninsured claim against the Company could have a material adverse effect on the Company’s operations.

Royalty agreements:

 

   

Cancellation and Reduction of Royalty Interests: On the Effective Date, the Company, Biovest, and Laurus/Valens entered into several agreements (the “Laurus/Valens Royalty Termination Agreements”) terminating the following royalties pursuant to the Plan. As a result of the foregoing agreements, the aggregate royalty obligation on BiovaxID and Biovest’s other biologic products was reduced from 35.25% to 6.30%. Additionally, the aggregate royalty obligation on the AutovaxID instrument was reduced from 3.0% to no obligation, including the elimination of the $7.5 million minimum royalty obligation.

Below is the detail of the royalty obligations following the Effective Date:

 

   

With respect to BiovaxID® and other biologic products

 

   

Accentia. The Royalty Agreement by and between Biovest and the Company, dated as of October 31, 2006, as amended, was terminated, which resulted in the cancellation of all royalty interest of the Company in Biovest’s biologic products. Under the Royalty Agreement, the Company had a 15.5% royalty interest in the gross revenue of Biovest’s biologic products including BiovaxID, as defined in the agreement after allowing for the 4.00% royalty assigned by the Company to Laurus/Valens pursuant to the four (4) separate Assignments of Rights Under Royalty Agreements, each dated as of June 18, 2008, by and among the Company, Biovest, Erato Corp., Valens U.S., Valens I, and PSource, as amended, modified or supplemented thereafter in accordance with their terms; and

   

Laurus/Valens. (i) The Royalty Agreement by and between Biovest and Valens II dated October 30, 2007; (ii) the Royalty Agreement by and between Biovest and Valens II dated December 10, 2007, as amended by a letter agreement dated May 30, 2008; (iii) the Royalty Agreement by and between Biovest and Valens U.S. dated October 30, 2007; and (iv) the Royalty Agreement by and between Biovest and Valens U.S. dated December 10, 2007 were all terminated.

 

   

With respect to AutovaxID™

 

   

The previously granted royalty equal to three percent (3%) of world-wide net sales (i.e., gross receipts from the world-wide sales of the automated cell and biologic production instrument known as AutovaxID manufactured by Biovest (the “AutovaxID Instruments”) less any rebates, returns and discounts) of AutovaxID Instruments for a period of five (5) years through May 31, 2012, granted to Laurus by Biovest and AutovaxID, Inc. in a letter agreement dated March 19, 2007, was terminated (including the guaranteed minimum royalty in the amount of $7.5 million remaining under such royalty).

Stanford University agreement:

In September 2004, Biovest entered into an agreement with Stanford University (“Stanford”) allowing worldwide rights to use two proprietary hybridoma cell lines that are used in the production of BiovaxID. Under the agreement with Stanford, Biovest is obligated to pay a yearly maintenance fee of $10,000 per year. The agreement also provides that Biovest will pay Stanford $0.1 million within one year following FDA approval of BiovaxID or five years following the agreement date (whichever occurs first). Following approval, Biovest is required to pay Stanford a running royalty of the higher of $50.00 per patient or 0.05% of revenues received by Biovest for each BiovaxID patient treated using this cell line. This running royalty will be creditable against the yearly maintenance fee. Biovest’s agreement with Stanford obligates Biovest to diligently develop, manufacture, market, and sell BiovaxID and to provide progress reports to Stanford regarding these activities. Biovest can terminate this agreement at any time upon 30 days’ prior written notice, and Stanford can terminate the agreement upon a breach of the agreement by Biovest that remains uncured for 30 days after written notice of the breach from Stanford.

 

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ACCENTIA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED JUNE 30, 2011 AND 2010

 

15. Commitments and contingencies (continued):

 

Sublicense agreement with related party:

On February 27, 2007, the Company entered into a sublicense agreement (the “Accentia Sublicense”) with Revimmune, LLC under which the Company was granted the exclusive worldwide rights to Revimmune™. Revimmune, LLC’s manager is a director of the Company. The perpetual sublicense allows the Company to develop and market a patent pending treatment for autoimmune diseases. The Accentia Sublicense covers the potential treatment of all autoimmune diseases including but not limited to multiple sclerosis.

Other material terms and conditions of the Accentia Sublicense are as follows:

 

   

The Company assumed certain future development, milestone and minimum royalty obligations of Revimmune, LLC under its license with Johns Hopkins University (“JHU”). In connection with the Accentia Sublicense, the Company did not pay an upfront fee or reimbursement of expenses. The Company also agreed to pay to Revimmune, LLC a royalty of 4% on net sales, and in the event of a sublicense, to pay 10% of net proceeds received from any such sublicense to Revimmune, LLC.

 

   

Upon the approval of the sublicensed treatment in the U.S. for each autoimmune disease, the Company is required to issue to Revimmune, LLC vested warrants to purchase 0.8 million shares of the Company’s common stock. The warrant which will be granted at the approval of the first sublicensed product will have an exercise price of $8 per share and any subsequent warrant to be issued will have an exercise price equal to the average of the volume weighted average closing prices of the Company’s common stock during the ten (10) trading days immediately prior to the grant of such warrant.

 

   

The Company will be responsible, at its sole cost and expense, for the development, clinical trial(s), promotion, marketing, sales and commercialization of the licensed products.

 

   

The Company has assumed the cost and responsibility for patent prosecution as provided in the license between Revimmune, LLC and JHU to the extent that the claims actually and directly relate to sublicensed products.

Baxter Corporation Agreement:

Effective on November 29, 2010, the Company and Baxter Healthcare Corporation (“Baxter”) entered into an agreement making Baxter the Company’s exclusive source of cyclophosphamide under an agreed-upon price structure (the “Agreement”). The Agreement provides the Company with the exclusive, worldwide right to purchase Baxter’s cyclophosphamide, which is marketed under the brand name Cytoxan®, for the treatment of certain designated autoimmune diseases, including but not limited to autoimmune hemolytic anemia, systemic sclerosis and multiple sclerosis. Cyclophosphamide is the active drug used in Revimmune™ therapy, the Company’s proprietary system-of-care being developed for the treatment of a broad range of autoimmune diseases. The Agreement requires the Company to make quarterly payments to Baxter in connection with net sales of products for the designated autoimmune indications, including without limitation any sales by subdistributors. Such quarterly payments will be calculated as 2.5% of sales of products sold by the Company incorporating cyclophosphamide. The Agreement also secures for the Company the exclusive right, in connection with the designated autoimmune disease indications, to reference Baxter’s proprietary, historical data related to cyclophosphamide as part of Accentia’s planned clinical and regulatory development of Revimmune. The Agreement designates Baxter as the Company’s sole source of supply of cyclophosphamide for Revimmune.

The initial term of the Agreement commenced on November 29, 2010 and will continue until the earlier of (a) the date that is five years following the first arms’ length commercial sale by the Company to a third party of products incorporating cyclophosphamide for an indication within the exclusive clinical field defined in the Agreement, and (b) November 29, 2020. Upon the expiration of the initial term, the Agreement will be automatically renewed for successive two year periods unless either party terminates the Agreement upon at least twelve (12) months written notice prior to the relevant termination date. The Agreement is subject to early termination by Baxter for various reasons, including a material breach of the Agreement by the Company, a change in control of the Company, the failure of the Company to file an IND within 24 months of the date of the Agreement for a product within the scope of the Company’s exclusivity under the Agreement, or the Company does not make its first commercial sale of such a product within 6 years of the date the first clinical trial patient is dosed with the product.

16. Variable Interest Entities:

Revimmune, LLC

Although the Company does not have an equity interest in Revimmune, LLC, the Company has the controlling financial interest of Revimmune, LLC because of the sublicense agreement between the parties and is considered the primary beneficiary. Therefore, the financial statements of Revimmune, LLC have been consolidated with the financial statements of the Company as of February 27, 2007 and through June 30, 2011. As of June 30, 2011, Revimmune, LLC’s assets and equity were approximately $28,321. The Company had no non-controlling interest in earnings from Revimmune, LLC for the nine months ended June 30, 2011.

 

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ACCENTIA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED JUNE 30, 2011 AND 2010

 

17. Effective Date (November 17, 2010) of Bankruptcy Plan:

Plan of Reorganization

On August 16, 2010, the Company and its subsidiaries (collectively, the “Debtors”) filed their First Amended Joint Plan of Reorganization, and, on October 25, 2010, the Debtors filed the First Modification to the First Amended Joint Plan of Reorganization (collectively and as amended and supplemented, the “Plan”). On October 27, 2010, the United States Bankruptcy Court for the Middle District of Florida, Tampa Division (the “Bankruptcy Court”) held a Confirmation hearing and confirmed the Plan, and, 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 (the “Confirmation Order”). In connection with the confirmation hearing all creditor classes deemed “impaired” pursuant to the Bankruptcy Code voted to support the Plan. The Debtors emerged from Chapter 11 protection, and the Plan became effective, on November 17, 2010 (the “Effective Date”). Pursuant to the Plan, the date on which a claim in any Class listed in the Plan became an “allowed claim” by order of the Bankruptcy Court or by agreement between Debtors and the claimant is the “Determination Date”.

Equity Interests (Class 15)

Each of the Company’s common stockholders on the Effective Date was deemed to receive one (1) share of Reorganized Accentia Common Stock (the “Class 15 Plan Shares”) for each share of the Company’s existing common stock held by such stockholder as of the Effective Date. The Company’s Class 15 Plan Shares shall be deemed issued pursuant to Section 1145 of the Bankruptcy Code and shall not have any legend restricting the sale thereof under federal securities laws.

April 2006 NMTC Transaction

Biovest and certain of its affiliates entered into an agreement in July 2010 (the “Worcester Restructuring Agreement”) with Telesis CDE Corporation and Telesis CDE Two, LLC (collectively, “Telesis”), contingent upon submission to and approval by the Bankruptcy Court. The Worcester Restructuring Agreement effectively terminates all agreements and obligations of all parties pursuant to the April 2006 New Market Tax Credit transaction (the “April 2006 NMTC Transaction”), in consideration of retention by Telesis of an unsecured claim in Biovest’s Chapter 11 proceeding in the amount of $0.3 million along with a settlement payment in the amount of $85,000 to defray certain legal and administrative expenses incurred by Telesis. The Worcester Restructuring Agreement and the compromise of the outstanding claims against Biovest and its affiliates in connection with the April 2006 NMTC Transaction was approved by the Bankruptcy Court in an Order entered on December 1, 2010. As a result, the Company’s guaranty, Biovest’s guaranty, all of Biovest’s subsidiary guaranties from affiliates and third parties and all other obligations of all parties to the April 2006 NMTC Transaction were terminated. Biovest has ceased all activities under the April 2006 NMTC Transaction and Biovest has liquidated the subsidiaries created specifically to conduct activities under the April 2006 NMTC transaction.

December 2006 NMTC Transaction

Biovest and certain of its affiliates entered into an agreement in July 2010 (the “St. Louis Restructuring Agreement”) with St. Louis Development Corporation and Saint Louis New Markets Tax Credit Fund II, LLC (collectively “SLDC”), contingent upon submission to and approval by the Bankruptcy Court. The St. Louis Restructuring Agreement effectively terminates all agreements and obligations of all parties pursuant to the December 2006 New Market Tax Credit transaction (the “December 2006 NMTC Transaction”), in consideration of retention by SLDC of an unsecured claim in Biovest’s Chapter 11 proceeding in the amount of $160,000 along with a settlement payment in the amount of $62,000 to defray certain legal and administrative expenses incurred by SLDC. This St. Louis Restructuring Agreement and the compromise of the outstanding claims against Biovest in connection with the December 2006 NMTC Transaction was approved by the Bankruptcy Court in an Order entered on December 1, 2010. As a result, the Company’s guaranty, Biovest’s guaranty, all of the subsidiary guaranties from affiliates and third parties and all other obligations of all parties to the December 2006 NMTC Transaction were terminated. Biovest has ceased all activities under the December 2006 NMTC Transaction and Biovest has liquidated the subsidiaries created specifically to conduct activities under the December 2006 NMTC Transaction.

 

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ACCENTIA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED JUNE 30, 2011 AND 2010

 

17. Effective Date of Bankruptcy Plan (continued):

 

Termination of Warrants

On the Effective Date, all of the following warrants were terminated and cancelled:

 

   

the common stock purchase warrant, dated August 16, 2005, issued by the Company to Laurus for the purchase of up to 1,000,000 shares of the Company’s common stock at an exercise price of $2.67 per share;

 

   

the common stock purchase warrant, dated September 29, 2006, issued by the Company to Laurus for the purchase of up to 627,240 shares of the Company’s common stock at an exercise price of $2.75 per share;

 

   

the common stock purchase warrant, dated October 31, 2007, issued by the Company to Laurus for the purchase of up to 4,024,398 shares of the Company’s common stock at an exercise price of $2.67 per share;

 

   

the common stock purchase warrant, dated January 18, 2008, issued by the Company to Valens I, for the purchase of up to 365,169 shares of the Company’s common stock at an exercise price of $2.67 per share; and

 

   

the common stock purchase warrant, dated January 18, 2008, issued by the Company to Valens U.S., for the purchase of up to 196,629 shares of the Company’s common stock at an exercise price of $2.67 per share.

Termination of Material Agreements

On the Effective Date all of the following documents were terminated:

 

   

all documents evidencing or relating to loans made by Laurus/Valens to the Company prior to the Effective Date;

 

   

that certain revolving credit agreement between Southwest Bank and the Company dated as of December 30, 2005, certain stock pledge agreement by and between the Company and Southwest Bank dated as of June 16, 2008, and all other documents executed in connection therewith;

 

   

all documents evidencing or relating to loans made by McKesson to the Company prior to the Effective Date (with certain exceptions set forth in the Plan);

 

   

all documents evidencing or relating to the 8% secured convertible debentures due September 29, 2010, issued by the Company in September 2006, in the original aggregate principal amount of $25 million;

 

   

all documents evidencing or relating to the 8% original issue discount secured convertible debentures due June 19, 2011, issued by the Company in June 2008, in the original aggregate principal amount of $8,906,098.00;

 

   

all documents evidencing or relating to the 8% convertible debentures due February 28, 2011, issued by the Company in February 2007, in the original aggregate principal amount of $24,940,000.00; and

 

   

all documents evidencing or relating to the Company’s Series A-1 convertible preferred stock, par value $1.00 per share.

 

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

When you read this section of this Quarterly Report on Form 10-Q, it is important that you also read the financial statements and related notes included elsewhere in this Form 10-Q. This section of this Quarterly Report contains forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations, and intentions. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including the matters discussed under the caption “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2010 and other risks and uncertainties discussed in our other filings with the Securities and Exchange Commission.

General

Headquartered in Tampa, Florida, Accentia Biopharmaceuticals, Inc. (Other OTC: “ABPI”) is a biotechnology company that is developing Revimmune™ as a comprehensive system of care for the treatment of autoimmune diseases. Additionally, through our majority-owned subsidiary, Biovest International, Inc. (OTCQB: “BVTI”) (“Biovest”), we are developing BiovaxID® as a therapeutic cancer vaccine for treatment of follicular non-Hodgkin’s lymphoma (“FL”) and mantle cell lymphoma (“MCL”). Through our wholly-owned subsidiary, Analytica International, Inc. (“Analytica”), we conduct a health economics research and consulting business which we market to the pharmaceutical and biotechnology industries, using its operating cash flow to support our corporate administration and product development activities.

Revimmune™ is being developed as a treatment for various autoimmune diseases. The approximately 80 known autoimmune diseases generally arise from an overactive immune response against substances and/or tissue normally present in the body. As a system of care, Revimmune consists of administering high, pulsed doses of an FDA-approved drug, cyclophosphamide, over a four-day interval as part of an integrated risk management system including a panel of preventive tests, monitoring and medications which are intended to minimize risks while seeking to maximize the clinical benefit.

Through collaboration with the National Cancer Institute (“NCI”), Biovest has developed a patient-specific cancer vaccine, BiovaxID, which has demonstrated statistically significant Phase 3 clinical benefit by prolonging disease-free survival in FL patients treated with BiovaxID.

Additionally, through Analytica, a Florida corporation based in New York, New York, we conduct a global research and strategy consulting business that provides professional services to the pharmaceutical and biotechnology industries. Since 1997, Analytica has expertly directed research studies and projects, including traditional health economic modeling projects, database studies, structured reviews, health technology assessments, reimbursement analyses, and value dossiers.

Corporate Overview

We were organized in 2002 to develop and commercialize biopharmaceutical products.

We commenced business in April 2002 with the acquisition of Analytica, a provider of analytical and consulting services to the biopharmaceuticals industry, including clinical trial services, pricing and market assessment and outcomes research. We acquired Analytica in a merger transaction for $3.7 million cash, $1.2 million of convertible promissory notes, and the issuance of 8.1 million shares of Series B preferred stock. Analytica, which was founded in 1997, has offices in New York and Germany.

In June 2003, we acquired an 81% interest in Biovest for an investment of $20.0 million in Biovest pursuant to an investment agreement. Biovest is a biologics company that is developing our BiovaxID patient-specific vaccine for the treatment of FL. As of June 30, 2011, we owned of record approximately 62% of the outstanding common stock of Biovest with the minority interest being held by approximately 400 shareholders of record. Biovest’s common stock is registered under Section 12(g) of the Securities Exchange Act of 1934, and Biovest therefore files periodic and other reports with the Securities and Exchange Commission (“SEC”).

On November 10, 2008, we, along with all of our subsidiaries, filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code (“Chapter 11”) in the U.S. Bankruptcy Court for the Middle District of Florida, Tampa Division (the “Bankruptcy Court”) under Case No. 8:08-bk-17795-KRM. On August 16, 2010, we filed our First Amended Joint Plan of Reorganization, and, on October 25, 2010, we filed the First Modification to the First Amended Joint Plan of Reorganization (collectively and as amended and supplemented, the “Plan”). On November 2, 2010, the Bankruptcy Court entered an Order Confirming Debtors’ First Amended Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy Code (the “Confirmation Order”). We emerged from Chapter 11 protection, and the Plan became effective, on November 17, 2010 (the “Effective Date”).

 

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Results of Operations

Net Sales: Our net sales for the nine months ended June 30, 2011 were approximately $6.4 million compared to net sales of $8.3 million for the nine months ended June 30, 2010, a decrease of approximately 22%. Net sales for the three months ended June 30, 2011 were approximately $2.1 million compared to net sales of $2.5 million for the three months ended June 30, 2010. Prior year instrument sales included approximately $0.9 million from a total $1.5 million contract with the U.S. Department of Defense Naval Health Research Center (“NHRC”) to supply AutovaxID™ bioreactors to evaluate the instrument’s suitability to produce cell-culture based anti-viral vaccines. The current fiscal year includes revenues of $0.3 million on this contract. The contract has been closed with the final milestone having been completed in January 2011.

Analytica’s sales decreased 20% to $3.2 million compared to the same nine month period in the previous fiscal year primarily due to the cessation of the clinical trial services business of our German subsidiary which accounted for $0.9 million of revenue for the nine months ended June 30, 2010.

Research and Development Expenses: Our research and development costs were $1.4 million for the nine months ended June 30, 2011; an increase of approximately $0.4 million over the nine months ended June 30, 2010. This is primarily attributable to an increase in wages and laboratory supplies as Biovest continues to analyze the available data from its clinical trials and plans to seek accelerated and/or conditional approval with the FDA and European Medicines Agency (“EMA”). Biovest has hired three additional employees at their Minneapolis facility and one in the Tampa offices to support this analysis. Biovest has also contracted with a number of consultants to provide it with regulatory and analytical insight as it prepares its applications for approval with the FDA and EMA. Accordingly, outside professional fees have increased when comparing the current and prior fiscal years.

General and Administrative Expenses: Our general and administrative expenses were $19.4 million for the nine months ended June 30, 2011; an increase of $15.54 million over the nine months ended June 30, 2010. This increase is primarily due to the increase in stock compensation expense of approximately $15.6 million related primarily to incentive stock options that vested upon emergence from reorganization.

Derivative gain/ loss: Derivative gain was $0.6 million for the nine months ended June 30, 2011 as compared to a loss of $22.4 million for the nine months ended June 30, 2010. This difference is primarily related to the derivatives issued in conjunction with our various financings, and results primarily from the decrease in our common stock price, on which the derivative liabilities are valued, during the nine months ended June 30, 2011 in addition to the significant reduction of our derivative obligations upon emergence from bankruptcy.

Gain on reorganization: The gain on reorganization is primarily a result of settling claims with cash or stock at amounts less than the recorded value. Additional gain or loss may be recognized depending on the final disposition of certain unresolved claims.

Liquidity and Capital Resources

Sources of Liquidity

Since our inception, we have funded our operations primarily through public and private placements of our capital stock, debt financing, and financing transactions with our strategic partners. These transactions are described throughout the following pages.

We have historically had significant losses from operations. On June 30, 2011, we had an accumulated deficit of approximately $331.2 million and a working capital deficit of approximately $19.3 million. Cash and cash equivalents at June 30, 2011 was approximately $1.4 million, of which $0.7 million was attributable to Biovest.

We intend to attempt to meet our cash requirements through proceeds from the cell culture and instrument manufacturing activities of our Biovest subsidiary, income from our Analytica subsidiary, and the use of cash on hand, trade-vendor credit, and short-term borrowings. Additionally, we may seek public or private equity investment, short or long term debt financing or strategic relationships such as investments or licenses. Our ability to continue present operations and to continue our product development efforts are dependent upon our ability to successfully execute the obligations under our Plan and to obtain significant external funding, which raises substantial doubt about our ability to continue as a going concern. The need for funds is expected to grow as we continue our efforts to commercialize Revimmune™, BiovaxID®, and AutovaxID™.

 

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Capital Raised through Equity Issuances

We have received funding from our initial public offering, private placements of our common and preferred stock, the issuance of convertible debentures and the exercise of warrants and options to purchase capital stock.

Corps Real, LLC-Accentia

On June 13, 2011, we entered into a convertible debt financing transaction with Corps Real, LLC (“Corps Real”) providing for aggregate loans to us in the maximum amount of $4.0 million. Corp Real is a shareholder and the senior secured lender to Biovest, our majority-owned subsidiary. Corps Real, as well as the majority owner of Corps Real, are both managed by Ronald E. Osman, Esq., a shareholder of our Company, who is also a shareholder and Director of Biovest. We executed a secured promissory note, payable to Corps Real, in the maximum principal amount of $4.0 million (the “Note”), under which Corps Real advanced $1.0 million to us on June 13, 2011 and agreed to advance an additional $1.0 million to us on each of August 1, 2011, November 15, 2011, and January 15, 2012. The other material terms and conditions of the Note are as follows:

 

   

The Note will mature on June 13, 2016, at which time all indebtedness under the Note will be due and payable;

 

   

Interest on the outstanding principal amount of the Note accrues and will be payable at a fixed rate of five percent (5%) per annum. Interest began accruing on June 13, 2011 and will be payable on a quarterly basis in arrears (as to the principal amount then outstanding). Interest payments may be paid in cash or, at our the election, may be paid in shares of our common stock based on the volume-weighted average trading price of our common stock during the last ten trading days of the quarterly interest period;

 

   

At Corps Real’s option, at any time prior to the earlier to occur of (a) the date of the prepayment of the Note in full or (b) the maturity date of the Note, Corps Real may convert all or a portion of the outstanding balance of the Note (including any accrued and unpaid interest) into shares of our common stock at a conversion rate equal to $0.34 per share;

 

   

If our common stock trades at $2.00 per share for ten (10) consecutive trading days, then we may, within three (3) trading days after the end of any such period, cause Corps Real to convert all or part of the then outstanding principal amount of the Note at the then conversion price, plus accrued but unpaid interest;

 

   

Subject to certain exceptions, if we wish to complete a follow-on equity linked financing during the 12 month period following June 13, 2011 at a price per share that is less than the conversion price under the Note, then our full board of directors must first confer with Mr. Osman, the manager of Corps Real, and we must offer Corps Real the first right of refusal to provide or to participate in such equity linked financing;

 

   

We will not be permitted to effect a conversion of the Note and Corps Real will not be permitted to convert the Note to the extent that, after giving effect to an issuance after a conversion of the Note, Corps Real (together with Corps Real’s affiliates and any other person or entity acting as a group together with Corps Real or any of Corps Real’s affiliates) would beneficially own in excess of 9.99% of the number of shares of our common stock outstanding immediately after giving effect to the issuance of shares of our common stock issuable upon conversion of the Note;

 

   

We may prepay the Note, in full, at any time without penalty, provided that we must provide ten (10) days advance written notice to Corps Real of the date for any such prepayment, during which period Corps Real may exercise its right to convert into shares of our common stock; and

 

   

Corps Real may, among other things, declare the entire outstanding principal amount, together with all accrued interest and all other sums due under the Note, to be immediately due and payable upon our failure to pay, when due, any amounts due under the Note if such amounts remain unpaid for five (5) business days after the due date or upon the occurrence of any other event of default described in the Security Agreement (as defined below).

To secure payment of the Note, we also entered into a Security Agreement with Corps Real on June 13, 2011 (the “Security Agreement”). Under the Security Agreement, all obligations under the Note are secured by a first security interest in (a) 12 million shares of Biovest common stock owned by us, (b) all of our contractual rights pertaining to the first product for which a new drug application (“NDA”) is filed containing BEMA Granisetron following the date of our settlement agreement (dated December 30, 2009) with BioDelivery Sciences International, Inc (“BDSI”); provided, however, that if BEMA Granisetron is not the first BEMA-based product for which an NDA is filed with the FDA by or on behalf of BDSI following that date, then the applicable product shall be the first BEMA-based product for which an NDA is filed with the FDA by or on behalf of BDSI following the date of the settlement agreement, and (c) all attachments, additions, replacements, substitutions, and accessions and all proceeds thereof in any form.

 

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As part of the financing transaction, on June 13, 2011, we also issued to Corps Real a Common Stock Purchase Warrant to purchase 5,882,353 shares of our common stock (the “Warrant”) for an exercise price of $0.47 per share (subject to adjustment for stock splits, stock dividends, and the like). The other material terms and conditions of the Warrant are as follows:

 

   

The Warrant was exercisable beginning on June 13, 2011 and will continue to be exercisable until the close of business on June 13, 2016;

 

   

If the fair market value of one share of our common stock is greater than the exercise price, in lieu of exercising the Warrant for cash, Corps Real may elect to utilize the cashless exercise provisions of the Warrant; and

 

   

We will not be permitted to effect any exercise of the Warrant, and Corps Real will not be permitted to exercise any portion of the Warrant, to the extent that, after giving effect to such issuance after exercise, Corps Real (together with Corps Real’s affiliates and any other person or entity acting as a group together with Corps Real or any of Corps Real’s affiliates) would beneficially own in excess of 9.99% of the number of shares of our common stock outstanding immediately after giving effect to the issuance of the shares of our common stock issuable upon exercise of the Warrant.

As of June 30, 2011, the outstanding principal amount of the Note, as issued on June 13, 2011, has remained unchanged.

Corps Real, LLC-Biovest

On November 17, 2010 (the effective date (the “Biovest Effective Date”) of Biovest’s First Amended Plan of Reorganization (the “Biovest Plan”), in accordance with the terms of the Biovest Plan, Biovest executed and delivered in favor of Corps Real., a secured convertible promissory note (the “DIP Lender Plan Note”) in an original principal amount of $2,291,560. The DIP Lender Plan Note amends and restates the $3.0 million secured line of credit promissory note dated December 22, 2008, which was previously executed by Biovest in favor of Corps Real. The DIP Lender Plan Note matures on November 17, 2012, and all principal and accrued but unpaid interest is due on such date. Interest accrues and is payable on the outstanding principal amount of the DIP Lender Plan Note at a fixed rate of sixteen percent (16%) per annum, with interest in the amount of ten percent (10%) to be paid monthly and interest in the amount of six percent (6%) to accrue and be paid on the maturity date. Biovest may prepay the DIP Lender Plan Note in full, without penalty, at any time, and Corps Real may convert all or a portion of the outstanding balance of the DIP Lender Plan Note into shares of Biovest common stock at a conversion rate of $0.75 per share of Biovest common stock. The DIP Lender Plan Note is secured by a first priority lien on all of Biovest’s assets. As of June 30, 2011, the outstanding principal amount of the DIP Lender Plan Note, as issued on the Effective Date, has remained unchanged.

Exit Financing-Biovest

On October 19, 2010, Biovest completed a financing as part of the Biovest Plan (the “Exit Financing”). Pursuant to the Exit Financing, Biovest issued an aggregate of $7.0 million in principal amount of Debtor-In-Possession Secured Convertible Notes (the “Initial Notes”) and warrants to purchase shares of Biovest common stock (the “Initial Warrants”) to a total of twelve (12) accredited investors (the “Buyers”). Biovest issued two separate types of Initial Warrants to the Buyers, Series A Warrants (the “Initial Series A Warrants”) and Series B Warrants (the “Initial Series B Warrants”).

On the Biovest Effective Date: (a) the Initial Notes were exchanged pursuant to the terms of the Biovest Plan for new unsecured notes (the “Exchange Notes”) in the aggregate principal amount of $7.04 million, (b) the Initial Series A Warrants were exchanged pursuant to the terms of the Biovest Plan for new warrants to purchase a like number of shares of Biovest common stock (the “Series A Exchange Warrants”), and (c) the Initial Series B Warrants were exchanged pursuant to the terms of the Biovest Plan for new warrants to purchase a like number of shares of Biovest common stock (the “Series B Exchange Warrants”).

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

 

   

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

 

   

interest accrues and is payable on the outstanding principal amount of the Exchange Notes at a fixed rate of seven percent (7%) per annum (with a fifteen percent (15%) per annum default rate), and is payable monthly in arrears. The first interest payment was paid on December 1, 2010;

 

   

interest payments are payable at Biovest’s election in either cash or subject to certain specified conditions, in shares of Biovest common stock;

 

   

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

 

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

 

   

in the event that the average of the daily volume weighted average price of Biovest common stock is at least 150% of the then-effective conversion price for any ten (10) consecutive trading days, Biovest, at its option, may upon written notice to the holders of the Exchange Notes, convert the then outstanding balance of the Exchange Notes into shares of Biovest common stock at the conversion price then in effect under the Exchange Notes.

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

 

   

the Series A Exchange Warrants give the Buyers the right to purchase an aggregate of 8,733,096 shares of Biovest common stock;

 

   

the Series A Exchange Warrants have an exercise price of $1.20 per share and expire on November 17, 2017; and

 

   

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

On December 22, 2010, the Series B Exchange Warrants were exercised by a cashless exercise and 1,075,622 shares of Biovest common stock were issued to the Buyers.

As of June 30, 2011, a total of $5.8 million in principal on the Exchange Notes had been converted into shares of Biovest common stock, resulting in the issuance to the Buyers of 6.9 million shares of Biovest common stock. The remaining principal balance outstanding on the Exchange Notes was $1.3 million as of June 30, 2011.

Debt Financing

Credit Facility with Laurus Master Fund, Ltd.

On the Effective Date, we issued to Laurus Master Fund, Ltd. (in liquidation) (“Laurus”), PSource Structured Debt Limited (“PSource”), Valens Offshore SPV I, Ltd. (“Valens I”), Valens Offshore SPV II, Corp. (“Valens II”), Valens U.S. SPV I, LLC (“Valens U.S.”), (collectively, “Valens”) and LV Administrative Services, Inc., as administrative and collateral agent for Laurus, PSource, and Valens (“LV” and together with Laurus, PSource, Valens, and each of their respective affiliates, “Laurus/Valens”), security agreements and term notes in the original principal amount of $8.8 million (the “Laurus/Valens Term Notes”) in satisfaction of allowed claims prior to the Effective Date. The following are the material terms and conditions of the Laurus/Valens Term Notes:

 

   

the Laurus/Valens Term Notes mature on November 17, 2012 and may be prepaid at any time without penalty;

 

   

interest accrues on the Laurus/Valens Term Notes at the rate of eight and one-half percent (8.5%) per annum (with a twelve and one-half percent (12.5%) per annum default rate), and is payable at the time of any principal payment or prepayment of principal;

 

   

we are required to make mandatory prepayments under the Laurus/Valens Term Notes as follows:

 

   

on May 17, 2012, a payment of principal, in cash, in the amount of $4.4 million, less the amount of any prior optional prepayments of principal by us and the amount of any other mandatory prepayments of principal under the Laurus/Valens Term Notes; and

 

   

a prepayment equal to thirty percent (30%) of the net proceeds (i.e., the gross proceeds received less any investment banking or similar fees and commissions and legal costs and expenses incurred by us) of certain capital raising transactions (with certain exclusions). The June 2011 tranche of the Corps Real funding did not meet the $1.5 million cumulative net proceeds criteria, however, the August 2011 tranche met the criteria and will require an approximately $0.1 million payment to Laurus/Valens;

 

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the Laurus/Valens Term Notes are secured by:

 

   

a first lien on all of our assets, junior only to the liens granted under the Plan to holders of the Class 6 Plan Debentures (as defined below), in the original aggregate principal amount of $8,906,098, and certain permitted liens;

 

   

a pledge by us to Laurus/Valens of (a) all of our equity interests in Analytica, and (b) 20,115,818 shares of Biovest common stock owned by us;

 

   

all of the assets of Analytica, which secure a guaranty of Analytica as to the entire indebtedness under the Laurus/Valens Term Notes;

and

 

   

with the prior written consent of Laurus/Valens, we may convert all or any portion of the outstanding principal and accrued interest under the Laurus/Valens Term Notes into a number of shares of our common stock equal to (a) the aggregate portion of the principal and accrued but unpaid interest outstanding under the Laurus/Valens Term Note being converted, divided by (b) ninety percent (90%) of the average closing price publicly reported for our common stock for the ten (10) trading days immediately preceding the date of the notice of conversion.

On the Effective Date, 2,236,848 shares of our common stock were issued to Laurus/Valens for payment of Laurus/Valens’ Class 5 and Class 13 claims under the Plan aggregating approximately $6.0 million at a conversion rate equal to $2.67 per share. As of June 30, 2011, the outstanding principal amounts of the Laurus/Valens Term Notes, as issued on the Effective Date, have remained unchanged.

Laurus Master Fund, Ltd. and the Valens Funds - Biovest

On the Biovest Effective Date, Biovest issued two new types of notes (the “Laurus/Valens Term A Notes” and the “Laurus/Valens Term B Notes”) in the aggregate original principal amount of $29.06 million to Laurus/Valens in compromise and satisfaction of secured claims prior to the Biovest Effective Date. The following are the material terms and conditions of the Laurus/Valens Term A Notes:

 

   

the original principal amount of the Laurus/Valens Term A Notes was $24.9 million;

 

   

the Laurus/Valens Term A Notes mature on November 17, 2012;

 

   

interest accrues on the Laurus/Valens Term A Notes at the rate of eight percent (8%) per annum (with a twelve percent (12%) per annum default rate), and is payable at the time of any principal payment or prepayment of principal;

 

   

Biovest may prepay the Laurus/Valens Term A Notes, without penalty, at any time; and

 

   

Biovest is required to make mandatory prepayments under the Laurus/Valens Term A Notes as follows:

 

   

a prepayment equal to thirty percent (30%) of the net proceeds (i.e., the gross proceeds received less any investment banking or similar fees and commissions and legal costs and expenses incurred by Biovest) of certain capital raising transactions (with certain exclusions), but only up to the amount of the then outstanding principal and accrued interest under the Laurus/Valens Term A Notes;

 

   

from any intercompany funding by us to Biovest (with certain exceptions and conditions); and

 

   

a prepayment equal to fifty percent (50%) of the positive net cash flow of Biovest for each fiscal quarter after November 17, 2010, less the amount of certain capital expenditures on certain biopharmaceutical products of Biovest made during such fiscal quarter or during any prior fiscal quarter ending after the Biovest Effective Date.

On November 18, 2010, Biovest prepaid the Laurus/Valens Term A Notes in an amount equal to $1.4 million from the proceeds received in the Exit Financing. Accordingly, as of June 30, 2011, Biovest’s indebtedness under the Laurus/Valens Term A Notes was $23.5 million.

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

 

   

the original principal amount of the Laurus/Valens Term B Notes was $4.16 million;

 

   

the Laurus/Valens Term B Notes mature on November 17, 2013;

 

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interest accrues on the Laurus/Valens Term B Notes at the rate of eight percent (8%) per annum (with a twelve percent (12%) per annum default rate), and is payable at the time of any principal payment or prepayment of principal;

 

   

Biovest may prepay the Laurus/Valens Term B Notes, without penalty, at any time; and

 

   

provided that the Laurus/Valens Term A Notes have been paid in full, Biovest is required to make mandatory prepayments under the Laurus/Valens Term B Notes from any intercompany funding by us to Biovest (with certain exceptions and conditions), but only up to the amount of the outstanding principal and accrued interest under the Laurus/Valens Term B Notes.

As of June 30, 2011, the outstanding principal amounts of the Laurus/Valens Term B Notes, as issued on the Biovest Effective Date, have remained unchanged.

With the prior written consent of Laurus/Valens, Biovest may convert all or any portion of the outstanding principal and accrued interest under either the Laurus/Valens Term A Notes or the Laurus/Valens Term B Notes into shares of Biovest common stock. The number of shares of Biovest common stock issuable on such a conversion (the “Laurus/Valens Conversion Shares”) is equal to (a) an amount equal to the aggregate portion of the principal and accrued and unpaid interest thereon outstanding under the applicable Laurus/Valens Term A Notes or Laurus/Valens Term B Notes being converted, divided by (b) ninety percent (90%) of the average closing price publicly reported (or reported by Pink Sheets, LLC) for Biovest common stock for the ten (10) trading days immediately preceding the date of the notice of conversion.

The Laurus/Valens Term A Notes and the Laurus/Valens Term B Notes are secured by a first lien on all of the assets of Biovest and its subsidiaries, junior only to the lien granted to Corps Real and to certain permitted liens. The Laurus/Valens Term A Notes and the Laurus/Valens Term B Notes are also guaranteed by us (the “Accentia Guaranty”), up to a maximum amount of $4,991,360. The Accentia Guaranty is secured by our pledge of 20,115,818 shares of Biovest common stock owned by us and by the assets of our subsidiary, Analytica.

McKesson Corporation

On the Effective Date, we issued a new promissory note in the original amount of $4,342,771 (the “Class 4 Plan Note”) to McKesson Corporation (“McKesson”) in satisfaction of McKesson’s approved pre-Effective Date secured claims. The Class 4 Plan Note is payable in cash in one installment on March 17, 2014 (unless earlier accelerated), and the outstanding principal together with all accrued but unpaid interest is due on such date. As of June 30, 2011, the outstanding principal amount of the Class 4 Plan Note, as issued on the Effective Date, has remained unchanged.

The following are the material terms and conditions of the Class 4 Plan Note:

 

   

interest accrues and is payable on the outstanding principal amount under the Class 4 Plan Note at a fixed rate of five percent (5%) per annum (with a ten percent (10%) per annum default rate);

 

   

we may prepay all or any portion of the Class 4 Plan Note, without penalty, at any time; and

 

   

the Class 4 Plan Note is secured by a lien on 6,102,408 shares of Biovest’s common stock owned by us.

Credit Facility with Southwest Bank of St. Louis f/k/a Missouri State Bank

On the Effective Date, we issued a new promissory note in an original principal amount of $4,483,284 (the “Class 3 Plan Note”) to Dennis Ryll, the holder by assignment of our previously-issued secured note to Southwest Bank, as payment of our obligation to Southwest Bank prior to the Effective Date. We are not obligated to pay the Class 3 Plan Note in cash, and instead may pay through quarterly conversions into shares of our common stock or, subject to certain conditions, by exchanging the quarterly conversion amounts into shares of Biovest common stock owned by us. The following are the material terms and conditions of the Class 3 Plan Note:

 

   

the Class 3 Plan Note matures on August 17, 2012;

 

   

interest accrues and is payable on the outstanding principal balance of the Class 3 Plan Note from time to time (the “Class 3 Interest”) at a fixed rate of six percent (6%) per annum;

 

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on November 17, 2010 and on each of the following seven (7) quarterly anniversaries of the Effective Date (each, a “Class 3 Automatic Conversion Date”), provided that the average of the trading price of our common stock (as determined in accordance with the Class 3 Plan Note and the Plan) for the ten (10) consecutive trading days ending on the trading day that is immediately preceding the then applicable Class 3 Automatic Conversion Date (the “Class 3 Automatic Conversion Price”) is at least $1.00 per share, one-eighth (1/8th) of the original principal balance of the Class 3 Plan Note plus the Class 3 Interest as of the Class 3 Automatic Conversion Date (the “Class 3 Automatic Conversion Amount”) will be automatically converted into shares of our common stock at a conversion rate equal to the Class 3 Automatic Conversion Price per share of our common stock;

 

   

the Class 3 Plan Note is secured by a lien on 15 million shares of Biovest common stock owned by us (the “Class 3 Pledged Shares”), subject to the incremental release of a designated portion of such security upon each quarterly payment under the Class 3 Plan Note. As of June 30, 2011, there remains approximately 9.4 million Class 3 Pledged Shares;

 

   

if, on any Class 3 Automatic Conversion Date, the Class 3 Automatic Conversion Price is less than $1.00 per share, Mr. Ryll may, at his election, convert the Class 3 Automatic Conversion Amount into shares of our common stock at a conversion rate equal to $1.00 per share of our common stock; and

 

   

if, on any Class 3 Automatic Conversion Date, the Class 3 Automatic Conversion Price is less than $1.00 per share, and Mr. Ryll does not elect to convert the Class 3 Automatic Conversion Amount into shares of our common stock at a conversion rate equal to $1.00 per share of our common stock, then, at our election and upon written notice to Mr. Ryll, we may deliver the Class 3 Automatic Conversion Amount by one of the following four methods of payment or a combination thereof:

 

  (i) the number of shares of our common stock determined by dividing the Class 3 Automatic Conversion Amount by $1.00 plus, the difference between (a) the Class 3 Automatic Conversion Amount and (b) the product of the Class 3 Automatic Conversion Price on the Class 3 Automatic Conversion Date and the number of shares of our common stock issued (as determined above).

 

  (ii) the number of shares of our common stock determined by dividing the Class 3 Automatic Conversion Amount by $1.00 plus, in order to pay the shortfall in the Class 3 Automatic Conversion Amount after the payment (as determined above), that number of the Class 3 Pledged Shares that has a value equal to the remaining unpaid portion of the Class 3 Automatic Conversion Amount (as determined above), using a conversion rate equal to the average of the trading price of shares of Biovest common stock for the ten (10) consecutive trading days prior to the Class 3 Automatic Conversion Date (the “Biovest VWAP Price”); or

 

  (iii) the number of shares of our common stock determined by dividing the Class 3 Automatic Conversion Amount by $1.00 plus cash in an amount equal to the shortfall in the Class 3 Automatic Conversion Amount after the payment (as determined above); or

 

  (iv) the number of the Class 3 Pledged Shares that has a value equal to the Class 3 Automatic Conversion Amount, using a conversion rate equal to the Biovest VWAP Price., i.e., dividing the Automatic Conversion Amount by the Biovest VWAP Price.

As of June 30, 2011, the outstanding principal amount of the Class 3 Plan Note is $2.8 million.

September 2006 Debentures and Warrants (Class 5)

On the Effective Date, we issued, in satisfaction of the secured debentures dated September 29, 2006 outstanding prior to the Effective Date, new debentures (the “Class 5 Plan Debentures”) in the original principal amount of $3,109,880. We are not obligated to pay the Class 5 Plan Debentures in cash, and instead may pay through the conversion by the holders into shares of our common stock or, subject to certain conditions, by exchanging the Class 5 Plan Debentures for shares of Biovest common stock owned by us during the term of the Class 5 Plan Debentures which mature on May 17, 2012.

The following are the material terms and conditions of the Class 5 Plan Debentures:

 

   

the Class 5 Plan Debentures mature on May 17, 2012 (provided, however, in the event that the average of the trading price of Biovest common stock (as determined in accordance with the Class 5 Plan Debentures and the Plan) for the ten (10) consecutive trading days ending on the trading day that is immediately preceding such maturity date is below $0.75, then the maturity date will automatically be extended for an additional twelve (12) months), and the outstanding principal together with all accrued but unpaid interest is due on such maturity date;

 

   

interest accrues and is payable on the outstanding principal amount under the Class 5 Plan Debentures at a fixed rate of eight and one-half percent (8.50%) per annum;

 

   

each of the Class 5 Plan Debentures is secured by a lien on certain shares of Biovest common stock owned by us;

 

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at the option of a holder of Class 5 Plan Debentures, all or any portion of the then outstanding balance of such holder’s Class 5 Plan Debentures may be converted into shares of our common stock or exchanged for shares of Biovest common stock owned by us at the applicable conversion or exchange rate set forth in such Class 5 Plan Debentures;

 

   

commencing on August 17, 2011, if the trading price of our common stock (determined in accordance with the Class 5 Plan Debentures and the Plan) is at least 150% of the fixed conversion price for a holder of Class 5 Plan Debentures for any ten (10) consecutive trading days (in the case of a conversion into our common stock), or the trading price of Biovest’s common stock (determined in accordance with the Class 5 Plan Debentures and the Plan) is at least $1.25 for any ten (10) consecutive trading days (in the case of an exchange for shares of Biovest common stock), at our option, we may (a) convert the then outstanding balance of all of the Class 5 Plan Debentures into shares of our common stock at a conversion rate equal to the fixed conversion price for each holder of Class 5 Plan Debentures, or (b) exchange the then outstanding balance of all of the Class 5 Plan Debentures into shares of Biovest common stock owned by us at a rate equal to $0.75 per share of Biovest common stock (with certain exceptions set forth in the Class 5 Plan Debentures and the Plan); and

 

   

if a holder of Class 5 Plan Debentures had elected to receive shares of Biovest common stock during the period of November 17, 2010 through February 17, 2011, then such holder would have been subjected to certain restrictions set forth in the Class 5 Plan Debentures regarding such shares of Biovest common stock.

As of June 30, 2011, the aggregate outstanding principal amount of the Class 5 Plan Debentures was approximately $2.0 million.

On the Effective Date, we also executed and delivered warrants (the “Class 5 Plan Warrants”) to purchase up to 2,508,960 shares of our common stock or up to 14.4 million shares of Biovest common stock owned by us. The Class 5 Plan Warrants (a) have an exercise price of $1.50 per share and a term of three (3) years from November 17, 2010, (b) can only be exercised for cash (no cashless exercise), and (c) are subject to certain call provisions set forth in the Class 5 Plan Warrants.

February 2007 Notes and Warrants (Class 9)

On the Effective Date, we issued, in satisfaction of the debentures dated February 28, 2007 outstanding prior to the Effective Date, new debentures (the “Class 9 Plan Debentures”) in the original principal amount of $19,109,554. We are not obligated to pay the Class 9 Plan Debentures in cash, and instead may pay through the conversion by the holders into shares of our common stock. The Class 9 Plan Debentures mature on November 17, 2012 (the “Class 9 Plan Debenture Maturity Date”) and no interest will accrue on the outstanding principal balance of the Class 9 Plan Debentures.

The following are the material terms and conditions of the Class 9 Plan Debentures:

 

   

on November 17, 2010 and on each of the following seven (7) quarterly anniversaries thereof (each, a “Class 9 Automatic Conversion Date”), provided that the average of the trading price of our common stock (as determined in accordance with the Class 9 Plan Debentures and the Plan) for the ten (10) consecutive trading days ending on the trading day that is immediately preceding the then applicable Class 9 Automatic Conversion Date (the “Class 9 Automatic Conversion Price”) is at least $1.00 per share, one-eighth (1/8th) of the original principal balance of the Class 9 Plan Debentures (the “Class 9 Automatic Conversion Amount”) will be automatically converted into shares of our common stock at a conversion rate equal to the lesser of $1.25 per share or the Class 9 Automatic Conversion Price per share;

 

   

if, on any Class 9 Automatic Conversion Date, the Class 9 Automatic Conversion Price is less than $1.00 per share and therefore the automatic conversion described above does not occur, a holder of Class 9 Plan Debentures may elect to convert the Class 9 Automatic Conversion Amount into shares of our common stock at a conversion rate equal to $1.00 per share;

 

   

any principal amount outstanding under the Class 9 Plan Debentures at the Class 9 Plan Debenture Maturity Date will be due and payable in full, at our election, in either cash or shares of our common stock at a conversion rate equal to the average trading price of our common stock (as determined in accordance with the Class 9 Plan Debentures and the Plan) for the ten (10) consecutive trading days ending on the trading day that is immediately preceding the Class 9 Plan Debenture Maturity Date (provided that the average trading price for such period is at least $0.50 per share);

 

   

if, at any time during the term of the Class 9 Plan Debentures, the trading price of our common stock (as determined in accordance with the Class 9 Plan Debentures and the Plan) is at least $1.50 per share for ten (10) consecutive trading days, a holder of the Class 9 Debentures, at its option, may convert any or all of the then outstanding principal balance of its Class 9 Plan Debenture into shares of our common stock at a conversion rate equal to the Class 9 Automatic Conversion Price used for the initial conversion on November 17, 2010 but not to exceed $1.25 per share; and

 

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if, at any time during the term of the Class 9 Plan Debentures, the trading price of our common stock (as determined in accordance with the Class 9 Plan Debentures and the Plan) is at least $1.88 per share for thirty (30) consecutive trading days, at our option, we may require the conversion of up to $5.0 million of the then aggregate outstanding principal balance of the Class 9 Plan Debentures at a conversion rate equal to the Class 9 Automatic Conversion Price used for the initial conversion on November 17, 2010 but not to exceed $1.25 per share.

As of June 30, 2011, the aggregate outstanding principal amount of the Class 9 Plan Debentures was approximately $16.4 million.

On the Effective Date, we also executed and delivered warrants (the “Class 9 Plan Warrants”) to purchase up to 3,154,612 shares of our common stock. The Class 9 Plan Warrants (a) have an exercise price of $1.50 per share and a term of three (3) years from the Effective Date, (b) can only be exercised for cash (no cashless exercise), and (c) are subject to certain call provisions set forth in the Class 9 Plan Warrants and the Plan.

January 2008 Notes and Warrants (Class 13)

On the Effective Date, we issued, in satisfaction of the convertible preferred stock outstanding prior to the Effective Date of the Plan, new promissory notes (the “Class 13 Plan Notes”) in the original principal amount of $4,903,644. The Class 13 Plan Notes mature on November 17, 2012 (the “Class 13 Plan Notes Maturity Date”), and no interest will accrue on the outstanding principal balance of the Class 13 Plan Notes. We have the option, but have no obligation to pay the Class 13 Plan Notes in cash at maturity and instead may pay through the conversion by the holders into shares of our common stock.

The following are the material terms and conditions of the Class 13 Plan Notes:

 

   

on November 17, 2010 and on each of the following seven (7) quarterly anniversaries thereof (each, a “Class 13 Automatic Conversion Date”), provided that the average of the trading price of our common stock (as determined in accordance with the Class 13 Plan Notes and the Plan) for the ten (10) consecutive trading days ending on the trading day that is immediately preceding the then applicable Class 13 Automatic Conversion Date (the “Class 13 Automatic Conversion Price”) is at least $1.00 per share, one-eighth ( 1/8th) of the original balance of the Class 13 Plan Notes (the “Class 13 Automatic Conversion Amount”) will be automatically converted into shares of our common stock at a conversion rate equal to the Class 13 Automatic Conversion Price per share;

 

   

if, on any Class 13 Automatic Conversion Date, the Class 13 Automatic Conversion Price is less than $1.00 per share and therefore the automatic conversion described above does not occur, a holder of Class 13 Plan Notes may elect to convert the Class 13 Automatic Conversion Amount into shares of our common stock at a conversion rate equal to $1.00 per share;

 

   

any principal amount outstanding under the Class 13 Plan Notes at the Class 13 Plan Notes Maturity Date will be due and payable in full, at our election, in either cash or shares of our common stock at a conversion rate equal to the greater of the average of the trading price of our common stock (as determined in accordance with the Class 13 Plan Notes and the Plan) for the ten (10) consecutive trading days ending on the trading day that is immediately preceding the Class 13 Plan Notes Maturity Date or $1.00;

 

   

if, at any time during the term of the Class 13 Plan Notes, the trading price of our common stock (as determined in accordance with the Class 13 Plan Notes and the Plan) is at least 125% of $1.25 per share for ten (10) consecutive trading days, a holder of Class 13 Plan Notes, at its option, may convert any or all of the then outstanding principal balance of its Class 13 Plan Notes into shares of our common stock at a conversion rate equal to the Class 13 Automatic Conversion Price used for the initial conversion on November 17, 2010; and

 

   

if, at any time during the term of the Class 13 Plan Notes, the trading price of our common stock (as determined in accordance with the Class 13 Plan Notes and the Plan) is at least 150% of $1.25 per share for thirty (30) consecutive trading days, at our option, we may require the conversion of all or any portion of the then aggregate outstanding principal balance of the Class 13 Plan Notes at a conversion rate equal to the Class 13 Automatic Conversion Price used for the initial conversion on November 17, 2010.

As of June 30, 2011, the aggregate outstanding principal amount of the Class 13 Plan Notes was approximately $4.0 million.

On the Effective Date, we also executed and delivered warrants (the “Class 13 Plan Warrants”) to purchase up to 1,072,840 shares of our common stock. The Class 13 Plan Warrants (a) have an exercise price of $1.50 per share and a term of three (3) years from November 17, 2010, (b) can only be exercised for cash (no cashless exercise), and (c) are subject to certain call provisions set forth in the Class 13 Plan Warrants and the Plan.

 

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June 2008 Debentures and Warrants (Class 6)

On the Effective Date, we issued in satisfaction of the secured debentures dated June 17, 2008 outstanding prior to the Effective Date, new debentures (the “Class 6 Plan Debentures”) in the original principal amount of $9,730,459. The Class 6 Plan Debentures mature on November 17, 2013, and the outstanding principal together with all accrued but unpaid interest is due in cash on such date.

The following are the material terms and conditions of the Class 6 Plan Debentures:

 

   

interest accrues and is payable on the outstanding principal under the Class 6 Plan Debentures at a fixed rate of eight and one-half percent (8.50%) per annum and each of the Class 6 Plan Debentures is secured by a lien on certain of our assets;

 

   

at the option of a holder of Class 6 Plan Debentures, such holder may elect to convert all of the then outstanding balance of its Class 6 Plan Debentures into shares of our common stock at a conversion rate equal to $1.10 per share of our common stock; and

 

   

commencing on May 15, 2011, if the trading price of our common stock (as determined in accordance with the Class 6 Plan Debentures and the Plan) is at least 150% of $1.10 per share for any ten (10) consecutive trading days, at our option, we may convert the then outstanding balance of all of the Class 6 Plan Debentures into shares of our common stock at a conversion rate equal to $1.10 per share of our common stock.

On the Effective Date, we also executed and delivered warrants (the “Class 6 Plan Warrants”) to purchase up to 2,979,496 shares of our common stock. The Class 6 Plan Warrants (a) have an exercise price of $1.50 per share and an expiration date of November 17, 2013, (b) can only be exercised for cash (no cashless exercise), and (c) are subject to certain call provisions set forth in the Class 6 Plan Warrants and the Plan.

During the period ended June 30, 2011, $2,870,871 in Class 6 Plan Debentures were converted into our common stock at a conversion price equal to $1.10 per share, resulting in the issuance of 2,772,548 shares of our common stock. As of June 30, 2011, the aggregate outstanding principal amount of the Class 6 Plan Debentures was approximately $6.9 million.

Accentia Class 10 Plan Distributions

On the Effective Date, we became obligated to pay approximately $2.4 million in cash, on March 17, 2014, to unsecured creditors holding Class 10 claims under the Plan (the “Class 10 Plan Distributions”).

The Class 10 Plan Distributions mature on March 17, 2014, and the outstanding principal together with all accrued but unpaid interest is due on such date. Interest accrues and is payable on the outstanding principal amount under the Class 10 Plan Distributions at a fixed rate of five percent (5%) per annum.

Unsecured creditors holding an aggregate of $3,287,695 in Class 10 claims elected to convert those Class 10 claims into our common stock valued at the average market price for our common stock over the ten trading days preceding the Effective Date. On the Effective Date, we issued 2,417,431 shares of our common stock to these Class 10 unsecured creditors at a conversion price equal to $1.36 per share.

As of June 30, 2011, the aggregate outstanding principal amount of the Class 10 Plan Distributions was approximately $2.2 million.

Accentia Demand Promissory Notes:

On the Biovest Effective Date and under the Biovest Plan, our entire pre-petition claim due from Biovest in the amount of $13,444,290 was converted into shares of Biovest common stock at a conversion rate equal to $0.75 per share, resulting in the issuance to us of 17,925,720 shares of Biovest common stock.

Biovest Class 8 Option A Obligations

On the Biovest Effective Date and under the Biovest Plan, Biovest became obligated to pay to the Biovest unsecured creditors approximately $2.7 million in cash together with interest at five percent (5%) per annum to be paid in one installment on March 17, 2014 (the “Option A Obligations”). These unsecured claims include, but are not limited to the Pulaski Bank notes, the Southwest Bank note, and the guarantor indemnities. As of June 30, 2011, the aggregate outstanding principal amount of the Option A Obligations as issued on the Effective Date has remained unchanged.

 

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Biovest Class 8 Option C Promissory Notes

On the Biovest Effective Date and under the Biovest Plan, Biovest became obligated to certain of its unsecured creditors in the principal amount of approximately $2.0 million. Each such unsecured creditor received an amount equal to 100% of such unsecured creditor’s allowed Class 8 unsecured claim (including post-petition interest under the Biovest Plan at a rate of three percent (3%) per annum) in combination of debt and equity resulting in the issuance of a total of $1.8 million in new notes (the “Option C Notes”), as well as 0.2 million shares of Biovest common stock, using an effective conversion rate equal to $1.66 per share. The Option C Notes bear interest at seven percent (7%) and are convertible into shares of Biovest common stock in seven quarterly installments beginning on February 17, 2011 as follows:

 

   

provided that the average of the volume weighted average prices for shares of Biovest common stock for the ten consecutive trading days immediately preceding each quarterly conversion date (“Ten Day VWAP”) is at least $1.00 per share, one-eighth (1/8th) of the Option C Notes plus accrued interest will be automatically converted into shares of Biovest common stock at a conversion rate equal to the Ten Day VWAP;

 

   

if the Ten Day VWAP is less than $1.00 per share, the Option C Notes will not automatically convert into shares of Biovest common stock, but will instead become payable at maturity (August 17, 2012), unless an Option C Notes holder elects to convert one-eighth (1/8th) of its Option C Notes plus accrued interest into shares of Biovest common stock at a conversion rate equal to $1.00 per share;

 

   

any portion of the Option C Notes and any Option C interest that are outstanding at maturity (August 17, 2012) will be due and payable in full, at Biovest’s election, in either cash or in shares of Biovest common stock at a conversion rate equal to the Ten Day VWAP;

 

   

if, at any time prior to August 17, 2012, the Ten Day VWAP is at least $1.50 per share, an Option C Note holder, at its option, may convert any or all of its Option C Notes, plus the then accrued and unpaid interest into shares of Biovest common stock at a conversion rate equal to the Ten Day VWAP used for the initial conversion on the Biovest Effective Date ($1.66 per share); and

 

   

if, at any time prior to August 17, 2012, the volume weighted average price for Biovest common stock is at least $1.88 per share for thirty (30) consecutive trading days, Biovest, at its option, may require the conversion of the then aggregate outstanding balance of the Option C Notes plus the then accrued and unpaid Option C interest at a conversion rate equal to the Ten Day VWAP used for the initial conversion on the Biovest Effective Date ($1.66 per share).

On February 17, 2011 and again on May 17, 2011, with the Ten Day VWAP of Biovest’s stock at less than $1.00 per share, the Option C Notes holder elected to convert one-eighth of the Option C Notes plus accrued interest into shares of Biovest common stock at a conversion rate equal to $1.00 per share, resulting in the issuance of an aggregate of 635,028 shares of Biovest common stock. As of June 30, 2011, the aggregate outstanding principal amount of the Option C Notes was approximately $1.3 million.

April 2006 NMTC Transaction

Biovest and certain of its affiliates entered into an agreement in July 2010 (the “Worcester Restructuring Agreement”) with Telesis CDE Corporation and Telesis CDE Two, LLC (collectively, “Telesis”), contingent upon submission to and approval by the Bankruptcy Court. The Worcester Restructuring Agreement effectively terminates all agreements and obligations of all parties pursuant to the April 2006 New Market Tax Credit transaction (the “April 2006 NMTC Transaction”), in consideration of retention by Telesis of an unsecured claim in Biovest’s Chapter 11 proceeding in the amount of $0.3 million along with a settlement payment in the amount of $85,000 to defray certain legal and administrative expenses incurred by Telesis. The Worcester Restructuring Agreement and the compromise of the outstanding claims against Biovest and its affiliates in connection with the April 2006 NMTC Transaction was approved by the Bankruptcy Court in an Order entered on December 1, 2010. As a result, our guaranty, Biovest’s guaranty, all of Biovest’s subsidiary guaranties from affiliates and third parties, and all other obligations of all parties to the April 2006 NMTC Transaction were terminated. Biovest has ceased all activities under the April 2006 NMTC Transaction and Biovest has liquidated the subsidiaries created specifically to conduct activities under the April 2006 NMTC transaction.

 

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December 2006 NMTC Transaction

Biovest and certain of its affiliates entered into an agreement in July 2010 (the “St. Louis Restructuring Agreement”) with St. Louis Development Corporation and Saint Louis New Markets Tax Credit Fund II, LLC (collectively “SLDC”), contingent upon submission to and approval by the Bankruptcy Court. The St. Louis Restructuring Agreement effectively terminates all agreements and obligations of all parties pursuant to the December 2006 New Market Tax Credit transaction (the “December 2006 NMTC Transaction”), in consideration of retention by SLDC of an unsecured claim in Biovest’s Chapter 11 proceeding in the amount of $160,000 along with a settlement payment in the amount of $62,000 to defray certain legal and administrative expenses incurred by SLDC. This St. Louis Restructuring Agreement and the compromise of the outstanding claims against Biovest in connection with the December 2006 NMTC Transaction was approved by the Bankruptcy Court in an Order entered on December 1, 2010. As a result, our guaranty, Biovest’s guaranty, all of the subsidiary guaranties from affiliates and third parties, and all other obligations of all parties to the December 2006 NMTC Transaction were terminated. Biovest has ceased all activities under the December 2006 NMTC Transaction and Biovest has liquidated the subsidiaries created specifically to conduct activities under the December 2006 NMTC Transaction.

Minneapolis, Minnesota Facility Lease

On December 2, 2010, Biovest entered into a lease agreement with JMS Holdings, LLC (the “Landlord”) for continued use and occupancy of its existing facility in Minneapolis, Minnesota. The lease contains provisions regarding a strategic collaboration whereby the Landlord has agreed to construct certain improvements to the leased premises to allow Biovest to perform GMP manufacturing of biologic products in the Minneapolis facility, including the manufacture of BiovaxID. Over $1.5 million in facility improvements were at or near completion as of June 30, 2011. These improvements have been financed by Biovest through a combination of cash on hand (approximately $0.175 million), promissory notes from the City of Coon Rapids, Minnesota and the State of Minnesota for the aggregate amount of $0.353 million, and an increase to the base rent charged in order to recoup the costs of construction incurred by the Landlord (approximately $1.0 million) over the initial term of the lease (ten years).

Minnesota Promissory Notes

On May 6, 2011, Biovest closed two financing transactions with the Economic Development Authority for the City of Coon Rapids and the Minnesota Investment Fund, which provide capital to help add workers and retain high-quality jobs in the State of Minnesota. Biovest issued two secured promissory notes in the aggregate amount of $0.353 million, which amortize over 240 months, with a balloon payment of $0.199 million due on May 1, 2021. The notes bear interest as follows, yielding an effective interest rate of 4.1%:

 

   

Months 1-60 at 2.5% interest,

 

   

Months 61-80 at 5.0% interest,

 

   

Months 81-100 at 7.0% interest, and

 

   

Months 101-120 at 9.0% interest.

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

Cash Flows for the Nine Months Ended June 30, 2011

For the nine months ended June 30, 2011, our operating activities before reorganization items had a positive cash flow of approximately $8.7 million. The use for operating activities included a net loss of $12.2 million, primarily offset by stock compensation of $16.0 million, accretion of debt discounts of $1.4 million, issuance of common stock warrants for finance costs of $1.2 million, and an increase in accrued expenses of $2.1 million. Our gain on reorganization was $12.8 million.

We had an approximately $0.7 million cash outflow from investing activities for the nine months ended June 30, 2011 for the acquisition of furniture, equipment, and leasehold improvements, primarily in Biovest’s Minnesota facility.

We had net cash flows from financing activities of approximately $5.9 million for the nine months ended June 30, 2011, including proceeds from long-term convertible debt of $7.4 million, proceeds from notes payable, related party of $1.3 million, and payments of long-term debt of $1.6 million.

 

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not Applicable.

ITEM 4. CONTROLS AND PROCEDURES

Under the supervision and with the participation of our management, including our chief executive officer (principal executive officer) and our acting 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 (principal executive officer) and our acting chief financial officer (principal financial officer) concluded that our disclosure controls and procedures were effective as of the end of the period covered by this 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 SEC’s rules and forms. These disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed by us in the reports we file or submit is accumulated and communicated our management, including our chief executive officer (principal executive officer) and our acting chief financial officer (principal financial officer), as appropriate to allow timely decisions regarding required disclosure.

There have been no changes in our internal controls over financial reporting identified in connection with this evaluation that occurred during the quarter ended June 30, 2011 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART  II. OTHER INFORMATION

ITEM  1. LEGAL PROCEEDINGS

Bankruptcy proceedings:

On November 10, 2008, we, along with our subsidiaries, filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code (“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 the First Modification to the First Amended Joint Plan of Reorganization (collectively and as amended and supplemented, the “Plan”). On November 2, 2010, the Bankruptcy Court entered an Order Confirming Debtors’ First Amended Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy Code (the “Confirmation Order”). We emerged from Chapter 11 protection, and the Plan became effective, on November 17, 2010 (the “Effective Date”).

Notwithstanding the effectiveness of our Plan, the Bankruptcy Court retains jurisdiction to adjudicate any remaining issues regarding, inter alia, the validity, amount, and method of payment of claims filed in connection with our Chapter 11 proceeding. Accordingly, we anticipate that there may be ongoing proceedings before the Bankruptcy Court to resolve any filed objections or disputes as to claims filed in the Chapter 11 proceeding.

Biovest litigation:

On August 4, 2008, Biovest was served with a summons and complaint filed in California Superior Court on behalf of Clinstar LLC for breach of contract for non-payment of certain fees for clinical trial studies and pass-through expenses in the amount of $385,000. Biovest intends to seek the dismissal of this litigation and plans to defend these claims vigorously. Upon the filing of Biovest’s Chapter 11 petition on November 10, 2008, this litigation was automatically stayed pursuant to provisions of federal bankruptcy law. Biovest anticipates that the claims involved in this litigation will be contested and resolved by the Bankruptcy Court as part of an objection to claim which Biovest expects to file shortly.

Other proceedings:

Further, from time to time we are subject to various legal proceedings in the normal course of business, some of which are covered by insurance.

ITEM 1A. RISK FACTORS

There have been no material changes from the risk factors disclosed in Item 1A of Part I of our Annual Report on Form 10-K for the year ended September 30, 2010.

 

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

During the period covered by this Quarterly Report on Form 10-Q, we issued the following securities, which were not registered under the Securities Act of 1933, as amended (the “Securities Act”):

 

  1. During the three months ended June 30, 2011, pursuant to our Plan (with an Effective Date of November 17, 2010) and Section 1145 of the United States Bankruptcy Code, we issued 1,420,791 shares of our common stock in satisfaction of allowed claims under our Plan to members of Classes 3, 9 and 13, with conversion prices ranging from $0.54 to $1.00 per share.

 

  2. During the three months ended June 30, 2011, we issued a common stock purchase warrant that entitles Corps Real to purchase up to 5,882,353 shares of our common stock with an exercise price of $0.47 per share. The warrant was issued pursuant to the convertible debt financing transaction with Corps Real, which provided for aggregate loans to us in the maximum amount of $4.0 million.

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

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

No underwriters were employed in any of the above transactions.

ITEM  3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.(Removed and Reserved)

ITEM  5. OTHER INFORMATION

None.

 

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ITEM 6. EXHIBITS

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

 

Number

   

Description of Document

  10.1      Plan Convertible Promissory Note, dated November 17, 2010, between Accentia Biopharmaceuticals, Inc. and Dennis Ryll.
  10.2      Stock Pledge Agreement, dated November 17, 2010, between Accentia Biopharmaceuticals, Inc. and Dennis Ryll.
  10.3      Secured Promissory Note, dated June 13, 2011, in the original principal amount of $4,000,000 payable by Accentia Biopharmaceuticals, Inc. to Corps Real, LLC (incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K filed on June 14, 2011).
  10.4      Common Stock Purchase Warrant, dated June 13, 2011, issued by Accentia Biopharmaceuticals, Inc. to Corps Real, LLC (incorporated herein by reference to Exhibit 10.2 to the Company’s Form 8-K filed on June 14, 2011).
  10.5      Security Agreement, dated June 13, 2011, by Accentia Biopharmaceuticals, Inc. in favor of Corps Real, LLC (incorporated herein by reference to Exhibit 10.3 to the Company’s Form 8-K filed on June 14, 2011).
  10.6      Escrow Agreement, dated June 13, 2011 among Accentia Biopharmaceuticals, Inc., Corps Real, LLC, and Escrow Agent thereto (incorporated herein by reference to Exhibit 10.4 to the Company’s Form 8-K filed on June 14, 2011).
  31.1      Rule 13a-14(a)/15d-14(a) Certifications of Chief Executive Officer.
  31.2      Rule 13a-14(a)/15d-14(a) Certifications of Chief Financial Officer.
  32.1      18 U.S.C. Section 1350 Certifications of Chief Executive Officer.
  32.2      18 U.S.C. Section 1350 Certifications of Chief Financial Officer.
  101 **+    The following financial information from Accentia Biopharmaceuticals, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets as of June 30, 2011 and September 30, 2010, (ii) Condensed Consolidated Statements of Operations for the three and nine months ended June 30, 2011 and 2010, (iii) Condensed Consolidated Statements of Stockholders’ Deficit for the nine months ended June 30, 2011, (iv) Condensed Consolidated Statements of Cash Flows for the nine months ended June 30, 2011 and 2010, and (v) the Notes to Condensed Consolidated Financial Statements.

 

** Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise are not subject to liability under these sections.

 

+ Submitted electronically with this Quarterly Report

 

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SIGNATURES

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

 

 

ACCENTIA BIOPHARMCEUTICALS, INC.

(Registrant)

Date: August 12, 2011  

/s/ Francis E. O’Donnell, Jr.

  Francis E. O’Donnell, Jr., M.D.
  Chief Executive Officer; Chairman of the Board; Director
  (Principal Executive Officer)
Date: August 12, 2011  

/s/ Garrison J. Hasara

  Garrison J. Hasara, CPA
  Acting Chief Financial Officer; Controller
  (Principal Financial Officer and Principal Accounting Officer)

 

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