When you read this section of this Annual Report on Form 10-K, it is important that you also read the financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This section of this Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations, and intentions. We use words such as "anticipate," "estimate," "plan," "project," "continuing," "ongoing," "expect," "believe," "intend," "may," "will," "should," "could," and similar expressions to identify forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including the matters discussed under the caption "Item 1A. Risk Factors" in this Annual Report on Form 10-K for the fiscal year ended
September 30, 2013and other risks and uncertainties discussed in our other filings with the Securities and Exchange Commission. Biovestis a biotechnology company focused on developing and commercializing BiovaxID, as a personalized therapeutic cancer vaccine for the treatment of B-cell blood cancers; the continued development, commercialization, manufacture and sale of AutovaxIDฎ and other instruments and disposables; and the commercial sale and production of cell culture products and services. We were incorporated in Minnesotain 1981, under the name Endotronics, Inc.In 1993, our name was changed to Cellex Biosciences, Inc.In 2001, we changed our corporate name to Biovest International, Inc.and changed our state of incorporation from Minnesotato Delaware. As a result of our collaboration with the National Cancer Institute("NCI"), we are developing BiovaxID as a personalized therapeutic cancer vaccine for the treatment of non-Hodgkin's lymphoma ("NHL"), a B-cell cancer, specifically, follicular lymphoma ("FL") and mantle cell lymphoma ("MCL"), and potentially other B-cell cancers. Both FL and MCL are generally considered to be incurable with currently approved therapies. These generally fatal diseases arise from the lymphoid tissue and are characterized by an uncontrolled proliferation and spread throughout the body of mature B-cells, which are a type of white blood cell. Three clinical trials conducted under our investigational new drug application ("IND") have studied BiovaxID in NHL. These studies include a Phase 2 clinical trial and a Phase 3 clinical trial in patients with FL, as well as a Phase 2 clinical trial in patients with MCL. We believe that these clinical trials demonstrate the safety and efficacy of BiovaxID. Based on our scientific advice meetings with multiple European Union("EU")-Member national medicines agencies, on June 13, 2012, we filed our formal notice of intent to file a marketing authorization application ("MAA") with the European Medicines Agency("EMA"), which began the EU marketing approval application process. Subsequently, on December 3, 2013, we submitted an MAA with the EMA for BiovaxID. Additionally, based on a scientific advice meeting conducted with Health Canada, we announced plans to file a new drug submission application ("NDS") seeking regulatory approval in Canada. We also conducted a formal guidance meeting with the U.S. Food and Drug Administration("FDA") in order to discuss the path for our filing of a biologics licensing application ("BLA") for BiovaxID's U.S. regulatory/marketing approval. As a result of this guidance meeting, we plan to conduct a second Phase 3 clinical trial to complete the clinical data gained through our first Phase 3 clinical trial and our BiovaxID development program to support the filing of our BLA for BiovaxID. We are preparingto initiate this second Phase 3 clinical trial, subject to availability of funding. To support our planned commercialization of BiovaxID and to support the products of personalized medicine and particularly patient specific oncology products, we developed and commercialized a fully automated, reusable instrument that employs a fully disposable, closed-system cell-growth chamber incorporating a hollow fiber cell-growth cartridge called AutovaxID. Since it is fully enclosed, computer controlled and automated, AutovaxID requires limited supervision and manpower to operate, compared to manual instruments. AutovaxID is suitable for growing antibody-secreting cell lines, including hybridomas and Chinese hamster ovary ("CHO") cells, which are among the leading kinds of cell lines used for commercial therapeutic protein manufacture. AutovaxID has a small footprint and supports scalable production. We plan to utilize the AutovaxID technology to streamline the commercial manufacture of BiovaxID. We believe that AutovaxID is the first cell culture system that enables production of personalized cell-based treatments economically. AutovaxID uses a disposable production unit which provides for robust and dependable manufacturing while complying with the industry current good manufacturing practices ("cGMP") standards. We are collaborating with the U.S. Department of Defense("DoD") and others to further develop AutovaxID and related hollow fiber systems and to explore potential production of additional vaccines, including vaccines for viral indications such as influenza and other contagious diseases. 62 -------------------------------------------------------------------------------- We also manufacture instruments and disposables used in the hollow fiber production of cell culture products. We manufacture mammalian cell culture products such as whole cells, recombinant and secreted proteins, and monoclonal antibodies for third parties, primarily researchers. We have produced over 7,000 cell based products for an estimated 2,500 researchers around the world. We consider our vast experience in manufacturing small batches of different cell based products, together with our expertise in designing and manufacturing instruments for personalized medicines as important competencies supporting our development of patient specific immunotherapies.
April 2003, we entered into an investment agreement with Accentia Biopharmaceuticals, Inc. ("Accentia"). As a result of this agreement, in June 2003, we became a subsidiary of Accentia through the sale of shares of our authorized but unissued common and preferred stock representing approximately 81% of our equity outstanding immediately after the investment. The aggregate investment commitment initially received from Accentia was $20 million. Following Accentia's investment, we continued to be a reporting company under Section 12(g) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and we filed periodic and other reports with the Securities and Exchange Commission("SEC"). On July 9, 2013, as a result of the 2013 Bankruptcy case (discussed below), Accentia retains no equity ownership or debt interest in Biovestand all Biovestcommon stock previously issued and outstanding was cancelled. In accordance with the Plan, we issued new common stock as of July 9, 2013(the "Effective Date") to secured and unsecured creditors with allowed claims in our 2013 Bankruptcy Case.
The 2013 Bankruptcy Case:
March 6, 2013(the "Petition Date"), as a result of our inability to pay approximately $30 millionin secured debt which had become due on November 17, 2012, we filed a voluntary petition to reorganize under Chapter 11 of the Bankruptcy Code, Case No.8:13-bk-2892-KRM, with the Bankruptcy Court("the 2013 Bankruptcy Case"). During the pendency of the Chapter 11 proceedings, we operated our business as a debtor-in-possession in accordance with the provisions of Chapter 11, and were subject to the jurisdiction of the bankruptcy court. On June 10, 2013, the Company filed its First Modification to the First Amended Plan of Reorganization (the "Plan") with the support of its senior, secured lenders. The Plan provided for, among other things, the cancellation of all outstanding common stock, options and warrants in Biovest. In addition, the Plan provided for the conversion of virtually all pre-petition debt into new common stock of the reorganized Company ('Reorganized Biovest Common Stock") as follows: (i) all outstanding indebtedness due to our senior secured lenders, totaling in excess of $41.0 million, would be converted into new equity representing ninety three percent (93%) of the newly issued Reorganized Biovest Common Stock and; (ii) approximately $5.4 millionof unsecured indebtedness outstanding under our prepetition unsecured debt obligations would be converted and exchanged for new equity representing seven percent (7%) of the newly issued Reorganized Biovest Common Stock. On June 27, 2013an evidentiary hearing was held to determine the validity of an unsecured claim filed by Accentia, our former majority shareholder and parent corporation. We had originally classified our intercompany obligation due to Accentia as a "debt subject to compromise" through our Chapter 11 proceeding and in the course of our Chapter 11 proceeding, Accentia timely filed an initial Proof of Claim for $5.0 millionand later an Amended Proof of Claim in the amount of approximately $6.5 million. The Official Committee of UnsecuredCreditors (the "Creditors Committee") filed an objection to the Accentia Claim, and after the June 27thhearing the court upheld the objection of the Creditors Committee and denied the Accentia Claim in its entirety, ruling that Accentia's claim be stricken and that Accentia would have no continued claim in our 2013 Bankruptcy Case. On June 28, 2013, the court entered an order confirming the Plan (the "Confirmation Order"). The Plan became effective on July 9, 2013(the "Effective Date"). The following is a summary of the material terms of the Plan as confirmed. This summary highlights only certain substantive provisions of the Plan and is not intended to be a complete description of the Plan.
Equity Interests and New Capital Structure
Common shares, options, and warrants or other rights to purchase or acquire common shares which existed prior to Effective Date were cancelled as of the Effective Date without further liability, payment or compensation in respect thereof. We amended and restated our Certificate of Incorporation to authorize the issuance of up to 50,000,000 shares of preferred stock and up to 300,000,000 shares of Reorganized Biovest Common Stock. Pursuant to the Plan, we issued 100,000,000 shares of Reorganized Biovest Common Stock as follows: ท to the holders of allowed secured claims - 93 million shares ท to the holders of allowed unsecured claims - 7 million shares
Administrative expenses consist primarily of legal fees incurred in connection with the 2013 Bankruptcy Case as well as a rent cure claim for past amounts due under the lease for our manufacturing facility located in
Minneapolis, Minnesota. The majority of the legal fees as well as the rent cure claim were paid, in cash, shortly after the Effective Date. A portion of the legal fees (approximately $0.18 million) will remain accrued and become due, in cash, at later dates, but no later than March 31, 2014. 63 -------------------------------------------------------------------------------- Priority Claims Priority Claims consist of pre-petition wages due to our employees in the approximate amount of $0.12 million. Priority wage claims were paid, in cash, shortly after the Effective Date.
DIP Financing Claims
During our reorganization proceedings, the court approved a
$5.7 millionpost-petition line of credit facility (the "DIP Financing") from Corps Real, LLC("Corps Real"), Laurus Master Fund Ltd., Calliope Corporation, Valens U.S. SPV I, LLC, Psource Structured Debt Limited, Valens Offshore SPV II, Corp, and Valens Offshore SPV I, Ltd, acting collectively through their agent, LV Administrative Services, Inc.(collectively, the "LV Entities"). The LV Entities and Corps Real represent the Company's pre-petition senior secured lenders (the "Senior Secured Lenders") originally secured by a security interest in and lien on all of our assets. Pursuant to the terms of the Plan, the DIP Financing claims were deemed fully paid and any liens and security interests granted in favor of Corps Real and the LV Entities under the DIP Financing documents were released and terminated. As a result of the Plan, the Senior Secured Lenders are no longer creditors of Biovest, but instead major shareholders of the Company, holding 93% of the Reorganized Biovest Common Stock. Furthermore, as of Effective Date, approximately $2.6 millionremained available under the DIP Financing for working capital without payment of any further consideration by Biovest. From the period following the Effective Date through September 30, 2013, Biovestdrew down approximately $1.9 millionof the $2.6 millionremaining. These draws were recorded as in increase to additional paid in capital on the Successor Company(as defined below) balance sheet as of September 30, 2013and are shown as "additional investment from shareholders" on the Successor Company Cash Flow Statement and Statement of Stockholders' Equity.
In addition to the DIP Financing claims discussed above, the allowed secured claims in our reorganization proceeding consisted of the following:
ท The Corps Real Claims (approximately
Corps Real Claims were exchanged for approximately 26 million shares of
Reorganized Biovest Common Stock, representing approximately 26% of the total
issued and outstanding shares of Reorganized Biovest Common Stock as of
effective date, in full and final satisfaction of all allowed Corps Real
ท The LV Entities Claims (approximately
the LV Entities Claims were exchanged for approximately 67 million shares of
Reorganized Biovest Common Stock, representing approximately 67% of the total
issued and outstanding shares of Reorganized Biovest Common Stock as of
effective date, in full and final satisfaction of all allowed LV Entities
ท The Minnesota Promissory Notes (approximately
Date, the obligations due under the Minnesota Promissory Notes were
principal and interest payments due during the reorganization
proceedings. Following the Effective Date, Reorganized Biovest resumed its
obligations under the original terms of Minnesota Promissory Note documents.
The allowed unsecured claims in our reorganization proceedings totaled approximately
$1.4 million(including interest) ท The March 2014Obligations (see Sources of Liquidity below) totaling approximately $3.3 million(including interest)
ท Other accrued pre-petition liabilities totaling approximately
On the Effective Date, the holders of allowed unsecured claims were entitled to seven million shares of Reorganized Biovest Common Stock, representing 7% of the total issued and outstanding shares of Reorganized Biovest Common Stock as of the Effective Date in full and final satisfaction of all allowed unsecured claims. Each holder of an allowed unsecured claim received a pro-rata share of the seven million shares available to all allowed unsecured claims. 64 --------------------------------------------------------------------------------
Upon the Effective Date of our Plan for Reorganization, we were required to adopt fresh-start reporting in accordance with Accounting Standards Codification No. 852 - Reorganization. We elected to apply fresh-start accounting on a convenience date of
July 1, 2013(the "Convenience Date") after concluding that operating results between the Effective Date and the Convenience Date did not result in a material difference. Material adjustments resulting from the reorganization and the application of fresh-start reporting have therefore been reflected in the September 30, 2013consolidated balance sheet as well as the statement of operations for the three months ended September 30, 2013. Given that the adoption of fresh-start reporting resulted in a new entity for financial reporting purposes, Biovestis referred to as the " Predecessor Company" for all periods preceding the Convenience Date, and the " Successor Company" for all periods subsequent to the Convenience Date. See Note 4 - Fresh-Start Reporting in the notes to the Consolidated Financial Statements for further details. Results of Operations
For comparative purposes, we have combined the results of the
Predecessor Companyand the Successor Companyfor the year ended September 30, 2013. Where specific income statement items have been impacted significantly as compared to our historical results by the reorganization plan or by the adjustments required by the fresh-start reporting process, we have provided explanations of such in the discussion. Revenue. Total revenues for the year ended September 30, 2013were $4.1 million, compared to $3.9 millionfor the year ended September 30, 2012. While revenue from cell culture contract services increased considerably year over year (by $0.76 millionor 90%), this was offset, in part, by a decrease in instrument and disposable revenues (a decrease of $0.58 millionor 20%). The increase in cell culture contract services revenue was due primarily to one project for $0.6 millionthat was completed, start to finish, during fiscal 2013. While we completed approximately the same number of cell culture contracts in the prior fiscal year, they were smaller jobs in comparison, with no single contract in excess of $0.25 million. As discussed, instrument and disposable revenue decreased by $0.58 millionwhen compared to the prior year, due to a reduction in the number of hollow fiber cell culture bioreactors sold. While unit sales for our disposable cultureware increased year over year (540 units in the current year, versus 521 units in fiscal 2012), we sold 4 bioreactor systems in the current year, compared to 22 systems for the year ended September 30, 2012. Also included in product revenue for the prior fiscal year is $0.1 millionresulting from a data sharing agreement which required us to share our data set resulting from our Phase 3 clinical trial for BiovaxID. The current year's results do not contain comparable revenue. Gross Margin. The overall gross margin as a percentage of sales for the year ended September 30, 2013increased from 29% to 30% when compared to the year ended September 30, 2012. Operating Costs and Expenses. Research and development expenses were relatively unchanged compared to the year ended September 30, 2012. During the current fiscal year we continued our analyses of the available data from our BiovaxID clinical trials and aggregated this data in the form of a Marketing Authorization Application for BiovaxID, which we filed with the European Medicines Agencyon December 3, 2013. These efforts resulted in significant fees for consulting services, travel expenses, wages and cost of laboratory supplies and equipment. General and Administrative Expenses. General and administrative expenses have decreased by $2.1 millionwhen compared to the prior fiscal year. For the year ended September 30, 2012, non-cash stock compensation expense aggregated to $2.6 million. As a result of our plan of reorganization, all incentive stock options issued to our employees prior to the Effective Date were cancelled, thus no further expense relating to these options will be recorded on the Successor Company. Prior to the cancellation of these options, we recognized $0.08 millionin stock compensation expense on the Predecessor Companyfor the nine month period ending June 30, 2013. Furthermore, as part of our restructuring, we reduced administrative overhead through a reduction in our administrative workforce as well as through the rejection of our lease for administrative office space located in Tampa, FL.During the current year, we entered into a new lease for office space in Tampa, FLat a significantly reduced rate. Other Expense. Other expense for the years ended September 30, 2013and 2012 includes contractual interest charges and amortization of discounts in connection with the Laurus/Valens Term A and Term B Notes, the Corps Real Note, the Exit Financing, the Accentia promissory demand note, and other long term notes issued to our unsecured creditors as a result of the Plan, as described below. As a result of our restructuring, our pre-petition debt was either disallowed through the bankruptcy proceedings, or converted to shares of Reorganized Biovest Common Stock pursuant to our Plan (see the 2013 Bankruptcy Case above). As a result, interest expense on the Successor Companyhas decreased considerably. For the three month period ending September 30, 2013, the Successor Companyhas recorded $6 thousandin interest expense, representing interest which has accrued on the Minnesota Promissory Notes, the obligations of which were affirmed in our reorganization proceedings. Other expense for the Predecessor Companyalso include a gain on derivative liabilities of $0.85 millionfor the nine month period ended June 30, 2013and a gain of $1.14 millionfor the year ended September 30, 2012. These gains resulted from the change in fair value of the secured convertible notes issued in our Exit Financing related to our 2008 Bankruptcy Case, which were convertible into shares of our Predecessor common stock, as well as Predecessor common stock purchase warrants we issued which had contingent exercise provisions. The convertible notes and common stock purchase warrants were required to be recorded at fair value; the values of which varied directly with the trading price of our Predecessor Companyoutstanding common stock. As a result of our Plan, these liabilities were extinguished. 65 --------------------------------------------------------------------------------
Gain on Reorganization. We have recognized gains of
$10.3 millionand $0.2 millionon the Predecessor Companyfor the nine months ended June 30, 2013and the year ended September 30, 2012, respectively, as a result of the settlement of our prepetition claims through our Chapter 11 proceedings. The gains upon reorganization have been presented separately in the consolidated statements of operations and are as follows: Successor Predecessor For the Period For the Period from from October 1, Year Ended July 1 through 2012 through September 30, September 30, 2013 June 30, 2013 2012 Gain on conversion of secured claims to common stock(a) $ - $ 4,530,000- Gain on conversion of unsecured claims to common stock(a) - 853,000 - Gain on disallowance of Accentia intercompany claim - 4,544,000 - Gain on disallowance of other unsecured claims - 360,000 - Gain from previous plan of reorganization(b) - - 222,000 $ - $ 10,287,000 $ 222,000(a) The gains upon conversion to common stock were calculated by charging the carrying value of the Predecessor's pre-petition liabilities against the fair value of Reorganized Biovest Common Shares issued to settle the associated liabilities pursuant to the Plan.
of reorganization (case 8:08-bk-17795-KRM filed on
November 10, 2008, the "2008 Bankruptcy"). Pursuant to the confirmed plan of reorganization resulting from the 2008 Bankruptcy, holders of existing voting shares
immediately before the confirmation received more than 50% of the voting
shares of the emerging entity, thus we did not adopt fresh-start reporting
upon emergence from the 2008 Bankruptcy. We instead followed the guidance as
described in Accounting Standard Codification ("ASC") 852-45-29 for entities
which do not qualify for fresh-start reporting. Liabilities compromised by
the plan were stated at present values of amounts to be paid, and
forgiveness of debt has been reported as an extinguishment of debt resulting
in the gain on reorganization.
$0.07 millionand $1.0 millionwere incurred on the Successor Companyfor the three months ended September 30, 2013and on the Predecessor Companyfor the nine months ended June 30, 2013, respectively, for legal fees and U.S. Trustee fees paid as a result of our Chapter 11 proceedings. On September 30, 2013, the Bankruptcy Courtentered a Final Decree closing our Chapter 11 proceedings. As a result, we anticipate professional fees related to our past reorganization proceeding to be minimal in the future. 66 --------------------------------------------------------------------------------
Liquidity and Capital Resources
Sources of Liquidity
We emerged from reorganization in
July 2013and continue to operate as a going concern. At September 30, 2013, we had cash of $0.7 millionand working capital of $0.8 million. As of September 30, 2013, we had approximately $0.7 millionavailable under the DIP Financing. On December 16, 2013, we entered into a Secured Promissory Note with our Senior Secured Lenders in a maximum principal amount of $3.5 millionhaving a five year maturity. Interest accrues at twelve percent per annum on the outstanding principal amount and is payable on the maturity of the note unless previously prepaid. We intend to draw down upon the note as and when needed to fund the Company's operations and commercialization efforts. We anticipate that the DIP Financing and the Secured Promissory Note will fund the Company's operations and commercialization efforts through the earlier of (a) obtaining significant additional external funding and (b) May, 2014. Through September 30, 2013we have been primarily engaged in developing BiovaxID. In the course of these activities, we have sustained losses and expect such losses to continue through at least 2014. Our ability to fund the additional confirmatory Phase 3 clinical trial required for FDAapproval and to continue our detailed analyses of BiovaxID's clinical trial results is dependent on our ability to obtain significant additional external funding in the near term, which raises substantial doubt about our ability to continue as a going concern. Additional sources of funding have not been established; however, additional financing is currently being sought by the Company through strategic collaborations, recognized research funding programs, domestic and/or foreign licensing of the Company's product candidates and future potential issuances of debt or equity securities. If adequate funds are not available from the foregoing sources in the immediate term, or if we determine it to otherwise be in the Company's best interest, we may be required to delay, reduce the scope of, or eliminate one or more of our research or development programs, sell our assets, or curtail some or all of our commercialization efforts.
During fiscal 2013, we financed our operations primarily through secured promissory notes issued to our Senior Secured Lenders. Below is a summary of these transactions.
Corps Real Financings: On
December 3, 2012, we issued a secured promissory note to Corps Real in the principal amount of $1.5 million(the "Corps Real II Note"). Corps Real is an Illinoislimited liability company, and is principally owned and managed by Ronald E. Osman, the chairman of the Company's Board of Directors. The Corps Real II Note accrued interest at 16% per annum with all interest due at maturity - December 3, 2013and was secured by a first priority lien on all of the Company's assets. On March 5, 2013we issued an additional secured note to Corps Real in the principal amount of $0.3 million(the "Corps Real III Note"). The Corps Real III Note accrued interest at 16% per annum with all interest due at maturity - March 5, 2014and was secured by a first priority lien of all the Company's assets.
As discussed above, during the Company's reorganization proceedings, the
Bankruptcy Courtapproved the DIP Financing, representing a post-petition line of credit facility in the amount of $5.7 millionfrom the Company's Senior Secured Lenders. As of September 30, 2013, the Company had approximately $0.7 millionavailable to draw down under the DIP Financing. As of the Effective Date, amounts due under the DIP Financing were extinguished in return for Reorganized Biovest Common Stock.
Net Cash Flows from Operating Activities
During the three months ended
September 30, 2013, we incurred a net loss of $1.5 million. Due to the fact that virtually all of our debt was either disallowed or converted to shares of Reorganized Biovest Common Stock through the Plan, a number of non-cash adjustments to net income, such as the amortization of discounts on debt, are no longer present on the Successor Companycash flows from operating activities. After adjusting the Successor Companynet loss for items such as depreciation on our property and equipment, as well as the payment of professional fees relating to our reorganization proceedings, which had previously been accrued for on the Predecessor Companyfinancial statements, the net cash deficit from operating activities was $1.4 millionfor the three months ended September 30, 2013. Predecessor Company: For the nine months ended June 30, 2013, we reported net income of $2.5 million, as a result of gains recorded upon the elimination and conversion of our debt pursuant to our Plan. Also included in the net income figure are several other non-cash transactions, described as follows:
Interest charges resulting from amortization of discounts on outstanding debt
in the amount of
An increase of
debt. Adjusting our net income for these and other non-cash items resulted in a net cash deficit from operating activities in the amount of
$4.3 millionfor the nine months ended June 30, 2013.
During the year ended
Interest charges resulting from amortization of discounts on outstanding debt
in the amount of
An increase of
A charge in the amount of
Adjusting our net loss for these and other non-cash items resulted in a net cash deficit from operating activities in the amount of
$4.3 millionfor the year ended September 30, 2012.
Net Cash Flows from Investing Activities
Investing activities for the three months ending
Investing activities for the nine months ended
June 30, 2013and the year ended September 30, 2012were $0.5 millionand $80 thousand, respectively, and consisted of the purchase of laboratory and computer equipment for use in our operations.
Net Cash Flows from Financing Activities
Financing activities for the three months ended
The repayment of principal due under the Minnesota Promissory Notes in the
eight thousand dollars.
The repayment of principal due under capital lease arrangements for laboratory
equipment used in our
Minneapolis, MNfacility in the amount of twelve thousand dollars.
Financing activities for the nine months ended
Advances under the DIP Financing and Corps Real II and III Notes in the amount
The repayment of approximately
payable to our former parent company, Accentia.
The repayment of approximately
term debt. 68
Financing activities for the year ended
Advances (mostly from Accentia) in the amount of
cash to fund operations, allocated inter-company expenses, accrued interest,
and payments directly to third parties on our behalf.
The repayment of approximately
purchase shares of our common stock.
Critical Accounting Policies and Estimates
Our management's discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with the U.S. generally accepted accounting principles ("GAAP"). The preparation of these financial statements requires us to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses and related disclosure of contingent assets and liabilities. We evaluate our estimates, including those related to bad debts, inventories, intangible assets, contingencies and litigation on an ongoing basis. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The accounting policies previously discussed are considered by our management to be critical to an understanding of our consolidated financial statements because their application depends on management's judgment, with financial reporting results relying on estimates and assumptions about the effect of matters that are inherently uncertain. On an ongoing basis, we evaluate our estimates and assumptions. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. For all of these policies, management cautions that future events rarely develop exactly as forecast and that best estimates routinely require adjustment. Accordingly, actual results may differ from our estimates under different assumptions or conditions and could materially impact our financial condition or results of operations. While our significant accounting policies are more fully described in our consolidated financial statements appearing at the end of this Annual Report on Form 10-K, we believe that the following critical accounting policies involve the more significant judgments and estimates used in the preparation of our consolidated financial statements and are the most critical to aid you in fully understanding and evaluating our reported financial results:
Revenues from contract cell production services are recognized using the
percentage-of-completion method, measured by the percentage of contract costs
incurred to date to the estimated total contract costs for each contract.
Because of the inherent uncertainties in estimating costs, it is at least
reasonably possible that the estimates used will change in the near term.
Contract costs related to cell culture production include all direct material,
subcontract and labor costs and those indirect costs related to contract
performance, such as indirect labor, insurance, supplies and tools. We believe
that actual costs incurred in contract cell production services is the best
indicator of the performance of the contractual obligations, because the costs
relate primarily to the amount of labor incurred to perform such services. The
deliverables inherent in each of our cell culture production contracts are not
output driven, but rather are driven by a pre-determined production run. The
duration of our cell culture production contracts range typically from 2 to 14
We maintain provisions for estimated losses resulting from the inability of
our customers to make required payments. If the condition of our customers
were to deteriorate, resulting in an impairment of their ability to make
payments, additional allowances may be required.
Inventories are recorded at the lower of cost or market. Write-downs of
inventories to market value are based upon contractual provisions and
obsolescence, as well as assumptions about future demand and market
conditions. If assumptions about future demand change and/or actual market
conditions are less favorable than those projected by management, additional
write-downs of inventories may be required.
In assessing the recoverability of our amounts recorded as intangible assets,
significant assumptions regarding the estimated future cash flows and other
factors to determine the fair value of the respective assets must be made, as
well as the related estimated useful lives. If these estimates or their
related assumptions change in the future as a result of changes in strategy
and/or market conditions, we may be required to record impairment charges.
We account for stock-based compensation based on ASC Topic 718 - Stock
Compensation, which requires expensing of stock options and other share-based
payments based on the fair value of each option awarded. The fair value of
each option is estimated on the date of grant using the Black-Scholes
valuation model. This model requires management to estimate the expected
volatility, expected dividends, and expected term as inputs to the valuation
The consolidated financial statements represent the consolidation of
wholly-owned companies and interests in joint ventures where we have had a
controlling financial interest or have been determined to be the primary
beneficiary under ASC Topic 810 - Consolidation. All significant inter-company
balances and transactions have been eliminated. We do not use derivative financial instruments to hedge exposures to
cash-flow, market or foreign-currency risks. However, we and our consolidated
subsidiaries have entered into certain other financial instruments and
contracts, such as debt financing arrangements and freestanding warrants with
features that are either (i) not afforded equity classification, (ii) embody
risks not clearly and closely related to host contracts, or (iii) may be net-cash settled by the counterparty. These instruments are required to be carried as derivative liabilities, at fair value.
In selecting the appropriate technique(s) to measure the fair values of our
derivative financial instruments, management considers, among other factors,
the nature of the instrument, the market risks that it embodies and the
expected means of settlement. For less complex derivative instruments, such as
free-standing warrants, we use the Black-Scholes option valuation technique
because it embodies all of the requisite assumptions (including trading
volatility, estimated terms and risk free rates) necessary to calculate the
fair value of these instruments. For forward contracts that contingently
require net-cash settlement as the principal means of settlement, management
projects and discounts future expected cash flows to multiple possible
outcomes. Estimating fair values of derivative financial instruments requires
the development of significant and subjective estimates that may, and are
likely to, change over the duration of the instrument with related changes in
internal and external market factors. In addition, option-based techniques are
highly volatile and sensitive to changes in our trading market price which has
high-historical volatility. Since derivative financial instruments classified
as liabilities are initially and subsequently carried at fair value, our
income will reflect the volatility in these estimate and assumption changes.
Upon implementation of fresh-start accounting, the
values were re-measured and allocated in conformity with ASC 805-20, Business
Combinations. The going concern enterprise value of the
operations for purposes of fresh start accounting was estimated to be
million. Upon implementation of fresh-starting accounting, we allocated the
estimated reorganization value to our various assets and liabilities based on
their estimated fair values and eliminated our deficit and additional
paid-in-capital. The reorganization value was first assigned to tangible and
identifiable intangible assets. The excess of the reorganization value over
and above the identifiable net asset values resulted in goodwill. We also
through this process. See Note 4 to the consolidated financial statements for
further information on fresh-start reporting. As the estimated enterprise
value is dependent on the achievement of future financial results and various
assumptions, there is no assurance that financial results will be realized to
support the estimated enterprise value.
We recognize revenue as follows:
Products. Net sales of cell culture instruments and disposables are recognized in the period in which the risk and rewards of ownership have passed (at point of shipment) to the buyer. We do not provide our customers with a right of return; however, deposits made by customers must be returned to customers in the event of non-performance by us. Actual product returns, chargebacks, and other sales allowances incurred are dependent upon future events and may be different than our estimates. We continually monitor the factors that influence sales allowance estimates and make adjustments to these provisions when management believes that actual product returns, chargebacks, and other sales allowances may differ from established allowances. Services. Service revenue is generated primarily by fixed-price contracts for cell culture production and consulting services. Such revenue is recognized over the contract term in accordance with the percentage-of-completion method based on the percentage of service cost incurred during the period compared to the total estimated service cost to be incurred over the entire contract. The nature and scope of our contracts often require us to make judgments and estimates in recognizing revenues. Estimates of total contract revenues and costs are continuously monitored during the term of the contract, and recorded revenues and costs are subject to revision as each contract progresses. Such revisions may result in increases or decreases to revenues and income and are reflected in the consolidated financial statements in the periods in which they are first identified. Each month, we accumulate costs on each contract and compare them to the total current estimated costs to determine the percentage of completion. We then apply this percentage to the total contract value to determine the amount of revenue that can be recognized. Each month, we review the total current estimated costs on each contract to determine if these estimates are still accurate and, if necessary, we adjust the total estimated costs for each contract. As the work progresses, we might decide that original estimates were incorrect due to, among other things, revisions in the scope of work, and a contract modification might be negotiated with the customer to cover additional costs. If a contract modification is not agreed to, we could bear the risk of cost overruns. Losses on contracts are recognized during the period in which the loss first becomes probable and reasonably estimable. Reimbursements of contract-related costs are included in revenues. An equivalent amount of these reimbursable costs is included in cost of sales. Because of the inherent uncertainties in estimating costs, it is at least reasonably possible that the estimates used will change within the near term. 70
-------------------------------------------------------------------------------- Service costs related to cell culture production include all direct materials and subcontract and labor costs and those indirect costs related to contract performance, such as indirect labor, insurance, supplies, and tools. We believe that actual cost incurred in contract cell production services is the best indicator of the performance of the contractual obligations, because the costs relate primarily to the amount of labor incurred to perform such services. The deliverables inherent in each of our cell culture production contracts are not output driven, but rather are driven by a pre-determined production run. The duration of our cell culture production contracts range typically from two to fourteen months. 71
-------------------------------------------------------------------------------- Service costs relating to our consulting services consist primarily of internal labor expended in the fulfillment of our consulting projects and, to a lesser extent, outsourced research services. Service costs on a specific project may also consist of a combination of both internal labor and outsourced research service. Our consulting projects are priced and performed in phases, and the projects are managed by phase. As part of the contract bidding process, we develop an estimate of the total number of hours of internal labor required to generate each phase of the customer deliverable (for example, a manuscript or database), and the labor cost is then computed by multiplying the hours dedicated to each phase by a standard hourly labor rate. We also determine whether we need services from an outside research or data collection firm and include those estimated outsourced costs in our total contract cost for the phase. At the end of each month, we collect the cumulative total hours worked on each contract and apply a standard labor cost rate to arrive at the total labor cost incurred to date. This amount is divided by the total estimated contract cost to arrive at the percentage of completion, which is then applied to the total estimated contract revenues to determine the revenue to be recognized through the end of the month. Accordingly, as hours are accumulated against a project and the related service costs are incurred, we concurrently fulfill our contract obligations. The duration of our consulting service contracts range typically from 1 to 12 months. Certain other professional service revenues, such as revenues from maintenance services on cell culture equipment, are recognized as the services are performed. In our consolidated financial statements, unbilled receivables represents revenue that is recognizable under the percentage-of-completion method due to the performance of services for which billings have not been generated as of the balance sheet date. In general, amounts become billable pursuant to contractual milestones or in accordance with predetermined payment schedules. Under our consulting services contracts, the customer is required to pay for contract hours worked by us (based on the standard hourly rate used to calculate the contract price) even if the customer cancels the contract and elects not to proceed to completion of the project. Unearned revenues represent customer payments in excess of revenue earned under the percentage-of-completion method. Such payments are made in accordance with predetermined payment schedules set forth in the contract. Valuation of goodwill and intangible assets. Our intangible assets include goodwill and in-process research and development, which are accounted for based on ASC Topic 350 Intangibles-Goodwill and Other. As described below, goodwill and intangible assets that have indefinite useful lives are not amortized but are tested at least annually for impairment or more frequently if events or changes in circumstances indicate that the asset might be impaired. Goodwill is tested for impairment by comparing the carrying amount to the estimated fair value, in accordance with GAAP. Impairment exists if the carrying amount is less than its estimated fair value, resulting in a write-down equal to the difference between the carrying amount and the estimated fair value. The values recorded for goodwill and other intangible assets represent fair values calculated by accepted valuation methods. Such valuations require critical estimates and assumptions derived from and which include, but are not limited to (i) information included in our business plan, (ii) estimated cash flows, (iii) discount rates, (iv) patent expiration information, (vi) terms of license agreements, and (vii) expected timelines and costs to complete any in-process research and development projects to commercialize our product candidates under development. Impairment testing. Our goodwill impairment testing is calculated at the reporting unit level. Our annual impairment test has two steps. The first identifies potential impairments by comparing the fair value of the reporting unit with its carrying value. If the fair value exceeds the carrying amount, goodwill is not impaired and the second step is not necessary. If the carrying value exceeds the fair value, the second step calculates the possible impairment loss by comparing the implied fair value of goodwill with the carrying amount. If the implied fair value of goodwill is less than the carrying amount, a write-down is recorded. In-process research and development ("IPR&D") represent intangible assets related to our development of that were recognized upon adoption of fresh-start accounting on
July 1, 2013. As we have not yet gained regulatory approval for BiovaxID, this asset is evaluated for impairment at least annually or whenever an indication of impairment exists. In the course of the evaluation of the potential impairment of IPR&D, either a qualitative or a quantitative assessment may be performed. If a qualitative evaluation determines that no impairment exists, then no further analysis is performed. If a qualitative evaluation is unable to determine whether impairment has occurred, a quantitative evaluation is performed. We have not recorded any impairment losses as a result of these evaluations. Should we begin generating revenue following regulatory approval of BiovaxID, IPR&D will be amortized as a finite-lived intangible asset over its estimated useful life. 72
-------------------------------------------------------------------------------- We predominately use a discounted cash flow model derived from internal budgets in assessing fair values for our impairment testing. Factors that could change the result of our impairment test include, but are not limited to, different assumptions used to forecast future net sales, expenses, capital expenditures, and working capital requirements used in our cash flow models. In addition, selection of a risk-adjusted discount rate on the estimated undiscounted cash flows is susceptible to future changes in market conditions, and when unfavorable, can adversely affect our original estimates of fair values. In the event that our management determines that the value of intangible assets have become impaired using this approach, we will record an accounting charge for the amount of the impairment. Share-based compensation. We account for stock-based compensation based on ASC Topic 718-Stock Compensation which requires expensing of stock options and other share-based payments based on the fair value of each stock option awarded. The fair value of each stock option is estimated on the date of grant using the Black-Scholes valuation model. This model requires management to estimate the expected volatility, expected dividends, and expected term as inputs to the valuation model. In applying the Black-Scholes options-pricing model for the three month period ending
September 30, 2013( Successor Company), we assumed no dividend yield, a risk-free interest rate of 0.30%, an expected option term of 2.5 years, a volatility factor of 65.5%, and a share price and an exercise price of $0.19.
In applying the Black-Scholes options-pricing model for the nine month period ending
We recorded stock-based compensation of approximately
$32 thousandfor the three months ended September 30, 2013( Successor Company), $77 thousandfor the nine months ended June 30, 2013( Predecessor Company) and $2.6 millionin the year ended September 30, 2012( Predecessor Company). For all periods, stock-based compensation is classified in both general and administrative and research and development expense in the accompanying consolidated statements of operations.
Derivative instruments - Fair value of financial assets and liabilities. We measure the fair value of financial assets and liabilities in accordance with GAAP, which defines fair value, establishes a framework for measuring fair value, and requires certain disclosures about fair value measurements.
GAAP defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. GAAP also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. GAAP describes three levels of inputs that may be used to measure fair value:
Level 1 - quoted prices in active markets for identical assets or liabilities.
Level 2 - quoted prices for similar assets and liabilities in active markets or inputs that are observable.
Level 3 - inputs that are unobservable (for example cash flow modeling inputs based on assumptions).
We generally do not use derivative financial instruments to hedge exposures to cash-flow, market or foreign-currency risks. However, we and our consolidated subsidiaries have entered into certain other financial instruments and contracts, such as debt financing arrangements and freestanding common stock purchase warrants with features that are either (i) not afforded equity classification, (ii) embody risks not clearly and closely related to host contracts, or (iii) may be net-cash settled by the counterparty. These instruments are required to be carried as derivative liabilities, at fair value. We estimate fair values of all derivative instruments, such as free-standing common stock purchase warrants, and embedded conversion features utilizing Level 2 inputs. We use the Black-Scholes option valuation technique because it embodies all of the requisite assumptions (including trading volatility, estimated terms and risk free rates) necessary to fair value these instruments. Estimating fair values of derivative financial instruments requires the development of significant and subjective inputs that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, option-based techniques are highly volatile and sensitive to changes in our trading market price and the trading market price of various peer companies, which have historically had high volatility. Since derivative financial instruments are initially and subsequently carried at fair value, our income will reflect the volatility in these estimate and assumption changes. We reported our derivative liabilities at fair value on the accompanying consolidated balance sheets as of
September 30, 2012. Pursuant to the Plan, all derivative liabilities were cancelled as of the Effective Date. As such, there were no derivative liabilities as of September 30, 2013. 73 -------------------------------------------------------------------------------- Income Taxes. We incurred net operating losses ("NOLs") for the years ended September 30, 2013and 2012, and consequently did not or will not be required to pay federal or foreign income taxes, but we did pay nominal state taxes in several states where we have operations. We have a federal NOL carryover of approximately $104.7 millionas of September 30, 2013, which will expire, beginning in 2020. Under Section 382 and 383 of the Internal Revenue Code, if an ownership occurred change occurs with respect to a "loss corporation", as defined, there are annual limitations on the amount of the NOL and other deductions which are available to us. The portion of the NOLs incurred prior to June 17, 2003( $3.4 million) is subject to this limitation. As such, these NOLs are limited to approximately $0.2 millionper year. NOLs incurred after June 17, 2003may also subject to restriction. Our ability to realize our deferred tax assets depends on our future taxable income as well as the limitations on usage discussed above. For financial reporting purposes, a deferred tax asset must be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized prior to its expiration. Because we believe the realization of our deferred tax assets is uncertain, we have recorded a valuation allowance to fully offset them. Impact of foreign sales. A significant amount of our operating revenue has historically been derived from export sales. While we invoice our customers in U.S. dollars, we will be subject to risks associated with foreign sales, including the difficulty of maintaining cross-cultural distribution relationships, economic or political instability, shipping delays, fluctuations in foreign currency exchange ratios and foreign patent infringement claims, all of which could have a significant impact on our ability to deliver products on a timely and competitive basis. This has not been a significant factor in prior years. In addition, future imposition of, or significant increases in, the level of customs duties, export quotas or other trade restrictions could have an adverse effect on our business. Effects of inflation. Our assets are primarily liquid in nature and are not significantly affected by inflation. However, the rate of inflation affects our expenses, including employee compensation, raw materials and occupancy, which may not be readily recoverable through charges for services provided by us. Funding requirements. We expect to devote substantial resources to further our development and commercialization efforts for our product candidates Our future funding requirements and our ability to raise additional capital will depend on factors that include:
the timing and amount of expense incurred to complete our clinical trials;
the costs and timing of the regulatory process as we seek approval of our
product candidates in development; the advancement of our product candidates in development; the timing, receipt and amounts of milestone payments to our existing development partners;
our ability to generate new relationships with industry partners whose
business plans seek long-term commercialization opportunities which allow for
up-front deposits or advance payments in exchange for license agreements;
the timing, receipt and amount of sales, if any, from our product candidates
the cost of manufacturing (paid to third parties) of our licensed product
the cost of marketing and sales activities of those product candidates;
the continued willingness of our vendors to provide trade credit on historical
the costs of prosecuting, maintaining, and enforcing patent claims, if any
claims are made;
our ability to maintain existing collaborative relationships and establish new
relationships as we advance our product candidates in development;
our ability to maintain our assets or cash flow so that they are sufficient to
fully repay the principal owed under our outstanding debt instruments, either
upon maturity or immediately upon demanded acceleration, upon the current
event of default or any other events of default; our ability to refinance or restructure our outstanding matured debt instruments; and
the receptivity of the financial market to biotechnology companies.
Off-Balance Sheet Arrangements. We do not maintain any off-balance sheet financing arrangements.
Fluctuations and Operating Results. We anticipate that our results of operations will fluctuate from quarter-to-quarter or year-to-year for several reasons, including:
the timing of the development and commercialization of our product candidates;
the timing and extent of our clinical trials for our product candidates that
we may develop in the future;
the timing and outcome of our regulatory/marketing approval applications both
nationally and internationally, for our product candidates;
the timing and outcome of our marketing of the AutovaxIDฎ instrument;
the timing and size of orders for instruments and disposables and
instrumentation and the sale and production of cell culture products and
the timing and extent of our adding new employees and infrastructure; and
the timing of any milestone payments, license fees, or royalty payments that
we may be required to make.
Consequently, revenues, profits or losses may vary significantly from quarter-to-quarter or year-to-year, and revenue or profits or losses in any period will not necessarily be indicative of results in subsequent periods.
Recent Accounting Pronouncements
See Note 2 to our consolidated financial statements.