ACCENTIA BIOPHARMACEUTICALS INC | 2012 | FY | 3


1. Description of the Company:

Overview

Accentia Biopharmaceuticals, Inc. (the “Company” or “Accentia”) is a biotechnology company focused on discovering, developing and commericializing innovatative therapies that address the unmet medical needs of patients by utilizing therapeutic clinical products including personalized immunotherapies designed to treat autoimmune related diseases and cancer. The Company incorporated in the State of Florida in 2002.

Cyrevia™ is a potential comprehensive system of care for the treatment of various autoimmune diseases. Cyrevia seeks to eliminate virtually all circulating white blood cells, including those driving autoimmunity, while seeking to spare the patient’s stem cells. The therapeutic theory of Cyrevia is that as the patient’s eliminated white blood cells are replenished with new white blood cells derived from these stem cells, the patient’s immune system becomes effectively replaced or “rebooted”. Cyrevia’s active ingredient is cyclophosphamide. The Company is repurposing cyclophosphamide and administering it as part of its integrated risk-management system designed to assure consistency in use and to minimize the risks of treatment. Cyclophosphamide is currently U.S. Food and Drug Administration (“FDA”) approved to treat disorders other than autoimmune disease, including various forms of cancer.

BiovaxID™ is being developed by through the Company’s majority-owned subsidiary, Biovest International, Inc. (“Biovest”), as an active immunotherapy, 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 Biovest’s investigational new drug application (“IND”) have studied BiovaxID in NHL. These studies include a Phase 2 clinical trial and a Phase 3 clinical trial in patients with FL, as well as a Phase 2 clinical trial in patients with MCL. BiovaxID has demonstrated statistically significant Phase 3 clinical benefit by prolonging disease-free survival in FL patients treated with BiovaxID. Biovest believes that these clinical trials demonstrate the safety and efficacy of BiovaxID.

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

To support Biovest’s planned commercialization of BiovaxID and to support the products of personalized medicine and particularly, patient specific oncology products, Biovest 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. Biovest plans to utilize the AutovaxID technology to streamline the commercial manufacture of BiovaxID. Biovest believes that AutovaxID is the first cell culture system that enables production of personalized cell-based treatments economically. AutovaxID uses a disposable production unit which provides for robust and dependable manufacturing while complying with the industry current good manufacturing practices (“cGMP”) standards. Biovest is 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. Biovest also manufactures instruments and disposables used in the hollow fiber production of cell culture products. Biovest manufactures mammalian cell culture products such as whole cells, recombinant and secreted proteins, and monoclonal antibodies for third parties, primarily researchers. Biovest has produced over 7,000 cell based products for an estimated 2,500 researchers around the world. Biovest considers its vast experience in manufacturing small batches of different cell based products, together with Biovest’s expertise in designing and manufacturing instruments for personalized medicines as important competencies supporting its development of patient specific immunotherapies.

The Company anticipates developing the SinuNasal™ Lavage System (“SinuNasal”) as a medical device for the treatment of patients with refractory, post-surgical chronic sinusitis (“CS”). SinuNasal is believed to provide benefit by delivering a proprietary patented buffered irrigation solution to mechanically flush the nasal passages to improve the symptoms of refractory post-surgical CS patients.

Corporate Overview

In April 2002, the Company commenced business with the acquisition of Analytica International, Inc. (“Analytica”). Analytica conducted a global research and strategy consulting business that provided services to the pharmaceutical and biotechnology industries. The Company 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 our Series B preferred stock. Analytica was founded in 1997 and has offices in New York and Germany. On December 15, 2011, the Company closed on the definitive purchase agreement on the sale of substantially all of the assets and business of Analytica to a third-party, for a combination of fixed and contingent payments aggregating up to $10 million. The purchase agreement included the name “Analytica International, Inc.” Accordingly, the Company changed the name of its wholly-owned subsidiary, from Analytica International, Inc. to Accentia Biotech, Inc.

In June 2003, the Company acquired an 81% interest in Biovest pursuant to an investment agreement for an initial investment of $20 million. Biovest’s business consists of three primary business segments: the development of BiovaxID™ for B-cell blood cancers; the manufacture and sale of AutovaxID® and other instruments and disposables; and the commercial sale and production of cell culture products and services. As of September 30, 2012, the Company owned approximately 59% of Biovest’s issued and outstanding capital stock with the minority interest being held by approximately 400 shareholders of record. Following the Company’s investment, Biovest continued to be a reporting company under Section 12(g) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Biovest files periodic and other reports with the Securities and Exchange Commission (“SEC”).

In November 2010, the Company and Biovest completed reorganizations and formally exited Chapter 11 of the U.S. Bankruptcy Code (“Chapter 11”) as fully restructured companies. Through the provisions of the companies’ respective bankruptcy plans (as amended) (the “Plan” and the “Biovest Plan”, respectively), both of which were effective on November 17, 2010 (the “Effective Date”), the Company and Biovest restructured their respective debts into a combination of new debt and equity. On March 19, 2012, the Bankruptcy Court entered a Final Decree closing Biovest’s Chapter 11 proceedings. 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 Company’s Chapter 11 proceeding.

On November 17, 2012, an aggregate of approximately $14.1 million in principal became due under the Company’s convertible debentures issued in November 2010 (the “Matured Obligations”). Because the Company was unable to pay the amount due on November 17, 2012, an event of default occurred under the Matured Obligations. As a result of this event of default, interest has begun accruing on the Matured Obligations at a default rate of 18% and the holders of the Matured Obligations have the right to an additional default payment of 30% on the outstanding balance due. The holders of the Matured Obligations could also cause all amounts outstanding, to be immediately due and payable. At present, the holders of the Matured Obligations have not taken any action to secure monetary judgment(s) against the Company for the outstanding principal owed to them.

 

Also, on November 17, 2012, an aggregate of approximately $27.7 million in principal became due under (1) a secured convertible promissory note issued to Corps Real, LLC (“Corps Real”) with an aggregate principal balance of $3.0 million (the “Biovest Corps Real Note”), (2) secured convertible promissory notes issued to Laurus Master Fund, Ltd. (in liquidation), PSource Structured Debt Limited, Valens U.S. SPV I, LLC, Valens Offshore SPV I, Ltd., Valens Offshore SPV II, Corp., and Erato Corp. (collectively, “Laurus/Valens”) with an aggregate principal balance of $23.5 million (the “Term A Notes”), and (3) unsecured convertible promissory notes (the “Exchange Notes”) issued to the holders of the Exit Financing with an aggregate principal balance of $1.2 million (collectively, the “Biovest Matured Obligations”). Because Biovest was unable to pay the amount due on November 17, 2012, an event of default occurred under the Biovest Matured Obligations. As a result of Biovest’s default under the Exchange Notes issued in the Exit Financing, interest has begun accruing on those Exchange Notes at rate of 15% per annum. On December 19, 2012, a majority of the holders (Whitebox Credit Arbitrage Partners, LP, Whitebox Special Opportunities Fund Series B Partners, LP, Pandora Select Partners, LP, Whitebox Multi-Strategy Partners, LP, Whitebox Concentrated Convertible Arbitrage Partners, LP, (collectively, the “Whitebox Entities”)) of the outstanding Exchange Notes issued in the Exit Financing commenced a breach of contract action to secure monetary judgment(s) against Biovest for the outstanding principal and interest owed to them (the “Whitebox Litigation”). With the exception of the Whitebox Litigation, Biovest has not been notified of an event of default by the other holders of the outstanding Exchanges Notes.

Pursuant to cross-default provisions contained in certain of Biovest’s other outstanding notes in the aggregate of approximately $0.3 million and $4.2 million, may be declared to be in default as well, and were issued to (a) the Economic Development Authority for the City of Coon Rapids (“EDA”) and the Minnesota Investment Fund (“MIF”) and (b) Laurus/Valens, respectively. Biovest has not been notified of an event of default by the EDA and/or MIF and the standstill agreement (discussed below) precludes Laurus/Valens from declaring a cross-default under its Term B Notes.

Effective November 17, 2012, Biovest entered into a standstill agreement with Corps Real and Laurus/Valens, pursuant to which (i) the maturity dates of the Biovest Corps Real Note and the Term A Notes were extended from November 17, 2012 to January 31, 2013 and (ii) Corps Real and Laurus/Valens granted Biovest a forbearance (until January 31, 2013) from their exercise of the rights and/or remedies available to them under the Biovest Corps Real Note, Term A Notes and Term B Notes. The standstill agreement allows Biovest the time and opportunity to negotiate with Corps Real and Laurus/Valens a potential restructuring of the Biovest Corps Real Note, Term A Notes, and Term B Notes. If Biovest defaults under the Biovest Corps Real Note following the expiration of the period covered by the standstill agreement, Corps Real will have the right to foreclose upon its first priority security interest in all of Biovest’s assets. If Biovest defaults under the Term A Notes following the expiration of the period covered by the standstill agreement, Laurus/Valens (a) will have right to foreclose upon their lien on all of Biovest’s assets (which is subordinate only to the security interest of Corps Real) and (b) may appoint one-third of the total membership of Biovest’s Board of Directors. The outcome of the negotiations relating to the restructuring of the Biovest Matured Obligations, which may include the remainder of Biovest’s outstanding debt, may negatively affect our ownership interest in Biovest and cause our potential deconsolidation/loss of control in Biovest.


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