UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2008

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

For the transition period from _____________ to ___________
Commission file number   0-29222

AVAX TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)

Delaware
13-3575874
(State or other jurisdiction of incorporation or organization )
(I.R.S. Employer Identification No.)

2000 Hamilton Street, Suite 204, Philadelphia, Pennsylvania
19130
(Address of principal executive offices)
(Zip Code)

(215) 241-9760
(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 is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of  “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated filer o
Accelerated filer o
Non-accelerated filer o
(do not check if a smaller reporting company)
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

On August 14, 2008, there were 142,605,753 shares of the Registrant’s common stock, par value $.004 per share, issued and outstanding .
 

AVAX TECHNOLOGIES, INC.
Table of Contents
 
     
Page
PART I - FINANCIAL INFORMATION
   
Item 1.
Financial Statements
 
3
 
Consolidated Balance Sheet - As of June 30, 2008 (Unaudited) and December 31, 2007
 
3
 
Consolidated Statements of Operations and Comprehensive Loss (Unaudited) For the Three Months and Six Months Ended June 30, 2008 and 2007 and for the Period from January 12, 1990 (Incorporation) to June 30, 2008
 
4
 
Consolidated Statements of Cash Flows (Unaudited) For the Six Months Ended June 30, 2008 and 2007 and for the Period from January 12, 1990 (Incorporation) to June 30, 2008
 
5
 
Notes to Consolidated Financial Statements
 
7
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
13
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
 
17
Item 4T.
Controls and Procedures
 
17
PART II - OTHER INFORMATION
   
Item 1.
Legal Proceedings
 
19
Item 1A.   
Risk Factors
 
19
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
19
Item 3.
Defaults Upon Senior Securities
 
19
Item 4.
Submission of Matters to a Vote of Security Holders
 
19
Item 5.
Other Information
 
19
Item 6.
Exhibits
 
19
Signatures  
20
 
2

PART I - FINANCIAL INFORMATION

Item 1.   Financial Statements.
AVAX Technologies, Inc. and Subsidiaries
(a development stage company)
   
June 30,
2008
(unaudited)
 
December 31,
2007
 
Assets
             
Current assets:
             
Cash
 
$
1,346,161
 
$
5,903,207
 
Accounts receivable
   
5,543
   
131,387
 
Inventory
   
5,775
   
11,520
 
VAT receivable
   
65,794
   
82,896
 
Prepaid expenses and other current assets
   
468,517
   
317,105
 
Total current assets
   
1,891,790
   
6,446,115
 
Property, plant and equipment, at cost
   
4,438,187
   
4,247,706
 
Less accumulated depreciation
   
3,735,755
   
3,505,051
 
Net property, plant and equipment
   
702,432
   
742,655
 
Goodwill
   
188,387
   
188,387
 
Total assets
 
$
2,782,609
 
$
7,377,157
 
               
Liabilities and stockholders’ equity (deficit)
             
Current liabilities:
             
Accounts payable
 
$
1,399,647
 
$
2,091,674
 
Accrued expenses
   
513,480
   
551,777
 
Accrued and withheld payroll taxes and liabilities
   
429,631
   
699,603
 
Deferred revenue
   
257,321
   
250,000
 
ANVAR advances
   
432,138
   
400,691
 
Total current liabilities
   
3,032,217
   
3,993,745
 
Stockholders’ equity :
             
Preferred stock, $.01 par value:
             
Authorized shares – 5,000,000, including Series C – 120,000 shares
             
Series C convertible preferred stock: 
             
Issued and outstanding shares – 33,500 at June 30, 2008 and December 31, 2007 (liquidation preference - $3,350,000)
   
335
   
335
 
Common stock, $.004 par value:
             
Authorized shares 500,000,000 at June 30, 2008 and December 31, 2007
Issued and outstanding shares –141,574,997 at June 30, 2008 and December 31, 2007
   
566,300
   
566,300
 
Additional paid-in capital
   
86,909,550
   
86,657,058
 
Subscription receivable
   
(422
)
 
(422
)
Accumulated other comprehensive income
   
336,094
   
414,971
 
Deficit accumulated during the development stage
   
(88,061,465
)
 
(84,254,830
)
Total stockholders’ equity (deficit)
   
(249,608
)
 
3,383,412
 
Total liabilities and stockholders’ equity (deficit)
 
$
2,782,609
 
$
7,377,157
 

See accompanying notes.
 
3

AVAX Technologies, Inc. and Subsidiaries
(a development stage company)
Consolidated Statements of Operations and Comprehensive Loss
(Unaudited)

   
Three months ended
June 30,
 
Six months ended
June 30,
 
Period from 
January 12, 1990 
(Incorporation) to 
June 30,
 
   
2008
 
2007
 
2008
 
2007
 
2008
 
Revenue:
                               
Gain from sale of the Product
 
$
–
 
$
–
 
$
–
 
$
–
 
$
1,951,000
 
Product and contract service revenue
   
91,135
   
58,769
   
206,775
   
203,316
   
7,022,869
 
Grant revenue
   
5,295
   
–
   
9,773
   
–
   
215,885
 
Total revenue
   
96,430
   
58,769
   
216,548
   
203,316
   
9,189,754
 
Costs and expenses:
                               
Research and development
   
1,228,394
   
1,041,708
   
2,360,238
   
2,051,497
   
54,607,978
 
Acquired in process research and development
   
–
   
–
   
–
   
–
   
4,420,824
 
Write down of acquired intellectual property and other intangibles
   
–
   
–
   
–
   
–
   
3,416,091
 
Amortization of acquired intangibles
   
–
   
–
   
–
   
–
   
715,872
 
Selling, general and administrative
   
754,335
   
623,274
   
1,718,072
   
1,094,193
   
39,677,453
 
Total operating loss
   
(1,886,299
)
 
(1,606,213
)
 
(3,861,762
)
 
(2,942,374
)
 
(93,648,464
)
Other income (expense):
                               
Interest income
   
11,204
   
84,565
   
52,849
   
94,878
   
6,257,440
 
Interest expense
   
–
   
–
   
–
   
–
   
(812,067
)
Other, net
   
1,885
   
–
   
2,278
   
–
   
145,471
 
Total other income , net
   
13,089
   
84,565
   
55,127
   
94,878
   
5,590,844
 
Loss before income taxes
   
(1,873,210
)
 
(1,521,648
)
 
(3,806,635
)
 
(2,847,496
)
 
(88,057,620
)
Income taxes
   
–
   
–
   
–
   
–
   
–
 
Loss from continuing operations
   
(1,873,210
)
 
(1,521,648
)
 
(3,806,635
)
 
(2,847,496
)
 
(88,057,620
)
Loss from discontinued operations
   
–
   
–
   
–
   
–
   
(3,845
)
Net loss
   
(1,873,210
)
 
(1,521,648
)
 
(3,806,635
)
 
(2,847,496
)
 
(88,061,465
)
Amount payable for liquidation preference
   
–
   
–
   
–
   
–
   
(1,870,033
)
Net loss attributable to common stockholders
 
$
(1,873,210
)
$
(1,521,648
)
$
(3,806,635
)
$
(2,847,496
)
$
(89,931,498
)
Loss per common share – basic and diluted
                               
Loss from continuing operations
 
$
(0.01
)
$
(0.01
)
$
(0.03
)
$
(0.03
)
     
Loss from discontinued operations
   
–
   
–
   
–
   
–
       
Net loss
 
$
(0.01
)
$
(0.01
)
$
(0.03
)
$
(0.03
)
     
Weighted-average number of common shares outstanding
   
141,530,614
   
130,037,855
   
141,555,545
   
95,915,992
       
Net loss
 
$
(1,873,210
)
$
(1,521,648
)
$
(3,806,635
)
$
(2,847,496
)
     
Foreign currency translation adjustment
   
16,961
   
(5,963
)
 
16,961
   
(40,200
)
     
Comprehensive loss
 
$
(1,856,249
)
$
(1,527,611
)
$
(3,789,674
)
$
(2,887,696
)
     

See accompanying notes.
 
4

AVAX Technologies, Inc. and Subsidiaries
(a development stage company)
Consolidated Statements of Cash Flows
(Unaudited)
   
 
 
 
Six months ended June 30,
 
Period from
January 12, 1990
(Incorporation) to
June 30,
 
   
2008
 
2007
 
2008
 
Operating activities
                   
Net loss
 
$
(3,806,635
)
$
(2,847,496
)
$
(88,061,465
)
Adjustments to reconcile net loss to net cash used in operating activities:
                   
Depreciation and amortization
   
131,257
   
146,731
   
5,215,984
 
Amortization of discount on convertible notes payable
   
–
   
–
   
142,500
 
Extraordinary gain related to negative goodwill on consolidated subsidiary
   
–
   
–
   
(902,900
)
Cumulative effect of change in accounting
   
–
   
–
   
(186,295
)
Amortization of deferred gain on joint venture
   
–
   
–
   
(1,805,800
)
Equity in net loss of joint venture
   
–
   
–
   
1,703,763
 
Employee Stock Option Expense
   
252,492
   
63,810
   
600,188
 
Minority interest in net loss of consolidated subsidiary
   
–
   
–
   
(80,427
)
Acquired in-process research and development charge
   
–
   
–
   
4,420,824
 
Write down of acquired intellectual property and other intangibles
   
–
   
–
   
3,416,091
 
Compensatory stock issue
   
–
   
–
   
25,000
 
Gain on sale of the Product
   
–
   
–
   
(1,951,000
)
Gain on sale of intellectual property
   
–
   
–
   
(787
)
Accretion of interest on common stock receivable
   
–
   
–
   
(449,000
)
Accretion of interest on amount payable to preferred stockholders and Former Officer
   
–
   
–
   
449,000
 
Loss on sale of furniture and equipment
   
–
   
–
   
246,254
 
Issuance of common stock or warrants for services
   
–
   
–
   
423,289
 
Changes in operating assets and liabilities:
                   
Accounts receivable
   
126,247
   
142,136
   
143,475
 
Inventory
   
6,165
   
(1,210
)
 
36,929
 
Prepaid expenses and other current assets
   
(119,211
)
 
(820
)
 
(275,242
)
Research and development tax credit receivable
   
–
   
–
   
320,488
 
Accounts payable and accrued liabilities
   
(1,040,646
)
 
359,732
   
1,162,421
 
Deferred revenue
   
6,788
   
287,835
   
217,080
 
Amount payable to Former Officer
   
–
   
–
   
80,522
 
Net cash used in operating activities
 
$
(4,443,543
)
$
(1,849,282
)
$
(75,109,108
)
                     
Investing activities
                   
Purchases of marketable securities
   
–
   
–
   
(351,973,210
)
Proceeds from sale of marketable securities
   
–
   
–
   
344,856,738
 
Proceeds from sale of short-term investments
   
–
   
–
   
7,116,472
 
Purchases of furniture and equipment
   
(64,895
)
 
(29,175
)
 
(3,794,960
)
Proceeds from sale of furniture and equipment
   
–
   
–
   
51,119
 
Cash acquired in acquisition of control of joint venture
   
–
   
–
   
991,634
 
Organization costs incurred
   
–
   
–
   
(622,755
)
Net cash used in investing activities
 
$
(64,895
)
$
(29,175
)
$
(3,374,962
)

5

AVAX Technologies, Inc. and Subsidiaries
(a development stage company)
Consolidated Statements of Cash Flows (continued)
(Unaudited)

   
 
 
Six months ended June 30,
 
Period from 
January 12, 1990 
(Incorporation) 
to
June 30,
 
   
2008
 
2007
 
2008
 
Financing activities
                   
Proceeds from issuance of notes payable to related party
 
$
–
 
$
–
 
$
957,557
 
Principal payments on notes payable to related party
   
–
   
–
   
(802,000
)
Proceeds from loans payable and the related issuance of warrants
   
–
   
–
   
2,314,000
 
Principal payments on loans payable
   
–
   
–
   
(1,389,000
)
Payments for fractional shares from reverse splits and preferred stock conversions
   
–
   
–
   
(76
)
Financing costs incurred
   
–
   
–
   
(90,000
)
Shareholder capital contribution
   
–
   
–
   
93,637
 
Payments received on subscription receivable
   
–
   
–
   
4,542
 
Proceeds received from exercise of stock warrants
   
–
   
–
   
76,892
 
Elimination of consolidated accounting treatment for joint venture
   
–
   
–
   
(2,511,701
)
Capital contribution through sale of interest in consolidated subsidiary
   
–
   
–
   
2,624,000
 
Net proceeds received from issuance of preferred and common stock
   
–
   
9,318,359
   
78,170,851
 
Net cash provided by financing activities
   
–
   
9,318,359
   
79,448,702
 
Effect of exchange rate changes on cash
   
(48,608
)
 
(39,380
)
 
381,529
 
Net increase (decrease) in cash
   
(4,557,046
)
 
7,400,522
 
 
1,346,161
 
Cash at beginning of period
   
5,903,207
   
1,484,570
   
–
 
Cash at end of period
 
$
1,346,161
 
$
8,885,092
 
$
1,346,161
 
                      
Supplemental disclosure of cash flow information
                   
Interest Paid
 
$
–
 
$
–
 
$
197,072
 
Non-cash activity:
                   
Issuance of restricted stock compensation
 
$
–
 
$
–
 
$
25,000
 
Common stock warrants issued with convertible notes
 
$
–
 
$
–
 
$
142,500
 
Conversion of bridge loan into common stock
 
$
–
 
$
–
 
$
950,000
 
Payment of interest with common stock
 
$
–
 
$
–
 
$
23,275
 

See accompanying notes.
 
6

AVAX Technologies, Inc. and Subsidiaries
(a development stage company)
Notes to Consolidated Financial Statements (Unaudited)

1. Description of Business

AVAX Technologies, Inc. and its subsidiaries (the “Company” or “AVAX”) is a development stage biopharmaceutical company.

In November 1995, the Company sold its leading product under development, an over-the-counter nutritional, dietary, medicinal and/or elixorative food supplement or drug and all of the related patents and other intellectual property. The agreement was for $2.4 million in shares of common stock of Interneuron Pharmaceuticals, Inc. (“IPI”), a public company, the parent of the purchaser of the product (the “Stock”). Certain common stockholders of the Company were also common stockholders of IPI. Pursuant to the terms of the agreement, the purchase price, payable in two equal installments in December 1996 and 1997, was fixed, and the number of shares of the Stock would vary depending on the quoted market price of the Stock at such time. Because the Stock was receivable in two equal annual installments, the gain from the sale of the product, $1,951,000, was calculated by discounting the value of the Stock receivable using a discount rate of 15%.

Also in November 1995, the Company entered into a license agreement with Thomas Jefferson University (“TJU”) to develop, commercially manufacture and sell products embodying immunotherapeutic vaccines for the treatment of malignant melanoma and other cancers (the “Invention”) (see Note 4 ).

In December 1996, the Company entered into a license agreement with Rutgers University (“Rutgers”) to develop, commercially manufacture and sell products embodying a series of compounds for the treatment of cancer and infectious diseases. During September 2004, the Company and Rutgers agreed to cancel the license agreement and all of the Company’s obligations associated with the license agreement.

In February 1997, the Company entered into a license agreement with Texas A&M University to develop, commercially manufacture and sell products embodying a series of compounds for the treatment of cancer (the “Texas A&M Compounds”) (see Note 4 ).

In November 1999, the Company entered into a definitive joint venture agreement with Australia Vaccine Technologies (“AVT”) (formerly Neptunus International Holdings Limited), a pharmaceutical group in Australia, under the subsidiary name, AVAX Holdings Australia Pty Limited (“AVAX Holdings”). Under the joint venture agreement, AVAX Holdings, through its affiliated entities, AVAX Australia Pty Limited and AVAX Australia Manufacturing Pty Limited (the “Joint Venture Companies”), was organized for the purpose of manufacturing and marketing M-Vax, an immunotherapy for the post-surgical treatment of Stage 3 and 4 melanoma (“M-Vax”), in Australia and New Zealand. In January 2002, the Joint Venture Companies repurchased 90% of AVT’s interest in the two joint venture companies, resulting in AVAX owning a 95% interest in the net equity of both joint venture companies. The Company was seeking but was unable to obtain a timely governmental reimbursement for the costs of treatment with the M-Vax in Australia, and determined to discontinue operations in Australia in order to focus the cash resources of the Company on its U.S. and European operations. In September 2002, the Company announced that it would be discontinuing its operations in Australia, and, in December 2002, the Company completed the liquidation of its Australian subsidiary.

In August 2000, the Company completed its acquisition of GPH, S.A. (“Holdings”) and Genopoietic S.A. (“Genopoietic”), each a French societe anonyme based in Paris, France with its principal operating facility in Lyon, France. Holdings and Genopoietic were organized in 1993 to develop gene therapy applications and market gene therapy treatments for cancer. The Company has designated the Lyon, France operations facility as its primary source facility for the production of vaccines to be used in clinical trials. In addition, the Company currently performs contract manufacturing and research activities at its facilities located in Lyon. The Company’s June 30, 2008 consolidated balance sheet includes approximately $516,707 in net assets related to these subsidiaries.

The Company’s business is subject to significant risks consistent with biotechnology companies that are developing products for human therapeutic use. These risks include, but are not limited to, uncertainties regarding research and development, access to capital, obtaining and enforcing patents, receiving regulatory approval, and competition with other biotechnology and pharmaceutical companies. The Company is seeking to continue to finance its operations with a combination of equity and debt financing and, in the longer term, revenues from product sales, if any. However, there can be no assurance that it will successfully develop any product or, if it does, that the product will generate any sufficient revenues or that the Company will continue to have the finances available to support its operations.
 
7

2. Basis of Presentation

The financial information for the three-month and six-month periods ended June 30, 2008 and 2007, contained herein, is unaudited.   The Company believes this information has been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and Article 8 of Regulation S-X. The Company also believes this information includes all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows for the periods then ended. The results of operations for the three-month and six-month periods ended June 30, 2008 are not necessarily indicative of the results of operations that may be expected for the entire year.
 
The accompanying financial statements and the related notes should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2007 included in the Company’s Annual Report on Form 10-K.

The consolidated financial statements have been prepared assuming that the Company will continue as a going concern. For the year ended December 31, 2007, the Company incurred a net loss of $6,413,648 and a use of cash in operating activities of $4,731,897. For the six months ended June 30, 2008, the Company incurred a net loss of $3,806,635 and a use of cash in operating activities of $4,443,543. The Company’s cash requirements were satisfied through a private placement of common stock in April 2007, maintaining balances in accounts payable and accrued expenses on terms in excess of those afforded in commercial practice and customer agreements and through the use of available cash. However, the Company does not have sufficient resources to maintain its existing plan of operations throughout 2008. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management anticipates that additional debt or equity financing will be required to fund ongoing operations in 2008. The Company is currently negotiating to raise additional capital or secure revenue sources to fund current operations. However, there is no assurance that the Company will successfully obtain the required capital or revenues or, if obtained, the amounts will be sufficient to fund ongoing operations in 2008. The inability to secure additional capital could have a material adverse effect on the Company, including the possibility that the Company could have to cease operations. Management has considered the impact of the going concern status in its evaluation of the recoverability and classification of its assets and liabilities.

3. Significant Accounting Policies

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of AVAX Technologies, Inc. and its subsidiaries. All significant intercompany balances and transactions have been eliminated.

Foreign Currency Translation

Holdings and Genopoietic use the Euro as their functional currency as required by the European Union. In accordance with Statement of Financial Accounting Standards (SFAS) No. 52, “Foreign Currency Translation,” the financial statements of these entities have been translated into U.S. dollars, the functional currency of the Company and its other wholly-owned subsidiaries and the reporting currency herein, for purposes of consolidation.

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Revenue Recognition

The Company’s revenues are related to the provision of contract services and the sale of its product, the AC Vaccine Technology, for the treatment of melanoma. Contract service revenue is recognized in installments based upon the contractual agreement entered into with clients. Product revenues represent fees received or payable to the Company related to the manufacture and sale of the vaccine. Product revenue is recognized when the vaccine is received by the hospital administering the vaccine.

The Company records as deferred revenue amounts received in advance of the provision of services in accordance with contracts or grants. Deferred revenue primarily consisted of $250,000 received pursuant to a clinical development and manufacturing agreement for which activities needed to be completed by May 31, 2008 which had been extended to early August, 2008 in order to earn the half the funds. Pursuant to the agreement, if the Company’s manufacturing facility in Philadelphia, PA is not able to produce products pursuant to the agreement, then $125,000 of the funds received will default to the collaboration partner.   The due date for the obligation has passed but the other party has not demanded repayment of the obligation. If the facilities are not able to produce products pursuant to the agreement by August 31, 2008, then the remaining $125,000 will default and be payable back to the collaboration partner.
 
8

Accounts Receivable

Accounts receivable are stated at the amount management expects to collect from outstanding balances. Management provides for probable uncollectible accounts through a charge to earnings and a credit to a valuation allowance based on its assessment of the current status of individual accounts. Balances that are still outstanding after management has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivable. There was no valuation allowance at June 30, 2008. The Company generally does not charge interest on accounts receivable.

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to credit risk are principally cash and accounts receivable. Cash consists of checking accounts, money market accounts and a certificate of deposit. The Company places its cash with its principal bank that is a high credit quality financial institution. Cash deposits generally are in excess of the FDIC insurance limits. Credit limits, ongoing credit evaluations, and account monitoring procedures are utilized to minimize the risk of loss from accounts receivable. Collateral is generally not required.

Fair Value of Financial Instruments

The carrying amount of accounts receivable, accounts payable and accrued liabilities are considered to be representative of their respective fair values due to their short-term nature.

Inventories

Inventories are stated at the lower of cost, determined using the first-in, first-out method, or market. The Company’s inventories include raw materials and supplies used in research and development activities.

Accrued Expenses

The Company provides for accrued expenses based upon its contractual obligation, as calculated by the Company, for all claims made for payment to the Company.

Depreciation

Depreciation is computed using the straight-line method over the estimated useful lives of furniture and equipment, which range from three to ten years. Depreciation for the Company’s manufacturing facility and related equipment are computed using the straight-line method over estimated useful lives of 5 to 10 years. Leasehold improvements related to the building are being amortized using the straight-line method over the actual life of the lease.

Goodwill

The Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets”, on January 1, 2002. This accounting standard requires that goodwill and indefinite lived assets no longer be amortized but instead be tested at least annually for impairment, and expensed against earnings when the implied fair value of a reporting unit, including goodwill, is less than its carrying amount. The Company performed its annual goodwill impairment test in accordance with SFAS No. 142 and determined that the carrying amount of goodwill was reasonable.

Prior to the adoption of SFAS No. 142, the Company had recorded cumulative amortization of $113,032. If SFAS No. 142 had been applied to earlier periods, the adjusted loss from continuing operations would be $87,944,588 and the adjusted net loss would be $87,948,433.

Research and Development Costs

Research and development costs, including payments related to research and license agreements, are expensed when incurred. Contractual research expenses are recorded pursuant to the provisions of the contract under which the obligations originate. Research and development costs include all costs incurred related to the research and development, including manufacturing costs incurred, related to the Company’s research programs. The Company is required to produce its products in compliance with current Good Manufacturing Practices (“cGMP”), which requires a minimum level of staffing, personnel and facilities testing and maintenance. Based upon its current staffing level required to be in compliance with cGMP, the Company has excess capacity. Utilizing this excess capacity, revenue is generated through contract manufacturing engagements. Costs for production of products will be capitalized and charged to cost of goods sold only after the Company has received approval to market the drug by a regulatory authority.
 
9

Stock-Based Compensation
 
Effective January 1, 2006, the Company has adopted SFAS 123R, “Share-Based Payment.” SFAS 123R establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services and requires that the compensation cost relating to share-based payment transactions be recognized in financial statements, measured by the fair value of the equity or liability instruments issued, adjusted for estimated forfeitures. The Company transitioned to SFAS 123R using the modified-prospective methods, under which prior periods have not been revised for comparative purposes. The valuation provisions of SFAS 123R apply to new grants and to grants that were outstanding as of the effective date and are subsequently modified. Estimated compensation for grants that were outstanding as of the effective date will be recognized over the remaining service period using the compensation cost previously estimated for our SFAS 123 pro forma disclosures. Recognized stock-based compensation expense for the three and six months ended June 30, 2008 includes compensation expense for share-based payment awards granted prior to, but not yet vested as of December 31, 2005, based on the grant date fair value estimated in accordance with the pro forma provisions of SFAS 123 and compensation expense for the share-based payment awards granted subsequent to December 31, 2005 based on the grant date fair value estimated in accordance with the provisions of SFAS 123R.
 
Prior to the adoption of SFAS 123R, the Company applied the intrinsic-value-based method of accounting prescribed by Accounting Principles Board Opinion (“APB”) 25, “Accounting for Stock Issued to Employees,” and related interpretations, to account for its fixed-plan stock options to employees. Under this method, compensation cost was recorded only if the market price of the underlying stock on the date of grant exceeded the exercise price. SFAS 123, “Accounting for Stock-Based Compensation,” established accounting and disclosure requirements using a fair-value-based method of accounting for stock-based employee compensation plans. As permitted by SFAS 123, the Company elected to continue to apply the intrinsic-value-based method of accounting described above, and adopted only the disclosure requirements of SFAS 123, as amended by SFAS No. 148, “Accounting for Stock-Based Compensation, Transition and Disclosure.” The fair-value-based method used to determine historical pro forma amounts under SFAS 123 was similar in most respects to the method used to determine stock-based compensation expense under SFAS 123R. However, in its pro forma disclosures, the Company accounted for option forfeitures as they occurred, rather than based on estimates of future forfeitures.

The Company maintains three employee stock option plans and a director stock option plan, and has issued non-qualified stock options to an executive officer and a director outside of the existing stock option plans, which non-plan option grants have been approved by the Board of Directors and the stockholders of the Company. These plans are more fully discussed in our Annual Report on Form 10-K filed for the year ended December 31, 2007. In addition, the Company issues warrants to consultants at the discretion of the Board of Directors of the Company. The Company accounts for warrants granted to consultants in accordance with Emerging Issues Task Force Issue 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.” The Company determines the value of stock warrants utilizing the Black-Scholes option-pricing model.

Compensation costs for fixed awards with pro rata vesting are allocated to periods on the straight-line basis. For the three and six month periods ended June 30, 2007, no options or warrants were issued. The estimated weighted average fair value of warrants granted as of June 30, 2008 was calculated based on the following assumptions:

   
Three Months Ended 
June 30, 2008
 
Six Months Ended 
June 30, 2008
 
Expected term (in years)
   
5.00
   
5.00
 
Volatility
   
71.5
%
 
73.5
%
Risk-free interest rate
   
3.18
%
 
2.86
%
Expected dividends
   
0
   
0
 
 
Compensation expense of $191,619 and $35,076 was charged to administrative expenses for the six months ended June 30, 2008 and 2007, respectively, while $60,873 and $28,734 was charged to research and development expenses related to stock options outstanding and not vested for the same periods, respectively. As of June 30, 2008, total compensation cost related to non-vested stock options not yet recognized is $542,685 and is expected to be allocated to expenses over a weighted-average period of 18 months.
 
10

Options and Warrants Outstanding
 
In addition to options and warrants granted for compensatory purposes, the Company also issues warrants from time to time in conjunction with financing transactions. A summary of applicable stock option and warrant activity and related information for the six months ended June 30, 2008, is as follows:

 
 
Options and
Warrants
 
Weighted-Average
     Exercise Price     
 
Outstanding at beginning of period
   
122,331,693
 
$
0.19
 
Granted
   
850,000
 
$
0.11
 
Exercised
   
—
   
—
 
Forfeited
   
50,000
 
$
0.91
 
Outstanding at end of period
   
123,131,693
 
$
0.19
 
Exercisable at end of period
   
114,228,471
 
$
0.19
 
 
The fair value of option grants is estimated at the date of grant using the Black-Scholes model. The options and warrants expire at various times through July 2017. The weighted-average exercise price of warrants granted during the first six months of 2008 was $0.11.
 
The fair value of option grants is estimated at the date of grant using the Black-Scholes model. The following table shows the options and warrants outstanding by strike price with the average expected remaining term of the instruments, in years, as of June 30, 2008.

 
Exercise Price Range
 
Options & Warrants
Outstanding
 
Weighted-Average
    Remaining Term    
 
Vested Options &
Warrants 
 
Weighted-Average
    Remaining Term    
 
$0.090 - $0.143
   
15,988,178
   
3.50
   
8,042,425
   
0.57
 
$0.150 - $0.190
   
90,915,400
   
3.93
   
90,252,900
   
3.91
 
$0.285 - $0.330
   
2,347,792
   
3.39
   
2,052,823
   
3.31
 
$0.340 - $0.390
   
5,682,293
   
1.34
   
5,682,293
   
1.34
 
$0.410 - $0.470
   
7,603,030
   
1.76
   
7,603,030
   
1.76
 
$0.890 - $0.906
   
230,000
   
0.34
   
230,000
   
0.34
 
$2.940
   
240,000
   
0.34
   
240,000
   
0.34
 
$8.240
   
125,000
   
3.34
   
125,000
   
3.34
 
     
123,131,693
         
114,228,471
       

Earnings Per Share

Net loss per share is based on net loss divided by the weighted average number of shares of common stock outstanding during the respective periods. Diluted earnings per share information is not presented, as the effects of stock options, warrants and other convertible securities would be anti-dilutive for the periods presented.

4.   License and Research Agreements

In November 1995, the Company entered into an agreement with TJU for the exclusive worldwide license to develop, manufacture and sell the Invention (see Note 1) . In consideration for the license agreement, the Company paid cash of $10,000 and issued an aggregate of 458,243 shares of common stock to TJU and the scientific founder (the “Scientist”).
 
11

Under the terms of the license agreement, the Company is obligated to (i) pay certain milestone payments as follows: $10,000 upon initiation of the first clinical trial that is approved by the Food and Drug Administration (“FDA”) or comparable international agency, $10,000 upon the first filing of a New Drug Application (“NDA”) with the FDA or comparable international agency, and $25,000 upon receipt by the Company of approval from the FDA or comparable international agency to market products, (ii) enter into a research agreement to fund a study to be performed by TJU for the development of the technology related to the Invention (the “Study”) at approximately $220,000 per annum for the first three years, and (iii) following the third year, spend an aggregate of $500,000 per year (which includes costs incurred pursuant to the research agreement plus other internal and external costs) on the development of the Invention until commercialized in the United States. If following the third year, the Company files for United States marketing approval through a Company sponsored NDA, the Company may elect to spend less than $500,000 per year on the development of the Invention during the period of time the NDA is under review by the FDA. During 2000, a payment of $25,000 was made to TJU pursuant to the license agreement. In addition, the Company is obligated to pay royalties on its worldwide net revenue derived from the Invention and a percentage of all revenues received from sub-licensees of the Invention .

The research agreement with TJU mentioned above was to continue until completion of the study, although it is terminable, upon notice by either party to the other, at any time. The Company has maintained the appropriate level of spending on the development of the Invention in accordance with the license agreement.
 
In February 1997, the Company licensed from Texas A&M University (“Texas A&M”) an issued U.S. patent and certain U.S. and foreign patent applications relating to a series of novel cancer-fighting anti-estrogen compounds that may be   especially effective against hormone-dependent tumors. The development of the anti-estrogen compounds is no longer a part of the Company‘s plan of operation. The Company has been notified by Texas A&M that Texas A&M considers the Company to be in violation of the license agreement and that the Company’s rights under the license agreement have been revoked. The Company disputes the contention by Texas A&M and the Company is attempting to return the technology to the University. Texas A&M has filed a lawsuit against the Company seeking reimbursement from the Company for certain patent expenses incurred by the university from the Company.  Although the disputed amount is fully accrued in the attached financial statements, the Company continues to dispute certain amounts that are claimed by the university.  

5.   ANVAR Advances

Genopoietic receives financial support from a French governmental agency (“ANVAR”). These advances are subject to conditions specifying that non-compliance with such conditions could result in the forfeiture of all or a portion of the future amounts to be received, as well as the repayment of all or a portion of amounts received to date. If certain products are commercialized, the June 30, 2008 balance of $432,138 is repayable based on an annual royalty equal to 47% of the revenue related to the project. As such, the total amount of advances received was recorded as a liability in the accompanying consolidated balance sheet. In case of failure or partial success, as defined in the agreement, $96,378 is payable. The due date for the obligation has passed but the grantor agency has not demanded repayment of the obligation. Due to the uncertainty regarding the amount that to will be required to be repaid to ANVAR, the Company maintains the full amount of the obligation as a current liability.
 
12

Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Cautionary Statement Regarding Forward-Looking Statements

In this report, in other filings with the Securities and Exchange Commission (“SEC”) and in press releases and other public communications throughout the year, AVAX Technologies, Inc. (“AVAX,” the “Company,” “we” or “us”) makes, or will make statements that plan for or anticipate the future. These forward-looking statements involve risks and uncertainties, including, among other things: statements about the future of biotechnology products and the biopharmaceutical industry, statements about our future business plans and strategies, and other statements that are not historical in nature. These forward-looking statements are based on our current expectations. Many of these statements are found in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Forward-looking statements may be identified by words or phrases such as “believe,” “expect,” “anticipate,” “should,” “planned,” “may,” “estimated” and “potential.” The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. In order to comply with the terms of the safe harbor, and because forward-looking statements involve future risks and uncertainties, listed below are a variety of factors that could cause actual results and experience to differ materially from the anticipated results or other expectations expressed in our forward-looking statements. These factors include:

 
·
Our history of operating losses, our continuing cash requirements, our immediate need to raise capital in the third quarter of 2008 and substantial capital thereafter, and the uncertainty of our prospects of reaching a meaningful level of revenues.

 
·
The business uncertainties arising from our decision to conduct all AC Vaccine manufacturing activities at our Lyon, France facility and the logistical issues and risks relating to shipping biologics from the U.S. and other countries to France and the vaccine from France to patients in the U.S. and other countries.
 
·
Uncertainty about whether our products will successfully complete the long, complex and expensive clinical trial and regulatory approval process for approval of new drugs in the U.S. and certain European countries.

 
·
Uncertainty about whether our AC Vaccine technology can be developed to produce safe and effective products and, if so, whether our AC Vaccine products will be commercially accepted and profitable.

 
·
Difficulties arising from our competition with other companies conducting clinical trials and treatment regimens for patients and clinical sites for our clinical trials.

 
·
The expenses, delays, uncertainties and complications typically encountered by development stage biopharmaceutical businesses, many of which are beyond our control.

 
·
Our financial and development obligations and our responsibility to meet requisite research funding levels under our license agreements in order to protect our rights to our products and technologies.

 
·
Each of the other factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2007, under Item 1A – “Risk Factors.”

13

GENERAL

Since our inception, we have primarily concentrated our efforts and resources on the development and commercialization of individualized vaccine therapies and other technologies for the treatment of cancer. These efforts require that we expend money in the development and clinical testing of our products.

We have been unprofitable since our founding and we fund our losses primarily through equity offerings of equity and debt. We incurred net losses of $6,413,648 and $5,355,500 for the 12 months ended December 31, 2007 and 2006, respectively, and $3,806,635 for the six months ended June 30, 2008. We have a cumulative net loss of $89,931,498 as of June 30, 2008. We expect to continue to incur operating losses, primarily due to the expenses associated with our product development efforts, and the cost of maintaining our manufacturing facilities in Europe and the U.S.

Our ability to continue as an operating company depends upon our immediate need to raise capital. We are in discussions with investors for a proposed bridge financing (the “Bridge Financing”) for the purpose of raising funds for working capital for the next few months, but there can be no assurance that we will complete the Bridge Financing or that the terms of such financing will be favorable to us or our existing stockholders. To the extent that we issue securities that are not registered under the Securities Act of 1933, as amended (the “Act”) in connection with the proposed Bridge Financing, the securities may not be offered or sold in the United States absent registration or an applicable exemption from registration. Even if we complete a Bridge Financing, we will need to raise additional funds immediately if we are to continue as a going concern. If we are successful in raising sufficient additional capital, it should allow us to develop products, obtain regulatory approval for our proposed products, and enter into agreements for product development, manufacturing and commercialization. There is no assurance that additional capital can be raised in an amount which is sufficient for all such purposes, or on terms favorable to us or to our stockholders.
 
In the event that we do not complete the Bridge Financing or raise additional financing, it will be difficult for the Company to continue operations as they exist. We may be forced to shut down our operations or seek bankruptcy relief. If we discontinue our operations, we may not have sufficient funds to pay any amounts to our stockholders.

Our M-Vax product does not currently generate any material revenue, and we may never achieve significant revenues or profitable operations from the sale of M-Vax or any other products that we may develop.

The major challenges for others and us in the biopharmaceutical industry are the significant costs, time and uncertainties related to efforts to obtain regulatory approval to market drug products in the U.S. and foreign countries. We have encountered a number of these challenges in our efforts to develop the AC Vaccine into marketable products including the following:

 
·
the FDA clinical hold of our AC Vaccine clinical trials in 2001 and the resultant substantial expenses and delays in resolving the FDA concerns and refiling new INDs for a revised AC Vaccine;
 
·
manufacturing challenges relating to the production of a vaccine from the patient’s own cancer cells, such as the sterility issues we previously experienced at our Philadelphia facility;
 
·
our failure to develop a market for the AC Vaccine in Australia notwithstanding substantial expenditures of time and money to do so;
 
·
our past inability to agree with the FDA on an acceptable potency assay (which is a biological measure of the drug’s active ingredients) of our product prior to administration of the vaccine, which was required before we could commence our Phase III registration trial for M-Vax;
 
·
our inability to generate any meaningful revenues from any other products or services while we work to develop our lead products and technologies; and
 
·
the periodic cutbacks in our development plans and programs due to the limited cash resources from time to time in recent years and in particular, currently.

As a result of the FDA clinical hold, we concluded that (1) it would no longer be feasible to continue the clinical development of the original AC Vaccine using the established manufacturing format (referred to as the “fresh” vaccine product format), and (2) a revised product format needed to be established, tested and reviewed by the FDA. Through these research and development activities we re-engineered the manufacturing steps for the production and distribution of the AC Vaccine, referred to as the “frozen” vaccine technology, which we believe has substantial advantages over the former “fresh” product.
 
14

Results of Operations for the Three and Six Months Ended June 30, 2008 compared with the comparable periods ended June 30, 2007

Revenue

Revenue recognized for the three and six months ended June 30, 2008 were $96,430 and $216,548, respectively, compared with revenue of $58,769 and $203,316, respectively, for the same periods in 2007. The increase in revenues for the three months ended June 30, 2008 was due to higher manufacturing reimbursements related to compassionate use treatments and higher revenues realized from contract manufacturing. The increase in revenues for the six months ended June 30, 2008 was due to a higher exchange rate in the current year.

Research and Development Expenses

Our research and development activities focus primarily on clinical development and trials of our AC Vaccine technology for the treatment of melanoma, ovarian cancer, lung cancer and other cancers. Our clinical development program includes the development of techniques, procedures and tests that need to be developed as part of the manufacturing of our biological product so that the product can be evaluated and potentially approved by regulatory authorities.

Our research and development expenses consist primarily of costs associated with the clinical trials of our product candidates, compensation and other expenses for research personnel, payments to collaborators under contract research agreements, costs for our consultants and compensation, materials, maintenance and supplies for the operation and maintenance of our biological clean room facilities, which are necessary for the production of materials to be used in clinical trials. All of these costs qualify as research and development expenses in accordance with the guidance included in Statement of Financial Accounting Standards No. 2 “Accounting for Research and Development Costs.”

Manufacturing costs included in this category relate to the costs of developing, supporting and maintaining facilities and personnel that produce clinical samples in compliance with cGMP. Our facilities and the personnel maintained for manufacturing are currently at what we feel are the minimum required for compliance with cGMP. Based upon the current capacity of our facilities, our personnel and our current and future planned clinical trials, we have excess capacity for the production and testing of biological products. We use this excess capacity to generate cash in the form of contract manufacturing alliances. Because the incremental costs incurred to provide these services are not material or quantifiable, they are not presented separately.

Contract manufacturing encompasses services we provide to other biotechnology or pharmaceutical companies that are pursuing the clinical development of biological products. The engagements generally consist of two components. The first component is process validation in which the contracting company provides information on its product and the processes and techniques used to produce the product. Procedures are developed, documented and catalogued for the cGMP production of the product using known and acceptable techniques, tests and materials. Small-scale lots are produced, and techniques, feasibility of the production processes and tests validated. The end product of the first phase of an engagement is a pilot batch of product and the necessary production formulation and techniques to be used to file an IND with regulatory authorities for human clinical trials. The second phase of an engagement consists of the production of batches of product to be used in human clinical trials. The typical engagement results in production of small batches of product to be used in early stage (Phase I and II) clinical trials.

Research and development costs incurred through June 30, 2008 were $54,607,978. The majority of these costs relate to clinical research and development of our AC Vaccine technology. Our management estimates that greater than 90% of the periodic and cumulative research and development expenses incurred relate to our one major program, the AC Vaccine. At this time, due to the risks inherent in the clinical trial process, risks associated with the product and product characterization, risks associated with regulatory review and approval of clinical product candidates and the limited funds available, we are unable to estimate with any certainty the costs we will incur in the continued development of our product candidates for commercialization.

During the three months ended June 30, 2008, research and development expenses increased 17.9% from $1,041,708 as of June 30, 2007 to $1,228,394 as of June 30, 2008. For the six-month period ended June 30, 2008, expenses increased 15.0% from $2,051,497 as of June 30, 2007 to $2,360,238 as of June 30, 2008. Expenses for the periods are broken out by region as follows:
 
15



 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
 
2008
 
2007
 
2008
 
2007
 
United States
 
$
583,693
 
$
584,380
 
$
1,071,558
 
$
1,052,191
 
France
   
644,701
   
457,328
   
1,288,680
   
999,306
 
 
 
$
1,228,394
 
$
1,041,708
 
$
2,360,238
 
$
2,051,497
 

In the U.S., the expense increase in 2008 is the result of the launch of the Phase III registration study, MAVALDI, for M-Vax in the U.S., Europe and Israel. The increased research costs related to new site initiation   fees   plus costs incurred for the contract research organization. These increased expenses were partially offset by a decline in expenses for the Phase I/II study in M-Vax, which was completed during 2007. The increase in costs in France was due to higher salaries and taxes for new employees plus higher facility costs related to an increase in the amount of space.

Selling, General and Administrative Expenses

During the three months ended June 30, 2008, selling, general and administrative expenses increased approximately 21.0%, from $623,374 as of June 30, 2007 to $754,335, and for the six month period ended June 30, 2008, expenses increased approximately 57.0% from $1,094,193 as of June 30, 2007 to $1,718,073. Expenses for the periods are broken out by region as follows:

 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
 
2008
 
2007
 
2008
 
2007
 
United States
 
$
702,600
 
$
489,498
 
$
1,616,126
 
$
864,775
 
France
   
51,735
   
133,776
   
101,946
   
229,418
 
 
 
$
754,335
 
$
623,274
 
$
1,718,072
 
$
1,094,193
 

In the U.S., the expense increase in 2008 is the result of higher salary costs and related expense for the Company’s new executive officer, salary increases for existing administrative staff and higher consulting costs to improving existing accounting and financial processes necessary for Sarbanes-Oxley 404 compliance by year end. In addition, there were increased legal costs including for securities and employment matters, financing efforts and patent counsel in connection with the filing and execution of ongoing patent expenses. Also, there were increased costs for travel, investor relations and public relations activities related to on-going financing activities. The decrease in administrative costs in France is due to one less administrative person in 2008 and less spending on marketing and logistics activities for Phase III Mvax clinical trials.

Other income, net decreased from $84,565 and $94,878 earned in the three and six months ended June 30, 2007, to $11,204 and $52,849 for the comparable periods in 2008. The decrease is the function of lower interest rates with a lower average invested balance of cash.

Assuming we are successful in raising additional capital, we anticipate our spending over the next 12 months for research and development and selling, general and administrative expenses will increase as compared with 2008, as we continue to implement and accelerate the plan of operation described above.

Liquidity and Capital Resources

Our ability to continue as an operating company depends upon our immediate need to raise capital. We are in discussions with investors for a proposed Bridge Financing for the purpose of raising funds for working capital for the next few months, but there can be no assurance that we will complete the Bridge Financing or that the terms of such financing will be favorable to us or our existing stockholders. To the extent that we issue securities that are not registered under the Act in connection with the proposed Bridge Financing, the securities may not be offered or sold in the United States absent registration or an applicable exemption from registration. Even if we complete a Bridge Financing, we will need to raise additional funds immediately if we are to continue as a going concern. If we are successful in raising sufficient additional capital, it should allow us to develop products, obtain regulatory approval for our proposed products, and enter into agreements for product development, manufacturing and commercialization. There is no assurance that additional capital can be raised in an amount which is sufficient for all such purposes, or on terms favorable to us or to our stockholders.

Our current extremely limited cash resources require that we significantly curtail our efforts to enlist new clinical sites for the Phase III registration trial for M-Vax and to significantly slow the patient enrollment in that trial until we are successful in raising additional capital. We will use the proceeds of any offering primarily to fund the additional costs associated with enlisting clinical sites for and patient enrollment in the Phase III trial for M-Vax and to initiate the Phase II clinical trial for O-Vax (“O-Vax”),, the Company’s AC Vaccine for ovarian cancer, in the United States. To implement the current plan of operation described above for the balance of 2008 and into the first quarter of 2009, we need to raise substantial additional capital. If we are able to raise this additional capital, the key components of our plan of operation for the balance of 2008 and the first quarter of 2009 will include:
 
16

 
·
Enrolling patients in our Phase III registration trial U.S. for M-Vax for the treatment of Stage 3 and 4 melanoma patients, which trial will proceed under the Special Protocol Assessment that we received from the U.S. FDA in October 2006.

 
·
Continuing the treatment of melanoma patients outside the U.S. on a compassionate use basis with M-Vax.

 
·
Initiating the launch of the O-Vax study with Cancer Treatment Centers of America.

 
·
Continuing our discussions with the European Medical Evaluations Agency and AFSSAPs, the FDA equivalent regulatory bodies for the European Union and France, respectively, regarding the regulatory requirements for the AC Vaccine and its continued development in Europe and France.

 
·
Initiating discussion with Japanese regulatory authorities regarding the regulatory approval process for autologous products like our AC Vaccines and the requirements for making M-Vax available for compassionate use in Japan.

We continually evaluate our plan of operation discussed above to determine the manner in which we can most effectively utilize our limited cash resources. The timing of completion of any aspect of our plan of operations is highly dependent upon the availability of cash to implement that aspect of the plan and other factors beyond our control.

Even if we raise substantial additional capital in the near future, if our current and planned clinical trials for the AC Vaccine in the U.S. and Europe do not demonstrate continuing progress toward taking one or more products to market, our ability to raise additional capital in the future to fund our product development efforts would likely be seriously impaired. The ability of a biotechnology company, such as AVAX, to raise additional capital in the marketplace to fund its continuing development operations is conditioned upon the Company continuing to move its development products toward ultimate regulatory approval and commercialization. If in the future we are not able to demonstrate adequate progress in the development of one or more products, we will not be able to raise the capital we need to continue our then-current business operations and business activities, and we will likely not have sufficient liquidity or cash resources to continue operating.

We conduct our capital raising efforts in U.S. dollars, while a significant portion of our revenues and expenses are generated and incurred in currencies other than U.S. dollars, mainly Euros. To the extent that we are unable to match revenues received in foreign currencies with costs paid in the same currency, exchange rate fluctuations in any such currency could have an adverse effect on our results of operations and cash flows.

Because our working capital requirements depend upon numerous factors, including progress of our research and development programs, pre-clinical and clinical testing, timing and cost of obtaining regulatory approvals, changes in levels of resources that we devote to the development of manufacturing and marketing capabilities, competitive and technological advances, status of competitors, and our ability to establish collaborative arrangements with other organizations, there can be no assurance that our current cash resources will be sufficient to fund our operations beyond August 2008. Because we have no committed external sources of capital, and expect no significant product revenues for the foreseeable future, we will require additional financing to fund future operations or will need to enter into contract manufacturing relationships on terms favorable to us. There can be no assurance, however, that we will be able to obtain the additional funds sought in this offering or attract contract-manufacturing relationships on acceptable terms, if at all and we may have to cease operations. We have begun to curtail certain initiatives and projects, including the deferral of senior management salaries, due to the fact we have not raised additional capital as of the date of this report.

In the event that we do not complete the Bridge Financing or raise additional financing, it will be difficult for the Company to continue operations as they exist. We may be forced to shut down our operations or seek bankruptcy relief. If we discontinue our operations, we may not have sufficient funds to pay any amounts to our stockholders.

Item 3.   Quantitative and Qualitative Disclosures About Market Risk.

Not applicable as we are a smaller reporting company.

Item 4T. Controls and Procedures.

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that information required to be disclosed by us is accumulated and communicated to management, including our President and Chief Executive Officer and our Executive Chairman to allow timely decisions regarding required disclosure.

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Under the supervision and with the participation of our management, including our President and Chief Executive Officer and our Executive Chairman, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e) and 15d-15(e) as of June 30, 2008. Based upon that evaluation, our President and Chief Executive Officer and our Executive Chairman concluded that our disclosure controls and procedures were not effective as of June 30, 2008, due to the material weakness described in our Management’s Report on Internal Control Over Financial Reporting previously reported in our Form 10-K for the year ended December 31, 2007. These included:

 
o
Our lack of sufficient personnel at the U.S. headquarters in the accounting, treasury and financial reporting functions affected our ability to have adequate segregation of duties over financial transactions and adequate monitoring controls over the annual and quarterly financial close processes.
 
 
o
The lack of segregation of duties often results in the same individual performing two or more of the following functions: initiation and authorization of financial transactions, recording of transactions, and custody of financial assets. The lack of segregation of duties also prevented us from satisfying important monitoring control objectives, such as authorization, completeness and accuracy, and reconciliation of accounting transactions and information.

In light of the material weaknesses, in preparing our consolidated financial statements as of and for the quarter ended June 30, 2008, we performed additional analyses and other post-closing procedures to ensure our consolidated financial statements included in this quarterly report fairly present, in all material respects, our financial condition, results of operations and cash flows for the fiscal years covered thereby in conformity with generally accepted accounting principles.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during the three months ended June 30, 2008, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

We plan to take corrective actions to remediate the material weaknesses noted above. Specifically, assuming we are successful in raising additional capital, we plan to hire additional qualified personnel to assist with various accounting and finance functions within the organization. We believe this new personnel will reduce the risk associated with our lack of segregation of duties and thus enhance our system of internal controls over financial reporting.

Management believes that the actions described above, when fully implemented, will be effective in remediation of the specific material weakness discussed above.

Limitations of Effectiveness of Controls

As of the date of this filing, we are satisfied that actions implemented to date and the planned actions described above will remediate the material weaknesses and deficiencies in the internal controls and information systems that have been identified. We note that, like other companies, any system of internal controls, however well designed and operated, can provide only reasonable assurance, and not absolute assurance, that the objectives of the internal control system will be met. The design of any control system is based, in part, upon the benefits of the control system relative to its costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of control. In addition, over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of the limitations inherent in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected.
 
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PART II - OTHER INFORMATION
 
Item 1. Legal Proceedings.

On February 1, 2008, a suit was filed against us by Texas A&M University in the United States District Court of Brazos County, Texas as previously disclosed in our Form 10-K, filed with the SEC on April 15, 2008. Discovery efforts have begun and the Company is considering alternatives to resolve the suit.

On July 16, 2008, a suit was filed against us by the University of Colorado in the Adams County, Colorado District Court. The lawsuit by the University of Colorado alleges that the Company is in breach of a clinical research contract by failing to reimburse the University of Colorado for approximately $84,000 in patient enrollment and treatment expenses. The Company has previously responded that it disputes the amount billed based on milestones and other treatment criteria per the terms and conditions of the agreement. No discovery has begun in this matter.
 
The Company is subject to various legal proceedings and claims that arise in the ordinary course of its business. We believe that the ultimate liability with respect to these actions will not have a material adverse effect on the Company’s financial position.

Item 1A. Risk Factors.

Not applicable as we are a smaller reporting company.
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Submission of Matters to a Vote of Security Holders.

None.

Item 5. Other Information.

None.
 
Item 6.   Exhibits.

31.1
Certification of Principal Executive Officer and Principal Financial Officer of the Company under Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *
   
32.1
Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350. *  

* Filed herewith

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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.

 
AVAX Technologies, Inc.
     
Date:   August 15, 2008
   
     
 
By:
/s/ Francois Martelet  
   
Francois Martelet
   
President and Chief Executive Officer
   
(Principal Executive Officer and
   
Principal Financial Officer)
 
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