** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**FORM 10-Q**

 

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| **(Mark  One)**                                                                                |
|------------------------------------------------------------------------------------------------|
| **x****   QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE**  |
| **SECURITIES  EXCHANGE ACT OF 1934**                                                           |
| ** **                                                                                     |
| **For  the quarterly period ended March 31, 2008**                                        |
| ** **                                                                                     |
| **OR**                                                                                         |
| ** **                                                                                     |
| **o****   TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE** |
| **SECURITIES  EXCHANGE ACT OF 1934**                                                           |

 

**Forthe transition periodfrom              to              **

 

**CommissionFile Number 000-51134**

 

**Favrille, Inc.**

(Exact name ofregistrant as specified in its charter)

 

| **Delaware**                                      | ** ** | **33-0892797**                        |
|---------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of incorporation or |       | (I.R.S. Employer  Identification No.) |
| organization)                                     |       |                                  |
|                                              |       |                                  |
| **10445  Pacific Center Court, San Diego, CA**    | ** ** | **92121**                             |
| (Address of  principal executive offices)         |       | (Zip Code)                            |

 

**(858)526-8000**

(Registrant’stelephone number, including area code)

 

**N/A**

(Former name,former address and former fiscal year if changed since last report)

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.   YES x   NO o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See the definitions of “largeaccelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act. (Check one):

 

| Large  accelerated filer o                     |   | Accelerated  filer x         |
|------------------------------------------------|--------|-----------------------------------|
|                                           |   |                              |
| Non-accelerated  filer o                       |   | Smaller  reporting company o |
| (Do not check if  a smaller reporting company) |   |                              |

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).YES  o    NO  x

 

The number of shares ofthe Registrant’s common stock outstanding as of April 30, 2008 was 41,299,598.

 

 

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**FAVRILLE,INC.**

 

**QUARTERLYREPORT ON FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 2008**

 

**TABLEOF CONTENTS**

** **
| ** **        | ** **                                                                                                                                                                   | **PAGE** |
|-------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------|
| **PART I.**  | **FINANCIAL  INFORMATION**                                                                                                                                                   | 3        |
| Item 1.           | Financial Statements                                                                                                                                                         | 3        |
|              | Balance Sheets as of  March 31, 2008 (Unaudited) and December 31, 2007                                                                                             | 3        |
|              | Statements of  Operations (Unaudited) for the three months ended March 31, 2008 and  2007 and the period from January 21, 2000 (inception) to March 31,  2008 | 4        |
|              | Statements of Cash Flows  (Unaudited) for the three months ended March 31, 2008 and 2007 and the  period from January 21, 2000 (inception) to March 31, 2008  | 5        |
|              | Notes to  Condensed Financial Statements (Unaudited)                                                                                                                         | 6        |
| Item  2.          | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                                                  | 10       |
| Item  3.          | Quantitative  and Qualitative Disclosures About Market Risk                                                                                                                  | 15       |
| Item  4.          | Controls and  Procedures                                                                                                                                                     | 15       |
|              |                                                                                                                                                                         |     |
| **PART II.** | **OTHER  INFORMATION**                                                                                                                                                       | 15       |
| Item 1.           | Legal Proceedings                                                                                                                                                            | 15       |
| Item 1A.          | Risk Factors                                                                                                                                                                 | 15       |
| Item  2.          | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                                                                 | 31       |
| Item 6.           | Exhibits                                                                                                                                                                     | 32       |
|              |                                                                                                                                                                         |     |
| SIGNATURES        | 34                                                                                                                                                                           |

 

2

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**PART I — FINANCIAL INFORMATION**

 

**Item1. Financial Statements.**

 

**FAVRILLE, INC.**

 

**(adevelopment stage company)**

 

**BALANCE SHEETS**

 

**(inthousands, except share and per share data)**

 
| ** **                                                                                                                                                                        | ** ** | **March 31,   2008** | ** ** | **December 31,   2007** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|-----------------------------------|------------|
| ** **                                                                                                                                                                        | ** ** | **(unaudited)**                | ** ** | ** **                        | ** ** |
| **Assets**                                                                                                                                                                        | ** ** | ** **                     | ** ** | ** **                        | ** ** |
| Current assets:                                                                                                                                                                   |       |                           |       |                              |       |
| Cash and cash  equivalents                                                                                                                                                        |       | $                              | 16,089     |                              | $          | 26,362 |   |
| Short-term  investments                                                                                                                                                           |       | 3,569                          |       | 3,577                             |       |
| Other current  assets                                                                                                                                                             |       | 1,007                          |       | 806                               |       |
| Total current  assets                                                                                                                                                             |       | 20,665                         |       | 30,745                            |       |
| Property and  equipment, net                                                                                                                                                      |       | 32,276                         |       | 33,293                            |       |
| Restricted cash                                                                                                                                                                   |       | 3,571                          |       | 3,451                             |       |
| Other assets                                                                                                                                                                      |       | 423                            |       | 466                               |       |
| Total assets                                                                                                                                                                      |       | $                              | 56,935     |                              | $          | 67,955 |   |
| **Liabilities  and stockholders’ equity**                                                                                                                                    | ** ** | ** **                     | ** ** | ** **                        | ** ** |
| Current  liabilities:                                                                                                                                                             |       |                           |       |                              |       |
| Accounts payable  and accrued liabilities                                                                                                                                         |       | $                              | 3,106      |                              | $          | 3,551 |   |
| Current portion  of debt                                                                                                                                                          |       | 5,046                          |       | 5,275                             |       |
| Warrants  liability                                                                                                                                                               |       | 2,403                          |       | 2,492                             |       |
| Total current  liabilities                                                                                                                                                        |       | 10,555                         |       | 11,318                            |       |
| Debt, less  current portion                                                                                                                                                       |       | 5,097                          |       | 6,342                             |       |
| Deferred rent                                                                                                                                                                     |       | 15,596                         |       | 15,415                            |       |
| Commitments and  contingencies                                                                                                                                                    |       |                           |       |                              |       |
| Stockholders’  equity:                                                                                                                                                       |       |                           |       |                              |       |
|                                                                                                                                                                              |       |                           |       |                              |       |
| Preferred stock,  $0.001 par value; 5,000,000 shares authorized; no shares issued and  outstanding at March 31, 2008 and December 31, 2007, respectively                |       | —                         |       | —                            |       |
| Common stock,  $0.001 par value; 75,000,000 shares authorized; 41,299,598 and 41,168,432  issued and outstanding at March 31, 2008 and December 31, 2007,  respectively |       | 41                             |       | 41                                |       |
| Additional  paid-in capital                                                                                                                                                       |       | 235,101                        |       | 233,807                           |       |
| Accumulated  other comprehensive income                                                                                                                                           |       | 2                              |       | 7                                 |       |
| Deficit  accumulated during the development stage                                                                                                                                 |       | (209,457                       | )          | (198,975                          | )          |
| Total  stockholders’ equity                                                                                                                                                  |       | 25,687                         |       | 34,880                            |       |
| Total  liabilities and stockholders’ equity                                                                                                                                  |       | $                              | 56,935     |                              | $          | 67,955 |   |

 

See accompanyingnotes.

 

3

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**FAVRILLE, INC.**

 

**(adevelopment stage company)**

 

**STATEMENTS OF OPERATIONS**

 

**(inthousands, except per share data)**

 

**Unaudited**

 
| ** **                                                                             | ** ** | **Three Months ended   March 31,** | ** ** | **Period from January 21,  2000 (inception) to   March 31,** | ** ** |
|----------------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------------------------------------------|------------|
| ** **                                                                             | ** ** | **2008**                                               | ** ** | **2007**                                                                                   | ** ** | **2008** | ** ** |
| Operating  expenses:                                                                   |       |                                                   |       |                                                                                       |       |   |   |
| Research and  development                                                              |       | $                                                      | 8,063      |                                                                                       | $          | 7,997 |   | $ | 142,833 |   |
| Marketing,  general and administrative                                                 |       | 2,556                                                  |       | 2,912                                                                                      |       | 43,417 |   |
| Total operating  expenses                                                              |       | 10,619                                                 |       | 10,909                                                                                     |       | 186,250 |   |
| Interest income                                                                        |       | 281                                                    |       | 565                                                                                        |       | 7,124 |   |
| Interest expense                                                                       |       | (233                                                   | )          | (187                                                                                       | )          | (4,127 | ) |
| Other expense                                                                          |       | —                                                 |       | —                                                                                     |       | (447 | ) |
| Change in  valuation of warrants                                                       |       | 89                                                     |       | —                                                                                     |       | 2,403 |   |
| Total other  income, net                                                               |       | 137                                                    |       | 378                                                                                        |       | 4,953 |   |
| Net loss                                                                               |       | (10,482                                                | )          | (10,531                                                                                    | )          | (181,297 | ) |
| Deemed dividend  and accretion of Series C redeemable convertible preferred stock |       | —                                                 |       | —                                                                                     |       | (28,160 | ) |
| Net loss  applicable to common stockholders                                            |       | $                                                      | (10,482    | )                                                                                          | $          | (10,531 | ) | $ | (209,457 | ) |
| Net loss per  share:                                                                   |       |                                                   |       |                                                                                       |       |   |   |
| Basic and  diluted                                                                     |       | $                                                      | (0.25      | )                                                                                          | $          | (0.34 | ) |   |   |
| Weighted-average  shares—basic and diluted                                        |       | 41,182                                                 |       | 30,690                                                                                     |       |   |   |
|                                                                                        |            |                                                        |            |                                                                                            |            |  |  |  |  |  |  |

 

See accompanyingnotes.

 

4

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**FAVRILLE, INC.**

 

**(adevelopment stage company)**

 

**STATEMENTS OF CASH FLOWS**

 

**(inthousands)**

 

**Unaudited**

 
| ** **                                                                   | ** ** | ** **                       | ** ** | ** **              | ** ** | **Period from** | ** ** |
|------------------------------------------------------------------------------|------------|----------------------------------|------------|-------------------------|------------|----------------------|------------|
| ** **                                                                   | ** ** | ** **                       | ** ** | ** **              | ** ** | **January 21,** | ** ** |
| ** **                                                                   | ** ** | ** **                       | ** ** | ** **              | ** ** | **2000**             | ** ** |
| ** **                                                                   | ** ** | **Three Months ended** | ** ** | **(inception) to** | ** ** |
| ** **                                                                   | ** ** | **March 31,**               | ** ** | **March 31,**      | ** ** |
| ** **                                                                   | ** ** | **2008**                         | ** ** | **2007**                | ** ** | **2008**             | ** ** |
| **Operating  activities:**                                                   | ** ** | ** **                       | ** ** | ** **              | ** ** | ** **           | ** ** |
| Net loss                                                                     |       | $                                | (10,482    | )                       | $          | (10,531              | )          | $ | (181,297 | ) |
|                                                                         |       |                             |       |                    |       |                 |       |   |   |   |
| Adjustments to  reconcile net loss to net cash used in operating activities: |       |                             |       |                    |       |                 |       |
| Depreciation and  amortization                                               |       | 1,080                            |       | 659                     |       | 11,020               |       |
| Stock-based  compensation                                                    |       | 1,117                            |       | 1,054                   |       | 15,161               |       |
| Amortization of  premium/discount on short-term investments                  |       | (29                              | )          | (177                    | )          | (1,074               | )          |
| Change in  valuation of warrants                                             |       | (89                              | )          | —                  |       | (2,403               | )          |
| Other                                                                        |       | 1                                |       | 36                      |       | 312                  |       |
| Changes in  operating assets and liabilities:                                |       |                             |       |                    |       |                 |       |
| Other assets                                                                 |       | (163                             | )          | (420                    | )          | (915                 | )          |
| Accounts payable  and accrued liabilities                                    |       | (315                             | )          | (1,178                  | )          | 3,088                |       |
| Deferred rent                                                                |       | 181                              |       | 466                     |       | 4,396                |       |
| Net cash used in  operating activities                                       |       | (8,699                           | )          | (10,091                 | )          | (151,712             | )          |
| **Investing  activities:**                                                   | ** ** | ** **                       | ** ** | ** **              | ** ** | ** **           | ** ** |
| Purchases of  property and equipment                                         |       | (187                             | )          | (3,990                  | )          | (32,193              | )          |
| Purchases of  short-term investments                                         |       | (468                             | )          | (6,263                  | )          | (113,241             | )          |
| Maturities of  short-term investments                                        |       | 500                              |       | 14,900                  |       | 110,749              |       |
| Other assets                                                                 |       | —                           |       | —                  |       | (70                  | )          |
| Restricted cash                                                              |       | (120                             | )          | —                  |       | (3,571               | )          |
| Net cash  provided by (used in) investing activities                         |       | (275                             | )          | 4,647                   |       | (38,326              | )          |
| **Financing  activities:**                                                   | ** ** | ** **                       | ** ** | ** **              | ** ** | ** **           | ** ** |
| Proceeds from  debt                                                          |       | —                           |       | 4,362                   |       | 29,854               |       |
| Payments on debt                                                             |       | (1,476                           | )          | (1,186                  | )          | (19,764              | )          |
| Issuance of  preferred stock, net                                            |       | —                           |       | —                  |       | 76,144               |       |
| Proceeds from  issuance of convertible promissory note                       |       | —                           |       | —                  |       | 650                  |       |
| Issuance of  common stock and warrants                                       |       | 177                              |       | 10,207                  |       | 119,287              |       |
| Repurchase of  restricted common stock                                       |       | —                           |       | —                  |       | (44                  | )          |
| Net cash  provided by (used in) financing activities                         |       | (1,299                           | )          | 13,383                  |       | 206,127              |       |
| Net increase  (decrease) in cash and cash equivalents                        |       | (10,273                          | )          | 7,939                   |       | 16,089               |       |
| Cash and cash  equivalents at beginning of period                            |       | 26,362                           |       | 14,249                  |       | —               |       |
| Cash and cash  equivalents at end of period                                  |       | $                                | 16,089     |                    | $          | 22,188               |       | $ | 16,089 |   |
|                                                                         |       |                             |       |                    |       |                 |       |
| **Supplemental  non-cash activities:**                                       | ** ** | ** **                       | ** ** | ** **              | ** ** | ** **           | ** ** |
| Capitalized  interest recorded as property, plant and equipment              |       | $                                | 63         |                    | $          | 127                  |       | $ | 559 |   |
| Accrued asset  acquisitions                                                  |       | $                                | (130       | )                       | $          | 238                  |       | $ | 19 |   |
| Leasehold  improvements acquired under tenant improvement allowance          |       | $                                | —     |                    | $          | 3,669                |       | $ | 11,200 |   |
| Conversion of  Series C to common stock                                 |       | $                                | —     |                    | $          | —               |       | $ | 43,678 |   |

 

See accompanyingnotes.

 

5

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**FAVRILLE,INC.**

 

**NOTES TO CONDENSED FINANCIALSTATEMENTS**

 

**MARCH 31,2008**

 

**UNAUDITED**

 

**1. Basisof Presentation**

 

The accompanyingunaudited interim financial statements have been prepared in accordance withU.S. generally accepted accounting principles and with the rules andregulations of the Securities and Exchange Commission related to a quarterly reporton Form 10-Q. Accordingly, they do not include all of the information anddisclosures required by U.S. generally accepted accounting principles forcomplete financial statements. The balance sheet at December 31, 2007 hasbeen derived from the audited financial statements at that date but does notinclude all information and footnotes required by U.S. generally acceptedaccounting principles for complete financial statements. The interim financialstatements reflect all adjustments which, in the opinion of management, arenecessary for a fair presentation of the financial condition and results ofoperations for the periods presented. Except as otherwise disclosed, all suchadjustments are of a normal recurring nature.

 

Operating results for thethree months ended March 31, 2008 are not necessarily indicative of theresults that may be expected for the year ending December 31, 2008. Thesefinancial statements should be read in conjunction with the financialstatements included in the Company’s Annual Report on Form 10-K for theyear ended December 31, 2007 and management’s discussion and analysis offinancial condition and results of operations included elsewhere herein.

 

The preparation offinancial statements in conformity with U.S. generally accepted accountingprinciples requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities as well as expenses during the reportingperiod. Actual results could differ from those estimates.  On an ongoingbasis, we review our estimates based on information currently available, andchanges in facts and circumstances may cause us to revise these estimates.

 

***Going Concern***

 

The accompanyingcondensed financial statements have been prepared assuming the Company willcontinue as a going concern. The basis of accounting contemplates the recoveryof the Company’s assets and the satisfaction of liabilities in the normalcourse of business. From inception through March 31, 2008, the Company hasincurred net losses of approximately $181.3 million and has a deficit accumulatedduring the development stage of approximately $209.5 million.

 

At March 31, 2008, wehad $19.7 million in cash, cash equivalents and short-term investments that webelieve should fund our operations through the middle of 2008 but will notenable us to fund our operations through fiscal year 2008. We are seekingadditional financing to continue our clinical development activities andprepare for commercialization of Specifid. We expect to meet our cash needs andfund our working capital requirements from additional capital sources, whichmay include an equity offering. If we are unable to complete an equityoffering, or otherwise obtain sufficient financing, we may be required toreduce, defer, or discontinue our clinical development activities or may not beable to continue as a going concern entity. The financial statements do notinclude any adjustments relating to the recoverability and classification ofrecorded asset amounts, including any of our noncurrent assets, or amounts andclassification of liabilities that might be necessary if the Company were notable to continue as a going concern.

 

***Stock-Based Compensation***

 

Total stock-basedcompensation expense recognized for the three months ended March 31, 2008and 2007 was as follows (in thousands):

 
| ** **                        | ** ** | **Three Months   ended   March 31,** | ** ** |
|-----------------------------------|------------|----------------------------------------------------------|------------|
| ** **                        | ** ** | **2008**                                                 | ** ** | **2007** | ** ** |
| Research and  development         |       | $                                                        | 555        |   | $ | 399 |   |
| General and  administrative       |       | 562                                                      |       | 655 |   |
| Stock-based  compensation expense |       | $                                                        | 1,117      |   | $ | 1,054 |   |

 

At March 31, 2008,the total compensation cost related to unvested stock-based awards granted toemployees under the Company’s stock award plans but not yet recognized,excluding performance-based options (see below), was approximately $3.7 million,net of estimated forfeitures of approximately $420,000. This cost will beamortized using the straight-line method over a weighted-average 

 

6

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period of approximately2.4 years and will be adjusted for subsequent changes in estimated forfeitures.

 

During the three monthsended March 31, 2008, we granted to employees performance-based stockoptions for the purchase of approximately 1.9 million shares of common stockunder the 2001 Amended and Restated Equity Incentive Plan (the “EquityIncentive Plan”).  Vesting is tied toachievement of certain milestones.

 

The recognition ofcompensation expense associated with performance-based grants requires judgmentin assessing the probability of meeting the performance milestones. This mayresult in significant expense recognition in the period in which theperformance goals are met or when achievement of the goals is deemed probable.

 

Of the performance-basedstock option awards granted during 2008, approximately 500,000 of these optionswill vest over 24 months, from the date of grant, contingent upon certainperformance conditions. At March 31, 2008, management has assessed thelikelihood of meeting all of the performance conditions as less than probableas they are dependent upon many factors which are not determinable.  As such, no compensation expense wasrecorded.  The compensation cost relatedto the outstanding options of approximately $500,000 will be recognized, overtheir respective expected terms, when achievement of the milestones is deemedprobable.

 

Of the approximately 1.4million remaining performance-based stock option awards granted during 2008, 50%of these options will vest immediately upon FDA approval of Specifid and theremaining 50% will vest monthly over the following 24 months. Management cannotassess the likelihood of the FDA’s approval of Specifid as it is dependent uponmany factors including the outcome of pivotal Phase 3 clinical trial dataanalysis. The compensation costs related to these options of approximately $1.5million will be recognized, over their respective vesting terms, uponachievement of the milestone.

 

As of March 31,2008, an aggregate total of 2.7 million performance-based options remainedoutstanding. Management has assessed the likelihood of meeting all of theperformance conditions as less than probable as they are dependent upon manyfactors which are not determinable. The compensation cost related to theoutstanding options of approximately $3.7 million will be recognized, overtheir respective expected terms, when achievement of the milestones is deemedprobable.

 

***Net Loss per Common Share***

 

Net loss per share iscalculated in accordance with SFAS No. 128,*Earnings Per Share,* and SAB No. 98. Basic loss pershare is calculated using the weighted average number of common sharesoutstanding during each period, without consideration for common stockequivalents. Diluted loss per share includes the dilutive effect of commonequivalent shares outstanding for the period determined using thetreasury-stock method. For purposes of this calculation, common stock subjectto repurchase by the Company, preferred stock, options and warrants areconsidered to be common stock equivalents and are only included in thecalculation of diluted earnings per share when their effect is dilutive.

 
| ** **                                                                                                    | ** ** | **As of March 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                                                    | ** ** | **(in thousands)**            | ** ** |
| ** **                                                                                                    | ** ** | **2008**                           | ** ** | **2007** | ** ** |
| **Historical  outstanding anti-dilutive securities not included in diluted net loss per  share calculation:** | ** ** | ** **                         | ** ** | ** ** | ** ** |
| ** **                                                                                                    | ** ** | ** **                         | ** ** | ** ** | ** ** |
| Common stock  equivalents:                                                                                    |       |                               |       |   |   |
| Stock warrants                                                                                                |       | 7,822                              |       | 3,372 |   |
| Options to  purchase common stock                                                                             |       | 6,547                              |       | 3,183 |   |
| Common stock  subject to repurchase                                                                           |       | 3                                  |       | 81 |   |
|                                                                                                          |       | 14,372                             |       | 6,636 |   |

 

***Adoption of Recent Accounting Pronouncements***

 

In September 2006,the FASB issued SFAS No. 157, *Fair Value Measurements*.SFAS 157 defines fair value, establishes a framework for measuring fair valuein GAAP and expands disclosures about fair value measurements. The standardapplies whenever other standards require (or permit) assets or liabilities tobe measured at fair value. The standard does not expand the use of fair value inany new circumstances.  SFAS 157 iseffective for financial statements issued for fiscal years beginning after November 15,2007. The Company has adopted the provisions of SFAS 157 as of January 1,2008, for financial instruments. Although the adoption of SFAS 157 did notmaterially impact its financial condition, results of operations, or cash flow,the Company is now required to provide additional disclosures as part of itsfinancial statements. In accordance with the guidance of FASB Staff Position No. 157-2,the Company has postponed adoption of the standard for non-financial assets andliabilities that are measured at fair value on a non-recurring basis, until thefiscal year beginning after November 15, 2008. The Company does notanticipate adoption will have a material impact on its financial position,results of operations or liquidity.

 

7

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In February 2007,the FASB issued SFAS No. 159, *The Fair Value Option forFinancial Assets and Financial Liabilities*, including an amendmentof SFAS No. 115, *Accounting for CertainInvestments in Debt and Equity Securities*, which permits an entityto measure certain financial assets and financial liabilities at fair value.The objective of SFAS 159 is to improve financial reporting by allowingentities to mitigate volatility in reported earnings caused by the measurementof related assets and liabilities using different attributes, without having toapply complex hedge accounting provisions. Under SFAS 159, entities that electthe fair value option (by instrument) will report unrealized gains and lossesin earnings at each subsequent reporting date. The fair value option electionis irrevocable, unless a new election date occurs. SFAS 159 establishespresentation and disclosure requirements to help financial statement usersunderstand the effect of the entity’s election on its earnings, but does noteliminate disclosure requirements of other accounting standards. Assets andliabilities that are measured at fair value must be displayed on the face ofthe balance sheet. The Company chose not to elect the fair value option for itsfinancial assets and liabilities existing at January 1, 2008, and did notelect the fair value option on financial assets and liabilities transacted inthe three months ended March 31, 2008. Therefore, the adoption of SFAS 159had no impact on the Company’s financial statements.

 

**2.Comprehensive Loss**

 

Components ofcomprehensive loss were as follows (in thousands):

 
| ** **                                                  | ** ** | **Three Months ended March 31,** | ** ** |
|-------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                  | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
|                                                        |       |                                                 |       |   |   |
| Net loss                                                    |       | $                                                    | (10,482    | ) | $ | (10,531 | ) |
| Change in  unrealized gain/(loss) on short-term investments |       | (5                                                   | )          | (2 | ) |
| Comprehensive  loss                                         |       | $                                                    | (10,487    | ) | $ | (10,533 | ) |

 

Accumulated othercomprehensive income totaled approximately $2,000 and $7,000 at March 31,2008 and December 31, 2007, respectively, and was attributed to net unrealizedgains on short-term investments.

 

**3. Stockholders’ Equity**

 

*RegistrationStatement*

 

On June 20, 2006,the Company filed a shelf registration statement on Form S-3 with theSecurities Exchange Commission (the “SEC”). The shelf registration statement onForm S-3 permits the Company to sell, in one or more public offerings,shares of its common stock, debt securities or warrants, or any combination ofsuch securities, for proceeds in an aggregate amount of up to $60 million. Theshelf registration statement was declared effective by the SEC on July 11,2006. The registration statement expired on February 29, 2008.

 

On February 12,2007, the Company entered into common stock purchase agreements with certaininvestors relating to a registered direct offering of an aggregate3,333,334 shares of our common stock at $3.00 per share to the investorsfor gross proceeds of approximately $10 million.  The common stockwas issued pursuant to a prospectus supplement filed with the SEC on February 13,2007, in connection with a shelf takedown from our shelf registrationstatement.

 

On November 2, 2007,the Company entered into definitive agreements with primarily institutionalinvestors relating to a registered direct offering of an aggregate 7.4 millionshares of common stock and warrants to purchase 4.4 million shares of ourcommon stock for gross proceeds of approximately $21.1 million, beforededucting placement agent fees and estimated offering expenses. The investorspurchased the shares of common stock and warrants to purchase common stock(together, a “unit”) at a price of $2.845 per unit, each unit consisting of oneshare and a warrant to purchase 0.6 shares of common stock. The warrants areexercisable at any time prior to November 7, 2012. The exercise price ofthe warrants is $2.77 per share. The common stock was issued pursuant to aprospectus supplement filed with the SEC on November 2, 2007, inconnection with the takedown from our shelf registration statement.

 

Certain of the Company’sexisting stockholders, including three members of our board of directors, IvorRoyston, M.D., Fred Middleton and Antonio Grillo-Lopez, M.D., and fundsaffiliated with Forward Ventures and Sanderling Ventures, invested in theregistered direct offering.  Dr. Roystonand Mr. Middleton, members of our board of directors on November 2,2007, are associated with Forward Ventures and Sanderling Ventures,respectively.

 

On March 11, 2008,the Company filed a shelf registration statement on Form S-3 with theSecurities Exchange Commission (the “SEC”). The shelf registration statement onForm S-3 permits the Company to sell, in one or more public offerings, upto 13 million shares of its common stock, inclusive of securities convertibleinto or exchangeable for shares of common stock, and/or debt securities and warrantsto purchase common stock up to a total dollar amount of $25 million. The shelfregistration statement was declared 

 

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effective by the SEC on March 17,2008.

 

*CommittedEquity Financing Facility*

 

On December 19,2006, the Company entered into a Committed Equity Financing Facility (CEFF)with Kingsbridge Capital Limited (Kingsbridge) pursuant to which Kingsbridgecommitted to purchase, subject to certain conditions, up to the lesser of 5.8million shares of the Company’s common stock or an aggregate of $40 millionduring the next three years.  The Companymay require Kingsbridge to purchase newly-issued shares of the Company’s commonstock at a price between 90% and 94% of the volume-weighted average price oneach trading day during an eight-day pricing period. The maximum dollar amountof shares that the Company may require Kingsbridge to purchase in any suchpricing period is the lesser of $10 million or 1.75% of the Company’s marketcapitalization at the time of a draw down under the CEFF. The Company is notobligated to sell any of the $40 million of common stock available under theCEFF, and there are no minimum commitments or minimum use penalties.

 

In connection with theCEFF, the Company issued a warrant to Kingsbridge to purchase 250,000 shares ofthe Company’s common stock at an exercise price of $3.98 per share (theWarrant). The Warrant is exercisable through May 2012.

 

On February 15,2007, the Company filed a resale registration statement with the SEC withrespect to resale shares of common stock pursuant to the CEFF and underlyingwarrant. The registration statement was declared effective by the SEC on May 2,2007.

 

In accordance with theCEFF, on July 17, 2007 and July 23, 2007, the Company issued anaggregate of approximately 462,000 shares of our common stock to Kingsbridge atan aggregate purchase price of $1.4 million. The common stock was issuedpursuant to a prospectus supplement filed with the SEC on July 24, 2007.On September 17, 2007 and September 21, 2007, the Company issued anaggregate of approximately 673,000 shares of our common stock to Kingsbridge atan aggregate purchase price of $1.9 million. The common stock was issuedpursuant to a prospectus supplement filed with the SEC on September 25,2007.

 

*PrivatePlacement of Common Stock and Warrants*

 

On March 6,2006, the Company entered into a securities purchase agreement relating to aprivate placement in which the Company issued and sold to certain investors,for an aggregate purchase price of approximately $45.4 million, 8.6million shares of its common stock and warrants to purchase up to 3million shares of its common stock at an exercise price of $5.26 pershare. At the closing, investors in the private placement paid $5.26 pershare of common stock and an additional purchase price equal to $0.125 perwarrant.

 

Certain of the Company’sexisting stockholders, including two members of our board of directors, IvorRoyston, M.D. and Fred Middleton, and funds affiliated with Forward Ventures,Sanderling Ventures, Alloy Ventures and William Blair Capital Partners,invested in the private placement.  Dr. Royston,Mr. Middleton, Doug Kelly, M.D. and Arda Minocherhomjee, Ph.D., members ofour board of directors on March 6, 2006, are associated with ForwardVentures, Sanderling Ventures, Alloy Ventures and William Blair CapitalPartners, respectively.

 

The Company filed a registrationstatement with the SEC on March 31, 2006 covering the resale of the sharesof common stock issued in the private placement and the shares of common stockissuable upon exercise of the warrants issued in the private placement.

 

**4. FairValue Measurement**

 

The Company adoptedSFAS 157 effective January 1, 2008 for financial assets andliabilities measured at fair value. SFAS 157 defines fair value, expandsdisclosure requirements around fair value and specifies a hierarchy ofvaluation techniques based on whether the inputs to those valuation techniquesare observable or unobservable. Observable inputs reflect market data obtainedfrom independent sources, while unobservable inputs reflect the Company’smarket assumptions. These two types of inputs create the following fair valuehierarchy:

 

Level 1: Quoted prices inactive markets that are accessible at the measurement date for assets orliabilities. The fair value hierarchy gives the highest priority to Level 1inputs.

 

Level 2: Observableprices that are based on inputs not quoted on active markets, but corroboratedby market data.

 

Level 3: Unobservableinputs are used when little or no market data is available. The fair valuehierarchy gives the lowest priority to Level 3 inputs.

 

This hierarchy requiresthe Company to use observable market data, when available, and to minimize theuse of unobservable inputs when determining fair value. A financial instrument’scategorization within the valuation hierarchy is based upon the lowest level ofinput that is significant to the fair value measurement.

 

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***Determination of fair value***

 

The Company measures fairvalue using the procedures set out below for all assets and liabilitiesmeasured at fair value. When available, the Company generally uses quotedmarket prices to determine fair value, and classifies such items in Level 1. Ifquoted market prices are not available, fair value is based upon internallydeveloped valuation techniques that use, where possible, current market-basedor independently sourced market parameters. Items valued using such internallygenerated valuation techniques are classified according to the lowest levelinput or value driver that is significant to the valuation. Thus, an item maybe classified in Level 3 even though there may be some significant inputs thatare readily observable.

 

Following is adescription of the Company’s valuation methodologies used for instrumentsmeasured at fair value, as well as the general classification of suchinstruments pursuant to the valuation hierarchy. Where appropriate, thedescription includes details of the valuation models, the key inputs to thosemodels, as well as any significant assumptions.

 

***Assets and liabilities measured at fair value on a recurringbasis***

 

*Short-terminvestments*

 

The short-terminvestments category on the Company’s balance sheets includesavailable-for-sale debt securities. The Company uses quoted market prices todetermine the fair value of all investment securities; such items areclassified in Level 1 of the fair value hierarchy.

 

*Warrantsliability*

 

The warrants liabilitycategory on the Company’s balance sheets includes the outstanding warrantsissued in connection with the November 2007 registered direct offeringdescribed in Note 3. The Company uses model-derived valuations in which allsignificant inputs and significant value drivers are observable in activemarkets; such items are classified in Level 2 of the fair value hierarchy.

 

The following tablepresents the financial instruments carried at fair value, by caption on thebalance sheet and by SFAS 157 valuation hierarchy (as described above) asof March 31, 2008 (in thousands):

 
| ** **              | ** ** | ** **                                | ** ** | **Fair Value Measurements at Reporting Date Using**         | ** ** |
|-------------------------|------------|-------------------------------------------|------------|-------------------------------------------------------------------------------------------|------------|
| **Description**         | ** ** | **Balance  at  March 31, 2008** | ** ** | **Quoted Prices in  Active Markets  for Identical Assets  (Level 1)** | ** ** | **Significant Other  Observable Inputs  (Level 2)** | ** ** | **Significant  Unobservable Inputs  (Level 3)** | ** ** |
| Short-term  investments |       | $                                         | 3,569      |                                                                                      | $          | 3,569 |   | $ | — |   | $ | — |   |
| Warrants  liability     |       | 2,403                                     |       | —                                                                                    |       | 2,403 |   | — |   |
|                         |            |                                           |            |                                                                                           |            |  |  |  |  |  |  |  |  |

 

**5.Commitments and Contingencies**

 

As of March 31,2008, we had financed the purchase of equipment and leasehold improvementsthrough debt totaling approximately $29.9 million.  Total debt of $10.1 million was outstandingat that date.  These obligations are securedby our existing and future assets excluding intellectual property and are due inmonthly installments through January 2011. Borrowings under the line ofcredit bear interest at effective rates ranging from 11.45% to 12.17% perannum.  The debt agreements subject us tocertain financial and non-financial covenants. As of March 31, 2008, wewere in compliance with the terms of the debt agreements. Theagreements contain a restrictive financial covenant requiring the Company tomaintain a minimum of $15 million in available cash, cash equivalents andshort-term investments (available cash balances). If the available cashbalances drop below $15 million, the lenders could require the Company toexecute a letter of credit (LOC) for their benefit equal to the outstandingloan balances at that time. The Company would be required to use a significantamount of its available cash balance to collateralize the LOC which wouldreduce the cash available to fund operations of the Company. Inaddition, the Agreements subject the Company to certain non-financialcovenants.

 

**Item2. Management’s Discussion and Analysis of Financial Condition and Results ofOperations.**

 

**CautionaryNote Regarding Forward-Looking Statements**

 

*This Form 10-Qcontains certain forward-looking statements including expectations of marketconditions, challenges and plans, within the meaning of Section 21E of theSecurities Exchange Act of 1934, as amended, and is subject to the Safe Harborprovisions created by that statute. The words “anticipate”, “expect”, “believe”,“plan”, “intend”, and similar expressions are intended to identify suchstatements. Although the forward-looking statements in this Form 10-Qreflect the good faith judgment of our management, such statements are subjectto various risks and uncertainties, including but not limited to thosediscussed herein and, in particular, the risks described in Item 1A of Part II and throughout our Annual Report on Form 10-K for the year ended*

 

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*December 31,2007. Actual results and the timing of selected events may differ materiallyfrom those anticipated in these forward-looking statements. Except as requiredby applicable law, we disclaim any duty to update any forward-looking statementto reflect events or circumstances that occur after the date on which suchstatement is made.*

 

**Overview**

 

We are abiopharmaceutical company focused on the development and commercialization oftargeted immunotherapies for the treatment of cancer and other diseases of theimmune system. We have developed a proprietary technology that enables us tomanufacture active immunotherapy products that are designed to stimulate apatient’s immune system to mount a specific and sustained response to disease.Our lead product candidate, Specifid, is an active immunotherapy for thetreatment of B-cell non-Hodgkin’s lymphoma, or NHL. We initiated a Phase 3registration trial of Specifid in patients with follicular B-cell NHL in July 2004and randomized the last of 349 patients into the trial in June 2006.  In addition, Specifid has been evaluated inseveral multi-center, open-label Phase 2 clinical trials involving morethan 200 patients.

 

We believe Specifid maybe effective in treating other types of B-cell NHL. Four additional Phase 2clinical trials of Specifid are ongoing. One of these clinical trials is beingconducted under a separate physician-sponsored Investigational New Drug, orIND, application in the United States. Moreover, we believe our activeimmunotherapy expertise and proprietary manufacturing technology may enable usto develop additional product candidates for other oncology indications, suchas T-cell lymphoma, and for autoimmune diseases.  In June 2006, we received an allowancefrom the FDA for an IND for our second product candidate, FAV-201, for thetreatment of cutaneous T-cell lymphoma. We have retained exclusive worldwidecommercialization rights to all of our product candidates.

 

We were incorporated inDelaware in January 2000. As of March 31, 2008, we had not generatedany revenues, and we had financed our operations and internal growth throughprivate placements and public offerings of our stock and warrants, andequipment and leasehold debt financings. We are a development stage company andhave incurred significant losses since our inception in 2000, as we havedevoted substantially all of our efforts to research and developmentactivities, including clinical trials. As of March 31, 2008, our deficitaccumulated during the development stage was approximately $209.5 million. Weexpect to incur substantial and increasing losses for the next several years aswe:

 

·continue to develop and prepare for the commercialization of our lead productcandidate, Specifid;

 

·expand our research and development programs;

 

·expand our current manufacturing capabilities to support commercialmanufacturing of Specifid; and

 

· acquireor in-license oncology products that are complementary to our own.

 

**Going Concern**

 

As more fully describedin the Risk Factors and Note 1 of the Notes to Condensed Financial Statements,our independent registered public accounting firm has included an explanatoryparagraph in their report on our 2007 financial statements included with ourAnnual Report on Form 10-K for the year ended December 31, 2007 filedwith the SEC on February 29, 2008, related to the uncertainty of ourability to continue as a going concern. At March 31, 2008, we had $19.7million in cash, cash equivalents and short-term investments that we believewill allow us to complete analysis of the primary endpoint in our Phase 3registration trial, which is anticipated to occur in the second quarter of 2008,but we will need to raise additional financing to continue operations beyondsuch time.  Although we may seek additional financing prior to that time,potential equity investors may not be willing and other capital resources maynot be available to provide funding before our Phase 3 results areavailable.  If the results of our Phase 3 trial are negative orinconclusive, we may not be able to raise the necessary funds to continue as agoing concern entity.  Even if the results of our Phase 3 trial arepositive, we will need to raise additional financing within a very short periodafter completion of our analysis of such results in order to continue theclinical development activities necessary for completion of a BLA and preparefor commercialization, and we may not be able to complete a financing, eitheron favorable terms or at all, within such period.  If we are unable tocomplete an equity offering, or otherwise obtain sufficient financing, we maybe required to reduce, defer, or discontinue our clinical developmentactivities or may not be able to continue as a going concern entity. Thefinancial statements do not include any adjustments relating to therecoverability and classification of recorded asset amounts, including any of ournoncurrent assets, or amounts and classification of liabilities that might benecessary if the Company were not able to continue as a going concern.

 

**Financial Operations Overview**

 

***Researchand Development Expense. ***Researchand development expense consists primarily of costs associated with clinicaltrials of our product candidates, including the costs of manufacturing ourproduct candidates, compensation and other expenses related to research anddevelopment personnel, facilities costs and depreciation. We charge allresearch and development expenses to operations as they are incurred. Ourresearch and development activities are primarily focused on the development ofSpecifid. We completed enrollment in our Phase3 registration trial of Specifid following Rituxan in patients withfollicular B-cell NHL in January 2006. We anticipate that theanalysis of the primary endpoint in the trial will be completed and madeavailable in the second quarter of 2008. We have also completed enrollmentin two Phase 2 clinical trials and continue to evaluate the results. Fouradditional Phase 2 clinical 

 

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trials of Specifid areongoing.

 

From inception through March 31,2008, we incurred costs of approximately $142.8 million associated with theresearch and development of Specifid, which represents substantially all of ourresearch and development costs to date. We expect our research and developmentcosts to increase as we advance Specifid and new product candidates into laterstages of clinical development. While difficult to predict, we estimate thatresearch and development costs required to complete the development of and filea Biologics Licensing Application, or BLA, for Specifid will be an additional$30 million.  We are unable to estimatewith any certainty the costs we will incur in the continued development ofother product candidates for commercialization. On an ongoing basis, we expectto expand our research and development activities to include clinical developmentof FAV-201 and preclinical research of treatments for autoimmune diseases,initially multiple sclerosis.

 

Clinical developmenttimelines, likelihood of success and total costs vary widely. Although we arecurrently focused primarily on Specifid, we anticipate that we will makedeterminations as to which research and development projects to pursue and howmuch funding to direct toward each project on an ongoing basis in response tothe scientific and clinical success of each product candidate.

 

At this time, due to therisks inherent in the clinical trial process, clinical trial completion datesand costs vary significantly for each product candidate and are difficult toestimate. The lengthy process of seeking regulatory approvals and thesubsequent compliance with applicable regulations require the expenditure ofsubstantial resources. Any failure by us to obtain, or any delay in obtaining,regulatory approvals for our product candidates could cause our research anddevelopment expenditures to increase and, in turn, have a material adverseeffect on our results of operations. We cannot be certain when, if ever, anycash flows from our current product candidates will commence.

 

***Marketing,General and Administrative Expense.***  Marketing,general and administrative expenses consist primarily of compensation and otherexpenses related to our marketing and corporate administrative employees, legalfees and other professional services expenses. We anticipate increases inmarketing, general and administrative expenses as we add personnel and continueto develop and prepare for commercialization of our product candidates.

 

***InterestIncome.***  Interestincome primarily consists of interest earned on our cash reserves, cashinvested in money market funds, government securities, corporate notes andbonds and certificates of deposit.

 

***InterestExpense.***  Interestexpense represents interest on our debt, including capital leases.

 

**Critical Accounting Policies andEstimates**

 

The discussion andanalysis of our financial condition and results of operations are based on ourfinancial statements, which have been prepared in accordance with U.S.generally accepted accounting principles. The preparation of financialstatements requires us to make estimates and assumptions that affect thereported amounts of assets, liabilities, expenses and related disclosures.Actual results could differ from those estimates. While our significantaccounting policies are described in more detail in Note 1 of the Notes toFinancial Statements included in our Annual Report on Form 10-K for theyear ended December 31, 2007, we believe the following accounting policiesto be critical to the judgments and estimates used in the preparation of ourfinancial statements:

 

***Stock-BasedCompensation.***  Weaccount for stock-based compensation in accordance with Statement of FinancialAccounting Standards No. 123 (revised 2004), “Share-Based Payment,” (SFAS123(R)).  Under SFAS 123(R), stock-basedcompensation cost is measured at the grant date, based on the estimated fairvalue of the award, and is recognized as expense over the employee’s requisiteservice period.

 

During the three monthsended March 31, 2008, we granted to employees performance-based stockoptions for the purchase of approximately 1.9 million shares of common stockunder the 2001 Amended and Restated Equity Incentive Plan (the “EquityIncentive Plan”).  Vesting of suchoptions is tied to achievement of certain milestones. For purposes of measuringcompensation expense, the amount of awards ultimately expected to vest isestimated at each reporting date based on management’s expectations regardingthe relevant performance criteria. Management has initially assessed thelikelihood of achieving all of the milestones as less than probable as they aredependent upon many factors which are not determinable at this time.  As such, the compensation cost related to theoptions of approximately $2 million will be recognized, over their respectiveexpected terms, when achievement of the milestones is deemed probable.

 

As of March 31,2008, an aggregate total of 2.7 million performance-based options remainedoutstanding. Management has assessed the likelihood of meeting all of theperformance conditions as less than probable as they are dependent upon manyfactors which are not determinable. The compensation cost related to theoutstanding options of approximately $3.7 million will be recognized, overtheir respective expected terms, when achievement of the milestones is deemedprobable.

 

***LeaseObligation.***  We recognizerent expense on a straight-line basis over the reasonably assured leaseterm.  Our lease agreements 

 

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provide for scheduledrent increases during the lease terms or for rental payments commencing at adate other than the date of initial occupancy. We include any rent escalations and other rent holidays in ourstraight-line rent expense.  In addition,tenant improvements paid by the landlord are capitalized as leaseholdimprovements and amortized over the shorter of their estimated useful lives orthe remaining lease term, while the tenant improvement allowance is recorded asdeferred rent and recovered ratably over the remaining term of the lease.

 

***CapitalizedSoftware.***  Softwaredeveloped for internal use, whether purchased or developed, is capitalized andamortized using the straight-line method over an estimated useful life of fiveyears.  Costs incurred until the pointthe project has reached development stage are expensed in accordance with Statementof Position (“SOP”) 98-1, “Accounting for the Costs of Computer SoftwareDeveloped or Obtained for Internal Use.” Determining when a project has reachedthe development stage, requires the use of judgment.  Subsequent additions, modifications or upgradesto internal-use software are capitalized only to the extent that they allow thesoftware to perform a task it previously did not perform. Software maintenanceand training costs are expensed in the period in which they are incurred.

 

***FairValue Measurement.*** As discussed in Notes 1 and 4 to the condensed financial statements, theCompany adopted the provisions of SFAS No. 157 and SFAS No. 159effective January 1, 2008.

 

Management has discussedthe development and selection of these critical accounting policies with theAudit Committee of our Board of Directors and the Audit Committee has reviewedthe disclosures presented above relating to them.

 

**Results of Operations**

 

***Comparison of the Three Months Ended March 31, 2008 and2007***

 

*Researchand Development.*    Research anddevelopment expense increased from approximately $8 million during thethree months ended March 31, 2007 to $8.1 million during the three monthsended March 31, 2008. The increase of $100,000, or 1%, is primarily due toapproximately $300,000 of additional operating expenses associated with thecommercial-scale manufacturing facility; an increase of approximately $100,000in stock-based compensation; an increase of approximately $100,000, foradditional personnel including our Chief Medical Officer and StatisticalProgramming staff; and an increase of $100,000 in consulting expense related to our Phase 3 registration trialdata collection and analysis; offset by a decrease of approximately $400,000 inmanufacturing supplies related to the completion of patient enrollment in ourPhase 3 registration trial; and a decrease in cash bonus expense ofapproximately $200,000 as possible payment of the Company’s cash bonusplan  is contingent upon meeting certainmilestones during 2008 which are considered less than probable.

 

*Marketing,General and Administrative.*    Marketing,general and administrative expense decreased from approximately$2.9 million during the three months ended March 31, 2007 to$2.6 million during the three months ended March 31, 2008. Thedecrease of $300,000, or 10%, primarily reflects a decrease in cash bonusexpense of approximately $100,000 as possible payment of the Company’s cashbonus plan  is contingent upon meetingcertain milestones during 2008 which are considered less than probable;

a decrease ofapproximately $100,000 in stock-based compensation; and a decrease ofapproximately $100,000 in travel expenses.

 

*InterestIncome.*  Interestincome decreased from approximately $565,000 during the three months ended March 31,2007 to $280,000 during the three months ended March 31, 2008. Thedecrease of $285,000, or 50%, was primarily the result of the reduction in theaverage balance of cash, cash equivalents and short-term investments and alower average interest rate.

 

*Change in Valuation of Warrants.*  In November 2007, the Company issuedwarrants to purchase 4.4 million shares of Common Stock in conjunction with theregistered direct offering of Common Stock and warrants. These warrants wererecorded as a liability of $4.8 million utilizing the Black-Scholes valuationmodel, or Black-Sholes, for estimating the fair value as of the closing date, November 7,2007. Utilizing Black-Scholes, on December 31, 2007, the warrants wererevalued at approximately $2.5 million and on March 31, 2008, the warrantswere again revalued at approximately $2.4 million. The change in valuation wasrecorded as other income during the three months ended March 31, 2008.

 

**Liquidity and Capital Resources**

 

***Sourcesof Liquidity***

 

We have historicallyfunded our operations primarily through the sale of our equity securities andequipment and leasehold debt financing. As of March 31, 2008, we hadreceived proceeds of approximately $76.1 million, net of stock issuancecosts from the sale of preferred stock which was converted to common stock;proceeds from the sale of common stock in our IPO of approximately $39.5million, net of underwriters’ discounts and commissions and offering expenses;proceeds of approximately $74.9 million from the sale of common stock andwarrants to purchase common stock to certain investors, in a private placementand in registered direct offerings, net of offering expenses; and proceeds of$3.3 million from the sale of common stock to certain investors, in a committedequity financing facility.

 

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As of March 31, 2008we had financed the purchase of equipment and leasehold improvements throughdebt totaling approximately $29.9 million. Total debt of $10.1 million was outstanding at that date.  These debt obligations are secured by ourexisting and future assets excluding intellectual property and are due inmonthly installments through January 2011. Borrowings under the line ofcredit bear interest at effective rates ranging from 11.45% to 12.17% perannum.  The debt agreements subject us tocertain financial and non-financial covenants. As of March 31, 2008, wewere in compliance with the terms of the debt agreements. The debtagreements contain a restrictive financial covenant requiring the Company tomaintain a minimum of $15 million in available cash, cash equivalents andshort-term investments (available cash balances). If the available cashbalances drop below $15 million, the lenders could require the Company toexecute a letter of credit (LOC) for their benefit equal to the outstandingloan balances at that time. The Company would be required to use a significantamount of its available cash balance to collateralize the LOC which wouldreduce the cash available to fund operations of the Company.

 

***CashFlows***

 

As of March 31,2008, cash, cash equivalents and short-term investments were approximately$19.7 million as compared to $29.9 million at December 31, 2007, adecrease of approximately $10.2 million. The decrease resulted primarilyfrom the net cash used to fund ongoing operations.

 

Net cash used inoperating activities was approximately $8.7 million for the three months ended March 31,2008, compared to approximately $10.1 million for the same period in 2007.  The decrease of approximately $1.4 million isprimarily due to a decrease in cash bonus payments as possible payment of theCompany’s cash bonus plan is contingent upon meeting certain milestones in 2008which are currently considered less than probable.

 

Net cash used ininvesting activities for the three months ended March 31, 2008 wasapproximately $275,000 compared to net cash provided by investing activities of$4.6 million for the same period in 2007. The increased use of cash of approximately $4.9 million is due to adecrease of $14.4 million in maturities of short-term investments offset by adecrease of approximately $5.8 million in purchases of short-term investmentsand approximately $3.8 million in property and equipment purchases.

 

Net cash used in financingactivities for the three months ended March 31, 2008 was approximately$1.3 million, reflecting primarily debt repayments of approximately $1.5million.  Net cash provided by financingfor the same period in 2007 totaled approximately $13.4 million, reflectingprimarily the gross proceeds of approximately $10 million from our registereddirect offering of common stock in February 2007 and approximately $4.4million of gross proceeds from our credit facility, offset by approximately$1.2 million of debt repayments.

 

***FundingRequirements***

 

Our future capital usesand requirements depend on numerous forward-looking factors. These factorsinclude but are not limited to the following:

 

·the results of our ongoing pivotal Phase 3 clinical trial of Specifid;

 

·magnitude and cost of our product development efforts and other research anddevelopment activities;

 

·rate of progress toward obtaining regulatory approval for our productcandidates;

 

·costs of filing, prosecuting, defending and enforcing our patent claims andother intellectual property rights;

 

·our ability to establish and maintain collaborative, licensing or otherarrangements for the development, sale, marketing or distribution of ourproduct candidates and the terms of those arrangements;

 

·effects of competing technological and market developments; and

 

·the success of the commercialization of Specifid.

 

Until we can generatesignificant cash from our operations, we expect to continue to fund ouroperations with existing cash resources that were primarily generated from theproceeds of offerings of our equity securities and from equipment and leaseholdimprovement debt financing. In addition, we may finance future cash needsthrough the sale of other equity securities, strategic collaboration agreementsand debt financing. However, we may not be successful in obtainingcollaboration agreements, or in receiving milestone or royalty payments underthose agreements. In addition, we cannot be sure that our existing cash, cashequivalents and short-term investments will be adequate or that additionalfinancing will be available when needed or that, if available, financing willbe obtained on terms favorable to us or our stockholders. Having insufficientfunds may require us to delay, scale back or eliminate some or all of 

 

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our research ordevelopment programs or to relinquish greater or all rights to productcandidates at an earlier stage of development or on less favorable terms thanwe would otherwise choose. Failure to obtain adequate financing may alsoadversely affect our ability to operate as a going concern. If we raiseadditional funds by issuing equity securities, substantial dilution to existingstockholders would likely result. If we raise additional funds by incurringdebt financing, the terms of the debt may involve significant cash paymentobligations as well as covenants and specific financial ratios that mayrestrict our ability to operate our business.

 

As of March 31,2008, we have not invested in any variable interest entities. We do not haveany relationships with unconsolidated entities or financial partnerships, suchas entities often referred to as structured finance or special purposeentities, which would have been established for the purpose of facilitatingoff-balance sheet arrangements or other contractually narrow or limitedpurposes. In addition, we do not engage in trading activities involvingnon-exchange traded contracts. As such, we are not materially exposed to any financing,liquidity, market or credit risk that could arise if we had engaged in theserelationships. We do not have relationships or transactions with persons orentities that derive benefits from their non-independent relationship with usor our related parties other than what is disclosed in Note 8 of the Notesto Financial Statements included in our Annual Report on Form 10-K for theyear ended December 31, 2007.

 

***Off-BalanceSheet Arrangements***

 

We do not have anyoff-balance sheet arrangements.

 

**Item3. Quantitative and Qualitative Disclosures about Market Risk.**

 

***Quantitative and Qualitative Disclosures About Market Risk***

 

The primary objective ofour investment activities is to preserve principal while maximizing incomewithout significantly increasing risk. Some of the securities in which weinvest may be subject to market risk. This means that a change in prevailinginterest rates may cause the market value of the investment to fluctuate. Tominimize this risk, we may maintain our portfolio of cash equivalents andshort-term investments in a variety of securities, including commercial paper,money market funds and direct or guaranteed obligations of the United Statesgovernment. The risk associated with fluctuating interest rates is limited toour investment portfolio and we do not believe that a 1% change in interestrates over the next year would have a significant impact on our interestincome. As of March 31, 2008, all of our short-term investments werecorporate bonds and notes and asset-backed securities, and our cash equivalentswere held in checking accounts and money market funds.

 

**Item4. Controls and Procedures.**

 

***DisclosureControls and Procedures***

 

Under the supervision andwith the participation of our management, including our Chief Executive Officerand Chief Financial Officer, we evaluated the effectiveness of the design andoperation of our disclosure controls and procedures, as defined under Rule 13a-15(e) promulgatedunder the Securities Exchange Act of 1934, as amended (the Exchange Act). Basedon that evaluation, our Chief Executive Officer and Chief Financial Officerhave concluded that, as of the end of the period covered by this report, ourdisclosure controls and procedures were effective.

 

***Changesin Internal Control over Financial Reporting***

 

During the quarter ended March 31,2008, there have been no changes in our internal control over financialreporting, as defined in Rule 13a-15(f) under the Exchange Act, thatmaterially affected, or are reasonably likely to materially affect, our internalcontrol over financial reporting.

 

**PART II- OTHER INFORMATION.**

 

**Item1.    Legal Proceedings.**

 

We are currently not aparty to any material legal proceeding. We may be subject to various claims andlegal actions arising in the ordinary course of business from time to time.

 

**Item 1A.****          *Risk Factors***

 

*Youshould consider carefully the risk factors described below, together with theother information contained in this report. If any of the following risksactually occur, our business, financial condition, results of operations andfuture growth prospects would likely be materially and adversely affected. Inthese circumstances, the market price of our common stock could decline, andyou may lose all or part of your investment in our common stock.*

 

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*We havemarked with an asterisk those risk factors that reflect substantive changesfrom the risk factors included in our Annual Report on Form 10-K for theyear ended December 31, 2007.*

 

Going Concern—See “GoingConcern” in Note 1 of Notes to Condensed Financial Statements and page 18of this Risk Factors section, in which we discuss the need to obtain additionalfinancing in 2008.

 

**RisksRelated to the Development of Our Product Candidates**

 

**Failureto obtain product approvals by the FDA could harm our business.**

 

We are subject torigorous and extensive regulation by the FDA. In the United States, ourbiologic product candidates, currently in the preclinical and clinical stagesof development, cannot be marketed until they are approved by the FDA.Obtaining FDA approval involves the submission of the results of preclinicalstudies and clinical trials of the product candidates, among other information.We may not be able to obtain FDA approval, and, even if we are able to do so,the approval process typically takes many years and requires the commitment ofsubstantial effort and financial resources. The FDA can delay, limit or denyapproval of a biologic product candidate for many reasons, including:

 

·               theFDA may not find that the biologic product candidate is sufficiently safe oreffective;

 

·               FDAofficials may interpret data from preclinical testing and clinical trialsdifferently than we do; and

 

·               theFDA may not find our manufacturing processes or facilities satisfactory.

 

In addition, the specificactive immunotherapy technology on which Specifid is based is a relatively newform of cancer therapy that presents novel issues for the FDA to consider,which may make the regulatory process especially difficult.

 

We cannot assure you thatany of our product candidates in development will be approved in the UnitedStates in a timely fashion, or at all. Failure to obtain regulatory approval ofour product candidates in a timely fashion, or at all, would prevent or delayus from marketing or selling any products and, therefore, from generatingrevenues from their sale. If this occurs, we may be unable to generatesufficient revenues to attain or maintain profitability, our ability to raiseadditional capital will be impaired and our stock price may be negativelyaffected. In addition, both before and after approval, we are subject tonumerous FDA requirements covering, among other things, testing, manufacturing,quality control, labeling, advertising, promotion and export of biologics.Failure to comply with the law, including statutes and regulations,administered by the FDA, could result in, among others, any of the followingactions:

 

·               warningletters;

 

·               finesand other civil penalties;

 

·               unanticipatedexpenditures;

 

·               delaysin approving or refusal to approve a product candidate;

 

·               productrecall or seizure;

 

·               interruptionof production;

 

·               operatingrestrictions;

 

·               injunctions;and

 

·               criminalprosecution.

 

**We aredependent on the success of our lead product candidate, Specifid, and we cannotbe certain that it will be commercialized.**

 

We have expendedsignificant time, money and effort in the development of our lead productcandidate, Specifid, which is still in clinical development, has not yet receivedregulatory approval and may never be commercialized. In order to commercializeSpecifid, we will need to demonstrate to the FDA and other regulatory agenciesthat it satisfies rigorous standards of safety and effectiveness. We completedenrollment of patients in a registrational, double-blind, placebo controlledPhase 3 clinical trial of Specifid for the treatment of follicular B-cell NHLin January 2006 and randomized the last of the 349 patients June 2006.

 

We are also evaluatingSpecifid for use in other B-cell NHL indications. However, even if we were toreceive regulatory approval of Specifid for the treatment of follicular B-cellNHL or the other indications we are exploring, our ability to successfullycommercialize Specifid could be jeopardized by the emergence of a competitiveproduct that exhibits greater efficacy, longer duration of response or otherbenefits. In addition, because our initial regulatory and marketing strategycontemplates the administration of Specifid to patients following treatmentwith Rituxan, the commercial opportunity for Specifid may be limited by thedegree to which oncologists continue to use Rituxan to treat indolent B-cellNHL. Furthermore, to the extent Specifid fails to gain market acceptance forits initial 

 

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indication, it may bemore difficult for us to generate sufficient credibility with physicians andpatients to commercialize Specifid for other indications.

 

Other than Specifid, wehave only three other product development programs, which are at significantlyearlier stages of development.  In June 2006, we received anallowance from the FDA for an IND for a product candidate, FAV-201, for thetreatment of cutaneous T-cell lymphoma. We have ongoing preclinical studies toassess the applicability of our technology to autoimmune diseases, with aninitial focus on multiple sclerosis. In June 2007, we acquired a series ofoptimized anti-CD20 antibodies from Diversa Corporation (now VereniumCorporation). We are currently initiating a plan to select a preferredcandidate for preclinical studies. We cannot be certain that we will be able tosuccessfully develop any product candidate from these development programs. Wecannot be certain that the clinical development of Specifid or any otherproduct candidate in preclinical testing or clinical trials will be successful,that it will receive the regulatory approvals required to commercialize it, orthat any of our other research programs will yield a product candidate suitablefor entry into clinical trials. If we are unable to commercialize Specifid orour other product candidates, we may be unable to generate sufficient revenuesto attain or maintain profitability, our ability to raise additional capitalwill be impaired and our stock price may be negatively affected.

 

***Beforewe can seek regulatory approval of any of our product candidates, we mustsuccessfully complete clinical trials, which are uncertain.**

 

Conducting clinicaltrials is a lengthy, time-consuming and expensive process, and the results ofthese trials are inherently uncertain. We have completed enrollment of patientsin several Phase 2 clinical trials of Specifid involving more than 200 indolentB-cell NHL patients and are currently conducting follow-up evaluation of thosepatients. We completed registration of patients in a double-blind, placebocontrolled Phase 3 registrational trial of Specifid for the treatment offollicular B-cell NHL in January 2006 and randomized the last of the 349patients in June 2006. During the week of November 6, 2006, ourindependent Data Monitoring Board, or DMB, completed a planned interim analysisof data from the secondary endpoint, overall response improvement, in the first226 patients enrolled in the trial. The DMB concluded that the interim analysisdid not demonstrate a statistically significant difference between treatmentand control groups in the secondary endpoint. On October 25, 2007, weannounced that the DMB was convened to assess TTP for patients in the controlgroup of our Phase 3 trial. The DMB assessment, which was conducted inaccordance with the clinical protocol under our SPA, indicated that the controlgroup behavior is consistent with data reported in the published literature onwhich we based our assumptions for trial design and statistical analysis. Basedin part on the guidance provided by the DMB, we determined April 2008 tobe the appropriate time for data cutoff of the Phase 3 trial. We anticipatethat the analysis of the data will be completed and made available in thesecond quarter of 2008. However, we cannot guarantee when the necessary datafrom the trial will be available, and accordingly, we may not be able tocomplete final analysis of the TTP data within the projected timeframe.Moreover, we cannot guarantee that the control group behavior will ultimatelybe consistent with data reported in the published literature on which we basedour assumptions for trial design and statistical analysis.

 

Four additional Phase 2clinical trials of Specifid are ongoing.  In June 2006, we receivedan allowance from the FDA for an IND for our second product candidate, FAV-201,for the treatment of cutaneous T-cell lymphoma.

 

We have received aSpecial Protocol Assessment, or SPA, from the FDA for our pivotal Phase 3clinical trial of Specifid. In the SPA process, the FDA reviewed the design,size and planned analysis of our Phase 3 clinical trial and provided commentsregarding the trial’s adequacy to form a basis with respect to effectivenessfor approval of a Biologics Licensing Application, or BLA, if the trial meetsits predetermined objectives. We will not be able to file a BLA for Specifiduntil after we complete the analysis of the primary endpoint, TTP, of ourongoing Phase 3 registration trial. We anticipate the analysis of the primaryendpoint to be completed and made available in the second quarter of 2008. TheFDA’s written agreement is binding, except in limited circumstances, such aswhen a substantial scientific issue essential to determining the safety oreffectiveness of a product candidate is identified after the Phase 3 clinicaltrial has commenced. Despite having received an SPA, we may be required toconduct an additional Phase 3 clinical trial of Specifid for the treatment offollicular B-cell NHL before we can apply for regulatory approval. Although theFDA typically requires successful results in two Phase 3 clinical trials tosupport marketing approval, the FDA has, on several occasions, approvedproducts based on a single Phase 3 clinical trial that demonstrates a highlevel of statistical significance where there is an unmet need for alife-threatening condition. We currently plan to seek FDA approval of Specifidbased on our ongoing pivotal Phase 3 clinical trial alone. In the event thatthe FDA requires the results of a second Phase 3 clinical trial beforeaccepting a BLA or before granting marketing approval of Specifid, our launchof Specifid would be delayed, possibly by several years, and we would incursignificant costs in conducting the additional trial.

 

The preliminary, blindedclinical data reported from time to time prior to the release of the finalresults of our Phase 3 registration trial and the preliminary clinical datafrom our Phase 2 clinical trials have not been fully audited and have beentaken from databases that have not been reconciled against medical records keptat the clinical sites or that may not include the most current information onpatient disease progressions.  The data released may not be indicative ofthe final results of our Phase 3 registration trial or any other clinical trialof Specifid.  Failure can occur at any stage of testing.  We do notknow whether our Phase 3 clinical trial or any future clinical trials willdemonstrate safety and efficacy sufficient to result in marketableproducts.  Our failure to adequately demonstrate the safety and efficacyof Specifid will prevent us from obtaining regulatory approval for, orcommercializing, Specifid.

 

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Completion of necessaryclinical trials may take several years or more. Our commencement and rate ofcompletion of clinical trials may be delayed by many factors, including:

 

·               ineffectivenessof the product candidate, or perceptions by physicians that the productcandidate is not safe or effective for a particular indication;

 

·               inabilityto manufacture sufficient quantities of the product candidate for use inclinical trials;

 

·               delayor failure in obtaining approval of our clinical trial protocols from the FDA;

 

·               slowerthan expected rate of patient recruitment and enrollment;

 

·               inability to adequately follow and monitor patients after treatment;

 

·               difficultyin managing multiple clinical sites;

 

·               unforeseensafety issues; and

 

·               governmentor regulatory delays.

 

Even if we achievepositive interim results in clinical trials, these results do not necessarilypredict final results, and positive results in early trials may not beindicative of success in later trials. A number of companies in thepharmaceutical industry have suffered significant setbacks in advanced clinicaltrials, even after promising results in earlier trials. Negative orinconclusive results or adverse medical events during a clinical trial couldcause us to repeat or terminate a clinical trial or require us to conductadditional trials. Our clinical trials may be suspended at any time for avariety of reasons, including if the FDA or we believe the patientsparticipating in our trials are exposed to unacceptable health risks or if theFDA finds deficiencies in the conduct of these trials.

 

Failures or perceivedfailures in our clinical trials will directly delay our product development andregulatory approval process, damage our business prospects, make it difficultfor us to establish collaboration and partnership relationships, and negativelyaffect our reputation and competitive position in the pharmaceutical community.

 

***Failureto enroll patients in our clinical trials may cause delays in developingSpecifid or any other product candidate.**

 

 We may encounterdelays in development and commercialization, or fail to obtain marketingapproval, of Specifid or any other product candidate that we may develop if weare unable to enroll enough patients to complete clinical trials. Our abilityto enroll sufficient numbers of patients in our clinical trials depends on manyfactors, including the size of the patient population, the nature of theprotocol, the proximity of patients to clinical sites, the eligibility criteriafor the trial and competing clinical trials. Although we completed patientenrollment in our Phase 3 registration trial of Specifid in January 2006,we have from time to time experienced slower-than-expected patient enrollmentin our clinical trials and may do so in the future if additional clinicaltrials of Specifid are required or if we clinically develop any of our otherproduct candidates. Delays in planned patient enrollment may result in increasedcosts and harm our ability to complete our clinical trials and obtainregulatory approval.

 

**Thedevelopment of Specifid requires the continued availability of two FDA-approveddrugs: GM-CSF and Rituxan****,and if either of those drugs becomes unavailable we may not be able to continuedevelopment of, or commercialize, Specifid.**

 

Administration ofSpecifid requires an adjuvant, which is a substance that is used to enhance theimmune response. We use a white blood cell growth factor known as GM-CSF, whichis commercially available solely from Bayer HealthCare Pharmaceuticals(formerly Berlex Laboratories, Inc.), as an adjuvant for Specifid. GM-CSFis an FDA-approved and commercially available drug that may be purchased byphysicians.  In February 2007, we entered into a clinical supply andstudy agreement with Berlex for clinical trials of Specifid performed in theUnited States, prior to which time we relied on purchase orders to purchaseGM-CSF from Berlex.  If we require GM-CSF for use in clinical trialsoutside the United States, or for use in other clinical trials not covered byour agreement with Berlex, we will need to rely on purchase orders for suchpurchases.  Our current strategy for the initial commercialization ofSpecifid involves the administration of Specifid following treatment withRituxan. Rituxan is a passive immunotherapy for patients with NHL, which isalso FDA-approved and is commercially available solely from Genentech, Inc.and Biogen Idec Inc. We currently rely on physicians to order and administerRituxan to patients prior to the administration of Specifid in our registrationtrial. If GM-CSF or Rituxan were to become unavailable as a result ofregulatory actions, supply constraints or other reasons, our ability tocontinue the clinical development of Specifid would be jeopardized.

 

**RisksRelated to Our Financial Results and Need for Financing**

 

***We maynot be able to continue as a going concern and will need to raise funds in thevery near future. We will need substantial additional funds to continueoperations, which we may not be able to raise on favorable terms, or at all.**

 

We will need substantialadditional funds for existing and planned preclinical studies and clinicaltrials, to continue research and development activities, for lease and debtobligations related to our manufacturing and headquarter facilities, and toestablish manufacturing and marketing capabilities for any products we maydevelop. In addition, because we do not expect to generate revenues from thesale of our product candidates for several years, if at all, we will also needto raise additional capital to fund our operations.

 

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As more fully describedin Note 1 of the Notes to CondensedFinancial Statements, our independent registered public accounting firmhas included an explanatory paragraph in their report on our 2007 financialstatements related to the uncertainty of our ability to continue as a goingconcern. We believe that our cash, cash equivalents and short-term investments,which were approximately $19.7 million at March 31, 2008, will allow us tocomplete analysis of the primary endpoint in our Phase 3 registration trial,which is anticipated to occur in the second quarter of 2008, but we will needto raise additional financing to continue operations beyond such time. Althoughwe may seek additional financing prior to that time, potential equity investorsor other capital resources may not be willing to provide funding before ourPhase 3 results are available.  If the results of our Phase 3 trial arenegative or inconclusive, we may not be able to raise the necessary funds tocontinue as a going concern entity.  Even if the results of our Phase 3trial are positive, we will need to raise additional financing within a veryshort period after completion of our analysis of such results in order tocontinue the clinical development activities necessary for completion of a BLAand prepare for commercialization, and we may not be able to complete afinancing, either on favorable terms or at all, within such period.  If weare unable to complete an equity offering, or otherwise obtain sufficientfinancing, we will be required to reduce, defer, or discontinue our clinicaldevelopment activities and will likely not be able to continue as a goingconcern entity.

 

Our forecast of theperiod of time through which our financial resources will be adequate tosupport our operations is a forward-looking statement and involves risks anduncertainties, and actual results could vary as a result of a number offactors, including the factors discussed elsewhere in these risk factors. Wehave based this estimate on assumptions that may prove to be wrong, and wecould utilize our available capital resources sooner than we currently expect.

 

Our future capitalrequirements or the adequacy of our available funds will depend on manyfactors, including, but not limited to:

 

·               theresults of our ongoing Phase 3 registration trial of Specifid;

 

·               magnitudeand cost of our product development efforts and other research and developmentactivities;

 

·               rateof progress toward obtaining regulatory approval for Specifid and our otherproduct candidates;

 

·               costsof filing, prosecuting, defending and enforcing our patent claims and otherintellectual property rights;

 

·               ourability to establish and maintain collaborative, licensing or otherarrangements for the development, sale, marketing or distribution of ourproduct candidates and the terms of those arrangements;

 

·               effectsof competing technological and market developments;

 

·               thecost of expansion of our current facility for commercial production or theconstruction of a large separate commercial-scale production facility; and

 

·               thesuccess of the commercialization of Specifid.

 

Future capitalrequirements will also depend on the extent to which we acquire or invest inbusinesses, products and technologies, but we currently have no commitments oragreements relating to any of these types of transactions.

 

Pursuant to an effectiveshelf registration statement on Form S-3, in February 2007, we sold$10 million of common stock and in November 2007, we sold $21.1 million ofcommon stock and warrants.  Additionally, we have entered into the CEFFpursuant to which Kingsbridge committed to purchase, subject to certainconditions, up to $40 million of our common stock.   In July 2007,we sold 462,195 shares of common stock to Kingsbridge pursuant to the CEFF forgross proceeds totaling $1.4 million. In September 2007, we issued anaggregate of 673,395 shares of our common stock to Kingsbridge at an aggregatepurchase price of $1.9 million.   On March 11, 2008, we filed ashelf registration statement with the SEC on Form S-3 pursuant to which wemay periodically sell up to 13 million shares of common stock and/or up to $25million of debt securities and warrants to purchase common stock. Theregistration statement was declared effective by the SEC on March 17,2008. Additional funding may not be available to us, and, if available, may notbe available on acceptable terms. If we raise additional funds by issuingequity securities, stockholders will incur immediate dilution. If adequatefunds are not available to us, we may be required to delay, reduce the scopeof, or eliminate one or more of our research, development and clinicalactivities. Alternatively, we may need to seek funds through arrangements withcollaborative partners or others that require us to relinquish rights totechnologies or product candidates that we would otherwise seek to develop orcommercialize ourselves. Any of these events could have a material adverseeffect on our business, results of operations, financial condition or cashflow.

 

***We haveincurred significant operating losses since inception and anticipate that wewill continue to incur substantial losses and negative cash flow fromoperations for the foreseeable future.**

 

We are a developmentstage company with a limited operating history. We have financed our operationsthrough private placements of common stock and warrants, public offerings ofour common stock and warrants to purchase our common stock, equipment andleasehold debt financing, and our Committed Equity Financing Facility, or CEFF,through Kingsbridge Capital Limited. We have incurred losses in each year sinceour inception in 2000. For the three months ended March 31, 2008, theCompany reported a net loss of $10.5 million, or $0.25 per share, compared to anet loss of $10.5 million, or $0.34 per share, for the same period in2007.  These losses, among other things, have had and will continue tohave an adverse effect on our stockholders’ equity and working capital. Weexpect to incur substantial operating losses for at least the next severalyears. This is due primarily to the expansion of our clinical 

 

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trials and research anddevelopment programs, preparations to manufacture Specifid on a commercial scale,and marketing, general and administrative expenses. We also have substantiallease and debt obligations related to our new manufacturing and headquartersfacilities impacting our operating expenses. We expect that our losses willfluctuate from quarter to quarter and year to year and that these fluctuationsmay be substantial. We cannot guarantee that we will successfully develop,manufacture, commercialize or market any products. As a result, we cannotguarantee that we will ever achieve or sustain product revenues orprofitability.

 

**Wecurrently have no source of revenue and may never become profitable.**

 

Our ability to becomeprofitable will depend upon our ability to generate revenue. To date, Specifidhas not generated any revenue, and we do not know when or if Specifid willgenerate revenue. Our ability to generate revenue depends on a number offactors, including our ability to:

 

·               successfullycomplete clinical trials for Specifid;

 

·               obtainregulatory approval for Specifid, including regulatory approval for ourcommercial scale manufacturing facility and process;

 

·               manufacturecommercial quantities of Specifid at acceptable cost levels; and

 

·               successfullymarket and sell Specifid.

 

We do not anticipate thatwe will generate revenues until 2009, at the earliest. Further, we do notexpect to achieve profitability for at least several years after generatingmaterial revenues. If we are unable to generate revenue, we will not becomeprofitable, and we may be unable to continue our operations.

 

*******Our credit facilities with Oxford Finance Corporation and GE CapitalCorporation include a restrictive financial covenant, violation of which couldrestrict a significant amount of our available cash balances.**

 

Our loan and securityagreements with Oxford Finance Corporation and GE Capital Corporation, or thelenders, contain a restrictive financial covenant requiring us to maintain aminimum of $15 million in available cash, cash equivalents and short-terminvestments, or available cash balances. If our available cash balances drop below $15 million, which is likelyto occur in the second quarter of 2008 unless we are able to raise additional financing,the lenders could require us to execute a letter of credit, or LOC, for theirbenefit equal to the outstanding loan balances at that time. We would berequired to use a significant amount of our available cash balance tocollateralize the LOC which would reduce the cash available to fund operationsof the Company.

 

**Ourcommitted equity financing facility with Kingsbridge may not be available to usif we elect to make a draw down, may require us to make additional “blackout”or other payments to Kingsbridge and may result in dilution to ourstockholders.**

 

In December 2006, weentered into the CEFF with Kingsbridge. The CEFF entitles us to sell andobligates Kingsbridge to purchase, from time to time over a period of 36months, shares of our common stock for cash consideration up to an aggregate of$40 million, subject to specified conditions and restrictions. Kingsbridge willnot be obligated to purchase shares under the CEFF unless specified conditionsare met, which include a minimum price for our common stock; the accuracy ofrepresentations and warranties made to Kingsbridge; compliance with laws; andthe effectiveness of a registration statement registering for resale the sharesof common stock to be issued in connection with the CEFF. In addition, amongother termination rights, Kingsbridge is permitted to terminate the CEFF byproviding written notice to us within 10 business days after it obtains actualknowledge that an event has occurred resulting in a material and adverse effecton our business, operations, properties or financial condition (subject tospecified exceptions, including conditions or events that are reasonablyexpected to occur in the ordinary course of our business). If we are unable toaccess funds through the CEFF, or if Kingsbridge terminates the CEFF, we may beunable to access capital on favorable terms, or at all. In July 2007, weissued an aggregate of 462,195 shares of our common stock to Kingsbridge at anaggregate purchase price of $1.4 million.   In September 2007, weissued an aggregate of 673,395 shares of our common stock to Kingsbridge at anaggregate purchase price of $1.9 million.

 

 We are entitled, incertain circumstances, to deliver a “blackout” notice to Kingsbridge to suspendthe use of the prospectus included in the resale registration statement andprohibit Kingsbridge from selling shares under such prospectus for a certainperiod of time.  If we deliver a blackout notice in the 60 trading daysfollowing the settlement of a draw down and the volume weighted average priceon the trading day immediately preceding the related blackout period is greaterthan the volume weighted average price on the first trading day following suchblackout period, or if such registration statement is not effective in circumstancesnot permitted by our registration rights agreement with Kingsbridge, then wemust make a payment to Kingsbridge, or issue Kingsbridge additional shares inlieu of this payment, calculated on the basis of a specified number of sharesheld by Kingsbridge immediately prior to the blackout period and the change inthe market price of our common stock during the period in which the use of theregistration statement is suspended.  If the trading price of our commonstock declines during a suspension of the resale registration statement, theblackout or other payment could be significant.

 

Should we sell shares toKingsbridge under the CEFF, or issue shares in lieu of a blackout payment, itwill have a dilutive effect on 

 

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the holdings of ourcurrent stockholders and may result in downward pressure on the price of ourcommon stock. If we draw down amounts under the CEFF, we will issue shares toKingsbridge at a discount of up to 10% from the volume weighted average priceof our common stock. If we draw down amounts under the CEFF when our stockprice is decreasing, we will need to issue more shares to raise the same amountthan if our stock price was higher. Issuances in the face of a declining stockprice will have an even greater dilutive effect than if our stock price werestable or increasing and may further decrease our stock price.

 

**Futurechanges in financial accounting standards or practices or existing taxation rules orpractices may cause adverse unexpected revenue or expense fluctuations andaffect our reported results of operations.**

 

A change in accountingstandards or practices or a change in existing taxation rules or practicescan have a significant effect on our reported results and may even affect ourreporting of transactions completed before the change is effective. Newaccounting pronouncements and taxation rules and varying interpretationsof accounting pronouncements and taxation practice have occurred and may occurin the future. Changes to existing rules or the questioning of currentpractices may adversely affect our reported financial results or the way weconduct our business.

 

**OtherRisks Related to Our Business and Industry**

 

**Wecurrently depend on single source suppliers for critical raw materials formanufacturing. The loss of these suppliers could delay our clinical trials orprevent or delay commercialization of Specifid.**

 

We currently depend onsingle source suppliers for critical raw materials used in the manufacture ofSpecifid. In particular, our manufacturing process for Specifid requires aforeign protein derived from shellfish that is known as keyhole limpethemocyanin, or KLH. We purchase KLH from biosyn Arzneimittel GmbH, or biosyn,which is currently the only supplier of KLH that has submitted the requiredfiling, known as a drug master file, to the FDA. In November 2004, weentered into an eight-year supply and license agreement with biosyn under whichbiosyn has agreed to supply us with KLH and we have agreed to make paymentsupon the achievement of certain milestones and committed to annual KLH purchaserequirements during the commercialization of Specifid.  Either party mayterminate the supply agreement upon a breach by the other party that is notcured within 60 days or other events relating to insolvency or bankruptcy. Ifwe identify another supplier of KLH of suitable quality for our purposes, wewill not be able to use the supplier as a second source of KLH for thecommercial manufacture of Specifid unless the KLH is tested to be comparable tothe existing KLH.

 

In addition, we depend ona single source supplier for the cell growth media we use to produce Specifid.We purchase this material from Expression Systems LLC, which in turn obtainsseveral of the components used in the cell growth media from sole suppliers. InApril 2007, we executed five-year supply and non-exclusive licenseagreements with Expression Systems. Each agreement is renewable for onethree-year period at our option. Under the terms of the agreements, we have theright to purchase raw material components from Expression Systems andmanufacture the cell growth media in-house.

 

Establishing additionalor replacement suppliers for these materials may take a substantial amount oftime. In addition, we may have difficulty obtaining similar materials fromother suppliers that are acceptable to the FDA. If we have to switch to areplacement supplier, we may face additional regulatory delays and themanufacture and delivery of Specifid, or any other product candidates that wemay develop, could be interrupted for an extended period of time, which maydelay completion of our clinical trials or commercialization. If we are unableto obtain adequate amounts of these materials, our clinical trials will bedelayed. In addition, we will be required to obtain regulatory clearance fromthe FDA to use different materials that may not be as safe or as effective. Asa result, regulatory approval of Specifid, or any other product candidates thatwe may develop, may not be received at all.

 

***We relyon third parties to conduct our clinical trials. If these third parties do notsuccessfully carry out their contractual duties or meet expected deadlines, wemay be delayed or may not be able to obtain regulatory approval for or commercializeSpecifid or any other product candidates that we may develop.**

 

Our Phase 3 registrationtrial of Specifid for the treatment of follicular B-cell NHL is being conductedat 67 centers in the United States and will require long-term follow up of atleast 342 patients randomized into the trial. One clinical trial of Specifid isbeing conducted under the direction of a physician sponsor, rather than underour supervision. We do not have the ability to independently conduct clinicaltrials for Specifid, or any other product candidate that we may develop, and wemust rely on third parties, such as medical institutions and clinicalinvestigators, including physician sponsors, to conduct our clinical trials. Inparticular, we will rely on these parties to recruit and enroll patients in ourclinical trials. We also rely on third-party couriers to transport patienttissue samples and Specifid. If any of the third parties upon whom we rely toconduct our clinical trials or transport patient tissue samples and immunotherapiesdo not comply with applicable laws, successfully carry out their obligations ormeet expected deadlines, and need to be replaced, our clinical trials may beextended, delayed or terminated.

 

If the quality oraccuracy of the clinical data obtained by medical institutions and clinicalinvestigators, including physician sponsors and other third-party vendorsinvolved in data management, is compromised due to their failure to adhere toapplicable laws or our clinical protocols or for other reasons, we may not beable to obtain regulatory approval for or successfully commercialize Specifid,or 

 

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any other productcandidates that we may develop. If any of our relationships with any of theseorganizations or individuals terminates, we believe that we would be able toenter into arrangements with alternative third parties. However, replacing anyof these third parties would delay our clinical trials and could jeopardize ourability to commercialize Specifid and our other product candidates on a timelybasis, or at all.

 

**Even ifwe obtain regulatory approval, we will continue to be subject to extensivegovernment regulation that may cause us to delay the introduction of ourproducts or withdraw our products from the market.**

 

Even if we obtainregulatory approval for Specifid or our other product candidates, we will stillbe subject to extensive regulation. These regulations will impact many aspectsof our operations, including production, record keeping, quality control,adverse event reporting, storage, labeling, advertising, promotion andpersonnel. In addition, the later discovery of previously unknown problems mayresult in restrictions of the product candidates, including their withdrawalfrom the market. Furthermore, regulatory approval may subject us to ongoingrequirements for post-marketing studies. If we or any third party that weinvolve in our operations fail to comply with any continuing regulations, wemay be subject to, among other things, product seizures, recalls, fines orother civil penalties, injunctions, suspensions or revocations of marketinglicenses, operating restrictions and criminal prosecution.

 

**Beforewe can obtain marketing approval for or commercially distribute Specifid, wemust have a commercial-scale facility for the manufacture of Specifid. Inaddition, the FDA and the California Department of Health Services must findour manufacturing facility and process satisfactory.**

 

Our manufacturingmethods, equipment and processes must comply with the FDA’s current GoodManufacturing Practices, or cGMP, requirements. We may also need to performextensive audits of vendors, contract laboratories and suppliers. The cGMPrequirements govern, among other things, record keeping, production processesand controls, personnel and quality control. We have only undertaken initialsteps towards achieving compliance with these regulatory requirements.Additional steps will require expenditure of significant time, money andeffort. We cannot predict the likelihood that the FDA will find our facilitysatisfactory, even if we believe that we have taken the necessary steps toachieve compliance. If we fail to comply with these requirements or fail topass a pre-approval inspection of our manufacturing facility in connection withan application to obtain marketing approval for Specifid or another productcandidate, we would not receive regulatory approval, and we would be subject topossible regulatory action.

 

We manufacture Specifidfor our ongoing Phase 3 registration trial and for the planned and ongoingPhase 2 clinical trials at our facility in San Diego, California. We currentlylease an 80,000 square foot facility in San Diego under a long-term leaseagreement. Our facility was inspected and licensed by the California Departmentof Health Services. Our facility is subject to re-inspection at any time.Failure to maintain a license from the California Department of Health Servicesor to meet the inspection criteria of the California Department of HealthServices would disrupt our manufacturing processes and prevent us fromsupplying Specifid to patients. If an inspection by the California Departmentof Health Services indicates that there are deficiencies in our manufacturingprocess, we could be required to take remedial actions at potentiallysignificant expense, and our facility may be temporarily or permanently closed.

 

We expanded and qualifiedour current facility for commercial scale manufacturing in order tocommercialize Specifid or any other product candidates that we may develop. Wecompleted construction to expand this facility during the second quarter of2007. The entire 80,000 square foot facility will be dedicated tomanufacturing. We cannot assure you that we would be able to meet commercialdemand for Specifid in this facility. Additionally, we may require a largerproduction facility to meet the demand for Specifid if it is approved. We wouldneed to raise additional debt or equity capital to finance construction of thelarger facility. Such financing may not be available or, if available, may notbe obtained on terms favorable to us or our stockholders.

 

Preparing a facility forcommercial manufacturing may involve unanticipated delays and the costs ofcomplying with FDA regulations may be significant. In addition, any materialchanges we make to the manufacturing process after approval may requireapproval by the FDA and state regulatory authorities. Obtaining these approvalsis a lengthy, involved process, and we may experience delays that could limitour ability to manufacture commercial quantities, increase our costs andadversely affect our business.

 

**We mayexperience difficulties in manufacturing Specifid or any other productcandidates that we may develop, which could prevent us from completing ourongoing clinical trials and commercializing these product candidates.**

 

Manufacturing Specifid isa complex, multi-step process that requires us to expend significant time,money and effort in production, record keeping and quality systems to assurethat Specifid will meet product specifications and other regulatoryrequirements. To date, we have manufactured Specifid only for use in Phase 2and Phase 3 clinical trials and have no experience in manufacturing Specifidfor the commercial quantities that might be required if we receive regulatoryapproval. In particular, we cannot be sure that we will be able to manufactureSpecifid at a cost that would enable commercial use. We may experience any ofthe following problems in our efforts to manufacture our product candidates forour expanding clinical trials or on a commercial scale:

 

·               failure to obtain asufficient supply of key raw materials;

 

·               difficultiesin completing the development and validation of the specialized assays requiredto ensure the consistency of 

 

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our product candidates,including Specifid;

 

·               difficultiesin obtaining adequate tumor samples from treating physicians and hospitals;

 

·               difficultiesin manufacturing Specifid for multiple patients simultaneously;

 

·               difficultiesin the timely shipping of tumor samples to us or in the shipping of Specifid tothe treating physicians due to errors by third-party couriers, transportationrestrictions or other reasons;

 

·               failureto ensure adequate quality control and assurance in the manufacturing processas we increase the production quantities of Specifid;

 

·               difficultiesin establishing and effectively managing a commercial-scale manufacturingfacility;

 

·               failureto comply with regulatory requirements, such as FDA regulations andenvironmental laws;

 

·               significantchanges in regulatory requirements;

 

·               damageto or destruction of our manufacturing facility or equipment;

 

·               difficultyin qualifying a second-source supplier for certain critical equipment; and

 

·               shortagesof qualified personnel.

 

In addition, because ourmanufacturing process only begins upon our receipt of a patient’s tumor biopsy,we cannot produce inventory reserves of our product candidate to be stored inanticipation of any of these potential manufacturing problems. The failure toproduce an adequate supply of Specifid could delay our clinical trials and, inturn, delay submission of a BLA for Specifid and commercial launch. Similarly,any difficulties we experience in the manufacture and supply of other productcandidates, such as FAV-201, would delay the clinical trials of those productcandidates.

 

**If ourmanufacturing facility is damaged or destroyed, our ability to manufactureproducts will be significantly affected, which could delay or preventcompletion of our clinical trials and commercialization of Specifid or anyother product candidates that we may develop.**

 

We currently rely on theavailability and condition of our manufacturing facility in San Diego tomanufacture Specifid. We lease the property where this facility is locatedunder a lease agreement that expires June 30, 2025, but may be extended atour option for two additional five-year periods. After that time, we may not beable to negotiate a new lease for our facility. If our current facility or anyadditional facility we may construct or acquire, or our equipment in suchfacilities, is damaged or destroyed, we will not be able to quickly orinexpensively replace our manufacturing capacity. This would significantlyaffect our ability to complete clinical trials of, and to manufacture andcommercialize, Specifid, or any other product candidates that we may develop.

 

In addition, ourfacilities have been subject to electrical blackouts as a result of a shortageof available electrical power. Although we have back-up emergency powergenerators to cover energy needs for key support systems, a lengthy outagecould disrupt the operations of our facilities and clinical trials. While wecarry business interruption insurance, this insurance may not be adequate. Anysignificant business interruption could cause delays in our product developmentand harm our business.

 

**If we donot develop a sufficient sales and marketing force or enter into agreementswith third parties to sell and market Specifid, we may not be able tosuccessfully commercialize our products, which would limit our ability to earnproduct revenues.**

 

We have exclusiveworldwide rights to Specifid. If we are successful in obtaining BLA approval orforeign marketing approval for Specifid, we will need to establish sales andmarketing capabilities. In the United States, we plan to do this either byestablishing our own sales force or by entering into a co-promotion arrangementwith a sales and distribution partner. Outside of the United States, we plan toestablish strategic collaborations for the development and marketing ofSpecifid.

 

We do not presentlypossess the resources or experience necessary to market Specifid or our otherproduct candidates ourselves, and we currently have no arrangements for thepromotion or distribution of our product candidates. Our future commercialsuccess will depend on our ability to establish our own sales and marketinginfrastructure or to collaborate with third parties that have greater sales andmarketing experience and resources. Developing effective internal sales andmarketing capabilities, which would include the hiring of a sales force, wouldrequire a significant amount of our financial resources and time.

 

We may be unable toestablish and manage an effective sales force in a timely or cost-effectivemanner, or at all, and any sales force we do establish may not be capable ofgenerating demand for Specifid or any other product candidate we may develop.In addition, if we cannot enter into co-promotion arrangements in the UnitedStates, or other strategic collaborations for the development and marketing ofSpecifid in other countries, in a timely manner and on acceptable terms, we maynot be able to successfully commercialize Specifid or any other productcandidate that we may develop.

 

To the extent that weenter into arrangements with third parties to perform sales, marketing anddistribution services, our product revenues are likely to be lower than if wedirectly marketed and sold Specifid, or any other product candidates that wemay develop. If we are unable to establish adequate sales, marketing anddistribution capabilities, independently or with others, we will not be able to

 

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generate product revenueand will not become profitable.

 

**If physiciansand patients do not use any of our products that may be approved, our abilityto generate revenue in the future will be limited.**

 

If approved, Specifid andother product candidates that we may develop may not gain market acceptanceamong physicians, healthcare payors, patients and the medical community. Demandfor any approved product that we may develop will depend on many factors,including:

 

·               ourability to provide acceptable evidence of safety and efficacy;

 

·               convenienceand ease of administration;

 

·               availabilityof alternative treatments;

 

·               costeffectiveness;

 

·               continuingwidespread use of Rituxan to treat our initial target disease market;

 

·               effectivenessof our regulatory and marketing strategies;

 

·               prevalenceand severity of adverse side effects;

 

·               publicityconcerning our products or competitive products; and

 

·               ourability to obtain third-party coverage or reimbursement.

 

Furthermore, to theextent Specifid fails to gain market acceptance for its initial indication, itmay be more difficult for us to generate sufficient credibility with physiciansand patients to commercialize Specifid for other indications.

 

**If weare unable to obtain acceptable prices or adequate coverage and reimbursementfrom third-party payors for Specifid, or any other product candidates that wemay develop, our revenues and prospects for profitability will suffer.**

 

Our ability tocommercialize Specifid, or any other product candidates that we may develop,depends on the extent to which coverage and reimbursement for Specifid, or anyother product candidates that we may develop, will be available from:

 

·               governmentalpayors, such as Medicare and Medicaid;

 

·               privatehealth insurers, including managed care organizations; and

 

·               otherthird-party payors.

 

Many patients will not becapable of paying for Specifid, and may be incapable of paying for any otherproduct candidates that we may develop, themselves and will rely on third-partypayors to pay for their medical needs. The federal and state governments,insurance companies, managed care organizations and other third-party payorsare actively seeking to contain or reduce costs of health care in the United Statesand exert increasing influence on decisions regarding the use of, andreimbursement levels for, particular treatments. Such third-party payors,including Medicare, are scrutinizing newly approved medical products andservices and may not cover or may limit coverage and reimbursement for ourproduct candidates. In particular, third-party payors may limit the indicationsfor which they will reimburse patients who use Specifid, or any other productcandidates that we may develop. Cost-control initiatives could cause us todecrease the price we might establish for Specifid, or any other productcandidates that we may develop, which would result in lower product revenues.If the prices for Specifid, or any other product candidates that we maydevelop, decrease or if governmental and other third-party payors do notprovide adequate coverage and reimbursement levels for Specifid, or any otherproduct candidates that we may develop, our revenue and prospects forprofitability will suffer.

 

**If weare unable to establish or manage strategic collaborations in the future, ourrevenue and product development may be limited.**

 

Our strategy may includereliance on strategic collaborations for co-promotion of Specifid in the UnitedStates. In addition, we expect to rely on strategic collaborators forcommercialization of Specifid outside of the United States and, to an evengreater extent, for worldwide development and commercialization of productcandidates and programs for chronic autoimmune diseases, such as multiplesclerosis. To date, we have not entered into any agreements with third partiesfor any of these services.

 

Establishing strategiccollaborations is difficult and time-consuming. Our discussions with potential collaboratorsmay not lead to the establishment of new collaborations on favorable terms, orat all. For example, potential partners may reject collaborations based upontheir assessment of our financial, regulatory or intellectual propertyposition. If we successfully establish new collaborations, these relationshipsmay never result in the successful development or commercialization of ourproduct candidates or the generation of sales revenue. To the extent that weenter into co-promotion or other collaborative arrangements, our productrevenues are likely to be lower than if we directly marketed and sold anyproducts that we may develop.

 

Management of anycollaborative relationship we may establish in the future will require:

 

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·               significanttime and effort from our management team;

 

·               coordinationof our research and development programs with the research and developmentpriorities of ourcollaborators; and

 

·               effectiveallocation of our resources to multiple projects.

 

If we enter intodevelopment or commercialization collaborations, our success will in partdepend on the performance of our corporate collaborators. We likely will notdirectly control the amount or timing of resources devoted by our corporatecollaborators to activities related to our product candidates. Our corporatecollaborators may not commit sufficient resources to our research anddevelopment programs or the commercialization, marketing or distribution of ourproduct candidates. If any corporate collaborator fails to commit sufficientresources, our preclinical or clinical development related to the collaborationcould be delayed or terminated. Also, our collaborators may pursue developmentor commercialization of other products, product candidates or alternativetechnologies in preference to our product candidates. Finally, ourcollaborators may terminate our relationships, and we may be unable toestablish additional corporate collaborations in the future on acceptableterms, or at all.

 

**Ourefforts to discover, develop and commercialize new product candidates beyondSpecifid are at an early stage and are subject to a high risk of failure.**

 

Our strategy is focusedon the research, development and commercialization of targeted immunotherapiesfor the treatment of cancer and other diseases of the immune system. Theprocess of successfully developing product candidates is very time-consuming,expensive and unpredictable. We have only recently begun to direct significanteffort toward the development of product candidates in addition to Specifid,such as FAV-201 for T-cell lymphoma and a preclinical product candidate for thetreatment of multiple sclerosis. In addition, we acquired a series of optimizedanti-CD20 antibodies in June 2007. We are currently initiating a plan toselect a preferred candidate for initiating preclinical studies. Development ofthese product candidates will depend substantially upon the availability offunding for our research and development programs.

 

We do not know whetherour planned preclinical studies or clinical trials for these other productcandidates will begin on time or be completed on schedule, or at all. Inaddition, we do not know whether these clinical trials will result inmarketable products. Typically, there is a high rate of attrition for productcandidates in preclinical and clinical trials. We do not anticipate that any ofour product candidates will reach the market for at least several years.

 

We may not identify,develop or commercialize any additional new product candidates from ourproprietary active immunotherapy technology. Our ability to developsuccessfully any of these product candidates depends on our ability todemonstrate safety and efficacy in humans through extensive preclinical testingand clinical trials and to obtain regulatory approval from the FDA and otherregulatory authorities.

 

***If ourcompetitors develop and market products that are more effective than ourexisting product candidates or others we may develop, or obtain marketingapproval before we do, our commercial opportunity may be reduced or eliminated.**

 

The development andcommercialization of new pharmaceutical products for the treatment of cancerand autoimmune diseases is competitive, and we will face competition fromnumerous sources, including major pharmaceutical companies, specialtypharmaceutical companies and biotechnology companies worldwide. Many of ourcompetitors have substantially greater financial and technical resources anddevelopment, production and marketing capabilities than we do. In addition,many of these companies have more experience than we do in preclinical testing,clinical trials and manufacturing of biologic therapeutics, as well as inobtaining FDA and foreign regulatory approvals. We will also compete withacademic institutions, governmental agencies and private organizations that areconducting research in the fields of cancer and autoimmune disease. Competitionamong these entities to recruit and retain highly qualified scientific,technical and professional personnel and consultants is also intense.

 

We are aware of a numberof companies that are developing active immunotherapies to treat B-cell NHL.Genitope Corporation, or Genitope, discontinued development of its idiotypeimmunotherapy product candidate, MyVax (Id-KLH), or MyVax, for patients withfollicular B-cell NHL after announcing, in December 2007, that the trialwas unable to show a statistical benefit in progression free survival forpatients receiving MyVax plus GM-CSF versus KLH plus GM-CSF. Antigenics, Inc.completed a Phase 2 clinical trial evaluating its active immunotherapycandidate in indolent NHL patients. Biovest International Inc., or Biovest, amajority owned subsidiary of Accentia Biopharmaceuticals terminated patientenrollment in a Phase 3 clinical trial of an active idiotype immunotherapy in September 2007.In April 2008, it announced that an independent data monitoring board hadperformed an interim analysis of the data and recommended that Biovest unblindthe data in August 2008..

 

Several companies areengaged in the development and commercialization of passive immunotherapyproducts for the treatment of B-cell NHL that may compete with Specifid.Genentech and Biogen Idec are co-marketing Rituxan for the treatment ofrelapsed or refractory, indolent B-cell NHL. Cell Therapeutics, Inc. ismarketing Zevalin, a passive radioimmunotherapy product. GlaxoSmithKline plccurrently markets Bexxar, a passive radioimmunotherapy product.

 

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The most recent advancesin the treatment of B-cell NHL have involved the combination of existingproducts and changes to approved schedules and doses, particularly for Rituxan.Numerous clinical trials reported in recent years have indicated that additionaldoses of Rituxan and maintenance dosing of Rituxan can improve TTP in patientswho respond to therapy. Combination therapies involving chemotherapeutic orimmunostimulatory drugs in combination with Rituxan at various doses andschedules may provide patients with an increase in TTP over that expected withRituxan alone. Accordingly, we may face competition as a result of developmentsin this area.

 

We expect that ourability to compete effectively will depend upon our ability to:

 

·               successfullyand rapidly complete clinical trials and obtain all requisite regulatoryapprovals in a cost-effective manner;

 

·               reliablyand cost-effectively manufacture sufficient quantities of our products;

 

·               maintaina proprietary position for our manufacturing process and other technology;

 

·               priceour products competitively;

 

·               obtainappropriate reimbursement approvals for our products;

 

·               establishan adequate sales and marketing force for our products; and

 

·               attractand retain key personnel.

 

In addition, our ability tocompete effectively will depend on the relative efficacy and safety of otheractive immunotherapy products approved for sale as compared to our ownproducts.

 

**We aresubject to new legislation, regulatory proposals and managed care initiativesthat may increase our costs of compliance and adversely affect our ability tomarket our products, obtain collaborators and raise capital.**

 

There have been a numberof legislative and regulatory proposals aimed at changing the healthcare systemand pharmaceutical industry, including reductions in the cost of prescriptionproducts and changes in the levels at which consumers and healthcare providersare reimbursed for purchases of pharmaceutical products. For example, thePrescription Drug and Medicare Improvement Act of 2003 was recently enacted.This legislation provides for a Medicare prescription drug benefit which beganin 2006 and mandates other reforms. Although we cannot predict the full effectson our business of the implementation of this new legislation, it is possiblethat the new benefit, which will be managed by private health insurers,pharmacy benefit managers and other managed care organizations, will result indecreased reimbursement for prescription drugs, which may further exacerbateindustry-wide pressure to reduce the prices charged for prescription drugs.This could harm our ability to market our products and generate revenues.However, we expect that Specifid will be administered under the supervision ofa physician and, therefore, fall outside of the prescription drug legislation.

 

***Wedepend on attracting and retaining key scientific and management personnel toadvance our technology, and the loss of these personnel could impair thedevelopment of our products.**

 

Our success depends onour continued ability to attract, retain and motivate highly qualifiedmanagement, clinical and scientific personnel and on our ability to develop andmaintain important relationships with leading academic institutions, cliniciansand scientists. We are highly dependent upon our senior management andscientific staff, particularly John P. Longenecker, Ph.D., our President andChief Executive Officer, and Daniel P. Gold, Ph.D., one of our co-founders andour Chief Scientific Officer. The loss of services of Dr. Longenecker or Dr. Gold,or one or more of our other members of senior management, could delay orprevent the successful completion of our Phase 3 registration trial or thecommercialization of Specifid. Although we have employment agreements with eachof our executives, their employment with us is “at will,” and each executivecan terminate his or her agreement with us at any time. We do not carry “keyperson” insurance covering members of senior management, other than Drs. Longeneckerand Gold. This insurance may not continue to be available on commerciallyreasonable terms and may prove inadequate to compensate us for the loss oftheir services.

 

The competition forqualified personnel in the biotechnology field is intense. In particular, ourmanufacturing process depends on our ability to attract and retain qualifiedmanufacturing and quality control personnel. We will need to hire additionalpersonnel as we continue to expand our manufacturing, research and developmentactivities. We may not be able to attract and retain quality personnel onacceptable terms given the competition for such personnel among biotechnology,pharmaceutical and other companies. We are not aware of any key personnelplanning to retire or terminate their employment in the near future.

 

***We mayneed to increase the size of our organization, and we may experiencedifficulties in managing growth.**

 

As of March 31,2008, we had 150 employees. Of these, 123 employees were in research anddevelopment which was comprised of 83 in manufacturing, quality control andquality assurance, 35 in research and process development, and five members ofsenior management.  Of the remaining employees, three were members ofsenior management and 24 were in marketing, general and administration. Ifresults of our Phase 3 registration trial are positive, we will need to expandour financial, managerial, operational and other resources in order to continueour clinical trials and commercialize Specifid, FAV-201, or any other productcandidates that 

 

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we may develop. Futuregrowth would impose significant added responsibilities on our management team,including the need to identify, recruit, maintain and integrate additionalemployees, and couldimpose significant added expenses to our operations. Our ability tocommercialize Specifid, FAV-201, or any other product candidates that we maydevelop, and our future financial performance in general, will depend in parton our ability to manage any future growth effectively. In order to meet thesechallenges, we would need to:

 

·               manageour clinical trials effectively;

 

·               manageour research and development efforts effectively;

 

·               developour administrative, accounting and management information systems and controls;and

 

·               hire,train and integrate additional management, administrative, manufacturing andsales and marketing personnel.

 

We may not be able toaccomplish these tasks, and our failure to accomplish any of them could harmour business or future prospects.

 

**If weuse biological and hazardous materials in a manner that causes injury orviolates laws, we may be liable for damages.**

 

Our research anddevelopment and manufacturing activities involve the use of biological andhazardous materials that could be dangerous to human health, safety or theenvironment. Although we believe our safety procedures for handling anddisposing of these materials comply with federal, state and local laws andregulations, we cannot entirely eliminate the risk of accidental injury orcontamination from the use, storage, handling or disposal of these materials.In the event of contamination or injury, we could be held liable for anyresulting damages, and any liability could exceed our resources. We currentlymaintain property and casualty insurance coverage which covers liability forhazardous and controlled materials. However, this insurance coverage may not besufficient to cover our liability and we may not be able to obtain sufficientcoverage in the future at a reasonable cost. In addition, we may incursignificant costs complying with both existing and future environmental lawsand regulations. In particular, we are subject to regulation by theOccupational Safety and Health Administration, or OSHA, and the EnvironmentalProtection Agency, or EPA, and to regulation under the Toxic Substances ControlAct and the Resource Conservation and Recovery Act. OSHA, the EPA or otheragencies may adopt regulations that adversely affect our research anddevelopment programs.

 

**We facea risk of product liability claims and may not be able to obtain adequateinsurance.**

 

Our business exposes usto potential liability risks that may arise from the clinical testing of ourproduct candidates and the manufacture and sale of any approved products. Theserisks will exist even with respect to those product candidates that areapproved for commercial sale by the FDA and manufactured in facilitiesregulated by the FDA. Any product liability claim or series of claims broughtagainst us could significantly harm our business by, among other things,reducing demand for our products, injuring our reputation and creatingsignificant adverse media attention and costly litigation. Plaintiffs havereceived substantial damage awards in some jurisdictions against pharmaceuticalcompanies based upon claims for injuries allegedly caused by the use of theirproducts. Any judgment against us that is in excess of our insurance policylimits would have to be paid from our cash reserves, which would reduce ourcapital resources. We currently maintain clinical trial insurance. Although webelieve our current insurance coverage is adequate, we cannot be certain thatit will be sufficient. Furthermore, we cannot be certain that our currentinsurance coverage will continue to be available, or that increased coverage,which will be necessary if we are able to commercialize our products, will beavailable in the future on reasonable terms, or at all. Further, we may nothave sufficient capital resources to pay a judgment, in which case ourcreditors could levy claims against our assets, including our intellectualproperty.

 

**We couldbe negatively impacted by future interpretation or implementation of federaland state fraud and abuse laws, including anti-kickback laws and other federaland state anti-referral laws.**

 

If we are able tocommercialize Specifid or any other product candidates that we may develop, wewill be subject to various federal and state laws pertaining to healthcarefraud and abuse, including anti-kickback laws and physician self-referral laws.Violations of these laws are punishable by criminal and civil sanctions,including, in some instances, imprisonment and exclusion from participation infederal and state healthcare programs, including Medicare, Medicaid andVeterans Administration health programs. Because of the far-reaching nature ofthese laws, we may be required to alter one or more of our practices to be incompliance with these laws. Healthcare fraud and abuse regulations are complex,and even minor, inadvertent irregularities can potentially give rise to claimsthat a statute or prohibition has been violated. Any violations of these laws,or any action against us for violation of these laws, even if we successfullydefend against it, could result in a material adverse effect on our business,financial condition and results of operations. If there is a change in law,regulation or administrative or judicial interpretations, we may have to changeour business practices or our existing business practices could be challengedas unlawful, which could have a material adverse effect on our business,financial condition and results of operations. In addition, some allegationsunder these laws have been claimed to violate the False Claims Act, discussedin more detail below.

 

In addition, if we areable to commercialize Specifid or any other product candidates that we maydevelop, we could become subject to false claims litigation under federalstatutes, which can lead to civil money penalties, criminal fines andimprisonment, and exclusion from participation in Medicare, Medicaid and otherfederal and state healthcare programs. These false claims statutes 

 

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include the False ClaimsAct, which allows any person to bring suit on behalf of the United Statesfederal government alleging the submission of false or fraudulent claims, orcausing to present such false or fraudulent claims, under federal programs orcontracts claims or other violations of the statute and to share in any amountspaid by the entity to the government in fines or settlement. These suitsagainst biotechnology companies have increased significantly in recent yearsand have increased the risk that a healthcare company will have to defend afalse claim action, pay fines or be excluded from the Medicare, Medicaid or otherfederal and state healthcare programs as a result of an investigation arisingout of such action. We cannot assure you that we will not become subject tosuch litigation or, if we are not successful in defending against such actions,that such actions will not have a material adverse effect on our business,financial condition and results of operations. In addition, we cannot assureyou that the costs of defending claims or allegations under the False ClaimsAct will not have a material adverse effect on our business, financialcondition and results of operations.

 

**RisksRelated to Our Intellectual Property and Potential Litigation**

 

**If weare unable to obtain and maintain protection for our intellectual property, thevalue of our technology and products may be adversely affected.**

 

Our business andcompetitive positions are dependent upon our ability to protect our proprietarytechnology. Our success will depend in large part on our ability to obtain andmaintain patent protection for our product and technologies, preserve tradesecrets and operate without infringing the intellectual property right ofothers. Because of the substantial length of time and expense associated withdevelopment of new products, we, along with the rest of the biopharmaceutical industry,place considerable importance on obtaining and maintaining patent protectionfor new technologies, products and processes. The patent positions ofpharmaceutical, biopharmaceutical and biotechnology companies, including us,are generally uncertain and involve complex legal and factual questions. Ourpatent applications may not protect our technologies and products because,among other things:

 

·               thereis no guarantee that any of our pending patent applications will result inissued patents;

 

·               wemay develop additional proprietary technologies that are not patentable;

 

·               thereis no guarantee that any patents issued to us, our collaborators or ourlicensors will provide a basis for a commercially viable product;

 

·               thereis no guarantee that any patents issued to us or our collaborators or ourlicensors will provide us with any competitive advantage;

 

·               thereis no guarantee that any patents issued to us or our collaborators or ourlicensors will not be challenged, circumvented or invalidated by third parties;and

 

·               thereis no guarantee that any patents previously issued to others or issued in thefuture will not have an adverse effect on our ability to do business.

 

We attempt to protect ourintellectual property position by filing United States patent applicationsrelated to our proprietary technology, inventions and improvements that areimportant to the development of our business. Currently we own U.S. Patent No. 6,911,204concerning the treatment of NHL with our technology together with five pendingUnited States patent applications covering methods of treating immune systemdiseases, including B-cell and T-cell lymphomas, using our proprietaryimmunotherapy production methods, as well as methods for combining the idiotypeimmunotherapies with other therapies that are used to treat diseases of theimmune system, as well as a panel of optimized anti-CD20 antibodies and theiruse in treating immune system diseases.

 

Outside of the UnitedStates, we have six issued patents and over twenty pending patentapplications.  Limitations on patent protection in some countries outsidethe United States, and the differences in what constitutes patentable subjectmatter in these countries, may limit the protection we have under patentsissued to us outside of the United States. In addition, laws of foreigncountries may not protect our intellectual property to the same extent as wouldlaws of the United States. In determining whether or not to seek a patent or tolicense any patent in a particular foreign country, we weigh the relevant costsand benefits, and consider, among other things, the market potential of ourproduct candidates in the jurisdiction, and the scope and enforceability ofpatent protection afforded by the law of the jurisdiction. Failure to obtainadequate patent protection for our proprietary product candidates andtechnology would impair our ability to be commercially competitive in thesemarkets.

 

Although we believe ourissued patents, as well as our patent applications if they issue as patents,will provide a competitive advantage, we may not be able to develop additionalpatentable products or processes.  Further, we may not be able to obtainpatents from any of the pending applications. Even if patent claims areallowed, the claims may not issue, or in the event of issuance, may not besufficient to protect our technology. In addition, any patents or patent rightswe obtain may be circumvented, challenged or invalidated by our competitors.

 

**We arenot able to prevent others, including potential competitors, from using certaintypes of patient-specific idiotype protein-KLH conjugates, like those we use inour lead product candidate, Specifid, for the treatment of indolent B-cell NHL.**

 

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Certain types ofpatient-specific idiotype-KLH conjugates, comprising single idiotype proteins,and their use for the treatment of indolent B-cell NHL are in the public domainand therefore cannot be patented. Consequently, we may only be able to seekpatent protection for methods of treating immune system diseases, includingB-cell and T-cell lymphomas, using our proprietary immunotherapy productionmethods for making idiotype protein conjugates and compositions comprising suchconjugates, as well as methods for combining the idiotype or T-cellreceptor-based immunotherapies with other therapies that are used to treatdiseases of the immune system. As a result, we may not be able to prevent othercompanies using different manufacturing processes from developing activeimmunotherapies that directly compete with Specifid.

 

**We mayhave to engage in costly litigation to enforce our proprietary rights or todefend challenges to our intellectual property by our competitors, which mayharm our business, results of operations, financial condition and cash flow.**

 

The pharmaceutical fieldis characterized by a large number of patent filings involving complex legaland factual questions, and, therefore, we cannot predict with certainty whetherour patents will be enforceable. Competitors may have filed applications for orhave been issued patents and may obtain additional patents and proprietaryrights related to products or processes that compete with or are similar toours. We may not be aware of all of the patents potentially adverse to ourinterests that may have been issued to others.

 

Litigation may benecessary to protect our patent position, and we cannot be certain that we willhave the required resources to pursue litigation or otherwise to protect ourpatent rights. In addition, our efforts to protect our patents may not besuccessful.

 

**Ourability to market our products may be impaired by the intellectual propertyrights of third parties.**

 

Our commercial successwill depend in part on not infringing the patents or proprietary rights ofthird parties. We are aware of competing intellectual property relating toactive idiotype immunotherapies for cancer. Competitors or third parties may beissued, or may currently hold, patents that may cover subject matter that we usein developing the technology required to bring our product candidates tomarket, that we use in producing our product candidates, or that we use intreating patients with our product candidates. In addition, from time to timewe receive correspondence inviting us to license patents from third parties.While we currently believe we have freedom to operate in our area, others maychallenge our position in the future. There has been, and we believe that therewill continue to be, significant litigation in the pharmaceutical industryregarding patent and other intellectual property rights.

 

While we believe that ourpre-commercialization activities fall within the scope of an availableexemption against patent infringement provided by 35 U.S.C. §271(e), and thatour subsequent manufacture of our commercial products will also not require thelicense of any patents, claims may be brought against us in the future based onthese or other patents held by others. As our product candidates progresstoward commercialization, competitors or other parties may assert that weinfringe on their patents or proprietary rights.

 

In particular, we areaware of the following third party patents:

 

·               Genentechand City of Hope National Medical Center hold patent rights related to theexpression of recombinant antibodies;

 

·               Genitopeholds patent rights relating to immunotherapy using idiotype proteins producedusing T-lymphoid cells for the treatment of B-Cell lymphoma; and

 

·               ScheringCorp. holds patent rights relating to the use of GM-CSF as a vaccine adjuvantfor use against infectious diseases.

 

The first patent listedabove was issued to Genentech in 2001. We do not believe that this patent coversour technology, and we note that in May 2005, a third party filed arequest for reexamination of this patent with the U.S. Patent and TrademarkOffice, requesting that the claims of this patent be reexamined as to theirpatentability; the reexamination is currently pending.  Duringreexamination the issued claims were rejected; proceedings before the U.S.Patent and Trademark Office continue.  If this patent reissues and wedecide to attempt to obtain a license for this patent, we cannot guarantee thatwe would be able to obtain such a license on commercially reasonable terms, orat all.

 

Additionally, becausepatent prosecution can proceed in secret prior to issuance of a patent, thirdparties may obtain other patents with claims of unknown scope relating to ourproduct candidates, which they could attempt to assert against us. Further, aswe develop our products, we may infringe the current patents of third partiesor patents that may issue in the future.  Third parties could bring legalactions against us claiming damages and seeking to enjoin clinical testing,manufacturing and marketing of the affected product or products. If we becomeinvolved in any litigation, it could consume a substantial portion of ourresources, regardless of the outcome of the litigation. If any of these actionsare successful, in addition to any potential liability for damages, we could berequired to obtain a license to continue to manufacture or market the affectedproduct, in which case we may be required to pay substantial royalties or grantcross-licenses to our patents. However, there can be no assurance that any suchlicense will be available on acceptable terms or at all. To enforce patentsissued to us or to determine the scope and validity of other parties’proprietary rights, we may also become involved in litigation or ininterference proceedings declared by the United States Patent and TrademarkOffice, which could result in substantial costs to us, regardless of theoutcome of the litigation, or an adverse decision as to the priority of ourinventions. Ultimately, as a result of patent infringement claims, our businesscould be harmed and we could be prevented from commercializing 

 

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a product, or forced tocease some aspect of our business operations.

 

**If weare not able to protect and control unpatented trade secrets, know-how andother technological innovation, we may suffer competitive harm.**

 

We also rely on tradesecrets to protect our technology, particularly when we do not believe thatpatent protection is appropriate or available. However, trade secrets aredifficult to protect. We attempt to protect our trade secrets by requiring eachof our employees, consultants and advisors to execute a non-disclosure and assignmentof invention agreement before beginning his or her employment, consulting oradvisory relationship with us. We cannot guarantee that these agreements willprovide meaningful protection, that these agreements will not be breached, thatwe will have an adequate remedy for any such breach, or that our trade secretswill not otherwise become known or independently developed by a third party.Our trade secrets, or those of our future collaborators, may become known ormay be independently discovered by others, which could adversely affect thecompetitive position of our product candidates.

 

**RisksRelated to the Securities Markets and Ownership of Our Common Stock**

 

***Untilour initial public offering in February 2005, there was no public marketfor our common stock, and the price of our common stock may be volatile andcould decline significantly.**

 

Until our initial publicoffering, or IPO, in February 2005, there was no public market for ourcommon stock, and despite our IPO, an active public market for these shares maynot be sustained. Our stock price has traded in the range of $7.77- $1.20 fromthe commencement of our IPO on February 2, 2005 to April 30, 2008.

 

The stock market ingeneral has been experiencing dramatic fluctuations that have often been unrelatedto the operating performance of companies. The market prices for securities ofbiotechnology companies in general have been highly volatile and may continueto be highly volatile in the future. If market-based or industry-basedvolatility continues, the trading price of our common stock could declinesignificantly, independent of our actual operating performance, and you couldlose all or part of your investment. The market price of our common stock couldfluctuate significantly as a result of several factors, including:

 

·               announcementsof technological innovations or new products by us or our competitors;

 

·               announcementof FDA approval or non-approval of Specifid or any other product candidatesthat we may develop, or delays in the FDA review process;

 

·               actionstaken by regulatory agencies with respect to Specifid and FAV-201, or any otherproduct candidates that we may develop, or our clinical trials, manufacturingprocess or sales and marketing activities;

 

·               regulatorydevelopments in the United States and foreign countries;

 

·               successof our research efforts and clinical trials;

 

·               anyintellectual property infringement lawsuit in which we may become involved;

 

·               announcementsconcerning our competitors, or the biotechnology or biopharmaceuticalindustries in general;

 

·               actualor anticipated fluctuations in our operating results;

 

·               changesin financial estimates or recommendations by securities analysts;

 

·               salesof large blocks of our common stock;

 

·               salesof our common stock by our executive officers, directors and significantstockholders;

 

·               changesin accounting principles; and

 

·               lossof any of our key scientific or management personnel.

 

Specifically, you may notbe able to resell your shares at or above the price you paid for such shares.In addition, class action litigation has often been instituted againstcompanies whose securities have experienced periods of volatility in marketprice. Any such litigation brought against us could result in substantial costsand a diversion of management’s attention and resources, which could hurt ourbusiness, operating results and financial condition.

 

***Concentrationof ownership among our existing officers, directors and principal stockholdersmay prevent other stockholders from influencing significant corporate decisionsand depress our stock price.**

 

As of April 30,2008, our officers and directors and stockholders affiliated with our directorstogether beneficially held approximately 35.5% of our outstanding common stockon an as-converted basis. If some or all of these officers, directors andprincipal stockholders act together, they will be able to exert a significantdegree of influence over our management and affairs and over matters requiringstockholder approval, including the election of directors, the merger,consolidation or sale of all or substantially all of our assets, and any othersignificant corporate transaction. The interests of this concentration ofownership may not always coincide with our interests or the interests of ourother stockholders. For instance, officers, directors and principalstockholders, acting together, could cause us to enter into transactions oragreements that we would not otherwise consider. Similarly, this concentrationof ownership may have the 

 

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effect of delaying orpreventing a change in control of us otherwise favored by our otherstockholders. This concentration of ownership also could depress our stockprice.

 

**Provisionsin our amended and restated certificate of incorporation and amended andrestated bylaws and applicable Delaware law may prevent or discourage thirdparties or our stockholders from attempting to replace our management orinfluencing significant decisions.**

 

Provisions in our amendedand restated certificate of incorporation and amended and restated bylaws mayhave the effect of delaying or preventing a change in control of us or ourmanagement, even if doing so would be beneficial to our stockholders. Theseprovisions include:

 

·                                             dividingour board of directors into three classes serving staggered three-year terms;

 

·                                             authorizingour board of directors to issue preferred stock without stockholder approval;

 

·                                             prohibitingcumulative voting in the election of directors;

 

·                                             prohibitingstockholder actions by written consent;

 

·                                             limitingthe persons who may call special meetings of stockholders;

 

·                                             prohibitingour stockholders from making certain changes to our certificate ofincorporation or bylaws except with 66.7% stockholder approval; and

 

·                                             requiringadvance notice for raising business matters or nominating directors atstockholders’ meetings.

 

We are also subject toprovisions of the Delaware corporation law that, in general, prohibit anybusiness combination with a beneficial owner of 15% or more of our common stockfor five years unless the holder’s acquisition of our stock was approved inadvance by our board of directors. Together, these charter and statutoryprovisions could make the removal of management more difficult and may discouragetransactions that otherwise could involve payment of a premium over prevailingmarket prices for our common stock.

 

**Becausewe do not intend to pay any cash dividends on our shares of common stock, ourstockholders will not be able to receive a return on their shares unless theysell them.**

 

We have never paid ordeclared any cash dividends on our capital stock and intend to retain anyfuture earnings to finance the development and expansion of our business. Thepayment of dividends by us on our common stock is limited by our debtagreements. We do not anticipate paying any cash dividends on our common stockin the foreseeable future. Unless we pay dividends, our stockholders will notbe able to receive a return on their shares unless they sell them.

 

**We mayincur increased costs as a result of recently enacted and proposed changes inlaws and regulations.**

 

Recently enacted andproposed changes in the laws and regulations affecting public companies,including the provisions of the Sarbanes-Oxley Act of 2002 and rules relatedto corporate governance and other matters subsequently adopted by the SEC andthe Nasdaq Global Market, could result in increased costs to us. The new rules andany related regulations that may be proposed in the future could make it moredifficult or more costly for us to obtain certain types of insurance, includingdirectors’ and officers’ liability insurance, and we may be forced to acceptreduced policy limits and coverage or incur substantially higher costs toobtain the same or similar coverage. The impact of these events could also makeit more difficult for us to attract and retain qualified persons to serve onour board of directors, our board committees or as executive officers. We arepresently evaluating and monitoring developments with respect to new andproposed rules and cannot predict or estimate the amount of the additionalcosts we may incur or the timing of such costs.

 

**Item2.    Unregistered Sales of EquitySecurities and Use of Proceeds.**

 

On April 8, 2008, inconjunction with a consulting agreement with Porter Novelli Life Sciences, LLC,the Company issued warrants to purchase up to 10,000 shares of the Company’sCommon Stock at an exercise price of $1.80 per share. The warrants areexercisable through April 8, 2013. These warrants were issued in relianceupon the exemption from registration provided in section 4(2) of theSecurities Act of 1933, as amended, and/or Regulation D promulgated thereunderpursuant to the consultant’s status as an accredited investor.

 

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**Item6.    Exhibits.**

 

The exhibits listed onthe accompanying index to exhibits are filed or incorporated by reference (asstated therein) as part of this Quarterly Report on Form 10-Q.

 
| **Exhibit****Number** | ** ** | **Description of Document**                                                                                                                                                                                                               |
|-----------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **            | ** ** | ** **                                                                                                                                                                                                                                          |
| 3.1                   |       | Registrant’s Amended  and Restated Certificate of Incorporation.(1)                                                                                                                                                                            |
|                  |       |                                                                                                                                                                                                                                                |
| 3.2                   |       | Registrant’s Amended  and Restated Bylaws.(7)                                                                                                                                                                                                  |
|                  |       |                                                                                                                                                                                                                                                |
| 4.1                   |       | Form of Common  Stock Certificate of Registrant.(1)                                                                                                                                                                                            |
|                  |       |                                                                                                                                                                                                                                                |
| 4.2                   |       | Amended and Restated  Investor Rights Agreement dated March 26, 2004 between the Registrant  and certain of its stockholders.(1)                                                                                                               |
|                  |       |                                                                                                                                                                                                                                                |
| 4.3                   |       | Amendment No. 1 to  Amended and Restated Investor Rights Agreement dated April 6, 2004  between the Registrant and certain of its stockholders.(1)                                                                                        |
|                  |       |                                                                                                                                                                                                                                                |
| 4.4                   |       | Securities Purchase Agreement  dated March 6, 2006, by and among Registrant and the individuals and  entities identified on Exhibit A thereto (the “Securities Purchase  Agreement”). (2)                                       |
|                  |       |                                                                                                                                                                                                                                                |
| 4.5                   |       | Form of Warrant  issued pursuant to the Securities Purchase Agreement. (2)                                                                                                                                                                     |
|                  |       |                                                                                                                                                                                                                                                |
| 4.6                   |       | Securities Purchase  Agreement dated February 12, 2007, by and among Registrant and certain  investors.(3)                                                                                                                                     |
|                  |       |                                                                                                                                                                                                                                                |
| 4.7                   |       | Warrant to purchase  250,000 shares of Common Stock dated December 19, 2006 issued to  Kingsbridge Capital Limited.(4)                                                                                                                         |
|                  |       |                                                                                                                                                                                                                                                |
| 4.8                   |       | Registration Rights  Agreement, dated December 19, 2006, by and between Registrant and  Kingsbridge Capital Limited.(4)                                                                                                                        |
|                  |       |                                                                                                                                                                                                                                                |
| 4.9                   |       | Warrant to purchase  48,834 shares of Common Stock dated December 30, 2005 issued to General  Electric Capital Corporation.(5)                                                                                                                 |
|                  |       |                                                                                                                                                                                                                                                |
| 4.10                  |       | Warrant to purchase  48,834 shares of Common Stock dated December 30, 2005 issued to Oxford  Finance Corporation.(5)                                                                                                                           |
|                  |       |                                                                                                                                                                                                                                                |
| 4.11                  |       | Amendment No. 1 to  Registration Rights Agreement dated December 19, 2006, by and between  Registrant and Kingsbridge Capital Limited dated August 10, 2007.(6)                                                                      |
|                  |       |                                                                                                                                                                                                                                                |
| 4.12                  |       | Form of Warrant  issued to investors in November 2007 registered direct offering. (8)                                                                                                                                                     |
|                  |       |                                                                                                                                                                                                                                                |
| 4.13                  |       | Placement Agent  Agreement dated November 2, 2007, by and between Registrant and Lazard  Capital Markets, LLC. (8)                                                                                                                             |
|                  |       |                                                                                                                                                                                                                                                |
| 4.14                  |       | Warrant to purchase  10,000 shares of Common Stock dated April 8, 2008 issued to Porter  Novelli Life Sciences, LLC.                                                                                                                           |
|                  |       |                                                                                                                                                                                                                                                |
| 31.1                  |       | Certification of  principal executive officer required by Rule 13a-14(a) or  Rule 15d-14(a).                                                                                                                                         |
|                  |       |                                                                                                                                                                                                                                                |
| 31.2                  |       | Certification of  principal accounting officer required by Rule 13a-14(a) or  Rule 15d-14(a).                                                                                                                                        |
|                  |       |                                                                                                                                                                                                                                                |
| 32                    |       | Certification by the  Chief Executive Officer and Chief Financial Officer of Favrille, Inc.,  as required by Rule13a-14(b) or 15d-14(b) and Section 1350 of  Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350). |

 

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| (1) |   | Filed as an  Exhibit to Registrant’s Registration Statement on Form S-1 (File  No. 333-114299), as amended, and incorporated by reference herein. |
|-----|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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| (2)    |   | Filed as an exhibit to  Registrant’s Current Report on Form 8-K dated March 6, 2006 and  incorporated herein by reference.                    |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                         |
| (3)    |   | Filed as an exhibit to  Registrant’s Current Report on Form 8-K dated February 13, 2007 and  incorporated herein by reference.                |
|   |   |                                                                                                                                                         |
| (4)    |   | Filed as an exhibit to  Registrant’s Current Report on Form 8-K dated December 20, 2006 and  incorporated herein by reference.                |
|   |   |                                                                                                                                                         |
| (5)    |   | Filed as an exhibit to  Registrant’s Annual Report on Form 10-K for the year ended  December 31, 2005 and incorporated herein by reference.   |
|   |   |                                                                                                                                                         |
| (6)    |   | Filed as an exhibit to  Registrant’s Quarterly Report on Form 10-Q for the quarter ended  June 30, 2006 and incorporated herein by reference. |
|   |   |                                                                                                                                                         |
| (7)    |   | Filed as an exhibit to  Registrant’s Current Report on Form 8-K dated October 4, 2007 and  incorporated herein by reference.                  |
|   |   |                                                                                                                                                         |
| (8)    |   | Filed as an exhibit to  Registrant’s Current Report on Form 8-K dated November 2, 2007 and  incorporated herein by reference.                 |

 

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**Favrille, Inc.**

 

**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
| Dated: May 12,  2008 |   |                                                                                                    |
|---------------------------|--------|---------------------------------------------------------------------------------------------------------|
|                      |   |                                                                                                    |
|                      |   |                                                                                                    |
|                      |   | Favrille, Inc.                                                                                     |
|                      |   |                                                                                                    |
|                      |   | /s/ Tamara A. Seymour                                                                                   |
|                      |   |                                                                                                    |
|                      |   | Tamara A. Seymour                                                                                       |
|                      |   |                                                                                                    |
|                      |   | Chief Financial Officer                                                                                 |
|                      |   |                                                                                                    |
|                      |   | (On behalf of the  registrant and as the registrant’s  Principal Financial and Accounting Officer) |

 

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