Table of Contents

 

 

 

**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 September 30,  2008** |
| ** **                                                  |
| **OR**                                                      |
| ** **                                                  |
| **o**                                                       | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |

 

**For the transition periodfrom              to**

 

**Commission File Number 000-51134**

 

**Favrille, Inc.**

(Exact name of registrant as specified in itscharter)

 

| **Delaware**                                      | ** ** | **33-0892797**                       |
|---------------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of  incorporation or |       | (I.R.S. Employer Identification No.) |
| organization)                                     |       |                                 |
|                                              |       |                                 |
| **4401 Eastgate Mall, San Diego, CA**             | ** ** | **92121**                            |
| (Address of principal executive offices)          |       | (Zip Code)                           |

 

**(858) 526-8000**

(Registrant’s telephone number, includingarea code)

 

**N/A**

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

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15 (d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.   YES   x   NO   o

 

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

 
| 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 mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act). YES   x   NO  o

 

The number of shares of the Registrant’s common stock outstanding asof October 24, 2008 was 41,299,598.

 

 

 

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Table of Contents

 

**FAVRILLE, INC.**

 

**QUARTERLY REPORT ON FORM 10-Q FOR THEPERIOD ENDED September 30, 2008**

 
| ** **        | ** **                                                                                                                                                                                   | **PAGE** |
|-------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------|
| **PART I.**  | **FINANCIAL INFORMATION**                                                                                                                                                                    | 3        |
| Item 1.           | Financial Statements                                                                                                                                                                         | 3        |
|              | Balance Sheets as of September 30,  2008 (Unaudited) and December 31, 2007                                                                                                         | 3        |
|              | Statements of Operations (Unaudited) for  the three and nine months ended September 30, 2008 and 2007 and the  period from January 21, 2000 (inception) to September 30, 2008 | 4        |
|              | Statements of Cash Flows (Unaudited) for  the nine months ended September 30, 2008 and 2007 and the period from  January 21, 2000 (inception) to September 30, 2008           | 5        |
|              | Notes to  Condensed Financial Statements (Unaudited)                                                                                                                                         | 6        |
| Item 2.           | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                                                                                                  | 12       |
| Item 3.           | Quantitative and Qualitative Disclosures  About Market Risk                                                                                                                                  | 17       |
| Item 4.           | Controls and Procedures                                                                                                                                                                      | 17       |
|              |                                                                                                                                                                                         |     |
| **PART II.** | **OTHER INFORMATION**                                                                                                                                                                        | 17       |
| Item 1.           | Legal Proceedings                                                                                                                                                                            | 17       |
| Item 1A           | Risk Factors                                                                                                                                                                                 | 17       |
| Item 2            | Unregistered Sales of Equity Securities and  Use of Proceeds                                                                                                                                 | 20       |
| Item 6.           | Exhibits                                                                                                                                                                                     | 20       |
|              |                                                                                                                                                                                         |     |
| SIGNATURES        |                                                                                                                                                                                         | 23       |

 

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Tableof Contents

 

**PART I– FINANCIAL INFORMATION**

 

**Item 1.    FinancialStatements.**

 

**FAVRILLE, INC.**

 

**(a development stage company)**

 

**BALANCESHEETS**

 

**(in thousands, except share and per sharedata)**

 
| ** **                                                                                                                                                                           | ** ** | **September 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                           | ** ** | **(unaudited)**              | ** ** | ** **                  | ** ** |
| **Assets**                                                                                                                                                                           | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Current assets:                                                                                                                                                                      |       |                         |       |                        |       |
| Cash and cash equivalents                                                                                                                                                            |       | $                            | 3,788      |                        | $          | 26,362 |   |
| Short-term investments                                                                                                                                                               |       | —                       |       | 3,577                       |       |
| Other current assets                                                                                                                                                                 |       | 195                          |       | 806                         |       |
| Total current assets                                                                                                                                                                 |       | 3,983                        |       | 30,745                      |       |
| Property and equipment, net                                                                                                                                                          |       | —                       |       | 33,293                      |       |
| Restricted cash                                                                                                                                                                      |       | —                       |       | 3,451                       |       |
| Other assets                                                                                                                                                                         |       | —                       |       | 466                         |       |
| Total assets                                                                                                                                                                         |       | $                            | 3,983      |                        | $          | 67,955 |   |
| **Liabilities and stockholders’ (deficit)  equity**                                                                                                                             | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Current liabilities:                                                                                                                                                                 |       |                         |       |                        |       |
| Accounts payable and accrued liabilities                                                                                                                                             |       | $                            | 5,492      |                        | $          | 3,551 |   |
| Current portion of debt                                                                                                                                                              |       | 3                            |       | 5,275                       |       |
| Warrants liability                                                                                                                                                                   |       | —                       |       | 2,492                       |       |
| Total current liabilities                                                                                                                                                            |       | 5,495                        |       | 11,318                      |       |
| Debt, less current portion                                                                                                                                                           |       | —                       |       | 6,342                       |       |
| Deferred rent                                                                                                                                                                        |       | —                       |       | 15,415                      |       |
| Commitments and contingencies                                                                                                                                                        |       |                         |       |                        |       |
| Stockholders’ equity:                                                                                                                                                           |       |                         |       |                        |       |
|                                                                                                                                                                                 |       |                         |       |                        |       |
| Preferred stock, $0.001 par value;  5,000,000 shares authorized; no shares issued and outstanding at  September 30, 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  September 30, 2008 and December 31, 2007, respectively |       | 41                           |       | 41                          |       |
| Additional paid-in capital                                                                                                                                                           |       | 236,589                      |       | 233,807                     |       |
| Accumulated other comprehensive income                                                                                                                                               |       | —                       |       | 7                           |       |
| Deficit accumulated during the development  stage                                                                                                                                    |       | (238,142                     | )          | (198,975                    | )          |
| Total stockholders’ (deficit) equity                                                                                                                                            |       | (1,512                       | )          | 34,880                      |       |
| Total liabilities and stockholders’  (deficit) equity                                                                                                                           |       | $                            | 3,983      |                        | $          | 67,955 |   |

 

See accompanying notes.

 

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**FAVRILLE, INC.**

 

**(a development stage company)**

 

**STATEMENTSOF OPERATIONS**

 

**(in thousands, except per share data)**

 

**Unaudited**

 
| ** **                                                                                              | ** ** | **Three Months ended  September 30,** | ** ** | **Nine Months ended  September 30,** | ** ** | **Period from January 21,  2000 (inception) to  September 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------------------------------------------------------------|------------|
| ** **                                                                                              | ** ** | **2008**                                             | ** ** | **2007**                                            | ** ** | **2008**                                                                                      | ** ** | **2007** | ** ** | **2008** | ** ** |
| Operating expenses:                                                                                     |       |                                                 |       |                                                |       |                                                                                          |       |   |   |   |   |
| Research and development                                                                                |       | $                                                    | 1,436      |                                                | $          | 9,480                                                                                         |       | $ | 19,587 |   | $ | 27,100 |   | $ | 154,357 |   |
| Marketing, general and administrative                                                                   |       | 1,215                                                |       | 2,938                                               |       | 6,813                                                                                         |       | 8,798 |   | 47,674 |   |
| Total operating expenses                                                                                |       | 2,651                                                |       | 12,418                                              |       | 26,400                                                                                        |       | 35,898 |   | 202,031 |   |
| Interest income                                                                                         |       | 13                                                   |       | 361                                                 |       | 390                                                                                           |       | 1,423 |   | 7,233 |   |
| Interest expense                                                                                        |       | —                                               |       | (271                                                | )          | (506                                                                                          | )          | (772 | ) | (4,400 | ) |
| Loss on impairment of property and  equipment                                                           |       | —                                               |       | —                                              |       | (28,478                                                                                       | )          | — |   | (28,478 | ) |
| Gain on sale of assets held for sale                                                                    |       | 680                                                  |       | —                                              |       | 680                                                                                           |       | — |   | 680 |   |
| Gain on lease termination                                                                               |       | 12,645                                               |       | —                                              |       | 12,645                                                                                        |       | — |   | 12,645 |   |
| Change in valuation of warrants                                                                         |       | —                                               |       | —                                              |       | 2,492                                                                                         |       | — |   | 4,806 |   |
| Other income (expense)                                                                                  |       | —                                               |       | —                                              |       | 10                                                                                            |       | — |   | (437 | ) |
| Total other income (expense), net                                                                       |       | 13,338                                               |       | 90                                                  |       | (12,767                                                                                       | )          | 651 |   | (7,951 | ) |
| Net income (loss)                                                                                       |       | 10,687                                               |       | (12,328                                             | )          | (39,167                                                                                       | )          | (35,247 | ) | (209,982 | ) |
|                                                                                                    |       |                                                 |       |                                                |       |                                                                                          |       |   |   |   |   |
| Deemed dividend-beneficial conversion  feature for Series C redeemable convertible preferred stock |       | —                                               |       | —                                              |       | —                                                                                        |       | — |   | (28,103 | ) |
|                                                                                                    |       |                                                 |       |                                                |       |                                                                                          |       |   |   |   |   |
| Accretion of Series C redeemable  convertible preferred stock issuance costs                       |       | —                                               |       | —                                              |       | —                                                                                        |       | — |   | (57 | ) |
| Net income (loss) applicable to common  stockholders                                                    |       | $                                                    | 10,687     |                                                | $          | (12,328                                                                                       | )          | $ | (39,167 | ) | $ | (35,247 | ) | $ | (238,142 | ) |
| Historical net income (loss) per share:                                                                 |       |                                                 |       |                                                |       |                                                                                          |       |   |   |   |   |
| Basic and diluted                                                                                       |       | $                                                    | 0.26       |                                                | $          | (0.37                                                                                         | )          | $ | (0.95 | ) | $ | (1.10 | ) |   |   |
| Weighted-average shares-basic and diluted                                                               |       | 41,300                                               |       | 32,929                                              |       | 41,260                                                                                        |       | 32,039 |   |   |   |

 

See accompanying notes.

 

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**FAVRILLE, INC.**

 

**(a development stage company)**

 

**STATEMENTSOF CASH FLOWS**

 

**(in thousands)**

 

**Unaudited**

 
| ** **                                                                   | ** ** | ** **                      | ** ** | ** **              | ** ** | **Period from** | ** ** |
|------------------------------------------------------------------------------|------------|---------------------------------|------------|-------------------------|------------|----------------------|------------|
| ** **                                                                   | ** ** | ** **                      | ** ** | ** **              | ** ** | **January 21,** | ** ** |
| ** **                                                                   | ** ** | ** **                      | ** ** | ** **              | ** ** | **2000**             | ** ** |
| ** **                                                                   | ** ** | **Nine Months ended** | ** ** | **(inception) to** | ** ** |
| ** **                                                                   | ** ** | **September 30,**          | ** ** | **September 30,**  | ** ** |
| ** **                                                                   | ** ** | **2008**                        | ** ** | **2007**                | ** ** | **2008**             | ** ** |
| **Operating activities:**                                                    | ** ** | ** **                      | ** ** | ** **              | ** ** | ** **           | ** ** |
| Net loss                                                                     |       | $                               | (39,167    | )                       | $          | (35,247              | )          | $ | (209,982 | ) |
|                                                                         |       |                            |       |                    |       |                 |       |
| Adjustments to reconcile net loss to net  cash used in operating activities: |       |                            |       |                    |       |                 |       |
| Depreciation and amortization                                                |       | 2,386                           |       | 2,361                   |       | 12,326               |       |
| Stock-based compensation                                                     |       | 2,610                           |       | 3,530                   |       | 16,654               |       |
| Amortization of premium/discount on  short-term investments                  |       | (31                             | )          | (401                    | )          | (1,076               | )          |
| Change in valuation of warrants                                              |       | (2,492                          | )          | —                  |       | (4,806               | )          |
| Loss on impairment of property and  equipment                                |       | 28,478                          |       | —                  |       | 28,478               |       |
| Gain on sale of assets held for sale                                         |       | (680                            | )          | —                  |       | (680                 | )          |
| Gain on lease termination                                                    |       | (12,645                         | )          | —                  |       | (12,645              | )          |
| Other                                                                        |       | 41                              |       | 83                      |       | 352                  |       |
| Changes in operating assets and  liabilities:                                |       |                            |       |                    |       |                 |       |
| Other assets                                                                 |       | 1,005                           |       | (237                    | )          | 253                  |       |
| Accounts payable and accrued liabilities                                     |       | 2,090                           |       | (437                    | )          | 5,493                |       |
| Deferred rent                                                                |       | 801                             |       | 1,216                   |       | 5,016                |       |
| Net cash used in operating activities                                        |       | (17,604                         | )          | (29,132                 | )          | (160,617             | )          |
| **Investing activities:**                                                    | ** ** | ** **                      | ** ** | ** **              | ** ** | ** **           | ** ** |
| Purchases of property and equipment                                          |       | (187                            | )          | (8,983                  | )          | (32,193              | )          |
| Proceeds from sale of assets held for sale                                   |       | 3,180                           |       | —                  |       | 3,180                |       |
| Purchases of short-term investments                                          |       | (468                            | )          | (11,337                 | )          | (113,241             | )          |
| Maturities of short-term investments                                         |       | 4,069                           |       | 38,599                  |       | 114,318              |       |
| Other assets                                                                 |       | —                          |       | —                  |       | (70                  | )          |
| Restricted cash                                                              |       | (120                            | )          | —                  |       | (3,571               | )          |
| Net cash provided by (used in) investing  activities                         |       | 6.474                           |       | 18,279                  |       | (31,577              | )          |
| **Financing activities:**                                                    | ** ** | ** **                      | ** ** | ** **              | ** ** | ** **           | ** ** |
| Proceeds from debt                                                           |       | —                          |       | 6,884                   |       | 29,854               |       |
| Payments on debt                                                             |       | (11,616                         | )          | (4,356                  | )          | (29,904              | )          |
| Issuance of preferred stock, net                                             |       | —                          |       | —                  |       | 76,144               |       |
| Proceeds from issuance of convertible  promissory note                       |       | —                          |       | —                  |       | 650                  |       |
| Issuance of common stock and warrants                                        |       | 172                             |       | 13,644                  |       | 119,282              |       |
| Repurchase of restricted common stock                                        |       | —                          |       | —                  |       | (44                  | )          |
| Net cash (used in) provided by financing  activities                         |       | (11,444                         | )          | 16,172                  |       | 195,982              |       |
| Net (decrease) increase in cash and cash equivalents                         |       | (22,574                         | )          | 5,319                   |       | 3,788                |       |
| Cash and cash equivalents at beginning of  period                            |       | 26,362                          |       | 14,249                  |       | —               |       |
| Cash and cash equivalents at end of period                                   |       | $                               | 3,788      |                    | $          | 19,568               |       | $ | 3,788 |   |
|                                                                         |       |                            |       |                    |       |                 |       |
| **Supplemental non-cash activities:**                                        | ** ** | ** **                      | ** ** | ** **              | ** ** | ** **           | ** ** |
| Capitalized interest recorded as plant and  equipment                        |       | $                               | —     |                    | $          | 336                  |       | $ | 559 |   |
| Accrued asset acquisitions                                                   |       | $                               | —     |                    | $          | (1,377               | )          | $ | — |   |
| Leasehold improvements acquired under  tenant improvement allowance          |       | $                               | —     |                    | $          | 3,818                |       | $ | 11,200 |   |
| Conversion of Series C to common stock                                  |       | $                               | —     |                    | $          | —               |       | $ | 43,678 |   |

 

See accompanying notes.

 

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**FAVRILLE, INC.**

 

**NOTESTO CONDENSED FINANCIAL STATEMENTS**

 

**SEPTEMBER 30, 2008**

 

**UNAUDITED**

 

**1. Basis of Presentation**

 

The accompanying unaudited interim financial statements have beenprepared in accordance with U.S. generally accepted accounting principles(GAAP) and in accordance with the rules and regulations of the Securitiesand Exchange Commission related to a quarterly report on Form 10-Q.Accordingly, they do not include all of the information and disclosuresrequired by GAAP for complete financial statements. The balance sheet at December 31,2007 has been derived from the audited financial statements at that date butdoes not include all information and footnotes required by U.S. generallyaccepted accounting principles for complete financial statements. The interimfinancial statements reflect all adjustments which, in the opinion ofmanagement, are necessary for a fair presentation of the financial conditionand results of operations for the periods presented. Except as otherwisedisclosed, all such adjustments are of a normal recurring nature.

 

Operating results for the three and nine months ended September 30,2008 are not necessarily indicative of the results that may be expected for theyear ending December 31, 2008. These financial statements should be readin conjunction with the financial statements included in the Company’s AnnualReport on Form 10-K for the year ended December 31, 2007 andmanagement’s discussion and analysis of financial condition and results ofoperations included elsewhere herein.

 

The preparation of financial statements in conformity with U.S.generally accepted accounting principles requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities aswell as expenses during the reporting period. Actual results could differ fromthose estimates.  On an ongoing basis, we review our estimates based oninformation currently available, and changes in facts and circumstances maycause us to revise these estimates.

 

Since the announcement in May 2008 disclosing the clinical trialfailure, and the discontinuation of development, of SpecifidTM, our lead product candidate for patients with B-cellnon-Hodgkin’s lymphoma (NHL), we have discontinued other programs requiringproduction of patient-specific therapies including the T-cell and autoimmunedisease programs and had workforce reductions which involved the termination of141 of our 144 employees, including six of our executive officers. As a resultof the foregoing events, we beganconsidering a number of strategic alternatives and we entered into anon-binding term sheet for a reverse merger with a private company,MyMedicalRecords.com, Inc. (“MMR”),. The term sheet contemplates our acquisition of all of the capital stockof MMR in a stock for stock merger that would result in MMR becoming awholly-owned operating subsidiary of Favrille.

 

See ***Impairment of Long-lived Assets and AssetsHeld for Sale,*****Note 6. RestructuringActivities,**and **Note 7. Subsequent Events**below for further discussion of these events**.**

 

***Going Concern***

 

The accompanying condensed financial statements have been preparedassuming the Company will continue as a going concern. The basis of accountingcontemplates the recovery of the Company’s assets and the satisfaction ofliabilities in the normal course of business. From inception through September 30,2008, the Company has incurred net losses of approximately $210 million and hasa deficit accumulated during the development stage of approximately $238million.

 

At September 30, 2008, current liabilities of $5.5 millionexceeded cash of $3.8 million, including the net proceeds from the sale of alllong-lived assets in August 2008. Although current liabilities exceedcurrent assets, the accompanying condensed financial statements are prepared ona going-concern basis as the Company is pursuing, and believes it is reasonablypossible, that it could complete a merger with MMR. If the Company is unable tocomplete the merger or any other strategic transaction, it will likely not beable to continue as a going concern.

 

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***Impairment of Long-lived Assets and AssetsHeld for Sale***

 

InMay2008,theCompanyobtainedresultsofthedataanalysisofitsPhase3registrationtrialfortheleadproductcandidate,Specifid,forpatientswithfollicularNHL.Analysisoftheprimaryendpointinthetrialfailedtoshowastatisticallysignificantimprovementinthetreatmentarm,SpecifidplusLeukine®followingRituxan®,comparedtothecontrolarm,placeboplusLeukineTM followingRituxan.Basedontheseresults,theCompanyimmediatelydiscontinueddevelopmentofSpecifidandotherprogramsrequiringproductionofpatient-specifictherapiesincludingtheT-cellandautoimmunediseaseprograms.TheCompanyhadpreviouslydevotedsubstantiallyallofitsresearch,developmentandclinicaleffortsandfinancialresourcestowardthedevelopmentofSpecifid.TheCompanyhasceasedthemanufactureofSpecifidatthefacilityinSanDiego,California.TheCompanysoldallofitsequipmentandotherpersonalpropertyinAugust2008fornetproceedsof$3.2millionandenteredintoanagreementwithitslandlordwhichterminateditsfacilityleaseeffectiveAugust31,2008.

 

During the second quarter of 2008, management performed arecoverability test of the long-lived assets included in the Specifid assetgroup in accordance with Statement of Financial Accounting Standards (SFAS) No. 144,*Accounting for the Impairment or Disposal ofLong-Lived Assets*. The recoverability test was based on theestimated undiscounted future cash flows expected to result from thedisposition of the Specifid asset group, including the estimated future cashinflows from anticipated sales and returns of assets and the estimated assetdisposition costs. Based on the recoverability analysis performed, the Companyrecorded a non-cash charge for the impairment of long-lived assets of $28.5million to write-down the carrying value of the Specifid asset group to itsestimated fair value of $2.5 million. The fair value was estimated based uponsales prices of similar assets. In August 2008, the assets were sold fornet proceeds of $3.2 million. The Company recorded a gain on the sale of$700,000.

 

The carrying value of property and equipment, net of accumulateddepreciation was as follows (in thousands):

 
| ** **                            | ** ** | **As of**         | ** ** | ** **     | ** ** |
|---------------------------------------|------------|------------------------|------------|----------------|------------|
| ** **                            | ** ** | **September 30,** | ** ** | ** **     | ** ** |
| ** **                            | ** ** | **2008**               | ** ** | **As of** | ** ** |
| ** **                            | ** ** | **Carrying**           | ** ** | **Dec.31,**    | ** ** |
| ** **                            | ** ** | **Value**              | ** ** | **2007**       | ** ** |
| ** **                            | ** ** | **Adjusted for**  | ** ** | **Carrying**   | ** ** |
| ** **                            | ** ** | **Impairment**         | ** ** | **Value**      | ** ** |
| **Property and Equipment, net**       |       |                   |       |           |       |
|                                  |       |                   |       |           |       |
| Leasehold Improvements                |       | $                      | —     |           | $          | 19,159 |   |
| Equipment and Construction-in-process |       | —                 |       | 14,134         |       |
|                                  |       |                   |       |           |       |
| Total Property and Equipment          |       | $                      | —     |           | $          | 33,293 |   |

 

***Stock-BasedCompensation***

 

We account for stock-based compensation in accordance with SFAS No. 123(revised 2004), *Share-Based Payment*, (SFAS123(R)).  Under SFAS 123(R), stock-based compensation cost is measured atthe grant date, based on the estimated fair value of the award, and isrecognized as expense over the employee’s requisite service period.

 

***Net Income (Loss)per Common Share***

 

Net income (loss) per share is calculated in accordance with SFAS No. 128,*Earnings Per Share,* and SAB No. 98.Basic income (loss) per share is calculated using the weighted average numberof common shares outstanding during each period, without consideration forcommon stock equivalents. Diluted income (loss) per share includes the dilutiveeffect of common equivalent 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 September 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                                   | ** ** | **(in thousands)**                | ** ** |
| ** **                                                                                                   | ** ** | **2008**                               | ** ** | **2007** | ** ** |
| **Historical outstanding anti-dilutive  securities not included in diluted net loss per share calculation:** | ** ** | ** **                             | ** ** | ** ** | ** ** |
| ** **                                                                                                   | ** ** | ** **                             | ** ** | ** ** | ** ** |
| Common stock equivalents:                                                                                    |       |                                   |       |   |   |
| Stock warrants                                                                                               |       | 7,832                                  |       | 3,372 |   |
| Options to purchase common stock                                                                             |       | 2,647                                  |       | 3,582 |   |
| Common stock subject to repurchase                                                                           |       | —                                 |       | 35 |   |
|                                                                                                         |       | 10,479                                 |       | 6,989 |   |

 

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***Adoption of RecentAccounting Pronouncements***

 

In September 2006, the FASB issued SFAS No. 157,*Fair Value Measurements (SFAS 157)*. SFAS157 defines fair value, establishes a framework for measuring fair value inGAAP 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 valuein any new circumstances.  SFAS 157 is effective for financial statementsissued for fiscal years beginning after November 15, 2007. The Company hasadopted the provisions of SFAS 157 as of January 1, 2008, for financialinstruments. Although the adoption of SFAS 157 did not materially impact itsfinancial condition, results of operations, or cash flow, the Company is nowrequired to provide additional disclosures as part of its financial statements.The Company has no financial instruments measured at fair value at September 30,2008. 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.

 

In February 2007, the FASB issued SFAS No. 159,*The Fair Value Option for Financial Assets andFinancial Liabilities*(SFAS159), including an amendment of SFAS No. 115,*Accounting for Certain Investments in Debt andEquity Securities*, which permits an entity to measure certainfinancial assets and financial liabilities at fair value. The objective of SFAS159 is to improve financial reporting by allowing entities to mitigatevolatility in reported earnings caused by the measurement of related assets andliabilities using different attributes, without having to apply complex hedgeaccounting provisions. Under SFAS 159, entities that elect the fair valueoption (by instrument) will report unrealized gains and losses in earnings ateach subsequent reporting date. The fair value option election is irrevocable,unless a new election date occurs. SFAS 159 establishes presentation anddisclosure requirements to help financial statement users understand the effectof the entity’s election on its earnings, but does not eliminate disclosurerequirements of other accounting standards. Assets and liabilities that aremeasured at fair value must be displayed on the face of the balance sheet. TheCompany chose not to elect the fair value option for its financial assets andliabilities existing at January 1, 2008, and did not elect the fair valueoption on financial assets and liabilities transacted in the three and ninemonths ended September 30, 2008. Therefore, the adoption of SFAS 159 hadno impact on the Company’s financial statements.

 

**2. Comprehensive Income (Loss)**

 

Components of comprehensive loss were as follows (in thousands):

 
| ** **                                                  | ** ** | **Three Months ended September 30,** | ** ** | **Nine Months ended September 30,** | ** ** |
|-------------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                  | ** ** | **2008**                                                 | ** ** | **2007**                                                | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                        |       |                                                     |       |                                                    |       |   |   |   |   |
| Net income (loss)                                           |       | $                                                        | 10,687     |                                                    | $          | (12,328 | ) | $ | (39,167 | ) | $ | (35,247 | ) |
| Change in unrealized gain (loss) on  short-term investments |       | —                                                   |       | (3                                                      | )          | (7 | ) | (3 | ) |
| Comprehensive income (loss)                                 |       | $                                                        | 10,687     |                                                    | $          | (12,331 | ) | $ | (39,174 | ) | $ | (35,250 | ) |

 

Accumulated other comprehensive income totaled approximately $0 and$7,000 at September 30, 2008 and December 31, 2007, respectively, andwas attributed to net unrealized gains on short-term investments.

 

**3.  Stockholders’ Equity**

 

*Registration Statement*

 

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

 

On February 12, 2007, the Company entered into common stockpurchase agreements with certain investors relating to a registered directoffering of an aggregate 3,333,334 shares of our common stock at $3.00 pershare to the investors for gross proceeds of approximately$10 million.  The common stock was issued pursuant to a prospectussupplement filed with the SEC on February 13, 2007, in connection with ashelf takedown from our shelf registration statement.

 

On November 2, 2007, the Company entered into definitiveagreements with primarily institutional investors relating to a registereddirect offering of an aggregate 7.4 million shares of common stock and warrantsto purchase 4.4 million shares of our common stock 

 

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for gross proceeds of approximately $21.1 million, before deductingplacement agent fees and estimated offering expenses. The investors purchasedthe 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 one share and awarrant to purchase 0.6 shares of common stock. The warrants are exercisable atany time prior to November 7, 2012. The exercise price of the warrants is$2.77 per share. The common stock was issued pursuant to a prospectussupplement filed with the SEC on November 2, 2007, in connection with thetakedown from our shelf registration statement.

 

Certain of the Company’s existing stockholders, including three membersof our board of directors, Ivor Royston, M.D., Fred Middleton and AntonioGrillo-Lopez, M.D., and funds affiliated with Forward Ventures and SanderlingVentures, invested in the registered 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 registrationstatement on Form S-3 with the Securities Exchange Commission (the “SEC”).The shelf registration statement on Form S-3 permits the Company to sell,in one or more public offerings, up to 13 million shares of its common stock,inclusive of securities convertible into or exchangeable for shares of commonstock, and/or debt securities and warrants to purchase common stock up to atotal dollar amount of $25 million. The shelf registration statement wasdeclared effective by the SEC on March 17, 2008.

 

*Committed Equity Financing Facility*

 

On December 19, 2006, the Company entered into a Committed EquityFinancing Facility (CEFF) with Kingsbridge Capital Limited (Kingsbridge)pursuant to which Kingsbridge committed to purchase, subject to certainconditions, up to the lesser of 5.8 million shares of the Company’s commonstock or an aggregate of $40 million during the next three years.  Inconnection with the CEFF, the Company issued a warrant to Kingsbridge topurchase 250,000 shares of the Company’s common stock at an exercise price of$3.98 per share (the Warrant). The Warrant is exercisable through May 2012.On February 15, 2007, the Company filed a resale registration statementwith the SEC with respect to resale shares of common stock pursuant to the CEFFand underlying warrant. The registration statement was declared effective bythe SEC on May 2, 2007.

 

In accordance with the CEFF, on July 17, 2007 and July 23,2007, the Company issued an aggregate of approximately 462,000 shares of ourcommon stock to Kingsbridge at an aggregate purchase price of $1.4 million. On September 17,2007 and September 21, 2007, the Company issued an aggregate of approximately673,000 shares of our common stock to Kingsbridge at an aggregate purchaseprice of $1.9 million. The common stock was issued pursuant to prospectussupplements filed with the SEC on July 24, 2007 and September 25,2007.

 

During July 2008, we terminated our CEFF with Kingsbridge. As aresult, no additional financing is available to us under this arrangement.

 

*Private Placement of Common Stock andWarrants*

 

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

 

Certain of the Company’s existing stockholders, including two membersof our board of directors, Ivor Royston, M.D. and Fred Middleton, and fundsaffiliated with Forward Ventures, Sanderling Ventures, Alloy Ventures andWilliam 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 registration statement with the SEC on March 31,2006 covering the resale of the shares of common stock issued in the privateplacement and the shares of common stock issuable upon exercise of the warrantsissued in the private placement.

 

**4. Stock Based Compensation**

 

On January 1, 2006, the Company adopted SFAS 123(R).  SFAS 123(R) requires the recognition ofthe fair value of stock-based compensation in net income or loss.  The Company recognizes the stock-basedcompensation expense over the requisite service period of the individualgrantees on a straight-line basis over the vesting period, which is generallyfour years for new awards.

 

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The Company utilized the Black-Scholes valuation model for estimatingthe fair value of the stock -based awards granted both before and after theadoption of SFAS 123(R).  Totalstock-based compensation expense recognized for the three and nine months endedSeptember 30, 2008 and 2007 was as follows (in thousands):

 
| ** **                       | ** ** | **Three Months  ended  September 30,** | ** ** | **Three Months  ended  September 30,** | ** ** | **Nine Months  ended  September 30,** | ** ** | **Nine Months  ended  September 30,** | ** ** |
|----------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                       | ** ** | **2008**                                         | ** ** | **2007**                                         | ** ** | **2008**                                        | ** ** | **2007**                                        | ** ** |
| Research and development         |       | $                                                | 2          |                                             | $          | 670                                             |       | $                                               | 1,382      |   | $ | 1,698 |   |
| General and administrative       |       | 196                                              |       | 601                                              |       | 1,228                                           |       | 1,832                                           |       |
| Stock-based compensation expense |       | $                                                | 198        |                                             | $          | 1,271                                           |       | $                                               | 2,610      |   | $ | 3,530 |   |

 

The Company has employment agreements with six members of its executivemanagement team who were included in the workforce reduction on June 6,2008. The employment agreements entitle the executives to accelerated vestingof the portion of any outstanding option to purchase common stock held by theexecutives on the date of termination that would have otherwise vested duringthe nine months following the date of termination. Approximately $600,000 ofstock-based compensation expense for the nine months ended September 30,2008 is associated with the accelerated vesting.

 

The following table summarizes the Company’s stock option activity,including performance-based options, for employee and director stock options(shares in thousands):

 
| ** **                             | ** ** | ** **         | ** ** | ** **              | ** ** | **Weighted**              | ** ** | ** **              | ** ** |
|----------------------------------------|------------|--------------------|------------|-------------------------|------------|---------------------------|------------|-------------------------|------------|
| ** **                             | ** ** | ** **         | ** ** | **Weighted**            | ** ** | **Average**               | ** ** | **Aggregate**           | ** ** |
| ** **                             | ** ** | **Number of** | ** ** | **Average**             | ** ** | **Remaining**             | ** ** | **Intrinsic**           | ** ** |
| ** **                             | ** ** | **Options**        | ** ** | **Exercise Price** | ** ** | **Contractual Life** | ** ** | **Value**               | ** ** |
| ** **                             | ** ** | **Outstanding**    | ** ** | **Per Share**      | ** ** | **(years)**               | ** ** | **(in thousands)** | ** ** |
| Outstanding at January 1, 2008    |       | 4,346              |       | $                       | 3.68       |                      | 8.27       |                    | $          | 734 |   |
| Granted                                |       | 2,227              |       | $                       | 1.75       |                      |       |                    |       |   |
| Exercised                              |       |               |       |                    |       |                      |       |                    |       |
| Repurchased                            |       |               |       |                    |       |                      |       |                    |       |
| Canceled                               |       | (3,052             | )          | $                       | 2.81       |                      |       |                    |       |   |
| Expired                                |       | (874               | )          | $                       | 3.94       |                      |       |                    |       |   |
| Outstanding at September 30, 2008 |       | 2,647              |       | $                       | 2.98       |                      | 7.50       |                    | $          | — |   |
| Exercisable at September 30, 2008 |       | 1,397              |       | $                       | 3.27       |                      | 6.30       |                    | $          | — |   |

 

Of the exercisable options above, approximately 57,145 were granted tothe nine employees included in workforce reductions during the third quarter of2008. These options expire on various dates through December 19, 2008.

 

At September 30, 2008, the total compensation cost related tounvested stock-based awards granted to employees under the Company’s stockaward plans but not yet recognized, excluding performance-based options, wasapproximately $860,000, net of estimated forfeitures.  This cost will beamortized using the straight-line method and will be adjusted for subsequentchanges in estimated forfeitures.

 

Prior to the second quarter of 2008, the Company granted an aggregatetotal of 2.7 million performance-based options with performance conditionsdependent upon the success of the trial. No stock-based compensation expensehas been recorded for these performance options as the Company did not assessthe vesting as probable. The compensation cost related to the options ofapproximately $3.7 million will not be recognized based on the results of thePhase 3 registration trial.

 

No amounts related to stock-based compensation expense have beencapitalized. The tax benefit, and the resulting effect on cash flows fromoperations and financial activities, related to stock-based compensationexpense were not recognized as we currently provide a full valuation allowancefor all of our deferred tax assets.

 

**5. Commitments and Contingencies**

 

In December 2005, the Company entered into a loan and securityagreement with a lender and an amendment to a loan and security agreement withanother lender (Agreements) under which the lenders agreed to extend theCompany a line of credit equal to $20 million. As a condition of the Agreements, on December 30, 2005, the Companyborrowed $3 million against the line of credit to repay the outstanding balanceof existing loan and security agreements executed in March 2003.  The remaining proceeds were used solely forthe purchase of eligible equipment and certain leasehold improvements through December 2007.  Borrowings against the line of credit werestructured as promissory notes with the interest rate fixed at the time of eachdraw based on the three-year Treasury 

 

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bill.  Such borrowings weresecured by all existing and future assets of the Company, excludingintellectual property, and were to be repaid monthly over 36 to 42 months,depending upon the nature of the equipment financed, through January 2011.  The Agreements contained a restrictivefinancial covenant requiring the Company to maintain a minimum of $15 millionin available cash, cash equivalents and short-term investments (available cashbalances). Under the Agreements, if the available cash balances dropped below$15 million, the lenders could require the Company to execute a letter ofcredit (LOC) for their benefit equal to the outstanding loan balances at thattime. In May 2008, the Agreements were amended to reduce the minimumavailable cash balances requirement to $14.5 million. In May 2008, theCompany’s available cash balances dropped below $14.5 million. Because theCompany did not execute an LOC equal to the outstanding loan balances, thelenders issued notices of default, acceleration and demand for payment of theoutstanding balances. In June 2008, the Company paid approximately $8.8million from the Company’s investment accounts as repayment of the outstandingprincipal balance, accrued interest and certain transaction costs. The lendersreleased the general lien on the Company’s assets. As of September 30,2008, there were no outstanding balances under the Agreements.

 

On July 18, 2008, inconnection with the discontinuation of the development of SpecifidTM, theCompany entered into a Lease Termination Agreement (Termination Agreement) withits landlord.  The Termination Agreementterminates the Amended and Restated Office Lease dated October 31, 2005, asamended by the First Amendment dated as of September 22, 2006(collectively, the Lease),pursuant to which the landlord leased to the Company its principal headquartersand manufacturing facilities, consisting of 128,580 rentable square feet ofspace (the Premises). Under the terms of the Termination Agreement, the Leaseterminated on August 31, 2008 (Termination Date).  Through the Termination Date, the Companypaid for all electrical, gas and water usage and for all clean room janitorialservices, and shut down all installations and equipment located in the GMP labportion of the Premises in accordance with mutually agreed upon procedures.

 

In consideration of theearly termination of the Lease term, which was originally scheduled to expireon June 30, 2025, and the releases set forth in the Termination Agreement,the Company has transferred and relinquished to the landlord all rights, claimsand/or interest it may have had in and to the security deposit of approximately$360,000 which was included in Other Assets in the June 30, 2008 balancesheet. During the third quarter of 2008, the landlord drew upon theapproximately $3.6 million letter of credit (L-C) for the entire L-C.  Cash collateralizing the L-C was included inRestricted Cash in the June 30, 2008 balance sheet. The Company has agreedthat the landlord may retain all amounts drawn on the L-C and has transferredand relinquished to landlord all rights, claims and interest it may have had inand to the L-C. The base rent and direct expenses which would have otherwisebeen payable by the Company for the months of July and August 2008were applied from the security deposit and amounts drawn on the L-C. Upon theeffective date of termination of the Lease, August 31, 2008, the Companyrecorded a gain on termination and the deferred rent was eliminated from thebalance sheet.

 

The Company has no other significant remaining commitments underleases.

 

**6. Restructuring Activities.**

 

On May 29, 2008, the Company provided a notice under the federalWorker Adjustment and Retraining Notification Act (WARN Act) to 132 employees,including six members of senior management, that it planned to conduct aworkforce reduction at its facility in San Diego, and that their employment wasexpected to end on June 6, 2008. In accordance with employment agreementsfor senior management, the cost of severance totaling $1.4 million whichincluded nine months of base salaries and health benefits was accrued asoperating expense in the second quarter of 2008. The costs related to WARN Actnotices of the remaining employees, of approximately $1.9 million, includingtwo months of salaries, wages and benefits, were accrued as operating expensesin the second quarter of 2008. During the third quarter of 2008, the Companyprovided WARN Act notices to an additional 10 employees that their employmentterminated, effective immediately upon issuance of the notices. The costsrelated to WARN Act notices to these employees of approximately $150,000 wereaccrued as operating expenses in the third quarter of 2008.

 

Approximately $50,000 and $2.6 million was recorded as research anddevelopment expenses and approximately $100,000 and $800,000 was recorded asmarketing, general and administrative expense for the three and nine monthsended September 30, 2008, respectively. Approximately $2.7 million inseverance cost, WARN Act payments and FTO for the 141 employees remainedoutstanding as of September 30, 2008.

 

**7. Subsequent Event.**

 

InOctober 2008, the Company entered into a non-binding term sheet withMMR that contemplates the Company acquiring all of the capital stock of MMR ina stock for stock merger that would result in MMR becoming a wholly-ownedsubsidiary of the Company. If adefinitive agreement is executed and the proposed transaction is consummated onthe terms set forth in the non-binding term sheet, at the effective time of themerger, the existing equity holders of MMR would own approximately 64% of theequity of the combined company on a fully diluted basis. The existing equityholders of Favrille would own about 29% of the combined company. Approximately7% of Favrille’s equity would be newly issued to certain creditors assettlement for a portion of the Company’s 

 

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outstandingdebt obligations. Favrille is in the process of negotiating with its creditorsto settle its current liabilities and is required to make disclosures to creditorsregarding the potential merger as part of the settlement process.  Favrille’s progress in settling its creditorclaims, consistent with a creditor plan that is outlined in the non-bindingterm sheet with MMR, is a condition to the signing of a definitive agreementfor the proposed merger.

 

The proposed merger is subject to completionof mutual diligence and the negotiation of a definitive agreement.  Any definitive agreement will containconditions to closing, including a requirement to complete specified creditorsettlements, and the approval of the proposed merger by the MMR stockholders.There can be no assurance that the parties will be able to reach a definitiveagreement or consummate the proposed merger on the terms set forth in thenon-binding term sheet or otherwise. Concurrent with the execution of thenon-binding term sheet, the Company extended MMR a $100,000 loan that isevidenced by a promissory note and matures if a definitive agreement is notreached within a specified period or if a definitive agreement is terminatedwithout closing for any reason other than a breach by the Company.

 

**Item 2.    Management’sDiscussion and Analysis of Financial Condition and Results of Operations.**

 

**Cautionary Note Regarding Forward-LookingStatements**

 

*This Form 10-Q contains certainforward-looking statements including expectations of market conditions,challenges and plans, within the meaning of Section 21E of the SecuritiesExchange Act of 1934, as amended, and is subject to the Safe Harbor provisionscreated by that statute. The words “anticipate”, “expect”, “believe”, “plan”,“intend”, and similar expressions are intended to identify such statements.Although the forward-looking statements in this Form 10-Q reflect the goodfaith judgment of our management, such statements are subject to various risksand uncertainties, including but not limited to those discussed herein and, inparticular, the risks described in Item 1A of Part II and throughout ourAnnual Report on Form 10-K for the year ended December 31, 2007.Actual results and the timing of selected events may differ materially fromthose anticipated in these forward-looking statements. Except as required byapplicable law, we disclaim any duty to update any forward-looking statement toreflect events or circumstances that occur after the date on which suchstatement is made.*

 

**Overview**

 

In May 2008,we obtained results of the data analysis of our Phase 3 registration trial forour lead product candidate, Specifid, for patients with follicular B-cell non-Hodgkin’slymphoma, or fNHL. Analysis of the primary endpoint in the trial failed to showa statistically significant improvement in the treatment arm, Specifid plusLeukine® (sargramostim, GM-CSF) following Rituxan, compared to the control arm,placebo plus Leukine following Rituxan. Based on these results, we immediatelydiscontinued development of Specifid and other programs requiring production ofpatient-specific therapies including the T-cell and autoimmune diseaseprograms. We had previously devoted substantially all of ourresearch, development and clinical efforts and financial resources toward thedevelopment Specifid. In connection with the termination of our clinical trialsfor Specifid, from June 6 through September 19, 2008, we had majorworkforce reductions in which 141 of our 144 employees were terminated. We havealso ceased the manufacture of Specifid at our facility in San Diego,California. In July 2008, we executed an Agreement with our landlord whichterminated our facility lease on August 31, 2008. During the secondquarter of 2008, we recorded a non-cash charge for the impairment of long-livedassets of $28.5 million to write-down the carrying value of the Specifid assetgroup to its estimated fair value of $2.5 million. We sold our equipment andother personal property in August 2008 for net proceeds of $3.2 millionand recorded a gain on the sale of the long-lived assets of approximately$700,000.

 

InOctober 2008, we entered into a non-binding term sheet with MMR,that contemplates that we will acquire all of the capital stock of MMR in astock for stock merger following which MMR would become our wholly-ownedsubsidiary.  In connection with theproposed merger, we are in the process of negotiating with creditors to settleour outstanding liabilities.  There is asubstantial risk that we may not successfully implement the proposed merger orany other restructuring alternatives, and even if we determine to pursue one ormore of these alternatives, we may be unable to do so on acceptable financialterms. Any such transactions may require us to incur non-recurring or othercharges and may pose significant integration challenges and/or management andbusiness disruptions, any of which could materially and adversely affect ourbusiness and financial results.

 

We were incorporated in Delaware in January 2000. As of September 30,2008, we had not generated any revenues, and we had financed our operations andinternal growth through private placements and public offerings of our stockand warrants, and equipment and leasehold debt financings. We are a developmentstage company and have incurred significant losses since our inception in 2000,as we have devoted substantially all of our efforts to research and developmentactivities, including clinical trials. As of September 30, 2008, ourdeficit accumulated during the development stage was approximately $238million. We expect to incur substantial and increasing losses for the nextseveral years as we attempt to complete any strategic transactions such as areorganization involving in-licensing of products or a merger with anothercompany.

 

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**Going Concern**

 

As more fully described in the Risk Factors and Note 1 of the Notes toCondensed Financial Statements, our independent registered public accountingfirm has included an explanatory paragraph in their report on our 2007financial statements included with our Annual Report on Form 10-K for theyear ended December 31, 2007 filed with the SEC on February 29, 2008,related to the uncertainty of our ability to continue as a going concern. At September 30,2008, current liabilities of $5.5 million exceeded cash of $3.8 million,including the net proceeds from the sale all long-lived assets in August 2008.Although current liabilities exceed current assets, the accompanying condensedfinancial statements are prepared on a going-concern basis as the Company ispursuing, and believes it is reasonably possible, that it could complete amerger with MMR. If the Company is unable to complete the merger or any otherstrategic transaction, it will likely not be able to continue as a goingconcern.

 

**Financial Operations Overview**

 

***Research andDevelopment Expense. *** Research anddevelopment expense consists primarily of costs associated with clinical trialsof our product candidates, including the costs of manufacturing our productcandidates, compensation and other expenses related to research and developmentpersonnel, facilities costs and depreciation. We charge all research anddevelopment expenses to operations as they are incurred. Our research anddevelopment activities have been primarily focused on the development ofSpecifid. Because we have discontinued the development of Specifid andsubstantially reduced our workforce, we expect our research and developmentexpenditures to decrease significantly during the remainder of 2008.

 

From inception through September 30, 2008, we incurred costs ofapproximately $154.4 million associated with the research and development ofSpecifid and, since May 2008, the discontinuation of the Specifiddevelopment program, which represents substantially all of our research anddevelopment costs to date.

 

***Marketing, Generaland 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. Because we have discontinued thedevelopment of Specifid and substantially reduced our workforce, we expect ourmarketing, general and administrative expenditures to decrease significantlyduring the remainder of 2008.

 

***Interest Income.*** Interest income primarily consists of interest earned on our cash reserves,cash invested in money market funds, government securities, corporate notes andbonds and certificates of deposit.

 

***Interest Expense.*** Interest expense represents interest on our debt, including capital leases.

 

**Critical Accounting Policies and Estimates**

 

The discussion and analysis of our financial condition and results ofoperations are based on our financial statements, which have been prepared inaccordance with U.S. generally accepted accounting principles. The preparationof financial statements requires us to make estimates and assumptions that affectthe reported 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.***  We account for stock-basedcompensation in accordance with Statement of Financial Accounting Standards(SFAS) No. 123 (revised 2004), *Share-Based Payment*,(SFAS 123(R)).  Under SFAS 123(R), stock-based compensation cost ismeasured at the grant date, based on the estimated fair value of the award, andis recognized as expense over the employee’s requisite service period.

 

***Lease Obligation.*** We recognize rent expense on a straight-line basis over the reasonably assuredlease term.  Our lease agreements provide for scheduled rent increasesduring the lease terms or for rental payments commencing at a date other thanthe date of initial occupancy.  We include any rent escalations and otherrent holidays in our straight-line rent expense.  In addition, tenant improvementspaid by the landlord are capitalized as leasehold improvements and amortizedover the shorter of their estimated useful lives or the remaining lease term,while the tenant improvement allowance is recorded as deferred rent andrecovered ratably over the remaining term of the lease.

 

***Impairment of Long-lived Assets.******         ***Long-livedassets to be held and used are reviewed for impairment when events or changesin circumstances indicate the carrying amount of an asset may not berecoverable or its estimated useful life has changed significantly. Impairmentis the condition that exists when the carrying amount of a long-lived asset (orgroup of assets herein referred to as an asset 

 

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group) exceeds its fair value. An impairment loss must be recognizedwhen the carrying amount of the long-lived asset (asset group) is notrecoverable and exceeds its fair value. The carrying amount of a long-livedasset (asset group) is not recoverable if it exceeds the sum of theundiscounted cash flows expected to result from the use and eventualdisposition of the asset.

 

***Costs Associated with Exit or DisposalActivities.* **Aliability for costs associated with exit or disposal activities should bemeasured and recognized, initially at its fair value, in the period in whichthe liability is incurred. In the second quarter of 2008, we recorded aliability associated with severance and related costs of a workforce reductionin which 132 employees were terminated on June 6, 2008. In the thirdquarter of 2008, we recorded a liability associated with severance and relatedcosts of the termination of an additional 10 employees.

 

***CapitalizedSoftware.***  Software developed for internaluse, whether purchased or developed, is capitalized and amortized using thestraight-line method over an estimated useful life of five years.  Costsincurred until the point the project has reached development stage are expensedin accordance with Statement of Position (“SOP”) 98-1, “Accounting for theCosts of Computer Software Developed or Obtained for Internal Use.” Determiningwhen a project has reached the development stage requires the use ofjudgment.  Subsequent additions, modifications or upgrades to internal-usesoftware are capitalized only to the extent that they allow the software toperform a task it previously did not perform. Software maintenance and trainingcosts are expensed in the period in which they are incurred.

 

***Fair ValueMeasurement.***  As discussed in Notes 1 and 4to the condensed financial statements, the Company adopted the provisions ofSFAS No. 157 and SFAS No. 159 effective January 1, 2008.

 

Management has discussed the development and selection of thesecritical accounting policies with the Audit Committee of our Board of Directorsand the Audit Committee has reviewed the disclosures presented above relatingto them.

 

**Results of Operations**

 

***Comparison of theThree Months Ended September 30, 2008 and 2007***

 

*Research and Development.*  Researchand development expense decreased from approximately $9.5 million duringthe three months ended September 30, 2007 to $1.4 million during the threemonths ended September 30, 2008. The decrease of approximately $8.1million, or 84%, was primarily due to the discontinuation of the development ofSpecifid in May 2008 and the workforce reduction on June 6,2008.  During the third quarter of 2008,a transition team of five employees shut down the manufacturing facility,disposed of all lab and manufacturing supplies, clinical material, terminatedservice agreements with clinical sites and sold the equipment. As a result,compensation and other labor-related expense decreased approximately $3.9 million,including a decrease of approximately $670,000 of stock-based compensation;depreciation expense associated with our commercial manufacturing facilitydecreased approximately $90,000; lab and manufacturing supplies decreasedapproximately $700,000; consulting, outside services and clinical site costsrelated to the discontinuation of Specifid development decreased approximately$1.5 million; and rent, utilities and other facilities-related expensesdecrease approximately $830,000.

 

*Marketing, General and Administrative.*  Marketing,general and administrative expense decreased from approximately$2.9 million during the three months ended September 30, 2007 to$1.2 million during the three months ended September 30, 2008. Thedecrease of $1.7 million, or 59%, primarily reflects the workforce reduction onJune 6, 2008 involving 27 of 35 marketing, finance, information technology(“IT”) and administrative employees resulting in a decrease in compensation andother labor-related expense of approximately $1.5 million; a decrease of$300,000 in consulting and outside services related to the discontinuation ofmarketing and compliance projects offset by a increase of $100,000 in legalfees related to winding down the current operations of the Company.

 

*Interest Income.* Interest income decreased from approximately $360,000 during the three monthsended September 30, 2007 to $13,000 during the three months ended September 30,2008. The decrease of $350,000, or 96%, was primarily the result of thereduction in the average balance of cash, cash equivalents and short-terminvestments and a lower average interest rate.

 

*Interest Expense.**   *Interestexpense decreased from approximately $270,000 during the three months ended September 30,2007 to $0 during the three months ended September 30, 2008. The decreaseof 100% was primarily the result of the Company paying off all debt outstandingunder the credit facility with its secured lenders in June 2008.

 

*Loss on Impairment of Assets.* Following the discontinuation of development of Specifid, we performed arecoverability test of the long-lived assets included in our Specifid assetgroup in accordance with SFAS No. 144,*Accounting for the Impairment or Disposal of Long-Lived Assets*. Thetest was based on the estimated undiscounted future cash flows expected toresult from the disposition of the Specifid asset group, including theestimated future cash inflows from anticipated sales and returns of assets andthe estimated asset disposition costs. Accordingly, we recorded a non-cashcharge for the impairment of long-lived assets of $28.5 million in the 

 

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second quarter of 2008 to write-down the carrying value of the Specifidasset group to its estimated fair value of $2.5 million. In August 2008,the Specifid asset group was sold for net proceeds of $3.2 million. During thethird quarter, we recorded a gain on the sale of the long-lived assets ofapproximately $700,000.

 

*Gain onLease Termination. *In July 2008 we entered into anagreement with our landlord which terminated our facility lease effective August 31,2008. On the termination date, we transferred our rights in the $3.6million L-C and the $360,000 security deposit to the landlord and eliminatedeach of them as well as the deferred rent from our balance sheet which resultedin our recording a gain on termination of $12.6 million.

 

***Comparison of theNine Months Ended September 30, 2008 and 2007***

 

*Research and Development.*    Researchand development expense decreased from approximately $27.1 million duringthe nine months ended September 30, 2007 to $19.6 million during the ninemonths ended September 30, 2008. The decrease of $7.5 million, or 28%, isprimarily due to the discontinuation of the development of Specifid in May 2008and the workforce reduction on June 6, 2008.  During the third quarter of 2008, atransition team of five employees shut down the manufacturing facility,disposed of all lab and manufacturing supplies, clinical material, terminatedservice agreements with clinical sites and sold the equipment. As a result,compensation and other labor-related expense decreased approximately $2.3million, including a decrease of approximately $300,000 of stock-basedcompensation; lab and manufacturing supplies and equipment maintenancedecreased approximately $1.9 million; consulting, outside services and clinicalsite costs related to the discontinuation of Specifid development decreasedapproximately $1.9 million; and rent, utilities and other facilities-relatedexpenses decrease approximately $800,000.

 

*Marketing, General and Administrative.*    Marketing,general and administrative expense decreased from approximately$8.8 million during the nine months ended September 30, 2007 to$6.8 million during the nine months ended September 30, 2008. Thedecrease of $2 million, or 23%, primarily reflects the workforce reduction on June 6,2008 involving 27 of 35 marketing, finance, information technology andadministrative employees resulting in a decrease in compensation and otherlabor-related expense of approximately $1.7 million and a decrease inconsulting services associated with the discontinuation of marketing and complianceprojects of approximately $500,000, which were offset by an increase ofapproximately $400,000 in legal fees related to winding down the currentoperations of the Company.

 

*Interest Income.* Interest income decreased from approximately $1.4 million during the ninemonths ended September 30, 2007 to $390,000 during the nine months ended September 30,2008. The decrease of $1 million, or 71%, was primarily the result of thereduction in the average balance of cash, cash equivalents and short-term investmentsand a lower average interest rate.

 

*Interest Expense.**   *Interestexpense decreased from approximately $770,000 during the nine months ended September 30,2007 to $500,000 during the nine months ended September 30, 2008. Thedecrease of $270,000, or 35% was primarily the result of the Company paying offall debt outstanding under the credit facility with its secured lenders in June 2008.

 

*Loss on Impairment of Assets.* Following the discontinuation of development of Specifid, we performed arecoverability test of the long-lived assets included in our Specifid assetgroup in accordance with SFAS No. 144,*Accounting for the Impairment or Disposal of Long-Lived Assets*. Thetest was based on the estimated undiscounted future cash flows expected toresult from the disposition of the Specifid asset group, including theestimated future cash inflows from anticipated sales and returns of assets andthe estimated asset disposition costs. Accordingly, we recorded a non-cashcharge for the impairment of long-lived assets of $28.5 million in the secondquarter of 2008 to write-down the carrying value of the Specifid asset group toits estimated fair value of $2.5 million. In August 2008, the Specifidasset group was sold for net proceeds of $3.2 million. During the thirdquarter, we recorded a gain on the sale of the long-lived assets ofapproximately $700,000.

 

*Change in Valuation of Warrants.* In November 2007, the Company issued warrants to purchase 4.4 millionshares of Common Stock in conjunction with the registered direct offering ofCommon Stock and warrants. These warrants were recorded as a liabilityutilizing the Black-Scholes valuation model for estimating the fair value in November 2007.Utilizing Black-Scholes, on December 31, 2007, the warrants were valued atapproximately $2.5 million and on September 30, 2008, the warrants werevalued at $0. The change in valuation was recorded as other income during thenine months ended September 30, 2008.

 

*Gain on Lease Termination. *In July 2008 we entered into an agreementwith our landlord which terminated our facility lease effective August 31,2008. On the termination date, we transferred our rights in the $3.6million L-C and the $360,000 security deposit to the landlord and eliminatedeach of them as well as the deferred rent from our balance sheet which resultedin our recording a gain on termination of $12.6 million.

 

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**Liquidity and Capital Resources**

 

***Sources of Liquidity***

 

We have historically funded our operations primarily through the saleof our equity securities and equipment and leasehold debt financing. Frominception through September 30, 2008, we had received proceeds ofapproximately $76.1 million, net of stock issuance costs from the sale ofpreferred stock which was converted to common stock; proceeds from the sale ofcommon stock in our IPO of approximately $39.5 million, net of underwriters’discounts and commissions and offering expenses; proceeds of approximately$74.9 million from the sale of common stock and warrants to purchase commonstock to certain investors, in a private placement and in registered directofferings, net of offering expenses; and proceeds of $3.3 million from the saleof common stock to certain investors, in a committed equity financing facility.

 

As more fully described in the Risk Factors and Note 1 of the Notes toCondensed Financial Statements, our independent registered public accountingfirm has included an explanatory paragraph in their report on our 2007financial statements included with our Annual Report on Form 10-K for theyear ended December 31, 2007 filed with the SEC on February 29, 2008,related to the uncertainty of our ability to continue as a going concern. At September 30,2008, current liabilities of $5.5 million exceeded cash of $3.8 million,including the net proceeds from the sale all long-lived assets in August 2008.Although current liabilities exceed current assets, the accompanying condensedfinancial statements are prepared on a going-concern basis as we are pursuing,and believe it is reasonably possible, that we could complete a merger withMMR. If we are unable to complete the merger or any other strategictransaction, we will likely not be able to continue as a going concern andlikely seek to be liquidated through a bankruptcy.

 

***Cash Flows***

 

As of September 30, 2008, cash, cash equivalents and short-terminvestments were approximately $3.8 million as compared to $29.9 million at December 31,2007, a decrease of approximately $26.1 million. The decrease resultedprimarily from the net cash used to fund ongoing operations and the repaymentof debt.

 

Net cash used in operating activities was approximately $17.6 millionfor the nine months ended September 30, 2008, compared to approximately$29.1 million for the same period in 2007.  The decrease of approximately$11.5 million is primarily due to an increase in net loss of $4 millionadjusted for a gain on the termination of our facility lease of $12.6 million,a loss of impairment of property and equipment of $28.5 million and a gain onsale of assets held for sale of $700,000.

 

Net cash provided by investing activities for the nine months ended September 30,2008 was approximately $6.5 million compared to net cash provided by investingactivities of $18.3 million for the same period in 2007.  The decrease ofapproximately $11.8 million is due to a decrease of $34.5 million in maturitiesof short-term investments offset by a reduction of approximately $10.8 millionin purchases of short-term investments, a reduction of approximately $8.7million in property and equipment purchases and net proceeds from the sale ofassets held for sale of $3.2 million.

 

Net cash used in financing activities for the nine months ended September 30,2008 was approximately $11.4 million, reflecting primarily debt repaymentsof approximately $11.6 million.  Net cash provided by financing for thesame period in 2007 totaled approximately $16.2 million, reflecting primarilythe proceeds of approximately $10 million from our registered direct offeringof common stock in February 2007, proceeds of approximately $3.3 millionfrom the sale of common stock under the CEFF and approximately $6.9 million ofgross proceeds from our credit facility, offset by approximately $4.4 millionof debt repayments.

 

***Funding Requirements***

 

Our future capital uses and requirements depend on numerousforward-looking factors, including whether we consummated the proposed mergerwith MMR, whether we settle our liabilities with our creditors and whether wecontinue to operate as a going concern. Due to the significant uncertaintyabout whether we will be able to consummate the merger with MMR, we cannot predictour funding requirements..  MMR is at anearly stage of development and will require additional financing in order tooperate its business and fund its growth.

 

As of September 30, 2008, we have not invested in any variableinterest entities. We do not have any relationships with unconsolidatedentities or financial partnerships, such as entities often referred to asstructured finance or special purpose entities, which would have beenestablished for the purpose of facilitating off-balance sheet arrangements orother contractually narrow or limited purposes. In addition, we do not engagein trading activities involving non-exchange traded contracts. As such, we arenot materially exposed to any financing, liquidity, market or credit risk thatcould arise if we had engaged in these relationships. We do not haverelationships or transactions with persons or entities that derive benefitsfrom their non-independent relationship with us or our related parties otherthan what is disclosed in Note 8 of the Notes to Financial Statementsincluded in our Annual Report on Form 10-K for the year ended December 31,2007.

 

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***Off-Balance SheetArrangements***

 

We do not have any off-balance sheet arrangements.

 

**Item 3.****           Quantitative andQualitative Disclosures about Market Risk.**

 

***Quantitative andQualitative Disclosures About Market Risk***

 

The primary objective of our investment activities is to preserveprincipal while maximizing income without significantly increasing risk. Someof the securities in which we invest may be subject to market risk. This meansthat a change in prevailing interest rates may cause the market value of theinvestment to fluctuate. To minimize this risk, we may maintain our portfolioof cash equivalents and short-term investments in a variety of securities,including commercial paper, money market funds and direct or guaranteedobligations of the United States government. The risk associated withfluctuating interest rates is limited to our investment portfolio and we do notbelieve that a 10% change in interest rates over a twelve month periodbeginning on September 30, 2008 would have a significant impact on ourinterest income. As of September 30, 2008, we had no short-terminvestments or cash equivalents.

 

**Item 4.****           Controls andProcedures.**

 

***Disclosure Controlsand Procedures***

 

Under the supervision and with the participation of our Chief ExecutiveOfficer and Chief Financial Officer, we evaluated the effectiveness of thedesign and operation of our disclosure controls and procedures, as definedunder Rule 13a-15(e) promulgated under the Securities Exchange Act of1934, as amended (the Exchange Act). Based on that evaluation, our ChiefExecutive Officer and Chief Financial Officer have concluded that, as of theend of the period covered by this report, our disclosure controls andprocedures were effective.

 

***Changes in InternalControl over Financial Reporting***

 

Our management, including our Chief Executive Officer and ChiefFinancial Officer, has concluded that there were changes in our internalcontrol over financial reporting that occurred during our quarter ended June 30,2008 and continued through September 30, 2008 that have materiallyaffected, and are reasonably likely to materially affect, our internal controlover financial reporting.

 

All but one member of our finance staff were included in the workforcereductions from June 6 through September 19, 2008. Therefore, certainsegregation of duties did not exist and other controls were not performed inthe preparation of this report as had been the case in past closing andreporting cycles. We did not adequately divide, or compensate for, incompatiblefunctions among personnel to reduce the risk that a potential materialmisstatement of the financial statements could occur without being prevented ordetected.

 

**PART II - OTHER INFORMATION.**

 

**Item 1.****                     LegalProceedings.**

 

We are currently not a party to any material legal proceeding. We maybe subject to various claims and legal actions arising in the ordinary courseof business from time to time.

 

**Item 1A.****           *****RiskFactors***

 

*You should consider carefully the risk factors describedbelow, together with the other information contained in this report. If any ofthe following risks actually occur, our business, financial condition, resultsof operations and future prospects would likely be materially and adverselyaffected. In these circumstances, the market price of our common stock coulddecline, and you may lose all or part of your investment in our common stock.*

 

*We have marked with an asterisk those risk factors thatreflect substantive changes from the risk factors included in our Annual Reporton Form 10-K for the year ended December 31, 2007.*

 

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**Risks Related to Our Business**

 

***In light of our decision todiscontinue development of our Specifid clinical program, we are seeking tomaximize the value of our assets, and address our liabilities.  We may be unable to satisfy our liabilitiesand can provide no assurances that we can be successful in pursuing a strategictransaction.**

 

**In May 2008, we obtained results of thedata analysis of our Phase 3 registration trial for our lead product candidate,Specifid, for patients with follicular B-cell non-Hodgkin’s lymphoma, or fNHL.Analysis of time to progression, or TTP, the primary endpoint in the trial,failed to show a statistically significant improvement in the treatment arm,Specifid plus Leukine® (sargramostim, GM-CSF) following Rituxan, compared tothe control arm, placebo plus Leukine following Rituxan. Analysis of allsubgroups also did not show any significant differences in primary or secondaryendpoints when adjusted for prognostic factors. Based on these results, we immediately discontinued development ofSpecifid and other programs requiring production of patient-specific therapiesincluding the T-cell and autoimmune disease programs.**We hadpreviously devoted substantially all of our research, development and clinicalefforts and financial resources toward the development Specifid. Subsequent toour termination of the development of Specifid, we have had the followingdevelopments:

 

**·**                  We had majorworkforce reductions in which 141 of our 144 employees were terminated.

**·**                  We have incurredapproximately $3.4 million of severance costs, the substantial majority ofwhich will be cash expenditures; approximately $2.7 million of severance andaccrued Flexible Time Off (“FTO”) remained outstanding at September 30,2008.

**·**                  We have alsoceased the manufacture of Specifid at our facility in San Diego, California. OnJuly 18, 2008, we executed an agreement with our landlord which terminatedour facility lease on August 31, 2008.

**·**                  We sold ourequipment and other personal property assets in an auction held in August 2008for net proceeds of $3.2 million.

 

As a result ofthe discontinuation of our clinical trials of Specifid, we are activelypursuing a strategic transaction with the goal of maximizing the value of ourassets. There are substantial challenges and risks which will make itdifficult to successfully implement any strategic transaction. Stockholders should recognize that our efforts to address our liabilities andpursue a strategic transaction may result in the stockholders of the Companyhaving little or no continuing interest in the assets of the Company asstockholders or otherwise.

 

***We have entered into a non-binding term sheet for a reverse mergerwhereby Favrille would acquire all of the capital stock of MyMedicalRecords.com, Inc.(“MMR”), in a stock for stock merger that would result in MMR becoming awholly-owned subsidiary of Favrille.**

 

We cannot assure you that wewill be able to execute a definitive agreement with MMR regarding the proposedmerger, or that any agreement we do execute will be on the previously disclosedterms set forth in the non-binding term sheet, and neither we nor MMR have any obligationto execute a definitive agreement on the non-binding agreed terms orotherwise.  Stockholders of Favrille willnot have the opportunity to vote on the merger with MMR; however, as a matterof law, stockholders of MMR must approve the merger by a required vote andthere is no assurance that the stockholders of MMR will approve themerger.  If the proposed transaction isconsummated on the proposed terms, at the effective time of the merger, the existingequity holders of MMR would own approximately 64% of the equity of the combinedcompany on a fully diluted basis. The existing equity holders of Favrille wouldown about 29% of the combined company. Approximately 7% of Favrille’s equitywould be newly issued to certain creditors as settlement for a portion ofoutstanding debt obligations. Favrille is in the process of negotiating withits creditors to settle its current liabilities. Favrille’s progress insettling its creditor claims, consistent with a creditor plan that is outlinedin the non-binding term sheet with MMR, is a condition to the signing ofdefinitive agreement for the proposed merger. We have no assurances that allcreditor claims can be settled consistent with the creditor plan or at all. Itis anticipated that post merger, Favrille’s common stock would continue to betraded on the OTC Bulletin Boards, subject to the continued willingness of aregistered broker-dealer to make a market in our stock.

 

The proposed merger is subject to completionof mutual diligence and the negotiation of a definitive agreement.  Any definitive agreement will containconditions to closing, including a requirement to complete specified creditorsettlements, and the approval of the proposed merger by the MMR stockholders.There can be no assurance that the parties will be able to reach a definitiveagreement or consummate the proposed merger on the terms set forth in thenon-binding term sheet or otherwise. If we are unable to complete the merger orany other strategic transaction, we may need to seek protectionunder the provisions of the U.S. Bankruptcy Code.

 

***We may not be able to continue as a going concern andmay be unable to satisfy our liabilities.**

 

As more fully described in Note 1 of the Notes to Condensed FinancialStatements, our independent registered public accounting firm has included anexplanatory paragraph in their report on our 2007 financial statements relatedto the uncertainty of our ability to continue as a going concern. Our cash andcash equivalents, which were approximately $3.8 million at September 30,2008, are 

 

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insufficient to discharge our existing and anticipated liabilities andobligations. If we are unable to complete the proposed merger with MMR andsettle our liabilities pursuant to our creditor plan, we do not expect to beable to continue as a going concern.

 

***We may need to liquidatethe Company in a voluntary dissolution under Delaware law or to seek protectionunder the provisions of the U.S. Bankruptcy Code, and in that event, it isunlikely that stockholders would receive any value for their shares.**

 

We have not generated any revenues to date, and we have incurred lossesin each year since our inception in 2000. We are currently evaluating ourstrategic alternatives with respect to all aspects of our business. We cannotassure you that any actions that we take would raise or generate sufficientcapital to fully address the uncertainties of our financial position. As aresult, we may be unable to realize value from our assets and discharge ourliabilities in the normal course of business. If we are unable to settle ourobligations to our creditors or if we are unable to consummate a strategictransaction we would likely need to liquidate the Company in a voluntarydissolution under Delaware law or to seek protection under the provisions ofthe U.S. Bankruptcy Code. In that event, we or a trustee appointed by the courtmay be required to liquidate our assets. In either of these events, we mightrealize significantly less from our assets than the values at which they arecarried on our financial statements. The funds resulting from the liquidationof our assets would be used first to satisfy obligations to creditors beforeany funds would be available to pay our stockholders, and any shortfall in theproceeds would directly reduce the amounts available for distribution, if any,to our creditors and to our stockholders. In the event we were required toliquidate under Delaware law or the federal bankruptcy laws, it is highlyunlikely that stockholders would receive any value for their shares.

 

***We have incurred significant operating losses sinceinception and anticipate that we will continue to incur losses and negativecash flow from operations for the foreseeable future even if we complete theproposed merger with MMR**

 

We are a development stage company with a limited operatinghistory.  As a biotechnology company, wefinanced our operations through private placements of common stock andwarrants, public offerings of our common stock and warrants to purchase ourcommon stock, equipment and leasehold debt financing, and our CEFF throughKingsbridge Capital Limited. We have incurred losses in each year since ourinception in 2000. For the three months ended September 30, 2008, theCompany reported net income of $10.7 million, or $0.26 per share, compared to anet loss of $12.3 million, or $0.37 per share. For the nine months ended September 30,2008, the Company reported a net loss of $39.2 million, or $0.95 per share,compared to $35.2 million, or $1.10 per share, for the same period in2007. MMR also is a development stage company with a limited operatinghistory and minimal revenue.  MMR hasdeveloped personal health care record and storage products that are currentlyavailable but MMR is at an early stage in developing a business model that willenable it to generate significant revenue from the use of its products.  MMR has financed its operations primarilythrough private placements of common stock and from secured loans from anaffiliate of MMR’s founder and chief executive officer.  If the merger is completed, the combined companyis expected to continue to incur losses from operations and to need financingto fund its operations until it develops a profitable business. There is noassurance that a combined Favrille and MMR will be able to generate sufficientrevenue and working capital to fund its operations and create a sustainablegoing concern.  As a result, if ouroperations continue, we expect that we would continue to incur operating lossesfor the foreseeable future.

 

***If we have used biological and hazardous materials in a manner thatcaused injury or violated laws, we may be liable for damages.**

 

Our historical research anddevelopment and manufacturing activities involved 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 complied with federal, state and local laws andregulations, we could not 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.

 

**Risks Related to the Securities Markets andOwnership of Our Common Stock**

 

***We have ceased operations as a biotechnology companyand our stock has been delisted by The Nasdaq Global Market effective October 17,2008 and our common stock price has declined very significantly and remainsvery volatile**

 

Until our initial public offering, or IPO, in February 2005, therewas no public market for our common stock, and despite our IPO, an activepublic market for these shares may not be sustained. Our stock price has tradedin the range of $7.77- $0.01 from the commencement of our IPO on February 2,2005 to October 24, 2008.

 

We were delisted from The Nasdaq Global Market, effective October 17,2008, due to our noncompliance with the following minimum requirements: i) thebid price for our common stock closed below the minimum $1.00 per sharerequirement for more than 30 days, ii) we had not maintained a minimum marketvalue of publicly held shares of $5,000,000 and iii) our stockholder’s equity 

 

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was less than $10 million as of June 30, 2008. Effective October 3,2008, we were listed and our common stock began trading on the OTC BulletinBoards. Our continued listing and trading on the OTC Bulletin Boards is subjectto our continuing compliance with our SEC reporting obligations and thecontinued willingness of a registered broker-dealer to make a market in ourstock, and we have no control over our current or future market-makers.

 

Also,there are substantial risks and uncertainties relating to our proposed mergerwith MMR that may significantly impact the trading price of our common stockand our ability to continue to operate as a going concern.

 

You may not be able to resell your shares at or above the price youpaid for such shares or at all. In addition, class action litigation has oftenbeen instituted against companies whose securities have experienced periods ofvolatility in market price. Any such litigation brought against us could resultin substantial costs and a diversion of management’s attention and resources,which could hurt our business, operating results and financial condition.

 

***Concentration****of****ownership****among****our****existing****officers,****directors****and****principal****stockholders****may****prevent****other****stockholders****from****influencing****significant****corporate****decisions****and****depress****our****stock****price.**

 

As of September 30, 2008, our officers and directors andstockholders affiliated with our directors together beneficially held approximately33.16% of our outstanding common stock on an as-converted basis. If some or allof these officers, directors and principal stockholders act together, they willbe able to exert a significant degree of influence over our management andaffairs and over matters requiring stockholder approval, including the electionof directors, the merger, consolidation or sale of all or substantially all ofour assets, and any other significant corporate transaction. The interests ofthis concentration of ownership may not always coincide with our interests orthe interests of our other stockholders. For instance, officers, directors andprincipal stockholders, acting together, could cause us to enter intotransactions or agreements that we would not otherwise consider. Similarly,this concentration of ownership may have the effect of delaying or preventing achange in control of us otherwise favored by our other stockholders. Thisconcentration of ownership also could depress our stock price.

 

**Provisions in our amended and restatedcertificate of incorporation and amended and restated bylaws and applicableDelaware law may prevent or discourage third parties or our stockholders fromattempting to replace our management or influencing significant decisions.**

 

Provisions in our amended and restated certificate of incorporation andamended and restated bylaws may have the effect of delaying or preventing achange in control of us or our management, even if doing so would be beneficialto our stockholders. These provisions 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 to provisions of the Delaware corporation law that,in general, prohibit any business combination with a beneficial owner of 15% ormore of our common stock for five years unless the holder’s acquisition of ourstock was approved in advance by our board of directors. Together, thesecharter and statutory provisions could make the removal of management moredifficult and may discourage transactions that otherwise could involve paymentof a premium over prevailing market prices for our common stock.

 

**Item 2.****                     UnregisteredSales of Equity Securities and Use of Proceeds.**

 

On April 8, 2008, in conjunction with a consulting agreement withPorter Novelli Life Sciences, LLC, we issued warrants to purchase up to 10,000shares of our common stock at an exercise price of $1.80 per share. Thewarrants are exercisable through April 8, 2013. These warrants were issuedin reliance upon the exemption from registration provided in section 4(2) ofthe Securities Act of 1933, as amended, and/or Regulation D promulgatedthereunder pursuant to the consultant’s status as an accredited investor.

 

**Item 6.****                     Exhibits.**

 

The exhibits listed on the accompanying index to exhibits are filed orincorporated by reference (as stated therein) as part of this Quarterly Reporton Form 10-Q.

 

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| **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 among the Registrant and certain of its stockholders.(1)                                                                                                                  |
|                      |       |                                                                                                                                                                                                                                                |
| 4.3                       |       | Amendment No. 1 to Amended and Restated Investor Rights  Agreement dated April 6, 2004 among 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. (9)                                                                                                                        |
|                      |       |                                                                                                                                                                                                                                                |
| 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. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                  |
| (2)    |   | Filed as an exhibit to Registrant’s Current Report on Form 8-K  dated March 6, 2006 and incorporated herein by reference.                              |

 

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| (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.                   |
|   |   |                                                                                                                                                          |
| (9)    |   | Filed as an exhibit to Registrant’s Quarterly Report on  Form 10-Q for the quarter ended March 31, 2008 and incorporated  herein by reference. |

 

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**Favrille, Inc.**

 

**SIGNATURES**

 

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

 
| Dated: October 31, 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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