**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

| **(Mark One)**                                         | ** **                                                                                              | ** ** |
|--------------------------------------------------------|---------------------------------------------------------------------------------------------------------|------------|
| ** **                                             | ** **                                                                                              | ** ** |
| **o**                                                  | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
| ** **                                             | ** **                                                                                              |
| **For the quarterly period ended September 30,  2007** |
| ** **                                             | ** **                                                                                              | ** ** |
| **OR**                                                 |
| ** **                                             | ** **                                                                                              | ** ** |
| **o**                                                  | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For thetransition periodfrom              to**

 

**CommissionFile Number 000-51134**

 

**Favrille, Inc.**

(Exact name of registrantas specified in its charter)

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

 

**(858)526-8000**

(Registrant’s telephonenumber, including area code)

 

**N/A**

(Former name, formeraddress and former fiscal 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 the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90days.   YES   x   NO   o

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, or a non-accelerated filer.  Seedefinition of “accelerated filer and large accelerated filer” inRule 12b-2 of the Exchange Act (Check one).
| Large Accelerated Filer  o | Accelerated Filer  o | Non-Accelerated  Filer  x |
|--------------------------------------|--------------------------------|-------------------------------------|

 

 Indicate by check mark whether the registrant is a shell company(as defined in Rule 12b-2 of the Exchange Act).

 

YES  o    NO  x

 

The number of shares of the Registrant’s common stock outstanding asof November 12, 2007 was 49,169,476.

 

 

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**FAVRILLE,INC.**

 

**QUARTERLYREPORT ON FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 2007**

 

**TABLE OFCONTENTS**

** **
| **PART I.**  | **FINANCIAL  INFORMATION**                                                                                                                                                          |
|-------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Item 1.           | Financial  Statements                                                                                                                                                               |
|              | Balance Sheets as of September 30, 2007 (Unaudited)  and December 31, 2006                                                                                                     |
|              | Statements  of Operations (Unaudited) for the three and nine months ended September 30,  2007 and 2006 and the period from January 21, 2000 (inception) to  September 30, 2007 |
|              | Statements of Cash Flows (Unaudited) for the nine  months ended September 30, 2007 and 2006 and the period from January 21,  2000 (inception) to September 30, 2007            |
|              | Notes to Condensed Financial Statements (Unaudited)                                                                                                                                 |
| Item 2.           | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                                                                                         |
| Item 3.           | Quantitative and Qualitative Disclosures About Market  Risk                                                                                                                         |
| Item 4T.          | Controls and Procedures                                                                                                                                                             |
|              |                                                                                                                                                                                |
| **PART II.** | **OTHER  INFORMATION**                                                                                                                                                              |
| Item 1.           | Legal  Proceedings                                                                                                                                                                  |
| Item  1A.         | Risk  Factors                                                                                                                                                                       |
| Item 2.           | Unregistered Sales of Equity Securities and Use of  Proceeds                                                                                                                        |
| Item  6.          | Exhibits                                                                                                                                                                            |
|              |                                                                                                                                                                                |
| SIGNATURES        |                                                                                                                                                                                |

 

 

----

 

 

 

 

**PART I— FINANCIAL INFORMATION**

 

**Item 1.Financial Statements.**

 

**FAVRILLE, INC.**

 

**(adevelopment stage company)**

 

**BALANCE SHEETS**

 

**(inthousands, except share and per share data)**
| ** **                                                                                                                                                                                                      | ** ** | **September 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                                      | ** ** | **(unaudited)**              | ** ** | ** **                  | ** ** |
| **Assets**                                                                                                                                                                                                      | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Current assets:                                                                                                                                                                                                 |       |                         |       |                        |       |
| Cash and cash  equivalents                                                                                                                                                                                      |       | $                            | 19,568     |                        | $          | 14,249 |   |
| Short-term  investments                                                                                                                                                                                         |       | 1,298                        |       | 28,160                      |       |
| Receivables                                                                                                                                                                                                     |       | 219                          |       | 242                         |       |
| Prepaid expenses  and other current assets                                                                                                                                                                      |       | 873                          |       | 608                         |       |
| Total current  assets                                                                                                                                                                                           |       | 21,958                       |       | 43,259                      |       |
| Property and  equipment, net                                                                                                                                                                                    |       | 34,148                       |       | 25,071                      |       |
| Restricted cash                                                                                                                                                                                                 |       | 3,451                        |       | 3,451                       |       |
| Other assets                                                                                                                                                                                                    |       | 487                          |       | 508                         |       |
| Total assets                                                                                                                                                                                                    |       | $                            | 60,044     |                        | $          | 72,289 |   |
| **Liabilities  and stockholders’ equity**                                                                                                                                                                  | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Current  liabilities:                                                                                                                                                                                           |       |                         |       |                        |       |
| Accounts payable  and accrued liabilities                                                                                                                                                                       |       | $                            | 4,964      |                        | $          | 6,779 |   |
| Current portion  of debt                                                                                                                                                                                        |       | 5,767                        |       | 4,976                       |       |
| Total current  liabilities                                                                                                                                                                                      |       | 10,731                       |       | 11,755                      |       |
| Debt, less  current portion                                                                                                                                                                                     |       | 7,576                        |       | 5,754                       |       |
| Deferred rent                                                                                                                                                                                                   |       | 15,179                       |       | 10,145                      |       |
| Commitments and  contingencies                                                                                                                                                                                  |       |                         |       |                        |       |
| Stockholders’  equity:                                                                                                                                                                                     |       |                         |       |                        |       |
| Preferred stock,  $0.001 par value 5,000,000 shares authorized at September 30, 2007 and  December 31, 2006; no shares issued and outstanding at September 30,  2007 and December 31,2006             |       | —                       |       | —                      |       |
|                                                                                                                                                                                                            |       |                         |       |                        |       |
| Common stock,  $0.001 par value:                                                                                                                                                                                |       |                         |       |                        |       |
| Authorized  shares, 75,000,000 at September 30, 2007 and December 31, 2006; Issued  and outstanding shares — 33,753,206 and 29,060,081 at September 30, 2007 and  December 31,2006, respectively |       | 34                           |       | 29                          |       |
| Additional  paid-in capital                                                                                                                                                                                     |       | 217,665                      |       | 200,497                     |       |
| Accumulated  other comprehensive income                                                                                                                                                                         |       | —                       |       | 3                           |       |
| Deficit  accumulated during the development stage                                                                                                                                                               |       | (191,141                     | )          | (155,894                    | )          |
| Total  stockholders’ equity                                                                                                                                                                                |       | 26,558                       |       | 44,635                      |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                                |       | $                            | 60,044     |                        | $          | 72,289 |   |
|                                                                                                                                                                                                                 |            |                              |            |                             |            |  |  |  |

 

 

See accompanying notes.

 

 

3

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**FAVRILLE, INC.**

 

**(adevelopment stage company)**

 

**STATEMENTS OF OPERATIONS**

 

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

 

**Unaudited**
| ** **                                                                                               | ** ** | **Three Months ended  September 30,** | ** ** | **Nine Months ended  September 30,** | ** ** | **Period from January 21,  2000 (inception) to  September 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------------------------------------------------------------|------------|
| ** **                                                                                               | ** ** | **2007**                                             | ** ** | **2006**                                            | ** ** | **2007**                                                                                      | ** ** | **2006** | ** ** | **2007** | ** ** |
| Operating  expenses:                                                                                     |       |                                                 |       |                                                |       |                                                                                          |       |   |   |   |   |
| Research and  development                                                                                |       | $                                                    | 9,480      |                                                | $          | 7,487                                                                                         |       | $ | 27,100 |   | $ | 23,370 |   | $ | 127,006 |   |
| Marketing,  general and administrative                                                                   |       | 2,938                                                |       | 2,605                                               |       | 8,798                                                                                         |       | 8,226 |   | 38,461 |   |
| Total operating  expenses                                                                                |       | 12,418                                               |       | 10,092                                              |       | 35,898                                                                                        |       | 31,596 |   | 165,467 |   |
| Interest income                                                                                          |       | 361                                                  |       | 773                                                 |       | 1,423                                                                                         |       | 2,004 |   | 6,480 |   |
| Interest expense                                                                                         |       | (271                                                 | )          | (266                                                | )          | (772                                                                                          | )          | (644 | ) | (3,613 | ) |
| Other income  (expense)                                                                                  |       | —                                               |       | —                                              |       | —                                                                                        |       | (29 | ) | (381 | ) |
| Total other  income, net                                                                                 |       | 90                                                   |       | 507                                                 |       | 651                                                                                           |       | 1,331 |   | 2,486 |   |
| Net loss                                                                                                 |       | (12,328                                              | )          | (9,585                                              | )          | (35,247                                                                                       | )          | (30,265 | ) | (162,981 | ) |
|                                                                                                     |       |                                                 |       |                                                |       |                                                                                          |       |   |   |   |   |
| 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 loss  applicable to common stockholders                                                              |       | $                                                    | (12,328    | )                                                   | $          | (9,585                                                                                        | )          | $ | (35,247 | ) | $ | (30,265 | ) | $ | (191,141 | ) |
| Historical net  loss per share:                                                                          |       |                                                 |       |                                                |       |                                                                                          |       |   |   |   |   |
| Basic and  diluted                                                                                       |       | $                                                    | (0.37      | )                                                   | $          | (0.33                                                                                         | )          | $ | (1.10 | ) | $ | (1.13 | ) |   |   |
| Weighted-average  shares-basic and diluted                                                               |       | 32,929                                               |       | 28,805                                              |       | 32,039                                                                                        |       | 26,680 |   |   |   |

 

 

See accompanying notes.

 

 

4

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**FAVRILLE, INC.**

 

**(adevelopment stage company)**

 

**STATEMENTS OF CASH FLOWS**

 

**(inthousands)**

 

**Unaudited**
| ** **                                                                                  | ** ** | ** **                      | ** ** | ** **              | ** ** | **Period from** | ** ** |
|---------------------------------------------------------------------------------------------|------------|---------------------------------|------------|-------------------------|------------|----------------------|------------|
| ** **                                                                                  | ** ** | ** **                      | ** ** | ** **              | ** ** | **January 21,** | ** ** |
| ** **                                                                                  | ** ** | ** **                      | ** ** | ** **              | ** ** | **2000**             | ** ** |
| ** **                                                                                  | ** ** | **Nine Months ended** | ** ** | **(inception) to** | ** ** |
| ** **                                                                                  | ** ** | **September 30,**          | ** ** | **September 30,**  | ** ** |
| ** **                                                                                  | ** ** | **2007**                        | ** ** | **2006**                | ** ** | **2007**             | ** ** |
| **Operating  activities**                                                                   | ** ** | ** **                      | ** ** | ** **              | ** ** | ** **           | ** ** |
| Net loss                                                                                    |       | $                               | (35,247    | )                       | $          | (30,265              | )          | $ | (162,981 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities:                |       |                            |       |                    |       |                 |       |
| Depreciation and  amortization                                                              |       | 2,361                           |       | 1,534                   |       | 8,852                |       |
| Stock-based  compensation                                                                   |       | 3,530                           |       | 2,898                   |       | 12,990               |       |
| Amortization of  premium/discount on short-term investments                                 |       | (401                            | )          | (428                    | )          | (1,034               | )          |
| Other                                                                                       |       | 83                              |       | 294                     |       | 232                  |       |
| Changes in  operating assets and liabilities:                                               |       |                            |       |                    |       |                 |       |
| Other assets                                                                                |       | (237                            | )          | (635                    | )          | (1,055               | )          |
| Accounts payable  and accrued liabilities                                                   |       | (437                            | )          | 1,915                   |       | 4,523                |       |
| Deferred rent                                                                               |       | 1,216                           |       | 3,313                   |       | 3,979                |       |
| Net cash used in  operating activities                                                      |       | (29,132                         | )          | (21,374                 | )          | (134,494             | )          |
| **Investing  activities**                                                                   | ** ** | ** **                      | ** ** | ** **              | ** ** | ** **           | ** ** |
| Purchases of  property and equipment                                                        |       | (8,983                          | )          | (8,461                  | )          | (31,418              | )          |
| Purchases of  short-term investments                                                        |       | (11,337                         | )          | (48,735                 | )          | (109,211             | )          |
| Maturities of  short-term investments                                                       |       | 38,599                          |       | 40,098                  |       | 108,950              |       |
| Other assets                                                                                |       | —                          |       | —                  |       | (70                  | )          |
| Restricted cash                                                                             |       | —                          |       | (1,901                  | )          | (3,451               | )          |
| Net cash  provided by (used in) investing activities                                        |       | 18,279                          |       | (18,999                 | )          | (35,200              | )          |
| **Financing  activities**                                                                   | ** ** | ** **                      | ** ** | ** **              | ** ** | ** **           | ** ** |
| Proceeds from  debt                                                                         |       | 6,884                           |       | 4,822                   |       | 29,854               |       |
| Payments on debt                                                                            |       | (4,356                          | )          | (2,103                  | )          | (16,552              | )          |
| Issuance of  preferred stock, net                                                           |       | —                          |       | —                  |       | 76,144               |       |
| Proceeds from  issuance of convertible promissory note                                      |       | —                          |       | —                  |       | 650                  |       |
| Issuance of  common stock and warrants                                                      |       | 13,644                          |       | 45,449                  |       | 99,208               |       |
| Repurchase of  restricted common stock                                                      |       | —                          |       | (4                      | )          | (42                  | )          |
| Net cash  provided by financing activities                                                  |       | 16,172                          |       | 48,164                  |       | 189,262              |       |
| Net increase in  cash and cash equivalents                                                  |       | 5,319                           |       | 7,791                   |       | 19,568               |       |
| Cash and cash  equivalents at beginning of period                                           |       | 14,249                          |       | 12,065                  |       | —               |       |
| Cash and cash  equivalents at end of period                                                 |       | $                               | 19,568     |                    | $          | 19,856               |       | $ | 19,568 |   |
|                                                                                        |       |                            |       |                    |       |                 |       |
| **Supplemental schedule of non-cash investing  and financing activities:**

** ** | ** ** | ** **                      | ** ** | ** **              | ** ** |
| Capitalized  interest recorded as property and equipment                                    |       | $                               | 336        |                    | $          | —               |       | $ | 427 |   |
| Accrued property  and equipment acquisitions                                                |       | $                               | (1,377     | )                       | $          | —               |       | $ | 442 |   |
| Leasehold  improvements acquired under tenant improvement allowance                         |       | $                               | 3,818      |                    | $          | —               |       | $ | 11,200 |   |
| Conversion of  convertible preferred stock to common stock upon initial public offering     |       | $                               | —     |                    | $          | —               |       | $ | 43,678 |   |
|                                                                                             |            |                                 |            |                         |            |                      |            |  |  |  |  |

 

 

See accompanying notes.

 

 

5

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**FAVRILLE,INC.**

 

**NOTES TO CONDENSED FINANCIAL STATEMENTS**

 

**SEPTEMBER30, 2007**

 

**UNAUDITED**

 

**1. Basis of Presentation**

 

The accompanying unaudited interim financial statements have beenprepared in accordance with U.S. generally accepted accounting principles andwith the rules and regulations of the Securities and Exchange Commissionrelated to a quarterly report on Form 10-Q. Accordingly, they do notinclude all of the information and disclosures required by U.S. generallyaccepted accounting principles for complete financial statements. The balancesheet at December 31, 2006 has been derived from the audited financial statementsat that date but does not include all information and footnotes required byU.S. generally accepted accounting principles for complete financialstatements. The interim financial statements reflect all adjustments which, inthe opinion of management, are necessary for a fair presentation of thefinancial condition and results of operations for the periods presented. Exceptas otherwise disclosed, all such adjustments are of a normal recurring nature.

 

Operating results for the three and nine months ended September 30,2007 are not necessarily indicative of the results that may be expected for theyear ending December 31, 2007. 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, 2006 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.

 

***Stock-BasedCompensation***

 

Total stock-based compensation expense recognized for the three andnine months ended September 30, 2007 and 2006 were as follows (in thousands):

 
| ** **                        | ** ** | **Three Months  ended  September 30,** | ** ** | **Three Months  ended  September 30,** | ** ** | **Nine Months  ended  September 30,** | ** ** | **Nine Months  ended  September 30,** | ** ** |
|-----------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                        | ** ** | **2007**                                         | ** ** | **2006**                                         | ** ** | **2007**                                        | ** ** | **2006**                                        | ** ** |
| Research and  development         |       | $                                                | 670        |                                             | $          | 458                                             |       | $                                               | 1,698      |   | $ | 1,376 |   |
| General and  administrative       |       | 601                                              |       | 577                                              |       | 1,832                                           |       | 1,522                                           |       |
| Stock-based  compensation expense |       | $                                                | 1,271      |                                             | $          | 1,035                                           |       | $                                               | 3,530      |   | $ | 2,898 |   |

 

The Company recorded approximately $1.3 million and $3.5 million ofstock-based compensation expense in our Statement of Operations for the threeand nine months ended September 30, 2007.  At September 30, 2007, thetotal compensation cost related to unvested stock-based awards granted toemployees with four-year vesting under the Company’s stock award plans but notyet recognized was approximately $5.3 million, net of estimated forfeitures ofapproximately $539,000. This cost will be amortized on a straight-line basisover a weighted-average period of approximately 2.5 years and will be adjustedfor subsequent changes in estimated forfeitures.

 

The Company granted employees 15,875 and 795,250 performance-basedstock option awards under the Favrille, Inc. Amended and Restated 2001 EquityIncentive Plan for the three and nine months ended September 30, 2007,respectively. Vesting is tied to achievement of certain milestones. Forpurposes of measuring compensation expense, the amount of awards ultimatelyexpected to vest is estimated at each reporting date based on management’sexpectations regarding the relevant performance criteria.

 

The recognition of compensation expense associated withperformance-based grants requires judgment in assessing the probability ofmeeting the performance milestones, as well as defined criteria for assessingachievement of the performance related milestones. This may result insignificant expense recognition in the period in which the performance goalsare met or when achievement of the goals is deemed probable.

 

Of the performance-based stock awards granted to employees in 2007, thevesting of the options is contingent upon multiple performance conditions asfollows: 1)**Options Group A:** 40%of the options will vest monthly over 24 months from the completion of certainmilestones related to the preparation for the commercialization of FavId and 2)**Options Group B:** the remaining 60% of theoptions will vest monthly over 24 months from the completion of certain othermilestones.

 

The total unrecognized compensation costs related to the**Options Group A**at the date of grant wasapproximately $385,000, net of estimated forfeitures of approximately $51,000.Management has deemed the completion of the milestones to be probable.Therefore, 

 

6

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the stock-based compensation related to**Options Group A** is being expensed ratably from May 2007through October 2010. Management has determined that it cannot assess thelikelihood of certain other milestones at this time. Therefore, theachievements of such milestones are not currently deemed probable. Thecompensation cost related to the**OptionsGroup B** of approximately $655,000 will be recognized whenachievement of the milestones are deemed probable.

 

Of the performance-based stock option awards granted in 2007, 340,000of these options will fully vest upon the FDA’s approval to market FavId.Management cannot assess the likelihood of the FDA’s approval of FavId as it isdependent upon many factors including the outcome of pivotal Phase 3 dataanalysis. The compensation costs related to these options of approximately$783,000 will be recognized upon achievement of the milestone.

 

***Net Loss per CommonShare***

 

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

 
| **Historical outstanding anti-dilutive securities  not included in diluted net loss per share calculation:** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                                   | ** ** | **As of September 30** | ** ** |
| ** **                                                                                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                                                                   | ** ** | **(in thousands)** | ** ** |
| Common stock  equivalents:                                                                                   |       |   |   |   |   |
| Stock warrants                                                                                               |       | 3,372 |   | 3,122 |   |
| Options to  purchase common stock                                                                            |       | 3,582 |   | 2,345 |   |
| Common stock  subject to repurchase                                                                          |       | 35 |   | 144 |   |
|                                                                                                         |       | 6,989 |   | 5,611 |   |

 

 

**Income Taxes**

 

On July 13, 2006, the FASB issued Interpretation No. 48, “Accountingfor Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109”(“FIN 48”).  FIN 48 clarifies the accounting for uncertainty in incometaxes recognized in an entity’s financial statements in accordance with FASBStatement No. 109, “Accounting for Income Taxes” and prescribes a recognitionthreshold and measurement attributes for financial statement disclosure of taxpositions taken or expected to be taken on a tax return.  Under FIN 48,the impact of an uncertain income tax position on the income tax return must berecognized at the largest amount that is more-likely-than-not to be sustainedupon audit by the relevant taxing authority.  An uncertain income taxposition will not be recognized if it has less than a 50% likelihood of beingsustained.  Additionally, FIN 48 provides guidance on derecognition,classification, interest and penalties, accounting in interim periods,disclosure and transition.  FIN 48 is effective for fiscal years beginningafter December 15, 2006.

 

The Company’s practice is to recognize interest and/or penaltiesrelated to income tax matters in income tax expense. During the years endedDecember 31, 2006, 2005 and 2004, the Company has not recognized any interestor penalties.  Upon adoption of FIN 48 on January 1, 2007, the Company didnot record any interest or penalties.

 

The Company is subject to taxation in the US and various statejurisdictions.  The Company’s tax years for 2000 and forward are subjectto examination by the US and California tax authorities due to the carryforwardof unutilized net operating losses and research and development credits.

 

The adoption of FIN 48 did not impact our financial condition, resultsof operations or cash flows.  At January 1, 2007, we had net deferred taxassets of $53.8 million.  The deferred tax assets are primarily composedof federal and state tax net operating loss (“NOL”) carryforwards and federaland state research and development (“R&D”) credit carryforwards.  Dueto uncertainties surrounding our ability to generate future taxable income torealize these assets, a full valuation has been established to offset our netdeferred tax asset. Additionally, the future utilization of our NOL and R&Dcredit carryforwards to offset future taxable income may be subject to asubstantial annual limitation as a result of ownership changes that may haveoccurred previously or that could occur in the future.  We have not yetdetermined whether such an ownership change has occurred. However, the Companyplans to complete a Section 382 analysis regarding the limitation of the netoperating losses and research and development credits. When this project iscompleted, the Company plans to update the unrecognized tax benefits under FIN48. Therefore, the Company expects that the unrecognized tax benefits maychange within 12 months of this reporting date.  At this time, the Companycannot estimate how much the unrecognized tax benefits may change.  Anycarryforwards that will expire prior to utilization as a result of suchlimitations will be removed from deferred tax assets with a correspondingreduction of the valuation allowance.  Due to the existence ofthe valuation allowance, future changes in our unrecognized tax benefitswill not impact our effective tax rate.

 

7

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**2. Comprehensive Loss**

 

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

 
| ** **                                                  | ** ** | **Three Months ended September 30,** | ** ** | **Nine Months ended September 30,** | ** ** |
|-------------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                  | ** ** | **2007**                                                 | ** ** | **2006**                                                | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net loss                                                    |       | $                                                        | (12,328    | )                                                       | $          | (9,585 | ) | $ | (35,247 | ) | $ | (30,265 | ) |
| Change in unrealized  gain/(loss) on short-term investments |       | (3                                                       | )          | 11                                                      |       | (3 | ) | 50 |   |
| Comprehensive  loss                                         |       | $                                                        | (12,331    | )                                                       | $          | (9,574 | ) | $ | (35,250 | ) | $ | (30,215 | ) |

 

Accumulated other comprehensive gain/(loss) totaled $(235) and $2,715at September 30, 2007 and December 31, 2006, respectively, and wasattributed to unrealized gains/(losses) on short-term investments.

 

 

**3.  Stockholders’ Equity**

 

*Registration Statement*

 

On June 20, 2006, the Company filed a shelf registration statement onForm S-3 with the Securities Exchange Commission (the “SEC”). The shelfregistration statement on Form S-3 permits the Company to sell, in one or morepublic offerings, shares of its common stock, debt securities or warrants, orany combination of such securities, for proceeds in an aggregate amount of upto $60 million. The shelf registration statement was declared effective by theSEC on July 11, 2006.

 

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.

 

*Private Placement of Common Stockand Warrants*

 

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 of our 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 Securities andExchange Commission on March 31, 2006 covering the resale of the shares ofcommon stock issued in the private placement and the shares of common stockissuable upon exercise of the warrants issued in the private placement.

 

*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.  The Company may require Kingsbridge topurchase newly-issued shares of the Company’s common stock at a price between90% and 94% of the volume-weighted average price on each trading day during aneight-day pricing period. The maximum dollar amount of shares that the Companymay require Kingsbridge to purchase in any such pricing period is the lesser of$10 million or 1.75% of the Company’s market capitalization at the time of adraw down under the CEFF.   The Companyis not obligated to sell any of the $40 million of common stock available underthe CEFF, and there are no minimum commitments or minimum use penalties.

 

In connection with the CEFF, the Company issued a warrant toKingsbridge to purchase 250,000 shares of the Company’s common stock at anexercise price of $3.98 per share (the “Warrant”). The Warrant is exercisablebeginning six months after the date of issuance and for a period of five yearsthereafter.

 

On February 15, 2007, the Company filed a resale registration statementwith the Securities and Exchange Commission (“SEC”) with respect to resaleshares of common stock pursuant to the CEFF and underlying warrant. Theregistration statement was declared effective by the SEC on May 2, 2007.

 

In accordance with the CEFF, on July 17, 2007 and July 23, 2007, theCompany issued an aggregate of 462,195 shares of our common stock toKingsbridge at an aggregate purchase price of $1.4 million. The common stockwas issued pursuant to a prospectus supplement filed with the SEC on July 24,2007.

 

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In accordance with the CEFF, on September 17, 2007 and September 21,2007, the Company issued an aggregate of 673,395 shares of our common stock toKingsbridge at an aggregate purchase price of $1.9 million. The common stockwas issued pursuant to a prospectus supplement filed with the SEC on September25, 2007.

 

 

**4.  Subsequent Event**

 

On November 2, 2007, the Company entered into definitive agreementswith primarily institutional investors to sell 7,416,520 shares of its commonstock and warrants to purchase up to 4,449,910 shares of its common stock forgross proceeds of approximately $21.1 million, before deducting placement agentfees and estimated offering expenses, in a “registered direct” offering. Theinvestors purchased the shares of common stock and warrants to purchase commonstock (together, a “unit”) at a price of $2.845 per unit, each unit consistingof one share and a warrant to purchase 0.6 shares of common stock. The warrantsare exercisable at any time prior to November 7, 2012. The exercise price ofthe warrants is $2.77 per share. The common stock was issued pursuant to aprospectus supplement filed with the SEC on November 2, 2007, in connectionwith a takedown from our shelf registration statement.

 

 

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

 

**Cautionary Note RegardingForward-Looking Statements**

 

*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 theforward-looking statements in this Form 10-Q reflect the good faithjudgment of our management, such statements are subject to various risks anduncertainties, including but not limited to those discussed herein and, inparticular, the risks described in Item 1A of Part II  and throughoutour Annual Report on Form 10-K for the year ended December 31, 2006.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**

 

We are a biopharmaceutical company focused on the development andcommercialization of targeted immunotherapies for the treatment of cancer andother diseases of the immune system. We have developed a proprietary technologythat enables us to manufacture active immunotherapy products that are designedto stimulate a patient’s immune system to mount a specific and sustainedresponse to disease. Our lead product candidate, FavId, is an active immunotherapyfor the treatment of B-cell non-Hodgkin’s lymphoma, or NHL. We initiated apivotal, double-blind, placebo controlled Phase 3 clinical trial of FavIdfor the treatment of follicular B-cell NHL in July 2004. We completedpatient registration in January 2006 and randomized the last of the 349patients in June 2006. We anticipate analysis of the primary endpoint forthe trial, time to disease progression, or TTP, no later than July 2008.

 

We believe FavId may be effective in treating other types of B-cellNHL. Four additional Phase 2 clinical trials of FavId are ongoing. One of theseclinical trials is being conducted under a separate physician-sponsoredInvestigational New Drug, or IND, application in the United States. Moreover,we believe our active immunotherapy expertise and proprietary manufacturingtechnology may enable us to develop additional product candidates for otheroncology indications, such as T-cell lymphoma, and for autoimmunediseases.  In June 2006, we received an allowance from the FDA for an INDfor our second product candidate, FAV-201, for the treatment of cutaneousT-cell lymphoma.

 

In addition, we acquired a panel of optimized anti-CD20 antibodiesalong with corresponding patents and an exclusive, royalty-free license toselected pending patents for commercialization of the panel from DiversaCorporation (now Verenium Corporation) in June 2007. The acquisition of theseanti-CD20 antibodies is an extension of our commitment to developing nextgeneration treatment approaches for B-cell NHL. Access to this panel may alsoallow us to explore the use of these products alone or in combination intherapeutic areas outside the oncology market. We are currently initiating aplan to select a preferred candidate for preclinical studies.

 

We have exclusive worldwide commercialization rights to all of ourproduct candidates.

 

We were incorporated in Delaware in January 2000. As of September30, 2007, we had not generated any revenues, and we had financed our operationsand internal growth through the sale of our equity securities and equipment andleasehold debt financings. We are a development stage company and have incurredsignificant losses since our inception in 2000, as we have devotedsubstantially all of our efforts to research and development activities,including clinical trials. As of September 30, 2007, our deficit accumulatedduring the development stage was approximately $191.1 million. We expect toincur substantial and increasing losses for the next several years as we:

 

•    continue to develop and prepare for thecommercialization of our lead product candidate, FavId;

 

•    expand our research and development programs;

 

•    expand our current manufacturing capabilities tosupport commercial manufacturing of FavId; and

 

•    acquire or in-license oncology products that arecomplementary to our own.

 

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**Financial Operations Overview**

 

***Research andDevelopment Expense. ***Research and development expense consists primarily ofcosts associated with clinical trials of our product candidates, including thecosts of manufacturing our product candidates, compensation and other expensesrelated to research and development personnel, facilities costs anddepreciation. We charge all research and development expenses to operations asthey are incurred. Our research and development activities are primarilyfocused on the development of FavId. We have completed enrollment in two Phase2 clinical trials and continue to evaluate the results. We initiated ourpivotal, double-blind, placebo controlled Phase 3 clinical trial of FavId forthe treatment of follicular B-cell NHL in July 2004. We completed patientregistration in January 2006 and randomized the last of the 349 patients inJune 2006. In addition, four additional Phase 2 clinical trials of FavId areongoing.

 

From inception through September 30, 2007, we incurred costs ofapproximately $127.0 million associated with the research and development ofFavId, which represents substantially all of our research and development coststo date. We expect our research and development costs to increase as we advanceFavId and new product candidates into later stages of clinical development.While difficult to predict, we estimate that research and development costsrequired to complete the development of and file a Biologics LicensingApplication, or BLA, for FavId by the fourth quarter of 2008 will be anadditional $46 million**. ** Anydelay in the analysis of the TTP data from our pivotal Phase 3 trial will causea delay in the BLA filing date and, therefore, could increase these additionalcosts. We are unable to estimate with any certainty the costs we will incur inthe continued development of other product candidates for commercialization. Onan ongoing basis, we expect to expand our research and development activitiesto include clinical development of FAV-201, preclinical research of treatmentsfor autoimmune diseases, initially multiple sclerosis, and preclinical researchof our series of optimized anti-CD20 antibodies.

 

Clinical development timelines, likelihood of success and total costsvary widely. Although we are currently focused primarily on FavId, weanticipate that we will make determinations as to which research anddevelopment projects to pursue and how much funding to direct toward eachproject on an ongoing basis in response to the scientific and clinical successof each product candidate.

 

At this time, due to the risks inherent in the clinical trial process,clinical trial completion dates and costs vary significantly for each productcandidate and are difficult to estimate. The lengthy process of seekingregulatory approvals and the subsequent compliance with applicable regulationsrequire the expenditure of substantial resources. Any failure by us to obtain,or any delay in obtaining, regulatory approvals for our product candidatescould cause our research and development expenditures to increase and, in turn,have a material adverse effect on our results of operations. We cannot becertain when, if ever, any cash flows from our current product candidates willcommence.

 

**Critical Accounting Policies andEstimates**

 

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 thataffect the reported amounts of assets, liabilities, expenses and relateddisclosures. Actual results could differ from those estimates. While oursignificant accounting policies are described in more detail in Note 1ofthe Notes to Financial Statements included in our Annual Report on Form 10-Kfor the year ended December 31, 2006, we believe the following accountingpolicies to be critical to the judgments and estimates used in the preparationof our financial statements:

 

***Stock-BasedCompensation. ***Effective January 1, 2006, the Company adopted Statement of FinancialAccounting Standards No.123 (revised 2004), “Share-Based Payments,” (SFAS 123(R)).  Under SFAS 123(R), stock-based compensation cost is measured at thegrant date, based on the estimated fair value of the award, and is recognizedas expense over the employee’s requisite service period.  The Companyadopted the provisions of SFAS 123 (R) using a modified prospectiveapplication.  Accordingly, prior periods have not been revised forcomparative purposes.  The valuation provisions of SFAS123(R) apply to newawards and to awards that are outstanding on the effective date, which aresubsequently modified or cancelled.  Estimated compensation for awardsoutstanding at the effective date will be recognized over the remaining serviceperiod using the compensation cost calculated for pro forma disclosure purposesunder SFAS 123,*Accounting for Stock-BasedCompensation*.

 

During the nine months ended September 30, 2007, the Company grantedemployees 795,250 performance-based stock option awards under the Favrille,Inc. Amended and Restated 2001 Equity Incentive Plan. Vesting is tied toachievement of certain milestones. For purposes of measuring compensationexpense, the amount of awards ultimately expected to vest is estimated at eachreporting date based on management’s expectations regarding the relevantperformance criteria. The recognition of compensation expense associated withperformance-based grants requires judgment in assessing the probability ofmeeting the performance milestones, as well as defined criteria for assessingachievement of the performance related milestones. This may result insignificant expense recognition in the period in which the performance goalsare met or when achievement of the goals is deemed probable.

 

***Lease Obligation.***  We recognize rent expense on astraight-line basis over the reasonably assured lease term.  Our leaseagreements provide for scheduled rent increases during the lease terms or forrental payments commencing at a date other than the date of initialoccupancy.  We include any rent escalations and rent holidays in ourstraight-line rent expense.  In addition, tenant improvements paid by thelandlord are capitalized as leasehold improvements and amortized over theshorter of their estimated useful lives or the remaining lease term, while thetenant improvement allowance is recorded as deferred rent and recovered ratablyover the remaining term of the lease.

 

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

 

Management has discussed the development and selection of thesecritical accounting policies with the Audit Committee of our Board ofDirectors, and the Audit Committee has reviewed the disclosures presented aboverelating to them.

 

**Results of Operations**

 

***Comparison of theThree Months Ended September 30, 2007 and 2006***

 

*Research and Development.*    Research anddevelopment expense increased from approximately $7.5 million during thethree months ended September 30, 2006 to $9.5 million during the threemonths ended September 30, 2007. The increase of $2.0 million, or 27%, was dueprimarily to an increase of approximately $1.8 million in utilities,validation, depreciation, rent and lab supplies associated with thecommercial-scale manufacturing facility expansion, $500,000 in additionalsalary expense, and $200,000 of increased stock-based compensation; offset by adecrease of approximately $500,000 in Phase 3 clinical trial expense related tothe completion of patient enrollment into the trial in January 2006.

 

*Marketing, General andAdministrative.*    Marketing,general and administrative expense increased from approximately$2.6 million during the three months ended September 30, 2006 to$2.9 million during the three months ended September 30, 2007. Theincrease of $300,000, or 12%, primarily reflects an increase of approximately$200,000 in compensation costs associated with additional administrativepersonnel, and $100,000 in consulting expense related to strategic marketingprograms.

 

*Interest Income.* Interest income decreased from approximately $770,000 during the threemonths ended September 30, 2006 to $360,000 during the three months endedSeptember 30, 2007. The decrease of $410,000, or 53%, was primarily the resultof the reduction in the average balance of cash, cash equivalents andshort-term investments.

 

***Comparison of theNine Months Ended September 30, 2007 and 2006***

 

*Research and Development.* Research and development expense increased from approximately$23.4 million during the nine months ended September 30, 2006 to $27.1million during the nine months ended September 30, 2007. The increase of $3.7million, or 16%, was due primarily to an increase of approximately $3.8 millionin utilities, validation, depreciation, rent and lab supplies associated withthe commercial-scale manufacturing facility expansion, $1 million in additionalsalary expense, and $300,000 of increased stock-based compensation; offset by adecrease of approximately $1.9 million in expenses associated with our pivotalPhase 3 clinical trial which completed patient enrollment in January 2006.

 

*Marketing, General andAdministrative.*  Marketing, general and administrative expenseincreased from approximately $8.2 million during the nine months endedSeptember 30, 2006 to $8.8 million during the nine months ended September30, 2007. The increase of $600,000, or 7%, primarily reflects an increase ofapproximately $800,000 in compensation costs associated with additionalcommercial and administrative personnel and $300,000 of increased stock-basedcompensation; offset by a decrease of approximately $300,000 in outsideservices expense related to strategic marketing programs, and $200,000 inconsulting related to our commercial software implementation project.

 

*Interest Income. * Interest incomedecreased from approximately $2.0 million during the nine months endedSeptember 30, 2006 to $1.4 million during the nine months ended September 30,2007. The decrease of $600,000, or 30%, was primarily the result of thereduction in the average balance of cash, cash equivalents and short-terminvestments.

 

**Liquidity and Capital Resources**

 

***Sources ofLiquidity***

 

We have historically funded our operations primarily through the saleof our equity securities and equipment and leasehold debt financing. As ofSeptember 30, 2007, we had received proceeds of approximately$76.1 million, net of stock issuance costs, from the sale of preferredstock which was converted to common stock; proceeds from the sale of commonstock in our IPO of approximately $39.4 million, net of underwriters’ discountsand commissions and offering expenses; proceeds of approximately $45 millionfrom the sale of common stock and warrants to purchase common stock to certaininvestors, in a private placement, net of offering expenses; proceeds ofapproximately $9.9 million from a registered direct offering of commonstock to certain investors, net of offering expenses; and proceeds of $3.3million from the sale of common stock to certain investors, in a committedequity financing facility. In November 2007, we received proceeds ofapproximately $20 million, net of offering expenses, from a registered directoffering of common stock and warrants to purchase common stock to certaininvestors.

 

As of September 30, 2007 we had financed the purchase of equipment,software and leasehold improvements through debt totaling approximately$29.9 million.  Total debt of $13.3 million was outstanding at thatdate.  These obligations are secured by our existing 

 

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and future assets excluding intellectual property and are due inmonthly installments through January 2011. They bear interest at stated ratesranging from approximately 9.34% to 12.17%.  The debt agreements subjectus to certain financial and non-financial covenants. As of September 30, 2007,we were in compliance with the terms of the debt agreements.

 

***Cash Flows***

 

As of September 30, 2007, cash, cash equivalents and short-terminvestments were approximately $20.9 million as compared to $42.4 millionat December 31, 2006, a decrease of approximately $21.5 million. Thedecrease resulted primarily from net cash used to fund ongoing operationspartially offset by the $10 million in gross proceeds from the registereddirect offering of our common stock in February 2007.

 

Net cash used in operating activities was approximately $29.1 millionfor the nine months ended September 30, 2007, compared to approximately $21.4million for the same period in 2006.  The increase of approximately $7.7million is primarily due to an increase in operating expenses related toadditional personnel and other expenses related to the continuing clinicaldevelopment and preparation for commercialization of FavId.

 

Net cash provided by investing activities for the nine months endedSeptember 30, 2007 was approximately $18.3 million compared to net cashused in investing activities of $19 million for the same period in 2006. The increase in cash provided by investing activities of approximately $37.3million is primarily due to an increase of approximately $35.9 million in short-terminvestment maturities net of short-term investment purchases.

 

Net cash provided by financing activities for the nine months endedSeptember 30, 2007 totaled $16.2 million, reflecting primarily the netproceeds of approximately $9.9 million from our registered direct offering ofcommon stock in February 2007 and $3.3 million from our committed equityfinancing facility sale of common stock in the third quarter of 2007.  Netcash provided by financing for the same period in 2006 totaled approximately$48.2 million, reflecting primarily the net proceeds of approximately $45million from our private placement of common stock and warrants in March 2006.

 

***FundingRequirements***

 

Our future capital uses and requirements depend on numerousforward-looking factors. These factors include but are not limited to thefollowing:

 

•    the results of our ongoing pivotal Phase 3 clinicaltrial of FavId;

 

•    magnitude and cost of our product development effortsand other research and development activities;

 

•    rate of progress toward obtaining regulatory approvalfor our product candidates;

 

•    costs of filing, prosecuting, defending and enforcingour patent claims and other intellectual property rights;

 

•    our ability to establish and maintain collaborative,licensing or other arrangements for the development, sale, marketing ordistribution of our product candidates and the terms of those arrangements;

 

•    effects of competing technological and marketdevelopments; and

 

•    the success of the commercialization of FavId.

 

Until we can generate significant cash from our operations, we expectto continue to fund our operations with existing cash resources that wereprimarily generated from the proceeds of offerings of our equity securities andfrom equipment and leasehold improvement debt financing. In addition, we mayfinance future cash needs through additional sales of equity securities,strategic collaboration agreements and debt financing. However, we may not besuccessful in obtaining collaboration agreements, or in receiving milestone orroyalty payments under those agreements. In addition, we cannot be sure thatour existing cash, cash equivalents and short-term investments will be adequateor that additional financing will be available when needed or that, ifavailable, financing will be obtained on terms favorable to us or ourstockholders. Having insufficient funds may require us to delay, scale back oreliminate some or all of our research or development programs or to relinquishgreater or all rights to product candidates at an earlier stage of developmentor on less favorable terms than we would otherwise choose. Failure to obtainadequate financing may also adversely affect our ability to operate as a goingconcern. If we raise additional funds by issuing equity securities, substantialdilution to existing stockholders would likely result. If we raise additionalfunds by incurring debt financing, the terms of the debt may involvesignificant cash payment obligations as well as covenants and specific financialratios that may restrict our ability to operate our business.

 

As of September 30, 2007, we have not invested in any variable interestentities. We do not have any relationships with unconsolidated entities orfinancial partnerships, such as entities often referred to as structuredfinance or special purpose entities, which would have been established for thepurpose of facilitating off-balance sheet arrangements or other contractuallynarrow or limited purposes. In addition, we do not engage in trading activitiesinvolving non-exchange traded contracts. As such, we are not materially exposedto any financing, liquidity, market or credit risk that could arise if we hadengaged in these relationships. We do not have relationships or transactionswith persons or entities that derive benefits from their non-independentrelationship with us or our related parties other than what is disclosed inNote 8 of the Notes to Financial Statements included in our Annual Reporton Form 10-K for the year ended December 31, 2006.

 

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***Off-Balance SheetArrangements***

 

We do not have any off-balance sheet arrangements.

 

**Item 3.Quantitative and Qualitative 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 donot believe that a 1% change in interest rates would have a significant impacton our interest income. As of September 30, 2007, all of our short-terminvestments were corporate notes and bonds, and our cash equivalents wereheld in checking accounts and money market funds.

 

**Item 4T.Controls and Procedures.**

 

We maintain disclosure controls and procedures that are designed toensure that information required to be disclosed in our reports under theSecurities Exchange Act of 1934, as amended, is recorded, processed, summarizedand reported within the time periods specified in the Securities and ExchangeCommission’s rules and forms, and that such information is accumulated andcommunicated to our management, including our Chief Executive Officer and ChiefFinancial Officer, as appropriate, to allow timely decisions regarding requireddisclosure.

 

As of the end of the period covered by this report, we carried out anevaluation, under the supervision and with the participation of our ChiefExecutive Officer and Chief Financial Officer, of the effectiveness of ourdisclosure controls and procedures pursuant to Rule 13a-15 of theSecurities Exchange Act of 1934, as amended, or Exchange Act. Based upon thatevaluation, our Chief Executive Officer and Chief Financial Officer concludedthat, as of the end of the period covered by this report, our disclosurecontrols and procedures were effective at the reasonable assurance level.

 

We believe that a control system, no matter how well designed andoperated, can only provide reasonable, not absolute, assurance that theobjectives of the controls system are met. In reaching a reasonable level ofassurance, management necessarily was required to apply its judgment inevaluating the cost-benefit relationship of possible controls andprocedures.  In addition, the design of any system of controls also isbased in part upon certain assumptions about the likelihood of future events,and there can be no assurance that any design will succeed in achieving itsstated goals under all potential future conditions.  Over time, a controlmay become inadequate because of changes in conditions, or the degree ofcompliance with policies or procedures may deteriorate. No evaluation ofcontrols can provide absolute assurance that all control issues and instancesof fraud, if any, within a company will be detected.

 

During the quarter ended September 30, 2007, there were no changes inour internal control over financial reporting which materially affected, or arereasonably likely to materially affect, our internal control over financialreporting.

 

This quarterly report does not include a report of management’sassessment regarding internal control over financial reporting or anattestation report of the Company’s registered public accounting firm, aspermitted by temporary rules established by the Securities and ExchangeCommission that are applicable to registrants that are neither “largeaccelerated filers” nor “accelerated filers,” as those terms are defined inRule 12b-2 under the Securities Exchange Act of 1934, as amended.

 

 

**PART II- OTHER INFORMATION.**

 

**Item1.    Legal Proceedings.**

 

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 therisk factors described below, together with the other information contained inthis report. If any of the following risks actually occur, our business,financial condition, results of operations and future growth prospects wouldlikely be materially and adversely affected. In these circumstances, the marketprice of our common stock could decline, and you may lose all or part of yourinvestment in our common stock.*

 

*We have marked with an asteriskthose risk factors that reflect substantive changes from the risk factorsincluded in our Annual Report on Form 10-K for the year ended December 31,2006.*

 

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

 

**Failure to obtain product approvalsby the FDA could harm our business.**

 

We are subject to rigorous and extensive regulation by the FDA. In theUnited States, our biologic product candidates, currently in the preclinicaland clinical stages of development, cannot be marketed until they are approvedby the FDA. Obtaining FDA approval involves the submission of the results ofpreclinical studies and clinical trials of the product candidates, among otherinformation. We may not be able to obtain FDA approval, and, even if we areable to do so, the approval process typically takes many years and requires thecommitment of substantial effort and financial resources. The FDA can delay,limit or deny approval of a biologic product candidate for many reasons,including:

 

•    the FDA may not find that the biologic productcandidate is sufficiently safe or effective;

 

•    FDA officials may interpret data from preclinicaltesting and clinical trials differently than we do; and

 

•    the FDA may not find our manufacturing processes orfacilities satisfactory.

 

In addition, the specific active immunotherapy technology on whichFavId is based is a relatively new form of cancer therapy that presents novelissues for the FDA to consider, which may make the regulatory processespecially difficult.

 

We cannot assure you that any of our product candidates in developmentwill be approved in the United States in a timely fashion, or at all. Failureto obtain regulatory approval of our product candidates in a timely fashion, orat all, would prevent or delay us from marketing or selling any products and,therefore, from generating revenues from their sale. If this occurs, we may beunable to generate sufficient revenues to attain or maintain profitability, ourability to raise additional capital will be impaired and our stock price may benegatively affected. In addition, both before and after approval, we aresubject to numerous FDA requirements covering, among other things, testing,manufacturing, quality control, labeling, advertising, promotion and export ofbiologics. Failure to comply with the law, including statutes and regulations,administered by the FDA, could result in, among others, any of the followingactions:

 

•    warning letters;

 

•    fines and other civil penalties;

 

•    unanticipated expenditures;

 

•    delays in approving or refusal to approve a productcandidate;

 

•    product recall or seizure;

 

•    interruption of production;

 

•    operating restrictions;

 

•    injunctions; and

 

•    criminal prosecution.

 

*** We are dependent on the success ofour lead product candidate, FavId, and we cannot be certain that it will becommercialized.**

 

We have expended significant time, money and effort in the developmentof our lead product candidate, FavId, which is still in clinical development,has not yet received regulatory approval and may never be commercialized. Inorder to commercialize FavId, we will need to demonstrate to the FDA and otherregulatory agencies that it satisfies rigorous standards of safety andeffectiveness. We completed registration of patients in a pivotal,double-blind, placebo controlled Phase 3 clinical trial of FavId for thetreatment of follicular B-cell NHL in January 2006 and randomized the last ofthe 349 patients June 2006

 

We are also evaluating FavId for use in other B-cell NHL indications.However, even if we were to receive regulatory approval of FavId for thetreatment of follicular B-cell NHL or the other indications we are exploring,our ability to successfully commercialize FavId could be jeopardized by theemergence of a competitive product that exhibits greater efficacy, longerduration of response or other benefits. In addition, because our initialregulatory and marketing strategy contemplates the administration of FavId topatients following treatment with Rituxan, the commercial opportunity for FavIdmay be limited by the degree to which oncologists continue to use Rituxan totreat indolent B-cell NHL. Furthermore, to the extent FavId fails to gainmarket acceptance for its initial indication, it may be more difficult for usto generate sufficient credibility with physicians and patients tocommercialize FavId for other indications.

 

Other than FavId, we have only three other product developmentprograms, which are at significantly earlier stages of development.  InJune 2006, we received an allowance from the FDA for an IND for a productcandidate, FAV-201, for the treatment of cutaneous T-cell lymphoma. We haveongoing preclinical studies to assess the applicability of our technology toautoimmune diseases, with an initial focus on multiple sclerosis. In June 2007,we acquired a series of optimized anti-CD20 antibodies from Diversa Corporation

 

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(now Verenium Corporation). We are currently initiating a plan toselect a preferred candidate for preclinical studies. We cannot be certain thatwe will be able to successfully develop any product candidate from thesedevelopment programs. We cannot be certain that the clinical development ofFavId or any other product candidate in preclinical testing or clinical trialswill be successful, that it will receive the regulatory approvals required tocommercialize it, or that any of our other research programs will yield aproduct candidate suitable for entry into clinical trials. If we are unable tocommercialize FavId or our other product candidates, we may be unable togenerate sufficient revenues to attain or maintain profitability, our abilityto raise additional capital will be impaired and our stock price may benegatively affected.

 

*** Before we can seek regulatoryapproval of any of our product candidates, we must successfully completeclinical trials, which are uncertain.**

 

Conducting clinical trials is a lengthy, time-consuming and expensiveprocess, and the results of these trials are inherently uncertain. We havecompleted enrollment of patients in several Phase 2 clinical trials of FavIdinvolving over 130 indolent B-cell NHL patients and are currently conductingfollow-up evaluation of those patients. We completed registration of patientsin a pivotal, double-blind, placebo controlled Phase 3 clinical trial of FavIdfor the treatment of follicular B-cell NHL in January 2006 and randomized thelast of the 349 patients in June 2006. During the week of November 6, 2006, ourindependent Data Monitoring Board, or DMB, completed a planned interim analysisof data from the secondary endpoint, overall response improvement, in the first226 patients enrolled in the trial. The DMB concluded that the interim analysisdid not demonstrate a statistically significant difference between treatmentand control groups in the secondary endpoint. On October 25, 2007, we announcedthat the DMB was convened to assess TTP for patients in the control group ofour Phase 3 trial. The DMB assessment, which was conducted in accordance withthe clinical protocol under our SPA, indicated that the control group behavioris consistent with data reported in the published literature on which we basedour assumptions for trial design and statistical analysis. Based in part on theguidance provided by the DMB, we have determined April 2008 to be theappropriate time for data cutoff of the Phase 3 trial. We anticipate that theanalysis of the data will be completed and made available no later than July2008. However, we cannot guarantee when the necessary data from the trial willbe available, and accordingly, we may not be able to complete final analysis ofthe TTP data within the projected time frame.

 

Moreover, we cannot guarantee that the control group behavior willultimately be consistent with data reported in the published literature onwhich we based our assumptions for trial design and statistical analysis.

 

Four additional Phase 2 clinical trials of FavId are ongoing.  InJune 2006, we received an allowance from the FDA for an IND for our secondproduct candidate, FAV-201, for the treatment of cutaneous T-cell lymphoma.

 

We have received a Special Protocol Assessment, or SPA, from the FDAfor our pivotal Phase 3 clinical trial of FavId. In the SPA process, the FDAreviewed the design, size and planned analysis of our Phase 3 clinical trialand provided comments regarding the trial’s adequacy to form a basis withrespect to effectiveness for approval of a Biologics Licensing Application, orBLA, if the trial meets its predetermined objectives. We will not be able tofile a BLA for FavId until after we complete the analysis of the primaryendpoint, TTP, of our ongoing pivotal Phase 3 clinical trial. We anticipate theanalysis of the primary endpoint to be completed and made available no laterthan July 2008. The FDA’s written agreement is binding, except in limitedcircumstances, such as when a substantial scientific issue essential to determiningthe safety or effectiveness of a product candidate is identified after thePhase 3 clinical trial has commenced. Despite having received an SPA, we may berequired to conduct an additional Phase 3 clinical trial of FavId for thetreatment of indolent B-cell NHL before we can apply for regulatory approval.Although the FDA typically requires successful results in two Phase 3 clinicaltrials to support marketing approval, the FDA has, on several occasions,approved products based on a single Phase 3 clinical trial that demonstrates ahigh level of statistical significance where there is an unmet need for alife-threatening condition. We currently plan to seek FDA approval of FavIdbased on our ongoing pivotal Phase 3 clinical trial alone. In the event thatthe FDA requires the results of a second Phase 3 clinical trial beforeaccepting a BLA or before granting marketing approval of FavId, our launch ofFavId would be delayed, possibly by several years, and we would incursignificant costs in conducting the additional trial.

 

The preliminary, blinded clinical data reported from time to time priorto the release of the final results of our pivotal Phase 3 clinical trial andthe preliminary clinical data from our Phase 2 clinical trials have not beenfully audited and have been taken from databases that have not been fullyreconciled against medical records kept at the clinical sites or that may notinclude the most current information on patient disease progressions.  Thedata released may not be indicative of the final results of our pivotal Phase 3clinical trial or any other clinical trial of FavId.  Failure can occur atany stage of testing.  We do not know whether our Phase 3 clinical trialor any future clinical trials will demonstrate safety and efficacy sufficientto result in marketable products.  Our failure to adequately demonstratethe safety and efficacy of FavId will prevent us from obtaining regulatoryapproval for, or commercializing, FavId.

 

Completion of necessary clinical trials may take several years or more.Our commencement and rate of completion of clinical trials may be delayed bymany factors, including:

 

•     ineffectiveness of the product candidate, or perceptions by physicians that theproduct candidate is not safe or effective for a particular indication;

 

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

 

•      delay orfailure in obtaining approval of our clinical trial protocols from the FDA;

 

•      slowerthan expected rate of patient recruitment and enrollment;

 

 

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•      inabilityto adequately follow and monitor patients after treatment;

 

•      difficultyin managing multiple clinical sites;

 

•      unforeseensafety issues; and

 

•      governmentor regulatory delays.

 

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

 

Failures or perceived failures in our clinical trials will directlydelay our product development and regulatory approval process, damage ourbusiness prospects, make it difficult for us to establish collaboration andpartnership relationships, and negatively affect our reputation and competitiveposition in the pharmaceutical community.

 

**Failure to enroll patients in ourclinical trials may cause delays in developing FavId or any other productcandidate.**

 

We may encounter delays in development and commercialization, or failto obtain marketing approval, of FavId or any other product candidate that wemay develop if we are unable to enroll enough patients to complete clinicaltrials. Our ability to enroll sufficient numbers of patients in our clinicaltrials depends on many factors, including the size of the patient population,the nature of the protocol, the proximity of patients to clinical sites, the eligibilitycriteria for the trial and competing clinical trials. Although we completedpatient enrollment in our pivotal Phase 3 clinical trial of FavId in January2006, we have from time to time experienced slower-than-expected patientenrollment in our clinical trials and may do so in the future if additionalclinical trials of FavId are required or if we clinically develop any of ourother product candidates. Delays in planned patient enrollment may result inincreased costs and harm our ability to complete our clinical trials and obtainregulatory approval.

 

*** The development of FavId requiresthe continued availability of two FDA-approved drugs: GM-CSF and Rituxan.**

 

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

 

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

 

*** We have incurred significantoperating losses since inception and anticipate that we will continue to incursubstantial losses and negative cash flow from operations for the foreseeablefuture.**

 

We are a development stage company with a limited operating history. Wehave financed 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 Committed EquityFinancing Facility, or CEFF, through Kingsbridge Capital Limited. We haveincurred losses in each year since our inception in 2000. For the three andnine months ended September 30, 2007, the Company reported net losses of $12.3million, or $0.37 per share, and $35.2 million, or $1.10 per share,respectively, compared to a net loss of $9.6 million, or $0.33 per share, and$30.3 million, or $1.13 per share, for the same periods in 2006.  Theselosses, among other things, have had and will continue to have an adverseeffect on our stockholders’ equity and working capital. We expect to incur substantialoperating losses for at least the next several years. This is due primarily tothe expansion of our clinical trials and research and development programs,preparations to manufacture FavId on a commercial scale, and selling, generaland administrative expenses. We also have substantial lease and debtobligations related to our new manufacturing and headquarters facilitiesimpacting our operating expenses. We expect that our losses will fluctuate fromquarter to quarter and that these fluctuations may be substantial. We cannotguarantee that we will successfully develop, manufacture, commercialize ormarket any products. As a result, we cannot guarantee that we will ever achieveor sustain product revenues or profitability.

 

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** **

*** We currently have no source ofrevenue and may never become profitable.**

 

Our ability to become profitable will depend upon our ability togenerate revenue. To date, FavId has not generated any revenue, and we do notknow when or if FavId will generate revenue. Our ability to generate revenuedepends on a number of factors, including our ability to:

 

•     successfully complete clinical trials for FavId;

 

•      obtainregulatory approval for FavId, including regulatory approval for our commercialscale manufacturing facility and process;

 

•     manufacture commercial quantities of FavId at acceptable cost levels; and

 

•     successfully market and sell FavId.

 

We do not anticipate that we will generate revenues until 2009, at theearliest. Further, we do not expect to achieve profitability for at leastseveral years after generating material revenues. If we are unable to generaterevenue, we will not become profitable, and we may be unable to continue ouroperations.

 

*** We will need substantial additionalfunds to continue operations, which we may not be able to raise on favorableterms, or at all.**

 

We will need substantial additional funds for existing and plannedpreclinical studies and clinical trials, to continue research and developmentactivities, for lease and debt obligations related to our manufacturing andheadquarter facilities, and to establish manufacturing and marketingcapabilities for any products we may develop. In addition, because we do notexpect to generate revenues from the sale of our product candidates for severalyears, if at all, we will also need to raise additional capital to fund ouroperations.

 

We believe that our cash, cash equivalents and short-term investments,which were approximately $20.9 million at September 30, 2007 and the proceedsof $20 million, net of expenses, from the sale of common stock and warrants ina registered direct offering in November 2007, will be sufficient to meet ourprojected operating requirements through the middle of 2008. We will need toraise additional funds in order to commercialize FavId, including completion ofclinical development-related and regulatory activities necessary for completionof a BLA submission for FavId. Our forecast of the period of time through whichour financial resources will be adequate to support our operations is aforward-looking statement and involves risks and uncertainties, and actualresults could vary as a result of a number of factors, including the factorsdiscussed elsewhere in these risk factors. We have based this estimate onassumptions that may prove to be wrong, and we could utilize our availablecapital resources sooner than we currently expect.

 

Our future capital requirements or the adequacy of our available fundswill depend on many factors, including, but not limited to:

 

•      theresults of our ongoing pivotal Phase 3 clinical trial of FavId;

 

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

 

•      rate ofprogress toward obtaining regulatory approval for FavId and our other productcandidates;

 

•      costs offiling, prosecuting, defending and enforcing our patent claims and otherintellectual property rights;

 

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

 

•      effects ofcompeting technological and market developments;

 

•      the costof expansion of our current facility for commercial production or theconstruction of a large separate commercial-scale production facility; and

 

•      thesuccess of the commercialization of FavId.

 

Future capital requirements will also depend on the extent to which weacquire or invest in businesses, products and technologies, but we currentlyhave no commitments or agreements relating to any of these types oftransactions.

 

To that end, on June 20, 2006, we filed a shelf registration statementwith the SEC on Form S-3 pursuant to which we may periodically sell up to $60million in debt securities, common stock or warrants to purchase debtsecurities or common stock.  In February 2007, we sold $10 million ofcommon stock and in November 2007, we sold $21 million of common stock andwarrants pursuant to the shelf registration statement.  Additionally, wehave entered into the CEFF pursuant to which Kingsbridge committed to purchase,subject to certain conditions, up to $40.0 million of our common stock.  In July 2007, we sold 462,195 shares of common stock to Kingsbridge pursuant tothe CEFF for gross proceeds totaling $1.4 million. In September 2007, we issuedan aggregate of 673,395 shares of our common stock to Kingsbridge at anaggregate purchase price of $1.9 million.   We may seek to access thepublic or private equity markets whenever conditions are favorable, even if wedo not have an immediate need for additional capital at that time. Additionalfunding may not be available to us, and, if available, may not be on acceptableterms. If we raise additional funds 

 

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by issuing equity securities, stockholders will incur immediatedilution. If adequate funds are not available to us, we may be required todelay, reduce the scope of, or eliminate one or more of our research,development and clinical activities. Alternatively, we may need to seek fundsthrough arrangements with collaborative partners or others that require us torelinquish rights to technologies or product candidates that we would otherwiseseek to develop or commercialize ourselves. Any of these events could have amaterial adverse effect on our business, results of operations, financialcondition or cash flow.

 

*** Our committed equity financingfacility with Kingsbridge may not be available to us if we elect to make a drawdown, may require us to make additional “blackout” or other payments toKingsbridge and may result in dilution to our stockholders.**

 

In December 2006, we entered into the CEFF with Kingsbridge. The CEFFentitles us to sell and obligates Kingsbridge to purchase, from time to timeover a period of 36 months, shares of our common stock for cash considerationup to an aggregate of $40.0 million, subject to specified conditions andrestrictions. Kingsbridge will not be obligated to purchase shares under theCEFF unless specified conditions are met, which include a minimum price for ourcommon stock; the accuracy of representations and warranties made toKingsbridge; compliance with laws; and the effectiveness of a registrationstatement registering for resale the shares of common stock to be issued inconnection with the CEFF. In addition, among other termination rights,Kingsbridge is permitted to terminate the CEFF by providing written notice tous within 10 business days after it obtains actual knowledge that an event hasoccurred resulting in a material and adverse effect on our business,operations, properties or financial condition (subject to specified exceptions,including conditions or events that are reasonably expected to occur in theordinary course of our business). If we are unable to access funds through theCEFF, or if Kingsbridge terminates the CEFF, we may be unable to access capitalon favorable terms, or at all. In July 2007, we issued an aggregate of 462,195shares of our common stock to Kingsbridge at an aggregate purchase price of$1.4 million.   In September 2007, we issued an aggregate of 673,395shares of our common stock to Kingsbridge at an aggregate purchase price of $1.9million.

 

We are entitled, in certain circumstances, to deliver a “blackout”notice to Kingsbridge to suspend the use of the prospectus included in theresale registration statement and prohibit Kingsbridge from selling sharesunder such prospectus for a certain period of time.  If we deliver ablackout notice in the 60 trading days following the settlement of a draw downand the volume weighted average price on the trading day immediately precedingthe related blackout period is greater than the volume weighted average priceon the first trading day following such blackout period, or if suchregistration statement is not effective in circumstances not permitted by ourregistration rights agreement with Kingsbridge, then we must make a payment toKingsbridge, or issue Kingsbridge additional shares in lieu of this payment,calculated on the basis of a specified number of shares held by Kingsbridgeimmediately prior to the blackout period and the change in the market price ofour common stock during the period in which the use of the registrationstatement is suspended.  If the trading price of our common stock declinesduring a suspension of the resale registration statement, the blackout or otherpayment could be significant.

 

Should we sell shares to Kingsbridge under the CEFF, or issue shares inlieu of a blackout payment, it will have a dilutive effect on the holdings ofour current stockholders and may result in downward pressure on the price ofour common stock. If we draw down amounts under the CEFF, we will issue sharesto Kingsbridge at a discount of up to 10% from the volume weighted averageprice of our common stock. If we draw down amounts under the CEFF when ourstock price is decreasing, we will need to issue more shares to raise the sameamount than if our stock price was higher. Issuances in the face of a decliningstock price will have an even greater dilutive effect than if our stock pricewere stable or increasing and may further decrease our stock price.

 

*** Future changes in financial accountingstandards or practices or existing taxation rules or practices may causeadverse unexpected revenue or expense fluctuations and affect our reportedresults of operations.**

 

A change in accounting standards or practices or a change in existingtaxation rules or practices can have a significant effect on our reportedresults and may even affect our reporting of transactions completed before thechange is effective. New accounting pronouncements and taxation rules andvarying interpretations of accounting pronouncements and taxation practice haveoccurred and may occur in the future. Changes to existing rules or thequestioning of current practices may adversely affect our reported financialresults or the way we conduct our business.

 

**OtherRisks Related to Our Business and Industry**

 

*** We currently depend on singlesource suppliers for critical raw materials for manufacturing. The loss ofthese suppliers could delay our clinical trials or prevent or delaycommercialization of FavId.**

 

We currently depend on single source suppliers for critical rawmaterials used in the manufacture of FavId. In particular, our manufacturingprocess for FavId requires a foreign protein derived from shellfish that isknown as keyhole limpet hemocyanin, or KLH. We purchase KLH from biosynArzneimittel GmbH, or biosyn, which is currently the only supplier of KLH thathas submitted the required filing, known as a drug master file, to the FDA. InNovember 2004, we entered into an eight-year supply and license agreement withbiosyn under which biosyn has agreed to supply us with KLH and we have agreedto make payments upon the achievement of certain milestones and committed toannual KLH purchase requirements during the commercialization of FavId. Either party may terminate the supply agreement upon a breach by the otherparty that is not cured within 60 days or other events relating to insolvencyor bankruptcy. If we identify another supplier of KLH of suitable quality forour purposes, we will not be able to use the supplier as a second source of KLHfor the commercial manufacture of FavId unless the KLH is tested to becomparable to the existing KLH.

 

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In addition, we depend on a single source supplier for the cell growthmedia we use to produce FavId. We purchase this material from ExpressionSystems LLC, which in turn obtains several of the components used in the cellgrowth media from sole suppliers. In April 2007, we executed five-year supplyand non-exclusive license agreements with Expression Systems. Each agreement isrenewable for one three-year period at our option. Under the terms of theagreements, we have the right to purchase raw material components fromExpression Systems and manufacture the cell growth media in-house.

 

Establishing additional or replacement suppliers for these materialsmay take a substantial amount of time. In addition, we may have difficultyobtaining similar materials from other suppliers that are acceptable to theFDA. If we have to switch to a replacement supplier, we may face additionalregulatory delays and the manufacture and delivery of FavId, or any otherproduct candidates that we may develop, could be interrupted for an extendedperiod of time, which may delay completion of our clinical trials orcommercialization. If we are unable to obtain adequate amounts of thesematerials, our clinical trials will be delayed. In addition, we will berequired to obtain regulatory clearance from the FDA to use different materialsthat may not be as safe or as effective. As a result, regulatory approval ofFavId, or any other product candidates that we may develop, may not be receivedat all.

 

**We rely on third parties to conductour clinical trials. If these third parties do not successfully carry out theircontractual duties or meet expected deadlines, we may be delayed or may not beable to obtain regulatory approval for or commercialize FavId or any otherproduct candidates that we may develop.**

 

Our pivotal Phase 3 clinical trial of FavId for the treatment offollicular B-cell NHL is being conducted at 67 centers in the United States andwill require long-term follow up of at least 342 patients randomized into thetrial. One clinical trial of FavId is being conducted under the direction of aphysician sponsor, rather than under our supervision. We do not have theability to independently conduct clinical trials for FavId, or any otherproduct candidate that we may develop, and we must rely on third parties, suchas medical institutions and clinical investigators, including physiciansponsors, to conduct our clinical trials. In particular, we will rely on theseparties to recruit and enroll patients in our clinical trials. We also rely onthird-party couriers to transport patient tissue samples and FavId. If any ofthe third parties upon whom we rely to conduct our clinical trials or transportpatient tissue samples and immunotherapies do not comply with applicable laws,successfully carry out their obligations or meet expected deadlines, and needto be replaced, our clinical trials may be extended, delayed or terminated.

 

If the quality or accuracy of the clinical data obtained by medicalinstitutions and clinical investigators, including physician sponsors and otherthird-party vendors involved in data management, is compromised due to theirfailure to adhere to applicable laws or our clinical protocols or for otherreasons, we may not be able to obtain regulatory approval for or successfullycommercialize FavId, or any other product candidates that we may develop. Ifany of our relationships with any of these organizations or individualsterminates, we believe that we would be able to enter into arrangements withalternative third parties. However, replacing any of these third parties woulddelay our clinical trials and could jeopardize our ability to commercializeFavId and our other product candidates on a timely basis, or at all.

 

**Even if we obtain regulatoryapproval, we will continue to be subject to extensive government regulationthat may cause us to delay the introduction of our products or withdraw ourproducts from the market.**

 

Even if we obtain regulatory approval for FavId or our other productcandidates, we will still be subject to extensive regulation. These regulationswill impact many aspects of our operations, including production, recordkeeping, quality control, adverse event reporting, storage, labeling,advertising, promotion and personnel. In addition, the later discovery ofpreviously unknown problems may result in restrictions of the product candidates,including their withdrawal from the market. Furthermore, regulatory approvalmay subject us to ongoing requirements for post-marketing studies. If we or anythird party that we involve in our operations fail to comply with anycontinuing regulations, we may be subject to, among other things, productseizures, recalls, fines or other civil penalties, injunctions, suspensions orrevocations of marketing licenses, operating restrictions and criminalprosecution.

 

*** Before we can obtain marketing approvalfor or commercially distribute FavId, we must have a commercial-scale facilityfor the manufacture of FavId. In addition, the FDA and the CaliforniaDepartment of Health Services must find our manufacturing facility and processsatisfactory.**

 

Our manufacturing methods, equipment and processes must comply with theFDA’s current Good Manufacturing Practices, or cGMP, requirements. We may alsoneed to perform extensive audits of vendors, contract laboratories andsuppliers. The cGMP requirements govern, among other things, record keeping,production processes and controls, personnel and quality control. We have onlyundertaken initial steps towards achieving compliance with these regulatoryrequirements. Additional steps will require expenditure of significant time,money and effort. We cannot predict the likelihood that the FDA will find ourfacility satisfactory, even if we believe that we have taken the necessarysteps to achieve compliance. If we fail to comply with these requirements orfail to pass a pre-approval inspection of our manufacturing facility inconnection with an application to obtain marketing approval for FavId oranother product candidate, we would not receive regulatory approval, and wewould be subject to possible regulatory action.

 

We manufacture FavId for our ongoing pivotal Phase 3 and for theplanned and ongoing Phase 2 clinical trials at our facility in San Diego. Wecurrently lease an 80,000 square foot facility in San Diego, California under along-term lease agreement. Our pilot manufacturing facility consisted ofapproximately 26,000 square feet of space in the facility. Our facility wasinspected and licensed by the California Department of Health Services. Ourfacility is subject to re-inspection at any time. Failure to maintain a licensefrom the California Department of Health Services or to meet the inspectioncriteria of the California Department of Health Services would disrupt ourmanufacturing processes and prevent us from supplying FavId to patients. If aninspection by the California Department of Health Services indicates that thereare deficiencies in our manufacturing process, we could be required to takeremedial actions at potentially significant expense, and our facility may betemporarily or permanently closed.

 

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We expanded and qualified our current facility for commercial scalemanufacturing in order to commercialize FavId or any other product candidatesthat we may develop. We completed construction to expand this facility duringthe second quarter of 2007 and are currently validating theexpanded facility to comply with cGMP requirements. The entire 80,000square foot facility will be dedicated to manufacturing. We cannot assure youthat we would be able to meet commercial demand for FavId in this facility.Additionally, we may require a larger production facility to meet the demandfor FavId if it is approved. We would need to raise additional debt or equitycapital to finance construction of the larger facility. Such financing may notbe available or, if available, may not be obtained on terms favorable to us orour stockholders.

 

Preparing a facility for commercial manufacturing may involveunanticipated delays and the costs of complying with FDA regulations may besignificant. In addition, any material changes we make to the manufacturingprocess after approval may require approval by the FDA and state regulatoryauthorities. Obtaining these approvals is a lengthy, involved process, and wemay experience delays that could limit our ability to manufacture commercialquantities, increase our costs and adversely affect our business.

 

**We may experience difficulties inmanufacturing FavId or any other product candidates that we may develop, whichcould prevent us from completing our ongoing clinical trials andcommercializing these product candidates.**

 

Manufacturing FavId is a complex, multi-step process that requires usto expend significant time, money and effort in production, record keeping andquality systems to assure that FavId will meet product specifications and otherregulatory requirements. To date, we have manufactured FavId only for use inPhase 2 and Phase 3 clinical trials and have no experience in manufacturingFavId for the commercial quantities that might be required if we receiveregulatory approval. In particular, we cannot be sure that we will be able tomanufacture FavId at a cost that would enable commercial use. We may experienceany of the following problems in our efforts to manufacture our productcandidates for our expanding clinical trials or on a commercial scale:

 

•      failure toobtain a sufficient supply of key raw materials;

 

•     difficulties in completing the development and validation of the specializedassays required to ensure the consistency of our product candidates, includingFavId;

 

•     difficulties in obtaining adequate tumor samples from treating physicians andhospitals;

 

•     difficulties in manufacturing FavId for multiple patients simultaneously;

 

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

 

•      failure toensure adequate quality control and assurance in the manufacturing process aswe increase the production quantities of FavId;

 

•     difficulties in establishing and effectively managing a commercial-scalemanufacturing facility;

 

•      failure tocomply with regulatory requirements, such as FDA regulations and environmentallaws;

 

•     significant changes in regulatory requirements;

 

•      damage toor destruction of our manufacturing facility or equipment;

 

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

 

•      shortagesof qualified personnel.

 

In addition, because our manufacturing process only begins upon ourreceipt of a patient’s tumor biopsy, we cannot produce inventory reserves ofour product candidate to be stored in anticipation of any of these potentialmanufacturing problems. The failure to produce an adequate supply of FavIdcould delay our clinical trials and, in turn, delay submission of a BLA forFavId and commercial launch. Similarly, any difficulties we experience in themanufacture and supply of other product candidates, such as FAV-201, woulddelay the clinical trials of those product candidates.

 

*** If our manufacturing facility isdamaged or destroyed, our ability to manufacture products will be significantlyaffected, which could delay or prevent completion of our clinical trials andcommercialization of FavId or any other product candidates that we may develop.**

 

We currently rely on the availability and condition of ourmanufacturing facility in San Diego to manufacture FavId. We lease the propertywhere this facility is located under a lease agreement that expires June 30,2025, but may be extended at our option for two additional five-year periods.After that time, we may not be able to negotiate a new lease for our facility. Ifour current facility or any additional facility we may construct or acquire, orour equipment in such facilities, is damaged or destroyed, we will not be ableto quickly or inexpensively replace our manufacturing capacity. This wouldsignificantly affect our ability to complete clinical trials of, and tomanufacture and commercialize, FavId, or any other product candidates that wemay develop.

 

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In addition, our facilities have been subject to electrical blackoutsas a result of a shortage of available electrical power. Although we haveback-up emergency power generators to cover energy needs for key supportsystems, a lengthy outage could disrupt the operations of our facilities andclinical trials. While we carry business interruption insurance, this insurancemay not be adequate. Any significant business interruption could cause delaysin our product development and harm our business.

 

*** If we do not develop a sufficientsales and marketing force or enter into agreements with third parties to selland market FavId, we may not be able to successfully commercialize ourproducts, which would limit our ability to earn product revenues.**

 

We have exclusive worldwide rights to FavId. If we are successful inobtaining BLA approval or foreign marketing approval for FavId, we will need toestablish sales and marketing capabilities. In the United States, we plan to dothis either by establishing our own sales force or by entering into aco-promotion arrangement with a sales and distribution partner. Outside of theUnited States, we plan to establish strategic collaborations for thedevelopment and marketing of FavId.

 

We do not presently possess the resources or experience necessary tomarket FavId or our other product candidates ourselves, and we currently haveno arrangements for the promotion or distribution of our product candidates.Our future commercial success will depend on our ability to establish our ownsales and marketing infrastructure or to collaborate with third parties thathave greater sales and marketing experience and resources. Developing effectiveinternal sales and marketing capabilities, which would include the hiring of asales force, would require a significant amount of our financial resources andtime.

 

We may be unable to establish and manage an effective sales force in atimely or cost-effective manner, or at all, and any sales force we do establishmay not be capable of generating demand for FavId or any other productcandidate we may develop. In addition, if we cannot enter into co-promotionarrangements in the United States, or other strategic collaborations for thedevelopment and marketing of FavId in other countries, in a timely manner andon acceptable terms, we may not be able to successfully commercialize FavId orany other product candidate that we may develop.

 

To the extent that we enter into arrangements with third parties toperform sales, marketing and distribution services, our product revenues arelikely to be lower than if we directly marketed and sold FavId, or any otherproduct candidates that we may develop. If we are unable to establish adequatesales, marketing and distribution capabilities, independently or with others,we will not be able to generate product revenue and will not become profitable.

 

**If physicians and patients do not useany of our products that may be approved, our ability to generate revenue inthe future will be limited.**

 

If approved, FavId and other product candidates that we may develop maynot gain market acceptance among physicians, healthcare payors, patients andthe medical community. Demand for any approved product that we may develop willdepend on many factors, including:

 

•      ourability to provide acceptable evidence of safety and efficacy;

 

•     convenience and ease of administration;

 

•     availability of alternative treatments;

 

•      costeffectiveness;

 

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

 

•     effectiveness of our regulatory and marketing strategies;

 

•      prevalenceand severity of adverse side effects;

 

•      publicityconcerning our products or competitive products; and

 

•      ourability to obtain third-party coverage or reimbursement.

 

Furthermore, to the extent FavId fails to gain market acceptance forits initial indication, it may be more difficult for us to generate sufficientcredibility with physicians and patients to commercialize FavId for otherindications.

 

**If we are unable to obtain acceptableprices or adequate coverage and reimbursement from third-party payors forFavId, or any other product candidates that we may develop, our revenues andprospects for profitability will suffer.**

 

Our ability to commercialize FavId, or any other product candidatesthat we may develop, depends on the extent to which coverage and reimbursementfor FavId, or any other product candidates that we may develop, will beavailable from:

 

•     governmental payors, such as Medicare and Medicaid;

 

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•      privatehealth insurers, including managed care organizations; and

 

•      otherthird-party payors.

 

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

 

*** If we are unable to establish ormanage strategic collaborations in the future, our revenue and productdevelopment may be limited.**

 

Our strategy may include reliance on strategic collaborations forco-promotion of FavId in the United States. In addition, we expect to rely onstrategic collaborators for commercialization of FavId outside of the UnitedStates and, to an even greater extent, for worldwide development andcommercialization of product candidates and programs for chronic autoimmunediseases, such as multiple sclerosis. To date, we have not entered into anyagreements with third parties for any of these services.

 

Establishing strategic collaborations is difficult and time-consuming.Our discussions with potential collaborators may not lead to the establishmentof new collaborations on favorable terms, or at all. For example, potentialpartners may reject collaborations based upon their assessment of ourfinancial, regulatory or intellectual property position. If we successfullyestablish new collaborations, these relationships may never result in thesuccessful development or commercialization of our product candidates or thegeneration of sales revenue. To the extent that we enter into co-promotion orother collaborative arrangements, our product revenues are likely to be lowerthan if we directly marketed and sold any products that we may develop.

 

Management of any collaborative relationship we may establish in thefuture will require:

 

•     significant time and effort from our management team;

 

•     coordination of our research and development programs with the research anddevelopment priorities of our collaborators; and

 

•      effectiveallocation of our resources to multiple projects.

 

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

 

*** Our efforts to discover, developand commercialize new product candidates beyond FavId are at an early stage andare subject to a high risk of failure.**

 

Our strategy is focused on the research, development andcommercialization of targeted immunotherapies for the treatment of cancer andother diseases of the immune system. The process of successfully developingproduct candidates is very time-consuming, expensive and unpredictable. We haveonly recently begun to direct significant effort toward the development ofproduct candidates in addition to FavId, such as FAV-201 for T-cell lymphomaand a preclinical product candidate for the treatment of multiple sclerosis. Inaddition, we acquired a series of optimized anti-CD20 antibodies in June 2007.We are currently initiating a plan to select a preferred candidate forinitiating preclinical studies. Development of these product candidates willdepend substantially upon the availability of funding for our research anddevelopment programs.

 

We do not know whether our planned preclinical studies or clinicaltrials for these other product candidates will begin on time or be completed onschedule, or at all. In addition, we do not know whether these clinical trialswill result in marketable products. Typically, there is a high rate ofattrition for product candidates in preclinical and clinical trials. We do notanticipate that any of our product candidates will reach the market for atleast several years.

 

We may not identify, develop or commercialize any additional newproduct candidates from our proprietary active immunotherapy technology. Ourability to develop successfully any of these product candidates depends on ourability to demonstrate safety and 

 

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efficacy in humans through extensive preclinical testing and clinicaltrials and to obtain regulatory approval from the FDA and other regulatoryauthorities.

 

**If our competitors develop and marketproducts that are more effective than our existing product candidates or otherswe may develop, or obtain marketing approval before we do, our commercialopportunity may be reduced or eliminated.**

 

The development and commercialization of new pharmaceutical productsfor the treatment of cancer and autoimmune diseases is competitive, and we willface competition from numerous sources, including major pharmaceuticalcompanies, specialty pharmaceutical companies and biotechnology companiesworldwide. Many of our competitors have substantially greater financial andtechnical resources and development, production and marketing capabilities thanwe do. In addition, many of these companies have more experience than we do inpreclinical testing, clinical trials and manufacturing of biologictherapeutics, as well as in obtaining FDA and foreign regulatory approvals. Wewill also compete with academic institutions, governmental agencies and privateorganizations that are conducting research in the fields of cancer andautoimmune disease. Competition among these entities to recruit and retainhighly qualified scientific, technical and professional personnel andconsultants is also intense.

 

We are aware of a number of companies that are developing activeimmunotherapies to treat B-cell NHL. Genitope Corporation is evaluating itsidiotype immunotherapy product candidate in a Phase 3 clinical trial inpatients with follicular B-cell NHL who are in remission following priortreatment with chemotherapy. Antigenics, Inc. completed a Phase 2 clinicaltrial evaluating its active immunotherapy candidate in indolent NHL patients.The NCI is also conducting a Phase 3 clinical trial of an active idiotype immunotherapyin collaboration with Accentia Biopharmaceuticals.

 

Several companies are engaged in the development and commercializationof passive immunotherapy products for the treatment of B-cell NHL that maycompete with FavId. Genentech and Biogen Idec are co-marketing Rituxan for thetreatment of relapsed or refractory, indolent B-cell NHL. Cell Therapeutics,Inc. is marketing Zevalin, a passive radioimmunotherapy product.GlaxoSmithKline plc currently markets Bexxar, a passive radioimmunotherapyproduct.

 

The most recent advances in the treatment of B-cell NHL have involvedthe combination of existing products and changes to approved schedules anddoses, particularly for Rituxan. Numerous clinical trials reported in recentyears have indicated that additional doses of Rituxan and maintenance dosing ofRituxan can improve TTP in patients who respond to therapy. Combinationtherapies involving chemotherapeutic or immunostimulatory drugs in combinationwith Rituxan at various doses and schedules may provide patients with anincrease in TTP over that expected with Rituxan alone. Accordingly, we may facecompetition as a result of developments in this area.

 

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

 

•     successfully and rapidly complete clinical trials and obtain all requisiteregulatory approvals in a cost-effective manner;

 

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

 

•      maintain aproprietary position for our manufacturing process and other technology;

 

•      price ourproducts competitively;

 

•      obtainappropriate reimbursement approvals for our products;

 

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

 

•      attractand retain key personnel.

 

In addition, our ability to compete effectively will depend on therelative efficacy and safety of other active immunotherapy products approvedfor sale as compared to our own products.

 

*** We are subject to new legislation,regulatory proposals and managed care initiatives that may increase our costsof compliance and adversely affect our ability to market our products, obtaincollaborators and raise capital.**

 

There have been a number of legislative and regulatory proposals aimedat changing the healthcare system and pharmaceutical industry, includingreductions in the cost of prescription products and changes in the levels atwhich consumers and healthcare providers are reimbursed for purchases ofpharmaceutical products. For example, the Prescription Drug and MedicareImprovement Act of 2003 was recently enacted. This legislation provides for aMedicare prescription drug benefit which began in 2006 and mandates otherreforms. Although we cannot predict the full effects on our business of the implementationof this new legislation, it is possible that the new benefit, which will bemanaged by private health insurers, pharmacy benefit managers and other managedcare organizations, will result in decreased reimbursement for prescriptiondrugs, which may further exacerbate industry-wide pressure to reduce the pricescharged for prescription drugs. This could harm our ability to market ourproducts and generate revenues. However, we expect that FavId will beadministered under the supervision of a physician and, therefore, fall outsideof the prescription drug legislation.

 

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**We depend on attracting and retainingkey scientific and management personnel to advance our technology, and the lossof these personnel could impair the development of our products.**

 

Our success depends on our continued ability to attract, retain andmotivate highly qualified management, clinical and scientific personnel and onour ability to develop and maintain important relationships with leadingacademic institutions, clinicians and scientists. We are highly dependent uponour senior management and scientific staff, particularly John P. Longenecker,Ph.D., our President and Chief Executive Officer, and Daniel P. Gold, Ph.D.,one of our co-founders and our Chief Scientific Officer. The loss of servicesof Dr. Longenecker or Dr. Gold, or one or more of our other members of seniormanagement, could delay or prevent the successful completion of our pivotalPhase 3 clinical trial or the commercialization of FavId. Although we haveemployment agreements with each of our executives, their employment with us is “atwill,” and each executive can terminate his or her agreement with us at anytime. We do not carry “key person” insurance covering members of seniormanagement, other than Drs. Longenecker and Gold. This insurance may notcontinue to be available on commercially reasonable terms and may proveinadequate to compensate us for the loss of their services.

 

The competition for qualified personnel in the biotechnology field isintense. In particular, our manufacturing process depends on our ability toattract and retain qualified manufacturing and quality control personnel. Wewill need to hire additional personnel as we continue to expand ourmanufacturing, research and development activities. We may not be able toattract and retain quality personnel on acceptable terms given the competitionfor such personnel among biotechnology, pharmaceutical and other companies. Weare not aware of any key personnel planning to retire or terminate theiremployment in the near future.

 

*** We will need to increase the sizeof our organization, and we may experience difficulties in managing growth.**

 

As of September 30, 2007, we had 158 employees. Of these, 129 employeeswere in research and development comprised of 92 in manufacturing, qualitycontrol and quality assurance, 32 in research and process development, and fivemembers of senior management.  Of the remaining employees, three weremembers of senior management and 26 were in marketing, general andadministration. We will need to expand our financial, managerial, operationaland other resources in order to continue our clinical trials and commercializeFavId, FAV-201, or any other product candidates that we may develop. Futuregrowth would impose significant added responsibilities on our management team,including the need to identify, recruit, maintain and integrate additionalemployees. Our ability to commercialize FavId, FAV-201, or any other productcandidates that we may develop, and our future financial performance ingeneral, will depend in part on our ability to manage any future growtheffectively. In order to meet these challenges, we would need to:

 

•      manage ourclinical trials effectively;

 

•      manage ourresearch and development efforts effectively;

 

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

 

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

 

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

 

**If we use biological and hazardousmaterials in a manner that causes injury or violates laws, we may be liable fordamages.**

 

Our research and development and manufacturing activities involve theuse of biological and hazardous materials that could be dangerous to humanhealth, safety or the environment. Although we believe our safety proceduresfor handling and disposing of these materials comply with federal, state andlocal laws and regulations, we cannot entirely eliminate the risk of accidentalinjury or contamination from the use, storage, handling or disposal of thesematerials. In the event of contamination or injury, we could be held liable forany resulting damages, and any liability could exceed our resources. Wecurrently maintain property and casualty insurance coverage which coversliability for hazardous and controlled materials. However, this insurancecoverage may not be sufficient to cover our liability and we may not be able toobtain sufficient coverage in the future at a reasonable cost. In addition, wemay incur significant costs complying with both existing and future environmentallaws and regulations. In particular, we are subject to regulation by theOccupational Safety and Health Administration, or OSHA, and the EnvironmentalProtection Agency, or EPA, and to regulation under the Toxic Substances ControlAct and the Resource Conservation and Recovery Act. OSHA, the EPA or otheragencies may adopt regulations that adversely affect our research anddevelopment programs.

 

**We face a risk of product liabilityclaims and may not be able to obtain adequate insurance.**

 

Our business exposes us to potential liability risks that may arisefrom the clinical testing of our product candidates and the manufacture andsale of any approved products. These risks will exist even with respect tothose product candidates that are approved for commercial sale by the FDA andmanufactured in facilities regulated by the FDA. Any product liability claim orseries of claims brought against us could significantly harm our business by,among other things, reducing demand for our products, injuring our reputationand creating significant adverse media attention and costly litigation.Plaintiffs have received substantial damage awards in some jurisdictionsagainst pharmaceutical companies based upon claims for injuries allegedlycaused by the use of their products. Any judgment against us that is in excessof our insurance policy limits would have to be paid from our cash reserves,which would reduce our capital resources. We currently maintain clinical trialinsurance. Although we believe our current insurance coverage is adequate, wecannot be certain that it will be sufficient. Furthermore, we cannot be certainthat our current insurance coverage will continue to be available, or thatincreased coverage, which will be necessary if we are able to commercialize ourproducts, will be available in the

 

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future on reasonable terms, or at all. Further, we may not havesufficient capital resources to pay a judgment, in which case our creditorscould levy claims against our assets, including our intellectual property.

 

**We could be negatively impacted byfuture interpretation or implementation of federal and state fraud and abuselaws, including anti-kickback laws and other federal and state anti-referrallaws.**

 

If we are able to commercialize FavId or any other product candidatesthat we may develop, we will be subject to various federal and state lawspertaining to healthcare fraud and abuse, including anti-kickback laws andphysician self-referral laws. Violations of these laws are punishable bycriminal and civil sanctions, including, in some instances, imprisonment andexclusion from participation in federal and state healthcare programs,including Medicare, Medicaid and Veterans Administration health programs.Because of the far-reaching nature of these laws, we may be required to alterone or more of our practices to be in compliance with these laws. Healthcarefraud and abuse regulations are complex, and even minor, inadvertentirregularities can potentially give rise to claims that a statute orprohibition has been violated. Any violations of these laws, or any actionagainst us for violation of these laws, even if we successfully defend againstit, could result in a material adverse effect on our business, financialcondition and results of operations. If there is a change in law, regulation oradministrative or judicial interpretations, we may have to change our businesspractices or our existing business practices could be challenged as unlawful,which could have a material adverse effect on our business, financial conditionand results of operations. In addition, some allegations under these laws havebeen claimed to violate the False Claims Act, discussed in more detail below.

 

In addition, if we are able to commercialize FavId or any other productcandidates that we may develop, we could become subject to false claimslitigation under federal statutes, which can lead to civil money penalties,criminal fines and imprisonment, and exclusion from participation in Medicare,Medicaid and other federal and state healthcare programs. These false claimsstatutes include the False Claims Act, which allows any person to bring suit onbehalf of the federal government alleging the submission of false or fraudulentclaims, or causing to present such false or fraudulent claims, under federalprograms or contracts claims or other violations of the statute and to share inany amounts paid by the entity to the government in fines or settlement. Thesesuits against biotechnology companies have increased significantly in recentyears and have increased the risk that a healthcare company will have to defenda false claim action, pay fines or be excluded from the Medicare, Medicaid orother federal and state healthcare programs as a result of an investigationarising out of such action. We cannot assure you that we will not becomesubject to such litigation or, if we are not successful in defending againstsuch actions, that such actions will not have a material adverse effect on ourbusiness, financial condition and results of operations. In addition, we cannotassure you that the costs of defending claims or allegations under the FalseClaims Act will not have a material adverse effect on our business, financialcondition and results of operations.

 

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

 

**If we are unable to obtain andmaintain protection for our intellectual property, the value of our technologyand products may be adversely affected.**

 

Our business and competitive positions are dependent upon our abilityto protect our proprietary technology. Our success will depend in large part onour ability to obtain and maintain patent protection for our product andtechnologies, preserve trade secrets and operate without infringing theintellectual property right of others. Because of the substantial length oftime and expense associated with development of new products, we, along withthe rest of the biopharmaceutical industry, place considerable importance onobtaining and maintaining patent protection for new technologies, products andprocesses. The patent positions of pharmaceutical, biopharmaceutical andbiotechnology companies, including us, are generally uncertain and involvecomplex legal and factual questions. Our patent applications may not protectour technologies and products because, among other things:

 

•      there isno guarantee that any of our pending patent applications will result in issuedpatents;

 

•      we maydevelop additional proprietary technologies that are not patentable;

 

•      there isno guarantee that any patents issued to us, our collaborators or our licensorswill provide a basis for a commercially viable product;

 

•      there isno guarantee that any patents issued to us or our collaborators or ourlicensors will provide us with any competitive advantage;

 

•      there is noguarantee that any patents issued to us or our collaborators or our licensorswill not be challenged, circumvented or invalidated by third parties; and

 

•      there isno guarantee that any patents previously issued to others or issued in thefuture will not have an adverse effect on our ability to do business.

 

We attempt to protect our intellectual property position by filingUnited States patent applications related to our proprietary technology,inventions and improvements that are important to the development of ourbusiness. Currently we own U.S. Patent No. 6,911,204 concerning the treatmentof NHL with our technology together with four pending United States patentapplications covering methods of treating immune system diseases, includingB-cell and T-cell lymphomas, using our proprietary immunotherapy productionmethods, as well as methods for combining the idiotype immunotherapies withother therapies that are used to treat diseases of the immune system.

 

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Outside of the United States, we have six issued patents and overtwenty pending patent applications.  Limitations on patent protection insome countries outside the United States, and the differences in whatconstitutes patentable subject matter in these countries, may limit theprotection we have under patents issued to us outside of the United States. Inaddition, laws of foreign countries may not protect our intellectual propertyto the same extent as would laws of the United States. In determining whetheror not to seek a patent or to license any patent in a particular foreigncountry, we weigh the relevant costs and benefits, and consider, among otherthings, the market potential of our product candidates in the jurisdiction, andthe scope and enforceability of patent protection afforded by the law of thejurisdiction. Failure to obtain adequate patent protection for our proprietaryproduct candidates and technology would impair our ability to be commerciallycompetitive in these markets.

 

Although we believe our issued patents, as well as our patentapplications if they issue as patents, will provide a competitive advantage, wemay not be able to develop additional patentable products or processes. Further, we may not be able to obtain patents from any of the pendingapplications. Even if patent claims are allowed, the claims may not issue, orin the event of issuance, may not be sufficient to protect our technology. Inaddition, any patents or patent rights we obtain may be circumvented,challenged or invalidated by our competitors.

 

**We are not able to prevent others,including potential competitors, from using certain types of patient-specificidiotype protein-KLH conjugates, like those we use in our lead productcandidate, FavId, for the treatment of indolent B-cell NHL.**

 

Certain types of patient-specific idiotype-KLH conjugates, comprisingsingle idiotype proteins, and their use for the treatment of indolent B-cellNHL are in the public domain and therefore cannot be patented. Consequently, wemay only be able to seek patent protection for methods of treating immunesystem diseases, including B-cell and T-cell lymphomas, using our proprietaryimmunotherapy production methods for making idiotype protein conjugates andcompositions comprising such conjugates, as well as methods for combining theidiotype or T-cell receptor-based immunotherapies with other therapies that areused to treat diseases of the immune system. As a result, we may not be able toprevent other companies using different manufacturing processes from developingactive immunotherapies that directly compete with FavId.

 

**We may have to engage in costlylitigation to enforce our proprietary rights or to defend challenges to ourintellectual property by our competitors, which may harm our business, resultsof operations, financial condition and cash flow.**

 

The pharmaceutical field is characterized by a large number of patentfilings involving complex legal and factual questions, and, therefore, wecannot predict with certainty whether our patents will be enforceable.Competitors may have filed applications for or have been issued patents and mayobtain additional patents and proprietary rights related to products orprocesses that compete with or are similar to ours. We may not be aware of allof the patents potentially adverse to our interests that may have been issuedto others.

 

Litigation may be necessary to protect our patent position, and wecannot be certain that we will have the required resources to pursue litigationor otherwise to protect our patent rights. In addition, our efforts to protectour patents may not be successful.

 

**Our ability to market our productsmay be impaired by the intellectual property rights of third parties.**

 

Our commercial success will depend in part on not infringing thepatents or proprietary rights of third parties. We are aware of competingintellectual property relating to active idiotype immunotherapies for cancer.Competitors or third parties may be issued, or may currently hold, patents thatmay cover subject matter that we use in developing the technology required tobring our product candidates to market, that we use in producing our productcandidates, or that we use in treating patients with our product candidates. Inaddition, from time to time we receive correspondence inviting us to licensepatents from third parties. While we currently believe we have freedom tooperate in our area, others may challenge our position in the future. There hasbeen, and we believe that there will continue to be, significant litigation inthe pharmaceutical industry regarding patent and other intellectual propertyrights.

 

While we believe that our pre-commercialization activities fall withinthe scope of an available exemption against patent infringement provided by 35U.S.C. §271(e), and that our subsequent manufacture of our commercial productswill also not require the license of any patents, claims may be brought againstus in the future based on these or other patents held by others. As our productcandidates progress toward commercialization, competitors or other parties mayassert that we infringe on their patents or proprietary rights.

 

In particular, we are aware of the following third party patents:

 

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

 

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

 

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

 

The first patent listed above was issued to Genentech in 2001. We donot believe that this patent covers our technology, and we note that in May2005, a third party filed a request for reexamination of this patent with theU.S. Patent and Trademark Office, requesting that the claims of this patent bereexamined as to their patentability; the reexamination is currentlypending.  During reexamination the issued claims were rejected;proceedings before the U.S. Patent and Trademark Office continue.  If thispatent reissues and we decide

 

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to attempt to obtain a license for this patent, we cannot guaranteethat we would be able to obtain such a license on commercially reasonableterms, or at all.

 

Additionally, because patent prosecution can proceed in secret prior toissuance of a patent, third parties may obtain other patents with claims ofunknown scope relating to our product candidates, which they could attempt toassert against us. Further, as we develop our products, we may infringe thecurrent patents of third parties or patents that may issue in the future. Third parties could bring legal actions against us claiming damages and seekingto enjoin clinical testing, manufacturing and marketing of the affected productor products. If we become involved in any litigation, it could consume asubstantial portion of our resources, regardless of the outcome of thelitigation. If any of these actions are successful, in addition to anypotential liability for damages, we could be required to obtain a license tocontinue to manufacture or market the affected product, in which case we may berequired to pay substantial royalties or grant cross-licenses to our patents.However, there can be no assurance that any such license will be available onacceptable terms or at all. To enforce patents issued to us or to determine thescope and validity of other parties’ proprietary rights, we may also becomeinvolved in litigation or in interference proceedings declared by the UnitedStates Patent and Trademark Office, which could result in substantial costs tous, regardless of the outcome of the litigation, or an adverse decision as tothe priority of our inventions. Ultimately, as a result of patent infringementclaims, our business could be harmed and we could be prevented fromcommercializing a product, or forced to cease some aspect of our business operations.

 

**If we are not able to protect andcontrol unpatented trade secrets, know-how and other technological innovation,we may suffer competitive harm.**

 

We also rely on trade secrets to protect our technology, particularlywhen we do not believe that patent protection is appropriate or available.However, trade secrets are difficult to protect. We attempt to protect ourtrade secrets by requiring each of our employees, consultants and advisors toexecute a non-disclosure and assignment of invention agreement before beginninghis or her employment, consulting or advisory relationship with us. We cannotguarantee that these agreements will provide meaningful protection, that theseagreements will not be breached, that we will have an adequate remedy for any suchbreach, or that our trade secrets will not otherwise become known orindependently developed by a third party. Our trade secrets, or those of ourfuture collaborators, may become known or may be independently discovered byothers, which could adversely affect the competitive position of our productcandidates.

 

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

 

*** Until our initial public offeringin February 2005, there was no public market for our common stock, and theprice of our common stock may be volatile and could decline significantly.**

 

Until our initial public offering, or IPO, in February 2005, there wasno public market for our common stock, and despite our IPO, an active publicmarket for these shares may not be sustained. Our stock price has traded in therange of $7.77- $2.19 from the commencement of our IPO on February 2, 2005 toNovember 9, 2007.

 

The stock market in general has been experiencing dramatic fluctuationsthat have often been unrelated to the operating performance of companies. Themarket prices for securities of biotechnology companies in general have beenhighly volatile and may continue to be highly volatile in the future. Ifmarket-based or industry-based volatility continues, the trading price of ourcommon stock could decline significantly, independent of our actual operatingperformance, and you could lose all or part of your investment. The marketprice of our common stock could fluctuate significantly as a result of severalfactors, including:

 

•     announcements of technological innovations or new products by us or ourcompetitors;

 

•     announcement of FDA approval or non-approval of FavId or any other productcandidates that we may develop, or delays in the FDA review process;

 

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

 

•      regulatorydevelopments in the United States and foreign countries;

 

•      success ofour research efforts and clinical trials;

 

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

 

•     announcements concerning our competitors, or the biotechnology or biopharmaceuticalindustries in general;

 

•      actual oranticipated fluctuations in our operating results;

 

•      changes infinancial estimates or recommendations by securities analysts;

 

•      sales oflarge blocks of our common stock;

 

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•      sales ofour common stock by our executive officers, directors and significantstockholders;

 

•      changes inaccounting principles; and

 

•      loss ofany of our key scientific or management personnel.

 

Specifically, you may not be able to resell your shares at or above theprice you paid for such shares. 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 amongour existing officers, directors and principal stockholders may prevent otherstockholders from influencing significant corporate decisions and depress ourstock price.**

 

As of November 9, 2007, our officers and directors and stockholdersaffiliated with our directors together beneficially held approximately 34.9% ofour outstanding common stock on an as-converted basis. If some or all of theseofficers, directors and principal stockholders act together, they will be ableto exert a significant degree of influence over our management and affairs andover matters requiring stockholder approval, including the election ofdirectors, the merger, consolidation or sale of all or substantially all of ourassets, and any other significant corporate transaction. The interests of thisconcentration of ownership may not always coincide with our interests or theinterests 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 andrestated certificate of incorporation and amended and restated bylaws andapplicable Delaware law may prevent or discourage third parties or ourstockholders from attempting to replace our management or influencingsignificant 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:

 

•                 dividing our board of directors intothree classes serving staggered three-year terms;

 

•                 authorizing our board of directors toissue preferred stock without stockholder approval;

 

•                 prohibiting cumulative voting in theelection of directors;

 

•                 prohibiting stockholder actions bywritten consent;

 

•                 limiting the persons who may call specialmeetings of stockholders;

 

•                 prohibiting our stockholders from makingcertain changes to our certificate of incorporation or bylaws except with 66.7%stockholder approval; and

 

•                 requiring advance notice for raisingbusiness matters or nominating directors at stockholders’ 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.

 

**Because we do not intend to pay anycash dividends on our shares of common stock, our stockholders will not be ableto receive a return on their shares unless they sell them.**

 

We have never paid or declared any cash dividends on our capital stockand intend to retain any future earnings to finance the development andexpansion of our business. The payment of dividends by us on our common stockis limited by our debt agreements. We do not anticipate paying any cashdividends on our common stock in the foreseeable future. Unless we paydividends, our stockholders will not be able to receive a return on theirshares unless they sell them.

 

*** We may incur increased costs as aresult of recently enacted and proposed changes in laws and regulations.**

 

Recently enacted and proposed changes in the laws and regulationsaffecting public companies, including the provisions of the Sarbanes-Oxley Actof 2002 and rules related to corporate governance and other matterssubsequently adopted by the SEC and the Nasdaq Global Market, could result inincreased costs to us. The new rules and any related regulations that may beproposed in the future could make it more difficult or more costly for us toobtain certain types of insurance, including directors’ and officers’ liabilityinsurance, and we may be forced to accept reduced policy limits and coverage orincur substantially higher costs to obtain the same or

 

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 similar coverage. The impact ofthese events could also make it more difficult for us to attract and retainqualified persons to serve on our board of directors, our board committees oras executive officers. We are presently evaluating and monitoring developmentswith respect to new and proposed rules and cannot predict or estimate theamount of the additional costs we may incur or the timing of such costs.

 

 

**Item2.  Unregistered Sales of Equity Securities and Use of Proceeds.**

 

On December 19, 2006, the Company entered intoa Committed Equity Financing Facility (“CEFF”) with Kingsbridge Capital Limited(“Kingsbridge”) pursuant to which Kingsbridge committed to purchase, subject tocertain conditions, up to the lesser of 5.8 million shares of the Company’scommon stock or an aggregate of $40 million during the next three years.  The Company may require Kingsbridge topurchase newly-issued shares of the Company’s common stock at a price between90% and 94% of the volume-weighted average price on each trading day during aneight-day pricing period. The maximum dollar amount of shares that the Companymay require Kingsbridge to purchase in any such pricing period is the lesser of$10 million or 1.75% of the Company’s market capitalization at the time of adraw down under the CEFF.   The Companyis not obligated to sell any of the $40 million of common stock available underthe CEFF, and there are no minimum commitments or minimum use penalties.

 

On February 15, 2007, the Company filed aresale registration statement with the Securities and Exchange Commission (“SEC”)with respect to resale shares of common stock pursuant to the CEFF. Theregistration statement was declared effective by the SEC on May 2, 2007.

 

In accordance with the CEFF, on July 17, 2007and July 23, 2007, the Company issued an aggregate of 462,195 shares of ourcommon stock to Kingsbridge at an aggregate purchase price of $1.4 million. Thecommon stock was issued pursuant to a prospectus supplement filed with the SECon July 24, 2007.

 

In accordance with the CEFF, on September 17,2007 and September 21, 2007, the Company issued an aggregate of 673,395 sharesof our common stock to Kingsbridge at an aggregate purchase price of $1.9million. The common stock was issued pursuant to a prospectus supplement filedwith the SEC on September 25, 2007.

 

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**Item6.  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.

 
| **Exhibit  Number** | ** ** | ** **

**Description of Document**                                                                                                                                                                               |
|---------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                                                            |
| 3.1                 |       | Registrant’s Amended and Restated Certificate of  Incorporation.(1)                                                                                                                                                        |
|                |       |                                                                                                                                                                                                                            |
| 3.2                 |       | Registrant’s Amended and Restated Bylaws.(7)                                                                                                                                                                               |
|                |       |                                                                                                                                                                                                                            |
| 4.1                 |       | Form of Common Stock Certificate of  Registrant.(1)                                                                                                                                                                        |
|                |       |                                                                                                                                                                                                                            |
| 4.2                 |       | Amended and Restated Investor Rights Agreement dated  March 26, 2004 between the Registrant and certain of its  stockholders.(1)                                                                                           |
|                |       |                                                                                                                                                                                                                            |
| 4.3                 |       | Amendment No. 1 to Amended and Restated  Investor Rights Agreement dated April 6, 2004 between the Registrant and  certain of its stockholders.(1)                                                                    |
|                |       |                                                                                                                                                                                                                            |
| 4.4                 |       | Securities Purchase Agreement dated March 6,  2006, by and among Favrille 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 Favrille 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 Favrille 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 Favrille and Kingsbridge  Capital Limited.(6)                                                                                   |
|                |       |                                                                                                                                                                                                                            |
| 4.12                |       | Form of Warrant issued to investors in November 2007  registered direct offering. (8)                                                                                                                                           |
|                |       |                                                                                                                                                                                                                            |
| 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). |

 

 
| (1)    |   | Filed as an Exhibit to Favrille, Inc.’s  Registration Statement on Form S-1 (File No. 333-114299), as  amended, and incorporated by reference herein. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2)    |   | Filed as an exhibit to Favrille’s Current Report on  Form 8-K dated March 6, 2006 and incorporated herein by reference.                                         |
|   |   |                                                                                                                                                                           |
| (3)    |   | Filed as an exhibit to Favrille’s Current Report on  Form 8-K dated February 13, 2007 and incorporated herein by reference.                                               |

 

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|   |   |                                                                                                                                                |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------|
| (4)    |   | Filed as an exhibit to Favrille’s Current Report on  Form 8-K dated December 20, 2006 and incorporated herein by reference.                    |
|   |   |                                                                                                                                                |
| (5)    |   | Filed as an exhibit to Favrille’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 Favrille’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 Favrille’s Current Report on  Form 8-K dated October 4, 2007 and incorporated herein by reference.                      |
|   |   |                                                                                                                                                |
| (8)    |   | Filed as an exhibit to Favrille’s Current Report on  Form 8-K dated November 2, 2007 and incorporated herein by reference.                     |

 

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**Favrille, Inc.**

 

**SIGNATURES**

 

Pursuant to 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: November 14, 2007 |                                                                                                   |
|--------------------------|--------------------------------------------------------------------------------------------------------|
|                     |                                                                                                   |
|                     | 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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