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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

(Mark One)

 

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

 

 

for the quarterly period ended March 31, 2005

 

 

OR

 

 

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

 

 

For the transition period from                to               

 

 

Commission File Number 000-29357

 

Favrille, Inc.

(Exact name of Registrant as specified in its Charter)

 

Delaware

33-0892797

(State or Other Jurisdiction of Incorporation or Organization)

(I.R.S. Employer Identification Number)

 

10421 Pacific Center Court, Suite 150
San Diego, CA 92121

(Address of Principal Executive Offices, including Zip Code)

 

(858) 526-8000

(Registrant’s Telephone Number, Including Area Code)

 

N/A

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

 

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

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).                        YES o    NO ý

 

The number of shares of the Registrant’s common stock outstanding as of April 24, 2005 was 20,300,335.

 

 



 

FAVRILLE, INC.
QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 2005
TABLE OF CONTENTS

 

PART I.

 

FINANCIAL INFORMATION

 

3

Item 1.

 

Financial Statements

 

3

 

 

Balance Sheet as of March 31, 2005 (Unaudited) and December 31, 2004

 

3

 

 

Statement of Operations (Unaudited) for the three months ended March 31, 2005 and 2004 and the period from January 21, 2000 (inception) to March 31, 2005 (Unaudited)

 

4

 

 

Statement of Cash Flows (Unaudited) for the three months ended March 31, 2005 and 2004 and the period from January 21, 2000 (inception) to March 31, 2005 (Unaudited)

 

5

 

 

Notes to Condensed Financial Statements (Unaudited)

 

6

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

10

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

34

Item 4.

 

Controls and Procedures

 

34

 

 

 

 

 

PART II.

 

OTHER INFORMATION

 

34

Item 1.

 

Legal Proceedings

 

34

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

34

Item 5.

 

Other Information

 

35

Item 6.

 

Exhibits

 

35

 

 

 

 

 

SIGNATURES

 

37

 

2



 

PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

FAVRILLE, INC.

(a development stage company)

 

BALANCE SHEETS

(in thousands, except share and per share data)

 

 

 

March 31, 2005

 

December 31,
2004

 

 

 

(unaudited)

 

 

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

53,854

 

$

25,065

 

Short-term investments

 

5,035

 

1,493

 

Receivable from employees

 

6

 

4

 

Receivable, other

 

52

 

15

 

Prepaid expenses and other current assets

 

865

 

694

 

Total current assets

 

59,812

 

27,271

 

Property and equipment, net

 

9,210

 

9,435

 

Restricted cash

 

1,606

 

1,606

 

Other assets

 

638

 

818

 

Total assets

 

$

71,266

 

$

39,130

 

Liabilities and stockholders’ equity (deficit)

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

3,410

 

$

2,603

 

Current portion of debt

 

2,578

 

2,492

 

Total current liabilities

 

5,988

 

5,095

 

Debt, less current portion

 

3,577

 

4,224

 

Deferred rent

 

929

 

793

 

Commitments and contingencies

 

 

 

 

 

Redeemable convertible preferred stock, $0.001 par value:

 

 

 

 

 

Authorized shares, none at March 31, 2005 and 6,286,014 at December 31, 2004;

 

 

 

 

 

Issued and outstanding shares— none at March 31, 2005 and 6,140,188 at December 31, 2004

 

 

43,672

 

Stockholders’ equity (deficit):

 

 

 

 

 

Preferred stock, $0.001 par value 5,000,000 shares authorized at March 31, 2005 and none at December 31, 2004; no shares issued and outstanding at March 31, 2005 and December 31, 2004

 

 

 

Convertible preferred stock, $0.001 par value:

 

 

 

 

 

Authorized shares, none at March 31, 2005 and 7,013,387 at December 31, 2004;

 

 

 

 

 

Issued and outstanding shares—none at March 31, 2003 and 5,505,330 at December 31, 2004

 

 

6

 

Common stock, $0.001 par value:

 

 

 

 

 

Authorized shares, 75,000,000 at March 31, 2005 and 15,402,410 at December 31, 2004;

 

 

 

 

 

Issued and outstanding shares— 20,300,335 at March 31, 2005 and 1,838,714 at December 31, 2004

 

20

 

2

 

Additional paid-in capital

 

156,664

 

73,324

 

Deferred stock-based compensation

 

(7,884

)

(8,386

)

Note receivable from stockholder

 

(96

)

(96

)

Accumulated other comprehensive loss

 

(19

)

(2

)

Deficit accumulated during the development stage

 

(87,913

)

(79,502

)

Total stockholders’ equity (deficit)

 

60,772

 

(14,654

)

Total liabilities and stockholders’ equity (deficit)

 

$

71,266

 

$

39,130

 

 

See accompanying notes.

 

3



 

FAVRILLE, INC.
(a development stage company)

 

STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)

Unaudited

 

 

 

Three Months ended March 31,

 

Period from
January 21,
2000
(inception) to
March 31,

 

 

 

2005

 

2004

 

2005

 

Operating expenses:

 

 

 

 

 

 

 

Research and development

 

$

6,461

 

$

3,728

 

$

44,415

 

General and administrative

 

1,284

 

984

 

11,740

 

Amortization of stock-based compensation:

 

 

 

 

 

 

 

Research and development

 

367

 

147

 

1,677

 

General and administrative

 

380

 

124

 

1,641

 

Total operating expenses

 

8,492

 

4,983

 

59,473

 

Interest income

 

296

 

15

 

1,213

 

Interest expense

 

(208

)

(206

)

(1,512

)

Other income

 

(1

)

 

19

 

Total other income (expense), net

 

87

 

(191

)

(280

)

Net loss

 

(8,405

)

(5,174

)

(59,753

)

Deemed dividend—beneficial conversion feature for Series C redeemable convertible preferred stock

 

 

(16,156

)

(28,103

)

Accretion of Series C redeemable convertible preferred stock issuance costs

 

(6

)

 

(57

)

Net loss applicable to common stockholders

 

$

(8,411

)

$

(21,330

)

$

(87,913

)

Historical net loss per share:

 

 

 

 

 

 

 

Basic and diluted

 

$

(0.69

)

$

(24.15

)

 

 

Weighted-average shares—basic and diluted

 

12,179,740

 

883,540

 

 

 

 

See accompanying notes.

 

4



 

FAVRILLE, INC.
(a development stage company)

 

STATEMENTS OF CASH FLOWS
(in thousands)

Unaudited

 

 

 

Three Months ended
March 31,

 

Period from
January 21,
2000
(inception) to
March 31,

 

 

 

2005

 

2004

 

2005

 

Operating activities

 

 

 

 

 

 

 

Net loss

 

$

(8,405

)

$

(5,174

)

$

(59,753

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

438

 

278

 

2,960

 

Issuance of options and warrant related to consulting agreements

 

 

169

 

186

 

Stock-based compensation

 

747

 

271

 

3,336

 

Non-cash interest expense

 

15

 

17

 

155

 

Issuance of restricted common stock for license

 

 

 

24

 

Deferred rent

 

136

 

148

 

929

 

Amortization of premium/discount on short-term investments

 

1

 

 

 

Accrued interest on short-term investments

 

(37

)

 

(52

)

Unrealized loss on cash and cash equivalents

 

1

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Receivables

 

(2

)

(2

)

(6

)

Prepaid expenses and other assets

 

5

 

93

 

(1,233

)

Accounts payable and accrued liabilities

 

807

 

136

 

3,410

 

Net cash used in operating activities

 

(6,294

)

(4,064

)

(50,044

)

Investing activities

 

 

 

 

 

 

 

Purchases of property and equipment

 

(209

)

(1,745

)

(12,150

)

Purchases of short-term investments

 

(3,561

)

 

(5,054

)

Receivable, other

 

 

239

 

 

Other assets

 

 

 

(70

)

Restricted cash

 

 

 

(1,710

)

Sale of restricted cash

 

 

8

 

104

 

Net cash used in investing activities

 

(3,770

)

(1,498

)

(18,880

)

Financing activities

 

 

 

 

 

 

 

Proceeds from debt

 

 

1,688

 

10,107

 

Payments on debt

 

(603

)

(529

)

(4,188

)

Issuance of preferred stock, net

 

 

24,990

 

76,144

 

Deferred IPO issuances costs, net

 

 

(22

)

 

Proceeds from issuance of convertible promissory note

 

 

 

650

 

Issuance of common stock

 

39,457

 

406

 

40,095

 

Repurchase of restricted common stock

 

(1

)

 

(30

)

Net cash provided by financing activities

 

38,853

 

26,533

 

122,778

 

Net increase (decrease) in cash and cash equivalents

 

28,789

 

20,971

 

53,854

 

Cash and cash equivalents at beginning of period

 

25,065

 

5,610

 

 

Cash and cash equivalents at end of period

 

$

53,854

 

$

26,581

 

$

53,854

 

 

 

 

 

 

 

 

 

Supplemental schedule of noncash investing and financing activities:

 

 

 

 

 

 

 

Conversion of convertible preferred stock to common stock upon initial public offering

 

$

43,678

 

$

 

$

43,678

 

 

See accompanying notes.

 

5



 

FAVRILLE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2005
UNAUDITED

 

1. Basis of Presentation

 

The accompanying unaudited interim financial statements have been prepared in accordance with U.S. generally accepted accounting principles and with the rules and regulations of the Securities and Exchange Commission related to a quarterly report on Form 10-Q. Accordingly, they do not include all of the information and disclosures required by U.S. generally accepted accounting principles for complete financial statements. The balance sheet at December 31, 2004 has been derived from the audited financial statements at that date but does not include all information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. The interim financial statements reflect all adjustments which, in the opinion of management, are necessary for a fair presentation of the financial condition and results of operations for the periods presented. Except as otherwise disclosed, all such adjustments are of a normal recurring nature.

 

Operating results for the three months ended March 31, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005. These financial statements should be read in conjunction with the financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 and management’s discussion and analysis of financial condition and results of operations included elsewhere herein.

 

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as well as expenses during the reporting period. Actual results could differ from those estimates.

 

Stock-Based Compensation

 

Favrille has two stock-based employee and non-employee director compensation plans that are described more fully in Note 5 to the Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004. Favrille accounts for these plans under the recognition and measurement principles of Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. As of March 31, 2005, no grants had been made from the non-employee director plan. With respect to certain options granted during the three month periods ended March 31, 2005 and 2004, the Company has recorded deferred compensation of approximately $246,000 and $9.4 million, respectively, for the incremental difference at the grant date between the fair value per share determined by the Company’s Board of Directors (“Board”) and the deemed fair value per share solely for financial reporting purposes. Deferred stock-based compensation is recognized and amortized on a straight-line basis over the vesting period of the related options, generally four years.

 

In December 2002, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure—an amendment of SFAS No. 123, Accounting for Stock-Based Compensation which provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation from the intrinsic value-based method of accounting prescribed by APB Opinion No. 25. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123. The Company adopted the disclosure requirements of SFAS No. 148 effective December 31, 2003.

 

Pro forma information regarding net loss is required by SFAS No. 123 and has been determined as if the Company had accounted for its stock-based employee compensation under the fair value method prescribed

 

6



 

in SFAS No. 123. The fair value of the options was estimated at the date of grant using the Black-Scholes option pricing model with the following assumptions for the three months ended March 31, 2005 and 2004: weighted-average risk-free interest rates of 4.27% and 2.76%, respectively, dividend yields of 0%, expected volatility of 70%, and a weighted-average expected life of four years. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the vesting period of the related options.

 

The following table illustrates the effect on net loss and net loss per share if Favrille had applied the fair value recognition provisions of SFAS No. 123, to stock-based employee compensation.

 

 

 

Three Months ended March 31,

 

 

 

2005

 

2004

 

 

 

(in thousands, except per share
data)

 

Net loss applicable to common stockholders as reported:

 

$

(8,411

)

$

(21,330

)

Add: Stock-based employee compensation expense included in net loss

 

747

 

271

 

Deduct: Stock-based employee compensation expense determined under fair value method for all awards

 

(728

)

(595

)

Pro forma net loss applicable to common stockholder

 

$

(8,392

)

$

(21,654

)

Net loss per share:

 

 

 

 

 

As reported—Basic and Diluted

 

$

(0.69

)

$

(24.15

)

Pro forma—Basic and Diluted

 

$

(0.69

)

$

(24.51

)

 

7



 

Net Loss per Common Share

 

Net loss per share is calculated in accordance with SFAS No. 128, Earnings Per Share, and Staff Accounting Bulletin (SAB) No. 98. Basic loss per share is calculated using the weighted average number of common shares outstanding during each period, without consideration for common stock equivalents. Diluted loss per share includes the dilutive effect of common equivalent shares outstanding for the period determined using the treasury-stock method. For purposes of this calculation, common stock subject to repurchase by the Company, preferred stock, options and warrants are considered to be common stock equivalents and are only included in the calculation of diluted earnings per share when their effect is dilutive.

 

Pro forma net loss per share has been calculated as described above. The pro forma shares used to compute basic and diluted net loss per share represent the weighted-average common shares outstanding, reduced by the weighted-average unvested common shares subject to repurchase, and include the assumed automatic conversion of all outstanding shares of preferred stock that automatically converted into shares of common stock upon the closing of our initial public offering  (“IPO”), in February 2005, using the as-if converted method as of January 1, 2004 or the date of issuance, if later.

 

 

 

 

Three Months ended March 31,

 

 

 

2005

 

2004

 

 

 

(in thousands, except per share data)

 

Historical:

 

 

 

 

 

Numerator:

 

 

 

 

 

Net loss

 

$

(8,405

)

$

(5,174

)

Deemed dividend—beneficial conversion feature for Series C redeemable convertible preferred stock

 

 

(16,156

)

Accretion of Series C redeemable convertible stock issuance costs

 

(6

)

 

Net loss applicable to common stockholders

 

$

(8,411

)

$

(21,330

)

Denominator:

 

 

 

 

 

Weighted-average common shares

 

12,750,694

 

1,065,572

 

Weighted-average unvested common shares subject to repurchase

 

(570,954

)

(182,032

)

Denominator for basic and diluted earnings per share

 

12,179,740

 

883,540

 

 

 

 

 

 

 

Basic and diluted net loss per share

 

$

(0.69

)

$

(24.15

)

Pro forma:

 

 

 

 

 

Net loss applicable to common stockholders

 

$

(8,411

)

$

(21,330

)

 

 

 

 

 

 

Pro forma basic and diluted net loss per share

 

$

(0.49

)

$

(3.24

)

 

 

 

 

 

 

Shares used above

 

12,179,740

 

883,540

 

Pro forma adjustments to reflect weighted-average affect of conversion of preferred stock

 

5,006,241

 

5,699,281

 

Pro forma shares used to compute basic and diluted net loss per share

 

17,185,981

 

6,582,821

 

 

 

 

As of March 31,

 

 

 

2005

 

2004

 

Historical outstanding antidilutive securities not included in diluted net loss per share calculation:

 

 

 

 

 

Common stock equivalents:

 

 

 

 

 

Redeemable convertible preferred stock

 

 

3,529,928

 

Convertible preferred stock

 

 

5,505,330

 

Stock warrants

 

29,831

 

39,469

 

Options to purchase common stock

 

1,459,770

 

1,035,425

 

Common stock subject to repurchase

 

526,042

 

619,654

 

 

 

2,015,643

 

10,729,806

 

 

8



 

Recent Accounting Pronouncements

 

In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment. Under previous practice, the reporting entity could account for share-based payment under the provisions of APB Opinion No. 25 and disclose share-based compensation as accounted for under the provisions of SFAS No. 123. Under the provisions of SFAS No. 123R, a public entity is required to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost is recognized over the period during which an employee is required to provide service in exchange for the award. In April 2005, the Securities and Exchange Commission (“SEC”) postponed the effective date of SFAS No. 123R until the fiscal year beginning after June 15, 2005. The Company expects to adopt SFAS No. 123R in January 2006. The Company cannot estimate what those amounts will be in the future, because they depend on, among other things, when employees exercise stock options. Application of this pronouncement requires significant judgment regarding the inputs to an option-pricing model, including stock price volatility and employee exercise behavior. Most of these inputs are either highly dependent on the current economic environment at the date of grant or forward-looking over the expected term of the award. The Company is currently considering the modified prospective method of transition, effective January 1, 2006.

 

2. Comprehensive Loss

 

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

 

 

 

Three Months ended March 31,

 

 

 

2005

 

2004

 

 

 

 

 

 

 

Net loss

 

$

(8,405

)

$

(5,174

)

Change in unrealized loss on short-term investments

 

(17

)

 

Comprehensive loss

 

$

(8,422

)

$

(5,174

)

 

Accumulated other comprehensive loss totaled $19,000 and $2,000 at March 31, 2005 and December 31, 2004, respectively, and was attributed to unrealized losses on short-term investments.

 

3.  Stockholders’ Equity

 

Initial Public Offering

 

On February 7, 2005, the Company completed an initial closing of its IPO in which it sold 6,000,000 shares of common stock for proceeds of $37.7 million, net of underwriting discounts and commissions and $1.4 million of offering expenses. In addition, on March 7, 2005, the Company completed an additional closing of its IPO in which it sold an additional 285,000 shares of common stock pursuant to the exercise by the underwriters of an over-allotment option which resulted in proceeds of $1.8 million, net of underwriting discounts and commissions.

 

Authorized Capital Stock

 

On February 7, 2005, the Company filed an amended and restated certificate of incorporation to provide for authorized capital stock of 75,000,000 shares of common stock and 5,000,000 shares of undesignated preferred stock.

 

9



 

Convertible Preferred Stock

 

Effective immediately prior to the initial closing of the IPO in February 2005, shares of Series A, B, B-2 and C convertible preferred stock then outstanding were converted into an aggregate of 12,177,344 shares of the Company’s common stock.

 

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

 

Cautionary Note Regarding Forward-Looking Statements

 

This Form 10-Q contains certain forward-looking statements including expectations of market conditions, challenges and plans, within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and is subject to the Safe Harbor provisions created by that statute. The words “anticipate”, “expect”, “believe”, “plan”, “intend”, and similar expressions are intended to identify such statements. Although the forward-looking statements in this Form 10-Q reflect the good faith judgment of our management, such statements are subject to various risks and uncertainties, including but not limited to those discussed herein and, in particular, under the caption “Factors That May Affect Future Operating Results” beginning on page 14 and throughout our Annual Report on Form 10-K  for the year ended December 31, 2004. Actual results and the timing of selected events may differ materially from those anticipated in these forward-looking statements. We disclaim any duty to update any forward-looking statement to reflect events or circumstances that occur after the date on which such statement is made.

 

Overview

 

We are a biopharmaceutical company focused on the research, development and commercialization of targeted immunotherapies for the treatment of cancer and diseases of the immune system. We have developed a proprietary technology that enables us to manufacture active immunotherapy products that are designed to stimulate a patient’s immune system to mount a specific and sustained response to disease. Our lead product candidate, FavId, is an active immunotherapy for the treatment of B-cell non-Hodgkin’s lymphoma, or NHL. FavId entered a pivotal Phase 3 clinical trial in follicular B-cell NHL in July 2004.  To date, FavId has been evaluated in several multi-center, open-label Phase 2 clinical trials involving over 120 patients.

 

We believe FavId may be effective in treating other types of B-cell NHL. Five additional Phase 2 clinical trials of FavId are either ongoing or expected to begin during 2005. One of these clinical trials will be conducted under a separate physician-sponsored Investigational New Drug Application (“IND”) in the United States. A second of these will be conducted as a physician-sponsored clinical trial in Switzerland. Moreover, we believe our active immunotherapy expertise and proprietary manufacturing technology will enable us to develop additional product candidates for other oncology indications, such as T-cell lymphoma, and for autoimmune diseases, with an initial focus on multiple sclerosis. We are currently developing a second product candidate, FAV-201, for the treatment of T-cell lymphoma and intend to initiate a Phase 1 / 2 clinical trial evaluating the safety and preliminary efficacy of FAV-201 in the second half of 2005. We have retained exclusive worldwide commercialization rights to all of our product candidates.

 

We were incorporated in Delaware in January 2000. As of March 31, 2005, we had not generated any revenues, and we had financed our operations and internal growth through private placements of our preferred stock, equipment and leasehold debt financings and the sale of common stock in our initial public offering (“IPO”) in February 2005. We are a development stage company and have incurred significant losses since our inception in 2000, as we have devoted substantially all of our efforts to research and development activities, including clinical trials. As of March 31, 2005, our accumulated deficit was approximately $87.9 million. We expect to incur substantial and increasing losses for the next several years as we:

 

continue to develop and prepare for the commercialization of our lead product candidate, FavId;

expand our research and development programs;

expand our current manufacturing capabilities to support our operations; and

 

10



 

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

 

Financial Operations Overview

 

Research and Development Expense. Research and development expense consists primarily of costs associated with clinical trials of our product candidates, including the costs of manufacturing our product candidates, compensation and other expenses related to research and development personnel, facilities costs and depreciation. We charge all research and development expenses to operations as they are incurred. Our research and development activities are primarily focused on the development of FavId. We have completed enrollment in two Phase 2 clinical trials and continue to evaluate the results. We initiated our pivotal Phase 3 clinical trial of FavId following Rituxan in patients with follicular B-cell NHL in July 2004. We estimate an 18-month patient enrollment period and an additional 18-month evaluation period for our Phase 3 clinical trial. Patient enrollment in the Phase 2 clinical trial with FavId following prior therapy in patients who do not qualify for randomization in the Phase 3 will depend upon the rate of completion of patient participation in the Phase 3 clinical trial. Five additional Phase 2 clinical trials of FavId are either ongoing or expected to begin during 2005. One of these clinical trials will be conducted under a separate physician-sponsored IND in the United States. A second of these will be conducted as a physician-sponsored clinical trial in Switzerland. We estimate average enrollment periods of 12 to 24 months and evaluation periods ranging from six to 36 months for these Phase 2 clinical trials.

 

From inception through March 31, 2005, we incurred costs of approximately $44.4 million associated with the research and development of FavId, which represents substantially all of our research and development costs to date. We expect our research and development costs to increase as we advance FavId and new product candidates into later stages of clinical development. While difficult to predict, we estimate that research and development costs required to complete the development of and file a Biologics Licensing Application (“BLA”) for FavId will be an additional $75 million. We are unable to estimate with any certainty the costs we will incur in the continued development of other product candidates for commercialization. On an ongoing basis, we expect to expand our research and development activities to include clinical development of FAV-201 and preclinical research of treatments for autoimmune diseases, primarily multiple sclerosis.

 

Clinical development timelines, likelihood of success and total costs vary widely. Although we are currently focused primarily on FavId, we anticipate that we will make determinations as to which research and development projects to pursue and how much funding to direct toward each project on an on-going basis in response to the scientific and clinical success of each product candidate.

 

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

 

General and Administrative Expense. General and administrative expenses consist primarily of compensation and other expenses related to our corporate administrative employees, legal fees and other professional services expenses. As a result of completing our IPO, we anticipate increases in general and administrative expenses as we add personnel, become subject to reporting obligations applicable to publicly-held companies and continue to develop and prepare for commercialization of our product candidates.

 

Stock-Based Compensation Expense. Stock-based compensation expense represents the amortization of deferred stock-based compensation resulting from options considered compensatory because the deemed fair value of the underlying common stock for financial reporting purposes was greater than the exercise prices determined by the board of directors on the date of grant.

 

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

 

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

 

Critical Accounting Policies and Estimates

 

The discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, expenses and related disclosures. Actual results could differ from those estimates. We believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our financial statements:

 

Deferred Tax Asset Valuation Allowance.    Our estimate for the valuation allowance for deferred tax assets requires us to make significant estimates and judgments about our future operating results. Our ability to realize the deferred tax assets depends on our future taxable income as well as limitations on utilization. A deferred tax asset must be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized prior to its expiration. The projections of our operating results on which the establishment of a valuation allowance is based involve significant estimates regarding future demand for our products, competitive conditions, product development efforts, approvals of regulatory agencies and product cost. We have recorded a full valuation allowance on our net deferred tax assets as of March 31, 2005 and 2004, due to uncertainties related to our ability to utilize our deferred tax assets in the foreseeable future. These deferred tax assets primarily consist of certain net operating loss carryforwards and research and development tax credits.

 

Deferred Stock-Based Compensation.    In connection with the grant of stock options during the three month periods ended March 31, 2005 and 2004, we recorded approximately $246,000 and $7.9 million in net deferred stock-based compensation within stockholders’ equity, respectively. These options were considered compensatory because the deemed fair value of the underlying common stock for financial reporting purposes was greater than the exercise prices determined by the board of directors on the date of grant. The determination of the fair value prior to our IPO of the underlying shares of common stock involves subjective judgment and the consideration of a variety of factors, including the prices obtained in private placement transactions of other equity securities, and as a result the amount of the compensatory charge is not based on an objective measure such as the trading price of the common stock since there was no public market for our common stock prior to February 2, 2005. As of March 31, 2005, we had an aggregate of $7.9 million of deferred stock-based compensation remaining to be amortized. This deferred stock-based compensation balance will be amortized as follows: an additional $2.1 million in 2005; $2.8 million in 2006; $2.4 million in 2007; and $584,000 in 2008. We are amortizing the deferred compensation on a straight-line basis over the vesting period of the related options, which is generally four years. The amount of stock-based compensation amortization actually recognized in future periods could decrease if options for which accrued but unvested compensation has been recorded are forfeited.

 

Results of Operations

 

Comparison of the Three Months Ended March 31, 2005 to 2004

 

Research and Development.    Research and development expense increased from approximately $3.7 million for the three months ended March 31, 2004 to $6.4 million for the three months ended March 31, 2005. The increase of $2.7 million, or 73%, was due primarily to an increase of $1.0 million associated with raw materials and supplies for the manufacture of FavId for our Phase 3 clinical trial; an increase of $700,000 associated with an increase in personnel from 67 full-time equivalent employees to 99 full-time equivalent employees to support our Phase 3 clinical trial; and an increase of approximately $700,000 in expenses associated with participating clinical sites and other third party vendors supporting the Phase 3 clinical trial.

 

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General and Administrative.    General and administrative expense increased from approximately $1.0 million for the three months ended March 31, 2004 to $1.3 million for the three months ended March 31, 2005. The increase of $300,000, or 30%, was primarily due to an increase of $200,000 associated with an increase in personnel from 10 full-time equivalent employees to 15 full-time equivalent employees and an increase in Directors & Officers Liability insurance premiums and board of director’s fees of $100,000 incurred subsequent to our IPO.

 

Amortization of Stock-Based Compensation.    We recorded net deferred stock-based compensation of $246,000 and $7.9 million for the periods ended March 31, 2005 and 2004, respectively. We recorded these amounts as components of stockholders’ equity and are amortizing the amounts, on a straight-line basis, as a non-cash charge to operations over the vesting period of the options. We recorded amortization of stock-based compensation of approximately $747,000 and $271,000 for the three month periods ended March 31, 2005 and 2004, respectively. We anticipate recording additional amortization of deferred stock-based compensation related to employee stock option grants of approximately $2.1 million, $2.8 million, $2.4 million and $584,000 for the years ending December 31, 2005, 2006, 2007 and 2008, respectively.

 

Interest IncomeInterest income increased from approximately $15,000 for the three months ended March 31, 2004 to $296,000 for the three months ended March 31, 2005. The increase of $281,000, or 1873%, was primarily a result of interest income attributable to the $43.6 million in net proceeds received from the sale of our Series C preferred stock in March and April 2004 and the net proceeds of $39.5 million from our IPO in February 2005.

 

Liquidity and Capital Resources

 

Sources of Liquidity

 

We have historically funded our operations primarily through the sale of our equity securities and equipment and leasehold debt financing. As March 31, 2005, we had received proceeds from the sale of preferred stock of approximately $76.8 million, net of stock offering costs of approximately $686,000 and proceeds from the sale of common stock in our IPO of approximately $39.5 million, net of underwriters’ discounts and commissions and approximately $1.4 million of offering costs. As of March 31, 2005, we had financed the purchase of equipment and leasehold improvements through debt totaling approximately $10.1 million, of which $6.2 million was outstanding at that date. These obligations are secured by certain purchased equipment and leasehold improvements and are due in monthly installments through June 2008. They bear interest at effective rates ranging from approximately 5.18% to 21.67% and include terminal payments at the end of certain of the loans ranging from 7.50% to 12.75%. The debt agreements subject us to certain non-financial covenants. As of March 31, 2005, we were in compliance with the terms of the debt agreements.

 

Cash Flows

 

As of March 31, 2005, cash and cash equivalents totaled approximately $53.9 million as compared to $26.6 million at March 31, 2004, an increase of approximately $27.3 million. The increase resulted primarily from proceeds of $39.5 million, net of underwriters’ discounts and commissions and approximately $1.4 million of offering costs, from the sale of 6.3 million shares of common stock in our IPO during the first quarter of 2005, and the proceeds of approximately $18.7 million from the sale of Series C preferred stock in April 2004, partially offset by cash used in operations.

 

Net cash used in operating activities was approximately $6.3 million for the quarter ended March 31, 2005 reflecting the net loss occurring for this period of $8.4 million, offset primarily by non-cash charges for depreciation and amortization of $438,000, stock-based compensation of $747,000 and deferred rent of $136,000 and an increase in accounts payable and accrued liabilities of $807,000. Net cash used in investing activities for the quarter ended March 31, 2005 totaled $3.8 million reflecting primarily the purchase of $3.6 million in short-term investments. Net cash provided by financing activities for the quarter ended March 31, 2005 totaled $38.9 million, reflecting primarily the net proceeds of $39.5 million from the

 

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sale of common stock offset by $603,000 in principal payments on the debt.

 

Funding Requirements

 

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

 

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

 

rate of progress toward obtaining regulatory approval for our product candidates;

 

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

 

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

 

effects of competing technological and market developments;

 

the cost of expansion of our current facility for commercial production or the construction of a large separate commercial-scale production facility; and

 

the success of the commercialization of FavId.

 

Until we can generate significant cash from our operations, we expect to continue to fund our operations with existing cash resources that were primarily generated from the proceeds of offerings of our equity securities and from equipment and leasehold improvement debt financing. In addition, we may finance future cash needs through the sale of other equity securities, strategic collaboration agreements and debt financing. However, we may not be successful in obtaining collaboration agreements, or in receiving milestone or royalty payments under those agreements. In addition, we cannot be sure that our existing cash and cash equivalents will be adequate or that additional financing will be available when needed or that, if available, financing will be obtained on terms favorable to us or our stockholders. Having insufficient funds may require us to delay, scale back or eliminate some or all of our research or development programs or to relinquish greater or all rights to product candidates at an earlier stage of development or on less favorable terms than we would otherwise choose. Failure to obtain adequate financing may also adversely affect our ability to operate as a going concern. If we raise additional funds by issuing equity securities, substantial dilution to existing stockholders would likely result. If we raise additional funds by incurring debt financing, the terms of the debt may involve significant cash payment obligations as well as covenants and specific financial ratios that may restrict our ability to operate our business.

 

As of March 31, 2005, we do not believe that we have invested in any variable interest entities. We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do not engage in trading activities involving non-exchange traded contracts. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships.

 

Factors that May Affect Future Operating Results

 

You should consider carefully the risk factors described below, together with the other information

 

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contained in this report. If any of the following risks actually occur, our business, financial condition, results of operations and future growth prospects would likely be materially and adversely affected. In these circumstances, the market price of our common stock could decline, and you may lose all or part of your investment in our common stock.

 

Risks Related to the Development of Our Product Candidates

 

We are dependent on the success of our lead product candidate, FavId, and we cannot be certain that it will be commercialized.

 

We have expended significant time, money and effort in the development of our lead product candidate, FavId, which is still in clinical development, has not yet received regulatory approval and may never be commercialized. In order to commercialize FavId, we will need to demonstrate to the FDA and other regulatory agencies that it satisfies rigorous standards of safety and effectiveness. We initiated a pivotal Phase 3 clinical trial of FavId following Rituxan for the treatment of follicular B-cell NHL in July 2004.

 

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 the treatment of indolent B-cell NHL or the other indications we are exploring, our ability to successfully commercialize FavId could be jeopardized by the emergence of a competitive product that exhibits greater efficacy, longer duration of response or other benefits. In addition, because our initial regulatory and marketing strategy contemplates the administration of FavId to patients following treatment with Rituxan, the commercial opportunity for FavId may be limited by the degree to which oncologists continue to use Rituxan to treat indolent B-cell NHL. Furthermore, to the extent FavId fails to gain market acceptance for its initial indication, it may be more difficult for us to generate sufficient credibility with physicians and patients to commercialize FavId for other indications.

 

Other than FavId, we have only two other product development programs, which are at significantly earlier stages of development. We plan to initiate a Phase 1/2 clinical trial evaluating the safety and preliminary efficacy of a product candidate, FAV-201, from one of these programs in patients with T-cell lymphoma in the second half of 2005. During the second quarter of 2005, we intend to initiate preclinical studies to assess the applicability of our technology to autoimmune diseases, with an initial focus on multiple sclerosis. We cannot be certain that we will be able to successfully develop any product candidate from these development programs. We cannot be certain that the clinical development of FavId or any other product candidate in preclinical testing or clinical trials will be successful, that it will receive the regulatory approvals required to commercialize it, or that any of our other research programs will yield a product candidate suitable for entry into clinical trials. If we are unable to commercialize FavId or our other product candidates, we may be unable to generate sufficient revenues to attain or maintain profitability, our ability to raise additional capital will be impaired and our stock price may be negatively affected.

 

Failure to obtain product approvals by the FDA could harm our business.

 

We are subject to rigorous and extensive regulation by the FDA. In the United States, our biologic product candidates, currently in the preclinical and clinical stages of development, cannot be marketed until they are approved by the FDA. Obtaining FDA approval involves the submission of the results of preclinical studies and clinical trials, among other information, of the product candidates. We may not be able to obtain FDA approval, and, even if we are able to do so, the approval process typically takes many years and requires the commitment 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 product candidate is sufficiently safe or effective;

 

FDA officials may interpret data from preclinical testing and clinical trials differently than we do; and

 

the FDA may not find our manufacturing processes or facilities satisfactory.

 

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In addition, the specific active immunotherapy technology on which FavId is based is a relatively new form of cancer therapy that presents novel issues for the FDA to consider, which may make the regulatory process especially difficult.

 

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

 

warning letters;

 

fines and other civil penalties;

 

unanticipated expenditures;

 

delays in approving or refusal to approve a product candidate;

 

product recall or seizure;

 

interruption of production;

 

operating restrictions;

 

injunctions; and

 

criminal prosecution.

 

Before we can seek regulatory approval of any of our product candidates, we must successfully complete clinical trials, which are uncertain.

 

Conducting clinical trials is a lengthy, time-consuming and expensive process, and the results of these trials are inherently uncertain. We have completed enrollment of patients in several Phase 2 clinical trials of FavId involving over 120 indolent B-cell NHL patients and are currently conducting follow-up evaluation of those patients. We initiated a pivotal Phase 3 clinical trial of FavId for the treatment of follicular B-cell NHL in July 2004. We estimate an 18-month patient enrollment period and an additional 18-month evaluation period for our pivotal Phase 3 clinical trial for FavId. Five additional Phase 2 clinical trials of FavId are either ongoing or expected to begin during 2005. One of these clinical trials will be conducted under a separate physician-sponsored IND in the United States. A second of these will be conducted as a physician-sponsored clinical trial in Switzerland. Sponsorship for a physician-sponsored IND of an ongoing Phase 2 clinical trial was assumed in August 2004. We are also developing FAV-201 for the treatment of T-cell lymphoma and expect to initiate a Phase 1/2 clinical trial evaluating the safety and preliminary efficacy of FAV-201 in the second half of 2005.

 

We have received a Special Protocol Assessment, or SPA, from the FDA for our recently-initiated Phase 3 clinical trial. In the SPA process, the FDA reviewed the design, size and planned analysis of our Phase 3 clinical trial and provided comments regarding the trial’s adequacy to form a basis with respect to effectiveness for approval of a Biologics Licensing Application, or BLA, if the trial meets its predetermined objectives. The FDA’s written agreement is binding, except in limited circumstances, such as when a substantial scientific issue essential to determining the safety or effectiveness of a product

 

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candidate is identified after the Phase 3 clinical trial is commenced. We have proposed a modification to the SPA which requires prior FDA approval before we can implement it.  In addition, despite having received an SPA, we may be required to conduct an additional Phase 3 clinical trial of FavId for the treatment of indolent B-cell NHL before we can apply for regulatory approval. Although the FDA typically requires successful results in two Phase 3 clinical trials to support marketing approval, the FDA has, on several occasions, approved products based on a single Phase 3 clinical trial that demonstrates a high level of statistical significance where there is an unmet need for a life-threatening condition. We currently plan to seek FDA approval of FavId based on our recently-initiated Phase 3 clinical trial alone. In the event that the FDA requires the results of a second Phase 3 clinical trial before accepting a BLA or before granting marketing approval of FavId, our launch of FavId would be delayed, possibly by several years, and we would incur significant costs in conducting the additional trial.

 

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

 

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

 

inability to manufacture sufficient quantities of the product candidate for use in clinical trials;

 

delay or failure in obtaining approval of our clinical trial protocols from the FDA;

 

slower than expected rate of patient recruitment and enrollment;

 

inability to adequately follow and monitor patients after treatment;

 

difficulty in managing multiple clinical sites;

 

unforeseen safety issues; and

 

government or regulatory delays.

 

Even if we achieve positive interim results in clinical trials, these results do not necessarily predict final results, and positive results in early trials may not be indicative of success in later trials. A number of companies in the pharmaceutical industry have suffered significant setbacks in advanced clinical trials, even after promising results in earlier trials. Negative or inconclusive results or adverse medical events during a clinical trial could cause us to repeat or terminate a clinical trial or require us to conduct additional trials. Our clinical trials may be suspended at any time for a variety of reasons, including if the FDA or we believe the patients participating in our trials are exposed to unacceptable health risks or if the FDA finds deficiencies in the conduct of these trials.

 

Failures or perceived failures in our clinical trials will directly delay our product development and regulatory approval process, damage our business prospects, make it difficult for us to establish collaboration and partnership relationships, and negatively affect our reputation and competitive position in the pharmaceutical community.

 

Failure to enroll patients in our clinical trials may cause delays in developing FavId or any other product candidate.

 

We may encounter delays in development and commercialization, or fail to obtain marketing approval, of FavId or any other product candidate that we may develop if we are unable to enroll enough patients to complete clinical trials. Our ability to enroll sufficient numbers of patients in our clinical trials depends on many factors, including the size of the patient population, the nature of the protocol, the proximity of patients to clinical sites, the eligibility criteria for the trial and competing clinical trials. We have from time

 

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to time experienced slower-than-expected patient enrollment in our clinical trials. Delays in planned patient enrollment may result in increased costs and harm our ability to complete our clinical trials and obtain regulatory approval.

 

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

 

Administration of FavId requires an adjuvant to enhance the immune response. An adjuvant is a substance that is used to enhance the immune response. We use a white blood cell growth factor known as GM-CSF, which is commercially available solely from Berlex Laboratories, Inc., as an adjuvant for FavId. We currently rely on purchase orders to purchase GM-CSF for use in our clinical trials and do not have a supply agreement with Berlex. GM-CSF is an FDA-approved and commercially available drug that may be purchased by physicians. Our current strategy for the initial commercialization of FavId involves the administration of FavId following treatment with Rituxan. Rituxan is a passive immunotherapy for patients with NHL, which is also FDA-approved and is commercially available solely from Genentech, Inc. and Biogen Idec Inc. We currently rely on physicians to order and administer Rituxan to patients prior to the administration of FavId in our registration trial. If GM-CSF or Rituxan were to become unavailable as a result of regulatory actions, supply constraints or other reasons, our ability to continue the clinical development of FavId would be jeopardized.

 

Risks Related to Our Financial Results and Need for Financing

 

We have incurred significant operating losses since inception and anticipate that we will continue to incur substantial losses and negative cash flow from operations for the foreseeable future.

 

We are a development stage company with a limited operating history. We have financed our operations through private placements of preferred stock, an initial public offering of our common stock, and equipment and leasehold debt financing. We have incurred losses in each year since our inception in 2000. Net losses were $8.4 million for the three months ended March 31, 2005, $5.2 million for the three months ended March 31, 2004, $26.0 million for the year ended December 31, 2004, $13.3 million in 2003, $7.2 million in 2002, $3.8 million in 2001 and $1.0 million in 2000. As of March 31, 2005, we had an accumulated deficit of $87.9 million. These losses, among other things, have had and will continue to have an adverse effect on our stockholders’ equity and working capital. We expect to incur substantial operating losses for at least the next several years. This is due primarily to the expansion of our clinical trials and research and development programs and, to a lesser extent, general and administrative expenses. We also have substantial lease and debt obligations related to our new manufacturing and headquarters facilities impacting our operating expenses. We expect that our losses will fluctuate from quarter to quarter and that these fluctuations may be substantial. We cannot guarantee that we will successfully develop, manufacture, commercialize or market any products. As a result, we cannot guarantee that we will ever achieve or sustain product revenues or profitability.

 

We currently have no source of revenue and may never become profitable.

 

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

 

successfully complete clinical trials for FavId;

 

obtain regulatory approval for FavId, including regulatory approval for our commercial scale manufacturing facility and process;

 

manufacture commercial quantities of FavId at acceptable cost levels; and

 

successfully market and sell FavId.

 

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We do not anticipate that we will generate revenues until 2008, at the earliest. Further, we do not expect to achieve profitability for at least several years after generating material revenues. If we are unable to generate revenue, we will not become profitable, and we may be unable to continue our operations.

 

We will need substantial additional funds to continue operations, which we may not be able to raise on favorable terms, or at all.

 

We will need substantial additional funds for existing and planned preclinical studies and clinical trials, to continue research and development activities, for lease and debt obligations related to our manufacturing and headquarter facilities, and to establish manufacturing and marketing capabilities for any products we may develop. In addition, because we do not expect to generate revenues from the sale of our product candidates for several years, or at all, we will also need to raise additional capital to fund our operations.

 

We believe that our existing cash and cash equivalents, together with interest thereon, will be sufficient to meet our projected operating requirements through fiscal 2006. We will need to raise additional funds in order to commercialize FavId, including the completion of the construction and qualification of a commercial scale manufacturing facility. Our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement and involves risks and uncertainties, and actual results could vary as a result of a number of factors, including the factors discussed elsewhere in this “Factors that May Affect Future Operating Results” section of this report. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect.

 

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

 

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

 

rate of progress toward obtaining regulatory approval for our product candidates;

 

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

 

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

 

effects of competing technological and market developments;.

 

the cost of expansion of our current facility for commercial production or the construction of a large separate commercial-scale production facility; and

 

the success of the commercialization of FavId.

 

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

 

We may seek to access the public or private equity markets whenever conditions are favorable, even if we do not have an immediate need for additional capital at that time. Additional funding may not be available to us, and, if available, may not be on acceptable terms. If we raise additional funds by issuing equity securities, stockholders will incur immediate dilution. If adequate funds are not available to us, we may be required to delay, reduce the scope of, or eliminate one or more of our research, development and clinical activities. Alternatively, we may need to seek funds through arrangements with collaborative partners or others that require us to relinquish rights to technologies or product candidates that we would otherwise

 

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seek to develop or commercialize ourselves. Any of these events could have a material adverse effect on our business, results of operations, financial condition or cash flow.

 

We are recording non-cash compensation expense that may result in an increase of our net losses for a given period.

 

Stock-based compensation represents an expense associated with the recognition of the difference between the deemed fair value of common stock at the time of an option grant or stock issuance and the option exercise price or price paid for the stock. Stock-based compensation is amortized over the vesting period of the option or issuance. As of March 31, 2005, deferred stock-based compensation related to option grants to our employees and non-employee directors totaled $7.9 million, which is being amortized to expense on a straight-line basis as the options or stock are earned, generally over a period of four years. Options granted to consultants, if any, for compensation purposes, must be remeasured at each reporting date during the vesting period. The remeasurement and the corresponding effect on the related expense may result in an increase in net losses for a given period.

 

Other Risks Related to Our Business and Industry

 

We currently depend on single source suppliers for critical raw materials for manufacturing. The loss of these suppliers could delay our clinical trials or prevent or delay commercialization of FavId.

 

We currently depend on single source suppliers for critical raw materials used in the manufacture of FavId. In particular, our manufacturing process for FavId requires a foreign protein derived from shellfish that is known as keyhole limpet hemocyanin, or KLH. We purchase KLH from biosyn Arzneimittel GmbH, or biosyn, which is currently the only supplier of KLH that has submitted the required filing, known as a drug master file, with the FDA. In November 2004, we entered into an eight-year supply and license agreement with biosyn under which biosyn has agreed to supply us with KLH and we have committed to minimum initial and annual KLH purchase requirements. We made a $50,000 initial payment to biosyn under the agreement and we committed to purchase $235,000 of raw material through May 2005. An additional aggregate of up to $300,000 will be due upon the achievement of certain milestones, the timing of which are not known at this time. Either party may terminate the supply agreement upon a breach by the other party that is not cured within 60 days or other events relating to insolvency or bankruptcy. If we identify another supplier of KLH of suitable quality for our purposes, we will not be able to use the supplier as a second source of KLH for the commercial manufacture of FavId unless the KLH is tested to be comparable to the existing KLH.

 

In addition, we depend on a single source supplier for the cell growth media we use to produce FavId. We purchase this material from Expression Systems LLC, which in turn obtains several of the components used in the cell growth media from sole suppliers. We currently rely on purchase orders to obtain this material and do not have a supply agreement with Expression Systems. We intend to qualify a second source for the cell growth media but may not be able to do so.

 

Establishing additional or replacement suppliers for these materials may take a substantial amount of time. In addition, we may have difficulty obtaining similar materials from other suppliers that are acceptable to the FDA. If we have to switch to a replacement supplier, we may face additional regulatory delays and the manufacture and delivery of FavId, or any other product candidates that we may develop, could be interrupted for an extended period of time, which may delay completion of our clinical trials or commercialization. If we are unable to obtain adequate amounts of these materials, our clinical trials will be delayed. In addition, we will be required to obtain regulatory clearance from the FDA to use different materials that may not be as safe or as effective. As a result, regulatory approval of FavId, or any other product candidates that we may develop, may not be received at all.

 

We rely on third parties to conduct our clinical trials. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, we may be delayed or may not be able to obtain regulatory approval for or commercialize FavId or any other product candidates that we may develop.

 

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We expect our pivotal Phase 3 clinical trial of FavId for the treatment of follicular B-cell NHL to be conducted at 65 or more sites in the United States and to require at least 342 evaluable patients. We expect that at least three clinical trials of FavId will be conducted under the direction of a physician sponsor, rather than under our supervision. We do not have the ability to independently conduct clinical trials for FavId, or any other product candidate that we may develop, and we must rely on third parties, such as medical institutions and clinical investigators, including physician sponsors, to conduct our clinical trials. In particular, we will rely on these parties to recruit and enroll patients in our clinical trials. We also rely on third-party couriers to transport patient tissue samples and FavId. If any of the third parties upon whom we rely to conduct our clinical trials or transport patient tissue samples and immunotherapies do not comply with applicable laws, successfully carry out their obligations or meet expected deadlines, and need to be replaced, our clinical trials may be extended, delayed or terminated.

 

If the quality or accuracy of the clinical data obtained by medical institutions and clinical investigators, including physician sponsors, is compromised due to their failure to adhere to applicable laws, our clinical protocols or for other reasons, we may not be able to obtain regulatory approval for or successfully commercialize FavId, or any other product candidates that we may develop. If any of our relationships with any of these organizations or individuals terminates, we believe that we would be able to enter into arrangements with alternative third parties. However, replacing any of these third parties would delay our clinical trials and could jeopardize our ability to commercialize FavId and our other product candidates on a timely basis, or at all.

 

Even if we obtain regulatory approval, we will continue to be subject to extensive government regulation that may cause us to delay the introduction of our products or withdraw our products from the market.

 

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

 

Before we can obtain marketing approval for or commercially distribute FavId, we must have a commercial-scale facility for the manufacture of FavId.  In addition, the FDA and the California Department of Health Services must find our manufacturing facility and process satisfactory.

 

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

 

We manufacture FavId for our recently-initiated Phase 3 and for the planned and ongoing Phase 1/2 clinical trials at our facility in San Diego. We currently lease approximately 63,000 square feet of space in one facility in San Diego, California under long-term lease agreements.  This space is used for our corporate headquarters and manufacturing and laboratory facilities.  Our manufacturing facility consists of approximately 26,000 square feet of space in the facility. Our manufacturing facility is subject to the licensing requirements of the California Department of Health Services. Our facility was inspected and licensed by the California Department of Health Services. Our facility is subject to re-inspection at any time. Failure to

 

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maintain a license from the California Department of Health Services or to meet the inspection criteria of the California Department of Health Services would disrupt our manufacturing processes and prevent us from supplying FavId to patients. If an inspection by the California Department of Health Services indicates that there are deficiencies in our manufacturing process, we could be required to take remedial actions at potentially significant expense, and our facility may be temporarily or permanently closed.

 

We will need to either expand and qualify our current facility or construct and qualify a commercial scale manufacturing facility in order to commercialize FavId or any other product candidates that we may develop. We have an option to lease the remaining 17,000 square feet of available space in the same facility. We believe the expanded facility could be used to manufacture FavId for initial commercial launch. We are currently exploring expansion into the additional space and increase our manufacturing capacity to meet initial commercial requirements for FavId if it is approved. We cannot be assured that we would be able to meet commercial demand for FavId in this facility.  Additionally, we may require a larger production facility to meet the demand for FavId if it is approved.  We would need to raise additional debt or equity capital to finance either facility.  Such financing may not be available or, if available, may not be obtained on terms favorable to us or our stockholders.

 

Preparing a facility for commercial manufacturing may involve unanticipated delays and the costs of complying with FDA regulations may be significant. In addition, any material changes we make to the manufacturing process after approval may require approval by the FDA and state regulatory authorities. Obtaining these approvals is a lengthy, involved process, and we may experience delays that could limit our ability to manufacture commercial quantities, increase our costs and adversely affect our business.

 

We may experience difficulties in manufacturing FavId or any other product candidates that we may develop, which could prevent us from completing our ongoing clinical trials and commercializing these product candidates.

 

Manufacturing FavId is a complex, multi-step process that requires us to expend significant time, money and effort in production, record keeping and quality systems to assure that FavId will meet product specifications and other regulatory requirements. To date, we have manufactured FavId only for use in Phase 2 clinical trials and have no experience in manufacturing FavId for the number of patients that we expect to enroll in our Phase 3 clinical trial or for the commercial quantities that might be required if we receive regulatory approval. In particular, we cannot be sure that we will be able to manufacture FavId at a cost that would enable commercial use. We may experience any of the following problems in our efforts to manufacture our product candidates for our expanding clinical trials or on a commercial scale:

 

failure to obtain a sufficient supply of key raw materials;

 

difficulties in completing the development and validation of the specialized assays required to ensure the consistency of our product candidates, including FavId;

 

difficulties in obtaining adequate tumor samples from treating physicians and hospitals;

 

difficulties in manufacturing FavId for multiple patients simultaneously;

 

difficulties in the timely shipping of tumor samples to us or in the shipping of FavId to the treating physicians due to errors by third-party couriers, transportation restrictions or other reasons;

 

failure to ensure adequate quality control and assurance in the manufacturing process as we increase the production quantities of FavId;

 

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difficulties in establishing and effectively managing a commercial-scale manufacturing facility;

 

failure to comply with regulatory requirements, such as FDA regulations and environmental laws;

 

significant changes in regulatory requirements;

 

damage to or destruction of our manufacturing facility or equipment; and

 

shortages of qualified personnel.

 

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

 

If our manufacturing facility is damaged or destroyed, our ability to manufacture products will be significantly affected, which could delay or prevent completion of our clinical trials and commercialization of FavId or any other product candidates that we may develop.

 

We currently rely on the availability and condition of our manufacturing facility in San Diego to manufacture FavId. We lease the property where this facility is located under a lease agreement that expires August 31, 2018, 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. If the facility or our equipment in the facility is damaged or destroyed, we will not be able to quickly or inexpensively replace our manufacturing capacity. This would significantly affect our ability to complete clinical trials of, and to manufacture and commercialize, FavId, or any other product candidates that we may develop.

 

In addition, our facilities have been subject to electrical blackouts as a result of a shortage of available electrical power. Although we have back-up emergency power generators to cover energy needs for key support systems, a lengthy outage could disrupt the operations of our facilities and clinical trials. While we carry business interruption insurance, this insurance may not be adequate. Any significant business interruption could cause delays in our product development and harm our business.

 

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

 

We plan to retain exclusive worldwide rights to FavId for oncology indications at least through the completion of our BLA filing with the FDA for approval to market FavId in the United States. If we are successful in obtaining BLA approval or foreign marketing approval for FavId, we will need to establish sales and marketing capabilities. In the United States, we plan to do this either by establishing our own sales force or by entering into a co-promotion arrangement with a sales and distribution partner. Outside of the United States, we plan to establish strategic collaborations for the development and marketing of FavId.

 

We do not presently possess the resources or experience necessary to market FavId or our other product candidates ourselves, and we currently have no arrangements for the promotion or distribution of our product candidates. Our future commercial success will depend on our ability to establish our own sales and marketing infrastructure or to collaborate with third parties that have greater sales and marketing experience and resources. Developing effective internal sales and marketing capabilities, which would include the hiring of a sales force, would require a significant amount of our financial resources and time.

 

We may be unable to establish and manage an effective sales force in a timely or cost-effective manner, or

 

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at all, and any sales force we do establish may not be capable of generating demand for FavId or any other product candidate we may develop. In addition, if we cannot enter into co-promotion arrangements in the United States, or other strategic collaborations for the development and marketing of FavId in other countries, in a timely manner and on acceptable terms, we may not be able to successfully commercialize FavId or any other product candidate that we may develop.

 

To the extent that we enter into arrangements with third parties to perform sales, marketing and distribution services, our product revenues are likely to be lower than if we directly marketed and sold FavId, or any other product candidates that we may develop. If we are unable to establish adequate sales, 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 use any of our products that may be approved, our ability to generate revenue in the future will be limited.

 

If approved, FavId and other product candidates that we may develop may not gain market acceptance among physicians, healthcare payors, patients and the medical community. Demand for any approved product that we may develop will depend on many factors, including:

 

our ability to provide acceptable evidence of safety and efficacy;

 

convenience and ease of administration;

 

availability of alternative treatments;

 

cost effectiveness;

 

continuing widespread use of Rituxan to treat our initial target disease market;

 

effectiveness of our regulatory and marketing strategies;

 

prevalence and severity of adverse side effects;

 

publicity concerning our products or competitive products; and

 

our ability to obtain third-party coverage or reimbursement.

 

Furthermore, to the extent FavId fails to gain market acceptance for its initial indication, it may be more difficult for us to generate sufficient credibility with physicians and patients to commercialize FavId for other indications.

 

If we are unable to obtain acceptable prices or adequate coverage and reimbursement from third-party payors for FavId, or any other product candidates that we may develop, our revenues and prospects for profitability will suffer.

 

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

 

governmental payors, such as Medicare and Medicaid;

 

private health insurers, including managed care organizations; and

 

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other third-party payors.

 

Many patients will not be capable of paying for FavId, or any other product candidates that we may develop, themselves and will rely on third-party payors to pay for their medical needs. The federal and state governments, insurance companies, managed care organizations and other third-party payors are actively seeking to contain or reduce costs of health care in the United States and exert increasing influence on decisions regarding the use of, and reimbursement levels for, particular treatments. Such third-party payors, including Medicare, are scrutinizing newly approved medical products and services and may not cover or may limit coverage and reimbursement for our product candidates. In particular, third-party payors may limit the indications for which they will reimburse patients who use FavId, or any other product candidates that we may develop. Cost-control initiatives could cause us to decrease the price we might establish for FavId, or any other product candidates 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 provide adequate coverage and reimbursement levels for FavId, or any other product candidates that we may develop, our revenue and prospects for profitability will suffer.

 

If we are unable to establish or manage strategic collaborations in the future, our revenue and product development may be limited.

 

Our strategy may include reliance on strategic collaborations for co-promotion of FavId in the United States. In addition, we expect to rely on strategic collaborators for commercialization of FavId outside of the United States and, to an even greater extent, for worldwide development and commercialization of product candidates and programs for chronic autoimmune diseases, such as multiple sclerosis. To date, we have not entered into any agreements with third parties for any of these services and do not plan to establish a collaboration for FavId until at least completion of a BLA filing.

 

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

 

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

 

significant time and effort from our management team;

 

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

 

effective allocation of our resources to multiple projects.

 

If we enter into development or commercialization collaborations, our success will in part depend on the performance of our corporate collaborators. We will not directly control the amount or timing of resources devoted by our corporate collaborators to activities related to our product candidates. Our corporate collaborators may not commit sufficient resources to our research and development programs or the commercialization, marketing or distribution of our product candidates. If any corporate collaborator fails to commit sufficient resources, our preclinical or clinical development related to the collaboration could be delayed or terminated. Also, our collaborators may pursue development or commercialization of other products, product candidates or alternative technologies in preference to our product candidates. Finally, our collaborators may terminate our relationships, and we may be unable to establish additional corporate collaborations in the future on acceptable terms, or at all.

 

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

 

Our strategy is focused on the research, development and commercialization of targeted immunotherapies for the treatment of cancer and other diseases of the immune system. The process of successfully developing product candidates is very time-consuming, expensive and unpredictable. We have only recently begun to direct significant effort toward the development of product candidates in addition to FavId, such as FAV-201 for T-cell lymphoma and a preclinical product candidate for the treatment of multiple sclerosis. We do not know whether our planned preclinical studies or clinical trials for these other product candidates will begin on time or be completed on schedule, or at all. In addition, we do not know whether these clinical trials will result in marketable products. Typically, there is a high rate of attrition for product candidates in preclinical and clinical trials. We do not anticipate that any of our product candidates will reach the market for at least several years.

 

We may not identify, develop or commercialize any additional new product candidates from our proprietary active immunotherapy technology. Our ability to develop successfully any of these product candidates depends on our ability to demonstrate safety and efficacy in humans through extensive preclinical testing and clinical trials and to obtain regulatory approval from the FDA and other regulatory authorities. Development of our product candidates will also depend substantially upon the availability of funding for our research and development programs.

 

If our competitors develop and market products that are more effective than our existing product candidates or others we may develop, or obtain marketing approval before we do, our commercial opportunity may be reduced or eliminated.

 

The development and commercialization of new pharmaceutical products for the treatment of cancer and autoimmune diseases is competitive, and we will face competition from numerous sources, including major pharmaceutical companies, specialty pharmaceutical companies and biotechnology companies worldwide. Many of our competitors have substantially greater financial and technical resources and development, production and marketing capabilities than we do. In addition, many of these companies have more experience than we do in preclinical testing, clinical trials and manufacturing of biologic therapeutics, as well as in obtaining FDA and foreign regulatory approvals. We will also compete with academic institutions, governmental agencies and private organizations that are conducting research in the fields of cancer and autoimmune disease. Competition among these entities to recruit and retain highly qualified scientific, technical and professional personnel and consultants is also intense.

 

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

 

Several companies are engaged in the development and commercialization of passive immunotherapy products for the treatment of B-cell NHL that may compete with FavId. Genentech and Biogen Idec are co-marketing Rituxan for the treatment of relapsed or refractory, indolent B-cell NHL. Biogen Idec has also received FDA approval to market Zevalin, its passive radioimmunotherapy product. GlaxoSmithKline plc and Corixa Corporation have received FDA approval to market Bexxar, a passive radioimmunotherapy product.

 

The most recent advances in the treatment of B-cell NHL have involved the combination of existing products and changes to approved schedules and doses, particularly for Rituxan. Numerous clinical trials reported in recent years have indicated that additional doses of Rituxan and maintenance dosing of Rituxan can improve the time to disease progression (“TTP”) in patients who respond to therapy. Combination therapies involving chemotherapeutic or immunostimulatory drugs in combination with Rituxan at various doses and schedules may provide patients with an increase in TTP over that expected with Rituxan alone. Accordingly, we may

 

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face competition as a result of developments in this area.

 

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

 

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

 

reliably and cost-effectively manufacture sufficient quantities of our products;

 

maintain a proprietary position for our manufacturing process and other technology;

 

price our products competitively;

 

obtain appropriate reimbursement approvals for our products;

 

establish an adequate sales and marketing force for our products; and

 

attract and retain key personnel.

 

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

 

We are subject to new legislation, regulatory proposals and managed care initiatives that may increase our costs of compliance and adversely affect our ability to market our products, obtain collaborators and raise capital.

 

There have been a number of legislative and regulatory proposals aimed at changing the healthcare system and pharmaceutical industry, including reductions in the cost of prescription products and changes in the levels at which consumers and healthcare providers are reimbursed for purchases of pharmaceutical products. For example, the Prescription Drug and Medicare Improvement Act of 2003 was recently enacted. This legislation provides a new Medicare prescription drug benefit beginning in 2006 and mandates other reforms. Although we cannot predict the full effects on our business of the implementation of this new legislation, it is possible that the new benefit, which will be managed by private health insurers, pharmacy benefit managers and other managed care organizations, will result in decreased reimbursement for prescription drugs, which may further exacerbate industry-wide pressure to reduce the prices charged for prescription drugs. This could harm our ability to market our products and generate revenues.

 

We depend on attracting and retaining key scientific and management personnel to advance our technology, and the loss of these personnel could impair the development of our products.

 

Our success depends on our continued ability to attract, retain and motivate highly qualified management, clinical and scientific personnel and on our ability to develop and maintain important relationships with leading academic institutions, clinicians and scientists. We are highly dependent upon our 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 services of Dr. Longenecker or Dr. Gold, or one or more of our other members of senior management, could delay or prevent the successful completion of our pivotal Phase 3 clinical trial or the commercialization of FavId. Although we have employment agreements with each of our executives, their employment with us is “at will,” and each executive can terminate his or her agreement with us at any time. We do not carry “key person” insurance covering members of senior management, other than Drs. Longenecker and Gold. This insurance may not continue to be available on commercially reasonable terms and may prove inadequate to compensate us for the loss of their services.

 

The competition for qualified personnel in the biotechnology field is intense. In particular, our

 

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manufacturing process depends on our ability to attract and retain qualified manufacturing and quality control personnel. We will need to hire additional personnel as we continue to expand our manufacturing, research and development activities. We may not be able to attract and retain quality personnel on acceptable terms given the competition for such personnel among biotechnology, pharmaceutical and other companies. We are not aware of any key personnel planning to retire or terminate their employment in the near future.

 

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

 

As of March 31, 2005, we had 114 full-time equivalent employees. Of these, 99 employees were in research and development comprised of 67 in manufacturing, quality control and quality assurance, 27 in research and process development, and five members of senior management.  Of the remaining employees, two were members of senior management and 13 were in administration. We will need to expand our financial, managerial, operational and other resources in order to continue our clinical trials and commercialize FavId, FAV-201, or any other product candidates that we may develop. Future growth will impose significant added responsibilities on our management team, including the need to identify, recruit, maintain and integrate additional employees. Our ability to commercialize FavId, FAV-201, or any other product candidates that we may develop, and our future financial performance in general, will depend in part on our ability to manage any future growth effectively. In order to meet these challenges, we will need to:

 

manage our clinical trials effectively;

 

manage our research and development efforts effectively;

 

develop our administrative, accounting and management information systems and controls; and

 

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

 

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

 

If we use biological and hazardous materials in a manner that causes injury or violates laws, we may be liable for damages.

 

Our research and development and manufacturing activities involve the use of biological and hazardous materials that could be dangerous to human health, safety or the environment. Although we believe our safety procedures for handling and disposing of these materials comply with federal, state and local laws and regulations, we cannot entirely eliminate the risk of accidental injury or contamination from the use, storage, handling or disposal of these materials. In the event of contamination or injury, we could be held liable for any resulting damages, and any liability could exceed our resources. We currently maintain property and casualty insurance coverage in the amount of $1.0 million per occurrence and $2.0 million in the aggregate, which covers liability for hazardous and controlled materials, at a cost of approximately $57,000 per year. However, this insurance coverage may not be sufficient to cover our liability and we may not be able to obtain sufficient coverage in the future at a reasonable cost. In addition, we may incur significant costs complying with both existing and future environmental laws and regulations. In particular, we are subject to regulation by the Occupational Safety and Health Administration, or OSHA, and the Environmental Protection Agency, or EPA, and to regulation under the Toxic Substances Control Act and the Resource Conservation and Recovery Act. OSHA, the EPA or other agencies may adopt regulations that adversely affect our research and development programs.

 

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

 

Our business exposes us to potential liability risks that may arise from the clinical testing of our product

 

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candidates and the manufacture and sale of any approved products. These risks will exist even with respect to those product candidates that are approved for commercial sale by the FDA and manufactured in facilities regulated by the FDA. Any product liability claim or series of claims brought against us could significantly harm our business by, among other things, reducing demand for our products, injuring our reputation and creating significant adverse media attention and costly litigation. Plaintiffs have received substantial damage awards in some jurisdictions against pharmaceutical companies based upon claims for injuries allegedly caused by the use of their products. Any judgment against us that is in excess of our insurance policy limits would have to be paid from our cash reserves, which would reduce our capital resources. We currently maintain clinical trial insurance in the amount of $6.0 million per occurrence and in the aggregate, which covers liability for up to 251 patients in our clinical trials, at a cost of approximately $59,000 per year. Although we believe this insurance is adequate, we cannot be certain that it will be sufficient. Furthermore, we cannot be certain that our current insurance coverage will continue to be available, or that increased coverage, which will be necessary if we are able to commercialize our products, will be available in the future on reasonable terms, or at all. Further, we may not have sufficient capital resources to pay a judgment, in which case our creditors could levy claims against our assets, including our intellectual property.

 

We could be negatively impacted by future interpretation or implementation of federal and state fraud and abuse laws, including anti-kickback laws and other federal and state anti-referral laws.

 

If we are able to commercialize FavId or any other product candidates that we may develop, we will be subject to various federal and state laws pertaining to healthcare fraud and abuse, including anti-kickback laws and physician self-referral laws. Violations of these laws are punishable by criminal and civil sanctions, including, in some instances, imprisonment and exclusion from participation 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 alter one or more of our practices to be in compliance with these laws. Healthcare fraud and abuse regulations are complex, and even minor, inadvertent irregularities can potentially give rise to claims that a statute or prohibition has been violated. Any violations of these laws, or any action against us for violation of these laws, even if we successfully defend against it, could result in a material adverse effect on our business, financial condition and results of operations. If there is a change in law, regulation or administrative or judicial interpretations, we may have to change our business practices or our existing business practices could be challenged as unlawful, which could have a material adverse effect on our business, financial condition and results of operations. In addition, some allegations under these laws have been claimed to violate the False Claims Act, discussed in more detail below.

 

In addition, if we are able to commercialize FavId or any other product candidates that we may develop, we could become subject to false claims litigation 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 claims statutes include the False Claims Act, which allows any person to bring suit on behalf of the federal government alleging the submission of false or fraudulent claims, or causing to present such false or fraudulent claims, under federal programs or contracts claims or other violations of the statute and to share in any amounts paid by the entity to the government in fines or settlement. These suits against biotechnology companies have increased significantly in recent years and have increased the risk that a healthcare company will have to defend a false claim action, pay fines or be excluded from the Medicare, Medicaid or other federal and state healthcare programs as a result of an investigation arising out of such action. We cannot assure you that we will not become subject to such litigation or, if we are not successful in defending against such actions, that such actions will not have a material adverse effect on our business, financial condition and results of operations. In addition, we cannot assure you that the costs of defending claims or allegations under the False Claims Act will not have a material adverse effect on our business, financial condition and results of operations.

 

Risks Related to Our Intellectual Property and Potential Litigation

 

If we are unable to obtain and maintain protection for our intellectual property, the value of our

 

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technology and products may be adversely affected.

 

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

 

there is no guarantee that any of our pending patent applications will result in issued patents;

 

we may develop additional proprietary technologies that are not patentable;

 

there is no guarantee that any patents issued to us, our collaborators or our licensors will provide a basis for a commercially viable product;

 

there is no guarantee that any patents issued to us or our collaborators or our licensors will provide us with any competitive advantage;

 

there is no guarantee that any patents issued to us or our collaborators or our licensors will not be challenged, circumvented or invalidated by third parties; and

 

there is no guarantee that any patents previously issued to others or issued in the future will not have an adverse effect on our ability to do business.

 

We attempt to protect our intellectual property position by filing United States patent applications related to our proprietary technology, inventions and improvements that are important to the development of our business. Currently we own five pending United States patent applications covering methods of treating immune system diseases, including B-cell and T-cell lymphomas, using our proprietary immunotherapy production methods, as well as methods for combining the idiotype or T-cell receptor-based immunotherapies with other therapies that are used to treat diseases of the immune system.

 

We also have 21 patent applications pending outside of the United States. Limitations on patent protection in some countries outside the United States, and the differences in what constitutes patentable subject matter in these countries, may limit the protection we have under patents issued to us outside of the United States. In addition, laws of foreign countries may not protect our intellectual property to the same extent as would laws of the United States. In determining whether or not to seek a patent or to license any patent in a particular foreign country, we weigh the relevant costs and benefits, and consider, among other things, the market potential of our product candidates in the jurisdiction, and the scope and enforceability of patent protection afforded by the law of the jurisdiction. Failure to obtain adequate patent protection for our proprietary product candidates and technology would impair our ability to be commercially competitive in these markets.

 

Although we believe our patent applications, if they issue as patents, will provide a competitive advantage, we may not be able to develop patentable products or processes, and may not be able to obtain patents from pending applications. Even if patent claims are allowed, the claims may not issue, or in the event of issuance, may not be sufficient to protect our technology. In addition, 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-specific idiotype protein-KLH conjugates, like those we use in our lead product candidate, FavId, for the treatment of indolent B-cell NHL.

 

Certain types of patient-specific idiotype-KLH conjugates, comprising single idiotype proteins, and their use for the treatment of indolent B-cell NHL are in the public domain and therefore cannot be patented. Consequently, we may only be able to seek patent protection for methods of treating immune system diseases, including B-cell and T-cell lymphomas, using our proprietary immunotherapy production methods for making idiotype protein conjugates and compositions comprising such conjugates, as well as methods for combining the idiotype or T-cell receptor-based immunotherapies with other therapies that are used to treat diseases of the immune system. As a result, we may not be able to prevent other companies using different manufacturing processes from developing active immunotherapies that directly compete

 

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with FavId.

 

We may have to engage in costly litigation to enforce our proprietary rights or to defend challenges to our intellectual property by our competitors, which may harm our business, results of operations, financial condition and cash flow.

 

The pharmaceutical field is characterized by a large number of patent filings involving complex legal and factual questions, and, therefore, we cannot predict with certainty whether our patents will be enforceable. Competitors may have filed applications for or have been issued patents and may obtain additional patents and proprietary rights related to products or processes that compete with or are similar to ours. We may not be aware of all of the patents potentially adverse to our interests that may have been issued to others. Litigation may be necessary to protect our patent position, and we cannot be certain that we will have the required resources to pursue litigation or otherwise to protect our patent rights. In addition, our efforts to protect our patents may not be successful.

 

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

 

Our commercial success will depend in part on not infringing the patents or proprietary rights of third parties. We are aware of competing intellectual property relating to active idiotype immunotherapies for cancer. Competitors or third parties may be issued patents that may cover subject matter that we use in developing the technology required to bring our product candidates to market, that we use in producing our product candidates, or that we use in treating patients with our product candidates. In addition, from time to time we receive correspondence inviting us to license patents from third parties. While we currently believe we have freedom to operate in these areas, others may challenge our position in the future. There has been, and we believe that there will continue to be, significant litigation in the pharmaceutical industry regarding patent and other intellectual property rights.

 

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

 

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

 

                                          Genentech and City of Hope National Medical Center hold patent rights related to the expression of recombinant antibodies;

                                          Genitope holds patent rights relating to immunotherapy using idiotype proteins produced using T-lymphoid cells for the treatment of B-Cell lymphoma;

                                          Texas A&M University holds patent rights relating to the production of proteins in insect cells; and

                                          Schering Corp. holds patent rights relating to the use of GM-CSF as a vaccine adjuvant for use against infectious deseases.

 

The first relevant patent listed above was issued to Genentech in 2001. We believe that other companies have negotiated license agreements for this patent. If we decide to attempt to obtain a license for this patent, we cannot guarantee that we would be able to obtain such a license on commercially reasonable terms, or at all.

 

Additionally, because patent prosecution can proceed in secret prior to issuance of a patent, third parties may obtain other patents with claims of unknown scope relating to our product candidates, prior to the issuance of patents, which they could attempt to assert against us. Further, as we develop our products, we may infringe the current patents of third parties or patents that may issue in the future.  Third parties could bring legal actions against us claiming damages and seeking to enjoin clinical testing, manufacturing and marketing of the affected product or products. If we become involved in any litigation, it could consume a substantial portion of our resources, regardless of the outcome of the litigation. If any of these actions are successful, in addition to any potential liability for damages, we could be required to obtain a license to continue to manufacture or market the affected product, in which case we may be required to pay substantial royalties or grant cross-licenses to our patents. However, there can be no assurance that any such license will be available on acceptable terms or at all. To enforce patents issued to us or to determine the scope and validity of other parties’ proprietary rights, we may also become involved in litigation or in interference proceedings declared by the United States Patent and Trademark Office, which could result in substantial costs to us, regardless of the outcome of the litigation, or an adverse decision as to the priority of our inventions. Ultimately, we could be prevented from commercializing a product, or forced to cease some aspect of our business operations, as a result of patent infringement claims, which could harm our business.

 

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

 

We also rely on trade secrets to protect our technology, particularly when we do not believe that patent protection is appropriate or available. However, trade secrets are difficult to protect. We attempt to protect our trade secrets by requiring each of our employees, consultants and advisors to execute a non-disclosure and assignment of invention agreement before beginning his or her employment, consulting or advisory relationship with us. We cannot guarantee that these agreements will provide meaningful protection, that these agreements will not be breached, that we will have an adequate remedy for any such breach, or that our trade secrets will not otherwise become known or independently developed by a third party. Our trade

 

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secrets, or those of our future collaborators, may become known or may be independently discovered by others, which could adversely affect the competitive position of our product candidates.

 

Risks Related to the Securities Markets and Ownership of Our Common Stock

 

There has been no prior public market for our common stock, and the price of our common stock may be volatile and could decline significantly.

 

Until our IPO in February 2005, there was no public market for our common stock, and despite our IPO, an active public market for these shares may not develop or be sustained. Our stock price has traded in the range of $7.50 - $3.46 since the commencement of our IPO on February 2, 2005.

 

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

 

announcements of technological innovations or new products by us or our competitors;

 

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

 

actions taken by regulatory agencies with respect to FavId and FAV-201, or any other product candidates that we may develop, or our clinical trials, manufacturing process or sales and marketing activities;

 

regulatory developments in the United States and foreign countries;

 

success of our research efforts and clinical trials;

 

any intellectual property infringement lawsuit in which we may become involved;

 

announcements concerning our competitors, or the biotechnology or biopharmaceutical industries in general;

 

actual or anticipated fluctuations in our operating results;

 

changes in financial estimates or recommendations by securities analysts;

 

sales of large blocks of our common stock;

 

sales of our common stock by our executive officers, directors and significant stockholders;

 

changes in accounting principles; and

 

loss of any of our key scientific or management personnel.

 

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

 

Concentration of ownership among our existing officers, directors and principal stockholders may

 

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prevent other stockholders from influencing significant corporate decisions and depress our stock price.

 

As of March 31, 2005, our officers, directors and those stockholders owning at least five percent of our outstanding capital stock together beneficially held approximately 71.6% of our outstanding common stock on an as-converted basis. If some or all of these officers, directors and principal stockholders act together, they will be able to exert a significant degree of influence over our management and affairs and over matters requiring stockholder approval, including the election of directors, the merger, consolidation or sale of all or substantially all of our assets, and any other significant corporate transaction. The interests of this concentration of ownership may not always coincide with our interests or the interests of our other stockholders. For instance, officers, directors and principal stockholders, acting together, could cause us to enter into transactions or agreements that we would not otherwise consider. Similarly, this concentration of ownership may have the effect of delaying or preventing a change in control of us otherwise favored by our other stockholders. This concentration of ownership also could depress our stock price.

 

Provisions in our amended and restated certificate of incorporation and amended and restated bylaws and applicable Delaware law may prevent or discourage third parties or our stockholders from attempting to replace our management or influencing significant decisions.

 

Provisions in our amended and restated certificate of incorporation and amended and restated bylaws may have the effect of delaying or preventing a change in control of us or our management, even if doing so would be beneficial to our stockholders. These provisions include:

 

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

 

authorizing our board of directors to issue preferred stock without stockholder approval;

 

prohibiting cumulative voting in the election of directors;

 

prohibiting stockholder actions by written consent;

 

limiting the persons who may call special meetings of stockholders;

 

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

 

requiring advance notice for raising business 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% or more of our common stock for five years unless the holder’s acquisition of our stock was approved in advance by our board of directors. Together, these charter and statutory provisions could make the removal of management more difficult and may discourage transactions that otherwise could involve payment of a premium over prevailing market prices for our common stock.

 

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

 

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

 

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

 

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

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

 

The primary objective of our investment activities is to preserve principal while maximizing income without significantly increasing risk. Some of the securities in which we invest may be subject to market risk. This means that a change in prevailing interest rates may cause the market value of the investment to fluctuate. To minimize this risk, we may maintain our portfolio of cash equivalents and short-term investments in a variety of securities, including commercial paper, money market funds and direct or guaranteed obligations of the United States government. The risk associated with fluctuating interest rates is limited to our investment portfolio and we do not believe that a 1% change in interest rates would have a significant impact on our interest income. As of March 31, 2005, all of our short-term investments were government agency securities and corporate notes and our cash equivalents were held in checking accounts, money market funds and commercial paper.

 

Item 4. Controls and Procedures.

 

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934, as amended, or Exchange Act. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective to cause material information required to be disclosed by the Company in the reports that we file or submit under the Exchange Act to be recorded, processed, summarized and reported within the time periods specified in the Securities and Commission’s rules and forms.

 

During the three months ended March 31, 2005, there were no changes in our internal control over financial reporting which materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II - - OTHER INFORMATION.

 

Item 1.  Legal Proceedings.

 

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

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

Our initial public offering of our common stock, par value $0.001, was effected through a Registration Statement on Form S-1 (File No. 333-114299) that was declared effective by the Securities and Exchange Commission on February 2, 2005.  The Registration Statement covered the offer and sale of up to

 

34



 

6,900,000 shares of our common stock for an aggregate offering price of $48.3 million.  Our initial public offering commenced on February 2, 2005.  On February 7, 2005, 6,000,000 shares of our common stock were sold for an aggregate offering price of $42.0 million.  On March 7, 2005, 285,000 shares of our common stock were sold for an aggregate offering price of $2.0 upon the partial exercise of the underwriters’ over-allotment option.  Our initial public offering terminated following the sale of all of the securities registered on the registration statement and the expiration of the underwriters’ over-allotment option.  Our initial public offering resulted in aggregate proceeds to us of approximately $39.5 million, net of underwriting discounts and commissions of approximately $3.1 million and offering expenses of approximately $1.4 million, through a syndicate of underwriters managed by Bear, Stearns & Co. Inc., CIBC World Markets Corp., Needham & Company, Inc. and A.G. Edwards & Sons, Inc.

 

No offering expenses were paid directly or indirectly to any of our directors or officers (or their associates) or person owning ten percent or more of any class of our equity securities or to any other affiliates.  All offering expenses were paid directly to others.

 

As of March 31, 2005, we had invested the $40.9 million in gross proceeds from the offering, net of underwriting discounts and commissions, in money market funds.  Through March 31, 2005, we had not used any of the net proceeds from our initial public offering.

 

Item 5.         Other Information.

 

At its meeting on March 29, 2005, the Board of Directors of Favrille, Inc. approved the following recommendations of the Compensation Committee of the Board with respect to the compensation of the Company’s named executive officers (as defined in Regulation S-K item 402(a)(3)):

 

Named Executive Officer

 

2005 Annual
Base Salary

 

Shares Underlying 2005
Stock Option Grant

 

John P. Longenecker, Ph.D.
President and Chief Executive Officer

 

$

 369,000

 

168,445

 

Alice M. Wei
Vice President of Regulatory Affairs and Quality

 

$

250,000

 

31,305

 

John F. Bender, Pharm.D.
Vice President of Clinical Research

 

$

250,000

 

31,623

 

Daniel P. Gold, Ph.D.
Chief Scientific Officer

 

$

250,000

 

30,193

 

Richard Murawski
Senior Vice President of Operations

 

$

239,588

 

28,922

 

 

In addition, on March 29, 2005, the Board of Directors granted a stock option to purchase 8,000 shares of the Company’s common stock to each of the non-employee directors. The options will vest in equal installments over 12 months.

 

Item 6.  Exhibits.

 

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

 

Exhibit Number

 

Description of Document

 

 

 

3.1

 

Registrant’s Amended and Restated Certificate of Incorporation.(1)

 

 

 

3.2

 

Registrant’s Amended and Restated Bylaws.(1)

 

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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)

 

 

 

10.1

 

Amended and Restated 2001 Equity Incentive Plan Form of Stock Option Agreement for management.(2)

 

 

 

10.2

 

Amended and Restated 2001 Equity Incentive Plan Form of Stock Option Agreement for non-management.

 

 

 

31.1

 

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

31.2

 

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.1

 

Certification of Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.2

 

Certification of Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 


(1)                Previously 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)                Indicates management contract or compensatory plan.

 

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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 the undersigned thereunto duly authorized.

 

Dated: May 13, 2005

 

 

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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