SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

COMMISSION FILE NUMBER: 000-1029142

DYNAVAX TECHNOLOGIES CORPORATION

717 Potter Street, Suite 100
Berkeley, CA 94710-2722
(Address Of The Registrant’s Principal Executive Offices)

     Registrant’s Telephone Number, Including Area Code: (510) 848-5100

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

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [  ] No [X]

     The number of shares of the Registrant’s Common Stock outstanding as of July 31, 2004 was 24,610,387.

INDEX

DYNAVAX TECHNOLOGIES CORPORATION

PART I. FINANCIAL STATEMENTS

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Dynavax Technologies Corporation

Condensed Consolidated Balance Sheets

(In thousands, except per share amounts)

See accompanying notes.

Dynavax Technologies Corporation

Condensed Consolidated Statements of Operations

(In thousands, except per share amounts)

(Unaudited)

See accompanying notes.

Dynavax Technologies Corporation

Condensed Consolidated Statements Cash Flows

(In thousands)

(Unaudited)

See accompanying notes.

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Dynavax Technologies Corporation

1. Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation

The terms “Dynavax,” the “Company,” “we” and “us” as used in this report refer to Dynavax Technologies Corporation. The accompanying condensed consolidated unaudited balance sheet as of June 30, 2004 and condensed consolidated statements of operations for the three and six month periods ended June 30, 2004 and 2003 have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of the management of the Company, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six month periods ended June 30, 2004 are not necessarily indicative of the results that may be expected for the year ended December 31, 2004 or any other period. The condensed consolidated balance sheet at December 31, 2003 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. These unaudited condensed financial statements and the notes accompanying them should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.

Certain reclassifications of prior year amounts have been made to conform with the current year presentation. Patent legal expenses in the prior year have been reclassified from research and development expenses to general and administrative expenses.

Dynavax Asia

In October 2003, the Company formed Dynavax Asia Pte. Ltd., or Dynavax Asia, a 100% owned Singapore subsidiary, which focuses on the Company’s clinical and preclinical hepatitis B programs. Also in October 2003, the Company completed a sale of 15,200,000 ordinary shares in Dynavax Asia, which reduced the Company’s ownership in Dynavax Asia from 100% to 50%. The Company recorded the sale of the ordinary shares as a minority interest liability in the consolidated financial statements. In February 2004, the ordinary shares of Dynavax Asia were converted into 2,111,111 shares of common stock of the Company and Dynavax Asia became a wholly owned subsidiary. The Company supports the development activities of Dynavax Asia through its U.S. personnel and through limited hiring in Singapore.

Principles of Consolidation

The consolidated financial statements include the accounts of Dynavax and Dynavax Asia, its wholly-owned subsidiary. All significant intercompany accounts and transaction have been eliminated.

Critical Accounting Policies

The Company believes that there have been no significant changes in its critical accounting policies during the six months ended June 30, 2004 as compared with those previously disclosed in its Annual Report on Form 10-K for the year ended December 31, 2003 filed with the SEC on March 30, 2004.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from these estimates.

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Revenue Recognition

The Company recognizes collaboration, upfront and other revenue based on the terms specified in the agreements, generally as work is performed or approximating the straight-line basis over the period of the collaboration. Any amounts received in advance of performance are recorded as deferred revenue. Revenue from milestones with substantive performance risk is recognized upon achievement of the milestone. All revenues recognized to date under these collaborations and milestones are nonrefundable.

Revenues related to government grants are recognized as the related research expenses are incurred. Any amounts received in advance of performance are recorded as deferred revenue until earned.

Payments by collaborators for the option to license technology or product rights in the future are deferred when received. When an option is exercised, revenue is recognized on a straight-line basis over the term of the resulting license agreement. In the event that an option expires without exercise, the payment is recognized in full at the expiration of the agreement.

Restricted Cash

At June 30, 2004, the Company held $76,954 in a certificate of deposit used as collateral for an irrevocable standby letter of credit being held as a security deposit for the new operating lease on its new corporate headquarters, which the Company entered into in January 2004.

Net Loss Per Share

Basic earnings per share is computed based on the number of weighted average shares outstanding. The calculation of diluted net loss per share excludes shares of potential common stock, consisting of stock options and warrants, because their effect is anti-dilutive.

Stock-Based Compensation

The Company has adopted the pro forma disclosure requirements of Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation (“SFAS 123”) as amended by SFAS No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure (“SFAS 148”). As permitted, the Company continues to recognize employee stock compensation under the intrinsic value method of accounting as prescribed by Accounting Principles Board Opinion No. 25 (“APB 25”) and its interpretations. Under APB 25, compensation expense is based on the difference, if any, on the date of grant, between the deemed fair value of the Company’s common stock and the option exercise price, and is amortized over the respective vesting period of the options using

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the straight-line method. The pro forma effects of applying SFAS 123, as amended by SFAS 148, on the Company’s net loss had compensation cost for options granted to employees been determined based on the fair value at grant date as prescribed by SFAS 123, would be as follows (in thousands, except per share amounts):

     Such pro forma disclosure may not be representative of future stock-based compensation expense because such options vest over several years and additional grants may be made each year.

     The estimated fair value of each option grant to employees is estimated on the date of grant using the Black-Scholes option pricing method with the following weighted average assumptions:

The weighted-average estimated fair value per share of employee stock options granted during the six months ended June 30, 2004 and 2003 was $6.14 and $4.27 respectively.

     For options granted to non-employees, the Company determined the estimated fair value of the options using the Black-Scholes option-pricing model. Compensation expense is being recognized over the option-vesting period ranging from 0.5 to 4 years. The Company recorded compensation expense of $12,000 for the six months ended June 30, 2004 in connection with options granted to non-employees. There was no compensation expense for the six months ended June 30, 2003.

2. Commitments and Contingencies

Operating Lease

     The Company leases its facilities under two operating leases that expire in May 2008 and March 2014. In January 2004, the Company amended its first operating lease for that facility to include an option to terminate the

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lease early. In May 2004, the Company exercised the option to terminate this lease early and incurred a termination fee of $300,000 under the terms of the amendment. Under the remaining operating lease, the Company had an option through May 2004 to expand the amount of office and laboratory space it occupies. In May 2004, the Company exercised that option. This lease can be terminated at no cost to the Company in March 2009 but extends automatically until March 2014 if the Company chooses to not terminate the lease.

     Future minimum payments under the non-cancelable portion of the operating leases at June 30, 2004 are as follows (in thousands):

3. Collaborative Research, Development, and License Agreements

University of California

     The Company entered into a series of exclusive license agreements with the Regents of the University of California (UC) in March 1997 and October 1998. These agreements provide the Company with certain technology and related patent rights and materials. Under the terms of the agreements, the Company pays annual license or maintenance fees and will be required to pay milestones and royalties on net sales of products originating from the licensed technologies. The agreements will expire on either the expiration date of the last-to-expire patent licensed under the agreements or the date upon which the last patent application licensed under the agreements is abandoned. The Company incurred license and milestone fees of $20,000 for both the three and six months ended June 30, 2004. The Company incurred patent expenses of approximately $62,000 and $63,000 for the three months ended June 30, 2004, and 2003, respectively, and $104,000 and $73,000 for the six months ended June 30, 2004 and 2003, respectively, in connection with these license agreements. The Company incurred a $375,000 one-time charge to UC due upon the closing of the Company’s initial public offering as partial consideration for the technology licenses. The Company recorded this charge as research and development expense in the first quarter of 2004. Also as partial consideration for the technology licenses, the Company incurred a one-time charge of $150,000 to UC related to the $8.0 million upfront payment from UCB Farchim S.A., which is being amortized over the development period of the licensed programs, currently estimated to be eight years.

License and Development Agreement with UCB

     In February 2004, the Company entered into an agreement with UCB Farchim, S.A., or UCB, a subsidiary of UCB, S.A. a publicly traded multi-national company based in Brussels, Belgium, in which the Company licensed the technology, know-how and preclinical and clinical data related to its AIC and grass allergy programs on an exclusive, worldwide basis. UCB was also granted an option to license the Company’s peanut allergy program. According to terms of the agreement, the Company received an $8.0 million upfront payment and may earn up to $40.0 million in milestone payments based on achieving defined clinical and regulatory objectives. The Company is amortizing the $8.0 million upfront payment from UCB over the development period of the licensed programs, currently estimated to be eight years. In addition, UCB agreed to fund ongoing development costs of the licensed programs, as well as costs relating to regulatory filings, potential launch, sales and marketing, and reasonable administrative support. The Company is accounting for such funding as collaboration revenue, which is generally recognized in the period in which expenses related to the licensed programs are incurred. The Company records the development costs and costs relating to regulatory filings, which account for substantially all of the costs as research and development expenses. The remaining costs are recorded as general and administrative expenses on the statement of operations. If any of the licensed product candidates are successfully developed and approved for sale, the Company will receive royalties on sales. The Company has retained an option to co-promote any approved

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product in the United States, in which case the Company would recognize revenue from sales in lieu of receiving royalty payments. UCB may terminate the agreement at any time on 60 days’ advance notice either in its entirety or with respect to one or more licensed programs, but may not terminate the agreement as to our ragweed allergy program prior to February 2006 except for safety or efficacy reasons, in which case it may not terminate the agreement prior to February 2005. Either party may terminate the UCB agreement if a default occurs and is not resolved. Otherwise, the agreement does not terminate until the later to occur of the date when the last valid issued patent claim covering any of the licensed programs expires or June 2018. Total revenue recognized during the three month period ended June 30, 2004, related to the UCB agreement was $5.1 million, making up 93.4% of total revenues. Total revenue recognized during the six month period ended June 30, 2004, related to the UCB agreement was $7.9 million, making up 90.5% of total revenues and 91.9% of total accounts receivables balances.

4. Initial Public Offering

     In October 2003, the Board of Directors and Stockholders approved a one-for three reverse stock split of its outstanding shares of common stock. An amended and restated certificate of incorporation reflecting the reverse stock split was filed on February 3, 2004. All common share and per share amounts contained in the condensed consolidated financial statements have been adjusted to reflect this stock split.

     In February 2004 the Company sold a total of 6,900,000 shares of its common stock, after adjusting for a one-for-three reverse stock split, in an underwritten initial public offering, raising net proceeds of approximately $46.4 million. As a result of the initial public offering, all outstanding shares of Preferred Stock with a net value of $83.6 million converted to 13,712,128 shares of common stock and the 15,200,000 shares of ordinary stock in Dynavax Asia with a net value of $14.7 million converted into 2,111,111 shares of common stock making Dynavax Asia a wholly-owned subsidiary as of that date.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     This Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 which are subject to the safe harbor created by those sections. These forward-looking statements include, but are not limited to: statements about our business strategy, our future research and development, our preclinical and clinical product development efforts, the timing of the introduction of our products, the effect of GAAP accounting pronouncements on our recognition of revenue, uncertainty regarding our future operating results and our profitability, anticipated sources of funds and all plans, objectives, expectations and intentions contained in this report that are not historical facts. We usually use words such as may, will, should, expect, plan, anticipate, believe, estimate, predict, future, intend, or certain or the negative of these terms or similar expressions to identify forward-looking statements. Discussions containing such forward-looking statements may be found throughout the document. These forward-looking statements involve certain risks and uncertainties that could cause actual results to differ materially from those in such forward-looking statements. We disclaim any obligation to update these forward-looking statements as a result of subsequent events. The business risks discussed in Item 2 of this Report on Form 10-Q, among other things, should be considered in evaluating our prospects and future financial performance.

     The following discussion and analysis is intended to provide an investor with a narrative of our financial results and an evaluation of our financial condition and results of operations. The discussion should be read in conjunction with our consolidated financial statements and notes thereto.

Overview

     We discover, develop and intend to commercialize innovative products to treat and prevent allergies, infectious diseases and chronic inflammatory diseases. Our clinical development programs are based on immunostimulatory sequences, or ISS, which are short DNA sequences that enhance the ability of the immune system to fight disease and control chronic inflammation. Our most advanced clinical programs include AIC, an immunotherapy product candidate for treatment of ragweed allergy that has completed Phase II trials, our hepatitis B vaccine, which is nearing completion of two Phase II trials, and an inhaled therapeutic product candidate for treatment of asthma, which has recently completed a pilot Phase II trial. We have initiated a Phase IIb trial and plan to initiate Phase III trials for AIC. We have also conducted a Phase I study to evaluate the safety of AIC in ragweed-allergic children. In addition, we plan to initiate Phase III trials for our hepatitis B vaccine. We intend to commercialize our hepatitis B vaccine only outside the U.S. We plan to advance the asthma program into a broader clinical program focused on direct measurement of efficacy. We have preclinical programs focused on chronic inflammation, antiviral therapies and improved, next-generation vaccines using ISS and other technologies.

Critical Accounting Policies and the Use of Estimates

     The Company believes that there have been no significant changes in its critical accounting policies during the six months ended June 30, 2004 as compared with those previously disclosed in its Annual Report on Form 10-K for the year ended December 31, 2003 filed with the SEC on March 30, 2004.

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Results of Operations

Comparison of Three Months and Six Months Ended June 30, 2004 and 2003

     Revenues for the three and six months ended June 30, 2004, were $5.5 million and $8.7 million, respectively, compared to $96,000 for both the three and six months ended June 30, 2003. Revenue for the three and six month periods ended June 30, 2004, consisted of $5.1 million and $7.9 million, respectively, from a collaborative agreement with UCB in ragweed and grass allergies, which was initiated in the first quarter of 2004, as well as revenue of $361,000 and $822,000, respectively, from government grants for biodefense programs. Revenue of $96,000 for both the three and six months ended June 30, 2003 resulted from a government grant awarded by the National Institutes of Health. We expect revenues from our collaboration with UCB and from government grants for biodefense programs to increase moderately through the remainder of 2004 as reimbursement for our expenses associated with those programs.

     Research and development expenses were $6.5 million for the three months ended June 30, 2004, an increase of 120.9% from $2.9 million for the three months ended June 30, 2003, and $11.8 million for the six months ended June 30, 2004, an increase of 78.7% from $6.6 million for the six months ended June 30, 2003. The increases for the three and six month periods ended June 30, 2004 compared to the same periods in 2003 were primarily the result of increased clinical trial activities in our ragweed allergy, hepatitis B vaccine and asthma programs, as well as preclinical works associated with government grants for biodefense programs, being conducted during the three and six months ended June 30, 2004. Non-cash stock-based compensation expense included in research and development expenses was approximately $341,000 and $205,000 for the three months ended June 30, 2004, and 2003, respectively, and approximately $720,000 and $410,000 for the six months end June 30, 2004 and 2003, respectively. We expect research and development expenses in future periods generally to be consistent with or increase moderately from levels experienced in the three and six month periods ended June 30, 2004, as our clinical and preclinical programs progress.

     General and administrative expenses were $2.1 million for the three months ended June 30, 2004, an increase of 71.1% as compared to $1.2 million for the three months ended June 30, 2003, and $4.0 million for the six months ended June 30, 2004, an increase of 65.3% as compared to $2.4 million for the six months ended June 30, 2003. The increases for the three and six month periods ended June 30, 2004 compared to the same periods in 2003 reflect higher compensation and benefits associated primarily with the expansion of our management team and higher expenditures for consulting and professional services. Non-cash stock-based compensation expense included in general and administrative expenses was approximately $237,000 and $120,000 for the three months ended June 30, 2004, and 2003, respectively, and approximately $484,000 and $239,000 for the six months ended June 30, 2004 and 2003, respectively. We expect general and administrative expenses to grow beyond levels experienced in the three and six month periods ended June 30, 2004, as a result of our expanding organization, incurring costs of operating as a public company, and increasing our lease and related obligations.

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     Interest income, net, was $186,000 for the three months ended June 30, 2004, an increase of 69.1% as compared to $110,000 for the three months ended June 30, 2003, and $305,000 for the six months ended June 30, 2004, an increase of 26.6% as compared to $241,000 for the six months ended June 30, 2003. The increases for both the three and six month periods compared to the same periods in 2003 were primarily due to higher average cash and marketable securities balances during the three and six months ended June 30, 2004

Liquidity and Capital Resources

     We have financed our operations since inception primarily through the sale of shares of our common stock, shares of our convertible preferred stock, and ordinary shares in a subsidiary, which have yielded a total of approximately $144.8 million in net cash proceeds and, to a lesser extent, through amounts received under collaborative agreements and government grants for biodefense programs. As of June 30, 2004, we had $74.0 million in cash and cash equivalents. Our funds are currently invested in highly liquid, institutional money market funds.

     Our operating activities used cash of $1.0 million during the six months ended June 30, 2004, compared to cash used in operating activities of $8.2 million during the six months ended June 30, 2003. The decrease of approximately $7.2 million was due primarily to an $8.0 million upfront payment made to us by UCB and a narrower loss from operations.

     Our investing activities provided cash of $5.1 million during the six months ended June 30, 2004, compared to $7.5 million during the six months ended June 30, 2003. Cash provided by investing activities during the six months ended June 30, 2004 consisted primarily of maturities of investments of approximately $5.5 million offset by an investment of approximately $464,000 in property and equipment. Cash provided by investing activities during the six months ended June 30, 2003 consisted primarily of net sales and maturities of investments of approximately $7.5 million.

     Our financing activities provided cash of approximately $46.4 million during the six months ended June 30, 2004, primarily from the issuance of 6,900,000 shares of common stock in our initial public offering in February 2004 and the repayment of notes receivable from stockholders, offset by a restricted cash held in a certificate of deposit used as collateral. Virtually no net cash from financing activities was generated during the six months ended June 30, 2003.

Long-term Debt and Operating Leases

     We have no long-term debt. As of June 30, 2004, we had contractual obligations related to non-cancelable portion of the operating leases as follows (in thousands):

     The Company leases its facilities under two operating leases that expire in May 2008 and March 2014. In January 2004, the Company amended the first operating lease for that facility to include an option to terminate the lease early. In May 2004, the Company exercised the option to terminate this lease and incurred a termination fee of $300,000. Under the remaining operating lease, the Company had an option through May 2004 to expand the amount of office and laboratory space it occupies. In May 2004, the Company exercised that option. This lease can be terminated at no cost to the Company in March 2009 but extends automatically until March 2014 if the Company chooses to not terminate the lease.

     We believe our existing cash and cash equivalents, together with the payments due to us under the terms of our collaboration agreement with UCB, will be sufficient to meet our anticipated cash requirements through 2006. Because of the significant time it will take for any of our product candidates to complete the clinical trials process,

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be approved by regulatory authorities and successfully commercialized, we may require substantial additional capital resources. We may raise additional funds through public or private equity offerings, debt financings, capital lease transactions, corporate collaborations or other means. We may attempt to raise additional capital due to favorable market conditions or strategic considerations even if we have sufficient funds for planned operations. To the extent that we raise additional funds by issuing equity securities, our stockholders will experience dilution, and debt financings, if available, may involve restrictive covenants or may otherwise constrain our financial flexibility. To the extent that we raise additional funds through collaborative arrangements, it may be necessary to relinquish some rights to our technologies or grant licenses on terms that are not favorable to us. In addition, payments made by potential collaborators, government agencies and other licensors generally will depend upon our achievement of negotiated d