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UNITED STATES
SECURITIESAND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
Commission file number 000-28401
MAXYGEN, INC.
(Exact name of registrant as specified in its charter)
Delaware (State of incorporation) | 77-0449487 (I.R.S. Employer Identification No.) |
515 Galveston Drive
Redwood City, California 94063
(Address of principal executive offices, including zip code)
(650) 298-5300
(Registrant’s telephone number, including area code)
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.
Yesx No¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yesx No¨
As of November 1, 2003, there were 34,857,642 shares of the registrant’s common stock, $0.0001 par value per share, outstanding, which is the only class of common or voting stock of the registrant issued.
Table of Contents
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2003
INDEX
Part I | FINANCIAL INFORMATION | |||
Item 1: | Unaudited Financial Statements: | |||
Condensed Consolidated Balance Sheets as of December 31, 2002 and September 30, 2003 | 3 | |||
Condensed Consolidated Statements of Operations for the three and nine month periods ended September 30, 2002 and 2003 | 4 | |||
Condensed Consolidated Statements of Cash Flows for the nine month periods ended September 30, 2002 and 2003 | 5 | |||
Notes to Condensed Consolidated Financial Statements | 6 | |||
Item 2: | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 14 | ||
Item 3: | Quantitative and Qualitative Disclosures About Market Risk | 30 | ||
Item 4: | Controls and Procedures | 30 | ||
Part II | OTHER INFORMATION | |||
Item 1: | Legal Proceedings | 32 | ||
Item 2: | Changes in Securities and Use of Proceeds | 32 | ||
Item 3: | Defaults Upon Senior Securities | 33 | ||
Item 4: | Submission of Matters to a Vote of Security Holders | 33 | ||
Item 5: | Other Information | 33 | ||
Item 6: | Exhibits and Reports on Form 8-K | 33 | ||
SIGNATURES | 34 |
This report and the disclosures herein include, on a consolidated basis, the business and operations of Maxygen, Inc. and its wholly-owned subsidiaries, Maxygen ApS, Maxygen Holdings Ltd. and Verdia, Inc., as well as its majority-owned subsidiary Codexis, Inc., unless, in each case, the context indicates that the disclosure applies only to a named subsidiary.
We make available on our website all reports filed with the Securities and Exchange Commission, including our reports on Form 10-K, 10-Q and 8-K, as soon as reasonably practicable after they have been filed. Our website is located at www.maxygen.com. Information contained on our website is not a part of this report.
Maxygen is a registered trademark of Maxygen, Inc. MolecularBreeding is a trademark of Maxygen, Inc. Verdia is a trademark of Verdia, Inc. Codexis is a trademark of Codexis, Inc.
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PART I – FINANCIAL INFORMATION
ITEM 1
FINANCIAL STATEMENTS
MAXYGEN, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
December 31, 2002 | September 30, 2003 | |||||||
(Note 1) | (unaudited) | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 67,611 | $ | 32,676 | ||||
Short-term investments | 149,307 | 116,068 | ||||||
Grant and other receivables | 7,427 | 7,505 | ||||||
Prepaid expenses and other current assets | 2,406 | 1,787 | ||||||
Total current assets | 226,751 | 158,036 | ||||||
Property and equipment, net | 16,363 | 14,526 | ||||||
Goodwill | 12,192 | 12,192 | ||||||
Other intangible assets, net of accumulated amortization of $2,737 at December 31, 2002 and $3,435 at September 30, 2003, respectively | 698 | — | ||||||
Long-term investments | 11,231 | 61,132 | ||||||
Deposits and other assets | 1,545 | 1,668 | ||||||
Total assets | $ | 268,780 | $ | 247,554 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 1,440 | $ | 1,743 | ||||
Accrued compensation | 2,576 | 4,588 | ||||||
Accrued legal expenses | 945 | 391 | ||||||
Deferred rent | 337 | 439 | ||||||
Other accrued liabilities | 2,755 | 1,935 | ||||||
Deferred revenue | 9,010 | 6,909 | ||||||
Current portion of equipment financing obligations | 617 | 132 | ||||||
Total current liabilities | 17,680 | 16,137 | ||||||
Deferred revenue | 1,273 | 1,041 | ||||||
Other liabilities | 628 | 232 | ||||||
Minority interest | 20,000 | 20,888 | ||||||
Commitments and contingencies | ||||||||
Stockholders’ equity: | ||||||||
Preferred stock, $0.0001 par value; 5,000,000 shares authorized; no shares issued and outstanding at December 31, 2002 and September 30, 2003 | — | — | ||||||
Common stock, $0.0001 par value; 100,000,000 shares authorized; 34,504,447, and 34,868,008 shares issued and outstanding at December 31, 2002 and September 30, 2003, respectively | 3 | 3 | ||||||
Additional paid-in capital | 393,491 | 395,032 | ||||||
Deferred stock compensation | (2,436 | ) | (611 | ) | ||||
Accumulated other comprehensive income | 813 | 382 | ||||||
Accumulated deficit | (162,672 | ) | (185,550 | ) | ||||
Total stockholders’ equity | 229,199 | 209,256 | ||||||
Total liabilities and stockholders’ equity | $ | 268,780 | $ | 247,554 | ||||
See accompanying notes.
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Three Months ended September 30, | Nine Months ended September 30, | |||||||||||||||
2002 | 2003 | 2002 | 2003 | |||||||||||||
Collaborative research and development revenue | $ | 10,435 | $ | 7,832 | $ | 27,744 | $ | 26,847 | ||||||||
Grant revenue | 1,273 | 669 | 3,818 | 2,138 | ||||||||||||
Total revenues | 11,708 | 8,501 | 31,562 | 28,985 | ||||||||||||
Operating expenses: | ||||||||||||||||
Research and development | 15,849 | 14,298 | 46,201 | 42,110 | ||||||||||||
General and administrative | 3,309 | 2,693 | 9,558 | 9,061 | ||||||||||||
Stock compensation expense (1) | 1,311 | 404 | 5,439 | 1,865 | ||||||||||||
Amortization of other intangible assets | 286 | 126 | 858 | 698 | ||||||||||||
Total operating expenses | 20,755 | 17,521 | 62,056 | 53,734 | ||||||||||||
Loss from operations | (9,047 | ) | (9,020 | ) | (30,494 | ) | (24,749 | ) | ||||||||
Interest and other income, net | 2,294 | 1,056 | 6,266 | 3,884 | ||||||||||||
Equity in net loss of joint venture and minority interests | (538 | ) | (973 | ) | (767 | ) | (2,013 | ) | ||||||||
Net loss | $ | (7,291 | ) | $ | (8,937 | ) | $ | (24,995 | ) | $ | (22,878 | ) | ||||
Net loss | $ | (7,291 | ) | $ | (8,937 | ) | $ | (24,995 | ) | $ | (22,878 | ) | ||||
Subsidiary preferred stock accretion | — | (319 | ) | — | (957 | ) | ||||||||||
Net loss applicable to common stockholders | $ | (7,291 | ) | $ | (9,256 | ) | $ | (24,995 | ) | $ | (23,835 | ) | ||||
Basic and diluted net loss per share applicable to common stockholders | $ | (0.22 | ) | $ | (0.27 | ) | $ | (0.75 | ) | $ | (0.69 | ) | ||||
Shares used in computing basic and diluted net loss per share | 33,757 | 34,667 | 33,339 | 34,338 | ||||||||||||
(1) Stock compensation expense related to the following: | ||||||||||||||||
Research and development | $ | 973 | $ | 286 | $ | 4,065 | $ | 1,419 | ||||||||
General and administrative | 338 | 118 | 1,374 | 446 | ||||||||||||
$ | 1,311 | $ | 404 | $ | 5,439 | $ | 1,865 | |||||||||
See accompanying notes.
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Nine Months ended September 30, | ||||||||
2002 | 2003 | |||||||
Operating activities | ||||||||
Net loss | $ | (24,995 | ) | $ | (22,878 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Depreciation and amortization | 3,945 | 4,961 | ||||||
Amortization of intangible assets | 858 | 698 | ||||||
Equity in net loss of joint venture and minority interests | 767 | 2,012 | ||||||
Non-cash stock compensation | 5,705 | 1,828 | ||||||
Common stock issued and stock options granted to consultants for services rendered | 1,258 | 306 | ||||||
Changes in operating assets and liabilities: | ||||||||
Grant and other receivables | 420 | (78 | ) | |||||
Prepaid expenses and other current assets | 639 | 411 | ||||||
Deposits and other assets | (406 | ) | 76 | |||||
Accounts payable | (1,522 | ) | 303 | |||||
Accrued liabilities and deferred rent | 2,524 | 399 | ||||||
Deferred revenue | (1,392 | ) | (2,333 | ) | ||||
Net cash used in operating activities | (12,199 | ) | (14,295 | ) | ||||
Investing activities | ||||||||
Purchases of available-for-sale securities | (18,413 | ) | (165,256 | ) | ||||
Maturities of available-for-sale securities | 152,663 | 148,549 | ||||||
Investment in joint venture and minority interests | (1,000 | ) | (2,211 | ) | ||||
Acquisition of property and equipment | (3,857 | ) | (3,124 | ) | ||||
Net cash provided by (used in) investing activities | 129,393 | (22,042 | ) | |||||
Financing activities | ||||||||
Repayments under equipment financing obligation | (460 | ) | (540 | ) | ||||
Equity adjustment from foreign currency translation | 581 | (178 | ) | |||||
Minority investment | 10,000 | (69 | ) | |||||
Proceeds from issuance of common stock | 1,828 | 2,189 | ||||||
Payments received on promissory notes | 339 | — | ||||||
Net cash provided by financing activities | 12,288 | 1,402 | ||||||
Net increase (decrease) in cash and cash equivalents | 129,482 | (34,935 | ) | |||||
Cash and cash equivalents at beginning of period | 48,388 | 67,611 | ||||||
Cash and cash equivalents at end of period | $ | 177,870 | $ | 32,676 | ||||
See accompanying notes.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation and Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information. The information as of September 30, 2003 and for the three months and nine months ended September 30, 2002 and September 30, 2003 includes all adjustments (consisting only of normal recurring adjustments) that the management of Maxygen, Inc. (“Maxygen” or the “Company”) believes necessary for fair presentation of the results for the periods presented.
Results for any interim period are not necessarily indicative of results for any future interim period or for the entire year. The accompanying condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Report on Form 10-K for the year ended December 31, 2002.
Principles of Consolidation
The consolidated financial statements include the amounts of the Company and its wholly-owned subsidiaries, Maxygen ApS (Denmark), which was acquired by the Company in August 2000, Maxygen Holdings Ltd. (Cayman Islands) and Verdia, Inc., as well as its majority-owned subsidiary, Codexis, Inc. All significant intercompany balances and transactions have been eliminated in consolidation.
The Company’s ownership in Codexis is currently approximately 57%, based upon the voting rights of the issued and outstanding shares of Codexis common and preferred stock. In accordance with EITF Consensus 96-16, “Investor Accounting for an Investee When the Investor Has a Majority of the Voting Interest but the Minority Stockholder or Stockholders Have Certain Approval or Veto Rights” and paragraph 1 of ARB No. 51, “Consolidated Financial Statements”, the Company has included 100% of the net losses of Codexis in the determination of the Company’s consolidated net loss. The Company records minority interest in the Consolidated Balance Sheets to account for the ownership interest of the minority owners.
On September 13, 2002, Codexis sold $15 million of Codexis preferred stock to investors, of which $5 million was purchased by Maxygen and $10 million was purchased by several unrelated investors. On October 1, 2002, Codexis sold an additional $10 million of preferred stock to unrelated investors. This series of convertible preferred stock included a redemption provision, which provided that the holders of at least a majority of the outstanding shares of this convertible preferred stock (excluding the convertible preferred stock held by Maxygen and its affiliates), voting together as a separate class, may require Codexis to redeem the convertible preferred stock. The redemption price for each share will be payable in cash in exchange for the shares of convertible preferred stock to be redeemed at a sum equal to the applicable original issue price per share plus five percent (5%) of the original issue price per year from the original issue date until the applicable redemption date, plus declared and unpaid dividends. Notice of redemption can be given at any time on or after the fifth anniversary of the original issue date. In connection with these redemption rights, Maxygen has recorded accretion of the redemption premium for the convertible preferred stock, excluding the shares owned by Maxygen, in the amount of $319,000 for the three months ended September 30, 2003 and $957,000 for the nine months ended September 30, 2003. The accretion is recorded as subsidiary preferred stock accretion on the Consolidated Statement of Operations and as a reduction of additional paid-in capital on the Consolidated Balance Sheets. Any obligation to make redemption payments is solely an obligation of Codexis and any payments are to be made solely from assets of Codexis.
The investment in the Company’s joint venture with Delta and Pine Land Company, called DeltaMax Cotton LLC, in which the Company has an equity interest of 50%, is being accounted for under the equity method of accounting.
The investment in Avidia Research Institute, formed by the Company and several outside investors in July, 2003, in which the Company has an equity interest of 46.7%, is being accounted for under the equity method of accounting.
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Revenue Recognition
The Company recognizes revenue from multiple element arrangements under collaborative research agreements, which include research and development services, milestones, and royalties. Revenue arrangements with multiple deliverables are accounted for under the provisions of Emerging Issues Task Force Issue No. 00-21,Revenue Arrangements with Multiple Deliverables, and are divided into separate units of accounting if certain criteria are met, including whether the delivered item has stand-alone value to the customer and whether there is objective and reliable evidence of the fair value of the undelivered items in the arrangement. The consideration the Company receives is allocated among the separate units of accounting based on their respective fair values, and the applicable revenue recognition criteria are considered separately for each of the separate units.
Non-refundable up-front payments received in connection with research and development collaboration agreements, including technology advancement funding that is intended for the development of the Company’s core technology, are deferred and recognized on a straight-line basis over the relevant periods specified in the agreement, generally the research term.
Revenue related to collaborative research payments with the Company’s corporate collaborators is recognized as research services are performed over the related funding periods for each contract. Under these agreements, the Company is typically required to perform research and development activities as specified in each respective agreement. Generally, the payments received are not refundable and are based on a contractual cost per full-time equivalent employee working on the project. Research and development expenses under the collaborative research agreements approximate or exceed the research funding revenue recognized under such agreements over the term of the respective agreement. Deferred revenue may result when the Company does not incur the required level of effort during a specific period in comparison to funds received under the respective contracts. Payments received related to substantive, at-risk incentive milestones, if any, are recognized as revenue upon achievement of the incentive milestone event because the Company has no future performance obligations related to the payment. Incentive milestone payments are triggered either by the results of the Company’s research efforts or by events external to the Company, such as regulatory approval to market a product.
The Company receives royalties from licensees, which are typically based on third-party sales of licensed products or technologies. Royalties are recorded as earned in accordance with the contract terms when third-party results can be reliably measured and collectibility is reasonably assured.
The Company has been awarded grants from the Defense Advanced Research Projects Agency (“DARPA”), National Institute of Standards and Technology-Advanced Technology Program, the U.S. Agency for International Development and the U.S. Army Medical Research and Materiel Command for various research and development projects. The terms of each of these grant agreements are three years with various termination dates, the last of which is June 2005 for existing agreements. Revenue related to grant agreements is recognized as related research and development expenses are incurred.
Net loss per share
Basic and diluted net loss per common share are presented in conformity with the Statement of Financial Accounting Standards No. 128, “Earnings per Share” (“SFAS 128”), for all periods presented. In accordance with SFAS 128, basic and diluted net loss per share has been computed using the weighted-average number of shares of common stock outstanding during the period, less shares subject to repurchase.
The following table presents the calculation of basic and diluted net loss per share (in thousands, except per share data):
Three Months ended September 30, | Nine Months ended September 30, | |||||||||||||||
2002 | 2003 | 2002 | 2003 | |||||||||||||
Net loss applicable to common stockholders | $ | (7,291 | ) | $ | (9,256 | ) | $ | (24,995 | ) | $ | (23,835 | ) | ||||
Basic and diluted: | ||||||||||||||||
Weighted-average shares of common stock outstanding | 34,341 | 34,822 | 34,200 | 34,611 | ||||||||||||
Less: weighted-average shares subject to repurchase | (584 | ) | (155 | ) | (861 | ) | (273 | ) | ||||||||
Weighted-average shares used in computing basic and diluted net loss per share | 33,757 | 34,667 | 33,339 | 34,338 | ||||||||||||
Basic and diluted net loss per share | $ | (0.22 | ) | $ | (0.27 | ) | $ | (0.75 | ) | $ | (0.69 | ) | ||||
The Company has excluded all outstanding stock options, outstanding warrants and shares subject to repurchase from the calculation of diluted loss per common share because all such securities are antidilutive for all applicable periods presented. The total number of shares excluded from the calculations of diluted net loss per share, prior to application of the treasury stock method for options, was 9,146,000 at September 30, 2002 and 9,970,309 at September 30, 2003. Such securities, had they been dilutive, would have been included in the computations of diluted net loss per share along with restricted common stock subject to the Company’s right of repurchase.
Comprehensive Income (Loss)
Comprehensive income (loss) is primarily comprised of net unrealized gains or losses on available-for-sale securities and foreign currency translation adjustments. Comprehensive income (loss) and its components for the three month and nine month periods ended September 30, 2002 and September 30, 2003 were as follows (in thousands):
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Three Months ended September 30, | Nine Months ended September 30, | |||||||||||||||
2002 | 2003 | 2002 | 2003 | |||||||||||||
Net loss | $ | (7,291 | ) | $ | (8,937 | ) | $ | (24,995 | ) | $ | (22,878 | ) | ||||
Changes in unrealized gain (loss) on securities available-for-sale | (228 | ) | 39 | (1,503 | ) | (45 | ) | |||||||||
Changes in foreign currency translation adjustments | (1,093 | ) | (88 | ) | 847 | (386 | ) | |||||||||
Comprehensive loss | $ | (8,612 | ) | $ | (8,986 | ) | $ | (25,651 | ) | $ | (23,309 | ) | ||||
The components of accumulated other comprehensive income (loss) were as follows (in thousands):
December 31, 2002 | September 30, 2003 | |||||
Unrealized gains on securities available-for-sale | $ | 322 | $ | 277 | ||
Foreign currency translation adjustments | 491 | 105 | ||||
Accumulated other comprehensive income | $ | 813 | $ | 382 | ||
Recent Accounting Pronouncements
In June 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (referred to as SFAS) No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue (referred to as EITF) No. 94-3 “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)”. SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred, not at the date of an entity’s commitment to an exit plan, as required under EITF 94-3. The provisions of SFAS 146 are effective for exit or disposal activities initiated after December 31, 2002, with earlier application encouraged. The adoption of SFAS 146 did not have a material effect on the Company’s consolidated financial statements.
In November 2002, the Financial Accounting Standards Board issued EITF Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables.” EITF Issue No. 00-21 addresses certain aspects of the accounting by a company for arrangements under which it will perform multiple revenue-generating activities. EITF Issue No. 00-21 addresses when and how an arrangement involving multiple deliverables should be divided into separate units of accounting. EITF Issue No. 00-21 provides guidance with respect to the effect of certain customer rights due to company nonperformance on the recognition of revenue allocated to delivered units of accounting. EITF Issue No. 00-21 also addresses the impact on the measurement and/or allocation of arrangement consideration of customer cancellation provisions and consideration that varies as a result of future actions of the customer or the company. Finally, EITF Issue No. 00-21 provides guidance with respect to the recognition of the cost of certain deliverables that are excluded from the revenue accounting for an arrangement. The provisions of EITF Issue No. 00-21 apply to revenue arrangements entered into in fiscal periods beginning on or after July 1, 2003. The adoption of EITF Issue No. 00-21 did not have a material effect on the Company’s consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46 (or FIN 46), “Consolidation of Variable Interest Entities.” FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns or both. A variable interest entity (“VIE”) is a corporation, partnership, trust, or any other legal structures used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. A variable interest entity often holds financial assets, including loans or receivables, real estate or other property. A variable interest entity may be essentially passive or it may engage in research and development or other activities on behalf of another entity. The consolidation requirements of FIN 46 apply to variable interest entities created after January 31, 2003. The consolidation requirements apply to older entities in the first fiscal year or interim period ending after December 15, 2003. Certain of the disclosure requirements apply to all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. The adoption of FIN 46 is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
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Stock-Based Compensation
The Company measures compensation expense for its stock-based employee compensation plans using the intrinsic method prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” and related Interpretations, including Financial Accounting Standards Board Interpretation 44 “Accounting for Certain Transactions Involving Stock Compensation.” Compensation expense is based on the difference, if any, between the deemed fair value of the Company’s common stock at the date of grant and the exercise price of the option at that date. This amount is recorded as “deferred stock compensation” in the Consolidated Balance Sheets and amortized as a charge to operations over the vesting period of the applicable options. In accordance with Statement of Financial Accounting Standards, referred to as SFAS, No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure,” the Company has provided, below, the pro forma disclosures of the effect on net income (loss) and earnings (loss) per share as if SFAS No. 123 had been applied in measuring compensation expense for all periods presented (in thousands, except per share amounts):
Three Months ended September 30, | Nine Months ended September 30, | |||||||||||||||
2002 | 2003 | 2002 | 2003 | |||||||||||||
Net loss applicable to common stockholders, as reported | $ | (7,291 | ) | $ | (9,256 | ) | $ | (24,995 | ) | $ | (23,835 | ) | ||||
Add: Stock based employee compensation cost included in the determination of net loss applicable to common stockholders, as reported | 1,304 | 382 | 5,163 | 1,811 | ||||||||||||
Deduct: Total stock based employee compensation expense determined under the fair value-based method for all awards, net of related tax effects | (8,693 | ) | (4,630 | ) | (22,326 | ) | (10,303 | ) | ||||||||
Pro forma net loss applicable to common stockholders | $ | (14,680 | ) | $ | (13,504 | ) | $ | (42,158 | ) | $ | (32,327 | ) | ||||
Net loss per share applicable to common stockholders | ||||||||||||||||
Basic and diluted—as reported | $ | (0.22 | ) | $ | (0.27 | ) | $ | (0.75 | ) | $ | (0.69 | ) | ||||
Basic and diluted—pro forma | $ | (0.43 | ) | $ | (0.39 | ) | $ | (1.26 | ) | $ | (0.94 | ) |
2. Investments
Management determines the appropriate classification of debt securities at the time of purchase and reevaluates such designation as of each balance sheet date. The Company’s debt securities are classified as available-for-sale and are carried at estimated fair value in cash equivalents and investments. Unrealized gains and losses are reported as accumulated other comprehensive income (loss) in stockholders’ equity. The amortized cost of debt securities in this category is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in interest income. Realized gains and losses on available-for-sale securities and declines in value deemed to be other than temporary, if any, are included in interest income and expense. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in interest income. The Company’s cash equivalents and investments as of September 30, 2003 were as follows (in thousands):
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Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | ||||||||||||
Money market funds | $ | 32,676 | $ | — | $ | — | $ | 32,676 | |||||||
Corporate bonds | 157,239 | 307 | (48 | ) | 157,498 | ||||||||||
U.S. government agency securities | 8,197 | 14 | — | 8,211 | |||||||||||
Commercial paper | 11,489 | 2 | — | 11,491 | |||||||||||
Total | 209,601 | 323 | (48 | ) | 209,876 | ||||||||||
Less amounts classified as cash equivalents | (32,676 | ) | — | — | (32,676 | ) | |||||||||
Total investments | $ | 176,925 | $ | 323 | $ | (48 | ) | $ | 177,200 | ||||||
Realized gains or losses on the sale of available-for-sale securities for the three month and nine month periods ended September 30, 2002 and September 30, 2003 were insignificant.
At September 30, 2003, the contractual maturities of investments were as follows (in thousands):
Amortized Cost | Estimated Fair Value | |||||
Due within one year | $ | 115,968 | $ | 116,068 | ||
Due after one year | 60,957 | 61,132 | ||||
$ | 176,925 | $ | 117,200 | |||
3. Intangible Assets
Intangible assets subject to amortization consist of purchased core technology as follows (in thousands):
December 31, 2002 | September 30, 2003 | |||||||
Gross carrying value | $ | 3,435 | $ | 3,435 | ||||
Accumulated amortization | (2,737 | ) | (3,435 | ) | ||||
Net carrying value | $ | 698 | $ | — | ||||
Aggregate amortization expense is as follows (in thousands):
For the year ended December 31, 2002 (actual) | $ | 1,144 | |
For the nine months ended September 30, 2003 (actual) | $ | 698 | |
For the remaining three months in the year ended December 31, 2003 | — | ||
For the year ended December 31, 2003 | $ | 698 | |
4. Collaborative Agreements
Roche
In May 2003, the Company announced the formation of a broad strategic alliance with Roche to collaborate on the global development and commercialization of next-generation interferon alpha and beta variants for a wide range of indications. The alliance will initially focus on the development of lead candidates for treatment of hepatitis B virus (HBV) and hepatitis C virus (HCV). Under the terms of the collaboration agreement, Roche has licensed worldwide commercialization rights to variant interferon alpha and beta product candidates for treatment of HBV and HCV. The Company has received an initial payment and research and development funding. The Company is also entitled to receive research and development funding for the first two years of the collaboration and option fees. In
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addition, the Company is eligible to receive milestone payments, and royalties based on product sales. The agreement also provides the companies with the option to expand the collaboration to encompass other interferon alpha and beta products for specific indications outside of HBV and HCV, including oncology, autoimmune diseases, inflammatory diseases, and other infectious diseases such as HIV. The Company retains the right to develop such product candidates while Roche may elect to acquire worldwide license and commercialization rights to these product candidates. The Company has the option to co-fund development in the United States of any product to which Roche acquires a license, in exchange for profit sharing or an increased royalty rate on sales of the applicable product.
5. Establishment of Avidia Research Institute
On July 15, 2003 the Company contributed certain technology and invested $500,000 to form a new company, Avidia Research Institute, with other third party investors. The Company has an equity interest of 46.7% in Avidia based upon the voting rights of the issued and outstanding shares of Avidia’s common and preferred stock. The Company’s investment in Avidia is being accounted for under the equity method of accounting and results recorded as a component of equity in net loss of joint venture and minority interests in the Condensed Consolidated Statement of Operations.
6. Litigation
In December 2001 a lawsuit was filed in the U.S. District Court for the Southern District of New York against Maxygen, Inc., certain officers of the Company, and certain underwriters of the Company’s initial public offering and secondary public offering of common stock. The complaint, which alleges claims under Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934, is among the so-called “laddering” cases that have been commenced against over 300 companies that had public offerings of securities in 1999 and 2000. The complaint has been consolidated with other laddering claims in a proceeding styledIn re Initial Public Offering Securities Litigation, No. 21 MC 92 (SAS), pending before the Honorable Shira A. Scheindlin. In February 2003, the court dismissed the Section 10(b) claim against the officers of the Company; the remainder of the case remains pending.
In June 2003 the Company agreed to the terms of a tentative settlement agreement along with other defendant issuers inIn re Initial Public Offering Securities Litigation. The tentative settlement provides that the 309 defendant issuers and their insurers will pay to the plaintiffs $1 billion less any recovery of damages the plaintiffs receive from the defendant underwriters. If the plaintiffs receive over $5 billion in damages from the defendant underwriters, the Company will be entitled to reimbursement of various expenses incurred by the Company as a result of the litigation. As part of the tentative settlement, the Company will assign to the plaintiffs its “excess compensation claims” and certain other of its claims against the defendant underwriters as a result of the alleged actions of the defendant underwriters. The settlement is subject to acceptance by a substantial majority of defendants and execution of a definitive settlement agreement. The settlement is also subject to approval of the Court, which cannot be assured. The Company believes that its portion of the tentative settlement of the litigation, if any, will be covered by existing insurance.
If the settlement is not accepted by the requisite number of defendants or if it is not approved by the Court, the Company intends to defend the lawsuit vigorously. However, the litigation is in the preliminary stage, and the Company cannot predict its outcome. The litigation process is inherently uncertain. If the outcome of the litigation is adverse to the Company and if the Company is required to pay significant damages, the Company’s business would be significantly harmed.
From time to time, the Company becomes involved in claims and legal proceedings that arise in the ordinary course of its business. The Company is currently subject to three such claims. The Company does not believe that the resolution of these claims will have a material adverse effect on its financial statements.
7. Segment Information
The Company has four reportable segments: human therapeutics, agriculture, chemicals and all other. The Company has determined its reportable operating segments based upon how the business is managed and operated. The accounting policies of the segments described above are the same as those described in Note 1 in this report and in the Company’s annual report on Form 10-K. For the three months ended March 31, 2002, the chemicals segment was composed of the chemicals business unit of Maxygen and the agriculture segment was composed of the agriculture business unit of Maxygen. For the three months ended September 30, 2002, the final six months of the nine months ended September 30, 2002 and for the three and nine months ended September 30, 2003, the chemicals segment was composed of Codexis and the agriculture segment was composed of Verdia.
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Segment Earnings
The Company evaluates the performance of its operating segments without considering the effects of net interest expense and income, amortization of intangibles and stock compensation expense, all which are managed by corporate headquarters. Corporate administrative costs including depreciation and amortization expense are primarily allocated based on headcount.
The following table presents segment operating loss reconciled to reported net loss (in thousands):
Three Months Ended September 30, | Nine Months ended September 30, | |||||||||||||||
2002 | 2003 | 2002 | 2003 | |||||||||||||
Human therapeutics | $ | (4,096 | ) | $ | (5,818 | ) | $ | (12,536 | ) | $ | (17,799 | ) | ||||
Chemicals | (2,484 | ) | (2,635 | ) | (6,705 | ) | (4,648 | ) | ||||||||
Agriculture | (854 | ) | (898 | ) | (2,487 | ) | (795 | ) | ||||||||
All other | (554 | ) | (112 | ) | (3,236 | ) | (957 | ) | ||||||||
Total segment loss | $ | (7,988 | ) | $ | (9,463 | ) | $ | (24,964 | ) | $ | (24,199 | ) | ||||
Interest income, net | 2,294 | 1,056 | 6,266 | 3,884 | ||||||||||||
Stock compensation | (1,311 | ) | (404 | ) | (5,439 | ) | (1,865 | ) | ||||||||
Amortization of intangibles | (286 | ) | (126 | ) | (858 | ) | (698 | ) | ||||||||
Total net loss | $ | (7,291 | ) | $ | (8,937 | ) | $ | (24,995 | ) | $ | (22,878 | ) | ||||
Net loss | $ | (7,291 | ) | $ | (8,937 | ) | $ | (24,995 | ) | $ | (22,878 | ) | ||||
Subsidiary preferred stock accretion | — | (319 | ) | — | (957 | ) | ||||||||||
Net loss applicable to common stockholders | $ | (7,291 | ) | $ | (9,256 | ) | $ | (24,995 | ) | $ | (23,835 | ) | ||||
For the three months ended September 30, 2003, interest income of $1.1 million includes $65,000 attributable to Codexis in the chemicals segment and $28,000 attributable to Verdia in the agriculture segment. For the nine months ended September 30, 2003, interest income of $3.9 million includes $234,000 attributable to Codexis in the chemicals segment and $96,000 attributable to Verdia in the agriculture segment. The subsidiary preferred stock accretion is attributable to Codexis.
Segment Revenue
Revenues for each operating segment are derived from the Company’s research collaboration agreements and government grants and are categorized based on the industry of the product or technology under development. The following table presents revenues for each reporting segment (in thousands):
Three Months Ended September 30, | Nine Months ended September 30, | |||||||||||
2002 | 2003 | 2002 | 2003 | |||||||||
Human therapeutics | $ | 6,332 | $ | 3,694 | $ | 16,356 | $ | 10,684 | ||||
Chemicals | 1,625 | 1,358 | 5,549 | 6,740 | ||||||||
Agriculture | 3,751 | 3,449 | 9,657 | 11,561 | ||||||||
Total revenue | $ | 11,708 | $ | 8,501 | $ | 31,562 | $ | 28,985 | ||||
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Identifiable Assets
The following table presents indentifiable assets for each reporting segment (in thousands):
December 31, 2002 | September 30, 2003 | |||||
Human therapeutics | $ | 28,594 | $ | 24,780 | ||
Chemicals | 27,207 | 23,247 | ||||
Agriculture | 11,928 | 9,505 | ||||
All other | 201,051 | 190,022 | ||||
Total assets | $ | 268,780 | $ | 247,554 | ||
7. Subsequent Event
In October 2003 the Company reached an agreement with H. Lundbeck A/S (“Lundbeck”) to acquire all rights previously licensed to Lundbeck for the Company’s interferon beta product candidate for centeral nervous system diseases, including multiple sclerosis. The companies agreed to transfer to the Company all rights held by Lundbeck with regard to the improved interferon beta product candidate. Lundbeck has retained a financial interest in this product candidate.
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Forward Looking Statements
This report contains forward-looking statements within the meaning of federal securities laws that relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may,” “can,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “intend,” “potential” or “continue” or the negative of these terms or other comparable terminology. Risks and uncertainties and the occurrence of other events could cause actual results to differ materially from these predictions. Factors that could cause or contribute to such differences include those discussed below under “Risk Factors That May Affect Results of Operations and Financial Condition,” as well as those discussed in our Annual Report on Form 10-K for the year ended December 31, 2002.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of these statements. We are under no duty to update any of the forward-looking statements after the date of this report or to conform these statements to actual results.
MANAGEMENT’S DISCUSSIONAND ANALYSISOF FINANCIAL CONDITIONAND RESULTSOF OPERATIONS
Overview
Maxygen was founded in May 1996 and began operations in March 1997. To date, we have generated revenues from research collaborations with agriculture, pharmaceutical, petroleum, and chemical companies and from government grants. We have strategic collaborations with leading companies including: Roche in interferon alpha and interferon beta therapies; Aventis Pasteur in novel vaccines; InterMune in next generation interferon gamma therapies; ALK-Abelló in allergy; the International AIDS Vaccine Initiative (IAVI) in HIV; Eli Lilly, Pfizer and DSM in pharmaceutical manufacturing; and Shearwater Corporation (a subsidiary of Nektar Therapeutics) for protein pharmaceutical PEGylation technologies. Additionally, we have a range of other strategic alliances in industrial applications, as well as funding from U.S. government organizations including from the Defense Advanced Research Projects Agency (“DARPA”), the National Institute of Standards and Technology-Advanced Technology Program, the U.S. Agency for International Development and the U.S. Army Medical Research and Materiel Command.
This report and the disclosures herein include, on a consolidated basis, the business and operations of Maxygen and our wholly-owned subsidiaries, Maxygen ApS, Maxygen Holdings Ltd. and Verdia, Inc., as well as our majority-owned subsidiary Codexis, Inc., unless, in each case, the context indicates that the disclosure applies only to a named subsidiary.
Revenue from strategic alliances and government grants increased from $30.5 million in 2001 to $41.8 million in 2002 and was $29.0 million in the nine months ended September 30, 2003. Revenues may fluctuate from period to period because there can be no assurance that these collaborations will continue for their initial term or beyond.
We have incurred significant losses since our inception. As of September 30, 2003, our accumulated deficit was $185.6 million and total stockholders’ equity was $209.3 million. We have invested heavily in establishing our proprietary technologies and product candidates. These investments have contributed to the increases in our research and development expenses from $54.0 million in 2001 to $62.0 million in 2002 and were $42.1 million in the nine months ended September 30, 2003. As of September 30, 2003 we had 276 employees, of whom approximately 84.8% were engaged in research and development. We expect to incur additional operating losses over at least the next several years.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with general accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
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We believe there have been no significant changes in our critical accounting policies during the nine months ended September 30, 2003 as compared to what was previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2002.
Deferred Compensation
In connection with the grant of stock options to employees before our initial public offering, we recorded deferred stock compensation of approximately $2.4 million in 1998 and $19.5 million in 1999. These amounts were initially recorded as a component of stockholders’ equity and are being amortized as charges to operations over the vesting period of the options using a graded vesting method. We recognized stock compensation expense related to the deferred compensation amortization on these option grants, which are split between research and development expense and general and administrative expense, as shown in the following table (in thousands):
Three Months Ended September 30, | Nine Months ended September 30, | |||||||||||||||
2002 | 2003 | 2002 | 2003 | |||||||||||||
Research and development | $ | 338 | $ | 144 | $ | 1,174 | $ | 514 | ||||||||
General and administrative | 338 | 118 | 1,324 | 446 | ||||||||||||
Total deferred compensation amortization | $ | 676 | $ | 262 | $ | 2,498 | $ | 960 | ||||||||
We expect to fully amortize to expense the remaining deferred compensation relating to the grant of stock options to employees before our initial public offering by August 2004. Stock compensation expense in connection with the grant of stock options to consultants for the three and nine months ended September 30, 2002 and 2003 were insignificant.
In connection with the Maxygen ApS acquisition in August 2000, stock options were granted in exchange for outstanding warrants to purchase Maxygen ApS securities. In connection with this exchange we recorded aggregate deferred compensation totaling $1.5 million. This amount is being amortized over the remaining vesting period of the options, of which $82,000 and $420,000 was expensed in the three and nine months ended September 30, 2002 and $0 and $8,000 was expensed in the comparable periods for 2003. For the shares exchanged that had a right of repurchase, deferred compensation of $13.1 million was recorded. This amount was amortized to expense over a three-year graded vesting period. A total of $548,000 and $2.4 million was recognized as expense for the three and nine months ended September 30, 2002, and $121,000 and $844,000 in the comparable periods for 2003. The deferred compensation relating to the shares subject to repurchase was fully amortized to expense in July 2003.
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Results of Operations
Revenues
Our total revenues were $11.7 million and $31.6 million in the three and nine months ended September 30, 2002 and $8.5 million and $29.0 million for the comparable periods in 2003. The decrease in collaborative research and development revenue for the three month periods is primarily due to the decrease in partner funding as the funded research terms of the Company’s collaborations with InterMune and Lundbeck wind down on schedule, offset in part by collaborative research and development revenue from the Company’s collaboration with Roche, which began in July 2003. For the nine month periods, the decrease is primarily due to the decrease in partner funding as the funded research terms of the Company’s collaborations with InterMune and Lundbeck wind down on schedule, offset in part by revenue from the Roche collaboration, the receipt of a $2.0 million product development milestone from Pioneer Hi-Bred and the receipt of a $2.5 million payment from Hercules to terminate our collaboration agreement. We have no ongoing obligations related to these payments received from Pioneer Hi-Bred and Hercules during the first quarter of 2003. The decline in grant revenue primarily reflects the expiration of a U.S. government grant from the Defense Advanced Research Projects Agency that began in 1999 and ended in September 2002. In 2003, we expect our consolidated revenue, consisting of collaboration revenue, grant revenue and royalties on product sales to be in the range of $35 million to $40 million.
Revenues for each operating segment are derived from our research collaboration agreements and government research grants and are categorized based on the industry of the product or technology under development. Results of Codexis, Inc. are shown as Maxygen’s chemicals segment and results of Verdia, Inc. are shown as Maxygen’s agriculture segment. The following table presents revenues for each operating segment (in thousands):
Three Months Ended September 30, | Nine Months ended September 30, | |||||||||||||
2002 | 2003 | 2002 | 2003 | |||||||||||
Human therapeutics | $ | 6,332 | $ | 3,694 | $ | 16,356 | $ | 10,684 | ||||||
Chemicals | 1,625 | 1,358 | 5,549 | 6,740 | ||||||||||
Agriculture | 3,751 | 3,449 | 9,657 | 11,561 | ||||||||||
Total revenue | $ | 11,708 | $ | 8,501 | $ | 31,562 | $ | 28,985 | ||||||
The decrease in revenue for our human therapeutics segment primarily reflects the scheduled winding down of the funded research terms of our collaborations with InterMune and Lundbeck. Revenue for our human therapeutics segment in the fourth quarter is expected to remain consistent with revenue for the three months ended September 30, 2003.
The decrease in revenue for our chemicals segment (Codexis) between the three months ended September 30, 2002 and the three months ended September 30, 2003 is primarily due to the termination of the Hercules collaboration in the first quarter of 2003. The increase in revenue for our chemicals segment for the nine month period was primarily due to the receipt of a $2.5 million payment from Hercules in the first quarter of 2003 to terminate our collaboration agreement with it. We have no ongoing obligations related to this payment.
The decrease in revenue for our agriculture segment (Verdia) between the three months ended September 30, 2002 and the three months ended September 30, 2003 is primarily due to a reduction in collaboration revenue from Syngenta. The increase in revenue for our agriculture segment for the nine month period was primarily due to the receipt of a $2.0 million product development milestone from Pioneer Hi-Bred in the first quarter of 2003 and an increase in revenue from DeltaMax. We have no ongoing obligations relating to the Pioneer Hi-Bred milestone payment.
Research and Development Expenses
We do not generally track fully burdened research and development costs or capital expenditures by project. However, we estimate, based on full-time equivalent effort, that the percentage of research and development efforts (as measured in hours incurred, which approximates costs) undertaken for collaborative projects funded by our collaborators and government grants was 50% and 49% for the three and nine months ended September 30, 2002 and 40% and 36% for the comparable periods in 2003. The decreased percentage of efforts on collaborative projects funded by our collaborators and government grants reflect the scheduled wind down of the research terms of our InterMune and Lundbeck collaborations, the completion of a DARPA contract in September 2002, and the termination of the Hercules collaboration. The percentage of research effort (as measured by hours incurred, which approximates costs) undertaken for our own internally funded research projects was 50% and 51% for the three and nine months ended September 30, 2002 and 60% and 64% for the comparable periods in 2003. Due to the nature
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of our research and our dependence on our collaborative partners to commercialize the results of the research, we cannot predict with any certainty whether any particular collaboration or research effort will ultimately result in a commercial product and therefore whether we will receive future milestone payments or royalty payments under our various collaborations.
Most of our human therapeutic, agriculture and chemical product development programs are at an early stage and may not result in any marketed products. Product candidates that may appear promising at early stages of development may not reach the market for a number of reasons. Human therapeutic product candidates may be found to be ineffective or cause harmful side effects during clinical trials, may take longer to pass through clinical trials than had been anticipated, may fail to receive necessary regulatory approvals and may prove impracticable to manufacture in commercial quantities at reasonable costs and with acceptable quality. Chemical and agricultural product candidates may be found ineffective, may fail to receive any necessary regulatory approvals or may prove impracticable to manufacture in commercial quantities at reasonable costs and with acceptable quality. Furthermore, it is uncertain which of our internally developed product candidates will be subject to future collaborative arrangements. The participation of a collaborative partner may accelerate the time to completion and reduce the cost to us of a product candidate or it may delay the time and increase the cost to us due to the alteration of our product development plan. The risks and uncertainties associated with our research and development projects are discussed more fully in the section of this report titled “Risk Factors That May Affect Results of Operations and Financial Condition.” Because of these risks and uncertainties, we cannot predict when or whether we will successfully complete the development of our product candidates or the ultimate product development cost in any particular case.
Our research and development expenses consist primarily of salaries and other personnel-related expenses, facility costs, research consultants and external collaborative research expenses, supplies and depreciation of facilities and laboratory equipment. Research and development expenses decreased from $15.8 million and $46.2 million in the three and nine months ended September 30, 2002 to $14.3 million and $42.1 million in the comparable periods of 2003. The decrease was primarily due to the impact of cost reduction measures announced in October 2002. Stock compensation expense related to research and development was $973,000 and $4.1 million for the three and nine months ended September 30, 2002 and $286,000 and $1.4 million for the comparable periods of 2003. The decrease in stock compensation expenses was primarily the result of lower amortization expense related to deferred compensation for the shares subject to repurchase that were exchanged in connection with the Maxygen ApS acquisition in August 2000 and the deferred compensation related to the grant of stock options to employees before our initial public offering. The deferred compensation for the shares subject to repurchase that were exchanged in connection with the Maxygen ApS acquisition in August 2000 was being amortized to expense over a three year graded vesting period. This deferred compensation was fully amortized to expense in July 2003. The deferred compensation related to the grant of stock options to employees before our initial public offering is being amortized using a graded vesting method. It is expected to be fully amortized to expense by August 2004.
On May 8, 2000, we acquired certain in-process technology through the acquisition of a privately held California corporation. In connection with the acquisition we issued 39,600 shares of our common stock. Pursuant to the terms of the acquisition agreement, 18,500 shares of our common stock were held in escrow until such time as contingencies regarding the acquired technology patents were resolved. In 2000, we recorded a charge for acquired in-process research and development of $912,000 representing the fair market value of the 21,100 shares delivered to the sellers at closing, plus certain transaction expenses. On May 8, 2003, the contingencies regarding the patents related to the acquired technology were resolved and the shares held in escrow were delivered to the sellers. Accordingly, a charge of $144,000 is included in research and development expenses for the nine months ended September 30, 2003, representing the fair value of the 18,500 shares delivered to the sellers.
Research and development expenses, excluding stock compensation expense, represented 135% and 146% of total revenues for the three and nine months ended September 30, 2002 and 168% and 145% of total revenues for the comparable periods in 2003. The increase between the three month periods is primarily due to the decline in our total revenue between the periods. The decrease between the nine month periods is primarily due to the reduction of research and development expenditures, offset in part by the decline in our total revenue between the periods.
We expect research and development expenses to remain constant or increase moderately during the balance of 2003 as we increase our efforts on internally funded projects. We expect to continue to devote substantial resources to research and development and we expect research and development expenses to increase in the next several years if we are successful in advancing our product candidates into clinical trials. To the extent we out-license our product candidates prior to commencement of clinical trials or collaborate with others with respect to clinical trials, increases in research and development expenses may be reduced or avoided. We intend to manage
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the level of our expenditures for research and development, including clinical trials, to balance advancing our product candidates against maintaining adequate cash resources for our operations.
General and Administrative Expenses
Our general and administrative expenses consist primarily of personnel costs for finance, human resources, business development, legal and general management, as well as insurance premiums and professional expenses, such as legal and accounting. General and administrative expenses decreased from $3.3 million and $9.6 million for the three and nine months ended September 30, 2002 to $2.7 million and $9.0 million in the comparable periods of 2003. The decrease in total general and administrative expenses between the three month periods is primarily due to lower legal costs and reduced headcount. The decrease between the nine month periods is primarily due to lower legal costs, lower spending on public relations, and reduced headcount, offset in part by the reimbursement of legal expenses of $657,000 received in the first quarter of 2002 resulting from the arbitration proceeding against Enchira Biotechnology Corporation.
General and administrative expenses, excluding stock compensation expense, represented 28% and 30% of total revenues for the three and nine months ended September 30, 2002 and 32% and 31% of total revenues in the comparable periods of 2003. The increase in the three and nine month periods is primarily due to the decline in our total revenue, offset in part by the decline in general and administrative expenses between the periods.
We expect general and administrative expenses for 2003 will remain relatively consistent with the three months ended September 30, 2003 but may increase modestly as a result of increased professional fees, regulatory compliance and improvements to infrastructure. We expect general and administrative expenses to increase in the next several years due to increased professional expenses and increased costs of regulatory compliance.
Amortization of Other Intangible Assets
We amortized the core technology purchased in our August 2000 acquisition of Maxygen ApS over its three year useful life. Such amortization was fully allocated to expense in August 2003. We recorded amortization expense of $286,000 and $858,000 for the three and nine months ended September 30, 2002 and $126,000 and $698,000 for the comparable periods in 2003.
Interest and Other Income, Net
Net interest and other income represents income earned on our cash, cash equivalents and marketable securities net of interest expense on our equipment leases and currency transaction gains or losses. Net interest and other income decreased from $2.3 million and $6.3 million in the three and nine months ended September 30, 2002 to $1.1 million and $3.9 million for the comparable periods in 2003. The decreases were due to declining interest rates and lower average balances of cash, cash equivalents and marketable securities.
Equity in Net Loss of Joint Venture and Minority Interests
Equity in net loss of joint venture and minority interests reflects Maxygen’s share of the net loss of DeltaMax Cotton LLC and Avidia Research Institute. DeltaMax Cotton LLC was formed in May 2002 and is being accounted for under the equity method of accounting. Avidia Research Institute was formed in July 2003 and is also being accounted for under the equity method of accounting. Equity in net loss of joint venture and minority interests increased from $538,000 and $767,000 for the three and nine months ended September 30, 2002 to $973,000 and $2.0 million for the comparable periods in 2003. The increase in net loss in 2003 is primarily due to the DeltaMax joint venture being fully operational for the entire nine month period of 2003 and the start of operations of Avidia.
Subsidiary Preferred Stock Accretion
On September 13, 2002, Codexis sold $15 million of Codexis preferred stock to investors, of which $5 million was purchased by Maxygen and $10 million was purchased by several unrelated investors. On October 1, 2002, Codexis sold an additional $10 million of preferred stock to unrelated investors. This series of convertible preferred stock included a redemption provision, which provided that the holders of at least a majority of the outstanding shares of this convertible preferred stock (excluding the convertible preferred stock held by Maxygen and its affiliates), voting together as a separate class, may require Codexis to redeem the convertible preferred stock. The redemption price for each share will be payable in cash in exchange for the shares of convertible preferred stock to be redeemed at a sum equal to the applicable original issue price per share plus five percent (5%) of the original issue price per year from the original issue date until the applicable redemption date, plus declared and unpaid dividends. Notice of redemption can be given at any time on or after the fifth anniversary of the original issue date.
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In connection with these redemption rights, we recorded accretion of the redemption premium for the convertible preferred stock, excluding the shares owned by Maxygen, in the amount of $319,000 and $957,000 for the three and nine months ended September 30, 2003. The accretion is recorded as subsidiary preferred stock accretion on the Consolidated Statement of Operations and as a reduction of additional paid-in capital on the Consolidated Balance Sheets. Any obligation to make redemption payments is solely an obligation of Codexis and any payments are to be made solely from assets of Codexis.
Recent Accounting Pronouncements
In June 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (referred to as SFAS) No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue (referred to as EITF) No. 94-3 “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)”. SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred, not at the date of an entity’s commitment to an exit plan, as required under EITF 94-3. The provisions of SFAS 146 are effective for exit or disposal activities initiated after December 31, 2002, with earlier application encouraged. The adoption of SFAS 146 did not have a material effect on the Company’s consolidated financial statements.
In November 2002, the Financial Accounting Standards Board issued EITF Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables.” EITF Issue No. 00-21 addresses certain aspects of the accounting by a company for arrangements under which it will perform multiple revenue-generating activities. EITF Issue No. 00-21 addresses when and how an arrangement involving multiple deliverables should be divided into separate units of accounting. EITF Issue No. 00-21 provides guidance with respect to the effect of certain customer rights due to company nonperformance on the recognition of revenue allocated to delivered units of accounting. EITF Issue No. 00-21 also addresses the impact on the measurement and/or allocation of arrangement consideration of customer cancellation provisions and consideration that varies as a result of future actions of the customer or the company. Finally, EITF Issue No. 00-21 provides guidance with respect to the recognition of the cost of certain deliverables that are excluded from the revenue accounting for an arrangement. The provisions of EITF Issue No. 00-21 apply to revenue arrangements entered into in fiscal periods beginning on or after July 1, 2003. The adoption of EITF Issue No. 00-21 did not have a material effect on the Company’s consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46 (or FIN 46), “Consolidation of Variable Interest Entities.” FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns or both. A variable interest entity is a corporation, partnership, trust, or any other legal structures used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. A variable interest entity often holds financial assets, including loans or receivables, real estate or other property. A variable interest entity may be essentially passive or it may engage in research and development or other activities on behalf of another entity. The consolidation requirements of FIN 46 apply to variable interest entities created after January 31, 2003. The consolidation requirements apply to older entities in the first fiscal year or interim period ending after December 15, 2003. Certain of the disclosure requirements apply to all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established.
Liquidity and Capital Resources
Since inception, we have financed our operations primarily through private placements and public offerings of equity securities, receiving aggregate consideration from such sales totaling $302.5 million and research and development funding from collaborators and government grants totaling approximately $167.6 million. In addition, our majority-owned subsidiary, Codexis, Inc., received $25 million from a private placement of its equity securities, $20 million from third party investors and $5 million from Maxygen. As of September 30, 2003, we had $209.9 million in cash, cash equivalents and marketable securities. This includes $25.3 million held by our subsidiaries Verdia and Codexis.
Net cash used in operating activities was $12.2 million for the nine months ended September 30, 2002 and was $14.3 million for the nine months ended September 30, 2003. Uses of cash in operating activities were primarily to fund operating losses.
Net cash provided by investing activities was $129.4 million for the nine months ended September 30, 2002. Net cash use in investing activities was $22.0 million for the nine months ended September 30, 2003. The cash provided during the nine months ended September 30, 2002 was primarily from the maturities of available-for-sale securities. The cash used during the nine months ended September 30, 2003 primarily represented purchases of available-for-sale securities net of the maturities of available-for-sale securities.
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Additions of property and equipment were $3.9 million for the nine months ended September 30, 2002 and were $3.1 million for the nine months ended September 30, 2003. We expect to continue to make investments in the purchase of property and equipment to support our operations. We may use a portion of our cash to acquire or invest in businesses, products or technologies, or to obtain the right to use such technologies.
In connection with our joint venture, DeltaMax Cotton LLC, Maxygen and Delta and Pine Land Company are committed to fund the joint venture in an amount sufficient to pay the anticipated development costs, but neither party is required to provide funding in excess of $15 million. During the nine months ended September 30, 2003, we funded the joint venture through a capital contribution in the amount of $1.7 million, which reflects our 50% ownership interest. In connection with the formation of Avidia Research Institute, Maxygen invested $500,000 in July 2003.
Net cash provided by financing activities was $12.3 million for the nine months ended September 30, 2002 and was $1.4 million for the nine months ended September 30, 2003. The cash provided during the nine months ended September 30, 2002 was primarily from the sale of Codexis preferred stock on September 13, 2002 to unrelated investors. The cash provided during the nine months ended September 30, 2003 was primarily from the proceeds of the sale of common stock in connection with our Employee Stock Purchase Plan and the exercise of stock options by employees. These amounts were partially offset by payments of equipment financing obligations.
Since inception we have received $138.9 million in payments from our collaborators and from government grants, which includes $7.8 million of deferred revenue to be recognized over approximately the next two years. Approximately $110.2 million was received from our collaborators and $28.7 million was received from government funding. Assuming our research efforts for existing collaborations and grants are expended for their full research terms, as of September 30, 2003 we had total committed funding of approximately $28.7 million remaining to be received over approximately the next two years. Potential milestone payments from our existing collaborations could exceed $500 million based on the accomplishment of specific performance criteria. We may also earn royalties on product sales. In general, the obligation of our corporate collaborators to provide research funding cannot be terminated by either party before the end of the research term unless there has been a material breach of contract or either party has become bankrupt or insolvent. In the case of such an event, the agreement specifies the rights, if any, that each party will retain.
We believe that our current cash, cash equivalents, short-term investments and long-term investments, together with funding received from collaborators and government grants, will be sufficient to satisfy our anticipated cash needs for working capital and capital expenditures for at least the next twelve months. However, it is possible that we will seek additional financing within this timeframe. We may raise additional funds through public or private financing, collaborative relationships or other arrangements. Additional funding, if sought, may not be available on terms favorable to us. Further, any additional equity financing may be dilutive to stockholders, and debt financing, if available, may involve restrictive covenants. Our failure to raise capital when needed may harm our business and operating results.
RISK FACTORS THAT MAY AFFECT RESULTS OF OPERATIONS AND FINANCIAL CONDITION
You should carefully consider the risks described below, together with all of the other information included in this report, in considering our business and prospects. The risks and uncertainties described below are not the only ones facing Maxygen. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations. If any of the following risks actually occur, our business could be harmed. In such case, the trading price of our common stock could decline, and you may lose all or part of your investment.
We Have a History of Net Losses. We Expect to Continue to Incur Net Losses and We May Not Achieve or Maintain Profitability.
We have incurred net losses since our inception, including a net loss applicable to common stockholders of approximately $45.0 million in 2001, $33.9 million in 2002 and $23.9 million in the nine months ended September 30, 2003. As of September 30, 2003, we had an accumulated deficit of approximately $185.6 million. We expect to have net losses and negative cash flow for at least the next several years. The size of these net losses will depend, in part, on the rate of growth, if any, in our revenues and on the level of our expenses. To date, we have derived substantially all our revenues from collaborations and grants and expect to derive a majority of our revenue from such sources for at least the next several years. Revenues from collaborations and grants are uncertain because
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our existing agreements have fixed terms and because our ability to secure future agreements will depend upon our ability to address the needs of current and potential future collaborators. We expect to spend significant amounts to fund development of products and further research and development to enhance our core technologies. As a result, we expect that our operating expenses will exceed revenues in the near term and we do not expect to achieve profitability during the next several years.
We Need to Contain Costs in Order to Achieve Profitability.
We are continuing our efforts to contain costs and reduce our expense structure. We believe strict cost containment and expense reductions in the near term are essential if our current funds are to be sufficient to allow us to achieve future profitability. We assess market conditions on an ongoing basis and plan to take appropriate actions as required. If we are not able to effectively contain our costs and achieve an expense structure commensurate with our business activities and revenues, we may have inadequate levels of cash for future operations or for future capital requirements, which could significantly harm our ability to operate the business.
Our Business and Our Ability to Grow Revenues has been Adversely Impacted by the Economic Slowdown and Related Uncertainties Affecting Markets in Which We Operate.
Adverse economic conditions worldwide have contributed to a slowdown in the biotechnology industry and impacted our business resulting in:
• | reduced demand for our technology and the products resulting therefrom; |
• | increased competition for a decreasing number of research and development collaborations and joint ventures; and |
• | a significant reduction in the ability of biotechnology companies to raise capital. |
Recent political and social turmoil in many parts of the world, including actual incidents and potential future acts of terrorism and war, may continue to put pressure on global economic conditions. These political, social and economic conditions and uncertainties make it difficult for Maxygen and our existing and potential collaboration partners to accurately forecast and plan future business activities. This reduced predictability challenges our ability to increase revenues and reach profitability. In particular, it is difficult to develop and implement strategies, sustainable business models and efficient operations, and effectively manage collaboration relationships due to difficult macroeconomic conditions. If the current economic or market conditions continue or further deteriorate, there could be a material adverse impact on our financial position, revenues, results of operations and cash flow.
Commercialization of Our Technologies Depends on Collaborations With Other Companies. If We Are Unable to Find Collaborators in the Future, We May Not Be Able to Develop Our Technologies or Products.
Since we do not currently possess the resources necessary to develop and commercialize potential products that may result from our technologies, or the resources to complete any approval processes that may be required for these products, we must enter into collaborative arrangements, including joint ventures, to develop and commercialize products. We have entered into collaborative agreements and joint ventures with other companies to fund the development of new products for specific purposes. These contracts expire after a fixed period of time. If they are not renewed or if we do not enter into new collaborative agreements or joint ventures, our revenues will be reduced and our products may not be commercialized.
We have limited or no control over the resources that any collaborator may devote to our products. Any of our present or future collaborators may not perform their obligations as expected. These collaborators may breach or terminate their agreement with us or otherwise fail to conduct their collaborative activities successfully and in a timely manner. Further, our collaborators may elect not to develop products arising out of our collaborative arrangements or devote sufficient resources to the development, manufacture, marketing or sale of these products. If any of these events occur, we may not be able to develop our technologies or commercialize our products.
We Are an Early Stage Company Deploying Unproven Technologies. If We Do Not Develop Commercially Successful Products, We May Be Forced to Cease Operations.
You must evaluate us in light of the uncertainties and complexities affecting an early stage biotechnology company. Our proprietary technologies are in the early stage of development. We may not develop products that prove to be safe and efficacious, meet applicable regulatory standards, are capable of being manufactured at reasonable costs or can be marketed successfully.
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We may not be successful in the commercial development of products. Successful products will require significant development and investment, including testing, to demonstrate their cost-effectiveness before their commercialization. To date, companies in the biotechnology industry have developed and commercialized only a limited number of products. We have not proven our ability to develop and commercialize products. We must conduct a substantial amount of additional research and development before any regulatory authority will approve any of our potential products. Our research and development may not indicate that our products are safe and effective, in which case regulatory authorities may not approve them. Problems frequently encountered in connection with the development and utilization of new and unproven technologies and the competitive environment in which we operate might limit our ability to develop commercially successful products.
Since Our Technologies Can Be Applied to Many Different Potential Products, If We Focus Our Efforts on Potential Products That Fail to Produce Viable Products, We May Fail to Capitalize on More Profitable Areas.
We have limited financial and managerial resources. Since our technologies may be applicable to numerous, diverse potential products, we must prioritize our application of resources to discrete efforts. This requires us to focus on product candidates in selected areas and forego efforts with regard to other products and areas. Our decisions may not produce viable commercial products and may divert our resources from more profitable market opportunities.
We May Need Additional Capital in the Future. If Additional Capital is Not Available, We May Have to Curtail or Cease Operations.
Our future capital requirements will depend on many factors including payments received under collaborative agreements, joint ventures and government grants, the progress and scope of our collaborative and independent research and development projects, the extent to which we advance products into clinical trials with our own resources, the effect of any acquisitions, and the filing, prosecution and enforcement of patent claims.
Changes may also occur that would consume available capital resources significantly sooner than we expect. We may be unable to raise sufficient additional capital. The current difficult economic climate means that the current ability of biotechnology companies to raise capital is severely limited, particularly companies such as Maxygen without human therapeutic product in late clinical development. If we fail to raise sufficient funds, we may have to curtail or cease operations. We anticipate that existing cash and cash equivalents and income earned thereon, together with anticipated revenues from collaborations, joint ventures and grants, will enable us to maintain our currently planned operations for at least the next twelve months. If our capital resources are insufficient to meet future capital requirements, we will have to raise additional funds to continue the development of our technologies and complete the commercialization of products, if any, resulting from our technologies.
We Intend to Conduct Proprietary Research Programs, and Any Conflicts With Our Collaborators or Any Inability to Commercialize Products Resulting from This Research Could Harm Our Business.
An important part of our strategy involves conducting proprietary research programs. We may pursue opportunities in fields that could conflict with those of our collaborators. Moreover, disagreements with our collaborators could develop over rights to our intellectual property. Any conflict with our collaborators could reduce our ability to obtain future collaboration agreements and negatively impact our relationship with existing collaborators, which could reduce our revenues.
Certain of our collaborators could become our competitors in the future. Our collaborators could develop competing products, preclude us from entering into collaborations with their competitors, fail to obtain timely regulatory approvals, terminate their agreements with us prematurely or fail to devote sufficient resources to allow the development and commercialization of products. Any of these developments could harm our product development efforts.
We will either commercialize products resulting from our proprietary programs directly or through licensing to other companies. We have no experience in manufacturing and marketing, and we currently do not have the resources or capability to manufacture products on a commercial scale. In order for us to commercialize these products directly, we would need to develop, or obtain through outsourcing arrangements, the capability to manufacture, market and sell products. We do not have these capabilities, and we may not be able to develop or otherwise obtain the requisite manufacturing, marketing and sales capabilities. If we are unable to successfully commercialize products resulting from our proprietary research efforts, we will continue to incur losses.
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We Do Not Completely Control Codexis, and Codexis May Not Make Decisions That Are in the Best Interests of Maxygen Stockholders.
Codexis operates as an independent subsidiary of Maxygen. While we currently own 57% of Codexis, we do not have complete control of the operating and other decisions of Codexis. The interests of Codexis and its stockholders may not always coincide with our interests or the interests of our stockholders. Since Maxygen is currently required to consolidate the financial statements of Codexis with its own financial statements, Codexis may enter into agreements or conduct its operations in a manner that could have a direct material adverse impact on our financial statements and results of operations. Since Maxygen and Codexis presently operate from shared facilities, Codexis could conduct its operations in a manner that adversely affects our business or reputation in the community and/or in the biotechnology industry, making it more difficult to operate in the community, secure additional alliances and maintain existing collaborations. This could have an adverse impact on our ability to conduct business.
We May Encounter Difficulties in Managing Our Operations. These Difficulties Could Increase Our Losses.
Our ability to manage our operations effectively requires us to continue to expend funds to enhance our operational, financial and management controls, reporting systems and procedures and to attract and retain sufficient numbers of talented employees. These requirements have been increased as a result of the increasing operational independence of our majority-owned subsidiary Codexis and our wholly-owned subsidiary Verdia. At present we provide a number of operational, financial and reporting services to Codexis and Verdia under services agreements. If we are unable to implement improvements to our management information and control systems in an efficient or timely manner, or if we encounter deficiencies in existing systems and controls, then management may have access to inadequate information to manage our day-to-day operations. Failure to attract and retain sufficient numbers of talented employees will further strain our human resources and our ability to satisfy our obligations under collaboration agreements. This would reduce our revenue, increase our losses and harm our reputation in the marketplace.
The Operation of International Locations May Increase Operating Expenses and Divert Management Attention.
Since August 2000, when we acquired Maxygen ApS, a Danish biotechnology company, we have been operating with international business locations. Operation as an international entity requires additional management attention and resources. We have limited experience in operating internationally and in conforming our operations to local cultures, standards and policies. We also must compete with local companies who understand the local situation better than we do. Due to these operational impediments we may have trouble generating revenues from foreign operations. Even if we are successful, the costs of operating internationally are expected to continue to exceed our international revenues for at least the next several years. As we continue to operate internationally, we are subject to risks of doing business internationally, including the following:
• | regulatory requirements that may limit or prevent the offering of our products in local jurisdictions; |
• | local legal and governmental limitations on company-wide employee benefit practices, such as the operation of our employee stock option plan in local jurisdictions; |
• | government limitations on research and/or research involving genetically engineered products or processes; |
• | difficulties in staffing and managing foreign operations; |
• | longer payment cycles, different accounting practices and problems in collecting accounts receivable; |
• | currency exchange risks; |
• | cultural non-acceptance of genetic manipulation and genetic engineering; and |
• | potentially adverse tax consequences. |
Legislative Actions, Potential New Accounting Pronouncements and Higher Insurance Costs are Likely to Adversely Impact Our Future Financial Position and Results of Operations.
Future changes in financial accounting standards, including the possibility that we will be required to expense all stock option grants, may cause adverse, unexpected revenue fluctuations and affect our financial position and results of operations. New pronouncements and varying interpretations of pronouncements have occurred with frequency in the recent past and may occur in the future. In addition we may make changes in our accounting policies in the future. Compliance with changing regulation of corporate governance and public disclosure will also result in additional expenses. Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations and Nasdaq National Market listing requirements, are creating uncertainty for companies such as ours and insurance costs are increasing as a result of
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this uncertainty and other factors. We are committed to maintaining high standards of corporate governance and public disclosure. As a result, we intend to invest all reasonably necessary resources to comply with evolving standards, and this investment will result in increased general and administrative expenses and may cause a diversion of management time and attention from revenue-generating activities to compliance activities.
Substantial Sales of Shares May Adversely Impact the Market Price of our Common Stock.
If our stockholders sell substantial amounts of our common stock, including shares issued upon the exercise of outstanding options, the market price of our common stock may decline. Our common stock purchase/sale volume is low and thus the market price of our common stock is particularly sensitive to purchases/sales of high volumes of shares. Our low purchase/sale volume may also make it more difficult for us to sell equity or equity related securities in the future at a time and price that we deem appropriate. Significant sales of our common stock may adversely impact the then-prevailing market price of our common stock.
Acquisitions Could Result in Dilution, Operating Difficulties and Other Harmful Consequences.
If appropriate opportunities present themselves, we may acquire businesses and technologies that complement our capabilities. The process of integrating any acquisition may create unforeseen operating difficulties and expenditures and is itself risky. The areas where we may face difficulties include:
• | diversion of management time (both ours and that of the acquired company) from focus on operating the businesses to issues of integration during the period of negotiation through closing and further diversion of such time after closing; |
• | decline in employee morale and retention issues resulting from changes in compensation, reporting relationships, future prospects, or the direction of the business; |
• | the need to integrate each company’s accounting, management information, human resource and other administrative systems to permit effective management and the lack of control if such integration is delayed or not implemented; and |
• | the need to implement controls, procedures and policies appropriate for a larger public company in companies that before acquisition had been smaller, private companies. |
We do not have extensive experience in managing this integration process. Moreover, the anticipated benefits of any or all of these acquisitions may not be realized.
Future acquisitions could result in potentially dilutive issuances of equity securities, the incurrence of debt, contingent liabilities or amortization expenses related to intangible assets, any of which could harm our business. Future acquisitions may require us to obtain additional equity or debt financing, which may not be available on favorable terms or at all. Even if available, this financing may be dilutive.
Public Perception of Ethical and Social Issues May Limit the Use of Our Technologies, Which Could Reduce Our Revenues.
Our success will depend in part upon our ability to develop products discovered through our technologies. Governmental authorities could, for social or other purposes, limit the use of genetic processes or prohibit the practice of our directed molecular evolution technologies or other technologies. Ethical and other concerns about our directed molecular evolution technologies or other technologies, particularly the use of genes from nature for commercial purposes, and products resulting therefrom, could adversely affect their market acceptance.
If the Public Rejects Genetically Engineered Products, There Will Be Lower Demand for Our Products.
The commercial success of our potential products will depend in part on public acceptance of the use of genetically engineered products including drugs, plants and plant products. Claims that genetically engineered products are unsafe for consumption or pose a danger to the environment may influence public attitudes. Our genetically engineered products may not gain public acceptance. Negative public reaction to genetically modified organisms and products could result in greater government regulation of genetic research and resultant products, including stricter labeling laws or regulations, and could cause a decrease in the demand for our products.
The subject of genetically modified organisms has received negative publicity in Europe and the United States, which has aroused public debate. The adverse publicity could lead to greater regulation and trade restrictions on genetic research and the resultant agricultural and other products could be subject to greater domestic or international regulation. Such regulation and restrictions could cause a decrease in the demand for our products.
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Many Potential Competitors Who Have Greater Resources and Experience Than We Do May Develop Products and Technologies That Make Ours Obsolete.
The biotechnology industry is characterized by rapid technological change, and the area of gene research is a rapidly evolving field. Our future success will depend on our ability to maintain a competitive position with respect to technological advances. Rapid technological development by others may result in our products and technologies becoming obsolete.
We face, and will continue to face, intense competition from organizations such as large and small biotechnology companies, as well as academic and research institutions and government agencies that are pursuing competing technologies for modifying DNA and proteins. These organizations may develop technologies that are alternatives to our technologies. Further, our competitors in the directed molecular evolution field may be more effective at implementing their technologies to develop commercial products. Some of these competitors have entered into collaborations with leading companies within our target markets to produce commercial products.
Any products that we develop through our technologies will compete in multiple, highly competitive markets. Most of the organizations competing with us in the markets for such products have greater capital resources, research and development and marketing staffs and facilities and capabilities, and greater experience in modifying DNA and proteins, obtaining regulatory approvals, manufacturing products and marketing.
Accordingly, our competitors may be able to develop technologies and products more easily, which would render our technologies and products and those of our collaborators obsolete and noncompetitive.
Any Inability to Adequately Protect Our Proprietary Technologies Could Harm Our Competitive Position.
Our success will depend in part on our ability to obtain patents and maintain adequate protection of our intellectual property for our technologies and products in the U.S. and other countries. If we do not adequately protect our intellectual property, competitors may be able to practice our technologies and erode our competitive advantage. The laws of some foreign countries do not protect proprietary rights to the same extent as the laws of the U.S., and many companies have encountered significant problems in protecting their proprietary rights in these foreign countries. These problems can be caused by, for example, a lack of rules and processes allowing for meaningfully defending intellectual property rights.
We will be able to protect our proprietary rights from unauthorized use by third parties only to the extent that our proprietary technologies are covered by valid and enforceable patents or are effectively maintained as trade secrets. The patent positions of biopharmaceutical and biotechnology companies, including our patent positions, are often uncertain and involve complex legal and factual questions. We apply for patents covering our technologies and products as we deem appropriate. However, we may not obtain patents on all inventions for which we seek patents, and any patents we obtain may be challenged and may be narrowed in scope or extinguished as a result of such challenges. Our existing patents and any future patents we obtain may not be sufficiently broad to prevent others from practicing our technologies or from developing competing products. Others may independently develop similar or alternative technologies or design around our patented technologies or products. In addition, others may challenge or invalidate our patents, or our patents may fail to provide us with any competitive advantages.
We rely upon trade secret protection for our confidential and proprietary information. We have taken security measures to protect our proprietary information. These measures may not provide adequate protection for our trade secrets or other proprietary information. We seek to protect our proprietary information by entering into confidentiality agreements with employees, collaborators and consultants. Nevertheless, employees, collaborators or consultants may still disclose or misuse our proprietary information, and we may not be able to meaningfully protect our trade secrets. In addition, others may independently develop substantially equivalent proprietary information or techniques or otherwise gain access to our trade secrets.
Litigation or Other Proceedings or Third Party Claims of Intellectual Property Infringement Could Require Us to Spend Time and Money and Could Shut Down Some of Our Operations.
Our ability to develop products depends in part on not infringing patents nor proprietary rights of third parties, and not breaching any licenses that we have entered into with regard to our technologies and products. Others have filed, and in the future are likely to file, patent applications covering genes or gene fragments or corresponding proteins or peptides that we may wish to utilize with our proprietary technologies, or products that are similar to products developed with the use of our technologies or alternative methods of generating gene diversity. If these patent applications result in issued patents and we wish to use the patented technology, we would need to obtain a license from the third party.
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Third parties may assert that we are employing their proprietary technology without authorization. In addition, third parties may obtain patents in the future and claim that use of our technologies infringes these patents. We could incur substantial costs and diversion of the time and attention of management and technical personnel in defending ourselves against any of these claims or enforcing our patents or other intellectual property rights against others. Furthermore, parties making claims against us may be able to obtain injunctive or other equitable relief that could effectively block our ability to further develop, commercialize and sell products, and such claims could result in the award of substantial damages against us. In the event of a successful claim of infringement against us, we may be required to pay damages and obtain one or more licenses from third parties. We may not be able to obtain these licenses at a reasonable cost, if at all. In that event, we could encounter delays in product introductions while we attempt to develop alternative methods or products or be required to cease commercializing affected products.
We monitor the public disclosures of other companies operating in our industry regarding their technological development efforts. If we determine that these efforts violate our intellectual property or other rights, we intend to take appropriate action, which could include litigation. Any action we take could result in substantial costs and diversion of management and technical personnel. Furthermore, the outcome of any action we take to protect our rights may not be resolved in our favor.
From time to time, Maxygen becomes involved in claims and legal proceedings that arise in the ordinary course of its business. We are currently subject to three such claims. We do not believe that the resolution of these claims will have a material adverse effect on us.
If We Lose Key Personnel or Are Unable to Attract and Retain Additional Personnel We May Be Unable to Pursue Collaborations or Develop Our Own Products.
We are highly dependent on the principal members of our management and scientific staff, the loss of whose services might adversely impact the achievement of our objectives. In addition, recruiting and retaining qualified scientific personnel to perform future research and development work will be critical to our success. We do not currently have sufficient executive management personnel to execute fully our business plan. Although we believe we will be successful in attracting and retaining qualified personnel, competition for experienced scientists from numerous companies and academic and other research institutions may limit our ability to do so on acceptable terms. Failure to attract and retain personnel could prevent us from pursuing collaborations or developing our products or core technologies.
Our planned activities will require additional expertise in specific industries and areas applicable to the products developed through our technologies. These activities will require the addition of new personnel, including management, and the development of additional expertise by existing management personnel. The inability to acquire these services or to develop this expertise could impair the growth, if any, of our business.
Some of Our Programs Depend on Government Grants, Which May Be Withdrawn. The Government Has License Rights to Technology Developed With Its Funds.
We have received and expect to continue to receive funds under various U.S. government research and technology development programs. The government may reduce funding in the future for a number of reasons. For example, some programs are subject to a yearly appropriations process in Congress. Additionally, we may not receive funds under existing or future grants because of budgeting constraints of the agency administering the program. There can be no assurance that we will receive the entire funding under our existing or future grants.
Our grants from the U.S. government provide the U.S. government with a non-exclusive, paid-up license to practice for or on behalf of the U.S. government inventions made with federal funds. If the government exercises these rights, the U.S. government could use these inventions and our potential market could be reduced.
Our Potential Therapeutic Products Are Subject to a Lengthy and Uncertain Regulatory Process. If Our Potential Products Are Not Approved, We Will Not Be Able to Commercialize Those Products.
The Food and Drug Administration must approve any vaccine or therapeutic product before it can be marketed in the U.S. Before we can file a new drug application or biologic license application with the FDA, the product candidate must undergo extensive testing, including animal and human clinical trials, which can take many years and require substantial expenditures. Data obtained from such testing are susceptible to varying interpretations that could delay, limit or prevent regulatory approval. In addition, changes in regulatory policy for product approval during the period of product development and regulatory agency review of each submitted new application or product license application may cause delays or rejections. The regulatory process is expensive and time consuming. The regulatory agencies of foreign governments must also approve our therapeutic products before the products can be sold in those other countries.
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Because our products involve the application of new technologies and may be based upon new therapeutic approaches, they may be subject to substantial review by government regulatory authorities and government regulatory authorities may grant regulatory approvals more slowly for our products than for products using more conventional technologies. We have not submitted an application to the FDA or any other regulatory authority for any product candidate, and neither the FDA nor any other regulatory authority has approved any therapeutic product candidate developed with our MolecularBreeding directed molecular evolution technologies for commercialization in the U.S. or elsewhere. We may not be able to, or our collaborators may not be able to, conduct clinical testing or obtain the necessary approvals from the FDA or other regulatory authorities for our products.
Even after investing significant time and expenditures we may not obtain regulatory approval for our products. Even if we receive regulatory approval, this approval may entail limitations on the indicated uses for which we can market a product. Further, once regulatory approval is obtained, a marketed product and its manufacturer are subject to continual review, and discovery of previously unknown problems with a product or manufacturer may result in restrictions on the product, manufacturer or manufacturing facility, including withdrawal of the product from the market. In certain countries, regulatory agencies also set or approve prices.
Our Potential Therapeutic Products Are Subject to a Lengthy and Uncertain Development Process. If Approval of Our Potential Products Is Delayed or Potential Products Do Not Perform as Expected, Our Stock Price and Ability to Raise Capital Will be Reduced.
The development and regulatory process for human therapeutic products is long and uncertain. Most product candidates fail before entering clinical trials and most clinical trials do not result in a marketed product. In addition, due to the nature of human therapeutic research and development, the expected timing of product development and initiation of clinical trials and the results of such development and clinical trial are uncertain and subject to change at any point. This uncertainty may result in research delays and product candidate failures and clinical trial delays and failures. Such delays and failures could drastically reduce the price of our stock and our ability to raise capital. Without sufficient capital, we would need to reduce operations and could be forced to cease operations.
Laws May Limit Our Provision of Genetically Engineered Agricultural Products in the Future. These Laws Could Reduce Our Ability to Sell These Products.
We may develop genetically engineered agricultural products. The field-testing, production and marketing of genetically engineered plants and plant products are subject to federal, state, local and foreign governmental regulation. Regulatory agencies administering existing or future regulations or legislation may not allow us to produce and market our genetically engineered products in a timely manner or under technically or commercially feasible conditions. In addition, regulatory action or private litigation could result in expenses, delays or other impediments to our product development programs or the commercialization of resulting products.
The FDA currently applies the same regulatory standards to foods developed through genetic engineering as apply to foods developed through traditional plant breeding. However, genetically engineered food products will be subject to pre-market review if these products raise safety questions or are deemed to be food additives. Our products may be subject to lengthy FDA reviews and unfavorable FDA determinations if they raise questions, are deemed to be food additives, or if the FDA changes its policy.
The FDA has also announced in a policy statement that it will not require that genetically engineered agricultural products be labeled as such, provided that these products are as safe and have the same nutritional characteristics as conventionally developed products. The FDA may reconsider or change its labeling policies, or local or state authorities may enact labeling requirements. Any such labeling requirements could reduce the demand for our products.
The U.S. Department of Agriculture prohibits genetically engineered plants from being grown and transported except pursuant to an exemption, or under strict controls. If our future products are not exempted by the USDA, it may be impossible to sell such products.
Health Care Reform and Restrictions on Reimbursements May Limit Our Returns on Pharmaceutical Products.
Our future products are expected to include pharmaceutical products. Our ability and that of our collaborators to commercialize pharmaceutical products developed with our technologies may depend in part on the extent to which
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reimbursement for the cost of these products will be available from government health administration authorities, private health insurers and other organizations. Third-party payers are increasingly challenging the price of medical products and services. Significant uncertainty exists as to the reimbursement status of newly approved health care products, and there can be no assurance that adequate third party coverage will be available for any product to enable us to maintain price levels sufficient to realize an appropriate return on our investment in research and product development.
Destructive Actions By Activists or Terrorists Could Damage Our Facilities, Interfere with Our Research Activities and Cause Ecological Harm. Any Such Adverse Events Could Damage Our Ability to Develop Products and Generate Adequate Revenue to Continue Operations.
Activists and terrorists have shown a willingness to injure people and damage physical facilities, equipment and biological materials to publicize and/or further their ideological causes. Recent bombings in Emeryville, CA also show that biotechnology companies could be a specific target of certain groups. Our operations and research activities could be adversely impacted depending upon the nature and extent of such acts. Such damage could include disability or death of our personnel, damage to our physical facilities, destruction of animals and biological materials, disruption of our communications and/or data management software used for research and/or destruction of research records. Any such damage could delay our research projects and decrease our ability to conduct future research and development. Damage caused by activist and/or terrorist incidents could also cause the release of hazardous materials, including chemicals, radioactive and biological materials, which could damage our reputation in the community. Clean up of any such releases could also be time consuming and costly.
Any significant interruptions in our ability to conduct our business operations or research and development activities could reduce our revenue and increase our expenses.
We Use Hazardous Chemicals and Radioactive and Biological Materials in Our Business. Any Claims Relating to Improper Handling, Storage or Disposal of These Materials Could Be Time Consuming and Costly.
Our research and development processes involve the controlled use of hazardous materials, including chemicals, radioactive and biological materials. Some of these materials may be novel, including viruses with novel properties and animal models for the study of viruses. Our operations also produce hazardous waste products. Some of our work also involves the development of novel viruses and viral animal models. We cannot eliminate the risk of accidental contamination or discharge and any resultant injury from these materials. Federal, state and local laws and regulations govern the use, manufacture, storage, handling and disposal of these materials. We believe that our current operations comply in all material respects with these laws and regulations. We could be subject to civil damages in the event of an improper or unauthorized release of, or exposure of individuals to, hazardous materials. In addition, claimants may sue us for injury or contamination that results from our use or the use by third parties of these materials, and our liability may exceed our total assets. Compliance with environmental laws and regulations may be expensive, and current or future environmental regulations may impair our research, development, or production efforts. We believe that our current operations comply in all material respects with applicable Environmental Protection Agency regulations.
In addition, certain of our collaborators are working with these types of hazardous materials in connection with our collaborations. To our knowledge, the work is performed in accordance with biosafety regulations. In the event of a lawsuit or investigation, we could be held responsible for any injury caused to persons or property by exposure to, or release of, these viruses and hazardous materials. Further, under certain circumstances, we have agreed to indemnify our collaborators against damages and other liabilities arising out of development activities or products produced in connection with these collaborations.
Our Collaborations With Outside Scientists May Be Subject to Change, Which Could Limit Our Access to Their Expertise.
We work with scientific advisors, consultants and collaborators at academic and other institutions. These scientists are not our employees and may have other commitments that could limit their availability to us. Although our scientific advisors generally agree not to do competing work, if a conflict of interest between their work for us and their work for another entity arises, we may lose their services. Although our scientific advisors and collaborators sign agreements not to disclose our confidential information, it is possible that certain of our valuable proprietary knowledge may become publicly known through them.
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We May Be Sued for Product Liability.
We may be held liable if any product we develop, or any product that is made with the use or incorporation of any of our technologies, causes injury or is found otherwise unsuitable during product testing, manufacturing, marketing or sale. These risks are inherent in the development of chemical, agricultural and pharmaceutical products. Although we intend in the future to obtain product liability insurance, we do not have such insurance currently. Any such insurance that we seek to obtain may be prohibitively expensive or may not fully cover our potential liabilities. Inability to obtain sufficient insurance coverage at an acceptable cost or otherwise to protect against potential product liability claims could prevent or inhibit the commercialization of products developed by us or our collaborators. If we are sued for any injury caused by our products, our liability could exceed our total assets.
Our Stock Price Has Been, and May Continue to Be, Extremely Volatile.
The trading prices of life science company stocks in general, and ours in particular, have experienced significant price fluctuations in the last three years. The valuations of many life science companies without consistent product revenues and earnings, including ours, are high based on valuation standards such as price to sales ratios and progress in product development and/or clinical trials. Trading prices based on these valuations may not be sustained. Any negative change in the public’s perception of the prospects of biotechnology or life science companies could depress our stock price regardless of our results of operations. Other broad market and industry factors may decrease the trading price of our common stock, regardless of our performance. Market fluctuations, as well as general political and economic conditions such as recession or interest rate or currency rate fluctuations, also may decrease the trading price of our common stock. In addition, our stock price could be subject to wide fluctuations in response to factors including the following:
• | announcements of new technological innovations or new products by us or our competitors; |
• | changes in financial estimates by securities analysts; |
• | conditions or trends in the biotechnology and life science industries; |
• | changes in the market valuations of other biotechnology or life science companies; |
• | developments in domestic and international governmental policy or regulations; |
• | announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments; |
• | developments in or challenges relating to patent or other proprietary rights; |
• | period-to-period fluctuations in our operating results; |
• | future royalties from product sales, if any, by our strategic partners; and |
• | sales of our common stock or other securities in the open market. |
In the past, stockholders have often instituted securities class action litigation after periods of volatility in the market price of a company’s securities. If a stockholder files a securities class action suit against us, we would incur substantial legal fees and our management’s attention and resources would be diverted from operating our business to respond to the litigation.
In December 2001 a lawsuit was filed in the U.S. District Court for the Southern District of New York against Maxygen, Inc., certain officers of the Company, and certain underwriters of the Company’s initial public offering and secondary public offering of common stock. The complaint, which alleges claims under Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934, is among the so-called “laddering” cases that have been commenced against a number of companies that had public offerings of securities prior to December 2000. The complaint has been consolidated with other laddering claims in a proceeding styledIn re Initial Public Offering Securities Litigation, No. 21 MC 92 (SAS), pending before the Honorable Shira A. Scheindlin. In February 2003, the court dismissed the Section 10(b) claim against the officers of the Company; the remainder of the case remains pending. We believe the lawsuit against Maxygen and its officers is without merit and intend to defend against it vigorously.
We Expect that Our Quarterly Results of Operations Will Fluctuate, and This Fluctuation Could Cause Our Stock Price to Decline.
Our quarterly operating results have fluctuated in the past and are likely to do so in the future. These fluctuations could cause our stock price to fluctuate significantly or decline. Some of the factors that could cause our operating results to fluctuate include:
• | expiration of research contracts with collaborators or government research grants, which may not be renewed or replaced; |
• | the success rate of our discovery efforts leading to milestones and royalties; |
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• | the timing and willingness of collaborators to commercialize our products, which would result in royalties; and |
• | general and industry specific economic conditions, which may affect our collaborators’ research and development expenditures. |
A large portion of our expenses are relatively fixed, including expenses for facilities, equipment and personnel. Accordingly, if revenues decline or do not grow as anticipated due to expiration of research contracts or government research grants, failure to obtain new contracts or other factors, we may not be able to correspondingly reduce our operating expenses. Failure to achieve anticipated levels of revenues could therefore significantly harm our operating results for a particular fiscal period.
Due to the possibility of fluctuations in our revenues and expenses, we believe that quarter-to-quarter comparisons of our operating results are not a good indication of our future performance. Our operating results in some quarters may not meet the expectations of stock market analysts and investors. In that case, our stock price would likely decline.
Some of Our Existing Stockholders Can Exert Control Over Us, and May Not Make Decisions that Are in the Best Interests of All Stockholders.
Our executive officers, directors and principal stockholders together control approximately 29% of our outstanding common stock, including GlaxoSmithKline plc, which owns approximately 19% of our outstanding common stock. As a result, these stockholders, if they act together, and GlaxoSmithKline plc by itself, are able to exert a significant degree of influence over our management and affairs and over matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. In addition, this concentration of ownership may delay or prevent a change in control of Maxygen and might affect the market price of our common stock, even when a change may be in the best interests of all stockholders. In addition, the interests of this concentration of ownership may not always coincide with our interests or the interests of other stockholders and accordingly, they could cause us to enter into transactions or agreements that we would not otherwise consider.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk management
Our cash flow and earnings are subject to fluctuations due to changes in foreign currency exchange rates, interest rates, the fair value of equity securities held and our stock price. We attempt to limit our exposure to some or all of these market risks through the use of various financial instruments. There were no significant changes in our market risk exposures during the three months ended September 30, 2003. These activities are discussed in further detail in Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” of our Annual Report on Form 10-K for the year ended December 31, 2002.
CONTROLSAND PROCEDURES
Quarterly Controls Evaluation and Related CEO and CFO Certifications
Company management, with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), has evaluated the effectiveness of our disclosure controls and procedures (“Disclosure Controls”) as of the end of the period covered by this report.
Appearing as Exhibits 32.1 and 32.2 of this report are the certifications of our CEO and CFO, which are required in accordance with Rule 13a-14 of the Securities Exchange Act of 1934 (the “Exchange Act”). This Controls and Procedures section includes the information concerning the controls evaluation referred to in the certifications and it should be read in conjunction with the certifications for a more complete understanding of the topics presented.
Definition of Disclosure Controls
Disclosure Controls are controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act, such as this report, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure Controls are also designed to ensure that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. Our Disclosure Controls include components of our internal
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control over financial reporting (“Internal Controls”), which consists of control processes designed with the objective of providing reasonable assurance that (1) our transactions are properly authorized; (2) our assets are safeguarded against unauthorized or improper use and (3) our transactions are properly recorded and reported, all to permit the preparation of our financial statements in conformity with generally accepted accounting principles.
Limitations on the Effectiveness of Controls.Our management, including our CEO and CFO, does not expect that our Disclosure Controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Maxygen have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or deterioration in the degree of compliance with the policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Scope of the Controls Evaluation.The CEO/CFO evaluation of our Disclosure Controls included a review of the controls’ objectives and design, the controls’ implementation by Maxygen and the effect of the controls on the information generated for use in this report. In the course of the controls evaluation, we sought to identify errors, controls problems or acts of fraud. Elements of our controls are also evaluated on an ongoing basis by personnel in our Finance department. The overall goals of these various evaluation activities are to monitor our Disclosure Controls and to make modifications as necessary. Our intent in this regard is that the Disclosure Controls will be maintained as dynamic systems that change (including with improvements and corrections) as conditions warrant.
Among other matters, we sought in our evaluation to determine whether there were any significant deficiencies or material weaknesses in our Internal Controls, or whether we had identified any acts of fraud involving personnel who have a significant role in our Internal Controls. This information was important both for the controls evaluation generally and because item 5 in the certifications of our CEO and CFO require that the CEO and CFO disclose that information to our Audit Committee and to our independent auditors and to report on related matters in this section of the report.
Conclusions.Based upon the controls evaluation, our CEO and CFO have concluded that our Disclosure Controls are effective to ensure that material information relating to Maxygen and its consolidated subsidiaries is made known to management, including the CEO and CFO, particularly during the period when our periodic reports are being prepared.
During the fiscal period covered by this report there have been no significant changes in our internal controls over financial reporting or in other factors that could significantly affect our internal controls over financial reporting, including any corrective actions with regard to significant deficiencies and material weaknesses.
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ITEM 1
LEGAL PROCEEDINGS
In December 2001 a lawsuit was filed in the U.S. District Court for the Southern District of New York against Maxygen, Inc., certain officers of the Company, and certain underwriters of the Company’s initial public offering and secondary public offering of common stock. The complaint, which alleges claims under Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934, is among the so-called “laddering” cases that have been commenced against over 300 companies that had public offerings of securities in 1999 and 2000. The complaint has been consolidated with other laddering claims in a proceeding styledIn re Initial Public Offering Securities Litigation, No. 21 MC 92 (SAS), pending before the Honorable Shira A. Scheindlin. In February 2003, the court dismissed the Section 10(b) claim against the officers of the Company; the remainder of the case remains pending.
In June 2003 the Company agreed to the terms of a tentative settlement agreement along with other defendant issuers inIn re Initial Public Offering Securities Litigation. The tentative settlement provides that the 309 defendant issuers and their insurers will pay to the plaintiffs $1 billion less any recovery of damages the plaintiffs receive from the defendant underwriters. If the plaintiffs receive over $5 billion in damages from the defendant underwriters, the Company will be entitled to reimbursement of various expenses incurred by the Company as a result of the litigation. As part of the tentative settlement, the Company will assign to the plaintiffs its “excess compensation claims” and certain other of its claims against the defendant underwriters as a result of the alleged actions of the defendant underwriters. The settlement is subject to acceptance by a substantial majority of defendants and execution of a definitive settlement agreement. The settlement is also subject to approval of the Court, which cannot be assured. The Company believes that its portion of the tentative settlement of the litigation, if any, will be covered by existing insurance.
If the settlement is not accepted by the requisite number of defendants or if it is not approved by the Court, the Company intends to defend the lawsuit vigorously. However, the litigation is in the preliminary stage, and the Company cannot predict its outcome. The litigation process is inherently uncertain. If the outcome of the litigation is adverse to the Company and if the Company is required to pay significant damages, the Company’s business would be significantly harmed.
CHANGESINSECURITIESAND USEOF PROCEEDS
Recent Sales of Unregistered Securities
On August 4, 2003 we issued a total of 9,486 shares of our common stock in connection with the acquisition of a license of certain technology. There was no underwriter employed in connection with the above described transaction. The issuance of securities was deemed to be exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”) in reliance upon Section 4(2) of the Securities Act and Regulation D promulgated thereunder as a transaction by an issuer not involving a public offering. The recipients of the securities represented their intentions to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the share certificates issued in the transactions. The recipients either received adequate information about us or had access, through employment or other relationships, to such information. The recipients, either alone or together with their duly appointed purchaser representatives, were knowledgeable, sophisticated and experienced in making investment decisions of this kind and received adequate information about us.
Application of Initial Public Offering Proceeds
The effective date of our first registration statement, filed on Form S-1 under the Securities Act (No. 333-89413) relating to our initial public offering of common stock, was December 15, 1999. Net proceeds to us were approximately $101.0 million. From the effective date through September 30, 2003, the proceeds were applied toward:
• | purchases and installation of equipment and build-out of facilities, $24.0 million; |
• | repayment of indebtedness, $1.9 million; |
• | working capital, $64.5 million; and |
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• | temporary investments in certificates of deposits, mutual funds and corporate debt securities, $10.7 million. |
The use of the proceeds from the offering does not represent a material change in the use of the proceeds described in the registration statement.
DEFAULTS UPON SENIOR SECURITIES
Not applicable.
SUBMISSIONOF MATTERSTOA VOTEOF SECURITY HOLDERS
Not applicable.
OTHER INFORMATION
Not applicable.
EXHIBITSAND REPORTSON FORM 8-K
(a) | The following exhibits are filed as part of this report: |
31.1 | Certification of Chief Executive Officer |
31.2 | Certification of Chief Financial Officer |
32.1 | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
(b) | The following report on Form 8-K was filed during the quarter ended September 30, 2003 |
On July 29, 2003 Maxygen filed a report on Form 8-K (items 7 and 12), attaching thereto a press release reporting its second quarter and year to date earnings.
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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.
MAXYGEN, INC. | ||||||
November 13, 2003 | By: | /s/ RUSSELL J. HOWARD | ||||
Russell J. Howard Chief Executive Officer | ||||||
November 13, 2003 | By: | /s/ LAWRENCE W. BRISCOE | ||||
Lawrence W. Briscoe Chief Financial Officer |
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