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United States
SECURITIES AND 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
March 31, 2012 For the quarterly period ended March 31, 2012
Commission file number 000-28401
MAXYGEN, INC.
(Exact name of registrant as specified in its charter)
Delaware | 77-0449487 | |
(State of incorporation) | (I.R.S. Employer Identification No.) |
411 Borel Avenue Suite 616
San Mateo, California 94402
(Address of principal executive offices, including zip code)
(650) 241-2292
(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. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | ¨ | Accelerated filer | x | |||
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of April 30, 2012, there were 27,756,742 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.
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FORM 10-Q
QUARTER ENDED MARCH 31, 2012
This report and the disclosures herein include, on a consolidated basis, the business and operations of Maxygen, Inc. and its wholly-owned subsidiaries, Maxygen Holdings (U.S.), Inc., Maxygen ApS and Maxygen Holdings, Inc., as well as its majority-owned subsidiary, Maxygen Holdings LLC. In this report, “Maxygen,” the “company,” “we,” “us” and “our” refer to such consolidated entities, unless, in each case, the context indicates that the disclosure applies only to a named subsidiary.
Our web site is located at www.maxygen.com. We make available free of charge, on or through our web site, our annual, quarterly and current reports, and any amendments to those reports, as soon as reasonably practicable after electronically filing or furnishing such reports with the Securities and Exchange Commission, or SEC. Information contained on our web site is not part of this report.
Maxygen® is a registered trademark of Maxygen, Inc. Other service marks, trademarks and trade names referred to in this report are the property of their respective owners. The use of the word “partner” and “partnership” does not mean a legal partner or legal partnership.
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Forward Looking Statements
This document contains forward-looking statements within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. These statements are based on the current expectations and beliefs of our management and are subject to a number of factors and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “can,” “will,” “should,” “could,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “intend,” “potential” or “continue” or the negative of these terms or other comparable terminology. In any forward-looking statement in which we express an expectation or belief as to future results, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the statement or expectation or belief will result or be achieved or accomplished. The following factors, among others, could cause actual results to differ materially from those described in the forward-looking statements:
• | our ability or plans to recommence and/or continue the development of our MAXY-G34 product candidate for any indication, including our receipt of any government contract or other funding to develop MAXY-G34 and the potential timing of any such funding; |
• | strategic alternatives and transactions with respect to our business and the timing, likelihood and outcome thereof; |
• | whether we receive any portion of the payment from Bayer HealthCare LLC and the potential timing of such receipt, and any events related to Bayer’s achievement, or failure to achieve, the development milestone related to such payment; |
• | our implementation, or our failure to implement, any additional distributions of our cash resources to stockholders; |
• | our ability to continue operations and our estimates for future performance and financial position of the company; |
• | our ability to retain key employees to maintain our ongoing operations and, if necessary, our ability to successfully grow our business and hire qualified personnel; |
• | the establishment, development and maintenance of any manufacturing or collaborative relationships; |
• | our ability to protect our intellectual property portfolio and rights; |
• | our ability to identify and develop new potential products; |
• | the attributes of any products we may develop; |
• | our business strategies and plans; and |
• | other economic, business, competitive, and/or regulatory factors affecting our business and the market we serve generally. |
These statements are only predictions. Risks and uncertainties and the occurrence of other events could cause actual results to differ materially from these predictions. 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. Important factors that could cause our actual results to differ materially from the forward-looking statements we make in this report are set forth in our Form 10-K for the year ended December 31, 2011 and in this report, including the factors described in the section entitled “Item 1A—Risk Factors, and “Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as those discussed in our Current Reports on Form 8-K and other SEC filings. While we may elect to update these forward-looking statements at some point in the future, Maxygen is under no obligation to (and expressly disclaims any such obligation to) update or alter its forward-looking statements whether as a result of new information, future events, or otherwise, except to the extent required by applicable law.
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PART I – FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
December 31, 2011 | March 31, 2012 | |||||||
(unaudited) | ||||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 154,572 | $ | 142,267 | ||||
Short-term investments | 4,999 | 12,996 | ||||||
Available-for-sale investment in equity securities | 2,478 | 1,639 | ||||||
Prepaid expenses and other current assets | 2,317 | 2,277 | ||||||
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Total current assets | 164,366 | 159,179 | ||||||
Property and equipment, net | 143 | 152 | ||||||
Other non-current assets | 124 | — | ||||||
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Total assets | $ | 164,633 | $ | 159,331 | ||||
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LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 253 | $ | 249 | ||||
Accrued compensation | 1,426 | 1,128 | ||||||
Distribution payable | 704 | 509 | ||||||
Other accrued liabilities | 831 | 513 | ||||||
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Total current liabilities | 3,214 | 2,399 | ||||||
Non-current distribution payable | 372 | 221 | ||||||
Other non-current liabilities | 103 | 103 | ||||||
Commitments and contingencies (Note 5) | ||||||||
Stockholders’ equity: | �� | |||||||
Preferred stock, $0.0001 par value, 5,000,000 shares authorized, no shares issued and outstanding at December 31, 2011 and March 31, 2012 | — | — | ||||||
Common stock, $0.0001 par value, 100,000,000 shares authorized, 27,398,829 and 27,233,953 shares issued and outstanding at December 31, 2011 and March 31, 2012, respectively | 3 | 3 | ||||||
Additional paid-in capital | 311,302 | 310,377 | ||||||
Accumulated other comprehensive income | 1,205 | 366 | ||||||
Accumulated deficit | (151,775 | ) | (154,347 | ) | ||||
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Total Maxygen, Inc. stockholders’ equity | 160,735 | 156,399 | ||||||
Non-controlling interest | 209 | 209 | ||||||
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Total stockholders’ equity | 160,944 | 156,608 | ||||||
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Total liabilities and stockholders’ equity | $ | 164,633 | $ | 159,331 | ||||
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See accompanying notes.
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(in thousands, except per share data)
Three months ended March 31, | ||||||||
2011 | 2012 | |||||||
(unaudited) | ||||||||
Technology and license revenue | $ | — | $ | 6 | ||||
Operating expenses: | ||||||||
Research and development | 567 | 65 | ||||||
General and administrative | 3,140 | 2,767 | ||||||
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Total operating expenses | 3,707 | 2,832 | ||||||
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Loss from operations | (3,707 | ) | (2,826 | ) | ||||
Gain on distribution of equity securities | 85 | 75 | ||||||
Interest and other income (expense), net | (123 | ) | 179 | |||||
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Loss from continuing operations before income taxes | (3,745 | ) | (2,572 | ) | ||||
Income tax benefit | 1,736 | — | ||||||
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Loss from continuing operations | (2,009 | ) | (2,572 | ) | ||||
Discontinued operations: | ||||||||
Income from discontinued operations | 6,037 | — | ||||||
Income tax expense for discontinued operations | (1,517 | ) | — | |||||
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Income from discontinued operations, net of taxes | 4,520 | — | ||||||
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Net income (loss) | 2,511 | (2,572 | ) | |||||
Net income attributable to non-controlling interests | 1,052 | — | ||||||
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Net income (loss) attributable to Maxygen, Inc. | $ | 1,459 | $ | (2,572 | ) | |||
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Basic and diluted net income (loss) per share: | ||||||||
Continuing operations | $ | (0.07 | ) | $ | (0.09 | ) | ||
Discontinued operations | $ | 0.12 | $ | — | ||||
Attributable to Maxygen, Inc. | $ | 0.05 | $ | (0.09 | ) | |||
Shares used in basic and diluted net income (loss) per share calculations | 29,225 | 27,232 | ||||||
Comprehensive income (loss) | $ | 1,777 | $ | (3,411 | ) | |||
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See accompanying notes.
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Three months ended March 31, | ||||||||
2011 | 2012 | |||||||
(unaudited) | ||||||||
Operating activities | ||||||||
Loss from continuing operations | $ | (2,009 | ) | $ | (2,572 | ) | ||
Adjustments to reconcile loss from continuing operations to net cash used in operating activities: | ||||||||
Depreciation and amortization | 2 | 13 | ||||||
Gain on distribution of equity securities | (85 | ) | (75 | ) | ||||
Non-cash stock compensation | 997 | 526 | ||||||
Amortization of discount on investments | — | (1 | ) | |||||
Income tax benefit | (1,736 | ) | — | |||||
Valuation of stock portion of distribution payable | 184 | (165 | ) | |||||
Changes in operating assets and liabilities: | ||||||||
Receivable from Perseid | 299 | — | ||||||
Prepaid expenses and other current assets | 62 | 40 | ||||||
Deposits and other non-current assets | 8 | 124 | ||||||
Accounts payable | 108 | (4 | ) | |||||
Accrued compensation | (303 | ) | (196 | ) | ||||
Accrued project costs | 23 | — | ||||||
Other accrued liabilities | (12 | ) | (318 | ) | ||||
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Net cash used in operating activities | (2,462 | ) | (2,628 | ) | ||||
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Investing activities | ||||||||
Purchase of available-for-sale securities | — | (7,996 | ) | |||||
Acquisition of property and equipment | — | (22 | ) | |||||
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Net cash used in investing activities | — | (8,018 | ) | |||||
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Financing activities | ||||||||
Cash distributions paid to common stockholders | (43 | ) | (106 | ) | ||||
Proceeds from issuance of common stock, net of stock repurchased to settle employee tax obligations | 329 | (17 | ) | |||||
Repurchase of common stock | — | (1,536 | ) | |||||
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Net cash provided by (used in) financing activities | 286 | (1,659 | ) | |||||
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Cash used in discontinued operations: | ||||||||
Operating activities | 569 | — | ||||||
Investing activities | (750 | ) | — | |||||
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Net cash used in discontinued operations | (181 | ) | — | |||||
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Net decrease in cash and cash equivalents | (2,357 | ) | (12,305 | ) | ||||
Cash and cash equivalents at beginning of period | 102,335 | 154,572 | ||||||
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Cash and cash equivalents at end of period | $ | 99,978 | $ | 142,267 | ||||
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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 (“GAAP”) for interim financial information. The information as of March 31, 2012, and for the three months ended March 31, 2011 and 2012, includes all adjustments (consisting only of normal recurring adjustments) that the management of Maxygen, Inc. (the “Company”) believes necessary for fair presentation of the results for the periods presented. The Condensed Consolidated Balance Sheet at December 31, 2011 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by GAAP for complete financial statements.
The preparation of financial statements in conformity with GAAP 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.
In addition, 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 Annual Report on Form 10-K for the year ended December 31, 2011.
On May 16, 2011, Astellas Pharma Inc. (“Astellas”) completed the purchase of the Company’s equity interests in Perseid Therapeutics LLC (“Perseid”), the Company’s former majority-owned subsidiary. As a result of this transaction, the results of operations and cash flows of Perseid, as well as any related business activities through May 16, 2011 have been reported separately as discontinued operations in the Company’s Condensed Consolidated Financial Statements for all periods presented.
Principles of Consolidation
The condensed consolidated financial statements include the amounts of the Company its wholly-owned subsidiaries, Maxygen Holdings (U.S.), Inc., Maxygen ApS and Maxygen Holdings, Inc., and its majority-owned subsidiary, Maxygen Holdings LLC. The condensed consolidated financial statements also include the amounts of the Company’s former majority-owned subsidiary, Perseid (through its acquisition by Astellas on May 16, 2011) (see Note 7).
Prior to the acquisition by Astellas on May 16, 2011, the Company was the primary beneficiary of Perseid, as determined under applicable accounting standards. In connection with the Company’s prior joint venture arrangement with Astellas, Astellas had acquired a minority interest in Perseid. Prior to the acquisition, amounts pertaining to the ownership interests held by Astellas in the operating results and financial position of Perseid were reported as non-controlling interests. In addition, the Company is the primary beneficiary of its majority-owned subsidiary, Maxygen Holdings LLC. In May 2010, the Company sold a minority membership interest in Maxygen Holdings LLC to a third party for $200,000 in cash and a contingent promissory note. Amounts pertaining to the ownership interest held by such third party in the operating results and financial position of Maxygen Holdings LLC are reported as a non-controlling interest. At each reporting date, the Company reassesses whether it is still the primary beneficiary of Maxygen Holdings LLC. If the Company determines that it is no longer the primary beneficiary, the Company will deconsolidate Maxygen Holdings LLC and record its interest at the fair market value on the date which it deconsolidates, along with any gain or loss at the time of deconsolidation.
The table below reflects a reconciliation of the equity attributable to non-controlling interests (in thousands):
Non-controlling interests at December 31, 2011 | $ | 209 | ||
Net loss attributable to non-controlling interest | — | |||
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Non-controlling interests at March 31, 2012 | $ | 209 |
Revenue Recognition
The Company has generally recognized revenue from multiple element arrangements under collaborative research agreements, including license payments, research and development services, milestones, and royalties. Revenue arrangements with multiple deliverables are divided into separate units of accounting if certain criteria are met. The Company estimates the selling price for each deliverable using the vendor specific objective evidence of selling price, if it exists, otherwise third-party evidence of selling price. If neither vendor specific objective evidence nor third-party evidence of selling price exists for a deliverable, then the Company uses its best estimate of the selling price for that deliverable. The consideration the Company receives is allocated among the separate units of accounting based on their respective estimated selling prices, and the applicable revenue recognition criteria are considered separately for each of the separate units.
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Incentive milestone payments may be 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. Consideration that is contingent upon achievement of a milestone can be recognized in its entirety as revenue in the period in which the milestone is achieved only if the consideration earned from the achievement of a milestone meets all the criteria for the milestone to be considered substantive at the inception of the arrangement. For a milestone to be considered substantive, the consideration earned by achieving the milestone should (i) be commensurate with either the Company’s performance to achieve the milestone or the enhancement of the value of the item delivered as a result of a specific outcome resulting from the Company’s performance to achieve the milestone, (ii) relate solely to past performance and (iii) be reasonable relative to all deliverables and payment terms in the arrangement.
Contingent payments for events for which the occurrences are contingent solely upon the passage of time or are the result of performance by a third party will be recognized as revenue when payments are earned, the amounts are fixed or determinable and collectability is reasonably assured.
Royalties are recorded as earned in accordance with the contract terms when third party sales can be reliably measured and collectability is reasonably assured.
Net Income (Loss) Per Share
Basic net income (loss) per share has been computed using the weighted-average number of shares of common stock outstanding during the period. During the periods in which the Company has net income from continuing operations, the diluted net income per share has been computed using the weighted average number of shares of common stock outstanding and other dilutive securities.
The following table presents a reconciliation of the numerators and denominators of the basic and dilutive net income (loss) per share computations and the calculation of basic and diluted net income (loss) per share (in thousands, except per share data):
Three months ended March 31, | ||||||||
2011 | 2012 | |||||||
Numerator: | ||||||||
Numerator for basic and diluted loss attributable to Maxygen, Inc. from continuing operations | $ | (2,009 | ) | $ | (2,572 | ) | ||
Numerator for basic and diluted income (loss) attributable to Maxygen, Inc. from discontinued operations | $ | 3,468 | $ | — | ||||
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Numerator for basic and diluted income (loss) attributable to Maxygen, Inc. | $ | 1,459 | $ | (2,572 | ) | |||
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Denominator: | ||||||||
Basic and diluted: | ||||||||
Weighted-average shares used in computing basic and diluted net income (loss) per share | 29,225 | 27,232 | ||||||
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Basic and diluted net income (loss) per share | ||||||||
Continuing operations | $ | (0.07 | ) | $ | (0.09 | ) | ||
Discontinued operations | $ | 0.12 | $ | — | ||||
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Attributable to Maxygen, Inc. | $ | 0.05 | $ | (0.09 | ) | |||
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Basic and diluted net income (loss) per share from discontinued operations includes net income (loss) attributable to non-controlling interests for all periods presented.
The total number of shares excluded from the calculations of diluted net income (loss) per share was approximately 7,505,000 options and 833,000 shares of restricted stock at March 31, 2011 and 5,647,000 options and 523,000 shares of restricted stock at March 31, 2012. These securities have been excluded from the calculation of diluted net income (loss) per share as their effect on results from continuing operations is anti-dilutive.
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Comprehensive income (loss)
Comprehensive income (loss) is primarily comprised of net income (loss), net unrealized gains or losses on available-for-sale securities, including the Company’s equity investment in Codexis, Inc. (“Codexis”) and its related tax effects, and foreign currency translation adjustments. Comprehensive income (loss) and its components for the three month periods ended March 31, 2011 and 2012 were as follows (in thousands):
Three months ended March 31, | ||||||||
2011 | 2012 | |||||||
Net income (loss) | $ | 2,511 | $ | (2,572 | ) | |||
Changes in unrealized gains (loss) on available-for-sale investment in equity securities, net of related tax effects | 318 | (839 | ) | |||||
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Comprehensive income (loss) | 2,829 | (3,411 | ) | |||||
Comprehensive income (loss) attributable to non-controlling interests | 1,052 | — | ||||||
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Comprehensive income (loss) attributable to Maxygen, Inc. | $ | 1,777 | $ | (3,411 | ) | |||
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The changes in unrealized loss on available-for-sale investment in equity securities of $839,000 represent the change in fair value of 449,134 shares of Codexis common stock held by the Company and the distribution of approximately 18,000 shares of Codexis, Inc. common stock upon the vesting of restricted stock awards in the three months ended March 31, 2012. The shares of Codexis common stock being retained by the Company primarily represent shares reserved on behalf of the holders of certain outstanding equity awards.
The components of accumulated other comprehensive income was as follows (in thousands):
December 31, 2011 | March 31, 2012 | |||||||
Unrealized gains on available-for-sale investment in equity securities | $ | 2,478 | $ | 1,639 | ||||
Tax effects of available-for-sale securities | (1,021 | ) | (1,021 | ) | ||||
Foreign currency translation adjustments | (252 | ) | (252 | ) | ||||
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Accumulated other comprehensive income | $ | 1,205 | $ | 366 | ||||
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The tax effects of available-for-sale securities of approximately $1.0 million recorded within accumulated other comprehensive income at December 31, 2011 resulted from the application of the Company’s statutory tax rate on its gross unrealized gains on its investment in Codexis, Inc. common stock (based on the fair value of such investment at December 31, 2011). At March 31, 2012, the fair value of the Company’s investment in Codexis, Inc. common stock had decreased by approximately $839,000. However, because the Company reported a loss from continuing operations for the three months ended March 31, 2012, the tax effect of this decrease in unrealized gains on its investment in Codexis, Inc. common stock was not allocated to continuing operations. Instead, this tax effect was allocated back to other comprehensive income for the three months ended March 31, 2012, resulting in the approximately $1.0 million reported within accumulated other comprehensive income at March 31, 2012.
Recent Accounting Pronouncements
In June 2011, the Financial Accounting Standards Board issued Accounting Standards Update No. 2011-05 for the presentation of comprehensive income, thereby amending Accounting Standards Codification 220, Comprehensive Income. The amendments require that all non-owner changes in stockholder’s equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The amendments were effective in fiscal years beginning after December 15, 2011 and should be applied retrospectively. These amendments impact the presentation of the Company’s financial statements beginning in the current quarter.
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Stock-Based Compensation
For the three months ended March 31, 2011 and 2012, stock-based compensation expense was recorded as follows (in thousands):
Three months ended March 31, | ||||||||
2011 | 2012 | |||||||
Research and development | $ | 18 | $ | — | ||||
General and administrative | 979 | 526 | ||||||
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Total stock-based compensation expense within continuing operations | $ | 997 | $ | 526 | ||||
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No stock-based compensation costs were capitalized as of March 31, 2011 and 2012. There were no recognized tax benefits during the quarters ended March 31, 2011 and 2012.
Stock Options
Stock options vest over four years and all options expire no later than 10 years from the grant date. The fair value of each option grant is estimated on the date of grant using the Black-Scholes-Merton option pricing model.
The weighted average assumptions used in the model for options granted in the respective periods are outlined in the following table:
Three months ended March 31, 2011 | Three months ended March 31, 2012 (1) | |||||||
Expected dividend yield | — | — | ||||||
Risk-free interest rate | 2.42 | % | — | |||||
Expected life | 6.26 years | — | ||||||
Expected volatility | 61.61 | % | — |
(1) | There were no stock options granted to employees during the three months ended March 31, 2012. |
The computation of the expected volatility assumption used in the Black-Scholes-Merton calculations for new option grants is based on historical volatilities. For awards issued to employees in 2011, the expected life of the stock options was calculated under the shortcut method as permitted under applicable accounting guidance from the Securities and Exchange Commission.
Restricted Stock Awards
The Company has granted restricted stock awards under its 2006 Equity Incentive Plan (the “2006 Plan”) to certain employees and members of its board of directors. Restricted stock awards are generally scheduled to vest over four years. The 2006 Plan and related award agreement provide for forfeiture in certain events, such as voluntary termination of employment, and for acceleration of vesting in certain events, such as termination of employment without cause or a change in control of the Company. Compensation cost for these awards is based on the closing price of the Company’s common stock on the date of grant and recognized as compensation expense on a straight-line basis over the requisite service period. In the three months ended March 31, 2011, the Company granted restricted stock awards to employees representing an aggregate of 30,000 shares of Company common stock. The Company did not grant any restricted stock awards in the three months ended March 31, 2012. For the three months ended March 31, 2011 and 2012, the Company recognized approximately $398,000 and $451,000, respectively, of stock-based compensation expense within continuing operations, related to these restricted stock awards. At March 31, 2012, the unrecognized compensation cost related to these awards was approximately $2.5 million, which is expected to be recognized on a straight-line basis over the requisite service period through June 2015.
Contingent Performance Units
In September 2009, the Company granted contingent performance units (“CPUs”) under the 2006 Plan to all employees and board members who held options to purchase Company’s common stock, and since that date the Company has also granted CPUs in connection with the grant of new stock option awards. CPUs vest on the earliest to occur of (i) a change in control of the Company, (ii) a corporate dissolution or liquidation of the Company, (iii) an involuntary termination of employment without cause, or (iv) the fourth anniversary of the grant date (the “Settlement Date”), generally so long as the holder continues to provide services for the Company on a continuous basis from the grant date to the Settlement Date. All unvested CPUs remaining following the Settlement Date will expire immediately. The CPUs are designed to protect holders of the Company’s stock options against a reduction in the share price of the Company’s common stock resulting from dividends or distributions to the Company’s stockholders, which could negatively affect outstanding options held by option holders of the Company since the options would not otherwise participate in any dividends or distributions to the Company’s stockholders. The earned value of any vested CPU will generally be settled in shares of common stock of the Company, but may also be settled, in part, with cash or any property distributed by the Company, or entirely in cash. The CPU awards are accounted for as liability awards.
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These awards were remeasured at estimated fair value as of March 31, 2012, as required for liability awards. During the three months ended March 31, 2012, approximately $33,000 in cash was paid to settle vested CPUs. The fair value of the remaining CPUs was approximately $1.0 million at March 31, 2012, as determined based on a Monte Carlo simulation.
The assumptions used in the Monte Carlo simulation to determine the value at March 31, 2011 and 2012, are outlined in the following table:
As of March 31, 2011 | As of March 31, 2012 | |||
Expected dividend yield | 0% | 0% | ||
Risk-free interest rate range | 0.93% – 1.41% | 0.22% – 0.42% | ||
Expected life | 2.48 – 3.50 years | 1.48 – 3.17 years | ||
Expected volatility of Maxygen, Inc. common stock | 57.0% to 66.4% | 35.75% to 41.95% | ||
Expected volatility of Codexis, Inc. common stock | 57.1% | 64.47% to 65.24% |
The risk-free interest rate is based on the U.S. Treasury yield in effect at each reporting date, with a term commensurate with the estimated remaining expected life of each award. Expected life is based on the estimated remaining time to settlement for each award. Expected volatility of both the Company’s common stock and the Codexis, Inc. common stock is based on the historical volatility, as available, of such stock commensurate with the expected life of each award.
The Company recognized compensation expense of approximately $420,000 and a credit of approximately $102,000 in the three months ended March 31, 2011 and 2012, respectively, related to changes in the fair value of the CPU liability within continuing operations. As the CPUs are accounted for as liability awards, the Company remeasures their fair value at each reporting date and records compensation expense utilizing a straight-line attribution method.
As the earned distribution value of any vested CPU can be settled in shares of Company’s common stock, cash or the property distributed to stockholders, or any combination of the foregoing, and because such property has an inherent ability to appreciate or depreciate in price by the Settlement Date, the Company has reserved, from its December 2010 distribution of Codexis, Inc. common stock, the number of shares of Codexis, Inc. common stock that it deems sufficient to settle its maximum potential liability related to the earned distribution value for each CPU. At March 31, 2012, the Company had reserved 270,078 shares of Codexis, Inc. common stock for this purpose.
For the three months ended March 31, 2011 and 2012, stock-based compensation expense related to the remeasurement of CPUs was recorded within continuing operations as follows (in thousands):
Three months ended March 31, | ||||||||
2011 | 2012 | |||||||
Research and development | $ | 28 | $ | — | ||||
General and administrative | 392 | (102 | ) | |||||
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Total stock-based compensation expense within continuing operations | $ | 420 | $ | (102 | ) | |||
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2. Cash Equivalents and Investments
The Company’s cash equivalents and investments as of March 31, 2012 were as follows (in thousands):
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | |||||||||||||
Money market funds | $ | 142,267 | $ | — | $ | — | $ | 142,267 | ||||||||
U.S. Treasury securities | 12,996 | — | — | 12,996 | ||||||||||||
Available-for-sale investment in equity securities | — | 1,639 | — | 1,639 | ||||||||||||
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Total | 155,263 | 1,639 | — | 156,902 | ||||||||||||
Less amounts classified as cash equivalents | (142,267 | ) | — | — | (142,267 | ) | ||||||||||
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Total investments | $ | 12,996 | $ | 1,639 | $ | — | $ | 14,635 | ||||||||
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The Company’s cash equivalents and investments as of December 31, 2011 were as follows (in thousands):
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | |||||||||||||
Money market funds | $ | 154,572 | $ | — | $ | — | $ | 154,572 | ||||||||
U.S. Treasury securities | 4,999 | — | — | 4,999 | ||||||||||||
Available-for-sale investment in equity securities | — | 2,478 | — | 2,478 | ||||||||||||
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Total | 159,571 | 2,478 | — | 162,049 | ||||||||||||
Less amounts classified as cash equivalents | (154,572 | ) | — | — | (154,572 | ) | ||||||||||
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Total investments | $ | 4,999 | $ | 2,478 | $ | — | $ | 7,477 | ||||||||
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Unrealized holding gains on available-for-sale securities, before tax, included in Accumulated other comprehensive income (loss) were $1.6 million at March 31, 2012 and $2.5 million at December 31, 2011, both of which were primarily related to the valuation of available-for-sale investment in equity securities. At March 31, 2012, all investments had a contractual maturity of less than one year.
3. Fair Value
Assets and liabilities recorded at fair value in the Condensed Consolidated Financial Statements are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels directly related to the amount of subjectivity associated with the inputs to valuation of these assets and liabilities, are as follows:
Level 1 – Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.
Level 2 – Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities and which reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.
The following tables represent the Company’s fair value hierarchy for its financial assets (cash equivalents and investments) and financial liabilities measured at fair value on a recurring basis as of March 31, 2012 and December 31, 2011 (in thousands):
As of March 31, 2012 | ||||||||||||||||
Estimated Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||
Assets: | ||||||||||||||||
Money market funds | $ | 142,267 | $ | 142,267 | $ | — | $ | — | ||||||||
U.S. Treasury securities | 12,996 | 12,996 | $ | — | $ | — | ||||||||||
Available-for-sale investment in equity securities | 1,639 | 1,639 | — | — | ||||||||||||
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Total | $ | 156,902 | $ | 156,902 | $ | — | $ | — | ||||||||
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Liabilities: | ||||||||||||||||
Stock portion of distribution payable | $ | 296 | $ | 296 | — | — | ||||||||||
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Total | $ | 296 | $ | 296 | $ | — | $ | — | ||||||||
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As of December 31, 2011 | ||||||||||||||||
Estimated Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||
Assets: | ||||||||||||||||
Money market funds | $ | 154,572 | $ | 154,572 | $ | — | $ | — | ||||||||
U.S. Treasury securities | 4,999 | 4,999 | — | — | ||||||||||||
Available-for-sale investment in equity securities | 2,478 | 2,478 | — | — | ||||||||||||
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Total | $ | 162,049 | $ | 162,049 | $ | — | $ | — | ||||||||
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Liabilities: | ||||||||||||||||
Stock portion of distribution payable | 535 | 535 | — | — | ||||||||||||
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Total | $ | 535 | $ | 535 | $ | — | $ | — | ||||||||
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As of March 31, 2012, the Company held 449,134 shares of Codexis, Inc. common stock, which is reflected on the Company’s Condensed Consolidated Balance Sheet as Available-for-sale investment in equity securities for $1.6 million. As the fair value of the Company’s investment in Codexis, Inc. common stock was based on the $3.65 closing price of such stock on March 30, 2012, and because an active market exists for such shares, the Company has classified the fair value of this asset as a Level 1 asset within the fair value hierarchy. As of December 31, 2011, the Company held 467,631 of such shares with a fair value of $2.5 million, based on the $5.30 closing price of such stock on December 30, 2011.
At March 31, 2012, the Company had an obligation to distribute 81,073 shares of Codexis, Inc. common stock to holders of the Company’s restricted stock awards. The fair value of this obligation of $296,000 is determined based on the $3.65 closing price of such stock on March 30, 2012. As of December 31, 2011, the obligation totaled $535,000, based on 101,005 shares of such stock with a $5.30 closing price on December 30, 2011. As the fair value was based on a quoted price in an active market, the Company classified this liability as a Level 1 liability within the fair value hierarchy and as the Stock portion of distribution payable in the table above.
4. Repurchases of Common Stock
Since December 2009, the Company has repurchased a total of 12,506,627 shares of its common stock for a total cost of approximately $67.9 million. These stock repurchases were conducted pursuant to a modified “Dutch auction” offer and through open market repurchases and private transactions.
In December 2009, the Company repurchased 7,345,103 shares pursuant to a modified “Dutch auction” tender offer at a total cost of approximately $39.2 million. In March 2010, the Company repurchased 1,433,361 shares from entities affiliated with GlaxoSmithKline plc at a per share price of $5.55, and the Company repurchased an additional 1,204,604 shares during 2010 as part of an open market repurchase program at an average price of $5.72 per share.
On May 31, 2011, the Company announced a stock repurchase program under which the Company was authorized to purchase up to $10.0 million of its common stock through December 31, 2011. On September 8, 2011, this repurchase program was increased from $10.0 million to $20.0 million. During 2011, the Company repurchased 2,244,289 shares of its common stock under this program at an aggregate cost of approximately $12.3 million. This program expired on December 31, 2011.
In January 2012, the Company announced a new stock repurchase program under which it is authorized to purchase up to $10.0 million of its common stock through December 31, 2012. In the three months ended March 31, 2012, the Company repurchased 279,270 shares of its common stock under this program at an aggregate cost of approximately $1.5 million.
The table below summarizes the Company’s repurchases of its common stock since 2009:
Period | Total Number of Shares Purchased | Total Costs, Net of Fees (In thousands) | ||||||
Twelve months ended December 31, 2009 | 7,345,103 | $ | 39,170 | |||||
Twelve months ended December 31, 2010 | 2,637,965 | 14,889 | ||||||
Twelve months ended December 31, 2011 | 2,244,289 | 12,256 | ||||||
Three months ended March 31, 2012 | 279,270 | 1,536 | ||||||
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Total | 12,506,627 | $ | 67,851 | |||||
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5. Litigation
From time to time, the Company may become involved in claims and legal proceedings that arise in the ordinary course of its business. Currently, the Company is not a party to any legal proceedings that management of the Company believes would have a material effect on its financial position or results of operations.
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6. Related Party Transactions
Waverley
On April 1, 2006, the Company entered into a consulting agreement with Waverley Associates, Inc. (“Waverley”), a private investment firm for which Mr. Isaac Stein is the president and sole stockholder. Mr. Stein also currently serves as executive chairman of the Company’s board of directors. The consulting agreement was amended in September 2009 to provide for an increase in the amount of consulting fees payable to Waverley to $50,000 per month. The consulting agreement, as amended to date, also provides for automatic renewal of the agreement for successive one-year terms and a two-year notice period for termination of the agreement by either party. Total expense under this arrangement was approximately $150,000 for each of the three month periods ended March 31, 2011 and 2012. At December 31, 2011 and March 31, 2012, $50,000 pertaining to this consulting agreement was recorded within accounts payable on the Company’s condensed consolidated balance sheet.
7. Discontinued Operations
On May 16, 2011, Astellas acquired all of the Company’s equity interests in Perseid for $76.0 million in cash. Perseid, a former majority-owned subsidiary, conducted substantially all of the Company’s research and development operations. As a result of the acquisition, the Company reported the financial results of Perseid and its related business activities as discontinued operations. Summarized operating results for the discontinued operations are as follows (in thousands):
Three months ended March 31, | ||||||||
2011 | 2012 | |||||||
Related party revenue | $ | 13,843 | $ | — | ||||
Operating expenses: | ||||||||
Research and development | 6,578 | — | ||||||
General and administrative | 1,200 | — | ||||||
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Total operating expenses | 7,778 | — | ||||||
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Income from operations of discontinued operations | 6,065 | — | ||||||
Interest and other income (expense), net | (28 | ) | — | |||||
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Income from discontinued operations before income taxes | 6,037 | — | ||||||
Income tax expense | (1,517 | ) | — | |||||
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Income from discontinued operations | $ | 4,520 | $ | — | ||||
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ITEM 2. MANAGEMENT’S DISCUSSIONAND ANALYSISOF FINANCIAL CONDITIONAND RESULTSOF OPERATIONS
Overview
We are a biopharmaceutical company focused on the potential further development of our MAXY-G34 product candidate, a next-generation pegylated, granulocyte colony stimulating factor, or G-CSF, for the treatment of chemotherapy-induced neutropenia and acute radiation syndrome, or ARS.
In May 2011, a subsidiary of Astellas Pharma Inc., or Astellas, acquired all of our interests in Perseid Therapeutics LLC, or Perseid, for $76.0 million in cash. Perseid, a former majority-owned subsidiary, included substantially all of our research and development operations and personnel. As a result of the acquisition of Perseid by Astellas, we have no further interests or obligations with respect to the business and operations of Perseid, except for the ongoing technology license agreement between the companies entered into as a part of the 2009 joint venture arrangement.
The acquisition of Perseid by Astellas largely completed a multi-year strategic process to restructure our operations, a process that also included the sale or distribution of various other assets, such as our vaccines assets, the patent rights relating to the MolecularBreeding™ directed evolution platform, and substantially all of our equity interests in Codexis, Inc., or Codexis.
We continue to retain all rights to our MAXY-G34 program for development of all therapeutic areas, including chemotherapy-induced neutropenia and ARS indications, and we continue to evaluate the potential further development of the program for both indications. Our current focus is to create value from this program for our stockholders, either through the potential further development of the product candidate for one or both indications, or through a sale, licensing, partnering or other transaction involving the program. We also continue to evaluate potential strategic options for our company as a whole, including a strategic business combination, other transaction, or a wind down of the company.
We currently have seven employees, all of whom are engaged in general and administrative activities, and we have significantly curtailed our operations and decreased our operating expenses. However, we expect our operating expenses to increase if we engage in any further development of our MAXY-G34 program or pursue any strategic combination or other transactions.
As of March 31, 2012, we held approximately $155.3 million in cash, cash equivalents and short-term investments. We also remain eligible for a payment of up to $30.0 million from Bayer HealthCare LLC, or Bayer, related to the sale of our hematology assets to Bayer in July 2008.
We have previously distributed cash and property to our stockholders and have repurchased our common stock under various stock repurchase programs. We also have a current stock repurchase program under which we are authorized to purchase up to $10.0 million of our common stock through December 31, 2012. In addition, given that we continue to have large cash reserves, we expect to consider and evaluate additional distributions to our stockholders of a portion of our cash resources in excess of our current and longer term operational requirements, although none are currently contemplated. Such distributions may be accomplished through cash dividends, distributions or other mechanisms and may be fully or partially taxable depending on the circumstances of such distribution. We may also use our cash resources to continue repurchases of our common stock. Our plans with respect to any future distributions, stock repurchases or other strategic transactions will be largely dependent on any future developments related to our MAXY-G34 program, whether we receive the remaining payment from Bayer and the future financial commitments and longer term operational requirements related to our business.
At present, we have no significant source of revenues, other than the revenue that would be recognized upon the potential receipt of the remaining contingent payment from Bayer. We continue to maintain a strong cash position, with cash, cash equivalents and short-term investments totaling $155.3 million as of March 31, 2012.
For the purposes of this report, our continuing operations consist of the results of Maxygen, Inc. and its wholly-owned subsidiaries, Maxygen Holdings (U.S.), Inc., Maxygen ApS and Maxygen Holdings, Inc., as well as its majority-owned subsidiary, Maxygen Holdings LLC. Discontinued operations consist of the results of Perseid prior to the acquisition by Astellas of our interests in Perseid in May 2011.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make judgments, estimates and assumptions in the preparation of our consolidated financial statements and accompanying notes. Actual results could differ from those estimates. We believe there have been no significant changes in our critical accounting policies as discussed in our Annual Report on Form 10-K for the year ended December 31, 2011.
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Results of Operations
Revenues
Our revenues have been derived primarily from collaboration agreements, technology and license arrangements and government research grants, and from the sale of certain assets. Technology and license revenue recorded in the three months ended March 31, 2012 consisted of certain miscellaneous licensing fees received from third parties. No revenue was recorded in the three months ended March 31, 2011.
Research and Development Expenses
Our research and development expenses have historically consisted of external collaborative research expenses (including contract manufacturing, contract research and clinical trial expenses), salaries and benefits, facility costs, supplies, research consultants, depreciation and stock compensation expense. As a result of the acquisition of Perseid by Astellas in May 2011, our research and development expenses have been substantially reduced and are currently attributable to limited research and development activities related to our MAXY G-34 product candidate. Research and development expenses were $65,000 in the three months ended March 31, 2012, compared to $567,000 in the three months ended March 31, 2011. The decrease in our research and development expenses for the three month period was primarily due to reductions in salary related costs and patent research expenses.
We expect our research and development expenses to be maintained well below historical levels. However, the potential further development of our MAXY G-34 product candidate could result in a significant increase in our research and development expenses.
General and Administrative Expenses
Our general and administrative expenses consist primarily of personnel costs for finance, legal, general management, business development and human resources, stock compensation expense, insurance premiums, business consultants and professional expenses, such as external expenditures for legal, accounting services and board fees. General and administrative expenses were $2.8 million for the three months ended March 31, 2012, compared to $3.1 million in the three months ended March 31, 2011. The decrease in our general and administrative expenses for the three month period was primarily due to a decrease in stock compensation expense attributable to a decline in the valuation of our CPU awards, a decrease in consulting costs, and a decrease in external legal and accounting expenses. These decreases were partially offset by the elimination of expense allocations under our transition services agreement with Perseid, under which a portion of our administrative costs was previously charged to Perseid.
We expect our general and administrative expenses for the remainder of 2012 to be comparable to or slightly lower than 2011, depending on, among other things, the use of external consultants, expenditures for legal and accounting services and stock compensation charges pertaining to our CPU awards, which are remeasured to estimated fair value on a recurring basis. However, our general and administrative expenses may increase significantly if we pursue any strategic transactions.
Gain on Distribution of Equity Securities
In connection with the distribution to our stockholders on December 14, 2010 of substantially all of the Codexis, Inc. common stock we held, we retained shares of such stock on behalf of the holders of certain outstanding equity awards. As of March 31, 2012, we held 449,134 shares of such stock. In the three months ended March 31, 2012 and 2011, we recorded a gain on distribution of equity securities of $75,000 and $85,000, respectively, as a result of the release of such stock pursuant to the vesting of restricted stock awards.
Interest Income and Other Income (Expense), Net
Interest income and other income (expense), net, represents income earned on our cash, cash equivalents and short-term investments, foreign currency gains or losses, and changes in value of stock portion of distribution payable. Amounts included in interest income and other income (expense), net, are as follows (in thousands):
Three months ended March 31, | ||||||||
2011 | 2012 | |||||||
Interest income | $ | 38 | $ | 6 | ||||
Foreign exchange gains (losses) | 23 | 8 | ||||||
Change in value of stock portion of distribution payable | (184 | ) | 165 | |||||
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Total interest income and other income (expense), net | $ | (123 | ) | $ | 179 | |||
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The increase in interest income and other income (expense), net, from the 2011 period to the 2012 period was primarily as a result of the change in value of the stock portion of distribution payable, partially offset by the lower interest income due to lower yields in our investment portfolio.
Provision for Income Taxes
We did not record any tax benefit or expense during the three months ended March 31, 2012. During the three months ended March 31, 2011, we recorded a $1.7 million tax benefit within continuing operations. The tax expense of $1.5 million recorded within discontinued operations was comprised of the $1.7 million tax expense allocated from continuing operations and a $0.2 million tax benefit related to the tax effect of the change in unrealized gains on our available-for-sale investments in other comprehensive income.
Discontinued Operations
We did not record any income from discontinued operations for the three months ended March 31, 2012 as a result of the sale of Perseid to Astellas in May 2011. Income from discontinued operations for the three months ended March 31, 2011 was $4.5 million, net of tax expense of $1.5 million. Income from discontinued operations before tax was generated from the operating activities of Perseid and its predecessor operations, reflecting the development of its programs for such activities. The majority of these operating activities were reimbursed by Astellas.
Recent Accounting Pronouncements
In June 2011, the Financial Accounting Standards Board issued Accounting Standards Update No. 2011-05 for the presentation of comprehensive income, thereby amending Accounting Standards Codification 220, Comprehensive Income. The amendments require that all non-owner changes in stockholder’s equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The amendments were effective in fiscal years beginning after December 15, 2011 and should be applied retrospectively. These amendments impact the presentation of our financial statements beginning in the current quarter.
Liquidity and Capital Resources
Since inception, we have financed our continuing operations primarily through private placements and public offerings of equity securities, research and development funding from collaborators and government grants and through the sale or license of various assets. The acquisition of Perseid by Astellas largely completed a multi-year strategic process to maximize stockholder value through sales, distributions and other arrangements involving our various assets, including the sale of our vaccine assets, the sale of patent rights relating to the MolecularBreeding™ directed evolution platform, and the distribution of substantially all of our equity interests in Codexis. As of March 31, 2012, we had $155.3 million in cash, cash equivalents and short-term investments.
During the three months ended March 31, 2012, we repurchased approximately 279,000 shares at an aggregate purchase price of approximately $1.5 million. During 2011, we repurchased approximately 2.2 million shares of our common stock under a stock repurchase program at an aggregate purchase price of approximately $12.3 million. Since we began repurchasing our common stock in 2009, we have repurchased a total of 12.5 million shares of our common stock at an aggregate purchase price of $67.9 million, through March 31, 2012.
In October 2010, we sold substantially all of the patents and other intellectual property rights associated with the Molecular Breeding™ directed evolution platform to Codexis and cancelled all payment and potential royalty obligations of Codexis to us relating to biofuels and other energy products, for $20.0 million. We received $16.0 million in cash upon closing of the sale in October 2010, with the remaining $4.0 million held in escrow, $2.0 million of which was released in November 2011 and $2.0 million of which will be held in escrow until September 2012 to satisfy any indemnification obligations under the purchase agreement.
In December 2010, we completed a distribution to our stockholders of substantially all of the Codexis, Inc. common stock we held. In aggregate, we distributed approximately 5.4 million shares of Codexis, Inc. common stock to our stockholders on December 14, 2010. The 449,134 shares of Codexis, Inc. common stock that we continued to hold at March 31, 2012 primarily represent shares that are being retained by us on behalf of the holders of certain outstanding equity awards. We also made a special cash distribution of $1.00 for each outstanding share of our common stock in December 2010, equal to approximately $29.2 million in the aggregate.
In May 2011, Astellas acquired all of our interests in Perseid for $76.0 million in cash. Perseid, a former majority-owned subsidiary, included substantially all of our research and development operations and personnel. As a result of the acquisition of Perseid by Astellas, we have no further interests or obligations with respect to the business and operations of Perseid, except for the ongoing technology license agreement between the companies entered into as a part of the 2009 joint venture arrangement.
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Net cash used in operating activities was $2.6 million in the three months ended March 31, 2012, compared to $2.5 million in the comparable period in 2011. The net cash used in operating activities in the 2012 period was primarily attributable to a loss from continuing operations, adjusted to exclude certain non-cash items, and a reduction in other accrued liabilities. The net cash used in operating activities in the 2011 period was primarily attributable to a loss from continuing operations, adjusted to exclude certain non-cash items, a reduction in accrued compensation, partially offset by a collection of receivables from Perseid. The non-cash adjustments to reconcile loss from continuing operations to net cash used in operating activities for the 2011 period included an income tax benefit of $1.7 million, partially offset by $1.0 million in non-cash stock compensation, while the 2012 period included $526,000 in non-cash stock compensation.
Net cash used in investing activities was $8.0 million in the three months ended March 31, 2012. No cash was used in or provided by investing activities in the three months ended March 31, 2011. The net cash used in investing activities during the 2012 period was primarily attributable to purchases of available-for-sale securities. 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.
Net cash used in financing activities was $1.7 million in the three months ended March 31, 2012, compared with $286,000 provided by financing activities in the comparable period in 2011. The net cash used in financing activities during 2012 was primarily due to repurchases of our common stock. The net cash provided by financing activities during the 2011 period was primarily attributable to the net proceeds received from issuance of common stock pursuant to stock option exercises.
Net cash used in discontinued operations was $181,000 in the three months ended March 31, 2011. No cash was used in or provided by discontinued operations in the three months ended March 31, 2012 as a result of the purchase of Perseid by Astellas in May 2011. The net cash used in discontinued operations in the 2011 period was primarily attributable to the payment of certain license fees.
The following are contractual commitments as of March 31, 2012, which consist solely of our operating lease obligations (in thousands):
Payments Due by Period | ||||||||||||||||||||
Contractual Obligations | Total | Less than 1 Year | 1-3 Years | 4-5 Years | More than 5 Years | |||||||||||||||
Operating lease obligations | $ | 104 | $ | 104 | $ | — | $ | — | $ | — | ||||||||||
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Total | $ | 104 | $ | 104 | $ | — | $ | — | $ | — | ||||||||||
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We are eligible for a potential payment of up to $30.0 million from Bayer based on the achievement of certain events related to the potential initiation of a phase II clinical trial of MAXY-VII and the satisfaction of certain patent related conditions associated with the MAXY-VII program. However, there can be no assurances that we will receive any portion of such payment from Bayer.
As of March 31, 2012, we had $155.3 million in cash, cash equivalents and short-term investments. We believe that our current cash, cash equivalents and short-term investments will be sufficient to satisfy our anticipated cash needs for working capital and capital expenditures for at least the next twelve months.
In addition, given that we continue to have large cash reserves, our board of directors expects to consider and evaluate additional distributions to our stockholders of a portion of our cash resources in excess of our current and longer term operational requirements, although none are currently contemplated. Such distributions may be accomplished through cash dividends, stock repurchases or other mechanisms and may be fully or partially taxable depending on the circumstances of such distribution. If appropriate opportunities become available, we may also consider and evaluate using a portion of our cash reserves to acquire additional businesses, assets, technologies, or products, or we may pursue other strategic transactions.
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ITEM 3. QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk Management
We are exposed to market risks, including changes in interest rates, foreign currency exchange rates, and the price fluctuations of certain equity securities. To mitigate some foreign currency exchange rate risk, we from time to time enter into currency forward contracts. We do not use derivative financial instruments for speculative or trading purposes. There were no significant changes in our market risk exposures during the three months ended March 31, 2012. 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, 2011.
ITEM 4. CONTROLSAND PROCEDURES
Evaluation of Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (“the Exchange Act”)) as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in reaching a reasonable level of assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time period specified in the Securities and Exchange Commission’s rules and forms.
Changes in Internal Control
There has been no change in our internal controls over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
Limitations on the Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures and internal controls over financial reporting 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. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
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From time to time, we may become involved in claims and legal proceedings that arise in the ordinary course of our business. Currently, we are not a party to any legal proceedings that we believe would have a material effect on our financial position or results of operations.
There have been no material changes from the risk factors previously disclosed in Item 1A to Part I of our Form 10-K for the year ended December 31, 2011.
ITEM 2. UNREGISTERED SALESOF EQUITY SECURITIESAND USEOF PROCEEDS
Issuer Purchases of Equity Securities
The table below summarizes information about repurchases of our common stock during the quarterly period ended March 31, 2012.
Period | Total Number of Shares Purchased(1) | Average Price Paid per Share(2) | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(1) | Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs(1) | ||||||||||||
Jan. 1, 2012 through Jan. 31, 2012 | 180,143 | $ | 5.47 | 180,143 | $ | 9,014,861 | ||||||||||
Feb. 1, 2012 through Feb. 29, 2012 | 78,060 | $ | 5.47 | 78,060 | $ | 8,587,896 | ||||||||||
Mar. 1, 2012 through Mar. 31, 2012 | 21,067 | $ | 5.50 | 21,067 | $ | 8,472,130 | ||||||||||
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Total | 279,270 | $ | 5.47 | 279,270 | $ | 8,472,130 | ||||||||||
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(1) | On January 10, 2012, we announced that our Board authorized a new stock repurchase program under which we are authorized to purchase up to $10.0 million of our common stock through December 31, 2012. |
(2) | The price paid per share of common stock does not include any related transaction costs. |
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
Not applicable.
Not applicable.
The following exhibits are filed as part of this report:
31.1 | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1 | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
101.INS | XBRL Instance Document | |
101.SCH | XBRL Taxonomy Extension Schema Document | |
101.CAL | XBRL Taxonomy Calculation Linkbase Document | |
101.LAB | XBRL Taxonomy Label Linkbase Document | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
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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. | ||||||
May 7, 2012 | By: | /s/ James R. Sulat | ||||
James R. Sulat | ||||||
Chief Executive Officer & Chief Financial Officer |
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