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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
For the quarterly period ended March 31, 2013
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, 2013, there were 27,792,520 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, 2013
This report and the disclosures herein include, on a consolidated basis, the business and operations of Maxygen, Inc. and its wholly-owned subsidiary, Maxygen ApS. 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.
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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:
• | strategic alternatives and transactions with respect to our MAXY-G34 product candidate or our company and the timing, likelihood and outcome thereof; |
• | our implementation, or our failure to implement, any additional distributions of our cash resources to stockholders and the treatment of any such distributions for tax purposes; |
• | our ability to estimate and maintain adequate reserves to fund our current and longer term operational requirements, pursue our ongoing strategic evaluation and provide for potential future liabilities and claims, such as liabilities, claims, adjustments, penalties, interest and other amounts resulting from potential future tax audits or from potential future litigation; |
• | 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 hire qualified personnel; |
• | our ability to protect and maintain our intellectual property portfolio and associated rights and obligations; |
• | 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, 2012 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
MAXYGEN, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
December 31, 2012 | March 31, 2013 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 62,784 | $ | 61,077 | ||||
Short-term investments | 19,996 | 19,998 | ||||||
Available-for-sale investment in equity securities | 76 | 61 | ||||||
Prepaid expenses and other current assets | 252 | 279 | ||||||
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Total current assets | 83,108 | 81,415 | ||||||
Property and equipment, net | 113 | 100 | ||||||
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Total assets | $ | 83,221 | $ | 81,515 | ||||
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LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 245 | $ | 213 | ||||
Accrued compensation | 947 | 1,295 | ||||||
Distribution payable | 1,002 | 761 | ||||||
Other accrued liabilities | 505 | 333 | ||||||
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Total current liabilities | 2,699 | 2,602 | ||||||
Non-current distribution payable | 283 | 264 | ||||||
Other non-current liabilities | 52 | 52 | ||||||
Commitments and contingencies | ||||||||
Stockholders’ equity: | ||||||||
Preferred stock, $0.0001 par value, 5,000,000 shares authorized, no shares issued and outstanding at December 31, 2012 and March 31, 2013 | — | — | ||||||
Common stock, $0.0001 par value, 100,000,000 shares authorized, 27,512,340 and 27,564,431 shares issued and outstanding at December 31, 2012 and March 31, 2013, respectively | 3 | 3 | ||||||
Additional paid-in capital | 212,008 | 212,566 | ||||||
Accumulated other comprehensive loss | (172 | ) | (189 | ) | ||||
Accumulated deficit | (131,652 | ) | (133,783 | ) | ||||
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Total stockholders’ equity | 80,187 | 78,597 | ||||||
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Total liabilities and stockholders’ equity | $ | 83,221 | $ | 81,515 | ||||
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See accompanying notes.
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MAXYGEN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except per share data)
Three Months Ended March 31, | ||||||||
2012 | 2013 | |||||||
(unaudited) | ||||||||
Technology and license revenue | $ | 6 | $ | 3 | ||||
Operating expenses: | ||||||||
Research and development | 65 | 2 | ||||||
General and administrative | 2,767 | 2,151 | ||||||
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Total operating expenses | 2,832 | 2,153 | ||||||
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Loss from operations | (2,826 | ) | (2,150 | ) | ||||
Gain on distribution of equity securities | 75 | 23 | ||||||
Interest and other income (expense), net | 179 | (4 | ) | |||||
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Net loss | $ | (2,572 | ) | $ | (2,131 | ) | ||
Other comprehensive loss: | ||||||||
Unrealized gains on available-for-sale securities, net of tax | (839 | ) | (17 | ) | ||||
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Comprehensive loss | $ | (3,411 | ) | $ | (2,148 | ) | ||
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Basic and diluted net loss per share | $ | (0.09 | ) | $ | (0.08 | ) | ||
Shares used in basic and diluted net loss per share calculations | 27,232 | 27,517 |
See accompanying notes.
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MAXYGEN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Three months ended March 31, | ||||||||
2012 | 2013 | |||||||
(unaudited) | ||||||||
Operating activities | ||||||||
Net loss | $ | (2,572 | ) | $ | (2,131 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Depreciation and amortization | 13 | 13 | ||||||
Gain on distribution of equity securities | (75 | ) | (23 | ) | ||||
Non-cash stock compensation | 526 | 616 | ||||||
Amortization of discount on investments | (1 | ) | (5 | ) | ||||
Valuation of stock portion of distribution payable | (165 | ) | 7 | |||||
Changes in operating assets and liabilities: | ||||||||
Prepaid expenses and other current assets | 40 | (27 | ) | |||||
Deposits and other non-current assets | 124 | — | ||||||
Accounts payable | (4 | ) | (32 | ) | ||||
Accrued compensation | (196 | ) | 302 | |||||
Other accrued liabilities | (318 | ) | (172 | ) | ||||
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Net cash used in operating activities | (2,628 | ) | (1,452 | ) | ||||
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Investing activities | ||||||||
Purchases of available-for-sale securities | (7,996 | ) | (4,999 | ) | ||||
Maturities of available-for-sale securities | — | 5,000 | ||||||
Acquisition of property and equipment | (22 | ) | — | |||||
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Net cash provided by (used in) investing activities | (8,018 | ) | 1 | |||||
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Financing activities | ||||||||
Proceeds from issuance of common stock, net of stock repurchased to settle employee tax obligations | (17 | ) | (12 | ) | ||||
Cash distributions paid to common stockholders | (106 | ) | (244 | ) | ||||
Repurchase of common stock | (1,536 | ) | — | |||||
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Net cash used in financing activities | (1,659 | ) | (256 | ) | ||||
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Net decrease in cash and cash equivalents | (12,305 | ) | (1,707 | ) | ||||
Cash and cash equivalents at beginning of period | 154,572 | 62,784 | ||||||
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Cash and cash equivalents at end of period | $ | 142,267 | $ | 61,077 | ||||
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See accompanying notes.
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MAXYGEN, INC.
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, 2013, and for the three months ended March 31, 2012 and 2013, 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, 2012 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, 2012.
Principles of Consolidation
The Condensed Consolidated Financial Statements include the amounts of the Company and its wholly-owned subsidiary, Maxygen ApS. The Condensed Consolidated Financial Statements also include the amounts of the Company’s former majority-owned subsidiary, Maxygen Holdings LLC (through its dissolution on June 21, 2012), and the Company’s former wholly-owned subsidiaries, Maxygen Holdings (U.S.), Inc. and Maxygen Holdings, Inc. (through their dissolution on August 9, 2012).
Net Loss Per Share
Basic net 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 loss per share computations and the calculation of basic and diluted net loss per share (in thousands, except per share data):
Three months ended March 31, | ||||||||
2012 | 2013 | |||||||
Numerator: | ||||||||
Net loss | $ | (2,572 | ) | $ | (2,131 | ) | ||
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Denominator: | ||||||||
Weighted-average shares used in computing basic and diluted net loss per share | 27,232 | 27,517 | ||||||
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Basic and diluted net loss per share | $ | (0.09 | ) | $ | (0.08 | ) | ||
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The total number of shares excluded from the calculations of diluted net loss per share was approximately 5,647,000 options and 523,000 shares of restricted stock at March 31, 2012 and 4,555,000 options and 228,000 shares of restricted stock at March 31, 2013. These securities have been excluded from the calculation of diluted net loss per share as their effect is anti-dilutive.
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Comprehensive loss
Comprehensive loss is primarily comprised of net loss, net unrealized gains or losses on available-for-sale securities, net of reclassification adjustments for gains included in net loss, and their related tax effects.
Three months ended March 31, | ||||||||
2012 | 2013 | |||||||
Net loss | $ | (2,572 | ) | $ | (2,131 | ) | ||
Changes in unrealized gains on available-for-sale investments | (764 | ) | 6 | |||||
Less: reclassification adjustments for gains included in net loss | 75 | 23 | ||||||
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Unrealized gains on available-for-sale investments, net | (839 | ) | (17 | ) | ||||
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Comprehensive loss | $ | (3,411 | ) | $ | (2,148 | ) | ||
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The changes in unrealized gain (loss) on available-for-sale investment in equity securities represent the change in fair value of the Codexis, Inc. common stock held by the Company. The reclassification adjustments to changes in unrealized gains on available-for-sale investments include gains associated with the distribution of such common stock in both 2012 and 2013. The shares of Codexis, Inc. 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 loss was as follows (in thousands):
December 31, 2012 | March 31, 2013 | |||||||
Unrealized gains on available-for-sale investments | $ | 80 | $ | 63 | ||||
Foreign currency translation adjustments | (252 | ) | (252 | ) | ||||
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Accumulated other comprehensive loss | $ | (172 | ) | $ | (189 | ) | ||
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Stock-Based Compensation
For the three months ended March 31, 2012 and 2013, stock-based compensation expense of $526,000 and $616,000, respectively, was allocated entirely to general and administrative expense.
Stock Options
Stock options are generally scheduled to 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. There were no stock options granted to employees during each of the three months ended March 31, 2012 and 2013. For the three months ended March 31, 2012 and 2013, stock-based compensation expense associated with stock options was $177,000 and $184,000, respectively.
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
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expense on a straight-line basis over the requisite service period. The Company did not grant any restricted stock awards in the three months ended March 31, 2012 and 2013. For the three months ended March 31, 2012 and 2013, the Company recognized approximately $451,000 and $386,000, respectively, in stock-based compensation expense within continuing operations, related to its restricted stock awards. At March 31, 2013, the unrecognized compensation cost related to these awards was approximately $1.1 million, which is expected to be recognized on a straight-line basis over the requisite service period through June 2016.
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 the 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. 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 entirely in cash. All unvested CPUs remaining following the Settlement Date will expire immediately.
These awards were remeasured at estimated fair value as of March 31, 2013, as required for liability awards. During the three months ended March 31, 2012, approximately $33,000 in cash was paid to settle vested CPUs. No CPUs settled in the three months ended March 31, 2013. The fair value of the remaining CPUs was approximately $1.0 million at March 31, 2013, as determined based on a Monte Carlo simulation using the following assumptions:
Three months ended March 31, 2012 | Three months ended March 31, 2013 | |||
Expected dividend yield | 0% | 0% | ||
Risk-free interest rate range | 0.22% – 0.42% | 0.12% – 0.29% | ||
Expected life | 1.48 – 3.17 years | 0.48 – 2.17 years | ||
Expected volatility of Maxygen, Inc. common stock | 35.75% to 41.95% | 18.87% to 25.35% | ||
Expected volatility of Codexis, Inc. common stock | 64.47% to 65.24% | 61.71% to 69.70% |
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 the 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 a credit to compensation expense of approximately $102,000 and a charge of $46,000 in the three months ended March 31, 2012 and 2013, respectively, related to changes in the fair value of the CPU liability within General and administrative expenses. As the CPUs are accounted for as liability awards, the Company re-measures their fair value at each reporting date and records compensation expense utilizing a straight-line attribution method.
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2. Cash Equivalents and Investments
The Company’s cash equivalents and investments as of March 31, 2013 were as follows (in thousands):
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | |||||||||||||
Money market funds | $ | 61,077 | $ | — | $ | — | $ | 61,077 | ||||||||
U.S. Treasury securities | 19,996 | 2 | — | 19,998 | ||||||||||||
Available-for-sale investment in equity securities | — | 61 | — | 61 | ||||||||||||
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Total | 81,073 | 63 | — | 81,136 | ||||||||||||
Less amounts classified as cash equivalents | (61,077 | ) | — | — | (61,077 | ) | ||||||||||
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Total investments | $ | 19,996 | $ | 63 | $ | — | $ | 20,059 | ||||||||
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The Company’s cash equivalents and investments as of December 31, 2012 were as follows (in thousands):
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | |||||||||||||
Money market funds | $ | 62,784 | $ | — | $ | — | $ | 62,784 | ||||||||
U.S. Treasury securities | 19,992 | 4 | — | 19,996 | ||||||||||||
Available-for-sale investment in equity securities | — | 76 | — | 76 | ||||||||||||
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Total | 82,776 | 80 | — | 82,856 | ||||||||||||
Less amounts classified as cash equivalents | (62,784 | ) | — | — | (62,784 | ) | ||||||||||
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Total investments | $ | 19,992 | $ | 80 | $ | — | $ | 20,072 | ||||||||
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At March 31, 2013, 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.
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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, 2013 and December 31, 2012 (in thousands):
As of March 31, 2013 | ||||||||||||||||
Estimated Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||
Assets recorded on the balance sheet: | ||||||||||||||||
Money market funds | $ | 61,077 | $ | 61,077 | $ | — | $ | — | ||||||||
U.S. Treasury securities | 19,998 | 19,998 | — | — | ||||||||||||
Available-for-sale investment in equity securities | 61 | 61 | — | — | ||||||||||||
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Total | $ | 81,136 | $ | 81,136 | $ | — | $ | — | ||||||||
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Liabilities: | ||||||||||||||||
Stock portion of distribution payable | 59 | 59 | — | — | ||||||||||||
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Total | $ | 59 | $ | 59 | $ | — | $ | — | ||||||||
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As of December 31, 2012 | ||||||||||||||||
Estimated Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||
Assets recorded on the balance sheet: | ||||||||||||||||
Money market funds | $ | 62,784 | $ | 62,784 | $ | — | $ | — | ||||||||
U.S. Treasury securities | 19,996 | 19,996 | — | — | ||||||||||||
Available-for-sale investment in equity securities | 76 | 76 | — | — | ||||||||||||
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Total | $ | 82,856 | $ | 82,856 | $ | — | $ | — | ||||||||
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Liabilities: | ||||||||||||||||
Stock portion of distribution payable | 75 | 75 | — | — | ||||||||||||
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Total | $ | 75 | $ | 75 | $ | — | $ | — | ||||||||
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As of March 31, 2013, the Company held 25,463 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 $61,000. As the fair value of the Company’s investment in Codexis, Inc. common stock was based on the $2.39 closing price of such stock on March 28, 2013, 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, 2012, the Company held 34,450 of such shares with a fair value of $76,000, based on the $2.21 closing price of such stock on December 31, 2012.
At March 31, 2013, the Company had an obligation to distribute 24,490 shares of Codexis, Inc. common stock to holders of the Company’s restricted stock awards. The fair value of this obligation of $59,000 is determined based on the $2.39 closing price of such stock on March 28, 2013. As of December 31, 2012, the obligation totaled $75,000, based on 33,988 shares of such stock with a $2.21 closing price on December 31, 2012. 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
From December 2009 through March 31, 2013, the Company repurchased a total of 12,506,627 shares of its common stock for a total cost of approximately $67.9 million. As further summarized below, 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.
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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 was authorized to purchase up to $10.0 million of its common stock through December 31, 2012. For the year ended December 31, 2012, the Company repurchased 279,270 shares of its common stock under this program at an aggregate cost of approximately $1.5 million. In November 2012, the Company announced the extension of this stock repurchase program through December 31, 2013. There were no repurchases of common stock during the three months ended March 31, 2013.
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 | ||||||
Twelve months ended December 31, 2012 | 279,270 | 1,536 | ||||||
Three months ended March 31, 2013 | — | — | ||||||
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Total | 12,506,627 | $ | 67,851 | |||||
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5. 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, as amended to date, provides for consulting fees payable to Waverley of $50,000 per month. The consulting agreement 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, 2012 and 2013. At March 31, 2013, $50,000 pertaining to this consulting agreement was recorded within accounts payable on the Company’s condensed consolidated balance sheet.
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ITEM 2.MANAGEMENT’SDISCUSSIONANDANALYSISOFFINANCIALCONDITIONANDRESULTSOFOPERATIONS
The following discussion should be read in conjunction with our consolidated financial statements and the related notes and other financial information appearing elsewhere in this report. This report contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those indicated in forward-looking statements. See “Forward-Looking Statements” and “Risk Factors.”
Overview
We are a biopharmaceutical company that has historically focused on the discovery and development of improved next-generation protein pharmaceuticals for the treatment of disease and serious medical conditions.
Over the past several years, we have focused our efforts on maximizing stockholder value through sales, distributions and other arrangements involving our various assets. This includes the distribution of approximately $100.0 million in cash to our stockholders in September 2012 and the receipt of a final $30.0 million payment from Bayer HealthCare LLC, or Bayer, in May 2012 in connection with our sale of certain hematology assets to Bayer in July 2008. This also includes the receipt of $76.0 million in cash in May 2011 in connection with the sale of all of our interests in Perseid Therapeutics LLC, or Perseid, to a subsidiary of Astellas Pharma Inc., or Astellas. Perseid was a former majority-owned subsidiary that included substantially all of our research and development operations and personnel. In addition, from December 2009 through March 31, 2013, we repurchased approximately 12.5 million shares of our common stock at an aggregate cost of approximately $67.9 million. In connection with these and other transactions, we have returned over $250.0 million in cash and property to our stockholders since 2009 primarily through our distributions of cash and repurchases of our stock.
We continue to retain all rights to 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, and we continue to focus on creating value from this program for our stockholders, principally through a sale or other transaction involving the program. We have no current plans to independently continue the further development of this product candidate for either indication and, to date, we have not been successful in identifying any potential transaction for the MAXY-G34 program. Accordingly, there can be no assurances we will be successful in identifying and consummating any such transaction in the future or be able to realize any value from this program.
We also continue to evaluate potential strategic options for our company as a whole, including a merger, reverse merger, sale or other strategic transaction. We also expect to evaluate and consider additional distributions to our stockholders of a portion of our cash resources in excess of our limited future operational requirements, amounts we consider appropriate to pursue our ongoing strategic evaluation and adequate reserves for potential future liabilities. 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. We may also decide to cease all of our operations and seek stockholder approval of a plan of liquidation and dissolution so that we may liquidate all of our remaining assets, pay our known liabilities, distribute our remaining cash on hand (subject to the set aside of adequate reserves to cover known, unknown and contingent liabilities, including potential tax liabilities and potential claims in litigation) and dissolve. However, there can be no assurances that any particular course of action, business arrangement or transaction, or series of transactions, will be pursued, successfully consummated or lead to increased stockholder value or that we will make any additional cash distributions to our stockholders.
We currently have four 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 pursue any strategic combination or other transactions.
At present, we have no significant source of recurring revenues. Our cash, cash equivalents and short-term investments totaled $81.1 million as of March 31, 2013.
For the purposes of this report, our continuing operations consist of the results of Maxygen, Inc. and our wholly-owned subsidiary, Maxygen ApS. Our condensed consolidated financial statements also include the amounts of our former majority-owned subsidiary, Maxygen Holdings LLC (through its dissolution on June 21, 2012), and our former wholly-owned subsidiaries, Maxygen Holdings (U.S.), Inc. and Maxygen Holdings, Inc. (through their dissolution on August 9, 2012).
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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, 2012.
Results of Operations
Revenues
Our revenues have been derived primarily from collaboration agreements, technology and license arrangements. Technology and license revenue recorded in each of the three month periods ended March 31, 2013 and 2012 consisted of certain miscellaneous licensing fees received from third parties.
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-G34 product candidate. Research and development expenses were $2,000 in the three months ended March 31, 2013, compared to $65,000 in the three months ended March 31, 2012. Research and development expenses in the three months ended March 31, 2012 included limited stability and other testing of our MAXY-G34 product candidate.
We expect our research and development expenses to continue to be limited and maintained well below historical levels. However, any further development of our MAXY-G34 product candidate that we may undertake in connection with a potential strategic combination or other transaction 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 expenditures for legal, accounting services and board fees. General and administrative expenses were $2.2 million in the three months ended March 31, 2013, compared to $2.8 million in the three months ended March 31, 2012. The decrease in our general and administrative expenses was primarily attributable to a decrease in salary and related costs as a result of lower headcount and a reduction in consulting expenses and professional expenses, including accounting and tax services. These decreases were partially offset by an increase in stock compensation expense due to an increase in the valuation of our contingent performance units, or CPUs.
Our general and administrative expenses for 2013 are expected to decrease for the full year, however individual quarters may vary significantly. Such decrease is dependent 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. Our general and administrative expenses may increase significantly if we pursue any strategic transactions or may decrease if we further wind-down our operations.
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, 2013, we held 25,463 shares of such stock. In the three months ended March 31, 2013 and 2012, we recorded a gain on distribution of equity securities of $23,000 and $75,000, respectively, as a result of the release of such stock pursuant to the vesting of restricted stock awards.
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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, change in value of stock portion of distribution payable, foreign currency gains or losses, and other expenses. Amounts included in interest income, net, are as follows (in thousands):
Three months ended March 31, | ||||||||
2012 | 2013 | |||||||
Interest income | $ | 6 | $ | 10 | ||||
Change in value of stock portion of distribution payable | 165 | (7 | ) | |||||
Foreign exchange gains (losses) | 8 | (7 | ) | |||||
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Total interest and other income (expense), net | $ | 179 | $ | (4 | ) | |||
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The decrease in interest income and other income (expense), net from the 2013 period to the 2012 period was primarily as a result of the change in value of the stock portion of distribution payable.
Liquidity and Capital Resources
Since inception, we have financed our continuing operations primarily through the sale or license of various assets, the public offerings and private placements of equity securities and research and development funding from collaborators and government grants. As of March 31, 2013, we had $81.1 million in cash, cash equivalents and short-term investments.
From December 2009 through March 31, 2013, we repurchased approximately 12.5 million shares of our common stock at an aggregate cost of approximately $67.9 million. These repurchases were conducted through a “Dutch auction” tender offer, private transactions, and under various open market repurchase programs. We have not repurchased any stock during the three months ended March 31, 2013 under our current open market repurchase program, which is scheduled to expire on December 31, 2013.
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.
In May 2012, we received the final $30.0 million payment from Bayer related to the sale of our hematology assets to Bayer in July 2008.
On September 6, 2012 we made a special cash distribution of $3.60 for each outstanding share of our common stock, equal to approximately $100.0 million in the aggregate. For U.S. Federal income tax purposes, approximately 4.7% of the payment was deemed a dividend, with the balance being treated as a return of capital. The tax treatment to our stockholders of such distribution was based on our current and cumulative earnings and profits through 2012.
Net cash used in operating activities was $1.5 million in the three months ended March 31, 2013, compared to $2.6 million in the comparable period in 2012. The net cash used in operating activities in the 2013 period was primarily attributable to a loss from continuing operations, adjusted to exclude certain non-cash items, and a reduction in other accrued liabilities, partially offset by an increase in accrued compensation. 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 non-cash adjustments to reconcile loss from continuing operations to net cash used in operating activities included $526,000 and $616,000 in non-cash stock compensation in the 2012 and 2013 periods, respectively.
Net cash used provided by investing activities was $1,000 in the three months ended March 31, 2013, compared to net cash used in investing activities of $8.0 million in the comparable period in 2012. The net cash provided by investing activities in the 2013 period reflected purchases of available-for-sale securities at a comparable level to maturities of such securities. The net cash used in investing activities during the 2012 period was primarily attributable to purchases of available-for-sale securities.
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Net cash used in financing activities was $256,000 in the three months ended March 31, 2013, compared to $1.7 million in the comparable period in 2012. The net cash used in financing activities during 2013 was primarily due to the distribution of cash, upon vesting, to holders of restricted stock awards. The net cash used in financing activities during 2012 was primarily due to repurchases of our common stock.
The following are contractual commitments as of March 31, 2013, consisting 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 | $ | 113 | $ | 113 | $ | — | $ | — | $ | — | ||||||||||
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Total | $ | 113 | $ | 113 | $ | — | $ | — | $ | — | ||||||||||
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As of March 31, 2013, we had $81.1 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.
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 limited future operational requirements. 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.
The amount and timing of any future distributions will also be largely dependent upon any amounts we consider appropriate to retain in order to pursue our ongoing strategic evaluation and to provide adequate reserves for any potential future liabilities and claims, such as liabilities and claims resulting from any potential future tax audits or legal proceedings. While we are not currently under audit by the Internal Revenue Service, party to any material legal proceedings or otherwise aware of any potential or threatened claims, we cannot predict the likelihood or outcome of any potential future tax audits, legal proceedings or other claims. Any such audits, legal proceedings or claims may result in material liabilities, such as adjustments, damages, penalties, interest and other amounts. The possibility of such audits, legal proceedings or claims and our need to reserve amounts from time to time that we deem appropriate to cover any possible exposure from such matters could impede our ability to enter into a strategic transaction or effect a wind-down or dissolution and could significantly delay, and if they ultimately materialize, diminish, any future distributions to our stockholders.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk Management
We are exposed to market risks, including changes in interest rates. There were no significant changes in our market risk exposures during the three months ended March 31, 2013. 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, 2012.
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ITEM 4. CONTROLS AND 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.
The following risk factor materially amends a risk factor previously disclosed in Item 1A to Part I of our Form 10-K for the year ended December 31, 2012. Except as set forth below, 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, 2012.
Potential future liabilities and claims, such as liabilities and claims resulting from any potential future tax audits or potential future legal proceedings, may result in material liabilities that could cause our stock price to decline or could impede our ability to enter into a strategic transaction or could significantly diminish or delay potential future distributions to our stockholders.
We remain subject to examination for certain tax years by U.S. Federal and state income tax authorities. In addition, Danish tax authorities are currently auditing our Danish tax filings for the years 2007 through 2009. The years that remain subject to examination by U.S. Federal and state tax authorities include years in which we did not incur a tax liability, despite the recognition of significant income and capital gains, due to our utilization of sufficient capital losses, net operating losses and certain tax credits. As a result, U.S. Federal and state income tax authorities could challenge tax positions we have taken with respect to these losses and credits.
While the Internal Revenue Service, or IRS, has concluded examinations of our federal tax returns for the 2008, 2009 and 2010 tax years without assessing any adjustments, there can be no assurances that the IRS will not commence a future examination of any other tax returns, or reopen its examination of any previously audited tax return, and assess material adjustments, penalties, interest and other amounts in connection with any such potential future examination.
In addition, while we are not currently a party to any material legal proceedings or otherwise aware of any potential or threatened claims, we may in the future become involved in claims and legal proceedings that arise in the ordinary course of our business. In any such legal proceeding, we could incur substantial legal fees in responding to the litigation and, if such litigation were to be decided adversely to us, we could be required to pay monetary damages and other amounts.
We cannot predict the likelihood or outcome of any potential future tax audits or legal proceedings and cannot guarantee the outcome of any such audits or legal proceedings. Any such audits or legal proceedings may result in material liabilities, such as adjustments, damages, penalties, interest and other amounts. The possibility of such audits and legal proceedings and our need to reserve amounts from time to time that we deem appropriate to cover any possible exposure from such potential future audits and legal proceedings could impede our ability to enter into a strategic transaction or effect a wind-down or dissolution and could significantly delay, and if they ultimately materialize, diminish, any future distributions to our stockholders.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
On January 10, 2012, we announced that our board authorized a new stock repurchase program under which we were authorized to purchase up to $10.0 million of our common stock through December 31, 2012. In November 2012, we announced the extension of this stock repurchase program through December 31, 2013. There were no stock repurchase activities from January 1, 2013 through March 31, 2013. The approximate dollar value of shares that may yet be purchased is $8.5 million at March 31, 2013.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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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 3, 2013 | By: | /s/ James R. Sulat | ||||
James R. Sulat | ||||||
Chief Executive Officer & Chief Financial Officer |
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