-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GOykHj09sr480Ud4SzT63EQZn0kocgz3o3NOLreQuunTpcSkbuSjcWk720xVPYsF DJOGBAsMlFeTULLVqst8hw== 0001012870-00-002860.txt : 20000516 0001012870-00-002860.hdr.sgml : 20000516 ACCESSION NUMBER: 0001012870-00-002860 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MAXYGEN INC CENTRAL INDEX KEY: 0001068796 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMMERCIAL PHYSICAL & BIOLOGICAL RESEARCH [8731] IRS NUMBER: 770449487 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-28401 FILM NUMBER: 633864 BUSINESS ADDRESS: STREET 1: 515 GALVESTON DRIVE CITY: REDWOOD CITY STATE: CA ZIP: 94063 BUSINESS PHONE: 6502985300 MAIL ADDRESS: STREET 1: 515 GALVESTON DRIVE CITY: REDWOOD CITY STATE: CA ZIP: 94063 10-Q 1 FORM 10-Q PERIOD MARCH 31, 2000 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, 2000 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.) 515 Galveston Drive Redwood City, California 94063 (Address of principal executive offices, including zip code) (650) 298-5300 (Registrant's telephone number, including area code) ___________________ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ____ ----- As of May 1, 2000, there were 32,285,355 shares of the registrant's common stock outstanding. MAXYGEN, INC. FORM 10-Q QUARTER ENDED MARCH 31, 2000 INDEX Part I FINANCIAL INFORMATION Item 1: Financial Statements: Balance Sheet as of December 31, 1999 and March 31, 2000................................... 3 Statement of Operations for the three month periods ended March 31, 1999 and 2000.......... 4 Statement of Cash Flows for the three month periods ended March 31, 1999 and 2000.......... 5 Notes to Financial Statements.............................................................. 6 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations...... 9 Item 3: Quantitative and Qualitative Disclosures About Market Risk................................. 21 Part II OTHER INFORMATION Item 1: Legal Proceedings.......................................................................... 22 Item 2: Changes in Securities and Use of Proceeds.................................................. 22 Item 3: Defaults Upon Senior Securities............................................................ 22 Item 4: Submission of Matters to a Vote of Security Holders........................................ 22 Item 5: Other Information.......................................................................... 22 Item 6: Exhibits and Reports on Form 8-K........................................................... 22 SIGNATURES........................................................................................... 23
================================================================================ Part I - Financial Information Item 1 Financial Statements MAXYGEN, INC. BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
December 31, March 31, 1999 2000 ------------ ---------- ASSETS (Note 1) (unaudited) Current assets: Cash and cash equivalents............................................................ $136,343 $246,521 Short-term investments............................................................... -- 9,990 Grant and other receivables.......................................................... 3,038 3,938 Prepaid expenses and other current assets............................................ 800 736 ---------- --------- Total current assets................................................................ 140,181 261,185 ---------- --------- Property and equipment, net.......................................................... 4,764 4,976 Long-term investments................................................................ -- 14,076 Deposits and other assets............................................................ 633 756 ---------- --------- Total assets........................................................................ $145,578 $280,993 ---------- --------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable..................................................................... $ 370 $ 535 Accrued compensation................................................................. 393 1,058 Other accrued liabilities............................................................ 1,803 1,408 Deferred revenue..................................................................... 4,935 3,388 Current portion of equipment financing obligations................................... 170 284 ---------- --------- Total current liabilities............................................................. 7,671 6,673 Deferred revenue...................................................................... 2,527 2,327 Non-current portion of equipment financing obligations................................ 1,664 1,544 Commitments Stockholders' equity: Convertible preferred stock, $0.0001 par value, 5,000,000 shares authorized, no shares issued and outstanding at December 31, 1999 and March 31, 2000, respectively.................................. -- -- Common stock, $0.0001 par value: 70,000,000 shares authorized, 30,860,781, and 32,270,769 shares issued and outstanding at December 31, 1999 and March 31, 2000, respectively................... 3 3 Additional paid-in capital........................................................... 176,517 315,931 Notes receivable from stockholders................................................... (1,411) (1,201) Deferred stock compensation.......................................................... (17,216) (14,381) Accumulated other comprehensive loss................................................. --- (86) Accumulated deficit.................................................................. (24,177) (29,817) ---------- --------- Total stockholders' equity.......................................................... 133,716 270,449 ---------- --------- Total liabilities and stockholders' equity.......................................... $145,578 $280,993 ---------- ---------
See accompanying notes. MAXYGEN, INC. STATEMENTS OF OPERATIONS (in thousands, except per share data) (unaudited)
Three Months ended March 31, 1999 2000 -------- -------- Collaborative research and development revenue................................... $ 1,330 $ 3,046 Grant revenue.................................................................... 984 2,368 -------- -------- Total revenues................................................................... 2,314 5,414 Operating expenses: Research and development (Including charges for stock compensation of $237 and $3,536 in the three months ended March 31, 1999 and 2000, respectively)................................................................ 2,791 9,782 General and administrative (Including charges for stock compensation of $296 and $1,375 in the three months ended March 31, 1999 and 2000, respectively).. 996 3,388 -------- -------- Total operating expenses......................................................... 3,787 13,170 -------- -------- Loss from operations............................................................. (1,473) (7,756) Interest income (expense), net................................................... 170 2,116 -------- -------- Net loss......................................................................... $ (1,303) $ (5,640) ======== ======== Basic and diluted net loss per share............................................. $ (0.18) $ (0.20) Shares used in computing basic and diluted net loss per share.................... 7,211 28,062
See accompanying notes. MAXYGEN, INC. STATEMENTS OF CASH FLOWS (in thousands, except per share data) (unaudited)
Three Months ended March 31, 1999 2000 -------- -------- Operating activities Net loss..................................................................... $ (1,303) $ (5,640) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization............................................... 71 309 Deferred stock compensation amortization.................................... 533 4,911 Common stock issued and stock options granted to consultants for services rendered................................................................... 7 -- Changes in operating assets and liabilities: Grant and other receivables................................................ (769) (900) Prepaid expenses and other current assets.................................. (133) 64 Deposits and other assets.................................................. (154) (123) Accounts payable........................................................... 437 165 Accrued compensation....................................................... 38 665 Other accrued liabilities.................................................. 109 (395) Deferred revenue........................................................... 247 (1,747) Related party payables..................................................... 108 -- -------- -------- Net cash used in operating activities........................................ (809) (2,691) -------- -------- Investing activities Purchase of short-term investments........................................... -- (10,001) Purchase of long-term investments............................................ -- (14,151) Acquisition of property and equipment........................................ (1,152) (521) -------- -------- Net cash used in investing activities........................................ (1,152) (24,673) -------- -------- Financing activities Repayment of equipment financing obligation.................................. -- (6) Proceeds from issuance of common stock - net of issuance costs............... 1 137,445 Repurchase of common stock................................................... -- (56) Payments of stockholders' notes receivable................................... -- 159 -------- -------- Net cash provided by financing activities.................................... 1 137,542 -------- -------- Net increase (decrease) in cash and cash equivalents......................... (1,960) 110,178 Cash and cash equivalents at beginning of period............................. 15,306 136,343 -------- -------- Cash and cash equivalents at end of period................................... $ 13,346 $246,521 ======== ========
See accompanying notes. MAXYGEN, INC. NOTES TO FINANCIAL STATEMENTS (unaudited) 1. Basis of Presentation and Significant Accounting Policies Basis of Presentation The accompanying unaudited financial statement have been prepared in accordance with generally accepted accounting principles for interim financial information. The information as of March 31, 2000 and for the quarters ended March 31, 1999 and 2000 includes all adjustments (consisting only of normal recurring adjustments) that the management of the Company believes necessary for fair presentation of the results for the periods presented. Results for any interim period are not necessarily indicative of results for any future interim period or for the entire year. The accompanying financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Report on Form 10-K for the year ended December 31, 1999. Revenue Recognition Non-refundable up-front payments received in connection with research and development collaboration agreements, including technology advancement funding that is intended for the development of the Company's core technology, are deferred and recognized on a straight-line basis over the relevant periods specified in the agreement, generally the research term. Revenue related to collaborative research with the Company's corporate collaborators is recognized as research services are performed over the related funding periods for each contract. Under these agreements, the Company is required to perform research and development activities as specified in each respective agreement. The payments received under each respective agreement are not refundable and are generally based on a contractual cost per full-time equivalent employee working on the project. Research and development expenses under the collaborative research agreements approximate or exceed the revenue recognized under such agreements over the term of the respective agreements. Deferred revenue may result when the Company does not incur the required level of effort during a specific period in comparison to funds received under the respective contracts. Milestone and royalty payments, if any, will be recognized pursuant to collaborative agreements upon the achievement of specified milestones. The Company has also been awarded Defense Advanced Research Projects Agency grants and National Institute of Standards and Technology-Advanced Technology Program grants for various research and development projects. The terms of these grant agreements are three years. Revenue related to grant agreements is recognized as related research and development expenses are incurred. Net loss per share Basic and diluted net loss per common share are presented in conformity with the Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"), for all periods presented. Following the guidance given by the Securities and Exchange Commission Staff Accounting Bulletin No. 98, common stock and convertible preferred stock that has been issued or granted for nominal consideration prior to the anticipated effective date of the initial public offering must be included in the calculation of basic and diluted net loss per common share as if these shares had been outstanding for all periods presented. To date, the Company has not issued or granted shares for nominal consideration. In accordance with SFAS 128, basic and diluted net loss per share has been computed using the weighted-average number of shares of common stock outstanding during the period, less shares subject to repurchase. Pro forma basic and diluted net loss per common share has been computed for the three months ended March 31, 1999 as described above, and also gives effect to the conversion of the convertible preferred stock that automatically converted to common stock immediately prior to the completion of the Company's initial public offering (using the if-converted method) from the original date of issuance. The following table presents the calculation of basic, diluted and pro forma basic and diluted net loss per share (in thousands, except per share data):
Three Months ended March 31, 1999 2000 -------- -------- Net Loss................................................................... $ (1,303) $ (5,640) ======== ======== Basic and diluted: Weighted-average shares of common stock outstanding...................... 9,239 30,977 Less: weighted-average shares subject to repurchase...................... (2,028) (2,915) -------- -------- Weighted-average shares used in computing basic and diluted net loss per share......................................................... 7,211 28,062 ======== ======== Basic and diluted net loss per share....................................... $ (0.18) $ (0.20) ======== ======== Pro forma: Shares used above........................................................ 7,211 Pro forma adjusted to reflect weighted effect of conversion of convertible preferred stock (unaudited)................................ 6,799 -------- Shares used in computing pro forma basic and diluted net loss per share (unaudited)...................................................... 14,010 ======== Pro forma basic and diluted net loss per share (unaudited)................. $ (0.09) ========
The Company has excluded all convertible preferred stock, outstanding stock options, and shares subject to repurchase from the calculation of diluted loss per common share because all such securities are antidilutive for all applicable periods presented. The total number of shares excluded from the calculations of diluted net loss per share, prior to application of the treasury stock method for options, was 11,503,000 at March 31, 1999 and 5,000,000 at March 31, 2000. Such securities, had they been dilutive, would have been included in the computations of diluted net loss per share along with restricted common stock subject to the Company's right of repurchase. Comprehensive loss Comprehensive loss is primarily comprised of net unrealized gains or losses on available-for-sale securities. There is no material difference between the reported net loss and the comprehensive net loss for all the periods presented. Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 requires the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through net income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the derivative are either offset against the change in fair value of assets, liabilities, or firm commitments through earnings or recognized in the other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of the derivative's change in fair value will be immediately recognized in earnings. SFAS 133 is effective for the Company's year ending December 31, 2001. The Company does not currently hold any derivatives and does not expect this pronouncement to materially impact results of operations. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101") that must be adopted in the quarter ended June 30, 2000. SAB 101 summarizes certain areas of the Staff's views in applying generally accepted accounting principles to revenue in financial statements and specifically addresses revenue recognition for non-refundable technology access fees. The Company believes that its current revenue recognition principles comply with SAB 101 and thus the adoption had no effect on results of operations. 2. Collaborative Agreement Technological Resources PTY Limited In January 2000, the Company entered into a three year collaborative research and development agreement with Technological Resources PTY Limited, a wholly owned subsidiary of Rio Tinto Limited ("TRPL"), to develop novel enzymatic systems to increase the efficiency of carbon dioxide fixation in connection with the combustion of fossil fuels and for other purposes more generally for use in chemical bioprocessing and other applications. Pursuant to the agreement, TRPL agreed to provide nonrefundable research and development funding and technology advancement payments of up to $2.7 million, as well as revenue sharing on certain commercialized products and processes. 3. Stockholders Equity--Follow-on Offering On March 24, 2000, the Company completed a follow-on public offering of its common stock. A total of 1,500,000 shares were sold by the Company at a price of $97.00 per share. The offering resulted in net proceeds to the Company of approximately $137.4 million. 4. Subsequent Events ProFound Pharma Acquisition On April 12, 2000, the Company agreed to acquire ProFound Pharma A/S, a Danish biotechnology company located in Copenhagen, Denmark. ProFound focuses on discovery and development of improved biopharmaceuticals applying a broad proprietary technology platform, involving computer modeling, derivatization of proteins and robotic high-throughput screening systems. The transaction will be accounted for as a purchase. The Company expects to issue 980,000 shares of its common stock and additional shares (subject to put and call options) having a value of an additional $10 million. The Company anticipates that a portion of the purchase price will be allocated to in-process research and development and will result in a one-time charge against earnings in the quarter of closing. Closing is subject to certain conditions, including a ruling from Danish tax authorities, and is expected to take place in the third quarter of 2000. Energy BioSystems Arbitration On April 27, 2000, Maxygen announced that it had initiated an arbitration proceeding against Energy BioSystems Corporation in connection with Energy BioSystems' claim that it has developed a "new gene shuffling'' technology. Maxygen alleges that Energy BioSystems has breached the confidentiality provisions and certain other terms of the Development and License Agreement entered into by Energy BioSystems and Maxygen in 1997, pursuant to which Maxygen disclosed confidential information regarding Maxygen's MolecularBreeding technology to Energy BioSystems. ================================================================================ Forward Looking Statements This report contains forward-looking statements within the meaning of federal securities laws that relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expect," "plan," "anticipate," "believe," "estimate," "predict," "intend," "potential" or "continue" or the negative of these terms or other comparable terminology. Risks and uncertainties and the occurrence of other events could cause actual results to differ materially from these predictions. Factors that could cause or contribute to such differences include those discussed below under "--Risk Factors," as well as those discussed in our Annual Report on Form 10-K for the year ended December 31, 1999. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of these statements. We are under no duty to update any of the forward-looking statements after the date of this report or to conform these statements to actual results. ================================================================================ Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations Overview Maxygen was founded in May 1996 and began operations in March 1997. To date, we have generated revenues from research collaborations with large agriculture and chemical companies and from government grants. Our current collaborators are Novo Nordisk, DuPont/Pioneer Hi-Bred, AstraZeneca, DSM and Rio Tinto. Our government grants are from the Defense Advanced Research Projects Agency and the National Institute of Standards and Technology-Advanced Technology Program. We have invested heavily in establishing our MolecularBreeding technologies. These investments contributed to revenue increases from $2.7 million in 1998 to $14.0 million in 1999 and $5.4 million in the three months ended March 31, 2000. Our total headcount increased from 74 employees at the end of 1998 to 143 employees at the end of 1999 and 151 employees at the end March 31, 2000, of whom 75% were engaged in research and development. Research and development consisted of work for collaborators, government grant agencies and work advancing our technologies. We have incurred significant losses since our inception. As of March 31, 2000, our accumulated deficit was $29.8 million and total stockholders' equity was $270.4 million. Operating expenses increased from $11.8 million in fiscal 1998, to $26.7 million in fiscal 1999 and to $13.2 million for the three months ended March 31, 2000. We expect to incur additional operating losses over at least the next several years as we continue to expand our research and development efforts and infrastructure. On April 12, 2000, we agreed to acquire ProFound Pharma A/S, a Danish biotechnology company located in Copenhagen, Denmark. ProFound focuses on discovery and development of improved biopharmaceuticals applying a broad proprietary technology platform, involving computer modeling, derivatization of proteins and robotic high-throughput screening systems. The transaction will be accounted for as a purchase. We expect to issue 980,000 shares of our common stock and additional shares (subject to put and call options) having a value of an additional $10 million. We anticipate that a portion of the purchase price will be allocated to in-process research and development and will result in a one-time charge against after-tax earnings in the quarter of closing. Closing is subject to certain conditions, including a ruling from Danish tax authorities, and is expected to take place in the third quarter of 2000. We have not yet had an opportunity to evaluate the specific effect the transaction will have on our results of operations. As such, the transaction has been omitted from the forward-looking comments in the discussion of the results of operation. 9 Source of Revenue and Revenue Recognition Policy We recognize revenues from research collaboration agreements as earned upon achievement of the performance requirements of the agreements. Revenue related to grant agreements is recognized as related research and development expenses are incurred. Our existing corporate collaboration agreements with DuPont/Pioneer Hi-Bred and AstraZeneca provide for research funding for a specified number of full time researchers working in defined research programs. Revenue related to these payments is earned as the related research work is performed. In addition, these collaborators make technology advancement payments that are intended to fund development of our core technology, as opposed to a defined research program. These payments are recognized ratably over the applicable funding period. Payments received that are related to future performance are deferred and recognized as revenue as the performance requirements are achieved. As of March 31, 2000, we have deferred revenues of approximately $5.7 million. Our sources of potential revenue for the next several years are likely to be research, technology advancement and milestone payments under existing and possible future collaborative arrangements, government research grants, and royalties from our collaborators based on revenues received from any products commercialized under those agreements. Deferred Compensation Deferred compensation for options granted to employees has been determined as the difference between the deemed fair market value for financial reporting purposes of our common stock on the date options were granted and the exercise price. Deferred compensation for options granted to consultants has been determined in accordance with Statement of Financial Accounting Standards No. 123 as the fair value of the equity instruments issued. Deferred compensation for options granted to consultants is periodically remeasured as the underlying options vest. In connection with the grant of stock options to employees and consultants, we recorded deferred stock compensation of approximately $2.4 million in 1998, $19.5 million in 1999 and $1.0 million in the three months ended March 31, 2000. These amounts were initially recorded as a component of stockholders' equity and are being amortized as charges to operations over the vesting period of the options using a graded vesting method. We recognized stock compensation expense of approximately $1.6 million in 1998, $4.9 million in 1999 and $4.9 million in the three months ended March 31, 2000. The amortization expense relates to options awarded to employees and consultants in all operating expense categories. Results of Operations Revenues Our total revenues for the three months ended March 31, 1999 and 2000 were $2.3 million and $5.4 million, respectively. The increase of $3.1 million was due primarily to the addition of new research collaborations with AstraZeneca and DuPont/Pioneer Hi-Bred, new government grants and the expansion of existing government grants. Collaboration research and development revenue and grant revenue accounted for 57% and 43%, respectively, of total revenues in the three months ended March 31, 1999, and 56% and 44%, respectively, of total revenues in the three months ended March 31, 2000. Research and Development Expenses Our research and development expenses consist primarily of salaries and other personnel-related expenses, facility costs, supplies and depreciation of facilities and laboratory equipment. Research and development expenses increased 250% from $2.8 million in the three months ended March 31, 1999 to $9.8 million in the three months ended March 31, 2000. The increase was due primarily to increased staffing and other personnel-related costs to support our additional collaborative and internal research efforts. Also included in research and development expenses is stock compensation expense of $237,000 in the three months ended March 31, 1999 and $3.5 million in the three months ended March 31, 2000. Research and development expenses represented 121% of total revenues in the three months ended March 31, 1999 and 181% of total revenues in the three months ended March 31, 2000. The increase as a percentage of total revenues was due primarily increased research and development activity offset in part by the increase in our total revenue. We expect to continue to devote substantial resources to research and development, and we expect that research and development expenses will continue to increase in absolute dollars. 10 General and Administrative Expenses Our general and administrative expenses consist primarily of personnel costs for finance, human resources, business development, legal and general management, as well as professional expenses, such as legal and accounting. General and administrative expenses increased 240% from $996,000 in the three months ended March 31, 1999 to $3.4 million in the three months ended March 31, 2000. Expenses increased primarily due to increased staffing necessary to manage and support our growth. Also included in general and administrative expenses is stock compensation expense of $296,000 in the three months ended March 31, 1999 and $1.4 million in the three months ended March 31, 2000. General and administrative expenses represented 43% of total revenues for the three months ended March 31, 1999 and 63% of total revenues for the three months ended March 31, 2000. The increase as a percentage of our total revenues was due primarily to increased staffing necessary to manage and support our growth plus increased costs associated with being a public company, offset in part by the growth in our total revenues. We expect that our general and administrative expenses will increase in absolute dollar amounts as we expand our legal and accounting staff, add infrastructure and incur additional costs related to being a public company, including directors' and officers' insurance, investor relations programs and increased professional fees. Net Interest Income Net interest income represents income earned on our cash, cash equivalents and marketable securities net of interest expense. Net interest income increased from $170,000 in the three months ended March 31, 1999 to $2.1 million in the three months ended March 31, 2000. This increase was due to higher average balances of cash, cash equivalents and marketable securities. Liquidity and Capital Resources Since inception, we have financed our operations primarily through private placements and public offerings of equity securities, receiving aggregate consideration from such sales totaling $302.5 million and research and development funding from collaborators and government grants totaling approximately $62 million. As of March 31, 2000, we had $270.6 million in cash, cash equivalents and marketable securities and $166,000 available under an equipment financing line of credit. Our operating activities used cash of $808,000 in the three months ended March 31, 1999 and $2.7 million in the three months ended March 31, 2000. Uses of cash in operating activities were primarily to fund net operating losses offset by receipt of funding from collaborators that has been deferred. Additions of property and equipment were $1.2 million the three months ended March 31, 1999 and $521,000 the three months ended March 31, 2000. We expect to continue to make significant investments in the purchase of property and equipment to support our expanding operations. We may use a portion of our cash to acquire or invest in complementary businesses, products or technologies, or to obtain the right to use such complementary technologies. Financing activities provided no cash in the three months ended March 31, 1999 and $137.5 million in the three months ended March 31, 2000. This amount primarily consists of the net proceeds we received from the sale of common stock in a follow-on public offering in March 2000. We expect cash flows from our corporate collaborators for the funding of research and technology advancement to total approximately $12 million in both 2000 and 2001 and up to this amount in 2002 and 2003 if our collaboration with DuPont/Pioneer Hi-Bred extends to a fourth and fifth year. DuPont/Pioneer Hi- Bred may terminate the agreement after three years, upon six months notice if a specified milestone has not been met. The above amounts include $1 million annually of technology advancement funding from AstraZeneca. In lieu of making this payment, AstraZeneca can elect to purchase $3 million of our equity securities at a 50% premium to the fair value of the securities on the date of issuance. Cash flows from government grants are determined by the expenses incurred by Maxygen. Total remaining committed grant funding amounts to $20 million through fiscal 2002; however some grant programs are subject to a yearly appropriations process in Congress and we may not receive funds under existing grants because of budgeting constraints of the agency administering the program. We believe that our current cash, cash equivalents and marketable securities and funding received from collaborators and government grants will be sufficient to satisfy our anticipated cash needs for working 11 capital and capital expenditures for the foreseeable future. However, it is possible that we will seek additional financing within this timeframe. We may raise additional funds through public or private financing, collaborative relationships or other arrangements. Additional funding, if sought, may not be available on terms favorable to us. Further, any additional equity financing may be dilutive to stockholders, and debt financing, if available, may involve restrictive covenants. Our failure to raise capital when needed may harm our business and operating results. RISK FACTORS You should carefully consider the risks described below, together with all of the other information included in this report, in considering our business and prospects. The risks and uncertainties described below are not the only ones facing Maxygen. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations. The occurrence of any of the following risks could harm our business, financial condition or results of operations. We Have a History of Net Losses. We Expect to Continue to Incur Net Losses and We May Not Achieve or Maintain Profitability. We have incurred net losses since our inception, including a net loss of approximately $11.3 million for the year ended December 31, 1999 and $5.6 million for the three months ended March 31, 2000. As of March 31, 2000, we had an accumulated deficit of approximately $29.8 million. We expect to have increasing net losses and negative cash flow in the foreseeable future. The size of these net losses will depend, in part, on the rate of growth, if any, in our contract revenues and on the level of our expenses. To date, we have derived all of our revenues from collaborations and grants and will continue to do so in the foreseeable future. Revenues from collaborations and grants are uncertain because our existing agreements have fixed terms and because our ability to secure future agreements will depend upon our ability to address the needs of our potential future collaborators. We expect to spend significant amounts to fund research and development and enhance our core technologies. If our recently announced acquisition of ProFound Pharma A/S is completed, we expect costs to increase further due to expanded operations and integration costs associated with the acquisition. As a result, we expect that our operating expenses will increase significantly in the near term and, consequently, we will need to generate significant additional revenues to achieve profitability. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. We Are an Early Stage Company Deploying Unproven Technologies. If We Do Not Develop Commercially Successful Products, We May Be Forced to Cease Operations. You must evaluate us in light of the uncertainties and complexities affecting an early stage biotechnology company. Our MolecularBreeding technologies are new and in the early stage of development. We may not develop products that prove to be safe and efficacious in any market, meet applicable regulatory standards, are capable of being manufactured at reasonable costs, or can be marketed successfully. We may not be successful in the commercial development of products. Successful products will require significant development and investment, including testing, to demonstrate their cost-effectiveness prior to their commercialization. To date, companies in the biotechnology industry have developed and commercialized only a limited number of gene-based products. We have not proven our ability to develop and commercialize products. Further, none of our potential vaccine or protein therapeutic products are expected to enter clinical trials within the next year. We must conduct a substantial amount of additional research and development before any regulatory authority will approve any of our products. Our research and development may not indicate that our products are safe and effective, in which case regulatory authorities may not approve them. Problems frequently encountered in connection with the development and utilization of new and unproven technologies and the competitive environment in which we operate might limit our ability to develop commercially successful products. Commercialization of Our Technologies Depends On Collaborations With Other Companies. If We Are Not Able to Find Collaborators in the Future, We May Not Be Able to Develop Our Technologies or Products. Since we do not currently possess the resources necessary to develop and commercialize potential products that may result from our MolecularBreeding technologies, or the resources to complete any 12 approval processes that may be required for these products, we must enter into collaborative arrangements to develop and commercialize products. We have entered into collaborative agreements with other companies to fund the development of certain new products for specific purposes. These contracts expire after a fixed period of time. If they are not renewed or if we do not enter into new collaborative agreements, our revenues will be reduced and our products may not be commercialized. We have limited or no control over the resources that any collaborator may devote to our products. Any of our present or future collaborators may not perform their obligations as expected. These collaborators may breach or terminate their agreement with us or otherwise fail to conduct their collaborative activities successfully and in a timely manner. Further, our collaborators may elect not to develop products arising out of our collaborative arrangements or devote sufficient resources to the development, manufacture, market or sale of these products. If any of these events occur, we may not be able to develop our technologies or commercialize our products. We Intend to Conduct Proprietary Research Programs, and Any Conflicts With Our Collaborators or Any Inability to Commercialize Products Resulting from This Research Could Harm Our Business. An important part of our strategy involves conducting proprietary research programs. We may pursue opportunities in fields that could conflict with those of our collaborators. Moreover, disagreements with our collaborators could develop over rights to our intellectual property. Any conflict with our collaborators could reduce our ability to obtain future collaboration agreements and negatively impact our relationship with existing collaborators, which could reduce our revenues. Certain of our collaborators could also become competitors in the future. Our collaborators could develop competing products, preclude us from entering into collaborations with their competitors, fail to obtain timely regulatory approvals, terminate their agreements with us prematurely or fail to devote sufficient resources to the development and commercialization of products. Any of these developments could harm our product development efforts. We will either commercialize products resulting from our proprietary programs directly or through licensing to other companies. We have no experience in manufacturing and marketing, and we currently do not have the resources or capability to manufacture products on a commercial scale. In order for us to commercialize these products directly, we would need to develop, or obtain through outsourcing arrangements, the capability to manufacture, market and sell products. We do not have these capabilities, and we may not be able to develop or otherwise obtain the requisite manufacturing, marketing and sales capabilities. If we are unable to successfully commercialize products resulting from our proprietary research efforts, we will continue to incur losses. We May Encounter Difficulties in Managing Our Growth. These Difficulties Could Increase Our Losses. We have experienced a period of rapid and substantial growth that has placed and, if this growth continues, will place a strain on our human and capital resources. If we are unable to manage this growth effectively, our losses could increase. The number of our employees increased from 74 at December 31, 1998 to 143 at December 31, 1999 to 151 at March 31, 2000. Our revenues increased from $2.7 million in 1998 to $14.0 million in 1999 and were $5.4 million for the three months ended March 31, 2000. Our ability to manage our operations and growth effectively requires us to continue to expend funds to improve our operational, financial and management controls, reporting systems and procedures and to attract and retain sufficient numbers of talented employees. If we are unable to successfully implement improvements to our management information and control systems in an efficient or timely manner, or if we encounter deficiencies in existing systems and controls, then management may receive inadequate information to manage our day-to-day operations. Acquisitions Could Result in Operating Difficulties and Other Harmful Consequences. If appropriate opportunities present themselves, we intend to acquire businesses and technologies that complement our capabilities. As set forth above in this report, on April 12, 2000 we announced an agreement to acquire ProFound Pharma A/S, a Danish biotechnology company. The process of integrating any acquisition may create unforeseen operating difficulties and expenditures and is itself risky. The areas where we may face difficulties include: 13 . diversion of management time (both ours and that of the acquired company) during the period of negotiation through closing and further diversion of such time after closing from focus on operating the businesses to issues of integration and future products; . decline in employee morale and retention issues resulting from changes in compensation, reporting relationships, future prospects, or the direction of the business; . the need to integrate each company's accounting, management information, human resource and other administrative systems to permit effective management and the lack of control if such integration is delayed or not implemented; and . the need to implement controls, procedures and policies appropriate for a larger public company in companies that prior to acquisition had been smaller, private companies. We have almost no experience in managing this integration process. Moreover, the anticipated benefits of any or all of these acquisitions may not be realized. Future acquisitions could result in potentially dilutive issuances of equity securities, the incurrence of debt, contingent liabilities or amortization expenses related to goodwill and other intangible assets, any of which could harm our business. Future acquisitions may require us to obtain additional equity or debt financing, which may not be available on favorable terms or at all. Even if available, this financing may be dilutive. In addition, recent proposed changes in the Financial Accounting Standards Board rules for merger accounting may affect the cost of making acquisitions or of being acquired. For example, if these proposed changes become effective we would likely have to record goodwill or other intangible assets that we would amortize to earnings if we merge with another company. Such amortization would adversely impact our future operating results. Further, accounting rule changes that reduce the availability of write-offs of the value of in-process research and development in connection with an acquisition could result in the capitalization and amortization of these amounts, which would negatively impact results of operations in future periods. Since Our Technologies Can Be Applied to Many Different Industries, If We Focus Our Efforts on Industries That Fail to Produce Viable Product Candidates, We May Fail to Capitalize on More Profitable Areas. We have limited financial and managerial resources. In light of the fact that our technologies may be applicable to numerous, diverse industries, we will be required to prioritize our application of resources to discrete efforts. This requires us to focus on product candidates in selected industries and forego efforts with regard to other products and industries. Our decisions may not produce viable commercial products and may divert our resources from more profitable market opportunities. Public Perception of Ethical and Social Issues May Limit the Use of Our Technologies, Which Could Reduce Our Revenues. Our success will depend in part upon our ability to develop products discovered through our MolecularBreeding technologies. Governmental authorities could, for social or other purposes, limit the use of genetic processes or prohibit the practice of our MolecularBreeding technologies. Ethical and other concerns about our MolecularBreeding technologies, particularly the use of genes from nature for commercial purposes, and products resulting therefrom could adversely affect their market acceptance. If the Public Does Not Accept Genetically Engineered Products, We Will Have Less Demand for Our Products. The commercial success of our potential products will depend in part on public acceptance of the use of genetically engineered products including drugs, plants and plant products. Claims that genetically engineered products are unsafe for consumption or pose a danger to the environment may influence public attitudes. Our genetically engineered products may not gain public acceptance. Negative public reaction to genetically modified organisms and products could result in greater government regulation of genetic research and resultant products, including stricter labeling laws or regulations, and could cause a decrease in the demand for our products. The subject of genetically modified organisms has received negative publicity in Europe, which has aroused public debate. The adverse publicity in Europe could lead to greater regulation and trade restrictions on imports of genetically altered products. If similar adverse public reaction occurs in the 14 United States, genetic research and resultant agricultural and other products could be subject to greater domestic regulation and could cause a decrease in the demand for our products. Many Potential Competitors Who Have Greater Resources and Experience Than We Do May Develop Products and Technologies That Make Ours Obsolete. The biotechnology industry is characterized by rapid technological change, and the area of gene research is a rapidly evolving field. Our future success will depend on our ability to maintain a competitive position with respect to technological advances. Rapid technological development by others may result in our products and technologies becoming obsolete. We face, and will continue to face, intense competition from organizations such as large and small biotechnology companies, as well as academic and research institutions and government agencies that are pursuing competing technologies for modifying DNA. These organizations may develop technologies that are superior alternatives to our technologies. Further, our competitors in the directed molecular evolution field may be more effective at implementing their technologies to develop commercial products. Some of these competitors have entered into collaborations with leading companies within our target markets to produce enzymes for commercial purposes. Any products that we develop through our MolecularBreeding technologies will compete in multiple, highly competitive markets. Most of the organizations competing with us in the markets for such products have greater capital resources, research and development and marketing staffs and facilities and capabilities, and greater experience in modifying DNA, obtaining regulatory approvals, manufacturing products and marketing. Accordingly, our competitors may be able to develop technologies and products more easily, which would render our technologies and products and those of our collaborators obsolete and noncompetitive. Any Inability to Adequately Protect Our Proprietary Technologies Could Harm Our Competitive Position. Our success will depend in part on our ability to obtain patents and maintain adequate protection of our other intellectual property for our technologies and products in the U.S. and other countries. If we do not adequately protect our intellectual property, competitors may be able to practice our technologies and erode our competitive advantage. The laws of some foreign countries do not protect proprietary rights to the same extent as the laws of the U.S., and many companies have encountered significant problems in protecting their proprietary rights in these foreign countries. These problems can be caused by, for example, a lack of rules and methods for defending intellectual property rights. The patent positions of biopharmaceutical and biotechnology companies, including our patent position, are generally uncertain and involve complex legal and factual questions. We will be able to protect our proprietary rights from unauthorized use by third parties only to the extent that our proprietary technologies are covered by valid and enforceable patents or are effectively maintained as trade secrets. We will apply for patents covering both our technologies and products as we deem appropriate. However, these applications may be challenged and may not result in issued patents. Our existing patents and any future patents we obtain may not be sufficiently broad to prevent others from practicing our technologies or from developing competing products. Furthermore, others may independently develop similar or alternative technologies or design around our patented technologies. In addition, others may challenge or invalidate our patents, or our patents may fail to provide us with any competitive advantages. We rely upon trade secret protection for our confidential and proprietary information. We have taken security measures to protect our proprietary information. These measures may not provide adequate protection for our trade secrets or other proprietary information. We seek to protect our proprietary information by entering into confidentiality agreements with employees, collaborators and consultants. Nevertheless, employees, collaborators or consultants may still disclose our proprietary information, and we may not be able to meaningfully protect our trade secrets. In addition, others may independently develop substantially equivalent proprietary information or techniques or otherwise gain access to our trade secrets. 15 Litigation or Other Proceedings or Third Party Claims of Intellectual Property Infringement Could Require Us to Spend Time and Money and Could Shut Down Some of Our Operations. Our commercial success depends in part on neither infringing patents and proprietary rights of third parties, nor breaching any licenses that we have entered into with regard to our technologies and products. Others have filed, and in the future are likely to file, patent applications covering genes or gene fragments that we may wish to utilize with our MolecularBreeding technologies, or products that are similar to products developed with the use of our MolecularBreeding technologies or alternative methods of generating gene diversity. If these patent applications result in issued patents and we wish to use the claimed technology, we would need to obtain a license from the third party. Third parties may assert that we are employing their proprietary technology without authorization. In addition, third parties may obtain patents in the future and claim that use of our technologies infringes these patents. We could incur substantial costs and diversion of management and technical personnel in defending ourselves against any of these claims or enforcing our patents or other intellectual property rights against others. Furthermore, parties making claims against us may be able to obtain injunctive or other equitable relief that could effectively block our ability to further develop, commercialize and sell products, and such claims could result in the award of substantial damages against us. In the event of a successful claim of infringement against us, we may be required to pay damages and obtain one or more licenses from third parties. We may not be able to obtain these licenses at a reasonable cost, if at all. In that event, we could encounter delays in product introductions while we attempt to develop alternative methods or products or be required to cease commercializing effected products. We routinely monitor the public disclosures of other companies operating in our industry regarding their technological development efforts. If we determine that these efforts violate our intellectual property or other rights, we intend to take appropriate action, which could include litigation. Any action we take could result in substantial costs and diversion of management and technical personnel. Furthermore, the outcome of any action we take to protect our rights may not be resolved in our favor. On April 27, 2000, we announced that we had initiated an arbitration proceeding against Energy BioSystems Corporation in connection with Energy BioSystems' claim that it has developed a "new gene shuffling" technology. We allege that Energy BioSystems has breached the confidentiality provisions and certain other terms of the Development and License Agreement entered into by Energy BioSystems and Maxygen in 1997, pursuant to which we disclosed confidential information regarding our MolecularBreeding technology to Energy BioSystems. If We Lose Our Key Personnel or Are Unable to Attract and Retain Additional Personnel We May Be Unable to Pursue Collaborations or Develop Our Own Products. We are highly dependent on the principal members of our management and scientific staff, the loss of whose services might adversely impact the achievement of our objectives. In addition, recruiting and retaining qualified scientific personnel to perform future research and development work will be critical to our success. We do not currently have sufficient executive management personnel to fully execute our business plan. There is currently a shortage of skilled executives, which is likely to continue. As a result, competition for skilled personnel is intense, and the turnover rate can be high. Although we believe we will be successful in attracting and retaining qualified personnel, competition for experienced scientists from numerous companies and academic and other research institutions may limit our ability to do so on acceptable terms. Failure to attract and retain personnel would prevent us from pursuing collaborations or developing our products or core technologies. Our planned activities will require additional expertise in specific industries and areas applicable to the products developed through our technologies. These activities will require the addition of new personnel, including management, and the development of additional expertise by existing management personnel. The inability to acquire these services or to develop this expertise could impair the growth, if any, of our business. We Will Need Additional Capital in the Future. If Additional Capital is Not Available, We Will Have to Curtail or Cease Operations. Our future capital requirements will be substantial and will depend on many factors including payments received under collaborative agreements and government grants, the progress and scope of our 16 collaborative and independent research and development projects, the effect of any acquisitions, and the filing, prosecution and enforcement of patent claims. Changes may also occur that would consume available capital resources significantly sooner than we expect. We may be unable to raise sufficient additional capital. If we fail to raise sufficient funds, we will have to curtail or cease operations. We anticipate that the net proceeds from our recent public offerings and interest earned thereon, together with existing cash and cash equivalents and anticipated cash flows from operations, will enable us to maintain our currently planned operations for the foreseeable future. If our capital resources are insufficient to meet future capital requirements, we will have to raise additional funds to continue the development of our technologies and complete the commercialization of products, if any, resulting from our technologies. Some of Our Programs Depend on Government Grants, Which May Be Withdrawn. The Government Has License Rights to Technology Developed With Its Funds. We have received and expect to continue to receive significant funds under various U.S. government research and technology development programs. The government may significantly reduce funding in the future for a number of reasons. For example, some programs are subject to a yearly appropriations process in Congress. Additionally, we may not receive funds under existing or future grants because of budgeting constraints of the agency administering the program. There can be no assurance that we will receive the entire funding under our existing or future grants. Our grants provide the U.S. government a non-exclusive, non-transferable, paid- up license to practice for or on behalf of the U.S. inventions made with federal funds. If the government exercises these rights, the U.S. government could use these inventions and Maxygen's potential market could be reduced. Our Potential Therapeutic Products Are Subject to a Lengthy and Uncertain Regulatory Process. If Our Potential Products Are Not Approved, We Will Not Be Able to Commercialize Those Products. The Food and Drug Administration must approve any vaccine or therapeutic product before it can be marketed in the U.S. Before we can file a new drug application or biologic license application with the FDA, the product candidate must undergo extensive testing, including animal and human clinical trials, which can take many years and require substantial expenditures. Data obtained from such testing are susceptible to varying interpretations that could delay, limit or prevent regulatory approval. In addition, changes in regulatory policy for product approval during the period of product development and regulatory agency review of each submitted new application or product license application may cause delays or rejections. The regulatory process is expensive and time consuming. Because our products involve the application of new technologies and may be based upon new therapeutic approaches they may be subject to substantial review by government regulatory authorities and government regulatory authorities may grant regulatory approvals more slowly for our products than for products using more conventional technologies. We have not submitted an application to the FDA or any other regulatory authority for any product candidate, and neither the FDA nor any other regulatory authority has approved any therapeutic product candidate developed with our MolecularBreeding technologies for commercialization in the U.S. or elsewhere. We or any of our collaborators may not be able to conduct clinical testing or obtain the necessary approvals from the FDA or other regulatory authorities for our products. The regulatory agencies of foreign governments must also approve our therapeutic products before the products can be sold in those other countries. Even after investing significant time and expenditures we may not obtain regulatory approval for our products. Even if we receive regulatory approval, this approval may entail limitations on the indicated uses for which we can market a product. Further, once regulatory approval is obtained, a marketed product and its manufacturer are subject to continual review, and discovery of previously unknown problems with a product or manufacturer may result in restrictions on the product, manufacturer and manufacturing facility, including withdrawal of the product from the market. In certain countries, regulatory agencies also set or approve prices. 17 Laws May Limit Our Provision of Genetically Engineered Agricultural Products in the Future. These Laws Could Reduce Our Ability to Sell These Products. We may develop genetically engineered agricultural products. The field testing, production and marketing of genetically engineered plants and plant products are subject to federal, state, local and foreign governmental regulation. Regulatory agencies administering existing or future regulations or legislation may not allow us to produce and market our genetically engineered products in a timely manner or under technically or commercially feasible conditions. In addition, regulatory action or private litigation could result in expenses, delays or other impediments to our product development programs or the commercialization of resulting products. The FDA currently applies the same regulatory standards to foods developed through genetic engineering as applied to foods developed through traditional plant breeding. However, genetically engineered food products will be subject to premarket review if these products raise safety questions or are deemed to be food additives. Our products may be subject to lengthy FDA reviews and unfavorable FDA determinations if they raise questions, are deemed to be food additives, or if the FDA changes its policy. The FDA has also announced in a policy statement that it will not require that genetically engineered agricultural products be labeled as such, provided that these products are as safe and have the same nutritional characteristics as conventionally developed products. The FDA may reconsider or change its labeling policies, or local or state authorities may enact labeling requirements. Any such labeling requirements could reduce the demand for our products. The U.S. Department of Agriculture prohibits genetically engineered plants from being grown and transported except pursuant to an exemption, or under strict controls. If our future products are not exempted by the USDA, it may be impossible to sell such products. Adverse Events in the Field of Gene Therapy May Negatively Impact Regulatory Approval or Public Perception of Any Gene Therapy Products We or Our Collaborators May Develop. Currently, we are not engaged in developing gene therapy products; however, we may engage in these activities in the future either for our own account or with collaborators. If we or our collaborators develop gene therapy products, these products may encounter substantial delays in development and approval due to the government regulation and approval process. A recent death and other adverse events reported in gene therapy clinical trials may lead to more government scrutiny of proposed clinical trials of gene therapy products, stricter labeling requirements for these products and delays in the approval of gene therapy products for commercial sale. The commercial success of any potential gene therapy products made by us or our collaborators will depend in part on public acceptance of the use of gene therapies for the prevention or treatment of human diseases. Public attitudes may be influenced by claims that gene therapies are unsafe, and gene therapy products may not gain the acceptance of the public or the medical community. Negative public reaction to gene therapy could result in a decrease in demand for any gene therapy products we or our collaborators may develop. Health Care Reform and Restrictions on Reimbursements May Limit Our Returns on Pharmaceutical Products. Our future products are expected to include pharmaceutical products. Our ability and that of our collaborators to commercialize pharmaceutical products developed with our MolecularBreeding technologies may depend in part on the extent to which reimbursement for the cost of these products will be available from government health administration authorities, private health insurers and other organizations. Third-party payors are increasingly challenging the price of medical products and services. Significant uncertainty exists as to the reimbursement status of newly approved health care products, and there can be no assurance that adequate third party coverage will be available for any product to enable us to maintain price levels sufficient to realize an appropriate return on our investment in research and product development. 18 Our Collaborations With Outside Scientists May Be Subject to Change, Which Could Limit Our Access to Their Expertise. We work with scientific advisors and collaborators at academic and other institutions. These scientists are not our employees and may have other commitments that would limit their availability to us. Although our scientific advisors generally agree not to do competing work, if a conflict of interest between their work for us and their work for another entity arises, we may lose their services. Although our scientific advisors and collaborators sign agreements not to disclose our confidential information, it is possible that certain of our valuable proprietary knowledge may become publicly known through them. We May Be Sued for Product Liability. We may be held liable if any product we develop, or any product that is made with the use or incorporation of, any of our technologies, causes injury or is found otherwise unsuitable during product testing, manufacturing, marketing or sale. These risks are inherent in the development of chemical, agricultural and pharmaceutical products. Although we intend to obtain product liability insurance, this insurance may be prohibitively expensive, or may not fully cover our potential liabilities. Inability to obtain sufficient insurance coverage at an acceptable cost or otherwise to protect against potential product liability claims could prevent or inhibit the commercialization of products developed by us or our collaborators. If we are sued for any injury caused by our products, our liability could exceed our total assets. We Use Hazardous Chemicals and Radioactive and Biological Materials in Our Business. Any Claims Relating to Improper Handling, Storage or Disposal of These Materials Could Be Time Consuming and Costly. Our research and development processes involve the controlled use of hazardous materials, including chemicals, radioactive and biological materials. Some of these materials may be novel, including viruses with novel properties and animal models for the study of viruses. Our operations also produce hazardous waste products. Some of our work also involves the development of novel viruses and viral animal models. We cannot eliminate the risk of accidental contamination or discharge and any resultant injury from these materials. Federal, state and local laws and regulations govern the use, manufacture, storage, handling and disposal of these materials. We believe that our current operations comply in all material respects with these laws and regulations. We could be subject to civil damages in the event of an improper or unauthorized release of, or exposure of individuals to, hazardous materials. In addition, claimants may sue us for injury or contamination that results from our use or the use by third parties of these materials, and our liability may exceed our total assets. Compliance with environmental laws and regulations may be expensive, and current or future environmental regulations may impair our research, development, or production efforts. We believe that our current operations comply in all material respects with applicable Environmental Protection Agency regulations. In addition, certain of our collaborators are working with these types of hazardous materials in connection with our collaborations. To our knowledge, the work is performed in accordance with biosafety regulations. In the event of a lawsuit or investigation, we could be held responsible for any injury caused to persons or property by exposure to, or release of, these viruses and hazardous materials. Further, under certain circumstances, we have agreed to indemnify our collaborators against all damages and other liabilities arising out of development activities or products produced in connection with these collaborations. Our Stock Price Has Been, and May Continue to Be, Extremely Volatile. The trading prices of life science company stocks in general, and ours in particular, have experienced extreme price fluctuations in recent months. The valuations of many life science companies without consistent product revenues and earnings, including ours, are extraordinarily high based on conventional valuation standards such as price to earnings and price to sales ratios. These trading prices and valuations may not be sustained. Any negative change in the public's perception of the prospects of biotechnology or life science companies could depress our stock price regardless of our results of operations. Other broad market and industry factors may decrease the trading price of our common stock, regardless of our performance. Market fluctuations, as well as general political and economic conditions such as recession or interest rate or currency rate fluctuations, also may decrease the trading price of our common stock. In addition, our stock price could be subject to wide fluctuations in response to factors including the following: 19 . announcements of new technological innovations or new products by us or our competitors; . changes in financial estimates by securities analysts; . conditions or trends in the biotechnology and life science industries; . changes in the market valuations of other biotechnology or life science companies; . developments in domestic and international governmental policy or regulations; . announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments; . developments in patent or other proprietary rights; . period-to-period fluctuations in our operating results; . future royalties from product sales, if any, by our strategic partners; and . sales of our common stock or other securities in the open market. In the past, stockholders have often instituted securities class action litigation after periods of volatility in the market price of a company's securities. If a stockholder files a securities class action suit against us, we would incur substantial legal fees and our management's attention and resources would be diverted from operating our business in order to respond to the litigation. We Expect that Our Quarterly Results of Operations Will Fluctuate, and This Fluctuation Could Cause Our Stock Price to Decline. Our quarterly operating results have fluctuated in the past and are likely to do so in the future. These fluctuations could cause our stock price to fluctuate significantly or decline. Some of the factors that could cause our operating results to fluctuate include: . expiration of research contracts with collaborators or government research grants, which may not be renewed or replaced; . the success rate of our discovery efforts leading to milestones and royalties; . the timing and willingness of collaborators to commercialize our products, which would result in royalties; and . general and industry specific economic conditions, which may affect our collaborators' research and development expenditures. A large portion of our expenses are relatively fixed, including expenses for facilities, equipment and personnel. Accordingly, if revenues decline or do not grow as anticipated due to expiration of research contracts or government research grants, failure to obtain new contracts or other factors, we may not be able to correspondingly reduce our operating expenses. In addition, we plan to significantly increase operating expenses in 2000. Failure to achieve anticipated levels of revenues could therefore significantly harm our operating results for a particular fiscal period. Due to the possibility of fluctuations in our revenues and expenses, we believe that quarter-to-quarter comparisons of our operating results are not a good indication of our future performance. Our operating results in some quarters may not meet the expectations of stock market analysts and investors. In that case, our stock price would probably decline. Future Sales of Our Common Stock May Depress Our Stock Price. The market price of our common stock could decline as a result of sales of substantial amounts of our common stock in the public market, or the perception that these sales could occur. In addition, these factors could make it more difficult for us to raise funds through future offerings of common stock. There were approximately 32,270,769 shares of common stock outstanding as of March 31, 2000. Of these shares, 7,081,834 shares are freely transferable without restriction or further registration under the Securities Act, except for any shares held by our "affiliates," as defined in Rule 144 of the Securities Act, 1,218,366 shares are subject to lock-up agreements providing that the stockholders will not offer, sell or otherwise dispose of any of the shares of common stock owned by them until June 19, 2000 and 100,925 shares are subject to lock-up agreements that expire on June 12, 2000. The remaining 23,869,644 shares of common stock outstanding are "restricted securities" as defined in Rule 144 and may be sold without registration under the Securities Act to the extent permitted by Rule 144 or other exemptions under the Securities Act. Our directors, officers and certain stockholders, including greater than 5% stockholders, who hold approximately 17,004,809 of these remaining shares have agreed not to sell any 20 of these shares until June 19, 2000. Other stockholders holding approximately 6,864,835 shares have agreed in connection with our initial public offering not to sell any of these shares until June 13, 2000. Some of Our Existing Stockholders Can Exert Control Over Us, and May Not Make Decisions that Are in the Best Interests of All Stockholders. Our officers, directors and principal stockholders (greater than 5% stockholders) together control approximately 46% of our outstanding common stock, and Glaxo Wellcome International B.V. owns approximately 21% of our outstanding common stock. As a result, these stockholders, if they act together, and Glaxo Wellcome International B.V. by itself, are able to exert a significant degree of influence over our management and affairs and over matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. In addition, this concentration of ownership may delay or prevent a change in control of Maxygen and might affect the market price of our common stock, even when a change may be in the best interests of all stockholders. In addition, the interests of this concentration of ownership may not always coincide with our interests or the interests of other stockholders and accordingly, they could cause us to enter into transactions or agreements that we would not otherwise consider. Item 3 Quantitative And Qualitative Disclosures About Market Risk Interest Rate Risk The primary objective of our investment activities is to preserve the principal while at the same time maximizing yields without significantly increasing risk. To achieve this objective, we maintain our portfolio of cash equivalents, short- term and long-term investments in a variety of securities, including corporate obligations and money market funds. As of March 31, 2000, approximately 95% of our total portfolio will mature in one year or less, with the remainder maturing in less than two years. The following table represents the fair value balance of our cash, cash equivalents, short-term and long-term investments that are subject to interest rate risk by year of expected maturity and average interest rates as of March 31, 2000 (in thousands, except interest rates): 2000 2001 Cash equivalents.................................. $243,819 -- Average interest rates............................ 5.89% -- Short-term investments............................ $ 9,990 -- Average interest rates............................ 6.41% -- Long-term investments............................. -- $14,076 Average interest rates............................ -- 7.04% We did not hold derivative instruments as of March 31, 2000, and we have never held such instruments in the past. In addition, we had outstanding debt, consisting of borrowings under an equipment financing line of credit, of $1.8 million as of March 31, 2000, with average interest rates of approximately 11%. Foreign Currency Risk Currently the majority of our revenue and expenses are denominated in U.S. dollars and as a result we have experienced no significant foreign exchange gains and losses to date. While we expect to effect some transactions in foreign currencies during 2000, we do not expect that foreign exchange gains or losses will be significant. We have not engaged in foreign currency hedging to date. 21 ================================================================================ Part II - Other Information Item 1 Legal Proceedings Not applicable. Item 2 Changes in Securities and Use of Proceeds The effective date of our first registration statement, filed on Form S-1 under the Securities Act of 1933 (No. 333-89413) relating to our initial public offering of common stock, was December 15, 1999. A total of 6,900,000 shares of our common stock were sold at a price of $16.00 per share to an underwriting syndicate led by Goldman, Sachs & Co., FleetBoston Robertson Stephens Inc. and Invemed Associates LLC. Of these 6,900,000 shares, 900,000 were issued upon exercise of the underwriters' over-allotment option. The offering commenced on December 16, 1999 and closed on December 21, 1999. The initial public offering resulted in gross proceeds of $110.4 million, $7.7 million of which was applied toward the underwriting discount. Expenses related to the offering totaled approximately $1.7 million. Net proceeds to us were approximately $101.0 million. From the time of receipt through March 31, 2000, the proceeds were applied toward: . purchases and installation of equipment and build-out of facilities, $521,000; . repayment of indebtedness, $6,000; . working capital, $2.7 million; and . temporary investments in certificates of deposits, mutual funds and corporate debt securities, $98 million. Item 3 Defaults Upon Senior Securities Not applicable. Item 4 Submission of Matters to a Vote of Security Holders Not applicable. Item 5 Other Information Not applicable. Item 6 Exhibits and Reports on Form 8-K (a) The following exhibits are filed as part of this report: 27.01 Financial Data Schedule (EDGAR version only) (b) There were no reports on Form 8-K filed during the quarter ended March 31, 2000. 22 ================================================================================ Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MAXYGEN, INC. May 12, 2000 By: /s/ Russell J. Howard ---------------------------------- Russell J. Howard Chief Executive Officer May 12, 2000 By: /s/ Simba Gill ---------------------------------- Simba Gill President, Chief Financial Officer and Senior Vice President of Corporate Development EX-27.01 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MAXYGEN, INC.'S QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-2000 JAN-01-2000 MAR-31-2000 246,521 9,990 3,938 0 0 261,185 6,232 1,256 280,993 6,673 0 0 0 3 270,446 280,993 0 5,414 0 0 13,170 0 52 (5,640) 0 (5,640) 0 0 0 (5,640) (0.20) (0.20)
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