##### Table of Contents



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 June 30, 2006
 Commission file number 000-28401
 MAXYGEN, INC.
 (Exact name of registrant as specified in its charter)
 Delaware(State of incorporation)
    
    77-0449487(I.R.S. Employer Identification No.)
 515 Galveston Drive
Redwood City, California 94063  (Address of principal executive offices, including zip code)
 (650) 298-5300  (Registrants telephone number, including area code)
  þ o
  o þ o
  o þ




---



##### 



MAXYGEN, INC.
FORM 10-Q
QUARTER ENDED JUNE 30, 2006
  Part I FINANCIAL INFORMATIONItem 1: Financial Statements:Condensed Consolidated Balance Sheets as of December 31, 2005
and June 30, 2006
    
    
    1Condensed Consolidated Statements of Operations for the three and six
month periods ended June 30, 2005 and 2006
    
    
    2Condensed Consolidated Statements of Cash Flows for the six month
periods ended June 30, 2005 and 2006
    
    
    3Notes to Condensed Consolidated Financial Statements
    
    
    4Item 2: Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    18Item 3: Quantitative and Qualitative Disclosures About Market Risk
    
    
    27Item 4: Controls and Procedures
    
    
    27Part II OTHER INFORMATIONItem 1: Legal Proceedings
    
    
    29Item 1A: Risk Factors
    
    
    29Item 2: Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    39Item 3: Defaults Upon Senior Securities
    
    
    39Item 4: Submission of Matters to a Vote of Security Holders
    
    
    40Item 5: Other Information
    
    
    40Item 6: Exhibits
    
    
    40SIGNATURES
    
    
    42EXHIBIT 10.6EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1
   i




---



##### Table of Contents



Forward Looking Statements
  
    
    our ability to develop products suitable for commercialization;
    
    our predicted development and commercial timelines for any of our potential products,
including the timing of any commencement of clinical trials of any product candidate and the
progress of such clinical trials;
    
    the commercial success of any of our products that may be marketed or sold;
    
    our liquidity and future financial performance;
    
    the establishment, development and maintenance of any manufacturing or collaborative
relationships;
    
    the effectiveness of our MolecularBreeding directed evolution platform and other
technologies and processes;
    
    our ability to protect our intellectual property portfolio and rights;
    
    our ability to identify and develop new potential products;
    
    the attributes of any products we may develop; and
    
    our business strategies and plans.
   ii




---



##### Table of Contents



PartI  Financial Information
 
 Item 1. Financial Statements
 MAXYGEN, INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (in thousands, except share and per share amounts)
 December 31,
    
    
    June 30,2005
    
    
    2006(Note 1)
    
    (unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    26,940
    
    
    $
    36,137Short-term investments
    
    
    127,336
    
    
    
    113,739Accounts receivable and other receivables
    
    
    6,076
    
    
    
    2,901Prepaid expenses and other current assets
    
    
    3,530
    
    
    
    3,430Total current assets
    
    
    163,882
    
    
    
    156,207Property and equipment, net
    
    
    4,068
    
    
    
    3,585Goodwill
    
    
    12,192
    
    
    
    12,192Long-term investments
    
    
    34,047
    
    
    
    30,280Deposits and other long-term assets
    
    
    334
    
    
    
    350Total assets
    
    $
    214,523
    
    
    $
    202,614LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,540
    
    
    $
    2,053Accrued compensation
    
    
    4,323
    
    
    
    3,408Other accrued liabilities
    
    
    3,121
    
    
    
    2,703Deferred revenue
    
    
    2,668
    
    
    
    1,905Total current liabilities
    
    
    11,652
    
    
    
    10,069Non-current deferred revenue
    
    
    5,517
    
    
    
    4,806Other long-term liabilities
    
    
    10
    
    
    
    Commitments and contingenciesStockholders equity:Preferred stock, $0.0001 par value, 5,000,000 shares
authorized, no shares issued and outstanding at
December 31, 2005 and June 30, 2006
    
    
    
    
    
    
    Common stock, $0.0001 par value: 100,000,000 shares
authorized, 35,922,178 and 36,069,526 shares issued and
outstanding at December 31, 2005 and June 30, 2006,
respectively
    
    
    3
    
    
    
    4Additional paid-in capital
    
    
    403,120
    
    
    
    406,994Accumulated other comprehensive loss
    
    
    (1,557
    )
    
    
    (932
    )Accumulated deficit
    
    
    (204,222
    )
    
    
    (218,327
    )Total stockholders equity
    
    
    197,344
    
    
    
    187,739Total liabilities and stockholders equity
    
    $
    214,523
    
    
    $
    202,614
  1




---



##### Table of Contents



MAXYGEN, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (in thousands, except per share amounts)
 Three Months ended
    
    
    Six Months endedJune 30,
    
    
    June 30,2005
    
    
    2006
    
    
    2005
    
    
    2006(unaudited)Collaborative research and development revenue
    
    $
    1,446
    
    
    $
    7,950
    
    
    $
    6,403
    
    
    $
    12,017Grant revenue
    
    
    500
    
    
    
    1,355
    
    
    
    1,092
    
    
    
    2,253Total revenues
    
    
    1,946
    
    
    
    9,305
    
    
    
    7,495
    
    
    
    14,270Operating expenses:Research and development
    
    
    9,920
    
    
    
    10,212
    
    
    
    21,104
    
    
    
    23,474General and administrative
    
    
    3,372
    
    
    
    4,065
    
    
    
    7,147
    
    
    
    8,383Total operating expenses
    
    
    13,292
    
    
    
    14,277
    
    
    
    28,251
    
    
    
    31,857Loss from operations
    
    
    (11,346
    )
    
    
    (4,972
    )
    
    
    (20,756
    )
    
    
    (17,587
    )Interest income and other (expense), net
    
    
    1,477
    
    
    
    1,931
    
    
    
    2,149
    
    
    
    3,824Equity in net loss of minority investee
    
    
    
    
    
    
    (342
    )
    
    
    
    
    
    
    (342
    )Loss from continuing operations
    
    
    (9,869
    )
    
    
    (3,383
    )
    
    
    (18,607
    )
    
    
    (14,105
    )Cumulative effect adjustment
    
    
    
    
    
    
    
    
    
    
    16,616
    
    
    
    Net loss
    
    
    (9,869
    )
    
    
    (3,383
    )
    
    
    (1,991
    )
    
    
    (14,105
    )Subsidiary preferred stock
accretion
    
    
    
    
    
    
    
    
    
    
    (167
    )
    
    
    Loss applicable to common stockholders
    
    $
    (9,869
    )
    
    $
    (3,383
    )
    
    $
    (2,158
    )
    
    $
    (14,105
    )Basic and diluted loss per share:Continuing operations
    
    $
    (0.28
    )
    
    $
    (0.09
    )
    
    $
    (0.52
    )
    
    $
    (0.39
    )Cumulative effect adjustment
    
    $
    
    
    
    $
    
    
    
    $
    0.47
    
    
    $
    Applicable to common stockholders
    
    $
    (0.28
    )
    
    $
    (0.09
    )
    
    $
    (0.06
    )
    
    $
    (0.39
    )Shares used in basic and diluted per share
calculations
    
    
    35,702
    
    
    
    36,024
    
    
    
    35,680
    
    
    
    35,999
  2




---



##### Table of Contents



MAXYGEN, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (in thousands)
 Six months endedJune 30,2005
    
    
    2006(unaudited)Operating activitiesNet loss
    
    $
    (1,991
    )
    
    $
    (14,105
    )Cumulative effect adjustment
    
    
    (16,616
    )
    
    
    Loss from continuing operations
    
    
    (18,607
    )
    
    
    (14,105
    )Adjustments to reconcile loss from continuing operations to
net cash used in operating activities:Depreciation and amortization
    
    
    2,048
    
    
    
    1,213Net loss in minority investment
    
    
    
    
    
    
    342Non-cash stock compensation
    
    
    7
    
    
    
    3,323Common stock issued and stock options granted to
consultants for services rendered and for certain
technology rights
    
    
    110
    
    
    
    12Changes in operating assets and liabilities:Accounts receivable and other receivables
    
    
    571
    
    
    
    3,175Prepaid expenses and other current assets
    
    
    (403
    )
    
    
    953Deposits and other assets
    
    
    (9
    )
    
    
    (16
    )Accounts payable
    
    
    557
    
    
    
    513Accrued compensation
    
    
    (1,500
    )
    
    
    (915
    )Accrued program termination costs
    
    
    (2,209
    )
    
    
    Other accrued liabilities
    
    
    1,249
    
    
    
    (428
    )Taxes payable
    
    
    (921
    )
    
    
    Deferred revenue
    
    
    (457
    )
    
    
    (1,474
    )Net cash used in operating activities
    
    
    (19,564
    )
    
    
    (7,407
    )Investing activitiesPurchases of available-for-sale securities
    
    
    (88,122
    )
    
    
    (70,127
    )Maturities of available-for-sale securities
    
    
    108,933
    
    
    
    87,499Investment in minority investee
    
    
    
    
    
    
    (600
    )Cash used in acquisition, net of cash acquired
    
    
    (2,617
    )
    
    
    Acquisition of property and equipment
    
    
    (1,804
    )
    
    
    (730
    )Net cash provided by investing activities
    
    
    16,390
    
    
    
    16,042Financing activitiesRepayments under equipment financing obligations
    
    
    (115
    )
    
    
    Borrowings under equipment financing obligations
    
    
    1,229
    
    
    
    Proceeds from issuance of common stock
    
    
    721
    
    
    
    538Net cash provided by financing activities
    
    
    1,835
    
    
    
    538Codexis related net adjustment
    
    
    (2,365
    )
    
    
    Effect of exchange rate changes on cash and cash equivalents
    
    
    301
    
    
    
    24Net increase (decrease) in cash and cash equivalents
    
    
    (3,403
    )
    
    
    9,197Cash and cash equivalents at beginning of period
    
    
    40,415
    
    
    
    26,940Cash and cash equivalents at end of period
    
    $
    37,012
    
    
    $
    36,137Supplemental Cash Flow InformationNon-cash transactions:Shares of Codexis common stock issued in acquisition
    
    $
    (188
    )
    
    $
    
  3




---



##### Table of Contents



MAXYGEN, INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited)
 1. Basis of Presentation and Significant Accounting Policies
 Basis of Presentation
     Principles of Consolidation
   4




---



##### Table of Contents



Cumulative Effect Adjustment
  Reclassifications
  5




---



##### Table of Contents



Revenue Recognition
      6




---



##### Table of Contents



Loss Per Common Share
   Three Months ended
    
    
    Six Months endedJune 30,
    
    
    June 30,2005
    
    
    2006
    
    
    2005
    
    
    2006Loss applicable to common stockholders
    
    $
    (9,869
    )
    
    $
    (3,383
    )
    
    $
    (2,158
    )
    
    $
    (14,105
    )Basic and diluted:Weighted-average shares used in
computing basic and diluted loss
per share
    
    
    35,702
    
    
    
    36,024
    
    
    
    35,680
    
    
    
    35,999Basic and diluted loss per common
share
    
    $
    (0.28
    )
    
    $
    (0.09
    )
    
    $
    (0.06
    )
    
    $
    (0.39
    )
  Comprehensive Loss
  Three Months ended
    
    
    Six Months endedJune 30,
    
    
    June 30,2005
    
    
    2006
    
    
    2005
    
    
    2006Net loss
    
    $
    (9,869
    )
    
    $
    (3,383
    )
    
    $
    (1,991
    )
    
    $
    (14,105
    )Changes in unrealized gain (loss) on
available-for-sale securities
    
    
    299
    
    
    
    (16
    )
    
    
    191
    
    
    
    6Changes in foreign currency translation
adjustments
    
    
    (686
    )
    
    
    453
    
    
    
    (428
    )
    
    
    619Comprehensive loss
    
    $
    (10,256
    )
    
    $
    (2,946
    )
    
    $
    (2,228
    )
    
    $
    (13,480
    )
 7




---



##### Table of Contents



December 31,
    
    
    June 30,2005
    
    
    2006Unrealized gain on available-for-sale securities
    
    $
    
    
    
    $
    9Unrealized losses on available-for-sale securities
    
    
    (592
    )
    
    
    (595
    )Foreign currency translation adjustments
    
    
    (579
    )
    
    
    (555
    )Changes in foreign currency contracts
    
    
    (386
    )
    
    
    209Accumulated other comprehensive loss
    
    $
    (1,557
    )
    
    $
    (932
    )
 Recent Accounting Pronouncements
    Stock-Based Compensation
  8




---



##### Table of Contents



Stock Options
  9




---



##### Table of Contents



Three months ended
    
    Six months endedJune 30, 2006
    
    June 30, 2006U.S.
    
    Danish
    
    U.S.
    
    DanishEmployees
    
    Employees
    
    Employees
    
    EmployeesExpected dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Risk-free interest rate
rangeOptions
    
    
    5.01
    %
    
    
    5.05
    %
    
    4.30% to 5.01%
    
    4.34% to 5.05%Risk-free interest rate
range ESPP
    
    
    
    
    
    
    
    
    
    3.20% to 4.36%
    
    
    Expected lifeOptions
    
    5.13 years
    
    2.4 years
    
    5.13 years
    
    2.4 yearsExpected lifeESPP
    
    
    
    
    
    
    
    
    
    0.92 years
    
    
    Expected volatility-Options
    
    
    54.48
    %
    
    
    45.78
    %
    
    54.48% to 56.42%
    
    44.38% to 45.78%
   Weighted-Weighted-
    
    
    AverageAverage
    
    
    Remaining
    
    
    AggregateExercise
    
    
    Contractual
    
    
    IntrinsicPrice Per
    
    
    Term
    
    
    ValueShares
    
    
    Share
    
    
    (in years)
    
    
    (in millions)Options outstanding at December 31, 2005
    
    
    9,401,599
    
    
    $
    16.13Granted
    
    
    1,457,137
    
    
    
    7.95Exercised
    
    
    (100,228
    )
    
    
    3.93Canceled
    
    
    (632,743
    )
    
    
    42.06Options outstanding at June 30, 2006
    
    
    10,125,765
    
    
    $
    13.45
    
    
    
    6.84
    
    
    $
    136Options exercisable at June 30, 2006
    
    
    6,867,417
    
    
    $
    15.66
    
    
    
    5.88
    
    
    $
    108
  10




---



##### Table of Contents



Options Outstanding
    
    
    
    
    
    Options ExercisableWeighted-AverageRemaining
    
    Weighted-
    
    Number of
    
    Weighted-Range of
    
    Number of Shares
    
    Contractual Life
    
    Average
    
    Shares
    
    AverageExercise Prices
    
    Outstanding
    
    (in years)
    
    Exercise Price
    
    Outstanding
    
    Exercise Price$0.20  $7.00
    
    
    1,379,754
    
    
    
    6.89
    
    
    $
    5.50
    
    
    
    809,679
    
    
    $
    4.44$7.08  $7.40
    
    
    1,397,169
    
    
    
    6.89
    
    
    $
    7.34
    
    
    
    1,305,756
    
    
    $
    7.36$7.47  $7.89
    
    
    1,259,783
    
    
    
    8.80
    
    
    $
    7.81
    
    
    
    112,507
    
    
    $
    7.54$7.92  $9.93
    
    
    1,030,401
    
    
    
    8.45
    
    
    $
    9.02
    
    
    
    442,278
    
    
    $
    9.53$9.95  $10.76
    
    
    1,474,406
    
    
    
    7.02
    
    
    $
    10.54
    
    
    
    1,203,332
    
    
    $
    10.57$10.80  $12.44
    
    
    1,240,354
    
    
    
    7.28
    
    
    $
    12.02
    
    
    
    649,967
    
    
    $
    11.95$12.99  $15.75
    
    
    1,033,307
    
    
    
    5.04
    
    
    $
    13.56
    
    
    
    1,033,307
    
    
    $
    13.56$15.84  $53.75
    
    
    880,425
    
    
    
    4.49
    
    
    $
    34.29
    
    
    
    880,425
    
    
    $
    34.28$56.88  $59.81
    
    
    430,166
    
    
    
    4.01
    
    
    $
    57.17
    
    
    
    430,166
    
    
    $
    57.1710,125,765
    
    
    
    
    
    
    
    
    
    
    
    6,867,417
  Employee Stock Purchase Plan
  Pro Forma Information under SFAS 123 for Periods Prior to 2006
  11




---



##### Table of Contents



Three months
    
    
    Six monthsended
    
    
    endedJune 30, 2005
    
    
    June 30, 2005Net loss, as reported
    
    $
    (9,869
    )
    
    $
    (1,991
    )Add: Stock based employee compensation cost included in the
determination of net loss, as reported
    
    
    
    
    
    
    Deduct: Total stock based employee compensation expense
determined under the fair value-based method for all
awards
    
    
    (1,713
    )
    
    
    (2,646
    )Pro forma net loss
    
    $
    (11,582
    )
    
    $
    (4,637
    )Loss per common share:Basic and diluted
    
    $
    (0.28
    )
    
    $
    (0.06
    )Basic and
diluted  pro forma
    
    $
    (0.32
    )
    
    $
    (0.13
    )
  Three months
    
    Six monthsended
    
    endedJune 30, 2005
    
    June 30, 2005Expected dividend yield
    
    
    0.0
    %
    
    
    0.0
    %Risk-free interest rate rangeOptions
    
    
    3.87
    %
    
    3.71% to 3.87%Risk-free interest rate rangeESPP
    
    
    
    
    
    1.23% to 2.79%Expected lifeOptions
    
    4 years
    
    4 yearsExpected lifeESPP
    
    
    
    
    
    0.7 yearsExpected volatility
    
    
    53.88
    %
    
    53.88% to 54.69%
  12




---



##### Table of Contents



Valuation and Expense Information under SFAS 123(R)
  Three months
    
    Six monthsended
    
    endedJune 30, 2006
    
    June 30, 2006Research and development
    
    $
    426
    
    
    $
    1,031Selling, general and administrative
    
    
    1,237
    
    
    
    2,115Stock-based compensation expense before income taxes
    
    
    1,663
    
    
    
    3,146Income tax benefit
    
    
    
    
    
    
    Total stock-based compensation expense after income taxes
    
    $
    1,663
    
    
    $
    3,146
  2. Cash Equivalents and Investments
  Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueMoney market funds
    
    $
    26,153
    
    
    $
    
    
    
    $
    
    
    
    $
    26,153Commercial paper
    
    
    22,528
    
    
    
    12
    
    
    
    (1
    )
    
    
    22,539Corporate bonds
    
    
    67,865
    
    
    
    
    
    
    
    (440
    )
    
    
    67,425U.S. government agency securities
    
    
    64,194
    
    
    
    
    
    
    
    (155
    )
    
    
    64,039Total
    
    
    180,740
    
    
    
    12
    
    
    
    (596
    )
    
    
    180,156Less amounts classified as cash
equivalents
    
    
    (36,135
    )
    
    
    (3
    )
    
    
    1
    
    
    
    (36,137
    )Total investments
    
    $
    144,605
    
    
    $
    9
    
    
    $
    (595
    )
    
    $
    144,019
  13




---



##### Table of Contents



Amortized
    
    
    EstimatedCost
    
    
    Fair ValueDue within one year
    
    $
    114,155
    
    
    $
    113,739Due after one year
    
    
    30,450
    
    
    
    30,280$
    144,605
    
    
    $
    144,019
 3. Derivatives and Financial Instruments
       14




---



##### Table of Contents



4. Litigation
 In
re Initial Public Offering Securities Litigation
 In re Initial Public Offering Securities Litigation
    5. Segment Information
   15




---



##### Table of Contents



Segment Earnings
 Human
    
    Chemicals
    
    Maxygen, Inc.(in thousands)
    
    Therapeutics
    
    (Codexis)
    
    ConsolidatedSix months ended June 30, 2005Segment loss
    
    $
    (19,431
    )
    
    $
    (1,325
    )
    
    $
    (20,756
    )Interest income and other (expense), net
    
    
    2,129
    
    
    
    20
    
    
    
    2149Loss from continuing operations
    
    
    (17,302
    )
    
    
    (1,305
    )
    
    
    (18,607
    )Cumulative effect adjustment
    
    
    16,616
    
    
    
    
    
    
    
    16,616Subsidiary preferred stock accretion
    
    
    
    
    
    
    (167
    )
    
    
    (167
    )Loss applicable to common stockholders
    
    $
    (686
    )
    
    $
    (1,472
    )
    
    $
    (2,158
    )
 Human
    
    Chemicals
    
    Maxygen, Inc.(in thousands)
    
    Therapeutics
    
    (Codexis)
    
    ConsolidatedSix months ended June 30, 2006Segment loss
    
    $
    (17,587
    )
    
    
    
    
    
    $
    (17,587
    )Interest income and other (expense), net
    
    
    3,824
    
    
    
    
    
    
    
    3,824Equity in net loss of minority investee
    
    
    (342
    )
    
    
    
    
    
    
    (342
    )Loss from continuing operations
    
    
    (14,105
    )
    
    
    
    
    
    
    (14,105
    )Loss applicable to common stockholders
    
    $
    (14,105
    )
    
    
    
    
    
    $
    (14,105
    )
 Segment Revenue
  Three Months ended
    
    
    Six Months endedJune 30,
    
    
    June 30,2005
    
    
    2006
    
    
    2005
    
    
    2006Human therapeutics
    
    $
    1,946
    
    
    $
    9,305
    
    
    $
    5,985
    
    
    $
    14,270Chemicals
    
    
    
    
    
    
    
    
    
    
    1,510
    
    
    
    Total revenue
    
    $
    1,946
    
    
    $
    9,305
    
    
    $
    7,495
    
    
    $
    14,270
 16




---



##### Table of Contents



Identifiable Assets
  December 31,
    
    
    June 30,2005
    
    
    2006Human therapeutics
    
    $
    214,523
    
    
    $
    202,614Chemicals
    
    
    
    
    
    
    Total assets
    
    $
    214,523
    
    
    $
    202,614
 6. Commitments
   For the remainder of 2006
    
    $
    5,213Year ending
December 31,2007
    
    $
    3,9152008
    
    
    1,352Thereafter
    
    
    Total commitments beyond current year
    
    $
    5,267
 7. Codexis
  8. Guarantees and Indemnifications
   17




---



##### Table of Contents



9. Related Party Transactions
  
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
 Executive Summary
   18




---



##### Table of Contents



19




---



##### Table of Contents



Critical Accounting Policies and Estimates
  Revenue Recognition  Non-Refundable Up-Front Payments
  Stock-Based Compensation
   20




---



##### Table of Contents



Results of Operations
 Revenues
    21




---



##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2005
    
    
    2006
    
    
    2005
    
    
    2006Human therapeutics
    
    $
    1,946
    
    
    $
    9,305
    
    
    $
    5,985
    
    
    $
    14,270Chemicals
    
    
    
    
    
    
    
    
    
    
    1,510
    
    
    
    Total revenue
    
    $
    1,946
    
    
    $
    9,305
    
    
    $
    7,495
    
    
    $
    14,270
 Research and Development Expenses
    22




---



##### Table of Contents



Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,2005
    
    
    2006
    
    
    2005
    
    
    2006Collaborative projects funded by third parties(1)
    
    $
    1,481
    
    
    $
    3,485
    
    
    $
    4,142
    
    
    $
    6,972Internal projects
    
    
    8,439
    
    
    
    6,727
    
    
    
    16,962
    
    
    
    16,502Total
    
    $
    9,920
    
    
    $
    10,212
    
    
    $
    21,104
    
    
    $
    23,474
 
 (1)
    
    Research and development expenses related to collaborative projects funded by third
parties are less than the reported revenues due to the amortization of non-refundable up-front
payments, as well as a portion of the collaborative research and development revenue that is
charged for general and administrative expenses.   General and Administrative Expenses
  23




---



##### Table of Contents



Interest Income and Other (Expense), net
  Equity in Net Loss of Minority Investee
  Cumulative Effect Adjustment
  Subsidiary Preferred Stock Accretion
  24




---



##### Table of Contents



Recent Accounting Pronouncements
    Liquidity and Capital Resources
  25




---



##### Table of Contents



Payments Due by PeriodMoreLess than
    
    1-3
    
    4-5
    
    than 5Contractual Obligations
    
    Total
    
    1 year
    
    years
    
    years
    
    yearsOperating Lease Obligations
    
    $
    1,536
    
    
    $
    1,177
    
    
    $
    359
    
    
    $
    
    
    
    $
    Purchase Obligations
    
    
    8,944
    
    
    
    4,036
    
    
    
    4,908
    
    
    
    
    
    
    
    Total
    
    $
    10,480
    
    
    $
    5,213
    
    
    $
    5,267
    
    
    $
    
    
    
    $
    
   26




---



##### Table of Contents



Item 3. Quantitative And Qualitative Disclosures About Market Risk
 Market risk management
  
 Item 4. Controls and Procedures
  Controls Evaluations.
 CEO and CFO Certifications.
 Definition of Disclosure Controls.
 Definition of Internal Control.
 27




---



##### Table of Contents



Limitations on the Effectiveness of Controls.
 Scope of the Controls Evaluation.
  Quarterly Reports
 Quarterly Evaluation of Disclosure Controls.
 Quarterly Evaluation of Changes in Internal Control.
 28




---



##### Table of Contents



Part II  Other Information
 
 Item 1. Legal Proceedings
 In re Initial Public
Offering Securities Litigation
 In re Initial Public Offering Securities Litigation
  
 Item 1A. Risk Factors
 You should carefully consider the risks described below, together with all of the other
information included in this report, in our business and prospects. The risks and
uncertainties described below are not the only ones facing Maxygen. Additional risks and
uncertainties not presently known to us or that we currently deem immaterial also may impair our
business operations. If any of the following risks actually occur, our business could be harmed.
In such case, the trading price of our common stock could decline, and you may lose all or part of
your investment
 We have a history of net losses. We expect to continue to incur net losses and may not achieve
or maintain profitability.
  29




---



##### Table of Contents



We are an early stage company deploying unproven technologies. If we do not develop
commercially successful products, we may be forced to cease operations.
  Our revenues, expenses and operating results are subject to fluctuations that may cause our
stock price to decline.
  
    
    termination of research and development contracts with collaborators or government
research grants, which may not be renewed or replaced;
    
    the success rate of our development or discovery efforts leading to milestones and
royalties;
    
    timing of licensing fees or the achievement of milestones under new or existing
licensing and collaborative arrangements;
    
    timing of expenses, particularly with respect to contract manufacturing, pre-clinical
studies and clinical trials;
    
    the timing and willingness of collaborators to commercialize our products, which would
result in royalties to us; and
    
    general and industry specific economic conditions, which may affect our collaborators
research and development expenditures.
   30




---



##### Table of Contents



Our revenues are substantially dependent on a limited number of collaborative arrangements and
government grants, and our inability to establish or maintain collaborations or grants would
adversely impact our revenues, financial position and results of operation.
  Drug development is a long, expensive and uncertain process and may not result in the
development of any commercially successful products.
   Our potential 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.
   31




---



##### Table of Contents



The manufacturing of our product candidates presents technological, logistical and regulatory
risks, each of which may adversely affect our potential revenues.
  
    
    before we can obtain approval of any of our products or product candidates for the
treatment of a particular disease or condition, we must demonstrate to the satisfaction of
the FDA and other governmental authorities that the drug manufactured for the clinical
trials is comparable to the drug manufactured for commercial use and that the manufacturing
facility complies with applicable laws and regulations;
    
    it may not be technically feasible to scale up an existing manufacturing process to meet
demand or such scale-up may take longer than anticipated; and
    
    failure to comply with strictly enforced Good Manufacturing Practices (GMP) regulations
and similar foreign standards may result in delays in product approval or withdrawal of an
approved product from the market.
  Our manufacturing strategy, which relies on third-party manufacturers, exposes us to
additional risks.
   32




---



##### Table of Contents



If our collaborations are not successful, we may not be able to effectively develop and market
some of our products.
    We conduct proprietary research programs, and any conflicts with our collaborators or any
inability to commercialize products resulting from this research could harm our business.
     33




---



##### Table of Contents



Any inability to adequately protect our proprietary technologies could harm our competitive
position.
    Litigation or other proceedings or third party claims of intellectual property infringement
could require us to spend time and money and could require us to shut down some of our operations.
  34




---



##### Table of Contents



Budget or cash constraints may force us to delay or terminate our efforts to develop certain
products and could prevent us from executing our business plan, meeting our stated timetables and
commercializing our potential products as quickly as possible.
   We may need additional capital in the future. If additional capital is not available, we may
have to curtail or cease operations.
  35




---



##### Table of Contents



Many potential competitors who have greater resources and experience than we do may develop
products and technologies that make ours obsolete.
     Legislative actions, recent and potential new accounting pronouncements and higher compliance
costs are likely to adversely impact our future financial position and results of operations.
  36




---



##### Table of Contents



If we do not attract and retain key employees, our business could be impaired.
  The operation of international locations may increase operating expenses and divert management
attention.
  
    
    regulatory requirements that may limit or prevent the offering of our products in local
jurisdictions;
    
    local legal and governmental limitations on company-wide employee benefit practices,
such as the operation of our employee stock option plan in local jurisdictions;
    
    government limitations on research and/or research involving genetically engineered
products or processes;
    
    difficulties in staffing and managing foreign operations;
    
    currency exchange risks; and
    
    potentially adverse tax consequences.
 37




---



##### Table of Contents



Acquisitions could result in dilution, operating difficulties and other harmful consequences.
  
    
    diversion of management time (both ours and that of the acquired company) from focus on
operating the businesses to issues of integration during the period of negotiation through
closing and further diversion of such time after closing;
    
    decline in employee morale and retention issues resulting from changes in compensation,
reporting relationships, future prospects, or the direction of the business;
    
    the need to integrate each companys accounting, management information, human resource
and other administrative systems to permit effective management and the lack of control if
such integration is delayed or not implemented; and
    
    the need to implement controls, procedures and policies appropriate for a larger public
company in companies that before acquisition had been smaller, private companies.
   Our stock price has been, and may continue to be, extremely volatile, and an investment in our
stock could decline in value.
  
    
    our failure to meet our publicly announced revenue and/or expense projections and/or
product development timetables;
    
    adverse results or delays in preclinical development or clinical trials;
    
    any decisions to discontinue or delay development programs or clinical trials;
    
    announcements of new technological innovations or new products by us or our competitors;
    
    conditions or trends in the biotechnology and life science industries;
    
    changes in the market valuations of other biotechnology or life science companies;
    
    developments in domestic and international governmental policy or regulations;
    
    announcements by us or our competitors of significant acquisitions, strategic
partnerships, joint ventures or capital commitments;
    
    developments in or challenges relating to patent or other proprietary rights; and
    
    sales of our common stock or other securities in the open market.
 38




---



##### Table of Contents



Substantial sales of shares may adversely impact the market price of our common stock.
  Some of our existing stockholders can exert control over us, and may not make decisions that
are in the best interests of all stockholders.
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  39




---



##### Table of Contents



Item 4. Submission of Matters to a Vote of Security Holders
  (a)
    
    The stockholders reelected the seven nominees for the Companys Board of Directors:
 Shares Voted For
    
    SharesCandidate
    
    Candidate
    
    WithheldM.R.C. Greenwood
    
    
    32,570,542
    
    
    
    1,002,603Russell J. Howard
    
    
    32,958,615
    
    
    
    614,530Louis G. Lange
    
    
    32,830,151
    
    
    
    742,994Ernest Mario
    
    
    32,460,359
    
    
    
    1,112,786Gordon Ringold
    
    
    32,544,214
    
    
    
    1,028,931Isaac Stein
    
    
    32,265,699
    
    
    
    1,307,446James R. Sulat
    
    
    32,542,225
    
    
    
    1,030,920
 (b)
    
    The stockholders approved the Maxygen, Inc. 2006 Equity Incentive Plan, including its
material terms and performance goals for purposes of Internal Revenue Code Section 162(m):
 Shares voted for
    
    
    18,092,817Shares voted against
    
    
    7,435,803Shares abstaining
    
    
    1,388,217Broker non-votes
    
    
    6,656,308
 (c)
    
    The stockholders ratified the selection of Ernst & Young LLP as independent registered public
accounting firm of the Company for the fiscal year ending December 31, 2006:
 Shares voted for
    
    
    33,455,520Shares voted against
    
    
    113,201Shares abstaining
    
    
    4,423Broker non-votes
    
    
    1
 
 Item 5. Other Information
  
 Exhibits
  10.1*
    
    Consulting Agreement, between the Company and Waverley Associates, Inc., dated
as of April 1, 2006 (incorporated by reference to Exhibit 10.1 to Maxygens Current
Report on Form 8-K (File No. 000-28401) filed with the Securities and Exchange
Commission on April 4, 2006)10.2*
    
    Description of 2006 Executive Officer Cash Bonus Plan (incorporated by
reference to Exhibit 10.1 to Maxygens Current Report on Form 8-K (File No. 000-28401)
filed with the Securities and Exchange Commission on June 30, 2006)
 40




---



##### Table of Contents



10.3*
    
    Form of Amendment to Stock Option Agreements (incorporated by reference to
Exhibit 10.2 to Maxygens Current Report on Form 8-K (File No. 000-28401) filed with
the Securities and Exchange Commission on June 30, 2006)10.4*
    
    Form of Amendment No. 2 to Change of Control Agreement (incorporated by
reference to Exhibit 10.3 to Maxygens Current Report on Form 8-K (File No. 000-28401)
filed with the Securities and Exchange Commission on June 30, 2006)10.5*
    
    2006 Equity Incentive Plan (including related form of stock option agreement)
(incorporated by reference to Exhibit 10.4 to Maxygens Current Report on Form 8-K
(File No. 000-28401) filed with the Securities and Exchange Commission on June 30,
2006)10.6+
    
    Amended and Restated Exclusive License Agreement, dated July 10, 2006
(effective as of April 1, 2006), between Regents of the University of Minnesota and
Maxygen, Inc.31.1
    
    Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 200231.2
    
    Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 200232.1
    
    Certification of Chief Executive Officer and Chief Financial Officer pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
 
 *
    
    Management contract or compensatory plan or arrangement.+
    
    Confidential treatment has been requested with respect to portions of the exhibit. A
complete copy of the agreement, including the redacted terms, has been separately filed with
the Securities and Exchange Commission. 41




---



##### Table of Contents



Signatures
  MAXYGEN, INC.
 August 7, 2006
    
    By:
    
    /s/ Russell J. HowardRussell J. HowardChief Executive OfficerAugust 7, 2006
    
    By:
    
    /s/ Lawrence W. BriscoeLawrence W. BriscoeChief Financial Officer
 42




---



##### Table of Contents



Exhibit Index
 10.1*
    
    Consulting Agreement, between the Company and Waverley Associates, Inc., dated
as of April 1, 2006 (incorporated by reference to Exhibit 10.1 to Maxygens Current
Report on Form 8-K (File No. 000-28401) filed with the Securities and Exchange
Commission on April 4, 2006)10.2*
    
    Description of 2006 Executive Officer Cash Bonus Plan (incorporated by
reference to Exhibit 10.1 to Maxygens Current Report on Form 8-K (File No. 000-28401)
filed with the Securities and Exchange Commission on June 30, 2006)10.3*
    
    Form of Amendment to Stock Option Agreements (incorporated by reference to
Exhibit 10.2 to Maxygens Current Report on Form 8-K (File No. 000-28401) filed with
the Securities and Exchange Commission on June 30, 2006)10.4*
    
    Form of Amendment No. 2 to Change of Control Agreement (incorporated by
reference to Exhibit 10.3 to Maxygens Current Report on Form 8-K (File No. 000-28401)
filed with the Securities and Exchange Commission on June 30, 2006)10.5*
    
    2006 Equity Incentive Plan (including related form of stock option agreement)
(incorporated by reference to Exhibit 10.4 to Maxygens Current Report on Form 8-K
(File No. 000-28401) filed with the Securities and Exchange Commission on June 30,
2006)10.6+
    
    Amended and Restated Exclusive License Agreement, dated July 10, 2006
(effective as of April 1, 2006), between Regents of the University of Minnesota and
Maxygen, Inc.31.1
    
    Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 200231.2
    
    Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 200232.1
    
    Certification of Chief Executive Officer and Chief Financial Officer pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
 
 *
    
    Management contract or compensatory plan or arrangement.+
    
    Confidential treatment has been requested with respect to portions of the exhibit. A
complete copy of the agreement, including the redacted terms, has been separately filed with
the Securities and Exchange Commission.