**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington,D.C. 20549**

****

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**FORM 10-Q**

| **(Mark One)**                                        |
|-------------------------------------------------------|
|                                                  |
| **ý**                                            | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **                                            |
| **For the quarterly period ended  December 31, 2004** |
|                                                  |
| **or**                                                |
| ** **                                            |
| **o**                                                 | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                  |

 

**For thetransition period from                     to**

 

**Commissionfile number 1-14430**

****

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**MAXIMPHARMACEUTICALS, INC.**

(ExactName of Registrant as Specified in Its Charter)

 

| **Delaware** 

(State or Other Jurisdiction of Incorporation or  Organization)                  | ** ** | **87-0279983**

 (IRS Employer Identification No.) |
|------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------|
| ** **                                                                                           | ** ** | ** **                                              |
| **8899 University Center Lane,  Suite 400, San Diego, CA**

(Address of Principal Executive Offices) | ** ** | **92122**

 (Zip Code)                             |

 

**(858) 453-4040**

(Registrant’sTelephone Number, Including Area Code)

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                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 (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past90 days. Yes ý No o

 

                Indicate by check mark whether the registrant is anaccelerated filer (as defined in Rule 12b-2 of the Exchange Act).  Yes ýNo o

 

                The number of outstanding sharesof the registrant’s Common Stock, $.001 par value, as of January 26, 2005 was28,606,091.

 

 

 

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**MAXIM PHARMACEUTICALS, INC.AND SUBSIDIARIES**

*(A Development Stage Company)*

 

 

 

**               ****INDEX**

 

 
| ** **                             |                                                                                                                                                                           |   | **Page** |
|----------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|
| ** **                             |                                                                                                                                                                           |   |     |
| **Part  I—Financial Information** |                                                                                                                                                                           |   |     |
| Item  1.                               | Financial  Statements (unaudited)                                                                                                                                              |   |     |   |
|                                   | Condensed  Consolidated Balance Sheets—December 31, 2004 and September 30, 2004                                                                                      |   | 1        |
|                                   | Condensed  Consolidated Statements of Operations—Three Months Ended December 31, 2004  and 2003 and from Inception (October 23, 1989) through December 31, 2004      |   | 2        |
|                                   | Condensed  Consolidated Statements of Cash Flows—Three Months Ended December 31, 2004 and 2003 and from  Inception (October 23, 1989) through December 31, 2004 |   | 3        |
|                                   | Notes  to Condensed Consolidated Financial Statements                                                                                                                          |   | 4        |
| Item  2.                               | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                                                    |   | 8        |
| Item  3.                               | Quantitative  and Qualitative Disclosures About Market Risk                                                                                                                    |   | 27       |
| Item 4.                                | Controls and Procedures                                                                                                                                                        |   |     | 27 |
| **Part II—Other Information**     |                                                                                                                                                                           |   |     |
| Item 1.                                | Legal Proceedings                                                                                                                                                              |   |     | 29 |
| Item 6.                                | Exhibits                                                                                                                                                                       |   |     | 30 |
| **SIGNATURES**                         |                                                                                                                                                                           |   |     |   |

 

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**CONDENSEDCONSOLIDATED BALANCE SHEETS (Unaudited)**

**(inthousands, except share data)**

 

*MaximPharmaceuticals, Inc. and Subsidiaries (A Development Stage Company)*

 

 
| ** **                                                                                                                                                        | ** ** | ** **            | ** ** | ** **             | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|------------------------|------------|
| ** **                                                                                                                                                        | ** ** | **As of December 31** | ** ** | **As of September 30** | ** ** |
| ** **                                                                                                                                                        | ** ** | **2004**              | ** ** | **2004**               | ** ** |
| **ASSETS**                                                                                                                                                        |       |                  |       |                   |       |
| **Current Assets:**                                                                                                                                               |       |                  |       |                   |       |
| Cash and cash equivalents                                                                                                                                         | ** ** | **$**                 | **6,533**  |                   | $          | 10,658 |   |
| Investments in marketable securities, available for sale                                                                                                          | ** ** | **30,454**            |       | 38,746                 |       |
| Accrued interest and other current assets                                                                                                                         | ** ** | **1,758**             |       | 2,354                  |       |
| Total current assets                                                                                                                                              | ** ** | **38,745**            |       | 51,758                 |       |
|                                                                                                                                                              |       |                  |       |                   |       |
| Restricted cash and cash equivalents                                                                                                                              | ** ** | **3,500**             |       | 3,500                  |       |
| Property and equipment, net                                                                                                                                       | ** ** | **3,253**             |       | 3,579                  |       |
| Patents and licenses, net                                                                                                                                         | ** ** | **4,624**             |       | 4,393                  |       |
| Notes receivable from officer and former officer, net of allowance of  $2,930,000                                                                                 |       | **682**               |       | 682                    |       |
| Deposits and other assets                                                                                                                                         | ** ** | **118**               |       | 273                    |       |
| Total assets                                                                                                                                                      | ** ** | **$**                 | **50,922** |                   | $          | 64,185 |   |
|                                                                                                                                                              |       |                  |       |                   |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                     |       |                  |       |                   |       |
| **Current Liabilities:**                                                                                                                                          |       |                  |       |                   |       |
| Accounts payable                                                                                                                                                  | ** ** | **$**                 | **3,041**  |                   | $          | 5,311 |   |
| Accrued expenses                                                                                                                                                  | ** ** | **3,275**             |       | 4,177                  |       |
| Notes payable and current portion of long-term debt and obligations  under capital leases                                                                         |       | **758**               |       | 1,071                  |       |
| Deferred revenue                                                                                                                                                  | ** ** | **—**            |       | 131                    |       |
| Total current liabilities                                                                                                                                         | ** ** | **7,074**             |       | 10,690                 |       |
|                                                                                                                                                              |       |                  |       |                   |       |
| Long-term debt, excluding current portion                                                                                                                         | ** ** | **54**                |       | 96                     |       |
|                                                                                                                                                              |       |                  |       |                   |       |
| Commitments and contigencies                                                                                                                                      |       |                  |       |                   |       |
|                                                                                                                                                              |       |                  |       |                   |       |
| **Stockholders’ Equity:**                                                                                                                                    |       |                  |       |                   |       |
| Convertible preferred stock, $.001 par value, 5,000,000 shares authorized;  no shares issued and outstanding at December 31, 2004 and September 30, 2004          |       | **—**            |       | —                 |       |
| Common stock, $.001 par value, 60,000,000 shares authorized; 28,561,091  shares issued and outstanding at December 31, 2004 and September 30, 2004,  respectively |       | **28**                |       | 28                     |       |
| Additional paid-in capital                                                                                                                                        | ** ** | **405,088**           |       | 405,031                |       |
| Deficit accumulated during the development stage                                                                                                                  | ** ** | **(361,059**          | **)**      | (351,472               | )          |
| Accumulated other comprehensive loss                                                                                                                              | ** ** | **(263**              | **)**      | (188                   | )          |
| Total stockholders’ equity                                                                                                                                   | ** ** | **43,794**            |       | 53,399                 |       |
| Total liabilities and stockholders’ equity                                                                                                                   | ** ** | **$**                 | **50,922** |                   | $          | 64,185 |   |

 

 

*See Accompanying Notes to CondensedConsolidated Financial Statements*

 

 

1

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**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)**

**(inthousands, except per share amounts)**

 

*MaximPharmaceuticals, Inc. and Subsidiaries (A Development Stage Company)*

 

 
| ** **                                                                        | ** ** | ** **                          | ** ** | ** **  | ** ** | **From Inception**     | ** ** |
|-----------------------------------------------------------------------------------|------------|-------------------------------------|------------|-------------|------------|------------------------|------------|
| ** **                                                                        | ** ** | ** **                          | ** ** | ** **  | ** ** | **(October 23, 1989)** | ** ** |
| ** **                                                                        |       | **Three  Months Ended December 31** |       | **Through** |       |
| ** **                                                                        |       | **2004**                            |       | **2003**    |       | **December  31, 2004** |       |
|                                                                              |       |                                |       |        |       |                   |       |
| Collaboration and research revenue                                                | ** ** | **$**                               | **363**    | ** **  | $          | 1,419                  |       | $ | 19,299 |   |
|                                                                              |       |                                | ** ** |        |       |                   |       |
| Operating expenses:                                                               |       |                                | ** ** |        |       |                   |       |
| Research and development                                                          | ** ** | **6,949**                           | ** ** | 9,331       |       | 260,652                |       |
| Business development and marketing                                                |       | **982**                             | ** ** | 643         |       | 27,257                 |       |
| General and administrative                                                        | ** ** | **2,215**                           | ** ** | 1,766       |       | 49,193                 |       |
| Amortization of goodwill and other acquisition-related intangible  assets         |       | **—**                          | ** ** | —      |       | 2,955                  |       |
| Purchased in-process technology                                                   | ** ** | **—**                          | ** ** | —      |       | 42,300                 |       |
| Provisions for note receivable and loan guarantee to/for officers                 |       | **—**                          | ** ** | —      |       | 2,930                  |       |
| Total operating expenses                                                          | ** ** | **10,146**                          | ** ** | 11,740      |       | 385,287                |       |
|                                                                              |       |                                | ** ** |        |       |                   |       |
| Loss from operations                                                              | ** ** | **(9,783**                          | **)**      | (10,321     | )          | (365,988               | )          |
|                                                                              |       |                                | ** ** |        |       |                   |       |
| Other income (expense):                                                           |       |                                | ** ** |        |       |                   |       |
| Investment income                                                                 | ** ** | **208**                             | ** ** | 470         |       | 31,530                 |       |
| Gain on sale of assets                                                            | ** ** | **—**                          | ** ** | —      |       | 4,435                  |       |
| Interest expense                                                                  | ** ** | **(13**                             | **)**      | (23         | )          | (2,879                 | )          |
| Other income                                                                      | ** ** | **1**                               | ** ** | 3           |       | 22                     |       |
| Total other income                                                                | ** ** | **196**                             | ** ** | 450         |       | 33,108                 |       |
|                                                                              |       |                                | ** ** |        |       |                   |       |
| Loss before cumulative effect of accounting change and preferred  stock dividends |       | **(9,587**                          | **)**      | (9,871      | )          | (332,880               | )          |
|                                                                              |       |                                | ** ** |        |       |                   |       |
| Cumulative effect of accounting change                                            | ** ** | **—**                          | ** ** | —      |       | (28,179                | )          |
|                                                                              |       |                                | ** ** |        |       |                   |       |
| Net loss before preferred stock dividends                                         | ** ** | **(9,587**                          | **)**      | (9,871      | )          | (361,059               | )          |
| Dividends on preferred stock                                                      | ** ** | **—**                          | ** ** | —      |       | 5,496                  |       |
|                                                                              |       |                                | ** ** |        |       |                   |       |
| Net loss applicable to common stock                                               | ** ** | **$**                               | **(9,587** | **)**       | $          | (9,871                 | )          | $ | (366,555 | ) |
|                                                                              |       |                                | ** ** |        |       |                   |       |
| Basic and diluted net loss per share of common stock                              |       | **$**                               | **(0.34**  | **)**       | $          | (0.35                  | )          |   |   |
|                                                                              |       |                                | ** ** |        |       |                   |       |
| Weighted average shares outstanding                                               | ** ** | **28,561,091**                      | ** ** | 27,986,732  |       |                   |       |

 

 

* See Accompanying Notes to CondensedConsolidated Financial Statements*

 

 

2

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**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)**

**(In thousands)**

 

*Maxim Pharmaceuticals, Inc. and Subsidiaries (ADevelopment Stage Company)*

 
| ** **                                                                             | ** ** | ** **                         | ** ** | ** **  | ** ** | **From Inception**     | ** ** |
|----------------------------------------------------------------------------------------|------------|------------------------------------|------------|-------------|------------|------------------------|------------|
| ** **                                                                             | ** ** | ** **                         | ** ** | ** **  | ** ** | **(October 23, 1989)** | ** ** |
| ** **                                                                             | ** ** | **Three Months Ended December 31** | ** ** | **Through** | ** ** |
| ** **                                                                             | ** ** | **2004**                           | ** ** | **2003**    | ** ** | **December 31, 2004**  | ** ** |
| **OPERATING ACTIVITIES:**                                                              |       |                               |       |        |       |                   |       |
| Net loss                                                                               | ** ** | **$**                              | **(9,587** | **)**       | $          | (9,871                 | )          | $ | (361,059 | ) |
| Adjustments to reconcile net loss to net cash used in operating  activities:           |       |                               | ** ** |        |       |                   |       |
| Depreciation and amortization                                                          | ** ** | **433**                            | ** ** | 440         |       | 14,700                 |       |
| Stock contributions to 401(k) plan                                                     | ** ** | **—**                         | ** ** | —      |       | 643                    |       |
| Cumulative effect of accounting change                                                 | ** ** | **—**                         | ** ** | —      |       | 28,179                 |       |
| Stock-based compensation                                                               | ** ** | **57**                             | ** ** | 143         |       | 1,614                  |       |
| Loss on disposal of property and equipment                                             | ** ** | **—**                         | ** ** | 8           |       | 304                    |       |
| Provisions for note receivable and loan guarantees to/for officers                     |       | **—**                         | ** ** | —      |       | 2,930                  |       |
| Purchased in-process technology                                                        | ** ** | **—**                         | ** ** | —      |       | 44,946                 |       |
| Gain on sale of assets                                                                 | ** ** | **—**                         | ** ** | —      |       | (2,146                 | )          |
| Amortization of premium on investments                                                 | ** ** | **—**                         | ** ** | —      |       | 535                    |       |
| Cumulative effect of reorganization                                                    | ** ** | **—**                         | ** ** | —      |       | 1,153                  |       |
| Gain on sale of subsidiary                                                             | ** ** | **—**                         | ** ** | —      |       | (2,288                 | )          |
| Other                                                                                  | ** ** | **—**                         | ** ** | —      |       | 160                    |       |
| Changes in operating assets and liabilities:                                           |       |                               | ** ** |        |       |                   |       |
| Accrued interest and other current assets                                              | ** ** | **596**                            | ** ** | (79         | )          | 697                    |       |
| Deposits and other assets                                                              | ** ** | **155**                            | ** ** | (148        | )          | (614                   | )          |
| Accounts payable                                                                       | ** ** | **(2,270**                         | **)**      | (2,764      | )          | 1,949                  |       |
| Accrued expenses                                                                       | ** ** | **(902**                           | **)**      | 842         |       | 1,978                  |       |
| Deferred revenue                                                                       | ** ** | **(131**                           | **)**      | 833         |       | —                 |       |
| Net cash used in operating activities                                                  | ** ** | **(11,649**                        | **)**      | (10,596     | )          | (266,319               | )          |
|                                                                                   |       |                               | ** ** |        |       |                   |       |
| **INVESTING ACTIVITIES:**                                                              |       |                               | ** ** |        |       |                   |       |
| Purchases of marketable securities                                                     | ** ** | **—**                         | ** ** | (27,835     | )          | (503,492               | )          |
| Sales and maturities of marketable securities                                          | ** ** | **8,217**                          | ** ** | 15,150      |       | 473,278                |       |
| Purchases of property and equipment                                                    | ** ** | **(18**                            | **)**      | (111        | )          | (11,582                | )          |
| Additions to patents and licenses                                                      | ** ** | **(320**                           | **)**      | (371        | )          | (7,839                 | )          |
| Net proceeds from sale of assets                                                       | ** ** | **—**                         | ** ** | —      |       | 3,452                  |       |
| Cash acquired in acquisition of business                                               | ** ** | **—**                         | ** ** | —      |       | 1,121                  |       |
| Net cash provided by (used in) investing activities                                    | ** ** | **7,879**                          | ** ** | (13,167     | )          | (45,062                | )          |
|                                                                                   |       |                               | ** ** |        |       |                   |       |
| **FINANCING ACTIVITIES:**                                                              |       |                               | ** ** |        |       |                   |       |
| Net proceeds from issuance of common stock and exercise of stock  options and warrants |       | **—**                         | ** ** | 386         |       | 281,326                |       |
| Net proceeds from issuance of preferred stock                                          | ** ** | **—**                         | ** ** | —      |       | 41,298                 |       |
| Payment of preferred stock dividends                                                   | ** ** | **—**                         | ** ** | —      |       | (302                   | )          |
| Proceeds from issuance of notes payable, capital lease and long-term  debt             |       | **—**                         | ** ** | —      |       | 9,318                  |       |
| Restricted cash                                                                        | ** ** | **—**                         | ** ** | —      |       | (3,500                 | )          |
| Payments on notes payable, long-term debt, and capital lease  obligations              |       | **(355**                           | **)**      | (351        | )          | (10,266                | )          |
| Proceeds from issuance of notes payable to related parties                             |       | **—**                         | ** ** | —      |       | 4,982                  |       |
| Payments on notes payable to related parties                                           | ** ** | **—**                         | ** ** | —      |       | (1,330                 | )          |
| Loan to officer                                                                        | ** ** | **—**                         | ** ** | 122         |       | (3,612                 | )          |
| Net cash provided by (used in) financing activities                                    | ** ** | **(355**                           | **)**      | 157         |       | 317,914                |       |
|                                                                                   |       |                               | ** ** |        |       |                   |       |
| Net increase (decrease) in cash and cash equivalents                                   | ** ** | **(4,125**                         | **)**      | (23,606     | )          | 6,533                  |       |
|                                                                                   |       |                               | ** ** |        |       |                   |       |
| Cash and cash equivalents at beginning of period                                       | ** ** | **10,658**                         | ** ** | 32,861      |       | —                 |       |
|                                                                                   |       |                               | ** ** |        |       |                   |       |
| Cash and cash equivalents at end of period                                             | ** ** | **$**                              | **6,533**  | ** **  | $          | 9,255                  |       | $ | 6,533 |   |
|                                                                                   |       |                               | ** ** |        |       |                   |       |
| Noncash investing activities:                                                          |       |                               | ** ** |        |       |                   |       |
| Acquisition of property and equipment under capital lease                              | ** ** | **$**                              | **—** | ** **  | $          | —                 |       | $ | 270 |   |
| Increase (decrease) in fair value of securities available for sale                     |       | **$**                              | (75        | **)**       | $          | (258                   | )          | $ | 391 |   |
|                                                                                        |            |                                    |            |             |            |                        |            |  |  |  |  |  |

 

*See Accompanying Notes to Condensed ConsolidatedFinancial Statements.*

 

 

3

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**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)**

*Maxim Pharmaceuticals, Inc.and Subsidiaries (A Development Stage Company)*

 

**1.             PRINCIPLES OF INTERIM PERIOD REPORTING**

 

                MaximPharmaceuticals, Inc. (the “Company”) has not earned significant revenuesfrom planned principal operations. Accordingly, the Company’s activities havebeen accounted for as those of a “Development Stage Enterprise” as set forth inStatement of Financial Accounting Standards (“SFAS”) No. 7, “Accounting and Reporting by Development StageEnterprises”.

 

                The information at December 31, 2004 and for thethree months ended December 31, 2004 and 2003 and from inception (October 23,1989) through December 31, 2004 is unaudited. In the opinion of the Company,these condensed consolidated financial statements contain all of theadjustments, consisting only of normal recurring adjustments and accruals,necessary to present fairly the condensed consolidated financial position ofthe Company as of December 31, 2004 and September 30, 2004, and the condensedconsolidated results of operations for the three months ended December 31, 2004and 2003 and from inception (October 23, 1989) through December 31, 2004.The condensed consolidated results of operations for the three months endedDecember 31, 2004 are not necessarily indicative of the results to be expectedin subsequent periods or for the year as a whole. For further information,refer to the consolidated financial statements and footnotes thereto in ourAnnual Report on Form 10-K for the year ended September 30, 2004.

 

**2.             SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES**

 

                *StockOption Plans*-The Company accounts for its stock option plans under the recognition andmeasurement principles of APB Opinion No. 25, “Accounting for Stock Issued toEmployees”,**and relatedInterpretations.  Compensation expenseassociated with stock options to employees was $52,000 and $46,000 for thethree months ended December 31, 2004 and 2003, respectively.  Compensation expense to non-employees was$5,000 and $97,000 for the three months ended December 31, 2004 and 2003,respectively.  No other stock-basedemployee compensation cost is reflected in net loss, as all options grantedunder our stock option plans had an exercise price equal to the market value ofthe underlying common stock on the date of grant.  The following table illustrates the effect onnet loss and loss per share if the Company had applied the fair valuerecognition provisions of SFAS No. 123, “Accounting for Stock-BasedCompensation”,**to stock-basedemployee compensation, in thousands, except per share data.

 
| ** **                                                                                                              | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                                              | ** ** | **December 31, 2004**  | ** ** | **December 31, 2003** | ** ** |
| Net loss, as reported                                                                                                   |       | $                      | (9,587     | ) | $ | (9,871 | ) |
| Add: Total stock-based employee compensation (expense) credit  determined under fair value based methods for all awards |       | 40                     |       | (605 | ) |
| Less: Compensation expense associated with stock options                                                                |       | 52                     |       | 46 |   |
| Pro forma net loss                                                                                                      |       | $                      | (9,495     | ) | $ | (10,430 | ) |
|                                                                                                                    |       |                   |       |   |   |
| Net loss per share:                                                                                                     |       |                   |       |   |   |
| Basic and diluted - as reported                                                                                         |       | $                      | (0.34      | ) | $ | (0.35 | ) |
| Basic and diluted - pro forma                                                                                           |       | $                      | (0.33      | ) | $ | (0.37 | ) |

 

 

4

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The fair value of the stock options were estimatedat the date of grant using the “Black-Scholes” method for option pricing andthe following weighted-average assumptions were used for grants made during thethree months ended, December 31, 2004 and 2003, respectively:

 
| ** **                   | ** ** | **Three Months Ended** | ** ** |
|------------------------------|------------|------------------------|------------|
| ** **                   | ** ** | **December 31, 2004**  | ** ** | **December 31, 2003** | ** ** |
| Risk free interest rate      |       | 3.00%                  |       | 2.56% |   |
| Dividend Yield               |       | 0                      |       | 0 |   |
| Volatility Factor            |       | 83%                    |       | 75% |   |
| Expected Life (in years)     |       | 3.6                    |       | 4.5 |   |
| Resulting average fair value |       | $                      | 1.30       |   | $ | 4.12 |   |
|                              |            |                        |            |  |  |  |  |

 

**3.             TOTAL OTHER COMPREHENSIVE LOSS**

 

                Total other comprehensive loss for the three monthsended December 31, 2004 and 2003 was $9,662,000 and $10,129,000, respectively.  The difference between total othercomprehensive loss and net loss attributable to common stock was comprised of anet unrealized loss on available-for-sale securities.

 

**4.             NET LOSS PER SHARE**

 

                Net loss per share is calculated in accordance withSFAS No. 128, “Earnings per Share”. Basic net loss per share of commonstock is computed by dividing the net loss after deduction of dividends onpreferred stock by the weighted average number of shares of common stockoutstanding during the period. Diluted net loss per share is calculated byincluding the additional common shares issuable upon exercise of outstandingoptions and warrants in the basic weighted average share calculation unless theeffect of their inclusion is antidilutive. For the three months ended December 31, 2004 and 2003, outstandingoptions and warrants totaled 5,943,000 and 5,602,000, respectively.  As these securities were antidilutive,diluted net loss per share equaled basic loss per share in each respectiveperiod.

 

**5.             DEFERRED RENT**

 

                Inaccordance with SFAS No.13, “Accounting for Leases”, the Company recordsoperating lease rent expenses on a straight-line basis over the lease term,which causes the amount expensed in our financial statements to vary from theactual amounts paid during the period. This variance is recorded as deferred rent and included in AccruedExpenses.  As of December 31, 2004 andSeptember 30, 2004, the deferred rent balance was $687,000 and $679,000,respectively.

 

**6.             RESTRUCTURING**

 

                InOctober 2004, the Company implemented a restructuring plan which resulted fromthe negative outcome of the Company’s confirmatory Phase 3 clinical trial ofCeplene in advanced malignant melanoma patients with liver metastases.  The restructuring plan included a reductionin the Company’s workforce of approximately 50%.  The cost of the severance packages 

 

5

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associated with the restructuring, includingpay, benefits continuation and outplacement services, totaled approximately$1,189,000 which was expensed in the three months ended December 31, 2004.  Of the total restructuring chargesapproximately $863,000 was included in research and development expense,approximately $115,000 was included in business development and marketing expenseand approximately $211,000 was included in general and administrativeexpense.  Through December 31, 2004,approximately $925,000 of this amount was paid and the remaining $264,000 willbe paid through April 30, 2005.

 

**7.             RELATED PARTY TRANSACTIONS**

 

                InDecember 2000, the Company entered into a $2.85 million full recourse securedrevolving promissory note with an officer of the Company.  The note bears interest at an annual rate of4.0% and is secured by the officer’s outstanding options and shares of commonstock. During the quarter ended September 30, 2002, the Company determined thatthe note to the officer had become impaired because the Company determined thatthe officer did not have the ability to repay the loan in full when due andrecorded an allowance on the note in the amount of $700,000.  In addition, the Company has not recordedinterest income of $308,000 on the note subsequent to June 30, 2002.  During the quarter ended September 30, 2004,the Company recorded $1,333,000 of expense to increase the allowance on thenote related to the decrease in the value of the Company stock and stockoptions held by the officer collateralizing the note, following the negativeresults of the Company’s confirmatory Phase 3 clinical trial of Ceplene in advancedmalignant melanoma patients with liver metastases released in September 2004,and the subsequent decrease in the price of the Company’s common stock.  The entire outstanding balance of principaland interest was due in December 2002. Since the note came due, the officer has not had sufficient liquidassets to repay the loan in full, however, the officer has paid the Company$394,000 related to the note.   TheCompany is continuing to review its options and alternatives and intends tocontinue to pursue collection on the loan. As of December 31, 2004, therecorded outstanding principal and interest balance on the note was $682,000,net of the $2,033,000 allowance.

 

At December 31, 2004, the Company was owed $910,000,including $13,000 of unrecorded interest, from a former officer resulting fromunpaid loans, due in July 2004, that the individuals had with a bank, which theCompany guaranteed in July 2001.  Thepurpose of the bank loans was to allow the payment of income taxes associatedwith the exercise of stock options.  TheBoard determined that it was in the Company’s best interest to provide theguarantees to avoid the necessity of the officer selling personal holding ofthe Company’s securities during a period of depressed market prices.  During the fourth quarter of fiscal year2002, the Company had determined that it was probable that this former officerwould not have the ability to repay his bank loan.  Therefore, the Company had recorded aprovision for the guarantee and a liability in the amount of $900,000.  The former officer does not currently havethe assets necessary to repay the Company. The Company holds the stock options of the former officer as collateral.  The Company is reviewing its options andalternatives, has full recourse and intends to continue to pursue collection ofthe amount from the former officer.  Asof December 31, 2004, the recorded outstanding principal and interest balanceon the loan was $0, net of the $897,000 allowance.

 

**8.****                                     ****CONTINGENCIES**

 

                InOctober 2001 and May 2002, certain former shareholders of Cytoviafiled complaints 

 

 

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in California Superior Court in San Diego,against the Company and two of its officers, alleging fraud and negligentmisrepresentation in connection with the Company’s acquisition of Cytovia. Abinding arbitration proceeding with the American Arbitration Association washeld in May 2003. The three-member arbitration panel rejected all of theplaintiffs’ claims, determined that the Company has no liability for suchclaims and awarded recovery of the Company’s reasonable attorneys’ fees andcosts of approximately $922,000 as prevailing party in the proceedings.  In December 2003, the decision wasconfirmed by the Superior Court, which entered a judgment to this effect.  In June 2004, the plaintiffs filed anAppeal.  On December 10, 2004, the Courtof Appeal reversed the judgment of the Superior Court and remanded the lawsuitto the trial court for further proceedings. The Company has filed a petition tothe California Supreme Court seeking further appellate review and intends tocontinue vigorously defending against these claims.

 

On September 21, 2004,plaintiff Dr. Richard Bassin, on behalf of himself and purportedly on behalf ofa class of others similarly situated, filed a complaint in the United StatesDistrict Court for the Southern District of California against the Company, oneofficer of the Company and one former officer of the Company, allegingviolations of federal securities laws related to declines in the Company’sstock price in connection with various statements and alleged omissions to thepublic and to the securities markets during the class period from November 11,2002 to September 17, 2004, and seeking damages therefore.  Thereafter two similar complaints were filedin the Southern District.  The Companyexpects that all three of the Southern District complaints will be consolidatedinto a single action.  No discovery hasbeen conducted.  The complaints have beentendered to the Company’s insurance carrier, which has initially deniedcoverage.  The Company disputes theinitial position taken by the insurance carrier and fully intends to enforceits rights under the policy.

 

On October 7, 2004, plaintiff JesusPutnam, purportedly on behalf of the Company, filed a derivative complaint inthe Superior Court for the State of California, Count of San Diego, against oneofficer of the Company, two former officers of the Company and the Company’sentire Board of Directors, alleging breach of fiduciary duty, abuse of control,gross mismanagement, waste of corporate assets, unjust enrichment andviolations of the California Corporations Code, all of which arise fromallowing purported violations of federal securities laws related to declines inthe Company’s stock price in connection with various statements and allegedomissions to the public and to the securities markets, and seeking damagestherefore.  No discovery has beenconducted, and plaintiff’s counsel has stipulated to stay the action pendingresolution of a motion to dismiss the federal actions.  The complaint has been tendered to theCompany’s insurance carrier, which has initially denied coverage.  The Company disputes the initial positiontaken by the insurance carrier and fully intends to enforce its rights underthe policy.

 

                The Company intends to engage in a rigorous defenseagainst such claims.  No assurances canbe made that the Company will be successful in its defense of the pendingclaims. If the Company is not successful in its defense of such claims, theCompany could be forced to, among other things, make significant payments toresolve these claims, and such payments could have a material adverse effect onthe Company’s business, financial condition and results of operations if notcovered by the Company’s insurance carrier.  The Company has not accrued any expensesrelated to the above claims as the extent or range of such payments, if any,cannot yet be reasonably estimated.  Further,regardless of success of the litigation, the litigation itself may result insubstantial costs and divert management’s attention and resources, all of whichcould adversely affect the Company’s business.

 

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**ITEM 2.  MANAGEMENT’S DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

*                MaximPharmaceuticals, Inc. and Subsidiaries (A Development Stage Company)*

 

*This Management’s Discussion and Analysis of FinancialCondition and Results of Operations contains certain forward-looking statementsthat involve risks and uncertainties. Such forward-looking statements includebut are not limited to statements regarding plans for the development andcommercialization of our drug candidates and future cash requirements. Suchstatements are only predictions and our actual results could differ materiallyfrom those anticipated or projected in such forward-looking statements.Moreover, we assume no responsibility for the accuracy and completeness of theforward-looking statements.  We are underno duty to update any of the forward-looking statements after the date hereofto conform such statements to actual results or to changes in ourexpectations.  Factors that could causeor contribute to such differences include, but are not limited to, thosediscussed in the section entitled “Risk Factors” contained in this QuarterlyReport. As a result, you are cautioned not to rely on these forward-lookingstatements.*

 

*This Management’s Discussion and Analysis of FinancialCondition and Results of Operations should be read in conjunction with thecondensed consolidated financial statements, including the related notes,appearing in Item 1 of this Quarterly Report on Form 10-Q as well as theCompany’s Annual Report on Form 10-K for the year ended September 30, 2004.*

 

#### **OVERVIEW**

 

We are a global bio-pharmaceutical company with adiverse pipeline of drug candidates for life-threatening cancers and chronicliver diseases.  During the periodsencompassed by this Quarterly Report, we have devoted substantially all of ourresources to our CepleneTM (histamine dihydrochloride) and apoptosis modulatorproduct development programs. In June 2000, we acquired Cytovia, Inc., orCytovia, for $72.9 million in common stock and commenced at that time researchand development efforts relating to apoptosis modulator drug candidates. Weconduct our research and other product development efforts through acombination of internal efforts and collaborative programs with universities,other clinical research sites, contract research organizations andpharmaceutical companies. Oversight of all external and collaborative programsis conducted by our executive officers and other staff located primarily at ourheadquarters in San Diego, California.

 

Our lead drug candidate CepleneTM (histaminedihydrochloride) is designed to prevent or reverse damage associated withoxidative stress, thereby protecting critical cells and tissues. BecauseCeplene modulates basic immune functions, it has the potential to be used inthe treatment of a broad range of diseases in which oxidative stress plays animportant role. More than 2,000 patients have participated in our 17 completedand ongoing clinical trials of Ceplene, conducted in 20 countries.  In May 2004, we announced the results of ourinternational Phase 3 clinical trial testing the combination of Ceplene plusInterleukin-2, or IL-2, in 320 patients with acute myeloid leukemia, or AML, incomplete remission.  The primary endpointof the Phase 3 trial was achieved using intent-to-treat analysis, as patientstreated with the Ceplene/IL-2 combination therapy experienced a statisticallysignificant (p=0.0096) increase in leukemia-free survival compared to patientsin the control arm of the trial as assessed by the stratified log-ranktest.  AML patients are typically treatedwith chemotherapy to achieve disease remission, but the majority of patientswill ultimately relapse.  The prognosis forAML patients after relapse is 

 

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dismal, with few long-term survivors.  The Ceplene therapy treats patients duringremission (after chemotherapy) with the goal to increase their remission periodand prevent relapses.

 

On January 18, 2005, we announced that based onongoing correspondence with the United States Food and Drug Administration, orFDA, as well as consultations with external advisors, an additional Phase 3clinical trial will be necessary to further evaluate Ceplene/IL-2 combinationtherapy for the treatment of AML patients in complete remission before applyingfor regulatory approval by the FDA in the United States. We will continuediscussions with the FDA regarding trial design, however, given the time andcosts required to conduct another Phase 3 clinical trial, we believe that anysuch trial would need to be done in collaboration with a corporatepartner.  We intend to pursue partneringopportunities in the United States related to Ceplene for the treatment of AML.We are also continuing discussions with European Regulators to determine if anadditional Phase 3 clinical trial is necessary for European regulatoryapproval. We will continue to evaluate strategic options related to the aboveoutcomes.

 

In September 2004, we announced that the confirmatoryPhase 3 trial, or M0104 trial, for the treatment of advanced malignant melanomapatients with liver metastases failed to demonstrate an improvement in overallpatient survival.  As a result wewithdrew our United States New Drug Application, or NDA, seeking approval of Ceplenetherapy to treat advanced malignant melanoma patients with liver metastases andclosed the treatment protocol approved in April 2004 by the FDA.  In addition, in October 2004 we implemented arestructuring plan that included a reduction of approximately 50% of ourworkforce, primarily in the area of research and development, to allowsufficient funds to support our operations. We expensed the total cost of the restructuring, approximately$1,189,000, in the three months ended December 31, 2004.  We expect the workforce reduction to lowerwhat would otherwise be our quarterly expense by $1,107,000.

 

We have on-goingtrials of Ceplene that involve the following diseases:

 

•     Renal cell carcinoma(kidney cancer); and

 

•     Hepatitis C, the mostcommon blood-borne virus in the United States.

 

Clinical trials completed to date have suggested thatCeplene can be safely self-administered by most patients in their own homes.

 

Our researchers have also identified a series of novelcancer drug candidates that are potent inducers of apoptosis, also known asprogrammed cell death. The compounds were identified through our proprietaryhigh-throughput screening technology that uses a unique live cell screeningassay. We have screened approximately one million compounds and have identifieddrug candidates with unique mechanisms of action that target major cancers suchas breast, lung, prostate, and colorectal. We are currently pursuing the outlicensing of these apoptosis compoundsand evaluating whether to independently move one apoptosis compound to anInvestigational New Drug, or IND, filing.

 

Our development activities are supported by clinicalcollaborations with Schering Plough, Myriad Genetics, and Chiron Corporation.

 

Our drug candidates arein the development stage, and the generation of revenue from product sales

 

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 is dependent upon approval by the FDA andinternational regulatory agencies. We expect to continue to incur losses atleast over the next several years as we continue our research and developmentactivities, particularly those relating to Phase 2 and Phase 3 clinical trialsof Ceplene, and earlier-stage clinical trials and other research related to theapoptosis modulator technology. Losses may fluctuate from quarter to quarter,and such fluctuations may be substantial as a result of, among other factors,the number and timing of clinical trials conducted, the funding, if any,provided as a result of corporate collaborations, the results of clinicaltesting, and the timing of FDA or international regulatory filings andapprovals. There can be no assurance that we will successfully develop,commercialize, manufacture or market its products or ever achieve or sustainproduct revenues or profitability.

 

# **CRITICAL ACCOUNTINGPOLICIES**

 

                The preparationof consolidated financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires us to makeestimates and judgments that affect the reported amounts of assets,liabilities, revenues and expenses as well as related disclosure of contingentassets and liabilities. These estimates include useful lives for fixed assets,useful lives for intellectual property, estimated lives for license agreements,revenue recognition, allowance for notes receivable, valuation of intellectualproperty, and estimates for clinical trial expenses incurred but not yetbilled.  On an on-going basis, weevaluate our estimates. We base our estimates on historical experience and variousother assumptions that are believed to be reasonable under the circumstances.Under different assumptions or conditions these estimates may varysignificantly. In addition, actual results may differ materially from theseestimates.

 

We believe the followingcritical accounting policies affect our more significant judgments andestimates used in the preparation of our consolidated financial statements.

 

*               **RevenueRecognition.*  Revenue isgenerally recognized when all of the following criteria are met: persuasiveevidence that an arrangement exists; services have been rendered and arenon-refundable; the price is fixed and determinable; and collection isreasonably assured.  All multipledeliverable arrangements are reviewed by us for separability in accordance withEITF 00-21.  If the separability criteriaare met, non-refundable upfront technology access fees are accounted forseparately.  Upfront technology accessfees which are not considered separable from the related research fees arerecognized as revenue over the applicable research period as researchactivities are performed. Milestone payments are recognized when earned andcollectibility is assured provided that the milestone events are substantiveand the payments approximate the fair value of the milestone. Amounts receivedbut unearned are recorded as deferred revenue. We are provided with donated materials and services pursuant to theterms of certain of our collaborative agreements.  These donated materials and services arerecorded as revenue and expense when used at the fair market value of thematerial received or the service provided. Grant funding is recognized as revenue when services are performed underthe grant.

 

*Clinical trial expenses.*  We account for certain study drug, clinical trialsite and other clinical trial costs by estimating the services incurred but notreported for each patient enrolled in each trial. These costs and estimatesvary based on the type of clinical trial, the site of the clinical

 

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trial, the length of treatment period foreach patient and the length of time required to receive formal documentation ofthe actual expenses incurred. As actual costs become known, we may need torevise our estimated accrual, which could also materially affect our results ofoperations.

 

*Valuation of Intellectual Property.*  We evaluate our patents and licenses forimpairment on an annual basis and whenever indicators of impairment exist.During this process, we review our portfolio of pending domestic andinternational patent applications, domestic and international issued patents,and licenses we have acquired from other parties. To determine if anyimpairment is present, we consider challenges or potential challenges to itsexisting patents, the likelihood of applications being issued, the scope of itsissued patents, the assessment of future cash flows to be generated from thepatents and its experience. In the event that it is determined that animpairment exists where we had previously determined that one did not exist, itmay result in a material adjustment to our financial statements.

 

**RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDEDDECEMBER 31, 2004 AND 2003**

 

*                Collaborationand Research Revenue*—For the quarter ended December31, 2004, collaboration and research revenue was $363,000, a decrease of$1,056,000 or 74% compared to the same period in the prior year.  This decrease was primarily attributable to adecrease in donated drugs and services from Schering Corporation which provided$6,000 in the current quarter and $1,041,000 in the same quarter of theprevious year. The decrease in donated drugs and services from Schering was dueto a lower number of patients in the treatment phase of our Phase 2 trial, orM0406 trial, which is also known as the Phase 2 triple-drug trial innonresponder HCV patients. Other revenue recognized during the quarter amountedto $357,000 from license and research agreements with Myriad GeneticsCorporation and Promega Corporation, along with a grant from the NationalInstitute of Health.

 

*Research and Development Expenses*—Research and development expenses for the quarter ended December 31,2004 totaled $6,949,000, a decrease of $2,382,000 or 26% over the same periodin the prior year.  This decreasewas primarily the result of decreased expenses resulting from the current stateof our M0406 trial and our M0104 trial, the results of which were announced inSeptember 2004.  In the future we expectto continue incurring substantial research and development expenses due to:

 

•                  research related to ourapoptosis modulator program;

•                  preclinical and clinicaltesting of our product candidates;

•                  the completion of ourongoing Ceplene clinical trials; and

•                  regulatory-related expenses.

 

*Business Development andMarketing Expenses*—Business development andmarketing expenses for the quarter ended December 31, 2004 were $982,000, anincrease of $339,000 or 53% over the same period of the prior year.  This increase was due to anincrease in premarketing activities associated with the potential market launchof Ceplene, primarily related to attendance at industry conferences.

 

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*                Generaland Administrative Expenses*—Forthe quarter ended December 31, 2004, general and administrative expenses were$2,215,000, an increase of $449,000 or 25% from the same period in the prioryear which was primarily due to an increase in accounting, legal and consultingexpenses.

 

*                OtherIncome*—Investment income was $208,000 for the quarterended December 31, 2004, a decrease of $262,000 or 56% from the same period inthe prior year.  This decrease wasprimarily the result of a decrease in our cash and short-term investmentsbalances.

 

*                NetLoss Applicable to Common Stock*—Netloss applicable to common stock for the quarter ended December 31, 2004 totaled$9,587,000, a decrease of $284,000 or 3% from the same period in the prioryear. This decrease was primarily a result of the decrease in research anddevelopment expenses, partially offset by increases in marketing and businessdevelopment and general and administrative expenses and the decrease incollaboration and research revenue, as described above.

 

#### **LIQUIDITY ANDCAPITAL RESOURCES**

 

                We have financed our operationsprimarily through the sale of our equity securities providing total netproceeds of approximately $323 million, including an initial public offering in1996, an international follow-on public offering in 1997, private offerings ofpreferred stock in July and November 1999, a follow-on public offering inFebruary 2000, and a private placement of common stock in September 2003.

 

                Until required for operations,our policy under established guidelines is to keep our cash reserves in bankdeposits, corporate debt securities, United States government instruments andother readily marketable debt instruments, all of which are investment-gradequality.  As of December 31, 2004, we hadcash, cash equivalents and investments (including restricted cash of $3.5million) totaling approximately $40.5 million compared with $52.9 million atSeptember 30, 2004.  As of December 31,2004, we had working capital of approximately $31.7 million compared with $41.1million at September 30, 2004.  Thedecrease in our cash, cash equivalents and short-term investments, and workingcapital was primarily due to day-to-day operating expenses relating to researchand development activities.

 

                InDecember 2000, we entered into a $2.85 million full recourse secured revolvingpromissory note with one of our officers. The note bears interest at an annual rate of 4.0% and is secured by theofficer’s outstanding options and shares of common stock.  During the quarter ended September 30, 2002,we determined that the note to the officer had become impaired because we determinedthat the officer did not have the ability to repay the loan in full when dueand recorded an allowance on the note in the amount of $700,000.  In addition, we have not recorded interestincome of $308,000 on the note subsequent to June 30, 2002.  During the quarter ended September 30, 2004,we recorded $1,333,000 of expense to increase the allowance on the note relatedto the decrease in the value of the Company stock and stock options held by theofficer collateralizing the note, following the negative M0104 trial resultsreleased in September 2004, and the subsequent decrease in the price of ourcommon stock.  The entire outstandingbalance of principal and interest was due in December 2002.  Since the note came due, the officer has nothad sufficient liquid assets to repay the loan in full, however, the officer 

 

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has paid us $394,000 related to the note.   We are continuing to review our options andalternatives and intend to continue to pursue collection on the loan. As ofDecember 31, 2004, the recorded outstanding principal and interest balance onthe note was $682,000, net of the $2,033,000 allowance.

 

At December 31, 2004, we were owed $910,000, including$13,000 of unrecorded interest, from a former officer resulting from unpaidloans, due in July 2004, that the individuals had with a bank, which weguaranteed in July 2001.  The purpose ofthe bank loans was to allow the payment of income taxes associated with theexercise of stock options.  The Boarddetermined that it was in our best interest to provide the guarantees to avoidthe necessity of the officer selling personal holding of our securities duringa period of depressed market prices. During the fourth quarter of fiscal year 2002, we had determined that itwas probable that this former officer would not have the ability to repay hisbank loan.  Therefore, we had recorded aprovision for the guarantee and a liability in the amount of $900,000.  The former officer does not currently havethe assets necessary to repay us.  Wehold the stock options of the former officer as collateral.  We are reviewing our options andalternatives, have full recourse and intend to continue to pursue collection ofthe amount from the former officer.  Asof December 31, 2004, the recorded outstanding principal and interest balanceon the loan was $0, net of the $897,000 allowance.

 

                We have term loans with a banktotaling $602,000 at December 31, 2004, the proceeds of which were used tofinance capital expenditures.  The termloan agreements contain customary affirmative and negative covenants, includingfinancial covenants requiring the maintenance of specified liquidity terms andthe maintenance of our principal depository and operating accounts with the bank.  In addition, we have the choice to eithermaintain a minimum aggregate balance of $3,500,000 at the institution or to paythe bank a quarterly fee of $2,500. During the quarter ended December 31, 2004, we maintained the minimumaggregate balance noted above at the bank and were in compliance with allcovenants.

 

Thefollowing table summarizes our contractual obligations as of December 31, 2004:

 
| ** **                   | ** ** | **Payments due by Period (in thousands)** | ** ** |
|------------------------------|------------|-------------------------------------------|------------|
| ** **                   | ** ** | **Total**                                 | ** ** | **Less than 1 Year** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **More than 5 Years** | ** ** |
| ** **                   | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **CONTRACTUAL  OBLIGATIONS** | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Debt                         | ** ** | $                                         | 796        |   | $ | 742 |   | $ | 54 |   | $ | — |   | $ | — | ** ** |
| Capital Lease  Obligations   |       | 16                                        |       | 16 |   | — |   | — |   | — |   |
| Severance  Obligations       |       | 264                                       |       | 264 |   | — |   | — |   | — |   |
| Operating Lease Commitments  |       | 9,895                                     |       | 1,829 |   | 3,810 |   | 3,265 |   | 991 |   |
|                              |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

As a development stageenterprise, we anticipate incurring substantial additional losses at least inthe near future as we continue to expend substantial amounts on our ongoing andplanned clinical

 

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 trials and our expanded efforts related to ourother research and development efforts, including the apoptosis modulatorprogram.  In addition, our cashrequirements may fluctuate in future periods as we conduct additional researchand development activities, including clinical trials, and undertake effortsassociated with the commercial launch of any product candidates that areapproved for sale by government regulatory bodies.  Among the activities that may result in an increasein cash requirements are the scope and timing of the Phase 3 Ceplene cancertrials that we recently completed in melanoma, M0104, and AML, M0201, and Phase2 Ceplene renal cell carcinoma, S02 and S04, and hepatitis C, M0406, clinicaltrials currently underway, and earlier-stage clinical trials with HD-O andother research related to liver disease and the apoptosis modulator and topicalhistamine technologies. Other factors that may impact our cash requirementsinclude the results of clinical trials, the scope of other research and developmentactivities, the time required to obtain regulatory approvals, costs associatedwith defending certain lawsuits currently pending against us, the costs offiling, prosecuting, defending and enforcing patent claims and otherintellectual property rights, and the ability to establish marketing alliancesand collaborative arrangements. As a result of these factors, it is difficultto predict accurately the timing and amount of future cash requirements.

 

Webelieve that our available cash, cash equivalents and investments at December31, 2004 will be sufficient to satisfy our funding needs for at least the next12 months.  To meet our cashrequirements, we may pursue the issuance of additional equity securities andcorporate collaborative agreements. In December 2003, we filed a shelfregistration statement, which will allow us to raise up to $75 million throughthe sale of various securities in one or more offerings in the future.  Specific prices and terms will be determinedat the time of any offering.  Theissuance of additional equity securities, if any, could result in substantialdilution to our stockholders. There can be no assurance that additional fundingwill be available on terms acceptable to us, if at all. The failure to fund ourcapital requirements would have a material adverse effect on our business,financial condition and results of operations.

 

We arecurrently pursuing a pharmaceutical collaboration regarding the marketingrights for Ceplene and are pursuing the out-licensing of certain of ourapoptosis modulator technologies.  Forinstance, in March 2004, we announced that we entered into an agreement withShire BioChem Inc. under which we reacquired the rights to the MX2105 series ofvascular targeting agent cancer drug candidates. The MX2105 series wasoriginally licensed in July 2000 to BioChem Pharma, a company that wassubsequently acquired by Shire Pharmaceuticals. In July 2003, Shire announcedthat it was exiting the field of oncology research, creating the opportunityfor us to reacquire the rights to the MX2105 series of compounds.  We are currently pursuing the out-licensingof these compounds and in the case of the apoptosis compound evaluating whetherto independently move this apoptosis compound to an IND filing.

 

InNovember 2003, we entered into an agreement with Myriad under which we licensedour MX90745 series of caspase-inducer anti-cancer compounds to Myriad.  The agreement requires that Myriad makelicensing, research and milestone payments to us totaling up to $27 million, assumingthe successful commercialization of the compound for the treatment of cancer,as well as pay a royalty on product sales. In December 2004, Myriad filed an IND with the FDA to begin humanclinical trials with this compound. There can be no assurance that we will be able to enter into anyadditional agreements on acceptable terms, if at all.

 

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InSeptember 2004, a complaint was filed in Federal Court against us, one officerand one former officer alleging violations of federal securities laws.  Thereafter two similar complaints werefiled.  In October 2004, a derivativecomplaint was filed against one officer, two former officers and our entireBoard of Directors alleging, among other things, breach of fiduciary dutyarising from allowing purported violations of federal securities laws.  These complaints are more fully discussed inthe section entitled Risk Factors contained herein and in footnote 8, “Contingencies”to these condensed consolidated financial statements.  No discovery has been conducted.  The complaints have been tendered to ourinsurance carrier, however, our carrier has initially denied coverage for theseclaims.  We dispute the position taken byour insurance carrier and intend to enforce our rights under the policy.  No assurances can be made as to whether wewill be successful in our defense of the pending claims. If we are notsuccessful in our defense of such claims, we could be forced to, among otherthings, make significant payments to resolve these claims.  To the extent such payments are not coveredby our insurance carrier, they would have a material adverse effect on ourliquidity and capital resources, including the possibility that such paymentscould fully deplete our cash resources.

 

We have never paid a cash dividend on our common stock andsuch payments are prohibited by the terms of our bank loan. We do notcontemplate the payment of cash dividends on our common stock in theforeseeable future.

 

**IMPACT OF INFLATION**

 

The impact of inflation on the operations of the Company for the threemonths ended December 31, 2004 and 2003 was not material.

 

#### **RECENT ACCOUNTINGPRONOUNCEMENTS**

 

In October 2004, the Financial AccountingStandards Board, or FASB, issued Statement 123R, “Share-Based Payment”. The statement is effective at the beginning of the first interim periodbeginning after June 15, 2005.  This statement requires the measurement ofcompensation costs for all share-based payments to employees, including grantsof employee stock options, at fair value. This statement would also eliminatethe ability to account for share-based compensation transactions using APBOpinion No. 25.  We are currently evaluating the effect that the adoptionof Statement 123R will have on our financial position and results ofoperations.

 

In March 2004, the FASB’s Emerging IssuesTask Force issued EITF 03-1, “The Meaning of Other-Than-Temporary Impairmentand Its Application to Certain Investments”*.* EITF 03-1 requires a three-step model to determine other-than-temporaryimpairments for all current and future investments in marketable securities,which was originally effective for interim and annual reporting periodsbeginning after June 15, 2004.  In September 2004, the FASB delayed therequirement to record impairment losses under EITF 03-1 until new guidance isissued.  We do not expect that the adoption of EITF 03-1 will have amaterial impact on our operating results and financial position.

 

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**RISK FACTORS**

 

You should carefully consider the following risk factorsand the other information included herein as well as the information includedin our Annual Report on Form 10-K for the fiscal year ended September 30, 2004,and other reports and filings made with the Securities and Exchange Commissionbefore investing in our common stock. If any of the following risks actuallyoccur, our business, financial condition or results of operations could beharmed. The trading price of our common stock could decline due to any of theserisks, and you may lose part or all of your investment.

 

**The development ofour drug candidates is subject to uncertainties, many of which are beyond ourcontrol. If we fail to successfully develop our drug candidates, our ability togenerate revenues will be substantially impaired.**

 

Potential products based on our Ceplene, apoptosismodulator and topical histamine gel technologies will require, dependent uponthe specific drug candidate, extensive research and development, preclinicaltesting, clinical testing, collaborative partners to conduct certain clinicaltrials, regulatory approval and substantial additional investment before we canmarket them. We cannot assure you that any of our drug candidates will:

 

•              be successfully developed;

 

•              prove to be safe and effective inclinical trials;

 

•              meet applicable United States orinternational regulatory standards;

 

•              be capable of being produced incommercial quantities at acceptable costs;

 

•              be commercially viable;

 

•              beeligible for third party reimbursement from governmental or private insurers;or

 

•              achieve market acceptance.

 

For example, in September 2004, we announced that ourconfirmatory M0104 trial of Ceplene in combination with IL-2 for the treatmentof advanced malignant melanoma patients with liver metastases failed todemonstrate an improvement in overall patient survival, the primaryendpoint.  As a result we withdrew ourpending NDA seeking approval of Ceplene therapy to treat advanced malignantmelanoma patients with liver metastases.

 

We have not completed final testing for efficacy orsafety in humans for the diseases we propose to treat with Ceplene and ourother drug candidates. Failure to ultimately obtain approval for Ceplene andour other drug candidates, any delay in our expected testing and developmentschedules, the failure to engage a collaborative partner, or any elimination ofa product 

 

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development program in itsentirety, will negatively impact our ability to generate revenues in the futurefrom the sale of our product candidates.

 

**We may not obtainregulatory clearance to market Ceplene or our other drug candidates on a timelybasis, or at all.**

 

Ceplene and our other drug candidates are subject toextensive government regulations related to development, clinical trials,manufacturing and commercialization. The process of obtaining FDA, EuropeanAgency for the Evaluation of Medicinal Products, or EMEA, and other governmental and similar international regulatoryapprovals is costly, time consuming, uncertain and subject to unanticipateddelays. Even if we believe that preclinical and clinical data are sufficient tosupport regulatory approval for a drug candidate, the FDA, EMEA and similarinternational regulatory authorities may not ultimately approve the candidatefor commercial sale in any jurisdiction. The FDA, EMEA or similar internationalregulators may refuse to approve an application for approval of a drugcandidate if they believe that applicable regulatory criteria are notsatisfied. The FDA, EMEA or similar international regulators may also requireadditional testing for safety and efficacy. For example, in May 2004, we announced the results of an internationalPhase 3 clinical trial testing the combination of Ceplene plus IL-2 in patientswith AML in complete remission.  Theprimary endpoint of the Phase 3 trials was achieved using intent-to-treatanalysis, as patients treated with the Ceplene/IL-2 combination therapyexperienced a statistically significant increase in leukemia-free survivalcompared to patients in the control arm of the trial.  In January2005, we announced that based on ongoing correspondence with the FDA, as wellas consultations with external advisors, we determined that an additional Phase3 clinical trial will be necessary to further evaluate Ceplene plus IL-2combination therapy for the treatment of AML patients in complete remissionbefore applying for regulatory approval in the United States.   We are continuing discussions with EuropeanRegulators to determine if an additional Phase 3 clinical trial is necessaryfor European regulatory approval.  We have not yet completed our discussions with the EuropeanRegulators and we have no assurance that (i) the EMEA or similar regulatoryagencies will not require an additional Phase 3 trial, (ii) the EMEA orsimilar regulatory agencies would approve regulatory filings for drug approval,or (iii) the results from an additional Phase 3 trial would confirm the resultsfrom the first Phase 3 trial.

 

In addition, manufacturing facilities operated by thethird party manufacturers with whom we contract to manufacture Ceplene and ourother drug candidates may not pass a FDA, EMEA or similar internationalregulatory pre-approval inspection. Moreover, if the FDA, EMEA or similarinternational regulatory agency grants regulatory approval of a productcandidate, the approval may be limited to specific indications or limited withrespect to its distribution. Similar international regulatory authorities mayapply similar limitations or may refuse to grant any approval.

 

Any failure or delay in obtaining these approvalscould prohibit or delay us from marketing Ceplene and our other drugcandidates. If Ceplene and our other drug candidates do not meet applicableregulatory requirements for approval, we may not have the financial resourcesto continue research and development of these candidates, and we may notgenerate revenues from the commercial sale of any of our products.

 

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**Delays in thecommencement, conduct or completion of our clinical trials would negativelyimpact our business.**

 

We may encounter problems with any of our completed,ongoing or planned clinical studies, including having inadequate resources toconduct clinical trials necessary to obtain regulatory approval. For example,we may encounter delays in commencing studies or enrolling volunteers, lowerthan anticipated retention rate of volunteers in a trial or serious sideeffects experienced by study participants relating to the drug candidate.Factors that could affect patient enrollment include the size of the patientenrollment population for the targeted disease, eligibility criteria, proximityof eligible patients to clinical sites, clinical trial protocols and theexistence of competing protocols, including competitive financial incentivesfor patients and clinicians, and existing approved drugs. If we encounter anydelay in the commencement, conduct or completion of our clinical studies forCeplene or our other drug candidates, we may experience the followingconsequences:

 

•                                          the analysis of data from our clinical studies and thereporting of results may be delayed;

 

•                                          the submission of our applications for regulatory approval ofCeplene and other drug candidates with regulatory authorities in North America,Europe and elsewhere in the world may be delayed;

 

•                                          regulatory approval of our drug candidates may be delayed andmay not occur on a timely basis, delaying the generation of revenues from thecommercial sale of any of our marketed product candidates;

 

•                                          we may not have the financial resources to continue andcomplete research and development of any of our product candidates; and

 

•                                          we may not be able to enter into collaborative arrangementsrelating to any potential product as a result of the delay in clinicaldevelopment or regulatory filings.

 

**Because we aredependent on clinical research centers and other contractors for clinicaltesting and for certain research and development activities, the results of ourclinical trials and such research activities are, to a certain extent, beyondour control.**

 

The nature of clinical trials and our businessstrategy requires us to rely on clinical research centers and our othercontractors to assist us with clinical testing and certain research anddevelopment activities. As a result, our success is dependent upon the successof these outside parties in performing their responsibilities. Although webelieve our contractors are economically motivated to perform on theircontractual obligations, we cannot directly control the adequacy and timelinessof the resources and expertise applied to these activities by our contractors.If our contractors do not perform their activities in an adequate or timelymanner, the development and commercialization of our drug candidates could bedelayed.

 

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**We expect to relyon collaborative partners for research and development and commercialization ofcertain potential products.**

 

We expect to rely on collaborative arrangements forresearch and development and commercialization of certain drug candidatesdiscovered and developed by us, such as our agreement with Schering Corporationrelated to our M0406 trial in non-responder hepatitis C patients and ouragreement with Myriad related to the MX90745 series of apoptosis-induceranti-cancer compounds. In addition, we willcontinue discussions with the FDA regarding the trial design for an additionalPhase 3 AML trial, however, given the time and costs required to conductanother Phase 3 clinical trial, the Company believes that such a trial wouldneed to be conducted in collaboration with a corporate partner, and we intendto pursue partnering opportunities in the United States related to Ceplene forthe treatment of AML.  We cannot be certain that we will be able to maintain thesecollaborations or enter into any future collaborative arrangements, that any ofour collaborations will be successful or that we will receive revenues from anyof these collaborations. The success of these and any future collaborationswill depend, in significant part, on our partners’ development and strategicconsiderations, including the relative advantages of alternative products beingdeveloped or marketed by competitors. If our partners fail to conduct theiractivities in a timely manner, or at all, preclinical or clinical developmentof drug candidates under those collaborations could be delayed or terminated.The suspension or termination of our collaborations, the failure of ourcollaborations to be successful or the delay in the development orcommercialization of drug candidates pursuant to our collaborations could harmour business.

 

**Our plannedbusiness may expose us to product, clinical trial and other liability claims.**

 

Our design, testing and development of potentialproducts involves an inherent risk of exposure to clinical trial and productliability claims and related adverse publicity. Insurance coverage is expensiveand difficult to obtain, and we may be unable to obtain coverage in the futureon acceptable terms, if at all. Although we currently maintain clinical trialinsurance for our drug candidates in the amounts we believe to be commerciallyreasonable, we cannot be certain that the coverage limits of our insurancepolicies or those of our strategic partners will be adequate. If we are unableto obtain sufficient insurance at an acceptable cost or if a claim is broughtagainst us, whether fully covered by insurance or not, our business, results ofoperations and financial condition could be materially adversely affected.

 

**Our products maynot be accepted, purchased or used by doctors, patients or payors.**

 

Ceplene, and any of our other drug candidates indevelopment, may not achieve market acceptance even if they are approved by theFDA, EMEA and similar international regulatory agencies. We cannot guaranteethat physicians, patients, payors or the medical community in general willaccept and utilize any products that we develop. The degree of marketacceptance of our potential products will depend on a number of factors,including:

 

•              the scope of regulatory approvals;

 

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•                                          the establishment and demonstration of the clinical efficacy,safety and advantages of our product candidates by clinical trial results, andthe acceptance of such results by the medical community;

 

•              the potential advantages of ourproducts over existing treatment methods; and

 

•              reimbursement policies ofgovernment and other third-party payors.

 

**We have yet tomarket or sell any of our product candidates.**

 

We intend to rely on collaborative partners to marketand sell Ceplene in the United States and in international markets, if approvedfor sale in such markets, and such arrangements may be sought to market certainother drug candidates in all markets. We have not yet entered into anycollaborative arrangement with respect to marketing or selling Ceplene with theexception of agreements relating to Australia, New Zealand and Israel. Wecannot guarantee that we will be able to enter into any such arrangements onterms favorable to us, or at all. If we are able to enter into marketing andselling arrangements with collaborative partners, we cannot assure you thatsuch marketing collaborators will apply adequate resources and skills to theirresponsibilities, or that their marketing efforts will be successful. If we areunable to enter into collaborative arrangements with respect to marketing orselling Ceplene or our marketing collaborators efforts are not successful, ourability to generate revenue from product sales will suffer.

 

**We will bedependent on third party manufacturers of our product candidates.  Our ability to sell our product candidatesmay be harmed if adequate quantities of our product candidates are notmanufactured on a timely basis.**

 

We do not intend to acquire or establish our owndedicated manufacturing facilities for Ceplene and our other drug candidates inthe foreseeable future. We have contracted and expect to continue to contractwith established pharmaceutical manufacturers for the production of Ceplene. Ifwe are unable to continue to contract with third-party manufacturers onacceptable terms or our manufacturers do not comply with applicable regulatoryrequirements, our ability to conduct clinical testing and to produce commercialquantities of Ceplene and other product candidates will be adversely affected.If we cannot adequately manufacture our product candidates, it could result indelays in submissions for regulatory approval and in commercial productlaunches, which in turn could materially impair our competitive position andthe possibility of achieving profitability. We cannot guarantee that we will beable to maintain our 

 

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existing contract manufacturingrelationships, or acquire or establish new, satisfactory third-partyrelationships to provide adequate manufacturing capabilities in the future.

 

**We are notprofitable and expect to continue to incur losses. If we do not becomeprofitable, we may ultimately be forced to discontinue our operations.**

 

We are a development-stage enterprise. We haveexperienced net losses every year since our inception. Our net lossesapplicable to common stock were $9.6 million and $9.9 million for quartersended December 31 2004 and 2003.  As ofDecember 31, 2004, we had an accumulated deficit of approximately $361.1million. We anticipate incurring substantial additional losses over at leastthe next several years related to developing and testing our drug candidatesand preparing for commercialization and planned market launches of ourproducts. If we do not become profitable, our stock price will be negativelyaffected, and we may ultimately be forced to discontinue our operations. We maynever generate product revenues or become profitable. We expect to havequarter-to-quarter fluctuations in revenues, expenses and losses, some of whichcould be significant.

 

**We will need toraise additional funds in the future. If we are unable to obtain the fundsnecessary to continue our operations, we will be required to delay, scale backor eliminate one or more of our drug development programs.**

 

We have already spent substantial funds developing ourpotential products and business. We expect to continue to have negative cashflow from our operations for at least the next several years.  We will have to raise additional funds tocomplete the development of our drug candidates and to bring them to market.Our future capital requirements will depend on numerous factors, including:

 

•              the results of our clinicaltrials;

 

•              the timing and scope of anyadditional clinical trials undertaken;

 

•              the scope and results of ourresearch and development programs;

 

•              the time required to obtainregulatory approvals;

 

•              our ability to establish marketingalliances and collaborative agreements;

 

•              the cost of our internal marketingactivities; and

 

•              the cost of filing, prosecutingand, if necessary, enforcing patent claims.

 

Additional financing may not be available onacceptable terms, if at all. If adequate funds are not available, we will berequired to delay, scale back or eliminate one or more of our drug developmentprograms or obtain funds through arrangements with collaborative partners orothers that may require us to relinquish rights to certain of our technologiesor product candidates that we would not otherwise relinquish.

 

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**We compete againstmany companies and research institutions that are developing products to treatthe same diseases as our drug candidates. To the extent these competitors aresuccessful in developing and marketing such products, our future potentialmarket share and revenues could be reduced.**

 

There are many companies, both publicly and privatelyheld, including well-known pharmaceutical companies and academic and otherresearch institutions, engaged in developing pharmaceutical products for thetreatment of life-threatening cancers and liver diseases. Products developed byany of these companies or institutions may demonstrate greater safety orefficacy than our drug candidates or be more widely accepted by doctors,patients or third-party payors. Many of our competitors and potential competitorshave substantially greater capital resources, research and developmentcapabilities and human resources than we do. Many of these competitors alsohave significantly greater experience than we do in undertaking preclinicaltesting and clinical trials of new pharmaceutical product candidates andobtaining FDA, EMEA and other regulatory approvals. If any of our drugcandidates are approved for commercial sale, we will also be competing withcompanies that have greater resources and experience in manufacturing,marketing and selling pharmaceutical products. To the extent that any of ourcompetitors succeed in developing products that are more effective, less costlyor have better side effect profiles than our products, then our futurepotential market share could decrease, which may have a negative impact on ourbusiness.

 

**If we fail tosecure adequate protection of our intellectual property or the right to usecertain intellectual property of others, we may not be able to protect ourproduct candidates and technologies from competitors.**

 

Our success depends in large part on our ability toobtain, maintain and protect patents, trademarks and trade secrets and tooperate without infringing upon the proprietary rights of others. If we areunable to do so, our product candidates and technologies may not provide uswith any competitive advantage.

 

The patent positions of biotechnology andpharmaceutical companies are highly uncertain and involve complex legal andfactual questions, and the breadth of claims allowed in biotechnology andpharmaceutical patents cannot be predicted. As a result, patents may not issuefrom any of our patent applications. Patents currently held by us or issued tous in the future, or to licensors from whom we have licensed technology rights,may be challenged, invalidated or circumvented so that our intellectualproperty rights may not protect our technologies or provide commercialadvantage to us. In addition, we also rely on unpatented trade secrets andproprietary know-how, and we cannot be sure that others will not obtain accessto or independently develop such trade secrets and know-how. Enforcement of ourintellectual property rights against any infringers of our patents relating toCeplene and our other technologies will be costly and time-consuming. Becauseof the nature of those patents, we could be required to bring lawsuits againstmany different entities such as hospitals or clinics. This would have theeffect of increasing the costs of enforcing our rights.

 

The pharmaceutical industry has experienced extensivelitigation regarding patent and other intellectual property rights. Although todate we are not aware of any intellectual property

 

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claims against us, in the future wecould be forced to incur substantial costs in defending ourselves in lawsuitsthat are brought against us claiming that we have infringed on the patentrights of others or in asserting our patent rights in lawsuits against otherparties. We may also be required to participate in interference proceedingsdeclared by the United States Patent and Trademark Office or internationalpatent authorities for the purpose of determining the priority of inventions inconnection with our patent applications or other parties’ patent applications.Adverse determinations in litigation or interference proceedings could requireus to seek licenses that may not be available on commercially reasonable termsor subject us to significant liabilities to third parties.

 

**The technology inour sector is developing rapidly, and our future success depends on our abilityto keep abreast of technological change.**

 

We are engaged in the pharmaceutical field, which ischaracterized by extensive research efforts and rapid technological progress.New developments in oncology, cancer therapy, medicinal pharmacology,biochemistry and other fields are expected to continue at a rapid pace.Research and discoveries by others may render some or all of our proposedprograms or product candidates noncompetitive or obsolete. Our businessstrategy is subject to the risks inherent in the development of new productcandidates using new technologies and approaches. Unforeseen problems maydevelop with these technologies or applications, and we may not be able tosuccessfully address technological challenges we encounter in our research anddevelopment programs. This may result in our inability to develop commerciallyfeasible products.

 

**Our future successdepends on our ability to attract and retain key personnel.**

 

Our success will depend, to a great extent, upon theexperience, abilities and continued services of our executive officers, and keypersonnel for research, development and commercialization. If we lose theservices of any of these officers or key research and development personnel,our business could be harmed. Our success also will depend upon our ability toattract and retain other highly qualified research and development, managerial,manufacturing and sales personnel and our ability to develop and maintainrelationships with qualified clinical researchers. Competition for thesepersonnel and relationships is intense and we compete with numerouspharmaceutical and biotechnology companies as well as with universities andnon-profit research organizations. We may not be able to continue to attractand retain qualified personnel or develop and maintain relationships withclinical researchers.

 

**The marketabilityof our product candidates may depend on reimbursement and reform measures inthe health care industry.**

 

Our success may depend, in part, on the extent towhich reimbursement for the costs of therapeutic product candidates and relatedtreatments will be available from third-party payors such as United States andsimilar international government health administration authorities, privatehealth insurers, managed care programs and other organizations. Over the pastdecade, the cost of health care has risen significantly, and there have beennumerous proposals by legislators, regulators and third-party health carepayors to curb these costs. Some of these proposals have involved limitationson the amount of reimbursement for certain products and

 

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product candidates.  We cannot guarantee that similar UnitedStates federal or state or similar international health care legislation andpolicies will not be adopted in the future or that any product candidatessought to be commercialized by us will be considered cost-effective or thatadequate third-party insurance coverage will be available for us to establishand maintain price levels sufficient for realization of an appropriate returnon our investment in product development. Moreover, the existence or threat ofcost control measures could have an adverse effect on the willingness ofpotential collaborators to pursue research and development programs related toour product candidates.

 

**We may engage instrategic transactions, which could adversely affect our business.**

 

From time to time we consider strategic transactionsand alternatives with the goal of maximizing stockholder value. These potentialtransactions may include a variety of different business arrangements,including spin-offs, acquisitions, strategic partnerships, joint ventures,restructurings, divestitures, business combinations and investments. We cannotassure you that any such transactions will be consummated on favorable terms orat all, will in fact enhance stockholder value, or will not adversely affectour business or the trading price of our stock. Any such transactions mayrequire us to incur non-recurring or other charges and may pose significantintegration challenges and/or management and business disruptions, any of whichcould materially and adversely affect our business and financial results.

 

**We have been namedas a defendant in litigation that could result in substantial costs and divertmanagement’s attention and resources.**

 

InOctober 2001 and May 2002, certain former shareholders of Cytoviafiled complaints in California Superior Court in San Diego, against us and twoof our officers, alleging fraud and negligent misrepresentation in connectionwith our acquisition of Cytovia. A binding arbitration proceeding with theAmerican Arbitration Association was held in May 2003. The three-memberarbitration panel rejected all of the plaintiffs’ claims, determined that wehave no liability for such claims and awarded recovery of our reasonableattorneys’ fees and costs of approximately $922,000 as prevailing party in theproceedings. In December 2003, the decision was confirmed by the SuperiorCourt, which entered a judgment to this effect. In June 2004, the plaintiffsfiled an Appeal. On December 10, 2004, the Court of Appeal reversed thejudgment of the Superior Court and remanded the lawsuit to the trial court forfurther proceedings. We have filed a petition to the California Supreme Courtseeking further appellate review and intend to continue vigorously defendingagainst these claims.

 

OnSeptember 21, 2004, plaintiff Dr. Richard Bassin, on behalf of himself andpurportedly on behalf of a class of others similarly situated, filed acomplaint in the United States District Court for the Southern District ofCalifornia against us, Larry G. Stambaugh, our President and Chief Executive Officer,and Anthony E. Altig, our former Vice President Finance and Chief FinancialOfficer, for alleged violations of federal securities laws related to declinesin our stock price in connection with various statements and alleged omissionsto the public and to the securities markets during the class period fromNovember 11, 2002 to September 17, 2004, and seeking damages therefore.  Thereafter two similar complaints were filedin the Southern District.  We expect thatall three of the Southern District complaints will be consolidated into a

 

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singleaction.  No discovery has beenconducted.  The complaints have beentendered to our insurance carrier, which has initially denied coverage.  We dispute the initial position taken by ourinsurance carrier and fully intend to enforce our rights under the policy.

 

On October 7, 2004, plaintiff Jesus Putnam,purportedly on behalf of the Company, filed a derivative complaint in theSuperior Court for the State of California, Count of San Diego, against LarryG. Stambaugh, Anthony E. Altig, Kurt R. Gehlsen, former Senior Vice Presidentand Chief Scientific Officer, and our entire Board of Directors for allegedbreach of fiduciary duty, abuse of control, gross mismanagement, waste ofcorporate assets, unjust enrichment and violations of the CaliforniaCorporations Code, all of which arise from allowing purported violations offederal securities laws related to declines in our stock price in connectionwith various statements and alleged omissions to the public and to thesecurities markets, and seeking damages therefore.  No discovery has been conducted, andplaintiff’s counsel has stipulated to stay the action pending resolution of amotion to dismiss the federal actions. The complaint has been tendered to our insurance carrier, which hasinitially denied coverage.  We disputethe initial position taken by our insurance carrier and fully intend to enforceour rights under the policy.

 

Weintend to engage in a rigorous defense against such claims.  No assurances can be made that we will besuccessful in our defense of the pending claims. If we are not successful inour defense of such claims, we could be forced to, among other things, makesignificant payments to resolve these claims, and such payments could have amaterial adverse effect on our business, financial condition and results ofoperations if not covered by our insurance carrier. Further, regardless ofsuccess of the litigation, the litigation itself may result in substantialcosts and divert management’s attention and resources, all of which couldadversely affect our business.

 

**Our stock pricemay be highly volatile due to external factors.**

 

Our common stock currently trades on the NasdaqNational Market and on the OM Stockholm Exchange. Historically, our commonstock has generally experienced relatively low daily trading volumes inrelation to the aggregate number of shares outstanding. We currently have a $75million shelf registration statement on file with the Securities and ExchangeCommission.  Sales of substantial amountsof our common stock in the public market could adversely affect the prevailingmarket prices of our common stock and our ability to raise equity capital inthe future.

 

Factors that may have a significant impact on themarket price or the liquidity of our common stock also include:

 

•                                          actual or potential clinical trial results relating to drugcandidates under development by us or our competitors;

 

•              delays in our clinical testing anddevelopment schedules;

 

•              events or announcements relatingto our collaborative relationships;

 

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•                                          failure to enter into a collaborative partnership to conductadditional clinical studies necessary to support regulatory approval of Ceplenetherapy in AML patients;

 

•                                          announcements of technological innovations or new products ordrug candidates by us or our competitors;

 

•              developments or disputesconcerning patents or proprietary rights;

 

•              regulatory developments in boththe United States and other countries;

 

•                                          economic and other external factors, disasters or crises, aswell as period-to-period fluctuations in our financial results;

 

•                                          market conditions for pharmaceutical and biotechnologystocks, whether or not related to results or news regarding us or ourcompetitors; and

 

•                                          publicity regarding actual or potential medical resultsrelating to products or drug candidates under development by us or ourcompetitors.

 

External factors may also adversely affect the marketprice for our common stock. The price and liquidity of our common stock may besignificantly affected by the overall trading activity and market factors onthe Nasdaq National Market and the OM Stockholm Exchange, and these factors maydiffer between the two markets. In addition, the securities markets have fromtime to time experienced significant price and volume fluctuations that may beunrelated to the operating performance of particular companies. The marketprices of the common stock of many publicly traded pharmaceutical orbiotechnology companies have in the past been, and can in the future beexpected to be, especially volatile.

 

**Certainanti-takeover provisions in our charter, by-laws, shareholder rights plan andunder Delaware law may deter a third party from acquiring us, even though suchacquisition may be beneficial to our stockholders.**

 

Certain provisions of our charter and by-laws may makeit more difficult for a third party to acquire control of us, even though suchacquisition may be beneficial to our stockholders. These provisions include,but are not limited to:

 

•              a staggered or classified board;

 

•              the inability of stockholders toact by written consent; and

 

•              no right to remove directors otherthan for cause.

 

                Wehave also adopted a shareholder rights plan or “poison pill”. Our shareholderrights plan is designed to protect our shareholders in the event of anunsolicited bid to acquire the

 

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 Company. In general terms, the rights planimposes a significant penalty upon any person or group that acquires 15% ormore of our outstanding common stock without the approval of our board ofdirectors. Our shareholder rights plan could discourage a third party fromattempting to acquire us through an acquisition of our outstanding votingstock, even though such acquisition may be beneficial to our stockholders.

 

Our board of directors also has the authority toissue, at any time, without further stockholder approval, up to 5,000,000shares of preferred stock, and to determine the price, rights, privileges andpreferences of those shares. These preferred shares are available to be used inconnection with our shareholder rights plan. Any issuance of preferred stockcould discourage a third party from acquiring a majority of our outstandingvoting stock.

 

Furthermore, we are subject to the provisions ofSection 203 of the Delaware General Corporations Law, an anti-takeoverlaw, which may also dissuade a potential acquiror, even though such acquisitionmay be beneficial to our stockholders.

 

**Issuing preferredstock with rights senior to those of our common stock could adversely affectholders of common stock.**

 

Our charter documents give our board of directors theauthority to issue a series of preferred stock without a vote or action by ourstockholders. The board also has the authority to determine the terms ofpreferred stock, including price, preferences and voting rights. The rightsgranted to holders of preferred stock may adversely affect the rights ofholders of our common stock. For example, a series of preferred stock may begranted the right to receive a liquidation preference—a pre-set distribution inthe event of a liquidation—that would reduce the amount available fordistribution to holders of common stock. In addition, the issuance of preferredstock could make it more difficult for a third party to acquire a majority ofour outstanding voting stock. As a result, common stockholders could beprevented from participating in transactions that would offer an optimal pricefor their shares.

 

#### **ITEM3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

                Our exposure to market risk is principally confinedto our cash equivalents and investments that have maturities of less than threeyears. We maintain a non-trading investment portfolio of investment grade,liquid debt securities that limit the amount of credit exposure to any oneissue, issuer or type of instrument. The securities in our investment portfolioare not leveraged, are classified as available-for-sale and are subject tointerest rate risk. We currently do not hedge interest rate exposure. Ahypothetical ten percent change in interest rates during the quarter endedDecember 31, 2004 would have resulted in approximately a $21,000 change in netloss.  The Company has not usedderivative financial instruments in its investment portfolio. There have beenno significant changes in the types or maturities of investments held fromSeptember 30, 2004.

 

###### **ITEM4. CONTROLS AND PROCEDURES**

 

                We carried out an evaluation,under the supervision and with the participation of our

 

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management,including the Company’s President and Chief Executive Officer and ChiefFinancial Officer, of the effectiveness of the design and operation of ourdisclosure controls and procedures, as defined in Exchange Act Rule 13a-15(e),as of the end of the period covered by this report.  Based upon that evaluation, our President andChief Executive Officer and Chief Financial Officer concluded that ourdisclosure controls and procedures are effective in enabling us to record,process, summarize and report information required to be included in ourperiodic filings with the Securities Exchange Commission within the requiredtime period.  There have been nosignificant changes in our internal controls over financial reporting thatoccurred during the period covered by this report that have materiallyaffected, or is reasonably likely to materially affect our internal controlover financial reporting.

 

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**PART II—OTHER INFORMATION**

 

***ITEM 1.  LEGAL PROCEEDINGS***

 

In October 2001 andMay 2002, certain former shareholders of Cytovia filed complaints inCalifornia Superior Court in San Diego, against the Company and two of itsofficers, alleging fraud and negligent misrepresentation in connection with theCompany’s acquisition of Cytovia. A binding arbitration proceeding with theAmerican Arbitration Association was held in May 2003. The three-memberarbitration panel rejected all of the plaintiffs’ claims, determined that theCompany has no liability for such claims and awarded recovery of the Company’sreasonable attorneys’ fees and costs of approximately $922,000 as prevailing partyin the proceedings.  InDecember 2003, the decision was confirmed by the Superior Court, whichentered a judgment to this effect.  InJune 2004, the plaintiffs filed an Appeal. On December 10, 2004, the Court of Appeal reversed the judgment of theSuperior Court and remanded the lawsuit to the trial court for furtherproceedings. The Company has filed a petition to the California Supreme Courtseeking further appellate review and intends to continue vigorously defendingagainst these claims.

 

On September 21, 2004,plaintiff Dr. Richard Bassin, on behalf of himself and purportedly on behalf ofa class of others similarly situated, filed a complaint in the United StatesDistrict Court for the Southern District of California against the Company, oneofficer of the Company and one former officer of the Company, allegingviolations of federal securities laws related to declines in the Company’sstock price in connection with various statements and alleged omissions to thepublic and to the securities markets during the class period from November 11,2002 to September 17, 2004, and seeking damages therefore.  Thereafter two similar complaints were filedin the Southern District.  The Companyexpects that all three of the Southern District complaints will be consolidatedinto a single action.  No discovery hasbeen conducted.  The complaints have beentendered to the Company’s insurance carrier, which has initially deniedcoverage.  The Company disputes theinitial position taken by the insurance carrier and fully intends to enforceits rights under the policy.

 

On October 7, 2004, plaintiff JesusPutnam, purportedly on behalf of the Company, filed a derivative complaint inthe Superior Court for the State of California, Count of San Diego, against oneofficer of the Company, two former officers of the Company and the Company’sentire Board of Directors, alleging breach of fiduciary duty, abuse of control,gross mismanagement, waste of corporate assets, unjust enrichment andviolations of the California Corporations Code, all of which arise fromallowing purported violations of federal securities laws related to declines inthe Company’s stock price in connection with various statements and allegedomissions to the public and to the securities markets, and seeking damagestherefore.  No discovery has beenconducted, and plaintiff’s counsel has stipulated to stay the action pendingresolution of a motion to dismiss the federal actions.  The complaint has been tendered to theCompany’s insurance carrier, which has initially denied coverage.  The Company disputes the initial positiontaken by the insurance carrier and fully intends to enforce its rights underthe policy.

 

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                The Company intends to engage in a rigorous defenseagainst such claims.  No assurances canbe made that the Company will be successful in its defense of the pendingclaims. If the Company is not successful in its defense of such claims, theCompany could be forced to, among other things, make significant payments toresolve these claims, and such payments could have a material adverse effect onthe Company’s business, financial condition and results of operations if notcovered by the Company’s insurance carrier. Further, regardless of success ofthe litigation, the litigation itself may result in substantial costs anddivert management’s attention and resources, all of which could adverselyaffect the Company’s business.

 

**ITEM 6. EXHIBITS**

** **
| 3.1  |   | Amended and Restated  Certificate of Incorporation of Registrant. (1)                                                                                                               |
|------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.2  |   | Certificate of Amendment  to Amended and Restated Certificate of Incorporation. (2)                                                                                                 |
| 3.3  |   | Bylaws of Registrant. (1)                                                                                                                                                           |
| 4.1  |   | Reference is made to  Exhibits 3.1, 3.2 and 3.3.                                                                                                                                    |
| 4.2  |   | Form of Certificate of  Designation of Series A Junior Participating Preferred Stock. (3)                                                                                           |
| 4.3  |   | Rights Agreement, dated as  of June 15, 2000, between the Registrant and American Stock Transfer &  Trust Company, as Rights Agents. (3)                                        |
| 4.4  |   | Form of Rights  Certificate. (3)                                                                                                                                                    |
| 4.5  |   | Specimen Common Stock  certificate. (1)                                                                                                                                             |
| 4.6  |   | Securities Purchase  Agreement dated September 22, 2003, between Maxim and the investors whose  names appear on the signature pages thereto. (4)                                    |
| 4.7  |   | Registration Rights  Agreement dated September 22, 2003, between Maxim and the investors whose  names appear on the signature pages thereto. (4)                                    |
| 4.8  |   | Form of Common Stock  Purchase Warrant issued to the investors on September 23, 2003. (4)                                                                                           |
| 4.9  |   | Common Stock Purchase  Warrant, No. #03-024, to purchase 148,049 shares of the Registrant’s common  stock, issued to Merriman Curhan Ford & Co. on September 23, 2003. (5) |
| 10.1 |   | Employment Agreement dated  October 18, 2004 between the Registrant and John D. Prunty. (6)*                                                                                        |
| 10.2 |   | Employment Agreement dated  December 3, 2004 between the Registrant and Larry G. Stambaugh. (7)*                                                                                    |
| 10.3 |   | Employment Agreement dated  December 3, 2004 between the Registrant and Pam G. Gleason. (7)*                                                                                        |
| 10.4 |   | Employment Agreement dated  December 3, 2004 between the Registrant and Sharon A. Tonetta, Ph.D. (7)*                                                                               |
| 31.1 |   | Certification by Larry G.  Stambaugh, Chief Executive Officer, Pursuant to 18 U.S.C. Section 1350, as  Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.           |
| 31.2 |   | Certification by John D.  Prunty, Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350, as  Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.               |
| 32   |   | Certification Pursuant to  18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002.                                                           |

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*                                         Managementcontract or compensatory plan or arrangement required to be filed as an exhibitto this form pursuant to Item 601 of Regulation S-K.

 

(1)                                  Previouslyfiled together with Registrant’s Registration Statement on Form SB-2 (FileNo. 333-4854-LA) or amendments thereto and incorporated herein byreference.

 

(2)                              Previously filed as ExhibitC with Registrant’s Definitive Proxy Statement filed with the SEC on January16, 2004, and incorporated herein by reference.

 

(3)                                  Previouslyfiled together with the Registrant’s Current Report on Form 8-A datedJune 20, 2000 and incorporated herein by reference.

 

(4)                                  Previouslyfiled together with Registrant’s Current Report on Form 8-K dated September 22,2003 and incorporated herein by reference.

 

(5)                                  Previouslyfiled together with the Registrant’s Annual Report on Form 10-K datedSeptember 30, 2003 and incorporated herein by reference.

 

(6)                                  Previouslyfiled together with Registrant’s Current Report on Form 8-K dated October 18,2004 and incorporated herein by reference.

 

(7)                                  Previouslyfiled together with Registrant’s Current Report on Form 8-K dated December 7,2004 and incorporated herein by reference.

 

 

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**SIGNATURE**

 

                Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
|                                                                                                                                                                         |   | MAXIM PHARMACEUTICALS,  INC. |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|
|                                                                                                                                                                         | By:    | /s/  John D. Prunty          |
| John  D. Prunty,

*Vice President, Finance and Chief Financial Officer*

*(Principal Financial and Accounting Officer duly  authorized to sign on behalf of the registrant)* |
| Date: February 3, 2005                                                                                                                                                       |   |                         |
|                                                                                                                                                                              |        |                              |  |

 

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