**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**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 Quarter Ended June 30, 2004** |
| ** **                                   | ** ** |
| **or**                                       |
| ** **                                   | ** ** |
| **o**                                        | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**Commission file number 1-14430**

 

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**MAXIM PHARMACEUTICALS, INC.**

(Exact name of registrant as specified in itscharter)

 

| **Delaware**                                               | ** ** | **87-0279983**                    |
|------------------------------------------------------------|------------|-----------------------------------|
| (State of incorporation)                                   |       | (IRS Employer Identification No.) |
|                                                       |       |                              |
| **8899 University Center Lane, Suite 400, San  Diego, CA** | ** ** | **92122**                         |
| (Address of principal executive offices)                   |       | (zip code)                        |
|                                                       |       |                              |
| **(858) 453-4040**                                    |
| (Registrant’s telephone number, including  area code) |

 

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Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorterperiod that the registrant was required to file such reports) and (2) hasbeen subject to such filing requirements for the past90 days. Yes ý  No o

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Exchange Act). Yes ý Noo

 

The number of outstanding shares of the registrant’s Common Stock,$.001 par value, as of August 3, 2004 was 28,560,983.

 

 

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**MAXIM PHARMACEUTICALS, INC. ANDSUBSIDIARIES**

*(A Development Stage Company)*

 

**INDEX**

 
| ** **                            | ** **                                                                                                                                                                           | ** ** | **Page** |
|---------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|
|                                  |                                                                                                                                                                                 |       |     |
| **Part I–Financial Information** |                                                                                                                                                                                 |       |
| Item 1.                               | Financial Statements (unaudited)                                                                                                                                                     |       |     |
|                                  | Condensed Consolidated Balance  Sheets–June 30, 2004 and September 30, 2003                                                                                           |       | 1        |
|                                  | Condensed Consolidated Statements of  Operations–Three and Nine Months Ended June 30, 2004 and 2003 and from  Inception (October 23, 1989) through June 30, 2004 |       | 2        |
|                                  | Condensed Consolidated Statements of Cash  Flows–Nine Months Ended June 30, 2004 and 2003 and from Inception  (October 23, 1989) through June 30, 2004           |       | 3        |
|                                  | Notes to Condensed Consolidated Financial  Statements                                                                                                                                |       | 4        |
| Item 2.                               | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                                                          |       | 9        |
| 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 and Reports on Form 8-K                                                                                                                                                     |       | 30       |
| **SIGNATURES**                        |                                                                                                                                                                                 |       |     |

 

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**CONDENSED CONSOLIDATED BALANCE SHEETS****(Unaudited)**

**(inthousands, except share data)**

 

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

 
| ** **                                                                                                                                                                             | ** ** | **As of June 30  2004** | ** ** | **As of September 30  2003** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------------|------------|
| **ASSETS**                                                                                                                                                                             |       |                         |       |                              |       |
| **Current Assets:**                                                                                                                                                                    |       |                         |       |                              |       |
| Cash and cash equivalents                                                                                                                                                              |       | **$**                        | **12,774** | ** **                        | $          | 32,861 |   |
| Investments in marketable securities,  available for sale                                                                                                                              |       | **48,790**                   | ** ** | 58,468                            |       |
| Accrued interest and other current assets                                                                                                                                              |       | **1,930**                    | ** ** | 2,210                             |       |
| Total current assets                                                                                                                                                                   |       | **63,494**                   | ** ** | 93,539                            |       |
|                                                                                                                                                                                   |       | ** **                   | ** ** |                              |       |
| Restricted cash and cash equivalents                                                                                                                                                   |       | **3,500**                    | ** ** | 3,500                             |       |
| Property and equipment, net                                                                                                                                                            |       | **3,703**                    | ** ** | 4,358                             |       |
| Patents and licenses, net                                                                                                                                                              |       | **4,413**                    | ** ** | 3,521                             |       |
| Note receivable from officer, net of  allowance of $700,000                                                                                                                            |       | **2,015**                    | ** ** | 2,287                             |       |
| Deposits and other assets                                                                                                                                                              |       | **273**                      | ** ** | 142                               |       |
| Total assets                                                                                                                                                                           |       | **$**                        | **77,398** | ** **                        | $          | 107,347 |   |
|                                                                                                                                                                                   |       | ** **                   | ** ** |                              |       |
| **LIABILITIES AND  STOCKHOLDERS’ EQUITY**                                                                                                                                         |       | ** **                   | ** ** |                              |       |
| **Current  Liabilities:**                                                                                                                                                              |       | ** **                   | ** ** |                              |       |
| Accounts payable                                                                                                                                                                       |       | **$**                        | **3,769**  | ** **                        | $          | 5,141 |   |
| Accrued expenses                                                                                                                                                                       |       | **4,177**                    | ** ** | 3,805                             |       |
| Notes payable and current portion of  long-term debt and obligations under capital leases                                                                                              |       | **842**                      | ** ** | 1,246                             |       |
| Provision for loan guarantee for officer                                                                                                                                               |       | **900**                      | ** ** | 900                               |       |
| Deferred revenue                                                                                                                                                                       |       | **381**                      | ** ** | 190                               |       |
| Total current liabilities                                                                                                                                                              |       | **10,069**                   | ** ** | 11,282                            |       |
|                                                                                                                                                                                   |       | ** **                   | ** ** |                              |       |
| Long-term debt and obligations under  capital leases, excluding current portion                                                                                                        |       | **196**                      | ** ** | 828                               |       |
|                                                                                                                                                                                   |       | ** **                   | ** ** |                              |       |
| Commitments and contingencies                                                                                                                                                          |       | ** **                   | ** ** |                              |       |
|                                                                                                                                                                                   |       | ** **                   | ** ** |                              |       |
| **Stockholders’  Equity:**                                                                                                                                                        |       | ** **                   | ** ** |                              |       |
| Convertible preferred stock, $.001 par  value, 5,000,000 shares authorized; no shares issued and outstanding at  June 30, 2004 and September 30, 2003                        |       | **—**                   | ** ** | —                            |       |
| Common stock, $.001 par value, 60,000,000  shares authorized; 28,423,242 and 27,951,059 shares issued and outstanding at  June 30, 2004 and September 30, 2003, respectively |       | **28**                       | ** ** | 28                                |       |
| Additional paid-in capital                                                                                                                                                             |       | **404,398**                  | ** ** | 401,251                           |       |
| Deficit accumulated during the development  stage                                                                                                                                      |       | **(336,993**                 | **)**      | (306,504                          | )          |
| Accumulated other comprehensive income  (loss)                                                                                                                                         |       | **(300**                     | **)**      | 462                               |       |
| Total stockholders’ equity                                                                                                                                                        |       | **67,133**                   | ** ** | 95,237                            |       |
| Total liabilities and stockholders’ equity                                                                                                                                        |       | **$**                        | **77,398** | ** **                        | $          | 107,347 |   |

 

*SeeAccompanying Notes to Condensed Consolidated Financial Statements*

 

1

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**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS****(Unaudited)**

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

 

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

 
| ** **                                                                        | ** ** | **Three Months Ended June 30** | ** **  | **Nine Months Ended June 30** | ** ** | **From Inception  (October 23, 1989)  Through  June 30, 2004** | ** ** |
|-----------------------------------------------------------------------------------|------------|-------------------------------------|-------------|------------------------------------|------------|--------------------------------------------------------------------------|------------|
| ** **                                                                        | ** ** | **2004**                            | ** **  | **2003**                           | ** ** | **2004**                                                                 | ** ** | **2003** | ** ** | ** ** |
|                                                                              |       |                                |        |                               |       |                                                                     |       |   |   |   |   |
| Collaboration and research revenue                                                | ** ** | **$**                               | **801**     | ** **                         | $          | 1,300                                                                    |       | **$** | **3,493** | ** ** | $ | 2,341 |   | $ | 18,311 |   |
|                                                                              |       | ** **                          | ** **  |                               |       | ** **                                                               | ** ** |   |   |   |   |
| Operating expenses:                                                               |       | ** **                          | ** **  |                               |       | ** **                                                               | ** ** |   |   |   |   |
| Research and development                                                          | ** ** | **9,883**                           | ** **  | 11,583                             |       | **27,578**                                                               | ** ** | 29,812 |   | 243,358 |   |
| Business development and marketing                                                | ** ** | **1,086**                           | ** **  | 360                                |       | **2,377**                                                                | ** ** | 1,078 |   | 24,048 |   |
| General and administrative                                                        | ** ** | **1,836**                           | ** **  | 2,255                              |       | **5,191**                                                                | ** ** | 6,102 |   | 45,538 |   |
| 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                | ** ** | **—**                          | ** **  | —                             |       | **—**                                                               | ** ** | — |   | 1,600 |   |
| Total operating expenses                                                          | ** ** | **12,805**                          | ** **  | 14,198                             |       | **35,146**                                                               | ** ** | 36,992 |   | 359,799 |   |
|                                                                              |       | ** **                          | ** **  |                               |       | ** **                                                               | ** ** |   |   |   |   |
| Loss from operations                                                              | ** ** | **(12,004**                         | **)**       | (12,898                            | )          | **(31,653**                                                              | **)**      | (34,651 | ) | (341,488 | ) |
|                                                                              |       | ** **                          | ** **  |                               |       | ** **                                                               | ** ** |   |   |   |   |
| Other income (expense):                                                           |       | ** **                          | ** **  |                               |       | ** **                                                               | ** ** |   |   |   |   |
| Investment income                                                                 | ** ** | **340**                             | ** **  | 546                                |       | **1,217**                                                                | ** ** | 2,038 |   | 31,072 |   |
| Gain on sale of assets                                                            | ** ** | **—**                          | ** **  | —                             |       | **—**                                                               | ** ** | — |   | 4,435 |   |
| Interest expense                                                                  | ** ** | **(14**                             | **)**       | (31                                | )          | **(56**                                                                  | **)**      | (98 | ) | (2,850 | ) |
| Other income (expense)                                                            | ** ** | **—**                          | ** **  | 2                                  |       | **3**                                                                    | ** ** | 19 |   | 17 |   |
| Total other income                                                                | ** ** | **326**                             | ** **  | 517                                |       | **1,164**                                                                | ** ** | 1,959 |   | 32,674 |   |
|                                                                              |       | ** **                          | ** **  |                               |       | ** **                                                               | ** ** |   |   |   |   |
| Loss before cumulative effect of accounting  change and preferred stock dividends | ** ** | **(11,678**                         | **)**       | (12,381                            | )          | **(30,489**                                                              | **)**      | (32,692 | ) | (308,814 | ) |
|                                                                              |       | ** **                          | ** **  |                               |       | ** **                                                               | ** ** |   |   |   |   |
| Cumulative effect of accounting change                                            | ** ** | **—**                          | ** **  | —                             |       | **—**                                                               | ** ** | — |   | (28,179 | ) |
|                                                                              |       | ** **                          | ** **  |                               |       | ** **                                                               | ** ** |   |   |   |   |
| Net loss before preferred stock dividends                                         | ** ** | **(11,678**                         | **)**       | (12,381                            | )          | **(30,489**                                                              | **)**      | (32,692 | ) | (336,993 | ) |
| Dividends on preferred stock                                                      | ** ** | **—**                          | ** **  | —                             |       | **—**                                                               | ** ** | — |   | 5,496 |   |
|                                                                              |       | ** **                          | ** **  |                               |       | ** **                                                               | ** ** |   |   |   |   |
| Net loss applicable to common stock                                               | ** ** | **$**                               | **(11,678** | **)**                              | $          | (12,381                                                                  | )          | **$** | **(30,489** | **)** | $ | (32,692 | ) | $ | (342,489 | ) |
|                                                                              |       | ** **                          | ** **  |                               |       | ** **                                                               | ** ** |   |   |   |   |
| Basic and diluted net loss per share of  common stock                             | ** ** | **$**                               | **(0.41**   | **)**                              | $          | (0.53                                                                    | )          | **$** | **(1.08** | **)** | $ | (1.40 | ) |   |   |
|                                                                              |       | ** **                          | ** **  |                               |       | ** **                                                               | ** ** |   |   |   |   |
| Weighted average shares outstanding                                               | ** ** | **28,282,906**                      | ** **  | 23,341,034                         |       | **28,100,889**                                                           | ** ** | 23,327,660 |   |   |   |

 

*SeeAccompanying Notes to Condensed Consolidated Financial Statements*

 

2

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

**(Inthousands)**

 

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

 
| ** **                                                                             | ** ** | **Nine Months Ended June 30** | ** **  | **From Inception  (October 23, 1989)  Through** | ** ** |
|----------------------------------------------------------------------------------------|------------|------------------------------------|-------------|------------------------------------------------------|------------|
| ** **                                                                             | ** ** | **2004**                           | ** **  | **2003**                                             | ** ** | **June 30, 2004** | ** ** |
| **OPERATING ACTIVITIES:**                                                              |       |                               |        |                                                 |       |   |   |
| Net loss                                                                               | ** ** | **$**                              | **(30,489** | **)**                                                | $          | (32,692 | ) | $ | (336,993 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities:           |       | ** **                         | ** **  |                                                 |       |   |   |
| Depreciation and amortization                                                          | ** ** | **1,258**                          | ** **  | 1,762                                                |       | 13,807 |   |
| Stock contributions to 401(k) plan                                                     | ** ** | **—**                         | ** **  | 46                                                   |       | 643 |   |
| Cumulative effect of accounting change                                                 | ** ** | **—**                         | ** **  | —                                               |       | 28,179 |   |
| Stock-based compensation                                                               | ** ** | **332**                            | ** **  | 78                                                   |       | 1,720 |   |
| Loss on disposal of property and equipment                                             | ** ** | **20**                             | ** **  | 6                                                    |       | 309 |   |
| Provisions for note receivable and loan  guarantees to/for officers                    | ** ** | **—**                         | ** **  | —                                               |       | 1,600 |   |
| 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                                              | ** ** | **280**                            | ** **  | 1,269                                                |       | 90 |   |
| Deposits and other assets                                                              | ** ** | **(131**                           | **)**       | 3                                                    |       | (769 | ) |
| Accounts payable                                                                       | ** ** | **(1,372**                         | **)**       | 253                                                  |       | 2,677 |   |
| Accrued expenses                                                                       | ** ** | **372**                            | ** **  | 2,180                                                |       | 2,880 |   |
| Deferred revenue                                                                       | ** ** | **191**                            | ** **  | (237                                                 | )          | 381 |   |
| Net cash used in operating activities                                                  | ** ** | **(29,539**                        | **)**       | (27,332                                              | )          | (243,116 | ) |
|                                                                                   |       | ** **                         | ** **  |                                                 |       |   |   |
| **INVESTING  ACTIVITIES:**                                                             |       | ** **                         | ** **  |                                                 |       |   |   |
| Purchases of marketable securities                                                     | ** ** | **(57,244**                        | **)**       | (37,768                                              | )          | (495,705 | ) |
| Sales and maturities of marketable  securities                                         | ** ** | **66,160**                         | ** **  | 51,345                                               |       | 447,118 |   |
| Purchases of property and equipment                                                    | ** ** | **(457**                           | **)**       | (683                                                 | )          | (11,349 | ) |
| Additions to patents and licenses                                                      | ** ** | **(1,058**                         | **)**       | (588                                                 | )          | (7,423 | ) |
| Net proceeds from sale of assets                                                       | ** ** | **—**                         | ** **  | —                                               |       | 3,452 |   |
| Cash acquired in acquisition of business                                               | ** ** | **—**                         | ** **  | —                                               |       | 1,121 |   |
| Net cash provided by (used in) investing  activities                                   | ** ** | **7,401**                          | ** **  | 12,306                                               |       | (62,786 | ) |
|                                                                                   |       | ** **                         | ** **  |                                                 |       |   |   |
| **FINANCING  ACTIVITIES:**                                                             |       | ** **                         | ** **  |                                                 |       |   |   |
| Net proceeds from issuance of common stock  and exercise of stock options and warrants | ** ** | **2,815**                          | ** **  | 318                                                  |       | 280,530 |   |
| Net proceeds from issuance of preferred  stock                                         | ** ** | **—**                         | ** **  | —                                               |       | 41,298 |   |
| Payment of preferred stock dividends                                                   | ** ** | **—**                         | ** **  | —                                               |       | (302 | ) |
| Proceeds from issuance of notes payable and  long-term debt                            | ** ** | **—**                         | ** **  | —                                               |       | 9,318 |   |
| Restricted cash and cash equivalents                                                   | ** ** | **—**                         | ** **  | —                                               |       | (3,500 | ) |
| Payments on notes payable, long-term debt,  and capital lease obligations              | ** ** | **(1,036**                         | **)**       | (1,110                                               | )          | (9,605 | ) |
| Proceeds from issuance of notes payable to  related parties                            | ** ** | **—**                         | ** **  | —                                               |       | 4,982 |   |
| Payments on notes payable to related  parties                                          | ** ** | **—**                         | ** **  | —                                               |       | (1,330 | ) |
| Loan to officer                                                                        | ** ** | **272**                            | ** **  | 122                                                  |       | (2,715 | ) |
| Net cash provided by (used in) financing  activities                                   | ** ** | **2,051**                          | ** **  | (670                                                 | )          | 318,676 |   |
|                                                                                   |       | ** **                         | ** **  |                                                 |       |   |   |
| Net increase (decrease) in cash and cash  equivalents                                  | ** ** | **(20,087**                        | **)**       | (15,696                                              | )          | 12,774 |   |
|                                                                                   |       | ** **                         | ** **  |                                                 |       |   |   |
| Cash and cash equivalents at beginning of  period                                      | ** ** | **32,861**                         | ** **  | 24,775                                               |       | — |   |
|                                                                                   |       | ** **                         | ** **  |                                                 |       |   |   |
| Cash and cash equivalents at end of period                                             | ** ** | **$**                              | **12,774**  | ** **                                           | $          | 9,079 |   | $ | 12,774 |   |
|                                                                                   |       | ** **                         | ** **  |                                                 |       |   |   |
| Noncash investing activities:                                                          |       | ** **                         | ** **  |                                                 |       |   |   |
| Acquisition of property and equipment under  capital lease                             | ** ** | **$**                              | **—**  | ** **                                           | $          | 51 |   | $ | 270 |   |
| Increase (decrease) in fair value of  securities available for sale                    | ** ** | **$**                              | **(762**    | **)**                                                | $          | (390 | ) | $ | (296 | ) |

 

*See Accompanying Notes to CondensedConsolidated Financial Statements*

 

3

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**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS****(Unaudited)**

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

 

**1.****                                      PRINCIPLESOF INTERIM PERIOD REPORTING**

 

Maxim Pharmaceuticals, Inc. (the “Company”) has not earnedsignificant revenues from planned principal operations. Accordingly, theCompany’s activities have been accounted for as those of a “Development StageEnterprise” as set forth in Financial Accounting Standards Board StatementNo. 7.

 

The information at June 30, 2004 and for the three and nine monthsended June 30, 2004 and 2003 and from inception (October 23, 1989)through June 30, 2004 is unaudited. In the opinion of the Company, thesecondensed consolidated financial statements contain all of the adjustments,consisting only of normal recurring adjustments and accruals, necessary topresent fairly the condensed consolidated financial position of the Company asof June 30, 2004 and September 30, 2003, and the condensedconsolidated results of operations for the three and nine months ended June 30,2004 and 2003 and from inception (October 23, 1989) through June 30,2004. The condensed consolidated results of operations for the three and ninemonths ended June 30, 2004 are not necessarily indicative of the resultsto be expected in subsequent periods or for the year as a whole. For furtherinformation, refer to the consolidated financial statements and footnotesthereto in our Annual Report on Form 10-K for the year endedSeptember 30, 2003.

 

**2.****                                      SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES**

 

Stock Option Plans-The Companyaccounts for its stock option plans under the recognition and measurementprinciples of APB Opinion No. 25, “Accounting for Stock Issued to Employees”,**and related Interpretations.  Compensation expense associated with stockoptions to employees was $29,000 in the current quarter and $81,000year-to-date.  Compensation expense tonon-employees was $97,000 in the current quarter and $251,000year-to-date.  There was no similarexpense in the same periods in the prior year.

 

No other stock-based employee compensationcost is reflected in net loss, as all options granted under those plans had anexercise price equal to the market value of the underlying common stock on thedate of grant.  The following tableillustrates the effect on net loss and

 

4

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loss per share if the Company had applied thefair value recognition provisions of Statement of Financial AccountingStandards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation”,**to stock-based employee compensation.

 
| ** **                                                                                                      | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                                                                      | ** ** | **June 30, 2004** | ** ** | **June 30, 2003** | ** ** | **June 30, 2004** | ** ** | **June 30,  2003** | ** ** |
| Net loss,  as reported                                                                                          |       | $                      | (11,678    | )                      | $          | (12,381 | ) | $ | (30,489 | ) | $ | (32,692 | ) |
| Add: Total  stock-based employee compensation expense determined under fair value based  methods for all awards |       | (778                   | )          | (924                   | )          | (2,335 | ) | (2,747 | ) |
| Less:  Compensation expense associated with stock  options                                                 |       | 29                     |       | —                 |       | 81 |   | — |   |
| Pro forma  net loss                                                                                             |       | $                      | (12,427    | )                      | $          | (13,305 | ) | $ | (32,743 | ) | $ | (35,439 | ) |
|                                                                                                            |       |                   |       |                   |       |   |   |   |   |
| Net loss  per share:                                                                                            |       |                   |       |                   |       |   |   |   |   |
| Basic and  diluted - as reported                                                                                |       | $                      | (0.41      | )                      | $          | (0.53 | ) | $ | (1.08 | ) | $ | (1.40 | ) |
| Basic and  diluted - pro forma                                                                                  |       | $                      | (0.44      | )                      | $          | (0.57 | ) | $ | (1.17 | ) | $ | (1.52 | ) |

 

The fair value of the stock options were estimated at the date of grantusing the “Black-Scholes” method for option pricing and the followingweighted-average assumptions were used for grants made during the three andnine months ended, June 30, 2004 and 2003, respectively:

 
| ** **                    | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|-------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                    | ** ** | **June 30, 2004** | ** ** | **June 30, 2003** | ** ** | **June 30, 2004** | ** ** | **June 30, 2003** | ** ** |
| Risk free  interest rate      |       | 1.94                   | %          | 2.59                   | %          | 2.20 | % | 2.29 | % |
| Dividend  Yield               |       | 0                      |       | 0                      |       | 0 |   | 0 |   |
| Volatility  Factor            |       | 75                     | %          | 75                     | %          | 75 | % | 75 | % |
| Expected  Life (in years)     |       | 3.09                   |       | 4.50                   |       | 3.59 |   | 3.76 |   |
| Resulting  average fair value |       | $                      | 4.37       |                   | $          | 2.51 |   | $ | 4.35 |   | $ | 1.58 |   |
|                               |            |                        |            |                        |            |  |  |  |  |  |  |  |  |

 

**3.****                                      TOTALOTHER COMPREHENSIVE LOSS**

 

Total other comprehensive loss for the three months ended June 30,2004 and 2003 was $12,049,000 and $12,554,000, respectively.  Total other comprehensive loss for the ninemonths ended June 30, 2004 and 2003 was $31,251,000 and $33,082,000,respectively.  The difference betweentotal other comprehensive loss and net loss attributable to common stock wascomprised of unrealized gains and losses on available-for-sale securities.

 

**4.****                                      NETLOSS PER SHARE**

 

Net loss per share is calculated in accordance with SFAS No. 128,“Earnings per Share”. Basic net loss per share of common stock is computed bydividing the net loss after deduction of dividends on preferred stock by theweighted average number of shares of common stock outstanding during theperiod. Diluted loss per share is calculated by including the additional commonshares issuable upon exercise of outstanding options and warrants in the basicweighted average share calculation unless the effect of their inclusion isantidilutive.  For the three and ninemonths ended June 30, 2004 and 2003, outstanding options and warrantstotaled 5,602,000 and

 

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3,991,000, respectively.  Asthese securities were antidilutive, diluted loss per share equaled basic lossper share in each respective period.

 

**5.****                                      DEFERREDRENT**

 

In accordance with SFAS No.13, “Accounting for Leases”, the Companyrecords operating lease rent expenses on a straight-line basis over the leaseterm, which causes the amount expensed in our financial statements to vary fromthe actual amounts paid during the period. This variance is recorded as deferred rent and included in AccruedExpenses.  As of June 30, 2004 and2003, the deferred rent balance was $658,000 and $251,000, respectively.

 

**6.****                                      RECLASSIFICATIONS**

 

Certain amounts in the prior period financial statements have beenreclassified to conform with current period classifications.

 

**7.****                                      RELATEDPARTY TRANSACTIONS**

 

In December 2000,the Company entered into a $2.85 million full recourse secured revolvingpromissory note with an officer of the Company. The purpose of the agreementwas to allow the repayment of margin loans associated with the exercise ofstock options, the payment of income taxes associated with such exercises andthe purchase of a residence.  The Boarddetermined that it was in the Company’s best interest to provide the loan tothe officer to avoid the necessity of selling personal holdings of theCompany’s securities during a period of depressed market prices.  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 determinedthat the note to the officer had become impaired because the Company determinedthat the officer did not have the ability to repay the loan in full whendue.  Accordingly, the Company has notrecorded interest income of $248,000 on the note subsequent to June 30, 2002and has recorded an allowance on the note in the amount of $700,000.  The officer has paid the Company $394,000related to the note which includes a $150,000 payment made in June 2004.  The entire outstanding balance of principaland interest was due on December 8, 2002. As of the date the note came due, the officer did not have the liquidassets necessary to repay the loan.  TheCompany is reviewing its options and alternatives and intends to continue topursue collection of the outstanding principal and interest on the loan.  As of June 30, 2004, the recordedoutstanding principal and interest balance on the note was $2,015,000, net ofthe $700,000 allowance.

 

At June 30, 2004, the Company was a guarantor on $1,800,000 inloans, due in July 2004, made by a bank to an officer and two formerofficers of the Company. Under the guarantor agreement executed inJuly 2001, the Company granted the bank a security interest in a$1,800,000 certificate of deposit as collateral for the loans the bank made tothe officers. The purpose of the bank loans was to allow the payment of incometaxes associated with the exercise of stock options.  The Board determined that it was in theCompany’s best interest to provide the guarantees to avoid the necessity of theofficers selling personal holdings of the Company’s securities during a periodof depressed market prices.  During thefourth quarter of fiscal year

 

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2002, the Company determined that it was probable that one of theofficers would not have the ability to repay his loan. Therefore, the Companyrecorded a provision for the guarantee and a liability in the amount of$900,000.  In July 2004, one formerofficer paid his loan in full and another former officer paid the bank $115,000resulting in an unpaid balance of $56,000 on his loan.  In addition, as of the date the loan camedue, a current officer did not have the assets necessary to pay his loan infull.  The officer paid $300,000 on hisloan.  As a result the bank liquidated$952,000 of the Company’s certificate of deposit to satisfy the loans.  The Company does not hold any assets ascollateral from the officer or former officer. The Company does not expect to incur losses exceeding amounts previouslyprovided for and is reviewing its options and alternatives, has full recourseand intends to continue to pursue collection of the $952,000 from the officerand former officer.

 

**8.****                                      CONTINGENCIES**

 

On December 14, 2000, plaintiff Blake Martin, on behalf of himselfand purportedly on behalf of a class of others similarly situated, filed acomplaint in the United States District Court for the Southern District ofCalifornia against the Company and two officers 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, and seeking damages therefore. InDecember 2003, the United States Federal Court granted the Company’smotion to dismiss the lawsuit with prejudice and without leave to amend, whichwas the third dismissal by the court in the case.  On December 30, 2003, plaintiff BlakeMartin exercised his right to appeal the decision of the United States DistrictCourt for the Southern District of California to the Ninth Circuit Court ofAppeals.  That appeal has been dropped,ending the litigation in favor of the Company.

 

InOctober 2001 and May 2002, certain former shareholders of Cytovia filedcomplaints in California Superior Court in San Diego against the Company andtwo of its officers based on similar facts and circumstances, alleging fraudand negligent misrepresentation in connection with the Company’s acquisition ofCytovia.  A binding arbitration proceeding with theAmerican Arbitration Association was held in May 2003.  The three-member arbitration panel rejectedall of the plaintiffs’ claims, determined that the Company has no liability forsuch claims and awarded recovery of the Company’s reasonable attorneys’ feesand costs of approximately $922,000 as prevailing party in the proceeding.  In December 2003, the decision wasconfirmed by the Superior Court, which entered a judgment to this effect.  In June 2004, the plaintiffs filed anAppeal, which the Company is vigorously opposing.  No amounts have been recorded in theCompany’s financial statements related to the recovery of these expenses.

 

TheCompany believes that the claims set forth in the pending complaint by theformer shareholders of Cytovia are without merit, and it intends to engage in arigorous defense against such claims. No assurances can be madethat the Company will be successful in its defense of the pending claims. Ifthe Company is not successful in its defense of such claims, the Company couldbe forced to make significant payments to the plaintiffs and defense lawyers,and such payments could have a material adverse effect on the Company’sbusiness, financial condition and results of operations if not covered by theCompany’s insurance carrier. Even if the Company’s defense against such claimsis successful, the litigation could result in substantial costs and divertmanagement’s attention and resources, which could adversely affect theCompany’s business.

 

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As discussed in Footnote 7, Related Party Transactions, the Company hasa $2,015,000 note receivable from an officer, net of a $700,000 allowanceagainst the note.

 

**9.****                                      SUBSEQUENTEVENT**

 

As discussed in Footnote 7, Related Party Transactions, inJuly 2004, $1,800,000 in loans made by a bank to one officer and twoformer officers of the Company for which the Company was a guarantor weredue.  In July 2004, one former officerpaid his loan in full and another former officer paid the bank $115,000resulting in an unpaid balance of $56,000 on his loan.  In addition, as of the date the loan camedue, a current officer did not have the assets necessary to pay his loan infull.  The officer paid $300,000 on hisloan.  As a result the bank liquidated$952,000 of the Company’s certificate of deposit to satisfy the loans.  The Company does not hold any assets ascollateral from the officer or former officer. The Company does not expect to incur losses exceeding amounts previouslyprovided for and is reviewing its options and alternatives, has full recourseand intends to continue to pursue collection of the $952,000 from the officerand former officer.

 

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

 

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

 

ThisManagement’s Discussion and Analysis of Financial Condition and Results ofOperations contains certain forward-looking statements that involve risks anduncertainties. Such forward-looking statements include but are not limited tostatements regarding plans for the development and commercialization of theCompany’s drug candidates and future cash requirements. Such statements areonly predictions and the Company’s actual results could differ materially fromthose anticipated or projected in such forward-looking statements. Moreover,the Company assumes no responsibility for the accuracy and completeness of theforward-looking statements.  The Companyis under no duty to update any of the forward-looking statements after the datehereof to conform such statements to actual results or to changes in itsexpectations.  Factors that could causeor contribute to such differences include, but are not limited to, thosediscussed in the section entitled “Risk Factors” contained in thisQuarterly Report. As a result, you are cautioned not to rely on theseforward-looking statements.

 

ThisManagement’s Discussion and Analysis of Financial Condition and Results ofOperations should be read in conjunction with the condensed consolidatedfinancial statements, including the related notes, appearing in Item 1 of thisQuarterly Report on Form 10-Q as well as the Company’s Annual Report on Form10-K for the year ended September 30, 2003.

 

#### **OVERVIEW**

 

Weare a global bio-pharmaceutical company with a diverse pipeline of drugcandidates for life-threatening cancers and chronic liver diseases.

 

Ourlead drug candidate CepleneTM (histamine dihydrochloride) is designed to preventor reverse damage associated with oxidative stress, thereby protecting criticalcells and tissues. Because Ceplene modulates basic immune functions, it has thepotential to be used in the treatment of a broad range of diseases in whichoxidative stress plays an important role. More than 2,000 patients haveparticipated in our 17 completed and ongoing clinical trials of Ceplene,conducted in 20 countries.  The clinicaltrials involve the following diseases:

 

•                  Life-threatening cancers, such as advancedmalignant melanoma (the most deadly form of skin cancer), acute myeloidleukemia (the most common form of acute leukemia in adults) and renal cellcarcinoma (kidney cancer); and

 

•                  Hepatitis C, the most common blood-bornevirus in the United States.

 

Clinicaltrials completed to date have suggested that Ceplene can be safelyself-administered by most patients in their own homes.

 

Ceplene for the treatment of advanced malignant melanoma represents ourmost advanced program.  InNovember 2003, we filed a European Centralized Procedure MarketingAuthorization Application for Ceplene, in combination with interleukin-2(IL-2), a drug manufactured by Chiron Corporation, for the treatment ofpatients with advanced malignant

 

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melanoma.  The Cepleneapplication was filed with the European Agency for the Evaluation of MedicinalProducts (EMEA) as an electronic Common Technical Dossier (eCTD) in compliancewith the most recent International Committee of Harmonization (ICH)guidelines.   Ireland and Sweden havebeen assigned by the EMEA as the Rapporteur and Co-rapporteur, respectively,with responsibility to review the application on behalf of the European Union(EU).

 

In April 2004, we announced that our treatment protocol to provideour investigational drug Ceplene, in combination with IL-2, for the treatmentof patients with advanced malignant melanoma, had been approved by the U.S.Food and Drug Administration (FDA). The treatment protocol allows us to provideexpanded access of Ceplene to patients in the United States while investigationof the drug continues in the Company’s confirming Phase 3 clinical trial. Although the FDA agreed to allow reimbursement for the study medicationunder the treatment protocol, we have determined that we will not seekreimbursement for providing patients access to Ceplene under the treatmentprotocol.

 

In May 2004, we announced the results of ourinternational Phase 3 clinical trial testing the combination of Ceplene plusIL-2 in 320 patients with acute myeloid leukemia (AML) in completeremission.  The primary endpoint of thePhase 3 trial was achieved using intent-to-treat analysis, as patients treatedwith the Ceplene/IL-2 combination therapy experienced a statisticallysignificant (p=0.0026) 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 prognosisfor AML patients after relapse is dismal, with few long-term survivors.  The Ceplene therapy treats patients duringremission (after chemotherapy) with the goal to increase their remission periodand prevent relapses.  We currently planto use the results from the Phase 3 AML trial to pursue expanded labeling forthe Ceplene/IL-2 combination after the potential approval of Ceplene for the treatmentof advanced malignant melanoma.

 

Our researchers have also identified a series of novel cancer drugcandidates that are potent inducers of apoptosis, also known as programmed celldeath. The compounds were identified through our proprietary high-throughputscreening technology that uses a unique live cell screening assay. We havescreened approximately one million compounds and have identified drugcandidates with unique mechanisms of action that target major cancers such asbreast, lung, prostate, and colorectal.

 

Our development activities are supported by clinical collaborationswith Schering Plough, Myriad Genetics, and Chiron Corporation.

 

# **CRITICALACCOUNTING POLICIES**

 

Thepreparation of condensed consolidated financial statements in conformity withaccounting principles generally accepted in the United States of Americarequires the Company to make estimates and judgments that affect the reportedamounts of assets, liabilities, revenues and expenses as well as relateddisclosure of contingent assets and liabilities. These estimates include usefullives for fixed assets, useful lives for intellectual property, estimated livesfor

 

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licenseagreements, revenue recognition, allowance for notes receivable, valuation ofintellectual property, and estimates for clinical trial expenses incurred butnot yet billed.  On an on-going basis,the Company evaluates its estimates. The Company bases its estimates on historicalexperience and various other assumptions that are believed to be reasonableunder the circumstances. Under different assumptions or conditions theseestimates may vary significantly. In addition, actual results may differmaterially from these estimates.

 

TheCompany believes the following critical accounting policies affect its moresignificant judgments and estimates used in the preparation of its condensedconsolidated financial statements.

 

*Revenue Recognition.* Revenue is generally recognized when all of the following criteria aremet: persuasive evidence that an arrangement exists; services have beenrendered and are non-refundable; the price is fixed and determinable andcollection is reasonably assured.  Allmultiple deliverable arrangements are reviewed by the Company for separabilityin accordance with EITF 00-21.  If theseparability criteria are met, non-refundable upfront technology access feesare accounted for separately.  Upfronttechnology access fees which are not considered separable from the relatedresearch fees are recognized as revenue over the applicable research period asresearch activities are performed. Milestone payments are recognized whenearned and collectibility is assured provided that the milestone events aresubstantive and their achievability is not reasonably assured at the inceptionof the agreement. Amounts received but unearned are recorded as deferredrevenue.  Certain collaborativeagreements provide the Company donated materials and services which arerecorded when used at the fair market value of the material received or theservice provided.  Grant funding isrecognized as revenue when earned.

 

Clinicaltrial expenses*.*  The Company accounts for certain study drug,clinical trial site and other clinical trial costs by estimating the servicesincurred but not reported for each patient enrolled in each trial. These costsand estimates vary based on the type of clinical trial, the site of theclinical trial, the length of treatment period for each patient and the lengthof time required to receive formal documentation of the actual expensesincurred. As actual costs become known, the Company may need to revise itsestimated accrual, which could also materially affect its results ofoperations.

 

Valuationof Intellectual Property*.*  The Company evaluates its patents andlicenses for impairment on an annual basis and whenever indicators ofimpairment exist. During this process, the Company reviews its portfolio ofpending domestic and international patent applications, domestic andinternational issued patents, and licenses the Company has acquired from otherparties. To determine if any impairment is present, the Company considerschallenges or potential challenges to its existing patents, the likelihood ofapplications being issued, the scope of its issued patents, the assessment offuture cash flows to be generated from the patents and its experience. In theevent that it is determined that an impairment exists where the Company hadpreviously determined that one did not exist, it may result in a material adjustmentto the Company’s financial statements.

 

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**RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHSENDED JUNE 30, 2004 AND 2003**

 

*Collaboration and Research Revenue. *For the quarterended June 30, 2004, collaboration and research revenue was $801,000, adecrease of $499,000 or 38% compared to the same period in the prior year.  The decrease is primarily attributable to adecrease of $924,000 in donated drugs and services from Schering on our Phase 2study (MP-8899-0406 or the Phase 2 triple-drug trial in nonresponder HCVpatients) due to a lower number of patients in the treatment phase of thetrial.    The Schering agreement provided$131,000 of revenue in the current quarter, compared to $1,055,000 of revenuein the same period in the prior year. This decrease is offset by an increase of $500,000 of revenue from theMyriad Genetics, Inc. (Myriad) collaboration that we entered into inNovember 2003.  Other revenuerecognized during the current quarter amounted to $170,000 from a license andresearch agreement with Celera Genomics Corporation and a grant from theNational Institute of Health.  In theprior year, these agreements generated $245,000 of revenue.

 

For the nine months ended June 30, 2004, collaboration andresearch revenue was $3,493,000, an increase of $1,152,000 or 49% over the sameperiod in the prior year.  This increasewas primarily attributable to $1,233,000 of research and license revenue fromour collaboration with Myriad. Additionally, we experienced an increase in donated drugs and servicesfrom Schering in our Phase 2 study (MP-8899-0406) that resulted in $1,824,000of revenue in the current year versus $1,606,000 in revenue during the sameperiod in the prior year.  Other revenuerecognized during the current year amounted to $436,000 from license andresearch agreements with Celera Genomics Corporation and a grant from theNational Institute of Health.  In theprior year these agreements generated $735,000 of revenue.

 

*Research and Development Expenses. *Research anddevelopment expenses for the quarter ended June 30, 2004 totaled$9,883,000, a decrease of $1,700,000 or 15% over the same period in the prioryear.  This decrease was primarily theresult of decreased expenses from the current stage of our Phase 2 study(MP-8899-0406) and Phase 3 study (MP-8899-0104), which is also known as thePhase 3 advanced malignant melanoma trial in patients with liver involvement.

 

Research and development expenses for the nine months ended June 30,2004 totaled $27,578,000, a decrease of $2,234,000 or 7% over the same periodin the prior year.  This decrease wasprimarily the result of decreased expenses from the current stage of our Phase2 study (MP-8899-0406) and Phase 3 study (MP-8899-0104).  In the future we expect to continue incurringsubstantial additional research and development expenses due to:

 

•                  preclinicaland clinical testing of our product candidates;

•                  expansionof or additional research and development programs; and

•                  regulatory-relatedexpenses.

 

*Business Development and MarketingExpenses. *Businessdevelopment and marketing expenses for the quarter ended June 30, 2004were $1,086,000, an increase of $726,000 or 202% over the same period of theprior year.  For the nine months endedJune 30, 2004, business development and marketing expenses were$2,377,000, an increase of $1,299,000 or 121% over the same period in the prioryear.  These increases are due to anincrease in premarketing activities

 

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associated with the potential market launch of Ceplene.  Business development and marketing expensesare expected to increase in the future to support marketing and administrativeactivities related to the potential commercialization of Ceplene as well as ourother product candidates.

 

*General and Administrative Expenses. *For the quarterended June 30, 2004, general and administrative expenses were $1,836,000,a decrease of $419,000 or 19% from the same period in the prior year.  For the nine months ended June 30, 2004,general and administrative expenses were $5,191,000, a decrease of $911,000 or15% from the same period in the prior year. These decreases are a result of decreased legal expenses.

 

*Other Income.* Investmentincome was $340,000 for the quarter ended June 30, 2004, a decrease of$206,000 or 38% from the same period in the prior year.  Investment income was $1,217,000 for the ninemonths ended June 30, 2004, a decrease of $821,000 or 40% from the sameperiod in the prior year.  This decreasewas a result of a decrease in our cash and short-term securities investmentbalances and in the rate of interest earned on our investments.

 

*Net Loss Applicable to Common Stock. *Net loss applicableto common stock for the quarter ended June 30, 2004 totaled $11,678,000, adecrease of $703,000 or 6% from the same period in the prior year. Thisdecrease was primarily a result of decreases in research and developmentexpenses and general and administrative expenses, partially offset by the increasein business development and marketing expenses, as described above.

 

Net loss applicable to common stock for the nine months endedJune 30, 2004 totaled $30,489,000, a decrease of $2,203,000 or 7% from thesame period in the prior year.  This decreasewas primarily a result of the decrease in research and development expenses.

 

#### **LIQUIDITYAND CAPITAL RESOURCES**

 

The Company has financed itsoperations primarily through the sale of its equity securities, including aninitial public offering in 1996, an international follow-on public offering in1997, private offerings of preferred stock in July and November 1999,a follow-on public offering in February 2000, and a private placement ofcommon stock in September 2003, that provided total net proceeds of approximately$322 million.

 

Until required for operations, theCompany’s policy under established guidelines is to keep its cash reserves inbank deposits, corporate debt securities, United States government instrumentsand other readily marketable debt instruments, all of which areinvestment-grade quality.  As ofJune 30, 2004, the Company had cash, cash equivalents and investments(including restricted cash of $3.5 million) totaling approximately $65.1 millioncompared with $94.8 million at September 30, 2003.  As of June 30, 2004, the Company hadworking capital of approximately $53.4 million compared with $82.3 million atSeptember 30, 2003.  The decrease inthe Company’s 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, the Company entered into a $2.85 million full recoursesecured revolving promissory note with an officer of the Company.  The note bears interest at an annual

 

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rate of 4.0% and is secured by the officer’s outstanding options andshares of common stock. During the quarter ended September 30, 2002, theCompany determined that the note to the officer had become impaired because theCompany determined that the officer did not have the ability to repay the loanin full when due.  Accordingly, theCompany has not recorded interest income of $248,000 on the note subsequent toJune 30, 2002, and has recorded an allowance on the note in the amount of$700,000.  The officer has paid theCompany $394,000 related to the note which includes a $150,000 payment made inJune 2004.  The entire outstandingbalance of principal and interest was due on December 8, 2002.  As of the date the note came due, the officerdid not have the liquid assets necessary to repay the loan.  The Company is reviewing its options andalternatives and intends to continue to pursue collection of the outstandingprincipal and interest on the loan.

 

At June 30,2004, the Company was a guarantor on $1,800,000 in loans, due inJuly 2004, made by a bank to an officer and two former officers of theCompany. Under the guarantor agreement executed in July 2001, the Companygranted the bank a security interest in a $1,800,000 certificate of deposit ascollateral for the loans the bank made to the officers. The purpose of the bankloans was to allow the payment of income taxes associated with the exercise ofstock options.  The Board determined thatit was in the Company’s best interest to provide the guarantees to avoid thenecessity of the officers selling personal holdings of the Company’s securitiesduring a period of depressed market prices. During the fourth quarter of fiscal year 2002, the Company determinedthat it was probable that one of the officers would not have the ability torepay his loan. Therefore, the Company recorded a provision for the guaranteeand a liability in the amount of $900,000. In July 2004, one former officer paid his loan in full and anotherformer officer paid the bank $115,000 resulting in an unpaid balance of $56,000on his loan.  In addition, as of the datethe loan came due, a current officer did not have the assets necessary to payhis loan in full.  The officer paid$300,000 on his loan.  As a result thebank liquidated $952,000 of the Company’s certificate of deposit to satisfy theloans.  The Company does not hold anyassets as collateral from the officer or former officer.  The Company does not expect to incur lossesexceeding amounts previously provided for and is reviewing its options andalternatives, has full recourse and intends to continue to pursue collection ofthe $952,000 from the officer and former officer.

 

The Company has term loans with abank totaling $1,014,000 at June 30, 2004, the proceeds of which were usedto finance capital expenditures.  Theterm loan agreements contain customary affirmative and negative covenants,including financial covenants requiring the maintenance of specified liquidityterms and the maintenance of the Company’s principal depository and operatingaccounts with the bank.  In addition, theCompany has the choice to either maintain a minimum aggregate balance of$3,500,000 at the institution or to pay the bank a quarterly fee of$2,500.  During the nine months endedJune 30, 2004, the Company maintained the minimum aggregate balance notedabove at the bank and was in compliance with all covenants.

 

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Thefollowing table summarizes our contractual obligations as of June 30,2004:

 
| ** **                  | ** ** | **Payments due by Period (in thousands)** | ** ** |
|-----------------------------|------------|-------------------------------------------|------------|
| ** **                  | ** ** | **Total**                                 | ** ** | **Less than  1  Year** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **More  than 5  Years** | ** ** |
|                        |       |                                      |       |   |   |   |   |   |   |   |   |
| CONTRACTUAL OBLIGATIONS     |       |                                      |       |   |   |   |   |   |   |   |   |
| Debt                        |       | $                                         | 1,014      |   | $ | 824 |   | $ | 190 |   | $ | — |   | $ | — |   |
| Guarantee on Officer Loans  |       | 900                                       |       | 900 |   | — |   | — |   | — |   |
| Capital Lease Obligations   |       | 24                                        |       | 18 |   | 6 |   | — |   | — |   |
| Operating Lease Obligations |       | 11,150                                    |       | 2,074 |   | 3,849 |   | 3,565 |   | 1,662 |   |
|                             |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The Company, as a development stage enterprise, anticipates incurringsubstantial additional losses at least in the near future as it continues toexpend substantial amounts on its ongoing and planned clinical trials and itsexpanded efforts related to its other research and development efforts,including the apoptosis modulator program. In addition, the Company’s cash requirements may fluctuate in futureperiods as it conducts additional research and development activities,including clinical trials, and undertakes efforts associated with thecommercial launch of any product candidates that are approved for sale bygovernment regulatory bodies.  Among theactivities that may result in an increase in cash requirements are the scopeand timing of the Phase 3 and Phase 2 Ceplene cancer and hepatitis C clinicaltrials currently underway, and earlier-stage clinical trials and other researchrelated to liver disease and the apoptosis modulator and topical histaminetechnologies. Other factors that may impact the Company’s cash requirementsinclude the results of clinical trials, the scope of other research anddevelopment activities, the time required to obtain regulatory approvals, costsassociated with defending certain lawsuits currently pending against theCompany, the costs of filing, prosecuting, defending and enforcing patentclaims and other intellectual property rights, and the ability to establishmarketing alliances and collaborative arrangements. As a result of thesefactors, it is difficult to accurately predict the timing and amount of futurecash requirements.

 

We believe that our available cash,cash equivalents and investments at June 30, 2004 will be sufficient tosatisfy our funding needs for at least the next 12 months.  To meet its cash requirements, the Company maypursue the issuance of additional equity securities and corporate collaborativeagreements. In December 2003, the Company filed a shelf registrationstatement, which will allow the Company to raise up to $75 million through thesale 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 the Company’s stockholders. There can be no assurance thatadditional funding will be available on terms acceptable to the Company, if atall. The failure to fund the Company’s capital requirements would have amaterial adverse effect on its business, financial condition and results ofoperations.

 

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The Company is currently pursuing apharmaceutical collaboration regarding the European marketing rights forCeplene and is pursuing the out-licensing of certain of its apoptosis modulatortechnology.  For instance, inMarch 2004 the Company announced that it has entered into anagreement with Shire BioChem Inc. under which the Company reacquired the rightsto the MX2105 series of vascular targeting agent cancer drug candidates. TheMX2105 series was originally licensed in July 2000 to BioChem Pharma, acompany that was subsequently acquired by Shire Pharmaceuticals.  In July 2003, Shire Pharmaceuticalsannounced that it was exiting the field of oncology research, creating theopportunity for the Company to reacquire the rights to the MX2105 series ofcompounds.  The Company is currentlypursuing the out-licensing of these compounds.

 

In November 2003, the Companyentered into an agreement with Myriad under which the Company licensed itsMX90745 series of caspase-inducer anti-cancer compounds to Myriad.  The agreement requires that Myriad makelicensing, research and milestone payments to the Company totaling up to $27million, assuming the successful commercialization of the compound for thetreatment of cancer, as well as pay a royalty on product sales.  There can be no assurance that the Companywill be able to enter into any additional agreements on acceptable terms, if atall.

 

The Company has never paid a cash dividend on its common stock and suchpayments are prohibited by the terms of the Company’s bank loan. The Companydoes not contemplate the payment of cash dividends on its common stock in theforeseeable future.

 

**IMPACT OF INFLATION**

 

Theimpact of inflation on the operations of the Company for the three and ninemonths ended June 30, 2004 and 2003 was not material.

 

#### **RECENTACCOUNTING PRONOUNCEMENTS**

 

                In March2004, the FASB's Emerging Issues Task Force issued EITF 03-1, “The Meaning ofOther-Than-Temporary Impairment and Its Application to Certain Investments,”which requires disclosures about unrealized losses on available-for-sale debtand equity securities accounted for under FASB Statement No. 115, “Accountingfor Certain Investments in Debt and Equity Securities,” as well as providingguidance for evaluating whether an investment is other-than-temporarilyimpaired.  The EITF is effective forreporting in the Company’s September 30, 2004 financial statements.  The adoption of this EITF is not expected tohave a material impact on the Company’s consolidated financial statements.

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**RISK FACTORS**

 

You should carefully consider thefollowing risk factors and the other information included herein as well as theinformation included in our Annual Report on Form 10-K for the fiscal yearended September 30, 2003, and other reports and filings made with theSecurities and Exchange Commission before investing in our common stock. If anyof the following risks actually occur, our business, financial condition orresults of operations could be harmed. The trading price of our common stockcould decline due to any of these risks, and you may lose part or all of yourinvestment.

 

**The development of our drug candidates issubject to uncertainties, many of which are beyond our control. If we fail tosuccessfully develop our drug candidates, our ability to generate revenues willbe substantially impaired.**

 

Potential products based on our Ceplene, apoptosis modulator andtopical histamine gel technologies will require, dependent upon the specificdrug candidate, extensive research and development, preclinical testing,clinical testing, regulatory approval and substantial additional investmentbefore we can market them. We cannot assure you that any of our drug candidateswill:

 

•                                          besuccessfully developed;

 

•                                          proveto be safe and effective in clinical trials;

 

•                                          meetapplicable United States or international regulatory standards;

 

•                                          becapable of being produced in commercial quantities at acceptable costs;

 

•                                          becommercially viable;

 

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

 

•                                          achievemarket acceptance.

 

We have not completed final testing for efficacy or safety in humansfor the diseases we propose to treat with Ceplene and our other drugcandidates. Failure to ultimately obtain approval for Ceplene and our otherdrug candidates, any delay in our expected testing and development schedules,or any elimination of a product development program in its entirety, willnegatively impact our ability to generate revenues in the future from the saleof our product candidates.

 

**We may not obtain regulatory clearance tomarket Ceplene or our other drug candidates on a timely basis, or at all.**

 

Ceplene and our other drug candidates are subject to extensivegovernment regulations related to development, clinical trials, manufacturingand commercialization. The process of obtaining Federal Drug Administration(FDA), European Agency for the Evaluation of Medicinal Products (EMEA), andother governmental and similar international regulatory approvals is costly,

 

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time consuming, uncertain and subject to unanticipated delays. Even ifwe believe that preclinical and clinical data are sufficient to supportregulatory 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 2000, we submitteda New Drug Application (NDA) to the FDA seeking approval to market Ceplenebased on the data from our first Phase 3 clinical study in advanced malignantmelanoma. In January 2001, the FDA determined that a second study wasrequired to support approval. In response to the FDA request, inJanuary 2002 we commenced another Phase 3 trial. Although we believe thatthis additional Phase 3 trial, in combination with the results of the firstPhase 3 trial, will support approval in the United States and other countries,we have no assurance that (i) the results from this additional Phase 3trial will confirm the results from the first Phase 3 trial, (ii) the FDA,EMEA or similar regulatory agencies will not require additional Phase 3 trialsor (iii) the FDA, EMEA or similar regulatory agencies will approve ourregulatory filings for drug approval.

 

In addition, manufacturing facilities operated by the third partymanufacturers with whom we contract to manufacture Ceplene and our other drugcandidates may not pass a FDA, EMEA or similar international regulatorypreapproval inspection. Moreover, if the FDA, EMEA or similar internationalregulatory agency grants regulatory approval of a product candidate, theapproval may be limited to specific indications or limited with respect to itsdistribution. Similar international regulatory authorities may apply similarlimitations or may refuse to grant any approval.

 

Any failure or delay in obtaining these approvals could prohibit ordelay us from marketing Ceplene and our other drug candidates. If Ceplene andour other drug candidates do not meet applicable regulatory requirements forapproval, we may not have the financial resources to continue research anddevelopment of these candidates, and we may not generate revenues from thecommercial sale of any of our products.

 

**Delays in the commencement, conduct orcompletion of our clinical trials would negatively impact our business.**

 

We may encounter problems with any of our completed, ongoing or plannedclinical studies. For example, we may encounter delays in commencing studies orenrolling volunteers, lower than anticipated retention rate of volunteers in atrial or serious side effects experienced by study participants relating to thedrug candidate. Factors that could affect patient enrollment include the sizeof the patient enrollment population for the targeted disease, eligibilitycriteria, proximity of eligible patients to clinical sites, clinical trialprotocols and the existence of competing protocols, including competitivefinancial incentives for patients and clinicians, and existing approved drugs.If we encounter any delay in the commencement, conduct or completion of ourclinical studies for Ceplene or our other drug candidates, we may experiencethe following consequences:

 

•                                          theanalysis of data from our clinical studies and the reporting of results may bedelayed;

 

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•                                          thesubmission of our applications for regulatory approval of Ceplene and otherdrug candidates with regulatory authorities in North America, Europe andelsewhere in the world may be delayed;

 

•                                          regulatoryapproval of our drug candidates may be delayed and may not occur on a timelybasis, delaying the generation of revenues from the commercial sale of any ofour marketed product candidates;

 

•                                          wemay not have the financial resources to continue and complete research anddevelopment of any of our product candidates; and

 

•                                          wemay not be able to enter into collaborative arrangements relating to anypotential product as a result of the delay in clinical development orregulatory filings.

 

**Because we are dependent on clinical researchcenters and other contractors for clinical testing and for certain research anddevelopment activities, the results of our clinical trials and such researchactivities are, to a certain extent, beyond our control.**

 

The nature of clinical trials and our business strategy requires us torely on clinical research centers and our other contractors to assist us withclinical testing and certain research and development activities. As a result,our success is dependent upon the success of these outside parties inperforming their responsibilities. Although we believe our contractors areeconomically motivated to perform on their contractual obligations, we cannotdirectly control the adequacy and timeliness of the resources and expertiseapplied to these activities by our contractors. If our contractors do notperform their activities in an adequate or timely manner, the development andcommercialization of our drug candidates could be delayed.

 

**We expect to rely on collaborative partnersfor research and development and commercialization of certain potentialproducts.**

 

We expect to rely on collaborative arrangements for research anddevelopment and commercialization of certain drug candidates discovered anddeveloped by us, such as our agreement with Schering Corporation related to ourMP-8899-0406 Phase 2 Ceplene clinical trial in nonresponder hepatitis Cpatients and our agreement with Myriad Genetics related to the MX90745 seriesof caspase-inducer anti-cancer compounds. We cannot be certain that we will beable to maintain these collaborations or enter into any future collaborativearrangements, that any of our collaborations will be successful or that we willreceive revenues from any of these collaborations. The success of these and anyfuture collaborations will depend, in significant part, on our partners’development and strategic considerations, including the relative advantages ofalternative products being developed or marketed by competitors. If ourpartners fail to conduct their activities in a timely manner, or at all,preclinical or clinical development of drug candidates under thosecollaborations could be delayed or terminated. The suspension or termination ofour collaborations, the failure of our collaborations to be successful or thedelay in the development or commercialization of drug candidates pursuant toour collaborations could harm our business.

 

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**Our planned business may expose us toproduct, clinical trial and other liability claims.**

 

Our design, testing and development of potential products involves aninherent risk of exposure to clinical trial and product liability claims andrelated adverse publicity. Insurance coverage is expensive and difficult toobtain, and we may be unable to obtain coverage in the future on acceptableterms, if at all. Although we currently maintain clinical trial insurance forour drug candidates in the amounts we believe to be commercially reasonable, wecannot be certain that the coverage limits of our insurance policies or thoseof our strategic partners will be adequate. If we are unable to obtainsufficient insurance at an acceptable cost or if a claim is brought against us,whether fully covered by insurance or not, our business, results of operationsand financial condition could be materially adversely affected.

 

**Our products may not be accepted, purchasedor used by doctors, patients or payors.**

 

Ceplene, and any of our other drug candidates in development, may notachieve market acceptance even if they are approved by the FDA, EMEA andsimilar international regulatory agencies. We cannot guarantee that physicians,patients, payors or the medical community in general will accept and utilizeany products that we develop. The degree of market acceptance of our potentialproducts will depend on a number of factors, including:

 

•                                          thescope of regulatory approvals;

 

•                                          theestablishment and demonstration of the clinical efficacy, safety and advantagesof our product candidates by clinical trial results, and the acceptance of suchresults by the medical community;

 

•                                          thepotential advantages of our products over existing treatment methods; and

 

•                                          reimbursementpolicies of government and other third-party payors.

 

**We have yet to market or sell any of ourproduct candidates.**

 

Although we currently intend to market Ceplene in the United States, ifit is approved by the FDA, through the recruitment of experienced marketing andsales personnel, we have never before marketed or sold any pharmaceuticalproduct. In order to market or co-market Ceplene or certain other drugcandidates, we will need to hire a significant number of people with relevantpharmaceutical experience to staff our sales force and marketing group, andpossibly also to make appropriate arrangements with collaborative partners. Ifwe cannot develop the required marketing and sales expertise both internallyand through our partnering arrangements, our ability to generate revenue fromproduct sales will likely suffer.

 

We intend to rely on collaborative partners to market and sell Ceplenein international markets, if approved for sale in such markets, and sucharrangements may be sought to market certain other drug candidates in allmarkets. We have not yet entered into any collaborative arrangement withrespect to marketing or selling Ceplene with the exception of agreementsrelating to Australia, New Zealand and Israel. We cannot guarantee that we willbe able to enter into any such arrangements on terms favorable to us, or atall. If we are able to enter into marketing and

 

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selling arrangements with collaborative partners, we cannot assure youthat such marketing collaborators will apply adequate resources and skills totheir responsibilities, or that their marketing efforts will be successful. Ifwe are unable to enter into favorable collaborative arrangements with respectto marketing or selling Ceplene or our marketing collaborators efforts are notsuccessful, our ability to generate revenue from product sales will suffer.

 

**We will be dependent on third partymanufacturers of our product candidates. Our ability to sell our product candidates may be harmed if adequatequantities of our product candidates are not manufactured on a timely basis.**

 

We do not intend to acquire or establish our own dedicatedmanufacturing facilities for Ceplene and our other drug candidates in theforeseeable future. We have contracted and expect to continue to contract withestablished pharmaceutical manufacturers for the production of Ceplene. If weare unable to continue to contract with third-party manufacturers on acceptableterms 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 in delaysin submissions for regulatory approval and in commercial product launches,which in turn could materially impair our competitive position and thepossibility of achieving profitability. We cannot guarantee that we will beable to maintain our existing contract manufacturing relationships, or acquireor establish new, satisfactory third-party relationships to provide adequatemanufacturing capabilities in the future.

 

**We are not profitable and expect to continueto incur losses. If we do not become profitable, we may ultimately be forced todiscontinue our operations.**

 

We are a development-stage enterprise. We have experienced net lossesevery year since our inception. Our net losses applicable to common stock were$30.5 million and $32.7 million for the nine months ended June 30,2004 and 2003. As of June 30, 2004, we had an accumulated deficit ofapproximately $337 million. We anticipate incurring substantial additionallosses over at least the next several years related to developing and testingour drug candidates and preparing for commercialization and planned marketlaunches of our products. If we do not become profitable, our stock price willbe negatively affected, and we may ultimately be forced to discontinue ouroperations. We may never generate product revenues or become profitable. Weexpect to have quarter-to-quarter fluctuations in revenues, expenses andlosses, some of which could be significant.

 

**We will need to raise additional funds in thefuture. If we are unable to obtain the funds necessary to continue ouroperations, we will be required to delay, scale back or eliminate one or moreof our drug development programs.**

 

We have already spent substantial funds developing our potentialproducts and business. We expect to continue to have negative cash flow fromour operations for at least the next several years. In addition, although the FDA agreed to allowreimbursement for the study medication under our treatment protocol, we havedetermined that we will not seek reimbursement for providing patients access toCeplene under the treatment protocol.  Wewill have to raise

 

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additional funds to complete the development of our drug candidates andto bring them to market. Our future capital requirements will depend onnumerous factors, including:

 

•                                          theresults of our clinical trials;

 

•                                          thetiming and scope of any additional clinical trials undertaken;

 

•                                          thescope and results of our research and development programs;

 

•                                          thetime required to obtain regulatory approvals;

 

•                                          ourability to establish marketing alliances and collaborative agreements;

 

•                                          thecost of our internal marketing activities; and

 

•                                          thecost of filing, prosecuting and, if necessary, enforcing patent claims.

 

Additional financing may not be available on acceptable terms, if atall. If adequate funds are not available, we will be required to delay, scaleback or eliminate one or more of our drug development programs or obtain fundsthrough arrangements with collaborative partners or others that may require usto relinquish rights to certain of our technologies or product candidates thatwe would not otherwise relinquish.

 

**We compete against many companies andresearch institutions that are developing products to treat the same diseasesas our drug candidates. To the extent these competitors are successful indeveloping and marketing such products, our future potential market share andrevenues could be reduced.**

 

There are many companies, both publicly and privately held, includingwell-known pharmaceutical companies and academic and other researchinstitutions, engaged in developing pharmaceutical products for the treatmentof life-threatening cancers and liver diseases. Products developed by any ofthese companies or institutions may demonstrate greater safety or efficacy thanour drug candidates or be more widely accepted by doctors, patients orthird-party payors. Many of our competitors and potential competitors havesubstantially greater capital resources, research and development capabilitiesand human resources than we do. Many of these competitors also havesignificantly greater experience than we do in undertaking preclinical testingand clinical trials of new pharmaceutical product candidates and obtaining FDA,EMEA and other regulatory approvals. If any of our drug candidates are approvedfor commercial sale, we will also be competing with companies that have greaterresources and experience in manufacturing, marketing and selling pharmaceuticalproducts. To the extent that any of our competitors succeed in developingproducts that are more effective, less costly or have better side effectprofiles than our products, then our future potential market share coulddecrease, which may have a negative impact on our business.

 

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**If we fail to secure adequate protection ofour intellectual property or the right to use certain intellectual property ofothers, we may not be able to protect our product candidates and technologiesfrom competitors.**

 

Our success depends in large part on our ability to obtain, maintainand protect patents, trademarks and trade secrets and to operate withoutinfringing upon the proprietary rights of others. If we are unable to do so,our product candidates and technologies may not provide us with any competitiveadvantage.

 

The patent positions of biotechnology and pharmaceutical companies arehighly uncertain and involve complex legal and factual questions, and thebreadth of claims allowed in biotechnology and pharmaceutical patents cannot bepredicted. As a result, patents may not issue from any of our patentapplications. Patents currently held by us or issued to us in the future, or tolicensors from whom we have licensed technology rights, may be challenged,invalidated or circumvented so that our intellectual property rights may notprotect our technologies or provide commercial advantage to us. In addition, wealso rely on unpatented trade secrets and proprietary know-how, and we cannotbe sure that others will not obtain access to or independently develop suchtrade secrets and know-how. Enforcement of our intellectual property rightsagainst any infringers of our patents relating to Ceplene and our othertechnologies will be costly and time-consuming. Because of the nature of thosepatents, we could be required to bring lawsuits against many different entitiessuch as hospitals or clinics. This would have the effect of increasing thecosts of enforcing our rights.

 

The pharmaceutical industry has experienced extensive litigationregarding patent and other intellectual property rights. Although to date weare not aware of any intellectual property 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 in our sector is developingrapidly, and our future success depends on our ability to keep abreast oftechnological change.**

 

We are engaged in the pharmaceutical field, which is characterized byextensive research efforts and rapid technological progress. New developmentsin oncology, cancer therapy, medicinal pharmacology, biochemistry and otherfields are expected to continue at a rapid pace. Research and discoveries byothers may render some or all of our proposed programs or product candidatesnoncompetitive or obsolete. Our business strategy is subject to the risks inherentin the development of new product candidates using new technologies andapproaches. Unforeseen problems may develop with these technologies orapplications, and we may not be able to successfully address technologicalchallenges we encounter in our research and development programs. This mayresult in our inability to develop commercially feasible products.

 

 

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**Ourfuture success depends on our ability to attract and retain key personnel.**

 

Our success will depend, to a great extent, upon the experience,abilities and continued services of our executive officers, and key personnelfor research, development and commercialization. If we lose the services of anyof these officers or key research and development personnel, our business couldbe harmed. Our success also will depend upon our ability to attract and retainother highly qualified research and development, managerial, manufacturing andsales personnel and our ability to develop and maintain relationships withqualified clinical researchers. Competition for these personnel andrelationships is intense and we compete with numerous pharmaceutical andbiotechnology companies as well as with universities and non-profit researchorganizations. We may not be able to continue to attract and retain qualifiedpersonnel or develop and maintain relationships with clinical researchers.

 

**The marketability of our product candidatesmay depend on reimbursement and reform measures in the health care industry.**

 

Our success may depend, in part, on the extent to which reimbursementfor the costs of therapeutic product candidates and related treatments will beavailable from third-party payors such as United States and similarinternational government health administration authorities, private healthinsurers, managed care programs and other organizations. Over the past decade,the cost of health care has risen significantly, and there have been numerousproposals by legislators, regulators and third-party health care payors to curbthese costs. Some of these proposals have involved limitations on the amount ofreimbursement for certain products and product candidates. For example, inJuly 2004, the Centers for Medicare and Medicaid Services (CMS) posted aproposed rule outlining revisions to payment policies under the physician feeschedule for calendar year 2005 which would implement many provisions ofthe Medicare Prescription Drug, Improvement and Modernization Act (MMA) of2003.  The proposed rule makes changes tothe payment policy and may impact the reimbursement of oncology products.  If the proposed rule is implemented, theamount we may be reimbursed for Medicare and Medicaid patients using ourproducts could be negatively affected, and this could, in turn, impact theamount of reimbursement from other healthcare payors and the prices of ourproducts.  We cannot guarantee thatsimilar United States federal or state or similar international health carelegislation and policies will not be adopted in the future or that any productcandidates sought to be commercialized by us will be considered cost-effectiveor that adequate third-party insurance coverage will be available for us toestablish and maintain price levels sufficient for realization of anappropriate return on our investment in product development. Moreover, theexistence or threat of cost control measures could have an adverse effect onthe willingness of potential collaborators to pursue research and developmentprograms related to our product candidates.

 

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

 

From time to time we consider strategic transactions and alternativeswith the goal of maximizing stockholder value. These potential transactions mayinclude a variety of different business arrangements, including spin-offs,acquisitions, strategic partnerships, joint ventures, restructurings,divestitures, business combinations and investments. We cannot assure you thatany such transactions will be consummated on favorable terms or at all, will infact enhance stockholder value, or will not adversely affect our business orthe trading price of our stock. Any such transactions may require us to incurnon-recurring or other charges and may pose significant integration challengesand/or management and business disruptions, any of which could materially andadversely affect our business and financial results.

 

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**We have been named as a defendant inlitigation that could result in substantial costs and divert management’sattention and resources.**

 

In October 2001 and May 2002, certain former shareholders ofCytovia filed complaints in California Superior Court in San Diego, against usand two of our officers, alleging fraud and negligent misrepresentation inconnection with our acquisition of Cytovia. A binding arbitration proceedingwith the American Arbitration Association was held in May 2003. Thethree-member arbitration panel rejected all of the plaintiffs’ claims, determinedthat we have no liability for such claims and awarded recovery of ourreasonable attorneys’ fees and costs of approximately $922,000 as prevailingparty in the proceedings. In December 2003, the decision was confirmed bythe Superior Court, which entered a judgment to this effect. In June 2004,the plaintiffs filed an Appeal, which the Company is vigorously opposing.

 

No assurances can be made that we will be successful in our defense ofthe pending claims. If we are not successful in our defense of such claims, wecould be forced to make significant payments to the plaintiffs and defenselawyers, and such payments could have a material adverse effect on ourbusiness, financial condition and results of operations if not covered by ourinsurance carrier. Even if our defense against such claims is successful, thelitigation could result in substantial costs and divert management’s attentionand resources, which could adversely affect our business.

 

**Our stock price may be highly volatile due toexternal 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. The Company currentlyhas a $75 million shelf registration statement on file with the Securities andExchange Commission.  Sales ofsubstantial amounts of our common stock in the public market could adverselyaffect the prevailing market prices of our common stock and our ability toraise equity capital in the future.

 

Factorsthat may have a significant impact on the market price or the liquidity of ourcommon stock also include:

 

•                                          actualor potential clinical trial results relating to drug candidates underdevelopment by us or our competitors;

 

•                                          delaysin our clinical testing and development schedules;

 

•                                          eventsor announcements relating to our collaborative relationships;

 

•                                          announcements of technologicalinnovations or new products or drug candidates by us or our competitors;

 

•                                          developments or disputes concerningpatents or proprietary rights;

 

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•                                          regulatory developments in both theUnited States and other countries;

 

•                                          economicand other external factors, disasters or crises, as well as period-to-periodfluctuations in our financial results;

 

•                                          marketconditions for pharmaceutical and biotechnology stocks, whether or not relatedto results or news regarding us or our competitors; and

 

•                                          publicityregarding actual or potential medical results relating to products or drugcandidates under development by us or our competitors.

 

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.

 

**Certain anti-takeover provisions in ourcharter, by-laws, shareholder rights plan and under Delaware law may deter athird party from acquiring us, even though such acquisition may be beneficialto our stockholders.**

 

Certain provisions of our charter and by-laws may make it moredifficult 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:

 

•                                          astaggered or classified board;

 

•                                          theinability of stockholders to act by written consent; and

 

•                                          noright to remove directors other than for cause.

 

We have also adopted a shareholder rights plan or “poison pill.” Ourshareholder rights plan is designed to protect our shareholders in the event ofan unsolicited bid to acquire the 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 to issue, at any time,without further stockholder approval, up to 5,000,000 shares of preferredstock, and to determine the price, rights, privileges and preferences of thoseshares. These preferred shares are available to be used in

 

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connection with our shareholder rights plan. Any issuance of preferredstock could discourage a third party from acquiring a majority of ouroutstanding voting stock.

 

Furthermore, we are subject to the provisions of Section 203 ofthe Delaware General Corporations Law, an anti-takeover law, which may alsodissuade a potential acquiror, even though such acquisition may be beneficialto our stockholders.

 

Issuing preferred stock with rights senior to those of our common stockcould adversely affect holders of common stock.

 

Our charter documents give our board of directors the authority toissue a series of preferred stock without a vote or action by our stockholders.The board also has the authority to determine the terms of preferred stock,including price, preferences and voting rights. The rights granted to holdersof preferred stock may adversely affect the rights of holders of our commonstock. For example, a series of preferred stock may be granted the right toreceive a liquidation preference—a pre-set distribution in the event of aliquidation—that would reduce the amount available for distribution to holdersof common stock. In addition, the issuance of preferred stock could make it moredifficult for a third party to acquire a majority of our outstanding votingstock. As a result, common stockholders could be prevented from participatingin transactions that would offer an optimal price for their shares.

 

#### **ITEM 3.**QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKETRISK

 

The Company’s exposure to market risk is principally confined to itscash equivalents and investments that have maturities of less than three years.The Company maintains a non-trading investment portfolio of investment grade,liquid debt securities that limits the amount of credit exposure to any oneissue, issuer or type of instrument. The securities in its investment portfolioare not leveraged, are classified as available-for-sale and are subject tointerest rate risk. The Company currently does not hedge interest rateexposure. A hypothetical ten percent change in interest rates during thequarter ended June 30, 2004 would have resulted in approximately a $35,000change in net loss.  The Company has notused derivative financial instruments in its investment portfolio. There havebeen no significant changes in the types or maturities of investments held fromSeptember 30, 2003.

 

###### **ITEM4.**CONTROLSAND PROCEDURES

 

The Company carried out an evaluation, under the supervision and withthe participation of the Company’s management, including the Company’sPresident and Chief Executive Officer and Chief Financial Officer, of theeffectiveness of the design and operation of the Company’s disclosure controlsand procedures, as defined in Exchange Act Rule 13a-15(e), as of the end of theperiod covered by this report.  Basedupon that evaluation, the Company’s President and Chief Executive Officer andChief Financial Officer concluded that the Company’s disclosure controls and proceduresare effective in enabling the Company to record, process, summarize and reportinformation required to be included in the Company’s periodic filings with theSecurities Exchange Commission within the required time period.  There have

 

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been no significant changes in the Company’s internal controls or inother factors that could significantly affect internal controls subsequent tothe date the Company carried out its evaluation.

 

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**PARTII–OTHER INFORMATION**

 

*Item 1.  Legal Proceedings*

* *

On December 14, 2000 plaintiff Blake Martin, on behalf of himselfand purportedly on behalf of a class of others similarly situated, filed acomplaint in the United States District Court for the Southern District ofCalifornia against the Company and two officers 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, and seeking damages therefore. InDecember 2003, the United States Federal Court granted the Company’smotion to dismiss the lawsuit with prejudice and without leave to amend, whichwas the third dismissal entered by the court in the case.  On December 30, 2003, plaintiff BlakeMartin exercised his right to appeal the decision of the United States DistrictCourt for the Southern District of California to the Ninth Circuit Court ofAppeals.  That appeal has been dropped,ending the litigation in favor of the Company.

 

InOctober 2001 and May 2002, certain former shareholders of Cytovia filedcomplaints in California Superior Court in San Diego against the Company andtwo of its officers based on similar facts and circumstances, alleging fraudand negligent misrepresentation in connection with the Company’s acquisition ofCytovia.  A binding arbitration proceeding with theAmerican Arbitration Association was held in May 2003.  The three-member arbitration panel rejectedall of the plaintiffs’ claims, determined that the Company has no liability forsuch claims and awarded recovery of the Company’s reasonable attorneys’ feesand costs of approximately $922,000 as prevailing party in the proceeding.  In December 2003, the decision wasconfirmed by the Superior Court, which entered a judgment to this effect.  In June 2004, the plaintiffs filed anAppeal, which the Company is vigorously opposing.

 

TheCompany believes that the claims set forth in the pending complaint by theformer shareholders of Cytovia are without merit, and it intends to engage in arigorous defense against such claims. No assurances can be madethat the Company will be successful in its defense of the pending claims. Ifthe Company is not successful in its defense of such claims, the Company couldbe forced to make significant payments to the plaintiffs and defense lawyers,and such payments could have a material adverse effect on the Company’sbusiness, financial condition and results of operations if not covered by theCompany’s insurance carrier. Even if the Company’s defense against such claimsis successful, the litigation could result in substantial costs and divertmanagement’s attention and resources, which could adversely affect theCompany’s business.

 

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*Item 6. Exhibits and Reports on Form 8-K*

 

*a)**            Exhibits*

 
| 10.1 |   | First  Amendment of Standard Office Lease dated April 30, 2004 between Alecta  Pensionsförsäkring, Ömsesidigt, a Swedish Company, as Landlord, and the  Registrant. |
|------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 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 Anthony E. Altig, 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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*b) Reports on Form 8-K*

 
| **Date of Report** | ** ** | **Description of Exhibit**  | ** ** | **Financial Statements Filed** |
|--------------------|------------|-----------------------------|------------|--------------------------------|
| May 4, 2004        |       | Press Release:  “Maxim |       | No                             |
|               |       | Pharmaceuticals Announces   |       |                           |
|               |       | 2004 Second Quarter         |       |                           |
|               |       | Financial Results”     |       |                           |

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 
|                       | MAXIM  PHARMACEUTICALS, INC. |
|----------------------------|------------------------------|
|                       | By:                          | /s/ Anthony E. Altig |
|                       |                         | Anthony E. Altig, |
| * *                   | * *                     | *Vice President, Finance and Chief Financial Officer* |
| * *                   | * *                     | *(Principal Financial and Accounting Officer duly  authorized to  sign on behalf of the registrant)* |
| Date:  August 6, 2004 | * *                     | * * |

 

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