Back to GetFilings.com

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the Quarter Ended June 30, 2002

or

Commission file number 1-14430

MAXIM PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)

(858) 453-4040
(Registrant's telephone number, including area code)

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

        As of August 2, 2002, the registrant had 23,292,393 shares of Common Stock, $.001 par value, outstanding.

MAXIM PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Company)

INDEX

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

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

See Notes to Condensed Consolidated Financial Statements

1

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

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

See Notes to Condensed Consolidated Financial Statements

2

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

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

See Notes to Condensed Consolidated Financial Statements.

3

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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

1.    PRINCIPLES OF INTERIM PERIOD REPORTING

        Maxim Pharmaceuticals, Inc. (the "Company") has not earned significant revenues from planned principal operations. Accordingly, the Company's activities have been accounted for as those of a "Development Stage Enterprise" as set forth in Financial Accounting Standards Board Statement No. 7.

        The information at June 30, 2002 and for the three and nine months ended June 30, 2002 and 2001 is unaudited. In the opinion of the Company, these condensed consolidated financial statements contain all of the adjustments, consisting only of normal recurring adjustments and accruals, necessary to present fairly the condensed consolidated financial position of the Company as of June 30, 2002 and September 30, 2001, and the condensed consolidated results of operations for the three months and nine months ended June 30, 2002 and 2001 and from inception (October 23, 1989) through June 30, 2002. The condensed consolidated results of operations for the three months and nine months ended June 30, 2002 are not necessarily indicative of the results to be expected in subsequent periods or for the year as a whole. For further information, refer to the consolidated financial statements and footnotes thereto in our Annual Report on Form 10-K for the year ended September 30, 2001.

2.    TOTAL OTHER COMPREHENSIVE LOSS

        Total other comprehensive loss for the three months ended June 30, 2002 and 2001 was $7,389,899 and $6,607,188, respectively. Total other comprehensive loss for the nine months ended June 30, 2002 and 2001 was $53,722,549 and $28,490,630, respectively. The difference between total other comprehensive loss and net loss attributable to common stock was composed of unrealized gains and losses on available-for-sale securities and foreign translation gains and losses.

3.    NET LOSS PER SHARE

        Net loss per share is calculated in accordance with Statement of Financial Accounting Standards No. 128 "Earnings per Share." Basic net loss per share of common stock is computed by dividing the net loss after deduction of dividends on preferred stock by the weighted average number of shares of common stock outstanding during the period. Diluted loss per share is calculated by including the additional common shares issuable upon exercise of outstanding options and warrants in the basic weighted average share calculation unless the effect of their inclusion is antidilutive. For the quarters ended June 30, 2002 and 2001, outstanding options and warrants totaled 3,179,988 and 3,190,060, respectively. As these securities were antidilutive, diluted loss per share equaled basic loss per share in each respective period.

4.    ADOPTION OF NEW ACCOUNTING PRONOUNCEMENT—GOODWILL AND OTHER INTANGIBLE ASSETS

        On June 16, 2000, the Company acquired all of the outstanding capital stock of Cytovia, Inc. ("Cytovia"), a privately held biopharmaceutical research company. The transaction was accounted for using the purchase method of accounting in accordance with Accounting Principles Board (APB) Opinion No. 16. The Company recorded goodwill and other intangible assets, consisting of assembled workforce, that combined had an unamortized book value of $28,179,466 at September 30, 2001. Through September 30, 2001, goodwill and assembled workforce were being amortized over 15 years and five years, respectively.

        Effective October 1, 2001, the Company adopted the provisions of Statement of Financial Accounting Standard ("SFAS") No. 142, "Goodwill and Other Intangible Assets". SFAS No. 142

4

requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually. SFAS No. 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets to Be Disposed Of".

        As a result of the adoption of SFAS No. 142, the Company ceased amortizing goodwill on October 1, 2001, and performed the transitional impairment assessment of the goodwill related to the Cytovia acquisition for impairment as of October 1, 2001. Although the goodwill arose from purchase accounting applied to the acquisition of a specific entity, SFAS No. 142 requires that this test be applied to the relevant "reporting unit" which may differ from the specific entity acquired. Due to the integrated nature of the Company's operations, the entire Company was determined to be one single reporting unit. Under the provisions of SFAS No. 142, the Company was required for the first time to determine the impairment of goodwill by first comparing the fair value of the Company, with the fair value based on the market price of the Company's common stock, to the carrying value of its assets, including goodwill. As this analysis indicated an impairment of goodwill, the Company was required to measure the amount of impairment by comparing the "implied" fair value of the goodwill to its carrying amount.

        The analyses performed under SFAS No. 142 resulted in an implied fair value of the goodwill of zero. Therefore, a charge of $28,179,466 was recorded during the quarter ended December 31, 2001 reflecting the cumulative effect of change in accounting principle resulting from the adoption of SFAS No. 142 and the related write down of goodwill.

        Had the Company accounted for its goodwill under the provisions of SFAS No. 142 beginning October 1, 2000, the Company's net loss applicable to common stock and net loss per share would have been as follows for the three and nine months ended June 30, 2001:

5.    RECLASSIFICATIONS

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

6.    CONTINGENCIES

        In December 2000, plaintiff Blake Martin, on behalf of himself and purportedly on behalf of a class of Company stockholders, filed a complaint in the United States District Court for the Southern District of California against the Company and certain officers, alleging violations of federal securities laws related to declines in the Company's stock price. In September 2001, this complaint, and similar complaints based on the same facts and circumstances, were consolidated into a single action. The complaints allege claims in connection with various alleged statements and omissions to the public and to the securities markets. On April 22, 2002, the complaint filed in the United States District Court for

5

the Southern District of California was dismissed by the court, but the plaintiff was given 30 days to file an amended complaint. In May 2002, the plaintiff filed an amended complaint, and the Company filed a motion to dismiss the amended complaint in June 2002. A hearing on the Company's motion to dismiss the amended complaint is scheduled to take place on August 26, 2002.

        In October 2001 and May 2002, certain former shareholders of Cytovia filed complaints in California Superior Court in San Diego, against the Company and two of its officers based on similar facts and circumstances, alleging fraud and negligent misrepresentation in connection with the Company's acquisition of Cytovia. The Superior Court subsequently issued an order compelling the first lawsuit to an arbitration forum and the second lawsuit has been stayed pending resolution of the arbitration proceeding.

        The Company believes that the claims set forth in each of these complaints are without merit, and it intends to engage in a rigorous defense of such claims.

7.    SUBSEQUENT EVENTS

        On July 29, 2002, the Company amended our credit agreement which increased our available line of credit to $3,800,000, providing the Company an additional $600,000 of borrowing capacity. The Company can access the line for equipment and other capital assets purchased between the date of the amendment through September 30, 2002. The agreement continues to contain customary affirmative and negative covenants, including financial covenants requiring the maintenance of specified liquidity terms and minimum tangible net worth. In addition, the Company is required to maintain its principal depository and operating accounts with the bank. The Company can choose to maintain a minimum aggregate balance of $3,500,000 at the institution or pay to the bank a fee in the amount of $2,500 quarterly in arrears. Payments on the line of credit are to be paid in equal monthly installments commencing November 1, 2002 through April 1, 2006 at an interest rate of prime plus ..75%.

        On July 23, 2002, the Company increased its guarantee to $1,800,000 on loans made by a bank to two officers of the Company and one former officer of the Company. Under the guarantor agreement, the Company granted the bank a security interest in a $1,800,000 certificate of deposit as collateral for the loans the bank made to the individual parties.

6

ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

        This Management's Discussion and Analysis of Financial Condition and Results of Operations contains certain forward-looking statements that involve risks and uncertainties. Such forward-looking statements include statements regarding plans for the development and commercialization of the Company's drug candidates and future cash requirements. Such statements are only predictions and the Company's actual results could differ materially from those anticipated or projected in such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section entitled "Risk Factors" following in this Report. As a result, you are cautioned not to rely on these forward-looking statements.

RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2002 AND 2001

        Collaboration and Research Revenue—For the quarter ended June 30, 2002, collaboration and research revenue totaled $776,000, a decrease of $50,000, or 6%, from the same period in the prior year. Collaboration and research revenue for the nine months ended June 30, 2002 totaled $1,818,000 compared to $2,528,000 for the nine months ended June 30, 2001. These decreases were primarily related to a decrease in research revenues associated with the licensing of the Company's MX2105 series of caspase-inducer anti-cancer compounds, a transaction that occurred shortly before the start of the prior fiscal year.

        Research and Development Expenses—Research and development expenses for the quarter ended June 30, 2002 totaled $7,631,000, an increase of $1,502,000, or 24%, over the same period in the prior year. This increase was due to increased expenses associated with the apoptosis modulator technology platform as well as an increase in research expenses related to the start of a Phase 3 clinical trial of Ceplene™ for the treatment of patients with advanced metastatic melanoma, and our Phase 2 triple-drug combination therapy trial for the treatment of patients infected with Hepatitis C. For the nine months ended June 30, 2002, research and development expenses were $23,501,000, a decrease of $1,929,000, or 8%, from the same period of the prior year. This decrease was primarily due to the completion of three large Ceplene™ clinical trials, and the advancement of several other clinical trials to the follow-up stage where ongoing costs were less than in the prior period.

        Marketing and Business Development Expenses—Marketing and business development expenses for the quarter ended June 30, 2002 were $886,000, a decrease of $472,000, or 35%, from the same period of the prior year. For the nine months ended June 30, 2002, marketing and business development expenses were $2,268,000, a decrease of $4,930,000, or 68%, from the same period in the prior year. These decreases were due to a decrease in marketing and sales management personnel and other premarketing activities that were incurred in preparation for the potential U.S. market launch of Ceplene. The market launch of Ceplene was originally anticipated for the first half of 2001; therefore, increased marketing preparation costs were incurred during the prior year periods. The potential launch was delayed to a future period after the FDA declined to approve the use of Ceplene for its most advanced development program, the treatment of patients with advanced metastatic melanoma that have liver metastases, until a second Phase 3 clinical trial is completed.

        General and Administrative Expenses—For the quarter ended June 30, 2002, general and administrative expenses were $1,502,000, an increase of $119,000, or 9%, over the same period in the prior year, primarily as a result of the increased legal and other related fees due to the shareholder litigation. For the nine months ended June 30, 2002, general and administrative expenses were consistent with the same period in the prior year.

7

        Amortization of Goodwill and Other Acquisition-Related Intangible Assets—There was no amortization of goodwill and other acquisition related intangible assets for the three and nine months ended June 30, 2002, compared to the $551,000 and 1,667,000 for the three and nine months ended June 30, 2001. These decreases were due to the adoption, effective October 1, 2001, of SFAS No. 142, "Accounting for Goodwill and Other Intangible Assets", which ceased the amortization of goodwill and identified intangible assets with indefinite lives.

        Other Income—Investment income was $1,132,000 for the quarter ended June 30, 2002, a decrease of $1,063,000, or 48%, from the same period in the prior year. For the nine months ended June 30, 2002, investment income totaled $4,015,000, a decrease of $3,899,000 or 49% from the same period in the prior year. These decreases were a result of the decrease in investment balances and the rate of earnings due to reductions in interest rates.

        Cumulative Effect of Change in Accounting Principle—The non-cash $28,179,000 charge recorded during the nine months ended June 30, 2002 reflects the write down of the carrying value of goodwill associated with the Cytovia acquisition recorded as a result of the adoption, effective October 1, 2001, of SFAS No. 142, "Accounting for Goodwill and Other Intangible Assets".

        Net Loss Applicable to Common Stock—Net loss applicable to common stock for the quarter ended June 30, 2002 totaled $8,156,000, an increase of $1,727,000 or 27%, from the same period in the prior year. This increase was primarily due to the decrease in investment income and the slight increase in operating expenses, as described above. Net loss applicable to common stock for the nine months ended June 30, 2002 totaled $53,223,000, an increase of $24,069,000 or 83%, from the same period in the prior year. The increase was primarily due to the cumulative effect of the change in accounting principle and the decrease in investment income, partially offset by the decrease in operating expenses, as described above.

LIQUIDITY AND CAPITAL RESOURCES

        The Company, as a development stage enterprise, anticipates incurring substantial additional losses at least in the near future as it continues to expend substantial amounts on its ongoing and planned clinical trials and its expanded efforts related to its other research and development efforts, including the apoptosis modulator program acquired as part of the Cytovia purchase. The Company has financed its operations primarily through the sale of its equity securities, including an initial public offering in 1996, an international follow-on public offering in 1997, private offerings of preferred stock in July and November 1999 and a follow-on public offering in February 2000 that provided total net proceeds of approximately $294 million.

        Until required for operations, the Company's policy under established guidelines is to keep its cash reserves in bank deposits, certificates of deposit, commercial paper, corporate notes, United States government instruments and other readily marketable debt instruments, all of which are investment-grade quality.

        As of June 30, 2002, the Company had cash, cash equivalents and investments totaling approximately $119.9 million. For the nine months ended June 30, 2002, net cash used in the Company's operating activities was approximately $24.0 million, as compared to $30.6 million during the same period in the prior year, primarily due to lower research and development and marketing and business development expenditures. The Company's cash requirements may fluctuate in future periods as it conducts additional research and development activities including clinical trials, other research and development activities, and efforts associated with the commercial launch of any products that are approved for sale by government regulatory bodies. Among the activities that may result in an increase in cash requirements are the scope and timing of the Phase 3 and Phase 2 Ceplene cancer and hepatitis C clinical trials currently underway, and earlier-stage clinical trials and other research related

8

to liver disease and the apoptosis modulator and MaxDerm™ technologies. Other factors that may impact the Company's cash requirements include the results of clinical trials, the scope of other research and development activities, the time required to obtain regulatory approvals, costs associated with defending certain lawsuits currently pending against the Company, the cost of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights, the ability to establish marketing alliances and collaborative arrangements and the cost of internal marketing activities. As a result of these factors, it is difficult to predict accurately the timing and amount of future cash requirements.

        The Company may pursue the issuance of additional equity securities, and pursue corporate collaborative agreements, as required, to meet its cash requirements. The issuance of addit