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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended June 30, 2006
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission File Number: 000-50484
Marshall Edwards, Inc.
(Exact name of registrant as specified in its charter)
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DELAWARE
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51-0407811 |
(State or other jurisdiction of
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(I.R.S. Employer Identification No.) |
Incorporation or organization) |
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140 Wicks Road, North Ryde, NSW, 2113 Australia
(Address of principal executive offices) (Zip Code)
Registrants telephone number, including area code:
(011) 61 2 8877- 6196
Securities registered pursuant to Section 12(b) of the Act:
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Name of Each Exchange on which |
Title of Each Class
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Registered |
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Common Stock, $0.00000002 par value
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Nasdaq Global Market |
Warrants to Purchase Common Stock
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Nasdaq Global Market |
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Indicate by a check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes o No þ
Indicate by a check mark if the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act. Yes o No þ
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 þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
(Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best
of the registrants knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer o Non-accelerated filer þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
The aggregate market value of the voting common equity held by non-affiliates of the
registrant was approximately $46.5 million based on the closing price of the registrants Common
Stock as reported on the Nasdaq Global Market on December 30, 2005.
As of August 31, 2006, the number of shares outstanding of the issuers common stock, $0.00000002
par value, was 63,390,937.
Documents Incorporated by Reference
Portions of this registrants definitive proxy statement for its 2006 annual meeting to be filed
with the SEC no later than 120 days after the end of the fiscal year are incorporated by reference
in Part III of this Annual Report on Form 10-K.
MARSHALL EDWARDS, INC.
TABLE OF CONTENTS
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PART I |
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Item 1: Business |
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5 |
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Item 1A: Risk Factors |
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25 |
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Item 1B: Unresolved Staff Comments |
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38 |
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Item 2: Properties |
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39 |
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Item 3: Legal Proceedings |
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39 |
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Item 4: Submissions of Matters to a Vote of Security Holders |
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39 |
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PART II |
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Item 5: Market for the Registrants Common Equity, Related Stockholder Matters and
Issuer Purchases of Securities |
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Item 6: Selected Financial Data |
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Item 7: Managements Discussion and Analysis of Financial Condition and results of
Operations. |
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Item 7a: Quantitative and Qualitative Disclosures about Market Risk |
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55 |
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Item 8: Financial Statements and Supplementary Data |
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56 |
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Item 9: Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure |
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76 |
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Item 9a: Controls and Procedures |
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Item 9b: Other Information |
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77 |
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PART III |
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Item 10: Directors and Officers of the Registrant |
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78 |
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Item 11: Executive Compensation |
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78 |
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Item 12: Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters |
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78 |
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Item 13: Certain Relationships and Related Transactions |
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78 |
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Item 14: Principle Accountant Fees and Services |
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78 |
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PART IV |
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Item 15: Exhibits and Financial Statement Schedules |
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79 |
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Cautionary Statement about Forward-Looking Statements
This Annual Report on Form 10-K includes forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended and Section 21E of the Security Exchange Act of 1934,
as amended. All statements other than statements of historical facts contained in this Annual
Report, including statements regarding the future financial position, business strategy and plans
and objectives of management for future operations, are forward-looking statements. The words
believe, may, will, estimate, continue, anticipate, intend, should, plan,
expect, and similar expressions, as they relate to the Company, are intended to identify
forward-looking statements. The Company has based these forward-looking statements largely on
current expectations and projections about future events and financial trends that it believes may
affect financial condition, results of operations, business strategy and financial needs. These
forward-looking statements are subject to a number of risks, uncertainties and assumptions,
including, without limitation, those described in Risk Factors and elsewhere in this Form 10-K,
including, among other things:
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our limited operating history; |
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our inability to obtain any additional required financing or financing
available to us on acceptable terms; |
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our failure to successfully commercialize our product candidates; |
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costs and delays in the development and/or receipt of FDA or other
required governmental approvals, or the failure to obtain such approvals, for our
product candidates; |
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uncertainties in clinical trial results; |
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our inability to maintain or enter into, and the risks resulting from our
dependence upon, collaboration or contractual arrangements necessary for the
development, manufacture, commercialization, marketing, sales and distribution of
any products; |
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our inability to control the costs of manufacturing our products; |
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continued cooperation and support of Novogen, our parent company; |
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competition and competitive factors; |
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our inability to protect our patents or proprietary rights and obtain
necessary rights to third party patents and intellectual property to operate our
business; |
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our inability to operate our business without infringing the patents and
proprietary rights of others; |
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costs stemming from our defence against third party intellectual property
infringement claims; |
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difficulties in enforcement of civil liabilities against our officers and
directors who are residents of jurisdictions outside the United States. |
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general economic conditions; |
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the failure of any products to gain market acceptance; |
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technological changes; |
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government regulation generally and the receipt of the regulatory
approvals; |
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changes in industry practice; and |
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one-time events; |
These risks are not exhaustive. Other sections of this Annual Report on Form 10-K may include
additional factors which could adversely impact our business and financial performance. Moreover,
we operate in a very competitive and rapidly changing environment. New risk factors emerge from
time to time and it is not possible for us to predict all risk factors, nor can we assess the
impact of all factors on our business or the extent to which any factor, or combination of factors,
may cause actual results to differ materially from those contained in any forward-looking
statements.
You should not rely upon forward looking statements as predictions of future events. We cannot
assure you that the events and circumstances reflected in the forward looking statements will be
achieved or occur. Although we believe that the expectations reflected in the forward looking
statements are reasonable, we cannot guarantee future results, levels of activity, performance or
achievements.
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PART I
Item 1. Business
Overview of Our Business
We are a developmental stage pharmaceutical company listed on the Nasdaq Global Market under the
symbol MSHL. We were incorporated on December 1, 2000 as a wholly-owned subsidiary of Novogen
Limited, an Australian company. Novogens ordinary shares trade on the Australian Stock Exchange
under the symbol NRT, and American Depositary Receipts (ADRs) trade in the United States under
the symbol NVGN on the Nasdaq Global Market. As at the date of this report Novogen owns
approximately 78.1% of our outstanding common stock.
We commenced operation in May 2002 and our business purpose is the development and
commercialization of drugs for the treatment of cancer. We are presently engaged in the clinical
development and commercialization of a drug candidate called phenoxodiol which we have licensed
from a subsidiary of Novogen. We believe that phenoxodiol may have broad application against a wide
range of cancers. Phenoxodiol appears to target a number of key components involved in cancer cell
survival and proliferation based on the emerging field of signal transduction regulation, with
little or no effect on normal cells detected in pre-clinical testing. We have also licensed two
other anti-cancer compounds, NV-196 and NV-143, from a subsidiary of Novogen.
Our strategy is to undertake further clinical development and testing of phenoxodiol, focusing on
those therapeutic indications that will expedite drug marketing approval by regulatory bodies,
leading to phenoxodiols commercialization and wide scale distribution. We also plan to develop
NV-196 and NV-143 for therapeutic indications not currently targeted by phenoxodiol.
Pre-clinical testing has shown phenoxodiol to have broad anti-cancer action against an extensive
library of human cancer cell lines, including prostate, ovarian and squamous cell carcinoma.
Phenoxodiol commenced Phase I clinical studies in Australia in 2000 and currently is undergoing a
Phase Ib/IIa clinical trial (intravenous dosage form) in the United States and Australia in
patients with refractory ovarian cancer, a Phase Ib study (oral dosage form) in Australia in
patients with hormone-refractory prostate cancer (prostate cancer that grows and is not inhibited
by hormone therapy), a Phase Ib study (oral dosage form) in the United States in patients with
cervical cancer and a Phase I study (oral dose form) in Australia in patients with renal carcinoma.
In 2004, the FDA granted phenoxodiol Fast Track status for patients with recurrent late stage
ovarian cancer that is resistant or refractory to platins and taxanes. In 2005, the FDA granted
phenoxodiol Fast Track status for its intended use in patients with hormone-refractory prostate
cancer.
Recent Developments
In May 2006, we completed a Special Protocol Assessment (SPA) and reached agreement with the FDA on
a pivotal Phase III study of phenoxodiol in combination with carboplatin for women with
platinum-resistant ovarian cancer (ovarian cancer that does not respond to platinum based
anti-cancer agents such as cisplatin and carboplatin). The SPA process allows for FDA evaluation of
a clinical trial protocol that will form the basis of an efficacy claim for a marketing
application, and provides a binding agreement that the study design, including patient numbers,
clinical endpoints and analyses are acceptable to the FDA. As a fast track product, phenoxodiol
will be eligible to apply for accelerated approval and priority review by the FDA of the marketing
application for this indication.
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In May 2006, we and Novogen entered into a licence agreement pursuant to which Novogen granted to
us, through Marshall Edwards Pty Limited, an exclusive, worldwide non-transferable license under
its patent and patent applications and in its know-how to conduct clinical trials, commercialize
and distribute the anti-cancer drug candidates, NV-196 and NV-143.
NV-196 is being developed initially in oral form for pancreatic and bile duct cancer and is
currently in Phase I human testing. NV-143 is targeted for the treatment of melanoma also in oral
dose form and is in the pre-clinical testing stage. We plan to engage in the clinical development
and commercialization of these two additional drug candidates which will compliment the current
drug candidate, phenoxodiol, in the area of cancer.
On July 11, 2006, we entered into a securities subscription agreement with certain accredited
investors providing for the placement of 6,329,311 shares of our common stock and warrants
exercisable for 2,215,258 shares of our common stock at a purchase price of $2.90 per unit. Each
unit consisted of one share of common stock and 0.35 of a warrant to purchase one share of common
stock. The warrants have an exercise price of $4.35 per share, subject to certain adjustments. The
warrants may be exercised no less than six months from the closing date and will expire four years
from the date of issuance, or July 11, 2010. We closed the private placement on July 11, 2006.
On July 11, 2006, we entered into a standby equity distribution agreement, which we refer to as the
SEDA, with Cornell Capital Partners, LP (Cornell). Under the SEDA, we may issue and sell to Cornell
shares of our common stock for a total purchase price of up to $15 million, once a resale
registration statement is in effect. We have sole discretion whether and when to sell shares of our
common stock to Cornell. Cornell will be irrevocably bound to purchase shares of our common stock
from us after we send a notice that we intend to sell shares of our common stock to Cornell. Each
advance under the SEDA is limited to a maximum of $1.5 million.
In connection with the SEDA, we paid Cornell a commitment fee of 123,626 shares of our common stock
and warrants to purchase 600,000 shares of our common stock that expire on July 11, 2010. The
warrants have an exercise price of $4.35 per share, subject to certain adjustments.
The purchase price for shares of our common stock under the SEDA will be equal to 97% of the lowest
volume weighted average price (as quoted by Bloomberg L.P.), or VWAP, of shares of our common stock
(subject to a minimum acceptable price as described below) during the five consecutive trading
days after we send notice to Cornell of our intention to sell them shares of our common stock,
which we refer to as the pricing period.
The minimum acceptable price at which we may sell our shares of common stock, unless we waive (in
our sole discretion) the minimum acceptable price, is no less than 97% of the VWAP for our shares
of common stock on the trading day immediately preceding the date we send notice to Cornell of our
intent to sell shares of our common stock. For any day in the pricing period when the VWAP is less
than the minimum acceptable price, (i) that days VWAP will be excluded from the pricing
mechanism during the pricing period: (ii) we will automatically reduce the amount of funds
covered by the advance notice by 20%; and (iii) the number of shares of our common stock
to be sold to Cornell (stated in the advance notice ) will be reduced proportionately.
Before we can sell any shares of our common stock to Cornell by the SEDA, a resale registration
statement will have to be filed with and declared effective by the SEC to cover Cornells resale of
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shares of our common stock it buys under the SEDA. We do not expect to access the SEDA prior to
2007.
The number of shares of our common stock that we can issue to Cornell is limited by Nasdaqs Market
Place Rule 4350(i)(1)(D) the 20% rule. All of the shares of our common stock that could be
issued in connection with the SEDA, the other securities issued as a commitment fee in connection
with the SEDA and the shares of our common stock issued in connection with the private placement
described above, cannot exceed 20% of the shares outstanding. We have determined that currently we
could issue and sell all of the shares of our common stock subject to the SEDA. If circumstances
change, however, we may need to obtain shareholder approval to waive the 20% rule.
While the SEDA provides us access to significant equity financing, using the SEDA at low market
prices could result in a dilution of net tangible assets per share for our current shareholders,
and also may have a depressing effect on our stock price. See Risks Related to the Cornell
Transaction.
Recent Clinical Developments
During fiscal year 2006, we made significant progress in the clinical development of phenoxodiol
including:
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In March 2006, we announced that Yale researchers presented data
from the study conducted at Yale New Haven Hospital,
Connecticut, United States as well as the Royal Womens Hospital,
Melbourne, Australia, at the Annual Meeting on Womens Cancer. The
Yale researchers reported that 74 percent of patients with
late-stage, platinum-resistant tumors who received the phenoxodiol
and cisplatin combination showed evidence of a change in tumor
growth by way of either tumor shrinkage or no increase in tumor
size. |
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In November 2005, we announced plans for a Phase Ib/IIa clinical
study of the investigational anti-cancer drug phenoxodiol, in
combination with docetaxel for women with recurrent ovarian
cancer. The investigator-initiated clinical study will take place
at the Yale University School of Medicine and is supported jointly
by Sanofi-Aventis and Marshall Edwards. |
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In November 2005, we announced results from a study showing that
phenoxodiol delayed tumor progression in men suffering from
late-stage hormone refractory prostate cancer. This study is being
conducted at the Sir Charles Gairdner Hospital in Perth, Australia
and was presented at the International Conference on Molecular
Targets and Cancer Therapeutics in Philadelphia. |
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In November 2005, we announced that Yale Universitys School of
Medicine reported a further update, at the International
Conference on Molecular Targets and Cancer Therapeutics in
Philadelphia, on results from a clinical study conducted with
women with early-stage cancer of the cervix and vagina. The data
presented by Yale researchers indicated continuing confidence that
the investigational drug phenoxodiol produces anti-cancer
responses in women with cervical cancer. |
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In October 2005, we announced updated results from two clinical
studies, conducted at Yale Universitys School of Medicine,
involving women with late-stage ovarian cancer and women with
early-stage cancer of the cervix and vagina. Interim data
presented by Dr. Mor at the 11th World Congress of the
International Menopause Society, Meeting in Buenos Aires,
Argentina, indicated that after combining phenoxodiol with either
paclitaxel or cisplatin, overall survival was substantially
extended beyond what was expected. |
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New Director
Following the appointment of Professor David de Kretser as the Governor of the Australian state of
Victoria, the Board appointed Professor Bryan Williams to succeed Professor de Kretser as one of
our directors.
Professor Williams is currently the Director of the Monash Institute of Medical Research in
Melbourne Australia. Prior to this appointment he was Chairman of the Department of Cancer Biology,
Lerner Research Institute, The Cleveland Clinic Foundation, Cleveland, Ohio.
Share Trading on the AIM Market of the London Stock Exchange
On January 17, 2006, we voluntarily cancelled the trading of our common stock on the Alternative
Investment Market of the London Stock Exchange.
Scientific Overview
Phenoxodiol, NV-196 and NV-143 belong to a class of drugs that we refer to as Multiple Signal
Transduction Regulators (MSTRs).
Signal transduction refers to the means by which cells respond to chemical signals that come from
within the cell itself, from neighboring cells, and from elsewhere in the body. These signals
regulate such vital functions as the growth and survival of the cell. We believe that malfunctions
in key components of the signal transduction process (whereby a series of chemical signals within a
cell leads to the expression of a particular function) are fundamental to neoplastic diseases such
as cancer, where cells respond abnormally to normal levels of signals, typically by over-responding
to them with increased cell growth and survival.
We believe that identifying malfunctions in the signal transduction process and then designing
drugs to block or correct them has become a basis for the development of the next generation of
anti-cancer drugs. These drugs have become known as signal transduction inhibitors. These drugs are
being designed to target a specific signaling pathway, which typically is over-active in a tumor
cell, and by blocking progression of the signal, prevent or reduce the ability of the tumor cell to
divide or to survive. We believe that single signal transduction inhibitors, while displaying
anti-tumor activity against a small number of different types of cancer, generally have failed to
provide more than modest prolongation of survival of cancer patients. We believe this is because
most human cancers involve errors of multiple signaling pathways, and inhibition of a single
pathway by any one drug alone cannot reasonably be expected to provide more than a temporary halt
to cancer progression.
We believe that our three drug candidates increase the potency of signal transduction inhibitors by
targeting multiple signaling pathways, and in particular, those pathways vital to the survival of
most, if not all, human cancer cells. In the term MSTR, multiple refers to the fact that more
than one signaling pathway is targeted by the drug, and regulator refers to the fact that while
the drug predominantly inhibits errant pro-survival signaling pathways, it conversely can also
activate pro-death signaling pathways to facilitate cancer cell death.
We believe that our three drug candidates are able to exert a multiplicity of effects, including on
both pro-survival and pro-death signaling systems, as a result of the primary target on the
tumor cell being a protein whose function in the tumor cell is so fundamental to cell biochemistry
that to shut it down produces a broad range of biochemical consequences.
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The potential explanation for this effect on the fundamental biochemistry of tumor cells was
provided by a discovery of a research team at Purdue University in Indiana. This team has a
long-standing research interest in a family of proteins at the cell surface that are involved in
the transport of waste electrons, particularly hydrogen ions (H+), across the cell membrane. This
function is so fundamental to normal cell function and viability, that any loss of function of this
electron pump will disrupt a wide range of biochemical processes as a consequence of elevated waste
hydrogen levels. One of the key components of this electron pump mechanism is a protein known as
NADH oxidase (abbreviated as NOX). NOX is situated on the outside of the cell membrane of all
living matter, and regulates the flow of waste hydrogen across the cell membrane. The Purdue
University studies have now shown that all forms of human cancer express a variant form of the
constitutive (or normal) NOX, known as tumor-specific NADH oxidase (abbreviated as tNOX). Based on
Purdue University studies, we believe that tNOX is a primary molecular target for phenoxodiol.
Phenoxodiol appears to specifically block the action of tNOX, with the resulting inhibition of H+
efflux from the cell leading to extensive disruption to signaling pathways and to eventual
inhibition of cell proliferation and activation of apoptosis, the process of programmed cell death
by which a cell dies naturally. The Purdue studies also show that phenoxodiol has no effect on the
normal form of NOX, providing an explanation for how phenoxodiol selectively targets cancer cells
for its cytotoxic effects.
Purdue University studies recently have also shown that one of the important consequences of a rise
in intra-cell levels of waste hydrogen ions is inhibition of enzymes known as kinases, which are
critically important to the activation of proteins within a cell. One of those kinases is
sphingosine kinase. This enzyme is responsible for the production of a compound within cells known
as sphingosine-1-phosphate (abbreviated as S-1-P). S-1-P plays an important role in all cells in
activating a wide range of pro survival signal transduction mechanisms, including the production
of proteins known as anti-apoptosis proteins whose task it is to block the apoptosis process.
S-1-P levels have been reported to be elevated in tumor cells, and in particular in tumor cells
that have become resistant to standard chemotherapy drugs.
This finding is relevant because of results from laboratory studies at Yale University that have
revealed that the killing effect of phenoxodiol on cancer cells occurs through the loss of the
ability of the tumor cell to manufacture anti-apoptosis proteins such as XIAP and c-FLIP.
Collectively, the Yale University and Purdue University results provide a rational mechanism of
action of phenoxodiol starting with the inhibition of tNOX, leading in turn to the loss of S-1-P
activity, leading eventually to the loss of anti-apoptosis proteins.
Recent laboratory studies conducted by Novogen and Yale University have confirmed that this chain
of biochemical events following exposure of tumor cells to phenoxodiol also provides an explanation
for why phenoxodiol is able to reverse resistance to standard anti-cancer drugs such as platinums,
gemcitabine and taxanes.
Phenoxodiol appears to restore sensitivity to these drugs in cells such as ovarian cancer cells
that have acquired resistance to these drugs. In addition, pretreatment of tumor cells with
phenoxodiol considerably increases the sensitivity of non-resistant tumor cells to the cytotoxic
effects of standard chemotherapy drugs. These effects are achieved without increasing the toxicity
of the standard chemotherapy drugs to non tumor-cells.
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Overall Clinical Development Strategy for Phenoxodiol
Based on the early clinical and pre-clinical work conducted on phenoxodiol, we believe that
phenoxodiol has the potential to become a treatment option for a wide range of human cancers, and
to be employed at various stages of cancer development ranging from early-stage cancer through to
late-stage cancer.
The immediate priority is to focus on those therapeutic indications that will expedite drug
marketing approval of phenoxodiol by regulatory bodies. To this end, we will continue to focus on
three forms of cancer ovarian cancer, prostate adenocarcinoma, and squamous cell carcinoma of the
cervix and vagina.
In ovarian cancer, we have initiated two studies, both of which are testing the ability of
phenoxodiol to overcome multi-drug resistance mechanisms, reversing resistance to platinums and
taxanes in particular. The first is a Phase III pivotal study (known as OVATURE) in patients who
have become resistant or refractory to at least 2 lines of platinum therapy, where phenoxodiol will
be tested in combination with weekly carboplatin to delay tumor progression as measured by
progression-free survival. The second study, a Phase II study, is being conducted in collaboration
with Sanofi-Aventis and Yale Medical School, and is testing a combination of phenoxodiol plus
docetaxel versus docetaxel alone in patients who have failed to respond to platinum and taxane
therapy.
Phenoxodiol also is being developed for use in squamous cell carcinoma (SCC) of the cervix, vagina
and vulva. A Phase II study is ongoing with a view to providing evidence of both a biological and
clinical effect in this aggressive form of cancer. A positive outcome in the current study could
lead to two potential therapeutic indications (i) the use of phenoxodiol as a monotherapy in
early-stage disease including pre-malignant disease and (ii) the use of phenoxodiol in combination
with standard drugs such as cisplatin for the treatment of non-resectable disease.
Prostate cancer is the third tumor type that we believe is likely to be responsive to phenoxodiol
therapy. We are assessing the feasibility of conducting a Phase II study that will address areas of
unmet medical need in this common cancer.
History of Phenoxodiol Development
Phenoxodiol is an analogue of genistein, a naturally-occurring plant isoflavone that was known from
the 1980s to have anti-cancer activity in pre-clinical studies and in humans. Although a wide
variety of plant chemicals display cytotoxicity against tumor cells, two notable features of
genistein were (a) that it was highly selective (having no known effects on non-tumor cells), and
(b) that its anti-cancer activity appeared to be heterogeneous (across a range of biochemical and
biological functions).
In 1995, Novogen scientists commenced a synthetic analogue program that sought to increase the
anti-cancer potency, but without affecting the high selectivity of the compounds.
Phenoxodiol was found to be the most potent anti-cancer compound among the compounds
synthesized and tested. It was cytostatic and cytotoxic against a wide range of human cancer cells,
but without toxicity against non-tumor cells. In vivo (in animals) studies in laboratory animals
subsequently showed that phenoxodiol administered either orally or systemically was adequately
bio-available (absorbed into the body in useful form) and significantly retarded tumor development,
in particular in athymic mice bearing xenografts of human prostate cancer. Such anti-cancer effects
in animals were achieved without evidence of toxicity, and thus phenoxodiol was selected for
development as a human anti-cancer drug.
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The broad
anti-cancer action of phenoxodiol against an extensive library of different human cancer cell lines suggested potential clinical application against a wide range of types of human cancer.
Further pre-clinical studies showed that phenoxodiol has a number of indirect anti-cancer effects
that suggested prostate cancer as a particularly suitable clinical target, leading to this form of
cancer being identified early as a prime potential clinical target for the drug. Phenoxodiol has a
potent ability as an anti-androgen, which is a process that reduces the biological impact of male
sex hormones like testosterone, and an ability to induce apoptosis of hyperplastic prostate smooth
muscle cells, the main type of stromal cells found in the prostate gland. However, with a view to
allowing further time to identify those cancer types that are the most sensitive types of cancer to
phenoxodiol, the strategy adopted was to conduct Phase I studies in patients with a wide selection
of solid tumors in order to gain preliminary evidence of efficacy across a range of different tumor
types.
Early animal studies had been conducted with both oral and intravenous dosage forms of phenoxodiol,
but for human use, the intravenous dosage form was selected as the preferred dosage form in the
first instance because of its ability to deliver high concentrations of drug within the blood.
A Phase Ib safety study was commenced in Australia in November 2000 and finished in March 2002. An
important end-point for Phase Ib safety studies is to determine the maximum tolerated dose,
abbreviated as MTD, which is the highest dose of drug that can be delivered without causing
life-threatening toxicity. The only safety issue reported in this study was hypersensitivity
represented by rashes, headaches or fever in three patients which was considered likely to be
associated with the material used to suspend the phenoxodiol in the intravenous dosage form. The
MTD was not reached by the 30 mg/kg dose, which is the highest that could practically be
administered.
A second Phase Ib safety study commenced in Australia in April 2001 and concluded in 2002.
Twenty-one patients with late-stage solid cancers of any type were given phenoxodiol by continuous
intravenous infusion. The rationale here was to test the concept of delivering phenoxodiol on a
continuous basis in order to maintain drug levels in the blood at a steady, moderate, continuous
level, rather than the short, infrequent peak levels achieved with the bolus injection method.
Laboratory studies had suggested that when used as a monotherapy, phenoxodiol was more effective
when given to animals on a repeated and frequent basis. This again was a dose-escalating study,
with different patients receiving doses from 1 to 40 mg/kg/day. As in the previous study, the MTD
was not reached and no significant toxicities were encountered.
An Investigational New Drug Application (IND) for the intravenous dosage form of phenoxodiol
became effective in the US in January 2001, allowing a third Phase Ib toxicity study to commence at
The Cleveland Clinic, Ohio, in August 2001. This study concluded in 2002. Nineteen patients with
late-stage solid cancers of any type were given phenoxodiol by continuous intravenous infusion in a
repeat of the Australian study. The US study was part of a larger program with the ultimate aim of
seeking to support eventual marketing approval in the US. This was a dose-escalating study, with
inter-patient escalation from 0.5 to 64 mg/kg/day. As with the Australian study, no MTD was reached
and no significant toxicities were encountered.
The main conclusions from this Phase I safety program of the intravenous dosage form were:
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that the intravenous dosage form generally was well-tolerated and
without significant safety issues, although it was associated with
some intolerance (hypersensitivity) that were likely to be
associated with the carrier compound rather than the phenoxodiol;
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that preliminary evidence of an anti-tumor effect was obtained in
some patients with solid tumors. |
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Concurrent with the Phase I clinical trial program outlined above, pre-clinical studies were being
conducted at Yale University Medical School that focused on the use of phenoxodiol in the treatment
of ovarian cancer, in particular, late-stage cancers that had become resistant to standard
anti-cancer drugs. Those studies found that phenoxodiol was particularly effective in cell culture
and in animals in killing highly chemo-resistant ovarian cancer cells. It also was found that
phenoxodiol displayed a potent ability to restore the sensitivity of these chemo-resistant cancer
cells to standard anti-cancer drugs including platinums and taxanes, the standard drugs used in the
treatment of ovarian cancer.
These Yale studies led to the development of a strategy to use phenoxodiol to restore sensitivity
to drugs such as cisplatin or carboplatin and paclitaxel or docetaxel in late-stage ovarian cancer
that had become resistant to such drugs. It was decided to give phenoxodiol by bolus injection, and
to give it on two consecutive days each week as a way of increasing the exposure of the cancer to
drug. A Phase Ib safety study was conducted in the first instance using this new regimen. This was
conducted at Yale-New Haven Hospital, CT, commencing 2002 and ending 2003 in patients with
late-stage, platinum- and taxane-resistant ovarian cancers. It was a dose-escalating study in 40
women, with 10 women each receiving 1, 3, 10 or 20 mg/kg/day. No particular safety issues were
encountered with the three lower dosages, although the 20 mg/kg dose produced two incidences of
thrombocytopenia, or reduced platelet levels. This was an effect observed earlier in safety studies
in dogs, and was thought to be due to the carrier compound in which the phenoxodiol was dissolved.
Evidence of an anti-tumor effect (stabilization of disease) was observed in the three lower
dosages, but not the highest dose.
At the conclusion of this study, a Phase IIa study was commenced in both Australia and the US in 40
women with chemo-resistant, late-stage ovarian cancer, where phenoxodiol was used in combination
with either cisplatin or paclitaxel to see if the chemo-resistance could be reversed. This study
commenced in early 2004 and was completed in late 2005. Phenoxodiol produced an overall 33% tumor
response (tumor shrinkage) rate in these patients with highly chemo-resistant tumors.
The tumor responses observed in these patients supported the receipt of Fast Track status from the
FDA in 2004 for phenoxodiol in combination with carboplatin for recurrent late stage ovarian cancer
that is resistant or refractory to platins and taxanes.
The first oral dose clinical study was a Phase Ib/IIa study which began in early 2002 on the use of
phenoxodiol in patients with hematological tumors. This was predominantly a bio-availability and
safety study, but also was intended to look for any evidence of anti-tumor activity in non-solid
tumors. It was a dose-escalation study, where each patient was given a rising dose up to a maximum
of 55 mg/kg/day over two 12-hourly doses. The study confirmed that the drug was readily absorbed
from the gut to the extent of about 30%, and that there were no safety or intolerance issues, even
at the highest dose.
The next clinical study undertaken with the oral dosage form was in Australia in men with
hormone-refractory prostate cancer. This study commenced in 2003 and completed in early 2005,
although a number of men remain on study treatment. Twenty-four patients with metastatic disease
were treated with different dosages of phenoxodiol (20, 80, 200 and 400 mg) every 8-hours until
they showed disease progression. The two efficacy end-points that were measured in this study were
the prostate specific antigen (PSA) doubling time (an indicator of the rate of tumor growth) and
the time patients were considered by the clinicians to be deriving a clinical benefit and remained
on therapy (time to disease progression). For the four different dosage strata (20, 40, 200, 400
mg), the PSA doubling times were 14, 22, 66 and 39 weeks, respectively, and the time to disease
progression was 13, 17, 55 and 42 weeks, respectively. The 400 mg dose data only refers to those
patients in this dosage group who had disease progression, and does not include three patients who
remain on therapy for periods up
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to approximately 90 weeks. No safety or intolerance issues were reported in patients in this study.
The PSA responses observed in some patients in this study led to the oral dosage form of
phenoxodiol receiving Fast Track status from the FDA in 2005 for hormone-refractory prostate
cancer.
An IND for the oral dosage form of phenoxodiol became effective in the US in June 2003 which
allowed a study in collaboration with Yale University School of Medicine to be conducted in
patients with cancer of the cervix, vulva and vagina. This dose-response Phase IIa study is
ongoing. Phenoxodiol is being used on a neo-adjuvant, monotherapy basis in patients following a
primary diagnosis of cancer. Phenoxodiol is being given at dosages of 50, 200 or 400 mg (8-hourly)
for up to four weeks prior to surgery. The study is intended to measure the effect of treatment on
tumor size and tumor biology. In early 2006, the investigators reported that the mean change in
tumor diameter over the 3-4 week period of phenoxodiol therapy was +10.0% and -7.3% respectively
for the 50 and 200 mg dose groups; there were five out of six patients who showed stable disease in
the 50 mg group as defined by RECIST criteria, and eight out of eight patients in the 200 mg dose
group who showed stable disease. The 400 mg dose stratum currently is being recruited.
A Phase IIa study commenced in Australia in early 2004 in order to determine the dose-limiting
toxicity (DLT) of oral phenoxodiol therapy on a continuous basis in combination with carboplatin or
cisplatin. This study is being conducted in 30 patients with solid cancers. The study is fully
recruited and will terminate when the last patient is off therapy. The phenoxodiol dose was
progressively increased up to 800 mg 8-hourly.
In May 2006, we announced that the FDA had granted Special Protocol Assessment status for a Phase
III trial known as OVATURE. In this study, phenoxodiol is being assessed for its ability to restore
sensitivity in ovarian tumors to carboplatin once those tumors have become resistant or refractory
to platinum therapy. Patients will be enrolled who have received at least two lines of platinum
therapy, and who have shown disease progression within six months of receiving a standard 3-weekly
treatment regimen with either cisplatin or carboplatin. This is a double-blinded,
placebo-controlled study involving 470 patients from 60 sites in the US, Australia, UK, Russia,
Poland, Czech Republic, Belgium, Netherlands and Germany. Patients will receive a dose-dense
platinum treatment regimen of weekly carboplatin and will be randomised to receive either
phenoxodiol or a placebo in combination with the carboplatin. The primary efficacy end-point is
progression-free survival, with disease progression being based on radiological evidence of tumor
growth as defined by RECIST criteria. We will be eligible to file with the FDA for marketing
approval under the Accelerated Approval program once the interim analysis is completed providing
that the difference in progression-free survival outcomes between the two treatment groups has
reached the required level of statistical significance. Otherwise, submission to the FDA for a New
Drug Approval will occur at the completion of the study, which is when the last patient shows
disease progression, or death, or survival for 18 months, whichever comes first.
NV-196 and NV-143
In May 2006, we entered into a second licence agreement with Novogen for two experimental
anti-cancer drug candidates, NV-196 and NV-143.
NV-196, is a synthetic anti-cancer compound developed by Novogen, based on an isoflavan ring
structure. Similar to phenoxodiol, NV-196 is a signal transduction inhibitor. Preliminary screening
studies conducted by Novogen have identified NV-196 as a candidate for product development showing
a favorable in vitro toxicity profile against normal cells and broad activity against cancer
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cells. NV-196 is currently in Phase I human testing and is being developed initially in oral form
for the treatment of pancreatic and bile duct cancers.
NV-143 is currently in pre-clinical testing. Preliminary screening studies have identified broad
anti-cancer activity against cancer cells representative of melanoma, glioma, prostate, ovarian,
breast and lung cancer. NV-143 also exhibits broadly acting chemo-sensitizing activity or the
ability to increase the sensitivity of cells to chemotherapeutic drugs that are used to control the
growth of cancer cells. Ongoing research is being undertaken to establish the mechanisms by which
NV-143 elicits its anti-cancer/chemo-sensitizing effect. NV-143 is initially being developed to
target the treatment of melanoma.
Both of these new drug candidates are analogues of phenoxodiol, but exhibit significantly different
biologies to phenoxodiol. In parallel with phenoxodiol, both drug candidates display pre-clinical
anti-cancer activity across a broad range of tumor types, high selectivity for cancer cells, and
the ability to chemo-sensitize tumor cells to the cytotoxic effects of most standard chemotoxic
drugs. However, both drugs differ from phenoxodiol in showing a substantially greater ability to
induce apoptosis in pancreatic cancer, bile duct cancer, and melanoma cells; they also show an
ability to increase the sensitivity of cancer cells to radiotherapy (radiosensitizers).
We are now engaged in a program that seeks to bring both drug candidates to market as agents that
will provide chemo-sensitization and/or radio-sensitization across a number of tumor types, but
particularly pancreatic cancer, bile duct cancer, and malignant melanoma.
NV-196 underwent a small Phase Ia study in 2005 in three patients. The aim of that study was to
confirm the bioavailability of the oral dosage form. That study showed that an oral dosing regimen
had the potential to deliver therapeutically-relevant plasma levels of the drug, and that
short-term therapy with NV-196 was well tolerated.
NV-143 is still undergoing pre-clinical evaluation for determination of the most appropriate
therapeutic indication, and is not expected to enter clinical trials until 2007.
Competition
The development of phenoxodiol and other drug candidates is highly competitive. A number of other
companies have products or drug candidates in various stages of pre-clinical or clinical
development that are intended for the same therapeutic indications for which phenoxodiol is being
developed. Some of these potential competing drugs are further advanced in development than
phenoxodiol and may be commercialized sooner. Even if we are successful in developing effective
drugs, phenoxodiol may not compete successfully with products produced by our competitors.
Docetaxel, a drug distributed by Aventis, was approved in 2004 by the FDA for the treatment of
hormone-refractory prostate cancer, establishing a new bench-mark for standard chemotherapy in
late-stage prostate cancer. We do not believe docetaxel is a direct competitor of phenoxodiol for
late-stage prostate cancer because our strategy is to develop phenoxodiol as a chemo-sensitizer for
docetaxel in patients with prostate cancer who become resistant to docetaxel. A number of
pharmaceutical and biotechnology companies are known to be seeking to develop drugs for the same
indication.
The experimental drug, Telcyta, manufactured by Telik Inc., is a directly competitive drug to our
use of phenoxodiol as a chemo-sensitizing agent to restore sensitivity to platinum-based drugs in
late-stage ovarian cancer. Telcyta currently is in a Phase III registration trial suggesting that
it has shown
14
sufficient promise in a Phase II study to warrant progression to a Phase III study. The different
study protocols being used by us with phenoxodiol and by Telik Inc with Telcyta make it difficult
to compare the two drugs for efficacy in this area and, as a result, we cannot evaluate the level
of competition. However, we expect that at any level of efficacy, Telcyta, should it be approved
for marketing, would represent a serious competitor for phenoxodiol.
Our competitors include pharmaceutical companies and biotechnology companies, as well as
universities and public and private research institutions. In addition, companies active in
different but related fields represent substantial competition for us. Many of our competitors
developing oncology drugs have significantly greater capital resources, larger research and
development staffs and facilities and greater experience in drug development, regulation,
manufacturing and marketing than we do. These organizations also compete with Novogen, our services
provider, to recruit qualified personnel, and with us to attract partners for joint ventures and to
licence technologies that are competitive with our technologies. As a result, our competitors may
be able to more easily develop technologies and products that would render our technologies or our
drug candidates obsolete or non-competitive.
Intellectual Property
Novogen has been granted patents and has additional patents pending in a number of countries which
cover a family of chemically related compounds with potentially broad ranging and complementary
anti-cancer effects. Novogen has granted to us an exclusive licence, with respect to its patent
rights and intellectual property know-how to develop, market and distribute one of these compounds,
phenoxodiol, as an anti-cancer agent, except in topical form. Novogen has subsequently also granted
to us an exclusive licence in respect of two novel derivatives of phenoxodiol, NV-143 and NV-196.
Phenoxodiol
We have licenced from Novogen the rights to the Novogen patents and applications as they relate to
phenoxodiol as an anti-cancer agent. Excluded from these rights is phenoxodiol in a topical
formulation. The patent rights we have licenced from Novogen can be largely classified into two
broad groups: patent rights relating to phenoxodiol used as an anti-cancer agent, which we refer to
as therapeutic patent rights, and patent rights relating to the manufacture of phenoxodiol for
anti-cancer purposes, which we refer to as manufacturing patent rights. The pending and issued
Novogen patent rights can be further broken down into four families, three families belonging to
the therapeutic patent rights and one family belonging to the manufacturing patent rights. The
three families in the therapeutic patent rights relate to:
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phenoxodiol in the treatment of cancer (eighteen pending and ten issued); |
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compositions and methods for protecting skin from ultraviolet induced immunosuppression
and skin damage, including phenoxodiol (six pending and seven issued); and |
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therapeutic methods and compositions involving isoflav-3-ene and isoflavan structure,
including phenoxodiol (thirteen pending). |
The family relating to the manufacturing patent rights relate to:
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the production of isoflavone derivatives, including phenoxodiol (fourteen pending and four
issued). |
Regarding the treatment of cancer, Novogen has been granted a U.S. Patent (No. 6,649,648) by the
United States Patent and Trademark Office (USPTO) relating to the treatment of cancerous disease
with isoflavone derivatives including phenoxodiol. U.S. Patent 6,649,648 also includes claims
15
specifically directed to the treatment of ovarian cancer, breast cancer, prostate cancer, uterine
cancer, bowel cancer, testicular cancer, endometrial cancer, leukaemia and metastatic cancer with
isoflavone derivatives including phenoxodiol.
NV-143 and NV-196
We have also licenced from Novogen the rights to patent applications as they relate to two novel
anti-cancer compounds, NV-143 and NV-196. These compounds are isoflavan derivatives of phenoxodiol.
The licenced patent rights relate to the novel compounds themselves (composition of matter
rights) and to uses of these compounds as anti-cancer agents and sensitizers of cancer cells and
tumors to chemotherapy and radiotherapy. The patent rights fall into two families of patent
applications:
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composition of matter rights in respect of NV-143 and NV-196 and uses of these compounds
as anti-cancer agents (four national applications and one PCT pending); and |
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uses of NV-143 and NV-196 as chemo-sensitizers and radiosensitizers of tumors and cancer
cells (eleven pending). |
As patent applications in the United States are maintained in secrecy until published by the USPTO
at 18 months from filing, for all cases filed after November 29, 2000, or at issue, for cases filed
prior to November 29, 2000, and as publication of discoveries in the scientific or patent
literature often lag behind the actual discoveries, we cannot be certain that Novogen was the first
to make the inventions covered by the Novogen patents and applications referred to above. Moreover,
pursuant to the terms of the Uruguay Round Agreements Act, patents filed on or after June 8, 1995
have a term of twenty years from the date of such filing, irrespective of the period of time it may
take for such patent to ultimately issue. This may shorten the period of patent protection afforded
to therapeutic uses of phenoxodiol or to NV-143 or NV-196, as patent applications in the
biopharmaceutical sector often take considerable time to issue. However, in some countries the
patent term may be extended.
In order to protect the confidentiality of our technology, including trade secrets and know-how and
other proprietary technical and business information, we require all of our consultants, advisors
and collaborators to enter into confidentiality agreements that prohibit the use or disclosure of
information that is deemed confidential. The agreements also oblige our consultants, advisors and
collaborators to assign to us developments, discoveries and inventions made by such persons in
connection with their work with us. We cannot be sure that confidentiality will be maintained or
disclosure prevented by these agreements or that our proprietary information or intellectual
property will be protected thereby or that others will not independently develop substantially
equivalent proprietary information or intellectual property.
The pharmaceutical industry is highly competitive and patents may have been applied for by, and
issued to, other parties relating to products competitive with phenoxodiol, NV-143 or NV-196. Use
of these compounds and any other drug candidates may give rise to claims that they infringe the
patents or proprietary rights of other parties, existing now and in the future. An adverse claim
could subject us to significant liabilities to such other parties and/or require disputed rights to
be licenced from such other parties. We cannot be sure that any licence required under any such
patents or proprietary rights would be made available on terms acceptable to us, if at all. If we
do not obtain such licences, we may encounter delays in product market introductions, or may find
that the development, manufacture or sale of products requiring such licences may be precluded. We
have not conducted any searches or made any independent investigations of the existence of any
patents or proprietary rights of other parties.
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Relationship with Novogen
Novogen has been granted patents and has additional patent applications pending in a number of
countries pertaining to phenoxodiols family of compounds and to phenoxodiol itself and their use
in anti-cancer therapeutics. Novogen has granted to us an exclusive licence under its patent
rights and the intellectual property rights in its relevant know-how to develop, market and
distribute all forms of administering phenoxodiol for anti-cancer applications, except topical
applications.
In May 2006, under the terms of the licence option deed with Novogen, we licenced two oncology
compounds, NV-196 and NV-143, which qualified as option compounds. NV-196 is being developed
initially in oral form for pancreatic and bile duct cancer and is currently in Phase I human
testing. NV-143 is targeted for the treatment of melanoma, also in oral dose form, and is in
pre-clinical testing stage. Under the terms of the licence agreement for NV-196 and NV-143, Novogen
has granted to us an exclusive licence under its patent rights and the intellectual property rights
in its relevant know-how to develop, market and distribute all forms of administering NV-196 and
NV-143 for anti-cancer applications, except topical applications.
Novogen is active in the discovery and development of new drugs based on the emerging field of
signal transduction regulation. Signal transduction regulators offer the potential for effective,
well-tolerated treatment of common diseases, including cancer and heart disease. Novogen has
developed a family of chemically related compounds with potentially broad ranging and complementary
anti-cancer effects.
We have entered into certain key agreements with Novogen which are discussed below.
Under the licence agreement, Novogen granted us an exclusive world-wide, non-transferable licence,
under the Novogen patent rights, to conduct clinical trials and commercialize and distribute all
forms of administering phenoxodiol except topical applications. The agreement covers uses of
phenoxodiol in the field of prevention, treatment or cure of cancer in humans. Our business is
currently focused on advancing the clinical program underway for the development of phenoxodiol.
Under a second licence agreement, Novogen granted us an exclusive world-wide, non-transferable
licence, under the Novogen patent rights, to conduct clinical trials and commercialize and
distribute all forms of administering NV-196 and NV-143, except topical applications. The agreement
covers uses of NV-196 and NV-143 in the field of prevention, treatment or cure of cancer in humans.
Our business is also currently focused on advancing the clinical program underway for the
development of NV-196 and NV-143.
Under a manufacturing licence and supply agreement, we have granted Novogen a sublicence to
manufacture and supply phenoxodiol to us in its primary manufactured form for both the OVATURE
clinical program and phenoxodiols ultimate commercial use. Novogen has taken the
strategic decision not to manufacture commercial scale Active Pharmaceutical Ingredients (API) for
cancer drugs, including phenoxodiol, as these can be more economically supplied by third parties
with particular expertise in this area. The contract facilities that have been identified are FDA
licenced, have a track record of large scale API manufacture and have already invested in capital
and equipment. We have completed the novation to MEPL of contracts that Novogen had entered into
with third parties to develop a scalable manufacturing method to ensure that sufficient quantities
of phenoxodiol can be manufactured in compliance with cGMP (Current Good Manufacturing Practices)
and to complete the analytical and stability work necessary for an NDA submission. An NDA will be
submitted if the Phase III study is successful, and approval of the NDA is required to market
phenoxodiol. We will
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need to arrange similar contracts in the future to secure the supply of NV-196 and
NV-143.Novogen has a pilot manufacturing plant which we believe has sufficient capacity
to also provide clinical trial quantities of NV-196 and NV-143.
Under a licence option deed, Novogen granted us an exclusive first right to accept and an exclusive
last right to match any proposed dealing by Novogen with its intellectual property rights in other
synthetic compounds developed by Novogen that have known or potential anti-cancer applications in
all forms other than topical applications.
Pursuant to a services agreement, Novogen provides services reasonably required by us relating to
the development and commercialization of phenoxodiol, NV-196, NV-143, or other option compound in
relation to which we have exercised our rights under the licence option deed. We do not currently
intend to directly employ any staff and are reliant on Novogen for the provision of resources to
conduct our business.
Research and Development
The objective of our research and development program is the generation of data sufficient to
achieve regulatory approval of phenoxodiol, NV-196 and NV-143 in one or more dosage forms in major
markets such as the United States, and/or to allow us to enter into a commercial relationship with
another party. The data are generated by our clinical trial programs.
The key aspects of this program are to provide more complete characterization of the following:
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the relevant molecular targets of action of phenoxodiol, NV-196 and NV-143; |
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the relative therapeutic indications of different dosage forms of phenoxodiol, NV-196
and NV-143; |
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the relative therapeutic benefits and indications of phenoxodiol, NV-196 and NV-143 as a
monotherapy or as part of combinational therapy with other chemotoxics; and |
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the most appropriate cancer targets for phenoxodiol, NV-196 and NV-143. |
Research expenses were $3.427 million for the year ended June 30, 2006, $2.279 million for the year
ended June 30, 2005 and $2.381 million for the year ended June 30, 2004.
Regulation
U.S. Regulatory Requirements
The U.S. Food and Drug Administration, or FDA, and comparable regulatory agencies in other
countries, regulate and impose substantial requirements upon the research, development,
pre-clinical and clinical testing, labeling, manufacture, quality control, storage, approval,
advertising, promotion, marketing, distribution and export of pharmaceutical products including
biologics, as well as significant reporting and record-keeping obligations. State governments may
also impose obligations in these areas.
In the United States, pharmaceutical products are regulated by the FDA under the Federal Food Drug
and Cosmetic Act or FDCA and other laws including in the case of biologics, the Public Health
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Service Act. We believe, but cannot be certain, that our products will be regulated as drugs by the
FDA. The process required by the FDA before drugs may be marketed in the United States generally
involves the following:
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pre-clinical laboratory evaluations, including formulation and stability testing, and
animal tests performed under the FDAs Good Laboratory Practices regulations to assess
potential safety and effectiveness; |
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submission and approval of an IND, including results of pre-clinical tests and protocols
for clinical tests, which must become effective before clinical trials may begin in the
United States; |
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obtaining approval of Institutional Review Boards to administer the products to human
subjects in clinical trials; |
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adequate and well-controlled human clinical trials to establish the safety and efficacy
of the product for the products intended use; |
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development of manufacturing processes which conform to FDA current Good Manufacturing
Practices, or cGMPs, as confirmed by FDA inspection; |
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submission of pre-clinical and clinical test results, and chemistry, manufacture and
control information on the product to the FDA in a New Drug Approval Application, or NDA;
and |
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FDA review and approval of an NDA, prior to any commercial sale or shipment of a
product. |
The testing and approval process requires substantial time, effort, and financial resources, and we
cannot be certain that any approval will be granted on a timely basis, if at all.
The results of the pre-clinical tests, together with initial specified manufacturing information,
the proposed clinical trial protocol, and information about the participating investigators are
submitted to the FDA as part of an IND, which must become effective before we may begin human
clinical trials in the U.S. Additionally, an independent Institutional Review Board must review and
approve each study protocol and oversee conduct of the trial. An IND becomes effective 30 days
after receipt by the FDA, unless the FDA, within the 30-day period, raises concerns or questions
about the conduct of the trials as outlined in the IND and imposes a clinical hold. If the FDA
imposes a clinical hold, the IND sponsor must resolve the FDAs concerns before clinical trials can
begin. Pre-clinical tests and studies can take several years to complete, and there is no guarantee
that an IND we submit based on such tests and studies will become effective within any specific
time period, if at all.
Human clinical trials are typically conducted in three sequential phases that may overlap.
Phase I: The drug is initially introduced into healthy human subjects or patients and tested for
safety and dosage tolerance. Absorption, metabolism, distribution, and excretion testing is
generally performed at this stage.
Phase II: The drug is studied in controlled, exploratory therapeutic trials in a
limited number of subjects with the disease or medical condition for which the new drug is intended
to be used in order to identify possible adverse effects and safety risks, to determine the
preliminary or potential efficacy
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of the product for specific targeted diseases or medical conditions, and to determine dosage
tolerance and the optimal effective dose.
Phase III: When Phase II studies demonstrate that a specific dosage range of the drug is likely
to be effective and the drug has an acceptable safety profile, controlled, large-scale therapeutic
Phase III trials are undertaken at multiple study sites to demonstrate clinical efficacy and to
further test for safety in an expanded patient population.
We cannot be certain that we will successfully complete Phase I, Phase II, or Phase III testing of
our products within any specific time period, if at all. Furthermore the FDA, the Institutional
Review Board or we may suspend or terminate clinical trials at any time on various grounds,
including a finding that the subjects or patients are being exposed to an unacceptable health risk.
Results of pre-clinical studies and clinical trials, as well as detailed information about the
manufacturing process, quality control methods, and product composition, among other things, are
submitted to the FDA as part of an NDA seeking approval to market and commercially distribute the
product on the basis of a determination that the product is safe and effective for its intended
use. Before approving an NDA, the FDA will inspect the facilities at which the product is
manufactured and will not approve the product unless cGMP compliance is satisfactory. If applicable
regulatory criteria are not satisfied, the FDA may deny the NDA or require additional testing or
information. As a condition of approval, the FDA also may require post-marketing testing or
surveillance to monitor the products safety or efficacy. Even after an NDA is approved, the FDA
may impose additional obligations or restrictions (such as labeling changes), or even suspend or
withdraw a product approval on the basis of data that arise after the product reaches the market,
or if compliance with regulatory standards is not maintained. We cannot be certain that any NDA we
submit will be approved by the FDA on a timely basis, if at all. Also, any such approval may limit
the indicated uses for which the product may be marketed. Any refusal to approve, delay in
approval, suspension or withdrawal of approval, or restrictions on indicated uses could have a
material adverse impact on our business prospects.
Each NDA must be accompanied by a user fee, pursuant to the requirements of the Prescription Drug
User Fee Act, or PDUFA, and its amendments. According to the FDAs fee schedule, effective on
October 1, 2006 for the fiscal year 2007, the user fee for an application requiring clinical data,
such as an NDA, is $896,200. The FDA adjusts the PDUFA user fees on an annual basis. PDUFA also
imposes an annual product fee for prescription drugs and biologics ($49,750), and an annual
establishment fee ($313,100) on facilities used to manufacture prescription drugs and biologics. A
written request can be submitted for a waiver for the application fee for the first human drug
application that is filed by a small business, but there are no waivers for product or
establishment fees. We are not at the stage of development with our products where we are subject
to these fees, but they are significant expenditures that will be incurred in the future and must
be paid at the time of application submissions to FDA.
Satisfaction of FDA requirements typically takes several years. The actual time required varies
substantially, based upon the type, complexity, and novelty of the pharmaceutical product, among
other things. Government regulation imposes costly and time-consuming requirements and restrictions
throughout the product life cycle and may delay product marketing for a considerable period of
time, limit product marketing, or prevent marketing altogether. Success in pre-clinical or early
stage clinical trials does not ensure success in later stage clinical trials. Data obtained from
pre-clinical and clinical activities are not always conclusive and may be susceptible to varying
interpretations that could delay, limit, or prevent marketing approval. Even if a product receives
marketing approval, the approval is
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limited to specific clinical indications. Further, even after marketing approval is obtained, the
discovery of previously unknown problems with a product may result in restrictions on the product
or even complete withdrawal of the product from the market.
After product approval, there are continuing significant regulatory requirements imposed by the
FDA, including record-keeping requirements, obligations to report adverse side effects in patients
using the products, and restrictions on advertising and promotional activities. Quality control and
manufacturing procedures must continue to conform to cGMPs, and the FDA periodically inspects
facilities to assess cGMP compliance. Additionally, post-approval changes in ingredient
composition, manufacturing processes or facilities, product labeling, or other areas may require
submission of an NDA Supplement to the FDA for review and approval. New indications will require
additional clinical tests and submission of an NDA Supplement. Failure to comply with FDA
regulatory requirements may result in an enforcement action by the FDA, including Warning Letters,
product recalls, suspension or revocation of product approval, seizure of product to prevent
distribution, impositions of injunctions prohibiting product manufacture or distribution, and civil
and criminal penalties. Maintaining compliance is costly and time-consuming. We cannot be certain
that we, or our present or future suppliers or third-party manufacturers, will be able to comply
with all FDA regulatory requirements, and potential consequences of noncompliance could have a
material adverse impact on our business prospects.
The FDAs policies may change, and additional governmental regulations may be enacted that could
delay, limit, or prevent regulatory approval of our products or affect our ability to manufacture,
market, or distribute our products after approval. Moreover, increased attention to the containment
of healthcare costs in the United States and in foreign markets could result in new government
regulations that could have a material adverse effect on our business. Our failure to obtain
coverage, an adequate level of reimbursement, or acceptable prices for our future products could
diminish any revenues we may be able to generate. Our ability to commercialize future products will
depend in part on the extent to which coverage and reimbursement for the products will be available
from government and health administration authorities, private health insurers, and other
third-party payers. European Union and U.S. government and other third-party payers increasingly
are attempting to contain healthcare costs by consideration of new laws and regulations limiting
both coverage and the level of reimbursement for new drugs. We cannot predict the likelihood,
nature or extent of adverse governmental regulation that might arise from future legislative or
administrative action, either in the United States or abroad.
Our activities also may be subject to state laws and regulations that affect our ability to develop
and sell our products. We are also subject to numerous federal, state, and local laws relating to
such matters as safe working conditions, clinical, laboratory, and manufacturing practices,
environmental protection, fire hazard control, and disposal of hazardous or potentially hazardous
substances. We may incur significant costs to comply with such laws and regulations now or in the
future, and the failure to comply may have a material adverse impact on our business prospects.
The FDCA includes provisions designed to facilitate and expedite the development and review of
drugs and biological products intended for treatment of serious or life-threatening conditions that
demonstrate the potential to address unmet medical needs for such conditions. These provisions set
forth a procedure for designation of a drug as a fast track product. The fast track designation
applies to the combination of the product and specific indication for which it is being studied. A
product designated as fast track is ordinarily eligible for additional programs for expediting
development and review, but products that are not in fast track drug development programs may also
be able to take advantage of these programs. These programs include priority review of NDAs and
accelerated
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approval. Drug approval under the accelerated approval regulations may be based on evidence of
clinical effect on a surrogate endpoint that is reasonably likely to predict clinical benefit. A
postmarketing clinical study will be required to verify clinical benefit, and other restrictions to
assure safe use may be imposed.
Under the Drug Price Competition and Patent Term Restoration Act of 1984 (the Patent Act), a
sponsor may obtain marketing exclusivity for a period of time following FDA approval of certain
drug applications, regardless of patent status, if the drug is a new chemical entity or if new
clinical studies were required to support the marketing application for the drug. This marketing
exclusivity prevents a third party from obtaining FDA approval for an identical or nearly identical
drug under an Abbreviated New Drug Application (ANDA) or a 505(b)(2) New Drug Application. The
statute also allows a patent owner to obtain an extension of applicable patent terms for a period
equal to one-half the period of time elapsed between the filing of an IND and the filing of the
corresponding NDA plus the period of time between the filing of the NDA and FDA approval, with a
five year maximum patent extension. We cannot be certain that Novogen will be able to take
advantage of either the patent term extension or marketing exclusivity provisions of these laws.
The Best Pharmaceuticals for Children Act, signed into law on January 4, 2002, provides an
additional six months of marketing exclusivity for new or marketed drugs, for which specific
pediatric studies were conducted at the written request of the FDA. On December 3, 2003, the
Pediatric Research Equity Act was signed into law, authorizing the FDA to require pediatric studies
for drugs and biological products to ensure the drugs or products safety and effectiveness in
children. This Act required that NDAs or supplements to NDAs contain data assessing the safety and
effectiveness for the claimed indication in all relevant pediatric subpopulations. Dosing and
administration must be supported for each pediatric subpopulation for which the drug is safe and
effective. The FDA may grant deferrals for submission of data, or full or partial waivers.
Australian Regulatory Requirements
The Therapeutic Goods Act 1989, or 1989 Act, sets out the legal requirements for the import,
export, manufacture and supply of pharmaceutical products in Australia. The 1989 Act requires that
all pharmaceutical products to be imported into, supplied in, manufactured in or exported from
Australia be included in the Australian Register of Therapeutic Goods, or ARTG, unless specifically
exempted under the Act.
In order to ensure that a product can be included in the ARTG, a sponsoring company must make an
application to the Therapeutic Goods Administration, or TGA. The application usually consists of a
form accompanied by data (based on the European Union requirements) to support the quality, safety
and efficacy of the drug and payment of a fee. Application details are available on the TGA
website http://www.tga.gov.au.
The first phase of evaluation, known as the Application Entry Process, is usually a short period
during which an application is assessed on an administrative level to ensure that it complies with
the basic guidelines. The TGA must decide within at least 40 working days whether it will accept
the application for evaluation.
Once an application is accepted for evaluation, aspects of the data provided are allocated to
evaluators within the different relevant sections, who prepare evaluation reports. Following
evaluation, the chemistry and quality control aspects of a product may be referred to a
sub-committee of the Australian Drug and Evaluation Committee, or ADEC, to review the relevant
evaluation reports. The evaluation reports (along with any resolutions of the ADEC sub-committee)
are then sent to the sponsoring company who then has the opportunity to comment on the views
expressed within the
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evaluation report, provide corrections and to submit supplementary data to address any issues
raised in the evaluation reports.
Once the evaluations are complete, the TGA prepares a summary document on the key issues on which
advice will be sought from the ADEC. This summary is sent to the sponsoring company which is able
to submit a response to the ADEC dealing with issues raised in the summary and those not previously
addressed in the evaluation report. The ADEC provides independent advice on the quality,
risk-benefit, effectiveness and access of the drug and conduct medical and scientific evaluations
of the application. The ADECs resolutions are provided to the sponsoring company after 5 working
days after the ADEC meeting.
The TGA takes into account the advice of the ADEC in reaching a decision to approve or reject a
product. Any approval for registration on the ARTG may have conditions associated with it.
From the time that the TGA accepts the initial application for evaluation, the TGA must complete
the evaluation and make a decision on the registration of the product within at least 255 working
days. The TGA also has a system of priority evaluation for products that meet certain criteria,
including where the product is a new chemical entity that it is not otherwise available on the
market as an approved product, and is for the treatment of a serious, life-threatening illness for
which other therapies are either ineffective or not available.
European Union Regulatory Requirements
Outside the United States, our ability to market our products will also be contingent upon
receiving marketing authorizations from the appropriate regulatory authorities and compliance with
applicable post-approval regulatory requirements. Although the specific requirements and
restrictions vary from country to country, as a general matter, foreign regulatory systems include
risks similar to those associated with FDA regulation, described above. Under EU regulatory
systems, marketing authorizations may be submitted either under a centralized or a national
procedure. Under the centralized procedure, a single application to the European Medicines Agency
(EMEA) leads to an approval granted by the European Commission which permits the marketing of the
product throughout the EU. The centralized procedure is mandatory for certain classes of medicinal
products, but optional for others. For example, all medicinal products developed by certain
biotechnological means, and those developed for cancer and other specified diseases and disorders,
must be authorized via the centralized procedure. We assume that the centralized procedure will
apply to our products that are developed by means of a biotechnology process. The national
procedure is used for products that are not required to be authorized by the centralized procedure.
Under the national procedure, an application for a marketing authorization is submitted to the
competent authority of one member state of the EU. The holders of a national marketing
authorization may submit further applications to the competent authorities of the remaining member
states via either the decentralized or mutual recognition procedure. The decentralized procedure
enables applicants to submit an identical application to the competent authorities of all member
states where approval is sought at the same time as the first application, while under the mutual
recognition procedure, products are authorized initially in one member state, and other member
states where approval is sought are then requested to recognize the original authorization based
upon an assessment report prepared by the original authorizing competent authority. Both the
decentralized and mutual recognition procedures should take no longer than 90 days, but if one
member state makes an objection, which under the legislation can only be based on a possible risk
to human health, the application will be automatically referred to the Committee for Medicinal
Products for Human Use (CHMP) of the EMEA. If a referral for arbitration is made, the procedure is
suspended. However, member states that have already approved the application may, at the request of
the applicant, authorize the product in question without waiting
23
for the result of the arbitration. Such authorizations will be without prejudice to the outcome of
the arbitration. For all other concerned member states, the opinion of the CHMP, which is binding,
could support or reject the objection or alternatively could reach a compromise position acceptable
to all EU countries concerned. The arbitration procedure may take an additional year before a final
decision is reached and may require the delivery of additional data.
As with FDA approval we may not be able to secure regulatory approvals in Europe in a timely
manner, if at all. Additionally, as in the United States, post-approval regulatory requirements,
such as those regarding product manufacture, marketing, or distribution, would apply to any product
that is approved in Europe, and failure to comply with such obligations could have a material
adverse effect on our ability to successfully commercialize any product.
The conduct of clinical trials in the European Union is governed by the European Clinical Trials
Directive (2001/20/EC), which was implemented in May 2004. This Directive governs how regulatory
bodies in member states control clinical trials. No clinical trial may be started without a
clinical trial authorization granted by the national competent authority and favorable ethics
approval.
Accordingly, there is a marked degree of change and uncertainty both in the regulation of clinical
trials and in respect of marketing authorizations which face us for our products in Europe.
Government Funding
Novogen received financial support for the phenoxodiol drug program from the Australian government
under what is known as the START Program. The START Program is a merit-based program designed to
encourage and assist Australian companies to undertake research and development and
commercialization through a range of grants and loans. The START Program is administered by the
Industry Research and Development, or IR&D Board. The IR&D Board is made up of private sector and
academic members with expertise and experience in research and development and commercialization.
In 1998, the Australian government agreed to provide A$2.7 million (approximately U.S. $1.8
million) to Novogen, enabling it to expedite phenoxodiol into clinical trials, provided that the
grant money was matched by an equal expenditure by Novogen. The START grant was awarded after the
governments review of the pertinent research results, the intellectual property driving the
program, and the likelihood and potential for commercial success of the drug.
The terms of the grant require Novogen to obtain the consent of the Australian government to deal
with the intellectual property rights which have arisen through the program conducted to date.
Novogen has obtained the consent of the Australian government to the grant of the licence to us and
to the other arrangements between us and Novogen concerning the development and commercialization
of phenoxodiol.
Under the START Program, Novogen must meet certain project development and commercialization
obligations. Novogen has met the project development obligations and has received final payment
thereon. Novogen believes that it is currently in compliance with its commercialization schedule
and that it has fulfilled all of its obligations under the terms of the START Program and expects
to continue to do so in the future. For additional information on the consequences to us in the
event Novogen fails to comply with its obligations under the START Program, see the Intellectual
Property and Risk Factors sections of this annual report.
Employees
We do not have any employees. Novogen provides us with staff and other financial and administrative
services under our services agreement with Novogen.
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Item 1A. Risk Factors
In addition to the other information in this Annual Report the following risk factors should be
considered carefully in evaluating us and our business.
Risks Related to Our Business
We have a limited operating history, and we are likely to incur operating losses for the
foreseeable future.
You should consider our prospects in light of the risks and difficulties frequently encountered by
early stage and developmental companies. Although we were incorporated in December 2000, we have
only been in operation since May 2002. We have incurred net losses of $25,501,000 since our
inception, including net losses of $7,386,000, $6,421,000, and $8,538,000 for the years ended June
30, 2006, 2005 and 2004, respectively. We anticipate that we will incur operating losses and
negative operating cash flow for the foreseeable future. We have not yet commercialized any drug
candidates and cannot be sure that we will ever be able to do so, or that we may ever become
profitable. We expect to expand our clinical trials significantly, which will result in increasing
losses, and may continue to incur substantial losses even if we begin to generate revenues from the
distribution and sale of phenoxodiol.
If we are unable to successfully develop and commercialize phenoxodiol or our newly licensed
anti-cancer compounds NV-196 and NV-143, or license other viable drug candidates, our ability to
sustain future operations will be significantly diminished.
Under our license option deed with Novogen, we acquired a license from Novogen to develop
anti-cancer drugs containing the drug candidates NV-196 and NV-143. We cannot guarantee that
phenoxodiol will be successful or that we will develop successful anti-cancer drugs containing
NV-196 and NV-143. Our rights under our license agreement for phenoxodiol and our license agreement
for NV-196 and NV-143 with Novogen are limited to the commercialization of phenoxodiol, NV-196 and
NV-143 as anti-cancer agents and these rights specifically exclude the use of phenoxodiol, NV-196
and NV-143 in topical applications. If we are unable to successfully develop and commercialize
phenoxodiol or other viable anti-cancer drug candidates containing NV-196 or NV-143, we may be
required to cease or reduce our operations.
If the data from our clinical trials do not demonstrate the safety and effectiveness of phenoxodiol
to the FDAs satisfaction, we will not receive FDA approval to market phenoxodiol in the United
States.
In 2004, the FDA granted phenoxodiol Fast Track status for patients with recurrent late stage
ovarian cancer that is resistant or refractory to platins and taxanes. In 2005, the FDA granted
phenoxodiol Fast Track status for its intended use in patients with hormone-refractory prostate
cancer (prostate cancer that grows and is no longer inhibited by hormone therapy). More recently we
completed a Special Protocol Assessment (SPA) and reached agreement with the FDA on a pivotal Phase
III study of phenoxodiol in combination with carboplatin in women with platinum-resistant ovarian
cancer (ovarian cancer that does not respond to platinum based anti-cancer agents such as
cisplatin). The SPA process allows for FDA evaluation of a clinical trial protocol that will form
the basis of an efficacy claim for a marketing application. As a fast track product, phenoxodiol
will be eligible for accelerated approval and priority review by the FDA of the marketing
application for this indication. If the FDA concludes that the data from our pivotal clinical trial
have failed to demonstrate the safety and
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effectiveness of phenoxodiol, we will not receive FDA approval to market phenoxodiol for those
indications in the United States. We cannot assure you that the results of our Phase III pivotal
trial will be successful.
If we do not receive marketing approval, our commercial prospects for phenoxodiol will be impaired.
Clinical trials have a high risk of failure. A number of companies in the pharmaceutical industry,
including biotechnology companies, have suffered significant setbacks in advanced clinical trials,
even after achieving promising results in earlier trials. If our clinical trials are unsuccessful,
our prospects for commercializing phenoxodiol will be impaired and we may be required to cease or
reduce our operations.
Our commercial opportunity will be reduced or eliminated if competitors develop and market products
that are more effective, have fewer side effects or are less expensive than phenoxodiol.
The development of phenoxodiol and other drug candidates is highly competitive. A number of other
companies have products or drug candidates in various stages of pre-clinical or clinical
development that are intended for the same therapeutic indications for which phenoxodiol is being
developed. Some of these potential competing drugs are further advanced in development than
phenoxodiol and may be commercialized sooner. Even if we are successful in developing effective
drugs, phenoxodiol may not compete successfully with products produced by our competitors.
Docetaxel, a drug distributed by Aventis, was approved in 2004 by the FDA for the treatment of
hormone-refractory prostate cancer, establishing a new bench-mark for standard chemotherapy in
late-stage prostate cancer. We do not believe docetaxel is a direct competitor of our use of
phenoxodiol for late-stage prostate cancer because our strategy is to develop phenoxodiol as a
chemo-sensitizer for docetaxel in patients with prostate cancer who become resistant to docetaxel.
A number of pharmaceutical and biotechnology companies are known to be seeking to develop drugs for
the same indication.
The experimental drug, Telcyta, manufactured by Telik, Inc., is a directly competitive drug to our
use of phenoxodiol as a chemo-sensitizing agent to restore sensitivity to platinum-based drugs in
late-stage ovarian cancer. Telcyta currently is in a Phase III registration trial suggesting that
it has shown sufficient promise in a Phase II study to warrant progression to a Phase III study.
The different study protocols being used by us with phenoxodiol and by Telik, Inc. with Telcyta
make it difficult to compare the two drugs for efficacy in this area and, as a result, we cannot
evaluate the level of competition. However, we expect that at any level of efficacy, Telcyta,
should it be approved for marketing, would represent a serious competitor for phenoxodiol.
Our competitors include pharmaceutical companies and biotechnology companies, as well as
universities and public and private research institutions. In addition, companies active in
different but related fields represent substantial competition for us. Many of our competitors
developing oncologic drugs have significantly greater capital resources, larger research and
development staffs and facilities and greater experience in drug development, regulation,
manufacturing and marketing than us. These organizations also compete with Novogen, our services
provider, to recruit qualified personnel, and with us to attract partners for joint ventures and to
license technologies that are competitive with ours. As a result, our competitors may be able to
more easily develop technologies and products that would render our technologies or our drug
candidates obsolete or non-competitive.
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We may not complete our pivotal trials on schedule, or at all, or they may be conducted improperly,
which may delay or preclude FDA marketing approval.
The completion of our pivotal trials may be delayed or terminated for many reasons, including, but
not limited to, if:
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subjects do not enroll in our pivotal trials at the rate we currently expect; |
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subjects experience an unacceptable rate or severity of adverse side effects; |
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third party clinical investigators do not perform our pivotal trial on our anticipated
schedule or consistent with the clinical trial protocol, Good Clinical Practice and
regulatory requirements, or other third parties do not perform data collection and
analysis in a timely or accurate manner; |
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inspections of our clinical trial sites by the FDA or Institutional Review Boards,
(IRBs), find regulatory violations that require us to undertake corrective action, suspend
or terminate one or more sites, or prohibit us from using some or all of the data in
support of our marketing applications; |
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one or more IRB suspends or terminates the trial at an investigational site, precludes
enrollment of additional subjects, or withdraws its approval of the trial; or |
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one or more of our clinical investigators withdraws from our trials or deviates from
our approved protocol. |
Our development costs will increase if we have material delays in our pivotal trials, or if we are
required to modify, suspend, terminate or repeat a pivotal trial.
We will need to raise additional funds to complete clinical trials and commercialize NV-196 and
NV-143, and the actual amount of funds we will need will be determined by a number of factors, some
of which are beyond our control.
While we believe that we have sufficient funds to complete our current clinical trial program, we
will require additional funds to further the evaluation of NV-196 and NV-143 beyond the current
objectives. The actual amount of funds that we will need will be determined by many factors, some
of which are beyond our control. As a result, we may need additional funds sooner than we currently
anticipate. These factors include:
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the progress of research activities, the number and scope of research programs; |
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the progress of pre-clinical and clinical development activities; |
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the progress of the development efforts of Novogen or any other parties with whom we
enter into research and development agreements; |
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our ability to establish and maintain current and new research and development and
licensing arrangements; |
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our ability to achieve milestones under licensing arrangements; and |
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the costs involved in enforcing or defending patent claims and other intellectual
property rights; and the costs and timing of regulatory approvals. |
If our capital resources are insufficient to meet future capital requirements, we will have to
raise additional funds. If we are unable to obtain additional funds on favorable terms we may be
required to cease or reduce our operations. Also, if we raise more funds by selling additional
shares of our common stock or securities convertible into or exercisable for shares of our common
stock, the ownership interests of our common stockholders will be diluted.
We have not yet submitted an investigational new drug application (IND) for NV-196 or NV-143
product candidates with the FDA and until an IND becomes effective, we will not be able to perform
human clinical trials in the United States.
Although we have conducted the first Phase I clinical trial of NV-196 in Australia, we have not yet
submitted an IND to the FDA. NV-143 has not yet commenced clinical trials in humans. Until an IND
becomes effective, we will not be able to perform human clinical trials of our NV-196 or NV-143
product candidates in the United States. Approval to begin clinical testing in the United States
requires submission of: (1) adequate information on the safety and manufacturing of NV-196 or
NV-143 to assure the proper quality, purity and strength of the investigational product, (2)
summary of pharmacological and toxicological effects, pharmacokinetics (how the drug is absorbed
and metabolised) and biological disposition in animals, (3) the proposed protocol for any planned
clinical study, and (4) a brief description of the overall plan for investigating the product.
Although we intend to prepare an IND to be submitted to the FDA, we do not know whether or when the
IND will become effective.
We may not be able to secure and maintain suitable research institutions to conduct our clinical
trials.
We rely on suitable research institutions, of which there are many, to conduct our clinical trials.
While we have not previously experienced problems with third parties upon whom we rely for research
or clinical trials, our reliance upon research institutions, including hospitals and cancer
clinics, provides us with less control over the timing and cost of clinical trials and the ability
to recruit patients than if we had conducted the trials on our own. Further, there is a greater
likelihood that disputes may arise with these research institutions over the ownership of
intellectual property discovered during the clinical trials. If we are unable to reach agreement
with suitable research institutions on acceptable terms, or if any resulting agreement is
terminated and we are unable to quickly replace the applicable research institution with another
qualified institution on acceptable terms, the research could be delayed and we may be unable to
complete development, or commercialize phenoxodiol, NV-196 or NV-143, which will adversely affect
our ability to generate operating revenues.
Our ability to achieve profitability is dependent on a number of factors, many of which have
uncertain outcomes.
Our ability to achieve profitability is dependent on a number of factors including:
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completing our clinical trial program and receiving marketing approval. Clinical testing
is a prerequisite to the receipt of the regulatory approval necessary to commercialize our
product candidates. We cannot control the outcome of our testing program or whether we
receive regulatory approval. We will not be able to generate sales revenues until we
receive marketing approval; |
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establishing strategic partnerships to market and sell our product candidates. Our
negotiating position with potential strategic partners will be affected by the success of
our clinical program. If we are unable to attract partners and negotiate favorable terms,
we may have difficulty generating revenues from our commercialization of our product
candidates; |
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identifying manufacturing partners with a low cost operation and scalable supply capable
of meeting the demands of the commercial market for our product candidates. We have
contracted with third parties for the supply of phenoxodiol for our pivotal study and to
develop a scalable manufacturing process. We will need to rely on Novogen or third party
manufacturers to supply NV-196 and NV-143. We do not have direct control over the
manufacturing costs of phenoxodiol, NV-196 and NV-143. If our costs for the supply of
phenoxodiol, NV-196 or NV-143 rise or if our contractors fail to supply sufficient
quantities of phenoxodiol, NV-196 and NV-143, our profitability could be adversely
affected; and |
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our ability to license from Novogen rights to commercialize new cancer compounds. We may
license from Novogen the rights to other cancer compounds under the terms of the license
option deed. If development of phenoxodiol is unsuccessful or if we choose to expand to the
development of additional compounds, our success may depend on controlling the costs of
developing such new compounds and negotiating a favorable license agreement with Novogen.
The availability of new compounds to commercialize and the cost to develop these compounds
is outside of our direct control. |
We have no direct control over the costs of manufacturing phenoxodiol, NV-196 or NV-143 and
increases in these costs would increase the costs of conducting clinical trials and could adversely
affect future profitability if these costs increase significantly.
We do not intend to manufacture phenoxodiol or NV-196 or NV-143 ourselves and we will be relying on
third parties for our supplies of phenoxodiol both for clinical trials and for commercial
quantities in the future. Novogen, which currently provides phenoxodiol for use in clinical trials,
has taken the strategic decision not to manufacture on a large scale Active Pharmaceutical
Ingredients (APIs) for cancer drugs, including phenoxodiol, as these can be more economically
supplied by third parties with particular expertise in this area. The contract facilities that have
been identified are FDA licensed, have a track record of large scale APIs manufacture and have
already invested in capital and equipment. We have completed the novation to MEPL of contracts that
Novogen had entered into with third parties to develop a scalable manufacturing method to ensure
that sufficient quantities of phenoxodiol can be manufactured in compliance with cGMP (Current Good
Manufacturing Practices) and to complete the analytical and stability work necessary for an NDA
submission. An NDA will be submitted if the planned Phase III study is successful, and approval of
the NDA is required to market phenoxodiol. We will need to arrange similar contracts in the future
to secure the supply of NV-196 and NV-143. We have no direct control over the costs of
manufacturing our product candidates. If the costs of manufacturing increase or if the cost of the
materials used increases, these costs will be passed on to us making the cost of conducting
clinical trials more expensive. Increases in manufacturing costs could adversely affect our future
profitability if we are unable to pass all of the increased costs along to our customers.
Final approval by regulatory authorities of our drug candidates for commercial use may be delayed,
limited or prevented, any of which would adversely affect our ability to generate operating
revenues.
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Any of the following factors may serve to delay, limit or prevent the final approval by
regulatory authorities of our drug candidates for commercial use:
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NV-196 and NV-143 are in the early stages of clinical development and we will need to
conduct significant clinical testing to prove safety and efficacy before applications for
marketing can be filed with the FDA, or with the regulatory authorities of other countries; |
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data obtained from pre-clinical and clinical tests can be interpreted in different ways,
which could delay, limit or prevent regulatory approval; |
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development and testing of product formulation, including identification of suitable
excipients, or chemical additives intended to facilitate delivery of our drug candidates; |
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it may take us many years to complete the testing of other drug candidates, and failure
can occur at any stage of this process; and |
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negative or inconclusive results or adverse medical events during a clinical trial could
cause us to delay or terminate our development efforts. |
While we have not encountered any material delays or adverse events from the factors described
above to date, we cannot assure you that such delays or adverse events will not be encountered in
the future.
We may not be able to establish the strategic partnerships necessary to market and distribute
phenoxodiol.
A key part of our business plan is to establish relationships with strategic partners. We must
successfully contract with third parties to package, market and distribute phenoxodiol. We have not
yet established any strategic partnerships. Potential partners may not wish to enter into
agreements with us due to Novogens current equity position as our majority stockholder or our
contractual relationships with Novogen. Similarly, potential partners may be discouraged by our
limited operating history. Additionally, our relative attractiveness to potential partners and
consequently, our ability to negotiate acceptable terms in any partnership agreement will be
affected by the results of our clinical program. For example, if phenoxodiol is shown to have high
efficacy against a broad range of cancers we may generate greater interest from potential partners
than if phenoxodiol was demonstrated to be less effective or applicable to a narrower range of
cancers. There is no assurance that we will be able to negotiate commercially acceptable licensing
or other agreements for the future exploitation of phenoxodiol, including the continued clinical
development, manufacture or marketing of phenoxodiol. If we are unable to successfully contract for
these services, or if arrangements for these services are terminated, we may have to delay our
commercialization program for phenoxodiol which will adversely affect our ability to generate
operating revenues.
We face a risk of product liability claims and may not be able to obtain adequate insurance.
Our business exposes us to the risk of product liability claims. This risk is inherent in the
manufacturing, testing and marketing of human therapeutic products. We have product liability
insurance coverage of up to approximately $14 million. Although we believe that this amount of
insurance coverage is appropriate for our business at this time, it is subject to deductibles and
coverage limitations, and the market for such insurance is becoming more restrictive. We may not be
able to obtain or maintain adequate protection against potential liabilities. If we are unable to
sufficiently
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insure against potential product liability claims, we will be exposed to significant liabilities,
which may materially and adversely affect our business development and commercialization efforts.
Our rights to develop and exploit phenoxodiol and the anti-cancer compounds NV-196 and NV-143 are
subject to the terms and conditions of agreements we have entered into with Novogen, and under
these agreements our rights may be terminated under certain circumstances, some of which may be
beyond our control.
We have licensed the intellectual property in the phenoxodiol technology and the anti-cancer
compounds NV-196 and NV-143 from Novogen. Under the terms of the license agreement for phenoxodiol,
all forms of administering phenoxodiol for the treatment of cancer are licensed to us, excluding
topical applications. Under the terms of the license agreement for NV-196 and NV-143, all forms of
administering drugs containing the anti-cancer compounds NV-196 and NV-143 are licensed to us,
excluding topical applications. If we fail to meet our obligations under our license agreements,
the manufacturing license and supply agreement or the services agreement with Novogen, any or all
of these agreements may be terminated by Novogen and we could lose our rights to develop
phenoxodiol or anti-cancer drugs containing NV-196 and NV-143. To date, we have no reason to
believe that we will be unable to satisfy our obligations under these agreements. In addition, each
of these agreements may be terminated immediately by Novogen in the event that we undergo a change
of control without the consent of Novogen. A change of control means a change in control of more
than half the voting rights attaching to the shares of our subsidiary, a change in control of more
than half of the issued shares of our subsidiary (not counting any share which carries no right to
participate beyond a specified amount in the distribution of either profit or capital) or a change
in control of the composition of the board of directors of our subsidiary. Each of these agreements
may also be terminated if we become the subject of certain bankruptcy proceedings or cease for any
reason to be able to lawfully carry out all the transactions required by each respective agreement.
Our license rights are fundamental to our business and therefore a loss of these rights will likely
cause us to cease operations.
The rights granted to us under the license agreements, the manufacturing license and supply
agreement and the license option deed with Novogen are fundamental to our business. The license
agreement for phenoxodiol grants us the right to make, have made, market, distribute, sell, hire or
otherwise dispose of phenoxodiol products in the field of prevention, treatment or cure of cancer
in humans by pharmaceuticals delivered in all forms except topical applications. The license
agreement for NV-196 and NV-143 grants us the right to make, have made, market, distribute, sell,
hire or otherwise dispose of anti-cancer drugs containing the compounds NV-196 and NV-143 in the
field of prevention, treatment or cure of cancer in humans by pharmaceuticals delivered in all
forms except topical applications. Our business purpose is to develop and commercialize cancer
drugs including phenoxodiol and drugs containing the compounds NV-196 and NV-143, which we would be
unable to pursue without the rights granted to us under the license agreements. Under the
manufacturing license and supply agreement, we have granted to Novogen an exclusive sub-license to
manufacture and supply phenoxodiol to us in its primary manufactured form and Novogen has agreed to
manufacture for us our required quantities of phenoxodiol. This agreement enables us to protect the
licensed intellectual property rights used in the manufacturing process while securing the services
of a manufacturing partner in Novogen, which through its equity position in us, shares a common
interest in the production of phenoxodiol. The license option deed grants us an exclusive first
right to accept and exclusive last right to match any proposed dealing by Novogen with its
intellectual property rights with a third party relating to certain compounds (other than
phenoxodiol) developed by Novogen and its affiliates which have applications in the field of
prevention, treatment or cure of cancer in humans.
31
The license option deed is important to our business because it allows us to maintain control over
the sale by Novogen of complimentary as well as potentially competitive intellectual property
rights to third party competitors. Any loss of the rights under any of these agreements will likely
cause us to cease operations.
The success of our product candidates is largely dependent on Novogens ability to obtain and
maintain patent protection and preserve trade secrets, which cannot be guaranteed.
Patent protection and trade secret protection are important to our business and our future will
depend, in part on our ability and the ability of Novogen to maintain trade secret protection,
obtain patents and operate without infringing the proprietary rights of others both in the United
States and abroad. Litigation or other legal proceedings may be necessary to defend against claims
of infringement, to enforce our patents, or to protect our trade secrets or the trade secrets of
Novogen. Such litigation could result in substantial costs and diversion of our managements
attention. Novogen has not been involved in any opposition re-examination trade secret dispute,
infringement litigation or any other litigation or legal proceedings pertaining to the licensed
patent rights.
The patent positions of pharmaceutical and biotechnology companies can be highly uncertain and
involve complex legal and factual questions. Novogen has applied for patents in a number of
countries with respect to the use of phenoxodiol for the treatment, prevention or cure of cancer.
We have licensed both issued patents and pending patent applications from Novogen. Novogen has
issued patents in the United States, Australia and Singapore covering the use of phenoxodiol to
prevent or treat skin cancer from ultraviolet damage. Novogen also has patents issued in Australia,
Hong Kong, New Zealand and the United Kingdom related to phenoxodiol for the treatment of a variety
of cancers and has recently received a notice of allowance in the United States that is also
related to phenoxodiol for the treatment of a variety of cancers.
Novogens applications may not proceed to grant or may be amended to reduce the scope of protection
of any patent granted. The applications and patents may also be opposed or challenged by third
parties. Our commercial success will depend, in part, on the ability of Novogen and our ability to
obtain and maintain effective patent protection for the technologies underlying phenoxodiol and
other compounds, and to successfully defend patent rights in those technologies against third-party
challenges. As patent applications in the United States are maintained in secrecy until published
or issued and as publication of discoveries in the scientific or patent literature often lag behind
the actual discoveries, we cannot be certain that Novogen was the first to make the inventions
covered by its pending patent applications or issued patents or that it was the first to file
patent applications for such inventions. Additionally, the breadth of claims allowed in
biotechnology and pharmaceutical patents or their enforceability cannot be predicted. We cannot be
sure that any additional patents will issue from any of Novogens patent applications or, should
any patents issue, that we will be provided with adequate protection against potentially
competitive products. Furthermore, we cannot be sure that should patents issue, they will be of
commercial value to us, or that private parties, including competitors, will not successfully
challenge our patents or circumvent our patent position in the United States or abroad.
Claims by other companies that we infringe their proprietary technology may result in liability for
damages or stop our development and commercialization efforts.
The pharmaceutical industry is highly competitive and patents have been applied for by, and issued
to, other parties relating to products competitive with phenoxodiol. Therefore, phenoxodiol and any
other drug candidates may give rise to claims that they infringe the patents or proprietary rights
of other
32
parties existing now and in the future. Furthermore, to the extent that we or Novogen or our
respective consultants or research collaborators use intellectual property owned by others in work
performed for us or Novogen, disputes may also arise as to the rights in such intellectual property
or in resulting know-how and inventions. An adverse claim could subject us to significant
liabilities to such other parties and/or require disputed rights to be licensed from such other
parties.
We have currently contracted formulation development and manufacturing process development work for
phenoxodiol formulation. This work is being conducted to ensure that there is a robust production
process which meets the expected commercial quantities of phenoxodiol and that dose formulations
are manufactured on a cost effective basis.
This process has identified a number of excipients, or additives to improve drug delivery, that may
be used in the formulations of phenoxodiol. Excipients, among other things, perform the function of
a carrier of the active drug ingredient in the intravenous formulation. Some of these identified
excipients or carriers may be included in third party patents in some countries. We intend to seek
a license if we decide to use a patented excipient in the marketed intravenous product or we may
choose one of those excipients that do not have a license requirement.
We cannot be sure that any license required under any such patents or proprietary rights would be
made available on terms acceptable to us, if at all. If we do not obtain such licenses, we may
encounter delays in product market introductions, or may find that the development, manufacture or
sale of products requiring such licenses may be precluded. We have not conducted any searches or
made any independent investigations of the existence of any patents or proprietary rights of other
parties.
We may be subject to substantial costs stemming from our defense against third-party intellectual
property infringement claims.
Third parties may assert that we or Novogen are using their proprietary information without
authorization. Third parties may also have or obtain patents and may claim that technologies
licensed to or used by us infringe their patents. If we are required to defend patent infringement
actions brought by third parties, or if we sue to protect our own patent rights, we may be required
to pay substantial litigation costs and managerial attention may be diverted from business
operations even if the outcome is not adverse to us. In addition, any legal action that seeks
damages or an injunction to stop us from carrying on our commercial activities relating to the
affected technologies could subject us to monetary liability and require us or Novogen or any third
party licensors to obtain a license to continue to use the affected technologies. We cannot predict
whether we or Novogen would prevail in any of these types of actions or that any required license
would be made available on commercially acceptable terms or at all.
In the event that Novogen does not comply with its obligations under a grant from the Australian
Government under which phenoxodiol was, in part, developed, our rights to use the intellectual
property relating to phenoxodiol and developed by Novogen may revert back to the Australian
Government.
Novogen developed phenoxodiol in part using funds from the Australian Government under what is
known as the START Program. Under the START Program, Novogen must meet certain project development
and commercialization obligations. Novogen has met the project development obligations and has
received final payment thereon. Novogen believes it is currently in compliance with its
commercialization schedule. Although Novogen believes that it has complied with its obligations
under the START Program, if the Australian Government disagrees or if Novogen
33
undergoes a change of control without the prior consent of the Australian Government, the
Australian Government has a right to demand that intellectual property created during the course of
the project funded by the grant be vested back in the Australian Government or demand repayment of
the funds paid to Novogen under the program. The Australian Government may then license the
intellectual property rights related to phenoxodiol to other parties and may demand other
intellectual property rights from Novogen. Any such reclamation by the Australian Government could
preclude our use of Novogens intellectual property in the development and commercialization of
phenoxodiol and we may have to compete with other companies to whom the Australian Government may
license the intellectual property.
The enforcement of civil liabilities against our officers and directors may be difficult.
All of our officers and directors are residents of jurisdictions outside the United States. As a
result it may be difficult for you to effect service of process within the United States upon our
officers and directors or to enforce judgments obtained against our officers and directors or us in
United States courts.
Our revenue is affected by fluctuations in currency exchange rates.
Much of our expenditures and potential revenue will be spent or derived outside of the United
States. As a result, fluctuations between the United States dollar and the currencies of the
countries in which we operate may increase our costs or reduce our potential revenue. At present,
we do not engage in hedging transactions to protect against uncertainty in future exchange rates
between particular foreign currencies and the U.S. dollar.
We are authorized to issue a class of blank check preferred stock, which could adversely affect the
holders of our common stock.
Our restated certificate of incorporation allows us to issue a class of blank check preferred stock
with rights potentially senior to those of our common stock without any further vote or action by
the holders of our common stock. The issuance of preferred stock could decrease the amount of
earnings and assets available for distribution to the holders of our common stock or could
adversely affect the rights and powers including voting rights, of such holders. In certain
circumstances such issuance could have the effect of decreasing the market price of our shares, or
making a change in control of us more difficult.
Risks Related to Our Relationship with Novogen
As our majority stockholder, Novogen has the ability to determine the outcome of all matters
submitted to our stockholders for approval and Novogens interests may conflict with ours or our
other stockholders interests.
Novogen beneficially owns approximately 78.1% of our outstanding shares of common stock. As a
result, Novogen will have the ability to effectively determine the outcome of all matters submitted
to our stockholders for approval, including the election and removal of directors and any merger,
consolidation or sale of all or substantially all of our assets.
Novogen will have the ability to effectively control our management and affairs. Novogens
interests may not always be the same as that of our other stockholders. In addition this
concentration of ownership may harm the market price of our shares by:
34
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delaying, deferring or preventing a change in control; |
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impeding a merger, consolidation, takeover or other business combination involving us; |
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discouraging a potential acquirer from making a tender, offer or otherwise attempting to
obtain control of us; or |
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selling us to a third party. |
Three of our directors and our secretary and chief financial officer are officers and/or directors
of Novogen and other Novogen subsidiaries, which may create a conflict of interest as well as
prevent them from devoting their full attention to us.
Three of our board members currently serve as board members of Novogen. Simultaneous service as a
Novogen director or officer could create, or appear to create, a conflict of interest when such
directors are presented with decisions that could have different implications for us and Novogen.
Mr. Philip Johnston is the chairman of Novogen Limited, Mr. Christopher Naughton is the managing
director of Novogen Limited and Professor Paul John Nestel is a director of Novogen Limited. Mr.
David Seaton is chief financial officer of Novogen. The responsibilities of Messrs. Johnston,
Naughton and Seaton and Professor Nestel to Novogen could prevent them from devoting their full
attention to us, which could be harmful to the development of our business.
We depend on a number of key personnel whose services are provided by Novogen under our services
agreement. If we are not able to procure these services in the future, the strategic direction of
the clinical development program would be disrupted, causing a delay in our commercialization
program.
We currently rely on Professor Graham Kelly, our Chairman and Phenoxodiol Program Director,
Professor Alan Husband, Novogen Research Director, and Mr. Christopher Naughton, our President and
CEO, to provide the strategic direction for the clinical development of phenoxodiol. If we are
unable to secure the ongoing services of these key personnel, the commercialization program for
phenoxodiol will be disrupted and will cause delays in obtaining marketing approval. Novogen has
entered into employment agreements and maintains key man life insurance policies for each of these
persons.
The ongoing criminal investigations involving Professor Kelly, our Chairman and Phenoxodiol Program
Director, could have a material adverse effect on our business or cause our stock price to decline.
Professor Kelly is one of a number of individuals who, and whose associated entities and advisors,
have been the subject of investigations by certain Australian authorities relative to their alleged
involvement in the evasion of Australian tax, fraud and money laundering. Professor Kelly has
informed us that he does not believe that he has committed any wrongdoing and denies that he has
been involved in any wrongdoing. Nevertheless, Professor Kelly may need to allocate time and
resources to deal with the investigation. Additionally, if the Australian authorities were to
decide to prosecute Professor Kelly upon concluding their investigation and if such prosecution
were to result in a conviction, Professor Kelly may be barred from acting as an officer or director
and may become unavailable to us. Any publicity related to this investigation or potential
prosecution or conviction of
35
Professor Kelly could have a material adverse effect on our business or cause our stock price to
decline.
Novogen can compete with us.
We have no contract, arrangement or understanding with Novogen to preclude it from developing a
product which may be competitive with phenoxodiol, NV-196 or NV-143 or to use these compounds for
any uses other than anti-cancer applications. Novogen has reserved the intellectual property rights
and know-how rights relating to topical applications of these compounds even in the field of
cancer. There can be no assurance that Novogen or its subsidiaries will not pursue alternative
technologies or product candidates as a means of developing treatments for the conditions targeted
by phenoxodiol or any other product candidate which we seek to exploit.
We are dependent on Novogen for our personnel.
We have no employees. We rely on Novogen to provide or procure the provision of staff and other
financial and administrative services under our services agreement with Novogen. We believe Novogen
has fully complied with the terms of our services agreement. To successfully develop our drug
candidates, we will require ongoing access to the personnel who have, to date, been responsible for
the development of our drug candidates. The services agreement does not specify a minimum amount of
time that Novogen employees must devote to our operations. If we are unable to secure or if we lose
the services of these personnel, the ability to develop our drug candidates could be materially
impaired. Moreover, if our business experiences substantial and rapid growth, we may not be able to
secure the services and resources we require from Novogen or from other persons to support that
growth.
Risks Related to Our Common Stock
The trading price of the shares of our common stock could be highly volatile and could decline in
value and we may incur significant costs from class action litigation.
The trading price of our common stock could be highly volatile in response to various factors, many
of which are beyond our control, including:
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developments concerning phenoxodiol and our other drug candidates NV-196 and NV-143; |
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announcements of technological innovations by us or our competitors; |
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new products introduced or announced by us or our competitors; |
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changes in financial estimates by securities analysts; |
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actual or anticipated variations in operating results; |
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expiration or termination of licenses, research contracts or other collaboration agreements; |
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conditions or trends in the regulatory climate and the biotechnology, pharmaceutical and
genomics industries; |
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changes in the market valuations of similar companies; |
36
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the liquidity of any market for our securities and; |
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additional sales by us or Novogen of shares of our common stock, including in connection
with our SEDA. |
In addition, equity markets in general, and the market for biotechnology and life sciences
companies in particular, have experienced substantial price and volume fluctuations that have often
been unrelated or disproportionate to the operating performance of companies traded in those
markets. In addition, changes in economic conditions in the United States, Europe or globally,
could impact upon our ability to grow profitably. Adverse economic changes are outside our control
and may result in material adverse impacts on our business or our results of operations. These
broad market and industry factors may materially affect the market price of our shares of common
stock, regardless of our development and operating performance. In the past, following periods of
volatility in the market price of a companys securities, securities class-action litigation has
often been instituted against that company. Such litigation, if instituted against us, could cause
us to incur substantial costs and divert managements attention and resources.
Future sales of our common stock may depress our stock price and cause stockholders to experience
dilution.
The market price of our common stock could decline as a result of sales of substantial amounts of
our common stock in the public market including the shares in connection with our SEDA, or the
perception that these sales could occur. Stockholders could also experience dilution in their
investment if we sell shares to Cornell under the SEDA at a price which is less than our net
tangible book value per share. In August 2006, we filed a resale registration statement on Form S-3
in relation to 6,452,937 shares of common stock in addition to 2,815,258 shares of common stock
underlying warrants we issued in connection with a private placement to accredited investors which
we closed on July 11, 2006. Once this registration statement has been declared effective by the
SEC, the selling stockholders named therein will be able to sell their shares of common stock
covered by the registration statement freely in the public market place. A depressed stock price
could make it more difficult for us to raise funds through future equity offerings. As of August 1,
2006, we had 63,390,937 shares of our common stock outstanding not including the 5,207,258 shares
of common stock underlying warrants.
We will have broad discretion over the use of the net proceeds to us from any exercise of
outstanding warrants.
We will have broad discretion to use the net proceeds to us upon any exercise of outstanding
warrants, and you will be relying on the judgment of our board of directors and management
regarding the application of these proceeds. Although we expect to use a substantial portion of the
net proceeds from any exercise of the warrants for general corporate purposes, including potential
payments to Novogen under the terms of the license agreements, potential licensing of other cancer
compounds developed by Novogen under the license option deed and potential expansion of the
clinical trial program for phenoxodiol to include other forms of cancer, we have not allocated
these net proceeds for specific purposes.
Risks Related to the Private Placement
If we fail to obtain and maintain registration of the common stock issued or issuable pursuant to
the exercise of warrants we issued in connection with the securities subscription agreement we
37
entered into with certain investors effective July 11, 2006, we may be obligated to pay the
investors of those securities liquidated damages.
In connection with the securities subscription agreement we entered into with certain accredited
investors as of July 11, 2006, we entered into a registration rights agreement pursuant to which we
are obligated to file a resale registration statement with the SEC covering the shares of common
stock issued in connection with the securities subscription agreement, in addition to the shares of
common stock underlying the warrants issued in connection with the securities subscription
agreement. We filed the registration statement on August 9, 2006.
In the event that (i) the registration statement is not declared effective by the SEC within the
time prescribed by the registration rights agreement or (ii) the registration statement ceases to
be effective or usable at any time while shares of common stock covered by it remain unsold or may
only be sold subject to certain volume limitations, or investors are not permitted to utilize the
prospectus in connection with the registration statement to resell shares of common stock covered
by the registration statement, we will be obligated to pay investors who purchased shares of common
stock in the private placement liquidated damages equal to 1% of the aggregate purchase price paid
by each investor pursuant to the securities subscription agreement for any shares of common stock,
shares of common stock issuable upon exercise of warrants or warrants then held by each investor
per month (pro rated for any period less than a month) until the registration statement is
effective or the investors are permitted to utilize the prospectus in connection with the
registration statement to resell shares of common stock covered by the registration statement.
Liquidated damages paid to each investor in the private placement may not exceed more than 10% of
the purchase price paid by such investor for shares of common stock, shares of common stock
issuable upon exercise of warrants or warrants purchased under the securities subscription
agreement. If we become obligated to pay liquidated damages, we would deplete our limited working
capital and potentially need to raise additional funds.
Risks Related to the Cornell Transaction
If we sell shares of our stock to Cornell under the SEDA, Cornell will pay less than the market
price and this incentive to sell our shares could cause our stock price to decline.
Because Cornell will purchase shares of our stock through the SEDA at a discount to market price,
Cornell will have an incentive to immediately sell the shares it purchases, to realize a gain on
the difference between the purchase price and the then-prevailing market price of our common stock.
These sales may result in a decrease in our stock price. Cornell is deemed to beneficially own the
shares corresponding to a particular advance on the date that we deliver an advance notice to
Cornell, which is prior to the date the shares are delivered to Cornell. Cornell may sell such
shares any time after we deliver an advance notice, and its sales during the pricing period could
cause our price to decline. Even with the SEDAs price floor (the minimum acceptable price of 97%
of VWAP on the day before we send an advance notice), Cornells sales could adversely impact share
price by as much as three percent or more if we waive the minimum acceptable price provision. In
addition, stockholders may experience dilution if we sell shares to Cornell under the SEDA at a
price which is less than our net tangible book value per share.
Item 1B. Unresolved Staff Comments
None.
38
Item 2. Properties
We do not own or lease any property.
Item 3. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth quarter of the fiscal
year covered by this Annual Report on
Form 10-K.
39
PART II
Item 5. Market for the Registrants Common Equity, Related Stockholder Matters and Issuer Purchases
of Securities
The following tables set forth for the period indicated the high and low sale prices of our common
stock and warrants as reported by the Nasdaq Global Market and for our common stock as reported by
the Alternative Investment Market of the London Stock Exchange (AIM). The trading price for our
shares of common stock on the AIM are quoted as sterling (£), the lawful currency of the United
Kingdom. On January 17, 2006, we voluntarily cancelled the trading of our common stock on the AIM.
Common Stock
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Nasdaq
Global Market |
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AIM Market |
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High |
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Low |
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High |
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Low |
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$ |
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$ |
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£ |
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£ |
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Year Ended June 30, 2005 |
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First Quarter |
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9.27 |
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5.74 |
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4.85 |
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4.25 |
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Second Quarter |
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10.49 |
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6.71 |
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5.10 |
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4.60 |
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Third Quarter |
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9.54 |
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6.79 |
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4.52 |
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3.60 |
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Fourth Quarter |
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9.32 |
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6.72 |
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4.05 |
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3.60 |
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Year Ended June 30, 2006 |
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First Quarter |
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7.98 |
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5.68 |
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4.08 |
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3.40 |
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Second Quarter |
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8.25 |
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5.53 |
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4.28 |
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3.25 |
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Third Quarter |
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7.29 |
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4.36 |
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3.80 |
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3.20 |
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Fourth Quarter |
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6.02 |
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2.51 |
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N/A |
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N/A |
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Warrants (with December 2006 expiry) |
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Year Ended June 30, 2005 |
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First Quarter |
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5.75 |
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2.95 |
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Second Quarter |
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6.00 |
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4.06 |
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Third Quarter |
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5.55 |
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3.60 |
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Fourth Quarter |
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5.10 |
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3.70 |
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Year Ended June 30, 2006 |
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First Quarter |
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4.01 |
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2.55 |
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Second Quarter |
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3.25 |
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0.68 |
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Third Quarter |
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1.99 |
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0.50 |
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Fourth Quarter |
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0.74 |
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0.20 |
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40
The following table sets forth, for the period indicated, the high, low, average and
period-end noon buying rate for sterling, expressed in dollars per sterling in New York City as
certified for customs purposes by the Federal Reserve Bank of New York.
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Period Ended |
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High |
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Low |
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Average |
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Period-End |
Year Ended June 30, 2005 |
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|
|
|
|
First Quarter |
|
$ |
1.8734 |
|
|
$ |
1.7733 |
|
|
$ |
1.8193 |
|
|
$ |
1.1809 |
|
Second Quarter |
|
$ |
1.9482 |
|
|
$ |
1.7790 |
|
|
$ |
1.8687 |
|
|
$ |
1.9160 |
|
Third Quarter |
|
$ |
1.9292 |
|
|
$ |
1.8570 |
|
|
$ |
1.8911 |
|
|
$ |
1.8880 |
|
Fourth Quarter |
|
$ |
1.9197 |
|
|
$ |
1.7930 |
|
|
$ |
1.8560 |
|
|
$ |
1.7930 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
1.8420 |
|
|
$ |
1.7303 |
|
|
$ |
1.7854 |
|
|
$ |
1.7696 |
|
Second Quarter |
|
$ |
1.7855 |
|
|
$ |
1.7138 |
|
|
$ |
1.7486 |
|
|
$ |
1.7188 |
|
Third Quarter |
|
$ |
1.7885 |
|
|
$ |
1.7256 |
|
|
$ |
1.7532 |
|
|
$ |
1.7393 |
|
Fourth Quarter |
|
$ |
1.8911 |
|
|
$ |
1.7389 |
|
|
$ |
1.8286 |
|
|
$ |
1.8491 |
|
As of August 1, 2006, the last reported closing price of our common stock and warrants on the
Nasdaq Global Market was $3.15 and $0.20 respectively. There were approximately 1564 stockholders
on record of our common stock
Dividends
We have never declared or paid any cash dividends on our common stock and do not anticipate paying
any cash dividends in the foreseeable future. We currently intend to retain future earnings, if
any, to fund the expansion and growth of our business. Payments of any future cash dividends will
be at the discretion of our board of directors after taking into account various factors, including
our financial condition, operating results, current and anticipated cash needs, plans for expansion
and other factors that our board of directors deem relevant.
Use of Proceeds of Initial Public Offering
The effective date of the registration statement (Registration No. 333-109129) filed on Form S-1
and registration statement (Registration No. 333-111291) filed on Form S-1 pursuant to Rule 462(b),
both relating to the initial public offering in the United States of common stock units (each unit
consisting of one share of our common stock and one warrant to purchase a share of our common stock
at an exercise price of $9.00 per share), was December 17, 2003. Proceeds to us from the offering,
after deduction of underwriting discounts and commissions of approximately $806,000 and offering
costs of approximately $1,612,000, totalled approximately $15,522,000. As of June 30, 2006, we had
used all of the proceeds of the offering of which: $5,000,000 was used to make the first licence
fee payment due to Novogen under the terms of the licence agreement; $2,000,000 was used to make
the milestone licence fee payment due to Novogen under the terms of the licence agreement; and
$7,569,000 was used to pay the ongoing expenses of clinical trials, amounts due to Novogen under
the services agreement and the manufacturing licence and supply agreement and general corporate
expenses. The balance of proceeds of $953,000 was used to partly pay the December 31, 2005 annual
licence fee of $4,000,000 paid to Novogen at the end of January 2006.
41
Stock Repurchases
We have not repurchased any shares of common stock during the fourth quarter of the fiscal year
ended June 30, 2006.
Equity Compensation
The following table sets forth, as of June 30, 2006 outstanding awards and shares remaining
available for future issuance under our compensation plans under which equity securities are
authorized for issuance.
|
|
|
|
|
|
|
|
|
(a) |
|
(b) |
|
(c) |
|
|
|
|
|
|
Number of securities |
|
|
Number of securities to |
|
Weighted-average |
|
remaining available for |
|
|
be issued upon exercise of |
|
exercise price of |
|
future issuance under |
|
|
outstanding options, |
|
outstanding options, |
|
equity compensation |
Plan Category |
|
warrants and rights |
|
warrants and rights |
|
plans |
Equity compensation
plans approved by
security holders
|
|
Not Applicable
|
|
Not Applicable
|
|
Not Applicable |
|
|
|
|
|
|
|
Equity compensation
plans not approved
by security holders
|
|
None
|
|
Not Applicable
|
|
Indeterminable |
|
|
|
|
|
|
|
Total
|
|
None
|
|
Not Applicable
|
|
Indeterminable |
Our employee share option plan provides our directors, employees, employees of our affiliates
and certain of our contractors and consultants with the opportunity to participate in our
ownership. To date, no options have been issued under the plan. Our remuneration committee
addresses participation, the number of options offered and any conditions of exercise. In making
these determinations the committee will generally consider the participants position and record of
service to us and our affiliates and potential contribution to the growth of us and our affiliates.
Any other matters tending to indicate the participants merit may also be considered. Options will
be exercisable between two years and five years after grant, unless otherwise determined by the
committee appointed by the board. Options granted will be exercisable at a price determined by the
committee at the time of issue (and will be subject to adjustment in accordance with the terms of
the plan). Other key terms of the plan include:
|
|
|
Options will lapse if the participants cease to be engaged by us or our affiliates. The
committee will have the discretion to waive this provision. |
|
|
|
|
The terms of the plan also provide for adjustments to the rights of an option holder as
a result of a reorganisation of our capital or other corporate event. The holder of an
option is not permitted to participate in any distribution by us or in any rights or other
entitlements issued by us to stockholders in respect of our shares unless the options are
exercised prior to the relevant record; and |
|
|
|
|
All options vest on the occurrence of certain events such as a change of control, as
defined in the share option plan. |
The plan also contains standard provisions dealing with matters such as administration of the plan,
amendment of the plan and termination or suspension of the plan.
42
Item 6. Selected Financial Data
The following selected financial data should be read in conjunction with Item 7. Managements
Discussion and Analysis of Financial Condition and Results of Operations and Item 8. Financial
Statements included elsewhere in this Annual Report on Form 10-K.
Statement of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30, |
|
|
2006 |
|
2005 |
|
2004 |
|
2003 |
|
2002 |
|
|
(in thousands, except per share data) |
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other income |
|
$ |
446 |
|
|
$ |
308 |
|
|
$ |
193 |
|
|
$ |
145 |
|
|
$ |
7 |
|
|
|
|
Total revenues |
|
|
446 |
|
|
|
308 |
|
|
|
193 |
|
|
|
145 |
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
|
(7,385 |
) |
|
|
(6,421 |
) |
|
|
(8,538 |
) |
|
|
(3,033 |
) |
|
|
(122 |
) |
Income tax expense |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
|
Net loss arising during development stage |
|
$ |
(7,386 |
) |
|
$ |
(6,421 |
) |
|
$ |
(8,538 |
) |
|
$ |
(3,033 |
) |
|
$ |
(123 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted |
|
$ |
(0.13 |
) |
|
$ |
(0.11 |
) |
|
$ |
(0.16 |
) |
|
$ |
(0.06 |
) |
|
$ |
(0.00 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
56,938,000 |
|
|
|
56,938,000 |
|
|
|
54,954,578 |
|
|
|
52,023,247 |
|
|
|
49,769,581 |
|
|
|
|
Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, |
|
|
2006 |
|
2005 |
|
2004 |
|
2003 |
|
2002 |
|
|
(in thousands) |
Cash and cash equivalents |
|
$ |
10,054 |
|
|
$ |
9,238 |
|
|
$ |
24,819 |
|
|
$ |
7,244 |
|
|
$ |
9,164 |
|
|
|
|
Total assets |
|
$ |
10,395 |
|
|
$ |
19,364 |
|
|
$ |
24,849 |
|
|
$ |
7,286 |
|
|
$ |
9,185 |
|
|
|
|
Total stockholders equity |
|
$ |
9,135 |
|
|
$ |
16,521 |
|
|
$ |
22,942 |
|
|
$ |
5,933 |
|
|
$ |
8,899 |
|
Item 7. Managements Discussion and Analysis of Financial Condition and results of
Operations.
The following discussion and analysis should be read in conjunction with Item 8. Financial
Statements and Supplementary Data included below. Operating results are not necessarily indicative
of results that may occur in future periods. This discussion and analysis contains forward-looking
statements that involve risks uncertainties and assumptions. The actual results may differ
materially from those anticipated in the forward-looking statements as a result of many factors
including, but not limited to, those set forth under Cautionary Statement About Forward-Looking
Statements, Risk Factors in Item 1A. included above in this Annual Report. All forward-looking
statements included in this document are based on the information available to us on the date of
this document and we assume no obligation to update any forward-looking statements contained in
this Annual Report.
Overview
We are a development stage company incorporated on December 1, 2000 as a wholly-owned subsidiary of
Novogen. We commenced operations in May 2002 and our business purpose is the development and
commercialization of drugs for the treatment of cancer. We are presently engaged in the clinical
development of the anti-cancer drug phenoxodiol. Novogens subsidiary has granted to our
subsidiary, Marshall Edwards Pty Ltd (MEPL), a worldwide non-transferable licence under its patent
43
right and patent applications and its relevant know-how to conduct clinical trials and
commercialize and distribute all forms of phenoxodiol for uses in the field of prevention,
treatment, and cure of cancer in humans, except topical applications.
Our main focus since commencing operations is to undertake human clinical testing of phenoxodiol.
Operations have now expanded to include the recently licenced drug candidates NV-196 and NV-143.
During fiscal year 2006, we continued to recruit patients into the existing clinical trial
programs. We have reached agreement under the Special Protocol Assessment (SPA) process with the
United States Food and Drug Administration (FDA) on the design of a pivotal study protocol for the
investigational anti-cancer drug, phenoxodiol. The trial, known as the OVATURE study, is designed
to test the ability of phenoxodiol to restore sensitivity of late-stage ovarian cancers to
carboplatin, a standard form of therapy for ovarian therapy.
In May 2006, we licenced a further two oncology compounds NV-196 and NV-143 from Novogen. NV-196 is
being developed initially in oral form for pancreatic and bile duct cancer and is currently in
Phase I human testing. NV-143 is targeted for the treatment of melanoma, also in oral dose form,
and is in pre-clinical testing stage. We plan to engage in the clinical development and
commercialization of these two additional drug candidates which will compliment the current drug
candidate, phenoxodiol, in the area of cancer.
On July 11, 2006, we entered into a securities purchase agreement with certain accredited investors
providing for the placement of 6,329,311 shares of our common stock and warrants exercisable for
2,215,258 shares of our common stock at a purchase price of $2.90 per unit. The warrants have an
exercise price of $4.35 per share, subject to certain adjustments. The warrants may be exercised no
less than six months from the closing date and will expire four years from the date of issuance, or
July 11, 2010. We closed the private placement on July 11, 2006.
On July 11, 2006, we entered into a standby equity distribution agreement, which we refer to as the
SEDA, with Cornell Capital Partners, LP. Under the SEDA, we may issue and sell to Cornell shares of
our common stock for a total purchase price of up to $15 million, once a resale registration
statement is in effect. We have sole discretion whether and when to sell shares of our common stock
to Cornell. Cornell will be irrevocably bound to purchase shares of our common stock from us after
we send a notice that we intend to sell shares of our common stock to Cornell. Each advance under
the SEDA is limited to a maximum of $1.5 million. The term of the SEDA is 24 months following the
date on which the SEC declares a resale registration statement relating to the SEDA shares
effective.
As at the date of the report Novogen owns approximately 78.1% of the outstanding shares of our
common stock.
We believe that we will have sufficient cash resources to fund the planned operations over at least
the next twelve months including the OVATURE trial, the planned preclinical development of NV-196
and NV-143 and the planned human Phase I clinical program for NV-196.
We do not employ any staff directly but obtain services from Novogen under a services agreement. We
have incurred losses since inception and expect to incur operating losses and generate negative
cash flows from operations for the foreseeable future as we expand research and development
activities and move our drug candidates into later stages of development. As of June 30, 2006, we
had accumulated losses of $25,501,000.
We have not generated any revenues from operations since inception other than interest on cash
assets.
44
Expenses have consisted primarily of costs associated with conducting the clinical trials of our
drug candidates and costs incurred under the licence agreements, the services agreement and the
manufacturing licence and supply agreements with Novogen and its subsidiaries, including the costs
of the clinical trial drug supplies.
To date, operations have been funded primarily through the sale of equity securities.
We expect that quarterly and annual results of operations will fluctuate for the foreseeable future
due to several factors, including the timing and extent of research and development efforts and the
outcome and extent of clinical trial activities. Our limited operating history makes accurate
prediction of future operating results difficult or impossible.
Critical Accounting Estimates
The preparation of the consolidated financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and the accompanying notes. Actual results
could differ from those estimates.
Development Expenses
Research and development costs incurred since inception through June 30, 2006 amount to
$10,180,000.
Research and development costs include clinical trial expenses,and are expensed as they are
incurred. These costs are expected to increase in the future as the phenoxodiol clinical program
progresses and as we expand our research and development to incorporate NV-196 and NV-143. The
planned phenoxodiol Phase III OVATURE trial will require large patient numbers resulting in
significantly increased costs.
Historical research and development costs and clinical trial costs have not been documented on a
project by project basis. In addition, research and development resources are supplied by Novogen
across several projects. As a result, the costs incurred for each clinical project cannot be stated
precisely on a project by project basis.
We expect that a large percentage of research and development expenses in the future will be
incurred in support of current and future clinical development programs. These expenditures are
subject to a number of uncertainties in timing and cost to completion.
The duration and cost of clinical trials may vary significantly over the life of a project as a result of:
|
|
|
the number of sites included in the trials; |
|
|
|
|
the length of time required to enroll suitable patients; |
|
|
|
|
the number of patients that participate in the trials; |
|
|
|
|
the indication being studied; and |
|
|
|
|
the efficacy and safety profile of the product. |
Our strategy also includes the option of entering into collaborative arrangements with third
parties to participate in the development and commercialization of our drug candidates. In the
event third parties
45
have control over the clinical development process, the completion dates would
largely be under the control of that third party.
As a result of these uncertainties, we are unable to determine the duration of or completion costs
for research and development projects or when and to what extent we will receive cash inflows from
the commercialization and sale of the drug candidates.
We intend to continue the clinical development of phenoxodiol as well as NV-196 and NV-143, which
were recently licenced from Novogen. We will also continue to assess the opportunity to licence
other cancer drugs developed by Novogen as the opportunities arise.
Clinical Trials Expenses
Estimates have been used in determining the expense liability under certain clinical trial
contracts where services have been performed but not yet invoiced. The actual costs of those
services could differ in amount and timing from the estimates used in completing the financial
results.
Clinical trial expenses of $840,000 have been included in the financial statements for the year
ended June 30, 2006, of which $205,000 has been accrued at June 30, 2006. These estimates are based
on the number of patients in each trial and the drug administration cycle.
Clinical research contracts may vary depending on the clinical trial design and protocol.
Generally the costs, and therefore estimates, associated with clinical trial contracts are based on
the number of patients, drug administration cycles, the type of treatment and the outcome being
measured. The length of time before actual amounts can be determined will vary depending on length
of the patient cycles and the timing of the invoices by the clinical trial partners.
Manufacturing Scale-up Expenses
Estimates have been used in determining the expense liability under certain manufacturing scale-up
contracts where services have been performed but not yet invoiced. The actual costs of those
services could differ in amount and timing from the estimates used in completing the financial
results.
We have completed the novation to MEPL of contracts that Novogen had entered into with
third parties which focuses on the manufacturing process development of phenoxodiol. This work is
being undertaken to develop a scalable manufacturing process which will facilitate larger scale
production quantities while concurrently developing analytical methods and the documentation
required for the future New Drug Application (NDA). An NDA is needed in order to market phenoxodiol
and will be required if the OVATURE study is successful. The work being undertaken will also
provide the drug quantities needed for the OVATURE clinical trial.
Manufacturing scale-up expenses of $1,329,000 have been included in the financial statements for
the year ended June 30, 2006, of which $265,000 has been accrued at June 30, 2006. These
estimates are based on the milestones completed for each of the service contracts.
46
Results of Operations
Summary of Revenue and Expenses
The following table provides a summary of revenues and expenses to supplement the more detailed
discussions below:
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30, |
|
|
2006 |
|
2005 |
|
2004 |
|
|
(in thousands) |
Interest and other income |
|
$ |
446 |
|
|
$ |
308 |
|
|
$ |
193 |
|
|
|
|
Total revenues |
|
|
446 |
|
|
|
308 |
|
|
|
193 |
|
|
|
|
Research and development expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30, |
|
|
2006 |
|
2005 |
|
2004 |
|
|
(in thousands) |
Clinical trial study costs |
|
$ |
(840 |
) |
|
$ |
(1,156 |
) |
|
$ |
(774 |
) |
Clinical trial drug costs |
|
|
(527 |
) |
|
|
(612 |
) |
|
|
(761 |
) |
Manufacturing scale-up costs |
|
|
(1,329 |
) |
|
|
|
|
|
|
|
|
Research and development service charge |
|
|
(588 |
) |
|
|
(385 |
) |
|
|
(811 |
) |
Other |
|
|
(143 |
) |
|
|
(126 |
) |
|
|
(35 |
) |
|
|
|
Total Research and Development Costs |
|
|
(3,427 |
) |
|
|
(2,279 |
) |
|
|
(2,381 |
) |
|
|
|
License Fees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30, |
|
|
2006 |
|
2005 |
|
2004 |
|
|
(in thousands) |
License Fees |
|
|
(3,000 |
) |
|
|
(3,000 |
) |
|
|
(5,500 |
) |
|
|
|
Selling, general and administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30, |
|
|
2006 |
|
2005 |
|
2004 |
|
|
(in thousands) |
Legal and professional fees |
|
$ |
(394 |
) |
|
$ |
(371 |
) |
|
$ |
(250 |
) |
Administrative service charge |
|
|
(707 |
) |
|
|
(688 |
) |
|
|
(302 |
) |
Other |
|
|
(303 |
) |
|
|
(391 |
) |
|
|
(298 |
) |
|
|
|
Total operating expenses |
|
|
(1,404 |
) |
|
|
(1,450 |
) |
|
|
(850 |
) |
|
|
|
Year Ended June 30, 2006 Compared to the Year Ended June 30, 2005
We recorded a consolidated loss of $7,386,000 and $6,421,000 for the years ended June 30, 2006 and
2005, respectively.
Revenues: We received interest on cash assets and cash equivalents of $446,000 for the year ended
June 30, 2006 versus $308,000 for the year ended June 30, 2005. This increase was due to an
increase
in interest rates combined with us investing some of our cash in short term investment deposits in
the first half of the year which yield a greater rate of return than cash accounts.
Research and Development: Research and development expenses increased $1,148,000 to $3,427,000 for
the year ended June 30, 2006 compared to $2,279,000 for the year ended June 30, 2005. This increase
was primarily due to third party contract costs associated with the production
47
scale-up activities of the manufacturing process of phenoxodiol and the initial development of the
NDA documentation together with the additional costs incurred under the services agreement
reflecting the increase time spent by Novogen research staff on the development of phenoxodiol.
These increases were partially offset by a reduction in the clinical trial study costs incurred as
a number of studies are nearing completion. Clinical trial drug costs have also reduced as many
patients have now completed the treatment cycles. We expect research and development clinical trial
costs to increase significantly in the future due to the planned Phase III OVATURE study.
Licence Fees: Milestone licence fees of $3,000,000 were expensed for both the years ended June 30,
2006 and June 30, 2005. The $3,000,000 expensed in the year ended June 30, 2006 represents 50
percent ($2,000,000) of the December 31, 2005 annual milestone licence fee of $4,000,000 (the other
50 percent was incurred and accrued in the year ended June 30, 2005) and $1,000,000 that was
payable on execution of the new licence agreement with Novogen in relation to the drug candidates
NV-196 and NV-143 licenced in May 2006. The $3,000,000 milestone licence fees expensed in the year
ended June 30, 2005 represents 50 percent ($2,000,000) of the December 31, 2005 annual milestone
licence fee of $4,000,000 plus 50 percent ($1,000,000) of the December 31, 2004 annual milestone
licence fee of $2,000,000.
Selling, General and Administrative: Selling, general and administrative expenses decreased by
$46,000 to $1,404,000 for the year ended June 30, 2006 compared to $1,450,000 for the year ended
June 30, 2005. The decrease was due primarily to a reduction in foreign exchange losses and legal
fees which were partially offset by an increase in travel costs. Foreign exchange gains/(losses)
are included in selling, general and administrative expenses which occur when revaluing cash
denominated in foreign currencies and upon consolidation of our wholly owned subsidiary MEPL. MEPL
uses US dollars as its functional currency and also engages in transactions in foreign currencies.
Further, MEPLs accounts and financial statements are denominated in Australian dollars.
Translation of MEPLs financial statements into U.S. dollars did not have a material impact on our
financial position. At June 30, 2006, we had not established a foreign currency hedging program.
Net foreign exchange losses during the twelve months ended June 30, 2006 were $2,000 compared with
net exchange losses of $24,000 during the twelve months ended June 30, 2005.
Year Ended June 30, 2005 Compared to the Year Ended June 30, 2004
We recorded a consolidated loss of $6,421,000 and $8,538,000 for the years ended June 30, 2005 and
2004, respectively.
Revenues: We received interest on cash assets and cash equivalents of $308,000 for the year ended
June 30, 2005 versus $193,000 for the year ended June 30, 2004. This increase was due to our
investing activities in higher yielding interest bearing deposits and higher average cash balances
following our December 2003 public offering.
Research and Development: Research and development expenses decreased $102,000 to $2,279,000 for
the year ended June 30, 2005 compared to $2,381,000 for the year ended June 30, 2004. This decrease
was due primarily to a reduction in the research and development service charge from Novogen under
the terms of the services agreement reflecting lower costs incurred by Novogen and reduced time
spent by Novogen personnel on the development of phenoxodiol. Clinical trial drug costs have also
reduced as many patients have now completed the treatment cycles. These costs have partially been
offset by an increase in clinical trial costs. This increase in clinical trial costs results from
an increase in patient data management and analysis costs associated with reporting and summarizing
the outcomes of the clinical trials.
48
Licence Fees: Milestone licence fees of $2,000,000 were accrued in the twelve months ended June 30,
2005 in connection with the annual milestone licence fee of $4,000,000 that was payable to Novogen
within 30 days after December 31, 2005 under the terms of the licence agreement with Novogen.
Milestone licence fees of $1,000,000 were accrued during the twelve months ended June 30, 2004 in
connection with the annual milestone licence fee of $2,000,000 due to Novogen within 30 days after
December 31, 2004. The December 31, 2004 licence fee was paid to Novogen in January 2005.
Selling, General and Administrative: Selling, general and administrative expenses increased by
$600,000 to $1,450,000 for the year ended June 30, 2005 compared to $850,000 for the year ended
June 30, 2004. The increase was due primarily to the increase in costs associated with professional
fees and increased costs incurred for administration and accounting services provided by Novogen
under the terms of the services agreement and other fees relating to compliance with United States
securities reporting requirements and FDA regulations. Included in selling, general and
administrative expenses are foreign exchange gains and losses which occur when revaluing cash
denominated in foreign currencies and translation gains and losses upon consolidation of MEPL. MEPL
uses US dollars as its functional currency and also engages in transactions in foreign currencies.
However, MEPLs accounts and financial statements are denominated in Australian dollars.
Translation of MEPLs financial statements into U.S. dollars did not have a material impact on our
financial position. At June 30, 2005, we had not established a foreign currency hedging program.
Net foreign exchange losses during the twelve months ended June 30, 2005 were $24,000 compared with
net exchange gains of $58,000 during the twelve months ended June 30, 2004. MEPLs accounts are
maintained in Australian dollars, however, its functional currency is US dollars. Foreign exchange
gains and losses occur upon consolidation of MEPL and also as a result of translations in foreign
currency.
Liquidity and Capital Resources
At June 30, 2006, we had cash resources of $10,054,000 compared to $19,238,000 at June 30, 2005.
The decrease was due to expenditures in the clinical trial program and other corporate expenses
incurred during the year. Funds are invested in short term bank accounts, pending use.
On July 11, 2006, we entered into a securities subscription agreement with certain accredited
investors providing for the placement of 6,329,311 shares of our common stock and warrants
exercisable for 2,215,258 shares of our common stock at a purchase price of $2.90 per unit. Each
unit consisted of one share of common stock and 0.35 of a warrant to purchase one share of common
stock. The warrants have an exercise price of $4.35 per share, subject to certain adjustments. The
warrants may be exercised no less than six months from the closing date and will expire four years
from the date of issuance, or July 11, 2010. We closed the private placement on July 11, 2006.
On July 11, 2006, we entered into a standby equity distribution agreement, which we refer to as the
SEDA, with Cornell Capital Partners, LP. Under the SEDA, we may issue and sell to Cornell shares of
our common stock for a total purchase price of up to $15 million, once a resale registration
statement is in effect. We have sole discretion whether and when to sell shares of our common stock
to Cornell. Cornell will be irrevocably bound to purchase shares of our common stock from us after
we send a notice that we intend to sell shares of our common stock to Cornell. Each advance under
the SEDA is limited to a maximum of $1.5 million.
In connection with the SEDA, we paid Cornell a commitment fee of 123,626 shares of our common stock
and warrants to purchase 600,000 shares of our common stock that expire on July 11, 2010. The
49
warrants have an exercise price of $4.35 per share, subject to certain adjustments.
The purchase price for shares of our common stock under the SEDA will be equal to 97% of the lowest
volume weighted average price (as quoted by Bloomberg L.P.), or VWAP, of shares of our common stock
(subject to a minimum acceptable price as described below) during the five consecutive trading
days after we send notice to Cornell of our intention to sell them shares of our common stock,
which we refer to as the pricing period.
The minimum acceptable price at which we may sell our shares of common stock, unless we waive (in
our sole discretion) the minimum acceptable price, is no less than 97% of the VWAP for our shares
of common stock on the trading day immediately preceding the date we send notice to Cornell of our
intent to sell shares of our common stock. For any day in the pricing period when the VWAP is less
than the minimum acceptable price, (i) that days VWAP will be excluded from the pricing mechanism
during the pricing period: (ii) we will automatically reduce the amount of funds covered by the
advance notice by 20%; and (iii) the number of shares of our common stock to be sold to Cornell
(stated in the advance notice) will be reduced proportionately.
Before we can sell any shares of our common stock to Cornell by the SEDA, a resale registration
statement will have to be filed with and declared effective by the SEC to cover Cornells resale of
shares of our common stock it buys under the SEDA. We do not expect to access the SEDA prior to
2007.
The number of shares of our common stock that we can issue to Cornell is limited by Nasdaqs Market
Place Rule 4350(i)(1)(D) the 20% rule. All of the shares of our common stock that could be
issued in connection with the SEDA, the other securities issued as a commitment fee in connection
with the SEDA and the shares of our common stock issued in connection with the private placement
described above, cannot exceed 20% of the shares outstanding. We have determined that currently we
could issue and sell all of the shares of our common stock subject to the SEDA. If circumstances
change, however, we may need to obtain shareholder approval to waive the 20% rule.
While the SEDA provides us access to significant equity financing, using the SEDA at low market
prices could result in a dilution of net tangible assets per share to current shareholders, and
also may have a depressing effect on our stock price. See Risks Related to the Cornell
Transaction.
Source and Uses of Cash
Cash Used in Operating Activities
Cash used in operating activities for the year ended June 30, 2006 was $9,089,000 compared to
$5,581,000 for the same period in 2005. The increase in cash outflow of $3,508,000 for the year
ended June 30, 2006 was due primarily to the licence fee paid to Novogen increasing from $2,000,000
in January 2005 to $4,000,000 in January 2006. In addition, a further $1,000,000 licence fee was
paid to Novogen in May 2006 in connection with the new licence agreement covering the drug
candidates NV-196 and NV-143. Additional cash was also used to fund the manufacturing production
scale-up program.
Cash Used in Financing Activities
50
During the year ended June 30, 2006, $10,000,000 was returned from the high interest yielding cash
deposit account following the expiration of the term. These funds were retained in the cash
accounts pending use.
Cash Requirements
We are currently planning to conduct a pivotal clinical study to support marketing approval of
phenoxodiol for ovarian cancer. In May 2006, we received a Special Protocol Assessment (SPA) and
reached agreement with the FDA on the design of a pivotal Phase III study for the investigational
anti-cancer drug, phenoxodiol. The trial, known as the OVATURE study, is designed to establish the
safety and effectiveness of phenoxodiol in combination with carboplatin for late-stage ovarian
cancers.
In May 2006, we licenced the two anti-cancer compounds NV-196 an NV-143 from Novogen. Additional
cash resources will be required to undertake the clinical trial program for these drug candidates.
Ongoing operations through the conduct of the clinical trial program will continue to consume cash
resources without generating revenues.
We believe
that the proceeds of the private placement closed in July 2006, as well as our access to
the SEDA, provide us with sufficient cash resources to fund our planned operations over the next
twelve months which include the OVATURE trial, the planned preclinical development of NV-196 and
NV-143 and the planned human Phase I clinical program for NV-196. We do not expect to access the
SEDA prior to 2007.
We will however need to raise additional funds in the future in order to further the clinical
development program for NV-196 and NV-143 beyond the current objectives.
Licence Agreement for Phenoxodiol
In September 2003, we entered into a licence agreement pursuant to which Novogens subsidiary,
Novogen Research Pty Limited, granted to MEPL a worldwide non-transferable licence under its
patents and patent applications and in its know-how to conduct clinical trials and commercialize
and distribute phenoxodiol products. The licence agreement covers uses of phenoxodiol in the field
of prevention, treatment or cure of cancer in humans delivered in all forms except topical
applications. The licence is exclusive until the expiration or lapsing of the last relevant Novogen
patents or patent applications in the world and thereafter is non-exclusive. MEPL may terminate the
agreement by giving three months notice to Novogen. MEPL paid $5,000,000 to Novogen in February
2004 which was the first lump sum licence fee payment due under the terms of the licence agreement.
Also, MEPL paid $2,000,000 to Novogen in January 2005 and $4,000,000 in January 2006 which were the
annual milestone licence fee payments due under the licence agreement. We paid a second lump sum
licence fee of $5,000,000 to Novogen in July 2006 following the raising of funds in a private
placement. This licence fee was due on the later of November 1, 2003 or such later date when the
cumulative total of all funds received from debt or equity issuances and revenue received from
commercialization (income other than sales) and sales of phenoxodiol products exceeds $50,000,000.
Following the PIPE share issue on July 11, 2006 the funds received from equity issuances exceeded
$50,000,000 which triggered this licence fee payment. Future amounts payable to Novogen under terms
of the licence agreement are as follows:
51
1. Until the expiration of the exclusivity period of the licence, MEPL must pay Novogen 2.5% of all
net sales and 25% of commercialization income. After the exclusivity period of the licence, 1.5% of
net sales must be paid to Novogen. The preconditions to such payments have not yet occurred.
The Exclusivity Period ends on the later of:
(a) |
|
the date of expiration or lapsing of the last patent right in the patents and patent
applications set out in the licence agreement with Novogen; or |
|
(b) |
|
the date of expiration or lapsing of the last licenced patent right which MEPL would, but for
the licence granted in the licence agreement, infringe in any country in the geographical
territory covered by the licence agreement by doing in that country any of the things set out
in the licence agreement. |
2. In addition to the amounts above, beginning in 2006, an $8 million annual milestone licence fee
is payable under the amended terms of the licence agreement for each calendar year ending December
31 during the exclusivity period of the licence. The December 31, 2006 licence fee has been
deferred under the licence amendment deed which is discussed below.
Licence Amendment Deed for Phenoxodiol
In June 2006, we entered into an amendment deed to the licence agreement for phenoxodiol. Pursuant
to the original term of the licence agreement for phenoxodiol we were required to pay an $8,000,000
licence milestone fee to Novogen Research Pty Limited in December 2006. The amendment deed extends
the date that the $8,000,000 licence milestone fee is payable until the earliest receipt by MEPL of
the first:
(i) |
|
approval by the FDA of a New Drug Application (NDA) for phenoxodiol;
|
|
(ii) |
|
approval or authorization of any kind to market phenoxodiol in the United States; or |
|
(iii) |
|
approval or authorization of any kind by a government agency in any other country to market
phenoxodiol. |
Upon receipt of any of the above, we must pay to Novogen, $8,000,000, together with interest on
that amount from (and including) December 31, 2006, calculated at the bank bill rate. This
milestone licence fee replaces the $8,000,000 December 31, 2006 milestone fee.
At June 30, 2005 an amount of $2,000,000 was accrued and reflected in amounts due to Novogen,
representing 50% of the $4,000,000 milestone payment payable to Novogen on December 31, 2005 under
the terms of the licence agreement with Novogen. We paid the $4,000,000 due to Novogen at the end
of January 2006. The licence amendment deed provides that the next milestone licence fee is not due
until one of the approvals set out above is obtained. Therefore no licence fees have been accrued
at June 30, 2006.
Licence Agreement NV-196 and NV-143
In May 2006, we entered into a second licence agreement with Novogen for two oncology compounds,
NV-196 and NV-143. NV-196 is being developed initially in oral form for pancreatic and bile duct
cancer and is currently in Phase I human testing. NV-143 is targeted for the treatment of
52
melanoma, also in oral dose form, and is in the pre-clinical testing stage. The licence agreement
is an agreement under which Novogens subsidiary, Novogen Research Pty Limited, grants to MEPL a
worldwide non-transferable licence under its patents and patent applications and in its know-how to
conduct clinical trials and commercialize and distribute NV-196 and NV-143 products. The licence
agreement covers uses of NV-196 and NV-143 in the field of prevention, treatment or cure of cancer
in humans delivered in all forms except topical applications. The licence is exclusive until the
expiration or lapsing of the last relevant Novogen patents or patent applications in the world and
thereafter is non-exclusive. MEPL may terminate the agreement by giving three months notice to
Novogen. MEPL paid $1,000,000 to Novogen in May 2006 which was the first lump sum licence fee
payment due under the terms of the licence agreement. We are required to make payments under the
terms of this second licence agreement with Novogen as follows:
1. A lump sum licence fee of $1,000,000 is payable to Novogen on the commencement date of the
licence in consideration of the licence granted. This initial lump sum licence fee was paid to
Novogen in May 2006.
2. MEPL must pay to Novogen the following milestone licence fees upon the occurrence of the
corresponding milestone as set forth below:
|
a) |
|
the first licenced product containing NV-196 to reach a milestone as set forth below; and |
|
|
b) |
|
the first licenced product containing NV-143 to reach a milestone as set forth below. |
|
|
|
|
The milestone licence fees are: |
|
i) |
|
$1,000,000 on the date an IND for the licenced product goes into effect or
the equivalent approval of a government agency is obtained in another country. If
this event does not occur before March 31, 2008, then this amount will be due on this
date; |
|
|
ii) |
|
$2,000,000 on the date of enrollment of the first clinical trial subject in
a Phase II clinical trial of the licenced product. If this event does not occur
before June 30, 2009, then this amount will be due on this date; |
|
|
iii) |
|
$3,000,000 on the date of enrollment of the first clinical trial subject in
a Phase III clinical trial of the licenced product. If this event does not occur
before December 31, 2011 then this amount will be due on this date; and |
|
|
iv) |
|
$8,000,000 on the date of first receipt of a NDA for the licenced product
from the FDA or equivalent approval from a government agency in another country. If
this event does not occur before December 31, 2013, then this amount will be due on
this date. |
3. MEPL must pay Novogen royalties of 5.0% of all net sales and 25% of commercialization income for
the term of the licence. The royalty rate is reduced by 50% if the licenced patent rights in any
country or territory expire, lapse, are revoked, does not exist or is assigned to MEPL and the
product is entirely manufactured and supplied in such country.
4. Minimum royalties of $3,000,000 per year are payable following the date of first receipt of an
NDA for a licenced product from the FDA (or equivalent approval from a government agency in any
other country) until the expiration of the term.
We will also be required to make payments to Novogen under the services agreement and
manufacturing licence and supply agreement.
We do not intend to incur any significant capital expenditures in the foreseeable future.
We are currently assessing the future cash requirements needed to fund new clinical trial
initiatives
53
and licensing options available under the license option deed.
Contractual Obligations
At June 30, 2006, we had contractual obligations for the conduct of clinical trials, pre-clinical
research and development and manufacturing process development of approximately $1,811,000. Of all
expenditure commitments, clinical trial amounts are based on the assumption that all patients
enrolled in clinical trials will complete the maximum number of allowed treatment cycles.
The following table summarizes our future payment obligations and commitments as of June 30, 2006
assuming all treatment cycles are completed:
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment due by period |
|
|
|
|
|
|
less than 1 |
|
1 3 |
|
3 5 |
|
More than |
Contractual Obligations |
|
Total |
|
Year |
|
Years |
|
Years |
|
5 Years |
Purchase Obligations |
|
$ |
1,811 |
|
|
$ |
1,760 |
|
|
$ |
51 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,811 |
|
|
$ |
1,760 |
|
|
$ |
51 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
No amounts have been included in the above table for future payments to Novogen which may
arise in connection with the licence agreements, the services agreement or the manufacturing and
supply agreement as future payments under the terms of the agreements are subject to termination
provisions. Payments in connection with these agreements are detailed above and in Note 6 Related
Party Transactions to the Consolidated Financial Statements.
Off-Balance Sheet Arrangements
We do not currently have any off-balance sheet arrangements.
54
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
We place cash in on call and short-term deposit accounts with high quality financial
institutions.
We do not consider the effects of interest rate movements to be a material risk to our financial
condition. We do not use derivative financial instruments to hedge risks associated with the
fluctuations of interest rates.
Foreign Currency Risk
We conduct a portion of our business in various currencies, primarily in U.S. and Australian
dollars. At June 30, 2006, we had not established a foreign currency hedging program. Net foreign
exchange losses during the twelve months ended June 30, 2006 were $2,000 compared with net exchange
losses of $24,000 during the twelve months ended June 30, 2005. Foreign exchange gains and losses
occur upon consolidation of MEPL, which uses U.S. dollars as its functional currency and also
engages in transactions in foreign currencies. MEPLs accounts are denominated in Australian
dollars. Translation of MEPLs financial statements into U.S. dollars did not have a material
impact on our financial position.
We do not consider the effects of foreign currency movements to be a material risk to our financial
condition.
55
Item 8. Financial Statements and Supplementary Data
Marshall Edwards, Inc
Index to Financial Statements
Report of BDO Independent Registered Public Accounting Firm
Report of Ernst & Young Independent Registered Public Accounting Firm
Report of Ernst & Young LLP Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
56
|
|
|
|
|
|
|
|
|
Level 19, 2 Market Street Sydney NSW 2000 |
|
Chartered Accountants & Advisers
|
|
GPO Box 2551 Sydney NSW 2001 |
|
|
Tel. +61 2 9286 5555 Fax +61 2 9286 5599 |
|
|
Email: bdosyd@bdosyd.com.au |
|
|
www.bdo.com.au |
Report of Independent Registered Public Accounting Firm
The Board of Directors
Marshall Edwards, Inc.
We have audited the accompanying consolidated balance sheet of Marshall Edwards, Inc. (a
development stage company) as of June 30, 2006, and the related statements of operations,
stockholders equity, and cash flows for the year then ended, and for the period from December 1,
2000 (inception) through June 30, 2006. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these financial statements
based on our audit. The financial statements as of June 30, 2004 and for the period from December
1, 2000 (inception) through June 30, 2004, were audited by other auditors whose report dated August
13, 2004 expressed an unqualified opinion on those statements. The financial statements for the
period from December 1, 2000 (inception) through June 30, 2004 include total revenues and net loss
of $345,000 and $11,694,000, respectively. Our opinion on the statements of operations,
stockholders equity, and cash flows for the period from December 1, 2000 (inception) through June
30, 2006, insofar as it relates to amounts for prior periods through June 30, 2004, is based solely
on the report of other auditors.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its internal control
over financial reporting. Our audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Companys internal control
over financial reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audit and
the report of other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audit and the report of other auditors, the financial statements
referred to above present fairly, in all material respects, the consolidated financial position of
Marshall Edwards, Inc. at June 30, 2006, and the consolidated results of its operations and its
cash flows for the year then ended and the period from December 1, 2000 (inception) through June
30, 2006, in conformity with accounting principles generally accepted in the United States of
America.
BDO
Sydney, NSW, Australia
September 1, 2006
57
|
|
|
|
|
|
|
wErnst & Young Centre 680 George Street Sydney NSW 2000 Australia |
|
wTel 61 2 9248 5555 Fax 61 2 9248 5959 DX Sydney Stock Exchange 10172 |
|
|
|
|
|
|
|
GPO Box 2646 |
|
|
|
|
Sydney NSW 2001 |
|
|
Report of Independent Registered Public Accounting Firm
The Board of Directors
Marshall Edwards, Inc.
We have
audited the accompanying consolidated statements of operations,
stockholders equity, and cash flows of Marshall Edwards, Inc. (a
development stage enterprise) (the Company) for the year
ended 30 June, 2004 and for the
period from December 1, 2000 (inception) through June 30, 2004. These financial statements are the
responsibility of the Companys management. Our responsibility is to express an opinion on these
financial statements based on our audit. The financial statements as of June 30, 2003, and for the
period from December 1, 2000 (inception) through June 30, 2003, were audited by other auditors
whose report dated July 31, 2003 expressed an unqualified opinion on those statements. The
financial statements for the period from December 1, 2000 (inception) through June 30, 2003 include
total revenues and net loss of US$l52,000 and US$3,156,000, respectively. Our opinion on the
statements of operations, stockholders equity, and cash flows for the period from December 1, 2000
(inception) through June 30, 2004, insofar as it relates to amounts for prior periods through June
30, 2003, is based solely on the report of other auditors.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit and the report of other auditors provide a reasonable basis
for our opinion.
In our opinion, based on our audit and the report of other auditors, the financial statements
referred to above present fairly, in all material respects, the
consolidated results of operations and cash flows of Marshall
Edwards, Inc. for the year ended 30 June, 2004 and the period from December 1, 2000 (inception) through June
30, 2004, in conformity with U.S. generally accepted accounting principles.
/s/ Ernst
& Young
Sydney, Australia
13 August 2004
|
|
|
|
|
Liability limited by the Accountants Scheme, approved
under the Professional Standards Act 1994 (NSW) |
58
Report of Independent Registered Public Accounting Firm
The Board of Directors Marshall Edwards, Inc.
We have
audited the accompanying consolidated statement of operations, shareholders equity, and cash flows of Marshall Edwards, Inc. (a development stage company) for the period from December 1, 2000 (inception) through June 30, 2003. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all material respects, the consolidated results of operations and cash flows of Marshall Edwards, Inc., for the period from December 1, 2000 (inception) through June 30, 2003, in conformity with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
July 31, 2003
A Member Practice of Ernst & Young Global
59
MARSHALL EDWARDS, INC.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
June 30, |
|
|
2006 |
|
2005 |
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
10,054 |
|
|
$ |
9,238 |
|
Short-term investments |
|
|
|
|
|
|
10,000 |
|
Deferred Offering Costs |
|
|
95 |
|
|
|
|
|
Prepaid expenses and other current assets |
|
|
246 |
|
|
|
126 |
|
|
|
|
Total current assets |
|
|
10,395 |
|
|
|
19,364 |
|
|
|
|
Total assets |
|
$ |
10,395 |
|
|
$ |
19,364 |
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
420 |
|
|
$ |
254 |
|
Accrued expenses |
|
|
638 |
|
|
|
403 |
|
Amount due to related company |
|
|
202 |
|
|
|
2,186 |
|
|
|
|
Total current liabilities |
|
|
1,260 |
|
|
|
2,843 |
|
|
|
|
|
|
|
|
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value, authorized 100,000 shares,
none outstanding |
|
|
|
|
|
|
|
|
Common stock, $0.00000002 par value, 113,000,000 authorized
shares; shares issued and outstanding: 56,938,000 at
June 30, 2006 and 56,938,000 at June 30, 2005 |
|
|
|
|
|
|
|
|
Additional paid-in capital |
|
|
34,636 |
|
|
|
34,636 |
|
Deficit accumulated during development stage |
|
|
(25,501 |
) |
|
|
(18,115 |
) |
|
|
|
Total stockholders equity |
|
|
9,135 |
|
|
|
16,521 |
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
10,395 |
|
|
$ |
19,364 |
|
|
|
|
See accompanying notes.
60
MARSHALL EDWARDS, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 1, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2000 (Inception) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
through |
|
|
|
|
|
|
Years Ended June 30, |
|
|
|
|
|
June 30, |
|
|
2006 |
|
2005 |
|
2004 |
|
2006 |
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other income |
|
$ |
446 |
|
|
$ |
308 |
|
|
$ |
193 |
|
|
$ |
1,099 |
|
|
|
|
Total revenues |
|
|
446 |
|
|
|
308 |
|
|
|
193 |
|
|
|
1,099 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
(3,427 |
) |
|
|
(2,279 |
) |
|
|
(2,381 |
) |
|
|
(10,180 |
) |
License fees |
|
|
(3,000 |
) |
|
|
(3,000 |
) |
|
|
(5,500 |
) |
|
|
(12,000 |
) |
Selling, general and administrative |
|
|
(1,404 |
) |
|
|
(1,450 |
) |
|
|
(850 |
) |
|
|
(4,418 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
(7,831 |
) |
|
|
(6,729 |
) |
|
|
(8,731 |
) |
|
|
(26,598 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
|
(7,385 |
) |
|
|
(6,421 |
) |
|
|
(8,538 |
) |
|
|
(25,499 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
(2 |
) |
|
|
|
Net loss arising during development stage |
|
$ |
(7,386 |
) |
|
$ |
(6,421 |
) |
|
$ |
(8,538 |
) |
|
$ |
(25,501 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted |
|
$ |
(0.13 |
) |
|
$ |
(0.11 |
) |
|
$ |
(0.16 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
56,938,000 |
|
|
|
56,938,000 |
|
|
|
54,954,578 |
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
61
MARSHALL EDWARDS, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 1, 2000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Inception) |
|
|
Years Ended June 30, |
|
through June 30, |
|
|
2006 |
|
2005 |
|
2004 |
|
2006 |
|
|
|
Operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss arising during development stage |
|
|
(7,386 |
) |
|
|
(6,421 |
) |
|
|
(8,538 |
) |
|
|
(25,501 |
) |
Adjustments to reconcile net loss to net cash
used in operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets |
|
|
(120 |
) |
|
|
(96 |
) |
|
|
12 |
|
|
|
(246 |
) |
Accounts payable |
|
|
166 |
|
|
|
62 |
|
|
|
(241 |
) |
|
|
420 |
|
Accrued expenses |
|
|
235 |
|
|
|
(34 |
) |
|
|
159 |
|
|
|
638 |
|
Amounts due to related company |
|
|
(1,984 |
) |
|
|
908 |
|
|
|
636 |
|
|
|
202 |
|
|
|
|
Net cash used in operating activities |
|
|
(9,089 |
) |
|
|
(5,581 |
) |
|
|
(7,972 |
) |
|
|
(24,487 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds from issuance of Common Stock |
|
|
|
|
|
|
|
|
|
|
25,578 |
|
|
|
34,636 |
|
Amounts payable in connection with issuance of
Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Offering Costs |
|
|
(95 |
) |
|
|
|
|
|
|
|
|
|
|
(95 |
) |
Withdrawal from/(investment) in short-term deposits |
|
|
10,000 |
|
|
|
(10,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by/(used in) financing activities |
|
|
9,905 |
|
|
|
(10,000 |
) |
|
|
25,578 |
|
|
|
34,541 |
|
Effect of exchange rate changes on cash and cash
equivalents |
|
|
|
|
|
|
|
|
|
|
(31 |
) |
|
|
|
|
Net increase/(decrease) in cash and cash
equivalents |
|
|
816 |
|
|
|
(15,581 |
) |
|
|
17,575 |
|
|
|
10,054 |
|
Cash and cash equivalents at beginning of period |
|
|
9,238 |
|
|
|
24,819 |
|
|
|
7,244 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
|
10,054 |
|
|
|
9,238 |
|
|
|
24,819 |
|
|
|
10,054 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
(2 |
) |
|
|
|
See accompanying notes.
62
MARSHALL EDWARDS, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
(In thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deficit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
accumulated |
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
during |
|
other |
|
|
|
|
|
|
|
|
Additional paid |
|
development |
|
comprehensive |
|
|
|
|
Common Stock |
|
in capital |
|
stage |
|
income/(loss) |
|
Total |
|
|
(shares) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance June 30, 2001 |
|
|
49,500,000 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Net loss arising during development stage |
|
|
|
|
|
|
|
|
|
|
(123 |
) |
|
|
|
|
|
|
(123 |
) |
Common Stock issued May 22, 2002
(including 2,523,000 warrants) |
|
|
2,523,000 |
|
|
|
9,022 |
|
|
|
|
|
|
|
|
|
|
|
9,022 |
|
|
|
|
Balance at June 30, 2002 |
|
|
52,023,000 |
|
|
|
9,022 |
|
|
|
(123 |
) |
|
|
|
|
|
|
8,899 |
|
Net loss arising during development stage |
|
|
|
|
|
|
|
|
|
|
(3,033 |
) |
|
|
|
|
|
|
(3,033 |
) |
Foreign currency translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31 |
|
|
|
31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,002 |
) |
Common Stock issued June 26, 2003 |
|
|
9,000 |
|
|
|
36 |
|
|
|
|
|
|
|
|
|
|
|
36 |
|
|
|
|
Balance at June 30, 2003 |
|
|
52,032,000 |
|
|
|
9,058 |
|
|
|
(3,156 |
) |
|
|
31 |
|
|
|
5,933 |
|
Net loss arising during development stage |
|
|
|
|
|
|
|
|
|
|
(8,538 |
) |
|
|
|
|
|
|
(8,538 |
) |
Foreign currency translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(31 |
) |
|
|
(31 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,569 |
) |
Common Stock issued November 30, 2003 |
|
|
2,514,000 |
|
|
|
10,056 |
|
|
|
|
|
|
|
|
|
|
|
10,056 |
|
Common Stock issued December 18, 2003
(including 2,392,000 warrants) |
|
|
2,392,000 |
|
|
|
15,522 |
|
|
|
|
|
|
|
|
|
|
|
15,522 |
|
|
|
|
Balance at June 30, 2004 |
|
|
56,938,000 |
|
|
$ |
34,636 |
|
|
$ |
(11,694 |
) |
|
$ |
|
|
|
$ |
22,942 |
|
Net loss arising during development stage |
|
|
|
|
|
|
|
|
|
|
(6,421 |
) |
|
|
|
|
|
|
(6,421 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,421 |
) |
|
|
|
Balance at June 30, 2005 |
|
|
56,938,000 |
|
|
$ |
34,636 |
|
|
$ |
(18,115 |
) |
|
$ |
|
|
|
$ |
16,521 |
|
Net loss arising during development stage |
|
|
|
|
|
|
|
|
|
|
(7,386 |
) |
|
|
|
|
|
|
(7,386 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,386 |
) |
|
|
|
Balance at June 30, 2006 |
|
|
56,938,000 |
|
|
|
34,636 |
|
|
|
(25,501 |
) |
|
|
|
|
|
$ |
9,135 |
|
|
|
|
See accompanying notes.
63
MARSHALL EDWARDS, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
1. The Company and Summary of Significant Accounting Policies
Marshall Edwards, Inc. (MEI) is a development stage company incorporated in December 2000 as a
wholly-owned subsidiary of Novogen. The Company commenced operations in May 2002 and its business
purpose is the development and commercialization of drugs for the treatment of cancer. The Company
is presently engaged in the clinical development of the anti-cancer drug phenoxodiol. Novogens
subsidiary has granted to the Companys subsidiary, Marshall Edwards Pty Ltd (MEPL), a worldwide
non-transferable licence under its patent right and patent applications and its relevant know-how
to conduct clinical trials and commercialize and distribute all forms of phenoxodiol for uses in
the field of prevention, treatment, and cure of cancer in humans, except topical applications. As
at the date of this report Novogen owns approximately 78.1% of the outstanding shares of the
Companys common stock.
The Companys main focus since commencing operations has been to undertake human clinical testing
of phenoxodiol. The Companys operations have now expanded to include the recently licenced drug
candidates NV-196 and NV-143. During fiscal year 2006, the Company continued to recruit patients
into the existing clinical trial programs. The Company has now reached agreement under the Special
Protocol Assessment (SPA) process with the United States Food and Drug Administration (FDA) on the
design of a pivotal study protocol for the investigational anti-cancer drug, phenoxodiol. The
trial, known as the OVATURE study, is designed to test the ability of phenoxodiol to restore
sensitivity of late-stage ovarian cancers to carboplatin, a standard form of therapy for ovarian
cancer.
In May 2006, the Company licenced two oncology compounds, NV-196 and NV-143, from Novogen. NV-196
is being developed initially in oral form for pancreatic and bile duct cancer and is currently in
Phase I human testing. NV-143 is targeted for the treatment of melanoma, also in oral dose form,
and is in pre-clinical testing stage. The Company plans to engage in the clinical development and
commercialization of these two additional drug candidates which will complement the current drug
candidate, phenoxodiol, in the area of cancer.
Principles of Consolidation
The consolidated financial statements include the accounts of Marshall Edwards, Inc. and its
wholly-owned subsidiary, Marshall Edwards Pty Limited. Significant intercompany accounts and
transactions have been eliminated on consolidation.
Estimates
The preparation of the consolidated financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and the accompanying notes. Actual results
could differ from those estimates.
64
Revenue Recognition
Interest
The only revenue earned by the company to date is interest on cash balances, which is recognised on
an accruals basis
Cash and Cash Equivalents and Short Term Investments
Cash on hand and in banks and short-term deposits are stated at their nominal value. The Company
considers all highly liquid investments with a maturity of three months or less when purchased to
be cash equivalents. Highly liquid investments with stated maturities of greater than three months
are classified as short-term investments. The Companys cash, held in the United States, is
deposited in financial institutions that are FDIC insured. These deposits are in excess of the FDIC
insurance limits. The Company also holds cash with Australian financial institutions.
Income Taxes
Income taxes have been provided for using the liability method in accordance with FASB Statement
No. 109, Accounting for Income Taxes. Under this method, deferred tax assets and liabilities are
recognized and measured using enacted tax rates in effect for the year in which the differences are
expected to be recognized. Valuation allowances are established against the recorded deferred
income tax assets to the extent that management believes that it is more likely than not that a
portion of the deferred income tax assets are not realizable.
Fair Value of Financial Instruments
The carrying amounts of the Companys financial instruments, including cash and cash equivalents,
short-term investments and accounts payable approximate fair value.
Foreign Currency Translation
The financial statements of MEPL have been translated into U.S. dollars in accordance with FASB
Statement No. 52, Foreign Currency Translation. Assets and liabilities are translated into U.S.
dollars using the exchange rates in effect at the balance sheet date. Income statement amounts have
been translated using the average exchange rate for the periods. Realized gains and losses from
foreign currency transactions are reflected in the consolidated statements of operations.
Translation of MEPLs Financial Statements into U.S dollars does not have a material impact on the
Companys financial position.
Research and Development Expenses
Research and development expenses relate primarily to the cost of conducting human clinical trials
of phenoxodiol and has recently been expanded to include NV-196 and NV-143. Research and
development costs are charged to expense as incurred.
Licence Fees
Costs incurred related to the acquisition or licensing of products that have not yet received
regulatory
65
approval to be marketed, or that are not commercially viable and ready for use or have no
alternative future use, are charged to earnings in the period incurred.
Stock-Based Compensation
The Companys stock option plan provides for the grant of options to the Companys directors,
employees, employees of the Companys affiliates and certain of the Companys contractors and
consultants. To date no options have been issued under the plan.
Basic and Diluted Loss Per Share
Basic and diluted earnings or loss per share is calculated in accordance with FASB Statement No.
128, Earnings Per Share. In computing basic earnings or loss per share, the dilutive effect of
stock options is excluded, whereas for diluted earnings per share it is included unless the effect
is anti-dilutive. Since the Company has a loss for all periods presented, there is no dilutive
effect of stock options.
Comprehensive Loss
Comprehensive loss is comprised of net loss and other comprehensive loss. Other comprehensive loss
includes certain changes in Stockholders Equity that are excluded from net loss. Comprehensive
loss for all periods presented has been reflected in the Consolidated Statement of Stockholders
Equity.
Stockholders Equity
Ordinary share capital is recognised at the fair value of the consideration received by the
Company. Any transaction costs arising on the issue of shares are recognized directly in equity as
a reduction in the share proceeds received.
Deferred Offering Costs
Where costs associated with a capital raising have been incurred at balance date and it is probable
that the capital raising will be successfully completed after balance date, such costs are deferred
and offset against the proceeds subsequently received from the capital raising.
66
2. Income Taxes
Loss from operations consists of the following jurisdictions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended June 30, |
|
|
2006 |
|
2005 |
|
2004 |
|
|
(in thousands $) |
Domestic |
|
|
(196 |
) |
|
|
(326 |
) |
|
|
(321 |
) |
Foreign |
|
|
(7,189 |
) |
|
|
(6,095 |
) |
|
|
(8,217 |
) |
|
|
|
|
|
|
(7,385 |
) |
|
|
(6,421 |
) |
|
|
(8,538 |
) |
|
|
|
The reconciliation of income tax computed at the U.S. federal statutory tax rates to income
tax expense attributable to loss arising during development stage is:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended June 30, |
|
|
2006 |
|
|
|
|
|
2005 |
|
|
|
|
|
2004 |
|
|
|
|
(in thousands $) |
|
% |
|
(in thousands $) |
|
% |
|
(in thousands $) |
|
% |
|
|
|
Tax at US statutory rates |
|
|
2,585 |
|
|
|
35 |
|
|
|
2,247 |
|
|
|
35 |
|
|
|
2,988 |
|
|
|
35 |
|
Australian tax |
|
|
(359 |
) |
|
|
(5 |
) |
|
|
(305 |
) |
|
|
(5 |
) |
|
|
(411 |
) |
|
|
(5 |
) |
R&D Tax concession |
|
|
91 |
|
|
|
1 |
|
|
|
43 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
Under Provision |
|
|
(161 |
) |
|
|
(2 |
) |
|
|
156 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
Change in valuation allowance |
|
|
(2,156 |
) |
|
|
(29 |
) |
|
|
(2,141 |
) |
|
|
(33 |
) |
|
|
(2,577 |
) |
|
|
(30 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities and assets are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
Year ended June 30, |
|
|
2006 |
|
2005 |
|
|
(in thousands $) |
Deferred tax liabilities |
|
|
|
|
|
|
|
|
Unrealised Foreign Exchange Gain |
|
|
(2 |
) |
|
|
(4 |
) |
|
|
|
Total deferred tax liabilities |
|
|
(2 |
) |
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
Deferred tax assets |
|
|
|
|
|
|
|
|
Tax carried forward losses |
|
|
7,686 |
|
|
|
4,972 |
|
Unrealised Foreign Exchange Loss |
|
|
2 |
|
|
|
8 |
|
Consultant and other accruals |
|
|
146 |
|
|
|
700 |
|
|
|
|
Total deferred tax assets |
|
|
7,834 |
|
|
|
5,680 |
|
|
|
|
|
|
|
|
|
|
Valuation allowance for deferred tax assets |
|
|
(7,832 |
) |
|
|
(5,676 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets and liabilities |
|
|
|
|
|
|
|
|
|
|
|
Management evaluates the recoverability of the deferred tax asset and the amount of the
required valuation allowance. Due to the uncertainty surrounding the realization of the tax
deductions in future tax returns, the Company has recorded a valuation allowance against its net
deferred tax asset at June
30, 2006 and 2005. At such time as it is determined that it is more likely than not that the
deferred tax assets will be realized, the valuation allowance will be reduced.
67
There was no benefit from income taxes recorded for the period from December 1, 2000 (inception) to
June 30, 2006 due to the Companys inability to recognize the benefit of net operating losses. The
Company had federal net operating loss carry forwards of approximately $1,036,000 at June 30, 2006.
The federal net operating losses will begin to expire in 2022.
Foreign tax losses of approximately $24,413,000 at June 30, 2006, may be carried forward
indefinitely.
3. Loss Per Share
The following table sets forth the computation of basic and diluted net loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended June 30, |
|
|
2006 |
|
2005 |
|
2004 |
|
|
(In Thousands, except share data) |
Numerator |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss arising during development stage |
|
|
(7,386 |
) |
|
|
(6,421 |
) |
|
|
(8,538 |
) |
Effect of dilutive securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for diluted earnings per share |
|
$ |
(7,386 |
) |
|
$ |
(6,421 |
) |
|
$ |
(8,538 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator |
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares used in
computing net loss per share, basic and
diluted. |
|
|
56,938,000 |
|
|
|
56,938,000 |
|
|
|
54,954,578 |
|
Effect of dilutive securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive potential common shares |
|
|
56,938,000 |
|
|
|
56,938,000 |
|
|
|
54,954,578 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted net loss per share |
|
$ |
(0.13 |
) |
|
$ |
(0.11 |
) |
|
$ |
(0.16 |
) |
During the period presented the Company had warrants outstanding that could potentially dilute
basic earnings per share in the future, but were excluded from the computation of diluted net loss
per share as the effect would have been anti-dilutive. Since the Company has a loss for all periods
presented, diluted and basic earnings per share are the same. The outstanding warrants consist of
the following potential common shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at June 30, |
|
|
2006 |
|
2005 |
|
2004 |
|
|
|
Outstanding Warrants |
|
|
2,392,000 |
|
|
|
2,392,000 |
|
|
|
2,392,000 |
|
The warrants outstanding at June 30, 2006 have an exercise price of $9.00 per share and are
exercisable prior to December 18, 2006.
During July 2006 the Company issued 6,452,937 shares of common stock and 2,815,258 warrants in
connection with a PIPE capital raising and for securing a Standby Equity Distribution Agreement.
For further details see Note 8 Significant Events After Balance Date.
4. Expenditure Commitments and Contingencies
68
At June, 30, 2006, the Company had contractual obligations for the conduct of clinical trials, pre-
clinical research and development and manufacturing process development of approximately
$1,811,000. Of the expenditure commitments, clinical trial amounts are based on the assumption that
all patients enrolled in clinical trials will complete the maximum number of allowed treatment
cycles. The amounts, assuming all treatment cycles are completed, are expected to be incurred as
follows:
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment due by period |
|
|
|
|
|
|
less than 1 |
|
1 3 |
|
3 5 |
|
More than |
Contractual Obligations |
|
Total |
|
Year |
|
Years |
|
Years |
|
5 Years |
Purchase Obligations |
|
$ |
1,811 |
|
|
$ |
1,760 |
|
|
$ |
51 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,811 |
|
|
$ |
1,760 |
|
|
$ |
51 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
No amounts have been included for future payments to Novogen which may arise in connection
with the licence agreements, the services agreement or the manufacturing licence and supply
agreement as future payments under the terms of the agreements are subject to termination
provisions. Payments in connection with these agreements are detailed in Note 6 Related Party
Transactions.
The Company is not currently a party to any material legal proceedings.
The Companys certificate of incorporation provides that it will indemnify Novogen in connection
with certain actions brought against Novogen by any of the Companys stockholders or any other
person.
The Company has guaranteed the payment and performance of the obligations of its subsidiary,
Marshall Edwards Pty Limited, to Novogen and its subsidiaries, Novogen Laboratories Pty Limited and
Novogen Research Pty Limited, under the licence agreements, the manufacturing licence and supply
agreement and the services agreement. Novogen has guaranteed the performance of the obligations of
Novogen Research Pty Limited under the licence agreements and the obligations of Novogen
Laboratories Pty Limited under the manufacturing licence and supply agreement to Marshall Edwards
Pty Limited. Each of the Company and Novogens obligations in the guarantee and indemnity agreement
are absolute, unconditional and irrevocable.
The Company has issued a letter of support to the Directors of Marshall Edwards Pty Limited
guaranteeing financial support, for a period of twelve months ending October 7, 2006, should it be
unable to meet any of its financial commitments.
5. Segment Information
The Companys focus is to continue the clinical program currently underway for the development and
commercialization of phenoxodiol, NV-196 and NV-143. The business contains two major segments based
on geographic location.
69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, |
|
|
2006 |
|
2005 |
|
2004 |
|
|
USA |
|
Australia |
|
Total |
|
USA |
|
Australia |
|
Total |
|
USA |
|
Australia |
|
Total |
|
|
(in thousands) |
Statement of Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Revenue |
|
|
348 |
|
|
|
98 |
|
|
|
446 |
|
|
|
238 |
|
|
|
70 |
|
|
|
308 |
|
|
|
167 |
|
|
|
26 |
|
|
|
193 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
|
(196 |
) |
|
|
(7,189 |
) |
|
|
(7,385 |
) |
|
|
(326 |
) |
|
|
(6,095 |
) |
|
|
(6,421 |
) |
|
|
(321 |
) |
|
|
(8,217 |
) |
|
|
(8,538 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Tax Expense |
|
|
(1 |
) |
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss arising during development stage |
|
|
(197 |
) |
|
|
(7,189 |
) |
|
|
(7,386 |
) |
|
|
(326 |
) |
|
|
(6,095 |
) |
|
|
(6,421 |
) |
|
|
(321 |
) |
|
|
(8,217 |
) |
|
|
(8,538 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment assets |
|
|
33,767 |
|
|
|
2,895 |
|
|
|
36,662 |
|
|
|
33,877 |
|
|
|
4,266 |
|
|
|
38,143 |
|
|
|
34,220 |
|
|
|
802 |
|
|
|
35,022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Elimination of investment in subsidiary |
|
|
(26,267 |
) |
|
|
|
|
|
|
(26,267 |
) |
|
|
(18,779 |
) |
|
|
|
|
|
|
(18,779 |
) |
|
|
(10,173 |
) |
|
|
|
|
|
|
(10,173 |
) |
|
|
|
Consolidated Assets |
|
$ |
7,500 |
|
|
$ |
2,895 |
|
|
$ |
10,395 |
|
|
$ |
15,098 |
|
|
$ |
4,266 |
|
|
$ |
19,364 |
|
|
$ |
24,047 |
|
|
$ |
802 |
|
|
$ |
24,849 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment liabilities |
|
$ |
180 |
|
|
$ |
1,080 |
|
|
$ |
1,260 |
|
|
$ |
93 |
|
|
$ |
2,750 |
|
|
$ |
2,843 |
|
|
$ |
110 |
|
|
$ |
1,797 |
|
|
$ |
1,907 |
|
|
|
|
6. Related Party Transactions
Licence Agreement for Phenoxodiol
In September 2003, the Company entered into a licence agreement pursuant to which Novogens
subsidiary, Novogen Research Pty Limited, granted to MEPL a worldwide non-transferable licence
under its patents and patent applications and in its know-how to conduct clinical trials and
commercialize and distribute phenoxodiol products. The licence agreement covers uses of phenoxodiol
in the field of prevention, treatment or cure of cancer in humans delivered in all forms except
topical applications. The licence is exclusive until the expiration or lapsing of the last relevant
Novogen patents or patent applications in the world and thereafter is non-exclusive. MEPL may
terminate the agreement by giving three months notice to Novogen. MEPL paid $5,000,000 to Novogen
in February 2004 which was the first lump sum licence fee payment due under the terms of the
licence agreement. Also, MEPL paid $2,000,000 to Novogen in January 2005 and $4,000,000 in January
2006 which was the annual milestone licence fee payments due under the licence agreement. The
Company paid a second lump sum licence fee of $5,000,000 to Novogen in July 2006 following the
raising of funds in a private placement. This licence fee was due on the later of November 1, 2003
or such later date when the cumulative total of all funds received from debt or equity issuances
and revenue received from commercialization (income other than sales) and sales of phenoxodiol
products exceeded $50,000,000. Following the PIPE share issue on July 11, 2006 the funds received
from equity issuances exceeded $50,000,000 which triggered this licence fee payment. Future amounts
payable to Novogen under terms of the licence agreement are as follows:
1. Until the expiration of the exclusivity period of the licence, MEPL must pay Novogen 2.5% of all
net sales and 25% of commercialization income. After the exclusivity period of the licence, 1.5% of
net sales must be paid to Novogen. The preconditions to such payments have not yet occurred.
The Exclusivity Period ends on the later of:
(a) |
|
the date of expiration or lapsing of the last patent right in the patents and patent
applications set out in the licence agreement with Novogen; or |
70
(b) |
|
the date of expiration or lapsing of the last licenced patent right which MEPL would, but for
the licence granted in the licence agreement, infringe in any country in the geographical
territory covered by the licence agreement by doing in that country any of the things set out
in the licence agreement. |
2. In addition to the amounts above, beginning in 2006, an $8 million annual milestone licence fee
is payable under the amended terms of the licence agreement for each calendar year ending December
31 during the exclusivity period of the licence. The December 31, 2006 licence fee has been
deferred under the licence amendment deed which is discussed below.
Licence Amendment Deed for Phenoxodiol
In June 2006, the Company entered into an amendment deed to the licence agreement for phenoxodiol.
Pursuant to the original term of the licence agreement for phenoxodiol the Company was required to
pay an $8,000,000 licence milestone fee to Novogen Research Pty Limited in December 2006. The
amendment deed extends the date that the $8,000,000 licence milestone fee is payable until the
earliest receipt by MEPL of the first:
(i) |
|
approval by the FDA of a New Drug Application (NDA) for phenoxodiol; |
|
(ii) |
|
approval or authorization of any kind to market phenoxodiol in the United States; or |
|
(iii) |
|
approval or authorization of any kind by a government agency in any other country to market
phenoxodiol. |
Upon receipt of any of the above, the Company must pay to Novogen, $8,000,000, together with
interest on that amount from (and including) December 31, 2006, calculated at the bank bill rate.
This milestone licence fee replaces the $8,000,000 December 31, 2006 milestone fee.
At June 30, 2005 an amount of $2,000,000 was accrued and reflected in amounts due to Novogen
representing 50% of the $4,000,000 milestone payment payable to Novogen on December 31, 2005 under
the terms of the licence agreement with Novogen. The Company paid the $4,000,000 due to Novogen at
the end of January 2006. The licence amendment deed provides that the next milestone licence fee is
not due until one of the approvals set out above is obtained. Therefore no licence fees have been
accrued at June 30, 2006.
Licence Agreement NV-196 and NV-143
In May 2006, the Company entered into a second licence agreement with Novogen for two oncology
compounds, NV-196 and NV-143. NV-196 is being developed initially in oral form for pancreatic and
bile duct cancer and is currently in Phase I human testing. NV-143 is targeted for the treatment of
melanoma, also in oral dose form, and is in the pre-clinical testing stage. The licence agreement
is an agreement under which Novogens subsidiary, Novogen Research Pty Limited, grants to MEPL a
worldwide non-transferable licence under its patents and patent applications and in its know-how to
conduct clinical trials and commercialize and distribute NV-196 and NV-143 products. The licence
agreement covers uses of NV-196 and NV-143 in the field of prevention, treatment or cure of cancer
in humans delivered in all forms except topical applications. The licence is exclusive until the
expiration or lapsing of the last relevant Novogen patents or patent applications in the world and
thereafter is non-exclusive. MEPL may terminate the agreement by giving three months notice to
Novogen. MEPL paid $1,000,000 to Novogen in May 2006 which was the first lump sum licence fee
payment due under the terms of the licence agreement. The Company is required to make payments
71
under the terms of this second licence agreement with Novogen as follows:
1. A lump sum licence fee of $1,000,000 is payable to Novogen on the commencement date of the
licence in consideration of the licence granted. This initial lump sum licence fee was paid to
Novogen in May 2006.
2. In further consideration of the licence granted, MEPL must pay to Novogen the following
milestone licence fees upon the occurrence of the corresponding milestone as set forth below;
a) the first licence product containing NV-196 to reach a milestone as set forth below; and
b) the first licenced product containing NV-143 to reach a milestone as set forth below.
|
|
|
The milestone licence fees are: |
|
|
i) |
|
$1,000,000 on the date an IND for the licenced product goes into effect or
the equivalent approval of a government agency is obtained in another country. If
this event does not occur before March 31, 2008 then this amount will be due on this
date; |
|
|
ii) |
|
$2,000,000 on the date of enrollment of the first clinical trial subject in
a Phase II clinical trial of the licenced product. If this event does not occur
before June 30, 2009, then this amount will be due on this date; |
|
|
iii) |
|
$3,000,000 on the date of enrollment of the first clinical trial subject in
a Phase III clinical trial of the licenced product. If this event does not occur
before December 31, 2011, then this amount will be due on this date; and |
|
|
iv) |
|
$8,000,000 on the date of first receipt of a NDA for the licenced product
from the FDA or equivalent approval from a government agency in another country. If
this event does not occur before December 31, 2013, then this amount will be due on
this date. |
3. MEPL must pay Novogen royalties of 5.0% of all net sales and 25% of commercialization income
for the term of the licence. The royalty rate is reduced by 50% if the licenced patent rights
in any country or territory expire, lapse, are revoked, do not exist or are assigned to MEPL
and the product is entirely manufactured and supplied in such country.
4. Minimum royalties of $3,000,000 per year are payable following the date of first receipt of
an NDA for a licenced product from the FDA (or equivalent approval from a government agency in
any other country) until the expiration of the term.
Licence Option Deed
The licence option deed grants MEPL an exclusive right to accept and an exclusive right to match
any proposed dealing by Novogen of its intellectual property rights with a third party relating to
synthetic compounds (other than phenoxodiol) that have known or potential applications in the field
of prevention, treatment or cure of cancer in humans in all forms other than topical applications.
Services Agreement
The Company does not currently intend to directly employ any staff. Under the terms of the services
agreement, Novogen Limited or its subsidiaries have agreed to provide services reasonably required
by the Company relating to the development and commercialization of phenoxodiol and other licenced
products, including NV-196 and NV-143. Novogen has agreed to provide these services at cost plus a
10% mark-up. The Company may terminate the agreement on three months written notice to Novogen.
72
Transactions giving rise to expenditures amounting to $1,294,000, $1,073,000 and $1,113,000
were made under the services agreement with Novogen during the twelve months ended June 30, 2006,
2005 and 2004 respectively. Of these amounts, $588,000, $385,000 and $811,000 related to service
fees paid to Novogen for research and development services provided in the twelve months ended June
30, 2006, 2005 and 2004 respectively, reflecting the time spent by Novogen research staff on the
development of phenoxodiol. Additionally, $707,000, $688,000 and $302,000 of the total expenditures
during the twelve months ended June 30, 2006, 2005 and 2004, respectively, related to costs
incurred for administration and accounting services provided by Novogen.
At June 30, 2006 and 2005, $118,000 and $100,000, respectively, was due and owing to Novogen under
the services agreement and is included in amounts due to related company.
Manufacturing Licence and Supply Agreement
Under the terms of the manufacturing licence and supply agreement, MEPL has granted to one of
Novogens subsidiaries an exclusive, non-transferable sub licence to manufacture and supply
phenoxodiol in its primary manufactured form. Novogens subsidiary has agreed to supply phenoxodiol
to MEPL for the clinical trial development program and phenoxodiols ultimate commercial use.
Phenoxodiol supplied by Novogen under the terms of this agreement will by charged at cost plus a
50% markup.
Transactions giving rise to expenditures amounting to $527,000, $612,000 and $761,000 were made
under the manufacturing licence and supply agreement with Novogen during the twelve months ended
June 30, 2006, 2005 and 2004, respectively.
At June 30, 2006 and 2005, $74,000 and $79,000, respectively, was due and owing to Novogen under
the manufacturing licence and supply agreement and is included in amounts due to related company.
7. Equity
MEI is a development stage company incorporated in December 2000 that commenced operations in May
2002 coinciding with its listing on the London Stock Exchanges Alternative Investment Market
(AIM).
In May 2002, the Company sold 2,523,000 shares of its common stock and 2,523,000 warrants, raising
proceeds of $9,022,000, net of $1,070,000 of transaction costs. The warrants were exercisable prior
to November 30, 2003 at an exercise price of $4.00 per share. The common stock was listed for
trading on the AIM. Following the listing, Novogen Limited retained 95.1% of the Companys common
stock.
In June 2003, 9,000 warrants were exercised, resulting in proceeds to the Company of $36,000. In
November 2003 the remaining 2,514,000 warrants were exercised at an exercise price of $4.00 per
share with proceeds to the Company of $10,056,000.
In December 2003, the Company sold 2,392,000 common stock units at a public offering price of $7.50
per unit. Each common stock unit consisted of:
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one share of common stock; and |
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one warrant to purchase a share of common stock, exercisable prior
to December 18, 2006 at an exercise price equal to $9.00. |
73
In connection with the December 2003 offering, the Companys common stock and warrants commenced
trading separately on the Nasdaq Global Market. The Company received proceeds of $15,522,000, net
of $2,431,000 transaction costs in the December 2003 offering. Following this offering, Novogen
Limited retained 86.9% of the Companys common stock.
8. Significant Events After Balance Date
On July 11, 2006, the Company entered into a securities subscription agreement with certain
accredited investors providing for the placement of 6,329,311 shares of our common stock and
warrants exercisable for 2,215,258 shares of our common stock at a purchase price of $2.90 per
unit. Each unit consisted of one share of common stock and 0.35 of a warrant to purchase one share
of common stock. The warrants have an exercise price of $4.35 per share, subject to certain
adjustments. The warrants may be exercised no less than six months from the closing date and will
expire four years from the date of issuance, or July 11, 2010. The Company closed the private
placement on July 11, 2006. In connection with the PIPE the company received proceeds of $17.2
million net of certain commissions and other costs.
On July 11, 2006, the Company entered into a standby equity distribution agreement (SEDA), with
Cornell Capital Partners, LP. Under the SEDA, the Company may issue and sell to Cornell shares of
its common stock for a total purchase price of up to $15 million, once a resale registration
statement is in effect. The Company has sole discretion whether and when to sell shares of its
common stock to Cornell. Cornell will be irrevocably bound to purchase shares of common stock from
the Company after the Company sends a notice that it intends to sell shares of its common stock to
Cornell. Each advance under the SEDA is limited to a maximum of $1.5 million.
In connection with the SEDA, the Company paid Cornell a commitment fee of 123,626 shares of its
common stock and warrants to purchase 600,000 shares of its common stock that expire on July 11,
2010. The warrants have an exercise price of $4.35 per share, subject to certain adjustments.
Before the Company can sell any shares of its common stock to Cornell under the SEDA, a resale
registration statement will have to be filed with and declared effective by the SEC to cover
Cornells resale of shares of our common stock it buys under the SEDA.
The Company has not issued any shares under the terms of the standby equity distribution agreement.
Following the private placement, Novogen Limited retained 78.1% of the Companys common stock.
In connection with the securities subscription agreement the Company entered into with certain
accredited investors as of July 11, 2006, the Company entered into a registration rights agreement
pursuant to which the Company is obligated to file a resale registration statement with the SEC
covering the shares of common stock issued in connection with the securities subscription
agreement, in addition to the shares of common stock underlying the warrants issued in connection
with the securities subscription agreement. The Company filed the registration statement on August
9, 2006.
At the date of this report the registration statement had not been declared effective. In the event
that (i) the registration statement is not declared effective by the SEC within the time prescribed
by the registration rights agreement or (ii) the registration statement ceases to be effective or
usable at any time while shares of common stock covered by it remain unsold or may only be sold
subject to certain volume limitations, or investors are not permitted to utilize the prospectus in
connection with the registration statement to resell shares of common stock covered by the
registration statement, the Company will be obligated to pay investors who purchased shares of
common stock in the private placement liquidated damages equal to 1% of the aggregate purchase
price paid by each investor
74
pursuant to the securities subscription agreement for any shares of common stock, shares of common
stock issuable upon exercise of warrants or warrants then held by each investor per month (pro
rated for any period less than a month) until the registration statement is effective or the
investors are permitted to utilize the prospectus in connection with the registration statement to
resell shares of common stock covered by the registration statement.
Liquidated damages paid to each investor in the private placement may not exceed more than 10% of
the purchase price paid by such investor for shares of common stock, shares of common stock
issuable upon exercise of warrants or warrants purchased under the securities subscription
agreement. The maximum amount of liquidated damages payable would be approximately $1.8 million. If
the Company becomes obligated to pay liquidated damages, the Company would deplete its limited
working capital and potentially need to raise additional funds.
The Company paid a second lump sum licence fee of $5,000,000 to Novogen in July 2006 following the
raising of funds in a private placement. This licence fee was due on the later of November 1, 2003
or such later date when the cumulative total of all funds received from debt or equity issuances
and revenue received from commercialization (income other than sales) and sales of phenoxodiol
products exceeds $50,000,000. Following the PIPE share issue on July 11, 2006 the funds received
from equity issuances exceeded $50,000,000 which triggered this licence fee payment.
9. Quarterly Financial Data (Unaudited)
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2006 for the quarter ended |
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Jun-30 |
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Mar-31 |
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Dec-31 |
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Sep-30 |
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Year |
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(in thousands except per share data) |
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Revenue |
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93 |
|
|
|
101 |
|
|
|
130 |
|
|
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122 |
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446 |
|
Net Loss |
|
|
(552 |
) |
|
|
(3,252 |
) |
|
|
(1,778 |
) |
|
|
(1,803 |
) |
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(7,385 |
) |
Net Loss arising during development stage |
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(553 |
) |
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(3,252 |
) |
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(1,778 |
) |
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(1,803 |
) |
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(7,386 |
) |
Basic and diluted loss per share |
|
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(0.01 |
) |
|
|
(0.06 |
) |
|
|
(0.03 |
) |
|
|
(0.03 |
) |
|
|
(0.13 |
) |
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|
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|
|
|
|
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|
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|
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2005 for the quarter ended |
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Jun-30 |
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Mar-31 |
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Dec-31 |
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Sep-30 |
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Year |
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(in thousands except per share data) |
|
|
|
|
Revenue |
|
|
106 |
|
|
|
71 |
|
|
|
64 |
|
|
|
67 |
|
|
|
308 |
|
Net Loss |
|
|
(2,076 |
) |
|
|
(1,740 |
) |
|
|
(1,375 |
) |
|
|
(1,230 |
) |
|
|
(6,421 |
) |
Net Loss arising during development stage |
|
|
(2,076 |
) |
|
|
(1,740 |
) |
|
|
(1,375 |
) |
|
|
(1,230 |
) |
|
|
(6,421 |
) |
Basic and diluted loss per share |
|
|
(0.04 |
) |
|
|
(0.03 |
) |
|
|
(0.02 |
) |
|
|
(0.02 |
) |
|
|
(0.11 |
) |
75
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9a.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
At the end of the period covered by this report, our management, with the participation of our
principal executive officer and principal financial officer, evaluated the effectiveness of our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended). Based on this evaluation, our principal executive
officer and principal financial officer have concluded that our disclosure controls and procedures
are effective to ensure that information required to be disclosed by us in reports that we file or
submit under the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in Securities and Exchange Commission rules and forms.
The removal of the identified weakness in internal control over financial reporting and in
disclosure controls, which was identified and reported in prior filings, is described below under
the heading Changes in Internal Controls.
Changes in Internal Controls
In 2004, we determined that the personnel and management of Novogen who perform its accounting and
financial reporting functions pursuant to the services agreement were not sufficiently expert in
U.S. GAAP and the requirements of the SEC and the Public Company Accounting Oversight Board and
that this lack of expertise represented a material weakness in the operation of the our internal
control over financial reporting.
In addition, we had concluded that our system of financial reporting was not designed to prepare
financial statements in accordance with U.S. GAAP and that our system of internal control, in
particular the processes to review and analyze elements of the financial statement close process
and prepare consolidated financial statements in accordance with U.S. GAAP, had not reduced to a
relatively low level the risk that errors in amounts that would be material in relation to those
financial statements may occur and may not be detected within a timely period by management in the
normal course of business.
In this regard, we required that Novogen engage personnel with expertise or train existing
personnel in the following areas:
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U.S. GAAP; |
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financial reporting in accordance with the SEC regulations; |
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requirements of the Public Company Accounting Oversight Board; and |
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application of technical accounting pronouncements. |
76
Prior to the period covered by this report, Novogen had made significant progress in implementing
its plan to address the identified material weakness. However, as of the end of such prior
reporting periods we were not satisfied that Novogen had fully addressed the issues underlying the
material weakness. During the period covered by this report, Novogen finalized its procedures in
addressing the material weakness and we now believe that Novogen has adopted processes that are
designed to ensure that the preparation of our consolidated financial statements, including the
processes to review and analyze elements of our financial statement close process, is in accordance
with U.S. GAAP and that relevant information about U.S. GAAP, SEC financial reporting requirements
and the requirements of the Public Company Accounting Oversight Board is available to those persons
involved in the process by which the financial statements are prepared. As a result, we have
re-assessed the effectiveness of Novogens disclosure controls and procedures as they relate to us
and having allowed a period of time to determine the effectiveness of additional controls and
procedures, we now believe that the weakness in internal accounting control as described above has
been eliminated.
The changes that have been made to Novogens internal control procedures have occurred gradually
over time. Therefore, during the quarter ended June 30, 2006, there has been no change in internal
control over reporting that has materially affected or is reasonably likely to materially affect
our internal control over financial reporting.
Item 9b. Other Information
Not applicable
77
PART III
Item 10. Directors and Executive Officers of the Registrant
Code of Ethics
We have adopted a Code of Business and Ethics policy that applies to our directors and
employees (including our principal executive officer and our principal financial officer), and have
posted the text of our policy on our website (www.marshalledwardsinc.com). In addition, we intend
to promptly disclose (i) the nature of any amendment to the policy that applies to our principal
executive officer and principal financial officer and (ii) the nature of any waiver, including an
implicit waiver, from a provision of the policy that is granted to one of these specified
individuals, the name of such person who is granted the waiver and the date of the waiver on our
website in the future.
The other information required by this item is incorporated herein by reference to our proxy
statement for the fiscal year ended June 30, 2006 (the Proxy Statement).
Item 11. Executive Compensation
The information required by this item is incorporated herein by reference to the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain of the information required by this item is included in Part II Item 5 of this Annual
Report and certain information is incorporated herein by reference to the Proxy Statement.
Item 13. Certain Relationships and Related Transactions
The information required by this item is incorporated herein by reference to the Proxy Statement.
Item 14. Principal Accountant Fees and Services.
The information required by this item is incorporated by reference to the Proxy Statement.
78
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) 1. Financial Statements
Reference is made to the Index to Financial Statements under Item 8, Part II hereof.
2. Financial Statement Schedules
The Financial Statement Schedules have been omitted either because they are not required or
because the information has been included in the financial statements or the notes thereto
included in this Annual Report on Form 10-K.
3. Exhibits
Exhibit Index
Exhibits
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3.1
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Restated Certificate of Incorporation (1) |
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3.2
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Amended and Restated Bylaws (2) |
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4.1
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Specimen Stock Certificate (3) |
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4.2
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Specimen Warrant Certificate (4) |
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4.3
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Specimen Warrant Certificate (5) |
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4.4
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Warrant Agreement (6) |
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4.5
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Form of Warrant Agreement (7) |
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4.6
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Form of Warrant (8) |
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10.1
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Amended and Restated Licence Agreement between Novogen Research Pty
Limited and Marshall Edwards Pty Limited (9) |
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10.2
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Amended and Restated Manufacturing Licence and Supply Agreement
between Novogen Laboratories Pty Limited and Marshall Edwards Pty
Limited (10) |
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10.3
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Amended and Restated Licence Option Deed between Novogen Research
Pty Limited and Marshall Edwards Pty Limited (11) |
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10.4
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Amended and Restated Services Agreement among Novogen Limited,
Marshall Edwards, Inc. and Marshall Edwards Pty Limited (12) |
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10.5
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Guarantee and Indemnity among Marshall Edwards, Inc., Novogen
Laboratories Pty Limited, Novogen Research Pty Limited and Novogen
Limited (13) |
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10.6
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Marshall Edwards, Inc. Share Option Plan (14) |
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10.7
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Licence Agreement between Novogen Research Pty Limited and Marshall
Edwards Pty Limited (15) |
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10.8
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Amendment Deed between Novogen Research Pty Limited and Marshall
Edwards Pty Limited (16) |
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10.9
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Securities Subscription Agreement by and among Marshall Edwards,
Inc. and the investors listed on Schedule 2.1 thereto (17) |
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10.10
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|
Registration Rights Agreement by and among Marshall Edwards, Inc.
and the investors as signatories thereto (18) |
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10.11
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|
Standby Equity Distribution Agreement between Marshall Edwards, Inc.
and Cornell Capital Partners, L.P. (19) |
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10.12
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Registration Rights Agreement between Marshall Edwards, Inc. and
Cornell Capital Partners, L.P. (20) |
79
|
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2.1
|
|
Subsidiaries of Marshall Edwards, Inc. (21) |
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23.1
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Consent of Ernst & Young* |
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23.2
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Consent of Ernst & Young LLP* |
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23.3
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Consent of BDO* |
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31.1
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Certification required by Rule 13a-14(a) or Rule 15d-14(a) |
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31.2
|
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Certification required by Rule 13a-14(a) or Rule 15d-14(a) |
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32.1
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Certification required by Rule 13a-14(b) or Rule 15d-14(b) and
section 1350 of Chapter 63 of Title 18 of the United States Code (18
U.S.C. 1350) |
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* |
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Filed herewith. |
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(1) |
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Incorporated by reference to Exhibit 3.1 to Registrants Registration
Statement on Form S-1 filed on September 25, 2003 (Reg. No.
333-109129). |
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(2) |
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Incorporated by reference to Exhibit 3.2 to Registrants Registration
Statement on Form S-1 filed on September 25, 2003 (Reg. No.
333-109129). |
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(3) |
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Incorporated by reference to Exhibit 4.1 to Amendment No. 1 to
Registrants Registration Statement on Form S-1 filed on October 31,
2003 (Reg. No. 333-109129). |
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(4) |
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Incorporated by reference to Exhibit 4.3 Amendment No. 1 to
Registrants Registration Statement on Form S-1 filed on October 31,
2003 (Reg. No. 333-109129 ). |
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(5) |
|
Incorporated by reference to Exhibit 4.2 to Registrants Registration
Statement on Form S-3 filed on August 9, 2006 (Reg. No. 333-136440 ). |
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(6) |
|
Incorporated by reference to Exhibit 4.2 to Amendment No. 1 to
Registrants Registration Statement on Form S-1 filed on October 31,
2003 (Reg. No. 333-109129 ). |
|
(7) |
|
Incorporated by reference to Exhibit 10.3 to Registrants Current
Report on Form 8-K filed on July 12, 2006. |
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(8) |
|
Incorporated by reference to Exhibit 10.4 to Registrants Current
Report on Form 8-K filed on July 12, 2006. |
|
(9) |
|
Incorporated by reference to Exhibit 10.1 to Registrants
Registration Statement on Form S-1 filed on September 25, 2003 (Reg.
No. 333-109129). |
|
(10) |
|
Incorporated by reference to Exhibit 10.2 to Registrants
Registration Statement on Form S-1 filed on September 25, 2003 (Reg.
No. 333-109129). |
|
(11) |
|
Incorporated by reference to Exhibit 10.3 to Registrants
Registration Statement on Form S-1 filed on September 25, 2003 (Reg.
No. 333-109129). |
|
(12) |
|
Incorporated by reference to Exhibit 10.4 to Registrants
Registration Statement on Form S-1 filed on September 25, 2003 (Reg.
No. 333-109129). |
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(13) |
|
Incorporated by reference to Exhibit 10.5 to Registrants
Registration Statement on Form S-1 filed on September 25, 2003 (Reg.
No. 333-109129). |
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(14) |
|
Incorporated by reference to Exhibit 10.6 to Registrants
Registration Statement on Form S-1 filed on September 25, 2003 (Reg.
No. 333-109129). |
|
(15) |
|
Incorporated by reference to Exhibit 99.1 to Registrants Current
Report on Form 8-K filed on May 16, 2006. |
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(16) |
|
Incorporated by reference to Exhibit 10.1 to Registrants Current
Report on Form 8-K filed on June 9, 2006 |
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(17) |
|
Incorporated by reference to Exhibit 10.1 to Registrants Current
Report on Form 8-K/A filed on July 12, 2006. |
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(18) |
|
Incorporated by reference to Exhibit 10.2 to Registrants Current
Report on Form 8-K filed on July 12, 2006. |
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(19) |
|
Incorporated by reference to Exhibit 10.1 to Registrants Current
Report on Form 8-K filed on July 12, 2006. |
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(20) |
|
Incorporated by reference to Exhibit 10.2 to Registrants Current
Report on Form 8-K filed on July 12, 2006. |
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(21) |
|
Incorporated by reference to Exhibit 21 to Registrants Registration
Statement on Form S-1 filed on September 25, 2003 (Reg. No.
333-109129). |
80
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized, on September 1, 2006.
MARSHALL EDWARDS, INC.
A Delaware Corporation
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By: |
/s/ Christopher Naughton
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Christopher Naughton |
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Chief Executive Offer |
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|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities indicated on
September 1, 2006.
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Signatures |
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Title |
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By:
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/s/ Christopher Naughton
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President, Chief Executive Officer and Director |
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Christopher Naughton |
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By:
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/s/ David Seaton
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Secretary, Chief Financial Officer |
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David Seaton |
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By:
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/s/ Graham Kelly
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Director |
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Graham Kelly |
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By:
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/s/ Stephen Breckenridge
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Director |
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Stephen Breckenridge |
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By:
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/s/ Bryan Williams
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Director |
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Bryan Williams |
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By:
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/s/ Paul Nestel
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Director |
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Paul Nestel |
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By:
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/s/ Philip Johnston
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Director |
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Philip Johnston |
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81
exv23w1
Exhibit 23.1
|
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§ Ernst & Young Centre
680 George Street
Sydney NSW 2000
Australia
|
|
§ Tel
Fax
Dx
|
|
61 2 9248 5555
61 2 9248 5959
Sydeny Stock
Exchange 10172
|
|
|
GPO Box 2646
Sydney NSW 2001 |
|
|
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|
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the Registration
Statement (Post-Effective
Amendment No.3 to Form S-1 No. 333-109129 on Form S-3 and Form S-3 for the registration of 9,268,195 shares of common stock) of
Marshall Edwards, Inc. and in the related Prospectuses of our report
dated 13 August, 2004, with respect to the
consolidated financial statements of Marshall Edwards, Inc., included in the Annual Report (Form 10-K) for the year ended
June 30, 2006.
/s/ Ernst
& Young
Sydney, Australia
August 30, 2006
Liability limited by the Accounts Scheme, approved
under the Professional Standards Act 1994 (NSW)
exv23w2
Exhibit 23.2
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the Registration Statement (Post-Effective
Amendment No.3 to Form S-1 No. 333-109129 on Form S-3 and Form S-3 for the registration of 9,268,195
shares of common stock) of Marshall Edwards, Inc. and in the related Prospectuses of our report
dated July 31, 2003, with respect to the consolidated financial statements of Marshall Edwards,
Inc., included in the Annual Report (Form 10-K) for the year ended June 30, 2006.
Stamford, Connecticut
August 30, 2006
A Member Practice of Ernst & Young Global
exv23w3
Exhibit 23.3
Consent of Independent Registered Public Accounting Firm
We hereby consent to the incorporation by reference in the (i) Registration Statement
(Post-Effective Amendment No.3 to Form S-1 No. 333-109129 on Form S-3) of Marshall Edwards, Inc.
and in the related Prospectus and (ii) the Registration Statement of Form S-3 (No. 333-136440) of
Marshall Edwards, Inc. and in the related Prospectus of our report dated September 1, 2006,
relating to the consolidated financial statements for the years ended June 30, 2005 and June 30,
2006 appearing in the Annual Report on Form 10-K for the year ended June 30, 2006.
We also consent to the reference to us under the caption Experts in the Prospectus of
Registration Statement No. 333-136440.
/s/ BDO
BDO
Sydney, NSW, Australia
September 1, 2006
exv31w1
Exhibit 31.1
CERTIFICATION
I, Christopher Naughton, certify that:
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I have reviewed this report on Form 10-K for the year ended June 30, 2006 of Marshall
Edwards, Inc.; |
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Based on my knowledge, this report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period
covered by this report; |
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Based on my knowledge, the financial statements, and other financial information included in
this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this
report; |
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The registrants other certifying officer(s) and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e) ) for the registrant and have: |
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Designed such disclosure controls and procedures, or caused such disclosure controls
and procedures to be designed under our supervision, to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us
by others within the entities, particularly during the period in which this report is
being prepared; |
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(b) |
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Evaluated the effectiveness of the registrants disclosure controls and procedures
and presented in the report our conclusions about the effectiveness of this disclosure
controls and procedures, as of the end of the period covered by this report based on such
evaluation; and |
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(c) |
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Disclosed in this report any change in the registrants internal control over
financial reporting that occurred during the registrants fourth fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the registrants
internal control over financial reporting; and |
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The registrants other certifying officer(s) and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrants auditors and the
audit committee of the registrants board of directors: |
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All significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to adversely affect
the registrants ability to record, process, summarize and report financial information;
and |
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(b) |
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Any fraud, whether or not material, that involves management or other employees who
have a significant role in the registrants internal control over financial reporting. |
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Date: September 1, 2006 |
/s/ Christopher Naughton
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Christopher Naughton |
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Chief Executive Officer |
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exv31w2
Exhibit 31.2
CERTIFICATION
I, David Ross Seaton, certify that:
1. |
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I have reviewed this report on Form 10-K for the year ended June 30, 2006 of Marshall
Edwards, Inc.; |
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2. |
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Based on my knowledge, this report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period
covered by this report; |
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3. |
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Based on my knowledge, the financial statements, and other financial information included in
this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this
report; |
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4. |
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The registrants other certifying officer(s) and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e) ) for the registrant and have; |
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(a) |
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Designed such disclosure controls and procedures, or caused such disclosure controls
and procedures to be designed under our supervision, to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us
by others within the entities, particularly during the period in which this report is
being prepared: |
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(b) |
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Evaluated the effectiveness of the registrants disclosure controls and procedures
and presented in the report our conclusions about the effectiveness of this disclosure
controls and procedures, as of the end of the period covered by this report based on such
evaluation; and |
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(c) |
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Disclosed in this report any change in the registrants internal control over
financial reporting that occurred during the registrants fourth fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the registrants
internal control over financial reporting; and |
5. |
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The Companys other certifying officer(s) and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrants auditors and the
audit committee of the registrants board of directors: |
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(a) |
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All significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to adversely affect
the registrants ability to record, process, summarize and report financial information;
and |
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(b) |
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Any fraud, whether or not material, that involves management or other employees who
have a significant role in the registrants internal control over financial reporting. |
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Date: September 1, 2006 |
/s/ David Seaton
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David R. Seaton |
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Chief Financial Officer |
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exv32w1
Exhibit 32.1
CERTIFICATION
Pursuant to the requirement set forth in Rule 13a-14(b) or Rule 15d-14(b) of the Securities
Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States
Code (18 U.S.C. § 1350), Christopher Naughton, the President and Chief Executive Officer of
Marshall Edwards, Inc. (the registrant), and David R. Seaton, the Chief Financial Officer of the
registrant, each hereby certifies that, to his knowledge:
1. |
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The registrants Annual Report on Form 10-K for the period ended June 30, 2006, to which this
Certification is attached as Exhibit 32 (the Periodic Report), fully complies with the
requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as
amended; and |
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2. |
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The information contained in the Periodic Report fairly presents, in all material respects,
the financial condition of the registrant at the end of the period covered by the Periodic
Report and results of operations of the registrant for the period covered by the Periodic
Report. |
These certifications accompany the Form 10-K to which they relate, are not deemed filed with the
Securities and Exchange Commission and are not to be incorporated by reference into any filing of
the registrant under the Securities Act of 1933, as amended, or the Securities Exchange Act of
1934, as amended (whether made before or after the date of the Form 10-K), irrespective of any
general incorporation language contained in such filing.
Dated: September 1, 2006
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/s/ Christopher Naughton
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/s/ David Seaton |
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Christopher Naughton
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David R. Seaton |
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Chief Executive Officer
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Chief Financial Officer
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