e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 31, 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
incorporation or organization)
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(I.R.S. Employer Identification No.) |
140 Wicks Road, North Ryde, NSW, 2113 Australia
(Address of principal executive offices) (Zip Code)
(011) 61 2 8877- 6196
Registrants telephone number, including area code:
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No 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
As of January 31, 2007 the number of shares outstanding of the issuers common stock,
$0.00000002 par value, was 63,390,937.
MARSHALL EDWARDS, INC.
INDEX
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Page |
PART I FINANCIAL INFORMATION |
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Item 1: Financial Statements (Unaudited) |
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Consolidated Balance Sheets as of December 31, 2006 and June
30, 2006 |
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3 |
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Consolidated Statements of Operations for the three months
and six months ended December 31, 2006 and 2005 and for the
period from December 1, 2000 (inception) through December
31, 2006 |
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4 |
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Consolidated Statements of Cash Flows for the six months
ended December 31, 2006 and 2005 and for the period from
December 1, 2000 (inception) through December 31, 2006 |
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5 |
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Consolidated Statement of Stockholders Equity |
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6 |
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Notes to Consolidated Financial Statements |
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7 |
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Item 2: Managements Discussion and Analysis of Financial Condition
and Results of Operation |
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19 |
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Item 3: Quantitative and Qualitative Disclosures about Market Risk |
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31 |
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Item 4: Controls and Procedures |
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32 |
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PART II OTHER INFORMATION |
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Item 4 Submission of Matters to a Vote of Security Holders |
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33 |
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Item 6: Exhibits |
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35 |
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SIGNATURES |
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36 |
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2
PART I FINANCIAL INFORMATION
Item 1: Financial Statements
MARSHALL EDWARDS, INC.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
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December 31, |
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June 30, |
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2006 |
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2006 |
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(unaudited) |
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ASSETS |
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Current assets |
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Cash and cash equivalents |
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$ |
20,226 |
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$ |
10,054 |
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Deferred offering costs |
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95 |
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Prepaid expenses and other current assets |
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73 |
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246 |
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Total current assets |
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20,299 |
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10,395 |
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Total assets |
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$ |
20,299 |
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$ |
10,395 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities |
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Accounts payable |
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$ |
805 |
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$ |
420 |
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Accrued expenses |
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1,386 |
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638 |
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Amount due to related company |
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523 |
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202 |
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Total current liabilities |
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2,714 |
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1,260 |
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Stockholders equity: |
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Preferred stock, $0.01 par value, authorized 100,000 shares,
none outstanding |
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Common stock, $0.00000002 par value, 113,000,000 authorized
shares; shares issued and outstanding: 63,390,937 at
December 31, 2006 and 56,938,000 at June 30, 2006 |
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Additional paid-in capital |
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53,141 |
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34,636 |
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Deficit accumulated during development stage |
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(35,556 |
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(25,501 |
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Total stockholders equity |
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17,585 |
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9,135 |
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Total liabilities and stockholders equity |
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$ |
20,299 |
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$ |
10,395 |
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See accompanying notes to the consolidated financial statements.
3
MARSHALL EDWARDS, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
(Unaudited)
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Period from |
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December 1, |
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2000 (Inception) |
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Three Months Ended |
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Six Months Ended |
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through |
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December 31, |
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December 31, |
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December 31, |
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2006 |
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2005 |
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2006 |
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2005 |
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2006 |
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Revenues: |
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Interest and other income |
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$ |
183 |
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$ |
130 |
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$ |
318 |
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$ |
252 |
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$ |
1,417 |
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Total revenues |
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183 |
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130 |
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318 |
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252 |
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1,417 |
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Operating expenses: |
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Research and development |
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(1,806 |
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(469 |
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(2,733 |
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(1,055 |
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(12,913 |
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License fees |
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(1,000 |
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(5,000 |
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(2,000 |
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(17,000 |
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Selling, general and administrative |
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(552 |
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(439 |
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(2,640 |
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(778 |
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(7,058 |
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Total operating expenses |
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(2,358 |
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(1,908 |
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(10,373 |
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(3,833 |
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(36,971 |
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Loss from operations |
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(2,175 |
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(1,778 |
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(10,055 |
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(3,581 |
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(35,554 |
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Income tax expense |
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(2 |
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Net loss arising during development stage |
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$ |
(2,175 |
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$ |
(1,778 |
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$ |
(10,055 |
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$ |
(3,581 |
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$ |
(35,556 |
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Net loss per common share: |
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Basic and diluted |
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$ |
(0.03 |
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$ |
(0.03 |
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$ |
(0.16 |
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$ |
(0.06 |
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Weighted average common shares outstanding |
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63,390,937 |
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56,938,000 |
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63,005,163 |
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56,938,000 |
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See accompanying notes to the consolidated financial statements.
4
MARSHALL EDWARDS, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
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Period from |
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December 1, 2000 |
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(Inception) |
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Six Months Ended |
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through |
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December 31, |
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December 31, |
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2006 |
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2005 |
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2006 |
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Operating activities |
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Net loss arising during development stage |
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$ |
(10,055 |
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$ |
(3,581 |
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$ |
(35,556 |
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Adjustments to reconcile net loss to net cash
(used in) provided by operating activities: |
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Share based payments |
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1,642 |
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1,642 |
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Changes in operating assets and liabilities: |
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Prepaid expenses and other current assets |
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173 |
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76 |
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(73 |
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Accounts payable |
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385 |
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24 |
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805 |
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Accrued expenses |
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748 |
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(12 |
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1,386 |
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Amounts due to related company |
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321 |
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1,990 |
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523 |
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Net cash used in operating activities |
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(6,786 |
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(1,503 |
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(31,273 |
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Financing activities |
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Net proceeds from issuance of common stock * |
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16,958 |
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51,499 |
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Proceeds from disposal of investments in short-term deposits |
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10,000 |
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Net cash provided by financing activities |
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16,958 |
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10,000 |
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51,499 |
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Net increase (decrease) in cash and cash
equivalents |
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10,172 |
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8,497 |
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20,226 |
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Cash and cash equivalents at beginning of period |
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10,054 |
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9,238 |
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Cash and cash equivalents at end of period |
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$ |
20,226 |
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$ |
17,735 |
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$ |
20,226 |
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* |
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Deferred offering costs of $95,000 from the year ended June 30, 2006 have been offset
against net proceeds from the issuance of common stock in the six months to December 31, 2006. |
See accompanying notes to the consolidated financial statements.
5
MARSHALL EDWARDS, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
(In thousands, except share data)
(Unaudited)
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Deficit |
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accumulated |
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during |
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Additional paid |
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development |
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Common Stock |
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in capital |
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stage |
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Total |
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(shares) |
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Balance at June 30, 2006 |
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56,938,000 |
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$ |
34,636 |
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$ |
(25,501 |
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$ |
9,135 |
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Net loss arising during development stage |
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(10,055 |
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(10,055 |
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Comprehensive Loss |
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(10,055 |
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Common Stock issued July 11, 2006 |
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6,329,311 |
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16,863 |
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16,863 |
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Shares issued as share-based payment (refer Note 6) |
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123,626 |
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443 |
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$ |
443 |
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Warrants issued as share-based payment (refer Note 6) |
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1,199 |
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$ |
1,199 |
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Balance at December 31, 2006 |
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63,390,937 |
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$ |
53,141 |
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$ |
(35,556 |
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$ |
17,585 |
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See accompanying notes to the consolidated financial statements.
6
MARSHALL EDWARDS, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
December 31, 2006
1. The Company and Summary of Significant Accounting Policies
Marshall Edwards, Inc. (MEI or the Company) is a development stage company incorporated in
December 2000 as a wholly-owned subsidiary of Novogen Limited (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 and pre-clinical
development of the anti-cancer drugs phenoxodiol, NV-196 and NV-143. Novogens subsidiary has
granted to the Companys subsidiary, Marshall Edwards Pty Ltd (MEPL), worldwide non-transferable
licenses under its patent right and patent applications and its relevant know-how to conduct
clinical trials and commercialize and distribute all forms of phenoxodiol, NV-196 and NV-143 for
uses in the field of prevention, treatment, and cure of cancer in humans, except topical
applications.
The Companys main focus since commencing operations has been to undertake human clinical testing
of phenoxodiol. 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 licensed 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 will continue 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 MEI and its wholly-owned subsidiary,
MEPL. 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.
7
Revenue Recognition
Interest
The only revenue earned 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
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 and
pre-clinical trials of phenoxodiol, NV-196 and NV-143. Research and development costs are charged
to expense as incurred.
8
License Fees
Costs incurred related to the acquisition or licensing of products that have not yet received
regulatory 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.
Other stock-based payments have been accounted for in accordance with SFAS No. 123R Share-Based
Payments. The Company therefore recognises the cost of goods acquired or the expense for services
received in a share-based payment transaction when it obtains the goods or as services are
received. The Company recognises a corresponding increase in equity or a liability depending on the
classification of the share-based instrument granted.
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 are excluded, whereas for diluted earnings per share they are 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.
9
2. Loss Per Share
The following table sets forth the computation of basic and diluted net loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
December 31, |
|
December 31, |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
|
(In Thousands, except share and per share data) |
Numerator |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss arising during development stage |
|
|
(2,175 |
) |
|
|
(1,778 |
) |
|
|
(10,055 |
) |
|
|
(3,581 |
) |
Effect of dilutive securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for diluted earnings per share |
|
$ |
(2,175 |
) |
|
$ |
(1,778 |
) |
|
$ |
(10,055 |
) |
|
$ |
(3,581 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share -
Weighted average number of shares used in computing net loss per share, basic and diluted |
|
|
63,390,937 |
|
|
|
56,938,000 |
|
|
|
63,005,163 |
|
|
|
56,938,000 |
|
Effect of dilutive securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive potential common shares |
|
|
63,390,937 |
|
|
|
56,938,000 |
|
|
|
63,005,163 |
|
|
|
56,938,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings per share |
|
$ |
(0.03 |
) |
|
$ |
(0.03 |
) |
|
$ |
(0.16 |
) |
|
$ |
(0.06 |
) |
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 December 31, |
|
|
2006 |
|
2005 |
|
|
|
Warrants exercisable prior to December 18, 2006 at an exercise price of $9.00 |
|
|
|
|
|
|
2,392,000 |
|
Warrants exercisable prior to July 11, 2010 at an exercise price of $4.35 |
|
|
2,815,258 |
|
|
|
|
|
|
|
|
Common shares issuable upon exercise of outstanding warrants |
|
|
2,815,258 |
|
|
|
2,392,000 |
|
|
|
|
The 2,392,000 warrants exercisable prior to December 18, 2006 have expired. No shares of
common stock have been issued as a result of exercise of any of these warrants.
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 6 Equity.
3. Expenditure Commitments
At December 31, 2006, the Company had contractual obligations for the conduct of clinical trials,
pre-clinical research and development, manufacture of clinical trial drug supply and manufacturing
process development of approximately $8,077,000. Of the expenditure commitments, clinical trial
amounts are based on the assumption that all patients enrolled in
10
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment due by period |
(In thousands) |
|
|
|
|
|
less than 1 |
|
1 - 3 |
|
|
|
|
|
More than |
Contractual Obligations |
|
Total |
|
Year |
|
Years |
|
3 - 5 Years |
|
5 Years |
|
|
|
Purchase Obligations |
|
$ |
8,077 |
|
|
$ |
4,715 |
|
|
$ |
3,000 |
|
|
$ |
362 |
|
|
$ |
|
|
|
Total |
|
$ |
8,077 |
|
|
$ |
4,715 |
|
|
$ |
3,000 |
|
|
$ |
362 |
|
|
$ |
|
|
|
|
|
No amounts have been included for future payments to Novogen which may arise in connection
with the license agreements for phenoxodiol, NV-143 and NV-196, the services agreement or the
manufacturing license 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 5 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, MEPL,
to Novogen and its subsidiaries, Novogen Laboratories Pty Limited and Novogen Research Pty Limited,
under the license agreement for phenoxodiol, the manufacturing license and supply agreement and the
services agreement. Novogen has guaranteed the performance of the obligations of Novogen Research
Pty Limited under the license agreement for phenoxodiol and the obligations of Novogen Laboratories
Pty Limited under the manufacturing license and supply agreement to MEPL. 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 MEPL guaranteeing financial support,
for a period of twelve months ending October 3, 2007, should it be unable to meet any of its
financial commitments.
11
4. Segment Information
The Companys focus is to continue the clinical and pre-clinical program currently underway for the
development and commercialization of phenoxodiol, NV-143 and NV-196. The business contains two
major segments based on geographic location.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Three Months Ended |
|
|
December 31, 2006 |
|
December 31, 2005 |
|
|
|
|
|
|
(In Thousands) |
|
|
|
|
USA |
|
Australia |
|
USA |
|
Australia |
|
|
|
Loss from operations |
|
$ |
(82 |
) |
|
$ |
(2,093 |
) |
|
$ |
(68 |
) |
|
$ |
(1,710 |
) |
Segment assets |
|
|
15,123 |
|
|
|
5,176 |
|
|
|
15,058 |
|
|
|
2,727 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
Six Months Ended |
|
|
December 31, 2006 |
|
December 31, 2005 |
|
|
(In Thousands) |
|
|
USA |
|
Australia |
|
USA |
|
Australia |
|
|
|
Loss from operations |
|
$ |
(1,854 |
) |
|
$ |
(8,201 |
) |
|
$ |
(98 |
) |
|
$ |
(3,483 |
) |
5. Related Party Transactions
License Agreement for Phenoxodiol
In September 2003, the Company entered into a license agreement pursuant to which Novogens
subsidiary, Novogen Research Pty Limited, granted to MEPL a worldwide non-transferable license
under its patents and patent applications and in its know-how to conduct clinical trials and
commercialize and distribute phenoxodiol products. The license 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 license 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 license fee payment due under the terms of the
license agreement. Also, MEPL paid $2,000,000 to Novogen in January 2005 and $4,000,000 in January
2006 which were the annual milestone license fee payments due under the license agreement. The
Company paid a second lump sum license fee of $5,000,000 to Novogen in July 2006 following the
raising of funds in a private placement. This license 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 license fee payment. Future amounts
payable to Novogen under terms of the license agreement are as follows:
1. Until the expiration of the exclusivity period of the license, MEPL must pay Novogen 2.5% of all
net sales and 25% of commercialization income. After the exclusivity period of the
license, 1.5% of net sales must be paid to Novogen. The preconditions to such payments have not yet
occurred.
12
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 license agreement with Novogen; or |
(b) |
|
the date of expiration or lapsing of the last licensed patent right which MEPL would, but for
the license granted in the license agreement, infringe in any country in the geographical
territory covered by the license agreement by doing in that country any of the things set out
in the license agreement. |
2. In addition to the amounts above, beginning in 2006, an $8,000,000 annual milestone license fee
is payable under the amended terms of the license agreement for each calendar year ending December
31 during the exclusivity period of the license. The December 31, 2006 license fee has been
deferred under the license amendment deed which is discussed below.
License Amendment Deed for Phenoxodiol
In June 2006, the Company entered into an amendment deed to the license agreement for phenoxodiol.
Pursuant to the original term of the license agreement for phenoxodiol the Company was required to
pay an $8,000,000 license milestone fee to Novogen Research Pty Limited in December 2006. The
amendment deed extends the date that the $8,000,000 license 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 license fee replaces the $8,000,000 December 31, 2006 milestone fee.
The license amendment deed provides that this next milestone license fee is not due until one of
the approvals set out above is obtained. As no approvals described above have been received no
milestone license fees have been accrued at December 31, 2006 or June 30, 2006.
License Agreement for NV-196 and NV-143
In May 2006, the Company entered into a second license 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 license agreement
is an agreement under which Novogens subsidiary, Novogen Research Pty Limited, grants to MEPL a
worldwide non-transferable license 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 license agreement covers uses of
NV-196 and NV-143 in the field of prevention, treatment or cure of cancer in humans
13
delivered in
all forms except topical applications. The license 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 license fee payment due under
the terms of the license agreement. The Company is required to make payments under the terms of
this second license agreement with Novogen as follows:
1. A lump sum license fee of $1,000,000 is payable to Novogen on the commencement date of the
license in consideration of the license granted. This initial lump sum license fee was paid to
Novogen in May 2006.
2. In further consideration of the license granted, MEPL must pay to Novogen the following
milestone license fees upon the occurrence of the corresponding milestone as set forth below;
a) the first license product containing NV-196 to reach a milestone as set forth below; and
b) the first licensed product containing NV-143 to reach a milestone as set forth below.
The milestone license fees are:
|
i) |
|
$1,000,000 on the date an investigational new drug application (IND) for
the licensed 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 licensed 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 licensed 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 licensed 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 license. The royalty rate is reduced by 50% if the licensed 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 licensed product from the FDA (or equivalent approval from a government agency in
any other country) until the expiration of the term.
License Option Deed
The license 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.
14
Services Agreement
The Company does not currently intend to directly employ any staff. Under the terms of the services
agreement, Novogen or its subsidiaries have agreed to provide services reasonably required by the
Company relating to the development and commercialization of phenoxodiol and other licensed
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.
Transactions giving rise to expenditures amounting to $1,039,000 and $651,000 were made under the
services agreement with Novogen during the six months ended December 31, 2006 and 2005,
respectively. Of these amounts, $642,000 and $296,000 related to service fees paid to Novogen for
research and development services provided in the six months ended December 31, 2006 and 2005,
respectively, reflecting the time spent by Novogen research staff on the development of
phenoxodiol. Additionally, $397,000 and $355,000 of the total expenditures during the six months
ended December 31, 2006 and 2005, respectively, related to costs incurred for administration and
accounting services provided by Novogen.
At December 31, 2006 and 2005, $395,000 and $116,000, respectively, were due and owing to Novogen
under the services agreement and are included in amounts due to related company.
Manufacturing License and Supply Agreement
Under the terms of the manufacturing license and supply agreement, MEPL has granted to one of
Novogens subsidiaries an exclusive, non-transferable sub license 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 be charged at cost plus a
50% markup.
Transactions giving rise to expenditures amounting to $89,000 and $226,000 were made under the
manufacturing license and supply agreement with Novogen during the six months ended December 31 ,
2006 and 2005, respectively.
At December 31, 2006 and 2005, $23,000 and $31,000, respectively, were due and owing to Novogen
under the manufacturing license and supply agreement and are included in amounts due to parent
company.
Novogen has taken the strategic decision not to manufacture large 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. The Company has 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), to
supply the necessary quantities of API for the Ovature trial and to complete the analytical and
stability work necessary for an NDA submission.
15
6. Equity
MEI is a development stage company incorporated in December 2000. MEI 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 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:
|
|
|
one share of common stock; and |
|
|
|
|
one warrant to purchase a share of common stock, exercisable prior to
December 18, 2006 at an exercise price equal to $9.00. |
The 2,392,000 warrants exercisable prior to December 18, 2006 have expired. No shares of common
stock have been issued as a result of exercise of any of these warrants.
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 the offering, Novogen
retained 86.9% of the Companys common stock.
In January 2006, the Company voluntarily cancelled the trading of its common stock on the
Alternative Investment Market of the London Stock Exchange (AIM).
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 exercise price and number of shares issuable upon exercise of such warrants are
subject to adjustment in the event of stock dividends, stock splits and other similar events. 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 $16.9 million net of $1.5 million commissions and other costs.
16
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 which was declared effective September 5, 2006.
On July 11, 2006, the Company entered into a standby equity distribution agreement (the SEDA),
with Cornell Capital Partners, LP (Cornell). 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. Commencing as of the effective date of the registration
statement and continuing for up to 24 months thereafter, 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. The
exercise price and number of shares issuable upon exercise of such warrants are subject to
adjustment in the event of stock dividends, stock splits and other similar events. The commitment
fee, comprising shares and warrants, is a share-based payment and has been accounted for in
accordance with FAS123R Share-based Payment. The fair values of shares and warrants issued have
been recognised directly in equity in the balance sheet and as selling, general and administration
expenses in the income statement in the quarter ended September 30, 2006.
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 of common stock under the terms of the standby equity
distribution agreement.
Under the terms of the PIPE, the Company is required to maintain an effective registration
statement. As the penalty for not maintaining this registration is less than the difference between
the value of registered shares and unregistered shares, the equity has been classified as permanent
equity.
Following the private placement, Novogen retained 78.1% of the Companys common stock.
7. Contingent Liability
In the event that the registration statement, filed in connection to the securities subscription
agreement, 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
17
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 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 reduce its limited
working capital and potentially need to raise additional funds.
18
Item 2: Managements Discussion and Analysis of Financial Condition and Results of Operation
Special Note Regarding Forward-Looking Statements
This quarterly report on Form 10-Q 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
quarterly 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. We have based these forward-looking statements largely on current
expectations and projections about future events and financial trends that we believe may affect
our 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, among other things:
|
|
|
our limited operating history; |
|
|
|
|
our inability to obtain any additional required financing or financing
available to us on acceptable terms; |
|
|
|
|
our failure to successfully commercialize our product candidates; |
|
|
|
|
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; |
|
|
|
|
uncertainties in clinical trial results; |
|
|
|
|
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; |
|
|
|
|
our inability to control the costs of manufacturing our products; |
|
|
|
|
continued cooperation and support of Novogen Limited (Novogen), our
parent company; |
|
|
|
|
competition and competitive factors; |
|
|
|
|
our inability to protect our patents or proprietary rights and obtain
necessary rights to third party patents and intellectual property to operate our business; |
|
|
|
|
our inability to operate our business without infringing the patents and
proprietary rights of others; |
|
|
|
|
costs stemming from our defence against third party intellectual property
infringement claims; |
|
|
|
|
difficulties in enforcement of civil liabilities against our officers and
directors who are residents of jurisdictions outside the United States;
|
19
|
|
|
general economic conditions; |
|
|
|
|
the failure of any products to gain market acceptance; |
|
|
|
|
technological changes; |
|
|
|
|
government regulation generally and the receipt of the regulatory
approvals; |
|
|
|
|
changes in industry practice; and |
|
|
|
|
one-time events. |
These risks are not exhaustive. Other sections of this quarterly report may include additional
factors which could adversely impact business and financial performance. In addition, our business
and financial performance may be affected by the factors that are discussed under Risk Factors in
the Annual Report on Form 10-K for the year ended June 30, 2006 and quarterly report on Form 10-Q
for the three month period ended September 30, 2006. Moreover, we operate in a very competitive and
rapidly changing environment.
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.
The following discussion is qualified in its entirety by, and should be read in conjunction with,
the more detailed information set forth in the financial statements and the notes thereto appearing
elsewhere in this report.
Overview
We are a development 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. 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 and commercialization of a drug candidate
called phenoxodiol. 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
20
to develop NV-196 and NV-143 for therapeutic indications not currently targeted by phenoxodiol.
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 phenoxodiol into later stages of development. As of December 31, 2006, we had
accumulated losses of $35,556,000.
We have not generated any revenues from operations since inception other than interest on cash
assets.
Expenses have consisted primarily of costs associated with conducting the clinical trials of
phenoxodiol, costs incurred under the license agreement for phenoxodiol, costs incurred under the
license agreement for NV-196 and NV-143, the services agreement and the manufacturing license 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 operating results 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 December 31, 2006 aggregate to
$12,913,000.
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 of 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
21
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 have control over the clinical development process, the completion date 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 licensed from Novogen. We will also continue to assess the opportunity to license other cancer
drugs developed by Novogen as the opportunities arise.
Clinical Trial 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 $404,000 have been accrued at December 31, 2006. These estimates are
based on the number of patients in each trial and the number of drug administration cycles
completed.
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
22
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.
The manufacturing process development of phenoxodiol 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 expenses of $811,000 have been accrued at December 31, 2006. These estimates are
based on the milestones completed for each of the service contracts.
Stock Based Compensation
We account for stock based payments in accordance with SFAS No. 123R Share-Based Payments. The
costs of these equity-settled transactions are determined using a binomial model to calculate the
fair value at the date on which they are granted. With respect to the fair value of 600,000
warrants issued July 11, 2006, in connection with the SEDA commitment fee, the following
assumptions were used:
|
|
|
|
|
Dividend yield |
|
|
0 |
% |
Expected volatility |
|
|
76 |
% |
Historical volatility |
|
|
76 |
% |
Risk-free interest rate |
|
|
5.45 |
% |
Expected life of warrant |
|
4 years |
Warrant fair value |
|
$ |
1.998 |
|
The dividend yield reflects the assumption that the current dividend payout, which is zero, will
continue with no anticipated increases. The expected life of the option is based on historical data
and is not necessarily indicative of exercise patterns that may occur. The expected volatility
reflects the assumption that the historical volatility is indicative of future trends, which may
also not necessarily be the actual outcome.
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.
23
Results of Operations
Three Months Ended December 31, 2006 and 2005
We recorded a consolidated loss of $2,175,000 and $1,778,000 for the three months ended December
31, 2006 and 2005, respectively.
Revenues: We received interest on cash assets and cash equivalents and short term investments of
$183,000 for the three months ended December 31, 2006 versus $130,000 for the three months ended
December 31, 2005. The increase was due to higher cash balances following the capital raising in
July 2006 combined with an increase in interest rates earned by our cash deposits.
Research and Development: Research and Development expenses increased $1,337,000 to $1,806,000 for
the three months ended December 31, 2006 compared to $469,000 for the three months ended December
31, 2005. The increase was due to a number of factors including the costs associated with the Phase
III OVATURE clinical trial. Costs were also incurred in connection with the production scale-up
activities of phenoxodiol and the manufacture of clinical trial drug supply. A further contributing
factor to the increase in the research and development expenses for the three months ended December
31, 2006 compared to corresponding period in 2005 was an increase in the research and development
service fees incurred under the services agreement with Novogen as a result of the additional time
spent on the OVATURE clinical trial and in developing the recently licensed product candidates
NV-196 and NV-143. We expect research and development clinical trial expenses to increase
significantly in the future due to the Phase III OVATURE study.
License Fees: No milestone license fees have been expensed in the three months ended December 31,
2006. Milestone license fees of $1,000,000 were expensed in the three months ended December 31,
2005 in connection with the annual milestone license fee of $4,000,000 due to Novogen on December
31, 2005.
Selling, General and Administrative: Selling, general and administrative expenses increased by
$113,000 to $552,000 for the three months ended December 31, 2006 compared to $439,000 for the
three months ended December 31, 2005. The increase was due primarily to the cost of printing a
shareholder newsletter and annual report, general legal costs and travel costs.
Foreign exchange gains/(losses) are included in selling, general and administrative expenses and
occur when revaluing cash denominated in foreign currencies and upon consolidation of our wholly
owned subsidiary Marshall Edwards Pty Ltd (MEPL). MEPL uses U.S. 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 December 31, 2006, we had
not established a foreign currency hedging program. Net foreign exchange losses during the three
months ended December 31, 2006 were $44,000 compared with net foreign exchange losses of $16,000
during the three months ended December 31, 2005.
24
Six Months Ended December 31, 2006 and 2005
We recorded a consolidated loss of $10,055,000 and $3,581,000 for the six months ended December 31,
2006 and 2005, respectively.
Revenues: We received interest on cash assets and cash equivalents and short term investments of
$318,000 for the six months ended December 31, 2006 versus $252,000 for the six months ended
December 31, 2005. The increase was due to higher cash balances following the capital raising in
July 2006 combined with an increase in interest rates earned by our cash deposits.
Research and Development: Research and Development expenses increased $1,678,000 to $2,733,000 for
the six months ended December 31, 2006 compared to $1,055,000 for the six months ended December 31,
2005. The increase was due to a number of factors including the initial fee following the
appointment of the clinical research organization which has commenced preparations for enrollment
of patients into the Phase III OVATURE clinical trial. Costs were also incurred in connection with
the production scale-up activities of phenoxodiol and the development of the NDA (New Drug
Application) documentation. A further contributing factor to the increase in the research and
development expenses for the six months ended December 31, 2006 compared to corresponding period in
2005 was an increase in the research and development service fees incurred under the services
agreement with Novogen as a result of the additional time spent on OVATURE clinical trial and in
developing the recently licensed product candidates NV-196 and NV-143. We expect research and
development clinical trial expenses to increase significantly in the future due to the Phase III
OVATURE study.
License Fees: Milestone license fees of $5,000,000 have been expensed in the six months ended
December 31, 2006. This milestone license 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 license fee payment. Milestone license fees of
$2,000,000 were expensed in the six months ended December 31, 2005 in connection with the annual
milestone license fee of $4,000,000 due to Novogen December 31, 2005.
Selling, General and Administrative: Selling, general and administrative expenses increased by
$1,862,000 to $2,640,000 for the six months ended December 31, 2006 compared to $778,000 for the
six months ended December 31, 2005. The increase was due primarily to the cost of the share-based
payment of the SEDA commitment fee paid to Cornell Capital Partners, LLP (Cornell) in the form of
shares and warrants which were valued at $1,642,000 and general corporate expenses including an
increase in legal compliance costs, travel and service fees paid to Novogen reflecting an increase
in corporate and accounting services and insurance.
Foreign exchange gains/(losses) are included in selling, general and administrative expenses and
occur when revaluing cash denominated in foreign currencies and upon consolidation of our wholly
owned subsidiary Marshall Edwards Pty Ltd (MEPL). MEPL uses U.S. dollars as its functional currency
and also engages in transactions in foreign currencies. Further,
25
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. Net foreign exchange losses during the six months ended December 31, 2006 were $25,000
compared with net foreign exchange losses of $19,000 during the three months ended December 31,
2005.
Liquidity and Capital Resources
At December 31, 2006, we had cash resources of $20,226,000 compared to $10,054,000 at June 30,
2006. The increase was due to the capital raising in July 2006, as described below, which was
partially offset by the payment of the $5,000,000 milestone license fee and expenditures in the
clinical trial program and other corporate expenses incurred in the period. Funds are invested in
short term market 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 in
the event of stock dividends, stock splits and other similar events. 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. The Company received proceeds
of $16.9 million net of $1.5 million commissions and other costs.
On July 11, 2006, we entered into a standby equity distribution agreement, which we refer to as the
SEDA, with 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.
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.
26
Source and Uses of Cash
Cash Used in Operating Activities
Cash used in operating activities for the six months ended December 31, 2006 was $6,786,000
compared to $1,503,000 for the same period in 2005. The increase in cash outflow of $5,283,000 for
the six months ended December 31, 2006 was due primarily to the license fee paid to Novogen of
$5,000,000 during the period.
Cash Requirements
We are commencing a pivotal clinical study to support marketing approval of phenoxodiol for ovarian
cancer. 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. We
expect to have significant cash requirements in connection with the OVATURE study.
Additional cash resources will also be required to continue the clinical trial programs for NV-196
and NV-143 which were licensed from Novogen in May 2006.
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 costs expected to be incurred in 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 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.
License Agreement for Phenoxodiol
In September 2003, we entered into a license agreement pursuant to which Novogens subsidiary,
Novogen Research Pty Limited, granted to MEPL a worldwide non-transferable license under its
patents and patent applications and in its know-how to conduct clinical trials and commercialize
and distribute phenoxodiol products. The license 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 license 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 license fee payment due under the terms of the license agreement.
Also, MEPL paid $2,000,000 to Novogen in January 2005 and $4,000,000 in January 2006 which were the
annual milestone license fee payments due under the license agreement. We paid a second lump sum
license fee of $5,000,000 to Novogen in July 2006 following the raising of funds in a private
placement. This license 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
27
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 license fee payment. Future amounts payable to
Novogen under terms of the license agreement are as follows:
1. Until the expiration of the exclusivity period of the license, MEPL must pay Novogen 2.5% of all
net sales and 25% of commercialization income. After the exclusivity period of the license, 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 license agreement with Novogen; or |
(b) |
|
the date of expiration or lapsing of the last licensed patent right which MEPL would, but for
the license granted in the license agreement, infringe in any country in the geographical
territory covered by the license agreement by doing in that country any of the things set out
in the license agreement. |
2. In addition to the amounts above, beginning in 2006, an $8,000,000 annual milestone license fee
is payable under the amended terms of the license agreement for each calendar year ending December
31 during the exclusivity period of the license. The December 31, 2006 license fee has been
deferred under the license amendment deed which is discussed below.
License Amendment Deed for Phenoxodiol
In June 2006, we entered into an amendment deed to the license agreement for phenoxodiol. Pursuant
to the original term of the license agreement for phenoxodiol we were required to pay an $8,000,000
license milestone fee to Novogen Research Pty Limited in December 2006. The amendment deed extends
the date that the $8,000,000 license 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 license fee replaces the $8,000,000 December 31, 2006 milestone fee.
The license amendment deed provides that the 2006 milestone license fee is not due until one of the
approvals set out above is obtained. Therefore no license fees have been accrued at December 31,
2006.
28
License Agreement for NV-196 and NV-143
In May 2006, we entered into a second license 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 license agreement is an
agreement under which Novogens subsidiary, Novogen Research Pty Limited, grants to MEPL a
worldwide non-transferable license 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 license
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 license 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 license fee
payment due under the terms of the license agreement. We are required to make payments under the
terms of this second license agreement with Novogen as follows:
1. A lump sum license fee of $1,000,000 is payable to Novogen on the commencement date of the
license in consideration of the license granted. This initial lump sum license fee was paid to
Novogen in May 2006.
2. MEPL must pay to Novogen the following milestone license fees upon the occurrence of the
corresponding milestone as set forth below:
a) the first licensed product containing NV-196 to reach a milestone as set forth below; and
b) the first licensed product containing NV-143 to reach a milestone as set forth below.
The milestone license fees are:
|
i) |
|
$1,000,000 on the date an IND for the licensed 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 licensed 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 licensed 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 licensed 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 license. The royalty rate is reduced by 50% if the licensed 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.
29
4. Minimum royalties of $3,000,000 per year are payable following the date of first receipt of an
NDA for a licensed 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
license 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 and licensing options available under the license option deed.
Off-Balance Sheet Arrangements
We do not currently have any off-balance sheet arrangements.
Contractual Obligations
The following table summarizes our contractual obligations at December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment due by period |
(In thousands) |
|
|
|
|
|
less than 1 |
|
1 - 3 |
|
|
|
|
|
More than |
Contractual Obligations |
|
Total |
|
Year |
|
Years |
|
3 - 5 Years |
|
5 Years |
|
|
|
Purchase Obligations |
|
$ |
8,077 |
|
|
$ |
4,715 |
|
|
$ |
3,000 |
|
|
$ |
362 |
|
|
$ |
|
|
Total |
|
$ |
8,077 |
|
|
$ |
4,715 |
|
|
$ |
3,000 |
|
|
$ |
362 |
|
|
$ |
|
|
No amounts have been included for future payments to Novogen which may arise in connection
with the license agreements for phenoxodiol, NV-196 and NV-143, the services agreement or the
manufacturing license and supply agreement as future payments under the terms of the agreements are
subject to termination provisions.
30
Item 3: Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
We place cash in on call deposits and short term investments 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 our 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 December 31, 2006, we had not established a foreign currency hedging program. Net
foreign exchange losses during the six months ended December 31, 2006 were $25,000 compared with
net foreign exchange losses of $19,000 during the six months ended December 31, 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.
31
Item 4: 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.
There were no changes in our internal control over financial reporting during the period covered by
this Form 10-Q that have materially affected, or are reasonably likely to affect, the Companys
internal control over financial reporting.
32
PART II OTHER INFORMATION
Item 4: Submission of Matters to a Vote of Security Holders
|
(a) |
|
The Company held its Annual Meeting of Stockholders on December
12, 2006. |
|
|
(b) |
|
Mr. Stephen Breckenridge and Professor
Bryan Williams were elected at the annual meeting for a term of three
years expiring at the 2009 annual meeting of stockholders and until
their respective successors have been duly elected and qualified. |
|
|
|
|
The following directors continued their term of office after the meeting:
Professor Paul Nestel
Mr. Philip Johnston
Professor Graham Kelly
Mr. Christopher Naughton |
|
|
(c) |
|
At the 2006 annual meeting, holders of the Companys common stock,
voted for the election of two members of the Companys Board of Directors
to serve for terms expiring at the annual meeting in 2009 and until their
respective successors have been duly elected and qualified. Holders of the
Companys common stock also voted for the ratification of BDO as the
Companys independent registered public accounting firm for the year
ending June 30, 2007 and for the approval of the issuance of the Companys
common stock to Cornell Capital Partners, LP pursuant to the Standby
Equity Distribution Agreement entered into by the Company and Cornell
Capital Partners LP on July 11, 2006. |
33
At the meeting the following votes for and against, as well as the number of abstentions and broker
non-votes were recorded for each matter as set forth below:
|
|
|
|
|
|
|
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Withhold |
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Broker non- |
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Matter |
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For |
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Against |
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Abstain |
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authority |
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votes |
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1. Election of Directors |
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Stephen Breckenridge |
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57,074,607 |
|
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293,525 |
|
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|
Professor Bryan Williams |
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|
57,074,907 |
|
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|
|
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|
293,225 |
|
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2. Ratification of the appointment of BDO as independent auditors for the fiscal year ending June 30, 2007. |
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|
57,308,996 |
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46,025 |
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13,111 |
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|
3. Approval of the issuance of the Companys common stock to Cornell Capital Partners, LP pursuant to the
Standby Equity Distribution Agreement entered into by the Company and Cornell Capital Partners LP on July
11, 2006. |
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|
52,861,474 |
|
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|
323,726 |
|
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|
12,400 |
|
|
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|
|
|
4,170,532 |
|
34
Item 6: Exhibits and Reports on Form 8-K
a) Exhibits
Exhibit Index
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Exhibits |
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|
31.1
|
|
Certification required by Rule 13a-14(a) or Rule 15d-14(a) |
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31.2
|
|
Certification required by Rule 13a-14(a) or Rule 15d-14(a) |
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32
|
|
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). |
35
SIGNATURES
Pursuant to the requirements 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.
|
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MARSHALL EDWARDS, INC. |
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/s/ DAVID SEATON
David R. Seaton
|
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Chief Financial Offer |
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|
|
(Duly Authorized Officer and
Principal Financial Officer) |
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|
Date: February 6, 2007
36
exv31w1
Exhibit 31.1
CERTIFICATION
I, Christopher Naughton, certify that:
1. |
|
I have reviewed this report on Form 10-Q of Marshall Edwards, Inc.; |
|
2. |
|
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; |
|
3. |
|
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; |
|
4. |
|
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: |
|
(a) |
|
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 those entities, particularly during the period in which this report is
being prepared: |
|
|
(b) |
|
Evaluated the effectiveness of the registrants disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this report based on such
evaluation; and |
|
|
(c) |
|
Disclosed in this report any change in the registrants internal control over
financial reporting that occurred during the registrants most recent fiscal quarter (the
registrants fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrants internal control
over financial reporting; and |
5. |
|
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: |
|
(a) |
|
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 |
|
|
(b) |
|
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. |
|
|
|
|
|
Date: February 6, 2007
|
|
/s/ CHRISTOPHER NAUGHTON
Christopher Naughton
|
|
|
|
|
Chief Executive Officer |
|
|
37
exv31w2
Exhibit 31.2
CERTIFICATION
I, David Ross Seaton, certify that:
1. |
|
I have reviewed this report on Form 10-Q of Marshall Edwards, Inc.; |
|
2. |
|
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; |
|
3. |
|
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; |
|
4. |
|
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: |
|
(a) |
|
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 these entities, particularly during the period in which this report is
being prepared: |
|
|
(b) |
|
Evaluated the effectiveness of the registrants disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this report based on such
evaluation; and |
|
|
(c) |
|
Disclosed in this report any change in the registrants internal control over
financial reporting that occurred during the registrants most recent fiscal quarter (the
registrants fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the Companys internal control
over financial reporting; and |
5. |
|
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: |
|
(a) |
|
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 |
|
|
(b) |
|
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. |
|
|
|
|
|
Date: February 6, 2007
|
|
/s/ DAVID SEATON
David R. Seaton
|
|
|
|
|
Chief Financial Officer |
|
|
38
exv32
Exhibit 32
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 or her knowledge:
1. |
|
The Registrants Quarterly Report on Form 10-Q for the period ended December 31, 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 |
2. |
|
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-Q 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-Q), irrespective of any
general incorporation language contained in such filing.
Dated: February 6, 2007
|
|
|
|
|
|
|
/s/ CHRISTOPHER NAUGHTON
Christopher Naughton
|
|
|
|
/s/ DAVID SEATON
David R. Seaton
|
|
|
Chief Executive Officer
|
|
|
|
Chief Financial Officer |
|
|
39