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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
 
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended August 31, 2013
 
OR
 
[  ]
TRANSITION REPORT UNDER SECTION 13 OF 15(d) OF THE EXCHANGE ACT OF 1934
 
From the transition period from              to             .
 
Commission File Number 000-52735

 
METASTAT, INC.
(Exact name of small business issuer as specified in its charter)
   
Nevada
20-8753132
(State or other jurisdiction of
incorporation or organization)
(IRS Employer
Identification No.)
 
8 Hillside Avenue, Suite 207
Montclair, New Jersey 07042
(Address of principal executive offices)
 
(973) 744-7618
(Issuer’s telephone number)
 
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 [X]  No [  ]
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes [X]  No [  ]

 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
 
       
Large accelerated filer
[  ]
Accelerated filer
[  ]
       
Non-accelerated filer
[  ]
Smaller reporting company
[X]
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes [  ]    No  [X]
 
As of October 14, 2013, 21,469,431 shares of the registrant’s common stock, $0.0001 par value, were issued and outstanding.

 
TABLE OF CONTENTS

 

 
PART I. FINANCIAL INFORMATION
 
Item  1.
Financial Statements
 
Unaudited Consolidated Balance Sheets as of August 31, 2013
 
Unaudited Statements of Consolidated Expenses for the three months ended August 31, 2013 and August 31, 2012 and July 22, 2009 (inception) to August 31, 2013
 
Unaudited Statements of Consolidated Cash Flows for the six months ended August 31, 2013 and August 31, 2012 and July 22, 2009 (inception) to August 31, 2013


 
MetaStat, Inc.
(A Development Stage Company)
Unaudited Consolidated Balance Sheets
 
     
August 31,
   
February 28,
 
     
2013
   
2013
 
               
ASSETS
 
           
               
CURRENT ASSETS
             
Cash
    $ 530,080     $ 969,188  
Prepaid Insurance
      73,309       -  
                   
Total Current Assets
      603,389       969,188  
                   
PROPERTY AND EQUIPMENT
                 
EQUIPMENT (net of accumulated depreciation of $19,200 and $1,271, respectively)
      48,888       53,326  
                   
TOTAL ASSETS
    $ 652,277     $ 1,022,514  
                   
                   
LIABILITIES AND STOCKHOLDERS' EQUITY            
                   
LIABILITIES
                 
                   
Accounts payable and accrued liabilities
    $ 72,060     $ 168,005  
Short Term Note Payable
      41,980       -  
Convertible debentures - net of discount of $252,091 and $71,543 respectively
      1,234,909       716,957  
Accrued interest payable
      64,429       1,940  
                   
TOTAL LIABILITIES
      1,413,378       886,902  
                   
STOCKHOLDERS' EQUITY
                 
Preferred stock, 10,000,000 shares authorized; no shares issued and outstanding
    -       -  
Common Stock, $0.0001 par value; 150,000,000 shares authorized; 21,469,435 and 21,054,418 shares issued and outstanding respectively
    2,147       2,106  
Paid-in-capital
      8,661,464       5,495,985  
Accumulated deficit as a development stage company
    (9,424,712 )     (5,362,479 )
Total  Equity
      (761,101 )     135,612  
                   
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
  $ 652,277     $ 1,022,514  
 
The accompanying notes are an integral part of the unaudited financial statements.


MetaStat, Inc.
(A Development Stage Company)
Unaudited Consolidated Statement of Expenses

   
Three Months
   
Three Months
   
Six Months
   
Six Months
   
Period from Inception (July 22, 2009)
 
   
ended
   
ended
   
ended
   
ended
   
to
 
   
August 31, 2013
   
August 31, 2012
   
August 31, 2013
   
August 31, 2012
   
August 31, 2013
 
                               
Revenue
                             
Interest income
  $ -     $ 116     $ 61     $ 348     $ 657  
Total Revenue
    -       116       61       348       657  
                                         
OPERATING EXPENSES
                                       
General & administrative
    354,409       540,840       927,303       873,698       3,592,487  
Research & development
    45,000       277,517       144,715       333,517       1,685,918  
Depreciation
    3,470       3,081       6,804       5,413       19,200  
Accretion - discount
    189,324       -       363,306       -       364,806  
Warrant Expense
    -       -       -       -       378,688  
Stock-based compensation
    648,087       11,075       2,620,166       11,075       3,384,270  
                                         
Total Operating Expenses
    1,240,290       832,513       4,062,294       1,223,703       9,425,369  
                                         
NET LOSS
  $ (1,240,290 )   $ (832,397 )   $ (4,062,233 )   $ (1,223,355 )   $ (9,424,712 )
                                         
Basic & Diluted Net Loss Per Share
  $ (0.06 )   $ (0.04 )   $ (0.19 )   $ (0.06 )        
                                         
Weighted shares outstanding
    21,300,995       21,053,335       21,300,995       20,707,357          
 
The accompanying notes are an integral part of the unaudited financial statements.



MetaStat, Inc.
(A Development Stage Company)
Unaudited Consolidated Statement of Cash Flows

   
Six
Months
ended
August 31, 2013
   
Six
Months
ended
August 31, 2012
   
Period from Inception (July 22, 2009) to August 31, 2013
 
         
         
 
                   
CASH FLOWS FROM OPERATING ACTIVITIES
                 
Net loss
  $ (4,062,233 )   $ (1,223,355 )   $ (9,424,712 )
Adjustments to reconcile net loss to net
                       
   cash used in  operating activities:
                       
        Depreciation
    6,804       5,413       19,200  
        Warrant expense
            -       378,688  
        Option expense
    1,296,174       -       1,296,174  
        Common stock issued for services
    1,323,992       11,075       2,088,097  
        Accretion of discount
    363,306       -       364,806  
        Changes in assets and liabilities
                       
              Prepaid Insurance
    (73,309 )     -       (73,309 )
              Accounts payable
    (95,945 )     (131,750 )     72,060  
              Accrued interest
    62,489       -       64,429  
                         
NET CASH USED IN OPERATING ACTIVITIES
    (1,178,722 )     (1,338,617 )     (5,214,567 )
                         
CASH FLOWS FROM INVESTING ACTIVITIES
                       
Cash paid for certificate of deposit
    -       (250,182 )     -  
Purchase of fixed assets
    (2,366 )     (38,812 )     (68,088 )
                         
NET CASH USED IN INVESTING ACTIVITIES
    (2,366 )     (288,994 )     (68,088 )
                         
CASH FLOWS FROM FINANCING ACTIVITIES
                       
Proceeds from sale of stock
    -       855,000       3,418,755  
Proceeds from subscription receivables
    -       865,000       865,000  
Payments on short-term debt
    (31,197 )     -       (31,197 )
Borrowings on short-term debt
    73,177       -       73,177  
Borrowings on convertible debentures
    700,000       -       1,487,000  
                         
NET CASH PROVIDED BY FINANCING ACTIVITIES
    741,980       1,720,000       5,812,735  
                         
NET INCREASE (DECREASE) IN CASH
    (439,108 )     92,389       530,080  
                         
Cash at the beginning of the year
    969,188       878,340       -  
                         
Cash at the end of the year
  $ 530,080     $ 970,729     $ 530,080  
                         
SUPPLEMENTAL DISCLOSURES:
                       
Interest Paid
  $ -     $ -     $ -  
Income taxes paid
  $ -     $ -     $ -  
                         
NON-CASH TRANSACTIONS
                       
Recapitalization of PVSO shareholders
  $ -     $ -     $ 8  
Debt discount
  $ 545,354     $ -     $ 616,897  
                         
 
The accompanying notes are an integral part of the unaudited financial statements.
 

METASTAT INC. and Subsidiary
(A Development Stage Company)
Notes to Condensed Consolidated Financial Statements
August 31, 2013 and August 31, 2012
(Unaudited)

NOTE 1 – DESCRIPTION OF BUSINESS AND GOING CONCERN

MetaStat, Inc. (“we,” “us,” “our,” the “Company,” or “MetaStat”) is a development stage life sciences company focused on developing and commercializing novel diagnostic technologies and therapeutics for the early and reliable prediction and treatment of systemic metastasis - cancer that spreads from a primary tumor through the bloodstream to other areas of the body. Systemic metastasis is responsible for ~90% of all solid tumor cancer related deaths and as such, we believe the more effective treatment of metastatic disease and/or the prevention of systemic metastasis is needed to improve patient outcomes.

Basis of Presentation

The accompanying unaudited consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, MetasStat BioMedical, Inc., a Delaware corporation. All significant intercompany balances and transactions have been eliminated in consolidation.  These interim financial statements have been prepared in conformity with generally accepted accounting principles (“GAAP”) in the United States consistent with those applied in, and should be read in conjunction with, the Company’s audited consolidated financial statements and related footnotes for the year ended February 28, 2013 included in the Company’s Annual Report on Form 10-K as filed with the United States Securities and Exchange Commission (“SEC”) on May 28, 2013. These financial statements reflect all adjustments, consisting only of normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of the Company’s financial position as of August 31, 2013 and its results of operations and cash flows for the interim periods presented and are not necessarily indicative of results for subsequent interim periods or for the full year. These interim financial statements do not include all of the information and footnotes required by GAAP for complete financial statements and allowed by the relevant SEC rules and regulations; however, the Company believes that its disclosures are adequate to ensure that the information presented is not misleading. Certain amounts in prior periods have been reclassified to conform to current presentation.

Going Concern
 
These financial statements have been prepared on a going concern basis, which implies the Company will continue to realize its assets and discharge its liabilities in the normal course of business. As of August 31, 2013, the Company has an accumulated deficit of $9,424,712. The continuation of the Company as a going concern is dependent upon continued financial support from its shareholders, the ability of the Company to obtain necessary equity and/or debt financing to continue operations, and the attainment of profitable operations. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern. The Company cannot make any assurances that additional financings will be completed on a timely basis, on acceptable terms or at all.  If the Company is unable to complete a debt or equity offering, or otherwise obtain sufficient financing when and if needed, it would negatively impact it’s business and operations, which could cause the price of its common stock to decline. It could also lead to the reduction or suspension of the Company’s operations and ultimately force the Company to go out of business. These financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.


NOTE 2- EQUITY

On April 5, 2013, the Company issued 303,013 shares of common stock to members of its members of its scientific advisory board and clinical advisory board vesting over a period of ten years or upon the listing of the Company on a national exchange. The Company valued the shares for a total fair value of $984,792 on the grant date and has amortized the expense each quarter based upon the vested portion. As of August 31, 2013, the Company has recognized $984,782 in stock compensation expense in connection with these shares.

On April 9, 2013, the Company issued 100,000 shares of common stock to an advisor and member of its Board of Directors for services. The Company valued the shares for a total fair value of $305,000 on the grant date and has amortized the expense each quarter based upon the vested portion. As of August 31, 2013, the Company has recognized $305,000 in stock compensation expense in connection with these shares.

On April 18, 2013, the Company issued 12,000 shares of common stock to a consultant for services. The Company valued the shares for a total fair value of $34,200 on the grant date and has amortized the expense each quarter based upon the vested portion. As of August 31, 2013, the Company has recognized $34,200 in stock compensation expense in connection with these shares.

NOTE 3 – STOCK OPTIONS

During the six months ended August 31, 2013, the Company issued options to purchase 823,500 shares of common stock at $3.25 per share to members of its management team, members of its Board of Directors, members of its scientific advisory board and clinical advisory board and a consultant. The options vest in four equal installments on each of May 31, 2013, August 31, 2013, November 30, 2013 and February 28, 2014 and expire on April 5, 2023. These options have a total fair value of $2,592,349, as calculated using the Black-Scholes model. Assumptions used in the Black-Scholes model included: (1) a discount rate of 1.72%; (2) an expected term of 10 years; (3) an expected volatility of 134%; and (4) zero expected dividends.  As of August 31, 2013, the Company recognized $1,296,174 in stock option expense.
 
The following table summarizes common stock options issued and outstanding:
 
   
Options
   
Weighted
average
exercise
price
   
Aggregate
intrinsic
value
   
Weighted
average
remaining
contractual
life (years)
 
                         
Outstanding at February 28, 2013
   
1,116,500
   
$
 0.68
   
$
2,526,500
     
8.86
 
Granted
   
823,500
   
 $
3.25
     
-
     
9.85
 
Exercised
   
 -
     
 -
     
-
     
-
 
Forfeited
   
 -
     
 -
     
-
     
-
 
Expired
   
 -
     
 -
     
-
     
-
 
                                 
Outstanding at August 31, 2013
   
1,940,000
   
$
 1.77
   
$
993,485
     
8.88
 

As of August 31, 2013, 896,500 options are exercisable at $0.68 per share with a weighted average life of 8.36 years and 823,500 options are exercisable at $3.25 with a weighted average life of 9.60 years. Additionally, 220,000 options with an exercise price of $0.68 and a weighted average life of 8.36 years have yet to vest.



NOTE 4 – WARRANTS

The following table summarizes common stock purchase warrants issued and outstanding:

   
Warrants
   
Weighted
average
exercise
price
   
Aggregate
intrinsic
value
   
Weighted
average
remaining
contractual
life (years)
 
                         
Outstanding at February 28, 2013
   
2,732,074
   
$
 1.12
   
$
6,489,388
     
3.52
 
Granted
   
78,480
     
2.95
     
-
     
3.89
 
Exercised
   
 -
     
 -
     
-
     
-
 
Forfeited
   
 -
     
 -
     
-
     
-
 
Expired
   
 -
     
 -
     
-
     
-
 
                                 
Outstanding at August 31 2013
   
2,810,554
   
$
 1.18
   
$
1,912,768
     
3.27
 
                                 
The following table summarizes common stock purchase warrants issued and outstanding:

Warrants exercisable at August 31, 2013 are:

Exercise
         
Weighted average
   
Exercisable number of
 
prices
   
Number of shares
   
remaining life (years)
   
shares
 
$
0.68
     
220,000
     
3.21
     
220,000
 
$
0.91
     
1,497,124
     
3.42
     
1,497,124
 
$
1.40
     
786,250
     
2.99
     
786,250
 
$
1.50
     
150,000
     
3.10
     
150,000
 
$
2.50
     
8,480
     
4.52
     
8,480
 
$
3.00
     
148,700
     
3.50
     
148,700
 

NOTE 5 – CONVERTIBLE NOTES

As of August 31, 2013, we have $1,487,000 aggregate principal amount of Convertible Promissory notes (the "Convertible Notes") outstanding.  Warrants are valued as a discount to convertible debt of $616,896 and can be converted into common stock within a four year period.  For the six  months ended August 31, 2013 $363,306 is recognized as accretion expensed. The Convertible Notes bear interest at the rate of 8% per annum, mature on December 31, 2013 and rank senior to the Company’s currently issued and outstanding indebtedness and equity securities.  Upon the closing by MetaStat of an equity or equity based financing or a series of equity or equity based financings (a “Qualified Financing”) resulting in gross proceeds to the Company of at least $3,500,000 in the aggregate inclusive of the Convertible Notes, the outstanding principal amount of the Convertible Notes together with all accrued and unpaid interest thereunder (the “Outstanding Balance”) shall automatically convert into such securities, including warrants, as are issued in the Qualified Financing, the amount of which shall be determined in accordance with the following formula: (the Outstanding Balance as of the closing of the Qualified Financing) x (1.15) / (the per security price of the securities sold in the Qualified Financing).  Commencing six months following the issuance date of the Convertible Notes, the Noteholders shall have the right, at their option, to convert the Outstanding Balance into shares of common stock at a conversion price of $2.50 per share. The Company analyzed the transaction for derivative liability and determined it did not apply.


NOTE 6 – SUBSEQUENT EVENTS

Lease Agreement
 
Effective as of September 1, 2013, the Company entered into an agreement of lease with Long Island High Technology Incubator, Inc. in connection with the Company’s new drug discovery research facility located in Stony Brook, New York. The term of the lease is for one year, from September 1, 2013 through August 31, 2014, and the rent payable thereunder is $28,000 per year, payable in monthly installments of $2,333.

Employment Agreements
 
On September 3, 2013, the Company entered into an employment agreement with Elizabeth Buck, Ph.D. to serve as the Company’s Chief Scientific Officer for Therapeutics until terminated in accordance with the terms of the agreement.  The employment agreement with Dr. Buck provides for an annual base salary of $175,000 and the issuance of 160,000 stock options, which options vest upon achieving certain milestones set forth in the agreement.  The employment agreement is terminable by either party at any time. In the event of termination by us without cause or by Dr. Buck for good reason not in connection with a change of control, as those terms are defined in the agreement, she is entitled to six months’ severance. In the event of termination by us without cause or by Dr. Buck for good reason in connection with a change of control, as those terms are defined in the agreement, she is entitled to twelve months’ severance.

The Company also entered into an employment agreement with Matthew O’Connor to serve as the Company’s Principal Scientist of Therapeutics, effective as of September 15, 2013, until terminated in accordance with the terms of the agreement.  The employment agreement with Mr. O’Connor provides for an annual base salary of $110,000 and the issuance of 30,000 stock options, which options vest upon achieving certain milestones set forth in the agreement.  The employment agreement is terminable by either party at any time. In the event of termination by us without cause or by Mr. O’Connor for good reason not in connection with a change of control, as those terms are defined in the agreement, he is entitled to three months’ severance. In the event of termination by us without cause or by Mr. O’Connor for good reason in connection with a change of control, as those terms are defined in the agreement, he is entitled to six months’ severance.


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

References in this report to “we,” “us,” “our,” “the Company” and “MetaStat” refer to MetaStat, Inc. and its subsidiary. References to the “SEC” refer to the U.S. Securities and Exchange Commission.
 
Forward-Looking Statements

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and the related notes included elsewhere in this interim report. Our consolidated financial statements have been prepared in accordance with U.S. GAAP. Our consolidated financial statements and the financial data included in this interim report reflect our reorganization and have been prepared as if our current corporate structure had been in place throughout the relevant periods. The following discussion and analysis contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”), including, without limitation, statements regarding our expectations, beliefs, intentions or future strategies that are signified by the words “expect,” “anticipate,” “intend,” “believe,” or similar language. All forward-looking statements included in this document are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. Our business and financial performance are subject to substantial risks and uncertainties. Actual results could differ materially from those projected in the forward-looking statements. In evaluating our business, you should carefully consider the information set forth under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended February 28, 2013. Readers are cautioned not to place undue reliance on these forward-looking statements.

The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes thereto and other financial information appearing in our Annual Report on Form 10-K for the year ended February 28, 2013.
 
Business Overview

We are a development stage life sciences company that is focused on developing and commercializing novel diagnostic technologies and therapeutics for the early and reliable prediction and treatment of systemic metastasis - cancer that spreads from a primary tumor through the bloodstream to other areas of the body. Systemic metastasis is responsible for ~90% of all solid tumor cancer related deaths and as such, we believe the more effective treatment of metastatic disease and/or the prevention of systemic metastasis is needed to improve patient outcomes.

We are developing two function-based diagnostic product lines, MetaSite Breast™ and MenaCalc™. The MetaSite Breast™ test measures the process of systemic metastasis and is intended for early stage breast cancer patients. MenaCalc™, a platform of diagnostic assays, based on the measurement of the balance of the Mena protein isoforms, is broadly applicable in solid epithelial-based cancers, including breast, prostate, lung and colorectal. Both our MetaSite Breast™ and MenaCalc™ diagnostics are designed to accurately predict the probability of systemic metastasis and to allow clinicians to better "customize" cancer treatment decisions by positively identifying patients with a high-risk of systemic metastasis who need aggressive therapy and by sparing patients with a low-risk of systemic metastasis from the harmful side effects and expense of chemotherapy.

Additionally, we are developing our MenaBloc™ therapeutic platform, with the goal of discovering inhibitors of the Mena pathway that can be advanced as anti-cancer therapeutics in multiple epithelial-based tumor types.


In January 2013, we completed a 500 patient study of the MetaSite Breast™ test. The data from this study has been analyzed and submitted for publication in a peer-reviewed journal. We anticipate establishing a laboratory that will be a clinical reference laboratory as defined under the Clinical Laboratory Improvement Amendments of 1988 (“CLIA”). Based on CLIA certification, we anticipate commencing initial marketing of the MetaSite Breast™ test in 2015 followed by our MenaCalc™ diagnostic assay for breast cancer in 2016. We plan to initially market to a select number of physicians and cancer centers in a few select markets in the United States. We believe a subsequent increase in demand will result from the publication of further studies in one or more peer-reviewed scientific/medical journals and the presentation of study results at gatherings such as the ASCO meeting and the San Antonio Breast Cancer Symposium. However, any increased demand for our product is not necessarily indicative of future growth rates, and we cannot assure you that this level of increased demand can be sustained. Initially, we expect our reference laboratory will have the capacity to process up to 1,000 tests per quarter, and our current expansion plan contemplates that we will have capacity to process up to 15,000 tests per quarter by the end of calendar 2015.

We believe the key factors that will drive broader adoption of our function-based diagnostic assays will be acceptance by healthcare providers of their clinical benefits, demonstration of the cost-effectiveness of using our tests, expansion of our sales force and increased marketing efforts and expanded reimbursement by third-party payors. Reimbursement by third-party payors is essential to our commercial success. In general, clinical laboratory testing services, when covered, are paid under various methodologies, including prospective payment systems and fee schedules. Reimbursement from payors depends upon whether a service is covered under the patient’s policy and if payment practices for the service have been established. As a relatively new diagnostic test, we may be considered investigational by payors and not covered under current reimbursement policies. Until we reach agreement with an insurer on contract terms or establish a policy for payment of our function-based diagnostic tests, we expect to recognize revenue on a cash basis.

Upon commercialization of the MetaSite Breast™ test, we will begin working with third-party payors to establish reimbursement coverage policies. Where policies are not in place, we will pursue case-by-case reimbursement. We believe that as much as 20% of our future revenues may be derived from tests billed to Medicare. We will begin working with many payors, including Medicare, to establish policy-level reimbursement, which, if in place, will allow us to recognize revenues upon submitting an invoice. We do not expect to recognize the majority of revenues in this manner until calendar 2015, at the earliest.
 
Since our inception, we have generated significant net losses. As of August 31, 2013, we had an accumulated deficit of $9,424,712. We incurred net losses of $1,240,290 and $823,397 in the quarters ended August 31, 2013 and August 31, 2012, respectively. We expect our net losses to continue for at least the next several years. We anticipate that a substantial portion of our capital resources and efforts will be focused on research and development both to develop additional tests for breast cancer and to develop products for other cancer indications, and to scale up our commercial organization, and other general corporate purposes. Our financial results will be limited by a number of factors, including establishment of coverage policies by third-party insurers and government payors, our ability in the short term to collect from payors often requiring a case-by-case manual appeals process, and our ability to recognize revenues other than from cash collections on tests billed until such time as reimbursement policies or contracts are in effect. Until we receive routine reimbursement and are able to record revenues as tests are processed and reports delivered, we are likely to continue reporting net losses.

Going Concern

As of August 31, 2013, the Company had an accumulated deficit of $9,424,712. The Company currently anticipates that its cash and cash equivalents will be sufficient to fund its operations through December 2013, without raising additional capital. The continuation of the Company as a going concern is dependent upon continued financial support from its shareholders, the ability of the Company to obtain necessary equity and/or debt financing to continue operations, and the attainment of profitable operations. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern. The Company cannot make any assurances that additional financings will be completed on a timely basis, on acceptable terms or at all.  If the Company is unable to complete a debt or equity offering, or otherwise obtain sufficient financing when and if needed, it would negatively impact it’s business and operations, which could cause the price of its common stock to decline. It could also lead to the reduction or suspension of the Company’s operations and ultimately force the Company to go out of business.


Critical Accounting Policies and Significant Judgments and Estimates
 
This discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as revenues and expenses during the reporting periods. We evaluate our estimates and judgments on an ongoing basis. We base our estimates on historical experience and on various other factors we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could therefore differ materially from those estimates under different assumptions or conditions.

Revenue Recognition

We have generated no revenues since our inception. Product revenues for our first product, the MetaSite Breast™ test, are expected to be generated from the projected commercial launch in 2015, and are expected to be recognized on a cash basis because we will have limited collection experience and a limited number of contracts.  In accordance with our policy, revenues for tests performed will be recognized on an accrual basis when the related costs are incurred, provided there is a contract or coverage policy in place and the following criteria are met:

persuasive evidence that an arrangement exists;
 
delivery has occurred or services rendered;
 
the fee is fixed and determinable; and
 
collectability is reasonably assured.

Determination of the last two criteria will be based on management’s judgment regarding the nature of the fee charged for products or services delivered and the collectability of those fees.

We expect to generally bill third-party payors for the MetaSite Breast™ test upon generation and delivery of a “Metastasis Score” report to the physician. Accordingly, we take assignment of benefits and the risk of collection with the third-party payor. We expect to bill the patient directly for amounts owed after multiple requests for payment have been denied or only partially paid by the insurance carrier. As a new test, the MetaSite Breast™ test may be considered investigational by payors and not covered under their reimbursement policies. Consequently, we expect to pursue case-by-case reimbursement where policies are not in place or payment history has not been established.

Financial Operations Overview

Revenues

We currently do not have any revenues. We expect to derive our revenues from product sales and operate in one industry segment. Initially, our product revenues will be derived solely from the sale of the MetaSite Breast™ test. Payors will be generally billed upon generation and delivery of a Metastasis Score report to the physician. Product revenues will be recorded on a cash basis unless a contract or policy is in place with the payor at the time of billing and collectability is reasonably assured.  Initially, all product revenues recognized will probably reflect cash collections.

Cost of Product Revenues

Cost of product revenues represents the cost of materials, direct labor, costs associated with processing tissue samples including histopathology, anatomical pathology, paraffin extraction, and quality control analyses, license fees and delivery charges necessary to render an individualized test result. Costs associated with performing our test will be recorded as tests are processed. License fees to third-party vendors would be recorded at the time product revenues are recognized or in accordance with other contractual obligations. We expect that license fees will represent a significant component of our cost of product revenues and are expected to remain so for the foreseeable future.
 
 
 

 
 
General and Administrative Expenses
 
General and administrative expenses from our inception through August 31, 2013 were $3,592,487. Our general and administrative expenses consist primarily of personnel related costs, legal costs, including intellectual property, accounting costs and other professional and administrative costs. 
 
Research and Development Expenses

Research and development expenses from our inception through August 31, 2013 were $1,685,918 and substantially all of these expenses were focused on the research and development of the MetaSite Breast™ test. During this time, the MetaSite Breast™ test was not the only product under development. Research and development expenses also represent costs incurred to develop our MenaCalc™ platform of diagnostic assays in breast, lung, and prostate cancers and initial research on our MenaBloc™ therapeutic platform.

We charge all research and development expenses to operations as they are incurred. All potential future product programs, apart from the MetaSite Breast™ test for breast cancer metastasis, are in the clinical research phase, and the earliest we expect another cancer program to reach the clinical development stage is late 2013. However, the expected time frame that a product related to one of these other cancers can be brought to market is uncertain given the technical challenges and clinical variables that exist between different types of cancers.

We do not record or maintain information regarding costs incurred in research and development on a program or project specific basis. Our research and development staff working under sponsored research agreements and consulting agreements and associated infrastructure resources are deployed across several programs. Many of our costs are thus not attributable to individual programs. We believe that allocating costs on the basis of time incurred by our employees does not accurately reflect the actual costs of a project.

As a result of the uncertainties discussed above, we are unable to determine the duration and completion costs of our research and development programs or when, if ever, and to what extent we will receive cash inflows from the commercialization and sale of a product.

Selling and Marketing Expenses

Our selling and marketing expenses that we expect to incur coincident with the launch of the MetaSite Breast™ test will consist primarily of personnel costs and education and promotional expenses. We expect these expenses will include the costs of educating physicians, laboratory personnel and other healthcare professionals regarding our technologies, how our MetaSite Breast™ test was developed and validated and the value of the quantitative information that the MetaSite Breast™ test provides. Selling and marketing expenses will also include the costs of sponsoring continuing medical education, medical meeting participation and dissemination of our scientific and economic publications related to the MetaSite Breast™ test. Sales and marketing expenses from our inception through August 31, 2013 were $0.


Results of Operations

Comparison of the Three Months Ended August 31, 2013 and August 31, 2012
 
Revenues.  There were no revenues for the three months ended August 31, 2013 and August 31, 2012, respectively, because we have not yet commercialized any of our function-based diagnostic tests.
 
Cost of Product Revenues.  No cost of product revenues were recorded in the three months ended August 31, 2013 and August 31, 2012, respectively, because we have not yet commercialized any of our function-based diagnostic tests.
 
General and Administrative Expenses.  General and administrative expenses totaled $354,409 for the three months ended August 31, 2013 as compared to $540,840 for the three months ended August 31, 2012. This represents a decrease of $186,431 for the three months ended August 31, 2013 over the three months ended August 31, 2012. This decrease was due in part to decreased costs for legal, including intellectual property, accounting and other professional costs.

Research and Development Expenses.  Research and development expenses were $45,000 for the three months ended August 31, 2013 as compared to $277,517 for the three months ended August 31, 2012. This represents a decrease of $232,517 for the three months ended August 31, 2013 over the three months ended August 31, 2012.  This decrease resulted primarily from the completion of the MetaSite Breast™ test study.

Selling and Marketing Expenses.  There were no selling and marketing expenses recorded for the three months ended August 31, 2013 and August 31, 2012, respectively, because we have not yet commercialized any of our function-based diagnostic tests.
 
Accretion Expense. Warrant expenses were $189,324 for the three months ended August 31, 2013 as compared to $0 for the three months ended August 31, 2012.
 
Stock-based Compensation.  Stock-based compensation was $648,087 for the three months ended August 31, 2013 as compared to $11,075 for the three months ended August 31, 2012.

Interest Income and Other Income/ Expense.  We recorded interest income of $0 during the three months ended August 31, 2013 and $116 during the three months ended August 31, 2012.

Interest Expense.  We made no interest payments on borrowings during the three months ended August 31, 2013 and August 31, 2012, respectively.

Net Loss.  As a result of the factors described above, we had a net loss of $1,240,290 for the three months ended August 31, 2013 as compared to $832,397 for the three months ended August 31, 2012.

Liquidity and Capital Resources

Since our inception, we have incurred significant losses and, as of August 31, 2013, we had an accumulated deficit of $9,424,712.  We have not yet achieved profitability and anticipate that we will continue to incur net losses for the foreseeable future. We expect that our research and development, general and administrative and selling and marketing expenses will continue to grow and, as a result, we will need to generate significant product revenues to achieve profitability. We may never achieve profitability.


Sources of Liquidity

Since our inception, substantially all of our operations have been financed through the sale of our common stock and convertible promissory notes. Through August 31, 2013, we had received net proceeds of $4,283,755 through the sale of common stock to investors and $1,487,000 from the sale of convertible promissory notes.  As of August 31, 2013, we had cash and cash equivalents of $530,080 and net debt of $1,234,909.  As a result of the most recent sale of shares of common stock and convertible promissory notes through August 31, 2013, we have issued and outstanding warrants to purchase 2,810,552 shares of our common stock at a weighted average exercise price of $1.18, which will result in proceeds to us of approximately $3.3 million if all outstanding warrants are exercised.

Cash Flows

As of August 31, 2013, we had $530,080 in cash and cash equivalents, compared to $969,188 on August 31, 2012. 

Net cash used in operating activities was $1,178,722 for the six months ended August 31, 2013 compared to $1,338,617 for the six months ended August 31, 2012. The decrease in cash used of $159,895 was primarily due to a reduction in professional fees.

Net cash used in investing activities was $2,366 for the six months ended August 31, 2013, compared to $288,994 for the six months ended August 31, 2012. This decrease of $286,628 was attributed to a decrease in cash paid for certificate of deposits and for the purchase of equipment. We expect amounts used in investing activities to increase in fiscal year 2013 and beyond as we grow our corporate operations, expand research and development activities and establish and add capacity in our commercial laboratory.

Net cash provided by financing activities during the six months ended August 31, 2013 was $741,980, compared to $1,720,000 for the six months ended August 31, 2012. Financing activities consisted primarily of the sale of convertible promissory notes and warrants for the six months ended August 31, 2013 and the sale our common stock and warrants for the six months ended August 31, 2012, respectively.

Contractual Obligations

As of August 31, 2013, we had the following contractual commitments:
 
   
Payments Due by Period
       
Less than
       
More than
Contractual Obligations
 
Total
   
1 Year
   
1-3 Years
   
4-5 Years
 
5 Years
   
(In thousands)
License Agreement
 
$
455
   
$
30
   
$
225
   
$
200
   
$
(a)
 
                                         
Second License Agreement
 
$
297
   
$
12
   
$
110
   
$
175
     
(b)
 
                                         
Third License Agreement  
$
297
   
$
12
   
$
110
   
$
175
     
(c)
 

(a) Amount of additional payments depends on several factors, including the duration of the License Agreement, which depends on expiration of the last patent to be issued pursuant to the License Agreement. That duration is uncertain because the last patent has not yet been issued.

(b) Amount of additional payments depends on several factors, including the duration of the Second License Agreement, which depends on expiration of the last patent to be issued pursuant to the Second License Agreement. That duration is uncertain because the last patent has not yet been issued.

(c) Amount of additional payments depends on several factors, including the duration of the Third License Agreement, which depends on expiration of the last patent to be issued pursuant to the Third License Agreement. That duration is uncertain because the last patent has not yet been issued.

License Agreement

The Company entered into a Patent and Technology License Agreement (the “License Agreement”) with the Albert Einstein College of Medicine of Yeshiva University, Massachusetts Institute of Technology, Cornell University, and the IFO-Regina Elena Cancer Institute (together the “Licensors”) during August 2010.  In conjunction with entering into the License Agreement, the Company also entered into a Stock Subscription Agreement (the “Subscription Agreement”) and a Stockholders Agreement (the “Stockholders Agreement”) with the Licensors, which included provisions such as participation rights in future financings, co-sale rights, and certain limited anti-dilution rights. The Subscription Agreement and Stockholders Agreement were terminated as of February 27, 2012.  The License Agreement grants the Company a world-wide exclusive license to materials and methods for use in the diagnosis and treatment of metastatic spread of solid tumor cancers.  In return, the Company has agreed to grant Company equity to the Licensors, to reimburse the Licensors patent expenses thus far incurred, to pay all future patent expenses, pay a royalty on any sales of product using licensed technology, as well as certain minimum royalties and milestone payments.

Pursuant to the License Agreement, we are required to make a series of annual minimum royalty or “license maintenance” payments under the License Agreement beginning on the first anniversary date, or August 26, 2011.  For a period of seven years on each anniversary, we are required to make additional payments in amounts that gradually increase beginning in year five. To date, we have satisfied the payments for 2011, 2012 and 2013 in the amount of $30,000, for each of such years. We are required to make additional payments of $30,000 in 2014, $50,000 in 2015, $75,000 in 2016 and $100,000 in 2017 and every year the license is in effect thereafter.

Second License Agreement and Third License Agreement

Additionally, effective in March 2012, the Company entered into two additional license agreements with the Albert Einstein College of Medicine of Yeshiva University (“Einstein”). The second license agreement with Einstein (the “Second License Agreement”) and the third license agreement with Einstein (the “Third License Agreement”) both cover pending patent applications, patent disclosures, cell lines and technology surrounding discoveries in the understanding of the underlying mechanisms of systemic metastasis in solid epithelial cancers. The Second License Agreement and the Third License Agreement both require certain customary payments such as a license signing fee, reimbursement of patent expenses, annual license maintenance fees, milestone payments, and the payment of royalties on sales of products or services covered under such agreements.

Pursuant to the Second License Agreement, we are required to make a series of annual minimum royalty or “license maintenance” payments beginning on the first anniversary date of the effective date, or January 3, 2013.  For a period of seven years on each anniversary, we are required to make additional payments in amounts that gradually increase beginning in year three. We have satisfied the license maintenance payment of $12,000 for the first anniversary in 2013. We are required to make additional payments of $12,000 in 2014, $30,000 in each of 2015, 2016, $50,000 in 2017, $75,000 in 2018 and $100,000 in 2019 and every year the license is in effect thereafter.

Pursuant to the Third License Agreement, we are required to make a series of annual minimum royalty or “license maintenance” payments beginning on the first anniversary date of the effective date, or January 3, 2013.  For a period of seven years on each anniversary, we are required to make additional payments in amounts that gradually increase beginning in year three. We have satisfied the license maintenance payment of $12,000 for the first anniversary in 2013. We are required to make additional payments of $12,000 in 2014, $30,000 in each of 2015, 2016, $50,000 in 2017, $75,000 in 2018 and $100,000 in 2019 and every year the license is in effect thereafter.

Beginning as early as the second half of calendar 2013, we intend to enter into arrangements for the acquisition of laboratory equipment, computer hardware and software, leasehold improvements and office equipment. We cannot at this time provide assurances that we will be able to enter into agreements with vendors on terms commercially favorable to us or that we will be able to enter into such arrangements without securing additional financing.

We currently sublease administrative and office space under a sublease on a month-to-month basis for at a cost of $1,200 per month.


Operating Capital and Capital Expenditure Requirements

We currently anticipate that our cash and cash equivalents will be sufficient to fund our operations through December 2013, without raising additional capital. We expect to continue to incur substantial operating losses in the future and to make capital expenditures to keep pace with the expansion of our research and development programs and to scale up our commercial operations, which we expect to fund in part with the proceeds of the recent financing activities. It may take several years to move any one of a number of product candidates in clinical research through the development and validation phases to commercialization. We expect that the remainder of the net proceeds and our existing cash and cash equivalents will be used to fund working capital and for capital expenditures and other general corporate purposes, such as licensing technology rights, partnering arrangements for the processing of tests outside the United States or reduction of contractual obligations. A portion of the net proceeds may also be used to acquire or invest in complementary businesses, technologies, services or products. We have no current plans, agreements or commitments with respect to any such acquisition or investment, and we are not currently engaged in any negotiations with respect to any such transaction.

The amount and timing of actual expenditures may vary significantly depending upon a number of factors, such as the progress of our product development, regulatory requirements, commercialization efforts, the amount of cash used by operations and progress in reimbursement. We expect that we will receive limited payments for the MetaSite Breast™ test billings from the beginning of our marketing efforts into the foreseeable future. As reimbursement contracts with third-party payors are put into place, we expect an increase in the number and level of payments received for the MetaSite Breast ™ test billings.

We cannot be certain that any of our future efforts to develop future products will be successful or that we will be able to raise sufficient additional funds to see these programs through to a successful result.
 
Our future funding requirements will depend on many factors, including the following:

  ●  
the rate of progress in establishing reimbursement arrangements with third-party payors;
   
  ●  
the cost of expanding our commercial and laboratory operations, including our selling and marketing efforts;
   
  ●  
the rate of progress and cost of research and development activities associated with expansion of products for breast cancer;
   
  ●  
the rate of progress and cost of research and development activities associated with products in the research phase focused on cancer, other than breast cancer;
   
  ●  
the cost of acquiring or achieving access to tissue samples and technologies;
   
  ●  
the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights;
   
  ●  
the effect of competing technological and market developments;
 
  ●  
the cost and delays in product development as a result of any changes in regulatory oversight applicable to our products; and
   
  ●  
the economic and other terms and timing of any collaborations, licensing or other arrangements into which we may enter.
 

Until we can generate a sufficient amount of product revenues to finance our cash requirements, which we may never do, we expect to finance future cash needs primarily through public or private equity offerings, debt financings, borrowings or strategic collaborations. The issuance of equity securities may result in dilution to stockholders. We cannot make any assurances that additional financings will be completed on a timely basis, on acceptable terms or at all. If we are unable to complete a debt or equity offering, or otherwise obtain sufficient financing when and if needed, it would negatively impact our business and operations, which could cause the price of our common stock to decline. It could also lead to the reduction or suspension of our operations and ultimately force the Company to go out of business.
 
Item 3.
Quantitative and Qualitative Disclosures about Market Risks
 
Not applicable.
 
Item 4.
Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness, as of August 31, 2013, of the design and operation of our disclosure controls and procedures, as such term is defined in Exchange Act Rules 13a-15(e) and 15d-15(e). Based on this evaluation, our principal executive officer and principal financial officer have concluded that, as of such date, our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
 
 Changes in Internal Control over Financial Reporting
 
None.
 
PART II. OTHER INFORMATION
 
Item  1.
Legal Proceedings
 
None.
 
Item  1A.
Risk Factors

There have been no material changes in the Company’s risk factors from those previously disclosed in the Company’s Annual Report on Form 10-K, initially filed with the SEC on May 28, 2013, except for the following risk factor:

If the Company is unable to continue as a going concern, its securities will have little or no value.

The report of the Company's independent registered public accounting firm that accompanies the Company's audited consolidated financial statements for the years ended February 28, 2013 and February 29, 2012 contains a going concern qualification in which such firm expressed substantial doubt about the Company's ability to continue as a going concern. As of August 31, 2013, the Company had an accumulated deficit of $9,424,712.  The Company currently anticipates that its cash and cash equivalents will be sufficient to fund its operations through December 2013, without raising additional capital. The continuation of the Company as a going concern is dependent upon continued financial support from its shareholders, the ability of the Company to obtain necessary equity and/or debt financing to continue operations, and the attainment of profitable operations. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern. The Company cannot make any assurances that additional financings will be completed on a timely basis, on acceptable terms or at all.  If the Company is unable to complete a debt or equity offering, or otherwise obtain sufficient financing when and if needed, it would negatively impact it’s business and operations, which could cause the price of its common stock to decline. It could also lead to the reduction or suspension of the Company’s operations and ultimately force the Company to go out of business.

 
Item  2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
None.
 
Item 3.
Defaults Upon Senior Securities
 
None.
 
Item  4.
Mine Safety Disclosures
 
None.
 
Item 5.
Other Information
 
None.
 
Item 6.
 
(b)
Exhibits
 
   
Exhibit
No.
Description
   
31.1
Certification of Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
31.2
Certification of Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
32.1
Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   
32.2
Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   
101
Interactive Data Files
 

 
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.
 
       
   
METASTAT, INC.
       
Date: October 15, 2013
 
By:
/s/ Oscar L. Bronsther
     
Oscar L. Bronsther, M.D., F.A.C.S.
Chief Executive Officer
(Principal Executive Officer)
       
 

EXHIBIT INDEX
 
   
 
Exhibit
No.
Description
   
31.1
Certification of Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
31.2
Certification of Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
32.1
Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   
32.2
Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   
101
Interactive Data Files
 
 

 
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