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EX-32.1 - CERTIFICATION OF THE PRINCIPAL EXECUTIVE AND FINANCIAL OFFICER, PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 - MetaStat, Inc.ex32-1.htm
EX-31.1 - CERTIFICATION OF THE PRINCIPAL EXECUTIVE AND FINANCIAL OFFICER, PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 - MetaStat, Inc.ex31-1.htm


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 November 30, 2015
 
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.)
 
27 Drydock Ave, 2nd Floor
Boston, Massachusetts 02210
(Address of principal executive offices)
 
(617) 531-6500
(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 (Sec.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
[   ]  (Do not check if a smaller reporting company)
Smaller reporting company
[X]
 
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 January 13, 2016, there were 1,851,201 shares of the registrant’s common stock, $0.0001 par value, issued and outstanding.

 
 



 
 
TABLE OF CONTENTS

 
PART I. FINANCIAL INFORMATION
 
Item  1.   Financial Statements
 
MetaStat, Inc.
Condensed Consolidated Balance Sheets
 
   
November 30,
   
February 28,
 
   
2015
   
2015
 
ASSETS
 
(Unaudited)
   
(Audited)
 
Current Assets:
           
Cash and cash equivalents
  $ 264,917     $ 257,820  
Notes receivable
    125,000       -  
Prepaid expenses
    121,154       38,748  
    Total Current Assets
    511,071       296,568  
                 
Equipment
               
(net of accumulated depreciation of $145,630 and $96,089, respectively)
    520,818       526,606  
Refundable deposits
    43,600       278,952  
Deferred offering costs
    151,566       -  
                 
TOTAL ASSETS
  $ 1,227,055     $ 1,102,126  
                 
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
               
                 
LIABILITIES
               
Current Liabilities:
               
Accounts payable
  $ 354,064     $ 293,152  
Accrued expenses
    202,915       4,565  
Current portion of capital lease
    -       99,965  
Note payable (net of discount $354,323)
    1,076,552       -  
Accrued interest payable
    32,000       2,351  
Accrued dividends on Series B Preferred Stock
    47,369       16,767  
    Total Current Liabilities
    1,712,900       416,800  
                 
Capital lease
    -       169,676  
Derivative warrant liability
    300,151       273,000  
TOTAL LIABILITIES
    2,013,051       859,476  
                 
STOCKHOLDERS' (DEFICIT) EQUITY
               
                 
Series A convertible preferred stock ($0.0001 par value; 1,000,000 shares authorized;  874,257 shares issued and outstanding as of November 30, 2015 and February 28, 2015,respectively)
    87       87  
Series B convertible preferred stock ($0.0001 par value; 1,000 shares authorized; 646 and 229 shares issued and outstanding as of November 30, 2015 and February 28, 2015, respectively)
    -       -  
Common Stock, ($0.0001 par value; 150,000,000 shares authorized; 1,851,201 and 1,831,483 shares issued and outstanding as of November 30, 2015 and February 28, 2015, respectively)
    185       183  
  Additional paid-in-capital
    21,509,931       18,965,529  
  Accumulated deficit
    (22,296,199 )     (18,723,149 )
  Total stockholders' (deficit) equity
    (785,996 )     242,650  
                 
TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
  $ 1,227,055     $ 1,102,126  
 
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.


MetaStat, Inc.
Unaudited Condensed Consolidated Statements of Operations
 
    Three Months Ended     Nine Months Ended  
   
November 30, 2015
   
November 30, 2014
   
November 30, 2015
   
November 30, 2014
 
                         
                         
Revenue
  $ -     $ -     $ -     $ -  
    Total Revenue
    -       -       -       -  
                                 
Operating Expenses
                               
General & administrative
    656,929       1,062,221       2,681,857       2,853,569  
Research & development
    405,911       287,561       943,205       1,031,517  
    Total Operating Expenses
    1,062,840       1,349,782       3,625,062       3,885,086  
                                 
Other Expenses (income)
                               
Interest expense
    123,918       303       169,279       679,432  
Other income, net
    7       23,873       (140,129 )     20,714  
Beneficial conversion feature
    -       -       -       2,324,758  
Loss on securities held for sale
    -       33,707       -       33,707  
Change in fair value of warrant liability
    49,507       -       (123,393 )     -  
 Change in fair value of put embedded in note payable
    -       -       3,134       -  
Settlement expense
    -       -       39,097       -  
    Total Other Expenses (Income)
    173,432       57,883       (52,012 )     3,058,611  
                                 
Net Loss
  $ (1,236,272 )   $ (1,407,665 )   $ (3,573,050 )   $ (6,943,697 )
                                 
Loss attributable to common shareholders and loss per common share:
                         
                                 
Net loss
  $ (1,236,272 )   $ (1,407,665 )   $ (3,573,050 )   $ (6,943,697 )
 Deemed dividend on Series B Preferred Stock issuance
      -       (1,067,491 )     -  
 Accrued dividends on Series B Preferred Stock
    (70,590 )     -       (195,057 )     -  
Loss attributable to common shareholders
  $ (1,306,862 )   $ (1,407,665 )   $ (4,835,598 )   $ (6,943,697 )
                                 
Net loss per share, basic and diluted
  $ (0.72 )   $ (0.79 )   $ (2.67 )   $ (4.30 )
                                 
Weighted average of shares outstanding
    1,821,182       1,779,662       1,812,825       1,615,339  
 
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.


MetaStat, Inc.
Unaudited Condensed Consolidated Statements of Cash Flows
 
   
Nine Months Ended
 
   
November 30, 2015
   
November 30, 2014
 
Cash Flows from Operating Activities:
           
Net loss
  $ (3,573,050 )   $ (6,943,697 )
Adjustments to reconcile net loss to net cash used in operating activities:
               
Depreciation
    72,422       40,258  
Share-based compensation
    724,526       1,173,639  
Loss on assets and securities held for sale
    10,196       33,707  
Loss on settlement of capital lease
    8,820       -  
Accretion expense
    129,354       539,319  
Beneficial conversion feature
    -       2,324,759  
Amortization of deferred financing costs
    -       60,523  
Change in fair value of warrant liability
    (123,393 )     -  
Change in fair value of put embedded in note payable
    3,134       -  
Net changes in assets and liabilities:
               
Other receivable
    -       20,000  
Prepaid expenses and other current assets
    24,844       46,226  
Refundable deposits
    (3,600 )     (278,952 )
Accounts payable
    60,912       251,599  
Accrued expenses
    198,350       37,190  
Interest payable
    29,649       63,712  
    Net cash (used in) operating activities
    (2,437,836 )     (2,631,717 )
                 
Cash Flows from Investing Activities:
               
Note receivable
    (50,000 )     -  
Proceeds received from settlement of capital lease
    2,897       -  
Proceeds from sale of investment
    -       1,142,926  
Purchase of equipment
    (151,830 )     (65,645 )
    Net cash (used in) provided by investing activities
    (198,933 )     1,077,281  
                 
Cash Flows from Financing Activities:
               
Proceeds from issuance of notes
    1,200,000       615,000  
Payment of debt issuance costs
    (88,592 )     -  
Proceeds from issuance of common stock and warrants, net
    -       750,000  
Re-purchase of common stock and warrants
    (111,563 )     -  
Proceeds from issuance of Series B preferred stock and warrants, net
    1,945,244       -  
Payment of convertible notes
    -       (100,000 )
Payment of short-term debt
    (107,250 )     (30,955 )
Payment of capital lease obligation
    (42,407 )     (93,840 )
Deferred offering costs
    (151,566 )     -  
    Net cash provided by financing activities
    2,643,866       1,140,205  
                 
Net increase in cash and cash equivalents
    7,097       (414,231 )
                 
Cash and cash equivalents at the beginning of the period
    257,820       483,408  
Cash and cash equivalents at the end of the period
  $ 264,917     $ 69,177  
                 
Supplemental Disclosure of Non-Cash Financing Activities:
               
Warrant liability associated with note payable
  $ 150,544     $ -  
Placement agent warrants issued with note payable
  $ 16,800     $ -  
Beneficial conversion feature associated with the convertible notes
  $ -     $ 45,746  
Warrants issued with convertible notes
  $ -     $ 127,289  
Issuance on lease financing for fixed assets
  $ -     $ 318,603  
Securities held-for-sale exchanged for common stock and preferred shares
  $ -     $ 1,000,000  
Common stock and warrants issued for conversion of debt
  $ -     $ 3,558,413  
Accrued offering costs
  $ -     $ 38,950  
Securities exchanged for preferred shares
  $ -     $ 256,633  
Financing of insurance premium through short-term debt
  $ 107,250     $ 93,840  
Note receivable received for sale of assets
  $ 75,000     $ -  
Warrants issued to placement agents
  $ 175,241     $ -  
Series B Preferred PIK dividend
  $ 164,454     $ -  
Series B Preferred Stock accrued dividends
  $ 195,057     $ -  
Capital lease settled against deposit
  $ 227,235     $ -  

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
 

NOTE 1 – DESCRIPTION OF BUSINESS AND GOING CONCERN

MetaStat, Inc. (“we,” “us,” “our,” the “Company,” or “MetaStat”) is a pre-commercial molecular diagnostic company focused on the development and commercialization of novel diagnostics that provide oncologists with actionable information to optimize treatment strategies based on the specific nature or “metastatic potential” of each patients tumor.  We believe cancer treatment strategies can be personalized and outcomes improved through new diagnostic tools that identify the aggressiveness and metastatic potential of primary tumors. The Company was incorporated on March 28, 2007 under the laws of the State of Nevada.

Basis of Presentation

The accompanying unaudited consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, MetaStat Biomedical, Inc., a Delaware corporation and all significant intercompany balances have been eliminated by consolidation.

These interim unaudited financial statements have been prepared in conformity with generally accepted accounting principles (“GAAP”) in the United States and should be read in conjunction with, the Company’s audited consolidated financial statements and related footnotes for the year ended February 28, 2015 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, 2015. These unaudited 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 November 30, 2015 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.

Reverse Stock Split

On October 8, 2015, we effected a 1-for-15 reverse stock split of our common stock, whereby every 15 shares of issued and outstanding common stock became 1 share of newly issued and outstanding common stock. The reverse stock split was approved by our stockholders at a special stockholders meeting on June 22, 2015.  The purpose of the reverse stock split was to qualify for the minimum stock price listing requirement for a planned up-listing to a national securities exchange including the NASDAQ Capital Market or NYSE Market.

All reference in the document to the number of shares, price per share and weighted average number of shares outstanding of our common stock prior to the reverse stock split have been adjusted to reflect the reverse stock split on a retroactive basis.

Going Concern
 
The accompanying unaudited financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has experienced net losses and negative cash flows from operations since its inception. The Company has sustained cumulative losses of $22,296,199 as of November 30, 2015 and has not generated revenues or positive cash flows from operations.  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 available to it and, if available, 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 its business and operations and could also lead to the reduction or suspension of the Company’s operations and ultimately force the Company to cease operations. 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.

 
-4-

MetaStat, Inc.
Notes to Condensed Consolidated Financial Statements

 
NOTE 2 – CAPITAL STOCK

The Company has authorized 160,000,000 shares of capital stock, par value $0.0001 per share, of which 150,000,000 are shares of common stock and 10,000,000 are shares of “blank-check” preferred stock.
 
Our Board is empowered, without stockholder approval, to issue preferred stock with dividend, liquidation, conversion, voting or other rights, which could adversely affect the voting power or other rights of the holders of common stock. The preferred stock could be utilized as a method of discouraging, delaying or preventing a change in control.
 
Common Stock
 
The holders of our common stock are entitled to one vote per share. In addition, the holders of our common stock will be entitled to receive ratably such dividends, if any, as may be declared by our Board out of legally available funds; however, the current policy of our Board is to retain earnings, if any, for operations and growth. Upon liquidation, dissolution or winding-up, the holders of our common stock will be entitled to share ratably in all assets that are legally available for distribution.
 
Series A Convertible Preferred Stock
 
Pursuant to the Certificate of Designation of Rights and Preferences of the Series A Preferred Stock (the “Series A Certificate of Designation”), the terms of the Series A Preferred Stock are as follows:

Ranking

The Series A Preferred Stock will rank senior to our common stock with respect to distributions of assets upon the liquidation, dissolution or winding up of the Company.

Dividends

The Series A Preferred Stock is not entitled to any dividends.

Liquidation Rights

In the event of any liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, the holders of the Series A Preferred Stock shall be entitled to receive out of the assets of the Company, whether such assets are capital or surplus, for each share of Series A Preferred Stock an amount equal to the fair market value as determined in good faith by the Board.

Voluntary Conversion; Anti-Dilution Adjustments

Each fifteen (15) shares of Series A Preferred Stock shall be convertible into one share of common stock (the “Series A Conversion Ratio”). The Series A Conversion Ratio is subject to customary adjustments for issuances of shares of common stock as a dividend or distribution on shares of the common stock, or mergers or reorganizations.

Voting Rights
 
The Series A Preferred Stock has no voting rights. The common stock into which the Series A Preferred Stock is convertible shall, upon issuance, have all of the same voting rights as other issued and outstanding common stock, and none of the rights of the Series A Preferred Stock.
 
Series B Convertible Preferred Stock
 
Pursuant to the Certificate of Designation of Rights and Preferences of the Series B Preferred Stock (the “Series B Certificate of Designation”), the terms of the Series B Preferred Stock are as follows:
 
Ranking

The Series B Preferred Stock will rank senior to the Company’s Series A Convertible Preferred Stock and common stock with respect to distributions of assets upon the liquidation, dissolution or winding up of the Company.

Stated Value
 
Each share of Series B Preferred Stock will have a stated value of $5,500, subject to adjustment for stock splits, combinations and similar events (the “Stated Value”).

 
-5-

MetaStat, Inc.
Notes to Condensed Consolidated Financial Statements

 
Dividends

Cumulative dividends on the Series B Preferred Stock accrue at the rate of 8% of the Stated Value per annum, payable quarterly on March 31, June 30, September 30, and December 31 of each year, from and after the date of the initial issuance.  Dividends are payable in kind in additional shares of Series B Preferred Stock valued at the Stated Value or in cash at the sole option of the Company. At November 30, 2015 and February 28, 2015, the dividend payable to the holders of the Series B Preferred stocks amounted to $47,369 and $16,767, respectively. During the three and nine months ended November 30, 2015, the Company issued 12.6658 and 29.9012 shares of Series B Preferred Stock, respectively, for payment of dividends amounting to $69,661 and $164,455.

Liquidation Rights

If the Company voluntarily or involuntarily liquidates, dissolves or winds up its affairs, each holder of the Series B Preferred Stock will be entitled to receive out of the Company’s assets available for distribution to stockholders, after satisfaction of liabilities to creditors, if any, but before any distribution of assets is made on the Series A Preferred Stock or common stock or any of the Company’s shares of stock ranking junior as to such a distribution to the Series B Preferred Stock, a liquidating distribution in the amount of the Stated Value of all such holder’s Series B Preferred Stock plus all accrued and unpaid dividends thereon. At November 30, 2015 and February 28, 2015, the value of the liquidation preference of the Series B Preferred stocks aggregated to approximately $3,600,074 and $1,274,000, respectively.

Conversion; Anti-Dilution Adjustments

Each share of Series B Preferred Stock will be convertible at the holder’s option into common stock in an amount equal to the Stated Value plus accrued and unpaid dividends thereon through the conversion date divided by the then applicable conversion price. The initial conversion price is $8.25 per share (the “Series B Conversion Price”) and is subject to customary adjustments for issuances of shares of common stock as a dividend or distribution on shares of common stock, or mergers or reorganizations, as well as “full ratchet” anti-dilution adjustments for future issuances of other Company securities (subject to certain standard carve-outs) at prices less than the applicable Series B Conversion Price.
 
The Series B Preferred Stock is subject to automatic conversion (the “Mandatory Conversion”) at such time when the Company’s common stock has been listed on a national stock exchange such as the NASDAQ, New York Stock Exchange or NYSE MKT; provided, that, on the Mandatory Conversion date, a registration statement providing for the resale of the shares of common stock underlying the Series B Preferred Stock is effective. In the event of a Mandatory Conversion, each share of Series B Preferred Stock will convert into the number of shares of common stock equal to the Stated Value plus accrued and unpaid dividends divided by the applicable Series B Conversion Price.
 
Voting Rights

On March 27, 2015, the holders of the Series B Preferred Stock entered into an Amended and Restated Series B Preferred Purchase Agreement, whereby the Company filed an Amended and Restated Series B Preferred Certificate of Designation. The Amended and Restated Series B Preferred Certificate of Designation provides that the holders of the Series B Preferred Stock shall be entitled to the number of votes equal to the number of shares of common stock into which such Series B Preferred Stock could be converted for purposes of determining the shares entitled to vote at any regular, annual or special meeting of stockholders of the Company, and shall have voting rights and powers equal to the voting rights and powers of the common stock (voting together with the common stock as a single class).

Most Favored Nation

For a period of up to 30 months after March 31, 2015, if the Company issues any New Securities (as defined below) in a private placement or public offering (a “Subsequent Financing”), the holders of Series B Preferred Stock may exchange all of the Series B Preferred Stock at their Stated Value plus all Series A Warrants (as defined below) issued to the Series B Preferred Stock investors in the Series B Private Placement for the securities issued in the Subsequent Financing on the same terms of such Subsequent Financing.  This right expires upon the earlier of (i) September 30, 2017 and (ii) the consummation of a bona fide underwritten public offering in which the Company receives aggregate gross proceeds of at least $5,000,000.  ”New Securities” means shares of the common stock, any other securities, options, warrants or other rights where upon exercise or conversion the purchaser or recipient receives shares of the common stock, or other securities with similar rights to the common stock, subject to certain standard carve-outs.

See Note 3 for the accounting treatment of the Series B Preferred Stock.

 
-6-

MetaStat, Inc.
Notes to Condensed Consolidated Financial Statements

 
NOTE 3 – EQUITY TRANSACTIONS

Issuances of common stock for services

During the nine months ended November 30, 2015, the Company issued an aggregate of 28,001 shares of common stock to consultants for services that vested immediately and 6,667 shares of common stock to a consultant for services that vest over 6 months.  The weighted average fair value of these shares of common stock amounted to $4.96.

During the three and nine months ended November 30, 2015, the Company terminated a contract with a consultant whereby the consultant returned an aggregate of 4,222 shares of common stock previously issued to the consultant and the Company reduced stock-based expense in the amount of $22,164.

During the nine months ended November 30, 2014, the Company issued an aggregate of 20,001 shares of common stock to consultants for services that vested immediately, and 31,504 shares of common stock to members of its Board that vested immediately, 12,987 shares of common stock to members of its Board that vested one year after issuance and 1,334 shares of common stock to an employee that will vest upon a certain milestone being reached.  The weighted average fair value of these shares of common stock amounted to $13.78.

During the three and nine months ended November 30, 2014, the Company modified the vesting term of 16,668 shares of common stock previously issued to certain members of its Board, resulting in the shares being fully vested upon modification.  As a result of the modification, the Company recognized a compensation charge of $192,500, equal to the fair value of these shares on the date of the modification.

During the nine months ended November 30, 2015 and 2014, the Company recognized $236,148 and $666,265, respectively, of share-based compensation related to common stock issued for services, all of which was recognized into general and administrative expense.

Settlement

On April 1, 2015, the Company entered into a settlement agreement to settle a dispute with two affiliated security holders in which the Company paid $150,000, in exchange for the cancellation of all Company securities held by such parties, which included an aggregate of 10,728 shares of common stock, 1,667 common stock purchase warrants with an exercise price of $31.50 and 5,001 common stock purchase warrants with an exercise price of $22.50. Additionally, the Company reimbursed $3,000 of legal expenses to the two affiliated security holders. The Company recorded the fair value of the instruments as a reduction of equity as equity instruments were cancelled and recognized a settlement expense of $39,097 for the excess of the amount paid over the fair value of the cancelled equity instruments.
 
Series B preferred stock financing – the Series B Private Placement

The Company entered into an amended and restated securities purchase agreement (the “A&R Series B Purchase Agreement”) on March 27, 2015 and March 31, 2015 with a number of new and existing accredited investors (collectively, the “Series B Investors”) pursuant to which it sold $2,130,750 of Series B Preferred Stock convertible into common stock at $8.25 per share in a private placement (the “Series B Private Placement”).  In addition, pursuant to the A&R Series B Purchase Agreement, the Company issued series A warrants (the “Series A Warrants”) to purchase up to 193,708 shares of common stock at an initial exercise price per share of $20.50 to the Series B Investors. The Series A Warrants expire on March 31, 2020. 
 
Pursuant to the closings of the Series B Private Placements in March 2015, the Company issued 387.4088 shares of Series B Preferred Stock convertible into 258,281 shares of common stock and Series A Warrants to purchase 193,708 shares of common stock for an aggregate purchase price of $2,130,750, of which $18,000 represents the exchange of stock-based compensation to a consultant that was to be settled in the form of shares of common stock but was actually settled with Series B Preferred Stock and Series A Warrants. As a result of the exchange, the Company recorded an additional $12,695 of stock-based compensation.

In connection with the March 2015 closings of the Series B Private Placement, the placement agents were paid a total cash fee of $147,451 including expense allowances and reimbursements, and were issued an aggregate of 20,668 Series A Warrants. On the grant dates, the fair value of the placement agent warrants amounted to $158,441 and was recorded as a stock issuance cost. Net proceeds amounted to $1,945,244 after deducting offering expenses to be paid in cash, including the placement agent fees and legal fees and other expenses.

 
-7-

MetaStat, Inc.
Notes to Condensed Consolidated Financial Statements

 
Accounting for the Series B Preferred Stock

The Company determined the Series B Preferred Stock should be classified as equity as it is not mandatorily redeemable, and there are no unconditional obligations in that (1) the Company must or may settle in a variable number of its equity shares and (2) the monetary value is predominantly (a) fixed, (b) varying with something other than the fair value of the Company’s equity shares or (c) varying inversely in relation to the Company’s equity shares.

Because the Series B Preferred Stock contain certain embedded features that could affect the ultimate settlement of the Series B Preferred Stock, the Company analyzed the instrument for embedded derivatives that require bifurcation. The Company’s analysis began with determining whether the Series B Preferred Stock is more akin to equity or debt.  The Company evaluated the following criteria/features in this determination: redemption, voting rights, collateral requirements, covenant provisions, creditor and liquidation rights, dividends, conversion rights and exchange rights. The Company determined that the preponderance of evidence suggests the Series B Preferred Stock was more akin to equity than to debt when evaluating the economic characteristics and risks of the entire Series B Preferred Stock, including the embedded features. The Company then evaluated the embedded features to determine whether their economic characteristics and risks were clearly and closely related to the economic characteristics and risks of the Series B Preferred Stock. Since the Series B Preferred Stock was determined to be more akin to equity than debt, and the underlying that causes the value of the embedded features to fluctuate would be the value of the Company’s common stock, the embedded features were considered clearly and closely related to the Series B Preferred Stock. As a result, the embedded features would not need to be bifurcated from the Series B Preferred Stock.

Any beneficial conversion features related to the exercise of the Most Favored Nation exchange right or the application of the Mandatory Conversion provision will be recognized upon the occurrence of the contingent events based on its intrinsic value at the commitment date.

Accounting for the Series A Warrants

The Company concluded the freestanding Series A Warrants were indexed to the Company’s common stock and should be classified in stockholder’s equity, based on their relative fair value.
 
Allocation of Proceeds of the Series B Private Placement on March 27, 2015 and March 31, 2015

The $2,130,750 proceeds from the Series B Private Placement on March 27, 2015 and March 31, 2015 were allocated to the Series B Preferred Stock and Series A Warrant instruments based on their relative fair values.
 
The Series B Preferred Stock was valued on an as-if-converted basis based on the underlying common stock.  The Series A Warrants were valued using the Black-Scholes model with the following weighted-average input at the time of issuance: expected term of 5.0 years based on their contractual life, volatility of 125% based on the Company’s historical volatility and risk free rate of 1.4% based on the rate of the 5-years U.S. treasury bill.

After allocation of the proceeds, the effective conversion price of the Series B Preferred Stock was determined to be beneficial and, as a result, the Company recorded a non-cash deemed dividend of $1,067,491 equal to the intrinsic value of the beneficial conversion feature.

The Series B Registration Rights Agreement

In connection with the closing of the Series B Private Placement, the Company entered into an amended and restated registration rights agreement (the “A&R Series B Registration Rights Agreement”) with the Series B Investors, in which the Company agreed to file a registration statement (the “Registration Statement”) with the Securities and Exchange Commission ("SEC") to register for resale the shares of common stock underlying the Series B Preferred Stock, the Series A Warrants and the Series B Warrants within 30 calendar days of the final closing date of March 31, 2015 (the “Filing Date”), and to have the registration statement declared effective within 120 calendar days of the Filing Date.

If the Registration Statement has not been filed with the SEC on or before the Filing Date, the Company shall, on the business day immediately following the Filing Date, and each 15th day thereafter, make a payment to the Series B Investors as partial liquidated damages for such delay (together, the “Late Registration Payments”) equal to 2.0% of the purchase price paid for the Series B Preferred Stock then owned by the Series B Investors for the initial 15 day period and 1.0% of the purchase price for each subsequent 15 day period until the Registration Statement is filed with the SEC.  Late Registration Payments will be prorated on a daily basis during each 15 day period and will be paid to the Series B Investors by wire transfer or check within five business days after the end of each 15 day period following the Filing Date.

The Company filed the Registration Statement on Form S-1 with the SEC on April 10, 2015 and the Registration Statement was declared effective on July 29, 2015. As a result, no penalty was incurred.

 
-8-

MetaStat, Inc.
Notes to Condensed Consolidated Financial Statements


Common stock financing – the Qualified Financing

On June 30, 2014, the Company issued 314,269 shares of common stock and 500,000 shares of Series A Convertible Preferred Stock to certain accredited investors that entered into a securities purchase agreement (the “Qualified Financing Purchase Agreement”), whereby the Company received aggregate gross proceeds of $5,735,427, of which $4,092,427 represents the automatic conversion of outstanding convertible promissory notes with principal amounts totaling $3,357,000 and related interest amounts as referenced in Note 4 below (the “Qualified Financing”). The net proceeds from this transaction amounted to $1,643,000. Included in the net proceeds is the receipt of $100,000 from an investor that was concurrently paid $100,000 for due diligence and legal fees by the Company. Approximately $1,000,000 of these proceeds was generated from the sale of marketable securities transferred to the Company by an investor (see Note 12).

On July 14, 2014, the Company completed a second closing under the Qualified Financing Purchase Agreement whereby the Company issued 12,546 shares of common stock for an aggregate purchase price of $207,000.

Series A preferred stock financing – the October 2014 Private Placement

On October 14, 2014, the Company issued 374,257 shares of Series A Convertible Preferred Stock to a certain accredited investors that entered into a securities purchase agreement in exchange for the transfer to the Company of 1,069,305 freely tradable shares of common stock of Quantum Materials Corp. (QTMM), a public reporting company whose shares of common stock are eligible for quotation on the OTCQB (the “October 2014 Private Placement”). We recorded the issuance of the Series A Convertible Preferred Stock in connection with the October 2014 Private Placement based on the fair value of the consideration received, which amounted to $256,633. The shares of QTMM were sold by the Company, generating approximately $214,000 of proceeds (see Note 12).

Purchase agreement with Lincoln Park Capital Fund, LLC

On October 10, 2014, the Company entered into a purchase agreement (the “LPC Purchase Agreement”), together with a registration rights agreement (the “LPC Registration Rights Agreement”), with Lincoln Park Capital Fund, LLC (“LPC”).

Under the terms and subject to the conditions of the LPC Purchase Agreement, we have the right to sell to and LPC is obligated to purchase up to $10 million in shares of our common stock subject to certain limitations, from time to time, over the 24-month period commencing on the date that a registration statement, which the Company agreed to file with the Securities and Exchange Commission (the “SEC”) pursuant to the LPC Registration Rights Agreement, is declared effective by the SEC and a final prospectus in connection therewith is filed. We may direct LPC, at its sole discretion and subject to certain conditions, to purchase up to 2,000 shares of common stock on any business day, provided that at least one business day has passed since the most recent purchase, increasing to up to 6,667 shares, depending upon the closing sale price of the common stock (such purchases, “Regular Purchases”). However, in no event shall a Regular Purchase be more than $500,000. The purchase price of shares of common stock related to the future funding will be based on the prevailing market prices of such shares at the time of sales, but in no event will shares be sold to LPC on a day the common stock closing price is less than the floor price as set forth in the LPC Purchase Agreement. In addition, we may direct LPC to purchase additional amounts as accelerated purchases if on the date of a Regular Purchase the closing sale price of the common stock is not below the threshold price as set forth in the LPC Purchase Agreement. In connection with the LPC Purchase Agreement, the Company issued 13,334 shares of common stock to LPC as a fee, and may issue up to 26,667 additional shares of common stock pro rata only if and as the $10 million is funded by LPC. The fair value of the 13,334 issued shares of common stock amounted to $139,980 on the grant date, which was recorded as a stock-based compensation during the three and nine months ended November 30, 2014, as the Company did not expect to close an offering with LPC within ninety days of the issuance of these shares.

The LPC Purchase Agreement and the LPC Registration Rights Agreement contain customary representations, warranties, agreements and conditions to completing future sale transactions, indemnification rights and obligations of the parties. The LPC Registration Rights Agreement does not contain any obligation for the Company to make payments to LPC if a registration statement has not been filed with the SEC. We have the right to terminate the LPC Purchase Agreement at any time, at no cost or penalty. Actual sales of shares of common stock to LPC under the LPC Purchase Agreement will depend on a variety of factors to be determined by us from time to time, including, among others, market conditions, the trading price of the common stock and determinations by us as to the appropriate sources of funding for us and our operations. There are no trading volume requirements or restrictions under the LPC Purchase Agreement. LPC has no right to require any sales by us, but is obligated to make purchases from us as it directs in accordance with the LPC Purchase Agreement. LPC has covenanted not to cause or engage in any manner whatsoever, any direct or indirect short selling or hedging of our shares.

The net proceeds under the LPC Purchase Agreement to us will depend on the frequency and prices at which we sell shares of our common stock to LPC. We expect that any proceeds received by us from such sales to LPC under the LPC Purchase Agreement will be used for general corporate purposes and working capital requirements.

As of November 30, 2015, the Company did not file the registration statement in connection with the LPC Registration Rights Agreement, and have not directed any sales of common stock pursuant to the LPC Purchase Agreement.

 
-9-

MetaStat, Inc.
Notes to Condensed Consolidated Financial Statements


Deferred Offering Costs

During the three months ended November 30, 2015, the Company incurred $151,566 of incremental costs in connection with a public offering of the Company’s common stock.  These costs have been classified as deferred offering costs in the consolidated condensed balance sheet and will be either offset against the proceeds of the public offering and charged to additional paid-in capital or charged to earnings if the public offering is aborted.

NOTE 4 – NOTE PAYABLE

On July 31, 2015, the Company entered into a note purchase agreement (the “Note Purchase Agreement”) with one its existing institutional investors.  Pursuant to the Note Purchase Agreement, the Company issued and sold a non-convertible promissory note in the principal amount of $1,200,000 (the “Note”) and a warrant (the “Warrant”) to purchase 43,636 shares of the Company’s common stock. Proceeds from the private placement (the “Private Placement”) of the Note and Warrant will be used for working capital and general corporate purposes.

The Note matures on July 30, 2016, accrues interest at a rate of eight percent (8%) per annum and may be prepaid by the Company at any time prior to the maturity date without penalty or premium.  The investor has the right at its option to exchange (the “Voluntary Exchange”) the outstanding principal balance of the Note plus the Conversion Interest Amount (as defined below) into such number of securities to be issued in the Public Offering (as defined below).  Upon effectuating such Voluntary Exchange, the Investor shall be deemed to be a purchaser in the Public Offering.  ”Public Offering” means a registered offering of equity or equity-linked securities resulting in gross proceeds of at least $5,000,000 to the Company; and “Conversion Interest Amount” means interest payable in an amount equal to all accrued but unpaid interest assuming the Note had been held from the issuance date to the maturity date.  In the event the Company completes a Public Offering and the Investor elected not to effectuate the Voluntary Exchange, then the Company shall promptly repay the outstanding principal amount of the Note plus all accrued and unpaid interest following completion of the Public Offering.

The Company evaluated the Voluntary Exchange provision, which provides for settlement of the Note at an 8% premium to the Note’s stated principal amount, in accordance with ASC 815-15-25. The Voluntary Exchange provision is a contingent put that is not clearly and closely related to the debt host instrument and therefore was initially separately measured at fair value and will be measured at fair value on an ongoing basis, with changes in fair value recognized in current operations. The proceeds of the Private Placement were first allocated to the fair value of the Warrant in the amount of $150,544 and to the fair value of the Voluntary Exchange provision in the amount of $227,740, with the difference of $821,716 representing the initial carrying value of the Note.  An additional $105,392 of debt issuance cost was recorded as additional debt discount at issuance.  The Note’s discount is amortized to interest expense over the term of the debt. During the three and nine months ended November 30, 2015, the Company recognized approximately $123,000 and $161,000 of interest expense related to the Note, including amortization of debt discount. Additionally, the Company recognized a loss of $3,134 in the three and nine month period ended November 30, 2015 due to the change in estimated fair value of the Voluntary Exchange provision.

The Warrant contains an adjustment clause affecting its exercise price, which may be reduced if the Company issues shares of common stock or convertible securities at a price below the then-current exercise price of the Warrants. As a result, we determined that the Warrant was not indexed to the Company’s common stock and therefore should be recorded as a derivative liability. The detachable Warrant issued in connection with the Note was recorded as a debt discount based on its fair value (See Note 10 for fair value measurement). The adjustment clause lapses upon listing of the Company’s common stock on a National Trading Market (as defined in the warrant agreement).
 
   
Note
Payable
   
Discount
   
Voluntary Exchange Feature
   
Note
Payable,
Net
 
February 28, 2015 balance
 
$
-
   
$
-
   
$
-
   
$
-
 
Issuance of Note
   
1,200,000
     
(483,676
   
227,740
     
944,064
 
Amortization of debt discount
   
-
     
129,354
     
-
     
129,354
 
Change in value
   
-
     
-
     
3,134
     
3,134
 
November 30, 2015 balance
 
$
1,200,000
   
$
(354,322
)
 
$
230,874
   
$
1,076,552
 

 
-10-

MetaStat, Inc.
Notes to Condensed Consolidated Financial Statements

 
NOTE 5 – CONVERTIBLE NOTES

2013 Notes

From January to May 2013, the Company issued convertible promissory notes in the aggregate principal amount of $1,487,000, originally due December 31, 2013 (the “2013 Notes”).
 
On December 31, 2013, the Company entered into certain amendments to its outstanding 2013 Notes with the holders of an aggregate of $1,387,000 principal amount of 2013 Notes (the “Amendments”).  The Company determined the Amendments constituted a substantive modification of the 2013 Notes and, as a result, we accounted for this transaction as extinguishment of debt instrument and recorded the amended 2013 Notes at their fair value, which amounted to $1,243,482, based on level 2 inputs, specifically prices for a subsequent issuance of comparable debt instruments.

During the nine months ended November 30, 2014, the Company recorded $159,647 in interest expense as accretion related to the amended 2013 Notes. 

2014 Notes

During the nine months ended November 30, 2014, the Company issued Additional 2014 Notes (as defined below) in the aggregate principal amount of $615,000 with 1,668 detachable warrants that can be exercised at $31.50 per share within a four-year period and 10,339 detachable warrants that can be exercised at $22.50 per share within a five-year period.

The promissory notes originally due June 30 and August 30, 2014 (the “2014 Notes”) bore interest at the rate of 8% per annum and ranked pari passu to the Company’s issued and outstanding convertible promissory notes and senior to the Company’s issued and outstanding equity securities.  Upon the closing by the Company 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 $5,000,000 in the aggregate inclusive of previously issued convertible notes, the outstanding principal amount of the 2014 Notes, together with all accrued and unpaid interest thereunder (the “Outstanding Balance”), automatically convert into such securities, including warrants of the Company, 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). Following the issuance date of the 2014 Notes, the noteholders have the right, at their option, to convert the Outstanding Balance into shares of common stock at a conversion price of $22.50 per share.

Debt Discount and beneficial conversion feature

The detachable warrants issued in connection with the convertible notes were recorded as a debt discount based on their relative fair value.

The relative fair value of the warrants and the intrinsic value of the beneficial conversion feature for the convertible notes issued during the nine months ended November 30, 2014 totaled $173,035 and was recorded as a discount to the convertible debt.

During the nine months ended November 30, 2014, $379,672 was recognized in interest expense as accretion expense related to the convertible notes debt discount.

Automatic Exchange of the Convertible Notes

On June 30, 2014, the Company completed the Qualified Financing whereby all outstanding convertible notes with an aggregate principal amount totaling $3,357,000 were automatically exchanged into the securities offered in the Qualified Financing.  The exchange also included approximately $201,000 of accrued interest. As of November 30, 2015, the Company has no convertible notes outstanding.

On June 30, 2014, as a result of the exchange of the convertible notes in the Qualified Financing, the Company recorded an expense amounting to $2,324,758 related to the recognition of a contingent beneficial conversion feature.  The expense was measured at the intrinsic value of the beneficial conversion feature for each of the convertible notes at their respective commitment date.

 
-11-

MetaStat, Inc.
Notes to Condensed Consolidated Financial Statements


NOTE 6 – STOCK OPTIONS

On June 22, 2015, our stockholders approved amending our Amended and Restated 2012 Omnibus Securities and Incentive Plan (the “2012 Incentive Plan”) to increase the number of authorized shares of common stock reserved for issuance under the 2012 Incentive Plan to a number not to exceed fifteen percent (15%) of the issued and outstanding shares of common stock on an as converted primary basis (the “As Converted Primary Shares”) on a rolling basis. For calculation purposes, the As Converted Primary Shares shall include all shares of common stock and all shares of common stock issuable upon the conversion of outstanding preferred stock and other convertible securities, but shall not include any shares of common stock issuable upon the exercise of options, warrants and other convertible securities issued pursuant to the 2012 Incentive Plan. The number of authorized shares of common stock reserved for issuance under the 2012 Incentive Plan shall automatically be increased concurrently with the Company’s issuance of fully paid and non- assessable shares of As Converted Primary Shares. Shares shall be deemed to have been issued under the 2012 Incentive Plan solely to the extent actually issued and delivered pursuant to an award under the 2012 Incentive Plan. 

During the nine months ended November 30, 2015, the Company issued options to purchase 6,667 shares of common stock at $11.25 per share to a consultant. The options vest upon achieving certain performance-based milestones and expire on March 1, 2025. The Company will measure the fair value of these options with vesting contingent on achieving certain performance-based milestones and recognize the compensation expense when vesting becomes probable.  The fair value will be measured using a Black-Scholes model. During the nine months ended November 30, 2015, 3,334 of these options vested based on achieving certain milestones and the Company recognized $14,918 in stock-based compensation in connection with these options.

During the nine months ended November 30, 2015, the Company issued options to purchase 80,004 shares of common stock at $8.25 per share to non-executive members of its Board. The options vest in three equal installments on each of May 18, 2016, May 18, 2017, and May 18, 2018 and expire on May 18, 2025. These options had a total fair value of $388,000 as calculated using the Black-Scholes model.  During the three and nine months ended November 30, 2015, the Company recognized $58,428 and $126,514 of compensation expense related to these options.

On June 30, 2015, the Company issued options to purchase an aggregate of 5,001 shares of common stock at $8.25 per share to employees. The options vest over time through September 2017.

During the nine months ended November 30, 2015, the Company issued options to purchase 60,000 shares of common stock at $8.25 per share to our Chief Executive Officer. Certain of these options vest upon achieving certain performance-based or market-based milestones and expire on June 17, 2025. The fair value of these options on the grant date was $221,100. The Company will recognize the compensation expense when vesting becomes probable.  During the nine months ended November 30, 2015, 10,000 of these options vested immediately and the Company recognized $34,100 in stock-based compensation in connection with these options. During the three and nine months ended November 30, 2015, 10,000 of these options vested upon achieving a performance based milestone and the Company recognized $34,100 in stock-based compensation in connection with these options.  Additionally, the Company recognized $2,593 and $5,186 during the three and nine months ended November 30, 2015 in connection with 10,000 options with market-based vesting conditions.

During the nine months ended November 30, 2015, the Company issued options to purchase 26,667 shares of common stock at $8.25 per share to our former Chief Executive Officer and Chief Medical Officer. The options vested immediately. These options had a total fair value of $44,267 as calculated using the Black-Scholes model. For the nine months ended November 30, 2015, the Company recognized $44,267 of stock-based compensation for these options. The Company also modified the expiration date of certain vested option previously granted to our former Chief Executive Officer and Chief Medical Officer, which resulted in an additional compensation expense of $22,150 being recorded during the nine months ended November 30, 2015.  During the nine months ended November 30, 2015, the Company issued options to purchase 10,000 shares of common stock at $8.25 per share to a consultant. The options vest upon achieving certain performance-based milestones and expire on June 17, 2025. The Company will measure the fair value of these options with vesting contingent on achieving certain performance-based milestones and recognize the compensation expense when vesting becomes probable.  The fair value will be measured using a Black-Scholes model.

 
-12-

MetaStat, Inc.
Notes to Condensed Consolidated Financial Statements

 
The weighted average inputs to the Black-Scholes model used to value the stock options granted during the nine months ended November 30, 2015 are as follows:

Expected volatility
 
113.47 - 123.55%
Expected dividend yield
 
0.00%
Risk-free interest rate
 
0.67% - 2.32%
Expected Term
 
6.30 years

During the nine months ended November 30, 2015, 534 options previously issued to a member of the Company’s Scientific and Clinical Advisory Board were mutually cancelled by the parties.  The member will continue to serve on the Company’s Scientific and Clinical Advisory Board without any equity compensation.
 
For the three and nine months ended November 30, 2014, the Company issued options to purchase 40,000 shares of common stock at $16.50 per share to members of its management team. The options vest upon certain milestones being achieved as follows: (i) 13,334 stock options shall fully vest two years following the date of issuance; (ii) of the remaining 26,667 stock options, one-third shall vest once the Company’s CLIA laboratory is operational, one-third shall vest upon the Company’s first commercial sale, and one-third shall vest upon the Company achieving $25 million in sales for the prior twelve month period.  These options had a total fair value of $368,002 as calculated using the Black-Scholes model. Assumptions used in the Black-Scholes model included: (1) a discount rate of 1.66%; (2) an expected term of 5.33 years; (3) an expected volatility of 116%; and (4) zero expected dividends.  The Company has recognized $8,393 in stock compensation expense in connection with the tranche with time-vesting condition of these options during the three and nine months ended November 30, 2014. During the three and nine months November 30, 2015, the Company recognized $16,030 and $48,087 in stock option expense in connection with the tranche with time-vesting conditions. Additionally, the Company also recognized $80,000 in stock option expense during the three months ended November 30, 2015 upon meeting the first milestone.
 
For the three and nine months ended November 31, 2014, a total of 14,667 non-employee performance-based stock options vested with a value of $232,000.  These options vested based on the completion of a trial and subsequent publication of results on June 3, 2014. The Company recognized $232,000 in stock option expense for the three and nine months ended November 30, 2014.

For the three and nine months ended November 30, 2014, an aggregate of 6,000 employee performance-based stock options vested with a value of $127,000. These options vested once certain milestones were completed by the employees, which included the completion of the research plan, lab setup, essential hires and investor presentation for the therapeutics program.  The Company recognized $127,000 in stock option expense for the three and nine months ended November 30, 2014.

For the three and nine months ended November 30, 2014, 6,667 stock options issued to certain members of our Board with an exercise price equal to $48.75 were cancelled in an effort to reduce the fully-diluted share count and increase number of available stock options. The Company determined that the transaction was not considered to be a modification of these stock-based awards. All stock-based compensation related to these options were recognized in the fiscal year ended February 28, 2014 and have not been reversed.

For the three and nine months ended November 30, 2015, the Company recognized $204,494 and $456,662, respectively, of compensation expense related to stock options, of which $141,541 and $369,478, respectively, was recognized in general and administrative expenses and $62,953 and $87,184, respectively, in research and development expenses.

For the three and nine months ended November 30, 2014, the Company recognized $8,394 and $367,394 of compensation expense related to stock options, of which $8,394 and $239,394 were recognized in general and administrative expenses and $0 and $128,000 in research and development expenses.

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, 2015
   
187,342
   
$
 23.70
   
$
20,670
     
8.29
 
Granted
   
188,335
     
8.36
     
-
     
-
 
Exercised
   
 -
     
 -
     
-
     
-
 
Forfeited
   
534
     
 8.10
     
-
     
-
 
Expired
   
 3,667
     
 10.20
     
-
     
-
 
                                 
Outstanding and expected to vest at November 30, 2015
   
371,476
   
$
16.08
   
$
-
     
 7.94
 
Exercisable at November 30, 2015
   
173,700
   
$
21.00
   
$
-
     
6.52
 

 
-13-

MetaStat, Inc.
Notes to Condensed Consolidated Financial Statements


The following table breaks down exercisable and unexercisable common stock options by exercise price as of November 30, 2015:
 
Exercisable
   
Unexercisable
 
Number of Options
   
Exercise Price
   
Weighted Average Remaining Life (years)
   
Number of Options
   
Exercise Price
   
Weighted Average Remaining Life (years)
 
  1,068     $ 8.10       9.17       -     $ 8.10       -  
  48,335     $ 8.25       4.86       133,333     $ 8.25       9.50  
  52,434     $ 10.20       6.11       -     $ 10.20       -  
  3,334     $ 11.25       9.47       3,333     $ 11.25       9.47  
  8,890     $ 16.50       8.88       31,110     $ 16.50       8.88  
  14,735     $ 22.50       8.66       30,000     $ 22.50       8.05  
  44,904     $ 48.75       7.35       -     $ 48.75       -  
  173,700     $ 21.00       6.52       197,776     $ 11.76       9.19  
 
As of November 30, 2015, we had approximately $357,000 of unrecognized compensation related to employee and consultant stock options that are expected to vest over a weighted average period of 1.6 years and, approximately $272,200 of unrecognized compensation related to employee stock options whose recognition is dependent on certain milestones to be achieved.  Additionally, there were 43,333 stock options with a performance vesting condition that were granted to consultants which will be measured and recognized when vesting becomes probable.
 
NOTE 7 – WARRANTS

For the nine months ended November 30, 2015, the Company issued a warrant to purchase an aggregate of 43,636 shares of common stock in connection with the issuances of the Note on July 31, 2015, referenced in Note 4. This warrant is exercisable at $8.25 per share and expire on July 30, 2020. The warrant vests immediately.

In connection with the issuances of the Note pursuant to the Note Purchase Agreement on July 31, 2015, the Company issued placement agent warrants to purchase an aggregate of 5,600 shares of common stock.  These placement agent warrants were issued on July 31, 2015, are exercisable at $10.50 per share and expire on July 31, 2020. These placement agent warrants vest immediately. The fair value of these warrants was determined to be $16,800, as calculated using the Black-Scholes model. Weighted-average assumptions used in the Black-Scholes model included: (1) a discount rate of 1.54%; (2) an expected term of 5.0 years; (3) an expected volatility of 128%; and (4) zero expected dividends. $16,800 was recorded as part of the debt discount against the stated value of the Note (See Note 4).

For the nine months ended November 30, 2015, the Company issued an aggregate of 193,708 Series A Warrants in connection with the issuances of Series B Preferred Stock in March 2015, referenced in Note 3. These Series A Warrants were issued on March 27, 2015 and March 31, 2015, are exercisable at $10.50 per share and expire on March 31, 2020. The Series A Warrants vest immediately. The Series A Warrants do not contain any provision that would require liability treatment, therefore they were classified as equity in the Condensed Consolidated Balance Sheet.

In connection with the issuances of the Series B Preferred Stock on March 27, 2015 and March 31, 2015, the Company issued placement agent warrants to purchase an aggregate of 20,668 shares of common stock.  These placement agent warrants had the same terms as the Series A Warrants and were issued on March 27, 2015, are exercisable at $10.50 per share and expire on March 31, 2020. These placement agent warrants vest immediately. The fair value of these warrants was determined to be $158,441, as calculated using the Black-Scholes model. Weighted-average assumptions used in the Black-Scholes model included: (1) a discount rate of 1.41%; (2) an expected term of 5.0 years; (3) an expected volatility of 125%; and (4) zero expected dividends.

For the nine months ended November 30, 2015, the Company issued an aggregate of 1,251 warrants to a consultant for services. These warrants were issued on May 31, 2015 and expire on May 31, 2020. A total of 556 of such warrants are exercisable at $15.00 per share and 695 of such warrants are exercisable at $18.75 per share. These warrants vest immediately. The fair value of these warrants was determined to be $4,771, as calculated using the Black-Scholes model. Average assumptions used in the Black-Scholes model included: (1) a discount rate of 1.49%; (2) an expected term of 5.0 years; (3) an expected volatility of 124%; and (4) zero expected dividends. For the nine months ended November 30, 2015, the Company recognized $4,771 of stock-based compensation for these warrants.

 
-14-

MetaStat, Inc.
Notes to Condensed Consolidated Financial Statements


For the three and nine months ended November 30, 2015, the Company issued to a consultant for services a five-year warrant to purchase 9,134 shares of common stock at an exercise price of $8.25 per share. This warrant vests immediately. The fair value of this warrant was determined to be $26,945, as calculated using the Black-Scholes model. Average assumptions used in the Black-Scholes model included: (1) a discount rate of 1.54%; (2) an expected term of 5.0 years; (3) an expected volatility of 128%; and (4) zero expected dividends. For the nine months ended November 30, 2015, the Company recognized $26,945 of stock-based compensation for this warrant.

For the nine months ended November 30, 2015, a total of 1,668 common stock purchase warrants with an exercise price of $31.50 and 5,001 common stock purchase warrants with an exercise price of $22.50 were repurchased and cancelled as part of a settlement of a dispute with two affiliated security holders (see Note 3).

For the nine months ended November 30, 2014, in connection with the issuance of convertible notes referenced in Note 5, the Company issued five-year warrants to purchase an aggregate 1,668 shares of common stock for a price of $31.50 and to purchase an aggregate 10,339 shares of common stock for a price of $22.50 per share. These warrants vested immediately. These warrants do not contain any provision that would require liability treatment, therefore they were classified as equity in the Condensed Consolidated Balance Sheet. These warrants had a weighted-average fair value of $127,289, as calculated using the Black-Scholes model. Assumptions used in the Black-Scholes model included: (1) a discount rate of 1.64%; (2) an expected term of 5 years; (3) an expected volatility of 116.8%; and (4) zero expected dividends.

For the nine months ended November 30, 2014, the Company issued 204,420 warrants in connection with the closing of the Qualified Financing as described in Note 3. These warrants were issued on June 30, 2014, are exercisable at $22.50 per share and expire on June 30, 2018. These warrants vested immediately. The warrants do not contain any provision that would require liability treatment, therefore they were classified as equity in the Condensed Consolidated Balance Sheet.

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, 2015
   
580,604
   
$
17.85
   
$
72,250
     
3.33
 
Granted
   
273,997
     
10.10
     
-
     
-
 
Cancelled
   
6,669
     
 24.75
     
-
     
-
 
Outstanding at November 30, 2015
   
847,932
   
$
 15.26
   
$
-
     
 3.17
 

 
-15-

MetaStat, Inc.
Notes to Condensed Consolidated Financial Statements


Warrants exercisable at November 30, 2015 are:
 
Exercise
Prices
   
Number
of shares
   
Weighted average
remaining life (years)
   
Exercisable
number of shares
 
$
8.25
     
83,104
     
4.56
     
83,104
 
$
10.20
     
14,668
     
0.96
     
14,668
 
$
10.50
     
344,005
     
4.34
     
344,005
 
$
13.65
     
99,826
     
1.17
     
99,826
 
$
15.00
     
556
     
4.50
     
556
 
$
18.75
     
695
     
4.50
     
695
 
$
21.00
     
52,427
     
0.74
     
52,427
 
$
22.50
     
219,754
     
2.52
     
219,754
 
$
31.50
     
29,830
     
2.37
     
29,830
 
$
37.50
     
1,733
     
2.12
     
1,733
 
$
45.00
     
1,334
     
1.17
     
1,334
 
         
847,932
             
847,932
 

 NOTE 8 – LICENSE AGREEMENTS AND COMMITMENTS

License Agreements

In August 2010, we entered into a License Agreement (the “License Agreement”) with Einstein, MIT, Cornell and IFO-Regina. Pursuant to the License Agreement, we are required to make annual license maintenance fee payments beginning August 26, 2011.  We have satisfied all license maintenance payments due through November 30, 2015 and are required to make payments of $75,000 in 2016 and $100,000 in 2017 and every year the license is in effect thereafter. These annual license maintenance fee payments will be credited to running royalties due on net sales earned in the same calendar year.

Effective March 2012, we entered into a second license agreement dated January 3, 2012 (the “Second License Agreement”) with Einstein. Pursuant to the Second License Agreement, we are required to make annual license maintenance fee payments beginning on January 3, 2013.  We have satisfied all license maintenance payments due through November 30, 2015 and are required to make additional payments of $30,000 in 2016, $50,000 in 2017, $75,000 in 2018 and $100,000 in 2019 and every year the license is in effect thereafter. These annual license maintenance fee payments will be credited to running royalties due on net sales earned in the same calendar year.

Effective December 2013, we entered into a diagnostic license agreement (the “Alternative Splicing Diagnostic License Agreement”) with MIT and its David H. Koch Institute for Integrative Cancer Research at MIT and its Department of Biology, Einstein, and Montefiore Medical Center.  Pursuant to the Alternative Splicing Diagnostic License Agreement, we are required to make annual license maintenance fee payments for each license beginning on January 1, 2015.  We have satisfied the license maintenance payment of $10,000 for 2015. We are required to make additional payments of $15,000 in 2016, $25,000 in 2017, $37,500 in 2018, and $50,000 in 2019 and every year each license is in effect thereafter.  These annual license maintenance fee payments will be credited to running royalties due on net sales earned in the same calendar year.
 
Effective June 2014, we entered into a license agreement (the “Antibody License Agreement”) with MIT. Pursuant to the Antibody License Agreement, we are required to make license maintenance fee payments beginning on January 1, 2015.  We have satisfied the license maintenance payment of $5,000 for 2015. We are required to make additional payments of $10,000 in 2016, $15,000 in 2017, $15,000 in 2018, and $20,000 in 2019 and every year the license is in effect thereafter. These annual license maintenance fee payments will be credited to running royalties due on net sales earned in the same calendar year.
 
Lease Agreements

On August 28, 2014, we entered into a lease agreement for our diagnostic laboratory and office space located in Boston, MA. The term of the lease is from September 1, 2014 through August 31, 2016, and the basic rent payable thereunder is $10,280 per month for the first year and $10,588 per month for the second year. Additional monthly payments under the lease agreement shall include tax payments and operational costs. Additionally, we paid a $40,000 refundable security deposit in connection with entering into the lease.
 
Effective December 1, 2015, we amended our lease agreement for a short-term office space in New York, NY.  The term of the lease is month-to-month and may be terminated with twenty-one (21) days notice. The basic rent payment is $2,400 per month and we paid an additional $1,500 refundable security deposit in connection with amending the lease.

 
-16-

MetaStat, Inc.
Notes to Condensed Consolidated Financial Statements


NOTE 9 – LICENSE, DEVELOPMENT AND COMMERCIALIZATION AGREEMENT WITH ASET THERAPEUTICS, LLC

On November 25, 2014, we entered into a License, Development and Commercialization Agreement (the “ASET License Agreement”) with ASET Therapeutics LLC (“ASET” or the “Licensee”), a private third party entity affiliated with one of the Company’s directors.  The ASET License Agreement sets forth the rights and obligations of the parties with respect to the grant by the Company to the Licensee of an exclusive license of certain of Company’s therapeutic assets and an exclusive sublicense, with the right to sublicense through multiple tiers, of all rights and obligations under the Company’s existing Therapeutic License Agreement dated as of December 7, 2013 with the Massachusetts Institute of Technology and its David H. Koch Institute for Integrative Cancer Research at MIT and its Department of Biology (“MIT”), Albert Einstein College of Medicine of Yeshiva University, and Montefiore Medical Center (the “Therapeutic License Agreement”). 

The licensed technology includes: (i) Alternative Splicing Event (ASE) technology based on International Patent Application WO 2012/116248 A1 entitled "Alternatively Spliced mRNA Isoforms as Prognostic and Therapeutic Tools for Metastatic Breast Cancer and Other Invasive/Metastatic Cancers"; and (ii) technology and know-how stemming from all ASE discovery work carried out in our labs at SUNY Stony Brook from September 2013 through November 25, 2014. The ASET License Agreement provides that the Company has the right to commercialize any companion diagnostic or biomarker (the “Companion Diagnostics”) arising from the work performed by the Licensee under the ASET License Agreement, pursuant to an exclusive sublicense.  
 
The ASET License Agreement calls for certain customary payments such as annual license maintenance payments ranging from $5,000 to $25,000 and milestone payments upon the achievement of specified regulatory and sales milestones.  The ASET License Agreement also requires the payment by ASET of a low single-digit royalty on net sales, at such time, if ever, as ASET’s products are fully developed, receive the required regulatory approvals and are commercialized.
 
MIT shall retain the sole and exclusive right to file, prosecute and maintain the MIT patent rights in accordance with the Therapeutic License Agreement.  ASET shall have the first right to file, prosecute and maintain at its expense, the MetaStat patent rights not covered by the Therapeutic License Agreement and any patent application(s) or patent(s) arising from joint inventions, using patent counsel selected by ASET.  In addition, ASET shall have the first right to initiate and prosecute such legal action or to control the defense of any declaratory judgment action relating to the parties’ patent rights in the territory in the field.  ASET and MetaStat shall jointly bear the expense of such legal action.
 
Pursuant to the ASET License Agreeement and the Memorandum of Understanding between the Company and ASET (as assignee), as amended (the “MOU”), ASET is obligated to invest an aggregate of $1.25 million in new equity in the Company, $250,000 of which was invested in the Qualified Financing (see Note 3) with the balance to be invested in a separate financing on substantially similar terms on or before December 31, 2015.  Under the ASET License Agreeement and the MOU, in the event that ASET does not satisfy its investment obligation, the ASET License Agreement will terminate by its terms and the assets will automatically revert back to the Company.  The MOU also required ASET to pay for all costs and expenses of the SUNY Stony Brook facility, up to a maximum of $50,000 per month, from October 15, 2014 until the transfer of such assets under the ASET License Agreement. In addition, ASET agreed to reimburse the Company $150,000 for certain costs incurred at such facility by March 1, 2015.

On June 22, 2015, effective May 31, 2015, the Company and ASET entered into a side letter that clarifies certain terms of the MOU including allowing for the equity investments in multiple tranches.

In addition, the parties have mutually agreed to an extension of the $150,000 due the Company on March 1, 2015 in connection with the reimbursement for certain costs. ASET issued an interest free promissory note to the Company in the aggregate amount of $150,000, payable in three installments of $50,000 each due on June 1, 2015, July 1, 2015 and August 1, 2015, respectively. The Company recorded $150,000 of other income during the nine months ended November 30, 2015, related to this reimbursement from ASET. The Company has received each of the first two payments of $50,000, and, as of November 30, 2015, has a $50,000 note receivable from ASET recorded on the Company’s Balance Sheet.

ASET also issued the Company a promissory note in the principal amount of $75,000 for the purchase of the equipment and fixed assets of the Stony Brook, NY laboratory. This note is interest free and matures on December 30, 2015. In the event the Company has purchased at least $925,000 in equity of ASET prior to December 30, 2015, then the Company may use this note as payment for its remainder purchase of equity in ASET. The $75,000 has been recorded as a note receivable on the Company’s Balance Sheet.

 
-17-

MetaStat, Inc.
Notes to Condensed Consolidated Financial Statements


Pursuant to the MOU, the Company is obligated to make a $1 million preferred stock equity investment in exchange for a 20% equity interest in ASET (on a fully diluted, as converted basis) on or before December 31, 2015.  The Company will maintain its 20% equity ownership in ASET until such time that ASET raises an aggregate of $4,000,000 in equity or in a financing in which ASET issues securities convertible into equity (including the $1 million received from the Company, but excluding any proceeds received by ASET from the sale of the Company’s securities), after which it will be diluted proportionately with all other equity holders of ASET. The Company will have the right to maintain its equity position in ASET by participating in future financings; provided, however, that such right will terminate in the event the Company does not make a minimum investment in a future financing of ASET equal to at least the lesser of (i) $250,000 and (ii) an amount required to maintain its 20% equity ownership interest.

The MOU also provides that so long as the Company owns at least ten percent (10%) of the outstanding equity interests of ASET, the Company will have the right to designate one member of the ASET’s board of directors or similar governing body and that the Company’s current chief executive officer shall provide an oversight function to ASET for a period of six months following the execution of the ASET License Agreement.
 
We determined that ASET is considered a variable interest entity (“VIE”) because it lacks substantial equity investment. VIEs are consolidated by the primary beneficiary.
 
The primary beneficiary is the party who has both the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and an obligation to absorb losses of the entity or a right to receive benefits from the entity that could potentially be significant to the entity. We determined that we are not the primary beneficiary of ASET based primarily on the facts that we do not have the power to direct ASET’s operations nor do we have any obligation to absorb ASET losses. As a result, ASET has not been consolidated by us.
 
Our determination of whether we are the primary beneficiary of the VIE is based upon the facts and circumstances for the VIE and requires significant judgment regarding whether we have power to direct the VIE’s most significant activities, which includes, but is not limited to, the VIE’s purpose and design and the risks passed through to investors, the voting interests of the VIE, management, service and/or other agreements of the VIE, involvement in the VIE’s initial design and the existence of explicit or implicit financial guarantees.

NOTE 10 – FAIR VALUE MEASUREMENTS

In accordance with ASC 820, Fair Value Measurements, financial instruments were measured at fair value using a three-level hierarchy which maximizes use of observable inputs and minimizes use of unobservable inputs:

·
Level 1: Observable inputs such as quoted prices in active markets for identical instruments
 
·
Level 2: Quoted prices for similar instruments that are directly or indirectly observable in the market
 
·
Level 3: Significant unobservable inputs supported by little or no market activity.  Financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, for which determination of fair value requires significant judgment or estimation.
 
Financial instruments measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. At November 30, 2015 and February 28, 2015, the warrant liability balances of $300,151 and $273,000, respectively, were classified as Level 3 instruments.

 
-18-

MetaStat, Inc.
Notes to Condensed Consolidated Financial Statements


The following table sets forth the changes in the estimated fair value for our Level 3 classified derivative warrant liability:

   
Note Payable Warrants
   
Series B Warrants
   
Total
 
Fair value at the beginning of period:
       
$
273,000
   
$
273,000
 
Additions
 
$
150,544
             
150,544
 
Change in fair value:
   
28,109 
     
(151,502
)
   
(123,393
)
Fair value at end of period:
 
$
178,653
   
$
121,498
   
$
300,151
 
 
In connection with the issuance of the Note on July 31, 2015, the Company issued warrants to purchase an aggregate of 43,636 shares of common stock.  These warrants were issued on July 31, 2015, are exercisable at $8.25 per share and expire on July 31, 2020. These warrants contain a full-ratchet anti-dilution price protection provision that requires liability treatment. The fair value of these warrants at November 30, 2015 and July 31, 2015 was determined to be $178,653 as calculated using the Monte Carlo simulation. The Monte Carlo simulation as of November 30, 2015 and July 31, 2015 used the following assumptions: (1) stock price of $5.20 and $3.90, respectively; (2) a risk free rate of 1.58%; (3) an expected volatility of 132% and 128%, respectively; and (4) a fundraising event to occur on January 15, 2016 and November 30 2015, respectively, that would result in the issuance of additional common stock.

The Series B Warrants contain an adjustment clause affecting the exercise price of the Series B warrants, which may be reduced if the Company issues shares of common stock or convertible securities at a price below the then-current exercise price of the Series B warrants. As a result, we determined that the Series B warrants were not indexed to the Company’s common stock and therefore should be recorded as a derivative liability.

The Series B Warrants were measured at fair value on the issuance date using a Monte Carlo simulation and will be re-measured to fair value at each balance sheet date, and any resultant changes in fair value will be recorded in earnings. The Monte Carlo simulation as of November 30, 2015 and February 28, 2015 used the following assumptions: (1) a stock price of $5.15 and $10.50, respectively; (2) a risk free rate of 1.51% and 1.50%, respectively; (3) an expected volatility of 132% and 125%, respectively; and (4) a fundraising event to occur on January 15, 2016 and September 30, 2015, respectively, that would result in the issuance of additional common stock.

NOTE 11 – EQUIPMENT
 
Equipment consists of the following:
 
 
Estimated 
Useful Lives
  
November 30, 
2015
   
February 28, 
2015
 
Research equipment
7 years
  
$
590,373
  
 
$
548,991
  
Computer equipment
5 years
  
 
76,075
  
   
73,704
  
   
  
 
666,448
     
622,695
  
Accumulated depreciation and amortization
 
  
 
(145,630
)
   
(96,089
)
Equipment, net
 
  
$
520,818
  
 
$
526,606
  
 
Depreciation and amortization expense was $23,765 and $21,686 for the three months ended November 30, 2015 and November 30, 2014, respectively. Depreciation of equipment utilized in research and development activities is included in research and development expenses and amounted to $20,126 and $18,001 for the three months ended November 30, 2015 and November 30, 2014, respectively. All other depreciation is included in general and administrative expense and amounted to $3,639 and $3,685 for the three months ended November 30, 2015 and November 30, 2014, respectively.
 
Depreciation and amortization expense was $72,422 and $40,258 for the nine months ended November 30, 2015 and November 30, 2014, respectively. Depreciation of equipment utilized in research and development activities is included in research and development expenses and amounted to $61,412 and $29,331 for the nine months ended November 30, 2015 and 2014, respectively. All other depreciation is included in general and administrative expense and amounted to $11,010 and $10,928 for the nine months ended November 30, 2015 and November 30, 2014, respectively.

 
-19-

MetaStat, Inc.
Notes to Condensed Consolidated Financial Statements


On March 26, 2014, we entered into an agreement to finance the purchase of research equipment for a purchase price of $318,603. The terms of the agreement require a down payment of $21,115 and 36 monthly payments of $10,260. The agreement further required a security deposit of $238,952, which will be refunded to the Company in three equal installments upon the payment of the twelfth, the twenty-fourth and the thirty-sixth monthly payments. This security deposit has been satisfied by the Company. As further security, a personal guaranty was required of our former chief executive officer. On July 9, 2015, we prepaid all the remaining installments due under the agreement through an application of the security deposit.

NOTE 12 – SECURITES HELD FOR SALE AND DUE TO INVESTOR

As part of the June 30, 2014 equity financing (see Note 3), the Company received 4,800,000 shares of common stock of Quantum Materials Corp. (“Consideration Shares”) in lieu of $1,000,000 of cash proceeds from an investor. In the event the Company does not receive gross proceeds of at least $1,000,000 from the sale of the Consideration Shares by the earliest to occur of (i) September 28, 2014 or (ii) the date the Company has sold of the Consideration Shares, then the investor shall make a payment to the Company equal to the difference between $1,000,000 and the aggregate gross proceeds received by the Company from the sale of the Consideration Shares.  In the event the Company received gross proceeds of at least $1,000,000 from the sale of the Consideration Shares within the 90 days following the closing date of the equity financing, the Company shall immediately cease to sell the Consideration Shares and return all the unsold Consideration Shares to the investor and any proceeds from the sale of the Consideration Shares in excess of the $1,000,000.

The Company has elected to account for the Consideration Shares and the related liability to the investor at fair value.  As such, any changes in fair value of the Consideration Shares and the related liability, which are expected to offset each other, are recorded in earnings.  The Consideration Shares and the related liability due to investor are financial instruments which are considered Level 1 in the fair value hierarchy and whose value is based on quoted prices in an active market.

The fair value of the Consideration Shares at the time of the closing of the equity financing amounted to approximately $1,344,000. During the nine months ended November 30, 2014, the Company generated approximately $1,000,000 of proceeds from the sale of the Consideration Shares.  On October 14, 2014, the Company entered into an agreement with the investor whereby the remaining 1,069,305 Consideration Shares were to be kept by the Company in exchange for the issuance of Series A Convertible Preferred Stock (see Note 3).  As of November 30, 2014, the unsold Consideration Shares had an aggregate fair value of approximately $80,000.  During the three and nine months ended November 30, 2014, the Company incurred a loss of $33,707 on the holding and selling of the Considerations Shares.  As of February 28, 2015, the Company had sold all remaining Consideration Shares.
 
NOTE 13 – NET LOSS PER SHARE

Basic net loss per common share is computed based on the weighted average number of common shares outstanding during the period.  Restricted shares issued with vesting condition that have not been met at the end of the period are excluded from the computation of the weighted average shares. As of November 30, 2015 and November 30, 2014, 26,201 and 24,521 restricted shares of common stock, respectively, were excluded from the computation of the weighted average shares.

Diluted net loss per common share is calculated giving effect to all dilutive potential common shares that were outstanding during the period. Diluted potential common shares generally consist of incremental shares issuable upon exercise of stock options and warrants and shares issuable from convertible securities.  When dilutive, warrants classified as liabilities are included in the potential common shares and any change in fair value of the warrant for the period presented is excluded from the net loss. For the periods ended November 30, 2015, the liability warrants were not dilutive.

In computing diluted loss per share for the periods ended November 30, 2015 and November 30, 2014, no effect has been given to the common shares issuable at the end of the period upon the conversion or exercise of the following securities as their inclusion would have been anti-dilutive:

 
  
November 30,
2015
 
  
November 30,
2014
 
Stock options
  
 
371,476
  
  
 
190,334
  
Warrants
  
 
847,932
  
  
 
426,241
 
Preferred stock
  
 
488,914
  
  
 
58,284
  
Total
  
 
1,708,322
  
  
 
674,859
  

 
-20-

MetaStat, Inc.
Notes to Condensed Consolidated Financial Statements


NOTE 14 – SUBSEQUENT EVENTS
 
ASET License Agreement

Pursuant to the terms of the ASET License Agreement, as of December 31, 2015, the license granted thereunder was terminated by its terms as a result of ASET’s failure to invest $1 million in new equity in the Company. However, we are currently in discussions with ASET regarding the relationship, if any, moving forward, and the resolution of certain issues arising under the ASET License Agreement and the previously executed MOU.


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, 2015. 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, 2015.

Business Overview

We are a pre-commercial molecular diagnostic company focused on the development and commercialization of novel diagnostic tests that provide oncologists with clinically-actionable information to optimize cancer treatment strategies based on the specific biological nature or “metastatic potential” of each patients tumor. We believe cancer treatment strategies can be personalized, outcomes improved and costs reduced through new diagnostic tools that identify the aggressiveness of primary tumors, response to chemotherapy and resistance to taxane-based therapeutics and selective tyrosine kinase inhibitors (TKIs).

Aggressive cancer that spreads from a primary tumor through the bloodstream to other areas of the body is responsible for approximately 90% of all solid tumor cancer related deaths. Determining which early stage cancer patients are at risk and the corresponding optimal level of treatment remains one of the greatest issues in healthcare today, despite the advent and adoption of many genomic-based cancer diagnostics over the past decade. Targeted therapies have represented promising agents for the treatment of cancer. A main limitation of therapies that selectively target kinase signaling pathways and chemotherapies which stabilize cellular cytoskeletal elements is that a significant number of patients do not respond, and for those patients that do respond, the emergence of secondary drug resistance after an initial benefit.
 
 
Our tests provide oncologists with information regarding the aggressiveness of a patient’s tumor and the risk of the cancer spreading, or metastasizing. High-risk patients with aggressive tumors that are more likely to spread are often treated with adjuvant chemotherapy to prevent disease recurrence and the development of systemic metastasis. Our diagnostic tests help identify patients at risk for metastatic disease who need aggressive treatment. Alternatively, low-risk patients with less aggressive, indolent tumors that are less likely to spread can be spared aggressive treatment as the risk of adverse events and the development of future malignancies associated with adjuvant chemotherapy outweigh any marginal benefits. Our diagnostic tests help identify patients at low-risk who can avoid the high cost and risk of chemotherapy. In addition, we believe our tests could provide oncologists with valuable information by predicting response to taxane-based drugs and selective TKIs.


Our patented and proprietary platform technologies are based on the identification of a common pathway for the development of metastatic disease in solid epithelial-based tumors and our unique understanding of the underlying biology, including the direct mechanisms of action and epigenetic factors that drive systemic metastasis. Central to these discoveries are i) the pivotal role the Mena protein and its isoforms (MenaINV and Mena11a) play in the metastatic cascade through changing cellular phenotype including increasing cell chemotaxis, motility, migration and invasiveness, ii) the “MetaSite” the micro-anatomical site, or “window” in the blood vessels that metastatic cells squeeze through to enter the blood stream to begin their deadly spread, and iii) the novel role of MenaINV in disrupting the receptor tyrosine kinase (RTK) signaling through a negative feedback mechanism to drive sensitivity to growth factors and resistance to RTK inhibitors epidermal growth factor receptor (EGFR) and Met.

We are developing two driver-based diagnostic product lines, which we intend to offer as a commercial laboratory service available through our state-of-the-art CLIA-certified reference laboratory located in Boston, Massachusetts.
 
The MetaSite Breast(TM) test is a tissue-based immunohistochemistry (IHC) assay applicable for early stage invasive breast cancer patients. The MenaCalc(TM) platform is a tissue-based quantitative immunofluorescence (IF) assay broadly applicable to many epithelial-based cancers, including breast, lung, prostate, and colorectal. We believe no modifications of the MenaCalc(TM) tests are required for clinical use in new epithelial-based cancer indications and prognostic features allowing for inexpensive and rapid product expansion into these indications.
 
Our initial focus is on the early stage invasive breast cancer market, where it is estimated, approximately 30% of breast cancer tumors are biologically capable of metastatic spread, yet the majority (70-80%) of these patients are treated with aggressive therapies that could be modified or eliminated if the true biologic nature of the disease or risk of metastasis could be identified. We plan on commencing marketing of our metastatic breast cancer diagnostic in 2016 followed by MenaCalc(TM) diagnostic tests for other cancer indications including lung cancer, prostate cancer and colorectal cancer in 2017 and beyond.
 
The MetaSite Breast(TM) and MenaCalc(TM) diagnostic tests are eligible for reimbursement under the well-established Current Procedural Terminology (CPT) code 88361 for quantitative or semi-quantitative immunohistochemistry testing using computer-assisted technology. Since we plan to bill as a service, we anticipate we will receive payment for both the professional and technical fee for multiple service units because our diagnostic tests involve multiple separate steps of multiple primary antibody binding followed by counterstaining. The Centers for Medicare & Medicaid Services (CMS) coding policy defines the unit of service for each IHC or IF stain charged as one unit per different antigen tested and individually reported, per specimen. Alternatively, we can seek reimbursement under a non-specific, unlisted procedure code. Claims are paid at a rate established by our local Medicare carrier in Massachusetts and based upon the development and validation costs of the assays, the costs of conducting the tests, the reimbursement rates paid by other payors and the cost savings impact of the tests.
 
Clinical studies of 585 patients in the aggregate for the MetaSite Breast(TM) test and 1,203 patients in the aggregate for the MenaCalc(TM) test have been successfully completed. Results from these studies demonstrate MetaSite Breast(TM) is prognostic for risk of distant metastasis in patients with estrogen receptor (ER)-positive and human epidermal growth factor receptor 2 (HER2)-negative invasive breast cancer, regardless of nodal status and independent of clinical factors.  The MenaCalc(TM) test has been shown to be prognostic for patient outcomes, as measured by disease-specific survival, in all invasive breast cancer, independent of molecular subtype and other clinical factors, including nodal status. MenaCalc(TM) has also been shown to be prognostic for disease specific survival in patient with squamous cell carcinoma of the lung.

During 2016 we anticipate completing at least three additional breast cancer clinical studies with the aim of providing additional prognostic and chemo-predictive clinical evidence and to further define specificity, sensitivity and clinical utility of our metastatic breast cancer diagnostics, including the MetaSite Breast(TM) and MenaCalc(TM) Breast assays to support our commercialization efforts.


ASET License Agreement

On November 25, 2014, we entered into the ASET License Agreement with ASET, a private third party entity affiliated with one of the Company’s directors.  The ASET License Agreement sets forth the rights and obligations of the parties with respect to the grant by the Company to ASET of an exclusive license of certain of the Company’s therapeutic assets and an exclusive sublicense, with the right to sublicense through multiple tiers, of all rights and obligations under the Company’s existing Alternative Splicing Therapeutic License Agreement dated as of as of December 7, 2013. The licensed technology includes: (i) Alternative Splicing Event (ASE) technology based on International Patent Application WO 2012/116248 A1 entitled "Alternatively Spliced mRNA Isoforms as Prognostic and Therapeutic Tools for Metastatic Breast Cancer and Other Invasive/Metastatic Cancers"; and (ii) Technology and know-how stemming from all ASE discovery work carried out in our labs at SUNY Stony Brook from September 2013 through November 25, 2014. The ASET License Agreement provides that the Company has the right to commercialize any Companion Diagnostics arising from the work performed by ASET under the ASET License Agreement, pursuant to an exclusive sublicense.  

The ASET License Agreement calls for certain customary payments, such as annual license maintenance payments ranging from $5,000 to $25,000, and milestone payments upon the achievement of specified regulatory and sales milestones.  The ASET License Agreement also requires the payment by ASET of a low single-digit royalty on net sales, at such time, if ever, as ASET’s products are fully developed, receive the required regulatory approvals and are commercialized.
 
We determined that ASET meets the criteria for variable interest entities (“VIEs”) because it lacks substantial equity investment. VIEs are consolidated by the primary beneficiary.
 
The primary beneficiary is the party who has both the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and an obligation to absorb losses of the entity or a right to receive benefits from the entity that could potentially be significant to the entity. We determined that the Company is not the primary beneficiary of ASET based primarily on the facts that we do not have the power to direct ASET’s operations nor do we have any obligation to absorb ASET losses.  As a result, ASET has not been consolidated by the Company based on our determination that the Company is not the primary beneficiary.

Our determination of whether we are the primary beneficiary of the VIE is based upon the facts and circumstances for the VIE and requires significant judgment regarding whether we have power to direct the VIE’s most significant activities, which includes, but is not limited to, the VIE’s purpose and design and the risks passed through to investors, the voting interests of the VIE, management, service and/or other agreements of the VIE, involvement in the VIE’s initial design and the existence of explicit or implicit financial guarantees.

Going Concern
 
Since our inception, we have generated significant net losses. As of November 30, 2015, we had an accumulated deficit of $22,296,199. We incurred net losses of $3,573,050 and $6,943,697 for the nine month periods ended November 30, 2015 and November 30, 2014, 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 cancers, 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. 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.
 
We currently anticipate that our cash and cash equivalents will be sufficient to fund our operations through January 2016, without raising additional capital. Our continuation as a going concern is dependent upon continued financial support from our shareholders, our ability to obtain necessary equity and/or debt financing to continue operations, and the attainment of profitable operations. These factors raise substantial doubt regarding our ability to continue as a going concern. We cannot make any assurances that additional financings will be available to us and, if available, 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 and could also lead to the reduction or suspension of our operations and ultimately force us to cease our operations.
  

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.

Our significant accounting policies are described in Note 2 to our consolidated financial statements included in the Form 10-K for the year ended February 28, 2015.  We believe the following critical accounting policies reflect our more significant estimates and assumptions used in the preparation of our financial statements.
 
Stock-based Compensation

We account for share-based payment awards issued to employees and members of our Board by measuring the fair value of the award on the date of grant and recognizing this fair value as stock-based compensation using a straight-line basis over the requisite service period, generally the vesting period.  For awards issued to non-employees, the measurement date is the date when the performance is complete or when the award vests, whichever is the earliest. Accordingly, non-employee awards are measured at each reporting period until the final measurement date. The fair value of the award is recognized as stock-based compensation over the requisite service period, generally the vesting period.

 Debt and Equity Instruments

We analyze debt and equity issuance for various features that would generally require either bifurcation and derivative accounting, or recognition of a debt discount or premium under authoritative guidance.

Detachable warrants issued in conjunction with debt are measured at their relative fair value, if they are determined to be equity instrument, or their fair value, if they are determined to be liability instruments, and recorded as a debt discount.  
 
Conversion features that are in the money at the commitment date constitute a beneficial conversion feature that is measured at its intrinsic value and are recognized as debt discount or deemed dividend. Debt discount is amortized as accretion expense over the maturity period of the debt using the effective interest method.

Any contingent beneficial conversion feature would be recognized when and if the contingent event occurs based on its intrinsic value at the commitment date.
 
 Financial Operations Overview

General and Administrative Expenses
 
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

The majority of the research and development expenses were focused on the research and development of the MetaSite Breast(TM) test. The remaining research and development expenses represent costs incurred to develop our MenaCalc(TM) platform of diagnostic assays in breast, lung, prostate and colorectal cancers and in 2014 initial research on our therapeutic platform, which was sublicensed to ASET pursuant to the ASET License Agreement.

We charge all research and development expenses to operations as they are incurred. All potential future product programs, apart from the MetaSite Breast(TM) test, are in the clinical research and development phase, and the earliest we expect another cancer indication to reach the commercialization stage is 2017.

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. Additionally, many of our costs are not attributable to individual programs. Therefore, 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.


Results of Operations

Comparison of the Three Months Ended November 30, 2015 and November 30, 2014
 
Revenues.  There were no revenues for the three months ended November 30, 2015 and November 30, 2014, respectively, because we have not yet commercialized any of our function-based diagnostic tests.
 
General and Administrative Expenses. General and administrative expense was $656,929 for the three months ended November 30, 2015 as compared to $1,062,221 for the three months ended November 30, 2014. This represents an aggregate decrease of $405,292. Stock-based compensation was $169,215 for the three months ended November 30, 2015 as compared to $504,266 for the three months ended November 30, 2014. Excluding non-cash stock-based compensation expense and depreciation expense, general and administrative expenses decreased by $70,195 to $484,075 for the three months ended November 30, 2015 from $554,270 for the three months ended November 30, 2014. 

Consulting expense, payroll expense, legal expense, conference, advertising and promotional expense, and office expense all decreased by $67,097, $51,667, $34,702, $20,540 and $13,730, respectively. Decreased general and administrative expenses were partially offset by increased investor relations expense, due and subscription fees, audit fees, health insurance expense, board compensation expense, website and telecommunication expense and travel expense of $26,989, $25,458, $13,385, $12,718, $12,500, $11,419 and $10,807, respectively.
 
Research and Development Expenses. Research and development expenses increased by $118,350 to $405,911 for the three months ended November 30, 2015 from $287,561 for the three months ended November 30, 2014. Excluding non-cash stock-based compensation expense and depreciation expense, research and development expenses increased by $53,271 to $322,832 for the three months ended November 30, 2015 from $269,560 for the three months ended November 30, 2014.

Increased diagnostic research and development spending was partially offset by decreases in therapeutic research and development spending associated with the divestiture of the therapeutic assets and reduction in therapeutic headcount including $75,000 of reimbursement from ASET for expenses incurred during the three months ended November 30, 2014. Consulting spending increased by $95,318, while payroll expense, therapeutic research spending, payroll expense and healthcare reimbursement decreased by $74,259, $37,939, and $10,550, respectively.
 
Other (Income) Expense. Other (income) expense amounted to $173,432 for the three months ended November 30, 2015 as compared to $57,833 for the three months ended November 30, 2014.  This represents an increase of $115,599. This increase was due in part to an increase in interest expense of $123,616, a change in the fair value of warrant liability of $49,507, partially offset by decreases in other income of $23,867 and loss on securities held for sale of $33,707 recorded in 2014.
 
Net Loss. As a result of the factors described above, we had a net loss of $1,236,272 for the three months ended November 30, 2015 as compared to a net loss $1,407,665 for the three months ended November 30, 2014.
 
Comparison of the Nine Months Ended November 30, 2015 and November 30, 2014
 
Revenues.  There were no revenues for the nine months ended November 30, 2015 and November 30, 2014, respectively, because we have not yet commercialized any of our function-based diagnostic tests.
 
General and Administrative Expenses. General and administrative expense was $2,681,857 for the nine months ended November 30, 2015 as compared to $2,853,569 for the nine months ended November 30, 2014. This represents an aggregate decrease of $171,712. Stock-based compensation was $637,343 for the nine months ended November 30, 2015 as compared to $1,045,641 for the nine months ended November 30, 2014. Excluding non-cash stock-based compensation expense and depreciation expense, general and administrative expenses increased by $236,504 to $2,033,504 for the nine months ended November 30, 2015 from $1,797,000 for the nine months ended November 30, 2014.

Payroll, benefits, payroll taxes and board compensation decreased by $276,605 which was partially offset by increased consulting expense of $153,729 as the company refocused operations on diagnostic product development and commercialization and ceased activity associated with therapeutic product development. Corporate communication and investor relations expense increased by $215,416 from $84,996 for the nine months ended November 30, 2014 to $300,413 for the nine months ended November 30, 2015. The increased activity was associated with communicating the new capital markets and product development strategy. Accounting expense increased by $119,407 from $157,782 for the nine months ended November 30, 2014 to $277,188 for the nine months ended November 30, 2015. This increase was mainly related to non-recurring transactions including filing registration statements and valuation set-up costs, among others. Corporate legal expense decreased by $78,633 from $264,535 for the nine months ended November 30, 2014 to $185,903 for the nine months ended November 30, 2015.


Research and Development Expenses. Research and development expenses decreased by $88,313 to $943,205 for the nine months ended November 30, 2015 from $1,031,518 for the nine months ended November 30, 2014. Stock-based compensation was $87,184 for the nine months ended November 30, 2015 as compared to $128,000 for the nine months ended November 30, 2014. Excluding non-cash stock-based compensation expense and depreciation expense, research and development expenses decreased by $79,578 to $794,609 for the nine months ended November 30, 2015 from $874,187 for the nine months ended November 30, 2014.

Increased diagnostic research and development spending was partially offset by decreases in therapeutic research and development spending associated with the divestiture of the therapeutic assets and reduction in therapeutic headcount including $75,000 of reimbursement from ASET for expenses incurred during the nine months ended November 30, 2014. Payroll and benefits and laboratory operations expense associated with therapeutic development decreased by $162,548 and $213,286, respectively which was partially offsetting by increased diagnostic R&D consulting and laboratory operations expense of $94,318 and $90,760, respectively.
 
Other (Income) Expense. Other (income) expense was $(52,012) for the nine months ended November 30, 2015 as compared to $3,058,611 for the nine months ended November 30, 2014.  This represents a change of $3,110,623. Other (income) expense for the nine months ended November 30, 2015 mostly comprised the interest expense and the beneficial conversion feature related to the promissory notes exchanged in June 2014 and amounted to $679,432 and $2,324,758, respectively. Other (income) expense for the nine months ended November 30, 2015 mostly comprised the $150,000 gain on the ASET transaction and the $123,393 gain from the change in fair value of the warrant liability, offset by $169,279 interest expense on the note payable.
 
Net Loss. As a result of the factors described above, we had a net loss of $3,573,050 for the nine months ended November 30, 2015 as compared to a net loss of $6,943,697 for the nine months ended November 30, 2014.

Liquidity and Capital Resources
 
Since our inception, we have incurred significant losses and, as of November 30, 2015, we had an accumulated deficit of $22,296,199.  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, preferred stock, and promissory notes. Through November 30, 2015, we had received net proceeds of $6,133,605 through the sale of common stock to investors, $256,311 through the sale of Series A Preferred Stock to investors, $3,388,250 through the sale of Series B Preferred Stock to investors, $3,457,000 from the sale of convertible promissory notes and $1,200,000 from the sale of the note payable.  As of November 30, 2015, we had cash and cash equivalents of $264,917 and net debt of $1,076,552.  Through November 30, 2015, we have issued and outstanding warrants to purchase 847,932 shares of our common stock at a weighted average exercise price of $15.26, which could result in proceeds to us of approximately $12,900,000 if all outstanding warrants were exercised for cash.
 
Cash Flows
 
At November 30, 2015, we had $264,917 in cash and cash equivalents, compared to $69,177 on November 30, 2014. 
 
Net cash used in operating activities was $2,437,836 for the nine months ended November 30, 2015 compared to $2,631,717 for the nine months ended November 30, 2014. The decrease in cash used of $193,881 was primarily due to the payment of a security deposit in 2014 related to a capital lease obligation, partially offset by the slight increase in operating expenses during the nine months ended November 30, 2015.
 
Net cash used in investing activities was $(198,933) for the nine months ended November 30, 2015, compared to $1,077,281 of cash provided for the nine months ended November 30, 2014. This increase of $1,276,214 was attributed to increases in laboratory equipment purchases for our research & development and CLIA-certified reference laboratory facility in Boston and reduction of proceeds from the sale of investments. We expect amounts used in investing activities to increase in fiscal year 2016 and beyond as we grow our corporate operations, expand research and development activities and establish and add capacity in our commercial laboratory, which is expected to result in an increase of our capital expenditures.

Net cash provided by financing activities during the nine months ended November 30, 2015 was $2,643,866 compared to $1,140,205 for the nine months ended November 30, 2014. Financing activities consisted primarily of proceeds from the sale of notes and warrants and Series B Preferred Stock and warrants for the nine months ended November 30, 2015, and from the issuance of convertible notes and warrants and common stock and warrants for the nine months ended November 30, 2014.
 
Contractual Obligations

As of November 30, 2015, we had the following contractual commitments:

   
Payments Due by Period
 
Contractual Obligations
 
Total
   
Less than
 1 Year
   
1-3
Years
   
4-5
Years
   
More than
5 Years
 
   
(In thousands)
 
License Agreement
 
$
575
   
$
75
   
$
300
   
$
200
   
$
(1)
 
                                         
Second License Agreement
 
$
455
   
$
30
   
$
225
   
$
200
   
$
(2)
 
                                         
Alternative Splicing Diagnostic License Agreements (3)
 
$
228
   
$
15
   
$
113
   
$
100
   
$
(4)
 
                                         
Antibody License Agreement
 
$
100
   
$
10
   
$
50
   
$
40
   
$
(5)
 
                                         
Lease Agreement (6)
 
$
127
   
$
127
   
$
-
   
$
-
   
$
   

(1)
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.
 
(2)
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.
 
(3)
No annual license maintenance fee payments are due on the Alternative Splicing Therapeutic License Agreement so as long as the Alternative Splicing Diagnostic License Agreement is in effect.

(4)
Amount of additional payments depends on several factors, including the duration of the Alternative Splicing Diagnostic License Agreement, which depends on expiration of the last patent to be issued pursuant to the Alternative Splicing Diagnostic License Agreement. That duration is uncertain because the last patent has not yet been issued.
  
(5)
Amount of additional payments depends on several factors, including the duration of the Antibody License Agreement, which depends on expiration of the last patent to be issued pursuant to the Antibody License Agreement. That duration is uncertain because the last patent has not yet been issued. 

(6)
Only includes basic rent payments. Additional monthly payments under the lease agreement shall include tax payments and operational costs. 
 
Pursuant to the License Agreement, we are required to make annual license maintenance fee payments beginning August 26, 2011.  We have satisfied all license maintenance payments due through November 30, 2015. We are required to make payments of $75,000 in 2016 and $100,000 in 2017 and every year the license is in effect thereafter. These annual license maintenance fee payments will be credited to running royalties due on net sales earned in the same calendar year.

Pursuant to the Second License Agreement, we are required to make annual license maintenance fee payments beginning on January 3, 2013.  We have satisfied all license maintenance payments due through November 30, 2015.

We are required to make additional payments of $30,000 in 2016, $50,000 in 2017, $75,000 in 2018 and $100,000 in 2019 and every year the license is in effect thereafter. These annual license maintenance fee payments will be credited to running royalties due on net sales earned in the same calendar year.


We paid a license-signing fee of $15,000 in connection with entering into the Alternative Splicing Diagnostic License Agreement and a license-signing fee of $5,000 in connection with entering into the Alternative Splicing Therapeutic License Agreement.  Pursuant to these agreements, we are required to make annual license maintenance fee payments for each license beginning on January 1, 2015.  We have satisfied the license maintenance payment of $10,000 for 2015.  We are required to make additional payments of $15,000 in 2016, $25,000 in 2017, $37,500 in 2018, and $50,000 in 2019 and every year each license is in effect thereafter.  On November 25, 2014, we entered into the ASET License Agreement with ASET who will assume responsibility for payment of half of the annual license maintenance fees as long as the Alternative Splicing Diagnostic License Agreement remains in effect. These annual license maintenance fee payments will be credited to running royalties due on net sales earned in the same calendar year. No annual license maintenance fee payments are due on the Alternative Splicing Therapeutic License Agreement so as long as the Alternative Splicing Diagnostic License Agreement is in effect.
 
We paid a license-signing fee of $10,000 in connection with entering into the Antibody License Agreement and are required to make license maintenance fee payments beginning on January 1, 2015.  We have satisfied the license maintenance payment of $5,000 for 2015. We are required to make additional payments of $10,000 in 2016, $15,000 in 2017, $15,000 in 2018, and $20,000 in 2019 and every year the license is in effect thereafter. These annual license maintenance fee payments will be credited to running royalties due on net sales earned in the same calendar year.
 
Pursuant to the ASET License Agreement and Memorandum of Understanding between the Company and ASET (as assignee), as amended (the “MOU”), ASET is obligated to invest an aggregate of $1.25 million in new equity in the Company, $250,000 of which was invested in the June 30, 2014 and July 14, 2014 equity financings with the balance to be invested in a separate financing or financings on substantially similar terms on or before December 31, 2015. Under the ASET License Agreement and the MOU, in the event that ASET does not satisfy its investment obligation, the ASET License Agreement will terminate by its terms and the assets will automatically revert back to the Company.  The MOU also required ASET to pay for all costs and expenses of the SUNY Stony Brook facility, up to a maximum of $50,000 per month, until the transfer of such assets under the ASET License Agreement. In addition, ASET agreed to reimburse the Company $150,000 for certain costs incurred at such facility by March 1, 2015.
 
On June 22, 2015, effective May 31, 2015, the Company and ASET entered into a side letter that clarifies certain terms of the MOU including allowing for the equity investments in multiple tranches.

In addition, the parties mutually agreed to an extension of the $150,000 due the Company on March 1, 2015 in connection with the reimbursement for certain costs. ASET issued an interest free promissory Note to the Company in the aggregate amount of $150,000, payable in three installments of $50,000 each due on June 1, 2015, July 1, 2015 and August 1, 2015, respectively. The Company has received each of the first two payments of $50,000 and as of November 30, 2015, has a $50,000 note receivable from ASET.
 
ASET also issued the Company a Note to the Company in the principal amount of $75,000 for the purchase of the equipment and fixed assets of the Stony Brook, NY laboratory. The Note is interest free and matures on December 30, 2015. In the event the Company has purchased at least $925,000 in equity of ASET prior to December 30, 2015, then the Company may use the Note as payment for its remainder purchase of equity in ASET. The $75,000 balance has been recorded as a note receivable on the Company’s Balance Sheet.
 
Pursuant to the MOU, the Company is obligated to make a $1 million preferred stock equity investment in exchange for a 20% equity interest in ASET (on a fully diluted, as converted basis) on or before December 31, 2015.  The Company shall maintain its 20% equity ownership in ASET until such time that ASET raises an aggregate of $4,000,000 in equity or in a financing in which ASET issues securities convertible into equity (including the $1 million received from the Company, but excluding any proceeds received by ASET from the sale of the Company’s securities), after which it will be diluted proportionately with all other equity holders of ASET. The Company will have the right to maintain its equity position in ASET by participating in future financings; provided, however, that such right will terminate in the event the Company does not make a minimum investment in a future financing of ASET equal to at least the lesser of (i) $250,000 and (ii) an amount required to maintain its 20% equity ownership interest.

Pursuant to the terms of the ASET License Agreement, as of December 31, 2015, the license granted thereunder was terminated by its terms as a result of ASET’s failure to invest $1 million in new equity in the Company. However, we are currently in discussions with ASET regarding the relationship, if any, moving forward, and the resolution of certain issues arising under the ASET License Agreement and the previously executed MOU.


Lease Agreements

On August 28, 2014, we entered into a lease agreement for our diagnostic laboratory and office space located in Boston, MA. The term of the lease is for two years, from September 1, 2014 through August 31, 2016, and the basic rent payable thereunder is $10,280 per month for the first year and $10,588 per month for the second year. Additional monthly payments under the lease agreement shall include tax payments and operational costs. Additionally, we paid a $40,000 security deposit in connection with entering into the lease.
 
Effective March 1, 2015 we entered into a lease agreement for short-term office space in New York, NY.  The term of the lease is month-to-month and may be terminated upon twenty-one (21) days’ notice. The basic rent payment is $1,400 per month and we paid a $2,100 security deposit in connection with entering into the lease. Effective December 1, 2015 we amended our lease agreement for the short-term office space in New York, NY.  The term of the lease is month-to-month and may be terminated with twenty-one (21) days notice. The basic rent payment is $2,400 per month and we paid an additional $1,500 security deposit in connection with the amended lease.
 
Equipment

On March 26, 2014, we entered into an agreement with HealthCare Equipment Funding located in Roswell, Georgia to finance the purchase of a Perkin Elmer Vectra 2.0 microscope for a purchase price of $318,603. The terms of the agreement required a down payment of $20,520 to cover the final two payments (months 35 and 36) and 34 monthly payments of $10,260 beginning on September 1, 2014. The agreement further required a security deposit of $238,952. As further security, a personal guaranty was required of our former chief executive officer.  Effective July 8, 2015, the refundable deposit was applied against the capital lease obligation and the Company recorded a loss of $8,820. No further payments are due under the terms of the agreement.

We intend to enter into arrangements for the acquisition of additional laboratory equipment, computer hardware and software, including data storage, leasehold improvements and office equipment in the second half of fiscal year 2016 as we prepare for commercialization of our metastatic breast cancer diagnostic. 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.

Operating Capital and Capital Expenditure Requirements

We currently anticipate that our cash and cash equivalents will be sufficient to fund our operations through January 2016, 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 our metastatic breast cancer diagnostic, including the MetaSite Breast(TM) and MenaCalc(TM) 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 our metastatic breast cancer diagnostic, including the MetaSite Breast(TM) and MenaCalc(TM) 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 success of billing, and collecting receivables;
   
  ●  
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 cease operations.
 
Item 3.  Quantitative and Qualitative Disclosures about Market Risks
 
Not applicable.
Item 4.  Controls and Procedures
 
Disclosure Controls and Procedures

Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in reports filed or submitted under the Securities Exchange Act of 1934 (“Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls include, without limitation, controls and procedures designed to ensure that information required to be disclosed under the Exchange Act is accumulated and communicated to management, including principal executive and financial officers, as appropriate, to allow timely decisions regarding required disclosure. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.
 
Management carried out an evaluation, under the supervision of the Chief Executive Officer and Vice President, Finance, of the effectiveness of disclosure controls and procedures as of November 30, 2015. Based upon that evaluation, management, including the Chief Executive Officer and Vice President, Finance, concluded that the design and operation of disclosure controls and procedures were effective.
 
Management's Report on Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in the Securities Exchange Act of 1934, as amended. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of internal control over financial reporting as of November 30, 2015.  In making this assessment, management used the criteria set forth by Internal Control—Integrated Framework  (2013 Framework) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its assessment using those criteria, management concluded that internal control over financial reporting was effective as of November 30, 2015.
 
As a smaller reporting company, we are not required to obtain an attestation report from our registered public accounting firm regarding internal controls over financial reporting.

Changes in Internal Control over Financial Reporting
 
We have had no changes in internal control over financial reporting during the nine months ended November 30, 2015 that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.
 
PART II. OTHER INFORMATION
 
Item  1.  Legal Proceedings
 
None.
 
Item  1A.   Risk Factors
 
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, 2015 and 2014 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 November 30, 2015, the Company had an accumulated deficit of $22,296,199. The Company currently anticipates that its cash and cash equivalents will be sufficient to fund its operations through January 2016, 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.   Exhibits
 
(b)
Exhibits
 
Exhibit No.
 
Description
     
31.1
 
Certification of the Principal Executive and Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
32.1
 
Certification of the Principal Executive and Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
     
101.INS*
 
XBRL Instance Document
     
101.SCH*
 
XBRL Taxonomy Extension Schema
     
101.CAL*
 
XBRL Taxonomy Extension Calculation Linkbase
     
101.DEF*
 
XBRL Taxonomy Extension Definition Linkbase
     
101.LAB*
 
XBRL Taxonomy Extension Label Linkbase
     
101.PRE*
 
XBRL Taxonomy Extension Presentation Linkbase
 
*
Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed note filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability.
 
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.
 
   
METASTAT, INC.
       
Date: January 14, 2016
 
By
/s/ Douglas A. Hamilton
     
Douglas A. Hamilton
President and Chief Executive Officer
(Principal Executive and Financial Officer)