Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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[X]
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For the quarterly period ended August 31, 2016
OR
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[ ]
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TRANSITION REPORT UNDER SECTION 13 OF 15(d) OF THE EXCHANGE ACT OF
1934
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From the transition period
from to .
Commission File Number 000-52735
METASTAT, INC.
(Exact name of small business issuer as specified in its
charter)
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Nevada
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20-8753132
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(State or other jurisdiction of incorporation or
organization)
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(IRS Employer Identification No.)
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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 (§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:
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Large accelerated filer
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[ ]
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Accelerated filer
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[ ]
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Non-accelerated filer
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[ ] (Do not check if a smaller reporting
company)
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Smaller reporting company
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[X]
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Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act). Yes
[ ] No [X]
As of October 14, 2016, there were 2,414,103 shares of the registrant’s common stock,
$0.0001 par value, issued and outstanding.
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PART I. FINANCIAL INFORMATION
MetaStat, Inc.
Condensed Consolidated Balance
Sheets
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August 31,
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February 29,
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2016
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2016
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ASSETS
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(Unaudited)
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(Audited)
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Current
Assets:
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Cash
and cash equivalents
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$86,233
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$363,783
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Notes
receivable
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-
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125,000
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Prepaid
expenses
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103,983
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33,121
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Total
Current Assets
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190,216
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521,904
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Equipment
(net
of accumulated depreciation of $216,928 and $169,396,
respectively)
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449,520
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497,052
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Refundable
deposits
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43,600
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43,600
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TOTAL
ASSETS
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$683,336
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$1,062,556
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LIABILITIES
AND STOCKHOLDERS' DEFICIT
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LIABILITIES
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Current
Liabilities:
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Accounts
payable
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$1,240,800
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$746,144
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Accrued
expenses
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273,782
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214,311
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Notes
payable (net of discount $390,015 and $743,282,
respectively)
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1,792,601
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1,533,120
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Accrued
interest payable
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108,000
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56,000
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Accrued
dividends on Series B Preferred Stock
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48,812
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48,317
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Total
Current Liabilities
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3,463,995
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2,597,892
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Derivative
warrant liability
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226,771
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234,461
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TOTAL
LIABILITIES
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3,690,766
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2,832,353
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STOCKHOLDERS'
DEFICIT
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Series
A convertible preferred stock ($0.0001 par value; 1,000,000 shares
authorized; 874,257 and 874,257 shares issued and outstanding
respectively)
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87
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87
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Series
B convertible preferred stock ($0.0001 par value; 1,000 shares
authorized; 666 and 659 shares issued and outstanding
respectively)
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-
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-
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Common
Stock, ($0.0001 par value; 150,000,000 shares authorized; 2,222,103
and 1,851,201 shares issued and outstanding
respectively)
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222
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185
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Additional
paid-in-capital
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22,468,879
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21,607,259
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Accumulated
deficit
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(25,476,618)
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(23,377,328)
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Total
stockholders' deficit
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(3,007,430)
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(1,769,797)
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TOTAL
LIABILITIES AND STOCKHOLDERS' DEFICIT
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$683,336
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$1,062,556
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The accompanying notes are an integral part of the unaudited
condensed consolidated financial statements.
-1-
MetaStat, Inc.
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Three Months Ended
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Six Months Ended
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August 31, 2016
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August 31, 2015
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August 31, 2016
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August 31, 2015
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Revenue
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$-
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$-
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$-
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$-
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Total
Revenue
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-
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-
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-
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-
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Operating
Expenses
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General
& administrative
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615,849
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1,076,032
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1,171,530
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2,024,928
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Research
& development
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356,168
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317,968
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627,291
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537,294
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Total
Operating Expenses
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972,017
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1,394,000
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1,798,821
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2,562,222
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Other
Expenses (income)
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Interest
expense
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401,990
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40,444
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706,636
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45,361
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Other
income, net
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(14)
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(139,967)
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(281)
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(140,136)
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Change
in fair value of warrant liability
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(96,241)
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(36,400)
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(61,749)
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(172,900)
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Change
in fair value of put embedded in note payable
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(510,867)
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3,134
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(456,868)
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3,134
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Loss
on sale of notes receivable
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112,500
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-
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112,500
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-
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Settlement
expense
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116
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660
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231
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39,097
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Total
Other Expenses (Income)
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(92,516)
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(132,129)
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300,469
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(225,444)
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Net Loss
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$(879,501)
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$(1,261,871)
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$(2,099,290)
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$(2,336,778)
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Loss attibutable to common shareholders and loss per common
share:
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Net
loss
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$(879,501)
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$(1,261,871)
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$(2,099,290)
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$(2,336,778)
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Deemed
Dividend on Series B Preferred Stock issuance
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-
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-
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(708,303)
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(1,067,491)
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Accrued
dividends on Series B Preferred Stock
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(73,452)
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(69,205)
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(146,894)
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(124,467)
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Deemed
dividend to Series B Preferred stock holders for exchange of
warrants
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(29,311)
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(29,311)
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-
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Loss attibutable to common shareholders
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$(982,264)
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$(1,331,076)
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$(2,983,798)
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$(3,528,736)
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Net
loss per share, basic and diluted
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$(0.46)
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$(0.73)
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$(1.50)
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$(1.94)
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Weighted
average of shares outstanding
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2,127,833
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1,823,003
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1,987,487
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1,816,136
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The accompanying notes are an integral part of the unaudited
condensed consolidated financial statements.
MetaStat, Inc.
Unaudited Condensed
Consolidated Statements of
Cash Flows
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Six Months Ended
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August 31, 2016
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August 31, 2015
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Cash
Flows from Operating Activities:
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Net
loss
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$(2,099,290)
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$(2,336,778)
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Adjustments
to reconcile net loss to net cash
used in operating activities:
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Depreciation
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47,532
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48,657
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Share-based
compensation
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362,326
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492,359
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Amortization
of debt discount
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652,879
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29,883
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Loss
on sale of notes receivable and assets
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112,500
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10,196
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Loss
on settlement of capital lease
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-
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8,820
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Gain
related to reimbursement of prior period research and development
expenses
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-
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(100,000)
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Change
in fair value of warrant liability
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(61,749)
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(172,900)
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Change
in fair value of put embedded in notes payable
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(456,868)
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3,134
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Net
changes in assets and liabilities:
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Prepaid
expenses
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87,538
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(40,729)
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Refundable
deposits
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-
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(2,100)
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Accounts
payable and accrued expenses
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507,022
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199,350
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Interest
payable
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52,000
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5,649
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Net
cash used in operating activities
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(796,110)
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(1,854,459)
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Cash
Flows from Investing Activities:
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Proceeds
received from settlement of capital lease
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-
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2,897
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Purchase
of equipment
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-
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(149,458)
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Proceeds
received from sale of notes receivable
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12,500
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-
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Net
cash provided by (used in) investing activities
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12,500
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(146,561)
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Cash
Flows from Financing Activities:
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Proceeds
from issuance of notes, net
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122,790
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1,111,408
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Proceeds
from issuance of common stock and warrants, net
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462,565
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-
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Proceeds
from issuance of Series B Preferred stock and warrants,
net
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-
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1,945,244
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Re-purchase
of common stock and warrants
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-
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(111,563)
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Payment
of capital lease obligation
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-
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(42,407)
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Payment
of short-term debt
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(79,295)
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(71,500)
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Net
cash provided by financing activities
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506,060
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2,831,182
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Net
increase in cash and cash equivalents
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(277,550)
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830,162
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Cash
and cash equivalents at the beginning of the period
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363,783
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257,820
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Cash
and cash equivalents at the end of the period
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$86,233
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$1,087,982
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Supplemental
Disclosure of Non-Cash Financing Activities:
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Warrant
liability associated with note payable
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$15,225
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$150,544
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Series
B Preferred stock paid in kind dividend
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$146,399
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$94,793
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Series
B Preferred stock accrued dividends
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$146,894
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$124,467
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Issuance
of common stock as payment of accounts payable
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$32,000
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$-
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Financing
of insurance premium through notes payable
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$158,400
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$107,250
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Note
receivable received for sale of assets
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$-
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$75,000
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Capital
lease settled against deposit
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$-
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$227,235
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Warrants
issued to placement agents
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$35,859
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$175,241
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Deemed
dividend related to Series B Preferred Stock BCF adjustment for
conversion price adjustment
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$708,303
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$-
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Deemed
dividend to Series B Preferred stock holders upon exercising Most
Favored Nation option
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$29,311
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$-
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Issuance
of warrants in connection with OID Notes amendment
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$44,095
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$-
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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 to provide physicians and patients actionable
information regarding the risk of systemic metastasis and adjuvant
chemotherapy treatment decisions. 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 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 29, 2016 included in the Company’s Annual Report on
Form 10-K as filed with the United States Securities and Exchange
Commission (“SEC”) on May 31, 2016. 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 August 31, 2016 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.
Going Concern
The accompanying 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 approximately $25.5
million as of August 31, 2016, has a negative working capital 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.
Subsequent to August 31, 2016, the Company completed closings of
the Additional Unit Private Placement (as defined in Note 3),
whereby the Company issued an aggregate of 135 units for 192,000 shares of common stock, 48,300 shares of its
Series A-2 Convertible Preferred Stock, convertible into 483,000
shares of common stock, and five-year common stock purchase
warrants to purchase 337,500 shares of common stock with an
exercise price of $3.00 per share for aggregate gross proceeds of
$1.35 million and net proceeds
of approximately $1.23 million. See Note 12-Subsequent
Events.
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 of the Company.
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 Series A
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”).
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 August 31, 2016 and February 29, 2016, the dividend
payable to the holders of the Series B Preferred Stock amounted to
approximately $48,812 and $48,317, respectively. During the three
and six months ended August 31, 2016, the Company issued 13.4407
and 26.6178 shares of Series B Preferred Stock, respectively, for
payment of dividends amounting to $73,925 and $146,399. During the
three and six months ended August 31, 2015, the Company issued
12.4175 and 17.2354 shares of Series B Preferred Stock,
respectively, for payment of dividends amounting to $68,295 and
$94,793.
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 August 31, 2016 and February 29, 2016, the
value of the liquidation preference of the Series B Preferred Stock
aggregated to approximately $3.7 million and $3.7 million,
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 was $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 issuance of shares of common stock pursuant to the 2016 Unit
Private Placement (as defined in Note 3) triggered the full ratchet
anti-dilution price protection provision of the Series B Preferred
Stock. Accordingly, the Series B Conversion Price was adjusted from
$8.25 to $2.00 per share. See Note 3 for the accounting treatment
of the conversion price adjustment.
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.
NOTE 3 – EQUITY ISSUANCES
Common stock financing – the 2016 Unit Private
Placement
During the six months ended August 31, 2016, the Company entered
into a subscription agreement pursuant to a private placement (the
“2016 Unit Private Placement”) with a number of
accredited investors pursuant to which the Company issued units for
an offering price of $10,000 per unit, with each unit consisting of
(i) 5,000 shares of its common stock, and (ii) five-year warrants
(the “Warrants”) to purchase 2,500 shares of common
stock (the “Warrant Shares”), at an exercise price of
$3.00 per share.
First Closing of the 2016 Unit Private Placement
On May 26, 2016, the Company issued an aggregate of 20 units
consisting of an aggregate of 100,000 shares of common stock and
50,000 Warrants for an aggregate purchase price of $200,000. After
deducting placement agent fees and other offering expenses,
including legal expenses, net proceeds amounted to approximately
$126,000. Additionally, the Company issued an aggregate of 10,000
placement agent warrants in substantially the same form as the
Warrants.
Second and Final Closing of the 2016 Unit Private
Placement
On June 8, 2016, the Company issued an aggregate of 29.5 units
consisting of an aggregate of 147,500 shares of common stock and
73,750 Warrants for an aggregate purchase price of $295,000. After
deducting placement agent fees and other offering expenses, the
Company received net proceeds of approximately $264,000.
Additionally, the Company issued an aggregate of 14,750 placement
agent warrants in substantially the same form as the
Warrants.
Registration Rights Agreement
Pursuant to a registration rights agreement entered into by the
parties, the Company agreed to file a registration statement with
the SEC providing for the resale of the shares of common stock and
the shares of common stock underlying the Warrants issued pursuant
to the 2016 Unit Private Placement on or before the date which is
forty-five (45) days after the date of the final closing of the
2016 Unit Private Placement. The Company will use its
commercially reasonable efforts to cause the registration statement
to become effective within one hundred fifty (150) days from the
filing date. The Company has received a waiver from a majority of
the 2016 Unit Private Placement investors extending the filing date
of the registration statement to no later than November 21,
2016.
Most Favored Nation Exchange – the MFN Exchange
On July 12, 2016, the Company and one Series B Preferred Stock
shareholder (the “Exchange Purchaser”) entered into an
exchange agreement effective July 1, 2016 (the “Exchange
Agreement”) whereby the Exchange Purchaser elected to
exercise their Most Favored Nation exchange right into the
securities offered pursuant to the 2016 Unit Private Placement (the
“MFN Exchange”). Accordingly, the Exchange
Purchaser tendered all of their 19.4837 shares of Series B
Preferred Stock and $2,143 of accrued and unpaid dividends for an
aggregate exchange amount of $109,304, plus 9,000 Series A Warrants
with an exercise price of $10.50 per share originally issued in
connection with the Series B Private Placement for an aggregate of
54,652 shares of common stock and warrants to purchase 27,326
shares of common stock at an exercise price of $3.00 per share.
Additionally, the parties entered into a joinder agreement, and the
Exchange Purchaser was granted all rights and benefits under the
2016 Unit Private Placement financing agreements.
The Company analyzed and determined that the MFN Exchange is a
contingent beneficial conversion feature that should be recognized
upon the occurrence of the contingent event based on its intrinsic
value at the commitment date. Since the Company had fully
recognized all allocated proceeds of the Series B Preferred Stock
in previously recognized beneficial conversion features, no
beneficial conversion was recognized upon the exchange of the
Series B Preferred Stock in the MFN Exchange.
For the three and six months ended August 31, 2016, the Company has
recorded a non-cash deemed dividend to Additional Paid-in Capital
of $29,311 in connection with the MFN Exchange equal to the excess
fair value of the warrants received over the fair value of the
Series A Warrants.
Common stock financing – Additional Unit Private
Placement
First Closing of the Additional Unit Private Placement
On August 31, 2016, the Company entered into a subscription
agreement pursuant to a private placement (the “Additional
Unit Private Placement”) with an accredited investor pursuant
to which the Company issued an aggregate of 8.75 units consisting
of an aggregate of 43,750 shares of common stock at an effective
price of $2.00 per share (the “Effective Price”) and
five-year warrants to purchase 21,875 shares of common stock at a
purchase price of $3.00 per share (the “Warrants”) for
an aggregate purchase price of $87,500. After deducting placement
agent fees and other offering expenses, including legal expenses,
net proceeds amounted to approximately $73,000. Additionally, the
Company issued an aggregate of 438 placement agent warrants in
substantially the same form as the Warrants.
Pursuant to the subscription agreement, for a period of one hundred
eighty (180) days following the final closing of the Additional
Unit Private Placement, the investors shall have
“full-ratchet” anti-dilution price protection (the
“Price Protection”) based on certain issuances by the
Company of common stock or securities convertible into shares of
common stock at an effective price per share less than the
Effective Price (a "Down-round Issuance"), whereby the Company
would be required to issue the investors additional shares of
common stock and Warrants.
Accounting for the Price Protection Provision
The Company analyzed the Price Protection provision for embedded
derivatives that require bifurcation. The Company evaluated the
Price Protection provision for both the issuance of additional
shares of common stock and additional Warrants in connection with a
Down-round Issuance in accordance with ASC 480 and ASC 815. In
connection with the potential issuance of additional shares of
common stock, the Company concluded that since the embedded
down-round feature is within the equity host contract, the embedded
Price Protection provision would be considered clearly and closely
related to the equity host under ASC 815-15-25-1(a) and that the
Price Protection provision should not be bifurcated. In connection
with the potential issuance of additional Warrants, the Company
concluded that the freestanding Warrants are not indexed to the
Company’s common stock within the scope of ASC 815-40 and
therefore was initially bifurcated and measured at fair value and
recorded as a derivative liability in the Condensed Consolidated
Balance Sheet. The derivative liability will be measured
at fair value on an ongoing basis, with changes in fair value
recognized in the statement of operations.
Issuances of common stock for services
During the six months ended August 31, 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 six months ended
August 31, 2015, the Company recognized approximately $208,000 into
general and administrative expense.
During the six months ended August 31, 2016, the Company issued an
aggregate of 25,000 shares of common stock to a consultant for
services that vested over a two-month term and to settle $32,000 of
accounts payable. The fair value of the shares amounted to $46,250
on the grant date, of which $14,250 was recognized into general and
administrative expense during the six months ended August 31,
2016.
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
$38,437 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 Placement in March
2015, the Company issued 387.4088 shares of Series B Preferred
Stock convertible into 3,874,088 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 shares of common stock and was settled in 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.
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 the Company must or may
settle in a variable number of its 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 contingent beneficial conversion features 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 and 31, 2015
The $2,130,750 proceeds from the Series B Private Placement on
March 27 and 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 since the Series B Preferred Stock was
immediately convertible.
Deemed Dividend due to Conversion Price Adjustment
During the six months ended August 31, 2016, as a result of the
adjustment of the Series B Conversion Price from $8.25 to $2.00 per
share due to the 2016 Unit Private Placement, the Company recorded
a non-cash deemed dividend, amounting to $708,303 (the
“Deemed Dividend due to Conversion Price
Adjustment”). The expense was measured at the
intrinsic value of the beneficial conversion feature for each
issuance of Series B Preferred Stock in the Series B Private
Placement and was limited to the amount of Series B Preferred
Stock allocated proceeds less previously recognized beneficial
conversion features.
-10-
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 as a result no penalty was
incurred.
NOTE 4 – STOCK OPTIONS
During the six months ended August 31, 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 six months ended August 31, 2015,
1,667 of these options with an aggregate fair value of $8,000
vested based on achieving certain milestones.
During the six months ended August 31, 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 six months ended August 31, 2016, the Company issued
options to purchase 50,000 shares of common stock at $2.19 per
share to a non-executive member of its Board. These 50,000 options
vest in three equal installments on each of May 26, 2017, May 26,
2018, and May 26, 2019 and expire on May 26, 2026. These options
had a total fair value of $86,500 as calculated using the
Black-Scholes model.
During the six months ended August 31, 2016, the Company issued
options to purchase 50,000 shares of common stock at $2.19 per
share to a non-executive member of its Board for performing other
services. These 50,000 options vest upon achieving a certain
milestone and expire on May 26, 2026. These options will be
measured and recognized when vesting becomes probable.
During the three and six months ended August 31, 2016, the Company
issued options to purchase an aggregate of 440,000 shares of common
stock at an exercise price of $2.00 per share to members of its
management team. These options expire on July 7, 2026. 73,333 of
these options vested immediately and 146,667 of these options vest
in equal monthly installments over a twenty-four-month period.
220,000 options are subject to certain milestone-based vesting. The
Company has not recognized any stock based compensation for the
options with performance-vesting conditions, and expects to
recognize the compensation expense when vesting become probable,
which has not yet occurred.
-11-
During the three and six months ended August 31, 2016, the Company
issued options to purchase an aggregate of 100,000 shares of common
stock at and exercise price of $2.00 per share to a non-executive
member of its Board. These options expire on July 7, 2026. These
options had a total fair value of $142,834 as calculated using the
Black-Scholes model. 33,333 of these options vested immediately and
66,667 of these options vest in equal monthly installments over a
twenty-four-month period.
During the three and six months ended August 31, 2016, the Company
issued options to purchase an aggregate of 240,000 shares of common
stock at an exercise price of $2.00 per share to consultants. These
options expire on July 7, 2026. 33,333 of these options vest on the
first anniversary date and then 66,667 of these options vest in
equal monthly installments over a twenty-four-month period. 140,000
of these options are subject to certain milestone-based vesting and
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 weighted average inputs to the Black-Scholes model used to
value the stock options granted during the six months ended August
31, 2016 and 2015 are as follows:
|
|
August 31,
2016
|
August 31,
2015
|
|
Expected
volatility
|
98.98 – 102.74%
|
113.47 - 123.55%
|
|
Expected
dividend yield
|
0.00%
|
0.00%
|
|
Risk-free interest rate
|
98.98 – 102.74%
|
113.47 - 123.55%
|
|
Expected
Term
|
5.47
years
|
6.07
years
|
For the three months ended August 31, 2016, the Company recognized
$243,240 of compensation expense related to stock options, of which
$200,032 was recognized in general and administrative expenses and
$43,208 in research and development expenses.
For the six months ended August 31, 2016, the Company recognized
$348,076 of compensation expense related to stock options, of which
$287,860 was recognized in general and administrative expenses and
$60,416 in research and development expenses.
For the three months ended August 31, 2015, the Company recognized
$183,233 of compensation expense related to stock options, of which
$159,002 was recognized in general and administrative expenses and
$24,231 in research and development expenses.
For the six months ended August 31, 2015, the Company recognized
$252,168 of compensation expense related to stock options, of which
$227,937 was recognized in general and administrative expenses and
$24,231 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 29, 2016
|
426,976
|
$14.45
|
$-
|
7.98
|
|
Granted
|
880,000
|
$2.02
|
-
|
-
|
|
Expired
and forfeited
|
(43,667)
|
$9.66
|
-
|
-
|
|
|
|
|
|
|
|
Outstanding
and expected to vest at August 31, 2016
|
1,263,309
|
$5.95
|
$-
|
9.08
|
|
Exercisable
at August 31, 2016
|
328,184
|
$12.39
|
$-
|
7.61
|
-12-
The following table breaks down exercisable and unexercisable
common stock options by exercise price as of August 31,
2016:
|
Exercisable
|
Unexercisable
|
||||
|
Number of Options
|
Exercise Price
|
Weighted Average Remaining Life (years)
|
Number of Options
|
Exercise Price
|
Weighted Average Remaining Life (years)
|
|
124,442
|
$2.00
|
9.85
|
655,558
|
$2.00
|
9.85
|
|
-
|
$2.19
|
-
|
100,000
|
$2.19
|
9.74
|
|
8,375
|
$3.55
|
9.43
|
25,125
|
$3.55
|
9.43
|
|
1,068
|
$8.10
|
8.42
|
-
|
$8.10
|
-
|
|
74,447
|
$8.25
|
5.72
|
105,554
|
$8.25
|
8.76
|
|
52,434
|
$10.20
|
5.35
|
-
|
$10.20
|
-
|
|
3,334
|
$11.25
|
8.72
|
3,333
|
$11.25
|
8.72
|
|
4,445
|
$16.50
|
8.13
|
15,555
|
$16.50
|
8.13
|
|
14,735
|
$22.50
|
7.91
|
30,000
|
$22.50
|
7.30
|
|
44,904
|
$48.75
|
6.60
|
-
|
$48.75
|
-
|
|
328,184
|
$12.39
|
7.61
|
935,125
|
$3.67
|
9.59
|
As of August 31, 2016, we had approximately $611,000 of
unrecognized compensation related to employee and consultant stock
options that are expected to vest over a weighted average period of
1.3 years and, approximately $580,000 of unrecognized compensation
related to employee stock options whose recognition is dependent on
certain milestones to be achieved. Additionally, there
were 230,000 stock options with a performance vesting
condition that were granted to consultants which will be measured
and recognized when vesting becomes probable.
NOTE 5 – WARRANTS
For the three and six months ended August 31, 2015, the Company
issued a warrant to purchase an aggregate of 43,636 shares of
common stock in connection with the issuance of the Promissory Note
on July 31, 2015, referenced in Note 6. This warrant is exercisable
at $8.25 per share and expires on March 31, 2020. The warrant
vested immediately. This warrant contained an anti-dilution price
protection provision, which required the warrant to be recorded as
derivative warrant liability. Such clause will lapse upon
completion of a Qualified Offering, as defined in the warrant
agreement. These warrants were recorded as a debt discount based on
their fair value.
In connection with the issuances of the Promissory 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 vested
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.
For the six months ended August 31, 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 and 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.
-13-
In connection with the issuances of the Series B Preferred Stock on
March 27 and 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 six months ended August 31, 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.
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 six months ended August 31, 2015, the Company recognized $4,771
of stock-based compensation for these warrants.
For the three and six months ended August 31, 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 three and six months ended August 31,
2015, the Company recognized $26,945 of stock-based compensation
for this warrant.
For the six months ended August 31, 2015, 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 six months ended August 31, 2016, the Company issued
warrants to purchase an aggregate of 9,092 shares of common
stock in connection with the issuance of the OID Notes pursuant to
the March 2016 OID Note Purchase Agreements dated between March 3
and 15, 2016, referenced in Note 6. These warrants were initially
exercisable at $8.25 per share and expire between March 3 and 15,
2021. These warrants vested immediately. These warrants contained
an anti-dilution price protection provision, which required the
warrants to be recorded as derivative warrant liability. Such
clause will lapse upon completion of a Qualified Offering, as
defined in the warrant agreement. These warrants were recorded as a
debt discount based on their fair value.
For the six months ended August 31, 2016, the Company issued
warrants to purchase an aggregate of 60,000 shares of common
stock to investors and placement agents in connection with the
issuance of common stock pursuant to the 2016 Unit Private
Placement referenced in Note 3. These warrants are exercisable at
$3.00 per share and expire on May 26, 2021. 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.
For the three and six months ended August 31, 2016, the Company
issued warrants to purchase an aggregate of 88,500 shares of
common stock in connection with the issuance of common stock
pursuant to the 2016 Unit Private Placement referenced in Note 3.
These warrants are exercisable at $3.00 per share and expire on
June 7, 2021. 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.
For the three and six months ended August 31, 2016, the Company
issued warrants to purchase an aggregate of 27,326 shares of
common stock in connection with the MFN Exchange referenced in Note
3. These warrants are exercisable at $3.00 per share and expire on
June 7, 2021. These warrants vested immediately. Additionally, in
connection with the MFN Exchange, the Company cancelled warrants to
purchase an aggregate of 9,000 shares of common stock. These
warrants were originally issued in connection with the Series B
Private Placement and were exercisable at $10.50 per
share.
-14-
For the three and six months ended August 31, 2016, the Company
issued warrants to purchase an aggregate of 45,459 shares of
common stock in connection with the OID Note Amendments referenced
in Note 6. These warrants are exercisable at $2.00 per share and
expire between August 11, 2021 and August 18, 20121. These warrants
vested immediately. The fair value of these warrants was determined
to be $44,096, as calculated using the Black-Scholes model and were
recorded as a debt discount based on their fair value.
For the three and six months ended August 31, 2016, the Company
issued warrants to purchase an aggregate of 21,875 shares of
common stock in connection with the issuance of common stock
pursuant to the Additional Unit Private Placement referenced in
Note 3. These warrants are exercisable at $3.00 per share and
expire on August 30, 2021. These warrants vested immediately. As
discussed in Note 3, due to the Price Protection Provision, these
warrants are being classified as a derivative liability and
measured at fair value.
In connection with the Additional Unit Private Placement, the
Company issued placement agent warrants to purchase an aggregate of
438 shares of common stock. These placement agent warrants
were issued on August 31, 2016, are exercisable at $3.00 per share
and expire on August 30, 2021. These placement agent warrants vest
immediately. The fair value of these warrants was determined to be
approximately $400, as calculated using the Black-Scholes model.
Weighted-average assumptions used in the Black-Scholes model
included: (1) a discount rate of 1.18 %; (2) an expected term of
5.0 years; (3) an expected volatility of 102% and (4) zero expected
dividends.
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 29, 2016
|
913,514
|
$14.56
|
$-
|
3.14
|
|
Granted
|
252,690
|
2.78
|
-
|
-
|
|
Cancelled
|
23,672
|
17.00
|
-
|
-
|
|
Outstanding
at August 31, 2016
|
1,142,532
|
$11.23
|
$-
|
3.15
|
Warrants exercisable at August 31, 2016 are:
|
Exercise
Prices
|
Number
of shares
|
Weighted average
remaining life (years)
|
Exercisable
number of shares
|
|
$2.00
|
134,554
|
2.78
|
134,554
|
|
$2.20
|
43,636
|
4.45
|
43,636
|
|
$3.00
|
198,139
|
1.43
|
198,139
|
|
$8.25
|
39,468
|
3.68
|
39,468
|
|
$10.20
|
14,668
|
0.21
|
14,668
|
|
$10.50
|
335,005
|
3.59
|
335,005
|
|
$13.65
|
99,826
|
0.42
|
99,826
|
|
$15.00
|
556
|
3.75
|
556
|
|
$18.75
|
695
|
3.75
|
695
|
|
$21.00
|
23,334
|
0.49
|
23,334
|
|
$22.50
|
219,754
|
1.80
|
219,754
|
|
$31.50
|
29,830
|
1.62
|
29,830
|
|
$37.50
|
1,733
|
1.37
|
1,733
|
|
$45.00
|
1,334
|
0.42
|
1,334
|
|
|
1,142,532
|
3.15
|
1,142,532
|
-15-
NOTE 6 – NOTES PAYABLE
Promissory Note and Promissory Note Amendment
The Company entered into a note purchase agreement effective July
31, 2015 (the “Note Purchase Agreement”) with one its
existing institutional investors (the “Note
Holder”). Pursuant to the Note Purchase Agreement,
the Company issued and sold a non-convertible promissory note in
the principal amount of $1.2 million (the “Promissory
Note”) and a warrant (the “Note Warrant”) to
purchase 43,636 shares of the Company’s common stock in a
private placement (the “Note Private
Placement”).
The Promissory Note matured on July 31, 2016, accrued 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 Note Holder has the right at its option to
exchange (the “Note Voluntary Exchange”) the
outstanding principal balance of the Promissory Note plus the
Conversion Interest Amount (as defined below) into such number of
securities to be issued in a Public Offering (as defined
below). Upon effectuating such Note Voluntary Exchange, the
Note Holder 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 $5.0 million to the Company; and
“Conversion Interest Amount” means interest payable in
an amount equal to all accrued but unpaid interest assuming the
Promissory Note had been held from the issuance date to the
maturity date. In the event the Company completes a
Public Offering and the Note Holder elected not to effectuate the
Note Voluntary Exchange, then the Company shall promptly repay the
outstanding principal amount of the Promissory Note plus all
accrued and unpaid interest following completion of the Public
Offering.
The Note 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 Note Warrant. As a result, we
determined that the Note Warrant was not indexed to the
Company’s common stock and therefore should be recorded as a
derivative liability. The detachable Note Warrant issued in
connection with the Promissory Note was recorded as a debt discount
based on its fair value (see Note 7 for fair value measurement).
The adjustment clause lapses upon listing of the Company’s
common stock on a national stock exchange such as the NASDAQ, New
York Stock Exchange or NYSE MKT.
The Company evaluated the Note Voluntary Exchange provision, which
provides for settlement of the Promissory Note at an 8% premium to
the Promissory 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 bifurcated and measured
at fair value and recorded as a derivative liability in the
consolidated balance sheet. The derivative liability
will be measured at fair value on an ongoing basis, with changes in
fair value recognized in the statement of operations. The proceeds
of the Note Private Placement were first allocated to the fair
value of the Note Warrant in the amount of $150,544 and to the fair
value of the Note Voluntary Exchange provision in the amount of
$227,740, with the difference of $821,716 representing the initial
carrying value of the Promissory Note. Further, approximately
$105,000 of debt issuance cost was recorded as additional debt
discount at issuance.
On February 12, 2016, the Company entered into an amendment (the
“Note Amendment”) with the Note Holder, whereby the
Company and the Note Holder agreed to extend the maturity date of
the Promissory Note from July 31, 2016 to December 31, 2016 and
increase the interest rate commencing August 1, 2016 to 12% per
annum. The Company also obtained the Note Holder’s consent to
the consummation of the OID Note Private Placement (as defined
below), as required under the Promissory Note.
Additionally, pursuant to the Note Amendment, the Note Voluntary
Exchange was modified to effect a voluntary exchange of $600,000
principal amount (“Initial Exchange Principal Amount”)
of the Promissory Note plus the Initial Conversion Interest Amount
into a Qualified Offering (as defined below) or Public Offering.
“Initial Conversion Interest Amount” shall mean
interest payable in an amount equal to all accrued but unpaid
interest assuming the Initial Exchange Principal Amount has been
held from the issuance date to the original maturity date of July
31, 2016 (for the avoidance of doubt, such amount that is
calculated using the following formula: (a) 8% multiplied by the
Initial Exchange Principal Amount ($600,000), multiplied by (b) the
actual number of days elapsed in a year of three hundred and
sixty-five (365) days, which amount shall equal $48,000 in the
aggregate). “Qualified Offering” means one or a series
of offerings of equity or equity-linked securities resulting in
aggregate gross proceeds of at least $2,000,000 to the
Company.
-16-
Further, under the modified Note Voluntary Exchange, the Note
Holder shall have the right to effect a voluntary exchange with
respect to the remaining $600,000 principal amount (the
“Remaining Principal Amount”) plus the Remaining
Conversion Interest Amount into a Qualified Offering or Public
Offering. “Remaining Conversion Interest Amount” shall
mean interest payable in an amount equal to the sum of (A) all
accrued but unpaid interest on such portion of the Remaining
Principal Amount subject to such Voluntary Exchange assuming such
portion of the Remaining Principal Amount had been held from the
original maturity date of July 31, 2016 to the amended maturity
date of December 31, 2016 (for the avoidance of doubt, such amount
that is calculated using the following formula: (a) 12% multiplied
by such portion of the Remaining Principal Amount subject to such
Voluntary Exchange, multiplied by (b) the actual number of days
elapsed in a year of three hundred and sixty-five (365) days, which
amount shall equal $30,000 in the aggregate assuming the aggregate
Remaining Principal Amount of $600,000 is used in such
calculation), plus (B) all accrued but unpaid interest assuming
such portion of the Remaining Principal Amount had been held from
the issuance date to the original maturity date of July 31, 2016
(for the avoidance of doubt, such amount that is calculated using
the following formula: (a) 8% multiplied by such portion of the
Remaining Principal Amount, multiplied by (b) the actual number of
days elapsed in a year of three hundred and sixty-five (365) days,
which amount shall equal $48,000 in the aggregate assuming the
aggregate Remaining Principal Amount of $600,000 is used in such
calculation).
In consideration for entering into the Note Amendment, the Company
issued the Note Holder a warrant to purchase 43,636 shares of the
Company’s common stock (the “Amendment Warrant”)
in substantially the same form as the Note Warrant issued in the
Note Private Placement, provided, however, that with respect to the
“full-ratchet” anti-dilution price protection
adjustments for future issuances of other Company equity or
equity-linked securities (subject to certain standard carve-outs),
such price protection adjustment shall be equal to 110% of the
consideration price per share of the issued equity or equity-linked
securities.
The Company evaluated the Note Amendment transaction in accordance
with ASC 470-50-40-12 and determined the Note Amendment did not
constitute a substantive modification of the Promissory Note and
that the transaction should be accounted for as a debt
modification.
The Company evaluated the Note Voluntary Exchange provision, which
provides for settlement of the Promissory Note at an 8% premium to
the Promissory Note’s stated principal amount, in accordance
with ASC 815-15-25. The Note 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 the statement of
operations.
The Amendment 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 Amendment Warrant. As a result,
the Company determined that the Amendment Warrant was not indexed
to the Company’s common stock and therefore should be
recorded as a derivative liability. The fair value of the
detachable Amendment Warrant issued in connection with the Note
Amendment was recorded as a debt discount. The adjustment clause
lapses upon the Company completing a Qualified
Offering.
Accordingly, the Company recorded a debt discount related to the
warrant liability of approximately $85,000 and a debt discount
related to the Voluntary Exchange of approximately
$104,000.
During the three months ended August 31, 2016, the Company
recognized $153,174 of interest expense related to the Promissory
Note, as amended, including amortization of debt discount of
$125,174 and accrued interest expense of $28,000. Additionally, the
Company recognized a gain of $294,114 in the three months ended
August 31, 2016 due to the change in estimated fair value of the
Voluntary Exchange provision.
During the six months ended August 31, 2016, the Company recognized
$291,177 of interest expense related to the Promissory Note, as
amended, including amortization of debt discount of $239,177 and
accrued interest expense of $52,000. Additionally, the Company
recognized a gain of $265,438 in the six months ended August 31,
2016 due to the change in estimated fair value of the Voluntary
Exchange provision.
-17-
OID Notes
In February 2016, the Company entered into an OID note purchase
agreement dated February 12, 2016 (the “February 2016 OID
Note Purchase Agreement”) in a private placement (the
“OID Note Private Placement”) with various
accredited investors (the “OID Note Holders”). Pursuant
to the OID Note Purchase Agreement, the Company may issue and sell
non-convertible OID promissory notes (the “OID Notes”)
up to an aggregate purchase price of $1,000,000 (the
“Purchase Price”) and warrants (the “OID
Warrants”) to purchase 7,273 shares of the Company’s
common stock for every $100,000 of Purchase Price. The OID Notes
shall have an initial principal balance equal to 120% of the
Purchase Price (the “OID Principal
Amount”). Pursuant to the February 2016 OID Note
Purchase Agreement, the Company received an aggregate Purchase
Price of $500,000 and issued OID Notes in the aggregate OID
Principal Amount of $600,000 and OID Warrants to purchase an
aggregate of 36,367 shares of the Company’s common
stock.
During the six months ended August 31, 2016, the Company entered
into OID note purchase agreements between March 4 and 15, 2016 (the
“March 2016 OID Note Purchase Agreements”) with various
accredited investors. Pursuant to the March 2016 OID Note Purchase
Agreements, the Company issued OID Notes with an aggregate Purchase
Price of $125,000 and OID Warrants to purchase 9,902 shares of the
Company’s common stock. The OID Notes issued in March 2016
have an OID Principal Amount equal to $150,000 or 120% of the
Purchase Price.
The OID Notes mature six (6) months following the issuance date of
each OID Note and may be prepaid by the Company at any time prior
to the maturity date without penalty or premium. In the event the
OID Notes are prepaid in full on or before the date that is ninety
(90) days following the issuance date of each OID Note, the
prepayment amount shall be equal to 110% of the Purchase Price and
in the event the OID Notes are prepaid following such initial
ninety (90) day period, the prepayment amount shall be equal to the
OID Principal Balance (the “Optional Redemption”). The
Company determined the Optional Redemption feature represents a
contingent call option. The Company evaluated the Optional
Redemption provision in accordance with ASC 815-15-25. The Company
determined that the Optional Redemption feature is clearly and
closely related to the debt host instrument and is not an embedded
derivative requiring bifurcation.
Each OID Note Holder has the right at its option to act as a
purchaser in a Qualified Offering and, in lieu of investing new
cash subscriptions, mechanically effect a voluntary exchange (the
“OID Note Voluntary Exchange”) of the OID Principal
Amount of the OID Notes into such number of securities to be issued
in a Qualified Offering. Upon effectuating such OID Voluntary
Exchange, the OID Note Holders shall be deemed to be purchasers in
the Qualified Offering. The Company evaluated the OID Note
Voluntary Exchange provision, which provides for settlement of the
OID Notes at the OID Principal Amount in accordance with ASC
815-15-25. The Company determined the OID Note 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
the statement of operations.
The OID Warrants contain an adjustment clause affecting their
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 OID Warrants. As a result, we
determined that the OID Warrants were not indexed to the
Company’s common stock and therefore should be recorded as a
derivative liability. The detachable OID Warrants issued in
connection with the OID Notes were recorded as a debt discount
based on their fair value (see Note 7 for fair value measurement).
The adjustment clause lapses upon the Company completing the
Qualified Offering.
Pursuant to the March 2016 closings of the OID Note Private
Placement, the OID Principal Amount was first allocated to the fair
value of the OID Warrants in the amount of $15,225, next to the
value of the original issuance discount in the amount of $25,000,
then to the fair value of the OID Note Voluntary Exchange provision
in the amount of $32,497, and lastly to the debt discount related
to offering costs of $2,210 with the difference of $75,069
representing the initial carrying value of the OID Notes issued in
March 2016.
-18-
Between August 12, 2016 and August 19, 2016, the Company entered
into certain amendments (the “OID Note
Amendments”), to its outstanding non-convertible OID
Notes originally issued between February 12, 2016 and March 15,
2016 (the “OID Notes”), with the holders of an
aggregate of $750,000 principal amount of OID Notes, whereby the
holders of the OID Notes extended the maturity date of the OID
Notes an additional three (3) months to between November 12, 2016
and December 15, 2016. In consideration for entering into the Note
Amendments, the Company (i) increased the principal amount of the
OID Notes by 10% to $825,000 in the aggregate from $750,000 in the
aggregate, (ii) issued an aggregate of 45,459 common stock purchase
warrants with an exercise price of $2.00 per share and a term of
five years, and (iii) modified the voluntary exchange provision of
the OID Notes by reducing the “Qualified Offering”
threshold amount to $500,000 from $2,000,000. Additionally, the
Company will have the sole option to extend the maturity date of
the OID Notes an additional three (3) months in consideration for a
further 10% increase in the principal amount from $825,000 to
$907,500.
The Company evaluated the OID Note Amendments transactions in
accordance with ASC 470-50-40-12 and determined the OID Note
Amendments did not constitute a substantive modification of the OID
Notes and that the transaction should be accounted for as a debt
modification.
During the three months ended August 31, 2016, the Company
recognized $248,113 of interest
expense related to the OID Notes, as amended, including
amortization of debt discount. Additionally, the Company recognized
a gain of $216,753 in the three months ended August 31, 2016 due to
the change in estimated fair value of the OID Note Voluntary
Exchange provision.
During the six months ended August 31, 2016, the Company recognized
$413,703 of interest expense
related to the OID Notes, as amended, including amortization of
debt discount. Additionally, the Company recognized a gain of
$191,430 in the six months ended August 31, 2016 due to the change
in estimated fair value of the OID Note Voluntary Exchange
provision.
The following table summarizes the notes payable:
|
|
Note
Payable
|
Discount
|
Voluntary Exchange Feature
|
Note
Payable,
Net
|
|
February 29, 2016 balance
|
$1,800,000
|
$(743,282)
|
$476,402
|
$1,533,120
|
|
Issuance
of Notes
|
150,000
|
(74,931)
|
32,496
|
107,565
|
|
Additional
debt discount upon Note amendments
|
75,000
|
(224,681)
|
105,586
|
(44,095)
|
|
Amortization
of debt discount
|
-
|
652,879
|
-
|
652,879
|
|
Change
in fair value of voluntary exchange feature
|
-
|
-
|
(456,868)
|
(456,868)
|
|
August 31, 2016 balance
|
$2,025,000
|
$(390,015)
|
$157,616
|
$1,792,601
|
NOTE 7 – 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 August 31, 2016 and
February 29, 2016, the warrant liability and put exchange feature
liability balances were classified as Level 3
instruments.
-19-
Derivative Warrant Liability
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
|
Additional Unit Private Placement Warrants
|
Total
|
|
Fair value at February 29, 2016
|
$188,351
|
$46,110
|
$-
|
$234,461
|
|
Additions
|
15,225
|
-
|
38,834
|
54,059
|
|
Change
in fair value:
|
(49,874)
|
(11,875)
|
-
|
(61,749)
|
|
Fair value at August 31, 2016
|
$153,702
|
$34,235
|
$38,834
|
$226,771
|
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 August 31,
2016 and February 29, 2016 used the following assumptions: (1) a
stock price of $1.40 and $1.80, respectively; (2) a risk free rate
of 0.99% and 1.08%, respectively; (3) an expected volatility of
134% and 134%, respectively; and (4) a fundraising event to
occur on October 31, 2016 and May 15, 2016, respectively, that
would result in the issuance of additional common
stock.
In connection with the issuance of the Promissory Note on July 31,
2015, the Company issued a warrant to purchase an aggregate of
43,636 shares of common stock. The warrant was issued on
July 31, 2015, was originally exercisable at $8.25 per share and
expires on July 31, 2020. The warrant contains a full-ratchet
anti-dilution price protection provision that requires liability
treatment and the exercise price of this warrant was adjusted to
$2.00 during the six months ended August 31, 2016. The fair value
of the warrant at August 31, 2016 and February 29, 2016 was
determined to be $50,228 and $64,438, respectively, as calculated
using the Monte Carlo simulation. The Monte Carlo simulation as of
August 31, 2016 and February 29, 2016 used the following
assumptions: (1) stock price of $1.40 and $1.80, respectively; (2)
a risk free rate of 1.04% and 1.13%, respectively; (3) an expected
volatility of 134% and 134%, respectively; and (4) a fundraising
event to occur on October 31, 2016 and May 15, 2016, respectively,
that would result in the issuance of additional common
stock.
In connection with the execution of the Note Amendment on
February 12, 2016, the Company issued a warrant to purchase an
aggregate of 43,636 shares of common stock. The warrant was
issued on February 12, 2016, initially exercisable at $8.25 per
share and expires on February 11, 2021. The warrant contains a
full-ratchet anti-dilution price protection provision that requires
liability treatment and the exercise price of this warrant was
adjusted to $2.20 during the six months ended August 31, 2016. The
fair value of the warrant at August 31, 2016 and February 29, 2016
was determined to be $50,877 and $68,292, respectively, as
calculated using the Monte Carlo simulation. The Monte Carlo
simulation as of August 31, 2016 and February 29, 2016 used the
following assumptions: (1) stock price of $1.40 and $1.80,
respectively; (2) a risk free rate of 1.12% and 1.20%,
respectively; (3) an expected volatility of 134% and 134%,
respectively; and (4) a fundraising event to occur on October 31,
2016 and May 15, 2016, respectively, that would result in the
issuance of additional common stock.
-20-
In connection with the issuance of OID Notes in February 2016, the
Company issued warrants to purchase an aggregate of 36,367 shares
of common stock. These warrants were issued between
February 12 and 22, 2016, were initially exercisable at $8.25 per
share and expire between February 11 and 21, 2021. These warrants
contain a full-ratchet anti-dilution price protection provision
that requires liability treatment and the exercise price of these
warrants were adjusted to $2.00 during the six months ended August
31, 2016. The fair value of these warrants at August 31, 2016 and
February 29, 2016 was determined to be $42,316 and $55,621,
respectively, as calculated using the Monte Carlo simulation. The
Monte Carlo simulation as of August 31, 2016 and February 29, 2016
used the following weighted-average assumptions: (1) stock price of
$1.40 and $1.80, respectively; (2) a risk free rate of 1.12% and
1.21%, respectively; (3) an expected volatility of 134% and 134%,
respectively; and (4) a fundraising event to occur on October 31,
2016 and May 15, 2016, respectively, that would result in the
issuance of additional common stock.
In connection with the issuance of OID Notes in March 2016, the
Company issued warrants to purchase an aggregate of 9,092 shares of
common stock. These warrants were issued between March 4
and 15, 2016, were initially exercisable at $8.25 per share and
expire between March 4 and 15, 2021. These warrants contain a
full-ratchet anti-dilution price protection provision that requires
liability treatment and the exercise price of these warrants were
adjusted to $2.00 during the six months ended August 31, 2016. The
fair value of these warrants at August 31, 2016 and at issuance
between March 4 and 15, 2016 was determined to be $10,281 and
$15,225, respectively, as calculated using the Monte Carlo
simulation. The Monte Carlo simulation as of August 31, 2016, and
between March 4 and 15, 2016, used the following weighted-average
assumptions: (1) stock price of $1.40 and $1.97, respectively; (2)
a risk free rate of 1.12% and 1.41%, respectively; (3) an expected
volatility of 134% and 136%, respectively; and (4) a fundraising
event to occur on October 31, 2016 and July 31, 2016, respectively,
that would result in the issuance of additional common
stock.
In connection with the Additional Unit Private Placement, the
Company issued warrants to purchase an aggregate of 21,875 shares
of common stock. These warrants were issued on August
31, 2016, are exercisable at $3.00 per share and expire on August
30, 2021. As described in Note 3, the Price Protection provision
associated with these warrants requires liability treatment. The
fair value of these warrants at August 31, 2016 was determined to
be $38,834 as calculated using the Monte Carlo simulation. The
Monte Carlo simulation as of August 31, 2016 used the following
weighted-average assumptions: (1) stock price of $1.40; (2) a risk
free rate of 1.22%; (3) an expected volatility of 134%; and (4) a
fundraising event to occur on January 31, 2017, that would result
in the issuance of additional common stock.
Put Exchange Feature Liability
The following table sets forth the changes in the estimated fair
value for our Level 3 classified put exchange feature
liabilities:
|
|
Promissory Note, as amended
|
OID Notes
|
Total
|
|
Fair
value, February 29, 2016:
|
$339,979
|
$136,423
|
$476,402
|
|
Additions
|
-
|
138,082
|
138,082
|
|
Change
in fair value:
|
(265,438)
|
(191,430)
|
(456,868)
|
|
Fair
value, August 31, 2016:
|
$74,541
|
$83,075
|
$157,616
|
The Promissory Note issued on July 31, 2015, as amended on February
12, 2016, contains a Note Voluntary Exchange provision that is a
contingent put that requires liability treatment (see Note 6). The
fair value of this put exchange feature at February 29, 2016 and
August 31, 2016 was determined to be $339,979 and $74,541,
respectively. The fair value was calculated using a probability
weighted present value methodology. The significant inputs to the
fair value model were 1) the timing of a Qualified Offering
expected to occur in May 2016 at February 29, 2016 and October 31,
2016 at August 31, 2016; 2) the combined probability of both a
Qualified Offering and a voluntary exchange to occur, which was
determined to be 71% at both February 29 and August 31, 2016 and 3)
a discount rate of 18%, approximating high yield distressed debt
rates, used for all measurement dates.
-21-
The OID Notes issued contain an OID Note Voluntary Exchange
provision that is a contingent put that requires liability
treatment (see Note 6). The fair value of this put exchange feature
at February 29, 2016 and August 31, 2016 was determined to be
$136,423 and $83,075, respectively, as calculated using a
probability weighted present value methodology. The significant
inputs to the fair value model at all measurement dates were 1) the
timing of a Qualified Offering expected to occur in May 2016 at
February 29, 2016 and October 31, 2016 at August 31, 2016; 2) the
combined probability of both a Qualified Offering and a voluntary
exchange to occur, which was determined to be 81% at February 29,
2016 and 85% at August 31, 2016; and 3) a discount rate of 18%,
approximating high yield distressed debt rates, used for all
measurement dates.
NOTE 8 – EQUIPMENT
Equipment consists of the following:
|
|
Estimated
Useful Lives
|
August 31,
2016
|
February 29,
2016
|
|
Research
equipment
|
7 years
|
$590,373
|
$590,373
|
|
Computer
equipment
|
5 years
|
76,075
|
76,075
|
|
|
666,448
|
666,448
|
|
|
Accumulated
depreciation and amortization
|
|
(216,928)
|
(169,396)
|
|
Equipment, net
|
|
$449,520
|
$497,052
|
Depreciation and amortization expense was $23,766 and $23,812 for
the three months ended August 31, 2016 and 2015, respectively.
Depreciation of equipment utilized in research and development
activities is included in research and development expenses and
amounted to $20,126 and $20,126 for the three months ended August
31, 2016 and 2015, respectively. All other depreciation is included
in general and administrative expense and amounted to $3,640 and
$3,686 for the three months ended August 31, 2016 and 2015,
respectively.
Depreciation and amortization expense was $47,532 and $48,657 for
the six months ended August 31, 2016 and 2015, respectively.
Depreciation of equipment utilized in research and development
activities is included in research and development expenses and
amounted to approximately $40,252 and $41,286 for the six months
ended August 31, 2016 and 2015, respectively. All other
depreciation is included in general and administrative expense and
amounted to approximately $7,280 and $7,371 for the six months
ended August 31, 2016 and 2015, respectively.
NOTE 9 - COMMITMENTS
Lease Agreements
On August 28, 2014, we entered into a lease agreement (the
“Boston Lease”) for our diagnostic laboratory and
office space located in Boston, MA. The term of the Boston
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 Boston Lease shall include
tax payments and operational and service costs. Additionally, we
paid a $40,000 security deposit in connection with entering into
the Boston Lease. Effective April 6, 2016, we entered into an
amendment to the Boston Lease (the “Boston Lease
Amendment”) whereby we extended the term by one year from
September 1, 2016 to August 31, 2017. The basic rent payable under
the Boston Lease Amendment increased to $17,164 per month plus
additional monthly payments including tax payments and operational
and service costs.
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 remains month-to-month and may still be
terminated with twenty-one (21) days’ notice. The basic rent
payment increased to $2,400 per month and we paid an additional
$1,500 security deposit in connection with the amended
lease.
-22-
NOTE 10 – LICENSE AGREEMENT WITH ASET THERAPEUTICS,
LLC
Effective August 31, 2016, the Company and ASET Therapeutics, LLC
(“ASET”) entered into a mutual release of claims with
respect to the termination of the Memorandum of Understanding dated
July 14, 2014, as amended, the License and Development and
Commercialization Agreement dated November 25, 2014 and all other
related documents and agreements.
The Company assessed the collectability of its notes receivable in
connection with two past due promissory notes of ASET in the
aggregate principal amount of $125,000 held by the Company (the
“ASET Notes”). The Company determined that the
probability of repayment of the ASET Notes had decreased
significantly and were to be written off. On August 30, 2016, the
Company entered into a sale and assignment agreement with a
non-affiliated shareholder, whereby the Company sold the ASET Notes
for gross proceeds of $12,500. The Company recorded a loss on sale
of notes receivable of $112,500 for the three and six months ended
August 31, 2016.
NOTE 11 – 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 August 31,
2016 and 2015, 10,417 and 31,188 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, shares issuable from convertible securities, and unvested
restricted shares. 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 August 31, 2016
and 2015, the liability warrants were not dilutive.
In computing diluted loss per share for the periods ended August
31, 2016 and 2015, 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:
|
|
August 31,
2016
|
August 31,
2015
|
|
Stock
options
|
1,263,309
|
371,476
|
|
Warrants
|
1,142,532
|
847,932
|
|
Preferred
stock
|
1,888,552
|
480,472
|
|
Total
|
4,293,552
|
1,699,880
|
-23-
NOTE 12 – SUBSEQUENT EVENTS
Additional Closings of the Additional Unit Private
Placement
Subsequent to August 31, 2016, the Company completed additional
closings of the Additional Unit Private Placement (as defined in
Note 3), whereby the Company issued an aggregate of 135
units for 192,000 shares of common stock, 48,300 shares of its newly
created Series A-2 Convertible Preferred Stock (the “Series
A-2 Preferred”), convertible into 483,000 shares of common
stock, and five-year common stock purchase warrants to purchase
337,500 shares of common stock
with an exercise price of $3.00 per share for aggregate gross
proceeds of $1.35 million and
net proceeds of approximately $1.23 million. The Company may
issue shares of Series A-2 Preferred in lieu of issuing shares of
common stock in the Additional Unit Private Placement for the
benefit of certain purchasers that would be deemed to have
beneficial ownership in excess of 4.99% or 9.99%. Additionally, the
Company will issue an aggregate of 54,000 placement agent warrants
in substantially the same form as the warrants issued to the
investors in the Additional Unit Private
Placement.
Research Collaboration
On September 29, 2016, the Company and Celgene Corporation
(“Celgene”) entered into an amendment (the
“Amendment”) to a previously executed pilot materials
transfer agreement (the “Research Agreement”), to
conduct a mutually agreed upon pilot research project (the
“Pilot Project”). The Amendment provides for milestone
payments to the Company of up to $973,482. Under the terms of the
Research Agreement, Celgene will provide certain proprietary
materials to the Company and the Company will evaluate
Celgene’s proprietary materials in the Company’s
metastatic cell line and animal nonclinical models. The milestone
schedule calls for Celgene to pay the Company $486,741 upon
execution of the Amendment, which the Company has received, and the
balance in accordance with the completion of three (3) milestones
to Celgene’s reasonable satisfaction. The term of the
Research Agreement is one (1) year, unless extended by the parties.
Either party may terminate the Research Agreement with thirty (30)
days prior written notice.
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 29, 2016. 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 29, 2016.
Business Overview
We are a pre-commercial biotechnology company focused on the
development and commercialization of diagnostic tests that are
prognostic for risk of cancer metastasis, companion diagnostics to
predict drug response, and anti-metastatic drugs. Our driver-based
platform technology is based on the pivotal role of the Mena
protein and its isoforms, a common pathway for the development of
metastatic disease in epithelial-based solid tumors.
Our product development strategy is based on identifying patients
most at risk for cancer metastasis and targeting the underlying
mechanisms that drive the metastatic cascade. Unlike most oncology
therapeutics that kill cancer cells directly or inhibit cancer cell
proliferation, we focus on preventing aggressive tumors from
spreading. This is particularly relevant as most cancer deaths are
caused by aggressive tumors that spread throughout the body and not
due to growth of the primary tumor.
Our novel diagnostic tests provide oncologists with
clinically-actionable information to optimize cancer treatment
strategies based on the specific biological nature of each
patient’s 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, predict benefit from adjuvant chemotherapy, and response to
existing therapeutics including tyrosine kinase inhibitors (TKIs)
and taxane-based drugs. The MetaSite Breast™ and MenaCalc™ assays are designed to
accurately stratify patients based on the aggressiveness of their
tumor and risk the cancer will spread. During 2016 and 2017, we
plan to complete 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 tests. Our diagnostic assays will be
offered as Laboratory Developed Tests (LDT) through our
state-of-the-art CLIA-certified central reference laboratory
located in Boston, MA.
Going Concern
Since our inception, we have generated significant net losses. As
of August 31, 2016, we had an accumulated deficit of approximately
$25.5 million. At August 31, 2016 we have a negative working
capital. We incurred net losses of approximately $2.1 million and
$2.3 million for the six months ended August 31, 2016 and 2015,
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 payers, and our ability in the
short term to collect from payers 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.
Subsequent to August 31, 2016, we
completed additional closings of the Additional Unit Private
Placement for aggregate gross proceeds of $1.35 million
and net proceeds of approximately
$1.23 million.
We currently anticipate that our cash and cash equivalents and the
proceeds from our Additional Unit Private Placement will be
sufficient to fund our operations through February 28, 2017,
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.
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 met the criteria for variable interest
entities (“VIEs”) because it lacked 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 was not the primary
beneficiary of ASET based primarily on the facts that we did not
have the power to direct ASET’s operations nor did we have
any obligation to absorb ASET losses. As a result, ASET
had not been consolidated by the Company based on our determination
that the Company was 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.
On December 31, 2015, the ASET License Agreement was terminated due
to ASET’s failure to meet certain obligations due to us. All
intellectual property licensed to ASET pursuant to the ASET License
Agreement has been returned to the Company and the parties entered
into a mutual release effective August 30,
2016.
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 29, 2016. 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 remeasured 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 recognized as debt discount or deemed dividend.
Debt discount is amortized as interest 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.
Derivative Financial Instruments and Fair Value
We account for certain warrants and exchange features embedded in
notes payable that are not deemed to be indexed to the
Company’s own stock in accordance with the guidance contained
in the Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (“ASC”) Topic 815,
Derivatives and Hedging (“ASC 815”) and ASC Topic 480,
Distinguishing Liabilities From Equity (“ASC 480”).
Such instruments are classified as liabilities and measured at
their fair values at the time of issuance and at each reporting
period, which change in fair value being recognized in the
statement of operations. The fair values of these instruments have
been estimated using Monte Carlo simulations and other valuation
techniques.
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™
and the MenaCalc™ platform. In 2014, initial research on our
therapeutic platform was sublicensed to ASET pursuant to the ASET
License Agreement. On December 31, 2015, the ASET License Agreement
terminated and rights to the therapeutic platform reverted back to
us.
We charge all research and development expenses to operations as
they are incurred. All potential future product programs, apart
from our breast cancer diagnostic are in the clinical research and
development phase, and the earliest we expect another cancer
indication to reach the commercialization stage is
2018.
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
August 31, 2016 and
August
31,
2015
Revenues. There were
no revenues for the three months ended August 31, 2016 and 2015,
respectively, because we have not yet commercialized any of our
function-based diagnostic tests.
General and Administrative Expenses. General and administrative expense was $615,849
for the three months ended August 31, 2016 as compared to
$1,076,032 for the three months ended August 31, 2015. This
represents an aggregate decrease of $460,183. Stock-based
compensation was $200,094 for the three months ended August 31,
2016 as compared to approximately $261,017 for the three months
ended August 31, 2015. Excluding non-cash stock-based
compensation expense and depreciation expense, general and
administrative expenses decreased by $399,155 to $412,176 for the
three months ended August 31, 2016 from $811,331 for the three
months ended August 31, 2015.
Consulting expense, investor relations and corporate communications
expense, corporate legal expense, travel expense, and board
compensation, all decreased by $257,202, $64,715, $30,229, $18,825
and $12,500, respectively. Decreased general and administrative
expenses were partially offset by increased intellectual property
legal expense and D&O insurance expense of approximately
$30,521 and $12,415, respectively. We expect general and
administrative expenses to remain relatively stable for the
remainder of the fiscal year ending February 28, 2017, as projected
increases in payroll and related expenses and consulting expenses
will be offset by reduced offering and one-time costs.
Research and Development Expenses. Research and development expenses increased by
$38,200 to $356,168 for the three months ended August 31, 2016 from
$317,968 for the three months ended August 31, 2015. Excluding
non-cash stock-based compensation expense
and depreciation expense, research and development expenses
increased by $19,227 to $292,838, for the three months ended August
31, 2016 from $273,611 for the three months ended August 31,
2015.
Research and development consulting expense increased by $53,983,
which was partially offset by decreased laboratory consumable
expense of approximately $40,633. We expect research and
development expenses to increase for the remainder of this fiscal
year ending February 28, 2017 as we conduct addition breast cancer
clinical studies and other research and development
activities.
Other (Income) Expense. Other
expense amounted to income of $92,516 for the three months ended
August 31, 2016 as compared to income of approximately $132,129 for
the three months ended August 31, 2015. This represents
a change of $39,613. This change was due in part to
an increase in interest expense on the notes payable of
$361,546, a loss from the change in fair value of the warrant
liability of $59,841, a loss on sale of notes receivable of
$112,500, offset by the change in fair value of the put liability
on the notes payable of $514,001.
Net Loss. As a result of
the factors described above, we had a net loss of $879,501 for the
three months ended August 31, 2016 as compared to a net loss of
$1,261,871 for the three months ended August 31,
2015.
Comparison of the
Six Months Ended
August
31, 2016
and August
31,
2015
Revenues. There were
no revenues for the six months ended August 31, 2016 and 2015,
respectively, because we have not yet commercialized any of our
function-based diagnostic tests.
General and Administrative Expenses. General and administrative expense was $1,171,530
for the six months ended August 31, 2016 as compared to $2,024,928
for the six months ended August 31, 2015. This represents an
aggregate decrease of $853,398. Stock-based compensation was
$287,860 for the six months ended August 31, 2016 as compared to
$468,129 for the six months ended August 31, 2015. Excluding
non-cash stock-based compensation expense and depreciation expense,
general and administrative expenses decreased by $673,038 to
$876,390 for the six months ended August 31, 2016 from $1,549,428
for the six months ended August 31, 2015.
Consulting expense, investor relations and corporate communications
expense, corporate legal expense, accounting, audit and tax
expense, payroll and related expense, board compensation, and
travel expense all decreased by $311,867, $164,261, $99,053,
$84,537, $33,183, $25,000 and $18,279, respectively. Decreased
general and administrative expenses were partially offset by
increased intellectual property legal expense and D&O insurance
expense of approximately $74,630 and $25,708, respectively. We
expect general and administrative expenses to remain relatively
stable for the next fiscal year ending February 28, 2017, as
projected increases in payroll and related expenses and consulting
expenses will be offset by reduced one-time and uplisting-related
costs.
Research and Development Expenses. Research and development expenses increased by
$89,997 to $627,291 for the six months ended August 31, 2016 from
$537,294 for the six months ended August 31, 2015. Excluding
non-cash stock-based compensation expense
and depreciation expense, research and development expenses
increased by $54,849 to $526,626 for the six months ended August
31, 2016 from $471,777 for the six months ended August 31,
2015.
Research and development consulting expense increased by $125,353,
which was partially offset by decreased laboratory consumable
expense, and payroll and related expenses of $77,690 and $29,660,
respectively. We expect research and development expenses to
increase for the remainder of this fiscal year ending February 28,
2017 as we conduct addition clinical studies and other research and
development activities.
Other (Income) Expense. Other
expense amounted to an expense of $300,469 for the six months ended
August 31, 2016 as compared to income of $225,444 for the six
months ended August 31, 2015. This represents a change
of $525,913. This change was due in part to an increase in
interest expense on the notes payable of $706,636,
an increase in other income of $139,953, gain from the change
in fair value of the warrant liability of $111,151, and a loss from
the change in fair value of the put liability on the notes payable
of $460,002.
Net Loss. As a result of
the factors described above, we had a net loss of $2,099,290 for
the six months ended August 31, 2016 as compared to a net loss of
$2,336,778 for the six months ended August 31,
2015.
Liquidity and Capital Resources
Since our inception, we have incurred significant losses and, as of
August 31, 2016, we had an accumulated deficit of approximately
$25.5 million. 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 commercialization
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 August 31, 2016, we had received net
proceeds of approximately $6.7 million through the sale of common
stock to investors, approximately $0.3 million through the sale of
Series A Preferred Stock to investors, approximately $3.4 million
through the sale of Series B Preferred Stock to investors,
approximately $3.5 million from the issuance of convertible
promissory notes and approximately $1.8 million from the issuance
of non-convertible promissory notes. As of August 31,
2016, we had cash and cash equivalents of $86,233 and net debt of
approximately $2.0 million. Through August 31, 2016, we
have issued and outstanding warrants to purchase 1,142,532 shares
of our common stock at a weighted average exercise price of $11.23,
which could result in proceeds to us of approximately $12.8 million
if all outstanding warrants were exercised for cash. Subsequent to
August 31, 2016, we have received net proceeds of approximately
$1.23 million through the sale of common stock, Series A-2
Preferred stock and warrants to investors in the Additional Unit
Private Placement.
Cash Flows
At August 31, 2016, we had $86,173 in cash and cash equivalents,
compared to $1,087,982 on August 31, 2015.
Net cash used in operating activities was $796,110 for the six
months ended August 31, 2016 compared to $1,854,459 for the six
months ended August 31, 2015. The decrease in cash used of
$1,058,349 was primarily due to reduced payroll and related
expenses, public company and professional fees associated with
offerings and non-recurring transaction costs. We expect amounts
used in operating activities to increase in fiscal year 2017 and
beyond as we grow our corporate operations.
Net cash provided by investing activities was $12,500 for the six
months ended August 31, 2016, compared to $146,561 of cash used for
the six months ended August 31, 2015. The $159,061 of net cash used
in investing activities for the three months ended August 31, 2015
was mainly attributable to laboratory equipment purchases for our
research and development and CLIA-certified reference laboratory
facility in Boston. We expect amounts used in investing activities
to increase in fiscal year 2017 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 three months
ended August 31, 2016 was $506,060 compared to $2,831,182 for the
three months ended August 31, 2015. Financing activities
consisted primarily of proceeds from issuance of non-convertible
OID promissory notes and warrants and common stock and warrants for
the six months ended August 31, 2016, and from the sale of Series B
Preferred Stock and warrants and the issuance of promissory notes
and warrants for the six months ended August 31, 2015.
Contractual Obligations
As of August 31, 2016, 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
|
$675
|
$175
|
$300
|
$200
|
$(1)
|
|
|
|
|
|
|
|
|
Second
License Agreement
|
$555
|
$80
|
$275
|
$200
|
$(2)
|
|
|
|
|
|
|
|
|
Alternative
Splicing Diagnostic License Agreements (3)
|
$278
|
$40
|
$138
|
$100
|
$(4)
|
|
|
|
|
|
|
|
|
Antibody
License Agreement
|
$120
|
$25
|
$55
|
$40
|
$(5)
|
|
|
|
|
|
|
|
|
Lease
Agreement (6)
|
$205
|
$205
|
$-
|
$-
|
$-
|
(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.
License Agreements
Pursuant to the License Agreement, we are required to make annual
license maintenance fee payments beginning August 26,
2011. The license maintenance payment of $75,000 for
2016 is currently outstanding. We are required to make payments of
$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, if any. We are in compliance with the License
Agreement.
Pursuant to the Second License Agreement, we are required to make
annual license maintenance fee payments beginning on January 3,
2013. The license maintenance payment of $30,000 for 2016 is
currently outstanding. We are required to make additional payments
of $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, if any. We are in
compliance with the Second License Agreement.
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. As of August 31, 2016, the license
maintenance payment of $15,000 for 2016 was outstanding.
Subsequent to August 31, 2016, the license maintenance payment of
$15,000 has been satisfied. We are required to make
additional payments of $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, if any. 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 are in compliance with the Alternative Splicing
License Agreements.
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.
As of August 31, 2016, the license maintenance payment of $10,000
for 2016 was outstanding. Subsequent to August 31, 2016, the
license maintenance payment of $10,000 has been satified. We
are required to make additional payments of $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, if any. We are in compliance with the
Antibody License Agreement.
Lease Agreements
On August 28, 2014, we entered into a lease agreement (the
“Boston Lease”) for our diagnostic laboratory and
office space located in Boston, MA. The term of the Boston
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 Boston Lease shall include
tax payments and operational and service costs. Additionally, we
paid a $40,000 security deposit in connection with entering into
the Boston Lease. Effective April 6, 2016, we entered into an
amendment to the Boston Lease (the “Boston Lease
Amendment”) whereby we extended the term by one year from
September 1, 2016 to August 31, 2017. The basic rent payable under
the Boston Lease Amendment increased to $17,164 per month plus
additional monthly payments, including tax payments and operational
and service costs.
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
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 remains month-to-month and may
still be terminated with twenty-one days’ notice. The basic
rent payment increased to $2,400 per month and we paid an
additional $1,500 security deposit in connection with the amended
lease.
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 and the
proceeds from our Additional Unit Private Placement will be
sufficient to fund our operations through February 28, 2017,
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 breast cancer diagnostic tests, including the
MetaSite BreastTM
and MenaCalcTM
Breast
test billings from the beginning of
our marketing efforts into the foreseeable future. As
reimbursement contracts with third-party payers are put into place,
we expect an increase in the number and level of payments received
for our breast cancer diagnostic, including the MetaSite
BreastTM
and MenaCalcTM
Breast
test billings.
We cannot be certain that any of our future efforts to develop
future products will be successful or that we will be able to raise
sufficient additional funds to see these programs through to a
successful result.
Our future funding requirements will depend on many factors,
including the following:
●
the rate of progress in establishing reimbursement arrangements
with third-party payers;
●
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;
and
●
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.
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.
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 August
31, 2016. 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 August 31,
2016. 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 August 31,
2016.
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 three months ended August 31, 2016 that have materially
affected, or are reasonably likely to materially affect, internal
control over financial reporting.
None.
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 29, 2016 and
February 28, 2015 contains a going concern qualification in which
such firm expressed substantial doubt about the Company's ability
to continue as a going concern. As of August 31, 2016, the Company
had an accumulated deficit of approximately $25.5 million. The
Company currently anticipates that its cash and cash equivalents
will be sufficient to fund its operations through February 28,
2017, 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 its 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.
None.
None.
None.
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: October 14, 2016
|
|
By:
|
/s/
Douglas A. Hamilton
|
|
|
|
|
|
Douglas A. Hamilton
President and Chief Executive Officer
(Principal Executive and Financial Officer)
|
|
-37-