Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[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, 2017
OR
[ ]
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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)
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:
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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If an emerging growth company, indicate by check mark if the
registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange Act.
[ ]
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 12, 2017, there were 5,677,383 shares of the
registrant’s common stock, $0.0001 par value, issued and
outstanding.
TABLE OF
CONTENTS
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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 28,
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2017
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2017
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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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$1,734,297
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$782,707
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Prepaid
expenses
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40,504
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20,856
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Total
Current Assets
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1,774,801
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803,563
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Equipment
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(net
of accumulated depreciation of $309,537 and $265,234,
respectively)
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398,782
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414,635
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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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$2,217,183
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$1,261,798
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LIABILITIES
AND STOCKHOLDERS' EQUITY (DEFICIT)
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LIABILITIES
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Current
Liabilities:
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Accounts
payable
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$531,749
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$572,195
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Accrued
expenses
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201,365
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179,680
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Deferred
research and development reimbursement
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204,974
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177,517
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Convertible
note payable (net of discount $1,576 and $10,914,
respectively)
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998,424
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989,086
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Accrued
interest payable
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66,300
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15,890
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Accrued
dividends on Series B Preferred Stock
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16,270
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15,638
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Total
Current Liabilities
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2,019,082
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1,950,006
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Derivative
warrant liability
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96,038
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2,106,972
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TOTAL
LIABILITIES
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2,115,120
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4,056,978
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STOCKHOLDERS'
EQUITY (DEFICIT)
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Series
A convertible preferred stock ($0.0001 par value; 1,000,000 shares
authorized; 0 and 874,257 shares issued and outstanding as of
August 31, 2017 and February 28, 2017, respectively)
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-
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87
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Series
A-2 convertible preferred stock ($0.0001 par value; 1,000,000
shares authorized; 299,904 and 70,541 shares issued and outstanding
as of August 31, 2017 and February 28, 2017,
respectively)
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30
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7
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Series
B convertible preferred stock ($0.0001 par value; 1,000 shares
authorized; 222 and 213 shares issued and outstanding as of August
31, 2017 and February 28, 2017,
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-
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-
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Common
Stock, ($0.0001 par value; 150,000,000 shares authorized; 5,677,383
and 4,707,942 shares issued and outstanding as of August 31, 2017
and February 28, 2017, respectively)
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568
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471
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Additional
paid-in-capital
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27,459,472
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23,523,140
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Accumulated
deficit
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(27,358,007)
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(26,318,885)
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Total
stockholders' deficit
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102,063
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(2,795,180)
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TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
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$2,217,183
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$1,261,798
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The accompanying notes are an integral part of the unaudited
condensed consolidated financial statements.
MetaStat, Inc.
Unaudited Condensed
Consolidated Statements of
Operations
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Three Months Ended
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Six Months Ended
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August 31, 2017
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August 31, 2016
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August 31, 2017
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August 31, 2016
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Revenue
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$-
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$-
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$23,300
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$-
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Total
Revenue
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-
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-
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23,300
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-
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Operating
Expenses
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General
& administrative
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459,628
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615,849
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1,030,233
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1,171,530
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Research
& development
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322,907
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356,168
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512,351
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627,291
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Total
Operating Expenses
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782,535
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972,017
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1,542,584
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1,798,821
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Other
Expenses (income)
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Interest
expense
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30,039
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401,990
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59,843
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706,636
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Other
income, net
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(267)
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(102)
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(333)
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(50)
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Change
in fair value of warrant liability
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(49,292)
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(96,241)
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(539,672)
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(61,749)
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Change
in fair value of put embedded in note payable
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-
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(510,867)
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-
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(456,868)
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Loss
on sale of notes receivable
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-
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112,500
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-
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112,500
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Total
Other Expenses (Income)
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(19,520)
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(92,516)
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(480,162)
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300,469
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Net Loss
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$(763,015)
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$(879,501)
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$(1,039,122)
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$(2,099,290)
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Loss attributable to common shareholders and loss per common
share:
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Net
loss
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$(763,015)
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$(879,501)
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$(1,039,122)
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$(2,099,290)
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Deemed
Dividend on Series B Preferred Stock issuance
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-
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-
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-
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(708,303)
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Accrued
dividends - Series B Preferred Stock
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(24,557)
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(73,452)
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(48,014)
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(146,894)
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Deemed
Dividend to Series B Preferred Stockholders for exchange of
warrants
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-
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(29,311)
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-
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(29,311)
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Deemed
dividend related to warrants exercise price
modification
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(31,139)
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-
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(31,139)
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-
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Loss attributable to common shareholders
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$(818,711)
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$(981,982)
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$(1,118,275)
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$(2,983,517)
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Net
loss per share, basic and diluted
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$(0.16)
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$(0.46)
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$(0.22)
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$(1.50)
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Weighted
average of shares outstanding
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5,245,819
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2,127,833
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5,002,635
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1,987,487
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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, 2017
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August 31, 2016
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Cash
Flows from Operating Activities:
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Net
loss
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$(1,039,122)
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$(2,099,290)
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Adjustments
to reconcile net loss to net
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cash
used in operating activities:
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Depreciation
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44,303
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47,532
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Share-based
compensation
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133,896
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362,326
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Amortization
of debt discount
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9,338
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652,879
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Loss
on sale of notes receivable and assets
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-
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112,500
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Change
in fair value of warrant liability
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(539,672)
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(61,749)
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Change
in fair value of put embedded in notes payable
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-
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(456,868)
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Net
changes in assets and liabilities:
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Prepaid
expenses
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(19,648)
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87,538
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Deferred
research and development reimbursement
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27,457
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-
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Accounts
payable and accrued expenses
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4,896
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507,022
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Accrued
interest
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50,410
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52,000
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Net cash used in operating activities
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(1,328,142)
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(796,110)
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Cash
Flows from Investing Activities:
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Purchase
of equipment
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(28,450)
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-
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Proceeds
received from sale of notes receivable
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-
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12,500
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Net cash (used in) provided by investing activities
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(28,450)
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12,500
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Cash
Flows from Financing Activities:
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Proceeds
from issuance of debt, net of debt issuance costs
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-
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122,790
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Proceeds
from issuance of common stock, preferred stock and warrants, net of
offering costs
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2,308,182
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462,565
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Payment
of short-term debt
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-
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(79,295)
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Net cash provided by financing activities
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2,308,182
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506,060
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Net
increase (decrease) in cash and cash equivalents
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951,590
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(277,550)
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Cash
at the beginning of the period
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782,707
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363,783
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Cash and cash equivalents at the end of the period
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$1,734,297
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$86,233
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Supplemental
Disclosure of Non-Cash Financing Activities:
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Warrant
liability associated with note payable
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$-
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$15,225
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Series
B Preferred stock paid in kind dividend
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$47,382
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$146,399
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Series
B Preferred stock accrued dividends
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$48,014
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$146,894
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Issuance
of common stock to convert Series A preferred stock
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$87
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$-
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Issuance
of common stock to convert accrued expenses
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$23,657
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$-
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Reclassification
between warrant liability and additional
paid-in-capital
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$1,471,262
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$-
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Issuance
ofcommon stock and warrants as payment on accounts
payable
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$-
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$32,000
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Warrants
issued to placement agents
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$185,063
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$35,859
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Deemed
dividend related to Series B Preferred Stock BCF adjustment for
conversion price adjustment
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$-
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$708,303
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Deemed
dividend to Series B Preferred stock holders upon exercising Most
Favored Nation option
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$-
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$29,311
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Deemed
dividend related to warrants exercise price
modification
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$31,139
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$-
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Issuance
of warrants in connection with OID Notes amendment
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$-
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$44,095
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Financing
of insurance premium through notes payable
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$-
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$158,400
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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 biotechnology company
focused on discovering and developing personalized therapeutic (Rx)
and diagnostic (Dx) treatment solutions for cancer patients. Our
Mena isoform “driver-based” diagnostic biomarkers also
serve as novel therapeutic targets for anti-metastatic drugs.
MetaStat is developing therapeutic product candidates and paired
companion diagnostics based on a novel approach that makes the Mena
isoform protein a druggable target. Our core expertise includes an
understanding of the mechanisms and pathways that drive tumor cell
invasion and metastasis, as well as drug resistance to certain
targeted therapies and cytotoxic chemotherapies. MetaStat’s
head office, research laboratories, and state-of-the-art
CLIA-certified diagnostic laboratory are located in Boston,
MA. The Company was incorporated on March 28, 2007 under the laws
of the State of Nevada.
Basis of Presentation
The accompanying condensed 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 in
consolidation.
These interim unaudited financial statements have been
prepared in conformity with generally accepted accounting
principles (“GAAP”) in the United States and should be
read in conjunction with the Company’s audited consolidated
financial statements and related footnotes for the year ended
February 28, 2017, included in the Company’s Annual Report on
Form 10-K as filed with the United States Securities and Exchange
Commission (“SEC”) on May 30, 2017. 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, 2017 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 $27.4
million as of August 31, 2017, has negative working capital and has
not generated positive cash flows from operations. The
Company
has raised approximately $2.3 million from a common stock financing
during the three months ended August 31, 2017, however 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.
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 of directors (the “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
Preferred Stock” or “Series A Preferred”), the
terms of the Series A Preferred Stock are as follows:
Ranking
The Series A Preferred Stock will rank (i) senior to our common
stock, (ii) pari passu with our Series A-2 Preferred Stock (as defined
below), and (iii) junior to our Series B Preferred Stock (as
defined below) 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 A-2 Convertible Preferred Stock
Pursuant to the Certificate of Designation of Rights and
Preferences of the Series A-2 Convertible Preferred Stock (the
“Series A-2 Preferred Stock” or “Series A-2
Preferred”), the terms of the Series A-2 Preferred Stock are
as follows:
Ranking
The Series A-2 Preferred will rank (i) senior to our common stock,
(ii) pari
passu with our Series A
Preferred Stock, and (iii) junior to our Series B Preferred Stock
(as defined below) with respect to distributions of assets upon the
liquidation, dissolution or winding up of the
Company.
Dividends
The Series A-2 Preferred 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-2 Preferred 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-2 Preferred an amount of cash, securities or
other property to which such holder would be entitled to receive
with respect to each such share of Preferred Stock if such shares
had been converted to common stock immediately prior to such
liquidation, dissolution or winding-up of the Company.
Voluntary Conversion; Anti-Dilution Adjustments
Each share of Series A-2 Preferred shall, at any time, and from
time to time, at the option of the holder, be convertible into ten
(10) shares of common stock (the “Series A-2 Conversion
Ratio”). The Series A-2 Conversion Ratio 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.
Conversion Restrictions
The holders of the Series A-2 Preferred may not convert their
shares of Series A-2 Preferred into shares of common stock if the
resulting conversion would cause such holder and its affiliates to
beneficially own (as determined in accordance with Section 13(d) of
the Exchange Act, and the rules thereunder) in excess of 4.99% or
9.99% of the common stock outstanding, when aggregated with all
other shares of common stock owned by such holder and its
affiliates at such time; provided, however, that such holder may
elect to waive these conversion restrictions.
Voting Rights
The Series A-2 Preferred has no voting rights. The common stock
into which the Series A-2 Preferred 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-2
Preferred.
Series B Convertible Preferred Stock
Pursuant to the Certificate of Designation of Rights and
Preferences of the Series B Preferred Stock (the “Series B
Preferred Stock” or “Series B Preferred”), the
terms of the Series B Preferred Stock are as follows:
Ranking
The Series B Preferred Stock will rank senior to our Series A
Preferred Stock, Series A-2 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, 2017 and February 28, 2017, the
dividends payable to the holders of the Series B Preferred Stock
amounted to approximately $16,000 and $16,000, respectively. During
the three and six months ended August 31, 2017, the Company issued
4.3501 and 8.6149 shares of Series B Preferred Stock, respectively,
for payment of dividends amounting to approximately $23,000 and
$47,000, 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 approximately $74,000 and $146,000, respectively.
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, 2017 and February 28, 2017, the
value of the liquidation preference of the Series B Preferred Stock
aggregated to approximately $1.2 million and $1.19 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. The issuance of shares of common stock
pursuant to the 2017 Common Stock 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 $2.00 to $0.83 per
share.
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
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 holders for the securities issued in the
Subsequent Financing on the same terms of such Subsequent
Financing. “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. This right expired on September 30, 2017 pursuant to
the Certificate of Designation of Rights and Preferences 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 an
aggregate of 49.5 units consisting of an aggregate of 247,500
shares of common stock and five-year warrants to purchase 123,750
shares of common stock at a purchase price of $3.00 per share (the
“2016 Unit Warrants”) for an aggregate purchase price
of $495,000. After deducting placement agent fees and other
offering expenses, including legal expenses, net proceeds amounted
to approximately $390,000. Additionally, the Company issued an
aggregate of 24,750 placement agent warrants in substantially the
same form as the 2016 Unit 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 December 15, 2016.
The Company filed the Registration Statement on Form S-1 with the
SEC on December 14, 2016, which was declared effective by the SEC
on January 5, 2017.
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 approximately
$708,000. 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 Preferred private placement and was
limited to the amount of Series B Preferred Stock allocated
proceeds less previously recognized beneficial conversion
features.
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 approximately $2,000 of accrued and unpaid
dividends for an aggregate exchange amount of approximately
$109,000, 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
recorded a non-cash deemed dividend to Additional Paid-in Capital
of approximately $29,000 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 2016 Unit Private
Placement
First Closing of the Additional 2016 Unit Private
Placement
On August 31, 2016, the Company entered into a subscription
agreement pursuant to a private placement (the “Additional
2016 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
“Additional 2016 Unit 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 Additional 2016 Unit Warrants.
Pursuant to the subscription agreement, for a period of one hundred
eighty (180) days following the final closing of the Additional
2016 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 was measured at
fair value on an ongoing basis, with changes in fair value
recognized in the statement of operations. The Price Protection
provision expired on April 30, 2017, resulting in the
reclassification of these warrants to equity (see Note
5).
Common stock financing – the 2017 Common Stock Private
Placement
Between June 23, 2017 and August 3, 2017, the Company completed
closings of a private placement (the “2017 Common Stock
Private Placement”) with existing and new institutional and
accredited investors pursuant to which the Company issued (i) an
aggregate of 811,158 shares of common stock, (ii) 229,363.2 shares
of Series A-2 Preferred Stock convertible into 2,293,632 shares of common stock
and (iii) reduced the exercise price of outstanding warrants
to purchase 536,434 shares of common
stock from $3.00 to $2.00 per share (see Note 5), for
an aggregate purchase price of
approximately $2.57 million, including the conversion of
approximately $22,000 of compensation payable to our Chief
Executive Officer. After deducting placement agent fees and other
offering expenses, the Company received net proceeds of
approximately $2.31 million. Additionally, the Company issued the
placement agent five-year warrants to purchase an aggregate of
162,486 shares of common stock with an exercise price equal to
$1.27 per share, and a cashless exercise provision. The effective
purchase price of the 2017 Common Stock Private Placement was $0.83
per share.
Conversion Price Adjustment
During the six months ended August 31, 2017, as a result of the
2017 Common Stock Private Placement, the Series B Conversion Price
was adjusted from $2.00 to $0.83 per share. No non-cash deemed
dividend was recorded to recognize any contingent beneficial
conversion feature related to this conversion price change as all
proceeds of the Series B Preferred have already been offset by
previously recognized beneficial conversion
features.
Issuances of common stock for services
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
approximately $46,000 on the grant date, of which approximately
$14,000 was recognized into general and administrative expense
during the six months ended August 31, 2016.
During the six months ended August 31, 2017, the Company issued an
aggregate of 100,000 shares of common stock to members of its Board
that vested immediately. The fair value of the shares amounted to
approximately $130,000 on the grant date, which was recognized into
general and administrative expense during the six months ended
August 31, 2017.
NOTE 4 – STOCK OPTIONS
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 $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. These options had a
total fair value of approximately $622,000 as calculated using the
Black-Scholes model. 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.
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 $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 approximately $143,000 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 $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.
During the six months ended August 31, 2017, the Company issued
options to purchase an aggregate 55,000 shares of common stock at
3.00 per share to its President and Chief Executive Officer and a
member of its management team. These options expire on April 4,
2027. 18,334 of these options vest on the first anniversary date of
April 4, 2018, and then 36,666 of these options vest in equal
monthly installments over a twenty-four-month period. These options
had a total fair value of approximately $60,000 as calculated using
the Black-Scholes model.
During the six months ended August 31, 2017, an aggregate of 39,999
unvested options to purchase shares of common stock at 8.25 per
share to certain members of the Company’s Board were
terminated upon resignation from the board. The Company recognized
a credit of approximately $146,000 for the true-up of forfeitures
related to these unvested options during the six months ended
August 31, 2017.
The weighted average inputs to the Black-Scholes model used to
value the stock options granted during the six months ended August
31, 2017 and 2016 are as follows:
|
August
31,
|
August
31,
|
|
2017
|
2016
|
Expected
volatility
|
129%
|
98.98 – 102.74%
|
Expected
dividend yield
|
0.00%
|
0.00%
|
Risk-free
interest rate
|
1.95%
|
0.97% – 1.65%
|
Expected
Term
|
6.01
years
|
5.47
years
|
For the six months ended August 31, 2016, the Company recognized
approximately $348,000 of compensation expense related to stock
options, of which approximately $288,000 was recognized in general
and administrative expenses and approximately $60,000 in research
and development expenses.
For the three months ended August 31, 2016, the Company recognized
approximately $243,000 of compensation expense related to stock
options, of which approximately $200,000 was recognized in general
and administrative expenses and approximately $43,000 in research
and development expenses.
For the six months ended August 31, 2017, the Company recognized a
credit of approximately $59,000 of compensation expense related to
stock options, of which a credit of approximately $89,000 was
recognized in general and administrative expenses and an expense of
approximately $30,000 in research and development
expenses.
For the three months ended August 31, 2017, the Company recognized
approximately $38,000 of compensation expense related to stock
options, of which approximately $24,000 was recognized in general
and administrative expenses and approximately $14,000 in research
and development expenses.
The following table summarizes common stock options issued and
outstanding:
|
Options
|
Weighted
average
exercise |
Aggregate
intrinsic
value |
Weighted
average
remaining
|
Outstanding
at February 28, 2017
|
966,474
|
$5.71
|
$-
|
8.87
|
Granted:
|
55,000
|
$3.00
|
$-
|
-
|
Expired
and forfeited:
|
(60,000)
|
$8.25
|
$-
|
-
|
Outstanding
and expected to vest at August 31, 2017
|
961,474
|
$5.40
|
$-
|
8.49
|
Exercisable
at August 31, 2017
|
349,892
|
$9.62
|
$-
|
7.76
|
The following table breaks down exercisable and unexercisable
common stock options by exercise price as of August 31,
2017:
Exercisable
|
Unexercisable
|
||||
Number of Options
|
Exercise Price
|
Weighted Average Remaining Life (years)
|
Number of Options
|
Exercise Price
|
Weighted Average Remaining Life (years)
|
178,888
|
$2.00
|
8.85
|
301,112
|
$2.00
|
8.85
|
16668
|
$2.19
|
8.74
|
83,332
|
$2.19
|
8.74
|
1,083
|
$3.00
|
9.23
|
174,917
|
$3.00
|
9.43
|
30,000
|
$3.55
|
8.43
|
-
|
$3.55
|
-
|
1,068
|
$8.10
|
7.42
|
-
|
8.10
|
-
|
20,000
|
$8.25
|
7.80
|
40,000
|
$8.25
|
7.80
|
41,434
|
$10.20
|
4.35
|
-
|
$10.20
|
-
|
3,334
|
$11.25
|
7.72
|
3,333
|
$11.25
|
7.72
|
11,112
|
$16.50
|
7.13
|
8,888
|
$16.50
|
7.13
|
8,068
|
$22.50
|
7.42
|
-
|
$22.50
|
-
|
38,237
|
$48.75
|
5.60
|
-
|
$48.75
|
-
|
349,892
|
$9.62
|
7.76
|
611,582
|
$2.98
|
8.90
|
As of August 31, 2017, we had approximately $133,000 of
unrecognized compensation related to employee and consultant stock
options that are expected to vest over a weighted average period of
1.25 years and, approximately $500,000 of unrecognized compensation
related to employee stock options whose recognition is dependent on
certain milestones to be achieved. Additionally, there
were 173,333 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 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 original issue
discount promissory notes dated between March 3 and 15, 2016. 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. Following the 2017 Common Stock Private Placement, these
warrants are now exercisable at $0.83 per share.
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 issuance of
Series B Preferred Stock and were exercisable at $10.50 per
share.
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 amendments to the OID Notes
referenced in Note 6. These warrants are exercisable at $2.00 per
share and expire between August 11, 2021 and August 18, 2021. These
warrants vested immediately. The fair value of these warrants was
determined to be approximately $44,000, 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 Additional 2016 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 were initially classified as a
derivative liability and measured at fair value.
For
the three and six months ended August 31, 2016, in connection with
the Additional 2016 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.
For the six months ended August 31, 2017, the Company issued
warrants to purchase an aggregate of 37,500 shares of common
stock to a consultant for advisory services. These warrants are
exercisable at $3.00 per share and expire between March 31, 2021
and May 31, 2021. These warrants vested immediately. The fair value
of these warrants was determined to be approximately $37,000, as
calculated using the Black-Scholes model. Average assumptions used
in the Black-Scholes model included: (1) a discount rate of 1.83%;
(2) an expected term of 5.0 years; (3) an expected volatility of
131%; and (4) zero expected dividends. For the six months ended
August 31, 2017, the Company recognized approximately $37,000 of
stock-based compensation for these warrants.
-11-
For the six months ended August 31, 2017, the Company reclassified
approximately $1.5 million of derivative warrant liability to
equity in connection with the lapse of a Price Protection provision
referenced in Note 3, that had resulted in these instruments being
classified as a derivative warrant liability at issuance. The fair
value of these warrants was determined to be approximately $1.5
million, as calculated using the Black-Scholes model. Average
assumptions used in the Black-Scholes model included: (1) a
discount rate of 1.81%; (2) an expected term of 4.46 years; (3) an
expected volatility of 124%; and (4) zero expected
dividends.
For the three and six months ended August 31, 2017, the Company
issued warrants to purchase an aggregate of 37,500 shares of
common stock to a consultant for advisory services. These warrants
are exercisable at $3.00 per share and expire between June 30, 2021
and August 31, 2021. These warrants vested immediately. The fair
value of these warrants was determined to be approximately $25,000,
as calculated using the Black-Scholes model. Average assumptions
used in the Black-Scholes model included: (1) a discount rate of
1.81%; (2) an expected term of 5.0 years; (3) an expected
volatility of 131%; and (4) zero expected dividends. For the three
and six months ended August 31, 2017, the Company recognized
approximately $25,000 of stock-based compensation for these
warrants.
For the three and six months ended August 31, 2017, in connection
with the 2017 Unit Private Placement, the Company reduced the
exercise price of outstanding warrants to purchase 536,434
shares of common stock from
$3.00 to $2.00 per share. The Company recorded a non-cash deemed
dividend of approximately $31,000 equal to difference in the
aggregated fair value of these
warrants on the measurement dates as calculated using the
Black-Scholes model.
For
the three and six months ended August 31, 2017, in connection with
the 2017 Unit Private Placement, the Company issued placement agent
warrants to purchase an aggregate of 162,486 shares of common
stock. These placement agent warrants were issued between June
23, 2017 and August 3, 2017, are exercisable at $1.27 per share and
expire between June 22, 2022 and August 2, 2022. These placement
agent warrants vest immediately. The fair value of these warrants
was determined to be approximately $185,000, as calculated using
the Black-Scholes model. Weighted-average assumptions used in the
Black-Scholes model included: (1) a discount rate of 1.78 %; (2) an
expected term of 5.0 years; (3) an expected volatility of 130%; and
(4) zero expected dividends.
The following table summarizes common stock purchase warrants
issued and outstanding:
|
Warrants
|
Weighted average exercise
price
|
Aggregate
intrinsicvalue |
Weighted average
remaining
contractual life (years)
|
Outstanding at February 28, 2017
|
2,698,694
|
$5.11
|
$-
|
4.21
|
Granted:
|
237,486
|
1.82
|
-
|
|
Cancelled/Expired/Exercised:
|
(4,671)
|
31.50
|
-
|
|
Outstanding at August 31, 2017
|
2,931,509
|
$4.56
|
$-
|
3.81
|
Warrants exercisable at August 31, 2017 are:
Exercise
|
Number
|
Weighted average
|
Exercisable
|
Prices
|
of shares
|
remaining life (years)
|
number of shares
|
$0.83
|
119,429
|
3.04
|
119,429
|
$0.91
|
43,636
|
3.45
|
43,636
|
$1.27
|
162,486
|
4.83
|
162,486
|
$2.00
|
581,893
|
4.06
|
581,893
|
$3.00
|
1,653,974
|
4.19
|
1,653,974
|
$8.25
|
9,134
|
2.99
|
9,134
|
$10.50
|
126,978
|
2.6
|
126,978
|
$15.00
|
556
|
2.75
|
556
|
$18.75
|
695
|
2.75
|
695
|
$22.50
|
209,754
|
0.88
|
209,754
|
$31.50
|
21,241
|
1.07
|
21,241
|
$37.50
|
1,733
|
0.37
|
1,733
|
$4.56
|
2,931,509
|
3.81
|
2,931,509
|
-12-
NOTE 6 – NOTES PAYABLE
Promissory Note
On July 31, 2015, the Company entered into a note purchase
agreement, which was subsequently amended, whereby it issued and
sold a non-convertible promissory note in the principal amount of
$1.2 million (the “Promissory Note”) and a warrant to
purchase 43,636 shares of the Company’s common stock.
Effective October 21, 2016, $600,000 principal amount of the
Promissory Note plus $48,000 of accrued and unpaid interest was
exchanged into the securities issued in a private placement. In
January 2017, the remaining unpaid principal balance and accrued
interest were exchanged into a convertible note (see Convertible
Note below).
During the three months ended August 31, 2016, the Company
recognized approximately $153,000 of interest expense related to
the Promissory Note, as amended, including amortization of debt
discount of approximately $125,000 and accrued interest expense of
approximately $28,000. Additionally, the Company recognized a gain
of approximately $294,000 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
approximately $291,000 of interest expense related to the
Promissory Note, as amended, including amortization of debt
discount of approximately $239,000 and accrued interest expense of
approximately $52,000. Additionally, the Company recognized a gain
of approximately $265,000 in the six months ended August 31, 2016
due to the change in estimated fair value of the Voluntary Exchange
provision.
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”). Pursuant to the February 2016 OID
Note Purchase Agreement, the Company received an aggregate purchase
price of $500,000 and issued OID promissory Notes (the “OID
Notes”) in the aggregate principal amount of $600,000 and
warrants (the “OID Warrants”) to purchase an aggregate
of 36,367 shares of the Company’s common stock.
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 a principal amount equal to
$150,000 or 120% of the purchase price.
Pursuant to the March 2016 closings of the OID Note private
placement, the principal amount was first allocated to the fair
value of the OID Warrants in the amount of approximately $15,000,
next to the value of the original issuance discount in the amount
of $25,000, then to the fair value of a bifurcated derivative
liability related to an exchange provision in the OID Notes in the
amount of approximately $33,000, and lastly to the debt discount
related to offering costs of approximately $2,000 with the
difference of approximately $75,000 representing the initial
carrying value of the OID Notes issued in March 2016.
The OID Notes were subsequently amended in August 2016, extending
the maturity date of the OID Notes in exchange for among other, (i)
an increased principal amount of the OID Notes by 10% to $825,000
in the aggregate from $750,000 in the aggregate, and (ii) the
issuance of an aggregate of 45,459 common stock purchase warrants
with an exercise price of $2.00 per share and a term of five
years.
In October 2016, $553,000 principal amount of OID Notes
were exchanged into
the securities issued in the
Additional 2016 Unit Private Placement. Accordingly, the Company recorded a loss on
extinguishment of approximately $555,000. Additionally, the Company
repaid $8,000 of OID Notes.
In November 2016, the Company exercised its sole option to further
extend the maturity date to its outstanding OID Note in the
aggregate of $264,000 principal amount of OID Note. In
consideration for the extension, the Company increased the
principal amount of the OID Note by 10% or to $26,400 to $290,400
in the aggregate. In January 2017, the remaining outstanding OID
Note was exchanged into a convertible note (see Convertible Note
below).
During the three months ended August 31, 2016, the Company
recognized approximately $248,000 of interest expense related to the OID Notes, as
amended, including amortization of debt discount. Additionally, the
Company recognized a gain of approximately $217,000 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
approximately $414,000 of
interest expense related to the OID Notes, as amended, including
amortization of debt discount. Additionally, the Company recognized
a gain of approximately $191,000 in the six months ended August 31,
2016 due to the change in estimated fair value of the OID Note
Voluntary Exchange provision.
-13-
Convertible Note
On January 17, 2017, the Company entered into an exchange
agreement, pursuant to which the Company issued a new convertible
promissory note in the principal amount of $1,000,000 (the
“Convertible Note”) in exchange (the “Debt
Exchange”) for the cancellation of (i) $600,000 principal
amount of the Promissory Note plus $96,000 of accrued and unpaid
interest thereon, and (ii) $290,400 principal amount of the OID
Note. The Convertible Note is convertible into shares of common
stock at $2.00 per share and accrues interest at a rate of 10% per
annum. The Convertible Note matured on September 30, 2017 and
provides for a 10 business day cure period that expires on October
16, 2017.
The Company is currently in the process of negotiating an extension
of the maturity date of the Convertible Note with the holder
thereof, which we expect will be finalized shortly. In the event we
do not reach an agreement with the noteholder to extend the
maturity date of the Convertible Note, the noteholder may exercise
its default rights. There can be no assurance that we will be able
to raise additional debt or equity financing in an amount
sufficient to enable us to retire these obligations and meet our
other obligations. Following the expiration of the cure period, the
noteholder may bring suit against us and foreclose on all of our
assets and business by reason of our default.
During the three months ended August 31, 2017, the Company
recognized approximately $30,000 of interest expense related to the
Convertible Note, including amortization of debt discount of
approximately $5,000 and accrued interest expense of approximately
$25,000.
During the six months ended August 31, 2017, the Company recognized
approximately $60,000 of interest expense related to the
Convertible Note, including amortization of debt discount of
approximately $10,000 and accrued interest expense of approximately
$50,000.
The following table summarizes the notes payable:
|
Convertible Note
|
|
Debt,
|
|
Payable
|
Discount
|
Net
|
February
28, 2017 balance
|
$1,000,000
|
$(10,914)
|
$989,086
|
Amortization
of debt discount
|
-
|
9,338
|
9,338
|
August
31, 2017 balance
|
$1,000,000
|
$(1,576)
|
$998,424
|
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, 2017 and
February 28, 2017, the warrant liability balance was classified as
Level 3 instruments.
Derivative Warrant Liability
The following table sets forth the changes in the estimated fair
value for our Level 3 classified derivative warrant
liability:
|
Promissory Note Warrants
|
Series B Warrant
|
PPM Warrants
|
Total
|
Fair
value at February 28, 2017
|
$157,204
|
$35,690
|
$1,914,078
|
$2,106,972
|
Change
in fair value
|
(78,024)
|
(18,832)
|
(442,816)
|
(539,672)
|
Reclassification
of warrant liability to equity
|
-
|
-
|
(1,471,262)
|
(1,471,262)
|
Fair
value at August 31, 2017
|
$79,180
|
$16,858
|
$-
|
$96,038
|
In connection with the initial closing of the Series B Preferred
private placement on December 31, 2014, the Company issued a
warrant to purchase an aggregate of 30,334 shares of common stock
(the “Series B Warrant”), originally exercisable at
$8.25 per share and expiring on March 31, 2020. The Series B
Warrant contains a full-ratchet anti-dilution price protection
provision that requires liability treatment. The exercise price of
the Series B Warrant was adjusted to $2.00 per share during the
year ended February 28, 2017 and subsequently adjusted to $0.83 per
share in August 2017 as a result of the 2017 Common Stock Private
Placement. The fair value of the Series B Warrant at August 31,
2017 and February 28, 2017 was determined to be approximately
$17,000 and $36,000, respectively, as calculated using the Monte
Carlo simulation. The Monte Carlo simulation as of August 31, 2017
and February 28, 2017 used the following assumptions: (1) a stock
price of $0.76 and $1.50, respectively; (2) a risk-free rate of
1.39% and 1.50%, respectively; (3) an expected volatility of 131%
and 131%, respectively; and (4) a fundraising event to occur
on January 31, 2018 and May 31, 2017, 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, originally exercisable at $8.25 per
share and expiring on July 31, 2020. This warrant contains a
full-ratchet anti-dilution price protection provision that requires
liability treatment. The exercise price of this warrant was
adjusted to $2.00 per share during the year ended February 28, 2017
and subsequently adjusted to $0.83 per share in August 2017 as a
result of the 2017 Common Stock Private Placement. The fair value
of the warrant at August 31, 2017 and February 28, 2017 was
determined to be approximately $25,000 and $51,000, respectively,
as calculated using the Monte Carlo simulation. The Monte Carlo
simulation as of August 31, 2017 and February 28, 2017 used the
following assumptions: (1) stock price of $0.76 and $1.50,
respectively; (2) a risk-free rate of 1.43% and 1.57%,
respectively; (3) an expected volatility of 131% and 131%,
respectively; and (4) a fundraising event to occur on January 31,
2018 and May 31, 2017, respectively, that would result in the
issuance of additional common stock.
In connection with the amendment of the Promissory Note on February
12, 2016, the Company issued a warrant to purchase an aggregate of
43,636 shares of common stock, initially exercisable at $8.25 per
share and expiring on February 11, 2021. This warrant contains a
ratchet anti-dilution price protection provision that requires
liability treatment. The exercise price of this warrant was
adjusted to $2.20 per share during the year ended February 28, 2017
and subsequently adjusted to $0.91 per share in August 2017 as a
result of the 2017 Common Stock Private Placement. The fair value
of the warrant at August 31, 2017 and February 28, 2017 was
determined to be approximately $26,000 and $51,000, respectively,
as calculated using the Monte Carlo simulation. The Monte Carlo
simulation as of August 31, 2017 and February 28, 2017 used the
following assumptions: (1) stock price of $0.76 and $1.50,
respectively; (2) a risk-free rate of 1.50% and 1.68%,
respectively; (3) an expected volatility of 131% and 131%,
respectively; and (4) a fundraising event to occur on January 31,
2018 and May 31, 2017, respectively, that would result in the
issuance of additional common stock.
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. The exercise price of these
warrants were adjusted to $2.00 per share during the year ended
February 28, 2017 and subsequently adjusted to $0.83 per share in
August 2017 as a result of the 2017 Common Stock Private Placement.
The fair value of these warrants at May 31, 2017 and February 28,
2017 was determined to be approximately $22,000 and $44,000,
respectively, as calculated using the Monte Carlo simulation. The
Monte Carlo simulation as of August 31, 2017 and February 28, 2017
used the following weighted-average assumptions: (1) stock price of
$0.76 and $1.50, respectively; (2) a risk-free rate of 1.50% and
1.68%, respectively; (3) an expected volatility of 131% and 131%,
respectively; and (4) a fundraising event to occur on January 31,
2018 and May 31, 2017, respectively, that would result in the
issuance of additional common stock.
-15-
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. The exercise price of these warrants were adjusted to
$2.00 per share during the year ended February 28, 2017 and
subsequently adjusted to $0.83 per share in August 2017 as a result
of the 2017 Common Stock Private Placement. The fair value of these
warrants at August 31, 2017 and February 28, 2017 was determined to
be approximately $6,000 and approximately $11,000, respectively, as
calculated using the Monte Carlo simulation. The Monte Carlo
simulation as of August 31, 2017, and February 28, 2017 used the
following weighted-average assumptions: (1) stock price of $0.76
and $1.50, respectively; (2) a risk-free rate of 1.51% and 1.69%,
respectively; (3) an expected volatility of 131% and 131%,
respectively; and (4) a fundraising event to occur on January 31,
2018 and May 31, 2017, respectively, that would result in the
issuance of additional common stock.
In connection with the private placement of common stock and
warrants that closed in October 2016, the Company issued warrants
to purchase an aggregate of 1,617,506 shares of common stock (the
“PPM Warrants”). These PPM Warrants were issued
between August 31, 2016 and October 30, 2016, are exercisable at
$3.00 per share and expire between August 30, 2021 and October 29,
2021. These warrants contain a full-ratchet anti-dilution price
protection provision that requires liability treatment. The fair
value of these warrants at February 28, 2017 was determined to be
approximately $1.9 million, as calculated using the Monte Carlo
simulation. The Monte Carlo simulation as of February 28, 2017 used
the following weighted-average assumptions: (1) stock price of
$1.50; (2) a risk-free rate of 1.66%; (3) an expected volatility of
131%; and (4) a fundraising event to occur on May 31, 2017, that
would result in the issuance of additional common stock. The price
protection provision expired on April 30, 2017, and the Company
reclassified approximately $1.5 million of derivative warrant
liability to equity, as referenced in Note 5.
NOTE 8 – EQUIPMENT
Equipment consists of the following:
|
Estimated
|
|
|
|
Useful Lives
|
August
31,
2017
|
February 28,
2017
|
Research
equipment
|
7 years
|
$630,170
|
$601,720
|
Computer
equipment
|
5 years
|
78,149
|
78,149
|
|
708,319
|
679,869
|
|
Accumulated
depreciation and amortization
|
|
(309,537)
|
(265,234)
|
Equipment, net
|
|
$398,782
|
$414,635
|
Depreciation and amortization expense was approximately $22,000 and
approximately $24,000 for the three months ended August 31, 2017
and August 31, 2016, respectively. Depreciation of equipment
utilized in research and development activities is included in
research and development expenses and amounted to approximately
$21,000 and approximately $20,000 for the three months ended August
31, 2017 and August 31, 2016, respectively. All other depreciation
is included in general and administrative expense and amounted to
approximately $1,000 and approximately $4,000 for the three months
ended August 31, 2017 and August 31, 2016,
respectively.
Depreciation and amortization expense was approximately $44,000 and
approximately $48,000 for the six months ended August 31, 2017 and
August 31, 2016, respectively. Depreciation of equipment utilized
in research and development activities is included in research and
development expenses and amounted to approximately $41,000 and
approximately $40,000 for the six months ended August 31, 2017 and
August 31, 2016, respectively. All other depreciation is included
in general and administrative expense and amounted to approximately
$3,000 and approximately $7,000 for the six months ended August 31,
2017 and August 31, 2016, respectively.
-16-
NOTE 9 - LICENSE AGREEMENTS AND COMMITMENTS
License Agreements
Pursuant to the License Agreement, we are required to make annual
license maintenance fee payments beginning August 26,
2011. We have satisfied all license maintenance payments
due through August 31, 2017. We are required to make payments of
$100,000 in 2018 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, as amended, we are
required to make annual license maintenance fee payments beginning
on January 3, 2013. We have satisfied all license maintenance
payments due through August 31, 2017. We are required to make
maintenance payments of $5,000 in 2018, $60,000, in 2019 and 2020,
and $100,000 in 2021 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.
Pursuant to the Alternative Splicing Diagnostic License Agreement
and the Alternative Splicing Therapeutic License Agreement, we are
required to make annual license maintenance fee payments for each
license beginning on January 1, 2015. We have satisfied all
license maintenance payments due through August 31, 2017. We are
required to make additional payments of $37,500 in 2018, and
$50,000 in 2019 and every year each license is in effect
thereafter. We are in compliance with the Alternative
Splicing License Agreements.
Pursuant to the Antibody License Agreement, we are required to make
license maintenance fee payments beginning on January 1,
2015. We have satisfied all license maintenance payments due
through August 31, 2017. We are required to make additional
payments of $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, subsequently
amended (the “Boston Lease”) for our diagnostic
laboratory and office space located at 27, Drydock Ave, 2nd
Floor, Boston, MA 02210 (the
“Boston Property”). 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 is
$17,164 per month plus additional monthly payments including tax
payments and operational and service costs.
On July 26, 2017, we entered into an amendment to the second lease
amendment for the Boston Property (the “Second Boston Lease
Amendment”). The Second Boston Lease Amendment extended the
term (the “Second Extension Period”) for five years
from September 1, 2017 through August 31, 2022. Monthly basic rent
payments are approximately $23,000 for the first year of the Second
Extension Period, approximately $24,000 for the second year of the
Second Extension Period, approximately $25,000 for the third year
of the Second Extension Period, approximately $25,000 for the
fourth year of the Second Extension Period, and approximately
$26,000 for the fifth year of the Second Extension
Period.
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.
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 approximately $113,000 for the three and six
months ended August 31, 2016.
-17-
NOTE 11 – COLLABORATIVE AND OTHER RELATIONSHIPS
Research and Development Reimbursements
In connection with our business strategy, we may enter into
research and development and other collaboration agreements.
Depending on the arrangement, we may record payments as advances,
funding receivables, payable balances or non-product income with
our partners, based on the nature of the cost-sharing mechanism and
activity within the collaboration.
On September 29, 2016, the Company entered into an amendment (the
“MTA Amendment”) to a previously executed pilot
materials transfer agreement (the “MTA” and together
with the Amendment, the “Research Agreement”) with
Celgene Corporation (“Celgene”), to conduct a mutually
agreed upon pilot research project (the “Pilot
Project”). The MTA Amendment provides for milestone payments
to the Company of up to approximately $973,000. 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 approximately
$487,000 upon execution of the MTA 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 was extended by the parties
through December 22, 2017. Either party may terminate the Research
Agreement with thirty (30) days prior written
notice.
The Company recognizes the upfront
payment as a deferred research and development reimbursement in the
Consolidated Balance Sheet and will amortize the deferred research
and development reimbursement as incurred over the term of the
Research Agreement. For the three and six months ended August 31,
2017, the Company recorded approximately $249,000 and $362,000 in deferred research and development
reimbursement, and, at August 31, 2017, the Company had a deferred
research and development reimbursement amount of approximately
$205,000.
The Company will recognize deferred research and development
reimbursement for each subsequent milestone in the period in which
the milestone is achieved. As of August 31, 2017, three of four
milestones have been successfully achieved, and the Company has
received aggregate milestone payments of approximately $876,000 or
90% of the total, of which approximately $389,000 was received
during the three and six months ended August 31, 2017.
Research Collaboration Revenue
We currently do not sell any products and do not have any
product-related revenue. From time to time, we may enter
into research and development
collaboration arrangements, in which we are reimbursed for either
all or a portion of the research and development costs incurred. We
record these payments as revenue in the statement of operations. We
recognize revenue upon delivery and acceptance of the test results
or other deliverables.
NOTE 12 – 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,
2017, and 2016, 11,536 and 10,417 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, 2017
and 2016, the liability warrants were not dilutive.
In computing diluted loss per share for the periods ended August
31, 2017 and 2016, 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,
|
August 31,
|
|
2017
|
2016
|
Stock
options
|
961,474
|
1,263,309
|
Warrants
|
2,931,509
|
1,142,532
|
Preferred
stock
|
4,469,177
|
1,888,552
|
Convertible
debt
|
533,150
|
-
|
Total
|
8,895,310
|
4,294,393
|
NOTE 13 – SUBSEQUENT EVENTS
Issuance of Stock Options
On October 11, 2017, we issued options to purchase an aggregate of
21,000 shares of common stock at $0.89 per share to employees.
These options expire on October 11, 2027 and are subject to
time-based vesting.
On October 11, 2017, we issued options to purchase an aggregate of
360,000 shares of common stock at $0.89 per share to consultants.
These options expire on October 11, 2027 and are subject to
time-based and milestone-based vesting.
Issuance of Restricted Stock Units
On October 11, 2017, we issued 100,000 restricted stock units
(“RSU’s”) to non-executive board members. These
RSU’s vest quarterly for active service and settle on the
5th anniversary of issuance,
unless accelerated due to departure from our board of directors or
a change of control.
Employment Agreement with Douglas A. Hamilton
Effective as of October 11, 2017, we have agreed to enter into an
employment agreement with Douglas A. Hamilton to serve as our
president and chief executive officer for a term of two years. The
employment agreement to be entered into with Mr. Hamilton will
provide for a base salary of $260,000 and an annual milestone
bonus, at the sole discretion of the board of directors and the
compensation committee, equal to 150% of Mr.
Hamilton’s compensation thereunder, based on his
attainment of certain financial, clinical development, and/or
business milestones to be established annually by the
Company’s board of directors or compensation
committee. The employment agreement will be terminable by
either party at any time. In the event of termination by the
Company without cause or by Mr. Hamilton for good reason not in
connection with a change of control, as those terms will be defined
in the agreement, he will be entitled to six months’
severance. In the event of termination by the Company without cause
or by Mr. Hamilton for good reason in connection with a change of
control, as those terms are defined in the agreement, he will be
entitled to twelve months’ severance. The employment
agreement will contain standard confidential and proprietary
information, and one-year non-competition and non-solicitation
provisions.
Additionally, our board of directors awarded Mr. Hamilton a bonus
of $153,500 and issued Mr. Hamilton 200,000 RSU’s. These
RSU’s are fully vested and settle on the 5th
anniversary of issuance, unless
accelerated due to termination or departure from the Company or a
change of control.
References in this report to “we,” “us,”
“our,” “the Company” and
“MetaStat” refer to MetaStat, Inc. and its subsidiary.
References to the “SEC” refer to the U.S. Securities
and Exchange Commission.
Forward-Looking Statements
You should read the following discussion and analysis of our
financial condition and results of operations in conjunction with
our consolidated financial statements and the related notes
included elsewhere in this interim report. Our consolidated
financial statements have been prepared in accordance with U.S.
GAAP. Our consolidated financial statements and the financial data
included in this interim report reflect our reorganization and have
been prepared as if our current corporate structure had been in
place throughout the relevant periods. The following
discussion and analysis contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934 (the
“Exchange Act”), including, without limitation,
statements regarding our expectations, beliefs, intentions or
future strategies that are signified by the words
“expect,” “anticipate,”
“intend,” “believe,” or similar language.
All forward-looking statements included in this document are based
on information available to us on the date hereof, and we assume no
obligation to update any such forward-looking statements. Our
business and financial performance are subject to substantial risks
and uncertainties. Actual results could differ materially from
those projected in the forward-looking statements. In evaluating
our business, you should carefully consider the information set
forth under the heading “Risk Factors” in our Annual
Report on Form 10-K for the year ended February 28, 2017. Readers
are cautioned not to place undue reliance on these forward-looking
statements.
The following discussion of our financial condition and results of
operations should be read in conjunction with our consolidated
financial statements and the related notes thereto and other
financial information appearing in our Annual Report on Form 10-K
for the year ended February 28, 2017.
Business Overview
We are a pre-commercial biotechnology company focused on
discovering and developing personalized therapeutic (Rx) and
diagnostic (Dx) treatment solutions for cancer patients. Our Mena
isoform “driver-based” diagnostic biomarkers also serve
as novel therapeutic targets for anti-metastatic drugs. MetaStat is
developing therapeutic product candidates and paired companion
diagnostics based on a novel approach that makes the Mena isoform
protein a druggable target. Our core expertise includes an
understanding of the mechanisms and pathways that drive tumor cell
invasion and metastasis, as well as drug resistance to certain
targeted therapies and cytotoxic chemotherapies.
Going Concern
Critical Accounting Policies and Significant Judgments and
Estimates
This discussion and analysis of our financial condition and results
of operations is based on our consolidated financial statements,
which have been prepared in accordance with United
States generally accepted accounting principles. The
preparation of these financial statements requires management to
make estimates and judgments that affect the reported amounts of
assets, liabilities and expenses and the disclosure of contingent
assets and liabilities at the date of the financial statements, as
well as revenues and expenses during the reporting periods. We
evaluate our estimates and judgments on an ongoing basis. We
base our estimates on historical experience and on various other
factors we believe are reasonable under the circumstances, the
results of which form the basis for making judgments about the
carrying value of assets and liabilities that are not readily
apparent from other sources. Actual results could therefore
differ materially from those estimates under different assumptions
or conditions.
Our significant accounting policies are described in Note 2 to
our consolidated financial statements included in the Form
10-K for the year ended February 28, 2017. 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 instruments 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.
Research and Development Reimbursements
From time to time, we may enter into research and development
agreements in which we share expenses or are reimbursed for
research and development expenses with a collaborative partner. We
analyze revenue recognition in connection with collaborative
arrangements in accordance with the guidance contained ASC Topic
808, Collaborative
Arrangements (“ASC
808”) and ASC Topic 605, Revenue Recognition
(“ASC 605”). We record
payments received from our collaborative partners as an offset to
research and development expenses, which are discussed in Note 11,
Collaborative and Other Relationships to these consolidated
financial statements.
Research Collaboration Revenue
We currently do not sell any products and do not have any
product-related revenue. From time to time, we may enter
into research and development
collaboration arrangements, in which we are reimbursed for either
all or a portion of the research and development costs incurred. We
record these payments as revenue in the statement of operations. We
recognize revenue upon delivery and acceptance of the test results
or other deliverables.
Financial Operations Overview
General and Administrative Expenses
Our general and administrative expenses primarily consist of
personnel and related costs, including stock-based
compensation, legal fees
relating to both intellectual property
and corporate matters,
accounting and audit related costs, insurance, corporate
communications and investor relations expenses, information
technology and internet related costs, office and facility rents
and related expenses, and fees for consulting and other
professional services.
We
anticipate that our general and administrative expenses will
increase in the future to support continued research, development
and commercialization activities, including potential partnership
and/or collaboration agreements, intellectual property and corporate legal
expenses, and public company operating costs, including
offering and related expenses in
connection with a potential uplisting to a national stock exchange,
SEC and exchange compliance, insurance, and investor relations and
corporate communication costs. These increases will likely
also include increased costs related to facilities and information
technology expansion, the hiring of additional personnel and
increased fees to outside consultants, lawyers and accountants,
among other expenses.
Research and Development Expenses
Historically, the majority of research and development expenses
were focused on our prognostic diagnostic tests for breast cancer,
including the MetaSite Breast™ and MenaCalc™ tests. We have
initiated research and development activities focused on our
MenaINV
and related driver-based biomarkers,
which support our integrated Rx/Dx product development strategy
focused on anti-metastatic therapeutics and companion diagnostics.
Research and development activities are central to our business
model and we expect future research and development expenses to be
focused on our MenaINV
and related biomarkers in support of
our integrated Rx/Dx product development
strategy.
We charge all research and development expenses to operations as
they are incurred. Any nonrefundable advance payments for goods or
services to be received in the future for use in research and
development activities will be deferred and capitalized. Such
capitalized amounts will be expensed as the related goods are
delivered or the services are performed.
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, outside consultants
and contract research organizations are deployed across several
programs and/or indications. Additionally, many of our costs
are not attributable to individual programs and/or
indications. 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.
Our therapeutic and companion diagnostic product development
programs are in early development stages. Since product candidates
in later stages of development generally have higher development
costs than those in earlier stages of development, we expect
research and development costs relating to therapeutic and
companion diagnostic programs to increase significantly for the
foreseeable future as those programs progress. 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 any
product candidate.
Results of Operations
Comparison of the
Three Months Ended August 31, 2017 and
August 31, 2016
Revenues. There were
no revenues for the three months ended August 31, 2017 and 2016,
respectively.
General and Administrative Expenses. General and administrative expense was
approximately $460,000 for the three months ended August 31, 2017
as compared to approximately $616,000 for the three months ended
August 31, 2016. This represents an aggregate decrease of
approximately $156,000. Stock-based compensation was
approximately $49,000 for the three months ended August 31, 2017 as
compared to approximately $200,000 for the three months ended
August 31, 2016. Excluding non-cash stock-based compensation
expense and depreciation expense, general and administrative
expenses decreased by approximately $4,000 to approximately
$409,000 for the three months ended August 31, 2017 from
approximately $413,000 for the three months ended August 31,
2016.
Slightly decreased general and administrative spending was
primarily due to decreases in accounting and audit expenses of
approximately $41,000, public company expenses, including investor
relations and corporate communications of approximately $18,000,
corporate legal expenses of approximately $12,000 and insurance
costs of approximately $10,000. These decreased general and
administrative expenses were offset by increases in intellectual
property and patent legal expenses of approximately $30,000,
payroll and related costs of approximately $26,000 and rent of
approximately $9,000. We expect general and administrative expenses
to increase slightly for the remainder of the fiscal year ending
February 28, 2018 with projected increases in rent and office
related costs, consulting expenses, and professional fees related
to intellectual property and patents, among others, as compared to
the fiscal year ended February 28, 2017.
Research and Development Expenses. Research and development expenses decreased by
approximately $33,000 to approximately $323,000 for the three
months ended August 31, 2017 from approximately $356,000 for the
three months ended August 31, 2016. Excluding non-cash stock-based
compensation expense and depreciation expense, research
and development expenses decreased by approximately $4,000 to
approximately $288,000, for the three months ended August 31, 2017
from approximately $292,000 for the three months ended August 31,
2016.
Slightly reduced research and development spending was primarily
due to decreases in consulting expense of approximately $52,000
partially offset by increases in licensing fees of approximately
$28,000, and laboratory and consumables expenses of approximately
$23,000. We expect research and development expenses to increase
for the remainder of this fiscal year ending February 28, 2018 as
we conduct research and development activities based on our
integrated Rx/Dx strategy and incur payroll and related expense for
new employees and increased consulting expenses. Research and
development expenses include approximately $249,000 of amortized
deferred research and development reimbursement earned by us in
connection with our collaborative arrangement as described in Note
11.
Other (Income) Expense. Other
expense amounted to income of approximately $20,000 for the three
months ended August 31, 2017, as compared to income of
approximately $93,000 for the three months ended August 31,
2016. This represents a change of approximately $73,000.
This change was mostly due in part to a decrease in gains from the
change in fair value of the warrant liability and of the put
liability on the notes payable of approximately $47,000 and
$511,000, respectively, offset by decreases of approximately
$372,000 and $113,000 in interest expense and a loss on sale of
notes receivable, respectively.
Net Loss. As a result of
the factors described above, we had a net loss of approximately
$763,000 for the three months ended August 31, 2017 as compared to
a net loss of approximately $879,000 for the three months ended
August 31, 2016.
Comparison of the
Six Months Ended August
31, 2017
and August 31, 2016
Revenues. Research collaboration revenue in
connection with certain research and development activities was
approximately $23,000 for the six months ended August 31, 2017.
There were no revenues for the six months ended August 31,
2016.
General and Administrative Expenses. General and administrative expense was
approximately $1.03 million for the six months ended August 31,
2017 as compared to approximately $1.17 million for the six months
ended August 31, 2016. This represents an aggregate decrease
of approximately $141,000. Stock-based compensation was
approximately $104,000 for the six months ended August 31, 2017 as
compared to approximately $288,000 for the six months ended August
31, 2016. Excluding non-cash stock-based compensation expense
and depreciation expense, general and administrative expenses
increased by approximately $47,000 to approximately $924,000 for
the six months ended August 31, 2017 from approximately $877,000
for the six months ended August 31, 2016.
Increased
general and administrative spending was primarily due to increases
in payroll and related costs including a bonus of approximately
$73,000, increased rent of approximately $18,000, and increased
corporate and intellectual property expenses of approximately
$15,000. These increased general and administrative costs were
partially offset by decreases related to public company expenses,
including investor relations and corporate communications of
approximately $40,000, as well as accounting and audit expenses of
approximately $33,000. We expect general and administrative
expenses to increase slightly for the remainder of the fiscal year
ending February 28, 2018 with projected increases in rent and
office related costs, consulting expenses, and professional fees
related to intellectual property and patents, among others, as
compared to the fiscal year ended February 28,
2017.
Research and Development Expenses. Research and development expenses decreased by
approximately $115,000 to approximately $512,000 for the six months
ended August 31, 2017 from approximately $627,000 for the six
months ended August 31, 2016. Excluding non-cash stock-based
compensation expense and depreciation expense, research
and development expenses decreased by approximately $86,000 to
approximately $441,000 for the six months ended August 31, 2017
from approximately $527,000 for the six months ended August 31,
2016.
Reduced research and development spending was primarily due to
decreases in consulting expense of approximately $118,000 and
payroll and related costs of approximately $29,000 partially offset
by increases in license fees of approximately $33,000, increased
laboratory and consumables of approximately $15,000 and general
expenses of approximately $10,000. We expect research and
development expenses to increase for the remainder of this fiscal
year ending February 28, 2018 as we conduct research and
development activities based on our integrated Rx/Dx strategy and
incur payroll and related expense for new employees and increased
consulting expenses. Research and development expenses include
approximately $362,000 of amortized deferred research and
development reimbursement earned by us in connection with our
collaborative arrangement as described in Note 11.
Other (Income) Expense. Other
expense amounted to income of approximately $480,000 for the six
months ended August 31, 2017, as compared to an expense of
approximately $300,000 for the six months ended August 31,
2016. This represents a change of approximately
$780,000. This change was due mostly to a decrease in interest
expense on the notes payable of approximately $647,000, an
increase in the gain from the change in fair value of the warrant
liability of approximately $478,000, and a decrease in the loss on
sale of notes receivable of approximately $113,000, offset by a
decrease of approximately $457,000 in the gain from the change in
fair value of the put liability on the notes
payable.
Net Loss. As a result of
the factors described above, we had a net loss of approximately
$1.04 million for the six months ended August 31, 2017 as compared
to a net loss of approximately $2.1 million for the six months
ended August 31, 2016.
Liquidity and Capital Resources
Since our inception, we have incurred significant losses and, as of
August 31, 2017, we had an accumulated deficit of approximately
$27.4 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, 2017, we had received net
proceeds of approximately $11.8 million through the sale of common
stock and/or Series A-2 Preferred Stock to investors, approximately
$0.26 million through the sale of Series A Preferred Stock to
investors, approximately $3.39 million through the sale of Series B
Preferred Stock to investors, approximately $3.46 million from the
issuance of convertible promissory notes and approximately $1.82
million from the issuance of non-convertible promissory
notes. As of August 31, 2017, we had cash and cash
equivalents of approximately $1.7 million and debt of approximately
$1.0 million. Through August 31, 2017, we had issued and
outstanding warrants to purchase 2,931,509 shares of our common
stock at a weighted average exercise price of $4.56 per share,
which could result in proceeds to us of approximately $13.4 million
if all outstanding warrants were exercised for
cash.
Cash Flows
At August 31, 2017, we had approximately $1.7 million in cash and
cash equivalents, compared to approximately $86,000 at August 31,
2016.
Net cash used in operating activities was approximately $1.3
million for the six months ended August 31, 2017, compared to
approximately $0.8 million for the six months ended August 31,
2016. The increase in cash used of approximately $0.5 million was
primarily due to increased operating expenses and faster payments
of accounts payable for the six months ended August 31, 2017 as
compared to slower payments and an increase in accounts payable the
six months ended August 31, 2016. We expect amounts used in
operating activities to increase in fiscal year 2018 and beyond as
we grow our corporate operations.
Net
cash used in investing activities for the six months ended August
31, 2017 was approximately $28,000 as compared to approximately
$13,000 of net cash provided by financing activities for the six
months ended August 31, 2016. Investing activities consisted
of purchases of equipment for the six months ended August 31, 2017
and proceeds from the sale of notes receivable for the six months
ended August 31, 2016.
Net cash provided by financing activities for the six months ended
August 31, 2017 was approximately $2.3 million as compared to
approximately $0.5 million for the six months ended August 31,
2016. Financing activities for the six months ended August 31,
2017 consisted primarily of proceeds from the issuance of common
stock and Series A-2 Preferred Stock. Financing activities for the
six months ended August 31, 2016 consisted primarily of proceeds
from non-convertible OID promissory notes, common stock, Series A-2
Preferred Stock and warrants, partially offset by the payment of
short-term debt.
Operating Capital and Capital Expenditure Requirements
We currently anticipate that our cash and cash equivalents will not
be sufficient to fund our operations for the next twelve
months, 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
determining reimbursement.
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 and cost of research and development
activities associated with our therapeutic and companion diagnostic
product development strategy;
●
the rate of progress and cost of research and development
activities associated with our prognostic diagnostic tests for
breast and other cancers;
●
the rate of progress in establishing reimbursement arrangements
with third-party payers;
●
the success of billing, and collecting receivables;
and
●
the cost of expanding our commercial and laboratory operations,
including our selling and marketing efforts.
Until we can generate a sufficient amount of 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.
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, 2017. 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,
2017. 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,
2017.
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, 2017 that have materially
affected, or are reasonably likely to materially affect, internal
control over financial reporting.
PART II. OTHER INFORMATION
None.
We have incurred significant indebtedness under our convertible
note with a shareholder which matured on September 30,
2017.
On January 17, 2017, we issued a convertible promissory note in the
principal amount of $1,000,000 (the “Convertible Note”)
in exchange for the cancellation of (i) $600,000 principal amount
of the Promissory Note plus $96,000 of accrued and unpaid interest,
and (ii) $290,400 principal amount of the OID Note. The Convertible
Note accrues interest at a rate of ten percent (10%) per annum
commencing as of January 1, 2017, and may be prepaid upon 10
days’ advanced written notice by us at any time prior to the
maturity date without penalty or premium. The noteholder has
the right to convert the outstanding principal balance of the
Convertible Note plus all accrued and unpaid interest thereon into
shares of our common stock at a conversion price of $2.00 per
share. The Convertible Note matured on September 30, 2017, and has
a ten (10) business day cure period that expires on October 16,
2017.
We are currently in the process of negotiating an extension of the
maturity date of the Convertible Note with the holder thereof,
which we expect will be finalized shortly. In the event we do not
reach an agreement with the noteholder to extend the maturity date
of the Convertible Note, the noteholder may exercise its default
rights. There can be no assurance that we will be able to raise
additional debt or equity financing in an amount sufficient to
enable us to retire these obligations and meet our other
obligations. Following the expiration of the cure period, the
noteholder may bring suit against us and foreclose on all of our
assets and business by reason of our default.
Our ability to repay or to refinance our indebtedness depends on
our future performance and ability to raise additional sources of
cash, which is subject to economic, financial, competitive and
other factors beyond our control. If we are unable to generate
sufficient cash to service our indebtedness we may be required to
adopt one or more alternatives, such as restructuring our debt or
obtaining additional equity capital on terms that may be onerous or
highly dilutive, or selling assets. If we desire to refinance our
indebtedness, our ability to do so will depend on the capital
markets and our financial condition at such time. We may not be
able to engage in any of these activities or engage in these
activities on desirable terms, which could result in a default on
our debt obligations.
If the Company is unable to continue as a going concern, its
securities will have little or no value.
The report of the Company's independent registered public
accounting firm that accompanies the Company's audited consolidated
financial statements for the years ended February 28, 2017 and
February 29, 2016 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, 2017, the Company
had an accumulated deficit of approximately $27.4 million. The
Company has raised approximately $2.3 million from a common stock
financing during the three months ended August 31, 2017. However,
the Company currently anticipates that its cash and cash
equivalents will not be sufficient to fund its operations for the
next twelve months, 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.
Item 2.
Unregistered Sales of Equity Securities and Use of
Proceeds
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None.
None.
None.
None.
Item 6. Exhibits
(b)
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Exhibits
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Exhibit No.
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Description
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Certification of the Principal Executive and Financial
Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
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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
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101.INS*
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XBRL Instance Document
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101.SCH*
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XBRL Taxonomy Extension Schema
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101.CAL*
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XBRL Taxonomy Extension Calculation Linkbase
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101.DEF*
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XBRL Taxonomy Extension Definition Linkbase
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101.LAB*
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XBRL Taxonomy Extension Label Linkbase
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101.PRE*
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XBRL Taxonomy Extension Presentation Linkbase
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*
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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.
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METASTAT, INC.
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Date: October 16, 2017
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By:
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/s/ Douglas A. Hamilton
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Douglas A. Hamilton
President, Chief Executive Officer and Director
(Principal Executive and Financial Officer)
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