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MTST > SEC Filings for MTST > Form 10-K on 28-May-2013All Recent SEC Filings

Show all filings for METASTAT, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-K for METASTAT, INC.


28-May-2013

Annual Report


Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our audited consolidated financial statements and the related notes to the consolidated financial statements included elsewhere in this Form 10-K. Our audited consolidated financial statements have been prepared in accordance with U.S. GAAP. In addition, our audited consolidated financial statements and the financial data included in this Form 10-K 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, 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" and elsewhere in this Form 10-K. Readers are cautioned not to place undue reliance on these forward-looking statements.

Business Overview

We are a development stage life sciences company that is focused on developing and commercializing novel diagnostic tests and therapeutics for the early and reliable prediction and treatment of systemic metastasis - cancer that spreads from a primary tumor through the bloodstream to other areas of the body. Systemic metastasis is responsible for ~90% of all solid tumor cancer related deaths and as such, we believe that more effective treatment of metastatic disease and/or the prevention of metastasis is needed to improve patient outcomes. Our first test, the MetaSite Breast™ test, will be used for early stage breast cancer patients to predict the likelihood of systemic metastasis. We anticipate all tumor samples will be sent to our clinical reference laboratory that we anticipate establishing in the New York for analysis. Upon generation and delivery of a Metastasis Score report to the physician, we plan to bill third-party payors for the MetaSite Breast™ test. We project that the list price of our test will be $2,595.

In January 2013, we completed a 500 patient Large Population Validation study of the MetaSite Breast™. The data from the Large Population Validation study has been submitted for publication in a peer-reviewed journal. We anticipate commencing initial marketing of the MetaSite Breast™ test in 2014 followed by our MenaCalc™ diagnostic assay for breast cancer in 2015. We plan to initially market to a select number of physicians in a few markets in the United States through a small direct sales force. We believe a subsequent increase in demand will result from the publication of further studies in one or more peer-reviewed scientific/medical journals and the presentation of study results at gatherings such as the ASCO meeting and the San Antonio Breast Cancer Symposium. However, any increased demand for our product is not necessarily indicative of future growth rates, and we cannot assure you that this level of increased demand can be sustained. Initially, we expect our laboratory will have the capacity to process up to 1,000 tests per quarter, and our current expansion plan contemplates that we will have capacity to process up to 15,000 tests per quarter by the end of calendar 2015.

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

Upon commercialization of the MetaSite Breast™ test, we will begin working with third-party payors to establish reimbursement coverage policies. Where policies are not in place, we will pursue case-by-case reimbursement. We believe that as much as 20% of our future revenues may be derived from tests billed to Medicare. We will begin working with many payors, including Medicare, to establish policy-level reimbursement, which, if in place, will allow us to recognize revenues upon submitting an invoice. We do not expect to recognize the majority of revenues in this manner until calendar 2015, at the earliest.

Since our inception, we have generated significant net losses. As of February 28, 2013, we had an accumulated deficit of $5,362,479. We incurred net losses of $2,520,579 and $2,426,654 in the years ended February 28, 2013 and February 29, 2012, respectively. We expect our net losses to continue for at least the next several years. We anticipate that a substantial portion of our capital resources and efforts will be focused on research and development, both to develop additional tests for breast cancer and to develop products for other cancers, and to scale up our commercial organization, and other general corporate purposes. Our financial results will be limited by a number of factors, including establishment of coverage policies by third-party insurers and government payors, our ability in the short term to collect from payors often requiring a case-by-case manual appeals process, and our ability to recognize revenues other than from cash collections on tests billed until such time as reimbursement policies or contracts are in effect. Until we receive routine reimbursement and are able to record revenues as tests are processed and reports delivered, we are likely to continue reporting net losses.

Financial Operations Overview

Revenues

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

Cost of Product Revenues

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

General and Administrative Expenses

General and administrative expenses from our inception through February 28, 2013 were $2,665,183. Our general and administrative expenses consist primarily of personnel related costs, legal costs, including intellectual property, accounting costs and other professional and administrative costs.

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Research and Development Expenses

Research and development expenses from our inception through February 28, 2013 were $1,541,203, and substantially all of these expenses were focused on the research and development of the MetaSite Breast™ test. During this time, the MetaSite Breast™ test was not the only product under development. Research and development expenses also represent costs incurred to develop our MenaCalc™ platform of diagnostic assays in breast, lung, and prostate cancers and initial research on our MenaBloc™ therapeutic platform.

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

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

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

Selling and Marketing Expenses

Our selling and marketing expenses that we expect to incur coincident with the launch of the MetaSite Breast™ test will consist primarily of personnel costs and education and promotional expenses. We expect these expenses will include the costs of educating physicians, laboratory personnel and other healthcare professionals regarding our technologies, how our MetaSite Breast™ test was developed and validated and the value of the quantitative information that the MetaSite Breast™ test provides. Selling and marketing expenses will also include the costs of sponsoring continuing medical education, medical meeting participation and dissemination of our scientific and economic publications related to the MetaSite Breast™ test. Sales and marketing expenses from our inception through February 28, 2013 were $0.

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 this Form 10-K. We believe the following critical accounting policies reflect our more significant estimates and assumptions used in the preparation of our financial statements.

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Revenue Recognition

We have generated no revenues since our inception. Clinical laboratory service revenues for our first product, the MetaSite Breast™ test, are expected to be generated from the projected commercial launch in 2014, and are expected to be recognized on a cash basis because we will have limited collection experience and a limited number of contracts. In accordance with our policy, revenues for tests performed will be recognized on an accrual basis when the related costs are incurred, provided there is a contract or coverage policy in place and the following criteria are met:

? persuasive evidence that an arrangement exists;

? delivery has occurred or services rendered;

? the fee is fixed and determinable; and

? collectability is reasonably assured.

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

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

Clinical Collaborator Costs

We expect to enter into collaboration and clinical trial agreements with clinical collaborators and record these costs as research and development expenses. We plan to record accruals for estimated study costs comprised of work performed by our collaborators under contract terms. All clinical collaborators will be expected to enter into agreements with us, which specify work content and payment terms.

Results of Operations

Comparison of the Years Ended February 28, 2013 and February 29, 2012

Revenues. There were no revenues for the years ended February 28, 2013 and February 29, 2012, respectively, because we have not yet commercialized any of our function-based diagnostics assays.

Cost of Product Revenues. No cost of product revenues were recorded in the years ended February 28, 2013 and February 29, 2012, respectively, because we have not yet commercialized any of our function-based diagnostics assays.

General and Administrative Expenses. General and administrative expenses totaled $1,757,793 for the year ended February 28, 2013 as compared to $737,113 for the year ended February 29, 2012. This represents an increase of $1,020,680 for the year ended February 28, 2013 over the year ended February 29, 2012. This increase was due in part to increases in costs for employee salaries, legal, including intellectual property, accounting and other professional and consulting costs.

Research and Development Expenses. Research and development expenses were $516,798 for the year ended February 28, 2013 as compared to $854,550 for the year ended February 29, 2012. This represents a decrease of $337,752 for the year ended February 28, 2013 over the year ended February 29, 2012. This decrease resulted primarily from the completion of the Sponsored Research Agreement for the MetaSite Breast™ test.

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Selling and Marketing Expenses. There were no selling and marketing expenses recorded for the years ended February 28, 2013 and February 29, 2012, respectively, because we have not yet commercialized any of our function-based diagnostics assays.

Warrant Expense. Warrant expenses were $230,189 for the year ended February 28, 2013 as compared to $149,999 for the year ended February 29, 2012. This represents an increase of $80,190 for the year ended February 28, 2013 over the year ended February 29, 2012. This increase resulted primarily from the issuance of warrants as partial compensation for financial advisory consulting services.

Stock-based Compensation. Stock-based compensation was $5,270 for the year ended February 28, 2013 as compared to $684,049 for the year ended February 28, 2012. This represents a decrease of $678,779 for the year ended February 28, 2013 over the year ended February 29, 2012. This decrease resulted primarily from a reduction in options and shares of common stock issued to employees, board members, scientific and clinical advisory board members and research consultants.

Interest Income and Other Income/ Expense. We recorded interest income of $596 for the year ended February 28, 2013 and no interest income during the year ended February 29, 2012.

Interest Expense. We made no interest payments on borrowings during the years ended February 28, 2013 and February 29, 2012, respectively.

Net Loss. As a result of the factors described above, we had a net loss of $2,520,579 for the year ended February 28, 2013 as compared to $2,426,654 for the year ended February 29, 2012.

Liquidity and Capital Resources

Since our inception, we have incurred significant losses and, as of February 28, 2013, we had an accumulated deficit of $5,362,479. We have not yet achieved profitability and anticipate that we will continue to incur net losses for the foreseeable future. We expect that our research and development, general and administrative and selling and marketing expenses will continue to grow and, as a result, we will need to generate significant product revenues to achieve profitability. We may never achieve profitability.

Sources of Liquidity

Since our inception, substantially all of our operations have been financed through the sale of our common stock and convertible promissory notes. Through February 28, 2013, we had received net proceeds of $4,283,755 through the sale of common stock to investors and $787,000 from the sale of convertible promissory notes. As of February 28, 2013, we had cash and cash equivalents of $969,188 and net debt of $716,957. As a result of the most recent sale of shares of common stock and convertible promissory notes through February 28, 2013, we have issued and outstanding warrants to purchase 2,732,072 shares of our common stock at a weighted average exercise price of $1.13, which will result in proceeds to us of approximately $3.1 million if all outstanding warrants are exercised.

Cash Flows

As of February 28, 2013, we had $969,188 in cash and cash equivalents including subscription receivables, compared to $878,340 on February 29, 2012.

Net cash used in operating activities was $2,395,909 for the year ended February 28, 2013, compared to $1,291,861 for the year ended February 29, 2012. The increase in cash used of $1,104,048 was primarily due to an increase in general and administrative costs including costs for employee salaries, legal, including intellectual property, accounting and other professional and consulting costs.

Net cash used in investing activities was $45,243 for the year ended February 28, 2013, compared to $17,200 for the year ended February 29, 2012. This cash was used for purchases of equipment. We expect amounts used in investing activities to increase in fiscal year 2014 and beyond as we grow our corporate infrastructure, expand research and development activities and establish and add capacity in our commercial laboratory.

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Net cash provided by financing activities during the year ended February 28, 2013 was $2,532,000, compared to $1,945,145 for the year ended February 29, 2012. Financing activities consisted primarily of the sale of our common stock and common stock purchase warrants and convertible promissory notes and common stock purchase warrants for the year ended February 28, 2013 and the sale of our common stock and common stock purchase warrants for the year ended February 29, 2012.

Capital Raising Requirements

Pursuant to the License Agreement, the Second License Agreement and the Third License Agreement, we are required to meet certain capital raising or financing requirements beginning on the first anniversary of the effective date of the License Agreement, or August 26, 2011. These capital raising requirements are inclusive for all three license agreements. We must meet the following conditions:

1. Raise $750,000 in debt, equity or other financing or revenues by the first anniversary of the effective date of the License Agreement, which requirement has been satisfied by us.

2. Raise $2,000,000 in debt, equity or other financing or revenues by the third anniversary of the effective date, which requirement has been satisfied by us.

3. Raise $5,000,000 in debt, equity or other financing or revenues by the fifth anniversary of the effective date. As of May 28, 2013, this requirement has been satisfied by us.

Subsequent Events

Convertible Note and Warrant Offering

In March through May 2013, we entered into separate convertible note and warrant purchase agreements with certain institutional and accredited investors for the issuance and sale in a private placement consisting of, in the aggregate: (a) $700,000 principal amount of Notes convertible into shares of our common stock, and (b) four-year warrants to purchase up to 70,000 shares of common stock at an exercise price of $3.00 per share, for aggregate gross proceeds of $700,000.

As of May 28, 2013, inclusive of the January and February 2013 issuances, we issued in the aggregate (a) $1,487,000 principal amount of Notes convertible into shares of our common stock, and (b) four-year warrants to purchase up to 148,700 shares of common stock at an exercise price of $3.00 per share, for aggregate gross proceeds of $1,487,000. Additionally, we paid Noble a cash fee of $10,496 and issued 5,248 five-year placement agent warrants exercisable for shares of common stock with an exercise price per share of $2.50. We paid to Rockwell a cash fee of $4,464 and issued 2,232 five-year placement agent warrants exercisable for shares of common stock with an exercise price per share of $2.50.

April 2013 Issuances

On April 5, 2013, we issued the following securities pursuant to our Amended and Restated 2012 Omnibus Securities and Incentive Plan: (1) an aggregate of 300,000 options to purchase shares of our common stock to our executive officers and directors and 150,000 shares of restricted stock to one of our directors; (2) an aggregate of 423,500 options to purchase shares of our common stock and an aggregate of 153,013 shares of restricted stock to members of our Scientific Advisory Board and Clinical Advisory Board; and (3) 100,000 options to purchase shares of our common stock to an advisor. The stock options provide for an exercise price per share of $3.25.

The stock options issued to our executive officers and directors vest in four equal installments on each of May 31, 2013, August 31, 2013, November 30, 2013 and February 28, 2014. The restricted stock issued to one of our directors vests upon the earlier of a change in control or upon us achieving $5,000,000 in gross sales from one or more of our products.

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Of the 423,500 stock options issued to members of our Scientific Advisory Board and Clinical Advisory Board, 181,500 of such stock options are immediately vested and 242,000 of such stock options vest in four equal installments on each of May 31, 2013, August 31, 2013, November 30, 2013 and February 28, 2014. The restricted stock issued to members of our Scientific Advisory Board and Clinical Advisory Board vests upon (1) the listing of our shares of common stock on a national securities exchange and (2) the shares trade on a national securities exchange with a daily trading volume of at least 50,000 shares per day for 30 consecutive trading days.

Appointment of David M. Epstein, Ph.D.

On April 12, 2013, we entered into an advisory agreement (the "Epstein Agreement") with David Epstein, Ph.D. to serve as our Head of Drug Development / Director until terminated in accordance with the terms of the Epstein Agreement. Effective on April 16, 2013 Dr. Epstein was appointed as a director of the Company. Dr. Epstein shall devote up to 30 hours per month, or 360 hours per year, of business time to the performance of his duties under the Epstein Agreement. In exchange for such services, we have agreed to pay to Dr. Epstein fees of $250.00 per hour and issue to him 100,000 restricted shares of our common stock. As such, we issued Dr. Epstein 100,000 shares in April 2013. In addition, upon the achievement of each of the three milestones set forth in the Epstein Agreement, we will issue an additional 200,000 restricted shares of common stock to Dr. Epstein, subject to his continued service with us.

Consulting Agreement

On April 18, 2013, we entered into an agreement with a consultant whereby we issued 12,000 shares of our common stock as partial consideration.

Contractual Obligations

As of February 28, 2013, we had the following contractual commitments:

                                              Payments Due by Period
                                                                                  More
                                       Less than                                 than 5
Contractual Obligations     Total        1 Year        1-3 Years     4-5 Years   Years
                                                  (In thousands)
License Agreement          $   385     $       30     $       155   $       200 $    (a)

Second License Agreement   $   297     $       12     $       110   $       175 $    (b)

Third License Agreement    $   297     $       12     $       110   $       175 $    (c)

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

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

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

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