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MTST > SEC Filings for MTST > Form 10-Q/A on 12-Jun-2014All Recent SEC Filings

Show all filings for METASTAT, INC.

Form 10-Q/A for METASTAT, INC.


12-Jun-2014

Quarterly Report


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

References in this report to "we," "us," "our," "the Company" and "MetaStat" refer to MetaStat, Inc. and its subsidiary. References to the "SEC" refer to the United States Securities and Exchange Commission.

Forward-Looking Statements

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

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

Restatement

The Company has revised the Management's Discussion and Analysis of Financial Condition and Results of Operations to reflect the restatement of the Condensed Consolidated Financial Statements (see Note 1 of the Condensed Consolidated Financial Statements for more information on the restatement), to update the Critical Accounting Policies and Significant Judgments and Estimates and to add a discussion of the result of operations for the three months ended November 30, 2013.

Business Overview

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

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

Additionally, we are developing our MenaBloc™ therapeutic program that aims to build upon mena biology and alternative splicing events as a driver of disease progression to exploit novel targets that provide precision medicines in oncology.

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Clinical studies of 585 patients in the aggregate for the MetaSite Breast™ test and 1,203 patients in the aggregate for the MenaCalc™ breast cancer test have successfully been completed to date. In 2014, we plan to initiate additional clinical utility studies for both the MetaSite Breast™ and MenaCalc™ breast cancer tests. We anticipate establishing a laboratory that will be a clinical reference laboratory as defined under the Clinical Laboratory Improvement Amendments of 1988 ("CLIA"). Based on CLIA certification, we anticipate commencing initial marketing of the MetaSite Breast™ test in 2015 followed by our MenaCalc™ diagnostic assay for breast cancer by late 2015. We plan to initially market to a select number of physicians and cancer centers in targeted markets in the United States. We expect this will subsequently be followed by a national rollout. 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. Initially, we expect our reference laboratory will have the capacity to process up to 1,000 tests per quarter, and our current expansion plan contemplates that we will have capacity to process up to 15,000 tests per quarter by the end of calendar 2015.

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

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

Since our inception, we have generated significant net losses. As of November 30, 2013, we had an accumulated deficit of $9,043,339. We incurred net losses of $3,680,860 and $1,779,350 for the nine months ended November 30, 2013 and November 30, 2012, respectively. We expect our net losses to continue for at least the next several years. We anticipate that a substantial portion of our capital resources and efforts will be focused on research and development both to develop additional tests for breast cancer and to develop products for other cancer indications, scale up our commercial organization, and other general corporate purposes. Our financial results will be limited by a number of factors, including establishment of coverage policies by third-party insurers and government payors, our ability in the short term to collect from payors often requiring a case-by-case manual appeals process, and our ability to recognize revenues other than from cash collections on tests billed until such time as reimbursement policies or contracts are in effect. Until we receive routine reimbursement and are able to record revenues as tests are processed and reports delivered, we are likely to continue reporting net losses.

Going Concern

As of November 30, 2013, the Company had an accumulated deficit of $9,043,339. The Company currently anticipates that its cash and cash equivalents will be sufficient to fund its operations through May 2014 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 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, which would likely 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 cease operations.

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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, 2013. 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 payments award issued to employees and members of our Board of Directors 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-employee, the measurement date is the date when the performance is complete or when the award vests, whichever is the earliest. Accordingly, non-employee awards are measured at each reporting period until the final measurement date. The fair value of the award is recognized as stock-based compensation over the requisite service period, generally the vesting period.

Debt Instruments

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

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

Financial Operations Overview

General and Administrative Expenses

General and administrative expenses from our inception through November 30, 2013 were $3,980,757. Our general and administrative expenses consist primarily of personnel related costs, legal costs, including intellectual property, accounting costs and other professional and administrative costs.

Research and Development Expenses

Research and development expenses from our inception through November 30, 2013 were $1,776,179 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 2014. 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.

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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.

Results of Operations

Comparison of the Three Months Ended November 30, 2013 and November 30, 2012

Revenues. There were no revenues for the three months ended November 30, 2013 and November 30, 2012, respectively, because we have not yet commercialized any of our function-based diagnostic tests.

General and Administrative Expenses. General and administrative expenses totaled $451,820 for the three months ended November 30, 2013 as compared to $364,110 for the three months ended November 30, 2012. This represents an increase of $87,710 for the three months ended November 30, 2013 over the three months ended November 30, 2012. This increase was due in part to increased costs for salaries, legal, including intellectual property, accounting and other professional costs.

Research and Development Expenses.Research and development expenses were $90,261 for the three months ended November 30, 2013 as compared to $45,000 for the three months ended November 30, 2012. This represents an increase of $45,261 for the three months ended November 30, 2013 over the three months ended November 30, 2012. This increase resulted primarily from the initiation of our therapeutic development program.

Warrant Expense. Warrant expenses were $0 for the three months ended November 30, 2013 as compared to $149,995 for the three months ended November 30, 2012.

Stock-based Compensation. Stock-based compensation was $338,798 for the three months ended November 30, 2013 as compared to $(5,806) for the three months ended November 30, 2012.

Other Expenses (Income).Other expenses (income) amounted to $223,466 for the three months ended November 30, 2013 and consisted of $196,190 of debt discount accretion and $27,296 of interest expense, both related to convertible promissory notes. There were no comparable transactions during the three months ended November 30, 2012.

Net Loss. As a result of the factors described above, we had a net loss of $1,107,883 for the three months ended November 30, 2013 as compared to $556,005 for the three months ended November 30, 2012.

Comparison of the Nine Months Ended November 30, 2013 and November 30, 2012

Revenues. There were no revenues for the nine months ended November 30, 2013 and November 30, 2012, respectively, because we have not yet commercialized any of our function-based diagnostic tests.

General and Administrative Expenses. General and administrative expenses totaled $1,315,573 for the nine months ended November 30, 2013 as compared to $1,237,808 for the nine months ended November 30, 2012. This represents an increase of $77,765 for the nine months ended November 30, 2013 over the nine months ended November 30, 2012. This increase was due in part to increased costs for salaries, legal, including intellectual property, accounting and other professional costs.

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Research and Development Expenses. Research and development expenses were $234,976 for the nine months ended November 30, 2013 as compared to $378,517 for the nine months ended November 30, 2012. This represents a decrease of $143,541 for the nine months ended November 30, 2013 over the nine months ended November 30, 2012. This decrease resulted primarily from the completion of the MetaSite Breast™ validation study.

Warrant Expense. Warrant expenses were $0 for the nine months ended November 30, 2013 as compared to $149,995 for the nine months ended November 30, 2012.

Stock-based Compensation. Stock-based compensation was $1,469,708 for the nine months ended November 30, 2013 as compared to $5,259 for the nine months ended November 30, 2012.

Other Expenses (Income). Other expenses (income) amounted to $650,261 for the nine months ended November 30, 2013 and consisted of $559,496 of debt discount accretion and $90,846 of interest expense, both related to convertible promissory notes. There were no comparable transactions during the nine months ended November 30, 2012.

Net Loss. As a result of the factors described above, we had a net loss of $3,680,860 for the nine months ended November 30, 2013 as compared to $1,779,350 for the nine months ended November 30, 2012.

Liquidity and Capital Resources

Since our inception, we have incurred significant losses and, as of November 30, 2013, we had an accumulated deficit of $9,043,339. 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 November 30, 2013, we had received net proceeds of $4,283,755 through the sale of common stock to investors and $1,987,000 from the sale of convertible promissory notes. As of November 30, 2013, we had cash and cash equivalents of $488,108 and gross debt of $1,857,657. As a result of the most recent sale of shares of common stock and convertible promissory notes through November 30, 2013, we have issued and outstanding warrants to purchase 2,893,887 shares of our common stock at a weighted average exercise price of $1.20, which could result in proceeds to us of approximately $3.47 million if all outstanding warrants are exercised.

Cash Flows

As of November 30, 2013, we had $488,108 in cash and cash equivalents, compared to $466,916 on November 30, 2012.

Net cash used in operating activities was $1,432,367 for the nine months ended November 30, 2013 compared to $1,865,917 for the nine months ended November 30, 2012. The decrease in cash used of $433,550 was primarily due to a reduction in professional fees.

Net cash used in investing activities was $165,409 for the nine months ended November 30, 2013, compared to $290,507 for the nine months ended November 30, 2012. This decrease of $125,098 was attributed to a decrease in cash paid for certificate of deposits and for the purchase of equipment. We expect amounts used in investing activities to increase in fiscal year 2014 and beyond as we grow our corporate operations, expand research and development activities and establish our commercial laboratory.

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Net cash provided by financing activities during the nine months ended November 30, 2013 was $1,116,696 compared to $1,745,000 for the nine months ended November 30, 2012. Financing activities consisted primarily of the sale of convertible promissory notes and warrants for the nine months ended November 30, 2013 and the sale our common stock and warrants for the nine months ended November 30, 2012, respectively.

Contractual Obligations

As of November 30, 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          $  455     $       30     $       225     $     200     $  (a)

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

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

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

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

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

License Agreement

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

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

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Second License Agreement and Third License Agreement

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

Pursuant to the Second License Agreement, we are required to make a series of annual minimum royalty or "license maintenance" payments beginning on the first anniversary date of the effective date, or January 3, 2013. For a period of seven years on each anniversary, we are required to make additional payments in amounts that gradually increase beginning in year three. We have satisfied the license maintenance payment of $12,000 for the first anniversary in 2013. We are . . .

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