SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| [ ] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended May 31, 2012
OR
| [ ] | TRANSITION REPORT UNDER SECTION 13 OF 15(d) OF THE EXCHANGE ACT OF 1934 |
From the transition period from ________ to ________ .
Commission File Number 000-52735
METASTAT, INC.
(Exact name of small business issuer as specified in its charter)
| Nevada | 20-8753132 |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |
4 Autumnwood Court
The Woodlands, Texas 77380
(Address of principal executive offices)
(281) 363-0003
(Issuer’s telephone number)
N/A
(Former name, former address and former fiscal year, if changed since last report)
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 o
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 o
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 | o | Accelerated filer | o |
| Non-accelerated filer | o | Smaller reporting company | x |
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of July 23, 2012, there were 21,054,422 shares of common stock of the registrant outstanding.
TABLE OF CONTENTS
| Page | |||
| PART I. | 1 | ||
| Item 1. | 1 | ||
| Item 2. | 7 | ||
| Item 3. | 14 | ||
| Item 4. | 14 | ||
| PART II. | 14 | ||
| Item 1. | 14 | ||
| Item 1A. | 14 | ||
| Item 2. | 14 | ||
| Item 3. | 14 | ||
| Item 4. | 14 | ||
| Item 5. | 14 | ||
| Item 6. | 15 | ||
PART I. FINANCIAL INFORMATION
| Item 1. | Financial Statements |
METASTAT INC.
(A Development Stage Company)
Balance Sheet
| May 31, | February 29, | ||||||||
| 2012 | 2012 | ||||||||
| ASSETS | |||||||||
| CURRENT ASSETS | |||||||||
| Cash | $ | 1,704,516 | $ | 878,340 | |||||
| Certificate of deposit | 250,088 | - | |||||||
| Subscription receivable | 25,000 | 865,000 | |||||||
| Total Current Assets | 1,979,604 | 1,743,340 | |||||||
| PROPERTY AND EQUIPMENT | |||||||||
EQUIPMENT (net of accumulated depreciation of $3,603 and $1,271, respectively) | 45,687 | 19,208 | |||||||
| TOTAL ASSETS | $ | 2,025,291 | $ | 1,762,548 | |||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||
| LIABILITIES | |||||||||
| Accounts payable | $ | 65,560 | $ | 291,859 | |||||
| TOTAL LIABILITIES | 65,560 | 291,859 | |||||||
| STOCKHOLDERS' EQUITY | |||||||||
| Preferred stock | - | - | |||||||
| (10,000,000 shares authorized; no shares issued and outstanding respectively) | |||||||||
| Common stock | 2,201 | 2,008 | |||||||
(Common Stock, $0.0001 par value; 150,000,000 shares authorized; 20,954,422 and 20,074,422 shares issued and outstanding respectively) | |||||||||
| Paid-in-capital | 5,190,388 | 4,310,581 | |||||||
| Accumulated deficit as a development stage company | (3,232,858 | ) | (2,841,900 | ) | |||||
| Total Equity | 1,959,731 | 1,470,689 | |||||||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 2,025,291 | $ | 1,762,548 | |||||
See accompanying notes to the unaudited financial statements.
METASTAT INC.
(A Development Stage Company)
Statement of Expenses
| Three Months | Three Months | Period from Inception (July 22, 2009) | ||||||||||
| ended | ended | to | ||||||||||
| May 31, 2012 | May 31, 2011 | May 31, 2012 | ||||||||||
| OPERATING EXPENSES | ||||||||||||
| General & administrative | $ | 332,858 | $ | 58,605 | $ | 1,240,270 | ||||||
| Research & development | 56,000 | 358,777 | 1,080,405 | |||||||||
| Depreciation | 2,332 | 164 | �� | 3,603 | ||||||||
| Warrant Expense | - | 149,999 | ||||||||||
| Stock-based compensation | - | - | 758,835 | |||||||||
| Total Operating Expenses | 391,190 | 417,546 | 3,233,112 | |||||||||
| OTHER INCOME (EXPENSE) | ||||||||||||
| Interest Income | 232 | - | 254 | |||||||||
| NET LOSS | $ | (390,958 | ) | $ | (417,546 | ) | $ | (3,232,858 | ) | |||
| Basic & Diluted Net Loss Per Share | $ | 0.02 | $ | 0.03 | ||||||||
| Weighted shares outstanding | 20,361,379 | 15,634,180 | ||||||||||
See accompanying notes to the unaudited financial statements.
METASTAT INC.
(A Development Stage Company)
Statement of Cash Flows
Three Months | Three Months | Period from Inception (July 22, 2009) | ||||||||||
| ended | ended | to | ||||||||||
| May 31, 2012 | May 31, 2011 | May 31, 2012 | ||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||||||
| Net loss | $ | (390,958 | ) | $ | (417,546 | ) | $ | (3,232,858 | ) | |||
| Adjustments to reconcile net loss to net | ||||||||||||
| cash used by operating activities | ||||||||||||
| Shares issued for services | - | - | 758,835 | |||||||||
| Depreciation | 2,332 | 164 | 3,603 | |||||||||
| Warrant expense | - | - | 149,999 | |||||||||
| Changes in assets and liabilities | ||||||||||||
| Accounts receivable | - | (461 | ) | - | ||||||||
| Accounts payable | (226,299 | ) | 78,938 | 65,560 | ||||||||
| NET CASH USED BY OPERATING ACTIVITIES | (614,925 | ) | (338,905 | ) | (2,254,861 | ) | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||||||
| Cash paid for certificate of deposit | (250,088 | ) | - | (250,088 | ) | |||||||
| Purchase of equipment | (28,811 | ) | - | (49,290 | ) | |||||||
| NET CASH USED BY INVESTING ACTIVITIES | (278,899 | ) | - | (299,378 | ) | |||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||||||
| Proceeds from subscription receivables | 865,000 | - | 865,000 | |||||||||
| Proceeds from sale of common stock | 855,000 | 220,640 | 3,393,755 | |||||||||
| NET CASH PROVIDED BY FINANCING ACTIVITIES | 1,720,000 | 220,640 | 4,258,755 | |||||||||
| NET INCREASE (DECREASE) IN CASH | 826,176 | (118,265 | ) | 1,704,516 | ||||||||
| Cash at the beginning of the year | 878,340 | 242,256 | - | |||||||||
| Cash at the end of the year | $ | 1,704,516 | $ | 123,991 | $ | 1,704,516 | ||||||
| SUPPLEMENTAL DISCLOSURES: | ||||||||||||
| Interest Paid | $ | - | $ | - | $ | - | ||||||
| Income taxes paid | $ | - | $ | - | $ | - | ||||||
| NON-CASH TRANSACTIONS: | ||||||||||||
| Subscriptions receivable | $ | 25,000 | $ | - | $ | 890,000 | ||||||
| Recapitalization of PVSO shareholders | $ | - | $ | - | $ | 8 | ||||||
See accompanying notes to the unaudited financial statements.
Notes to Condensed Consolidated Financial Statements
May 31, 2012 and May 31, 2011
MetaStat, Inc. (“we,” “us,” “our,” the “Company,” or “MetaStat”), formerly known as Photovoltaic Solar Cells Inc. (“PVSO”) was incorporated on March 28, 2007 under the laws of the State of Nevada. From inception until November of 2008, PVSO’s business plan was to produce and market inexpensive solar cells and in November 2008, our board of directors determined that the implementation of our business plan was no longer financially feasible. At such time, we discontinued the implementation of our prior business plan and pursued an acquisition strategy, whereby we sought to acquire a business. Based on these business activities, until February 27, 2012, we were considered a development stage company and a "blank check" company, with no or nominal assets (other than cash) and no or nominal operations.
MetaStat BioMedical, Inc. (“MBM”), formerly known as MetaStat, Inc., our Delaware operating subsidiary, was incorporated in the State of Texas on July 22, 2009, re-incorporated in the State of Delaware on August 26, 2010, and since inception has been a Development Stage Enterprise as defined by the ASC 915-15. During this time, MBM has devoted substantially all of its efforts to activities such as acquiring biomedical technology licenses, funding research and development, engaging in organizational activities, and raising capital. MBM was formed to allow cancer patients to benefit from the latest discoveries in how cancer spreads to other organs in the body.
On February 27, 2012, we consummated a share exchange transaction as more fully described below, whereby we acquired all the outstanding shares of MBM and, MBM became our wholly owned subsidiary. From and after the share exchange, our business has been conducted through our wholly owned subsidiary, MBM, and the discussion of our business is that of our current business which is conducted through MBM.
Prior to April 9, 2012, our company name was Photovoltaic Solar Cells, Inc. For the sole purpose of changing our name, on April 9, 2012, we merged with a newly-formed, wholly owned subsidiary incorporated under the laws of Nevada called MetaStat, Inc. As a result of the merger, our corporate name was changed to MetaStat, Inc. In May 2012, we changed the name of our Delaware operating subsidiary to MetaStat BioMedical, Inc. from MetaStat, Inc.
The Company has adopted a fiscal year end of February 28.
The Company’s mission is to become an industry leader in the emerging field of personalized cancer therapy. The Company’s first product, projected to be commercially available as early as the third calendar quarter 2013, will be the first test that can advise a woman and her doctor of the probability that her breast cancer will spread to other organs in her body. This systemic spread, called metastasis, is responsible for almost 90% of the fatalities in breast cancer. The Company has similar diagnostics in development for lung and prostate cancer. In addition, the Company is in discussions with potential development partners for the first therapeutic agent that can preemptively arrest the systemic spread of cancer.
Share Exchange Agreement
On February 27, 2012 (the “Closing Date”), we entered into a Share Exchange Agreement (the “Exchange Agreement”) by and among us, MBM, the holders of all outstanding shares of MBM (the “MBM Shareholders”) and Waterford Capital Acquisition Co IX, LLC, our principal shareholder (the “Company Principal Shareholder”), whereby we acquired all of the outstanding shares of MBM (the “MBM Shares”) from the MBM Shareholders. In exchange, we issued to the MBM Shareholders an aggregate of 18,369,421 shares of our common stock (the “Exchange Shares”), equal to 95.6% of our outstanding shares of common stock after such issuance. As a result of the transactions contemplated by the Exchange Agreement (collectively, the “Share Exchange”), MBM became our wholly owned subsidiary. Pursuant to the Exchange Agreement, we assumed warrants to purchase up to 780,511 shares of MBM’s common stock, with exercise prices ranging between $1.50 and $2.00 per share on a 2.2-for-1 basis, equivalent to 1,717,122 shares of our common stock with exercise prices ranging from $0.68 to $0.91 per share. Immediately prior to the Share Exchange, we converted approximately $336,075 of debt owed to the Company Principal Shareholder into 309,595 shares of our common stock (the “Debt Conversion”) and issued an aggregate of 36,000 shares of our common stock to certain of our officers, directors and consultants in consideration for services rendered to us, leaving 840,000 shares of our common stock outstanding immediately prior to the issuance of the Exchange Shares and showing on our Statement of Stockholders’ Equity as 840,000 shares as ‘recapitalization of PVSO shareholders’. Additionally, immediately prior to the Share Exchange, we issued five-year warrants to purchase up to an aggregate of 350,000 shares of our common stock at an exercise price of $1.40 per share, of which warrants to purchase 337,500 shares were issued for a purchase price of $21,000 and warrants to purchase 12,500 shares were issued for services rendered to us prior to the Share Exchange (the “Warrant Financing”). We used the proceeds of the Warrant Financing to pay off all of our liabilities prior to the Share Exchange.
On the Closing Date, we assumed MBM’s 2012 Omnibus Securities and Incentive Plan (the “2012 Plan”) and reserved 1,116,789 shares of our common stock for the benefit of our employees, nonemployee directors and consultants. All 507,500 options outstanding under the 2012 Plan were converted, on a 2.2-for-1 basis, into the right to receive options to purchase up to 1,116,500 shares of our common stock with an exercise price of $0.68 per share. On May 21, 2012, we increased the number of authorized and unissued shares of common stock reserved for issuance pursuant to the 2012 Plan to 3,316,789.
Basis of Presentation
The accompanying unaudited interim financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission, and should be read in conjunction with the audited financial statements and notes thereto contained in the Company’s most recent Annual Report filed with the Securities and Exchange Commission ("SEC") on Form 10-K. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim period presented have been reflected herein. The results of operations for the interim period are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements, which would substantially duplicate the disclosures contained in the audited financial statements for the most recent fiscal period, as reported in the Form 10-K, have been omitted.
NOTE 2 – EQUITY
During the three months ended May 31, 2012, the Company sold 880,000 shares of common stock for total proceeds of $880,000, of which the Company received $855,000 and the remaining $25,000 will be received subsequent to May 31, 2012. The Company has accounted for the $25,000 received subsequent to May 31, 2012 as a subscription receivable on its balance sheet.
The Company has authorized 150,000,000 shares of common stock, par value $0.0001 per share, and has 20,954,422 shares of common stock issued and outstanding as of May 31, 2012.
The Company has authorized 10,000,000 shares of preferred stock, par value $0.0001 per share, and has 0 shares of preferred stock issued and outstanding as of May 31, 2012.
May 2012 Private Placement
On May 1, 2012, we entered into a securities purchase agreement with certain institutional and accredited investors for the issuance and sale in a private placement consisting of, in the aggregate, (a) 880,000 shares of common stock, at a price per share of $1.00 and (b) four-year warrants to purchase up to 220,000 shares of common stock at an exercise price of $1.40 per share, expiring on May 1, 2016, for aggregate gross proceeds of $880,000 (the “May 2012 Private Placement”). As of May 31, 2012, we have closed on $855,000 and have a subscription receivable for the remaining amount. The amounts recorded as a subscription receivable have been collected subsequent to the quarter end.
In connection with the May 2012 Private Placement, we also entered into a registration rights agreement with the investors whereby we agreed to file a registration statement with the Securities and Exchange Commission to register for resale the shares of common stock and the shares of common stock underlying the warrants within 120 calendar days of the closing date, and to have the registration statement declared effective within 180 calendar days of the closing date or within 270 calendar days of the closing date in the event of a full review of the registration statement by the SEC.
Restricted Stock Grant
On May 22, 2012, the Company issued 50,000 restricted shares to each of our two directors, Patrick T. Mooney and Johan M. “Thijs”Spoor, for services rendered to the Company. The restricted shares shall vest pursuant to the Company listing its shares of Common Stock on a national securities exchange. The restricted shares expire on May 21, 2022 if the Company fails to meet the vesting conditions. The fair value of the restricted stock is $400,000, which will be expensed over a 10 year period. $0 has been expensed as of May 31, 2012 related to the restricted stock grant.
NOTE 3 – STOCK OPTIONS
During January 2012, the Company issued options to purchase 1,116,500 shares of common stock at $0.68 per share to its President, members of its scientific advisory board and several consultants involved in the Company’s ongoing research related to cancer. All of the options except 220,000 vest immediately and expire on January 6, 2022. These options have a fair value of $611,250, as calculated using the Black-Scholes model. Assumption used in the Black-Scholes model included: (1) a discount rate of 1.98%; (2) an expected term of 10 years; (3) an expected volatility of 403%; and (4) zero expected dividends.
| Options | Weighted average exercise price | Aggregate intrinsic value | Weighted average remaining contractual life (years) | |||||||||||||
| Outstanding at February 29, 2012 | 1,116,500 | $ | 0.68 | $ | 2,052,976 | 9.86 | ||||||||||
| Granted | - | - | - | - | ||||||||||||
| Exercised | - | - | - | - | ||||||||||||
| Forfeited | - | - | - | - | ||||||||||||
| Expired | - | - | - | - | ||||||||||||
| Outstanding at May 31, 2012 | 1,116,500 | $ | 0.68 | $ | 3,647,125 | 9.61 | ||||||||||
As of May 31, 2012, 896,500 options were exercisable at $0.68 per share with a weighted average life of 9.61 years.
NOTE 4– WARRANTS
On November 14, 2011, the Company entered into consulting agreement with Burnham Hill Advisors, LLC whereby we issued warrants to purchase an aggregate of 220,000 shares of common stock at an exercise price of $0.68 per share. The fair value of these warrants was determined to be $149,999, as calculated using the Black-Scholes model. Assumption used in the Black-Scholes model included: (1) a discount rate of 0.91%; (2) an expected term of 5 years; (3) an expected volatility of 403%; and (4) zero expected dividends.
During the year ended February 29, 2012, the Company granted 1,497,214 warrants, together with shares of common stock, issued on January 31, 2012, exercisable at $0.91 per share and expiring on January 31, 2017. The Company also granted 216,250 warrants on February 27, 2012 exercisable at $1.40 per share and expiring on February 27, 2016.
Immediately prior to the Share Exchange, PVSO issued 350,000 warrants exercisable at $1.40 per share.
For the three months ended May 31, 2012, the Company issued 220,000 warrants in connection with the May 2012 Private Placement referenced in Note 2. These warrants were issued on May 1, 2012 and are exercisable at $1.40 per share and expire on May 1, 2016. These warrants vest immediately.
The following table summarizes common stock purchase warrants issued and outstanding:
| Warrants | Weighted average exercise price | Aggregate intrinsic value | Weighted average remaining contractual life (years) | ||||||||||
| Outstanding at February 28, 2012 | 2,283,372 | $ | 1.01 | $ | 2,283,372 | 4.83 | |||||||
| Granted in May 2012 Private Placement | 220,000 | $ | 1.40 | $ | 737,000 | 3.92 | |||||||
| Outstanding at May 31, 2012 | 2,503,372 | $ | 1.04 | $ | 9,279,255 | 4.52 | |||||||
Warrants exercisable at May 31, 2012 are:
| Exercise | Weighted average | Exercisable number of | ||||||||||||
| prices | Number of shares | remaining life (years) | shares | |||||||||||
| $ | 0.68 | 220,000 | 4.46 | 220,000 | ||||||||||
| $ | 0.91 | 1,497,122 | 4.67 | 1,497,122 | ||||||||||
| $ | 1.40 | 216,250 | 4.67 | 216,250 | ||||||||||
| $ | 1.40 | 350,000 | 5.75 | 350,000 | ||||||||||
| $ | 1.40 | 220,000 | 3.92 | 220,000 | ||||||||||
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
References in this report to “we,” “us,” “our,” “the Company” and “MetaStat” refer to MetaStat, Inc. and its subsidiary. References to the “SEC” refer to the U.S. Securities and Exchange Commission.
Forward-Looking Statements
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and the related notes included elsewhere in this interim report. Our consolidated financial statements have been prepared in accordance with U.S. GAAP. Our consolidated financial statements and the financial data included in this interim report reflect our reorganization and have been prepared as if our current corporate structure had been in place throughout the relevant periods. The following discussion and analysis contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”), including, without limitation, statements regarding our expectations, beliefs, intentions or future strategies that are signified by the words “expect,” “anticipate,” “intend,” “believe,” or similar language. All forward-looking statements included in this document are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. Our business and financial performance are subject to substantial risks and uncertainties. Actual results could differ materially from those projected in the forward-looking statements. In evaluating our business, you should carefully consider the information set forth under the heading “Risk Factors” in our Form 10-K for the year ended February 29, 2012. 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 Form 10-K for the year ended February 29, 2012.
Business Overview
We are a life science company focused on the development and commercialization of proprietary clinical diagnostic tests for cancer that predict the probability of hematogenous (blood borne) systemic metastasis of cancer, as well as companion therapeutics to prevent systemic metastasis. Our first test, the MetaSite Breast™ test, will be used for breast cancer patients to predict the likelihood of hematogenous metastasis in breast cancer. Hematogenous metastasis is the spread of breast cancer cells to other organs in the body through the blood stream. This spread, and the resulting growth of breast cancer tumors in other organs in the patient’s body, is responsible for up to 90% of fatalities in breast cancer. We anticipate all tumor samples will be sent to our clinical reference laboratory that we anticipate establishing in 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 initial list price of our test will be $2,595.
The MetaSite Breast test is currently being tested in a 500 patient Large Population Validation study. If the data currently being generated in this study shows the same predictive power shown in our previously completed 60 patient and 44 patient trials, we anticipate commencing pilot marketing of the MetaSite Breast test as early as the second calendar quarter of 2013. 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 our Large Population Validation study in one or more peer-reviewed scientific/medical journals and the presentation of our 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, 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.
We believe the key factors that will drive broader adoption of the MetaSite Breast test will be acceptance by healthcare providers of its clinical benefits, demonstration of the cost-effectiveness of using our test, expanded reimbursement by third-party payors, expansion of our sales force and increased marketing efforts. Reimbursement of the MetaSite Breast test 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 test, MetaSite Breast 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 the MetaSite Breast test, 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 2014, at the earliest.
Since our inception, we have generated significant net losses. As of May 31, 2012, we had an accumulated deficit of $3,232,858. We incurred net losses of $390,958 and $417,546 in the three months ended May 31, 2012 and 2011, 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, 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.
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-Q. We believe the following critical accounting policies reflect our more significant estimates and assumptions used in the preparation of our financial statements.
Revenue Recognition
We have generated no revenues since our inception. Product revenues for our first product, the MetaSite Breast test, are expected to be generated from the projected commercial launch in 2013, 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.
Contract revenues are expected to be derived from studies conducted with biopharmaceutical and pharmaceutical companies and will be recognized on a contract specific basis. Under certain contracts, our input, measured in terms of full-time equivalent level of effort or running a set of assays through our laboratory under a contractual protocol, will trigger payment obligations and revenues will be recognized as costs are incurred or assays are processed. Certain contracts may have payment obligations that are triggered as milestones are complete, such as completion of a successful set of experiments. In these cases, revenues are recognized when the milestones are achieved.
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.
Financial Operations Overview
Revenues
We currently do not have any revenues. We expect to derive our revenues from product sales and contract research arrangements 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 MetaSite Breast 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. Contract revenues are derived from studies conducted with biopharmaceutical and pharmaceutical companies will be recorded on an accrual basis upon completion of the contractual obligation.
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 May 31, 2012 were $1,240,270. 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 May 31, 2012 were $1,080,405, 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 represent costs incurred both to develop our MenaCalc technology in breast, lung, and prostate cancers and to carry out our clinical studies to validate our MetaSite Breast test.
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 calendar 2012. 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 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 May 31, 2012 were $0.
Results of Operations
Comparison of the Three Months Ended May 31, 2012 and May 31, 2011
Revenues. There were no revenues for the three months ended May 31, 2012 and May 31, 2011, respectively, because we have not yet commercialized the MetaSite Breast test.
Cost of Product Revenues. No cost of product revenues were recorded in the three months ended May 31, 2012 and May 31, 2011, respectively, because we have not yet commercialized the MetaSite Breast test.
General and Administrative Expenses. General and administrative expenses totaled $332,858 for the three months ended May 31, 2012 as compared to $58,605 for the three months ended May 31, 2011. This represents an increase of $274,253 for the three months ended May 31, 2012 over the three months ended May 31, 2011. This increase was due in part to increases in costs for employee salaries, legal, including intellectual property, accounting and other professional costs.
Research and Development Expenses. Research and development expenses were $56,000 for the three months ended May 31, 2012 as compared to $358,777 for the three months ended May 31, 2011. This represents a decrease of $302,777 for the three months ended May 31, 2012 over the three months ended May 31, 2011. This decrease resulted primarily as a result of no payments being made during the three months ended May 31, 2012 for our ongoing MetaSite Breast test study pursuant to the Sponsored Research Agreement.
Selling and Marketing Expenses. There were no selling and marketing expenses recorded for the three months ended May 31, 2012 and May 31, 2011, respectively, because we have not yet commercialized the MetaSite Breast test.
Warrant Expense. Warrant expenses were $0 for the three months ended May 31, 2012 and May 31, 2011.
Stock-based Compensation. Stock-based compensation was $0 for the three months ended May 31, 2012 and May 31, 2011.
Interest Income and Other Income/ Expense. We recorded $232 of interest income during the three months ended May 31, 2012 and $0 during the three months ended May 31, 2011, respectively.
Interest Expense. We made no interest payments on borrowings during the three months ended May 31, 2012 and May 31, 2011, respectively.
Net Loss. As a result of the factors described above, we had a net loss of $390,958 for the three months ended May 31, 2012 as compared to $417,546 for the three months ended May 31, 2011.
Liquidity and Capital Resources
Since our inception, we have incurred significant losses and, as of May 31, 2012, we had an accumulated deficit of $3,232,858. 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. Through May 31, 2012, we had received net proceeds of approximately $4.3 million through the sale of common stock to investors. As of May 31, 2012, we had cash and cash equivalents, of $1,954,604 and no debt. As a result of the most recent sale of shares of common stock through May 31, 2012, we have issued and outstanding warrants to purchase 2,503,372 shares of our common stock at a weighted average exercise price of $1.04, which will result in proceeds to us of $2,611,772 if all outstanding warrants are exercised.
Cash Flows
As of May 31, 2012, we had $1,954,604 in cash and cash equivalents, compared to $1,743,340 on May 31, 2011.
Net cash used in operating activities was $614,925 for the three months ended May 31, 2012, compared to $338,905 for the three months ended May 31, 2011. The increase in cash used of $276,020 was primarily due to professional fees.
Net cash used in investing activities was $278,899 for the three months ended May 31, 2012, compared to $0 for the three months ended May 31, 2011. This increase was attributed to a $250,088 increase in cash paid for certificate of deposits and $28,811 for the purchase of equipment. We expect amounts used in investing activities to increase in fiscal year 2013 and beyond as we expand research and development activities and establish and add capacity in our commercial laboratory.
Net cash provided by financing activities during the three months ended May 31, 2012 was $1,720,000, compared to $220,640 for the three months ended May 31, 2011. Financing activities consisted primarily of the sale of our common stock and common stock purchase warrants for the three months ended May 31, 2012 and May 31, 2011, respectively.
Contractual Obligations
As of May 31, 2012, 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) | ||||||||||||||||||||
| Sponsored Research Agreement (500 Patent Trial) | $ | 179 | $ | 179 | $ | --- | $ | — | $ | — | ||||||||||
| License Agreement | $ | 315 | $ | 30 | $ | 110 | $ | 175 | (1) | |||||||||||
| Second License Agreement | $ | 309 | $ | 12 | $ | 72 | $ | 125 | 100 (2) | |||||||||||
| Third License Agreement | $ | 309 | $ | 12 | $ | 72 | $ | 125 | 100 (3) |
(1) Amount of additional payments depends on several factors, including the duration of the License Agreement, which depends on expiration of the last patent to be issued pursuant to the License Agreement. That duration is uncertain because the last patent has not yet been issued.
(2) Amount of additional payments depends on several factors, including the duration of the Second License Agreement, which depends on expiration of the last patent to be issued pursuant to the Second License Agreement. That duration is uncertain because the last patent has not yet been issued.
(3) 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.
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 28, 2011. The initial payment of $30,000 was made in August 2011. For a period of seven years on each anniversary of this first payment, we are required to make additional payments in amounts that gradually increase beginning in year five. We are required to make additional payments of $30,000 in each of 2012, 2013, and 2014 and $50,000 in 2015, $75,000 in 2016 and $100,000 in 2017 and every year the license is in effect thereafter.
Pursuant to the Second License Agreement, we paid a license signing fee of $15,000 in connection with entering into the Second License Agreement and 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. The payments are $12,000 each for the first and second anniversary in 2013 and 2014, respectively. We are required to make additional payments of $30,000 in each of 2015, 2016, $50,000 in 2017, $75,000 in 2018 and $100,000 in 2019 and every year the license is in effect thereafter.
Pursuant to the Third License Agreement, we paid a license signing fee of $15,000 in connection with entering into the Third License Agreement and 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. The payments are $12,000 each for the first and second anniversary in 2013 and 2014, respectively. We are required to make additional payments of $30,000 in each of 2015, 2016, $50,000 in 2017, $75,000 in 2018 and $100,000 in 2019 and every year the license is in effect thereafter.
Beginning in the second half of 2012, we intend to enter into arrangements for the acquisition of laboratory equipment, computer hardware and software, leasehold improvements and office equipment. We cannot at this time provide assurances that we will be able to enter into agreements with vendors on terms commercially favorable to us or that we will be able to enter into such arrangements without securing additional financing.
We currently sublease approximately 1,000 square feet of administrative and office space under a sublease on a month-to-month basis for an annual cost of $12.00 per square foot.
Operating Capital and Capital Expenditure Requirements
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 February 2012 private placement and the May 2012 Private Placement. It may take several years to move any one of a number of product candidates in clinical research through the development phase and validation phase to commercialization. We expect that the remainder of the net proceeds and our existing cash and cash equivalents will be used to fund working capital and for capital expenditures and other general corporate purposes, such as licensing technology rights, partnering arrangements for the processing of tests outside the United States or reduction of contractual obligations. A portion of the net proceeds may also be used to acquire or invest in complementary businesses, technologies, services or products. We have no current plans, agreements or commitments with respect to any such acquisition or investment, and we are not currently engaged in any negotiations with respect to any such transaction.
The amount and timing of actual expenditures may vary significantly depending upon a number of factors, such as the progress of our product development, regulatory requirements, commercialization efforts, the amount of cash used by operations and progress in reimbursement. We expect that we will receive limited payments for the MetaSite Breast test billings from the beginning of our marketing efforts into the foreseeable future. As reimbursement contracts with third-party payors are put into place, we expect an increase in the number and level of payments received for the MetaSite Breast test billings.
We currently anticipate that our cash and cash equivalents, together with proceeds from the February 2012 private placement and the May 2012 Private Placement, will be sufficient to fund our operations for at least the next 12 months. We cannot be certain that any of our future efforts to secure reimbursement contract programs or development of future products will be successful or that we will be able to raise sufficient additional funds to see these programs through to a successful result.
Our future funding requirements will depend on many factors, including the following:
| ● | the rate of progress in establishing reimbursement arrangements with third-party payors; | |
| ● | the cost of expanding our commercial and laboratory operations, including our selling and marketing efforts; | |
| ● | the rate of progress and cost of research and development activities associated with expansion of products for breast cancer; | |
| ● | the rate of progress and cost of research and development activities associated with products in the research phase focused on cancer, other than breast cancer; | |
| ● | the cost of acquiring or achieving access to tissue samples and technologies; | |
| ● | the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights; | |
| ● | the effect of competing technological and market developments; | |
| ● | the cost and delays in product development as a result of any changes in regulatory oversight applicable to our products; and | |
| ● | the economic and other terms and timing of any collaborations, licensing or other arrangements into which we may enter. |
Until we can generate a sufficient amount of product revenues to finance our cash requirements, which we may never do, we expect to finance future cash needs primarily through public or private equity offerings, debt financings, borrowings or strategic collaborations. The issuance of equity securities may result in dilution to stockholders. We do not know whether additional funding will be available on acceptable terms, or at all. If we are not able to secure additional funding when needed, we may have to delay, reduce the scope of or eliminate one or more research and development programs or selling and marketing initiatives. In addition, we may have to work with a partner on one or more of our product development programs or market development programs, which would lower the economic value of those programs to our company.
Item 3. Quantitative and Qualitative Disclosures about Market Risks
Not applicable.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness, as of May 31, 2012, of the design and operation of our disclosure controls and procedures, as such term is defined in Exchange Act Rules 13a-15(e) and 15d-15(e). Based on this evaluation, our principal executive officer and principal financial officer has concluded that, as of such date, our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
None.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item1A. Risk Factors
There have been no material changes in the Company’s risk factors from those previously disclosed in the Company’s Form 10-K filed with the SEC on June 13, 2012.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
None.
Item 6. Exhibits
| (b) | Exhibits |
| Exhibit No. | Description |
| 31.1 | Certification of Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 31.2 | Certification of Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 32.1 | Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| 32.2 | Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| 101.INS* | XBRL Instance Document |
| 101.SCH* | XBRL Taxonomy Extension Schema |
| 101.CAL* | XBRL Taxonomy Extension Calculation Linkbase |
| 101.DEF* | XBRL Taxonomy Extension Definition Linkbase |
| 101.LAB* | XBRL Taxonomy Extension Label Linkbase |
| 101.PRE* | XBRL Taxonomy Extension Presentation Linkbase |
* Pursuant ot Rule 406T of Regulation S-T, the XBRL (Extensible Business Reporting Language) information included in Exhibit 101 hereto is deemed furnished and not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| METASTAT, INC. | |||
| Date: July 23, 2012 | By: | /s/ Warren C. Lau | |
| Warren C. Lau, President, Chief Executive Officer and Chief Financial Officer (Principal Executive Officer and Principal Accounting Officer) | |||