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EX-32.1 - CERTIFICATION OF THE PRINCIPAL EXECUTIVE AND FINANCIAL OFFICER, PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 - MetaStat, Inc.ex32-1.htm
EX-31.1 - CERTIFICATION OF THE PRINCIPAL EXECUTIVE AND FINANCIAL OFFICER, PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 - MetaStat, Inc.ex31-1.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
(Mark One)
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended May 31, 2016
 
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.)
 
27 Drydock Ave, 2nd Floor
Boston, Massachusetts 02210
(Address of principal executive offices)
 
(617) 531-6500
(Issuer’s telephone number)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes [X]    No [   ]
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes [X]    No [   ]
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
 
Large accelerated filer
[   ]
Accelerated filer
[   ]
       
Non-accelerated filer
[   ]  (Do not check if a smaller reporting company)
Smaller reporting company
[X]
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes [   ]    No [X]
 
As of July 13, 2016, there were 2,178,353 shares of the registrant’s common stock, $0.0001 par value, issued and outstanding.
 
 


 

 

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION
 
Item  1.   Financial Statements
 
MetaStat, Inc.
Condensed Consolidated Balance Sheets
 
   
May 31, 2016
   
February 29, 2016
 
   
(Unaudited)
   
(Audited)
 
ASSETS
           
Current Assets:
           
Cash and cash equivalents
  $ 154,294     $ 363,783  
Note receivable
    125,000       125,000  
Prepaid expenses
    192,492       33,121  
Total Current Assets
    471,786       521,904  
                 
Equipment
               
(net of accumulated depreciation of $193,162
               
  and $169,396 respectively)
    473,286       497,052  
Refundable deposits
    43,600       43,600  
                 
TOTAL ASSETS
  $ 988,672     $ 1,062,556  
                 
LIABILITIES AND STOCKHOLDERS' DEFICIT
               
                 
LIABILITIES
               
Current Liabilities:
               
Accounts payable
  $ 947,216     $ 746,144  
Accrued expense
    366,697       214,311  
   Notes payable (net of debt discount of $538,620 and $743,282, respectively)
    1,974,277       1,533,120  
Accrued interest payable
    80,000       56,000  
Accrued dividends on Series B Preferred Stock
    49,283       48,317  
Total Current Liabilities
    3,417,473       2,597,892  
                 
Warrant liability
    284,178       234,461  
Total Liabilities
    3,701,651       2,832,353  
                 
STOCKHOLDERS' DEFICIT
               
                 
Series A convertible preferred stock ($0.0001 par value; 1,000,000 shares authorized; 874,257 and 874,257 issued and outstanding, respectively)
    87       87  
Series B convertible preferred stock ($0.0001 par value; 1,000 shares authorized; 672 and 659 shares issued and outstanding, respectively)
    -       -  
Common Stock, ($0.0001 par value; 150,000,000 shares authorized; 1,976,201 and 1,851,201 shares issued and outstanding, respectively)
    198       185  
Additional paid-in-capital
    21,883,853       21,607,259  
Accumulated deficit
    (24,597,117 )     (23,377,328 )
Total stockholders' deficit
    (2,712,979 )     (1,769,797 )
                 
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT
  $ 988,672     $ 1,062,556  
 
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
 

 
MetaStat, Inc.
Unaudited Condensed Consolidated Statements of Operations
 
   
Three Months Ended
 
   
May 31, 2016
   
May 31, 2015
 
                 
Revenue
  $ -     $ -  
          Total Revenue
    -       -  
                 
Operating Expenses
               
General & administrative
    555,681       948,895  
Research & development
    271,123       219,327  
          Total Operating Expenses
    826,804       1,168,222  
                 
Other Expenses (income)
               
    Interest expense
    304,646       4,917  
    Other income, net
    (267 )     (169 )
    Change in fair value of warrant liability
    34,492       (136,500 )
    Change in fair value of put embedded in notes payable
    53,999       -  
    Settlement expense
    115       38,437  
          Total Other Expenses (Income)
    392,985       (93,315 )
                 
Net Loss
  $ (1,219,789 )   $ (1,074,907 )
                 
Loss attibutable to common shareholders and loss per common share:
         
                 
Net loss
    (1,219,789 )     (1,074,907 )
                 
      Deemed dividend on Series B Preferred Stock issuance
    (708,303 )     (1,067,491 )
      Accrued dividend on Series B Preferred Stock
    (73,442 )     (55,262 )
                 
Loss attibutable to common shareholders
  $ (2,001,534 )   $ (2,197,660 )
                 
   Net loss per share, basic and diluted
  $ (1.08 )   $ (1.21 )
                 
     Weighted average of shares outstanding, basic and diluted
    1,847,140       1,809,257  
 
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
 
 
MetaStat, Inc.
Unaudited Condensed Consolidated Statements of Cash Flows
 
   
Three Months Ended
 
   
May 31, 2016
   
May 31, 2015
 
Cash Flows from Operating Activities:
           
Net loss
  $ (1,219,789 )   $ (1,074,907 )
Adjustments to reconcile net loss to net
               
    Cash used in operating activities:
               
    Depreciation
    23,766       24,845  
    Share-based compensation
    119,086       207,112  
    Amortization of debt discount
    279,593       -  
    Change in fair value of warrant liability
    34,492       (136,500 )
    Change in fair value of put embedded in notes payable
    53,999       -  
    Net changes in assets and liabilities:
               
    Prepaid expenses
    (971 )     (13,862 )
    Refundable deposit
    -       (2,100 )
    Accounts payable and accrued expenses
    266,299       96,496  
    Interest payable
    24,000       (2,351 )
       Net Cash used in Operating Activities
    (419,525 )     (901,267 )
                 
Cash Flows from Investing Activities:
               
Purchase of equipment
    -       (97,922 )
       Net Cash used in Investing Activities
    -       (97,922 )
                 
Cash Flows from Financing Activities:
               
Proceeds from issuance of debt
    125,000       -  
Payment of debt issuance costs
    (2,210 )     -  
Proceeds from issuance of common stock and warrants, net
    126,487       -  
Proceeds from issuance of Series B preferred stock and warrant, net
    -       1,945,244  
Common stock and warrant cancellation settlement
    -       (111,563 )
Payment of capital lease obligation
    -       (23,999 )
Payment of short-term debt
    (39,241 )     (35,750 )
       Net Cash provided by Financing Activities
    210,036       1,773,932  
                 
Net (decrease) increase in cash and cash equivalents
    (209,489 )     774,743  
                 
Cash and cash equivalents:
               
Cash at the beginning of the period
    363,783       257,820  
Cash at the end of the period
  $ 154,294     $ 1,032,563  
                 
Supplemental Disclosure of Non-cash Financing Activities:
               
Warrant liability associated with note payable
  $ 15,225     $ -  
Deemed dividend related to Series B Preferred Stock BCF adjustment for conversion price adjustment
  $ 708,303     $ -  
Series B Preferred PIK dividend
  $ 72,476     $ 26,498  
Series B Preferred Stock accrued dividends
  $ 73,442     $ 55,262  
Issuance of common stock as payment of accounts payable
  $ 32,000     $ -  
Financing of insurance premium through notes payable
  $ 158,400     $ 107,250  
Reclassification of equipment to assets held for sale
  $ -     $ 85,196  
Warrants issued to placement agents
  $ 15,400     $ 158,441  
 
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
 

NOTE 1 – DESCRIPTION OF BUSINESS AND GOING CONCERN

MetaStat, Inc. (“we,” “us,” “our,” the “Company,” or “MetaStat”) is a pre-commercial molecular diagnostic company focused on the development and commercialization of novel diagnostics to provide physicians and patients actionable information regarding the risk of systemic metastasis and adjuvant chemotherapy treatment decisions. We believe cancer treatment strategies can be personalized and outcomes improved through new diagnostic tools that identify the aggressiveness and metastatic potential of primary tumors. The Company was incorporated on March 28, 2007 under the laws of the State of Nevada.

Basis of Presentation

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, MetaStat Biomedical, Inc., a Delaware corporation and all significant intercompany balances have been eliminated by consolidation.

These interim unaudited financial statements have been prepared in conformity with generally accepted accounting principles (“GAAP”) in the United States and should be read in conjunction with, the Company’s audited consolidated financial statements and related footnotes for the year ended February 29, 2016 included in the Company’s Annual Report on Form 10-K as filed with the United States Securities and Exchange Commission (“SEC”) on May 31, 2016. These unaudited financial statements reflect all adjustments, consisting only of normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of the Company’s financial position as of May 31, 2016 and its results of operations and cash flows for the interim periods presented and are not necessarily indicative of results for subsequent interim periods or for the full year. These interim financial statements do not include all of the information and footnotes required by GAAP for complete financial statements and allowed by the relevant SEC rules and regulations; however, the Company believes that its disclosures are adequate to ensure that the information presented is not misleading.

Reverse Stock Split

On October 8, 2015, the Company effected a 1-for-15 reverse stock split of our common stock, whereby every 15 shares of issued and outstanding common stock became 1 share of newly issued and outstanding common stock. The reverse stock split was approved by the Company's stockholders at a special stockholders meeting on June 22, 2015. The purpose of the reverse stock split was to qualify for the minimum stock price listing requirement for a planned up-listing to a national securities exchange including the NASDAQ Capital Market or NYSE Market.

All reference in the document to the number of shares, price per share and weighted average number of shares outstanding of the Company's common stock prior to the reverse stock split have been adjusted to reflect the reverse stock split on a retroactive basis.

Going Concern
 
The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has experienced net losses and negative cash flows from operations since its inception.  The Company has sustained cumulative losses of $24,597,117 as of May 31, 2016, has a negative working capital and has not generated revenues or positive cash flows from operations. The continuation of the Company as a going concern is dependent upon continued financial support from its shareholders, the ability of the Company to obtain necessary equity and/or debt financing to continue operations, and the attainment of profitable operations. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern. The Company cannot make any assurances that additional financings will be available to it and, if available, completed on a timely basis, on acceptable terms or at all. If the Company is unable to complete a debt or equity offering, or otherwise obtain sufficient financing when and if needed, it would negatively impact its business and operations and could also lead to the reduction or suspension of the Company’s operations and ultimately force the Company to cease operations. These financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
 
Subsequent to May 31, 2016, the Company completed a second and final closing of the 2016 Unit Private Placement (as defined in Note 3), whereby the Company issued an aggregate of 29.5 units for 147,500 shares of common stock and five-year common stock purchase warrants to purchase 73,750 shares of common stock with an exercise price of $3.00 per share for aggregate gross proceeds of $295,000 and net proceeds of $263,778. Following the first and second closings of the 2016 Unit Private Placement, the Company received net proceeds of approximately $390,000 after deducting placement agent fees and other offering expenses, including legal expenses. See Note 10 – Subsequent Events for more details on this transaction.
 
NOTE 2 – CAPITAL STOCK

The Company has authorized 160,000,000 shares of capital stock, par value $0.0001 per share, of which 150,000,000 are shares of common stock and 10,000,000 are shares of “blank-check” preferred stock.
 
Our Board is empowered, without stockholder approval, to issue preferred stock with dividend, liquidation, conversion, voting or other rights, which could adversely affect the voting power or other rights of the holders of common stock. The preferred stock could be utilized as a method of discouraging, delaying or preventing a change in control of the Company.
 
Common Stock
 
The holders of our common stock are entitled to one vote per share. In addition, the holders of our common stock will be entitled to receive ratably such dividends, if any, as may be declared by our Board out of legally available funds; however, the current policy of our Board is to retain earnings, if any, for operations and growth. Upon liquidation, dissolution or winding-up, the holders of our common stock will be entitled to share ratably in all assets that are legally available for distribution.
 

Series A Convertible Preferred Stock
 
Pursuant to the Certificate of Designation of Rights and Preferences of the Series A Preferred Stock (the “Series A Certificate of Designation”), the terms of the Series A Preferred Stock are as follows:

Ranking

The Series A Preferred Stock will rank senior to our common stock with respect to distributions of assets upon the liquidation, dissolution or winding up of the Company.

Dividends

The Series A Preferred Stock is not entitled to any dividends.

Liquidation Rights

In the event of any liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, the holders of the Series A Preferred Stock shall be entitled to receive out of the assets of the Company, whether such assets are capital or surplus, for each share of Series A Preferred Stock an amount equal to the fair market value as determined in good faith by the Board.

Voluntary Conversion; Anti-Dilution Adjustments

Each fifteen (15) shares of Series A Preferred Stock shall be convertible into one share of common stock (the “Series A Conversion Ratio”). The Series A Conversion Ratio is subject to customary adjustments for issuances of shares of common stock as a dividend or distribution on shares of the common stock, or mergers or reorganizations.

Voting Rights
 
The Series A Preferred Stock has no voting rights. The common stock into which the Series A Preferred Stock is convertible shall, upon issuance, have all of the same voting rights as other issued and outstanding common stock, and none of the rights of the Series A Preferred Stock.
 
Series B Convertible Preferred Stock
 
Pursuant to the Certificate of Designation of Rights and Preferences of the Series B Preferred Stock (the “Series B Certificate of Designation”), the terms of the Series B Preferred Stock are as follows:
 
Ranking

The Series B Preferred Stock will rank senior to the Series A Preferred Stock and common stock with respect to distributions of assets upon the liquidation, dissolution or winding up of the Company.

Stated Value
 
Each share of Series B Preferred Stock will have a stated value of $5,500, subject to adjustment for stock splits, combinations and similar events (the “Stated Value”).

Dividends

Cumulative dividends on the Series B Preferred Stock accrue at the rate of 8% of the Stated Value per annum, payable quarterly on March 31, June 30, September 30, and December 31 of each year, from and after the date of the initial issuance.  Dividends are payable in kind in additional shares of Series B Preferred Stock valued at the Stated Value or in cash at the sole option of the Company. At May 31, 2016 and February 29, 2016, the dividend payable to the holders of the Series B Preferred stocks amounted to $49,283 and $48,317, respectively. During the three months ended May 31, 2016 and 2015, the Company issued 13.1771 and 4.818 shares of Series B Preferred Stock, respectively, for payment of dividends amounting to $72,475 and $26,498.

Liquidation Rights

If the Company voluntarily or involuntarily liquidates, dissolves or winds up its affairs, each holder of the Series B Preferred Stock will be entitled to receive out of the Company’s assets available for distribution to stockholders, after satisfaction of liabilities to creditors, if any, but before any distribution of assets is made on the Series A Preferred Stock or common stock or any of the Company’s shares of stock ranking junior as to such a distribution to the Series B Preferred Stock, a liquidating distribution in the amount of the Stated Value of all such holder’s Series B Preferred Stock plus all accrued and unpaid dividends thereon. At May 31, 2016 and February 29, 2016, the value of the liquidation preference of the Series B Preferred Stock aggregated to approximately $3,700,000 and $3,700,000, respectively.
 
 
Conversion; Anti-Dilution Adjustments

Each share of Series B Preferred Stock will be convertible at the holder’s option into common stock in an amount equal to the Stated Value plus accrued and unpaid dividends thereon through the conversion date divided by the then applicable conversion price. The initial conversion price was $8.25 per share (the “Series B Conversion Price”) and is subject to customary adjustments for issuances of shares of common stock as a dividend or distribution on shares of common stock, or mergers or reorganizations, as well as “full ratchet” anti-dilution adjustments for future issuances of other Company securities (subject to certain standard carve-outs) at prices less than the applicable Series B Conversion Price.

The issuance of shares of common stock pursuant to the 2016 Unit Private Placement (as defined in Note 3) triggered the full ratchet anti-dilution price protection provision of the Series B Preferred Stock. Accordingly, the Series B Conversion Price was adjusted from $8.25 to $2.00 per share. See Note 3 for the accounting treatment of the conversion price adjustment.
 
The Series B Preferred Stock is subject to automatic conversion (the “Mandatory Conversion”) at such time when the Company’s common stock has been listed on a national stock exchange such as the NASDAQ, New York Stock Exchange or NYSE MKT; provided, that, on the Mandatory Conversion date, a registration statement providing for the resale of the shares of common stock underlying the Series B Preferred Stock is effective. In the event of a Mandatory Conversion, each share of Series B Preferred Stock will convert into the number of shares of common stock equal to the Stated Value plus accrued and unpaid dividends divided by the applicable Series B Conversion Price.
 
Voting Rights

On March 27, 2015, the holders of the Series B Preferred Stock entered into an Amended and Restated Series B Preferred Purchase Agreement, whereby the Company filed an Amended and Restated Series B Preferred Certificate of Designation. The Amended and Restated Series B Preferred Certificate of Designation provides that the holders of the Series B Preferred Stock shall be entitled to the number of votes equal to the number of shares of common stock into which such Series B Preferred Stock could be converted for purposes of determining the shares entitled to vote at any regular, annual or special meeting of stockholders of the Company, and shall have voting rights and powers equal to the voting rights and powers of the common stock (voting together with the common stock as a single class).

Most Favored Nation

For a period of up to 30 months after March 31, 2015, if the Company issues any New Securities (as defined below) in a private placement or public offering (a “Subsequent Financing”), the holders of Series B Preferred Stock may exchange all of the Series B Preferred Stock at their Stated Value plus all Series A Warrants (as defined below) issued to the Series B Preferred Stock investors in the Series B Private Placement for the securities issued in the Subsequent Financing on the same terms of such Subsequent Financing.  This right expires upon the earlier of (i) September 30, 2017 and (ii) the consummation of a bona fide underwritten public offering in which the Company receives aggregate gross proceeds of at least $5,000,000. ”New Securities” means shares of the common stock, any other securities, options, warrants or other rights where upon exercise or conversion the purchaser or recipient receives shares of the common stock, or other securities with similar rights to the common stock, subject to certain standard carve-outs.

See Note 3 for the accounting treatment of the Series B Preferred Stock.

NOTE 3 – EQUITY ISSUANCES

Common stock financing – the 2016 Unit Private Placement

During the three months ended May 31, 2016, the Company entered into a subscription agreement pursuant to a private placement (the “2016 Unit Private Placement”) with a number of accredited investors pursuant to which the Company issued an aggregate of 20 units consisting of an aggregate of 100,000 shares of common stock and five-year warrants to purchase 50,000 shares of common stock at a purchase price of $3.00 per share (the “Warrants”) for an aggregate purchase price of $200,000. After deducting placement agent fees and other offering expenses, including legal expenses, net proceeds amounted to approximately $126,000. Additionally, the Company issued an aggregate of 10,000 placement agent warrants in substantially the same form as the Warrants.

Pursuant to a registration rights agreement entered into by the parties, the Company agreed to file a registration statement with the SEC providing for the resale of the shares of common stock and the shares of common stock underlying the Warrants issued pursuant to the 2016 Unit Private Placement on or before the date which is forty-five (45) days after the date of the final closing of the 2016 Unit Private Placement.  The Company will use its commercially reasonable efforts to cause the registration statement to become effective within one hundred fifty (150) days from the filing date. The Company has received a waiver from a majority of the 2016 Unit Private Placement investors extending the filing date of the registration statement to no later than September 30, 2016.

Issuances of common stock for services

During the three months ended May 31, 2015, the Company issued an aggregate of 21,334 shares of common stock to consultants for services that vested immediately. The fair value of the shares amounted to $133,406 on the grant dates, which was recognized into general and administrative expense during the three months ended May 31, 2015.

During the three months ended May 31, 2016, the Company issued an aggregate of 25,000 shares of common stock to a consultant for services that vested over a two-month term and to settle $32,000 of accounts payable. The fair value of the shares amounted to $46,250 on the grant date, of which $14,250 was recognized into general and administrative expense during the three months ended May 31, 2016.
 

Settlement

On April 1, 2015, the Company entered into a settlement agreement to settle a dispute with two affiliated security holders in which the Company paid $150,000, in exchange for the cancellation of all Company securities held by such parties, which included an aggregate of 10,728 shares of common stock, 1,667 common stock purchase warrants with an exercise price of $31.50 and 5,001 common stock purchase warrants with an exercise price of $22.50 Additionally, the Company reimbursed $3,000 of legal expenses to the two affiliated security holders. The Company recorded the fair value of the instruments as a reduction of equity as equity instruments were cancelled and recognized a settlement expense of $38,437 for the excess of the amount paid over the fair value of the cancelled equity instruments.

Series B preferred stock financing – the Series B Private Placement

The Company entered into an amended and restated securities purchase agreement (the “A&R Series B Purchase Agreement”) on March 27, 2015 and March 31, 2015 with a number of new and existing accredited investors (collectively, the “Series B Investors”) pursuant to which it sold $2,130,750 of Series B Preferred Stock convertible into common stock at $8.25 per share in a private placement (the “Series B Private Placement”).  In addition, pursuant to the A&R Series B Purchase Agreement, the Company issued series A warrants (the “Series A Warrants”) to purchase up to 193,708 shares of common stock at an initial exercise price per share of $20.50 to the Series B Investors. The Series A Warrants expire on March 31, 2020. 
 
Pursuant to the closings of the Series B Private Placement in March 2015, the Company issued 387.4088 shares of Series B Preferred Stock convertible into 3,874,088 shares of common stock and Series A Warrants to purchase 193,708 shares of common stock for an aggregate purchase price of $2,130,750, of which $18,000 represents the exchange of stock-based compensation to a consultant that was to be settled in shares of common stock and was settled in Series B Preferred Stock and Series A Warrants. As a result of the exchange, the Company recorded an additional $12,695 of stock-based compensation.

In connection with the March 2015 closings of the Series B Private Placement, the placement agents were paid a total cash fee of $147,451 including expense allowances and reimbursements, and were issued an aggregate of 20,668 Series A Warrants. On the grant dates, the fair value of the placement agent warrants amounted to $158,441 and was recorded as a stock issuance cost. Net proceeds amounted to $1,945,244 after deducting offering expenses to be paid in cash, including the placement agent fees and legal fees and other expenses.

Accounting for the Series B Preferred Stock

The Company determined the Series B Preferred Stock should be classified as equity as it is not mandatorily redeemable, and there are no unconditional obligations in that the Company must or may settle in a variable number of its equity shares.

Because the Series B Preferred Stock contain certain embedded features that could affect the ultimate settlement of the Series B Preferred Stock, the Company analyzed the instrument for embedded derivatives that require bifurcation. The Company’s analysis began with determining whether the Series B Preferred Stock is more akin to equity or debt.  The Company evaluated the following criteria/features in this determination: redemption, voting rights, collateral requirements, covenant provisions, creditor and liquidation rights, dividends, conversion rights and exchange rights. The Company determined that the preponderance of evidence suggests the Series B Preferred Stock was more akin to equity than to debt when evaluating the economic characteristics and risks of the entire Series B Preferred Stock, including the embedded features. The Company then evaluated the embedded features to determine whether their economic characteristics and risks were clearly and closely related to the economic characteristics and risks of the Series B Preferred Stock. Since, the Series B Preferred Stock was determined to be more akin to equity than debt, and the underlying that causes the value of the embedded features to fluctuate would be the value of the Company’s common stock, the embedded features were considered clearly and closely related to the Series B Preferred Stock. As a result, the embedded features would not need to be bifurcated from the Series B Preferred Stock.

Any contingent beneficial conversion features will be recognized upon the occurrence of the contingent events based on its intrinsic value at the commitment date.

Accounting for the Series A Warrants

The Company concluded the freestanding Series A Warrants were indexed to the Company’s common stock and should be classified in stockholder’s equity, based on their relative fair value.

Allocation of Proceeds of the Series B Private Placement on March 27 and 31, 2015

The $2,130,750 proceeds from the Series B Private Placement on March 27 and 31, 2015 were allocated to the Series B Preferred Stock and Series A Warrant instruments based on their relative fair values.
 
The Series B Preferred Stock was valued on an as-if-converted basis based on the underlying common stock.  The Series A Warrants were valued using the Black-Scholes model with the following weighted-average input at the time of issuance: expected term of 5.0 years based on their contractual life, volatility of 125% based on the Company’s historical volatility and risk free rate of 1.4% based on the rate of the 5-years U.S. treasury bill.
 
 
After allocation of the proceeds, the effective conversion price of the Series B Preferred Stock was determined to be beneficial and, as a result, the Company recorded a non-cash deemed dividend of $1,067,491 equal to the intrinsic value of the beneficial conversion feature since the Series B Preferred Stock was immediately convertible.
 

Deemed Dividend due to Conversion Price Adjustment

During the three months ended May 31, 2016, as a result of the adjustment of the Series B Conversion Price from $8.25 to $2.00 per share due to the 2016 Unit Private Placement, the Company recorded a non-cash deemed dividend, amounting to $708,303.  The expense was measured at the intrinsic value of the beneficial conversion feature for each issuance of Series B Preferred Stock in the Series B Private Placement and was limited to the amount of Series B Preferred Stock allocated proceeds less previously recognized beneficial conversion features.

The Series B Registration Rights Agreement

In connection with the closing of the Series B Private Placement, the Company entered into an amended and restated registration rights agreement (the “A&R Series B Registration Rights Agreement”) with the Series B Investors, in which the Company agreed to file a registration statement (the “Registration Statement”) with the Securities and Exchange Commission ("SEC") to register for resale the shares of common stock underlying the Series B Preferred Stock, the Series A Warrants and the Series B Warrants within 30 calendar days of the final closing date of March 31, 2015 (the “Filing Date”), and to have the registration statement declared effective within 120 calendar days of the Filing Date.

If the Registration Statement has not been filed with the SEC on or before the Filing Date, the Company shall, on the business day immediately following the Filing Date, and each 15th day thereafter, make a payment to the Series B Investors as partial liquidated damages for such delay (together, the “Late Registration Payments”) equal to 2.0% of the purchase price paid for the Series B Preferred Stock then owned by the Series B Investors for the initial 15 day period and 1.0% of the purchase price for each subsequent 15 day period until the Registration Statement is filed with the SEC.  Late Registration Payments will be prorated on a daily basis during each 15-day period and will be paid to the Series B Investors by wire transfer or check within five business days after the end of each 15-day period following the Filing Date.

The Company filed the Registration Statement on Form S-1 with the SEC on April 10, 2015, and as a result no penalty was incurred.

NOTE 4 – STOCK OPTIONS

During the three months ended May 31, 2015, the Company issued options to purchase 6,667 shares of common stock at $11.25 per share to a consultant. The options vest upon achieving certain performance-based milestones and expire on March 1, 2025. The Company will measure the fair value of these options with vesting contingent on achieving certain performance-based milestones and recognize the compensation expense when vesting becomes probable.  The fair value will be measured using a Black-Scholes model. During the three months ended May 31, 2015, 1,667 of these options with an aggregate fair value of $8,000 vested based on achieving certain milestones.

During the three months ended May 31, 2015, the Company issued options to purchase 80,000 shares of common stock at $8.25 per share to non-executive members of its Board. The options vest in three equal installments on each of May 18, 2016, May 18, 2017, and May 18, 2018 and expire on May 18, 2025. These options had a total fair value of $388,000 as calculated using the Black-Scholes model.

During the three months ended May 31, 2016, the Company issued options to purchase 50,000 shares of common stock at $2.19 per share to a non-executive member of its Board. These 50,000 options vest in three equal installments on each of May 26, 2017, May 26, 2018, and May 26, 2019 and expire on May 26, 2026. These options had a total fair value of $86,500 as calculated using the Black-Scholes model.

During the three months ended May 31, 2016, the Company issued options to purchase 50,000 shares of common stock at $2.19 per share to a non-executive member of its Board for performing other services. These 50,000 options vest upon achieving a certain milestone and expire on May 26, 2026. These options will be measured and recognized when vesting becomes probable.

The weighted average inputs to the Black-Scholes model used to value the stock options granted during the three months ended May 31, 2016 and 2015 are as follows:
 
   
May 31,
2016
   
May 31, 
2015
 
Expected volatility
    100 %     123 %
Expected dividend yield
    0.00 %     0.00 %
Risk-free interest rate
    1.65 %     1.88 %
Expected Term
 
6.00 years
   
6.08 years
 

For the three months ended May 31, 2016, the Company recognized $104,836 of compensation expense related to stock options, of which $87,628 was recognized in general and administrative expenses and $17,208 in research and development expenses.

For the three months ended May 31, 2015, the Company recognized $38,240 of compensation expense related to stock options, which was recognized in general and administrative expenses.


The following table summarizes common stock options issued and outstanding:
 
   
Options
   
Weighted
average exercise
price
   
Aggregate
intrinsic value
   
Weighted
average remaining
contractual life (years)
 
Outstanding at February 29, 2016
   
426,976
   
$
 14.45
   
$
-
     
7.98
 
Granted
   
100,000
     
2.19
     
-
     
-
 
Exercised
   
 -
     
 -
     
-
     
-
 
Forfeited
   
-
     
 -
     
-
     
-
 
Expired
   
 -
     
-
     
-
     
-
 
                                 
Outstanding and expected to vest at May 31, 2016
   
526,976
   
$
12.12
   
$
-
     
 8.16
 
Exercisable at May 31, 2016
   
214,243
   
$
18.28
   
$
-
     
6.63
 

The following table breaks down exercisable and unexercisable common stock options by exercise price as of May 31, 2016:
 
Exercisable
   
Unexercisable
 
Number of Options
   
Exercise Price
   
Weighted Average Remaining Life (years)
   
Number of Options
   
Exercise Price
   
Weighted Average Remaining Life (years)
 
 
-
   
$
2.19
     
-
     
100,000
   
$
2.19
     
9.99
 
 
13,875
   
$
3.55
     
9.68
     
41,625
   
$
3.55
     
9.68
 
 
1,068
   
$
8.10
     
8.67
     
-
   
$
8.10
     
-
 
 
75,003
   
$
8.25
     
4.36
     
106,
   
$
8.25
     
9.00
 
 
52,434
   
$
10.20
     
5.61
     
-
   
$
10.20
     
-
 
 
3,334
   
$
11.25
     
8.97
     
3,333
   
$
11.25
     
8.97
 
 
8,890
   
$
16.50
     
8.38
     
31,110
   
$
16.50
     
8.38
 
 
14,735
   
$
22.50
     
8.16
     
30,000
   
$
22.50
     
7.55
 
 
44,904
   
$
48.75
     
6.85
     
-
   
$
48.75
     
-
 
 
214,243
   
$
18.28
     
6.63
     
312,733
   
$
7.91
     
9.21
 
 
As of May 31, 2016, we had approximately $353,000 of unrecognized compensation related to employee and consultant stock options that are expected to vest over a weighted average period of 1.43 years and, approximately $272,000 of unrecognized compensation related to employee stock options whose recognition is dependent on certain milestones to be achieved.  Additionally, there were 93,333 stock options with a performance vesting condition that were granted to consultants which will be measured and recognized when vesting becomes probable.
 
NOTE 5 – WARRANTS

For the three months ended May 31, 2015, the Company issued an aggregate of 193,708 Series A Warrants in connection with the issuances of Series B Preferred Stock in March 2015, referenced in Note 3. These Series A Warrants were issued on March 27 and 31, 2015, are exercisable at $10.50 per share and expire on March 31, 2020. The Series A Warrants vest immediately. The Series A Warrants do not contain any provision that would require liability treatment, therefore they were classified as equity in the Condensed Consolidated Balance Sheet.
 
In connection with the issuances of the Series B Preferred Stock on March 27 and 31, 2015, the Company issued placement agent warrants to purchase an aggregate of 20,668 shares of common stock.  These placement agent warrants had the same terms as the Series A Warrants and were issued on March 27, 2015, are exercisable at $10.50 per share and expire on March 31, 2020. These placement agent warrants vest immediately. The fair value of these warrants was determined to be $158,441, as calculated using the Black-Scholes model. Weighted-average assumptions used in the Black-Scholes model included: (1) a discount rate of 1.41%; (2) an expected term of 5.0 years; (3) an expected volatility of 125% and (4) zero expected dividends.
 
For the three months ended May 31, 2015, the Company issued an aggregate of 1,251 warrants to a consultant for services. These warrants were issued on May 31, 2015 and expire on May 31, 2020. 556 of such warrants are exercisable at $15.00 per share and 695 of such warrants are exercisable at $18.75 per share. These warrants vest immediately. The fair value of these warrants was determined to be $4,771, as calculated using the Black-Scholes model. Average assumptions used in the Black-Scholes model included: (1) a discount rate of 1.49%; (2) an expected term of 5.0 years; (3) an expected volatility of 124 %; and (4) zero expected dividends. For the three months ended May 31, 2015, the Company recognized $4,771 of stock-based compensation for these warrants.
 
 
For the three months ended May 31, 2015, 1,668 common stock purchase warrants with an exercise price of $31.50 and 5,001 common stock purchase warrants with an exercise price of $22.50 were repurchased and cancelled as part of a settlement of a dispute with two affiliated security holders (see Note 3).

For the three months ended May 31, 2016, the Company issued warrants to purchase an aggregate of 9,092 shares of common stock in connection with the issuance of the OID Notes pursuant to the March 2016 OID Note Purchase Agreements dated between March 3 and 15, 2016, referenced in Note 6. These warrants were initially exercisable at $8.25 per share and expire between March 3 and 15, 2021. These warrants vested immediately. These warrants contained an anti-dilution price protection provision, which required the warrants to be recorded as derivative warrant liability. Such clause will lapse upon completion of a Qualified Offering, as defined in the warrant agreement. These warrants were recorded as a debt discount based on their fair value.

For the three months ended May 31, 2016, the Company issued warrants to purchase an aggregate of 50,000 shares of common stock in connection with the issuance of common stock pursuant to the 2016 Unit Private Placement referenced in Note 3. These warrants are exercisable at $3.00 per share and expire on May 26, 2021. These warrants vested immediately. These warrants do not contain any provision that would require liability treatment, therefore they were classified as equity in the Condensed Consolidated Balance Sheet.

The following table summarizes common stock purchase warrants issued and outstanding:
 
  
 
Warrants
   
Weighted
average exercise
price
   
Aggregate
intrinsic
value
   
Weighted
average remaining contractual life (years)
 
Outstanding at February 29, 2016
   
913,514
   
$
14.56
   
$
-
     
3.14
 
Granted
   
69,092
     
3.69
     
-
     
-
 
Cancelled
   
14,672
     
21.00
     
-
     
-
 
Outstanding at May 31, 2016
   
967,934
   
$
 12.84
   
$
-
     
 3.08
 

Warrants exercisable at May 31, 2016 are:

Exercise
Prices
   
Number
of shares
   
Weighted average
remaining life (years)
   
Exercisable
number of shares
 
$
2.00
     
89,095
     
4.45
     
89,095
 
$
2.20
     
43,636
     
4.70
     
43,636
 
$
3.00
     
60,000
     
4.99
     
60,000
 
$
8.25
     
39,468
     
3.93
     
39,468
 
$
10.20
     
14,668
     
0.46
     
14,668
 
$
10.50
     
344,005
     
3.84
     
344,005
 
$
13.65
     
99,826
     
0.67
     
99,826
 
$
15.00
     
556
     
4.00
     
556
 
$
18.75
     
695
     
4.00
     
695
 
$
21.00
     
23,334
     
0.75
     
23,334
 
$
22.50
     
219,754
     
2.05
     
219,754
 
$
31.50
     
29,830
     
1.87
     
29,830
 
$
37.50
     
1,733
     
1.62
     
1,733
 
$
45.00
     
1,334
     
0.67
     
1,334
 
         
967,934
     
 3.08
     
967,934
 
 

NOTE 6 – NOTE PAYABLE

Promissory Note and Promissory Note Amendment

The Company entered into a note purchase agreement effective July 31, 2015 (the “Note Purchase Agreement”) with one its existing institutional investors (the “Note Holder”).  Pursuant to the Note Purchase Agreement, the Company issued and sold a non-convertible promissory note in the principal amount of $1.2 million (the “Promissory Note”) and a warrant (the “Note Warrant”) to purchase 43,636 shares of the Company’s common stock in a private placement (the “Note Private Placement”).

The Promissory Note matures on July 31, 2016, accrues interest at a rate of eight percent (8%) per annum and may be prepaid by the Company at any time prior to the maturity date without penalty or premium.  The Note Holder has the right at its option to exchange (the “Note Voluntary Exchange”) the outstanding principal balance of the Promissory Note plus the Conversion Interest Amount (as defined below) into such number of securities to be issued in a Public Offering (as defined below). Upon effectuating such Note Voluntary Exchange, the Note Holder shall be deemed to be a purchaser in the Public Offering. ”Public Offering” means a registered offering of equity or equity-linked securities resulting in gross proceeds of at least $5.0 million to the Company; and “Conversion Interest Amount” means interest payable in an amount equal to all accrued but unpaid interest assuming the Promissory Note had been held from the issuance date to the maturity date.  In the event the Company completes a Public Offering and the Note Holder elected not to effectuate the Note Voluntary Exchange, then the Company shall promptly repay the outstanding principal amount of the Promissory Note plus all accrued and unpaid interest following completion of the Public Offering.

The Note Warrant contains an adjustment clause affecting its exercise price, which may be reduced if the Company issues shares of common stock or convertible securities at a price below the then-current exercise price of the Note Warrant. As a result, we determined that the Note Warrant was not indexed to the Company’s common stock and therefore should be recorded as a derivative liability. The detachable Note Warrant issued in connection with the Promissory Note was recorded as a debt discount based on its fair value (see Note 7 for fair value measurement). The adjustment clause lapses upon listing of the Company’s common stock on a national stock exchange such as the NASDAQ, New York Stock Exchange or NYSE MKT.

The Company evaluated the Note Voluntary Exchange provision, which provides for settlement of the Promissory Note at an 8% premium to the Promissory Note’s stated principal amount, in accordance with ASC 815-15-25. The Voluntary Exchange provision is a contingent put that is not clearly and closely related to the debt host instrument and therefore was initially bifurcated and measured at fair value and recorded as a derivative liability in the consolidated balance sheet.  The derivative liability will be measured at fair value on an ongoing basis, with changes in fair value recognized in the statement of operations. The proceeds of the Note Private Placement were first allocated to the fair value of the Note Warrant in the amount of $150,544 and to the fair value of the Note Voluntary Exchange provision in the amount of $227,740, with the difference of $821,716 representing the initial carrying value of the Promissory Note. Further, approximately $105,000 of debt issuance cost was recorded as additional debt discount at issuance.  

On February 12, 2016, the Company entered into an amendment (the “Note Amendment”) with the Note Holder, whereby the Company and the Note Holder agreed to extend the maturity date of the Promissory Note from July 31, 2016 to December 31, 2016 and increase the interest rate commencing August 1, 2016 to 12% per annum. The Company also obtained the Note Holder’s consent to the consummation of the OID Note Private Placement (as defined below), as required under the Promissory Note.

Additionally, pursuant to the Note Amendment, the Note Voluntary Exchange was modified to effect a voluntary exchange of $600,000 principal amount (“Initial Exchange Principal Amount”) of the Promissory Note plus the Initial Conversion Interest Amount into a Qualified Offering (as defined below) or Public Offering. “Initial Conversion Interest Amount” shall mean interest payable in an amount equal to all accrued but unpaid interest assuming the Initial Exchange Principal Amount has been held from the issuance date to the original maturity date of July 31, 2016 (for the avoidance of doubt, such amount that is calculated using the following formula: (a) 8% multiplied by the Initial Exchange Principal Amount ($600,000), multiplied by (b) the actual number of days elapsed in a year of three hundred and sixty-five (365) days, which amount shall equal $48,000 in the aggregate). “Qualified Offering” means one or a series of offerings of equity or equity-linked securities resulting in aggregate gross proceeds of at least $2,000,000 to the Company.

Further, under the modified Note Voluntary Exchange, the Note Holder shall have the right to effect a voluntary exchange with respect to the remaining $600,000 principal amount (the “Remaining Principal Amount”) plus the Remaining Conversion Interest Amount into a Qualified Offering or Public Offering. “Remaining Conversion Interest Amount” shall mean interest payable in an amount equal to the sum of (A) all accrued but unpaid interest on such portion of the Remaining Principal Amount subject to such Voluntary Exchange assuming such portion of the Remaining Principal Amount had been held from the original maturity date of July 31, 2016 to the amended maturity date of December 31, 2016 (for the avoidance of doubt, such amount that is calculated using the following formula: (a) 12% multiplied by such portion of the Remaining Principal Amount subject to such Voluntary Exchange, multiplied by (b) the actual number of days elapsed in a year of three hundred and sixty-five (365) days, which amount shall equal $30,000 in the aggregate assuming the aggregate Remaining Principal Amount of $600,000 is used in such calculation), plus (B) all accrued but unpaid interest assuming such portion of the Remaining Principal Amount had been held from the issuance date to the original maturity date of July 31, 2016 (for the avoidance of doubt, such amount that is calculated using the following formula: (a) 8% multiplied by such portion of the Remaining Principal Amount, multiplied by (b) the actual number of days elapsed in a year of three hundred and sixty-five (365) days, which amount shall equal $48,000 in the aggregate assuming the aggregate Remaining Principal Amount of $600,000 is used in such calculation).
 
 
In consideration for entering into the Note Amendment, the Company issued the Note Holder a warrant to purchase 43,636 shares of the Company’s common stock (the “Amendment Warrant”) in substantially the same form as the Note Warrant issued in the Note Private Placement, provided, however, that with respect to the “full-ratchet” anti-dilution price protection adjustments for future issuances of other Company equity or equity-linked securities (subject to certain standard carve-outs), such price protection adjustment shall be equal to 110% of the consideration price per share of the issued equity or equity-linked securities.

The Company evaluated the Note Amendment transaction in accordance with ASC 470-50-40-12 and determined the Note Amendment did not constitute a substantive modification of the Promissory Note and that the transaction should be accounted for as a debt modification.

The Company evaluated the Voluntary Exchange provision, which provides for settlement of the Promissory Note at an 8% premium to the Promissory Note’s stated principal amount, in accordance with ASC 815-15-25. The Voluntary Exchange provision is a contingent put that is not clearly and closely related to the debt host instrument and therefore was initially separately measured at fair value and will be measured at fair value on an ongoing basis, with changes in fair value recognized in the statement of operations.

The Amendment Warrant contains an adjustment clause affecting its exercise price, which may be reduced if the Company issues shares of common stock or convertible securities at a price below the then-current exercise price of the Amendment Warrant. As a result, the Company determined that the Amendment Warrant was not indexed to the Company’s common stock and therefore should be recorded as a derivative liability. The fair value of the detachable Amendment Warrant issued in connection with the Note Amendment was recorded as a debt discount. The adjustment clause lapses upon the Company completing a Qualified Offering.

Accordingly, the Company recorded a debt discount related to the warrant liability of $84,552 and a debt discount related to the Voluntary Exchange of $103,806.

During the three months ended May 31, 2016, the Company recognized $138,003 of interest expense related to the Promissory Note, as amended, including amortization of debt discount of $114,003 and accrued interest expense of $24,000. Additionally, the Company recognized a loss of $28,676 in the three months ended May 31, 2016 due to the change in estimated fair value of the Voluntary Exchange provision.

OID Notes

In February 2016, the Company entered into an OID note purchase agreement dated February 12, 2016 (the “February 2016 OID Note Purchase Agreement”) in a private placement (the “OID Note Private Placement”) with various accredited investors (the “OID Note Holders”). Pursuant to the OID Note Purchase Agreement, the Company may issue and sell non-convertible OID promissory notes (the “OID Notes”) up to an aggregate purchase price of $1,000,000 (the “Purchase Price”) and warrants (the “OID Warrants”) to purchase 7,273 shares of the Company’s common stock for every $100,000 of Purchase Price. The OID Notes shall have an initial principal balance equal to 120% of the Purchase Price (the “OID Principal Amount”). Pursuant to the February 2016 OID Note Purchase Agreement, the Company received an aggregate Purchase Price of $500,000 and issued OID Notes in the aggregate OID Principal Amount of $600,000 and OID Warrants to purchase an aggregate of 36,367 shares of the Company’s common stock.

During the three months ended May 31, 2016, the Company entered into OID note purchase agreements between March 4 and 15, 2016 (the “March 2016 OID Note Purchase Agreements”) with various accredited investors. Pursuant to the March 2016 OID Note Purchase Agreements, the Company issued OID Notes with an aggregate Purchase Price of $125,000 and OID Warrants to purchase 9,902 shares of the Company’s common stock. The OID Notes issued in March 2016 have an OID Principal Amount equal to $150,000 or 120% of the Purchase Price.

The OID Notes mature six (6) months following the issuance date of each OID Note and may be prepaid by the Company at any time prior to the maturity date without penalty or premium. In the event the OID Notes are prepaid in full on or before the date that is ninety (90) days following the issuance date of each OID Note, the prepayment amount shall be equal to 110% of the Purchase Price and in the event the OID Notes are prepaid following such initial ninety (90) day period, the prepayment amount shall be equal to the OID Principal Balance (the “Optional Redemption”). The Company determined the Optional Redemption feature represents a contingent call option. The Company evaluated the Optional Redemption provision in accordance with ASC 815-15-25. The Company determined that the Optional Redemption feature is clearly and closely related to the debt host instrument and is not an embedded derivative requiring bifurcation.
 
Each OID Note Holder has the right at its option to act as a purchaser in a Qualified Offering and, in lieu of investing new cash subscriptions, mechanically effect a voluntary exchange (the “OID Note Voluntary Exchange”) of the OID Principal Amount of the OID Notes into such number of securities to be issued in a Qualified Offering. Upon effectuating such OID Voluntary Exchange, the OID Note Holders shall be deemed to be purchasers in the Qualified Offering. The Company evaluated the OID Note Voluntary Exchange provision, which provides for settlement of the OID Notes at the OID Principal Amount in accordance with ASC 815-15-25. The Company determined the OID Note Voluntary Exchange provision is a contingent put that is not clearly and closely related to the debt host instrument and therefore was initially separately measured at fair value and will be measured at fair value on an ongoing basis, with changes in fair value recognized in the statement of operations.
 

The OID Warrants contain an adjustment clause affecting their exercise price, which may be reduced if the Company issues shares of common stock or convertible securities at a price below the then-current exercise price of the OID Warrants. As a result, we determined that the OID Warrants were not indexed to the Company’s common stock and therefore should be recorded as a derivative liability. The detachable OID Warrants issued in connection with the OID Notes were recorded as a debt discount based on their fair value (see Note 7 for fair value measurement). The adjustment clause lapses upon the Company completing the Qualified Offering.

Pursuant to the March 2016 closings of the OID Note Private Placement, the OID Principal Amount was first allocated to the fair value of the OID Warrants in the amount of $15,225, next to the value of the original issuance discount in the amount of $25,000, then to the fair value of the OID Note Voluntary Exchange provision in the amount of $32,497, and lastly to the debt discount related to offering costs of $2,210 with the difference of $75,069 representing the initial carrying value of the OID Notes issued in March 2016.

During the three months ended May 31, 2016, the Company recognized $165,590 of interest expense related to the OID Notes, including amortization of debt discount. Additionally, the Company recognized a loss of $25,323 in the three months ended May 31, 2016 due to the change in estimated fair value of the OID Note Voluntary Exchange provision.

The following table summarizes the notes payable:

   
Note
Payable
   
Discount
   
Voluntary Exchange Feature
   
Note
Payable,
Net
 
February 29, 2016 balance
 
$
1,800,000
   
$
(743,282
 
$
476,402
   
$
1,533,120
 
Issuance of Note
   
150,000
     
(74,932
   
32,497
     
107,565
 
Amortization of debt discount
   
-
     
279,593
     
-
     
279,593
 
Change in value
   
-
     
-
     
53,999
     
53,999
 
May 31, 2016 balance
 
$
1,950,000
   
$
(538,621)
   
$
562,898
   
$
1,974,277
 

NOTE 7 – FAIR VALUE MEASUREMENTS

In accordance with ASC 820, Fair Value Measurements, financial instruments were measured at fair value using a three-level hierarchy which maximizes use of observable inputs and minimizes use of unobservable inputs:

·
Level 1: Observable inputs such as quoted prices in active markets for identical instruments
 
·
Level 2: Quoted prices for similar instruments that are directly or indirectly observable in the market
 
·
Level 3: Significant unobservable inputs supported by little or no market activity.  Financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, for which determination of fair value requires significant judgment or estimation.
 
Financial instruments measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. At May 31, 2016 and February 29, 2016, the warrant liability and put exchange feature liability balances were classified as Level 3 instruments.

Derivative Warrant Liability

The following table sets forth the changes in the estimated fair value for our Level 3 classified derivative warrant liability:

 
Note Payable Warrants
 
Series B Warrants
   
Total
 
Fair value at February 29, 2016
$
188,351
 
$
46,110
   
$
234,461
 
Additions
 
15,225
   
 -
     
15,225
 
Change in fair value:
 
31,636
   
2,856
     
34,492
 
Fair value at May 31, 2016
$
235,212
 
$
48,966
   
$
284,178
 
 
The Series B Warrants contain an adjustment clause affecting the exercise price of the Series B warrants, which may be reduced if the Company issues shares of common stock or convertible securities at a price below the then-current exercise price of the Series B warrants. As a result, we determined that the Series B warrants were not indexed to the Company’s common stock and therefore should be recorded as a derivative liability. The Series B Warrants were measured at fair value on the issuance date using a Monte Carlo simulation and will be re-measured to fair value at each balance sheet date, and any resultant changes in fair value will be recorded in earnings. The Monte Carlo simulation as of May 31, 2016 and February 29, 2016 used the following assumptions: (1) a stock price of $2.00 and $1.80, respectively; (2) a risk free rate of 1.17% and 1.08%, respectively; (3) an expected volatility of 136% and 134%, respectively; and (4) a fundraising event to occur on July 31, 2016 and May 15, 2016, respectively, that would result in the issuance of additional common stock.
 
 
In connection with the issuance of the Promissory Note on July 31, 2015, the Company issued a warrant to purchase an aggregate of 43,636 shares of common stock.  The warrant was issued on July 31, 2015, was originally exercisable at $8.25 per share and expires on July 31, 2020. The warrant contains a full-ratchet anti-dilution price protection provision that requires liability treatment and the exercise price of this warrant was adjusted to $2.00 during the three months ended May 31, 2016. The fair value of the warrant at May 31, 2016 and February 29, 2016 was determined to be $79,127 and $64,438, respectively, as calculated using the Monte Carlo simulation. The Monte Carlo simulation as of May 31, 2016 and February 29, 2016 used the following assumptions: (1) stock price of $2.00 and $1.80, respectively; (2) a risk free rate of 1.23% and 1.13%, respectively; (3) an expected volatility of 136% and 134%, respectively; and (4) a fundraising event to occur on July 31, 2016 and May 15, 2016, respectively, that would result in the issuance of additional common stock.

In connection with the execution of the Note Amendment on February 12, 2016, the Company issued a warrant to purchase an aggregate of 43,636 shares of common stock. The warrant was issued on February 12, 2016, initially exercisable at $8.25 per share and expires on February 11, 2021. The warrant contains a full-ratchet anti-dilution price protection provision that requires liability treatment and the exercise price of this warrant was adjusted to $2.20 during the three months ended May 31, 2016. The fair value of the warrant at May 31, 2016 and February 29, 2016 was determined to be $78,576 and $68,292, respectively, as calculated using the Monte Carlo simulation. The Monte Carlo simulation as of May 31, 2016 and February 29, 2016 used the following assumptions: (1) stock price of $2.00 and $1.80, respectively; (2) a risk free rate of 1.32% and 1.20%, respectively; (3) an expected volatility of 136% and 134%, respectively; and (4) a fundraising event to occur on July 31, 2016 and May 15, 2016, respectively, that would result in the issuance of additional common stock.

In connection with the issuance of OID Notes in February 2016, the Company issued warrants to purchase an aggregate of 36,367 shares of common stock.  These warrants were issued between February 12 and 22, 2016, were initially exercisable at $8.25 per share and expire between February 11 and 21, 2021. These warrants contain a full-ratchet anti-dilution price protection provision that requires liability treatment and the exercise price of these warrants were adjusted to $2.00 during the three months ended May 31, 2016. The fair value of these warrants at May 31, 2016 and February 29, 2016 was determined to be $60,750 and $55,621, respectively, as calculated using the Monte Carlo simulation. The Monte Carlo simulation as of May 31, 2016 and February 29, 2016 used the following weighted-average assumptions: (1) stock price of $2.00 and $1.80, respectively; (2) a risk free rate of 1.32% and 1.21%, respectively; (3) an expected volatility of 136% and 134%, respectively; and (4) a fundraising event to occur on July 31, 2016 and May 15, 2016, respectively, that would result in the issuance of additional common stock.

In connection with the issuance of OID Notes in March 2016, the Company issued warrants to purchase an aggregate of 9,092 shares of common stock.  These warrants were issued between March 4 and 15, 2016, were initially exercisable at $8.25 per share and expire between March 4 and 15, 2021. These warrants contain a full-ratchet anti-dilution price protection provision that requires liability treatment and the exercise price of these warrants were adjusted to $2.00 during the three months ended May 31, 2016. The fair value of these warrants at May 31, 2016 and at issuance between March 4 and 15, 2016 was determined to be $16,760 and $15,225, respectively, as calculated using the Monte Carlo simulation. The Monte Carlo simulation as of May 31, 2016, and between March 4 and 15, 2016, used the following weighted-average assumptions: (1) stock price of $2.00 and $1.97, respectively; (2) a risk free rate of 1.33% and 1.41%, respectively; (3) an expected volatility of 136% and 136%, respectively; and (4) a fundraising event to occur on July 31, 2016 and July 31, 2016, respectively, that would result in the issuance of additional common stock.

Put Exchange Feature Liability

The following table sets forth the changes in the estimated fair value for our Level 3 classified put exchange feature liabilities:

   
Promissory Note, as amended
 
OID Notes
   
Total
 
Fair value, February  29, 2016:
  $ 339,979     $ 136,423     $ 476,402  
Additions
    -        32,497        32,497  
Change in fair value:
    28,676        25,323        53,999  
Fair value, May 31, 2016:
  $ 368,655     $ 194,243     $ 562,898  

The Promissory Note issued on July 31, 2015, as amended on February 12, 2016, contains a Note Voluntary Exchange provision that is a contingent put that requires liability treatment (see Note 6). The fair value of this put exchange feature at February 29, 2016 and May 31, 2016 was determined to be $339,979 and $368,655, respectively. The fair value was calculated using a probability weighted present value methodology. The significant inputs to the fair value model were 1) the timing of a Qualified Offering expected to occur in May 2016 at February 29, 2016 and July 31, 2016 at May 31, 2016; 2) the combined probability of both a Qualified Offering and a voluntary exchange to occur, which was determined to be 71% at both February 29 and May 31, 2016 and 3) a discount rate of 18%, approximating high yield distressed debt rates, used for all measurement dates.

The OID Notes issued contain an OID Note Voluntary Exchange provision that is a contingent put that requires liability treatment (see Note 6). The fair value of this put exchange feature at February 29, 2016 and May 31, 2016 was determined to be $136,423 and $194,243, respectively, as calculated using a probability weighted present value methodology. The significant inputs to the fair value model at all measurement dates were 1) the timing of a Qualified Offering expected to occur in May 2016 at February 29, 2016 and July 31, 2016 at May 31, 2016; 2) the combined probability of both a Qualified Offering and a voluntary exchange to occur, which was determined to be 81%; and 3) a discount rate of 18%, approximating high yield distressed debt rates, used for all measurement dates.
 

NOTE 8 – EQUIPMENT

Equipment consists of the following:
 
 
Estimated 
Useful Lives
  
May 31, 
2016
   
February 29, 
2016
 
Research equipment
7 years
  
$
590,373
  
 
$
590,373
  
Computer equipment
5 years
  
 
76,075
  
   
76,075
  
   
  
 
666,448
     
666,448
  
Accumulated depreciation and amortization
 
  
 
(193,162
)    
(169,396
)
Equipment, net
 
  
$
473,286
  
 
$
497,052
  
 
Depreciation and amortization expense was $23,766 and $24,845 for the three months ended May 31, 2016 and 2015, respectively. Depreciation of equipment utilized in research and development activities is included in research and development expenses and amounted to $20,126 and $21,160 for the three months ended May 31, 2016 and 2015, respectively. All other depreciation is included in general and administrative expense and amounted to $3,640 and $3,685 for the three months ended May 31, 2016 and 2015, respectively.
 
NOTE 9 - COMMITMENTS

Lease Agreements

On August 28, 2014, we entered into a lease agreement (the “Boston Lease”) for our diagnostic laboratory and office space located in Boston, MA. The term of the Boston Lease is for two years, from September 1, 2014 through August 31, 2016, and the basic rent payable thereunder is $10,280 per month for the first year and $10,588 per month for the second year. Additional monthly payments under the Boston Lease shall include tax payments and operational and service costs. Additionally, we paid a $40,000 security deposit in connection with entering into the Boston Lease. Effective April 6, 2016, we entered into an amendment to the Boston Lease (the “Boston Lease Amendment”) whereby we extended the term by one year from September 1, 2016 to August 31, 2017. The basic rent payable under the Boston Lease Amendment increased to $17,164 per month plus additional monthly payments including tax payments and operational and service costs.

Effective March 1, 2015, we entered into a lease agreement for short-term office space in New York, NY.  The term of the lease is month-to-month and may be terminated upon twenty-one (21) days’ notice. The basic rent payment is $1,400 per month and we paid a $2,100 security deposit in connection with entering into the lease. Effective December 1, 2015, we amended our lease agreement for the short-term office space in New York, NY.  The term of the lease remains month-to-month and may still be terminated with twenty-one (21) days’ notice. The basic rent payment increased to $2,400 per month and we paid an additional $1,500 security deposit in connection with the amended lease.

NOTE 10 – NET LOSS PER SHARE

Basic net loss per common share is computed based on the weighted average number of common shares outstanding during the period.  Restricted shares issued with vesting condition that have not been met at the end of the period are excluded from the computation of the weighted average shares. As of May 31, 2016 and 2015, 21,951 and 29,188 restricted shares of common stock, respectively, were excluded from the computation of the weighted average shares.

Diluted net loss per common share is calculated giving effect to all dilutive potential common shares that were outstanding during the period. Diluted potential common shares generally consist of incremental shares issuable upon exercise of stock options and warrants, shares issuable from convertible securities, and unvested restricted shares. When dilutive, warrants classified as liabilities are included in the potential common shares and any change in fair value of the warrant for the period presented is excluded from the net loss. For the periods ended May 31, 2016 and 2015, the liability warrants were not dilutive.

In computing diluted loss per share for the periods ended May 31, 2016 and 2015, no effect has been given to the common shares issuable at the end of the period upon the conversion or exercise of the following securities as their inclusion would have been anti-dilutive:

 
  
May 31,
2016
 
  
May 31,
2015
 
Stock options
  
 
526,976
  
  
 
273,467
  
Warrants
  
 
967,934
  
  
 
789,465
 
Preferred stock
  
 
1,906,404
  
  
 
472,192
  
Total
  
 
3,401,314
  
  
 
1,535,124
  
 

NOTE 11 – SUBSEQUENT EVENTS

2016 Unit Private Placement

On June 8, 2016, the Company entered into a subscription agreement with a number of accredited investors pursuant to which the Company sold an aggregate of 29.5 units, with each unit consisting of (i) 5,000 shares of its common stock, and (ii) five-year warrants (the “Warrants”) to purchase 2,500 shares of common stock (the “Warrant Shares”), at an exercise price of $3.00 per share. The offering price was $10,000 per unit.

Pursuant to the second and final closing of the private placement of the units, the Company issued an aggregate of 147,500 shares of common stock and 73,750 Warrants for an aggregate purchase price of $295,000. After deducting placement agent fees and other offering expenses, the Company received net proceeds of $263,778. Additionally, the Company issued an aggregate of 14,750 placement agent warrants in substantially the same form as the Warrants.
 
The Company issued an aggregate of 49.5 units consisting of 247,500 shares of common stock and 123,750 Warrants for gross proceeds of $495,000 pursuant to both closings of the 2016 Unit Private Placement and issued an aggregate of 24,750 placement agent warrants. The Company received aggregate net proceeds of approximately $390,000 in the 2016 Unit Private Placement after deducting placement agent fees and other offering expenses, including legal expenses.

Pursuant to a registration rights agreement entered into by the parties, the Company has agreed to file a registration statement with the SEC providing for the resale of the shares of common stock and the Warrant Shares issued pursuant to the private placement on or before the date which is ninety (90) days after the date of the final closing of the private placement.  The Company will use its commercially reasonable efforts to cause the registration statement to become effective within one hundred fifty (150) days from the filing date.

Amendment #1 to Registration Rights Agreement

Effective July 11, 2016, the Company and the holders of a majority of the shares of common stock issued in the 2016 Unit Private Placement have entered into an amendment to the registration rights agreements dated May 26, 2016 and June 8, 2016, respectively, whereby the parties have agreed to extend the filing date of the registration statement with the SEC providing for the resale of the shares of common stock and the Warrant Shares issued pursuant to the 2016 Unit Private Placement to no later than September 30, 2016.

Stock Option Issuances

On July 7, 2016, the Company issued: (i) stock options to purchase an aggregate of 440,000 shares of common stock to members of its management team; (ii) stock options to purchase an aggregate 240,000 shares of common stock to consultants, and (iii) stock options to purchase an aggregate of 100,000 shares of common stock to a member of its Board. The stock options have an exercise price of $2.00 per share and are subject to certain time-based, milestone vesting and market-based vesting.
 
Most Favored Nation Exchange

On July 12, 2016, the Company and one Series B Preferred Stock shareholder (the “Exchange Purchaser”) entered into an exchange agreement effective July 1, 2016 (the “Exchange Agreement”) whereby the Exchange Purchaser elected to effect their Most Favored Nation exchange right into the securities offered pursuant to the 2016 Unit Private Placement (the “Exchange”). Accordingly, the Exchange Purchaser has tendered 19.4837 shares of Series B Preferred Stock and $2,143.21 of accrued and unpaid dividends for an aggregate exchange amount of $109,304, plus 9,000 Series A Warrants with an exercise price of $10.50 per share originally issued in connection with the Series B Private Placement for an aggregate of 54,652 shares of common stock and warrants to purchase 27,326 shares of common stock at an exercise price of $3.00 per share. Additionally, the parties entered into a joinder agreement, and the Exchange Purchaser shall have all rights and benefits under the 2016 Unit Private Placement financing agreements.
 

Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
References in this report to “we,” “us,” “our,” “the Company” and “MetaStat” refer to MetaStat, Inc. and its subsidiary. References to the “SEC” refer to the U.S. Securities and Exchange Commission.
 
Forward-Looking Statements
 
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and the related notes included elsewhere in this interim report. Our consolidated financial statements have been prepared in accordance with U.S. GAAP. Our consolidated financial statements and the financial data included in this interim report reflect our reorganization and have been prepared as if our current corporate structure had been in place throughout the relevant periods. The following discussion and analysis contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”), including, without limitation, statements regarding our expectations, beliefs, intentions or future strategies that are signified by the words “expect,” “anticipate,” “intend,” “believe,” or similar language. All forward-looking statements included in this document are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. Our business and financial performance are subject to substantial risks and uncertainties. Actual results could differ materially from those projected in the forward-looking statements. In evaluating our business, you should carefully consider the information set forth under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended February 28, 2015. Readers are cautioned not to place undue reliance on these forward-looking statements.

The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes thereto and other financial information appearing in our Annual Report on Form 10-K for the year ended February 29, 2016.

Business Overview
 
We are a pre-commercial molecular diagnostic company focused on the development and commercialization of novel diagnostic tests that provide oncologists with clinically-actionable information to optimize cancer treatment strategies based on the specific biological nature or “metastatic potential” of each patient’s tumor. We believe cancer treatment strategies can be personalized, outcomes improved and costs reduced through new diagnostic tools that identify the aggressiveness of primary tumors, response to chemotherapy and resistance to certain receptor tyrosine kinase inhibitors (TKIs).

We are developing two driver-based diagnostic product lines, which we intend to offer as a commercial laboratory service available through our state-of-the-art CLIA-certified reference laboratory located in Boston, MA. During 2016, we plan to complete at least three additional breast cancer clinical studies with the aim of providing additional prognostic and chemo-predictive clinical evidence and to further define specificity, sensitivity and clinical utility of our metastatic breast cancer diagnostics, including the MetaSite Breast™ and MenaCalc™ Breast assays to support our commercialization efforts. We plan on commencing marketing of our breast cancer diagnostic assays following presentation of clinical data at a major medical meeting in late 2016.

Going Concern

Since our inception, we have generated significant net losses. As of May 31, 2016, we had an accumulated deficit of approximately $24.6 million. At May 31, 2016 we have a negative working capital. We incurred net losses of approximately $1.2 million and $1.1 million for the three months ended May 31, 2016 and 2015, respectively. We expect our net losses to continue for at least the next several years. We anticipate that a substantial portion of our capital resources and efforts will be focused on research and development, both to develop additional tests for breast cancer and to develop products for other cancers, to scale up our commercial organization, and other general corporate purposes. Our financial results will be limited by a number of factors, including establishment of coverage policies by third-party insurers and government payers, and our ability in the short term to collect from payers often requiring a case-by-case manual appeals process. Until we receive routine reimbursement and are able to record revenues as tests are processed and reports delivered, we are likely to continue reporting net losses.
 
We currently anticipate that our cash and cash equivalents will be sufficient to fund our operations through July 2016, without raising additional capital. Our continuation as a going concern is dependent upon continued financial support from our shareholders, our ability to obtain necessary equity and/or debt financing to continue operations, and the attainment of profitable operations. These factors raise substantial doubt regarding our ability to continue as a going concern. We cannot make any assurances that additional financings will be available to us and, if available, completed on a timely basis, on acceptable terms or at all. If we are unable to complete a debt or equity offering, or otherwise obtain sufficient financing when and if needed, it would negatively impact our business and operations and could also lead to the reduction or suspension of our operations and ultimately force us to cease our operations.
 

ASET License Agreement

On November 25, 2014, we entered into the ASET License Agreement with ASET, a private third party entity affiliated with one of the Company’s directors.  The ASET License Agreement sets forth the rights and obligations of the parties with respect to the grant by the Company to ASET of an exclusive license of certain of the Company’s therapeutic assets and an exclusive sublicense, with the right to sublicense through multiple tiers, of all rights and obligations under the Company’s existing Alternative Splicing Therapeutic License Agreement dated as of as of December 7, 2013. The licensed technology includes: (i) Alternative Splicing Event (ASE) technology based on International Patent Application WO 2012/116248 A1 entitled "Alternatively Spliced mRNA Isoforms as Prognostic and Therapeutic Tools for Metastatic Breast Cancer and Other Invasive/Metastatic Cancers"; and (ii) Technology and know-how stemming from all ASE discovery work carried out in our labs at SUNY Stony Brook from September 2013 through November 25, 2014. The ASET License Agreement provides that the Company has the right to commercialize any Companion Diagnostics arising from the work performed by ASET under the ASET License Agreement, pursuant to an exclusive sublicense.  
 
The ASET License Agreement calls for certain customary payments, such as annual license maintenance payments ranging from $5,000 to $25,000, and milestone payments upon the achievement of specified regulatory and sales milestones.  The ASET License Agreement also requires the payment by ASET of a low single-digit royalty on net sales, at such time, if ever, as ASET’s products are fully developed, receive the required regulatory approvals and are commercialized.
 
We determined that ASET meets the criteria for variable interest entities (“VIEs”) because it lacks substantial equity investment. VIEs are consolidated by the primary beneficiary.
 
The primary beneficiary is the party who has both the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and an obligation to absorb losses of the entity or a right to receive benefits from the entity that could potentially be significant to the entity. We determined that the Company is not the primary beneficiary of ASET based primarily on the facts that we do not have the power to direct ASET’s operations nor do we have any obligation to absorb ASET losses.  As a result, ASET has not been consolidated by the Company based on our determination that the Company is not the primary beneficiary.

Our determination of whether we are the primary beneficiary of the VIE is based upon the facts and circumstances for the VIE and requires significant judgment regarding whether we have power to direct the VIE’s most significant activities, which includes, but is not limited to, the VIE’s purpose and design and the risks passed through to investors, the voting interests of the VIE, management, service and/or other agreements of the VIE, involvement in the VIE’s initial design and the existence of explicit or implicit financial guarantees.

Pursuant to the terms of the ASET License Agreement, as of December 31, 2015, the license granted thereunder was terminated by its terms as a result of ASET’s failure to invest $1 million in new equity in the Company. However, we are currently in discussions with ASET regarding the relationship, if any, moving forward, and the resolution of certain issues arising under the ASET License Agreement and the previously executed MOU.

We intend to actively pursue business development opportunities with the objective of entering into sublicense or joint venture agreements with suitable strategic partners capable of the developing and commercializing our therapeutic assets.
  
Critical Accounting Policies and Significant Judgments and Estimates
 
This discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as revenues and expenses during the reporting periods. We evaluate our estimates and judgments on an ongoing basis. We base our estimates on historical experience and on various other factors we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could therefore differ materially from those estimates under different assumptions or conditions.

Our significant accounting policies are described in Note 2 to our consolidated financial statements included in the Form 10-K for the year ended February 29, 2016.  We believe the following critical accounting policies reflect our more significant estimates and assumptions used in the preparation of our financial statements.
 
Stock-based Compensation

We account for share-based payment awards issued to employees and members of our Board by measuring the fair value of the award on the date of grant and recognizing this fair value as stock-based compensation using a straight-line basis over the requisite service period, generally the vesting period.  For awards issued to non-employees, the measurement date is the date when the performance is complete or when the award vests, whichever is the earliest. Accordingly, non-employee awards are remeasured at each reporting period until the final measurement date. The fair value of the award is recognized as stock-based compensation over the requisite service period, generally the vesting period.

Debt and Equity Instruments

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

Detachable warrants issued in conjunction with debt are measured at their relative fair value, if they are determined to be equity instrument, or their fair value, if they are determined to be liability instruments, and recorded as a debt discount.

Conversion features that are in the money at the commitment date constitute a beneficial conversion feature that is measured at its intrinsic value and recognized as debt discount or deemed dividend. Debt discount is amortized as interest expense over the maturity period of the debt using the effective interest method.


Any contingent beneficial conversion feature would be recognized when and if the contingent event occurs based on its intrinsic value at the commitment date.

                        Derivative Financial Instruments and Fair Value

We account for certain warrants and exchange features embedded in notes payable that are not deemed to be indexed to the Company’s own stock in accordance with the guidance contained in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 815, Derivatives and Hedging (“ASC 815”) and ASC Topic 480, Distinguishing Liabilities From Equity (“ASC 480”). Such instruments are classified as liabilities and measured at their fair values at the time of issuance and at each reporting period, which change in fair value being recognized in the statement of operations. The fair values of these instruments have been estimated using Monte Carlo simulations and other valuation techniques.

Financial Operations Overview

    General and Administrative Expenses
 
Our general and administrative expenses consist primarily of personnel related costs, legal costs, including intellectual property, accounting costs and other professional and administrative costs.

     Research and Development Expenses
 
The majority of the research and development expenses were focused on the research and development of the MetaSite Breast™ and the MenaCalc platform. In 2014, initial research on our therapeutic platform was sublicensed to ASET pursuant to the ASET License Agreement. On December 31, 2015, the ASET License Agreement terminated and rights to the therapeutic platform reverted back to us.

We charge all research and development expenses to operations as they are incurred. All potential future product programs, apart from our breast cancer diagnostic are in the clinical research and development phase, and the earliest we expect another cancer indication to reach the commercialization stage is 2018.

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

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

Results of Operations

Comparison of the Three Months Ended May 31, 2016 and May 31, 2015
 
Revenues.  There were no revenues for the three months ended May 31, 2016 and 2015, respectively, because we have not yet commercialized any of our function-based diagnostic tests.
 
General and Administrative Expenses. General and administrative expense was $555,681 for the three months ended May 31, 2016 as compared to $948,895 for the three months ended May 31, 2015. This represents an aggregate decrease of $393,214. Stock-based compensation was $87,628 for the three months ended May 31, 2016 as compared to $207,112 for the three months ended May 31, 2015. Excluding non-cash stock-based compensation expense and depreciation expense, general and administrative expenses decreased by $273,685 to $464,413 for the three months ended May 31, 2016 from $738,098 for the three months ended May 31, 2015. 

Investor relations and corporate communications expense, accounting, audit and tax expense, corporate legal expense, consulting expense, and board compensation, all decreased by $99,546, $83,687, $68,824, $54,666 and $12,500, respectively. Decreased general and administrative expenses were partially offset by increased intellectual property legal expense and D&O insurance expense of $44,109 and $13,294, respectively. We expect general and administrative expenses to remain relatively stable for the next fiscal year ending February 28, 2017, as projected increases in payroll and related expenses and consulting expenses will be offset by reduced offering and one-time costs.
 
Research and Development Expenses. Research and development expenses increased by $51,796 to $271,123 for the three months ended May 31, 2016 from $219,327 for the three months ended May 31, 2015. Excluding non-cash stock-based compensation expense and depreciation expense, research and development expenses increased by $35,622 to $233,789 for the three months ended May 31, 2016 from $198,167 for the three months ended May 31, 2015.
 
Research and development consulting expense increased by $51,370, which was partially offset by decreased laboratory consumable expense of $17,057. We expect research and development expenses to increase for the remainder of this fiscal year ending February 28, 2017 as we conduct addition breast cancer clinical studies and other research and development activities.

Other (Income) Expense. Other expense amounted to an expense of $392,985 for the three months ended May 31, 2016 as compared to income of $93,315 for the three months ended May 31, 2015.  This represents a change of $486,300. This change was due in part to an increase in interest expense on the notes payable of $299,729, loss from the change in fair value of the warrant liability $170,992, and a loss from the change in fair value of the put liability on the notes payable of $53,999.
 
Net Loss. As a result of the factors described above, we had a net loss of $1,219,789 for the three months ended May 31, 2016 as compared to a net loss of approximately $1,074,907 for the three months ended May 31, 2015.
 
 
Liquidity and Capital Resources
 
Since our inception, we have incurred significant losses and, as of May 31, 2016, we had an accumulated deficit of approximately $24.6 million. We have not yet achieved profitability and anticipate that we will continue to incur net losses for the foreseeable future. We expect that our research and development, general and administrative and commercialization expenses will continue to grow and, as a result, we will need to generate significant product revenues to achieve profitability. We may never achieve profitability.
 
 Sources of Liquidity
 
Since our inception, substantially all of our operations have been financed through the sale of our common stock, preferred stock, and promissory notes. Through May 31, 2016, we had received net proceeds of $6,333,605 through the sale of common stock to investors, $256,311 through the sale of Series A Preferred Stock to investors, $3,388,250 through the sale of Series B Preferred Stock to investors, $3,457,000 from the issuance of convertible promissory notes and $1,825,000 from the issuance of non-convertible promissory notes.  As of May 31, 2016, we had cash and cash equivalents of approximately $154,294 and net debt of $1,950,000.  Through May 31, 2016, we have issued and outstanding warrants to purchase 967,934 shares of our common stock at a weighted average exercise price of $12.84, which could result in proceeds to us of approximately $12,400,000 if all outstanding warrants were exercised for cash.
 
Cash Flows
 
At May 31, 2016, we had $154,294 in cash and cash equivalents, compared to approximately $1,032,563 on May 31, 2015. 
 
Net cash used in operating activities was $419,525 for the three months ended May 31, 2016 compared to $901,267 for the three months ended May 31, 2015. The decrease in cash used of $481,742 was primarily due to reduced public company and professional fees associated with offering and non-recurring transaction costs. We expect amounts used in operating activities to increase in fiscal year 2017 and beyond as we grow our corporate operations.
 
Net cash used in investing activities was $0 for the three months ended May 31, 2016, compared to $97,922 of cash used for the three months ended May 31, 2015. The $97,922 of net cash used in investing activities for the three months ended May 31, 2015 was attributed to laboratory equipment purchases for our research and development and CLIA-certified reference laboratory facility in Boston. We expect amounts used in investing activities to increase in fiscal year 2017 and beyond as we grow our corporate operations, expand research and development activities and establish and add capacity in our commercial laboratory, which is expected to result in an increase of our capital expenditures.

Net cash provided by financing activities during the three months ended May 31, 2016 was $210,036 compared to approximately $1,773,932 for the three months ended May 31, 2015. Financing activities consisted primarily of proceeds from issuance of non-convertible OID promissory notes and warrants and common stock and warrants for the three months ended May 31, 2016, and from the sale of Series B Preferred Stock and warrants for the three months ended May 31, 2015.
 
 
     Contractual Obligations

As of May 31, 2016, we had the following contractual commitments:

   
Payments Due by Period
 
Contractual Obligations
 
Total
   
Less than 1 Year
   
1-3 Years
   
4-5 Years
   
More
than 5
Years
 
   
(In thousands)
 
License Agreement
 
$
575
   
$
75
   
$
300
   
$
200
   
$
(1
                                         
Second License Agreement
 
$
555
   
$
80
   
$
275
   
$
200
   
$
(2
)
                                         
Alternative Splicing Diagnostic License Agreements (3)
 
$
278
   
$
40
   
$
138
   
$
100
   
$
(4
)
                                         
Antibody License Agreement
 
$
120
   
$
25
   
$
55
   
$
40
   
$
(5
)
                                         
Lease Agreement (6)
 
$
238
   
$
186
   
$
52
   
$
-
   
$
-
 

 
(1)
Amount of additional payments depends on several factors, including the duration of the License Agreement, which depends on expiration of the last patent to be issued pursuant to the License Agreement. That duration is uncertain because the last patent has not yet been issued.
 
(2)
Amount of additional payments depends on several factors, including the duration of the Second License Agreement, which depends on expiration of the last patent to be issued pursuant to the Second License Agreement. That duration is uncertain because the last patent has not yet been issued.
 
(3)
No annual license maintenance fee payments are due on the Alternative Splicing Therapeutic License Agreement so as long as the Alternative Splicing Diagnostic License Agreement is in effect.

(4)
Amount of additional payments depends on several factors, including the duration of the Alternative Splicing Diagnostic License Agreement, which depends on expiration of the last patent to be issued pursuant to the Alternative Splicing Diagnostic License Agreement. That duration is uncertain because the last patent has not yet been issued.
  
(5)
Amount of additional payments depends on several factors, including the duration of the Antibody License Agreement, which depends on expiration of the last patent to be issued pursuant to the Antibody License Agreement. That duration is uncertain because the last patent has not yet been issued. 

(6)
Only includes basic rent payments. Additional monthly payments under the lease agreement shall include tax payments and operational costs. 
 
License Agreements

Pursuant to the License Agreement, we are required to make annual license maintenance fee payments beginning August 26, 2011.  We have satisfied all license maintenance payments due through May 31, 2016. We are required to make payments of $75,000 in 2016 and $100,000 in 2017 and every year the license is in effect thereafter. These annual license maintenance fee payments will be credited to running royalties due on net sales earned in the same calendar year, if any. We are in compliance with the License Agreement.

Pursuant to the Second License Agreement, we are required to make annual license maintenance fee payments beginning on January 3, 2013. The license maintenance payment of $30,000 for 2016 is currently outstanding. We are required to make additional payments of $50,000 in 2017, $75,000 in 2018 and $100,000 in 2019 and every year the license is in effect thereafter. These annual license maintenance fee payments will be credited to running royalties due on net sales earned in the same calendar year, if any. We are in compliance with the Second License Agreement.

We paid a license-signing fee of $15,000 in connection with entering into the Alternative Splicing Diagnostic License Agreement and a license-signing fee of $5,000 in connection with entering into the Alternative Splicing Therapeutic License Agreement.  Pursuant to these agreements, we are required to make annual license maintenance fee payments for each license beginning on January 1, 2015. The license maintenance payment of $15,000 for 2016 is currently outstanding   We are required to make additional payments of $25,000 in 2017, $37,500 in 2018, and $50,000 in 2019 and every year each license is in effect thereafter.  On November 25, 2014, we entered into the ASET License Agreement with ASET who will assume responsibility for payment of half of the annual license maintenance fees as long as the Alternative Splicing Diagnostic License Agreement remains in effect. These annual license maintenance fee payments will be credited to running royalties due on net sales earned in the same calendar year, if any. No annual license maintenance fee payments are due on the Alternative Splicing Therapeutic License Agreement so as long as the Alternative Splicing Diagnostic License Agreement is in effect. We are in compliance with the Alternative Splicing License Agreements.
 

We paid a license-signing fee of $10,000 in connection with entering into the Antibody License Agreement and are required to make license maintenance fee payments beginning on January 1, 2015. The license maintenance payment of $10,000 for 2016 is currently outstanding. We are required to make additional payments of $15,000 in 2017, $15,000 in 2018, and $20,000 in 2019 and every year the license is in effect thereafter. These annual license maintenance fee payments will be credited to running royalties due on net sales earned in the same calendar year, if any. We are in compliance with the Antibody License Agreement.
 
Pursuant to the ASET License Agreement and Memorandum of Understanding between the Company and ASET (as assignee), as amended (the “MOU”), ASET is obligated to invest an aggregate of $1.25 million in new equity in the Company, $250,000 of which was invested in the June 30, 2014 and July 14, 2014 equity financings with the balance to be invested in a separate financing or financings on substantially similar terms on or before December 31, 2015. Under the ASET License Agreement and the MOU, in the event that ASET does not satisfy its investment obligation, the ASET License Agreement will terminate by its terms and the assets will automatically revert back to the Company.  The MOU also required ASET to pay for all costs and expenses of the SUNY Stony Brook facility, up to a maximum of $50,000 per month, until the transfer of such assets under the ASET License Agreement. In addition, ASET agreed to reimburse the Company $150,000 for certain costs incurred at such facility by March 1, 2015.
 
On June 22, 2015, effective May 31, 2015, the Company and ASET entered into a side letter that clarifies certain terms of the MOU including allowing for the equity investments in multiple tranches.

In addition, the parties mutually agreed to an extension of the $150,000 due the Company on March 1, 2015 in connection with the reimbursement for certain costs. ASET issued an interest free promissory Note to the Company in the aggregate amount of $150,000, payable in three installments of $50,000 each due on June 1, 2015, July 1, 2015 and August 1, 2015, respectively. The Company has received each of the first two payments of $50,000 and as of May 31, 2016, has a $50,000 note receivable from ASET.
 
ASET also issued a Note to the Company in the principal amount of $75,000 for the purchase of the equipment and fixed assets of the Stony Brook, NY laboratory. The Note is interest free and matured on December 30, 2015. In the event the Company has purchased at least $925,000 in equity of ASET prior to December 30, 2015, then the Company may use the Note as payment for its remainder purchase of equity in ASET. The $75,000 balance has been recorded as a note receivable on the Company’s Balance Sheet.
 
Pursuant to the MOU, the Company is obligated to make a $1 million preferred stock equity investment in exchange for a 20% equity interest in ASET (on a fully diluted, as converted basis) on or before December 31, 2015.  The Company shall maintain its 20% equity ownership in ASET until such time that ASET raises an aggregate of $4,000,000 in equity or in a financing in which ASET issues securities convertible into equity (including the $1 million received from the Company, but excluding any proceeds received by ASET from the sale of the Company’s securities), after which it will be diluted proportionately with all other equity holders of ASET. The Company will have the right to maintain its equity position in ASET by participating in future financings; provided, however, that such right will terminate in the event the Company does not make a minimum investment in a future financing of ASET equal to at least the lesser of (i) $250,000 and (ii) an amount required to maintain its 20% equity ownership interest.

Pursuant to the terms of the ASET License Agreement, as of December 31, 2015, the license granted thereunder was terminated by its terms as a result of ASET’s failure to invest $1 million in new equity in the Company. However, we are currently in discussions with ASET regarding the relationship, if any, moving forward, and the resolution of certain issues arising under the ASET License Agreement and the previously executed MOU.
 
Lease Agreements

On August 28, 2014, we entered into a lease agreement (the “Boston Lease”) for our diagnostic laboratory and office space located in Boston, MA. The term of the Boston Lease is for two years, from September 1, 2014 through August 31, 2016, and the basic rent payable thereunder is $10,280 per month for the first year and $10,588 per month for the second year. Additional monthly payments under the Boston Lease shall include tax payments and operational and service costs. Additionally, we paid a $40,000 security deposit in connection with entering into the Boston Lease. Effective April 6, 2016, we entered into an amendment to the Boston Lease (the “Boston Lease Amendment”) whereby we extended the term by one year from September 1, 2016 to August 31, 2017. The basic rent payable under the Boston Lease Amendment increased to $17,164 per month plus additional monthly payments, including tax payments and operational and service costs.
 
Effective March 1, 2015, we entered into a lease agreement for short-term office space in New York, NY.  The term of the lease is month-to-month and may be terminated upon twenty-one days’ notice. The basic rent payment is $1,400 per month and we paid a $2,100 security deposit in connection with entering into the lease. Effective December 1, 2015, we amended our lease agreement for the short-term office space in New York, NY.  The term of the lease remains month-to-month and may still be terminated with twenty-one days’ notice. The basic rent payment increased to $2,400 per month and we paid an additional $1,500 security deposit in connection with the amended lease.
 
We intend to enter into arrangements for the acquisition of additional laboratory equipment, computer hardware and software, including data storage, leasehold improvements and office equipment in the second half of fiscal year 2016 as we prepare for commercialization of our metastatic breast cancer diagnostic. We cannot at this time provide assurances that we will be able to enter into agreements with vendors on terms commercially favorable to us or that we will be able to enter into such arrangements without securing additional financing.
 
 
Operating Capital and Capital Expenditure Requirements

We currently anticipate that our cash and cash equivalents will be sufficient to fund our operations through July 2016, without raising additional capital. We expect to continue to incur substantial operating losses in the future and to make capital expenditures to keep pace with the expansion of our research and development programs and to scale up our commercial operations, which we expect to fund in part with the proceeds of the recent financing activities. It may take several years to move any one of a number of product candidates in clinical research through the development and validation phases to commercialization. We expect that the remainder of the net proceeds and our existing cash and cash equivalents will be used to fund working capital and for capital expenditures and other general corporate purposes, such as licensing technology rights, partnering arrangements for the processing of tests outside the United States or reduction of contractual obligations. A portion of the net proceeds may also be used to acquire or invest in complementary businesses, technologies, services or products. We have no current plans, agreements or commitments with respect to any such acquisition or investment, and we are not currently engaged in any negotiations with respect to any such transaction.

The amount and timing of actual expenditures may vary significantly depending upon a number of factors, such as the progress of our product development, regulatory requirements, commercialization efforts, the amount of cash used by operations and progress in reimbursement. We expect that we will receive limited payments for our breast cancer diagnostic tests, including the MetaSite BreastTM and MenaCalcTM Breast test billings from the beginning of our marketing efforts into the foreseeable future. As reimbursement contracts with third-party payers are put into place, we expect an increase in the number and level of payments received for our breast cancer diagnostic, including the MetaSite BreastTM and MenaCalcTM Breast test billings.

We cannot be certain that any of our future efforts to develop future products will be successful or that we will be able to raise sufficient additional funds to see these programs through to a successful result.

Our future funding requirements will depend on many factors, including the following:

·
the rate of progress in establishing reimbursement arrangements with third-party payers;
·
the success of billing, and collecting receivables; 
·
the cost of expanding our commercial and laboratory operations, including our selling and marketing efforts; 
·
the rate of progress and cost of research and development activities associated with expansion of products for breast cancer; and 
·
the rate of progress and cost of research and development activities associated with products in the research phase focused on cancer, other than breast cancer.

Until we can generate a sufficient amount of product revenues to finance our cash requirements, which we may never do, we expect to finance future cash needs primarily through public or private equity offerings, debt financings, borrowings or strategic collaborations. The issuance of equity securities may result in dilution to stockholders. We cannot make any assurances that additional financings will be completed on a timely basis, on acceptable terms or at all. If we are unable to complete a debt or equity offering, or otherwise obtain sufficient financing when and if needed, it would negatively impact our business and operations, which could cause the price of our common stock to decline. It could also lead to the reduction or suspension of our operations and ultimately force the Company to cease operations.
 
Item 3.  Quantitative and Qualitative Disclosures about Market Risks
 
Not applicable.

Item 4.  Controls and Procedures
 
Disclosure Controls and Procedures

Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in reports filed or submitted under the Securities Exchange Act of 1934 (“Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls include, without limitation, controls and procedures designed to ensure that information required to be disclosed under the Exchange Act is accumulated and communicated to management, including principal executive and financial officers, as appropriate, to allow timely decisions regarding required disclosure. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.
 
Management carried out an evaluation, under the supervision of the Chief Executive Officer and Vice President, Finance, of the effectiveness of disclosure controls and procedures as of May 31, 2016. Based upon that evaluation, management, including the Chief Executive Officer and Vice President, Finance, concluded that the design and operation of disclosure controls and procedures were effective.
 
 
Management's Report on Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in the Securities Exchange Act of 1934, as amended. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of internal control over financial reporting as of May 31, 2016.  In making this assessment, management used the criteria set forth by Internal Control—Integrated Framework (2013 Framework) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its assessment using those criteria, management concluded that internal control over financial reporting was effective as of May 31, 2016.
 
As a smaller reporting company, we are not required to obtain an attestation report from our registered public accounting firm regarding internal controls over financial reporting.

Changes in Internal Control over Financial Reporting
 
We have had no changes in internal control over financial reporting during the three months ended May 31, 2016 that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.
 
PART II. OTHER INFORMATION
 
Item  1.  Legal Proceedings
 
None.
 
Item  1A.   Risk Factors
 
If the Company is unable to continue as a going concern, its securities will have little or no value.

The report of the Company's independent registered public accounting firm that accompanies the Company's audited consolidated financial statements for the years ended February 29, 2016 and February 28, 2015 contains a going concern qualification in which such firm expressed substantial doubt about the Company's ability to continue as a going concern. As of May 31, 2016, the Company had an accumulated deficit of $24,597,117. The Company currently anticipates that its cash and cash equivalents will be sufficient to fund its operations through July 2016, without raising additional capital. The continuation of the Company as a going concern is dependent upon continued financial support from its shareholders, the ability of the Company to obtain necessary equity and/or debt financing to continue operations, and the attainment of profitable operations. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern. The Company cannot make any assurances that additional financings will be completed on a timely basis, on acceptable terms or at all. If the Company is unable to complete a debt or equity offering, or otherwise obtain sufficient financing when and if needed, it would negatively impact its business and operations, which could cause the price of its common stock to decline. It could also lead to the reduction or suspension of the Company’s operations and ultimately force the Company to go out of business.
 
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds
 
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 the Principal Executive and Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
       
  32.1  
Certification of the Principal Executive and Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
       
 
101.INS*
 
XBRL Instance Document
       
 
101.SCH*
 
XBRL Taxonomy Extension Schema
       
 
101.CAL*
 
XBRL Taxonomy Extension Calculation Linkbase
       
 
101.DEF*
 
XBRL Taxonomy Extension Definition Linkbase
       
 
101.LAB*
 
XBRL Taxonomy Extension Label Linkbase
       
 
101.PRE*
 
XBRL Taxonomy Extension Presentation Linkbase
 
*
Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed note filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability.
 
 
SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
     
      METASTAT, INC.
       
Date: July 14, 2016
 
By:
/s/ Douglas A. Hamilton  
     
Douglas A. Hamilton
President and Chief Executive Officer
(Principal Executive and Financial Officer)
 
 
-26-