Notes to Unaudited Condensed Consolidated Financial
Statements
NOTE 1 – DESCRIPTION OF
BUSINESS AND GOING
CONCERN
MetaStat, Inc. (“we,” “us,”
“our,” the “Company,” or
“MetaStat”) is a pre-commercial biotechnology company
focused on discovering and developing personalized therapeutic (Rx)
and diagnostic (Dx) treatment solutions for cancer patients. Our
Mena isoform “driver-based” diagnostic biomarkers also
serve as novel therapeutic targets for anti-metastatic drugs.
MetaStat is developing therapeutic product candidates and paired
companion diagnostics based on a novel approach that makes the Mena
isoform protein a drugable target. Our core expertise includes an
understanding of the mechanisms and pathways that drive tumor cell
invasion and metastasis, as well as drug resistance to certain
targeted therapies and cytotoxic chemotherapies. MetaStat’s
head office, research laboratories, and state-of-the-art
CLIA-certified diagnostic laboratory are located in Boston,
MA. The Company was incorporated on March 28, 2007 under the laws
of the State of Nevada.
Basis of Presentation
The accompanying 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 28, 2017, included in the Company’s Annual Report on
Form 10-K as filed with the United States Securities and Exchange
Commission (“SEC”) on May 30, 2017. These unaudited
financial statements reflect all adjustments, consisting only of
normal recurring adjustments, which are, in the opinion of
management, necessary for a fair presentation of the
Company’s financial position as of May 31, 2017 and its
results of operations and cash flows for the interim periods
presented and are not necessarily indicative of results for
subsequent interim periods or for the full year. These interim
financial statements do not include all of the information and
footnotes required by GAAP for complete financial statements and
allowed by the relevant SEC rules and regulations; however, the
Company believes that its disclosures are adequate to ensure that
the information presented is not misleading.
Going Concern
The accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of
business. The Company has experienced net losses and negative
cash flows from operations since its inception. The
Company has sustained cumulative losses of approximately $26.6
million as of May 31, 2017, has negative working capital and has
not generated 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, 2017, the Company completed a private
placement for gross proceeds of approximately $2.14 million (See
Note 12).
NOTE 2 – CAPITAL STOCK
The Company has authorized 160,000,000 shares of capital stock, par
value $0.0001 per share, of which 150,000,000 are shares of common
stock and 10,000,000 are shares of “blank-check”
preferred stock.
Our board of directors (the “Board”) is empowered,
without stockholder approval, to issue preferred stock with
dividend, liquidation, conversion, voting or other rights, which
could adversely affect the voting power or other rights of the
holders of common stock. The preferred stock could be utilized as a
method of discouraging, delaying or preventing a change in control
of the Company.
Common Stock
The holders of our common stock are entitled to one vote per share.
In addition, the holders of our common stock will be entitled to
receive ratably such dividends, if any, as may be declared by our
Board out of legally available funds; however, the current policy
of our Board is to retain earnings, if any, for operations and
growth. Upon liquidation, dissolution or winding-up, the holders of
our common stock will be entitled to share ratably in all assets
that are legally available for distribution.
Series A Convertible Preferred Stock
Pursuant to the Certificate of Designation of Rights and
Preferences of the Series A Preferred Stock (the “Series A
Preferred Stock” or “Series A Preferred”), the
terms of the Series A Preferred Stock are as follows:
Ranking
The Series A Preferred Stock will rank (i) senior to our common
stock, (ii)
pari passu
with our Series A-2 Preferred Stock (as defined
below) and (iii) junior to our Series B Preferred Stock (as defined
below) with respect to distributions of assets upon the
liquidation, dissolution or winding up of the
Company.
Dividends
The Series A Preferred Stock is not entitled to any
dividends.
Liquidation Rights
In the event of any liquidation, dissolution or winding-up of the
Company, whether voluntary or involuntary, the holders of the
Series A Preferred Stock shall be entitled to receive out of the
assets of the Company, whether such assets are capital or surplus,
for each share of Series A Preferred Stock an amount equal to the
fair market value as determined in good faith by the
Board.
Voluntary Conversion; Anti-Dilution Adjustments
Each fifteen (15) shares of Series A Preferred Stock shall be
convertible into one share of common stock (the “Series A
Conversion Ratio”). The Series A Conversion Ratio is subject
to customary adjustments for issuances of shares of common stock as
a dividend or distribution on shares of the common stock, or
mergers or reorganizations.
Voting Rights
The Series A Preferred Stock has no voting rights. The common stock
into which the Series A Preferred Stock is convertible shall, upon
issuance, have all of the same voting rights as other issued and
outstanding common stock, and none of the rights of the Series A
Preferred Stock.
Series A-2 Convertible Preferred Stock
Pursuant to the Certificate of Designation of Rights and
Preferences of the Series A-2 Convertible Preferred Stock (the
“Series A-2 Preferred Stock” or “Series A-2
Preferred”), the terms of the Series A-2 Preferred Stock are
as follows:
Ranking
The Series A-2 Preferred will rank (i) senior to our common stock,
(ii)
pari
passu
with our Series A
Preferred Stock, and (iii) junior to our Series B Preferred Stock
(as defined below) with respect to distributions of assets upon the
liquidation, dissolution or winding up of the
Company.
Dividends
The Series A-2 Preferred is not entitled to any
dividends.
Liquidation Rights
In the event of any liquidation, dissolution or winding-up of the
Company, whether voluntary or involuntary, the holders of the
Series A-2 Preferred shall be entitled to receive out of the assets
of the Company, whether such assets are capital or surplus, for
each share of Series A-2 Preferred an amount of cash, securities or
other property to which such holder would be entitled to receive
with respect to each such share of Preferred Stock if such shares
had been converted to common stock immediately prior to such
liquidation, dissolution or winding-up of the Company.
Voluntary Conversion; Anti-Dilution Adjustments
Each share of Series A-2 Preferred shall, at any time, and from
time to time, at the option of the holder, be convertible into ten
(10) shares of common stock (the “Series A-2 Conversion
Ratio”). The Series A-2 Conversion Ratio is subject to
customary adjustments for issuances of shares of common stock as a
dividend or distribution on shares of common stock, or mergers or
reorganizations.
Conversion Restrictions
The holders of the Series A-2 Preferred may not convert their
shares of Series A-2 Preferred into shares of common stock if the
resulting conversion would cause such holder and its affiliates to
beneficially own (as determined in accordance with Section 13(d) of
the Exchange Act, and the rules thereunder) in excess of 4.99% or
9.99% of the common stock outstanding, when aggregated with all
other shares of common stock owned by such holder and its
affiliates at such time; provided, however, that such holder may
elect to waive these conversion restrictions.
Voting Rights
The Series A-2 Preferred has no voting rights. The common stock
into which the Series A-2 Preferred is convertible shall, upon
issuance, have all of the same voting rights as other issued and
outstanding common stock, and none of the rights of the Series A-2
Preferred.
Series B Convertible Preferred Stock
Pursuant to the Certificate of Designation of Rights and
Preferences of the Series B Preferred Stock (the “Series B
Preferred Stock” or “Series B Preferred”), the
terms of the Series B Preferred Stock are as follows:
Ranking
The Series B Preferred Stock will rank senior to our Series A
Preferred Stock, Series A-2 Preferred Stock and common stock with
respect to distributions of assets upon the liquidation,
dissolution or winding up of the Company.
Stated Value
Each shares 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, 2017 and February 28, 2017, the dividends
payable to the holders of the Series B Preferred Stock amounted to
approximately $16,000 and $16,000, respectively. During the three
months ended May 31, 2017 and May 31, 2016, the Company issued
4.2648 and 13.1771 shares of Series B Preferred Stock,
respectively, for payment of dividends amounting to approximately
$23,000 and $72,000, respectively.
Liquidation Rights
If the Company voluntarily or involuntarily liquidates, dissolves
or winds up its affairs, each holder of the Series B Preferred
Stock will be entitled to receive out of the Company’s assets
available for distribution to stockholders, after satisfaction of
liabilities to creditors, if any, but before any distribution of
assets is made on the Series A Preferred Stock or common stock or
any of the Company’s shares of stock ranking junior as to
such a distribution to the Series B Preferred Stock, a liquidating
distribution in the amount of the Stated Value of all such
holder’s Series B Preferred Stock plus all accrued and unpaid
dividends thereon. At May 31, 2017 and February 28, 2017, the value
of the liquidation preference of the Series B Preferred Stock
aggregated to approximately $1.2 million and $1.19 million,
respectively.
Conversion; Anti-Dilution Adjustments
Each share of Series B Preferred Stock will be convertible at the
holder’s option into common stock in an amount equal to the
Stated Value plus accrued and unpaid dividends thereon through the
conversion date divided by the then applicable conversion price.
The initial conversion price was $8.25 per share (the “Series
B Conversion Price”) and is subject to customary adjustments
for issuances of shares of common stock as a dividend or
distribution on shares of common stock, or mergers or
reorganizations, as well as “full ratchet”
anti-dilution adjustments for future issuances of other Company
securities (subject to certain standard carve-outs) at prices less
than the applicable Series B Conversion Price.
The issuance of shares of common stock pursuant to the 2016 Unit
Private Placement (as defined in Note 3) triggered the full ratchet
anti-dilution price protection provision of the Series B Preferred
Stock. Accordingly, the Series B Conversion Price was adjusted from
$8.25 to $2.00 per share.
The Series B Preferred Stock is subject to automatic conversion
(the “Mandatory Conversion”) at such time when the
Company’s common stock has been listed on a national stock
exchange such as the NASDAQ, New York Stock Exchange or NYSE MKT;
provided, that, on the Mandatory Conversion date, a registration
statement providing for the resale of the shares of common stock
underlying the Series B Preferred Stock is effective. In the event
of a Mandatory Conversion, each share of Series B Preferred Stock
will convert into the number of shares of common stock equal to the
Stated Value plus accrued and unpaid dividends divided by the
applicable Series B Conversion Price.
Voting Rights
The holders of the Series B Preferred Stock shall be entitled to
the number of votes equal to the number of shares of common stock
into which such Series B Preferred Stock could be converted for
purposes of determining the shares entitled to vote at any regular,
annual or special meeting of stockholders of the Company, and shall
have voting rights and powers equal to the voting rights and powers
of the common stock (voting together with the common stock as a
single class).
Most Favored Nation
For a period of up to 30 months after March 31, 2015, if the
Company issues any New Securities (as defined below) in a private
placement or public offering (a “Subsequent
Financing”), the holders of Series B Preferred Stock may
exchange all of the Series B Preferred Stock at their Stated Value
plus all Series A Warrants (as defined below) issued to the
Series B Preferred Stock holders for the securities issued in the
Subsequent Financing on the same terms of such Subsequent
Financing. 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.
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.
Registration Rights Agreement
Pursuant to a registration rights agreement entered into by the
parties, the Company agreed to file a registration statement with
the SEC providing for the resale of the shares of common stock and
the shares of common stock underlying the Warrants issued pursuant
to the 2016 Unit Private Placement on or before the date which is
forty-five (45) days after the date of the final closing of the
2016 Unit Private Placement. The Company will use its
commercially reasonable efforts to cause the registration statement
to become effective within one hundred fifty (150) days from the
filing date. The Company has received a waiver from a majority of
the 2016 Unit Private Placement investors extending the filing date
of the registration statement to no later than December 15, 2016.
The Company filed the Registration Statement on Form S-1 with the
SEC on December 14, 2016, which was declared effective by the SEC
on January 5, 2017.
Deemed Dividend due to Conversion Price Adjustment
During the 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 approximately
$708,000. The expense was measured at the intrinsic value of
the beneficial conversion feature for each issuance of Series B
Preferred Stock in the Series B Preferred private placement and was
limited to the amount of Series B Preferred Stock allocated
proceeds less previously recognized beneficial conversion
features.
Issuances of common stock for services
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
approximately $46,000 on the grant date, of which approximately
$14,000 was recognized into general and administrative expense
during the three months ended May 31, 2016.
During the three months ended May 31, 2017, the Company issued an
aggregate of 100,000 shares of common stock to members of its Board
that vested immediately. The fair value of the shares amounted to
approximately $130,000 on the grant date, which was recognized into
general and administrative expense during the three months ended
May 31, 2017.
NOTE 4 – STOCK OPTIONS
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 approximately $87,000 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 for performing other
services. These 50,000 options vest upon achieving a certain
milestone and expire on May 26, 2026. These options will be
measured and recognized when vesting becomes probable.
During the three months ended May 31, 2017, the Company issued
options to purchase an aggregate 55,000 shares of common stock at
3.00 per share to its President and Chief Executive Officer and a
member of its management team. These options expire on April 4,
2027. 18,334 of these options vest on the first anniversary date of
April 4, 2018, and then 36,666 of these options vest in equal
monthly installments over a twenty-four-month period. These options
had a total fair value of approximately $60,000 as calculated using
the Black-Scholes model.
During the three months ended May 31, 2017, an aggregate of 39,999
unvested options to purchase shares of common stock at 8.25 per
share to certain members of the Company’s Board were
terminated upon resignation from the board. The Company recognized
a credit of approximately $146,000 for the true-up of forfeitures
related to these unvested options during the three months ended May
31, 2017.
The weighted average inputs to the Black-Scholes model used to
value the stock options granted during the three months ended May
31, 2017 and 2016 are as follows:
|
|
|
|
|
Expected
volatility
|
129.0
%
|
100.0
%
|
|
Expected
dividend yield
|
0.00
%
|
0.00
%
|
|
Risk-free
interest rate
|
1.95
%
|
1.65
%
|
|
Expected
term
|
|
|
For the three months ended May 31, 2016, the Company recognized
approximately $105,000 of compensation expense related to stock
options, of which approximately $88,000 was recognized in general
and administrative expenses and approximately $17,000 in research
and development expenses.
For the three months ended May 31, 2017, the Company recognized a
credit of approximately $96,000 of compensation expense related to
stock options, of which a credit of approximately $113,000 was
recognized in general and administrative expenses and expense of
approximately $16,000 in research and development
expenses.
The following table summarizes common stock options issued and
outstanding as of May 31, 2017:
|
|
|
Weighted
average exercise
price
|
Aggregate
intrinsic value
|
Weighted
average remaining
contractual life (years)
|
|
Outstanding
at February 28, 2017
|
966,474
|
$
5.71
|
$
-
|
8.87
|
|
Granted:
|
55,000
|
$
3.00
|
-
|
-
|
|
Expired
and forfeited:
|
(39,999
)
|
$
8.25
|
-
|
-
|
|
|
|
|
|
|
|
Outstanding
and expected to vest at May 31, 2017
|
981,475
|
$
5.46
|
$
-
|
8.72
|
|
Exercisable
at May 31, 2017
|
350,477
|
$
9.96
|
$
-
|
7.95
|
The following table breaks down exercisable and unexercisable
common stock options by exercise price as of May 31,
2017:
|
|
|
|
|
|
Weighted Average Remaining Life (years)
|
|
|
Weighted Average Remaining Life (years)
|
|
160,555
|
$
2.00
|
9.11
|
319,445
|
$
2.00
|
9.11
|
|
16,668
|
$
2.19
|
8.99
|
83,332
|
$
2.19
|
8.99
|
|
-
|
$
3.00
|
-
|
176,000
|
$
3.00
|
9.68
|
|
30,000
|
$
3.55
|
8.68
|
-
|
$
8.10
|
-
|
|
1,068
|
$
8.10
|
7.67
|
-
|
$
8.25
|
-
|
|
40,001
|
$
8.25
|
8.01
|
40,000
|
$
10.20
|
8.05
|
|
41,434
|
$
10.20
|
4.61
|
-
|
$
10.50
|
-
|
|
3,334
|
$
11.25
|
7.97
|
3,333
|
$
11.25
|
7.97
|
|
11,112
|
$
16.50
|
7.38
|
8,888
|
$
16.50
|
7.38
|
|
8,068
|
$
22.50
|
7.67
|
-
|
$
22.50
|
-
|
|
38,237
|
$
48.75
|
5.85
|
-
|
$
48.75
|
-
|
|
350,477
|
$
9.96
|
7.95
|
630,998
|
$
2.95
|
9.15
|
As of May 31, 2017, we had approximately $172,000 of unrecognized
compensation related to employee and consultant stock options that
are expected to vest over a weighted average period of 1.15
years and, approximately $500,000 of unrecognized compensation
related to employee stock options whose recognition is dependent on
certain milestones to be achieved. Additionally, there
were 173,333 stock options with a performance vesting
condition that were granted to consultants which will be measured
and recognized when vesting becomes probable.
NOTE 5 – WARRANTS
For the 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.
For the three months ended May 31, 2017, the Company issued
warrants to purchase an aggregate of 37,500 shares of common
stock to a consultant for advisory services. These warrants are
exercisable at $3.00 per share and expire between March 31, 2021
and May 31, 2021. These warrants vested immediately. The fair value
of these warrants was determined to be approximately $37,000, as
calculated using the Black-Scholes model. Average assumptions used
in the Black-Scholes model included: (1) a discount rate of 1.83%;
(2) an expected term of 5.0 years; (3) an expected volatility of
131%; and (4) zero expected dividends. For the three months ended
May 31, 2017, the Company recognized approximately $37,000 of
stock-based compensation for these warrants.
For the three months ended May 31, 2017, the Company reclassified
approximately $1.5 million of derivative warrant liability to
equity in connection with the lapse of a price protection
provision, that had resulted in these instruments being classified
as a derivative warrant liability at issuance. The fair value of
these warrants was determined to be approximately $1.5 million, as
calculated using the Black-Scholes model. Average assumptions used
in the Black-Scholes model included: (1) a discount rate of 1.81%;
(2) an expected term of 4.46 years; (3) an expected volatility of
124%; and (4) zero expected dividends
The following table summarizes common stock purchase warrants
issued and outstanding:
|
|
|
Weighted
average exercise
price
|
Aggregate
intrinsic
value
|
Weighted
average remaining contractual life (years)
|
|
|
|
|
|
|
|
Outstanding
at February 28, 2017
|
2,698,694
|
$
5.11
|
$
-
|
4.21
|
|
Granted:
|
37,500
|
3.00
|
-
|
|
|
Cancelled/Expired/Exercised
|
(4,671
)
|
31.50
|
-
|
|
|
Outstanding
at May 31, 2017
|
2,731,523
|
$
5.04
|
$
-
|
3.98
|
Warrants exercisable at May 31, 2017 are:
|
|
|
Weighted average
remaining life (years)
|
Exercisable
number of shares
|
|
$
2.00
|
164,888
|
2.39
|
164,888
|
|
$
2.20
|
43,636
|
3.70
|
43,636
|
|
$
3.00
|
2,152,908
|
0.11
|
2,152,908
|
|
$
8.25
|
9,134
|
3.24
|
9,134
|
|
$
10.50
|
126,978
|
2.85
|
126,978
|
|
$
15.00
|
556
|
3.00
|
556
|
|
$
18.75
|
695
|
3.00
|
695
|
|
$
22.50
|
209,754
|
1.13
|
209,754
|
|
$
31.50
|
21,241
|
1.32
|
21,241
|
|
$
37.50
|
1,733
|
0.62
|
1,733
|
|
|
2,731,523
|
3.98
|
2,731,523
|
NOTE 6 – NOTES PAYABLE
Promissory Note
On July 31, 2015, the Company entered into a note purchase
agreement, which was subsequently amended, whereby it issued and
sold a non-convertible promissory note in the principal amount of
$1.2 million (the “Promissory Note”) and a warrant to
purchase 43,636 shares of the Company’s common stock.
Effective October 21, 2016, $600,000 principal amount of the
Promissory Note plus $48,000 of accrued and unpaid interest was
exchanged into the securities issued in a private placement. In
January 2017, the remaining unpaid principal balance and accrued
interest were exchanged into a convertible note (see Convertible
Note below).
During the three months ended May 31, 2016, the Company recognized
approximately $138,000 of interest expense related to the
Promissory Note, as amended, including amortization of debt
discount of approximately $114,000 and accrued interest expense of
$24,000. Additionally, the Company recognized a loss of
approximately $29,000 in the three months ended May 31, 2016 due to
the change in estimated fair value of a bifurcated derivative
liability related to an exchange provision in the Promissory
Note.
OID Notes
In February 2016, the Company entered into an OID note purchase
agreement dated February 12, 2016 (the “February 2016 OID
Note Purchase Agreement”). Pursuant to the February 2016 OID
Note Purchase Agreement, the Company received an aggregate purchase
price of $500,000 and issued OID promissory Notes (the “OID
Notes”) in the aggregate principal amount of $600,000 and
warrants (the “OID Warrants”) to purchase an aggregate
of 36,367 shares of the Company’s common stock.
The Company entered into OID note purchase agreements between March
4 and 15, 2016 (the “March 2016 OID Note Purchase
Agreements”) with various accredited investors. Pursuant to
the March 2016 OID Note Purchase Agreements, the Company issued OID
Notes with an aggregate purchase price of $125,000 and OID Warrants
to purchase 9,902 shares of the Company’s common stock. The
OID Notes issued in March 2016 have a principal amount equal to
$150,000 or 120% of the purchase price.
Pursuant to the March 2016 closings of the OID Note private
placement, the principal amount was first allocated to the fair
value of the OID Warrants in the amount of approximately $15,000,
next to the value of the original issuance discount in the amount
of $25,000, then to the fair value of a bifurcated derivative
liability related to an exchange provision in the OID Notes in the
amount of approximately $33,000, and lastly to the debt discount
related to offering costs of approximately $2,000 with the
difference of approximately $75,000 representing the initial
carrying value of the OID Notes issued in March 2016.
The OID Notes were subsequently amended in August 2016, extending
the maturity date of the OID Notes in exchange for among other, (i)
an increased principal amount of the OID Notes by 10% to $825,000
in the aggregate from $750,000 in the aggregate, and (ii) the
issuance of an aggregate of 45,459 common stock purchase warrants
with an exercise price of $2.00 per share and a term of five
years.
In October 2016,
$553,000 principal amount of OID Notes
were exchanged
into
the securities issued in a private
placement
.
Accordingly, the
Company recorded a loss on extinguishment of approximately
$555,000. Additionally, the Company repaid $8,000 of OID
Notes.
In November 2016, the Company exercised its sole option to further
extend the maturity date to its outstanding OID Note in the
aggregate of $264,000 principal amount of OID Note. In
consideration for the extension, the Company increased the
principal amount of the OID Note by 10% or to $26,400 to $290,400
in the aggregate. In January 2017, the remaining outstanding OID
Note was exchanged into a convertible note (see Convertible Note
below).
During the three months ended May 31, 2016, the Company recognized
approximately $166,000 of interest expense related to the OID
Notes, including amortization of debt discount. Additionally, the
Company recognized a loss of approximately $25,000 in the three
months ended May 31, 2016 due to the change in estimated fair value
of a bifurcated derivative liability related to an exchange
provision in the OID Notes.
Convertible Note
On January 17, 2017, the Company entered into an exchange
agreement, pursuant to which the Company issued a new convertible
promissory note in the principal amount of $1,000,000 (the
“Convertible Note”) in exchange (the “Debt
Exchange”) for the cancellation of (i) $600,000 principal
amount of the Promissory Note plus $96,000 of accrued and unpaid
interest thereon, and (ii) $290,400 principal amount of the OID
Note.
During the three months ended May 31, 2017, the Company recognized
approximately $30,000 of interest expense related to the
Convertible Note, including amortization of debt discount of
approximately $5,000 and accrued interest expense of approximately
$25,000.
The following table summarizes the notes payable:
|
|
|
|
Voluntary Exchange Feature
|
|
|
February
28, 2017 balance
|
$
1,000,000
|
$
(10,914
)
|
$
-
|
$
989,086
|
|
Amortization
of debt discount
|
-
|
4,599
|
-
|
4,599
|
|
May
31, 2017 balance
|
$
1,000,000
|
$
(6,315
)
|
$
-
|
$
993,685
|
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, 2017 and
February 28, 2017, the warrant liability balances were classified
as Level 3 instruments.
Derivative Warrant Liability
At May 31, 2017 and February 28, 2017, the warrant liability
balances of approximately $0.15 million and $2.1 million,
respectively, were classified as Level 3 instruments.
The following table sets forth the changes in the estimated fair
value for our Level 3 classified derivative warrant
liability:
|
|
|
|
|
|
|
Fair
value at February 28, 2017
|
$
157,204
|
$
35,690
|
$
1,914,078
|
$
2,106,972
|
|
Change
in fair value
|
(37,366
)
|
(10,198
)
|
(442,816
)
|
(490,380
)
|
|
Reclassification
of warrant liability to equity
|
-
|
-
|
(1,471,262
)
|
(1,471,262
)
|
|
Fair
value at May 31, 2017
|
$
119,838
|
$
25,492
|
$
-
|
$
145,330
|
In connection with the initial closing of the Series B Preferred
private placement on December 31, 2014, the Company issued a
warrant to purchase an aggregate of 30,334 shares of common stock
(the “Series B Warrant”), originally exercisable at
$8.25 per share and expiring on March 31, 2020. The Series B
Warrant contains a full-ratchet anti-dilution price protection
provision that requires liability treatment and the exercise price
of the Series B Warrant was adjusted to $2.00 during the year ended
February 28, 2017. The fair value of the Series B Warrant at May
31, 2017 and February 28, 2017 was determined to be approximately
$25,000 and $36,000, respectively, as calculated using the Monte
Carlo simulation. The Monte Carlo simulation as of May 31, 2017 and
February 28, 2017 used the following assumptions: (1) a stock price
of $1.15 and $1.50, respectively; (2) a risk-free rate of 1.41% and
1.50%, respectively; (3) an expected volatility of 129% and 131%,
respectively; and (4) a fundraising event to occur on June 30,
2017 and May 31, 2017, respectively, that would result in the
issuance of additional common stock.
In connection with the issuance of the Promissory Note on July 31,
2015, the Company issued a warrant to purchase an aggregate of
43,636 shares of common stock, originally exercisable at $8.25 per
share and expiring on July 31, 2020. This warrant contains a
full-ratchet anti-dilution price protection provision that requires
liability treatment and the exercise price of this warrant was
adjusted to $2.00 during the year ended February 28, 2017. The fair
value of the warrant at May 31, 2017 and February 28, 2017 was
determined to be approximately $38,000 and $51,000, respectively,
as calculated using the Monte Carlo simulation. The Monte Carlo
simulation as of May 31, 2017 and February 28, 2017 used the
following assumptions: (1) stock price of $1.15 and $1.50,
respectively; (2) a risk-free rate of 1.47% and 1.57%,
respectively; (3) an expected volatility of 129% and 131%,
respectively; and (4) a fundraising event to occur on June 30, 2017
and May 31, 2017, respectively, that would result in the issuance
of additional common stock.
In connection with the amendment of the Promissory Note on February
12, 2016, the Company issued a warrant to purchase an aggregate of
43,636 shares of common stock, initially exercisable at $8.25 per
share and expiring on February 11, 2021. This warrant contains a
ratchet anti-dilution price protection provision that requires
liability treatment and the exercise price of this warrant was
adjusted to $2.20 during the year ended February 28, 2017. The fair
value of the warrant at May 31, 2017 and February 28, 2017 was
determined to be approximately $40,000 and $51,000, respectively,
as calculated using the Monte Carlo simulation. The Monte Carlo
simulation as of May 31, 2017 and February 28, 2017 used the
following assumptions: (1) stock price of $1.15 and $1.50,
respectively; (2) a risk-free rate of 1.55% and 1.68%,
respectively; (3) an expected volatility of 129% and 131%,
respectively; and (4) a fundraising event to occur on June 30, 2017
and May 31, 2017, respectively, that would result in the issuance
of additional common stock.
In connection with the issuance of OID Notes in February 2016, the
Company issued warrants to purchase an aggregate of 36,367 shares
of common stock. These warrants were issued between
February 12 and 22, 2016, were initially exercisable at $8.25 per
share and expire between February 11 and 21, 2021. These warrants
contain a full-ratchet anti-dilution price protection provision
that requires liability treatment and the exercise price of these
warrants were adjusted to $2.00 during the year ended February 28,
2017. The fair value of these warrants at May 31, 2017 and February
28, 2017 was determined to be approximately $34,000 and $44,000,
respectively, as calculated using the Monte Carlo simulation. The
Monte Carlo simulation as of May 31, 2017 and February 28, 2017
used the following weighted-average assumptions: (1) stock price of
$1.15 and $1.50, respectively; (2) a risk-free rate of 1.55% and
1.68%, respectively; (3) an expected volatility of 129% and 131%,
respectively; and (4) a fundraising event to occur on June 30, 2017
and May 31, 2017, 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 year ended February 28, 2017. The fair value of
these warrants at May 31, 2017 and February 28, 2017 was determined
to be approximately $8,000 and approximately $11,000, respectively,
as calculated using the Monte Carlo simulation. The Monte Carlo
simulation as of May 31, 2017, and February 28, 2017 used the
following weighted-average assumptions: (1) stock price of $1.15
and $1.50, respectively; (2) a risk-free rate of 1.56% and 1.69%,
respectively; (3) an expected volatility of 129% and 131%,
respectively; and (4) a fundraising event to occur on June 30, 2017
and May 31, 2017, respectively, that would result in the issuance
of additional common stock.
In connection with the private placement of common stock and
warrants that closed in October 2016, the Company issued warrants
to purchase an aggregate of 1,617,506 shares of common stock (the
“PPM Warrants”). These PPM Warrants were issued
between August 31, 2016 and October 30, 2016, are exercisable at
$3.00 per share and expire between August 30, 2021 and October 29,
2021. These warrants contain a full-ratchet anti-dilution price
protection provision that requires liability treatment. The fair
value of these warrants at February 28, 2017 was determined to be
approximately $1.9 million, as calculated using the Monte Carlo
simulation. The Monte Carlo simulation as of February 28, 2017 used
the following weighted-average assumptions: (1) stock price of
$1.50; (2) a risk-free rate of 1.66%; (3) an expected volatility of
131%; and (4) a fundraising event to occur on May 31, 2017, that
would result in the issuance of additional common stock. The price
protection provision expired on April 30, 2017, and the Company
reclassified approximately $1.5 million of derivative warrant
liability to equity, as referenced in Note 5.
NOTE 8 – EQUIPMENT
Equipment consists of the following:
|
|
|
|
|
|
Research
equipment
|
7 years
|
$
601,720
|
$
601,720
|
|
Computer
equipment
|
5 years
|
78,149
|
78,149
|
|
|
679,869
|
679,869
|
|
Accumulated
depreciation and amortization
|
|
(287,900
)
|
(265,234
)
|
|
Equipment, net
|
|
$
391,969
|
$
414,635
|
Depreciation and amortization expense was approximately $23,000 and
approximately $24,000 for the three months ended May 31, 2017 and
May 31, 2016, respectively. Depreciation of equipment utilized in
research and development activities is included in research and
development expenses and amounted to approximately $19,000 and
$20,000 for the three months ended May 31, 2017 and May 31, 2016,
respectively. All other depreciation is included in general and
administrative expense and amounted to approximately $4,000 and
approximately $4,000 for the three months ended May 31, 2017 and
May 31, 2016, respectively.
NOTE 9 - – LICENSE AGREEMENTS AND COMMITMENTS
License Agreements
Pursuant to the License Agreement, we are required to make annual
license maintenance fee payments beginning August 26,
2011. We have satisfied all license maintenance payments
due through May 31, 2017. We are required to make payments of
$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, as amended, we are
required to make annual license maintenance fee payments beginning
on January 3, 2013. We are required to make maintenance
payments of $5,000 in 2018, $60,000, in 2019 and 2020, and $100,000
in 2021 and every year the license is in effect thereafter. These
annual license maintenance fee payments will be credited to running
royalties due on net sales earned in the same calendar year, if
any. The license maintenance payment of $5,000 for 2017 is
currently outstanding, pending invoice. As such, we are in
compliance with the Second License Agreement.
Pursuant to the Alternative Splicing Diagnostic License Agreement
and the Alternative Splicing Therapeutic License Agreement, we are
required to make annual license maintenance fee payments for each
license beginning on January 1, 2015. We have satisfied all
license maintenance payments due through May 31, 2017. We are
required to make additional payments of $37,500 in 2018, and
$50,000 in 2019 and every year each license is in effect
thereafter. We are in compliance with the Alternative
Splicing License Agreements.
Pursuant to the Antibody License Agreement, we are required to make
license maintenance fee payments beginning on January 1,
2015. We have satisfied all license maintenance payments due
through May 31, 2017. We are required to make additional payments
of $15,000 in 2018 and $20,000 in 2019 and every year the license
is in effect thereafter. These annual license maintenance fee
payments will be credited to running royalties due on net sales
earned in the same calendar year, if any. We are in compliance with
the Antibody License Agreement.
Lease Agreements
On August 28, 2014, we entered into a lease agreement, subsequently
amended (the “Boston Lease”) for our diagnostic
laboratory and office space located at 27, Drydock Ave,
2
nd
Floor, Boston, MA 02210 (the
“Boston Property”). We paid a $40,000 security
deposit in connection with entering into the Boston Lease.
Effective April 6, 2016, we entered into an amendment to the Boston
Lease (the “Boston Lease Amendment”), whereby we
extended the term by one year from September 1, 2016 to August 31,
2017. The basic rent payable under the Boston Lease Amendment is
$17,164 per month plus additional monthly payments including tax
payments and operational and service costs.
We have entered into a letter of intent to amend the lease
agreement for the Boston Property and anticipate entering into
definitive documentation for the second lease amendment (the
“Second Boston Lease Amendment”) shortly. The Second
Boston Lease Amendment is anticipated to extend the term (the
“Second Extension Period”) for five years from
September 1, 2017 through August 31, 2022. Monthly basic rent
payments are anticipated to be $23,355 for the first year of the
Second Extension Period, $24,056 for the second year of the Second
Extension Period, $24,777 for the third year of the Second
Extension Period, $25,521 for the fourth year of the Second
Extension Period, and $26,286 for the fifth year of the Second
Extension Period.
Effective March 1, 2015, we entered into a lease agreement for
short-term office space in New York, NY. 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 is month-to-month and may be terminated with twenty-one (21)
days’ notice. The basic rent payment is $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 conditions
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, 2017,
and May 31, 2016, 11,536 and 11,536, respectively, restricted
shares of common stock 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 or conversion of stock
options and warrants and shares issuable from convertible
securities, as well as nonvested restricted shares.
In computing diluted loss per share for the years ended May 31,
2017 and May 31, 2016, no effect has been given to the common
shares issuable at the end of the period upon the conversion or
exercise of the following securities as their inclusion would have
been anti-dilutive:
|
|
|
|
|
Stock
options
|
981,475
|
526,976
|
|
Warrants
|
2,731,523
|
967,934
|
|
Preferred
stock
|
1,361,837
|
1,906,404
|
|
Convertible
debt
|
520,548
|
-
|
|
Total
|
5,595,383
|
3,401,314
|
NOTE 11 – COLLABORATIVE AND OTHER RELATIONSHIPS
Research and Development Reimbursements
In connection with our business strategy, we may enter into
research and development and other collaboration agreements.
Depending on the arrangement, we may record payments as advances,
funding receivables, payable balances or non-product income with
our partners, based on the nature of the cost-sharing mechanism and
activity within the collaboration.
On September 29, 2016, the Company entered into an amendment (the
“MTA Amendment”) to a previously executed pilot
materials transfer agreement (the “MTA” and together
with the Amendment, the “Research Agreement”) with
Celgene Corporation (“Celgene”), to conduct a mutually
agreed upon pilot research project (the “Pilot
Project”). The MTA Amendment provides for milestone payments
to the Company of up to approximately $973,000. Under the terms of
the Research Agreement, Celgene will provide certain proprietary
materials to the Company and the Company will evaluate
Celgene’s proprietary materials in the Company’s
metastatic cell line and animal nonclinical models. The milestone
schedule calls for Celgene to pay the Company approximately
$487,000 upon execution of the MTA Amendment, which the Company has
received, and the balance in accordance with the completion of
three (3) milestones to Celgene’s reasonable satisfaction.
The term of the Research Agreement is one (1) year, unless extended
by the parties. Either party may terminate the Research Agreement
with thirty (30) days prior written notice.
The Company recognizes the upfront payment as a deferred research
and development reimbursement in the Consolidated Balance Sheet and
will amortize the deferred research and development reimbursement
as incurred over the term of the Research Agreement. For the three
months ended May 31, 2017, the Company recorded
approximately
$133,000 in deferred research and development
reimbursement, and, at May 31, 2017, the Company had a deferred
research and development reimbursement amount of approximately
$65,000.
The Company will recognize deferred research and development
reimbursement for each subsequent milestone in the period in which
the milestone is achieved. As of May 31, 2017, none of the
milestones have been achieved.
Research Collaboration Revenue
We currently do not sell any products and do not have any
product-related revenue.
From time to time, we may enter
into
research and development
collaboration arrangements, in which we are reimbursed for either
all or a portion of the research and development costs incurred. We
record these payments as revenue in the statement of operations. We
recognize revenue upon delivery and acceptance of the test results
or other deliverables.
NOTE 12 – SUBSEQUENT EVENTS
Celgene Research Agreement
On June 16, 2017, the Company received payment of approximately
$243,000 from Celgene for satisfactory completion of the second
milestone pursuant to the Research Agreement between the
parties.
Private Placement
On June 23, 2017, pursuant to the initial closing of a private
placement, the Company issued an aggregate of 359,348 shares of
common stock and approximately 229,363.2 shares of Series A-2
Preferred, convertible into 2,293,632 shares of common stock and
repriced an aggregate of 474,829 warrants, for an aggregate
purchase price of approximately $2.14 million. After deducting
placement agent fees and other offering expenses, the Company
received net proceeds of approximately $2.0 million. Additionally,
in connection with the private placement, the Company will issue an
aggregate of 136,830 placement agent warrants with a term of five
years, an exercise price equal to $1.27 per share, and a cashless
exercise provision.