SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
For the quarterly period ended November 30, 2012
From the transition period from ______ to ______ .
Commission File Number 000-52735
(Exact name of small business issuer as specified in its charter)
8 Hillside Avenue, Suite 207
Montclair, New Jersey 07042
(Address of principal executive offices)
(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 [ ] 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:
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 January 14, 2013, there were 21,054,418 shares of common stock of the registrant outstanding.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
(A Development Stage Company)
Consolidated Balance Sheet
The accompanying footnotes are an integral part of these unaudited financial statements.
(A Development Stage Company)
Consolidated Statement of Expenses
The accompanying footnotes are an integral part of these unaudited financial statements.
(A Development Stage Company)
Consolidated Statement of Cash Flows
The accompanying footnotes are an integral part of these unaudited financial statements.
Notes to Condensed Consolidated Financial Statements
November 30, 2012 and February 29, 2012
MetaStat, Inc. (“we,” “us,” “our,” the “Company,” or “MetaStat”) is a life science company focused on understanding and treating systemic metastasis. Our mission is to become an industry leader in the emerging field of personalized cancer therapy.
Basis of Presentation
The accompanying unaudited interim financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission ("SEC"), and should be read in conjunction with the audited financial statements and notes thereto contained in the Company’s most recent Annual Report filed with the SEC on Form 10-K. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim period presented have been reflected herein. The results of operations for the interim period are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements, which would substantially duplicate the disclosures contained in the audited financial statements for the most recent fiscal period, as reported in the Form 10-K, have been omitted.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of MetaStat Inc. and its controlled subsidiaries. Equity investments in which we exercise significant influence, but do not control and are not the primary beneficiary, are accounted for using the equity method of accounting. Investments in which we do not exercise significant influence over the investee are accounted for using the cost method of accounting. Intercompany transactions are eliminated.
NOTE 3 – EQUITY
During the nine months ended November 30, 2012, the Company sold 880,000 shares of common stock for total proceeds of $880,000, of which the Company received $880,000.
On May 22, 2012, the Company issued 100,000 shares to two consultants vesting over a period of ten years or upon the listing of the Company on a national exchange. The Company valued the shares for a total fair value of $100,000 on the grant date and has amortized the expense each quarter based upon the vested portion. As of November 30, 2012, the Company has recognized $5,259 in stock compensation expense.
May 2012 Private Placement
On May 1, 2012, we entered into a securities purchase agreement with certain institutional and accredited investors for the issuance and sale in a private placement consisting of, in the aggregate, (a) 880,000 shares of common stock, at a price per share of $1.00 and (b) four-year warrants to purchase up to 220,000 shares of common stock at an exercise price of $1.40 per share, expiring on May 1, 2016, for aggregate gross proceeds of $880,000 (the “May 2012 Private Placement”). As of November 30, 2012, we have closed on the full amount of $880,000.
In connection with the May 2012 Private Placement, we also entered into a registration rights agreement with the investors whereby we agreed to file a registration statement with the SEC to register for resale the shares of common stock and the shares of common stock underlying the warrants within 120 calendar days of the closing date, and to have the registration statement declared effective within 180 calendar days of the closing date or within 270 calendar days of the closing date in the event of a full review of the registration statement by the SEC.
NOTE 4 – STOCK OPTIONS
During January 2012, the Company issued options to purchase 1,116,500 shares of common stock at $0.68 per share to its President, members of its scientific advisory board and several consultants involved in the Company’s ongoing research related to cancer. All of the options except for 220,000 vest immediately and expire on January 6, 2022. These options have a fair value of $611,250, as calculated using the Black-Scholes model. Assumptions used in the Black-Scholes model included: (1) a discount rate of 1.98%; (2) an expected term of 10 years; (3) an expected volatility of 403%; and (4) zero expected dividends.
The following table summarizes common stock options issued and outstanding:
As of November 30, 2012, 1,116,500 options were exercisable at $0.68 per share with a weighted average life of 9.11 years.
NOTE 5 – WARRANTS
On November 14, 2011, the Company entered into consulting agreement with Burnham Hill Advisors and warrants were issued to purchase 220,000 shares of common stock at $0.68 per share. The fair value of these warrants was determined to be $149,999, as calculated using the Black-Scholes model. Assumptions used in the Black-Scholes model included: (1) a discount rate of 0.91%; (2) an expected term of 5 years; (3) an expected volatility of 403%; and (4) zero expected dividends.
During the year ended February 29, 2012, the Company granted 1,497,214 warrants together with shares of common stock issued on January 31, 2012 exercisable at $0.91 per share and expiring on January 31, 2017. The Company also granted 216,250 warrants on February 27, 2012 exercisable at $1.40 per share and expiring on February 27, 2016.
Immediately prior to the share exchange transaction, Photovoltaic Solar Cells, Inc. issued an aggregate of 350,000 warrants exercisable at $1.40 per share.
On October 14, 2012, the Company entered into consulting agreement with Crystal Research Associates and warrants were issued to purchase 150,000 shares of common stock at $1.50 per share. The fair value of these warrants was determined to be $149,995, as calculated using the Black-Scholes model. Assumptions used in the Black-Scholes model included: (1) a discount rate of 0.63%; (2) an expected term of 4 years; (3) an expected volatility of 420%; and (4) zero expected dividends.
For the nine months ended November 30, 2012, the Company issued 220,000 warrants in connection with the May 2012 Private Placement referenced in Note 2. These warrants were issued on May 1, 2012, are exercisable at $1.40 per share and expire on May 1, 2016. These warrants vest immediately.
The following table summarizes common stock purchase warrants issued and outstanding:
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.
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 29, 2012. Readers are cautioned not to place undue reliance on these forward-looking statements.
The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes thereto and other financial information appearing in our Annual Report on Form 10-K for the year ended February 29, 2012.
We are a life science company focused on understanding and treating hematogenous (blood borne) or systemic metastasis of cancer. Our proprietary platform technologies are the result of over 15 years of collaboration involving four scientific/academic institutions, which enabled us to characterize the behavior, mechanics and genetics of metastatic cancer cells.
Our MetaSite Breast™ and MenaCalc™ diagnostic product lines are designed to accurately predict the probability of cancer metastasizing. They are intended to allow clinicians to better "customize" cancer treatment decisions by positively identifying and differentiating high-risk patients who need aggressive therapy and by sparing low-risk patients from the harmful side effects and expense of chemotherapy and radiation therapies. Furthermore, we believe our MenaCalc™ diagnostic platform may be applicable in up to 80% of all solid epithelial cancers, including breast, prostate, lung and colorectal, which account for over 50% of all new cancer cases in the U.S. each year. As such, we believe our diagnostic products represent a significant breakthrough for cancer patients and their doctors because 90% of all solid tumor cancer deaths are due from systemic metastasis.
Additionally, we believe our MenaBloc™ chemotherapy technology will target and interrupt key pathways essential for the development of systemic metastasis in multiple epithelial derived tumors.
Our first test, the MetaSite Breast™ test, will be used for breast cancer patients to predict the likelihood of systemic metastasis in breast cancer. Systemic metastasis is the spread of breast cancer cells to other organs in the body through the blood stream. This spread, and the resulting growth of breast cancer tumors in other organs in the patient’s body, is responsible for up to 90% of fatalities in breast cancer. We anticipate the necessary tumor samples from a patient’s biopsy will be sent to our clinical reference laboratory that we anticipate establishing for analysis. We believe that we will be a clinical reference laboratory as defined under the Clinical Laboratory Improvement Amendments of 1988 (“CLIA”), and as such we will be required to hold certain federal, state and local licenses, certifications and permits to conduct our business. Under CLIA, we will be required to hold a certificate applicable to the type of work we perform and to comply with standards covering personnel, facilities administration, quality systems and proficiency testing. Upon generation and delivery of a Metastasis Score report to the physician, we plan to bill third-party payors for the MetaSite Breast test.
We have completed a 500 patient Large Population Validation study for the MetaSite Breast test and expect the full analysis and publication of the data later in 2013. If the data generated in this study shows the predictive power shown in our previously completed 60 patient and 44 patient trials, we anticipate commencing pilot marketing of the MetaSite Breast test within the next 12 to 18 months. We plan to initially market to a select number of physicians in a few markets in the United States through a small direct sales force. We believe a subsequent increase in demand will result from the publication of our Large Population Validation study in one or more peer-reviewed scientific/medical journals and the presentation of our study results at gatherings such as the ASCO meeting and/or the San Antonio Breast Cancer Symposium. However, any increased demand for our product is not necessarily indicative of future growth rates, and we cannot assure you that this level of increased demand can be sustained. Initially, we believe our clinical reference laboratory will have the capacity to process up to 1,000 tests per quarter, and our current expansion plan contemplates that we will have capacity to process up to 15,000 tests per quarter by the end of calendar 2015.
We believe the key factors that will drive broader adoption of the MetaSite Breast test will be acceptance by healthcare providers of its clinical benefits, demonstration of the cost-effectiveness of using our test, expanded reimbursement by third-party payors, expansion of our sales force and increased marketing efforts. Reimbursement of the MetaSite Breast test by third-party payors is essential to our commercial success. In general, clinical laboratory testing services, when covered, are paid under various methodologies, including prospective payment systems and fee schedules. Reimbursement from payors depends upon whether a service is covered under the patient’s policy and if payment practices for the service have been established. As a relatively new test, MetaSite Breast may be considered investigational by payors and not covered under current reimbursement policies. Until we reach agreement with an insurer on contract terms or establish a policy for payment of the MetaSite Breast test, we expect to recognize revenue on a cash basis.
Upon commercialization of the MetaSite Breast test, we will begin working with third-party payors to establish reimbursement coverage policies. Where policies are not in place, we will pursue case-by-case reimbursement. We believe that as much as 20% of our future revenues may be derived from tests billed to Medicare. We will begin working with many payors, including Medicare, to establish policy-level reimbursement, which, if in place, will allow us to recognize revenues upon submitting an invoice. We do not expect to recognize the majority of revenues in this manner until calendar 2014, at the earliest.
Since our inception, we have generated significant net losses. As of November 30, 2012, we had an accumulated deficit of $4,621,250. We incurred net losses of $556,005 and $381,222 in the three months ended November 30, 2012 and 2011, respectively. We expect our net losses to continue for at least the next several years. We anticipate that a substantial portion of our capital resources and efforts will be focused on research and development, both to develop additional tests for breast cancer, to develop diagnostic products for other cancers, develop therapeutic products, scale up our commercial organization, and other general corporate purposes. Our financial results will be limited by a number of factors, including establishment of coverage policies by third-party insurers and government payors, our ability in the short term to collect from payors often requiring a case-by-case manual appeals process, and our ability to recognize revenues other than from cash collections on tests billed until such time as reimbursement policies or contracts are in effect. Until we receive routine reimbursement and are able to record revenues as tests are processed and reports delivered, we are likely to continue reporting net losses.
Critical Accounting Policies and Significant Judgments and Estimates
This discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as revenues and expenses during the reporting periods. We evaluate our estimates and judgments on an ongoing basis. We base our estimates on historical experience and on various other factors we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could therefore differ materially from those estimates under different assumptions or conditions.
Our significant accounting policies are described in Note 2 to our consolidated financial statements included in this Form 10-Q. We believe the following critical accounting policies reflect our more significant estimates and assumptions used in the preparation of our financial statements.
We have generated no revenues since our inception. Product revenues for our first product, the MetaSite Breast test, are expected to be generated from the projected commercial launch in 2013, and are expected to be recognized on a cash basis because we will have limited collection experience and a limited number of contracts. In accordance with our policy, revenues for tests performed will be recognized on an accrual basis when the related costs are incurred, provided there is a contract or coverage policy in place and the following criteria are met:
Determination of the last two criteria will be based on management’s judgment regarding the nature of the fee charged for products or services delivered and the collectability of those fees.
We expect to generally bill third-party payors for the MetaSite Breast test upon generation and delivery of a Metastasis Score report to the physician. Accordingly, we take assignment of benefits and the risk of collection with the third-party payor. We usually bill the patient directly for amounts owed after multiple requests for payment have been denied or only partially paid by the insurance carrier. As a new test, the MetaSite Breast test may be considered investigational by payors and not covered under their reimbursement policies. Consequently, we expect to pursue case-by-case reimbursement where policies are not in place or payment history has not been established.
Contract revenues are expected to be derived from studies conducted with biopharmaceutical and pharmaceutical companies and will be recognized on a contract specific basis. Under certain contracts, our input, measured in terms of full-time equivalent level of effort or running a set of assays through our laboratory under a contractual protocol, will trigger payment obligations and revenues will be recognized as costs are incurred or assays are processed. Certain contracts may have payment obligations that are triggered as milestones are complete, such as completion of a successful set of experiments. In these cases, revenues are recognized when the milestones are achieved.
Clinical Collaborator Costs
We expect to enter into collaboration and clinical trial agreements with clinical collaborators and record these costs as research and development expenses. We plan to record accruals for estimated study costs comprised of work performed by our collaborators under contract terms. All clinical collaborators will be expected to enter into agreements with us, which specify work content and payment terms.
Financial Operations Overview
We currently do not have any revenues. We expect to derive our revenues from product sales and contract research arrangements and operate in one industry segment. Initially, our product revenues will be derived solely from the sale of the MetaSite Breast test. Payors will be generally billed upon generation and delivery of a MetaSite Breast Metastasis Score report to the physician. Product revenues will be recorded on a cash basis unless a contract or policy is in place with the payor at the time of billing and collectability is reasonably assured. Initially, all product revenues recognized will probably reflect cash collections. Contract revenues are derived from studies conducted with biopharmaceutical and pharmaceutical companies will be recorded on an accrual basis upon completion of the contractual obligation.
Cost of Product Revenues
Cost of product revenues represents the cost of materials, direct labor, costs associated with processing tissue samples including histopathology, anatomical pathology, paraffin extraction, and quality control analyses, license fees and delivery charges necessary to render an individualized test result. Costs associated with performing our test will be recorded as tests are processed. License fees to third-party vendors would be recorded at the time product revenues are recognized or in accordance with other contractual obligations. We expect that license fees will represent a significant component of our cost of product revenues and are expected to remain so for the foreseeable future.
General and Administrative Expenses
General and administrative expenses from our inception through November 30, 2012 were $2,145,187. Our general and administrative expenses consist primarily of personnel related costs, legal costs, including intellectual property, accounting costs and other professional and administrative costs.
Research and Development Expenses
Research and development expenses from our inception through November 30, 2012 were $1,402,923, and substantially all of these expenses were focused on the research and development of the MetaSite Breast test. During this time, the MetaSite Breast test was not the only product under development. Research and development expenses represent costs incurred both to develop our MenaCalc technology in breast, lung, and prostate cancers and to carry out our clinical studies to validate our MetaSite Breast test.
We charge all research and development expenses to operations as they are incurred. All potential future product programs, apart from the MetaSite Breast test for breast cancer metastasis, are in the clinical research phase, and the earliest we expect another cancer program to reach the clinical development stage is calendar year 2013. However, the expected time frame that a product related to one of these other cancers can be brought to market is uncertain given the technical challenges and clinical variables that exist between different types of cancers.
We do not record or maintain information regarding costs incurred in research and development on a program or project specific basis. Our research and development staff working under sponsored research agreements and consulting agreements and associated infrastructure resources are deployed across several programs. Many of our costs are thus not attributable to individual programs. We believe that allocating costs on the basis of time incurred by our employees does not accurately reflect the actual costs of a project.
As a result of the uncertainties discussed above, we are unable to determine the duration and completion costs of our research and development programs or when, if ever, and to what extent we will receive cash inflows from the commercialization and sale of a product.
Selling and Marketing Expenses
Our selling and marketing expenses that we expect to incur coincident with the launch of the MetaSite Breast test will consist primarily of personnel costs and education and promotional expenses. We expect these expenses will include the costs of educating physicians, laboratory personnel and other healthcare professionals regarding our technologies, how our MetaSite Breast test was developed and validated and the value of the quantitative information that the MetaSite Breast provides. Selling and marketing expenses will also include the costs of sponsoring continuing medical education, medical meeting participation and dissemination of our scientific and economic publications related to the MetaSite Breast test. Sales and marketing expenses from our inception through November 30, 2012 were $0.
Results of Operations
Comparison of the Three Months Ended November 30, 2012 and November 30, 2011
Revenues. There were no revenues for the three months ended November 30, 2012 and November 30, 2011, respectively, because we have not yet commercialized the MetaSite Breast test or any of our other diagnostic tests.
Cost of Product Revenues. No cost of product revenues were recorded in the three months ended November 30, 2012 and November 30, 2011, respectively, because we have not yet commercialized the MetaSite Breast test or any of our other diagnostic tests.
General and Administrative Expenses. General and administrative expenses totaled $364,110 for the three months ended November 30, 2012 as compared to $205,267 for the three months ended November 30, 2011. This represents an increase of $158,843 for the three months ended November 30, 2012 over the three months ended November 30, 2011. This increase was due in part to increases in costs for employee salary, legal, including intellectual property, accounting and other professional costs.
Research and Development Expenses. Research and development expenses were $45,000 for the three months ended November 30, 2012 as compared to $91,000 for the three months ended November 30, 2011. This represents a decrease of $46,000 for the three months ended November 30, 2012 over the three months ended November 30, 2011. This decrease resulted primarily from the fact that payments were made during the three months ended November 30, 2011 for the ongoing MetaSite Breast test study pursuant to the Sponsored Research Agreement.
Selling and Marketing Expenses. There were no selling and marketing expenses recorded for the three months ended November 30, 2012 and November 30, 2011, respectively, because we have not yet commercialized the MetaSite Breast test or any of our other diagnostic tests.
Warrant Expense. Warrant expenses were $149,995 for the three months ended November 30, 2012 as compared to $84,792 for the three months ended November 30, 2011.
Stock-based Compensation. Stock-based compensation was $5,806 for the three months ended November 30, 2012 as compared to $0 for the three months ended November 30, 2011.
Interest Income and Other Income/ Expense. We recorded interest income of $0 during the three months ended November 30, 2012 and $0 during the three months ended November 30, 2011.
Interest Expense. We made no interest payments on borrowings during the three months ended November 30, 2012 and November 30, 2011, respectively.
Net Loss. As a result of the factors described above, we had a net loss of $556,005 for the three months ended November 30, 2012 as compared to $381,222 for the three months ended November 30, 2011.
Liquidity and Capital Resources
Since our inception, we have incurred significant losses and, as of November 30, 2012, we had an accumulated deficit of $4,621,250. We have not yet achieved profitability and anticipate that we will continue to incur net losses for the foreseeable future. We expect that our research and development, general and administrative and selling and marketing expenses will continue to grow and, as a result, we will need to generate significant product revenues to achieve profitability. We may never achieve profitability.
Sources of Liquidity
Since our inception, substantially all of our operations have been financed through the sale of our common stock. Through November 30, 2012, we had received net proceeds of approximately $4.3 million through the sale of common stock to investors. As of November 30, 2012, we had cash and cash equivalents of $717,191 and no debt. As a result of the most recent sale of shares of common stock through November 30, 2012, we have issued and outstanding warrants to purchase 2,653,374 shares of our common stock at a weighted average exercise price of $1.07, which will result in proceeds to us of approximately $2.84 million if all outstanding warrants are exercised for cash.
As of November 30, 2012, we had $717,191 in cash and cash equivalents, including subscription receivables, compared to $1,743,340 on February 29, 2012.
Net cash used in operating activities was $1,865,917 for the nine months ended November 30, 2012, compared to $847,378 for the nine months ended November 30, 2011. The increase in cash used of $1,018,539 was primarily due to professional fees and other public company expenses.
Net cash used in investing activities was $290,507 for the nine months ended November 30, 2012, compared to $0 for the nine months ended November 30, 2011. This increase was attributed to a $250,275 increase in cash paid for certificates of deposits and $40,232 for the purchase of equipment. We expect amounts used in investing activities to increase in fiscal year 2013 and beyond as we grow our corporate operations, expand research and development activities and establish and add capacity in our commercial laboratory.
Net cash provided by financing activities during the nine months ended November 30, 2012 was $1,745,000, compared to $697,643 for the nine months ended November 30, 2011. Financing activities consisted primarily of the sale of our common stock and common stock purchase warrants for the nine months ended November 30, 2012 and November 30, 2011, respectively.
As of November 30, 2012, we had the following contractual commitments:
(1) Amount of additional payments depends on several factors, including the duration of the License Agreement, which depends on expiration of the last patent to be issued pursuant to the License Agreement. That duration is uncertain because the last patent has not yet been issued.
(2) Amount of additional payments depends on several factors, including the duration of the Second License Agreement, which depends on expiration of the last patent to be issued pursuant to the Second License Agreement. That duration is uncertain because the last patent has not yet been issued.
(3) Amount of additional payments depends on several factors, including the duration of the Third License Agreement, which depends on expiration of the last patent to be issued pursuant to the Third License Agreement. That duration is uncertain because the last patent has not yet been issued.
We are required to make a series of annual minimum royalty or “license maintenance” payments under the License Agreement beginning on the first anniversary date, or August 28, 2011. The initial payment of $30,000 was made in August 2011. For a period of seven years on each anniversary of this first payment, we are required to make additional payments in amounts that gradually increase beginning in year five. We are required to make additional payments of $30,000 in each of 2012, 2013, and 2014 and $50,000 in 2015, $75,000 in 2016 and $100,000 in 2017 and each year the license is in effect thereafter.
Pursuant to the Second License Agreement, we paid a license signing fee of $15,000 in connection with entering into the Second License Agreement and are required to make a series of annual minimum royalty or “license maintenance” payments beginning on the first anniversary date of the effective date, or January 3, 2013. For a period of seven years on each anniversary, we are required to make additional payments in amounts that gradually increase beginning in year three. The payments are $12,000 each for the first and second anniversary in 2013 and 2014, respectively. We are required to make additional payments of $30,000 in each of 2015, 2016, $50,000 in 2017, $75,000 in 2018 and $100,000 in 2019 and each year the license is in effect thereafter.
Pursuant to the Third License Agreement, we paid a license signing fee of $15,000 in connection with entering into the Third License Agreement and are required to make a series of annual minimum royalty or “license maintenance” payments beginning on the first anniversary date of the effective date, or January 3, 2013. For a period of seven years on each anniversary, we are required to make additional payments in amounts that gradually increase beginning in year three. The payments are $12,000 each for the first and second anniversary in 2013 and 2014, respectively. We are required to make additional payments of $30,000 in each of 2015, 2016, $50,000 in 2017, $75,000 in 2018 and $100,000 in 2019 and each year the license is in effect thereafter.
Beginning in calendar 2013, we intend to enter into arrangements for the acquisition of laboratory equipment, computer hardware and software, leasehold improvements and office equipment. We cannot at this time provide assurances that we will be able to enter into agreements with vendors on terms commercially favorable to us or that we will be able to enter into such arrangements without securing additional financing.
We currently sublease administrative and office space under a sublease on a month-to-month basis at a cost of $1,200 per month.
Operating Capital and Capital Expenditure Requirements
We expect to continue to incur substantial operating losses in the future and to make capital expenditures to keep pace with the expansion of our research and development programs and to scale up our commercial operations. 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 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 our existing cash and cash equivalents may also be used to acquire or invest in complementary businesses, technologies, services or products. We have no current plans, agreements or commitments with respect to any such acquisition or investment, and we are not currently engaged in any negotiations with respect to any such transaction.
The amount and timing of actual expenditures may vary significantly depending upon a number of factors, such as the progress of our product development, regulatory requirements, commercialization efforts, the amount of cash used by operations and progress in reimbursement. We expect that we will receive limited payments for the MetaSite Breast test billings from the beginning of our marketing efforts into the foreseeable future. As reimbursement contracts with third-party payors are put into place, we expect an increase in the number and level of payments received for the MetaSite Breast test billings.
Because we anticipate additional net losses in the near future, the Company may be required to raise additional capital through debt or equity financings to fund its operations. 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 our business and operations, which could cause the price of our common stock to decline.
Our future funding requirements will depend on many factors, including the following:
Until we can generate a sufficient amount of product revenues to finance our cash requirements, which we may never do, we expect to finance future cash needs primarily through public or private equity offerings, debt financings, borrowings or strategic collaborations. The issuance of equity securities may result in dilution to stockholders. We do not know whether additional funding will be available on acceptable terms, or at all. If we are not able to secure additional funding when needed, we may have to delay, reduce the scope of or eliminate one or more research and development programs or selling and marketing initiatives. In addition, we may have to work with a partner on one or more of our product development programs or market development programs, which would lower the economic value of those programs to our company.
Item 3. Quantitative and Qualitative Disclosures about Market Risks
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness, as of November 30, 2012, of the design and operation of our disclosure controls and procedures, as such term is defined in Exchange Act Rules 13a-15(e) and 15d-15(e). Based on this evaluation, our principal executive officer and principal financial officer have concluded that, as of such date, our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 1A. Risk Factors
There have been no material changes in the Company’s risk factors from those previously disclosed in the Company’s Annual Report on Form 10-K, as amended, initially filed with the SEC on June 13, 2012.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
*Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not 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.
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.