10-Q

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 August 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 October 14, 2016, there were 2,414,103 shares of the registrant’s common stock, $0.0001 par value, issued and outstanding.

TABLE OF CONTENTS

			Page
PART I.	FINANCIAL INFORMATION
	Item 1.	Financial Statements	1
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	34
	Item 4.	Controls and Procedures	34
PART II.	OTHER INFORMATION
	Item 1.	Legal Proceedings	35
	Item 1A.	Risk Factors	35
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35
	Item 3.	Defaults Upon Senior Securities	35
	Item 4.	Mine Safety Disclosures	35
	Item 5.	Other Information	35
	Item 6.	Exhibits	36

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PART I. FINANCIAL INFORMATION

Item  1. Financial Statements

MetaStat, Inc.

Condensed Consolidated Balance Sheets

	August 31,	February 29,
	2016	2016
ASSETS	(Unaudited)	(Audited)
Current Assets:
Cash and cash equivalents	$86,233	$363,783
Notes receivable	-	125,000
Prepaid expenses	103,983	33,121
Total Current Assets	190,216	521,904
Equipment (net of accumulated depreciation of $216,928 and $169,396, respectively)	449,520	497,052
Refundable deposits	43,600	43,600
TOTAL ASSETS	$683,336	$1,062,556
LIABILITIES AND STOCKHOLDERS' DEFICIT
LIABILITIES
Current Liabilities:
Accounts payable	$1,240,800	$746,144
Accrued expenses	273,782	214,311
Notes payable (net of discount $390,015 and $743,282, respectively)	1,792,601	1,533,120
Accrued interest payable	108,000	56,000
Accrued dividends on Series B Preferred Stock	48,812	48,317
Total Current Liabilities	3,463,995	2,597,892
Derivative warrant liability	226,771	234,461
TOTAL LIABILITIES	3,690,766	2,832,353
STOCKHOLDERS' DEFICIT
Series A convertible preferred stock ($0.0001 par value; 1,000,000 shares authorized; 874,257 and 874,257 shares issued and outstanding respectively)	87	87
Series B convertible preferred stock ($0.0001 par value; 1,000 shares authorized; 666 and 659 shares issued and outstanding respectively)	-	-
Common Stock, ($0.0001 par value; 150,000,000 shares authorized; 2,222,103 and 1,851,201 shares issued and outstanding respectively)	222	185
Additional paid-in-capital	22,468,879	21,607,259
Accumulated deficit	(25,476,618)	(23,377,328)
Total stockholders' deficit	(3,007,430)	(1,769,797)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT	$683,336	$1,062,556

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

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MetaStat, Inc.

Unaudited Condensed Consolidated Statements of Operations

	Three Months Ended		Six Months Ended
	August 31, 2016	August 31, 2015	August 31, 2016	August 31, 2015
Revenue	$-	$-	$-	$-
Total Revenue	-	-	-	-
Operating Expenses
General & administrative	615,849	1,076,032	1,171,530	2,024,928
Research & development	356,168	317,968	627,291	537,294
Total Operating Expenses	972,017	1,394,000	1,798,821	2,562,222
Other Expenses (income)
Interest expense	401,990	40,444	706,636	45,361
Other income, net	(14)	(139,967)	(281)	(140,136)
Change in fair value of warrant liability	(96,241)	(36,400)	(61,749)	(172,900)
Change in fair value of put embedded in note payable	(510,867)	3,134	(456,868)	3,134
Loss on sale of notes receivable	112,500	-	112,500	-
Settlement expense	116	660	231	39,097
Total Other Expenses (Income)	(92,516)	(132,129)	300,469	(225,444)
Net Loss	$(879,501)	$(1,261,871)	$(2,099,290)	$(2,336,778)
Loss attibutable to common shareholders and loss per common share:
Net loss	$(879,501)	$(1,261,871)	$(2,099,290)	$(2,336,778)
Deemed Dividend on Series B Preferred Stock issuance	-	-	(708,303)	(1,067,491)
Accrued dividends on Series B Preferred Stock	(73,452)	(69,205)	(146,894)	(124,467)
Deemed dividend to Series B Preferred stock holders for exchange of warrants	(29,311)		(29,311)	-
Loss attibutable to common shareholders	$(982,264)	$(1,331,076)	$(2,983,798)	$(3,528,736)
Net loss per share, basic and diluted	$(0.46)	$(0.73)	$(1.50)	$(1.94)
Weighted average of shares outstanding	2,127,833	1,823,003	1,987,487	1,816,136

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

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MetaStat, Inc.

Unaudited Condensed Consolidated Statements of Cash Flows

	Six Months Ended
	August 31, 2016	August 31, 2015
Cash Flows from Operating Activities:
Net loss	$(2,099,290)	$(2,336,778)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation	47,532	48,657
Share-based compensation	362,326	492,359
Amortization of debt discount	652,879	29,883
Loss on sale of notes receivable and assets	112,500	10,196
Loss on settlement of capital lease	-	8,820
Gain related to reimbursement of prior period research and development expenses	-	(100,000)
Change in fair value of warrant liability	(61,749)	(172,900)
Change in fair value of put embedded in notes payable	(456,868)	3,134
Net changes in assets and liabilities:
Prepaid expenses	87,538	(40,729)
Refundable deposits	-	(2,100)
Accounts payable and accrued expenses	507,022	199,350
Interest payable	52,000	5,649
Net cash used in operating activities	(796,110)	(1,854,459)
Cash Flows from Investing Activities:
Proceeds received from settlement of capital lease	-	2,897
Purchase of equipment	-	(149,458)
Proceeds received from sale of notes receivable	12,500	-
Net cash provided by (used in) investing activities	12,500	(146,561)
Cash Flows from Financing Activities:
Proceeds from issuance of notes, net	122,790	1,111,408
Proceeds from issuance of common stock and warrants, net	462,565	-
Proceeds from issuance of Series B Preferred stock and warrants, net	-	1,945,244
Re-purchase of common stock and warrants	-	(111,563)
Payment of capital lease obligation	-	(42,407)
Payment of short-term debt	(79,295)	(71,500)
Net cash provided by financing activities	506,060	2,831,182
Net increase in cash and cash equivalents	(277,550)	830,162
Cash and cash equivalents at the beginning of the period	363,783	257,820
Cash and cash equivalents at the end of the period	$86,233	$1,087,982
Supplemental Disclosure of Non-Cash Financing Activities:
Warrant liability associated with note payable	$15,225	$150,544
Series B Preferred stock paid in kind dividend	$146,399	$94,793
Series B Preferred stock accrued dividends	$146,894	$124,467
Issuance of common stock as payment of accounts payable	$32,000	$-
Financing of insurance premium through notes payable	$158,400	$107,250
Note receivable received for sale of assets	$-	$75,000
Capital lease settled against deposit	$-	$227,235
Warrants issued to placement agents	$35,859	$175,241
Deemed dividend related to Series B Preferred Stock BCF adjustment for conversion price adjustment	$708,303	$-
Deemed dividend to Series B Preferred stock holders upon exercising Most Favored Nation option	$29,311	$-
Issuance of warrants in connection with OID Notes amendment	$44,095	$-

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

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MetaStat, Inc.

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 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 August 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.

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 $25.5 million as of August 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 August 31, 2016, the Company completed closings of the Additional Unit Private Placement (as defined in Note 3), whereby the Company issued an aggregate of 135 units for 192,000 shares of common stock, 48,300 shares of its Series A-2 Convertible Preferred Stock, convertible into 483,000 shares of common stock, and five-year common stock purchase warrants to purchase 337,500 shares of common stock with an exercise price of $3.00 per share for aggregate gross proceeds of $1.35 million and net proceeds of approximately $1.23 million.  See Note 12-Subsequent Events.

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MetaStat, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

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.

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MetaStat, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

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 August 31, 2016 and February 29, 2016, the dividend payable to the holders of the Series B Preferred Stock amounted to approximately $48,812 and $48,317, respectively. During the three and six months ended August 31, 2016, the Company issued 13.4407 and 26.6178 shares of Series B Preferred Stock, respectively, for payment of dividends amounting to $73,925 and $146,399. During the three and six months ended August 31, 2015, the Company issued 12.4175 and 17.2354 shares of Series B Preferred Stock, respectively, for payment of dividends amounting to $68,295 and $94,793.

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 August 31, 2016 and February 29, 2016, the value of the liquidation preference of the Series B Preferred Stock aggregated to approximately $3.7 million and $3.7 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. See Note 3 for the accounting treatment of the conversion price adjustment.

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MetaStat, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

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 six months ended August 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 units for an offering price of $10,000 per unit, 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.

First Closing of the 2016 Unit Private Placement

On May 26, 2016, the Company issued an aggregate of 20 units consisting of an aggregate of 100,000 shares of common stock and 50,000 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.

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MetaStat, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Second and Final Closing of the 2016 Unit Private Placement

On June 8, 2016, the Company issued an aggregate of 29.5 units consisting of 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 approximately $264,000. Additionally, the Company issued an aggregate of 14,750 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 November 21, 2016.

Most Favored Nation Exchange – the MFN 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 exercise their Most Favored Nation exchange right into the securities offered pursuant to the 2016 Unit Private Placement (the “MFN Exchange”). Accordingly, the Exchange Purchaser tendered all of their 19.4837 shares of Series B Preferred Stock and $2,143 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 was granted all rights and benefits under the 2016 Unit Private Placement financing agreements.

The Company analyzed and determined that the MFN Exchange is a contingent beneficial conversion feature that should be recognized upon the occurrence of the contingent event based on its intrinsic value at the commitment date. Since the Company had fully recognized all allocated proceeds of the Series B Preferred Stock in previously recognized beneficial conversion features, no beneficial conversion was recognized upon the exchange of the Series B Preferred Stock in the MFN Exchange.

For the three and six months ended August 31, 2016, the Company has recorded a non-cash deemed dividend to Additional Paid-in Capital of $29,311 in connection with the MFN Exchange equal to the excess fair value of the warrants received over the fair value of the Series A Warrants.

Common stock financing – Additional Unit Private Placement

First Closing of the Additional Unit Private Placement

On August 31, 2016, the Company entered into a subscription agreement pursuant to a private placement (the “Additional Unit Private Placement”) with an accredited investor pursuant to which the Company issued an aggregate of 8.75 units consisting of an aggregate of 43,750 shares of common stock at an effective price of $2.00 per share (the “Effective Price”) and five-year warrants to purchase 21,875 shares of common stock at a purchase price of $3.00 per share (the “Warrants”) for an aggregate purchase price of $87,500. After deducting placement agent fees and other offering expenses, including legal expenses, net proceeds amounted to approximately $73,000. Additionally, the Company issued an aggregate of 438 placement agent warrants in substantially the same form as the Warrants.

Pursuant to the subscription agreement, for a period of one hundred eighty (180) days following the final closing of the Additional Unit Private Placement, the investors shall have “full-ratchet” anti-dilution price protection (the “Price Protection”) based on certain issuances by the Company of common stock or securities convertible into shares of common stock at an effective price per share less than the Effective Price (a "Down-round Issuance"), whereby the Company would be required to issue the investors additional shares of common stock and Warrants.

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MetaStat, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Accounting for the Price Protection Provision

The Company analyzed the Price Protection provision for embedded derivatives that require bifurcation. The Company evaluated the Price Protection provision for both the issuance of additional shares of common stock and additional Warrants in connection with a Down-round Issuance in accordance with ASC 480 and ASC 815. In connection with the potential issuance of additional shares of common stock, the Company concluded that since the embedded down-round feature is within the equity host contract, the embedded Price Protection provision would be considered clearly and closely related to the equity host under ASC 815-15-25-1(a) and that the Price Protection provision should not be bifurcated. In connection with the potential issuance of additional Warrants, the Company concluded that the freestanding Warrants are not indexed to the Company’s common stock within the scope of ASC 815-40 and therefore was initially bifurcated and measured at fair value and recorded as a derivative liability in the Condensed 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.

Issuances of common stock for services

During the six months ended August 31, 2015, the Company issued an aggregate of 28,001 shares of common stock to consultants for services that vested immediately and 6,667 shares of common stock to a consultant for services that vest over 6 months.  The weighted average fair value of these shares of common stock amounted to $4.96. During the six months ended August 31, 2015, the Company recognized approximately $208,000 into general and administrative expense.

During the six months ended August 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 six months ended August 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.

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MetaStat, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

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 six months ended August 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 “Deemed Dividend due to Conversion Price Adjustment”).  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.

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MetaStat, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

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 six months ended August 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 six months ended August 31, 2015, 1,667 of these options with an aggregate fair value of $8,000 vested based on achieving certain milestones.

During the six months ended August 31, 2015, the Company issued options to purchase 80,004 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 six months ended August 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 six months ended August 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 and six months ended August 31, 2016, the Company issued options to purchase an aggregate of 440,000 shares of common stock at an exercise price of $2.00 per share to members of its management team. These options expire on July 7, 2026. 73,333 of these options vested immediately and 146,667 of these options vest in equal monthly installments over a twenty-four-month period. 220,000 options are subject to certain milestone-based vesting. The Company has not recognized any stock based compensation for the options with performance-vesting conditions, and expects to recognize the compensation expense when vesting become probable, which has not yet occurred.

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MetaStat, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

During the three and six months ended August 31, 2016, the Company issued options to purchase an aggregate of 100,000 shares of common stock at and exercise price of $2.00 per share to a non-executive member of its Board. These options expire on July 7, 2026. These options had a total fair value of $142,834 as calculated using the Black-Scholes model. 33,333 of these options vested immediately and 66,667 of these options vest in equal monthly installments over a twenty-four-month period.

During the three and six months ended August 31, 2016, the Company issued options to purchase an aggregate of 240,000 shares of common stock at an exercise price of $2.00 per share to consultants. These options expire on July 7, 2026. 33,333 of these options vest on the first anniversary date and then 66,667 of these options vest in equal monthly installments over a twenty-four-month period. 140,000 of these options are subject to certain milestone-based vesting and 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 weighted average inputs to the Black-Scholes model used to value the stock options granted during the six months ended August 31, 2016 and 2015 are as follows:

	August 31, 2016	August 31,  2015
Expected volatility	98.98 – 102.74%	113.47 - 123.55%
Expected dividend yield	0.00%	0.00%
Risk-free interest rate	98.98 – 102.74%	113.47 - 123.55%
Expected Term	5.47 years	6.07 years

For the three months ended August 31, 2016, the Company recognized $243,240 of compensation expense related to stock options, of which $200,032 was recognized in general and administrative expenses and $43,208 in research and development expenses.

For the six months ended August 31, 2016, the Company recognized $348,076 of compensation expense related to stock options, of which $287,860 was recognized in general and administrative expenses and $60,416 in research and development expenses.

For the three months ended August 31, 2015, the Company recognized $183,233 of compensation expense related to stock options, of which $159,002 was recognized in general and administrative expenses and $24,231 in research and development expenses.

For the six months ended August 31, 2015, the Company recognized $252,168 of compensation expense related to stock options, of which $227,937 was recognized in general and administrative expenses and $24,231 in research and development 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	880,000	$2.02	-	-
Expired and forfeited	(43,667)	$9.66	-	-
Outstanding and expected to vest at August 31, 2016	1,263,309	$5.95	$-	9.08
Exercisable at August 31, 2016	328,184	$12.39	$-	7.61

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MetaStat, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

The following table breaks down exercisable and unexercisable common stock options by exercise price as of August 31, 2016:

Exercisable			Unexercisable
Number of Options	Exercise Price	Weighted Average Remaining Life (years)	Number of Options	Exercise Price	Weighted Average Remaining Life (years)
124,442	$2.00	9.85	655,558	$2.00	9.85
-	$2.19	-	100,000	$2.19	9.74
8,375	$3.55	9.43	25,125	$3.55	9.43
1,068	$8.10	8.42	-	$8.10	-
74,447	$8.25	5.72	105,554	$8.25	8.76
52,434	$10.20	5.35	-	$10.20	-
3,334	$11.25	8.72	3,333	$11.25	8.72
4,445	$16.50	8.13	15,555	$16.50	8.13
14,735	$22.50	7.91	30,000	$22.50	7.30
44,904	$48.75	6.60	-	$48.75	-
328,184	$12.39	7.61	935,125	$3.67	9.59

As of August 31, 2016, we had approximately $611,000 of unrecognized compensation related to employee and consultant stock options that are expected to vest over a weighted average period of 1.3 years and, approximately $580,000 of unrecognized compensation related to employee stock options whose recognition is dependent on certain milestones to be achieved.  Additionally, there were 230,000 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 and six months ended August 31, 2015, the Company issued a warrant to purchase an aggregate of 43,636 shares of common stock in connection with the issuance of the Promissory Note on July 31, 2015, referenced in Note 6. This warrant is exercisable at $8.25 per share and expires on March 31, 2020. The warrant vested immediately. This warrant contained an anti-dilution price protection provision, which required the warrant 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.

In connection with the issuances of the Promissory Note pursuant to the Note Purchase Agreement on July 31, 2015, the Company issued placement agent warrants to purchase an aggregate of 5,600 shares of common stock.  These placement agent warrants were issued on July 31, 2015, are exercisable at $10.50 per share and expire on July 31, 2020. These placement agent warrants vested immediately. The fair value of these warrants was determined to be $16,800, as calculated using the Black-Scholes model. Weighted-average assumptions used in the Black-Scholes model included: (1) a discount rate of 1.54%; (2) an expected term of 5.0 years; (3) an expected volatility of 128%; and (4) zero expected dividends. $16,800 was recorded as part of the debt discount against the stated value of the Note.

For the six months ended August 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.

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MetaStat, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

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 six months ended August 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 six months ended August 31, 2015, the Company recognized $4,771 of stock-based compensation for these warrants.

For the three and six months ended August 31, 2015, the Company issued to a consultant for services a five-year warrant to purchase 9,134 shares of common stock at an exercise price of $8.25 per share. This warrant vests immediately. The fair value of this warrant was determined to be $26,945, as calculated using the Black-Scholes model. Average assumptions used in the Black-Scholes model included: (1) a discount rate of 1.54%; (2) an expected term of 5.0 years; (3) an expected volatility of 128 %; and (4) zero expected dividends. For the three and six months ended August 31, 2015, the Company recognized $26,945 of stock-based compensation for this warrant.

For the six months ended August 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 six months ended August 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 six months ended August 31, 2016, the Company issued warrants to purchase an aggregate of 60,000 shares of common stock to investors and placement agents 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 and six months ended August 31, 2016, the Company issued warrants to purchase an aggregate of 88,500 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 June 7, 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 and six months ended August 31, 2016, the Company issued warrants to purchase an aggregate of 27,326 shares of common stock in connection with the MFN Exchange referenced in Note 3. These warrants are exercisable at $3.00 per share and expire on June 7, 2021. These warrants vested immediately. Additionally, in connection with the MFN Exchange, the Company cancelled warrants to purchase an aggregate of 9,000 shares of common stock. These warrants were originally issued in connection with the Series B Private Placement and were exercisable at $10.50 per share.

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MetaStat, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

For the three and six months ended August 31, 2016, the Company issued warrants to purchase an aggregate of 45,459 shares of common stock in connection with the OID Note Amendments referenced in Note 6. These warrants are exercisable at $2.00 per share and expire between August 11, 2021 and August 18, 20121. These warrants vested immediately. The fair value of these warrants was determined to be $44,096, as calculated using the Black-Scholes model and were recorded as a debt discount based on their fair value.

For the three and six months ended August 31, 2016, the Company issued warrants to purchase an aggregate of 21,875 shares of common stock in connection with the issuance of common stock pursuant to the Additional Unit Private Placement referenced in Note 3. These warrants are exercisable at $3.00 per share and expire on August 30, 2021. These warrants vested immediately. As discussed in Note 3, due to the Price Protection Provision, these warrants are being classified as a derivative liability and measured at fair value.

In connection with the Additional Unit Private Placement, the Company issued placement agent warrants to purchase an aggregate of 438 shares of common stock. These placement agent warrants were issued on August 31, 2016, are exercisable at $3.00 per share and expire on August 30, 2021. These placement agent warrants vest immediately. The fair value of these warrants was determined to be approximately $400, as calculated using the Black-Scholes model. Weighted-average assumptions used in the Black-Scholes model included: (1) a discount rate of 1.18 %; (2) an expected term of 5.0 years; (3) an expected volatility of 102% and (4) zero expected dividends.

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	252,690	2.78	-	-
Cancelled	23,672	17.00	-	-
Outstanding at August 31, 2016	1,142,532	$11.23	$-	3.15

Warrants exercisable at August 31, 2016 are:

Exercise Prices	Number of shares	Weighted average remaining life (years)	Exercisable number of shares
$2.00	134,554	2.78	134,554
$2.20	43,636	4.45	43,636
$3.00	198,139	1.43	198,139
$8.25	39,468	3.68	39,468
$10.20	14,668	0.21	14,668
$10.50	335,005	3.59	335,005
$13.65	99,826	0.42	99,826
$15.00	556	3.75	556
$18.75	695	3.75	695
$21.00	23,334	0.49	23,334
$22.50	219,754	1.80	219,754
$31.50	29,830	1.62	29,830
$37.50	1,733	1.37	1,733
$45.00	1,334	0.42	1,334
	1,142,532	3.15	1,142,532

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MetaStat, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

NOTE 6 – NOTES 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 matured on July 31, 2016, accrued 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.

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MetaStat, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

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 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 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 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 approximately $85,000 and a debt discount related to the Voluntary Exchange of approximately $104,000.

During the three months ended August 31, 2016, the Company recognized $153,174 of interest expense related to the Promissory Note, as amended, including amortization of debt discount of $125,174 and accrued interest expense of $28,000. Additionally, the Company recognized a gain of $294,114 in the three months ended August 31, 2016 due to the change in estimated fair value of the Voluntary Exchange provision.

During the six months ended August 31, 2016, the Company recognized $291,177 of interest expense related to the Promissory Note, as amended, including amortization of debt discount of $239,177 and accrued interest expense of $52,000. Additionally, the Company recognized a gain of $265,438 in the six months ended August 31, 2016 due to the change in estimated fair value of the Voluntary Exchange provision.

-17-

MetaStat, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

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 six months ended August 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.

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MetaStat, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Between August 12, 2016 and August 19, 2016, the Company entered into certain amendments (the “OID Note Amendments”), to its outstanding non-convertible OID Notes originally issued between February 12, 2016 and March 15, 2016 (the “OID Notes”), with the holders of an aggregate of $750,000 principal amount of OID Notes, whereby the holders of the OID Notes extended the maturity date of the OID Notes an additional three (3) months to between November 12, 2016 and December 15, 2016. In consideration for entering into the Note Amendments, the Company (i) increased the principal amount of the OID Notes by 10% to $825,000 in the aggregate from $750,000 in the aggregate, (ii) issued an aggregate of 45,459 common stock purchase warrants with an exercise price of $2.00 per share and a term of five years, and (iii) modified the voluntary exchange provision of the OID Notes by reducing the “Qualified Offering” threshold amount to $500,000 from $2,000,000. Additionally, the Company will have the sole option to extend the maturity date of the OID Notes an additional three (3) months in consideration for a further 10% increase in the principal amount from $825,000 to $907,500.

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

During the three months ended August 31, 2016, the Company recognized $248,113 of interest expense related to the OID Notes, as amended, including amortization of debt discount. Additionally, the Company recognized a gain of $216,753 in the three months ended August 31, 2016 due to the change in estimated fair value of the OID Note Voluntary Exchange provision.

During the six months ended August 31, 2016, the Company recognized $413,703 of interest expense related to the OID Notes, as amended, including amortization of debt discount. Additionally, the Company recognized a gain of $191,430 in the six months ended August 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 Notes	150,000	(74,931)	32,496	107,565
Additional debt discount upon Note amendments	75,000	(224,681)	105,586	(44,095)
Amortization of debt discount	-	652,879	-	652,879
Change in fair value of voluntary exchange feature	-	-	(456,868)	(456,868)
August 31, 2016 balance	$2,025,000	$(390,015)	$157,616	$1,792,601

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 August 31, 2016 and February 29, 2016, the warrant liability and put exchange feature liability balances were classified as Level 3 instruments.

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MetaStat, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

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	Additional Unit Private Placement Warrants	Total
Fair value at February 29, 2016	$188,351	$46,110	$-	$234,461
Additions	15,225	-	38,834	54,059
Change in fair value:	(49,874)	(11,875)	-	(61,749)
Fair value at August 31, 2016	$153,702	$34,235	$38,834	$226,771

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 August 31, 2016 and February 29, 2016 used the following assumptions: (1) a stock price of $1.40 and $1.80, respectively; (2) a risk free rate of 0.99% and 1.08%, respectively; (3) an expected volatility of 134% and 134%, respectively; and (4) a fundraising event to occur on October 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 six months ended August 31, 2016. The fair value of the warrant at August 31, 2016 and February 29, 2016 was determined to be $50,228 and $64,438, respectively, as calculated using the Monte Carlo simulation. The Monte Carlo simulation as of August 31, 2016 and February 29, 2016 used the following assumptions: (1) stock price of $1.40 and $1.80, respectively; (2) a risk free rate of 1.04% and 1.13%, respectively; (3) an expected volatility of 134% and 134%, respectively; and (4) a fundraising event to occur on October 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 six months ended August 31, 2016. The fair value of the warrant at August 31, 2016 and February 29, 2016 was determined to be $50,877 and $68,292, respectively, as calculated using the Monte Carlo simulation. The Monte Carlo simulation as of August 31, 2016 and February 29, 2016 used the following assumptions: (1) stock price of $1.40 and $1.80, respectively; (2) a risk free rate of 1.12% and 1.20%, respectively; (3) an expected volatility of 134% and 134%, respectively; and (4) a fundraising event to occur on October 31, 2016 and May 15, 2016, respectively, that would result in the issuance of additional common stock.

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MetaStat, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

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 six months ended August 31, 2016. The fair value of these warrants at August 31, 2016 and February 29, 2016 was determined to be $42,316 and $55,621, respectively, as calculated using the Monte Carlo simulation. The Monte Carlo simulation as of August 31, 2016 and February 29, 2016 used the following weighted-average assumptions: (1) stock price of $1.40 and $1.80, respectively; (2) a risk free rate of 1.12% and 1.21%, respectively; (3) an expected volatility of 134% and 134%, respectively; and (4) a fundraising event to occur on October 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 six months ended August 31, 2016. The fair value of these warrants at August 31, 2016 and at issuance between March 4 and 15, 2016 was determined to be $10,281 and $15,225, respectively, as calculated using the Monte Carlo simulation. The Monte Carlo simulation as of August 31, 2016, and between March 4 and 15, 2016, used the following weighted-average assumptions: (1) stock price of $1.40 and $1.97, respectively; (2) a risk free rate of 1.12% and 1.41%, respectively; (3) an expected volatility of 134% and 136%, respectively; and (4) a fundraising event to occur on October 31, 2016 and July 31, 2016, respectively, that would result in the issuance of additional common stock.

In connection with the Additional Unit Private Placement, the Company issued warrants to purchase an aggregate of 21,875 shares of common stock.  These warrants were issued on August 31, 2016, are exercisable at $3.00 per share and expire on August 30, 2021. As described in Note 3, the Price Protection provision associated with these warrants requires liability treatment. The fair value of these warrants at August 31, 2016 was determined to be $38,834 as calculated using the Monte Carlo simulation. The Monte Carlo simulation as of August 31, 2016 used the following weighted-average assumptions: (1) stock price of $1.40; (2) a risk free rate of 1.22%; (3) an expected volatility of 134%; and (4) a fundraising event to occur on January 31, 2017, 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	-	138,082	138,082
Change in fair value:	(265,438)	(191,430)	(456,868)
Fair value, August 31, 2016:	$74,541	$83,075	$157,616

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 August 31, 2016 was determined to be $339,979 and $74,541, 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 October 31, 2016 at August 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 August 31, 2016 and 3) a discount rate of 18%, approximating high yield distressed debt rates, used for all measurement dates.

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MetaStat, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

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 August 31, 2016 was determined to be $136,423 and $83,075, 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 October 31, 2016 at August 31, 2016; 2) the combined probability of both a Qualified Offering and a voluntary exchange to occur, which was determined to be 81% at February 29, 2016 and 85% at August 31, 2016; 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	August 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		(216,928)	(169,396)
Equipment, net		$449,520	$497,052

Depreciation and amortization expense was $23,766 and $23,812 for the three months ended August 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 $20,126 for the three months ended August 31, 2016 and 2015, respectively. All other depreciation is included in general and administrative expense and amounted to $3,640 and $3,686 for the three months ended August 31, 2016 and 2015, respectively.

Depreciation and amortization expense was $47,532 and $48,657 for the six months ended August 31, 2016 and 2015, respectively. Depreciation of equipment utilized in research and development activities is included in research and development expenses and amounted to approximately $40,252 and $41,286 for the six months ended August 31, 2016 and 2015, respectively. All other depreciation is included in general and administrative expense and amounted to approximately $7,280 and $7,371 for the six months ended August 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.

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MetaStat, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

NOTE 10 – LICENSE AGREEMENT WITH ASET THERAPEUTICS, LLC

Effective August 31, 2016, the Company and ASET Therapeutics, LLC (“ASET”) entered into a mutual release of claims with respect to the termination of the Memorandum of Understanding dated July 14, 2014, as amended, the License and Development and Commercialization Agreement dated November 25, 2014 and all other related documents and agreements.

The Company assessed the collectability of its notes receivable in connection with two past due promissory notes of ASET in the aggregate principal amount of $125,000 held by the Company (the “ASET Notes”). The Company determined that the probability of repayment of the ASET Notes had decreased significantly and were to be written off. On August 30, 2016, the Company entered into a sale and assignment agreement with a non-affiliated shareholder, whereby the Company sold the ASET Notes for gross proceeds of $12,500. The Company recorded a loss on sale of notes receivable of $112,500 for the three and six months ended August 31, 2016.

NOTE 11 – 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 August 31, 2016 and 2015, 10,417 and 31,188 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 August 31, 2016 and 2015, the liability warrants were not dilutive.

In computing diluted loss per share for the periods ended August 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:

	August 31, 2016	August 31, 2015
Stock options	1,263,309	371,476
Warrants	1,142,532	847,932
Preferred stock	1,888,552	480,472
Total	4,293,552	1,699,880

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MetaStat, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

NOTE 12 – SUBSEQUENT EVENTS

Additional Closings of the Additional Unit Private Placement

Subsequent to August 31, 2016, the Company completed additional closings of the Additional Unit Private Placement (as defined in Note 3), whereby the Company issued an aggregate of 135 units for 192,000 shares of common stock, 48,300 shares of its newly created Series A-2 Convertible Preferred Stock (the “Series A-2 Preferred”), convertible into 483,000 shares of common stock, and five-year common stock purchase warrants to purchase 337,500 shares of common stock with an exercise price of $3.00 per share for aggregate gross proceeds of $1.35 million and net proceeds of approximately $1.23 million. The Company may issue shares of Series A-2 Preferred in lieu of issuing shares of common stock in the Additional Unit Private Placement for the benefit of certain purchasers that would be deemed to have beneficial ownership in excess of 4.99% or 9.99%. Additionally, the Company will issue an aggregate of 54,000 placement agent warrants in substantially the same form as the warrants issued to the investors in the Additional Unit Private Placement.

Research Collaboration

On September 29, 2016, the Company and Celgene Corporation (“Celgene”) entered into an amendment (the “Amendment”) to a previously executed pilot materials transfer agreement (the “Research Agreement”), to conduct a mutually agreed upon pilot research project (the “Pilot Project”). The Amendment provides for milestone payments to the Company of up to $973,482. 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 $486,741 upon execution of the 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.

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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 29, 2016. 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 biotechnology company focused on the development and commercialization of diagnostic tests that are prognostic for risk of cancer metastasis, companion diagnostics to predict drug response, and anti-metastatic drugs. Our driver-based platform technology is based on the pivotal role of the Mena protein and its isoforms, a common pathway for the development of metastatic disease in epithelial-based solid tumors.

Our product development strategy is based on identifying patients most at risk for cancer metastasis and targeting the underlying mechanisms that drive the metastatic cascade. Unlike most oncology therapeutics that kill cancer cells directly or inhibit cancer cell proliferation, we focus on preventing aggressive tumors from spreading. This is particularly relevant as most cancer deaths are caused by aggressive tumors that spread throughout the body and not due to growth of the primary tumor.

Our novel diagnostic tests provide oncologists with clinically-actionable information to optimize cancer treatment strategies based on the specific biological nature 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, predict benefit from adjuvant chemotherapy, and response to existing therapeutics including tyrosine kinase inhibitors (TKIs) and taxane-based drugs. The MetaSite Breast™ and MenaCalc™ assays are designed to accurately stratify patients based on the aggressiveness of their tumor and risk the cancer will spread. During 2016 and 2017, we plan to complete 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 tests. Our diagnostic assays will be offered as Laboratory Developed Tests (LDT) through our state-of-the-art CLIA-certified central reference laboratory located in Boston, MA.

Going Concern

Since our inception, we have generated significant net losses. As of August 31, 2016, we had an accumulated deficit of approximately $25.5 million. At August 31, 2016 we have a negative working capital. We incurred net losses of approximately $2.1 million and $2.3 million for the six months ended August 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.

Subsequent to August 31, 2016, we completed additional closings of the Additional Unit Private Placement for aggregate gross proceeds of $1.35 million and net proceeds of approximately $1.23 million.

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We currently anticipate that our cash and cash equivalents and the proceeds from our Additional Unit Private Placement will be sufficient to fund our operations through February 28, 2017, 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 met the criteria for variable interest entities (“VIEs”) because it lacked 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 was not the primary beneficiary of ASET based primarily on the facts that we did not have the power to direct ASET’s operations nor did we have any obligation to absorb ASET losses.  As a result, ASET had not been consolidated by the Company based on our determination that the Company was 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.

On December 31, 2015, the ASET License Agreement was terminated due to ASET’s failure to meet certain obligations due to us. All intellectual property licensed to ASET pursuant to the ASET License Agreement has been returned to the Company and the parties entered into a mutual release effective August 30, 2016.

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Critical Accounting Policies and Significant Judgments and Estimates

This discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as revenues and expenses during the reporting periods. We evaluate our estimates and judgments on an ongoing basis. We base our estimates on historical experience and on various other factors we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could therefore differ materially from those estimates under different assumptions or conditions.

Our significant accounting policies are described in Note 2 to our consolidated financial statements included in the Form 10-K for the year ended February 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.

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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 August 31, 2016 and August 31, 2015

Revenues.  There were no revenues for the three months ended August 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 $615,849 for the three months ended August 31, 2016 as compared to $1,076,032 for the three months ended August 31, 2015. This represents an aggregate decrease of $460,183. Stock-based compensation was $200,094 for the three months ended August 31, 2016 as compared to approximately $261,017 for the three months ended August 31, 2015. Excluding non-cash stock-based compensation expense and depreciation expense, general and administrative expenses decreased by $399,155 to $412,176 for the three months ended August 31, 2016 from $811,331 for the three months ended August 31, 2015. 

Consulting expense, investor relations and corporate communications expense, corporate legal expense, travel expense, and board compensation, all decreased by $257,202, $64,715, $30,229, $18,825 and $12,500, respectively. Decreased general and administrative expenses were partially offset by increased intellectual property legal expense and D&O insurance expense of approximately $30,521 and $12,415, respectively. We expect general and administrative expenses to remain relatively stable for the remainder of the 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 $38,200 to $356,168 for the three months ended August 31, 2016 from $317,968 for the three months ended August 31, 2015. Excluding non-cash stock-based compensation expense and depreciation expense, research and development expenses increased by $19,227 to $292,838, for the three months ended August 31, 2016 from $273,611 for the three months ended August 31, 2015.

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Research and development consulting expense increased by $53,983, which was partially offset by decreased laboratory consumable expense of approximately $40,633. 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 income of $92,516 for the three months ended August 31, 2016 as compared to income of approximately $132,129 for the three months ended August 31, 2015.  This represents a change of $39,613. This change was due in part to an increase in interest expense on the notes payable of $361,546, a loss from the change in fair value of the warrant liability of $59,841, a loss on sale of notes receivable of $112,500, offset by the change in fair value of the put liability on the notes payable of $514,001.

Net Loss. As a result of the factors described above, we had a net loss of $879,501 for the three months ended August 31, 2016 as compared to a net loss of $1,261,871 for the three months ended August 31, 2015.

Comparison of the Six Months Ended August 31, 2016 and August 31, 2015

Revenues.  There were no revenues for the six months ended August 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 $1,171,530 for the six months ended August 31, 2016 as compared to $2,024,928 for the six months ended August 31, 2015. This represents an aggregate decrease of $853,398. Stock-based compensation was $287,860 for the six months ended August 31, 2016 as compared to $468,129 for the six months ended August 31, 2015. Excluding non-cash stock-based compensation expense and depreciation expense, general and administrative expenses decreased by $673,038 to $876,390 for the six months ended August 31, 2016 from $1,549,428 for the six months ended August 31, 2015. 

Consulting expense, investor relations and corporate communications expense, corporate legal expense, accounting, audit and tax expense, payroll and related expense, board compensation, and travel expense all decreased by $311,867, $164,261, $99,053, $84,537, $33,183, $25,000 and $18,279, respectively. Decreased general and administrative expenses were partially offset by increased intellectual property legal expense and D&O insurance expense of approximately $74,630 and $25,708, 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 one-time and uplisting-related costs.

Research and Development Expenses. Research and development expenses increased by $89,997 to $627,291 for the six months ended August 31, 2016 from $537,294 for the six months ended August 31, 2015. Excluding non-cash stock-based compensation expense and depreciation expense, research and development expenses increased by $54,849 to $526,626 for the six months ended August 31, 2016 from $471,777 for the six months ended August 31, 2015.

Research and development consulting expense increased by $125,353, which was partially offset by decreased laboratory consumable expense, and payroll and related expenses of $77,690 and $29,660, respectively. We expect research and development expenses to increase for the remainder of this fiscal year ending February 28, 2017 as we conduct addition clinical studies and other research and development activities.

Other (Income) Expense. Other expense amounted to an expense of $300,469 for the six months ended August 31, 2016 as compared to income of $225,444 for the six months ended August 31, 2015.  This represents a change of $525,913. This change was due in part to an increase in interest expense on the notes payable of $706,636, an increase in other income of $139,953, gain from the change in fair value of the warrant liability of $111,151, and a loss from the change in fair value of the put liability on the notes payable of $460,002.

Net Loss. As a result of the factors described above, we had a net loss of $2,099,290 for the six months ended August 31, 2016 as compared to a net loss of $2,336,778 for the six months ended August 31, 2015.

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Liquidity and Capital Resources

Since our inception, we have incurred significant losses and, as of August 31, 2016, we had an accumulated deficit of approximately $25.5 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 August 31, 2016, we had received net proceeds of approximately $6.7 million through the sale of common stock to investors, approximately $0.3 million through the sale of Series A Preferred Stock to investors, approximately $3.4 million through the sale of Series B Preferred Stock to investors, approximately $3.5 million from the issuance of convertible promissory notes and approximately $1.8 million from the issuance of non-convertible promissory notes.  As of August 31, 2016, we had cash and cash equivalents of $86,233 and net debt of approximately $2.0 million.  Through August 31, 2016, we have issued and outstanding warrants to purchase 1,142,532 shares of our common stock at a weighted average exercise price of $11.23, which could result in proceeds to us of approximately $12.8 million if all outstanding warrants were exercised for cash. Subsequent to August 31, 2016, we have received net proceeds of approximately $1.23 million through the sale of common stock, Series A-2 Preferred stock and warrants to investors in the Additional Unit Private Placement.

Cash Flows

At August 31, 2016, we had $86,173 in cash and cash equivalents, compared to $1,087,982 on August 31, 2015. 

Net cash used in operating activities was $796,110 for the six months ended August 31, 2016 compared to $1,854,459 for the six months ended August 31, 2015. The decrease in cash used of $1,058,349 was primarily due to reduced payroll and related expenses, public company and professional fees associated with offerings 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 provided by investing activities was $12,500 for the six months ended August 31, 2016, compared to $146,561 of cash used for the six months ended August 31, 2015. The $159,061 of net cash used in investing activities for the three months ended August 31, 2015 was mainly attributable 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 August 31, 2016 was $506,060 compared to $2,831,182 for the three months ended August 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 six months ended August 31, 2016, and from the sale of Series B Preferred Stock and warrants and the issuance of promissory notes and warrants for the six months ended August 31, 2015.

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Contractual Obligations

As of August 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	$675	$175	$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)	$205	$205	$-	$-	$-

(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.  The license maintenance payment of $75,000 for 2016 is currently outstanding. 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.

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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. As of August 31, 2016, the license maintenance payment of $15,000 for 2016 was outstanding.  Subsequent to August 31, 2016, the license maintenance payment of $15,000 has been satisfied.  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. As of August 31, 2016, the license maintenance payment of $10,000 for 2016 was outstanding. Subsequent to August 31, 2016, the license maintenance payment of $10,000 has been satified.  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.

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.

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Operating Capital and Capital Expenditure Requirements

We currently anticipate that our cash and cash equivalents and the proceeds from our Additional Unit Private Placement will be sufficient to fund our operations through February 28, 2017, 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.

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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 August 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 August 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 August 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 August 31, 2016 that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

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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 August 31, 2016, the Company had an accumulated deficit of approximately $25.5 million. The Company currently anticipates that its cash and cash equivalents will be sufficient to fund its operations through February 28, 2017, 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.

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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.

-36-

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: October 14, 2016	By:	/s/ Douglas A. Hamilton
		Douglas A. Hamilton President and Chief Executive Officer (Principal Executive and Financial Officer)

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EX-31.1

Exhibit 31.1

CERTIFICATION PURSUANT TO

RULE 13A-14 OF THE SECURITIES EXCHANGE ACT OF 1934

AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Douglas A. Hamilton, certify that:

1. I have reviewed this quarterly report on Form 10-Q of MetaStat, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchanged Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

October 14, 2016

/s/ Douglas A. Hamilton

Douglas A. Hamilton

President and Chief Executive Officer

(Principal Executive and Financial Officer)

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 In connection with the Quarterly Report of MetaStat, Inc. (the “Company”) on Form 10-Q for the period ended August 31, 2016 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Douglas A. Hamilton, the President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

 (1)  The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 (2)  The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

October 14, 2016

/s/ Douglas A. Hamilton

Douglas A. Hamilton

President and Chief Executive Officer

(Principal Executive and Financial Officer)

XML

Document and Entity Information - shares	6 Months Ended
	Aug. 31, 2016	Oct. 14, 2016
Document And Entity Information
Entity Registrant Name	MetaStat, Inc.
Entity Central Index Key	0001404943
Document Type	10-Q
Document Period End Date	Aug. 31, 2016
Amendment Flag	false
Current Fiscal Year End Date	--02-28
Is Entity a Well-known Seasoned Issuer?	No
Is Entity a Voluntary Filer?	No
Is Entity's Reporting Status Current?	Yes
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		2,414,103
Document Fiscal Period Focus	Q2
Document Fiscal Year Focus	2017
Trading symbol	MTST

XML

Consolidated Balance Sheets - USD ($)	Aug. 31, 2016	Feb. 29, 2016
CURRENT ASSETS
Cash and cash equivalents	$ 86,233	$ 363,783
Notes receivable	0	125,000
Prepaid expenses	103,983	33,121
Total Current Assets	190,216	521,904
Equipment (net of accumulated depreciation of $216,928 and $169,396, respectively)	449,520	497,052
Refundable deposits	43,600	43,600
TOTAL ASSETS	683,336	1,062,556
Current liabilities
Accounts payable	1,240,800	746,144
Accrued expense	273,782	214,311
Notes payable (net of discount $390,015 and $743,282, respectively)	1,792,601	1,533,120
Accrued interest payable	108,000	56,000
Accrued dividends on Series B Preferred Stock	48,812	48,317
Total Current Liabilities	3,463,995	2,597,892
Warrant liability	226,771	234,461
TOTAL LIABILITIES	3,690,766	2,832,353
STOCKHOLDERS' (DEFICIT) EQUITY
Common Stock, ($0.0001 par value; 150,000,000 shares authorized; 1,976,201 and 1,851,201 shares issued and outstanding, respectively)	222	185
Additional Paid-in-capital	22,468,879	21,607,259
Accumulated deficit	(25,476,618)	(23,377,328)
Total stockholders' deficit	(3,007,430)	(1,769,797)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT	683,336	1,062,556
Series A Preferred Stock [Member]
STOCKHOLDERS' (DEFICIT) EQUITY
Convertible Preferred Stock: Series A convertible preferred stock ($0.0001 par value; 1,000,000 shares authorized; 874,257 and 874,257 shares issued and outstanding respectively), Series B convertible preferred stock ($0.0001 par value; 1,000 shares authorized; 666 and 659 shares issued and outstanding respectively)	87	87
Series B Preferred Stock [Member]
STOCKHOLDERS' (DEFICIT) EQUITY
Convertible Preferred Stock: Series A convertible preferred stock ($0.0001 par value; 1,000,000 shares authorized; 874,257 and 874,257 shares issued and outstanding respectively), Series B convertible preferred stock ($0.0001 par value; 1,000 shares authorized; 666 and 659 shares issued and outstanding respectively)	$ 0	$ 0

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Consolidated Balance Sheets (Parenthetical) - USD ($)	Aug. 31, 2016	Feb. 29, 2016
Accumulated depreciation	$ 216,928	$ 169,396
Convertible debentures, discount	$ 390,015	$ 743,282
STOCKHOLDERS' EQUITY
Common stock, par value	$ .0001	$ 0.0001
Common stock, shares authorized	150,000,000	150,000,000
Common stock, shares issued	2,222,103	1,851,201
Common stock, shares outstanding	2,222,103	1,851,201
Series B Preferred Stock [Member]
STOCKHOLDERS' EQUITY
Preferred stock, par value	$ 0.0001	$ 0.0001
Preferred stock, shares authorized	1,000	1,000
Preferred stock, shares issued	666	659
Preferred stock, shares outstanding	666	659
Series A Preferred Stock [Member]
STOCKHOLDERS' EQUITY
Preferred stock, par value	$ .0001	$ 0.0001
Preferred stock, shares authorized	1,000,000	1,000,000
Preferred stock, shares issued	874,257	874,257
Preferred stock, shares outstanding	874,257	874,257

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Consolidated Statements of Operations (Unaudited) - USD ($)	3 Months Ended		6 Months Ended
	Aug. 31, 2016	Aug. 31, 2015	Aug. 31, 2016	Aug. 31, 2015
Income Statement [Abstract]
Revenue	$ 0	$ 0	$ 0	$ 0
Total revenue	0	0	0	0
OPERATING EXPENSES
General & administrative	615,849	1,076,032	1,171,530	2,024,928
Research & development	356,168	317,968	627,291	537,294
Total Operating Expenses	972,017	1,394,000	1,798,821	2,562,222
OTHER EXPENSES (INCOME)
Interest expense	401,990	40,444	706,636	45,361
Other income, net	(14)	(139,967)	(281)	(140,136)
Change in fair value of warrant liability	(96,241)	(36,400)	(61,749)	(172,900)
Change in fair value of put embedded in note payable	(510,867)	3,134	(456,868)	3,134
Loss on sale of notes receivable	112,500	0	112,500	0
Settlement expense	116	660	231	39,097
Total Other Expenses (Income)	(92,516)	(132,129)	300,469	(225,444)
NET LOSS	(879,501)	(1,261,871)	(2,099,290)	(2,336,778)
Net loss	(879,501)	(1,261,871)	(2,099,290)	(2,336,778)
Deemed dividend on Series B Preferred Stock issuance	0	0	(708,303)	0
Accrued dividends on Series B Preferred Stock	(73,452)	(69,205)	(146,894)	(124,467)
Deemed dividend to Series B Preferred stock holders for exchange of warrants	(29,311)	0	(29,311)	0
Loss attributable to common shareholders	$ (982,264)	$ (1,331,076)	$ (2,983,798)	$ (3,528,736)
Net loss per share, basic and diluted	$ (0.46)	$ (0.73)	$ (1.50)	$ (1.94)
Weighted average of shares outstanding	2,127,833	1,823,003	1,987,487	1,816,136

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Consolidated Statements of Cash Flows - USD ($)	6 Months Ended
	Aug. 31, 2016	Aug. 31, 2015
Cash Flows from Operating Activities
Net loss	$ (2,099,290)	$ (2,336,778)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation	47,532	48,657
Share-based compensation	362,326	492,359
Amortization of debt discount	652,879	29,883
Loss on sale of notes receivable and assets	112,500	10,196
Loss on settlement of capital lease	0	8,820
Gain related to reimbursement of prior period research and development expenses	0	(100,000)
Change in fair value of warrant liability	(61,749)	(172,900)
Change in fair value of put embedded in note payable	(456,868)	3,134
Net changes in assets and liabilities
Prepaid expenses	87,538	(40,729)
Refundable deposit	0	(2,100)
Accounts payable and accrued expenses	507,022	199,350
Interest payable	52,000	5,649
Net Cash used in Operating Activities	(796,110)	(1,854,459)
Cash Flows from Investing Activities
Proceeds from sale of notes receivable	12,500	0
Proceeds received from settlement of capital lease	0	2,897
Purchase of equipment	0	(149,458)
Net Cash provided by (used in) Investing Activities	12,500	(146,561)
Cash Flows from Financing Activities
Proceeds from issuance of notes, net	122,790	1,111,408
Proceeds from issuance of common stock and warrants, net	462,565	0
Re-purchase of common stock and warrants	0	(111,563)
Proceeds from issuance of Series B preferred stock and warrant, net	0	1,945,244
Payment of capital lease obligation	0	(42,407)
Payment of short-term debt	(79,295)	(71,500)
Net Cash provided by Financing Activities	506,060	2,831,182
Net increase in cash and cash equivalents	(277,550)	830,162
Cash at the beginning of the period	363,783	257,820
Cash at the end of the period	86,233	1,087,982
Supplemental Disclosure of Non-Cash Financing Activities
Warrant liability associated with note payable	15,225	150,544
Series B Preferred paid in kind dividend	146,399	94,793
Series B Preferred Stock accrued dividends	146,894	124,467
Issuance of common stock as payment of accounts payable	32,000	0
Financing of insurance premium through notes payable	158,400	107,250
Note receivable received for sale of assets	0	75,000
Capital lease settled against deposit	0	227,235
Warrants issued to placement agents	35,859	175,241
Deemed dividend related to Series B Preferred Stock BCF adjustment for conversion price adjustment	708,303	0
Deemed dividend to Series B Preferred stock holders upon exercising Most Favored Nation option	29,311	0
Issuance of warrants in connection with OID Notes amendment	$ 44,095	$ 0

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DESCRIPTION OF BUSINESS AND GOING CONCERN

6 Months Ended

Aug. 31, 2016

Description Of Business And Going Concern

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 August 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.

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 $25.5 million as of August 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 August 31, 2016, the Company completed closings of the Additional Unit Private Placement (as defined in Note 3), whereby the Company issued an aggregate of 135 units for 192,000 shares of common stock, 48,300 shares of its Series A-2 Convertible Preferred Stock, convertible into 483,000 shares of common stock, and five-year common stock purchase warrants to purchase 337,500 shares of common stock with an exercise price of $3.00 per share for aggregate gross proceeds of $1.35 million and net proceeds of approximately $1.23 million. See Note 12 - Subsequent Events.

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CAPITAL STOCK

6 Months Ended

Aug. 31, 2016

Equity [Abstract]

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 August 31, 2016 and February 29, 2016, the dividend payable to the holders of the Series B Preferred Stock amounted to approximately $48,812 and $48,317, respectively. During the three and six months ended August 31, 2016, the Company issued 13.4407 and 26.6178 shares of Series B Preferred Stock, respectively, for payment of dividends amounting to $73,925 and $146,399. During the three and six months ended August 31, 2015, the Company issued 12.4175 and 17.2354 shares of Series B Preferred Stock, respectively, for payment of dividends amounting to $68,295 and $94,793.

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 August 31, 2016 and February 29, 2016, the value of the liquidation preference of the Series B Preferred Stock aggregated to approximately $3.7 million and $3.7 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. 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.

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EQUITY ISSUANCES

6 Months Ended

Aug. 31, 2016

Equity [Abstract]

EQUITY ISSUANCES

Common stock financing – the 2016 Unit Private Placement

During the six months ended August 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 units for an offering price of $10,000 per unit, 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.

First Closing of the 2016 Unit Private Placement

On May 26, 2016, the Company issued an aggregate of 20 units consisting of an aggregate of 100,000 shares of common stock and 50,000 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.

Second and Final Closing of the 2016 Unit Private Placement

On June 8, 2016, the Company issued an aggregate of 29.5 units consisting of 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 approximately $264,000. Additionally, the Company issued an aggregate of 14,750 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 November 21, 2016.

Most Favored Nation Exchange – the MFN 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 exercise their Most Favored Nation exchange right into the securities offered pursuant to the 2016 Unit Private Placement (the “MFN Exchange”). Accordingly, the Exchange Purchaser tendered all of their 19.4837 shares of Series B Preferred Stock and $2,143 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 was granted all rights and benefits under the 2016 Unit Private Placement financing agreements.

The Company analyzed and determined that the MFN Exchange is a contingent beneficial conversion feature that should be recognized upon the occurrence of the contingent event based on its intrinsic value at the commitment date. Since the Company had fully recognized all allocated proceeds of the Series B Preferred Stock in previously recognized beneficial conversion features, no beneficial conversion was recognized upon the exchange of the Series B Preferred Stock in the MFN Exchange.

For the three and six months ended August 31, 2016, the Company has recorded a non-cash deemed dividend to Additional Paid-in Capital of $29,311 in connection with the MFN Exchange equal to the excess fair value of the warrants received over the fair value of the Series A Warrants.

Common stock financing – Additional Unit Private Placement

First Closing of the Additional Unit Private Placement

On August 31, 2016, the Company entered into a subscription agreement pursuant to a private placement (the “Additional Unit Private Placement”) with an accredited investor pursuant to which the Company issued an aggregate of 8.75 units consisting of an aggregate of 43,750 shares of common stock at an effective price of $2.00 per share (the “Effective Price”) and five-year warrants to purchase 21,875 shares of common stock at a purchase price of $3.00 per share (the “Warrants”) for an aggregate purchase price of $87,500. After deducting placement agent fees and other offering expenses, including legal expenses, net proceeds amounted to approximately $73,000. Additionally, the Company issued an aggregate of 438 placement agent warrants in substantially the same form as the Warrants.

Pursuant to the subscription agreement, for a period of one hundred eighty (180) days following the final closing of the Additional Unit Private Placement, the investors shall have “full-ratchet” anti-dilution price protection (the “Price Protection”) based on certain issuances by the Company of common stock or securities convertible into shares of common stock at an effective price per share less than the Effective Price (a "Down-round Issuance"), whereby the Company would be required to issue the investors additional shares of common stock and Warrants.

Accounting for the Price Protection Provision

The Company analyzed the Price Protection provision for embedded derivatives that require bifurcation. The Company evaluated the Price Protection provision for both the issuance of additional shares of common stock and additional Warrants in connection with a Down-round Issuance in accordance with ASC 480 and ASC 815. In connection with the potential issuance of additional shares of common stock, the Company concluded that since the embedded down-round feature is within the equity host contract, the embedded Price Protection provision would be considered clearly and closely related to the equity host under ASC 815-15-25-1(a) and that the Price Protection provision should not be bifurcated. In connection with the potential issuance of additional Warrants, the Company concluded that the freestanding Warrants are not indexed to the Company’s common stock within the scope of ASC 815-40 and therefore was initially bifurcated and measured at fair value and recorded as a derivative liability in the Condensed 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.

Issuances of common stock for services

During the six months ended August 31, 2015, the Company issued an aggregate of 28,001 shares of common stock to consultants for services that vested immediately and 6,667 shares of common stock to a consultant for services that vest over 6 months.  The weighted average fair value of these shares of common stock amounted to $4.96. During the six months ended August 31, 2015, the Company recognized approximately $208,000 into general and administrative expense.

During the six months ended August 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 six months ended August 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 six months ended August 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 “Deemed Dividend due to Conversion Price Adjustment”).  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.

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STOCK OPTIONS

6 Months Ended

Aug. 31, 2016

Stock Options

STOCK OPTIONS

During the six months ended August 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 six months ended August 31, 2015, 1,667 of these options with an aggregate fair value of $8,000 vested based on achieving certain milestones.

During the six months ended August 31, 2015, the Company issued options to purchase 80,004 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 six months ended August 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 six months ended August 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 and six months ended August 31, 2016, the Company issued options to purchase an aggregate of 440,000 shares of common stock at an exercise price of $2.00 per share to members of its management team. These options expire on July 7, 2026. 73,333 of these options vested immediately and 146,667 of these options vest in equal monthly installments over a twenty-four-month period. 220,000 options are subject to certain milestone-based vesting. The Company has not recognized any stock based compensation for the options with performance-vesting conditions, and expects to recognize the compensation expense when vesting become probable, which has not yet occurred.

During the three and six months ended August 31, 2016, the Company issued options to purchase an aggregate of 100,000 shares of common stock at an exercise price of $2.00 per share to a non-executive member of its Board. These options expire on July 7, 2026. These options had a total fair value of $142,834 as calculated using the Black-Scholes model. 33,333 of these options vested immediately and 66,667 of these options vest in equal monthly installments over a twenty-four-month period.

During the three and six months ended August 31, 2016, the Company issued options to purchase an aggregate of 240,000 shares of common stock at an exercise price of $2.00 per share to consultants. These options expire on July 7, 2026. 33,333 of these options vest on the first anniversary date and then 66,667 of these options vest in equal monthly installments over a twenty-four-month period. 140,000 of these options are subject to certain milestone-based vesting and 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 weighted average inputs to the Black-Scholes model used to value the stock options granted during the six months ended August 31, 2016 and 2015 are as follows:

	August 31, 2016			August 31,  2015
Expected volatility		98.98 – 102.74	%		113.47 - 123.55	%
Expected dividend yield		0.00	%		0.00	%
Risk-free interest rate		98.98 – 102.74	%		113.47 - 123.55	%
Expected Term	5.47 years			6.07 years

For the three months ended August 31, 2016, the Company recognized $243,240 of compensation expense related to stock options, of which $200,032 was recognized in general and administrative expenses and $43,208 in research and development expenses.

For the six months ended August 31, 2016, the Company recognized $348,076 of compensation expense related to stock options, of which $287,860 was recognized in general and administrative expenses and $60,416 in research and development expenses.

For the three months ended August 31, 2015, the Company recognized $183,233 of compensation expense related to stock options, of which $159,002 was recognized in general and administrative expenses and $24,231 in research and development expenses.

For the six months ended August 31, 2015, the Company recognized $252,168 of compensation expense related to stock options, of which $227,937 was recognized in general and administrative expenses and $24,231 in research and development 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		880,000		$	2.02		-		-
Expired and forfeited		(43,667	)	$	9.66		-		-
Outstanding and expected to vest at August 31, 2016		1,263,309		$	5.95	$	-		9.08
Exercisable at August 31, 2016		328,184		$	12.39	$	-		7.61

The following table breaks down exercisable and unexercisable common stock options by exercise price as of August 31, 2016:

Exercisable						Unexercisable
Number of Options		Exercise Price		Weighted Average Remaining Life (years)		Number of Options		Exercise Price		Weighted Average Remaining Life (years)
	124,442	$	2.00		9.85		655,558	$	2.00		9.85
	-	$	2.19		-		100,000	$	2.19		9.74
	8,375	$	3.55		9.43		25,125	$	3.55		9.43
	1,068	$	8.10		8.42		-	$	8.10		-
	74,447	$	8.25		5.72		105,554	$	8.25		8.76
	52,434	$	10.20		5.35		-	$	10.20		-
	3,334	$	11.25		8.72		3,333	$	11.25		8.72
	4,445	$	16.50		8.13		15,555	$	16.50		8.13
	14,735	$	22.50		7.91		30,000	$	22.50		7.30
	44,904	$	48.75		6.60		-	$	48.75		-
	328,184	$	12.39		7.61		935,125	$	3.67		9.59

As of August 31, 2016, we had approximately $611,000 of unrecognized compensation related to employee and consultant stock options that are expected to vest over a weighted average period of 1.3 years and, approximately $580,000 of unrecognized compensation related to employee stock options whose recognition is dependent on certain milestones to be achieved.  Additionally, there were 230,000 stock options with a performance vesting condition that were granted to consultants which will be measured and recognized when vesting becomes probable.

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WARRANTS

6 Months Ended

Aug. 31, 2016

Warrants

WARRANTS

For the three and six months ended August 31, 2015, the Company issued a warrant to purchase an aggregate of 43,636 shares of common stock in connection with the issuance of the Promissory Note on July 31, 2015, referenced in Note 6. This warrant is exercisable at $8.25 per share and expires on March 31, 2020. The warrant vested immediately. This warrant contained an anti-dilution price protection provision, which required the warrant 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.

In connection with the issuances of the Promissory Note pursuant to the Note Purchase Agreement on July 31, 2015, the Company issued placement agent warrants to purchase an aggregate of 5,600 shares of common stock.  These placement agent warrants were issued on July 31, 2015, are exercisable at $10.50 per share and expire on July 31, 2020. These placement agent warrants vested immediately. The fair value of these warrants was determined to be $16,800, as calculated using the Black-Scholes model. Weighted-average assumptions used in the Black-Scholes model included: (1) a discount rate of 1.54%; (2) an expected term of 5.0 years; (3) an expected volatility of 128%; and (4) zero expected dividends. $16,800 was recorded as part of the debt discount against the stated value of the Note.

For the six months ended August 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 six months ended August 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 six months ended August 31, 2015, the Company recognized $4,771 of stock-based compensation for these warrants.

For the three and six months ended August 31, 2015, the Company issued to a consultant for services a five-year warrant to purchase 9,134 shares of common stock at an exercise price of $8.25 per share. This warrant vests immediately. The fair value of this warrant was determined to be $26,945, as calculated using the Black-Scholes model. Average assumptions used in the Black-Scholes model included: (1) a discount rate of 1.54%; (2) an expected term of 5.0 years; (3) an expected volatility of 128 %; and (4) zero expected dividends. For the three and six months ended August 31, 2015, the Company recognized $26,945 of stock-based compensation for this warrant.

For the six months ended August 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 six months ended August 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 six months ended August 31, 2016, the Company issued warrants to purchase an aggregate of 60,000 shares of common stock to investors and placement agents 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 and six months ended August 31, 2016, the Company issued warrants to purchase an aggregate of 88,500 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 June 7, 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 and six months ended August 31, 2016, the Company issued warrants to purchase an aggregate of 27,326 shares of common stock in connection with the MFN Exchange referenced in Note 3. These warrants are exercisable at $3.00 per share and expire on June 7, 2021. These warrants vested immediately. Additionally, in connection with the MFN Exchange, the Company cancelled warrants to purchase an aggregate of 9,000 shares of common stock. These warrants were originally issued in connection with the Series B Private Placement and were exercisable at $10.50 per share.

For the three and six months ended August 31, 2016, the Company issued warrants to purchase an aggregate of 45,459 shares of common stock in connection with the OID Note Amendments referenced in Note 6. These warrants are exercisable at $2.00 per share and expire between August 11, 2021 and August 18, 20121. These warrants vested immediately. The fair value of these warrants was determined to be $44,096, as calculated using the Black-Scholes model and were recorded as a debt discount based on their fair value.

For the three and six months ended August 31, 2016, the Company issued warrants to purchase an aggregate of 21,875 shares of common stock in connection with the issuance of common stock pursuant to the Additional Unit Private Placement referenced in Note 3. These warrants are exercisable at $3.00 per share and expire on August 30, 2021. These warrants vested immediately. As discussed in Note 3, due to the Price Protection Provision, these warrants are being classified as a derivative liability and measured at fair value.

In connection with the Additional Unit Private Placement, the Company issued placement agent warrants to purchase an aggregate of 438 shares of common stock. These placement agent warrants were issued on August 31, 2016, are exercisable at $3.00 per share and expire on August 30, 2021. These placement agent warrants vest immediately. The fair value of these warrants was determined to be approximately $400, as calculated using the Black-Scholes model. Weighted-average assumptions used in the Black-Scholes model included: (1) a discount rate of 1.18 %; (2) an expected term of 5.0 years; (3) an expected volatility of 102% and (4) zero expected dividends.

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		252,690		2.78		-		-
Cancelled		23,672		17.00		-		-
Outstanding at August 31, 2016		1,142,532	$	11.23	$	-		3.15

Warrants exercisable at August 31, 2016 are:

Exercise Prices		Number of shares		Weighted average remaining life (years)		Exercisable number of shares
$	2.00		134,554		2.78		134,554
$	2.20		43,636		4.45		43,636
$	3.00		198,139		1.43		198,139
$	8.25		39,468		3.68		39,468
$	10.20		14,668		0.21		14,668
$	10.50		335,005		3.59		335,005
$	13.65		99,826		0.42		99,826
$	15.00		556		3.75		556
$	18.75		695		3.75		695
$	21.00		23,334		0.49		23,334
$	22.50		219,754		1.80		219,754
$	31.50		29,830		1.62		29,830
$	37.50		1,733		1.37		1,733
$	45.00		1,334		0.42		1,334
			1,142,532		3.15		1,142,532

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NOTE PAYABLE

6 Months Ended

Aug. 31, 2016

Note Payable

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 matured on July 31, 2016, accrued 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 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 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 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 approximately $85,000 and a debt discount related to the Voluntary Exchange of approximately $104,000.

During the three months ended August 31, 2016, the Company recognized $153,174 of interest expense related to the Promissory Note, as amended, including amortization of debt discount of $125,174 and accrued interest expense of $28,000. Additionally, the Company recognized a gain of $294,114 in the three months ended August 31, 2016 due to the change in estimated fair value of the Voluntary Exchange provision.

During the six months ended August 31, 2016, the Company recognized $291,177 of interest expense related to the Promissory Note, as amended, including amortization of debt discount of $239,177 and accrued interest expense of $52,000. Additionally, the Company recognized a gain of $265,438 in the six months ended August 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 six months ended August 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.

Between August 12, 2016 and August 19, 2016, the Company entered into certain amendments (the “OID Note Amendments”), to its outstanding non-convertible OID Notes originally issued between February 12, 2016 and March 15, 2016 (the “OID Notes”), with the holders of an aggregate of $750,000 principal amount of OID Notes, whereby the holders of the OID Notes extended the maturity date of the OID Notes an additional three (3) months to between November 12, 2016 and December 15, 2016. In consideration for entering into the Note Amendments, the Company (i) increased the principal amount of the OID Notes by 10% to $825,000 in the aggregate from $750,000 in the aggregate, (ii) issued an aggregate of 45,459 common stock purchase warrants with an exercise price of $2.00 per share and a term of five years, and (iii) modified the voluntary exchange provision of the OID Notes by reducing the “Qualified Offering” threshold amount to $500,000 from $2,000,000. Additionally, the Company will have the sole option to extend the maturity date of the OID Notes an additional three (3) months in consideration for a further 10% increase in the principal amount from $825,000 to $907,500.

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

During the three months ended August 31, 2016, the Company recognized $248,113 of interest expense related to the OID Notes, as amended, including amortization of debt discount. Additionally, the Company recognized a gain of $216,753 in the three months ended August 31, 2016 due to the change in estimated fair value of the OID Note Voluntary Exchange provision.

During the six months ended August 31, 2016, the Company recognized $413,703 of interest expense related to the OID Notes, as amended, including amortization of debt discount. Additionally, the Company recognized a gain of $191,430 in the six months ended August 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 Notes		150,000		(74,931	)		32,496			107,565
Additional debt discount upon Note amendments		75,000		(224,681	)		105,586			(44,095	)
Amortization of debt discount		-		652,879			-			652,879
Change in fair value of voluntary exchange feature		-		-			(456,868	)		(456,868	)
August 31, 2016 balance	$	2,025,000	$	(390,015	)	$	157,616		$	1,792,601

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FAIR VALUE MEASUREMENTS

6 Months Ended

Aug. 31, 2016

Fair Value Disclosures [Abstract]

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 August 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			Additional Unit Private Placement Warrants		Total
Fair value at February 29, 2016	$	188,351		$	46,110		$	-	$	234,461
Additions		15,225			-			38,834		54,059
Change in fair value:		(49,874	)		(11,875	)		-		(61,749	)
Fair value at August 31, 2016	$	153,702		$	34,235		$	38,834	$	226,771

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 August 31, 2016 and February 29, 2016 used the following assumptions: (1) a stock price of $1.40 and $1.80, respectively; (2) a risk free rate of 0.99% and 1.08%, respectively; (3) an expected volatility of 134% and 134%, respectively; and (4) a fundraising event to occur on October 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 six months ended August 31, 2016. The fair value of the warrant at August 31, 2016 and February 29, 2016 was determined to be $50,228 and $64,438, respectively, as calculated using the Monte Carlo simulation. The Monte Carlo simulation as of August 31, 2016 and February 29, 2016 used the following assumptions: (1) stock price of $1.40 and $1.80, respectively; (2) a risk free rate of 1.04% and 1.13%, respectively; (3) an expected volatility of 134% and 134%, respectively; and (4) a fundraising event to occur on October 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 six months ended August 31, 2016. The fair value of the warrant at August 31, 2016 and February 29, 2016 was determined to be $50,877 and $68,292, respectively, as calculated using the Monte Carlo simulation. The Monte Carlo simulation as of August 31, 2016 and February 29, 2016 used the following assumptions: (1) stock price of $1.40 and $1.80, respectively; (2) a risk free rate of 1.12% and 1.20%, respectively; (3) an expected volatility of 134% and 134%, respectively; and (4) a fundraising event to occur on October 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 six months ended August 31, 2016. The fair value of these warrants at August 31, 2016 and February 29, 2016 was determined to be $42,316 and $55,621, respectively, as calculated using the Monte Carlo simulation. The Monte Carlo simulation as of August 31, 2016 and February 29, 2016 used the following weighted-average assumptions: (1) stock price of $1.40 and $1.80, respectively; (2) a risk free rate of 1.12% and 1.21%, respectively; (3) an expected volatility of 134% and 134%, respectively; and (4) a fundraising event to occur on October 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 six months ended August 31, 2016. The fair value of these warrants at August 31, 2016 and at issuance between March 4 and 15, 2016 was determined to be $10,281 and $15,225, respectively, as calculated using the Monte Carlo simulation. The Monte Carlo simulation as of August 31, 2016, and between March 4 and 15, 2016, used the following weighted-average assumptions: (1) stock price of $1.40 and $1.97, respectively; (2) a risk free rate of 1.12% and 1.41%, respectively; (3) an expected volatility of 134% and 136%, respectively; and (4) a fundraising event to occur on October 31, 2016 and July 31, 2016, respectively, that would result in the issuance of additional common stock.

In connection with the Additional Unit Private Placement, the Company issued warrants to purchase an aggregate of 21,875 shares of common stock.  These warrants were issued on August 31, 2016, are exercisable at $3.00 per share and expire on August 30, 2021. As described in Note 3, the Price Protection provision associated with these warrants requires liability treatment. The fair value of these warrants at August 31, 2016 was determined to be $38,834 as calculated using the Monte Carlo simulation. The Monte Carlo simulation as of August 31, 2016 used the following weighted-average assumptions: (1) stock price of $1.40; (2) a risk free rate of 1.22%; (3) an expected volatility of 134%; and (4) a fundraising event to occur on January 31, 2017, 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		-			138,082			138,082
Change in fair value:		(265,438	)		(191,430	)		(456,868	)
Fair value, August 31, 2016:	$	74,541		$	83,075		$	157,616

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 August 31, 2016 was determined to be $339,979 and $74,541, 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 October 31, 2016 at August 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 August 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 August 31, 2016 was determined to be $136,423 and $83,075, 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 October 31, 2016 at August 31, 2016; 2) the combined probability of both a Qualified Offering and a voluntary exchange to occur, which was determined to be 81% at February 29, 2016 and 85% at August 31, 2016; and 3) a discount rate of 18%, approximating high yield distressed debt rates, used for all measurement dates.

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EQUIPMENT

6 Months Ended

Aug. 31, 2016

Property, Plant and Equipment [Abstract]

EQUIPMENT

Equipment consists of the following:

	Estimated  Useful Lives	August 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			(216,928	)		(169,396	)
Equipment, net		$	449,520		$	497,052

Depreciation and amortization expense was $23,766 and $23,812 for the three months ended August 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 $20,126 for the three months ended August 31, 2016 and 2015, respectively. All other depreciation is included in general and administrative expense and amounted to $3,640 and $3,686 for the three months ended August 31, 2016 and 2015, respectively.

Depreciation and amortization expense was $47,532 and $48,657 for the six months ended August 31, 2016 and 2015, respectively. Depreciation of equipment utilized in research and development activities is included in research and development expenses and amounted to approximately $40,252 and $41,286 for the six months ended August 31, 2016 and 2015, respectively. All other depreciation is included in general and administrative expense and amounted to approximately $7,280 and $7,371 for the six months ended August 31, 2016 and 2015, respectively.

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COMMITMENTS

6 Months Ended

Aug. 31, 2016

Research and Development [Abstract]

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.

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LICENSE AGREEMENT WITH ASET THERAPEUTICS, LLC

6 Months Ended

Aug. 31, 2016

License Agreement With Aset Therapeutics Llc

LICENSE AGREEMENT WITH ASET THERAPEUTICS, LLC

Effective August 31, 2016, the Company and ASET Therapeutics, LLC (“ASET”) entered into a mutual release of claims with respect to the termination of the Memorandum of Understanding dated July 14, 2014, as amended, the License and Development and Commercialization Agreement dated November 25, 2014 and all other related documents and agreements.

The Company assessed the collectability of its notes receivable in connection with two past due promissory notes of ASET in the aggregate principal amount of $125,000 held by the Company (the “ASET Notes”). The Company determined that the probability of repayment of the ASET Notes had decreased significantly and were to be written off. On August 30, 2016, the Company entered into a sale and assignment agreement with a non-affiliated shareholder, whereby the Company sold the ASET Notes for gross proceeds of $12,500. The Company recorded a loss on sale of notes receivable of $112,500 for the three and six months ended August 31, 2016.

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NET LOSS PER SHARE

6 Months Ended

Aug. 31, 2016

Accounting Policies [Abstract]

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 August 31, 2016 and 2015, 10,417 and 31,188 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 August 31, 2016 and 2015, the liability warrants were not dilutive.

In computing diluted loss per share for the periods ended August 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:

	August 31, 2016		August 31, 2015
Stock options		1,263,309		371,476
Warrants		1,142,532		847,932
Preferred stock		1,888,552		480,472
Total		4,293,552		1,699,880

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SUBSEQUENT EVENTS

6 Months Ended

Aug. 31, 2016

Subsequent Events [Abstract]

SUBSEQUENT EVENTS

Additional Closings of the Additional Unit Private Placement

Subsequent to August 31, 2016, the Company completed additional closings of the Additional Unit Private Placement (as defined in Note 3), whereby the Company issued an aggregate of 135 units for 192,000 shares of common stock, 48,300 shares of its Series A-2 Convertible Preferred Stock (the “Series A-2 Preferred”), convertible into 483,000 shares of common stock, and five-year common stock purchase warrants to purchase 337,500 shares of common stock with an exercise price of $3.00 per share for aggregate gross proceeds of $1.35 million and net proceeds of approximately $1.23 million. The Company may issue shares of Series A-2 Preferred in lieu of issuing shares of common stock in the Additional Unit Private PLacement for the benefit of certain purchasers that would be deemed to have beneficial ownership in excess of 4.99% or 9.99%. Additionally, the company will issue an aggregate of 54,000 placement agent warrants in substantially the same form as the warrants issued to the investors in the Additional Unit Private Placement.

Research Collaboration

On September 29, 2016, the Company and Celgene Corporation (“Celgene”) entered into an amendment (the “Amendment”) to a previously executed pilot materials transfer agreement (the “Research Agreement”), to conduct a mutually agreed upon pilot research project (the “Pilot Project”). The Amendment provides for milestone payments to the Company of up to $973,482. 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 $486,741 upon execution of the 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.

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DESCRIPTION OF BUSINESS AND GOING CONCERN (Policies)

6 Months Ended

Aug. 31, 2016

Description Of Business And Going Concern Policies

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 August 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.

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 $25.5 million as of August 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 August 31, 2016, the Company completed closings of the Additional Unit Private Placement (as defined in Note 3), whereby the Company issued an aggregate of 135 units for 192,000 shares of common stock, 48,300 shares of its Series A-2 Convertible Preferred Stock, convertible into 483,000 shares of common stock, and five-year common stock purchase warrants to purchase 337,500 shares of common stock with an exercise price of $3.00 per share for aggregate gross proceeds of $1.35 million and net proceeds of approximately $1.23 million. See Note 12 - Subsequent Events.

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STOCK OPTIONS (Tables)

6 Months Ended

Aug. 31, 2016

Stock Options Tables

Weighted average inputs to the Black-Scholes model used to value the stock options granted

	August 31, 2016			August 31,  2015
Expected volatility		98.98 – 102.74	%		113.47 - 123.55	%
Expected dividend yield		0.00	%		0.00	%
Risk-free interest rate		98.98 – 102.74	%		113.47 - 123.55	%
Expected Term	5.47 years			6.07 years

Common stock options issued and outstanding

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		880,000		$	2.02		-		-
Expired and forfeited		(43,667	)	$	9.66		-		-
Outstanding and expected to vest at August 31, 2016		1,263,309		$	5.95	$	-		9.08
Exercisable at August 31, 2016		328,184		$	12.39	$	-		7.61

Exercisable and unexercisable stock options

Exercisable						Unexercisable
Number of Options		Exercise Price		Weighted Average Remaining Life (years)		Number of Options		Exercise Price		Weighted Average Remaining Life (years)
	124,442	$	2.00		9.85		655,558	$	2.00		9.85
	-	$	2.19		-		100,000	$	2.19		9.74
	8,375	$	3.55		9.43		25,125	$	3.55		9.43
	1,068	$	8.10		8.42		-	$	8.10		-
	74,447	$	8.25		5.72		105,554	$	8.25		8.76
	52,434	$	10.20		5.35		-	$	10.20		-
	3,334	$	11.25		8.72		3,333	$	11.25		8.72
	4,445	$	16.50		8.13		15,555	$	16.50		8.13
	14,735	$	22.50		7.91		30,000	$	22.50		7.30
	44,904	$	48.75		6.60		-	$	48.75		-
	328,184	$	12.39		7.61		935,125	$	3.67		9.59

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WARRANTS (Tables)

6 Months Ended

Aug. 31, 2016

Warrants Tables

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		252,690		2.78		-		-
Cancelled		23,672		17.00		-		-
Outstanding at August 31, 2016		1,142,532	$	11.23	$	-		3.15

Warrants exercisable

Exercise Prices		Number of shares		Weighted average remaining life (years)		Exercisable number of shares
$	2.00		134,554		2.78		134,554
$	2.20		43,636		4.45		43,636
$	3.00		198,139		1.43		198,139
$	8.25		39,468		3.68		39,468
$	10.20		14,668		0.21		14,668
$	10.50		335,005		3.59		335,005
$	13.65		99,826		0.42		99,826
$	15.00		556		3.75		556
$	18.75		695		3.75		695
$	21.00		23,334		0.49		23,334
$	22.50		219,754		1.80		219,754
$	31.50		29,830		1.62		29,830
$	37.50		1,733		1.37		1,733
$	45.00		1,334		0.42		1,334
			1,142,532		3.15		1,142,532

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NOTE PAYABLE (Tables)

6 Months Ended

Aug. 31, 2016

Note Payable Tables

Summary of 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 Notes		150,000		(74,931	)		32,496			107,565
Additional debt discount upon Note amendments		75,000		(224,681	)		105,586			(44,095	)
Amortization of debt discount		-		652,879			-			652,879
Change in fair value of voluntary exchange feature		-		-			(456,868	)		(456,868	)
August 31, 2016 balance	$	2,025,000	$	(390,015	)	$	157,616		$	1,792,601

Fair value measurements

	Note Payable Warrants			Series B Warrants			Additional Unit Private Placement Warrants		Total
Fair value at February 29, 2016	$	188,351		$	46,110		$	-	$	234,461
Additions		15,225			-			38,834		54,059
Change in fair value:		(49,874	)		(11,875	)		-		(61,749	)
Fair value at August 31, 2016	$	153,702		$	34,235		$	38,834	$	226,771

	Promissory Note, as amended			OID Notes			Total
Fair value, February  29, 2016:	$	339,979		$	136,423		$	476,402
Additions		-			138,082			138,082
Change in fair value:		(265,438	)		(191,430	)		(456,868	)
Fair value, August 31, 2016:	$	74,541		$	83,075		$	157,616

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FAIR VALUE MEASUREMENTS (Tables)

6 Months Ended

Aug. 31, 2016

Fair Value Disclosures [Abstract]

Changes in the estimated fair value for our Level 3 classified derivative warrant liability and put exchange feature liability

	Note Payable Warrants			Series B Warrants			Additional Unit Private Placement Warrants		Total
Fair value at February 29, 2016	$	188,351		$	46,110		$	-	$	234,461
Additions		15,225			-			38,834		54,059
Change in fair value:		(49,874	)		(11,875	)		-		(61,749	)
Fair value at August 31, 2016	$	153,702		$	34,235		$	38,834	$	226,771

	Promissory Note, as amended			OID Notes			Total
Fair value, February  29, 2016:	$	339,979		$	136,423		$	476,402
Additions		-			138,082			138,082
Change in fair value:		(265,438	)		(191,430	)		(456,868	)
Fair value, August 31, 2016:	$	74,541		$	83,075		$	157,616

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EQUIPMENT (Tables)

6 Months Ended

Aug. 31, 2016

Property, Plant and Equipment [Abstract]

Equipment

	Estimated  Useful Lives	August 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			(216,928	)		(169,396	)
Equipment, net		$	449,520		$	497,052

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NET LOSS PER SHARE (Tables)

6 Months Ended

Aug. 31, 2016

Accounting Policies [Abstract]

Anti-dilutive securities

	August 31, 2016		August 31, 2015
Stock options		1,263,309		371,476
Warrants		1,142,532		847,932
Preferred stock		1,888,552		480,472
Total		4,293,552		1,699,880

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DESCRIPTION OF BUSINESS AND GOING CONCERN (Details Narrative) - USD ($)	6 Months Ended
	Aug. 31, 2016	Feb. 29, 2016
Description Of Business And Going Concern Policies
Date of incorporation	Mar. 28, 2007
State of incorporation	Nevada
Going Concern
Accumulated deficit	$ (25,476,618)	$ (23,377,328)

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CAPITAL STOCK (Details Narrative) - USD ($)	Aug. 31, 2016	Feb. 29, 2016
Par value of shares	$ .0001	$ 0.0001
Authorized shares of common stock	150,000,000	150,000,000
Dividend payable		$ 48,317
Series B Preferred Stock [Member]
Authorized shares of preferred stock	1,000	1,000
Stated value per share	$ 0.0001	$ 0.0001
Liquidation preference		$ 3,700,000
Series A Preferred Stock [Member]
Authorized shares of preferred stock	1,000,000	1,000,000
Stated value per share	$ .0001	$ 0.0001

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EQUITY ISSUANCES (Details Narrative) - shares	6 Months Ended
	Aug. 31, 2016	Aug. 31, 2015
Equity [Abstract]
Common stock issued for services	25,000	28,001

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STOCK OPTIONS (Details) - Option [Member]	6 Months Ended
	Aug. 31, 2016	Aug. 31, 2015
Expected volatility, minimum	98.98%	113.47%
Expected volatility, maximum	102.74%	123.55%
Expected dividend yield	0.00%	0.00%
Risk-free interest rate, minimum	98.98%	111.347%
Risk-free interest rate, maximum	102.74%	123.55%
Expected Term	5 years 5 months 19 days	6 years 25 days

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STOCK OPTIONS (Details 1) - Option [Member]	6 Months Ended
	Aug. 31, 2016 USD ($) $ / shares shares
Options Outstanding
Outstanding at Beginning of Period | shares	426,976
Granted | shares	880,000
Exercised | shares	(43,667)
Outstanding and expected to vest at End of Period | shares	1,263,309
Options exercisable | shares	328,184
Weighted Average Exercise Price
Outstanding at Beginning of Period | $ / shares	$ 14.45
Granted | $ / shares	2.02
Exercised | $ / shares	9.66
Outstanding and expected to vest at End of Period | $ / shares	5.95
Exercisable at End of period | $ / shares	$ 12.39
Outstanding at Beginning of Period | $	$ 0
Outstanding and expected to vest at End of Period | $	0
Exercisable at End of period | $	$ 0
Weighted Average Remaining Contractual Term
Outstanding and expected to vest at Beginning of Period	7 years 11 months 23 days
Outstanding and expected to vest at End of Period	9 years 29 days
Exercisable at End of period	7 years 7 months 10 days

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STOCK OPTIONS (Details 2) - Option [Member]	6 Months Ended
	Aug. 31, 2016 $ / shares shares
Options exercisable | shares	328,184
Exercise Price | $ / shares	$ 12.39
Weighted Average Remaining Life (years)	7 years 7 months 10 days
Number of Options | shares	935,125
Exercise Price | $ / shares	$ 3.67
Weighted Average Remaining Life (years)	9 years 7 months 2 days
Exercisable | Exercise Price 1
Options exercisable | shares	124,442
Exercise Price | $ / shares	$ 2
Weighted Average Remaining Life (years)	9 years 10 months 6 days
Exercisable | Exercise Price 2
Options exercisable | shares	0
Exercise Price | $ / shares	$ 2.19
Weighted Average Remaining Life (years)	0 years
Exercisable | Exercise Price 3
Options exercisable | shares	8,375
Exercise Price | $ / shares	$ 3.55
Weighted Average Remaining Life (years)	9 years 5 months 5 days
Exercisable | Exercise Price 4
Options exercisable | shares	1,068
Exercise Price | $ / shares	$ 8.1
Weighted Average Remaining Life (years)	8 years 5 months 1 day
Exercisable | Exercise Price 5
Options exercisable | shares	74,447
Exercise Price | $ / shares	$ 8.25
Weighted Average Remaining Life (years)	5 years 8 months 19 days
Exercisable | Exercise Price 6
Options exercisable | shares	52,434
Exercise Price | $ / shares	$ 10.2
Weighted Average Remaining Life (years)	5 years 4 months 6 days
Exercisable | Exercise Price 7
Options exercisable | shares	3,334
Exercise Price | $ / shares	$ 11.25
Weighted Average Remaining Life (years)	8 years 8 months 19 days
Exercisable | Exercise Price 8
Options exercisable | shares	4,445
Exercise Price | $ / shares	$ 16.5
Weighted Average Remaining Life (years)	8 years 1 month 17 days
Exercisable | Exercise Price 9
Options exercisable | shares	14,735
Exercise Price | $ / shares	$ 22.5
Weighted Average Remaining Life (years)	7 years 10 months 28 days
Exercisable | Exercise Price 10
Options exercisable | shares	44,904
Exercise Price | $ / shares	$ 48.75
Weighted Average Remaining Life (years)	6 years 7 months 6 days
Unexercisable | Exercise Price 1
Number of Options | shares	655,558
Exercise Price | $ / shares	$ 2
Weighted Average Remaining Life (years)	9 years 10 months 6 days
Unexercisable | Exercise Price 2
Number of Options | shares	100,000
Exercise Price | $ / shares	$ 2.19
Weighted Average Remaining Life (years)	9 years 8 months 27 days
Unexercisable | Exercise Price 3
Number of Options | shares	25,125
Exercise Price | $ / shares	$ 3.55
Weighted Average Remaining Life (years)	9 years 5 months 5 days
Unexercisable | Exercise Price 4
Number of Options | shares	0
Exercise Price | $ / shares	$ 8.1
Weighted Average Remaining Life (years)	0 years
Unexercisable | Exercise Price 5
Number of Options | shares	105,554
Exercise Price | $ / shares	$ 8.25
Weighted Average Remaining Life (years)	8 years 9 months 4 days
Unexercisable | Exercise Price 6
Number of Options | shares	0
Exercise Price | $ / shares	$ 10.2
Weighted Average Remaining Life (years)	0 years
Unexercisable | Exercise Price 7
Number of Options | shares	3,333
Exercise Price | $ / shares	$ 11.25
Weighted Average Remaining Life (years)	8 years 8 months 19 days
Unexercisable | Exercise Price 8
Number of Options | shares	15,555
Exercise Price | $ / shares	$ 16.5
Weighted Average Remaining Life (years)	8 years 1 month 17 days
Unexercisable | Exercise Price 9
Number of Options | shares	30,000
Exercise Price | $ / shares	$ 22.5
Weighted Average Remaining Life (years)	7 years 3 months 18 days
Unexercisable | Exercise Price 10
Number of Options | shares	0
Exercise Price | $ / shares	$ 48.75
Weighted Average Remaining Life (years)	0 years

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STOCK OPTIONS (Details Narrative) - USD ($)	3 Months Ended		6 Months Ended
	Aug. 31, 2016	Aug. 31, 2015	Aug. 31, 2016	Aug. 31, 2015
Stock based compensation expense			$ 362,326	$ 492,359
Option [Member]
Stock based compensation expense	$ 243,240	$ 183,233	348,076	252,168
Unrecognized compensation expense, expected to vest	611,000		$ 611,000
Period for compensation expense recognition			1 year 3 months 18 days
General and Administrative Expense [Member]
Stock based compensation expense	200,032	159,002	$ 287,860	227,937
Research and Development Expense [Member]
Stock based compensation expense	$ 43,208	$ 24,231	$ 60,416	$ 24,231

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WARRANTS (Details) - Stock Warrants [Member]	6 Months Ended
	Aug. 31, 2016 USD ($) $ / shares shares
Warrants Outstanding
Outstanding at Beginning of Period | shares	913,514
Granted | shares	252,690
Cancelled | shares	23,672
Outstanding at End of Period | shares	1,142,532
Weighted Average Exercise Price
Outstanding at Beginning of Period | $ / shares	$ 14.56
Granted | $ / shares	2.78
Cancelled | $ / shares	17.00
Outstanding at End of Period | $ / shares	$ 11.23
Average Intrensic Value
Outstanding at Beginning of Period | $	$ 0
Outstanding at End of Period | $	$ 0
Weighted Average Remaining Contractual Term
Outstanding at Beginning of Period	3 years 1 month 20 days
Outstanding at End of Period	3 years 1 month 24 days

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WARRANTS (Details 1) - Warrants [Member]	6 Months Ended
	Aug. 31, 2016 $ / shares shares
Number of shares	1,142,532
Weighted average remaining life (years)	3 years 1 month 24 days
Exercisable number of shares	1,142,532
Exercise Price 1
Exercise prices | $ / shares	$ 2
Number of shares	134,554
Weighted average remaining life (years)	2 years 9 months 11 days
Exercisable number of shares	134,554
Exercise Price 2
Exercise prices | $ / shares	$ 2.2
Number of shares	43,636
Weighted average remaining life (years)	4 years 5 months 12 days
Exercisable number of shares	43,636
Exercise Price 3
Exercise prices | $ / shares	$ 3
Number of shares	198,139
Weighted average remaining life (years)	1 year 5 months 5 days
Exercisable number of shares	198,139
Exercise Price 4
Exercise prices | $ / shares	$ 8.25
Number of shares	39,468
Weighted average remaining life (years)	3 years 8 months 5 days
Exercisable number of shares	39,468
Exercise Price 5
Exercise prices | $ / shares	$ 10.2
Number of shares	14,668
Weighted average remaining life (years)	2 months 16 days
Exercisable number of shares	14,668
Exercise Price 6
Exercise prices | $ / shares	$ 10.5
Number of shares	335,005
Weighted average remaining life (years)	3 years 7 months 2 days
Exercisable number of shares	335,005
Exercise Price 7
Exercise prices | $ / shares	$ 13.65
Number of shares	99,826
Weighted average remaining life (years)	5 months 1 day
Exercisable number of shares	99,826
Exercise Price 8
Exercise prices | $ / shares	$ 15
Number of shares	556
Weighted average remaining life (years)	3 years 9 months
Exercisable number of shares	556
Exercise Price 9
Exercise prices | $ / shares	$ 18.75
Number of shares	695
Weighted average remaining life (years)	3 years 9 months
Exercisable number of shares	695
Exercise Price 10
Exercise prices | $ / shares	$ 21
Number of shares	23,334
Weighted average remaining life (years)	5 months 26 days
Exercisable number of shares	23,334
Exercise Price 11
Exercise prices | $ / shares	$ 22.5
Number of shares	219,754
Weighted average remaining life (years)	1 year 9 months 18 days
Exercisable number of shares	219,754
Exercise Price 12
Exercise prices | $ / shares	$ 31.5
Number of shares	29,830
Weighted average remaining life (years)	1 year 7 months 13 days
Exercisable number of shares	29,830
Exercise Price 13
Exercise prices | $ / shares	$ 37.5
Number of shares	1,733
Weighted average remaining life (years)	1 year 4 months 13 days
Exercisable number of shares	1,733
Exercise Price 14
Exercise prices | $ / shares	$ 45
Number of shares	1,334
Weighted average remaining life (years)	5 months 1 day
Exercisable number of shares	1,334

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NOTE PAYABLE (Details)	6 Months Ended
	Aug. 31, 2016 USD ($)
Note Payable
Note Payable, beginning of period	$ 1,800,000
Issuance of note	150,000
Additional debt discount upon Note amendments	75,000
Change in value	0
Note payable, end of period	2,025,000
Discount [Member]
Note Payable
Note Payable, beginning of period	(743,282)
Issuance of note	(74,931)
Additional debt discount upon Note amendments	(224,681)
Amortization of debt discount	652,879
Change in value	0
Note payable, end of period	(390,015)
Voluntary Exchange Feature [Member]
Note Payable
Note Payable, beginning of period	476,402
Issuance of note	32,496
Additional debt discount upon Note amendments	105,586
Amortization of debt discount	0
Change in value	(456,868)
Note payable, end of period	157,616
NotePayable Net [Member]
Note Payable
Note Payable, beginning of period	1,533,120
Issuance of note	107,565
Additional debt discount upon Note amendments	(44,095)
Amortization of debt discount	652,879
Change in value	(456,868)
Note payable, end of period	$ 1,792,601

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NOTE PAYABLE (Details Narrative) - USD ($)	3 Months Ended	6 Months Ended
	Aug. 31, 2016	Aug. 31, 2016
OID Note
Note interest expense	$ 248,113	$ 413,703
Promissory Note
Note interest expense	153,174	291,117
Amortization of debt discount	$ 125,174	$ 239,177

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FAIR VALUE MEASUREMENTS (Details)	6 Months Ended
	Aug. 31, 2016 USD ($)
Warrants [Member] | Series B Preferred Stock [Member]
Fair value of Level 3 derivative warrant liability, beginning of period	$ 46,110
Additions	0
Change in fair value:	(11,875)
Fair value at end of period	34,235
Additional Unit Private Placement Warrants
Fair value of Level 3 derivative warrant liability, beginning of period	0
Additions	38,834
Change in fair value:	0
Fair value at end of period	38,834
Promissory Note
Fair value of Level 3 derivative warrant liability, beginning of period	339,979
Additions	0
Change in fair value:	(265,438)
Fair value at end of period	74,541
OID Note
Fair value of Level 3 derivative warrant liability, beginning of period	136,423
Additions	138,082
Change in fair value:	(191,430)
Fair value at end of period	83,075
Derivative Warrant Liability
Fair value of Level 3 derivative warrant liability, beginning of period	234,461
Additions	54,059
Change in fair value:	(61,749)
Fair value at end of period	226,771
Put Exchange Feature Liability
Fair value of Level 3 derivative warrant liability, beginning of period	476,402
Additions	138,082
Change in fair value:	(456,858)
Fair value at end of period	157,616
Warrants [Member]
Fair value of Level 3 derivative warrant liability, beginning of period	188,351
Additions	15,225
Change in fair value:	(49,874)
Fair value at end of period	$ 153,702

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EQUIPMENT (Details) - USD ($)	6 Months Ended
	Aug. 31, 2016	Feb. 29, 2016
Equipment, gross	$ 666,448	$ 666,448
Accumulated depreciation and amortization	(216,928)	(169,396)
Equipment, net	$ 449,520	497,052
Computer Equipment [Member]
Estimated useful life	5 years
Equipment, gross	$ 76,075	76,075
Research Equipment [Member]
Estimated useful life	7 years
Equipment, gross	$ 590,373	$ 590,373

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EQUIPMENT (Details Narrative) - USD ($)	3 Months Ended		6 Months Ended
	Aug. 31, 2016	Aug. 31, 2015	Aug. 31, 2016	Aug. 31, 2015
Depreciation	$ 23,766	$ 23,812	$ 47,532	$ 48,657
Research and Development Expense [Member]
Depreciation	20,126	20,126	40,252	41,286
General and Administrative Expense [Member]
Depreciation	$ 3,640	$ 3,686	$ 7,280	$ 7,371

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NET LOSS PER SHARE (Details) - shares	6 Months Ended
	Aug. 31, 2016	Aug. 31, 2015
Anti-dilutive securities	4,293,552	1,699,880
Warrants [Member]
Anti-dilutive securities	1,142,532	847,932
Stock Options [Member]
Anti-dilutive securities	1,263,309	371,476
Preferred Stock [Member]
Anti-dilutive securities	1,888,552	480,472

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NET LOSS PER SHARE (Details Narrative) - shares	6 Months Ended
	Aug. 31, 2016	Aug. 31, 2015
Anti-dilutive securities	4,293,552	1,699,880
Warrants [Member]
Anti-dilutive securities	1,142,532	847,932
Stock Options [Member]
Anti-dilutive securities	1,263,309	371,476
Preferred Stock [Member]
Anti-dilutive securities	1,888,552	480,472