0001376474-14-000313.txt : 20140911 0001376474-14-000313.hdr.sgml : 20140911 20140911122213 ACCESSION NUMBER: 0001376474-14-000313 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20140731 FILED AS OF DATE: 20140911 DATE AS OF CHANGE: 20140911 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ARROGENE, INC CENTRAL INDEX KEY: 0001403792 STANDARD INDUSTRIAL CLASSIFICATION: BLANK CHECKS [6770] IRS NUMBER: 208057585 STATE OF INCORPORATION: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-52932 FILM NUMBER: 141097610 BUSINESS ADDRESS: STREET 1: 8560 W. SUNSET BLVD STREET 2: #424 CITY: LOS ANGELES STATE: CA ZIP: 90069 BUSINESS PHONE: 424-274-4791 MAIL ADDRESS: STREET 1: 8560 W. SUNSET BLVD STREET 2: #424 CITY: LOS ANGELES STATE: CA ZIP: 90069 FORMER COMPANY: FORMER CONFORMED NAME: SRKP 16 INC DATE OF NAME CHANGE: 20070620 10-Q 1 aro_10q.htm FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE

UNITED STATES SECURITIES AND

EXCHANGE COMMISSION

WASHINGTON, D.C.  20549


FORM 10-Q


QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934


For the Quarterly Period Ended July 31, 2014


Commission File Number: 000-52932




ARROGENE, INC.

(Exact name of registrant as Specified in its Charter)


Delaware

 

20-8057585

(State or Other Jurisdiction of
Incorporation or Organization)

 

(Internal Revenue Service
Employer Identification Number)

 

 

 

8560 W. Sunset Blvd., Suite 424
Los Angeles, CA

 

90069

(Address of Principal Executive Offices)

 

(Zip Code)


(424) 274-4791

(Issuer’s Telephone Number)


(Former name or former address, if changed since last report.)

2500 Broadway, Bldg. F, Suite F-125

Santa Monica, CA  90404



Securities registered under Section 12(b) of the Exchange Act:

None


Securities registered under Section 12(g) of the Exchange Act:

Common Stock, $.0001 par value per share


Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:                                 Yes x   No o


Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).                                 Yes x   No o


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company x

(Do not check if a smaller reporting company)

 

 


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):  Yes o   No x




 



APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS


Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court:  Yes o   No  o 


APPLICABLE ONLY TO CORPORATE USERS


As of September 10, 2014 the registrant had 21,375,860 shares of its common stock ($.0001 par value) outstanding.






 





TABLE OF CONTENTS


 

 

 

 

Page

 

 

PART I — FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Financial Statements

 

 

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of July 31, 2014 (unaudited) and October 31, 2013

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations for the three and nine months ended July 31, 2014 and July 31, 2013

 

5

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the nine months ended July 31, 2014 and July 31, 2013

 

6

 

 

 

 

 

 

 

Condensed Consolidated Statements of Stockholders’ Equity (Deficit) for the nine months ended July 31, 2014 and July 31, 2013

 

7

 

 

 

 

 

 

 

Notes to Unaudited Condensed Consolidated Financial Statements (unaudited)

 

8

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

17

 

 

 

 

 

 

 

Overview

 

16

 

 

 

 

 

 

 

Liquidity and Capital Resources

 

21

 

 

 

 

 

 

 

Results of Operations

 

23

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

25

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

25

 

 

 

 

 

 

 

PART II — OTHER INFORMATION

 

 

 

 

 

 

 

Item 1

 

Legal Proceedings

 

26

 

 

 

 

 

Item 1A

 

Risk Factors

 

26

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

26

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

26

 

 

 

 

 

Item 4.

 

[Removed and Reserved]

 

26

 

 

 

 

 

Item 5.

 

Other Information

 

26

 

 

 

 

 

Item 6.

 

Exhibits

 

26




3







PART 1.  FINANCIAL INFORMATION


Item 1.   Financial Statements

ARROGENE, INC.


CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF JULY 31, 2014 (UNAUDITED) AND OCTOBER 31, 2013


 

 

July 31,
2014

 

October 31,
2013

 

 

 

(Unaudited)

 

 

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

219,035

 

$

13,822

 

Prepaid expenses and deposit

 

20,142

 

13,709

 

Debt offering costs

 

92,968

 

 

Total current assets

 

332,145

 

27,531

 

 

 

 

 

 

 

Property and equipment, net

 

928

 

1,705

 

Total assets

 

$

333,073

 

$

29,236

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES:

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accrued compensation

 

$

220,690

 

$

85,280

 

Accrued research expenses payable to CSMC

 

258,091

 

229,003

 

Accounts payable and other accrued expenses

 

438,043

 

128,368

 

Bridge notes, less discount of $145,530

 

554,470

 

 

Related party payables

 

49,000

 

39,000

 

Convertible notes

 

10,000

 

10,000

 

Total current liabilities

 

1,530,294

 

491,651

 

 

 

 

 

 

 

Total liabilities

 

1,530,294

 

491,651

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY:

 

 

 

 

 

 

 

 

 

 

 

Preferred stock, $.0001 par value 10,000,000 shares authorized, none issued

 

 

 

Common stock, $.0001 par value; 100,000,000 shares authorized; 21,375,860 and 21,350,860 shares, respectively, issued and outstanding

 

2,138

 

2,135

 

Additional paid-in capital

 

4,820,625

 

4,287,289

 

Retained deficit

 

(6,019,984

)

(4,751,839

)

Total stockholders’ equity

 

(1,197,221)

 

(462,415

)

Total liabilities and stockholders’ equity

 

$

333,073

 

$

29,236

 


The accompanying notes are an integral part of these financial statements.



4







ARROGENE, INC.


  CONDENSED STATEMENTS OF OPERATIONS


FOR THE THREE AND NINE MONTHS ENDED JULY 31, 2014 AND 2013

(Unaudited)


 

Three Months Ended
July 31 ,

 

Nine Months Ended
July 31,

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

REVENUE

$               —

 

 

$                —

 

$

                 

 

 

$                     —

 

 

 

 

 

 

 

 

 

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

Licensing fees

 

 

 

 

Research and development

82,497

 

132,592

 

271,449

 

317,084

 

General and administrative

312,827

 

147,799

 

876,494

 

466,813

 

 

395,324

 

280,391

 

1,147,943

 

783,897

 

 

 

 

 

 

 

 

 

 

Loss from operations

(395,324

)

(280,391

)

(1,147,943

)

(783,897

)

 

 

 

 

 

 

 

 

 

OTHER EXPENSE:

 

 

 

 

 

 

 

 

Interest

(94,790

)

(278

)

(120,202

)

(561

)

 

(94,790

)

(278)

 

(120,202

)

(561

)

 

 

 

 

 

 

 

 

 

NET LOSS

$      (490,114

)

$       (280,669

)

$      (1,268,145

)

$          (784,458

)

 

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE SHARES OUTSTANDING:

 

 

 

 

 

 

 

 

Basic and diluted

21,375,860

 

21,350,860

 

21,370,457

 

21,289,358

 


LOSS PER SHARE:

Basic and diluted

$         (0.02)

 

$            (0.01)

 

$            (0.06)

 

$               (0.04)

 



The accompanying notes are an integral part of these financial statements.



5






ARROGENE, INC.


STATEMENTS OF CASH FLOWS


FOR THE NINE MONTHS ENDED JULY 31, 2014 AND 2013

(Unaudited)


 

 

2014

 

2013

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net loss

 

$

(1,268,145

)

$

(784,458

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

Amortization of debt placement costs and debt discount

 

96,683

 

 

Share-based payment expense

 

344,883

 

 

Contributed services

 

90,000

 

 

Depreciation expense

 

777

 

1,174

 

Increase in prepaid services and deposit

 

(6,433

)

(7,402)

 

Increase in other payables and accrued expenses

 

316,174

 

204,700

 

Net cash used in operating activities

 

(426,061

)

(585,986

)

 

 

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

   Capital expenditures

 

 

 

        Net cash provided by investing activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Net proceeds from sale of Units at $1.00 per Unit

 

24,956

 

227,645

 

Net proceeds from sale of Bridge Notes

 

606,318

 

 

Net cash provided by financing activities

 

631,274

 

227,645

 

 

 

 

 

 

 

Net increase (decrease) in cash

 

205,213

 

(358,341)

 

Cash and cash equivalents at the beginning of period

 

13,822

 

539,727

 

Cash and cash equivalents at the end of period

 

$

219,035

 

$

181,386

 




The accompanying notes are an integral part of these financial statements.











6






ARROGENE, INC.


CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)


FOR THE NINE MONTHS ENDED JULY 31, 2014

(UNAUDITED)


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred Stock

 

 

Common Stock

 

 

 

Retained

 

 

 

 

 

Shares

 

Amount

 

 

Shares

 

Amount

 

APIC

 

Deficit

 

Total

 

BALANCES, October 31, 2013

 

 

 

$                  —

 

 

21,350,860

 

 

$        2,135

 

 

4,287,289

 

 

$    (4,751,839

)

 

$           (462,415)

 

     Sale of Units at $1.00 per Unit

 

 

 

 

 

25,000

 

 

3

 

 

24,953

 

 

 

 

24,956

     Stock option compensation expense

 

 

 

 

 

 

 

 

 

176,883

 

 

 

 

176,883

     Bridge Note Warrants

 

 

 

 

 

 

 

 

 

205,800

 

 

 

 

205,800

     Placement Agent warrants

 

 

 

 

 

 

 

 

 

35,700

 

 

 

 

35,700

     Contributed services

 

 

 

 

 

 

 

 

 

90,000

 

 

 

 

90,000

     Net loss

 

 

 

 

 

 

 

 

 

 

 

(1,268,145

)

 

(1,268,145)

BALANCES, July 31, 2014

 

 

$

 

 

21,375,860

 

$

2,138

 

$

4,820,625

 

$

(6,019,984)

 

$

(1,197,221)


The accompanying notes are an integral part of these financial statements.



7







ARROGENE, INC.

(a development stage enterprise)


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)


JULY 31, 2014



(1)

BUSINESS AND OVERVIEW


Arrogene, Inc. (“Arrogene” f/k/a SRKP 16, Inc.), was incorporated under the laws of the State of Delaware on December 7, 2006.  On January 11, 2012, we consummated a reverse merger transaction (the “Reverse Merger”) with Arrogene Nanotechnology, Inc. (“ANI”), a company focused on oncology.  Hereafter, SRKP 16, Inc., Arrogene and ANI are collectively referred to as the “Company.”  Effective September 4, 2012, SRKP 16, Inc. officially changed its name to Arrogene, Inc.


The Company was founded to commercialize both new cancer treatments and imaging targeting technology as well as a proprietary molecular delivery platform that interferes with those targets in order to inhibit and finally eradicate tumor progression.  The Company is the exclusive licensee to certain intellectual property rights owned by Cedars Sinai Medical Center (“CSMC”) in Los Angeles, one of the nation’s premiere research institutions (the “License”).  CSMC has developed a family of related nano-biopolymers conjugates (collectively referred to here as Polycefin™), believed capable of acting as a drug delivery and targeting platform for cancer therapy and imaging.  


We plan on commercializing our products using a licensing and cost sharing strategy, seeking to enter into arrangements with major pharmaceutical companies with existing cancer therapy drugs facing issues relating to patent expirations, market expansion or contraction.   It is our goal to only commence later stage clinical trials with a commitment from a licensee to complete Phase II and III clinical trials, predicated on the successful outcome of each phase, and go to market, if approval is received.  Further, we are also exploring use of Polycefin as a potential medical diagnostic product(s) for oncology related applications.  We also have developed important related intellectual properties surrounding Laminin-411. Pre-clinical investigation is also on-going on methods of inhibiting Laminin-411 as a therapeutic agent, which could be conjugated in various forms of Polycefin in the future.


The majority, of our planned products will require approval or marketing clearance from the United States Food and Drug Administration (the “FDA”).  To date we have not filed any applications with the FDA, but we have begun the process of validating our Laboratory Development Test (“LDT”) with applicable regulators.





8






(2) GOING CONCERN, MANAGEMENT’S PLANS AND BASIS OF PRESENTATION


Going Concern and Management’s Plans


The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern. Since our inception in August 2007, we have not generated revenue, incurred operating losses, and as of July 31, 2014, had a retained deficit $6,019,984.   Further, as of July 31, 2014, our cash balance was $219,035 and we had a working capital deficit of $1,198,149. These conditions raise substantial doubt about our ability to continue as a going concern.


During the nine months ended July 31, 2014, we sold $700,000 in Bridge Notes (defined below) receiving net proceeds of $606,318 after payment of offering expenses. Management believes that existing cash on hand will be sufficient to fund the Company’s planned activities through at least the end of our fiscal year.  This assumes that we continue to defer payment of certain liabilities to our officers but allows for some payments to be made to CSMC for accrued research and development expenses.  Additionally, certain key professionals such as legal counsel have also had payments deferred and the proceeds from the Bridge Notes will allow for some partial payments of these deferred balances but not payment in full.  While these parties have continued to work with the Company despite this lack of payment, there is no assurance they will continue to do so, and the loss of a key management member, or the loss of CSMC as a research partner, could have a material adverse effect on the Company’s business prospects.  


To raise sufficient capital to fund the Company’s business plan, we plan on filing a registration statement with the Securities and Exchange Commission (the “SEC”) for an initial public offering of the Company’s securities. No assurance can be given that this effort will be successful or adequately capitalize the Company.


In the event that we cannot raise sufficient capital within the required timeframe, it will have a material adverse effect on the Company’s liquidity, financial condition and business prospects or force the Company out of business.  The accompanying financial statements do not include adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from an inability of the Company to continue as a going concern.


Basis of Presentation


The accompanying condensed consolidated financial statements include the accounts of Arrogene and its wholly owned subsidiary ANI.  All intercompany transactions have been eliminated in consolidation.  The condensed consolidated financial statements have been prepared without audit pursuant to the rules and regulations of the SEC.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations.  The condensed consolidated financial statements reflect all adjustments (consisting of only normal recurring entries), which in the opinion of management, are necessary to present fairly the financial position at July 31, 2014 and the results of operations and cash flows of the Company for the three and nine months ended July 31, 2014 and 2013.  Operating results for the nine months ended July 31, 2014, are not necessarily indicative of the results that may be expected for the year ended October 31, 2014.


The unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements and footnotes thereto for the year ended October 31, 2013 filed on April 2, 2014.  



9







Use of Estimates and Assumptions


The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported periods.  Actual results may differ from these estimates.


Adoption of New Accounting Pronouncement


In June 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-10, Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance (“ASU 2014-10”), which eliminates the financial reporting distinction between development stage entities and other reporting entities from U.S. GAAP. Additionally, ASU 2014-10 eliminates the separate requirements for development stage entities to (1) present inception-to-date information in the statements of income, cash flow and shareholders’ equity, (2) label the financial statements as those of a development stage entity, (3) disclose a description of the development stage activities in which the entity is engaged, and (4) disclose in the first year in which the entity is no longer a development stage entity that in prior years it had been in the development stage.  ASU 2014-10 is effective for fiscal years beginning after December 15, 2014 and interim periods therein, with early adoption permitted.  The Company has adopted ASU 2014-10 effective with the filing of this Quarterly Report on Form 10-Q. 


(3)

LICENSE AGREEMENT


On December 23, 2009, we entered into an agreement for the right to an exclusive license agreement with CSMC which provides us with the world-wide rights to U.S Patents No. 7,547,511 “Antisense Inhibition of Laminin-8 Expression to Inhibit Human Gliomas”, No. 7,935,677, “Polymalic Acid-Based Multifunctional Drug Delivery System”, No. 8,309,614 “Poly (Beta Malic Acid) with Pendant Leu-Leu-Leu Tripeptide for Effective Cytoplasmic Drug Delivery”, and  No. 8,562,964 along with various Japanese, EU and Asian related patents and applications, related technical information to develop, market and sell human therapeutic and diagnostic products, including new pharmaceutical products and/or non-prescriptive products using the patented technology (the “CSMC Agreement”).  The CSMC Agreement has been amended five times; December 8, 2010, June 30, 2011, August 31, 2011, October 28, 2011, and December 30, 2013. The CSMC Agreement also provides us with the rights to several other related, filed, but yet unissued patents.  The CSMC Agreement requires royalty payments equal to 3.5% of the gross sales price and other forms of consideration (such as milestone and sublicense payments), as defined in the agreement, on all products using the licensed technology.  The CSMC Agreement expires on a country-by-country basis on the date that the last patent covered under the agreement expires (currently 2032).


The CSMC Agreement, as amended, requires us to achieve certain other milestones in order to maintain the agreement.  These include the following:


·

Begin development or enter into a joint venture, licensing or sub-licensing agreement, or other business arrangement with a third party not an affiliate of the Company to cause development of at least one product consistent with sound business practices by December 31, 2012;

·

Expend at least $500,000 in the aggregate toward the development or promotion of the sale of products based on the licensed patent rights or technical information commencing from the effective date of the agreement and continuing through and including December 31, 2012, and at least $1,000,000 annually thereafter, for further development or promotion of the sale of products through and including December 31, 2013;

·

Provide to CSMC at least $150,000 (in aggregate) within at least a four year period to fund research and development of the licensed patent rights and technical information;

·

On or before December 31, 2014, the Company shall have commenced a clinical trial or trials in connection with at least one intended commercial use;


We believe that we have achieved the required milestones for the contractual periods ended December 31, 2013.  It is management’s belief that administrative expenses incurred in support of the Company’s business activities meet the



10






definition of “development and promotion” of the licensed technology. We can, however, provide no assurance that CSMC has concurred with our position and that we will be able to meet any or all of these milestones in the future.  In the event that we fail to meet one or more of the milestones required by the CSMC Agreement, there is no assurance that CSMC will agree to amend or waive the requirements and we could lose the License.  Additionally, as discussed further in Note 9, we have entered into a research and development agreement with CSMC that satisfies the milestone requirement described above regarding funded research at CSMC.  However, in order to extend the Company’s cash on hand, we have been deferring payment to CSMC of our obligations under the agreement.  During the second quarter of 2014 we resumed making payments to CSMC but our outstanding balance with them remains delinquent.  To date, CSMC has continued to do work under the agreement despite our payment delays but no assurance can be provided that CSMC will continue to do so.  As of July 31, 2014, we had an outstanding liability to CSMC of $258,091 which represents amounts owed for services provided by CSMC.


Further, in the event the Company issues or sells shares of common stock, the CSMC Agreement requires that the Company issue to CSMC additional shares of common stock for no additional consideration so as to assure CSMC will own 5% of the total issued and outstanding shares of the Company until December 31, 2015.  


(4)  BRIDGE NOTES


During the nine months ended July 31, 2014, we sold an aggregate of $700,000 in bridge notes (the “Bridge Notes”), receiving net proceeds of $606,318 after payment of offering costs.  The Bridge Notes are due and payable one year after the close of the offering (the “Maturity Date”), bear interest at 10% per annum, and are convertible into shares of our common stock at a conversion price of either (i) 50% of the price per share of our common stock as sold through a qualified initial public offering as defined in the terms of the Bridge Notes, or (ii) in the event a Qualified IPO has not taken place prior to the Maturity Date but there has otherwise developed a public trading market for the Company’s common stock, then the conversion price shall be 50% of the 30 day Volume Weighted Average Price per share as quoted on the over-the-counter market, or (iii) in the event a public trading market has not been established for our common stock prior to the Maturity Date, then the conversion price shall be $1.00 per share.   Accrued and unpaid interest on the Bridge Notes will be payable in shares of common stock at the conversion price on the earlier of (i) the date of conversion of the Bridge Notes or (ii) the Maturity Date. Further, for every $1.00 of Bridge Note principal that an investor elects to convert into shares of common stock, the investor will receive one warrant (the “Bridge Note Warrant”).  Each warrant shall be exercisable to purchase shares of common stock at a price equal to the conversion price of the Bridge Notes and shall have a life of 5 years from the close of the offering.  If the investor elects not to convert their Bridge Notes prior to the Maturity Date, then the note holder will receive one warrant for every $2.00 in Bridge Note principal.


We evaluated the conversion feature of the Bridge Notes within the context of ASC 815 and determined that it did not meet the definition of an embedded derivative due to the Company having no active market for its common stock.   We further evaluated the conversion feature of the Bridge Notes within the context of ASC 470-20 and determined that the Bridge Notes did not contain a beneficial conversion feature as the default conversion price of $1.00 per share is greater than the current fair value of the Company’s common stock based on the most recent price paid for the Units.


We evaluated the Bridge Note Warrants using the guidelines established by ASC 815 and determined that it did not meet the definition of a derivative due to the Company having no active market for its common stock.  We valued these warrants at $205,800 using the Black-Scholes option pricing model which we recorded as debt discount with a corresponding increase to additional paid in capital using the following assumptions: expected life 5 years, risk free interest rate 1.69% and annualized volatility 78.9%. We are amortizing the debt discount over the life of the Bridge Notes.  For the three and nine months ended July 31, 2014, we amortized $49,541 and $60,270, respectively, of debt discount which is included in interest expense on the accompanying condensed consolidated financial statements.


We are also obligated to issue to the placement agents warrants to acquire shares of common stock equal to 10% of the securities underlying the Bridge Notes and Bridge Note Warrants (the “PA Bridge Note Warrants”).  The PA Bridge Note Warrants have a life of 5 years and are exercisable at the conversion price of the Bridge Notes and the exercise price of the Bridge Note Warrants, respectively.  We evaluated the PA Bridge Note Warrants using the guidelines established by ASC 815 and determined that they did not meet the definition of a derivative due to the Company having no active trading market for its common stock.  We valued the PA Bridge Note Warrants at $35,700 using the Black-Scholes pricing model using the



11






following assumptions: expected life 5 years, risk free interest rate 1.69% and annualized volatility 78.9%.  We recorded the PA Bridge Note Warrants as a debt offering cost on the accompanying condensed consolidated balance sheet.  We are amortizing the PA Bridge Note Warrants over the life of the Bridge Notes.  For the three and nine months ended July 31, 2014, we amortized $8,292 and $10,825, respectively, of PA Bridge Note Warrants which is included in interest expense on the accompanying condensed consolidated financial statements.    


The effective rate of the Bridge Notes after taking into account the Bridge Note Warrants and PA Bridge Note Warrants is 44.5%.

      

(5)

CONVERTIBLE NOTES


Commencing October 2010 through April 2011, we sold in private transactions an aggregate of $726,550 of Convertible Notes.  The Convertible Notes were initially convertible into shares of our common stock at $.30 per share (the “Conversion Price”). The Convertible Notes do not bear interest and were originally payable on October 19, 2011. The Convertible Notes are secured by a first lien security interest on all of our tangible and intangible assets.  We did not repay the Convertible Notes by the maturity date and the notes were therefore technically in default.  During the year ended October 31, 2012, agreed to reduce the conversion price of the Convertible Notes to $.15 per share. $10,000 of Convertible Notes remains outstanding as of July 31, 2014.  On an as converted basis, as of July 31, 2014, the estimated value of the Convertible Notes exceeds the principal balance by $27,333.  


 (6)  STOCKHOLDERS’ EQUITY


Common Stock


On August 29, 2013, we entered into an agreement for investor relation services that requires us to issue up to 400,000 shares of common stock as a component of the consideration for the services.  The shares are issuable in 100,000 increments for each quarter of service rendered.  We valued these shares at $224,000 using the Black-Scholes option-pricing model and are recognizing expense over the 12 months the services are being rendered.  For the three months and nine months ended July 31, 2014, we recorded $56,000 and $168,000, respectively, of stock compensation expense which is included in general and administrative expense in the accompanying condensed consolidated statements of operations with a corresponding increase in accounts payable and other accrued expenses on the accompanying condensed consolidated balance sheet.


Units


During the nine months ended July 31, 2014 and 2013, we sold 25,000 and 260,000 units (the “Units”), respectively, for $1.00 per Unit, receiving net proceeds of $24,956 and $227,645, respectively.  Each Unit consists of  (i) one share of common stock, and (ii) two warrants with one warrant exercisable at $1.50 per share and one warrant exercisable at $2.00 per share.  (the “Unit Warrants”).  The Unit Warrants expire five years from the date of issuance.


Warrants


In connection with the sale of the Units during nine months ended July 31, 2013, the placement agents earned warrants to acquire 78,000 shares of common stock consisting of 26,000 warrants exercisable at $1.00 per share, 26,000 warrants exercisable at $1.50 per share and 26,000 warrants exercisable at $2.00 per share.  Each warrant expires five years from the date of issuance.   We valued these warrants at $17,160 using the Black Scholes option-pricing model.   We recorded the warrants as a reduction to the net proceeds from the sale of the Units with a corresponding increase to additional paid in capital.   The placement agents voluntarily agreed to forgo the earning of warrants in connection with the Unit sale that took place during the nine months ended July 31, 2014.  


As of July 31, 2014, we had 6,358,358 warrants outstanding with weighted average remaining lives of 31 months and a weighted average exercise price of $1.44.




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Stock Options


On November 1, 2013, we issued a non-statutory stock option to acquire up to 200,000 shares of common stock with an exercise price of $1.00 per share to a consultant for providing certain services as defined in the consulting agreement.  The option expires 7 years from the date of grant. The options vest as follows: (i) as to 100,000 options, vesting shall occur 1/3 on each one year anniversary date of the consulting agreement  (“Vesting 1”) and (ii) as to 100,000 options, vesting shall occur upon the closing of certain transactions as defined in the agreement at a rate of 2 stock options for each $100 received by the Company in a deal or transaction resulting from the efforts of the consultant (“Vesting 2”).  We valued this option at $58,400 using the Black Scholes option-pricing model using the following assumptions: option life 5 years, risk free interest rate 1.37%, and annualized volatility of 78.9% based on a peer group of publicly traded common stocks.  Stock options issued to non-employees are remeasured at each reporting date and the cumulative expense is adjusted based on the remeasured grant. We are recognizing expense for this option as the underlying services are provided, ratably over 36 months for Vesting 1, and upon the occurrence of a vesting event for Vesting 2.  For the three and nine months ended July 31, 2014, we recognized $2,433 and $7,300, respectively, of expense for this option which is included in general and administrative expense on the accompanying condensed consolidated statements of operations.


In April 2014, we issued stock options to acquire 1,200,000 shares of common stock to certain employees and consultants with an exercise price of $1.00 per share.  The options expire 7 years from the date of grant. The options vest under terms ranging from immediately to 1/3 on each anniversary date from the date of grant.  We valued these options at $352,800 using the Black Scholes option-pricing model using the following assumptions:  option life 5 years, risk free interest rate 1.65%, and annualized volatility of 78.9% based on a peer group of publicly traded stocks.  We are recognizing expense for these options over the respective vesting periods.  For the three and nine months ended July 31, 2014, we recognized $56,066 and $169,583, respectively, of expense for these options which is included in general and administrative expense on the accompanying condensed consolidated statements of operations.


(7)  EARNINGS (LOSS) PER SHARE


Earnings (loss) per share are calculated in accordance with the provisions of ASC 260 “Earnings Per Share” (“ASC 260”). Under ASC 260, basic earnings (loss) per share are computed by dividing the Company’s income (loss) by the weighted average number of common shares outstanding. The impact of any potentially dilutive securities is excluded. Diluted earnings per share are computed by dividing the Company’s income (loss) attributable to common shareholders by the weighted average number of common shares and dilutive potential common shares outstanding during the period. In calculating diluted earnings per share, we utilize the “treasury stock method” for all stock options and warrants and the “if converted method” for all other convertible securities. For all periods presented, the basic and diluted loss per share is the same as the impact of potential dilutive common shares is anti-dilutive.


Warrants and convertible securities excluded from the calculation of diluted loss per share are as follows:


 

 

Three and Nine Months Ended
July 31,

 

 

 

 

2014

 

2013

 

 

 

 

 

 

 

 

 

Warrants

 

6,358,358

 

5,422,858

 

 

Stock options

 

1,400,000

 

 

 

Convertible debt*

 

766,667

 

66,667

 

 


*Assumes Bridge Note conversion price of $1.00 per share see Note 4 for conversion price calculations.




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(8)  SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION


Cash paid during the period for:

 

 

Nine Months Ended July 31,

 

 

 

2014

 

2013

 

Interest

 

$

435

 

$

561

 

Income taxes

 

 

 




(9)  COMMITMENTS, CONTINGENCIES, AND RELATED PARTY TRANSACTIONS


Related Party Transactions


Consulting Agreements


We have an agreement with an entity controlled by our chief executive officer for his part-time personal services as CEO. The agreement is referred to as the Synthetica Agreement.  In December 2013, the Synthetica Agreement was amended so that the compensation paid for the services of our CEO is capped at $1 per annum effective January 1, 2014.  However, our chief executive may request that his compensation revert back to the original terms of the Synthetica Agreement with 30 days written notice.  Under the original terms, there was no monthly retainer or minimum billing amount but the maximum that could be charged to us in any given month was $15,000. During the three and nine months ended July 31, 2014, we were billed $0 and $20,000, respectively, under the Synthetica Agreement.  During the three and nine months ended July 31, 2013, we were billed $33,900 and $117,600, respectively, under the Synthetica Agreement. At July 31, 2014 and October 31 2013, $67,600 and $47,600, respectively, is included in accrued compensation on the accompanying condensed consolidated balance sheets resulting from a voluntary deferral of fees due under the agreement, agreed to by Synthetica to allow the Company to optimize its cash flow.


In September 2010, we entered into a business and financial consulting agreement with an entity controlled by our Board chairman for operational consulting services.   The agreement was for an initial term of 12 months with an automatic 12 month renewal period unless terminated by either party upon 30 days written notice.  The agreement is now on a month-to-month basis. There is no monthly retainer or minimum billing amount but the maximum that can be billed to us in a given month cannot exceed $10,000.   Effective January 2014, the fees for this agreement were capped at $1.00 per year. During the three and nine months ended July 31, 2014, we were charged $0 and $10,000, respectively, under this agreement.  During the three and nine months ended July 31, 2013, we were charged $20,100 and $75,100, respectively, under this agreement which is included in general and administrative expense on the accompanying condensed consolidated statements of operations.  At July 31, 2014 and October 31, 2013, $49,000 and $39,000, respectively, is included in related party payables on the accompanying condensed consolidated balance sheets resulting from a voluntary deferral of fees due under the agreement, agreed to by our Board chairman, to allow the Company to optimize its cash flow.


Contributed Services


As discussed above, effective January 1, 2014, the Company’s chief executive officer and Board chairman began to provide their services for $1 per year.  The fair value of those services has been recorded as an expense in the accompanying condensed consolidated financial statements based on the estimated fair value for such services, with a corresponding credit to additional paid in capital. The fair value of the services was estimated based on the terms of the respective agreements prior to January 1, 2014. Contributed services were $45,000 and $90,000, respectively, for the three and nine months ended July 31, 2014.




14






CSMC


Certain founders and directors of the Company are employees of CSMC.  These individuals are also the inventors of the Polycefin technology and are primarily responsible for its development.  As described further in Note 3 above, we have an exclusive license agreement with CSMC for this technology.  


The License requires royalty payments equal to 3.5% of the gross sales price and other forms of consideration (such as milestone and sublicense payments), as defined in the agreement, on all products using the licensed technology.   The License also requires us to achieve certain milestones as described in Note 3.


In December 2012, we entered into an agreement with CSMC to support certain activities within the laboratory necessary to prepare compounds.  For the three and nine months ended July 31, 2014, we were charged $38,625 and $142,087, respectively, by CSMC under this agreement which is included in research and development costs on the accompanying condensed consolidated statements of operations. For the three and nine months ended July 31, 2013, we were charged $87,000 and $195,884, respectively, by CSMC under this agreement.  As of July 31, 2014, $258,091 is reflected as payable on the accompanying condensed consolidated balance sheets.  Work under the agreement concluded during the three months ended July 31, 2014.  As discussed in Note 3, we have deferred payments under this agreement in order to extend our cash balance.  


Commitments and Contingencies


Litigation


From time to time, we may become party to litigation and other claims in the ordinary course of business.  To the extent that such claims and litigation arise, management would provide for them if upon the advice of counsel, losses are determined to be both probable and estimable.  We are currently not party to any litigation.


Office Lease


We have a lease agreement for office space with a third party (the “Office Lease”) that expires on May 31, 2015.  For the three month periods ended July 31, 2014 and 2013, we recorded $9,434 and $10,950, respectively, of rent expense under the Office Lease which is included in general and administrative expense on the accompanying condensed consolidated statements of operations.  For the nine months ended July 31, 2014 and 2013, we recorded $31,880 and $30,392, respectively, of rent expense under the Office Lease.


Commitments under non-cancelable operating leases are as follows as of July 31, 2014:


 

 

Year Ended October 31,

2014

 

$              8,100

2015

 

10,800

 

 

$            18,900


(10)  SUBSEQUENT EVENTS


In August 2014, Dr. Randolphe Swenson, Jr. was elected to serve as a member of the Board of Directors. In consideration of his agreement to serve as a member of the Board of Directors, the Company granted to Dr. Swenson non-qualified options to purchase for five (5) years 50,000 shares of common stock at an exercise price of $1.00 per share, which options are deemed immediately vested.


The Company also entered into a Consultation and Securities Compensation Agreement between the Company, on the one hand and Dr. Swenson, pursuant to which Dr. Swenson was engaged to serve as a consultant to the Company for a term of six (6) months, to oversee and supervise an executive search to recruit a new CEO under the direction and supervision of the Board of Directors.  



15







Pursuant to the Consultation and Securities Compensation Agreement and in consideration of his services as a consultant to conduct a CEO recruitment search, the Company (i) granted to Dr. Swenson non-qualified stock options exercisable for five (5) years to purchase an aggregate of 25,000 shares of common stock at an exercise price of $1.00, and (ii) conditioned on the Company successfully engaging a new CEO on terms acceptable to the Board of Directors during the term of Mr. Swenson’s consultancy, in its sole discretion, agreed to grant to Mr. Swenson additional non-qualified stock options exercisable for five (5) years to purchase an additional 35,000 shares of common stock at an exercise price of $1.00 per share.  All of such options will be fully vested and exercisable upon grant.



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ITEM 2.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

OR PLAN OF OPERATION


FORWARD LOOKING STATEMENTS


Our disclosure and analysis in this Quarterly Report on Form 10-Q (this “Form 10-Q”), in other reports that we file with the Securities and Exchange Commission, in our press releases and in public statements of our officers contain forward-looking statements.  Forward-looking statements are based on the current expectations of, or forecasts of future events made by, our management.  Forward-looking statements may turn out to be wrong.  They can be affected by inaccurate assumptions or by known or unknown risks and uncertainties.  Many factors mentioned in this Form 10-Q, for example governmental regulation, general economic and capital market conditions in the United States, and competition in our industry, will be important in determining future results.  No forward-looking statement can be guaranteed, and actual results may vary materially from those anticipated in any forward-looking statement.


You can identify forward-looking statements by the fact that they do not relate strictly to historical or current events.  They use words such as “anticipate,” “estimate,” “expect” “will,” “may,” “intent,” “plan,” “believe,” and similar expressions in connection with discussion of future operating or financial performance.  These include statements relating to future actions, prospective products or product approvals, future performance or results of anticipated products, expenses, financial results or contingencies.


Although we believe that our plans, intentions and expectations reflected in these forward-looking statements are reasonable, we may not achieve these plans or expectations.  Forward-looking statements in this Form 10-Q will be affected by several factors, including the following: the ability of the Company to raise sufficient capital to finance its planned activities including completing development of its Polycefin technology; the ability of the Company to meet its obligations under the License including meeting the required milestones and making required payments; receiving the necessary marketing clearance approvals from the United States Food and Drug Administration; successful clinical trials of the Company’s planned products including the ability to enroll the studies in a timely manner, patient compliance with the study protocol, and a sufficient number of patients completing the studies; the ability of the Company to commercialize its planned products; the ability of the Company to successfully manufacture its products in commercial quantities (through contract manufacturers); market acceptance of the Company’s planned products, the Company’s ability to successfully develop its licensed compounds, alone or in cooperation with others, into commercial products, the ability of the Company to successfully prosecute and protect its intellectual property, the Company’s limited operating history; the Company’s lack of profitability; and the Company’s ability to hire, manage and retain qualified personnel.  Actual results, performance or achievements could differ materially from those contemplated, expressed or implied by the forward-looking statements contained in this Form 10-Q.  In particular, this Form 10-Q sets forth important factors that could cause actual results to differ materially from our forward-looking statements.  These and other factors, including general economic factors, business strategies, the state of capital markets, regulatory conditions, and other factors not currently known to us, may be significant, now or in the future, and the factors set forth in this Form 10-Q may affect us to a greater extent than indicated.  All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements set forth in this Form 10-Q and in other documents that we file from time to time with the Securities and Exchange Commission including our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K to be filed in 2014.  Except as required by law, we do not undertake any obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise.




17






MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


This management’s discussion and analysis of financial condition and results of operations should be read in conjunction with the Company’s financial statements and the related notes, and the other financial information included in this Quarterly Report.


Overview


The Company was founded to commercialize both a new cancer treatment and imaging targeting technology as well as a proprietary molecular delivery platform that interferes with those targets in order to inhibit and finally eradicate tumor progression.  The Company is the exclusive licensee to certain intellectual property rights owned or co-owned by CSMC in Los Angeles, one of the nation’s premiere research institutions (the “License”).  CSMC has developed a family of related nano-biopolymers conjugates (collectively referred to here as Polycefin™), believed capable of acting as a drug delivery and targeting platform for cancer therapy and imaging.  The founders of Arrogene were principally involved in all research and development behind all critical discoveries and science at CSMC related to Polycefin and authored all the patents underlying the technologies behind Polycefin (the “Technology”) and include internationally acclaimed brain surgeon and scientist Dr. Keith Black, Dr. Julia Ljubimova, Dr. Eggehard Holler, Dr. Alex Ljubimov.  Work on Polycefin involved seven years of development and over $7,500,000 of grants funded mainly from the NIH.  


We also have developed important related intellectual properties surrounding Laminin-411. Laminins are the major components of basement membranes that are orderly sheet-like structures secreted by cells to separate several cell types from one another. Laminins play key roles in cell adhesion, polarity, movement, and differentiation. They form a family of related but distinct proteins. Like all laminins, Laminin-411 is comprised of three chains, a4, b1, and g1 (hence the name). In normal tissues, Laminin-411 expression is almost negligible in blood vessels. At the same time, vessels in some organs, like breast and brain, predominantly contain another, closely related, isoform, Laminin-421 (a4b2g1). Our scientists were the first to demonstrate that during tumor development, Laminin-411 (formerly, laminin-8) is produced in excessive amounts, while the normal Laminin-421 gets suppressed, causing a shift from “normal” to “tumor” laminin (Ljubimova et al., Cancer Res, 2001; Fujita et al., Breast Cancer Res, 2005). Laminin-411 has been implicated in cell migration and increased production of some cancer stem cell proteins. In general, abnormal interactions between tumor cells and laminins are among major traits of various cancers. Taken together, the data presented above suggest that by blocking the production of Laminin-411, one may expect to slow down or arrest tumor growth and inhibit cancer cell spread, as well as possibly suppress cancer stem cells thereby diminishing chances of disease relapse.


Using clinical material from 65 patients with brain gliomas, we found an inverse correlation between Laminin-411 overproduction, patients’ survival and time of recurrent development (Ljubimova et al., Cancer, 2004).   In 2007, our founders, in their capacity as researchers at CSMC, started a clinical trial to examine a possible clinicopathological use of Laminin-411 as a diagnostic tool for advanced brain glioma and as a prognostic indicator that could predict disease recurrence. The study of the expression of Laminin-411 and Laminin-421 was performed this time with the paraffin-embedded archival material routinely used in all pathological laboratories. Currently, this trial is nearing completion, with more than 300 cases of human tumors analyzed. The data show that this protein is overproduced in more than (85%) of grade IV gliomas. Its production is correlated with poor patient survival, as compared to patients whose tumors predominantly contain a normal isoform, Laminin-421. This data is currently being prepared for publication.  As a result, we are in the process of commercializing this new test as a Laboratory Developed Test and we are currently nearing the end of a negotiation with a partner for delivery of this test into clinical practice. With this potential partner, we have conducted protocol development and have furthered our clinical trial to measure the range of application for Laminin 411. Conclusions of that clinical trial indicate that Laminin 411 is over-expressed in many tumors beyond the initial indications and we are working on incorporating those findings in both published results and the market strategy for the LDT.



18







Beyond diagnostic and prognostic applications, we believe that our discovery of Lamin 411’s role in tumor growth can be exploited together with our Polycefin technology towards novel tumor inhibiting treatments. We are currently working on the technology allowing us to combine antisense oligonucleotides against two Laminin-411 chains on one nanopolymer (Polycefin) molecule and target them specifically to tumor cells. As a result, we were able to stop brain glioma and HER2/neu breast cancer growth in mice without harming other unaffected organs (Ding et al., Proc Natl AScad Sci USA, 2010, J Control Release, 2013). This appears to be a superior approach to using antibody blocking because, due to being buried in basement membranes, laminins may not be accessible enough to the antibodies in real-life tumors to obtain a therapeutic effect. We plan to use our nanopolymer Polycefin to block Laminin-411 production in primary and metastatic brain and breast tumors. Importantly, due to special chemical groups on the polymer backbone, it can deliver the antisense drugs to the tumor cells specifically, largely avoiding non-cancer cells. Our published results to date show the feasibility of this approach.


Antisense drugs and other therapeutics like siRNA have significant problems in delivery to tumor cells. Besides rapid clearance from blood, they cannot specifically get inside tumor cells causing potential problems for the healthy cells and induce immunotoxicity. Our nanopolymer platform has special antibodies that guide the drug complex to the tumor cells. Once in these cells, another special module on the delivery vehicle helps release the drugs inside the cell, where they get detached from the polymer by natural mechanisms and exert their blocking function. As a result, the drug has much lower clearance when injected into the bloodstream, and the possibility of it getting into normal cells is minimized. We have shown that such a nanopolymeric delivery system targeting Laminin-411 can efficiently suppress growth of brain cancers by reducing tumor vasculature and causing tumor cell death (Fujita et al., Angiogenesis, 2006; Ljubimova et al., Front Biosci, 2006; Ding et al., Proc Natl Acad Sci USA, 2010, J Drug Target 2013, J Control Release 2013). Therefore, we believe that this delivery system is currently most promising for specific treatment of tumors targeting their blood supply.  However at this time, these findings are based on pre-clinical research and there can be no assurances that they can be successfully translated into successful therapies in the future.


In vivo studies show evidence that when attached to the platform, drugs for cancer therapy could have increased treatment efficacy and reduced side effects.  In vivo and in vitro studies, many of which have been published, have shown that tumor size was reduced and animal survival increased using the targeting platform in conjunction with therapeutics as compared to using those same therapeutics in conventional therapies. 1 2


We believe that Polycefin has the ability to harbor various drugs at the same time making it a potential master delivery vehicle that can be customized for a particular tumor and even for an individual patient.3 Additionally, in vivo treatment has shown effectiveness against more than one, widely different, type of cancers: HER2/neu positive breast cancer, EGFR positive Triple Negative Breast Cancer (TNBC) and Glioblastoma, suggesting that Polycefin’s application might be flexible and appropriate to a wide range of cancer types and therapeutics (Inoue et al, Cancer Research 2011, Inoue et al, PlosOne 2012, Ding et al, J Control Release 2013).


We also have presented evidence that the PMLA nanoplatform was well tolerated in vivo and in vitro in extreme dosages without toxicity and immune reactions. PMLA and the nanoconjugates purified free of endotoxin activated neither complement nor macrophages. They also did not show appreciable toxicity for cultured liver HepG2 and kidney LLC-PK1 human cells even at in vitro dosages as high as 1 mg/ml. Analysis of blood biochemistry, metabolic assays, CBC panel, and immunotoxicity did not reveal any abnormalities compatible with toxicity in vitro or in vivo even after 12 repeated systemic nanodrug injections. In particular, hemolysis was not observed, and only minimum complement activation was noticed at very high dosage of nanoconjugates (1.0 mg/kg), which is 37 times higher than

1 Inoue  S., Ding H., Portilla-Arias J., et al  (2011) Polymalic Acid-Based Nanobiopolymer Provedes Efficient Systemic Breast Cancer Treatment by Inhibiting both Her2/neu Receptor Snthetsis and Activity. Cancer Res; 71(4) February 15, 2011

2 Inoue S, Patil R, Portilla-Arias J, Ding H, Konda B, et al. (2012) Nanobiopolymer for Direct Targeting and Inhibition of EGFR Expression in Triple Negative

Breast Cancer. PLoS ONE 7(2): e31070. doi:10.1371/journal.pone.0031070

3 Ding H., Portilla-Arias J., Patil R., et al. (2011).

H. Ding, J. Portilla-Arias, R. Patil, K.L. Black, LJubimova JY, E. Holler. (2013) The optimization of polymalic acid peptide copolymers for endosomolytic drug delivery. Biomaterials 32 (2011) 5269-5278

J Control Release 2013



19






nanodrug therapeutic concentration. The degree of activation was far less than that observed with FDA-approved Doxil. The nanoconjugates did not induce significant platelet aggregation, and did not affect coagulation pathways. Special tests excluded the presence of pyrogenic material in the nanoconjugate preparations.

Under conditions of advanced cancer, continuous treatment could be necessary until the tumor regresses. In clinics, however, in many cases the chemotherapy must be discontinued due to life threatening side effects such as liver, kidney, cardio- or neurotoxicity. The significant side effects, in particular thrombocytopenia and leukopenia, induction of thrombosis and suppression of immune system (immunotoxicity) are the major indications for treatment interruption. This situation with prolonged treatment was tested by conducting 12 consecutive nanodrug systemic administrations against growing TNBC over the period of 8 weeks. As a result, the tumor growth was significantly inhibited, and the treatment was well tolerated without noticeable abnormalities in blood cell counts, multiple biochemistry parameters, and with no immunostimulatory or immunosuppressive response.  Thus, PMLA-based nanodrugs of the PolycefinTM family passed multiple toxicity and efficacy tests in vitro and in vivo on preclinical level and may prove to be efficacious for the treatment of cancer patients in the future (Ljubimova JY, et, al (2013). J Drug Target, 21:956-967).

As survival rates for primary cancers improve, increasingly significant percentiles of the patient population are developing metastatic forms of these cancers, which are often found late stage and have few or no treatment options.  Arrogene estimates that 30% of breast and 75% of lung primary cancers metastasize to the brain, based on published studies.  Polycefin’s ability to pass through the tumor’s Brain Tumor Barrier (BTB), which is the part of brain blood barrier (BBB) could make it ideally suited for use as a diagnostic and/or therapeutic to treat such metastatic cancers, and these might present early market opportunities.  


It is estimated that approximately 207,000 new cases of breast cancer are diagnosed every year in the U.S. Approximately 204,000 cases of lung cancer are diagnosed annually. Additionally there are between 120,000 and 140,000 annual cases of secondary brain cancers, according to various published sources. Based on these patient populations, and certain price and usage assumptions, we have estimated that the total market potential for Polycefin based therapeutics products could exceed $30 billion annually.


Our first therapeutic drug candidate is AG 101 which will target certain brain cancer.  We need to commission final Phase 0 toxicology studies at an external laboratory for AG101 drug candidate preparation of an IND for submission to the FDA to receive clearance to begin human clinical trial work. We then plan to commence a Phase I clinical trial.  We have estimated the cost related to an IND submission and a Phase 1 clinical trial to be $4,000,000 - $5,000,000 which will require additional funding.


We plan to bring our products to market using a licensing and cost sharing strategy.  We will seek to joint venture with pharmaceutical companies with existing cancer therapy drugs or active diagnostic imaging agents.  


Over the following twelve months we are targeting a number of objectives and milestones that we plan to pursue utilizing cash on hand and proceeds from capital raising efforts. We may or may not be successful in consummating such capital raises and this remains a significant risk to our ability to meet our objectives. These objectives and milestones are the commissioning of final Phase 0 toxicology studies for our first Polycefin drug candidate; prepare an IND for submission to the FDA to receive clearance to begin human clinical trial work; and begin human clinical studies once such IND clearance can be obtained. There are various factors that can influence the timing of starting and completing these objectives and milestones as well as the total costs.  Such factors include, but are not limited to, the pace and success of scientific developments, the availability of financial and human resources, competing demands of our scientific team, and changes in regulatory requirements. Due to the inherent uncertainty and variability related to these activities, we cannot accurately predict start dates, completion dates and total costs.  We will also need to raise additional capital in order to complete our planned activities.


In addition, we are expanding our production of the key ingredients for the production of Polycefin, according to a proprietary production and purification process, in preparation to support both pre-clinical and clinical phases of



20






upcoming clinical trials. We are also taking steps to negotiate outside supplies agreements to create industrial partnerships relating to the production under license of these compounds.


General Factors


Our profitability will be affected by costs associated with our efforts to develop Polycefin into a commercial product including regulatory approvals, the expansion of our general and administrative capabilities, and the expenses that we incur as a public reporting company.  These costs include costs associated with, among other things, financial reporting, information technology, complying with federal securities laws (including compliance with the Sarbanes-Oxley Act of 2002), tax administration and human resources related functions.  


LIQUIDITY AND CAPITAL RESOURCES


As of July 31, 2014, the Company’s cash balance was  $219,035 compared to $13,822 at October 31, 2013.


The following is a summary of the Company's cash flows provided by (used in) operating, investing, and financing activities for the nine months ended July 31, 2014 and 2013.

      

                   

 


Nine Mos.

Ended

July 31, 2014

Nine Mos.

Ended

July 31, 2013

Net Cash Used in Operating Activities

 $     (426,061)

$           (585,986)

Net Cash Provided by Investing Activities

                  —

Net Cash Provided by Financing Activities

631,274

             227,645

Net Increase (Decrease) in Cash and Cash Equivalents

205,213

              (358,341)


Operating Activities


During the nine months ended July 31, 2014, $426,061 of cash was used in operating activities which primarily represents cash operating expenses.   As discussed elsewhere in this Quarterly Report, we have been deferring payments to our officers, certain professionals and CSMC to minimize cash used in operating activities in order to extend our cash on hand until such time that we can raise additional capital.


Investing Activities


During the nine months ended July 31, 2014, no cash was provided by or used in investing activities.  As of July 31, 2014, we had no material commitments for capital expenditures.


Financing Activities


During the nine months ended July 31, 2014, $631,274 of cash was provided by financing activities, consisting primarily of net proceeds from the sale of Bridge Notes.


Management’s Outlook


As of July 31, 2014, our cash balance was $219,035.  Management believes that existing cash on hand will be sufficient to fund the Company’s planned activities through at least the end of the fiscal year.  This assumes that we continue to defer payment of certain liabilities to our officers but allows for some payments to be made to CSMC for accrued research and development expenses.  Additionally, certain key professionals such as legal counsel have also had payments deferred and the proceeds from the Bridge Notes will allow for some partial payments of these deferred balances but not payment in full.  While these parties have continued to work with the Company despite this lack of



21






payment, there is no assurance they will continue to do so, and the loss of a key management member, or the loss of CSMC as a research partner, could have a material adverse effect on the Company’s business prospects.  


To raise sufficient capital to fund the Company’s business plan, we plan on filing a registration statement with the Securities and Exchange Commission (the “SEC”) for an initial public offering of the Company’s securities.  No assurance can be given that this effort will be successful or adequately capitalize the Company.


The success of our business will depend in great part on our ability to conduct research and development on the technology covered by the License. Our ability to conduct research and development activities is greatly dependent upon our financial resources.  No assurance can be given that the necessary financing will be available on terms acceptable to us, if at all.  If adequate additional funds are not available when required, we may have to delay, scale-back, or eliminate certain aspects of our research, testing and/or development activities.


In the event that we cannot raise sufficient capital within the required timeframes, it will have a material adverse effect on the Company’s liquidity, financial condition and business prospects or could force the Company out of business.




22






RESULTS OF OPERATIONS


THREE MONTHS ENDED JULY 31, 2014 COMPARED TO THREE MONTHS ENDED JULY 31, 2013


Research and Development


During the three months ended July 31, 2014, research and development expense decreased by $50,095 or 38% compared to the prior year period.  The decrease in research and development expense is the result of reduced activity under the CSMC research agreement which concluded during the three months ended July 31, 2014.


General and Administrative


General and administrative expense increased by $165,028 or approximately 112% for the three months ended July 31, 2014 compared to the prior year period.  The increase in expense is primarily the result of an increase in share-based compensation expense related to stock options and investor relations.


Loss from Operations


As a result of the factors described above, the loss from operations for the three months ended July 31, 2014, increased by $114,933 compared to the prior year period.


Other Expense


For the three months ended July 31, 2014, other expense increased by $94,791 compared to the prior year period. The increase in other expense is the result of interest expense related to the Bridge Notes sold during 2014.


Net Loss


As a result of the factors described above, we recorded $490,114 of net loss for the three months ended July 31, 2014 compared to a $280,669 net loss for the prior year period.


NINE MONTHS ENDED JULY 31, 2014 COMPARED TO NINE MONTHS ENDED JULY 31, 2013


Research and Development


During the nine months ended July 31, 2014, research and development expense decreased by $45,635 or 14% compared to the prior year period.  The decrease in research and development expense is the result of reduced activity under the CSMC research agreement which concluded during the three months ended July 31, 2014.


General and Administrative


General and administrative expense increased by $409,681 or approximately 88% for the nine months ended July 31, 2014, compared to the prior year period. The increase in expense is primarily the result of an increase in share-based compensation expense related to stock options and investor relations.


Loss from Operations


As a result of the factors described above, the loss from operations for the nine months ended July 31, 2014, increased by $364,046 compared to the prior year period.




23






Other Expense


For the nine months ended July 31, 2014, we recorded other expense of $120,202 compared to $561 for the prior year period. The increase in other expense is the result of interest expense related to the Bridge Notes sold during 2014.


Net Loss


As a result of the factors described above, we recorded $1,268,145 of net loss for the nine months ended July 31, 2014 compared to a net loss of $784,458 in the prior year period.


Critical Accounting Policies and Estimates


Please refer to our Annual Report on Form 10-K for the year ended October 31, 2013 for accounting policies that management believes are critical to understanding the Company’s financial statements.


Recently Issued Accounting Pronouncements


Please refer to our Annual Report on Form 10-K for the year ended October 31, 2013 for management’s view on the impact of recently issued accounting pronouncements.


In June 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-10, Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance (“ASU 2014-10”), which eliminates the financial reporting distinction between development stage entities and other reporting entities from U.S. GAAP. Additionally, ASU 2014-10 eliminates the separate requirements for development stage entities to (1) present inception-to-date information in the statements of income, cash flow and shareholders’ equity, (2) label the financial statements as those of a development stage entity, (3) disclose a description of the development stage activities in which the entity is engaged, and (4) disclose in the first year in which the entity is no longer a development stage entity that in prior years it had been in the development stage.  ASU 2014-10 is effective for fiscal years beginning after December 15, 2014 and interim periods therein, with early adoption permitted.  The Company has adopted ASU 2014-10 effective with the filing of this Quarterly Report on Form 10-Q. 


Off-Balance Sheet Arrangements


The Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.   


Contractual Obligations


As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide this information.


Subsequent Events


In August 2014, Dr. Randolphe Swenson, Jr. was elected to serve as a member of the Board of Directors. In consideration of his agreement to serve as a member of the Board of Directors, the Company granted to Dr. Swenson non-qualified options to purchase for five (5) years 50,000 shares of common stock at an exercise price of $1.00 per share, which options are deemed immediately vested.


The Company also entered into a Consultation and Securities Compensation Agreement between the Company, on the one hand and Dr. Swenson, pursuant to which Dr. Swenson was engaged to serve as a consultant to the Company



24






for a term of six (6) months, to oversee and supervise an executive search to recruit a new CEO under the direction and supervision of the Board of Directors.  


Pursuant to the Consultation and Securities Compensation Agreement and in consideration of his services as a consultant to conduct a CEO recruitment search, the Company (i) granted to Dr. Swenson non-qualified stock options exercisable for five (5) years to purchase an aggregate of 25,000 shares of common stock at an exercise price of $1.00, and (ii) conditioned on the Company successfully engaging a new CEO on terms acceptable to the Board of Directors during the term of Mr. Swenson’s consultancy, in its sole discretion, agreed to grant to Mr. Swenson additional non-qualified stock options exercisable for five (5) years to purchase an additional 35,000 shares of common stock at an exercise price of $1.00 per share.  All of such options will be fully vested and exercisable upon grant.


ITEM 3.  Quantitative and Qualitative Disclosures About Market Risk


As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide information required by this Item.


ITEM 4.

CONTROLS AND PROCEDURES


Evaluation of Disclosure Controls and Procedures


We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed pursuant to the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules, regulations and related forms, and that such information is accumulated and communicated to our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.


As of July 31, 2014, we carried out an evaluation, under the supervision and with the participation of our principal executive officer and our principal financial officer of the effectiveness of the design and operation of our disclosure controls and procedures.  Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.


Changes in Internal Controls


There have been no changes in our internal controls over financial reporting during the quarter ended July 31, 2014 that have materially affected or are reasonably likely to materially affect our internal controls.




25









PART II.

 

OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

 

 

 

None.

 

 

 

 

 

 

 

Item 1A.

 

Risk Factors


As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide information required by this Item.

 

 

 

 

 

 

 

Item 2

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

 

 

 

None.

 

 

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

 

 

 

 

 

 

 

 

None

 

 

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 

 

 

 

 

 

 

 

 

NA

 

 

 

 

 

 

 

Item 5.

 

Other Information

 

 

 

 

 

 

 

 

 

None.

 

 

 

 

 

 

 

Item 6.

 

Exhibits and Reports on Form 8-K

 

 

 

 

Exhibits

 

 

 

 

 

 

 

 

 

 

 

*

 

31.1

 

Certification of Chief Executive Officer

 

 

*

 

31.2

 

Certification of Chief Financial Officer

 

 

*

 

32

 

Certification pursuant to USC Section 1350

 

 

**

 

101.INS

 

XBRL Instance Document

 

 

**

 

101.SCH

 

XBRL Schema Document

 

 

**

 

101.CAL

 

XBRL Calculation Linkbase Document

 

 

**

 

101.LAB

 

XBRL Label Linkbase Document

 

 

**

 

101.PRE

 

XBRL Presentation Linkbase Document

 

 

**

 

101.DEF

 

XBRL Definition Linkbase Document

 

 

 

 

 

 

 

 

 

*

 

 

 

Filed herewith

 

 

**

 

 

 

Furnished, not filed.



26









SIGNATURES


Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Quarterly Report to be signed on its behalf by the undersigned, thereunto duly authorized.


 

 

ARROGENE, INC

 

 

 

 

 

Date:

September 11, 2014

 

 

By:

/s/ Maurizio Vecchione

 

 

 

Maurizio Vecchione, Principal Executive Officer

 

 

 

 

Date:

September 11, 2014

 

 

By:

/s/ Jeffrey S. Sperber

 

 

 

Jeffrey S. Sperber, Principal Financial and
Accounting Officer




27



EX-31.1 2 aro_ex31z1.htm CERTIFICATION Converted by EDGARwiz



Exhibit 31.1


CERTIFICATIONS


I, Maurizio Vecchione, Chief Executive Officer of ARROGENE, INC., Inc. certify that:


1.

I have reviewed this quarterly report on Form 10-Q of ARROGENE, 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(s) 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 Exchange 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 or 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(s) 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.


Date: September 11, 2014

By:

/s/ Maurizio Vecchione

 

 

 

Maurizio Vecchione

 

 

 

Chief Executive Officer

 

 

 

(Principal Executive Officer)






EX-31.2 3 aro_ex31z2.htm CERTIFICATION Converted by EDGARwiz



Exhibit 31.2


CERTIFICATIONS


I, Jeffrey S. Sperber, Chief Financial Officer of ARROGENE, Inc., certify that:


1.

I have reviewed this quarterly report on Form 10-Q of ARROGENE, 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(s) 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 Exchange 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 or 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(s) 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.


Date: September 11, 2014

By:

___/s/ Jeffrey S. Sperber

 

Jeffrey S. Sperber

 

Chief Financial Officer

 

(Principal Financial Officer)







EX-32 4 aro_ex32.htm CERTIFICATION Converted by EDGARwiz



Exhibit 32


CERTIFICATIONS OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT TO 18
U.S.C. 1350


The undersigned, the Chief Executive Officer and the Chief Financial Officer of ARROGENE, Inc. (the “Company”), each hereby certifies that, to his knowledge on the date hereof:


(a)

the Form 10-Q of the Company for the quarter ended July 31, 2014, filed on the date hereof with the Securities and Exchange Commission (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities and Exchange Act of 1934; and


(b)

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



Date:  September 11, 2014

By:

__/s/ Maurizio Vecchione

 

 

Maurizio Vecchione

 

 

Chief Executive Officer

 

 

 

 

 

 

 

By:

__/s/ Jeffrey S. Sperber

 

 

Jeffrey S. Sperber

Date: September 11, 2014

 

Chief Financial Officer








EX-101.CAL 5 skrp-20140731_cal.xml XBRL TAXONOMY EXTENSION CALCULATION LINKBASE DOCUMENT EX-101.DEF 6 skrp-20140731_def.xml XBRL TAXONOMY EXTENSION DEFINITION LINKBASE DOCUMENT EX-101.INS 7 skrp-20140731.xml XBRL INSTANCE DOCUMENT 10-Q 2014-07-31 false ARROGENE, INC 0001403792 --10-31 21375860 Smaller Reporting Company Yes No No 2014 Q3 20142 13709 92968 332145 27531 928 1705 333073 29236 220690 85280 258091 229003 438043 128368 554470 49000 39000 10000 10000 1530294 491651 1530294 491651 2138 2135 4820625 4287289 -6019984 -4751839 -1197221 -462415 333073 29236 0.0001 0.0001 10000000 10000000 0 0 0.0001 0.0001 100000000 100000000 21375860 21375860 21350860 21350860 82497 132592 271449 317084 312827 147799 876494 466813 395324 280391 1147943 783897 -395324 -280391 -1147943 -783897 94790 278 120202 561 -94790 -278 -120202 -561 -490114 -280669 21375860 21350860 21370457 21289358 -0.02 -0.01 -0.06 -0.04 -784458 96683 344883 777 1174 -6433 -7402 316174 204700 -426061 -585986 24956 227645 606318 631274 227645 205213 -358341 13822 539727 181386 2135 4287289 -4751839 -462415 21350860 3 24953 24956 25000 176883 176883 205800 205800 35700 35700 90000 90000 -1268145 -1268145 2138 4820625 -6019984 -1197221 21375860 <!--egx--><p style='margin:0in;margin-bottom:.0001pt'><b>(1)&#160;&#160; BUSINESS AND OVERVIEW</b></p> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> <p style='margin:0in;margin-bottom:.0001pt'><font style='letter-spacing:-.1pt'>Arrogene, Inc. (&#147;Arrogene&#148; f/k/a SRKP 16, Inc.), was incorporated under the laws of the State of Delaware on </font><font style='letter-spacing:-.1pt'>December 7, 2006</font><font style='letter-spacing:-.1pt'>.&#160; On </font><font style='letter-spacing:-.1pt'>January 11, 2012</font><font style='letter-spacing:-.1pt'>, we consummated a reverse merger transaction (the &#147;Reverse Merger&#148;) with </font><font style='letter-spacing:-.1pt'>Arrogene Nanotechnology, Inc. (&#147;ANI&#148;)</font><font style='letter-spacing:-.1pt'>, </font><font style='letter-spacing:-.1pt'>a company focused on oncology</font><font style='letter-spacing:-.1pt'>.&#160; Hereafter, SRKP 16, Inc., Arrogene and ANI are collectively referred to as the &#147;Company.&#148;&#160; Effective September 4, 2012, SRKP 16, Inc. officially changed its name to Arrogene, Inc.</font></p> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> <p style='margin:0in;margin-bottom:.0001pt'>The Company was founded to commercialize both new cancer treatments and imaging targeting technology as well as a proprietary molecular delivery platform that interferes with those targets in order to inhibit and finally eradicate tumor progression.&#160; The Company is the exclusive licensee to certain intellectual property rights owned by Cedars Sinai Medical Center (&#147;CSMC&#148;) in Los Angeles, one of the nation&#146;s premiere research institutions (the &#147;License&#148;).&#160; CSMC has developed a family of related nano-biopolymers conjugates (collectively referred to here as Polycefin ), believed capable of acting as a drug delivery and targeting platform for cancer therapy and imaging.</p> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> <p style='margin:0in;margin-bottom:.0001pt'><font style='letter-spacing:-.1pt'>We plan on commercializing our products using a licensing and cost sharing strategy, seeking to enter into arrangements with major pharmaceutical companies with existing cancer therapy drugs facing issues relating to patent expirations, market expansion or contraction.&#160;&#160; It is our goal to only commence later stage clinical trials with a commitment from a licensee to complete Phase II and III clinical trials, predicated on the successful outcome of each phase, and go to market, if approval is received.&#160; Further, we are also exploring use of Polycefin as a potential medical diagnostic product(s) for oncology related applications.&#160; We also have developed important related intellectual properties surrounding Laminin-411. Pre-clinical investigation is also on-going on methods of inhibiting Laminin-411 as a therapeutic agent, which could be conjugated in various forms of Polycefin in the future.</font></p> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> <p style='margin:0in;margin-bottom:.0001pt'><font style='letter-spacing:-.1pt'>The majority, of our planned products will require approval or marketing clearance from the United States Food and Drug Administration (the &#147;FDA&#148;).&#160; To date we have not filed any applications with the FDA, but we have begun the process of validating our Laboratory Development Test (&#147;LDT&#148;) with applicable regulators.</font></p> <!--egx--><p style='margin:0in;margin-bottom:.0001pt'><b>(2)&nbsp;GOING CONCERN, MANAGEMENT&#146;S PLANS AND BASIS OF PRESENTATION</b></p> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> <p style='margin-top:0in;margin-right:0in;margin-bottom:12.0pt;margin-left:0in;text-indent:.5in;margin-bottom:0in;margin-bottom:.0001pt;text-indent:0in'><b>Going Concern and Management&#146;s Plans</b></p> <p style='margin-top:0in;margin-right:0in;margin-bottom:12.0pt;margin-left:0in;text-indent:.5in;margin-bottom:0in;margin-bottom:.0001pt;text-indent:0in'>&nbsp;</p> <p style='margin:0in;margin-bottom:.0001pt'>The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern. Since our inception in August&nbsp;2007, we have not generated revenue, incurred operating losses, and as of July 31, 2014, had a retained deficit $6,019,984.&#160;&#160; Further, as of July 31, 2014, our cash balance was $219,035 and we had a working capital deficit of $1,198,149. These conditions raise substantial doubt about our ability to continue as a going concern.</p> <p style='margin:0in;margin-bottom:.0001pt;text-indent:.5in'>&nbsp;</p> <p style='margin:0in;margin-bottom:.0001pt'>During the nine months ended July 31, 2014, we sold $700,000 in Bridge Notes (defined below) receiving net proceeds of $606,318 after payment of offering expenses. Management believes that existing cash on hand will be sufficient to fund the Company&#146;s planned activities through at least the end of our fiscal year.&#160; This assumes that we continue to defer payment of certain liabilities to our officers but allows for some payments to be made to CSMC for accrued research and development expenses. &#160;Additionally, certain key professionals such as legal counsel have also had payments deferred and the proceeds from the Bridge Notes will allow for some partial payments of these deferred balances but not payment in full.&#160; While these parties have continued to work with the Company despite this lack of payment, there is no assurance they will continue to do so, and the loss of a key management member, or the loss of CSMC as a research partner, could have a material adverse effect on the Company&#146;s business prospects.</p> <p style='margin:0in;margin-bottom:.0001pt;text-indent:.5in'>&nbsp;</p> <p style='margin:0in;margin-bottom:.0001pt'>To raise sufficient capital to fund the Company&#146;s business plan, we plan on filing a registration statement with the Securities and Exchange Commission (the &#147;SEC&#148;) for an initial public offering of the Company&#146;s securities. No assurance can be given that this effort will be successful or adequately capitalize the Company.</p> <p style='margin:0in;margin-bottom:.0001pt;text-indent:.5in'>&nbsp;</p> <p style='margin:0in;margin-bottom:.0001pt'>In the event that we cannot raise sufficient capital within the required timeframe, it will have a material adverse effect on the Company&#146;s liquidity, financial condition and business prospects or force the Company out of business.&#160; The accompanying financial statements do not include adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from an inability of the Company to continue as a going concern.</p> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> <p style='margin:0in;margin-bottom:.0001pt'><b>Basis of Presentation</b></p> <p style='margin-top:0in;margin-right:0in;margin-bottom:12.0pt;margin-left:0in;text-indent:.5in;margin-bottom:0in;margin-bottom:.0001pt;text-indent:0in'>&nbsp;</p> <p style='margin-top:0in;margin-right:0in;margin-bottom:12.0pt;margin-left:0in;text-indent:.5in;margin-bottom:0in;margin-bottom:.0001pt;text-indent:0in'>The accompanying condensed consolidated financial statements include the accounts of Arrogene and its wholly owned subsidiary ANI.&#160; All intercompany transactions have been eliminated in consolidation.&#160; The condensed consolidated financial statements have been prepared without audit pursuant to the rules&nbsp;and regulations of the SEC.&#160; Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations.&#160; The condensed consolidated financial statements reflect all adjustments (consisting of only normal recurring entries), which in the opinion of management, are necessary to present fairly the financial position at July 31, 2014 and the results of operations and cash flows of the Company for the three and nine months ended July 31, 2014 and 2013.&#160; Operating results for the nine months ended July 31, 2014, are not necessarily indicative of the results that may be expected for the year ended October&nbsp;31, 2014.</p> <p style='margin-top:0in;margin-right:0in;margin-bottom:12.0pt;margin-left:0in;text-indent:.5in;margin-bottom:0in;margin-bottom:.0001pt'>&nbsp;</p> <p style='margin-top:0in;margin-right:0in;margin-bottom:12.0pt;margin-left:0in;text-indent:.5in;margin-bottom:0in;margin-bottom:.0001pt;text-indent:0in'>The unaudited condensed consolidated financial statements should be read in conjunction with the Company&#146;s audited financial statements and footnotes thereto for the year ended October 31, 2013 filed on April 2, 2014.</p> <p style='margin-top:0in;margin-right:0in;margin-bottom:12.0pt;margin-left:0in;text-indent:.5in;margin-bottom:0in;margin-bottom:.0001pt;text-indent:0in'>&nbsp;</p> <p style='margin-top:0in;margin-right:0in;margin-bottom:12.0pt;margin-left:0in;text-indent:.5in;margin-bottom:0in;margin-bottom:.0001pt;text-indent:0in'><b>Use of Estimates and Assumptions</b></p> <p style='margin-top:0in;margin-right:0in;margin-bottom:12.0pt;margin-left:0in;text-indent:.5in;margin-bottom:0in;margin-bottom:.0001pt;text-indent:0in'>&nbsp;</p> <p style='margin-top:0in;margin-right:0in;margin-bottom:12.0pt;margin-left:0in;text-indent:.5in;margin-bottom:0in;margin-bottom:.0001pt;text-indent:0in'>The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (&#147;U.S. GAAP&#148;) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported periods.&#160; Actual results may differ from these estimates.</p> <p style='margin-top:0in;margin-right:0in;margin-bottom:12.0pt;margin-left:0in;text-indent:.5in;margin-bottom:0in;margin-bottom:.0001pt;text-indent:0in'>&nbsp;</p> <p style='margin-top:0in;margin-right:0in;margin-bottom:12.0pt;margin-left:0in;text-indent:.5in;margin-bottom:0in;margin-bottom:.0001pt;text-indent:0in'><b>Adoption of New Accounting Pronouncement</b></p> <p style='margin-top:0in;margin-right:0in;margin-bottom:12.0pt;margin-left:0in;text-indent:.5in;margin-bottom:0in;margin-bottom:.0001pt;text-indent:0in'>&nbsp;</p> <p style='margin-top:0in;margin-right:0in;margin-bottom:12.0pt;margin-left:0in;text-indent:.5in;margin-bottom:0in;margin-bottom:.0001pt;text-indent:0in'>In June 2014, the Financial Accounting Standards Board (&#147;FASB&#148;) issued ASU 2014-10,&nbsp;<i>Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance&nbsp;</i>(&#147;ASU 2014-10&#148;), which eliminates the financial reporting distinction between development stage entities and other reporting entities from U.S. GAAP. Additionally, ASU 2014-10 eliminates the separate requirements for development stage entities to (1) present inception-to-date information in the statements of income, cash flow and shareholders&#146; equity, (2) label the financial statements as those of a development stage entity, (3) disclose a description of the development stage activities in which the entity is engaged, and (4) disclose in the first year in which the entity is no longer a development stage entity that in prior years it had been in the development stage.&nbsp; ASU 2014-10 is effective for fiscal years beginning after December 15, 2014 and interim periods therein, with early adoption permitted.&nbsp; The Company has adopted ASU 2014-10 effective with the filing of this Quarterly Report on Form 10-Q.</p> <!--egx--><p style='margin:0in;margin-bottom:.0001pt'><b>(3)</b>&#160; <b>LICENSE AGREEMENT</b></p> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> <p style='margin:0in;margin-bottom:.0001pt;text-autospace:none'>On December 23, 2009, we entered into an agreement for the right to an exclusive license agreement with CSMC which provides us with the world-wide rights to U.S Patents No. 7,547,511 &#147;Antisense Inhibition of Laminin-8 Expression to Inhibit Human Gliomas&#148;, No. 7,935,677, &#147;Polymalic Acid-Based Multifunctional Drug Delivery System&#148;, No. 8,309,614 &#147;Poly (Beta Malic Acid) with Pendant Leu-Leu-Leu Tripeptide for Effective Cytoplasmic Drug Delivery&#148;, and&#160; No. 8,562,964 along with various Japanese, EU and Asian related patents and applications, related technical information to develop, market and sell human therapeutic and diagnostic products, including new pharmaceutical products and/or non-prescriptive products using the patented technology (the &#147;CSMC Agreement&#148;).&#160; The CSMC Agreement has been amended five times; December 8, 2010, June 30, 2011, August 31, 2011, October 28, 2011, and December 30, 2013. The CSMC Agreement also provides us with the rights to several other related, filed, but yet unissued patents.&#160; The CSMC Agreement requires royalty payments equal to 3.5% of the gross sales price and other forms of consideration (such as milestone and sublicense payments), as defined in the agreement, on all products using the licensed technology.&#160; The CSMC Agreement expires on a country-by-country basis on the date that the last patent covered under the agreement expires (currently 2032).</p> <p style='margin:0in;margin-bottom:.0001pt;text-indent:.5in;text-autospace:none'>&nbsp;</p> <p style='margin:0in;margin-bottom:.0001pt'>The CSMC Agreement, as amended, requires us to achieve certain other milestones in order to maintain the agreement.&#160; These include the following:</p> <p style='margin:0in;margin-bottom:.0001pt;margin-left:.5in'>&nbsp;</p> <p style='margin:0in;margin-bottom:.0001pt;margin-left:.5in;text-indent:-.25in;text-autospace:none'><font style='font-family:Symbol'>&#183;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; </font>Begin development or enter into a joint venture, licensing or sub-licensing agreement, or other business arrangement with a third party not an affiliate of the Company to cause development of at least one product consistent with sound business practices by December 31, 2012;</p> <p style='margin:0in;margin-bottom:.0001pt;margin-left:.5in;text-indent:-.25in;text-autospace:none'><font style='font-family:Symbol'>&#183;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; </font>Expend at least $500,000 in the aggregate toward the development or promotion of the sale of products based on the licensed patent rights or technical information commencing from the effective date of the agreement and continuing through and including December 31, 2012, and at least $1,000,000 annually thereafter, for further development or promotion of the sale of products through and including December 31, 2013;</p> <p style='margin:0in;margin-bottom:.0001pt;margin-left:.5in;text-indent:-.25in;text-autospace:none'><font style='font-family:Symbol'>&#183;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; </font>Provide to CSMC at least $150,000 (in aggregate) within at least a four year period to fund research and development of the licensed patent rights and technical information;</p> <p style='margin:0in;margin-bottom:.0001pt;margin-left:.5in;text-indent:-.25in;text-autospace:none'><font style='font-family:Symbol'>&#183;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; </font>On or before December 31, 2014, the Company shall have commenced a clinical trial or trials in connection with at least one intended commercial use;</p> <p style='margin:0in;margin-bottom:.0001pt;margin-left:.5in;text-autospace:none'>&nbsp;</p> <p style='margin:0in;margin-bottom:.0001pt;text-autospace:none'>We believe that we have achieved the required milestones for the contractual periods ended December 31, 2013.&#160; It is management&#146;s belief that administrative expenses incurred in support of the Company&#146;s business activities meet the definition of &#147;development and promotion&#148; of the licensed technology. We can, however, provide no assurance that CSMC has concurred with our position and that we will be able to meet any or all of these milestones in the future.&#160; In the event that we fail to meet one or more of the milestones required by the CSMC Agreement, there is no assurance that CSMC will agree to amend or waive the requirements and we could lose the License.&#160; Additionally, as discussed further in Note 9, we have entered into a research and development agreement with CSMC that satisfies the milestone requirement described above regarding funded research at CSMC.&#160; However, in order to extend the Company&#146;s cash on hand, we have been deferring payment to CSMC of our obligations under the agreement. &#160;During the second quarter of 2014 we resumed making payments to CSMC but our outstanding balance with them remains delinquent.&#160; To date, CSMC has continued to do work under the agreement despite our payment delays but no assurance can be provided that CSMC will continue to do so.&#160; As of July 31, 2014, we had an outstanding liability to CSMC of $258,091 which represents amounts owed for services provided by CSMC.</p> <p style='margin:0in;margin-bottom:.0001pt;text-indent:.5in;text-autospace:none'>&nbsp;</p> <p style='margin:0in;margin-bottom:.0001pt'>Further, in the event the Company issues or sells shares of common stock, the CSMC Agreement requires that the Company issue to CSMC additional shares of common stock for no additional consideration so as to assure CSMC will own 5% of the total issued and outstanding shares of the Company until December 31, 2015.</p> <!--egx--><p style='margin:0in;margin-bottom:.0001pt'><b>(4)&#160; BRIDGE NOTES</b></p> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> <p style='margin:0in;margin-bottom:.0001pt'>During the nine months ended July 31, 2014, we sold an aggregate of $700,000 in bridge notes (the &#147;Bridge Notes&#148;), receiving net proceeds of $606,318 after payment of offering costs.&#160; The Bridge Notes are due and payable one year after the close of the offering (the &#147;Maturity Date&#148;), bear interest at 10% per annum, and are convertible into shares of our common stock at a conversion price of either (i) 50% of the price per share of our common stock as sold through a qualified initial public offering as defined in the terms of the Bridge Notes, or (ii) in the event a Qualified IPO has not taken place prior to the Maturity Date but there has otherwise developed a public trading market for the Company&#146;s common stock, then the conversion price shall be 50% of the 30 day Volume Weighted Average Price per share as quoted on the over-the-counter market, or (iii) in the event a public trading market has not been established for our common stock prior to the Maturity Date, then the conversion price shall be $1.00 per share.&#160;&#160; Accrued and unpaid interest on the Bridge Notes will be payable in shares of common stock at the conversion price on the earlier of (i) the date of conversion of the Bridge Notes or (ii) the Maturity Date. Further, for every $1.00 of Bridge Note principal that an investor elects to convert into shares of common stock, the investor will receive one warrant (the &#147;Bridge Note Warrant&#148;).&#160; Each warrant shall be exercisable to purchase shares of common stock at a price equal to the conversion price of the Bridge Notes and shall have a life of 5 years from the close of the offering.&#160; If the investor elects not to convert their Bridge Notes prior to the Maturity Date, then the note holder will receive one warrant for every $2.00 in Bridge Note principal.</p> <p style='margin:0in;margin-bottom:.0001pt;text-indent:.5in'>&nbsp;</p> <p style='margin:0in;margin-bottom:.0001pt'>We evaluated the conversion feature of the Bridge Notes within the context of ASC 815 and determined that <font style='letter-spacing:-.1pt'>it did not meet the definition of an embedded derivative due to the Company having no active market for its common stock.</font>&#160;&#160; We further evaluated the conversion feature of the Bridge Notes within the context of ASC 470-20 and determined that the Bridge Notes did not contain a beneficial conversion feature as the default conversion price of $1.00 per share is greater than the current fair value of the Company&#146;s common stock based on the most recent price paid for the Units.</p> <p style='margin:0in;margin-bottom:.0001pt;text-indent:.5in'>&nbsp;</p> <p style='margin:0in;margin-bottom:.0001pt'>We evaluated the Bridge Note Warrants using the guidelines established by ASC 815 and determined that <font style='letter-spacing:-.1pt'>it did not meet the definition of a derivative due to the Company having no active market for its common stock.&#160; We valued these warrants at </font><font style='letter-spacing:-.1pt'>$205,800</font><font style='letter-spacing:-.1pt'> using the </font><font style='letter-spacing:-.1pt'>Black-Scholes option pricing model</font><font style='letter-spacing:-.1pt'> which we recorded as debt discount with a corresponding increase to additional paid in capital using the following assumptions: expected life </font><font style='letter-spacing:-.1pt'>5 years</font><font style='letter-spacing:-.1pt'>, risk free interest rate </font><font style='letter-spacing:-.1pt'>1.69%</font><font style='letter-spacing:-.1pt'> and annualized volatility </font><font style='letter-spacing:-.1pt'>78.9%</font><font style='letter-spacing:-.1pt'>. We are amortizing the debt discount over the life of the Bridge Notes.&#160; For the three and nine months ended July 31, 2014, we amortized </font><font style='letter-spacing:-.1pt'>$49,541</font><font style='letter-spacing:-.1pt'> and </font><font style='letter-spacing:-.1pt'>$60,270</font><font style='letter-spacing:-.1pt'>, respectively, of debt discount which is included in interest expense on the accompanying condensed consolidated financial statements.</font></p> <p style='margin:0in;margin-bottom:.0001pt'><font style='letter-spacing:-.1pt'>We are also obligated to issue to the placement agents warrants to acquire shares of common stock equal to 10% of the securities underlying the Bridge Notes and Bridge Note Warrants (the &#147;PA Bridge Note Warrants&#148;).&#160; The PA Bridge Note Warrants have a life of 5 years and are exercisable at the conversion price of the Bridge Notes and the exercise price of the Bridge Note Warrants, respectively.&#160; We evaluated the PA Bridge Note Warrants using the guidelines established by ASC 815 and determined that they did not meet the definition of a derivative due to the Company having no active trading market for its common stock.&#160; We valued the PA Bridge Note Warrants at </font><font style='letter-spacing:-.1pt'>$35,700</font><font style='letter-spacing:-.1pt'> using the </font><font style='letter-spacing:-.1pt'>Black-Scholes pricing model</font><font style='letter-spacing:-.1pt'> using the following assumptions: expected life </font><font style='letter-spacing:-.1pt'>5 years</font><font style='letter-spacing:-.1pt'>, risk free interest rate </font><font style='letter-spacing:-.1pt'>1.69%</font><font style='letter-spacing:-.1pt'> and annualized volatility </font><font style='letter-spacing:-.1pt'>78.9%</font><font style='letter-spacing:-.1pt'>.&#160; We recorded the PA Bridge Note Warrants as a debt offering cost on the accompanying condensed consolidated balance sheet.&#160; We are amortizing the PA Bridge Note Warrants over the life of the Bridge Notes.&#160; For the three and nine months ended July 31, 2014, we amortized </font><font style='letter-spacing:-.1pt'>$8,292</font><font style='letter-spacing:-.1pt'> and </font><font style='letter-spacing:-.1pt'>$10,825</font><font style='letter-spacing:-.1pt'>, respectively, of PA Bridge Note Warrants which is included in interest expense on the accompanying condensed consolidated financial statements.</font></p> <p style='margin:0in;margin-bottom:.0001pt'><font style='letter-spacing:-.1pt'>The effective rate of the Bridge Notes after taking into account the Bridge Note Warrants and PA Bridge Note Warrants is 44.5%.</font></p> <!--egx--><p style='margin:0in;margin-bottom:.0001pt'><b>(5)</b>&#160; <b>CONVERTIBLE NOTES</b></p> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> <p style='margin:0in;margin-bottom:.0001pt'><font style='letter-spacing:-.1pt'>Commencing October&nbsp;2010 through April 2011, we sold in private transactions an aggregate of </font><font style='letter-spacing:-.1pt'>$726,550</font><font style='letter-spacing:-.1pt'> of Convertible Notes. <b><i>&#160;</i></b></font><font style='letter-spacing:-.1pt'>The Convertible Notes were initially convertible into </font><font style='letter-spacing:-.1pt'>shares of our common stock</font><font style='letter-spacing:-.1pt'> at $.30 per share (the &#147;Conversion Price&#148;).</font><font style='letter-spacing:-.1pt'> The </font><font style='letter-spacing:-.1pt'>Convertible Notes do not bear interest</font><font style='letter-spacing:-.1pt'> and were </font><font style='letter-spacing:-.1pt'>originally payable on October 19, 2011</font><font style='letter-spacing:-.1pt'>. The Convertible Notes are secured by a first lien security interest on all of our tangible and intangible assets.&#160; We did not repay the Convertible Notes by the maturity date and the notes were therefore technically in default</font>.&#160; During the year ended October 31, 2012, agreed to reduce the conversion price of the Convertible Notes to $.15 per share. $10,000 of Convertible Notes remains outstanding as of July 31, 2014.&#160; On an as converted basis, as of July 31, 2014, the estimated value of the Convertible Notes exceeds the principal balance by $27,333.</p> <!--egx--> <p style='margin:0in;margin-bottom:.0001pt'><b>(6)&#160; STOCKHOLDERS&#146; EQUITY</b></p> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> <p style='margin:0in;margin-bottom:.0001pt'><b><font style='letter-spacing:-.1pt'>Common Stock</font></b></p> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> <p style='margin:0in;margin-bottom:.0001pt'><font style='letter-spacing:-.1pt'>On August 29, 2013, we entered into an agreement for investor relation services that requires us to issue up to 400,000 shares of common stock as a component of the consideration for the services.&#160; The shares are issuable in 100,000 increments for each quarter of service rendered.&#160; We valued these shares at </font><font style='letter-spacing:-.1pt'>$224,000</font><font style='letter-spacing:-.1pt'> using the Black-Scholes option-pricing model and are recognizing expense over the 12 months the services are being rendered.&#160; For the three months and nine months ended July 31, 2014, we recorded </font><font style='letter-spacing:-.1pt'>$56,000</font><font style='letter-spacing:-.1pt'> and </font><font style='letter-spacing:-.1pt'>$168,000</font><font style='letter-spacing:-.1pt'>, respectively, of stock compensation expense which is included in general and administrative expense in the accompanying condensed consolidated statements of operations with a corresponding increase in accounts payable and other accrued expenses on the accompanying condensed consolidated balance sheet.</font></p> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> <p style='margin:0in;margin-bottom:.0001pt'><b><font style='letter-spacing:-.1pt'>Units</font></b></p> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> <p style='margin:0in;margin-bottom:.0001pt'>During the nine months ended July 31, 2014 and 2013, we sold 25,000 and 260,000 units (the &#147;Units&#148;), respectively, for $1.00 per Unit, receiving net proceeds of $24,956 and $227,645, respectively. &#160;Each Unit consists of&#160; (i) one share of common stock, and (ii) two warrants with one warrant exercisable at $1.50 per share and one warrant exercisable at $2.00 per share.&#160; (the &#147;Unit Warrants&#148;).&#160; The Unit Warrants expire five years from the date of issuance.</p> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> <p style='margin:0in;margin-bottom:.0001pt'><b>Warrants</b></p> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> <p style='margin:0in;margin-bottom:.0001pt'><font style='letter-spacing:-.1pt'>In connection with the sale of the Units during nine months ended July 31, 2013, the placement agents earned warrants to acquire 78,000 shares of common stock consisting of 26,000 warrants exercisable at $1.00 per share, 26,000 warrants exercisable at $1.50 per share and 26,000 warrants exercisable at $2.00 per share.&#160; Each warrant expires five years from the date of issuance.&#160;&#160; We valued these warrants at </font><font style='letter-spacing:-.1pt'>$17,160</font><font style='letter-spacing:-.1pt'> using the Black Scholes option-pricing model.&#160;&#160; We recorded the warrants as a reduction to the net proceeds from the sale of the Units with a corresponding increase to additional paid in capital.&#160;&#160; The placement agents voluntarily agreed to forgo the earning of warrants in connection with the Unit sale that took place during the nine months ended July 31, 2014.</font></p> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> <p style='margin:0in;margin-bottom:.0001pt'><font style='letter-spacing:-.1pt'>As of July 31, 2014, we had 6,358,358 warrants outstanding with weighted average remaining lives of 31 months and a weighted average exercise price of $1.44.</font></p> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> <p style='margin:0in;margin-bottom:.0001pt'><b><font style='letter-spacing:-.1pt'>Stock Options</font></b></p> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> <p style='margin:0in;margin-bottom:.0001pt'><font style='letter-spacing:-.1pt'>On November 1, 2013, we issued a non-statutory stock option to acquire up to 200,000 shares of common stock with an exercise price of $1.00 per share to a consultant for providing certain services as defined in the consulting agreement. &#160;The option expires 7 years from the date of grant. The options vest as follows: (i) as to 100,000 options, vesting shall occur 1/3 on each one year anniversary date of the consulting agreement&#160; (&#147;Vesting 1&#148;) and (ii) as to 100,000 options, vesting shall occur upon the closing of certain transactions as defined in the agreement at a rate of 2 stock options for each $100 received by the Company in a deal or transaction resulting from the efforts of the consultant (&#147;Vesting 2&#148;).&#160; We valued this option at </font><font style='letter-spacing:-.1pt'>$58,400</font><font style='letter-spacing:-.1pt'> using the Black Scholes option-pricing model using the following assumptions: option life </font><font style='letter-spacing:-.1pt'>5 years</font><font style='letter-spacing:-.1pt'>, risk free interest rate </font><font style='letter-spacing:-.1pt'>1.37%</font><font style='letter-spacing:-.1pt'>, and annualized volatility of </font><font style='letter-spacing:-.1pt'>78.9%</font><font style='letter-spacing:-.1pt'> based on a peer group of publicly traded common stocks.&#160; Stock options issued to non-employees are remeasured at each reporting date and the cumulative expense is adjusted based on the remeasured grant. We are recognizing expense for this option as the underlying services are provided, ratably over 36 months for Vesting 1, and upon the occurrence of a vesting event for Vesting 2.&#160; For the three and nine months ended July 31, 2014, we recognized </font><font style='letter-spacing:-.1pt'>$2,433</font><font style='letter-spacing:-.1pt'> and </font><font style='letter-spacing:-.1pt'>$7,300</font><font style='letter-spacing:-.1pt'>, respectively, of expense for this option which is included in general and administrative expense on the accompanying condensed consolidated statements of operations.</font></p> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> <p style='margin:0in;margin-bottom:.0001pt'><font style='letter-spacing:-.1pt'>In April 2014, we issued stock options to acquire 1,200,000 shares of common stock to certain employees and consultants with an exercise price of $1.00 per share.&#160; The options expire 7 years from the date of grant. The options vest under terms ranging from immediately to 1/3 on each anniversary date from the date of grant.&#160; We valued these options at $352,800 using the Black Scholes option-pricing model using the following assumptions:&#160; option life 5 years, risk free interest rate 1.65%, and annualized volatility of 78.9% based on a peer group of publicly traded stocks.&#160; We are recognizing expense for these options over the respective vesting periods.&#160; For the three and nine months ended July 31, 2014, we recognized $56,066 and $169,583, respectively, of expense for these options which is included in general and administrative expense on the accompanying condensed consolidated statements of operations.</font></p> <!--egx--><p style='margin:0in;margin-bottom:.0001pt'><b><font lang="X-NONE">(7)</font></b><b>&#160; </b><b><font lang="X-NONE">EARNINGS (LOSS) PER SHARE</font></b></p> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> <p style='margin-top:0in;margin-right:0in;margin-bottom:12.0pt;margin-left:0in;text-indent:.5in;margin-bottom:0in;margin-bottom:.0001pt;text-indent:0in'>Earnings (loss) per share are calculated in accordance with the provisions of ASC 260 &#147;Earnings Per Share&#148; (&#147;ASC 260&#148;). Under ASC 260, basic earnings (loss) per share are computed by dividing the Company&#146;s income (loss) by the weighted average number of common shares outstanding. The impact of any potentially dilutive securities is excluded. Diluted earnings per share are computed by dividing the Company&#146;s income (loss) attributable to common shareholders by the weighted average number of common shares and dilutive potential common shares outstanding during the period. In calculating diluted earnings per share, we utilize the &#147;treasury stock method&#148; for all stock options and warrants and the &#147;if converted method&#148; for all other convertible securities. For all periods presented, the basic and diluted loss per share is the same as the impact of potential dilutive common shares is anti-dilutive.</p> <p style='margin-top:0in;margin-right:0in;margin-bottom:12.0pt;margin-left:0in;text-indent:.5in;margin-bottom:0in;margin-bottom:.0001pt;text-indent:0in'>&nbsp;</p> <p style='margin:0in;margin-bottom:.0001pt'>Warrants and convertible securities excluded from the calculation of diluted loss per share are as follows:</p> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> <table border="0" cellspacing="0" cellpadding="0" style='margin-left:.5in;border-collapse:collapse'> <tr align="left"> <td width="42%" valign="bottom" style='width:42.78%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> </td> <td width="5%" valign="bottom" style='width:5.02%;padding:0'> <p align="center" style='margin:0in;margin-bottom:.0001pt;text-align:center'>&nbsp;</p> </td> <td width="45%" colspan="3" valign="bottom" style='width:45.16%;border:none;border-bottom:solid windowtext 1.0pt;padding:0'> <p align="center" style='margin:0in;margin-bottom:.0001pt;text-align:center'><b>Three and Nine Months&nbsp;Ended July 31,</b></p> </td> <td width="5%" valign="bottom" style='width:5.02%;padding:0'> <p align="center" style='margin:0in;margin-bottom:.0001pt;text-align:center'>&nbsp;</p> </td> <td width="2%" valign="bottom" style='width:2.0%;padding:0'> <p align="center" style='margin:0in;margin-bottom:.0001pt;text-align:center'>&nbsp;</p> </td> </tr> <tr align="left"> <td width="42%" valign="bottom" style='width:42.78%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> </td> <td width="5%" valign="bottom" style='width:5.02%;padding:0'> <p align="center" style='margin:0in;margin-bottom:.0001pt;text-align:center'>&nbsp;</p> </td> <td width="20%" valign="bottom" style='width:20.06%;border:none;border-bottom:solid windowtext 1.0pt;padding:0'> <p align="center" style='margin:0in;margin-bottom:.0001pt;text-align:center'><b>2014</b></p> </td> <td width="5%" valign="bottom" style='width:5.02%;border:none;border-top:solid windowtext 1.0pt;padding:0'> <p align="center" style='margin:0in;margin-bottom:.0001pt;text-align:center'>&nbsp;</p> </td> <td width="20%" valign="bottom" style='width:20.08%;border-top:solid windowtext 1.0pt;border-left:none;border-bottom:solid windowtext 1.0pt;border-right:none;padding:0'> <p align="center" style='margin:0in;margin-bottom:.0001pt;text-align:center'><b>2013</b></p> </td> <td width="5%" valign="bottom" style='width:5.02%;padding:0'> <p align="center" style='margin:0in;margin-bottom:.0001pt;text-align:center'>&nbsp;</p> </td> <td width="2%" valign="bottom" style='width:2.0%;padding:0'> <p align="center" style='margin:0in;margin-bottom:.0001pt;text-align:center'>&nbsp;</p> </td> </tr> <tr align="left"> <td width="42%" valign="top" style='width:42.78%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt;margin-left:10.0pt;text-indent:-10.0pt'>&nbsp;</p> </td> <td width="5%" valign="bottom" style='width:5.02%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> </td> <td width="20%" valign="bottom" style='width:20.06%;border:none;padding:0'> <p align="right" style='margin:0in;margin-bottom:.0001pt;text-align:right'>&nbsp;</p> </td> <td width="5%" valign="bottom" style='width:5.02%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> </td> <td width="20%" valign="bottom" style='width:20.08%;border:none;padding:0'> <p align="right" style='margin:0in;margin-bottom:.0001pt;text-align:right'>&nbsp;</p> </td> <td width="5%" valign="bottom" style='width:5.02%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> </td> <td width="2%" valign="bottom" style='width:2.0%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> </td> </tr> <tr align="left"> <td width="42%" valign="top" style='width:42.78%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt;margin-left:10.0pt;text-indent:-10.0pt'>Warrants</p> </td> <td width="5%" valign="bottom" style='width:5.02%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> </td> <td width="20%" valign="bottom" style='width:20.06%;padding:0'> <p align="right" style='margin:0in;margin-bottom:.0001pt;text-align:right'>6,358,358</p> </td> <td width="5%" valign="bottom" style='width:5.02%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> </td> <td width="20%" valign="bottom" style='width:20.08%;padding:0'> <p align="right" style='margin:0in;margin-bottom:.0001pt;text-align:right'>5,422,858</p> </td> <td width="5%" valign="bottom" style='width:5.02%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> </td> <td width="2%" valign="bottom" style='width:2.0%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> </td> </tr> <tr align="left"> <td width="42%" valign="top" style='width:42.78%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt;margin-left:10.0pt;text-indent:-10.0pt'>Stock options</p> </td> <td width="5%" valign="bottom" style='width:5.02%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> </td> <td width="20%" valign="bottom" style='width:20.06%;padding:0'> <p align="right" style='margin:0in;margin-bottom:.0001pt;text-align:right'>1,400,000</p> </td> <td width="5%" valign="bottom" style='width:5.02%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> </td> <td width="20%" valign="bottom" style='width:20.08%;padding:0'> <p align="right" style='margin:0in;margin-bottom:.0001pt;text-align:right'>&#151;</p> </td> <td width="5%" valign="bottom" style='width:5.02%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> </td> <td width="2%" valign="bottom" style='width:2.0%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> </td> </tr> <tr align="left"> <td width="42%" valign="top" style='width:42.78%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt;margin-left:10.0pt;text-indent:-10.0pt'>Convertible debt*</p> </td> <td width="5%" valign="bottom" style='width:5.02%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> </td> <td width="20%" valign="bottom" style='width:20.06%;padding:0'> <p align="right" style='margin:0in;margin-bottom:.0001pt;text-align:right'>766,667</p> </td> <td width="5%" valign="bottom" style='width:5.02%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> </td> <td width="20%" valign="bottom" style='width:20.08%;padding:0'> <p align="right" style='margin:0in;margin-bottom:.0001pt;text-align:right'>66,667</p> </td> <td width="5%" valign="bottom" style='width:5.02%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> </td> <td width="2%" valign="bottom" style='width:2.0%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> </td> </tr> </table> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> <table border="0" cellspacing="0" cellpadding="0" style='margin-left:.5in;border-collapse:collapse;display:none'> <tr style='display:none'> <td width="42%" valign="bottom" style='width:42.78%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> </td> <td width="5%" valign="bottom" style='width:5.02%;padding:0'> <p align="center" style='margin:0in;margin-bottom:.0001pt;text-align:center'>&nbsp;</p> </td> <td width="45%" colspan="3" valign="bottom" style='width:45.16%;border:none;border-bottom:solid windowtext 1.0pt;padding:0'> <p align="center" style='margin:0in;margin-bottom:.0001pt;text-align:center'><b><font style='display:none'>Three and Nine Months&nbsp;Ended July 31,</font></b></p> </td> <td width="5%" valign="bottom" style='width:5.02%;padding:0'> <p align="center" style='margin:0in;margin-bottom:.0001pt;text-align:center'>&nbsp;</p> </td> <td width="2%" valign="bottom" style='width:2.0%;padding:0'> <p align="center" style='margin:0in;margin-bottom:.0001pt;text-align:center'>&nbsp;</p> </td> </tr> <tr style='display:none'> <td width="42%" valign="bottom" style='width:42.78%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> </td> <td width="5%" valign="bottom" style='width:5.02%;padding:0'> <p align="center" style='margin:0in;margin-bottom:.0001pt;text-align:center'>&nbsp;</p> </td> <td width="20%" valign="bottom" style='width:20.06%;border:none;border-bottom:solid windowtext 1.0pt;padding:0'> <p align="center" style='margin:0in;margin-bottom:.0001pt;text-align:center'><b><font style='display:none'>2014</font></b></p> </td> <td width="5%" valign="bottom" style='width:5.02%;border:none;border-top:solid windowtext 1.0pt;padding:0'> <p align="center" style='margin:0in;margin-bottom:.0001pt;text-align:center'>&nbsp;</p> </td> <td width="20%" valign="bottom" style='width:20.08%;border-top:solid windowtext 1.0pt;border-left:none;border-bottom:solid windowtext 1.0pt;border-right:none;padding:0'> <p align="center" style='margin:0in;margin-bottom:.0001pt;text-align:center'><b><font style='display:none'>2013</font></b></p> </td> <td width="5%" valign="bottom" style='width:5.02%;padding:0'> <p align="center" style='margin:0in;margin-bottom:.0001pt;text-align:center'>&nbsp;</p> </td> <td width="2%" valign="bottom" style='width:2.0%;padding:0'> <p align="center" style='margin:0in;margin-bottom:.0001pt;text-align:center'>&nbsp;</p> </td> </tr> <tr style='display:none'> <td width="42%" valign="top" style='width:42.78%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt;margin-left:10.0pt;text-indent:-10.0pt'>&nbsp;</p> </td> <td width="5%" valign="bottom" style='width:5.02%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> </td> <td width="20%" valign="bottom" style='width:20.06%;border:none;padding:0'> <p align="right" style='margin:0in;margin-bottom:.0001pt;text-align:right'>&nbsp;</p> </td> <td width="5%" valign="bottom" style='width:5.02%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'><font style='display:none'>&nbsp;</font></p> </td> <td width="20%" valign="bottom" style='width:20.08%;border:none;padding:0'> <p align="right" style='margin:0in;margin-bottom:.0001pt;text-align:right'>&nbsp;</p> </td> <td width="5%" valign="bottom" style='width:5.02%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'><font style='display:none'>&nbsp;</font></p> </td> <td width="2%" valign="bottom" style='width:2.0%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'><font style='display:none'>&nbsp;</font></p> </td> </tr> <tr style='display:none'> <td width="42%" valign="top" style='width:42.78%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt;margin-left:10.0pt;text-indent:-10.0pt'><font style='display:none'>Warrants</font></p> </td> <td width="5%" valign="bottom" style='width:5.02%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> </td> <td width="20%" valign="bottom" style='width:20.06%;padding:0'> <p align="right" style='margin:0in;margin-bottom:.0001pt;text-align:right'><font style='display:none'>6,358,358</font></p> </td> <td width="5%" valign="bottom" style='width:5.02%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'><font style='display:none'>&nbsp;</font></p> </td> <td width="20%" valign="bottom" style='width:20.08%;padding:0'> <p align="right" style='margin:0in;margin-bottom:.0001pt;text-align:right'><font style='display:none'>5,422,858</font></p> </td> <td width="5%" valign="bottom" style='width:5.02%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'><font style='display:none'>&nbsp;</font></p> </td> <td width="2%" valign="bottom" style='width:2.0%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'><font style='display:none'>&nbsp;</font></p> </td> </tr> <tr style='display:none'> <td width="42%" valign="top" style='width:42.78%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt;margin-left:10.0pt;text-indent:-10.0pt'><font style='display:none'>Stock options</font></p> </td> <td width="5%" valign="bottom" style='width:5.02%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> </td> <td width="20%" valign="bottom" style='width:20.06%;padding:0'> <p align="right" style='margin:0in;margin-bottom:.0001pt;text-align:right'><font style='display:none'>1,400,000</font></p> </td> <td width="5%" valign="bottom" style='width:5.02%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> </td> <td width="20%" valign="bottom" style='width:20.08%;padding:0'> <p align="right" style='margin:0in;margin-bottom:.0001pt;text-align:right'><font style='display:none'>&#151;</font></p> </td> <td width="5%" valign="bottom" style='width:5.02%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> </td> <td width="2%" valign="bottom" style='width:2.0%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> </td> </tr> <tr style='display:none'> <td width="42%" valign="top" style='width:42.78%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt;margin-left:10.0pt;text-indent:-10.0pt'><font style='display:none'>Convertible debt*</font></p> </td> <td width="5%" valign="bottom" style='width:5.02%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> </td> <td width="20%" valign="bottom" style='width:20.06%;padding:0'> <p align="right" style='margin:0in;margin-bottom:.0001pt;text-align:right'><font style='display:none'>766,667</font></p> </td> <td width="5%" valign="bottom" style='width:5.02%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'><font style='display:none'>&nbsp;</font></p> </td> <td width="20%" valign="bottom" style='width:20.08%;padding:0'> <p align="right" style='margin:0in;margin-bottom:.0001pt;text-align:right'><font style='display:none'>66,667</font></p> </td> <td width="5%" valign="bottom" style='width:5.02%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'><font style='display:none'>&nbsp;</font></p> </td> <td width="2%" valign="bottom" style='width:2.0%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'><font style='display:none'>&nbsp;</font></p> </td> </tr> </table> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> <p style='margin:0in;margin-bottom:.0001pt'>*Assumes Bridge Note conversion price of $1.00 per share see Note 4 for conversion price calculations.</p> <!--egx--><p style='margin:0in;margin-bottom:.0001pt'><b>(8)&#160; SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION</b></p> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> <p style='margin:0in;margin-bottom:.0001pt;margin-bottom:24.0pt;text-indent:.5in'>Cash paid during the period for:</p> <p style='margin:0in;margin-bottom:.0001pt;margin-bottom:24.0pt;text-indent:.5in'>&nbsp;</p> <table border="0" cellspacing="0" cellpadding="0" style='margin-left:.75in;border-collapse:collapse'> <tr align="left"> <td width="45%" valign="bottom" style='width:45.48%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt;margin-left:10.0pt;text-indent:-10.0pt'>&nbsp;</p> </td> <td width="13%" valign="bottom" style='width:13.3%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> </td> <td width="40%" colspan="5" valign="bottom" style='width:40.04%;border:none;border-bottom:solid windowtext 1.0pt;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'><b>Nine Months&nbsp;Ended&nbsp;July 31,</b></p> </td> <td width="1%" valign="bottom" style='width:1.18%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> </td> </tr> <tr align="left"> <td width="45%" valign="bottom" style='width:45.48%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt;margin-left:10.0pt;text-indent:-10.0pt'>&nbsp;</p> </td> <td width="13%" valign="bottom" style='width:13.3%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> </td> <td width="15%" colspan="2" valign="bottom" style='width:15.98%;border:none;border-bottom:solid windowtext 1.0pt;padding:0'> <p align="center" style='margin:0in;margin-bottom:.0001pt;text-align:center'><b>2014</b></p> </td> <td width="2%" valign="bottom" style='width:2.46%;padding:0'> <p align="center" style='margin:0in;margin-bottom:.0001pt;text-align:center'>&nbsp;</p> </td> <td width="21%" colspan="2" valign="bottom" style='width:21.6%;border-top:solid windowtext 1.0pt;border-left:none;border-bottom:solid windowtext 1.0pt;border-right:none;padding:0'> <p align="center" style='margin:0in;margin-bottom:.0001pt;text-align:center'><b>2013</b></p> </td> <td width="1%" valign="bottom" style='width:1.18%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> </td> </tr> <tr align="left"> <td width="45%" valign="bottom" style='width:45.48%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt;margin-left:10.0pt;text-indent:-10.0pt'>Interest</p> </td> <td width="13%" valign="bottom" style='width:13.3%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> </td> <td width="3%" valign="bottom" style='width:3.62%;border:none;padding:0'> <p align="right" style='margin:0in;margin-bottom:.0001pt;text-align:right'>$</p> </td> <td width="12%" valign="bottom" style='width:12.36%;border:none;border-top:solid windowtext 1.0pt;padding:0'> <p align="right" style='margin:0in;margin-bottom:.0001pt;text-align:right'>435</p> </td> <td width="2%" valign="bottom" style='width:2.46%;padding:0'> <p align="right" style='margin:0in;margin-bottom:.0001pt;text-align:right'>&nbsp;</p> </td> <td width="5%" valign="bottom" style='width:5.18%;border:none;padding:0'> <p align="right" style='margin:0in;margin-bottom:.0001pt;text-align:right'>$</p> </td> <td width="16%" valign="bottom" style='width:16.42%;border:none;border-top:solid windowtext 1.0pt;padding:0'> <p align="right" style='margin:0in;margin-bottom:.0001pt;margin-right:10.2pt;text-align:right'>561</p> </td> <td width="1%" valign="bottom" style='width:1.18%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> </td> </tr> <tr align="left"> <td width="45%" valign="bottom" style='width:45.48%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt;margin-left:10.0pt;text-indent:-10.0pt'>Income taxes</p> </td> <td width="13%" valign="bottom" style='width:13.3%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> </td> <td width="15%" colspan="2" valign="bottom" style='width:15.98%;padding:0'> <p align="right" style='margin:0in;margin-bottom:.0001pt;text-align:right'>&#151;</p> </td> <td width="2%" valign="bottom" style='width:2.46%;padding:0'> <p align="right" style='margin:0in;margin-bottom:.0001pt;text-align:right'>&nbsp;</p> </td> <td width="21%" colspan="2" valign="bottom" style='width:21.6%;padding:0'> <p align="right" style='margin:0in;margin-bottom:.0001pt;margin-right:10.2pt;text-align:right'>&#151;</p> </td> <td width="1%" valign="bottom" style='width:1.18%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> </td> </tr> <tr align="left"> <td width="247" style='border:none'></td> <td width="72" style='border:none'></td> <td width="20" style='border:none'></td> <td width="67" style='border:none'></td> <td width="13" style='border:none'></td> <td width="28" style='border:none'></td> <td width="89" style='border:none'></td> <td width="6" style='border:none'></td> </tr> </table> <!--egx--><p style='margin:0in;margin-bottom:.0001pt'><b><u>Related Party Transactions</u></b></p> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> <p style='margin:0in;margin-bottom:.0001pt'><b>Consulting Agreements</b></p> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> <p style='margin:0in;margin-bottom:.0001pt'><font style='letter-spacing:-.1pt'>We have an agreement with an entity controlled by our chief executive officer for his part-time personal services as CEO. The agreement is referred to as the Synthetica Agreement.&#160; In December 2013, the Synthetica Agreement was amended so that the compensation paid for the services of our CEO is capped at $1 per annum effective January 1, 2014.&#160; However, our chief executive may request that his compensation revert back to the original terms of the Synthetica Agreement with 30 days written notice.&#160; Under the original terms, there was no monthly retainer or minimum billing amount but the maximum that could be charged to us in any given month was $15,000. During the three and nine months ended July 31, 2014, we were billed $0 and $20,000, respectively, under the Synthetica Agreement.&#160; </font><font style='letter-spacing:-.1pt'>During the three and nine months ended July 31, 2013, we were billed $33,900 and $117,600, respectively, under the Synthetica Agreement. </font><font style='letter-spacing:-.1pt'>At July 31, 2014 and October 31 2013, </font><font style='letter-spacing:-.1pt'>$67,600</font><font style='letter-spacing:-.1pt'> and </font><font style='letter-spacing:-.1pt'>$47,600</font><font style='letter-spacing:-.1pt'>, respectively, is included in accrued compensation on the accompanying condensed consolidated balance sheets resulting from a voluntary deferral of fees due under the agreement, agreed to by Synthetica to allow the Company to optimize its cash flow.</font></p> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> <p style='margin:0in;margin-bottom:.0001pt'><font style='letter-spacing:-.1pt'>In September 2010, we entered into a business and financial consulting agreement with an entity controlled by our Board chairman for operational consulting services.</font><font style='letter-spacing:-.1pt'>&#160;&#160; The agreement was for an initial term of 12 months with an automatic 12 month renewal period unless terminated by either party upon 30 days written notice.&#160; The agreement is now on a month-to-month basis. There is no monthly retainer or minimum billing amount but the maximum that can be billed to us in a given month cannot exceed $10,000. &#160;&#160;Effective January 2014, the fees for this agreement were capped at $1.00 per year. During the three and nine months ended July 31, 2014, we were charged $0 and $10,000, respectively, under this agreement.&#160; During the three and nine months ended July 31, 2013, we were charged $20,100 and $75,100, respectively, under this agreement which is included in general and administrative expense on the accompanying condensed consolidated statements of operations. &#160;At July 31, 2014 and October 31, 2013, </font><font style='letter-spacing:-.1pt'>$49,000</font><font style='letter-spacing:-.1pt'> and </font><font style='letter-spacing:-.1pt'>$39,000</font><font style='letter-spacing:-.1pt'>,</font><font style='letter-spacing:-.1pt'> respectively, is included in related party payables on the accompanying condensed consolidated balance sheets resulting from a voluntary deferral of fees due under the agreement, agreed to by our Board chairman, to allow the Company to optimize its cash flow.</font></p> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> <p style='margin:0in;margin-bottom:.0001pt'><b>Contributed Services</b></p> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> <p style='margin:0in;margin-bottom:.0001pt'>As discussed above, effective January 1, 2014, the Company&#146;s chief executive officer and Board chairman began to provide their services for $1 per year.&#160; The fair value of those services has been recorded as an expense in the accompanying condensed consolidated financial statements based on the estimated fair value for such services, with a corresponding credit to additional paid in capital. The fair value of the services was estimated based on the terms of the respective agreements prior to January 1, 2014. Contributed services were $45,000 and $90,000, respectively, for the three and nine months ended July 31, 2014.</p> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> <p style='margin:0in;margin-bottom:.0001pt'><b>CSMC</b></p> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> <p style='margin:0in;margin-bottom:.0001pt'><font style='letter-spacing:-.1pt'>Certain founders and directors of the Company are employees of CSMC.&#160; These individuals are also the inventors of the Polycefin technology and are primarily responsible for its development.&#160; As described further in Note 3 above, we have an exclusive license agreement with CSMC for this technology.</font></p> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> <p style='margin:0in;margin-bottom:.0001pt'><font style='letter-spacing:-.1pt'>The License requires royalty payments equal to 3.5% of the gross sales price and other forms of consideration (such as milestone and sublicense payments), as defined in the agreement, on all products using the licensed technology.&#160;&#160; The License also requires us to achieve certain milestones as described in Note 3.</font></p> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> <p style='margin:0in;margin-bottom:.0001pt'>In December 2012, we entered into an agreement with CSMC to support certain activities within the laboratory necessary to prepare compounds.<font style='letter-spacing:-.1pt'>&#160; For the three and nine months ended July 31, 2014, we were charged </font><font style='letter-spacing:-.1pt'>$38,625</font><font style='letter-spacing:-.1pt'> and </font><font style='letter-spacing:-.1pt'>$142,087</font><font style='letter-spacing:-.1pt'>, respectively, by CSMC under this agreement which is included in research and development costs on the accompanying condensed consolidated statements of operations. For the three and nine months ended July 31, 2013, we were charged </font><font style='letter-spacing:-.1pt'>$87,000</font><font style='letter-spacing:-.1pt'> and </font><font style='letter-spacing:-.1pt'>$195,884</font><font style='letter-spacing:-.1pt'>, respectively, by CSMC under this agreement.&#160; As of July 31, 2014, </font><font style='letter-spacing:-.1pt'>$258,091</font><font style='letter-spacing:-.1pt'> is reflected as payable on the accompanying condensed consolidated balance sheets.&#160; Work under the agreement concluded during the three months ended July 31, 2014.&#160; As discussed in Note 3, we have deferred payments under this agreement in order to extend our cash balance.</font></p> <!--egx--><p style='margin:0in;margin-bottom:.0001pt'><b><u><font style='letter-spacing:-.1pt'>Commitments and Contingencies</font></u></b></p> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> <p style='margin:0in;margin-bottom:.0001pt'><b>Litigation</b></p> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> <p style='margin:0in;margin-bottom:.0001pt'>From time to time, we may become party to litigation and other claims in the ordinary course of business.&#160; To the extent that such claims and litigation arise, management would provide for them if upon the advice of counsel, losses are determined to be both probable and estimable.&#160; We are currently not party to any litigation.</p> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> <p style='margin:0in;margin-bottom:.0001pt'><b>Office Lease</b></p> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> <p style='margin:0in;margin-bottom:.0001pt'>We have a lease agreement for office space with a third party (the &#147;Office Lease&#148;) that expires on May 31, 2015.&#160; For the three month periods ended July 31, 2014 and 2013, we recorded $9,434 and $10,950, respectively, of rent expense under the Office Lease which is included in general and administrative expense on the accompanying condensed consolidated statements of operations.&#160; For the nine months ended July 31, 2014 and 2013, we recorded $31,880 and $30,392, respectively, of rent expense under the Office Lease.</p> <p style='margin:0in;margin-bottom:.0001pt;text-indent:.5in'>&nbsp;</p> <p style='margin:0in;margin-bottom:.0001pt'>Commitments under non-cancelable operating leases are as follows as of July 31, 2014:</p> <p style='margin:0in;margin-bottom:.0001pt;text-indent:.5in'>&nbsp;</p> <table border="0" cellspacing="0" cellpadding="0" style='margin-left:130.5pt;border-collapse:collapse'> <tr align="left"> <td width="54" valign="bottom" style='width:40.55pt;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> </td> <td width="7" colspan="2" valign="bottom" style='width:5.2pt;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> </td> <td width="149" valign="bottom" style='width:111.75pt;border:none;border-bottom:solid windowtext 1.0pt;padding:0'> <p align="center" style='margin:0in;margin-bottom:.0001pt;text-align:center'>Year Ended October 31,</p> </td> </tr> <tr align="left"> <td width="54" valign="bottom" style='width:40.55pt;padding:0'> <p style='margin:0in;margin-bottom:.0001pt;margin-left:10.0pt;text-indent:-10.0pt'>2014</p> </td> <td width="1" valign="bottom" style='width:1.0pt;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> </td> <td width="155" colspan="2" valign="bottom" style='width:115.95pt;border:none;border-top:solid windowtext 1.0pt;padding:0'> <p align="right" style='margin:0in;margin-bottom:.0001pt;text-align:right'>$&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; &#160;&#160;&#160;8,100</p> </td> </tr> <tr align="left"> <td width="54" valign="bottom" style='width:40.55pt;padding:0'> <p style='margin:0in;margin-bottom:.0001pt;margin-left:10.0pt;text-indent:-10.0pt'>2015 </p> </td> <td width="1" valign="bottom" style='width:1.0pt;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> </td> <td width="155" colspan="2" valign="bottom" style='width:115.95pt;padding:0'> <p align="right" style='margin:0in;margin-bottom:.0001pt;text-align:right'>10,800</p> </td> </tr> <tr align="left"> <td width="54" valign="bottom" style='width:40.55pt;padding:0'> <p style='margin:0in;margin-bottom:.0001pt;margin-left:10.0pt;text-indent:-10.0pt'>&nbsp;</p> </td> <td width="1" valign="bottom" style='width:1.0pt;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> </td> <td width="155" colspan="2" valign="bottom" style='width:115.95pt;border-top:solid windowtext 1.0pt;border-left:none;border-bottom:double windowtext 2.25pt;border-right:none;padding:0'> <p align="right" style='margin:0in;margin-bottom:.0001pt;text-align:right'>$&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; 18,900</p> </td> </tr> <tr align="left"> <td width="55" style='border:none'></td> <td width="2" style='border:none'></td> <td width="6" style='border:none'></td> <td width="150" style='border:none'></td> </tr> </table> <!--egx--><p style='margin:0in;margin-bottom:.0001pt;text-align:center;letter-spacing:-.1pt;font-weight:bold;text-align:justify'><font lang="X-NONE">(10)&#160; SUBSEQUENT EVENTS</font></p> <p style='margin:0in;margin-bottom:.0001pt;text-align:center;letter-spacing:-.1pt;font-weight:bold;text-align:justify'>&nbsp;</p> <p style='margin:0in;margin-bottom:.0001pt;text-align:justify'>In August 2014, Dr. Randolphe Swenson, Jr. was elected to serve as a member of the Board of Directors. In consideration of his agreement to serve as a member of the Board of Directors, the Company granted to Dr. Swenson non-qualified options to purchase for five (5) years 50,000 shares of common stock at an exercise price of $1.00 per share, which options are deemed immediately vested.</p> <p style='margin:0in;margin-bottom:.0001pt;text-align:justify;text-indent:31.5pt'>&nbsp;</p> <p style='margin:0in;margin-bottom:.0001pt;text-align:justify'>The Company also entered into a Consultation and Securities Compensation Agreement between the Company, on the one hand and Dr. Swenson, pursuant to which Dr. Swenson was engaged to serve as a consultant to the Company for a term of six (6) months, to oversee and supervise an executive search to recruit a new CEO under the direction and supervision of the Board of Directors.</p> <p style='margin:0in;margin-bottom:.0001pt;text-align:justify;text-indent:31.5pt'>&nbsp;</p> <p style='margin:0in;margin-bottom:.0001pt;text-align:justify'>Pursuant to the Consultation and Securities Compensation Agreement and in consideration of his services as a consultant to conduct a CEO recruitment search, the Company (i) granted to Dr. Swenson non-qualified stock options exercisable for five (5) years to purchase an aggregate of 25,000 shares of common stock at an exercise price of $1.00, and (ii) conditioned on the Company successfully engaging a new CEO on terms acceptable to the Board of Directors during the term of Mr. Swenson&#146;s consultancy, in its sole discretion, agreed to grant to Mr. Swenson additional non-qualified stock options exercisable for five (5) years to purchase an additional 35,000 shares of common stock at an exercise price of $1.00 per share.&#160; All of such options will be fully vested and exercisable upon grant.</p> <!--egx--><p style='margin-top:0in;margin-right:0in;margin-bottom:12.0pt;margin-left:0in;text-indent:.5in;margin-bottom:0in;margin-bottom:.0001pt;text-indent:0in'><b>Going Concern and Management&#146;s Plans</b></p> <p style='margin-top:0in;margin-right:0in;margin-bottom:12.0pt;margin-left:0in;text-indent:.5in;margin-bottom:0in;margin-bottom:.0001pt;text-indent:0in'>&nbsp;</p> <p style='margin:0in;margin-bottom:.0001pt'>The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern. Since our inception in August&nbsp;2007, we have not generated revenue, incurred operating losses, and as of July 31, 2014, had a retained deficit $6,019,984.&#160;&#160; Further, as of July 31, 2014, our cash balance was $219,035 and we had a working capital deficit of $1,198,149. These conditions raise substantial doubt about our ability to continue as a going concern.</p> <p style='margin:0in;margin-bottom:.0001pt;text-indent:.5in'>&nbsp;</p> <p style='margin:0in;margin-bottom:.0001pt'>During the nine months ended July 31, 2014, we sold $700,000 in Bridge Notes (defined below) receiving net proceeds of $606,318 after payment of offering expenses. Management believes that existing cash on hand will be sufficient to fund the Company&#146;s planned activities through at least the end of our fiscal year.&#160; This assumes that we continue to defer payment of certain liabilities to our officers but allows for some payments to be made to CSMC for accrued research and development expenses. &#160;Additionally, certain key professionals such as legal counsel have also had payments deferred and the proceeds from the Bridge Notes will allow for some partial payments of these deferred balances but not payment in full.&#160; While these parties have continued to work with the Company despite this lack of payment, there is no assurance they will continue to do so, and the loss of a key management member, or the loss of CSMC as a research partner, could have a material adverse effect on the Company&#146;s business prospects.</p> <p style='margin:0in;margin-bottom:.0001pt;text-indent:.5in'>&nbsp;</p> <p style='margin:0in;margin-bottom:.0001pt'>To raise sufficient capital to fund the Company&#146;s business plan, we plan on filing a registration statement with the Securities and Exchange Commission (the &#147;SEC&#148;) for an initial public offering of the Company&#146;s securities. No assurance can be given that this effort will be successful or adequately capitalize the Company.</p> <p style='margin:0in;margin-bottom:.0001pt;text-indent:.5in'>&nbsp;</p> <p style='margin:0in;margin-bottom:.0001pt'>In the event that we cannot raise sufficient capital within the required timeframe, it will have a material adverse effect on the Company&#146;s liquidity, financial condition and business prospects or force the Company out of business.&#160; The accompanying financial statements do not include adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from an inability of the Company to continue as a going concern.</p> <!--egx--><p style='margin:0in;margin-bottom:.0001pt'><b>Basis of Presentation</b></p> <p style='margin-top:0in;margin-right:0in;margin-bottom:12.0pt;margin-left:0in;text-indent:.5in;margin-bottom:0in;margin-bottom:.0001pt;text-indent:0in'>&nbsp;</p> <p style='margin-top:0in;margin-right:0in;margin-bottom:12.0pt;margin-left:0in;text-indent:.5in;margin-bottom:0in;margin-bottom:.0001pt;text-indent:0in'>The accompanying condensed consolidated financial statements include the accounts of Arrogene and its wholly owned subsidiary ANI.&#160; All intercompany transactions have been eliminated in consolidation.&#160; The condensed consolidated financial statements have been prepared without audit pursuant to the rules&nbsp;and regulations of the SEC.&#160; Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations.&#160; The condensed consolidated financial statements reflect all adjustments (consisting of only normal recurring entries), which in the opinion of management, are necessary to present fairly the financial position at July 31, 2014 and the results of operations and cash flows of the Company for the three and nine months ended July 31, 2014 and 2013.&#160; Operating results for the nine months ended July 31, 2014, are not necessarily indicative of the results that may be expected for the year ended October&nbsp;31, 2014.</p> <p style='margin-top:0in;margin-right:0in;margin-bottom:12.0pt;margin-left:0in;text-indent:.5in;margin-bottom:0in;margin-bottom:.0001pt'>&nbsp;</p> <p style='margin-top:0in;margin-right:0in;margin-bottom:12.0pt;margin-left:0in;text-indent:.5in;margin-bottom:0in;margin-bottom:.0001pt;text-indent:0in'>The unaudited condensed consolidated financial statements should be read in conjunction with the Company&#146;s audited financial statements and footnotes thereto for the year ended October 31, 2013 filed on April 2, 2014.</p> <!--egx--><p style='margin-top:0in;margin-right:0in;margin-bottom:12.0pt;margin-left:0in;text-indent:.5in;margin-bottom:0in;margin-bottom:.0001pt;text-indent:0in'><b>Use of Estimates and Assumptions</b></p> <p style='margin-top:0in;margin-right:0in;margin-bottom:12.0pt;margin-left:0in;text-indent:.5in;margin-bottom:0in;margin-bottom:.0001pt;text-indent:0in'>&nbsp;</p> <p style='margin-top:0in;margin-right:0in;margin-bottom:12.0pt;margin-left:0in;text-indent:.5in;margin-bottom:0in;margin-bottom:.0001pt;text-indent:0in'>The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (&#147;U.S. GAAP&#148;) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported periods.&#160; Actual results may differ from these estimates.</p> <!--egx--><p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> <table border="0" cellspacing="0" cellpadding="0" style='margin-left:.5in;border-collapse:collapse'> <tr align="left"> <td width="42%" valign="bottom" style='width:42.78%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> </td> <td width="5%" valign="bottom" style='width:5.02%;padding:0'> <p align="center" style='margin:0in;margin-bottom:.0001pt;text-align:center'>&nbsp;</p> </td> <td width="45%" colspan="3" valign="bottom" style='width:45.16%;border:none;border-bottom:solid windowtext 1.0pt;padding:0'> <p align="center" style='margin:0in;margin-bottom:.0001pt;text-align:center'><b>Three and Nine Months&nbsp;Ended July 31,</b></p> </td> <td width="5%" valign="bottom" style='width:5.02%;padding:0'> <p align="center" style='margin:0in;margin-bottom:.0001pt;text-align:center'>&nbsp;</p> </td> <td width="2%" valign="bottom" style='width:2.0%;padding:0'> <p align="center" style='margin:0in;margin-bottom:.0001pt;text-align:center'>&nbsp;</p> </td> </tr> <tr align="left"> <td width="42%" valign="bottom" style='width:42.78%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> </td> <td width="5%" valign="bottom" style='width:5.02%;padding:0'> <p align="center" style='margin:0in;margin-bottom:.0001pt;text-align:center'>&nbsp;</p> </td> <td width="20%" valign="bottom" style='width:20.06%;border:none;border-bottom:solid windowtext 1.0pt;padding:0'> <p align="center" style='margin:0in;margin-bottom:.0001pt;text-align:center'><b>2014</b></p> </td> <td width="5%" valign="bottom" style='width:5.02%;border:none;border-top:solid windowtext 1.0pt;padding:0'> <p align="center" style='margin:0in;margin-bottom:.0001pt;text-align:center'>&nbsp;</p> </td> <td width="20%" valign="bottom" style='width:20.08%;border-top:solid windowtext 1.0pt;border-left:none;border-bottom:solid windowtext 1.0pt;border-right:none;padding:0'> <p align="center" style='margin:0in;margin-bottom:.0001pt;text-align:center'><b>2013</b></p> </td> <td width="5%" valign="bottom" style='width:5.02%;padding:0'> <p align="center" style='margin:0in;margin-bottom:.0001pt;text-align:center'>&nbsp;</p> </td> <td width="2%" valign="bottom" style='width:2.0%;padding:0'> <p align="center" style='margin:0in;margin-bottom:.0001pt;text-align:center'>&nbsp;</p> </td> </tr> <tr align="left"> <td width="42%" valign="top" style='width:42.78%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt;margin-left:10.0pt;text-indent:-10.0pt'>&nbsp;</p> </td> <td width="5%" valign="bottom" style='width:5.02%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> </td> <td width="20%" valign="bottom" style='width:20.06%;border:none;padding:0'> <p align="right" style='margin:0in;margin-bottom:.0001pt;text-align:right'>&nbsp;</p> </td> <td width="5%" valign="bottom" style='width:5.02%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> </td> <td width="20%" valign="bottom" style='width:20.08%;border:none;padding:0'> <p align="right" style='margin:0in;margin-bottom:.0001pt;text-align:right'>&nbsp;</p> </td> <td width="5%" valign="bottom" style='width:5.02%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> </td> <td width="2%" valign="bottom" style='width:2.0%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> </td> </tr> <tr align="left"> <td width="42%" valign="top" style='width:42.78%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt;margin-left:10.0pt;text-indent:-10.0pt'>Warrants</p> </td> <td width="5%" valign="bottom" style='width:5.02%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> </td> <td width="20%" valign="bottom" style='width:20.06%;padding:0'> <p align="right" style='margin:0in;margin-bottom:.0001pt;text-align:right'>6,358,358</p> </td> <td width="5%" valign="bottom" style='width:5.02%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> </td> <td width="20%" valign="bottom" style='width:20.08%;padding:0'> <p align="right" style='margin:0in;margin-bottom:.0001pt;text-align:right'>5,422,858</p> </td> <td width="5%" valign="bottom" style='width:5.02%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> </td> <td width="2%" valign="bottom" style='width:2.0%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> </td> </tr> <tr align="left"> <td width="42%" valign="top" style='width:42.78%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt;margin-left:10.0pt;text-indent:-10.0pt'>Stock options</p> </td> <td width="5%" valign="bottom" style='width:5.02%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> </td> <td width="20%" valign="bottom" style='width:20.06%;padding:0'> <p align="right" style='margin:0in;margin-bottom:.0001pt;text-align:right'>1,400,000</p> </td> <td width="5%" valign="bottom" style='width:5.02%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> </td> <td width="20%" valign="bottom" style='width:20.08%;padding:0'> <p align="right" style='margin:0in;margin-bottom:.0001pt;text-align:right'>&#151;</p> </td> <td width="5%" valign="bottom" style='width:5.02%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> </td> <td width="2%" valign="bottom" style='width:2.0%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> </td> </tr> <tr align="left"> <td width="42%" valign="top" style='width:42.78%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt;margin-left:10.0pt;text-indent:-10.0pt'>Convertible debt*</p> </td> <td width="5%" valign="bottom" style='width:5.02%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> </td> <td width="20%" valign="bottom" style='width:20.06%;padding:0'> <p align="right" style='margin:0in;margin-bottom:.0001pt;text-align:right'>766,667</p> </td> <td width="5%" valign="bottom" style='width:5.02%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> </td> <td width="20%" valign="bottom" style='width:20.08%;padding:0'> <p align="right" style='margin:0in;margin-bottom:.0001pt;text-align:right'>66,667</p> </td> <td width="5%" valign="bottom" style='width:5.02%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> </td> <td width="2%" valign="bottom" style='width:2.0%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> </td> </tr> </table> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> <table border="0" cellspacing="0" cellpadding="0" style='margin-left:.5in;border-collapse:collapse;display:none'> <tr style='display:none'> <td width="42%" valign="bottom" style='width:42.78%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> </td> <td width="5%" valign="bottom" style='width:5.02%;padding:0'> <p align="center" style='margin:0in;margin-bottom:.0001pt;text-align:center'>&nbsp;</p> </td> <td width="45%" colspan="3" valign="bottom" style='width:45.16%;border:none;border-bottom:solid windowtext 1.0pt;padding:0'> <p align="center" style='margin:0in;margin-bottom:.0001pt;text-align:center'><b><font style='display:none'>Three and Nine Months&nbsp;Ended July 31,</font></b></p> </td> <td width="5%" valign="bottom" style='width:5.02%;padding:0'> <p align="center" style='margin:0in;margin-bottom:.0001pt;text-align:center'>&nbsp;</p> </td> <td width="2%" valign="bottom" style='width:2.0%;padding:0'> <p align="center" style='margin:0in;margin-bottom:.0001pt;text-align:center'>&nbsp;</p> </td> </tr> <tr style='display:none'> <td width="42%" valign="bottom" style='width:42.78%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> </td> <td width="5%" valign="bottom" style='width:5.02%;padding:0'> <p align="center" style='margin:0in;margin-bottom:.0001pt;text-align:center'>&nbsp;</p> </td> <td width="20%" valign="bottom" style='width:20.06%;border:none;border-bottom:solid windowtext 1.0pt;padding:0'> <p align="center" style='margin:0in;margin-bottom:.0001pt;text-align:center'><b><font style='display:none'>2014</font></b></p> </td> <td width="5%" valign="bottom" style='width:5.02%;border:none;border-top:solid windowtext 1.0pt;padding:0'> <p align="center" style='margin:0in;margin-bottom:.0001pt;text-align:center'>&nbsp;</p> </td> <td width="20%" valign="bottom" style='width:20.08%;border-top:solid windowtext 1.0pt;border-left:none;border-bottom:solid windowtext 1.0pt;border-right:none;padding:0'> <p align="center" style='margin:0in;margin-bottom:.0001pt;text-align:center'><b><font style='display:none'>2013</font></b></p> </td> <td width="5%" valign="bottom" style='width:5.02%;padding:0'> <p align="center" style='margin:0in;margin-bottom:.0001pt;text-align:center'>&nbsp;</p> </td> <td width="2%" valign="bottom" style='width:2.0%;padding:0'> <p align="center" style='margin:0in;margin-bottom:.0001pt;text-align:center'>&nbsp;</p> </td> </tr> <tr style='display:none'> <td width="42%" valign="top" style='width:42.78%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt;margin-left:10.0pt;text-indent:-10.0pt'>&nbsp;</p> </td> <td width="5%" valign="bottom" style='width:5.02%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> </td> <td width="20%" valign="bottom" style='width:20.06%;border:none;padding:0'> <p align="right" style='margin:0in;margin-bottom:.0001pt;text-align:right'>&nbsp;</p> </td> <td width="5%" valign="bottom" style='width:5.02%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'><font style='display:none'>&nbsp;</font></p> </td> <td width="20%" valign="bottom" style='width:20.08%;border:none;padding:0'> <p align="right" style='margin:0in;margin-bottom:.0001pt;text-align:right'>&nbsp;</p> </td> <td width="5%" valign="bottom" style='width:5.02%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'><font style='display:none'>&nbsp;</font></p> </td> <td width="2%" valign="bottom" style='width:2.0%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'><font style='display:none'>&nbsp;</font></p> </td> </tr> <tr style='display:none'> <td width="42%" valign="top" style='width:42.78%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt;margin-left:10.0pt;text-indent:-10.0pt'><font style='display:none'>Warrants</font></p> </td> <td width="5%" valign="bottom" style='width:5.02%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> </td> <td width="20%" valign="bottom" style='width:20.06%;padding:0'> <p align="right" style='margin:0in;margin-bottom:.0001pt;text-align:right'><font style='display:none'>6,358,358</font></p> </td> <td width="5%" valign="bottom" style='width:5.02%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'><font style='display:none'>&nbsp;</font></p> </td> <td width="20%" valign="bottom" style='width:20.08%;padding:0'> <p align="right" style='margin:0in;margin-bottom:.0001pt;text-align:right'><font style='display:none'>5,422,858</font></p> </td> <td width="5%" valign="bottom" style='width:5.02%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'><font style='display:none'>&nbsp;</font></p> </td> <td width="2%" valign="bottom" style='width:2.0%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'><font style='display:none'>&nbsp;</font></p> </td> </tr> <tr style='display:none'> <td width="42%" valign="top" style='width:42.78%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt;margin-left:10.0pt;text-indent:-10.0pt'><font style='display:none'>Stock options</font></p> </td> <td width="5%" valign="bottom" style='width:5.02%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> </td> <td width="20%" valign="bottom" style='width:20.06%;padding:0'> <p align="right" style='margin:0in;margin-bottom:.0001pt;text-align:right'><font style='display:none'>1,400,000</font></p> </td> <td width="5%" valign="bottom" style='width:5.02%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> </td> <td width="20%" valign="bottom" style='width:20.08%;padding:0'> <p align="right" style='margin:0in;margin-bottom:.0001pt;text-align:right'><font style='display:none'>&#151;</font></p> </td> <td width="5%" valign="bottom" style='width:5.02%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> </td> <td width="2%" valign="bottom" style='width:2.0%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> </td> </tr> <tr style='display:none'> <td width="42%" valign="top" style='width:42.78%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt;margin-left:10.0pt;text-indent:-10.0pt'><font style='display:none'>Convertible debt*</font></p> </td> <td width="5%" valign="bottom" style='width:5.02%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> </td> <td width="20%" valign="bottom" style='width:20.06%;padding:0'> <p align="right" style='margin:0in;margin-bottom:.0001pt;text-align:right'><font style='display:none'>766,667</font></p> </td> <td width="5%" valign="bottom" style='width:5.02%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'><font style='display:none'>&nbsp;</font></p> </td> <td width="20%" valign="bottom" style='width:20.08%;padding:0'> <p align="right" style='margin:0in;margin-bottom:.0001pt;text-align:right'><font style='display:none'>66,667</font></p> </td> <td width="5%" valign="bottom" style='width:5.02%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'><font style='display:none'>&nbsp;</font></p> </td> <td width="2%" valign="bottom" style='width:2.0%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'><font style='display:none'>&nbsp;</font></p> </td> </tr> </table> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> <!--egx--><p style='margin:0in;margin-bottom:.0001pt;margin-bottom:24.0pt;text-indent:.5in'>&nbsp;</p> <table border="0" cellspacing="0" cellpadding="0" style='margin-left:.75in;border-collapse:collapse'> <tr align="left"> <td width="45%" valign="bottom" style='width:45.48%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt;margin-left:10.0pt;text-indent:-10.0pt'>&nbsp;</p> </td> <td width="13%" valign="bottom" style='width:13.3%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> </td> <td width="40%" colspan="5" valign="bottom" style='width:40.04%;border:none;border-bottom:solid windowtext 1.0pt;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'><b>Nine Months&nbsp;Ended&nbsp;July 31,</b></p> </td> <td width="1%" valign="bottom" style='width:1.18%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> </td> </tr> <tr align="left"> <td width="45%" valign="bottom" style='width:45.48%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt;margin-left:10.0pt;text-indent:-10.0pt'>&nbsp;</p> </td> <td width="13%" valign="bottom" style='width:13.3%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> </td> <td width="15%" colspan="2" valign="bottom" style='width:15.98%;border:none;border-bottom:solid windowtext 1.0pt;padding:0'> <p align="center" style='margin:0in;margin-bottom:.0001pt;text-align:center'><b>2014</b></p> </td> <td width="2%" valign="bottom" style='width:2.46%;padding:0'> <p align="center" style='margin:0in;margin-bottom:.0001pt;text-align:center'>&nbsp;</p> </td> <td width="21%" colspan="2" valign="bottom" style='width:21.6%;border-top:solid windowtext 1.0pt;border-left:none;border-bottom:solid windowtext 1.0pt;border-right:none;padding:0'> <p align="center" style='margin:0in;margin-bottom:.0001pt;text-align:center'><b>2013</b></p> </td> <td width="1%" valign="bottom" style='width:1.18%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> </td> </tr> <tr align="left"> <td width="45%" valign="bottom" style='width:45.48%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt;margin-left:10.0pt;text-indent:-10.0pt'>Interest</p> </td> <td width="13%" valign="bottom" style='width:13.3%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> </td> <td width="3%" valign="bottom" style='width:3.62%;border:none;padding:0'> <p align="right" style='margin:0in;margin-bottom:.0001pt;text-align:right'>$</p> </td> <td width="12%" valign="bottom" style='width:12.36%;border:none;border-top:solid windowtext 1.0pt;padding:0'> <p align="right" style='margin:0in;margin-bottom:.0001pt;text-align:right'>435</p> </td> <td width="2%" valign="bottom" style='width:2.46%;padding:0'> <p align="right" style='margin:0in;margin-bottom:.0001pt;text-align:right'>&nbsp;</p> </td> <td width="5%" valign="bottom" style='width:5.18%;border:none;padding:0'> <p align="right" style='margin:0in;margin-bottom:.0001pt;text-align:right'>$</p> </td> <td width="16%" valign="bottom" style='width:16.42%;border:none;border-top:solid windowtext 1.0pt;padding:0'> <p align="right" style='margin:0in;margin-bottom:.0001pt;margin-right:10.2pt;text-align:right'>561</p> </td> <td width="1%" valign="bottom" style='width:1.18%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> </td> </tr> <tr align="left"> <td width="45%" valign="bottom" style='width:45.48%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt;margin-left:10.0pt;text-indent:-10.0pt'>Income taxes</p> </td> <td width="13%" valign="bottom" style='width:13.3%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> </td> <td width="15%" colspan="2" valign="bottom" style='width:15.98%;padding:0'> <p align="right" style='margin:0in;margin-bottom:.0001pt;text-align:right'>&#151;</p> </td> <td width="2%" valign="bottom" style='width:2.46%;padding:0'> <p align="right" style='margin:0in;margin-bottom:.0001pt;text-align:right'>&nbsp;</p> </td> <td width="21%" colspan="2" valign="bottom" style='width:21.6%;padding:0'> <p align="right" style='margin:0in;margin-bottom:.0001pt;margin-right:10.2pt;text-align:right'>&#151;</p> </td> <td width="1%" valign="bottom" style='width:1.18%;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> </td> </tr> <tr align="left"> <td width="247" style='border:none'></td> <td width="72" style='border:none'></td> <td width="20" style='border:none'></td> <td width="67" style='border:none'></td> <td width="13" style='border:none'></td> <td width="28" style='border:none'></td> <td width="89" style='border:none'></td> <td width="6" style='border:none'></td> </tr> </table> <!--egx--><p style='margin:0in;margin-bottom:.0001pt;text-indent:.5in'>&nbsp;</p> <table border="0" cellspacing="0" cellpadding="0" style='margin-left:130.5pt;border-collapse:collapse'> <tr align="left"> <td width="54" valign="bottom" style='width:40.55pt;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> </td> <td width="7" colspan="2" valign="bottom" style='width:5.2pt;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> </td> <td width="149" valign="bottom" style='width:111.75pt;border:none;border-bottom:solid windowtext 1.0pt;padding:0'> <p align="center" style='margin:0in;margin-bottom:.0001pt;text-align:center'>Year Ended October 31,</p> </td> </tr> <tr align="left"> <td width="54" valign="bottom" style='width:40.55pt;padding:0'> <p style='margin:0in;margin-bottom:.0001pt;margin-left:10.0pt;text-indent:-10.0pt'>2014</p> </td> <td width="1" valign="bottom" style='width:1.0pt;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> </td> <td width="155" colspan="2" valign="bottom" style='width:115.95pt;border:none;border-top:solid windowtext 1.0pt;padding:0'> <p align="right" style='margin:0in;margin-bottom:.0001pt;text-align:right'>$&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; &#160;&#160;&#160;8,100</p> </td> </tr> <tr align="left"> <td width="54" valign="bottom" style='width:40.55pt;padding:0'> <p style='margin:0in;margin-bottom:.0001pt;margin-left:10.0pt;text-indent:-10.0pt'>2015 </p> </td> <td width="1" valign="bottom" style='width:1.0pt;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> </td> <td width="155" colspan="2" valign="bottom" style='width:115.95pt;padding:0'> <p align="right" style='margin:0in;margin-bottom:.0001pt;text-align:right'>10,800</p> </td> </tr> <tr align="left"> <td width="54" valign="bottom" style='width:40.55pt;padding:0'> <p style='margin:0in;margin-bottom:.0001pt;margin-left:10.0pt;text-indent:-10.0pt'>&nbsp;</p> </td> <td width="1" valign="bottom" style='width:1.0pt;padding:0'> <p style='margin:0in;margin-bottom:.0001pt'>&nbsp;</p> </td> <td width="155" colspan="2" valign="bottom" style='width:115.95pt;border-top:solid windowtext 1.0pt;border-left:none;border-bottom:double windowtext 2.25pt;border-right:none;padding:0'> <p align="right" style='margin:0in;margin-bottom:.0001pt;text-align:right'>$&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; 18,900</p> </td> </tr> <tr align="left"> <td width="55" style='border:none'></td> <td width="2" style='border:none'></td> <td width="6" style='border:none'></td> <td width="150" style='border:none'></td> </tr> </table> 2006-12-07 January 11, 2012 Arrogene Nanotechnology, Inc. (&#147;ANI&#148;) a company focused on oncology 0 6019984 219035 700000 606318 205800 Black-Scholes option pricing model P5Y 0.0169 0.7890 49541 60270 35700 Black-Scholes pricing model P5Y 0.0169 0.7890 8292 10825 726550 The Convertible Notes were initially convertible into shares of our common stock at $.30 per share (the &#147;Conversion Price&#148;). shares of our common stock Convertible Notes do not bear interest originally payable on October 19, 2011 10000 224000 56000 168000 25000 260000 1.00 1.00 24956 227645 17160 58400 P5Y 0.0137 0.7890 2433 7300 6358358 5422858 1400000 766667 66667 6358358 5422858 1400000 766667 66667 435 561 67600 47600 In September 2010, we entered into a business and financial consulting agreement with an entity controlled by our Board chairman for operational consulting services. 49000 39000 38625 142087 87000 195884 258091 9434 10950 31880 30392 8100 10800 18900 Dr. Randolphe Swenson, Jr. was elected to serve as a member of the Board of Directors 0001403792 2012-10-31 0001403792 us-gaap:CommonStockMember 2013-10-31 0001403792 fil:APICMember 2013-10-31 0001403792 us-gaap:RetainedEarningsMember 2013-10-31 0001403792 2013-10-31 0001403792 fil:SyntheticaLtdMember 2013-10-31 0001403792 fil:EntityControlledByBoardChairmanMember 2013-10-31 0001403792 2013-11-01 2014-07-31 0001403792 2014-09-10 0001403792 2014-07-31 0001403792 2014-05-01 2014-07-31 0001403792 2013-05-01 2013-07-31 0001403792 2012-11-01 2013-07-31 0001403792 2007-08-07 2014-07-31 0001403792 2013-07-31 0001403792 us-gaap:CommonStockMember 2013-11-01 2014-07-31 0001403792 fil:APICMember 2013-11-01 2014-07-31 0001403792 us-gaap:RetainedEarningsMember 2013-11-01 2014-07-31 0001403792 us-gaap:CommonStockMember 2014-07-31 0001403792 fil:APICMember 2014-07-31 0001403792 us-gaap:RetainedEarningsMember 2014-07-31 0001403792 fil:ArrogeneNanotechnologyIncMember 2013-11-01 2014-07-31 0001403792 fil:BridgeNoteWarrantsMember 2014-07-31 0001403792 fil:BridgeNoteWarrantsMember 2013-11-01 2014-07-31 0001403792 fil:PaBridgeNoteWarrantsMember 2014-07-31 0001403792 fil:PaBridgeNoteWarrantsMember 2013-11-01 2014-07-31 0001403792 fil:October2010ThroughApril2011Memberfil:ConvertibleDebt1Member 2013-11-01 2014-07-31 0001403792 fil:ConvertibleDebt1Member 2014-07-31 0001403792 fil:CommonStock1Member 2013-11-01 2014-07-31 0001403792 fil:CommonStock1Member 2014-05-01 2014-07-31 0001403792 fil:CommonStockPurchaseWarrantsMember 2013-11-01 2014-07-31 0001403792 fil:StockOptions1Member 2013-11-01 2014-07-31 0001403792 fil:StockOptions1Member 2014-05-01 2014-07-31 0001403792 fil:Warrants1Member 2013-11-01 2014-07-31 0001403792 fil:Warrants1Member 2014-05-01 2014-07-31 0001403792 fil:Warrants1Member 2013-05-01 2013-07-31 0001403792 fil:StockOptions1Member 2013-11-01 2014-07-31 0001403792 fil:StockOptions1Member 2014-05-01 2014-07-31 0001403792 fil:ConvertibleDebt1Member 2013-11-01 2014-07-31 0001403792 fil:ConvertibleDebt1Member 2014-05-01 2014-07-31 0001403792 fil:ConvertibleDebt1Member 2013-05-01 2013-07-31 0001403792 fil:Warrants1Member 2012-11-01 2013-07-31 0001403792 fil:ConvertibleDebt1Member 2012-11-01 2013-07-31 0001403792 fil:SyntheticaLtdMember 2014-07-31 0001403792 fil:September2010Memberfil:EntityControlledByBoardChairmanMember 2013-11-01 2014-07-31 0001403792 fil:EntityControlledByBoardChairmanMember 2014-07-31 0001403792 fil:CSMCMember 2014-05-01 2014-07-31 0001403792 fil:CSMCMember 2013-11-01 2014-07-31 0001403792 fil:CSMCMember 2013-05-01 2013-07-31 0001403792 fil:CSMCMember 2012-11-01 2013-07-31 0001403792 fil:CSMCMember 2014-07-31 0001403792 fil:YearEndingOctober312014Member 2014-07-31 0001403792 fil:YearEndingOctober312015Member 2014-07-31 pure iso4217:USD shares iso4217:USD shares Less discount of $145,530 Preferred stock, $.0001 par value 10,000,000 shares authorized, none issued. 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Related Party Transactions: Consulting Agreements (Details) (USD $)
9 Months Ended
Jul. 31, 2014
Oct. 31, 2013
Jul. 31, 2014
Synthetica, Ltd
Oct. 31, 2013
Synthetica, Ltd
Jul. 31, 2014
Entity controlled by Board chairman
Oct. 31, 2013
Entity controlled by Board chairman
Jul. 31, 2014
Entity controlled by Board chairman
September 2010
AccruedCompensation     $ 67,600 $ 47,600      
Related Party Transaction, Description of Transaction             In September 2010, we entered into a business and financial consulting agreement with an entity controlled by our Board chairman for operational consulting services.
Related party payables $ 49,000 $ 39,000     $ 49,000 $ 39,000  
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Going Concern, Management's Plans and Basis of Presentation: Going Concern and Management's Plans (Details) (USD $)
9 Months Ended
Jul. 31, 2014
Oct. 31, 2013
Jul. 31, 2013
Oct. 31, 2012
Details        
Revenue since inception $ 0      
Deficit accumulated during development stage 6,019,984      
Cash and cash equivalents $ 219,035 $ 13,822 $ 181,386 $ 539,727
XML 16 R37.htm IDEA: XBRL DOCUMENT v2.4.0.8
Subsequent Events (Details)
9 Months Ended
Jul. 31, 2014
Details  
Subsequent Event, Description Dr. Randolphe Swenson, Jr. was elected to serve as a member of the Board of Directors
XML 17 R9.htm IDEA: XBRL DOCUMENT v2.4.0.8
License Agreement
9 Months Ended
Jul. 31, 2014
Notes  
License Agreement

(3)  LICENSE AGREEMENT

 

On December 23, 2009, we entered into an agreement for the right to an exclusive license agreement with CSMC which provides us with the world-wide rights to U.S Patents No. 7,547,511 “Antisense Inhibition of Laminin-8 Expression to Inhibit Human Gliomas”, No. 7,935,677, “Polymalic Acid-Based Multifunctional Drug Delivery System”, No. 8,309,614 “Poly (Beta Malic Acid) with Pendant Leu-Leu-Leu Tripeptide for Effective Cytoplasmic Drug Delivery”, and  No. 8,562,964 along with various Japanese, EU and Asian related patents and applications, related technical information to develop, market and sell human therapeutic and diagnostic products, including new pharmaceutical products and/or non-prescriptive products using the patented technology (the “CSMC Agreement”).  The CSMC Agreement has been amended five times; December 8, 2010, June 30, 2011, August 31, 2011, October 28, 2011, and December 30, 2013. The CSMC Agreement also provides us with the rights to several other related, filed, but yet unissued patents.  The CSMC Agreement requires royalty payments equal to 3.5% of the gross sales price and other forms of consideration (such as milestone and sublicense payments), as defined in the agreement, on all products using the licensed technology.  The CSMC Agreement expires on a country-by-country basis on the date that the last patent covered under the agreement expires (currently 2032).

 

The CSMC Agreement, as amended, requires us to achieve certain other milestones in order to maintain the agreement.  These include the following:

 

·         Begin development or enter into a joint venture, licensing or sub-licensing agreement, or other business arrangement with a third party not an affiliate of the Company to cause development of at least one product consistent with sound business practices by December 31, 2012;

·         Expend at least $500,000 in the aggregate toward the development or promotion of the sale of products based on the licensed patent rights or technical information commencing from the effective date of the agreement and continuing through and including December 31, 2012, and at least $1,000,000 annually thereafter, for further development or promotion of the sale of products through and including December 31, 2013;

·         Provide to CSMC at least $150,000 (in aggregate) within at least a four year period to fund research and development of the licensed patent rights and technical information;

·         On or before December 31, 2014, the Company shall have commenced a clinical trial or trials in connection with at least one intended commercial use;

 

We believe that we have achieved the required milestones for the contractual periods ended December 31, 2013.  It is management’s belief that administrative expenses incurred in support of the Company’s business activities meet the definition of “development and promotion” of the licensed technology. We can, however, provide no assurance that CSMC has concurred with our position and that we will be able to meet any or all of these milestones in the future.  In the event that we fail to meet one or more of the milestones required by the CSMC Agreement, there is no assurance that CSMC will agree to amend or waive the requirements and we could lose the License.  Additionally, as discussed further in Note 9, we have entered into a research and development agreement with CSMC that satisfies the milestone requirement described above regarding funded research at CSMC.  However, in order to extend the Company’s cash on hand, we have been deferring payment to CSMC of our obligations under the agreement.  During the second quarter of 2014 we resumed making payments to CSMC but our outstanding balance with them remains delinquent.  To date, CSMC has continued to do work under the agreement despite our payment delays but no assurance can be provided that CSMC will continue to do so.  As of July 31, 2014, we had an outstanding liability to CSMC of $258,091 which represents amounts owed for services provided by CSMC.

 

Further, in the event the Company issues or sells shares of common stock, the CSMC Agreement requires that the Company issue to CSMC additional shares of common stock for no additional consideration so as to assure CSMC will own 5% of the total issued and outstanding shares of the Company until December 31, 2015.

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Convertible Notes (Details) (Convertible Debt, USD $)
9 Months Ended
Jul. 31, 2014
Convertible Debt Outstanding $ 10,000
October 2010 through April 2011
 
Net proceeds from sale of Convertible Notes $ 726,550
Debt Instrument, Convertible, Terms of Conversion Feature The Convertible Notes were initially convertible into shares of our common stock at $.30 per share (the “Conversion Price”).
Debt Conversion, Converted Instrument, Type shares of our common stock
Debt Instrument, Interest Rate Terms Convertible Notes do not bear interest
Debt Instrument, Payment Terms originally payable on October 19, 2011

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Bridge Notes: PA Bridge Note Warrants (Details) (USD $)
3 Months Ended 9 Months Ended
Jul. 31, 2014
Jul. 31, 2014
PA Bridge Note Warrants, Debt Discount Amortized $ 8,292 $ 10,825
PA Bridge Note Warrants
   
Assets, Fair Value Disclosure $ 35,700 $ 35,700
Fair Value Measurements, Valuation Techniques   Black-Scholes pricing model
Fair Value Assumptions, Expected Term   5 years
Fair Value Assumptions, Risk Free Interest Rate   1.69%
Fair Value Assumptions, Expected Volatility Rate   78.90%
XML 21 R30.htm IDEA: XBRL DOCUMENT v2.4.0.8
Stockholders' Equity (Details) (USD $)
9 Months Ended 3 Months Ended 9 Months Ended 3 Months Ended 9 Months Ended
Jul. 31, 2014
Jul. 31, 2013
Jul. 31, 2014
Common Stock
Jul. 31, 2014
Common Stock
Jul. 31, 2014
Common Stock Purchase Warrants
Jul. 31, 2014
Stock options
Jul. 31, 2014
Stock options
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Vested in Period, Fair Value       $ 224,000 $ 17,160   $ 58,400
Allocated Share-based Compensation Expense     56,000 168,000   2,433 7,300
Sale of Units, Shares 25,000 260,000          
Sale of Units, price per unit $ 1.00 $ 1.00          
Sale of Units, Value $ 24,956 $ 227,645          
Fair Value Assumptions, Expected Term             5 years
Fair Value Assumptions, Risk Free Interest Rate             1.37%
Fair Value Assumptions, Expected Volatility Rate             78.90%
XML 22 R31.htm IDEA: XBRL DOCUMENT v2.4.0.8
Earnings (loss) Per Share: Schedule of Antidilutive Securities Excluded from Computation of Earnings Per Share (Details)
3 Months Ended 9 Months Ended
Jul. 31, 2014
Jul. 31, 2013
Jul. 31, 2014
Jul. 31, 2013
Warrants
       
Antidilutive Securities Excluded from Computation of Earnings Per Share, Amount 6,358,358 5,422,858 6,358,358 5,422,858
Stock options
       
Antidilutive Securities Excluded from Computation of Earnings Per Share, Amount 1,400,000   1,400,000  
Convertible Debt
       
Antidilutive Securities Excluded from Computation of Earnings Per Share, Amount 766,667 [1] 66,667 [1] 766,667 [1] 66,667 [1]
[1] Assumes Bridge Note conversion price of $1.00 per share see Note 4 for conversion price calculations.
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Going Concern, Management's Plans and Basis of Presentation
9 Months Ended
Jul. 31, 2014
Notes  
Going Concern, Management's Plans and Basis of Presentation

(2) GOING CONCERN, MANAGEMENT’S PLANS AND BASIS OF PRESENTATION

 

Going Concern and Management’s Plans

 

The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern. Since our inception in August 2007, we have not generated revenue, incurred operating losses, and as of July 31, 2014, had a retained deficit $6,019,984.   Further, as of July 31, 2014, our cash balance was $219,035 and we had a working capital deficit of $1,198,149. These conditions raise substantial doubt about our ability to continue as a going concern.

 

During the nine months ended July 31, 2014, we sold $700,000 in Bridge Notes (defined below) receiving net proceeds of $606,318 after payment of offering expenses. Management believes that existing cash on hand will be sufficient to fund the Company’s planned activities through at least the end of our fiscal year.  This assumes that we continue to defer payment of certain liabilities to our officers but allows for some payments to be made to CSMC for accrued research and development expenses.  Additionally, certain key professionals such as legal counsel have also had payments deferred and the proceeds from the Bridge Notes will allow for some partial payments of these deferred balances but not payment in full.  While these parties have continued to work with the Company despite this lack of payment, there is no assurance they will continue to do so, and the loss of a key management member, or the loss of CSMC as a research partner, could have a material adverse effect on the Company’s business prospects.

 

To raise sufficient capital to fund the Company’s business plan, we plan on filing a registration statement with the Securities and Exchange Commission (the “SEC”) for an initial public offering of the Company’s securities. No assurance can be given that this effort will be successful or adequately capitalize the Company.

 

In the event that we cannot raise sufficient capital within the required timeframe, it will have a material adverse effect on the Company’s liquidity, financial condition and business prospects or force the Company out of business.  The accompanying financial statements do not include adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from an inability of the Company to continue as a going concern.

 

Basis of Presentation

 

The accompanying condensed consolidated financial statements include the accounts of Arrogene and its wholly owned subsidiary ANI.  All intercompany transactions have been eliminated in consolidation.  The condensed consolidated financial statements have been prepared without audit pursuant to the rules and regulations of the SEC.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations.  The condensed consolidated financial statements reflect all adjustments (consisting of only normal recurring entries), which in the opinion of management, are necessary to present fairly the financial position at July 31, 2014 and the results of operations and cash flows of the Company for the three and nine months ended July 31, 2014 and 2013.  Operating results for the nine months ended July 31, 2014, are not necessarily indicative of the results that may be expected for the year ended October 31, 2014.

 

The unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements and footnotes thereto for the year ended October 31, 2013 filed on April 2, 2014.

 

Use of Estimates and Assumptions

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported periods.  Actual results may differ from these estimates.

 

Adoption of New Accounting Pronouncement

 

In June 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-10, Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance (“ASU 2014-10”), which eliminates the financial reporting distinction between development stage entities and other reporting entities from U.S. GAAP. Additionally, ASU 2014-10 eliminates the separate requirements for development stage entities to (1) present inception-to-date information in the statements of income, cash flow and shareholders’ equity, (2) label the financial statements as those of a development stage entity, (3) disclose a description of the development stage activities in which the entity is engaged, and (4) disclose in the first year in which the entity is no longer a development stage entity that in prior years it had been in the development stage.  ASU 2014-10 is effective for fiscal years beginning after December 15, 2014 and interim periods therein, with early adoption permitted.  The Company has adopted ASU 2014-10 effective with the filing of this Quarterly Report on Form 10-Q.

XML 24 R32.htm IDEA: XBRL DOCUMENT v2.4.0.8
Supplemental Disclosure of Cash Flow Information: Schedule of Cash Flow, Supplemental Disclosures (Details) (USD $)
9 Months Ended
Jul. 31, 2014
Jul. 31, 2013
Details    
Interest Paid $ 435 $ 561
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Condensed Consolidated Balance Sheets (July 31, 2014 unaudited) (USD $)
Jul. 31, 2014
Oct. 31, 2013
Current assets:    
Cash and cash equivalents $ 219,035 $ 13,822
Prepaid expenses and deposit 20,142 13,709
Debt offering costs 92,968  
Total current assets 332,145 27,531
Property and equipment, net 928 1,705
Total assets 333,073 29,236
Current liabilities:    
Accrued compensation 220,690 85,280
Accrued research expenses payable to CSMC 258,091 229,003
Accounts Payable and accrued expenses 438,043 128,368
Bridge notes 554,470 [1]    [1]
Related party payables 49,000 39,000
Convertible notes 10,000 10,000
Total current liabilities 1,530,294 491,651
Total liabilities 1,530,294 491,651
STOCKHOLDERS' EQUITY (DEFICIT):    
Preferred stock    [2]    [2]
Common stock 2,138 [3] 2,135 [4]
Additional paid-in capital 4,820,625 4,287,289
Retained Deficit (6,019,984) (4,751,839)
Total stockholders' equity (deficit) (1,197,221) (462,415)
Total liabilities and stockholders' equity (deficit) $ 333,073 $ 29,236
[1] Less discount of $145,530
[2] Preferred stock, $.0001 par value 10,000,000 shares authorized, none issued.
[3] Common stock, $.0001 par value; 100,000,000 shares authorized; 21,375,860 shares issued and outstanding.
[4] Common stock, $.0001 par value; 100,000,000 shares authorized; 21,350,860 shares issued and outstanding.
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Condensed Statements of Cash Flows (unaudited) (USD $)
9 Months Ended 84 Months Ended
Jul. 31, 2014
Jul. 31, 2013
Jul. 31, 2014
CASH FLOWS FROM OPERATING ACTIVITIES:      
Net Income (Loss) $ (1,268,145) $ (784,458)  
Adjustments to reconcile Net Income (Loss) to net cash used in operating activities:      
Amortization of debt placement costs and debt discount 96,683    
Share-based payment expense 344,883    
Contributed services 90,000    
Depreciation expense 777 1,174  
(Increase) decrease in prepaid services and deposit (6,433) (7,402)  
Increase (decrease) in other payables and accrued expenses 316,174 204,700  
Net cash used in operating activities (426,061) (585,986)  
CASH FLOWS FROM FINANCING ACTIVITIES:      
Net proceeds from sale of Units 24,956 [1] 227,645 [1]    [1]
Net proceeds from sale of Bridge Notes 606,318    
Net cash provided by financing activities 631,274 227,645  
Net increase (decrease) in cash 205,213 (358,341)  
Cash and cash equivalents at the beginning of period 13,822 539,727  
Cash and cash equivalents at the end of period $ 219,035 $ 181,386 $ 219,035
[1] At $1.00 per Unit
XML 27 R35.htm IDEA: XBRL DOCUMENT v2.4.0.8
Commitments and Contingencies (Details) (USD $)
3 Months Ended 9 Months Ended
Jul. 31, 2014
Jul. 31, 2013
Jul. 31, 2014
Jul. 31, 2013
Details        
Operating Leases, Rent Expense $ 9,434 $ 10,950 $ 31,880 $ 30,392
XML 28 R22.htm IDEA: XBRL DOCUMENT v2.4.0.8
Supplemental Disclosure of Cash Flow Information: Schedule of Cash Flow, Supplemental Disclosures (Tables)
9 Months Ended
Jul. 31, 2014
Tables/Schedules  
Schedule of Cash Flow, Supplemental Disclosures

 

 

 

Nine Months Ended July 31,

 

 

 

2014

 

2013

 

Interest

 

$

435

 

$

561

 

Income taxes

 

 

 

XML 29 R36.htm IDEA: XBRL DOCUMENT v2.4.0.8
Commitments and Contingencies: Schedule of Commitments under non-cancelable operating leases (Details) (USD $)
Jul. 31, 2014
Commitments under non-cancelable operating leases $ 18,900
Year ending October 31, 2014
 
Commitments under non-cancelable operating leases 8,100
Year ending October 31, 2015
 
Commitments under non-cancelable operating leases $ 10,800
XML 30 R24.htm IDEA: XBRL DOCUMENT v2.4.0.8
Business and Overview (Details)
9 Months Ended
Jul. 31, 2014
Entity Incorporation, Date of Incorporation Dec. 07, 2006
Arrogene Nanotechnology, Inc.
 
Business Acquisition, Effective Date of Acquisition January 11, 2012
Business Acquisition, Name of Acquired Entity Arrogene Nanotechnology, Inc. (“ANI”)
Business Acquisition, Description of Acquired Entity a company focused on oncology
XML 31 Show.js IDEA: XBRL DOCUMENT /** * Rivet Software Inc. * * @copyright Copyright (c) 2006-2011 Rivet Software, Inc. All rights reserved. * Version 2.4.0.3 * */ var Show = {}; Show.LastAR = null, Show.hideAR = function(){ Show.LastAR.style.display = 'none'; }; Show.showAR = function ( link, id, win ){ if( Show.LastAR ){ Show.hideAR(); } var ref = link; do { ref = ref.nextSibling; } while (ref && ref.nodeName != 'TABLE'); if (!ref || ref.nodeName != 'TABLE') { var tmp = win ? win.document.getElementById(id) : document.getElementById(id); if( tmp ){ ref = tmp.cloneNode(true); ref.id = ''; link.parentNode.appendChild(ref); } } if( ref ){ ref.style.display = 'block'; Show.LastAR = ref; } }; Show.toggleNext = function( link ){ var ref = link; do{ ref = ref.nextSibling; }while( ref.nodeName != 'DIV' ); if( ref.style && ref.style.display && ref.style.display == 'none' ){ ref.style.display = 'block'; if( link.textContent ){ link.textContent = link.textContent.replace( '+', '-' ); }else{ link.innerText = link.innerText.replace( '+', '-' ); } }else{ ref.style.display = 'none'; if( link.textContent ){ link.textContent = link.textContent.replace( '-', '+' ); }else{ link.innerText = link.innerText.replace( '-', '+' ); } } }; XML 32 R7.htm IDEA: XBRL DOCUMENT v2.4.0.8
Business and Overview
9 Months Ended
Jul. 31, 2014
Notes  
Business and Overview

(1)   BUSINESS AND OVERVIEW

 

Arrogene, Inc. (“Arrogene” f/k/a SRKP 16, Inc.), was incorporated under the laws of the State of Delaware on December 7, 2006.  On January 11, 2012, we consummated a reverse merger transaction (the “Reverse Merger”) with Arrogene Nanotechnology, Inc. (“ANI”), a company focused on oncology.  Hereafter, SRKP 16, Inc., Arrogene and ANI are collectively referred to as the “Company.”  Effective September 4, 2012, SRKP 16, Inc. officially changed its name to Arrogene, Inc.

 

The Company was founded to commercialize both new cancer treatments and imaging targeting technology as well as a proprietary molecular delivery platform that interferes with those targets in order to inhibit and finally eradicate tumor progression.  The Company is the exclusive licensee to certain intellectual property rights owned by Cedars Sinai Medical Center (“CSMC”) in Los Angeles, one of the nation’s premiere research institutions (the “License”).  CSMC has developed a family of related nano-biopolymers conjugates (collectively referred to here as Polycefin ), believed capable of acting as a drug delivery and targeting platform for cancer therapy and imaging.

 

We plan on commercializing our products using a licensing and cost sharing strategy, seeking to enter into arrangements with major pharmaceutical companies with existing cancer therapy drugs facing issues relating to patent expirations, market expansion or contraction.   It is our goal to only commence later stage clinical trials with a commitment from a licensee to complete Phase II and III clinical trials, predicated on the successful outcome of each phase, and go to market, if approval is received.  Further, we are also exploring use of Polycefin as a potential medical diagnostic product(s) for oncology related applications.  We also have developed important related intellectual properties surrounding Laminin-411. Pre-clinical investigation is also on-going on methods of inhibiting Laminin-411 as a therapeutic agent, which could be conjugated in various forms of Polycefin in the future.

 

The majority, of our planned products will require approval or marketing clearance from the United States Food and Drug Administration (the “FDA”).  To date we have not filed any applications with the FDA, but we have begun the process of validating our Laboratory Development Test (“LDT”) with applicable regulators.

XML 33 R3.htm IDEA: XBRL DOCUMENT v2.4.0.8
Condensed Consolidated Balance Sheets - Parenthetical (July 31, 2014 unaudited) (USD $)
Jul. 31, 2014
Oct. 31, 2013
CONDENSED CONSOLIDATED BALANCE SHEETS    
Preferred Stock, Par Value $ 0.0001 $ 0.0001
Preferred Stock, Shares Authorized 10,000,000 10,000,000
Preferred Stock, Shares Issued 0 0
Common Stock, Par Value $ 0.0001 $ 0.0001
Common Stock, Shares Authorized 100,000,000 100,000,000
Common Stock, Shares Issued 21,375,860 21,375,860
Common Stock, Shares Outstanding 21,350,860 21,350,860
XML 34 R17.htm IDEA: XBRL DOCUMENT v2.4.0.8
Subsequent Events
9 Months Ended
Jul. 31, 2014
Notes  
Subsequent Events

(10)  SUBSEQUENT EVENTS

 

In August 2014, Dr. Randolphe Swenson, Jr. was elected to serve as a member of the Board of Directors. In consideration of his agreement to serve as a member of the Board of Directors, the Company granted to Dr. Swenson non-qualified options to purchase for five (5) years 50,000 shares of common stock at an exercise price of $1.00 per share, which options are deemed immediately vested.

 

The Company also entered into a Consultation and Securities Compensation Agreement between the Company, on the one hand and Dr. Swenson, pursuant to which Dr. Swenson was engaged to serve as a consultant to the Company for a term of six (6) months, to oversee and supervise an executive search to recruit a new CEO under the direction and supervision of the Board of Directors.

 

Pursuant to the Consultation and Securities Compensation Agreement and in consideration of his services as a consultant to conduct a CEO recruitment search, the Company (i) granted to Dr. Swenson non-qualified stock options exercisable for five (5) years to purchase an aggregate of 25,000 shares of common stock at an exercise price of $1.00, and (ii) conditioned on the Company successfully engaging a new CEO on terms acceptable to the Board of Directors during the term of Mr. Swenson’s consultancy, in its sole discretion, agreed to grant to Mr. Swenson additional non-qualified stock options exercisable for five (5) years to purchase an additional 35,000 shares of common stock at an exercise price of $1.00 per share.  All of such options will be fully vested and exercisable upon grant.

XML 35 R1.htm IDEA: XBRL DOCUMENT v2.4.0.8
Document and Entity Information
9 Months Ended
Jul. 31, 2014
Sep. 10, 2014
Document and Entity Information:    
Entity Registrant Name ARROGENE, INC  
Document Type 10-Q  
Document Period End Date Jul. 31, 2014  
Amendment Flag false  
Entity Central Index Key 0001403792  
Current Fiscal Year End Date --10-31  
Entity Common Stock, Shares Outstanding   21,375,860
Entity Filer Category Smaller Reporting Company  
Entity Current Reporting Status Yes  
Entity Voluntary Filers No  
Entity Well-known Seasoned Issuer No  
Document Fiscal Year Focus 2014  
Document Fiscal Period Focus Q3  
Entity Incorporation, Date of Incorporation Dec. 07, 2006  
XML 36 R18.htm IDEA: XBRL DOCUMENT v2.4.0.8
Going Concern, Management's Plans and Basis of Presentation: Going Concern and Management's Plans (Policies)
9 Months Ended
Jul. 31, 2014
Policies  
Going Concern and Management's Plans

Going Concern and Management’s Plans

 

The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern. Since our inception in August 2007, we have not generated revenue, incurred operating losses, and as of July 31, 2014, had a retained deficit $6,019,984.   Further, as of July 31, 2014, our cash balance was $219,035 and we had a working capital deficit of $1,198,149. These conditions raise substantial doubt about our ability to continue as a going concern.

 

During the nine months ended July 31, 2014, we sold $700,000 in Bridge Notes (defined below) receiving net proceeds of $606,318 after payment of offering expenses. Management believes that existing cash on hand will be sufficient to fund the Company’s planned activities through at least the end of our fiscal year.  This assumes that we continue to defer payment of certain liabilities to our officers but allows for some payments to be made to CSMC for accrued research and development expenses.  Additionally, certain key professionals such as legal counsel have also had payments deferred and the proceeds from the Bridge Notes will allow for some partial payments of these deferred balances but not payment in full.  While these parties have continued to work with the Company despite this lack of payment, there is no assurance they will continue to do so, and the loss of a key management member, or the loss of CSMC as a research partner, could have a material adverse effect on the Company’s business prospects.

 

To raise sufficient capital to fund the Company’s business plan, we plan on filing a registration statement with the Securities and Exchange Commission (the “SEC”) for an initial public offering of the Company’s securities. No assurance can be given that this effort will be successful or adequately capitalize the Company.

 

In the event that we cannot raise sufficient capital within the required timeframe, it will have a material adverse effect on the Company’s liquidity, financial condition and business prospects or force the Company out of business.  The accompanying financial statements do not include adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from an inability of the Company to continue as a going concern.

XML 37 R4.htm IDEA: XBRL DOCUMENT v2.4.0.8
Condensed Statements of Operations (unaudited) (USD $)
3 Months Ended 9 Months Ended
Jul. 31, 2014
Jul. 31, 2013
Jul. 31, 2014
Jul. 31, 2013
OPERATING EXPENSES:        
Research and development $ 82,497 $ 132,592 $ 271,449 $ 317,084
General and administrative 312,827 147,799 876,494 466,813
Operating Expenses 395,324 280,391 1,147,943 783,897
Income (Loss) from operations (395,324) (280,391) (1,147,943) (783,897)
OTHER INCOME (EXPENSE):        
Interest (94,790) (278) (120,202) (561)
Other Income (expense) (94,790) (278) (120,202) (561)
Net Income (Loss) $ (490,114) $ (280,669) $ (1,268,145) $ (784,458)
Weighted Average Shares Outstanding, Basic and diluted 21,375,860 21,350,860 21,370,457 21,289,358
Loss Per Share, Basic and diluted $ (0.02) $ (0.01) $ (0.06) $ (0.04)
XML 38 R12.htm IDEA: XBRL DOCUMENT v2.4.0.8
Stockholders' Equity
9 Months Ended
Jul. 31, 2014
Notes  
Stockholders' Equity

(6)  STOCKHOLDERS’ EQUITY

 

Common Stock

 

On August 29, 2013, we entered into an agreement for investor relation services that requires us to issue up to 400,000 shares of common stock as a component of the consideration for the services.  The shares are issuable in 100,000 increments for each quarter of service rendered.  We valued these shares at $224,000 using the Black-Scholes option-pricing model and are recognizing expense over the 12 months the services are being rendered.  For the three months and nine months ended July 31, 2014, we recorded $56,000 and $168,000, respectively, of stock compensation expense which is included in general and administrative expense in the accompanying condensed consolidated statements of operations with a corresponding increase in accounts payable and other accrued expenses on the accompanying condensed consolidated balance sheet.

 

Units

 

During the nine months ended July 31, 2014 and 2013, we sold 25,000 and 260,000 units (the “Units”), respectively, for $1.00 per Unit, receiving net proceeds of $24,956 and $227,645, respectively.  Each Unit consists of  (i) one share of common stock, and (ii) two warrants with one warrant exercisable at $1.50 per share and one warrant exercisable at $2.00 per share.  (the “Unit Warrants”).  The Unit Warrants expire five years from the date of issuance.

 

Warrants

 

In connection with the sale of the Units during nine months ended July 31, 2013, the placement agents earned warrants to acquire 78,000 shares of common stock consisting of 26,000 warrants exercisable at $1.00 per share, 26,000 warrants exercisable at $1.50 per share and 26,000 warrants exercisable at $2.00 per share.  Each warrant expires five years from the date of issuance.   We valued these warrants at $17,160 using the Black Scholes option-pricing model.   We recorded the warrants as a reduction to the net proceeds from the sale of the Units with a corresponding increase to additional paid in capital.   The placement agents voluntarily agreed to forgo the earning of warrants in connection with the Unit sale that took place during the nine months ended July 31, 2014.

 

As of July 31, 2014, we had 6,358,358 warrants outstanding with weighted average remaining lives of 31 months and a weighted average exercise price of $1.44.

 

Stock Options

 

On November 1, 2013, we issued a non-statutory stock option to acquire up to 200,000 shares of common stock with an exercise price of $1.00 per share to a consultant for providing certain services as defined in the consulting agreement.  The option expires 7 years from the date of grant. The options vest as follows: (i) as to 100,000 options, vesting shall occur 1/3 on each one year anniversary date of the consulting agreement  (“Vesting 1”) and (ii) as to 100,000 options, vesting shall occur upon the closing of certain transactions as defined in the agreement at a rate of 2 stock options for each $100 received by the Company in a deal or transaction resulting from the efforts of the consultant (“Vesting 2”).  We valued this option at $58,400 using the Black Scholes option-pricing model using the following assumptions: option life 5 years, risk free interest rate 1.37%, and annualized volatility of 78.9% based on a peer group of publicly traded common stocks.  Stock options issued to non-employees are remeasured at each reporting date and the cumulative expense is adjusted based on the remeasured grant. We are recognizing expense for this option as the underlying services are provided, ratably over 36 months for Vesting 1, and upon the occurrence of a vesting event for Vesting 2.  For the three and nine months ended July 31, 2014, we recognized $2,433 and $7,300, respectively, of expense for this option which is included in general and administrative expense on the accompanying condensed consolidated statements of operations.

 

In April 2014, we issued stock options to acquire 1,200,000 shares of common stock to certain employees and consultants with an exercise price of $1.00 per share.  The options expire 7 years from the date of grant. The options vest under terms ranging from immediately to 1/3 on each anniversary date from the date of grant.  We valued these options at $352,800 using the Black Scholes option-pricing model using the following assumptions:  option life 5 years, risk free interest rate 1.65%, and annualized volatility of 78.9% based on a peer group of publicly traded stocks.  We are recognizing expense for these options over the respective vesting periods.  For the three and nine months ended July 31, 2014, we recognized $56,066 and $169,583, respectively, of expense for these options which is included in general and administrative expense on the accompanying condensed consolidated statements of operations.

XML 39 R11.htm IDEA: XBRL DOCUMENT v2.4.0.8
Convertible Notes
9 Months Ended
Jul. 31, 2014
Notes  
Convertible Notes

(5)  CONVERTIBLE NOTES

 

Commencing October 2010 through April 2011, we sold in private transactions an aggregate of $726,550 of Convertible Notes.  The Convertible Notes were initially convertible into shares of our common stock at $.30 per share (the “Conversion Price”). The Convertible Notes do not bear interest and were originally payable on October 19, 2011. The Convertible Notes are secured by a first lien security interest on all of our tangible and intangible assets.  We did not repay the Convertible Notes by the maturity date and the notes were therefore technically in default.  During the year ended October 31, 2012, agreed to reduce the conversion price of the Convertible Notes to $.15 per share. $10,000 of Convertible Notes remains outstanding as of July 31, 2014.  On an as converted basis, as of July 31, 2014, the estimated value of the Convertible Notes exceeds the principal balance by $27,333.

XML 40 R23.htm IDEA: XBRL DOCUMENT v2.4.0.8
Commitments and Contingencies: Schedule of Commitments under non-cancelable operating leases (Tables)
9 Months Ended
Jul. 31, 2014
Tables/Schedules  
Schedule of Commitments under non-cancelable operating leases

 

 

 

Year Ended October 31,

2014

 

$              8,100

2015

 

10,800

 

 

$            18,900

XML 41 R19.htm IDEA: XBRL DOCUMENT v2.4.0.8
Going Concern, Management's Plans and Basis of Presentation: Basis of Presentation (Policies)
9 Months Ended
Jul. 31, 2014
Policies  
Basis of Presentation

Basis of Presentation

 

The accompanying condensed consolidated financial statements include the accounts of Arrogene and its wholly owned subsidiary ANI.  All intercompany transactions have been eliminated in consolidation.  The condensed consolidated financial statements have been prepared without audit pursuant to the rules and regulations of the SEC.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations.  The condensed consolidated financial statements reflect all adjustments (consisting of only normal recurring entries), which in the opinion of management, are necessary to present fairly the financial position at July 31, 2014 and the results of operations and cash flows of the Company for the three and nine months ended July 31, 2014 and 2013.  Operating results for the nine months ended July 31, 2014, are not necessarily indicative of the results that may be expected for the year ended October 31, 2014.

 

The unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements and footnotes thereto for the year ended October 31, 2013 filed on April 2, 2014.

XML 42 R15.htm IDEA: XBRL DOCUMENT v2.4.0.8
Related Party Transactions
9 Months Ended
Jul. 31, 2014
Notes  
Related Party Transactions

Related Party Transactions

 

Consulting Agreements

 

We have an agreement with an entity controlled by our chief executive officer for his part-time personal services as CEO. The agreement is referred to as the Synthetica Agreement.  In December 2013, the Synthetica Agreement was amended so that the compensation paid for the services of our CEO is capped at $1 per annum effective January 1, 2014.  However, our chief executive may request that his compensation revert back to the original terms of the Synthetica Agreement with 30 days written notice.  Under the original terms, there was no monthly retainer or minimum billing amount but the maximum that could be charged to us in any given month was $15,000. During the three and nine months ended July 31, 2014, we were billed $0 and $20,000, respectively, under the Synthetica Agreement.  During the three and nine months ended July 31, 2013, we were billed $33,900 and $117,600, respectively, under the Synthetica Agreement. At July 31, 2014 and October 31 2013, $67,600 and $47,600, respectively, is included in accrued compensation on the accompanying condensed consolidated balance sheets resulting from a voluntary deferral of fees due under the agreement, agreed to by Synthetica to allow the Company to optimize its cash flow.

 

In September 2010, we entered into a business and financial consulting agreement with an entity controlled by our Board chairman for operational consulting services.   The agreement was for an initial term of 12 months with an automatic 12 month renewal period unless terminated by either party upon 30 days written notice.  The agreement is now on a month-to-month basis. There is no monthly retainer or minimum billing amount but the maximum that can be billed to us in a given month cannot exceed $10,000.   Effective January 2014, the fees for this agreement were capped at $1.00 per year. During the three and nine months ended July 31, 2014, we were charged $0 and $10,000, respectively, under this agreement.  During the three and nine months ended July 31, 2013, we were charged $20,100 and $75,100, respectively, under this agreement which is included in general and administrative expense on the accompanying condensed consolidated statements of operations.  At July 31, 2014 and October 31, 2013, $49,000 and $39,000, respectively, is included in related party payables on the accompanying condensed consolidated balance sheets resulting from a voluntary deferral of fees due under the agreement, agreed to by our Board chairman, to allow the Company to optimize its cash flow.

 

Contributed Services

 

As discussed above, effective January 1, 2014, the Company’s chief executive officer and Board chairman began to provide their services for $1 per year.  The fair value of those services has been recorded as an expense in the accompanying condensed consolidated financial statements based on the estimated fair value for such services, with a corresponding credit to additional paid in capital. The fair value of the services was estimated based on the terms of the respective agreements prior to January 1, 2014. Contributed services were $45,000 and $90,000, respectively, for the three and nine months ended July 31, 2014.

 

CSMC

 

Certain founders and directors of the Company are employees of CSMC.  These individuals are also the inventors of the Polycefin technology and are primarily responsible for its development.  As described further in Note 3 above, we have an exclusive license agreement with CSMC for this technology.

 

The License requires royalty payments equal to 3.5% of the gross sales price and other forms of consideration (such as milestone and sublicense payments), as defined in the agreement, on all products using the licensed technology.   The License also requires us to achieve certain milestones as described in Note 3.

 

In December 2012, we entered into an agreement with CSMC to support certain activities within the laboratory necessary to prepare compounds.  For the three and nine months ended July 31, 2014, we were charged $38,625 and $142,087, respectively, by CSMC under this agreement which is included in research and development costs on the accompanying condensed consolidated statements of operations. For the three and nine months ended July 31, 2013, we were charged $87,000 and $195,884, respectively, by CSMC under this agreement.  As of July 31, 2014, $258,091 is reflected as payable on the accompanying condensed consolidated balance sheets.  Work under the agreement concluded during the three months ended July 31, 2014.  As discussed in Note 3, we have deferred payments under this agreement in order to extend our cash balance.

XML 43 R13.htm IDEA: XBRL DOCUMENT v2.4.0.8
Earnings (loss) Per Share
9 Months Ended
Jul. 31, 2014
Notes  
Earnings (loss) Per Share

(7)  EARNINGS (LOSS) PER SHARE

 

Earnings (loss) per share are calculated in accordance with the provisions of ASC 260 “Earnings Per Share” (“ASC 260”). Under ASC 260, basic earnings (loss) per share are computed by dividing the Company’s income (loss) by the weighted average number of common shares outstanding. The impact of any potentially dilutive securities is excluded. Diluted earnings per share are computed by dividing the Company’s income (loss) attributable to common shareholders by the weighted average number of common shares and dilutive potential common shares outstanding during the period. In calculating diluted earnings per share, we utilize the “treasury stock method” for all stock options and warrants and the “if converted method” for all other convertible securities. For all periods presented, the basic and diluted loss per share is the same as the impact of potential dilutive common shares is anti-dilutive.

 

Warrants and convertible securities excluded from the calculation of diluted loss per share are as follows:

 

 

 

Three and Nine Months Ended July 31,

 

 

 

 

2014

 

2013

 

 

 

 

 

 

 

 

 

Warrants

 

6,358,358

 

5,422,858

 

 

Stock options

 

1,400,000

 

 

 

Convertible debt*

 

766,667

 

66,667

 

 

 

 

 

Three and Nine Months Ended July 31,

 

 

 

 

2014

 

2013

 

 

 

 

 

 

 

 

 

Warrants

 

6,358,358

 

5,422,858

 

 

Stock options

 

1,400,000

 

 

 

Convertible debt*

 

766,667

 

66,667

 

 

 

 

 

*Assumes Bridge Note conversion price of $1.00 per share see Note 4 for conversion price calculations.

XML 44 R14.htm IDEA: XBRL DOCUMENT v2.4.0.8
Supplemental Disclosure of Cash Flow Information
9 Months Ended
Jul. 31, 2014
Notes  
Supplemental Disclosure of Cash Flow Information

(8)  SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

 

Cash paid during the period for:

 

 

 

Nine Months Ended July 31,

 

 

 

2014

 

2013

 

Interest

 

$

435

 

$

561

 

Income taxes

 

 

 

XML 45 R16.htm IDEA: XBRL DOCUMENT v2.4.0.8
Commitments and Contingencies
9 Months Ended
Jul. 31, 2014
Notes  
Commitments and Contingencies

Commitments and Contingencies

 

Litigation

 

From time to time, we may become party to litigation and other claims in the ordinary course of business.  To the extent that such claims and litigation arise, management would provide for them if upon the advice of counsel, losses are determined to be both probable and estimable.  We are currently not party to any litigation.

 

Office Lease

 

We have a lease agreement for office space with a third party (the “Office Lease”) that expires on May 31, 2015.  For the three month periods ended July 31, 2014 and 2013, we recorded $9,434 and $10,950, respectively, of rent expense under the Office Lease which is included in general and administrative expense on the accompanying condensed consolidated statements of operations.  For the nine months ended July 31, 2014 and 2013, we recorded $31,880 and $30,392, respectively, of rent expense under the Office Lease.

 

Commitments under non-cancelable operating leases are as follows as of July 31, 2014:

 

 

 

Year Ended October 31,

2014

 

$              8,100

2015

 

10,800

 

 

$            18,900

XML 46 R34.htm IDEA: XBRL DOCUMENT v2.4.0.8
Related Party Transactions (Details) (USD $)
3 Months Ended 9 Months Ended
Jul. 31, 2014
Jul. 31, 2013
Jul. 31, 2014
Jul. 31, 2013
Research and development $ 82,497 $ 132,592 $ 271,449 $ 317,084
CSMC
       
Research and development 38,625 87,000 142,087 195,884
Accounts Payable, Related Parties, Current $ 258,091   $ 258,091  
XML 47 R21.htm IDEA: XBRL DOCUMENT v2.4.0.8
Earnings (loss) Per Share: Schedule of Antidilutive Securities Excluded from Computation of Earnings Per Share (Tables)
9 Months Ended
Jul. 31, 2014
Tables/Schedules  
Schedule of Antidilutive Securities Excluded from Computation of Earnings Per Share

 

 

 

Three and Nine Months Ended July 31,

 

 

 

 

2014

 

2013

 

 

 

 

 

 

 

 

 

Warrants

 

6,358,358

 

5,422,858

 

 

Stock options

 

1,400,000

 

 

 

Convertible debt*

 

766,667

 

66,667

 

 

 

 

 

Three and Nine Months Ended July 31,

 

 

 

 

2014

 

2013

 

 

 

 

 

 

 

 

 

Warrants

 

6,358,358

 

5,422,858

 

 

Stock options

 

1,400,000

 

 

 

Convertible debt*

 

766,667

 

66,667

 

 

 

 

XML 48 R26.htm IDEA: XBRL DOCUMENT v2.4.0.8
Bridge Notes (Details) (USD $)
9 Months Ended
Jul. 31, 2014
Details  
Bridge Notes, Aggregate sold $ 700,000
Bridge Notes, Net Proceeds $ 606,318
XML 49 R5.htm IDEA: XBRL DOCUMENT v2.4.0.8
Condensed Consolidated Statements of Stockholders' Equity (Deficit) - (Unaudited) (USD $)
Common Stock
APIC
Deficit Accumulated in Development Stage
Total
Balances, Value at Oct. 31, 2013 $ 2,135 $ 4,287,289 $ (4,751,839) $ (462,415)
Balances, Shares at Oct. 31, 2013 21,350,860      
Sale of Units at $1.00 per Unit, Value 3 24,953   24,956
Sale of Units at $1.00 per Unit, Shares 25,000      
Stock option compensation expense   176,883   176,883
Bridge Note Warrants   205,800   205,800
Placement Agent warrants   35,700   35,700
Contributed services   90,000   90,000
Net Income (Loss)     (1,268,145) (1,268,145)
Balances, Value at Jul. 31, 2014 $ 2,138 $ 4,820,625 $ (6,019,984) $ (1,197,221)
Balances, Shares at Jul. 31, 2014 21,375,860      
XML 50 R10.htm IDEA: XBRL DOCUMENT v2.4.0.8
Bridge Notes
9 Months Ended
Jul. 31, 2014
Notes  
Bridge Notes

(4)  BRIDGE NOTES

 

During the nine months ended July 31, 2014, we sold an aggregate of $700,000 in bridge notes (the “Bridge Notes”), receiving net proceeds of $606,318 after payment of offering costs.  The Bridge Notes are due and payable one year after the close of the offering (the “Maturity Date”), bear interest at 10% per annum, and are convertible into shares of our common stock at a conversion price of either (i) 50% of the price per share of our common stock as sold through a qualified initial public offering as defined in the terms of the Bridge Notes, or (ii) in the event a Qualified IPO has not taken place prior to the Maturity Date but there has otherwise developed a public trading market for the Company’s common stock, then the conversion price shall be 50% of the 30 day Volume Weighted Average Price per share as quoted on the over-the-counter market, or (iii) in the event a public trading market has not been established for our common stock prior to the Maturity Date, then the conversion price shall be $1.00 per share.   Accrued and unpaid interest on the Bridge Notes will be payable in shares of common stock at the conversion price on the earlier of (i) the date of conversion of the Bridge Notes or (ii) the Maturity Date. Further, for every $1.00 of Bridge Note principal that an investor elects to convert into shares of common stock, the investor will receive one warrant (the “Bridge Note Warrant”).  Each warrant shall be exercisable to purchase shares of common stock at a price equal to the conversion price of the Bridge Notes and shall have a life of 5 years from the close of the offering.  If the investor elects not to convert their Bridge Notes prior to the Maturity Date, then the note holder will receive one warrant for every $2.00 in Bridge Note principal.

 

We evaluated the conversion feature of the Bridge Notes within the context of ASC 815 and determined that it did not meet the definition of an embedded derivative due to the Company having no active market for its common stock.   We further evaluated the conversion feature of the Bridge Notes within the context of ASC 470-20 and determined that the Bridge Notes did not contain a beneficial conversion feature as the default conversion price of $1.00 per share is greater than the current fair value of the Company’s common stock based on the most recent price paid for the Units.

 

We evaluated the Bridge Note Warrants using the guidelines established by ASC 815 and determined that it did not meet the definition of a derivative due to the Company having no active market for its common stock.  We valued these warrants at $205,800 using the Black-Scholes option pricing model which we recorded as debt discount with a corresponding increase to additional paid in capital using the following assumptions: expected life 5 years, risk free interest rate 1.69% and annualized volatility 78.9%. We are amortizing the debt discount over the life of the Bridge Notes.  For the three and nine months ended July 31, 2014, we amortized $49,541 and $60,270, respectively, of debt discount which is included in interest expense on the accompanying condensed consolidated financial statements.

We are also obligated to issue to the placement agents warrants to acquire shares of common stock equal to 10% of the securities underlying the Bridge Notes and Bridge Note Warrants (the “PA Bridge Note Warrants”).  The PA Bridge Note Warrants have a life of 5 years and are exercisable at the conversion price of the Bridge Notes and the exercise price of the Bridge Note Warrants, respectively.  We evaluated the PA Bridge Note Warrants using the guidelines established by ASC 815 and determined that they did not meet the definition of a derivative due to the Company having no active trading market for its common stock.  We valued the PA Bridge Note Warrants at $35,700 using the Black-Scholes pricing model using the following assumptions: expected life 5 years, risk free interest rate 1.69% and annualized volatility 78.9%.  We recorded the PA Bridge Note Warrants as a debt offering cost on the accompanying condensed consolidated balance sheet.  We are amortizing the PA Bridge Note Warrants over the life of the Bridge Notes.  For the three and nine months ended July 31, 2014, we amortized $8,292 and $10,825, respectively, of PA Bridge Note Warrants which is included in interest expense on the accompanying condensed consolidated financial statements.

The effective rate of the Bridge Notes after taking into account the Bridge Note Warrants and PA Bridge Note Warrants is 44.5%.

XML 51 R27.htm IDEA: XBRL DOCUMENT v2.4.0.8
Bridge Notes: Bridge Note Warrants (Details) (USD $)
3 Months Ended 9 Months Ended
Jul. 31, 2014
Jul. 31, 2014
Bridge Notes, Debt Discount Amortized $ 49,541 $ 60,270
Bridge Note Warrants
   
Assets, Fair Value Disclosure $ 205,800 $ 205,800
Fair Value Measurements, Valuation Techniques   Black-Scholes option pricing model
Fair Value Assumptions, Expected Term   5 years
Fair Value Assumptions, Risk Free Interest Rate   1.69%
Fair Value Assumptions, Expected Volatility Rate   78.90%
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Going Concern, Management's Plans and Basis of Presentation: Use of Estimates and Assumptions (Policies)
9 Months Ended
Jul. 31, 2014
Policies  
Use of Estimates and Assumptions

Use of Estimates and Assumptions

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported periods.  Actual results may differ from these estimates.