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EX-23.1 - CONSENT OF BARTOLOMEI PUCCIARELLI, LLC. - BioNeutral Group, Incf10k2010ex23i_bioneutral.htm
EX-31.1 - CERTIFICATION - BioNeutral Group, Incf10k2010ex31i_bioneutral.htm
EX-32.1 - CERTIFICATION - BioNeutral Group, Incf10k2010ex32i_bioneutral.htm
EX-4.14 - 8% EXCHANGEABLE PROMISSORY NOTE, DATED OCTOBER 28, 2010, ISSUED IN FAVOR OF BLACKBETH HOLDINGS LTD. - BioNeutral Group, Incf10k2010ex4iv_bioneutral.htm
EX-4.12 - 8% EXCHANGEABLE PROMISSORY NOTE, DATED AUGUST 31, 2010, ISSUED IN FAVOR OF CAPARA INVESTMENTS LLC - BioNeutral Group, Incf10k2010ex4xii_bioneutral.htm
EX-4.13 - 8% EXCHANGEABLE PROMISSORY NOTE, DATED OCTOBER 12, 2010, ISSUED IN FAVOR OF CAPARA INVESTMENTS LLC - BioNeutral Group, Incf10k2010ex4xiii_bioneutral.htm


UNITED STATES 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended October 31, 2010.

OR
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _______ to _______.

Commission File No. 333-149235
 
BIONEUTRAL GROUP, INC.
 (Exact name of registrant as specified in its charter)
 
Nevada
 
26-0745273
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer Identification No.)
     
211 Warren Street,  Newark, New Jersey
 
07103
(Address of principal executive offices)
 
(Zip Code)
 
(973) 286-2899
 (Registrant’s telephone number, including area code)
 
Securities registered under Section 12(b) of the Exchange Act:
     
Title of each class registered:
 
Name of each exchange on which registered:
None
 
None
 
Securities registered under Section 12(g) of the Exchange Act:   None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o    No  x
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o    No  x
 
 
 

 
 
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). o Yes o   No
   
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
  o
Accelerated filer
  o
       
Non-accelerated filer
(Do not check if a smaller reporting company)
  o
Smaller reporting company
  x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes  o  No x
 
The aggregate market value of the registrant’s common stock, par value $0.00001 per share (“Common Stock”), held by non-affiliates is $31,180,43 computed by reference to the price at which the Common Stock was last sold on April 30, 2010, as reported on the Over-the-Counter Bulletin Board.

As of February 11, 2011, there were 76,634,903 shares of the registrant’s common stock outstanding.

Documents Incorporated by Reference:   None.
 
 
 

 
 
TABLE OF CONTENTS
 
   
PAGE
PART I
 
   
ITEM 1.
Business
  1
ITEM 1A.
Risk Factors
  10
ITEM 1B.
Unresolved Staff Comments
  23
ITEM 2.
Properties
  23
ITEM 3.
Legal Proceedings
  23
     
PART II
 
ITEM 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
  24
ITEM 6.
Selected Financial Data
  26
ITEM 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
  26
ITEM 8.
Financial Statements and Supplementary Data
  32
ITEM 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
  58
ITEM 9A.
Controls and Procedures
  58
ITEM 9B. 
Other Information  
  59
     
PART III
 
   
ITEM 10.
Directors, Executive Officers and Corporate Governance
  59
ITEM 11.
Executive Compensation
  60
ITEM 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
  64
ITEM 13.
Certain Relationships and Related Transactions, and Director Independence
  65
ITEM 14.
Principal Accounting Fees and Services
  67
     
PART IV
 
   
ITEM 15.
Exhibits, Financial Statement Schedules
  68
 
 
 

 
 
PART I

In addition to historical information, this Annual Report on Form 10-K contains “forward-looking statements” (within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that involve risks and uncertainties. See “Risk Factors - Cautionary Note Regarding Forward-Looking Statements” of this Annual Report on Form 10-K.

ITEM 1.       BUSINESS

 
Recent Developments
 
On February 3, 2011 the Company formed an affiliation with the Kentucky Hospital Association (“KHA”) positioning itself for a potential national healthcare product launch within the coming months.  It has also formed a new wholly owned subsidiary, BioNeutral Services Inc. (“BNS”), and placed it under the direction of Mr. Frank Battafarano as its new CEO. Mr. Battafarano has more than thirty years experience as a senior level executive in the healthcare sector.
 
On January 14, 2011, Suresh Relwani resigned as a member of the Board, following the resignation of Mr. Relwani from the Board, the remaining directors of the Company, pursuant to the authority under the Company's By-laws, appointed Wayne Stratton to fill the vacancy on the Board created by Mr. Relwani's resignation. Mr. Stratton's appointment to the Board became effective immediately.
 
On January 4, 2011 the company announced  that it has received an initial indication for support from the Commissioner of Kentucky's Department for Business Development (the Department).The Department's mandate includes exploring innovative ways to stimulate Kentucky's economy by supporting existing businesses and attracting new enterprises to Kentucky at the lowest overall cost of doing business.
 
On December 19, 2010 the company entered discussions with the KHA through its subsidiary Kentucky Hospital Services Corporation LLC "KHSC" to introduce BioNetural’s Ogiene™ and Ygiene™ products into its member hospital association. The KHA, established in 1929, represents hospitals, related health care organizations, and integrated health care systems and is dedicated to sustaining and improving the health status of the citizens of Kentucky. The KHSC aims to provide its member hospitals with the cleanest health care facilities possible.
 
Effective November 30, 2010, the Company appointed Dr. Andy Kielbania, BioNeutral Group's Chief Scientist, as a member of its Board of Directors,. Dr. Kielbania will serve on the audit committee.
 
Overview
 
Company Structure

We are a life science specialty technology company that has developed a novel combinational chemistry-based technology which we believe in certain circumstances may neutralize harmful environmental contaminants, toxins and dangerous micro-organisms, including bacteria, viruses and spores.  We currently operate our business through our subsidiary, BioNeutral Laboratories Corporation USA (“BioNeutral Laboratories” or “BioLabs”), a corporation organized in Delaware in 2003. As used in this Annual Report, the words the “Company,” “our,” “us” or “we” refer to BioNeutral Group, Inc.
 
 
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We were incorporated in the State of Nevada on April 10, 2007 under the name “Moonshine Creations, Inc.”, and changed our name to “BioNeutral Group, Inc.” on December 22, 2008.  From our incorporation until January 30, 2009, we did not have significant business operations.
 
On January 30, 2009, we entered into a share exchange agreement, which we refer to herein as the Share Exchange Agreement, with BioNeutral Laboratories pursuant to which we agreed to issue to the shareholders of BioNeutral Laboratories 44,861,023 shares of our common stock (the “Share Exchange”).

In connection with the Share Exchange, certain shareholders of BioNeutral Laboratories delivered shareholder consents, which we refer to as the "Share Exchange Consents", to BioNeutral Laboratories approving the execution and delivery by BioNeutral Laboratories of the Share Exchange Agreement.  We refer to such persons as the “Consenting Shareholders.”  The Share Exchange Consents did not specify the number of shares of BioNeutral Laboratories common stock to be exchanged by the Consenting Shareholder.  Schedule II to the Share Exchange Agreement, however, contained a list of holders of BioLabs common stock (certain of which shareholders also held BioLabs Series a Preferred Stock), shares of our common stock to be issued to such shareholders, and shares of our common stock to be issued to holders or BioLabs preferred stock.

Based on the Share Exchange Consents, we caused to be delivered to our transfer agent instructions to issue stock certificates representing 42,649,500 shares of our common stock in accordance with Schedule II to the Share Exchange Agreement.  We did not receive Share Exchange Consents in respect of each share of our common stock that was issued by our transfer agent and we believe that stock certificates representing approximately 1,011,362 shares of common stock may have been delivered to those persons who did not deliver a Share Exchange Consent.

In addition, our records indicate that (i) we did not receive stock certificates representing shares of  BioNeutral Laboratories common stock for cancellation from the Consenting Shareholders, and (ii) we did not cause to be delivered the applicable stock certificates representing shares of our common stock issued in the Share Exchange to certain of the Consenting Shareholders.  Accordingly we intend to request that (i) with respect to each Consenting Shareholder who received a stock certificate, such stockholder affirm its consent, which we refer to as a “Consenting Shareholder Acknowledgement” and deliver to us for cancellation its certificates representing BioNeutral Laboratories common stock; and (ii) with respect to each Consenting Shareholder who did not receive a stock certificate, such stockholder deliver to us a Consenting Shareholder Acknowledgment and deliver to us for cancellation its certificates representing BioNeutral Laboratories common stock, each in advance of us delivering the applicable stock certificate.

With respect to any shareholder of BioNeutral Laboratories who is not able to confirm that it previously delivered a Share Exchange Consent, we are going to evaluate offering to such persons the ability to exchange their shares of common stock of BioNeutral Laboratories for shares of our common stock on the same terms as would have occurred had such exchange occurred at the time of the consummation of the Share Exchange.  Although we cannot assure you as to the determination we may make, if we were to make such offer, we would likely request that each such stockholder deliver to us a consent that is similar to a Share Exchange Consent and deliver to us for cancellation its certificates representing BioNeutral Laboratories common stock, each in advance of us delivering the applicable stock certificate. With respect to shareholders of BioNeutral Laboratories who did not deliver a Share Exchange Consent and to whom we may have caused to be issued stock certificates for shares of our common stock, we intend to request a Consenting Shareholder Acknowledgment from each of such persons.

With respect to holders of Series A preferred stock of BioNeutral Laboratories who did not receive shares of our common stock in exchange for such preferred stock, we intend to offer to such persons 2,799,910 shares of our common stock in exchange for their shares of Series a preferred stock, in accordance with Schedule II to the Share Exchange Agreement.  We intend to request that such persons execute and deliver a share exchange agreement evidencing such exchange.

For purposes of preparation of our financial statements, we do not treat as outstanding any shares of common stock issued pursuant to the Share Exchange and for which we do not have a record of receiving a Share Exchange Consent.  We made this determination despite the fact that certificates representing certain of such shares of our common stock may have been delivered to the applicable shareholder.  We cannot assure you that any person in possession of such shares of common stock but who did not deliver the applicable Share Exchange Consent will not claim ownership of such shares.    
 
 
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As a result of the closing of the Share Exchange, BioNeutral Laboratories became our subsidiary, and the shareholders of BioNeutral Laboratories acquired the majority ownership and control of our company. We reviewed the Financial Accounting Standards Board Accounting Standards Codification 805-40 (“FASB ASC 805-40”) and determined that BioNeutral Laboratories was the accounting acquirer and the entity which would be continuing operations.  As a result, the transaction between BioNeutral Laboratories and us was accounted for as a reverse recapitalization in accordance with FASB ASC 805-40.

Business Overview

We are a life science specialty technology corporation that has developed a novel combinational chemistry-based technology which we believe can, in certain circumstances, neutralize harmful environmental contaminants, toxins and dangerous micro-organisms including bacteria, viruses and spores.  We are focused on commercializing two classes of product formulations: (1) anti­microbials, which are formulations designed to kill certain harmful microscopic living organisms, and (2) bioneutralizers, which are formulations designed to destroy certain agents that are noxious and harmful to health and/or the environment.

Our Ygiene product line has not been approved for sale in the United States.  To date, we have only marketed our Ogiene product line on a very limited basis but have not generated any meaningful product revenue to date. We have not marketed any of our products and have not generated any meaningful product revenue to date.

Products

We currently are focused on the commercialization of two classes of product formulations, antimicrobials and bioneutralizers.  We refer to our anti­microbial formulations as our Ygiene™ products and our bioneutralizer formulations as our Ogiene™ products.  A description of each of these products is set forth below.
  
Ygiene ™  .   We have developed our Ygiene ™  products with the intent to kill certain harmful microbes, includ­ing virulent gram   positive or negative bacteria, viruses, yeast, mold, fungi, spores and/or certain bioterrorism agents, such as anthrax.  We are designing our Ygiene ™  formulations to target and bind to specific surface proteins and penetrate and alter the cellular structure of such proteins.  They are proxy-based and we believe, based on our internal laboratory studies, on a per unit volume basis, contain more active ingredients than any commercially available antimicrobial known to us.  In laboratory tests conducted by us,   our   Ygiene™ formulations demonstrated large zones of inhibition (areas on agar plates where growth of control organisms are prevented by antibiotics placed on agar surfaces) and high potency across a wide spectrum of harmful microbes.

We are developing our Ygiene ™  formulations for potential use in a broad range of applications, although the marketing and sale of each Ygiene ™  formulation in the United States and internationally will be subject to U.S. and foreign governmental regulations, respectively.  We believe there are three potential applications of our Ygiene ™  formulations, are set forth below:

·
Military/First Responders/Hospital Sterilant/Specialty Industrial:   We have develop Ygiene formulations for “kill on contact” applications for anthrax and other micro-organisms for use by the military, first responders, hospitals and other special industries.

·
Hospital/Health Care/Mold/Industrial:   We have developed the Ygiene formulations for high-level disinfectant applications for Methicillin Resistant Staphylococus Aureus (MRSA), multi-drug resistant Pseudomonas Aeruginosa, E. Coli, mold and other microbes for use by hospitals and other healthcare facilities, food preparation facilities and other demanding environments, which application we refer to herein as the “Hospital and Industrial Application.”
 
 
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·
Consumer Products/Light Industrial/Healthcare:   We have developed the Ygiene formulations for sporacidal, bactericidal and virucidal applications in general areas of hospitals, nursing homes and physician and dental offices.  We also are considering Ygiene formulations for use as skin sanitizers.

Currently, we are focusing our efforts on the commercialization of an Ygiene formulation for the Hospital and Industrial Application.  Based on laboratory tests conducted by us, we believe that, under certain laboratory conditions, this Ygiene formulation may be as effective as chlorine bleach or caustic soda for killing certain microbes, without the high level of toxicity generally associated with chlorine bleach or caustic soda.  In these laboratory tests, the Ygiene formulation inhibited the growth of over 200 microbes, including Methicillin resistant Staphylococus Aureus (MRSA), multi-drug resistant Pseudomonas Aeruginosa and E. coli.

Before we may market and sell any of our Ygiene formulations in the United States, the Ygiene formulation, regardless of their intended applications, must be registered with respect to each disinfectant claim for such formulation with the U.S. Environmental Protection Agency, or the EPA.  Similarly, before we may market and sell any Ygiene formulation in any foreign country, the Ygiene formulation must be registered with the appropriate agencies of such foreign country.  Our Ygiene formulation that we intend to market for the Hospital and Industrial Application has not been registered with the EPA with respect to its disinfectant claims for marketing and sale in the United States, although it has been registered for marketing and sale in Germany.  We cannot assure you that such formulation will be registered for marketing and sale with the EPA or any other foreign government agency on a timely basis, if at all.  See “Item 1. Business - Governmental Regulation” and “Item 1A. Risk Factors - We may not obtain the necessary U.S. or worldwide regulatory registrations, clearances or approvals to commercialize our products, and if we cannot commercialize our products, we will not become profitable.”

Ogiene™ .  We are developing our Ogiene™ products to potentially eliminate or reduce odors of many chemicals such as hydrogen sulfide, formaldehyde and ammonia, and to reduce certain green­house gases such as carbon dioxide and sulfur dioxide.  Our Ogiene™ formulations are designed to interact with the functional organic or inorganic groups of harmful gases and reduce or eliminate them.  We intend to offer Ogiene™ products in the gas phase – being applied as a fog, mist or spray – or in the liquid phase – being applied directly to liquid contaminates.  Based on laboratory studies conducted by us, we believe that Ogiene™ is free of unreasonable adverse impacts to health or the environment and that no or minimal clean up is required after application of our Ogiene™ products.  We plan to market our Ogiene™ products for hotels, restaurants, industrial manufacturing, controlled animal feeding operations (“CAFOs”), and homes.  

In laboratory tests conducted by us, our Ogiene™ formulations have demonstrated an ability to destroy a variety of agents that are noxious and harmful to health and/or the environment, particulates and their associated odors.  Specifically, in these tests, our Ogiene™ formulations demonstrated an ability to neutralize hydrogen sulfide, carbon dioxide, sulfur dioxide, formaldehyde and ammonia that are known contributors to foul odors and/or greenhouse gases.  We also are seeking to demonstrate that our Ogiene™ formulations may be used to effectively neutralize certain poisonous gases and to remove industrial pollution and environmental contaminants.

We believe our Ogiene™ formulations provide fast delivery capabilities of active ingredients and can eliminate or reduce a broad range of gases. We believe this is important since household, institutional and industrial odors and irritating gases can be the result of either a single odoriferous compound or the result of a multiplicity of odoriferous compounds or components. These odor causing components include various organic carboxylic acids, aldehydes, ketones, amines, mercaptans, sulfides, disulfides and esters. In addition, various inorganic compounds such as ammonia, hydrogen sulfide and sulfur dioxide may add to the complexity of specific odors.  Laboratory tests conducted by us have demonstrated that in certain laboratory conditions our Ogiene™ formulations can reduce or eliminate the following:

·
formaldehyde;

·
ammonia and carbon dioxide;

·
sulfur dioxide/ nitrogen oxide (green house gases); and
 
 
4

 
 
·
cigar smoke
 
In general, our Ygiene™ and Ogiene™ formulations have shown the following capabilities in laboratory tests conducted by us:
 
·
Our formulations have killed spores, bacteria and viruses at room temperature.

·
We can manipulate our products, depending upon the needs of customers, to address requirements that can vary as follows:
 
the kill time from seconds to minutes;

the breadth of kill; and
   
the class of target organisms.

·
Our formulations are stable, non corrosive, non flammable and water soluble.

·
Our formulations can be applied as a liquid, wet wipe, spray, mist/fog or foam/froth and can be applied to air, surface and water.

Our Customers

To date, we have not sold any of our current products.  If we obtain the requisite U.S. and foreign governmental agency registrations, clearances or approvals for our formulations, we plan to market and sell our products to consumers, commercial firms, healthcare facilities, and military chemical firms in the United States and overseas.
 
Marketing

If and when funding becomes available and when we obtain the necessary regulatory approvals for our products, we plan to develop a small, highly capable, experienced business team to market, license, sell and distribute our products to major international companies in our target industries.  Potential customers include hotels, restaurants and hospitals and those engaged in the military, power generation, mold remediation, surgical equipment sterilization and waste­­-water treatment industries.

If the EPA registers our Ygiene ™  formulation for disinfectant claims with respect to the Hospital and Industrial Application, we plan to commit most of our available resources at such time, if any, to application development, marketing and business development to accelerate commercialization of such formulation in the United States; however, there can be no assurance that we will receive such EPA registration or that commercialization of our Ygiene ™  formulation will be achieved on a timely basis, if at all.  See “Item 1. Business - Government Regulation” and “Item 1A. Risk Factors - We may not obtain the necessary U.S. or worldwide regulatory registrations, clearances or approvals to commercialize our products, and if we cannot commercialize our products, we will not become profitable.”

Competition

The markets for our Ogiene™ and Ygiene™ products and each of their potential channels are highly competitive.  We have a number of competitors that vary in size and scope and breadth of products offered.  Such competitors include some of the largest corporations in the world, and we believe substantially all of our competitors have greater financial resources than we do, including in the areas of sales, marketing, and branding and product development.  We expect to face additional competition from other competitors in the future.
 
 
5

 
 
Current competitive products and the company manufacturing the products include Clorox and other products including Formula 409 from The Clorox Company, Lysol and other cleaning products from Reckitt Benckiser, and laundry products including Tide and Downy from Procter & Gamble.  Although these large competitors have significant market share in the disinfectant and cleaning product markets, product comparison tests that were either supported or conducted by BioNeutral indicate the superiority of BioNeutral products as effective antimicrobials, disinfectants, surface cleaners, laundry cleaners, stain removers, and odor neutralizers.

Because Ogiene™ and Ygiene™ are new formulations enhanced from our initial base formulas, our success will depend, in part, upon our ability to achieve market share at the expense of existing, established and future products in our relevant target markets.  Even if our Ogiene™ and Ygiene™ formulations may have technological competitive advantages over competing products, we or potential distributors, will need to invest significant resources in order to attempt to displace traditional technologies sold by what are in many cases well-known international industry leaders.  Alternatively, we may pursue strategies in selective markets of encouraging existing competitors to incorporate our products into their existing brands, thereby reducing the proportion of end-use revenues that would accrue to us.  To the extent that we were to grant any existing competitor exclusivity to any field and/or territory, we would risk having our technology marketed in a manner that may be less than optimal for us.  We recognize that innovative marketing methods may be required in order to establish our products, and that such methods may not be successful.
 
Intellectual Properties

Our intellectual property includes patent applications for our formulations and our manufacturing processes, and applications to register the trademarks BioNeutral™, AutoNeutral™, Ogiene™,  Ygiene™, Collagiene™, Spore No More™  and the tagline SCIENCE TO SAVE LIVES & PROTECT THE ENVIRONMENT™.

Intellectual Property

We believe our patent claims are unique within our chemical composition space.  We believe prior lab and field tests completed by us have verified approximately 80 potential applications.  As we continue to utilize our technology platform and complement our product offerings, we plan to protect our technology and products by filing patent applications.

We currently have three pending utility patent applications filed with the United States Patent & Trademark Office, or the USPTO, directed to compositions of matter of our formulations, our manufacturing process and a number of applications.  In addition, we have pending patent applications in Japan, Europe, Mexico, China, and New Zealand.  We also have a pending patent application with the Patent Cooperation Treaty, or PCT, which can potentially be filed in any of the member countries.  We cannot assure you, however, that we will be able to obtain or maintain any Intellectual Property for our formulations.  See “Item 1A.  Risk Factors - If we are unable to obtain, maintain or defend patent and other intellectual property ownership rights relating to our technology, we may not be able to develop and market products based on our technology, which would have a material adverse impact on our results of operations and the price of our common stock.”

Trademarks

In April 2005, we filed in the United States Patent and Trademark Office an application for the registration of the trademarks BioNeutral™, Ogiene™ and Ygiene™, based on our intent to use each of these marks in commerce.  In April 2006, the USPTO issued notices of allowance signifying that each of these trademarks was entitled to registration after timely submission of statements of use, including evidence that such trademarks have been properly used in commerce.  From June through November of 2008, however, our applications for each of these trademarks were declared abandoned by the USPTO, since we inadvertently failed to timely file the appropriate statements of use with respect to each trademark within the six-month period from the date the USPTO issued the respective notices of allowance.  In July 2009, we refiled applications for each of these trademarks as well as our tagline SCIENCE TO SAVE LIVES & PROTECT THE ENVIRONMENT™; however, we learned that a third party had filed application for the registration of the trademarks BioNeutral™ and Ygiene™ prior to our refiling of our applications. Although we have filed with the Trademark Trial and Appeal Board oppositions to PURE Bioscience's a third party, applications and intend to pursue such oppositions vigorously, we cannot assure you that we will be successful with such opposition on a basis, if at all.  See “Item 3.  Legal Proceedings.”
 
 
6

 
 
We have entered into confidentiality agreements with certain third parties in an attempt to protect our trade secrets, including the processes, concepts, ideas and documentation associated with our technologies. We have not entered into such agreements with our directors, officers and employees.  Accordingly, we may not have sufficient protections for our technology and our competitors could acquire and use information that we consider to be our trade secrets and we may not be able to compete effectively. Most of our competitors have substantially greater financial, marketing, technical and manufacturing resources than we have and we may not be profitable if our competitors are also able to take advantage of our trade secrets.

Research and Development

We conduct our primary research and development activities in-house, and use third-party laboratories to conduct independent testing.  Research and development expenditures which were approximately $225,000 and $230,000 for the fiscal year ended October 31, 2010 and 2009, respectively.

Manufacturing

We currently have no manufacturing capabilities.  If and when we have available capital resources, we anticipate considering engaging (1) a contract manufacturer to produce finished products, which can be resold to our distributors/customers in Germany and after we obtain the requisite EPA and/or U.S. Food & Drug Administration clearance, in the United States; and (2) a contract manufacturer to produce the component which may be sold to a customer who may manufacture the finished products for mass distribution using the customer’s brand name.
 
The active and inactive ingredients in our concentrated and ready-to-use products are readily available from multiple chemical supply companies.

Raw Materials

The active and inactive ingredients in our concentrated and ready-to-use products are readily available from multiple chemical supply companies

Governmental Regulation
 
The marketing and sale in the United States and foreign countries of some of our current products and the products we may develop in the future are and may be subject to U.S. and foreign governmental regulations, respectively, which regulations vary substantially from country to country. The time required obtaining registration, clearance or approval by the United States or any foreign country may be longer or shorter, and the requirements may be different. There can be no assurance that we will be successful in obtaining or maintaining necessary registrations, clearances or approvals to market any of our current or future products in the United States or certain foreign countries.
 
 
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Some of our current or future products are or may be subject to the Federal Insecticide, Fungicide and Rodenticide Act, or FIFRA.  The objective of FIFRA is to provide federal control of pesticide distribution, sale, and use. All pesticides used in the United States must be registered with or licensed by the EPA.  Registration assures that pesticides will be properly labeled and that, if used in accordance with specifications, they will not cause unreasonable harm to the environment.  Use of each registered pesticide must be consistent with use directions contained on the label or labeling.  Each application for registration of a pesticide product with the EPA must include the results of laboratory testing conducted in accordance with the EPA's Good Laboratory Practice Standards (GLP), which standards are designed to ensure the quality and integrity of test data submitted to the EPA in support of a pesticide product registration. These laboratory tests generally are conducted to demonstrate the efficacy, toxicity and certain physical characteristics of the pesticide product.  When the GLP testing for a pesticide product is complete, an application demonstrating that the product candidate does not have unreasonable adverse impacts on health or the environment and that is effective for its intended use must be submitted to the EPA for its consideration.  The registration application must include the proposed product label and claims to be made for the product and explain permissible uses and required conditions for use; it must include data to support registration relating to product and residue chemistry, toxicology, environmental fate, eco-toxicology, exposure data, and for public health pesticides such as antimicrobials, efficacy data consistent with EPA’s data requirement standards.  The EPA reviews, evaluates, and analyzes the required data over a period of months, ranging from 6-8 months upwards to 20 or more, depending on the complexity of the product and its usage, whether its active ingredient has been registered previously and other factors.  A cost-benefit analysis of the scientific data based on environmental, societal and economic variables is used by the EPA to determine the acceptable uses and conditions for use of the pesticide.  The standard of analysis requires that the pesticide and its acceptable uses not cause harm to human health with reasonable certainty or pose unreasonable risks to the environment.  During its review, the agency may request that studies need to be repeated, or additional studies may need to be conducted and new data submitted.  The EPA staff evaluates risk assessment results and make a decision based on risks versus benefits in light of the proposed use of the product.  The EPA also may require changes in proposed labeling, uses, and application methods to mitigate risks to human health or the environment.  For a new product with a new active ingredient that has low risk, the estimated time for the EPA to complete review of a registration submission is approximately 15 months.  See “Item 1A.  Risk Factors - We may not obtain the necessary U.S. or worldwide regulatory registrations, clearances or approvals to commercialize our products, and if we cannot commercialize our products, we will not become profitable.”

Our current or future products also are or may be subject to the Toxic Substance Control Act of 1976, or TSCA.  TSCA provides the EPA with authority to require reporting, record-keeping and testing requirements, and restrictions relating to chemical substances and/or mixtures.  Certain substances are generally excluded from TSCA, including, among others, food, drugs, cosmetics and pesticides. TSCA addresses the production, importation, use, and disposal of specific chemicals including polychlorinated biphenyls (PCBs), asbestos, radon and lead-based paint.  If we determine that our products contain or constitute any “new chemical substances,” we are required to file a premanufacture notice (PMN) with the EPA 90 days before the start of production, and  must include information about the chemical identity of the substance,  byproducts, production volume, and descriptions of uses, human exposure and disposal practices, and any relevant test data.  The EPA will at the end of the 90 day period issue a regulatory decision dropping the substance from any further review or, if not, specifying the need for additional review or other action, including any regulatory constraints upon production.

The marketing and sale of any of our current or future product in the United States for use on or in the human body also will require pre-clearance by the FDA. We understand that the FDA pre-clearance process typically takes from approximately 15 to 19 months, depending upon the type, complexity and novelty of the product candidate.

We also are subject to regulation by the U.S. Federal Trade Commission, or FTC, with respect to our environmental marketing claims.  Products advertised as eco-friendly and “green” cleaning products must conform to the FTC's Guides for the Use of Environmental Marketing Claims.  In the event the FTC were to determine that any of our products are not in compliance with such guides, the FTC could bring enforcement actions on the basis that our marketing claims are false or misleading, which if successful, could subject us to fines or other penalties which could have a material adverse effect on our operations.
 
 
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Our Ygiene™ formulations are considered pesticides under FIFRA and require registration with the EPA and approval of each proposed disinfectant claim to be made.  We currently are focusing our efforts on obtaining EPA registration of our Ygiene™ formulation for disinfectant claims with respect to the Hospital and Industrial Application.  This Ygiene™ formulation has passed initial screening tests for hard surface disinfectant and mold use that are required by the EPA and three batches have been produced for the EPA registration process.  The GLP laboratory tests with respect to the impacts on health and the environment of our Ygiene™ formulation were completed in January 2010, with positive results that we believe are acceptable for submission to the EPA in connection with our application for registration.  On August 19, 2010, the Company submitted its application to the U.S. Environmental Protection Agency for the Company’s Ygiene antimicrobial for approval for use as a bactericide, fungicide, sporicide on hard, non-porous surfaces in hospitals, health care facilities and other commercial uses. The Company expects to receive a determination from the EPA during the Company’s second quarter. If the Company is unable to obtain such favorable determination it could have a material adverse impact on the valuation of the Intellectual Property.   As of October 31, 2010, we incurred expenses of approximately $407,500 in connection with the preparation of our application for registration of our Ygiene™ formulation, and anticipate that the total cost to us for the EPA registration process will be approximately $950,000.
 
Our Ygiene™ professional disinfectant product and multipurpose cleaner and disinfectant product were registered with the German Bundesanstalt für Arbeitsschutz und Arbeitsmedizin, a German government sanctioned institute for safety and health, on January 5, 2010 and November 30, 2009, respectively.  As a result of such registrations, we are permitted to sell such Ygiene™-based products in Germany.   We have not sold any of our products in Germany and currently do not have adequate resources to attempt to make any such sales or to have our products manufactured for sale.
 
Our Ogiene™ formulations, which do not rely upon antibiotic or pesticide activity, are not regulated under FIFRA.   All of the active ingredients of our Ogiene™ formulations are already on the Chemical Substance Inventory maintained by the EPA under TSCA and therefore are not subject to additional requirements under TSCA.
 
If we intend to market and sell any of our formulations as a skin sanitizer, to sterilize medical equipment or otherwise for use on or in the human body, we will need to obtain pre-clearance from the FDA. We have not submitted any of our formulations for clearance by the FDA and do not anticipate seeking FDA clearance for any of our formulations unless and until the requisite EPA registration for such formulation is obtained. If we were to seek FDA clearance for any of our formulations, we anticipate that the total cost to us for each pre-clearance would be approximately $400,000.

Employees
 
As of February 14, 2011, we had three employees and consultants devoting substantially all of their time to us. As of such date, we also had two part-time employees. None of our employees are represented by union or collective bargaining agreements. We believe that our relationships with our employees are good.
 
Advisory and Consultant Agreements

Advisory Agreement

On August 26, 2009, the Company entered into an advisory agreement (the “Original Agreement”) with the Chertoff Group, LLC (“Chertoff Group”) whereby Chertoff Group agreed to provide certain professional services to the Company. The Agreement provided for a monthly advisory fee payable by the Company to Chertoff Group of $75,000 per month. In addition, the Agreement obligated the Company to make an equity award to Chertoff Group in the form of restricted stock or restricted stock units representing the right to receive, on a fully diluted basis, 10% of Company’s common stock on terms to be mutually agreed by the Company and Chertoff Group.  

On February 3, 2010, we and Chertoff Group entered into a First Amendment to the Advisory Agreement (the “Amendment”) which amends the Original Agreement. The Amendment modifies, among other things, the scope of services to be provided under the Original Agreement by Chertoff Group and reduces the monthly fee for such services to $28,000 per month during the term of the Original Agreement.

In connection with the execution and delivery of the Amendment, we also entered into a Stock Appreciation Rights Agreement (the "SAR Agreement"), a Registered Stock Unit Agreement (the "RSU Agreement") and a Registration Rights Agreement, dated as of February 3, 2010, with Chertoff Group (the “Registration Rights Agreement” and together with the SAR Agreement and the RSU Agreement, the “Equity Award Agreements”). The Equity Award Agreements evidence the terms of the equity awards required to be made to Chertoff Group pursuant to the Amendment with Chertoff Group.  We relied on the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended, in issuing the securities covered by the Equity Award Agreements.
 
 
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On or about June 28, 2010, Chertoff Group informed the Company that Chertoff Group had terminated the August 26, 2009 Advisory Agreement, as amended between Chertoff Group and the Company.

Pursuant to the SAR Agreement, we granted 7,442,725 stock appreciation rights to Chertoff Group evidencing the Chertoff Group’s right to receive, for each stock appreciation right (“SAR”) exercised, up to the number of shares of our common stock (the “SAR Shares”) equal in value to the excess of the Fair Market Value of one share of common stock on the date of exercise (as defined in the SAR Agreement) over $0.186.  The SARs shall vest on a cumulative basis according to the following vesting schedule:  25% shall vest on September 1, 2010, an additional 25% shall vest on September 1, 2011, and the remaining 50% shall vest on September 1, 2012.  In addition, such vesting shall accelerate and fully vest upon the occurrence of certain events specified in the SAR Agreement, including a Change in Control of our company (as defined in the SAR Agreement.

Pursuant to the RSU Agreement, we granted to Chertoff Group the right to receive on the “Delivery Date” (as defined in the RSU Agreement) a number of shares of common stock (the “RSU Shares,” and together with the SAR Shares, the “Chertoff Group Shares”) equal to “A” divided by “B,” where “A” equals 1,384,346.85, and “B” equals the greater of (i) the Fair Market Value of a share of common stock on the Delivery Date (as defined in the RSU Agreement) and (ii) $0.186.  The RSU Agreement defines “Delivery Date” as the earlier to occur of January 2, 2013 and the date that is immediately prior to a Change in Control of our company (as defined in the RSU Agreement).  The RSUs shall vest on a cumulative basis according to the following vesting schedule:  25% shall vest on September 1, 2010, 50% shall vest on September 1, 2011 and 100% shall vest on September 1, 2012.  In addition, such vesting shall accelerate and fully vest upon the occurrence of certain events specified in the RSU Agreement, including a change in control of our company (as defined in the RSU Agreement).
 
Consulting Agreement

During the first quarter of fiscal 2009, we entered into consulting agreements with each of Khasar Investments Limited, Kachiun Investments Limited, Indus Limited, Orient Arts Limited and Style Asia Limited (collectively, the “Consulting Agreements”).  The Consulting Agreements with the consultants other than Style Asia Limited related to proposed commercial activities of our company in Japan, South Korea, Israel, New Zealand and Australia (collectively, the “Non-EU Territories”).  The Consulting Agreement with Style Asia Limited related to proposed commercial activities of our company in the United Kingdom, France and Germany (the “EU Territories”).  Each of the Consulting Agreements has a term that expires three years from the date of such agreement, subject to extension in certain instances.  We issued an aggregate of 11,300,000 shares of our common stock as partial consideration for the service obligations contained in the Consulting Agreements, 1,500,000 shares of which were issued to Khasar Investments Limited, 800,000 shares of which were issued to Kachiun Investments Limited, 2,500,000 shares of which were issued to Indus Limited, 3,400,000 shares of which were issued to Orient Arts Limited, and 3,100,000 shares of which were issued to Style Asia Limited.  The Consultant Agreement with Style Asia Limited was terminated, effective February 24, 2010, for no additional consideration, beyond the shares issued at inception of the agreement.  We have determined that we will not be able to avail ourselves of any services to be provided under the Consultant Agreements relating to the Non-EU Territories prior to the expiration of the initial term of each such agreement.  We also intend to evaluate whether we were wrongfully induced to enter into such Consulting Agreements.

On February 24, 2010 the company terminated the above Consulting Agreements and no compensation or reimbursement of expenses or other amount is due or owed by the Company pursuant to such agreements.
 
ITEM 1A.     RISK FACTORS

An investment in our common stock is speculative and involves a high degree of risk. You should carefully consider the risks described below, together with the other information contained in this Annual Report on Form 10-K.  The risks described below could have a material adverse effect on our business, financial condition and results of operations.
 
 
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Risks Related to Our Business
 
We have generated no meaningful product revenues to date and will need to raise additional funds in the near future.  If we are unable to obtain the funds necessary to continue our operations, we will be required to delay, scale back or eliminate certain of our product development activities and may not continue as a going concern.
 
We have generated no meaningful product revenues to date. We had net losses of approximately $3.507 million, after consideration of $450,000 attributable to the Non-Controlling interest's share of the net loss, for the year ended October 31, 2010. For the year ended October 31, 2009 we had net losses of approximately $13.5 million, after consideration of $2.1 million attributable to the Non-Controlling interest's share of the net loss. Our cash flow projections presently indicate that our current assets and projected revenues will not be sufficient to fund operations over the next twelve months.  Our auditors have concluded that our net losses negative cash flow and accumulated deficit as of October 31, 2010, raise substantial doubt about our ability to continue as a going concern.

We need to raise substantial additional funds or take other measures within the next few months in order to continue our operations.  Our future capital requirements will depend on numerous factors, including:
 
 
·
the results of studies relating to the efficacy and impacts on health and the environment of our products;
 
 
·
the scope and results of our research and development efforts;
 
 
·
the time required to obtain regulatory registrations, clearances or approvals;
 
 
·
our ability to establish and maintain marketing alliances and collaborative agreements; and
 
 
·
the cost of our internal marketing activities.
 
Our ability to accurately project revenues and expenses can be significantly impacted by unforeseen events, developments and contingencies that cannot be anticipated.  As such, there can be no assurance that our plans to raise additional financing will be successful or sufficient in order to sustain our operations over the next twelve months.

It is difficult for companies like ours to raise funds in the current economic environment and additional financing may not be available on acceptable terms, if at all. If adequate funds are not available, we will be required to delay, scale back or eliminate our product development activities or operations or obtain funds through arrangements with collaborative partners or others that may require us to relinquish rights to certain of our technologies or products that we would not otherwise relinquish.
 
For the past six months, we have relied on loans that may convert into common stock in certain instances from a shareholder and a director to fund our operations. We make no assurances that we will be able to secure similar financing arrangements in the future.  

We are the subject of an ongoing investigation by the SEC that could have a material adverse impact on our business.

As described under “Item 3.  Legal Proceedings”, on October 1, 2009, the SEC issued a formal order of investigation to us regarding possible securities laws violations by us and other persons. The investigation concerns the process by which we became a publicly traded entity, trading in our shares, and disclosure and promotion of developments in our business. The SEC has requested that we deliver certain documents to the SEC.  We have incurred, and expect to continue to incur, significant costs in responding to such investigation.  Any adverse findings by the SEC in connection with such investigation could have a material adverse impact on our business, including our ability to continue to operate as a publicly traded company.
 
 
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Our directors and executive officers do not have experience in public company matters, which could impair our ability to comply with legal and regulatory requirements.
 
Some of our directors and executive officers have almost no public company management experience.  This could impair our ability to comply with legal and regulatory requirements such as the Sarbanes-Oxley Act of 2002 and applicable federal securities laws including filing required reports and other information required on a timely basis.  In fiscal 2009 we failed to meet the filing deadline for two periodic reports.  There can be no assurance that our management will be able to implement and affect programs and policies in an effective and timely manner that adequately respond to increased legal, regulatory compliance and reporting requirements imposed by such laws and regulations.  Our failure to comply with such laws and regulations could lead to the imposition of fines and penalties, affect our ability to operate as a publicly traded company and further result in the deterioration of our business.

Management has concluded that our internal controls over financial reporting were ineffective as of October 31, 2010.

Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud.  We are required to maintain a system of internal control over financial reporting, which is defined as a process designed by, or under the supervision of, our principal executive officer and principal financial officer, or persons performing similar functions, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.

The areas of our internal control over financial reporting requiring improvement were generally with respect to our financial statement close process, our entity level controls (including with respect to disbursements from bank accounts), recording of stock issuances, our functional controls and our segregation of duties.  See discussion under “Item 9A.  Controls and Procedures”  Our management has determined that we had not consistently followed established internal control over financial reporting procedures related to the analysis, documentation and review of selection of the appropriate accounting treatment for certain transactions.

Although we have assigned priority to the improvement in our internal control over financial reporting and have taken certain actions, and plan to continue to take, action in furtherance of such improvement, we cannot assure you that the above-mentioned areas will be fully remedied.  Moreover, we cannot assure you that we will not, in the future, identify further areas requiring improvement in our internal control over financial reporting. We cannot assure you that the measures we have taken or will take to remediate any areas in need of improvement will be effective or that we will implement and maintain adequate controls over our financial processes and reporting in the future as we continue our growth.

If we are unable to establish appropriate internal financial reporting controls and procedures, it could cause us to fail to meet our reporting obligations, result in additional restatements of our financial statements, harm our operating results, subject us to regulatory scrutiny and sanction, cause investors to lose confidence in our reported financial information and have a negative effect on the market price for shares of our common stock.   In addition, we may incur significant expenses in connection with restating our previously reported financial statements and remediating the weaknesses in our internal control over financial reporting which could have a negative effect on our operating results.

We failed to file federal tax returns for the fiscal years ended December 31, 2007 and the ten months ended October 31, 2008 and for the fiscal year ended October 31, 2009. We have also failed to file any New Jersey state tax returns. We cannot assure you that we will not incur fines and penalties for failure to file such tax returns.
 
 
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We have a non-controlling interest in our subsidiary BioNeutral Laboratories.

We currently hold approximately 96% of the outstanding interests in our subsidiary, BioNeutral Laboratories.  We did not receive consents to the Share Exchange from all common and preferred shareholders of BioNeutral Laboratories, and we have accounted for those shareholders who did not sign consents as holders of the remaining 4% outstanding interests in BioNeutral Laboratories as not have received shares in BioNeutral.  As described in “Item I Business -- Company Overview” the Share Exchange Consents did not specify the number of shares of BioNeutral Laboratories common stock to be exchanged by the Consenting Shareholder and did not affirmatively make the representation and warranties to be made by our stockholders as set forth in the Share Exchange Agreement.  In light of such omissions, there can be no assurances that a shareholder will not challenge the validity of its consent and request a rescission offer in respect of shares of common stock issued to such person. There can also be no assurances that in light of the content of such Share Exchange Consent, we had a basis for a valid private placement of our common stock issued in the Share Exchange and that we will not be requested to conduct a rescission offer.

In addition, we believe that the shareholders who consented to the Share Exchange and were issued shares of our common stock failed to deliver to us the stock certificates representing their shares of common stock and Series A Preferred Stock of BioNeutral Laboratories and may claim they also have an ownership interest in BioNeutral Laboratories.  Although we would challenge any such claims, we cannot assure you that we would prevail, in which case our percentage ownership interest in BioNeutral Laboratories would decrease.  In addition, any litigation with respect to such claims could result in substantial costs, diversion of management's attention and diversion of our resources.  The size and uncertainty with respect to the Non-Controlling interest in BioNeutral Laboratories may make it difficult for us to raise capital, and even if we were to raise capital, would result in dilution to our stockholders at the public company level that is not experienced by stockholders that are part of the Non-Controlling interest, each of which would have a material adverse effect on our financial position.

We have a limited operating history on which to evaluate our potential for future success and to determine whether we will be able to execute our business plan.  This makes it difficult to evaluate future prospects and the risk of success or failure of our business.

We have not commenced the marketing and sale of our bioneutralizer, odor controllers and antimicrobial applications and have generated no revenues to date. Consequently, our historical results of operations may not give you an accurate indication of our future results of operations or prospects. You must consider our business and prospects in light of the risks and difficulties we will encounter as an early-stage company in a new and rapidly evolving market. These risks include:

·
our ability to obtain regulatory registration, clearance or approval of our products;
 
·
our ability to effectively and efficiently market and distribute our products through our sales force and third-party distributors;
 
·
the ability of manufacturers utilized by us to effectively and efficiently manufacture our products;
 
·
our ability to obtain market acceptance of our current products and future products that may be developed by us;
 
·
our ability to sell our products at competitive prices which exceed our per unit costs;
 
·
our ability to adequately protect our intellectual property;
 
·
 our ability to attract and retain key business development, technical and management personnel; and
 
·
our ability to effectively manage our anticipated growth.
   
 
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We may not be able to address these risks and difficulties, which could materially and adversely affect our revenues, operating results and our ability to continue to operate our business. There can be no assurance that we will be able to achieve or sustain profitability, or generate sufficient cash flow to meet our capital and operating expense obligations.  As a result, you could lose your entire investment in our stock.

We currently are not profitable and may never become profitable, which could negatively impact the value of our common stock.
 
We have a history of losses and expect to incur substantial losses and negative operating cash flow for the foreseeable future, and we may never achieve or maintain profitability. Even if we succeed in developing and commercializing one or more of our products, we expect to incur substantial losses for the foreseeable future and may never become profitable. We also expect to continue to incur significant operating and capital expenditures and anticipate that our expenses will increase substantially in the foreseeable future as we:
 
 
·
continue to undertake development and laboratory testing for our product candidates;
 
 
·
seek regulatory registrations, clearances or approvals for our products;
 
 
·
implement additional internal systems and infrastructure;
 
 
·
lease additional or alternative office facilities; and
 
 
·
hire additional personnel.
 
We also expect to experience negative cash flow for the foreseeable future as we fund our operating losses and capital expenditures. As a result, we will need to generate significant revenues in order to achieve and maintain profitability. We may not be able to generate these revenues or achieve profitability in the future. Our failure to achieve or maintain profitability could negatively impact the value of our common stock.
 
We may not obtain the necessary U.S. or worldwide regulatory registrations, clearances or approvals to commercialize our products, and if we cannot commercialize our products, we will not become profitable.
 
We will need to register as pesticides with the EPA certain of our products we intend to commercialize in the U.S. and to obtain similar registrations from the EPA equivalent regulatory authorities in foreign jurisdictions to commercialize our product candidates in those jurisdictions.  We also may need to obtain FDA clearance to commercialize any of our products we intend to market for human application.

Some of our current or future products are or may be subject to FIFRA.  In order to market or sell any of our formulations that constitute pesticides, including our Ygiene formulation, such formulations must be registered or licensed by the EPA.  Each application for registration of a pesticide product by the EPA must include the results of laboratory testing conducted, which tests must be conducted in accordance with GLP to ensure the quality and integrity of test data submitted to the EPA in support of a pesticide product registration. If and when the GLP testing for a pesticide product is complete, we will need to submit to the EPA an application demonstrating that the product candidate is effective for its intended use and when used in accordance with recognized practice, will not cause “unreasonable adverse effects” to humans or the environment.  Satisfaction of the EPA’s regulatory requirements typically requires from nine to over twenty months to complete, depending upon the type, complexity and novelty of the product and requires substantial resources for research, development and testing. We cannot predict whether our research and testing will result in products that the EPA finds effective for indicated uses and consistent with applicable regulatory standards regarding effects on humans or the environment. Testing, preparation of necessary applications and the processing of those applications by the EPA is expensive and time consuming. We do not know if the EPA will act favorably or quickly in making such reviews, and significant difficulties or costs may be encountered by us in our efforts to obtain EPA registration. The EPA also may place conditions on registrations that could restrict commercial applications of such products. Product registrations may be withdrawn if compliance with regulatory standards is not maintained or if problems occur following initial marketing.
 
 
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The EPA has substantial discretion in the registration process and may require us to conduct additional testing or to perform post-marketing studies. The registration process may also be delayed by changes in government regulation, future legislation or administrative action or changes in EPA policy that occur prior to or during our regulatory review. Delays in obtaining regulatory registrations, clearances or approvals may:
 
 
·
delay commercialization of, and our ability to derive product revenues from, our product candidates;
 
 
·
impose costly procedures on us; and
 
 
·
diminish any competitive advantages that we may otherwise have.
 
Even if we comply with all EPA requests, the EPA ultimately may reject any or all of our future applications. We cannot be sure that we will ever obtain registration of any of our antimicrobial products.  Failure to obtain EPA registration of any of our antimicrobial products will severely undermine our business by reducing our number of salable products and, therefore, corresponding product revenues.
 
In foreign jurisdictions, we must obtain similar regulatory approvals from the appropriate authorities before we can commercialize our products.  Foreign regulatory registration, clearance or approval processes generally include all of the risks associated with the EPA registration procedures described above.  We have not yet made any determination as to which foreign jurisdictions we may seek regulatory approval in and have not undertaken any steps to obtain approvals or register our products for sale in any foreign jurisdiction other than Germany.

Independent GLP tests are very expensive, time consuming and difficult to design and implement.
 
Independent GLP tests are very expensive and difficult to design and implement, in part because they are subject to rigorous regulatory requirements. The laboratory testing process is also time consuming. The GLP laboratory tests with respect to the impacts on health and the environment of our Ygiene™ formulation was completed in January 2010, with positive results that we believe are acceptable for submission to the EPA in connection with our application for registration.  The GLP laboratory tests with respect to the efficacy and physical characteristics of the Ygiene™ formulation was completed during July 2010. On August 19, 2010, the Company submitted its application to the U.S. Environmental Protection Agency of the Company’s Ygiene antimicrobial for approval for use as a bactericide, fungicide, sporicide on hard, non-porous surfaces in hospitals, health care facilities and other commercial uses. The Company expects to receive a determination from the EPA during the Company’s second quarter. If the Company is unable to obtain such favorable determination it could have a material adverse impact on the valuation of the valuation of the company’s Intellectual Property.

Even if our GLP testing of any of our Ygiene formulations or any other products we may develop in the future are completed as planned, we cannot be certain that their results will support our product claims. The GLP testing may fail to demonstrate that our product candidates are effective for indicated use or meet the EPA's standards with respect to the impacts on health and the environment. This failure would cause us to abandon a product formulation and may delay development of other products. Any delay in, or termination of, GLP testing will delay the filing of our applications with the EPA and, ultimately, our ability to commercialize our products and generate product revenues.
 
If our efforts to achieve and maintain market acceptance of our products are not successful, we will not attain profitability.
 
We have invested a significant portion of our time and financial resources in the development and commercialization of our Ygiene™ and Ogiene™ formulations. We expect that sales of our Ygiene™ and Ogiene™ formulations will constitute a substantial portion, or all, of any revenues in future periods.  Failure to obtain market acceptance for Ygiene™ and Ogiene™ formulations, whether as a result of competition, lack of customer demand, lack of product effectiveness and safety, or any other factor, would have a materially adverse effect on our business, financial condition and results of operations. Even if our products achieve market acceptance, we may not be able to maintain product sales or other forms of revenue over time if new products or technologies are introduced that are more favorably received or are more cost-effective than our products or otherwise render our products less attractive or obsolete.  
 
 
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We are subject to regulation by the FTC with respect to our environmental marketing claims and any other advertising claims, and if we fail to comply with such regulation, we could become subject to fines or other penalties which could have a material adverse effect on our operations.
 
We expect to advertise some of our products as “eco-friendly” and “green” cleaning products and must conform with the FTC's Guides for the use of Environmental Marketing Claims.  In the event the FTC were to determine that our products are not in compliance with such guides, the FTC could bring enforcement actions against us on the basis that our marketing claims are false or misleading, which if successful, could subject us to fines or other penalties which could have a material adverse effect on our operations.
 
The specialty chemical products market is highly competitive and we may not be able to compete effectively.

Our Ogiene™ and Ygiene™ products will compete in highly competitive markets dominated by extremely large, well financed domestically and internationally recognized chemical and pharmaceutical companies.  We believe substantially all of our competitors have greater financial resources than we do in the areas of sales, marketing, and branding and product development.  Many of our competitors also already have well established brands and distribution, and we expect to face additional competition from these competitors in the future.  Focused competition by larger chemical and pharmaceutical corporations could substantially limit or eliminate our potential market share and ability to profit from our products and technologies.

The specialty chemical products market is susceptible to rapid change, and developments by competitors with greater resources may render our products or technologies uneconomical or obsolete.  Our ability to compete will depend upon our ability to quickly develop marketable products, brand recognition and novel distribution methods, and to displace existing, established and future products in our relevant target markets.  We may not be successful in doing so and may not become profitable.

If we are not able to manage anticipated rapid growth effectively, we may not become profitable.
 
Our success will depend upon the expansion of our operations and the effective management of our growth, which will place a significant strain on our management and on our administrative, operational and financial resources.  The growth in the size and geographic range of our business will place significant demands on management and our operating systems.  Our ability to manage our growth effectively will depend on our ability to, among other things:

·
attract additional management personnel;

·
develop and improve our operating systems;

·
hire, train, and manage an employee base; and

·
maintain adequate service capacity.

There can be no assurance that we will be able to effectively manage growth and build the infrastructure necessary to achieve our plans for growth.  If we are unable to manage our growth effectively, our business may suffer.
 
Our success depends on our ability to retain our key personnel and the loss of any of our key personnel may materially and adversely affect our operations and our ability to execute our growth strategy.
 
Our present and future performance will depend on the continued service of our senior management personnel. Our key employees include Stephen Browand, our Chairman and Chief Executive Officer, and Dr. Andy Kielbania, our Chief Scientist and Secretary.  The loss of the services of any of these individuals could have a material and adverse effect on us and our stock price may decline. In addition, our ability to execute our business plan is dependent on our ability to attract and retain additional highly skilled personnel. We currently do not have long term employment agreements with our officers.  We do not maintain any key man life insurance on any of our key personnel.
 
 
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Because competition for highly qualified business development and scientific personnel is intense, we may not be able to attract and retain the employees we need to support our planned growth.
 
To successfully meet our objectives, we must attract and retain highly qualified business development and scientific personnel with specialized skill sets focused on the industries in which we compete, or intend to compete.  Competition for qualified business development and scientific personnel can be intense.  Our ability to meet our business development objectives will depend in part on our ability to recruit, train and retain top quality people with advanced skills who understand our technology and business.  In addition, it takes time for our new personnel to become productive and to learn our business.  If we are unable to hire or retain qualified business development and scientific personnel, it will be difficult for us to sell our products or to license our technology, and we may experience a shortfall in revenue and not achieve our anticipated growth.

We may become subject to product liability claims, as a result of which we could incur substantial liabilities and be required to limit commercialization of our products, which could adversely affect our business.
 
If we are able to sell any of our products for use by consumers and institutions, we may become liable for any damage caused by our products, whether used in the manner intended or not.  Any such claim of liability, whether meritorious or not, could be time-consuming, result in costly litigation, damage our reputation and/or require us to limit the commercialization of our products.  Although we maintain general liability insurance, our insurance may not cover potential claims of the types described above and may not be adequate to indemnify for all liabilities that may be imposed.  Any imposition of liability that is not covered by insurance or is in excess of insurance coverage could harm our business and operating results, and you may lose some or all of any investment you have made, or may make, in our common stock.

If we are unable to obtain, maintain or defend patent and other intellectual property ownership rights relating to our technology, we may not be able to develop and market products based on our technology, which would have a material adverse impact on our results of operations and the price of our common stock.
 
We rely and expect in the future to rely on a combination of patent, trademark, trade secret and copyright law, and contractual restrictions to protect the proprietary aspects of our technology and business. These legal protections afford only limited protection for our intellectual property and trade secrets.  Unauthorized parties may attempt to copy aspects of our proprietary technology or otherwise obtain and use information that we regard as proprietary.  As a result, we cannot assure you that our means of protecting our proprietary rights will be adequate, and the infringement of such rights could have a material negative impact on our business and on our results of operations.
 
We have filed U.S. and foreign patent applications for our Intellectual Property as well as applications in the U.S. and European Community for the registration of our trademarks, BioNeutral ™   Ygiene ™   and Ogiene . We have also filed an application in the U.S. to register our tagline SCIENCE TO SAVE LIVES & PROTECT THE ENVIRONMENT™.  We may not be successful in obtaining the Intellectual Property or trademark registrations, and we may be unable to obtain additional patent and trademark protection in the future.  Further, the scope of the Intellectual Property and trademarks we may obtain could potentially be inadequate to encompass our commercial operations.  Furthermore, legal standards relating to the validity, enforceability and scope of protection of intellectual property rights are uncertain.  It is possible that, despite our efforts, competitors or others will create and use products in violation of our Intellectual Property and/or adopt service names similar to our service names or otherwise misappropriate our intellectual property.  Such patent infringement or misappropriation could have a material adverse effect on our business.  Any unauthorized production of our products, whether in the U.S. or overseas, would or could reduce our own sales of products, thereby reducing, perhaps significantly, our actual or potential profits.  Adopting similar names and trademarks by competitors could lead to customer confusion.  Any claims or customer confusion related to our trademarks could negatively affect our business.
 
 
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Litigation or other action may be necessary to enforce our intellectual property rights and protect our trade secrets.  If third parties apply to register our trademarks in the U.S. or other countries, we may oppose those applications and may be required to participate in proceedings before the regulatory agencies who determine priority of rights to such trademarks.  We currently are opposing applications for registration by a third party of our trademarks BioNeutral ™  and Ygiene ™  ; however, there can be no assurance that we will prevail with such opposition.  Such administrative proceedings and any other litigation or adverse priority proceeding could result in substantial costs and diversion of resources, and could seriously harm our business and operating results.  See “Item 3.  Legal Proceedings.”

To the extent that we operate internationally, the laws of foreign countries may not protect our proprietary rights to the same extent as do the laws of the United States.  Many countries have a “first-to-file” trademark registration system.  As a result, we may be prevented from registering or using our trademarks in certain countries if third parties have previously filed applications to register or have registered the same or similar trademarks.  Our means of protecting our proprietary rights may not be adequate, and our competitors, or potential competitors, could independently develop similar technology.
 
It is possible that our products infringe upon the Intellectual Property or violate the proprietary rights of others, which could have a material adverse effect on our business.
 
In the event that products we sell are deemed to infringe upon the Intellectual Property or other proprietary rights of third parties, we could be required to modify our products or obtain a license for the manufacture and/or sale of such products and services. In such event, we cannot assure you that we would be able to do so in a timely manner, upon acceptable terms and conditions, or at all, and the failure to do any of the foregoing could have a material adverse effect upon our business.  Moreover, we cannot assure you that we will have the financial or other resources necessary to enforce or defend a patent infringement or proprietary rights violation action. In addition, if our products or proposed products are deemed to infringe or likely to infringe upon the Intellectual Property or proprietary rights of others, we could be subject to injunctive relief and, under certain circumstances, become liable for damages, which could also have an adverse effect on our business.

Because we have no experience selling, marketing or distributing products and no internal capability to do so, we may not be successful in marketing our products, which would adversely affect our results of operations.
 
We currently have no sales, marketing or distribution capabilities.  We do not anticipate having the resources in the foreseeable future to allocate to the sales and marketing of our proposed products.  Significant capital expenditures, management resources and time will be required to establish and develop an in-house marketing and sales force with technical expertise.  There can also be no assurance that we will be able to develop in-house sales capabilities or that we will be able to market and sell our product in the United States or overseas, which would adversely affect the results of our operations.

We have no distribution capabilities and expect to rely primarily on product distribution arrangements with third parties.  We may license our technology to certain third parties for commercialization of certain applications.  We expect to enter into additional distribution agreements and licensing agreements in the future, and we may not be able to enter into these additional agreements on terms that are favorable to us, if at all.  In addition, we may have limited or no control over the distribution activities of these third parties.  These third parties could sell competing products and may devote insufficient sales efforts to our products.  As a result, our future revenues from sales of our products, if any, will depend on the success of the efforts of these third parties.
 
We expect to rely exclusively on a limited number of third parties to manufacture our products, and may be unable to distribute our products if any of our manufacturers are unable to manufacture our products in a timely manner or at all, which could adversely affect our results of operations.
 
We have no experience in manufacturing products and do not intend to establish our own manufacturing facilities.  We lack the resources and expertise to manufacture our own products.  If we receive the requisite approvals to market and sell any of our products, we intend to contract with one or more manufacturers to manufacture our products.  Our anticipated future reliance on a limited number of third-party manufacturers exposes us to the following risks:
 
 
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·
We may be unable to identify manufacturers on acceptable terms or at all because the number of potential manufacturers is limited and depending on the product formulation being manufactured may require registration, clearance or approval by the EPA or FDA.  This registration, clearance or approval would require testing and compliance inspections. In addition, a new manufacturer would have to be educated in, or develop substantially equivalent processes for, production of our products after receipt of EPA or FDA registration, clearance or approval, if any.
 
 
·
Our third-party manufacturers might be unable to manufacture our products in the volume and of the quality required to meet our clinical and commercial needs, if any.
 
 
·
Our future contract manufacturers may not perform as agreed or may not remain in the contract manufacturing business for the time required to distribute our products.
 
 
·
Pesticide manufacturers are subject to ongoing periodic unannounced inspection by the EPA and in some cases, the FDA, and corresponding state agencies to ensure strict compliance with good manufacturing practice and other government regulations and corresponding foreign standards. We do not have control over third-party manufacturers’ compliance with these regulations and standards.
 
 
·
If any third-party manufacturer makes improvements in the manufacturing process for our products, we may not own, or may have to share, the intellectual property rights to the innovation.
 
 We expect to rely, in part, on third parties to develop Ogiene™ and Ygiene™ -based products and they may not do so successfully or diligently.
 
We will rely, in part, on third parties to whom we license rights to our technology to develop products containing Ogiene™ and Ygiene™ for many of the applications for which we believe Ogiene™ and Ygiene™ -based products have, or may have, market opportunities.  Generally, under our contractual relationships with these third parties, we rely on the third party to fund and direct product development activities and appropriate regulatory filings.  Any of these third parties may not be able to successfully develop such Ogiene™ and Ygiene™ -based products, due to, among other factors, a lack of capital, a lack of appropriate diligence, a change in the evaluation by the third party of the market potential for Ogiene™ or Ygiene™ -based products, technical failures and poorer than expected test results resulting from trial use of any products that may be developed.

If we are unable to timely fill orders for our products, our operations could be materially adversely impacted.
 
In order for us to successfully market our products, we must be able to timely fill orders for our product line. Our ability to timely meet our supply requirements will depend on numerous factors including our ability to successfully maintain an effective distribution network and to maintain adequate inventories and the ability of any manufacturer we engage to adequately produce our products in volumes sufficient to meet demand. Our failure to adequately supply our products to retailers or of our manufacturer to adequately produce products to meet demand could materially adversely impact our operations.
 
Our failure to procure adequate supplies of raw materials could delay the commercial introduction or shipment and hinder market acceptance of our products, which could materially adversely affect our business.
 
If for any reason we are unable to obtain any of the raw materials in our products on a timely basis or at all or if the prices of such materials increase the commercial introduction and shipment of our products could be delayed or halted and the market acceptance of our products could be hindered, any or all of which could adversely affect our business.
 
Risks Related to Our Corporate Governance and Common Stock

Our stock price is, and we expect it to remain, volatile, which could limit investors’ ability to sell stock at a profit.
 
 
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The market price of our common stock is highly volatile and could be subject to wide fluctuations in response to a number of factors some of which are beyond our control, including:
 
 
dilution caused by our issuance of additional shares of common stock and other forms of equity securities in connection with future capital financings to fund our operations and growth, to attract and retain valuable personnel and in connection with future strategic partnerships with other companies;
 
announcements of new acquisitions or other business initiatives by our competitors;
 
our ability to take advantage of new acquisitions or other business initiatives;
 
fluctuations in revenue from our products;
 
changes in the market for our products and/or in the capital markets generally;
 
changes in the demand for our products, including changes resulting from the introduction or expansion of new  products;
 
quarterly variations in our revenues and operating expenses;
 
changes in the valuation of similarly situated companies, both in our industry and in other industries;
 
changes in analysts’ estimates affecting our company (if any), our competitors and/or our industry;
 
changes in the accounting methods used in or otherwise affecting our industry;
 
additions and departures of key personnel;
 
announcements of technological innovations or new products available to the our industry;
 
announcements by relevant governments pertaining to incentives for products utilizing our technology;
 
fluctuations in interest rates and the availability of capital in the capital markets; and
 
significant sales of our common stock, including sales by investors following registration of the shares of our common stock issued in connection with the Share Exchange Agreement and/or future investors in future offerings we expect to make to raise additional capital. 
 
These and other factors are largely beyond our control, and the impact of these risks, singly or in the aggregate, may result in material adverse changes to the market price of our common stock.  In addition, the stock market in general, and the market for specialty chemical companies in particular, has experienced extreme price and volume fluctuations that may have been unrelated or disproportionate to the operating performance of individual companies.  These broad market and industry factors may seriously harm the market price of our common stock, regardless of our operating performance.

On the OTCBB, there will be a limited trading market for our common stock and you may not be able to resell your shares at or above the price at which you purchased your shares, or at all.

Our common stock is quoted on the OTCBB.  Trading volume of OTCBB stocks have been historically lower and more volatile then stocks traded on an exchange.  Quoting of our stock on the OTCBB could have an adverse effect on the market price of, and the efficiency of the trading market for, our common stock, not only in terms of the number of shares that can be bought and sold at a given price, but also through delays in the timing of transactions and less coverage of us by securities analysts, if any.  Trading on the OTCBB may also reduce the fair market value of our common stock and have an adverse effect on our ability to raise capital in the public of private equity markets or to acquire other companies or technologies by using common stock as consideration.
 
Future sales of our common stock, or the perception that such sales could occur, could have an adverse effect on the market price of our common stock.

As of October 31, 2010 there were approximately 74,643,115 shares of our common stock and approximately 146 holders of our common stock.  Future sales of our common stock, pursuant to a registration statement or Rule 144 under the Securities Act, or the perception that such sales could occur, could have an adverse effect on the market price of our common stock. The shares of our common stock issued in connection with the consummation of the Share Exchange (other than shares of our common stock held by our Chief Executive Officer and one of our directors that are subject to a lock-up agreement), which is a large number of shares relative to the trading volume of our common stock, may be eligible for resale under Rule 144 following the date on which we file this Annual Report so long as the applicable conditions contained in Rule 144(i) are satisfied. The market price of our common stock could fall if the holders of these shares sell them or are perceived by the market as intending to sell them.     
 
 
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Since our common stock is classified as a “penny stock,” our common stock will be subject to rules that impose sales practice and disclosure requirements on broker-dealers who engage in certain transactions involving a penny stock.

We are subject to the penny stock rules adopted by the SEC that require brokers to provide extensive disclosure to its customers prior to executing trades in penny stocks.  These disclosure requirements may cause a reduction in the trading activity of our common stock, which in all likelihood would make it difficult for our stockholders to sell their securities.
 
Rule 3a51-1 of the Exchange Act establishes the definition of a “penny stock,” for purposes relevant to us, as any equity security that has a minimum bid price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to a limited number of exceptions which are not available to us.  It is likely that our shares will be considered to be penny stocks for the immediately foreseeable future.  This classification severely and adversely affects any market liquidity for our common stock.

For any transaction involving a penny stock, unless exempt, the penny stock rules require that a broker or dealer approve a person's account for transactions in penny stocks and the broker or dealer receive from the investor a written agreement to the transaction setting forth the identity and quantity of the penny stock to be purchased.  In order to approve a person's account for transactions in penny stocks, the broker or dealer must obtain financial information and investment experience and objectives of the person and make a reasonable determination that the transactions in penny stocks are suitable for that person and that that person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.

The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prepared by the SEC relating to the penny stock market, which, in highlight form, sets forth:

 
·
the basis on which the broker or dealer made the suitability determination; and
 
·
that the broker or dealer received a signed, written agreement from the investor prior to the transaction.

Disclosure also must be made about the risks of investing in penny stocks in both public offerings and in secondary trading and commission’s payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions.  Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.
 
Because of these regulations, broker-dealers may not wish to engage in the above-referenced necessary paperwork and disclosures and/or may encounter difficulties in their attempt to sell shares of our common stock, which may affect the ability of selling shareholders or other holders to sell their shares in any secondary market and have the effect of reducing the level of trading activity in any secondary market.  These additional sales practice and disclosure requirements could impede the sale of our common stock, if and when our common stock becomes publicly traded.  In addition, the liquidity for our common stock may decrease, with a corresponding decrease in the price of our common stock.  Our common stock are subject to such penny stock rules for the foreseeable future and our shareholders will, in all likelihood, find it difficult to sell their common stock.

The market for penny stock has experienced numerous frauds and abuses which could adversely impact subscribers of our stock.

We believe that the market for penny stocks has suffered from patterns of fraud and abuse. Such patterns include:
 
 
·
control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer;
 
·
manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases;
 
 
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·
“boiler room” practices involving high pressure sales tactics and unrealistic price projections by inexperienced sales persons;
 
·
excessive and undisclosed bid-ask differentials and markups by selling broker-dealers; and
 
·
wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the inevitable collapse of those prices with consequent investor losses.
 
We believe that many of these abuses have occurred with respect to the promotion of low price stock companies that lacked experienced management, adequate financial resources, an adequate business plan and/or marketable and successful business or product.

We do not expect to pay dividends in the foreseeable future.

We do not intend to declare dividends for the foreseeable future, as we anticipate that we will reinvest any future earnings in the development and growth of our business.  Therefore, investors will not receive any funds unless they sell their common stock, and stockholders may be unable to sell their shares on favorable terms or at all. Investors cannot be assured of a positive return on investment or that they will not lose the entire amount of their investment in the common stock.

Cautionary Note Regarding Forward-Looking Statements.
 
This Annual Report on Form 10-K may contain forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act.
 
Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, anticipations, assumptions, estimates, intentions, and future performance, and involve known and unknown risks, uncertainties and other factors, which may be beyond our control, and which may cause our actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements.
 
All statements other than statements of historical fact are statements that could be forward-looking statements. You can identify these forward-looking statements through our use of words such as “may,” “will,” “can,” “anticipate,” “assume,” “should,” “indicate,” “would,” “believe,” “contemplate,” “expect,” “seek,” “estimate,” “continue,” “plan,” “point to,” “project,” “predict,” “could,” “intend,” “target,” “potential,” and other similar words and expressions of the future. These forward-looking statements may not be realized due to a variety of factors, including, without limitation:
 
 
·
our inability to raise capital;
 
·
our failure to obtain the necessary regulatory approvals for our products;
 
·
the results of the current SEC investigation of our company;
 
·
the inability to obtain or retain customer acceptance of our products;
 
·
the failure of the market for our products to develop;
 
·
our inability to protect our intellectual property;
 
·
our inability to manage any growth;
 
·
the effects of competition from a wide variety of local, regional, national and other providers of products similar to our products;
 
·
changes in laws and regulations, including tax and securities laws and regulations and laws and regulations promulgated by the EPA, FDA and FTC.
 
·
changes in accounting policies, rules and practices;
 
·
changes in technology or products, which may be more difficult or costly, or less effective than anticipated; and
 
·
the other factors listed under this Item 1A - “Risk Factors.”
 
 
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All forward-looking statements are expressly qualified in their entirety by this cautionary notice. You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K. We have no obligation, and expressly disclaim any obligation, to update, revise or correct any of the forward-looking statements, whether as a result of new information, future events or otherwise. We have expressed our expectations, beliefs and projections in good faith and we believe they have a reasonable basis. However, we cannot assure you that our expectations, beliefs or projections will result or be achieved or accomplished.

ITEM 1B.     UNRESOLVED STAFF COMMENTS
 
None.

ITEM 2 .       PROPERTIES

Our executive offices are located at New Jersey Institute of Technology, 211 Warren Street, Newark, New Jersey 07103.  Our facilities located in Newark, New Jersey consist of approximately 519 square feet of office space and approximately 590 square feet of laboratory space.  We currently occupy this space pursuant to a lease which began on September 1, 2005 and has been renewed every year since inception. The current lease has been renewed on September 1, 2010 and expires on August 31, 2011, subject to our option to renew the lease for an additional one year period on terms and conditions set forth therein. All leases at the Enterprise Development Center at the NJIT campus are limited to a one year term. Pursuant to the lease, we are required to pay rent in the amount of $2,834 per month. Such rental payment includes all common area maintenance costs.

We believe that our existing facilities are suitable as office and laboratory space, and are adequate to meet our current needs. We also believe that our insurance coverage adequately covers our current interest in our leased space. We do not own any real property for use in our operations or otherwise.

ITEM 3.        LEGAL PROCEEDINGS

On October 1, 2009, the SEC issued a formal order of investigation to us regarding possible securities laws violations by us and other persons.  The investigation concerns the process by which we became a publicly traded entity, trading in our shares, and disclosure and promotion of developments in our business.  The SEC has requested that we deliver certain documents to the SEC.  We have, and will continue to, fully cooperate with the SEC with respect to its investigation. We have not received any further communication from the SEC concerning the investigation since November of 2009.

In April 2005, we filed in the USPTO an application for the registration of the trademarks BioNeutral™, Ogiene™ and Ygiene™, based on our intent to use each of these marks in commerce.  In April 2006, the USPTO issued notices of allowance signifying that each of these trademarks were entitled to registration after timely submission of statements of use, including evidence that such trademarks have been properly used in commerce.  From June through November of 2008, however, our applications for each of these trademarks were declared abandoned by the USPTO, since we inadvertently failed to timely file the appropriate statements of use with respect to each trademark within the six-month period from the date the USPTO issued the respective notices of allowance.  In July 2009, we refiled applications for each of these trademarks as well as our tagline SCIENCE TO SAVE LIVES & PROTECT THE ENVIRONMENT™; however, we learned that PURE Bioscience, a company focused on the development and commercialization of bioscience products, had filed application for the registration of the trademarks BioNeutral™ and Ygiene™ prior to our refiling of our applications.  Although we have filed with the Trademark Trial and Appeal Board oppositions to PURE Bioscience's applications and intend to pursue such oppositions vigorously, we cannot assure you that we will be successful with such opposition on a timely basis, if at all.

Other than the foregoing, we are not a party to, and none of our property is the subject of, any pending legal proceedings other than routine litigation that is incidental to our business.

 
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PART II.

ITEM 5.     MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Public Market for Common Stock

Our common stock has been quoted on the OTC Bulletin Board under the symbol “BONU.OB” since February 20, 2009. Prior to February 20, 2009, there was no public trading market for our shares of common stock. The following table sets forth the range of quarterly high and low sales prices of our common stock as reported for the periods indicated:

Quarter Ending
 
High
   
Low
 
             
April 30, 2009  (beginning February 20, 2009)
  $ 1.56     $ 0.12  
July 31, 2009
  $ 0.75     $ 0.20  
October 31, 2009
  $ 3.50     $ 0.21  
January 31, 2010
  $ 1.09     $ 0.43  
April 30, 2010
  $ 0.75     $ 0.20  
July 31, 2010
  $ 0.95     $ 0.36  
October 31, 2010
  $ 0.55     $ 0.29  


As of February 11, 2011 there were approximately 146 holders of record of our common stock.

Dividends
 
We have not paid any cash dividends to shareholders. The declaration of any future cash dividends is at the sole discretion of our board of directors and depends upon our earnings, if any, our capital requirements and financial position, our general economic conditions, and other pertinent conditions.  It is our present intention not to pay any cash dividends in the foreseeable future, but rather to reinvest earnings, if any, in our business operations.
 
Unregistered Sales and Issuance of Equity Securities.

The following is a description of issuances of shares of our equity securities that were not registered under the Securities Act during the twelve months ended October 31, 2010 and which shares were not previously disclosed by us in a Quarterly Report on Form 10-Q or Current Report on Form 8-K.

During fiscal 2010, the Company exchanged shares with several of the BioLabs preferred and common stockholders, all of whom exchanged their shares at a ratio of 1 share of preferred stock for 10 shares of common stock and 1 to 1 common exchange, except for four preferred stockholders and common stockholders of BioLabs who were issued an aggregate of 3,598,800 shares of common stock. These four shareholders exchanged their shares at a ratio of 200 shares of common stock for 1 share of preferred stock and a 1 to 1 common share exchange. Although all of the exchanged shares are reflected in the financial statements as issued and outstanding, the issuance of shares to the four holders who exchanged at the higher exchange ratio is subject to dispute.
 
 
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As a result of the above transaction, the company is disputing the issuance  2,634,730 shares of common stock. The outcome of this dispute is expected to be resolved in the near future
.
Equity Issuance

During the year ended October 31, 2010, the Company issued 735,715 shares of the Company’s common stock for gross proceeds of $180,000 to various investors. All of such shares were issued pursuant to an exemption from registration under the Securities Act by virtue of Section 4(2) of the Securities Act.  Each individual investor represented to us, among other things, that such investor is a sophisticated investor with access to all relevant information necessary to evaluate its investment and that the purchased shares were being acquired for investment purposes only. The Company also issued 90,000 shares to a current shareholder in the satisfaction of $13,500 in debt.

Consulting Agreements

The Company issued 100,000 shares in satisfaction of $40,000 in payment of legal services incurred during the year. The Company issued 110,780 shares for financial advisory and accounting related services and 182,730 shares for marketing and public relations services in satisfaction of $43,000 and $67,500 respectively. The company issued 200,000 of its common stock in settlement for a disputed consulting contract in satisfaction of a consulting agreement related to marketing services valued at $80,000. Shares issued in the above paragraph are valued at the market price during the period for which services were provided.

Other Equity Issuances

During the year ended October 31, 2010 various holders of our preferred stock exchanged 196,238 shares of Series A preferred stocks for 1,962,380 shares of common stock at the rate of 10 shares of common stock to one share of preferred stock, in accordance with the term of our preferred share agreement, dated December 12, 2006.  During the year ended October 31, 2010 and in connection with the Share Exchange (as defined below), various non-controlling interests exchanged 1,572,044 shares of BioLabs common stock for the same amount of shares of our common stock.

Convertible Debt Capital Funding
 
On November 13, 2009, the Company issued (i) an unsecured promissory note to Michael D. Francis, a shareholder of the Company, in the amount of $250,000,  (ii) a second unsecured promissory note on January 4, 2010 in the amount of $250,000, a (iii) a third unsecured promissory note in the amount of $250,000, on March 15, 2010 of which $100,000 was drawn down by the Company on March 15, 2010 and $150,000 on April 1, 2010, (iv) a fourth secured promissory note in the amount of $100,000 on April 30, 2010 with an original issuance date of April 26, 2010, and (v) a fifth unsecured promissory note in the amount of $25,000 on July 7, 2010 (all such notes issued to Mr. Francis are collectively referred to as the “Francis Notes”).

On November 13, 2009, the Company issued an unsecured promissory note to Capara Investments LLC (“Capara”), in the amount of $250,000 and (ii) a second unsecured promissory note to Capara on January 4, 2010 in the amount of $250,000 and (iii) a third unsecured promissory note to Capara on September 2, 2010 in the amount of $25,000 and (iv) a fourth unsecured promissory note to Capara on October 13, 2010 in the amount of $25,000.The sole member of Capara, Raj Pamani, is a member of our Board and a shareholder of the Company.

The Francis Notes and the Capara Notes are sometimes referred to herein as the “Shareholder Notes”. The Shareholder Notes resulted in gross proceeds to the Company of $1,425,000.
 
On October 28, 2010, the Company issued an unsecured promissory note to Blackbeth Holdings Ltd, in the amount of $50,000.
 
 
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Each of the Shareholders Notes bears an 8% annual interest rate,  is due and payable in cash on the fifth anniversary of the date of issuance, and upon consummation of a “Qualified Financing” (as defined in each of the Shareholder Notes), will automatically be exchanged for, solely at our election, either (i) securities on the same terms and conditions as those received by investors in such Qualified Financing based on an assumed exchange rate reflecting the pricing used in such financing or (ii) shares of our common stock equal to the quotient obtained by dividing (x) the then outstanding principal amount of the Shareholder Note by (y) the lower of (i) $0.69 and (ii) the Fair Market Value (as defined in the Shareholder Notes) of one share of our common stock as of the date of such exchange.  On each three (3) month anniversary of the issuance of each Shareholder Note, all accrued and unpaid interest shall be added to the unpaid principal amount of such note.  Each of the Shareholder Notes defines  “Qualified Financing” as  an investment in securities of the Company (including any financing that includes convertible indebtedness and/or warrants) occurring after the date of issuance of the Shareholder Note by an investor that is not an affiliate of our company in which we receive net proceeds greater than $500,000 (including any additional investment by the holder of the Shareholder Note or by the holder of any other 8% exchangeable promissory note) in the Qualified Financing. The secured promissory note in the principal amount of $100,000 issued by the Company to Mr. Francis on April 30, 2010, is secured by the Company’s Intellectual Property (as defined in such promissory note).

Accrued and unpaid interest is added to the unpaid principal amount of the Shareholder Notes every three months. Interest expense on the Shareholder Notes for the year ended October 31, 2010 and 2009 was $87,097 and $0, respectively. As of October 31, 2010, $70,646 of accrued interest was added to the principal amount of the Shareholder Notes.  
 
We relied on the exemption from registration provided by Section 4(2) of the Securities Act for all such issuances of our common stock described above.

Securities Authorized for Issuance under Equity Compensation Plans
 
The following table provides information as of October 31, 2010 with respect to the shares of our Common Stock that may be issued under our existing equity compensation plans.
 
ITEM 6 .      SELECTED FINANCIAL DATA
 
Not applicable.

ITEM 7.        MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
 
The following discussion contains forward-looking statements and involves risks and uncertainties, including, but not limited to, those described under “Item 1. Business-Risk Factors” of this Annual Report on Form 10-K.  Actual Results may differ materially from those contained in any forward-looking statements.  The following discussion should be read in conjunction with the financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K.

Company Overview

We are life science specialty technology corporation that has developed  a novel combinational chemistry-based technology which we believe can, in certain circumstances, neutralize harmful environmental contaminants, toxins and dangerous micro-organisms including bacteria, viruses and spores.  We are focused on developing and commercializing two classes of product formulations: (1) anti­microbials, which are formulations designed to kill certain harmful microscopic living organisms, and (2) bioneutralizer, which are formulations designed to destroy certain agents that are noxious and harmful to health and/or the environment.  We have not marketed any of our products and have not generated any meaningful product revenue to date.
 
 
26

 
 
We currently are focused on the commercialization of two classes of product formulations, antimicrobials and bioneutralizer.  We refer to our anti­microbial formulations as our Ygiene™ products and our bioneutralizer formulations as our Ogiene™ products.  Our Ygiene products are being developed to kill certain harmful microbes, including virulent gram and bacteria (which cause staph infections), viruses, yeast, mold, fungi, spores and/or certain bioterrorism agents, such as anthrax.  Our Ogiene™ products are being developed to eliminate or reduce odors of many chemicals such as hydrogen sulfide, formaldehyde and ammonia, and to reduce certain greenhouse gases such as carbon dioxide and sulfur dioxide.
 
The marketing and sale in the United States and foreign countries of some of our current products and the products we may develop in the future are and may be subject to U.S. and foreign governmental regulations, respectively, which vary substantially from country to country.  The marketing and sale of our Ygiene ™  products in the United States, is subject to EPA registration and in some cases, FDA clearance, and we cannot market and sell any of such products in the United States until such registration or clearance is obtained.  We do not believe the marketing sale of our Ogiene ™   products are subject to EPA registration or FDA clearance.  We have not sold any of our Ygiene or Ogiene products to date.  We currently are focusing our efforts and resources on obtaining the registrations, clearances and approvals necessary to marketing and selling our Ygiene products in the United States; however, we cannot assure you that we will be have the financial resources to do so or that such registrations, clearances and approvals will be obtained on a timely basis, if at all.

Accounting Treatment

On January 30, 2009, we entered into a Share Exchange Agreement with BioNeutral Laboratories pursuant to which we agreed to issue to the shareholders of BioNeutral Laboratories 44,861,023 shares of our common stock.   

In connection with the Share Exchange, certain shareholders of BioNeutral Laboratories delivered the Share Exchange Consents to BioNeutral Laboratories approving the execution and delivery by BioNeutral Laboratories of the Share Exchange Agreement.  Such persons are referred to herein as the “Consenting Shareholders.”   The Share Exchange Consents did not specify the number of shares of common stock of BioNeutral Laboratories to be exchanged by the Consenting Shareholder.  Schedule II to the Share Exchange Agreement, however, contained a list of holders of common stock of BioNeutral Laboratories (certain of which shareholders also held Series A Preferred Stock of BioNeutral Laboratories), shares of our common stock to be issued to such shareholders, and shares of our common stock to be issued to holders of the Series A Preferred Stock of BioNeutral Laboratories.

Approximately 96% of BioNeutral Laboratories common shareholders exchanged their shares of common stock of BioNeutral Laboratories for shares of our common stock (including 88% of the outstanding shares of the Series A Preferred Stock of BioNeutral Laboratories on an as-converted basis).  We issued 42,250,090 shares of our common stock in respect of the exchanged shares of common stock of BioNeutral Laboratories.  As a result of the Share Exchange, BioNeutral Laboratories shareholders held approximately 66% controlling interest in the combined entity, after giving effect to the Share Exchange.

Since the owners and management of BioNeutral Laboratories possessed voting and operating control of the combined company after the Share Exchange, the transaction constituted a reverse acquisition for accounting purposes, as contemplated by FASB ASC 805-40 and corresponding ASC 805-10-55-10, 12 & 13.  Under this accounting, the entity that issues shares (our company – the legal acquirer) is identified as the acquiree for accounting purposes.  The entity whose shares are acquired (BioNeutral Laboratories) is the accounting acquirer.

In addition, we were characterized as a non-operating public shell company, pursuant to SEC reporting rules. The SEC staff considers a reverse-acquisition with a public shell to be a capital transaction, in substance, rather than a business combination. The transaction is effectively a reverse recapitalization, equivalent to the issuance of stock by the private company for the net monetary assets of the shell corporation accompanied by a recapitalization. The accounting is similar to that resulting from a reverse acquisition, except that the transaction was consummated at book value and no goodwill or intangible assets were recognized.
 
 
27

 
 
For SEC reporting purposes, BioNeutral Laboratories is treated as the continuing reporting entity that acquired Moonshine Creations, Inc. (the historic shell registrant).  The reports filed after the transaction have been prepared as if BioNeutral Laboratories (accounting acquirer) were the legal successor to Moonshine Creations. Inc’s reporting obligation as of the date of the acquisition.  Therefore, all financial statements filed subsequent to the transaction reflect the historical financial condition, results of operations and cash flows of BioNeutral Laboratories, for all periods presented.

As referenced above, initially approximately 14% of BioNeutral Laboratories shareholders did not participate in the initial exchange of their shares of common stock of BioNeutral Laboratories for shares of our common stock.  Those shareholders are treated as a Non-Controlling interest in our financial statements in accordance with FASB ACS 805-40-30-3.  The assets, liabilities and operations underlying the shares of common stock of BioNeutral Laboratories and our company are identical.  However, the shares representing the ownership of our company reflect the combined entity after the Share Exchange, while the shares of common stock of BioNeutral Laboratories represent ownership of only that legal entity.  In connection with the reverse acquisition and recapitalization, all share and per share amounts of BioNeutral Laboratories were retroactively adjusted to reflect our legal capital structure pursuant to FASB ASC 805-40-45-1.
 
Plan of Operation

Our strategic plan for our fiscal year ending October 31, 2010 is focused on leveraging developments in the European Union for our Ygiene™ professional disinfectant product and continuing our work within the regulatory process of the U.S. for EPA registration.  Our Ygiene™ professional disinfectant product and multipurpose cleaner and disinfectant product were registered with the German Bundesanstalt für Arbeitsschutz und Arbeitsmedizin, a German government sanctioned institute for safety and health, on January 5, 2010 and November 30, 2009, respectively.  As a result of such registrations, we are permitted to sell such Ygiene™-based products in Germany, although we have not sold any of our products in Germany and currently do not have adequate resources to attempt to make any such sales or to have our products manufactured for sale.  Similar regulatory registration is anticipated with additional major members of the European Union during fiscal year 2011.  We believe these registrations present us with a strong and dynamic platform for accessing well developed global markets for commercial use of our Ygiene™ professional disinfectant product and multipurpose cleaner and disinfectant product.

Currently, we are focusing our efforts on the development and commercialization of a Ygiene formulation for the Hospital and Industrial Application.  We are developing our Ogiene™ products to potentially eliminate or reduce odors of many chemicals such as hydrogen sulfide, formaldehyde and ammonia, and to reduce certain green­house gases such as carbon dioxide and sulfur dioxide.  Our Ogiene™ formulations are designed to interact with the functional organic or inorganic groups of harmful gases and reduce or eliminate them.

We believe that our products can offer a superior solution that addresses needs not currently being met in the marketplace for combating bacteria, viral and spore based threats. We further believe that our products can provide a distinct advantage when distinguishing them from those that are currently in use in our targeted markets. In addition, our core product is flexible and adaptable for multiple applications.  Industry or use specific modifications made by our professional scientist allow our products to be readily customized to the demands of multiple unique markets.

We are emphasizing these strategic advantages as part of our brand development efforts to overcome competitive barriers to entry in markets that are driven by large, established organizations.  The markets for our Ogiene™ and Ygiene™ products and each of their potential channels are highly competitive. We have a number of competitors that vary in size and scope and breadth of products offered.  Such competitors include some of the largest corporations in the world, and we believe substantially all of our competitors have greater financial resources than we do, including in the areas of sales, marketing, and branding and product development.  We expect to face additional competition from other competitors in the future.
 
 
28

 
 
Because Ogiene™ and Ygiene™ are new formulations enhanced from our initial base formulas, our success will depend, in part, upon our ability to achieve market share at the expense of existing, established and future products in our relevant target markets. Even if our Ogiene™ and Ygiene™ formulations may have technological competitive advantages over competing products, we or potential distributors, will need to invest significant resources in order to attempt to displace traditional technologies sold by what are in many cases well-known international industry leaders.  Alternatively, we may pursue strategies in selective markets of encouraging existing competitors to incorporate our products into their existing brands, thereby reducing the proportion of end-use revenues that would accrue to us.  To the extent that we were to grant any existing competitor exclusivity to any field and/or territory, we would risk having our technology marketed in a manner that may be less than optimal for us.  We recognize that innovative marketing methods may be required in order to establish our products, and that such methods may not be successful.

On August 19, 2010, the Company submitted its application to the U.S. Environmental Protection Agency of the Company’s Ygiene antimicrobial for approval for use as a bactericide, fungicide, sporicide on hard, non-porous surfaces in hospitals, health care facilities and other commercial uses. The Company expects to receive a determination from the EPA within six to eight months of the filing. If the Company is unable to obtain such favorable determination it could have a material adverse impact on the valuation of the Intellectual Property.
 
The Company has authorized Steve Campus of the Campus Group and J-Man Distributors to exclusively represent BioNetural’s Odor Eliminator and its Multi Purpose Cleaner to a major home shopping cable network.
 
In a second agreement, BioNeutral announced that J-Man Distributors has concluded an exclusive commercial agreement with Planned Companies, under which Planned Companies will exclusively use BioNetural’s AutoNeutral(™ ) product to clean and deodorize the automobiles of an international car sharing company that it contractually provides cleaning services for in the New York metro area.

Results of Operations

Comparison of Results of Operations for Fiscal Year Ended October 31, 2010 (“fiscal 2010”) and the Fiscal Year Ended Ten Months Ended October 31, 2009 (“fiscal 2009”).

Revenues :  During fiscal 2010 the Company generated revenues of $15,500 as compared to revenues of $2,825 for fiscal 2009 from the Ogiene™  product line from a national distributor that is focusing on distribution of the AutoNeutral™ product, which is an Ogiene™ formulation designed for cleaning and de-odorizing vehicles. Our efforts have been focused on sales and marketing of our non regulated Ogiene™  product line as well the sale of our Ygiene formulation for the Hospital and Industrial Application in Germany the UK and France where the product has been registered for marketing and sale. Additionally, we are continuing our efforts to obtain the regulatory approvals required for the sale and distribution in the United States .of our Ygiene formulation.

Operating Expenses:   Our operating expenses consist of compensation of our executive and scientific staff, consulting expenses supporting development of, and regulatory approvals for, our products, legal and accounting services, and non-cash amortization of our intellectual property.

Selling, general & administrative (“SG&A”) expenses for fiscal 2010 and fiscal 2009 included non-cash stock-based compensation to employees of $0 and $1,648,045, respectively  primarily for agreements with our Chief Executive Officer and our prior Chief Financial Officer.  In addition, for fiscal 2010 and fiscal 2009, $168,966 and $3,347,515 million, respectively of non-cash stock based compensation expense was reported for amounts paid for services to non-employees.  

SG&A costs for fiscal 2010 that were paid or payable in cash include approximately $149,500 related to our agreement with the Chertoff Group, L.L.C., an aggregate of approximately $189,900 to a director and a company with which such director is affiliated under agreements we have with the director and his affiliated company, and $91,300 for independent consulting expenses. SG&A costs for fiscal 2009 that were paid or payable in cash include approximately $172,000 related to our agreement with the Chertoff Group, L.L.C., an aggregate of approximately $270,000 to a director and a company with which such director is affiliated under agreements we have with the director and his affiliated company, and $95,000 for independent consulting expenses.  In addition, there were significant increases in legal and accounting expenses related to the Share Exchange involving BioNeutral Laboratories Corp USA, and us becoming a public company. Total legal and accounting expenses reported for fiscal 2010 and fiscal 2009 were approximately $1,224,000 and $674,000, respectively.
 
 
29

 
 
Amortization & depreciation increased to $696,750 in fiscal 2010 from the $627,301 reported in fiscal 2009 as a result of the increased investment in our intellectual property.  Business development agreements in which we entered into with entities responsible for advancing our market access in Asia and the European Union accounted for approximately $11 million of such expense.   Of that amount, $8,050,091 was reflected as a charge off in the fourth quarter of fiscal 2009 upon management’s determination that the related prepaid asset balance was not recoverable (see full discussion in Note 14 to the financial statements).

We anticipate operating expenses will increase for fiscal 2011.  We anticipate increased legal, accounting and investor relations fees related to being public and the regulatory processes involved with registration, clearance or approval of our products for sale in global markets.  We also anticipate we will need to add up to five additional employees to our professional and support staff, as part of our growth and development.

Net Loss:  We experienced a net loss from operations before consideration of our Non-Controlling interest of $3,833,324 for fiscal 2010. The discussion of operating expenses identifies the elements of the net loss.  In 2009, our net loss was $15,598,163.  We anticipate we will experience a net loss in fiscal 2011 as we continue to pursue regulatory approvals for the sale and distribution of our products and development of access to global markets.
Analysis of Impairment
 
In  conjunction with our 2010 audit, we performed our annual impairment testing during January 2011. In this analysis, we determined that the current carrying value of our Intellectual Property approximately $11,254,000.
 
We computed the Intellectual Property value of using a discounted cash model. In our discounted cash flow analysis, we prepared a ten year forecast of our expected earnings to derive an explicit stream of expected free cash flows through October 31, 2021. We developed our revenue and direct variable costs forecast based on a variety of factors including our current and anticipated sales pipeline, knowledge of our business and industry, general economic conditions in the marketplace and expectations of market opportunity with respect to the specific types of advertising services we provide. Our operating expenses are generally fixed and predictable; however, we increased our budgeted operating expenses by an amount that we believe is approximately equal to theoretical lease costs we would incur had our parent company not provided us with facilities that are not a component of operating costs in our goodwill reporting unit. We computed the present value of our explicit year cash flows using discount rates ranging from approximately 16% to 18% with various target financing structures during the course of computing our weighted average cost of capital (“WACC”). We specifically considered a range of assumptions for both equity and debt financings; such as risk free interest rate, market risk premium, small cap premium, company specific premium and sensitivity premium. After having determined the amount of our explicit year cash flows, we assumed that the Company would experience a long-term growth rate in free cash flows of 2% per annum thereafter. The range of Intellectual Property values we derived using the above noted discount amounted to $12,983,000, which exceeds the carrying value of our Intellectual Property by $1,729,000.
 
Liquidity and Capital Resources

We had $59,395 of cash at October 31, 2010.  Cash used by operations for fiscal 2010 was $1,735,208. The principal use of funds were for consulting services supporting the development of our business plan, legal, and accounting fees in connection with becoming a public company and daily operations of the business, including rent and travel and laboratory costs.  Costs associated with developing and filing our Intellectual Property used an additional $127,316 of cash.

In fiscal 2010, we raised $180,000 of cash from the issuance of our capital stock to fund operations.  We received $1,475,000 from the issuance of convertible debentures.

We had $139,663 of cash at October 31, 2009.  Cash used by operations for fiscal 2009 was $ 1,627,610  The principal use of funds were for consulting services supporting the development of our business plan, legal, and accounting fees in connection with becoming a public company and daily operations of the business, including rent and travel and laboratory costs.  Costs associated with developing and filing our Intellectual Property used an additional $ 8,467 of cash.

In fiscal 2009, we raised $1,689,802 of cash from the issuance of our capital stock to fund operations.  We received $600,000 from conversion of 90-day debentures issued in connection with the Share Exchange in the first quarter, $450,000 from a private placement in the fourth quarter, and approximately $695,000 from investments made by private investors throughout the fiscal year.

We are not currently generating significant revenues and rely on raising new capital to fund our ongoing operations and development of our strategic business objectives. While we have been able to use proceeds from the sale of our shares of common stock to fund a substantial balance of our operating costs, we do not expect that our funds will be sufficient to meet our anticipated needs through August 1, 2011 and we will need to raise additional capital during fiscal 2011 to fund the full costs associated with our growth and development. The Company believes that we will be able to generate sales by the third quarter of 2011 and that we will require approximately $2,500,000 in additional capital in order to achieve our goals. Subsequent to the end of October 31, 2010, we have raised approximately $325,000 in a combination of issuing debt and selling equity. There can be no assurances that we will be successful in raising additional capital on favorable terms if at all. If the Company is unable to secure additional capital, it may be required to curtail its business development initiatives, impair its intellectual property and take additional measures to reduce cost in order to conserve cash.
 
 
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These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Accordingly, the accompanying audited consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplates continuation of the Company as a going concern and the realization of assets and the satisfaction of liabilities in the normal course of business. The carrying amounts of assets and liabilities presented in the financial statements do not necessarily purport to represent realizable or settlement values. The audited consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.
 
Critical Accounting Policies and Estimates
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires judgment on the part of management to arrive at estimates and assumptions on matters that are inherently uncertain.  These estimates may affect the amount of assets, liabilities, revenue and expenses reported in the financial statements and accompanying notes and disclosure of contingent assets and liabilities within the financial statements.  Estimates and assumptions are periodically evaluated and may be adjusted in future periods. Actual results could differ from those estimates.

Stock-Based Payments – Significant amounts of our shares of common stock are issued as payment to employees and non-employees for services and periodically as consideration for acquisition of assets.  These are non-cash transactions that require management to make judgments related to the fair value of the shares issued, which affects the amounts reported in our consolidated financial statements for certain of our assets and expenses.  For historic fiscal years when there was not an observable active, liquid market for our shares, the valuation of the shares issued in a non-cash share payment transaction relied on observation of arms-length transactions where cash was received for our shares, before and after the non-cash share payment date.
 
Impairment of long-lived assets - Long-lived assets, such as property and equipment and definite-life intangible assets (i.e. Intellectual Property) are evaluated for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable in accordance with FASB ASC 360-10-35-17 thru 35-35 “Measurement of an Impairment Loss”.  We assess the impairment of the assets based on the undiscounted future cash flow the assets are expected to generate compared to the carrying value of the assets.  If the carrying amount of the assets is determined not to be recoverable, a write-down to fair value is recorded.  Management estimates future cash flows using assumptions about expected future operating performance.  Management’s estimates of future cash flows may differ from actual cash flow due to, among other things, technological changes, economic conditions or changes to our business operations.  Our Intellectual Property was tested for impairment as of October 31, 2010.  Forecasted undiscounted future cash flows exceeded the carrying amount of the assets indicating that the assets were not impaired.
 
New Accounting Pronouncements
 
See Note 2 of Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.
 
 
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ITEM 8.        FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
 
Index to Consolidated financial statements
 
REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS
33-34
   
CONSOLIDATED BALANCE SHEETS
35
   
CONSOLIDATED STATEMENTS OF OPERATIONS
36
   
CONSOLIDATED STATEMENTS OF CASH FLOWS
37
   
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
38
   
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
39
 
 
 
32

 
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 

 
To the Board of Directors and
Stockholders of Bioneutral Group, Inc.
 
We have audited the accompanying consolidated balance sheet of Bioneutral Group, Inc. as of October 31, 2010, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audit provides a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Bioneutral Group, Inc. as of October 31, 2010, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
 
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 3, the Company had a working capital deficiency of approximately $1.8 million for the year ended October 31, 2010 and accumulated deficit of approximately $50 million as of October 31, 2010.  These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plan regarding these matters is described in Note 3. The consolidated financial statements do not include adjustments that might result from the outcome of this uncertainty.


/s/ Marcum LLP
Marcum, LLP
 
New York, NY
February15, 2011
 
 
33

 
 
 
Bartolomei Pucciarelli, LLC
2564 Brunswick Pike
Lawrenceville, NJ 08648
 
Report of Independent Registered Public Accounting Firm
 
To the Board of Directors and
Stockholders of BioNeutral Group, Inc.
 
We have audited the accompanying consolidated balance sheets of BioNeutral Group, Inc. as of October 31, 2009, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year ended October 31, 2009. BioNeutral Group, Inc’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.
 
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
During the first quarter of 2009, the Company entered into Consulting Agreements whereby shares of restricted common stock were issued for future services. The details of these agreements are disclosed in Notes 11 and 12. The 2009 statement of operations contains a significant charge off related to these agreements as disclosed in Note 12.
 
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of BioNeutral Group, Inc. as of October 31, 2009, and the results of its operations and its cash flows for the year ended October 31, 2009 in conformity with accounting principles generally accepted in the United States of America.
 
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As shown in the accompanying consolidated financial statements, the Company had a working capital deficiency of approximately $425,000 as of October 31, 2009, a net loss of approximately $15.6 million for the year ended October 31, 2009, and an accumulated deficit of approximately $46.3 million as of October 31, 2009. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plan regarding these matters is described in Note 3. The consolidated financial statements do not include adjustments that might result from the outcome of this uncertainty.
 
 
/s/ Bartolomei Pucciarelli, LLC
Bartolomei Pucciarelli, LLC
 
Lawrenceville, NJ
March 17, 2010
 
 
 
 
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BIONEUTRAL GROUP, INC.
 
CONDENSED CONSOLIDATED BALANCE SHEETS
 
   
             
             
   
October 31, 2010
   
October 31, 2009
 
             
ASSETS
 
             
Current Assets
           
Cash
  $ 59,395     $ 139,663  
Accounts Receivable
            2,825  
Inventory
            2,925  
Prepaid Expenses
    5,236       192,007  
Prepaid Expenses-Related Parties
    172,102       438,668  
                 
Total Current Assets
    236,733       776,088  
                 
Property & Equipment - Net
    993       1,206  
Intellectual Property net of accumulated amortization
               
of $3,883,126 and $3,186,025 as of October 31, 2010
               
and October 31, 2009, respectively.
    11,254,154       11,739,033  
Other Assets
    2,500       2,500  
                 
TOTAL ASSETS
  $ 11,494,380     $ 12,518,827  
                 
LIABILITIES & STOCKHOLDERS' EQUITY
 
                 
Current Liabilities
               
Accounts Payable
  $ 1,725,002     $ 1,044,530  
Accrued Compensation
    244,841       124,991  
Related Party Payables
    70,517       31,412  
Current Liabilities
    2,040,360       1,200,933  
                 
Long Term Liabilities
               
Convertible Loans From Unrelated Party
    50,000          
Convertible Loans From Director
    575,402       -  
Convertible Loans From Stockholder
    920,244       -  
       Total long Term Liabilities
    1,545,646       -  
                 
   TOTAL LIABILITIES
    3,586,006       1,200,933  
                 
Commitments & Contingencies
               
                 
                 
Equity:
               
BioNeutral Group, Inc. Stockholders' Equity
               
Preferred Stock, $.001 par value; 5,000,000 shares authorized,
               
with 800,000 designated as follows
    0       0  
Convertible Preferred Stock, Series A, $.001 par value; 800,000 shares
               
authorized,  83,762 and 279,991 issued and outstanding
               
at October 31, 2010 and October 31, 2009 respectively.
               
Preference Liquation Value $1,509,810 at October 31, 2010 and
               
$5,046,838 at October 31, 2009 included in Noncontrolling interest
    84       280  
Common Stock, $.00001 Par Value; 200,000,000 shares authorized,
               
74,643,115 shares and  60,849,200 shares issued and
               
outstanding at October 31, 2010 and October 31, 2009 respectively.
    746       608  
Additional Paid-in Capital
    57,099,519       56,675,657  
Accumulated Deficit
    (49,762,192 )     (46,260,596 )
Total Bioneutral Group, Inc. Stockholders' Equity
    7,338,157       10,415,949  
                 
Noncontrolling Interest
    570,217       901,945  
                 
Total Equity
    7,908,374       11,317,894  
                 
   TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY
  $ 11,494,380     $ 12,518,827  
                 
 
See Notes to Condensed Consolidated Financial Statements
 
 
 
35

 
 
             
BIONEUTRAL GROUP, INC.
       
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
       
             
   
Twelve Months Ended October 31,
   
Twelve Months Ended October 31,
 
   
2010
   
2009
 
             
             
             
Revenues
  $ 15,500     $ 2,825  
                 
Cost of Revenues
    12,299       5,879  
                 
Gross Profit (Loss)
    3,201       (3,054 )
                 
Operating Expenses
               
Depreciation and Amortization
    696,750       627,301  
Other Selling, General and Administrative Expenses
    3,052,852       6,918,335  
Charge off of prepaid distribution agreements
            8,050,091  
Total Operating Expenses
    3,749,602       15,595,727  
                 
Loss from Operations
    (3,746,401 )     (15,598,781 )
                 
Interest Income
            3,936  
                 
Interest Expense
    (86,923 )     (3,318 )
                 
Net Loss Before Income Taxes
    (3,833,324 )     (15,598,163 )
                 
Provision for Income Taxes
    -       -  
                 
Net Loss
    (3,833,324 )     (15,598,163 )
                 
Loss Attributable to Non-controlling Interest
    331,728       2,146,831  
                 
Net Loss Attributable to BioNeutral Group, Inc.
  $ (3,501,596 )   $ (13,451,332 )
                 
Net Loss Per Common Share - Basic and Diluted
  $ (0.06 )   $ (0.27 )
                 
Weighted Average Number of Common Shares outstanding
               
Basic and Diluted Loss per Share
    62,813,098       49,980,206  
                 
 
See Notes to Condensed Consolidated Financial Statements
 
 
36

 
 
             
BIONEUTRAL GROUP, INC.
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
   
             
   
Twelve Months Ended October 31,
 
       
   
2010
   
2009
 
             
CASH USED IN OPERATING ACTIVITIES
           
Net Loss
  $ (3,833,324 )   $ (15,598,163 )
Adjustments to Reconcile Net Loss To Net Cash Used in
               
  Operating Activities                
                 
Charge Off of Prepaid Distribution Agreements Paid in Shares
            8,050,091  
Stock Based Compensation
    168,966       4,995,560  
Depreciation and Amortization
    696,751       627,301  
Forgiveness of Debt
    -       (2,251 )
Issuance of Stock related professional services
    244,000       -  
Interest added to exchangeable assets
    70,646       -  
Deferral if interest on exchangeable Promissory notes
    15,592          
Changes in Operating Assets and Liabilities
               
  Accounts receivable     2,825       (2,825 )
  Inventory     2,925       (2,925 )
  Prepaid Expenses     284,371       (169,608 )
  Other Assets             (1,250 )
  Accounts Payable and Accrued Expenses     588,467       482,307  
  Increase in Related Party Payables-  Director     23,513       (5,847 )
                 
  NET CASH USED IN OPERATING ACTIVITIES     (1,735,268 )     (1,627,610 )
                 
CASH USED IN INVESTING ACTIVITIES
               
Expenditures for Intellectual Property
            (8,467 )
                 
  NET CASH USED IN INVESTING ACTIVITIES             (8,467 )
                 
                 
CASH PROVIDED BY FINANCING ACTIVITIES
               
Net Proceeds From Issuance of  Stock
    180,000       1,689,802  
Proceeds from Exchangeable Promissory Notes
    1,475,000          
                 
  NET CASH PROVIDED BY FINANCING ACTIVITIES     1,655,000       1,689,802  
                 
NET (DECREASE)  INCREASE IN CASH
    (80,268 )     53,725  
                 
CASH, BEGINNING OF PERIOD
    139,663       85,938  
                 
                 
CASH, END OF PERIOD
  $ 59,395     $ 139,663  
                 
                 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
               
Cash Paid For Interest
  $ -     $ 3,517  
                 
                 
Cash Paid For Income Taxes
  $ -     $ -  
                 
                 
SUPPLEMENTAL DISCLOSURE OF NON-CASH INFORMATION
               
Non-cash Intellectual Property Cost Additions
  $ 211,854     $ 205,232  
                 
                 
Cancellation of Debt Upon Agreement to Issue Shares of Common Stock
  $ 13,500     $ 30,000  
                 
                 
Issuance of Common Stock to cancel promissory Note - director
    -     $ 20,000  
                 
Issuance of Common Stock in Lieu of Expense reimbursement and
               
Cash compensation
          $ 10,000  
                 
                 
Issuance of Common Stock in Exchange for Intellectual Property
    -     $ 4,730,250  
                 
Issuance of Common Stock for Prepaid Consulting Contracts
          $ 11,300,000  
                 
 
See Notes to Condensed Consolidated Financial Statements
 
 
37

 
 
BIONEUTRAL GROUP, INC.
 
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
 
                           
                                                       
   
Preferred Stock
   
Common Stock
                               
                           
Additional
         
Bioneutral Group Inc
         
Total
 
   
Shares
   
   Par
   
Shares
   
Par
   
Paid-in
   
Accumulated
   
Stockholders'
   
Noncontrolling
   
Stockholders'
 
   
Issued
      0.001    
Issued
      0.00001    
Capital
   
Deficit
   
Equity
   
Interest
   
Equity
 
                                                           
Balance, October 31, 2008
    279,991     $ 280       22,841,415     $ 228     $ 44,860,743     $ (37,920,871 )   $ 6,940,380     $ -     $ 6,940,380  
                                                                         
Issuance of Shares for Cash
    -       -       3,909,538       39       1,689,763               1,689,802               1,689,802  
                                                                         
Stock Issuance on Conversion of debt
                    125,000       1       49,999               50,000               50,000  
                                                                         
Stock Based Compensation-Employees and Board
                    1,958,675       20       1,211,577               1,211,597               1,211,597  
                                                                         
Stock Based Compensation-Consulting Services
                    12,782,500       128       12,305,880               12,306,008               12,306,008  
                                                                         
Acquisition of Intellectual Property
                    5,800,000       58       4,730,192               4,730,250               4,730,250  
                                                                         
Shares issued to record reverse merger
                    19,065,000       190       (12,170 )             (11,980 )             (11,980 )
                                                                         
Adjustment for Noncontrolling Interest
                    (6,040,928 )     (60 )     (8,591,245 )     5,421,935       (3,169,370 )     3,169,370       -  
                                                                         
Conversions to controlling interest
                    303,000       3       430,919       (310,328 )     120,594       (120,594 )     -  
                                                                         
Share issuances paid in prior period
                    105,000       1       (1 )             -               -  
                                                                         
Net Loss
                                            (13,451,332 )     (13,451,332 )     (2,146,831 )     (15,598,163 )
                                                                         
Balance, October 31, 2009
    279,991       280       60,849,200     $ 608     $ 56,675,657     $ (46,260,596 )   $ 10,415,949     $ 901,945     $ 11,317,894  
                                                                         
Issuance of Shares for Cash
    -       -       735,715       7       179,993               180,000               180,000  
                                                                         
Issuance of Shares for professional services
                    593,510       6       230,494               230,500               230,500  
                                                                         
Shares issued to satisfy bad debt
                    90,000       1       13,499               13,500               13,500  
                                                                         
Shares issued in prior period
                    1,450,000       14       (14 )             -               -  
                                                                         
 Adjustment to reconcile to Transfer Agent records
                    4,755,536       48       (48 )             -               -  
                                                                         
Conversions to controlling interest
                    1,572,044       16       (16 )             -       -       -  
                                                                         
 Preferred Conversion at 10-1
    (196,238 )     (196 )     1,962,380       20       (20 )             -               -  
                                                                         
 Disputed Shares
                    2,634,730       26       (26 )                                
                                                                         
Net Loss
                                            (3,501,596 )     (3,501,596 )     (331,728 )     (3,833,324 )
                                                                         
Balance, October 31, 2010
    83,753     $ 84       74,643,115     $ 746     $ 57,099,519     $ (49,762,192 )   $ 7,338,353     $ 570,217     $ 7,908,570  
 
See Notes to Condensed Consolidated Financial Statements
 
 
38

 
 
Notes to Consolidated Financial Statements
 
Note 1 - Nature of Business & Organization
 
BioNeutral Group, Inc (the “Company”) is a specialty chemical company seeking to develop and commercialize a novel combinational chemistry-based technology which it believes in certain circumstances may neutralize harmful environmental contaminants, toxins and dangerous micro-organisms, including bacteria, viruses and spores.  The Company’s  business operations are conducted through BioNeutral Laboratories Corporation USA, a corporation organized in Delaware in 2003 (“BioLabs”). 

In January 2009, the Company conducted reorganization and recapitalization through a transaction accounted for as a reverse acquisition with a public shell corporation. See Note 4 to these financial statements for a full discussion of the transaction and its effect on the presentation of the financial statements. On January 30, 2009, the Company (formerly called Moonshine Creations Inc. (“Moonshine”)) entered into a share exchange agreement (the “Share Exchange Agreement”) with BioLabs pursuant to which the Company agreed to issue to the shareholders of BioLabs 44,861,023 shares of its common stock (the “Share Exchange”).

In connection with the Share Exchange, certain shareholders of BioLabs delivered shareholder consents (collectively, the “Share Exchange Consents”) to BioLabs approving the execution and delivery by BioLabs of the Share Exchange Agreement. Such persons are referred to herein as the “Consenting Shareholders”. The Share Exchange Consents did not specify the number of shares of BioLabs common stock to be exchanged by the Consenting Shareholder. Schedule II to the Share Exchange Agreement, however, contained a list of holders of BioLabs common stock (certain of which shareholders also held BioLabs Series A Preferred Stock), shares of Company common stock to be issued to such shareholders, and shares of Company common stock to be issued to holders of BioLabs preferred stock.

Based on the Share Exchange Consents, the Company caused to be delivered to its transfer agent instructions to issue stock certificates representing 42,649,500 shares of its common stock in accordance with Schedule II to the Share Exchange Agreement.  The Company did not receive Share Exchange Consents in respect of each share of common stock that was issued by the Company's transfer agent and the Company believes that stock certificates representing approximately 1,011,362 shares of common stock may have been delivered to those persons who did not deliver a Share Exchange Consent.

In addition, the Company's records indicate that (i) the Company did not receive stock certificates representing shares of BioNeutral Laboratories common stock for cancellation from the Consenting Shareholders, and (ii) the Company did not cause to be delivered the applicable stock certificates representing shares of common stock issued in the Share Exchange to certain of the Consenting Shareholders.  Accordingly, the Company intends to request that (i) with respect to each Consenting Shareholder who received a stock certificate, such stockholder affirm its consent, which we refer to as a “Consenting Shareholder Acknowledgement”, and deliver to the Company for cancellation its certificates representing BioNeutral Laboratories common stock; and (ii) with respect to each Consenting Shareholder who did not receive a stock certificate, such stockholder deliver to the Company a Consenting Shareholder Acknowledgment and deliver to the Company for cancellation its certificates representing BioNeutral Laboratories common stock, each in advance of the Company delivering the applicable stock certificate.

With respect to any shareholder of BioNeutral Laboratories who is not able to confirm that it previously delivered a Share Exchange Consent, the Company is going to evaluate offering to such persons the ability to exchange their shares of common stock of BioNeutral Laboratories for shares of the Company's common stock on the same terms as would have occurred had such exchange occurred at the time of the consummation of the Share Exchange.  Although there can be no assurance as to the determination it may make, if it were to make such offer, it would likely request that each such stockholder deliver to it a consent that is similar to a Share Exchange Consent and deliver to it for cancellation its certificates representing BioNeutral Laboratories common stock, each in advance of the Company delivering the applicable stock certificate.   With respect to shareholders of BioNeutral Laboratories who did not deliver a Share Exchange Consent and to whom the Company may have caused to be issued stock certificates for shares of its common stock, it intends to request a Consenting Shareholder Acknowledgment from each of such persons.
 
 
 
39

 
 
With respect to holders of Series A preferred stock of BioNeutral Laboratories who did not receive shares of the Company's common stock in exchange for such preferred stock, the Company intends to offer to such persons 2,799,910 shares of common stock in exchange for their shares of Series A preferred stock, in accordance with Schedule II to the Share Exchange Agreement.  The Company intends to request that such persons execute and deliver a share exchange agreement evidencing such exchange.

For purposes of preparation of these consolidated financial statements, the Company does not treat as outstanding any shares of common stock issued pursuant to the Share Exchange and for which the Company does not have a record of receiving a Share Exchange Consent.  The Company made this determination despite the fact that certificates representing certain of such shares of its common stock may have been delivered to the applicable shareholder.  There can be no assurance that any person in possession of such shares of common stock but who did not deliver the applicable Share Exchange Consent will not claim ownership of such shares.    

Approximately 86% of BioLabs common shareholders initially exchanged their BioLabs shares of common stock for shares of common stock of the Company (including 65% of the Series A Preferred Stock of BioLabs on an as-converted basis). The Company issued approximately 42,646,100 million shares to acquire all of the exchanged shares of Bio Labs. As a result of the Share Exchange, BioLabs held an approximately 66% controlling interest in the combined entity, after giving effect to the Share Exchange.

Since the owners and management of BioLabs possessed voting and operating control of the combined company after the Share Exchange, the transaction constituted a reverse acquisition for accounting purposes, as contemplated by FASB ASC 805-40 and corresponding ASC 805-10-55-10, 12 & 13. Under this accounting, the entity that issues shares (Moonshine – the legal acquirer) is identified as the acquiree for accounting purposes. The entity whose shares are acquired (BioLabs) is the accounting acquirer.

In addition, Moonshine was characterized as a non-operating public shell company, pursuant to SEC reporting rules. The SEC staff considers a reverse-acquisition with a public shell to be a capital transaction, in substance, rather than a business combination. The transaction is effectively a reverse recapitalization, equivalent to the issuance of stock by the private company (BioLabs) for the net monetary assets of the shell corporation (Moonshine) accompanied by a recapitalization. The accounting is similar to that resulting from a reverse acquisition, except that the transaction was consummated at book value and no goodwill or intangible assets were recognized.

For SEC reporting purposes, BioLabs is treated as the continuing reporting entity that acquired the Company (the historic shell registrant). All reports filed after the transaction have been prepared as if BioLabs (accounting acquirer) were the legal successor to Moonshine’s reporting obligation as of the date of the acquisition. Therefore, these financial statements and all such statements filed subsequent to the transaction reflect the historical financial condition, results of operations and cash flows of BioLabs, for all periods presented.

Note that Moonshine changed its name to BioNeutral Group, Inc. in the month prior to the exchange, to facilitate the Share Exchange. References to “Moonshine” in this description of the accounting treatment is included to add clarity to the separation of the independent entities involved in the Share Exchange, prior to such exchange.
 
As referenced above, approximately 14% of BioLabs shareholders did not participate in the exchange of their shares of common stock of BioLabs for shares of common stock of Moonshine. Those shareholders are recognized as a Non-Controlling interest in the Company’s consolidated financial statements in accordance with FASB ACS 805-40-25-2. However, the shares representing ownership of the Company reflect the combined entity after the Share Exchange transaction, while BioLabs shares represent ownership of only that legal entity.

In connection with the reverse acquisition and recapitalization, all share and per share amounts of BioLabs were retroactively adjusted to reflect the legal capital structure of Moonshine pursuant to FASB ASC 805-40-45-1.
 
 
40

 
 

 
Note 2 - Summary of Significant Accounting Policies
 
Principles of Consolidation
 
The accompanying Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The accompanying financial statements include the accounts of the company and its majority-owned subsidiary. All significant intercompany transactions and balances were eliminated.
 
Non-Controlling Interest
 
A Non-Controlling Interest (“non-controlling interest”) was created as a result of the Company’s reorganization and recapitalization with a public shell corporation. The non-controlling interest arose because the Company’s records indicated that initially 14% of the shareholder’s of the accounting acquirer in the transaction, BioLabs, did not participate in the exchange of their shares of common stock of BioLabs for shares of common stock of the Company. In all material respects, the shares of the Company and the shares of the common stock of BioLabs included in the non-controlling interest represent different legal instruments conveying mirror ownership claims to the same underlying net assets and operations, as reflected in these consolidated financial statements.
 
Reclassifications
 
Certain reclassifications have been made to conform the prior period data to current year presentation these reclassifications had no effect on reported net loss.
 
Cash and Cash Equivalents
 
The Company considers all highly liquid debt instruments having a maturity of three months or less when purchased to be cash equivalents. The Company did not have any cash equivalents at either October 31, 2010 or 2009.
 
Long-Lived Assets
 
Long-lived assets, such as and equipment and definite-life intangible assets are evaluated for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable in accordance with FASB ASC 360-10-35-17 thru 35-35 “Measurement of an Impairment Loss.” The Company assesses the impairment of the assets based on the undiscounted future cash flow the assets are expected to generate compared to the carrying value of the assets. If the carrying amount of the assets is determined not to be recoverable, a write-down to fair value is recorded. Management estimates future cash flows using assumptions about expected future operating performance. Management’s estimates of future cash flows may differ from actual cash flow due to, among other things, technological changes, economic conditions or changes to the Company’s business operations.
 
Intangible Assets
 
Definite-lived intangible assets, such as acquired intellectual property is being amortized over the estimated useful live of 20 years. The Company continually evaluates the reasonableness of the useful lives of these assets. Once these assets are fully amortized, they are removed from the Consolidated Balance Sheets.
 
The cost of intangible assets with determinable useful lives is amortized to reflect the pattern of economic benefits consumed, either on a straight-line or accelerated basis over the estimated periods benefited. Intellectual Property is generally amortized over their respective legal or contractual lives. When certain events or changes in operating conditions occur, an impairment assessment is performed and lives of intangible assets with determinable lives may be adjusted.
 
 
41

 
 
 
Property and Equipment

Property and equipment is located at the Company’s office in Newark, New Jersey and is recorded at cost less accumulated depreciation. Depreciation and amortization is calculated using the straight-line method over the expected useful life of the asset, after the asset is placed in service. The Company generally uses the following depreciable lives for its major classifications of property and equipment:
 
Description
 
Useful Lives
Furniture and Fixture
 
7 years
Computer hardware
 
3 years
 
Ordinary maintenance and repair expenses are charged to income when incurred.
 
Use of Estimates
 
The preparation of the financial statements in conformity with Accounting Principles generally accepted in America 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 dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates. These estimates and assumptions include valuing equity securities, share based payment arrangements, and deferred taxes and related valuation allowances. Certain of our estimates, could be affected by external conditions, including those unique to our industry, and general economic conditions. It is possible that these external factors could have an effect on our estimates that could cause actual results to differ from our estimates. The Company re-evaluates all of its accounting estimates at least quarterly based on these conditions and record adjustments when necessary.

Research and Development

In accordance with ASC Topic 730 research and development costs are expensed as incurred.  Research and development expenses consist of purchased technology (including but not limited to intellectual property), purchased research and development rights and outside services for research and development activities associated with product development.  During the years ended October 31, 2010 and 2009 the Company expensed approximately $225,000 and $230,000 of such costs, respectively.

Income Taxes
 
The Company uses the asset and liability method of accounting for income taxes in accordance with ASC Topic 740, “Income Taxes.” Under this method, income tax expense is recognized for the amount of: (i) taxes payable or refundable for the current year and (ii) deferred tax consequences of temporary differences resulting from matters that have been recognized in an entity’s financial statements or tax returns. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation allowance is provided to reduce the deferred tax assets reported if based on the weight of the available positive and negative evidence, it is more likely than not some portion or all of the deferred tax assets will not be realized.
 
ASC Topic 740-10-30 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC Topic 740-10-40 provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The Company will classify as income tax expense any interest and penalties. The tax years ending October 31, 2007, 2008 and 2009 are still open for review by the various tax jurisdictions. The state jurisdiction the Company files in is New Jersey. The Company has no material uncertain tax positions for any of the reporting periods presented.
 
 
42

 
 
 
Fair Value Measurements
 
The Company adopted the provisions of ASC Topic 820, “Fair Value Measurements and Disclosures”, which  defines fair value as used in numerous accounting pronouncements, establishes a framework for measuring fair value and expands disclosure of fair value measurements.
 
The estimated fair value of certain financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued expenses are carried at historical cost basis, which approximates their fair values because of the short-term nature of these instruments. The carrying amounts of our long term credit obligations approximate fair value because the effective yields on these obligations, are comparable to rates of returns for instruments of similar credit risk.
 
ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 describes three levels of inputs that may be used to measure fair value:
 
Level 1 — quoted prices in active markets for identical assets or liabilities
 
Level 2 — quoted prices for similar assets and liabilities in active markets or inputs that are observable
 
Level 3 — inputs that are unobservable (for example cash flow modeling inputs based on assumptions)
 
The adoption of this pronouncement did not have a material impact on the Company’s consolidated financial position, results of operations and cash flows.

Stock-Based Compensation
 
The Company recognizes compensation expense for stock-based compensation in accordance with ASC Topic 718. For employee stock-based awards, the Company calculates the fair value of the award on the date of grant using the Black-Scholes method for stock options and the quoted price of its common stock for unrestricted shares; the expense is recognized over the service period for awards expected to vest. For non-employee stock-based awards, the Company calculate the fair value of the award on the date of grant in the same manner as employee awards, however, the awards are revalued at the end of each reporting period and the pro rata compensation expense is adjusted accordingly until such time the nonemployee award is fully vested, at which time the total compensation recognized to date equals the fair value of the stock-based award as calculated on the measurement date, which is the date at which the award recipient’s performance is complete. The estimation of stock-based awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from original estimates, such amounts are recorded as a cumulative adjustment in the period estimates are revised. The Company considers, many factors when estimating expected forfeitures, including types of awards, employee class, and historical experience.
 
Stock-Based Payments

Significant amounts of the Company’s shares of common stock have been issued as payment to employees and non-employees for services and periodically as consideration for acquisition of assets. These are non-cash transactions that require management to make judgments related to the fair value of the shares issued, which affects the amounts reported in the Company’s consolidated financial statements for certain of its assets and expenses. For historic fiscal years when there was not an observable active, liquid market for the Company’s common stock, the valuation of the shares issued in a non-cash share payment transaction relies on observation of arms-length transactions where cash was received for its shares, before and after the non-cash share payment date.
 
 
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Convertible Instruments
 
 The Company evaluates and accounts for conversion options embedded in convertible instruments in accordance with ASC 815 “Derivatives and Hedging Activities.”
 
Applicable GAAP requires companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments according to certain criteria. The criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under other GAAP with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument.
 
Net income (loss) per share

The Company utilizes FASB ASC 260, Earnings per Share to calculate gain or loss per share. Basic gain or loss per share is computed by dividing the gain or loss available to common stockholders (as the numerator) by the weighted-average number of shares of common stock outstanding (as the denominator). Diluted gain or loss per share is computed similar to basic gain or loss per share except that the denominator is increased to include the number of additional shares of common stock that would have been outstanding if all potential common stock (including common stock equivalents) had all been issued, and if such additional shares of common stock were dilutive. Under FASB ASC 260, if the additional shares of common stock are not dilutive, they are not added to the denominator in the calculation. Where there is a loss, the inclusion of additional shares of common stock is anti-dilutive (since the increased number of shares reduces the per share loss available to common stock holders). The Company incurred a loss for the year ended October 31, 2010 and the year ended October 31, 2009. Therefore, common stock equivalents have been excluded from the calculation of diluted loss per share.

The following table outlines the common stock equivalents outstanding as of October 31, 2010 and 2009.
 
   
10/31/2010
   
10/31/2009
 
             
Convertible Series A Preferred Stock
    837,620       2,799,910  
      837,620       2,799,910  
 
In connection with the reverse acquisition disclosed in Note 4, net income (loss) per share was calculated in accordance FASB ASC 805-40-45-4 and 45-5.
 
Segment Information

Accounting Standards Codification subtopic 280-10, Segment Reporting (“ASC 280-10”) establishes standards for reporting information regarding operating segments in annual financial statements and requires selected information for those segments to be presented in interim financial reports issued to stockholders.  ASC 280-10 also establishes standards for related disclosures about products and services and geographic areas.  Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision-making group, in making decisions how to allocate resources and assess performance.  The information disclosed therein materially represents all of the financial information related the Company’s principal operating segments.

The Company with its limited resources is currently operating in one segment and reporting unit.  As it matures it will look to organize the Company into various reporting units as it starts to develop and ascertain its markets and avenues of distribution and product offerings.  Therefore, it anticipates in the future it may be operating in multiple reporting units.
 
 
 
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Recent Accounting Pronouncements
 
In May 2009, the FASB issued SFAS No. 165, Subsequent Events. This statement establishes general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. This statement was effective for the Company beginning with the quarter ended July 31, 2009.
 
In December 2007, the FASB issued SFAS No. 160, Non-controlling Interests in Consolidated Financial Statements — an amendment of ARB No.51. This statement establishes reporting standards for non-controlling interests in subsidiaries. This statement changes the presentation of non-controlling interests in subsidiaries in the financial statements for the Company beginning November 1, 2009.

In March 2010, the FASB issued new accounting guidance, under ASC Topic 605 on Revenue Recognition.  This standard provides that the milestone method is a valid application of the proportional performance model for revenue recognition if the milestones are substantive and there is substantive uncertainty about whether the milestones will be achieved.  Determining whether a milestone is substantive requires judgment that should be made at the inception of the arrangement.  To meet the definition of a substantive milestone, the consideration earned by achieving the milestone (1) would have to be commensurate with either the level of effort required to achieve the milestone or the enhancement in the value of the item delivered, (2) would have to relate solely to past performance, and (3) should be reasonable relative to all deliverables and payment terms in the arrangement.  No bifurcation of an individual milestone is allowed and there can be more than one milestone in an arrangement.  The standard is effective for annual periods beginning on or after October 1, 2010.  The Company does not believe the impact of the adoption of this guidance will have a material effect on its financial statements.

In April 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2010-13, “Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades” (“ASU 2010-13”). ASU 2010-13 addresses the classification of a share-based payment award with an exercise price denominated in the currency of a market in which the underlying equity security trades. FASB Accounting Standards Codification (“ASC”) Topic 718 was amended to clarify that a share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trade shall not be considered to contain a market, performance or service condition. Therefore, such an award is not to be classified as a liability if it otherwise qualifies for equity classification. The amendments in ASU 2010-13 are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010, with early application permitted. The adoption of this standard did not have a material impact on the Company’s consolidated financial position and results of operations.

In October 2009, the FASB issued ASU No. 2009-13, Multiple-Deliverable Revenue Arrangements (ASU 2009-13) (formerly EITF 08-1, Revenue Arrangements with Multiple Deliverables) which amends ASC Topic 605, Revenue Recognition. This accounting update establishes a hierarchy for determining the value of each element within a multiple deliverable arrangement. ASU 2009-13 is effective for the Company beginning October 1, 2010 and applies to arrangements entered into on or after this date. The Company is currently evaluating the impact that ASU 2009-13 may have on its financial position and results of operations, and does not expect the impact, if any, to be material.
 
The FASB has issued Accounting Standards Update (ASU) No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. This ASU requires some new disclosures and clarifies some existing disclosure requirements about fair value measurement as set forth in Codification Subtopic 820-10. ASU 2010-06 amends Codification Subtopic 820-10 and now requires a reporting entity to use judgment in determining the appropriate classes of assets and liabilities and to provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. ASU 2010-06 was effective for interim and annual reporting periods beginning after December 15, 2009, As this standard relates specifically to disclosures, the adoption did not have an impact on the Company’s consolidated financial position and results of operations.

In February 2010, the Financial Accounting Standards Board (“FASB”) issued an accounting standard that amended certain recognition and disclosure requirements related to subsequent events. The accounting standard requires an entity that is an SEC filer to evaluate subsequent events through the date that the financial statements are issued and removes the requirement that an SEC filer disclose the date through which subsequent events have been evaluated. This guidance was effective upon issuance. The adoption of this standard had no effect on the Company’s condensed consolidated financial position or results of operations.  
 
 
 
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In March 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-11, which is included in the Codification under ASC 815, “Derivatives and Hedging” (“ASC 815”).  This update clarifies the type of embedded credit derivative that is exempt from embedded derivative bifurcation requirements.  Only an embedded credit derivative that is related to the subordination of one financial instrument to another qualifies for the exemption.  This guidance is effective for interim and annual reporting periods beginning January 1, 2010.  The adoption of this standard did not have a material impact on the Company’s consolidated financial position and results of operations.

Note 3 – Going Concern

The Company's financial statements are prepared using generally accepted accounting principles applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company has had no significant revenues and has generated losses from operations. In order to continue as a going concern and achieve a profitable level of operations, the Company will need, among other things, additional capital resources and to develop a consistent source of revenues. The ability of the Company to continue as a going concern is dependent upon its ability to successfully accomplish its strategic plan and/or recognize revenue from its intangible assets and eventually attain profitable operations. The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. There can be no assurance the Company will be able to continue as a going concern.

At October 31, 2010, the Company had negative working capital of $(1,803,627). For the year ended October 31, 2010 the Company incurred an operating loss of $(3,746,401) and since inception has accumulated a deficit of $(49,762,192).

We had $59,395 of cash at October 31, 2010.  Cash used by operations for fiscal 2010 was $1,735,268. The principal use of funds were for consulting services supporting the development of our business plan, legal, and accounting fees in connection with becoming a public company and daily operations of the business, including rent and travel and laboratory costs.  Costs associated with developing and filing our Intellectual Property used an additional $127,316 of cash.

In fiscal 2010, we raised $180,000 of cash from the issuance of our capital stock to fund operations.  We received $1,475,000 from the issuance of convertible debentures.

We had $139,663 of cash at October 31, 2009.  Cash used by operations for fiscal 2009 was $ 1,621,610  The principal use of funds were for consulting services supporting the development of our business plan, legal, and accounting fees in connection with becoming a public company and daily operations of the business, including rent and travel and laboratory costs.  Costs associated with developing and filing our Intellectual Property used an additional $ 8,467 of cash.

In fiscal 2009, we raised $1,689,802 of cash from the issuance of our capital stock to fund operations.  We received $600,000 from conversion of 90-day debentures issued in connection with the Share Exchange in the first quarter, $450,000 from a private placement in the fourth quarter, and approximately $695,000 from investments made by private investors throughout the fiscal year.

Note 4 - Prepaid Expenses

The Company periodically pays for services supporting its business operations with shares of its common stock. When these services are provided by third parties (i.e. non-employees) and performance extends over more than the current reporting period, a prepaid asset is established at the agreement date for the value of shares issued. The prepaid asset is established in the same period and manner as if cash were paid for the underlying goods or services, pursuant to FASB ASC 505-50-25-4 and 25-6.
 
 
 
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Amounts are expensed on a straight line basis (and the prepaid asset reduced) over the periods the services are provided. The prepaid expense balance includes $172,101 and $ 122,299 at October 31, 2010 and October 31, 2009 respectively for share based payments to non-employees for services and $169,772 and $169,608 at October 31, 2010 and October 31, 2009 respectively for prepaid expenses paid in cash, of which $99,900 of prepaid expenses paid in cash to a related party is reported as Prepaid Expenses - Related Parties.  Prepaid Expenses –Related Parties also includes $327,899 in share based payments to a company controlled by a director for consulting services to be provided by the company controlled by said director. The share based payment is being amortized over a three year period, starting in January 2009. For the years ended October 31, 2009, the Company recognized expense of $169,772, respectively related to this share based payments which is recorded on “Other Selling, General and Administrative Expenses.”  See Note 9 for a complete discussion of the share valuation and accounting for share based payments to non-employees in exchange for services and a detailed listing of the transaction amounts.

Note 5 - Property & Equipment

Property and equipment consisted of the following:
 
 
October 31, 2010
   
October 31, 2009
 
           
Computer Hardware
 
$
4,233
   
$
4,233
 
Furniture and Fixtures
   
1,494
     
1,494
 
Less: Accumulated depreciation & amortization
   
(4,734)
     
(4,521)