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EX-32 - CERTIFICATIONS - ARROGENE, INCarro_ex32.htm


U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


Form 10-K


(Mark One)


|X| ANNUAL REPORT UNDER SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934


For the fiscal year ended October 31, 2013


|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934


For the transition period from ______________ to ______________


Commission File Number 000-52932

_______________________________________________


Arrogene, Inc.

 (Exact name of registrant as specified in its charter)

______________________________________________

Delaware                                                                                                                                          20-8057585

--------------------------------------                                                                                       --------------------------------------

 (State or other jurisdiction of                                                                                                    (I.R.S. Employer

incorporation or organization)                                                                                                   Identification No.)


                                          2500 Broadway, Building F, Suite F-125; Santa Monica, California 90404

------------------------------------------------------------------------------------

(Address of principal executive offices)


(424) 238-4442

----------------------------------------------------------

(Registrant’s telephone number, including area code)

_____________________________________________


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


None.


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


Common Stock, $0.0001 par value per share

-----------------------------------------

(Title of Class)



Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes [  ]  No [X]


Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes [  ] No [X]




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Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections.


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


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


Indicate by check mark if disclosure of delinquent filers in response 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. [X]


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


Large Accelerated Filer [  ]

Accelerated Filer                    [  ]


              Non-accelerated Filer     [  ]

Smaller Reporting Company [X]

   (Do not check if a smaller reporting company.)


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes [  ]  No  [X]


The aggregate market value of the voting and non-voting common equity held by non-affiliated computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter is:  $0.00.


  APPLICABLE ONLY TO CORPORATE REGISTRANTS


As of March 13, 2014, there were 21,395,860 shares of common stock, par value $.0001, outstanding.




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FORWARD-LOOKING STATEMENTS


Certain statements made in this Annual Report on Form 10-K (this “Report”) are “forward-looking statements” (within the meaning of the Private Securities Litigation Reform Act of 1995) regarding the plans and objectives of management for future operations. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements of Arrogene, Inc. (the “Company”) to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. In this Report, forward-looking statements are generally identified by the words "anticipate," "plan," "believe," "expect," "estimate”, “project” and the like.  These forward-looking statements include, but are not limited to, statements regarding the following:


 

*

adequacy of our financial resources;

 

 

 

 

*

strategic business relationships;

 

 

 

 

*

statements about our future business plans, strategies and prospects;

 

 

 

 

*

anticipated operating results and sources of future revenue;

 

 

 

 

*

our organization's growth;

 

 

 

 

*

anticipated regulatory approval paths and timeframes;

 

 

 

 

*

our intellectual property and related license agreements;

 

 

 

 

*

the efficacy of our technology;

 

 

 

 

*

our marketing plans and strategy;

 

 

 

 

*

development of new products and markets;

 

 

 

 

*

competitive pressures;

 

 

 

 

*

changing economic conditions; and

 

 

 

 

*

expectations regarding competition from other companies.

 

 

 


Although we believe that any forward-looking statements we make in this Report are reasonable, because forward-looking statements involve future risks and uncertainties, there are factors that could cause actual results to differ materially from those expressed or implied. The forward-looking statements included herein are based on current expectations that involve numerous risks and uncertainties. The Company's plans and objectives are based, in part, on assumptions involving the continued expansion of business. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the control of the Company. Although the Company believes its assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate and, therefore, there can be no assurance the forward-looking statements included in this Report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the objectives and plans of the Company will be achieved.   See Risk Factors included elsewhere in this Report.





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PART I


Item 1. Description of Business.


Arrogene, Inc., f/k/a SRKP 16, Inc., (“we”, “us”, “our”, the "Company") was incorporated in the State of Delaware on December 7, 2006 and was originally organized as a “blank check” shell company to investigate and acquire a target company or business seeking the perceived advantages of being a publicly held corporation. On January 11, 2012, we completed a merger in accordance with the terms of an Agreement and Plan of Reorganization (the “Reverse Merger”), dated as of July 18, 2011, by and among the Company and Arrogene NanoTechnology, Inc., a California corporation (“ANI”) focused on oncology.  As a result of the Reverse Merger, we became the 100% parent corporation of ANI, and the shareholders of ANI became stockholders of the Company. In addition, we adopted the business and operations of Arrogene.  Effective September 4, 2012, SRKP 16, Inc. officially changed its name to Arrogene, Inc.  Hereafter, Arrogene, Inc. and ANI are collectively referred to as “Arrogene” or the “Company.”


Reverse Merger


As a result of the Reverse Merger, the shareholders of ANI received 12,660,000 shares of Company common stock or approximately 86 % of the then issued and outstanding common shares of the Company after the transaction.  Further, ANI warrant holders received identical common stock purchase warrants in the Company.  Additionally, immediately after the Reverse Merger, the officers of ANI became the officers of the Company and the Company’s Board of Directors consists solely of former ANI officers and directors. For accounting purposes, the Reverse Merger has been treated as an acquisition of the Company by ANI (the accounting acquirer) and a recapitalization of ANI.  As a result, the financial statements for all periods presented and discussed herein are those of ANI.  Immediately prior to consummating the Reverse Merger, the Company sold 502,000 units (the “Units”), with each Unit consisting of  (i) one share of common stock, and (ii) two common stock purchase warrants (the “SRKP Warrants”) that are exercisable for five years from the date of issuance.  One of the SRKP Warrants is exercisable at $1.50 per share and the other is exercisable at $2.00 per share.  The Company received $404,688 in net proceeds from the sale of the Units after payment of commissions and other expenses associated with the offering, of which, $389,688 was acquired by ANI at the time of the Reverse Merger.  Subsequent to completion of the Reverse Merger, the Company has sold 1,815,250 Units receiving net proceeds of $1,561,584 after the payment of commissions and other expenses associated with the offering.


Overview of Arrogene’s Business


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


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




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Using clinical material from 65 patients with brain gliomas, our founders in their capacity as researchers at CSMC, found an inverse correlation between Laminin-411 overproduction, patients’ survival and time of recurrent development (Ljubimova et al., Cancer, 2004).   In 2007, they started a clinical trial to examine a possible clinicopathological use of Laminin-411 as a diagnostic tool for advanced brain glioma and as a prognostic indicator that could predict disease recurrence. The study of the expression of Laminin-411 and Laminin-421 was performed this time with the paraffin-embedded archival material routinely used in all pathological laboratories. This trial has recently completed, with more than 300 cases of human tumors analyzed. The data show that this protein is overproduced in more than (85%) of grade IV gliomas. Its production is correlated with poor patient survival, as compared to patients whose tumors predominantly contain a normal isoform, Laminin-421. This data is currently being prepared for publication.  Based on these results, we are in the process of exploring commercializing this new test as a Laboratory Developed Test (“LDT”) and we are currently in negotiations with a partner for delivery of this test into clinical practice. With this potential partner, we have conducted protocol development and have furthered our clinical trial to measure the range of application for Laminin 411. Conclusions of that clinical trial indicate that Laminin 411 is over-expressed in many tumors beyond the initial indications and we are working on incorporating those findings in both published results and the market strategy for the LDT.  No assurance can be provided that we will successfully conclude negotiations with this potential partner.


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


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


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


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

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

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

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

3 Ding H., Portilla-Arias J., Patil R., et al. (2011). The optimization of polymalic acid peptide copolymers for endosomolytic drug delivery. Biomaterials 32 (2011) 5269-5278



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


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


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


Our first therapeutic drug candidate is AG 101 which will target certain brain cancer.  We are planning to commission final Phase 0 toxicology studies at an external laboratory for AG101 for preparation of an IND submission to the FDA to receive clearance to begin human clinical trial work. We then plan to commence a Phase I clinical trial.  However, these next steps will cost a minimum of $1,500,000 which will require additional funding.


Industry


The industry for cancer diagnostics and therapeutic drugs is very large and competitive.  We have estimated the market potential for our targeted diagnostic imaging products to be at least $400 million annually for the U.S. based on published data and we have estimated the market potential for the therapeutic products to exceed $30 billion annually for the U.S


Products


We are developing our Polycefin family of products for both cancer therapeutics and diagnostics.


Therapeutics Pipeline


Our initial pipeline, currently in pre-clinical development, allows us to combine antisense oligonucleotides against two Laminin-411 chains on one nanopolymer (Polycefin) molecule and target them specifically to tumor cells. As a result, we were able to stop brain glioma growth in mice without harming other unaffected organs (Ding et al., Proc Natl AScad Sci USA, 2010). This appears to be a superior approach to using antibody blocking because, due to being buried in basement membranes, laminins may not be accessible enough to the antibodies in real-life tumors to obtain a therapeutic effect. We plan initially to use our nanopolymer Polycefin to block Laminin-411 production in primary and metastatic brain and breast tumors. Importantly, due to special chemical groups on the polymer backbone, it can deliver the antisense drugs to the tumor cells specifically, largely avoiding non-cancer cells. Our published results show the feasibility of this approach.


This approach also appears to be well suited to treat certain metastatic brain tumors, such as the treatment of triple negative breast cancer metastasis into the brain. These brain gliomas should in general fall under the designation of “rare cancers”.


Later we intend to widen the indication to other brain cancers, (low- and high- grade gliomas, brain metastatic cancers).  Additional indications could be developed by combining Laminin inhibition with other antibodies, peptides and therapeutics. The expansion of the product line will be subject to collaboration with third party licensing partners.


Diagnostic Pipeline


Using fresh clinical material from 65 patients with brain gliomas, our founders in their capacity as researchers at CSMC, found an inverse correlation between Laminin-411 overproduction, patients’ survival and time of recurrent development (Ljubimova et al., Cancer, 2004). In 2007, they started a clinical trial to examine a possible clinicopathological use of Laminin-411 as a diagnostic tool for advanced brain glioma and as a prognostic indicator that could predict disease recurrence. The study of the expression of Laminin-411 and laminin-421 was performed this time



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with the paraffin-embedded archival material routinely used in all pathological laboratories.  This trial has recently completed, with more than 300 cases of human tumors analyzed. The data show that this protein is overproduced in more than (85%) of grade IV gliomas. Its production is correlated with poor patient survival, as compared to patients whose tumors predominantly contain a normal isoform, Laminin-421. This data is currently being prepared for publication.  Based on these results, we are in the process of exploring commercializing this new test as a LDT and we are currently in negotiations with a partner for delivery of this test into clinical practice.  No assurance can be provided that we will successfully conclude negotiations with this potential partner.

 

Imaging studies have shown the potential of using the platform to improve the visualization, accuracy, and definition of cancers, including the ability to image certain metastatic cancers, which are difficult to detect or visualize using conventional diagnostic imaging techniques.   More importantly, the high specificity associated with Polycefin based targeting provides the opportunity to create an imaging “virtual biopsy” that can identify with a high degree of specificity target tumors in diagnostic imaging. The Company plans to develop such virtual biopsy diagnostic products for difficult to biopsy or operate cancers such as glioblastoma, multiforme (“GBM”).


Our scientists have published extensively in peer reviewed scientific journals the results of our clinical and pre-clinical work, including in J Control Release , J Drug Target, Cancer Research1 , and the Proceeds in the US Academy of Sciences, and Cell.2


Competitive Strengths


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


Polycefin has the following characteristics which we believe are competitive strengths:


·

It is based on a naturally occurring nano-bio-polymer platform;

·

Testing to date has found it to be non-toxic and bio-degradable with no immunogenic properties;

·

It can be loaded with multiple imaging, therapeutic and targeting agents at the same time;

·

It releases and activates the active ingredients only inside targeted tumor cells;

·

It is capable of passing the Brain Blood Barrier; and

·

It allows for flexibility to engineer multiple nano-conjugates from a common platform each targeting different indications and delivering active agents or imaging agents.


Our Strategy


Our strategy is to develop Polycefin and Laminin 411 into both a diagnostic product line as well as therapeutics with both product lines targeting tumors, with an initial focus on brain, breast and lung cancers including the metastatic forms of the latter two. Based on the scientific results from these initial indications, we might expand our indications to other types of cancer indications as well as other diseases that could benefit from Polycefin’s ability to target disease cells or pass through the Brain Tumor Barrier. Our product development plan focuses on delivering a diagnostic product line first, due to the relatively shorter regulatory approval process associated with diagnostic imaging agents over therapeutics.  


Our preclinical testing has provided evidence that Polycefin can accurately target certain cancers based on certain over-expressed markers at the cellular level.   

1 Cancer Research; 71(4); 1454-64.

2 http://www.pnas.org/content/107/42/18143



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It is also our goal to file IND applications for diagnostic and therapeutic products as soon as possible around an initial set of indications that could allow a fast-track regulatory path and centering on brain gliomas for which we have shown good efficacy in pre-clinical work.


In both diagnostic and therapeutic applications, we plan on partnering with larger, more well established diagnostic and pharmaceutical partners.


By partnering we believe we can reduce development risks, lower development costs and required capital for the Company.  However, partnering early in the development/regulatory approval path generally translates into lower up-front and milestone payments for licensing transactions as the partner is taking a greater risk than on a transaction that occurs later in the cycle.


We will continue to evaluate our business and licensing strategy based on market conditions, development progress and our access to capital.


Manufacturing and Suppliers


We currently manufacture batches of Polycefin for preclinical testing purposes in the laboratory at CSMC.  We source biomarkers from multiple commercial partners and suppliers. We also work with pharmaceutical companies to source the active ingredients to be conjugated with Polycefin.  At this time there are no significant dependencies on any one supplier and the Company has adopted a dual sourcing strategy for all key components wherever possible.  We do anticipate working with one or more contract manufacturers with FDA Current Good Manufacturing Practices (“GMP”) facilities in the future as we progress in our product development efforts.  In addition, we are expanding our production of the key ingredients for the production of Polycefin, according to a proprietary production and purification process, in preparation to support both pre-clinical and clinical phases of upcoming clinical trials. We are also taking steps to negotiate outside supplies agreements to create industrial partnerships relating to the production under license of these compounds.


Quality Control


We do not have a quality system in place at this stage of our development. We plan on developing a set of Standard Operating Procedures (“SOPs”) and overall quality system that is compliant with required FDA Good Laboratory Practices (GLP) and GMP as needed in the future as we progress in our development.


Sales and Marketing


As a Company we are still in the development stage, we do not engage in any sales and marketing activities.  We have begun, however, the negotiation for technical and scientific collaborations with a variety of potential future licensing partners. Our strategy is to commercialize our technology through licensing agreements and accordingly, sales and marketing efforts of the end-product will be the responsibility of the licensees, while our primary focus will be to negotiate and support our licensing partners and collaborations.


Research and Development


We are currently utilizing the laboratory at CSMC for research and development activities as provided for in the License.  As of this time we do not employ any full time research and development personnel directly, although key personnel at CSMC are consultants to the Company. It is our plan to expand the development effort by employing or supporting CSMC hiring of certain technical resources.  Our ability to conduct research and development activities is greatly dependent upon our financial resources.  If adequate funds are not available when required, we may have to delay, scale-back or eliminate certain aspects of our research, testing and/or development activities.  In 2012, we entered into an agreement with CSMC to support certain activities within the laboratory necessary to prepare compounds.


Competition


The diagnostic, pharmaceutical and biopharmaceutical industry is characterized by intense competition and rapid and significant technological changes and advancements. Many companies, research institutions and universities are doing research and development work in a number of areas similar to those that we focus on that could lead to the development of new products which could compete with and be superior to our product candidates.  Most of the companies with which we



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will compete have substantially greater financial, technical, manufacturing, marketing, distribution and other resources than those of ours. A number of these companies may have or may develop technologies for developing products for treating various diseases that could prove to be superior to ours. We expect technological developments in the diagnostic, pharmaceutical and biopharmaceutical and related fields to occur at a rapid rate, and we believe competition will intensify as advances in these fields are made. Accordingly, we will be required to continue to devote substantial resources and efforts to research and development activities in order to potentially achieve and maintain a competitive position in this field. Products that we develop may become obsolete before we are able to commercialize them or to recover all or any portion of our research and development expenses. We will be competing with respect to our products with companies that have significantly more experience in undertaking preclinical testing and human clinical trials with new or improved diagnostic and therapeutic products and obtaining regulatory approvals of such products. A number of these companies already market and may be in advanced phases of clinical testing of various drugs that may compete with our lead product candidate or any future product candidates. Our competitors may develop or commercialize products more rapidly than we do or with significant advantages over any products we develop. Our competitors may therefore be more successful in commercializing their products than we are, which could adversely affect our competitive position and business.


In addition to larger pharmaceutical or biopharmaceutical companies that may develop different competing technologies or technologies within the cancer diagnostics and therapeutic fields, we will be competing with a number of smaller biotechnology companies that are focused on cellular or nano-technological therapy technologies to treat cancers, which may include among others Arrowhead Research Corp., Applied Nanotech Holdings, Dendreon, Northwest Biotherapeutics, Antigenics, Celldex Therapeutics, NeuralStem, Geron, NeuroNova, ReNeuron, Stemcells, Inc., Advanced Cell Technology, Immunocellular Therapeutics and Osiris Therapeutics. Northwest Biotherapeutics is developing a dendritic cell-based vaccine treating brain tumors and Celldex Therapeutics has recently completed a Phase II clinical trial to treat glioblastoma with their cancer vaccines, and other companies may also be developing vaccines of this type.


Colleges, universities, governmental agencies and other public and private research organizations are becoming more active in seeking patent protection and licensing arrangements to collect royalties for use of technologies that they have developed, some of which may be directly competitive with our lead product candidate or any future product candidates. The governments of a number of foreign countries are aggressively investing in cellular therapy research and promoting such research by public and private institutions within those countries. These domestic and foreign institutions and governmental agencies, along with pharmaceutical and specialized biotechnology companies, can be expected to compete with us in recruiting qualified scientific personnel.


Intellectual Property


The technology covered by the CSMC License provides us with the world-wide rights to U.S Patents No. 7,547,511 “Antisense Inhibition of Laminin-8 Expression to Inhibit Human Gliomas”, No. 7,935,677, “Polymalic Acid-Based Multifunctional Drug Delivery System”, No. 8,309,614 “Poly (Beta Malic Acid) with Pendant Leu-Leu-Leu Tripeptide for Effective Cytoplasmic Drug Delivery”, and  No. 8,562,964 along with various Japanese, EU and Asian related patents and applications, related technical information to develop, market and sell human therapeutic and diagnostic products, including new pharmaceutical products and/or non-prescriptive products using the patented technology .New additional patent filings are pending. Under the scope of our license new patent applications filed by CSMC relating to the same subject matter or derivative of the existing patents are subject to inclusion rights or rights of first refusal under the license.


Employees


As of October 31, 2013, we had two part-time employees both of whom are members of management and one full-time administrative employee due to our limited capital resources.  We also utilize several consultants who are focused on business and technical development. Our ability to expand our employee base to include full-time personnel in administration, research and development and business development is dependent on the availability of funding.






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Item 1A. Risk Factors


CERTAIN RISK FACTORS OF ARROGENE THAT MAY AFFECT FUTURE RESULTS


Our business, future performance and forward-looking statements are affected by general industry and market conditions and growth rates, general U.S. and non-U.S. economic and political conditions (including the global economy), competition, interest rate and currency exchange rate fluctuations and other events.  The following items are representative of the risks, uncertainties and other conditions that may impact our business, future performance and the forward-looking statements that we make in this report or that we may make in the future.


Risks Related to our Business, Products and Markets


Our auditors have expressed substantial doubt about our ability to continue as a going concern.


Arrogene has incurred cumulative net operating losses and negative cash flow since inception. Additionally, as of the date of this Report, we only had enough cash to fund our activities for another 30 days.  We expect that the Company will continue to experience operating losses and negative cash flow for the foreseeable future, which will impact the financial results of Arrogene. Accordingly, our auditors have expressed substantial doubt about our ability to continue as a going concern.


We require additional funding which may not be available on favorable terms or at all.


We will require additional funds to support our working capital and planned development requirements within the next few months.  Adequate funds may not be available when needed or may not be available on favorable terms. If the Company raises additional funds by issuing equity securities or convertible debt securities, existing shareholders may be diluted or have their rights subordinated to newly-issued senior securities. If funding is insufficient at any time in the future, we may not be able to develop or commercialize its products or services, take advantage of business opportunities or respond to competitive pressures, any of which could harm its business.


The future capital requirements of Arrogene depend upon many factors, including the following:

 

 

 

·

the cost of testing and developing our technologies;

 

 

 

 

·

the cost and timing of regulatory approvals;

 

 

 

 

·

the rate at which we expand our operations; and

 

 

 

 

·

the cost of commercializing our products.



Current economic conditions and in the global economy generally, including ongoing disruptions in the debt and equity capital markets, may adversely affect our business and results of operations, and our ability to obtain financing.


The global economy is currently undergoing numerous challenges, and the future economic environment may continue to be less favorable than that of past years. We are unable to predict the likely duration and severity of the current disruptions in debt and equity capital markets and adverse economic conditions in the United States and other countries, which may continue to have an adverse effect on our business and results of operations, in part because we are dependent upon customer behavior and the impact on consumer spending that the continued market disruption may have.


The global stock and credit markets have recently experienced significant price volatility, dislocations and liquidity disruptions, which have caused market prices of many stocks to fluctuate substantially and the spreads on prospective and outstanding debt financings to widen considerably. These circumstances have materially impacted liquidity in the financial markets, making terms for certain financings materially less attractive, and in certain cases have resulted in the unavailability of certain types of financing. This volatility and illiquidity has negatively affected a broad range of mortgage and asset-backed and other fixed income securities. As a result, the market for fixed income securities has experienced decreased liquidity, increased price volatility, credit downgrade events, and increased defaults. Global equity



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markets have also been experiencing heightened volatility and turmoil, with issuers exposed to the credit markets particularly affected. These factors and the continuing market disruption have an adverse effect on us, in part because we, like many companies, from time to time may need to raise capital in debt and equity capital markets including in the asset-backed securities markets. We will require additional capital within the following 12 months and our ability to raise such capital, including the terms under which such capital is raised, will be dependent on the general economic conditions of the United States and the capital markets.  If we are unable to raise additional capital, it was have a material adverse affect on our liquidity and business operations and would likely put us out of business.


We cannot predict our future capital needs and we may not be able to secure additional financing.


Our projection of future capital needs is based on our operating plan, which in turn is based on assumptions that may prove to be incorrect. As a result, our financial resources may not be sufficient to satisfy our future capital requirements. Should these assumptions prove incorrect, there is no assurance that we can raise additional financing on a timely basis or on favorable terms. If funding is insufficient at any time in the future, we may not be able to develop or commercialize our products or services, take advantage of business opportunities or respond to competitive pressures, any of which could harm our business.



Future financings may result in dilution to our shareholders and restrictions on its business operations.


If we raise additional funds by issuing equity or convertible debt securities, further dilution to our shareholders could occur. Additionally, we may grant registration rights to investors purchasing equity or debt securities. Debt financing, if available, may involve pledging some or all of our assets and may contain restrictive covenants with respect to raising future capital and other financial and operational matters. If we are unable to obtain necessary additional capital, we may be unable to execute our business strategy, which would have a material adverse effect on our business, financial condition and results of operations.


Future share issuances to CSMC will have a dilutive effect on our shareholders.


The License requires us to issue additional shares of common stock to CSMC in the future for no additional consideration to ensure that CSMC will own 5% of the total issued and outstanding common shares.  This commitment continues until December 31, 2015.  As a result, existing shareholders may suffer further dilution in the event we sell or issue additional shares in the future.


Because we have a limited operating history, we may not be able to successfully manage our business or achieve profitability.

 

We have a limited operating history upon which to base an evaluation of our prospects and the potential value of our common stock.  We are confronted with the risks inherent in an early stage company, including difficulties and delays in connection with the development of Polycefin into a commercially viable product, reliance on a small number of scientific collaborators, operational difficulties, and difficulty in estimating future development, regulatory, and administrative costs.  If we cannot successfully manage our business, we may not be able to develop a commercially viable product, generate future profits and may not be able to support our operations.  It is possible that we will incur additional expenses and losses in the further implementation of our business plan.  We may not be able to improve operations and therefore may not become profitable.

 

We have incurred losses since inception and may never achieve profitability. 

 

We are subject to many of the risks common to developing enterprises, including undercapitalization, cash shortages, limitations with respect to financial and other resources, and insufficient revenue to be self-sustaining. There is no assurance that we will ever attain profitability.


We have limited human resources; we need to attract and retain highly skilled personnel; and we may be unable to manage our growth with our limited resources effectively.


We expect that the expansion of our business will place a significant strain on our limited managerial, operational, and financial resources.  We will be required to expand our operational and financial systems significantly and to expand, train and manage our work force in order to manage the expansion of our operations. Our future success will depend in large part on our ability to attract, train, and retain additional highly skilled executive level management with experience in



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the pharmaceutical industry.  Competition is intense for these types of personnel from more established organizations, many of which have significantly larger operations and greater financial, marketing, human, and other resources than we have.  We will need substantial additional capital in order to attract and retain critical management.  We may not be successful in attracting and retaining qualified personnel on a timely basis, on competitive terms or at all.  We currently are required to limit the engagement of critical management to part-time due to limited resources and there is no assurance that we will be successful in raising the necessary additional financial resources to employ them, and other key employees, on a full time basis.  We currently are in arrears in paying our management team.  There is no assurance that our management team will continue working without getting paid.  If we are not successful in attracting and retaining these personnel, our business, prospects, financial condition and operating results would be materially adversely affected. Further, our ability to manage our growth effectively will require us to continue to improve our operational, financial and management controls, reporting systems and procedures, to install new management information and control systems and to train, motivate and manage employees.  If we are unable to manage growth effectively and new employees are unable to achieve adequate performance levels, our business, prospects, financial condition and operating results could be materially adversely affected.


We will be dependent on the rights included in the License for all of our products.


Since we have acquired the License, we will have to continue to comply with the requirements of that agreement to maintain the license rights in full force and effect.  The License may be terminated if we fail to perform our obligations under the agreement in accordance with its terms including, but not limited to, our ability to make all payments due under the License as well as certain other development milestones. Our inability to continue to license these technologies will materially adversely affect our business, prospects, financial condition, and operating results. In addition, our strategy depends on the successful development of these licensed technologies into commercial products, and, therefore, any limitations on our ability to utilize these technologies may impair our ability to market and sell our products, delay new product introductions, and/or adversely affect our reputation, any of which could have a material adverse effect on our business, prospects, financial condition, and operating results.  We are currently in arrears in making payments to CSMC under a research and development agreement, having not made payments for services provided subsequent to February 2013.  There is no assurance that CSMC will continue to provide such services without being paid for the past due balance.


If clinical trials of our current or future product candidates do not produce results necessary to support regulatory approval in the United States or elsewhere, we will be unable to commercialize these products.


To receive regulatory approval for the commercial sale of our product candidates that we may develop or out-license, we must conduct, at our own expense, adequate and well controlled clinical trials to demonstrate efficacy and safety in humans. Clinical testing is expensive, takes many years and has an uncertain outcome. Clinical failure can occur at any stage of the testing.  Our clinical trials may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional clinical and/or non-clinical testing.  Our failure to adequately demonstrate the efficacy and safety of any product candidate that we may develop or out-license would prevent receipt of regulatory approval of that product candidate.


Our assumptions concerning the regulatory approval pathway for our diagnostic products may prove to be incorrect.


Our business plan makes certain assumptions concerning the regulatory approval pathway for our planned diagnostic and therapeutic products.  While such assumptions are based on the guidance of regulatory consultants, there is no assurance the FDA will agree with our conclusions, which could result in a longer, more costly process than we are currently anticipating.


Delays in the commencement or completion of clinical testing could result in increased costs to us and delay or limit our ability to obtain regulatory approval for our product candidates.


Delays in the commencement or completion of clinical testing could significantly affect our product development costs. The commencement and completion of clinical trials requires us to identify and maintain a sufficient number of trial sites, many of which may already be engaged in other clinical trial programs for the same indication as our product candidates or may not be eligible to participate in or may be required to withdraw from a clinical trial as a result of changing standards of care. The commencement and completion of clinical trials can be delayed for a variety of other reasons, including delays related to:




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·

reaching agreements on acceptable terms with prospective clinical research organizations, or CROs, and trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites;

·

obtaining regulatory approval to commence a clinical trial;

·

obtaining institutional review board approval to conduct a clinical trial at a prospective site;

·

recruiting and enrolling patients to participate in clinical trials for a variety of reasons, including competition from other clinical trial programs for the same indication as our product candidates; and

·

retaining patients who have initiated a clinical trial but may be prone to withdraw due to the treatment protocol, lack of efficacy, personal issues, side effects from the therapy or who are lost to further follow-up.


In addition, a clinical trial may be suspended or terminated by us, the FDA or other regulatory authorities, due to a number of factors, including:


·

failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols;

·

inspection of the clinical trial operations or trial sites by the FDA or other regulatory authorities resulting in the imposition of a clinical hold;

·

unforeseen safety issues or any determination that a trial presents unacceptable health risks; or

·

lack of adequate funding to continue the clinical trial, including the incurrence of unforeseen costs due to enrollment delays, requirements to conduct additional trials and studies and increased expenses associated with the services of our CROs and other third parties.


Additionally, changes in regulatory requirements and guidance may occur and we may need to amend clinical trial protocols to reflect these changes. Amendments may require us to resubmit our clinical trial protocols to institutional review boards for reexamination, which may impact the costs, timing or successful completion of a clinical trial. If we experience delays in the completion of, or if we terminate, our clinical trials, the commercial prospects for our product candidates will be harmed, and our ability to generate product revenues will be delayed. In addition, many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory approval of a product candidate. Even if we are able to ultimately commercialize our product candidates, other therapies for the same indications may have been introduced to the market and established a competitive advantage.


Even if our product candidates receive regulatory approval, they may still face future development and regulatory difficulties.


Even if U.S. regulatory approval or clearance is obtained, the FDA can impose significant restrictions on a product’s indicated uses or marketing or may impose ongoing requirements for potentially costly post-approval studies. Any of these restrictions or requirements could adversely affect our potential product revenues.  Our product candidates will also be subject to ongoing FDA requirements for the labeling, packaging, storage, advertising, promotion, record-keeping and submission of safety and other post-market information on the drug. In addition, approved products, manufacturers and manufacturers’ facilities are subject to continual review and periodic inspections. If a regulatory agency discovers previously unknown problems with a product, such as adverse events of unanticipated severity or frequency, or problems with the facility where the product is manufactured, a regulatory agency may impose restrictions on that product or us, including requiring withdrawal of the product from the market. If our product candidates fail to comply with applicable regulatory requirements, such as cGMP, a regulatory agency may:


·

issue warning letters or untitled letters;

·

require us to enter into a consent decree, which can include imposition of various fines, reimbursements for inspection costs, required due dates for specific actions and penalties for noncompliance;

·

impose other civil or criminal penalties;

·

suspend regulatory approval;

·

suspend any ongoing clinical trials;

·

refuse to approve pending applications or supplements to approved applications filed by us;

·

impose restrictions on operations, including costly new manufacturing requirements; or

·

seize or detain products or require a product recall.


Our commercialization efforts will be greatly dependent upon our ability to demonstrate product efficacy in clinical trials. Pharmacies and other dispensing facilities will be reluctant to order our products, and medical practitioners will be reluctant to prescribe our products, without compelling supporting data. While we believe that our products will be



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effective for our planned indications, there is no assurance that this will be proven in clinical trials.  The failure to demonstrate efficacy in our clinical trials, or a delay or failure to complete our clinical trials, would have a material adverse effect on our business, prospects, financial condition and operating results.


Our failure to convince medical practitioners to use our technologies will limit our revenue and profitability.


If we, or our commercialization partners, fail to convince medical practitioners to prescribe products using our technologies, we will not be able to sell our products or license our technologies in sufficient volume for our business to become profitable. We will need to make leading physicians aware of the benefits of products using our technologies through published papers, presentations at scientific conferences and favorable results from our clinical studies. Our failure to be successful in these efforts would make it difficult for us to convince medical practitioners to prescribe products using our technologies for their patients. Failure to convince medical practitioners to prescribe our products will damage our commercialization efforts and would have a material adverse effect on our business, prospects, financial condition and operating results.


If we lose the support of our key scientific collaborators, it may be difficult to establish products using our technologies as a standard of care for various indications, which may limit our revenue growth and profitability.


We have established relationships with leading scientists around the world. We plan to formalize certain of these relationships by establishing a scientific advisory board. We believe that such relationships are key to establishing products using our technologies as a standard of care for various indications. We plan to enter into consulting agreements with our scientific advisory board members, but such agreements will likely provide for termination with 30 days notice. Additionally, there is no assurance that our current research partners will continue to work with us or we will be able to attract additional research partners. The inability to maintain and build on our existing scientific relationships could have a material adverse effect on our business, prospects, financial condition and operating results.


If we are unsuccessful in establishing strategic licensing arrangement with strategic industry partners, our efforts to develop our products will be more costly and involve significant delays.


Our product development plan relies upon our ability to join with strategic industry partners in licensing arrangements.  This approach would allow us to utilize the resources and scientific talent of our strategic licensing partners.  However, if we are not successful in establishing these relationships, we will be required to bear the cost of commercializing our technology, both financial and human resources, alone. As a result, we would expect that our future capital requirements would be significantly increased than presently projected, and the time to market materially delayed.


We may not be able to market or generate sales of our products to the extent anticipated.


Assuming that we are successful in receiving regulatory clearances to market any of our products, our ability to successfully penetrate the market and generate sales of those products may be limited by a number of factors, including the following:


·

Certain of our competitors in the field have already received regulatory approvals for and have begun marketing similar products, which may result in greater physician awareness of their products as compared to ours.

·

Information from our competitors or the academic community indicating that current products or new products are more effective than our products could, if and when it is generated, impede our market penetration or decrease our existing market share.

·

Physicians may be reluctant to switch from existing treatment methods, including traditional therapy agents, to our products.

·

The price for our products, as well as pricing decisions by our competitors, may have an effect on our revenues.

·

Our revenues may diminish if third-party payors, including private health coverage insurers and health maintenance organizations, do not provide adequate coverage or reimbursement for our products.




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If any of our future marketed products were to experience problems related to their efficacy, safety, or otherwise, or if new, more effective treatments were to be introduced, our revenues from such marketed products could decrease.


If any of our current or future marketed products become the subject of problems, including those related to, among others:


·

efficacy or safety concerns with the products, even if not justified;

·

unexpected side-effects;

·

regulatory proceedings subjecting the products to potential recall;

·

publicity affecting doctor prescription or patient use of the product;

·

pressure from competitive products; or

·

introduction of more effective treatments.


Our revenues from such marketed products could decrease. For example, efficacy or safety concerns may arise, whether or not justified, that could lead to the recall or withdrawal of such marketed products. In the event of a recall or withdrawal of a product, our revenues would significantly decline.


If we do not receive adequate third-party reimbursement for the sales of our products, we may not be able to sell such products on a profitable basis.


Sales of our products will depend, in part, upon the extent to which the costs of our products will be paid by health maintenance, managed care, pharmacy benefit and similar reimbursement sources, or reimbursed by government health administration authorities, private health coverage insurers and other third-party payors. Such third-party payors continue to aggressively challenge the prices charged for healthcare products and services. Additionally, federal and state governments have prioritized the containment of healthcare costs, and drug prices have been targeted in this effort. If these organizations and third-party payors do not consider our products to be cost-effective, they may not reimburse providers of our products, or the level of reimbursement may not be sufficient to allow us to sell our products on a profitable basis.



Although we have potential products that appear to be promising at early stages of development and in pre clinical trials, none of our potential products may reach the commercial market for a number of reasons.


Successful research and development of pharmaceutical products is high risk. Most products and development candidates fail to reach the market. Our success depends on the discovery of new drugs or devices that we can commercialize. It is possible that our potential products may never reach the market for a number of reasons. They may be found ineffective or may cause harmful side-effects during pre-clinical testing or clinical trials or fail to receive necessary regulatory approvals. We may find that certain products cannot be manufactured on a commercial scale basis and, therefore, they may not be economical to produce. Our products could also fail to achieve market acceptance or be precluded from commercialization by proprietary rights of third parties. We have a number of product candidates in various stages of development but do not expect the majority of them to be commercially available for a number of years, if at all.


If our competitors succeed in developing products and technologies that are more effective than our own, or if scientific developments change our understanding of the potential scope and utility of our products, then our products and technologies may be rendered less competitive.


We will face significant competition from industry participants that are pursuing similar products and technologies that we are pursuing and are developing pharmaceutical products that are competitive with our planned products and potential products. Nearly all of our industry competitors have greater capital resources, larger overall research and development staffs and facilities, and a longer history in drug discovery and development, obtaining regulatory approval and pharmaceutical product manufacturing and marketing than we do. With these additional resources, our competitors may be able to respond to the rapid and significant technological changes in the biotechnology and pharmaceutical industries faster than we can. Our future success will depend in large part on our ability to maintain a competitive position with respect to these technologies. Rapid technological development, as well as new scientific developments, may result in our compounds, products or processes becoming obsolete before we can recover any of the expenses incurred to develop them. For example, changes in our understanding of the appropriate population of patients who should be treated with a targeted therapy like we are developing may limit the product's market potential if it is subsequently demonstrated that only certain subsets of patients should be treated with the targeted therapy.




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Our reliance on third parties, such as clinical research organizations, may result in delays in completing, or a failure to complete, clinical trials if they fail to perform under our agreements with them.


In the course of product development, we may engage clinical research organizations to conduct and manage clinical studies and to assist us in guiding our products through the FDA review and approval process. If we engage clinical research organizations to help us obtain market approval for our drug candidates, many important aspects of this process have been and will be out of our direct control. If the clinical research organizations fail to perform their obligations under our agreements with them or fail to perform clinical trials in a satisfactory manner, we may face delays in completing our clinical trials, as well as commercialization of one or more drug candidates. Furthermore, any loss or delay in obtaining contracts with such entities may also delay the completion of our clinical trials and the market approval of drug candidates.


If the manufacturers upon whom we rely fail to produce our product candidates in the volumes that we require on a timely basis, or to comply with stringent regulations applicable to pharmaceutical drug manufacturers, we may face delays in the development and commercialization of, or be unable to meet demand for, our products and may lose potential revenues.


We do not manufacture any of our product candidates, and we do not currently plan to develop any capacity to do so. To date, we have only manufactured product in small batches at CSMC. We do not yet have agreements established regarding commercial supply of any product candidates. There is no assurance that we will be successful in negotiating an agreement on commercially reasonable terms. There is no assurance that our commercialization partner will approve of our manufacturer.  Any problems or delays we experience in preparing for commercial-scale manufacturing of any product candidate may impair our ability to manufacture commercial quantities, which would adversely affect our business. For example, our manufacturers will need to produce specific batches of our product candidates to demonstrate acceptable stability under various conditions and for commercially viable lengths of time. Furthermore, if our commercial manufacturers fail to deliver the required commercial quantities of bulk drug substance or finished product on a timely basis and at commercially reasonable prices, we would likely be unable to meet demand for our products and we would lose potential revenues.


The manufacture of pharmaceutical products requires significant expertise and capital investment, including the development of advanced manufacturing techniques and process controls. Manufacturers of pharmaceutical products often encounter difficulties in production, particularly in scaling up initial production. These problems include difficulties with production costs and yields, quality control, including stability of the product candidate and quality assurance testing, shortages of qualified personnel, as well as compliance with strictly enforced federal, state and foreign regulations. Our manufacturers may not perform as agreed. If our manufacturers were to encounter any of these difficulties, our ability to provide product to commercialization partners or product candidates to patients in our clinical trials would be jeopardized.  In addition, all manufacturers of our product candidates must comply with cGMP requirements enforced by the FDA through its facilities inspection program. These requirements include quality control, quality assurance and the maintenance of records and documentation. Manufacturers of our product candidates may be unable to comply with these cGMP requirements and with other FDA, state and foreign regulatory requirements. We have little control over our manufacturers’ compliance with these regulations and standards. A failure to comply with these requirements may result in fines and civil penalties, suspension of production, suspension or delay in product approval, product seizure or recall, or withdrawal of product approval. If the safety of any quantities supplied is compromised due to our manufacturers’ failure to adhere to applicable laws or for other reasons, we may not be able to obtain regulatory approval for or successfully commercialize our product candidates.


The use of any of our potential products in clinical trials and the sale of any approved products exposes us to liability claims.


The nature of our business exposes us to potential liability risks inherent in the testing, manufacturing and marketing of drug candidates and products. If any of our drug candidates in clinical trials or our marketed products harm people or allegedly harm people, we may be subject to costly and damaging product liability claims. A number of patients who participate in trials are already critically ill when they enter a trial. The waivers we obtain may not be enforceable and may not protect us from liability or the costs of product liability litigation. Although we intend to obtain product liability insurance that we believe is adequate, we are subject to the risk that our insurance will not be sufficient to cover claims. There is also a risk that adequate insurance coverage will not be available in the future on commercially reasonable terms, if at all. The successful assertion of an uninsured product liability or other claim against us could cause us to incur significant expenses to pay such a claim, could adversely affect our product development and could cause a decline in our product revenues. Even a successfully



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defended product liability claim could cause us to incur significant expenses to defend such a claim, could adversely affect our product development and could cause a decline in our product revenues.


If other companies claim that we infringe on their intellectual property rights, we may be subject to costly and time-consuming litigation and delays in product introduction.


Our processes and potential products may conflict with patents that have been or may be granted to competitors, academic institutions or others. As the biotechnology and pharmaceutical industries expand and more patents are filed and issued, the risk increases that our product candidates may give rise to a declaration of interference by the U.S. Patent and Trademark Office, to administrative proceedings in foreign patent offices or to claims of patent infringement by other companies, institutions or individuals. These entities or persons could bring legal proceedings against us seeking substantial damages or seeking to enjoin us from testing, manufacturing or marketing our products. If any of these actions were successful, we may also be required to cease the infringing activity or obtain the requisite licenses or rights to use the technology that may not be available to us on acceptable terms, if at all. Any litigation, regardless of the outcome, could be extremely costly to us.


Because it is difficult and costly to protect our proprietary rights, we may not be able to ensure their protection.


Our commercial success will depend in part on maintaining patent protection and trade secret protection for our products, as well as successfully defending these patents against third-party challenges. We will only be able to protect our technologies from unauthorized use by third parties to the extent that valid and enforceable patents or trade secrets cover them.


The patent positions of pharmaceutical and biotechnology companies can be highly uncertain and involve complex legal and factual questions for which important legal principles remain unresolved. No consistent policy regarding the breadth of claims allowed in pharmaceutical or biotechnology patents has emerged to date in the United States. The patent situation outside the United States is even more uncertain. Changes in either the patent laws or in interpretations of patent laws in the United States and other countries may diminish the value of our intellectual property. Accordingly, we cannot predict the breadth of claims that may be allowed or enforced in our patents or in third-party patents.


The degree of future protection for our proprietary rights is uncertain, because legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep our competitive advantage. For example: our licensors might not have been the first to make the inventions covered by each of our pending patent applications and issued patents; our licensors might not have been the first to file patent applications for these inventions; others may independently develop similar or alternative technologies or duplicate any of our product candidates or technologies; it is possible that none of the pending patent applications licensed to us will result in issued patents; the issued patents covering our product candidates may not provide a basis for commercially viable active products, may not provide us with any competitive advantages, or may be challenged by third parties; we may not develop additional proprietary technologies that are patentable; or patents of others may have an adverse effect on our business.


In the event that a third party has also filed a U.S. patent application relating to our product candidates or a similar invention, we may have to participate in interference proceedings declared by the U.S. Patent and Trademark Office to determine priority of invention in the United States. The costs of these proceedings could be substantial and it is possible that our efforts would be unsuccessful, resulting in a material adverse effect on our U.S. patent position. It is also possible we may not have the financial resources to pursue infringement actions on a timely basis if at all. Furthermore, we may not have identified all U.S. and foreign patents or published applications that affect our business either by blocking our ability to commercialize our drugs or by covering similar technologies that affect our drug market.


In addition, some countries, including many in Europe, do not grant patent claims directed to methods of treating humans, and in these countries patent protection may not be available at all to protect our drug candidates. Even if patents issue, we cannot guarantee that the claims of those patents will be valid and enforceable or provide us with any significant protection against competitive products, or otherwise be commercially valuable to us.


We may also rely on trade secrets to protect our technology, particularly where we do not believe patent protection is appropriate or obtainable. However, trade secrets are difficult to protect. While we use reasonable efforts to protect our trade secrets, our licensors, employees, consultants, contractors, outside scientific collaborators and other advisors may unintentionally or willfully disclose our information to competitors. Enforcing a claim that a third party illegally obtained and is using our trade secrets is expensive and time consuming, and the outcome is unpredictable. In addition, courts



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outside the United States are sometimes less willing to protect trade secrets. Moreover, our competitors may independently develop equivalent knowledge, methods and know-how.


If our licensors or we fail to obtain or maintain patent protection or trade secret protection for our products, third parties could use our proprietary information, which could impair our ability to compete in the market and adversely affect our ability to generate revenues and achieve profitability.


If we are sued for infringing intellectual property rights of third parties, it will be costly and time consuming, and an unfavorable outcome in any litigation would harm our business.


Our ability to develop, manufacture, market and sell our products depends upon our ability to avoid infringing the proprietary rights of third parties. There is a substantial amount of litigation involving patent and other intellectual property rights in the biotechnology and biopharmaceutical industries generally. If a third party claims that we infringe on their products or technology, we could face a number of issues, including: infringement and other intellectual property claims which, with or without merit, can be expensive and time consuming to litigate and can divert management’s attention from our core business; substantial damages for past infringement which we may have to pay if a court decides that our product infringes on a competitor’s patent; a court prohibiting us from selling or licensing our product unless the patent holder licenses the patent to us, which it is not required to do; if a license is available from a patent holder, we may have to pay substantial royalties or grant cross licenses to our patents; and re-designing our processes so they do not infringe, which may not be possible or could require substantial funds and time.


 



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Risks Related to Our Stock


There currently exists no public trading market for the Arrogene shares; and should a public trading market develop in the future, or which there can be no assurance, such trading will likely be subject to the “penny stock” rules.


Arrogene common stock is currently not quoted on the OTC Electronic Bulletin Board, a NASD sponsored and operated quotation system for equity securities, or OTCQB or OTC Pink electronic quotation systems run by OTC Markets Group Inc. Should a public trading market for the shares develop in the future, of which there can be no assurance, the shares will likely be quoted on the Bulletin Board, OTCQB or OTC Pink Sheets.  These are more limited trading markets than the Nasdaq Capital Market, and timely, accurate quotations of the price of our common stock may not always be available.  You may expect trading volume to be low in such a market.  Consequently, the activity of only a few shares may affect the market and may result in wide swings in price and in volume.


Arrogene common stock will be subject to the requirements of Rule 15g.9, promulgated under the Securities Exchange Act as long as the price of our common stock is below $5.00 per share.  Under such rule, broker-dealers who recommend low-priced securities to persons other than established customers and accredited investors must satisfy special sales practice requirements, including a requirement that they make an individualized written suitability determination for the purchaser and receive the purchaser's consent prior to the transaction.  The Securities Enforcement Remedies and Penny Stock Reform Act of 1990 also requires additional disclosure in connection with any trades involving a stock defined as a penny stock.  Generally, a penny stock is defined as any equity security not traded on an exchange or quoted on Nasdaq that has a market price of less than $5.00 per share.  The penny stock rules require a broker-dealer to deliver a standardized risk disclosure document prepared by the SEC, to provide the customer with additional information including current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, monthly account statements showing the market value of each penny stock held in the customer's account, and to make a special written determination that the penny stock is a suitable investment for the customer and receive the customer’s written agreement to the transaction. The required penny stock disclosures include the delivery, prior to any transaction, of a disclosure schedule explaining the penny stock market and the risks associated with it.  Such requirements could severely limit the market liquidity of the securities and the ability of purchasers to sell their securities in the secondary market.


Over-the-counter stocks are subject to risks of high volatility and price fluctuation.


Arrogene’s common stock is currently not traded or listed on any market, and it is not eligible to have its shares listed on any stock exchange or on the NASDAQ Capital Market.  As a result, the trading market for our common stock, if any, will be on the over-the-counter market. The OTC market for securities has experienced extreme price and volume fluctuations during certain periods.  These broad market fluctuations and other factors, such as new product developments and trends in our company's industry and the investment markets generally, as well as economic conditions and quarterly variations in our results of operations, may adversely affect the market price of our common stock and make it more difficult for investors in this offering to sell their shares.


Trading in Arrogene securities will likely be conducted on an electronic bulletin board established for securities that do not meet NASDAQ listing requirements. As a result, investors will find it substantially more difficult to dispose of our securities. Investors may also find it difficult to obtain accurate information and quotations as to the price of our common stock.  


Arrogene’s stock price may be volatile and as a result, investors could lose all or part of their investment.  The value of an investment could decline due to the impact of any of the following factors upon the market price of our common stock:


·

failure to meet sales and marketing goals or operating budget

·

failure to achieve development goals

·

failure to obtain regulatory approvals

·

concerns regarding insufficient financial resources

·

inability to create an active trading market for our common stock

·

decline in demand for our common stock

·

operating results failing to meet the expectations of securities analysts or investors in any quarter



19



·

downward revisions in securities analysts' estimates or changes in general market conditions

·

investor perception of our company's industry or prospects

·

general economic trends


In addition, stock markets have experienced extreme price and volume fluctuations and the market prices of securities have been highly volatile.  These fluctuations are often unrelated to operating performance and may adversely affect the market price of our common stock.


There can be no assurance that we will be able to successfully complete a secondary public offering that will allow our shares to be listed and traded on a national exchange or Nasdaq Capital Market.


While we would like to undertake a public offering that would qualify us for listing and trading on a national exchange (eg. NYSE MKT, LLC, formerly NYSE Amex) or Nasdaq Capital Market, there can be no assurance that market conditions or our future performance will support such an effort.  Numerous factors, including market liquidity and demand for our stock, our ability to identify one or more underwriters willing to undertake such an offering, and general economic conditions, could adversely affect this effort.   If we are unable to complete a public offering, trading in our stock, if any, will continue on the volatile and illiquid over-the-counter market.  In addition, we may be required to curtail or delay our efforts to commercialize our technology and may have difficulty in meeting some of the financial milestones required under the the License.


Future issuances of our Common Stock could dilute current shareholders and adversely affect the market if it develops.


We have the authority to issue up to 100,000,000 shares of common stock and 10,000,000 shares of preferred stock and to issue options and warrants to purchase shares of our common stock, without shareholder approval.  These future issuances could be at values substantially below the price paid for our common stock by existing shareholders, which would result in significant dilution to those shareholders.  In addition, we could issue large blocks of our common stock to fend off unwanted tender offers or hostile takeovers without further shareholder approval, which would not only result in further dilution to investors in this offering but could also depress the market value of our common stock, if a public trading market develops.


We may issue preferred stock that would have rights that are preferential to the rights of the common stock that could discourage potentially beneficial transactions to our Common Stockholders.


An issuance of additional shares of preferred stock could result in a class of outstanding securities that would have preferences with respect to voting rights and dividends and in liquidation over our common stock and could, upon conversion or otherwise, have all of the rights of our common stock.  Our Board of Directors' authority to issue preferred stock could discourage potential takeover attempts or could delay or prevent a change in control through merger, tender offer, proxy contest or otherwise by making these attempts more difficult or costly to achieve.  The issuance of preferred stock could impair the voting, dividend and liquidation rights of common stockholders without their approval.


We do not expect to pay cash dividends in the foreseeable future.  Any return on investment may be limited to the value of our stock.


We have never paid any cash dividends on any shares of our capital stock, and we do not anticipate that we will pay any dividends in the foreseeable future.  Our current business plan is to retain any future earnings to finance the expansion of our business.  Any future determination to pay cash dividends will be at the discretion of our Board of Directors, and will be dependent upon our consolidated financial condition, results of operations, capital requirements and other factors as our board of directors may deem relevant at that time.  If we do not pay cash dividends, our stock may be less valuable because a return on your investment will only occur if our stock price appreciates.


If the Company were to dissolve or wind-up, holders of our Common Stock may not receive a liquidation distribution.  


If we were to wind-up or dissolve the Company and liquidate and distribute our assets, our shareholders would share ratably in our assets only after we satisfy any amounts we would owe to our creditors.  If our liquidation or dissolution were attributable to our inability to profitably operate our business, then it is likely that we would have material liabilities at the time of liquidation or dissolution.  Accordingly, we cannot give you any assurance that sufficient assets will



20



remain available after the payment of our creditors to enable you to receive any liquidation distribution with respect to any shares you may hold.


If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud. As a result, current and potential shareholders could lose confidence in our financial reporting, which would harm our business and the trading price of our stock, should a public market develop in the future.

 

Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. If we cannot provide financial reports or prevent fraud, our business reputation and operating results could be harmed. Inferior internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our stock.



Item 1B.  Unresolved Staff Comments


None.


Item 2. Description of Property


The Company leases executive office space at 2500 Broadway, Building F, Suite F-125, Santa Monica, California pursuant to a lease with a monthly payment of $3,642 through February 28, 2014. We believe that this office space will be sufficient for our anticipated needs for the foreseeable future. The Company currently has no policy with respect to investments or interests in real estate, real estate mortgages or securities of, or interests in, persons primarily engaged in real estate activities.


Item 3. Legal Proceedings


There are presently no material pending legal proceedings to which the Company, any of its subsidiaries, any executive officer, any owner of record or beneficially of more than five percent of any class of voting securities is a party or as to which any of its property is subject, and no such proceedings are known to the Company to be threatened or contemplated against it.

 

Item 4. Mine Safety Disclosures


Not applicable



21




PART II


Item 5. Market for Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities.


Common Stock


Our Certificate of Incorporation authorizes the issuance of up to 100,000,000 shares of common stock, par value $.0001 per share (the “Common Stock”).  The Common Stock is not listed on a publicly-traded market.  As of February 28, 2014, there were 117 holders of record of 21,395,860 shares of the Company’s Common Stock.


Preferred Stock


Our Certificate of Incorporation authorizes the issuance of up to 10,000,000 shares of preferred stock, par value $.0001 per share (the “Preferred Stock”).   Our Board of Directors have authorized the issuance of 3,000,000 shares of Series A Preferred Stock. The Company does not have any Preferred Stock issued or outstanding.

Dividend Policy


         

The Company has not declared or paid any cash dividends on its Common Stock and does not intend to declare or pay any cash dividend in the foreseeable future. The payment of dividends, if any, is within the discretion of the Board of Directors and will depend on the Company’s earnings, if any, its capital requirements and financial condition and such other factors as the Board of Directors may consider.


Securities Authorized for Issuance under Equity Compensation Plans


In March 2012, our Board of Directors and a majority of shareholders approved the 2012 Equity Incentive Plan (the “2012 Equity Plan”).  There are 1,500,000 shares of Common Stock reserved for issuance under the 2012 Equity Plan.  As of October 31, 2013, no shares had been awarded pursuant to the plan.

The following table illustrates the number of shares remaining available for issuance under the Plan.


Equity Compensation Plan Information


Plan Category

Number of securities to be issued upon exercise of outstanding options, warrants and rights
(a)

Weighted-average exercise price of outstanding options, warrants and rights
(b)

Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
(c)

Equity compensation plans approved by security holders

0

NA

1,500,000

Equity compensation plans not approved by security holders

0

NA

0

TOTAL

0

NA

1,500,000



Recent Sales of Unregistered Securities

         

None.




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Issuer Purchases of Equity Securities


None.

 

Item 6.  Selected Financial Data.


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


Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operation


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


Overview


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


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


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




23



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


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


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


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


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

Under conditions of advanced cancer, continuous treatment could be necessary until the tumor regresses. In clinics, however, in many cases the chemotherapy must be discontinued due to life threatening side effects such as liver, kidney, cardio- or neurotoxicity. The significant side effects, in particular thrombocytopenia and leukopenia, induction of

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

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

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

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

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

J Control Release 2013



24



thrombosis and suppression of immune system (immunotoxicity) are the major indications for treatment interruption. This situation with prolonged treatment was tested by conducting 12 consecutive nanodrug systemic administrations against growing TNBC over the period of 8 weeks. As a result, the tumor growth was significantly inhibited, and the treatment was well tolerated without noticeable abnormalities in blood cell counts, multiple biochemistry parameters, and with no immunostimulatory or immunosuppressive response.  Thus, PMLA-based nanodrugs of the PolycefinTM family passed multiple toxicity and efficacy tests in vitro and in vivo on preclinical level and may prove to be efficacious for the treatment of cancer patients in the future (Ljubimova JY, et, al (2013). J Drug Target, 21:956-967).

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


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


Our first therapeutic drug candidate is AG 101 which will target certain brain cancer.  We need to commission final Phase 0 toxicology studies at an external laboratory for AG101 drug candidate preparation of an IND for submission to the FDA to receive clearance to begin human clinical trial work. We then plan to commence a Phase I clinical trial.  However, these next steps will cost a minimum of $1,500,000 which will require additional funding.,


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


Over the following twelve months we are targeting a number of objectives and milestones that we plan to pursue utilizing cash on hand and proceeds from capital raising efforts. We may or may not be successful in consummating such capital raises and this remains a significant risk to our ability to meet our objectives. These objectives and milestones are the commissioning of final Phase 0 toxicology studies for our first Polycefin drug candidate; prepare an IND for submission to the FDA to receive clearance to begin human clinical trial work; and begin human clinical studies once such IND clearance can be obtained. There are various factors that can influence the timing of starting and completing these objectives and milestones as well as the total costs.  Such factors include, but are not limited to, the pace and success of scientific developments, the availability of financial and human resources, competing demands of our scientific team, and changes in regulatory requirements.  While we had budgeted approximately $1.4 million through December 2013 towards these efforts, given the delays in raising additional capital, we will not be able to execute on our development plan within the time frames originally contemplated.  Due to the inherent uncertainty and variability related to these activities, we cannot accurately predict start dates, completion dates and total costs.  We will also need to raise additional capital in order to complete our planned activities.


In addition, we are expanding our production of the key ingredients for the production of Polycefin, according to a proprietary production and purification process, in preparation to support both pre-clinical and clinical phases of upcoming clinical trials. We are also taking steps to negotiate outside supplies agreements to create industrial partnerships relating to the production under license of these compounds.


General Factors


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




25




Critical Accounting Policies and Estimates


The discussion and analysis of our financial condition and results of operations is based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.  The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities.  On an on-going basis, we evaluate our estimates including those related to valuing our share-based compensation and contingencies.  We base our estimates on historical experience and on other assumptions that we believe to be reasonable under the circumstances, the results of which form our basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions.


We cannot predict what future laws and regulations might be passed that could have a material effect on our results of operations.  We assess the impact of significant changes in laws and regulations on a regular basis and update the assumptions and estimates used to prepare our financial statements when we deem it necessary.

Revenue Recognition

While we have not generated revenue to date, we will recognize revenue when there is persuasive evidence that an arrangement exists, when title has passed, the price is fixed or determinable, and we are reasonably assured of collecting the resulting receivable.  Revenue arrangements that include multiple deliverables are divided into separate units of accounting if the deliverables meet certain criteria.  If applicable, we will record product revenues net of revenue reserves such as sales returns and allowances.   This accounting policy for revenue recognition may have a substantial impact on our reported results and relies on certain estimates that can require difficult, subjective and complex judgments on the part of management.


Share-Based Payments

We account for share-based payment costs at fair value on the date of grant and recognition of compensation over the service period for awards expected to vest. For stock options that may be granted in the future, the estimation of stock awards that will ultimately vest requires judgment, and to the extent actual results differ from our estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised. We will consider various factors when estimating expected forfeitures, including historical experience. Actual results may differ substantially from these estimates.


We determine the fair value of warrants and stock options using the Black-Scholes valuation model, which considers the exercise price relative to the market value of the underlying stock, the expected stock price volatility, the risk-free interest rate and the dividend yield, and the estimated period of time option grants will be outstanding before they are ultimately exercised.  Significant management judgment is required in making certain of these assumptions.


Fair Value Measurements


We measure our financial assets and liabilities at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., exit price) in an orderly transaction between market participants at the measurement date. Additionally, we are required to provide disclosure and categorize assets and liabilities measured at fair value into one of three different levels depending on the assumptions (i.e., inputs) used in the valuation. Level 1 provides the most reliable measure of fair value while Level 3 generally requires significant management judgment. Financial assets and liabilities are classified in their entirety based on the lowest level of input significant to the fair value measurement. The fair value hierarchy is defined as follows:


Level 1—Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities.


Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.


Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.




26




Recently Issued Accounting Pronouncements


In July 2012, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2012-02, Testing Indefinite-Lived Intangible Assets for Impairment (ASU 2012-02), which amended the guidance in ASU 2011-08 to simplify the testing of indefinite-lived intangible assets other than goodwill for impairment.  ASU 2012-02 becomes effective for annual and interim impairment tests performed for fiscal years beginning on or after September 15, 2012 and earlier adoption is permitted.  We adopted ASU 2012-02 effective November 1, 2012.  The adoption of ASU 2012-02 is not expected to have any impact on our consolidated financial position, results of operations or cash flows.


Liquidity and Capital Resources


As of October 31, 2013, the Company’s cash balance was $13,822 compared to $539,727 at October 31, 2012.


The following is a summary of the Company's cash flows provided by (used in) operating, investing, and financing activities for the years ended October 31, 2013 and October 31, 2012 and for the cumulative period from August 7, 2007 (Inception) to October 31, 2013.

      

                   

 


Fiscal Year

Ended

October 31, 2013

Fiscal Year

Ended

October 31, 2012

For the Cumulative

Period from

August 7, 2007 (Inception) to

October 31, 2013

Net Cash (Used in) Operating Activities

 $     (753,550)

$           (1,136,831)

$          (2,513,079)

Net Cash Provided by Investing Activities

                  386,780

                 384,991

Net Cash Provided by Financing Activities

           227,645

             1,287,684

            2,141,910

Net Increase (Decrease) in Cash and Cash Equivalents

             (525,905)

              537,633

                  13,822


Operating Activities


During the year ended October 31, 2013, $753,550 of cash was used in operating activities which primarily represents cash operating expenses to principally support continued pre-clinical development, drug synthesis, and business development  and administrative activities.


Investing Activities


During the year ended October 31, 2013, there were no cash flows from investing activties.  As of October 31, 2013, we had no material commitments for capital expenditures.


Financing Activities


During the year ended October 31, 2013, we received $227,645 in net proceeds from the sale of 260,000 Units.


Sources of Capital


As of October 31, 2013, we had $13,822 of cash on hand.  Subsequent to yearend, the Company sold an additional 45,000 Units, generating net proceeds of $44,955.  Upon the closing of this last sale of Units the Company terminated the Unit offering.  On February 28, 2014, the Company authorized the issuance of up to $700,000 in unsecured Convertible Notes (the “Bridge Notes”).  The Bridge Notes are due and payable one year after the close of the offering (the “Maturity Date”), bear interest at 10% per annum, and are convertible into shares of our common stock at a conversion price of either (i) 50% of the price per share of our common stock as sold through a qualified initial public offering as defined in the terms of the Bridge Notes (“Qualified IPO”), or (ii) in the event a Qualified IPO has not taken place prior to the Maturity Date but there has otherwise developed a public trading market for the Company’s common stock, then the conversion price shall be 50% of the 30 day Volume Weighted Average Price (“VWAP”) per share as quoted on the over-the-counter market, or (iii) in the event a public trading market has not been established for our common stock prior to the Maturity Date, then the conversion price shall be $1.00 per share.   Accrued and unpaid interest on the Bridge Notes will be payable in shares of



27



common stock at the conversion price on the earlier of (i) the date of conversion of the Bridge Notes or (ii) the Maturity Date. Further, for every $1.00 of Bridge Note principal that an investor elects to convert into shares of common stock, the investor will receive one warrant.  Each warrant shall be exercisable into shares of common stock at a price equal to the conversion price of the Bridge Notes.  If the investor elects not to convert their Bridge Notes prior to the Maturity Date, then the note holder will receive one warrant for every $2.00 in Bridge Note principal.


Requirements of Capital


In addition to the costs associated with operating our business in accordance with our plan, and complying with public company reporting requirements, the License requires that we expend $1,000,000 during the calendar year ending December 31, 2014, towards the development of one or more products using the licensed technology.  


Management’s Outlook


We have relied primarily upon proceeds from the sale of the Units and convertible notes (the “Convertible Notes”) to fund our operations.  Through October 31, 2013, the Company had sold 1,770,250 Units in the Private Placement receiving net proceeds of $1,516,629.  Management believes that existing cash on hand, combined with 45,000 Units sold subsequent to year end, will be sufficient to fund the Company’s planned activities through February 2014.  This assumes that we continue to defer payment of certain liabilities to our officers and CSMC.  We have not paid management for their services since August 2013 nor have we paid CSMC for services provided since February 2013.  Additionally, certain key professionals such as legal counsel have also had payments deferred as well.  While these parties have continued to work with the Company despite this lack of payment, there is no assurance they will continue to do so, and the loss of a key management member, or the loss of CSMC as a research partner, could have a material adverse effect on the Company’s business prospects. The Company is currently attempting to raise additional capital, and to that end, on February 28, 2014, sold $170,000 in Bridge Notes, receiving net proceeds of $147,765 after payment of offering costs.  Management believes that the funds received from the Bridge Notes will be sufficient to fund the Company’s planned activities through at least the end of June 2014 using the same cash conservation principles described above.  There is no assurance that the Company will be successful in selling additional Bridge Notes or raising additional capital of any kind on acceptable terms, or be successful in raising additional capital under any terms.


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


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


RESULTS OF OPERATIONS


Licensing Fees


We recorded $480,430 of licensing fees for the year ended October 31, 2012 representing the fair value of 1,468,100 shares of common stock issued to CSMC as well as a $40,000 cash payment to satisfy certain conditions precedent to effectuating the License.  There were no similar transactions during the year ended October 31, 2013.


Research and Development


During the year ended October 31, 2013, research and development expenses increased by $353,835 or 359% compared to the prior year.  The increase in research and development expense is primarily due to activities under the research agreement with CSMC supporting pre-clinical development of Polycefin and synthesis of drug candidates.




28




General and Administrative


General and administrative expense decreased by $33,822 or approximately 5% for the year ended October 31, 2013 compared to the prior year.  The decrease in expense was the net result of a decrease in legal expense partially offset by increased travel and office related expenses relating to our business development activities.


Loss from Operations


As a result of the factors described above, the loss from operations for the year ended October 31, 2013, decreased by $160,417 compared to the prior year period.


Other Expense


For the year ended October 31, 2012, we recorded other expense of $839 compared to $757,427 for the prior year. Expense for the year ended October 31, 2012 includes a charge taken for reducing the conversion price of the Convertible Notes which resulted in the issuance of 2,388,500 additional shares of common stock.


Net Loss


As a result of the factors described above, we recorded $1,156,485 of net loss for the year ended October 31, 2013 compared to a net loss of $2,073,490 in the prior year.


Off-Balance Sheet Arrangements


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


Contractual Obligations


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


Item 7A.  Quantitative and Qualitative Disclosures about Market Risk.


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


Item 8.  Financial Statements and Supplementary Data.


Audited financial statements begin on the following page of this report.



29





ARROGENE, INC.

(A Development Stage Company)



INDEX TO FINANCIAL STATEMENTS



Page  



Report of Independent Registered Public Accounting Firm

F-2


Financial Statements:


Consolidated Balance Sheets

F-3


Consolidated Statements of Operations

F-4


Consolidated Statement of Changes in Stockholders' Equity (Deficit)

F-5


Consolidated Statements of Cash Flows

F-6


Notes to Consolidated Financial Statements

F-7
































F-1







REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Board of Directors and Stockholders of Arrogene, Inc.


We have audited the accompanying consolidated balance sheets of Arrogene, Inc. (a Delaware development stage enterprise) and subsidiary (the “Company”) as of October 31, 2013 and 2012 and the related  consolidated statements of operations, stockholders’ equity (deficit) and cash flows for the years ended October 31, 2013, and 2012 and for the period from August 7, 2007 (inception) through October 31, 2013.  These consolidated financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.


We conducted our audits 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 consolidated 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 consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation.  We believe that our audits provide 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 Arrogene, Inc., and Subsidiary as of October 31, 2013 and 2012, and the results of their operations and their cash flows for the years ended October 31, 2013 and 2012, and for the period from August 7, 2007 (inception) through October 31, 2013 in conformity with accounting principles generally accepted in the United States of America.


The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.  As discussed in Note 2 to the consolidated financial statements, the Company has not generated cash flows from operations since inception, has incurred continuing losses, has a negative working capital balance and has accumulated a deficit during the development stage at October 31, 2013.  These factors raise substantial doubt about the Company’s ability to continue as a going concern.  Management’s plans in regard to these matters are also described in Note 2.  The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.



Rose, Snyder & Jacobs LLP

/s/ Rose, Snyder & Jacobs, LLP


Encino, California


March 17, 2014




F-2







ARROGENE, INC.

(a development stage enterprise)


CONSOLIDATED BALANCE SHEETS

AS OF OCTOBER 31, 2013 AND 2012


ASSETS

 

2013

 

2012

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

13,822

 

$

539,727

 

Prepaid expenses and deposit

 

13,709

 

13,020

 

Total current assets

 

27,531

 

552,747

 

 

 

 

 

 

 

Property and equipment, net of accumulated depreciation of $2,992 and $1,426 at October 31, 2013 and 2012, respectively

 

1,705

 

3,271

 

 

 

 

 

 

 

Total assets

 

$

29,236

 

$

556,018

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES:

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accrued compensation

 

$

 85,280

 

$

29,240

 

Accrued payable to CSMC

 

229,003

 

 

Accrued legal fees

 

50,518

 

7,754

 

Related party payables

 

39,000

 

10,000

 

Other accrued liabilities

 

77,850

 

32,599

 

Convertible notes

 

10,000

 

10,000

 

Total current liabilities

 

491,651

 

89,593

 

 

 

 

 

 

 

Total liabilities

 

491,651

 

89,593

 


COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

STOCKHOLDERS’ EQUITY (DEFICIT)

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

Common stock, $.0001 par value; 100,000,000 shares authorized; 21,350,860 and 21,090,860 shares, respectively, issued and outstanding

 

2,135

 

2,109

 

Additional paid-in capital

 

4,287,289

 

4,059,670

 

Deficit accumulated during the development stage

 

(4,751,839

)

(3,595,354

)

Total stockholders’ equity (deficit)

 

(462,415  

)

466,425

 

Total liabilities and stockholders’ equity (deficit)

 

$

29,236

 

$

556,018

 











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






F-3








ARROGENE, INC.


(a development stage enterprise)


  STATEMENTS OF OPERATIONS


FOR THE YEARS ENDED OCTOBER 31, 2013 AND 2012 AND THE PERIOD FROM AUGUST 7, 2007 (INCEPTION) THROUGH OCTOBER 31, 2013


 

 

2013

 

2012

 

Cumulative
From Inception
(August 7,
2007) Through October 31, 2013

 

 

 

 

 

 

 

 

 

REVENUE:

 

$

 

$

 

$

 

 

 

 

 

 

 

 

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

General and administrative

 

703,262  

 

737,084  

 

2,840,448

 

Licensing fees

 

 

480,430

 

480,430

 

Research and development

 

452,384

 

98,549

 

550,933

 

 

 

1,155,646

 

1,316,063

 

3,871,811

 

 

 

 

 

 

 

 

 

Loss from operations

 

(1,155,646

)

(1,316,063

)

( 3,871,811

)

 

 

 

 

 

 

 

 

OTHER EXPENSE:

 

 

 

 

 

 

 

Interest

 

(839

)

(757,427)   

 

(880,028

)

 

 

(839

)

(757,427)

 

(880,028

)

 

 

 

 

 

 

 

 

NET LOSS

 

$    ( 1,156,485

)

$  ( 2,073,490

)

$ (4,751,839

)

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE SHARES OUTSTANDING:

 

 

 

 

 

 

 

Basic and diluted

 

21,304,860

 

17,645,317

 

N/A

 

 

 

 

 

 

 

 

 

LOSS PER SHARE:

 

 

 

 

 

 

 

Basic and diluted

 

$

(0.05

)

$

(0.12

)

N/A

 


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





F-4







ARROGENE, INC.


CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)


FOR THE PERIOD FROM AUGUST 7, 2007 (INCEPTION) THROUGH OCTOBER 31, 2013


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred Stock

 

 

Common Stock

 

 

 

Deficit Accumulated during the Development

 

 

 

 

 

Shares

 

Amount

 

 

Shares

 

Amount

 

APIC

 

Stage

 

Total

 

INCEPTION, August 7, 2007

 

 

 

$            —

 

 

10,960,000

 

 

$       1,096

 

 

$            —

 

 

$                    —

 

 

$   1,096

 

     Net Loss

 

 

 

 

 

 

 

 

 

 

 

(1,215)

 

 

(1,215)

 

BALANCES, October 31, 2007

 

 

 

 

 

10,960,000

 

 

1,096

 

 

 

 

(1,215

)

 

(119)

 

     Net loss

 

 

 

 

 

 

 

 

 

 

 

(868)

 

 

(868)

 

BALANCES, October 31, 2008

 

 

 

 

 

10,960,000

 

 

1,096

 

 

 

 

(2,083)

 

 

(987)

 

     Net loss

 

 

 

 

 

 

 

 

 

 

 

(168,756)

 

 

(168,756)

 

BALANCES, October 31, 2009

 

 

 

 

 

10,960,000

 

 

1,096

 

 

 

 

(170,839)

 

 

(169,743)

 

     Issuance of common stock for License

 

 

 

 

 

31,900

 

 

3

 

 

 

 

 

 

3

 

     Fair value of warrants issued to placement agent

 

 

 

 

 

 

 

 

 

13,133

 

 

 

 

13,133

 

     Warrants issued for advisory services agreement

 

 

 

 

 

 

 

 

 

251,112

 

 

 

 

251,112

 

     Extinguishment of related party liability

 

 

 

 

 

 

 

 

 

100,000

 

 

 

 

100,000

 

     Net loss

 

 

 

 

 

 

 

 

 

 

 

(360,208)

 

 

(360,208)

 

BALANCES, October 31, 2010

 

 

 

 

 

10,991,900

 

 

1,099

 

 

364,245

 

 

(531,047)

 

 

(165,703)

 

     Fair value of warrants issued to placement agent

 

 

 

 

 

 

 

 

 

34,233

 

 

 

 

34,233

 

     Shares issued in satisfaction of accrued compensation

 

 

 

 

 

100,000

 

 

10

 

 

99,990

 

 

 

 

100,000

 

     Net loss

 

 

 

 

 

 

 

 

 

 

 

(990,817)

 

 

(990,817)

 

BALANCES, October 31, 2011

 

 

 

 

 

11,091,900

 

 

1,109

 

 

498,468

 

 

(1,521,864

)

 

(1,022,287)

 

Shares issued for licensing agreement

 

 

 

 

1,468,100

 

147

 

440,283

 

 

440,430

 

Reverse Merger with SRKP 16, Inc.

 

 

 

 

2,243,610

 

224

 

389,464

 

 

389,688

 

Sale of Units at $1.00 per Unit

 

 

 

 

1,510,250

 

151

 

1,288,833

 

 

1,288,984

 

Conversion of Convertible Notes into common stock

 

 

 

 

4,777,000

 

478

 

1,442,622

 

 

1,443,100

 

Net loss

 

 

 

 

 

 

 

(2,073,490

)

(2,073,490)

 

BALANCES, October 31, 2012

 

 

 

 

 

21,090,860

 

 

2,109

 

 

4,059,670

 

 

(3,595,354

)

 

466,425

 

     Sale of Units at $1.00 per Unit

 

 

 

 

 

260,000

 

 

26

 

 

227,619

 

 

 

 

227,645

 

     Net loss

 

 

 

 

 

 

 

 

 

 

 

(1,156,485)

 

 

(1,156,485)

 

BALANCES, October 31, 2013

 

 

 

 

 

21,350,860     

 

 

$       2,135

 

 

$4,287,289

 

 

$     (4,751,839)

 

 

$         (462,415)

 


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







F-5







ARROGENE, INC.

(a development stage enterprise)


STATEMENTS OF CASH FLOWS


FOR THE YEARS ENDED OCTOBER 31, 2013 AND 2012 AND THE PERIOD FROM

AUGUST 7, 2007 (INCEPTION) THROUGH OCTOBER 31, 2013


 

 

2013

 

2012

 


Cumulative

 From

Inception 

(August 7, 2007) Through October 31, 2013

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

Net loss

 

$

(1,156,485

)

$

(2,073,490

)

$

(4,751,839)

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

 

 

 

 

 

 

Non-cash charge for reduction in conversion price of Convertible Notes

 

 

726,550

 

726,550

Amortization of debt placement costs

 

 

 

121,517

Shares issued for License

 

 

440,430

 

440,430

Share-based payment expense

 

37,333

 

22,400

 

311,013

Depreciation expense

 

1,566

 

879

 

2,992

Increase in prepaids and deposit

 

(689

)

(2,996

)

(13,709)

Increase (decrease) in accrued liabilities

 

364,725

 

(250,604

649,967

Net cash used in operating activities

 

(753,550

)

(1,136,831

)

(2,513,079)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

   Cash acquired in Reverse Merger with SRKP 16, Inc.

 

 

389,688

 

389,688

   Capital expenditures

 

 

(2,908

)

(4,697)

        Net cash provided by investing activities

 

 

386,780

 

384,991

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

Proceeds received from Promissory Notes

 

 

80,000

 

80,000

Repayments of Promissory Notes

 

(80,000

)

(80,000)

Net proceeds from sales of Units

 

227,645

 

1,288,984

 

1,516,629

Net proceeds from sale of Convertible Notes

 

 

 

624,351

Proceeds from sale of Series A Preferred Stock

 

 

 

930

    Advances from related parties

 

 

 

1,300

    Repayment of related party advances

 

 

(1,300

)

(1,300)

Net cash provided by financing activities

 

227,645

 

1,287,684

 

2,141,910

 

 

 

 

 

 

 

Net increase (decrease) in cash

 

(525,905

)

537,633

 

13,822

Cash and cash equivalents at the beginning of year

 

539,727

 

2,094

 

Cash and cash equivalents at the end of year

 

$

13,822

 

$

539,727

 

$

13,822




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









F-6







ARROGENE, INC.

(a development stage enterprise)


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


OCTOBER 31, 2013 AND 2012


(1)

BUSINESS, OVERVIEW, BASIS OF PRESENTATION AND CONSOLIDATION


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


As a result of the Reverse Merger, the shareholders of ANI received 12,660,000 shares of Company common stock or approximately 86 % of the issued and outstanding common shares of the Company immediately after the transaction.  Further, ANI warrant holders received identical common stock purchase warrants in the Company.  Additionally, immediately after the Reverse Merger, the officers of ANI became the officers of the Company and the Company’s Board of Directors was changed to consist solely of former ANI officers and directors. For accounting purposes, the Reverse Merger has been treated as an acquisition of the Company by ANI (the accounting acquirer) and a recapitalization of ANI.  As a result, the financial statements for all periods presented and discussed herein are those of ANI.  Immediately prior to consummating the Reverse Merger, the Company sold 502,000 units (the “Units”), with each Unit consisting of  (i) one share of common stock, and (ii) two common stock purchase warrants (the “Unit Warrants”) that are exercisable for five years from the date of issuance in a private placement (the “Private Placement”).  One of the Unit Warrants is exercisable at $1.50 per share and the other is exercisable at $2.00 per share.  The Company received $404,688 in net proceeds from the sale of the Units after payment of commissions and other expenses associated with the offering, of which, $389,688 was acquired by ANI at the time of the Reverse Merger.  


The Company has an exclusive license (the “License”) to a family of related nano-biopolymers conjugated drugs collectively referred to as  “Polycefin™” as well as certain tumor bio-markers and related intellectual properties that are collectively expected to be capable of acting as a drug delivery and targeting platform (based on natural biopolymer, polymalic acid) for cancer therapy and diagnostics based on pre-clinical studies conducted at Cedars-Sinai Medical Center (“CSMC”).  Polycefin are designed to target cancer cells and deliver a variety of bound therapeutics to them.   In vivo pre-clinical studies have shown evidence that existing cancer drugs could have increased efficacy and reduced side effects when attached to the bioplatform.  We believe that Polycefin has the ability to harbor various drugs at the same time making it possibly a master delivery vehicle that can be customized for a particular tumor and potentially for an individual patient.  Additionally, in vivo testing has shown efficacy against more than one type of cancer (breast and brain) suggesting that Polycefin may have application to a wide range of cancer types, therapeutics and diagnostics.


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


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


Since its inception in August 2007, ANI’s principal activities have involved developing a business strategy, raising capital, identifying and licensing the Polycefin technology, development of the technology principally in pre-clinical activities, expanding intellectual property rights, and recruiting management, key staff, and board members.  For accounting purposes,



F-7







the Company is considered a development stage company in accordance with Accounting Standards Codification (“ASC”) 915.  


The accompanying consolidated financial statements include the accounts of Arrogene and its wholly owned subsidiary ANI.  All intercompany transactions have been eliminated in consolidation.


(2)  GOING CONCERN AND MANAGEMENT’S PLANS


The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. Since our inception in August 2007, we have not generated revenue, incurred cash and operating losses, and as of October 31, 2013, had a deficit accumulated during the development stage of $4,751,839.   Further, as of October 31, 2013, our cash balance was $13,822 and we had a working capital deficit of $464,120. These conditions raise substantial doubt about our ability to continue as a going concern.


We have relied primarily upon proceeds from the sale of the Units and convertible notes (the “Convertible Notes”) to fund our operations.  Through October 31, 2013, the Company had sold 1,770,250 Units in the Private Placement receiving net proceeds of $1,516,629.  Management believes that existing cash on hand, combined with 45,000 Units sold subsequent to year end, will be sufficient to fund the Company’s planned activities through February 2014.  This assumes that we continue to defer payment of certain liabilities to our officers and CSMC.  We have not paid management for their services since August 2013 nor have we paid CSMC for services provided since February 2013.  Additionally, certain key professionals such as legal counsel have also had payments deferred as well.  While these parties have continued to work with the Company despite this lack of payment, there is no assurance they will continue to do so, and the loss of a key management member, or the loss of CSMC as a research partner, could have a material adverse effect on the Company’s business prospects.  The Company is currently attempting to raise additional capital, and to this end, on February 28, 2014, the Company authorized the issuance of up to $700,000 in unsecured convertible notes (the “Bridge Notes”).  The Bridge Notes are due and payable one year after the close of the offering (the “Maturity Date”), bear interest at 10% per annum, and are convertible into shares of our common stock at a conversion price of either (i) 50% of the price per share of our common stock as sold through a qualified initial public offering as defined in the terms of the Bridge Notes (“Qualified IPO”), or (ii) in the event a Qualified IPO has not taken place prior to the Maturity Date but there has otherwise developed a public trading market for the Company’s common stock, then the conversion price shall be 50% of the 30 day Volume Weighted Average Price (“VWAP”) per share as quoted on the over-the-counter market, or (iii) in the event a public trading market has not been established for our common stock prior to the Maturity Date, then the conversion price shall be $1.00 per share.   Accrued and unpaid interest on the Bridge Notes will be payable in shares of common stock at the conversion price on the earlier of (i) the date of conversion of the Bridge Notes or (ii) the Maturity Date. Further, for every $1.00 of Bridge Note principal that an investor elects to convert into shares of common stock, the investor will receive one warrant.  Each warrant shall be exercisable into shares of common stock at a price equal to the conversion price of the Bridge Notes.  If the investor elects not to convert their Bridge Notes prior to the Maturity Date, then the note holder will receive one warrant for every $2.00 in Bridge Note principal.


On February 28, 2014, we sold $170,000 in Bridge Notes, receiving net proceeds of $147,765 after payment of offering costs.  Management believes that the funds received from the Bridge Notes will be sufficient to fund the Company’s planned activities through at least the end of June 2014 using the same cash conservation principles described above.   There is no assurance that the Company will be successful in selling additional Bridge Notes or raising additional capital of any kind on acceptable terms, or be successful in raising additional capital under any terms.


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


(3)

SIGNIFICANT ACCOUNTING POLICIES


Use of Estimates and Assumptions


The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and



F-8







liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported periods.  Actual results may differ from these estimates.


Cash and cash equivalents


We consider all investments with original maturities of three months or less to be cash equivalents.


Property and Equipment


Property and equipment is recorded at historical cost, and is comprised of computer equipment and software. Depreciation and amortization of property and equipment is provided in amounts sufficient to relate the cost of the related assets to operations over their estimated service lives using the straight-line method.  The useful lives of the assets are three years.  Depreciation and amortization expense amounted to $1,566, $879, and $2,992 for the years ended October 31, 2013 and 2012 and for the period from August 7, 2007 (Inception) through October 31, 2013, respectively.


Revenue Recognition


While we have not generated revenue to date, we will recognize revenue when there is persuasive evidence that an arrangement exists, when title has passed, the price is fixed or determinable, and we are reasonably assured of collecting the resulting receivable.  Revenue arrangements that include multiple deliverables are divided into separate units of accounting if the deliverables meet certain criteria.  If applicable, we will record product revenues net of revenue reserves such as sales returns and allowances.   This accounting policy for revenue recognition may have a substantial impact on our reported results and relies on certain estimates that can require difficult, subjective and complex judgments on the part of management.


Research and Development Costs


Research and development costs are expensed as incurred.


Income Taxes


We account for income taxes by recognizing deferred tax assets and liabilities for the expected future income tax consequences of transactions that have been included in the financial statements or tax returns.  Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.  Deferred tax assets then may be reduced by a valuation allowance for amounts that do not satisfy specified realization criteria.


Accounting rules also prescribe 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.  We are required to recognize a liability in the financial statements for the impact of a tax position if that position is more likely than not of not being sustained on audit, based on the technical merits of the position.  We currently do not have any tax positions that meet this threshold.


We currently have a full valuation allowance against our net deferred tax assets and have not recognized any benefits from tax positions in earnings.  We will recognize potential interest and penalties related to income tax positions as a component of the provision for income taxes on the statements of operations in any future periods in which we must record a liability.  Interest and penalties totaled $0 and $0 for the years ended October 31, 2013 and 2012, respectively, and $449 for the period from August 7, 2007 (date of inception) through October 31, 2013.  We file income tax returns in the U.S. federal jurisdiction and with the State of California.  We have not filed income tax returns for the year ended October 31, 2012, however, as no taxes are due, we do not believe these non filings will have a material impact on our financial statements.   We are still subject to income tax examinations by the State of California and the IRS for all tax years since the date of inception.  Since we have not recorded a liability at October 31, 2013, there is no impact to our effective tax rate.  We do not believe there will be any material changes in our unrecognized tax positions over the next 12 months.  Our review of prior year tax positions using the criteria and provisions presented by the FASB did not result in a material impact on the Company’s financial position or results of operations.




F-9








Share-Based Payments


We account for share-based payment costs at fair value on the date of grant and recognition of compensation over the service period for awards expected to vest. For stock options that may be granted in the future, the estimation of stock awards that will ultimately vest requires judgment, and to the extent actual results differ from our estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised. We will consider various factors when estimating expected forfeitures, including historical experience. Actual results may differ substantially from these estimates.


We determine the fair value of warrants and stock options using the Black-Scholes valuation model, which considers the exercise price relative to the market value of the underlying stock, the expected stock price volatility, the risk-free interest rate and the dividend yield, and the estimated period of time option grants will be outstanding before they are ultimately exercised.  Significant management judgment is required in making certain of these assumptions.


Earnings (Loss) Per Share


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



Shares of common stock from the exercise of warrants and convertible securities excluded from the calculation of diluted loss per share are as follows:


 

 

Years ended October 31,

 

 

 

2013

 

2012

 

 

 

 

 

 

 

Convertible Notes

 

66,667

 

66,667

 

Warrants

 

6,308,358

 

5,710,358

 



Segment Information


We operate in one business segment.  The determination of reportable segments is based on the way management organizes financial information for making operating decisions and assessing performances.  All of our operations are located in the United States.


Concentration of Credit Risk


We maintain a checking account with Wells Fargo Bank (“Wells”).  The account is insured by the Federal Deposit Insurance Corporation (“FDIC”) for up to $250,000.  At times our cash balance may exceed the FDIC insurance coverage.  Management believes that the Company is not exposed to significant credit risk due to the financial position of Wells.


Fair Value of Financial Instruments


The fair value of cash, accounts payable and accrued liabilities, and notes payable approximate their carrying amounts due to the short-term maturities of these instruments.


Fair Value Measurements


We measure our financial assets and liabilities at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., exit price) in an orderly transaction between market participants at the



F-10







measurement date. Additionally, we are required to provide disclosure and categorize assets and liabilities measured at fair value into one of three different levels depending on the assumptions (i.e., inputs) used in the valuation. Level 1 provides the most reliable measure of fair value while Level 3 generally requires significant management judgment. Financial assets and liabilities are classified in their entirety based on the lowest level of input significant to the fair value measurement. The fair value hierarchy is defined as follows:


Level 1—Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities.


Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.


Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.


We had no financial assets or liabilities subject to fair value measurement at October 31, 2013 or 2012.


Supplemental Disclosures of Cash Flow Information


Cash paid during the year for:

 

Years ended October 31,

 

Cumulative from Inception

 

 

2013

 

2012

 

(August 7, 2007)

Interest

 

$

839

 

$

8,477

 

$      9,560

Income taxes

 

 

 



Supplemental disclosures of noncash investing and financing activities:

 

 

Years ended October 31,

 

 

 

2013

 

2012

 

 

 

 

 

 

 

Convertible Notes converted into common stock

 

 

 

 

716,550

 


Recently Issued Accounting Pronouncements

In July 2012, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2012-02, Testing Indefinite-Lived Intangible Assets for Impairment (ASU 2012-02), which amended the guidance in ASU 2011-08 to simplify the testing of indefinite-lived intangible assets other than goodwill for impairment.  ASU 2012-02 becomes effective for annual and interim impairment tests performed for fiscal years beginning on or after September 15, 2012 and earlier adoption is permitted.  We adopted ASU 2012-02 effective November 1, 2012.  The adoption of ASU 2012-02 is not expected to have any impact on our consolidated financial position, results of operations or cash flows.


(4)

LICENSE AGREEMENT


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



F-11







sublicense payments), as defined in the agreement, on all products using the licensed technology.  The CSMC Agreement expires on a country-by-country basis on the date that the last patent covered under the agreement expires (currently 2032).


In connection with effectuating the License, on November 2, 2011, we paid a non-refundable cash licensing fee of $40,000, as well as issued to CSMC 1,468,100 shares of common stock.  We valued the shares issued to CSMC at $.30 per share based on Convertible Notes most recently issued.  Accordingly, we recorded $440,430 as a licensing fee to reflect the issuance of these shares.  


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


·

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

·

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

·

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

·

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


We believe that we have achieved the required milestones for the contractual periods ended December 31, 2013.  It is management’s belief that administrative expenses incurred in support of the Company’s business activities meet the definition of “development and promotion” of the licensed technology. We can, however, provide no assurance that CSMC will concur with our position and that we will be able to meet any or all of these milestones in the future.  In the event that we fail to meet one or more of the milestones required by the CSMC Agreement, there is no assurance that CSMC will agree to amend or waive the requirements and we could lose the License.  Additionally, as discussed further in Note 9, we have entered into a research and development agreement with CSMC that satisfies the milestone requirement described above regarding funded research at CSMC.  However, in order to extend the Company’s cash on hand, we have been deferring payment to CSMC of certain payments due under the agreement.   As of October 31, 2013, we had an outstanding liability to CSMC of $229,003 which represents amounts owed for services provided by CSMC from February 2013 through October 2013.


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


(5)

CONVERTIBLE NOTES


Commencing October 2010 through April 2011, we sold in private transactions an aggregate of $726,550 of Convertible Notes.  The Convertible Notes were initially convertible into shares of our common stock at $.30 per share (the “Conversion Price”). The Convertible Notes do not bear interest and were originally payable on October 19, 2011. However, in October 2011, a majority of the note holders agreed to extend the maturity date of the notes to December 15, 2011.  The Convertible Notes are secured by a first lien security interest on all of our tangible and intangible assets.  We did not repay the Convertible Notes by the December 15, 2011 extended maturity date and the notes were therefore technically in default.  As an inducement to obtain conversions, we agreed to reduce the conversion price of the Convertible Notes to $.15 per share.  During the nine months ended July 31, 2012, holders converted $716,550 of Convertible Notes into 4,777,000 shares of common stock.  $10,000 of Convertible Notes remains outstanding as of October 31, 2013 and 2012.  On an as converted basis, as of October 31, 2013, the estimated value of the Convertible Notes exceeds the principal balance by $27,333.  As a result of the reduction in conversion price, we recorded a charge of $726,550, in accordance with ASC 470-50-40 during the year ended October 31, 2012, which was included in interest expense on the accompanying consolidated statements of operations.




F-12







We evaluated the conversion feature of the Convertible Notes within the context of ASC 815 and concluded that it did not meet the definition of an embedded derivative due to the Company having no active market for its common stock.


(6)

STOCKHOLDERS’ EQUITY


Our articles of incorporation authorizes our board of directors (the “Board”) to issue up to 10,000,000 shares of preferred stock and allows the Board to determine preferences, conversion and other rights, voting powers, restrictions, limitations as to distributions, qualifications, and other terms and conditions.


 Preferred Stock


In connection with the Reverse Merger in January 2012, all outstanding shares of preferred stock of ANI, 1,030,000 shares in aggregate, were converted into 10,722,000 shares of common stock.  


In September 2013, the Board designated 3,000,000 shares as “Series A Preferred Stock” with a stated value of $.0001.  As of October 31, 2013, there were no shares of Series A Preferred Stock outstanding.


Common Stock


In connection with the formation of the Company, we issued 238,000 shares of common stock to founders.  We ascribed no value to these shares as management believes that the value of the common stock was $0 until after consummation of the CSMC Agreement in December 2009 and receipt of adequate funding.  


In December 2009, we issued to CSMC 31,900 shares of common stock in connection with entering into the CSMC Agreement.  We ascribed no value to the common shares issued to CSMC.  As described above in Note 4, in November 2011, we issued to CSMC 1,468,100 shares of common stock in order to effectuate the License. We valued the shares issued to CSMC at $.30 per share based on the stated conversion price of the Convertible Notes most recently issued.


In connection with accounting for the Reverse Merger, we are deemed to have issued to the shareholders of SRKP, 2,143,610 shares of common stock which we recorded at  $389,688, representing the net assets received in the acquisition.  As part of the same transaction, 100,000 shares of common stock were issued to legal counsel.


On August 29, 2013, we entered into an agreement with a third party for investor relation services (the “IR Agreement”).  The IR Agreement has a term of one year but can be terminated by either party after 90 days upon 30 days written notice.  The IR Agreement requires the Company to issue 400,000 shares of common stock as compensation for the services provided, 100,000 shares issuable after each 90 days of service provided.  We valued the shares at $0.56 per share based upon the value ascribed to the common stock of our Unit sales using the Black-Scholes option pricing model.  For the year ended October 31, 2013, we recorded $37,333 of stock compensation expense under the IR Agreement which is included in general and administrative expense on the accompanying consolidated statements of operations.  At October 31, 2013, $37,333 is included in other accrued liabilities on the accompanying consolidated balance sheet representing the value of the common shares issuable under the IR Agreement.


Units


During the years ended October 31, 2013 and 2012, we sold 260,000 Units and 1,510,250, respectively, for $1.00 per Unit, receiving net proceeds of $227,645 and $1,288,984, respectively.  Each Unit consists of (i) one share of common stock, and (ii) two Unit Warrants.  Subsequent to yearend, we sold an additional 45,000 Units receiving net proceeds of $44,955.


Warrants


In connection with the sale of the Units, during the year ended October 31, 2013 the placement agents earned warrants to acquire 78,000 shares of common stock consisting of 26,000 warrants exercisable at $1.00 per share, 26,000 warrants exercisable at $1.50 per share and 26,000 warrants exercisable at $2.00 per share.  During the year ended October 31, 2012, the placement agents earned warrants to acquire 603,675 shares of common stock consisting of 201,225 warrants exercisable at $1.00 per share, 201,225 warrants exercisable at $1.50 per share and 201,225 warrants exercisable at $2.00 per share.  Each warrant expires five years from the date of issuance.   During the years ended October 31, 2013 and 2012, we



F-13







valued these warrants at $17,160 and $99,677, respectively, using the Black Scholes option-pricing model.   We recorded the warrants as a reduction to the net proceeds from the sale of the Units with a corresponding increase to additional paid in capital.   As of October 31, 2013, we are obligated to issue 681,675 warrants to the placement agents for sales of the Units with a weighted average exercise price of $1.50 per share.


At October 31, 2013, we had 6,308,358 warrants issuable or outstanding with a weighted average exercise price of $1.43 per share.



(7)

INCOME TAXES


The Company did not incur any income tax expense or benefit during the years ended October 31, 2013 and 2012.


A reconciliation of the statutory federal income tax rate to the effective rate is as follows for the years ended October 31, 2013 and 2012:


 

 

2013

 

2012

 

Federal income tax rate

 

34.00

%

34.00

%

State income taxes, net of Federal income tax effect

 

5.80

%

5.80

%

Nondeductible expenses and other

 

(00.1

)%

(11.50

)%

Valuation allowance

 

(39.79

)%

(28.30

)%

 

 

0.00

%

0.00

%


Deferred tax assets and liabilities represent the future impact of temporary differences between the financial statement and tax bases of assets and liabilities. At October 31, 2013 and 2012, the significant components of deferred income taxes relates to net operating loss carryforwards, offset by a 100% valuation allowance.


The Tax Reform Act of 1986 contains provisions that limit the utilization of net operating loss (“NOL”) and tax credit carryforwards if there has been a change of ownership as described in Section 382 of the Internal Revenue Code.  We have not prepared an analysis to determine if a change of ownership has occurred.  Such a change of ownership may significantly limit the utilization of our net operating losses.


Total deferred tax assets and the valuation allowance increased by $500,000 during 2013.  As of October 31, 2013, we had an estimated NOL carryforward of approximately $3.4 million for federal income tax purposes, which is available to offset future taxable income, if any, through 2033.  The ultimate realization of these assets is dependent upon the generation of future taxable income sufficient to offset the related deductions and loss carryforwards within the applicable carryforward period.  All tax years since inception (August 7, 2007) are still subject to examination by the State of California and the IRS.


(8)

PROMISSORY NOTES

In November 2011, the Company entered into two promissory note agreements each for $40,000 for an aggregate of $80,000 (the “Promissory Notes”).  The Promissory Notes did not bear interest but required repayment of $44,000 representing principal and an origination fee.  The Promissory Notes were to mature on January 30, 2012.  In addition to the required payment of principal and origination fee, upon repayment of each Promissory Note, the Company was obligated to issue 20,000 shares of common stock.  In the event the Promissory Notes were not repaid by January 30, 2012, the Company was to issue an additional 2,000 shares of common stock under each note for each thirty day period until the note is paid in full.  The Promissory Notes were unsecured.  

The Promissory Notes were repaid in full in January 2012.  Included in interest expense for the year ended October 31 2012 is $8,000 representing the origination fees.  Also included in interest expense for the year ended October 31, 2012 is $22,400 representing the value of the 40,000 shares of common stock issuable to the makers of the Promissory Notes.  As of October 31, 2013, these shares had not been issued, and accordingly, the associated liability is included in other payables and accrued expenses on the accompanying consolidated balance sheet.



F-14







(9)

COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS

 

Consulting Agreements


We have an agreement with an entity controlled by our chief executive officer for his part-time personal services as CEO. The agreement is referred to as the Synthetica Agreement.  Under the Synthetica Agreement, there is no monthly retainer or minimum billing amount but the maximum that can be charged to us in any given month cannot exceed $15,000.  During the years ended October 31, 2013, and 2012 we were billed $162,600 and $180,000, respectively, under the Synthetica Agreement which is included in general and administrative expenses on the accompanying consolidated financial statements of operations.  At October 31 2013 and 2012, $47,600 and $15,000, respectively, is included in accrued compensation on the accompanying consolidated balance sheets resulting from a voluntary deferral of fees due under the agreement, agreed to by Synthetica to allow the company to optimize its cash flow.  Additionally as of January 1, 2014 in an effort to further optimize the company’s cash flow, Synthetica has agreed to further amend the Synthetica Agreement to provide Mr. Vecchione’s services going forward for $1 per year in compensation.  However, our chief executive may request that his compensation revert back to the original terms of the Synthetica Agreement with 30 days written notice.  


In September 2010, we entered into a business and financial consulting agreement with an entity controlled by our Board chairman for operational consulting services.   The agreement was for an initial term of 12 months with an automatic 12 month renewal period unless terminated by either party upon 30 days written notice.  The agreement is now on a month-to-month basis. There is no monthly retainer or minimum billing amount but the maximum that can be billed to us in a given month cannot exceed $10,000.  During the years ended October 31, 2013 and 2012, we were charged $104,000 and $120,000, respectively, under this agreement, which is included in general and administrative expense on the accompanying consolidated statements of operations. At October 31, 2013 and 2012, $39,000 and $10,000, respectively, is included in related party payables on the accompanying consolidated balance sheets.


CSMC


Certain founders and directors of the Company are employees of CSMC.  These individuals are also the inventors of the Polycefin technology and are primarily responsible for its development.  As described further in Note 4 above, we have an exclusive license agreement with CSMC for this technology.  


The License requires royalty payments equal to 3.5% of the gross sales price and other forms of consideration (such as milestone and sublicense payments), as defined in the agreement, on all products using the licensed technology.   The License also requires us to achieve certain milestones as described in Note 4.


In December 2012, we entered into an agreement with CSMC to support certain activities within the laboratory necessary to prepare compounds. Funding under this agreement is not used to support the activities of our founders and directors who are employed by CSMC.  For the year ended October 31, 2013, we were charged $281,495 by CSMC under this agreement which is included in research and development costs on the accompanying consolidated statements of operations.  As of October 31, 2013, $229,003 is reflected as payable on the accompanying consolidated balance sheets.  As discussed in Note 4, we have been deferring payments under this agreement in order to extend our cash balance.  


Sublease Agreement


For the period commencing November 2010 through March 2012, we had an agreement (the “Sublease”) with Compumed, Inc. (“Compumed”) for office space whereby we subleased space from Compumed and certain services such as internet, telephone and receptionist services.  Our chief executive officer also served as the chief executive officer of Compumed during this time period.  The Sublease required monthly payments of $8,000 and was on a month-to-month basis. For the year ended October 31, 2012, we recorded $40,000 of rent expense under the Sublease which is included in general and administrative expense on the accompanying consolidated statements of operations.




F-15







Commitments and Contingencies


Litigation


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


Office Lease


We have a lease agreement for office space with a third party (the “Office Lease”) that expires on February 28, 2014.  Rent expense under the Office Lease for the years ended October 31, 2013 and 2012, was $37,692 and $17,808, respectively, and is included in general and administrative expense on the accompanying consolidated statements of operations.   Subsequent to yearend, the Office Lease was renewed through February 28, 2015 on substantially similar terms.


Commitments under non-cancelable operating leases are as follows as of October 31, 2013:


 

 

Year Ended October 31,

2014

 

$            45,160

2015

 

15,296

 

 

$            60,456



(10)

SUBSEQUENT EVENTS


On February 28, 2014, we sold $170,000 in Bridge Notes, receiving net proceeds of $147,765 after payment of offering costs.  The Bridge Notes are due and payable one year after the close of the offering, bear interest at 10% per annum, and are convertible into shares of our common stock at a conversion price of either (i) 50% of the price per share of our common stock as sold through a qualified initial public offering as defined in the terms of the Bridge Notes, or (ii) in the event a Qualified IPO has not taken place prior to the Maturity Date but there has otherwise developed a public trading market for the Company’s common stock, then the conversion price shall be 50% of the 30 day Volume Weighted Average Price per share as quoted on the over-the-counter market, or (iii) in the event a public trading market has not been established for our common stock prior to the Maturity Date, then the conversion price shall be $1.00 per share.   Accrued and unpaid interest on the Bridge Notes will be payable in shares of common stock at the conversion price on the earlier of (i) the date of conversion of the Bridge Notes or (ii) the Maturity Date. Further, for every $1.00 of Bridge Note principal that an investor elects to convert into shares of common stock, the investor will receive one warrant.  Each warrant shall be exercisable into shares of common stock at a price equal to the conversion price of the Bridge Notes.  If the investor elects not to convert their Bridge Notes prior to the Maturity Date, then the note holder will receive one warrant for every $2.00 in Bridge Note principal.



F-16







Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.


There are not and have not been any disagreements between the Company and its accountants on any matter of accounting principles, practices or financial statement disclosure.


Evaluation of Disclosure Controls and Procedures


It is management's responsibility to establish and maintain adequate internal control over all financial reporting pursuant to Rule 13a-15 under the Securities Exchange Act of 1934 (the "Exchange Act"). Our management, including our chief executive officer and our chief financial officer, have reviewed and evaluated the effectiveness of our disclosure controls and procedures as of October 31, 2013. Following this review and evaluation, management collectively determined that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to management, including our chief executive officer, and our chief financial officer, as appropriate to allow timely decisions regarding required disclosure.


Evaluation of Internal Controls and Procedures


Our management is responsible for establishing and maintaining adequate internal control over our financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act). Internal control over financial reporting is a process designed 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.

 

Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets, (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors, and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may have deteriorated.  We assessed the effectiveness of our internal control over financial reporting as of October 31, 2013. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO”) in Internal Control-Integrated Framework.

 

Based upon management’s assessment using the criteria contained in COSO, and for the reasons discussed below, our management has concluded that, as of October 31, 2013, our internal control over financial reporting was not effective.

 

Based on its evaluation, the Company's Chief Executive Officer and Chief Financial Officer identified major deficiencies that existed in the design or operation of our internal control over financial reporting that it considers to be a material weakness”. The Public Company Accounting Oversight Board has defined a material weakness as a significant deficiency or combination of significant deficiencies that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.  These material weaknesses identified include the following:

 

 

·

We have insufficient quantity of dedicated resources and experienced personnel involved in reviewing and designing internal controls. As a result, a material misstatement of the interim and annual financial statements could occur and not be prevented or detected on a timely basis.

 

 

·

We have not achieved the optimal level of segregation of duties relative to key financial reporting functions. The deficiency in our internal control is related to a lack of segregation of duties due to the size of the accounting department and the lack of experienced accountants due to the limited financial resources of the Company.  We continue to actively search for additional capital in order to be in position to add the necessary staff to address this material weakness. We are also assessing how we can improve our internal control over financial reporting with the current number of employees in an effort to remediate this lack of segregation of duties.





30








 

 

·

We did not perform an entity level risk assessment to evaluate the implication of relevant risks on financial reporting, including the impact of potential fraud related risks and the risks related to non-routine transactions, if any, on our internal control over financial reporting.  Lack of an entity-level risk assessment constituted an internal control design deficiency which resulted in more than a remote likelihood that a material error would not have been prevented or detected, and constituted a material weakness.


Changes in Internal Controls over Financial Reporting


There were no significant changes in the Company's internal controls over financial reporting or in other factors that could significantly affect these internal controls subsequent to the date of their most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.  

  


Item 9B. Other Information.  


None.





31





PART III


Item 10. Directors, Executive Officers, Promoters and Control Persons; Compliance With Section 16(a) of the Exchange Act.


(a)  Identification of Directors and Executive Officers.  


Upon closing of the Reverse Merger, the following individuals were named to the board of directors and executive management of the Company:

  

Name


Robert Stuckelman                  

  

Age


81

  

Position


Chairman

Maurizio Vecchione

  

52

  

Chief Executive Officer and Director

Julia Ljubimova

  

53

  

President and Chief Scientific Officer and Director

Jeffrey Sperber

Alex Ljubimov

Eggehard Holler

 

49

60

72

  

Chief Financial Officer

Senior Vice-President, Research of Arrogene

Senior Vice-President, Product Development of Arrogene

  


Robert Stuckelman.  Mr. Stuckelman is the President of Technical Management Consultants, providing consulting services to technology and healthcare companies. He founded CompuMed, a public medical technology company in 1973, was its President from 1973 to 1982 and 1990 to 1994.  He has recently been or is currently on the Board of Directors of Roex, Surpluzz, Cyber University, The Worldwide Web Store, HWO and BioEnergy Delivery Systems. He holds an MSEE from the University of Southern California and a BEE from Cornell University.


Maurizio Vecchione.  Mr. Vecchione’s career spans 28 years as both a scientist and a high technology entrepreneur. He is Sr. Vice President of Global Good and Research at Intellectual Ventures.  Global Good is a collaborative effort between Intellectual Ventures and Bill Gates to tackle humanity's problems through new inventions and technologies, with a focus on the developing world. He also serves as Chairman of a high technology incubator and strategic consultant Synthetica. He currently serves on telemedicine pioneer and clinical research company CompuMed’s Board of Directors.  He is Chairman of the IDEAS Studio, an educational software and media company he co-founded. Previously  he co-founded computer graphics and imaging company Modacad, which later became Styleclick and completed an initial public offering in 1996. He led Styleclick until it was sold to InterActive Corp (then USA Networks).  Subsequently, he was CEO of Microwave Photonics, a unit of British Telecom Plc (BT), which he spun out of BT and was eventually sold to LGC Wireless.  He was then CEO of cancer imaging biomarker pioneer company Trestle, a position he held until the sale of that company to Clarient Inc. (then a unit of Safeguard Scientific).  He then was CEO of CompuMed Inc., a telemedicine and clinical research company in cardiology. He is a founding member of nonprofit organization 700 For Science. He was twice a finalist for Ernst & Young’s Entrepreneur of the Year award and received the prestigious DEMO award in 2003.  He is a member of the Institute of Electrical and Electronic Engineers (“IEEE”), a member of the IEEE Nanotechnology Council and the IEEE Engineering in Medicine and Biology Society, and the Association for Computing Machinery’s Special Interest Group on Computer Graphics and Interactive Technique.


Julia Ljubimova, MD, PhD.  Dr. Ljubimova is serving as Arrogene’s President and Chief Scientific Officer. She is the Director Nanomedicine Center and Professor of Neurosurgery at Cedars-Sinai Medical Center. Her primary research interests involve methods to block human glioma growth, brain and breast tumor prevention treatments and the effects of air pollution on the brain.  Dr. Ljubimova has been working at Cedars-Sinai Medical Center since 1993. Dr. Ljubimova's studies have been published in numerous peer-reviewed publications, including Cancer Research, Cancer, American Journal of Pathology, and International Journal of Oncology.  She is serving on the National Institute of Health Study Section “Nanoscience for Biology and Medicine”.   Dr. Ljubimova’s research is funded by the grants from the National Institutes of Health and other government organizations.


Jeffrey Sperber.  Mr. Sperber has served as Arrogene’s Chief Financial Officer since November 2010.  Mr. Sperber is employed on a part-time basis and also serves as the chief financial officer of another non-competitive business.  From June 2004 through June 2011, Mr. Sperber served as the chief financial officer of Ceragenix Pharmaceuticals, and its predecessor companies where he led a successful reverse merger transaction and several rounds of subsequent financing.  From





32





January 2004 through May 2004, Mr. Sperber worked as an independent consultant for various companies.  From March 2001 through January 2004, Mr. Sperber served as the Vice President and Controller of TeleTech Holdings, Inc., a $1 billion, global, public company which provides outsourced call center services primarily to the Fortune 1000.  From October 1997 through March 2001, he served as the Chief Financial Officer of USOL Holdings, Inc., a publicly traded broadband provider focused on multi-family housing communities.  At USOL, Mr. Sperber led a successful public offering of USOL’s Common Stock.  From August 1995 through September 1997, Mr. Sperber served as a business unit controller for Tele Communications, Inc., which was subsequently acquired by Comcast.  From September 1991 through August 1995, he served in various financial positions for Concord Services, Inc., an international conglomerate, most recently as the Chief Financial Officer of its manufacturing and processing business unit where he oversaw both public and private entities.  From September 1986 through September 1991, Mr. Sperber was employed by Arthur Andersen LLP in Denver, Colorado.  Mr. Sperber received a CPA license in the State of Colorado, which has since expired.   Mr. Sperber formerly served as an outside director of Omni Bio Pharmaceuticals, Inc. from October 2009 to August 2011where he also served as Audit Committee Chair.  Ceragenix Pharmaceuticals, Inc. filed a voluntary petition for bankruptcy pursuant to Chapter 11 of the United States Bankruptcy code in June 2010 which was converted to a Chapter 7 in January 2012.  That proceeding is ongoing.

Eggehard Holler, PhD.   Dr. Holler is serving as Arrogene’s SVP for Chemistry and Synthesis. He is Professor of Biochemistry at the University of Regensburg, Regensburg, Germany, where he has been employed since 1972. He has authored more than 150 peer reviewed scientific papers. He has worked extensively on the synthesis and purification of polymalic acid (PLMA) as a carrier for drug delivery. Dr. Holler received his Ph.D. from the University of Frankfurt on Main, Germany, and did his postdoctoral training at Cornell University and University of California, Berkeley. Dr. Holler has been awarded the Hoerlein-Preis (German Biological Society) for outstanding work on Drosophila. He served as a consultant in the patent dispute between Roche against Promega, and has consulted at Cedars Medical Center from 2008 to the present. His scientific work was supported during more than 30 years by the Deutsche Forschungsgemeinschaft, by the Deutsche Krebshilfe, by the German Ministry of Agriculture-German Industry (Bayer, ASTA Medica), and other funding agencies. Dr. Holler is on the board of examiners for Diploma in Biochemistry, and the Ph.D. program in Biology at the University of Regensburg. He has been a member of the board of Staatsexamen Biology in Bavaria, and is a member of India Academic Affairs on Ph.D. adjudication. He has been interim chair holder of Biochemistry at Regensburg. His scientific career involves enzymology of amino acyl-tRNAsynthetases, enzymatic synthesis and function of nucleoside-oligophosphate-nucleosides, estrogen receptor mechanisms, chemistry and biological mechanisms of platinum drugs, DNA-polymerases and associated proteins, protein affinity labeling. Dr. Holler pioneered the study and characterization of poly(malic acid). He investigated synthesis, structure, function, metabolism, and established semi-industrial production of highly purified poly(malic acid). He contributed largely to the concept and design of chemical syntheses of the Polycefin drug family.


Alexander Ljubimov, PhD, DSc.   Dr. Ljubimov is serving and Arrogene’s SVP or R&D. He is Director of the Ophthalmology Research Laboratories and Professor of Surgery and Biomedical Sciences at Cedars-Sinai Medical Center, where he has been employed since 1993. Dr. Ljubimov has a 20-year expertise in cancer research and production of antibodies to cancer markers that are being currently manufactured by more than 15 companies around the world. He has more than 100 publications in both ophthalmology and cancer research and has presented his results at numerous national and international conferences. Dr. Ljubimov joined Cedars-Sinai Medical Center in 1993 to direct the new program in diabetic retinopathy. Since 1998, his research in ocular diabetes is funded by the National Institutes of Health. Dr. Ljubimov currently serves on the editorial boards of Diabetes, Experimental Eye Research, Brain Research Bulletin, The Open Ophthalmology Journal, Journal of Angiogenesis, Experimental Biology and Medicine, and Frontiers in Bioscience. He has served on several National Institutes of Health Study Sections and completed a 3-year term as member of the American Diabetes Association Grant Review Panel. He is member of four professional societies and ARVO Fellow. Dr. Ljubimov is also Professor of Medicine at the David Geffen School of Medicine, University of California Los Angeles.


 (b)  Significant Employees.  


As of the date hereof, the Company has no significant employees.

 

(c)  Family Relationships.  


Other than Julia Ljubimova and Alex Ljubimov being husband and wife, none.






33





 (d)   Involvement in Certain Legal Proceedings.

There have been no events under any bankruptcy act, no criminal proceedings and no judgments, injunctions, orders or decrees material to the evaluation of the ability and integrity of any director, executive officer, promoter or control person of the Company during the past five years except for the voluntary Chapter 11 filing by Ceragenix Pharmaceuticals, Inc., of which Mr. Sperber served as an officer and director.


There have been no material proceedings to which any director, officer or affiliate of the Company, any owner of record or beneficially of more than five percent of any class of voting securities of the Company, or any associate of any such director, officer, affiliate of the Company, or security holder is a party adverse to the Company or any of its subsidiaries or has a material interest adverse to the Company or any of its subsidiaries.


Compliance with Section 16(a) of the Exchange Act

   

      

Section 16(a) of the Exchange Act requires the Company’s directors and officers, and persons who beneficially own more than 10% of a registered class of the Company’s equity securities, to file reports of beneficial ownership and changes in beneficial ownership of the Company’s securities with the SEC on Forms 3, 4 and 5. Officers, directors and greater than 10% stockholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file.

Based solely on the Company’s review of the copies of the forms received by it during the fiscal year ended October 31, 2013 and written representations that no other reports were required, the Company believes that no person who, at any time during such fiscal year, was a director, officer or beneficial owner of more than 10% of the Company’s common stock failed to comply with all Section 16(a) filing requirements during such fiscal years.

Code of Ethics

On December 20, 2007, Company adopted a formal code of ethics statement for senior officers and directors (the “Code of Ethics”) that is designed to deter wrongdoing and to promote ethical conduct and full, fair, accurate, timely and understandable reports that the Company files or submits to the Securities and Exchange Commission and others.  A form of the Code of Ethics has been filed as an exhibit to the Company’s Form 10-KSB filed with the Securities and Exchange Commission on March 5, 2008 and is incorporated herein by reference.  Requests for copies of the Code of Ethics should be sent in writing to Arrogene, Inc., Attention: Secretary, 2500 Broadway, Building F, Suite F-125, Santa Monica, CA  90404.


Nominating Committee


We have not adopted any procedures by which security holders may recommend nominees to our Board of Directors.


Audit and Compensation Committee


The Board of Directors has not appointed a standing audit committee and acts as a whole as the audit committee. The Company does not have a qualified financial expert at this time because it has not been able to hire a qualified candidate. Further, the Company believes that it has inadequate financial resources at this time to hire such an expert.  None of our current directors would be deemed “independent” within the meaning of Item 407(a) of Regulation S-K.


Item 11. Executive Compensation.


Executive Compensation


The following information relates to all aspects of executive compensation currently paid by Arrogene to its executive officers and directors.  


The following tables and discussion set forth information with respect to all plan and non-plan compensation awarded to, earned by or paid to the Chief Executive Officer ("CEO") and Chief Financial Officer (“CFO”) of Arrogene for all services rendered in all capacities to Arrogene for each of its last two (2) completed fiscal years.






34





SUMMARY COMPENSATION TABLE


Name and

Principal

Position




Year



Salary

($)




Bonus



 Stock

Awards



Options

Awards


Non equity

Incentive Plan

Compensation

Nonqualified

Deferred

Compensation

Earnings



 All Other  Compensation




    Total

Maurizio Vecchione, CEO(1)

2013


2012

$162,600


$180,000

 



 

 

 

 

$162,600


$180,000

Jeffrey Sperber, CFO

2013

2012

$ 36,810     $ 46,909

 

 

 

 

 

 

$  36,810

$  46,909

(1)

Consists of compensation earned by Synthetica, Ltd., a management consulting firm controlled by Mr. Vecchione and with whom Arrogene has contracted for the services of Mr. Vecchione.  


Doctors Ljubimova, Ljubimov and Holler are employed by CSMC and receive their compensation from CSMC and are not deemed employees of the Company. The Company has entered into compensation agreements with these officers and directors to secure their services.  The following table reflects the basic terms of the agreements. Each individual is to be paid as a consultant, at agreed upon consulting fee rates, for providing services pursuant to agreed operating budgets and timelines for the services to be rendered:



Name


Title

Hourly Consulting Fee


Maximum Fee per Month

M. Vecchione

CEO

$300.00

$15,000.00

 

 

 

 

J. Ljubimova

President

$250.00

Set by Company through budget every 90 days

 

 

 

 

J. Sperber

CFO

$120.00

$10,000.00

 

 

 

 

A. Ljubimov

SVP – Research

$200.00

Set by Company through budget every 90 days

 

 

 

 

E. Holler

SVP – Product Development

$200.00

Set by Company through budget every 90 days


Under the agreements, the Company’s board of directors has sole discretion to request the full time employment of each senior executive and upon giving of notice, each executive has a 30-day time period within which to agree to become a full time employee.  In the absence of such acceptance, the previously executed agreements can be terminated by the Company without any obligation to pay any termination or severance benefits.  Additionally the contracts include non-compete, confidentiality and other customary provisions protecting the Company and its intellectual properties.  The agreements include a 6 month severance clause for termination for reasons other than cause (as defined in the agreements).


At the discretion of the Board, the officers/directors are eligible to participate in certain annual bonuses, payable in stock, relating to achieving certain milestones as set annually by the Board, with such bonuses not to exceed 40% of the annual compensation.


It should be noted that certain key executives, i.e., Doctors Ljubimova, Ljubimov and Holler, are all currently employed by CSMC in various capacities in conjunction with pre-clinical and clinical development of the technology which is the subject of the License obtained by the Company from CSMC. The Company believes that their continued work at CSMC benefits the Company as we are the recipients of the license to exploit such technology.  


Outside directors may be paid a meeting stipend and/or granted options; however, there is no commitment to do so.


At the end of the most recently completed fiscal year, there were no unexercised options, stock that has not vested, or equity incentive plan awards outstanding.



Compensation Committee Interlocks and Insider Participation


The Company does not have a standing compensation committee or a committee performing similar functions.  We anticipate that our board of directors will establish a compensation committee in the future that will be comprised of non-





35





employee members of our board of directors.  Our current expectation is that the compensation committee of our board of directors will perform, at least annually, a strategic review of the compensation program for our executive officers to determine whether it provides adequate incentives and motivation to our executive officers and whether it adequately compensates our executive officers relative to comparable officers in other companies with which we compete for executives.  Those companies may or may not be public companies or companies located in California or even, in all cases, companies in a similar business.


Until such time as a formal compensation program and committee is established, our board of directors will structure compensation and bonus levels and our board of directors will approve the structure.  After the compensation committee is formed, it will determine the structure.  Our board of directors has established a compensation program for executive officers for 2013 that is designed to attract, as needed, individuals with the skills necessary for us achieve our business plan, to motivate those individuals, to reward those individuals fairly over time, and to retain those individuals who continue to perform at or above the levels that we expect.


Except as noted above, the above persons do not hold any other directorships in any company with a class of securities registered pursuant to Section 12 of the Exchange Act or subject to the requirements of Section 15(d) of the Exchange Act.


None of our current directors would be deemed “independent” within the meaning of Item 407(a) of Regulation S-K.


Under the terms of the Reverse Merger, the placement agents were entitled to designate one member of the Board of Directors.  As of the date of this Report, the placement agents have not made such designation.


Under the terms of our License agreement with CSMC, CSMC has the right to designate an observer to our Board of Directors.  As of the date of this Report, CSMC has not exercised this right.


Compensation Committee Report


The Company does not have a standing compensation committee or a committee performing similar functions; therefore, it does not have a compensation committee report.


Scientific Advisory Board


We plan to constitute a Scientific Advisory Board (the “Advisory Board”).  The Advisory Board will not exercise any of the authority of the Board of Directors, but rather will serve at the pleasure of the Board of Directors to consult on matters pertaining to the Company’s scientific developments and product strategy.  It is currently intended that the Advisory Board will consist of up to five persons and will be chaired by Dr. Keith Black, one of our founders, and principal shareholders and a team leader at CSMC overseeing the development of our technology. Dr. Black has agreed to be the Chairman of our Advisory Board. No commitment has been made regarding possible future compensation for Advisory Board members.

Keith L. Black, MD, serves as Chairman and Professor of the Department of Neurosurgery, Director of Maxine Dunitz Neurosurgical Institute and Director of Johnnie L. Cochran, Jr. Brain Tumor Center at Cedars-Sinai Medical Center.  An internationally renowned neurosurgeon and scientist, Dr. Black joined Cedars-Sinai Medical Center in July 1997 and was awarded the Ruth and Lawrence Harvey Chair in Neurosciences in November of that year.

Prior to joining Cedars-Sinai, Dr. Black served on the University of California, Los Angeles (UCLA) faculty for 10 years where he was Professor of Neurosurgery.  In 1992 he was awarded the Ruth and Raymond Stotter Chair in the Department of Surgery and was head of the UCLA Comprehensive Brain Tumor Program.

Dr. Black pioneered research on designing ways to open the blood-brain barrier, enabling chemotherapeutic drugs to be delivered directly into the tumor. His work in this field received the Jacob Javits award from the National Advisory Neurological Disorders and Stroke Council of the National Institutes of Health in June of 2000.  Dr. Black and patients undergoing the first clinical trials of the drug, RMP-7, were profiled in 1996 on the PBS program, The New Explorers, in an episode called Outsmarting the Brain. Dr. Black’s other groundbreaking research has focused on developing a vaccine to enhance the body’s immune response to brain tumors, use of gene arrays to develop molecular profiles of tumors, the use of optical technology for brain mapping, and the use of focused microwave energy to non-invasively destroy brain tumors.  He





36





was featured on the cover of Time magazine in the Fall 1997 special edition of Heroes in Medicine. In March 2009, he authored the book Brain Surgeon: A Doctor’s Inspiring Encounters with Mortality and Miracles.

Dr. Black serves on the editorial boards of Gene Therapy and Molecular Biology, Neurosurgery Quarterly, Frontiers in Bioscience, and Public Library of Science (PLoS). He was on the National Institutes of Health’s Board of Scientific Counselors for Neurological Disorders and Stroke and was appointed to the National Advisory Neurological Disorders and Stroke Council of the National Institutes of Health from 2000-2004.  He was also selected as committee member of the California Institute for Regenerative Medicine Independent Citizens Oversight Committee from 2004-2006.  He is also a member of numerous professional societies including the American Association of Neurological Surgeons, Neurosurgical Society of America and the Academy of Neurological Surgery.  He also is a Founding Member of the North American Skull Base Society.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.


(a)

The following tables set forth certain information as of January 31, 2014, regarding (i) each person known by the Company to be the beneficial owner of more than 5% of the outstanding shares of common stock, (ii) each director, nominee and executive officer of the Company and (iii) all officers and directors as a group.


Unless otherwise indicated, the persons and entities named in the table have sole voting and sole investment power with respect to the shares set forth opposite the stockholder’s name, subject to community property laws, where applicable.  Unless otherwise indicated, the address of each stockholder listed in the table is 2500 Broadway, Building F, Suite F-125, Santa Monica, CA  90404.


 

 

 

Name and Address of Beneficial Owners


Name and Address

of Beneficial Owner

Number of Shares (1)


Percent

Julia Ljubimova (2)

3,869,259

18.1%

Keith Black

2,560,900

12.0%

Alex Ljubimov (2)

745,347

3.5%

Robert Stuckelman

899,444

4.2%

Eggehard Holler

832,777

3.9%

Maurizio Vecchione (3)

1,415,832

6.6%

Jeffrey Sperber

20,000

0.1%

Richard Rappaport (4)

1,274,389

6.0%

Cedars-Sinai Medical Center (5)

1,500,000

7.0%

Executive Officers and Directors as

a Group (6 persons)

7,782,658

36.4%


(1)

There were 21,395,860 shares of Common Stock issued and outstanding as of February 28, 2014. That number does not give effect to (a) $10,000 in Convertible Notes that are convertible into an aggregate of 66,667 shares (b) the exercise of 6,411,858 of outstanding warrants, (c) 1,500,000 shares reserved for issuance under an employee incentive plan., (d) the conversion of $170,000 of Bridge Notes sold subsequent to year end.


(2)

Ms.Ljubimova and Mr. Ljubimov are husband and wife.


(3)

Shares are held by Synthetica, Ltd. of which Mr. Vecchione is the sole beneficial owner.


(4)

Consists of shares of Arrogne that Mr. Rappaport owns or controls.  Mr. Rappaport’s address is WestPark Capital, Inc., 1900 Avenue of the Stars, Suite 310, Los Angeles, CA  90067


(5)

Mr. Edward M. Prunchunas, Senior Vice President of Finance and Chief Financial Officer is deemed to control the voting and dispositive power associated with these securities.


Item 13. Certain Relationships and Related Transactions.


Advances


During the year ended October 31, 2009, certain directors advanced $1,300 to the Company in order to fund operating





37





expenses.  The advances were made on an informal basis and not pursuant to any documented agreement.  Accordingly, there is no stated repayment term or interest rate.  These advances were repaid during the year ended October 31, 2012.

 

Consulting Agreements


In December 2008, we entered into an agreement with an entity controlled by our chief executive officer for his services (the “Synthetica Agreement”).  The Synthetica Agreement was replaced by a second agreement for the personal services of our chief executive officer in July 2011.   Under the Synthetica Agreement, there was no monthly retainer or minimum billing amount but the maximum that could be charged to us in any given month could not exceed $15,000. During the years ended October 31, 2013 and 2012, we were billed $162,600 and $180,000, respectively, under these agreements. In October 2011, we issued 100,000 shares of common stock to Synthetica, Ltd (“Synthetica”) in satisfaction of $100,000 in accrued compensation that had been earned under the agreement.  At October 31, 2013 and 2012, $47,600 and $15,000, respectively, is included in accrued compensation for amounts owed to Synthetica on the accompanying consolidated balance sheets.   Effective January 1, 2014, in an effort to further optimize the company’s cash flow, Synthetica has agreed to further amend the Synthetica Agreement to provide Mr. Vecchione’s services going forward for  $1 per year in compensation.   However, Mr. Vecchione may request that his compensation revert back to the original terms of the Synthetica Agreement with 30 days written notice.



In September 2010, we entered into a business and financial consulting agreement with an entity controlled by our Board chairman.   The agreement was for an initial term of 12 months with an automatic 12 month renewal period unless terminated by either party upon 30 days written notice.  The agreement is now on a month-to-month basis.  There is no monthly retainer or minimum billing amount but the maximum that can be billed to us in a given month cannot exceed $10,000.  During the years ended October 31, 2013 and 2012, we were charged $104,000 and $120,000, respectively, under this agreement which is included in general and administrative expense on the accompanying consolidated statements of operations. At October 31, 2013 and October 31, 2012, $39,000 and $10,000, respectively, is included in related party payables on the accompanying consolidated balance sheets.


CSMC


Certain founders and directors of the Company are employees of CSMC.  These individuals are also the inventors of the Polycefin technology and are primarily responsible for its development.  As described further in Note 4 above, we have a right to an exclusive license agreement with CSMC for this technology.  


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


Sublease Agreement


For the period commencing November 2010 through March 2012, we had an agreement (the “Sublease”) with Compumed, Inc. (“Compumed”) for office space whereby we subleased space from Compumed.  Our chief executive officer also served as the chief executive officer of Compumed during this time period.  The Sublease required monthly payments of $8,000 and was on a month-to-month basis.  The Sublease was approved by our Board.   For the year ended October 31, 2012 we recorded $40,000 of rent expense which is included in general and administrative expense on the accompanying consolidated statements of operations...


Except as otherwise indicated herein, there have been no related party transactions, or any other transactions or relationships required to be disclosed pursuant to Item 404 of Regulation S-K.






38






Director Independence


The Company is not a listed issuer whose securities are listed on a national securities exchange, or an inter-dealer quotation system which has requirements that a majority of the board of directors be independent.  Under NASDAQ Rule 5605(a)(2)(A), a director is not considered to be independent if he or she also is an executive officer or employee of the corporation.  Under such definition, Maurizio Vecchione and Julia Ljubimova would not be considered independent as they also serve as executive officers of the Company.


Item 14.  Principal Accounting Fees and Services


Rose Snyder and Jacobs LLP (“RSJ”) is the Company's independent registered public accounting firm.


Audit Fees


The aggregate fees billed by RSJ for professional services rendered for the audit of our annual financial statements and review of financial statements included in our quarterly reports on Form 10-Q or services that are normally provided in connection with statutory and regulatory filings were $31,500 for the fiscal year ended October 31, 2013 and $41,850 for the fiscal year ended October 31, 2012.


Audit-Related Fees


There were no fees billed by RSJ for assurance and related services that are reasonably related to the performance of the audit or review of the Company’s financial statements for the fiscal years ended October 31, 2013 and 2012.


Tax Fees


There were no fees billed by RSJ for taxes and related services for the fiscal years ended October 31, 2013 and 2012.


All Other Fees


There were no fees billed by RSJ for other products and services for the fiscal years ended October 31, 2013 and 2012.


Audit Committee’s Pre-Approval Process


 The Board of Directors acts as the audit committee of the Company, and accordingly, all services are approved by all the members of the Board of Directors.





39






Part IV


Item 15. Exhibits, Financial Statement Schedules


(a)  We set forth below a list of our audited financial statements included in Item 8 of this annual report on Form 10-K.


Statement

Page*


Index to Financial Statements

F-1


Report of Independent Registered Public Accounting Firm

F-2


Balance Sheets

F-3


Statements of Operations

F-4


Statement of Changes in Stockholders' Equity (Deficit)

F-5


Statements of Cash Flows

F-6

  

Notes to Financial Statements

F-7

---------------

*Page F-1 follows page 28 to this annual report on Form 10-K.  


(b) Index to Exhibits required by Item 601 of Regulation S-K.


Exhibit      

Description


2.2(1)

Agreement and Plan of Reorganization dated July 18, 2011

3.1(2)

Certificate of Incorporation

    3.2(2)

By-laws

    3.3(8)

Amendment to Certificate of Incorporation

  10.1(3)

Form of Subscription Agreement and Lock-Up Agreement

  10.2(3)

License Agreement with Cedars-Sinai Medical Center

  10.3(3)

Amendment No. 1 to License Agreement with Cedars-Sinai Medical Center

  10.4(3)

Amendment No. 2 to License Agreement with Cedars-Sinai Medical Center

  10.5(3)

Amendment No. 3 to License Agreement with Cedars-Sinai Medical Center

  10.6(3)

Amendment No. 4 to License Agreement with Cedars-Sinai Medical Center

  10.7(6)

Employment Agreement with M. Vecchione

  10.8(6)

Employment Agreement with E. Holler

  10.9(6)

Employment Agreement with J. Ljubimova

 10.10(6)

Employment Agreement with A. Ljubimov

  14.1(4)

Corporate Code of Ethics and Conduct, adopted December 20, 2007            

  16.1(5)

Letter on change in certifying accountant

 31.1*

Certification of the Company’s Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, with respect to the registrant’s Annual Report on Form 10-K for the year ended October 31, 2012.

  31.2*

Certification of the Company’s Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, with respect to the registrant’s Annual Report on Form 10-K for the year ended October 31, 2012.

  32.1*

Certification of the Company’s Principal Executive Officer pursuant to 18 U.S.C. Section 1350,





40





as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002

  32.2*

Certification of the Company’s Principal Financial Officer pursuant to 18 U.S.C. Section

1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002

  99.1(7)

Confirmation of CMSC License

101.INS**

XBRL Instance Document

101.SCH**

XBRL Schema Document

101.CAL**

XBRL Calculation Linkbase Document

101.LAB**

XBRL Label Linkbase Document

101.PRE**

XBRL Presentation Linkbase Document

101.DEF**

XBRL Definition Linkbase Document


(1)

Filed as an exhibit to the Company's Current Report on Form 8-K, as filed with the Securities and

Exchange Commission on October 25, 2011 and incorporated herein by this reference.

(2)

Filed as an exhibit to the Company's registration statement on Form 10-SB, as filed with the Securities and Exchange Commission on November 26, 2007 and incorporated herein by this reference.

(3)

Filed as an exhibit to the Company's Current Report on Form 8-K, as filed with the Securities and

Exchange Commission on January 11, 2012 and incorporated herein by this reference.

(4)

Filed as an exhibit to the Company's Annual Report on Form 10-KSB, as filed with the Securities and Exchange Commission on March 5, 2008 and incorporated herein by this reference.

(5)

Filed as an exhibit to the Company's Current Report on Form 8-K, as filed with the Securities and

Exchange Commission on April 12, 2012, as amended May 24, 2012 and incorporated herein by this reference.

(6)

Filed as an exhibit to the Company's Current Report on Form 8-K, as filed with the Securities and

Exchange Commission on April 20, 2012, as amended May 24, 2012 and incorporated herein by this reference.

(7)

Filed as an exhibit to the Company's Current Report on Form 8-K, as filed with the Securities and

Exchange Commission on July 24, 2012 and incorporated herein by this reference.

(8)

Filed as an exhibit to the Company's Current Report on Form 8-K, as filed with the Securities and

Exchange Commission on September 10, 2012 and incorporated herein by this reference.


*

Filed herewith

**

Furnished, not filed.





41






SIGNATURES


In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



      ARROGENE, INC.



Dated: March 25, 2014

      By: /s/  Maurizio Vecchione

 

Maurizio Vecchione

Chief Executive Officer

Principal Executive Officer



Dated: March 25 , 2014

      By: /s/  Jeffrey Sperber

 

Jeffrey Sperber

Chief Financial Officer

Principal Financial Officer

Principal Accounting Officer




In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.


                   Title

  

Date


By: /s/  Maurizio Vecchione

Chief Executive Officer and Director                    

March 25, 2014

      Maurizio Vecchione


By: /s/ Robert Stuckelman

Chairman of the Board

March 25,  2014

      Robert Stuckelman


By: /s/Julia Ljubimova

President, Chief Scientific Officer

   

March 25, 2014

      Julia Ljubimova

and Director





42