ITEM 1. BUSINESS
Recent Developments
On February 3, 2011 the Company formed an affiliation with the Kentucky Hospital Association (“KHA”) positioning itself for a potential national healthcare product launch within the coming months. It has also formed a new wholly owned subsidiary, BioNeutral Services Inc. (“BNS”), and placed it under the direction of Mr. Frank Battafarano as its new CEO. Mr. Battafarano has more than thirty years experience as a senior level executive in the healthcare sector.
On January 14, 2011, Suresh Relwani resigned as a member of the Board, following the resignation of Mr. Relwani from the Board, the remaining directors of the Company, pursuant to the authority under the Company's By-laws, appointed Wayne Stratton to fill the vacancy on the Board created by Mr. Relwani's resignation. Mr. Stratton's appointment to the Board became effective immediately.
On January 4, 2011 the company announced that it has received an initial indication for support from the Commissioner of Kentucky's Department for Business Development (the Department).The Department's mandate includes exploring innovative ways to stimulate Kentucky's economy by supporting existing businesses and attracting new enterprises to Kentucky at the lowest overall cost of doing business.
On December 19, 2010 the company entered discussions with the KHA through its subsidiary Kentucky Hospital Services Corporation LLC "KHSC" to introduce BioNetural’s Ogiene™ and Ygiene™ products into its member hospital association. The KHA, established in 1929, represents hospitals, related health care organizations, and integrated health care systems and is dedicated to sustaining and improving the health status of the citizens of Kentucky. The KHSC aims to provide its member hospitals with the cleanest health care facilities possible.
Effective November 30, 2010, the Company appointed Dr. Andy Kielbania, BioNeutral Group's Chief Scientist, as a member of its Board of Directors,. Dr. Kielbania will serve on the audit committee.
Overview
Company Structure
We are a life science specialty technology company that has developed a novel combinational chemistry-based technology which we believe in certain circumstances may neutralize harmful environmental contaminants, toxins and dangerous micro-organisms, including bacteria, viruses and spores. We currently operate our business through our subsidiary, BioNeutral Laboratories Corporation USA (“BioNeutral Laboratories” or “BioLabs”), a corporation organized in Delaware in 2003. As used in this Annual Report, the words the “Company,” “our,” “us” or “we” refer to BioNeutral Group, Inc.
We were incorporated in the State of Nevada on April 10, 2007 under the name “Moonshine Creations, Inc.”, and changed our name to “BioNeutral Group, Inc.” on December 22, 2008. From our incorporation until January 30, 2009, we did not have significant business operations.
On January 30, 2009, we entered into a share exchange agreement, which we refer to herein as the Share Exchange Agreement, with BioNeutral Laboratories pursuant to which we agreed to issue to the shareholders of BioNeutral Laboratories 44,861,023 shares of our common stock (the “Share Exchange”).
In connection with the Share Exchange, certain shareholders of BioNeutral Laboratories delivered shareholder consents, which we refer to as the "Share Exchange Consents", to BioNeutral Laboratories approving the execution and delivery by BioNeutral Laboratories of the Share Exchange Agreement. We refer to such persons as the “Consenting Shareholders.” The Share Exchange Consents did not specify the number of shares of BioNeutral Laboratories common stock to be exchanged by the Consenting Shareholder. Schedule II to the Share Exchange Agreement, however, contained a list of holders of BioLabs common stock (certain of which shareholders also held BioLabs Series a Preferred Stock), shares of our common stock to be issued to such shareholders, and shares of our common stock to be issued to holders or BioLabs preferred stock.
Based on the Share Exchange Consents, we caused to be delivered to our transfer agent instructions to issue stock certificates representing 42,649,500 shares of our common stock in accordance with Schedule II to the Share Exchange Agreement. We did not receive Share Exchange Consents in respect of each share of our common stock that was issued by our transfer agent and we believe that stock certificates representing approximately 1,011,362 shares of common stock may have been delivered to those persons who did not deliver a Share Exchange Consent.
In addition, our records indicate that (i) we did not receive stock certificates representing shares of BioNeutral Laboratories common stock for cancellation from the Consenting Shareholders, and (ii) we did not cause to be delivered the applicable stock certificates representing shares of our common stock issued in the Share Exchange to certain of the Consenting Shareholders. Accordingly we intend to request that (i) with respect to each Consenting Shareholder who received a stock certificate, such stockholder affirm its consent, which we refer to as a “Consenting Shareholder Acknowledgement” and deliver to us for cancellation its certificates representing BioNeutral Laboratories common stock; and (ii) with respect to each Consenting Shareholder who did not receive a stock certificate, such stockholder deliver to us a Consenting Shareholder Acknowledgment and deliver to us for cancellation its certificates representing BioNeutral Laboratories common stock, each in advance of us delivering the applicable stock certificate.
With respect to any shareholder of BioNeutral Laboratories who is not able to confirm that it previously delivered a Share Exchange Consent, we are going to evaluate offering to such persons the ability to exchange their shares of common stock of BioNeutral Laboratories for shares of our common stock on the same terms as would have occurred had such exchange occurred at the time of the consummation of the Share Exchange. Although we cannot assure you as to the determination we may make, if we were to make such offer, we would likely request that each such stockholder deliver to us a consent that is similar to a Share Exchange Consent and deliver to us for cancellation its certificates representing BioNeutral Laboratories common stock, each in advance of us delivering the applicable stock certificate. With respect to shareholders of BioNeutral Laboratories who did not deliver a Share Exchange Consent and to whom we may have caused to be issued stock certificates for shares of our common stock, we intend to request a Consenting Shareholder Acknowledgment from each of such persons.
With respect to holders of Series A preferred stock of BioNeutral Laboratories who did not receive shares of our common stock in exchange for such preferred stock, we intend to offer to such persons 2,799,910 shares of our common stock in exchange for their shares of Series a preferred stock, in accordance with Schedule II to the Share Exchange Agreement. We intend to request that such persons execute and deliver a share exchange agreement evidencing such exchange.
For purposes of preparation of our financial statements, we do not treat as outstanding any shares of common stock issued pursuant to the Share Exchange and for which we do not have a record of receiving a Share Exchange Consent. We made this determination despite the fact that certificates representing certain of such shares of our common stock may have been delivered to the applicable shareholder. We cannot assure you that any person in possession of such shares of common stock but who did not deliver the applicable Share Exchange Consent will not claim ownership of such shares.
As a result of the closing of the Share Exchange, BioNeutral Laboratories became our subsidiary, and the shareholders of BioNeutral Laboratories acquired the majority ownership and control of our company. We reviewed the Financial Accounting Standards Board Accounting Standards Codification 805-40 (“FASB ASC 805-40”) and determined that BioNeutral Laboratories was the accounting acquirer and the entity which would be continuing operations. As a result, the transaction between BioNeutral Laboratories and us was accounted for as a reverse recapitalization in accordance with FASB ASC 805-40.
Business Overview
We are a life science specialty technology corporation that has developed a novel combinational chemistry-based technology which we believe can, in certain circumstances, neutralize harmful environmental contaminants, toxins and dangerous micro-organisms including bacteria, viruses and spores. We are focused on commercializing two classes of product formulations: (1) anti­microbials, which are formulations designed to kill certain harmful microscopic living organisms, and (2) bioneutralizers, which are formulations designed to destroy certain agents that are noxious and harmful to health and/or the environment.
Our Ygiene product line has not been approved for sale in the United States. To date, we have only marketed our Ogiene product line on a very limited basis but have not generated any meaningful product revenue to date. We have not marketed any of our products and have not generated any meaningful product revenue to date.
Products
We currently are focused on the commercialization of two classes of product formulations, antimicrobials and bioneutralizers. We refer to our anti­microbial formulations as our Ygiene™ products and our bioneutralizer formulations as our Ogiene™ products. A description of each of these products is set forth below.
Ygiene ™ . We have developed our Ygiene ™ products with the intent to kill certain harmful microbes, includ­ing virulent gram positive or negative bacteria, viruses, yeast, mold, fungi, spores and/or certain bioterrorism agents, such as anthrax. We are designing our Ygiene ™ formulations to target and bind to specific surface proteins and penetrate and alter the cellular structure of such proteins. They are proxy-based and we believe, based on our internal laboratory studies, on a per unit volume basis, contain more active ingredients than any commercially available antimicrobial known to us. In laboratory tests conducted by us, our Ygiene™ formulations demonstrated large zones of inhibition (areas on agar plates where growth of control organisms are prevented by antibiotics placed on agar surfaces) and high potency across a wide spectrum of harmful microbes.
We are developing our Ygiene ™ formulations for potential use in a broad range of applications, although the marketing and sale of each Ygiene ™ formulation in the United States and internationally will be subject to U.S. and foreign governmental regulations, respectively. We believe there are three potential applications of our Ygiene ™ formulations, are set forth below:
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Military/First Responders/Hospital Sterilant/Specialty Industrial: We have develop Ygiene ™ formulations for “kill on contact” applications for anthrax and other micro-organisms for use by the military, first responders, hospitals and other special industries.
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Hospital/Health Care/Mold/Industrial: We have developed the Ygiene ™ formulations for high-level disinfectant applications for Methicillin Resistant Staphylococus Aureus (MRSA), multi-drug resistant Pseudomonas Aeruginosa, E. Coli, mold and other microbes for use by hospitals and other healthcare facilities, food preparation facilities and other demanding environments, which application we refer to herein as the “Hospital and Industrial Application.”
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Consumer Products/Light Industrial/Healthcare: We have developed the Ygiene ™ formulations for sporacidal, bactericidal and virucidal applications in general areas of hospitals, nursing homes and physician and dental offices. We also are considering Ygiene ™ formulations for use as skin sanitizers.
Currently, we are focusing our efforts on the commercialization of an Ygiene ™ formulation for the Hospital and Industrial Application. Based on laboratory tests conducted by us, we believe that, under certain laboratory conditions, this Ygiene ™ formulation may be as effective as chlorine bleach or caustic soda for killing certain microbes, without the high level of toxicity generally associated with chlorine bleach or caustic soda. In these laboratory tests, the Ygiene ™ formulation inhibited the growth of over 200 microbes, including Methicillin resistant Staphylococus Aureus (MRSA), multi-drug resistant Pseudomonas Aeruginosa and E. coli.
Before we may market and sell any of our Ygiene ™ formulations in the United States, the Ygiene ™ formulation, regardless of their intended applications, must be registered with respect to each disinfectant claim for such formulation with the U.S. Environmental Protection Agency, or the EPA. Similarly, before we may market and sell any Ygiene ™ formulation in any foreign country, the Ygiene ™ formulation must be registered with the appropriate agencies of such foreign country. Our Ygiene ™ formulation that we intend to market for the Hospital and Industrial Application has not been registered with the EPA with respect to its disinfectant claims for marketing and sale in the United States, although it has been registered for marketing and sale in Germany. We cannot assure you that such formulation will be registered for marketing and sale with the EPA or any other foreign government agency on a timely basis, if at all. See “Item 1. Business - Governmental Regulation” and “Item 1A.
ITEM 1A. RISK FACTORS
An investment in our common stock is speculative and involves a high degree of risk. You should carefully consider the risks described below, together with the other information contained in this Annual Report on Form 10-K. The risks described below could have a material adverse effect on our business, financial condition and results of operations.
Risks Related to Our Business
We have generated no meaningful product revenues to date and will need to raise additional funds in the near future. If we are unable to obtain the funds necessary to continue our operations, we will be required to delay, scale back or eliminate certain of our product development activities and may not continue as a going concern.
We have generated no meaningful product revenues to date. We had net losses of approximately $3.507 million, after consideration of $450,000 attributable to the Non-Controlling interest's share of the net loss, for the year ended October 31, 2010. For the year ended October 31, 2009 we had net losses of approximately $13.5 million, after consideration of $2.1 million attributable to the Non-Controlling interest's share of the net loss. Our cash flow projections presently indicate that our current assets and projected revenues will not be sufficient to fund operations over the next twelve months. Our auditors have concluded that our net losses negative cash flow and accumulated deficit as of October 31, 2010, raise substantial doubt about our ability to continue as a going concern.
We need to raise substantial additional funds or take other measures within the next few months in order to continue our operations. Our future capital requirements will depend on numerous factors, including:
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the results of studies relating to the efficacy and impacts on health and the environment of our products;
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the scope and results of our research and development efforts;
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the time required to obtain regulatory registrations, clearances or approvals;
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our ability to establish and maintain marketing alliances and collaborative agreements; and
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the cost of our internal marketing activities.
Our ability to accurately project revenues and expenses can be significantly impacted by unforeseen events, developments and contingencies that cannot be anticipated. As such, there can be no assurance that our plans to raise additional financing will be successful or sufficient in order to sustain our operations over the next twelve months.
It is difficult for companies like ours to raise funds in the current economic environment and additional financing may not be available on acceptable terms, if at all. If adequate funds are not available, we will be required to delay, scale back or eliminate our product development activities or operations or obtain funds through arrangements with collaborative partners or others that may require us to relinquish rights to certain of our technologies or products that we would not otherwise relinquish.
For the past six months, we have relied on loans that may convert into common stock in certain instances from a shareholder and a director to fund our operations. We make no assurances that we will be able to secure similar financing arrangements in the future.
We are the subject of an ongoing investigation by the SEC that could have a material adverse impact on our business.
As described under “Item 3. Legal Proceedings”, on October 1, 2009, the SEC issued a formal order of investigation to us regarding possible securities laws violations by us and other persons. The investigation concerns the process by which we became a publicly traded entity, trading in our shares, and disclosure and promotion of developments in our business. The SEC has requested that we deliver certain documents to the SEC. We have incurred, and expect to continue to incur, significant costs in responding to such investigation. Any adverse findings by the SEC in connection with such investigation could have a material adverse impact on our business, including our ability to continue to operate as a publicly traded company.
Our directors and executive officers do not have experience in public company matters, which could impair our ability to comply with legal and regulatory requirements.
Some of our directors and executive officers have almost no public company management experience. This could impair our ability to comply with legal and regulatory requirements such as the Sarbanes-Oxley Act of 2002 and applicable federal securities laws including filing required reports and other information required on a timely basis. In fiscal 2009 we failed to meet the filing deadline for two periodic reports. There can be no assurance that our management will be able to implement and affect programs and policies in an effective and timely manner that adequately respond to increased legal, regulatory compliance and reporting requirements imposed by such laws and regulations. Our failure to comply with such laws and regulations could lead to the imposition of fines and penalties, affect our ability to operate as a publicly traded company and further result in the deterioration of our business.
Management has concluded that our internal controls over financial reporting were ineffective as of October 31, 2010.
Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. We are required to maintain a system of internal control over financial reporting, which is defined as a process designed by, or under the supervision of, our principal executive officer and principal financial officer, or persons performing similar functions, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
The areas of our internal control over financial reporting requiring improvement were generally with respect to our financial statement close process, our entity level controls (including with respect to disbursements from bank accounts), recording of stock issuances, our functional controls and our segregation of duties. See discussion under “Item 9A. Controls and Procedures” Our management has determined that we had not consistently followed established internal control over financial reporting procedures related to the analysis, documentation and review of selection of the appropriate accounting treatment for certain transactions.
Although we have assigned priority to the improvement in our internal control over financial reporting and have taken certain actions, and plan to continue to take, action in furtherance of such improvement, we cannot assure you that the above-mentioned areas will be fully remedied. Moreover, we cannot assure you that we will not, in the future, identify further areas requiring improvement in our internal control over financial reporting. We cannot assure you that the measures we have taken or will take to remediate any areas in need of improvement will be effective or that we will implement and maintain adequate controls over our financial processes and reporting in the future as we continue our growth.
If we are unable to establish appropriate internal financial reporting controls and procedures, it could cause us to fail to meet our reporting obligations, result in additional restatements of our financial statements, harm our operating results, subject us to regulatory scrutiny and sanction, cause investors to lose confidence in our reported financial information and have a negative effect on the market price for shares of our common stock. In addition, we may incur significant expenses in connection with restating our previously reported financial statements and remediating the weaknesses in our internal control over financial reporting which could have a negative effect on our operating results.
We failed to file federal tax returns for the fiscal years ended December 31, 2007 and the ten months ended October 31, 2008 and for the fiscal year ended October 31, 2009. We have also failed to file any New Jersey state tax returns. We cannot assure you that we will not incur fines and penalties for failure to file such tax returns.
We have a non-controlling interest in our subsidiary BioNeutral Laboratories.
We currently hold approximately 96% of the outstanding interests in our subsidiary, BioNeutral Laboratories. We did not receive consents to the Share Exchange from all common and preferred shareholders of BioNeutral Laboratories, and we have accounted for those shareholders who did not sign consents as holders of the remaining 4% outstanding interests in BioNeutral Laboratories as not have received shares in BioNeutral. As described in “Item I Business -- Company Overview” the Share Exchange Consents did not specify the number of shares of BioNeutral Laboratories common stock to be exchanged by the Consenting Shareholder and did not affirmatively make the representation and warranties to be made by our stockholders as set forth in the Share Exchange Agreement. In light of such omissions, there can be no assurances that a shareholder will not challenge the validity of its consent and request a rescission offer in respect of shares of common stock issued to such person. There can also be no assurances that in light of the content of such Share Exchange Consent, we had a basis for a valid private placement of our common stock issued in the Share Exchange and that we will not be requested to conduct a rescission offer.
In addition, we believe that the shareholders who consented to the Share Exchange and were issued shares of our common stock failed to deliver to us the stock certificates representing their shares of common stock and Series A Preferred Stock of BioNeutral Laboratories and may claim they also have an ownership interest in BioNeutral Laboratories. Although we would challenge any such claims, we cannot assure you that we would prevail, in which case our percentage ownership interest in BioNeutral Laboratories would decrease. In addition, any litigation with respect to such claims could result in substantial costs, diversion of management's attention and diversion of our resources. The size and uncertainty with respect to the Non-Controlling interest in BioNeutral Laboratories may make it difficult for us to raise capital, and even if we were to raise capital, would result in dilution to our stockholders at the public company level that is not experienced by stockholders that are part of the Non-Controlling interest, each of which would have a material adverse effect on our financial position.
We have a limited operating history on which to evaluate our potential for future success and to determine whether we will be able to execute our business plan. This makes it difficult to evaluate future prospects and the risk of success or failure of our business.
We have not commenced the marketing and sale of our bioneutralizer, odor controllers and antimicrobial applications and have generated no revenues to date. Consequently, our historical results of operations may not give you an accurate indication of our future results of operations or prospects. You must consider our business and prospects in light of the risks and difficulties we will encounter as an early-stage company in a new and rapidly evolving market. These risks include:
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our ability to obtain regulatory registration, clearance or approval of our products;
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our ability to effectively and efficiently market and distribute our products through our sales force and third-party distributors;
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the ability of manufacturers utilized by us to effectively and efficiently manufacture our products;
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our ability to obtain market acceptance of our current products and future products that may be developed by us;
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our ability to sell our products at competitive prices which exceed our per unit costs;
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our ability to adequately protect our intellectual property;
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our ability to attract and retain key business development, technical and management personnel; and
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our ability to effectively manage our anticipated growth.
We may not be able to address these risks and difficulties, which could materially and adversely affect our revenues, operating results and our ability to continue to operate our business. There can be no assurance that we will be able to achieve or sustain profitability, or generate sufficient cash flow to meet our capital and operating expense obligations. As a result, you could lose your entire investment in our stock.
We currently are not profitable and may never become profitable, which could negatively impact the value of our common stock.
We have a history of losses and expect to incur substantial losses and negative operating cash flow for the foreseeable future, and we may never achieve or maintain profitability. Even if we succeed in developing and commercializing one or more of our products, we expect to incur substantial losses for the foreseeable future and may never become profitable. We also expect to continue to incur significant operating and capital expenditures and anticipate that our expenses will increase substantially in the foreseeable future as we:
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continue to undertake development and laboratory testing for our product candidates;
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seek regulatory registrations, clearances or approvals for our products;
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implement additional internal systems and infrastructure;
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lease additional or alternative office facilities; and
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hire additional personnel.
We also expect to experience negative cash flow for the foreseeable future as we fund our operating losses and capital expenditures. As a result, we will need to generate significant revenues in order to achieve and maintain profitability. We may not be able to generate these revenues or achieve profitability in the future. Our failure to achieve or maintain profitability could negatively impact the value of our common stock.
We may not obtain the necessary U.S. or worldwide regulatory registrations, clearances or approvals to commercialize our products, and if we cannot commercialize our products, we will not become profitable.
We will need to register as pesticides with the EPA certain of our products we intend to commercialize in the U.S. and to obtain similar registrations from the EPA equivalent regulatory authorities in foreign jurisdictions to commercialize our product candidates in those jurisdictions. We also may need to obtain FDA clearance to commercialize any of our products we intend to market for human application.
Some of our current or future products are or may be subject to FIFRA. In order to market or sell any of our formulations that constitute pesticides, including our Ygiene ™ formulation, such formulations must be registered or licensed by the EPA. Each application for registration of a pesticide product by the EPA must include the results of laboratory testing conducted, which tests must be conducted in accordance with GLP to ensure the quality and integrity of test data submitted to the EPA in support of a pesticide product registration. If and when the GLP testing for a pesticide product is complete, we will need to submit to the EPA an application demonstrating that the product candidate is effective for its intended use and when used in accordance with recognized practice, will not cause “unreasonable adverse effects” to humans or the environment. Satisfaction of the EPA’s regulatory requirements typically requires from nine to over twenty months to complete, depending upon the type, complexity and novelty of the product and requires substantial resources for research, development and testing. We cannot predict whether our research and testing will result in products that the EPA finds effective for indicated uses and consistent with applicable regulatory standards regarding effects on humans or the environment. Testing, preparation of necessary applications and the processing of those applications by the EPA is expensive and time consuming. We do not know if the EPA will act favorably or quickly in making such reviews, and significant difficulties or costs may be encountered by us in our efforts to obtain EPA registration. The EPA also may place conditions on registrations that could restrict commercial applications of such products. Product registrations may be withdrawn if compliance with regulatory standards is not maintained or if problems occur following initial marketing.
The EPA has substantial discretion in the registration process and may require us to conduct additional testing or to perform post-marketing studies. The registration process may also be delayed by changes in government regulation, future legislation or administrative action or changes in EPA policy that occur prior to or during our regulatory review. Delays in obtaining regulatory registrations, clearances or approvals may:
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delay commercialization of, and our ability to derive product revenues from, our product candidates;
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impose costly procedures on us; and
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diminish any competitive advantages that we may otherwise have.
Even if we comply with all EPA requests, the EPA ultimately may reject any or all of our future applications. We cannot be sure that we will ever obtain registration of any of our antimicrobial products. Failure to obtain EPA registration of any of our antimicrobial products will severely undermine our business by reducing our number of salable products and, therefore, corresponding product revenues.
In foreign jurisdictions, we must obtain similar regulatory approvals from the appropriate authorities before we can commercialize our products. Foreign regulatory registration, clearance or approval processes generally include all of the risks associated with the EPA registration procedures described above. We have not yet made any determination as to which foreign jurisdictions we may seek regulatory approval in and have not undertaken any steps to obtain approvals or register our products for sale in any foreign jurisdiction other than Germany.
Independent GLP tests are very expensive, time consuming and difficult to design and implement.
Independent GLP tests are very expensive and difficult to design and implement, in part because they are subject to rigorous regulatory requirements. The laboratory testing process is also time consuming. The GLP laboratory tests with respect to the impacts on health and the environment of our Ygiene™ formulation was completed in January 2010, with positive results that we believe are acceptable for submission to the EPA in connection with our application for registration. The GLP laboratory tests with respect to the efficacy and physical characteristics of the Ygiene™ formulation was completed during July 2010. On August 19, 2010, the Company submitted its application to the U.S. Environmental Protection Agency of the Company’s Ygiene antimicrobial for approval for use as a bactericide, fungicide, sporicide on hard, non-porous surfaces in hospitals, health care facilities and other commercial uses. The Company expects to receive a determination from the EPA during the Company’s second quarter. If the Company is unable to obtain such favorable determination it could have a material adverse impact on the valuation of the valuation of the company’s Intellectual Property.
Even if our GLP testing of any of our Ygiene ™ formulations or any other products we may develop in the future are completed as planned, we cannot be certain that their results will support our product claims. The GLP testing may fail to demonstrate that our product candidates are effective for indicated use or meet the EPA's standards with respect to the impacts on health and the environment. This failure would cause us to abandon a product formulation and may delay development of other products. Any delay in, or termination of, GLP testing will delay the filing of our applications with the EPA and, ultimately, our ability to commercialize our products and generate product revenues.
If our efforts to achieve and maintain market acceptance of our products are not successful, we will not attain profitability.
We have invested a significant portion of our time and financial resources in the development and commercialization of our Ygiene™ and Ogiene™ formulations. We expect that sales of our Ygiene™ and Ogiene™ formulations will constitute a substantial portion, or all, of any revenues in future periods. Failure to obtain market acceptance for Ygiene™ and Ogiene™ formulations, whether as a result of competition, lack of customer demand, lack of product effectiveness and safety, or any other factor, would have a materially adverse effect on our business, financial condition and results of operations. Even if our products achieve market acceptance, we may not be able to maintain product sales or other forms of revenue over time if new products or technologies are introduced that are more favorably received or are more cost-effective than our products or otherwise render our products less attractive or obsolete.
We are subject to regulation by the FTC with respect to our environmental marketing claims and any other advertising claims, and if we fail to comply with such regulation, we could become subject to fines or other penalties which could have a material adverse effect on our operations.
We expect to advertise some of our products as “eco-friendly” and “green” cleaning products and must conform with the FTC's Guides for the use of Environmental Marketing Claims. In the event the FTC were to determine that our products are not in compliance with such guides, the FTC could bring enforcement actions against us on the basis that our marketing claims are false or misleading, which if successful, could subject us to fines or other penalties which could have a material adverse effect on our operations.
The specialty chemical products market is highly competitive and we may not be able to compete effectively.
Our Ogiene™ and Ygiene™ products will compete in highly competitive markets dominated by extremely large, well financed domestically and internationally recognized chemical and pharmaceutical companies. We believe substantially all of our competitors have greater financial resources than we do in the areas of sales, marketing, and branding and product development. Many of our competitors also already have well established brands and distribution, and we expect to face additional competition from these competitors in the future. Focused competition by larger chemical and pharmaceutical corporations could substantially limit or eliminate our potential market share and ability to profit from our products and technologies.
The specialty chemical products market is susceptible to rapid change, and developments by competitors with greater resources may render our products or technologies uneconomical or obsolete. Our ability to compete will depend upon our ability to quickly develop marketable products, brand recognition and novel distribution methods, and to displace existing, established and future products in our relevant target markets. We may not be successful in doing so and may not become profitable.
If we are not able to manage anticipated rapid growth effectively, we may not become profitable.
Our success will depend upon the expansion of our operations and the effective management of our growth, which will place a significant strain on our management and on our administrative, operational and financial resources. The growth in the size and geographic range of our business will place significant demands on management and our operating systems. Our ability to manage our growth effectively will depend on our ability to, among other things:
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attract additional management personnel;
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develop and improve our operating systems;
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hire, train, and manage an employee base; and
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maintain adequate service capacity.
There can be no assurance that we will be able to effectively manage growth and build the infrastructure necessary to achieve our plans for growth. If we are unable to manage our growth effectively, our business may suffer.
Our success depends on our ability to retain our key personnel and the loss of any of our key personnel may materially and adversely affect our operations and our ability to execute our growth strategy.
Our present and future performance will depend on the continued service of our senior management personnel. Our key employees include Stephen Browand, our Chairman and Chief Executive Officer, and Dr. Andy Kielbania, our Chief Scientist and Secretary. The loss of the services of any of these individuals could have a material and adverse effect on us and our stock price may decline. In addition, our ability to execute our business plan is dependent on our ability to attract and retain additional highly skilled personnel. We currently do not have long term employment agreements with our officers. We do not maintain any key man life insurance on any of our key personnel.
Because competition for highly qualified business development and scientific personnel is intense, we may not be able to attract and retain the employees we need to support our planned growth.
To successfully meet our objectives, we must attract and retain highly qualified business development and scientific personnel with specialized skill sets focused on the industries in which we compete, or intend to compete. Competition for qualified business development and scientific personnel can be intense. Our ability to meet our business development objectives will depend in part on our ability to recruit, train and retain top quality people with advanced skills who understand our technology and business. In addition, it takes time for our new personnel to become productive and to learn our business. If we are unable to hire or retain qualified business development and scientific personnel, it will be difficult for us to sell our products or to license our technology, and we may experience a shortfall in revenue and not achieve our anticipated growth.
We may become subject to product liability claims, as a result of which we could incur substantial liabilities and be required to limit commercialization of our products, which could adversely affect our business.
If we are able to sell any of our products for use by consumers and institutions, we may become liable for any damage caused by our products, whether used in the manner intended or not. Any such claim of liability, whether meritorious or not, could be time-consuming, result in costly litigation, damage our reputation and/or require us to limit the commercialization of our products. Although we maintain general liability insurance, our insurance may not cover potential claims of the types described above and may not be adequate to indemnify for all liabilities that may be imposed. Any imposition of liability that is not covered by insurance or is in excess of insurance coverage could harm our business and operating results, and you may lose some or all of any investment you have made, or may make, in our common stock.
If we are unable to obtain, maintain or defend patent and other intellectual property ownership rights relating to our technology, we may not be able to develop and market products based on our technology, which would have a material adverse impact on our results of operations and the price of our common stock.
We rely and expect in the future to rely on a combination of patent, trademark, trade secret and copyright law, and contractual restrictions to protect the proprietary aspects of our technology and business. These legal protections afford only limited protection for our intellectual property and trade secrets. Unauthorized parties may attempt to copy aspects of our proprietary technology or otherwise obtain and use information that we regard as proprietary. As a result, we cannot assure you that our means of protecting our proprietary rights will be adequate, and the infringement of such rights could have a material negative impact on our business and on our results of operations.
We have filed U.S. and foreign patent applications for our Intellectual Property as well as applications in the U.S. and European Community for the registration of our trademarks, BioNeutral ™ Ygiene ™ and Ogiene ™ . We have also filed an application in the U.S. to register our tagline SCIENCE TO SAVE LIVES & PROTECT THE ENVIRONMENT™. We may not be successful in obtaining the Intellectual Property or trademark registrations, and we may be unable to obtain additional patent and trademark protection in the future. Further, the scope of the Intellectual Property and trademarks we may obtain could potentially be inadequate to encompass our commercial operations. Furthermore, legal standards relating to the validity, enforceability and scope of protection of intellectual property rights are uncertain. It is possible that, despite our efforts, competitors or others will create and use products in violation of our Intellectual Property and/or adopt service names similar to our service names or otherwise misappropriate our intellectual property. Such patent infringement or misappropriation could have a material adverse effect on our business. Any unauthorized production of our products, whether in the U.S. or overseas, would or could reduce our own sales of products, thereby reducing, perhaps significantly, our actual or potential profits. Adopting similar names and trademarks by competitors could lead to customer confusion. Any claims or customer confusion related to our trademarks could negatively affect our business.
Litigation or other action may be necessary to enforce our intellectual property rights and protect our trade secrets. If third parties apply to register our trademarks in the U.S. or other countries, we may oppose those applications and may be required to participate in proceedings before the regulatory agencies who determine priority of rights to such trademarks. We currently are opposing applications for registration by a third party of our trademarks BioNeutral ™ and Ygiene ™ ; however, there can be no assurance that we will prevail with such opposition. Such administrative proceedings and any other litigation or adverse priority proceeding could result in substantial costs and diversion of resources, and could seriously harm our business and operating results. See “Item 3. Legal Proceedings.”
To the extent that we operate internationally, the laws of foreign countries may not protect our proprietary rights to the same extent as do the laws of the United States. Many countries have a “first-to-file” trademark registration system. As a result, we may be prevented from registering or using our trademarks in certain countries if third parties have previously filed applications to register or have registered the same or similar trademarks. Our means of protecting our proprietary rights may not be adequate, and our competitors, or potential competitors, could independently develop similar technology.
It is possible that our products infringe upon the Intellectual Property or violate the proprietary rights of others, which could have a material adverse effect on our business.
In the event that products we sell are deemed to infringe upon the Intellectual Property or other proprietary rights of third parties, we could be required to modify our products or obtain a license for the manufacture and/or sale of such products and services. In such event, we cannot assure you that we would be able to do so in a timely manner, upon acceptable terms and conditions, or at all, and the failure to do any of the foregoing could have a material adverse effect upon our business. Moreover, we cannot assure you that we will have the financial or other resources necessary to enforce or defend a patent infringement or proprietary rights violation action. In addition, if our products or proposed products are deemed to infringe or likely to infringe upon the Intellectual Property or proprietary rights of others, we could be subject to injunctive relief and, under certain circumstances, become liable for damages, which could also have an adverse effect on our business.
Because we have no experience selling, marketing or distributing products and no internal capability to do so, we may not be successful in marketing our products, which would adversely affect our results of operations.
We currently have no sales, marketing or distribution capabilities. We do not anticipate having the resources in the foreseeable future to allocate to the sales and marketing of our proposed products. Significant capital expenditures, management resources and time will be required to establish and develop an in-house marketing and sales force with technical expertise. There can also be no assurance that we will be able to develop in-house sales capabilities or that we will be able to market and sell our product in the United States or overseas, which would adversely affect the results of our operations.
We have no distribution capabilities and expect to rely primarily on product distribution arrangements with third parties. We may license our technology to certain third parties for commercialization of certain applications. We expect to enter into additional distribution agreements and licensing agreements in the future, and we may not be able to enter into these additional agreements on terms that are favorable to us, if at all. In addition, we may have limited or no control over the distribution activities of these third parties. These third parties could sell competing products and may devote insufficient sales efforts to our products. As a result, our future revenues from sales of our products, if any, will depend on the success of the efforts of these third parties.
We expect to rely exclusively on a limited number of third parties to manufacture our products, and may be unable to distribute our products if any of our manufacturers are unable to manufacture our products in a timely manner or at all, which could adversely affect our results of operations.
We have no experience in manufacturing products and do not intend to establish our own manufacturing facilities. We lack the resources and expertise to manufacture our own products. If we receive the requisite approvals to market and sell any of our products, we intend to contract with one or more manufacturers to manufacture our products. Our anticipated future reliance on a limited number of third-party manufacturers exposes us to the following risks:
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We may be unable to identify manufacturers on acceptable terms or at all because the number of potential manufacturers is limited and depending on the product formulation being manufactured may require registration, clearance or approval by the EPA or FDA. This registration, clearance or approval would require testing and compliance inspections. In addition, a new manufacturer would have to be educated in, or develop substantially equivalent processes for, production of our products after receipt of EPA or FDA registration, clearance or approval, if any.
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Our third-party manufacturers might be unable to manufacture our products in the volume and of the quality required to meet our clinical and commercial needs, if any.
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Our future contract manufacturers may not perform as agreed or may not remain in the contract manufacturing business for the time required to distribute our products.
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Pesticide manufacturers are subject to ongoing periodic unannounced inspection by the EPA and in some cases, the FDA, and corresponding state agencies to ensure strict compliance with good manufacturing practice and other government regulations and corresponding foreign standards. We do not have control over third-party manufacturers’ compliance with these regulations and standards.
·
If any third-party manufacturer makes improvements in the manufacturing process for our products, we may not own, or may have to share, the intellectual property rights to the innovation.
We expect to rely, in part, on third parties to develop Ogiene™ and Ygiene™ -based products and they may not do so successfully or diligently.
We will rely, in part, on third parties to whom we license rights to our technology to develop products containing Ogiene™ and Ygiene™ for many of the applications for which we believe Ogiene™ and Ygiene™ -based products have, or may have, market opportunities. Generally, under our contractual relationships with these third parties, we rely on the third party to fund and direct product development activities and appropriate regulatory filings. Any of these third parties may not be able to successfully develop such Ogiene™ and Ygiene™ -based products, due to, among other factors, a lack of capital, a lack of appropriate diligence, a change in the evaluation by the third party of the market potential for Ogiene™ or Ygiene™ -based products, technical failures and poorer than expected test results resulting from trial use of any products that may be developed.
If we are unable to timely fill orders for our products, our operations could be materially adversely impacted.
In order for us to successfully market our products, we must be able to timely fill orders for our product line. Our ability to timely meet our supply requirements will depend on numerous factors including our ability to successfully maintain an effective distribution network and to maintain adequate inventories and the ability of any manufacturer we engage to adequately produce our products in volumes sufficient to meet demand. Our failure to adequately supply our products to retailers or of our manufacturer to adequately produce products to meet demand could materially adversely impact our operations.
Our failure to procure adequate supplies of raw materials could delay the commercial introduction or shipment and hinder market acceptance of our products, which could materially adversely affect our business.
If for any reason we are unable to obtain any of the raw materials in our products on a timely basis or at all or if the prices of such materials increase the commercial introduction and shipment of our products could be delayed or halted and the market acceptance of our products could be hindered, any or all of which could adversely affect our business.
Risks Related to Our Corporate Governance and Common Stock
Our stock price is, and we expect it to remain, volatile, which could limit investors’ ability to sell stock at a profit.
The market price of our common stock is highly volatile and could be subject to wide fluctuations in response to a number of factors some of which are beyond our control, including:
•
dilution caused by our issuance of additional shares of common stock and other forms of equity securities in connection with future capital financings to fund our operations and growth, to attract and retain valuable personnel and in connection with future strategic partnerships with other companies;
•
announcements of new acquisitions or other business initiatives by our competitors;
•
our ability to take advantage of new acquisitions or other business initiatives;
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fluctuations in revenue from our products;
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changes in the market for our products and/or in the capital markets generally;
•
changes in the demand for our products, including changes resulting from the introduction or expansion of new products;
•
quarterly variations in our revenues and operating expenses;
•
changes in the valuation of similarly situated companies, both in our industry and in other industries;
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changes in analysts’ estimates affecting our company (if any), our competitors and/or our industry;
•
changes in the accounting methods used in or otherwise affecting our industry;
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additions and departures of key personnel;
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announcements of technological innovations or new products available to the our industry;
•
announcements by relevant governments pertaining to incentives for products utilizing our technology;
•
fluctuations in interest rates and the availability of capital in the capital markets; and
•
significant sales of our common stock, including sales by investors following registration of the shares of our common stock issued in connection with the Share Exchange Agreement and/or future investors in future offerings we expect to make to raise additional capital.
These and other factors are largely beyond our control, and the impact of these risks, singly or in the aggregate, may result in material adverse changes to the market price of our common stock. In addition, the stock market in general, and the market for specialty chemical companies in particular, has experienced extreme price and volume fluctuations that may have been unrelated or disproportionate to the operating performance of individual companies. These broad market and industry factors may seriously harm the market price of our common stock, regardless of our operating performance.
On the OTCBB, there will be a limited trading market for our common stock and you may not be able to resell your shares at or above the price at which you purchased your shares, or at all.
Our common stock is quoted on the OTCBB. Trading volume of OTCBB stocks have been historically lower and more volatile then stocks traded on an exchange. Quoting of our stock on the OTCBB could have an adverse effect on the market price of, and the efficiency of the trading market for, our common stock, not only in terms of the number of shares that can be bought and sold at a given price, but also through delays in the timing of transactions and less coverage of us by securities analysts, if any. Trading on the OTCBB may also reduce the fair market value of our common stock and have an adverse effect on our ability to raise capital in the public of private equity markets or to acquire other companies or technologies by using common stock as consideration.
Future sales of our common stock, or the perception that such sales could occur, could have an adverse effect on the market price of our common stock.
As of October 31, 2010 there were approximately 74,643,115 shares of our common stock and approximately 146 holders of our common stock. Future sales of our common stock, pursuant to a registration statement or Rule 144 under the Securities Act, or the perception that such sales could occur, could have an adverse effect on the market price of our common stock. The shares of our common stock issued in connection with the consummation of the Share Exchange (other than shares of our common stock held by our Chief Executive Officer and one of our directors that are subject to a lock-up agreement), which is a large number of shares relative to the trading volume of our common stock, may be eligible for resale under Rule 144 following the date on which we file this Annual Report so long as the applicable conditions contained in Rule 144(i) are satisfied. The market price of our common stock could fall if the holders of these shares sell them or are perceived by the market as intending to sell them.
Since our common stock is classified as a “penny stock,” our common stock will be subject to rules that impose sales practice and disclosure requirements on broker-dealers who engage in certain transactions involving a penny stock.
We are subject to the penny stock rules adopted by the SEC that require brokers to provide extensive disclosure to its customers prior to executing trades in penny stocks. These disclosure requirements may cause a reduction in the trading activity of our common stock, which in all likelihood would make it difficult for our stockholders to sell their securities.
Rule 3a51-1 of the Exchange Act establishes the definition of a “penny stock,” for purposes relevant to us, as any equity security that has a minimum bid price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to a limited number of exceptions which are not available to us. It is likely that our shares will be considered to be penny stocks for the immediately foreseeable future. This classification severely and adversely affects any market liquidity for our common stock.
For any transaction involving a penny stock, unless exempt, the penny stock rules require that a broker or dealer approve a person's account for transactions in penny stocks and the broker or dealer receive from the investor a written agreement to the transaction setting forth the identity and quantity of the penny stock to be purchased. In order to approve a person's account for transactions in penny stocks, the broker or dealer must obtain financial information and investment experience and objectives of the person and make a reasonable determination that the transactions in penny stocks are suitable for that person and that that person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.
The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prepared by the SEC relating to the penny stock market, which, in highlight form, sets forth:
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the basis on which the broker or dealer made the suitability determination; and
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that the broker or dealer received a signed, written agreement from the investor prior to the transaction.
Disclosure also must be made about the risks of investing in penny stocks in both public offerings and in secondary trading and commission’s payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.
Because of these regulations, broker-dealers may not wish to engage in the above-referenced necessary paperwork and disclosures and/or may encounter difficulties in their attempt to sell shares of our common stock, which may affect the ability of selling shareholders or other holders to sell their shares in any secondary market and have the effect of reducing the level of trading activity in any secondary market. These additional sales practice and disclosure requirements could impede the sale of our common stock, if and when our common stock becomes publicly traded. In addition, the liquidity for our common stock may decrease, with a corresponding decrease in the price of our common stock. Our common stock are subject to such penny stock rules for the foreseeable future and our shareholders will, in all likelihood, find it difficult to sell their common stock.
The market for penny stock has experienced numerous frauds and abuses which could adversely impact subscribers of our stock.
We believe that the market for penny stocks has suffered from patterns of fraud and abuse. Such patterns include:
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control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer;
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manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases;
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“boiler room” practices involving high pressure sales tactics and unrealistic price projections by inexperienced sales persons;
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excessive and undisclosed bid-ask differentials and markups by selling broker-dealers; and
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wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the inevitable collapse of those prices with consequent investor losses.
We believe that many of these abuses have occurred with respect to the promotion of low price stock companies that lacked experienced management, adequate financial resources, an adequate business plan and/or marketable and successful business or product.
We do not expect to pay dividends in the foreseeable future.
We do not intend to declare dividends for the foreseeable future, as we anticipate that we will reinvest any future earnings in the development and growth of our business. Therefore, investors will not receive any funds unless they sell their common stock, and stockholders may be unable to sell their shares on favorable terms or at all. Investors cannot be assured of a positive return on investment or that they will not lose the entire amount of their investment in the common stock.
Cautionary Note Regarding Forward-Looking Statements.
This Annual Report on Form 10-K may contain forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act.
Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, anticipations, assumptions, estimates, intentions, and future performance, and involve known and unknown risks, uncertainties and other factors, which may be beyond our control, and which may cause our actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements.
All statements other than statements of historical fact are statements that could be forward-looking statements. You can identify these forward-looking statements through our use of words such as “may,” “will,” “can,” “anticipate,” “assume,” “should,” “indicate,” “would,” “believe,” “contemplate,” “expect,” “seek,” “estimate,” “continue,” “plan,” “point to,” “project,” “predict,” “could,” “intend,” “target,” “potential,” and other similar words and expressions of the future. These forward-looking statements may not be realized due to a variety of factors, including, without limitation:
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our inability to raise capital;
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our failure to obtain the necessary regulatory approvals for our products;
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the results of the current SEC investigation of our company;
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the inability to obtain or retain customer acceptance of our products;
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the failure of the market for our products to develop;
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our inability to protect our intellectual property;
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our inability to manage any growth;
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the effects of competition from a wide variety of local, regional, national and other providers of products similar to our products;
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changes in laws and regulations, including tax and securities laws and regulations and laws and regulations promulgated by the EPA, FDA and FTC.
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changes in accounting policies, rules and practices;
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changes in technology or products, which may be more difficult or costly, or less effective than anticipated; and
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the other factors listed under this Item 1A - “Risk Factors.”
All forward-looking statements are expressly qualified in their entirety by this cautionary notice. You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K. We have no obligation, and expressly disclaim any obligation, to update, revise or correct any of the forward-looking statements, whether as a result of new information, future events or otherwise. We have expressed our expectations, beliefs and projections in good faith and we believe they have a reasonable basis. However, we cannot assure you that our expectations, beliefs or projections will result or be achieved or accomplished.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2
ITEM 2 . PROPERTIES
Our executive offices are located at New Jersey Institute of Technology, 211 Warren Street, Newark, New Jersey 07103. Our facilities located in Newark, New Jersey consist of approximately 519 square feet of office space and approximately 590 square feet of laboratory space. We currently occupy this space pursuant to a lease which began on September 1, 2005 and has been renewed every year since inception. The current lease has been renewed on September 1, 2010 and expires on August 31, 2011, subject to our option to renew the lease for an additional one year period on terms and conditions set forth therein. All leases at the Enterprise Development Center at the NJIT campus are limited to a one year term. Pursuant to the lease, we are required to pay rent in the amount of $2,834 per month. Such rental payment includes all common area maintenance costs.
We believe that our existing facilities are suitable as office and laboratory space, and are adequate to meet our current needs. We also believe that our insurance coverage adequately covers our current interest in our leased space. We do not own any real property for use in our operations or otherwise.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
On October 1, 2009, the SEC issued a formal order of investigation to us regarding possible securities laws violations by us and other persons. The investigation concerns the process by which we became a publicly traded entity, trading in our shares, and disclosure and promotion of developments in our business. The SEC has requested that we deliver certain documents to the SEC. We have, and will continue to, fully cooperate with the SEC with respect to its investigation. We have not received any further communication from the SEC concerning the investigation since November of 2009.
In April 2005, we filed in the USPTO an application for the registration of the trademarks BioNeutral™, Ogiene™ and Ygiene™, based on our intent to use each of these marks in commerce. In April 2006, the USPTO issued notices of allowance signifying that each of these trademarks were entitled to registration after timely submission of statements of use, including evidence that such trademarks have been properly used in commerce. From June through November of 2008, however, our applications for each of these trademarks were declared abandoned by the USPTO, since we inadvertently failed to timely file the appropriate statements of use with respect to each trademark within the six-month period from the date the USPTO issued the respective notices of allowance. In July 2009, we refiled applications for each of these trademarks as well as our tagline SCIENCE TO SAVE LIVES & PROTECT THE ENVIRONMENT™; however, we learned that PURE Bioscience, a company focused on the development and commercialization of bioscience products, had filed application for the registration of the trademarks BioNeutral™ and Ygiene™ prior to our refiling of our applications. Although we have filed with the Trademark Trial and Appeal Board oppositions to PURE Bioscience's applications and intend to pursue such oppositions vigorously, we cannot assure you that we will be successful with such opposition on a timely basis, if at all.
Other than the foregoing, we are not a party to, and none of our property is the subject of, any pending legal proceedings other than routine litigation that is incidental to our business.
PART II.
ITEM 5.
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Public Market for Common Stock
Our common stock has been quoted on the OTC Bulletin Board under the symbol “BONU.OB” since February 20, 2009. Prior to February 20, 2009, there was no public trading market for our shares of common stock. The following table sets forth the range of quarterly high and low sales prices of our common stock as reported for the periods indicated:
As of February 11, 2011 there were approximately 146 holders of record of our common stock.
Dividends
We have not paid any cash dividends to shareholders. The declaration of any future cash dividends is at the sole discretion of our board of directors and depends upon our earnings, if any, our capital requirements and financial position, our general economic conditions, and other pertinent conditions. It is our present intention not to pay any cash dividends in the foreseeable future, but rather to reinvest earnings, if any, in our business operations.
Unregistered Sales and Issuance of Equity Securities.
The following is a description of issuances of shares of our equity securities that were not registered under the Securities Act during the twelve months ended October 31, 2010 and which shares were not previously disclosed by us in a Quarterly Report on Form 10-Q or Current Report on Form 8-K.
During fiscal 2010, the Company exchanged shares with several of the BioLabs preferred and common stockholders, all of whom exchanged their shares at a ratio of 1 share of preferred stock for 10 shares of common stock and 1 to 1 common exchange, except for four preferred stockholders and common stockholders of BioLabs who were issued an aggregate of 3,598,800 shares of common stock. These four shareholders exchanged their shares at a ratio of 200 shares of common stock for 1 share of preferred stock and a 1 to 1 common share exchange. Although all of the exchanged shares are reflected in the financial statements as issued and outstanding, the issuance of shares to the four holders who exchanged at the higher exchange ratio is subject to dispute.
As a result of the above transaction, the company is disputing the issuance 2,634,730 shares of common stock. The outcome of this dispute is expected to be resolved in the near future
.
Equity Issuance
During the year ended October 31, 2010, the Company issued 735,715 shares of the Company’s common stock for gross proceeds of $180,000 to various investors. All of such shares were issued pursuant to an exemption from registration under the Securities Act by virtue of Section 4(2) of the Securities Act. Each individual investor represented to us, among other things, that such investor is a sophisticated investor with access to all relevant information necessary to evaluate its investment and that the purchased shares were being acquired for investment purposes only. The Company also issued 90,000 shares to a current shareholder in the satisfaction of $13,500 in debt.
Consulting Agreements
The Company issued 100,000 shares in satisfaction of $40,000 in payment of legal services incurred during the year. The Company issued 110,780 shares for financial advisory and accounting related services and 182,730 shares for marketing and public relations services in satisfaction of $43,000 and $67,500 respectively. The company issued 200,000 of its common stock in settlement for a disputed consulting contract in satisfaction of a consulting agreement related to marketing services valued at $80,000. Shares issued in the above paragraph are valued at the market price during the period for which services were provided.
Other Equity Issuances
During the year ended October 31, 2010 various holders of our preferred stock exchanged 196,238 shares of Series A preferred stocks for 1,962,380 shares of common stock at the rate of 10 shares of common stock to one share of preferred stock, in accordance with the term of our preferred share agreement, dated December 12, 2006. During the year ended October 31, 2010 and in connection with the Share Exchange (as defined below), various non-controlling interests exchanged 1,572,044 shares of BioLabs common stock for the same amount of shares of our common stock.
Convertible Debt Capital Funding
On November 13, 2009, the Company issued (i) an unsecured promissory note to Michael D. Francis, a shareholder of the Company, in the amount of $250,000, (ii) a second unsecured promissory note on January 4, 2010 in the amount of $250,000, a (iii) a third unsecured promissory note in the amount of $250,000, on March 15, 2010 of which $100,000 was drawn down by the Company on March 15, 2010 and $150,000 on April 1, 2010, (iv) a fourth secured promissory note in the amount of $100,000 on April 30, 2010 with an original issuance date of April 26, 2010, and (v) a fifth unsecured promissory note in the amount of $25,000 on July 7, 2010 (all such notes issued to Mr. Francis are collectively referred to as the “Francis Notes”).
On November 13, 2009, the Company issued an unsecured promissory note to Capara Investments LLC (“Capara”), in the amount of $250,000 and (ii) a second unsecured promissory note to Capara on January 4, 2010 in the amount of $250,000 and (iii) a third unsecured promissory note to Capara on September 2, 2010 in the amount of $25,000 and (iv) a fourth unsecured promissory note to Capara on October 13, 2010 in the amount of $25,000.The sole member of Capara, Raj Pamani, is a member of our Board and a shareholder of the Company.
The Francis Notes and the Capara Notes are sometimes referred to herein as the “Shareholder Notes”. The Shareholder Notes resulted in gross proceeds to the Company of $1,425,000.
On October 28, 2010, the Company issued an unsecured promissory note to Blackbeth Holdings Ltd, in the amount of $50,000.
Each of the Shareholders Notes bears an 8% annual interest rate, is due and payable in cash on the fifth anniversary of the date of issuance, and upon consummation of a “Qualified Financing” (as defined in each of the Shareholder Notes), will automatically be exchanged for, solely at our election, either (i) securities on the same terms and conditions as those received by investors in such Qualified Financing based on an assumed exchange rate reflecting the pricing used in such financing or (ii) shares of our common stock equal to the quotient obtained by dividing (x) the then outstanding principal amount of the Shareholder Note by (y) the lower of (i) $0.69 and (ii) the Fair Market Value (as defined in the Shareholder Notes) of one share of our common stock as of the date of such exchange. On each three (3) month anniversary of the issuance of each Shareholder Note, all accrued and unpaid interest shall be added to the unpaid principal amount of such note. Each of the Shareholder Notes defines “Qualified Financing” as an investment in securities of the Company (including any financing that includes convertible indebtedness and/or warrants) occurring after the date of issuance of the Shareholder Note by an investor that is not an affiliate of our company in which we receive net proceeds greater than $500,000 (including any additional investment by the holder of the Shareholder Note or by the holder of any other 8% exchangeable promissory note) in the Qualified Financing. The secured promissory note in the principal amount of $100,000 issued by the Company to Mr. Francis on April 30, 2010, is secured by the Company’s Intellectual Property (as defined in such promissory note).
Accrued and unpaid interest is added to the unpaid principal amount of the Shareholder Notes every three months. Interest expense on the Shareholder Notes for the year ended October 31, 2010 and 2009 was $87,097 and $0, respectively. As of October 31, 2010, $70,646 of accrued interest was added to the principal amount of the Shareholder Notes.
We relied on the exemption from registration provided by Section 4(2) of the Securities Act for all such issuances of our common stock described above.
Securities Authorized for Issuance under Equity Compensation Plans
The following table provides information as of October 31, 2010 with respect to the shares of our Common Stock that may be issued under our existing equity compensation plans.
ITEM 6
ITEM 6 . SELECTED FINANCIAL DATA
Not applicable.
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The following discussion contains forward-looking statements and involves risks and uncertainties, including, but not limited to, those described under “Item 1. Business-Risk Factors” of this Annual Report on Form 10-K. Actual Results may differ materially from those contained in any forward-looking statements. The following discussion should be read in conjunction with the financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K.
Company Overview
We are life science specialty technology corporation that has developed a novel combinational chemistry-based technology which we believe can, in certain circumstances, neutralize harmful environmental contaminants, toxins and dangerous micro-organisms including bacteria, viruses and spores. We are focused on developing and commercializing two classes of product formulations: (1) anti­microbials, which are formulations designed to kill certain harmful microscopic living organisms, and (2) bioneutralizer, which are formulations designed to destroy certain agents that are noxious and harmful to health and/or the environment. We have not marketed any of our products and have not generated any meaningful product revenue to date.
We currently are focused on the commercialization of two classes of product formulations, antimicrobials and bioneutralizer. We refer to our anti­microbial formulations as our Ygiene™ products and our bioneutralizer formulations as our Ogiene™ products. Our Ygiene ™ products are being developed to kill certain harmful microbes, including virulent gram and bacteria (which cause staph infections), viruses, yeast, mold, fungi, spores and/or certain bioterrorism agents, such as anthrax. Our Ogiene™ products are being developed to eliminate or reduce odors of many chemicals such as hydrogen sulfide, formaldehyde and ammonia, and to reduce certain greenhouse gases such as carbon dioxide and sulfur dioxide.
The marketing and sale in the United States and foreign countries of some of our current products and the products we may develop in the future are and may be subject to U.S. and foreign governmental regulations, respectively, which vary substantially from country to country. The marketing and sale of our Ygiene ™ products in the United States, is subject to EPA registration and in some cases, FDA clearance, and we cannot market and sell any of such products in the United States until such registration or clearance is obtained. We do not believe the marketing sale of our Ogiene ™ products are subject to EPA registration or FDA clearance. We have not sold any of our Ygiene ™ or Ogiene ™ products to date. We currently are focusing our efforts and resources on obtaining the registrations, clearances and approvals necessary to marketing and selling our Ygiene ™ products in the United States; however, we cannot assure you that we will be have the financial resources to do so or that such registrations, clearances and approvals will be obtained on a timely basis, if at all.
Accounting Treatment
On January 30, 2009, we entered into a Share Exchange Agreement with BioNeutral Laboratories pursuant to which we agreed to issue to the shareholders of BioNeutral Laboratories 44,861,023 shares of our common stock.
In connection with the Share Exchange, certain shareholders of BioNeutral Laboratories delivered the Share Exchange Consents to BioNeutral Laboratories approving the execution and delivery by BioNeutral Laboratories of the Share Exchange Agreement. Such persons are referred to herein as the “Consenting Shareholders.” The Share Exchange Consents did not specify the number of shares of common stock of BioNeutral Laboratories to be exchanged by the Consenting Shareholder. Schedule II to the Share Exchange Agreement, however, contained a list of holders of common stock of BioNeutral Laboratories (certain of which shareholders also held Series A Preferred Stock of BioNeutral Laboratories), shares of our common stock to be issued to such shareholders, and shares of our common stock to be issued to holders of the Series A Preferred Stock of BioNeutral Laboratories.
Approximately 96% of BioNeutral Laboratories common shareholders exchanged their shares of common stock of BioNeutral Laboratories for shares of our common stock (including 88% of the outstanding shares of the Series A Preferred Stock of BioNeutral Laboratories on an as-converted basis). We issued 42,250,090 shares of our common stock in respect of the exchanged shares of common stock of BioNeutral Laboratories. As a result of the Share Exchange, BioNeutral Laboratories shareholders held approximately 66% controlling interest in the combined entity, after giving effect to the Share Exchange.
Since the owners and management of BioNeutral Laboratories possessed voting and operating control of the combined company after the Share Exchange, the transaction constituted a reverse acquisition for accounting purposes, as contemplated by FASB ASC 805-40 and corresponding ASC 805-10-55-10, 12 & 13. Under this accounting, the entity that issues shares (our company - the legal acquirer) is identified as the acquiree for accounting purposes. The entity whose shares are acquired (BioNeutral Laboratories) is the accounting acquirer.
In addition, we were characterized as a non-operating public shell company, pursuant to SEC reporting rules. The SEC staff considers a reverse-acquisition with a public shell to be a capital transaction, in substance, rather than a business combination. The transaction is effectively a reverse recapitalization, equivalent to the issuance of stock by the private company for the net monetary assets of the shell corporation accompanied by a recapitalization. The accounting is similar to that resulting from a reverse acquisition, except that the transaction was consummated at book value and no goodwill or intangible assets were recognized.
For SEC reporting purposes, BioNeutral Laboratories is treated as the continuing reporting entity that acquired Moonshine Creations, Inc. (the historic shell registrant). The reports filed after the transaction have been prepared as if BioNeutral Laboratories (accounting acquirer) were the legal successor to Moonshine Creations. Inc’s reporting obligation as of the date of the acquisition. Therefore, all financial statements filed subsequent to the transaction reflect the historical financial condition, results of operations and cash flows of BioNeutral Laboratories, for all periods presented.
As referenced above, initially approximately 14% of BioNeutral Laboratories shareholders did not participate in the initial exchange of their shares of common stock of BioNeutral Laboratories for shares of our common stock. Those shareholders are treated as a Non-Controlling interest in our financial statements in accordance with FASB ACS 805-40-30-3. The assets, liabilities and operations underlying the shares of common stock of BioNeutral Laboratories and our company are identical. However, the shares representing the ownership of our company reflect the combined entity after the Share Exchange, while the shares of common stock of BioNeutral Laboratories represent ownership of only that legal entity. In connection with the reverse acquisition and recapitalization, all share and per share amounts of BioNeutral Laboratories were retroactively adjusted to reflect our legal capital structure pursuant to FASB ASC 805-40-45-1.
Plan of Operation
Our strategic plan for our fiscal year ending October 31, 2010 is focused on leveraging developments in the European Union for our Ygiene™ professional disinfectant product and continuing our work within the regulatory process of the U.S. for EPA registration. Our Ygiene™ professional disinfectant product and multipurpose cleaner and disinfectant product were registered with the German Bundesanstalt für Arbeitsschutz und Arbeitsmedizin, a German government sanctioned institute for safety and health, on January 5, 2010 and November 30, 2009, respectively. As a result of such registrations, we are permitted to sell such Ygiene™-based products in Germany, although we have not sold any of our products in Germany and currently do not have adequate resources to attempt to make any such sales or to have our products manufactured for sale. Similar regulatory registration is anticipated with additional major members of the European Union during fiscal year 2011. We believe these registrations present us with a strong and dynamic platform for accessing well developed global markets for commercial use of our Ygiene™ professional disinfectant product and multipurpose cleaner and disinfectant product.
Currently, we are focusing our efforts on the development and commercialization of a Ygiene ™ formulation for the Hospital and Industrial Application. We are developing our Ogiene™ products to potentially eliminate or reduce odors of many chemicals such as hydrogen sulfide, formaldehyde and ammonia, and to reduce certain green­house gases such as carbon dioxide and sulfur dioxide. Our Ogiene™ formulations are designed to interact with the functional organic or inorganic groups of harmful gases and reduce or eliminate them.
We believe that our products can offer a superior solution that addresses needs not currently being met in the marketplace for combating bacteria, viral and spore based threats. We further believe that our products can provide a distinct advantage when distinguishing them from those that are currently in use in our targeted markets. In addition, our core product is flexible and adaptable for multiple applications. Industry or use specific modifications made by our professional scientist allow our products to be readily customized to the demands of multiple unique markets.
We are emphasizing these strategic advantages as part of our brand development efforts to overcome competitive barriers to entry in markets that are driven by large, established organizations. The markets for our Ogiene™ and Ygiene™ products and each of their potential channels are highly competitive. We have a number of competitors that vary in size and scope and breadth of products offered. Such competitors include some of the largest corporations in the world, and we believe substantially all of our competitors have greater financial resources than we do, including in the areas of sales, marketing, and branding and product development. We expect to face additional competition from other competitors in the future.
Because Ogiene™ and Ygiene™ are new formulations enhanced from our initial base formulas, our success will depend, in part, upon our ability to achieve market share at the expense of existing, established and future products in our relevant target markets. Even if our Ogiene™ and Ygiene™ formulations may have technological competitive advantages over competing products, we or potential distributors, will need to invest significant resources in order to attempt to displace traditional technologies sold by what are in many cases well-known international industry leaders. Alternatively, we may pursue strategies in selective markets of encouraging existing competitors to incorporate our products into their existing brands, thereby reducing the proportion of end-use revenues that would accrue to us. To the extent that we were to grant any existing competitor exclusivity to any field and/or territory, we would risk having our technology marketed in a manner that may be less than optimal for us. We recognize that innovative marketing methods may be required in order to establish our products, and that such methods may not be successful.
On August 19, 2010, the Company submitted its application to the U.S. Environmental Protection Agency of the Company’s Ygiene antimicrobial for approval for use as a bactericide, fungicide, sporicide on hard, non-porous surfaces in hospitals, health care facilities and other commercial uses. The Company expects to receive a determination from the EPA within six to eight months of the filing. If the Company is unable to obtain such favorable determination it could have a material adverse impact on the valuation of the Intellectual Property.
The Company has authorized Steve Campus of the Campus Group and J-Man Distributors to exclusively represent BioNetural’s Odor Eliminator and its Multi Purpose Cleaner to a major home shopping cable network.
In a second agreement, BioNeutral announced that J-Man Distributors has concluded an exclusive commercial agreement with Planned Companies, under which Planned Companies will exclusively use BioNetural’s AutoNeutral(™ ) product to clean and deodorize the automobiles of an international car sharing company that it contractually provides cleaning services for in the New York metro area.
Results of Operations
Comparison of Results of Operations for Fiscal Year Ended October 31, 2010 (“fiscal 2010”) and the Fiscal Year Ended Ten Months Ended October 31, 2009 (“fiscal 2009”).
Revenues : During fiscal 2010 the Company generated revenues of $15,500 as compared to revenues of $2,825 for fiscal 2009 from the Ogiene™ product line from a national distributor that is focusing on distribution of the AutoNeutral™ product, which is an Ogiene™ formulation designed for cleaning and de-odorizing vehicles. Our efforts have been focused on sales and marketing of our non regulated Ogiene™ product line as well the sale of our Ygiene ™ formulation for the Hospital and Industrial Application in Germany the UK and France where the product has been registered for marketing and sale. Additionally, we are continuing our efforts to obtain the regulatory approvals required for the sale and distribution in the United States .of our Ygiene ™ formulation.
Operating Expenses: Our operating expenses consist of compensation of our executive and scientific staff, consulting expenses supporting development of, and regulatory approvals for, our products, legal and accounting services, and non-cash amortization of our intellectual property.
Selling, general & administrative (“SG&A”) expenses for fiscal 2010 and fiscal 2009 included non-cash stock-based compensation to employees of $0 and $1,648,045, respectively primarily for agreements with our Chief Executive Officer and our prior Chief Financial Officer. In addition, for fiscal 2010 and fiscal 2009, $168,966 and $3,347,515 million, respectively of non-cash stock based compensation expense was reported for amounts paid for services to non-employees.
SG&A costs for fiscal 2010 that were paid or payable in cash include approximately $149,500 related to our agreement with the Chertoff Group, L.L.C., an aggregate of approximately $189,900 to a director and a company with which such director is affiliated under agreements we have with the director and his affiliated company, and $91,300 for independent consulting expenses. SG&A costs for fiscal 2009 that were paid or payable in cash include approximately $172,000 related to our agreement with the Chertoff Group, L.L.C., an aggregate of approximately $270,000 to a director and a company with which such director is affiliated under agreements we have with the director and his affiliated company, and $95,000 for independent consulting expenses. In addition, there were significant increases in legal and accounting expenses related to the Share Exchange involving BioNeutral Laboratories Corp USA, and us becoming a public company. Total legal and accounting expenses reported for fiscal 2010 and fiscal 2009 were approximately $1,224,000 and $674,000, respectively.
Amortization & depreciation increased to $696,750 in fiscal 2010 from the $627,301 reported in fiscal 2009 as a result of the increased investment in our intellectual property. Business development agreements in which we entered into with entities responsible for advancing our market access in Asia and the European Union accounted for approximately $11 million of such expense. Of that amount, $8,050,091 was reflected as a charge off in the fourth quarter of fiscal 2009 upon management’s determination that the related prepaid asset balance was not recoverable (see full discussion in Note 14 to the financial statements).
We anticipate operating expenses will increase for fiscal 2011. We anticipate increased legal, accounting and investor relations fees related to being public and the regulatory processes involved with registration, clearance or approval of our products for sale in global markets. We also anticipate we will need to add up to five additional employees to our professional and support staff, as part of our growth and development.
Net Loss: We experienced a net loss from operations before consideration of our Non-Controlling interest of $3,833,324 for fiscal 2010. The discussion of operating expenses identifies the elements of the net loss. In 2009, our net loss was $15,598,163. We anticipate we will experience a net loss in fiscal 2011 as we continue to pursue regulatory approvals for the sale and distribution of our products and development of access to global markets.
Analysis of Impairment
In conjunction with our 2010 audit, we performed our annual impairment testing during January 2011. In this analysis, we determined that the current carrying value of our Intellectual Property approximately $11,254,000.
We computed the Intellectual Property value of using a discounted cash model. In our discounted cash flow analysis, we prepared a ten year forecast of our expected earnings to derive an explicit stream of expected free cash flows through October 31, 2021. We developed our revenue and direct variable costs forecast based on a variety of factors including our current and anticipated sales pipeline, knowledge of our business and industry, general economic conditions in the marketplace and expectations of market opportunity with respect to the specific types of advertising services we provide. Our operating expenses are generally fixed and predictable; however, we increased our budgeted operating expenses by an amount that we believe is approximately equal to theoretical lease costs we would incur had our parent company not provided us with facilities that are not a component of operating costs in our goodwill reporting unit. We computed the present value of our explicit year cash flows using discount rates ranging from approximately 16% to 18% with various target financing structures during the course of computing our weighted average cost of capital (“WACC”). We specifically considered a range of assumptions for both equity and debt financings; such as risk free interest rate, market risk premium, small cap premium, company specific premium and sensitivity premium. After having determined the amount of our explicit year cash flows, we assumed that the Company would experience a long-term growth rate in free cash flows of 2% per annum thereafter. The range of Intellectual Property values we derived using the above noted discount amounted to $12,983,000, which exceeds the carrying value of our Intellectual Property by $1,729,000.
Liquidity and Capital Resources
We had $59,395 of cash at October 31, 2010. Cash used by operations for fiscal 2010 was $1,735,208. The principal use of funds were for consulting services supporting the development of our business plan, legal, and accounting fees in connection with becoming a public company and daily operations of the business, including rent and travel and laboratory costs. Costs associated with developing and filing our Intellectual Property used an additional $127,316 of cash.
In fiscal 2010, we raised $180,000 of cash from the issuance of our capital stock to fund operations. We received $1,475,000 from the issuance of convertible debentures.
We had $139,663 of cash at October 31, 2009. Cash used by operations for fiscal 2009 was $ 1,627,610 The principal use of funds were for consulting services supporting the development of our business plan, legal, and accounting fees in connection with becoming a public company and daily operations of the business, including rent and travel and laboratory costs. Costs associated with developing and filing our Intellectual Property used an additional $ 8,467 of cash.
In fiscal 2009, we raised $1,689,802 of cash from the issuance of our capital stock to fund operations. We received $600,000 from conversion of 90-day debentures issued in connection with the Share Exchange in the first quarter, $450,000 from a private placement in the fourth quarter, and approximately $695,000 from investments made by private investors throughout the fiscal year.
We are not currently generating significant revenues and rely on raising new capital to fund our ongoing operations and development of our strategic business objectives. While we have been able to use proceeds from the sale of our shares of common stock to fund a substantial balance of our operating costs, we do not expect that our funds will be sufficient to meet our anticipated needs through August 1, 2011 and we will need to raise additional capital during fiscal 2011 to fund the full costs associated with our growth and development. The Company believes that we will be able to generate sales by the third quarter of 2011 and that we will require approximately $2,500,000 in additional capital in order to achieve our goals. Subsequent to the end of October 31, 2010, we have raised approximately $325,000 in a combination of issuing debt and selling equity. There can be no assurances that we will be successful in raising additional capital on favorable terms if at all. If the Company is unable to secure additional capital, it may be required to curtail its business development initiatives, impair its intellectual property and take additional measures to reduce cost in order to conserve cash.
These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Accordingly, the accompanying audited consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplates continuation of the Company as a going concern and the realization of assets and the satisfaction of liabilities in the normal course of business. The carrying amounts of assets and liabilities presented in the financial statements do not necessarily purport to represent realizable or settlement values. The audited consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires judgment on the part of management to arrive at estimates and assumptions on matters that are inherently uncertain. These estimates may affect the amount of assets, liabilities, revenue and expenses reported in the financial statements and accompanying notes and disclosure of contingent assets and liabilities within the financial statements. Estimates and assumptions are periodically evaluated and may be adjusted in future periods. Actual results could differ from those estimates.
Stock-Based Payments - Significant amounts of our shares of common stock are issued as payment to employees and non-employees for services and periodically as consideration for acquisition of assets. These are non-cash transactions that require management to make judgments related to the fair value of the shares issued, which affects the amounts reported in our consolidated financial statements for certain of our assets and expenses. For historic fiscal years when there was not an observable active, liquid market for our shares, the valuation of the shares issued in a non-cash share payment transaction relied on observation of arms-length transactions where cash was received for our shares, before and after the non-cash share payment date.
Impairment of long-lived assets - Long-lived assets, such as property and equipment and definite-life intangible assets (i.e. Intellectual Property) are evaluated for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable in accordance with FASB ASC 360-10-35-17 thru 35-35 “Measurement of an Impairment Loss”. We assess the impairment of the assets based on the undiscounted future cash flow the assets are expected to generate compared to the carrying value of the assets. If the carrying amount of the assets is determined not to be recoverable, a write-down to fair value is recorded. Management estimates future cash flows using assumptions about expected future operating performance. Management’s estimates of future cash flows may differ from actual cash flow due to, among other things, technological changes, economic conditions or changes to our business operations. Our Intellectual Property was tested for impairment as of October 31, 2010. Forecasted undiscounted future cash flows exceeded the carrying amount of the assets indicating that the assets were not impaired.
New Accounting Pronouncements
See Note 2 of Notes to Consolidated Financial Statements included in Item 8
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Index to Consolidated financial statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Bioneutral Group, Inc.
We have audited the accompanying consolidated balance sheet of Bioneutral Group, Inc. as of October 31, 2010, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Bioneutral Group, Inc. as of October 31, 2010, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 3, the Company had a working capital deficiency of approximately $1.8 million for the year ended October 31, 2010 and accumulated deficit of approximately $50 million as of October 31, 2010. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plan regarding these matters is described in Note 3. The consolidated financial statements do not include adjustments that might result from the outcome of this uncertainty.
/s/ Marcum LLP
Marcum, LLP
New York, NY
February15, 2011
Bartolomei Pucciarelli, LLC
2564 Brunswick Pike
Lawrenceville, NJ 08648
Report of Independent Registered Public Accounting Firm
To the Board of Directors and
Stockholders of BioNeutral Group, Inc.
We have audited the accompanying consolidated balance sheets of BioNeutral Group, Inc. as of October 31, 2009, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year ended October 31, 2009. BioNeutral Group, Inc’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
During the first quarter of 2009, the Company entered into Consulting Agreements whereby shares of restricted common stock were issued for future services. The details of these agreements are disclosed in Notes 11 and 12. The 2009 statement of operations contains a significant charge off related to these agreements as disclosed in Note 12.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of BioNeutral Group, Inc. as of October 31, 2009, and the results of its operations and its cash flows for the year ended October 31, 2009 in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As shown in the accompanying consolidated financial statements, the Company had a working capital deficiency of approximately $425,000 as of October 31, 2009, a net loss of approximately $15.6 million for the year ended October 31, 2009, and an accumulated deficit of approximately $46.3 million as of October 31, 2009. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plan regarding these matters is described in Note 3. The consolidated financial statements do not include adjustments that might result from the outcome of this uncertainty.
/s/ Bartolomei Pucciarelli, LLC
Bartolomei Pucciarelli, LLC
Lawrenceville, NJ
March 17, 2010
See Notes to Condensed Consolidated Financial Statements
See Notes to Condensed Consolidated Financial Statements
See Notes to Condensed Consolidated Financial Statements
Notes to Consolidated Financial Statements
Note 1 - Nature of Business & Organization
BioNeutral Group, Inc (the “Company”) is a specialty chemical company seeking to develop and commercialize a novel combinational chemistry-based technology which it believes in certain circumstances may neutralize harmful environmental contaminants, toxins and dangerous micro-organisms, including bacteria, viruses and spores. The Company’s business operations are conducted through BioNeutral Laboratories Corporation USA, a corporation organized in Delaware in 2003 (“BioLabs”).
In January 2009, the Company conducted reorganization and recapitalization through a transaction accounted for as a reverse acquisition with a public shell corporation. See Note 4 to these financial statements for a full discussion of the transaction and its effect on the presentation of the financial statements. On January 30, 2009, the Company (formerly called Moonshine Creations Inc. (“Moonshine”)) entered into a share exchange agreement (the “Share Exchange Agreement”) with BioLabs pursuant to which the Company agreed to issue to the shareholders of BioLabs 44,861,023 shares of its common stock (the “Share Exchange”).
In connection with the Share Exchange, certain shareholders of BioLabs delivered shareholder consents (collectively, the “Share Exchange Consents”) to BioLabs approving the execution and delivery by BioLabs of the Share Exchange Agreement. Such persons are referred to herein as the “Consenting Shareholders”. The Share Exchange Consents did not specify the number of shares of BioLabs common stock to be exchanged by the Consenting Shareholder. Schedule II to the Share Exchange Agreement, however, contained a list of holders of BioLabs common stock (certain of which shareholders also held BioLabs Series A Preferred Stock), shares of Company common stock to be issued to such shareholders, and shares of Company common stock to be issued to holders of BioLabs preferred stock.
Based on the Share Exchange Consents, the Company caused to be delivered to its transfer agent instructions to issue stock certificates representing 42,649,500 shares of its common stock in accordance with Schedule II to the Share Exchange Agreement. The Company did not receive Share Exchange Consents in respect of each share of common stock that was issued by the Company's transfer agent and the Company believes that stock certificates representing approximately 1,011,362 shares of common stock may have been delivered to those persons who did not deliver a Share Exchange Consent.
In addition, the Company's records indicate that (i) the Company did not receive stock certificates representing shares of BioNeutral Laboratories common stock for cancellation from the Consenting Shareholders, and (ii) the Company did not cause to be delivered the applicable stock certificates representing shares of common stock issued in the Share Exchange to certain of the Consenting Shareholders. Accordingly, the Company intends to request that (i) with respect to each Consenting Shareholder who received a stock certificate, such stockholder affirm its consent, which we refer to as a “Consenting Shareholder Acknowledgement”, and deliver to the Company for cancellation its certificates representing BioNeutral Laboratories common stock; and (ii) with respect to each Consenting Shareholder who did not receive a stock certificate, such stockholder deliver to the Company a Consenting Shareholder Acknowledgment and deliver to the Company for cancellation its certificates representing BioNeutral Laboratories common stock, each in advance of the Company delivering the applicable stock certificate.
With respect to any shareholder of BioNeutral Laboratories who is not able to confirm that it previously delivered a Share Exchange Consent, the Company is going to evaluate offering to such persons the ability to exchange their shares of common stock of BioNeutral Laboratories for shares of the Company's common stock on the same terms as would have occurred had such exchange occurred at the time of the consummation of the Share Exchange. Although there can be no assurance as to the determination it may make, if it were to make such offer, it would likely request that each such stockholder deliver to it a consent that is similar to a Share Exchange Consent and deliver to it for cancellation its certificates representing BioNeutral Laboratories common stock, each in advance of the Company delivering the applicable stock certificate. With respect to shareholders of BioNeutral Laboratories who did not deliver a Share Exchange Consent and to whom the Company may have caused to be issued stock certificates for shares of its common stock, it intends to request a Consenting Shareholder Acknowledgment from each of such persons.
With respect to holders of Series A preferred stock of BioNeutral Laboratories who did not receive shares of the Company's common stock in exchange for such preferred stock, the Company intends to offer to such persons 2,799,910 shares of common stock in exchange for their shares of Series A preferred stock, in accordance with Schedule II to the Share Exchange Agreement. The Company intends to request that such persons execute and deliver a share exchange agreement evidencing such exchange.
For purposes of preparation of these consolidated financial statements, the Company does not treat as outstanding any shares of common stock issued pursuant to the Share Exchange and for which the Company does not have a record of receiving a Share Exchange Consent. The Company made this determination despite the fact that certificates representing certain of such shares of its common stock may have been delivered to the applicable shareholder. There can be no assurance that any person in possession of such shares of common stock but who did not deliver the applicable Share Exchange Consent will not claim ownership of such shares.
Approximately 86% of BioLabs common shareholders initially exchanged their BioLabs shares of common stock for shares of common stock of the Company (including 65% of the Series A Preferred Stock of BioLabs on an as-converted basis). The Company issued approximately 42,646,100 million shares to acquire all of the exchanged shares of Bio Labs. As a result of the Share Exchange, BioLabs held an approximately 66% controlling interest in the combined entity, after giving effect to the Share Exchange.
Since the owners and management of BioLabs possessed voting and operating control of the combined company after the Share Exchange, the transaction constituted a reverse acquisition for accounting purposes, as contemplated by FASB ASC 805-40 and corresponding ASC 805-10-55-10, 12 & 13. Under this accounting, the entity that issues shares (Moonshine - the legal acquirer) is identified as the acquiree for accounting purposes. The entity whose shares are acquired (BioLabs) is the accounting acquirer.
In addition, Moonshine was characterized as a non-operating public shell company, pursuant to SEC reporting rules. The SEC staff considers a reverse-acquisition with a public shell to be a capital transaction, in substance, rather than a business combination. The transaction is effectively a reverse recapitalization, equivalent to the issuance of stock by the private company (BioLabs) for the net monetary assets of the shell corporation (Moonshine) accompanied by a recapitalization. The accounting is similar to that resulting from a reverse acquisition, except that the transaction was consummated at book value and no goodwill or intangible assets were recognized.
For SEC reporting purposes, BioLabs is treated as the continuing reporting entity that acquired the Company (the historic shell registrant). All reports filed after the transaction have been prepared as if BioLabs (accounting acquirer) were the legal successor to Moonshine’s reporting obligation as of the date of the acquisition. Therefore, these financial statements and all such statements filed subsequent to the transaction reflect the historical financial condition, results of operations and cash flows of BioLabs, for all periods presented.
Note that Moonshine changed its name to BioNeutral Group, Inc. in the month prior to the exchange, to facilitate the Share Exchange. References to “Moonshine” in this description of the accounting treatment is included to add clarity to the separation of the independent entities involved in the Share Exchange, prior to such exchange.
As referenced above, approximately 14% of BioLabs shareholders did not participate in the exchange of their shares of common stock of BioLabs for shares of common stock of Moonshine. Those shareholders are recognized as a Non-Controlling interest in the Company’s consolidated financial statements in accordance with FASB ACS 805-40-25-2. However, the shares representing ownership of the Company reflect the combined entity after the Share Exchange transaction, while BioLabs shares represent ownership of only that legal entity.
In connection with the reverse acquisition and recapitalization, all share and per share amounts of BioLabs were retroactively adjusted to reflect the legal capital structure of Moonshine pursuant to FASB ASC 805-40-45-1.
Note 2 - Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The accompanying financial statements include the accounts of the company and its majority-owned subsidiary. All significant intercompany transactions and balances were eliminated.
Non-Controlling Interest
A Non-Controlling Interest (“non-controlling interest”) was created as a result of the Company’s reorganization and recapitalization with a public shell corporation. The non-controlling interest arose because the Company’s records indicated that initially 14% of the shareholder’s of the accounting acquirer in the transaction, BioLabs, did not participate in the exchange of their shares of common stock of BioLabs for shares of common stock of the Company. In all material respects, the shares of the Company and the shares of the common stock of BioLabs included in the non-controlling interest represent different legal instruments conveying mirror ownership claims to the same underlying net assets and operations, as reflected in these consolidated financial statements.
Reclassifications
Certain reclassifications have been made to conform the prior period data to current year presentation these reclassifications had no effect on reported net loss.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments having a maturity of three months or less when purchased to be cash equivalents. The Company did not have any cash equivalents at either October 31, 2010 or 2009.
Long-Lived Assets
Long-lived assets, such as and equipment and definite-life intangible assets are evaluated for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable in accordance with FASB ASC 360-10-35-17 thru 35-35 “Measurement of an Impairment Loss.” The Company assesses the impairment of the assets based on the undiscounted future cash flow the assets are expected to generate compared to the carrying value of the assets. If the carrying amount of the assets is determined not to be recoverable, a write-down to fair value is recorded. Management estimates future cash flows using assumptions about expected future operating performance. Management’s estimates of future cash flows may differ from actual cash flow due to, among other things, technological changes, economic conditions or changes to the Company’s business operations.
Intangible Assets
Definite-lived intangible assets, such as acquired intellectual property is being amortized over the estimated useful live of 20 years. The Company continually evaluates the reasonableness of the useful lives of these assets. Once these assets are fully amortized, they are removed from the Consolidated Balance Sheets.
The cost of intangible assets with determinable useful lives is amortized to reflect the pattern of economic benefits consumed, either on a straight-line or accelerated basis over the estimated periods benefited. Intellectual Property is generally amortized over their respective legal or contractual lives. When certain events or changes in operating conditions occur, an impairment assessment is performed and lives of intangible assets with determinable lives may be adjusted.
Property and Equipment
Property and equipment is located at the Company’s office in Newark, New Jersey and is recorded at cost less accumulated depreciation. Depreciation and amortization is calculated using the straight-line method over the expected useful life of the asset, after the asset is placed in service. The Company generally uses the following depreciable lives for its major classifications of property and equipment:
Ordinary maintenance and repair expenses are charged to income when incurred.
Use of Estimates
The preparation of the financial statements in conformity with Accounting Principles generally accepted in America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates. These estimates and assumptions include valuing equity securities, share based payment arrangements, and deferred taxes and related valuation allowances. Certain of our estimates, could be affected by external conditions, including those unique to our industry, and general economic conditions. It is possible that these external factors could have an effect on our estimates that could cause actual results to differ from our estimates. The Company re-evaluates all of its accounting estimates at least quarterly based on these conditions and record adjustments when necessary.
Research and Development
In accordance with ASC Topic 730 research and development costs are expensed as incurred. Research and development expenses consist of purchased technology (including but not limited to intellectual property), purchased research and development rights and outside services for research and development activities associated with product development. During the years ended October 31, 2010 and 2009 the Company expensed approximately $225,000 and $230,000 of such costs, respectively.
Income Taxes
The Company uses the asset and liability method of accounting for income taxes in accordance with ASC Topic 740, “Income Taxes.” Under this method, income tax expense is recognized for the amount of: (i) taxes payable or refundable for the current year and (ii) deferred tax consequences of temporary differences resulting from matters that have been recognized in an entity’s financial statements or tax returns. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation allowance is provided to reduce the deferred tax assets reported if based on the weight of the available positive and negative evidence, it is more likely than not some portion or all of the deferred tax assets will not be realized.
ASC Topic 740-10-30 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC Topic 740-10-40 provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The Company will classify as income tax expense any interest and penalties. The tax years ending October 31, 2007, 2008 and 2009 are still open for review by the various tax jurisdictions. The state jurisdiction the Company files in is New Jersey. The Company has no material uncertain tax positions for any of the reporting periods presented.
Fair Value Measurements
The Company adopted the provisions of ASC Topic 820, “Fair Value Measurements and Disclosures”, which defines fair value as used in numerous accounting pronouncements, establishes a framework for measuring fair value and expands disclosure of fair value measurements.
The estimated fair value of certain financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued expenses are carried at historical cost basis, which approximates their fair values because of the short-term nature of these instruments. The carrying amounts of our long term credit obligations approximate fair value because the effective yields on these obligations, are comparable to rates of returns for instruments of similar credit risk.
ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 describes three levels of inputs that may be used to measure fair value:
Level 1 - quoted prices in active markets for identical assets or liabilities
Level 2 - quoted prices for similar assets and liabilities in active markets or inputs that are observable
Level 3 - inputs that are unobservable (for example cash flow modeling inputs based on assumptions)
The adoption of this pronouncement did not have a material impact on the Company’s consolidated financial position, results of operations and cash flows.
Stock-Based Compensation
The Company recognizes compensation expense for stock-based compensation in accordance with ASC Topic 718. For employee stock-based awards, the Company calculates the fair value of the award on the date of grant using the Black-Scholes method for stock options and the quoted price of its common stock for unrestricted shares; the expense is recognized over the service period for awards expected to vest. For non-employee stock-based awards, the Company calculate the fair value of the award on the date of grant in the same manner as employee awards, however, the awards are revalued at the end of each reporting period and the pro rata compensation expense is adjusted accordingly until such time the nonemployee award is fully vested, at which time the total compensation recognized to date equals the fair value of the stock-based award as calculated on the measurement date, which is the date at which the award recipient’s performance is complete. The estimation of stock-based awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from original estimates, such amounts are recorded as a cumulative adjustment in the period estimates are revised. The Company considers, many factors when estimating expected forfeitures, including types of awards, employee class, and historical experience.
Stock-Based Payments
Significant amounts of the Company’s shares of common stock have been issued as payment to employees and non-employees for services and periodically as consideration for acquisition of assets. These are non-cash transactions that require management to make judgments related to the fair value of the shares issued, which affects the amounts reported in the Company’s consolidated financial statements for certain of its assets and expenses. For historic fiscal years when there was not an observable active, liquid market for the Company’s common stock, the valuation of the shares issued in a non-cash share payment transaction relies on observation of arms-length transactions where cash was received for its shares, before and after the non-cash share payment date.
Convertible Instruments
The Company evaluates and accounts for conversion options embedded in convertible instruments in accordance with ASC 815 “Derivatives and Hedging Activities.”
Applicable GAAP requires companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments according to certain criteria. The criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under other GAAP with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument.
Net income (loss) per share
The Company utilizes FASB ASC 260, Earnings per Share to calculate gain or loss per share. Basic gain or loss per share is computed by dividing the gain or loss available to common stockholders (as the numerator) by the weighted-average number of shares of common stock outstanding (as the denominator). Diluted gain or loss per share is computed similar to basic gain or loss per share except that the denominator is increased to include the number of additional shares of common stock that would have been outstanding if all potential common stock (including common stock equivalents) had all been issued, and if such additional shares of common stock were dilutive. Under FASB ASC 260, if the additional shares of common stock are not dilutive, they are not added to the denominator in the calculation. Where there is a loss, the inclusion of additional shares of common stock is anti-dilutive (since the increased number of shares reduces the per share loss available to common stock holders). The Company incurred a loss for the year ended October 31, 2010 and the year ended October 31, 2009. Therefore, common stock equivalents have been excluded from the calculation of diluted loss per share.
The following table outlines the common stock equivalents outstanding as of October 31, 2010 and 2009.
In connection with the reverse acquisition disclosed in Note 4, net income (loss) per share was calculated in accordance FASB ASC 805-40-45-4 and 45-5.
Segment Information
Accounting Standards Codification subtopic 280-10, Segment Reporting (“ASC 280-10”) establishes standards for reporting information regarding operating segments in annual financial statements and requires selected information for those segments to be presented in interim financial reports issued to stockholders. ASC 280-10 also establishes standards for related disclosures about products and services and geographic areas. Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision-making group, in making decisions how to allocate resources and assess performance. The information disclosed therein materially represents all of the financial information related the Company’s principal operating segments.
The Company with its limited resources is currently operating in one segment and reporting unit. As it matures it will look to organize the Company into various reporting units as it starts to develop and ascertain its markets and avenues of distribution and product offerings. Therefore, it anticipates in the future it may be operating in multiple reporting units.
Recent Accounting Pronouncements
In May 2009, the FASB issued SFAS No. 165, Subsequent Events. This statement establishes general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. This statement was effective for the Company beginning with the quarter ended July 31, 2009.
In December 2007, the FASB issued SFAS No. 160, Non-controlling Interests in Consolidated Financial Statements - an amendment of ARB No.51. This statement establishes reporting standards for non-controlling interests in subsidiaries. This statement changes the presentation of non-controlling interests in subsidiaries in the financial statements for the Company beginning November 1, 2009.
In March 2010, the FASB issued new accounting guidance, under ASC Topic 605 on Revenue Recognition. This standard provides that the milestone method is a valid application of the proportional performance model for revenue recognition if the milestones are substantive and there is substantive uncertainty about whether the milestones will be achieved. Determining whether a milestone is substantive requires judgment that should be made at the inception of the arrangement. To meet the definition of a substantive milestone, the consideration earned by achieving the milestone (1) would have to be commensurate with either the level of effort required to achieve the milestone or the enhancement in the value of the item delivered, (2) would have to relate solely to past performance, and (3) should be reasonable relative to all deliverables and payment terms in the arrangement. No bifurcation of an individual milestone is allowed and there can be more than one milestone in an arrangement. The standard is effective for annual periods beginning on or after October 1, 2010. The Company does not believe the impact of the adoption of this guidance will have a material effect on its financial statements.
In April 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2010-13, “Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades” (“ASU 2010-13”). ASU 2010-13 addresses the classification of a share-based payment award with an exercise price denominated in the currency of a market in which the underlying equity security trades. FASB Accounting Standards Codification (“ASC”) Topic 718 was amended to clarify that a share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trade shall not be considered to contain a market, performance or service condition. Therefore, such an award is not to be classified as a liability if it otherwise qualifies for equity classification. The amendments in ASU 2010-13 are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010, with early application permitted. The adoption of this standard did not have a material impact on the Company’s consolidated financial position and results of operations.
In October 2009, the FASB issued ASU No. 2009-13, Multiple-Deliverable Revenue Arrangements (ASU 2009-13) (formerly EITF 08-1, Revenue Arrangements with Multiple Deliverables) which amends ASC Topic 605, Revenue Recognition. This accounting update establishes a hierarchy for determining the value of each element within a multiple deliverable arrangement. ASU 2009-13 is effective for the Company beginning October 1, 2010 and applies to arrangements entered into on or after this date. The Company is currently evaluating the impact that ASU 2009-13 may have on its financial position and results of operations, and does not expect the impact, if any, to be material.
The FASB has issued Accounting Standards Update (ASU) No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. This ASU requires some new disclosures and clarifies some existing disclosure requirements about fair value measurement as set forth in Codification Subtopic 820-10. ASU 2010-06 amends Codification Subtopic 820-10 and now requires a reporting entity to use judgment in determining the appropriate classes of assets and liabilities and to provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. ASU 2010-06 was effective for interim and annual reporting periods beginning after December 15, 2009, As this standard relates specifically to disclosures, the adoption did not have an impact on the Company’s consolidated financial position and results of operations.
In February 2010, the Financial Accounting Standards Board (“FASB”) issued an accounting standard that amended certain recognition and disclosure requirements related to subsequent events. The accounting standard requires an entity that is an SEC filer to evaluate subsequent events through the date that the financial statements are issued and removes the requirement that an SEC filer disclose the date through which subsequent events have been evaluated. This guidance was effective upon issuance. The adoption of this standard had no effect on the Company’s condensed consolidated financial position or results of operations.
In March 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-11, which is included in the Codification under ASC 815, “Derivatives and Hedging” (“ASC 815”). This update clarifies the type of embedded credit derivative that is exempt from embedded derivative bifurcation requirements. Only an embedded credit derivative that is related to the subordination of one financial instrument to another qualifies for the exemption. This guidance is effective for interim and annual reporting periods beginning January 1, 2010. The adoption of this standard did not have a material impact on the Company’s consolidated financial position and results of operations.
Note 3 - Going Concern
The Company's financial statements are prepared using generally accepted accounting principles applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company has had no significant revenues and has generated losses from operations. In order to continue as a going concern and achieve a profitable level of operations, the Company will need, among other things, additional capital resources and to develop a consistent source of revenues. The ability of the Company to continue as a going concern is dependent upon its ability to successfully accomplish its strategic plan and/or recognize revenue from its intangible assets and eventually attain profitable operations. The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. There can be no assurance the Company will be able to continue as a going concern.
At October 31, 2010, the Company had negative working capital of $(1,803,627). For the year ended October 31, 2010 the Company incurred an operating loss of $(3,746,401) and since inception has accumulated a deficit of $(49,762,192).
We had $59,395 of cash at October 31, 2010. Cash used by operations for fiscal 2010 was $1,735,268. The principal use of funds were for consulting services supporting the development of our business plan, legal, and accounting fees in connection with becoming a public company and daily operations of the business, including rent and travel and laboratory costs. Costs associated with developing and filing our Intellectual Property used an additional $127,316 of cash.
In fiscal 2010, we raised $180,000 of cash from the issuance of our capital stock to fund operations. We received $1,475,000 from the issuance of convertible debentures.
We had $139,663 of cash at October 31, 2009. Cash used by operations for fiscal 2009 was $ 1,621,610 The principal use of funds were for consulting services supporting the development of our business plan, legal, and accounting fees in connection with becoming a public company and daily operations of the business, including rent and travel and laboratory costs. Costs associated with developing and filing our Intellectual Property used an additional $ 8,467 of cash.
In fiscal 2009, we raised $1,689,802 of cash from the issuance of our capital stock to fund operations. We received $600,000 from conversion of 90-day debentures issued in connection with the Share Exchange in the first quarter, $450,000 from a private placement in the fourth quarter, and approximately $695,000 from investments made by private investors throughout the fiscal year.
Note 4 - Prepaid Expenses
The Company periodically pays for services supporting its business operations with shares of its common stock. When these services are provided by third parties (i.e. non-employees) and performance extends over more than the current reporting period, a prepaid asset is established at the agreement date for the value of shares issued. The prepaid asset is established in the same period and manner as if cash were paid for the underlying goods or services, pursuant to FASB ASC 505-50-25-4 and 25-6.
Amounts are expensed on a straight line basis (and the prepaid asset reduced) over the periods the services are provided. The prepaid expense balance includes $172,101 and $ 122,299 at October 31, 2010 and October 31, 2009 respectively for share based payments to non-employees for services and $169,772 and $169,608 at October 31, 2010 and October 31, 2009 respectively for prepaid expenses paid in cash, of which $99,900 of prepaid expenses paid in cash to a related party is reported as Prepaid Expenses - Related Parties. Prepaid Expenses -Related Parties also includes $327,899 in share based payments to a company controlled by a director for consulting services to be provided by the company controlled by said director. The share based payment is being amortized over a three year period, starting in January 2009. For the years ended October 31, 2009, the Company recognized expense of $169,772, respectively related to this share based payments which is recorded on “Other Selling, General and Administrative Expenses.” See Note 9 for a complete discussion of the share valuation and accounting for share based payments to non-employees in exchange for services and a detailed listing of the transaction amounts.
Note 5 - Property & Equipment
Property and equipment consisted of the following:
Note 6 - Intellectual Property
The Company has several patent applications pending regarding proprietary chemical formulations that the Company believes are capable of neutralizing noxious chemicals and eliminating harmful microbes. The Company capitalized the costs of acquired technology, know-how and trade secrets and identifiable costs incurred to develop, file and defend the Company’s Intellectual Property and new patent or provisional patent applications (collectively “Intellectual Property”) in accordance with FASB ASC 350. Periodic gross carrying amounts and related accumulated amortization were as follows:
The Company follows FASB ASC 350-30-35 and amortizes the costs of its Intellectual Property over the shorter of its specific useful life, or 20 years. The Company is amortizing its Intellectual Property over 20 years, with no anticipated residual value. Amortization expense for the year ended October 31, 2010 and the year ended October 31, 2009 was $695,998 and $627,049 respectively.
Estimated amortization expense is as follows
The Intellectual Property is evaluated annually for recoverability pursuant to FASB ASC 350-30-35-14 and related guidance in ASC 360-10-35-17 thru 35-35. An impairment loss is recognized if the asset is determined not to be recoverable and its carrying amount exceeds its fair value. During its annual impairment testing, the Company did not identify an impairment loss in either fiscal year ending October 31, 2010 or 2009.
Note 7 - Related Party Payables
During the year ended October 31, 2010 and the year ended October 31, 2009, the Company recorded interest of $630 and $3,318, respectively, on promissory notes entered into with former members of the Board of Directors who resigned their positions with the Company on January 29, 2009.
On January 29, 2009, the Company issued 20,000 shares of the Company’s common stock to a former member of the Company’s Board of Directors to cancel outstanding loans of $20,000 owed to him. In connection with the stock issuance, the individual also agreed to forgive interest on the loan of $2,251, which is included in “Other Income and Expenses” in the Consolidated Statement of Operations.
On January 29, 2009, the Company repaid loans of $33,517 owed to three former members of the Board of Directors who resigned their positions with the Company on January 29, 2009. The balance of the amounts payable to former members of the Board of Directors at October 31, 2010 including accrued interest was $29,739 and $ 29,109 at October 31, 2009.
The Company and its director, Raj Pamani, are parties to a consulting agreement, dated as of June 15, 2008, pursuant to which Mr. Pamani agreed to accept responsibilities and take direction from the Company's board of directors. Under this agreement, we are obligated to pay Mr. Pamani $10,000 per month. During the year ended October 31, 2009 and the year ended October 31, 2010, the Company paid or credited $120,000 and $29,900, respectively, to Mr. Pamani under this agreement, which were recorded as consulting expenses and recorded in a Related Party Payable account. Mr. Pamani has charged certain personal expenses against the Company's cash account which have been treated by the Company as repayment of the Related Party Payable. At October 31, 2009 and October 31, 2010, the balance owed to the director was $2,303 and $0, respectively.
On September 6, 2008, the Company entered into an agreement with Jina Partners (“Jina”), an affiliate of Raj Pamani, for consulting services relating to the development of certain commercial transactions. Under this agreement, the Company is obligated to pay Jina $10,000 per month. The term of this agreement is two years. For the year ended October 31, 2009 and year ended October 31, 2010, we paid $219,000 and $60,000, respectively, to Jina, of which $99,000 and $0, respectively, was treated as prepaid expense, with the Prepaid Expense included in the Prepaid Expenses-Related Parties on the Consolidated Balance Sheet. See Note 13-Related Party Transactions.
Note 8 - Stock Based Compensation
The Company issues shares of its common stock to employees and non-employees as compensation for services provided. Stock based compensation related to employees is accounted for in accordance with FASB ASC 718-10 and ASC 505-50 for non-employees. All shares issued during fiscal years 2010 and 2009 were fully vested upon grant of the shares or no later than the respective year end dates.
Employees and Board Members
Measurement of compensation cost related to shares of common stock issued to employees is based on the grant date fair value of the shares. Fair value was determined through the use of quoted prices in the trading market for the Company’s shares (OTCBB) or arms-length exchanges of shares for cash in private transactions, in periods that quoted market prices were not available.
During the fiscal year ended October 31, 2010 and the fiscal year ended October 31, 2009, 0 and 1,958,675 shares of common stock were issued to employees and Board members, respectively as compensation for services and were vested at the end of the related period. The per share weighted average grant date fair value for these same periods were $0 and $.96, respectively.
The total value of common stock issued to employees and vested during the fiscal years ended October 31, 2010 and 2009 were $0 and $1,648,045, respectively. These amounts are also reported on the consolidated statement of operation as compensation expense (included in Other Selling, General and Administrative Expenses) for the related periods. There was no related tax benefits recognized.
Non-Employees
Measurement of compensation cost related to common stock issued to non-employees for services is based on the value of the services provided or the fair value of the shares issued. Each transaction is reviewed to determine the more reliably measurable basis for the valuation, pursuant to FASB ASC 505-50-30-6.
When the value of the common stock issued is determined to be the more reliably measurable basis, the measurement date would be when the services are completed, unless the shares are determined to be non-forfeitable at the issue date, pursuant to FASB ASC 505-50-25-7. In these instances, the measurement date is the agreement date.
When the measurement date is the date on which the services have been completed, the Company adjusts the reported expense and any related asset that was created, as of each periodic reporting date, pursuant to FASB ASC 505-50-35.
All share issuances during the periods presented that were based on the value of the shares used the agreement date as the measurement date. In all such instances, the shares were fully vested and non-forfeitable as contemplated by FASB ASC 505-50-25-7.
A prepaid asset is established when shares are issued prior to the related services being received, in accordance with FASB ASC 505-50-25-4 and 25-6. Such instances occur when services are provided beyond balance sheet dates. The Company considered reporting the un-expensed value as a contra account to equity for deferred compensation. Specific guidance under GAAP prohibited such treatment, since the shares are issued as of the agreement date and are non-forfeitable in the event of non-performance by the provider of the services (FASB ASC 505-50-25-41 and 25-7). The equity issued is permanent and unrecoverable. Therefore, GAAP guidance directs the establishment of the prepaid account based on the value of the shares issued. As October 31, 2010 and 2009 the potential impairment of such deferral is not material to the Company’s Consolidated Financial Statements.
During the fiscal years ended October 31, 2010 and October 31, 2009, 0 and 12,782,500 shares of common stock were granted to non-employees as compensation for services and were vested at the end of the related period. The per share weighted average grant date fair value for the year ended October 31, 2009 was $0.96.
The total value of common stock issued to non-employees and vested during the fiscal years ended October 31, 2010 and October 31, 2009 were $ 0 and $12,306,600, respectively. These amounts are also reported on the income statement as compensation expense (included in Other Selling, General and Administrative Expenses) for the related periods and for the Charge-off of the prepaid distribution agreements in 2009 (See Note 14). There was no related tax benefits recognized (see Note 11 Taxes).
Note 9 - Stockholder’s Equity (and Non-Controlling Interest)
As a result of the reverse acquisition disclosed in Note 1, the financial statements of BioLabs were carried forward as the Company’s reported historical financial statements for all periods presented, in accordance with FASB ASC 805-40-45-1. In addition, all share and per share amounts of BioLabs were retroactively adjusted to reflect the legal capital structure of the Company.
Preferred Stock
Included in stockholder’s equity is Series A Preferred Stock that is convertible into common stock of BioLabs at a rate of 10 shares of common stock for each share of preferred stock.
BioLabs is authorized to issue 5,000,000 shares of preferred stock, $0.001 par value, of which 800,000 shares are designated as Convertible Series A Preferred Stock. The BioLabs Certificate of Incorporation authorizes the Board of Directors (the “Board”) to determine the preferences, limitations and relative rights of any class or series of preferred stock prior to issuance. Each such class or series must be given distinguishable designated rights prior to issuance. As of October 31, 2010 and October 31, 2009, 83,762 and 279,991 shares of the Company’s Series A Preferred Stock were issued and outstanding, respectively.
Through the date of this report, the rights and preferences of the outstanding preferred stock are identified below:
Convertible Series A Preferred Stock:
1.
800,000 Authorized shares.
2.
Holders of shares of Series A Preferred Stock have the right to vote and shall be entitled to the number of votes equal to the largest number of full shares of Common Stock into which such shares of Series A Preferred could be converted.
3.
Each share of Convertible Series A Preferred Stock is convertible into 10 shares of common stock of BioNeutral Laboratories Corp, which can be exchanged on a 1 for 1 basis with BioNeutral Group, Inc.’s common stock.
4.
Liquidation preference equal to 250% of the stated value of $7.21 of the shares.
5.
No dividends are issuable to any shareholders who rank junior to the preferred shares.
6.
Upon an initial public offering or if a significant trading market develops and other parameters occur in relation to the Company's common stock, each preferred share shall be mandatorily converted into 10 shares of common stock.
7.
Par value of $0.001.
Non-Controlling Interest
In connection with the reverse acquisition disclosed in Note 1, initially approximately 14% of BioLabs common shareholders did not participate in the exchange of their shares of BioLabs common stock for shares of common stock of the Company. Those shareholders are recognized as a non-controlling interest in the Company’s consolidated financial statements in accordance with FASB ACS 805-40-25-2. The assets, liabilities and operations underlying the shares of BioLabs and the Company are identical. However, the shares representing ownership of the Company reflect the combined entity after the Share Exchange transaction, while BioLabs shares included in the non-controlling interest held by the non-controlling interest represent ownership of that legal entity.
The Series A Preferred Stock is not recognized in the Non-Controlling Interest. If the 83,762 shares of preferred stock were fully converted into shares of BioLabs common stock and Preferred Shareholders did not elect to exchange those shares for Company common stock, the Non-Controlling interest would be 11.84%. as of October 31, 2010 and if 279,991 shares of preferred stock were fully converted into shares of BioLabs common stock and Preferred Shareholders did not elect to exchange those shares for Company common stock, the Non-Controlling interest would be 19.65% as of October 31, 2009.
Note 10 - Taxes
The Company has had operating losses since inception and there is no provision for corporate income taxes for federal purposes. Therefore, there are no deferred tax amounts as of October 31, 2010 and 2009, respectively.
The Company is incorporated in Nevada but does not conduct business in Nevada.
The Company has not filed federal tax returns for the fiscal years ended December 31, 2007, the ten months ended October 31, 2008 and the fiscal year ended October 31, 2009. Those returns, which are not expected to report any tax due are currently being prepared. The Company has its primary operations in the State of New Jersey and is required to file New Jersey corporate income tax returns. The Company has not filed New Jersey State tax returns. The Company is in the process of bringing its filings of New Jersey State Tax Returns up to date. Since the Company has incurred operating and tax losses for each of the years for which returns have not been filed, it anticipates that only minimal taxes will be due, including any interest and penalties that might be assessed.
The Company is not in discussions with any tax authorities whereby any settlements over past due taxes are in progress.
The components of current income tax expense for the periods ended October 31, 2010 and 2009 consisted of the following:
The following is a reconciliation of the provision for income taxes at the United States federal income tax rate to the income taxes reflected in the statement of operations:
As of October 31, 2010 and 2009, the Company’s deferred tax assets consisted of the effects of temporary differences attributable to the following:
For the year ended October 31, 2010, the Company had approximately $32,473,000 of federal and state net operating loss carryovers (“NOLs”) which begins to expire in 2029. The NOLs may be subject to limitation under Internal Revenue Code Section 382 should there be a greater than 50% ownership change as determined under regulations.
In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based on the assessment, management has established a full valuation allowance against all of the deferred tax assets for every period because it is more likely than not that all of the deferred tax assets will not be realized.
The Company files U.S. federal and states of New Jersey and Delaware tax returns that are subject to audit by tax authorities beginning with the year ended December 31, 2008.
The Company believes that the cumulative issuances of its common stock likely resulted in an “ownership change” for tax purposes. This determination would have no effect on the Company’s reported historic results. However, under this treatment, the Company’s ability to utilize its net operating loss carry-forwards in future years, in the event the Company has net income for federal and state income tax purposes, which is not assured, may be very limited and there can be no assurance the Company would be able to fully utilize this tax benefit in full over the periods it is allowed. The Company intends to conduct further analysis to confirm this treatment.
Note 11 - Related Party Transactions
Related Party Events for Fiscal Year Ended October 31, 2010
On November 13, 2009, the Company issued (i) an unsecured promissory note to Michael D. Francis, a shareholder of the Company, in the amount of $250,000, (ii) a second unsecured promissory note on January 4, 2010 in the amount of $250,000, a (iii) a third unsecured promissory note in the amount of $250,000, on March 15, 2010 of which $100,000 was drawn down by the Company on March 15, 2010 and $150,000 on April 1, 2010, (iv) a fourth secured promissory note in the amount of $100,000 on April 30, 2010 with an original issuance date of April 26, 2010, and (v) a fifth unsecured promissory note in the amount of $25,000 on July 7, 2010 (all such notes issued to Mr. Francis are collectively referred to as the “Francis Notes”).
On November 13, 2009, the Company issued an unsecured promissory note to Capara Investments LLC (“Capara”), in the amount of $250,000 and (ii) a second unsecured promissory note to Capara on January 4, 2010 in the amount of $250,000 and (iii) a third unsecured promissory note to Capara on September 2, 2010 in the amount of $25,000 and (iv) a fourth unsecured promissory note to Capara on October 13, 2010 in the amount of $25,000.The sole member of Capara, Raj Pamani, is a member of our Board and a shareholder of the Company.
The Francis Notes and the Capara Notes are sometimes referred to herein as the “Shareholder Notes.” The Shareholder Notes resulted in gross proceeds to the Company of $1,425,000.
Each of the Shareholders Notes bears an 8% annual interest rate, is due and payable in cash on the fifth anniversary of the date of issuance, and upon consummation of a “Qualified Financing” (as defined in each of the Shareholder Notes), will automatically be exchanged for, solely at our election, either (i) securities on the same terms and conditions as those received by investors in such Qualified Financing based on an assumed exchange rate reflecting the pricing used in such financing or (ii) shares of our common stock equal to the quotient obtained by dividing (x) the then outstanding principal amount of the Shareholder Note by (y) the lower of (i) $0.69 and (ii) the Fair Market Value (as defined in the Shareholder Notes) of one share of our common stock as of the date of such exchange. On each three (3) month anniversary of the issuance of each Shareholder Note, all accrued and unpaid interest shall be added to the unpaid principal amount of such note. Each of the Shareholder Notes defines “Qualified Financing” as an investment in securities of the Company (including any financing that includes convertible indebtedness and/or warrants) occurring after the date of issuance of the Shareholder Note by an investor that is not an affiliate of our company in which we receive net proceeds greater than $500,000 (including any additional investment by the holder of the Shareholder Note or by the holder of any other 8% Exchangeable Promissory Note) in the Qualified Financing. The secured promissory note in the principal amount of $100,000 issued by the Company to Mr. Francis on April 30, 2010, is secured by the Company’s Intellectual Property (as defined in such promissory note).
Accrued and unpaid interest is added to the unpaid principal amount of the Shareholder Notes every three months. Interest expense on the Shareholder Notes for the year ended October 31, 2010 and 2009 was $87,097 and $0, respectively. As of October 31, 2010, $70,646 of accrued interest was added to the principal amount of the Shareholder Notes.
Related Party Events for Fiscal Year Ended October 31, 2009
During the twelve months ended October 31, 2009 the Company recorded interest of $3,318 on promissory notes entered into with former members of the Board of Directors who resigned their positions with the Company on January 29, 2009.
On January 29, 2009, the Company issued 20,000 shares of the Company’s common stock to a former member of the Company’s Board of Directors to cancel outstanding loans of $20,000 owed to him. In connection with the stock issuance, the individual also agreed to forgive interest on the loan of $2,251, which is included in “Other Income and Expenses” in the Consolidated Statement of Operations.
On January 29, 2009, the Company repaid loans of $33,517 owed to three former members of the Board of Directors who resigned their positions with the Company on January 29, 2009. The balance of the amounts payable to former members of the Board of Directors at October 31, 2009 was $29,109.
The Company and its director, Raj Pamani, are parties to a consulting agreement, dated as of June 15, 2008, pursuant to which Mr. Pamani agreed to accept responsibilities and take direction from the Company's board of directors. Under this agreement, we are obligated to pay Mr. Pamani $10,000 per month. During the fiscal 2009, the Company paid or credited $120,000, to Mr. Pamani under this agreement, which were recorded as consulting expenses and recorded in Related Party Payable account. Mr. Pamani has charged certain personal expenses against the Company's cash account which have been treated by the Company as repayment the Related Party Payable. At October 31, 2009, the balance owed to the director was $2,303.
On September 6, 2008, the Company entered into an agreement with Jina Partners (“Jina”), an affiliate of Raj Pamani, for consulting services relating to the development of certain commercial transactions. Under this agreement, the Company is obligated to pay Jina $10,000 per month. The term of this agreement is two years. For fiscal 2009, we paid $219,000 to Jina, of which $99,900 was treated as prepaid expense.
During the fiscal year ended October 31, 2009, a member of the Company’s Board of Director’s was compensated $10,000 for consulting services and approximately $3,000 for expenses. In addition, a company controlled by the director was granted 500,000 shares valued at $500,000 for future consulting services to the Company, which amount is being amortized over three years. At October 31, 2009, the balance of prepaid compensation was $338,768.
The Company has made payments on three automobile leases entered into on behalf of the Company by its Chief Scientist and Secretary of the Company since June 10, 2008. One of these automobiles is driven by the Chief Scientist and one of the automobiles has been driven by a director since October 2008 and one automobile is stored at the residence of the same director. Payments during fiscal 2009 and totaled $31,597.
During the twelve months ended October 31, 2009, an entity controlled by the Company’s Chief Executive Officer billed and was paid $30,558 for data security services provided to the Company.
On May 27, 2009, a significant shareholder of the Company, Michael D. Francis, purchased 1,000,000 shares of the Company’s common stock in exchange for $250,000. These shares of common stock had not yet been issued as of October 31, 2009 but have been accrued by the Company and recorded in the balance Sheet at October 31, 2009.
In January 2009, the Company issued 750,000 shares of its common stock to the Chief Executive Officer in lieu of cash compensation. The shares were fully vested on grant. The shares were valued at $750,000 and are included in “Other Selling, General and Administrative Expenses for the twelve months ended October 31, 2009.
In January 2009, the Company issued 82,585 shares valued at $82,585 to its former Chief Financial Officer in payment for services performed and for $10,000 in expenses incurred by the former Chief Financial Officer. In June 2009 the Company issued 450,000 shares valued at $295,200 to its former Chief Financial Officer for past services and future services to be performed and is included in “Other Selling, General and Administrative Expenses” for the year ended October 31, 2009.
In January 2009, the Company issued 260,000 shares to its Chief Scientist that had been granted prior to November 1, 2008 to compensate him for past wages that had not been paid to him.
Also in January 2009 the Company issued 416,090 shares to members of its board of directors, of which 332,872 shares with a value of $332,872 had been granted prior to November 1, 2009 and 83,218 shares with a value of $83,218 were granted in January 2009.
The Company is party to consulting agreements with five entities, as referenced and described in Note 12. The Company issued 11,300,000 shares of its common stock as partial consideration for the services to be provided under the agreements, which constitutes approximately 18% of its outstanding shares of common stock at October 31, 2009.
The counterparties to the agreements are incorporated and domiciled outside of US jurisdiction. The Company’s management and its Board of Directors have represented that they have no related party affiliation with any of the counterparty entities. While there is no direct evidence to suggest a related party relationship exists between any former or current member of the Company’s Board or its management, we are unable to definitively conclude upon such a representation, or whether the counterparties are legally formed entities under the laws of their respective jurisdictions. The advisor that was the Company’s liaison with these entities is no longer available to the Company and we are no longer able to contact any of the Non-EU territory entities.
Note 12 - Consulting Agreements Charge Off
During the first quarter of fiscal year 2009, prior to the reverse merger, the Company entered into consulting agreements with the following entities: (i) Khasar Investments Limited, (ii) Kachiun Investments Limited, (iii) Indus Limited, (iv) Orient Arts Limited and (v) Style Asia Limited (collectively, the “Consulting Agreements”).
The Consulting Agreements referenced in clauses (i) through (iv) above (the “Non-EU Consulting Agreements”) were for proposed commercial activities of the Company in Japan, South Korea, Israel, New Zealand and Australia (collectively, the “Non-EU Territories”). The Style Asia Agreement relates to proposed commercial activities of the Company in the United Kingdom, France and Germany (the “EU Territories”).
Each of the Consulting Agreements has a term that expires three years from the date of such agreement, subject to extension in certain instances. The Company issued a total of 11,300,000 shares of restricted common stock as partial consideration for the service obligations contained in the agreements. The cost of the services was not stipulated in the agreements, which resulted in the value of the Consulting Agreements being based on the common stock issued, pursuant to FASB 505-50-30-6.
The total non-cash value of the shares ($11,300,000) was based on the price per share of $1.00, which represented the cash price paid for shares in arms-length transactions with third parties at the time of the agreements and the periods immediately after the agreements. The effects of dilution from the issuance of the large blocks of shares could not be reliably measured in the valuation of the shares, beyond using observable market prices from the daily trading activity in the Company’s shares, as quoted in its listing on the Over-The-Counter Bulletin Board (OTCBB), subsequent to the share issuances, pursuant to FASB ASC 820-10-35.
The Company has determined that, with respect to the four Non-EU Consulting Agreements, it believes it is unlikely that the Company will, for the foreseeable future, have adequate resources to pursue regulatory approval or business opportunities in any of the Non-EU Territories. The Company also considered that, in the event it were to raise up to an additional $10 million of equity or debt financing, it would remain unlikely that the Company would have adequate resources to pursue regulatory approval or business opportunities in any of the Non-EU Territories.
The Company determined it will not be able to avail itself of any services to be provided under the Non-EU Consulting Agreements prior to the expiration of the initial term of each such agreement.
The Style Asia Agreement, relating to services within the EU Territories, was terminated effective February 24, 2010, for no additional consideration.
Accordingly, the Company has determined that the unamortized carrying amount of its prepaid asset relating to the Consulting Agreements at October 31, 2009, in the amount of $8,050,091, is unrecoverable. A charge in the amount of $8,050,091 is included on the Company’s income statement for the fiscal year ended October 31, 2009 to reflect this determination. In addition, $3,249,909 was expensed as amortized consulting expenses in “Other Selling, General and Administrative Expenses” in the Consolidated Statement of Operations as amortization of these Agreements for the year ended October 31, 2009.
In addition, the Company intends to evaluate whether it was wrongfully induced to enter into the Non-EU Consulting Agreements.
The unamortized balance related to the Consulting Agreements was reported as a contra-equity amount for deferred stock-based compensation in the Company’s interim financial statements through its third fiscal quarter ended July 31, 2009. In the fourth quarter the Company reclassified the balance from equity to a prepaid asset, based on its determination that the shares issued were fully vested and non-forfeitable pursuant to FASB ASC 505-50-25-7.
Note 13 - Commitments & Contingencies
Operating Leases
On August 31, 2010, the Company renewed its annual lease agreement for its office space in Newark, New Jersey. The following table summarizes the Company’s future minimum lease payments under operating lease agreements for the one year subsequent to October 31, 2010:
Rent expense for fiscal years ended October 31, 2010 and 2009 aggregates $12,307 and $20,832, respectively.
Litigation
On October 1, 2009, the SEC issued a formal order of investigation to the Company regarding possible securities laws violations by us and other persons. The investigation concerns the process by which the Company became a publicly traded entity, trading in the Company’s shares, and disclosure and promotion of developments in the Company’s business. The SEC has requested that the Company deliver certain documents to the SEC. The Company has, and will continue to fully cooperate with the SEC with respect to its investigation.
The Company has incurred, and expects to continue to incur, significant costs in responding to such investigation. Any adverse findings by the SEC in connection with such investigation could have a material adverse impact on the Company's business, including the Company's ability to continue to operate as a publicly traded company.
In April 2005, the Company filed in the US Patent and Trademark Office (the “USPTO”) an application for the registration of the trademarks BioNeutral™, Ogiene™ and Ygiene™, based on its intent to use each of these marks in commerce. In April 2006, the USPTO issued notices of allowance signifying that each of these trademarks was entitled to registration after timely submission of statements of use, including evidence that such trademarks have been properly used in commerce. From June through November of 2008, however, the Company’s applications for each of these trademarks were declared abandoned by the USPTO, since the Company inadvertently failed to timely file the appropriate statements of use with respect to each trademark within the six-month period from the date the USPTO issued the respective notices of allowance. In July 2009, the Company refiled applications for each of these trademarks as well as the Company’s tagline SCIENCE TO SAVE LIVES & PROTECT THE ENVIRONMENT™; however, the Company learned that PURE Bioscience, a company focused on the development and commercialization of bioscience products, had filed application for the registration of the trademarks BioNeutral™ and Ygiene™ prior to the Company’s refiling of its applications. Although the Company has filed with the Trademark Trial and Appeal Board oppositions to PURE Bioscience's applications and intend to pursue such oppositions vigorously, the Company cannot assure you that it will be successful with such opposition on a timely basis, if at all.
Other than the foregoing, the Company is not a party to, and none of the Company’s property is the subject of, any pending legal proceedings other than routine litigation that is incidental to the Company’s business.
Contingent Share Issuance
­The Company has an outstanding verbal commitment to its Chief Scientist such that if and when the Company gains approval from the EPA for a product or application which utilizes its patented chemical formulations, the Chief Scientist will immediately be awarded 555,822 shares of the Company’s common stock. In accordance with FASB ASC 450-20-25-2, the Company would not record stock based compensation expense until the obligation to issue these shares of common stock became probable and the shares were earned. The value of such stock based compensation would become measurable on the date the shares of common stock are earned.
Other Contingencies
Approximately 6 million shares issued in the Share Exchange (see Note 4) were issued by the then transfer agent to stockholders of BioLabs for whom the Company does not have records as having consented to the Share Exchange. The Company currently holds approximately 96% of the outstanding interests in its subsidiary, BioLabs. The Company did not receive consents to the Share Exchange from all common and preferred shareholders of BioLabs, and the Company has accounted for those shareholders who did not sign consents as holders of the remaining 4% outstanding interests in BioLabs. As described in “Item 1 Business-Company Overview” in this Annual Report on Form 10-K, the Share Exchange Consents did not specify the number of shares of BioLabs common stock to be exchanged by the Consenting Shareholder and did not affirmatively make the representation and warranties to be made by our stockholders as set forth in the Share Exchange. In light of such omissions, there can be no assurances that a shareholder will not challenge the validity of its consent and request a rescission offer in respect of shares of common stock issued to such person. There can also be no assurances that in light of the content of such Shareholder Consent, the Company had a basis for a valid private placement of its common stock issued in the Share Exchange, which if such were the case, may negatively affect our status as a publicly traded company.
In addition, the Company believes that the shareholders who consented to the Share Exchange and were issued shares of Company common stock failed to deliver the stock certificates representing their shares of common stock and Series A Preferred Stock of BioLabs and may claim they also have an ownership interest in BioLabs. Although the Company would challenge any such claims, it cannot assure investors that it would prevail, in which case the Company’s percentage ownership interest in BioLabs would decrease.
Searchhelp, Inc. Royalty Rights
On February 3, 2004, the Company’s subsidiary, Environmental Commercial Technology, Corp. (“ECT”), entered into an agreement with Searchhelp, Inc. (“Searchhelp”). Searchhelp paid cash and issued shares of its common stock and stock warrants to ECT in order to acquire a royalty equal to 5% of the gross sales of a product ECT was developing (the “U.S. Product”). The U.S. Product, which has not been commercially released and has not been approved by the U.S. Environmental Protection Agency ("EPA"), was intended to prevent the growth of mold and fungus. The agreement with Searchhelp was for a 5 ½ year term, commencing on the first quarter in which the royalty payments to Searchhelp have aggregated to $50,000. The Company cannot currently estimate any liability it may have with regard to Searchhelp.
Company's former chief financial officer
The Company's former chief financial officer, James Crane, has asserted that he is entitled to up to 147,210 shares of common stock pursuant to the terms of that certain Consulting Agreement, dated May 20, 2009, between the Company and James Crane (the "Consulting Agreement"). The Company asserts that Mr. Crane is not entitled to any additional shares of common stock pursuant to the Consulting Agreement or any other arrangement. If the Company is not successful in its assertion, the Company may be required to issue the shares to Mr. Crane. The corresponding charge has not been accrued for in the financial statements.
Note 14 - Subsequent Events:
On December 6, 2010, the Company issued (i) an unsecured promissory note to Herbert Kozlov, a shareholder of the Company containing the same terms and conditions as the Francis Notes, in the amount of $50,000. The Company issued another unsecured promissory note to Mr. Francis on December 10, 2010, containing the same terms and conditions as the Francis Notes, which issuance resulted in gross proceeds to the Company of $75,000. The Company issued another unsecured promissory note to Riverfalls Financial Services LLC on December 15, 2010, containing the same terms and conditions as the Francis Notes, which issuance resulted in gross proceeds to the Company of $100,000.
On November 13, 2010, the Company issued 100,000 shares of the Company’s common stock for gross proceeds of $25,000 to an investor. The Company also issued 125,000 shares of the Company’s common stock on December 13, 2010 for gross proceeds of $25,000 to an investor.The Company also issued 333,333 shares of the Company’s common stock on December 30, 2010 for gross proceeds of $50,000 to an investor.
On December 21, 2010, the Company paid $12,850 in Delaware Franchise taxes of behalf of its subsidiary BioNeutral Laboratories.
On January 14, 2011, Suresh Relwani resigned as a member of the Board. Following the resignation of Mr. Relwani from the Board, the remaining directors of the Company, pursuant to their authority under the Company's By-laws, appointed Wayne Stratton to fill the vacancy on the Board created by Mr. Relwani's resignation. Mr. Stratton's appointment to the Board became effective immediately. As a non-management member of the Board, in remuneration for his services, Mr. Stratton will receive an annual grant of 85,000 restricted shares of the Company's common stock. Further, Mr. Stratton entered into the Company's form of Director Indemnification Agreement, pursuant to which the Company agreed to indemnify Mr. Stratton from certain expenses, including reasonable attorney's fees, incurred by Mr. Stratton as a result of serving on the Board (and/or a committee of the Board), subject to certain exclusions for certain delineated matters.
On February 3, 2011the Company formed an affiliation with the Kentucky Hospital Association (KHA) positioning itself for a potential national healthcare product launch within the coming months. It has also formed a new wholly owned subsidiary company, BioNeutral Services Inc. (“BNS”), and placed it under the direction of Mr. Frank Battafarano as its new CEO. Mr. Battafarano has more than thirty years experience as a senior level executive in the healthcare sector.
On January 4, 2011 the company announced that it has received a commitment of support from the Commissioner of Kentucky's Department for Business Development (the Department). The Department's mandate includes exploring innovative ways to stimulate Kentucky's economy by supporting existing businesses and attracting new enterprises to Kentucky at the lowest overall cost of doing business.
On December 19, 2010 the company entered discussions with the Kentucky Hospital Association (“KHA”) through its subsidiary Kentucky Hospital Services Corporation LLC (“KHSC”) to introduce BioNetural’s Ogiene™ and Ygiene™ products into its member hospital association. The KHA, established in 1929, represents hospitals, related health care organizations, and integrated health care systems and is dedicated to sustaining and improving the health status of the citizens of Kentucky. The KHSC aims to provide its member hospitals with the cleanest health care facilities possible.
Effective November 30, 2010, the Company appointed Dr. Andy Kielbania, BioNeutral Group's Chief Scientist, as a member of its Board of Directors. Dr. Kielbania will serve on the audit committee. Subsequent events have been evaluated through the date the financial statements were issued. All appropriate subsequent event disclosure, if any, have been made in notes to consolidated financial statements.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Exchange Act, as of October 31, 2010. Based on this evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures are not effective to ensure that all information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and is accumulated and communicated to our management, including our principal executive and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Our principal executive officer and principal financial officer reached a similar conclusion based on their evaluation of our disclosure controls and procedures as of October 31, 2009. Although our principal executive officer and principal financial officer believe that progress has been made with respect to our disclosure controls and procedures during the past year, the following areas have been identified as requiring further improvement:
·
There is insufficient supervision and review by our corporate management, particularly relating to transactions relating to equity and debt instruments.
·
There is an insufficient level of monitoring and oversight controls for review and recording of stock issuances, agreements and contracts, including insufficient documentation and review of the selection and application of GAAP to significant non-routine transactions.
·
There are insufficient corporate governance policies. Our corporate governance activities and processes are not always formally documented. Specifically, decisions made by the board to be carried out by management should be documented and communicated on a timely basis to reduce the likelihood of any misunderstandings regarding key decisions affecting our operations and management.
·
We currently have insufficient resources and an insufficient level of monitoring and oversight, which may restrict our ability to gather, analyze and report information relative to the financial statements in a timely manner, including insufficient documentation and review of the selection and application of generally accepted accounting principles to significant non-routine transactions. In addition, the limited size of our accounting function makes it impractical to achieve an optimum segregation of duties.
Our size (a Chief Executive Officer and a Chief Science Officer) dictates that most policies are self policing and adjusted on an ad-hoc basis as required so formal policies are essentially not formed and recorded.
In order to help improve our disclosure controls and procedures, the Company has engaged a chief financial advisor and added a Board member with financial and accounting expertise and prior corporate board experience. The Company intends to form an audit committee to further assist with improving its disclosure controls and procedures.
Management's Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining effective internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act over the registrant. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of our financial reporting for external purposes in accordance with accounting principles generally accepted in the United States. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our financial statements would be prevented or detected.
An internal control material weakness is a significant deficiency, or aggregation of deficiencies, that does not reduce to a relatively low level the risk that material misstatements in financial statements will be prevented or detected on a timely basis by employees in the normal course of their work. An internal control significant deficiency, or aggregation of deficiencies, is one that could result in a misstatement of the financial statements that is more than inconsequential.
As of October 31, 2010 As of October 31, 2010, management assessed the effectiveness of the Company’s internal control over financial reporting based on the criteria for effective internal control over financial reporting established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control - Integrated Framework, our management concluded that our internal control over financial reporting was not effective as of October 31, 2010 for the reasons outlined above.
Changes in Internal Controls over Financial Reporting
There have been no changes in our internal controls over financial reporting that occurred during our last fiscal quarter to which this Annual Report on Form 10-K relates that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. We are committed to improving our financial organization. As part of this commitment, we intend to continue to educate our management personnel to comply with U.S. GAAP and SEC disclosure requirements and to increase management oversight of accounting and reporting functions in the future.
ITEM 9B
ITEM 9B . OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors and Executive Officers
The following table sets forth the names, ages and titles of our directors and executive officers as of February 14, 2011, and the years in which such directors became directors. All directors hold office until the next annual meeting of shareholders or until their respective successors are elected and qualified.
Stephen J. Browand has served as our Chief Executive Officer (Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer) and a director of our company since January 30, 2009. Mr. Browand served as Chairman and Chief Executive Officer of the NYSS Group Ltd., a New York based multinational security consulting firm, from 2000 to January 2009. He also served as the President and Chief Executive Officer of Hachette Distribution Services USA (HDS), a division of the Lagardere Group, a public French multi-national conglomerate, from 1989 to 1999. Mr. Browand has a Bachelor of Science in business administration from New York University. As a result of these and other professional experiences, we believe Mr. Browand is qualified to serve as a director based upon his diverse business and management expertise.
Raj Pamani has served as a director of our company since January 30, 2009. For approximately the last twelve years, Mr. Pamani has served as a director of the privately held Pamani Group Ltd., a company engaged in the business of real estate investments (commercial and residential) and owning and operating restaurants and hotels and food processing plants. As a result of these and other professional experiences, we believe Mr. Pamani is qualified to serve as a director due to his expertise in business transactions and his record of success in managing business investments.
Dr. Andy Kielbania has served as our Chief Scientist and Secretary since January 30, 2009 and has served a director of our company since November 30, 2010. Dr. Kielbania joined BioNeutral Laboratories as a scientist in 2005. From 2002 to 2005 Dr. Kielbania served as the vice president of Manning Management. He previously held positions at Rohm and Haas where he assumed senior level positions in research and developing. Dr. Kielbania received his Ph.D. in organic chemistry from the University of California at Berkeley. As a result of these and other professional experiences, we believe Mr. Kielbania is qualified to serve as a director based on his scientific knowledge and his management skill.
Mr. Wayne Stratton is a certified public accountant in Kentucky, His corporate board experience includes current service as Chairman of the Board of East Kentucky Power Cooperative where is the former Audit Committee Chairman and has served as Director since 1990, Director of National Rural Utilities Cooperative Finance Corporation, Director of Shelby Energy Cooperative since 1987, Director of ACES Power Marketing since 2004, Director of Shelbyville Municipal Water & Sewer Commission since 2000 and Director of Republic Bancorp, a $2.8 billion bank traded on NASDAQ, since 1995, where he currently serves as the Audit Committee Chairman and Audit Committee Financial Expert. As a result of these and other professional experiences, we believe Mr. Stratton is qualified to serve as a director due to his financial and accounting expertise and his prior service as a director of other companies.
Family Relationships
There are no family relationships between any of our executive officers or directors.
Code of Ethics
We have a code of ethics that applies to our chief executive officer, chief financial officer and other persons who perform similar functions. A copy of our code of ethics is incorporated by reference as an exhibit to this Annual Report on Form 10-K.
Audit Committee Financial Expert
Our Board of Directors, which currently consists of four individuals, does not have any separately-designated standing committees, including a separately-designated standing audit committee. The entire Board of Directors currently acts as our audit committee. We may, however, as our business grows and if additional members are added to our Board of Directors, our Board of Directors will establish an audit committee, one of the members of which may be an “audit committee financial expert,” as such term is defined in the rules of the SEC.
ITEM 11
ITEM 11 . EXECUTIVE COMPENSATION
Summary Compensation Table
(Fiscal Year Ended October 31, 2010 and Fiscal Year Ended October 31, 2009)
The following table sets forth all of the compensation awarded to, earned by or paid to (i) each individual serving as our principal executive officer during the fiscal year ended October 31, 2010 and (ii) the two most highly compensated executive officers, other than the principal executive officer who were serving as executive officers at the end of such fiscal year and who received total compensation in excess of $100,000 during such fiscal year (collectively, the “named executive officers”).
________________________
(1) Represents the expense to us pursuant to FAS 123(R) for the respective year for restricted stock or stock options granted as long-term incentives. See Note 10 of our financial statements for the fiscal year ended October 31, 2010 and the fiscal year ended October 31, 2009 for the assumptions used for valuing the expense under FAS 123(R).
(2) Mr. Browand was appointed to serve as our Chief Executive Officer, effective as of January 29, 2009. Represents the value of 750,000 shares of our common stock issued to Mr. Browand on January 29, 2009.
(3) Does not include $30,558 paid to NYSS Group Ltd., an affiliate of Mr. Browand, for services provided to us in fiscal 2009.
(4) Represents the cost of a leased car utilized by Dr. Kielbania.
Employment/Consulting Agreements
We and Dr. Andy Kielbania, our Chief Scientist, are parties to a consulting agreement, pursuant to which Dr. Kielbania agreed to take responsibilities and take direction from our board of directors. Under this agreement, we are obligated to pay Dr. Kielbania $10,000 per month; provided, that compensation need not be paid until we have adequate funds in order to make payment on the compensation owed to him. We also have verbally agreed with Dr. Andy Kielbania, our Chief Scientist, that at such time as we obtain approval from the EPA for a product or application which utilizes our patented chemical formulations, if ever, we will award Dr. Kielbania 555,822 shares of our common stock.
2009 Stock Incentive Plan
On January 30 , 2009, at a special meeting of our stockholders, our stockholders approved the BioNeutral Group, Inc. 2009 Stock Incentive Plan (the “Plan”), which had been previously approved by our Board of Directors, subject to stockholder approval. The purpose of the Plan is to foster and promote our long-term financial success and to increase stockholder value by, among other things, enabling key employees and outside directors to share in our long-term growth and success. A total of 5,000,000 shares of common stock are available for incentive awards granted under the Plan, subject to adjustment. The number of shares of common stock that are the subject of incentive awards under the Plan, which are forfeited or terminated, are surrendered in payment of applicable employment taxes and/or other withholding obligations in connection with the vesting of an incentive award, or are settled in cash in lieu of common stock or in another manner such that all or some of the shares covered by the incentive award are either not issued to a grantee or are exchanged for incentive awards that do not involve common stock, shall again, in each case, immediately become available for incentive awards to be granted under the Plan.
The Plan is to be administered by the Compensation Committee (or subcommittee thereof) (the “Committee”) of the Board of Directors, which consists of not less than three directors who fulfill the “non-employee director” requirements of Rule 16b-3 under the Exchange Act and the “outside director” requirements of Section 162(m) of the Internal Revenue Code; provided, however, that with respect to any incentive award for an outside director, the Committee shall be the entire Board of Directors. The Committee shall from time to time designate those employees and/or outside directors to be granted incentive awards under the Plan, the type of incentive awards granted, the number of shares, rights or units, as the case may be, which shall be granted to each
such person, and any other terms or conditions relating to the incentive awards as it may deem appropriate to the extent consistent with the provisions of the Plan. Unless and until the Committee determines that a particular incentive award granted to a covered employee is not intended to comply with the “performance-based exception” under Section 162(m) of the Internal Revenue Code, (i) the maximum aggregate number of shares of common stock attributable to incentive awards that may vest in any calendar year pursuant to any incentive award held by any individual covered employee shall be 2,000,000 shares and (ii) subject to such limitation, the maximum aggregate number of shares issuable to any one person pursuant to incentive awards shall be 5% of the number of shares of common stock outstanding at the time of the grant.
With respect to a grantee who is an employee or outside director, shares of restricted stock may be awarded by the Committee with such restrictions during the restriction period as the Committee designates in its discretion. Subject to limited exceptions, in no event shall the restriction period for a grant of restricted stock expire earlier than (i) one year from the date of grant for restricted stock for which the restriction period expires upon the attainment of performance goals or (ii) ratably over three years from the date of grant for restricted stock for which the restriction period expires upon the performance of services over time. Restricted stock shall be awarded for no additional consideration or such additional consideration as the Committee may determine, which consideration may be less than, equal to, or more than the fair market value of the shares of restricted stock on the grant date. Unless otherwise specified in the grantee’s incentive agreement with respect to the restricted stock, each restricted stock award shall not constitute an immediate transfer of the record and beneficial ownership of the shares of restricted stock to the grantee in consideration of the performance of services as an employee or outside director, as applicable, and shall not entitle such grantee to any voting and other ownership rights in such shares until the date the restriction period ends.
Stock-based awards other than restricted stock awards may be awarded by the Committee to selected grantees that are payable in shares of our common stock or in cash, as determined in the discretion of the Committee to be consistent with our goals. Such awards that are payable in shares of our common stock include, without limitation, purchase rights, shares of common stock awarded that are not subject to any restrictions or conditions, convertible or exchangeable debentures, and other rights convertible into shares. The amount of consideration required to be received by us shall be either (i) no consideration other than services actually rendered (in the case of authorized and unissued shares) or to be rendered, or (ii) as otherwise specified in the incentive agreement. Except for limited circumstances, in no event shall a grant of a stock-based award vest earlier than (i) one year from the date of grant for an award which is subject to the attainment of performance goals or (ii) ratably over three years from the date of grant for an award which vests upon the performance of services over time. Other stock-based awards shall be paid in shares of common stock, in a single payment or in installments on such dates as determined by the Committee; all as specified in the incentive agreement.
In the event of a change in control of our company, as of the day immediately preceding the change in control date, unless expressly provided otherwise in the grantee’s incentive agreement: (a) all of the restrictions and conditions of any awards then outstanding shall be deemed satisfied, and the restriction period with respect thereto shall be deemed to have expired, and each award shall become free of all restrictions and fully vested; and (b) all of the performance-based stock-based awards and any other stock-based awards shall become fully vested, deemed earned in full, and promptly paid within 30 days to the affected grantees without regard to payment schedules and notwithstanding that the applicable performance cycle, retention cycle or other restrictions and conditions have not been completed or satisfied.
Outstanding Equity Awards at Fiscal Year End
(Fiscal Year Ended October 31, 2010)
As of October 31, 2010, none of our named executive officers held any outstanding unexercised stock options, unvested stock awards, or any other equity incentive plan awards.
Director Compensation
All directors are reimbursed for their reasonable out-of-pocket expenses incurred in connection with attending board of director and committee meetings.
Non-management members of the Board will receive an annual grant of 85,000 restricted shares of the Company's common stock.
The following table provides certain information with respect to the compensation earned or paid to our non-employee directors during the fiscal year ended October 31, 2010. Mr. Browand did not receive any compensation for his service on our board of directors beyond the compensation he received as our Chief Executive Officer.
(1) Represents the expense to us pursuant to FAS 123(R) for the respective year for shares granted as long-term incentives. See Note 10 of our financial statements for the fiscal year ended October 31, 2010 and the year ended October 31, 2009 for the assumptions used for valuing the expense under FAS 123(R).
(2) This amount consists of (i) $60,000 per month paid or credited to Pamani Foods LLC, an affiliate to Mr. Pamani for consulting services (ii) $129,900 paid or credited to Jina Partners Ltd, an affiliate of Mr. Pamani, for consulting services, and (iii) $21,163 in respect of a car leased by us that is utilized by Mr. Pamani.
(3) Includes (i) the value of 500,000 shares of our common stock issued to R.K. and Associates, Inc. ("R.K."), an entity controlled by Mr. Relwani, on January 29, 2009, in advance for consulting services to be provided to us; (ii) $10,000 paid to R.K. for consulting services provided to us during fiscal 2009 and (iii) expenses incurred in connection with such services in the amount of $3,000 that were reimbursed to R.K.
Consulting Agreements with Certain Directors
We and our director, Raj Pamani, are parties to a consulting agreement, dated as of June 15, 2008, pursuant to which Mr. Pamani agreed to accept responsibilities and take direction from our board of directors. Under this agreement, we are obligated to pay Mr. Pamani $10,000 per month. During fiscal 2009 and fiscal 2010, we paid or credited $120,000 and $129,900, respectively, to Mr. Pamani under this agreement, which were recorded as consulting expenses and recorded as a related party payable. Mr. Pamani has charged certain personal expenses against our cash account which have been treated by us as repayment of the related party payable. At October 31, 2009 and October 31, 2010, the balance owed to the director was $2,303 and $0, respectively.
On September 6, 2008, we entered into an agreement with Jina Partners (“Jina”), an affiliate of Raj Pamani, for consulting services relating to the development of certain commercial transactions. Under this agreement, we are obligated to pay Jina $10,000 per month. The term of this agreement is two years. For the year ended October 31, 2009 and year ended October 31, 2010, we paid $219,000 and $60,000, respectively, to Jina.
Between January 1, 2009 and February 28, 2009, R.K. and Associates, Inc. (“R.K.”), provided environmental consulting services to us for whom we paid R.K. approximately $10,000 for consulting services and approximately $3,000 for expenses incurred by R.K. while providing those services. Our former director, Suresh Relwani, is the sole owner of R.K. In addition, on November 12, 2008, we entered into a Consultant Agreement with R.K. (the “R.K. Consultant Agreement”) pursuant to which R.K. agreed to provide us with environmental consulting services. The term of the R.K. Consultant Agreement expires on November 11, 2011, unless terminated earlier by either party. On January 29, 2009, we granted R.K. 500,000 shares of our common stock, valued at $500,000, under the R.K. Consultant Agreement, for future consulting services to us, which is being amortized over three years. At October 31, 2010, the balance of prepaid compensation was $172,101.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding ownership of shares of our common stock, as of February 16, 2010:
•
by each person known by us to be the beneficial owner of 5% or more of our common stock;
•
by each of our directors and named executive officers; and
•
By all of our directors and executive officers as a group.
Except as otherwise indicated, each person and each group shown in the table below has sole voting and investment power with respect to the shares of common stock indicated. For purposes of the table below, in accordance with Rule 13d-3 under the Exchange Act, a person is deemed to be the beneficial owner of any shares of our common stock over which he or she has or shares, directly or indirectly, voting or investment power or of which he or she has the right to acquire beneficial ownership at any time within 60 days. As used in this proxy statement, “voting power” is the power to vote or direct the voting of shares and “investment power” includes the power to dispose or direct the disposition of shares. Common stock beneficially owned and percentage ownership as of January 17, 2011 was based on 73,666,722 shares outstanding.
* Less than 1%
(1) Unless otherwise stated, the address for all the officers and directors is c/o BioNeutral Group, Inc., 211 Warren Street, Newark, New Jersey 07103.
(2) Mr. Browand was appointed to serve as our Chief Executive Officer, effective as of January 29, 2009. Mr. Browand’s nineteen year old son, who lives in the same home as Mr. Browand, currently owns 750,000 shares of our common stock. Mr. Browand disclaims any beneficial ownership of these shares.
(3) Includes 2,000,000 shares of our common stock held by Pamani Group Ltd. with respect to which Mr. Pamani has sole voting and dispositive power.
(4) Includes 15,500 shares with respect to which Michael D. Francis has sole voting and dispositive power and 5,108,847 shares with respect to which Michael D. Francis and Marjorie R. Francis have shared voting and dispositive power. The address of the principal business office or residence of Michael D. Francis and Marjorie R. Francis is 50 Smith Road, Parsippany, New Jersey 07054. The foregoing information is derived from a Schedule 13G filed on behalf of the reporting persons on September 8, 2009. Excludes shares of our common stock that may be issued to Mr. Francis that may be issued upon conversion of the first Francis Note and the second Francis Note. See “Item 5 --Unregistered Sales of Equity Securities” of this Annual Report on Form 10-K.
(5) See Footnote Nos. 1 through 4.
Equity Compensation Plan Information
The following table sets forth certain information as of October 31, 2010, with respect to compensation plans under which our equity securities are authorized for issuance:
(1) Represents shares of our common stock authorized for issuances under our 2009 Stock Incentive Plan.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Certain Relationships and Related Transactions
We and our director, Raj Pamani, are parties to a consulting agreement, dated as of June 15, 2008, pursuant to which Mr. Pamani agreed to accept responsibilities and take direction from our board of directors.Under this agreement, we are obligated to pay Mr. Pamani $10,000 per month. During fiscal 2009 and fiscal 2010, we paid or credited $120,000 and $129,900, respectively, to Mr. Pamani under this agreement, which were recorded as consulting expenses and recorded as a related party payable to Mr. Pamani. Mr. Pamani has charged certain personal expenses against our cash account which have been treated by us as repayment of the related party payable. At October 31, 2009 and October 31, 2010, the balance owed to the director was $2,303 and $0, respectively.
On September 6, 2008, we entered into an agreement with Jina, an affiliate of Raj Pamani, for consulting services relating to the development of certain commercial transactions. Under this agreement, we are obligated to pay Jina $20,000 per month. The term of this agreement is two years. For the year ended October 31, 2009 and year ended October 31, 2010, we paid $219,000 and $60,000, respectively, to Jina, of which $99.000 and $0, respectively, was treated as prepaid expense.
Between January 1, 2009 and February 28, 2009, R.K. provided environmental consulting services to us for whom we paid R.K. approximately $10,000 for consulting services and approximately $3,000 for expenses incurred by R.K. while providing those services. Our director, Suresh Relwani, is the sole owner of R.K. In addition, on November 12, 2008, we entered into the R.K. Consultant Agreement pursuant to which R.K. agreed to provide us with environmental consulting services. The term of the R.K. Consultant Agreement expires on November 11, 2011, unless terminated earlier by either party. On January 29, 2009, we granted R.K. 500,000 shares of our common stock, valued at $500,000, for future consulting services under the R.K. Consultant Agreement, which amount is being amortized over three years. At October 31, 2010, the balance of prepaid compensation was $172,101.
During fiscal 2009, we paid approximately $30,558 to NYSS Group Ltd., an affiliate of by Stephen Browand, our Chief Executive Officer, for the provision by NYSS of intellectual property encryption services to us.
In January 2009, we issued 82,585 shares valued at $82,585 to James Crane, our former Chief Financial Officer in payment for services performed and for $10,000 in expenses incurred by the former Chief Financial Officer. In June 2009, we issued 450,000 shares valued at $295,200 for past services and future services to be performed.
In January 2009, we issued 416,090 shares of our common stock to members of our board of directors, of which 332,872 shares with a value of $332,872 had been granted prior to November 1, 2009 and 83,218 shares with a value of $83,218 were granted in January 2009.
In February 2009, we entered into indemnification agreements with each of our current officers and directors, which provide indemnification in certain situations to the fullest extent permitted by applicable law.
On May 27, 2009, Mr. Francis purchased 1,000,000 shares of our common stock for $250,000. See “Item 5 --Unregistered Sales of Equity Securities” of this Annual Report on Form 10-K.
On November 13, 2009, the Company issued (i) an unsecured promissory note to Michael D. Francis, a shareholder of the Company, in the amount of $250,000, (ii) a second unsecured promissory note on January 4, 2010 in the amount of $250,000, a (iii) a third unsecured promissory note in the amount of $250,000, on March 15, 2010 of which $100,000 was drawn down by the Company on March 15, 2010 and $150,000 on April 1, 2010, (iv) a fourth secured promissory note in the amount of $100,000 on April 30, 2010 with an original issuance date of April 26, 2010, and (v) a fifth unsecured promissory note in the amount of $25,000 on July 7, 2010 (all such notes issued to Mr. Francis are collectively referred to as the “Francis Notes”).
On November 13, 2009, the Company issued an unsecured promissory note to Capara Investments LLC (“Capara”), in the amount of $250,000 and (ii) a second unsecured promissory note to Capara on January 4, 2010 in the amount of $250,000 and (iii) a third unsecured promissory note to Capara on September 2, 2010 in the amount of $25,000 and (iv) a fourth unsecured promissory note to Capara on October 13, 2010 in the amount of $25,000. The sole member of Capara, Raj Pamani, is a member of our Board and a shareholder of the Company.
The Francis Notes and the Capara Notes are sometimes referred to herein as the “Shareholder Notes.” The Shareholder Notes resulted in gross proceeds to the Company of $1,425,000.
Each of the Shareholders Notes bears an 8% annual interest rate, is due and payable in cash on the fifth anniversary of the date of issuance, and upon consummation of a “Qualified Financing” (as defined in each of the Shareholder Notes), will automatically be exchanged for, at our election, either (i) securities on the same terms and conditions as those received by investors in such Qualified Financing based on an assumed exchange rate reflecting the pricing used in such financing or (ii) shares of our common stock equal to the quotient obtained by dividing (x) the then outstanding principal amount of the Shareholder Note by (y) the lower of (i) $0.69 and (ii) the Fair Market Value (as defined in the Shareholder Notes) of one share of our common stock as of the date of such exchange. On each three (3) month anniversary of the issuance of each Shareholder Note, all accrued and unpaid interest shall be added to the unpaid principal amount of such note. Each of the Shareholder Notes defines “Qualified Financing” as an investment in securities of the Company (including any financing that includes convertible indebtedness and/or warrants) occurring after the date of issuance of the Shareholder Note by an investor that is not an affiliate of our company in which we receive net proceeds greater than $500,000 (including any additional investment by the holder of the Shareholder Note or by the holder of any other 8% exchangeable promissory note) in the Qualified Financing. The secured promissory note in the principal amount of $100,000 issued by the Company to Mr. Francis on April 30, 2010, is secured by the Company’s Intellectual Property (as defined in such promissory note).
Accrued and unpaid interest is added to the unpaid principal amount of the Shareholder Notes every three months. Interest expense on the Shareholder Notes for the year ended October 31, 2010 and 2009 was $87,097 and $0, respectively. As of October 31, 2010, $70,646 of accrued interest was added to the principal amount of the Shareholder Notes.
From time to time, one or more of our affiliates may form or hold an ownership interest in and/or manage other businesses both related and unrelated to the type of business that we own and operate. These persons expect to continue to form, hold an ownership interest in and/or manage additional other businesses which may compete with ours with respect to operations, including financing and marketing, management time and services and potential customers. These activities may give rise to conflicts between or among the interests of us and other businesses with which our affiliates are associated. Our affiliates are in no way prohibited from undertaking such activities, and neither we nor our shareholders will have any right to require participation in such other activities.
Further, because we intend to transact business with or affiliates have a material interest, potential conflicts may arise between the respective interests of us and these related persons or entities. We believe that such transactions will be effected on terms at least as favorable to us as those available from unrelated third parties.
We have not adopted policies and procedures to review, approve, or ratify transactions involving real or apparent conflicts of interest.
Director Independence
Our common stock is not listed on a national securities exchange and therefore, we are not subject to any corporate governance requirements regarding independence of board or committee members. Under the definition of independence contained in the rules of The American Stock Exchange, LLC, an “independent director” of a company means a person who is not an officer or employee of the company or its subsidiaries and who the board of directors has affirmatively determined does not have a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. After review of all relevant transactions or relationships between each director, or any of his family members, and our company, our senior management and our independent registered public accounting firm, we have determined that Mr. Stratton is the only one of our directors that is an independent director within the meaning of the applicable AMEX listing standard.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
In accordance with the requirements of the Sarbanes-Oxley Act of 2002, all audit and audit-related work and all non-audit work performed by our registered independent public accounting firm, Marcum LLP (“Marcum”) and our prior independent public accounting firm Bartolomei Pucciarelli, LLC (“Bartolomei”), is approved in advance by our Board of Directors, including the proposed fees for such work. The Board of Directors is informed of each service actually rendered. None of the services provided by our independent registered public accounting firm for the fiscal year ended October 31, 2010 was obtained in reliance on the waiver of the pre-approval requirement afforded in SEC regulations.
Audit Fees
The aggregate fees billed by Marcum for professional services rendered for the audit of our annual financial statements for the fiscal years ended October 31, 2010 and 2009, and for the review of the financial statements included in our Quarterly Reports on Form 10-Q for the fiscal years ended October 31, 2010 and 2009 were $ 53,500 and $0 respectively.
The aggregate fees billed by Bartolomei for professional services rendered for the audit of our annual financial statements for the fiscal years ended October 31, 2010 and 2009, and for the review of the financial statements included in our Quarterly Reports on Form 10-Q for the fiscal years ended October 31, 2010 and 2009 were $129,352 and $150,000 respectively.
Audit-Related Fees
Other than the fees described under the caption “Audit Fees” above, Marcum and Bartolomei did not bill any fees for services rendered to us during fiscal years ended October 31, 2010 and 2009 for assurance and related services in connection with the audit or review of our financial statements.
Tax Fees
There were no fees billed by Marcum and Bartolomei for professional services rendered for tax compliance, tax advice or tax planning during fiscal years ended October 31, 2010 and 2009.
All Other Fees
There were no fees billed by Marcum and Bartolomei for products or professional services rendered, other than services described under the caption “Audit Fees” above during fiscal years ended October 31, 2010 and 2009.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
(a) List of Financial Statements, Financial Statement Schedules, and Exhibits.
1. Financial Statements. The following financial statements of BioNeutral Group, Inc. are included in Item 8 of Part II of this Annual Report on Form 10-K:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of October 31, 2010 and October 31, 2009
Consolidated Statements of Operations for the years ended October 31, 2010 and October 31, 2009
Consolidated Statements of Changes in Shareholders’ Equity for the years ended October 31, 2009 and October 31, 2009
Consolidated Statements of Cash Flows for the years ended October 31, 2009 and October 31, 2009
Notes to Consolidated Financial Statements
2. Financial Statement Schedules.
All financial statement schedules are omitted from this Annual Report on Form 10-K, as they are not required or applicable or the required information is included in the financial statements or notes thereto.
3. Exhibits. The following exhibits are filed with this Annual Report on Form 10-K or are incorporated herein by reference, as indicated.
* Filed herewith.
(1) Incorporated by reference to BioNeutral Group, Inc.'s Amendment No. 1 to Current Report on Form 8-K filed with the Securities and Exchange Commission on February 23, 2009.
(2) Incorporated by reference to BioNeutral Group, Inc.'s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on February 14, 2008.
(3) Incorporated by reference to BioNeutral Group, Inc.'s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 5, 2009.
(4) Incorporated by reference to BioNeutral Group, Inc.'s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on March 23, 2009.
(5) Incorporated by reference to BioNeutral Group, Inc.'s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 4, 2009.
(6) Incorporated by reference to BioNeutral Group, Inc.'s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 18, 2010.
(7) Incorporated by reference to BioNeutral Group, Inc.'s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 17, 2010.
(8) Incorporated by reference to BioNeutral Group, Inc.'s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on June 14, 2010.
(9) Incorporated by reference to BioNeutral Group, Inc.'s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on September 20, 2010.
(b) Exhibits. The exhibits required by Item 601 of Regulation S-K are filed herewith or incorporated by reference.
(c) Financial Statement Schedules and Other Financial Statements.
All financial statement schedules are omitted from this Annual Report on Form 10-K, as they are not required or applicable or the required information is included in the financial statements or notes thereto.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements 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.
/s/ Stephen Browand
Chairman of the Board of Director and Chief Executive Officer (Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer)
February 15, 2011
Stephen Browand
/s/ Raj Pamani
Director
February 15, 2011
Raj Pamani
/s/ Dr. Andy Kielbania
Director
February 15, 2011
Dr. Andy Kielbania
/s/ Wayne Stratton
Director
February 15, 2011
Wayne Stratton