10-Q/A

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

FORM 10-Q/A-1

[ X ]   QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 2012

OR

[   ]   TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT

For the transition period from          to         

Commission file number 1-17378

SRKP 16, INC.

(Exact Name of Small Business Issuer as Specified in its Charter)

Delaware	20-8057585
(State or other jurisdiction	I.R.S. Employer
of incorporation or organization)	Identification number

2500 Broadway, Bldg. F, Suite F-125
Santa Monica, CA   90404

(Address of Principal Executive Offices)

Issuer's telephone number:     (310) 359-1680

Former name, former address, and former fiscal year, if changed since last report

Check whether the Issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the last 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  

Yes  [ X ]    No [    ]

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

Large accelerated filer [    ] Accelerated filer [    ]   Non-accelerated filer [    ]

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

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

As of June 14, 2012 the registrant had 20,685,860 shares of its common stock ($.0001 par value) outstanding.

EXPLANATORY NOTE

This Amendment No. 1 (this “Amendment”) to the Quarterly Report on Form 10-Q for the quarter ended April 30, 2012 (the “Form 10-Q”) of SRKP 16, Inc. is being filed for the purpose of furnishing Exhibit 101 to the Form 10-Q in accordance with Rule 405 of Regulation S-T. Exhibit 101 to this report provides the consolidated financial statements and related notes from the Form 10-Q formatted in eXtensible Business Reporting Language (“XBRL”).

Pursuant to Rule 406T of Regulation S-T, the interactive data files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

No attempt has been made in this Amendment to modify or update the other disclosures presented in the Form 10-Q. This Amendment does not reflect events occurring after the filing of the Form 10-Q (i.e., occurring after June 19, 2012) or modify or update those disclosures that may be affected by subsequent events. Such subsequent matters are addressed in subsequent reports filed by the registrant with the SEC. Accordingly, this Amendment should be read in conjunction with the Form 10-Q and the registrant’s other filings with the SEC.

Item 6.

Exhibits

Certification*

Certification pursuant to 18 U.S.C. Section 1350*

* Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q filed June 19, 2012.

SIGNATURES

       Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Amendment No. 1 to its Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized.

		SRKP 16, Inc.
Date:	June 20 , 2012	By:	/s/ Maurizio Vecchione
			Maurizio Vecchione, Principal Executive Officer
Date:	June 20, 2012	By:	/s/ Jeffrey S. Sperber
			Jeffrey S. Sperber, Principal Financial and Accounting Officer

INDEX TO EXHIBITS

Certification*

Certification pursuant to 18 U.S.C. Section 1350*

101.INS	XBRL Instance**
101.SCH	XBRL Taxonomy Extension Schema**
101.CAL	XBRL Taxonomy Extension Calculation**
101.DEF	XBRL Taxonomy Extension Definition**
101.LAB	XBRL Taxonomy Extension Labels**
101.PRE	XBRL Taxonomy Extension Presentation**

* Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q filed June 19, 2012.

** Provided herewith.

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(3) License Agreement

3 Months Ended

Apr. 30, 2012

(3) License Agreement:

(3) License Agreement

(3) LICENSE AGREEMENT

On December 23, 2009, we entered into an agreement for the right to an exclusive license agreement with CSMC which provides us with the world-wide rights to U.S Patent No. 7,547,511 “Antisense Inhibition of Laminin-8 Expression to Inhibit Human Gliomas” along with related technical information to develop, market and sell human therapeutic and diagnostic products, including new pharmaceutical products and/or non-prescriptive products using the patented technology (the “CSMC Agreement”).  The CSMC Agreement has been amended four times; December 8, 2010, June 30, 2011, August 31, 2011 and October 28, 2011. The CSMC Agreement also provides us with the rights to several other related, filed, but yet unissued patents.  The CSMC Agreement requires royalty payments equal to 3.5% of the gross sales price and other forms of consideration (such as milestone and sublicense payments), as defined in the agreement, on all products using the licensed technology.  The CSMC Agreement expires on a country-by-country basis on the date that the last patent covered under the agreement expires (currently 2029).

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

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

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

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

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

·         On or before December 31, 2013, the Company shall have commenced a clinical trial or trials in connection with at least one intended commercial use;

To date, we have not met these requirements, although we have plans to do so as part of our business strategy.  We can, however, provide no assurance that we will be able to meet any or all of these milestones in the future.

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

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(2) Going Concern, Management's Plans and Basis of Presentation

3 Months Ended

Apr. 30, 2012

(2) Going Concern, Management's Plans and Basis of Presentation:

(2) Going Concern, Management's Plans and Basis of Presentation

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

Going Concern and Management’s Plans

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern.  In connection with our audit as of and for the year ended October 31, 2011, our independent public accountants issued an opinion expressing substantial doubt about our ability to continue as a going concern.  Since our inception in August 2007, we have not generated revenue, incurred cash and operating losses, and as of April 30, 2012, had a deficit accumulated during the development stage of $3,165,900. We have relied primarily upon proceeds from the sale of convertible notes (the “Convertible Notes”) and Units to fund our operations.

As discussed above, in connection with the Reverse Merger, SRKP sold 502,000 Units receiving net proceeds of $404,688 of which $389,688 remained at the time of the Reverse Merger.  Subsequent to the Reverse Merger, we have sold an additional 1,105,250 Units receiving net proceeds of $943,007 after payment of commissions and offering expenses. As of April 30, 2012, the Company’s cash balance was $648,423.  We are continuing to market the sale of Units and expect to have at least one additional closing before terminating the private placement. The Company is authorized to sell up to 4.0 million Units in the aggregate.  Management believes that existing cash on hand will be sufficient to fund the Company’s planned activities and contractual obligations through at least the end of the Company’s fiscal year.  

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

Basis of Presentation

The accompanying condensed consolidated financial statements include the accounts of SRKP and its wholly owned subsidiary Arrogene.  All intercompany transactions have been eliminated in consolidation.  The condensed consolidated financial statements have been prepared without audit pursuant to the rules and regulations of the Securities and Exchange Commission.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the have been condensed or omitted pursuant to such rules and regulations.  The condensed consolidated financial statements reflect all adjustments (consisting of only normal recurring entries), which in the opinion of management, are necessary to present fairly the financial position at April 30, 2012 and the results of operations and cash flows of the Company for the three and six months ended April 30, 2012 and 2011.  Operating results for the six months ended April 30, 2012, are not necessarily indicative of the results that may be expected for the year ended October 31, 2012.

The unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements and footnotes thereto for the year ended October 31, 2011 filed on Form 8-K on January 18, 2012.  The accompanying financial statements have been prepared as if the Reverse Merger took place at the beginning of all periods presented.

Use of Estimates and Assumptions

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

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Condensed Consolidated Balance Sheets (April 30, 2012 unaudited) (USD $)	Apr. 30, 2012	Oct. 31, 2011
Current assets:
Cash and cash equivalents	$ 648,423	$ 2,094
Prepaid expenses and deposit	22,685	10,024
Total current assets	671,108	12,118
Property and equipment, net	944	1,242
Total assets	672,052	13,360
Current liabilities:
Accrued compensation	26,535	79,453
Accrued legal fees	36,016	153,547
Related party payables	11,300	66,350
Other payables and accrued expenses	38,299	9,747
Convertible notes	10,000	726,550
Total current liabilities	122,150	1,035,647
Total liabilities	122,150	1,035,647
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock	2,069	1,109
Additional paid-in capital	3,713,733	498,468
Deficit accumulated during the development stage	(3,165,900)	(1,521,864)
Total stockholders' equity (deficit)	549,902	(1,022,287)
Total liabilities and stockholders' equity (deficit)	$ 672,052	$ 13,360

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Statements of Cash Flows (USD $)	6 Months Ended		57 Months Ended
	Apr. 30, 2012	Apr. 30, 2011	Apr. 30, 2012
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss)	$ (1,644,036)	$ (561,672)	$ (3,165,900)
Adjustments to reconcile Net Income (Loss) to net cash used in operating activities:
Non-cash charge for reduction in conversion price of Convertible Notes	726,550		726,550
Amortization of debt placement costs		38,612	121,517
Share-based payment expense	462,830	167,440	714,110
Depreciation expense	298	248	845
(Increase) decrease in prepaid services and deposit	(12,661)	(14,072)	(22,685)
Increase (decrease) in other payables and accrued expenses	(164,297)	(75,717)	305,199
Increase (decrease) in related party payables	(55,050)	(3,500)	11,300
Net cash used in operating activities	(686,366)	(448,661)	(1,309,064)
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash acquired in business acquisition	389,688		389,688
Capital expenditures		(1,789)	(1,789)
Net cash provided by (used in) investing activities	389,688	(1,789)	387,899
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds received from Promissory Notes	80,000		80,000
Repayments of Promissory Notes	(80,000)		(80,000)
Sale of Units, Value	943,007	943,007
Net proceeds from sale of Convertible Notes		472,399	624,351
Proceeds from sale of Series A Preferred Stock			930
Advances from related parties			1,300
Net cash provided by financing activities	943,007	472,399	1,569,588
Net increase (decrease) in cash	646,329	21,949	648,423
Cash and cash equivalents at the beginning of period	2,094	110,158
Cash and cash equivalents at the end of period	$ 648,423	$ 132,107	$ 648,423

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(1) Business and Overview

3 Months Ended

Apr. 30, 2012

(1) Business and Overview:

(1) Business and Overview

(1) BUSINESS AND OVERVIEW

SRKP 16, Inc. (“SRKP”), was incorporated under the laws of the State of on December 7, 2006.  On January 11, 2012, we consummated a reverse merger transaction (the “Reverse Merger”) with Arrogene Nanotechnology, Inc., (“Arrogene”) a company focused on oncology.  Hereafter, SRKP 16, Inc. and Arrogene are collectively referred to as the “Company.”  Until such time that SRKP can formally change its name, it is doing business as Arrogene.

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

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

We plan on commercializing our products using a licensing and cost sharing strategy, seeking to enter into arrangements with major pharmaceutical companies with existing cancer therapy drugs facing issues relating to patent expirations, market expansion or contraction.   It is our goal to only commence Phase I clinical trials with a commitment from a licensee to complete Phase II and III clinical trials, predicated on the successful outcome of each phase, and go to market, if approval is received.  Further, we are also exploring use of Polycefin as a potential medical diagnostic product(s) for oncology related applications.   We also have developed intellectual properties surrounding Laminin-411, a new bio-marker that the Company believes can be used as a diagnostic and prognostic test on biopsies for certain types of cancers. The Company has completed a clinical trial with over 400 human patients’ biopsies and is in the process of securing regulatory clearances to begin commercializing this new test as a Laboratory Developed Test (“LDT”).   The Company also expects Laminin-411 to be used as a targeting bio-marker for its Polycefin drugs targeting certain cancers and it has published a paper on its in-vivo results for Glioblastoma that utilized Laminin-411. The Company is currently investigating applications of Laminin-411 in other cancers.

Pre-clinical investigation is also on-going on methods of inhibiting Laminin-411 as a therapeutic agent, which could be conjugated in various forms of Polycefin in the future.  The majority, of our planned products will require approval or marketing clearance from the United States Food and Drug Administration (the “FDA”).  To date we have not filed any applications with the FDA, but we have begun the process of validating our LDT with applicable regulators.

Since its inception in August 2007, Arrogene’s principal activities have involved developing a business strategy, raising capital, identifying and licensing the Polycefin technology, development of the technology, expanding intellectual property rights, and recruiting management, key staff, and board members.  For accounting purposes, the Company is considered a development stage company in accordance with Accounting Standards Codification (“ASC”) 915. 

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Balance Sheets - Parenthetical (April 30, 2012 unaudited) (USD $)	Apr. 30, 2012	Oct. 31, 2011
Preferred Stock, Par Value	$ 0.0001	$ 0.0001
Preferred Stock, Shares Authorized	10,000,000	10,000,000
Preferred Stock, Shares Issued	0	0
Common Stock, Par Value	$ 0.0001	$ 0.0001
Common Stock, Shares Authorized	100,000,000	100,000,000
Common Stock, Shares Issued	20,685,860	11,091,900
Common Stock, Shares Outstanding	20,685,860	11,091,900

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Document and Entity Information	3 Months Ended
	Apr. 30, 2012	Jun. 14, 2012
Document and Entity Information
Entity Registrant Name	SRKP 16 INC
Document Type	10-Q
Document Period End Date	Apr. 30, 2012
Amendment Flag	false
Entity Central Index Key	0001403792
Current Fiscal Year End Date	--10-31
Entity Filer Category	Smaller Reporting Company
Entity Current Reporting Status	Yes
Entity Voluntary Filers	No
Entity Well-known Seasoned Issuer	No
Document Fiscal Year Focus	2012
Document Fiscal Period Focus	Q2
Entity Common Stock, Shares Outstanding		20,685,860

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Condensed Statements of Operations (unaudited) (USD $)	3 Months Ended		6 Months Ended		57 Months Ended
	Apr. 30, 2012	Apr. 30, 2011	Apr. 30, 2012	Apr. 30, 2011	Apr. 30, 2012
OPERATING EXPENSES:
Licensing fees			$ 480,430		$ 480,430
Research and development	28,932		28,932		28,932
General and administrative	196,476	216,163	377,509	522,973	1,777,611
Operating Expenses	225,408	216,163	886,871	522,973	2,286,973
Income (Loss) from operations	(225,408)	(216,163)	(886,871)	(522,973)	(2,286,973)
OTHER INCOME (EXPENSE):
Interest	(726,713)	(27,567)	(757,165)	(38,699)	(878,927)
Other Income (expense)	(726,713)	(27,567)	(757,165)	(38,699)	(878,927)
Net Income (Loss)	$ (952,121)	$ (243,730)	$ (1,644,036)	$ (561,672)	$ (3,165,900)
Weighted Average Shares Outstanding, Basic and diluted	15,718,388	10,991,900	14,104,901	10,991,900
Loss Per Share, Basic and diluted	$ (0.06)	$ (0.02)	$ (0.12)	$ (0.05)

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(6) Promissory Notes

3 Months Ended

Apr. 30, 2012

(6) Promissory Notes:

(6) Promissory Notes

(6) PROMISSORY NOTES

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

The Promissory Notes were repaid in full in January 2012.  Included in interest expense for the six months ended April 30, 2012 is $8,000 representing the origination fees.  Also included in interest expense for the six months ended April 30, 2012 is $22,400 representing the value of the 40,000 shares of common stock issuable to the makers of the Promissory Notes.  As of April 30, 2012, these shares had not been issued, and accordingly, the associated liability is included in other payables and accrued expenses on the accompanying condensed consolidated balance sheet.

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(5) Stockholders' Equity

3 Months Ended

Apr. 30, 2012

(5) Stockholders' Equity:

(5) Stockholders' Equity

(5) STOCKHOLDERS’ EQUITY

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

 Preferred Stock

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

Common Stock

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

In December 2009, we issued to CSMC 31,900 shares of common stock in connection with entering into the CSMC Agreement.  We ascribed no value to the common shares issued to CSMC.  As described above in Note 3, in November 2011, we issued to CSMC 1,468,100 shares of common stock in order to effectuate the License. We valued the shares issued to CSMC at $.30 per share based on the stated conversion price of the Convertible Notes most recently issued.

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

Units

As described above in Note 2, during the three months ended April 30, 2012, we sold 1,105,250 Units for $1.00 per Unit, receiving net proceeds of $943,007 after payment of commissions and offering expenses. Each Unit consists of  (i) one share of common stock, and (ii) two SRKP Warrants. 

Warrants

On August 24, 2010, we entered into a financial advisory agreement with an investment banking firm to provide certain services over a six month period.  As compensation for the services, we were obligated to issue common stock purchase warrants to acquire 840,000 shares of common stock at $.001 per share exercisable for five years from the date of issuance (the “Advisory Warrants”).  The Advisory Warrants were issuable upon completion of any financing event as defined in the agreement.  The sale of the Convertible Notes met the definition of a financing event.  We recorded the Advisory Warrants at their fair value of $251,160 using the Black-Scholes option pricing model. We amortized the Advisory Warrants over the six month term of the agreement.  For the three months ended April 30, 2012 and 2011, we amortized $0 and $41,860, respectively, of Advisory Warrants which is included in general and administrative expense on the accompanying condensed consolidated statements of operations.  For the six months ended April 30, 2012 and 2011, we amortized $0 and $167,440, respectively.

In connection with the sale of the Units, we are obligated to issue to the placement agents warrants to acquire 331,575 shares of common stock (the “Unit Placement Warrants”) with 110,525 warrants exercisable at $1.00 per share, 110,525 exercisable at $1.50 per share and 110,525 warrants exercisable at $2.00 per share.  Each warrant expires five years from the date of issuance.  As described above, in connection with the sale of the Units, we issued to the investors 1,105,250 warrants exercisable at $1.50 per share and 1,105,250 warrants exercisable at $2.00 per share.  These warrants expire on June 30, 2017.

In connection with the Reverse Merger, we assumed warrants from the sale of the Units to acquire 1,154,600 shares of common stock; 50,200 with an exercise price of $1.00 per share, 552,200 with an exercise price of $1.50 per share, and 552,200 with an exercise price of $2.00 per share.  Each warrant expires on January 11, 2017

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(9) Commitments, Contingencies, and Related Party Transactions

3 Months Ended

Apr. 30, 2012

(9) Commitments, Contingencies, and Related Party Transactions:

(9) Commitments, Contingencies, and Related Party Transactions

(9) COMMITMENTS, CONTINGENCIES, AND RELATED PARTY TRANSACTIONS

Related Party Transactions

Advances

During the year ended October 31, 2009, certain directors made nominal advances to the Company in order to fund operating expenses.  The advances were made on an informal basis and not pursuant to any documented agreement.  Accordingly, there is no stated repayment term or interest rate.  As of April 30, 2012 and October 31, 2011, the advances aggregated $1,300 and are included in related party payables on the accompanying condensed consolidated balance sheets.   The Company intends on repaying these advances during the year ended October 31, 2012.

Consulting Agreements

In December 2008, we entered into an agreement with an entity controlled by our chief executive officer for his services (the “Synthetica Agreement”).  The Synthetica Agreement was replaced by a second agreement for the personal services of our chief executive officer in July 2011.   Under the Synthetica Agreement, there was no monthly retainer or minimum billing amount but the maximum that could be charged to us in any given month could not exceed $15,000.  During the three months ended April 30, 2012 and 2011, we were billed $45,000 and $45,000, respectively, under these agreements.  During the six months ended April 30, 2012 and 2011, we were billed $90,000 and $90,000, respectively, under these agreements. In October 2011, we issued 100,000 shares of common stock to Synthetica, Ltd (“Synthetica”) in satisfaction of $100,000 in accrued compensation that had been earned under the agreement.  At April 30, 2012 and October 31 2011, $11,250 and $60,000, respectively, is included in accrued compensation for amounts owed to Synthetica on the accompanying condensed consolidated balance sheets. 

In September 2010, we entered into a business and financial consulting agreement with an entity controlled by our Board chairman.   The agreement was for an initial term of 12 months with an automatic 12 month renewal period unless terminated by either party upon 30 days written notice.  There is no monthly retainer or minimum billing amount but the maximum that can be billed to us in a given month cannot exceed $10,000.  During the three months ended April 30, 2012 and 2011, we were charged $30,000 and $30,000, respectively, under this agreement which is included in general and administrative expense on the accompanying condensed consolidated statements of operations.  During the six months ended April 30, 2012 and 2011, we were charged $60,000 and $60,000 under this agreement. At April 30, 2012 and October 31, 2011, $10,000 and $40,000, respectively, is included in related party payables on the accompanying balance sheets.

CSMC

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

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

Lease Agreement

For the period commencing November 2010 through March 2012, we had an agreement (the “Sublease”) with Compumed, Inc. (“Compumed”) for office space whereby we subleased space from Compumed.  Our chief executive officer also serves as the chief executive officer of Compumed.  The Sublease required monthly payments of $8,000 and was on a month-to-month basis.  The Sublease was approved by our Board.   For the three months ended April 30, 2012 and 2011 we recorded $16,000 and $24,000, respectively, of rent expense which is included in general and administrative expense on the accompanying condensed consolidated statements of operations.   For the six months ended April 30, 2012 and 2011, we recorded $40,000 and $48,000, respectively, of rent expense under the Sublease. Additionally, at October 31, 2011, $24,000 of accrued but unpaid rent is included in related party payables on the accompanying condensed consolidated balance sheets.

Commitments and Contingencies

Litigation

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

Office Lease

Effective March 1, 2012, we entered into a lease agreement for office space with a third party (the “Office Lease”).  The Office Lease requires eight monthly payments of $3,338 plus costs for incidental expenses.  We are recognizing rent expense over the lease term using the straight-line method resulting in monthly expense of $2,226.  The Office Lease expires on February 29, 2013.

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(7) Earnings (loss) Per Share

3 Months Ended

Apr. 30, 2012

(7) Earnings (loss) Per Share:

(7) Earnings (loss) Per Share

(7) EARNINGS (LOSS) PER SHARE

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

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

	Three and Six Months Ended April 30,
	2012	2011
Warrants.............................	4,778,858	1,082,183
Convertible debt.................	66,667	2,421,833

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(8) Supplemental Disclosure of Cash Flow Information

3 Months Ended

Apr. 30, 2012

(8) Supplemental Disclosure of Cash Flow Information:

(8) Supplemental Disclosure of Cash Flow Information

(8) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

Cash paid during the period for:

	Six Months Ended April 30,				Cumulative from Inception
	2012		2011		(August 7, 2007)
Interest	$	8,215	$	87	$           8,459
Income taxes	—		—		—

Supplemental disclosures of noncash investing and financing activities:

	Six Months Ended April 30,
	2012		2011
Fair value of warrants issued under placement agent and advisory agreements		$                 —		$       34,233
Convertible Notes converted into common stock		716,550		—

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Condensed Consolidated Statement of Stockholders' Equity (Deficit) (unaudited) (USD $)	Common Stock	APIC	Deficit Accumulated in Development Stage	Total
Balances, Value at Oct. 31, 2011	$ 1,109	$ 498,468	$ (1,521,864)	$ (1,022,287)
Balances, Shares at Oct. 31, 2011	11,091,900
Shares issued for licensing agreement, Value	147	440,283		440,430
Shares issued for licensing agreement, Shares	1,468,100
Business acquisition, Value	224	389,464		389,688
Business acquisition, Shares	2,243,610
Sale of Units, Value	111	942,896		943,007
Sale of Units, Shares	1,105,250
Conversion of Convertible Notes into common stock, Value	478	1,442,622		1,443,100
Conversion of Convertible Notes into common stock, Shares	4,777,000
Net Income (Loss)			(1,644,036)	(1,644,036)
Balances, Value at Apr. 30, 2012	$ 2,069	$ 3,713,733	$ (3,165,900)	$ 549,902
Balances, Shares at Apr. 30, 2012	20,685,860

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(4) Convertible Notes

3 Months Ended

Apr. 30, 2012

(4) Convertible Notes:

(4) Convertible Notes

(4) CONVERTIBLE NOTES

Commencing October 2010 through April 2011, we sold in private transactions an aggregate of $726,550 of Convertible Notes.  The Convertible Notes were initially convertible into shares of our common stock at $.30 per share (the “Conversion Price”). The Convertible Notes do not bear interest and were originally payable on October 19, 2011. However, in October 2011, a majority of the note holders agreed to extend the maturity date of the notes to December 15, 2011.  The Convertible Notes are secured by a first lien security interest on all of our tangible and intangible assets.  The Convertible Notes automatically convert into shares of our common stock at the then current Conversion Price in the event that  (i) there is an effective registration statement registering the underlying common shares or the shares are eligible to be resold without restriction or limitation under Rule 144 of the Securities Act of 1934 and (ii) the closing bid price of our common stock as quoted on the OTC Bulletin Board or other principal trading market is at least 200% of the Conversion Price for 20 out of 30 consecutive trading days with an average daily trading volume of at least 1.0 million shares.  However, the Convertible Notes contain a provision that prohibits a holder from converting the note if such conversion would result in the holder owning more than 4.99% of our outstanding common stock at the time of such conversion.  Holders of the Convertible Notes have no voting, preemptive, or other rights of shareholders.

Events of default include failure to pay principal when due and payable; a failure to observe or perform any covenant, agreement or warranty, or otherwise breach, any term contained in the Convertible Notes or related borrowing documents that is not remedied within 30 days of notice; or if a proceeding commences under the United States Bankruptcy Code (whether voluntary or involuntary) and such proceeding is not controverted within 30 days or dismissed within 60 days after commencement.  An event of default can only be declared by a vote of the majority of the principal amount of the holders of the Convertible Notes upon not less than 30 days written notice to the Company.  If we fail to cure the default within the 30 day period, then the Conversion Price shall be reduced to $.15 per common share and the holders may declare all amounts due under the Convertible Notes immediately due and payable, apply to a court in California for the appointment of a receiver, convert the Convertible Notes to common stock or assert any other remedy available at law or in equity.

We did not repay the Convertible Notes by the December 15, 2011 extended maturity date and the notes were therefore technically in default.  As an inducement to obtain conversions, we agreed to reduce the conversion price of the Convertible Notes to $.15 per share.  During the three months ended April 30, 2012, holders converted $716,550 of Convertible Notes into 4,777,000 shares of common stock.  $10,000 of Convertible Notes remains outstanding as of April 30, 2012.  As a result of the reduction in conversion price, we recorded a charge of $726,550, in accordance with ASC 470-50-40, which is included in interest expense on the accompanying condensed consolidated statements of operations.

In connection with the sale of the Convertible Notes, we paid the placement agent cash commissions equal to 10% of the gross proceeds received from the sale  (except for sales of Convertible Notes to Company identified purchasers including management and directors for which we paid cash commissions equal to 5%) and we issued to the placement agent common stock purchase warrants to acquire a number of common shares equal to 10% of the common shares issuable upon conversion of the Convertible Notes (the “Placement Agent Warrants”).  The Placement Agent Warrants have an exercise price of $0.30 per share and expire on October 19, 2015. We paid the placement agent cash commissions of $67,905 and issued warrants exercisable to purchase an aggregate of 242,183 shares of common stock.  We recorded the cash commissions and the fair value of the Placement Agent Warrants as debt placement costs which were amortized to interest expense over the original term of the Convertible Notes.  We used the Black-Scholes option pricing model to determine the fair value of the Placement Agent Warrants. For the six months ended April 30, 2012 and 2011, we amortized $0 and $38,612, respectively, of debt placement costs which is included in interest expense on the accompanying condensed consolidated statements of operations.  For the three months ended April 30, 2012 and 2011, we amortized $0 and $20,843, respectively.

The assumptions used in valuing the Placement Agent Warrants issued during the six months ended April 30, 2011 follows below.  The expected life used in the calculation was the life of the warrants at the date they became issuable.  The risk free interest rate was derived from government treasury securities for similar lived periods.  The volatility rate used was derived from a peer group of comparable public companies.

	Six Months ended April 30,
	2012		2011
Risk free interest rate		N/A		1.47% - 2.04%
Expected life		N/A		54.0 - 58.5 mos.
Dividend yield		N/A		0%
Volatility		N/A		83.2% - 84.5%

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