3

4

5

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

6

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

7

ARROGENE, INC.

(a development state enterprise)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

JANUARY 31, 2013

(1)

BUSINESS AND OVERVIEW

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

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

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

We plan on commercializing our products using a licensing and cost sharing strategy, seeking to enter into arrangements with major pharmaceutical companies with existing cancer therapy drugs facing issues relating to patent expirations, market expansion or contraction.   It is our goal to only commence 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 important related intellectual properties surrounding Laminin-411. Pre-clinical investigation is also on-going on methods of inhibiting Laminin-411 as a therapeutic agent, which could be conjugated in various forms of Polycefin in the future.  

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

8

Since its inception in August 2007, ANI’s principal activities have involved developing a business strategy, raising capital, identifying and licensing the Polycefin technology, development of the technology, 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.  

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

Going Concern and Management’s Plans

The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern. Since our inception in August 2007, we have not generated revenue, incurred cash and operating losses, and as of January 31, 2013, had a deficit accumulated during the development stage of $3,862,240. We have relied primarily upon proceeds from the sale of the Units and convertible notes (the “Convertible Notes”) to fund our operations. These conditions raise substantial doubt about our ability to continue as a going concern.

As of January 31, 2013, the Company’s cash balance was $453,664.  Through January 31, 2013, the Company had sold 1,640,250 Units in the Private Placement receiving net proceeds of $1,405,858.  Subsequent to January 31, 2013, the Company sold an additional 130,000 Units receiving net proceeds of $110,771. Management believes that existing cash on hand, combined with proceeds received from the sale of Units subsequent to January 31, 2013, will be sufficient to fund the Company’s planned activities and contractual obligations through at least the end of July 2013.   Accordingly, the Company will require additional funding within the next six months.  The Company is currently evaluating various alternatives for raising additional capital including the continuation of the Private Placement. There is no assurance that the Company will be successful in raising additional capital on acceptable terms, or be successful in raising additional capital under any terms.

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

Basis of Presentation

The accompanying condensed consolidated financial statements include the accounts of Arrogene and its wholly owned subsidiary ANI.  All intercompany transactions have been eliminated in consolidation.  The condensed consolidated financial statements have been prepared without audit pursuant to the rules and regulations of the Securities and Exchange Commission.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations.  The condensed consolidated financial statements reflect all adjustments (consisting of only normal recurring entries), which in the opinion of management, are necessary to present fairly the financial position at January 31, 2013 and the results of operations and cash flows of the Company for the three months ended January 31, 2013 and 2012.  Operating results for the three months ended January 31, 2013, are not necessarily indicative of the results that may be expected for the year ended October 31, 2013.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, 2012 filed on January 29, 2013.  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 United States of 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 date of the financial statements and the reported amounts of revenues and expenses during the reported periods.  Actual results may differ from these estimates.

9

(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 2031).

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;

We believe that we have achieved the required milestones for the contractual period ended December 31, 2012.  It is management’s belief that cash administrative expenses in support of the Company’s business activities meet the definition of “development and promotion” of the licensed technology. We can, however, provide no assurance that CSMC will concur with our position and that we will be able to meet any or all of these milestones in the future.

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.  

(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.  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.  

10

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 January 31, 2013.  On an as converted basis, as of January 31, 2013, the estimated value of the Convertible Notes exceeds the principal balance by $27,333.  As a result of the reduction in conversion price, we recorded a charge of $726,550, in accordance with ASC 470-50-40 during the three months ended April 30, 2012, which was included in interest expense on the accompanying condensed consolidated statements of operations.

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

(5)

STOCKHOLDERS’ EQUITY

Units

During the three months ended January 31, 2013, we sold 130,000 Units, for $1.00 per Unit, receiving net proceeds of $116,874. Each Unit consists of  (i) one share of common stock, and (ii) two Unit Warrants.

Subsequent to January 31, 2013, we sold an additional 130,000 Units, for $1.00 per Unit, receiving net proceeds of $110,771.  

Warrants

In connection with the sale of the Units during the three months ended January 31, 2013, the placement agents earned warrants to acquire 39,000 shares of common stock consisting of 13,000 warrants exercisable at $1.00 per share, 13,000 warrants exercisable at $1.50 per share and 13,000 warrants exercisable at $2.00 per share.  Each warrant expires five years from the date of issuance.   We valued these warrants at $8,580 using the Black Scholes option pricing model.   We recorded the warrants as a reduction to the net proceeds from the sale of the Units with a corresponding increase to additional paid in capital.   

(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 three months ended January 31, 2012 is $8,000 representing the origination fees.  Also included in interest expense for the three months ended January 31, 2012 is $22,400 representing the value of the 40,000 shares of common stock issuable to the makers of the Promissory Notes.  As of January 31, 2013, these shares had not been issued, and accordingly, the associated liability is included in accounts payables and accrued expenses on the accompanying condensed consolidated balance sheets.

(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 net 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 net income (loss) by the weighted average number of

11

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:

(8)  SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

Cash paid during the period for:

 (9)  COMMITMENTS, CONTINGENCIES, AND RELATED PARTY TRANSACTIONS

Related Party Transactions

Consulting Agreements

In December 2008, we entered into an agreement with an entity controlled by our chief executive officer for his services. The agreement was replaced by a second agreement for the personal services of our chief executive officer in July 2011.  Both agreements are collectively referred to as the Synthetica Agreement.  Under the Synthetica Agreement, there is no monthly retainer or minimum billing amount but the maximum that can be charged to us in any given month cannot exceed $15,000.  During the three months ended January 31, 2013 and 2012, we were billed $45,000 and $45,000, respectively, under the Synthetica Agreement.  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 January 31, 2013 and October 31 2012, $15,000 and $15,000, respectively, is included in accrued compensation 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.  The agreement is now on a month-to-month basis. There is no monthly retainer or minimum billing amount but the maximum that can be billed to us in a given month cannot exceed $10,000.  During the three months ended January 31, 2013 and 2012, 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. At January 31, 2013 and October 31, 2012, $10,000 and $10,000, respectively, is included in related party payables on the accompanying condensed consolidated balance sheets.

12

CSMC

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

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

In December 2012, we entered into an agreement with CSMC to support certain activities within the laboratory necessary to prepare compounds.   For the three months ended January 31, 2013, we were charged $43,649 by CSMC under this agreement which is included in research and development costs on the accompanying condensed consolidated statements of operations.  As of January 31, 2013, $43,649 is included in related party payables on the accompanying condensed consolidated balance sheets.

Sublease Agreement

For the period commencing November 2010 through March 2012, we had an agreement (the “Sublease”) with Compumed, Inc. (“Compumed”) for office space whereby we subleased space from Compumed.  Our chief executive officer also served as the chief executive officer of Compumed during this time period.  The Sublease required monthly payments of $8,000 and was on a month-to-month basis.  The Sublease was approved by our Board.   For the three months ended January 31, 2013 and 2012, we recorded $0 and $24,000 of rent expense under the Sublease which is included in general and administrative expense on the accompanying condensed consolidated statements of operations.

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 one-year lease agreement for office space with a third party (the “Office Lease”) that was subsequently extended through February 28, 2014 for a payment of $3,642 per month.  For the three month periods ended January 31, 2013 and 2012, $9,932 and $0, respectively, of rent expense under the Office Lease is included in general and administrative expense on the accompanying condensed consolidated statements of operations.

Commitments under non-cancelable operating leases are as follows inclusive of the renewal period as of January 31, 2013:

13

FORWARD LOOKING STATEMENTS

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

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

Although we believe that our plans, intentions and expectations reflected in these forward-looking statements are reasonable, we may not achieve these plans or expectations.  Forward-looking statements in this Form 10-Q will be affected by several factors, including the following: the ability of the Company to raise sufficient capital to finance its planned activities including completing development of its Polycefin technology; the ability of the Company to meet its obligations under the License including meeting the required milestones; receiving the necessary marketing clearance approvals from the United States Food and Drug Administration; successful clinical trials of the Company’s planned products including the ability to enroll the studies in a timely manner, patient compliance with the study protocol, and a sufficient number of patients completing the studies; the ability of the Company to commercialize its planned products; the ability of the Company to successfully manufacture its products in commercial quantities (through contract manufacturers); market acceptance of the Company’s planned products, the Company’s ability to successfully develop its licensed compounds, alone or in cooperation with others, into commercial products, the ability of the Company to successfully prosecute and protect its intellectual property, the Company’s limited operating history; the Company’s lack of profitability; and the Company’s ability to hire, manage and retain qualified personnel.  Actual results, performance or achievements could differ materially from those contemplated, expressed or implied by the forward-looking statements contained in this Form 10-Q.  In particular, this Form 10-Q sets forth important factors that could cause actual results to differ materially from our forward-looking statements.  These and other factors, including general economic factors, business strategies, the state of capital markets, regulatory conditions, and other factors not currently known to us, may be significant, now or in the future, and the factors set forth in this Form 10-Q may affect us to a greater extent than indicated.  All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements set forth in this Form 10-Q and in other documents that we file from time to time with the Securities and Exchange Commission including our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K to be filed in 2013.  Except as required by law, we do not undertake any obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise.

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

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

14

Overview

The Company was founded to commercialize both a new cancer treatment and imaging targeting technology and a proprietary molecular delivery platform that interferes with those targets in order to inhibit and finally eradicate tumor progression.  The Company is the exclusive licensee to certain intellectual property rights owned by CSMC in Los Angeles, one of the nation’s premiere research institutions (the “License”).  CSMC has developed a family of related nano-biopolymers conjugates (collectively referred to here as Polycefin™), believed capable of acting as a drug delivery and targeting platform for cancer therapy and imaging.  The founders of Arrogene were principally involved in all research and development behind all critical discoveries and science at CSMC related to Polycefin and authored all the patents underlying the technologies behind Polycefin (the “Technology”) and include internationally acclaimed brain surgeon and scientist Dr. Keith Black, Dr. Julia Ljubimova, Dr. Eggehard Holler, Dr. Alex Ljubimov.  Work on Polycefin involved seven years of development and over $6,000,000 of grants funded mainly from the NIH.  

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

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

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

15

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

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

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

We are also working to complete some of the pre-clinical work to support an Investigational New Drug (“IND”) application with the FDA for our first therapeutic compound, a process that we intend to follow as a second step.  Our expected initial indications for our therapeutic INDs and subsequent clinical trials center on primary breast  and lung cancers and their metastatic forms into the brain as well as Glioblastoma. However, a final decision on exactly which indication to target first, will be made in consultation with our potential licensing partners and will be based in part on their interest to target specific indications and active drugs.  

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

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

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

Over the following twelve months we are targeting a number of objectives and milestones that we plan to pursue utilizing cash on hand and proceeds from capital raising efforts.  We may or may not be successful in consummating such capital

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

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

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

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

16

raises and this remains a significant risk to our ability to meet our objectives. These objectives and milestones are the commissioning of final Phase 0 toxicology studies for our first Polycefin drug candidate; prepare an IND for submission to the FDA to receive clearance to begin human clinical trial work; and begin human clinical studies once such IND clearance can be obtained. There are various factors that can influence the timing of starting and completing these objectives and milestones as well as the total costs.  Such factors include, but are not limited to, the pace and success of scientific developments, the availability of financial and human resources, competing demands of our scientific team, and changes in regulatory requirements.  We have budgeted approximately $1.4 million through December 2013 towards these efforts but given the inherent uncertainty and variability related to these activities, we cannot accurately predict start dates, completion dates and total costs.  We will also need to raise additional capital in order to complete our planned activities.

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

General Factors

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

Liquidity and Capital Resources

As of January 31, 2013, the Company’s cash balance was  $453,664 compared to $539,727 at October 31, 2012.

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

Operating Activities

During the three months ended January 31, 2013, $202,937 of cash was used in operating activities which primarily represents cash operating expenses.

Investing Activities

During the three month ended January 31, 2013, no cash was provided by or used in investing activities.  As of January 31, 2013, we had no material commitments for capital expenditures.

17

18

Research and Development

During the three months ended January 31, 2013, we recorded $86,349 of research and development expenses representing costs incurred for the management of such activities as well as contract laboratory support pursuant to a research agreement with CSMC.  There were no similar expenses during the three months ended January 31, 2012.

Loss from Operations

As a result of the factors described above, the loss from operations for the three months ended January 31, 2013, decreased by $394,750 compared to the prior year period.

Other Expense

For the three months ended January 31, 2013, we recorded other expense of $173 compared to $30,452 for the three months ended January 31, 2012.  Expense for the three months ended January 31, 2012 includes costs associated with the Promissory Notes which were not outstanding during the three months ended January 31, 2013.

Net Loss

As a result of the factors described above, we recorded $266,886 of net loss for the three months ended January 31, 2013 compared to a net loss of $691,915 for the prior year period.

Critical Accounting Policies and Estimates

Please refer to our Annual Report on Form 10-K for the year ended October 31, 2012 for accounting policies that management believes are critical to understanding the Company’s financial statements.

Recently Issued Accounting Pronouncements

Please refer to our Annual Report on Form 10-K for the year ended October 31, 2012 for management’s view on the impact of recently issued accounting pronouncements.

Off-Balance Sheet Arrangements

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

Contractual Obligations

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

ITEM 3.  Quantitative and Qualitative Disclosures About Market Risk

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

19

20

21

SIGNATURES

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

22