Commitments and Contingencies

12 Months Ended

Oct. 31, 2014

(9) COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS

Related Party Transactions

Consulting Agreements

We have an agreement with an entity controlled by our chief executive officer for his part-time personal services as CEO. The agreement is referred to as the Synthetica Agreement. In December 2013, the Synthetica Agreement was amended so that the compensation paid for the services of our CEO is capped at $1 per annum effective January 1, 2014. However, our chief executive may request that his compensation revert back to the original terms of the Synthetica Agreement with 30 days written notice. Under the original terms, there was no monthly retainer or minimum billing amount but the maximum that could be charged to us in any given month was $15,000. During the years ended October 31, 2014 and 2013, we were billed $20,000 and $162,600, respectively, under the Synthetica Agreement. At October 31, 2014 and 2013, $67,600 and $47,600, respectively, is included in accrued compensation on the accompanying consolidated balance sheets resulting from a voluntary deferral of fees due under the agreement, agreed to by Synthetica to allow the Company to optimize its cash flow.

In September 2010, we entered into a business and financial consulting agreement with an entity controlled by our Board chairman for operational consulting services. The agreement was for an initial term of 12 months with an automatic 12 month renewal period unless terminated by either party upon 30 days written notice. The agreement is now on a month-to-month basis. There is no monthly retainer or minimum billing amount but the maximum that can be billed to us in a given month cannot exceed $10,000. Effective January 2014, the fees for this agreement were capped at $1.00 per year. During the years ended October 31, 2014 and 2013, we were charged $10,000 and $104,000, respectively, under this agreement which is included in general and administrative expense on the accompanying consolidated statements of operations. At October 31, 2014 and October 31, 2013, $49,000 and $39,000, respectively, is included in related party payables on the accompanying consolidated balance sheets resulting from a voluntary deferral of fees due under the agreement, agreed to by our Board chairman, to allow the Company to optimize its cash flow.

In August 2014, we entered into a consulting agreement with a Board member to supervise an executive search to recruit a new chief executive officer under the direction and supervision of the Board. This agreement has a term of six months. Pursuant to the consulting agreement, we granted this director a stock option to acquire 25,000 shares of common stock at an exercise price of $1.00 per share. The options are for a term of 5 years and were fully vested upon grant. Additionally, conditioned upon the successful engagement of a new chief executive officer on terms acceptable to the Board during the term of the consulting agreement, the Board in its sole discretion may grant the director additional stock options to acquire 35,000 shares of common stock at an exercise price of $1.00 per share. If granted, these options would also have a life of 5 years and be fully vested upon grant. We recorded $7,350 of expense related to the options granted under this agreement during the year ended October 31, 2014, which is included in general and administrative expense on the accompanying statements of operations. See Note 7 for further discussion on the assumptions used in valuing these options.

Contributed Services

As discussed above, effective January 1, 2014, the Company’s chief executive officer and Board chairman began to provide their services for $1 per year. The fair value of those services has been recorded as an expense in the accompanying consolidated financial statements based on the estimated fair value for such services, with a corresponding credit to additional paid in capital. The fair value of the services was estimated based on the terms of the respective agreements prior to January 1, 2014. Contributed services were $135,000 for the year ended October 31, 2014.

CSMC

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

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

In December 2012, we entered into an agreement with CSMC to support certain research and development activities within the CSMC laboratory. For the years ended October 31, 2014 and 2013, we recorded $111,384 and $281,495, respectively, under this agreement which is included in research and development expense on the accompanying consolidated statements of operations. Work under this agreement was completed by CSMC during the year ended October 31, 2014. As discussed in Note 4, we have deferred payments under this agreement in order to extend our cash balance. As of October 31, 2014 and 2013, $158,391 and $229,003, respectively, is reflected as payable on the accompanying 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

We have a lease agreement for office space with a third party (the “Office Lease”) that expired on May 31, 2015. For the years ended October 31, 2014 and 2013, we recorded $40,202 and $37,692, respectively, of rent expense under the Office Lease which is included in general and administrative expense on the accompanying consolidated statements of operations.

Commitments under non-cancelable operating leases are as follows as of October 31, 2014:

	Year Ended October 31,
2015	10,800
	$ 10,800

ARROGENE, INC 10-K