UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





FORM 10-Q


(Mark One)


x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934





For the quarterly period ended January 31, 2010





OR





o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934





For the transition period from _______ to _______.





Commission File No. 333-149235




BIONEUTRAL GROUP, INC.(Exact name of registrant as specified in its charter)





Nevada

26-0745273(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer Identification No.)211 Warren Street,  Newark, New Jersey

07103(Address of principal executive offices)

(Zip Code)





(973) 286-2899


(Registrant’s telephone number, including area code)





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





Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). o Yes o  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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.





Large accelerated filer
o

Accelerated filer
oNon-accelerated filer

(Do not check if a smaller reporting company)
o

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). oYes  xNo





The number of shares of the registrant's common stock, par value $0.00001 per share, outstanding as of March 15, 2010 was 66,618,604 shares.  (See explanatory note preceding Item 1 of this Form 10-Q).











BIONEUTRAL GROUP, INC.





TABLE OF CONTENTS





PagePART I - FINANCIAL INFORMATION
1Item 1.
Financial Statements.
1Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
16Item 3.
Quantitative and Qualitative Disclosures About Market Risk.
23Item 4.
Controls and Procedures.
23PART II - OTHER INFORMATIONItem 1.
Legal Proceedings.
23Item 1A.
Risk Factors.
23Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
24Item 3.
Defaults Upon Senior Securities.
24Item 4.
(Removed and Reserved).
24Item 5.
Other Information.
24Item 6.
Exhibits.
24Signatures
25





Explanatory Note:  Our transfer agent's records indicate that as of March 15, 2010, 66,618,604 shares of our common stock were outstanding.  Our records, however, indicate that as of March 15, 2010, there were 60,849,200 shares of our common stock outstanding.  See Part I, Item 2 of this Quarterly Report on Form 10-Q for additional information.










PART I — FINANCIAL INFORMATION





ITEM 1.  FINANCIAL STATEMENTS






BIONEUTRAL GROUP, INC.


CONSOLIDATED BALANCE SHEETS AS OF JANUARY 31, 2010 and OCTOBER 31, 2009


January 31, 2010


October 31, 2009UnauditedASSETSCurrent AssetsCash

$
227,402


$
139,663Accounts Receivable


2,825



2,825Inventory


2,925



2,925Prepaid Expenses  (Note 2)


144,000



192,007Prepaid Expenses-Related Parties  (Note 2)


367,001



438,668Total Current Assets


744,153



776,088Property & Equipment  (Note 3)


1,152



1,206Patents  (Note 4)


11,619,112



11,739,033Other Assets


2,500



2,500TOTAL ASSETS

$
12,366,917


$
12,518,827LIABILITIES & STOCKHOLDERS' EQUITYCurrent LiabilitiesLoan From Stockholder (Note 7)

$
250,000


$
-Accounts Payable & Accrued Expenses  (Note 5)


1,732,568



1,169,521Related Party Payables  (Note 6)


55,104



31,412Current Liabilities


2,037,672



1,200,933Long Term LiabilitiesExchangeable Loan From Director (Note 7)


250,000



-Exchangeable Loan From Stockholder  (Note 7)


250,000



-Total Long Term Liabilities


500,000



-TOTAL LIABILITIES


2,537,672



1,200,933Commitments & Contingencies  (Note 12)Equity: (Note 9)Bioneutral Group, Inc. Stockholders' EquityPreferred Stock, Series A, $.001 par value; 800,000 sharesauthorized,  279,991 and 279,991 issued and outstandingat January 31, 2010 and October 31, 2009 respectively.


280



280Preferred Stock, $.001 par value; 4,200,000 shares authorized,0 shares issued and outstanding at January 31, 2010 andOctober 31, 2009.


-



-Common Stock, $.00001 par value; 200,000,000 shares authorized,60,849,200 shares and  60,849,200 shares issued andoutstanding at January 31, 2010 and October 31, 2009 respectively.


608



608Additional Paid-in Capital


56,675,657



56,675,657Accumulated Deficit


(47,548,513
)


(46,260,596
)Total Bioneutral Group, Inc. Stockholders' Equity


9,128,032



10,415,949Noncontrolling Interest


701,213



901,945Total Equity


9,829,245



11,317,894TOTAL LIABILITIES AND EQUITY

$
12,366,917


$
12,518,827
  The Accompanying Notes Are an Integral Part of these Consolidated Financial Statements
  1
  BIONEUTRAL GROUP, INC.
 CONSOLIDATED STATEMENTS OF OPERATIONS
 Three Months Ended January 31,2010


2009Unaudited


UnauditedRevenues

$
-


$
-Cost of Revenues


-



-Gross Profit (Loss)


-



-Operating ExpensesDepreciation and Amortization


172,937



112,432Other Selling, General and Administrative Expenses


1,304,832



2,209,390Total Operating Expenses


1,477,769



2,321,822Loss from Operations


(1,477,769
)


(2,321,822
)Other Income and Expenses


(10,880
)


1,111Net Loss Before Income Taxes


(1,488,649
)


(2,320,711
)Provision for Income Taxes


-



-Net Loss


(1,488,649
)


(2,320,711
)Add: Net Loss Attibutable to the Non-controlling  Interest


200,732



331,718Net Loss Attributable to BioNeutral Group, Inc.

$
(1,287,917
)

$
(1,988,993
)Basic and Diluted Net Loss Per Share

$
(0.02
)

$
(0.09
)Weighted Average Number of Common Shares Used toCompute Basic and Diluted Loss per Share


60,849,200



23,339,518
  The Accompanying Notes Are an Integral Part of these Consolidated Financial Statements
  2
 BIONEUTRAL GROUP, INC.
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 Three Months Ended January 31,2010


2009Unaudited


UnauditedCASH USED IN OPERATING ACTIVITIESNet Loss

$
(1,287,917
)

$
(1,988,993
)Adjustments to Reconcile Net Loss To Net Cash Used inOperating ActivitiesStock Based Compensation


79,966



1,732,415Depreciation and Amortization


172,937



112,432Net Loss Attributed to Non Controlling Interest


(200,732
)


(331,718
)Forgiveness of Debt


-



(2,251
)Changes in Operating Assets and Liabilities(Increase) / Decrease  in Prepaid Expenses


39,708



(42,500
)Increase in Accounts Payable and Accrued Expenses


510,083



65,458NET CASH USED IN OPERATING ACTIVITIES


(685,955
)


(455,157
)CASH USED IN INVESTING ACTIVITIESExpenditures for Patentable Technology and Associated Patent Costs


-



(4,963
)NET CASH USED IN INVESTING ACTIVITIES


-



(4,963
)CASH PROVIDED BY FINANCING ACTIVITIESNet Proceeds From Issuance of  Stock


-



630,000Repayment of Loans from Former Board Members


-



(33,517
)Increase in Related Party Payables-  Director


22,828



19,178Deferral of Interest on Related Party Payables-Director Notes


866



1,643Increase in Loan from Stockhlder


250,000



-Proceeds from Exchangeable Promisorry Notes


500,000



-NET CASH PROVIDED BY FINANCING ACTIVITIES


773,694



617,304NET INCREASE IN CASH & CASH EQUIVALENTS


87,739



157,184CASH & CASH EQUIVALENTS, BEGINNING OF PERIOD


139,663



85,938CASH & CASH EQUIVALENTS, END OF PERIOD

$
227,402


$
243,122SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATIONCash Paid For Interest

$
-


$
3,517Cash Paid For Income Taxes

$
-


$
-SUPPLEMENTAL DISCLOSURE OF NON-CASH INFORMATIONNon-cash Patent Cost Additions

$
52,963


$
48,000Cancellation of Debt Upon Agreement to Issue Shares of Common Stock

$
-


$
20,000Issuance of Common Stock in Lieu of Expense reimbursement andCash compensation

$
-


$
10,000Issuance of Common Stock in Exchange for Intellectual Property

$
-


$
4,730,250Issuance of Common Stock for Prepaid Consulting Contracts

$
-


$
11,300,000
  The Accompanying Notes Are an Integral Part of these Consolidated Financial Statements
  3


Notes to Consolidated Financial Statements


(Unaudited)





1.
Basis of Presentation




The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and judgments that may affect the amounts reported in its consolidated financial statements and accompanying notes.  Actual results may differ from these estimates under different assumptions or conditions.




The financial information as of October 31, 2009 is derived from the audited financial statements presented in the BioNeutral Group, Inc. (the “Company”) Annual Report on Form 10-K for the year ended October 31, 2009.  Certain information or footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted, pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the accompanying financial statements include all adjustments necessary (which are of a normal and recurring nature) for the fair statement of the results of the interim periods presented. The accompanying financial statements should be read in conjunction with the Company’s audited financial statements for the year ended October 31, 2009, as presented in the Company’s Annual Report on Form 10-K.




Operating results for the three months ended January 31, 2010 are not necessarily indicative of the results that may be expected for the entire fiscal year ending October 31, 2010.




References throughout the Notes to Consolidated Financial Statements to “BioLabs” or “BioNeutral Laboratories” are to our subsidiary BioNeutral Laboratories Corporation USA.




The Company’s consolidated financial statements for the three months ended January 31, 2009 have not been previously filed with the Securities and Exchange Commission (“SEC”) and are included in these consolidated financial statements (includes the statements of financial position, income and cash flows for the three months ended January 31, 2009) that will be included in the Company’s Quarterly Report on Form 10-Q.




Initial Adoption of Accounting Policy -In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51. This statement guidance, which has been codified within ASC 810-10-65, Consolidations, establishes reporting standards for noncontrolling interests in subsidiaries. This statement changed the presentation of noncontrolling interests in subsidiaries in the financial statements for the Company beginning November 1, 2009.





Note 2 - Prepaid Expenses





The Company periodically pays for services supporting its business operations with shares of its common stock. When these services are provided by third parties (i.e. non-employees) and performance extends over more than the current reporting period, a prepaid asset is established at the agreement date for the value of shares issued. The prepaid asset is established in the same period and manner as if cash were paid for the underlying goods or services, pursuant to FASB ASC 505-50-25-4 and 25-6.





Amounts are expensed on a straight line basis (and the prepaid asset reduced) over the periods the services are provided. The prepaid expense balance includes $ 84,000 and $ 120,000 at January 31, 2010 and October 31, 2009, respectively, for share based payments to non-employees for services and $ 60,000 and $ 72,007 at January 31, 2010 and October 31, 2009, respectively, for prepaid expenses paid in cash.




4





The prepaid expenses – related parties includes $69,900 and $99,900 of prepaid expenses paid in cash to a related party at January 31, 2010 and October 31, 2009, respectively and $297,101 and $338,768 of prepaid expenses paid in shares to a related party at January 31, 2010 and October 31, 2009, respectively.









5





Note 3 - Property & Equipment





Property and equipment consisted of the following:





January 31, 2010


October 31, 2009Computer Hardware

$
4,233


$
4,233Furniture and Fixtures


1,494



1,494Less: Accumulated Depreciation & Amortization


(4,575
)


(4,521
)$
1,152


$
1,206




Note 4 - Patents





The Company has several patent applications pending regarding proprietary chemical formulations that the Company believes are capable of neutralizing noxious chemicals and eliminating harmful microbes. The Company capitalized the costs of acquired technology, know-how and trade secrets and identifiable costs incurred to develop, file and defend the Company’s patents and new patent or provisional patent applications in accordance with FASB ASC 350. Periodic gross carrying amounts and related accumulated amortization were as follows:





January 31, 2010


October 31, 2009Gross Carrying Amount

$
14,978,021


$
14,925,058Accumulated Amortization


(3,358,909
)


(3,186,025
)Net Carrying Amount

$
11,619,112


$
11,739,033




The Company follows FASB ASC 350-30-35 and amortizes the costs of its patents over the shorter of its specific useful life, or 20 years. The Company is amortizing its patents over 20 years, with no anticipated residual value.  Amortization expense for the three months ended January 31, 2010 and October 31, 2009 was $ 172,884 and $ 112,379, respectively.





Estimated amortization expense is as follows:




For The Year Ending:
Amount10/31/2010
$691,00010/31/2011
$691,00010/31/2012
$691,00010/31/2013
$691,00010/31/2014
$691,000




6




The patents are evaluated annually for recoverability pursuant to FASB ASC 350-30-35-14 and related guidance in ASC 360-10-35-17 through 35-35. An impairment loss is recognized if the asset is determined not to be recoverable and its carrying amount exceeds its fair value.




Note 5 – Accounts Payable & Accrued Expenses





Accounts payable and accrued expenses consisted of the following:





January 31,

2010


October 31,

2009Accrued Compensation

$
474,000


$
423,000Other Liabilities


1,258,568



746,521$
1,732,568


$
1,169,521




Note 6 - Related Party Payables





The Company and one of its directors, Raj Pamani, are parties to a consulting agreement, dated as of June 15, 2008, pursuant to which Mr. Pamani agreed to accept responsibilities and take direction from the Company's Board of Directors.  Under this agreement, the Company is obligated to pay Mr. Pamani $10,000 per month.  During the three months ended January 31, 2010 and 2009, the Company paid or credited $30,000 and $30,000 respectively, to Mr. Pamani under this agreement, which were recorded as consulting expenses and recorded in the Company's related party payable account.  Mr. Pamani has charged certain personal expenses against the Company's cash account which have been treated by the Company as repayment of the related party payable.   At January 31, 2010 and October 31, 2009, the balance owed to the director was $25,130 and $2,303, respectively.





On September 6, 2008, the Company entered into an agreement with Jina Partners Ltd. (“Jina”), an affiliate of Raj Pamani, for consulting services relating to the development of certain commercial transactions. Under this agreement, the Company is obligated to pay Jina $10,000 per month.  The term of this agreement is two years.  For three months ended January 31, 2010 and 2009, the Company paid or credited $30,000 and $43,000 respectively, to Jina, of which $13,000 of the 2009 payments were reclassified to prepaid expenses for future services. See Note 11 Related Party Transactions.





On January 29, 2009, the Company repaid loans of $33,517 owed to three former members of the Company’s Board of Directors who resigned their positions with the Company on January 29, 2009. The balance of the amounts payable to former members of the Board of Directors at January 31, 2010 was $29,109.





Note 7 – Shareholder and Director Notes





On November 13, 2009, the Company issued (i) an unsecured promissory note to Michael D. Francis, a shareholder of the Company, in the amount of $250,000 (the “First Francis Note”), and (ii) an unsecured promissory note to Capara Investments LLC (“Capara”), in the amount of $250,000 (the “First Capara Note”), which issuances resulted in gross proceeds to the Company of $500,000.   The sole member of Capara, Raj Pamani, is a member of the Board of Directors and a shareholder of the Company. These two Notes are reflected on the Company’s balance sheet at January 31, 2010 under “Long Term Liabilities.”




7




The Company issued to Mr. Francis a second unsecured promissory note (the “Second Francis Note”, and together with the First Francis Note, the “Francis Notes”), dated February 12, 2010, containing substantially the same terms and conditions as the First Francis Note.  Gross proceeds in the amount of $250,000 from the Second Francis Note were received by the Company on January 4, 2010 and have been included on the Company’s balance sheet at January 31, 2010 in current liabilities since such note was not executed until February 12, 2010.  The Francis Notes and the Capara Note are sometimes referred to herein as the “Shareholder Notes.”





Each of the Shareholders Notes (i) bears an 8% annual interest rate, (ii) is due and payable in cash on the fifth anniversary of the date of issuance, and (iii) upon consummation of a “Qualified Financing” (as defined in each of the Shareholder Notes), will automatically be exchanged for, at our election, either (i) securities on the same terms and conditions as those received by investors in such Qualified Financing based on an assumed exchange rate reflecting the pricing used in such financing or (ii) shares of our common stock equal to the quotient obtained by dividing (x) the then outstanding principal amount of the Shareholder Note by (y) the lower of (i) $0.69 and (ii) the Fair Market Value (as defined in the Shareholder Notes) of one share of our common stock as of the date of such exchange.  On each three (3) month anniversary of the issuance of each Shareholder Note, all accrued and unpaid interest shall be added to the unpaid principal amount of such note.  Each of the Shareholder Notes defines  “Qualified Financing” as  an investment in securities of the Company (including any financing that includes convertible indebtedness and/or warrants) occurring after the date of issuance of the Shareholder Note by an investor that is not an affiliate of our company in which we receive net proceeds greater than $500,000 (including any additional investment by the holder of the Shareholder Note or by the holder of any other 8% Exchangeable Promissory Note) in the Qualified Financing.





Accrued and unpaid interest is added to the unpaid principal amount of the Shareholder Notes every three months. Interest expense on the Shareholder Notes for the three months ended January 31, 2010 and 2009 was $9,500 and $0, respectively.





Note 8 - Stock Based Compensation





The Company issues shares of its common stock to employees and non-employees as compensation for services provided. Stock based compensation related to employees is accounted for in accordance with FASB ASC 718-10 and ASC 505-50 for non-employees. All shares issued during the presented periods were fully vested upon grant of the shares or no later than the respective period end dates.





Employees





Measurement of compensation cost related to common shares issued to employees is based on the grant date fair value of the shares. Fair value was determined through the use of quoted prices in the Over the Counter Bulletin Board market (OTCBB) and applying a 10% discount for the restricted nature of the shares or arms-length exchanges of shares for cash in private transactions, in periods that quoted market prices were not available.





During the three months ended January 31, 2010 and 2009, 0 and 2,008,675 shares of the Company's common stock were issued to employees and Board members, respectively as compensation for services and were vested at the end of the related period.  The weighted average grant date fair value for these same periods was $0 and $1.00 respectively.





The total value of common shares issued to employees and vested during the three months ended January 31, 2010 and 2009 were $0 and $998,773, respectively.  These amounts are also reported on the income statement as compensation expense (included in Other Selling, General and Administrative Expenses) for the related periods. There was no related tax benefits recognized.





8





Non-Employees





Measurement of compensation cost related to common shares issued to non-employees for services is based on the value of the services provided or the fair value of the shares issued. Each transaction is reviewed to determine the more reliably measurable basis for the valuation, pursuant to FASB ASC 505-50-30-6.





During the three months ended January 31, 2010 and 2009, 0 and 11,562,500 shares of the Company's common stock, respectively, were granted to non-employees as compensation for services and were vested at the end of the related period. The weighted average grant date fair value for the three months ended January 31, 2010 and 2009 was $0 and $1.00, respectively.





The total value of shares of the Company's common stock issued to non-employees and vested during the three months ended January 31, 2010 and 2009 were $ 0 and $ 11,275,000, respectively. For the three months ended January 31, 2010 and 2009, $79,966 and $733,641 respectively  are  reported on the Company’s income statement as compensation expense (included in Other Selling, General and Administrative Expenses) for the related periods.





Note 9 - Equity (Non-Controlling Interest)





Non-Controlling Interest





On January 30, 2009, the Company entered into a share exchange agreement (the “Share Exchange Agreement”), with BioNeutral Laboratories pursuant to which the Company agreed to issue to the shareholders of BioNeutral Laboratories 45,000,000 shares of the Company's common stock (the “Share Exchange”).  As a result of the closing of the Share Exchange, BioNeutral Laboratories became our subsidiary, and the shareholders of BioNeutral Laboratories acquired the majority ownership and control of the Company.  The Company reviewed the Financial Accounting Standards Board Accounting Standards Codification 805-40 (“FASB ASC 805-40”) and determined that BioNeutral Laboratories was the accounting acquirer and the entity which would be continuing operations.  As a result, the transaction between BioNeutral Laboratories and the Company was accounted for as a reverse acquisition in accordance with FASB ASC 805-40.





In connection with the Share Exchange, approximately 14%of BioLabs common shareholders did not participate in the exchange of their shares of BioLabs common stock for shares of common stock of the Company. Those shareholders are recognized as a non-controlling interest in the Company’s financial statements in accordance with FASB ACS 805-40-25-2. The assets, liabilities and operations underlying the shares of BioLabs and the Company are identical. However, the shares representing ownership of the Company reflect the combined entity after the Share Exchange transaction, while BioLabs shares included in the non-controlling interest held by the non-controlling interest represent ownership of that legal entity.




Non-Controlling Interest on October 31, 2009
$ 901,945Conversion to BioNeutral Group Shares

During 3 months ended 01/31/2010
-Non-Controlling interest Share of Net Loss
( 200,732)Non-Controlling Interest at January 31 ,2010
$  701,213




The outstanding shares of Series A Preferred Stock of BioLabs is not recognized in the non-controlling interest.  If the 279,991 outstanding shares of Series A Preferred Stock were fully converted into shares of BioLabs common stock and holders of such shares did not exchange those shares for Company common stock, the non-controlling interest would be 19.65%.




9




Note 10 - Taxes





Federal





The Company has had operating losses since inception and there is no provision for corporate income taxes for federal purposes. Therefore, there are no deferred tax amounts as of January 31, 2010 and October 31, 2009, respectively.





Nevada





The Company is incorporated in Nevada but does not conduct business in Nevada.





The Company has not filed federal tax returns for the fiscal years ended December 31, 2007, or the ten months ended October 31, 2008. Those returns, which are not expected to report any tax due are currently being prepared. The Company has its primary operations in the State of New Jersey and is required to file New Jersey corporate income tax returns. The Company has not filed New Jersey State tax returns. The Company is in the process of bringing its filings of New Jersey State Tax Returns up to date. Since the Company has incurred operating and tax losses for each of the years for which returns have not been filed, it anticipates that only minimal taxes will be due, including any interest and penalties that might be assessed.





The Company is not in discussions with any tax authorities whereby any settlements over past due taxes are in progress.





FASB ASC 740 Income Taxes, requires the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred income taxes are recognized for the tax consequences of “temporary differences” by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities.





10




The Company's net deferred tax asset as of January 31, 2010 and October 31, 2009 consisted of the following:





January 31,

2010


October 31,

2009Net operating loss carry forward

$
29,748,011


$
28,512,212Valuation allowance


(29,748,011
)


(28,512,212
)Net deferred tax asset

$
-


$
-




The net operating losses generated in the year ended October 31, 2009 will begin to expire in 2029.  The Company has recorded a full allowance against its deferred tax assets due to the fact that the likelihood of any benefit being derived by the Company in future years is indeterminable as of the date of these consolidated financial statements.





The components of current income tax expense for the three months ended January 31, 2010 and 2009 consisted of the following:





January 31,

2010


January 31,

2009Current federal tax expense

$
-


$
-Current state tax expense


-



-Change in Potential NOL benefits


1,235,799



475,864Change in valuation allowance


(1,235,799
)


(475,864
)Income tax expense

$
-


$
-





The following is a reconciliation of the provision for income taxes at the United States federal income tax rate to the income taxes reflected in the statement of operations:





January 31,

2010

January 31,

2009Tax expense (credit) at statutory rate-federal

(35%)

(35%)State tax expense net of federal tax

(6%)

(6%)Changes in valuation allowance

41%

41%Tax expense at actual rate

0%

0%





Ownership Change For Tax Purposes





The Company believes that the cumulative issuances of its common shares likely resulted in an “ownership change” for tax purposes. This determination would have no effect on the Company’s reported historic results. However, under this treatment, the Company’s ability to utilize its net operating loss carry-forwards in future years, in the event the Company has net income for federal and state income tax purposes, which is not assured, may be very limited and there can be no assurance the Company would be able to fully utilize this tax benefit in full over the periods it is allowed. The Company intends to conduct further analysis to confirm this treatment.





Note 11 - Related Party Transactions





Related Party Transactions During the Three Months Ended January 31, 2010





11





The Company and one of its directors, Raj Pamani, are parties to a consulting agreement, dated as of June 15, 2008, pursuant to which Mr. Pamani agreed to accept responsibilities and take direction from the Company's board of directors.  Under this agreement, the Company is obligated to pay Mr. Pamani $10,000 per month.  During the three months ended January 31, 2010 and 2009, the Company paid or credited $30,000 and $30,000 respectively, to Mr. Pamani under this agreement, which were recorded as consulting expenses and recorded in the Company's related party payable account.  Mr. Pamani has charged certain personal expenses against the Company's cash account which have been treated by the Company as repayment of the related party payable.   At January 31, 2010 and October 31, 2009, the balance owed to the director was $25,130 and $2,303, respectively.





On September 6, 2008, the Company entered into an agreement with Jina Partners Ltd. (“Jina”), an affiliate of Raj Pamani, for consulting services relating to the development of certain commercial transactions. Under this agreement, the Company is obligated to pay Jina $10,000 per month.  The term of this agreement is two years.  For three months ended January 31, 2010 and 2009, we paid or credited $ 30,000 and $ 43,000 respectively, to Jina, of which $13,000 of the 2009 payments were reclassified as prepaid expenses for future service.




During the three months ended January 31, 2010, an entity controlled by the Company’s Chief Executive Officer billed the Company $17,637 for data security services provided to the Company.





In addition, in January 2009 RK and Associates, a company controlled by Suresh Relwani, a director of the Company, was granted 500,000 shares of common stock of the Company, valued at $500,000, as consideration for future North American business development efforts on behalf of the Company. The amount is being amortized over three years. At January 31, 2010, the balance of prepaid stock compensation (included in prepaid expenses-related parties) was $297,101.





The Company has made payments on three automobile leases entered into on behalf of the Company by Dr. Andrew Kielbania, Chief Scientist and Secretary of the Company since June 10, 2008.  One of these automobiles is driven by Dr. Kielbania and one of the automobiles has been driven by a director since October 2008 and one automobile is stored at the residence of the same director. Payments during the three months ended January 31, 2010 and January 31, 2009 totaled $7,779 and $7,122, respectively.





On November 13, 2009, the Company issued (i) an unsecured promissory note to Michael D. Francis, a shareholder of the Company, in the amount of $250,000 (the “First Francis Note”), and (ii) an unsecured promissory note to Capara Investments LLC (“Capara”), in the amount of $250,000 (the “First Capara Note”), which issuances resulted in gross proceeds to the Company of $500,000.  The sole member of Capara, Raj Pamani, is a member of our Board of Directors.  (See note 7, Shareholder and Directors Notes).  For the three months ended January 31, 2010, the Company recorded an aggregate interest expense of $9,500 on each of the First Francis Note and the First Capara Note.





Related Party Transactions Subsequent to January 31, 2010:





On February 12, 2010, the Company  issued an unsecured promissory note to Mr. Francis, containing substantially the same terms and conditions as the First Francis Note, which issuance resulted in gross proceeds to the Company of $250,000.  The Company received such proceeds on January 4, 2010 and therefore such amount is included in current liabilities on the Company’s balance sheet at January 31, 2010.  (See note 7, Shareholder and Directors Notes)





12





The Company issued an unsecured promissory note to Capara on March 9, 2010, containing substantially the same terms and conditions as the First Capara Note, which issuance resulted in gross proceeds to the Company of $250,000.





On March 15, 2010, Mr. Francis loaned $100,000 to the Company and Mr. Francis has agreed to loan an additional $150,000 to the Company on March 31, 2010.   The Company and Michael Francis intend to enter into an unsecured promissory note in respect of each of such borrowings containing substantially the same terms as the First Francis Note.





Note 12 – Commitments & Contingencies





Litigation





On October 1, 2009, the SEC issued a formal order of investigation to the Company regarding possible securities laws violations by the Company and other persons.  The investigation concerns the process by which the Company became a publicly traded entity, trading in the Company’s shares, and disclosure and promotion of developments in the Company’s business.  The SEC has requested that the Company deliver certain documents to the SEC.  The Company has, and will continue to fully cooperate with the SEC with respect to its investigation.  The Company has incurred, and expects to continue to incur, significant costs in responding to such investigation.  Any adverse findings by the SEC in connection with such investigation could have a material adverse impact on the Company's business, including the Company's ability to continue to operate as a publicly traded company.





In April 2005, the Company filed in the US Patent and Trademark Office (the “USPTO”) an application for the registration of the trademarks BioNeutralTM, OgieneTM and YgieneTM, based on its intent to use each of these marks in commerce.  In April 2006, the USPTO issued notices of allowance signifying that each of these trademarks was entitled to registration after timely submission of statements of use, including evidence that such trademarks have been properly used in commerce.  From June through November of 2008, however, the Company’s applications for each of these trademarks were declared abandoned by the USPTO, since the Company inadvertently failed to timely file the appropriate statements of use with respect to each trademark within the six-month period from the date the USPTO issued the respective notices of allowance.  In July 2009, the Company refiled applications for each of these trademarks as well as the Compnay’s tagline SCIENCE TO SAVE LIVES & PROTECT THE ENVIRONMENTTM; however, the Company learned that PURE Bioscience, a company focused on the development and commercialization of bioscience products, had filed applications for the registration of the trademarks BioNeutralTM and YgieneTM prior to the Company’s refiling of its applications.  Although the Company has filed with the Trademark Trial and Appeal Board oppositions to PURE Bioscience's applications and intend to pursue such oppositions vigorously, the Company cannot assure you that it will be successful with such opposition on a timely basis, if at all.





Other than the foregoing, the Company is not a party to, and none of the Company’s property is the subject of, any pending legal proceedings other than routine litigation that is incidental to the Company’s business.




Chertoff Agreement





On August 26, 2009, the Company entered into an advisory agreement (the “Original Agreement”) with the Chertoff Group, LLC (“Chertoff Group”) whereby Chertoff Group agreed to provide certain professional services to the Company.




13




The Agreement provided for a monthly advisory fee payable by the Company to Chertoff Group of $75,000 per month.  In addition, the Agreement obligated the Company to make an equity award to Chertoff Group in the form of restricted stock or restricted stock units representing the right to receive, on a fully diluted basis, 10% of Company’s common stock on terms to be mutually agreed by the Company and Chertoff Group.  As of January 31, 2010, the Company had not made such equity award and the full terms of such award had not been established by the Company and Chertoff Group.





On February 3, 2010, the Company and Chertoff Group entered into a  First Amendment to the Advisory Agreement (the “Amendment”), which amended the Original Agreement.  The Amendment modified, among other things, the scope of services to be provided under the Original Agreement by the Chertoff Group and the personnel to provide such services and reduced the monthly fee for such services to $28,000 per month during the term of the Original Agreement.  See note 14 "Subsequent Events," for a further discussion of the Amendment and the equity award made to Chertoff Group.




Other Contingencies





Approximately 6 million shares of the Company's common stock issued pursuant to the Share Exchange Agreement were issued by the then transfer agent to stockholders of BioLabs for whom the Company does not have records as having consented to the Share Exchange.  The Company currently holds approximately 86% of the outstanding interests in its subsidiary, BioLabs. In connection with the Share Exchange, certain shareholders of BioLabs delivered shareholder consents (the “Share Exchange Consents”), to BioLabs approving the execution and delivery by BioLabs of the Share Exchange Agreement (each, a "Consenting Shareholder").  The Company did not receive consents to the Share Exchange from all common and preferred shareholders of BioLabs, and the Company has accounted for those shareholders who did not sign consents as holders of the remaining 14% outstanding interests in BioLabs.  As described in “Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations—Company Structure” in this Quarterly Report on Form 10-Q, the Share Exchange Consents did not specify the number of shares of BioLabs common stock to be exchanged by the Consenting Shareholder and did not affirmatively make the representation and warranties to be made by the Consenting Shareholder as set forth in the Share Exchange. In light of such omissions, there can be no assurances that a shareholder will not challenge the validity of its consent and request a rescission offer in respect of shares of common stock issued to such person. There can also be no assurances that in light of the content of such Shareholder Consent, the Company had a basis for a valid private placement of its common stock issued in the Share Exchange, which if such were the case, may negatively affect our status as a publicly traded company.





In addition, the Company believes that the shareholders who consented to the Share Exchange and were issued shares of Company common stock failed to deliver the stock certificates representing their shares of common stock and Series A Preferred Stock of BioLabs and may claim they also have an ownership interest in BioLabs. Although the Company would challenge any such claims, it cannot assure investors that it would prevail, in which case the Company’s percentage ownership interest in BioLabs would decrease.




Note 13 – Going Concern





The Company's financial statements are prepared using generally accepted accounting principles applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company has had no significant revenues and has generated losses from operations. In order to continue as a going concern and achieve a profitable level of operations, the Company will need, among other things, additional capital resources and to develop a consistent source of revenues. The ability of the Company to continue as a going concern is dependent upon its ability to successfully accomplish its strategic plan and/or recognize revenue from its intangible assets and eventually attain profitable operations. The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. There can be no assurance the Company will be able to continue as a going concern.




14




At January 31, 2010, the Company had negative working capital of $(1,293,519). For the quarter ended January 31, 2010 the Company incurred a net loss of $(1,488,649) and since inception has an accumulated a deficit of $(47,548,513).




Note 14 Subsequent Events:





Shareholder Note Payable





The Company issued a second unsecured promissory note to Mr. Michael D. Francis, a shareholder of the Company, dated February 12, 2010, containing substantially the same terms and conditions as the First Francis Note (see Note 7).  Gross proceeds of $250,000 were received by the Company on January 4, 2010 and have been included on the Company’s balance sheet in current liabilities at January 31, 2010.





The Company issued a second unsecured promissory note to Capara Investments LLC (“Capara”), on March 9, 2010, containing substantially the same terms and conditions as the First Capara Note (see Note 7), which issuance resulted in gross proceeds to us of $250,000. The sole member of Capara, Raj Pamani, is a member of our Board of Directors.





On March 15, 2010, Michael Francis loaned $100,000 to the Company on the same terms as those contained in the First Francis Note and has agreed to loan an additional $150,000 to the Company on March 31, 2010 on the same terms as the First Francis Note.  The Company and Michael Francis intend to enter into an unsecured promissory note in respect of such borrowings containing substantially the same terms as the First Francis Note.





Chertoff Group LLC Amendment





On February 3, 2010, the Company and Chertoff Group, L.L.C. (the “Chertoff Group”) entered into a  First Amendment to the Advisory Agreement (the “Amendment”) which amends the Advisory Agreement by and between the Company and the Chertoff Group dated August 26, 2009 (the “Original Agreement”). The Amendment modified, among other things, the scope of services to be provided under the Original Agreement by the Chertoff Group and the personnel to provide such services and reduced the monthly fee for such services to $28,000 per month during the term of the Original Agreement.





In connection with the execution and delivery of the Amendment, the Company also entered into a Stock  Appreciation Rights Agreement (the "SAR Agreement"), a Registered Stock Unit Agreement (the "RSU Agreement") and a Registration Rights Agreement, dated as of February 3, 2010, with the Chertoff Group  (the “Registration Rights Agreement” and together with the SAR Agreement and the RSU Agreement, the “Equity Award Agreements”).  The Equity Award Agreements evidence the terms of the equity award required to be made to Chertoff Group pursuant to the Amendment with Chertoff Group.





Pursuant to the SAR Agreement, the Company granted 7,442,725 stock appreciation rights to Chertoff Group evidencing Chertoff Group's right to receive, for each SAR exercised, up to the number of shares of the Company's common stock  (the “SAR Shares”) equal in value to the excess of the Fair Market Value of one share of common stock on the date of exercise (as defined in the SAR Agreement) over $0.186.  The SARs shall vest on a cumulative basis according to the following vesting schedule:  25% shall vest on September 1, 2010, 50% shall vest on September 1, 2011, and 100% shall vest on September 1, 2012.  In addition, such vesting shall accelerate and fully vest upon the occurrence of certain events specified in the SAR Agreement, including a "change in control" of the Company (as defined in the SAR Agreement).





15





Pursuant to the RSU Agreement, the Company granted to Chertoff Group the right to receive on the “Delivery Date” (as defined in the RSU Agreement) a number of shares of the Company's common stock (the “RSU Shares,” and together with the SAR Shares, the “Chertoff Group Shares”) equal to “A” divided by “B,” where “A” equals 1,384,346.85, and “B” equals the greater of (i) the Fair Market Value of a share of common stock on the Delivery Date (as defined in the RSU Agreement) and (ii) $0.186.  The RSU Agreement defines “Delivery Date” as the earlier to occur of January 2, 2013 and the date that is immediately prior to a Change in Control of the Company (as defined in the RSU Agreement).  The RSUs shall vest on a cumulative basis according to the following vesting schedule:  25% shall vest on September 1, 2010, 50% shall vest on September 1, 2011 and 100% shall vest on September 1, 2012.  In addition, such vesting shall accelerate and fully vest upon the occurrence of certain events specified in the RSU Agreement, including a "change in control" of the Company (as defined in the RSU Agreement).





Pursuant to the Registration Rights Agreement, the Company granted certain registration rights and preemptive rights to Chertoff Group.





ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.





The following discussion and analysis of the consolidated financial condition and results of operations of BioNeutral Group, Inc. (the “Company,” “we” or “us”) should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere herein.  In the following discussions, most percentages and dollar amounts have been rounded to aid presentation, and accordingly, all amounts are approximations.





Forward-Looking Information





This Quarterly Report on Form 10-Q contains forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act").





All statements other than statements of historical fact are statements that could be forward-looking statements. You can identify these forward-looking statements through our use of words such as “may,” “will,” “can,” “anticipate,” “assume,” “should,” “indicate,” “would,” “believe,” “contemplate,” “expect,” “seek,” “estimate,” “continue,” “plan,” “point to,” “project,” “predict,” “could,” “intend,” “target,” “potential,” and other similar words and expressions of the future. These forward-looking statements may not be realized due to a variety of factors, including, without limitation:




•
our inability to raise capital;




•
our failure to obtain the necessary regulatory approvals for our products;




•
the results of the current Securities and Exchange Commission (the "SEC") investigation of our company;




•
the inability to obtain or retain customer acceptance of our products;




•
the failure of the market for our products to develop;




•
our inability to protect our intellectual property;




•
our inability to manage any growth;




•
the effects of competition from a wide variety of local, regional, national and other providers of products similar to our products;




•
changes in laws and regulations, including tax and securities laws and regulations and laws and regulations promulgated by the U.S. Environmental Protection Agency (the "EPA"), the U.S. Food & Drug Administration (the "FDA") and the U.S. Federal Trade Commission.




•
changes in accounting policies, rules and practices;




•
changes in technology or products, which may be more difficult or costly, or less effective than anticipated; and




•
the other factors listed under “Risk Factors” in the Company’s Form 10-K for the fiscal year ended October 31, 2009 and other filings with the Securities and Exchange Commission (the “SEC”).





All forward-looking statements are expressly qualified in their entirety by this cautionary notice. You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q or the date of the document incorporated by reference into this report.  We have no obligation, and expressly disclaim any obligation, to update, revise or correct any of the forward-looking statements, whether as a result of new information, future events or otherwise. We have expressed our expectations, beliefs and projections in good faith and we believe they have a reasonable basis.  However, we cannot assure you that our expectations, beliefs or projections will result or be achieved or accomplished.




16





Company Overview





We are a specialty chemical corporation seeking to develop and commercialize a novel combinational chemistry-based technology which we believe can, in certain circumstances, neutralize harmful environmental contaminants, toxins and dangerous micro-organisms including bacteria, viruses and spores.  We are focused on developing and commercializing two classes of product formulations: (1) anti­microbials, which are formulations designed to kill certain harmful microscopic living organisms, and (2) bioneutralizers, which are formulations designed to destroy certain agents that are noxious and harmful to health and/or the environment.  We have not marketed any of our products and have not generated any meaningful product revenue to date.





We currently are focused on the development and commercialization of two classes of product formulations, antimicrobrials and bioneutralizers.  We refer to our anti­microbial formulations as our YgieneTM products and our bioneutralizer formulations as our OgieneTM products.  Our YgieneTM products are being developed to kill certain harmful microbes, includ­ing virulent gram and bacteria (which cause staph infections), viruses, yeast, mold, fungi, spores and/or certain bioterrorism agents, such as anthrax.  Our OgieneTM products are being developed to eliminate or reduce odors of many chemicals such as hydrogen sulfide, formaldehyde and ammonia, and to reduce certain green¬house gases such as carbon dioxide and sulfur dioxide.




The marketing and sale in the United States and foreign countries of some of our current products and the products we may develop in the future are and may be subject to U.S. and foreign governmental regulations, respectively, which vary substantially from country to country.  The marketing and sale of our YgieneTM products in the United States, is subject to EPA registration and in some cases, FDA clearance, and we cannot market and sell any of such products in the United States until such registration or clearance is obtained.  We do not believe the marketing sale of our OgieneTM products are subject to EPA registration or FDA clearance.  We have not sold any of our YgieneTM or OgieneTM products to date.  We currently are focusing our efforts and resources on obtaining the registrations, clearances and approvals necessary to marketing and selling our YgieneTM products in the United States; however, we cannot assure you that we will be have the financial resources to do so or that such registrations, clearances and approvals will be obtained on a timely basis, if at all.





Company Structure





We currently operate our business through our subsidiary, BioNeutral Laboratories Corporation USA (“BioNeutral Laboratories” or “BioLabs”), a corporation organized in Delaware in 2003.  We were incorporated in the State of Nevada on April 10, 2007 under the name “Moonshine Creations, Inc.”, and changed our name to “BioNeutral Group, Inc.” on December 22, 2008.  From our incorporation until January 30, 2009, we did not have significant business operations.





On January 30, 2009, we entered into a share exchange agreement, which we refer to herein as the Share Exchange Agreement, with BioNeutral Laboratories pursuant to which we agreed to issue to the shareholders of BioNeutral Laboratories 45,000,000 shares of our common stock (the “Share Exchange”).





Additionally, at the closing of the Share Exchange, we issued 600,000 shares of our common stock to six holders of debentures of BioNeutral Laboratories and agreed to convert those debentures into 600,000 shares of our common stock pursuant to the terms of the Share Exchange Agreement.




17




In connection with the Share Exchange, certain shareholders of BioNeutral Laboratories delivered shareholder consents, which we refer to as the “Share Exchange Consents”, to BioNeutral Laboratories approving the execution and delivery by BioNeutral Laboratories of the Share Exchange Agreement.  We refer to such persons as the “Consenting Shareholders.”  The Share Exchange Consents did not specify the number of shares of BioNeutral Laboratories common stock to be exchanged by the Consenting Shareholder.  Schedule II to the Share Exchange Agreement, however, contained a list of holders of BioLabs common stock (certain of which shareholders also held BioLabs Series A Preferred Stock), shares of our common stock to be issued to such shareholders, and shares of our common stock to be issued to holders or BioLabs preferred stock.





Based on the Share Exchange Consents, we caused to be delivered to our transfer agent instructions to issue stock certificates representing 42,649,500 shares of our common stock in accordance with Schedule II to the Share Exchange Agreement.  We did not receive Share Exchange Consents in respect of each share of our common stock that was issued by our transfer agent and we believe that stock certificates representing approximately 1,011,362 shares of common stock may have been delivered to those persons who did not deliver a Share Exchange Consent.





In addition, our records indicate that (i) we did not receive stock certificates representing shares of  BioNeutral Laboratories common stock for cancellation from the Consenting Shareholders, and (ii) we did not cause to be delivered the applicable stock certificates representing shares of our common stock issued in the Share Exchange to certain of the Consenting Shareholders.  Accordingly we intend to request that (i) with respect to each Consenting Shareholder who received a stock certificate, such stockholder affirm its consent, which we refer to as a “Consenting Shareholder Acknowledgement”, and deliver to us for cancellation its certificates representing BioNeutral Laboratories common stock; and (ii) with respect to each Consenting Shareholder who did not receive a stock certificate, such stockholder deliver to us a Consenting Shareholder Acknowledgment and deliver to us for cancellation its certificates representing BioNeutral Laboratories common stock, each in advance of us delivering the applicable stock certificate.




With respect to any shareholder of BioNeutral Laboratories who is not able to confirm that it previously delivered a Share Exchange Consent, we are going to evaluate offering to such persons the ability to exchange their shares of common stock of BioNeutral Laboratories for shares of our common stock on the same terms as would have occurred had such exchange occurred at the time of the consummation of the Share Exchange.  Although we cannot assure you as to the determination we may make, if we were to make such offer, we would likely request that each such stockholder deliver to us a consent that is similar to a Share Exchange Consent and deliver to us for cancellation its certificates representing BioNeutral Laboratories common stock, each in advance of us delivering the applicable stock certificate.   With respect to shareholders of BioNeutral Laboratories who did not deliver a Share Exchange Consent and to whom we may have caused to be issued stock certificates for shares of our common stock, we intend to request a Consenting Shareholder Acknowledgment from each of such persons.





With respect to holders of Series A preferred stock of BioNeutral Laboratories who did not receive shares of our common stock in exchange for such preferred stock, we intend to offer to such persons 2,799,910 shares of our common stock in exchange for their shares of Series A preferred stock, in accordance with Schedule II to the Share Exchange Agreement.  We intend to request that such persons execute and deliver a share exchange agreement evidencing such exchange.





For purposes of preparation of our financial statements, we do not treat as outstanding any shares of common stock issued pursuant to the Share Exchange and for which we do not have a record of receiving a Share Exchange Consent.  We made this determination despite the fact that certificates representing certain of such shares of our common stock may have been delivered to the applicable shareholder.  We cannot assure you that any person in possession of such shares of common stock but who did not deliver the applicable Share Exchange Consent will not claim ownership of such shares.




18




As a result of the closing of the Share Exchange, BioNeutral Laboratories became our subsidiary, and the shareholders of BioNeutral Laboratories acquired the majority ownership and control of our company.  We reviewed the Financial Accounting Standards Board Accounting Standards Codification 805-40 (“FASB ASC 805-40”) and determined that BioNeutral Laboratories was the accounting acquirer and the entity which would be continuing operations.  As a result, the transaction between BioNeutral Laboratories and us was accounted for as a reverse acquisition in accordance with FASB ASC 805-40.





Plan of Operation





Our strategic plan for our fiscal year ending October 31, 2010 is focused on leveraging developments in the European Union for our YgieneTM professional disinfectant product and continuing our work within the regulatory process of the U.S. for EPA registration.  Our YgieneTM professional disinfectant product and multipurpose cleaner and disinfectant product were registered with the German Bundesanstalt für Arbeitsschutz und Arbeitsmedizin, a German government sanctioned institute for safety and health, on January 5, 2010 and November 30, 2009, respectively.  As a result of such registrations, we are permitted to sell such YgieneTM-based products in Germany, although we have not sold any of our products in Germany and currently do not have adequate resources to attempt to make any such sales or to have our products manufactured for sale.  Similar regulatory registration is anticipated with additional major members of the European Union during fiscal year 2010.  We believe these registrations present us with a strong and dynamic platform for accessing well developed global markets for commercial use of our YgieneTM professional disinfectant product and multipurpose cleaner and disinfectant product.





Currently, we are focusing our efforts on the development and commercialization of a YgieneTM formulation for the Hospital and Industrial Application.  We are developing our OgieneTM products to potentially eliminate or reduce odors of many chemicals such as hydrogen sulfide, formaldehyde and ammonia, and to reduce certain green­house gases such as carbon dioxide and sulfur dioxide.  Our OgieneTM formulations are designed to interact with the functional organic or inorganic groups of harmful gases and reduce or eliminate them.





We believe that our products can offer a superior solution that addresses needs not currently being met in the marketplace for combating bacteria, viral and spore based threats.  We further believe that our products can provide a distinct advantage when distinguishing them from those that are currently in use in our targeted markets. In addition, our core product is flexible and adaptable for multiple applications.  Industry or use specific modifications made by our professional scientist allow our products to be readily customized to the demands of multiple unique markets.





We are emphasizing these strategic advantages as part of our brand development efforts to overcome competitive barriers to entry in markets that are driven by large, established organizations.  The markets for our OgieneTM and YgieneTM products and each of their potential channels are highly competitive. We have a number of competitors that vary in size and scope and breadth of products offered.  Such competitors include some of the largest corporations in the world, and we believe substantially all of our competitors have greater financial resources than we do, including in the areas of sales, marketing, branding and product development.  We expect to face additional competition from other competitors in the future.





Because OgieneTM and YgieneTM are new formulations, our success will depend, in part, upon our ability to achieve market share at the expense of existing, established and future products in our relevant target markets. Even if our OgieneTM and YgieneTM formulations may have technological competitive advantages over competing products, we or potential distributors, will need to invest significant resources in order to attempt to displace traditional technologies sold by what are in many cases well-known international industry leaders.  Alternatively, we may pursue strategies in selective markets of encouraging existing competitors to incorporate our products into their existing brands, thereby reducing the proportion of end-use revenues that would accrue to us.  To the extent that we were to grant any existing competitor exclusivity to any field and/or territory, we would risk having our technology marketed in a manner that may be less than optimal for us.  We recognize that innovative marketing methods may be required in order to establish our products, and that such methods may not be successful.





19




Results of Operations





Three Months Ended January 31, 2010 Compared to Three Months Ended January 31, 2009





Revenues:  We have not generated material revenues. To date, our efforts have been focused on development of our products and obtaining regulatory approvals for their sale and distribution in the United States and international markets.





Operating Expenses: Our operating expenses consist of compensation of our executive and scientific staff, consulting expenses supporting development of, and regulatory approvals for, our products, legal and accounting services, and non-cash amortization of our patents.





Selling, general & administrative (“SG&A”) expenses for the three months ended January 31, 2010 did not include any costs related to non-cash stock-based compensation to employees.  During the same period for 2009, we incurred $998,773 of such costs, primarily for agreements with our new Chief Executive Officer and prior Chief Financial Officer.  In addition, for the quarter ended January 31, 2009, approximately $733,641 of non-cash stock based compensation expense was reported for amortization of amounts paid for services to non-employees, principally for business development agreements entered into with entities responsible for advancing our market access in Asia and the European Union.





SG&A costs for the three months ended January 31, 2010 that were paid or payable in cash include approximately $187,708 related to our agreement with the Chertoff Group, L.L.C. and approximately $60,000 to a director and a company with which such director is affiliated under agreements we have with the director and his affiliated company. There was no expense related to the agreement with the Chertoff Group in the same period for 2009, since the agreement was not entered into until August 2009. Expense related to the director was the same for the 2009 period.





Total legal and accounting expenses for the three months ended January 31, 2010 were approximately $694,000, an increase over amounts for the same period for 2009 which were approximately $170,000. The increase reflected costs incurred in responding to the SEC investigation (see note 12 to the interim financial statements for the three months ended January 31, 2010) and the preparation of our Annual Report on Form 10-K for the fiscal year ended October 31, 2009.  Costs for the 2009 period were related primarily to the Share Exchange involving BioNeutral Laboratories Corp USA, and us becoming a publicly traded company.





Amortization & depreciation increased to $172,937 for the three months ended January 31, 2010 from the $112,432 reported for the same three months in 2009, as a result of the increased investment in our patents.  We acquired the remainder of the licensing rights for all geographic regions in January 2009, in exchange for shares of our common stock.





Net Loss:  We experienced a net loss from operations of $1,488,649 for the three months ended January 31, 2010, before consideration of the non-controlling interest in BioLabs.  The discussion of operating expenses identifies the elements of the net loss.  For the same period in 2009, our net loss was $2,320,711 before consideration of the non-controlling interest.  We anticipate we will experience a net loss in fiscal 2010 as we continue to pursue regulatory approvals for the sale and distribution of our products and development of access to global markets.




20




Liquidity and Capital Resources





We had $227,402 of cash and cash equivalents at January 31, 2010.  Cash used by operations for the three months ended January 31, 2010 was $685,955.  The principal use of funds were for consulting services supporting the development of our business plan; legal and accounting fees in connection with responding to the SEC investigation, the preparation of our Annual Report on Form 10-K for the fiscal year ended October 31, 2009  and other matters; and daily operations of the business, including rent, travel and laboratory costs.





During the three months ended January 31, 2010, we raised $500,000 of cash from the issuance of exchangeable notes to a shareholder and Director of the company to fund operations and $250,000 from a shareholder as a loan to be converted into an exchangeable note (see note 7 to the interim financial statements).





We are not currently generating revenues and rely on raising new capital to fund our ongoing operations and development of our strategic business objectives.  While we have been able to use our shares of common stock to fund a substantial balance of our operating costs, we do not expect that our funds will be sufficient to meet our anticipated needs through April 20, 2010 and we will need to raise additional capital during fiscal 2010 to fund the full costs associated with our growth and development.  There can be no assurances that we will be successful in raising additional capital.





Off-Balance Sheet Arrangements





We do not have any off-balance sheet arrangements.





Restatement of Prior Financial Statements





As stated in our Current Report on Form 8-K filed with the SEC on February 18, 2010, our Board of Directors has concluded that there were errors in the following financial statements (the “Subject Financial Statements”) and that the Subject Financial Statements should no longer be relied upon:





●
for the year ended December 31, 2007, the year ended December 31, 2006, the nine month period ended September 30, 2008 and the nine month period ended September 30, 2007, each included in our Current Report on Form 8-K filed on February 5, 2009;





●
for the ten months ended October 31, 2008 and included in our Transition Annual Report on Form 10-KT filed on June 24, 2009;





●
for the three months ended January 31, 2009 and included in our Quarterly Report on Form 10-Q filed on March 23, 2009;





●
for the three months ended April 30, 2009 and included in our Quarterly Report on Form 10-Q filed on June 24, 2009; and





●
for the three months ended July 31, 2009 and included in our Quarterly Report on Form 10-Q filed on September 21, 2009.





We anticipate that, at a minimum, we will:





●
Make adjustments to the beginning balance of stockholders’ equity for each fiscal quarter or year end contained in the Subject Financial Statements.




21


●
Reduce our capital and deficit calculations contained in the Subject Financial Statements based on a revaluing from the stated value of $5 per share to the fair value of $1 per share of 7,832,800 shares of common stock issued in 2005 for non-cash consideration.  7,000,000 of such shares were issued in connection with our acquisition of patent rights; the balance was issued as compensation.  The asset value of the patent was previously written down to its fair value in fiscal year 2006.  This adjustment would address all corresponding amounts included in our capital and deficit accounts related to the original $5 a share valuation and patent write-down.





●
Reverse a previously reported liability of approximately $1.1 million related to the issuance of warrants in 2005.  We historically treated such warrants as having a feature for issuing a variable amount of shares, thereby creating an obligation under U.S. generally accepted accounting principles ("GAAP").  We anticipate recording such warrants as standard equity instruments with no obligation to redeem the warrants or to issue a variable amount of shares pursuant to the warrants.





●
Expand the related party transaction disclosures in the Notes to certain of the Subject Financial Statements.





In addition, the Subject Financial Statements for the interim periods of our fiscal year ended October 31, 2009 reflect a minority interest of 19% interest in BioLabs.  We believe that this figure will be adjusted to reflect a 14% minority interest in BioLabs.   We do not have records of certain common stockholders of BioLabs as participating in the exchange of their shares of BioLabs common stock for shares of our common stock pursuant to the Share Exchange Agreement.  Accordingly, until such time as we locate such records or such stockholders of BioLabs are able to confirm such participation in accordance with the terms of the Share Exchange Agreement, we have determined that we will treat such persons as part of a 14% minority interest in BioLabs.





Critical Accounting Policies and Estimates





The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires judgment on the part of management to arrive at estimates and assumptions on matters that are inherently uncertain.  These estimates may affect the amount of assets, liabilities, revenue and expenses reported in the financial statements and accompanying notes and disclosure of contingent assets and liabilities within the financial statements.  Estimates and assumptions are periodically evaluated and may be adjusted in future periods. Actual results could differ from those estimates.





Stock-Based Payments – Significant amounts of our shares of common stock are issued as payment to employees and non-employees for services and periodically as consideration for acquisition of assets.  These are non-cash transactions that require management to make judgments related to the fair value of the shares issued, which affects the amounts reported in our consolidated financial statements for certain of our assets and expenses.  For historic fiscal years when there was not an observable active, liquid market for our shares, the valuation of the shares issued in a non-cash share payment transaction relied on observation of arms-length transactions where cash was received for our shares, before and after the non-cash share payment date.





Impairment of long-lived assets - Long-lived assets, such as property and equipment and definite-life intangible assets (i.e. patents) are evaluated for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable in accordance with FASB ASC 360-10-35-17 thru 35-35 “Measurement of an Impairment Loss”.  We assess the impairment of the assets based on the undiscounted future cash flow the assets are expected to generate compared to the carrying value of the assets.  If the carrying amount of the assets is determined not to be recoverable, a write-down to fair value is recorded.  Management estimates future cash flows using assumptions about expected future operating performance.  Management’s estimates of future cash flows may differ from actual cash flow due to, among other things, technological changes, economic conditions or changes to our business operations.  Our patents were tested for impairment as of October 31, 2009 by an independent valuation specialist.  Forecasted undiscounted future cash flows exceeded the carrying amount of the assets indicating that the assets were not impaired.


22
 
 New Accounting Pronouncements
 
 See Note 2 of Notes to Consolidated Financial Statements included in Item 8 of our Annual Report on Form 10-K for the fiscal year ended October 31, 2009.
 .


ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





There have been no significant changes from the items previously disclosed in the Annual Report on Form 10-K for the fiscal year ended October 31, 2009 filed with the Securities and Exchange Commission on March 17, 2010.





ITEM 4.  CONTROLS AND PROCEDURES





(a)           Disclosure controls and procedures.





Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Exchange Act, as of January 31, 2010.   Based on this evaluation, as a result of the material weaknesses in internal controls over financial reporting as previously disclosed in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 17, 2010, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures are not effective to ensure that all information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and is accumulated and communicated to our management, including our principal executive and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.





(b)           Changes in Internal Controls Over Financial Reporting





There have been no changes in our internal control over financial reporting that occurred during the fiscal quarter ended January 31, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.








PART II — OTHER INFORMATION





ITEM 1. LEGAL PROCEEDINGS




There were no material changes to the legal proceedings previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended October 31, 2009 filed with the Securities and Exchange Commission on March 17, 2010.





ITEM 1A.  RISK FACTORS





There were no material changes in any risk factors previously disclosed in the Company's Annual Report on Form 10-K for the year ended October 31, 2009 filed with the Securities and Exchange Commission on March 17, 2010.




23




ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.





There were no sales of equity securities by the Company during the three months ended January 31, 2010 that were not registered under the Securities Act of 1933, as amended, other than sales disclosed in the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on February 18, 2010.





ITEM 3.  DEFAULTS UPON SENIOR SECURITIES.





None.





ITEM 4.  (REMOVED AND RESERVED).








ITEM 5.  OTHER INFORMATION.





None.




ITEM 6. EXHIBITS





The following exhibits are filed with this Quarterly Report on Form 10-Q:





Exhibit No.

Description4.1

8% Exchangeable Promissory Note, dated November 13, 2009, issued in favor of Michael D. Francis (1)4.2

8% Exchangeable Promissory Note, dated November 13, 2009, issued in favor of Capara Investments LLC (1)4.3

8% Exchangeable Promissory Note, dated February 12, 2010, issued in favor of Michael D. Francis (1)31.1

Certification of Principal Executive Officer and Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*32.1

Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*


________________________


*  Filed herewith.





(1)            Incorporated by reference to BioNeutral Group, Inc.'s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 18, 2010.





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SIGNATURE





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






BIONEUTRAL GROUP, INC.By:
/s/Stephen BrowandStephen BrowandChief Executive Officer

(Principal Executive Officer, Principal Financial

Officer and Principal Accounting Officer)


Dated: March 22, 2010
 
 25