UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1 TO
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2008
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from __________ to __________
Commission file number 000-50331
UPSTREAM BIOSCIENCES INC.
(Exact name of small business issuer as specified in its charter)
Nevada 98-0371433
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
Suite 200 - 1892 West Broadway, Vancouver, British Columbia, Canada V6J 1Y9
(Address of principal executive offices)
(604) 638-1674
(Issuer's telephone number)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). (Check one): Yes [ ] No [X]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
49,239,281 common shares issued and outstanding as of May 10, 2008
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
EXPLANATION OF THE AMENDED FILING: THIS FORM 10-QSB AND THE CONSOLIDATED
FINANCIAL STATEMENTS FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2008 INCLUDED
HEREIN HAVE BEEN AMENDED. OUR COMPANY HAS RESTATED THE FINANCIAL STATEMENTS TO
CORRECT THE CALCULATION OF THE CONSOLIDATED ACCOUNTING FOR THE ACCRUAL SEVERANCE
LIABILITES TO TWO EMPLOYEES. ACCORDINGLY, OUR COMPANY HAS RESTATED THE BALANCE
SHEET, STATEMENT OF OPERATIONS AND DEFICIT, AND STATEMENT OF CASH FLOWS FOR THE
PERIOD ENDING MARCH 31, 2008 TO CORRECTLY PRESENT THESE REVISED CALCULATIONS.
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
UPSTREAM BIOSCIENCES, INC.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
March 31, September 30,
2008 2007
---------- ----------
(Unaudited) (Audited)
(Restated -
see Note 4)
$ $
ASSETS
CURRENT ASSETS
Cash 1,126,787 1,618,728
Receivables 44,265 44,793
Prepaid expenses 21,072 44,919
391 --
---------- ----------
1,192,515 1,708,440
Restricted cash 33,751 32,643
Equipment, net 14,830 10,789
Intellectual property rights 353,322 353,322
---------- ----------
1,594,418 2,105,194
========== ==========
LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued liabilities 389,331 403,957
Amounts owing to related parties -- 30,123
---------- ----------
389,331 434,080
DEFERRED INCOME TAXES 57,415 57,415
---------- ----------
446,746 491,495
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 3)
STOCKHOLDERS' DEFICIENCY
COMMON STOCK (Note 2)
750,000,000 shares authorized at $0.001 par value
49,239,281 issued and outstanding (September 30, 2006 -
47,827,710) 49,241 47,828
ADDITIONAL PAID IN CAPITAL 6,188,276 5,464,752
DEFERRED EXPENSE (162,609) (108,872)
ACCUMULATED OTHER COMPREHENSIVE LOSS 29,173 26,856
DEFICIT ACCUMULATED DURING DEVELOPMENT STAGE (4,956,409) (3,816,865)
---------- ----------
1,147,672 1,613,699
---------- ----------
1,594,418 2,105,194
========== ==========
The accompanying notes are an integral part of these interim
consolidated financial statements.
3
UPSTREAM BIOSCIENCES INC.
(A Development Stage Company)
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
(Unaudited)
Cumulative
From
Inception
For the Three Months Ended For the Six Months Ended (June 14, 2004) to
March 31, March 31, March 31,
2008 2007 2008 2007 2008
----------- ----------- ----------- ----------- -----------
(Restated - (Restated - (Restated -
see Note 4) see Note 4) see Note 4)
$ $ $ $ $
REVENUE
Consulting revenue -- -- -- -- 67,600
----------- ----------- ----------- ----------- -----------
OPERATING EXPENSES
Consulting fees -- -- -- -- 12,598
Depreciation 1,412 777 2,367 1,553 6,403
(Gain) Loss on foreign exchange 48,731 -- (21,657) 1,246 (14,293)
Interest and finance charges 101 227,569 378 258,935 629,705
Interest income (10,735) (2,460) (27,165) (5,528) (63,522)
Investor communications 27,078 25,385 51,139 34,442 143,705
License fees and royalties (3,863) (596) 2,519 3,246 57,968
Management compensation 81,390 55,732 157,972 109,541 976,298
Office and miscellaneous 33,911 29,324 73,503 55,018 249,015
Research and development 461,880 40,717 563,296 78,720 842,246
Professional fees 19,804 34,109 73,278 65,992 350,313
Stock based compensation 131,957 530,042 263,914 547,584 1,735,873
----------- ----------- ----------- ----------- -----------
791,666 940,599 1,139,544 1,150,749 4,926,309
----------- ----------- ----------- ----------- -----------
NET LOSS (791,666) (940,599) (1,139,544) (1,150,749) (4,858,709)
=========== =========== =========== =========== ===========
BASIC NET LOSS PER SHARE (0.02) (0.02) (0.02) (0.03)
=========== =========== =========== ===========
WEIGHTED AVERAGE COMMON SHARES
UTSTANDING 48,314,219 45,257,126 48,069,635 45,049,849
=========== =========== =========== ===========
The accompanying notes are an integral part of these interim
consolidated financial statements
4
UPSTREAM BIOSCIENCES INC
(A Development Stage Company)
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Cumulative
From
Inception
For the Six Months Ended (June 14, 2004) to
March 31, December 31,
2008 2007 2008
---------- ---------- ----------
(Restated - (Restated -
see Note 4) see Note 4)
$ $ $
CASH FLOW USED IN OPERATING ACTIVITIES
Net loss (1,139,544) (1,150,749) (4,858,709)
Non-cash items included in net loss:
Depreciation 2,367 1,553 6,403
Shares issued for operating expenses 407,286 42,428 1,202,140
Amortization of fair value of granted options 263,914 547,584 1,303,831
Accretion of convertible debenture -- 232,621 302,808
Changes in non-cash working capital:
Receivables 528 (8,190) (44,264)
Prepaid expenses 23,847 1,459 (23,853)
Accrued license fees -- 2,315 --
Accounts payable and accrued liabilities (14,626) 39,698 189,545
Amounts owing to related parties (30,514) (47,176 52,372
---------- ---------- ----------
NET CASH FLOW USED IN OPERATING ACTIVITIES (486,742) (338,457) (1,869,727)
---------- ---------- ----------
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of office furniture and equipment (6,408) -- (21,233)
Acquisition of option to acquire PPT -- (21,628) (51,507)
Purchase of short term investment (1,108) -- (33,751)
---------- ---------- ----------
NET CASH FLOW FROM INVESTING ACTIVITIES (7,516) (21,628) (106,491)
---------- ---------- ----------
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from convertible debentures -- -- 1,000,000
Loan from related party -- -- 78,487
Issuance of common stock for cash -- 995,000 1,995,345
---------- ---------- ----------
NET CASH FLOW FROM FINANCING ACTIVITIES -- 995,000 3,073,832
---------- ---------- ----------
Effect of Exchange Rates 2,317 2,451 29,173
---------- ---------- ----------
INCREASE IN CASH (491,941) 637,366 1,126,787
CASH, BEGINNING 1,618,728 471,527 --
---------- ---------- ----------
CASH, ENDING 1,126,787 1,108,893 1,126,787
========== ========== ==========
The accompanying notes are an integral part of these interim
consolidated financial statements.
5
UPSTREAM BIOSCIENCES, INC
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2008
(Unaudited)
1. BASIS OF PRESENTATION
These unaudited interim consolidated financial statements may not include all
information and footnotes required by US GAAP for complete financial statement
disclosure. However, except as disclosed herein, there have been no material
changes in the information contained in the notes to the audited consolidated
financial statements for the year ended September 30, 2007, included in the
Company's Form 10-KSB and filed with the Securities and Exchange Commission.
These unaudited interim consolidated financial statements should be read in
conjunction with the audited financial statements included in the Form 10-KSB.
In the opinion of management, all adjustments considered necessary for fair
presentation and consisting solely of normal recurring adjustments have been
made. Operating results for the six months ended March 31, 2008 are not
necessarily indicative of the results that may be expected for the year ending
September 30, 2008.
2. CAPITAL STOCK
During the six months ended March 31, 2008, there were the following
transactions:
(i) On January 31, 2008, 83,183 shares were issued pursuant to a
consulting services agreement for the development and
commercialization of proprietary drugs with one of the former
shareholders of Pacific Pharma Technologies Inc. ("PPT"). The fair
value of the common shares issued is $24,955, of which $20,796 was
expensed for the six months ended March 31, 2008.
(ii) On February 28, 2008, 925,000 shares were issued pursuant to the terms
of an agreement dated August 24, 2007 regarding the purchase of PPT
whereby the Company is obligated to issue 1,000,000 shares to the two
former shareholders of PPT in consideration for achievement of a
milestone. The fair value of the common shares is $362,400, of which
$27,180 was credited to deferred compensation and $335,220 was
expensed as research and development in the quarter ended March 31,
2008.
(iii) On March 7, 2008, 403,388 shares were issued pursuant to the same
consulting services contract as (i) above. The fair value of the
common shares is $100,847 for the six month period ending August 31,
2008, of which $16,808 was expensed for the quarter ended March 31,
2008.
6
UPSTREAM BIOSCIENCES, INC
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2008
(Unaudited)
3. COMMITMENTS AND CONTINGENCIES
(A) AMENDMENTS TO CONSULTING SERVICES AGREEMENT
A three year agreement with one of the former shareholders of PPT for assistance
in the development and commercialization of proprietary drugs commenced
immediately after the August 24, 2007 acquisition. The annual consulting fee
consisted of $50,000 payable in cash on a monthly basis and $50,000 payable in
shares on a semi-annual basis based on the month end average of the closing
share price. Effective March 1, 2008, the annual common shares component of the
agreement was amended to $200,000 payable semi-annually. 403,368 shares at fair
value of $100,847 were issued with $50,000 in shares due on both August 31, 2008
and February 28, 2009. Thereafter, $100,000 in common shares will be issued
semi-annually until the agreement expires on July 31, 2010.
(B) CONTINGENT PAYMENTS FOR MILESTONE ACHIEVEMENTS
The Company is obligated to issue up to 2,000,000 additional common shares, less
155,000 escrow performance-based shares already issued as deferred compensation
effective August 24, 2007, to the two former shareholders of PPT in
consideration for the achievement of the two remaining milestones.
(C) CONTINGENT GRANTS OF INCENTIVE STOCK OPTIONS
On February 7, 2008, the Company signed a three month contract for $3,750 per
month with an investor relations firm for the purpose of raising funds to
further the Company's research and development activities. The Company will
grant up to 500,000 incentive stock options to this firm, exercisable at $0.23
per share, upon successful completion of a financing agreement up to
$10,000,000. During the six months ended, the Company did not raise any more
funds.
7
UPSTREAM BIOSCIENCES, INC
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2008
(Unaudited)
4. RESTATEMENTS
The Company has restated its financial statements for the six months ended March
31, 2008 to reflect the following adjustments:
As At March 31, 2008
----------------------------------------------------------
As Originally
Reported Adjustments As Restated
-------- ----------- -----------
$ $ $
BALANCE SHEET
Accounts payable and accrued liabilities 89,331 300,000 389,331
Due to (from) related parties 276,692 (277,083) (391)
Accumulated deficit (4,933,492) (22,917) (4,956,409)
For The Three Months Ended March 31, 2008
----------------------------------------------------------
As Originally
Reported Adjustments As Restated
-------- ----------- -----------
$ $ $
STATEMENT OF OPERATIONS AND DEFICIT
Management compensation 125,140 (43,750) 81,390
Net loss (835,416) 43,750 (791,666)
For The Six Months Ended March 31, 2008
----------------------------------------------------------
As Originally
Reported Adjustments As Restated
-------- ----------- -----------
$ $ $
STATEMENT OF OPERATIONS AND DEFICIT
Management compensation 245,472 (87,500) 157,972
Net loss (1,227,044) 87,500 (1,139,544)
Cumulative From Inception (June 14, 2004) to March 31, 2008
-----------------------------------------------------------
As Originally
Reported Adjustments As Restated
-------- ----------- -----------
$ $ $
STATEMENT OF OPERATIONS AND DEFICIT
Management compensation 953,381 22,917 976,298
Net loss (4,835,792) (22,917) (4,858,709)
STATEMENT OF CASH FLOWS
Net cash flows used in operating activities
* Period ended March 31, 2008 (486,742) -- (486,742)
* From inception (June 14, 2004)
to March 31, 2008 (1,869,727) -- (1,869,727)
8
UPSTREAM BIOSCIENCES, INC
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2008
(Unaudited)
(I) EMPLOYMENT CONTRACT WITH COMPANY OFFICERS
In connection with the employment contract with company officers, the Company
has corrected the following:
* The entire $300,000 of severance payable to officers and directors of
the company has now been recognized during the period ending September
30, 2006 reporting period rather than deferred over the life of the
contracts as previously recorded.
* The amount of $68,750 that was previously accrued for an officer of
the Company has been reversed.
(II) OTHER
The net loss per share for the three months ended March 31, 2008 decreased from
$0.03 to $0.02 resulting from the restatement and the net loss for the six
months ended March 31, 2008 remained unchanged.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
FORWARD-LOOKING STATEMENTS
This quarterly report contains forward-looking statements as that term is
defined in Section 27A of the United States Securities Act of 1933 and section
21E of the United States Securities Exchange Act of 1934. These statements
relate to future events or our future financial performance. In some cases, you
can identify forward-looking statements by terminology such as "may", "should",
"expects", "plans", "anticipates", "believes", "estimates", "predicts",
"potential" or "continue" or the negative of these terms or other comparable
terminology. These statements are only predictions and involve known and unknown
risks, uncertainties and other factors, including the risks in the section
entitled "Risk Factors", that may cause our or our industry's actual results,
levels of activity, performance or achievements to be materially different from
any future results, levels of activity, performance or achievements expressed or
implied by these forward-looking statements.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Except as required by applicable law,
including the securities laws of the United States, we do not intend to update
any of the forward-looking statements to conform these statements to actual
results.
Our financial statements are stated in United States dollars and are prepared in
conformity with generally accepted accounting principles in the United States of
America for interim financial statements. The following discussion should be
read in conjunction with our financial statements and the related notes that
appear elsewhere in this quarterly report.
As used in this quarterly report and unless otherwise indicated, the terms "we",
"us" and "our" refer to Upstream Biosciences Inc. and our wholly-owned
subsidiaries. The term "Upstream Nevada" specifically refers to our company and
the term "Upstream Canada" specifically refers to our wholly-owned subsidiary,
Upstream Biosciences Inc., a Canadian corporation. Unless otherwise specified,
all dollar amounts are expressed in United States dollars and all references to
"common shares" refer to the common shares in our capital stock.
CORPORATE HISTORY
We were incorporated pursuant to the laws of the State of Nevada on March 20,
2002 under the name Integrated Brand Solutions Inc. and on February 6, 2006, we
changed our name to Upstream Biosciences Inc. We entered into an amended and
restated share exchange agreement dated February 24, 2006, which amended and
restated the terms of a share exchange agreement dated February 3, 2006.
Pursuant to the terms of the amended and restated share exchange agreement, our
company agreed to acquire all of the issued and outstanding stock of Upstream
Canada in exchange for the issuance by our company of 24,000,000 common shares.
The closing of the transactions contemplated in the amended share exchange
agreement and the acquisition of all of the issued and outstanding shares of
Upstream Canada occurred on March 1, 2006. As at the closing date, the former
shareholders of Upstream Canada held 54.2% of the issued and outstanding common
shares of our company. The acquisition of Upstream Canada was deemed to be a
reverse acquisition for accounting purposes. Upstream Canada, the acquired
entity, is regarded as the predecessor entity as of March 1, 2006.
GENETIC DIAGNOSTIC BIOMARKER BUSINESS
As of the closing date of the amended and restated share exchange agreement on
March 1, 2006, our company commenced the business of developing genetic
diagnostic biomarkers for use in determining a patient's susceptibility to
disease and predicting a patient's response to drugs. Our business strategy is
to generate revenues through licensing our technologies or collaborating with
third parties in the disease susceptibility, biomarkers identification, and drug
response areas of cancer, primarily to companies that develop and/or market
developing diagnostic products.
Our company focuses our research on variations in the untranslated regions of
the human genome. Variations in these regions can be used as diagnostic markers
to predict or aid in the prediction of susceptibility to disease or to predict a
patient's response to drugs. We have identified and filed a provisional patent
application on genetic markers that, following successful development and
testing, may assist in determining the susceptibility of patients to liver
cancer. These markers may also be important for determining the susceptibility
of patients to other types of cancer, such as prostate or colorectal cancer. We
10
have also filed a provisional patent application on an assay for identifying
genetic markers that may predict a patient's response to a drug. On March 22,
2006, we have identified and filed a provisional patent application on genetic
markers that, following successful development and testing, may assist in
determining the susceptibility of patients to prostate cancer. On September 12,
2006, we identified and filed a provisional patent application on genetic
markers that, following successful development and testing, may assist in
determining the susceptibility of patients to ovarian cancer. On September 26,
2006, we identified and filed a provisional patent application on genetic
markers that, following successful development and testing, may assist in
determining the susceptibility of patients to thyroid cancer.
We incorporate data, ideas and methods from disciplines such as mathematics,
computer science, biochemistry, evolutionary biology, literature mining, pattern
recognition and network analysis and apply such information in a manner that
permits us to understand the genetic basis of human disease and the role that
variations in genes and their related gene regulatory regions play in the onset
of disease, particularly cancer. If successful, we believe that our research and
development will result in predictive models, discovery engines and related
technologies, which will enable us to develop potential diagnostic markers. The
presence, absence, varying quantities, and varying composition of molecules
provide information about the development of a disease or other physiological
condition. A molecule that provides this information is referred to as a
diagnostic marker. In order to develop a diagnostic marker, we must identify a
correlation between the presence of a particular variation of a molecule and a
disease or other physiological condition. Once a correlation is identified, we
must develop a method for identifying the correlation. Our goal is to develop
our research into marketable diagnostic markers that are easy to perform,
sensitive, consistent, safe, inexpensive and cover an attractive market segment.
We are currently developing platforms and related technologies that we hope will
enable the discovery of marketable diagnostic markers to aid in the disease
susceptibility and drug response areas of cancer. We are currently developing
our technologies which will enable us to identify and prioritize potential
diagnostic markers. Our goal is to develop our platforms and related
technologies to identify a variety of novel gene regulatory regions with
potential applications in diagnostics. Our business strategy is to understand
the relationship between genetic regulation, proteins and human diseases in
order to develop molecular diagnostic products. Through our research and
development, we intend to identify important disease genes, the proteins they
produce, and the biological pathways in which they are involved to better
understand the underlying molecular basis for the cause of human disease.
BIOTECHNOLOGY DRUG DEVELOPMENT BUSINESS
On August 24, 2007, we acquired Pacific Pharma Technologies Inc. ("PPT"), a
Canadian early stage biopharmaceutical company, that has developed a proprietary
technology platform that combines artificial intelligence, advanced
computational methods and chemical diversity techniques to discover new drug
candidates. Following the acquisition, we expanded our business to include the
development of biotechnology drugs for certain infectious diseases and cancers.
Our business strategy for our biotechnology drug development business is to
generate revenues through either licensing of our technology or sales of our
products following commercialization or collaboration with third party
companies.
PPT was acquired by our company from its founders, Mr. Gary Morrison and Dr.
Artem Cherkasov. The PPT technology, together with several compounds that were
identified by PPT's founders as potential drug candidates for pre-clinical
testing, were developed by Dr. Artem Cherkasov, a faculty member in the
Department of Infectious Diseases in the Faculty of Medicine at the University
of British Columbia, and a current member of Upstream's Scientific Advisory
Board. Subsequent to the acquisition of PPT, Dr. Artem Cherkasov entered into a
multi-year consulting agreement with our company. On December 31, 2007, we
entered into an amended consulting agreement whereby Dr. Cherkasov provided his
consulting services through JTAT Consulting, a proprietorship owned by Dr.
Cherkasov and his spouse.
The PPT technology has generated novel compounds that in preliminary and
pre-clinical laboratory studies suggest human and veterinary potential against
certain tropical parasitic diseases. Our company intends to apply screening
analyses and diversity generation chemistry to the compounds in order to produce
an array of potential drug candidates. On June 13, 2007, PPT filed a provisional
patent with the United States Patent and Trademark Office with respect to
technology developed by its founders. On November 7, 2007, and subsequent to the
end of our September 30, 2007 fiscal year end, we filed an additional
provisional patent entitled "Method for combining 3D quantitative chemical
structure activity relationships (QSAR) of compounds with genetic variation of
11
drug targets and metabolic enzymes to optimize efficacy, provide predictive
toxicology, and address drug resistant microorganisms", based on technology
developed following the acquisition of PPT.
We have not generated any revenues from our technologies to date. We are a
development stage company and we anticipate that we will require significant
time and financing before our technologies are developed to a marketable state.
Without adequate funding, it is management's intention to complete current
research and development efforts associated with our biomarker program and wait
until sufficient financial resources exist prior to spending additional and
significant funds for the commercialization of our biomarker program. The
company's management and Board of Directors will continue to evaluate and
determine the most effective use of available funds for our future research and
development programs, including those programs related to diagnostic biomarkers,
biomarkers for a drug response assay, and biotechnology drugs. Depending on the
level of financing and resources available to us, we may elect to concentrate
our resources on the development of either our pharmaceutical business or our
biomarker business or we may elect to pursue both business segments
simultaneously. Once we have developed our technologies to commercialization, we
could generate revenues in one of two ways. We may elect to license our
diagnostic biomarkers and/or our drug candidates to third parties or we may
elect to enter into joint ventures or other collaborations with third parties
such as pharmaceutical, biotechnology and diagnostics companies, with the aim
that they will develop and commercialize our discoveries into therapeutic,
biopharmaceutical or diagnostic products. If such a collaboration is successful,
we will seek to receive payments upon the successful completion of certain
predetermined developmental stages and milestones, and receive royalties from
the sales of the drugs and/or diagnostics kits, which will be based on our
discoveries.
To date, and during the six month period ended March 31, 2008, we did not
generate any revenues from the licensing of our technologies or from the sale of
products relating to our technologies.
PLAN OF OPERATIONS
As of March 31, 2008, our company had cash and cash equivalents of $1,126,787
and working capital of $803,184. We estimate our operating expenses and working
capital requirements for the next twelve month period to be as follows:
Estimated Expenses for the Next Twelve Month Period
---------------------------------------------------
Cash Operating Expenses
Employee and consultant compensation $ 500,000
Research and development $ 550,000
Professional fees and insurance $ 200,000
Business development and travel expenses $ 200,000
Royalties $ 50,000
General and administrative expenses $ 130,000
-----------
Total $ 1,630,000
===========
EMPLOYEE AND CONSULTANT COMPENSATION
We estimate that our employee and consultant cash compensation expenses for the
next twelve months will be approximately $500,000 pertaining to Joel Bellenson,
our Chief Executive Officer, Dexster Smith, our President, Secretary and
Treasurer, Tim Fernback, our Chief Financial Officer, through his management
company TCF Ventures Corp. and Dr. Artem Cherkasov, a consultant of our company.
This amount excludes the value of any stock or option awards that are required
to be issued to such persons pursuant to their respective employment or
consulting agreements.
All of our current research and development is carried out by Mr. Bellenson and
Mr. Smith. Both individuals have entered into employment agreements with our
company. Pursuant to the terms of the employment agreements, our company
currently pays Mr. Bellenson and Mr. Smith each a base salary of $150,000 per
year.
We have also entered into a management services agreement with TCF Ventures
Corp., a company beneficially owned by Mr. Fernback, and pay $150,000 annually
to TCF Ventures Corp. for consulting services.
We have also entered into an amended three year consulting agreement with JTAT
Consulting through which Dr. Artem Cherkasov provides consulting services
related to our biotechnology drug development business. In consideration for
12
such services, we have agreed to pay JTAT Consulting CDN$50,000 annually and an
equivalent amount of shares in the capital of our company, calculated based upon
the closing price of our shares at the end of each calendar month. On March 7,
2008, we amended the agreement with JTAT Consulting to increase the equity
component of the contract from CDN$50,000 to CDN$200,000 worth of shares in the
capital of our company, calculated based upon the closing price of our shares at
the end of each calendar month. This agreement was retroactive to March 1, 2008.
RESEARCH AND DEVELOPMENT
Although our company anticipates that the majority of our research and
development requirements will be met from the efforts of Mr. Bellenson, Mr.
Smith and Dr. Cherkasov, we may retain independent contractors as and when
circumstances warrant.
In addition to the efforts of Messrs Bellenson, Smith and Cherkasov, our
research and development costs primarily consist of research programs related to
the development of drug candidates for the treatment of infectious diseases and
cancers, biomarker validation expenses and biomarker assay related expenses. We
estimate that our research and development expenditures for the next twelve
months will be approximately $550,000 as follows: $100,000 for tissue and sera
sample acquisition; $350,000 for third party lab and testing services; $50,000
for third party drug candidate manufacturing services; and $50,000 for added
research personnel costs.
PROFESSIONAL FEES
We expect to incur significant legal expenses to prepare and file a number of
provisional patent applications over the next twelve months, as new discoveries
are made in our research and development process. Furthermore, as a publicly
traded company, we expect to incur ongoing legal and accounting expenses to
comply with our reporting responsibilities as a public company under the United
States Securities Exchange Act of 1934, as amended. During this period, we also
intend to obtain director and officer insurance and perhaps general insurance
for our company. We estimate our legal, accounting and insurance expenses for
the next twelve months to be approximately $200,000.
BUSINESS DEVELOPMENT AND TRAVEL EXPENSES
We estimate our business development and travel expenses for the next twelve
months to be the approximately $200,000. We anticipate that we will incur
$100,000 in investor relations, public relations and marketing costs and
$100,000 in travel costs and costs incurred from attending industry conferences.
We have hired an investor relations person to, among other things, produce
investor and marketing materials. Our company will also incur travel expenses to
attend biotech related conferences and investigate financing opportunities
should additional financing be required during this period.
ROYALTIES
We estimate our aggregate royalty related expenditures on licensing
complementary technology for the next twelve months will be $50,000.
GENERAL AND ADMINISTRATIVE EXPENSES
We anticipate spending $130,000 on general and administrative costs in the next
twelve months primarily consisting of rent, contract administrative staff,
office supplies and equipment, communications, etc.
PURCHASE OF SIGNIFICANT EQUIPMENT
We do not intend to purchase any significant equipment over the next twelve
months.
EMPLOYEES
As of May 10, 2008, we had two employees consisting of Joel Bellenson as our
Chief Executive Officer and Dexster Smith as our President, Secretary and
Treasurer. We have also retained TCF Ventures, a company beneficially held by
Tim Fernback, to provide management services. We also retain consultants to
provide services as and when circumstances warrant. We plan to hire additional
employees when circumstances warrant.
13
TRENDS AND UNCERTAINTIES
Our ability to generate revenues in the future is dependent on whether we
successfully develop our technologies and create a marketable product and
license or otherwise commercialize our products. We cannot predict whether or
when this may happen and this causes uncertainty with respect to the growth of
our company and our ability to generate revenues.
LIQUIDITY AND CAPITAL RESOURCES
To date, we have had negative cash flows from operations and we have been
dependent on sales of our equity securities and debt financing to meet our cash
requirements. We expect this situation to continue for the foreseeable future.
We anticipate that we will have negative cash flows during the next twelve month
period.
Our company incurred a loss of $791,666 for the three months ended March 31,
2008. As of March 31, 2008, we had cash and cash equivalents of $1,126,787 and
$389,331 in current liabilities. The current liabilities primarily consisted of
accounts payable and accrued liabilities of $389,331. We had working capital of
$803,184 as of March 31, 2008. As indicated above, our estimated working capital
requirements and projected operating expenses for the next twelve month period
total $1,630,000. As we had cash and cash equivalents of $1,126,787 and total
current assets of $1,192,515 at March 31, 2008, we anticipate that such funds
will not be sufficient to pay our estimated expenses for the next twelve months.
We intend to fulfil any additional cash requirement through the sale of our
equity securities or by way of issuance of a debenture or convertible debenture.
There are no assurances that we will be able to obtain funds required for our
continued operation. We intend to pursue various financing alternatives to meet
our immediate and long-term financial requirements. There can be no assurance
that additional financing will be available to us when needed or, if available,
that it can be obtained on commercially reasonable terms. If we are not able to
obtain additional financing on a timely basis, we will not be able to meet our
other obligations as they become due and we will be forced to scale down or
perhaps even cease the operation of our business.
Given that we are a development stage company and have not generated significant
revenues to date, our cash flow projections are subject to numerous
contingencies and risk factors beyond our control, including market acceptance
of our products, competition from well-funded competitors, and our ability to
manage our expected growth. We can offer no assurance that our company will
generate cash flow sufficient to meet our cash flow projections or that our
expenses will not exceed our projections. If our expenses exceed estimates, we
will require additional monies during the next twelve months to execute our
business plan.
There is substantial doubt about our ability to continue as a going concern as
the continuation of our business is dependent upon obtaining further long-term
financing, successful development of our technologies into a marketable product
and successful and sufficient market acceptance of our products once developed
and, finally, achieving a profitable level of operations. The issuance of
additional equity securities by us could result in significant dilution of the
equity interests of our current stockholders. Obtaining commercial loans,
assuming those loans would be available, will increase our liabilities and
future cash commitments.
GOING CONCERN
Due to the uncertainty of our ability to meet our current operating and capital
expenses, in their audit report on our consolidated financial statements for the
twelve month audited period ended September 30, 2007, our independent auditors
included an explanatory paragraph regarding substantial doubt about our ability
to continue as a going concern.
OFF-BALANCE SHEET ARRANGEMENTS
Our company has no outstanding derivative financial instruments, off-balance
sheet guarantees, interest rate swap transactions or foreign currency contracts.
Neither our company nor our operating subsidiaries engage in trading activities
involving non-exchange traded contracts.
14
CAPITAL EXPENDITURES
We incurred a negligible amount of capital expenditures during the three months
ended March 31, 2008. As of May 10, 2008, our company did not have any material
commitments for capital expenditures and management does not anticipate that our
company will spend additional material amounts on capital expenditures in the
next twelve month period.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with United States
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying disclosures of our company. Although these estimates are based on
management's knowledge of current events and actions that our company may
undertake in the future, actual results may differ from such estimates.
STOCK-BASED COMPENSATION ACCOUNTING POLICY
In accordance with SFAS No. 123R, "Share-Based Payments", all grants of stock
options and share issuances to employees and consultants for compensation are
recognized in the financial statements based on the fair value of the award at
the grant date. The Black-Scholes fair value pricing model has been selected to
value these share-based payments on the date of grant. The modified prospective
approach was adopted during our former fiscal year beginning on January 1, 2006
since there were no stock-based compensation awards granted prior to this date.
RISK FACTORS
Much of the information included in this quarterly report includes or is based
upon estimates, projections or other forward-looking statements. Such
forward-looking statements include any projections or estimates made by us and
our management in connection with our business operations. While these
forward-looking statements, and any assumptions upon which they are based, are
made in good faith and reflect our current judgment regarding the direction of
our business, actual results will almost always vary, sometimes materially, from
any estimates, predictions, projections, assumptions or other future performance
suggested herein.
Such estimates, projections or other forward-looking statements involve various
risks and uncertainties as outlined below. We caution the reader that important
factors in some cases have affected and, in the future, could materially affect
actual results and cause actual results to differ materially from the results
expressed in any such estimates, projections or other forward-looking
statements.
Our common shares are considered speculative during the development of our new
business operations. Prospective investors should consider carefully the risk
factors set out below.
RISKS RELATED TO OUR BUSINESS
WE HAVE HAD NEGATIVE CASH FLOWS FROM OPERATIONS SINCE INCEPTION. WE WILL REQUIRE
SIGNIFICANT ADDITIONAL FINANCING, THE AVAILABILITY OF WHICH CANNOT BE ASSURED,
AND IF OUR COMPANY IS UNABLE TO OBTAIN SUCH FINANCING, OUR BUSINESS MAY FAIL.
To date, we have had negative cash flows from operations and have depended on
sales of our equity securities and debt financing to meet our cash requirements.
Our ability to develop and, if warranted, commercialize our technologies, will
be dependent upon our ability to raise significant additional financing. If we
are unable to obtain such financing, we will not be able to fully develop our
business. Specifically, we will need to raise additional funds to:
* support our planned growth and carry out our business plan;
* continue scientific progress in our research and development programs;
* address costs and timing of conducting clinical trials and seek
regulatory approvals and patent prosecutions;
15
* address competing technological and market developments;
* establish additional collaborative relationships; and
* market and develop our technologies.
We may not be able to obtain additional equity or debt financing on acceptable
terms as required. Even if financing is available, it may not be available on
terms that are favorable to us or in sufficient amounts to satisfy our
requirements. If we require, but are unable to obtain, additional financing in
the future, we may be unable to implement our business plan and our growth
strategies, respond to changing business or economic conditions, withstand
adverse operating results and compete effectively. More importantly, if we are
unable to raise further financing when required, we may be forced to scale down
our operations and our ability to generate revenues may be negatively affected.
WE HAVE A HISTORY OF LOSSES AND NOMINAL OPERATING RESULTS, WHICH RAISE
SUBSTANTIAL DOUBT ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN.
Since inception through the three month period ended March 31, 2008, we have
incurred aggregate net losses of $4,858,709 from operations. We can offer no
assurance that we will operate profitably or that we will generate positive cash
flow in the future. In addition, our operating results in the future may be
subject to significant fluctuations due to many factors not within our control,
such as the level of competition and general economic conditions.
Our company's operations will be subject to all the risks inherent in the
establishment of a developing enterprise and the uncertainties arising from the
absence of a significant operating history. No assurance can be given that we
may be able to operate on a profitable basis.
Due to the nature of our business and the early stage of our development, our
securities must be considered highly speculative. We are engaged in the business
of developing and commercializing genetic biomarkers and biotechnology drugs,
which technology is in the development stage and we have not commenced the
regulatory approval process for our technology. We have not realized a profit
from our operations to date and there is little likelihood that we will realize
any profits in the short or medium term. Any profitability in the future from
our business will be dependent upon the successful commercialization or
licensing of our core technology, which itself is subject to numerous risk
factors as set forth herein.
We expect to continue to incur development costs and operating costs.
Consequently, we expect to incur operating losses and negative cash flows until
our technology gains market acceptance sufficient to generate a sustainable
level of income from the commercialization or licensing of our technology. Our
history of losses and nominal operating results raise substantial doubt about
our ability to continue as a going concern, as described in the explanatory
paragraph in our company's independent registered public accounting firm's audit
report dated December 6, 2007 which is included in our annual report on Form
10-KSB.
WE CURRENTLY HOLD NO PATENTS ON OUR PROPRIETARY TECHNOLOGY AND IF WE ARE NOT
ABLE TO PROTECT OUR PROPRIETARY TECHNOLOGY, OUR COMPANY WILL SUFFER A MATERIAL
ADVERSE EFFECT.
We currently have seven provisional patent applications filed on our
technologies. We currently rely on the provisional patent applications and trade
secrets to protect our proprietary intellectual property.
The departure of any of our management or any significant technical personnel or
consultants we may hire in the future, the breach of their confidentiality and
non-disclosure obligations, or the failure to achieve our intellectual property
objectives may have a material adverse effect on our business, financial
condition and results of operations. We believe our success depends upon the
knowledge and experience of our management and our ability to market our
existing technology and to develop new technologies.
16
While we believe that we have adequately protected our proprietary technology,
and we intend to take all appropriate and reasonable legal measures to protect
it in the future, the use of our technology by a competitor could have a
material adverse effect on our business, financial condition and results of
operations. Our ability to compete successfully and achieve future revenue
growth will depend, in part, on our ability to protect our proprietary
technology and operate without infringing upon the rights of others. We may not
be able to successfully protect our proprietary technology, and our proprietary
technology may otherwise become known or similar technology may be independently
developed by competitors. Competitors may discover novel uses, develop similar
or more marketable technologies or offer services similar to our company at
lower prices. We cannot predict whether our technologies and services will
compete successfully with the technologies and services of existing or emerging
competitors.
OUR INABILITY TO COMPLETE OUR PRODUCT DEVELOPMENT ACTIVITIES SUCCESSFULLY MAY
SEVERELY LIMIT OUR ABILITY TO OPERATE AND FINANCE OPERATIONS.
Commercialization of our core technologies will require significant additional
research and development as well as substantial clinical trials. For our
biomarker technologies, we believe that the United States will be the principal
market for our technology, although we may elect to expand into Japan and
Western Europe. With regards to our drug technologies for certain infectious
diseases and cancers, we believe that Africa and Asia will be the principal
market for our technology, although we may elect to expand into Central and
South America, Europe and the Middle East. We may not be able to successfully
complete development of our core technology, or successfully market our
technology. We, and any of our potential collaborators, may encounter problems
and delays relating to research and development, regulatory approval and
intellectual property rights of our technology. Our research and development
programs may not be successful. Our core technology may not prove to be safe and
efficacious in clinical trials, and we may not obtain the intended regulatory
approvals for our core technology. Whether or not any of these events occur, we
may not have adequate resources to continue operations for the period required
to resolve the issue delaying commercialization and we may not be able to raise
capital to finance our continued operations during the period required for
resolution of that issue.
WE MAY LOSE OUR COMPETITIVENESS IF WE ARE NOT ABLE TO PROTECT OUR PROPRIETARY
TECHNOLOGY AND INTELLECTUAL PROPERTY RIGHTS AGAINST INFRINGEMENT, AND ANY
RELATED LITIGATION MAY BE TIME-CONSUMING AND COSTLY.
Our success and ability to compete depends to a significant degree on our
proprietary technology. If any of our competitors copy or otherwise gain access
to our proprietary technology or develop similar technologies independently, we
may not be able to compete as effectively. The measures we have implemented to
protect our proprietary technology and other intellectual property rights are
currently based upon a combination of provisional patent applications,
technology licenses and trade secrets. This, however, may not be adequate to
prevent the unauthorized use of our proprietary technology and our other
intellectual property rights. Further, the laws of foreign countries may provide
inadequate protection of such intellectual property rights. We may need to bring
legal claims to enforce or protect such intellectual property rights. Any
litigation, whether successful or unsuccessful, may result in substantial costs
and a diversion of our company's resources. In addition, notwithstanding our
rights to our intellectual property, other persons may bring claims against us
alleging that we have infringed on their intellectual property rights or claims
that our intellectual property rights are not valid. Any claims against us, with
or without merit, could be time consuming and costly to defend or litigate,
divert our attention and resources, result in the loss of goodwill associated
with our business or require us to make changes to our technology.
IF OUR PROVISIONAL PATENT APPLICATIONS AND PROPRIETARY RIGHTS DO NOT PROVIDE
SUBSTANTIAL PROTECTION, THEN OUR BUSINESS AND COMPETITIVE POSITION WILL SUFFER.
Our success depends in large part on our ability to develop, commercialize and
protect our proprietary technology. However, patents may not be granted on any
of our provisional or future patent applications. Also, the scope of any future
patent may not be sufficiently broad to offer meaningful protection. In
addition, any patents granted to us in the future may be successfully
challenged, invalidated or circumvented so that such patent rights may not
create an effective competitive barrier.
OUR COMPANY MAY BECOME SUBJECT TO INTELLECTUAL PROPERTY LITIGATION WHICH MAY
HARM OUR BUSINESS.
Our success depends in part on our ability to develop commercially viable
products without infringing the proprietary rights of others. Although we have
not been subject to any filed infringement claims, other patents could exist or
could be filed which may prohibit or limit our ability to market our products or
maintain a competitive position. In the event of an intellectual property
dispute, we may be forced to litigate. Intellectual property litigation may
17
divert management's attention from developing our technology and may force us to
incur substantial costs regardless of whether we are successful. An adverse
outcome could subject us to significant liabilities to third parties, and force
us to curtail or cease the development and commercialization of our technology.
IF OUR COMPANY COMMERCIALIZES OR TESTS OUR TECHNOLOGY, OUR COMPANY WILL BE
SUBJECT TO POTENTIAL PRODUCT LIABILITY CLAIMS THAT MAY AFFECT OUR EARNINGS AND
FINANCIAL CONDITION.
We face an inherent business risk of exposure to product liability claims in the
event that the use of our core technology during research and development
efforts, including clinical trials, or after commercialization, results in
adverse affects. As a result, we may incur significant product liability
exposure, which may exceed any insurance coverage that we obtain in the future.
Even if we elect to purchase such issuance in the future, we may not be able to
maintain adequate levels of insurance at reasonable cost and/or reasonable
terms. Excessive insurance costs or uninsured claims may increase our operating
loss and affect our financial condition.
WE HAVE NOT GENERATED ANY REVENUES FROM OPERATIONS AND IF WE ARE UNABLE TO
DEVELOP MARKET SHARE AND GENERATE SIGNIFICANT REVENUES FROM THE
COMMERCIALIZATION OR LICENSING OF OUR TECHNOLOGY, THEN OUR BUSINESS MAY FAIL.
We operate in a highly competitive industry and our failure to compete
effectively and generate income through the commercialization or licensing of
our technology may adversely affect our ability to generate revenue. The
business of developing genetic biomarkers and biotechnology drug development are
both highly competitive and subject to frequent technological innovation with
improved price and/or performance characteristics. There can be no assurance
that our new or existing technologies will gain market acceptance. Management is
aware of similar technologies that our technology, when developed to a stage of
commercialization, will compete directly against. Many of our competitors have
greater financial, technical, sales and marketing resources, better name
recognition and a larger customer base than ours. In addition, many of our large
competitors may offer customers a broader or superior range of services and
technologies. Some of our competitors may conduct more extensive promotional
activities and offer lower commercialization and licensing costs to customers
than we do, which could allow them to gain greater market share or prevent us
from establishing and increasing our market share. Increased competition in the
genetic biomarker industry and the drug development industry may result in
significant price competition, reduced profit margins or loss of market share,
any of which may have a material adverse effect on our ability to generate
revenues and successfully operate our business. Our competitors may develop
technologies superior to those that our company is currently developing. In the
future, we may need to decrease our prices if our competitors lower their
prices. Our competitors may be able to respond more quickly to new or changing
opportunities, technologies and customer requirements. Such competition will
potentially affect our chances of achieving profitability, and ultimately affect
our ability to continue as a going concern.
RAPID TECHNOLOGICAL CHANGES IN OUR INDUSTRY MAY RENDER OUR TECHNOLOGY
NON-COMPETITIVE OR OBSOLETE AND CONSEQUENTLY AFFECT OUR ABILITY TO GENERATE
FUTURE REVENUES.
The genetic biomarker and biotechnology drug development industries are
characterized by rapidly changing technology, evolving industry standards and
varying customer demand. We believe that our success will depend on our ability
to generate income through the commercialization and licensing of our technology
and that it will require us to continuously develop and enhance our technology
that is currently being developed and introduce new and more technologically
advanced technologies promptly into the market. We can make no assurance that
our technology will not become obsolete due to the introduction of alternative
technologies. If we are unable to continue to develop and introduce new genetic
biomarkers, new biotechnology drugs and drug candidates to meet technological
changes and changes in market demands, our business and operating results,
including our ability to generate revenues, may be adversely affected.
IF WE FAIL TO EFFECTIVELY MANAGE THE GROWTH OF OUR COMPANY AND THE
COMMERCIALIZATION OR LICENSING OF OUR TECHNOLOGY, OUR FUTURE BUSINESS RESULTS
COULD BE HARMED AND OUR MANAGERIAL AND OPERATIONAL RESOURCES MAY BE STRAINED.
As we proceed with the development of our technology and the expansion of our
marketing and commercialization efforts, we expect to experience significant
growth in the scope and complexity of our business. We will need to add staff to
market our services, manage operations, handle sales and marketing efforts and
perform finance and accounting functions. We anticipate that we will be required
to hire a broad range of additional personnel in order to successfully advance
18
our operations. This growth is likely to place a strain on our management and
operational resources. The failure to develop and implement effective systems,
or to hire and retain sufficient personnel for the performance of all of the
functions necessary to effectively service and manage our potential business, or
the failure to manage growth effectively, could have a material adverse effect
on our business and financial condition.
FAILURE TO OBTAIN AND MAINTAIN REQUIRED REGULATORY APPROVALS WILL SEVERELY LIMIT
OUR ABILITY TO COMMERCIALIZE OUR TECHNOLOGY.
We believe that it is important for the success of our business to obtain the
approval of the Food and Drug Administration in the United States (FDA) before
we commence commercialization of our technology in the United States, the
principal market for our biomarker technology and internationally. Furthermore
we believe that it is important for the success of our business to obtain the
approval of the FDA or similar international drug regulatory bodies, before we
can commence the commercialization of our biotechnology drug candidates in their
respective international markets. We may also be required to obtain additional
approvals from foreign regulatory authorities to apply for any sales activities
we may carry out in those jurisdictions. If we cannot demonstrate the safety,
reliability and efficacy of our technology, the FDA or other regulatory
authorities could delay or withhold regulatory approval of our technology.
Even if we obtain regulatory approval of our technology, that approval may be
subject to limitations on the indicated uses for which it may be marketed. Even
after granting regulatory approval, the FDA and other regulatory agencies and
governments in other countries will continue to review and inspect any future
marketed products as well as any manufacturing facilities that we may establish
in the future. Later discovery of previously unknown problems with a product or
facility may result in restrictions on the product, including a withdrawal of
the product from the market.
Further, governmental regulatory agencies may establish additional regulations
which could prevent or delay regulatory approval of our technology.
EVEN IF WE OBTAIN REGULATORY APPROVAL TO COMMERCIALIZE OUR TECHNOLOGY, LACK OF
COMMERCIAL ACCEPTANCE MAY IMPAIR OUR BUSINESS.
Our product development efforts are primarily directed toward obtaining
regulatory approval to market genetic diagnostic markers and biotechnology
drugs. Diagnostic markers for cancer, as well as, biotechnology drugs for
certain cancers and infectious diseases, have been widely available for a number
of years, and our technology may not be accepted by the marketplace as readily
as these or other competing products, processes and methodologies. Additionally,
our technology may not be employed in all potential applications being
investigated, and any reduction in applications may limit the market acceptance
of our technology and our potential revenues. As a result, even if our
technology is developed into a marketable technology and we obtain all required
regulatory approvals, we cannot be certain that our technology will be adopted
at a level that would allow us to operate profitably.
IF WE DO NOT KEEP PACE WITH OUR COMPETITORS, TECHNOLOGICAL ADVANCEMENTS AND
MARKET CHANGES, OUR TECHNOLOGY MAY BECOME OBSOLETE AND OUR BUSINESS MAY SUFFER.
The market for our technology is very competitive, is subject to rapid
technological changes and varies for different individual products. We believe
that there are potentially many competitive approaches being pursued that
compete with our technology, including some by private companies for which
information is difficult to obtain.
Many of our competitors have significantly greater resources and have developed
products and processes that directly compete with our technology. Our
competitors may develop, or may in the future develop, new technologies that
directly compete with our technology or even render our technology obsolete. Our
technology is designed to develop diagnostic products as well as treatments for
certain diseases. Even if we are able to demonstrate improved or equivalent
results from our technology, researchers and practitioners may not use our
technology and we may suffer a competitive disadvantage. Finally, to the extent
that others develop new technologies that address the targeted application for
our current technology, our business will suffer.
OUR ABILITY TO HIRE AND RETAIN KEY PERSONNEL WILL BE AN IMPORTANT FACTOR IN THE
SUCCESS OF OUR BUSINESS AND A FAILURE TO HIRE AND RETAIN KEY PERSONNEL MAY
RESULT IN OUR INABILITY TO MANAGE AND IMPLEMENT OUR BUSINESS PLAN.
We are highly dependent upon our management personnel such Joel Bellenson and
Dexster Smith because of their experience developing genetic diagnostic markers
and bioinformatics software as it relates to drug development. The loss of the
services of one or more of these individuals may impair management's ability to
operate our company. We have not purchased key man insurance on any of these
individuals, which insurance would provide us with insurance proceeds in the
event of their death. Without key man insurance, we may not have the financial
19
resources to develop or maintain our business until we could replace the
individual or to replace any business lost by the death of that person. The
competition for qualified personnel in the markets in which we operate is
intense. In addition, in order to manage growth effectively, we must implement
management systems and recruit and train new employees. We may not be able to
attract and retain the necessary qualified personnel. If we are unable to retain
or to hire qualified personnel as required, we may not be able to adequately
manage and implement our business.
WE WILL DEPEND UPON THE ESTABLISHMENT OF RELATIONSHIPS WITH THIRD PARTIES TO
TEST OUR TECHNOLOGIES AND ANY RELATIONSHIP MAY REQUIRE OUR COMPANY TO SHARE
REVENUES AND TECHNOLOGY.
Management anticipates that it will be crucial to identify the degree of
elevated or reduced risk of a particular disease or medication based on a
particular variation or combination of variations. To do so will require access
to samples of patients who have had the diseases in question as well as normal
populations. And for each of these collections of samples, it will be important
to note the demographic and epidemiological ranges covered by the collection.
This would entail establishing relationships with clinics, hospitals,
universities and companies that have repositories of biological samples with
carefully curated patient disease and demographic information. These
relationships have various confidentiality provisions that require negotiations
that can span several months. In addition, some of these institutions have
national or provincial mandates for providing access to these samples that may
require us to make our test results publicly available for these jurisdictions
or institutions at a reduced rate and could also require us to provide a flow
back of intellectual property licensing for their further research process. Any
such requirement may reduce our revenues.
OUR COMPANY WILL BE DEPENDENT ON VARIOUS OUTSOURCING ACTIVITIES FOR TESTING OUR
TECHNOLOGY AND FAILURE TO OUTSOURCE CERTAIN ACTIVITIES WILL HAVE A MATERIAL
ADVERSE EFFECT ON OUR COMPANY.
We intend to establish relationships with various vendors of biological
laboratory services. Such laboratory services may include DNA SNP profiling,
gene expression profiling, cell culturing, recombinant techniques for inserting
reporter genes into artificial constructs for testing purposes, profiling of
transcription factors active in different disease states, manufacturing and
testing of potential drug candidates, and other laboratory and analytical
services depending upon the outcome of the results at various stages. Our
ability to secure and maintain these future relationships will be critical to
the success of our business objectives, and conversely the inability to secure
these future relationships on reasonable commercial terms represents a risk and
could have a material adverse effect on our operations or financial condition.
MOST OF OUR ASSETS AND A MAJORITY OF OUR DIRECTORS AND OFFICERS ARE OUTSIDE THE
UNITED STATES, WITH THE RESULT THAT IT MAY BE DIFFICULT FOR INVESTORS TO ENFORCE
WITHIN THE UNITED STATES ANY JUDGMENTS OBTAINED AGAINST US OR ANY OF OUR
DIRECTORS OR OFFICERS.
Although we are organized under the laws of the State of Nevada, United States,
our principal business office is located in Vancouver, British Columbia, Canada.
Outside the United States, it may be difficult for investors to enforce
judgments against us that are obtained in the United States in any action,
including actions predicated upon civil liability provisions of federal
securities laws. In addition, three of our four directors and all of our
executive officers reside outside the United States, and nearly all of the
assets of these non US persons and our assets are located outside of the United
States. As a result, it may not be possible for investors to effect service of
process within the United States upon such persons or to enforce against us or
such persons judgments predicated upon the liability provisions of United States
securities laws. There is substantial doubt as to the enforceability against us
or any of our directors and officers located outside the United States in
original actions or in actions of enforcement of judgments of United States
courts or liabilities predicated on the civil liability provisions of United
States federal securities laws. In addition, as the majority of our assets are
located outside of the United States, it may be difficult to enforce United
States bankruptcy proceedings against us. Under bankruptcy laws in the United
States, courts typically have jurisdiction over a debtor's property, wherever it
is located, including property situated in other countries. Courts outside of
the United States may not recognize the United States bankruptcy court's
jurisdiction. Accordingly, you may have trouble administering a United States
bankruptcy case involving a Nevada company as debtor with most of its property
located outside the United States. Any orders or judgments of a bankruptcy court
obtained by you in the United States may not be enforceable.
20
OUR BUSINESS IS SUBJECT TO COMPREHENSIVE GOVERNMENT REGULATION AND ANY CHANGE IN
SUCH REGULATION MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR COMPANY.
There is no assurance that the laws, regulations, policies or current
administrative practices of any government body, organization or regulatory
agency in the United States or any other jurisdiction, will not be changed,
applied or interpreted in a manner which will fundamentally alter the ability of
our company to carry on our business. The actions, policies or regulations, or
changes thereto, of any government body or regulatory agency, or other special
interest groups, may have a detrimental effect on our company. Any or all of
these situations may have a negative impact on our operations.
RISKS RELATED TO OUR COMMON STOCK
A DECLINE IN THE PRICE OF OUR COMMON STOCK COULD AFFECT OUR ABILITY TO RAISE
FURTHER WORKING CAPITAL AND ADVERSELY IMPACT OUR ABILITY TO CONTINUE OPERATIONS.
A prolonged decline in the price of our common stock could result in a reduction
in the liquidity of our common stock and a reduction in our ability to raise
capital. Because a significant portion of our operations has been and will be
financed through the sale of equity securities, a decline in the price of our
common stock could be especially detrimental to our liquidity and our
operations. Such reductions may force us to reallocate funds from other planned
uses and may have a significant negative effect on our business plans and
operations, including our ability to develop new products and continue our
current operations. If our stock price declines, we can offer no assurance that
we will be able to raise additional capital or generate funds from operations
sufficient to meet our obligations. If we are unable to raise sufficient capital
in the future, we may not be able to have the resources to continue our normal
operations.
The market price for our common stock may also be affected by our ability to
meet or exceed expectations of analysts or investors. Any failure to meet these
expectations, even if minor, may have a material adverse effect on the market
price of our common stock.
IF WE ISSUE ADDITIONAL SHARES IN THE FUTURE, IT WILL RESULT IN THE DILUTION OF
OUR EXISTING SHAREHOLDERS.
Our certificate of incorporation authorizes the issuance of up to 750,000,000
shares of common stock with a $0.001 par value and 100,000,000 preferred shares
with a par value of $0.001, of which 49,239,281 common shares were issued and
outstanding as of March 31, 2008. Our board of directors may fix and determine
the designations, rights, preferences or other variations of each class or
series within each class. Our board of directors may choose to issue some or all
of such shares to acquire one or more businesses or to provide additional
financing in the future. The issuance of any such shares will result in a
reduction of the book value and market price of the outstanding shares of our
common stock. If we issue any such additional shares, such issuance will cause a
reduction in the proportionate ownership and voting power of all current
shareholders. Further, such issuance may result in a change of control of our
corporation.
TRADING OF OUR STOCK MAY BE RESTRICTED BY THE SECURITIES EXCHANGE COMMISSION'S
PENNY STOCK REGULATIONS, WHICH MAY LIMIT A STOCKHOLDER'S ABILITY TO BUY AND SELL
OUR STOCK.
The Securities and Exchange Commission has adopted regulations which generally
define "penny stock" to be any equity security that has a market price (as
defined) less than $5.00 per share or an exercise price of less than $5.00 per
share, subject to certain exceptions. Our securities are covered by the penny
stock rules, which impose additional sales practice requirements on
broker-dealers who sell to persons other than established customers and
"accredited investors". The term "accredited investor" refers generally to
institutions with assets in excess of $5,000,000 or individuals with a net worth
in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly
with their spouse. The penny stock rules require a broker-dealer, prior to a
transaction in a penny stock not otherwise exempt from the rules, to deliver a
standardized risk disclosure document in a form prepared by the Securities and
Exchange Commission, which provides information about penny stocks and the
nature and level of risks in the penny stock market. The broker-dealer also must
provide the customer with current bid and offer quotations for the penny stock,
the compensation of the broker-dealer and its salesperson in the transaction and
monthly account statements showing the market value of each penny stock held in
the customer's account. The bid and offer quotations, and the broker-dealer and
salesperson compensation information, must be given to the customer orally or in
writing prior to effecting the transaction and must be given to the customer in
writing before or with the customer's confirmation. In addition, the penny stock
rules require that prior to a transaction in a penny stock not otherwise exempt
from these rules, the broker-dealer must make a special written determination
that the penny stock is a suitable investment for the purchaser and receive the
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purchaser's written agreement to the transaction. These disclosure requirements
may have the effect of reducing the level of trading activity in the secondary
market for the stock that is subject to these penny stock rules. Consequently,
these penny stock rules may affect the ability of broker-dealers to trade our
securities. We believe that the penny stock rules discourage investor interest
in and limit the marketability of our common stock.
FINRA'S SALES PRACTICE REQUIREMENTS MAY ALSO LIMIT A STOCKHOLDER'S ABILITY TO
BUY AND SELL OUR STOCK.
In addition to the "penny stock" rules promulgated by the Securities and
Exchange Commission (see above for a discussion of penny stock rules), FINRA
rules require that in recommending an investment to a customer, a broker-dealer
must have reasonable grounds for believing that the investment is suitable for
that customer. Prior to recommending speculative low priced securities to their
non-institutional customers, broker-dealers must make reasonable efforts to
obtain information about the customer's financial status, tax status, investment
objectives and other information. Under interpretations of these rules, FINRA
believes that there is a high probability that speculative low priced securities
will not be suitable for at least some customers. FINRA requirements make it
more difficult for broker-dealers to recommend that their customers buy our
common stock, which may limit your ability to buy and sell our stock and have an
adverse effect on the market for our shares.
OUR COMMON STOCK IS ILLIQUID AND THE PRICE OF OUR COMMON STOCK MAY BE NEGATIVELY
IMPACTED BY FACTORS WHICH ARE UNRELATED TO OUR OPERATIONS.
Our common stock is currently quoted on the OTC Bulletin Board. Trading of our
stock through the OTC Bulletin Board is frequently thin and highly volatile.
There is no assurance that a sufficient market will develop in the stock, in
which case it could be difficult for shareholders to sell their stock. The
market price of our common stock could fluctuate substantially due to a variety
of factors, including market perception of our ability to achieve our planned
growth, quarterly operating results of our competitors, trading volume in our
common stock, changes in general conditions in the economy and the financial
markets or other developments affecting our competitors or us. In addition, the
stock market is subject to extreme price and volume fluctuations. This
volatility has had a significant effect on the market price of securities issued
by many companies for reasons unrelated to their operating performance and could
have the same effect on our common stock.
ITEM 3. CONTROLS AND PROCEDURES.
As required by Rule 13a-15 under the Securities Exchange Act of 1934, as of the
end of the period covered by this quarterly report, being March 31, 2008, we
have carried out an evaluation of the effectiveness of the design and operation
of our company's disclosure controls and procedures. This evaluation was carried
out under the supervision and with the participation of our company's
management, including our company's Chief Executive Officer and our Chief
Financial Officer. Based upon that evaluation, our company's Chief Executive
Officer and our Chief Financial Officer concluded that our company's disclosure
controls and procedures are effective as at the end of the period covered by
this report. There have been no changes in our company's internal controls or in
other factors, which could affect internal control subsequent to the date we
carried out our evaluation.
Disclosure controls and procedures and other procedures that are designed to
ensure that information required to be disclosed in our reports filed or
submitted under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported, within the time period specified in the Securities and
Exchange Commission's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed in our reports filed under the Securities
Exchange Act of 1934 is accumulated and communicated to management including our
Chief Executive Officer and our Chief Financial Officer as appropriate, to allow
timely decisions regarding required disclosure.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
We know of no material, active, or pending legal proceeding against our company,
nor are we involved as a plaintiff in any material proceeding or pending
litigation where such claim or action involves damages for more than 10% of our
current assets as of May 10, 2008. There are no proceedings in which any of our
company's directors, officers, or affiliates, or any registered or beneficial
22
shareholders, is an adverse party or has a material interest adverse to our
company's interest.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
On January 31, 2008, pursuant to the terms of a Consulting Services Agreement
dated December 31, 2007, we issued 83,183 common shares to Dr. Artem Cherkasov.
The common shares were issued Dr. Artem Cherkasov as a non-U.S. person (as that
term is defined in Regulation S of the Securities Act of 1933, as amended), in
an offshore transaction relying on Regulation S and/or section 4(2) of the
Securities Act of 1933, as amended.
On February 28, 2008, pursuant to the terms of the Share Exchange Agreement
dated August 17, 2007, among our company, Pacific Pharma Technologies Inc., and
the selling shareholders of Pacific Pharma Technologies Inc. we issued 462,500
common shares to Dr. Artem Cherkasov and 462,500 to Mr. Gary Morrison. The
common shares were issued to Dr. Artem Cherkasov and Mr. Gary Morrison as a
non-U.S. person (as that term is defined in Regulation S of the Securities Act
of 1933, as amended), in an offshore transaction relying on Regulation S and/or
section 4(2) of the Securities Act of 1933, as amended.
On March 7, 2008, pursuant to the terms of a Consulting Services Agreement dated
March 7, 2008, we issued 403,388 common shares to Dr. Artem Cherkasov. The
common shares were issued to Dr. Artem Cherkasov as a non-U.S. person (as that
term is defined in Regulation S of the Securities Act of 1933, as amended), in
an offshore transaction relying on Regulation S and/or section 4(2) of the
Securities Act of 1933, as amended.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS.
Exhibits required by Item 601 of Regulation S-B
Exhibit
Number Description
- ------ -----------
(2) PLAN OF PURCHASE, SALE, REORGANIZATION, ARRANGEMENT, LIQUIDATION OR
SUCCESSION
2.1 Share Exchange Agreement dated February 3, 2006, among our company,
Upstream Canada, the shareholders of Upstream Canada and Steve Bajic
(incorporated by reference from our Current Report on Form 8-K filed on
February 6, 2006).
2.2 Amended and Restated Share Exchange Agreement dated February 24, 2006,
among our company, Upstream Canada, the shareholders of Upstream Canada
and Steve Bajic (incorporated by reference from our Current Report on
Form 8-K filed on February 27, 2006).
(3) ARTICLES OF INCORPORATION AND BY-LAWS
3.1 Articles of Incorporation (incorporated by reference from our
Registration Statement on Form SB-2 filed on July 5, 2002).
3.2 Bylaws (incorporated by reference from our Registration Statement on
Form SB-2 Filed on July 5, 2002).
23
3.3 Certificate of Amendment filed with the Nevada Secretary of State on
March 8, 2005 (incorporated by reference from our Current Report on
Form 8-K filed on March 10, 2005).
3.4 Certificate of Change filed with the Nevada Secretary of State on
December 20, 2005 (incorporated by reference from our Current Report on
Form 8-K filed on December 29, 2005).
3.5 Articles of Merger filed with the Nevada Secretary of State on February
6, 2006 (incorporated by reference from our Current Report on Form 8-K
filed on February 9, 2006).
3.6 Certificate of Amendment filed with the Nevada Secretary of State on
November 27, 2006 (incorporated by reference from our Current Report on
Form 8-K filed on November 30, 2006).
(10) MATERIAL CONTRACTS
10.1 Consultant Engagement Agreement dated February 7, 2006 among TCF
Ventures Corp., our company and Upstream Canada (incorporated by
reference from our Current Report on Form 8-K filed on March 7, 2006).
10.2 Stock Option and Subscription Agreement dated February 13, 2006,
between our company and TCF Ventures Corp. (incorporated by reference
from our Current Report on Form 8-K filed on March 7, 2006).
10.3 Amendment Agreement dated February 13, 2006, among TCF Ventures Corp.,
our company and Upstream Canada (incorporated by reference from our
Current Report on Form 8-K filed on March 7, 2006).
10.4 Employment Agreement dated March 1, 2006, between our company and Joel
Bellenson (incorporated by reference from our Current Report on Form
8-K filed on March 7, 2006).
10.5 Employment Agreement dated March 1, 2006 between our company and
Dexster Smith (incorporated by reference from our Current Report on
Form 8-K filed on March 7, 2006).
10.6 Financing Services Agreement dated August 29, 2006 between our company
and Atlas Capital Services, LLC (incorporated by reference from our
Current Report on Form 8-K filed on August 30, 2006)
10.7 Private Placement Subscription Agreement dated March 2, 2007, between
our company and Ultimate Investments Ltd. (incorporated by reference
from our Registration Statement on Form SB-2 filed on October 1, 2007)
10.8 2007 Stock Option Plan (incorporated by reference from our Registration
Statement on Form SB-2 filed on October 1, 2007)
10.9 Stock Option and Subscription Agreement dated March 16, 2007, between
our company and Dexster Smith (incorporated by reference from our
Registration Statement on Form SB-2 filed on October 1, 2007)
10.10 Stock Option and Subscription Agreement dated March 16, 2007, between
our company and Joel Bellenson (incorporated by reference from our
Registration Statement on Form SB-2 filed on October 1, 2007)
10.11 Stock Option and Subscription Agreement dated March 27, 2007, between
our company and Philip Rice (incorporated by reference from our
Registration Statement on Form SB-2 filed on October 1, 2007)
10.12 Contract for Services Agreement dated May 1, 2007, between our company
and TCF Ventures Corp. (incorporated by reference from our Registration
Statement on Form SB-2 filed on October 1, 2007)
24
10.13 Stock Option and Subscription Agreement dated May 3, 2007, between our
company and Dale Pfost (incorporated by reference from our Registration
Statement on Form SB-2 filed on October 1, 2007)
10.14 Private Placement Subscription Agreement dated May 3, 2007, between our
company and Red Tree Ventures SA (incorporated by reference from our
Registration Statement on Form SB-2 filed on October 1, 2007)
10.15 Share Exchange Agreement dated August 17, 2007, among our company,
Pacific Pharma Technologies Inc., and the selling shareholders of
Pacific Pharma Technologies Inc. (incorporated by reference from our
Current Report on Form 8-K filed on August 23, 2007) 10.16 Art
Cherkasov Revised Consulting Services Contract dated September 12, 2007
10.17 JTAT Consulting Services Contract dated December 31, 2007
10.18* JTAT Consulting Services Contract dated March 7, 2008
(31) SECTION 302 CERTIFICATIONS
31.1* Certification of Principal Executive Officer filed pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2* Certification of Principal Financial Officer filed pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
(32) SECTION 906 CERTIFICATIONS
32.1* Certification of Principal Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
32.2* Certification of Principal Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
- ----------
* Filed herewith.
25
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
UPSTREAM BIOSCIENCES INC.
By: /s/ Joel Bellenson
------------------------------------
Joel Bellenson,
Chief Executive Officer and Director
(Principal Executive Officer)
December 10, 2010
By: /s/ Tim Fernback
------------------------------------
Tim Fernback,
Chief Financial Officer (Principal
Financial Officer and Principal
Accounting Officer)
December 10, 2010
26