UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2009
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from __________ to ____________
Commission file number 000-50331
Upstream Biosciences Inc.
(Exact name of registrant as specified in its charter)
Nevada 98-0371433
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
Suite 200 - 1892 West Broadway, Vancouver, British Columbia, Canada V6J 1Y9
(Address of principal executive offices) (zip code)
604.638.1674
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
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. Yes [X] No[ ]
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (ss.232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes [ ] No[ ]
(Not currently applicable to the Registrant).
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
definitions of "large accelerated filer," "accelerated filer," " and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No[X]
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 49,453,006 common shares issued
and outstanding as at May 11, 2009.
EXPLANATION OF THE AMENDED FILING: THIS FORM 10-QSB AND THE CONSOLIDATED
FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED MARCH 31, 2009 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, 2009 TO CORRECTLY PRESENT THESE REVISED CALCULATIONS.
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
Our unaudited consolidated interim financial statements are stated in United
States dollars and are prepared in accordance with United States generally
accepted accounting principles.
It is the opinion of management that the unaudited consolidated interim
financial statements for the quarter ended March 31, 2009 include all
adjustments necessary in order to ensure that the unaudited consolidated interim
financial statements are not misleading.
3
UPSTREAM BIOSCIENCES, INC.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
March 31, September 30,
2009 2008
---------- ----------
(Restated -
See Note 4)
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 318,959 $ 612,306
Other receivables 5,799 6,485
Prepaid expenses 13,229 34,131
Due from related parties (Note 2) -- 385
---------- ----------
337,987 653,307
RESTRICTED CASH 27,610 33,231
EQUIPMENT, net 9,184 12,007
INTELLECTUAL PROPERTY RIGHTS, net 264,551 294,141
---------- ----------
$ 639,332 $ 992,686
========== ==========
LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 369,319 $ 398,315
Due to related parties (Note 2) 109,931 --
---------- ----------
479,250 398,315
DEFFERED INCOME TAX 40,190 45,932
---------- ----------
519,440 444,247
---------- ----------
STOCKHOLDERS' EQUITY
CAPITAL STOCK
Authorized
100,000,000 non-voting preferred shares at $0.001 par value
750,000,000 common shares at $0.001 par value
Issued and outstanding
49,453,006 common shares 49,453 49,453
ADDITIONAL PAID-IN CAPITAL 6,555,547 6,395,333
OBLIGATION TO ISSUE SHARES 46,682 14,391
DEFERRED COMPENSATION (78,570) (78,570)
ACCUMULATED OTHER COMPREHENSIVE INCOME 10,321 19,199
DEFICIT ACCUMULATED DURING THE DEVELOPMENT STAGE (6,463,541) (5,851,367)
---------- ----------
119,892 548,439
---------- ----------
$ 639,332 $ 992,686
========== ==========
The accompanying notes are an integral part of these interim
consolidated financial statements.
4
UPSTREAM BIOSCIENCES, INC
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Cumulative
Results From
Inception
Three Months Ended Six Months Ended (June 14, 2004) to
March 31, March 31, March 31,
2009 2008 2009 2008 2009
----------- ----------- ----------- ----------- -----------
(Restated - (Restated - (Restated -
see Note 4) see Note 4) see Note 4)
REVENUE $ -- $ -- $ -- $ -- $ 67,600
----------- ----------- ----------- ----------- -----------
OPERATING EXPENSES
Amortization 16,206 1,412 32,413 2,367 68,407
Consulting fees -- -- -- -- 45,011
Interest and finance charges 20 101 188 378 630,234
Interest income (1,681) (10,735) (2,974) (27,165) (82,379)
Investor and corporate communications (8,344) 27,078 16,169 51,139 254,354
License fees and royalties 5,028 (3,863) 10,193 2,519 80,509
Loss (Gain) on foreign exchange 920 48,731 170 (21,657) 788
Management compensation 82,190 81,390 158,632 157,972 1,289,821
Office and general administration 14,602 33,911 35,197 73,503 342,140
Professional fees 13,240 19,804 61,515 73,278 457,898
Research and development - Cash 52,252 66,716 113,908 168,132 746,178
- Stock 19,422 395,164 32,291 395,164 561,404
Stock based compensation 80,107 131,957 160,214 263,914 2,056,301
----------- ----------- ----------- ----------- -----------
LOSS BEFORE INCOME TAX 273,962 791,666 617,916 1,139,544 6,450,666
Deferred income tax recovery 2,871 -- 5,742 -- 17,225
----------- ----------- ----------- ----------- -----------
NET LOSS $ (271,091) $ (791,666) $ (612,174) $(1,139,544) $(6,365,841)
----------- ----------- ----------- ----------- -----------
BASIC AND DILUTED NET LOSS PER SHARE $ (0.01) $ (0.02) $ (0.01) $ (0.02)
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING - BASIC AND DILUTED 49,453,006 48,314,219 49,453,006 48,069,635
=========== =========== =========== ===========
The accompanying notes are an integral part of these interim
consolidated financial statements.
5
UPSTREAM BIOSCIENCES INC
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Cumulative
Results
From Inception
Six Months Ended (June 14, 2004) to
March 31, March 31,
2009 2008 2009
------------ ------------ ------------
(Restated - (Restated -
see Note 4) see Note 4)
CASH FLOW FROM OPERATING ACTIVITIES
Net loss $ (612,174) $ (1,139,544) $ (6,365,841)
Adjustments to reconcile net loss to net cash used
in operating activities:
Amortization of intellectual property 32,413 2,367 100,820
Shares issued for services 32,291 407,286 1,375,075
Amortization of fair value of stock options granted 160,214 263,914 1,624,259
Deferred income tax benefit (5,742) -- (17,225)
Accretion of convertible debenture -- -- 302,808
Changes in operating assets and liabilities:
Other receivables 686 528 (5,798)
Prepaid expenses 20,902 23,847 (16,010)
Accounts payable and accrued liabilities (28,996) (14,626) 174,375
Due to related parties 110,316 (30,514) 162,694
------------ ------------ ------------
Net cash used in operating activities (290,090) (486,742) (2,664,843)
------------ ------------ ------------
CASH FLOW FROM INVESTING ACTIVITIES
(Increase) Decrease in restricted cash 5,621 (1,108) (27,610)
Cash paid for acquisition of PPT shares -- -- (51,507)
Purchase of equipment -- (6,408) (21,234)
------------ ------------ ------------
Net cash provided by (used in) investing activities 5,621 (7,516) (100,351)
------------ ------------ ------------
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from issuance of convertible debentures -- -- 1,000,000
Proceeds from issuance of common shares, net -- -- 1,995,345
Loan from related party -- -- 78,487
------------ ------------ ------------
Net cash provided by financing activities -- -- 3,073,832
------------ ------------ ------------
EFFECT OF EXCHANGE RATE CHANGES (8,878) 2,317 10,321
------------ ------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (293,347) (491,941) 318,959
CASH AND CASH EQUIVALENTS, BEGINNING 612,306 1,618,728 --
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, ENDING $ 318,959 $ 1,126,787 $ 318,959
============ ============ ============
The accompanying notes are an integral part of these interim
consolidated financial statements.
6
UPSTREAM BIOSCIENCES, INC
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
1. BASIS OF PRESENTATION
These unaudited consolidated financial statements of the Company have been
prepared in accordance with generally accepted accounting principles for interim
financial reporting and the rules and regulations of the Securities and Exchange
Commission. They do not include all information and footnotes required by United
States generally accepted accounting principles 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, 2008, included in the
Company's Form 10-K filed with the Securities and Exchange Commission. These
interim unaudited consolidated financial statements should be read in
conjunction with the audited financial statements included in the Form 10-K In
the opinion of management, all adjustments considered necessary for fair
presentation, consisting solely of normal recurring adjustments, have been made.
Operating results for the six months ended March 31, 2009 are not necessarily
indicative of the results that may be expected for the year ending September 30,
2009.
2. RELATED PARTY TRANSACTIONS
At March 31, 2009, the Company owed $409,931 (September 30 2008 - $300,000) to
three Company officers. For the six months ended March 31, 2009, the Company
expensed $158,632 (March 31, 2008 - $157,972) to the Statement of Operations for
the three Company officers regarding compensation-related amounts. At March 31,
2009 related parties owed the Company $nil (September 30, 2008 - $385). The
following table shows a breakdown of these amounts:
Expense Expense
Six Months Six Months
Payable Payable Ended Ended
March 31, September 30, March 31, March 31,
2009 2008 2009 2008
-------- -------- -------- --------
Management fees/ benefits $109,931 $ -- $149,967 $157,972
Amortization of stock option
benefit -- -- 105,900 73,134
-------- -------- -------- --------
Total $109,931 $ -- $255,867 $231,106
======== ======== ======== ========
Management compensation of $158,632 on the Statement of Operations for the six
months ended March 31, 2009 (March 31, 2008 - $157,972) is comprised of
management fees/ benefits, net of a reclassification to research and development
expense of $76,753 (March 31, 2008 -$76,198).
All related party transactions are conducted in the ordinary course of business
and measured at the exchange amount established and agreed to by the related
parties. Amounts due to related parties are unsecured, non-interest bearing and
have no set terms of repayment.
7
3. COMMITMENTS AND CONTINGENCIES
(A) EMPLOYMENT CONTRACTS WITH COMPANY OFFICERS
The Company has employment contracts with three Company officers for renewable
periods of two to three years. The total annual cash compensation commitment for
the three officers is $450,000, excluding a 40% bonus commitment for two of the
three officers when certain performance milestones, yet to be determined, are
achieved.
In the event of contract termination by either party and subject to 30 to 90-day
termination clauses, retirement allowances of $300,000 ($150,000 each) will
become immediately payable to two officers. This amount was fully accrued at
March 31, 2009.
(B) COMMITMENTS PERTAINING TO PACIFIC PHARMA TECHNOLOGIES, INC. ("PPT")
ACQUISITION
(i) The Company is committed under a three year consulting services
agreement, expiring February 28, 2011, with one of the former
shareholders of PPT regarding the development and commercialization of
proprietary drugs using PPT's intellectual property. The annual
consulting fee consists of $40,800 (C$50,000) in cash payable monthly
and $163,100 (C$200,000) in shares payable semi-annually based on the
average closing share prices at the end of each month.
(ii) The Company is committed to issuing up to 2,000,000 contingent common
shares for the future achievement of two agreed research milestones
depending on the degree of success. These shares will be reduced by
the release of 150,000 performance-based shares currently being held
in escrow for this purpose.
(iii)The Company must spend a minimum $150,000 on third-party testing of
the PPT intellectual property during each of the four years ending
December 31, 2011 or else the maximum contingent shares for milestone
achievements described in (b)(ii) above becomes due and payable. The
spending commitment was met for the year ended September 30, 2008.
(C) LICENSE AGREEMENT WITH BRITISH COLUMBIA CANCER AGENCY BRANCH ("BCCA")
The Company entered into a license agreement with BCCA on March 10, 2005 for a
seven year term expiring March 2012 regarding bioinformatics technology
developed at the University of British Columbia ("UBC"). Under terms of the
agreement, the Company has been accruing annual royalties since September 14,
2007 equal to 10% of the gross revenue from licensed product sales or $8,150
(C$10,000), whichever is greater. At March 31, 2009, royalties of $12,344
(C$15,417) have been accrued but remain unpaid.
(D) LICENSE AGREEMENT WITH UBC
The Company entered into a License Agreement with UBC on March 23, 2005 for a
ten year term expiring March 2015 regarding bioinformatics technology developed
at UBC. Under terms of the agreement, the Company agreed to pay the initial
license fee consisting of $7,554 cash plus an equity component not yet
negotiated. The former has been paid and the latter accrued at an estimated
amount of $10,190 (C$12,500) but remains unpaid at March 31, 2009. In addition
to the license fee and commencing March 2005, the Company has agreed to pay the
greater of (a) annual royalties equal to 15% of the gross revenue from licensed
product sales or (b) minimum annual sliding scale amounts as follows: $6,137
(C$7,500) from April 1, 2005 to March 31, 2007 (2 years); $12,230 (C$15,000)
from April 1, 2007 to March 31, 2012 (5 years); and $16,310 (C$20,000) from
April 1, 2012 to March 31, 2015 (3 years). At March 31, 2009, royalties of
$24,021 (C$30,000) have been accrued but remain unpaid.
(E) CONTINGENT PAYMENT FOR SUCCESSFUL FUND RAISING
On May 27, 2008, the Company signed a non-exclusive agreement with an investment
firm for five months, expensed at $7,500 per month and extendable on a
month-to-month basis by mutual consent. The fund raising agreement remains in
effect but the monthly fee was discontinued after the fifth payment was made in
October 2008. Upon successful completion of a financing agreement, the Company
is obligated to pay a contingency fee of 2% of the funds raised or $247,800,
whichever is greater, to the investment firm.
8
4. RESTATEMENTS
The Company has restated its financial statements for the three and six months
ended March 31, 2009 to reflect the following adjustments:
As At March 31, 2009
------------------------------------------------
As Originally
Reported Adjustments As Restated
-------- ----------- -----------
$ $ $
BALANCE SHEET
Accounts payable and accrued liabilities 69,319 300,000 369,319
Due to related parties 559,931 (450,000) 109,931
Accumulated deficit (6,613,541) 150,000 (6,463,541)
For The Three Months Ended March 31, 2009
------------------------------------------------
As Originally
Reported Adjustments As Restated
-------- ----------- -----------
$ $ $
STATEMENT OF OPERATIONS AND DEFICIT
Management compensation 123,857 (41,667) 82,190
Net loss (312,758) 41,667 (271,091)
For The Six Months Ended March 31, 2009
------------------------------------------------
As Originally
Reported Adjustments As Restated
-------- ----------- -----------
$ $ $
STATEMENT OF OPERATIONS AND DEFICIT
Management compensation 364,786 (131,250) 233,536
Net loss (1,692,931) 131,250 (1,561,681)
Cumulative From Inception (June 14, 2004) to March 31, 2009
-----------------------------------------------------------
As Originally
Reported Adjustments As Restated
-------- ----------- -----------
$ $ $
STATEMENT OF OPERATIONS AND DEFICIT
Management compensation 1,439,821 (150,000) 1,289,821
Net loss (6,515,841) 150,000 (6,365,841)
STATEMENT OF CASH FLOWS
Net cash flows used in operating activities
Six months ended March 31, 2009 (290,090) -- (290,090)
From inception (June 14, 2004) to March 31, 2009 (2,664,843) -- (2,664,843)
(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 $150,000 that was previously accrued for an officer of
the Company has been reversed.
(II) OTHER
The net loss per share has not changed due to the restatement.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
FORWARD-LOOKING STATEMENTS
This quarterly report contains forward-looking statements. 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 unaudited consolidated interim financial statements are stated in United
States dollars and are prepared in accordance with United States generally
accepted accounting principles. The following discussion should be read in
conjunction with our unaudited consolidated interim financial statements and the
related notes that appear elsewhere in this quarterly report.
In this quarterly report, unless otherwise specified, all references to "common
shares" refer to the common shares in our capital stock and the terms "we", "us"
and "our" mean Upstream Biosciences Inc. and our wholly-owned subsidiaries.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2009
REVENUE
We are a development stage company and have not generated any revenues from our
technologies since inception. We anticipate significant additional time and
financing will be required before our technologies are developed to a marketable
state.
EXPENSES
During the three months ended March 31, 2009, we incurred expenses of $273,962
compared to $791,666 during the three months ended March 31, 2008. The decrease
in expenses during the three months ended March 31, 2009 was largely due to
decreased research and development expenses (cash) of $14,464 and (stock)
$375,742, decreased stock based compensation expenses of $51,850, decreased
office and general administration expenses of $19,309 and decreased investor and
corporate communications expenses of $35,422 and decreased professional fee
expenses of $6,564 between the respective periods. These reductions were offset
by increases in amortization expense of $14,794, increased license fees and
royalties of $8,891 and reduced gain on interest income of $9,054.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED MARCH 31, 2009
EXPENSES
During the six months ended March 31, 2009, we incurred expenses of $617,916
compared to $1,139,544 during the six months ended March 31, 2008. The decrease
in expenses during the six months ended March 31, 2009 was largely due to
decreased research and development expenses (cash) of $449,388, decreased stock
based compensation expenses of $103,700, decreased office and general
administration expenses of $38,306 and decreased investor and corporate
10
communications expenses of $34,970 and decreased professional fee expenses of
$11,763 between the respective periods. These reductions were offset by
increases in amortization expense of $30,046, an increase in research and
development expenses (stock) of $32,291 and a reduced gain on interest income of
$24,191. During the six months ended March 31, 2009, our company also incurred a
foreign exchange loss of $170 relating to our short term investments as compared
to a gain of $21,657 during the six months ended March 31, 2008.
The increase in amortization expense during the six months ended March 31, 2009
resulted from commencing amortization of intellectual property acquired pursuant
to the acquisition of Pacific Pharma Technologies Inc. The decrease in research
and development expenses resulted from reduced spending on contract research and
with other suppliers. Deceased office and general administration expenses and
decreased investor and corporate communications expenses were a result of
reduced spending on suppliers and services during the period.
RESULTS OF OPERATIONS - GENERAL
Without adequate funding, it is management's intention to halt current research
and development efforts associated with our biomarker and drug development
programs and wait until sufficient financial resources exist before spending
additional and significant funds for the commercialization of our biomarker
program. We intend to continue to evaluate and determine the most cost effective
use of available funds for all future research and development programs,
including diagnostic biomarkers, biomarkers for a drug response assay and drug
development efforts. Depending on the level of financing and resources
available, we may further develop our pharmaceutical business, or biomarker
business, or both, if possible.
There is no assurance that our research and development programs will produce
commercially viable products or treatments, and a great deal of additional
research and development will be required before a final evaluation of the
economic feasibility of our technologies can be determined. Even if we complete
our proposed research and development and we are successful in identifying
commercially viable products and/or treatments, we will have to spend
substantial funds on further studies before we will know our products and/or
treatments are commercially viable or not.
ANTICIPATED CASH REQUIREMENTS
Over the next 12 months, we have estimated our minimum cash requirements to be
as follows:
Estimated Cash Expenses for the Next Twelve Month Period
--------------------------------------------------------
Cash Operating Expenses
Employee and consultant compensation $100,000
Professional fees $ 80,000
Research and Development $ 25,000
General and administrative expenses $ 20,000
Corporate communications $ 5,000
--------
Total $230,000
========
EMPLOYEE AND CONSULTANT COMPENSATION
We estimate that our employee and consultant cash compensation expenses for the
next twelve months will be approximately $100,000 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, through his management
company JTAT Consulting. 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.
11
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. Of note, Joel Bellenson and Dexster Smith have voluntarily agreed to defer
their salary for the 2009 calendar year, or until such time that our company
completes a suitable financing. 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. Our
company has received notice that this management services agreement is in
default, and as per the terms of the same agreement, our company intends to
rectify the default over the next thirty-day period.
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
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. We estimate that our research and development
expenditures for the next twelve months will be approximately $25,000 for third
party consulting, lab and testing services, which reflect an overall decrease in
the use of third party laboratory services for conducting research and
development.
OTHER EXPENSES
We also expect to incur professional fees of $80,000, corporate communication
fees of $5,000 and general and administrative fees of $20,000 to maintain
operations during the next twelve months period.
LIQUIDITY AND CAPITAL RESOURCES
Our financial position as at March 31, 2009 and September 30, 2008 are as
follows:
WORKING CAPITAL
As at As at
March 31, September 30,
2009 2008
--------- ---------
(unaudited) (audited)
Current assets $ 337,987 $ 653,307
Current liabilities 479,250 398,315
--------- ---------
Working capital (deficiency) $(141,263) $ 254,992
========= =========
Working capital has decreased from $254,992 at September 30, 2008 to a working
capital deficiency of $141,263 at March 31, 2009. 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.
12
For the three months ended March 31, 2009, we recorded a net loss of $271,091
and for the six months ended March 31, 2009, we recorded a net loss of $612,174.
As at March 31, 2009, we had an accumulated deficit of $6,463,541 since
inception. As at March 31, 2009, we had cash and cash equivalents of $318,959.
As management estimates we will require at least $230,000 to fund on-going
operations and planned research and development programs, we believe we have
sufficient funds to meet our plan of operation over the next 12 months. However,
we will need to obtain further financing through issuance of shares, debentures
or convertible debentures if we are to reasonably fund our research and
development programs. We will also endeavor to access available funding from
research and development grants or loans from various public and private
research granting agencies. Moreover, all cash operating expenses will be
carefully monitored to address our obligations as they come due.
In addition to the issues set out above regarding our ability to raise capital,
global economies are currently undergoing a period of economic uncertainty
related to the tightening of credit markets worldwide. This has resulted in
numerous adverse effects, including unprecedented volatility in financial
markets and stock prices, slower economic activity, decreased consumer
confidence and commodity prices, reduced corporate profits and capital spending,
increased unemployment, liquidity concerns and volatile but generally declining
energy prices. Due to the current financial crisis, there can be no assurance
that additional financing will be available when needed or, if available, on
commercially reasonable terms. If we are not able to obtain additional financing
on a timely basis, we may not be able to meet our obligations as they come due
and may be forced to scale down or perhaps even cease business operations.
CASH FLOWS
During the six months ended March 31, 2009 and 2008, net cash used in operating
activities was $290,090 and $486,742, respectively. Cash flow from investing
activities was $5,621 during the six months ended March 31, 2009 as compared to
using cash of $7,516 during the six months ended March 31, 2008. Cash flow from
financing activities did not provide any cash during the six months ended March
31, 2009 and 2008.
GOING CONCERN
Our independent auditors included an explanatory paragraph in their annual
report on our financial statements for the year ended September 30, 2008
regarding concerns about our ability to continue as a going concern. In
addition, our financial statements contain further note disclosures in this
regard. The audited financial statements included in our Form 10-K for the year
ended September 30, 2008 were prepared on a going concern basis, which implies
that our company will continue to realize its assets and discharge its
liabilities and commitments in the normal course of business. Our company has
not generated revenues since inception, has never paid any dividends and is
unlikely to pay dividends or generate earnings in the immediate or foreseeable
future. The continuation of our company as a going concern is dependent upon:
(i) the continued financial support from our shareholders; (ii) the ability of
our company to continue raising necessary equity financing to achieve its
operating objectives; (iii) the continuing achievement of positive results from
our research and development activities; and (iv) the eventual attainment of
profitable operations.
OFF-BALANCE SHEET ARRANGEMENTS
We have no significant off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on our financial condition,
changes in financial position, revenues and expenses, results of operations,
liquidity, capital expenditures or capital resources that are material to
stockholders.
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 and 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
13
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.
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:
* pay our existing and accrued liabilities;
* 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;
* address competing technological and market developments;
* establish additional collaborative relationships; and
* market and develop our technologies.
In light of the current financial crises, financing for companies such as ours
is very difficult to obtain. 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. Without additional funds, we
may not be able to pay our employees or contracts to provide services, and these
same employees or service providers may have to either accept accruals or common
shares, or a combination of both, for compensation. 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 continue operations 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 ending March 31, 2009, we have
accumulated a deficit of $6,463,541. 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,
14
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 November 27, 2008 which is included in our annual report on Form
10-K.
IN OUR MANAGEMENT'S REPORT ON INTERNAL CONTROLS OVER FINANCIAL REPORTING, WE
IDENTIFIED A NUMBER OF MATERIAL WEAKNESSES RELATED TO OUR INTERNAL CONTROL OVER
FINANCIAL REPORTING AND CONCLUDED THAT OUR INTERNAL CONTROL OVER FINANCIAL
REPORTING AND DISCLOSURE CONTROLS AND PROCEDURES WERE INEFFECTIVE AS OF
SEPTEMBER 30, 2008. THESE MATERIAL WEAKNESSES REMAIN UNREMEDIED, WHICH COULD
CONTINUE TO IMPACT OUR ABILITY TO REPORT RESULTS OF OPERATIONS AND FINANCIAL
CONDITION ACCURATELY AND IN A TIMELY MANNER.
We have identified a number of material weaknesses in our internal control over
financial reporting. Our management evaluated the effectiveness of our
disclosure controls and procedures as at March 31, 2009 pursuant to Section 404
of the Sarbanes-Oxley Act of 2002 and the related SEC rules and concluded that
our internal control over financial reporting and disclosure controls and
procedures were not effective as at March 31, 2009. Specifically, they concluded
that four material weaknesses existed as at March 31, 2009 which are set out in
Item 4 under the heading "Controls and Procedures". Although we intend to
remediate such material weaknesses as set out in Item 4, we have not yet been
able to address these material weaknesses and they may continue to remain
unremedied for some time, which could adversely impact the accuracy and
timeliness of future reports and filings we make to the SEC and could have a
material adverse effect on our business, results of operations, financial
condition and liquidity.
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 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.
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.
15
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, the Middle East and Asia will be
the principal market for our technology, although we may elect to expand into
Central and South America, Europe and North America. 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
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.
16
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 effects. 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
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.
17
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 United States Food and Drug Administration (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 infectious diseases and cancers, 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 as 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
18
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 would provide us with insurance proceeds in the event of
their death. Without key man insurance, we may not have the financial 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, pre-clinical and clinical drug trials, 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-U.S. persons and our assets are located outside of the
United States. As a result, it may not be possible for investors to affect
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
19
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.
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, Canada 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 49,453,006 common shares were issued and
outstanding as of March 31, 2009. 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
company.
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
20
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
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.
APPLICATION OF 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.
BASIS OF PRESENTATION
Our consolidated financial statements and related notes are presented in
accordance with generally accepted accounting principles in the United States of
America ("US") and are expressed in US dollars. We are a development stage
company as defined by Statement of Financial Accounting Standard ("SFAS") No. 7,
"Accounting and Reporting by Development Stage Enterprises" and has not realized
any revenues from its planned operations to date. These financial statements
21
include the accounts of the Company and its wholly-owned subsidiaries, Upstream
Canada and PPT, which were acquired pursuant to share exchange agreements on
February 24, 2006 and August 24, 2007 respectively. All inter-company
transactions and account balances have been eliminated on consolidation. The
fiscal year end of our company and subsidiaries is September 30.
INTELLECTUAL PROPERTY RIGHTS
We have adopted the provisions of the Statement of Financial Accounting
Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets".
Intangible assets with a definite life are amortized over that expected life and
tested for impairment at least annually or whenever events or circumstances
indicate a revision to the remaining period of amortization is warranted.
The fair market value of Intellectual Property Rights ("IPR") acquired on August
24, 2007 during the acquisition of Pacific Pharma Technologies Inc. is being
amortized on a straight line basis over 5 years. The determination of any
impairment of Intellectual Property Rights includes a comparison of net carrying
value with estimated future operating cash flows anticipated during the
remaining life; and is dependent on our ability to continue operating as a going
concern.
During the annual impairment review, we determined the carrying value of our IPR
at September 30, 2008 was not impaired.
RESEARCH AND DEVELOPMENT
These costs are charged to expense when incurred and consist primarily of direct
material and personnel costs, contract services and indirect costs. We have
received government assistance in the past and may receive same in the future
regarding our research and development activities. When the work is performed
that qualifies for such grants, the related assistance amount is credited to
research and development expense.
STOCK-BASED COMPENSATION
Effective January 1, 2006, we adopted the fair value recognition provisions of
SFAS No. 123R, "Share Based Payments", using the modified prospective transition
method. Under this transition method, compensation cost is recognized for all
share-based payments granted prior to January 1, 2006, based on the grant date
fair value estimated in accordance with the original provisions of SFAS 123; and
the compensation cost of all share-based payments granted subsequent to January
1, 2006, based on the grant date fair value estimated in accordance with the
provisions of SFAS 123R.
All transactions in which goods and services are the consideration received for
the issuance of equity instruments are accounted for based on fair value of the
consideration received or the fair value of the equity instrument issued,
whichever is more reliably measurable. Equity instruments issued to employees
and the cost of the services received as consideration are measured and
recognized based on the fair value of the equity instruments issued.
RECENT ACCOUNTING PRONOUNCEMENTS
We do not believe that any recently issued, but not yet effective accounting
standards if currently adopted, will have a material effect on our financial
statements.
In March 2008, the FASB issued Statement of Financial Accounting Standards No.
161, "Disclosures about Derivative Instruments and Hedging Activities, an
Amendment of FASB Statement No. 133" ("SFAS 161"). SFAS 161 amends and expands
the disclosure requirements of FASB Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities - as amended" ("SFAS 133"), to
provide enhanced disclosures about how and why an entity uses derivative
instruments; how derivative instruments and related hedged items are accounted
for under SFAS 133; and how derivative instruments and related hedged items
22
affect an entity's financial position, financial performance, and cash flows.
SFAS 161 is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008, with early application
encouraged. We have reached the conclusion that this will have no impact on our
consolidated financial statements.
In May 2008, the FASB issued Statement of Financial Accounting Standards No.
162, "The Hierarchy of Generally Accepted Accounting Principles" ("SFAS 162").
SFAS 162 identifies a consistent framework, or hierarchy, for selecting
accounting principles to be used in preparing financial statements that are
presented in conformity with U.S. generally accepted accounting principles for
nongovernmental entities. SFAS 162 is effective 60 days following the SEC's
approval of the Public Company Accounting Oversight Board amendments to AU
Section 411, "The Meaning of Present Fairly in Conformity With Generally
Accepted Accounting Principles". We have reached the conclusion that this will
have no impact on our consolidated financial statements.
In June 2008, the FASB issued FASB Staff Position No. EITF 03-6-1, "Determining
Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities" ("FSP EITF 03-6-1"). FSP EITF 03-6-1 establishes that
unvested share-based payment awards that contain nonforfeitable rights to
dividends or dividend equivalents (whether paid or unpaid) are participating
securities as defined in Emerging Issues Task Force ("EITF") Issue No. 03-6,
"Participating Securities and the Two-Class Method under FASB Statement No.
128", and should be included in the computation of earnings per share pursuant
to the two-class method as described in Statement of Financial Accounting
Standards No. 128, "Earnings per Share". FSP EITF 03-6-1 is effective for
financial statements issued for fiscal years beginning after December 15, 2008,
and interim periods within those years. All prior-period earnings per share data
presented shall be adjusted retrospectively to conform to the provisions of FSP
EITF 03-6-1. Early application is not permitted. We are currently evaluating the
impact that the adoption of FSP EITF 03-6-1 will have on our consolidated
financial statements.
In September 2008, the FASB issued two separate but related exposure drafts: (1)
Proposed Statement of Financial Accounting Standards, "Accounting for Transfers
of Financial Assets - an amendment of FASB Statement No. 140", and (2) Proposed
Statement of Financial Accounting Standards, "Amendments to FASB Interpretation
No. 46(R)" (together, the "proposed Statements"). The proposed Statements would
remove the concept of a qualifying special-purpose entity ("QSPE") from SFAS 140
and the exceptions from applying FIN 46R to QSPEs. The proposed Statements would
be effective as of the beginning of a reporting entity's fiscal year that begins
after November 15, 2009. We have reached the conclusion that this will have no
impact on our consolidated financial statements.
In November 2008, the Financial Accounting Standards Board (the "FASB") voted on
the effective date and other amendments of proposed FASB Staff Position FAS
140-e and FIN 46(R)-e, "Disclosures about Transfers of Financial Assets and
Interests in Variable Interest Entities" ("FSP FAS 140-e and FIN 46R-e"). FSP
FAS 140-e and FIN 46R-e would amend SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities - as amended"
("SFAS 140") and FASB Interpretation No. 46 (revised December 2003),
"Consolidation of Variable Interest Entities" ("FIN 46R") to require enhanced
disclosures by public entities about transfers of financial assets and interests
in variable interest entities, and provide users of the financial statements
with greater transparency about a transferor's continuing involvement with
transferred financial assets and an enterprise's involvement with variable
interest entities. The disclosures required by FSP FAS 140-e and FIN 46R-e will
be effective for reporting periods (interim and annual) ending after December
15, 2008. We have reached the conclusion that this will have no impact on our
consolidated financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
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ITEM 4. CONTROLS AND PROCEDURES.
DISCLOSURE CONTROLS AND PROCEDURES
As required by paragraph (b) of Rules 13a-15 or 15d-15 under the Exchange Act,
our principal executive officer and principal financial officer evaluated our
company's disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) of the Exchange Act) as of the end of the period covered by this
quarterly report on Form 10-Q. Based on this evaluation, these officers
concluded that as of the end of the period covered by this quarterly report on
Form 10-Q, these disclosure controls and procedures were not effective to ensure
that the information required to be disclosed by our company in reports it files
or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the
Securities Exchange Commission and include controls and procedures designed to
ensure that such information is accumulated and communicated to our company's
management, including our company's principal executive officer and principal
financial officer, to allow timely decisions regarding required disclosure. The
conclusion that our disclosure controls and procedures were not effective was
due to the presence of the following material weaknesses in internal control
over financial reporting which are indicative of many small companies with small
staff: (i) inadequate segregation of duties and effective risk assessment; (ii)
insufficient written policies and procedures for accounting and financial
reporting with respect to the requirements and application of both US GAAP and
SEC guidelines; (iii) inadequate security and restricted access to computer
systems including insufficient disaster recovery plans; and (iv) no written
whistle-blower policy. Management anticipates that such disclosure controls and
procedures will not be effective until the material weaknesses are remediated.
Our company plans to take steps to enhance and improve the design of our
internal controls over financial reporting. During the period covered by this
quarterly report on Form 10-Q, we have not been able to remediate the material
weaknesses identified above. To remediate such weaknesses, we plan to implement
the following changes during our fiscal year ending September 30, 2009: (i)
appoint additional qualified personnel to address inadequate segregation of
duties and ineffective risk management; (ii) adopt sufficient written policies
and procedures for accounting and financial reporting and a whistle-blower
policy; and (iii) implement sufficient security and restricted access measures
regarding our computer systems and implement a disaster recovery plan. The
remediation efforts set out in (i) and (iii) are largely dependent upon our
company securing additional financing to cover the costs of implementing the
changes required. If we are unsuccessful in securing such funds, remediation
efforts may be adversely effected in a material manner.
Because of the inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that all control issues, if any, within
our company have been detected. These inherent limitations include the realities
that judgments in decision-making can be faulty and that breakdowns can occur
because of simple error or mistake.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There have been no changes in our internal controls over financial reporting
that occurred during the quarter ended March 31, 2009 that have materially
affected, or are reasonably likely to materially affect, our internal controls
over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
We know of no material, active or pending legal proceedings against our company,
nor are we involved as a plaintiff in any material proceeding or pending
litigation. There are no proceedings in which any of our directors, officers or
affiliates, or any registered or beneficial shareholder, is an adverse party or
has a material interest adverse to our interest.
24
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.
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.
Exhibit
Number Description
- ------ -----------
(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).
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 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).
10.2 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).
10.3 2007 Stock Option Plan (incorporated by reference from our Registration
Statement on Form SB-2 filed on October 1, 2007)
10.4 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)
10.5 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)
10.6 Art Cherkasov Revised Consulting Services Contract dated September 12,
2007 (incorporated by reference from our Quarterly Report on Form
10-QSB filed on February 14, 2008)
25
10.7 JTAT Consulting Services Contract dated December 31, 2007 (incorporated
by reference from our Quarterly Report on Form 10-QSB filed on February
14, 2008)
10.8 JTAT Consulting Services Contract dated March 7, 2008 (incorporated by
reference from our Quarterly Report on Form 10-QSB filed on May 15,
2008)
10.9 Compensation Committee Charter (incorporated by reference from our
Annual Report on Form 10-K filed on December 19, 2008)
10.10 Audit Committee Charter (incorporated by reference from our Annual
Report on Form 10-K filed on December 19, 2008)
(21) SUBSIDIARIES OF THE REGISTRANT
21 Upstream Biosciences, Inc., a Canadian corporation Pacific Pharma
Technologies, Inc., a British Columbia corporation
(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.
26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly 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 16, 2010
By: /s/ Tim Fernback
------------------------------------------------
Tim Fernback,
Chief Financial Officer (Principal Financial
Officer and Principal Accounting Officer)
December 16, 2010
27