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EX-32 - CalEthos, Inc.ex32-1.txt
EX-31 - CalEthos, Inc.ex31-1.txt

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q

(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934

                 For the quarterly period ended March 31, 2012

[ ] 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.)

Three Sugar Creek Center, Suite 100, Sugar Land, TX                77478
    (Address of Principal Executive Offices)                     (Zip Code)

                                  403.537.2516
              (Registrant's telephone number, including area code)

                 50 West Liberty St., Suite 880, Reno, NV, 89501
              (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 [ ] No [X]

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 [X] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
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:

34,112,065 common shares issued and outstanding as at May 15, 2012.

PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Our unaudited 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 interim financial statements for the quarter ended March 31, 2012 include all adjustments necessary in order to ensure that the unaudited interim financial statements are not misleading. 2
UPSTREAM BIOSCIENCES INC. (A Development Stage Company) BALANCE SHEETS March 31, September 30, 2012 2011 ---------- ---------- (Unaudited) ASSETS CURRENT ASSETS Cash $ 3,122 $ 12,602 Prepaid expenses 1,250 396 ---------- ---------- $ 4,372 $ 12,998 ========== ========== LIABILITIES CURRENT LIABILITIES Accounts payable and accrued liabilities $ 39,129 $ 36,513 Due to related parties 35,000 35,000 ---------- ---------- 74,129 71,513 ---------- ---------- STOCKHOLDERS' DEFICIT 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: 34,112,065 common shares (September 30, 2011 - 34,112,065) 34,112 34,112 ADDITIONAL PAID-IN CAPITAL 7,123,633 7,123,633 ACCUMULATED OTHER COMPREHENSIVE LOSS (11,838) (10,352) DEFICIT ACCUMULATED DURING THE DEVELOPMENT STAGE (7,215,664) (7,205,908) ---------- ---------- (69,757) (58,515) ---------- ---------- $ 4,372 $ 12,998 ========== ========== The accompanying notes are an integral part of these financial statements. 3
UPSTREAM BIOSCIENCES INC. (A Development Stage Company) STATEMENTS OF OPERATIONS (Unaudited) Cumulative Results From Inception Three Months Ended Six Months Ended (June 14, 2004) to March 31, March 31, March 31, 2011 2010 2012 2011 2012 ------------ ------------ ------------ ------------ ------------ REVENUE $ -- $ -- $ -- $ -- $ 67,600 ------------ ------------ ------------ ------------ ------------ OPERATING EXPENSES Amortization -- 125 -- 175 133,600 Consulting fees -- -- -- 7,420 12,598 Interest and finance charges -- -- -- 2,447 598,965 Interest income -- -- -- -- (84,671) Investor and corporate communications -- 421 -- 421 258,349 License fees and royalties -- 3,125 -- 9,375 114,384 Loss on foreign exchange -- -- -- -- 15,453 Management compensation -- -- -- -- 1,526,086 Office and general administration 1,163 374 4,766 4,284 492,323 Professional fees 1,500 7,900 4,990 10,417 627,665 Research and development -- -- -- -- 1,421,530 Stock-based compensation -- -- -- -- 2,090,632 ------------ ------------ ------------ ------------ ------------ (2,663) (11,945) (9,756) (34,539) (7,206,914) OTHER ITEMS Asset impairment loss -- -- -- -- (59,010) Compensation shares -- -- -- -- (25,000) Loss on sale of intellectual property -- -- -- -- (78,570) Gain on sale of subsidiary -- 126,515 -- 126,515 126,515 ------------ ------------ ------------ ------------ ------------ INCOME (LOSS) BEFORE INCOME TAX (2,663) 114,570 (9,756) 91,976 (7,175,379) Deferred income tax recovery -- -- -- -- 57,415 ------------ ------------ ------------ ------------ ------------ INCOME (LOSS) $ (2,663) $ 114,570 $ (9,756) $ 91,976 $ (7,117,964) ============ ============ ============ ============ ============ LOSS PER SHARE - BASIC AND DILUTED $ 0.00 $ 0.00 $ 0.00 $ 0.00 ============ ============ ============ ============ WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - BASIC AND DILUTED 34,112,065 34,112,065 34,112,065 34,112,065 ============ ============ ============ ============ The accompanying notes are an integral part of these financial statements. 4
UPSTREAM BIOSCIENCES INC. (A Development Stage Company) STATEMENTS OF CASH FLOWS (Unaudited) Cumulative Results From Inception (June 14, 2004) to Six Months Ended March 31, March 31, 2012 2011 2012 ------------ ------------ ------------ CASH FLOW FROM OPERATING ACTIVITIES Net loss $ (9,756) $ 91,976 $ (7,117,964) Adjustments to reconcile net loss to net cash used in operating activities: Amortization -- 175 133,600 Accretion of convertible debenture -- -- 302,808 Shares issued or to be issued for services -- -- 1,487,236 Stock-based compensation -- -- 1,658,590 Compensation shares -- -- 25,000 Deferred income tax -- -- (57,415) Asset impairment -- -- 59,010 Gain on sale of subsidiary -- (126,515) (126,515) Loss from sale of intellectual property -- -- 78,570 Changes in operating assets and liabilities: Other receivables -- 9,966 (10,259) Prepaid expenses (854) (1,583) (4,031) Accounts payable and accrued liabilities 1,240 4,964 269,160 Due to related parties -- -- 271,984 ------------ ------------ ------------ NET CASH USED IN OPERATING ACTIVITIES (9,370) (21,017) (3,030,226) ------------ ------------ ------------ CASH FLOW FROM INVESTING ACTIVITIES Cash paid for acquisition of PPT shares -- -- (51,507) Proceeds on the sale of subsidiary -- -- 1 Purchase of equipment -- -- (22,764) ------------ ------------ ------------ NET CASH USED IN INVESTING ACTIVITIES -- -- (74,270) ------------ ------------ ------------ 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 -- -- 113,487 ------------ ------------ ------------ NET CASH PROVIDED BY FINANCING ACTIVITIES -- -- 3,108,832 ------------ ------------ ------------ EFFECT OF EXCHANGE RATE CHANGES (110) 203 (1,214) ------------ ------------ ------------ INCREASE (DECREASE) IN CASH (9,480) (20,814) 3,122 CASH, BEGINNING 12,602 31,152 -- ------------ ------------ ------------ CASH, ENDING $ 3,122 $ 10,338 $ 3,122 ============ ============ ============ The accompanying notes are an integral part of these financial statements. 5
UPSTREAM BIOSCIENCES INC (A Development Stage Company) NOTES TO FINANCIAL STATEMENTS March 31, 2012 (Unaudited) 1. BASIS OF PRESENTATION These unaudited financial statements of Upstream Biosciences Inc. (the "Company") have been prepared in accordance with generally accepted accounting principles in the United States of America for interim financial statements 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 financial statements for the year ended September 30, 2011, included in the Company's Form 10-K filed with the Securities and Exchange Commission. These interim unaudited 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, 2012, are not necessarily indicative of the results that may be expected for the year ending September 30, 2012. Going concern These unaudited financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. As at March 31, 2012, the Company has a working capital deficiency of $69,757 and has incurred losses since inception of $7,117,964. The Company has no current sources of revenues and has no active business generations. This raises substantial doubt about the Company's ability to continue as a going concern which is dependent upon generating profitable operations and obtaining the necessary financing to meet its obligations when they become due. There is no assurance that equity or debt capital will be available as necessary to meet the Company's requirements or, if the capital is available, that it will be on terms acceptable to the Company. Recent Accounting Pronouncements The Company has reviewed recently issued accounting pronouncements and plans to adopt those that are applicable to it. It does not expect the adoption of these pronouncements to have a material impact on its current financial position, results of operations or cash flows. 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS This quarterly report contains forward-looking statements that involve risk, uncertainties and assumptions. In some cases, you can identify forward-looking statements by terminology such as "may", "should", "expect", "plan", "anticipate", "believe", "estimate", "predict", "potential" or "continue" or the negative of these terms or other comparable terminology. Examples of forward-looking statements made in this quarterly report on Form 10-Q include statements about: * Our business plans, * Our ability to raise additional finances, and * Our future investments and allocation of capital resources. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including: * General economic and business conditions, * Our lack of operating history, * Our financial condition, * Our material weakness in our internal control over financial reporting, * Our patents are only a provisional patent, and * The risks in the section of this annual report entitled "Risk Factors", any of which 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. 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. 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 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 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.. 7
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2012 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 Our operating expenses for the three month period ended March 31, 2012 were $2,663 compared to $11,945 in 2011. This net decrease of $9,282 was primarily due to the following: * $6,400 decrease in professional fees, which comprise legal and accounting fees, due to there being minimal activity during the period; and * $3,125 decrease in license and royalty fees due to us selling the subsidiary that incurred these costs in 2011. RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED MARCH 31, 2012 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 Our operating expenses for the six month period ended March 31, 2012 were $9,756 compared to $34,539 in 2011. This net decrease of $24,603 was primarily due to the following: * $5,427 decrease in professional fees, which comprise legal and accounting fees, due to there being minimal activity during the period; and * $9,375 decrease in license and royalty fees due to us selling the subsidiary that incurred these costs in 2011; * $7,420 decrease in consulting fees due to us selling the subsidiary that incurred these costs in 2011; and * $2,447 decrease in interest and finance charges as during 2011 we sold the subsidiary which held the interest bearing liabilities. PLAN OF OPERATIONS AND CASH REQUIREMENTS OVER THE NEXT 12 MONTHS Without adequate funding, it is management's intention to halt current research and development efforts associated with our biomarker program and wait until sufficient financial resources exist before spending additional and significant funds for the commercialization of our biomarker program. However, we will 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. 8
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. We are also currently seeking new acquisitions and/or business opportunities with established business entities for the merger of a target business with our company including businesses not having a resource focus. In certain instances, a target business may wish to become a subsidiary of us or may wish to contribute assets to us rather than merge. There can be no assurance that we will be able to enter into any agreements. We anticipate that any new acquisition or business opportunities by our company will require additional financing. There can be no assurance, however, that we will be able to acquire the financing necessary to enable us to pursue our plan of operation. If our company requires additional financing and we are unable to acquire such funds, our business may fail. 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 Professional fees $20,000 General and administrative expenses $20,000 Corporate communications $ 5,000 ------- Total $45,000 ======= For the three and six months ended March 31, 2012, we recorded a net operating loss, before other items, of $2,663 and $9,756 respectively and have accumulated losses of $7,117,964 since inception. As at March 31, 2012, we had a working capital deficiency of $69,757 and for the next twelve months, management estimates minimum cash requirements of $45,000 to fund on-going operations. Accordingly, we do not have sufficient funds to meet our plan of operation over the next twelve months and will need to obtain further financing through issuance of shares, debentures or convertible debentures. 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 ensure we can meet our obligations as they come due. 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. LIQUIDITY AND CAPITAL RESOURCES Our financial positions as at March 31, 2012 and September 30, 2011 are as follows: WORKING CAPITAL As at As at March 31, September 30, 2012 2011 -------- -------- (unaudited) (audited) Current assets $ 4,372 $ 12,998 Current liabilities $ 74,129 $ 71,513 Working capital deficiency $(69,757) $(58,515) 9
Working capital deficiency has increased from $58,515 at September 30, 2011 to $69,751 at March 31, 2012. 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. CASH FLOWS Six Months Six Months Ended Ended March 31, March 31, 2012 2011 -------- -------- Net cash used in operating activities $ (9,370) $(21,017) Net cash from investing activities $ -- $ -- Net cash provided by financing activities $ -- $ -- Effect of exchange rate changes $ (110) $ 203 Decrease in cash during the period $ (9,480) $(20,814) Cash, beginning of period $ 12,602 $ 31,152 Cash, end of period $ 3,122 $ 10,338 During the six month period ended March 31, 2012 and 2011: (i) Our net cash used in operating activities decreased from $21,017 to $9,370 primarily due to our company focusing on reducing expenses and conserving our available cash. (ii) Our net cash from investing activities was $nil in 2012 and $nil in 2011. (iii) Our net cash from financing activities was $nil in 2012 and $nil in 2011. GOING CONCERN The audited financial statements accompanying our annual report on Form 10-K have been 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; and (iii) the eventual attainment of profitable operations. Our independent auditors included an explanatory paragraph in their annual report on our financial statements for the year ended September 30, 2011 regarding concerns about our ability to continue as a going concern. In addition, our financial statements contain further note disclosures in this regard. The continuation of our business plan is dependent upon our ability to continue raising sufficient new capital from equity or debt markets in order to fund our on-going operating losses. The issuance of additional equity securities could result in a significant dilution in the equity interests of our current stockholders. 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. 10
BASIS OF PRESENTATION These financial statements and related notes are presented in accordance with United States generally accepted accounting principles ("US GAAP") and are expressed in US dollars. Our company is in the development stage and has not realized significant revenues from its business plan to date. These financial statements include the accounts of our company and our previously wholly-owned Canadian subsidiaries up to the date of their disposal. USE OF ESTIMATES AND ASSUMPTIONS The preparation of financial statements in conformity with US GAAP requires our company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. We base our estimates and assumptions on current facts, historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are readily apparent from other sources. The actual results experienced by our company may differ materially from our company's estimates. To the extent there are material differences, future results may be affected. There were no significant estimates used in preparing these financial statements. SHARE-BASED COMPENSATION Our company accounts for share-based compensation using the fair value method and related compensation expense is recognized over the period of benefit when the service is rendered. FINANCIAL INSTRUMENTS Our company's financial instruments consist of cash and accounts payable. The carrying amounts of these financial instruments approximate their fair values due to their short term nature. FOREIGN CURRENCY TRANSACTIONS AND TRANSLATION The functional and reporting currency of our company is the Canadian dollar. The financial statements are translated into United States dollars using period-end rates of exchange for assets and liabilities, and period average rates of exchange for revenues and expenses. Foreign currency transaction gains (losses) are included in the statements of operations and those arising from translation are included in other comprehensive income (loss) which is disclosed as a separate component of shareholders' deficit. Our company has not entered into any derivative instruments to offset the impact of foreign currency fluctuations. RESEARCH AND DEVELOPMENT These costs were expensed when incurred and consisted primarily of direct material and personnel costs, contract services and indirect costs. Our company has received government assistance in the past and may receive same in the future regarding research and development activities. When work is performed that qualifies for such grants, the related assistance amount is credited to research and development expense. There were no research or development expenditures incurred during the period. INCOME TAXES Our company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on temporary differences between the financial statements and the tax basis of assets and liabilities, and net operating loss carry forwards based on using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the year that includes the enactment date. Valuation allowances are established to the extent that it is considered 11
more likely than not that deferred tax assets will be realized. A valuation allowance for the full amount of the deferred tax assets has been recorded. LOSS PER SHARE Basic loss per share is computed by dividing the net loss by the weighted average number of outstanding common shares during the year. Diluted loss per share gives effect to all potentially dilutive common shares outstanding during the year, including convertible debt, stock options and share purchase warrants, using the treasury stock method. The computation of diluted loss per share does not assume conversion, exercise or contingent exercise of securities that would have an anti-dilutive effect on loss per share. RECENT ACCOUNTING PRONOUNCEMENTS Our company has reviewed recently issued, but not yet effective, accounting pronouncements and plans to adopt those that are applicable to it. Due to our limited activity we do not expect the adoption of these pronouncements to have a material impact on our reported financial position, results of operations or cash flows. 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 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, and support and carry out our business plan. There is no certainty that financing for companies such as ours will be available. 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. 12
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, 2012, we have incurred aggregate net losses of $7,117,964. 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 stage of our development, our securities must be considered highly speculative. 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 or the acquisition of another business. 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 January 12, 2012 which is included in our annual report on Form 10-K. THE WORLDWIDE MACROECONOMIC DOWNTURN MAY REDUCE THE ABILITY OF OUR COMPANY TO OBTAIN THE FINANCING NECESSARY TO CONTINUE OUR BUSINESS AND MAY REDUCE THE NUMBER OF VIABLE BUSINESSES THAT WE MAY WISH TO ACQUIRE. In 2009 and 2010, there has been a downturn in general worldwide economic conditions due to many factors, including the effects of the subprime lending and general credit market crises, volatile but generally declining energy costs, slower economic activity, decreased consumer confidence and commodity prices, reduced corporate profits and capital spending, adverse business conditions, increased unemployment and liquidity concerns. In addition, these macroeconomic effects, including the resulting recession in various countries and slowing of the global economy, will likely result in decreased business opportunities as potential target companies face increased financial hardship. Tightening credit and liquidity issues will also result in increased difficulties for our company to raise capital for our continued operations and to consummate a business opportunity with a viable business. WE HAVE IDENTIFIED MATERIAL WEAKNESSES RELATED TO OUR INTERNAL CONTROL OVER FINANCIAL REPORTING AND CONCLUDED THAT OUR INTERNAL CONTROL OVER FINANCIAL REPORT AND DISCLOSURE CONTROLS AND PROCEDURES WERE INEFFECTIVE AS OF MARCH 31, 2012. 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 assessed the effectiveness of our internal control over financial reporting and disclosure controls and procedures as at September 30, 2011 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 ineffective. In connection with the preparation of our quarterly report for the period ended June 30, 2009, we determined that an accrual error with respect to the management compensation of one of our senior officers had been made in our financial statements in prior periods and we determined that our disclosure controls and procedures were not effective as at March 31, 2012. Although we intend to remediate such material weaknesses, we have not yet been able to address these material weaknesses and they may continue to remain unremedied for some time, which could adversely 13
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. 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. 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 provisional patent applications. 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. 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, and any of our potential collaborators, 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. 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 licensing of our technology may adversely affect our ability to generate revenue. 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 14
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 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. We can make no assurance that our technology will not become obsolete due to the introduction of alternative technologies. Our ability to generate revenues in the future may be adversely affected. 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. 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. 15
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 34,112,065 common shares were issued and outstanding as of May 15, 2012. 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 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 QB. Trading of our stock through the OTC QB 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 16
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. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not Applicable. 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. 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, 2012: (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 were no changes in our company's internal control over financial reporting during the period ended December 31, 2011, that affected our company's internal control over financial reporting subsequent to the date that we carried out our evaluation for that period. 17
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. Additionally, there were no proceedings in which any of our company's directors, officers, or affiliates, or any registered or beneficial shareholders holding more than 5% of our voting securities, 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 None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. MINE SAFETY DISCLOSURES None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS 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). 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). 18
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 2007 Stock Option Plan (incorporated by reference from our Registration Statement on Form SB-2 filed on October 1, 2007). 10.2 Amendment to Employment Agreement dated August 18, 2009 between our company and Dexster Smith (incorporated by reference from our Quarterly Report on Form 10-Q filed on August 31, 2009). 10.3 Amendment to Employment Agreement dated August 18, 2009 between our company and Joel Bellenson (incorporated by reference from our Quarterly Report on Form 10-Q filed on August 31, 2009). 10.4 Return to Treasury Agreement dated December 14, 2009 between our company and Joel Bellenson (incorporated by reference from our Current Report on Form 8-K filed on December 14, 2009). 10.5 Return to Treasury Agreement dated December 14, 2009 between our company and Dexster Smith (incorporated by reference from our Current Report on Form 8-K filed on December 14, 2009). 10.6 Asset Sale Agreement dated December 14, 2009 between Pacific Pharma Technologies Inc. and JTAT Consulting Inc. (incorporated by reference from our Current Report on Form 8-K filed on December 14, 2009). (31) SECTION 302 CERTIFICATIONS 31.1* Certification of Principal Executive Officer and 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 and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (99) ADDITIONAL EXHIBITS 99.1 Compensation Committee Charter (incorporated by reference from our Annual Report on Form 10-K filed on December 19, 2008) 99.2 Audit Commission Charter (incorporated by reference from our Annual Report on Form 10-K filed on December 19, 2008) 101* Interactive data files pursuant to Rule 405 of Regulation S-T. ---------- * Filed herewith 19
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/ Charles El-Moussa ------------------------------------------------- Charles El Moussa Chief Financial Officer, President, Chief Executive Officer, Treasurer and Director (Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer) Dated: May 15, 2012 20