ART Advanced Research Technologies Inc.
TSX : ARA

ART Advanced Research Technologies Inc.

November 03, 2005 07:00 ET

ART Advanced Research Technologies Announces 2005 Third Quarter Financial Results

MONTREAL, QUEBEC--(CCNMatthews - Nov. 3, 2005) - ART Advanced Research Technologies Inc. (ART) (TSX:ARA)

Reports revenues of US$ 1,122,000 for the quarter, up by 48% compared to the same quarter a year ago, for a total of US$ 2.9 million in sales recorded so far this year

ART Advanced Research Technologies Inc. (ART) (TSX:ARA), a Canadian medical device company and a leader in optical molecular imaging products for the healthcare and pharmaceutical industries, today announces its financial results for the third quarter ended September 30, 2005. All dollar amounts referenced herein are in US dollars, unless otherwise stated.

ART reported a sales increase of $362,000 to $1,122,000, up by 48% from $760,000 for the same quarter a year ago. The Company posted a net loss of $3,870,288 ($0.09 per share) for the quarter ended September 30, 2005, compared to $2,438,606 ($0.06 per share) for the three-month period ended September 30, 2004.

For the nine-month period ended September 30, 2005 revenues were $2,885,850 compared to $1,336,000 for the same period in 2004, an increase of $1,549,850, or 116%. The net loss was $9,815,865 ($0.23 per share) for the nine-month period ended September 30, 2005, compared to $7,214,396 ($0.18 per share) for the nine-month period ended September 30, 2004.

"We are pleased to show a gain in market share with the increase in our sales from the new eXplore Optix multiwavelength system," reported President and CEO Micheline Bouchard. "We have also completed a financing round totaling US $ 10.9 million. With the entry of our SoftScan device into the final pivotal trials stage before commercialization, ART is in a favorable position for the upcoming quarters," added Ms. Bouchard.

Following the close of its third quarter, ART announced the publication of results from a SoftScan engineering optimization study conducted at the McGill University Health Centre in Academic Radiology, a peer-reviewed journal, as well as the launch of a clinical study at its first US research site, the Massachusetts General Hospital (MGH). In addition, a pivotal study, North American in scope, was launched at a recent press conference at the McGill University Health Centre, representing the final stage before commercializing the SoftScan device for the diagnosis of breast cancer.

Financial Highlights (in US dollars)

Sales for the three-month period ended September 30, 2005 were $1,122,000, compared to $760,000 for the three-month period ended September 30, 2004. Sales resulting from products amounted to $1,122,000 compared to $760,000 for the same quarter of last year. No sales resulting from maintenance were recorded during the third quarter of this year and during the quarter ended September 30, 2004. For the nine-month period ended September 30, 2005 revenues were $2,885,850, compared to $1,336,000 for the nine-month period ended September 30, 2004. Sales resulting from products for the nine-month period ended September 30, 2005 amounted to $2,386,400 compared to $1,336,000 for the same period of last year. Sales resulting from maintenance totaled $499,450 compared to nil in the nine-month period ended September 30, 2004. The increase in revenues comes from an increase in the Company's eXplore Optix product and maintenance sales as it pursues its market penetration in preclinical optical imaging. During the nine-month period ended September 30, 2005, the Company sold 13 eXplore units, including 1 demo unit, as compared to 7 units during the same period of last year and upgraded 4 single-wavelength systems to the new multiwavelength system during the nine-month period of current fiscal year compared to none during the same period of last year. Sales from products include new multi-wavelength system as well as add-ons that include diodes purchased by existing customers offering broader capability compared to the single-wavelength system. Sales resulting from maintenance include upgrades of the single-wavelength system to the new multiwavelength system and the sale of demonstration units. As of today, ART has a backlog of 5 units thus providing visibility and confirming expected revenues for the following quarters.

The following information provides a discussion and analysis on the expenses for the three and nine-month periods ended September 30, 2005 compared to the three-month and nine-month periods ended September 30, 2004. The majority of these expenses, which include the cost of sales and operating expenses, are incurred in Canadian dollars. Following a rapid appreciation of the Canadian currency over the US, non-favorable variances were created for these expenses in the current periods compared to same periods of last year.

ART generated a combined gross margin of 32% during the nine-month period ended September 30, 2005, and 54% in the preceding period. The combined gross margin decrease during the nine-month period compared to the same period of last year was principally due to the fact that ART transitioned to the new multiwavelength base system which is a more costly system and offered the possibility to its customer base to upgrade their base system to the new system at a preferential price. During the three and nine-month periods ended September 30, 2005, ART generated a gross margin of 33% and 35% respectively from the sales of its products and a gross margin of nil (i.e., no sales resulting from maintenance were recorded) and 18% respectively from sales resulting from maintenance.

The Company's research and development ("R&D") expenditures for the three-month period ended September 30, 2005, net of investment tax credits amounted to $2,269,531, compared to $2,056,835 for the three-month period ended September 30, 2004. For the nine-month period ended September 30, 2005, R&D expenditures, net of investment tax credits, were $6,938,814 compared to $5,504,262 for the nine-month period ended September 30, 2004. The R&D expenditures consist principally of the salaries and benefits paid to its personnel involved in R&D projects, of consultation fees paid for clinical studies, the cost associated with the preparation and conduct of the clinical studies and of the cost to build prototypes. The increase in R&D expenditures for the nine-month period compared to last year relates to the medical sector and is mainly due to the cost associated with the preparation and conduct of the clinical studies, which include the manufacturing of the SoftScan clinical prototypes, the negotiation of the protocols with the selected sites and the cost related to site selection both in Canada and in the US.

As a result, during the three and nine-month periods ended September 30, 2005, 79% and 82% respectively of the R&D expenditures were dedicated to the medical sector and 21% and 18 % respectively to the pharmaceutical sector.

Selling, general, and administrative ("SG&A") expenses for the three-month period ended September 30, 2005, totaled $1,103,473, compared to $794,033 for the three-month period ended September 30, 2004. For the nine-month period ended September 30, 2005, SG&A expenses were $2,946,831 compared to $2,513,573 for the nine-month period ended September 30, 2004. SG&A expenses consist principally of salaries, professional fees and other costs associated with marketing activities. During the three and the nine-month periods ended September 30, 2005, 62% of the SG&A expenditures were dedicated to the medical sector and 38% to the pharmaceutical sector.

Net loss for the three-month period ended September 30, 2005 was $3,870,288 or $0.09 per share, compared to $2,438,606 or $0.06 per share for the three-month period ended September 30, 2004. For the nine-month period ended September 30, 2005, the net loss was $9,815,865 or $0.23 per share, compared to $7,214,396 or $0.18 per share, for the nine-month period ended September 30, 2004.

The financial statements, accompanying notes to the financial statements, and Management's Discussion and Analysis for three-month period ended September 30, 2005, will be available online at www.sedar.com or at www.art.ca. Summary financial tables are provided below.

Conference Call

ART will host a conference call today at 8:30 AM (EDT). The telephone number to access the conference call is (866) 898-9626 (U.S. and Canada). Outside of North America, please dial (416) 340-2216. A replay of the call will be available until November 10, 2005. When dialing in for the replay from North America, please dial (800) 408-3053 or from outside of North America, please dial (416) 695-5800. The access code for the replay is 3165089#.

A detailed list of the risks and uncertainties affecting the Company can be found in its Annual Report on Form 20-F.

This press release may contain forward-looking statements subject to risks and uncertainties that would cause actual events to differ materially from expectations. These risks and uncertainties are described in ART Advanced Research Technologies Inc.'s regulatory filings with Canadian Securities Commissions and with the Securities and Exchange Commission in the United States.

About ART

ART Advanced Research Technologies Inc. is a leader in optical molecular imaging products for the healthcare and pharmaceutical industries. ART has developed two products based on its innovative technology. The first is eXplore Optix™, a molecular imaging device designed for monitoring physiological changes in living systems at the preclinical study phases of new drugs. eXplore Optix™ is distributed by GE Healthcare and is used by industry and academic leaders worldwide to bring new and better treatments to patients faster. The second is SoftScan®, a medical imaging device designed to improve the diagnosis and treatment of breast cancer. ART is commercializing its products in a global strategic alliance with GE Healthcare, a world leader in mammography and imaging. ART's shares are listed on the TSX under the ticker symbol ARA. Visit ART online at www.art.ca



ART Advanced Research Technologies Inc.
Balance Sheets
(In U.S. dollars)
(Unaudited)

---------------------------------------------------------------------
---------------------------------------------------------------------
September 30, December 31,
2005 2004
---------------------------------------------------------------------
ASSETS
Current assets
Cash $11,338,384 $631,164
Term deposit, 2.00%, maturing in
April 2006 258,020 249,584
Commercial papers and bank
acceptance (2.24% to 2.51% in 2004) - 10,950,403
Accounts receivable 1,433,326 883,604
Investment tax credits receivable 616,813 815,760
Inventories 1,872,559 1,014,551
Prepaid expenses 375,921 144,882
---------------------------------------------------------------------
15,895,023 14,689,948
---------------------------------------------------------------------

Property and equipment 608,769 547,406
Patents 1,543,316 1,527,533
Deferred costs 596,170 -
---------------------------------------------------------------------
$18,643,278 $16,764,887
---------------------------------------------------------------------
---------------------------------------------------------------------

LIABILITIES
Current liabilities
Accounts payable and accrued liabilities $2,448,934 $2,155,073
Deferred grant 134,082 -
Current portion of convertible debenture
(Note 3) 2,500,000 -
---------------------------------------------------------------------
5,083,016 2,155,073
---------------------------------------------------------------------

Liability component of convertible
debenture (Note 3) 881,622 -
---------------------------------------------------------------------
5,964,638 2,155,073

SHAREHOLDERS' EQUITY
Share capital and share purchase warrants
(Note 3) 87,131,724 80,696,107
Equity component of convertible debenture
(Note 3) 1,510,467 -
Contributed surplus (Note 5) 654,722 474,698
Deficit (78,719,264) (68,122,241)
Cumulative translation adjustment 2,100,991 1,561,250
---------------------------------------------------------------------
12,678,640 14,609,814
---------------------------------------------------------------------
$18,643,278 $16,764,887
---------------------------------------------------------------------
---------------------------------------------------------------------



ART Advanced Research Technologies Inc.
Operations and Deficit
(In U.S. dollars)
(Unaudited)

---------------------------------------------------------------------
---------------------------------------------------------------------
Three-month period ended Nine-month period ended
September 30, September 30, September 30, September 30,
2005 2004 2005 2004
---------------------------------------------------------------------
Sales
Product $1,122,000 $760,000 $2,386,400 $1,336,000
Maintenance - - 499,450 -
---------------------------------------------------------------------
1,122,000 760,000 2,885,850 1,336,000
---------------------------------------------------------------------
Cost of sales
Product 756,194 340,038 1,562,853 608,462
Maintenance - - 409,783 -
---------------------------------------------------------------------
756,194 340,038 1,972,636 608,462
---------------------------------------------------------------------
Gross margin 365,806 419,962 913,214 727,538
---------------------------------------------------------------------

Operating
expenses
Research and
development,
net of
investment
tax credits 2,269,531 2,056,835 6,938,814 5,504,262
Selling,
general and
administra-
tive 1,103,473 794,033 2,946,831 2,513,573
Amortization 71,016 67,520 216,307 192,821
---------------------------------------------------------------------
3,444,020 2,918,388 10,101,952 8,210,656
---------------------------------------------------------------------
Operating loss 3,078,214 2,498,426 9,188,738 7,483,118
Interest expense
on convertible
debenture 330,309 - 330,309 -
Interest income (43,190) (96,662) (139,058) (229,028)
Foreign exchange
loss (gain) 504,955 36,842 435,876 (39,694)
---------------------------------------------------------------------
Net loss $3,870,288 $2,438,606 9,815,865 7,214,396
---------------------------------------------------------------------
---------------------------------------------------------------------
Deficit,
beginning of
year 68,122,241 56,753,062
Share and share
purchase
warrant issue
expenses 781,158 1,436,480
---------------------------------------------------------------------
Deficit, end
of period $78,719,264 $65,403,938
---------------------------------------------------------------------
---------------------------------------------------------------------

Basic and
diluted net
loss per
share (Note 2) $0.09 $0.06 $0.23 $0.18
---------------------------------------------------------------------
---------------------------------------------------------------------

Basic and
diluted
weighted
average number
of common
shares
outstanding 42,664,523 42,662,523 42,664,523 40,739,634
---------------------------------------------------------------------
---------------------------------------------------------------------

Number of
common shares
outstanding,
end of period 42,664,523 42,664,523 42,664,523 42,664,523
---------------------------------------------------------------------
---------------------------------------------------------------------



ART Advanced Research Technologies Inc.
Cash Flows
(In U.S. dollars)
(Unaudited)

---------------------------------------------------------------------
---------------------------------------------------------------------
Three-month period ended Nine-month period ended
September 30, September 30, September 30, September 30,
2005 2004 2005 2004
---------------------------------------------------------------------
OPERATING
ACTIVITIES
Net loss $(3,870,288) $(2,438,606) $(9,815,865) $(7,214,396)
Items not
affecting
cash
Amortization 71,016 67,520 216,307 192,821
Stock-based
compensation
(Note 5) 63,881 42,296 180,024 103,942
Interest on
convertible
debenture 252,317 - 252,317 -
Net change in
working
capital items
Accounts
receivable (397,697) (196,706) (502,469) (7,359)
Investment tax
credits
receivable (76,949) 1,005,496 214,627 728,639
Inventories (396,853) (271,773) (780,400) (638,283)
Prepaid expenses (95,758) 27,389 (215,645) 104,867
Accounts payable
and accrued
liabilities 426,926 405,514 226,141 526,949
Deferred grant 40,785 - 130,319 -
---------------------------------------------------------------------
Cash flows from
operating
activities (3,982,620) (1,358,870) (10,094,644) (6,202,820)
---------------------------------------------------------------------
INVESTING
ACTIVITIES
Short-term
investments - 5,764,163 9,749,504 (898,667)
Property and
equipment 3,739 (72,604) (219,611) (160,013)
Patents - 11,004 (5,339) (90,689)
Deferred costs (58,064) - (258,730) -
---------------------------------------------------------------------
Cash flows from
investing
activities (54,325) 5,702,563 9,265,824 (1,149,369)
---------------------------------------------------------------------
FINANCING
ACTIVITIES
Issue of senior
convertible
debenture 5,000,000 - 5,000,000 -
Issue of
convertible
preferred
shares 5,900,000 - 5,900,000 -
Issue of common
shares - - - 12,722,832
Cost of
financing (918,241) (34,214) (918,241) (1,436,480)
---------------------------------------------------------------------
Cash flows from
financing
activities 9,981,759 (34,214) 9,981,759 11,286,352
Effect of
foreign currency
translation
adjustments 640,432 368,710 552,374 246 160
---------------------------------------------------------------------
10,622,191 334,496 10,534,133 11,532,512
---------------------------------------------------------------------
Net increase
in cash and
cash
equivalents 6,585,246 4,678,189 9,705,313 4,180,323
Cash and cash
equivalents,
beginning of
year 4,753,138 3,702,262 1,633,071 4,200,128
---------------------------------------------------------------------
Cash and cash
equivalents,
end of period $11,338,384 $8,380,451 $11,338,384 $8,380,451
---------------------------------------------------------------------
---------------------------------------------------------------------

CASH AND CASH
EQUIVALENTS
Cash $11,338,384 $7,266,826 $11,338,384 $7,266,826
Term deposits - 45,087 - 45,087
Commercial
papers - 1,068,538 - 1,068,538
---------------------------------------------------------------------
$11,338,384 $8,380,451 $11,338,384 $8,380,451
---------------------------------------------------------------------
---------------------------------------------------------------------
Supplemental
disclosure of
cash flow
information
Interest
received $35,950 $66,444 $115,747 $121,602
Interest paid $- $- $- $-


ART Advanced Research Technologies Inc.
Notes to Financial Statements
(In U.S. dollars)
(Unaudited)

1- BASIS OF PRESENTATION

These interim financial statements as at September 30, 2005 are
unaudited. They have been prepared by the Company in accordance with
Canadian generally accepted accounting principles. In the opinion of
management, they contain all adjustments necessary to present fairly
the Company's financial position as at September 30, 2005 and
December 31, 2004 and its results of operations and its cash flows
for the three-month periods and the nine-month periods ended
September 30, 2005 and September 30, 2004.

The accounting policies and methods of computation adopted in these
financial statements are the same as those used in the preparation of
the Company's most recent annual financial statements. All
disclosures required for annual financial statements have not been
included in these financial statements. These financial statements
should be read in conjunction with the Company's most recent annual
financial statements.

2- ACCOUNTING POLICIES

Basic and diluted loss per common share and information pertaining to
number of shares

The Company uses the treasury stock method to determine the dilutive
effect of the share purchase warrants and the stock options. Per
share amounts have been computed based on the weighted average number
of common shares outstanding for all periods presented. The diluted
loss per share is calculated by adjusting outstanding shares to take
into account the dilutive effect of stock options and share purchase
warrants. For all periods presented, the effect of stock options and
share purchase warrants was not included as the effect would be anti-
dilutive. Consequently, there is no difference between the basic and
diluted net loss per share.

3-SHARE CAPITAL AND SHARE PURCHASE WARRANTS

The following table presents the changes in the number of outstanding
common shares:

September 30, December 31,
2005 2004
---------------------------------------------------------------------
Common shares Common shares
---------------------------------------------------------------------
Number Value Number Value
---------------------------------------------------------------------
Issued and fully
paid
Balance,
beginning of
year 42,664,523 $78,678,625 34,238,523 $65,955,938
Issue of
shares for
cash - - 8,420,000 12,714,401(a)
Issue of
shares for
cash
following
the exercise
of stock
options - - 6,000 8,286
---------------------------------------------------------------------
Balance, end
of period 42,664,523 $78,678,625 42,664,523 $78,678,625
---------------------------------------------------------------------
---------------------------------------------------------------------


The following table presents the changes in the number of outstanding
preferred shares:

September 30, December 31,
2005 2004
---------------------------------------------------------------------
Preferred Preferred
shares shares
---------------------------------------------------------------------
Number Value Number Value
---------------------------------------------------------------------
Issued and
fully paid
Balance,
beginning
of year - $- - $-
Issue of
shares for
cash 6,341,982(c) 5,900,000 - -
---------------------------------------------------------------------
Balance, end
of period 6,341,982 $5,900,000 - $-
---------------------------------------------------------------------
---------------------------------------------------------------------


The following table presents the changes in the number of share
purchase warrants outstanding:

September 30, 2005
---------------------------------------------------------------------
Weighted
average
exercise price
Number Value CA$
---------------------------------------------------------------------

Balance, beginning of year 2,194,422 $2,017,482 2.28
Issue of share purchase
warrants 1,828,395 535,617(c)(e) 1.19
Expiry of share purchase
warrants - -
---------------------------------------------------------------------
Balance, end of period 4,022,817 $2,553,099 1.78
---------------------------------------------------------------------
---------------------------------------------------------------------


December 31, 2004
---------------------------------------------------------------------
Weighted
average
exercise price
Number Value CA$
---------------------------------------------------------------------

Balance, beginning of year 3,208,422 $1,914,746 4.84
Issue of share purchase
warrants 546,000 162,736(b) 2.15
Expiry of share purchase
warrants (1,560,000) (60,000)(d) 7.50
---------------------------------------------------------------------
Balance, end of period 2,194,422 $2,017,482 2.28
---------------------------------------------------------------------
---------------------------------------------------------------------


(a) In March 2004, the Company issued 8,420,000 common shares through
a public offering for gross cash proceeds of $12,714,401.
Commission and other transaction costs amounting to $1,440,576
were incurred and included in the deficit.

(b) In December 2004, the Company issued to an agent 546,000 share
purchase warrants at an exercise price of CA$2.15, by way of
private placement, and received, in consideration, aggregate
proceeds of $241,904. This private placement of share purchase
warrants was coincident with, and set as a condition for, the
payment of a sum of $241,904 to the agent in consideration for
the settlement of all claims and disputes between the agent and
ART. With respect to the share purchase warrants issue, 50% of
the share purchase warrants are exercisable immediately and the
balance beginning December 2005. The share purchase warrants will
expire five years from the date of issue. The Company evaluated
the fair value of the share purchase warrants at $162,736 using
the Black & Scholes model. The valuation assumptions are listed
below:

- Expected life: 5 years;
- Expected volatility: 70%;
- Weighted average risk-free interest rate: 3.71%;
- Dividend rate: 0%.

(c) In July 2005, the Company closed a $5.9 million private placement
of convertible preferred shares with an existing institutional
investor. The private placement of 6,341,982 preferred shares was
made at a subscription price of CA$1.14 per preferred share. The
preferred shares are entitled to a cumulative dividend of 7%,
payable in cash or common shares at the Company's option. The
preferred shares are convertible at the investor's option at any
time into common shares at a fixed conversion price of CA$1.26
per share (being an effective conversion rate of 0.9036 common
share for each Series 1 preferred share). The definitive
agreement also provides that, if on the first anniversary of
closing of the transaction, the weighted average trading price of
the common shares for the previous ten (10) days does not exceed
C$1.20 per share, the investor will have the option to convert
some or all the preferred shares at a conversion price of 112.5%
of the weighted average trading price for the ten (10) trading
days prior to date of conversion. The right to convert at the
adjusted conversion price shall only be available for a period
ending on the third anniversary of the closing of the
transaction. The definitive agreement also provides that the
Company may force the conversion of the preferred shares into
common shares at the conversion price of C$1.26 per share upon
the occurrence of certain events or the achievement of certain
milestones. For a period of twelve (12) months commencing from
the closing date, the investor shall have the option to purchase
an additional 2,000,000 preferred shares at a price of CA$1.14
per additional preferred share, for a total potential additional
investment of CA$2,280,000. Each such additional preferred share
shall be convertible into common shares at a fixed conversion
price of CA$1.08 per share (being an effective conversion rate of
1.0556 common share for each Series 2 preferred share).

In conjunction with this transaction, ART issued to an agent
share purchase warrants to purchase 286,535 common shares at an
exercise price of CA$1.18 per share. The Company evaluated the
fair value of such share purchase warrants at $85,961 using the
Black & Scholes model. The valuation assumptions are listed
below:

- Expected life: 3 years;
- Expected volatility: 70%;
- Weighted average risk-free interest rate: 3.19%;
- Dividend rate: 0%.

(d) Upon the expiry of the share purchase warrants, an amount of
$60,000 was transferred to contributed surplus.

(e) In July 2005 , ART closed a $5 million private placement of
senior secured convertible debentures with a limited number of
U.S. institutional investors. The debentures are secured by a
perfected security interest and hypotech on all assets of the
Company. The debentures mature on January 28, 2008 and bear
interest at a rate of 9% per annum, payable quarterly, subject to
certain quarterly adjustments. The debentures are convertible at
the investor's option at any time into common shares at a fixed
conversion price of CA$0.99 per share. The definitive agreement
provides that, at ART's option, any cash payments contemplated
under the debentures may be made in freely tradable common shares
issued at a 10% percent discount to market. In addition, if after
November 28,2006, the trading price of ART's stock exceeds 225%
of the conversion price for 20 consecutive trading days
(equivalent to CA$2.23 per share), ART may require the investors
to convert the debentures into common shares at the fixed
conversion price of CA$0.99 per share. The debentures have
certain covenants relating to the achievement of specific
quarterly and annual revenue levels, quarterly gross margins, and
the maintenance of minimum cash and cash equivalents thresholds.
These covenants also provide that the Company shall file a
submission for regulatory approval for SoftScan by June 30, 2006.
The debentures also have certain customary covenants regarding,
among other things, the debt that ART may incur. In an event of
default under the debentures, ART may be required to repay any
outstanding amounts plus accrued and unpaid interest, plus a 20%
premium. Also, ART issued to the investors 5-year warrants to
purchase 1,110,139 common shares at an exercise price of CA$1.16
per share and 5-year warrants to purchase 123,349 common shares
at an exercise price of CA$1.39 per share. Finally, for a period
of twelve (12) months commencing from the closing date, the
investors shall have the option of purchasing additional senior
convertible debentures for a total investment of $2.0 million ;
and for a period of twelve months (12) months following
shareholder approval the investors shall have the option of
purchasing additional senior convertible debentures for a total
investment of US$500,000. The definitive agreement also provides
that ART may force this additional investment to be made if ART's
stock price closes above 150% of the conversion price for 20
consecutive trading days (equivalent to CA$1.49 per share). With
that financing ART has terminated its credits facility of
CA$1,000,000 to cover fluctuations in cash as well as its
CA$1,300,000 facility to finance investment tax credits.

For accounting purposes, the debentures contain both a liability
component and an equity component, which represent the holder's
conversion option and the warrants. The liability component's
carrying amount has been determined at $3,129,305, the conversion
option has been valued at $1,510,467 and the warrants has been
valued at $360,228. The above values were determined by a
combination of Black & Scholes (for the conversion option and the
warrants) with a discounted cash flow (for the liability
component) of future capital and interest payments until their
maturity dates, at a discount rate which represented the
borrowing rate available to the Company for similar debentures
having no conversion rights. The valuation assumptions are listed
below:

Future cash flow discount rate: 25%

Conversion option Warrants
---------------------------------------------------------------------

Expected life: 2.5 years 5 years
Expected volatility: 70% 70%
Weighted average risk-free interest rate: 3,13% 3,33%
Dividend rate: 0% 0%

Also, in conjunction with the transaction, ART issued to an agent
share purchase warrants to purchase 308,372 common shares at an
exercise price of CA$1.21 per share. The Company evaluated the
fair value of the agent share purchase warrants at $89,428 using
the Black & Scholes model. The valuation assumptions are listed
below:

- Expected life: 3 years;
- Expected volatility: 70%;
- Weighted average risk-free interest rate: 3.13%;
- Dividend rate: 0%.

4-CONVERTIBLE DEBENTURE

As at September 30, 2005, the Company had a convertible debenture
which is describe in Note 3e.

The following table discloses the information about the contractual
obligations and periods in which payments are due as of September 30,
2005

Total Payment due
---------------------------------------------------------------------
Less than 1 year 1-3 years
---------------------------------------------------------------------
Convertible debenture $5,000,000 $2,500,000 $2,500,000


5-STOCK-BASED COMPENSATION PLAN

As at September 30, 2005, the Company offered a compensation plan to
employees, which is described in its most recent annual financial
statements.

The following table presents the changes in the number of stock
options outstanding:

September 30, 2005 December 31, 2004
---------------------------------------------------------------------
Weighted Weighted
average average
exercise exercise
Number price Number price
of options CA$ of options CA$
---------------------------------------------------------------------
Balance, beginning
of year 2,467,374 2.81 1,431,600 3.79
Options granted 69,500 0.79 1,282,574 1.96
Options exercised - - (6,000) 1.91
Options cancelled (104,395) 3.60 (240,800) 4.18
---------------------------------------------------------------------
Balance, end of
period 2,432,479 2.72 2,467,374 2.81
---------------------------------------------------------------------
---------------------------------------------------------------------

Options exercisable
end of period 1,414,623 3.60 1,222,898 3.63
---------------------------------------------------------------------
---------------------------------------------------------------------


The following table provides information on options outstanding and
exercisable as of September 30, 2005:

Options outstanding
---------------------------------------------------------------------
Weighted
Weighted average
average remaining
Exercice price Number exercice price contractual life
CA$ outstanding CA$ (years)
---------------------------------------------------------------------

1.04 @ 1.99 1,141,900 1.31 8.34
2.00 @ 2.99 262,134 2.27 7.72
3.00 @ 3.99 617,445 3.24 8.14
4.00 @ 4.99 137,000 4.60 1.91
5.00 @ 5.99 - - -
6.00 @ 6.99 111,000 6.00 3.38
7.00 @ 7.50 163,000 7.50 4.44
---------------------------------------------------------------------
2,432,479 2.72 7.37
---------------------------------------------------------------------
---------------------------------------------------------------------


Options exercisable
---------------------------------------------------------------------
Weighted
average
Exercice price Number exercice price
CA$ exercisable CA$
---------------------------------------------------------------------

1.04 @ 1.99 361,600 1.74
2.00 @ 2.99 163,245 2.32
3.00 @ 3.99 478,778 3.27
4.00 @ 4.99 137,000 4.60
5.00 @ 5.99 - -
6.00 @ 6.99 111,000 6.00
7.00 @ 7.50 163,000 7.50
---------------------------------------------------------------------
1,414,623 3.60
---------------------------------------------------------------------
---------------------------------------------------------------------

The fair value of stock options granted during the nine-month period
ended September 30, 2005 and 2004 was estimated on the grant date
using the Black & Scholes option-pricing model with the following
assumptions for the stock options granted since the beginning of the
fiscal year:

- Weighted average expected life: 4.5 years (3.5 years in 2004);
- Expected volatility : 70% (70% in 2004);
- Weighted average risk-free interest rate: 3.51% (3.19% in 2004);
- Dividend rate: 0% (0% in 2004).

The weighted average fair value of stock options granted during the
three-month period and the nine-month period ended September 30, 2005
was $0.35. For 2004 it was zero and $1.00 respectively .

The Company recorded an expense of $63,882 and $180,024, using the
fair value method in its operations and deficit statement for stock
options granted to employees in the three-month period and in the
nine-month period ended September 30, 2005. For 2004 it was $42,296
and $103,942 respectively .

The fair value of all stock options outstanding as at September 30,
2005 was CA$1.56, and was estimated on the grant date using the Black
& Scholes option-pricing model.

During the fiscal year ended April 30, 2003, the Company did not
record any compensation cost related to stock options granted to
employees. If the compensation cost had been determined using the
fair-value-based method at the grant date of stock options awarded to
employees, the net loss and loss per share would have been adjusted
to the pro forma amounts indicated in the following table :

---------------------------------------------------------------------
---------------------------------------------------------------------
Three-month period ended Nine-month period ended
September 30, September 30, September 30, September 30,
2005 2004 2005 2004
---------------------------------------------------------------------
Net loss as
reported $3,870,288 $2,438,606 $9,815,865 $7,214,396
Less:
compensation
expense
recognized in
the statement
of operations
and deficit (63,882) (42,296) (180,024) (103,942)
Plus: total
compensation
expenses 86,447 93,020 288,165 255,019
---------------------------------------------------------------------
Pro forma net
loss $3,892,853 $2,489,330 $9,924,006 $7,365,473
---------------------------------------------------------------------
---------------------------------------------------------------------

Basic and
diluted loss
per share
As reported $(0.09) $(0.06) $(0.23) $(0.18)
Pro forma $(0.09) $(0.06) $(0.23) $(0.18)

6-SEGMENT INFORMATION

The Company operates in two sectors for financial reporting purposes;
the medical sector and the pharmaceutical sector. The medical sector
includes the research, design, development and marketing of
SoftScan® time domain optical breast imaging device. The
pharmaceutical sector includes the research, design, development and
commercialization of eXplore Optix™ product.

The information pertaining to the two operating segments are
summarized as follows:

---------------------------------------------------------------------
---------------------------------------------------------------------
Three-month period ended
September 30, 2005
---------------------------------------------------------------------
Pharmaceutical Medical Total

Sales
Product $1,122,000 $- $1,122,000
Maintenance - - -
---------------------------------------------------------------------
1,122,000 - 1,122,000
---------------------------------------------------------------------
Cost of sales
Product 756,194 - 756,194
Maintenance - - -
---------------------------------------------------------------------
756,194 - 756,194
---------------------------------------------------------------------
Gross margin 365,806 - 365,806
---------------------------------------------------------------------

Operating expenses
Research and development
expenses, net of investment
tax credits 483,460 1,786,071 2,269,531
Selling, general and
administrative 420,076 683,397 1,103,473
Amortization 38,497 32,519 71,016
---------------------------------------------------------------------
942,033 2,501,987 3,444,020
---------------------------------------------------------------------
Operating loss 576,227 2,501,987 3,078,214
Interest expense on convertible
debenture 96,582 233,727 330,309
Interest income (12,629) (30,561) (43,190)
Foreign exchange loss 147,649 357,306 504,955
---------------------------------------------------------------------
Net loss $807,829 $3,062,459 $3,870,288
---------------------------------------------------------------------
---------------------------------------------------------------------


---------------------------------------------------------------------
---------------------------------------------------------------------
Nine-month period ended
September 30, 2005
---------------------------------------------------------------------
Pharmaceutical Medical Total

Sales
Product $2,386,400 $- $2,386,400
Maintenance 499,450 - 499,450
---------------------------------------------------------------------
2,885,850 - 2,885,850
---------------------------------------------------------------------
Cost of sales
Product 1,562,853 - 1,562,853
Maintenance 409,783 - 409,783
---------------------------------------------------------------------
1,972,636 - 1,972,636
---------------------------------------------------------------------
Gross margin 913,214 - 913,214
---------------------------------------------------------------------

Operating expenses
Research and development
expenses, net of investment
tax credits 1,238,211 5,700,603 6,938,814
Selling, general and
administrative 1,125,567 1,821,264 2,946,831
Amortization 124,840 91,467 216,307
---------------------------------------------------------------------
2,488,618 7,613,334 10,101,952
---------------------------------------------------------------------
Operating loss 1,575,404 7,613 334 9,188,738
Interest expense on convertible
debenture 96,582 233,727 330,309
Interest income (40,660) (98,398) (139,058)
Foreign exchange loss 127,450 308,426 435,876
---------------------------------------------------------------------
Net loss $1,758,776 $8,057,089 $9,815,865
---------------------------------------------------------------------
---------------------------------------------------------------------


---------------------------------------------------------------------
---------------------------------------------------------------------
Three-month period ended
September 30, 2004
---------------------------------------------------------------------
Pharmaceutical Medical Total

Sales
Product $760,000 $- $760,000
Maintenance - - -
---------------------------------------------------------------------
760,000 - 760,000
---------------------------------------------------------------------
Cost of sales
Product 340,038 - 340,038
Maintenance - - -
---------------------------------------------------------------------
340,038 - 340,038
---------------------------------------------------------------------
Gross margin 419,962 - 419,962
---------------------------------------------------------------------

Operating expenses
Research and development expenses,
net of investment tax credits 425,022 1,631,813 2,056,835
Selling, general and
administrative 340,658 453,375 794,033
Amortization 43,345 24,175 67,520
---------------------------------------------------------------------
809,025 2,109,363 2,918,388
---------------------------------------------------------------------
Operating loss 389,063 2,109,363 2,498,426
Interest income (27,104) (69,558) (96,662)
Foreign exchange loss (gain) 10,330 26,512 36,842
---------------------------------------------------------------------
Net loss $372,289 $2,066,317 $2,438,606
---------------------------------------------------------------------
---------------------------------------------------------------------


---------------------------------------------------------------------
---------------------------------------------------------------------
Nine-month period ended
September 30, 2004
---------------------------------------------------------------------
Pharmaceutical Medical Total

Sales
Product $1,336,000 $- $1,336,000
Maintenance - - -
---------------------------------------------------------------------
1,336,000 - 1,336,000
---------------------------------------------------------------------
Cost of sales
Product 608,462 - 608,462
Maintenance - - -
---------------------------------------------------------------------
608,462 - 608,462
---------------------------------------------------------------------
Gross margin 727,538 - 727,538
---------------------------------------------------------------------

Operating expenses
Research and development
expenses, net of investment
tax credits 1,428,342 4,075,920 5,504,262
Selling, general and
administrative 945,675 1,567,898 2,513,573
Amortization 125,641 67,180 192,821
---------------------------------------------------------------------
2,499,658 5,710,998 8,210,656
---------------------------------------------------------------------
Operating loss 1,772,120 5,710,998 7,483,118
Interest income (64,219) (164,809) (229,028)
Foreign exchange loss (gain) (11,131) (28,563) (39,694)
---------------------------------------------------------------------
Net loss $1,696,770 $5,517,626 $7,214,396
---------------------------------------------------------------------
---------------------------------------------------------------------

As at September 30, 2005 and December 31, 2004, the majority of
identifiable assets consisted of cash, short-term investments and
property and equipment used for corporate head office purposes.
Identifiable assets by segment are summarized as follows:

---------------------------------------------------------------------
---------------------------------------------------------------------
September 30, 2005 December 31, 2004
---------------------------------------------------------------------

Pharmaceutical $3,236,752 $2,132,979
Medical 1,756,638 1,734,349
Corporate 13,649,888 12,897,559
---------------------------------------------------------------------
$18,643,278 $16,764,887
---------------------------------------------------------------------
---------------------------------------------------------------------

The accompanying notes are an integral part of the financial statements.

The unaudited quarterly financial statements have not been reviewed
by external auditors.


Contact Information

  • ART Advanced Research Technologies Inc.
    Jacques Bedard
    Chief Financial Officer
    jbedard@art.ca
    or
    ART Advanced Research Technologies Inc.
    Jacques (Jack) Raymond
    Vice-President, Business Development
    (514) 832-0777
    jraymond@art.ca
    www.art.ca