ART Advanced Research Technologies Inc.
TSX : ARA

ART Advanced Research Technologies Inc.

August 03, 2006 07:01 ET

ART Advanced Research Technologies Announces 2006 Second Quarter Financial Results

MONTREAL, QUEBEC--(CCNMatthews - Aug. 3, 2006) - 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 announced its financial results for the second quarter ended June 30, 2006. All dollar amounts referenced herein are in US dollars, unless otherwise stated.

Highlights

- Revenues for the second quarter totaled $829,000, including sales from the newly acquired Fenestra product line;

- ART filed a Medical Device Licence Application with Health Canada to obtain approval to begin the commercialization of the SoftScan breast imaging device;

- Clinical trials continued with enrollment at the Princess Margaret Hospital in Toronto, the University of California-San Diego (UCSD), the Cancer Center at Martin Memorial in Florida, the Cedars Breast Clinic at the McGill University Health Centre (MUHC) and at the Central Alberta Medical Imaging Services (CAMIS);

- Integration of Alerion Biomedical, Inc. (Alerion) imaging technology and product assets completed;

- CDN$9.3 million (US$8.5 million) in investments closed in this quarter will fund new and ongoing activities;

- Scientific presentations at the European Society of Molecular Imaging and at the International Union of Biochemistry and Molecular Biology have demonstrated to researchers the applications of the eXplore Optix time-domain technology for their research activities.

During the second quarter, ART completed the integration of the imaging technology and product assets resulting from the acquisition of Alerion, a US-based developer and manufacturer of biomarkers and contrast media for preclinical and clinical imaging devices. The total purchase price, including related expenses, was readjusted from $563,000 to $840,000 (subject to some further adjustments); these assets include, in particular, the intellectual property, the accounts receivable, the Fenestra product inventory and some fixed assets. The acquisition was recorded using the purchase method, and earnings from this acquisition have been included in the financial statements since the date of acquisition. The terms of the transaction provide for a purchase price which is subject to adjustments and to purchase price increases - in the form of earn-outs - based on the future revenue generated by the purchased assets. The purchase price was paid in cash and in common shares of the Company.

During the quarter, the Company announced the closing of a CDN$9.3 million financing round, in the form of an additional CDN$2.3 million (US$2.1M) investment by an institutional investor (through the exercise of an option granted pursuant to terms of the private placement of preferred shares announced in July, 2005), combined with a public offering of common shares for total gross proceeds of CDN$7 million (US$6.4M) to fund new and ongoing activities.

Following the second quarter, the Company announced the resignation of Ms. Micheline Bouchard as President &CEO, and the appointment of Mr. Sebastien Gignac to that position by the Board of Directors of ART.

Financial Highlights (in US dollars)

Sales for the three-month period ended June 30, 2006 were $828,673, compared to $752,500 for the three-month period ended June 30, 2005. Sales resulting from products amounted to $664,056, compared to $511,550 for the same quarter of last year. Sales resulting from maintenance totaled $164,617, compared to $240,950 in the quarter ended June 30, 2005. For the six-month period ended June 30, 2006, sales were $1,631,229, compared to $1,763,850 for the six-month period ended June 30, 2005. Sales resulting from products for the six-month period ended June 30, 2006 amounted to $1,466,612, compared to $1,264,400 for the same period of last year. Sales resulting from maintenance totaled $164,617, compared to $499,450 in the six-month period ended June 30, 2005. During the quarter ended June 30, 2006, the Company sold three (seven for the six-month period ended June 30, 2006) eXplore Optix units compared to two (six for the six-month period ended June 30, 2005) units during the same quarter a year ago. Sales from products include the multi-wavelength eXplore Optix system as well as add-ons and the sales of the Fenestra product. Sales resulting from maintenance include upgrades of the single-wavelength system to the new multiwavelength system and the sale of demonstration units.

For the three-month period ended June 30, 2006, the total cost of sales was $507,628, compared to $477,121 in the three-month period ended June 30, 2005. For the six-month period ended June 30, 2006, cost of sales was $1,005,666, compared to $1,216,442 for the six-month period ended June 30, 2005. During the three and six-month periods ended June 30, 2006, ART generated a gross margin of 44% and 41% respectively from the sales of its products compared to 38% and 36% for the same periods a year ago. Also, the Company generated on the maintenance a gross margin of 16% for both the three and six-month periods ended June 30, 2006, compared to 34% and 18% respectively for the same periods a year ago. The combined gross margin increase during the six-month period compared to the same period of last year is principally due to the lower cost of the eXplore Optix components resulting from more favorable terms negotiated with some vendors and the sales of the Fenestra product which provides higher margins. Cost of sales consisted principally of raw materials, royalties and manufacturing costs.

The Company's research and development ("R&D") expenditures for the three-month period ended June 30, 2006, net of investment tax credits amounted to $2,385,340, compared to $1,999,239 for the three-month period ended June 30, 2005. For the six-month period ended June 30, 2006, R&D expenditures, net of investment tax credits, were $4,349,112, compared to $4,669,283 for the six-month period ended June 30, 2005. The R&D expenditures consist principally of the salaries and benefits paid to its employees involved in R&D projects, and of clinical activities. The increase in R&D expenses for the current quarter compared to the same quarter last year is due to the increased effort accomplished to complete the SoftScan Medical Device Licence Application with Health Canada. At the same time, in order to optimize the eXplore Optix performance, the Company has reassigned a large part of the R&D resources of the SoftScan program to the Optix program. The decrease in R&D expenditures for the six-month period compared to last year also relates to the medical sector and is principally due to the non-recurring cost engaged last year associated with the manufacturing of the SoftScan clinical prototypes, partially offset by the increase of the costs related to complete the Health Canada filing.

Selling, general, and administrative ("SG&A") expenses for the three-month period ended June 30, 2006 totaled $986,932, compared to $971,275 for the three-month period ended June 30, 2005. For the six-month period ended June 30, 2006, SG&A expenses were $1,979,435, compared to $1,843,358 for the six-month period ended June 30, 2005. SG&A expenses consist principally of salaries, professional fees and other costs associated with marketing activities. SG&A expenses were principally engaged to support commercial activities related to the eXplore Optix and Fenestra products as well as to support the Company's overall activities.

The loss before interest and foreign exchange loss for the second quarter of 2006 was $3,122,676, compared to $2,783,946 for the same quarter a year ago. For the six-month period ended June 30, 2006, the loss before interest and foreign exchange loss was $5,847,584, compared to $6,110,524 for the same period a year ago.

As a result, net loss for the three-month period ended June 30, 2006 was $3,643,064 or $0.07 per share, compared to $2,701,883 or $0.06 per share for the three-month period ended June 30, 2005. For the six-month period ended June 30, 2006, the net loss was $6,785,096 or $0.14 per share, compared to $5,945,577 or $0.14 per share, for the six-month period ended June 30, 2005.

The financial statements, accompanying notes to the financial statements, and Management's Discussion and Analysis for three-month period ended June 30, 2006, 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 (514) 868-1042 when dialing within the Montreal area, or (866) 898-9626 for the rest of North America. Outside of North America, please dial (514) 868-1042. A replay of the call will be available until August 10, 2006. When dialing in for the replay from the Montreal area, please dial (514) 861-2272, or (800) 408-3053 for the rest of North America. From outside of North America, please dial (514) 861-2272. The access code for the replay is 3191781#.

A detailed list of the risks and uncertainties affecting the Company can be found in the Company's 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 products in medical imaging, medical diagnostics, disease research, and drug discovery with the goal of bringing new and better treatments to patients faster. eXplore Optix™, an optical molecular imaging device designed for monitoring physiological changes in living systems at the preclinical study phases of new drugs, is distributed by GE Healthcare and is used by industry and academic leaders worldwide. SoftScan®, an optical medical imaging device, is designed to improve the diagnosis and treatment of breast cancer. ART is commercializing these products in a global strategic alliance with GE Healthcare, a world leader in mammography and imaging. Finally, the Fenestra™ line of molecular imaging contrast products provide image enhancement for a wide range of preclinical Micro CT applications allowing scientists to see greater detail in their imaging studies, with potential extension into other major imaging modalities. ART's shares are listed on the TSX under the ticker symbol ARA. For more information on ART, visit our website at www.art.ca .



ART Advanced Research Technologies Inc.
Balance Sheets
(In U.S. dollars)
(Unaudited)
---------------------------------------------------------------------
---------------------------------------------------------------------
June 30, 2006 December 31, 2005
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ASSETS
Current assets
Cash $7,952,298 $4,858,085
Term deposit, 2.00%, maturing
in April 2006 (2% in 2005) - 257,954
Commercial paper, 4.69% maturing
in July 2006 (4.27% in 2005) 913,434 4,000,496
Accounts receivable 893,703 1,102,124
Investment tax credits receivable 791,388 691,273
Inventories 1,513,700 1,226,812
Prepaid expenses 483,990 399,567
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12,548,513 12,536,311
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Property and equipment 687,001 554,929
Patents 2,291,268 1,529,092
Deferred costs 575,469 611,877
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$16,102,251 $15,232,209
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LIABILITIES
Current liabilities
Accounts payable and accrued
liabilities $2,149,914 $2,052,381
Deferred grant 135,262 89,872
Current portion of convertible
debentures (Note 3) 2,054,600 2,054,600
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4,339,776 4,196,853
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Convertible debentures (Note 3) 999,450 1,666,543
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5,339,226 5,863,396

SHAREHOLDERS' EQUITY
Share capital and share purchase
warrants (Note 3) 95,724,373 87,131,724
Equity component of convertible
debentures (Note 3b) 1,510,467 1,510,467
Contributed surplus (Note 5) 862,506 721,051
Deficit (89,785,690) (82,033,557)
Cumulative translation adjustment 2,451,369 2,039,128
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10,763,025 9,368,813
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$16,102,251 $15,232,209
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On behalf of the board,

Director Director


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

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



ART Advanced Research Technologies Inc.
Operations and Deficit
(In U.S. dollars)
(Unaudited)
---------------------------------------------------------------------
---------------------------------------------------------------------
Three-month period ended Six-month period ended
June 30, June 30, June 30, June 30,
2006 2005 2006 2005
---------------------------------------------------------------------

Sales
Product $664,056 $511,550 $1,466,612 $1,264,400
Maintenance 164,617 240,950 164,617 499,450
---------------------------------------------------------------------
828,673 752,500 1,631,229 1,763,850
---------------------------------------------------------------------

Cost of sales
Product 369,793 318,012 867,831 806,659
Maintenance 137,835 159,109 137,835 409,783
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507,628 477,121 1,005,666 1,216,442
---------------------------------------------------------------------
Gross margin 321,045 275,379 625,563 547,408
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Operating expenses
Research and
development, net of
investment tax
credits 2,385,340 1,999,239 4,349,112 4,669,283
Selling, general
and administrative 986,932 971,275 1,979,435 1,843,358
Amortization 71,449 88,811 144,600 145,291
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3,443,721 3,059,325 6,473,147 6,657,932
---------------------------------------------------------------------
Operating loss 3,122,676 2,783,946 5,847,584 6,110,524
Interest expense on
convertible
debentures 397,456 - 873,198 -
Interest income (47,041) (39,557) (109,348) (95,868)
Foreign exchange
loss (gain) 169,973 (42,506) 173,662 (69,079)
---------------------------------------------------------------------
Net loss $3,643,064 $2,701,883 6,785,096 5,945,577
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---------------------------------------------------------------------
Deficit, beginning
of year 82,033,557 68,122,241
Share and share
purchase warrant
issue expenses 967,037 -
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Deficit, end of
period $89,785,690 $74,067,818
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Basic and diluted net
loss per share
(Note 2) $0.07 $0.06 $0.14 $0.14
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Basic and diluted
weighted average
number of
common shares
outstanding 47,582,281 42,664,523 47,486,066 42,664,523
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---------------------------------------------------------------------

Number of common
shares outstanding,
end of period 52,248,981 42,664,523 52,248,981 42,664,523
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---------------------------------------------------------------------

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

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



ART Advanced Research Technologies Inc.
Cash Flows
(In U.S. dollars)
(Unaudited)
---------------------------------------------------------------------
---------------------------------------------------------------------
Three-month period ended Six-month period ended
June 30, June 30, June 30, June 30,
2006 2005 2006 2005
---------------------------------------------------------------------
OPERATING ACTIVITIES
Net loss $(3,643,064)$(2,701,883)$(6,785,096)$(5,945,577)
Items not affecting
cash
Amortization 71,449 88,811 144,600 145,291
Stock-based
compensation
(Note 5) 73,283 58,788 141,455 116,143
Interest on
convertible
debentures 316,459 - 666,960 -
Net change in
working capital
items
Accounts receivable 99,519 106,312 221,626 (104,772)
Investment tax
credits receivable (35,007) (102,963) (69,745) 291,576
Inventories 578,181 (600,077) (95,952) (383,547)
Prepaid expenses (525) (48,240) (52,994) (119,887)
Accounts payable and
accrued liabilities (274,535) (551,069) (18,940) (200,785)
Deferred grant (1,858) (527) 40,190 89,534
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Cash flows from
operating
activities (2,816,098) (3,750,848) (5,807,897) (6,112,024)
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INVESTING ACTIVITIES
Assets acquisition
(Note 7) (281,023) - (600,657) -
Short-term
investments - - 4,288,738 9,749,504
Property and equipment (180,001) (2,452) (181,733) (223,350)
Patents - (5,339) - (5,339)
Deferred costs (15,209) (107,313) (31,332) (200,666)
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Cash flows from
investing
activities (476,233) (115,104) 3,475,016 9,320,149
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FINANCING ACTIVITIES
Issue of senior
convertible
debentures (625,000) - (1,250,000) -
Issue of convertible
preferred shares 2,031,361 - 2,031,361 -
Common shares and
share purchase
warrants 6,283,707 - 6,283,707 -
Equity and debt
issue expenses (909,956) - (909,956) -
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Cash flows from
financing activities 6,780,112 - 6,155,112 -
Effect of foreign
currency translation
adjustments 152,786 (175,033) 143,848 (88,058)
---------------------------------------------------------------------
6,932,898 (175,033) 6,298,960 (88,058)
---------------------------------------------------------------------
Net increase
(decrease) in cash
and cash equivalents 3,640,567 (4,040,985) 3,966,080 3,120,067
Cash and cash
equivalents,
beginning of year 5,184,655 8,794,123 4,859,142 1,633,071
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Cash and cash
equivalents, end
of period $8,825,222 $4,753,138 $8,825,222 $4,753,138
---------------------------------------------------------------------
---------------------------------------------------------------------
CASH AND CASH
EQUIVALENTS
Cash $7,952,298 $513,438 $7,952,298 $513,438
Commercial paper 872,924 4,239,700 872,924 4,239,700
---------------------------------------------------------------------
$8,825,222 $4,753,138 $8,825,222 $4,753,138
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---------------------------------------------------------------------
Supplemental
disclosure of cash
flow information
Interest received $37,345 $32,274 $81,506 $88,585
Interest paid $120,309 $- $246,837 $-

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

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


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


1- BASIS OF PRESENTATION

These interim financial statements as at June 30, 2006 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 June 30, 2006 and December 31, 2005 and its results of operations and its cash flows for the three-month and the six-month periods ended June 30, 2006 and 2005.

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 and the "if converted" method to determine the dilutive effect of the conversion feature of the preferred shares and the convertible debentures. 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, share purchase warrants and the conversion feature of the preferred shares and the convertible debentures. For all periods presented, the effect of stock options, share purchase warrants and the conversion feature of the preferred shares and the convertible debentures 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:
June 30, 2006 December 31, 2005
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Common shares Common shares
---------------------------------------------------------------------
Number Value Number Value
---------------------------------------------------------------------

Issued and fully paid
Balance, beginning
of year 42,664,523 $78,678,625 42,664,523 $78,678,625
Issue of
shares Note 7 9,584,458(c) 6,468,707 - -
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Balance, end
of period 52,248,981 $85,147,332 42,664,523 $78,678,625
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The following table presents the changes in the number of outstanding
preferred shares:

June 30, 2006 December 31, 2005
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Preferred shares Preferred shares
---------------------------------------------------------------------
Number Value Number Value
---------------------------------------------------------------------

Issued and fully paid
Balance, beginning
of year 6,341,982 $5,900,000 - $-
Issue of shares
for cash 2,000,000(a) 2,007,043 6,341,982(a)5,900,000
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Balance, end of
period 8,341,982 $7,907,043 6,341,982 $5,900,000
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The following table presents the changes in the number of share
purchase warrants outstanding:

June 30, 2006
---------------------------------------------------------------------
Weighted
average
exercise price
Number Value CA$
---------------------------------------------------------------------
Balance, beginning of year 4,022,817 $2,553,099 1.78
Issue of share purchase (a), (c),
warrants 678,891 116,899 Note 7 0.86
Expiry of share purchase
warrants - - -
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Balance, end of period 4,701,708 $2,669,998 1.65
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---------------------------------------------------------------------


December 31, 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 (a)(b) 1.19
Expiry of share purchase warrants - - -
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Balance, end of period 4,022,817 $2,553,099 1.78
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---------------------------------------------------------------------

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

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


(a) 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 C$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 cumulative dividend has a value of $405,079 on June 30, 2006. The preferred shares are convertible at the investor's option at any time into common shares at a fixed conversion price of C$1.26 per share (being an effective conversion rate of 0.9036 common share for each Series 1 preferred share).

The agreement also provides that, if on the first anniversary of the 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 the 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 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 C$1.14 per additional preferred share, for a total potential additional investment of C$2,280,000. Each such additional preferred share shall be convertible into common shares at a fixed conversion price of C$1.08 per share (being an effective conversion rate of 1.0556 common share for each Series 2 preferred share). This option was exercised in April 2006. Commission and other costs amounting to $194,382 were incurred and included in the deficit.

In conjunction with the transaction of July 2005, the Company issued to an agent share purchase warrants to purchase 286,535 common shares at an exercise price of C$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%

Also, with the exercise of the option to purchase an additional 2,000,000 preferred shares, the Company issued to an agent share purchase warrants to purchase 105,555 common shares at an exercise price of C$1.18 per share. The Company evaluated the fair value of such share purchase warrants at $30,294 using the Black & Scholes model. The valuation assumptions are listed below:

- Expected life: 3 years

- Expected volatility: 65%

- Weighted average risk-free interest rate: 4.17%

- Dividend rate: 0%

(b) In July 2005 , the Company 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 hypothec 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 C$0.99 per share.

The agreement provides that, at the Company's option, any cash payments contemplated under the debentures may be made in freely tradable common shares issued at a 10% discount to market. In addition, if after November 28, 2006, the trading price of the Company's stock exceeds 225% of the conversion price for 20 consecutive trading days (equivalent to C$2.23 per share), the Company may require the investors to convert the debentures into common shares at the fixed conversion price of C$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 the Company may incur. In an event of default under the debentures, the Company may be required to repay any outstanding amounts plus accrued and unpaid interest, plus a 20% premium. The Company complied with these restrictive clauses which were all met at June 30, 2006.

Also, the Company issued to the investors 5-year warrants to purchase 1,110,139 common shares at an exercise price of C$1.16 per share and 5-year warrants to purchase 123,349 common shares at an exercise price of C$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 (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. These options had not been exercised as at June 30, 2006. The agreement also provides that the Company may force this additional investment to be made if the Company's stock price closes above 150% of the conversion price for 20 consecutive trading days (equivalent to C$1.49 per share).

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. Interest expense on the liability component is charged to operations, based on the effective interest rate of 38%. The above values were determined by using a combination of the Black -Scholes (for the conversion option and the warrants) and 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, the Company issued to an agent share purchase warrants to purchase 308,372 common shares at an exercise price of C$1.21 per share. The Company evaluated the fair value of the 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%

(c) In May 2006, the Company issued 9,333,400 common shares through a public offering for gross cash proceeds of C$7,000,050. Commission and other costs amounting to $772,655 were incurred and included in the deficit.

Also, in conjunction with the transaction, the Company issued to an agent share purchase warrants to purchase 373,336 common shares at an exercise price of C$0.75 per share. The Company evaluated the fair value of the share purchase warrants at $31,659 using the Black-Scholes model. The valuation assumptions are listed below:

- Expected life: 1 years

- Expected volatility: 65%

- Weighted average risk-free interest rate: 4.08%

- Dividend rate: 0%

4- CONVERTIBLE DEBENTURE

As at June 30, 2006, the Company had a convertible debenture which is describe in Note 3b.

The following table discloses the information about the contractual obligations and periods in which payments are due as of June 30, 2006



Total Payment due
---------------------------------------------------------------------
Less than 1 year 1-3 years
---------------------------------------------------------------------
Convertible debentures $3,750,000 $2,500,000 $1,250,000
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5- STOCK-BASED COMPENSATION PLAN

The following table presents the changes in the number of stock
options outstanding and exercisable as at:

June 30, 2006 December 31, 2005
---------------------------------------------------------------------
Weighted Weighted
average average
Number of exercise price Number of exercise price
options C$ options C$
---------------------------------------------------------------------
Balance,
beginning
of year 2,479,479 2.68 2,467,374 2.81
Options
granted 306,000 0.63 119,500 0.74
Options
exercised - - - -
Options
cancelled (105,000) 1.50 (107,395) 3.57
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Balance, end
of period 2,680,479 2.49 2,479,479 2.68
---------------------------------------------------------------------
---------------------------------------------------------------------

Options
exercisable
end of period 1,683,970 3.26 1,659,957 3.25
---------------------------------------------------------------------
---------------------------------------------------------------------


The following table provides information on options outstanding and
exercisable as of June 30, 2006:

Options outstanding Options exercisable
---------------------------------------------------------------------
Weighted
Weighted average Weighted
Exercice average remaining average
price Number exercice contractual Number exercice
C$ outstanding price C$ life (years) exercisable price C$
---------------------------------------------------------------------
0.63 @ 0.99 423,500 0.66 9.46 - -
1.00 @ 1.99 989,400 1.36 7.40 589,733 1.53
2.00 @ 2.99 256,134 2.27 7.00 216,689 2.29
3.00 @ 3.99 600,445 3.24 7.40 514,445 3.25
4.00 @ 4.99 137,000 4.60 1.16 137,000 4.60
6.00 @ 6.99 111,000 6.00 2.63 111,000 6.00
7.00 @ 7.50 163,000 7.50 3.70 163,000 7.50
---------------------------------------------------------------------
2,680,479 2.49 6.95 1,731,867 3.23
---------------------------------------------------------------------
---------------------------------------------------------------------

The fair value of stock options granted during the six-month period
ended June 30, 2006 and 2005 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 (4.5 years in 2005);

- Expected volatility : 65% (70% in 2005);

- Weighted average risk-free interest rate: 3.98% (3.70% in 2005);

- Dividend rate: 0% (0% in 2005).

The weighted average fair value of stock options granted during the
three-month period and the six-month period ended June 30, 2006 was
$0.30 and zero respectively . For 2005 it was zero and $0.50
respectively.

The Company recorded an expense of $73,277 and $141,455, 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
six-month period ended June 30, 2006. For 2005 it was $58,788 and
$116,143 respectively.

The fair value of all stock options outstanding as at June 30, 2006
was CA$1.43, 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 Six-month period ended
June 30, June 30, June 30, June 30,
2006 2005 2006 2005
---------------------------------------------------------------------
Net loss as
reported $3,643,064 $2,701,883 $6,785,096 $5,945,577
Less: compensation
expense recognized
in the statement
of operations and
deficit (73,277) (58,788) (141,455) (116,143)
Plus: total
compensation
expenses 76,015 100,768 144,193 201,619
---------------------------------------------------------------------
Pro forma net loss $3,645,802 $2,743,863 $6,787,834 $6,031,053
---------------------------------------------------------------------
---------------------------------------------------------------------

Basic and diluted
loss per share
As reported $(0.07) $(0.06) $(0.14) $(0.14)
Pro forma $(0.07) $(0.06) $(0.14) $(0.14)


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, commercialization of
eXplore Optix product and Fenestra operations.

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

---------------------------------------------------------------------
---------------------------------------------------------------------
Three-month period ended
June 30, 2006
---------------------------------------------------------------------
Pharmaceutical Medical Total
Sales
Product $664,056 $- $664,056
Maintenance 164,617 - 164,617
---------------------------------------------------------------------
828,673 - 828,673
---------------------------------------------------------------------
Cost of sales
Product 369,793 - 369,793
Maintenance 137,835 - 137,835
---------------------------------------------------------------------
507,628 - 507,628
---------------------------------------------------------------------
Gross margin 321,045 - 321,045
---------------------------------------------------------------------
Operating expenses
Research and development expenses,
net of investment tax credits 757,043 1,628,297 2,385,340
Selling, general and
administrative 402,349 584,583 986,932
Amortization 33,843 37,606 71,449
---------------------------------------------------------------------
1,193,235 2,250,486 3,443,721
---------------------------------------------------------------------
Operating loss 872,190 2,250,486 3,122,676
Interest expense on convertible
debentures 119,237 278,219 397,456
Interest income (14,112) (32,929) (47,041)
Foreign exchange loss 50,992 118,981 169,973
---------------------------------------------------------------------
Net loss $1,028,307 $2,614,757 $3,643,064
---------------------------------------------------------------------
---------------------------------------------------------------------


---------------------------------------------------------------------
---------------------------------------------------------------------
Six-month period ended
June 30, 2006
---------------------------------------------------------------------
Pharmaceutical Medical Total
Sales
Product $1,466,612 $- $1,466,612
Maintenance 164,617 - 164,617
---------------------------------------------------------------------
1,631,229 - 1,631,229
---------------------------------------------------------------------
Cost of sales
Product 867,831 - 867,831
Maintenance 137,835 - 137,835
---------------------------------------------------------------------
1,005,666 - 1,005,666
---------------------------------------------------------------------
Gross margin 625,563 - 625,563
---------------------------------------------------------------------
Operating expenses
Research and development
expenses, net of investment
tax credits 1,308,089 3,041,023 4,349,112
Selling, general and
administrative 733,714 1,245,721 1,979,435
Amortization 69,409 75,191 144,600
---------------------------------------------------------------------
2,111,212 4,361,935 6,473,147
---------------------------------------------------------------------
Operating loss 1,485,649 4,361,935 5,847,584
Interest expense on convertible
debentures 261,960 611,238 873,198
Interest income (32,804) (76,544) (109,348)
Foreign exchange loss 52,099 121,563 173,662
---------------------------------------------------------------------
Net loss $1,766,904 $5,018,192 $6,785,096
---------------------------------------------------------------------
---------------------------------------------------------------------


---------------------------------------------------------------------
---------------------------------------------------------------------
Three-month period ended
June 30, 2005
---------------------------------------------------------------------
Pharmaceutical Medical Total
Sales
Product $511,550 $- $511,550
Maintenance 240,950 - 240,950
---------------------------------------------------------------------
752,500 - 752,500
---------------------------------------------------------------------
Cost of sales
Product 318,012 - 318,012
Maintenance 159,109 - 159,109
---------------------------------------------------------------------
477,121 - 477,121
---------------------------------------------------------------------
Gross margin 275,379 - 275,379
---------------------------------------------------------------------
Operating expenses
Research and development expenses,
net of investment tax credits 364,122 1,635,117 1,999,239
Selling, general and administrative 372,472 598,803 971,275
Amortization 58,884 29,927 88,811
---------------------------------------------------------------------
795,478 2,263,847 3,059,325
---------------------------------------------------------------------
Operating loss 520,099 2,263,847 2,783,946
Interest income (11,566) (27,991) (39,557)
Foreign exchange loss (gain) (12,429) (30,077) (42,506)
---------------------------------------------------------------------
Net loss $496,104 $2,205,779 $2,701,883
---------------------------------------------------------------------
---------------------------------------------------------------------


---------------------------------------------------------------------
---------------------------------------------------------------------
Six-month period ended
June 30, 2005
---------------------------------------------------------------------
Pharmaceutical Medical Total
Sales
Product $1,264,400 $- $1,264,400
Maintenance 499,450 - 499,450
---------------------------------------------------------------------
1,763,850 - 1,763,850
---------------------------------------------------------------------
Cost of sales
Product 806,659 - 806,659
Maintenance 409,783 - 409,783
---------------------------------------------------------------------
1,216,442 - 1,216,442
---------------------------------------------------------------------
Gross margin 547,408 - 547,408
---------------------------------------------------------------------
Operating expenses
Research and development
expenses, net of investment
tax credits 754,751 3,914,532 4,669,283
Selling, general and
administrative 705,491 1,137,867 1,843,358
Amortization 86,343 58,948 145,291
---------------------------------------------------------------------
1,546,585 5,111,347 6,657,932
---------------------------------------------------------------------
Operating loss 999,177 5,111,347 6,110,524
Interest income (28,031) (67,837) (95,868)
Foreign exchange loss (gain) (20,199) (48,880) (69,079)
---------------------------------------------------------------------
Net loss $950,947 $4,994,630 $5,945,577
---------------------------------------------------------------------
---------------------------------------------------------------------



As at June 30, 2006 and December 31, 2005, 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:

---------------------------------------------------------------------
---------------------------------------------------------------------
June 30, 2006 December 31, 2005
---------------------------------------------------------------------

Pharmaceutical $3,178,023 $3,162,239
Medical 1,957,513 1,816,893
Corporate 10,966,715 10,253,077
---------------------------------------------------------------------
$16,102,251 $15,232,209
---------------------------------------------------------------------
---------------------------------------------------------------------

7- ASSETS ACQUISITION


On March 13, 2006, ART acquired substantially all of the imaging technology and product assets of Alerion Biomedical, Inc., a US-based developer and manufacturer of biomarkers and contrast media for preclinical and clinical imaging devices for a total purchase price, including related expenses, of $840,000 (subject to some adjustments); these assets include, in particular, the intellectual property, the accounts receivable, the Fenestra product inventory and some fixed assets. The acquisition was recorded using the purchase method, and earnings from this acquisition have been included in the financial statements since the date of acquisition. The terms of the transaction provide for a purchase price which will be subject to adjustments and to purchase price increases - in the form of earn-outs - based on the future revenue generated by the purchased assets. The purchase price was paid in cash and common shares of the Company.

Also, in conjunction with the transaction, ART issued to an agent share purchase warrants to purchase 200,000 common shares at an exercise price of CA$0.88 per share. The Company evaluated the fair value of the agent share purchase warrants at $54,946 using the Black & Scholes model. The valuation assumptions are listed below:

- Expected life: 3 years

- Expected volatility: 65%

- Weighted average risk-free interest rate: 3.97%

- Dividend rate: 0%

Contact Information

  • ART Recherches et Technologies Avancées Inc
    Jacques Bedard
    Chief Financial Officer
    (514) 832-0777
    jbedard@art.ca
    www.art.ca