Theratechnologies inc.
TSX : TH

Theratechnologies inc.

October 09, 2008 14:00 ET

Theratechnologies Announces Financial Results and Highlights for the Third Quarter 2008

MONTREAL, QUEBEC--(Marketwire - Oct. 9, 2008) - Theratechnologies (TSX:TH) today announced its financial results for the third quarter ended August 31, 2008 and reviewed recent corporate highlights of the quarter.

"During this third quarter, the publication of the first Phase 3 data in AIDS and the presentation of positive data on body image have once again testified to the scientific value of the tesamorelin clinical studies as well as to the quality of the molecule developed by Theratechnologies," commented Mr. Yves Rosconi, President and CEO of Theratechnologies. "Positive results generated by both Phase 3 clinical trials as well as our recent communications with the US Food and Drug Administration indicate that we are on track for a market launch of tesamorelin by the end of 2009," added Mr. Rosconi.

"Theratechnologies has a solid balance sheet. The Company closes this third quarter with $62 million available, which represents 18 months of liquidity, based on the actual rate," noted Mr. Luc Tanguay, Senior Executive Vice President and CFO.

"Although no decision has yet been made concerning the ongoing strategic review process, I would like to assure shareholders that the discussions are active and advancing at a steady pace," added Mr. Rosconi.

Recent Highlights

Advancement of the Strategic Review Process

During the third quarter, the strategic review process, initiated by the Board of Directors, continues to steadily advance. Parallel to the ongoing due diligence efforts, discussions with interested parties continue to progress. The Independent Committee of the Board of Directors met on several occasions and will continue to do so in order to complete the process as soon as possible. As previously stated, the Company will advise its shareholders of any material developments in due course.

Publication in AIDS

The results from its first Phase 3 clinical trial, using tesamorelin, are published in the September 2, 2008 Journal of the International AIDS Society (www.aidsonline.com). The study entitled, "Long-term safety and effects of tesamorelin, a growth hormone-releasing factor analogue, in HIV patients with abdominal fat accumulation" outlines, in detail, the 52-week data of the first Phase 3 trial.

Presentation of Positive Data on Body Image at the International AIDS Conference

In August 2008, Theratechnologies participated at the XVII International AIDS Conference in Mexico City, Mexico. On that occasion, the Company presented positive data related to body image from the first and confirmatory Phase 3 clinical trials, in two poster presentations. At the Conference, Theratechnologies also sponsored a symposium entitled "Body Fat Changes and Metabolic Complications in the General Population and in HIV".


MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE THIRD QUARTER

Revenues

Consolidated revenues for the three-month period ended August 31, 2008 amounted to $710,000, compared to $748,000 in 2007. For the nine-month period ended August 31, 2008, consolidated revenues were $2,025,000, compared to $1,840,000 for the same period in 2007. Revenues for the quarter and for the first nine months of the current year are mainly composed of interest from investments. For the nine-month period ended August 31, 2008, interest revenues were higher than those of 2007, despite a general reduction in interest rates, reflecting the higher level of liquidities reported in the first quarter of 2008.

R&D Activities

Consolidated research and development (R&D) expenditures, before tax credits, totalled $9,602,000 for the third quarter of 2008, compared to $8,715,000 in 2007. For the nine-month period ended August 31, 2008, R&D expenses were $29,013,000, compared to $23,391,000 for the same period in 2007. The increase in R&D spending in 2008 is related to an increase in activities associated with various projects in completing the tesamorelin clinical program in HIV associated lipodystrophy and to spending related to the preparation of the New Drug Application for the Food and Drug Administration in the United States. Finally, for the nine-month period ended August 31, 2008, the stock-based compensation expenses attributable to R&D amounted to $471,000 compared to $993,000 in 2007. The exceptionally high stock-based compensation expenses in 2007 were due to a special distribution of stock options to all employees.

Other Expenses

For the third quarter of 2008, general and administrative expenses, patents and amortization of other assets (G&A) amounted to $1,639,000, compared to $1,719,000 for the same period in 2007. For the nine-month period ended August 31, 2008, the G&A amounted to $5,615,000 compared to $5,796,000 for the same period in 2007. In 2008, the G&A expenses were comparable to those in 2007 and include the expenses associated with the growth and the development of the Company as well as fees related to the ongoing strategic review. In 2007, the Company had reported an exchange rate loss of $438,000, compared to revenues of $63,000 in 2008. The stock-based compensation expenses attributable to G&A amounted to $179,000 compared to $953,000 in 2007. The exceptionally high stock based compensation expenses in 2007 were due to a special distribution of stock options to all employees.

Selling and market development costs amounted to $1,281,000 for the third quarter 2008, compared to $801,000 for the same period in 2007. For the nine-month period ended August 31, 2008, selling and market development expenses amounted to $2,687,000, compared to $1,662,000 for the same period in 2007. The increase in these expenses is related to the pre-commercialization efforts for the tesamorelin program in HIV-associated lipodystrophy, which include the activities associated with the continuing medical education program.

Net Results

Reflecting the variations in revenues and expenses described above, the Company recorded a net third-quarter loss of $11,224,000, compared to $9,781,000 for the same period in 2007. For the nine-month period ended August 31, 2008, the loss was $33,513,000, compared to $27,309,000 in 2007.

Quarterly Financial Information

The selected financial information provided below is derived from the Company's unaudited quarterly financial statements for each of the last eight quarters.



--------------------------------------------------------------------------
--------------------------------------------------------------------------
2008
--------------------------------------------------------------------------
Q3 Q2 Q1
--------------------------------------------------------------------------
Revenues $710 $716 $599
Net Loss $(11,224) $(11,398) $(10,891)
Basic and diluted loss per share $(0.19) $(0.20) $(0.20)
--------------------------------------------------------------------------
--------------------------------------------------------------------------

--------------------------------------------------------------------------
--------------------------------------------------------------------------
2007 2006
--------------------------------------------------------------------------
Q4 Q3 Q2 Q1 Q4
--------------------------------------------------------------------------
Revenues $1,294 $748 $805 $287 $367
Net Loss $(10,279) $(9,781) $(8,089) $(9,439) $(6,942)
Basic and
diluted loss
per share $(0.19) $(0.18) $(0.15) $(0.20) $(0.15)
--------------------------------------------------------------------------
--------------------------------------------------------------------------


Financial Position

The Company maintained a sound financial position. At August 31, 2008, liquidities, which include cash and bonds, amounted to $60,234,000 and tax credits receivable amounted to $1,449,000, for a total of $61,683,000.

During the first quarter 2008, the Company completed a public offering for the sale and issuance of 3,500,000 common shares for a cash consideration of $29,750,000. Issue costs totalled $1,938,000 resulting in net proceeds of $27,812,000. During the nine-month period ended August 31, 2008, the Company issued 119,666 common shares following the exercise of stock options, for cash proceeds of $397,000. The Company received subscriptions for an amount of $28,000 for the issue of 3,671 common shares to its employees in connection with its share purchase plan.

For the three-month period ended August 31, 2008, the burn rate from operating activities, excluding changes in operating assets and liabilities, was $10,716,000, compared to $9,711,000 in 2007. For the nine-month period ended August 31, 2008, the burn rate amounted to $31,966,000, compared to a burn rate of $24,740,000 in 2007. The increased burn rate in 2008 is the result of the higher R&D expenses described above.

New Accounting Policies

Refer to note 2 of the Company's unaudited Consolidated Financial Statements for the third quarter 2008.

The adoption of the new accounting policies described above has no impact on the financial results of the Company.

Outstanding Share Data

On October 8, 2008, the number of shares issued and outstanding was 58,154,470, while outstanding options granted under the stock option plan were 2,163,300.

Contractual Obligations

Apart from the financings mentioned above, no material changes in contractual obligations occurred during the quarter, other than in the ordinary course of business.

Economic and Industry Factors

Economic and industry factors were substantially unchanged from those reported in the Company's 2007 Annual Report.

About Theratechnologies

Theratechnologies (TSX:TH) is a Canadian biopharmaceutical company that discovers innovative drug candidates in order to develop them and bring them to market. The Company targets unmet medical needs in financially attractive specialty markets. Its most advanced program is tesamorelin, now in a confirmatory Phase 3 clinical trial for a serious metabolic disorder known as HIV-associated lipodystrophy. The Company also has other projects at earlier stages of development.

Additional information about Theratechnologies

Further information about Theratechnologies is available on the Company's website at www.theratech.com. Additional information, including the Company's Annual Information Form and Annual report, is also available on SEDAR at www.sedar.com.

Forward-Looking Information

This press release and the management's discussion and analysis for the third quarter contained herein contain certain statements that are considered "forward-looking information" within the meaning of applicable securities legislation. This forward-looking information includes, but is not limited to, information regarding the Phase 3 clinical program of tesamorelin, the preparation of a New Drug Application ("NDA") to submit to the U.S. Food and Drug Administration (the "FDA") and the commercialization of tesamorelin in HIV-associated lipodystrophy. Words such as "will", "may", "could", "should", "outlook", "believe", "plan", "envisage", "anticipate", "expect" and "estimate", or the negatives of these terms or variations of them and the use of the future or conditional tense as well as similar expressions denote forward-looking information.

Forward-looking information is based upon a number of assumptions and is subject to a number of risks and uncertainties, many of which are beyond the Company's control, that could cause actual results to differ materially from those that are disclosed in or implied by such forward-looking information. These risks and uncertainties include, but are not limited to the risk that the Company may not obtain all required approvals from the FDA to market its products, the risk that the Company's products may not be accepted by the market, the risk that unexpected events delay or prevent the advancement of the tesamorelin clinical program, challenges, regulatory or other, which could impact the NDA submission and delays or excessive costs that could result from the use of third party suppliers.

Although the forward-looking information contained herein is based upon what the Company believes are reasonable assumptions, investors are cautioned against placing undue reliance on this information since actual results may vary from the forward-looking information. Certain assumptions used in these forward looking statements, and the Company's anticipated objectives, take into consideration that the administration of tesamorelin to patients will not have any significant adverse side-effects, that the Company will have access to all the data and necessary resources to submit the NDA, that the estimated costs for the tesamorelin clinical program will not vary, or if they vary, the variation will be insignificant and that the Company will continue to have a good business relationship with its third party suppliers.

Consequently, all of the forward-looking information contained herein is qualified by the foregoing cautionary statements, and there can be no guarantee that the results or developments anticipated by the Company will be realized or, even if substantially realized, that they will have the expected consequences or effects on the Company, its business, its financial condition or its results of operation. Furthermore, the forward-looking information reflects current expectations regarding future events and speaks only as of the date of release of this press release and represents the Company's expectations as of that date. Investors are referred to the Company's public filings available at www.sedar.com. In particular, further details and descriptions of these and other factors are disclosed in the "Risk and Uncertainties" section of the Company's Annual Information Form, dated January 29, 2008, for the year ended November 30, 2007. The Company does not undertake to update or amend such forward-looking information whether as a result of new information, future events or otherwise, except as may be required by applicable law.



Consolidated Financial Statements of
(Unaudited)

THERATECHNOLOGIES INC.

Nine-month periods ended August 31, 2008 and 2007


THERATECHNOLOGIES INC.
Consolidated Balance Sheets
(Unaudited)

August 31, 2008, with comparative figures as at November 30, 2007
(in thousands of dollars)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
August 31, November 30,
2008 2007
--------------------------------------------------------------------------
(Audited)
Assets

Current assets:
Cash $9,615 $2,578
Bonds 16,881 27,466
Accounts receivable 590 451
Tax credits receivable 1,449 1,418
Research supplies 255 2,110
Prepaid expenses 506 414
--------------------------------------------------------------------------
29,296 34,437

Bonds 33,738 30,324
Investments in public companies 80 635
Property and equipment 1,403 1,722
Other assets (note 3) 7,885 7,472

--------------------------------------------------------------------------
$72,402 $74,590
--------------------------------------------------------------------------
--------------------------------------------------------------------------

Liabilities and Shareholders' Equity

Current liabilities:
Accounts payable and accrued liabilities $10,961 $8,613

Shareholders' equity:
Capital stock (note 4) 269,098 238,842
Contributed surplus 5,404 4,807

Accumulated other comprehensive loss (271) (333)
Deficit (212,790) (177,339)
--------------------------------------------------------------------------
(213,061) (177,672)
--------------------------------------------------------------------------
Total shareholders' equity 61,441 65,977

--------------------------------------------------------------------------
$72,402 $74,590
--------------------------------------------------------------------------
--------------------------------------------------------------------------
See accompanying notes to unaudited consolidated financial statements.



THERATECHNOLOGIES INC.
Notes to Consolidated Statements of Earnings
(Unaudited)

Periods ended August 31, 2008 and 2007
(in thousands of dollars, except per share amounts)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
August 31, August 31,
--------------------------------------------------------------------------
2008 2007 2008 2007
--------------------------------------------------------------------------
(3 months) (9 months)
Revenues:
Royalties, technologies
and other $106 $5 $116 $14
Interest 604 743 1,909 1,826
--------------------------------------------------------------------------
710 748 2,025 1,840

Operating costs and expenses:
Research and development 9,602 8,715 29,013 23,391
Tax credits (588) (323) (1,777) (1,358)
--------------------------------------------------------------------------
9,014 8,392 27,236 22,033
General and administrative 1,455 1,514 5,056 5,196
Selling and market development 1,281 801 2,687 1,662
Patents and amortization
of other assets 184 205 559 600
--------------------------------------------------------------------------
11,934 10,912 35,538 29,491
--------------------------------------------------------------------------
Operating loss before
undernoted item (11,224) (10,164) (33,513) (27,651)

Realized gain on disposal
of investments in public
companies - 383 - 342
--------------------------------------------------------------------------
Net loss $(11,224) $(9,781) $(33,513) $(27,309)
--------------------------------------------------------------------------
--------------------------------------------------------------------------

Basic and diluted loss
per share (note 4 (C)) $(0.19) $(0.18) $(0.59) $(0.53)
--------------------------------------------------------------------------
--------------------------------------------------------------------------

Weighted average number
of common shares
outstanding 58,145,358 54,471,371 57,167,178 51,942,099
--------------------------------------------------------------------------
--------------------------------------------------------------------------
See accompanying notes to unaudited consolidated financial statements.



THERATECHNOLOGIES INC.
Consolidated Statements of Comprehensive Earnings
(Unaudited)

Periods ended August 31, 2008 and 2007
(in thousands of dollars)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
August 31, August 31,
--------------------------------------------------------------------------
2008 2007 2008 2007
--------------------------------------------------------------------------
(3 months) (9 months)

Net loss $(11,224) $(9,781) $(33,513) $(27,309)

Unrealized gains (losses) on
available-for-sale financial
assets 20 (400) 62 (1,040)
--------------------------------------------------------------------------
Comprehensive loss $(11,204) $(10,181) $(33,451) $(28,349)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
See accompanying notes to unaudited consolidated financial statements.



THERATECHNOLOGIES INC.
Consolidated Statements of Shareholders' Equity
(Unaudited)

Nine-month period ended August 31, 2008
(in thousands of dollars)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Accumulated
other
Capital stock compre-
--------------- Contributed hensive
Number Dollars surplus income Deficit Total
-------------------------------------------------------------------------
Balance,
November 30,
2007 54,531,133 $238,842 $4,807 $(333) $(177,339) $65,977
Issuance
of share
capital
(note 4) 3,503,671 29,778 - - - 29,778
Share
issue
costs - - - - (1,938) (1,938)
Exercise of
stock
options:
Cash
proceeds 119,666 397 - - - 397
Ascribed
value - 81 (81) - - -

Stock-based
compensation - - 678 - - 678

Net loss - - - - (33,513) (33,513)

Unrealized
gains on
available-for
sale financial
assets - - - 62 - 62
-------------------------------------------------------------------------
Balance,
August 31,
2008 $58,154,470 $269,098 $5,404 $(271) (212,790) $61,441
-------------------------------------------------------------------------
See accompanying notes to unaudited consolidated financial statements.



THERATECHNOLOGIES INC.
Consolidated Statements of Shareholders' Equity, Continued
(Unaudited)

Nine-month period ended
August 31, 2007
(in thousands of dollars)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Accumulated
other
Capital stock compre-
--------------- Contributed hensive
Number Dollars surplus income Deficit Total
-------------------------------------------------------------------------
Balance,
November 30
2006 46,775,359 $177,552 $3,486 $- (136,563) $44,475
Issuance
of share
capital 6,885,949 57,854 - - - 57,854
Share
issue
costs - - - - (3,238) (3,238)
Exercise of
stock
options:
Cash
proceeds 822,200 2,207 - - - 2,207
Ascribed
value - 953 (953) - - -
Stock-based
compensation - - 2,120 - - 2,120
Changes in
accounting
policies - - - 79 - 79
Net loss - - - - (27,309) (27,309)
Unrealized
losses on
available-
for sale
financial
assets - - - (1,040) - (1,040)
--------------------------------------------------------------------------
Balance,
August 31,
2007 54,483,508 $238,566 $4,653 $(961) $(167,110) $75,148
-------------------------------------------------------------------------
See accompanying notes to unaudited consolidated financial statements.



THERATECHNOLOGIES INC.
Consolidated Statements of Cash Flows
(Unaudited)

Periods ended August 31, 2008 and 2007
(in thousands of dollars)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
August 31, August 31,
--------------------------------------------------------------------------
2008 2007 2008 2007
--------------------------------------------------------------------------
(3 months) (9 months)
Cash flows from
operating
activities:
Net loss $(11,224) $(9,781) $(33,513) $(27,309)
Adjustments for:
Depreciation of
property
and equipment 156 145 465 390
Depreciation of
other assets 135 140 404 401
Stock-based
compensation 217 168 678 2,120
Realized gain on
disposal of
investments in
public companies - (383) - (342)
---------------------------------------------------------------------------
(10,716) (9,711) (31,966) (24,740)
Changes in
operating assets
and liabilities:
Interest
receivable on
bonds 105 (32) 186 (662)
Accounts
receivable (270) (238) (114) (471)
Tax credits
receivable 1,159 718 (31) 786
Research supplies 357 521 1,080 (453)
Prepaid expenses 197 (192) (92) (569)
Accounts payable
and accrued
liabilities (312) 3,181 2,475 2,785
--------------------------------------------------------------------------

1,236 3,958 3,504 1,416
--------------------------------------------------------------------------
(9,480) (5,753) (28,462) (23,324)
Cash flows from
financing
activities:
Share issuance 111 214 30,175 60,061
Share issue costs (204) (139) (1,907) (3,188)
--------------------------------------------------------------------------
(93) 75 28,268 56,873
Cash flows from
investing
activities:
Addition to
property
and equipment (34) (100) (270) (366)
Addition to other
assets (28) (88) (101) (156)
Acquisition of
bonds - (6,310) (13,172) (40,689)
Disposal of bonds 11,268 5,411 20,774 13,487
Disposal of
investments in
public companies - 660 - 701
--------------------------------------------------------------------------

11,206 (427) 7,231 (27,023)
--------------------------------------------------------------------------
Net change in cash 1,633 (6,105) 7,037 6,526
Cash, beginning of
period 7,982 12,647 2,578 16
--------------------------------------------------------------------------
Cash, end of
period $9,615 $6,542 $9,615 $6,542
--------------------------------------------------------------------------
See note 5 (a) for supplemental cash flow information.

See accompanying notes to unaudited consolidated financial statements.


THERATECHNOLOGIES INC.
Notes to Consolidated Financial Statements (Unaudited)

Periods ended August 31, 2008 and 2007
(in thousands of dollars, except per share amounts)
--------------------------------------------------------------------------


1. Basis of presentation:

The financial statements included in this report are unaudited and reflect normal and recurring adjustments which are, in the opinion of the Company, considered necessary for a fair presentation. These financial statements have been prepared in conformity with Canadian generally accepted accounting principles. The same accounting policies as described in the Company's latest Annual Report have been used, except as described in note 2 below. However, these financial statements do not include all disclosures required under generally accepted accounting principles and, accordingly, should be read in connection with the financial statements and the notes thereto included in the Company's latest Annual Report. These interim financial statements have not been reviewed by the auditors.

2. New accounting policies:

(a) Adoption of new accounting standards:

Effective with the commencement of its 2008 fiscal year, the Company has adopted the Canadian Institute of Chartered Accountants ("CICA") Handbook Section 1535, Capital Disclosures, CICA Handbook Section 3862, Financial Instruments - Disclosures, and CICA Handbook Section 3863, Financial Instruments - Presentation. The Sections relate to disclosure and presentation only and did not have an impact on the Company's financial results (see notes 6 and 7).

(b) Future accounting changes: Inventories

In June 2007, the CICA issued Section 3031, Inventories, which replaces Section 3030 and harmonizes the Canadian standards related to inventories with International Financial Reporting Standards (IFRS). This Section provides changes to the measurement and more extensive guidance on the determination of cost, including allocation of overhead; narrows the permitted cost formulas; requires impairment testing; and expands the disclosure requirements to increase transparency. This Section will apply to the Company's interim and annual financial statements beginning December 1, 2008. The Company has not yet determined the impact on the consolidated financial statements of adopting these standards.

Goodwill and intangible assets

In January 2008, the CICA issued Section 3064, Goodwill and Intangible Assets, which will replace Section 3062, Goodwill and Other Intangible Assets. The standard provides guidance on the recognition of intangible assets in accordance with the definition of an asset and the criteria for asset recognition, as well as clarifying the application of the concept of matching revenues and expenses, whether these assets are separately acquired or internally developed. This standard will apply to the Company's interim and annual financial statements beginning on December 1, 2008. The Company has not yet determined the impact on the consolidated financial statements of adopting this standard.

International Financial Reporting Standards

In 2005, the Accounting Standards Board of Canada (AcSB) announced that accounting standards in Canada are to converge with IFRS. In May 2007, the CICA published an updated version of its "Implementation Plan for Incorporating International Financial Reporting Standards into Canadian GAAP". This plan includes an outline of the key decisions that the CICA will need to make as it implements the Strategic Plan for publicly accountable enterprises that will converge Canadian generally accepted accounting standards with IFRS. While IFRS uses a conceptual framework similar to Canadian GAAP, there are significant differences in accounting policy which must be addressed. The CICA has confirmed the changeover date from current Canadian GAAP to IFRS to be January 1, 2011. The Company has not yet determined the impact on the consolidated financial statements of adopting these standard.

3. Other assets:



--------------------------------------------------------------------------
--------------------------------------------------------------------------
August 31,
2008
--------------------------------------------------------------------------
Accumulated Net book
Cost depreciation value
--------------------------------------------------------------------------
Intellectual property $7,670 $3,003 $4,667
Patent costs 2,060 1,166 894
Research supplies 2,299 - 2,299
Other assets 25 - 25
--------------------------------------------------------------------------
$12,054 $4,169 $7,885
--------------------------------------------------------------------------
--------------------------------------------------------------------------
November 30,
2007
--------------------------------------------------------------------------
Accumulated Net book
Cost depreciation value
--------------------------------------------------------------------------
Intellectual property $7,670 $2,713 $4,957
Patent costs 1,993 1,052 941
Research supplies 1,524 - 1,524
Other assets 50 - 50
--------------------------------------------------------------------------
$11,237 $3,765 $7,472
--------------------------------------------------------------------------
--------------------------------------------------------------------------


4. Capital stock:

On February 13, 2008, the Company completed a public offering for the sale and issue of 3,500,000 common shares, for cash proceeds, of $29,750. The issuance costs amounted to $1,938.

During the second quarter of 2008, the Company received subscriptions in the amount of $28 for the issue of 3,671 common shares in connection with its share purchase plan.

(a) Share option plan:

Changes in outstanding options granted under the Company's stock option plan for the year ended November 30, 2007 and the nine-month period ended August 31, 2008 were as follows:



--------------------------------------------------------------------
--------------------------------------------------------------------
Weighted
average
Number exercise price
--------------------------------------------------------------------
Options as at November 30, 2006 (audited) 2,551,000 $4.26

Granted 608,500 9.41
Cancelled (84,167) 2.80
Exercised (867,700) 2.76
--------------------------------------------------------------------
Options as at November 30, 2007 (audited) 2,207,633 6.32

Granted 101,000 8.45
Cancelled (25,667) 9.69
Exercised (119,666) 3.32
--------------------------------------------------------------------
Options as at August 31, 2008 2,163,300 $6.55
--------------------------------------------------------------------
--------------------------------------------------------------------


(b) Stock-based compensation and other stock-based payments:

The fair value of the options granted was estimated at the date of grant using the Black- Scholes option pricing model with the following weighted average assumptions:



--------------------------------------------------------------------
--------------------------------------------------------------------
2008 2007
--------------------------------------------------------------------
Risk-free interest rate 3.41% 4.19%
Volatility 70% 69%
Average option life in years 6 6
Dividend yield Nil Nil
--------------------------------------------------------------------
--------------------------------------------------------------------



The risk-free interest rate is based on the implied yield on a Canadian Treasury zero-coupon issue with a remaining term equal to the expected term of the option. The volatility is based solely on historical volatility equal to the expected term of the option. The average life of the options is estimated considering the vesting period, the term of the option and historical exercise patterns. Dividend yield was excluded from the calculation, since it is the present policy of the Company to retain all earnings to finance operations and future growth.

The following table summarizes the weighted average fair value of stock options granted during the periods ended August 31, 2008 and 2007:




------------------------------------------------------------------
------------------------------------------------------------------
Weighted average
Number of grant date
options fair value
------------------------------------------------------------------
Periods ended August 31 (9 months):
2008 101,000 $5.45
2007 533,500 5.89
------------------------------------------------------------------
------------------------------------------------------------------
Weighted average
Number of grant date
options fair value
------------------------------------------------------------------
Periods ended August 31 (3 months):
2008 - $-
2007 160,000 7.24
------------------------------------------------------------------
------------------------------------------------------------------


(c) Diluted loss per share:

Diluted loss per share was not presented as the effect of 2,163,300 options ongoing would have been anti-dilutive. Furthermore, the exercise of 646,500 options (266,500 options in 2007) would not have been considered in such calculation, since their exercise prices were higher than the average market price during the reporting periods of 2008 and 2007.

5. Supplemental information:

(a) The following transactions were conducted by the Company and did not impact cash flows:



-------------------------------------------------------------------------
-------------------------------------------------------------------------
August 31, November 30,
2008 2007
-------------------------------------------------------------------------
Additions to property and equipment included in
accounts payable and accrued liabilities $23 $147

Additions to other assets financed included in
accounts payable and accrued liabilities 30 64

Share issue costs included in accounts
payable and accrued liabilities 31 -
-------------------------------------------------------------------------
-------------------------------------------------------------------------


(b) During the nine-month period ended August 31, 2008, the Company has not reclassified any amount in the net loss for realized losses on available-for-sale financial assets previously recorded in accumulated other comprehensive income ($316 in 2007).

(c) The Company received tax credits of $1,746 in July 2008.

6. Capital disclosures:

The Company's objective in managing capital is to ensure a sufficient liquidity position to finance its research and development activities, general and administrative expenses, working capital and overall capital expenditures, including those associated with patents. The Company makes every attempt to manage its liquidity to minimize shareholder dilution when possible.

To fund its activities, the Company has followed an approach that relies almost exclusively on the issuance of common equity. Since inception, the Company has financed its liquidity needs primarily through public offerings of common shares and private placements. When possible, the Company tries to optimize its liquidity needs by non-dilutive sources, including investment tax credits, grants, interest income as well as proceeds and royalties from technologies.

The Company's policy is to maintain a minimum level of debt. The Company has a line of credit of $1,800 for its short-term financing needs. As at August 31, 2008, this line of credit has not been used.

The capital management objectives remain the same as for the previous fiscal year.

At August 31, 2008, cash and bonds amounted to $60,234 and tax credits receivable amounted to $1,449, for a total of $61,683. Considering the financing in February 2008, as disclosed in note 4 to the unaudited consolidated financial statements ("Capital stock"), the Company believes that its cash position will be sufficient to finance its operations and capital needs for at least one year.

The Company's general policy on dividends is to retain cash to keep funds available to finance the Company's growth. However, the Board of Directors may, from time to time, choose to declare a dividend in assets if warranted by circumstances.

The Company is not subject to any capital requirements imposed by a regulator.

7. Financial risk management:

This note provides disclosures relating to the nature and extent of the Company's exposure to risks arising from financial instruments, including credit risk, liquidity risk, foreign currency risk and interest rate risk, and how the Company manages those risks.

(a) Credit risk:

Credit risk is the risk of an unexpected loss if a customer or counterparty to a financial instrument fails to meet its contractual obligations. The Company regularly monitors the credit risk exposure and takes steps to mitigate the likelihood of these exposures from resulting in actual loss.

Financial instruments other than cash that potentially subject the Company to significant credit risk consist principally of bonds. The Company invests its available cash in fixed income instruments from governmental, paragovernmental and municipal bonds ($48,193 as at August 31, 2008) as well as from corporations ($2,426 as at August 31, 2008) with high credit ratings.

As at August 31, 2008, the Company's maximum credit risk exposure corresponded to the carrying amount of the bonds.

(b) Liquidity risk:

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company manages liquidity risk through the management of its capital structure and financial leverage, as outlined in note 6 to the unaudited consolidated financial statements ("Capital Disclosures"). It also manages liquidity risk by continuously monitoring actual and projected cash flows. The Board of Directors and/or the audit committee reviews and approves the Company's operating and capital budgets, as well as any material transactions out of the ordinary course of business.

The Company has investment policies that ensure the safety and preservation of its principal to ensure the Company's liquidity needs are met.

The instruments are selected with regard to the expected timing of expenditures and prevailing interest rates. Bonds mature during the following fiscal years: $7,222 in 2008, $13,125 in 2009, $14,299 in 2010, $12,647 in 2011 and $3,326 in 2012.

The following are the contractual maturities of financial liabilities as of August 31, 2008:



------------------------------------------------------------------------
------------------------------------------------------------------------
Carrying Less than 1 to 3
(in thousands of dollars) amount 1 year years
------------------------------------------------------------------------

Accounts payable and accrued liabilities $10,961 $10,961 $-
Operating leases 1,358 814 544

------------------------------------------------------------------------
$12,319 $11,775 $544
------------------------------------------------------------------------
------------------------------------------------------------------------


(c) Foreign currency risk:

The Company is exposed to the financial risk related to the fluctuation of foreign exchange rates. Foreign currency risk is limited to the portion of the Company's business transactions denominated in currencies other than the Canadian dollar, primarily expenses for research and development incurred in US dollars, EURO and GBP. The Company does not use derivative financial instruments to reduce its foreign exchange exposure.

The Company manages foreign exchange risk by maintaining US cash on hand to support US forecasted cash outflows over a 12-month time horizon at the beginning of the fiscal year. The Company does not currently view its exposure to the EURO and GBP as a significant foreign exchange risk due to the limited volume of transactions conducted by the Company in these currencies.

The Company believes that the results of operations and cash flows would be affected by a sudden change in foreign exchange rates, but would not impair or enhance its ability to pay its US dollar denominated obligations.

The following table provides significant items exposed to foreign exchange as at August 31, 2008:



-----------------------------------------------------------------
-----------------------------------------------------------------
August 31,
(in thousands of Canadian dollars) 2008
-----------------------------------------------------------------
$US EUR GBP

Cash 3,454 - -
Accounts receivable - - -
Accounts payable and accrued liabilities (3,737) (121) (238)

-----------------------------------------------------------------
Balance sheet's elements exposed to
foreign currency risk (283) (121) (238)
-----------------------------------------------------------------
-----------------------------------------------------------------


The following exchange rates applied during the nine-month period ended August 31, 2008:



-----------------------------------------------------------------
-----------------------------------------------------------------
Reporting
Average rate date rate
August 31, August 31,
2008 2008
-----------------------------------------------------------------
(9 months)

$US - $CA 1.0127 1.062
EUR - $CA 1.5427 1.558
GBP - $CA 1.9948 1.9359

-----------------------------------------------------------------
-----------------------------------------------------------------


Based on the Company's foreign currency exposures noted above, varying the above foreign exchange rates to reflect a 5 percent strengthening of the have Canadian dollar would decreased the net loss as follows, assuming that all other variables remained constant:



----------------------------------------------------------------------
----------------------------------------------------------------------
(in thousands of Canadian dollars) $US EURO GBB
----------------------------------------------------------------------

Decrease net loss 14 6 12
----------------------------------------------------------------------


An assumed 5 percent weakening of the Canadian dollar would have had an equal but opposite effect on the above currencies to the amounts shown above, on the basis that all other variables remain constant.

(d) Interest rate risk:

Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates.

Short-term bonds of the Company are invested at fixed interest rates and mature in the short- term. Long-term bonds are also instruments that bear interest at fixed rates. The risk that the Company will realize a loss as a result of a decline in the fair value of its bonds is limited because these investments, although available for sale, are generally held to maturity.

Cash bears interest at a variable rate. Accounts receivable, accounts payable and accrued liabilities bear no interest.

Based on the value of variable interest-bearing cash during the nine months ended August 31, 2008, an assumed 0.5 percentage point increase in interest rates during such period would have decreased the net loss by $35, with an equal but opposite effect for an assumed 0.5 percentage point decrease in interest rates.

8. Financial instruments:

(a) Carrying value and fair value:

The Company has determined that the carrying values of its short-term financial assets and liabilities, including cash, accounts receivable, as well as accounts payable and accrued liabilities, approximate their fair value because of the relatively short period to maturity of the instruments.

Bonds and investments in public companies are stated at estimated fair value.

(b) Interest income and expenses:

Interest income consists of interest earned on cash and bonds.

(c) Loss on exchange:

General and administrative expenses include a gain on foreign exchange of $63 (loss of $438 in 2007) for the nine-month period ended August 31, 2008.

Contact Information