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BELLUS Health Reports Results for First Half of Fiscal 2009


8/12/2009 8:49:25 AM

LAVAL, QC, Aug. 11 /PRNewswire-FirstCall/ - BELLUS Health Inc. ("BELLUS Health" or the "Company") reported results for the second quarter and first half ended June 30, 2009. All currency figures reported, including comparative figures, are reported in US dollars, unless otherwise specified.

For the three-month period ended June 30, 2009, the net income amounted to $12,880,000 ($0.10 per share), compared to a net loss of $12,742,000 ($0.26 per share) for the corresponding period the previous year. For the six-month period ended June 30, 2009, the net income amounted to $2,973,000 ($0.03 per share), compared to a net loss of $25,784,000 ($0.52 per share) for the same period last year. Results for the periods ended June 30, 2009 include a gain on extinguishment of debt in the amount of $17,020,000 resulting from amendments to the terms of the $42,085,000 aggregate principal amount of 6% convertible senior notes issued in November 2006, as well as on the $4,500,000 principal amount of 6% senior convertible notes issued in May 2007. These amendments took place at the time of a refinancing of the Company in April 2009 and were a condition thereto. Results for the periods ended June 30, 2009, also include a net credit for vacant space in the amount of $2,196,000 in relation to the vacant portion of the Company's premises.

As at June 30, 2009, the Company had available cash, cash equivalents and marketable securities of $13,326,000, compared to $10,595,000 at December 31, 2008. The increase is primarily due to the completion of the CDN$20,500,000 convertible notes financing in April 2009, which amount is offset by funds used in operating activities.

On July 7, 2009, subsequent to the close of the second quarter of fiscal 2009, BELLUS Health announced that it was filing a preliminary short form prospectus in each of the provinces of Canada for a CDN$12,080,018 million rights offering to holders of its common shares. Each of Victoria Square Ventures Inc. and Vitus Investments III Private Limited, a corporation whose shares are beneficially owned by Mr. Carlo Bellini, have entered into separate standby purchase commitments with BELLUS Health whereby they have agreed, on a separate and individual and not solidary basis, to purchase such of the common shares that are not otherwise purchased under the rights offering up to a maximum for a subscription price of CDN$4,000,000 each, for an aggregate amount of CDN$8,000,000. The record date for this rights offering is August 5, 2009. Please refer to the "Liquidity and capital resources" section below for further details.

Consolidated Financial Results Highlights

This Management's Discussion and Analysis (MD A) provides a review of the Company's operations and financial performance for the three and six-month periods ended June 30, 2009, compared to the three and six-month periods ended June 30, 2008. It should be read in conjunction with the Company's unaudited consolidated financial statements for the periods ended June 30, 2009, as well as the Company's audited consolidated financial statements for the year ended December 31, 2008, which have been prepared in accordance with Canadian Generally Accepted Accounting Principles (GAAP). For discussion regarding related-party transactions, contractual obligations, disclosure controls and procedures, internal control over financial reporting, critical accounting policies and estimates, recent accounting pronouncements, and risks and uncertainties, refer to the Annual Report and the Annual Information Form for the year ended December 31, 2008, as well as registration statements and other public filings, which are available on SEDAR at www.sedar.com. This document contains forward-looking statements, which are qualified by reference to, and should be read together with the "Forward-Looking Statements" cautionary notice, which can be found at the end of this MD A. All currency figures reported in this document, including comparative figures, are reported in US dollars, unless otherwise specified. This MD A was prepared by Management with information available as at August, 11, 2009.

Results of operations

For the three-month period ended June 30, 2009, the net income amounted to $12,880,000 ($0.10 per share), compared to a net loss of $12,742,000 ($0.26 per share) for the corresponding period the previous year. For the six-month period ended June 30, 2009, the net income amounted to $2,973,000 ($0.03 per share), compared to a net loss of $25,784,000 ($0.52 per share) for the same period last year. Results for the periods ended June 30, 2009, include a gain on extinguishment of debt in the amount of $17,020,000 resulting from amendments to the terms of the $42,085,000 aggregate principal amount of 6% convertible senior notes issued in November 2006 (2006 Notes), as well as on the $4,500,000 principal amount of 6% senior convertible notes (2007 Notes) issued in May 2007. These amendments took place at the time of a refinancing of the Company in April 2009 and were a condition thereto. Results for the periods ended June 30, 2009, also include a net credit for vacant space in the amount of $2,196,000 in relation to the vacant portion of the Company's premises. Refer to the Liquidity and Capital Resources section for details.

Gross sales amounted to $82,000 for the current quarter ($196,000 for the six-month period) and net sales amounted to negative $189,000 for the current quarter (negative $105,000 for the six-month period). These sales represent the sales of VIVIMIND(TM) (also known as tramiprosate and homotaurine), the Company's first natural health brand launched on September 2, 2008, in Canada and also globally on the Internet. VIVIMIND(TM) is commercialized by OVOS Natural Health Inc., a wholly owned subsidiary of BELLUS Health. VIVIMIND(TM), to protect memory function, is based on homotaurine, a naturally occurring ingredient found in certain seaweed. Targeted at healthy baby boomers, this patented natural health brand is expected to address a largely underserved self-care market by providing a scientific, evidence-based health solution. VIVIMIND(TM) is the direct result of over 15 years of significant scientific research, including clinical testing in over 2,000 individuals. Results outlining the beneficial effects of homotaurine were published in the June 2009 edition of the Journal of Nutrition, Health and Aging, the peer-reviewed journal of the European Union Geriatric Medicine Society. They show that homotaurine slows the loss of volume in the hippocampus, a region of the brain associated with memory, and suggest that homotaurine has a beneficial effect on cognition. On the regulatory front, the Company continues to move forward on its original goal of making VIVIMIND(TM) available on a worldwide basis. On July 16, 2009, the Company announced that the Italian Ministry of Health has granted a certificate of free sale for VIVIMIND(TM) as a food supplement, permitting the commercial sale of the product in that country. This certificate opens up means by which to pursue marketing and sales authorization in the other member states of the European Union. With respect to the United States, the Company has filed a premarket notification of a New Dietary Ingredient for homotaurine with the US Food and Drug Administration, and is pursuing mandatory associated regulatory activities to obtain marketing approval for homotaurine as a dietary supplement. Negative net sales for the current periods were attributable to a provision recorded during the current quarter following the Company's decision to reduce VIVIMIND(TM)'s suggested retail price effective July 7, 2009 via announcement to retail customers. This decision is supported by changing economic conditions as well as comments of consumers, healthcare providers and retail customers. This price adjustment will make VIVIMIND(TM) accessible to a broader clientele and ultimately promote the growth of the cognitive natural health market.

Research and development expenses, before research tax credits and grants, amounted to $2,869,000 for the current quarter ($6,479,000 for the six-month period), compared to $7,123,000 for the same period the previous year ($15,903,000 for the six-month period). The decrease is mainly attributable to a reduction in the research and development activities and associated workforce. The Company is currently developing NC-503 (eprodisate) for the treatment of Type II diabetes and certain features of metabolic syndrome. During the second quarter of 2008, a 26-week, double-blind, placebo-controlled Phase II clinical trial in diabetic patients was initiated in Canada and patient recruitment is concluded. The Company has revised the expected timing of the announcement of results for the Phase II clinical trial; rather than release interim results in the second half of 2009, the Company will provide final results upon completion of the study. The release of such final results is expected in the first quarter of 2010. Results from a validated rat model of diabetes and metabolic syndrome have demonstrated that NC-503 decreases glycemic levels in obese diabetic Zucker rats, when compared to the control group, while preserving 40% more pancreatic islet cells (insulin secreting cells) as compared to the control group, and have shown some protective effect on renal function.

Research tax credits and grants amounted to $154,000 for the current quarter ($457,000 for the six-month period), compared to $467,000 for the corresponding period the previous year ($864,000 for the six-month period). Research tax credits represent refundable tax credits earned under the Quebec Scientific Research and Experimental Development Program for expenditures incurred in Quebec. The decrease is attributable to lower research and development expenses incurred in Quebec during the current periods.

General and administrative expenses totaled $1,209,000 for the current quarter ($4,357,000 for the six-month period), compared to $2,373,000 for the same quarter the previous year ($5,949,000 for the six-month period). Expenses for the current three-month period are presented net of an amount of $1,245,000 in relation to amortization of the deferred gain on sale of property ($1,580,000 for the six-month period) compared to $334,000 for the corresponding period the previous year ($669,000 for the six-month period). Refer to Liquidity and Capital Resources section for details.

Marketing and selling expenses amounted to $560,000 for the current quarter ($2,438,000 for the six-month period) compared to $2,035,000 for the same quarter and six-month period of the previous year and represent expenses incurred in relation to the commercialization of the Company's natural health brand, VIVIMIND(TM).

Stock-based compensation amounted to $724,000 for the current quarter ($1,176,000 for the six-month period), compared to $824,000 for the corresponding quarter the previous year ($1,859,000 for the six-month period). This expense relates to stock options and stock-based incentives, whereby compensation cost in relation to stock options is measured at fair value at the date of grant and is expensed over the award's vesting period. The decrease in the six-month period is mainly due to adjustments in relation to forfeitures of stock options, which occurred as a result of reductions in the workforce.

Net credit for vacant space amounted to $2,196,000 and is in relation to the vacancy of a portion of the Company's premises following the reduction in the Company's research activities and associated workforce. Refer to Liquidity and Capital resources section for details.

Interest income amounted to $30,000 for the current quarter ($43,000 for the six-month period) compared to $213,000 for the same quarter the previous year ($711,000 for the six-month period). The decrease is mainly attributable to lower average cash balances and lower interest rates during the current periods, compared to the same periods the previous year.

Accretion expense amounted to $1,069,000 for the current quarter ($2,351,000 for the six-month period), compared to $1,225,000 for the same quarter the previous year ($2,432,000 for the six-month period). Accretion expense represents the imputed interest under GAAP on the 2006, 2007 and 2009 Convertible notes. The Company accretes the carrying values of the convertible notes to their face value through a charge to earnings over their expected lives. As of June 30, 2009, $13,000,000 of the Amended 2006 Notes, $500,000 of the Amended 2007 Notes and CDN$21,115,000 of the 2009 Notes remained outstanding.

Gain on extinguishment of debt amounted to $17,020,000 and resulted from amendments to the terms of the 2006 and 2007 Notes that took place at the time of a refinancing of the Company in April 2009. Refer Liquidity and Capital Resources section for details.

Change in the fair value of third party Asset-Backed Commercial Paper (ABCP) increased by $524,000 for the current quarter (increase of $183,000 for the six-month period) compared to nil for the same quarter the previous year (decrease of $375,000 for the six-month period). This represents net changes during the periods on the valuation of ABCP held by the Company. Refer Liquidity and Capital Resources section for details.

Foreign exchange loss amounted to $426,000 for the current quarter (loss of $303,000 for the six-month period), compared to a gain of $106,000 for the same quarter the previous year (gain of $860,000 for the six-month period). Foreign exchange gains or losses arise on the movement in foreign exchange rates in relation to the Company's net monetary assets denominated in currencies other than US dollars, the Company's functional and reporting currency, such net monetary assets consisting primarily of assets and liabilities denominated in Canadian dollars. Foreign exchange gains for the comparative six-month period include $924,000 of gain recognized on the reclassification of the refundable amount ($6,000,000) due to Centocor, Inc., from deferred revenue (non-monetary liability) to accrued liability (monetary liability) following the recovery by the Company of ownership rights in and control of eprodisate (KIACTA(TM)).

Other income amounted to $231,000 for the current quarter ($760,000 for the six-month period), compared to $256,000 for the same quarter the previous year ($534,000 for the six-month period). Other income consists of non-operating revenue, such as sub-lease revenue and other items. The increase in the six-month period is attributable to a gain realized during the first quarter of 2009 on the settlement of a dispute with a supplier.

Liquidity and capital resources

As at June 30, 2009, the Company had available cash, cash equivalents and marketable securities of $13,326,000, compared to $10,595,000 at December 31, 2008. The increase is primarily due the completion of the CDN$20,500,000 convertible notes financing in April 2009, discussed below, which amount was substantially consumed in operating activities.

On April 16, 2009, the Company announced the completion of the first tranche of a CDN$20,500,000 convertible notes (2009 Notes) financing with Vitus Investments III Private Limited (Vitus), a corporation whose shares are beneficially owned by Mr. Carlo Bellini, and Victoria Square Ventures Inc. (VSVI), a subsidiary of Power Corporation of Canada (together with Vitus, the Investors). On that date, BELLUS Health received gross proceeds of CDN$10,000,000 for the issuance of 2009 Notes (CDN$5,000,000 from each Vitus and VSVI). On June 3, 2009, BELLUS Health received a second tranche of CDN$10,500,000 (CDN$5,000,000 from Vitus and CDN$5,500,000 from VSVI) and issued additional 2009 Notes in consideration for the second tranche principal amount received. The aggregate amount of the 2009 Notes issued to the Investors was increased by CDN$615,000 to cover a set up fee in connection with the financing.

In connection with this financing, and as a condition thereto, BELLUS Health and all of the existing note holders agreed to amend the terms of the outstanding 2006 Notes and 2007 Notes to either make them convertible into a new series of preferred shares of BELLUS Health and to have these notes converted into such preferred shares immediately, or to otherwise amend the existing notes which remained outstanding. In addition, the landlord of the premises of BELLUS Health in Laval, Quebec, has agreed, as a condition precedent to the financing, to defer certain rental payments and to accept payment of the deferred rent in cash or Common Shares of BELLUS Health (at the then applicable market price) at the option of BELLUS Health at a later date. The features of the 2009 Notes issued to the Investors, the terms of the preferred shares, the amended terms of the 2006 Notes and 2007 Notes, as well as the amended terms of the lease for the Laval premises are set forth below.

The 2009 Notes are secured, subject to certain permitted encumbrances, by a first charge on all of the assets of BELLUS Health and certain of its subsidiaries. Interest will be capitalized on the 2009 Notes at the rate of 15% per year compounded annually and the notes and capitalized interest will mature 5 years and one day from the date of issuance. At maturity, capital and interest are payable in cash or shares of BELLUS Health, at the option of the holder, at CDN$0.20 per share (the Financing Conversion Price). The 2009 Notes include customary anti-dilution provisions in respect of issuances of securities or distributions to shareholders and, in the event BELLUS Health issues additional equity or equity-linked securities at a price per common share that is less than the Financing Conversion Price then in effect, "full ratchet" anti-dilution protection (which will have the effect of lowering the Financing Conversion Price to the new issue price of equity or equity-linked securities) will apply, subject to certain exceptions. In addition, the 2009 Notes contain adjustment provisions in the event of a change of control and negative covenants, as well as a pre-emptive right in respect of future financings of BELLUS Health. The 2009 Notes issued to VSVI contains certain piggyback rights in favour of VSVI. The exercise of pre-emptive and piggyback rights will be subject to regulatory approval. Assuming that each of the 2009 Notes remain outstanding until maturity, is converted in full at the Financing Conversion Price and that all interest thereon is paid by the issuance of Common Shares at the Financing Conversion Price, the maximum number of Common Shares issuable under the 2009 Notes is 212,349,035, representing a potential dilution factor of 407%, based on the number of Common Shares issued and outstanding as at June 30, 2009.

Each of Vitus and VSVI has the right to nominate two (2) members to the Board of Directors of BELLUS Health.

In connection with the 2009 Notes financing, BELLUS Health and all of the existing note holders agreed to amend the terms of the outstanding 2006 Notes and 2007 Notes (the Original Notes). Holders of $29,085,000 principal amount of 2006 Notes and $4,000,000 principal amount of 2007 Notes agreed to amend the terms of their notes to make them convertible into the preferred shares in the authorized capital of BELLUS Health and received 3,096 preferred shares per $1,000 aggregate principal amount of existing convertible notes, representing a conversion price equal to 200% of the Financing Conversion Price (resulting in a conversion price of CDN$0.40 per share) (the Preferred Share Conversion Price). A total of 102,431,160 preferred shares were issued to note holders who elected to receive preferred shares. Such preferred shares are convertible into Common Shares on a one-to-one basis, subject to adjustment, entitle the holder to 6% cumulative dividends, payable in cash or Common Shares at the then market price at the option of the Company, and shall be automatically converted into Common Shares five years from the date of issuance. The amendment and immediate conversion of Original Notes into preferred shares triggered a gain on extinguishment of debt in the amount of $10,777,000 during the current quarter. Assuming that each of the preferred shares remain outstanding until maturity, is converted in full at the Preferred Share Conversion Price and that all dividends payable in respect of the preferred shares are paid by the issuance of Common Shares at an assumed market price of CDN$0.24, the maximum number of Common Shares issuable on conversion of the preferred shares would be 147,778,326, representing a potential dilution factor of 283%, based on the number of Common Shares issued and outstanding as at June 30, 2009. The holders of Original Notes that chose not to convert their amended notes immediately into preferred shares retained Original Notes, amended as set out below.

Holders of $13,000,000 principal amount of 2006 Notes and the one remaining holder of 2007 Notes (aggregate principal amount of $500,000) agreed to amend the terms of their notes (Amended Notes), without immediate conversion into preferred shares. The amendments include providing for a 6% annual interest rate, payable semi-annually in cash or Common Shares at the option of BELLUS Health at the then market price of the Common Shares, replacing the existing conversion rate adjustment period of October 2009 - November 2009 with a period from October 2012 - November 2012 for conversion of the Amended Notes at the then applicable market price of the Common Shares based on a twenty (20) day volume weighted average price at that time, and replacing the right of the holder to have BELLUS Health redeem the Amended Notes in November 2011 with a right to have BELLUS Health first redeem the Amended Notes in January 2014 at the then face value of the notes. Amendments to the notes also include the removal of certain negative covenants. Amendment of this aggregate $13,500,000 principal amount of Original Notes triggered a gain on extinguishment of debt in the amount of $6,243,000 during the current quarter. Assuming that the Amended Notes are converted in full at an assumed market price of CDN$0.24 in 2012, when the price of such instruments gets adjusted based on the then market price of the Common Shares, and that all interest thereon is paid by way of issuance of Common Shares at an assumed market price of CDN$0.24, the maximum number of Common Shares issuable under Amended Notes, as amended, would be 75,199,219, representing a potential dilution factor of 144%, based on the number of Common Shares issued and outstanding as at June 30, 2009.

BELLUS Health has agreed that the right to redeem the Amended Notes shall be exercisable 90 days prior to the maturity date of the 2009 Notes issued to the Investors. Any additional unsecured debt, other than operating facilities or debt that is pari passu or junior in ranking to the Amended Notes, shall not mature or be redeemable for cash prior to the date on which the redemption right of the Amended Notes comes into effect. In addition, BELLUS Health has agreed to certain restrictions on its ability to declare or pay dividends in cash while the 2009 Notes are outstanding.

The terms of the 2009 Notes and of the Amended Notes require the continued listing of the Company's shares on the TSX; failure to meet this requirement may be an event default which may result in the convertible notes being immediately due and payable.

The landlord of the Company's premises, in Laval, Quebec, agreed, effective April 1, 2009, and continuing through and including the period to April 7, 2011 (on which date BELLUS Health shall have the right to terminate the lease (the First Termination Option)), to defer BELLUS Health' base rent by CDN$166,667 per month (the Deferred Rent). In the event BELLUS Health does not exercise its First Termination Option, the monthly deferral of the Deferred Rent will continue for an additional twelve-month period until March 31, 2012 (on which date BELLUS Health shall have the right to terminate the lease (the Second Termination Option)). The Deferred Rent shall bear interest at the rate of ten percent (10%) annually, calculated from the first date of the month when any such component of Deferred Rent becomes due and payable. Deferred Rent and the accrued interest are evidenced by promissory notes issued by BELLUS Health to its landlord on the first day of each month when such Deferred Rent becomes due. The notes are payable in cash or, at the option of BELLUS Health, through the issuance of Common Shares at the market price on the day that the notes become payable. Deferred Rent and all notes evidencing Deferred Rent shall be payable on April 7, 2011, in the event that the First Termination Option is exercised or, alternatively, on March 31, 2012. In the event that the lease is terminated under the First Termination Option or the Second Termination Option, BELLUS Health will pay the landlord a consideration of CDN$6,000,000 or CDN$5,450,000, respectively, payable in Common Shares at the then market price of the Common Shares (the Termination Option Payment). The precise amount of rent and number of Common Shares issuable upon conversion of promissory notes to be issued to the landlord will depend, among other things, on the extent to which portions of the premises are sublet or assigned to other tenants during the relevant period. Assuming that the promissory notes issued to the landlord in respect of deferred rent and interest thereon remain outstanding until April 7, 2011, are paid by way of issuance of Common Shares at an assumed market price of CDN$0.24, and that the lease is terminated pursuant to the First Termination Option, the maximum number of Common Shares issuable under the notes would be 43,365,913, representing a potential dilution factor of 83%, based on the number of Common Shares issued and outstanding as at June 30, 2009.

In May 2009, BELLUS Health issued 1,594,026 Common Shares in payment of interest on the outstanding Amended Notes and in June 2009, BELLUS Health issued 600,000 Common Shares upon conversion of Series A Preferred Shares.

In June 2009, options to purchase an aggregate of 600,000 Common Shares were granted to directors of the Company, options to purchase 410,851 Common Shares and 101,300 Common Shares have been cancelled and expired, respectively.

On January 8, 2009, the Company's common stock was delisted from the NASDAQ Capital Market following the Company's formal notice of its intention to voluntarily delist its common stock provided to the NASDAQ Stock Market, notice to the public by press release and the formal notice provided to the SEC, in December 2008. The decision was taken in light of the continuing, extreme short-term volatility in the financial markets and, accordingly, in the Company's market value. Originally, the Company received a NASDAQ Staff Deficiency Letter dated October 10, 2008, stating that, for 10 consecutive trading days, the market value of the Company's listed securities had been below the minimum $50,000,000 requirement for continued inclusion on the NASDAQ Global Market. The Company filed an application to transfer the listing of its common stock from the NASDAQ Global Market to the NASDAQ Capital Market and the transfer was effective as of November 14, 2008. The Company then received a Deficiency Letter dated December 1, 2008, from the NASDAQ Staff stating that, for 10 consecutive trading days, the market value of the Company's listed securities had been below the minimum $35,000,000 requirement for continued inclusion on the NASDAQ Capital Market. The Company then formally initiated the steps to voluntarily delist by notifying the NASDAQ Stock Market and issuing a press release regarding its intention to voluntarily delist its common stock from the NASDAQ Capital Market. The Company received the consent of the holders of over a majority in value of the Company's 2006 Notes and amended the trust indenture governing these notes, so as to permit delisting from NASDAQ. The Company's listing on the Toronto Stock Exchange was not affected by the delisting from NASDAQ.

As at December 31, 2008, the Company held approximately $12,250,000 (of which $6,250,000 was denominated in Canadian dollars) in principal value of third party ABCP, including $5,719,000 of third party ABCP acquired as part of the Innodia acquisition. These investments were due to mature as early as August 2007, but, as a result of a disruption in the credit markets, particularly in the ABCP market, they did not settle on maturity. On April 25, 2008, the restructuring plan announced by the Pan-Canadian Investors Committee (the Committee) in December 2007 was approved by the ABCP holders. On January 21, 2009, the Committee announced that the restructuring plan had been implemented. Pursuant to the terms of the restructuring plan, the Company received the following new floating rate interest-bearing notes (New ABCP Notes) in exchange for its ABCP: CDN$2,306,000 of MAV2 Class A-1 Notes, CDN$2,773,000 of MAV2 Class A-2 Notes, CDN$503,000 of MAV2 Class B Notes, CDN$173,000 of MAV2 Class C Notes, CDN$850,000 of MAV2 IA Tracking Notes, $5,000,000 of MAV3 IA Tracking Notes as well as $977,000 and CDN$985,000 of MAV3 TA Tracking Notes. The legal maturity of the New ABCP Notes is July 15, 2056, but the actual expected repayment date of the Notes, if held to maturity, is January 22, 2017. The New ABCP Notes issued following the restructuring plan are designated as held for trading financial assets. Previously, the ABCP were also classified in that category. During the quarter ended June 30, 2009, the Company received partial payments for capital, totaling $1,459,000 ($1,459,000 for the six-month period), and for accrued interest, totaling $141,000, ($532,000 for the six-month period) for its investment in ABCP held since the market disruption. The Company has not recorded any interest income since the initial maturity of the ABCP it held; however, the expected proceeds from the interest were considered in the determination of the fair value of the ABCP.

During the second quarter of 2008, the Company entered into a temporary credit facility with the chartered bank that sold the ABCP to the Company. On April 20, 2009, in connection with the restructuring of the ABCP market, the Company entered into new secured revolving credit facilities with the chartered bank, with a minimum 2-year term and with options to renew on an annual basis for up to a maximum total potential term of seven years. These facilities have combined maximum aggregate amounts of CDN$7,307,000 and $4,578,000, bear interest at prime rate minus 1% per annum, and are secured by hypothecs having an aggregate principal amount of CDN$18,400,000 on the New ABCP Notes issued to the Company, on the securities accounts in which they are held and on all proceeds of these notes. The amounts of the credit facilities reduce as capital payments are received on the New ABCP Notes. A portion of these facilities and all other obligations of the Company towards the bank are secured by a hypothec on the universality of the Company's assets in the amount of approximately CDN$2,000,000. The revolving credit facilities also include a put option feature in 2011 and 2012, which may limit the Company's losses to between 25% and 55% of the New ABCP Notes, subject to certain conditions.

As at June 30, 2009, the Company estimated the fair value of the outstanding balance of New ABCP Notes at approximately $7,153,000, of which $296,000 is presented as part of Restricted Cash, as it is pledged to a bank as collateral for letter of credit issued in connection with a lease agreement. In connection with its fair value determinations, the Company recorded an increase in fair value of $524,000 for the three-month period ended June 30, 2009 (increase of $183,000 for the six-month period), compared to nil for the same period the previous year (decrease of $375,000 for the six-month period). The exchange of third party ABCP for New ABCP Notes during the first quarter of 2009 resulted in a loss on settlement, which is presented as part of the decrease in fair value recorded during that period. The Company estimates the fair value of the New ABCP Notes using a probability weighted discounted cash flow approach, based on its best estimates of the period o


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