Opsens
Annual Report 2009

Plain-text annual report

MEASURE• • • IMPROVE ANNUAL REPORT 2009 CORPORATE PROFILE Opsens is a leading developer, manufacturer, supplier and installer of a wide range of fiber optic solutions based on proprietary patented technologies. Opsens sensors provide long-term accuracy and reliability in the harshest environments. Opsens develops applications and provides sensors to measure pressure, temperature, strain and displacement to original equipment manufacturers (OEM) and end users in the oil and gas, medical, transformers, and laboratories fields. HIGHLIGHTS 2009 A PROMISING FUTURE FOR OPSENS' PRODUCTS • • • July 2009 Receipt of a grant of close to $500,000 to develop a medical instrumentation device. • • • June 2009 Closing of a $1.75M financing. • • • May 2009 The OPP-W sensor completes its first year of successful operation. • • • March 2009 Important sale in the power transformer market to a company from an emerging market. • • • February 2009 Order renewal for the OPP-W sensor. • • • November 2008 Receipt of an order from Nexen for the OPP-W sensor. • • • October 2008 Opsens gets ISO9001:2000 certification. GREAT START FOR 2010 • • • November 2009 Receipt of first order to instrument permanent observation well in CO2-enhanced oil recovery project. • • • October 2009 Receipt of a commercial size order – 26 OPP-W sensors from a major oil & gas producer. Backlog reaches record level, exceeding the sales of previous year. Capital structure – August 31, 2009 Shares outstanding: 43 million Symbol TSX V: OPS OUR VISION OF 2010 • • • Possibilities for significant growth generated by a growing need to measure temperature and pressure in hostile environments, including wells exploited by SAGD and the human body (medical instrumentation). • • • Opsens partners with major players well-established in their fields. • • • Opsens' products have been proven effective. • • • Opsens' products benefit from a strong gross margin, supported by recurring revenues and by the maintenance and replacement of sensors. • • • There is growing acceptance of optical products in oil and gas, power transformers and laboratories. VALUE CREATED BY RESEARCH AND DEVELOPMENT • • • Opsens continually identifies new applications. • • • Opsens' expertise in optical sensors is well recognized. • • • Opsens' team has a strong capacity to materialize ideas. SHAREHOLDING STRUCTURE • • • Through strong share ownership, executives' interests are aligned with shareholders. FINANCIAL POSITION • • • That allows the company to execute its business plan. Strong progression of sales in each of our strategic markets. • • • Trials of our medical instrumentation device in humans. • • • Enlargement of our clientele for the OPP-W oil & gas sensor. • • • Delivery of order to instrument a permanent observation well in CO2 enhanced oil recovery project. • • • Launching of our high-temperature fiber optic extensometer to measure cap rock integrity. • • • Pursuing development in our actual and future markets of new products and new applications for our existing products. • • • The coming products will provide, among other things, complete progressive solutions in cap rock integrity, CO2 stimulated production and medical instrumentation. w w w • o p s e n s • c o m LETTER TO OUR SHAREHOLDERS 2009 will leave a mark in the collective memory as a period of rapid change during which uncertainty and unprecedented market volatility led both companies and consumers to reduce spending. Nonetheless, Opsens rose to the challenge, making progress on several fronts, and established a strong basis for future growth. Oil & Gas In fiscal 2009, oil and gas companies in Alberta slowed their investment projects which temporarily reduced demand for Opsens’ products. Yet in the last few months, we believe the winds have begun to change. The oil price has recovered considerably, allowing us to foresee major investments. Oil and gas companies, particularly those using steam assisted gravity drainage (SAGD) in oil sands projects, are refocusing their attention on optimizing production to improve yield and reduce costs. Our OPP-W fiber optic sensors do just that. Commercial order to instrument 26 wells with the OPP-W The technical evaluation of the OPP-W sensor continues successfully since its installation in SAGD’s hostile conditions in May 2008. In October 2009, Opsens received its first commercial- sized order to equip 26 wells with our OPP-W sensors. The order came from a leader in the oil and gas industry, which should further stimulate interest in our OPP-W sensor. The Opsens OPP-W sensor system measures pressure and temperature, in real-time, at temperatures up to 300° Celsius continuously in SAGD wells. The capacity to control pressure and temperature at high temperatures allows in-situ producers to improve steam-to-oil ratios, increase production, and reduce operation and lifting costs. The integration of OPP-W sensor systems on a multi-well basis will allow unprecedented field-wide, real-time bottom-hole pressure and temperature to operators, production engineers and reservoir engineers, enabling effective and timely heavy oil reservoir management decisions. We are confident that the OPP-W is destined to become a crucial instrument in the exploitation and the optimization of SAGD. Since receiving our first large order, we have seen an increase in the number of requests for information, a good sign for 2010. Development of Opsens’ first medical instrumentation device For a number of years, Opsens has made a miniature fiber optic sensor for international OEM clients in the medical instrument industry. To build and capitalize on the success of that miniature sensor, Opsens is developing its own medical device, and has filed a provisional patent for a ground-breaking application. Opsens has received a $498,500 grant from the NRC-IRAP towards this project, which should be released in 2011. High-power transformers and scientific laboratories Opsens has seen remarkable growth in the scientific laboratories sector. The high-power transformers sector has set foot in emerging markets with a major delivery in Asia, demonstrating progress in spreading Opsens’ products worldwide. A Perspective on 2010 The 26-sensor order from the oil and gas market provided a strong start to 2010. This order has helped push Opsens’ consolidated backlog to historical levels. 1 Opsens has created innovative products that generate a substantial return on investment for our clients. In addition to our current product and services offering, we will launch new solutions to measure various parameters for oil and gas to promote efficient and safe exploitation. The November 2009 announcement of an order to instrument a permanent observation well in a CO2 enhanced oil recovery project, is a concrete example of Opsens taking advantage of its expertise to improve penetration in its markets. Within our medical division, trials in humans are planned for 2010. Also, we expect sustainable sales in other sectors. In closing, I want to thank our clients for the confidence they demonstrate in our products. The growth of our activities relies on our team’s dedication to providing high-quality products developed in conformity with the ISO 9000:2001 norm. I salute their commitment to excellence. The presence and the experience of our directors have provided inspiration, stability and focus in these highly turbulent times. I thank them for bringing their creative energy into the mix. Finally, I want to thank our shareholders for their continued support in our team. They are a following our story closely; we want to make them proud. (s) Pierre Carrier President and Chief Executive Officer 2 3MANAGEMENT DISCUSSION & ANALYSIS Annual report for shareholders Fiscal year ended August 31, 2009 The following comments are intended to provide a review and analysis of the operating results and financial position of Opsens Inc. as of August 31, 2009, and for the three months and year ended this date, in comparison with the corresponding periods ended August 31, 2008. They should be read and interpreted in conjunction with the audited financial statements as well as the accompanying notes as of August 31, 2009. Unless stated otherwise, the interim Management Discussion and Analysis has been prepared in accordance with Canadian Generally Accepted Accounting Principles (GAAP) on a consolidated basis. This document was prepared on November 6, 2009. All amounts are in Canadian dollars. This report contains forward-looking statements that involve risks and uncertainties. These forward-looking statements are not guarantees of our future results, and actual results could differ significantly from those foreseen by such statements due to several factors, including economic conditions, capital expenditures in the measuring instrument sector, currency exchange rate variation, and our ability to manage Opsens successfully under these uncertain conditions. Consequently, the reader should not place undue reliance on these forward-looking statements. These forward-looking statements are only valid as at the date of this document. The Company is under no obligation to revise or update these forward-looking statements in order to reflect the events or circumstances that occur after the date of this analysis, except when it is required by law. CORPORATE OVERVIEW Opsens Inc. (the “Company”) is a leading developer, manufacturer, and supplier of a wide range of fiber optic sensors and associated signal conditioners based on proprietary patented and patent-pending technologies. Opsens sensors provide long-term accuracy and reliability in the harshest environments. Opsens provides sensors to measure pressure, temperature, strain, and displacement to original equipment manufacturers (OEM) and end-users in the oil and gas, medical, transformers, and laboratory fields. Opsens provides complete technical support, including installation, training, and after-sales service in conformity with ISO 9001:2000. Opsens holds three (3) patents and has three (3) patents pending covering its products and technology provided to its markets, giving the Company freedom to operate. With its patented technologies and highly recognized expertise, Opsens meets consumer needs in the medical, oil and gas, high-power transformers, and laboratory markets. Since December 11, 2007, activities in the oil and gas market have been performed by the wholly-owned subsidiary Opsens Solutions Inc. (“Opsens Solutions”), formerly Inflo Solutions Inc. VISION, STRATEGY, AND OUTLOOK The worldwide market for fiber optic and conventional sensors is a multi-billion dollar market. The Opsens sales and marketing strategy aims to provide solutions for the various current niche markets and develop specific new markets. The Company’s expertise, know-how, and patented technology are the keys to new production techniques improving the reliability of measuring equipment. Also, the Opsens production technique called MEMS (Micro-Electro- Mechanical-System) encourages penetration into markets traditionally occupied by conventional sensors through higher production volumes and reduced manufacturing costs. In 2010, Opsens expects revenue from product sales to be higher than a year earlier, despite the challenging economic environment. The recent order from a major Alberta oil and gas producer to instrument 26 wells with OPP- W fibre optic sensors, and the greater maturity of our products, will contribute significantly to increase revenues. Disclosures in volatile and uncertain times in the financial markets Even in the current economic environment, Opsens continues to execute its business plan, targeting revenue growth in all of its markets. The company continues to hire in human resources to provide its clients with top-quality 4 products and services. Given the controls in place in each of Opsens’ units, the company isn’t at this point taking any unusual measures. Regarding cash management, the private placements that Opsens completed in 2008 and 2009 give the company the financial resources necessary to operate in 2010. The company has not changed its cash management strategy, which aims to protect its financial assets and defer spending that isn’t essential to enacting Opsens’ business plan in the near to medium term. If Opsens did need to raise money in the future, success would depend on revenue growth. The accounting estimates used in the financial statements for the period ended August 31, 2009, were not modified for the current uncertain economic environment. These items are receivable tax credits, provisions for contractual guarantees and assumptions tied to the fair value of share options and warrants. Management doesn’t anticipate an impact on the company’s accounting estimates for fiscal 2010. Majors drivers that have changed as a result of the financial crisis Credit availability and cost The availability of credit has decreased as a result of the global financial crisis. Opsens’ current assets are enough to execute its current short-term business plan. If additional equity financing is required, current fiscal incentives may help. It is uncertain what the impact of an equity financing on current shareholders would be compared with doing such a financing under more normal market conditions. Customers The current period of uncertainty and volatility has not required the company to change its method of dealing with credit, since Opsens’ clients are primarily businesses with strong capitalization, distributors and government-related agencies. Currency fluctuations As for recent currency fluctuations, an appreciating American dollar against the Canadian dollar generally favours sales figures and gross margins, since most of Opsens’ sales are made in U.S. dollars. Additional information is included below under the “Distribution, sales and long-term recurring revenues” and “Capital management” headings. Commodity prices The oil and gas market is a strategic one for Opsens. In spite of the recovery in the price of oil and gas, the high volatility of this commodity could affect negatively short-term investments in the oil and gas industry. Counterparties Because Opsens’ revenues and purchases are diversified, the company doesn’t anticipate any significant impact from decreased solvency of certain clients, suppliers and bankers. 5 SELECTED CONSOLIDATED FINANCIAL DATA (In thousands of Canadian dollars, except for information per share) Year Ended August 31, 2009 $ Year Ended August 31, 2008 $ Year Ended August 31, 2007 $ Sales Cost of revenues Gross margin Administrative expenses Marketing expenses R&D expenses Financial expenses (income) Stock option-based compensation Amortization of property, plant and equipment Amortization of intangible assets Write-off of intangible assets Amortization of reported financing fees Loss before income taxes Income taxes Net loss Net loss per share – Basic Net loss per share - Diluted (In thousands of Canadian dollars) Current assets Total assets Current liabilities Long-term debt Shareholders' equity 3,088 2,000 1,088 1,179 872 828 (34) 229 164 21 - - 3,259 (2,171) - (2,171) (0.05) (0.05) 2,844 1,432 1,412 984 731 699 (58) 253 100 40 - - 2,749 (1,337) - (1,337) (0.04) (0.04) 813 639 174 623 825 591 (9) 345 72 18 12 10 2,487 (2,313) - (2,313) (0.08) (0.08) As at August 31, 2009 $ As at August 31, 2008 $ As at August 31, 2007 $ 4,880 6,450 652 256 5,542 5,462 6,852 770 253 5,829 2,543 3,029 541 499 1,989 No dividend was declared per share for each share class. On October 3, 2006, Opsens completed a qualifying transaction under the rules of the TSX Venture Exchange Corporate Finance Manual. On April 8, 2008, the Company completed a private placement of 4,711,126 units at a price of $0.80 per unit for gross proceeds of $3,768,901. On June 25, 2009, the Company completed a private placement of 2,916,667 units at a price of $0.60 per unit for gross proceeds of $1,750,000. 6 SUMMARY OF CONSOLIDATED QUARTERLY RESULTS The summary below presents the periods in which Opsens published unaudited interim financial statements. (In thousands of Canadian dollars) Three months ended August 31, 2009 $ Three months ended May 31, 2009 $ Three months ended February 28, 2009 $ Three months ended November 30, 2008 $ Revenues Net loss for the period Net loss per share - Basic Net loss per share - Diluted 591 (719) (0.02) (0.02) 1,279 (215) (0.01) (0.01) 606 (682) (0.02) (0.02) 612 (555) (0.01) (0.01) (In thousands of Canadian dollars) Three-month period ended August 31, 2008 Three-month period ended May 31, 2008 Three-month period ended February 29, 2008 Revenues Net loss for the period Net loss per share - Basic Net loss per share - Diluted $ 748 (228) (0.01) (0.01) $ 890 (359) (0.01) (0.01) $ 637 (403) (0.01) (0.01) Three-month period ended November 30, 2007 $ 569 (347) (0.01) (0.01) The acquisition of Inflo Solutions on December 11, 2007, stimulated sales in the oil and gas sector beginning in the second quarter of fiscal 2008. In the first quarter of fiscal 2009, the Company performed leasehold improvements to its Quebec facilities, which temporarily affected production and hence revenues, and increased the Company’s loss. In the latest second quarter, Opsens incurred and recorded expenses related to the planned installation of two OPP-W sensors. The installation was delayed by the client until the third quarter, when the sensors were installed, and the revenue recorded. FOURTH QUARTER 2009 Revenue totalled $591,000 for the quarter ended August 31, 2009, compared with $748,000 a year earlier. The decrease resulted from weakness in the oil and gas market. The company had anticipated to completing two installations from its oil and gas backlog in the fourth quarter, but the orders were postponed. Opsens expects to proceed with these installations in the first half of 2010, further boosting expected revenue growth. The Company recorded a loss of $719,000 or 2 cents a share in the fourth quarter, compared with a loss of $228,000 or 1 cent a share a year earlier. The increased loss reflects lower sales, gross margins and financial income. Seasonal fluctuations and year-end adjustments had no impact on operating revenues and net loss for the fourth quarter 2009. Administrative expenses were little changed at $285,000 for the latest quarter, compared with $275,000 for the same period in 2008. Marketing expenses for the quarter were declined to $203,000 versus $222,000 a year earlier. 7 Research and development expenses totalled $201,000 for the quarter ended August 31, 2009, compared with $165,000 for the same period in 2008. The increased spending went towards a promising new project in medical instrumentation. Historically, the Company’s revenues have been little affected by seasons. Seasonal fluctuations will become more significant as the weighting of sales to the oil and gas field increases, since business activity is generally greater in the winter quarter for this sector. PERFORMANCE INDICATORS In order to evaluate the Company’s performance and generate long-term value for its shareholders, the Company has identified the following financial and non-financial performance indicators: 1) Distribution, sales, and long-term recurring revenues; 2) Products and innovation; 3) Short-term financial performance and cash flows; 4) Strategic acquisitions and development of new projects. YEARS ENDED AUGUST 31, 2009, AND AUGUST 31, 2008 DISTRIBUTION, SALES, AND LONG-TERM RECURRING REVENUES (In thousands of dollars except for percentage data figures) Year Ended August 31, 2009 $ Year Ended August 31, 2008 $ Revenues Growth rate (%) Gross margin Growth rate (%) 3,088 2,844 (8.5 ) 1,088 1,412 (-22.9) The Company reported revenue of $3,088,000 for the year ended August 31, 2009, compared with $2,844,000 a year earlier, an increase of 8.5%. The growth includes a sales increase of $800,000 in the high-power transformers market and an increase of close to $180,000 in the scientific and military laboratories markets. The growth is attributable to an emphasis on highlighting the added value of our products. Sales in the oil and gas sector totalled $375,000, compared with $799,000 a year earlier ($207,000 accounted for within the Opsens Inc. reportable segment) for 2008. In general, the drop reflects our oil and gas clients’ reluctance to make investments in an uncertain economy. Sales in medical instrumentation were $285,000 in fiscal 2009 compared with $612,000 for 2008. In 2008, we made some major deliveries used for product evaluation that we expect will stimulate growth in this market in 2010. 8  (In thousands of Canadian dollars except for percentage data figures) Year ended August 31, 2009 Opsens Inc.’s reportable segment $ Year ended August 31, 2009 Opsens Solutions Inc.’s reportable segment $ Year ended August 31, 2009 Eliminations $ Year ended August 31, 2009 Consolidated financial statements $ Revenues Cost of revenues Gross margin Gross margin rate (%) 2,803 1,431 1,372 49 366 651 (285) (78) (81) (81) - - 3,088 2,000 1,088 35 The gross margin and the gross margin rate on product sales fell in fiscal 2009 from a year earlier, mostly because of the increase in general costs of production and in the number of production employees in the Opsens Solutions Inc. division, where the company is preparing for an expected growth in sales in coming quarters. The company expects the gross margin rate for Opsens Solutions Inc. to go back to its minimum target of 40% next year, as sales increase. As at August 31, 2009, the backlog amounted to $617,000, more than double the $295,000 in backlog on August 31, 2008. Given that a large proportion of the Company's revenue is generated in U.S. dollars, while most costs are incurred in Canadian dollars, fluctuation in the exchange rate affects revenue. For the fiscal year ended August 31, 2009, the average exchange rate was higher than the previous year, which affected positively sales by $518,000 for the fiscal year ended August 31, 2009. Market acceptance of fiber optic sensors is increasing in the company’s markets, leading to higher sales, despite the recession. That said, some sectors, such as high-power transformers, are seeing additional competition. Opsens is addressing the added competition by highlighting the performance characteristics of its products compared with those of its competitors. For the periods ended August 31, 2009 and 2008, pricing fluctuations and new product launches did not have a significant impact on revenues. PRODUCTS AND INNOVATION The Company is constantly working to improve its position in terms of intellectual property and what it can offer to its customers. In fiscal 2009, the Company focused on continuous improvements to its technology in markets with the highest perceived potential payoff, particularly oil and gas and medical devices. During the first quarter, Opsens filed a provisionary patent to the USPTO for a strong potential medical application. Opsens was also awarded a $498,500 grant from the National Research Council Industrial Research Assistance Program (“NRC-IRAP”) for this project. In addition to the technical advice provided by the NRC-IRAP, this financial assistance will help Opsens continue to develop this medical product. The innovative qualities of our application lead us to believe Opsens will make a major breakthrough in the medical sector in 2011. Research and development expenses increased to $828,000 from $699,000 in fiscal 2008. The increase reflects an increase in the number of employees and higher prices for R&D supplies. 9 SHORT-TERM FINANCIAL PERFORMANCE AND CASH FLOWS Non-GAAP financial measure - EBITDA EBITDA before stock-based compensation costs does not have any standardized meaning prescribed by GAAP and is therefore unlikely to be comparable to similar measures presented by other issuers. EBITDA before stock-based compensation costs provides investors and management burn rate related to operating activities of the Company. Reconciliation of EBITDA to the Annual Results (In thousands of Canadian dollars) Year Ended August 31, 2009 $ Year Ended August 31, 2008 $ Year Ended August 31, 2007 $ Net loss for the period Financial expenses (income) Amortization of property, plant, and equipment Amortization of intangible assets Write-off of intangible assets Amortization of reported financing fees (2,171) (34) 164 21 - - (1,337) (58) 100 40 - - (2,313) (9) 72 18 12 10 EBITDA Stock-based compensation costs (2,020) (1,255) (2,210) EBITDA before stock-based compensation costs 229 253 345 (1,791) (1,002) (1,865) Net loss For the year ended August 31, 2009, net loss totalled $2,171,000, compared with $1,337,000 a year earlier. This increase, as well as the EBITDA for FY2009, reflects an increase in administrative, commercialization and R&D expenses and a decrease in gross margin. Fiscal 2010 results will be strongly influenced by product sales volume. The backlog, including the order for 26 OPP-W sensor systems received early in the year, and the expansion of marketing activities within the oil and gas market following the OPP-W installations in 2008 and 2009, should contribute to an increase in EBITDA. Capital management The Company uses its capital to finance marketing expenses, research and development activities, administrative charges, working capital and capital assets. Historically, the Company has financed activities through rounds of public and private financing, debt financing as well as government grants. The company reviews net loss and EBITDA quarterly. The Company aims to improve these ratios which negatively varied for the period ended August 31, 2009, compared with the same period in 2008. The Company believes that its current liquid assets are sufficient to finance its activities for the short term. The Company has an authorized line of credit for a maximum amount of $200,000, $50,000 of which is available at all times and which is not limited by margin requirements. When using the line of credit in an amount varying from 10 $50,000 and $100,000, the available credit is limited to an amount equal to 75% of Canadian accounts receivable and 65% of foreign accounts receivable plus 50% of inventories of raw materials and finished goods. If the amount used exceeds $100,000, the credit available is limited to an amount equal to 75% of Canadian accounts receivable and 90% of ensured foreign accounts receivable plus 50% of inventories of raw materials and finished goods. Under the terms and conditions of the credit agreement, the Company is subject to certain covenants with respect to maintaining minimum financial ratios related to the maintenance of a maximum ratio of 3 to 1 for total debt to equity, and a ratio of at least than 1.5 to 1 for debt to working capital, with a minimum working capital of $200,000. The covenants were met as of August 31, 2009. INFORMATION BY REPORTABLE SEGMENTS Segmented information The Company’s reportable segments are strategic business units managed separately; one is focused on developing, producing, and supplying fiber optic sensors (Opsens Inc.) and the other (Opsens Solutions Inc.) is specialized in the commercialization and installation of optical and conventional sensors for the oil and gas industry. The same accounting policies are used for both reportable segments. Operations are carried out in the normal course of operations and are measured at the exchange value. 2009 Opsens Solutions Opsens inc. 2008 Opsens Total Opsens inc. Solutions $ $ $ $ $ Total $ 2,721,088 366,728 3,087,816 2,248,817 595,422 2,844,239 81,481 - 81,481 4,000 87,094 91,094 147,940 16,520 164,460 94,748 5,507 100,255 21,387 (92,939) - 58,252 21,387 (34,687) 20,340 (71,787 ) 20,000 13,574 40,340 (58,213) (1,212,563) (958,069) (2,170,632) (1,231,708 ) (104,980) (1,336,688) 256,792 76,912 333,704 270,625 44,519 315,144 31,418 5,182,350 - 1,267,924 31,418 6,450,274 37,664 5,787,433 - 1,064,786 37,664 6,852,219 External sales Internal sales Amortization of property, plant and equipment Amortization of intangible assets Financial expenses Net loss Acquisition of property, plant and equipment Acquisition of intangible assets Segment assets 11 Information by geographic segments Revenue per geographic sector Canada United States Germany UK Other 2009 $ 464,061 754,214 363,586 146,767 1,359,188 3,087,816 2008 $ 651,875 933,916 416,805 285,465 196,178 2,844,239 Revenues are attributed to the geographic sector based on the clients’ location. Capital assets, which include property, plant and equipment and intangible assets, are all located in Canada. During the period ended August 31, 2009, revenues from two clients represent individually more than 10% of the total revenues of the company, i.e. 15.92% (Opsens Inc.’s reportable segment), and 11.16% (Opsens Inc.’s reportable segment). For the period ended August 31, 2008, revenues from three clients represented respectively 18.09% (Opsens Solutions Inc.’s reportable segment), 17.62% (Opsens Inc.’s reportable segment), and 13.09% (Opsens Inc.’s reportable segment) of the Company’s total revenues. Administrative expenses Administrative expenses were $1,179,000 and $984,000 respectively for the periods ended August 31, 2009, and 2008. Administrative expenses increased mainly due to a rise in employment levels and communication expenses. In fiscal 2010, administrative expenses will continue to increase, particularly in light of a general rise in fees necessary to support the anticipated growth in sales. Sales and marketing expenses Sales and marketing expenses were $872,000 for FY2009, up from $731,000 a year earlier. This increase is explained mainly higher salaries and benefits. The company expects these costs to rise again in fiscal 2010, considering our planned activities. Financial expenses (income) Financial income was $34,000 for the period ended August 31, 2009, compared with $58,000 a year earlier. The decrease resulted directly from a loss in the exchange rate compared with the year before. Financial income should continue to decrease in 2010, notably because of lower interest rates. Financing activities cash flow On June 25, 2009, the Company completed a private placement of 2,916,667 common shares at a price of $0.60 a share for gross proceeds of $1.75 million. Opsens also issued non-transferable warrants to the brokers entitling them 12 to acquire 204,167 common shares of Opsens at $0.60 a share for a period of 24 months from the closing of the offering. The net proceeds of the private placement will be used for marketing, general working capital purposes and potentially for acquisitions. Opsens will expand its sales and marketing activities and finalize main product development partnerships, which should provide long-term recurring revenues. Warrants exercised During period ended August 31, 2009, 50,000 warrants entitling their holders to acquire common shares at $0.40 each were exercised, for a total of $20,000. The book value of the exercised warrants transferred to share capital was $8,000. In the latest period, warrants entitling holders to buy 393,000 shares at $0.40 each, 111,111 at $0.55 and 4,865,000 shares at $0.60 each expired. For the period ended August 31, 2009, the Company granted to some employees a total of 705,500 stock options with an average exercise price of $0.40, and cancelled 160,000 stock options with an exercise price of $0.52 a share. As at the date of this Management Discussion and Analysis, the following components of shareholders' equity are outstanding: Common shares Stock options Warrants Securities on a fully diluted basis Investing activities cash flow 43,398,344 2,788,500 2,889,509 49,075,853 Opsens performed leasehold improvements at its Quebec City manufacturing facility in 2009. Leasehold improvements, R&D and production equipment purchases amounted to $334,000 for the period ended August 31, 2009. These acquisitions were made primarily to gain access to space and high-tech R&D and production equipment. As for intangible assets, Opsens invested $31,000 for the period ended August 31, 2009. These investments involved software and patent protection for the Company's inventions. Cash and cash equivalents On August 31, 2009, the Company had cash and cash equivalents of $2,887,000, compared with $3,743,000 as of August 31, 2008. Of this amount as at August 31, 2009, $2,465,000 was invested in highly liquid, safe investments. The Company also has an available line of credit in the amount of $200,000. This line of credit incurs interest at prime +2%. The restrictive clauses of the Company’s financial institution are respected. Financial position As at August 31, 2009, Opsens had working capital of $4,228,000, compared with working capital of $4,691,000 on August 31, 2008. Based on the private placement completed on June 25, 2009, the exercised warrants, its cash and cash equivalents, its working capital, and its order backlog, Opsens has the financial resources necessary to maintain short-term operations, honour its commitments, and support its anticipated growth and development activities. From a medium-term perspective, Opsens may need to raise additional financing by issuing equity securities and debt. In the long term, there is uncertainty about obtaining additional financing, given the risks and uncertainties identified in the Risks and uncertainties section. During fiscal 2010, fluctuation in cash assets will depend particularly on the rate of revenue growth. In fiscal 2010, widespread sales growth should require the Company to make an additional investment of a few hundred thousand dollars in accounts receivable and inventory. 13 Commitments  Leases The Company leases office space under an operating lease expiring on January 31, 2014. This agreement is renewable for an additional five-year period. Future rent, without considering the escalation clause, will amount to $523,477. Opsens Solutions Inc. rents three vehicles under operating lease expiring in November 2010, September 2013, and October 2013. Future rent payments will amount to $81,509. Future payments for the leases and other commitments, totalizing $749,986, required in the next years are as follows: 2009 2010 2011 2012 2013  Licence $ 231,677 177,966 147,257 138,757 56,433 Under an exclusive licence with a third party, the Company is committed to provide exclusive marketing of some of its products for a defined territory.  Related-party transactions During the normal course of business, management and professional fees have been incurred from related parties. These transactions have been valued at the exchange amount agreed by the parties. Professional fees to A company controlled by a shareholder and director Financial instruments Cash equivalents and temporary investments 2009 $ 2008 $ - - 30,000 30,000 The Company is exposed to various types of risks in the management of its cash and cash equivalents, including those related to the use of financial instruments. To manage these risks, controls were put in place, particularly those related to investment policy. The investment policy is approved by the Board of Directors. The Company’s investment policy aims primarily to protect capital, while considering return on investment and income taxes. 14 Market Risk Market risk is the risk that the value of a financial instrument will fluctuate as a result of changes in the parameters underlying their measurement, particularly interest rates and market prices. Interest Rate Risk Interest rate risk exists when interest rate fluctuations modify the cash flows of the Company’s investments. The Company owns investments with fixed interest rates. As of August 31, 2009, the Company was holding 85.4% of its cash equivalents portfolio in term deposits redeemable at any time. Financial charges (income) Interest and bank charges Interest on long-term debt Gain on foreign currency translation Interest income Credit Risk Year Ended August 31, 2009 $ 25,599 42,684 (20,524 ) (82,446 ) (34,687 ) 2008 $ 13,173 48,964 (32,809) (87,541) (58,213) The use of financial instruments can create a credit risk that is the risk of financial loss resulting from a counterparty’s inability or refusal to fully discharge its contractual obligations. The Company’s credit risk management policies include the authorization to carry out investment transactions with recognized financial institutions, with credit ratings of at least A and higher, in either bonds, money market funds or guaranteed investment certificates. Consequently, the Company manages credit risk by complying with established investment policies. Concentration Risk Concentration risk exists when investments are made with multiple entities that share similar characteristics or when a large investment is made with a single entity. As of August 31, 2009, the Company was holding more than 85.4% of its cash equivalents portfolio in term deposits redeemable at any time. Operational credit risk The Company provides credit for a conventional period of 30 days to its customers in the normal course of business. Credit evaluations are performed on an ongoing basis of all its accounts receivable and an allowance for doubtful accounts is recorded when those accounts are deemed uncollectible. Four major customers represent 50.73% of the Company’s accounts receivable as at August 31, 2009. As at August 31, 2009, 23.66% of accounts receivable were older than 90 days, while 33.49% were less than 30 days old. The maximum exposure to the risk of credit for receivable corresponded to their book value. On August 31, 2009, the bad debt provision was established at $14,678 ($14,031 on August 31, 2008). Management considers that substantially all receivables are fully collectible, as most of our customers are large corporations with good credit standing and no history of default. 15 Interest rate and cash flow risk The Company is exposed to interest rate fluctuations on certain long-term debt that bears interest at variable rates. The Company does not actively manage this risk. Assuming the cash equivalents and long-term debt as reported on August 31, 2009, had been the same throughout the period, a hypothetical 1% interest rate increase would have had a favourable impact of $1,975 and $2,926 on the net loss respectively for years ended August 31, 2009 and 2008. The net result would have had an equal but opposite effect for a hypothetical 1% interest rate decrease. Foreign exchange risk The Company realizes certain sales and purchases certain supplies and professional services in U.S. dollars. Therefore, it is exposed to foreign currency fluctuations. The Company does not actively manage this risk. For the years ended August 31, 2009 and 2008, if the Canadian dollar had strengthened 10% against the U.S. dollar with all other variables held constant, after-tax net income and other comprehensive income would have been $138,000 and $168,000 lower, respectively. Conversely, if the Canadian dollar had weakened 10% against the U.S. dollar, with all other variables held constant, after-tax net income and other comprehensive income would have been $138,000 and $168,000 higher for the same periods. As at August 31, the risk to which the Company was exposed is established as follows: Cash Accounts receivable Accounts payable and accrued liabilities Total Fair value $ 78,752 471,847 (30,545) 520,054 The fair value of cash and cash equivalents, accounts receivable, income tax credits receivable and accounts payable and accrued liabilities approximate their carrying value due to their short-term maturities. The fair value of long-term debt is based on the discounted value of future cash flows under the current financial arrangements at the interest rate the Company expects to currently negotiate for loans with similar terms and conditions and maturity dates. The fair value of long-term debt approximates its carrying value due to the current market rates. Liquidity Risk Liquidity risk represents the possibility of the Company not being able to raise the funds needed to meet financial commitments at the appropriate time and under reasonable conditions. The Company manages this risk by maintaining permanent and sufficient liquidity to meet current and future financial obligations, under both normal and exceptional circumstances. The funding strategies used to manage this risk include turning to capital markets to carry out issues of equity and debt securities. 16 The following are the contractual maturities of the financial liabilities, principal and interest (assuming current interest rates), as at August 31, 2009: 2 to 5 More than 5 Accounts payable and accrued liabilities Long-term debt Obligation under capital lease Commitments Total Total $ 518,782 423,573 88,827 0 to 12 months $ 518,782 150,072 33,904 1 to 2 years $ - years $ - 137,952 135,549 22,829 32,094 749,986 231,677 175,862 342,447 1,781,168 934,435 336,643 510,090 years $ - - - - STRATEGIC ACQUISITIONS AND NEW PROJECT DEVELOPMENT In its business plan, Opsens has identified some acquisition targets for growth. In order to maximize value creation for our shareholders, and based on the opportunities, Opsens may make strategic acquisitions. Opsens remains open to any business opportunities that could occur at any time. On December 11, 2007, the Company concluded the acquisition of all outstanding shares of Inflo Solutions Inc. (“Inflo”), a company dedicated to the design and installation of reservoir surveillance solutions based on optical and conventional sensors to the oil and gas market. The purchase price comprised 1,199,997 Opsens common shares and $120,000 cash. At the closing, 510,000 shares out of the first 600,000 shares were paid into escrow and will be released over a 48-month period. The balance of the shares and the cash, represented by a series of promissory notes, have also been paid in escrow, to be released or cancelled, as applicable, over a 48-month period ending December 11, 2011, following the achievement or non achievement of certain performance milestones. The Company has also committed to invest up to $350,000 into the working capital of Inflo during the 48-month period following the acquisition. The shares issued at closing were subject to a statutory four-month hold period that ended on April 12, 2008. On April 8, 2008, a milestone was achieved, releasing a series of promissory notes for a total value of $60,000. This amount had been booked as goodwill. On August 31, 2008, the Company renegotiated the agreement made on December 11, 2007. The revised agreement eliminated the possibility of cancelling 499,997 shares against an escrow ending on December 11, 2011. The acquisition has been accounted for using the purchase method, and the results of operations have been included in the consolidated financial statements of the Company from the date of acquisition. The purchase price allocation shown below is based on the fair value estimate made by the Company: 17 Assets Cash Current assets Service contracts Liabilities Current liabilities Net identifiable assets acquired Goodwill* Purchase price Less : Cash acquired Issuance of shares in connection with the acquisition Net cash used for the acquisition * Goodwill is not deductible for income taxes calculation. Amount $ 6,029 42,024 20,000 68,053 44,377 23,676 676,574 700,250 6,029 525,574 168,647 On December 11, 2007, Inflo changed its name to Opsens Solutions Inc. (“Opsens Solutions”). The value attributed to the order backlog as part of the purchase price allocation has been amortized based on the realization of revenues from present contracts in the order backlog at the time of the acquisition. For the fiscal year ended August 31, 2008, there was $20,000 in intangible asset amortization for the order backlog. Goodwill is not deductible for the purposes of income taxes. The Company now considers the activities of Opsens Solutions as a reportable segments as defined by the CICA Handbook. Opsens Solutions operates in the oil and gas market. CAPACITY TO PRODUCE RESULTS As discussed in the section regarding financial position, the Company has the required financial resources for its short-term operations, to fulfill its commitments, to support its growth plan and for the development of its activities. In a mid-term perspective, it is possible that additional financing, through the issuance of shares or through debt financing, might be required. During the next year, the generalized growth in sales should require an additional investment of a few additional hundreds of thousands of dollars in accounts receivable and inventories. Also, investments in capital of a few hundreds of thousands of dollars will be needed to respond to Opsens’ operational needs. From the point of view of human resources, the main corporate executive positions are filed within the Company. However, additional production personnel will be required in Quebec and Alberta. Taking into account the employment market in Canada, Opsens is confident in its capacity to recruit qualified human resources in a timely fashion. 18 Regarding the strategy on corporate executive remuneration, it is oriented towards creation of long-term value for the shareholders. Several corporate executives hold an important share and share-purchase option position, with rights to be acquired over a four-year period in order to align shareholders’ interest with corporate executives’ interest. This long-term vision stimulates innovation and the development of recurrent revenues. CHANGES IN ACCOUNTING POLICIES Changes applied for the exercise ended August 31, 2009 On September 1, 2008, the Company adopted the new accounting standards issued by the Canadian Institute of Chartered Accountants (“CICA”) regarding “Capital Disclosures” (Section 1535), “Inventories” (Section 3031), “Instruments – Disclosures” (Section 3862) and “Financial Instruments – Presentation” (section 3863). The new standards were applied without restatement of comparative financial statements. Inventories Section 3031 provides guidance on the determination of cost and its subsequent recognition as an expense, including any write-down to net realizable value. It also provides guidance on the cost formulas that are used to assign costs to inventories. Since this standard came into effect, the Company has been recording its raw materials inventory at the lower of cost and net realizable value. In the past, the Company recorded raw materials inventory at the lower of cost and replacement value. This new policy has no impact on the current consolidated financial statements. Capital Disclosures Section 1535 “Capital Disclosures”, established standards for disclosing information about an entity’s capital and how it is managed. It describes the disclosure requirements of the entity’s objectives, policies and processes for managing capital, the quantitative data relating to what the entity regards as capital, whether the entity has complied with capital requirements, and, if it has not complied, the consequences of such non-compliance. Since the standard came into effect, the Company has been presenting relevant information about capital management in the “Capital Management” note. Financial Instruments Sections 3862 and 3863 place heightened importance on disclosure, enabling financial statement users to assess the nature and extent of the risks associated with the financial instruments to which the Company is exposed and the manner in which it manages these risks. Changes applied for the exercise ended August 31, 2008 On September 1, 2007, the Company adopted the new accounting standards issued by the CICA regarding Financial instruments – Recognition and measurement (Section 3855), Financial Instruments – Disclosure and presentation (Section 3861), Hedges (Section 3865) and Comprehensive Income (section 1530). Information released prior to September 1, 2007 was not restated. Financial Instruments – Recognition and measurement Short-term investments Short-term investments are classified as financial instruments “held for trading”. As such, these financial instruments are recorded at their fair values. Changes in the fair value of held for trading instruments are recorded as investment income and disclosed as financial income in the statement of loss. 19 The fair value of financial instruments represents the amount at which the financial instruments could be traded knowingly and voluntarily between the parties involved. The fair value is based on market prices (buyer-seller prices) in an active market. If this is not the case, the fair value is based on market prices prevailing for instruments with similar risk profiles or characteristics or on internal or external valuation models that use observable market data. Derivative financial instruments Derivative financial instruments must be recorded at fair value unless they are specifically designated in an effective hedging relationship, and the change in fair value will be recorded directly in net earnings. Long-term debt The long-term debt is classified as “other liabilities” and is recorded at amortized cost. Transaction fees related to “other liabilities” are capitalized and presented against long-term debt. They are amortized using the effective interest rate and are recorded in the statement of loss. Other comprehensive income (loss) According to the new accounting standards, the Company must present a comprehensive income statement. Since the Company has classified all of its financial instruments as financial instruments “held for trading”, except for the long-term debt which is classified as “other liabilities”, there is no element to be disclosed distinctively in other comprehensive income. Consequently, the net earnings (net loss) also represents the results of the comprehensive income (loss). Future accounting changes The CICA has issued new accounting standards: a) Section 3064, “Goodwill and intangible assets”, replacing Section 3062, “Goodwill and other intangible assets” and Section 3450, “Research and development costs”. The new section will be applicable to financial statements relating to fiscal years beginning on or after October 1, 2008. Accordingly, the Company will adopt the new standards for its fiscal year beginning September 1, 2009. It establishes standards for the recognition, measurement, presentation and disclosure of goodwill subsequent to its initial recognition and of intangible assets by profit-oriented enterprises. Standards concerning goodwill are unchanged from the standards included in the previous Section 3062. The Company does not expect that the adoption of this new Section will have a material impact on its interim and annual consolidated financial statements. b) In January 2009, the CICA issued Handbook Section 1582, Business Combinations, replacing Section 1581, Business Combinations. The Section establishes standards for the accounting for a business combination. It provides the Canadian equivalent to the IFRS standard, IFRS 3 (Revised), Business Combinations. The Section applies prospectively to business combinations for which the acquisition date is on or after January 1, 2011. Earlier application is permitted. As this section is consistent with IFRS, it will be applied in accordance with our IFRS conversion framework. c) In January 2009, the CICA issued Section 1601, Consolidated Financial Statements, and Section 1602, non- controlling interests, which together replace Section 1600, Consolidated Financial Statements. Section 1601 establishes standards for the preparation of consolidated financial statements. Section 1602 establishes standards for accounting for a non-controlling interest in a subsidiary in consolidated financial statements 20 subsequent to a business combination. It is equivalent to the corresponding provisions of IFRS standard, IAS 27 (Revised), Consolidated and Separate Financial Statements. The Sections apply to interim and annual consolidated financial statements relating to fiscal years beginning on January 1, 2011. Earlier adoption is permitted as of the beginning of a fiscal year. As these sections are consistent with IFRS, they will be applied in accordance with our IFRS conversion framework. International Financial Reporting Standards The Accounting Standards Board of Canada has announced that accounting standards in Canada, as used by public companies, will converge to International Financial Reporting Standards ("IFRS") over a transition period that is expected to be complete by 2011. On February 13, 2008, the CICA confirmed 2011 as the official changeover date from current Canadian GAAP to IFRS. The changeover date applies to the annual and interim financial statements opened from January 1, 2011. The Company will convert to these new standards according to the timetable set with these new rules. The Company is currently assessing the future impact of these new standards on its financial information systems and its consolidated financial statements. ACCOUNTING POLICIES The financial statements have been prepared in accordance with Canadian generally accepted accounting principles (“GAAP”) and include the following policies: Principles of consolidation The consolidated financial statements include the accounts of the Company and those of its wholly-owned subsidiary Opsens Solutions Inc. since its acquisition. Cash and cash equivalents Cash and cash equivalents include cash and short-term investments redeemable anytime or with a maturity of three months or less beginning on the acquisition date. Inventories Inventories are valued at the lower of cost and net realizable value. Cost is determined using the moving average method. Property, plant and equipment and intangible assets Property, plant and equipment and intangible assets with finite lives are recorded at their acquisition cost. Amortization is provided using the declining balance method based on their useful lives, except for patents, which are amortized using the straight-line method, at the following annual rates: Property, plant and equipment and intangible assets Office furniture and equipment Production equipment Automotive equipment Research and development equipment Research and development computer equipment Computer equipment Leasehold improvements 20% 20% 30% 20% 30% 30% Lease Term 21 Intangible assets with limited lives Patents Software Term of underlying patent, 5 to 20 years 30% Service contracts are intangible assets with definite useful life which were accounted for at cost. Amortization was based on the fair value of the contracts on the total value of the contracts portfolio acquired. The service contracts were fully amortized during the year. Intangible assets with indefinite lives Intangible assets with indefinite lives are recorded at cost and are tested for impairment annually or more frequently if events of changes in circumstances indicate a potential impairment in value. The excess of the carrying value over the fair value is recorded in loss. Impairment of long-lived assets Long-lived assets held are reviewed annually or more frequently when events or changes in circumstances cause its carrying value to exceed the total undiscounted cash flows expected from its use and eventual disposition. The impairment loss is calculated by deducting the fair value of the asset from its carrying value. Government assistance and income tax credits for research and development Government grants are recorded when there is reasonable assurance that the Company has complied with and will continue to comply with all the conditions of the grant. Non-repayable grants or contributions related to operating expenses are included in the statement of loss when the related expenses are incurred. Grants related to capital expenditures are netted against the related assets when acquired. The Company is also eligible for income tax credits for scientific research and experimental development (SR&ED) awarded by the federal and provincial governments. The portion of SR&ED credits immediately receivable is accounted for in the year during which the related costs or capital expenses are incurred. The portion of SR&ED credits not immediately receivable is accounted for in the year during which these costs or expenses are incurred, provided the Company has reasonable assurance that these credits will be recovered. Income tax credits are applied against expenses or related assets. Recorded income tax credits are based on management’s estimates of amounts expected to be recovered and are subject to an audit by the taxation authorities. Loss per share Loss per share is determined using the weighted average number of outstanding shares during the period. The Company uses the treasury stock method to calculate the diluting effect of share purchase options and warrants. Reconciliations of the numerators and the denominators used in the calculation of the basic and diluted loss are disclosed in accordance with the GAAP. Stock-based compensation and other stock-based payments The Company uses the fair value method to assess the fair value of stock options or warrants as at their date of allocation. The fair value is determined using the Black-Scholes option pricing model and is amortized to earnings over the vesting period with an offset to the corresponding shareholder’s equity account. When stock options or warrants are exercised, the corresponding account and the proceeds received by the Company are credited to share capital. 22 Income taxes The Company accounts for income taxes using the tax liability method. Under this method, future income tax assets and liabilities are recognized for deductible or taxable temporary differences between the carrying value and the tax value of the assets and liabilities based on the enacted or substantially enacted tax rates expected to apply to the year in which the differences are expected to reverse. The Company establishes a valuation allowance against future income tax assets if, based on available information, it is more likely than not that some or all the future income tax assets will not be realized. Foreign currency translation Monetary assets and liabilities denominated in foreign currencies are translated at the exchange rate prevailing at the balance sheet date while non-monetary items are translated at the historical rate. Revenues and expenses denominated in foreign currencies are recorded at the average rate of exchange prevailing during the period, except for depreciation and amortization, which is translated at the historical rate. Foreign exchange gains or losses are included in expenses for the year. Goodwill Goodwill representing the excess of purchase price over fair value of the net identifiable assets of acquired businesses is tested for impairment annually or more frequently when an event or circumstance occurs that indicates that goodwill might be impaired. When the carrying amount exceeds the fair value, an impairment loss is recognized in the statement of earnings in an amount equal to the excess. Revenue recognition and work in progress Opsens Inc. reportable segment revenues related to the sale of products are recognized when persuasive evidence of an arrangement exists, delivery has occurred, the price to the buyer is fixed or determinable and collection is reasonably assured. Opsens Solutions Inc. reportable segment revenues related to the sale or products and sensor installation services are recognized when persuasive evidence of an arrangement exists, on site installation has occurred, the price to the buyer is fixed or determinable and collection is reasonably assured. For contract revenues earned over a long period, revenues are recorded using the percentage of completion method. Therefore, these revenues are recognized proportionately with the degree of completion of the work. The Company uses the efforts expended method to calculate the degree of completion of work based on the number of hours incurred as at the balance sheet date compared to the estimated total number of hours. Work in progress is valued by taking into consideration the number of hours worded but not yet invoiced and the payments received. Losses are recorded as soon as they become apparent. Financial instruments Short-term investments are classified as financial instruments “held for trading”. As such, these financial instruments are recorded at their fair values. Changes in the fair value of held for trading instruments are recorded as investment income and disclosed as financial expenses in the income statement. The long-term debt is classified as “other liabilities” and is recorded at amortized cost. Transaction fees related to “other liabilities” are capitalized and presented against long-term debt. They are amortized using the effective interest rate and are recorded in the income statement. 23 Use of estimates The presentation of financial statements in accordance with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingencies at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The main accounting estimates relate to the income tax credit receivable, the provision for warranty and the assumptions used in the determination of the fair value of the stock options and warrants. Actual results could differ from those estimates. RISK FACTORS AND UNCERTAINTIES Opsens operates in an industry that is subject to various risks and uncertainties. The Company’s business, financial position, and operating results could be impacted negatively by these risks and uncertainties. The risks and uncertainties listed below are not the only risks and uncertainties that could impact the Company. Capital requirements Additional financing may be required for operating and investment activities. There is no guarantee that additional capital would be available for situations that would be acceptable for Opsens and favourable for its growth. Revenues Opsens draws most of its revenue from the sale of readout devices and fiber optic sensors. The company feels that the revenue from these products will continue to represent a significant share of Opsens’ revenue for the foreseeable future. Consequently, Opsens is particularly vulnerable to fluctuations in the demand for its products. Therefore, if demand for Opsens products decreases significantly, the company and the operating results could be unfavourably affected. Labour and key personnel Opsens depends on the services of its engineers, technical employees, and key management personnel. The loss of one of these people could have a significant unfavourable impact on the company, its operating results, and its financial position. The success of Opsens is largely dependent upon its ability to identify, hire, train, motivate, and retain highly skilled management employees, engineers, technical employees, and sales and marketing personnel. Competition for its employees can be intense, and Opsens can not ensure that it will be able to bring in and retain highly skilled technical and management personnel in the future. Its ability to bring in and retain management and technical personnel and the necessary sales and marketing employees could have an unfavourable impact on its growth and future profitability. Opsens may be obligated to increase the compensation paid to current or new employees, which could substantially increase operating expenses. Growth management and market development There is no guarantee that Opsens can develop its market significantly, thus affecting its profitability. Opsens’ expected rapid growth may create significant pressure on management, operations, and technical resources. Opsens foresees increased operating and personnel expenses in the future. In order to manage its growth, Opsens may need to increase the size of its technical and operational staff and manage its personnel while maintaining many effective relationships with third parties. There is no guarantee that Opsens will be able to manage its business growth. The inability of Opsens to establish consistent management systems, add economic resources, or manage its expansion adequately would have a significant, unforeseeable effect on its activities and operating results. 24 Pricing policies The competitive market in which Opsens operates could force it to reduce its prices. If its competitors offer large discounts on certain products and services in order to gain market share or sell products and services, Opsens may need to lower its prices and offer other favourable terms in order to compete successfully. Such changes could reduce profit margins and have an unfavourable impact on its operating results. Some of Opsens’ competitors could offer products and services that compete with theirs for promotional purposes or as part of a long-term pricing strategy or offer price guarantees or product implementation. With time, these practices could limit the prices that Opsens may charge for its products and services. If Opsens cannot offset these price reductions with a corresponding increase in sales or decreased expenses, the decreased revenues from products and services could unfavourably affect its profit margins and operating results. Product failures and mistakes Opsens products are complex and therefore may contain failures and mistakes that could be detected at any time in a product’s life cycle. Failures and mistakes in its products could have a significant unfavourable impact on its reputation, open it up to significant costs, delay product launch dates, and harm its ability to sell its products in the future. The costs of correcting a failure or mistake in one of these products could be significant and could negatively affect its operating margins. Although Opsens expects to continue to test products to detect failures and mistakes and to work with its customers through its support and maintenance services in order to find and correct failures and mistakes, they could appear in its products in the future. Warranties, recalls, and legal proceedings Opsens is exposed to warranty expenses, product recalls, and other claims, particularly if the products prove to be defective, which would harm business development and the Company’s reputation. Intellectual property and exclusive rights In order to protect its intellectual property rights, Opsens relies on a combination of laws related to patents and trademarks, trade secrets, confidentiality procedures, and contractual provisions. Despite Opsens’ best efforts to protect its intellectual property rights, unauthorized individuals may attempt to copy certain aspects of Opsens products or obtain information that Opsens considers to be its property. The monitoring of the unauthorized use of exclusive technologies, if applicable, may prove difficult, time consuming, and expensive. In addition, the laws of certain countries in which Opsens products will be sold do not protect their products and their related intellectual property rights in the same way as the laws of Canada and the United States. There is no certainty that Opsens will successfully protect its intellectual property rights, which could unfavourably affect it. Patents applications, claims, PCTs, and Continuations in Part files by Opsens could be incomplete, invalid, circumvented, or deemed not applicable. Legal proceedings could prove necessary to carry out patent applications, claims, PCTs, and Continuations in Part. These cases could lead to considerable expenses without any guarantee of success. Despite Opsens’ best efforts to ensure its right to market its products on its target markets, competitor patents could impede the sales potential of certain products. Competition and technological obsolescence Competitors and new companies could launch new products. In order to remain on the cutting edge of technology, Opsens may need to launch a new generation of fiber optic sensors and develop its related products and services. Whether it is competition from development companies and/or marketing of fiber optic sensors or a merger or acquisition of existing companies, competition within certain fiber optic sensor industry sectors offering solutions similar to what Opsens offers is vigorous and could increase. Some of Opsens’ competitors have significantly greater financial, technical, distribution, and marketing resources than Opsens. Technological progress and product development could make Opsens products obsolete or reduce their value. 25 Currency exchange rate Since Opsens makes most of its sales in U.S. dollars, while a large part of its operating expenses are incurred in Canadian dollars, exchange rate fluctuations between the two currencies may have an unfavourable impact on its activities, financial position, and operating results. Based on outlooks and its expected penetration in the oil and gas market, the weighting of Canadian sales should increase during the coming fiscal years and, consequently, reduce Opsens’ currency exchange risk. Restrictive clauses The Company has restrictive clauses regarding indebtedness and working capital in the agreement with its financial institution. If these restrictive clauses are not respected, Opsens may need to allocate a portion of its working capital to repaying the LFPEC loan, valued at $77,132 as at August 31, 2008. OTHER INFORMATION Updated information on the Company can be found on the SEDAR Web site at http://www.sedar.com. On behalf of management, Chief Financial Officer and Secretary (s) Louis Laflamme _______________ November 18, 2009 26 27Samson Bélair/Deloitte & Touche s.e.n.c.r.l. 925 Grande Allée West Suite 400 Québec City QC G1S 4Z4 Canada Tel.: 418-624-3333 Fax: 418-624-0414 www.deloitte.ca Auditors’ Report To the Shareholders of Opsens Inc. We have audited the consolidated balance sheets of Opsens Inc. as at August 31, 2009 and 2008 and the consolidated statements of loss and comprehensive loss, shareholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at August 31, 2009 and 2008 and the results of its operations and its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles. 1 Chartered Accountants October 9, 2009 ____________________ 1 Chartered accountant auditor permit no 11848 28 Opsens Inc. Consolidated Statements of Loss and Comprehensive Loss Years ended August 31, 2009 and 2008 Revenues Sales Cost of sales Gross margin Expenses (Revenues) Administrative Marketing Research and development Stock option-based compensation (Note 14b) Amortization of property, plant and equipment Amortization of intangible assets Financial income Loss before income taxes Income taxes (Note 20) 2009 $ 2008 $ 3,087,816 2,844,239 1,999,843 1,432,385 1,087,973 1,411,854 1,178,659 871,972 827,406 229,408 164,460 21,387 984,316 730,309 698,957 252,576 100,257 40,340 (34,687 ) (58,213 ) 3,258,605 2,748,542 (2,170,632 ) (1,336,688 ) - - Net loss and comprehensive loss (2,170,632 ) (1,336,688 ) Net loss per share (Note 15) Basic Diluted (0.05 ) (0.05 ) (0.04 ) (0.04 ) The accompanying notes are an integral part of the consolidated financial statements. Additional information on the Statements of Loss is presented in Note 24. 29 l a t o T t i c i f e D l s u p r u s t n a r r a W s n o i t p o s e r a h S l a t o T d e t u b i r t n o C k c o t S n o m m o C k c o t S s n o i t p o t n a r r a W s e r a h s n o m m o C $ $ $ $ $ $ ) r e b m u n ( ) r e b m u n ( ) r e b m u n ( ) r e b m u n ( 9 0 0 2 y t i u q E ’ s r e d l o h e r a h S f o s t n e m e t a t S d e t a d i l o s n o C 9 0 0 2 , 1 3 t s u g u A d e d n e r a e Y . c n I s n e s p O 0 0 0 , 0 2 5 5 0 , 9 0 8 , 1 - - 0 7 3 , 9 2 8 , 5 ) 6 8 4 , 2 8 3 , 6 ( ) 8 8 5 , 5 7 1 ( ) 8 8 5 , 5 7 1 ( - - - 8 0 4 , 9 2 2 - - - - ) 2 3 6 , 0 7 1 , 2 ( ) 2 3 6 , 0 7 1 , 2 ( - - - - 5 5 0 , 9 5 ) 0 0 0 , 8 ( - - - - - - - - - 7 4 0 , 5 9 5 ) 7 4 0 , 5 9 5 ( - - - - - - 8 0 4 , 9 2 2 - 0 0 0 , 8 2 - - - - - - 0 0 0 , 0 5 7 , 1 4 3 8 , 0 2 1 , 3 - - - - - - ) 0 0 0 , 0 5 ( 0 0 0 , 0 5 7 6 1 , 4 0 2 7 6 6 , 6 1 9 , 2 0 0 5 , 5 0 7 0 0 5 , 5 0 7 ) 0 0 0 , 0 6 1 ( ) 0 0 0 , 0 6 1 ( - - - - - - - - ) 1 1 1 , 9 6 3 , 5 ( - ) 1 1 1 , 9 6 3 , 5 ( - - - - - - 9 6 0 , 0 0 4 , 1 8 2 5 , 4 5 5 9 5 2 , 7 5 2 , 0 1 0 3 6 , 8 7 7 , 0 5 0 0 5 , 2 4 2 , 2 3 5 4 , 4 0 1 , 8 7 7 6 , 1 3 4 , 0 4 3 1 6 , 1 4 5 , 5 ) 6 0 7 , 8 2 7 , 8 ( 7 4 0 , 5 9 5 7 7 0 , 6 5 8 6 3 9 , 3 8 7 9 5 2 , 5 3 0 , 2 1 3 5 8 , 5 7 0 , 9 4 0 0 0 , 8 8 7 , 2 9 0 5 , 9 8 8 , 2 4 4 3 , 8 9 3 , 3 4 e t a v i r P – e c n a u s s i e r a h S t n e m e c a p l s t n a r r a W – e c n a u s s i e r a h S d e s i c r e x e y t i u q e n o s e s n e p x e e c n a u s s I 8 0 0 2 , 1 3 t s u g u A t a s a e c n a a B l d e r i p x e s t n a r r a W ) c 4 1 e t o N ( d e t n a r g s n o i t p O d e l l e c n a c s n o i t p O t n e n o p m o c n o i t a s n e p m o c d e s a b - k c o t S 9 0 0 2 , 1 3 t s u g u A t a s a e c n a a B l s s o l t e N . s t n e m e t a t s l a i c n a n i f d e t a d i l o s n o c e h t f o t r a p l a r g e t n i n a e r a s e t o n i g n y n a p m o c c a e h T 30 $ l a t o T t i c i f e D l s u p r u s t n a r r a W d e t u b i r t n o C k c o t S s n o i t p o s e r a h S n o m m o C l a t o T k c o t S s n o i t p o t n a r r a W s e r a h s n o m m o C $ $ $ $ $ ) r e b m u n ( ) r e b m u n ( ) r e b m u n ( ) r e b m u n ( 8 0 0 2 y t i u q E ’ s r e d l o h e r a h S f o s t n e m e t a t S d e t a d i l o s n o C 8 0 0 2 , 1 3 t s u g u A d e d n e r a e Y . c n I s n e s p O 5 4 5 , 8 8 9 , 1 ) 5 4 1 , 7 8 5 , 4 ( 4 7 5 , 5 2 5 0 0 5 , 7 3 1 1 1 6 , 4 3 8 5 0 2 , 3 7 7 0 0 7 , 2 1 1 , 3 ) 0 4 3 , 2 3 5 ( - - 6 7 5 , 2 5 2 - - - - - ) 0 4 3 , 2 3 5 ( - - - ) 8 8 6 , 6 3 3 , 1 ( ) 8 8 6 , 6 3 3 , 1 ( 7 8 6 , 3 7 7 8 6 , 3 7 0 7 3 , 9 2 8 , 5 ) 6 8 4 , 2 8 3 , 6 ( - - - - - - - - - - - - - - 4 7 5 , 5 2 5 7 9 9 , 9 9 1 , 1 - 6 0 5 , 4 3 8 1 0 7 , 8 0 4 3 8 4 , 2 3 3 , 5 5 6 6 , 4 6 5 , 1 4 3 3 3 , 3 3 0 , 2 2 2 7 , 2 0 9 , 6 0 1 6 , 8 2 6 , 2 3 n o i t i s i u q c a . c n I s n o i t u o S l o l f n I – e c n a u s s i e r a h S 7 0 0 2 , 1 3 t s u g u A t a s a e c n a a B l - - ) 2 4 6 , 7 0 2 ( - 5 0 2 , 3 7 7 - - - - - - - - - - - - 6 7 5 , 2 5 2 - - ) 9 4 7 , 6 0 1 ( 9 4 2 , 4 4 2 3 5 2 , 2 4 0 , 1 - - 0 0 7 , 2 1 1 , 3 6 2 1 , 1 1 7 , 4 ) 3 3 3 , 8 0 4 ( - - - - - - - - - - - - 2 4 3 , 5 8 6 , 2 0 0 5 , 2 1 9 0 0 5 , 2 1 9 ) 0 0 0 , 5 9 2 ( ) 0 0 0 , 5 9 2 ( - - - - - - - - - - - - 2 4 3 , 5 8 6 , 2 - - - - - - - ) 1 1 6 , 3 8 4 , 1 ( 1 1 6 , 3 8 4 , 1 s t n a r r a w – e c n a u s s i e r a h S d e s i c r e x e - 6 2 1 , 1 1 7 , 4 t n e m e c a p l e t a v i r P – e c n a u s s i e r a h S - - 7 9 9 , 9 9 1 , 1 ) 6 e t o N ( 3 3 3 , 8 0 4 d e s i c r e x e s n o i t p o – e c n a u s s i e r a h S n o s e s n e p x e e c n a u s s I t n e n o p m o c y t i u q e e c n a u s s i s t n a r r a W d e l l e c n a c s n o i t p O d e t n a r g s n o i t p O n o i t a s n e p m o c d e s a b - k c o t S g n i t n u o c c a n i s e g n a h C ) 2 e t o N ( s e i c i l o p s s o l t e N 8 0 0 2 , 1 3 t s u g u A t a s a e c n a a B l 9 6 0 , 0 0 4 , 1 8 2 5 , 4 5 5 9 5 2 , 7 5 2 , 0 1 0 3 6 , 8 7 7 , 0 5 0 0 5 , 2 4 2 , 2 3 5 4 , 4 0 1 , 8 7 7 6 , 1 3 4 , 0 4 . s t n e m e t a t s l a i c n a n i f d e t a d i l o s n o c e h t f o t r a p l a r g e t n i n a e r a s e t o n i g n y n a p m o c c a e h T 31 Opsens Inc. Consolidated Balance Sheets August 31, 2009 and 2008 Assets Current Cash and cash equivalents (Note 16) Accounts receivable (Note 7) Income tax credits receivable (Note 20) Work in progress Inventories (Note 8) Prepaid expenses Property, plant and equipment (Note 9) Intangible assets (Note 10) Goodwill Liabilities Current Accounts payable and accrued liabilities (Note 12) Current portion of long-term debt (Note 13) Long-term debt (Note 13) Shareholders’ equity Share capital (Note 14a) Stock options (Note 14b) Warrants (Note 14c) Contributed surplus Deficit 2009 $ 2008 $ 2,887,085 3,742,520 573,310 214,624 - 1,125,260 80,198 743,951 183,950 237,551 453,271 100,454 4,880,477 5,461,697 723,424 169,799 676,574 554,180 159,768 676,574 6,450,274 6,852,219 518,782 133,440 652,222 547,204 223,265 770,469 256,439 252,380 908,661 1,022,849 12,035,259 10,257,259 783,936 554,528 856,077 1,400,069 595,047 - (8,728,706 ) (6,382,486 ) 5,541,613 5,829,370 6,450,274 6,852,219 The accompanying notes are an integral part of the consolidated financial statements. References: Commitments (Note 17) Contractual guarantees (Note 18) Approved by the Board Signed [Mario Jacob] Director Signed [Pierre Carrier] Director 32 Opsens Inc. Consolidated Statements of Cash Flows Years ended August 31, 2009 and 2008 Operating activities Net loss Adjustments for: Amortization of property, plant and equipment Amortization of intangible assets Premium payable to Canada Economic Development Premium payable to Investissement Québec Stock option-based compensation Changes in non-cash operating working capital items (Note 16) Investing activities Acquisition of property, plant and equipment Acquisition of intangible assets Cash and cash equivalents paid in business combination (Note 6) Financing activities Increase in long-term debt Reimbursement of long-term debt Issuance of equity component Issuance of equity component expenses Increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning Cash and cash equivalents at end 2009 $ 2008 $ (2,170,632 ) (1,336,688 ) 164,460 21,387 100,257 40,340 24,353 8,520 16,799 8,520 229,408 252,576 (302,637 ) (811,991 ) (2,025,141 ) (1,730,187 ) (333,704 ) (315,144 ) (31,418 ) (37,664 ) - (168,647 ) (365,122 ) (521,455 ) 84,295 72,966 (202,934 ) (243,859 ) 1,770,000 4,741,011 (116,533 ) (415,335 ) 1,534,828 4,154,783 (855,435 ) 1,903,141 3,742,520 1,839,379 2,887,085 3,742,520 The accompanying notes are an integral part of the consolidated financial statements. Additional information is presented in Note 16. 33 Opsens Inc. Notes to the Consolidated Financial Statements August 31, 2009 and 2008 1. Description of business The Company, issued from a merger completed as of October 3, 2006, is incorporated under part IA of the Québec Companies Act. The Company specializes in developing and manufacturing technical and scientific instruments. 2. Changes in accounting policies Changes applied for the exercise ended August 31, 2009 On September 1, 2008, the Company adopted the new accounting standards issued by the Canadian Institute of Chartered Accountants (“CICA”) regarding “Capital Disclosures” (Section 1535), “Inventories” (Section 3031), “Instruments – Disclosures” (Section 3862) and “Financial Instruments – Presentation” (section 3863). The new standards were applied without restatement of comparative financial statements. Inventories Section 3031 provides guidance on the determination of cost and its subsequent recognition as an expense, including any write-down to net realizable value. It also provides guidance on the cost formulas that are used to assign costs to inventories. Since this standard came into effect, the Company has been recording its raw materials inventory at the lower of cost and net realizable value. In the past, the Company recorded raw materials inventory at the lower of cost and replacement value. This new policy has no impact on the current consolidated financial statements. Capital Disclosures Section 1535 “Capital Disclosures”, established standards for disclosing information about an entity’s capital and how it is managed. It describes the disclosure requirements of the entity’s objectives, policies and processes for managing capital, the quantitative data relating to what the entity regards as capital, whether the entity has complied with capital requirements, and, if it has not complied, the consequences of such non-compliance. Since the standard came into effect, the Company has been presenting relevant information about capital management in the “Capital Management” note. Financial Instruments Sections 3862 and 3863 place heightened importance on disclosure, enabling financial statement users to assess the nature and extent of the risks associated with the financial instruments to which the Company is exposed and the manner in which it manages these risks. Changes applied for the exercise ended August 31, 2008 On September 1, 2007, the Company adopted the new accounting standards issued by the CICA regarding Financial instruments – Recognition and measurement (Section 3855), Financial Instruments – Disclosure and presentation (Section 3861), Hedges (Section 3865) and Comprehensive Income (section 1530). Information released prior to September 1, 2007 was not restated. 34 Opsens Inc. Notes to the Consolidated Financial Statements August 31, 2009 and 2008 2. Changes in accounting policies (continued) Changes applied for the exercise ended August 31, 2008 (continued) Financial Instruments – Recognition and measurement Short-term investments Short-term investments are classified as financial instruments “held for trading”. As such, these financial instruments are recorded at their fair values. Changes in the fair value of held for trading instruments are recorded as investment income and disclosed as financial income in the statement of loss. The fair value of financial instruments represents the amount at which the financial instruments could be traded knowingly and voluntarily between the parties involved. The fair value is based on market prices (buyer-seller prices) in an active market. If this is not the case, the fair value is based on market prices prevailing for instruments with similar risk profiles or characteristics or on internal or external valuation models that use observable market data. Derivative financial instruments Derivative financial instruments must be recorded at fair value unless they are specifically designated in an effective hedging relationship, and the change in fair value will be recorded directly in net earnings. Long-term debt The long-term debt is classified as “other liabilities” and is recorded at amortized cost. Transaction fees related to “other liabilities” are capitalized and presented against long-term debt. They are amortized using the effective interest rate and are recorded in the statement of loss. Other comprehensive income (loss) According to the new accounting standards, the Company must present a comprehensive income statement. Since the Company has classified all of its financial instruments as financial instruments “held for trading”, except for the long-term debt which is classified as “other liabilities”, there is no element to be disclosed distinctively in other comprehensive income. Consequently, the net earnings (net loss) also represents the results of the comprehensive income (loss). 35 Opsens Inc. Notes to the Consolidated Financial Statements August 31, 2009 and 2008 2. Changes in accounting policies (continued) Future accounting changes The CICA has issued new accounting standards: a) Section 3064, “Goodwill and intangible assets”, replacing Section 3062, “Goodwill and other intangible assets” and Section 3450, “Research and development costs”. The new section will be applicable to financial statements relating to fiscal years beginning on or after October 1, 2008. Accordingly, the Company will adopt the new standards for its fiscal year beginning September 1, 2009. It establishes standards for the recognition, measurement, presentation and disclosure of goodwill subsequent to its initial recognition and of intangible assets by profit-oriented enterprises. Standards concerning goodwill are unchanged from the standards included in the previous Section 3062. The Company does not expect that the adoption of this new Section will have a material impact on its interim and annual consolidated financial statements. b) In January 2009, the CICA issued Handbook Section 1582, Business Combinations, replacing Section 1581, Business Combinations. The Section establishes standards for the accounting for a business combination. It provides the Canadian equivalent to the IFRS standard, IFRS 3 (Revised), Business Combinations. The Section applies prospectively to business combinations for which the acquisition date is on or after January 1, 2011. Earlier application is permitted. As this section is consistent with IFRS, it will be applied in accordance with our IFRS conversion framework. c) In January 2009, the CICA issued Section 1601, Consolidated Financial Statements, and Section 1602, non-controlling interests, which together replace Section 1600, Consolidated Financial Statements. Section 1601 establishes standards for the preparation of consolidated financial statements. Section 1602 establishes standards for accounting for a non-controlling interest in a subsidiary in consolidated financial statements subsequent to a business combination. It is equivalent to the corresponding provisions of IFRS standard, IAS 27 (Revised), Consolidated and Separate Financial Statements. The Sections apply to interim and annual consolidated financial statements relating to fiscal years beginning on January 1, 2011. Earlier adoption is permitted as of the beginning of a fiscal year. As these sections are consistent with IFRS, they will be applied in accordance with our IFRS conversion framework. International Financial Reporting Standards The Accounting Standards Board of Canada has announced that accounting standards in Canada, as used by public companies, will converge to International Financial Reporting Standards ("IFRS") over a transition period that is expected to be complete by 2011. On February 13, 2008, the CICA confirmed 2011 as the official changeover date from current Canadian GAAP to IFRS. The changeover date applies to the annual and interim financial statements beginning on or after January 1, 2011. The Company will convert to these new standards according to the timetable set with these new rules. The Company is currently assessing the future impact of these new standards on its financial information systems and its consolidated financial statements. 36 Opsens Inc. Notes to the Consolidated Financial Statements August 31, 2009 and 2008 3. Accounting policies The financial statements have been prepared in accordance with Canadian generally accepted accounting principles (“GAAP”) and include the following policies: Principles of consolidation The consolidated financial statements include the accounts of the Company and those of its wholly- owned subsidiary Opsens Solutions Inc. since its acquisition. Cash and cash equivalents Cash and cash equivalents include cash and short-term investments redeemable anytime or with a maturity of three months or less beginning on the acquisition date. Inventories Inventories are valued at the lower of cost and net realizable value. Cost is determined using the moving average method. Property, plant and equipment and intangible assets Property, plant and equipment and intangible assets with finite lives are recorded at their acquisition cost. Amortization is provided using the declining balance method based on their useful lives, except for patents, which are amortized using the straight-line method, at the following annual rates: Property, plant and equipment and intangible assets Office furniture and equipment Production equipment Automotive equipment Research and development equipment Research and development computer equipment Computer equipment Leasehold improvements Intangible assets with limited lives Patents Software 20% 20% 30% 20% 30% 30% Lease Term Term of underlying patent, 5 to 20 years 30% Service contracts are intangible assets with definite useful life which were accounted for at cost. Amortization was based on the fair value of the contracts on the total value of the contracts portfolio acquired. The service contracts were fully amortized during the year. Intangible assets with indefinite lives Intangible assets with indefinite lives are recorded at cost and are tested for impairment annually or more frequently if events of changes in circumstances indicate a potential impairment in value. The excess of the carrying value over the fair value is recorded in loss. 37 Opsens Inc. Notes to the Consolidated Financial Statements August 31, 2009 and 2008 3. Accounting policies (continued) Impairment of long-lived assets Long-lived assets held are reviewed annually or more frequently when events or changes in circumstances cause its carrying value to exceed the total undiscounted cash flows expected from its use and eventual disposition. The impairment loss is calculated by deducting the fair value of the asset from its carrying value. Government assistance and income tax credits for research and development Government grants are recorded when there is reasonable assurance that the Company has complied with and will continue to comply with all the conditions of the grant. Non-repayable grants or contributions related to operating expenses are included in the statement of loss when the related expenses are incurred. Grants related to capital expenditures are netted against the related assets when acquired. The Company is also eligible for income tax credits for scientific research and experimental development (SR&ED) awarded by the federal and provincial governments. The portion of SR&ED credits immediately receivable is accounted for in the year during which the related costs or capital expenses are incurred. The portion of SR&ED credits not immediately receivable is accounted for in the year during which these costs or expenses are incurred, provided the Company has reasonable assurance that these credits will be recovered. Income tax credits are applied against expenses or related assets. Recorded income tax credits are based on management’s estimates of amounts expected to be recovered and are subject to an audit by the taxation authorities. Loss per share Loss per share is determined using the weighted average number of outstanding shares during the period. The Company uses the treasury stock method to calculate the diluting effect of share purchase options and warrants. Reconciliations of the numerators and the denominators used in the calculation of the basic and diluted loss are disclosed in accordance with the GAAP. Stock-based compensation and other stock-based payments The Company uses the fair value method to assess the fair value of stock options or warrants as at their date of allocation. The fair value is determined using the Black-Scholes option pricing model and is amortized to earnings over the vesting period with an offset to the corresponding shareholder’s equity account. When stock options or warrants are exercised, the corresponding account and the proceeds received by the Company are credited to share capital. 38 Opsens Inc. Notes to the Consolidated Financial Statements August 31, 2009 and 2008 3. Accounting policies (continued) Income taxes The Company accounts for income taxes using the tax liability method. Under this method, future income tax assets and liabilities are recognized for deductible or taxable temporary differences between the carrying value and the tax value of the assets and liabilities based on the enacted or substantially enacted tax rates expected to apply to the year in which the differences are expected to reverse. The Company establishes a valuation allowance against future income tax assets if, based on available information, it is more likely than not that some or all the future income tax assets will not be realized. Foreign currency translation Monetary assets and liabilities denominated in foreign currencies are translated at the exchange rate prevailing at the balance sheet date while non-monetary items are translated at the historical rate. Revenues and expenses denominated in foreign currencies are recorded at the average rate of exchange prevailing during the period, except for depreciation and amortization, which is translated at the historical rate. Foreign exchange gains or losses are included in expenses for the year. Goodwill Goodwill representing the excess of purchase price over fair value of the net identifiable assets of acquired businesses is tested for impairment annually or more frequently when an event or circumstance occurs that indicates that goodwill might be impaired. When the carrying amount exceeds the fair value, an impairment loss is recognized in the statement of earnings in an amount equal to the excess. Revenue recognition and work in progress Opsens Inc. reportable segment revenues related to the sale of products are recognized when persuasive evidence of an arrangement exists, delivery has occurred, the price to the buyer is fixed or determinable and collection is reasonably assured. Opsens Solutions Inc. reportable segment revenues related to the sale or products and sensor installation services are recognized when persuasive evidence of an arrangement exists, on site installation has occurred, the price to the buyer is fixed or determinable and collection is reasonably assured. For contract revenues earned over a long period, revenues are recorded using the percentage of completion method. Therefore, these revenues are recognized proportionately with the degree of completion of the work. The Company uses the efforts expended method to calculate the degree of completion of work based on the number of hours incurred as at the balance sheet date compared to the estimated total number of hours. Work in progress is valued by taking into consideration the number of hours worded but not yet invoiced and the payments received. Losses are recorded as soon as they become apparent. 39 Opsens Inc. Notes to the Consolidated Financial Statements August 31, 2009 and 2008 3. Accounting policies (continued) Financial instruments Short-term investments are classified as financial instruments “held for trading”. As such, these financial instruments are recorded at their fair values. Changes in the fair value of held for trading instruments are recorded as investment income and disclosed as financial expenses in the income statement. The long-term debt is classified as “other liabilities” and is recorded at amortized cost. Transaction fees related to “other liabilities” are capitalized and presented against long-term debt. They are amortized using the effective interest rate and are recorded in the income statement. Use of estimates The presentation of financial statements in accordance with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingencies at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The main accounting estimates relate to the income tax credit receivable, the provision for warranty and the assumptions used in the determination of the fair value of the stock options and warrants. Actual results could differ from those estimates. 4. Financial instruments Cash equivalents and temporary investments The Company is exposed to various types of risks in the management of its cash and cash equivalents, including those related to the use of financial instruments. To manage these risks, controls were put in place, particularly those related to investment policy. The investment policy is approved by the Board of Directors. The Company’s investment policy aims primarily to protect capital, while considering return on investment and income taxes. Market Risk Market risk is the risk that the value of a financial instrument will fluctuate as a result of changes in the parameters underlying their measurement, particularly interest rates and market prices. Interest Rate Risk Interest rate risk exists when interest rate fluctuations modify the cash flows of the Company’s investments. The Company owns investments with fixed interest rates. As of August 31, 2009, the Company was holding more than 85.4% of its cash equivalents in all time redeemable term-deposit. 40 Opsens Inc. Notes to the Consolidated Financial Statements August 31, 2009 and 2008 4. Financial instruments (continued) Financial charges (income) Interest and bank charges Interest on long-term debt Gain on foreign currency translation Interest income Credit Risk 2009 $ 2008 $ 25,599 42,684 (20,524 ) (82,446 ) 13,173 48,964 (32,809 ) (87,541 ) (34,687 ) (58,213 ) The use of financial instruments can create a credit risk that is the risk of financial loss resulting from a counterparty’s inability or refusal to fully discharge its contractual obligations. The Company’s credit risk management policies include the authorization to carry out investment transactions with recognized financial institutions, with credit ratings of at least A and higher, in either bonds, money market funds or guaranteed investment certificates. Consequently, the Company manages credit risk by complying with established investment policies. Concentration Risk Concentration risk exists when investments are made with multiple entities that share similar characteristics or when a large investment is made with a single entity. As of August 31, 2009, the Company was holding more than 85.4% of its cash equivalents portfolio in all time redeemable term-deposit. Operational credit risk The Company provides credit for a conventional period of 30 days to its customers in the normal course of business. Credit evaluations are performed on an ongoing basis of all its accounts receivable and an allowance for doubtful accounts is recorded when those accounts are deemed uncollectible. Four major customers represent 50.73% of the Company’s accounts receivable as at August 31, 2009. As at August 31, 2009, 23.66% of the accounts receivable were of more than 90 days whereas 33.49% of those were with less than 30 days. The maximum exposure to the risk of credit for receivable corresponded to their book value. On August 31, 2009, the bad debt provision was established at $14,678 ($14,031 on August 31, 2008). Management considers that substantially all receivables are fully collectible as most of our customers are large corporations with good credit standing and no history or default. Interest rate and cash flow risk The Company is exposed to interest rate fluctuations on certain long-term debt that bears interest at variable rates. The Company does not actively manage this risk. Assuming the cash equivalents and long-term debt as reported on August 31, 2009 had been the same throughout the period, a hypothetical 1% interest rate increase would have had an unfavourable impact of $1,975 and $2,926 on the net loss for the years ended August 31, 2009 and 2008. The net loss would have had an equal but opposite effect for a hypothetical 1% interest rate decrease. 41 Opsens Inc. Notes to the Consolidated Financial Statements August 31, 2009 and 2008 4. Financial instruments (continued) Foreign exchange risk The Company realizes certain sales and purchases certain supplies and professional services in US dollars. Therefore, it is exposed to foreign currency fluctuations. The Company does not actively manage this risk. For the years ended August 31, 2009 and 2008, if the Canadian dollar had strengthened 10% against the U.S. dollar with all other variables held constant, after-tax net income and other comprehensive income would have been respectively $138,000 and $168,000 lower. Conversely, if the Canadian dollar had weakened 10% against the U.S. dollar with all other variables held constant, after-tax net income and other comprehensive income would have been $138,000 and $168,000 higher for the same periods. As at August 31, 2009, the risk to which the Company was exposed is established as follows: Cash Accounts receivable Accounts payable and accrued liabilities Total Fair value 2009 $ 78,752 471,847 (30,545 ) 520,054 The fair value of cash and cash equivalents, accounts receivable, income tax credits receivable and accounts payable and accrued liabilities approximate their carrying value due to their short-term maturities. The fair value of long-term debt is based on the discounted value of future cash flows under the current financial arrangements at the interest rate the Company expects to currently negotiate for loans with similar terms and conditions and maturity dates. The fair value of long-term debt approximates its carrying value due to the current market rates. Liquidity Risk Liquidity risk represents the possibility of the Company not being able to raise the funds needed to meet financial commitments at the appropriate time and under reasonable conditions. The Company manages this risk by maintaining permanent and sufficient liquidity to meet current and future financial obligations, under both normal and exceptional circumstances. The funding strategies used to manage this risk include turning to capital markets to carry out issues of equity and debt securities. 42 Opsens Inc. Notes to the Consolidated Financial Statements August 31, 2009 and 2008 4. Financial instruments (continued) Liquidity Risk (continued) The following are the contractual maturities of the financial liabilities, principal and interest (assuming current interest rates), at August 31, 2009: 0 to 12 1 year to 2 years to More than Total months 2 years 5 years 5 years $ $ $ $ $ Accounts payable and accrued liabilities 518,782 518,782 - - Long-term debt 423,573 150,072 137,952 135,549 Obligation under capital lease 88,827 33,904 22,829 32,094 Commitments Total 749,986 231,677 175,862 342,447 1,781,168 934,435 336,643 510,090 - - - - - 5. Capital management The Company uses its capital to finance marketing expenses, research and development activities, administrative and working capital and capital assets. Historically, the Company has financed activities through rounds of public and private financing, debt financing as well as government grants. The Company quarterly reviews net loss and Earnings before Interest, Taxes, Depreciation, Amortization and Stock option-based compensation "EBITDAO". The EBITDAO has no normalized sense prescribed by the CICA. It is not very probable that this measure is comparable with measures of the same type presented by other issuers. The EBITDAO is defined by the Company as the cash flows from operating activities without taking in consideration changes in non-cash operating working capital items. Net loss Financial income Amortization of property, plant and equipment Amortization of intangible assets Stock option-based compensation 2009 $ 2008 $ (2,170,632 ) (1,336,688 ) (34,687 ) (58,213 ) 164,460 21,387 229,408 100,257 40,340 252,576 EBITDAO (1,790,064 ) (1,001,728 ) 43 Opsens Inc. Notes to the Consolidated Financial Statements August 31, 2009 and 2008 5. Capital management (continued) The Company targets to improve these ratios which negatively vary for the year ended August 31, 2009 compare to the same period in 2008. The Company believes that its current liquid assets are sufficient to finance its activities on the short-term. The Company has an authorized line of credit for a maximum amount of $200,000, $50,000 of which is available at all times and which does not take into consideration the margining. When using the line of credit in an amount varying from $50,000 and $100,000, the available credit is limited to an amount that is equal to 75% of Canadian accounts receivable and 65% of foreign accounts receivable plus 50% of inventories of raw materials and finished goods. If the amount used exceeds $100,000, the credit available is limited to an amount equal to 75% of Canadian accounts receivable and 90% of ensured foreign accounts receivable plus 50% of inventories of raw materials and finished goods. Under the terms and conditions of the credit agreement, the Company is subject to certain covenants with respect to maintaining minimum financial ratios related to the maintenance of a maximum ratio of 3 to 1 for total debt to equity, and a ratio of at least than 1.5 for debt to working capital, with a minimum working capital of $200,000. The covenants are met as of August 31, 2009. 6. Business acquisition On December 11, 2007, the Company concluded the acquisition of all outstanding shares of Inflo Solutions Inc. (“Inflo”), a company dedicated to the design and installation of reservoir surveillance solutions based on optical and conventional sensors to the oil and gas market. The purchase price is comprised of 1,199,997 Opsens common shares and $120,000 cash. At the closing, 510,000 shares out of the first 600,000 shares were paid into escrow and will be released over a 48-month period. The balance of the shares and the cash, represented by a series of promissory notes, have also been paid in escrow, to be released or cancelled, as applicable, over a 48-month period ending December 11, 2011, following the achievement or non achievement of certain performance milestones. The Company has also committed to invest up to $350,000 into the working capital of Inflo during the 48-month period following the acquisition. On April 8, 2008, a milestones had been achieved which had effect to release a series of promissory notes for a total value of $60,000. This amount had been booked as goodwill. On August 31, 2008, the Company renegotiated the agreement made on December 11, 2007. The revised agreement eliminated the possibility of cancelling 499,997 shares against an escrow ending on December 11, 2011. 44 Opsens Inc. Notes to the Consolidated Financial Statements August 31, 2009 and 2008 6. Business acquisition (continued) The acquisition has been accounted for using the purchase method, and the results of operations have been included in the consolidated financial statements of the Company from the date of acquisition. The purchase price allocation shown below is based on the fair value estimate made by the Company: Assets Cash Current assets Service contracts Liabilities Current liabilities Net identifiable assets acquired Goodwill* Purchase price Less : Cash acquired Issuance of shares in connection with the acquisition Net cash used for the acquisition * Goodwill is not deductible for income taxes calculation. On December 11, 2007, the company Inflo changed its name for Opsens Solutions Inc. (“Opsens Solutions”). Amount $ 6,029 42,024 20,000 68,053 44,377 23,676 676,574 700,250 6,029 525,574 168,647 7. Accounts receivable Trade Allowance for doubtful accounts Taxes receivable 2009 $ 2008 $ 537,573 729,406 (14,678 ) (14,031 ) 50,415 573,310 28,576 743,951 45 Opsens Inc. Notes to the Consolidated Financial Statements August 31, 2009 and 2008 8. Inventories Raw materials Finished goods 9. Property, plant and equipment Office furniture and equipment Leased office furniture and equipment Production equipment Leased Automative equipment Research and development equipment, 2009 $ 2008 $ 636,084 380,885 489,176 72,386 1,125,260 453,271 2009 Accumulated Net Book Cost Amortization Value $ $ $ 74,483 8,326 113,514 59,028 32,283 42,200 5,875 37,366 10,963 2,451 76,148 48,065 net of income tax credits of $23,834 734,428 300,469 433,959 Research and development computer equipment, net of income tax credits of $3,078 Computer equipment Leased computer equipment Leasehold improvements 27,122 111,269 29,009 39,908 18,617 44,466 8,703 14,921 8,505 66,803 20,306 24,987 1,197,087 473,663 723,424 46 Opsens Inc. Notes to the Consolidated Financial Statements August 31, 2009 and 2008 9. Property, plant and equipment (continued) Office furniture and equipment Leased office furniture and equipment Production equipment Leased Automotive equipment Research and development equipment, net of income tax credits of $23,834 Research and development computer equipment, net of income tax credits of $3,078 Computer equipment Leasehold improvements 10. Intangible assets Indefinite lives Trademarks Limited lives Patents Software, net of income tax credits of $1,518 Indefinite lives Trademarks Limited lives Patents Software, net of income tax credits of $1,518 Cost $ 52,723 12,535 88,020 16,500 Accumulated Amortization $ 24,666 3,225 25,018 2,200 2008 Net Book Value $ 28,057 9,310 63,002 14,300 582,134 202,577 379,557 24,270 74,298 12,905 863,385 15,649 27,713 8,157 8,621 46,585 4,748 309,205 554,180 2009 Cost $ Accumulated amortization Net Book value $ $ 200 - 200 203,454 41,578 245,232 46,414 29,019 75,433 Cost $ Accumulated amortization $ 157,040 12,559 169,799 2008 Net Book value $ 200 - 200 172,036 41,578 213,814 30,445 23,601 54,046 141,591 17,977 159,768 47 Opsens Inc. Notes to the Consolidated Financial Statements August 31, 2009 and 2008 11. Authorized line of credit The Company has an authorized line of credit for a maximum amount of $200,000, $50,000 of which is available at all times and which does not take into consideration the margining. When using the line of credit in an amount varying from $50,000 and $100,000, the available credit is limited to an amount that is equal to 75% of Canadian accounts receivable and 65% of foreign accounts receivable plus 50% of inventories of raw materials and finished goods. If the amount used exceeds $100,000, the credit available is limited to an amount equal to 75% of Canadian accounts receivable and 90% of ensured foreign accounts receivable plus 50% of inventories of raw materials and finished goods. This line of credit bears interest at the financial institution’s prime rate plus 2% and is repayable on a weekly basis by $5,000 tranches. It is secured by a first-rank movable hypothec for an amount of $750,000 on the universality of receivables and inventories. Under the terms and conditions of the credit agreement, the Company is subject to certain covenants with respect to maintaining minimum financial ratios (see Note 5). The Company also has credit cards for a maximum amount of $50,000 to finance its current operations. The balance used on these credit cards bears interest at the financial institution’s prime rate plus 4%. 12. Accounts payable and accrued liabilities Suppliers Provision for warranty (Note 18) 2009 $ 2008 $ 491,461 527,204 27,321 20,000 518,782 547,204 48 Opsens Inc. Notes to the Consolidated Financial Statements August 31, 2009 and 2008 13. Long-term debt Contributions repayable to Canada Economic Development, without interest, repayable in five equal and consecutive annual instalments effective of 39,567 and $20,000, maturing in February2012 and June 2013 Debt balance Imputed interest BDC loan, of an authorized amount of $285,000, bearing interest at the Bank’s prime rate plus 2.5%, repayable in monthly principal instalments of $3,690 and a final payment of $870 in January 2011, secured by a first-rank movable hypothec in the amount of $285,000 on the universality of the Company’s present and future, tangible and intangible property, subordinated only with respect to trade accounts receivable and inventories provided as security for the operating loans or operating lines of credits, and for which the BDC granted a subordinate clause in favour of Investissement Québec for an amount of $255,750 on the intellectual property, and by joint and several suretyship of certain shareholders for an amount equal to 25% of the outstanding commitment Investissement Québec loan of an authorized amount of $213,000, bearing interest at the weekly variable rate plus 3%, repayable in monthly principal instalments of $5,071 and a monthly premium of $1,014 starting in March 2006, maturing in September 2009, secured by a first-rank movable hypothec in the amount of $255,750 on the universality of the Company’s present and future, tangible and intangible property, subordinated only with respect to trade accounts receivable and inventories provided as security for the operating loans or operating lines of credit, up to a maximum amount of $213,000 reimbursed during year end 2009 Canada Small Business Financing Act loan, for an authorized amount of $119,340, bearing interest at the financial institution’s prime rate plus 2.75% annually, repayable in monthly principal instalments of $1,423 until May 2009, secured by a first-rank movable hypothec in the amount of $119,340 on specific property Capital lease, bearing interest at 13,5%, payable in monthly instalments of $1,367, including interest and a final payment of $1,417, maturing in December 2010 Capital lease, bearing interest at 10.6%, payable in monthly instalments of $98, including interest and a final payment of $486 maturing in March 2011 Amounts carried forward 2009 $ 2008 $ 198,696 258,263 (42,707 ) (67,060 ) 155,989 191,203 104,190 126,330 - 58,417 55,561 77,132 19,211 - 2,054 2,964 337,005 456,046 49 Opsens Inc. Notes to the Consolidated Financial Statements August 31, 2009 and 2008 13. Long-term debt 2009 $ 2008 $ Amounts carried forward 337,005 456,046 Capital lease, bearing interest at 13.5%, payable in monthly instalments of $140, including interest and a final payment of $740 maturing in August 2012 Capital lease, bearing interest at 9.7%, payable in monthly instalments of $837, including interest and a final payment of $837 maturing in April 2014 Capital lease, bearing interest at 13.5%, payable in monthly instalments of $375, including interest and a final payment of $1,650 maturing in August 2012 Current portion Principal payments required over the next five years are as follows: Obligations – Capital lease 4,689 5,663 37,632 - 10,553 13,936 389,879 475,645 133,440 223,265 256,439 252,380 Debt and principal portion Other debts of capital lease Total payments $ Imputed interest $ Principal payments $ $ $ 2010 2011 2012 2013 2014 33,904 22,829 15,343 10,047 6,703 6,629 3,678 2,210 1,099 236 27,275 19,151 13,133 8,112 6,468 106,165 107,090 62,657 39,828 - 133,440 126,241 75,790 47,940 6,468 Under the terms and conditions of the agreement on long-term debt with its financial institution, the Company is subject to certain covenants with respect to maintaining minimum financial ratios (see Note 5). 50 Opsens Inc. Notes to the Consolidated Financial Statements August 31, 2009 and 2008 14. Share capital, stock options and warrants a) Share capital Authorized, unlimited number Common shares, voting and participating without par value Year ended August 31, 2009 Outstanding shares and the changes occurred during the year are as follows: Issued and fully paid Number Amount Balance at beginning of year Share issuance – warrants exercised i) Share issuance – Private placement ii) Balance as at August 31, 2009 40,431,677 50,000 2,916,667 43,398,344 $ 10,257,259 28,000 1,750,000 12,035,259 i) Warrants exercised During the year ended August 31, 2009, 50,000 warrants entitling their holders to acquire one common share of the Company at an average price of $0.40 per share were exercised for a total amount of $20,000. The book value of the exercised warrants was transferred to Share capital for an amount of $8,000. ii) Private Placement On June 25, 2009, the Company realized a private placement of 2,916,667 shares at a price of $0.60 per unit for gross proceeds of $1,750,000. Opsens paid to the Agents a cash commission equal to $87,500 and issue broker compensation warrants entitling the Agents to purchase 204,167 common shares of Opsens. The Broker Warrants shall be issuable at an exercise price of $0.60 for a period of 24 months from the closing of the Offering. Year ended August 31, 2008 Outstanding shares and the changes occurred during the year are as follows: Issued and fully paid Balance at beginning of year Share issuance – Inflo Solutions Inc. (Note 6) Share issuance – options exercised Share issuance – warrants exercised iii) Share issuance – Private placement iv) Balance as at August 31, 2008 Number 32,628,610 1,199,997 408,333 1,483,611 4,711,126 40,431,677 Amount $ 5,332,483 525,574 244,249 1,042,253 3,112,700 10,257,259 51 Opsens Inc. Notes to the Consolidated Financial Statements August 31, 2009 and 2008 14. Share capital, stock options and warrants a) Common share capital (continued) iii) Warrants exercised During the year ended August 31, 2008, 1,483,611 warrants entitling their holders to acquire one common share of the Company at an average price of $0.56 per share were exercised for a total amount of $834,611. The book value of the exercised warrants was transferred to Share capital for an amount of $207,642. iv) Private Placement On April 8, 2008, the Company realized a private placement of 4,711,126 units at a price of $0.80 per unit for gross proceeds of $3,768,901. Each unit is comprised of one common share and one-half common share purchase warrant of the Company. Each warrant will entitle the holder to purchase one common share of the Company at a price of $1.10 for a period of 24 months following the closing of the Offering, or in the event the 20-day volume weighted average price of the common shares of Opsens trade, on the TSX Venture Exchange, is at or above $1.50 during this same 24-month period. Then, the warrants must be exercised or will expire 30 calendar days after notice of such event is received or deemed received by the warrant holders. The notice must be given within the 10-working-day period following the event date. The warrants will expire 30 days after actual or demmed receipt, by the warrants holders, of the notice confirming the occurrence of such an event. Opsens paid to the Agents a cash commission equal to $263,823 and issue broker compensation warrants entitling the Agents to purchase 329,779 common shares of Opsens. The Broker Warrants shall be issuable at an exercise price per common share equal to the Offering Price for a period of 24 months from the closing of the Offering. b) Stock options The Company changed the stock option plan on January 20, 2009. The number of common shares reserved by the Board of Directors for options granted under the plan shall not exceed 10% of the issued and outstanding common shares of the Company. The plan is available to the Company’s directors, consultants, officers and employees. The stock option plan stipulates that the terms of the options and the option price shall be fixed by the directors subject to the price restrictions and other requirements imposed by TSX Venture Exchange. The exercise period cannot exceed five years, beginning on the grant date. These options generally vest over a four-year period, except for 580,000 outstanding options granted which are completely vested at grant. The compensation expense in regards to the stock option plan included in the administrative expenses for the year ended August 31, 2009 is $229,408 ($252,576 for the year ended August 31, 2008). 52 Opsens Inc. Notes to the Consolidated Financial Statements August 31, 2009 and 2008 14. Share capital, stock options and warrants (continued) b) Stock options (continued) The fair value of these options was determined using the Black-Scholes option pricing model with the following assumptions: Risk-free interest rate Expected volatility Expected dividend yield on shares Duration Between 1.57% and 4.15% Between 70% and 95% - % 5 years Fair value per option at the grant date Between $0.22 and $0.70 The Black-Scholes options valuation model was developed to estimate the fair value of traded options, which have no vesting restrictions and are fully transferable, a practice which differs significantly from the Company’s stock option awards. In addition, option valuation models require the input of highly-subjective assumptions including the expected stock price volatility. Any changes in the subjective input assumptions can affect the fair value estimate. The situation of the outstanding stock option plan and the changes that took place during the years ended August 31, 2009 and 2008 are as follows: 2009 2008 Weighted average Number of exercise Number of options price options $ Outstanding at beginning of year 2,242,500 0.65 2,033,333 Options granted Options cancelled Options exercised 705,500 0.40 912,500 (160,000 ) 0.52 (295,000 ) - - (408,333 ) Outstanding at end of the year 2,788,000 0.61 2,242,500 Weighted average exercise price $ 0.53 0.77 0.58 0.34 0.65 Options exercisable at end of the year 1,228,125 0.61 765,000 0.59 53 Opsens Inc. Notes to the Consolidated Financial Statements August 31, 2009 and 2008 14. Share capital, stock options and warrants (continued) b) Stock options (continued) The table below provides information on the outstanding stock options as at August 31, 2009: Exercise price Number of outstanding stock options Number of exercisable stock options Weighted average residual duration (years) $ 0.37 0.40 0.42 0.45 0.50 0.60 0.64 0.72 0.80 0.87 0.95 305,500 90,000 50,000 50,000 1,060,000 70,000 50,000 500,000 150,000 262,500 200,000 40,000 - - 25,000 725,000 5,000 - 125,000 112,500 95,625 100,000 2,788,000 1,228,125 4,64 4,27 4,39 2.26 2.11 4.59 4.79 3.28 2.91 3.64 2.62 3.05 c) Warrants The fair value of the warrants was determined using the Black-Scholes option pricing model with the following assumptions: Exercisable price Risk-free interest rates Expected volatility Expected dividend yield on shares Duration Fair value by warrant Units issued Broker compensation warrant $1.10 2.72% 76% - % 2 years $0.28 $0.60 and $0.80 From 1.33% to 2.72% From 76% to 90% - % 2 years $0.29 and $0.35 54 Opsens Inc. Notes to the Consolidated Financial Statements August 31, 2009 and 2008 14. Share capital, stock options and warrants (continued) c) Warrants (continued) The situation of the outstanding warrants and the changes that took place during the years ended August 31, 2009 and 2008 are as follows: 2009 2008 Weighted average exercise price Number of warrants $ Number of warrants Weighted average exercise price $ 8,104,453 0.74 6,902,722 0.58 204,167 (5,369,111 ) 0.60 0.56 - - (50,000 ) 0.40 - - - - (1,483,611 ) - 2,355,563 - 2,889,509 - 1.03 329,779 8,104,453 - - - 0.56 1.10 0.80 0.74 Outstanding at beginning of year Warrants issued, private placement (Note 14 a)ii) Warrants cancelled Warrants exercised during the year 2009 (Note 14 a)i) Warrants exercised during the period 2008 (Note 14a)iii) Warrants issued, private placement (Note 14a)iv) Warrants issued, private placement (Note 14a)iv) Outstanding at end of year Warrants exercisable at end of year 2,889,509 1.03 8,104,453 0,74 The table below provides information on the outstanding warrants as at August 31, 2009: Exercise price $ 0.60 0.80 1.10 Number of outstanding warrants Number of exercisable warrants Weighted average residual duration (years) 204,167 329,779 2,355,563 2,889,509 204,167 329,779 2,355,563 2,889,509 1.82 0.60 0.60 0.69 55 Opsens Inc. Notes to the Consolidated Financial Statements August 31, 2009 and 2008 15. Loss per share The table below presents a reconciliation between the basic net loss and the diluted net loss per share: 2009 $ 2008 $ (2,170,632 ) (1,336,688 ) (2,170,632 ) (1,336,688 ) Numerator Net loss Amount available for calculating the loss per share Denominator Number of shares Weighted average number of shares outstanding 41,010,627 36,327,185 Dilutive effect of stock options and warrants - - Weighted average number of shares outstanding on diluted basis 41,010,627 36,327,185 Amount per share Net loss per share Basic Diluted (0.05 ) (0.05 ) (0.04 ) (0.04 ) The calculation of dilution effects excludes options and warrants that have an anti-diluting effect. However, should the Company's basic earnings per share have been positive, some options and warrants, at an exercise price of $0.37, $0.42, $0.45, $0.50 and $0.60, would have been dilutive and would have resulted in the addition of 106,072 shares to the weighted average number of shares outstanding used in the diluted earnings per share calculation for year ended August 31, 2009 (2,434,422 as at August 31, 2008). 56 Opsens Inc. Notes to the Consolidated Financial Statements August 31, 2009 and 2008 16. Additional information on the Statements of Cash Flows Changes in non-cash operating working capital items (net of effects of the business acquisition) Accounts receivable Income tax credits receivable Inventories Work in progress Prepaid expenses Accounts payable and accrued liabilities Deferred revenue Cash and cash equivalents Cash Short-term investments Other information Interests paid Non-cash transactions 2009 $ 2008 $ 170,641 (584,425 ) (30,674 ) (6,595 ) (671,989 ) (78,450 ) 237,551 (237,551 ) 20,256 (66,837 ) (28,422 ) 181,867 - (20,000 ) (302,637 ) (811,991 ) 422,168 147,574 2,464,917 3,594,946 2,887,085 3,742,520 49,456 56,283 On June 25, 2009, Opsens issued broker compensation warrants entitling the Agents to purchase 204,167 common shares of Opsens at an exercise price of $0.60 per share for a book value of $59,055. On April 8, 2008, Opsens issued broker compensation warrants entitling the Agents to purchase 329,779 common shares of Opsens at an exercise price of $0.80 per share for a book value of $117,005. The Company concluded the acquisition of all outstanding shares at December 11, 2007 of Inflo Solutions Inc. (“Inflo”) by the issuance of 1,199,997 Opsens common shares with a book value of $525,574. 57 Opsens Inc. Notes to the Consolidated Financial Statements August 31, 2009 and 2008 17. Commitments Lease The Company leases offices under an operating lease expiring on January 31, 2014. This agreement is renewable for an additional five-year period. Future rent, without considering the escalation clause, will amount to $523,477. Opsens Solutions rents three vehicles under an operating lease expiring in November 2010, September 2013 and October 2013. Future rent payments will amount to $81,509. Future payments for the leases and other commitments, totalizing $749,986, required in each of the next five years are as follows: 2010 2011 2012 2013 Thereafter Licence $ 231,677 175,862 147,257 138,757 56,433 Under an exclusive licence with a third party, the Company is committed to provide exclusive marketing of some of its products for a defined territory. 18. Contractual guarantees During the normal course of business, the Company replaces defective parts under warranties offered at the sale of the products. The term of the warranties is 12 months. During the year ended August 31, 2009, the Company recognized an expense of $7,321 ($3,688 for the year ended August 31, 2008) for guarantees. A provision for $27,321 ($20,000 as at August 31, 2008) was recorded for guarantees. This provision estimate is based on past experience and is presented in liabilities under "Accounts payable and accrued liabilities." The actual costs that the Company may incur, as well as the moment when the parts should be replaced, can differ from the estimated amount. 19. Government assistance Industrial Research Assistance Programme (IRAP) Under an agreement reached with the National Research Council with respect to the Industrial Research Assistance Programme (IRAP), the Company may receive non-refundable contributions for a maximum amount of $498,500 to cover some of its incurred costs to carry out a development project of medical devices sensors. For the year ended August 31, 2009, the Company recorded contributions totalling $22,116 which were accounted for against Research and development fees. 58 Opsens Inc. Notes to the Consolidated Financial Statements August 31, 2009 and 2008 19. Government assistance (continued) Under an agreement reached with ministère du Développement économique, de l’Innovation et de l’Exportation, the Company received non-refundable contributions to cover some of its incurred costs for hiring an employee, training and product conception. During the year ended August 31, 2009, the Company received a cash contribution of $45,640 which was recorded against research and development, marketing and administrative expenses. During the year ended August 31, 2009, the Company received a cash contribution of $4,856 from Emploi Québec. This amount was recorded against research and development expenses. 20. Income taxes The effective income tax rate of the Company differs from the rate that would have been calculated using the combined statutory tax rate (federal and provincial). The difference is generated as follows: Income tax recovery using the combined federal and provincial statutory tax rate Non-deductible expenses Deductible financing fees Non-taxable income tax credits Losses carried forward Income tax using effective income tax rate 2009 $ 2008 $ (657,312 ) (411,847 ) 478,946 (102,007 ) (77,450 ) 357,823 - 88,566 (57,801 ) (18,123 ) 399,205 - As at August 31, 2008, the Company has tax losses of approximately $4,037,400 for federal purposes and $4,039,400 for provincial purposes that can be used to reduce future taxable income. These losses expire as follows: 2015 2023 2024 2025 2027 2028 2029 Federal $ Provincial $ 96,000 483,000 42,000 400 1,524,000 691,000 1,201,000 121,000 463,000 40,000 400 1,509,000 692,000 1,214,000 4,037,400 4,039,400 59 Opsens Inc. Notes to the Consolidated Financial Statements August 31, 2009 and 2008 20. Income taxes (continued) The Company also has undeducted research and development expenses in the amount of $2,411,000 for federal purposes and $3,535,000 for provincial purposes that are deferred over an undetermined period. Future income tax assets related to tax losses, undeducted research and development expenses, and the difference between the undepreciated capital cost for tax purposes and the net book value of property, plant and equipment will be recorded in the financial statements once the Company concludes that these losses and tax benefits will likely be realized. 21. Income tax credits for scientific research and experimental development For tax purposes, research and development expenses are detailed as follows: Federal Provincial 2009 $ 2008 $ 2,434,000 1,175,000 1,695,000 597,000 These expenses have enabled the Company to become eligible for scientific research and experimental development tax credits reimbursable for the following amounts: Federal Provincial These credits were recorded in research and development expenses in the statements of loss These credits were recorded against the related property, plant and equipment 2009 $ - 214,624 214,624 2008 $ - 158,975 158,975 214,624 158,975 - - Reimbursable scientific research income tax credits earned 214,624 158,975 Reimbursable scientific research income tax credits earned for the year ended August 31, 2009 have not yet been reviewed by the taxation authorities, and the amounts granted could differ from those that have been recorded. Over the years, the Company qualified to federal Research and development credit, which were non refundable and could be used against Part I Company tax. The accumulated credit for the year ended on August 31, 2009 is about $655,000 and expired on a 10 years period beginning in 2014. 60 Opsens Inc. Notes to the Consolidated Financial Statements August 31, 2009 and 2008 22. Related party transactions In the normal course of its operations, the Company has entered into transactions with related parties. These transactions have been measured at the exchange amount. Professional fees to a company controlled by a shareholder and director 23. Segmented information Sector’s information 2009 $ 2008 $ - - 30,000 30,000 The Company’s reportable segments are strategic business units managed separately as one is focused on developing, producing, and supplying fiber optic sensors (Opsens Inc.) and the other (Opsens Solutions Inc.) is specialized in the commercialization and the installation of optical and conventional sensors for the oil and gas industry. Same accounting policies are used for both reportable segments. Operations are carried out in the normal course of operations and are measured at the exchange value. 2009 Opsens 2008 Opsens Opsens inc. Solutions Total Opsens inc. Solutions Total $ $ $ $ $ $ External sales Internal sales Amortization of property, 2,721,088 366,728 3,087,816 2,248,817 595,422 2,844,239 81,481 - 81,481 4,000 87,094 91,094 plant and equipment 147,940 16,520 164,460 94,748 5,507 100,255 Amortization of intangible assets 21,387 - 21,387 20,340 20,000 40,340 Financial expenses (92,939 ) 58,252 (34,687 ) (71,787 ) 13,574 (58,213 ) Net loss (1,212,563 ) (958,069 ) (2,170,632 ) (1,231,708 ) (104,980 ) (1,336,688 ) Acquisition of property, plant and equipment 256,792 76,912 333,704 270,625 44,519 315,144 Acquisition of intangible assets 31,418 - 31,418 37,664 - 37,664 Segment assets 5,182,350 1,267,924 6,450,274 5,787,433 1,064,786 6,852,219 61 Opsens Inc. Notes to the Consolidated Financial Statements August 31, 2009 and 2008 23. Segmented information (continued) These operating units generate revenue in various geographic segments as follows: Revenue per geographic sector Canada United States Germany United Kingdom Other 2009 2008 $ $ 464,061 651,875 754,214 933,916 363,586 416,805 146,767 285,465 1,359,188 556,178 3,087,816 2,844,239 Revenues are attributed to the geographic sector based on the clients’ location. Capital assets, which include property, plant and equipment and intangible assets, are all located in Canada. During the year ended August 31, 2009, revenues from two clients represent individually more than 10% of the total revenues of the Company, i.e. approximately 15.92% (Opsens Inc.’ reportable segment) and 11.16% (Opsens Inc.’s reportable segment). During the year ended August 31, 2008, revenues from three clients represent approximately 18.09% (Opsens Solutions’ reportable segment), 17.62% (Opsens Inc.’s reportable segment) and 13.09% (Opsens Inc.’s reportable segment). 24. Additional information to the Statements of Loss Government assistance Income tax credits for research and development Interest and bank charges Interest on demand loan and long-term debt Gain on foreign currency translation Interest income 2009 $ 2008 $ (76,391 ) (4,699 ) (250,648 ) (158,975 ) 25,599 42,684 (20,524 ) (82,446 ) 13,173 48,964 (32,809 ) (87,541 ) 62 63Opsens inc. Shareholder Information Corporate Information Directors Head Office Pierre Carrier President, Chief Executive Officer, Chairman Claude Belleville Vice President, Medical Devices, Laboratories & Transformers Gaétan Duplain Vice President Oil and Gas, President, Opsens Solutions Bertrand Bolduc Director Mario Jacob Director Jean Rochette Director Denis M. Sirois Director Senior Officers Pierre Carrier President, Chief Executive Officer, Chairman Claude Belleville Vice President, Medical Devices, Laboratories & Transformers Gaétan Duplain Vice President Oil and Gas, President, Opsens Solutions Louis Laflamme, CA Chief Financial Officer, Corporate Secretary 2014 Cyrille-Duquet St., Suite 125 Quebec City QC G1N 4N6 Phone: (418) 682-9996 Fax: (418) 682-9939 Opsens Solutions 10456 176th St., Suite 201 Edmonton AB T5S 1L3 Phone: (780) 930-1777 Fax: (780) 930-2077 Website: www.opsens.com Investor Relations: For further information about Opsens Inc. or to be placed on the mailing list for quarterly reports and news releases, please contact Marie-Claude Poitras at the head office address, or marie-claude.poitras@opsens.com. Auditors Samson Bélair Deloitte & Touche Quebec QC Stock Exchange Listing Toronto Venture Exchange Trading Symbol: OPS Transfer Agent & Registrar CIBC Mellon 2001, University Street, Suite 1600 Montreal QC H3A 2A6 Phone: (514) 285-3600 Annual Meeting of Shareholders Tuesday, January 19, 2010 10:30 a.m. l’Hôtel ALT Quebec Quebec City, QC 64 EMERGING LEADER IN OIL SANDS MEASUREMENT Opsens offers integrated services for the management of reservoirs and in situ environments for the oil and gas market. Its near-term focus is the Western Canadian oil sands market, where a growing demand to measure pressure and temperature is identified. There is a large number of active in situ oil sands projects in Alberta, and all the major oil and gas companies are involved. Steam assisted gravity drainage is the most common process for developing in situ reserves. In SAGD, recovery rates are typically somewhere between 30% and 60%. To optimize recovery rates, the operator needs data on temperature and pressure below the surface directly from the injecting and producer wells, where temperatures may be between 200 and 300 degrees Celsius. Opsens’ OPP-W sensors have been proven to meet that need, measuring pressure and temperature up to 300 degrees Celsius. STE AM ASSISTE D GRAVIT Y DRA IN AGE (S AGD) Producing Well Steam Injection Well SRU Installation S t e a m O i l Hot Steam Chamber ( ~ 3 0 0 ° C + ) H e a t e d O i l Opsens Sensors for in situ Pressure & Temperature Monitoring (300°C) Cold Oil San d w w w • o p s e n s • c o m SENSORS AT WORK • OIL & GAS • Helping operators optimize production in the Western Canadian oil sands. • MEDICAL DEVICES • Development in partnerships of applications in areas such as cardiac assistance. Development of our first medical instrument. • LABORATORIES & TRANSFORMERS • Ensuring components that control systems are unaffected by magnetic interference. Preventing heating in high-power transformers. #125, 2014, Cyrille-Duquet St., Quebec City, QC G1N 4N6 # 201, 10456, 176th St., Edmonton, AB T5S 1L3 T• +1 418 .6 8 2. 9 9 9 6 F • +1 418 .6 8 2. 9 9 3 9 T• +1 78 0 . 9 3 0 .17 7 7 F • +1 78 0 . 9 3 0 . 207 7 w w w • o p s e n s • c o m 

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