Annual Reports

 
Other

FMI HOLDINGS LTD. 20-F 2010

Documents found in this filing:

  1. 20-F
  2. Ex-12.1
  3. Ex-12.2
  4. Ex-13.1
  5. Ex-13.2
  6. Graphic
  7. Graphic
forbesmedi_20f-12312009.htm
 
 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

FORM 20-F

X
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2009
 

Commission file number:000-30076


FORBES MEDI-TECH INC.
(Exact name of Registrant as specified in its charter)


British Columbia
(Jurisdiction of incorporation or organization)


200 – 750 West Pender Street
Vancouver, British Columbia, Canada V6C 2T8
(Address of principal executive offices)


David Goold
200 – 750 West Pender Street
Vancouver, British Columbia, Canada V6C 2T8
Telephone:  1-604-689-5899 Fax: 1-604-689-7641
 (Name, Telephone, Email and/or Facsimile number and Address of Company Contact Person)
 
Securities registered or to be registered pursuant to Section 12(b) of the Act.


Title of each class
Common Shares, without par value
Name of each exchange on which registered
Pink OTC Markets (“Pink Sheets”)

Securities registered or to be registered pursuant to Section 12(g) of the Act.
None
(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
Not applicable
(Title of Class)
 
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

4,969,813 Common Shares as at December 31, 2009.
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act
o Yes   No
 
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

o Yes   No
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes   o No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
Yes   o No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check one):

_______  Large accelerated filer
_______  Accelerated filer
    X           Non-accelerated filer

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 
________  U.S. GAAP
 
________  International Financial Reporting Standards as issued by the International Accounting Standards Board
 
    X            Other
 
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
 
o  Item 17       x  Item 18

If this is an annual report, indicated by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes   No
 

 
 

 
iii

FORBES MEDI-TECH INC.

FORM 20-F ANNUAL REPORT
TABLE OF CONTENTS>

 
PART I       1
 
ITEM 1                   Identity of Directors, Senior Management and Advisers  1
ITEM 2                   Offer Statistics and Expected Timetable       1
ITEM 3                     Key Information   1
ITEM 4                   Information on the Company   13
ITEM 5                   Operating and Financial Review and Prospects  25 
ITEM 6                   Directors, Senior Management and Employees 37
ITEM 7                   Major Shareholders and Related Party Transactions  51
ITEM 8                   Financial Information  52
ITEM 9                   The Offer and Listing  55
ITEM 10                 Additional Information   57
ITEM 12                 Description of Securities Other than Equity Securities    73
 
 
ITEM 13                    Defaults, Dividend, Arrearages and Delinquencies    74
ITEM 14                    Material Modifications to the Rights of Security Holders and Use of Proceeds    74 
ITEM 15T                 Controls and Procedures  74
ITEM 16                    [Reserved]   76
Item 16A.                  Audit Committee Financial Expert  76
Item 16B.                  Code Of Ethics      76
Item 16C.                  Principal Accountant Fees And Services  76
Item 16F.                  Changes in Registrant’s Certifying Accountant  77
Item 16G.                  Corporate Governance   77
 
ITEM 17                    Financial Statements  77
ITEM 18                    Financial Statements   77
ITEM 19                    Exhibits  77


 
 

 
iv

INTRODUCTION
 
Forbes Medi-Tech Inc. is organized under the British Columbia Business Corporations Act. In this Annual Report, the “Company”, “Forbes”, “we”, “our” and “us” refer to Forbes Medi-Tech Inc. and its subsidiaries (unless the context otherwise requires). We refer you to the documents attached as exhibits hereto for more complete information than may be contained in this Annual Report. Our principal corporate offices are located at Suite 200, 750 West Pender Street, Vancouver, B.C., V6C 2T8.  The telephone number is (604) 689 – 5899 and our website address is www.forbesmedi.com..
 
Business of Forbes Medi-Tech Inc.
 
Forbes Medi-Tech Inc. is a life sciences company focused on evidence-based nutritional solutions.  A leader in nutraceutical technology, Forbes is a provider of value-added products and cholesterol-lowering ingredients for use in functional foods and dietary supplements. Forbes successfully developed and commercialized its Reducol™ plant sterol blend, which has undergone clinical trials in various matrices and has been shown to lower "LDL" cholesterol levels safely and naturally. Building upon established partnerships with leading retailers and manufacturers across the globe, Forbes helps its customers to develop private label and branded products.
 
Financial and Other Information
 
In this Annual Report, unless otherwise specified, all dollar amounts are expressed in Canadian Dollars (“CDN$” or “$”). The Government of Canada permits a floating exchange rate to determine the value of the Canadian Dollar against the U.S. Dollar (“US$”).
 
Forward-Looking Statements
 
This Annual Report on Form 20-F contains forward-looking statements about Forbes Medi-Tech Inc., which are intended to be covered by the safe harbor for “forward-looking statements” provided by the United States Private Securities Litigation Reform Act of 1995 and “forward-looking information” within the meaning of applicable Canadian securities laws. Any document that has been filed or will be filed with the United States Securities and Exchange Commission (“SEC”), the Ontario Securities Commission (the “OSC”) or the British Columbia Securities Commission (the “BCSC”) also may include forward-looking statements and information. Other written or oral forward-looking statements and information have been made and may in the future be made, from time to time, by or on behalf of the Company.  Forward-looking statements and information are statements and information that are not historical facts, and include but are not limited to, financial projections and estimates and their underlying assumptions; statements regarding plans, objectives and expectations with respect to future operations, products and services; the impact of regulatory initiatives on our operations; our share of new and existing markets; general industry and macroeconomic growth rates and our performance relative to them and statements regarding future performance.  Forward-looking information as defined under applicable Canadian securities laws means “disclosure regarding possible events, conditions or results of operations that is based on assumptions about future economic conditions and courses of action and includes future oriented financial information with respect to prospective results of operations, financial position or cash flows that is presented either as a forecast or a projection”.  Forward-looking statements and information generally, but not always, are identified by the words “expects,” “anticipates,” “believes,” “intends,” “estimates,” “projects”, “potential”, “possible” and similar expressions, or that events or conditions “will,” “may,” “could” or “should” occur.
The forward-looking statements and information in this Annual Report are subject to various risks and uncertainties, most of which are difficult to predict and generally beyond the control of the Company, including without limitation:
 
 

v

 
·
uncertainty as to our ability to achieve the goals and satisfy assumptions of management;
 
·
our need to complete a sale, merger, acquisition or other strategic alternative, and/or secure additional funds in the first half of 2010 and if unable to do so, our need to consider additional strategic alternatives which may include asset sales, winding up,  liquidation or dissolution;
 
·
uncertainty as to our ability to continue operations, as indicated by the going concern qualification contained in our Independent Registered Public Accounting Firm’s Auditors’ Report to the Shareholders;
 
·
the need to control costs and the possibility of unanticipated expenses;
 
·
our dependence on a few customers;
 
·
research and development risks;
 
·
the need for regulatory approvals to market our products in various countries, either with specific label claims or at all;
 
·
uncertainty as to the successful conclusion of sales discussions currently underway, and of those anticipated, with third party purchasers;
 
·
uncertainty related to the performance of contract obligations by buyers of products;
 
·
uncertainty as to the market acceptance of our products and our ability to generate projected sales volumes and product prices;
 
·
uncertainties as to the volume and timing of sales of our products;
 
·
risks associated with our patents and other intellectual property;
 
·
the possibility that we will pursue additional development projects or other business opportunities;
 
·
our potential need to develop additional formulations for the  incorporation of our phytosterols into various types of dietary supplements or food products in order to meet new customer requirements;
 
·
the risk that our objectives will not be met within the time lines we expect or at all;
 
·
the risk of exchange rate fluctuations, particularly with respect to the Canadian and U.S. dollars and the Euro; and
 
·
other factors identified under the heading “Risk Factors” in this Annual Report, and those that are discussed or identified in our other public filings on EDGAR and SEDAR.

Our actual results, performance or achievements could differ significantly from those expressed in, or implied by, our forward-looking statements and information. Accordingly, we cannot assure that any of the events anticipated by our forward-looking statements and information will occur, or if they do, what impact they will have on our results of operations and financial condition.

Forward-looking statements and information are based on the beliefs, assumptions, opinions and expectations of our management at the time they are made, and we do not assume any obligation, except as required by law, to update our forward-looking statements or information if those beliefs, assumptions, opinions, or expectations, or other circumstances, should change.

For all of the reasons set forth above, investors should not place undue reliance on forward-looking statements and information.

 
 

vi

Glossary of Terms

Arrangement
Plan of Arrangement, the transaction by which the Company acquired all outstanding shares, options, and warrants of Old Forbes for shares of New Forbes.  See Item 4 – Information on the Company – A. History and Development of the Company – Forbes Medi-Tech Inc.
 
atherosclerosis
A hardening of the arteries in which cholesterol, other fats and various blood components build up in the walls of the arteries. As atherosclerosis progresses, the arteries to the heart may narrow so that oxygen-rich blood and nutrients have difficulty reaching the heart. This condition leads to angina and heart attack (see coronary heart disease).
 
Board
The Board of Directors of the Company
 
Canadian GAAP
Generally accepted accounting principles in Canada.
 
cardiovascular disease
A disease of the heart or arteries supplying the heart or other organs.
 
cGMP
Current Good Manufacturing Practices - manufacturing practices for drugs and/or foods as set out in the regulations of the United States, Canada and other countries.
 
cholesterol
A soft, waxy substance essential for normal body functions, including the production of steroid-based hormones and bile acids. Cholesterol can be made by the body in sufficient quantities and is present in all tissues, including the nervous system, muscle, skin, liver, intestines and heart.
 
cholesterol-lowering agent
A therapeutic agent that is used to reduce the level of circulating cholesterol in the blood.
 
coronary heart disease
A common heart ailment caused by narrowing of the coronary arteries that supply oxygen and nutrients directly to the heart muscle, almost exclusively caused by atherosclerosis (see atherosclerosis).
 
Development Agreement
In October 2006, Forbes acquired 100% of TheraPei Pharmaceuticals, Inc. (“TheraPei”) of San Diego, California (now Forbes Medi-Tech (Research) Inc,). As part of the acquisition of TheraPei, Forbes entered into a development agreement which provides for the continuing development of one lead compound from each of two principal platforms acquired through TheraPei. See Item 4 - Information on the Company - A. History and Development of the Company – Acquisitions Since January 1, 2006 - Forbes Medi-Tech (Research) Inc.
 
dietary supplements
Products intended to supplement the diet which are ingested in dosage form and which may contain a nutraceutical.
 
EU
European Union.
 
FDA
Food and Drug Administration - the government agency which regulates the manufacture, use and sale of food, human diagnostics and therapeutic products in the United States.
 

 
 

 
vii


Fayrefield
Fayrefield Foods Limited, a UK company that we work with through our Forbes-Fayrefield joint venture.  We had previously signed a sales and licensing agreement with Fayrefield in November 2004 to supply Reducol™ for use in Reducol™-based products.
 
Forbes
Forbes Medi-Tech Inc., the Company, as constituted on the date hereof.
 
Forbes–Fayrefield
Forbes-Fayrefield Ltd.  We have a 51% interest in Forbes Fayrefield Ltd. for an initial investment of £10,200, and Fayrefield has the remaining 49% interest for an initial investment of £9,800.  The Board of Directors of FFL consists of an equal number of nominees of Forbes and of Fayrefield.
 
Old Forbes or Forbes Operations or FMTO
Forbes Medi-Tech Operations Inc., a former wholly-owned subsidiary of Forbes. See Item 4 -- Information on the Company – A. History and Development of the Company – Forbes Medi-Tech Inc.
 
Forbes Research
Forbes Medi-Tech (Research) Inc., a wholly-owned subsidiary of Forbes USA.
 
Forbes USA
Forbes Medi-Tech (USA) Inc., a wholly-owned subsidiary of Forbes .
 
Functional Foods
Conventional foods containing ingredients that provide health benefits beyond basic nutritional functions and/or reduce the risk of chronic disease.
 
GRAS
Generally Recognized as Safe – Refers to substances that are “generally recognized as safe” for consumption in the US and can be added to foods by manufacturers without establishing their safety by rigorous experimental studies.
 
HDL
High density lipoproteins - HDL contains proteins which are involved in the removal of cholesterol from the tissues. High levels of HDL cholesterol are associated with a decreased risk of coronary heart disease. HDL cholesterol is known as the “good” cholesterol.
 
Health Canada
The government agency which regulates the manufacture, use and sale of human diagnostics and therapeutic products in Canada.
 
hyperlipidemia
An excessive amount of lipids in the blood (i.e. elevated cholesterol, triglyceride or lipoprotein levels).
 
LDL
Low density lipoproteins - LDL carries the largest amount of cholesterol. High levels of LDL cholesterol are associated with an increased risk of coronary heart disease.
 
LDL-C
Cholesterol carried as a component of low density lipoprotein particles. LDL-C is known as the “bad” cholesterol.
 
lipids
Dietary or blood fatty substances, including cholesterol and triglycerides that are present in cell membranes and body tissues.
 
lipoproteins
Protein and lipid coated “packages” that transport fat and cholesterol in the blood. Lipoproteins are classified according to their density. Major lipoproteins include HDL and LDL.
 
 
 
 

 
viii
 
Minimum Bid Price Requirement
NASDAQ’s requirement for a listed company to maintain a minimum closing bid price of U.S. $1.00 for continued listing on NASDAQ.
 
New Forbes
Forbes Medi-Tech Inc., incorporated pursuant to the British Columbia Business Corporations Act effective January 10, 2008 under the name 0813361 B.C. Ltd., and subsequently renamed Forbes Medi-Tech Inc. effective February 27, 2008.  See Item 4 -- Information on the Company – A. History and Development of the Company – Forbes Medi-Tech Inc.
 
New Plan
Rolling stock option plan initially approved by the Board of Directors of the Company on April 12, 2007 and approved by the shareholders on May 17, 2007.  See Item 6 – Directors, Senior Management and Employees – E. Share Ownership – Stock Option Plan and Total Outstanding Stock Options.
 
non-GMO
Non-Genetically Modified Organism.
 
nutraceutical
Nutraceuticals can be generally described as ingredients extracted from natural sources which are incorporated into food or into capsules or other medicinal formats, and which have been demonstrated to have a physiological benefit and may help prevent disease.
 
Pharmavite
Pharmavite LLC of California.
 
phytosterols
A class of natural products bearing a common tetracyclic carbon structure. Found in plants, where they serve functions as constituents of cell membranes (e.g. sitosterol, sitostanol, campesterol, campestanol and stigmasterol).
 
Plan of Reorganization
The Plan of Reorganization described under Item 4 – Information on the Company – A. History and Development of the Company – Forbes Medi-Tech Inc.
 
Post-Arrangement Basis
This term refers to our common shares after giving effect to the one for eight reverse stock split pursuant to the Plan of Arrangement.   See Item 4 - Information on the Company - A. History and Development of the Company - Forbes Medi-Tech Inc.
 
Pre-Arrangement Basis
This term refers to our common shares before giving effect to the one for eight reverse stock split pursuant to the Plan of Arrangement.  See Item 4 - Information on the Company - A. History and Development of the Company.
 
Reducol™
A unique blend of phytosterols and phytostanols, sold as a food and dietary supplement ingredient.   See Item 4 – Information on the Company – B. Business Overview – Reducol™.
 
Rights Plan
Amended and Restated Shareholder Rights Plan Agreement made as of April 22, 2008 between Forbes and Computershare Investor Services Inc.
 
 
Staff Determination
NASDAQ Staff Determination.  See Item 3 – Key Information – D. Risk Factors – Stock Exchange Minimum Listing Requirements.
 
stanols
Hydrogenated sterols.
 
sterols
An abbreviated name for “phytosterols”.
 
Tall Oil License
A license of certain laboratory level phytosterol extraction technology developed at UBC.  See Item 4 – Information on the Company – B. Business Overview – Technology Licenses Granted to the Company.
 
tall oil pitch
Pitch is the viscous, black tarry residue remaining after the volatile components of crude tall oil have been removed by distillation. It contains the non-volatile phytosterols and other higher molecular weight components that do not distill due to their very high boiling point.
 
tall oil soap
The upper layer formed in the vat during the caustic soda treatment of wood chips in the pulping process. This layer contains the water insoluble natural substances present in the wood. These substances are a mixture of phytosterols, fatty acids and fatty alcohols and terpenes.
 
TheraPei
TheraPei Pharmaceuticals, Inc., of San Diego, California, acquired by Forbes in October 2006 and renamed Forbes Medi-Tech (Research), Inc.  See Item 4 – Information on the Company – A. History and Development of the Company – Dispositions Since January 1, 2007.
 
therapeutic
For treating a disease.
 
toxicity
The quality of being poisonous.
 
triglycerides
A dietary fat transported in blood as fatty acid esters of the alcohol glycerol.  Triglycerides are carried through the blood stream to the tissues where released fatty acids serve as a source of energy. Dietary fat is the primary source of triglycerides.
 
UBC
University of British Columbia located in Vancouver, British Columbia, Canada.
 
up-scaling
Taking a small scale laboratory-scale biological or chemical process and increasing its physical scale.
 
US or U.S.
United States of America.
 
TheraPei Stockholders
TheraPei selling shareholders.  See Item 4 – Information on the Company – A. History and Development of the Company – Dispositions Since January 1, 2007
 


 
 

 

PART I


Not Applicable.


 Not Applicable.

 
A.           Selected Financial Data
 
The following table sets forth selected financial data regarding our consolidated operating results and financial position.  The data has been derived from our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in Canada (“Canadian GAAP”).  For reconciliation to accounting principles generally accepted in the United States see Note 26 to the consolidated financial statements for the year ended December 31, 2009, and the years ended December 31, 2008 and 2007.  The following selected financial data should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Annual Report.  The selected financial data is expressed in Canadian dollars.

   
Year ended
   
Year ended
   
Year ended
   
Year ended
   
Year ended
 
Canadian GAAP unless otherwise noted
(Expressed in '000's , except per share information)
 
31-Dec-09
   
31-Dec-08
   
31-Dec-07
   
31-Dec-06
   
31-Dec-05
 
                               
Phytosterol revenues
  $ 4,626     $ 7,844     $ 8,904     $ 6,115     $ 4,020  
Loss from continuing operations
    (3,385 )     (7,342 )     (10,098 )     (11,969 )     (8,765 )
Other income
    4,277       169       364       1,126       461  
Income tax recovery (expense)
    (765 )     (17 )     492       (158 )      
Net income / (loss) from continuing operations
  $ 127     $ (7,190 )   $ (9,242 )   $ (11,001 )   $ (8,304 )
                                         
(Loss) / income from discontinued operations, net of tax expense
          (463 )     (2,441 )     158       (4,502 )
                                         
Net income / (loss) and comprehensive income / (loss)
  $ 127     $ (7,653 )   $ (11,683 )   $ (10,843 )   $ (12,806 )
                                         
Net (loss) and comprehensive (loss) in accordance with US GAAP
  $ (244 )   $ (7,358 )   $ (11,683 )   $ (10,881 )   $ (11,062 )

 
 



Weighted average number of shares used to calculate (loss) income per share, basic
    4,970       4,865       4,801       4,675       4,257  
Weighted average number of shares used to calculate (loss) income per share, diluted
    5,033       4,865       4,801       4,675       4,257  
Income / (loss) per share from continuing operations
                                       
  Basic
  $ 0.03     $ (1.48 )   $ (1.92 )   $ (2.35 )   $ (1.95 )
  Diluted
  $ 0.03     $ (1.48 )   $ (1.92 )   $ (2.35 )   $ (1.95 )
 (Loss) / income per share from discontinued operations
                                       
  Basic
  $     $ (0.09 )   $ (0.51 )   $ 0.03     $ (1.06 )
  Diluted
  $     $ (0.09 )   $ (0.51 )   $ 0.03     $ (1.06 )
Net income (loss) per share
                                       
   Basic
  $ 0.03     $ (1.57 )   $ (2.43 )   $ (2.32 )   $ (3.01 )
   Diluted
  $ 0.03     $ (1.57 )   $ (2.43 )   $ (2.32 )   $ (3.01 )
                                         
Basic income (loss) per share in accordance with US GAAP
  $ (0.05 )   $ (1.51 )   $ (2.43 )   $ (2.33 )   $ (2.60 )
Diluted income (loss) per share in accordance with US GAAP
  $ (0.05 )   $ (1.51 )   $ (2.43 )   $ (2.33 )   $ (2.60 )
                                         
Total assets
                                       
Canadian GAAP
  $ 4,697     $ 9,216     $ 12,951     $ 25,387     $ 35,975  
US GAAP
    4,623       9,216       12,951       25,387       36,485  
                                         
Total Liabilities
                                       
Canadian GAAP
  $ 2,269     $ 6,531     $ 3,319     $ 5,037     $ 7,552  
US GAAP
    2,275       6,640       3,319       5,037       7,552  
                                         
Equity component of subsidiary’s convertible debenture
                                       
Canadian GAAP
        $ 399                    
US GAAP
                             
                                         
Liability component of preferred shares
                                       
Canadian GAAP
                          $ 2,341  
US GAAP
                            2,268  
                                         
Shareholders Equity- Canadian GAAP
                                       
Common shares
  $ 2 ,721     $ 2,721     $ 101,027     $ 100,994     $ 94,790  
Contributed surplus
    10,043       10,027       9,875       8,943       7,554  
Equity component of preferred shares
                            2,481  
Deficit
    (10,336 )     (10,462 )     (101,270 )     (89,587 )     (78,743 )
                                         
Shareholders Equity- US GAAP
                                       
Common shares
  $ 100,218     $ 100,218     $ 100,064     $ 100,031     $ 93,827  
Contributed surplus
    7,653       7,637       7,485       6,553       5,710  
Equity component of preferred shares
                            2,481  
Deficit
    (105,523 )     (105,279 )     (97,917 )     (86,234 )     (75,353 )
                                         

 
 

 
Currency Exchange Rates

Our accounts are maintained in Canadian dollars. In this Annual Report all currency references are expressed in Canadian dollars ($) unless otherwise indicated. The following tables set forth, for the periods and dates indicated, certain information concerning the exchange rates for the conversion of Canadian dollars into United States dollars, based on the Bank of Canada nominal noon buying rate.  The noon buying rate on March 29, 2010 as reported by the Bank of Canada for the purchase of one United States dollar with Canadian Dollars was Cdn$1.0203 (US$1.00 = Cdn$1.0203).

US Dollars per Canadian Dollar

Fiscal Year Ended December 31
 
   
2009
   
2008
   
2007
   
2006
   
2005
 
Average for period
    0.8757       0.9381       0.9309       0.8818       0.8254  
End of period
    0.9555       0.8170       1.0120       0.8582       0.8579  

US Dollars per Canadian Dollar

   
February
2010
   
January
2010
   
December
2009
   
November
2009
   
October
2009
   
September
2009
 
Low for the Month
    0.9316       0.9384       0.9334       0.9282       0.9221       0.9038  
High for the Month
    0.9597       0.9755       0.9611       0.9560       0.9716       0.9422  

B.           Capitalization and Indebtedness

Not Applicable.

C.           Reasons for the Offer and Use of Proceeds

Note Applicable.

D.           Risk Factors

We are subject to significant risks and past performance is no guarantee of future performance.  The following offers a brief overview of some of the risk factors to be considered in relation to our business.  This list of factors may not be exhaustive, as we operate in a rapidly changing business environment, and new risk factors emerge from time to time. We cannot predict such risk factors, nor can the impact of such risk factors on our business, , if any, be assessed or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those projected in any forward-looking statements or information.  Accordingly, forward-looking statements or information should not be relied upon as a prediction of actual results.

The following summarizes what we believe are the major risks and uncertainties we currently face:

General Corporate Risks

 
Need for Additional Funds / M&A Transaction>    We will need to obtain additional financing, or a suitable merger, acquisition or other strategic combination transaction (an “M&A transaction”), by the end of the second quarter of 2010 in order to carry on our business as a going concern.  We believe our capital resources are adequate to fund operations through the second quarter of fiscal 2010.  This belief is based on a number of factors and assumptions, and includes the assumption that our expenditures will not exceed those currently planned, that there will be no material change to our relationships with our largest customers, and our revenues for the first half of 2010 will meet or exceed our expectations.  There can be no assurance that such assumptions and factors will be realized or met.  We have no external sources of
 
 
 
 

 
liquidity such as lines of credit (excluding the line of credit in Forbes-Fayrefield, which is restricted to use by that entity). Forbes-Fayrefield has a € 50,000 line of credit to support its operations.  Security for the line of credit is currently by way of a debenture registered over all of the assets of Forbes-Fayrefield. No guarantees have currently been provided by us, or by Fayrefield. The line of credit bears interest at a floating rate of the Royal Bank of Scotland Currency Lending Rate for Euros (currently 1.0%) plus 2.0% per annum, calculated daily. Any funds drawn under this facility are repayable on demand, and the facility may be terminated at any time by the Lender.  As at December 31, 2009, € nil was drawn under the facility, and Forbes-Fayrefield was in compliance with all covenants with the Lender.)  While management is considering all financing alternatives, the market for both debt and equity financings for companies such as ours has always been challenging.  We are continuing to focus our efforts on obtaining a suitable M&A transaction.  Our future operations are completely dependent upon our ability to complete a suitable M&A transaction. If we cannot secure additional funds or complete a suitable M&A transaction,, we will have to consider additional strategic alternatives which may include, among other strategies, exploring the monetization of certain intangible assets as well as seeking to out-license assets, potential asset divestitures, winding up, dissolution or liquidation. The above matters raise substantial doubt about our ability to continue to operate as currently structured.
 
 
We have sustained continuing operating losses since our formation and at December 31, 2009 had cash of $1,329,000.  Management is of the view that there are sufficient financial resources to finance operations through the second quarter of 2010.  This view is based on a number of factors and assumptions and includes the assumption that our expenditures will not exceed those currently planned, and that our revenues will meet or exceed our expectations.

Our future operations are completely dependent upon our ability to complete a strategic transaction such as a merger, acquisition, sale of business or other suitable transaction, and/or secure additional funds.  The market for any of these activities for companies such as ours has always been challenging.  The outcome of these matters cannot be predicted at this time. Any possible strategic transactions to define our future may require shareholder approval. If we are unable to close on a strategic transaction before we exhaust our available financial resources, then we may be unable to continue operations as a going concern and will have to consider winding up, dissolution or liquidation. The Report Of Independent Registered Public Accounting Firm attached contains a going concern paragraph.

We have a History of Losses>   We have a history of losses, including a net loss from continuing operations before other income / expenses and taxes, of $3,385,000 for the financial year ended December 31 2009. For the fiscal year ended December 31, 2008, we reported a net loss from continuing operations before other income / expenses and taxes, of $7,342,000 and for the financial year ended December 31, 2007, we reported a net loss from continuing operations before other income / expenses and taxes, of $10,098,000.  We anticipate that we will continue to incur losses during fiscal 2010.

Future Revenues and Profitability are Uncertain  >Our financial results may fluctuate, and our future revenue and profitability are uncertain. During the past three years our revenue has declined from $8,847,117 for our fiscal year ended December 31, 2007, to $7,839,674 for our fiscal year ended December 31, 2008, to $4,624,082 for our fiscal year ended December 31, 2009.  There is no guarantee that our revenue will increase in the foreseeable future.

Our ability to achieve and maintain profitability in the foreseeable future depends on our ability to increase sales of our products and control costs.  Because the majority of our sales are of a nutraceutical ingredient, we need to work with potential customers in their development of their own new product to include our ingredient.  There can be no assurance that our product development work with potential customers will reach the stage of successful development and launch of new products or that any such products will achieve market acceptance.
 
 
 

 
Our future revenue is also dependent upon fulfillment of contractual obligations by third parties, including fulfilling payment terms and meeting forecasted purchase requirements by buyers of our products and assets.  There can be no assurance that our revenue expectations for the current fiscal year will be achieved.

Global Economic Downturn>  The general global economic downturn may continue to have a negative effect on demand by consumers and others for functional foods and dietary supplements, which would in turn have a negative affect on the markets for our products.  Such a negative effect could reduce our future revenues from sales of ReducolTM and other phytosterol products.  We are dependent upon completion of an M&A transaction to continue as a going concern.
Need for Growth and / or Merger & Acquisition Opportunities>  Our aim is to expand our sales of Reducol™ and other value-added products, and to diversify our product line with new types of nutraceutical products, however, there is no assurance that our resources will be able to adequately respond to support such growth or that there will exist a demand for such growth by our current and proposed customers.   We also intend to build a nutraceutical base through merger and acquisition opportunities, which may not materialize.

Dependence upon Key Personnel  >Our key management employees include Charles Butt, Chief Executive Officer and President; David Goold, Chief Financial Officer, and Laura Wessman, Senior Vice President, Operations. These key management employees are primarily responsible for our day to day operations, and we believe our ability to continue operations, increase sales, and complete a suitable M&A transaction or secure additional financing will depend, in large part, upon our ability to retain our key management employees and to attract and retain additional highly qualified management personnel.  Our employment agreements with our key management employees permit such employees to terminate their employment on three months’ notice, in the case of Charles Butt, otherwise on thirty days’ notice. If we lose the services of any our key personnel, we may be unable to replace them, which could have a material adverse effect on our business, financial condition, and ability to continue as a going concern.

Volatility of Stock Price/Liquidity of Shares  >The market prices for the securities of companies such as ours have historically been highly volatile, and the market has, from time to time, experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. Factors such as fluctuations in our operating results, announcements of competing or new products by our competitors, clinical study results, governmental regulation, developments in patent or other proprietary rights, public concern as to the safety and efficacy of our products or those of our customers or competitors in the phytosterol market and general market conditions, delay in achieving or failure to achieve our previously announced milestones or goals, can have an adverse effect on the market price of our shares. In particular, the realization of any of the risks described herein could have a material adverse impact on such market price. Sales of substantial amounts of our shares in the public market, or the perception that such sales will occur, could also adversely affect the market price of our shares and make it more difficult in the future for us to raise funds through equity offerings.  Our common share price has been, and is likely to continue to be, volatile.

No National Exchange Listing>  On February 18, 2010, our common shares were delisted from the NASDAQ Stock Market and on September 11, 2009, our common shares were delisted from the TSX.  Consequently, there is no recognized national exchange on which are common shares are listed and actively traded.  Our common shares are quoted on the Pink Sheets electronic quotation service, operated by Pink OTC Markets Inc., but as a result of the delisting from the NASDAQ Stock Market and TSX, there is limited volume in our common shares.

Our common shares are considered penny stock>  Rule 15g-9 of the Securities Exchange Act of 1934, as amended, generally defines "penny stock" to be any equity security that has a market price (as defined) less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. Our securities are covered by the penny stock rules, which impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and "accredited investors". The term "accredited investor" refers generally to institutions with assets in excess of $5,000,000 or individuals with a net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000
 
 
 
 

 
 
jointly with their spouse. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the Securities and Exchange Commission which provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customer's account. The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer's confirmation. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from these rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the stock that is subject to these penny stock rules. Consequently, these penny stock rules may affect the ability of broker-dealers to trade our securities. We believe that the penny stock rules discourage investor interest in and limit the marketability of our common shares.

Anti-Takeover Provisions  >On February 9, 1998, our board of directors (the “Board of Directors”) adopted a shareholder rights plan which was amended and restated by our board of directors on April 28, 2003 (the “Rights Plan”).  In December 2007, the Board of Directors extended the Rights Plan beyond its scheduled expiry date of February 9, 2008 to the next annual general meeting of the Company and, effective April 22, 2008, the Board of Directors further amended, extended and restated the Rights Plan.  The Rights Plan as so amended, extended and restated was adopted by our shareholders at our Annual General Meeting on May 21, 2008.  The Rights Plan was adopted in part to discourage takeover attempts that may not be in the best interests of our shareholders. The Rights Plan is designed to give our Board of Directors time to pursue other alternatives to maximize shareholder value in the event of an unsolicited takeover offer for Forbes. The effect of the Rights Plan could be to discourage a third party from attempting to acquire, or make it more difficult to acquire, control of Forbes without first negotiating with our Board of Directors. The Rights Plan could also limit the price that certain investors might be willing to pay in the future for our common shares.

Directors’ and Officers’ Indemnity >We have entered into agreements pursuant to which we will indemnify our directors and officers for any claims made against them while acting in their capacity as such, which may adversely affect our finances.

OPERATIONAL RISKS

Dependence Upon a Few Customers and Products>  During the year ended December 31, 2009, we had phytosterol revenues of $4,626,000, most of which was revenue from sales with a small portion ($2,000) attributable to licensing revenues.  Most of our revenue was earned from sales of phytosterols to four customers.  We anticipate that we will be dependent on these customers for most of our revenues for the fiscal year ending December 31, 2010.  Any material change in the relationship with such customers or in the demand for our phytosterol products will have a material effect on our business and results of operations. Our contract for the sale of Reducol™ to Pharmavite, one of our primary customers, will end in June, 2010, and is subject to automatic one-year renewals unless either party provides 90 days’ prior written notice of its intention not to renew.  While we have not received any non-renewal notice to date, there can be no assurance that this contract will be renewed.  Failure to renew or otherwise extend this contract will have a material adverse effect on our product sales and revenue, and on the sustainability of our operations and ability to continue.  In addition, our product line is currently limited to Reducol™ and other phytosterol products as cholesterol-lowering ingredients or products.    Any decreases in consumer demand in Europe or lack of increase in consumer demand, particularly in the U.S., for phytosterol-containing consumer products, whether due to general economic market conditions, a change in public perception about nutraceuticals in general or phytosterol-containing products in particular, or other factors, would also have a material adverse on our product sales and revenue, and on the sustainability of our operations and ability to continue.
 
 
 


In the functional foods market, our products compete with the products of, among others, Johnson & Johnson, Unilever, Cargill Incorporated, Archer Daniels Midland Company, Cognis and Raisio Staest Oy. These companies are more established, benefit from greater name recognition and have greater resources than we do.  In addition, many of our competitors have greater experience in undertaking research and preclinical studies and human clinical studies on, obtaining regulatory approvals for, and manufacturing, distributing and marketing, new nutraceutical products. In addition, there are several other companies and products with which we may compete from time to time, and which may have better and larger resources than we do.  Accordingly, our competitors may succeed in commercializing and marketing products more rapidly or effectively, which could have a material adverse effect on our business, financial condition or results of operations.
We anticipate that we will face increased competition in the future as new products enter the market. There can be no assurance that existing products or new products developed by our competitors will not be more effective, or more effectively marketed and sold, than any that may be developed or sold by us. Competitive products may render our products obsolete and uncompetitive prior to recovering research, development or commercialization expenses incurred with respect to any such products.
The dietary supplement market is very competitive as well as highly fragmented due to the diverse nature of the supplements available. According to the Nutrition Business Journal, dietary supplement manufacturers include companies such as Royal Numico, Pfizer (formerly Wyeth), Bayer and Bristol Myers Squibb/Mead Johnson.

Risks Related to Strategic Relationships  >We are dependent upon strategic relationships, and in particular, on our main processor of ReducolTM to manufacture product for supply to our customers.    The breakdown of our relationships with our strategic partners may have a negative effect on our future revenues and business, and such negative effect could be material.   However, in the case of our ReducolTM , processor, we believe that in the event that they were unable to provide us with required supplies, we have the technology and resources to engage another potential supplier in a timely manner and to use then existing inventories to support our product sales.
Manufacturing Risks  >   We have relied and will continue to rely heavily on contract manufacturers for the production of product required for our clinical studies, product formulation work, up-scaling experiments, and commercial production.  We may not be able to obtain contract manufacturers to produce a sufficient quantity or quality of our products to conduct our clinical studies, product formulation work, up-scaling experiments and commercial production.

Even if we are successful in securing manufacture of sufficient products for our clinical studies, product formulation work, up-scaling experiments and commercial production, we expect to rely on the efforts of contract manufacturers and third-party manufacturers to produce our products.  Contract manufacturers may not be available or, if obtained, may not be reliable in meeting our requirements for cost, quality, quantity or schedule, or the requirements of any regulatory agencies.  Any such failure would adversely affect our business.

Factors beyond our control could cause interruption in operations at the ReducolTM manufacturing facilities, or at other contract manufacturing facilities, which could adversely affect our ability to supply our customers and in turn could adversely affect our reputation in the marketplace and our business.  These facilities could suffer an interruption caused by damage from a variety of sources, many of which are not within our control or that of our contract manufacturers, including, fire, flood and other natural disasters, power loss and telecommunication failure, software and hardware errors, failures or crashes and similar disruptions.  These facilities could also suffer interruption, suspension of operations or closure due to global economic conditions, including the tightening of the credit markets, reduced business or loss of business from other customers, or failure to obtain required quantities of raw materials and other supplies from suppliers also suffering due to the economic crisis.  Any significant interruptions in operations could interrupt our ability to supply our customers, which in turn could subject us to lawsuits, damage our reputation in the marketplace and have a material adverse impact on our business and our ability to continue current operations.
 
 
 


Risks Associated with Our Patents  >Our success will depend, in part, on our ability to obtain, enforce and maintain patent protection for our technology and our products, in Canada, the United States and other countries. We cannot be assured that patents will issue from any pending applications or that claims now or in the future, if any, allowed under issued patents will be sufficiently broad to protect our technology and patented products.  In addition, no assurance can be given that any patents issued to or licensed by us will not be challenged, invalidated, infringed or circumvented, or that the rights granted thereunder will provide continuing competitive advantages to us.  To date, there have been challenges to some of our European patents. (See Item 8 - Financial Information - A. Consolidated Statements and Other Financial Information - Legal Matters.)  The patent positions of companies such as ours are generally uncertain and involve complex legal and factual questions. In addition, it is not known whether any of our research endeavors will result in the issuance of patents in Canada, the United States, or elsewhere, or if any patents already issued will provide significant proprietary protection or will be circumvented or invalidated. Moreover, we cannot be certain that we or any licensor was the first to create inventions claimed by pending patent applications or that we were the first to file patent applications for such inventions. Loss of patent protection could lead to generic competition for our products, and others in the future, which would materially and adversely affect the financial prospects for these products and us.
 
There is no assurance that our patents will be held valid or enforceable by a court or that a competitor’s technology or product would be found to infringe such patents. Accordingly, we may not be able to obtain and enforce effective patents to protect our proprietary rights from use by competitors, and the patents of other parties could require us to stop using or pay to use certain intellectual property, and as such, our competitive position and profitability could suffer as a result.
 
Risks Associated with Our Intellectual Property Rights  >Our success is dependent not only on our ability to protect our intellectual property rights, but also upon the protection of rights of third parties from which we have licensed intellectual property rights.  We hold, directly or indirectly, rights to various patents and trade marks and rights to various pending patent and trade mark applications in Canada, the United States, and other jurisdictions.  In addition, we rely upon certain other technologies, ideas, know-how, secrets or other information, which we may not be able to protect.  Notwithstanding precautions we may take to protect our rights, third parties may copy or obtain and use our proprietary and licensed technologies, ideas, know-how, secrets and other proprietary information without authorization or independently develop technologies similar or superior to our proprietary and licensed technologies.  We enter into confidentiality and restriction on use agreements with our employees, strategic partners and others; however, these agreements may not provide meaningful protection of our proprietary and licensed technologies or other intellectual property in the event of unauthorized use or disclosure.  Policing unauthorized use of such technologies and intellectual property is extremely difficult, and the cost of enforcing our rights through litigation may be prohibitive.  Further, the laws of jurisdictions other than Canada and the United States may not provide meaningful protection of our and such third parties’ intellectual property rights.
 
Risks Associated with Claims of Infringement of Proprietary Rights of Others  >The nutraceutical industry increasingly relies on intellectual property rights for the manufacture, use and sale of new products that may be the subject of conflicting proprietary rights.  As a result, there is a substantial risk that we, or our licensors, may become subject to litigation alleging that our or such licensors’ products and technologies infringe on the proprietary rights of third parties.  Whether or not our or such licensors’ products or technologies infringe on the proprietary rights of third parties, we or such licensors could incur significant expenses in defending allegations of infringement of proprietary rights. Further, we or such licensors may be required to modify our or their products or obtain licenses for intellectual property rights as a result of any alleged proprietary infringement.  We or such licensors may not be able to modify ours or their products or obtain licenses on commercially reasonable terms, in a timely manner, or at all, any of which could adversely affect our business.  There can be no assurance that third-party claims will not in the future adversely affect our business, financial condition, and results of operations.
 
 
 


Risk of Market Acceptance  >There can be no assurance that any of our products in development or products recently launched will achieve or sustain market acceptance.  Further, there can be no assurance that products launched by third parties containing ReducolTM or any of our other phytosterol products will achieve sustained market acceptance.
The degree of market acceptance for our products, and those of our customers, will depend upon a number of factors, including competitive pricing, the extent to which the products fulfill customers’ expectations and demands, the receipt of regulatory approvals, the establishment and demonstration of the clinical efficacy and safety of the products, the establishment and demonstration of the potential advantages over competing products and the acceptance of the listing of the product and appropriate distribution with large retailers. There can be no assurance that consumers, distributors, retailers or suppliers in general will accept and utilize any existing or new products that may be developed by us.
 
Development of Additional Nutraceutical Products  >To achieve sustained, profitable operations, we must successfully develop, obtain regulatory approvals for, and profitably manufacture and market nutraceutical products in addition to Reducol™ and our other phytosterol products. There can be no assurance that we will successfully develop other products.  The development and commercialization of new products is subject to a number of significant risks and uncertainties, particularly in the emerging nutraceutical industry which is highly speculative in nature.  Potential products that appear to be promising in various stages of development, may not reach the market, or if reached (such as Reducol™), may not achieve profitable sales levels, for a number of reasons such as:
 

 
·
the discovery of unexpected toxicities or lack of sufficient efficacy of products which make them unattractive or unsuitable for human use;
 
·
preliminary results may not be substantiated in later clinical studies or other further testing;
 
·
manufacturing costs or other factors, such as the need for new manufacturing processes, may make manufacturing of products impractical, non-competitive or delayed;
 
·
proprietary rights of third parties or competing products or technologies may preclude commercialization;
 
·
inability to receive necessary regulatory approvals from local and international government and regulators to manufacture, label, advertise, make claims and sell our products;
 
·
unacceptability of the products in the market place;
 
·
inability to protect our intellectual property rights necessary for the research and development, manufacture and sale of our products or  commercialization obstacles imposed by patents held by third parties;
 
·
the termination, expiry or inability to use proprietary processes, products or information owned by third parties needed for the manufacture and sale of products developed or acquired by us;
 
·
the risk of obsolescence of our technology;
 
·
insufficient availability of raw materials and the inability to obtain raw materials on acceptable terms; and
 
·
other factors that may become apparent during the course of research, up-scaling or manufacturing which may result in the discontinuation of research and other critical projects.

Products that we may develop will never have been manufactured on a commercial scale, and there can be no assurance that such products can be manufactured at a cost or in a quantity to render such products commercially viable. Production of our products may require the development of new manufacturing technologies and expertise. The impact on our business in the event that new manufacturing technologies and expertise are required to be developed is uncertain. There can be no assurance that we will successfully meet any of these technological challenges, or others that may arise in the course of development.
 
Risks Related to Clinical Claims and Studies  >
 
Clinical claims regarding the efficacy of our products can be advantageous to distinguish finished nutraceutical products from their conventional counterparts.  Clinical studies of Reducol™ conducted by or for us in the US, Europe and Canada have demonstrated a significant LDL cholesterol lowering effect, between 10 to 15%, using various food matrices such as vegetable spreads and oils, yogurts, chocolate, and milk drinks.  These studies have been conducted under
 
 
 

10 
 
particular test conditions and parameters and there can be no assurance that results achieved in studies conducted by or for us will be achieved in other studies with different conditions and/or parameters.  Clinical studies proving the efficacy of our phytosterols in a wide variety of foods, beverages and dietary supplements have not yet been completed, and there can be no assurance that sufficient efficacy will be demonstrated in any particular product, if required to support commercialization of that product.  In addition, further studies may be required by regulatory authorities in certain countries prior to permitting phytosterol products to be sold in those countries, or in order to support health claims made by us or our customers.  There can be no assurance that future clinical studies as required by regulatory authorities will result in required regulatory approvals.  Failure to obtain such approval may have an adverse effect on our business, and such effect could be material.
 
Risk of Technical Obsolescence  >The nutraceutical industry is characterized by rapidly changing markets, technology, emerging industry standards and frequent introduction of new products.  The introduction of new products embodying new technologies, including new manufacturing processes, and the emergence of new industry standards may render our products obsolete, less competitive or less marketable.  The process of developing our products is extremely complex and requires significant continuing development efforts and third party commitments.  Our failure to develop new technologies and products and the obsolescence of existing technologies could adversely affect our business.
 
Because the nutraceutical industry is characterized by rapid technology change and obsolescence, we may be unable to anticipate changes in our current and potential customer requirements that could make our existing technology obsolete. Our success will depend, in part, on our ability to continue to enhance our existing products and services, develop new technology that addresses the increasing sophistication and varied needs of our current and future customers, license leading technologies and respond to technological advances and emerging industry standards and practices on a timely and cost-effective basis. The development of our proprietary technology and investing in certain niche markets entails significant technical and business risks. We may not be successful in using our new technologies or exploiting our niche markets effectively or adapting our businesses to evolving customer or medical requirements or preferences or emerging industry standards.
 
Government Regulation Generally  >Some products manufactured by us will have to comply with the FDA’s current Good Manufacturing Practices (“cGMP”) and other FDA and local government guidelines and regulations, including other international regulatory requirements and guidelines.  Additionally, certain of our customers may require the manufacturing facilities contracted by us to adhere to additional manufacturing standards, even if not required by the FDA. Compliance with cGMP regulations requires manufacturers to expend time, money and effort in production, and to maintain precise records and quality control to ensure that the product meets applicable specifications and other requirements. The FDA and other regulatory bodies periodically inspect drug-manufacturing facilities to ensure compliance with applicable cGMP requirements. If the manufacturing facilities contracted by us fail to comply with the cGMP requirements, the facilities may become subject to possible FDA or other regulatory action and manufacturing at the facility could consequently be suspended.  We may not be able to contract suitable alternative or back-up manufacturing facilities on terms acceptable to us or at all.
 
The FDA or other regulatory agencies may also require the submission of any lot of a particular product for inspection. If the lot product fails to meet the FDA requirements, then the FDA could take any of the following actions: (i) restrict the release of the product; (ii) suspend manufacturing of the specific lot of the product; (iii) order a recall of the lot of the product; or (iv) order a seizure of the lot of the product.
 
We are subject to regulation by governments in many jurisdictions and, if we do not comply with food, manufacturing and environmental regulations, among others, our existing and future operations may be curtailed, and we could be subject to liability.
 
In addition to the regulatory approval process, we may be subject to regulations under local, provincial, state, federal and foreign law, including requirements regarding occupational health safety, laboratory practices, environmental protection and hazardous substance control, and may be subject to other present and future local, provincial, state, federal and foreign regulations, including possible future regulations of the food ingredient, dietary supplement and pharmaceutical industries.
 
 
 

11 
 
We cannot predict the time required for regulatory approval, or the extent of clinical testing and documentation that may be required by regulatory authorities.  We may not be able to obtain the approval of regulatory authorities in any country to market our products or make appropriate label claims, or if obtained, that the approval will be given in a timely manner or that such approval will not later be revoked.  Any delays in obtaining, or failure to obtain regulatory approvals in the United States, Europe, or other countries would significantly delay or prevent the development of our markets and products and would therefore adversely and severely affect our business.
 
Government Regulation of Functional Foods  >The regulatory process for the approval of functional foods in a number of countries is currently in a state of uncertainty, which may negatively impact the marketing of our phytosterol products.  For example, prior to June, 2001, Australia had no regulations governing functional foods.  However, in June of 2001, the Australia New Zealand Food Authority (ANZFA) regulations governing novel foods, including foods containing plant sterols, came into force with the result that previously unregulated novel foods, including products enriched with Reducol™, were voluntarily withdrawn from the market pending regulatory approval.

In 2004, regulations for Natural Health Products (NHP) were passed in Canada. This regulatory route allows the marketing of phytosterols in standard dosage forms such as tablets, capsules, and syrups. Therapeutic and health claims for phytosterols in Natural Health Products are permitted under these regulations. Separate applications have been made to NHP to sell Reducol™ in tablets, soft gelatin capsules and in soft gelatin capsules with Reducol™/Omega-3-fatty acids.  The Natural Health Products Directorate currently has a very large backlog of applications.  The time required for approval is expected to be lengthy.

In the United States, our phytosterols are currently permitted to be included in food or as dietary supplements and the FDA has issued a letter to us allowing us to use a heart-health claim for our phytosterols.  There can be no assurance that the current regulations will not be modified or that such modifications will not have an adverse effect on our ability to continue to distribute or advertise such products in the United States with the heart-health claim for our phytosterols.

In the EU, we have received approval to market Reducol™ in a variety of approved food groups (See Item 4 – Information on the Company – B. Business Overview – Our Nutraceuticals - Reducol™ and Functional Foods).  There can be no assurance that such approval will not be modified in a manner adverse to our business, or will not be revoked in its entirety.

Restrictions on Product Labeling and Advertising  >The FDA, which regulates product labeling, has issued a letter allowing us to use a heart-health claim for our phytosterol products.  There can be no assurance that the FDA will not revoke the permission granted to us to make the claim.  Regulatory agencies in Europe and other countries may regulate claims made regarding functional foods and their efficacy. Similarly, the United States Federal Trade Commission and its counterparts in other countries may place restrictions on our ability to make claims regarding the efficacy of our products in advertising. Restrictions on product claims may impede our efforts to gain general market acceptance for our products at a premium price, which would adversely affect our business. Currently, the pricing of functional foods generally exceeds the pricing of similar conventional foods, and clinical claims are necessary to maintain the competitive position of functional foods.

Product Liability, Negative Publicity and Insurance  >The sale of our phytosterol products, or the use of our nutraceutical products in clinical studies, may expose us to liability claims which could adversely affect us.  Such claims might be made directly by consumers, healthcare providers or by manufacturers or distributors of finished goods incorporating our products, or by others selling or consuming such products.  Our insurance may not cover any potential claim or if coverage is available, may not provide sufficient coverage to protect us against loss.  We may not be able to maintain or obtain commercially reasonable product liability insurance for future products, and any claims under any insurance policies may adversely affect our ability to maintain existing policies or to obtain new insurance on existing or future products. Further, even if sufficient insurance coverage is available to cover any potential claim, publicity associated with any such claim could adversely affect public opinion regarding the safety or efficacy of our products. As a result, any product liability claim or recall could seriously adversely affect our business.
 
 
 

12 

Risks Relating to Supply and Sale of Raw Materials  >We rely on the availability of raw materials, such as phytosterols, at commercially reasonable prices for the production and development of our sterol-based products and technology.  We may not be able to obtain adequate supplies of raw materials in a timely fashion or at acceptable quality, quantity, timing or prices to satisfy our complete long-term requirements.  Our inability to obtain raw materials at acceptable qualities, quantities, timing or prices would adversely affect our business.

No Assurance Regarding Licensing of Proprietary Technology Owned by Others  >The manufacture and sale of any products we have developed may involve the use of proprietary processes, products or information, which are owned by third parties. Although we have obtained licenses or rights with regard to the use of certain of such processes, products and information as best we can, there is no assurance that such licenses or rights will not be terminated or expire during critical periods, that we will be able to obtain licenses or other rights which may be important to us, or, if obtained, that such licenses will be obtained on favorable terms. Some of these licenses provide for limited periods of exclusivity that may be extended only with the consent of the licensor. There is no assurance that extensions will be granted on any or all such licenses. This same restriction may be contained in licenses obtained in the future.
To maintain these agreements in good standing, we must abide by the terms of such agreements, and the loss of any of such agreements due to default could have a materially adverse impact on our operations.  There are no assurances that we will be able to renew or renegotiate the licensing agreements on acceptable terms if and when the agreements terminate.
Risk of Side Effects  >There is a risk that an individual could experience side effects, yet to be determined, through consumption of foods and dietary supplements containing Reducol™ or our other phytosterol products.  We could face future liability for unknown side effects and any such liability could exceed our resources.

Political and Economic Risks  >We rely in part on third parties located in the United States and other foreign countries for the development and manufacture of our products.  The current political and economic climate in these countries may be considered less predictable than in Canada.  Changes in government, economic and political policies may adversely affect our business and operating results.  Inflation or other changes in economic conditions that affect demand for nutraceutical products could adversely affect our revenue. Uncertainty about current global economic conditions poses a risk as consumers and our customers may postpone spending in response to a number of factors such as tighter credit markets, negative financial news, declines in investment values or income, negative changes in employment compensation, or suspension or loss of employment or anticipation thereof, and other economic factors affecting consumer spending.  These and other economic factors could have a material adverse effect on demand for our products and on our financial condition and operating results.

Environmental Risks  >Research, development and commercial processes involve use of materials which may result in by-products that may be hazardous.  The Company, our strategic partners, distributors, manufacturers, sales agents and others involved in handling materials are subject to laws and regulations governing the use, manufacture, storage, handling and disposal of such materials and certain waste products. There is a risk of accidental contamination or injury from these materials which cannot be eliminated. We could be liable for any resulting damages and any such liability could exceed our resources. We may also be required to obtain permits to transport and dispose of hazardous waste under applicable environmental laws. We may not be able to obtain such permits, which would adversely affect our ability to efficiently manufacture or transport our products. We, our strategic partners, distributors, sales agents, manufacturers and others involved in handling materials may be required to incur significant costs to comply with environmental laws and regulations in the future or to remediate environmental violations.  We may be adversely affected by current or future environmental laws or regulations.  Any failure by us to comply with the present or future environmental laws in Canada and the United States, or elsewhere, could result in any of the following: (i) cessation of portions or all of our operations; (ii) imposition of fines; (iii) restrictions on our ability to carry on or expand operations; (iv) significant
 
 
 

13 
 
 
expenditures by us in order to comply with environmental laws and regulations; or (v) liabilities in excess of our resources. Any of these sanctions could have a material adverse effect on our business.  In addition, there is no assurance that we will be able to dispose of our waste products in a cost effective or timely manner, or at all.
Foreign Currency and Exchange  >Our functional currency is the Canadian dollar.  We operate and intend to continue operating in several foreign markets.  As such, cash flows from such foreign operations will be subject to fluctuations in the foreign exchange rate of the applicable currency.

Risks Related to Material Contractual Obligations>  We have obligations under a number of contracts, and failure to meet our obligations under any of our material contracts may have a material adverse effect on our operations and financial condition.  In particular, but without limitation, failure to meet our obligations under the Pharmavite License & Supply Agreement and the Forbes-Fayrefield Joint Venture Agreement may adversely affect our assets and business. (See Item 10 - Additional Information – C. Material Contracts).  Alternatively, failure on the part of the other party to each material contract to meet their respective obligations may also adversely affect our operations and finances.  There exists the possibility that any or all of our material contracts may be renegotiated, amended, terminated, or not renewed, and there is no guarantee that such action will be favourable to us.

Risks Related to Legal Proceedings  >Any costs associated with legal proceedings, including, but not limited to, attorney fees, filing fees, and damages, may adversely affect our assets and business, whether the outcome of the proceedings is favourable to us or not.  (See Item 8 – Financial Information – A. Legal Matters).

Adherence to Time Frames>  We set goals and make public statements regarding our expected timing of meeting our objectives, such as the identification of lead compounds. The actual timing of these forward looking events can vary dramatically due to a number of factors, including other risk factors identified herein.  There can be no assurance that our objectives will be met within the time lines we expect or at all.


We are a life sciences company focused on evidence-based nutritional solutions. We provide value-added products and cholesterol-lowering ingredients for use in functional foods and dietary supplements, or nutraceuticals. We successfully developed and commercialized our Reducol™ plant sterol blend, which has undergone clinical studies in various food matrices and has been shown to lower "LDL" cholesterol levels safely and naturally. Building upon established partnerships with leading retailers and manufacturers across the globe, we help our customers to develop private label and branded products.

A.           History and Development of the Company

Forbes Medi-Tech Inc.

The Company (sometimes referred to in this Annual Report as “New Forbes”) was incorporated on January 10, 2008 pursuant to the British Columbia Business Corporations Act as 0813361 B.C. Ltd.  On February 27, 2008, the Company changed its name to Forbes Medi-Tech Inc.

The predecessor company to New Forbes, Old Forbes was incorporated pursuant to the provisions of the Company Act (British Columbia) on September 17, 1985 as Amber Resources Ltd.  In 1992, Old Forbes changed its focus from mining exploration to pharmaceutical research and development and, accordingly, changed its name to “Forbes Medi-Tech Inc.” on July 8, 1992.  Old Forbes was continued under the federal laws of Canada pursuant to the Canada Business Corporation Act on April 11, 2001 and its previous Memorandum and Articles were replaced by Articles of Continuance and By-Laws. As a result of a Plan of Arrangement (as described following), on February 27, 2008, Old Forbes changed its name from “Forbes Medi-Tech Inc.” to “Forbes Medi-Tech Operations Inc.” As required by the Plan of Reorganization (see Other Important Events – Plan of Reorganization below) on May 12, 2008, Old Forbes changed its name from “Forbes Medi-Tech Operations Inc.” to “3887685 Canada Inc.” and subsequently, on February 9, 2009 Old Forbes changed its name from “3887685 Canada Inc.” to “Deans Knight Income Corporation”.
 
 
 

14 

On February 14, 2008 at a Special General Meeting of Old Forbes securityholders, being the shareholders, optionholders and warrantholders of Old Forbes, three resolutions were approved in respect of a corporate reorganization. The resolutions passed at the Special General Meeting included a 'Reduction in Stated Capital', a 'Name Change' and the 'Plan of Arrangement' (the "Arrangement"). The Arrangement was subsequently approved by the Supreme Court of British Columbia on February 15, 2008.  The Arrangement was designed to allow us to accommodate and capitalize on certain financing opportunities that may arise in the future, such as the proposed Non-Dilutive Financing (see Other Important Events – Plan of Reorganization below), and to achieve NASDAQ’s Minimum Bid Price Requirement (see Other Important Events – NASDAQ below).

On February 27, 2008, the closing of the Arrangement, the shareholders of Old Forbes exchanged eight of their existing common shares for one common share of New Forbes; holders of options and warrants of Old Forbes became entitled to receive, on exercise of the options or warrants, one common share of New Forbes for each eight common shares of Old Forbes. The exercise price for each common share of New Forbes became eight times the exercise price for one existing common share of New Forbes.   As a result of the exchange of shares referred to above, Old Forbes became a wholly owned subsidiary of New Forbes; shareholders, optionholders and warrantholders became shareholders, optionholders and warrantholders of New Forbes; Old Forbes changed its name from "Forbes Medi-Tech Inc." to "Forbes Medi-Tech Operations Inc." and New Forbes changed its name from "0813361 B.C. Ltd." to "Forbes Medi-Tech Inc.". The shares of New Forbes began to trade on the TSX and NASDAQ in substitution for the shares of Old Forbes on Monday, March 3, 2008.

The Arrangement affected all shareholders, optionholders and warrantholders uniformly and did not affect any securityholders' existing percentage ownership interests or proportionate voting power in the Company or the existing percentage of the number of common shares of New Forbes that could be acquired upon the exercise of an option or a warrant. After giving effect to the Arrangement, there were approximately 4,801,512 issued and outstanding common shares of New Forbes, warrants to purchase 259,083 common shares of New Forbes at a price of US $16.48 per share and options to purchase a total of 363,296 common shares of New Forbes at prices between $4.24 and $8.00 per share.

Unless otherwise specified, all common share amounts referred to in this Annual Report are on a Post-Arrangement basis.

Our Notice of Articles currently authorizes us to issue an unlimited number of common shares without par value and an unlimited number of preferred shares without par value.

Our head office, as well as our registered and records office, is Suite 200, 750 West Pender Street, Vancouver, B.C., V6C 2T8.  The telephone number of the registered office is (604) 689 – 5899.

Our principal acquisitions and dispositions, and principal capital expenditures from continuing operations, since the beginning of our last three financial years to date, and certain important events in our development since January 1, 2009, were as follows:

Acquisitions since January 1, 2007

Not Applicable.

Dispositions since January 1, 2007

Historically, we have been involved in pharmaceutical research and development. On May 15, 2008, we announced a plan to focus exclusively on our revenue-generating nutraceutical business, to cease all in-house drug development activities and to reduce our total workforce in effect prior to the restructuring by approximately one-third, affecting employees in the U.S. and Canada. We retained core team members and are continuing to target key merger and/or acquisition opportunities in order to build a strong nutraceutical business base.
 
 
 

15 

In August of 2008, we sold our former pharmaceutical business unit and assets based in San Diego, California to Transition Therapeutics Inc. (“Transition”).  Terms of the sale included an upfront payment of US$1,000,000 (Cdn$1,054,400) in cash paid at closing to us along with potential future payments of up to US$6,000,000, in cash or shares of Transition, based upon Transition reaching certain developmental and regulatory milestones as outlined in the sale agreement.

We originally acquired these pharmaceutical assets in October 2006 as part of our acquisition of TheraPei Pharmaceuticals, Inc. (“TheraPei”). In October 2006, we acquired 100% of TheraPei, and subsequently changed the name of TheraPei to Forbes Medi-Tech (Research) Inc. (“Forbes Research”). TheraPei was a privately held company formed with technology ‘spun-out’ of Sequenom, Inc. and is focused on developing novel pharmaceuticals directed at the underlying causes of type II diabetes and related metabolic diseases.

Pursuant to the Assignment Agreement dated August 15, 2008 (the “Assignment Agreement”) between Forbes Research and Transition, Forbes Research assigned certain pharmaceutical intellectual property to Transition in consideration of the following:

 
a)
US$910,000 (Cdn$959,500) on the closing of the transaction.

 
b)
Contingent consideration totaling US$1,000,000 upon the dosing of the first patient in the first FDA Phase II clinical trial, for any compound disclosed in an assigned patent or derived from or included in assigned intellectual property.

 
c)
Contingent consideration totaling US$1,000,000 upon the filing and acceptance of the first NDA filed with the FDA for any compound disclosed in an assigned patent or derived from or included in assigned intellectual property.

Each contingent consideration payment in (b) and (c) above will only be payable once in respect of each of the three compound classes described in the Assignment Agreement and hence contingent consideration shall never exceed US$6,000,000 in the aggregate.  Such contingent consideration may be in the form of cash or shares of Transition (or a combination thereof) at the sole discretion of Transition.

Pursuant to an Asset Purchase Agreement dated August 15, 2008 between Forbes Research and Transition Therapeutics (USA) Inc. (“Transition USA”), Forbes Research sold its tangible pharmaceutical assets to Transition USA for US$90,000 (Cdn$94,900).

Pursuant to a Payment, Amendment and Release Agreement dated August 15, 2008 among the Company, Forbes Research and the former TheraPei Stockholders, Forbes Research has agreed to pay to the former TheraPei Stockholders 20% of the amounts received by it pursuant to the Assignment Agreement in consideration for the assignment thereunder.

Accordingly, we made payments to the former TheraPei Stockholders of US$182,000 (Cdn$192,000) which was comprised of 168,322 Forbes’ common shares valued at US$145,600 (Cdn$154,500) and cash of US$36,400 (Cdn$38,600).

All amounts payable to the former TheraPei Stockholders are to be paid as to 20% in cash and as to 80% in common shares of the Company, subject to the Company’s right to elect to pay cash in lieu of shares in certain circumstances.  In consideration of the agreement to make these payments, the former TheraPei Stockholders have released the Company and Forbes Research from all obligations under the Development Agreement, have terminated the Development Agreement, and have released and discharged the Company and Forbes Research from any obligation to make future milestone payments, licensing revenue and/or royalties pursuant to a prior merger agreement.
 
 
 

16 

Deans Knight Income Corporation
In February 2009, we announced that 3887685 Canada Inc., whose name was changed to “Deans Knight Income Corporation” (“Deans Knight”) on February 6, 2009, had filed a prospectus in connection with a public offering (the “Offering”).  On March 18, 2009, the Offering was completed with Deans Knight issuing 10,036,890 Voting Common Shares at a price of $10 per share for gross proceeds of $100,368,900.  As a requirement of the closing of the Offering, the holder of the Convertible Debenture issued by Old Forbes, exercised the conversion feature of the Convertible Debenture.
 
On March 18, 2009, as a result of the completion of the Offering and the conversion of the Convertible Debenture, our ownership in Deans Knight was diluted from 100% to approximately 1%. This loss of control resulted in a dilution gain of approximately $4,148,000.  Our remaining interest in Deans Knight was valued at approximately $789,000 which we disposed of in April 2009, to the original Investor, for proceeds of $789,000.

Other Principal Capital Expenditures Since January 1, 2007

For the years ended December 31, 2009, 2008, and 2007, we acquired capital assets, for continuing operations, in the amounts of $nil, $10,000, and $99,000,  respectively, primarily for office equipment and furniture and leasehold improvements.

Other Important Events Since January 1, 2009

Reducol™
We have contracted with Pharmavite, LLC for the sale of Reducol™ since 2002.  Pharmavite incorporates Reducol™ into one of its leading dietary supplements, Nature Made’s® Cholest-Off™.  In March, 2003, we announced that we had extended our supply and licensing contract with Pharmavite for up to three years, and on June 11, 2009 we announced that we had again extended our supply and licensing contract with Pharmavite until mid 2010.  Under the terms of the agreement, the contract is subject to automatic one-year renewals unless either party provides 90 days’ prior written notice of its intention not to renew.  While we have not received notice of non-renewal to date, there can be no assurance that the contract will be further renewed or otherwise extended.

In October 2009, we announced that the European Union had approved a health claim for plant sterols in free or esterified form.

In December 2009, we announced the launch of Del Monte Heart Smart Pineapple Juice containing Reducol™ in the Philippines.

NASDAQ
On January 22, 2008 we received a NASDAQ Staff Determination, (the “Staff Determination”) indicating that we failed to comply with the U.S. $1.00 Minimum Bid Price Requirement for continued listing set forth in Marketplace Rule 4310(c)(4), and that our securities were, therefore, subject to delisting from The NASDAQ Capital Market. Following a hearing before a NASDAQ Listing Qualifications Panel to review the Staff Determination and a subsequent extension request, we were afforded until June 30, 2008 to regain compliance with NASDAQ’s Minimum Bid Price Requirement. We regained compliance on June 17, 2008.

On September 19, 2008, we announced that we had received a NASDAQ Staff Deficiency Letter dated September 19, 2008 indicating that the bid price for our common stock has closed below the minimum of U.S. $1.00 per share for the previous 30 consecutive trading days, as required by Marketplace Rule 4320(e)(2)(E)(ii). NASDAQ provided us with 180 calendar days, or until March 18, 2009, to regain compliance with this rule.
 
 
 

17 

In October 2008, we announced that we had received a letter from The NASDAQ Stock Market stating that with an effective date of October 16, 2008, NASDAQ had decided to temporarily suspend enforcement of the minimum bid price and minimum market value of publicly held shares rules, given the extraordinary market conditions. In January 2009, we announced that NASDAQ had extended its suspension of the bid price and market value of publicly held shares requirements. Additional extensions were announced by NASDAQ on March 23, 2009 and July 13, 2009. As a result of these extensions, our compliance deadline was extended to January 4, 2010.

On April 14, 2009 we received a NASDAQ Staff Deficiency Letter indicating that we did not meet the minimum requirements regarding stockholders’ equity for continued listing on the NASDAQ Capital Market as required by Listing Rule 5550(b)(1). We submitted a letter demonstrating our plan to meet compliance with the requirements and after reporting stockholders’ equity as of March 31, 2009 of $5,290,947, or approximately US $4,200,000, NASDAQ issued us a NASDAQ Staff Letter dated May 15, 2009 confirming that we once again met the minimum requirements regarding stockholders’ equity (US$2,500,000) for continued listing on the NASDAQ Capital Market.

In January 2010, we received a Nasdaq Staff Deficiency Letter indicating that we did not meet the NASDAQ initial listing standard set forth in Listing Rule 5505 and unless we requested an appeal of the Staff’s determination, our common shares would be suspended at the opening of business on January 15, 2010, and a Form 25-NSE would be filed with the Securities and Exchange Commission which would remove our common shares from listing and registration on The NASDAQ Stock Market. On January 14, 2010 we announced that we had provided the NASDAQ with a notice of appeal of the NASDAQ Staff Deficiency determination to a Hearings Panel (“Panel”). On February 16, 2010 we received notice that the Panel had reviewed our appeal and had determined to delist our common shares from The NASDAQ Stock Market, effective with the open of business on February 18, 2010.

We were advised by Pink OTC Markets Inc, which operates an electronic quotation service for securities traded over-the-counter, commonly known as the Pink Sheets, that our common shares were immediately eligible for quotation effective with the open of business on February 18, 2010.  Our common shares continue to trade on the Pink Sheet under the symbol FMTI.

TSX
On January 14, 2009, we announced that we had received notice from the Toronto Stock Exchange ("TSX"), indicating that the TSX was reviewing the eligibility of our common shares for continued listing on the TSX. The delisting review announced by the TSX related to our market capitalization, which had fallen below the designated TSX threshold. Pursuant to the TSX's Remedial Review Process, we were given 210 days -- until August 12, 2009 -- to regain compliance with the TSX continued listing requirements.

On August 12, 2009, we announced that we had received notice from the TSX that our common shares would be delisted at the close of market on September 11, 2009. The delisting decision announced by the TSX related to the Company’s market capitalization, which remained below the TSX designated minimum, $3,000,000 market capitalization threshold for continued listing. On September 11, 2009, as we had not regained compliance with the TSX listing requirements, we were delisted from the TSX.

B.           Business Overview

We are a life sciences company focused on evidence-based nutritional solutions. We provide value-added products and cholesterol-lowering ingredients for use in functional foods and dietary supplements, or nutraceuticals. We successfully developed and commercialized Reducol™, a proprietary plant sterol and stanol blend, which has undergone clinical studies in various food matrices and has been shown to lower "LDL" cholesterol (LDL-C) levels safely and naturally. Building upon established partnerships with leading retailers and manufacturers across the globe, we help our customers to develop private label and branded products.
 
 
 

18 

Background on Cardiovascular Disease

Cardiovascular Disease
The cardiovascular disease market continues to be one of the largest, with increasing prevalence in the developed and developing worlds.

A major symptom of cardiovascular disease is a build-up of atherosclerotic plaque in the arteries, which can lead to heart attack or stroke. Angioplasty and by-pass surgery are often used to treat severe cases. Sufferers of cardiovascular disease also manifest a higher incidence of diabetes, obesity, Alzheimer’s and a number of other debilitating illnesses.

Cardiovascular Disease and Cholesterol
It is well recognized that an elevated level of LDL-C is an independent risk factor for cardiovascular disease, and that the reduction of LDL-C can significantly reduce that risk.

About Cholesterol
Cholesterol is a substance found among the fats (often referred to as lipids) in the bloodstream and in the body’s cells. Lipids are an important part of a healthy body because they are a constituent of cell membranes and are used to form certain hormones. Cholesterol and other lipids cannot dissolve in the blood as they have to be transported to and from tissues by special carriers called lipoproteins. There are several types of lipoproteins, but the primary focus is on low-density lipoprotein (“LDL” or “bad”) cholesterol and high-density lipoprotein (“HDL” or “good”) cholesterol.

LDL is a major cholesterol carrier in the blood. When a person has a high amount of LDL cholesterol circulating in the blood, cholesterol can slowly build-up within the walls of the arteries that feed the heart and brain. Together with other substances, it can form an atherosclerotic plaque, a thick, hard deposit that is often referred to as hardening of the arteries. The formation of a clot in the region of this plaque can block the flow of blood to parts of the heart muscle and cause a heart attack. That is why LDL cholesterol is often called “bad” cholesterol.

HDL carries about one-fourth to one-third of blood cholesterol. Medical experts think HDL tends to carry cholesterol away from the arteries and back to the liver, where it is excreted from the body. Some experts believe HDL removes excess cholesterol from atherosclerotic plaques and thus slow their growth. HDL is known as “good” cholesterol because a high level of HDL protects against heart attack and stroke.

Our Nutraceuticals
An increasingly active population, the pursuit of healthier lifestyles and the desire to live longer has given rise to a category of products known as nutraceuticals. This category includes functional foods, which are conventional foods containing ingredients that provide additional health or nutritional benefits leading to possible risk reduction of contracting chronic diseases. A second niche within the nutraceuticals category is dietary supplements, healthful products derived from natural and synthetic food sources and delivered in a medicinal form.

Our lead product in the nutraceutical area is Reducol™, our branded, clinically proven food and dietary supplement ingredient that helps lower LDL, or “bad” cholesterol, safely and naturally. LDL-C is generally recognized as a significant risk factor for cardiovascular disease.

In Europe, Reducol™ can now be found in yogurt, yogurt drinks, and margarine. Worldwide, Reducol™ can also be found in such items as milk, yogurt drinks and dietary supplements.  To date, the majority of our revenue has derived from the sale of Reducol™ as an ingredient.  However, in June 2006 we established a joint venture, Forbes Fayrefield Ltd., with Fayrefield Foods Limited of Crewe, U.K. (“Fayrefield”), to support the growth and distribution of finished products containing Reducol™ directly to retail customers in Europe. We also sell sterol esters and other phytosterol products as phytosterol functional food ingredients.
 
 
 

19 

The estimated global market for functional foods has reached more than US$30 billion. The US market alone contributes US$15 billion annually to this, and the Nutrition Business Journal estimates it will grow to US$34 billion by 2010. The nutraceuticals category also includes dietary supplements, which are healthful products derived from natural and synthetic food sources and delivered in a medicinal form. Dietary supplements accounted for approximately 34% of the US$47.6 billion nutrition market, according to a Health Business Partners study that was published in 2000.

In 2005, the US functional food market represented US$26.5 billion and dietary supplements accounted for US$21.3 billion.  We believe that the growth in this industry is fuelled by factors such as: (i) increased awareness of the link between diet and health; (ii) aging populations in developed countries; (iii) governments seeking to reduce healthcare costs; (iv) food and beverage manufacturers seeking product differentiation; and (v) scientific studies linking ingredients to health benefits.

The current credit crisis and general global economic downturn appears to have had a negative effect on demand by consumers and others for functional foods, which would in turn have a negative effect on the markets for such products.  At this time we are unable to assess what impact, if any, the credit crisis and economic downturn may continue to have on our sales of Reducol™ and other phytosterol products.

Reducol™

Clinical studies have shown that, when added to certain foods, Reducol™ can reduce both total and LDL-C. In 1997, a clinical human study was conducted over a 30-day period with 32 male subjects with high cholesterol levels in which half received a placebo margarine and half received Reducol™-enhanced margarine in their diet.  The key finding was that the Reducol™ test group showed a 24.4% reduction in LDL-C compared to an 8.9% reduction for the control group. Both groups were on a standardized, prudent North American diet.  During this study, no clinically significant adverse events were observed and the level of HDL (good) cholesterol remained unchanged.

As a cholesterol-lowering agent, we believe that there are a number of positive aspects to Reducol™ such as:
 
• the ability to help reduce total cholesterol and LDL-C;
 
• a favorable safety profile;
 
• an absence of taste and odor;
 
• the ability to be incorporated into a wide variety of fatty, low-fat and no-fat foods and beverages;
 
• its origin from natural and non-genetically modified plant constituents; and
 
• the ability to be incorporated into certain foods without esterification.
 

We believe that cholesterol-lowering nutraceutical products are proving attractive, not only to those people with confirmed high cholesterol levels, but also to a large population of consumers concerned about their overall health regardless of their cholesterol levels, since these kinds of products may have value in the prevention and risk reduction of cardiovascular disease.

As an ingredient, Reducol™ does not change the sensory properties of foods, and can be formulated alone, or in combination with other active ingredients, for dietary supplements.

Reducol™ and Functional Foods

Our phytosterols can be incorporated into a wide variety of foods, including low-fat and no-fat foods.  We have developed technology for the use of our phytosterols in the following broad food categories: cereal bars, bread, fruit juices, cheese, yogurt, milk and other dairy products, cooking oils, salad dressings, fat spreads and confectionary items.
 
 
 

20 

We initially commenced supplying Reducol™ for use in functional foods in Europe following our November 2004 announcement that we had signed a sales and licensing agreement with Fayrefield of Crewe, U.K. to supply Reducol™ for use in milk-based drinks.  This announcement followed the approval, announced earlier that month, by the European Commission for the use of Reducol™ in milk-based beverages.  Fayrefield specializes in the production and marketing of dairy products and powders throughout Europe, the Middle East and North America.   In 2006, we entered into a joint venture with Fayrefield, to establish a new U.K. company, Forbes Fayrefield Ltd., for the purpose of expanding the distribution of finished products containing Reducol™ in Europe.

Subsequent to entering into our initial agreement with Fayrefield in late 2004, we worked closely with Fayrefield to develop products incorporating Reducol™ for distribution and sale by Tesco Stores Ltd. in the U.K. On December 20, 2005, we announced that Reducol™ had been launched in the U.K. by Tesco, the U.K.’s largest retailer, under their own private label.

In November 2004, we announced that we had agreed to supply Reducol™ for use in milk-based drinks to Scanvit Ltd., a Finnish healthcare company focusing on the prevention of cardiovascular diseases. Scanvit's core competency is in developing new markets for dietary supplements and functional foods in Scandinavia, the Baltic countries and Russia. As a result of our relationship with Scanvit, in May 2005 we announced that Kesko of Finland had launched a range of yogurts incorporating Reducol™. The yogurt is sold under the “Pirkka” premium brand name.

Since 2004, we have been working with a number of other manufacturers, suppliers and agents to develop additional Reducol™-containing functional foods. Those currently being marketed include:

 
 
§
a margarine spread, yogurt and yogurt drinks marketed by Albert Heijn B.V. of the Netherlands, under the Albert Heijn private label brand;
 
 
§
a range of dairy products marketed by Jeronimo Martins of Portugal under the Salutare private label brand;
 
 
§
a cholesterol-lowering milk drink marketed by Uni-President Enterprises Corporation of Taiwan,  under the UPEC brand; and
 
 
§
a yogurt drink under the under the Vital+ brand, marketed by CONAPROLE, the main dairy exporter in Uruguay and Latin America.
 
 
§
a pineapple juice drink under the under the Del Monte brand, marketed by Del Monte Pacific of the Philippines.
 
 
§
a milk drink under the under the Lanitis brand, marketed by Lanitis Bros, a division of the Coca Cola Co. in Cyprus.
 

We are also continuing to work with various U.S. food manufacturers but the completion of the product development stage and the timing of product launches is unclear at this point.  We will update our shareholders in the event of a product launch.

Reducol™ and Dietary Supplements

Reducol™ has been incorporated by Pharmavite LLC of California into its nationally distributed dietary supplements, Nature Made® Cholest-Off™. These supplements are sold through mass-market channels including food, drug and mass merchandising stores. Our renewed contract with Pharmavite will end in June 2010, and is subject to automatic one-year renewals unless either party provides 90 days’ prior written notice of its intention not to renew.  To date, we have not received any notice of non-renewal.  Failure to renew or otherwise extend this contract would have a material adverse effect on our product sales and revenue.

Phytosterol and Other Revenue

Revenues from continuing operations for the year ended December 31, 2009 include our proportionate share of the revenue generated by our joint venture, Forbes-Fayrefield.
 
 
 

21 

Our Total Revenues can be broken down as follows:


Summary:
(thousands of $)
 
Year ended
December 31, 2009
   
Year ended
December 31, 2008
   
Year ended
December 31, 2007
 
                   
Sales-phytosterol products
  $ 4,264     $ 7,108     $ 7,717  
Sales-finished goods
    360       732       1,130  
Licensing
    2       4       57  
Phytosterol revenues
  $ 4,626     $ 7,844     $ 8,904  

Our Phytosterol revenues can be broken down geographically as follows:

Annual Export Sales by Product
 
Year ended
December 31, 2009
   
Year ended
December 31, 2008
   
Year ended
December 31, 2007
 
(percentage of total phytosterol revenues)
                 
Sterol Ingredient
                 
North America
    51 %     51 %     49 %
Europe
    28 %     38 %     37 %
Other
    13 %     1 %     1 %
                         
Finished Goods With Sterols
                       
North America
                 
Europe
    8 %     10 %     13 %
Other
                 

All of our phytosterol revenues were derived from sales to arms-length customers.

For the year ended December 31, 2009, the majority of the Company’s revenue was generated from four customers (year ended December 31, 2008 – four customers, year ended December 31, 2007 – four customers).  Customer A accounted for 44% (2008 – 47%, 2007 – 40%), Customer B accounted for 15% (2008 – 11%, 2007 – 10%), Customer C accounted for 9% (2008 – 20%, 2007 – 15%), and Customer D accounted for 8% (2008 – 9%, 2007 – 13%) of revenue.  51% of sales are recorded in the USA, 36% of sales are recorded in Europe and the balance in rest of the world.


The markets for nutraceutical ingredients and products are competitive and, as a result, we face competition from several different sources, including nutraceutical, food and dietary supplement companies and manufacturers.   For a further discussion of our competition, see above Item 3 Key Information – D. Risk Factors – Operational Risks - Competition.

Marketing Activities

We are continuing to concentrate our marketing efforts for Reducol™ primarily in Europe, which we believe remains the most mature market internationally in terms of consumer acceptance of, and demand for, phytosterol – containing foods.   Accordingly, we plan to continue our marketing efforts in Europe with a view to growing both our product and customer base.  At the same time, we also continue to look to markets outside Europe, primarily in the U.S. and Asia-Pacific countries, as the functional food markets in those regions continue to mature. In the dietary supplement market, our focus will continue to be on the United States.

Technology License Granted to the Company

In 1995, we obtained a license of certain laboratory level phytosterol extraction technology developed at UBC (the “Tall Oil License”).  This license relates to the preparation and purification of sterol compositions from tall oil soap, the actual compositions of the sterols, and the use of these compositions and derivatives thereof as agents to prevent or treat lipid disorders. Pursuant to the Tall Oil License, as amended, we have agreed to:
 
 
 

22 

 
issue to UBC 6,250 Common Shares (of which 3,125 Common Shares have been issued and 3,125 Common Shares are to be issued after the first sale of any product derived from the technology); and
 
pay to UBC a royalty of 1% of gross revenue earned from sales of products by us and our licensees derived from the technology.

The Tall Oil License grants us the exclusive worldwide right to manufacture, distribute, market, sell, license or sublicense any products derived from or developed from the technology.  The Tall Oil License continues until the later of the expiration of the 20-year term and the expiration of the last registered patent subject to the Tall Oil License.

Nutraceutical Research, Development and Support

In the functional food and nutraceuticals area, we are currently focusing on Reducol™ product formulations to assist food manufacturers with potential launches of cholesterol-lowering products.

For the years indicated below, our expenses related to nutraceutical research, development and support were:

Period
 
Expenses for Year
 
(thousands of $)
     
Year ended December 31, 2009
  $ 734  
Year ended December 31, 2008
  $ 1,213  
Year ended December 31, 2007
  $ 1,775  

Our Nutraceutical research, development and support expenses for the year ended December 31, 2009, totaled $734,000 compared with $1,213,000 for the year ended December 31, 2008 and $1,775,000 for the year ended December 31, 2007.  In 2009, nutraceutical research, development and support expenditures prior to the allocation of stock based compensation decreased mainly due to severance costs associated with our restructuring in May, 2008, and a decrease in regulatory and patent costs.  In 2008, nutraceutical research, development and support expenditures prior to the allocation of stock based compensation decreased primarily due to reduced patent costs and clinical work relating to functional foods offset by severance costs.

Government Regulation

Nutraceuticals  The sale of Reducol™ and non-branded sterols and their incorporation into foods and dietary supplements is regulated in most countries.  Described below for general information purposes are some regulatory highlights.

United States (“US”)>
The United States is one of the world’s largest markets for nutraceuticals and has less stringent requirements for the market approval of nutraceuticals than some jurisdictions such as Canada and Europe. The US regulations allow phytosterols to be marketed either as a food ingredient under the GRAS notification process or as a dietary supplement.

GRAS (Generally Recognized As Safe) notification process:  Currently, the FDA is requiring that phytosterol food products be cleared for marketing by the GRAS notification process. In April 2000, the FDA responded to a notification filed for Reducol™ thus permitting our phytosterols to be marketed in the US in food products.

Dietary Supplements:  Reducol™ and other phytosterol dietary supplements can be sold in the United States under the Dietary Supplement Health Education Act of 1994. Dietary supplements are not food additives but are discrete dosage forms such as pills or capsules. The Act requires filing a notification with the FDA 75 days prior to marketing.
 
 
 

23 

In February 2003, we received a letter from the FDA allowing the use of the phytosterol heart-health claim previously approved by the FDA in an interim final ruling to be applied to our range of phytosterol products.  This enables the food industry to include statements about the heart health benefits of our cholesterol-lowering phytosterol ingredients in a variety of food products and dietary supplements.  Previously, the interim final ruling authorized a heart health claim for only plant sterol esters and plant stanol esters.  A final ruling by the FDA regarding the use of the health claim with respect to our phytosterols remains pending.

We cannot assure you that the current regulations will not be modified or that such modifications will not have an adverse effect on our ability to continue to distribute or advertise such products in the US, or that the final ruling will continue to allow us to use the heart-health claim for our phytosterols.

European Union (“EU”)
Novel Foods Regulations:  We received an approval under the Novel Foods Regulations to market Reducol™ in milk-based drinks in November 2004. In 2005 and 2006, the Novel Food Board of Finland determined that the use of Reducol™ in milk-based drinks was substantially equivalent to the use of Reducol™ in other food groups approved to contain phytosterols and these are: yellow fat spreads (margarine), fermented milk type products, soy drinks, low-fat cheese type products, yoghurt type products, spicy sauces, salad dressings and rye bread. Marketing of these products with Reducol™ can now proceed in the EU. In February 2005, the Novel Food Board of Finland also provided an opinion that the esterified form of our phytosterols was equivalent to sterol esters approved for sale in the European Union. In addition to Reducol™, our sterol esters can be marketed in the EU in the nine food categories outlined above.

On April 14, 2004, we announced that the European Commission had published regulations concerning the labeling of foods and food ingredients with added phytosterols, phytostanols or their respective esters. The regulation will allow consumers to choose different food formats containing phytosterol ingredients, including Reducol™. The recommended intake of phytosterols/stanols is within a range of 1 to 3 grams per day.

There can be no assurance that the Novel Foods approval will not be modified in a manner adverse to our business, or will not be revoked in its entirety.  There can be no assurance that Reducol™ will be approved for use in the EU in any additional food groups.

Health Claim for Plant Sterols In December 2009, a Regulation (EC 983/2009) was passed which allows the Health Claim "Plant sterols have been proven to lower/reduce blood cholesterol significantly. Blood cholesterol lowering has been proven to reduce the risk of (coronary) heart disease". The claim can be used only for food which ensures a daily intake of at least 2 g plant sterols. The Reducol™  ingredient is authorized to make the above health claim.

Australia
Novel Foods:  The Australian New Zealand Food Authority approved our sterols for use in vegetable oil spreads in May, 2002.  An application for use of Reducol™ in milk was filed with the Food Authority in May 2003.  The application was approved in December 2006.

On February 19, 2010, applications A1019 and A1024 were approved by FSANZ and forwarded to the ministerial council for final approval. If the applications progress to gazettal, Reducol™ will be approved for use in breakfast cereals and yoghurts. Reducol™  would also be approved for use in the esterified form in vegetable oil spreads and other food products that currently have approval to contain sterol esters. Five formulation additives would also be approved for use in liquid milk with Reducol™, providing greater flexibility in the manufacture of milk product.  However, there is no assurance that these applications will receive final approval by the ministerial council in the near future.
 
 
 

24 

Dietary Supplements:  Our sterols received approval for marketing as a complementary medicine by the Office of Complementary Medicines in July 2001. Reducol™ tablet products have been on the Australian/New Zealand market since 2002.

Canada
Novel Foods: Currently, applications for approval of food products containing Reducol™ must be made under the Novel Foods regulations. Seven applications have been submitted for food products. The approval process by this route is expected to be lengthy as any claims such as, “reduction of cholesterol”, will require an amendment to the Canadian Food & Drug Act.  To date, no food products from any food manufacturer in Canada, have been approved to include added phytosterols ingredients.

Dietary Supplements:  In 2004, regulations for Natural Health Products (NHP) were passed in Canada. This regulatory route allows the marketing of phytosterols in standard dosage forms such as tablets, capsules, and syrups. Therapeutic and health claims for phytosterols in Natural Health Products are permitted under these regulations. Separate applications have been made to NHP to sell Reducol™ in tablets, soft gelatin capsules, soft gelatin capsules with Reducol™/Omega-3-fatty acids, and gummies.  The Natural Health Products Directorate currently has a very large backlog of applications. NHP has only actively reviewed Forbes applications submitted in 2006; more recent applications have not received active review.   The time required to complete the review process is unknown. There is no assurance that any of the filed applications will be approved.

Brazil
In 2007, Reducol™ was approved for use in food products by the Brazilian National Health Surveillance Agency, ANVISA.  Each new food product in Brazil with Reducol™, however, requires a separate petition from a local food manufacturer.  A petition has been filed for Reducol™ in milk. However, there is no assurance that the Brazilian food manufacturer will market the product when and if approved.

Malaysia
Reducol™  in ester form is approved to use foods and can make a U.S. style Health Claim. An application is on file to use Reducol™ l powder in foods and make the same Health Claim. There is no assurance that the application will be approved or that food manufacturers will market products with either the powder or ester forms.

Taiwan
Reducol™ was approved for use in milk in Taiwan in 2007; commercial sales of milk product with Reducol™ have continued from that time.

Uruguay
Reducol™ was approved for use in yoghurt drinks in 2008; commercial sales of the yoghurt product have continued from that time.


Patents, trademarks and other proprietary rights are important to us. Our strategy is to build a strong patent portfolio to protect technology that we consider important to the development of our business, and to adopt, register, promote and protect our trademarks for our branded products.  We also rely upon trade secrets to maintain our competitive position.

Our patent portfolio includes patents and patent applications comprising therapeutic applications or indications for sterol compositions, formulations and delivery vehicles comprising sterol compositions, sterol-based derivatives, additional therapeutic indications for these derivatives, sterol-based combinations for use in lowering serum cholesterol,  compositions comprising sterols, additional components to assist in food and nutraceutical formulations, and sterol extraction, process and manufacturing methods.  We have patents issued in the United States and Europe.
 
 
 

25 

Notices of Opposition have been filed against certain patents allowed in Europe. (See Item 8 – Financial Information – A. Legal Matters – Patent Oppositions)

C.           Organizational Structure

Subsidiaries> We have two wholly-owned subsidiaries as follows:

 
·
Forbes Medi-Tech (USA) Inc. (“Forbes USA”) was incorporated under the laws of the state of Delaware on December 8, 2000 and holds our 100% interest in Forbes Medi-Tech (Research) Inc.

 
·
Forbes Medi-Tech (Research) Inc. (“Forbes Research”), a wholly owned subsidiary of Forbes Medi-Tech (USA) Inc. was acquired as TheraPei Pharmaceuticals, Inc., and then the name was changed on October 26, 2006 to Forbes Medi-Tech (Research) Inc.  The original company, TheraPei Pharmaceuticals, Inc., was incorporated under the laws of the state of Delaware on August 9, 2004.

We also have a 51 % interest in the following entity:

 
·
Forbes-Fayrefield Limited (“Forbes-Fayrefield”) is a company limited by shares and incorporated in England under the English Companies Act 1985.  Forbes-Fayrefield purchases and resells food products containing Forbes’ proprietary ingredient, Reducol™ throughout the European Union.  We have an initial 51% interest in Forbes-Fayrefield for an initial investment of £10,200, and Fayrefield has the remaining 49% initial interest for an initial investment of £9,800.  The Board of Directors of Forbes-Fayrefield consists, and under the agreement with Fayrefield will continue to consist, of an equal number of nominees of Forbes and of Fayrefield.


We lease approximately 9,500 square feet of office space at executive offices located in Vancouver, British Columbia at an annual cost of approximately $294,000.  We have sublet approximately 3,600 square feet of this office space to a third party for annual proceeds of approximately $115,000.

We, through our interest in Forbes-Fayrefield, pay our 51% proportionate share of office operating costs to Fayrefield Foods Limited.

 
Not Applicable.
 

Overview

Except for historical information, this review contains forward-looking statements which involve known and unknown risks, delays, uncertainties and other factors not under our control.  (See Note Regarding Forward Looking Statements and Item 3 – Key Information – D. Risk Factors).

The following discussion is based on the consolidated financial statements included in this Annual Report which have been prepared in accordance with accounting principles generally accepted in Canada.  These principles differ in certain material respects from those accounting principles generally accepted in the United States.  These differences are described in note 25 of our consolidated financial statements.

In the ordinary course of business, we have made a number of estimates and assumptions relating to the reporting of results of operations and financial position in the preparation of our financial statements in conformity with accounting principles generally accepted in Canada.  Actual results could differ significantly from those estimates under different assumptions and conditions.
 
 
 

26 

There are several accounting policies that we believe are critical to the presentation of our consolidated financial statements.  Note 5 - “Significant accounting policies” to our consolidated financial statements summarizes each of our significant accounting policies.  Those accounting policies should be read in conjunction with the other notes to our consolidated financial statements and management’s discussion and analysis of results of operations and financial condition described in this “Operating and Financial Review and Prospects.”

We believe that the following discussion addresses our most critical accounting policies, which are those that are most important to the portrayal of our financial condition and results of operations and require management's most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.  Set out below are certain of our accounting policies that we believe are critical to the presentation of our consolidated financial statements.

Critical Accounting Policies and Estimates
 
Our consolidated financial statements are prepared in accordance with Canadian generally accepted accounting principles (“Canadian GAAP”).  A reconciliation of amounts presented in accordance with United States generally accepted accounting principles (“U.S. GAAP”) is described in Note 25 to the consolidated financial statements for the year ended December 31, 2009.
 
Critical accounting policies and estimates are those policies, assumptions and estimates most important in the preparation of our consolidated financial statements. Selection of policies requires Management’s subjective and complex judgment from many alternatives and estimates involving matters that are inherently uncertain. Management believes that those policies, assumptions and estimates are reasonable, based on the information available. Those policies, assumptions and estimates affect the reported amounts of assets and liabilities at the date of the financial statements and revenues and expenses during the period represented.
 
The preparation of our financial statements requires estimates and judgments that affect the reported amounts of assets, liabilities, equity, and revenues and expenses, and related disclosure of contingencies. Management evaluates the assumptions and estimates, including those related to sales, inventories and intangible assets. Management bases its estimates on historical experience and on various other assumptions believed to be reasonable under the circumstances. The results of those estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The actual results might differ materially from these estimates under different assumptions or conditions. The methodologies used and assumptions selected by management in making these estimates, as well as the related disclosures, have been reviewed by and discussed with the Audit Committee of the Board of Directors. Management believes the following critical accounting policies affect the more significant judgments and estimates used in the preparation of the consolidated financial statements. Notes 4 and 5 to the consolidated financial statements for the year ended December 31, 2009 should be read in conjunction with this Management Discussion and Analysis for a more comprehensive outline of our significant accounting policies.

Revenue recognition>  We recognize revenue from product sales at the time the product is shipped or upon delivery, which is when title passes to the customer, and when all significant contractual obligations have been satisfied and collection is reasonably assured.
 
Revenue from licensing agreements is recognized when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the amount is determinable and collectability is reasonably assured. License fees are deferred and amortized over the life of the relevant agreements.
 
 
 
 

27 
 
We regularly review our inventories for obsolescence and valuation issues. Should selling prices and demand for our inventory decline, additional provisions for obsolescence and valuation may be necessary.  In the year ended December 31, 2009, our inventory valuation allowance amounted to $819,000 (December 31, 2008 - $247,000) of inventory reserves on excess inventories
 
For the year ended December 31, 2009, $nil (2008-$1,424,000) was recognized as a provision for losses on future inventory purchase commitments.
 
 
We account for all options granted to non-employees under the fair value based method.  Under this method, options granted to non-employees are measured at their fair value and are recognized as the options are earned and the services are provided.
 
We use the Black-Scholes option-pricing model to calculate stock option values, which requires certain assumptions related to the expected life of the option, forfeiture rate, future stock-price volatility, risk-free interest rate, and dividend yield. The expected life of an option is based on a maximum up to two years vesting period of the stock option plan. The basis of future stock-price volatility is historical volatility of our common shares over the expected life of the option. The basis of the risk-free interest rate is the zero-coupon Canadian government bond rate with a term equal to the expected life of the option. The basis of the dividend yield is on the option’s exercise price and expected annual dividend rate at the time of grant. We have not paid dividends in the past, nor have any plans to pay dividends. Changes to any of these estimates or assumptions, or the use of a different option-pricing model could produce a different fair value for stock-based compensation expense, which could have a material effect on the results of operations.
 
 
CHANGES IN ACCOUNTING POLICIES INCLUDING INITIAL ADOPTION

Current year adoption of new accounting standards

Effective on January 1, 2009, the Company adopted the recommendation of CICA Handbook Section 3064, Goodwill and Intangible Assets (Section 3064), Section 3862, Financial Instruments (Section 3862).

Section 3064 replaced Handbook Section 3062, Goodwill and Intangible Assets, and Handbook Section 3450, Research and Development. The new standard provides guidance on the recognition, measurement, presentation and disclosure of goodwill and intangible assets.  This standard is effective for interim and annual financial statements relating to fiscal years beginning on or after October 1, 2008 and was applicable for our first quarter of fiscal 2009.  The adoption of this new standard did not have an impact on our financial position or results of operations.

Section 3862 was amended which entailed disclosures to include additional disclosure requirements about fair value measurements of financial instruments and enhanced liquidity risk disclosure requirements. We adopted these amendments that require the classification of fair value measurements of financial instruments using a three level hierarchy reflecting the significance of the inputs used in estimating these fair value measurements. The fair value hierarchy consists of the following levels:
 
 
i)
financial assets and liabilities measured at estimated fair values determined using quoted prices in active markets for identical assets or liabilities.
 
 
 

28 
 

 
 
ii)
financial assets and liabilities measured at estimated fair values determined using inputs other than quoted prices that are observable for the asset or liability either directly (as prices) or indirectly (derived from prices).
 
iii)
financial assets and liabilities measured at estimated fair values determined using inputs that are not based on observable market data.

Classification of the fair value measurements is determined on the basis of the lowest level input that is significant to the fair value measurement in its entirety.

Future changes in accounting standards

International financial reporting standards  >In 2006, the Canadian Accounting Standards Board (“AcSB”) published a new strategic plan that will significantly affect financial reporting requirements for Canadian companies. The AcSB strategic plan outlines the convergence of Canadian GAAP with IRFS over an expected five year transitional period. In February 2008 the AcSB announced that 2011 is the changeover date for the publicly-listed companies to use IFRS, replacing Canada’s own GAAP. The date is for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2011. The Company’s first year end under IFRS will be December 31, 2011. The transition date for us will be January 1, 2011 and may require the restatement for comparative purposes of amounts reported by us for the year ended December 31, 2010.

During the year ended December 31, 2009, we began to prepare an IFRS conversion plan and we are now assessing the impact of various IFRS standards on our financial statements. In 2009 we reviewed potential differences between IFRS and our current accounting policies.  During 2010 we will be assessing the financial reporting impact, and analyzing alternative policies, which could be adopted. Throughout 2010 we will continue to review standards for their application to our operations, carry out impact assessments, and continue to monitor and evaluate current IFRS pronouncements.

Although our impact assessment activities are underway, continued progress is necessary before we can prudently increase the specificity of the disclosure of the impacts of IFRS.

Business combinations  >In January 2009, the CICA issued Handbook Section 1582, Business Combinations, which replaces the existing standards. This section establishes the standards for the accounting of business combinations, and states that all assets and liabilities of an acquired business will be recorded at fair value. Obligations for contingent considerations and contingencies will also be recorded at fair value at the acquisition date. The standard also states that acquisition-related costs will be expensed as incurred and that restructuring charges will be expensed in the periods after the acquisition date. This standard is effective for business combinations with acquisition dates on or after January 1, 2011. Earlier adoption is permitted. We are currently assessing the impact this standard will have on its financial position and results of operations.

Consolidated financial statements  >In January 2009, the CICA issued Handbook Section 1601, Consolidated Financial Statements, which replaces the existing standards. This section establishes the standards for preparing consolidated financial statements and is effective for the Company on December 1, 2011. Earlier adoption is permitted. We are currently assessing the impact this standard will have on its financial position and results of operations.

Non-controlling interests>  In January 2009, the CICA issued Handbook Section 1602, Non-controlling Interests, which establishes standards for the accounting of non-controlling interests of a subsidiary in the preparation of consolidated financial statements subsequent to a business combination, and is effective for the Company on December 1, 2011. We are currently assessing the impact this standard will have on its financial position and results of operations.
 
 
 

29 

A.           Operating Results


Our December 31, 2009 consolidated financial statements include the assets, liabilities and operating results of the Company, its wholly-owned subsidiaries, Forbes Medi-Tech (Research) Inc., Forbes Medi-Tech (USA) Inc., and its 51% venture interest in Forbes-Fayrefield Ltd. (“Forbes-Fayrefield”).  We account for our interest in Forbes-Fayrefield using the proportionate consolidation method.  In May 2008 we ceased operation of pharmaceutical research and development, to focus on our nutraceutical operations.   Our management’s discussion and analysis of results of operations and financial condition described in this “Operating and Financial Review and Prospects.” focuses on our continuing operations and we present separately the expenses associated with our pharmaceutical research and development programs, under “Discontinued Operations”.  Material inter-company balances and transactions have been eliminated in these consolidated financial statements.

For the fiscal year ended December 31, 2009, we reported a net income of $127,000 ($0.03 per share basic and diluted) compared with a net loss of $7,653,000 ($1.57 per share basic and diluted) for the year ended December 31, 2008, and a net loss of $11,683,000 ($2.43 per share basic and diluted) for the year ended December 31, 2007.

In May 2008, we announced our decision to discontinue our pharmaceutical research and development programs and to focus on our nutraceutical operations.  In accordance with CICA Handbook Section 3475, the activities relating to our pharmaceutical research and development have been presented as discontinued operations in the consolidated financial statements ended December 31, 2009 and in the following analysis. Results for the year ended December 31, 2008 and 2007 have also been reclassified to reflect this treatment.

For the fiscal year ended December 31, 2009, we reported a net income from continuing operations of $127,000 ($0.03 per share basic and diluted) compared with a net loss from continuing operations of $7,190,000 ($1.48 per share basic and diluted) for the year ended December 31, 2008, and a net loss from continuing operations of $9,242,000 ($1.92 per share basic and diluted) for the year ended December 31, 2007.

For the year ended December 31, 2009 we reported a net loss from continuing operations, before other income / expenses of $3,385,000. The Company has not, since inception, reported year-end profitable operating earnings.  The Company has regularly reported year end losses. We anticipate that we will continue to incur significant losses.  At December 31, 2009 our accumulated deficit was $10,336,000.

Results of Continuing Operations

Selected Annual Information

Summary:
(thousands of $ except per share values and number of shares)
 
Year ended
December 31, 2009
   
Year ended
December 31, 2008
   
Year ended
December 31, 2007
 
                   
Phytosterol revenues
  $ 4,626     $ 7,844     $ 8,904  
Cost of sales
    (4,230 )     (6,713 )     (8,664 )
Change in inventory and purchase commitment
  allowances
    852       (830 )     (491 )
      1,248       301       (251 )
Expenses
    (4,633 )     (7,643 )     (9,847 )
Other income
    4,277       169       364  
Income / (loss) from continuing
  operations
    892       (7,173 )     (9,734 )
                         
Income tax (expense) /  recovery
    (765 )     (17 )     492  
Net income / (loss) from continuing
  operations
    127       (7,190 )     (9,242 )
                         
Income / (loss) from discontinued operations
          (463 )     (2,441 )
 
 
 

30 
 
 
 
Summary:
(thousands of $ except per share values and number of shares)
   
Year ended
December 31, 2009
     
Year ended
December 31, 2008
     
Year ended
December 31, 2007
 
 
Net income / (loss) for the period
  $ 127     $ (7,653 )   $ (11,683 )
                         
 
Weighted average number of shares, basic
    4,969,813       4,865,131       4,800,923  
 
Basic income / (loss) per share from continuing operations
  $ 0.03     $ (1.48 )   $ (1.92 )
 
Basic loss per share from discontinued operations
  $     $ (0.09 )   $ (0.51 )
 
Diluted income / (loss) per share
  $ 0.03     $ (1.57 )   $ (2.43 )
 
Weighted average number of shares, diluted
    5,032,539       4,865,131       4,800,923  
Diluted income / (loss) per share from continuing operations
  $ 0.03     $ (1.48 )   $ (1.92 )
 
Diluted loss per share from discontinued operations
        $ (0.09 )   $ (0.51 )
 
Diluted income / (loss) per share
  $ 0.03     $ (1.57 )   $ (2.43 )


ASSETS:
                 
Current assets
  $ 4,571     $ 9,058     $ 12,052  
Property plant and equipment
    103       140       387  
Intangibles and other assets
    23       18       512  
Total assets
    4,697       9,216       12,951  
                         
LIABILITIES:
                       
Current liabilities
  $ 612     $ 2,671     $ 2,379  
Convertible debenture
          2,856        
Long term liabilities
    1,657       1,005       940  
                         
Equity component of subsidiary’s convertible debenture
          399        
SHAREHOLDERS EQUITY:
                       
Share capital
  $ 2,721     $ 2,721     $ 101,027  
Contributed Surplus
    10,043       10,027       9,875  
Deficit
    (10,336 )     (10,462 )     (101,270 )

Net income for the year ended December 31, 2009 resulted primarily from other income, the majority of which resulted from the one time gain related to the completion of the Offering and conversion of the convertible debenture.  These events resulted in our recognition of a gain of approximately $4,148,000.  In addition, the reversal of the provision for losses on purchase commitments amounting to $1,424,000 in the second quarter of 2009 had a one-time positive impact on net income.

Revenues / Cost of Sales
Revenues from continuing operations for the year ended December 31, 2009 include our proportionate share of the revenue generated by our joint venture, Forbes-Fayrefield.

 
 

31 


Summary:
(thousands of $)
 
Year ended
December 31, 2009
   
Year ended
December 31, 2008
   
Year ended
December 31, 2007
 
                   
Sales-phytosterol products
  $ 4,264     $ 7,108     $ 7,717  
Sales-finished goods
    360       732       1,130  
Licensing
    2       4       57  
Phytosterol revenues
    4,626       7,844       8,904  
Cost of sales
    4,230       6,713       8,664  
Inventory and purchase commitment  allowances
    (852 )     830       491  
    $ 1,248     $ 301     $ (251 )

Phytosterol revenues> include direct sales of phytosterol products (branded – Reducol™, non-branded sterol esters and sterols), sales of finished products containing Reducol™ and license fees received.  Phytosterol revenues for the year ended December 31, 2009 totaled $4,626,000 compared with $7,844,000 for the year ended December 31, 2008.   The decreases are primarily due to re-alignment of inventories by one of our major customers in the first six months of 2009. This customer returned to its prior purchasing patterns in the second half of 2009.  Also, our sales to our European customers have shown a decrease, primarily due to the effect of the economic downturn. In addition, sales by Forbes-Fayrefield of finished products to key European markets also decreased, in part as a result of a switch from revenue to commission based sales. As a result of these events this year’s revenues were significantly below our prior year’s level.

We are in negotiation with potential customers internationally to expand our customer base.

Phytosterol revenues include direct sales of phytosterol products (branded – Reducol™, non-branded sterol esters and sterols), sales of finished products containing Reducol™ and amortization of previously received license fees in accordance with our revenue recognition policies.  Phytosterol revenues for the year ended December 31, 2008 totaled $7,844,000 compared with $8,904,000 for the year ended December 31, 2007.   This decrease was due to a decrease in our sales of certain sterols and in sales by Forbes-Fayrefield of finished products, such as margarine spread, spoonable yogurt, and yogurt drinks offset by an increase in sales of Reducol™.

Concentration of sales and segmented disclosure
In the year ended December 31, 2009, the majority of our revenue was generated from four customers (December 31, 2008 – four customers, December 31, 2007 – four customers).  Customer A accounted for 44% (2008 – 47%, 2007 – 40%), Customer B accounted for 15% (2008 – 11%, 2007 – 10%), Customer C accounted for 9% (2008 – 20%, 2007 – 15%), and Customer D accounted for 8% (2008 – 9%, 2007 – 13%) of revenue. For 2009, 51% (2008 – 51%, 2007 – 49%) of sales are recorded in the USA, 36% (2008 – 48%, 2007 – 50%) of sales are recorded in Europe and the balance in other international markets.

Cost of Sales (“Cost of Sales”)> Cost of Sales for the year ended December 31, 2009 totaled $ 4,230,000 on phytosterol revenues of $4,624,000, or 91% of phytosterol revenues, for the year ended December 31, 2008 totaled $6,713,000 on phytosterol revenues of $7,840,000, or 86% of phytosterol revenues.  The margins decreased primarily due to selling higher cost product offset by favorable exchange rates.

Cost of Sales for the year ended December 31, 2008 totaled $ 6,713,000 on phytosterol revenues of $7,840,000, or 86% of phytosterol revenues, for the year ended December 31, 2007 totaled $8,664,000 on phytosterol revenues of $8,847,000, or 98% of phytosterol revenues.  The margins increased primarily due to sale of excess inventories at reduced prices in 2007 and less favorable foreign exchange rates in 2008.


In the second quarter of 2009, we renegotiated a supply agreement which eliminated our requirement to purchase minimum inventory quantities or incur a take or pay penalty.
 
 
 

32 

We regularly review inventory quantities on hand and record an estimated provision for excess inventory based primarily on our historical sales and expectations for future use. To the extent we have excess inventory, we recognize a reserve for such excess inventories based on the expected realizable value of inventory. Actual demand and market conditions may be different from those projected by us. This could have a material effect on our operating results and financial position. If we were to make different judgments or utilize different estimates, the amount and timing of our revaluation of inventories could be materially different.
 
Excess inventory remains saleable. Sales of excess inventory may have the effect of increasing the gross profit margin beyond that which would otherwise occur, because of previous write-downs.

Operating Expenses

Summary:
(thousands of $)
 
Year ended
December 31, 2009
   
Year ended
December 31, 2008
   
Year ended
December 31, 2007
 
                   
General and administrative
  $ 3,043     $ 5,282     $ 4,875  
Nutraceutical research, development and support
    734       1,213       1,775  
Marketing, sales & product development
    682       1,528       1,606  
Depreciation/amortization
    37       76       160  
Foreign exchange losses / (gains)
    137       (456 )     1,431  
Total operating expenses
  $ 4,633     $ 7,643     $ 9,847  

 
General and administrative>  General and administrative expenditures (“G&A”) for fiscal year 2009 totaled $3,043,000, compared with $5,282,000 in fiscal year 2008 and with $4,875,000 in fiscal year 2007.  By type of costs incurred, G&A for 2009 consists of professional services - $404,000 (2008 - $1,167,000, 2007 - $845,000); salaries and benefits - $1,220,000 (2008 - $1,605,000, 2007 - $1,745,000); travel - $121,000 (2008 - $233,000, 2007 - $265,000); occupancy costs - $327,000 (2008 - $310,000, 2007 - $298,000); and operations - $959,000 (2008 - $1,875,000, 2007 - $1,303,000).  The allocation of stock based compensation to G&A was $11,000 (2008 - $92,000, 2007 - $419,000).  In 2009, the decrease in G&A is mainly attributable to a decrease in financing and professional fees which in 2008 were incurred in connection with the Special General Meeting, the NASDAQ hearing, and the non dilutive financing, a decrease in wages mainly attributable to a decrease in staff, a decrease in insurance expense mainly attributable to insurance expense which in 2008 was incurred in connection with the non dilutive financing, a decrease in interest accretion expense associated with the convertible debenture, a decrease in travel expenses and a decrease in other operating expenses mainly attributable to cost savings measures.  In 2008, the increase in G&A from 2007 was primarily attributable to an increase in professional fees incurred to complete the Plans of Arrangement and Reorganization, and an increase in professional fees and filing fees associated with the NASDAQ hearing.  Also, a substantial portion of the increase in fiscal 2008 was due to interest accretion associated with the convertible debenture.
 
We continue to reduce operating expenses wherever possible.
 
 
Nutraceutical research, development and support>   Our Nutraceutical research, development and support expenses for the year ended December 31, 2009, totaled $734,000 compared with $1,213,000 for the year ended December 31, 2008 and $1,775,000 for the year ended December 31, 2007.  In 2009, nutraceutical research, development and support expenditures prior to the allocation of stock based compensation decreased mainly due to severance costs associated with our restructuring in May, 2008, and a decrease in regulatory and patent costs.  In 2008, nutraceutical research, development and support expenditures prior to the allocation of stock based compensation decreased from 2007 primarily due to reduced patent costs and clinical work relating to functional foods offset by severance costs.
 
 
 

33 
 
Marketing, sales & product development (“Marketing”) >totaled $682,000 for 2009 compared with $1,528,000 incurred in 2008 and $1,606,000 in 2007.  The decrease is mainly attributable to severance costs incurred in 2008, decrease in wages, and a reduction in promotional material, product samples, travel, and IP insurance expense. The decrease in 2008 from 2007 is attributable to a reduction in promotional material, product samples and travel costs offset by severance costs.
 
Foreign exchange losses >totaled $137,000 for the year ended December 31, 2009 compared with $456,000 in gains in year ended December 31, 2008.  Of the foreign exchange losses for the year ended December 31, 2009, $141,000 (2008 - $529,000 exchange gains) is attributable to unrealized foreign exchange losses and $4,000 relates to realized exchange gains (2008 - $73,000 exchange losses).
 
Foreign exchange gains totaled $456,000 for the year ended December 31, 2008 compared with $1,431,000 in losses in year ended December 31, 2007.  Of the foreign exchange gains for the year ended December 31, 2008, $529,000 (2007 - $1,170,000 exchange losses) is attributable to unrealized foreign exchange gains and $73,000 relates to realized exchange losses (2007 - $261,000 exchange losses).
 
The unrealized foreign exchange losses result primarily from the translation of non-Canadian dollar denominated assets and liabilities into Canadian dollars and realized foreign exchange losses are recognized on settling of non-Canadian dollar transactions at different rates than those originally booked.
 
 
For the years December 31, 2009, 2008 and 2007, this compensation expense was allocated to nutraceutical research, development and support expenses, general and administrative expenses, and marketing, sales and product development expenses on the same basis as for the allocations of cash compensation as summarized below:

Stock based compensation
(thousands of $)
 
Year ended
December 31, 2009
   
Year ended
December 31, 2008
   
Year ended
December 31, 2007
 
                   
General and administrative
  $ 11     $ 92     $ 419  
Marketing, sales and product development
    3       31       189  
Nutraceutical research, development and support
    2       29       350  
    $ 16     $ 152     $ 958  

Discontinued Operations

The following tables reflect our loss from discontinued operations relating to our pharmaceutical research and development, for the years ended December 31, 2009, 2008 and 2007.

 
 

34 


 
 
Discontinued operations
(thousands of $)
 
Year ended
December 31, 2009
   
Year ended
December 31, 2008
   
Year ended
December 31, 2007
 
                   
Discontinued Operations – Pharmaceuticals
Research & Development
                 
                   
Loss from discontinued operations
  $     $ (1,231 )   $ (2,441 )
Gain on disposal of discontinued operations
          768        
                         
 
Loss from discontinued operations
  $     $ (463 )   $ (2,441 )

 
In May 2008, we announced our decision to discontinue our pharmaceutical research and development programs and to focus on our nutraceutical operations.  In August 2008, we completed an agreement for the sale of our pharmaceutical assets and business unit based in San Diego, California to Transition Therapeutics Inc. (“Transition”).  Terms of the sale included an upfront payment of $1,054,000 (US $1,000,000) in cash paid at closing to us with potential future payments of up to US $6,000,000 payable in cash or Transition shares, based upon Transition reaching certain developmental and regulatory milestones.  We originally acquired these pharmaceutical assets in October 2006 as a part of our acquisition of TheraPei.  Of the amounts received from the sale transaction, we will pay 20 percent to the former TheraPei shareholders, in cash and common shares of Forbes.

Quarterly Financial Information

   
2009
   
2008
 
(thousands of  $ except per share amounts)
(unaudited)
    Q4       Q3       Q2       Q1       Q4       Q3       Q2       Q1  
 
Revenues
  $ 1,604     $ 1,279     $ 1,018     $ 725     $ 1,196     $ 1,927     $ 2,691     $ 2,030  
(Loss) / income from continuing operations
    (1,596 )     (1,379 )      113       2,989       (2,316 )     (1,430 )     (2,347 )     (1,097 )
(Loss) / income from   discontinued operations
    -       -       -       -       (5 )     785       (683 )     (559 )
 
Net income / (loss) for period
  $ (1,596 )   $ (1,379 )   $ 113     $ 2,989     $ (2,321 )   $ (645 )   $ (3,030 )   $ (1,656 )
                                                                 
Basic (loss) / income per share from continuing operations
  $ (0.31 )   $ (0.28 )   $ 0.02     $ 0.60     $ (0.48 )   $ (0.29 )   $ (0.48 )   $ (0.23 )
Basic income / (loss) per share from  discontinued operations
                                  0.16       (0.14 )     (0.11 )
Basic net (loss) / income per share
  $ (0.31 )   $ (0.28 )   $ 0.02     $ 0.60     $ (0.48 )   $ (0.13 )   $ (0.62 )   $ (0.34 )
                                                                 
Diluted (loss) / income per share from continuing operations
  $ (0.31 )   $ (0.28 )   $  0.02     $  0.60     $ (0.48 )   $ (0.29 )   $ (0.48 )