UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2008
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission
file number: 001-33882
 ONCOTHYREON INC.
 (Exact name of registrant as specified in its charter)
 Delaware(State or other jurisdiction of 
incorporation or organization)
    
    26-0868560(I.R.S. Employer
Identification Number)110  110th Avenue NE, Suite 685
Bellevue, Washington(Address of principal executive offices)
    
    98004(Zip Code)
 (425) 450-0370  (Registrants telephone number, including area code)
 þ o
  Large accelerated filer o

   

   Accelerated filer þ


   Non-accelerated filer o
(Do not check if a smaller reporting company)


  Smaller reporting company o
 o þ




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##### 



ONCOTHYREON INC.
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2008
 INDEX
 PagePart I  Financial Information
    
    
    3Item 1. Financial Statements (unaudited)
    
    
    3Notes to the Condensed Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
    
    
    27Item 3. Qualitative and Quantitative Disclosures about Market Risks
    
    
    43Item 4. Controls and Procedures
    
    
    43Part II  Other Information
    
    
    45Item 1. Legal Proceedings
    
    
    45Item 1A. Risk Factors
    
    
    45Item 6. Exhibits
    
    
    63Signatures
    
    
    64
   -2-




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##### 



PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements (unaudited)
 ONCOTHYREON INC.
Condensed Consolidated Balance Sheets
(expressed in thousands of U.S. dollars, except Stock amounts)
(Unaudited)
 June 30,
    
    
    December 31,2008
    
    
    2007ASSETSCurrentCash and cash equivalents
    
    $
    9,381
    
    
    $
    12,035Short-term investments
    
    
    4,806
    
    
    
    12,151Accounts receivable
    
    
    1,360
    
    
    
    2,024Government grant receivable
    
    
    113
    
    
    
    552Notes receivable
    
    
    212
    
    
    
    364Prepaid expenses
    
    
    525
    
    
    
    528Inventory (See Note 5)
    
    
    7,649
    
    
    
    5,06924,046
    
    
    
    32,723Plant and equipment
    
    
    1,274
    
    
    
    1,378Long term deposit
    
    
    354
    
    
    
    Goodwill
    
    
    2,117
    
    
    
    2,117$
    27,791
    
    
    $
    36,218LIABILITIESCurrentAccounts payable and accrued liabilities
    
    $
    3,709
    
    
    $
    5,768Current portion of capital lease obligations
    
    
    73
    
    
    
    104Current portion of deferred revenue
    
    
    7,042
    
    
    
    5,80110,824
    
    
    
    11,673Capital lease obligations
    
    
    41
    
    
    
    66Notes payable
    
    
    199
    
    
    
    199Warrant liability (See Note 6)
    
    
    
    
    
    
    64Deferred revenue
    
    
    13,931
    
    
    
    12,167Class UA preferred stock, 12,500 shares authorized, 12,500 and 12,500
shares issued and outstanding
    
    
    30
    
    
    
    3025,025
    
    
    
    24,199Contingencies, commitments, and guarantees (See Note 9)STOCKHOLDERS EQUITYPreferred stock, $0.0001 par value; 10,000,000 shares authorized, no
shares issued and outstanding
    
    
    
    
    
    
    Common stock, $0.0001 par value; 100,000,000 shares authorized, 19,492,432
and 19,485,889 shares issued and outstanding
    
    
    325,043
    
    
    
    324,992Warrants (See Note 6)
    
    
    64
    
    
    
    Additional paid-in capital
    
    
    14,329
    
    
    
    13,636Accumulated deficit
    
    
    (331,573
    )
    
    
    (321,543
    )Accumulated other comprehensive loss
    
    
    (5,097
    )
    
    
    (5,066
    )2,766
    
    
    
    12,019$
    27,791
    
    
    $
    36,218
  -3-




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##### 



ONCOTHYREON INC.
 Condensed Consolidated Statements of Operations and Comprehensive Loss
(expressed in thousands of U.S. dollars, except share and per share amounts)
 (Unaudited)
 Three months
    
    
    Six monthsended June 30,
    
    
    ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007RevenueContract research and development
    
    $
    
    
    
    $
    473
    
    
    $
    
    
    
    $
    572Contract manufacturing
    
    
    802
    
    
    
    
    
    
    
    2,520
    
    
    
    Licensing revenue from collaborative agreements
    
    
    350
    
    
    
    105
    
    
    
    652
    
    
    
    168Licensing, royalties, and other revenue
    
    
    
    
    
    
    12
    
    
    
    
    
    
    
    211,152
    
    
    
    590
    
    
    
    3,172
    
    
    
    761ExpensesResearch and development (see Note 4)
    
    
    2,726
    
    
    
    3,355
    
    
    
    5,034
    
    
    
    6,327Manufacturing
    
    
    646
    
    
    
    
    
    
    
    2,726
    
    
    
    General and administrative
    
    
    2,661
    
    
    
    2,214
    
    
    
    5,364
    
    
    
    4,125Marketing and business development
    
    
    
    
    
    
    34
    
    
    
    
    
    
    
    512Depreciation
    
    
    103
    
    
    
    45
    
    
    
    206
    
    
    
    102Investment and other (income) expense (See Note 8)
    
    
    (68
    )
    
    
    305
    
    
    
    (128
    )
    
    
    Change in fair value of warrant liability (See Note 6)
    
    
    
    
    
    
    (402
    )
    
    
    
    
    
    
    (668
    )6,068
    
    
    
    5,551
    
    
    
    13,202
    
    
    
    10,398Net loss
    
    
    (4,916
    )
    
    
    (4,961
    )
    
    
    (10,030
    )
    
    
    (9,637
    )Other comprehensive (loss) income
    
    
    72
    
    
    
    763
    
    
    
    (31
    )
    
    
    1,990Comprehensive loss
    
    $
    (4,844
    )
    
    $
    (4,198
    )
    
    $
    (10,061
    )
    
    $
    (7,647
    )Basic and diluted loss per share
    
    $
    (0.25
    )
    
    $
    (0.25
    )
    
    $
    (0.51
    )
    
    $
    (0.49
    )Weighted average number of common shares
outstanding
    
    
    19,491,641
    
    
    
    19,485,889
    
    
    
    19,488,801
    
    
    
    19,485,889
  -4-




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##### 



ONCOTHYREON INC.
 Condensed Consolidated Statements of Stockholders Equity
(expressed in thousands of U.S. dollars, except number of common shares issued and outstanding)
(Unaudited)
 AccumulatedAdditional
    
    
    
    
    
    
    OtherCommon Stock
    
    
    
    
    
    
    Paid-in
    
    
    Accumulated
    
    
    ComprehensiveNumber
    
    
    Amount
    
    
    Warrants
    
    
    Capital
    
    
    Deficit
    
    
    LossBalance at December 31, 2006
    
    
    19,485,889
    
    
    $
    324,992
    
    
    $
    
    
    
    $
    11,955
    
    
    $
    (301,203
    )
    
    $
    (8,309
    )Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,681
    
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (20,340
    )
    
    
    Unrealized holding loss on
available-for-sale-securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (48
    )Foreign currency translation
adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,291Other comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,243Balance at December 31, 2007
    
    
    19,485,889
    
    
    $
    324,992
    
    
    $
    
    
    
    $
    13,636
    
    
    $
    (321,543
    )
    
    $
    (5,066
    )Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    744
    
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,030
    )
    
    
    Release of Restricted share units
    
    
    6,543
    
    
    
    51
    
    
    
    
    
    
    
    (51
    )
    
    
    
    
    
    
    Warrants (Note 6)
    
    
    
    
    
    
    
    
    
    
    64
    
    
    
    
    
    
    
    
    
    
    
    Unrealized holding loss on
available-for-sale securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (31
    )Other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (31
    )Balance at June 30, 2008
    
    
    19,492,432
    
    
    $
    325,043
    
    
    $
    64
    
    
    $
    14,329
    
    
    $
    (331,573
    )
    
    $
    (5,097
    )
  -5-




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##### 



ONCOTHYREON INC.
 Condensed Consolidated Statements of Cash Flows
(expressed in thousands of U.S. dollars)
(Unaudited)
 Six months ended June 30,2008
    
    
    2007OperatingNet loss
    
    $
    (10,030
    )
    
    $
    (9,637
    )Depreciation
    
    
    206
    
    
    
    102Stock-based compensation expense
    
    
    744
    
    
    
    835Change in fair value of warrant liability (See Note 6)
    
    
    
    
    
    
    (668
    )Gain on disposal of short-term investments
    
    
    
    
    
    
    (46
    )Proceeds from collaborative agreements
    
    
    3,000
    
    
    
    2,500Deferred revenue
    
    
    5
    
    
    
    (168
    )Net change in non-cash working capital balances from operationsAccounts receivable
    
    
    664
    
    
    
    634Government grant receivable
    
    
    439
    
    
    
    Prepaid expenses
    
    
    3
    
    
    
    (48
    )Inventory
    
    
    (2,580
    )
    
    
    (2,767
    )Accounts payable and accrued liabilities
    
    
    (1,772
    )
    
    
    (123
    )Long term deposits
    
    
    (354
    )
    
    
    (9,675
    )
    
    
    (9,386
    )InvestingPurchase of short-term investments
    
    
    (18,971
    )
    
    
    (17,119
    )Redemption of short-term investments
    
    
    26,074
    
    
    
    20,465Purchase of plant and equipment
    
    
    (389
    )
    
    
    (118
    )Payment of accrued business acquisition cost
    
    
    
    
    
    
    (244
    )Collection of notes receivable
    
    
    152
    
    
    
    6,866
    
    
    
    2,984FinancingRepayment of share issuance costs
    
    
    
    
    
    
    (169
    )Repayment of capital lease obligations
    
    
    (56
    )
    
    
    (23
    )(56
    )
    
    
    (192
    )Net cash outflow
    
    
    (2,865
    )
    
    
    (6,594
    )Effect of exchange rate fluctuations on cash and cash equivalents
    
    
    211
    
    
    
    906Decrease in cash and cash equivalents
    
    
    (2,654
    )
    
    
    (5,688
    )Cash and cash equivalents, beginning of period
    
    
    12,035
    
    
    
    13,409Cash and cash equivalents, end of period
    
    $
    9,381
    
    
    $
    7,721Supplemental disclosure of cash flow informationAmount of interest paid in the period
    
    $
    2
    
    
    $
    1Amount of income taxes paid in the period
    
    $
    
    
    
    $
    
  -6-




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##### 



ONCOTHYREON INC.
 
 Notes to the Condensed Consolidated Financial Statements
 Three and six months ended June 30, 2008 and 2007

(expressed in thousands of U.S. dollars, except share and per share amounts)
 (Unaudited)
 1. DESCRIPTION OF BUSINESS
  Change in reporting entity
     Accounting for
Business Combinations
 -7-




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##### 



2. BASIS OF PRESENTATION
       8




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##### 



Foreign currency translation
 Foreign
Currency Translation;
 3. ACCOUNTING POLICY CHANGES
 Accounting standards adopted in the current year
 Fair Value Measurements
 Fair Value
Measurements
  
    
    Level 1  quoted prices in active markets for identical assets or liabilities,
    
    Level 2  observable inputs other than Level 1 prices such as quoted prices for similar
assets or liabilities, quoted prices in markets that are not active, or other inputs that
are
 9




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##### 



observable or can be corroborated by observable market data for substantially the full term
of the assets or liabilities, and
 
    
    Level 3  unobservable inputs that are supported by little or no market activity and
that are significant to the fair value of the assets or liabilities.
  The Fair Value Option for Financial Assets and Financial Liabilities
 The Fair Value Option for Financial
Assets and Financial Liabilities (SFAS 159)
 Accounting for Non Refundable Advance Payments for Goods or Services Received for Use in
Future Research and Development Activities
 Accounting for Non Refundable Advance Payments for Goods or Services Received for Use in
Future Research and Development Activities
 Accounting standards effective in future periods
 GAAP Hierarchy
 The Hierarchy of Generally Accepted Accounting
Principles
 10




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##### 



Determination of the Useful Life of Intangible Assets
  Collaborative Arrangements
 Collaborative
Arrangements
 Business Combinations
 Business Combinations
 Noncontrolling Interests in Consolidated Financial Statements
 Noncontrolling Interests in Consolidated Financial
Statementsan Amendment of ARB No. 51
 11




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##### 



Disclosures about Derivative Instruments and Hedging Activities
 Disclosure about Derivative Investments and Hedging
Activities an amendment to SFAS No. 133
 4. RESEARCH AND DEVELOPMENT COSTS
  5. INVENTORY
 June 30,
    
    
    December 31,2008
    
    
    2007Raw material supplies
    
    $
    2,106
    
    
    $
    1,693Work-in-process
    
    
    5,121
    
    
    
    2,454Finished goods
    
    
    422
    
    
    
    922$
    7,649
    
    
    $
    5,069
 6. SHARE CAPITAL
 Warrants
 Accounting for Derivative Instruments and Hedging Activities
  12




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##### 



Stock transactions
 (a) Loss per Share
  (b) Registration Statement
  13




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##### 



7. STOCK-BASED COMPENSATION
 Stock Option Plan
    Three months ended
    
    Six months endedJune 30,
    
    June 30,2008
    
    2007
    
    2008
    
    2007CDN$  Weighted average grant-date fair value for
stock options granted in CDN$
    
    
    
    
    
    $
    6.48
    
    
    $
    3.84
    
    
    $
    6.47US$  Weighted average grant-date fair value for
stock options granted in US$
    
    $
    2.93
    
    
    $
    
    
    
    $
    2.93
    
    
    $
    Expected dividend rate
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Expected volatility
    
    
    114.46
    %
    
    
    102.52
    %
    
    
    114.19
    %
    
    
    102.52
    %Risk-free interest rate
    
    
    3.09
    %
    
    
    4.22
    %
    
    
    3.09
    %
    
    
    4.21
    %Expected life of options in years
    
    
    6.0
    
    
    
    6.0
    
    
    
    6.0
    
    
    
    6.0
 8. IMPACT OF FOREIGN CURRENCY TRANSLATION
  9. CONTINGENCIES, COMMITMENTS, AND GUARANTEES
 Royalties
  14




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##### 



Guarantees
    10. FINANCIAL INSTRUMENTS
  Credit risk
  15




---



##### 



Interest rate risk
  Foreign exchange risk
    Short-term investments
  16




---



##### 



Accounts receivable, government grant receivable and accounts payable and accrued liabilities
  Notes receivable
  Capital lease obligations
  Notes payable
  Limitations
   Fair Value Measurements at June 30, 2008Significant other
    
    SignificantQuoted prices in
    
    observable
    
    unobservableTotal carrying
    
    active markets
    
    inputs
    
    inputsvalue
    
    (Level -1)
    
    (Level 2)
    
    (Level 3)Short term investments
    
    $
    4,806
    
    
    $
    
    
    
    $
    4,806
    
    
    $
    Capital lease obligations
    
    
    114
    
    
    
    
    
    
    
    119
    
    
    
    
 17




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##### 



11. SEGMENTED INFORMATION
  Three months
    
    
    Three months
    
    
    Six months
    
    
    Six monthsended
    
    
    ended
    
    
    ended
    
    
    endedJune 30,
    
    
    June 30,
    
    
    June 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Revenue from operations inCanada
    
    $
    4
    
    
    $
    17
    
    
    $
    8
    
    
    $
    30United States
    
    
    1,148
    
    
    
    
    
    
    
    3,123
    
    
    
    Barbados
    
    
    
    
    
    
    556
    
    
    
    28
    
    
    
    697Europe
    
    
    
    
    
    
    17
    
    
    
    13
    
    
    
    34$
    1,152
    
    
    $
    590
    
    
    $
    3,172
    
    
    $
    761DepreciationCanada
    
    $
    81
    
    
    $
    43
    
    
    $
    154
    
    
    $
    91United States
    
    
    22
    
    
    
    2
    
    
    
    52
    
    
    
    11$
    103
    
    
    $
    45
    
    
    $
    206
    
    
    $
    102
 June 30,
    
    
    December 31,2008
    
    
    2007Long-lived assetsCanada
    
    $
    737
    
    
    $
    833United States
    
    
    2,654
    
    
    
    2,662$
    3,391
    
    
    $
    3,495
   Customers
    
    RevenueSix months ended June 30, 2007
    
    
    1
    
    
    $
    732Six months ended June 30, 2008
    
    
    1
    
    
    $
    3,165
 18




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##### 



12. SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN THE
UNITED STATES AND CANADA
  Three months
    
    
    Three months
    
    
    Six months
    
    
    Six monthsended
    
    
    ended
    
    
    ended
    
    
    endedJune 30,
    
    
    June 30,
    
    
    June 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Consolidated statements of operations and other
comprehensive incomeNet loss  U.S. GAAP
    
    $
    (4,916
    )
    
    $
    (4,961
    )
    
    $
    (10,030
    )
    
    $
    (9,637
    )Intangible assets (1), (3)
    
    
    (783
    )
    
    
    (734
    )
    
    
    (1,566
    )
    
    
    (1,413
    )Future income taxes (1)
    
    
    299
    
    
    
    422
    
    
    
    820
    
    
    
    1,051Acquired in-process research and development,
net of future income taxes (2)
    
    
    
    
    
    
    13
    
    
    
    
    
    
    
    434Change in fair value of warrants (3)
    
    
    
    
    
    
    (402
    )
    
    
    
    
    
    
    (668
    )Net loss  Canadian GAAP
    
    $
    (5,400
    )
    
    $
    (5,662
    )
    
    $
    (10,776
    )
    
    $
    (10,233
    )Weighted average number of common shares
outstanding
    
    
    19,491,641
    
    
    
    19,485,889
    
    
    
    19,488,801
    
    
    
    19,485,889Loss per common shareBasic and diluted loss per share  U.S. GAAP
    
    $
    (0.25
    )
    
    $
    (0.25
    )
    
    $
    (0.51
    )
    
    $
    (0.49
    )Basic and diluted loss per share  Canadian GAAP
    
    $
    (0.28
    )
    
    $
    (0.29
    )
    
    $
    (0.55
    )
    
    $
    (0.53
    )
 Six months
    
    
    Six monthsended
    
    
    endedJune 30,
    
    
    June 30,2008
    
    
    2007Other comprehensive (loss) income  U.S. GAAP
    
    $
    (31
    )
    
    $
    1,990Foreign currency translation adjustments
    
    
    
    
    
    
    2,432Other comprehensive (loss) income  Canadian GAAP
    
    $
    (31
    )
    
    $
    4,422
 19




---



##### 



June 30,
    
    
    December 31,2008
    
    
    2007Canadian
    
    
    
    
    
    
    CanadianU.S. GAAP
    
    
    GAAP
    
    
    U.S. GAAP
    
    
    GAAPConsolidated balance sheetsIntangible assets (1), (2)
    
    $
    
    
    
    $
    36,406
    
    
    $
    
    
    
    $
    37,972Future income tax liability (1)
    
    
    
    
    
    
    9,648
    
    
    
    
    
    
    
    10,468Warrant liability (3)
    
    
    
    
    
    
    
    
    
    
    64
    
    
    
    Common Stock (1), (3)
    
    
    325,043
    
    
    
    324,188
    
    
    
    324,992
    
    
    
    324,137Additional paid-in capital (3)
    
    
    14,329
    
    
    
    22,296
    
    
    
    13,636
    
    
    
    21,603Deficit (1), (2), (3)
    
    
    (331,573
    )
    
    
    (320,461
    )
    
    
    (321,543
    )
    
    
    (309,685
    )Accumulated other comprehensive loss
    
    
    (5,097
    )
    
    
    (1,277
    )
    
    
    (5,066
    )
    
    
    (1,246
    )Warrants
    
    
    64
    
    
    
    4,778
    
    
    
    
    
    
    
    4,778Total Stockholders equity
    
    
    2,766
    
    
    
    29,524
    
    
    
    12,019
    
    
    
    39,587
  June 30,
    
    
    December 31,2008
    
    
    2007Stockholders equity  U.S. GAAP
    
    $
    2,766
    
    
    $
    12,019Intangible assets (1), (2)
    
    
    36,406
    
    
    
    37,972Future income taxes (1)
    
    
    (9,648
    )
    
    
    (10,468
    )Warrant liability reclassification (3)
    
    
    
    
    
    
    64Stockholders equity  Canadian GAAP
    
    $
    29,524
    
    
    $
    39,587
  Six months
    
    
    Six monthsended
    
    
    endedJune 30,
    
    
    June 30,2008
    
    
    2007Accumulated other comprehensive loss U.S. GAAP
    
    $
    (5,097
    )
    
    $
    (6,319
    )Foreign currency translation adjustments
    
    
    3,820
    
    
    
    1,850Accumulated other comprehensive loss  Canadian GAAP
    
    $
    (1,277
    )
    
    $
    (4,469
    )
 20




---



##### 



Six months
    
    
    Six monthsended
    
    
    endedJune 30,
    
    
    June 30,2008
    
    
    2007Consolidated statements of cash flow  Canadian GAAPCash and cash equivalents, beginning of period
    
    $
    12,035
    
    
    $
    13,409Cash used in operating activities (2)
    
    
    (9,675
    )
    
    
    (8,952
    )Cash provided by investing activities (2)
    
    
    6,866
    
    
    
    2,550Cash used in financing activities
    
    
    (56
    )
    
    
    (192
    )Effect of exchange rate fluctuations on cash and cash equivalents
    
    
    211
    
    
    
    906Cash and cash equivalents, end of period
    
    $
    9,381
    
    
    $
    7,721
 
 (1)
    
    Business acquisitions   (2)
    
    Intangible assets acquired from others for use in research and development
  21




---



##### 



(3)
    
    Warrants
   Canadian GAAP accounting standards adopted in the current year
 Inventories
 Inventories
 Financial instruments  Disclosures and Presentations
 Financial Instruments 
Disclosures Financial Instruments 
Disclosures and Presentation Financial Instruments  Presentations
 22




---



##### 



Capital Disclosures
 Capital Disclosures
 .
   Going Concern
  Canadian GAAP accounting standards effective in future years
 Goodwill and Intangible Assets
  Financial Statement Concepts
  23




---



##### 



24




---



##### 



13. OTHER INFORMATION
    As previouslyreported
    
    
    As restatedCanadian
    
    
    U.S. GAAPGAAP CDN $
    
    
    U.S. $RevenueContract research and development
    
    $
    649
    
    
    $
    572Licensing revenue from collaborative agreements
    
    
    191
    
    
    
    168Licensing, royalties, and other revenue
    
    
    24
    
    
    
    21864
    
    
    
    761ExpensesResearch and development
    
    
    6,688
    
    
    
    6,327General and administrative
    
    
    4,681
    
    
    
    4,125Marketing and business development
    
    
    581
    
    
    
    512Depreciation
    
    
    1,719
    
    
    
    102Investment and other income
    
    
    
    
    
    
    Change in fair value of warrant liability
    
    
    
    
    
    
    (668
    )13,669
    
    
    
    10,398Loss before income taxes
    
    
    (12,805
    )
    
    
    ( 9,637
    )Income tax recovery:Future
    
    
    1,193
    
    
    
    Net loss
    
    
    (11,612
    )
    
    
    (9,637
    )Other comprehensive (loss) income
    
    
    (52
    )
    
    
    1,990Comprehensive loss
    
    $
    (11,664
    )
    
    $
    (7,647
    )Basic and diluted loss per share
    
    $
    (0.60
    )
    
    $
    (0.49
    )Weighted average number of common shares
outstanding
    
    
    19,485,889
    
    
    
    19,485,889
 25




---



##### 



As previouslyreported
    
    
    As restatedCanadian
    
    
    U.S. GAAPGAAP CDN $
    
    
    U.S. $OperatingNet loss
    
    $
    (11,612
    )
    
    $
    (9,637
    )Depreciation
    
    
    1,719
    
    
    
    102Future income tax recovery
    
    
    (1,193
    )
    
    
    Stock-based compensation expense
    
    
    948
    
    
    
    835Change in fair value of warrant liability
    
    
    
    
    
    
    (668
    )Gain on sale of short-term investments
    
    
    (52
    )
    
    
    (46
    )Proceeds from collaborative agreements
    
    
    2,925
    
    
    
    2,500Foreign exchange gain on notes payable
    
    
    (20
    )
    
    
    Deferred revenue
    
    
    (191
    )
    
    
    (168
    )Foreign exchange loss on cash and cash equivalents
    
    
    307
    
    
    
    Net change in non-cash working capital balances
from operationsAccounts receivable
    
    
    719
    
    
    
    634Prepaid expenses
    
    
    (55
    )
    
    
    (48
    )Inventory
    
    
    (3,140
    )
    
    
    (2,767
    )Accounts payable and accrued liabilities
    
    
    (140
    )
    
    
    (123
    )(9,785
    )
    
    
    (9,386
    )InvestingPurchase of short-term investments
    
    
    (19,428
    )
    
    
    (17,119
    )Redemption of short-term investments
    
    
    23,226
    
    
    
    20,465Purchase of plant and equipment
    
    
    (134
    )
    
    
    (118
    )Payment of accrued business acquisition costs
    
    
    (277
    )
    
    
    (244
    )Purchase of intangible assets
    
    
    (493
    )
    
    
    2,894
    
    
    
    2,984FinancingRepayment of share issuance costs
    
    
    (192
    )
    
    
    (169
    )Repayment of capital lease obligation
    
    
    (26
    )
    
    
    (23
    )(218
    )
    
    
    (192
    )Net cash outflow
    
    
    (7,109
    )
    
    
    (6,594
    )Effect of exchange rate fluctuations on cash and cash equivalents
    
    
    (307
    )
    
    
    906Decrease in cash and cash equivalents
    
    
    (7,416
    )
    
    
    (5,688
    )Cash and cash equivalents, beginning of period
    
    
    15,626
    
    
    
    13,409Cash and cash equivalents, end of period
    
    $
    8,210
    
    
    $
    7,721Supplemental disclosure of cash flow informationAmount of interest paid in the period
    
    $
    1
    
    
    $
    1Amount of income taxes paid in the period
    
    $
    
    
    
    $
    
 26




---



##### 



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 The information in this Item 2  Managements Discussion and Analysis of Financial Condition
and Results of Operations should be read in conjunction with our consolidated financial statements
and related notes included in Part I, Item 1 of this quarterly report. This discussion contains
forward-looking statements based on current expectations that involve risks and uncertainties, such
as our plans, objectives, expectations and intentions. These forward-looking statements are
subject to certain risks and uncertainties that could cause actual results to differ materially
from those anticipated in the forward-looking statements. Factors that might cause such a
difference include, but are not limited to, those discussed in this quarterly report in Part II,
Item 1A  Risk Factors, and elsewhere in this quarterly report These statements, like all
statements in this quarterly report, speak only as of their date, and we undertake no obligation to
update or revise these statements in light of future developments.
 Overview
     27




---



##### 



28




---



##### 



Key Financial Metrics
 Revenue
  Contract Research and Development
 29




---



##### 



Contract Manufacturing
 Licensing Revenue from Collaborative Agreements
 Other Revenue
 Expenses
 Research and Development/Manufacturing
   30




---



##### 



General and Administrative
 31




---



##### 



Marketing and Business Development
 Depreciation
 Investment and other income
 Interest expense
 Change in fair value of warrants
 Critical Accounting Policies and Significant Judgments and Estimates
  32




---



##### 



Foreign Currency Translation;
  33




---



##### 



Results of Operations for the Quarters Ended June 30, 2008 and June 30, 2007
  Overview
 Three Months Ended
    
    %
    
    Six Months Ended
    
    %June 30,
    
    Change
    
    June 30,
    
    Change2008
    
    2007
    
    
    
    
    
    2008
    
    2007(In millions, except per
    
    
    
    
    
    (In millions, except pershare amounts)
    
    
    
    
    
    share amounts)Revenue
    
    $
    1.2
    
    
    $
    0.6
    
    
    
    100.0
    %
    
    $
    3.2
    
    
    $
    0.8
    
    
    
    300.0
    %Expenses
    
    
    6.1
    
    
    
    6.0
    
    
    
    1.7
    %
    
    
    13.2
    
    
    
    11.1
    
    
    
    18.9
    %Change in fair value of
warrant liability
    
    
    
    
    
    
    (0.4
    )
    
    
    N/M
    +
    
    
    
    
    
    
    (0.7
    )
    
    
    N/M
    +Net loss
    
    $
    4.9
    
    
    $
    5.0
    
    
    
    (2.0
    )%
    
    $
    10.0
    
    
    $
    9.6
    
    
    
    4.2
    %Other comprehensive
(income) loss
    
    
    (.1
    )
    
    
    (.8
    )
    
    
    (87.5
    )%
    
    
    0.0
    
    
    
    (2.0
    )
    
    
    N/M
    +Comprehensive loss
    
    $
    4.8
    
    
    $
    4.2
    
    
    
    14.3
    %
    
    $
    10.0
    
    
    $
    7.6
    
    
    
    31.6
    %Basic and diluted loss per
share
    
    $
    0.25
    
    
    $
    0.25
    
    
    
    N/M
    +
    
    $
    0.51
    
    
    $
    0.49
    
    
    
    4.1
    %
 
    34




---



##### 



Revenue
 Three Months Ended
    
    
    
    
    
    
    Six Months EndedJune 30,
    
    
    % Change
    
    
    June 30,
    
    
    % Change2008
    
    
    2007
    
    
    
    
    
    
    2008
    
    
    2007(In millions)
    
    
    
    
    
    
    (In millions)Contract research
and development
    
    $
    
    
    
    $
    0.5
    
    
    
    N/M
    +
    
    $
    
    
    
    $
    0.6
    
    
    
    N/M
    +Contract manufacturing
    
    
    0.8
    
    
    
    
    
    
    
    N/M
    +
    
    
    2.5
    
    
    
    
    
    
    
    N/M
    +License revenue from
collaborative agreements
    
    
    0.4
    
    
    
    0.1
    
    
    
    300.0
    %
    
    
    0.7
    
    
    
    0.2
    
    
    
    250.0
    %$
    1.2
    
    
    $
    0.6
    
    
    
    100.0
    %
    
    $
    3.2
    
    
    $
    0.8
    
    
    
    300.0
    %
 
 +
    
    Not meaningful    Research and Development / Manufacturing Expenses
 Three Months Ended
    
    
    
    
    
    
    Six Months EndedJune 30,
    
    
    % Change
    
    
    June 30,
    
    
    % Change2008
    
    
    2007
    
    
    
    
    
    
    2008
    
    
    2007(In millions)
    
    
    
    
    
    
    (In millions)Research and development
    
    $
    2.7
    
    
    $
    3.4
    
    
    
    (20.6
    )%
    
    $
    5.0
    
    
    $
    6.3
    
    
    
    (20.6
    )%Manufacturing
    
    
    0.6
    
    
    
    
    
    
    
    N/M
    +
    
    
    2.7
    
    
    
    
    
    
    
    N/M
    +$
    3.3
    
    
    $
    3.4
    
    
    
    (2.9
    )%
    
    $
    7.7
    
    
    $
    6.3
    
    
    
    22.2
    %
  -35-




---



##### 



General and Administrative Expense
 Three Months Ended
    
    
    
    
    
    Six Months EndedJune 30,
    
    
    
    
    
    June 30,2008
    
    2007
    
    % Change
    
    2008
    
    2007
    
    % Change(In millions)
    
    
    
    
    
    (In millions)General and administrative
    
    $
    2.7
    
    
    $
    2.2
    
    
    
    22.7
    %
    
    $
    5.4
    
    
    $
    4.1
    
    
    
    31.7
    %
  Marketing and Business Development Expense
 Three Months Ended
    
    
    
    
    
    Six Months EndedJune 30,
    
    
    
    
    
    June 30,2008
    
    2007
    
    % Change
    
    2008
    
    2007
    
    % Change(In millions)
    
    
    
    
    
    (In millions)Marketing and
Business
Development
    
    $
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    $
    0.5
    
    
    
    N/M+
  Depreciation Expense
 Three Months Ended
    
    
    
    
    
    Six Months EndedJune 30,
    
    
    
    
    
    June 30,2008
    
    2007
    
    % Change
    
    2008
    
    2007
    
    % Change(In millions)
    
    
    
    
    
    (In millions)Depreciation
    
    $
    0.1
    
    
    $
    
    
    
    
    N/M+
    
    
    $
    0.2
    
    
    $
    0.1
    
    
    
    100.0
    %
  -36-




---



##### 



Investment and Other Income
 Three Months Ended
    
    
    
    
    
    Six Months EndedJune 30,
    
    
    
    
    
    June 30,2008
    
    2007
    
    % Change
    
    2008
    
    2007
    
    % Change(In millions)
    
    
    
    
    
    (In millions)Investment and
Other
Income/(Expense)
    
    $
    0.1
    
    
    $
    (0.3
    )
    
    
    (133.3
    )%
    
    $
    0.1
    
    
    $
    
    
    
    
    N/M+
 
 +
    
    Not meaningful  Change in Fair Value of Warrant Liability
 Three Months Ended
    
    
    
    
    
    Six Months EndedJune 30,
    
    
    
    
    
    June 30,2008
    
    2007
    
    % Change
    
    2008
    
    2007
    
    % Change(In millions)
    
    
    
    
    
    (In millions)Change in fair value of
warrant liability
    
    $
    
    
    
    $
    0.4
    
    
    
    N/M+
    
    
    $
    
    
    
    $
    0.7
    
    
    
    N/M+
 Accounting for Derivative Instruments and
Hedging Activities
 -37-




---



##### 



Liquidity and Capital Resources
 Cash, cash equivalents, short term investments and working capital
      Cash Flows From Operating Activities
  -38-




---



##### 



Cash Flows From Investing Activities
  Cash Flows From Financing Activities
  Contractual Obligations and Contingencies
 Payments Due by PeriodLess thanTotal
    
    
    1 Year
    
    
    1-3 Years
    
    
    4-5 Years
    
    
    After 5 Years(In thousands)Operating leases  premises
    
    $
    6,950
    
    
    $
    929
    
    
    $
    1,686
    
    
    $
    1,368
    
    
    $
    2,967Capital lease obligations
(including interest)
    
    
    117
    
    
    
    83
    
    
    
    34
    
    
    
    
    
    
    
    Total contractual obligations
    
    $
    7,067
    
    
    $
    1,012
    
    
    $
    1,720
    
    
    $
    1,368
    
    
    $
    2,967
    -39-




---



##### 



Guarantees and Indemnification
  Off-Balance Sheet Arrangements
  -40-




---



##### 



Recent Accounting Pronouncements
 Fair
Value Measurements
  
    
    Level 1  quoted prices in active markets for identical assets or liabilities,
    
    Level 2  observable inputs other than Level 1 prices such as quoted prices for similar
assets or liabilities, quoted prices in markets that are not active, or other inputs that
are observable or can be corroborated by observable market data for substantially the full
term of the assets or liabilities, and
    
    Level 3  unobservable inputs that are supported by little or no market activity and
that are significant to the fair value of the assets or liabilities.
  The Fair Value Option for Financial Assets and
Financial Liabilities
 Accounting
for Non Refundable Advance Payments for Goods or Services Received for Use in Future Research and
Development Activities
 -41-




---



##### 



The Hierarchy
of Generally Accepted Accounting Principles (SFAS 162)
   Collaborative
Arrangements
 Business Combinations
 Noncontrolling Interests in Consolidated Financial
Statements  an Amendment of ARB No. 51
 -42-




---



##### 



Accounting for Derivative
Instruments and Hedging Activities,
 
 Item 3. Qualitative and Quantitative Disclosures about Market Risks
 Foreign Currency Exchange Risk
  Interest Rate Sensitivity
  
 Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  -43-




---



##### 



Changes in Internal Control Over Financial Reporting
  Remediation
  Inherent Limitation on the Effectiveness of Internal Controls
  -44-




---



##### 



PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
 Set forth below and elsewhere in this quarterly report, and in other documents we file with
the SEC are descriptions of risks and uncertainties that could cause actual results to differ
materially from the results contemplated by the forward-looking statements contained in this
report. Because of the following factors, as well as other variables affecting our operating
results, past financial performance should not be considered a reliable indicator of future
performance and investors should not use historical trends to anticipate results or trends in
future periods. The risks and uncertainties described below are not the only ones facing us.
Other events that we do not currently anticipate or that we currently deem immaterial also affect
our results of operations and financial condition.
 Risks Relating to our Business
 Our near-term success is highly dependent on the success of our lead product candidate,
Stimuvax, and we cannot be certain that it will receive regulatory approval or be successfully
commercialized.
  Our ability to continue as a going concern is dependent on our success at raising additional
capital sufficient to meet our obligations on a timely basis. If we fail to obtain additional
financing when needed, we may be unable to complete the development, regulatory approval and
commercialization of our product candidates.
  -45-




---



##### 




    
    our commercialization activities and arrangements;
    
    the progress of our research and development programs;
    
    the progress of our pre-clinical and clinical testing;
    
    the time and cost involved in obtaining regulatory approvals for our product
candidates;
    
    the cost of filing, prosecuting, defending and enforcing any patent claims and other
intellectual property rights with respect to our intellectual property;
    
    the effect of competing technological and market developments;
    
    the effect of changes and developments in our existing collaborative, licensing and
other relationships; and
    
    the terms of any new collaborative, licensing and other arrangements that we may
establish.
  Stimuvax and our other vaccine product candidates are based on novel technologies, which may
raise new regulatory issues that could delay or make FDA approval more difficult.
   -46-




---



##### 



We have a history of net losses, we anticipate additional losses and we may never become
profitable.
  There is no assurance that we will be granted regulatory approval for any of our product
candidates.
  We are dependent upon our collaborative relationship with Merck KGaA to develop and
commercialize our lead product candidate, Stimuvax.
  -47-




---



##### 



We currently rely on third party manufacturers to supply our product candidates, which could
delay or prevent the clinical development and commercialization of our product candidates.
     -48-




---



##### 



The continuing threat of terrorist attacks on the United States and current concern regarding
the possibility of further chemical/biological terrorist threats could interfere with the
manufacturing and distribution of our product candidates.
  Any failure or delay in commencing or completing clinical trials for our product candidates
could severely harm our business.
  
    
    our or our collaborators ability to obtain regulatory approval to commence a
clinical trial;
    
    our or our collaborators ability to manufacture or obtain from third parties
materials sufficient for use in pre-clinical studies and clinical trials;
    
    delays in patient enrollment and variability in the number and types of patients
available for clinical trials;
    
    poor effectiveness of product candidates during clinical trials;
    
    safety issues or side effects;
    
    governmental or regulatory delays and changes in regulatory requirements, policy and
guidelines; and
    
    varying interpretation of data by the FDA and similar foreign regulatory agencies.
  -49-




---



##### 



The failure to enroll patients for clinical trials may cause delays in developing our product
candidates.
  We rely on third parties to conduct our clinical trials. If these third parties do not
perform as contractually required or otherwise expected, we may not be able to obtain regulatory
approval for or be able to commercialize our product candidates.
  Even if regulatory approval is received for our product candidates, the later discovery of
previously unknown problems with a product, manufacturer or facility may result in restrictions,
including withdrawal of the product from the market.
  
    
    warning letters;
    
    fines;
    
    product recalls;
    
    withdrawal of regulatory approval;
    
    operating restrictions;
    
    disgorgement of profits;
 -50-




---



##### 




    
    injunctions; and
    
    criminal prosecution.
  Failure to obtain regulatory approval in foreign jurisdictions would prevent us from marketing
our products internationally.
  Our product candidates may never achieve market acceptance even if we obtain regulatory
approvals.
  
    
    our ability to provide acceptable evidence of safety and efficacy;
    
    the prevalence and severity of adverse side effects;
    
    availability, relative cost and relative efficacy of alternative and competing
treatments;
    
    the effectiveness of our marketing and distribution strategy;
    
    publicity concerning our products or competing products and treatments; and
    
    our ability to obtain sufficient third party insurance coverage or reimbursement.
 -51-




---



##### 



If we are unable to obtain, maintain and enforce our proprietary rights, we may not be able to
compete effectively or operate profitably.
  
    
    obtain patent and other proprietary protection for our technology, processes and
product candidates;
    
    defend patents once issued;
    
    preserve trade secrets; and
    
    operate without infringing the patents and proprietary rights of third parties.
  
    
    we might not have been the first to make the inventions covered by any of our
patents, if issued, or our pending patent applications;
    
    we might not have been the first to file patent applications for these inventions;
    
    others may independently develop similar or alternative technologies or products
and/or duplicate any of our technologies and/or products;
    
    it is possible that none of our pending patent applications will result in issued
patents or, if issued, these patents may not be sufficient to protect our technology or
provide us with a basis for commercially-viable products and may not provide us with
any competitive advantages;
    
    if our pending applications issue as patents, they may be challenged by third
parties as infringed, invalid or unenforceable under U.S. or foreign laws;
    
    if issued, the patents under which we hold rights may not be valid or enforceable;
or
    
    we may develop additional proprietary technologies that are not patentable and which
may not be adequately protected through trade secrets, if for example a competitor were
to independently develop duplicative, similar or alternative technologies.
  -52-




---



##### 



-53-




---



##### 



If any products we develop become subject to unfavorable pricing regulations, third party
reimbursement practices or healthcare reform initiatives, our ability to successfully commercialize
our products will be impaired.
  -54-




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Foreign governments often impose strict price controls, which may adversely affect our future
profitability.
  We face potential product liability exposure, and if successful claims are brought against us,
we may incur substantial liability for a product candidate and may have to limit its
commercialization.
  
    
    decreased demand for our product candidates;
    
    impairment of our business reputation;
    
    withdrawal of clinical trial participants;
    
    costs of related litigation;
    
    substantial monetary awards to patients or other claimants;
    
    loss of revenues; and
    
    the inability to commercialize our product candidates.
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We face substantial competition, which may result in others discovering, developing or
commercializing products before, or more successfully, than we do.
  Stimuvax
 Small Molecule Products
  
    
    design and develop products that are superior to other products in the market;
    
    attract qualified scientific, medical, sales and marketing and commercial personnel;
    
    obtain patent and/or other proprietary protection for our processes and product
candidates;
    
    obtain required regulatory approvals; and
    
    successfully collaborate with others in the design, development and
commercialization of new products.
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If we are unable to enter into collaborations with partners to perform sales and marketing
functions, or build these functions ourselves, we will not be able to commercialize our product
candidates.
  
    
    our inability to recruit and retain adequate numbers of effective sales and
marketing personnel;
    
    the inability of sales personnel to obtain access to or persuade adequate numbers of
physicians to prescribe our products;
    
    the lack of complementary products to be offered by sales personnel, which may put
us at a competitive disadvantage relative to companies with more extensive product
lines; and
    
    unforeseen costs and expenses associated with creating a sales and marketing
organization.
  If we lose key personnel, or we are unable to attract and retain highly-qualified personnel on
a cost-effective basis, it would be more difficult for us to manage our existing business
operations and to identify and pursue new growth opportunities.
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Our business is subject to increasingly complex environmental legislation that has increased
both our costs and the risk of noncompliance.
  If we fail to establish and maintain proper and effective internal controls, our ability to
produce accurate financial statements on a timely basis could be impaired, which would adversely
affect our consolidated operating results, our ability to operate our business, and our stock
price.
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We may expand our business through the acquisition of companies or businesses or in-licensing
product candidates that could disrupt our business and harm our financial condition.
  
    
    substantial cash expenditures;
    
    potentially dilutive issuance of equity securities;
    
    incurrence of debt and contingent liabilities, some of which may be difficult or
impossible to identify at the time of acquisition;
    
    difficulties in assimilating the operations of the acquired companies;
    
    diverting our managements attention away from other business concerns;
    
    entering markets in which we have limited or no direct experience; and
    
    potential loss of our key employees or key employees of the acquired companies or
businesses.
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Risks Related to the Ownership of Our Common Stock
 Our common stock may become ineligible for listing on the NASDAQ Global Market, which would
materially adversely affect the liquidity and price of our common stock.
  The trading price of our common stock may be volatile.
  
    
    the results of pre-clinical testing and clinical trials by us, our collaborators
and/or our competitors;
    
    technological innovations or new therapeutic products;
    
    governmental regulations;
    
    developments in patent or other proprietary rights;
    
    litigation;
    
    public concern as to the safety of products developed by us or others;
    
    comments by securities analysts;
    
    the issuance of additional shares of common stock, or securities convertible into,
or exercisable or exchangeable for, shares of our common stock in connection with
financings, acquisitions or otherwise;
    
    the incurrence of debt;
 -60-




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
    
    general market conditions in our industry or in the economy as a whole; and
    
    political instability, natural disasters, war and/or events of terrorism.
  Because we do not expect to pay dividends on our common stock, stockholders will benefit from
an investment in our common stock only if it appreciates in value.
  Future sales of shares by existing stockholders could cause our stock price to decline.
  We expect to raise additional capital in the future; however, such capital may not be
available to us on reasonable terms, if at all, when or as we require additional funding. If we
issue additional shares of our common stock or other securities that may be convertible into, or
exercisable or exchangeable for, our common stock, our existing stockholders would experience
further dilution.
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Changes in financial accounting standards related to share-based payments are expected to
continue to have a significant effect on our reported results.
 Share-Based Payment
 Our operating results may be affected by currency exchange rate fluctuations.
  We can issue shares of preferred stock that may adversely affect the rights of a stockholder
of our common stock.
  
    
    adversely affect the voting power of the holders of our common stock;
    
    make it more difficult for a third party to gain control of us;
    
    discourage bids for our common stock at a premium;
    
    limit or eliminate any payments that the holders of our common stock could expect to
receive upon our liquidation; or
    
    otherwise adversely affect the market price or our common stock.
 
 -62-




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Item 6. Exhibits
 ExhibitNumber
    
    Description12.1
    
    
    Ratio of Earnings to Fixed Charges31.1
    
    
    Certification of Chief Executive Officer and President Pursuant to Exchange Act Rule 13a-14(a)31.2
    
    
    Certification of Chief Financial Officer Pursuant to Exchange Act Rule 13a-14(a)32.1
    
    
    Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 -63-




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SIGNATURES
  ONCOTHYREON INC.
(Registrant)Date:  August 11, 2008
    /s/ Edward A. TaylorVice President, Finance and Administration,Chief Financial Officer and Corporate Secretary -64-




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INDEX OF EXHIBITS
 ExhibitNumber
    
    Description12.1
    
    
    Ratio of Earnings to Fixed Charges31.1
    
    
    Certification of Chief Executive Officer and President Pursuant to Exchange Act Rule 13a-14(a)31.2
    
    
    Certification of Chief Financial Officer Pursuant to Exchange Act Rule 13a-14(a)32.1
    
    
    Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 -65-