UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended March 31, 2009
OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
to
Commission file number: 000-51686
NUCRYST Pharmaceuticals Corp.
(Exact name of registrant as specified in its charter)
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Alberta, Canada
(State or other jurisdiction of
incorporation or organization)
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Not Applicable
(I.R.S. Employer
Identification No.)
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101 College Road East, Princeton, NJ
(Address of principal executive offices)
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08540
(Zip Code)
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(609) 228-8210
(Registrants telephone number, including area code)
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.
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).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of Large
accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the
Exchange Act.
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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(Do not check if smaller reporting company)
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Smaller reporting company
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
Indicate the number of shares outstanding of each of the issuers classes of common stock, as
of the latest practicable date.
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Class
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Outstanding at May 1, 2009
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Common Shares
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18,323,865 shares
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TABLE OF CONTENTS
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Part I
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Financial Information
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Item 1.
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Financial Statements (unaudited)
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Condensed Consolidated Balance Sheets at March 31, 2009 and December 31, 2008
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Condensed Consolidated Statements of Operations for the three months ended March 31, 2009 and 2008
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Condensed Consolidated Statements
of Cash Flow for the three months ended March 31, 2009 and 2008
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Condensed Consolidated Statements of Shareholders Equity for the three months ended March 31, 2009
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Notes to Interim Condensed Consolidated Financial Statements
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Item 2.
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Managements Discussion and Analysis of Financial Condition and Results of Operations
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Item 4T.
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Controls and Procedures
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Part II
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Other Information
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Item 1.
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Legal Proceedings
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Item 1A.
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Risk Factors
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Item 4.
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Submission of Matters to a Vote of Security Holders
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Item 6.
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Exhibits
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In this Form 10-Q, unless otherwise specified, all monetary amounts are in United
States dollars, all references to $, U.S.$, U.S. dollars and dollars mean U.S. dollars and
all references to C$, Canadian dollars and CDN$ mean Canadian dollars. To the extent that
such monetary amounts are derived from our consolidated financial statements included elsewhere in
this Form 10-Q, they have been translated into U.S. dollars in accordance with our accounting
policies as described therein. Unless otherwise indicated, other Canadian dollar monetary amounts
have been translated into United States dollars at the March 31, 2009 noon buying rate reported by
the Bank of Canada, being U.S.$1.00 = C$1.2602.
PART I FINANCIAL INFORMATION
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ITEM 1.
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FINANCIAL STATEMENTS (UNAUDITED)
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NUCRYST Pharmaceuticals Corp.
Condensed Consolidated Balance Sheets
(unaudited)
(thousands of U.S. dollars)
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March 31, 2009
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December 31, 2008
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ASSETS
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Current
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Cash and cash equivalents
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$
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8,412
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$
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23,388
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Accounts receivable (note 10)
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4,210
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5,062
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Inventories (note 4)
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3,173
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2,887
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Prepaid expenses
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355
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414
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Total
current assets
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16,150
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31,751
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Restricted cash
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145
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Capital assets net
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8,822
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9,379
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Intangible assets net (note 5)
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479
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525
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Total assets
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$
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25,451
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$
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41,800
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LIABILITIES AND SHAREHOLDERS EQUITY
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Current
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Accounts payable and accrued liabilities
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$
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2,886
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$
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2,859
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Deferred lease inducement
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87
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90
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Total
current
liabilities
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2,973
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2,949
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Long term deferred lease inducement
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459
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495
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Total
liabilities
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3,432
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3,444
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Guarantees (note 9)
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Shareholders equity
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Common shares no par value, unlimited shares authorized: issued and outstanding 18,323,865 and 18,320,531
shares at
March 31, 2009 and December 31, 2008, respectively (note 7)
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68,133
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82,776
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Additional paid-in capital
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2,229
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2,178
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Accumulated other comprehensive loss
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(6,197
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(5,528
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Accumulated deficit
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(42,146
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(41,070
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Total shareholders equity
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22,019
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38,356
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Total
liabilities and shareholders equity
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$
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25,451
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$
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41,800
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The accompanying notes are an integral part of these unaudited condensed consolidated financial
statements.
3
NUCRYST Pharmaceuticals Corp.
Condensed Consolidated Statements of Operations
(unaudited)
(thousands of U.S. dollars except share and per share data)
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Three Months Ended March 31,
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2009
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2008
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Revenue
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Wound care product revenue
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$
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4,149
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$
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5,189
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Costs
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Manufacturing
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2,233
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4,100
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Research and development
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749
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1,487
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General and administrative
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2,628
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2,488
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Loss from operations
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(1,461
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(2,886
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Foreign exchange gains
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383
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638
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Interest income
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2
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70
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Loss before income taxes
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(1,076
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(2,178
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Current income tax expense
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2
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Net loss
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$
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(1,076
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$
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(2,180
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Loss per common share (note 8)
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Net loss basic and diluted
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$
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(0.06
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$
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(0.12
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Weighted average number of common shares
outstanding:
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basic
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18,321,864
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18,370,092
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diluted
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18,321,864
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18,370,092
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The accompanying notes are an integral part of these unaudited condensed consolidated financial
statements.
4
NUCRYST Pharmaceuticals Corp.
Condensed Consolidated Statements of Cash Flow
(unaudited)
(thousands of U.S. dollars)
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Three Months Ended March 31,
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2009
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2008
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Operating activities
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Net loss
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$
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(1,076
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$
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(2,180
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Items not affecting cash
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Depreciation and amortization
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362
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429
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Stock-based compensation expense
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64
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217
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Amortized lease inducement
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(22
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(27
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Changes in non cash working capital
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Accounts receivable
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779
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7,254
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Inventories
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(372
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905
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Prepaid expenses
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52
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(78
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Accounts payable and accrued liabilities
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94
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49
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Cash (used in) provided from operating
activities
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(119
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6,569
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Investing activities
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Restricted cash
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145
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(1
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Capital expenditures
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(34
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(705
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Intangible assets
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(4
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(8
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Cash (used in) provided from used in
investing activities
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107
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(714
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Financing activities
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Return of
capital to shareholders (note 7)
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(14,656
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Cash provided from financing activities
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(14,656
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Effect of exchange rate changes on cash
and cash equivalents
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(308
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(469
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Net (decrease) increase in cash and cash
equivalents
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(14,976
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5,386
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Cash and cash equivalents at beginning of
period
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23,388
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17,841
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Cash and cash equivalents at end of period
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$
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8,412
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$
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23,227
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Cash and cash equivalents is comprised of:
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Cash
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$
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3,777
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$
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13,923
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Cash equivalents
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4,635
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9,304
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Supplemental disclosure of cash flow information:
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Non-cash capital asset additions
included in accounts payable and
accrued liabilities at end of period
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$
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$
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6
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Cash paid for income taxes
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142
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The accompanying notes are an integral part of these unaudited condensed consolidated financial
statements.
5
NUCRYST Pharmaceuticals Corp.
Condensed Consolidated Statement of Shareholders Equity
(unaudited)
(thousands of U.S. dollars)
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Common Shares
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Accumulated
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Additional
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Other
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Total
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Total
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Stated
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Paid-in
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Comprehensive
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Accumulated
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Comprehensive
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Shareholders
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Number
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Amount
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Capital
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Loss
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Deficit
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Loss
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Equity
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December 31, 2008
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18,320,531
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$
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82,776
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$
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2,178
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$
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(5,528
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$
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(41,070
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)
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$
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38,356
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Issuance of common
shares for restricted share units
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3,334
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13
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(13
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$
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Stock-based compensation
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64
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64
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Return of capital to
shareholders
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(14,656
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(14,656
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Foreign currency
translation adjustments
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(669
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(669
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(669
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Net loss
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(1,076
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(1,076
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(1,076
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March 31 ,2009
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18,323,865
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$
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68,133
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$
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2,229
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$
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(6,197
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)
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$
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(42,146
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)
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$
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(1,745
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)
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$
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22,019
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
6
NUCRYST Pharmaceuticals Corp.
Notes to Interim Condensed Consolidated Financial Statements
For the three months ended March 31, 2009 and 2008
(unaudited)
(Unless otherwise indicated, all amounts are expressed in thousands of U.S. dollars, except share
and per share data)
1
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DESCRIPTION OF BUSINESS
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NUCRYST Pharmaceuticals Corp. (the Corporation) was incorporated on December 18, 1997 by
articles of incorporation under the Business Corporations Act (Alberta) as a wholly owned
subsidiary of The Westaim Corporation (the Parent). On December 29, 2005, the Corporation
completed an initial public offering for the sale of 4,500,000 common shares. Following the
initial public offering, the Parent continues to own a controlling interest in the Corporation.
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The Corporation develops, manufactures and commercializes innovative medical products that
fight infection and inflammation based on its noble metal nanocrystalline technology. The
Corporation produces nanocrystalline silver as a coating for wound care products under the
trademark SILCRYST
TM
and as a powder, that the Corporation refers to as NPI 32101,
for use in medical devices and as an active pharmaceutical ingredient.
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The Corporations revenue is comprised of wound care product revenue, which includes
manufacturing cost reimbursement on the sale of the Corporations
wound care products to Smith
& Nephew plc (Smith & Nephew) and royalties on the
further sale of those products by Smith & Nephew to third parties, as well as milestone payments earned upon the achievement of specified Smith & Nephew sales thresholds or
regulatory events. All of the Corporations revenues since May 2001 have been derived from
sales of the Corporations
wound care products to Smith & Nephew, royalties on the further
sale of those products and milestone
payments from Smith & Nephew.
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2
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BASIS OF PRESENTATION
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The unaudited interim condensed consolidated financial statements of the Corporation have
been prepared in accordance with accounting principles generally accepted in the United States
of America (GAAP). They do not include all information and notes required by GAAP in the
preparation of annual consolidated financial statements. The accounting policies used in the
preparation of the unaudited interim condensed consolidated financial statements are the same
as those described in the Corporations audited consolidated financial statements prepared in
accordance with GAAP for the year ended December 31, 2008.
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The Corporation makes estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities as of the date of the
consolidated financial statements and the reported amounts of revenues and expenses during the
reporting period. Actual results may differ from those estimates. Estimates are used when
accounting for items and matters such as the useful lives of capital assets and intangible
assets, inventory valuation, deferred tax asset valuation, uncertain tax positions, financial
instrument valuation, revenue recognition and the fair value of stock-based compensation.
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The Corporation believes all adjustments necessary for a fair statement of the results for
the periods presented have been made and all such adjustments were of a normal recurring
nature. The financial results for the three months ended March 31, 2009 are not necessarily
indicative of financial results for the full year. The unaudited interim condensed
consolidated financial statements should be read in conjunction with the Corporations annual
consolidated financial statements for the year ended December 31, 2008.
|
|
|
|
These condensed consolidated financial statements include the accounts of the Corporation
and its wholly owned subsidiary, NUCRYST Pharmaceuticals Inc., which was incorporated on
November 20, 1997 under the laws of the state of Delaware. All intercompany balances and
transactions have been eliminated during consolidation.
|
7
3
|
|
SIGNIFICANT ACCOUNTING PRINCIPLES
|
|
|
|
Accumulated other comprehensive loss
|
|
|
|
Comprehensive loss is comprised of net loss and other comprehensive loss. Other
comprehensive loss consists of foreign currency translation adjustments for the period, that
arise from the conversion of the Canadian dollar functional currency consolidated financial
statements to the U.S. dollar reporting currency consolidated financial statements.
Accumulated other comprehensive loss of $6,197 and $5,528 at March 31, 2009 and 2008,
respectively, consists of foreign currency translation adjustments.
|
|
|
|
Recently adopted and pending accounting pronouncements
|
|
|
|
SFAS 157-2
|
|
|
|
In February 2008, the FASB issued FSP SFAS 157-2, which delayed the effective date of SFAS
No. 157, Fair Value Measurement for all non-recurring fair value
measurements of nonfinancial assets and nonfinancial liabilities until the fiscal year beginning after
November 15, 2008. The Corporation adopted the provisions of SFAS 157 as it relates to reporting units
and indefinite-lived intangible assets measured at fair value for the purposes of goodwill and intangible asset
impairment testing as of January 1, 2009. The adoption of SFAS 157 did not have a material impact on the
Corporations consolidated financial position or results of operations.
|
|
|
|
SFAS 157-4
|
|
|
|
In April 2009, the FASB issued Statement No. 157-4, Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly. SFAS 157-4 provides additional guidance for
estimating fair value in accordance with FASB Statement No. 157, Fair Value Measurements,
when the volume and level of activity for the asset or liability have significantly decreased
and guidance for identifying circumstances that indicate a transaction is not orderly. This
pronouncement is effective for the periods ending after June 15, 2009. The Corporation is
currently assessing the impact SFAS 157-4 will have on its results of operations and
consolidated financial position.
|
|
|
|
SFAS 161
|
|
|
|
In March 2008, the FASB issued Statement No. 161, Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No. 133 (SFAS 161). SFAS
161 requires additional disclosures about the objectives of using derivative instruments, the
method by which the derivative instruments and related hedged items are accounted for under
FASB Statement No.133 and its related interpretations, and the effect of derivative instruments
and related hedged items on financial position, financial performance and cash flows. SFAS 161
also requires disclosure of the fair values of derivative instruments and their gains and
losses in a tabular format. SFAS 161 is effective for fiscal years beginning after November 15,
2008. The adoption of SFAS 161 did not have a material impact on the Corporations
consolidated financial position or results of operations.
|
|
|
|
EITF 07-1
|
|
|
|
In September 2007, the Emerging Issues Task Force (EITF) reached a consensus on EITF
Issue No. 07-1 Collaborative Arrangements (EITF 07-1). EITF 07-1 addresses the accounting
for arrangements in which two companies work together to achieve a commercial objective,
without forming a separate legal entity. The nature and purpose of a companys collaborative
arrangements are required to be disclosed, along with the accounting policies applied and the
classification and amounts for significant financial activities related to the arrangements.
EITF 07-1 is effective for fiscal years beginning after December 15, 2008. The adoption of
EITF 07-1 did not have a material impact on the Corporations consolidated financial position
or results of operations.
|
|
|
|
FASB Business Combinations
|
|
|
|
The FASB completed the second phase of its business combinations project, to date the most
significant convergence effort with the International Accounting Standards Board (IASB), and
issued the following two accounting standards:
|
|
i.
|
|
Statement No. 141(R), Business Combination; and
|
|
|
ii.
|
|
Statement No. 160, Non-controlling Interests in Consolidated Financial Statements
an amendment of ARB No. 51.
|
|
|
These statements change the way companies account for business combinations
and non-controlling interests (minority interests in current U.S. GAAP). Compared with their
predecessors, Statements 141(R) and 160 will require:
|
|
|
|
More assets acquired and liabilities assumed to be measured at fair value
as of the acquisition date;
|
8
3
|
|
SIGNIFICANT ACCOUNTING PRINCIPLES (Continued)
|
|
|
|
Liabilities related to contingent consideration to be re-measured at fair
value in each subsequent reporting period;
|
|
|
|
|
An acquirer in pre-acquisition periods to expense all acquisition related
costs; and
|
|
|
|
|
Non-controlling interests in subsidiaries initially to be measured at fair
value and classified as a separate component of equity.
|
|
|
Statements 141(R) and 160 should both be applied prospectively for fiscal years beginning
on or after December 15, 2008. However, Statement 160 requires entities to apply the
presentation and disclosure requirements retrospectively (e.g., by reclassifying
non-controlling interests to appear in equity) to comparative financial statements if
presented. Both standards prohibit early adoption. The adoption of these standards did not
have a material impact on the Corporations consolidated financial position or results of
operations.
|
|
|
|
SFAS 141R-1
|
|
|
|
In April 2009, the FASB issued Statement No. 141R-1, Accounting for Assets and
Liabilities Assumed in a Business Combination That Arise from Contingencies (SFAS 141R-1).
SFAS 141R-1 amends and clarifies SFAS 141R to address application issues regarding initial
recognition and measurement, subsequent measurement and accounting and disclosure of assets and
liabilities arising from contingencies in business combinations. SFAS 141R-1 is effective for
assets or liabilities arising from contingences in business combinations for which the
acquisition date is on or after the beginning of the first annual reporting period beginning on
or after December 15, 2008. The adoption of SFAS 141R-1 did not have a material impact on the
Corporations consolidated financial position or results of operations.
|
|
|
|
FSP SFAS 107-1 and Accounting Principles Board (APB) 28-1
|
|
|
|
In April 2009, the FASB issued FSP SFAS 107-1 and APB 28-1, which amends FASB
Statement No. 107, Disclosures about Fair Value of Financial
Instruments, to require disclosures about fair value of financial instruments in
interim as well as annual financial statements.
FSP SFAS 107-1 and APB 28-1 is effective for interim and fiscal periods beginning
after June 15, 2009. Because FSP SFAS 107-1 and APB 28-1 applies only to financial statement
disclosures, the Corporations adoption of this standard is not expected to have a material
impact on the Corporations consolidated financial position or results of operations.
|
|
4
|
|
INVENTORIES
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Raw materials
|
|
$
|
2,060
|
|
|
$
|
2,226
|
|
Materials in process
|
|
|
883
|
|
|
|
316
|
|
Finished product
|
|
|
230
|
|
|
|
345
|
|
|
Total
|
|
$
|
3,173
|
|
|
$
|
2,887
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Patents
|
|
$
|
2,107
|
|
|
$
|
2,165
|
|
Less accumulated amortization
|
|
|
(1,628
|
)
|
|
|
(1,640
|
)
|
|
Total
|
|
$
|
479
|
|
|
$
|
525
|
|
|
|
|
Amortization related to intangible assets was $34 and $51 for the three months ended March
31, 2009 and 2008.
|
9
|
|
Estimated future amortization expense of intangible assets at March 31, 2009 is as
follows:
|
|
|
|
|
|
|
2009 (remaining 9 months)
|
|
$
|
102
|
|
2010
|
|
|
118
|
|
2011
|
|
|
90
|
|
2012
|
|
|
66
|
|
2013
|
|
|
51
|
|
Thereafter
|
|
|
52
|
|
|
Total
|
|
$
|
479
|
|
|
6
|
|
INCOME TAXES
|
|
|
|
The Corporation adopted the provisions of FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes (FIN 48 an interpretation of FASB Statement No. 109, Accounting
for Income Taxes.) on January 1, 2007. During the year ended December 31, 2008, changes in
the amount of the Corporations unrecognized tax benefits were related to tax positions of 2008
and prior years.
|
|
|
|
The additions were mostly offset by reductions, resulting in unrecognized tax benefits of
$0.2 million at December 31, 2008. Additions and reductions of unrecognized tax benefits for
the three months ended March 31, 2009 were not material and were in respect of tax positions of
the current period.
|
|
|
|
The Corporation files federal and provincial income tax returns in Canada and its U.S.
subsidiary files federal and state income tax returns in the U.S. The Corporation is generally
no longer subject to income tax examinations by Canadian and U.S. tax authorities for years
before 2001. The Canada Revenue Agency (CRA) commenced an examination of the Corporations
Canadian income tax returns for 2001 and 2002 in the second quarter of 2005. The Corporation
has been working with the CRA to resolve the audit matters under review. Resolution of the
audit matters under review may apply to taxation years beyond 2002. Any reassessments to be
issued by the CRA, on an aggregate basis, could result in a material effect on the
Corporations consolidated financial statements, although at this time, the potential impact
cannot be reasonably estimated by the Corporation.
|
|
|
|
In assessing the realization of deferred tax assets, management considers whether it is
more likely than not that some portion or all of the deferred tax assets will not be realized.
At December 31, 2008 and March 31, 2009, the Corporations deferred tax assets were offset by a
valuation allowance. Management will continue to provide a full valuation allowance until it
determines that it is more likely than not that the deferred tax assets will be realized.
|
|
7
|
|
SHARE CAPITAL
|
|
|
|
At a special meeting of the Corporations shareholders held on February 12, 2009, the
shareholders passed a special resolution to reduce stated capital of the common shares of the
Corporation for the purpose of distributing $0.80 cash per common share to shareholders of the
Corporation as of the record date February 17, 2009. The
Corporation distributed an aggregate of $14,656 to
shareholders on February 25, 2009.
|
|
|
|
Stock-based compensation plans
|
|
|
|
The Corporation maintains an equity incentive plan (the Plan) for employees under which
stock options, stock appreciation rights and restricted share units (RSUs) may be granted.
In May 2008, the Corporation amended the Plan to increase the maximum number of common shares
reserved for issuance under the Plan from 2,200,000 common shares to an amount that is equal to
15% of the issued and outstanding common shares of the Corporation. As of March 31, 2009, 15%
of issued and outstanding shares represented 2,748,580 shares and
1,867,318 of this amount were available for grant under the Corporations stock-based compensation plans as of March 31,
2009.
|
|
|
|
The exercise price of each stock option and RSU is set at an amount not less than the
market value of the common shares of the Corporation at the time of grant. Stock options
generally vest evenly over a three-year period. Certain option grants are subject to immediate
vesting as to one-third of the grant, with the remaining two-thirds of the options vesting
evenly over a two-year period. All stock options expire ten years from the date of grant.
RSUs generally vest evenly over a period between two and three years. Awards that expire or are
forfeited generally become available for issuance under the plan.
|
10
7
|
|
SHARE CAPITAL (Continued)
|
|
|
|
Total stock-based compensation expense recognized under SFAS 123(R) for the three
months ended March 31, 2009 and 2008 was $64 and $217, respectively, and was included in general and
administrative expense.
|
|
|
|
A summary of the status of the Corporations stock option plan as at March 31, 2009 and
2008 and changes during the three months ended on those dates is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Options
|
|
|
Weighted Average Exercise Price
|
|
For the three months ended March 31
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Balance at beginning of
period
|
|
|
1,596,199
|
|
|
|
1,405,638
|
|
|
$
|
2.85
|
|
|
$
|
3.82
|
|
Granted
|
|
|
100,000
|
|
|
|
160,000
|
|
|
|
0.38
|
|
|
|
2.00
|
|
Forfeited
|
|
|
(836,269
|
)
|
|
|
(90,085
|
)
|
|
|
2.52
|
|
|
|
3.81
|
|
|
Balance at end of period
|
|
|
859,930
|
|
|
|
1,475,553
|
|
|
$
|
2.88
|
|
|
$
|
3.73
|
|
|
|
|
The weighted average remaining contractual life of options outstanding at March 31, 2009
was 8.27 years.
|
|
|
|
The fair value of each stock-based award is estimated on the date of grant using the
Black-Scholes option pricing model and the assumptions are noted in the table below. The
amounts computed according to the Black-Scholes pricing model may not be indicative of the
actual values realized upon the exercise of the options by the holders. The fair value and
vesting period of certain options with variable vesting provisions were estimated on the date
of grant using an alternative pricing model. The weighted average fair value of options
granted in the three months ended March 31, 2009 and 2008 was $0.31 and $1.62, respectively. As of March 31,
2009, total compensation cost related to unvested stock options not yet recognized was $383.
This amount is expected to be recognized over the next 36 months on a weighted-average basis.
|
|
|
|
The expected volatility used in the stock option valuation is the Corporations estimate
for the future volatility of the stock price based on a review of the historical volatility.
The dividend yield reflects the Corporations intention to not pay cash dividends in the
foreseeable future. The expected life is based on observed historical exercise patterns of
the Corporation. Groups of directors and employees that have different historical exercise
patterns are being considered separately for valuation purposes. The risk free interest rate
is based on the yield of a U.S. Government zero-coupon issue with a remaining life
approximately equal to the expected term of the option.
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31
|
|
Stock options
|
|
2009
|
|
2008
|
|
Expected volatility
|
|
|
93%
|
|
|
|
93%
|
|
Dividend yield
|
|
|
|
|
|
|
|
|
Expected life
|
|
7 years
|
|
|
7 years
|
|
Risk free rate
|
|
|
2.24%
|
|
|
|
4.63%
|
|
|
|
|
There were no RSUs granted during the three months ended March 31, 2009 and 2008. A
summary of the Corporations unvested RSUs as of March 31, 2009 and 2008 and changes during the three
months ended on those dates is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Grant
|
|
|
|
Number of RSUs
|
|
|
Date Fair Value
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Balance at beginning of period
|
|
|
27,999
|
|
|
|
39,200
|
|
|
$
|
1.98
|
|
|
$
|
3.02
|
|
Exercised
|
|
|
(3,334
|
)
|
|
|
(5,901
|
)
|
|
|
4.08
|
|
|
|
4.08
|
|
Forfeited
|
|
|
(3,333
|
)
|
|
|
|
|
|
|
2.00
|
|
|
|
|
|
|
Balance at end of period
|
|
|
21,332
|
|
|
|
33,299
|
|
|
$
|
1.64
|
|
|
$
|
2.84
|
|
|
11
8
|
|
LOSS PER SHARE
|
|
|
|
In calculating loss per share under the treasury stock method, the numerator remains
unchanged from the basic loss per share calculation as the assumed exercise of the
Corporations stock options does not result in an adjustment to income.
|
|
|
|
The impact of all dilutive securities on loss per share is anti-dilutive for the three
months ended March 31, 2009 and 2008, including all outstanding
options and RSUs.
Therefore, these options and RSUs were not included in the computation of diluted net loss per share.
|
|
9
|
|
GUARANTEES
|
|
|
|
The Corporation has not provided for product warranty obligations as products presently
sold to the Corporations customer carry a limited short term warranty and the Corporations
claims experience has been negligible.
|
|
|
|
In the normal course of operations, the Corporation may
provide indemnification in standard contractual terms to counterparties in transactions such as purchase and sale
agreements, service agreements, director/officer contracts and leasing transactions. These
indemnification agreements may require the Corporation to compensate the counterparties for
costs incurred as a result of various events, such as litigation claims or statutory sanctions
that may be suffered by the counterparty as a consequence of the transaction. The terms of
these indemnification agreements will vary based upon the agreement, which
prevents the Corporation from making a reasonable estimate of the maximum potential amount that
it could be required to pay to counterparties. Historically, the Corporation has not made any
payments under such arrangements and no amounts have been accrued in these condensed
consolidated financial statements with respect to these indemnification guarantees.
|
|
10
|
|
SEGMENTED INFORMATION
|
|
|
|
The Corporation operates in one reportable segment consisting of the manufacturing,
research, development and commercialization of medical products based on its proprietary noble
metal nanocrystalline technology. The Corporation currently manufactures wound care products
and all the Corporations revenues are earned through long-term agreements with Smith & Nephew.
The Corporation exports the manufactured wound care products directly to Smith & Nephew for
resale in international markets.
|
|
a)
|
|
Assets by geographic segment
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Canada
|
|
$
|
22,958
|
|
|
$
|
29,436
|
|
United States
|
|
|
2,493
|
|
|
|
12,364
|
|
|
|
|
$
|
25,451
|
|
|
$
|
41,800
|
|
|
|
b)
|
|
Capital assets and intangible assets by geographic segment
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Canada
|
|
$
|
9,247
|
|
|
$
|
9,871
|
|
United States
|
|
|
54
|
|
|
|
33
|
|
|
|
|
$
|
9,301
|
|
|
$
|
9,904
|
|
|
|
|
All of the Corporations revenues in the three months ended March 31, 2009 and 2008 were
earned through long-term agreements with Smith & Nephew for the sale and marketing of the
Corporations wound care products manufactured exclusively for Smith & Nephew. The agreements
expire in 2026.
|
12
|
|
|
ITEM 2.
|
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
Forward-Looking Statements
The following discussion should be read in conjunction with our unaudited, condensed
consolidated financial statements and notes thereto included in Part I Item 1 of this Form 10-Q
and the audited financial statements and notes thereto and Managements Discussion and Analysis of
Financial Condition and Results of Operations contained in our Annual Report on
Form 10-K
for the
year ended December 31, 2008. These historical financial statements may not be indicative of our
future performance. In this discussion, unless the context otherwise requires or indicates, the
terms the Company, our Company, NUCRYST, we, us and our refer to NUCRYST
Pharmaceuticals Corp. and its consolidated subsidiaries and their predecessors.
In addition to historical information, the information in this discussion contains
forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934 and/or forward-looking information under
applicable Canadian provincial securities laws (collectively forward-looking statements) which
are subject to the safe harbor created by those sections and include, but are not limited to,
statements that relate to projections of earnings, cash flows, capital expenditures or other
financial items, discussions of future revenue and product enhancements and cash savings. These
statements also relate to our business strategy, goals and expectations concerning future
operations, margins, liquidity, new product development and capital resources, as well as more
generally to the pharmaceutical and medical device industry and business, demographic and other
general matters. Forward-looking statements reflect our current views with respect to future
events and financial performance. These statements include forward-looking statements both with
respect to us specifically and the pharmaceutical and medical device industry and business,
demographic and other matters, in general. The words expect, intend, plan, believe,
project, estimate, anticipate, may, will, would, could, continue, further,
seek, and similar words or statements of a future or forward-looking nature are intended to
identify forward-looking statements for purposes of the federal securities laws or otherwise,
although not all forward-looking statements contain these identifying words.
All forward-looking statements you read in this quarterly report reflect our current views
with respect to future events and are subject to risks, uncertainties and assumptions relating to
our operations, results of operations, business strategy and liquidity and the markets for our
current and proposed products. Accordingly, there are or will be numerous important factors that could cause our actual results
and other circumstances and events to differ materially from those indicated in these statements
including, but not limited to: future shareholder actions with respect to our capitalization and
strategic direction; our ability to satisfy
regulatory and stock exchange standards and requirements to maintain our exchange listings; the performance of the stock
markets generally; the
uncertainty of our future operating results, which are likely to fluctuate; our reliance on and
ability to maintain our collaboration with Smith & Nephew; our reliance on sales of
Acticoat
products with our SILCRYST
coatings by Smith & Nephew; our ability
to achieve and sustain cost savings and operating efficiencies sufficient to substantially offset
the manufacturing cost rebate we have agreed to pay Smith & Nephew; our ability to retain skilled
and experienced personnel; the availability, timing or likelihood of regulatory filings and
approvals for our new products and our ability to maintain regulatory compliance with respect to
our existing products; our ability to establish successful commercialization programs, through
corporate collaborations or otherwise, for our NPI 32101 barrier cream and other development
programs; the impact of delays and challenges with new product introductions, the impact of new
product introductions on the sales of existing products; changes in currency exchange rates;
changes in regulation or tax laws applicable to us; changes in general economic and
capital market conditions; other risks and uncertainties that have not been identified at this
time; and managements response to these factors.
The foregoing list should not be construed as exhaustive, and you
should specifically consider the other cautionary statements that are identified in the section
Risk Factors included in this quarterly report and in our Annual Report on Form 10-K for the year
ended December 31, 2008.
13
Other than as required by applicable law, we undertake no obligation publicly to update
or review any forward-looking statement, whether as a result of new information, events,
circumstances or developments of which we may become aware after the date of this report or
otherwise. All future written and oral forward-looking statements attributable to us or persons
acting on our behalf are expressly qualified in their entirety by the foregoing.
Overview and Current Developments
We develop, manufacture and commercialize innovative medical products that fight infection and
inflammation based on our noble metal nanocrystalline technology. Our patented technology enables
us to convert silvers microcrystalline structure into an atomically disordered nanocrystalline
coating. We believe that this conversion can enhance silvers natural antimicrobial properties.
In addition, our nanocrystalline silver has exhibited potent anti-inflammatory properties in
preclinical studies. We produce our nanocrystalline silver as a coating for wound care products
under the trademark SILCRYST
and as a powder, which we refer to as NPI 32101, for use
in medical devices and as an active pharmaceutical ingredient.
We are a majority-owned subsidiary of the Westaim Corporation (Westaim), a Canadian company
incorporated in Alberta and publicly traded on the Toronto Stock Exchange. Westaim
owns approximately 75% of our outstanding common shares as of the date of filing of this report.
In May 2008, Westaim announced that as a part of an overall strategic review, it was reviewing
alternatives for monetizing its investment in NUCRYST. In December 2008, we received a requisition from
Westaim to call a special meeting of shareholders to consider a return of capital of $0.80 per
share to shareholders. On February 12, 2009, the special meeting was held and pursuant to section
38(1) of the Business Corporations Act (Alberta) a special resolution was approved to reduce the
stated capital of our outstanding common shares by $0.80 per share, for the purpose of distributing $0.80
cash per common share to shareholders. This equated to a return of capital of approximately $14.7
million. The return of capital was distributed to shareholders on February 25, 2009.
We experienced changes in senior management in the first quarter of 2009. In January 2009,
Mr. Thomas E. Gardner resigned as Chairman of our board of directors, President and Chief Executive
Officer and Mr. David B. Holtz was appointed interim President and Chief Executive Officer in
addition to his Chief Financial Officer responsibilities. Mr. Neil Carragher, our lead director,
was appointed Chairman of our board of directors. Mr. Gardner resigned from our board of directors
on February 11, 2009.
Smith & Nephew Agreements
We develop and sell advanced wound care products with our SILCRYST coating under a series of
license and supply agreements with Smith & Nephew plc (Smith & Nephew), a global medical device
company. Under these agreements, we licensed to Smith & Nephew the exclusive right to market,
distribute and sell world-wide certain products with our SILCRYST coatings for use on non-minor skin wounds
and burns on humans, and agreed to manufacture these products and supply them
exclusively to Smith & Nephew. Advanced wound care products with our SILCRYST coatings have
received clearance from the U.S. Food and Drug Administration (FDA) and approval of other
regulators and are now sold by Smith & Nephew in over 30 countries around the world, under its
Acticoat trademark.
We currently do not have any products being sold in the marketplace other than Acticoat wound
care products being sold by Smith & Nephew. Consequently, our results of operations depend solely
on Acticoat product sales generated by Smith & Nephew under our agreements with Smith & Nephew.
The amount of our revenues in general, and royalty revenues in particular, is determined primarily
by the level of sales of Acticoat products achieved by Smith & Nephew. On April 30, 2009, Smith &
Nephew announced their first quarter results and reported a 9% growth in their wound care business
prior to the impact of foreign currency changes. Acticoat product sales by Smith & Nephew
increased by 7% prior to the impact of foreign currency changes but declined by 9% after taking
into account foreign currency changes. We believe that market conditions in the advanced wound
care market, including the silver dressing segment, have become more competitive due in part to
increased competition and customer cost containment efforts. We are uncertain as to whether or the
extent to which this increased competition or Smith & Nephews ability to introduce other
silver-based wound care products has had, or will have an
14
impact on Acticoat product sales and our revenues in the future, as it will depend on future
events, including Smith & Nephews response to market conditions. Since the execution of amended
agreements with Smith & Nephew in September 2007, Smith & Nephew has introduced three new wound
care products with other forms of silver (Algisite Ag, Allevyn Ag and Biostep Ag). We believe that
some of these new silver-based wound care products will serve to simply complement the existing
Acticoat products marketed by Smith & Nephew without impacting sales of Acticoat products, while
others may be viewed as alternatives to Acticoat products, thereby potentially adversely affecting
Acticoat product sales and ultimately our operating revenues in the foreseeable future.
We continue to work with Smith & Nephew to develop new Acticoat wound care products with our
SILCRYST coating, and in the fourth quarter of 2008 we announced that Health Canada granted
marketing approval for Acticoat Flex barrier dressing for wounds that require up to seven days of
sustained antimicrobial activity. Smith & Nephew is in the
process of seeking additional regulatory approvals for Acticoat Flex, including an FDA 510(k) clearance. Smith & Nephew has indicated that upon receipt of the required regulatory approvals it expects to launch
the Acticoat Flex product in North America and Europe during 2009.
Our revenues under the amended license and supply agreements with Smith & Nephew consist of
manufacturing cost reimbursements on a fixed overhead cost basis, royalties, payments upon the
achievement of specified milestones and reimbursement of a portion of the costs we incur in
connection with the development of and improvement to SILCRYST coated products covered by the
agreements. We record our royalty revenues upon the sale of our products by Smith & Nephew to its
customers. Our royalty revenue varies in proportion to increases or decreases in Smith & Nephews
sales of its Acticoat products. These sales could be affected by Smith & Nephews unilateral authority to determine the selling price for its Acticoat products. Moreover, although Smith & Nephew has
agreed to use reasonable commercial efforts to market Acticoat products, Smith & Nephew is not
required to purchase any significant amount of product from us.
Effective January 1, 2007, under the amended supply agreement with Smith & Nephew, the method
by which we determine the price we charge for the products we manufacture and supply to Smith &
Nephew was changed to reimburse us for a fixed overhead charge plus all direct costs incurred in manufacturing
Acticoat products, including direct material, direct labor, labeling, testing and packaging. The
overhead component of the unit pricing mechanism has been fixed at a minimum floor amount equal to
all indirect costs we incurred in 2007 related to the manufacture of Acticoat products, including
administration, labor, rent, insurance, utilities, repairs and quality control. This fixed floor
amount is payable by Smith & Nephew regardless of the actual volume of Acticoat products ordered
by Smith & Nephew and regardless of our actual overhead costs during the year. The amended
agreements provide for a reconciliation process such that if we have not received sufficient orders
to cover the fixed overhead charge by a certain date each year, we are entitled to immediately
invoice Smith & Nephew for the difference. In addition, as part of the new pricing mechanism, we
agreed to pay Smith & Nephew an annual manufacturing cost rebate in the amount of $4.5 million per
year, which we expect to be recoverable through reductions in our cost of goods manufactured
for Smith & Nephew over the same time period. We recognize the manufacturing cost rebate as a
reduction in our wound care product revenue. In order to control expenses, we have continued to
make adjustments to our manufacturing operations, including reductions in our workforce. Through
these workforce reductions, together with the implementation of manufacturing production
efficiencies and other overhead cost reduction initiatives, we have achieved actual reductions in
our costs sufficient to offset a significant portion of the manufacturing cost rebate we pay to
Smith & Nephew. Our ability to continue to offset the manufacturing cost rebate in 2009 will
depend on the level of Smith & Nephew product orders as well as our ability to maintain the
efficiency gains we have achieved. Under the amended supply agreement, the modified reimbursement
pricing and the manufacturing cost rebate were established for years 2007, 2008 and 2009, and we
will negotiate future product pricing with Smith & Nephew for 2010 and beyond.
New Product Development
Outside of our Smith & Nephew agreements, we are continuing our efforts to extend our
nanocrystalline silver technology to develop other medical devices to combat infection and
inflammation. While we discontinued our efforts to develop pharmaceutical products containing our
NPI 32101 for the treatment of gastrointestinal conditions in 2008, we are continuing to explore
commercialization avenues for our topical barrier cream containing NPI 32101, as well as discussing
with third parties other product applications for
our coating technology outside of wound care.
15
In addition to our efforts to expand our revenue base, we have been reviewing our overall
operations and reducing the level of expenditures, particularly in certain development areas. We
closed our Wakefield, Massachusetts research center and relocated our corporate headquarters to
Princeton, New Jersey in the fourth quarter of 2008. We remain focused on looking for development
opportunities with third-parties in various clinical areas, but we do not expect to develop
additional pharmaceuticals applications for NPI 32101 without first securing commercialization
partners.
Results of Operations
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended March 31
|
|
|
|
(in thousands)
|
|
|
|
2009
|
|
|
2008
|
|
Total Revenue
|
|
$
|
4,149
|
|
|
$
|
5,189
|
|
Manufacturing Costs
|
|
|
2,233
|
|
|
|
4,100
|
|
|
|
|
|
|
|
|
Gross Margin
|
|
$
|
1,916
|
|
|
$
|
1,089
|
|
Gross Margin Percent
|
|
|
46%
|
|
|
|
21%
|
|
Three Months Ended March 31, 2009 and March 31, 2008
Revenue & Gross Margin
Total revenue, which consists of wound care product revenue less the manufacturing cost rebate,
for the three months ended March 31, 2009 was $4.1 million compared to $5.2 million for the three
months ended March 31, 2008. The decrease of $1.1 million is primarily attributable to the
combined effect of a 29% decline in units shipped to Smith & Nephew compared to the prior year period, and
to a decrease in royalty revenue as a result of the impact of foreign currency changes on sales
reported by Smith & Nephew in U.S. dollars
.
The decline in products shipped year over year is due
in part to a higher than average level of shipments in the first quarter of 2008, and a lower level
of shipments in the first quarter of 2009 as a consequence of Smith & Nephews continued efforts to
reduce its inventory levels.
Our gross margin increased $0.8 million to $1.9 million for the three months ended March 31,
2009 from $1.1 million for the three months ended March 31, 2008 due to a significant reduction in
our per unit costs, and a slight increase in manufacturing prices per unit. Our manufacturing costs
declined by $1.9 million to $2.2 million for the three months ended March 31, 2009 as compared to the same period in 2008.
The significant decline is due to overall cost reductions achieved through the implementation of
manufacturing production efficiencies, workforce reductions and other overhead cost reduction
initiatives as well a 29% decline in units shipped.
We recognize manufacturing cost reimbursement revenue when we ship our products to Smith &
Nephew and recognize royalty revenue when Smith & Nephew sells our products to its end-user
customers. Consequently, our gross margin percent may vary from period to period due to
differences in timing of when we ship our products to Smith & Nephew and when Smith & Nephew sells
our products to its customers.
Other Operating Costs
Research and development costs for the three months ended March 31, 2009 were $0.7 million
compared to $1.5 million for the three months ended March 31, 2008. The decrease of $0.8 million
is the result of reductions in our research staff and activities, including the
closure of our Wakefield, Massachusetts research facility. We intend to continue to control these expenses
and incur development costs at a reduced level compared to 2008.
General and administrative costs for the three months ended March 31, 2009 were $2.6 million
compared to $2.5 million for the three months ended March 31, 2008. The increases associated with
higher severance and other administrative costs were partially offset by cost
reductions achieved through the transfer of our U.S. headquarters to Princeton, New Jersey and a reduction
in administrative staff. The decline in the Canadian dollar relative to the U.S. dollar also
reduced the overall increase. We expect to achieve reductions in our general and administrative
costs on a quarterly basis for the remainder of 2009.
16
Non-Operating Items
We recorded a net gain of $0.4 million from foreign currency changes for the three months
ended March 31, 2009 compared to a $0.6 million net gain for the three months ended March 31, 2008.
The changes in the U.S. dollar and Canadian dollar exchange rates result in unrealized
currency gains and losses on U.S. dollar working capital amounts held by our Canadian operations.
All of our revenues from Smith & Nephew are received in U.S. dollars.
There was $0.1 million interest income for the three months ended March 31, 2008 compared to a
negligible amount for the three months ended March 31, 2009. This reduction is primarily the
result of the lower interest rates and lower levels of short term investments for the three months
ended March 31, 2009 compared to the three months ended March 31, 2008.
Liquidity and Capital Resources
At March 31, 2009, we had cash and cash equivalents of $8.4 million, compared to $23.2 million
at December 31, 2008. Cash and cash equivalents not required for operating and other investing
activities are invested in treasury bills and other short term, liquid investments. We currently
have no third party debt or lines of credit or other financing arrangements in place with banks or
other financial institutions.
Cash used in operating activities amounted to $0.1 million for the three months ended March
31, 2009 compared to $6.6 million of cash provided by operating activities for the three months
ended March 31, 2008. Cash used in operations is primarily impacted by operating results and
changes in working capital, particularly the timing of the collection of receivables from Smith &
Nephew, inventory levels and the timing of payments to suppliers. In January of 2008, we received
$5.0 million from Smith & Nephew with respect to a sales milestone earned in December 2007.
Increases in inventories resulted in a $0.4 million use of cash in the three months ended March 31,
2009 compared to a $0.9 million source of cash from a decline in inventories in the three months
ended March 31, 2008.
Cash provided by investing activities amounted to $0.1 million for the three months ended
March 31, 2009 compared to a use of $0.7 million in cash for the three months ended March 31, 2008.
Capital expenditures were less than $0.1 million for the three months ended March 31, 2009 and
were $0.7 million for the three months end March 31, 2008. Capital expenditures for the three months
ended March 31, 2008 were primarily related to the completion of a major production expansion at
our manufacturing facility in Fort Saskatchewan, Alberta. The capital expenditures for the three
months ended March 31, 2009 were below historical levels and we expect capital expenditures for the
remainder of 2009 to remain below prior year levels.
In February 2009, we distributed $14.7 million to shareholders pursuant to a shareholder
initiated and approved return of capital. There were no other financing activities for the three
months ended March 31, 2009 and 2008.
In August 2008, we announced that our Board of Directors authorized a program for the Company
to repurchase up to 900,000 shares of its outstanding common stock for an amount not to exceed $1.3
million using the facilities of the NASDAQ Global Market. Under the stock repurchase program, the Company may
selectively repurchase its stock from time to time on the open market, in privately negotiated
transactions or otherwise, at times and in amounts as the Company deems appropriate. The
repurchase program is authorized through June 30, 2009, and may be modified or discontinued at any
time. The repurchased shares, if any, will be held in the Companys treasury. The Company made no
repurchases of shares under the program in the three months ended March 31, 2009.
We expect that our available cash resources together with the anticipated revenue from our agreements with
Smith & Nephew will be sufficient to support our current and expected operations for at least the
next 18 months. However, the adequacy of our available funds to meet future operating and capital
requirements will depend on many factors, including Smith &
Nephews purchases of our wound care products, sales performance of Smith & Nephews Acticoat
products, the number, breadth and prospects of our discovery and development programs, the costs
and timing of obtaining regulatory approvals for any of our product candidates and the occurrence
of unexpected developments.
We may seek to raise additional financing through the sale of equity, equity-related or debt
securities or loans. The sale of additional equity or equity-related securities may result in
additional dilution to our shareholders. Debt financing will expose us to risks of leverage,
including the risk that we may be unable to pay the principal of and interest on our indebtedness
when due, and that we may be required to pledge our
17
assets as collateral for any debt financing that we obtain. Moreover, additional financing may
not be available at times, in amounts or on terms acceptable to us or at all, particularly because
we have granted a first priority security interest in certain critical patents and other
intellectual property to Smith & Nephew. If we require and are unable to obtain additional financing, we may be forced to further reduce the scope of, or delay or eliminate, some or all of
our planned research, development and commercialization activities and we may also be required to
reduce the scale of our operations, any of which could have a material adverse effect on our
business.
Income Taxes
We adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty
in Income Taxes (FIN 48 an interpretation of FASB Statement No. 109, Accounting for Income
Taxes.) on January 1, 2007. During the year ended December 31, 2008, changes in the amount of our unrecognized tax benefits were related to tax positions of 2008 and prior years. The
additions were mostly offset by reductions, resulting in unrecognized tax benefits of $0.2 million
at December 31, 2008. Additions and reductions of unrecognized tax benefits for the three months
ended March 31, 2009 were not material and were in respect of tax positions of the current period.
We
filed federal and provincial income tax returns in Canada and our U.S.
subsidiary files federal and state income tax returns in the U.S. We are generally no
longer subject to income tax examinations by Canadian and U.S. tax authorities for years before
2001. The Canada Revenue Agency (CRA) commenced an examination of our Canadian
income tax returns for 2001 and 2002 in the second quarter of 2005. We have been working with the CRA to resolve the audit matters under review. Resolution of the audit matters
under review may apply to taxation years beyond 2002. Any reassessments to be issued by the CRA,
on an aggregate basis, could result in a material effect on our consolidated
financial statements, although at this time, we cannot reasonably estimate the potential impact.
At
December 31, 2008 and March 31, 2009, the Companys deferred tax assets were offset by a
valuation allowance. We will continue to provide a full valuation allowance until we determine that it is more likely than not that the deferred tax assets will be realized.
Contractual Commitments and Obligations at March 31, 2009
The table provided below reports commitments and obligations that have been recorded on
our condensed consolidated balance sheet as of March 31, 2009. Certain other obligations and
commitments, while not required under generally accepted accounting principles (GAAP) to be
included in the condensed consolidated balance sheets, may have a material impact on liquidity.
These items, all of which have been entered into in the ordinary course of business, are also
included in the table below in order to present a more complete picture of our financial position
and liquidity.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
|
|
More than
|
|
|
|
|
|
|
1 year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
5 years
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Obligations and Commitments
|
|
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facilities operating leases
|
|
$
|
0.7
|
|
|
$
|
1.4
|
|
|
$
|
1.4
|
|
|
$
|
1.4
|
|
|
$
|
4.9
|
|
Contractual Obligations
(1)
|
|
|
4.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.6
|
|
Purchase Obligations
|
|
|
0.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total obligations and commitments
|
|
$
|
6.2
|
|
|
$
|
1.4
|
|
|
$
|
1.4
|
|
|
$
|
1.4
|
|
|
$
|
10.4
|
|
|
|
|
|
(1)
|
|
This commitment relates primarily to our obligation under our supply agreement to pay
Smith & Nephew a manufacturing cost rebate in the amount of $4.5 million in 2009.
|
We are unable to make a reasonably reliable estimate as to when a cash settlement with
taxing authorities may occur for our unrecognized tax benefits. Therefore, our liability for
unrecognized tax benefits is not
18
included in the table above. See Note 6 to the Consolidated Financial Statements for
additional information.
Off-Balance Sheet Commitments as of March 31, 2009
As of March 31, 2009, our future minimum commitments and contractual obligations included two
facilities operating leases. These items are not required to be recorded on our balance sheet
under GAAP. They are disclosed in the table presented above in order to provide a more complete
picture of our financial position and liquidity as of March 31, 2009.
In the normal course of operations, we may agree to provide contractual indemnification to
counterparties under purchase and sale agreements, service agreements, and leasing transactions,
among others. These indemnification agreements may require us to compensate the counterparties for
costs incurred as a result of various events, such as litigation claims or statutory sanctions that
may be suffered by the counterparty as a consequence of the transaction. The terms of the
indemnification agreements will vary based upon the agreement, the nature of which prevents us from
making a reasonable estimate of the maximum potential amount that we could be required to pay
counterparties. Historically, we have not made any payments under such indemnifications and no
amounts have been accrued in the consolidated financial statements with respect to these
indemnification guarantees. In addition, we have entered into indemnification agreements with our
officers and directors.
Critical Accounting Policies and Significant Judgments and Estimates
Our managements discussion and analysis of our financial condition and results of operations
are based on our consolidated financial statements, which have been prepared in accordance with
GAAP. The preparation of these consolidated financial statements requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities as at the date of the consolidated financial statements as well
as the reported revenues and expenses during the reporting periods. On an ongoing basis, we
evaluate estimates and judgments, including those related to revenue recognition, inventory
valuation, and useful lives of capital and intangible assets. Our estimates are based on historical
experience and on various other factors that we believe to be appropriate under the circumstances
at the time made. Actual results may differ from these estimates under different
assumptions or conditions.
Certain of our accounting policies are particularly important to the understanding of our
financial position and results of operations and require the application of significant judgment by
our management. As a result, these policies are subject to an inherent degree of uncertainty. In
applying these policies, we use our judgment in making certain assumptions and estimates. Our
critical accounting policies, which include revenue recognition, inventory valuation, useful life
of capital and intangible assets, and share-based compensation are described in our Annual Report
on Form 10-K for the year ended December 31, 2008. There have been no material changes to our
critical accounting policies as of March 31, 2009.
Recently Adopted and Pending Accounting Pronouncements
See
Note 3, Recently Adopted and Pending Accounting
Pronouncements regarding the effect of certain recent accounting
pronouncements on our consolidated financial statements.
19
|
|
|
ITEM 4T.
|
|
CONTROLS AND PROCEDURES
|
Evaluation of disclosure controls and procedures
.
We maintain disclosure controls and procedures (as such term is defined in Rule 13a-15(e)
under the Securities Exchange Act of 1934) that are designed to ensure that information required to
be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within time periods specified in the Securities and
Exchange Commissions rules and forms, and that such information is accumulated and communicated to
our management, including our Chief Executive Officer and our Chief Financial Officer, as
appropriate, to allow for timely decisions regarding required disclosure.
In designing and evaluating our disclosure controls and procedures, our management recognized
that any controls and procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives. In addition, the design of
disclosure controls and procedures must reflect the fact that there are resource constraints and
that management is required to apply its judgment in evaluating the benefits of possible controls
and procedures relative to their costs.
Our management, with the participation of our interim Chief Executive Officer and Chief
Financial Officer, has carried out an evaluation of the effectiveness of the design and operation
of our disclosure controls and procedures as of March 31, 2009. Based on this evaluation our
management concluded that, as of March 31, 2009, our disclosure controls and procedures were
effective.
Changes in internal control over financial reporting
There has been no change in our internal control over financial reporting during the quarter
ended March 31, 2009 that has materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.
PART IIOTHER INFORMATION
|
|
|
ITEM 1.
|
|
LEGAL PROCEEDINGS
|
In the normal course of business, we are from time to time subject to litigation and claims
from third parties. We are not currently a party to any material legal proceedings.
There have been no significant changes to the risk factors disclosed in the Companys Annual
Report on Form 10-K for the year ended December 31, 2008.
20
|
|
|
ITEM 4.
|
|
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
A Special Meeting of our shareholders was held on Thursday, February 12, 2009 pursuant to a
requisition dated December 1, 2008 made by Westaim, for the purpose of considering and voting on a special resolution
pursuant to section 38(1)(b) of the Business Corporations Act (Alberta) to reduce the stated capital of the Companys common shares by $0.80 per share
for the purpose of distributing $0.80 cash per common share to our shareholders
of record as of the close of business on February 17, 2009. The
shareholders passed the resolution and we distributed an aggregate of $14.7 million to our
shareholders on February 25, 2009.
The final vote on the special resolution was recorded as follows:
|
|
|
|
|
Votes For
|
|
Against
|
|
Withheld
|
15,076,602
|
|
131,612
|
|
6,438
|
(a)
|
|
The following exhibits are filed as part of this quarterly report on Form 10-Q.
|
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Exhibit
|
|
|
|
|
|
|
|
10.62
|
|
|
2009 Annual Employee Incentive Program (filed herewith)
|
|
|
|
|
|
|
10.63
|
|
|
Confidential Separation Agreement and General Release between
Thomas E. Gardner and NUCRYST Pharmaceuticals Inc. is incorporated
by reference to Exhibit 99.1 of the Companys Current Report on
Form 8-K filed on February 18, 2009.
|
|
|
|
|
|
|
10.64
|
|
|
Form of Employment Agreement between the NUCRYST Pharmaceuticals
Inc. and David B. Holtz made effective January 19, 2009 is
incorporated by reference to Exhibit 99.1 of the Companys Current
Report on Form 8-K filed on March 31, 2009.
|
|
|
|
|
|
|
10.65
|
|
|
Form of Stock Award Agreement between NUCRYST Pharmaceuticals
Corp. and David B. Holtz effective March 27, 2009 is incorporated
by reference to Exhibit 99.2 of the Companys Current Report on
Form 8-K filed on March 31, 2009.
|
|
|
|
|
|
|
10.66
|
|
|
Form of Amending Agreement between NUCRYST Pharmaceuticals Corp.
and David B. Holtz effective May 8, 2008 is incorporated by
reference to Exhibit 99.3 of the Companys Current Report on Form
8-K filed on March 31, 2009.
|
|
|
|
|
|
|
10.67
|
|
|
Form of Letter Agreement between NUCRYST Pharmaceuticals Corp. and
David B. Holtz is incorporated by reference to Exhibit 99.4 of the
Companys Current Report on Form 8-K filed on March 31, 2009
|
|
|
|
|
|
|
10.68
|
|
|
Form of Letter Agreement between NUCRYST Pharmaceuticals Corp. and
David McDowell is incorporated by reference to Exhibit 99.5 of the
Companys Current Report on Form 8-K filed on March 31, 2009
|
|
|
|
|
|
|
10.69
|
|
|
Form of Letter Agreement between NUCRYST Pharmaceuticals Corp. and
Carol L. Amelio is incorporated by reference to Exhibit 99.6 of
the Companys Current Report on Form 8-K filed on March 31, 2009.
|
|
|
|
|
|
|
31.1
|
|
|
Certification pursuant to Rule 13a-14(a)/15d-14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
|
32.1
|
|
|
Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on behalf of the registrant by the undersigned, thereunto duly authorized in Princeton, New Jersey on May 6, 2009.
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NUCRYST Pharmaceuticals Corp.
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By:
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/s/ David B. Holtz
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David B. Holtz
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Interim President and Chief Executive Officer
Chief Financial Officer
(and as principal financial officer)
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22
EXHIBIT INDEX
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Exhibit
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Number
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Exhibit
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10.62
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2009 Annual Employee Incentive Program (filed herewith)
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10.63
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Confidential Separation Agreement and General Release between
Thomas E. Gardner and NUCRYST Pharmaceuticals Inc. is incorporated
by reference to Exhibit 99.1 of the Companys Current Report on
Form 8-K filed on February 18, 2009.
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10.64
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Form of Employment Agreement between the NUCRYST Pharmaceuticals
Inc. and David B. Holtz made effective January 19, 2009 is
incorporated by reference to Exhibit 99.1 of the Companys Current
Report on Form 8-K filed on March 31, 2009.
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10.65
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Form of Stock Award Agreement between NUCRYST Pharmaceuticals
Corp. and David B. Holtz effective March 27, 2009 is incorporated
by reference to Exhibit 99.2 of the Companys Current Report on
Form 8-K filed on March 31, 2009.
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10.66
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Form of Amending Agreement between NUCRYST Pharmaceuticals Corp.
and David B. Holtz effective May 8, 2008 is incorporated by
reference to Exhibit 99.3 of the Companys Current Report on Form
8-K filed on March 31, 2009.
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10.67
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Form of Letter Agreement between NUCRYST Pharmaceuticals Corp. and
David B. Holtz is incorporated by reference to Exhibit 99.4 of the
Companys Current Report on Form 8-K filed on March 31, 2009
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10.68
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Form of Letter Agreement between NUCRYST Pharmaceuticals Corp. and
David McDowell is incorporated by reference to Exhibit 99.5 of the
Companys Current Report on Form 8-K filed on March 31, 2009
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10.69
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Form of Letter Agreement between NUCRYST Pharmaceuticals Corp. and
Carol L. Amelio is incorporated by reference to Exhibit 99.6 of
the Companys Current Report on Form 8-K filed on March 31, 2009.
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31.1
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Certification pursuant to Rule 13a-14(a)/15d-14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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32.1
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Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
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23
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