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 June 30, 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
þ
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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 July 31, 2009
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Common Shares
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18,325,365 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 June 30, 2009 and December 31, 2008
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Condensed Consolidated Statements of Operations for the three and six months ended
June 30, 2009 and 2008
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Condensed Consolidated Statements of Cash Flow for the three and six months ended
June 30, 2009 and 2008
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Condensed Consolidated Statements of Shareholders Equity for the six months ended
June 30, 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 2
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Unregistered Sales of Equity Securities and Use of Proceeds
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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 unaudited condensed 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 June 30, 2009 noon
buying rate reported by the Bank of Canada, being U.S.$1.00 = C$1.1625.
PART I FINANCIAL INFORMATION
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ITEM 1.
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FINANCIAL STATEMENTS (UNAUDITED)
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NUCRYST Pharmaceuticals Corp.
Condensed Consolidated Balance Sheets
(unaudited)
(thousands of U.S. dollars)
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June 30, 2009
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December 31, 2008
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ASSETS
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Current
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Cash and cash equivalents
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$
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11,751
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$
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23,388
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Accounts receivable (note 10)
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3,426
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5,062
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Inventories (note 4)
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3,970
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2,887
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Prepaid expenses
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253
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414
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Total current assets
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19,400
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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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9,458
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9,379
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Intangible assets net (note 5)
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486
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525
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Total assets
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$
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29,344
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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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5,479
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$
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2,859
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Deferred lease inducement
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95
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90
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Total current liabilities
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5,574
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2,949
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Long term deferred lease inducement
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474
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495
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Total liabilities
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6,048
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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 18,325,365 and 18,320,531 shares at
June 30, 2009 and December 31, 2008, respectively (note 7)
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68,134
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82,776
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Additional paid-in capital
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2,259
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2,178
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Accumulated other comprehensive loss
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(4,538
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(5,528
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Accumulated deficit
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(42,559
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(41,070
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Total shareholders equity
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23,296
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38,356
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Total liabilities and shareholders equity
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$
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29,344
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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
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Six Months Ended
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June 30, 2009
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June 30, 2008
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June 30, 2009
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June 30, 2008
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Revenue
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Wound care product revenue
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$
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4,942
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$
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4,708
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$
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9,091
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$
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9,897
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Costs
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Manufacturing
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2,801
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2,726
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5,034
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6,826
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Research and development
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599
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1,463
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1,348
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2,950
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General and administrative
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1,351
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2,164
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3,979
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4,652
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Income (loss) from operations
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191
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(1,645
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(1,270
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(4,531
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Foreign exchange (losses) gains
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(605
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(178
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(222
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460
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Interest income
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1
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107
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3
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177
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Loss before income taxes
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(413
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(1,716
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(1,489
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(3,894
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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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(413
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$
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(1,716
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$
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(1,489
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$
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(3,896
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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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(0.02
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$
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(0.09
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$
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(0.08
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$
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(0.21
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Weighted average number of common shares
outstanding:
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basic
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18,324,458
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18,374,506
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18,323,168
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18,372,299
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diluted
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18,324,458
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18,374,506
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18,323,168
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18,372,299
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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
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Six Months Ended
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June 30, 2009
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June 30, 2008
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June 30, 2009
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June 30, 2008
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Operating activities
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Net loss
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$
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(413
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$
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(1,716
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$
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(1,489
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)
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$
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(3,896
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Items not affecting cash
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Depreciation and amortization
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379
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506
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741
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935
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Stock-based compensation expense
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31
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124
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95
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341
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Amortized lease inducement
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(23
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(27
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(45
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)
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(54
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Changes in non cash working capital
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Accounts receivable
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1,091
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3,839
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1,870
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11,093
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Inventories
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(540
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)
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(559
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)
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(912
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)
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346
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Prepaid expenses
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121
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218
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173
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140
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Accounts payable and accrued liabilities
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2,410
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1,281
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2,504
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1,379
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Accounts payable and accrued liabilities to related party
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78
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29
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Cash provided from operating activities
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3,056
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3,744
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2,937
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10,313
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Investing activities
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Restricted cash
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(1
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145
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(2
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)
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Capital expenditures
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(240
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)
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(179
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)
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(274
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)
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(884
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)
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Intangible assets
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(3
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(18
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(7
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(26
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)
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Cash used in investing activities
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(243
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)
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(198
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)
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(136
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)
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(912
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)
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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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)
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Cash used in financing activities
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|
|
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(14,656
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)
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Effect of exchange rate changes on cash and cash equivalents
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526
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|
105
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|
218
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(364
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)
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|
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|
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Net increase (decrease) in cash and cash equivalents
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3,339
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3,651
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(11,637
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)
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9,037
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Cash and cash equivalents at beginning of period
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8,412
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23,227
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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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$
|
11,751
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$
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26,878
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|
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$
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11,751
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|
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$
|
26,878
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Cash and cash equivalents is comprised of:
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Cash
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$
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2,785
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$
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13,868
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$
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2,785
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$
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13,868
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Cash equivalents
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$
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8,966
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$
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13,010
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|
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$
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8,966
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|
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$
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13,010
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Supplemental disclosure of cash flow information:
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|
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|
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Non-cash capital asset additions included in accounts
payable and accrued liabilities at end of period
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$
|
4
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|
|
$
|
42
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|
|
$
|
4
|
|
|
$
|
42
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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 Statements Shareholders Equity
(unaudited)
(thousands of U.S. dollars)
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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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Common Shares
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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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Stated 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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$
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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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4,834
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14
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(14
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)
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$
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Return of capital
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(14,656
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)
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(14,656
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)
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Stock-based compensation
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95
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95
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Foreign currency translation adjustments
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990
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990
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990
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Net loss
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(1,489
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)
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(1,489
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)
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(1,489
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)
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June 30, 2009
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18,325,365
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$
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68,134
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$
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2,259
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$
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(4,538
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)
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$
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(42,559
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)
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$
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(499
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)
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$
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23,296
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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 six months ended June 30, 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. 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 and six months ended June 30, 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.
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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.
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7
3
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SIGNIFICANT ACCOUNTING PRINCIPLES
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Accumulated other comprehensive (loss) income
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Comprehensive (loss) income is comprised of net loss and other comprehensive (loss) income.
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Other comprehensive (loss) income 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 $4,538 and $5,528 at
June 30, 2009 and December 31, 2008, respectively, consists of foreign currency translation
adjustments.
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Recently adopted and pending accounting pronouncements
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SFAS 157-2
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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
non-financial assets and non-financial 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
purpose of intangible asset impairment testing as of January 1, 2009. The adoption of SFAS
157 did not have a material impact on the Corporations results of operations or
consolidated financial position.
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SFAS 157-4
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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 adoption of SFAS 157-4 did not have a material impact on the
Corporations results of operations or consolidated financial position.
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SFAS 161
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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 results of operations or consolidated financial position.
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SFAS 165
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In May 2009, the FASB issued Statement No. 165, Subsequent Events (SFAS 165). This
statement provides guidance on managements assessment of subsequent events. Historically,
management relied on U.S. auditing literature in AICPA Professional Standard, AU Section
560. SFAS 165 did not significantly change practice because its guidance is similar to AU
Section 560. This standard was adopted by the Corporation as of June 30, 2009. The date
through which subsequent events have been evaluated is August 4, 2009, the date on which
the financial statements were issued or available to be issued.
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8
3.
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SIGNIFICANT ACCOUNTING PRINCIPLES (continued)
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SFAS 168
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In June 2009, the FASB issued Statement No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement
of FASB Statement No. 162 (SFAS 168), which identifies the sources of accounting
principles and the framework for selecting the principles used in the preparation of
financial statements of nongovernmental entities that are presented in conformity with
generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy).
SFAS 168 will be effective for the Corporations interim and annual financial periods
ending after September 15, 2009. The Corporation is currently assessing the impact SFAS
168 will have on its results of operations and consolidated financial position.
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EITF 07-1
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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
results of operations or consolidated financial position.
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FASB Business Combinations
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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:
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i.
|
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Statement No. 141(R), Business Combination; and
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ii.
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Statement No. 160, Non-controlling Interests in Consolidated Financial
Statements an amendment of ARB No. 51.
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These statements dramatically 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:
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More assets acquired and liabilities assumed to be measured at fair value as of the
acquisition date;
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Liabilities related to contingent consideration to be re-measured at fair value in
each subsequent reporting period;
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An acquirer in pre-acquisition periods to expense all acquisition related costs;
and
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Non-controlling interests in subsidiaries initially to be measured at fair value
and classified as a separate component of equity.
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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 results of operations or consolidated
financial position.
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9
3
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SIGNIFICANT ACCOUNTING PRINCIPLES (continued)
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SFAS 141R-1
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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 results of operations or consolidated financial
position.
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FSP SFAS 107-1 and Accounting Principles Board (APB) 28-1
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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 are effective for interim and fiscal periods beginning after June
15, 2009. The adoption of SFAS 107-1 and APB 28-1 did not have a material impact on the
Corporations results of operations or consolidated financial position.
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4
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INVENTORIES
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June 30, 2009
|
|
|
December 31, 2008
|
|
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Raw materials
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$
|
2,422
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|
|
$
|
2,226
|
|
Materials in process
|
|
|
552
|
|
|
|
316
|
|
Finished product
|
|
|
996
|
|
|
|
345
|
|
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|
$
|
3,970
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|
|
$
|
2,887
|
|
|
|
|
|
|
|
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|
|
|
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|
|
June 30, 2009
|
|
|
December 31, 2008
|
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|
Patents
|
|
$
|
2,286
|
|
|
$
|
2,165
|
|
Less accumulated amortization
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|
|
(1,800
|
)
|
|
|
(1,640
|
)
|
|
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$
|
486
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|
|
$
|
525
|
|
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|
|
Amortization related to intangible assets was $35 and $49 for the three months ended June
30, 2009 and 2008. Amortization related to intangible assets was $69 and $100 for the six
months ended June 30, 2009 and 2008, respectively.
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Estimated future amortization expense of intangible assets at June 30, 2009 is as follows:
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2009 (remaining 6 months)
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$
|
74
|
|
2010
|
|
|
128
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|
2011
|
|
|
97
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|
2012
|
|
|
71
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2013
|
|
|
55
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|
Thereafter
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|
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61
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Total
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$
|
486
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10
|
|
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.
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|
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 June 30, 2009 were not material and at June 30, 2009, there were
no unrecognized tax benefits.
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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.
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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 June 30, 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.
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7
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SHARE CAPITAL
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At a special meeting of the Corporations shareholders held on February 21, 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.
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Stock-based compensation plans
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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 June 30, 2009, 15% of issued and outstanding shares represented 2,748,805 shares and
on that date 1,765,907 of this amount were available for grant under the Corporations
stock-based compensation plans.
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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.
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|
Total stock-based compensation expense recognized under SFAS 123(R) was for the three
months ended June 30, 2009 and 2008 was $31 and $124, respectively, and was included in
general and administrative expense. Total stock-based compensation expense recognized
under SFAS 123(R) for the six months ended June 30, 2009 and 2008 was $95 and $341,
respectively, and was included in general and administrative expense.
|
11
7.
|
|
SHARE CAPITAL (continued)
|
|
|
|
A summary of the status of the Corporations stock option plan as at June 30, 2009 and 2008
and changes during the three and six months periods ended on those dates is presented
below:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Options
|
|
|
Weighted Average Exercise Price
|
|
|
|
|
For the three months ended June 30,
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Balance at beginning of
period
|
|
|
859,930
|
|
|
|
1,475,553
|
|
|
$
|
2.88
|
|
|
$
|
3.73
|
|
Granted
|
|
|
152,000
|
|
|
|
494,972
|
|
|
|
0.40
|
|
|
|
1.84
|
|
Forfeited
|
|
|
(42,864
|
)
|
|
|
(120,086
|
)
|
|
|
9.49
|
|
|
|
2.11
|
|
|
Balance at end of period
|
|
|
969,066
|
|
|
|
1,850,439
|
|
|
$
|
2.20
|
|
|
$
|
3.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Options
|
|
|
Weighted Average Exercise Price
|
|
|
|
|
For the six months ended June 30,
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Balance at beginning of
period
|
|
|
1,596,199
|
|
|
|
1,405,638
|
|
|
$
|
2.85
|
|
|
$
|
3.98
|
|
Granted
|
|
|
252,000
|
|
|
|
654,972
|
|
|
|
0.39
|
|
|
|
1.88
|
|
Forfeited
|
|
|
(879,133
|
)
|
|
|
(210,171
|
)
|
|
|
2.86
|
|
|
|
2.84
|
|
|
Balance at end of period
|
|
|
969,066
|
|
|
|
1,850,439
|
|
|
$
|
2.20
|
|
|
$
|
3.36
|
|
|
|
|
The weighted average remaining contractual life of options outstanding at June 30, 2009 was
8.33 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 weighted
average fair value of options granted in the three months ended June 30, 2009 and 2008 was
$0.33 and $0.86, respectively. The weighted average fair value of options granted in the
six months ended June 30, 2009 and 2008 was $0.32 and $1.04, respectively. As of June 30,
2009, total compensation cost related to unvested stock options not yet recognized was
$388. This amount is expected to be recognized over the next 36 months on a
weighted-average basis.
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|
|
|
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 and six months
|
|
|
ended June 30,
|
Stock options
|
|
2009
|
|
|
2008
|
|
|
Expected volatility
|
|
|
93
|
%
|
|
|
93
|
%
|
Dividend yield
|
|
|
|
|
|
|
|
|
Expected life
|
|
7 years
|
|
7 years
|
Risk free rate
|
|
|
2.24
|
%
|
|
|
4.05
|
%
|
|
12
7.
|
|
SHARE CAPITAL (continued)
|
|
|
|
Certain directors and executives were granted 3,000 and 6,000 RSUs for the three and six
months ended June 30, 2009 and 2008, respectively. RSUs vest evenly over a period of
between two to three years. Unvested RSUs are subject to forfeiture upon termination of
employment.
|
|
|
|
A summary of the Corporations unvested RSUs as at June 30, 2009 and changes
during the three and six month periods ended on those dates is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of RSUs
|
|
|
Weighted Average Grant
Date Fair Value
|
|
|
|
|
For the three months ended June 30,
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Balance at beginning of period
|
|
|
21,332
|
|
|
|
33,299
|
|
|
$
|
1.64
|
|
|
$
|
2.84
|
|
Granted
|
|
|
3,000
|
|
|
|
6,000
|
|
|
|
0.56
|
|
|
|
1.19
|
|
Exercised
|
|
|
(1,500
|
)
|
|
|
(3,167
|
)
|
|
|
1.19
|
|
|
|
2.06
|
|
Forfeited
|
|
|
(9,000
|
)
|
|
|
(5,133
|
)
|
|
|
1.26
|
|
|
|
4.08
|
|
|
Balance at end of period
|
|
|
13,832
|
|
|
|
30,999
|
|
|
$
|
1.71
|
|
|
$
|
2.39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of RSUs
|
|
|
Weighted Average Grant
Date Fair Value
|
|
|
|
|
For the six months ended June 30,
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Balance at beginning of period
|
|
|
27,999
|
|
|
|
39,200
|
|
|
$
|
1.98
|
|
|
$
|
3.02
|
|
Granted
|
|
|
3,000
|
|
|
|
6,000
|
|
|
|
0.56
|
|
|
|
1.19
|
|
Exercised
|
|
|
(4,834
|
)
|
|
|
(9,068
|
)
|
|
|
3.18
|
|
|
|
3.37
|
|
Forfeited
|
|
|
(12,333
|
)
|
|
|
(5,133
|
)
|
|
|
1.46
|
|
|
|
4.08
|
|
|
Balance at end of period
|
|
|
13,832
|
|
|
|
30,999
|
|
|
$
|
1.71
|
|
|
$
|
2.39
|
|
|
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 and
six months ended June 30, 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 arrangement, 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.
|
13
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
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009
|
|
|
December 31, 2008
|
|
|
Canada
|
|
$
|
26,250
|
|
|
$
|
29,436
|
|
United States
|
|
|
3,094
|
|
|
|
12,364
|
|
|
|
|
$
|
29,344
|
|
|
$
|
41,800
|
|
|
|
b)
|
|
Capital assets and intangible assets by geographic segment
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009
|
|
|
December 31, 2008
|
|
|
Canada
|
|
$
|
9,894
|
|
|
$
|
9,871
|
|
United States
|
|
|
50
|
|
|
|
33
|
|
|
|
|
$
|
9,944
|
|
|
$
|
9,904
|
|
|
|
|
Included in capital assets is construction in progress of $426 and $300 at June 30, 2009
and December 31, 2008 which is not currently subject to depreciation.
|
|
|
|
The Corporations revenues in the six months ended June 30, 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.
|
|
11
|
|
FINANCIAL INSTRUMENTS
|
|
|
|
Financial instruments include accounts receivable and other like amounts which will result
in future cash receipts and accounts payable and accrued liabilities and other like amounts
which will result in future outlays. Indebtedness to related party is not included in
financial instruments due to the unique terms and conditions attached to this item.
|
|
|
|
Fair value of financial instruments
|
|
|
|
The carrying values of the Corporations interests in financial instruments approximate
their fair value. The estimated fair value approximates the amount for which the financial
instruments could currently be exchanged in an arms length transaction between willing
parties who are under no compulsion to act.
|
|
|
|
Certain financial instruments, including indebtedness to related party, lack an available
trading market and, therefore, fair value amounts should not be interpreted as being
necessarily realizable in an immediate settlement of the instrument.
|
14
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. If
one or more of these or other risks or uncertainties materialize, or if our underlying assumptions
prove to be incorrect, actual results may vary materially from what we projected. 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.
15
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.
In view of the completion of the return of capital in the first quarter, our Board of
Directors is currently evaluating strategic alternatives for the business as well as assessing the
appropriate level of senior management required to implement any future business plans. While this
strategic evaluation is being conducted, we have continued to reduce our overall cost structure. For the second quarter of 2009, we reported non-manufacturing operating expenses of under $2.0
million and operating income of $0.2 million before foreign currency losses and interest income.
We will continue to manage our operating costs closely during this transitional period for the
business.
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 world-wide right to
market, distribute and sell 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 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 July 30, 2009, Smith &
Nephew announced their second quarter results and reported a 4% growth year over year in their
wound care business prior to the impact of foreign currency changes. Acticoat product sales by
Smith & Nephew increased by 6% prior to the impact of foreign currency changes but declined by 7%
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 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
16
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 July 2009 we announced that Smith & Nephew received US FDA 510(k) clearance to
market Acticoat Flex barrier dressing for wounds that require up to seven days of sustained
antimicrobial activity. Smith & Nephew is now able to offer Acticoat Flex in the U.S. and Canadian
and they are in the process of seeking additional regulatory approvals for Acticoat Flex in
Europe.
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.
17
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.
Results of Operations
Our net loss for the three and
six months ended June 30, 2009 was $0.4 million and $1.7 million, respectively, compared to $1.5 million
and $4.9 million for the three and six months ended June 30, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount in Thousands
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Total Revenue
|
|
$
|
4,942
|
|
|
$
|
4,708
|
|
|
$
|
9,091
|
|
|
$
|
9,897
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing Costs
|
|
|
2,801
|
|
|
|
2,726
|
|
|
|
5,034
|
|
|
|
6,826
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin
|
|
$
|
2,141
|
|
|
$
|
1,982
|
|
|
$
|
4,057
|
|
|
$
|
3,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin Percent
|
|
|
43%
|
|
|
|
42%
|
|
|
|
45%
|
|
|
|
31%
|
|
Three Months Ended June 30, 2009 and June 30, 2008
Revenue & Gross Margin
Total revenue for the three months ended June 30, 2009 was $4.9 million compared to $4.7
million for the three months ended June 30, 2008. The increase of $0.2 million is primarily
attributable to an increase in units shipped to Smith & Nephew compared to the prior year period
which was partially offset by a decrease in product and royalty revenues as a result of the impact
of foreign currency changes. The higher level of units shipped in the second quarter of 2009
reflects a recovery from the below average level of units shipped in the first quarter of this
year.
Our gross margin increased $0.2 million to $2.1 million for the three months ended June 30,
2009 from the prior year second quarter due to reductions in our per unit costs which were
partially offset by a slight decrease in manufacturing prices per unit. 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 June 30, 2009 were $0.6 million
compared to $1.5 million for the three months ended June 30, 2008. The decrease of $0.9 million is
the result of reductions in our research staff and activities including the closure of our
Wakefield, Massachusetts research facility at the end of 2008. 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 June 30, 2009 were $1.4 million
compared to $2.2 million for the three months ended June 30, 2008. The decrease is attributable to
the achievement of cost reductions following 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 contributed to overall decrease. We expect to achieve reductions in our
general and administrative costs compared to 2008 levels for the remainder of 2009.
Non-Operating Items
We recorded a net loss of $0.6 million from foreign currency changes for the three months
ended June 30, 2009 compared to a $0.2 million net loss for the three months ended June 30, 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 June 30, 2008 compared to a
negligible amount for the three months ended June 30, 2009. This reduction is primarily the result
of the lower interest rates and lower levels of short term investments in 2009 compared to 2008.
18
Six Months Ended June 30, 2009 and June 30, 2008
Revenue and Gross Margin
Total revenue for the six months ended June 30, 2009 was $9.1 million compared to $9.9 million
for the six months ended June 30, 2008. The decrease of $0.8 million is attributable to lower
revenues on product shipments and decreased royalty revenue. Lower product revenues were the
result of a 7% decline in year over year units shipped and a decline in reimbursement levels as a
result of foreign currency rate changes. Royalty revenue was lower as a result of foreign currency
changes that negatively effected Smith & Nephews reported sales.
The gross margin for the six months ended June 30, 2009 was $4.1 million or 45% compared to
$3.1 million or 31% for the six months ended June 30, 2008 as lower manufacturing costs more than
offset the negative impact of lower revenues and the accrued manufacturing cost rebate payable to
Smith & Nephew.
Other Operating Costs
Research and development costs for the six months ended June 30, 2009 were $1.3 million
compared to $3.0 million for the six months ended June 30, 2008. The decrease of $1.7 million is
the result of reductions in our research staff and activities including the closure of our
Wakefield, Massachusetts research facility. The six months ended June 30, 2008 expense included
$0.3 million in employee severance costs.
General and administrative costs for the six months ended June 30, 2009 were $4.0 million
compared to $4.7 million for the six months ended June 30, 2008. The six month periods ended June
30, 2009 and 2008 included approximately $0.8 million and $0.2 million of employee severance costs respectively.
Other general and administrative costs excluding severance costs declined due to reduced overhead
costs from our U.S. operations.
Non-Operating Items
We recorded $0.2 million of interest income for the six months ended June 30, 2008 compared to
a negligible amount for the six months ended June 30, 2009. This reduction is due to lower
interest rates earned on short term investments and available cash balances.
We recorded a net loss of $0.2 million from foreign currency changes for the six months ended
June 30, 2009 compared to a net gain of $0.5 million for the six months ended June 30, 2008.
Liquidity and Capital Resources
At June 30, 2009, we had cash
and cash equivalents of $11.8 million compared to $23.4 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 provided by operating activities amounted to $2.9 million for the six months ended June 30,
2009 compared to $10.3 million of cash provided by operating activities for the six months ended
June 30, 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, while no
milestone payment was earned in 2009. Increases in inventories resulted in a $0.9 million use of
cash in the six months ended June 30, 2009 compared to a $0.3 million source of cash from a decline
in inventories in the six months ended June 30, 2008.
Cash used in investing activities amounted to $0.1 million for the six months ended June
30, 2009 compared to a use of $0.9 million in cash for the six months ended June 30, 2008. Capital
expenditures were $0.3 million for the six months ended June 30, 2009 compared to $0.9 million for
the six months ended June 30, 2008. Capital expenditures in the first half of 2008 were primarily
related to the completion of a major production expansion at our manufacturing facility in Fort
Saskatchewan, Alberta. 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
return of capital initiated and approved by our shareholders. There were no other financing
activities for the six months ended June 30, 2009 and 2008.
19
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, we could selectively
repurchase our stock from time to time on the open market, in privately
negotiated transactions or otherwise, at times and in amounts as we deemed appropriate.
The repurchase program was authorized through June 30, 2009 and we have not extended the repurchase
program.
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 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 June 30, 2009 were
not material and at June 30, 2009 there were no unrecognized tax benefits.
We file 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 June 30, 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 June 30, 2009
The table provided below reports commitments and obligations that have been recorded on our
condensed consolidated balance sheet as of June 30, 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.
20
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Payments Due by Period
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Less
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More
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than
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than
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1 year
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1-3 years
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3-5 years
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5 years
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Total
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Consolidated Obligations and
Commitments
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(in millions)
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Facilities operating leases
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$
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0.8
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$
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1.5
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$
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1.5
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$
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0.6
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$
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4.4
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Contractual Obligations
(1)
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4.5
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4.5
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Purchase Obligations
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0.9
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0.9
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Total obligations and commitments
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$
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6.2
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$
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1.5
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$
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1.5
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$
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0.6
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$
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9.8
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(1)
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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 October 2009.
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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 included in the table above. See Note 6 to the unaudited Condensed
Consolidated Financial Statements for additional information.
Off-Balance Sheet Commitments as of June 30, 2009
As of June 30, 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 June 30, 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. Estimates are based on historical
experience and on various other factors that are believed to be appropriate under the circumstances
at the time made, the results of which form the basis for making judgments about the carrying value
of assets and liabilities that are not readily apparent from other sources and the methodology is
consistent with prior years. 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 June 30, 2009.
21
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.
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 interim Chief Executive Officer and Chief Financial Officer, 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 June 30, 2009. Based on this evaluation our
management concluded that, as of June 30, 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 June 30, 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.
ITEM 1A.
RISK FACTORS
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.
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the quarter ended June 30, 2009, there were no unregistered sales of equity securities
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The stock repurchase plan approved by our Board of Directors in 2008 expired on June 30, 2009.
The Company made no repurchases of shares under the program during the quarter ended June 30,
2009.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 2009 Annual General Meeting of the shareholders of NUCRYST Pharmaceuticals Corp. was held
on Wednesday, May 13, 2009 for the following purposes:
1.
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elect three directors for the ensuing year;
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2.
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appoint auditors and authorize the board of directors to fix the auditors remuneration; and
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3.
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to transact such other business as may properly come before the Meeting, or at any
adjournments or postponements thereof.
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22
In addition, at the 2009 Annual General Meeting our shareholders received our audited
consolidated financial statements for the year ended December 31, 2008, together with the report of
the independent registered public accounting firm on those financial statements.
We are not subject to Section 14(a) of the Securities Exchange Act of 1934, as amended. There
was no solicitation in opposition of managements solicitations.
The final vote on the proposals was recorded as follows:
1.
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Under Canadian Securities Law we nominate a slate of directors and do not tabulate votes
on individual directors. The slate of three Directors, which included Neil Carragher,
Richard Zahn and Barry Heck, was re-elected by the following vote:
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Votes for
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Against
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Withheld
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16,697,432
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0
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383,473
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2.
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The appointment of Deloitte & Touche LLP as our independent registered public accounting
firm for the ensuing year was approved by the following vote:
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Votes For
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Against
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Withheld
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17,049,133
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0
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31,774
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ITEM 6.
EXHIBITS
(a)
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The following exhibits are filed as part of this quarterly report on Form 10-Q.
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Exhibit
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Number
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Exhibit
|
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10.70
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Amended Form of Directors Stock Option Award Agreement under the
NUCRYST Pharmaceuticals Corp. 1998 Equity Incentive Plan (as
amended).
|
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10.71
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Amended Form of Directors Restricted Stock Unit Award Agreement
under the NUCRYST Pharmaceuticals Corp. 1998 Equity Incentive Plan
(as amended).
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10.72
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Amended Form of Stock Option Award Agreement for Executives under
the NUCRYST Pharmaceuticals Corp. 1998 Equity Incentive Plan (as
amended).
|
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10.73
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Summary of non-employee Director Compensation, as amended.
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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
|
|
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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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 August 5, 2009.
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NUCRYST Pharmaceuticals
Corp.
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By:
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David B. Holtz
|
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David B. Holtz
|
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|
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Interim President and Chief
Executive Officer
Chief Financial Officer
(and as principal financial officer)
|
|
23
|
|
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Exhibit
|
|
|
Number
|
|
Exhibit
|
|
10.70
|
|
Amended Form of Directors Stock Option Award Agreement under the
NUCRYST Pharmaceuticals Corp. 1998 Equity Incentive Plan (as
amended).
|
|
|
|
10.71
|
|
Amended Form of Directors Restricted Stock Unit Award Agreement
under the NUCRYST Pharmaceuticals Corp. 1998 Equity Incentive Plan
(as amended).
|
|
|
|
10.72
|
|
Amended Form of Stock Option Award Agreement for Executives under
the NUCRYST Pharmaceuticals Corp. 1998 Equity Incentive Plan (as
amended).
|
|
|
|
10.73
|
|
Summary of non-employee Director Compensation, as amended.
|
|
|
|
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.
|
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