UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2008
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or
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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
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Commission
file number:
000-51686
NUCRYST Pharmaceuticals
Corp.
(Exact name of registrant as
specified in its charter)
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Alberta, Canada
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Not Applicable
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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101 College Road East, Princeton, NJ
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08540
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(Address of principal executive
offices)
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(Zip Code)
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(609) 228-8210
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class:
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Name of Each Exchange on Which Registered:
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Common shares, no par value
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The NASDAQ Stock Market LLC
The Toronto Stock Exchange
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes
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No
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Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes
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No
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Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes
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No
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Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K.
þ
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. (Check one):
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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Smaller reporting company
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes
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No
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As of June 30, 2008, the aggregate market value of the
registrants voting and non-voting common equity held by
non-affiliates of the registrant was $4,874,325 based on the
closing price of the registrants common shares of U.S.
$1.06, as reported on the NASDAQ Global Market on that date.
Shares of the registrants common shares held by each
officer and director and each person who owns 10% or more of the
outstanding common shares of the registrant have been excluded
in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a
conclusive determination for other purposes.
Indicate the number of shares outstanding of each of the
registrants classes of common stock, as of the latest
practicable date.
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Class
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Outstanding at February 13, 2009
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Common Shares, no par value
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18,320,531 shares
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Documents incorporated by reference: None.
TABLE OF
CONTENTS
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Part I
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Item 1.
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Business
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5
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Item 1A.
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Risk Factors
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19
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Item 2.
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Properties
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34
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Item 3.
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Legal Proceedings
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35
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Item 4.
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Submission of Matters to a Vote of Security Holders
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35
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Part II
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Item 5.
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Market for the Registrants Common Equity; Related
Stockholder Matters and Issuer Purchases of Equity Securities
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35
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Item 6.
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Selected Financial Data
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38
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Item 7.
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Managements Discussion and Analysis of Financial Condition
and Results of Operations
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40
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Item 7A.
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Quantitative and Qualitative Disclosures About Market Risk
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52
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Item 8.
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Financial Statements and Supplementary Data
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53
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Item 9.
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Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
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69
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Item 9A.
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Controls and Procedures
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69
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Item 9B.
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Other Information
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70
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Part III
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Item 10.
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Directors and Executive Officers of the Registrant
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70
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Item 11.
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Executive Compensation
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73
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Item 12.
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Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters
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88
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Item 13.
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Certain Relationships and Related Transactions; and Director
Independence
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89
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Item 14.
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Principal Accountant Fees and Services
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92
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Part IV
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Item 15.
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Exhibits, Financial Statements Schedules
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93
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Signatures
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98
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Index to Exhibits
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In this
Form 10-K,
unless otherwise specified, all monetary amounts are in United
States dollars, all references to $,
U.S.$, U.S. dollars and
dollars mean U.S. dollars and all references to
C$, Canadian dollars and
CDN$ mean Canadian dollars. To the extent that such
monetary amounts are derived from our consolidated financial
statements included elsewhere in this
Form 10-K,
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 December 31,
2008 noon buying rate reported by the Bank of Canada, being U.S.
$1.00 = C$1.2246. For more detailed information on foreign
exchange rates for 2006, 2007 and 2008, please refer to the
table on page 50.
2
FORWARD-LOOKING
STATEMENTS
The information in this Annual Report on
Form 10-K
which includes Managements Discussion and Analysis,
include forward-looking statements within the meaning of
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. 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,
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 address matters that involve
risks and uncertainties. Accordingly, there are or will be
important factors that could cause our actual results and other
circumstances and events to differ materially from those
indicated in these statements. We believe that these factors
include but are not limited to those described under Risk
Factors above and the following:
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the effect of our recently announced distribution of capital to
our shareholders on our ability to operate the business;
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future shareholder actions with respect to our capitalization
and strategic direction;
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the performance of the stock markets generally;
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our ability to satisfy regulatory and stock exchange standards
and requirements to maintain our exchange listings;
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the uncertainty of our future operating results, which are
likely to fluctuate;
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our reliance on and ability to maintain our collaboration with
Smith & Nephew, plc (Smith &
Nephew);
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our reliance on sales of
Acticoat
tm
products with our
SILCRYST
tm
coatings by Smith & Nephew;
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the future financial and operating performance of
Smith & Nephew;
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our ability to achieve cost savings and operating efficiencies
sufficient to substantially or to completely offset the
manufacturing cost rebate we have agreed to pay
Smith & Nephew;
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our ability to achieve cost reductions from office, facility and
program consolidations;
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our ability to successfully implement our business model,
strategic plans for our business, product candidates and
technology;
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our ability to establish successful commercialization programs,
through corporate collaborations or otherwise, for our NPI 32101
barrier cream and other development programs;
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our ability to protect our intellectual property rights covering
our product candidates and technology;
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our ability to operate our business without infringing the
intellectual property rights of others;
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the impact of competition from other medical device and
pharmaceutical companies;
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our ability to retain skilled and experienced personnel;
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our ability to comply with applicable governmental regulations
and standards;
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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;
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changes in currency exchange rates;
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changes in regulation or tax laws applicable to us;
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changes in accounting policies or practices;
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changes in general economic and capital market conditions;
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other risks and uncertainties that have not been identified at
this time; and
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managements response to these factors.
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3
The foregoing list should not be construed as exhaustive, and
should be read in conjunction with the other cautionary
statements that are included in this annual report. 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, future developments or
otherwise.
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. Any forward-looking statements you read in this
annual report reflect our current views with respect to future
events and are subject to these and other risks, uncertainties
and assumptions relating to our operations, results of
operations, growth strategy and liquidity and the markets for
our current and proposed products. You should specifically
consider the factors identified in this annual report that could
cause actual results to differ.
Unless the context otherwise requires, all references to
NUCRYST, we, our,
company and us in this Annual Report on
Form 10-K
refer to NUCRYST Pharmaceuticals Corp. and its subsidiaries.
4
PART I
ITEM 1. BUSINESS
Overview
and Current Years Developments
We develop, manufacture and commercialize innovative medical
products that fight infection and inflammation. Our patented
technology enables us to convert silvers microcrystalline
structure into an atomically disordered nanocrystalline coating
that we believe enhances silvers natural antimicrobial
properties by providing for the sustained release of an
increased quantity of positively-charged particles called ions.
We believe currently marketed wound care products with our
nanocrystalline silver combat infection longer than other
silver-based wound care products that we view as major
competitors and offer a broader spectrum of antimicrobial
activity than many topically applied antibiotics. In addition,
our nanocrystalline silver structures have exhibited potent
anti-inflammatory properties in preclinical studies. We produce
our nanocrystalline silver as a coating for wound dressing
products under the trademark
SILCRYST
tm
and as a powder, which we refer to as NPI 32101, for use in
medical devices and as an active pharmaceutical ingredient
(API). Our common shares are traded on the Toronto
Stock Exchange (TSX) under the symbol NCS and on the
NASDAQ Global Market under the symbol NCST.
Following our inception in 1997, we developed and sold advanced
wound care products with our
SILCRYST
tm
coatings under the
Acticoat
tm
trademark until May 2001 when we entered a series of agreements
with Smith & Nephew plc (Smith &
Nephew), a global medical device company. Under these
agreements, we license to Smith & Nephew the exclusive
right to market, distribute and sell products with our
SILCRYST
tm
technology for use on non-minor skin wounds and burns on humans
world-wide, and we agreed to manufacture these products and
supply them exclusively to Smith & Nephew. We also
sold various assets to Smith & Nephew in connection
with the license and supply agreements, including the
Acticoat
tm
trade name and trademark, various regulatory approvals and
certain manufacturing equipment, which we lease back. We have
worked with Smith & Nephew to develop new
Acticoat
tm
wound care products with our
SILCRYST
tm
coatings. Smith & Nephews anticipated launch of
the
Acticoat
tm
Flex product in the first half of 2009 is the latest result of
these efforts, and it represents the seventh wound care product
with our
SILCRYST
tm
coating currently sold by Smith & Nephew.
Our results of operations currently depend solely on
Acticoat
tm
product sales generated by Smith & Nephew, which is
our only customer and our sole source of revenue. The
Acticoat
tm
product line competes in the advanced wound care products market
and is targeted at the premium priced segments of the serious
wound care dressings market.
Acticoat
tm
products with our
SILCRYST
tm
coatings have received U.S. Food and Drug Administration
(FDA) clearance and approval of other regulators for
over 30 countries around the world and are used for a wide
variety of wound types by hospitals, clinics, burn centers,
doctors offices, home healthcare agencies and nursing
homes. Smith & Nephew has reported that its sales of
Acticoat
tm
products were $54 million in 2006 and $60 million in
both 2007 and 2008.
In 2008, we continued to reduce our spending on research and
development, including spending on our NPI 32101 development
programs. We discontinued our efforts to develop pharmaceutical
products containing our NPI 32101 for the treatment of
gastrointestinal conditions. While we remain focused on
identifying development opportunities with third parties in
various clinical areas, we do not intend to pursue the
development of additional pharmaceuticals applications for NPI
32101 without first securing development partners. We are
continuing our efforts to explore commercialization options for
bringing our NPI 32101 cream to market as an antimicrobial
barrier cream. As part of our efforts to reduce costs, in the
fourth quarter we closed our Wakefield, Massachusetts research
center and relocated our corporate headquarters to Princeton,
New Jersey.
In May 2008, The Westaim Corporation (Westaim),
which owns approximately 75% of our outstanding common shares,
announced that as a part of an overall strategic review, it was
reviewing alternatives for monetizing its investment in NUCRYST,
including the sale of its NUCRYST shares, the distribution of
its NUCRYST shares to shareholders of Westaim or the investment
of Westaims remaining liquid assets 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 NUCRYST shareholders. After evaluating
various alternatives regarding the request for a return of
capital, our board of directors called a special meeting of
shareholders to consider a special resolution pursuant to
section 38(1) of the Business Corporations Act (Alberta) to
reduce the stated capital of our outstanding common shares by an
amount equal to the product of the number of common shares
outstanding on the date of the meeting and $0.80 for the purpose
of distributing $0.80 cash per common share to our shareholders.
The meeting was held on Thursday, February 12, 2009, and
the special
5
resolution was approved with a record date of February 17,
2009. The return of capital distribution will total
$14.7 million and we have set a payable date of
February 25, 2009.
We experienced changes in management in 2008 and January 2009.
In August 2007, Mr. Thomas E. Gardner was appointed
Chairman of the Board, President and Chief Executive Officer. In
May 2008, Mr. David B. Holtz was appointed our Vice
President, Chief Financial Officer. In January 2009,
Mr. Gardner resigned as our Chairman of the Board,
President and Chief Executive Officer and Mr. Holtz was
appointed interim President and Chief Executive Officer in
addition to his Chief Financial Officer responsibilities.
Mr. Neil Carragher, our lead director, was appointed
Chairman of our board of directors. Please see the Risk
Factors section under Item 1A of Part II
included in this report for a more detailed discussion of the
changes in management.
In August 2008, we announced that the company received a notice
from the NASDAQ Stock Market that our shares had not maintained
the minimum market value of publicly held shares of
$5 million required for continued listing on the NASDAQ
Global Market. We were advised that we had 90 calendar days, or
until November 12, 2008, to regain compliance with the
requirement. In October 2008, we announced that we received a
second notice from the NASDAQ Stock Market regarding the
companys non-compliance with the $1.00 per share minimum
closing bid requirement for continued listing on the NASDAQ
Global Market. We were advised that we had until March 31,
2009 to regain compliance with the closing bid price
requirement. In October 2008, the NASDAQ Stock Market
temporarily suspended the enforcement of the closing bid price
and market value of publicly held shares continued listing
requirements otherwise applicable to issuers. In January 2009,
the suspension was extended until April 20, 2009. On
January 23, 2009, we received a notice from the NASDAQ
Stock Market that the company had regained compliance with the
$1.00 per share minimum closing bid requirement by having a
minimum closing bid of $1.00 or greater for 10 consecutive
trading days. Please see the Risk Factors section
under Item 1A of Part II included in this report for a
detailed discussion of the status of these deficiency notices.
Company
Information
We were incorporated under the Alberta Business Corporations Act
on December 18, 1997. We have one wholly owned subsidiary,
NUCRYST Pharmaceuticals Inc. that was incorporated under the
laws of the State of Delaware on November 20, 1997. Our
principal executive offices are located at 101 College Road
East, Princeton, New Jersey, and our telephone number at that
address is
(609) 228-8210.
Our registered office is at 10102 114 Street,
Fort Saskatchewan Alberta T8L 3W4.
We are a majority owned subsidiary of Westaim, a Canadian
company incorporated in Alberta and the shares of which are
listed on the Toronto Stock Exchange.
Our
Nanocrystalline Technology
Silver, platinum and gold, which are elements of the noble
metals group, have long been known to have medicinal properties.
For example, platinum is the primary active ingredient in
cisplatin, a prominent cancer drug. Similarly, gold is the
active agent in some treatments for rheumatoid arthritis. We
selected silver as the first noble metal for the application of
our proprietary nanotechnology based on silvers
antimicrobial properties. Although silvers medicinal
properties have been well known for centuries, we believe its
use in its microcrystalline form has been limited due to its
slow release of relatively small quantities of silver ions and
the widespread use of antibiotics. Silver is composed of large
microcrystals, usually of one or two microns in diameter or
greater. These microcrystals dissolve slowly, thereby limiting
the rate and amount of silver released over time. By converting
silvers microcrystalline structure into an atomically
disordered nanocrystalline structure, we believe that we enhance
silvers release and efficacy characteristics and thereby
make it a more effective antimicrobial agent.
Antibacterial agents inhibit or kill bacterial cells by
attacking one of the bacteriums structures or processes.
Common targets are the bacteriums outer shell (called the
cell wall) and the bacteriums intracellular
processes that normally help the bacterium grow and reproduce.
However, since a particular antibiotic typically attacks one or
a limited number of cellular targets, any bacteria with a
resistance to that antibiotics killing mechanism could
potentially survive and repopulate the bacterial colony. Over
time, these bacteria could make resistance or immunity to this
antibiotic widespread. Unlike antibiotics, silver has been shown
to simultaneously attack several targets in the bacterial cell
and therefore it is thought to be less likely that bacteria
would become resistant to all of these killing mechanisms and
thereby create a new silver-resistant strain of bacteria. This
may be the reason that bacterial resistance to silver has not
yet been widely observed despite its centuries-long use. This
can be particularly important in hospitals, nursing homes and
other healthcare institutions where patients are at risk of
developing infections. As a result, we believe that our
nanocrystalline
6
silver fulfills a large unmet need for effective, locally
administered antimicrobial products that are not as susceptible
to bacterial resistance.
Our
SILCRYST
tm
coatings exhibit rapid antimicrobial activity, killing many
organisms within 30 minutes of application, which is faster than
many other commercially-available forms of antimicrobial silver.
These organisms include gram positive and gram negative
bacteria, including some antibiotic resistant strains in both
classes, as well as fungi and yeast. We have designed our
SILCRYST
tm
coatings to provide sustained antimicrobial activity for up to
seven days.
We have demonstrated in non-clinical studies that our
nanocrystalline silver exhibits anti-inflammatory properties. It
suppresses two naturally occurring inflammatory agents,
specifically IL-12b and TNFα, and reduces the level of a
naturally occurring enzyme called MMP-9. While helpful at the
correct levels, excessive amounts of these substances are
associated with inflammation. In addition, our nanocrystalline
silver increases the natural cell death of certain inflammatory
cells, specifically polymorphonuclear leukocytes, or PMNs.
Our manufacturing technology is currently based on a physical
vapor deposition, or PVD, process called magnetron sputtering.
The process begins by bombarding silver with positive ions to
liberate, or sputter, nanosized silver-containing particles.
These nanosized silver-containing particles are then
re-condensed to form new atomically disordered nanocrystalline
structures on various materials, called substrates. For example,
we use high-density polyethylene as the substrate for some of
our non-adherent wound care dressings.
While the PVD process is generally used to produce films or
continuous coatings, we have developed methods to coat inert
substrates and also have developed a method to produce our
nanocrystalline silver in powder form for use in medical devices
and as an API in pharmaceutical products. This powder consists
of aggregates of silver nanocrystals which can be used in
various formulations, such as creams, gels, liquids, tablets,
capsules, suppositories and aerosols, for treating a variety of
infectious or inflammatory conditions.
In furtherance of these and other research and development
activities, we incurred research and development costs of
$5.0 million in 2008, $6.3 million in 2007, and
$11.2 million in 2006. These amounts include research and
development expenses we incurred in relation to
Smith & Nephew-sponsored research activities relating
to the development of new
Acticoat
tm
products with our
SILCRYST
tm
coatings or improvements to existing
Acticoat
tm
products. As part of the amendments to our licensing agreement
with Smith & Nephew entered into in 2007, we agreed to
limit the amount by which Smith & Nephew is required
to reimburse us for such research and development expenses we
incur in a given calendar year to only those amounts we incur in
excess of 1.5% of net sales of
Acticoat
tm
products for that year. We received no reimbursements for
research and development expense from Smith & Nephew
in respect of 2008 and 2007 expenses and a minimal amount in
2006.
Market
Overview
Industry
and Market Data
This annual report includes industry and market data concerning
our business and the markets for our current and proposed
products, including data regarding the size of these markets and
their projected growth rates, the incidence of certain medical
conditions and sales of certain drugs and healthcare products.
This information was obtained from our own research, industry
and general publications and reports prepared by third parties,
including Espicom Business Intelligences The Global Market
For Advanced Wound Care Products 2007 report. Although we
believe that information from third-party sources is reliable,
we have not independently verified any of this information and
we cannot assure you that it is accurate. Similarly, our own
research, while believed by us to be reliable, has not been
verified by any independent sources.
Wound
Care Market
Acticoat
tm
products with our
SILCRYST
tm
coatings compete in the advanced wound care market, which
includes products for chronic wounds, serious burns and
traumatic and surgical wounds. According to Espicom Business
Intelligence 2007 report, the advanced wound care segment was
valued at $4.1 billion in 2006, increasing to
$6.9 billion in 2011, with the active sector
(antimicrobial, biological and negative pressure wound therapy
(NPWT)) being the fastest growing sector of the advanced wound
care segment. We believe that the aging population and growing
incidence of diabetes and obesity in many of our markets are
driving an increase in the incidence of serious and
difficult-to-heal
wounds. In addition, we believe that improvements in wound care
technology are motivating physicians to increase their use of
advanced wound care products.
7
Advanced wound care products are frequently used in the
treatment of chronic wounds. Chronic wounds include pressure
ulcers, diabetic foot ulcers and venous stasis ulcers. Pressure
ulcers are caused by unrelieved pressure or by tissue layers
sliding over each other. We believe that diabetic foot ulcers
are one of the most difficult types of chronic wounds to heal.
Venous stasis ulcers typically affect the elderly and are caused
by the inability of blood to circulate effectively through the
venous system in the leg. According to information published in
2003 by the Cleveland Clinic, a leading healthcare institution,
approximately 500,000 people in the United States have venous
stasis ulcers.
Chronic wounds generally occur more frequently among diabetic,
elderly, immobile or seriously ill people due to their
diminished healing capabilities or immobility. It is often
difficult to prevent pressure ulcers by repositioning patients
due to the staffing limitations in hospitals, nursing homes and
other healthcare facilities. In addition, it can be difficult to
consistently prevent the formation of venous stasis or diabetic
foot ulcers because of the patients chronic underlying
disease or other health issues. Traditional gauze treatments for
chronic wounds require frequent dressing changes that can
disrupt the wound, which can retard or prevent the healing
process. In addition, chronic wounds are often prone to
infection.
Matrix metalloproteinases, or MMPs, are enzymes that digest
tissue and that thereby regulate the formation of new tissue and
blood vessels in a healing wound. MMP-9 is one of these enzymes.
Studies of human tissue samples indicate that excess levels of
MMP-9 and other MMPs, particularly in wounds such as chronic
ulcers, may contribute to non-healing or slow healing by
digesting newly formed tissue faster than the wounds can heal.
We have demonstrated in non-clinical studies that our
nanocrystalline silver reduced the level of MMP-9.
According to a 2005 report of the National Institute of General
Medical Sciences, each year in the United States approximately
1.1 million burn injuries require medical attention;
approximately 45,000 of these require hospitalization, and
roughly half of those burn patients are admitted to a
specialized burn unit; up to 10,000 people in the United States
die every year of burn-related infections; and complications
following serious burns may occur long after the initial
incident, often when the patient is in an intensive care unit.
Prior to the introduction of
Acticoat
tm
in 1998, the standard of care for serious burns had been the use
of antibacterial ointments or solutions, usually a form of
silver, covered by sterile dressings. Because these creams and
solutions are short acting forms of silver, these dressings
generally needed to be changed at least daily or more
frequently, which can be painful and can interfere with healing
because of disruption of the wound bed.
Acticoat
tm
dressings with
SILCRYST
tm
coatings are generally non-adherent and provide for up to seven
days of antimicrobial protection. Since its introduction,
Acticoat
tm
has been rapidly adopted to replace short acting creams and
solutions.
Another important segment of the advanced wound care market is
the treatment of traumatic wounds and surgical wounds. Traumatic
wounds often have irregular edges and missing flesh, making them
difficult to heal and prone to infection. Surgical wounds,
resulting from incisions, are more regular than traumatic
wounds, but still have the potential to become infected. These
procedures range from spinal taps with a needle incision to open
heart surgeries, which require large chest incisions. With the
increasing resistance of many infectious agents to systemic
antibiotics, there is a need for products that can help prevent
the entry of infectious agents into the body. We believe that
this market segment presents a natural extension for our
SILCRYST
tm
coatings for wound care products.
Pharmaceutical
Market
Our pharmaceutical opportunities center on the use of our
patented nancrystalline technology formulation NPI 32101. Based
on the preclinical results in a variety of
in vitro
and
in vivo
models and the consistently favorable safety data
generated in studies performed to date, we believe that NPI
32101 has the potential to treat various inflammatory and
infectious conditions.
While our Phase 2 clinical trial of the topical cream
formulation containing NPI 32101 for the treatment of mild to
moderate atopic dermatitis in children and adolescents that we
completed in September 2006 did not meet its primary end points,
it did demonstrate that treatment with NPI 32101 cream was well
tolerated and that the incidence of all adverse events was low
and was not different among the NPI 32101-treated groups and the
placebo-treated patients. Based on this data, in July 2007 we
obtained 510(k) clearance for a prescription topical device
containing our NPI 32101, as a broad spectrum antimicrobial
barrier cream to organisms including
Pseudomonas
aeruginosa
and
Staphyloccocus aureus,
including
strains resistant to methicillin or MRSA. We
continue to explore commercialization options for the barrier
cream and, in support of this effort, we are working on
developing stability and production scale up protocols for this
potential new product.
8
We filed an additional 510(k) application with the FDA to expand
the claims and indications for our barrier cream. We applied for
a claim that barrier cream relieves the signs and symptoms of
dermatoses. In May 2008, we received a request from the FDA for
additional information regarding this submission. We requested
an extension of time regarding our response to the FDAs
questions while we reviewed commercial alternatives for the
barrier cream. While these additional claims and indications
would expand the potential market for the barrier cream, the
application for this expansion was withdrawn without prejudice
and will be assessed for resubmission once we secure a
commercialization partner for the barrier cream.
We have also conducted preclinical research for the use of NPI
32101 for the treatment of gastrointestinal conditions. In 2007,
we began shifting the focus of our research and development
efforts from topical clinical work towards preclinical work for
gastrointestinal applications of our nanocrystalline technology.
The gastrointestinal market is composed of the drugs and other
treatments for the many diseases causing heartburn, acid
indigestion and bowel disorders. We had begun exploring the use
of our nanocrystalline technology to treat inflammatory bowel
disease, or IBD, consisting of ulcerative colitis and
Crohns disease. Ulcerative colitis and Crohns
disease are typically treated with anti-inflammatories,
immunomodulators, corticosteroids, antibiotics or other
treatments. According to IMS Health, prescription U.S. drug
sales for the treatment of IBD were over $1 billion in
2006, including approximately $500 million for the
treatment of ulcerative colitis.
Our first focus was on the development of products for the
treatment of ulcerative colitis. Ulcerative colitis affects
approximately half a million people in the United States alone
of which about 50% have mild symptoms. The first line of
treatment for
mild-to-moderate
disease is typically a class of drugs known as the
5-ASAs
(aminosalicylates). However, not all patients comply with
dosing, tolerate the medication, or respond to treatment. If
patients do not respond to the
5-ASAs,
the
other options include much stronger therapies such as biologics,
immunomodulators or steroids, which carry potentially severe
side effects.
We have completed promising pre-clinical research using NPI
32101 in ulcerative colitis. We have demonstrated in preclinical
in vivo
models of ulcerative colitis a positive dose
response and demonstrated efficacy of NPI 32101 given both
orally and rectally. These studies have been repeated with
similar efficacy. NPI 32101 has also exhibited the ability to
suppress the expression of several inflammatory cytokines
including TNFα and IL-12/23. Over expression of these two
cytokines has been linked to IBD such as ulcerative colitis and
Crohns disease. We have conducted preclinical studies that
demonstrate a favorable effect of NPI 32101 on symptoms of
ulcerative colitis including a reduction in colon thickening and
ulceration. While we believe that NPI 32101 may hold
significant potential as a new class of drug in the treatment of
ulcerative colitis because of its novel mechanism of action, we
have discontinued our development activities in this area until
we identify a commercial partner for this program.
A second focus area of development within gastroenterology is
the treatment of
Clostridium difficile
(C
difficile) associated disease (CDAD). CDAD is a growing
problem in hospitals and a major cause of colitis and diarrhea.
During 2007, we presented data at two medical meetings, the
Interscience Conference on Antimicrobial Agents and Chemotherapy
and the American College of Gastroenterology on the
antimicrobial activity of our nanocrystalline silver against
both vegetative and spore forms of C difficile. Like our
ulcerative colitis program, we have discontinued development
work on CDAD until a commercial partner is identified.
Acticoat
tm
Products With Our
SILCRYST
tm
Coatings
We initially developed and received regulatory clearance to
market, and then licensed to Smith & Nephew in May
2001, four products using our
SILCRYST
tm
coatings for the advanced wound care market. In April 2007,
together with Smith & Nephew, we developed two new
dressings, increasing the number of wound care products with our
SILCRYST
tm
coating currently sold by Smith & Nephew to a total of
seven. Pursuant to our amended agreements with Smith &
Nephew, we have licensed to Smith & Nephew the
exclusive worldwide rights to market, distribute and sell these
products with our
SILCRYST
tm
coatings and any new products that use our
SILCRYST
tm
coatings or powder technology for use on non-minor skin wounds
and burns on humans that we develop together in accordance with
the terms of the agreements. Smith & Nephew markets
these products under its
Acticoat
tm
trademark to healthcare professionals in over 30 countries.
Currently, we believe that the existing
Acticoat
tm
product line using our
SILCRYST
tm
coatings targets the premium price segments of the serious wound
care dressings market.
In addition to the antimicrobial and anti-inflammatory effects
of
Acticoat
tm
,
Smith & Nephew is promoting the use of
Acticoat
tm
products with
SILCRYST
tm
coatings to help reduce the risk of methicillin-resistant
Staphylococcus aureus,
or MRSA, transmission. MRSA
is one of the many antibiotic-resistant bacteria sometimes
called super bugs. Our
9
SILCRYST
tm
products have proven efficacy in controlling MRSA in the
laboratory and the clinic. An independent study sponsored by
Smith & Nephew and published in the July 2005 issue of
the Journal of Hospital Infection concluded that of all
clinically observed wounds treated with
Acticoat
tm
dressings in the study, 67% showed a decrease in the MRSA load
and 11% showed a complete eradication of MRSA load. The study
consisted of using
Acticoat
tm
dressings as a cover for ten MRSA colonized wounds in a total of
seven patients over the course of three days. Based on these
findings, the authors of this study stated their belief that
nanocrystalline silver dressings may become an important part of
local MRSA management, with potential cost benefits to both
patients and the healthcare system. In addition, the authors
noted the possibility that nanocrystalline silver dressings may
enhance effective antibiotic treatment and reduce therapeutic
regimens in diabetics or other patients with conditions that
often cause systemic antibiotics to fail to reach infected
wounds.
Health care professionals select different types of dressings
for different types of wounds. Some wounds are dry while others
have excess fluid, or exudate. As a result, an effective
portfolio of products must address various wound types. As
described below, Smith & Nephews
Acticoat
tm
product family with our
SILCRYST
tm
coatings is designed to treat a wide variety of serious wounds.
Each of these currently marketed products has been cleared by
the FDA and Health Canada, except for the
Acticoat
tm
Flex product which has only received Health Canada approval.
Acticoat
tm
3/Acticoat
tm
Burn Dressings
Acticoat
tm
3 and
Acticoat
tm
Burn are dressings offering antimicrobial activity for up to
three days. They were first sold in the United States in 1998
and in Europe in 2001, where they are sold under the brand name
Acticoat
tm
.
Smith & Nephew currently sells these products in over
30 countries around the world, including the United States.
Acticoat
tm
3 and
Acticoat
tm
Burn are used extensively in the in-patient burn segment of the
wound dressing market. They consist of a rayon/polyester
non-woven core between two layers of high-density polyethylene,
or HDPE, mesh with
SILCRYST
tm
coatings that provides an antimicrobial barrier layer to protect
wounds. A non-woven inner core retains moisture and improves
handling characteristics.
Acticoat
tm
7 Dressings
Acticoat
tm
7 is a dressing offering antimicrobial activity for up to seven
days. It was first sold in the United States in 2000 and in
Europe in 2001. Smith & Nephew currently sells
Acticoat
tm
7 in over 20 countries around the world, including the United
States.
Acticoat
tm
7 is used primarily in the chronic wound segment of the wound
dressing market.
Acticoat
tm
7 provides consistent
seven-day
sustained antimicrobial protection for patients with venous
stasis ulcers, diabetic foot ulcers, pressure ulcers and other
persistent wounds and allows up to seven days before wound
dressings are required to be changed.
Acticoat
tm
7 consists of two rayon/polyester non-woven inner cores
laminated between three layers of HDPE mesh with
SILCRYST
tm
coatings.
Acticoat
tm
Absorbent Dressings
The
Acticoat
tm
Absorbent Dressing is an alginate dressing for wounds with
moderate to heavy exudate, providing antimicrobial activity for
up to three days. This product was first sold in 2001 and is
currently sold in the United States, Canada and Europe.
Acticoat
tm
Absorbent Dressing is used primarily in the chronic wound
segment of the wound dressing market. The
Acticoat
tm
Absorbent Dressing consists of a calcium alginate fabric coated
on both sides with
SILCRYST
tm
nanocrystals. Alginate dressings are derived from seaweed and
are highly absorbent, biodegradable fibrous materials. Alginate
dressings are commonly used in advanced wound care because they
absorb exudate to help create a moist wound healing environment.
Acticoat
tm
Moisture Control Dressings
The
Acticoat
tm
Moisture Control Dressing is a solid foam dressing for wounds
with light to moderate exudate, providing antimicrobial activity
for up to seven days. Smith & Nephew currently sells
the
Acticoat
tm
Moisture Control Dressing in the United States and Canada, and
introduced it in Europe in 2006. The
Acticoat
tm
Moisture Control Dressing is used primarily in the chronic wound
segment of the wound dressing market. The
Acticoat
tm
Moisture Control Dressing consists of an absorbent foam
sandwiched between an outer film and a non-adherent wound
contact layer with
SILCRYST
tm
coatings. The
Acticoat
tm
Moisture Control Dressing was developed in collaboration with
Smith & Nephew.
10
Acticoat
tm
Site
Acticoat
tm
Site is an antimicrobial absorbent 3-layer polyurethane foam
dressing for use around vascular and nonvascular percutaneous
device sites such as intravenous catheter and external fixation
sites that provides an effective barrier to microbial
contamination protecting the insertion site from invasive
pathogenic microorganisms for up to seven days.
Acticoat
tm
Post-Op
Acticoat
tm
Post-Op is an absorbent post-operative dressing for light to
moderate exudate, providing an antimicrobial activity for up to
seven days.
Acticoat
tm
Post-Op consists of a
SILCRYST
tm
coated polyurethane layer, a white polyurethane foam pad, and an
adhesive coated waterproof polyurethane film layer.
Acticoat
tm
Flex
Acticoat
tm
Flex is an advance wound care dressing made of a conformable
mesh for light to moderate exudate, providing an antimicrobial
activity for up to seven days.
Acticoat
tm
Flex simplifies the dressing of wounds with its unique elastic
conformable design that easily contours to surfaces, including
difficult-to-protect
articulating regions such as knee or elbow joints.
Smith &
Nephew Agreements
In September 2007, we entered into amended license and supply
agreements with Smith & Nephew. Smith &
Nephew advised us, and, based on our own information, we believe
that the advanced wound care market, including the silver
dressing segment, has become significantly more competitive
since the original agreements had been signed in 2001. Both
parties recognized the need to restructure the agreements to
better enable the parties to work jointly and individually to
support both the continued growth of
Acticoat
tm
products and our respective businesses in the context of
increasing competitive pressures. Pursuant to the amended
agreements, a non-compete clause in the original agreements was
removed to allow Smith & Nephew to broaden its wound
care dressings product line to include other forms of silver. In
exchange, Smith & Nephews exclusive license was
limited in the new agreements to existing
Acticoat
tm
products and such new wound care or burn products that the
parties agree to develop together using our nanocrystalline
silver technology. As well, under the new agreements, we may
develop our own wound care and burn products using our
nanocrystalline silver technology provided that we offer such
products to Smith & Nephew first. If Smith &
Nephew refuses to purchase the new products, we are then free to
pursue the commercialization of the products in any manner we
choose.
Amended
License and Development Agreement
Under the amended license and development agreement,
Smith & Nephew has the exclusive right to market,
distribute and sell the existing
Acticoat
tm
products using our
SILCRYST
tm
coatings, including improvements to those products, and any new
products using our
SILCRYST
tm
technology we develop together with Smith & Nephew for
use on non-minor skin wounds and burns on humans. The license
and development agreement expires in May 2026, although it may
be terminated earlier by either party if the other party fails
to cure its material breach of the agreement, suspends its
operations or ceases to carry on its business, files for
bankruptcy or takes other similar actions.
Smith & Nephew has agreed to work with us to develop
new products with our
SILCRYST
tm
coatings or powder technology for use on non-minor skin wounds
and burns on humans. We have established a new product
development steering group that includes representatives from
both NUCRYST and Smith & Nephew to oversee and manage
the development of new
Acticoat
tm
products under the license and development agreement. We are
responsible for our internal costs and expense incurred in
connection with the development of new products up to an
aggregate maximum of 1.5% of net sales of
Acticoat
tm
products per calendar year and thereafter Smith &
Nephew is obligated to reimburse us for all costs and expenses
incurred in connection with the development, commercialization,
marketing, promotion and sale of all new products.
Smith & Nephew is required to maintain regulatory
approvals to sell the
Acticoat
tm
products, and to obtain additional regulatory approvals for any
new products or any new markets that require additional
approvals.
We have granted Smith & Nephew a right of first offer
to seek a license of wound care or burn products for use on
non-minor skin wounds and burns on humans that we develop using
our nanocrystalline silver technology on our own outside of the
new product development group. If Smith & Nephew
declines the opportunity, we are then free to license and sell
such products to any person in any manner we choose. The license
and development agreement includes performance standards for
Smith & Nephew based on its net sales of
Acticoat
tm
products and other measures. Under certain circumstances, if the
standards are not met, we would be permitted to market,
distribute and sell products with our
11
SILCRYST
tm
coatings for use on non-minor skin wounds and burns on humans to
other parties, other than
Acticoat
tm
3/Acticoat
tm
Burn and
Acticoat
tm
7 which would continue to be subject to the provisions of the
license and development agreement giving Smith &
Nephew the exclusive right to sell those products in the United
States and Canadian markets.
We have granted Smith & Nephew a non-exclusive
royalty-free license to use our
SILCRYST
tm
trademark for use in marketing, distributing and selling
Acticoat
tm
products under our agreements with them. This license also
applies to any other marks we develop to identify products that
contain our nanocrystalline silver coating technology. Subject
to certain exceptions, Smith & Nephew has agreed to
include these trademarks in all product labels and sales and
promotional literature for
Acticoat
tm
products.
Smith & Nephew pays us royalties based on their sales
of
Acticoat
tm
products. We also receive payments upon the achievement of
milestones relating to Smith & Nephews sales of
Acticoat
tm
products and regulatory matters specified in the license and
development agreement. All payments under the license and supply
agreements are made in U.S. dollars. In calculating sales levels
for milestone payment thresholds and other purposes under the
license and development agreement, sales by Smith &
Nephew in currencies other than the U.S. dollar are converted to
the U.S. dollar based on the average exchange rate for the prior
quarter. Since May 2004, the contractual royalty rate has
remained unchanged and, under the terms of the agreements, is to
remain constant for the life of the agreements, subject only to:
(i) the possibility of a negotiated or arbitrator-awarded
reduction in royalty rates on sales in countries where patent
protection has been lost and a competing product is being sold
that would have infringed our patent rights had they been in
effect; (ii) the possibility of a negotiated reduction in
royalty rates on sales of a particular
Acticoat
tm
product where Smith & Nephew does not realize industry
standard margins on sales of such products; or (iii) a
reduced royalty rate in respect of sales of
Acticoat
tm
products in certain countries, including the United States, upon
the expiration of patent rights to our
SILCRYST
tm
coatings in such country. In addition, under our amended
agreements with Smith & Nephew, our previous right to
receive increased royalty rates on sales of particular
Acticoat
tm
products in which Smith & Nephew realized gross profit
margins over a specified threshold was eliminated.
We earned a $1 million milestone payment in 2001 for the
first sale of product in Europe and a $3 million milestone
payment in 2003 for the receipt of a regulatory approval in
Europe. We earned a $5 million sales milestone payment in
the first quarter of 2004, another $5 million sales
milestone payment in the third quarter of 2004 and a
$5 million sales milestone payment during the third quarter
of 2005. No milestone payment was earned in 2006. In 2007, we
earned a $5 million milestone in the third quarter and
another $5 million in the fourth quarter. We did not earn
any milestone revenues in 2008. The maximum amount of milestone
payments that we may receive under the Smith & Nephew
agreements, including the $29 million of milestone payments
we have already received, is $56.5 million.
We have granted Smith & Nephew a right of first offer
regarding our assets and technology used to manufacture and
supply
Acticoat
tm
products. This right of first offer applies only if we desire to
sell all or substantially all of these assets. We have also
granted to Smith & Nephew a right of first refusal
regarding these assets if we receive an offer to purchase them,
which we wish to accept, from a competitor of Smith &
Nephews in the wound care market.
Supply
Agreement
Effective January 1, 2007, under the new supply agreement,
the method by which we determine the price we charge for the
products that we manufacture and supply to Smith &
Nephew changed from a fully allocated cost of manufacturing
reimbursement mechanism to a system whereby we recover a fixed
overhead charge plus all direct costs incurred in manufacturing
Acticoat
tm
products, including material, labor, labeling, testing and
packaging costs. This pricing mechanism is used to establish the
unit prices that we charge for each
Acticoat
tm
product we supply to Smith & Nephew until the end of
2009. Unit prices will be set at the beginning of each year
based on Smith & Nephews product forecast and
may only be increased, with Smith & Nephews
agreement, for actual cost increases we incur that are outside
our reasonable control. The new 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. On the other hand,
if we have received orders in excess of that which is required
to cover the fixed overhead charge by certain dates,
Smith & Nephew is entitled to immediately invoice us
for the difference. In each case, actual overhead is to be
reconciled at December 31 of each year.
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 in each of 2007, 2008 and
2009 in anticipation of annual reductions we intend to
12
achieve in our cost of goods manufactured for Smith &
Nephew over the same time period. We recognize the manufacturing
cost rebate as a reduction to wound care product revenue. We
made adjustments to our manufacturing and research operations,
including reductions in our workforce in 2007 and 2008, to
control expenses. Through these workforce reductions, together
with the implementation of manufacturing production efficiencies
and overhead cost reduction initiatives, we achieved actual
reductions in our overhead costs in 2008 sufficient to offset a
significant portion of the manufacturing cost rebate we paid to
Smith & Nephew in 2008. In addition, if we are able to
achieve cost savings such that our actual total cost of goods
manufactured for Smith & Nephew in any of the three
years is less than 18% of net sales of
Acticoat
tm
products, we have agreed to reimburse Smith & Nephew
70% of the amount by which our total cost of goods manufactured
differs from the 18% of net sales. In 2010, the revised
agreements contemplate that we will determine a new cost
recovery structure that takes into account actual cost savings
we achieve in the previous three years.
If we suffer a material difficulty in supplying
Acticoat
tm
products and that difficulty is not cured on a timely basis,
Smith & Nephew would have the right to use our
technology to manufacture, on its own or with a third party,
Acticoat
tm
products for non-minor skin wounds and burns on humans. If
within one year of Smith & Nephew commencing to
manufacture
Acticoat
tm
products under these circumstances we are able to demonstrate to
the reasonable satisfaction of Smith & Nephew that we
are once again able to manufacture products in accordance with
our agreements with Smith & Nephew at a cost no
greater than Smith & Nephew incurred during its period
of manufacture, subject to our reimbursing Smith &
Nephew for its costs incurred to establish and terminate its
manufacturing operations and subject to any then-existing
Smith & Nephew third party commitments, the right of
Smith & Nephew to use our manufacturing technology
would cease.
Smith & Nephew is responsible for any product recalls,
although we have agreed to reimburse Smith & Nephew
for its
out-of-pocket
costs to the extent the adverse event or complaint resulting in
the recall was attributable to us.
We have agreed not to use the manufacturing equipment that we
lease from Smith & Nephew and use for producing
Acticoat
tm
products for other purposes. The supply agreement expires upon
the expiration or termination of the license and development
agreement (which is scheduled to expire in 2026), although it
may be terminated earlier by either party if the other party
fails to cure a material breach of the agreement, suspends its
operations or files for bankruptcy or takes other similar
actions.
Manufacturing
and Technology Escrow Agreement
Under the manufacturing and technology escrow agreement, we have
deposited with an escrow agent certain documentation and manuals
that describe technology used to manufacture
Acticoat
tm
products. Upon the occurrence of certain release events, the
documentation and manuals would be released by the escrow agent
to Smith & Nephew as part of the right to use our
technology to manufacture
Acticoat
tm
products designed and indicated solely for use on non-minor skin
wounds and burns on humans. A release event is defined as a
material difficulty supplying
Acticoat
tm
products under our supply agreement with Smith &
Nephew that is not cured on a timely basis or the occurrence of
certain events in connection with our insolvency or bankruptcy.
Security
Trust Agreement and Trust Indenture
Under the security trust agreement and the trust indenture, we
have granted to Smith & Nephew a security interest in
our manufacturing technology and patent rights used in the
manufacture of
Acticoat
tm
products. This security interest secures our obligations to
Smith & Nephew under the manufacturing right that
would be granted to Smith & Nephew as described above.
Under the security trust agreement and trust indenture,
Smith & Nephew may take possession of and use the
manufacturing technology and patent rights upon the occurrence
of a release event as described under Smith &
Nephew Agreements Manufacturing and Technology
Escrow Agreement. Accordingly, Smith & Nephew
would have the right, upon the occurrence of specified events,
to use our manufacturing technologies and patent rights to
manufacture
Acticoat
tm
products on its own or with a third party. Assignments with
respect to the patent rights that are covered by the security
interest have been deposited with a trustee under the security
trust agreement and the indenture.
Indemnities
We and Smith & Nephew have agreed to indemnify each
other in respect of claims resulting from any alleged physical
injury or property damage as a result of our respective acts or
omissions, the failure to perform our respective obligations
under the license and development agreement and the supply
agreement, our respective non-compliance with applicable law or
regulation, any breach of our respective representations under
these agreements, for so long as the particular representation
survives. In addition, Smith & Nephew has agreed to
indemnify us for claims arising out of its
13
marketing and sale of
Acticoat
tm
products except to the extent attributable to us. Also, we have
agreed to indemnify Smith & Nephew in respect of
claims resulting from any actual or threatened action by any
third party alleging our
SILCRYST
tm
coatings infringe that third partys intellectual property
rights to the extent Smith & Nephew must pay damages
or royalties on account of the infringement action unless we
have breached any representation to Smith & Nephew in
connection with that infringement.
Manufacturing
We manufacture Smith & Nephews
Acticoat
tm
products with our
SILCRYST
tm
coatings and our NPI 32101 powder in environmentally-controlled
conditions. Our production facility is located in
Fort Saskatchewan, Alberta, is ISO 13485:2003 approved and
subject to inspection from time to time by regulatory
authorities from the United States, Canada and Europe.
We currently purchase most of our raw materials from single
suppliers, which in certain circumstances are specified in
Smith & Nephews product registrations thereby
requiring us to obtain such raw materials and supplies from that
particular source. The loss of any of these suppliers could
result in a disruption in our production while we arrange for a
replacement supplier. To reduce this risk, we maintain inventory
levels sufficient to continue production for approximately six
months. We also maintain approximately one months supply
of finished goods in inventory to accommodate fluctuations in
Smith & Nephews demand for
Acticoat
tm
products and order lead times. Once we ship products to
Smith & Nephew in accordance with an accepted purchase
order, Smith & Nephews right to return products
is governed by our supply agreement and is limited to
circumstances where the products are found to be non-conforming
with the agreed upon product specifications.
At January 31, 2009, our quality, operations, development
and engineering staff was made up of 86 technicians, some of
whom are professional engineers with expertise in quality
systems, equipment design, logistics and production. Our
Fort Saskatchewan, Alberta facility purchases and stores
raw materials, coats wound care dressing components, assembles,
labels and packages finished product for sterilization, and
ships the products to Smith & Nephew.
Intellectual
Property
Our success depends significantly on our ability to obtain and
maintain intellectual property protection for our technology,
including our materials, devices, compositions and methods of
making and using the same. Our success also depends on our
ability to operate without infringing the intellectual property
rights of others and our ability to prevent others from
infringing our intellectual property rights. We also rely on
trade secrets to protect our know-how and continuing
technological innovation.
Where possible, we pursue composition of matter patent claims.
Such patent claims cover our materials, devices and compositions
independent of the manner in which they are made and used. We
also pursue device and method of manufacture, use and treatment
claims.
As of February 13, 2009, we hold 25 United States patents
having expiration dates ranging from 2011 to 2025. In addition,
we are pursuing 11 United States patent applications. Our goal
is to hold corresponding patents and applications in our most
important target markets outside the United States. Accordingly,
we hold 94 corresponding patents from jurisdictions such as
European Union countries, Australia, Canada, China and Japan.
Moreover, we are pursuing 21 corresponding patent applications
outside of the United States, including two patent cooperation
treaty applications, which may lead to the filing of additional
foreign patent applications.
We believe our portfolio of issued patents prevents unlicensed
parties from making, using, importing, selling and/or offering
to sell our nanocrystalline silver material independent of its
form and no matter how it is made or used in the United States
and other important markets outside the United States. We
believe our portfolio of pending patent applications, if and
when issued, may help prevent unlicensed parties from making,
using, importing, selling and/or offering to sell certain
aspects of our technology in the United States and other
important markets outside the United States.
Individual patents extend for varying periods depending on the
date of filing of the patent application or the date of patent
issuance and the term of patents in the countries in which they
are obtained. Generally, patents issued in the United States are
effective for the longer of 17 years from the issue date or
20 years from the earliest effective filing date if the
patent application, from which the patent issued, was filed
prior to June 8, 1995; and 20 years from the earliest
effective filing date, if the patent application, from which the
patent issued was filed on or after June 8, 1995. In
addition, in certain instances, the term of a United States
patent can be extended to recapture a portion of the term
effectively lost as a result of the FDA regulatory review period
(as defined in United States patent law). The duration of
patents in other countries
14
varies in accordance with provisions of applicable local law,
but in countries with major markets typically is 20 years
from the earliest effective filing date.
The actual protection afforded by a patent varies from country
to country and depends upon many factors, including the type of
patent, the scope of its coverage, the availability of
regulatory related extensions, the availability of legal
remedies in a particular country and the validity and
enforceability of the patent.
In addition to patents, we rely on trade secrets to protect our
intellectual property where appropriate. The protection of our
trade secrets relies on our ability to keep information
confidential. Our policy is to keep information confidential by
disclosing it only to those employees and third parties with a
need to know and only to the extent warranted in specific
circumstances and under confidentiality agreements, where
appropriate.
Competition
The medical device and pharmaceutical industries are intensely
competitive. There are numerous silver-containing advanced wound
care dressings and silver-coated medical devices available from
a variety of health care companies. Some of these products have
been recently introduced and directly compete with
Acticoat
tm
dressings. We sell products containing our
SILCRYST
tm
coatings to Smith & Nephew and Smith &
Nephew markets and sells them under its
Acticoat
tm
trademark into a larger competitive environment.
Smith & Nephew has introduced three new wound care
products with other forms of silver (Algisite Ag, Allevyn Ag and
Biostep Ag). We believe that some of these new silver based
wound care products will serve to simply compliment the existing
Acticoat
tm
products marketed by Smith & Nephew without impacting
sales of
Acticoat
tm
products while others may be viewed by the advanced wound care
market as alternatives to certain
Acticoat
tm
products, thereby potentially adversely affecting
Acticoat
tm
product sales and ultimately our operating revenues in the
foreseeable future.
Major competitors in the advanced wound dressing market in which
Smith & Nephews
Acticoat
tm
products are sold include Convatec, Systagenix Wound Management,
Coloplast Corp., 3M Company, Kinetic Concepts Inc.,
Mölnlycke Health Care Group AB, and Medline Industries,
Inc. To the extent that we develop medical device and
pharmaceutical products to treat dermatological and
gastrointestinal conditions, we will face competition from
medical device and pharmaceutical companies developing
alternative products to treat these diseases. In addition, we
face and will continue to face competition from other major
multi-national pharmaceutical companies and medical device
companies, specialty pharmaceutical companies, universities and
other research institutions.
Under our amended license agreement, Smith & Nephew
may now develop, manufacture and market advanced wound care
products that use forms of silver other than our
SILCRYST
tm
coatings. This means we may now face competition from other
silver based advance wound care product manufacturers for
Smith & Nephews future product development needs.
Third-Party
Reimbursement and Pricing Controls
In the United States and elsewhere, sales of pharmaceutical
products and medical devices depend in significant part on the
availability of reimbursement to the consumer from third-party
payors, including government health authorities, managed care
providers, public health insurers, private health insurers or
other organizations. Third-party payors are increasingly
challenging the prices charged for medical products and services
and examining their cost-effectiveness. It can be time consuming
and expensive to go through the process of seeking reimbursement
approval from Medicare and private payors.
Acticoat
tm
dressings or other products from which we may receive revenue in
the future may not be considered cost-effective, and
reimbursement may not be available or sufficient to allow these
products to be sold on a competitive and profitable basis.
In many foreign markets, including countries in the European
Union and Canada, pricing of medical products, in particular
reimbursed products, is subject to governmental control. In some
countries of the European Union, a product must receive specific
country pricing approval in order to be reimbursed in that
country. In others, specific discounts will need to be granted
on certain, in particular reimbursed, products. The pricing
approval in those Member States of the European Union can take
many months, and sometimes years, to obtain. In Canada, pricing
must be approved by the Patented Medicine Prices Review Board,
and government and third party payors. In addition, the Canadian
provincial governments have the authority to assess the
reimbursement status, if any, and the pricing of newly approved
drugs, pharmaceutical products and pharmaceutical product
indications. Obtaining price approval from the Patented Medicine
Prices Review Board and provincial governments can take six to
twelve months or longer after the receipt of the notice of
15
compliance. To obtain reimbursement or pricing approval in some
countries, we may be required to conduct a clinical trial that
compares the cost-effectiveness of a product to other available
therapies.
In the United States, there have been, and we expect that there
will continue to be, a number of federal and state proposals to
implement similar governmental pricing controls. Although we do
not expect the Medicare Prescription Drug Improvement and
Modernization Act of 2003 to have a significant effect on
pricing or reimbursement for
Acticoat
tm
products, we cannot predict what impact it may have on prices or
reimbursement policies for pharmaceutical products, including
the products we may develop.
Government
Regulation
Government authorities extensively regulate the testing,
manufacturing, labeling, storage, record-keeping, advertising,
promotion, export, marketing and distribution, of medical
devices and pharmaceutical products. Since the United States and
Europe are significant markets, we have described their
regulatory systems. Many other countries have similar regulatory
systems. Smith & Nephew is required to maintain
regulatory approvals to sell the
Acticoat
tm
products, and to obtain additional regulatory approvals for any
new products or any new markets that require additional
approvals.
United
States
In the United States, the FDA, under the Federal Food, Drug, and
Cosmetic Act and other federal statutes and regulations,
subjects medical products to rigorous review. If we do not
comply with applicable requirements, we may be fined, the
government may refuse to approve our marketing applications or
allow us to manufacture or market our products, and we may be
criminally prosecuted. The FDA has different approval processes
for medical devices, such as our wound care dressings, and
pharmaceutical products, such as the products we are developing
using our NPI 32101 API.
Medical Device Regulation.
Under the Federal
Food, Drug, and Cosmetic Act, medical devices are classified
into one of three classes Class I,
Class II or Class III depending on the
degree of risk associated with each medical device and the
extent of control needed to ensure safety and effectiveness.
Class I medical devices are subject to the FDAs
general controls, which include compliance with the applicable
portions of the FDAs Quality System Regulation, facility
registration and product listing, reporting of adverse medical
events, and appropriate, truthful and non-misleading labeling,
advertising, and promotional materials. Class II devices
are subject to the FDAs general controls and may also be
subject to other special controls as deemed necessary by the FDA
to ensure the safety and effectiveness of the device.
Class III medical devices are subject to the FDAs
general controls, special controls, and generally pre-market
approval prior to marketing.
Acticoat
tm
products with our
SILCRYST
tm
coatings require pre-market clearance by the FDA through the
510(k) pre-market notification process. When a 510(k) is
required, the manufacturer must submit to the FDA a pre-market
notification demonstrating that the device is
substantially equivalent to either a device that was
legally marketed prior to May 28, 1976, the date upon which
the Medical Device Amendments of 1976 were enacted, or to
another commercially available, similar device which was
subsequently cleared through the 510(k) process. By regulation,
the FDA is required to review a 510(k) within 90 days of
submission of the application. As a practical matter, clearance
often takes longer. All currently marketed
Acticoat
tm
products with our
SILCRYST
tm
coatings have been cleared for marketing pursuant to the 510(k)
process.
The FDA has broad post-market regulatory and enforcement powers
with respect to medical devices, similar to those for drug
products. Failure to comply with the applicable U.S. medical
device regulatory requirements could result in, among other
things, warning letters, fines, injunctions, consent decrees,
civil penalties, repairs, replacements, refunds, recalls or
seizures of products, total or partial suspension of production,
the FDAs refusal to grant future pre-market clearances or
approvals, withdrawals or suspensions of current product
applications, and criminal prosecution.
New Drug Approval Process.
To obtain approval
of a new drug product from the FDA, we must, among other
requirements, submit data supporting safety and efficacy as well
as detailed information on the manufacture and composition of
the product candidate and proposed labeling. The testing and
collection of data and the preparation of necessary applications
are expensive and time-consuming.
The process required by the FDA before a new drug may be
marketed in the United States generally involves the following:
completion of preclinical laboratory and animal testing in
compliance with FDA regulations; submission of an
investigational new drug application which must become effective
before human clinical trials may begin; performance of adequate
and well-controlled human clinical trials to establish the
safety and efficacy of the proposed drug for its intended
16
use; and submission of a New Drug Application (NDA).
The applicant typically conducts human clinical trials in three
sequential phases, but the phases may overlap. In Phase 1
clinical trials, the product is tested in a small number of
patients or healthy volunteers, primarily for safety at one or
more doses. In Phase 2 clinical trials, in addition to safety
risk, efficacy is assessed in a patient population. Phase 3
clinical trials typically involve additional testing of safety
and clinical efficacy in an expanded population at
geographically-dispersed test sites.
Clinical trials must be conducted in accordance with the
FDAs good clinical practices requirements. The FDA may
order the temporary or permanent discontinuation of a clinical
trial at any time or impose other sanctions if it believes that
the clinical trial is not being conducted in accordance with FDA
requirements or presents an unacceptable risk to the clinical
trial patients. At each site where we sponsor a clinical trial,
the Institutional Review Board, or IRB, for that site generally
must approve the clinical trial design and patient informed
consent form to be used at that site and may also require the
clinical trial at that site to be halted, either temporarily or
permanently, for failure to comply with that IRBs
requirements, or may impose other conditions.
The applicant must submit to the FDA the results of the
preclinical and clinical trials, together with, among other
things, detailed information on the manufacture and composition
of the product and proposed labeling, in the form of an NDA,
including payment of a user fee. The FDA reviews all NDAs
submitted before it accepts them for filing and may request
additional information rather than accepting an NDA for filing.
The review process may be extended if the FDA requests
additional information or clarification regarding information
already provided in the submission. If the FDAs
evaluations of the safety and efficacy data in the NDA and the
manufacturing procedures and facilities are favorable, the FDA
may issue either an approval letter or an approvable letter,
which contains the conditions that must be met in order to
secure a final approval letter, authorizing commercial marketing
of the drug for certain indications. If the FDAs
evaluation of the NDA submission and the manufacturing
procedures and facilities is not favorable, the FDA may refuse
to approve the NDA or issue a not approvable letter.
Manufacturing cGMP Requirements.
If and when
we manufacture pharmaceutical products, we will be required to
comply with applicable FDA manufacturing requirements contained
in the FDAs current good manufacturing practices, or cGMP,
regulations. cGMP regulations require among other things,
quality control and quality assurance as well as the
corresponding maintenance of records and documentation. The
manufacturing facility for our products must meet cGMP
requirements to the satisfaction of the FDA pursuant to a
pre-NDA approval inspection before we can use them. We and some
of our third party service providers are also subject to
periodic inspections of facilities by the FDA and other
authorities, including procedures and operations used in the
testing and manufacture of our products to assess our compliance
with applicable regulations.
Failure to comply with statutory and regulatory requirements
subjects a manufacturer to possible legal or regulatory action,
including the seizure or recall of products, injunctions,
consent decrees placing significant restrictions on or
suspending manufacturing operations, and civil and criminal
penalties. Adverse experiences with the product must be reported
to the FDA and could result in the imposition of market
restriction through labeling changes or in product withdrawal.
Product approvals may be withdrawn if compliance with regulatory
requirements is not maintained or if problems concerning safety
or efficacy of the product occur following the approval.
European
Union Regulation
Marketing Authorizations for Drugs.
In order
to gain marketing approval of any of our drug products in
Europe, we must submit for review an application similar to a
U.S. NDA to the relevant authority. In contrast to the United
States, where the FDA is the only authority that administers and
approves NDAs, in Europe there are multiple authorities that
administer and approve these applications. Marketing
authorizations in Europe expire after five years but may be
renewed.
We believe that our nanocrystalline silver drugs will be
reviewed by the Committee for Medicinal Products for Human Use,
or CHMP, on behalf of the European Medicines Agency, or EMEA.
Based upon the review of the CHMP, the EMEA provides an opinion
to the European Commission on the safety, quality and efficacy
of the drug. The decision to grant or refuse an authorization is
made by the European Commission.
Approval of applications can take several months to several
years, or be denied. This approval process can be affected by
many of the same factors relating to safety, quality and
efficacy as in the approval process for NDAs in the United
States. As in the United States, European drug regulatory
authorities can require that additional nonclinical studies and
clinical trials be performed. The need for such studies or
trials, if imposed, may delay marketing approval and involve
unbudgeted costs. Inspection of clinical investigation sites by
a competent authority may also be required as part of the
17
regulatory approval procedure. In addition, as a condition of
marketing approval, regulatory agencies in Europe may require
post-marketing surveillance to monitor for adverse effects, or
other additional studies as deemed appropriate. The terms of any
approval, including labeling content, may be more restrictive
than expected and could affect the marketability of a product.
In addition, after approval for the initial indication, further
clinical studies are usually necessary to gain approval for any
additional indications.
European GMP.
In the European Union, the
manufacture of pharmaceutical products and clinical trial
supplies is subject to good manufacturing practice, or GMP, as
set forth in the relevant laws and guidelines. Compliance with
GMP is generally assessed by the competent regulatory
authorities. They may conduct inspections of relevant
facilities, and review manufacturing procedures, operating
systems and personnel qualifications. In addition to obtaining
approval for each product, in many cases each drug manufacturing
facility must be approved. Further inspections may occur over
the life of the product.
Medical Devices.
All of Smith &
Nephews
Acticoat
tm
products are classified as medical devices in the European
Union. In order to sell its medical device products within the
European Union, Smith & Nephew is required to achieve
compliance with the requirements of the relevant Medical Devices
Directive, or MDD, and its national implementations and affix CE
markings on its products to attest to such compliance.
Therefore, Smith & Nephew must meet the
Essential Requirements, as defined under the MDD,
relating to safety and performance of its products and, prior to
their marketing, must successfully undergo verification of its
regulatory compliance (conformity assessment) by a
so-called Notified Body, which is usually a private entity that
has been certified and equipped with respective rights by
governmental regulators.
The nature of the assessment depends on the regulatory class of
the product. Under European law, any medical device products we
may develop are likely to be in class III. In the case of
class III products, a company must follow the requirements
set forth in Article 11 of the MDD and its relevant
Annexes, which may impose the obligation to establish and
maintain a complete quality system for design and manufacture as
described in Annex II of the MDD (this corresponds to a
quality system for design described in the standards ISO 9001
and EN 46001 as amended, in particular by EN ISO 13485: 2000 and
EN ISO 13488: 2000). The Notified Body must audit this quality
system and determine if it meets the requirements of the MDD. In
addition, the Notified Body must approve the specific design of
each device in class III. As part of the design approval
process, the Notified Body must also verify that the products
comply with the Essential Requirements of the MDD. In order to
comply with these requirements, a company must, among other
things, complete a risk analysis and present sufficient clinical
data. The clinical data presented by a company must provide
evidence that the products meet the performance specifications
claimed by a company, provide sufficient evidence of adequate
assessment of unwanted side effects and demonstrate that the
benefits to the patient outweigh the risks associated with the
device. A company will be subject to continued supervision by
the Notified Body and competent authorities and will be required
to report any serious adverse incidents to the appropriate
authorities. A company will also be required to comply with
additional national requirements that are beyond the scope of
the MDD.
Environmental
and Occupational Safety and Health Regulations
Our operations are subject to extensive federal, state,
provincial and municipal environmental statutes, regulations and
policies, including those promulgated by the Occupational Safety
and Health Administration, the United States Environmental
Protection Agency, Environment Canada, Alberta Environment, the
Department of Health Services, and the Air Quality Management
District, that govern activities and operations that may have
adverse environmental effects such as discharges to air and
water, as well as handling and disposal practices for solid and
hazardous wastes. Some of these statutes and regulations impose
strict liability for the costs of cleaning up, and for damages
resulting from, sites of spills, disposals, or other releases of
contaminants, hazardous substances and other materials and for
the investigation and remediation of environmental contamination
at properties leased or operated by us and at off-site locations
where we have arranged for the disposal of hazardous substances.
In addition, we may be subject to claims and lawsuits brought by
private parties seeking damages and other remedies with respect
to similar matters.
We have not to date needed to make material expenditures to
comply with current environmental statutes, regulations and
policies. However, we cannot accurately predict the impact and
costs that future statutes, regulations and policies will impose
on our business.
Employees
As of January 31, 2009, we had a total of 106 employees in
Canada and the United States. Of these 106 employees, 16 were
engaged in research and development, 68 in manufacturing and
quality assurance and 22 in administration. We had
18
151, 158 and 133 employees at the end of 2005, 2006 and 2007,
respectively. None of our employees are represented by a labor
union or covered by a collective bargaining agreement. We
believe our relationship with our employees is good.
Financial
Information by Business Segment and Geographic Data
We operate in one business segment consisting of the
manufacturing, research, development and commercialization of
medical products based on our proprietary noble metal
nanocrystalline technology. For information regarding our
geographic data, please refer to Note 18
Segmented Information
of our Notes to our Consolidated
Financial Statements found in Item 8 of this annual report
on
Form 10-K.
ITEM 1A. RISK
FACTORS
If any of the following risks materialize, then our business,
financial condition, results of operations and future prospects
would likely be materially and adversely affected.
Risks
Related to Our Business and Industry
Risks
Related to Our Capital Structure and Operations
We
have a history of net losses and negative cash flow from
operations; this will likely continue in the future and our cash
may not be adequate to accomplish our objectives.
We have reported a net loss in each of the past four years. Our
ability to generate revenue is dependent on our ability to
successfully and in a timely fashion manufacture products for
sale by Smith & Nephew and design, develop, obtain
regulatory approval for, manufacture, and commercialize our
product candidates. We intend to focus on reducing our operating
expenses and capital expenditures over the coming year as we
refocus our research and development activities on developing or
acquiring new product candidates. We expect to continue to incur
net losses and negative cash flow from operations in the near
term while we work to implement our cost reduction plans.
Because of the numerous risks and uncertainties associated with
our reliance on Smith & Nephew revenues and our
product development and cost reduction efforts, we are unable to
predict with certainty the extent of any future losses or when
or if we will become profitable. Therefore, we may require
additional financing in the future, and additional financing may
not be available at times, in amounts or on terms acceptable to
us or at all, which could have a material adverse effect on our
business.
Westaim
controls and may continue to control us and may have conflicts
of interest with us or you in the future.
Since our initial public offering, Westaim has owned
approximately 75% of our outstanding common shares. In addition,
certain of our directors also serve as directors of Westaim. For
as long as Westaim continues to own a majority of our common
shares, Westaim will be able to direct the election of all of
the members of our board of directors and control the vote of
shareholders on other matters. For as long as Westaim owns a
significant percentage of our outstanding common shares, even if
less than a majority, Westaim will be able to control or
exercise significant influence over our business and affairs,
including the strategic direction of our business generally, the
incurrence of indebtedness by us, the issuance of any additional
common shares or other equity securities, the repurchase of
common shares, and the payment of dividends, and will have the
power to determine or significantly influence the outcome of
matters submitted to a vote of our shareholders, including
mergers, consolidations, sales or dispositions of assets,
reductions in share capital, other business combinations and
amendments to our articles. Westaim may take actions with which
you or we do not agree, including actions that delay, defer or
prevent a change in control of our company or that could
adversely affect the market price of our common shares. In
addition, Westaim may take other actions that might be favorable
to Westaim but not favorable to us or our other shareholders.
Also, if Westaim sells all or a portion of its interest in us,
it may cause the value of your investment to decrease.
The
recently approved distribution of share capital may
significantly deplete our available cash on hand, which could
adversely affect our financial condition and ability to operate
our business.
As discussed in Managements Discussion and Analysis
of Financial Condition and Results of Operations
Overview & Current Developments, on
February 12, 2009, our shareholders approved a significant
reduction in share capital and distribution of cash to our
shareholders (the Distribution) at a special meeting
of shareholders. The Distribution represented approximately 80%
of the market value of our shares on the date of approval. While
we cannot predict with certainty the long term effects of the
Distribution on our company, we expect that our market
capitalization
19
will be materially and adversely affected. Specifically, the
decrease in share capital and the Distribution may, among other
things:
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reduce available cash and adversely affect our ability to
satisfy liabilities;
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make it difficult or impossible to obtain financing, from
institutional lenders or otherwise;
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require us to reduce the resources devoted towards our research
and development initiatives;
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adversely affect our ability to engage in strategic transactions;
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decrease investor confidence in us;
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substantially decrease the market price of our shares;
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decrease trading volume in our shares; and
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prevent us from regaining and/or maintaining compliance with
NASDAQ market capitalization requirements, causing our common
shares to be delisted from trading on the NASDAQ Global Market.
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If we
are not able to regain compliance with applicable listing
standards, our common shares may be delisted from the NASDAQ
Global Market.
On August 15, 2008, we announced that we received a notice
from NASDAQ advising that, for the last 30 consecutive trading
days, our common shares had not maintained the minimum market
value of publicly held shares (MVPHS) of
$5 million required for continued listing on the NASDAQ
Global Market under Marketplace Rule 4450(a)(2) (the
MVPHS Rule). We were advised that we had 90 calendar
days, or until November 12, 2008, to regain compliance with
the MVPHS Rule, which requires us to maintain the MVPHS at
$5 million for a minimum of 10 consecutive trading days.
On October 3, 2008, we announced that we received an
additional notice from NASDAQ advising us that for 30
consecutive trading days, the bid price for our common shares
had closed below $1.00 per share (the Price
Deficiency). NASDAQ requires a $1.00 minimum price
requirement for listing on the NASDAQ Global Market. We were
advised that we had until March 31, 2009 to regain
compliance, which requires a closing bid price at or above $1.00
per share for a minimum of ten consecutive business days.
Prior to the expiration of either cure period, NASDAQ determined
to temporarily suspend enforcement of its MVPHS and the $1.00
minimum bid price for all issuers. The suspension was
subsequently extended and enforcement is scheduled to resume on
April 20, 2009.
On January 23, 2009, we received notice from NASDAQ
advising us that our shares traded with a closing bid price at
or above $1.00 per share for ten consecutive business days.
Accordingly, we have cured the Price Deficiency and regained
compliance with the minimum bid price requirement.
We have not regained compliance with the MVPHS Rule. If NASDAQ
determines to enforce the MVPHS Rule and we have not regained
compliance, our shares would be subject to delisting from the
NASDAQ Global Market. Upon receipt of such a notice, we may
choose to submit a transfer application to transfer our common
shares to the NASDAQ Capital Market, but no assurance can be
made that we will do so. If the application for transfer is made
and accepted, we anticipate a change in listings may result in a
reduction in some or all of the following, each of which could
have a material adverse effect on our investors:
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the liquidity of our common shares;
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the market price of our common shares;
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the number of institutional investors and investors in general
that will consider investing in our common shares;
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the number of market makers in our common shares;
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the availability of information concerning the trading prices
and volume of our common shares;
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the number of broker-dealers willing to execute trades in our
common shares; and
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our ability to obtain financing for the continuation of our
operations.
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The Distribution approved on February 12, 2009 may
have an adverse effect on the price of our common shares and
consequently our market capitalization. We remain subject to the
minimum bid price rule, and if the Distribution causes a
decrease in our share price such that we experience another
Price Deficiency, we would cease to be in compliance. Such a
20
decrease could also adversely affect our ability to regain
compliance with the MVPHS Rule if and when NASDAQ determines to
resume enforcement.
If we are not able to maintain compliance with the listing
requirements of NASDAQ, our common shares may be subject to
removal from listing on the NASDAQ Global Market. Trading in our
common shares after a NASDAQ delisting would likely continue in
Canada on the Toronto Stock Exchange and may be conducted in the
U.S., if at all, in the over-the-counter markets on the
Over-The-Counter
Bulletin Board or the pink sheets, in which
case trading in our shares could also be subject to additional
restrictions. As a consequence of a delisting, our shareholders
would find it more difficult to dispose of, or to obtain
accurate quotations as to the market value of, our common
shares. In addition, a delisting would make our common shares
substantially less attractive as collateral for margin and
purpose loans, for investment by financial institutions under
their internal policies or state investment laws or as
consideration in future capital raising.
We are
no longer able to rely upon Westaim for financial support, and
must now rely on third parties for financing.
In the past, we relied on Westaim for the ongoing financial
support necessary to operate our business. See
Managements Discussion and Analysis of Financial
Condition and Results of Operations Liquidity and
Capital Resources. Westaim does not currently provide us
with financing or financial support, nor does it intend to
provide us any financing or financial support in the future. To
the extent we must obtain financing to support our cash needs,
we will be entirely reliant on third parties for financing. We
do not have any lines of credit or other financing arrangements
in place with banks or other financial institutions. Therefore,
we may require additional financing in the future, and
additional financing may not be available at times, in amounts
or on terms acceptable to us or at all, which would have a
material adverse effect on our business.
Risks
Related to our Relationship with Smith &
Nephew
We are
dependent on our relationship with Smith & Nephew, our
only customer.
Smith & Nephew is currently our only customer and,
since May 2001, all of our revenues have been earned under our
contracts with Smith & Nephew. See
Business Smith & Nephew
Agreements. Because all of our products currently being
sold in the marketplace are sold by Smith & Nephew,
all of our revenue is received from Smith & Nephew and
is determined primarily by the level of sales of
Acticoat
tm
products achieved by Smith & Nephew. As a result, our
revenues generally vary in proportion to increases or decreases
in Smith & Nephews sales of its
Acticoat
tm
products. If Smith & Nephew experiences a significant
decrease in sales of its
Acticoat
tm
products, this could have a material adverse effect on our
results of operations and financial condition.
Smith & Nephew has the authority to unilaterally
determine the selling price for
Acticoat
tm
products. Smith & Nephew may set a relatively low
price for our products, or give discounts or rebates that
effectively lower the price of the
Acticoat
tm
products, which in either case could reduce our revenues and
delay or eliminate receipt of milestone payments.
Smith & Nephew is not required to purchase any
significant amount of products from us.
The Smith & Nephew agreements expire in 2026. However,
Smith & Nephew may terminate our agreements earlier if
we fail to cure our material breach of the agreements or if we
suspend operations, cease to carry on business or file for
bankruptcy or take other similar actions. If Smith &
Nephew were to terminate our agreements prior to their
expiration, we could be subject to the loss of our strategic
collaboration and our only current source of revenue.
Decisions regarding key aspects of our relationship with
Smith & Nephew and the pricing and marketing of
Acticoat
tm
products are made by a limited number of key Smith &
Nephew executives. The departure or replacement of any of these
executives could have a material adverse effect on our
relationship with Smith & Nephew.
Our future success depends in part on the launch of new
Acticoat
tm
products by Smith & Nephew. We have worked in the past
and intend to work in the future with Smith & Nephew
on the development of such new products; however, the decision
to develop or launch a new product, the timing of the
development and launch and all related matters are entirely
within Smith & Nephews discretion. Therefore,
there can be no assurance that new products will be developed or
launched on a timeline or in a manner favorable to us, or at all.
21
Our
industry is highly competitive, and introduction of lower-cost,
higher margin products may adversely affect our
revenues.
Smith & Nephew, which previously was restricted by a
non-competition clause, may now introduce other silver-based
products that compete with
Acticoat
tm
products and could have an adverse effect on the sales of
Acticoat
tm
products by Smith & Nephew. We are at risk of
Smith & Nephew reducing its marketing effort with
respect to
Acticoat
tm
products due to any one of a number of factors, including that
the other products marketed by Smith & Nephew have
better profit margins, or achieve greater acceptance or
popularity with health care providers, than the
Acticoat
tm
products. Smith & Nephew has introduced three new
wound care products which use other forms of silver (Algisite
Ag, Allevyn Ag and Biostep Ag). These products may be viewed by
the advanced wound care market as alternatives to certain
Acticoat
tm
products and may adversely affect
Acticoat
tm
product sales and ultimately our operating revenues in the
foreseeable future. We are now at risk of the sales of
Acticoat
tm
products failing to grow as they have in the past or declining
due to the introduction by Smith & Nephew of new
silver-based wound care products. Smith & Nephew may
also choose to focus its sales and marketing efforts on the new
products to the detriment of
Acticoat
tm
products. Smith & Nephews ability to introduce
and to focus sales and marketing efforts on potentially
competitive products could affect the growth of, or contribute
to a decline in, sales of our products, which could in turn have
a material adverse effect on our results of operations and
financial condition.
If we
are unable to effectively manage our production capacity, our
results of operations and our relationship with
Smith & Nephew may be adversely
affected.
We are required to manufacture
Acticoat
tm
products according to Smith & Nephews demand
forecasts. If Smith & Nephew requests future increases
in our productivity, we may not be able to supply
Smith & Nephew with the quantity or quality of
products it requests. Meeting anticipated demand for
Acticoat
tm
products estimated by Smith & Nephew may require
significant
scale-up
expenses for new facilities and personnel. Moreover, we cannot
assure you that we will be able to successfully increase our
manufacturing capacity to meet anticipated demand or that we
will be able to satisfy demand in a cost-effective manner.
In 2005, we began expansion of our Fort Saskatchewan,
Alberta production facility with an estimated cost of
approximately $5.7 million which we completed in the first
quarter of 2008. We may not be able to use the additional
capacity cost-effectively, which could adversely affect our
results of operations.
Further, even if our production capacity appropriately meets the
demand forecasts provided by Smith & Nephew, such
forecasts may materially overstate or understate actual demand
for
Acticoat
tm
products. An overstatement may result in excess inventories and
the potential for loss of product due to shelf-life expiration,
and an understatement may result in lost sales due to the
inability to meet demand on a timely basis. Either situation
would have a negative impact on our results of operations. While
we recognize manufacturing cost reimbursement as revenue upon
shipment of
Acticoat
tm
products to Smith & Nephew, we do not recognize
royalty revenues until Smith & Nephew sells these
products to its customers, and consequently, increases in
Smith & Nephews inventory levels, or changes in
the relative contribution of manufacturing cost reimbursement
and royalty revenues to our total revenues, may affect our gross
margins.
If we
cannot meet Smith & Nephews demand forecasts,
our agreements may give Smith & Nephew the right to
use our technology and facilities to manufacture
Acticoat
tm
products.
If we suffer a material difficulty supplying
Acticoat
tm
products, Smith & Nephew would have the right to
manufacture or cause a third party to manufacture
Acticoat
tm
products using our technology and facilities. If such a material
difficulty were to occur, Smith & Nephew would be
given access to certain equipment used in our manufacturing
process, which we lease from Smith & Nephew, as well
as technology, patent rights and other know-how. In such
circumstances we will be subject to a number of risks,
including, but not limited to, Smith & Nephew failing
to comply with FDA-mandated current good manufacturing practices
or similar regulations in other jurisdictions, resulting in
mandated production halts or limitations, Smith &
Nephew experiencing manufacturing quality or control issues
which halt or limit
Acticoat
tm
production, and a greater risk that some of our proprietary
manufacturing processes and trade secrets will become known to
other third parties. If Smith & Nephew were to take
possession of our technology and manufacturing equipment and
manufacture
Acticoat
tm
products on its own or with a third party, even for a limited
period of time, it would have a material adverse effect on our
business.
22
Our
agreements with Smith & Nephew may limit our ability
to enter into agreements to transfer certain of our assets or to
collaborate with third parties in new product
development.
We have granted Smith & Nephew a right of first offer
regarding our assets and technology used to manufacture and
supply
Acticoat
tm
products if we desire to sell all or substantially all of these
manufacturing assets. We have also granted Smith &
Nephew a right of first refusal regarding these manufacturing
assets if we receive and wish to accept an offer to purchase
them from a competitor of Smith & Nephews in the
wound care market. The existence of these Smith &
Nephew rights could limit our ability to enter into transactions
involving the transfer of all or substantially all of these
assets.
We have also granted Smith & Nephew a right of first
offer to seek a license of any new wound care or burn products
we may develop using our silver nanocrystalline technology
without Smith & Nephews involvement. If
Smith & Nephew declines the opportunity, then we are
free to license or sell these products to others. The existence
of this Smith & Nephew right may limit our ability to
enter into such new wound care product development
collaborations with third parties. Smith &
Nephews right of first refusal may discourage third
parties from working with us on new product development to meet
either their needs or the needs of the advanced wound care
market.
We may
be unable to sell our existing products to other parties, even
if our agreements with Smith & Nephew expire or
terminate.
We have agreed to exclusively supply existing
Acticoat
tm
products to Smith & Nephew and any new products with
our
SILCRYST
tm
coatings or powder that we develop together with
Smith & Nephew for use on non-minor skin wounds and
burns on humans. We do not have the right to sell these products
to other parties so long as Smith & Nephew has
complied with the terms of our agreements. In addition, we do
not have the right to sell the products marketed by
Smith & Nephew as
Acticoat
tm
3/
Acticoat
tm
Burn and
Acticoat
tm
7 in the U.S. or Canada under any circumstances.
If our agreements with Smith & Nephew were terminated
or expire, or if we otherwise have the right to sell
SILCRYST
tm
-coated
wound care products to customers other than Smith &
Nephew, we may be unable to market, distribute and sell these
products or to enter into a marketing, distribution and sales
agreement with another distributor. We do not currently have a
marketing, distribution or sales organization and we cannot
assure you that we would be successful in marketing,
distributing or selling our products were we to attempt to do so.
In addition, Smith & Nephew owns and uses the
trademark
Acticoat
tm
to sell products with our
SILCRYST
tm
coatings and consequently end-users tend to have greater
familiarity with the
Acticoat
tm
trademark as compared to the
SILCRYST
tm
trademark. If our agreements with Smith & Nephew were
terminated or expire and we attempted to market products with
our
SILCRYST
tm
coatings ourselves or through a distributor, we would not have
the benefit of the
Acticoat
tm
trademark.
We may
be unable to achieve the cost savings required to offset the
manufacturing cost rebate we agreed to pay Smith &
Nephew in 2007, 2008 and 2009.
Under the revised agreements with Smith & Nephew
entered into in 2007, we agreed to pay Smith & Nephew
an annual manufacturing cost rebate of $4.5 million in each
of 2007, 2008 and 2009, in anticipation of cost savings we had
expected to achieve in such years. We did not completely offset
the manufacturing rebate in 2007 or 2008. If we are unable to
achieve the cost savings required to substantially or completely
offset the manufacturing rebate in 2009, our gross margin,
results of operations, and financial condition may be adversely
affected.
The revised agreements contemplate that starting in 2010, we
will determine a new cost recovery structure that takes into
account actual cost savings we achieve in the previous three
years. The precise terms of the cost recovery structure are
subject to negotiation, and we may be unable to negotiate a
structure that allows us to achieve any cost savings or that is
otherwise favorable to us.
General
Risks Related to Our Business and Industry
Our
operating results may be adversely impacted by the current
worldwide economic conditions.
During 2008, general worldwide economic conditions experienced a
downturn due to the subprime lending crisis, general credit
market crisis, collateral effects on the finance and banking
industries, fluctuating energy costs, concerns about inflation,
slower economic activity, decreased consumer confidence, reduced
corporate profits and capital spending, adverse business
conditions and liquidity concerns. These conditions make it
difficult for our customer, our vendors, our controlling
shareholder and us to accurately forecast and plan future
business activities, and they could
23
cause U.S. and foreign businesses to slow spending on our
products, which would delay and lengthen sales cycles. We cannot
predict the timing or duration of any economic slowdown or the
timing or strength of a subsequent economic recovery, worldwide,
or in the health care industry. If the economy or markets in
which we operate deteriorate, our business, financial condition
and results of operations will be materially and adversely
affected. Additionally, the market price of our common shares
could decrease if investors have concerns that our business,
financial condition and results of operations will be negatively
impacted by a worldwide economic downturn.
Recent
changes in senior management may divert attention and resources
from the core activities of our business and may adversely
affect our relationships with customers, suppliers, employees
and other constituencies.
During 2008 we experienced changes in senior management. Our
President, Chief Executive Officer and Chairman of the Board,
our Vice President, Research & Development, our Vice
President, Corporate Development and our Chief Financial Officer
all departed our company. Not all of these departing executives
were replaced. David B. Holtz, our new Chief Financial Officer,
has assumed the role of Interim Chief Executive Officer.
Searching for and transitioning to a permanent Chief Executive
Officer will take significant time and resources, and the timing
of such a search has not yet been decided. We also plan to
continue to invest time and resources in building our management
team, but we may not replace some senior management positions.
Our long-term success will depend on our ability to recruit and
retain capable and talented people, and any failure to do so
could have a material adverse effect on our future operating
results and financial condition. In addition, if management
changes negatively impact our relationships with customers,
suppliers and other constituencies, it could have a material
adverse effect on our future operating results and financial
condition.
Our success depends upon the continued contributions of our
executive officers and scientific and technical personnel. Due
to the specialized knowledge of our personnel with respect to
our operations, the loss of service of any of our key personnel
could impair our ability to operate our business successfully.
We rely substantially upon the services of our current
management team. Although these individuals have employment
agreements with us, we cannot assure you that we will be able to
retain their services. If one of our executive officers was
terminated without cause, we would be required to make severance
payments to such officer under the terms of his or her
employment agreement. See Executive
Compensation Employment Agreements. We do not
currently maintain key man life insurance policies with respect
to any of our employees.
Our success also depends in part on our ability to attract and
retain highly qualified scientific, commercial and
administrative personnel. In order to pursue our product
development and commercialization strategies, we will need to
retain existing personnel or hire new personnel with experience
in a number of disciplines, including product development,
manufacturing, quality, clinical testing, government regulation,
sales and marketing, drug reimbursement and information systems.
There is intense competition for personnel in the fields in
which we operate. If we are unable to retain existing employees
or attract new employees, we may be unable to continue our
development and commercialization activities.
Our
ability to develop and sell future products is critical to our
success, and if we fail to do so, our business and financial
condition will suffer.
We have invested and will continue to invest a significant
portion of our time and financial resources in the development
of future products for wound care and in our core coating
technology capabilities. The development of medical devices is
risky because we cannot be sure that products will be as
effective as we anticipate or will receive regulatory approval,
and the development of new products is extremely costly and
typically extends over many years. Even if we receive regulatory
approval, other companies may be able to market similar products
prior to the launch of our products, during which time their
products may gain a significant marketing advantage. We may need
to incur substantial capital expenditures in connection with the
development of future products. If we fail to successfully
develop and sell our future products then we will not earn any
return on our investment in these future products, which will
adversely affect our results of operations and could adversely
affect the market price of our common shares. It would also
adversely affect our financial condition. In addition, if we are
unable to develop future products, we will remain dependent on
Smith & Nephews ability to market and sell
Acticoat
tm
products successfully.
24
The
market for advanced wound care and pharmaceutical products is
intensely competitive and many of our competitors have
significantly more resources and experience than we do, which
may limit our commercial opportunities and
revenues.
The medical device and pharmaceutical industries are intensely
competitive. There are numerous silver-containing advanced wound
care dressings and silver-coated medical devices available from
a variety of health care companies. Some of these products have
been recently introduced and directly compete with
Acticoat
tm
.
We may not be able to compete successfully. Major competitors in
the advanced wound dressing market in which Smith &
Nephews
Acticoat
tm
products are sold include Convatec, Systagenix Wound Management,
Coloplast Corp., 3M Company, Kinetic Concepts Inc.,
Mölnlycke Health Care Group AB, and Medline Industries,
Inc. To the extent that we develop pharmaceutical products to
treat gastrointestinal conditions, we will face competition from
pharmaceutical companies developing alternative drugs to treat
this disease. In addition, we face and will continue to face
competition from other major multi-national pharmaceutical
companies, medical device companies, specialty pharmaceutical
companies, universities and other research institutions.
Our competitors may succeed in developing alternative
technologies and products that are more effective, easier to use
or more economical than those which have been or are being
developed by us or that would render our technology and products
obsolete and noncompetitive in these fields.
Some of our competitors, either alone or together with their
collaborators, have substantially greater financial, sales and
marketing, manufacturing, and other resources and larger
research, development and regulatory staffs than we do. In
addition, many of our competitors, either alone or together with
their collaborators, have significantly greater experience than
we do in discovering, developing, manufacturing and marketing
products and may also have greater experience in conducting
clinical trials and obtaining regulatory clearances or
approvals. As a result, they may be able to devote greater
resources to the development, manufacture, marketing or sale of
their products, initiate or withstand substantial price
competition or development costs, or more readily take advantage
of acquisitions or other opportunities. Additional mergers and
acquisitions, collaborations or other transactions, or the
emergence or growth of other competitors in the medical device
and pharmaceutical industries, may result in the competitive
landscape changing in favor of competitors.
We
currently purchase most of our raw materials from single
suppliers. If we are unable to obtain raw materials and other
products from our suppliers that we depend on for our
operations, our ability to deliver our products to market may be
impeded.
We depend on suppliers for raw materials and other components
that are subject to stringent regulatory requirements. We
currently purchase most of our raw materials from single
suppliers and the loss of any of these suppliers could result in
a disruption in our production. If this were to occur, it may be
difficult to arrange a replacement supplier, because certain of
these materials may only be available from one or a limited
number of sources. Our suppliers may encounter problems during
manufacturing due to a variety of reasons, including failure to
follow specific protocols and procedures, failure to comply with
applicable regulations, equipment malfunction and environmental
factors. In addition, establishing additional or replacement
suppliers for these materials may take a substantial period of
time, as certain of these suppliers must be approved by
regulatory authorities.
If we are unable to secure on a timely basis sufficient
quantities of the materials we depend on to manufacture
Acticoat
tm
products, if we encounter delays or contractual or other
difficulties in our relationships with these suppliers, or if we
cannot find replacement suppliers at an acceptable cost, then
the manufacture of
Acticoat
tm
products may be disrupted, which could increase our costs and
have a materially adverse effect on our revenues.
If we
are not successful in establishing collaborations with prominent
health care companies, we may not be able to grow our
business.
Our long-term success depends upon our ability to identify,
develop and commercialize products, potentially including new
device coatings and products for dermatological and
gastrointestinal applications. We cannot assure you that we will
be successful in developing new products. However, if we do
develop new products, we will need to either market and sell
such products ourselves or collaborate with one or more other
companies that have the required marketing and sales
capabilities. New collaborations are a key part of our growth
strategy. If we are unable to enter into collaborations
respecting new products or market and sell such products
ourselves, we will continue to be dependent upon
Smith & Nephew for all of our revenues, and we may be
limited in our ability to grow our business. The terms and
conditions of any future collaboration agreements may be less
favorable than our agreements with Smith & Nephew.
25
We may
face increased risk of product liability due to the
nanocrystalline nature of our technology. If product liability
lawsuits are brought against us, they could result in costly
litigation and significant liabilities.
Materials made in the nanoscale size range can often have
chemical or physical properties that are different from those of
their larger counterparts. Such differences include altered
magnetic properties, altered electrical or optical activity,
increased structural integrity, and increased chemical and
biological activity. Because of some of their special
properties, nanotechnology materials may pose different safety
issues than their larger counterparts. Our nanocrystalline
technology may present safety risks which are unknown at this
time, and which may result in claims against us. Any claims,
with or without merit, could result in costly litigation,
reduced sales, significant liabilities and diversion of our
managements time and attention.
Our use of products in clinical trials, and our or
Smith & Nephews marketing and sale of products,
may expose us to product liability claims and associated adverse
publicity. Additionally, the manufacture and sale of medical or
pharmaceutical products or devices exposes us to an inherent
risk of product liability claims, and the industries in which
our products are sold or are likely to be sold have been subject
to significant product liability litigation. Any claims, with or
without merit, could result in costly litigation, reduced sales,
significant liabilities and diversion of our managements
time and attention.
In the event a product liability claim is brought against us, we
may be required to pay legal and other expenses to defend the
claim and, if such a claim is successful, damage awards may not
be covered, in whole or in part, by our insurance. We may not
have sufficient capital resources to pay a judgment, in which
case our creditors could levy against our assets. We may also be
obligated to indemnify our collaborators and make payments to
other parties with respect to product liability damages and
claims. Defending any product liability claims, or indemnifying
others against those claims, could require us to expend
significant financial and managerial resources.
We
have agreed to indemnify Smith & Nephew for claims
under our agreements, which could result in significant costs to
us.
We have agreed to indemnify Smith & Nephew in respect
of claims resulting from any alleged physical injury or property
damage as a result of our acts or omissions, the failure to
perform our obligations under the license and development
agreement and the supply agreement, our non-compliance with
applicable law or regulation, or any breach of our
representations under these two agreements for so long as the
particular representation survives. Also, we have agreed to
indemnify Smith & Nephew in respect of claims
resulting from any actual or threatened action by any third
party alleging our
SILCRYST
tm
coatings infringe that third partys intellectual property
rights. Smith & Nephews remedy for such an
infringement action is limited to withholding damages or
royalties it must pay on account of the infringement action from
amounts or royalties payable to us under the two agreements,
unless we have breached any representation to Smith &
Nephew in connection with that infringement.
Our
insurance may not cover any or all of the costs of product
liability claims that may be brought against us or others we may
be required to indemnify.
Our business exposes us to potential product liability, recalls
and other liability risks that are inherent in the testing and
manufacturing of medical products, and such potential claims may
be asserted against us. A successful liability claim or claims
brought against us could have a material adverse effect on our
business, financial condition and results of operations.
Our insurance coverage may not protect us against any or all of
the product liability claims which could be brought against us
in the future, and there can be no assurance that we will be
able to obtain or maintain product liability insurance in the
future at a cost or on terms that we deem acceptable, or at all.
We may be required to indemnify others for product liability
claims, and our insurance policies may not cover all or part of
such indemnification. Claims or losses in excess of any product
liability insurance coverage that may be obtained by us could
have a material adverse effect on our business, financial
condition and results of operations.
If a
natural or man-made disaster strikes one or more of our
facilities, or facilities upon which we depend, we may be unable
to manufacture certain products for a substantial amount of time
and our revenue could decline.
Our facilities and the facilities of others on which we depend
may be affected by natural or man-made disasters, which may
include terrorist activities. We depend on our manufacturing
facility and research laboratories, as well as our critical
information systems, for the continued operation of our
business. Our sole manufacturing facility is located in
Fort Saskatchewan, Alberta, Canada. This facility and the
manufacturing equipment that we use to produce our products,
26
as well as our critical information systems, would be difficult
to replace and could require substantial lead time to repair or
replace. In the event that our manufacturing facility was
affected by a natural or man-made disaster, we may be forced to
repair them or construct new manufacturing facilities and may
not be able to produce our products in sufficient quantities, or
at all, during the period of repair or construction. In that
regard, due to the specialized nature of our manufacturing
equipment, we anticipate that it would take a substantial period
of time to construct new manufacturing facilities. Moreover, we
would need to secure regulatory approval to manufacture our
products at a new facility. Accordingly, construction of new
facilities and regulatory approvals could take years to complete
and could result in significant costs to us.
We are
listed on both the Toronto Stock Exchange and the NASDAQ Global
Market, and could incur significant compliance expenses as a
result.
We currently list our common shares on the NASDAQ Global Market
and the Toronto Stock Exchange; therefore, we devote substantial
efforts and incur substantial costs in complying with the
reporting obligations and internal controls required of a public
company in the U.S. and Canada. If rules and regulations
applicable to us change, or our status or treatment under these
rules and regulations changes, we may incur significant
additional compliance costs, including legal, accounting,
insurance and certain other expenses, which could negatively
impact our results of operations and financial condition.
We may
incur losses associated with currency fluctuations and may not
be able to effectively hedge our exposure.
The Smith & Nephew sales revenues on which our royalty
and milestone revenues are determined are reported to us in U.S.
dollars. Sales by Smith & Nephew in other currencies
will result in fluctuations in its revenue as reported in U.S.
dollars. Our accounts receivable from Smith & Nephew
are denominated in U.S. dollars. The functional currency that we
use for accounting purposes is the Canadian dollar and, as a
result, accounts receivable recorded in Canadian dollars are
exposed to changes in the exchange rate between the Canadian and
U.S. dollars until these receivables are collected. We do not
maintain derivative instruments to mitigate our exposure to
fluctuations in exchange rates.
Failure
to comply with workplace safety legislation could adversely
affect our financial condition.
If we fail to comply with workplace safety legislation
applicable to our employees, we may be subject to sanctions,
fines and penalties including but not limited to closure of our
manufacturing facility, as well as litigation risks, all of
which would adversely affect our financial condition.
Risks
Related to Regulatory Matters
Our
industry is heavily regulated, and if existing regulatory
approvals for our products are not maintained, or regulatory
approvals for any new products are delayed or denied, it could
have a material adverse effect on our business.
Current
Acticoat
tm
products are subject to extensive regulation by the U.S. Food
and Drug Administration, or FDA, other federal authorities and
certain state, provincial, territorial and foreign regulatory
authorities. If we, Smith & Nephew or any companies
with which we may collaborate in the future obtain regulatory
approval for any future products, we, Smith & Nephew
and any such collaborators will also be subject to extensive
regulation by the FDA, other federal authorities and certain
state, provincial, territorial and foreign regulatory
authorities. These regulations will impact and do impact in the
case of
Acticoat
tm
products many aspects of our operations, including
manufacturing, record keeping, quality control, adverse event
reporting, storage, labeling, advertising, promotion, sale and
distribution, export and personnel. The FDA and state,
provincial, territorial and foreign agencies may conduct
periodic inspections to assess compliance with these
requirements. We, together with Smith & Nephew and any
companies with which we may collaborate in the future, will be
required to conduct post-marketing surveillance of the products.
We also may be required to conduct post-marketing studies and
safety monitoring. Any failure by us, Smith & Nephew
or any companies with which we may collaborate in the future to
comply with applicable FDA and other regulatory requirements, or
the discovery of previously unknown problems, may result in
problems including:
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delays in commercialization;
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refusal by the FDA or other regulatory agencies to review
pending applications or supplements to approved applications;
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warning letters;
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product recalls or seizures;
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27
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suspension of manufacturing;
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withdrawals of previously approved marketing applications;
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fines and other civil penalties;
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injunctions, suspensions or revocations of marketing licenses;
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refusals to permit products to be imported to or exported from
the U.S. and other countries; and
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civil litigation and criminal prosecutions.
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See Business Government Regulation
United States Manufacturing cGMP Requirements.
Smith & Nephew is required to maintain regulatory
approvals to sell the
Acticoat
tm
products that it currently sells and to obtain additional
regulatory approvals for those current products to sell them in
any new markets. We cannot assure you that Smith &
Nephew will be able to maintain existing regulatory approvals
for the
Acticoat
tm
products it now sells or obtain new regulatory approvals, or
that the conditions imposed by regulators will not adversely
affect Smith & Nephews ability to market those
products. Regulatory requirements imposed on products could
limit Smith & Nephews ability to commercialize
its product and our ability to test, manufacture and
commercialize our products. If Smith & Nephew does not
fully comply with the regulatory requirements to maintain or
achieve these approvals, then we may be subject to risks which
could adversely affect our results of operations and prospects,
including but not limited to actions by the FDA or other
regulatory authorities which may have the effect of restricting
or preventing our ability to market and sell our products, or to
have those products marketed or sold.
Any products we may develop in the future will also require
regulatory approval before we or any collaborator are allowed to
market and sell them. We expect the regulatory approval process
to be lengthy and expensive and we will have the burden of
proving that our products are safe and effective. Satisfying
regulatory requirements may cause our products to become
prohibitively expensive. Preclinical studies and clinical trials
are expensive, can take many years and have uncertain outcomes.
In addition, the regulatory approval procedures vary among
countries and additional testing may be required in some
jurisdictions. It usually takes at least several years to
complete the requisite pre-clinical studies and clinical trials,
and a product candidate may fail at any stage of testing.
Difficulties and risks associated with pre-clinical studies and
clinical trials may result in failure to receive regulatory
approval or inability to commercialize products for new
indications. Clinical trials may be suspended or terminated at
any time due to the actions of the FDA, other regulatory
authorities, our collaborators, or due to our own actions.
Delays or failures in obtaining regulatory approvals may:
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delay or prevent the commercialization of any product that we
develop for new indications or any product within an already
approved indication for which the submission of additional
clinical trial data is required;
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in the case of delays, materially and adversely increase the
cost of completing the development of such product and obtaining
regulatory approval to market it;
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diminish any competitive advantages; and
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adversely affect our ability to attract new collaborators.
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If
government and third-party payors fail to provide coverage and
adequate reimbursement rates for
Acticoat
tm
products or our future products, our revenues and
potential for profitability will be reduced.
Our revenues currently depend in part and will continue to
depend upon the reimbursement rates established by third-party
payors, including government health administration authorities,
managed-care providers, public health insurers, private health
insurers and other organizations. These third-party payors are
increasingly challenging the price, and examining the
cost-effectiveness, of medical products and services. Cost
control initiatives could decrease the established reimbursement
rates that we receive for any products in the future, which
would limit our revenues. Legislation and regulations affecting
the pricing of pharmaceutical products or medical devices,
including the
Acticoat
tm
products, may change at any time, which could limit or eliminate
reimbursement rates for
Acticoat
tm
or other products. If physicians, hospitals and other users of
Acticoat
tm
products or any products we develop in the future fail to obtain
sufficient reimbursement from healthcare payors for these
products, or if adverse changes occur in governmental and
private third-party payors policies toward reimbursement
for these products, it could negatively affect the demand for
these products, which could have a material adverse effect on
our results of operations. Significant uncertainty exists as to
the reimbursement status, if any, of newly approved
pharmaceutical or medical device products, and we have no
assurance that adequate or any third-party coverage will be
provided for any new products introduced by us. If any new
products we
28
may develop do not receive adequate coverage and reimbursement,
the market acceptance of these products could be adversely
affected, which could have a material adverse effect on our
results of operations.
We may need to conduct post-marketing clinical trials in order
to demonstrate the cost-effectiveness of products. Such studies
may require us to commit a significant amount of management time
and financial and other resources. Future products may not be
reimbursed or covered by any of these third-party payors for our
targeted indications.
In many foreign markets, particularly countries in the European
Union and Canada, the pricing of medical products is subject to
governmental control. In these countries, obtaining pricing
approval from governmental authorities can take many months and
sometimes years to obtain. To obtain reimbursement or pricing
approval in some countries, we may be required to conduct a
clinical trial that compares the cost-effectiveness of a product
to other available therapies. If reimbursement of such products
is unavailable or limited in scope or amount, or if pricing is
set at unsatisfactory levels, then our revenues could be
reduced. In the U.S., there may be future federal and state
proposals to implement similar governmental pricing controls,
which could adversely affect our revenues.
Our
business involves the use, handling, storage and disposal of
hazardous materials and may subject us to environmental
liability, and any future environmental liability could
seriously harm our financial condition. We do not maintain
insurance covering these risks.
Our research and development and manufacturing activities
involve the use, handling, storage and disposal of various
hazardous materials commonly used in conducting these activities
in the pharmaceutical industry, such as alcohols and acids.
These materials are considered hazardous because they may be
toxic, corrosive or flammable under certain conditions. We are
subject to federal, state, provincial, local and foreign laws,
regulations and policies governing the use, manufacture,
storage, handling, and disposal of these materials. Some of our
facilities are located in areas where third parties manufacture
chemicals and deal with similar hazardous materials that may
cause environmental contamination. If contamination occurs in or
near our facilities, whether as a result of our action or that
of a third party, our ability to conduct our manufacturing
activities could be adversely affected.
We cannot completely eliminate the risk of accidental injury or
contamination from the use, manufacture, storage, handling, and
disposal of materials we use. In the event of an accident or
contamination, we could be liable for damages or costs of
clean-up
or
remediation or be penalized with fines. This liability could be
substantial and exceed our resources, which could have a
material adverse effect on our financial condition. We do not
maintain insurance for environmental liabilities. We may have to
incur significant costs to comply with future environmental laws
and regulations. Accordingly, we cannot assure you that costs
and expenses relating to environmental matters or our use of
hazardous materials will not have a material adverse effect on
our business.
Risks
Related to Intellectual Property
The
protection of our intellectual property rights is critical to
our success and any failure on our part to adequately protect
those rights would materially adversely affect our
business.
Patents.
Our commercial success will depend in
part on the patent rights we own or may license in the future.
Our success depends on maintaining these patent rights against
third-party challenges to their validity, scope or
enforceability. In general, our patent position is subject to
the risk that a governmental agency, such as the U.S. Patent and
Trademark Office, or PTO, or the courts may deny, narrow or
invalidate patent claims.
We may not be successful in securing or maintaining proprietary
or patent protection for our products and candidates, and any
protection that we do secure may be challenged and possibly
lost. Our competitors may develop products similar to ours using
compositions, methods and technologies that are beyond the scope
of our intellectual property rights. In addition, if we are
unable to maintain our proprietary rights, other companies may
be able to copy our products or manufacturing processes. For
example, although we believe that we have valid patent
protection for our current products until at least 2014, it is
possible that, prior to the expiration of our patents,
competitors will attempt to introduce products similar to ours
outside of the scope of our patents.
Intellectual property protection is highly uncertain and
involves complex legal and technical questions. Our patents and
any patent that we may license in the future may be challenged
by our competitors or other third parties, including generic
drug companies. Our patents may be narrowed, invalidated, or
circumvented, resulting in a failure to provide us with any
market exclusivity or competitive advantage even after our
investment of significant amounts of money. Our issued patents
may not contain claims sufficiently broad to protect us against
third parties with similar technologies or
29
products, or provide us with any competitive advantage. We also
may not be able to protect our intellectual property rights
against third-party infringement, which may be difficult to
detect.
The PTO, the PTOs counterparts in other nations and the
courts in the U.S. and elsewhere have not established a
consistent policy regarding the breadth of claims allowed
related to pharmaceutical patents. The allowance of broader
claims may increase the incidence and cost of patent
interference proceedings and the risk of infringement
litigation. On the other hand, the allowance of narrower claims
may limit the value of our proprietary rights.
Failure to obtain or maintain patent or trade secret protection,
for any reason, could adversely affect our competitive position
in the marketplace.
Additionally, the laws of some countries do not protect our
intellectual property rights to the same extent as do the laws
of the U.S. and Canada. For example, enforcing patents in
countries such as China and Japan may be difficult due to the
structures of their patent systems. In addition, litigation in
these or other countries may not be cost effective when balanced
against the benefit that may be obtained. Further, there may be
substantial global markets in which we do not have or may not be
able to secure patent protection. There are also countries where
our patents may not provide us with a financial or commercial
benefit due to that countrys lax enforcement of patent
rights.
Specifically, if we lose our current patent rights in a
particular country and in respect of a particular
SILCRYST
tm
coated product and if someone else sells a competing product in
that country that would have infringed on our patent rights had
they been in effect, then we are obligated to negotiate in good
faith with Smith & Nephew for a reduction of the
royalty rate applicable to sales of the particular product in
that country for so long as the competing product is being sold
and we are without patent protection. If those negotiations do
not result in any agreement, the matter would be referred to
binding arbitration, although there is a limit on the maximum
royalty reduction permitted. Any reduction in our royalties
could adversely affect our results of operations and financial
condition.
Trade Secrets and Proprietary Know-how.
We
also rely upon trade secrets and unpatented proprietary know-how
and continuing technological innovation in developing our
products, especially where we do not believe patent protection
is appropriate or obtainable. We seek to protect this
intellectual property, in part, by generally requiring our
employees, consultants and current and prospective business
partners to enter into confidentiality agreements. We may lack
the financial or other resources to successfully monitor and
detect, or to enforce our rights in respect of, infringements of
our rights or breaches of these confidentiality agreements. In
the case of any such undetected or unchallenged infringements or
breaches, these confidentiality agreements may not provide us
with meaningful protection of our trade secrets and unpatented
proprietary know-how or adequate remedies. In addition, others
may independently develop technology that is similar or
equivalent to our trade secrets or know-how. If any of our trade
secrets, unpatented know-how or other confidential and
proprietary information is divulged to third parties, including
our competitors, our competitive position in the marketplace
could be harmed and our ability to successfully sell products in
our target markets could be severely compromised.
Trademarks.
We have received trademark
registrations for the words
NUCRYST
tm
and
SILCRYST
tm
as well as associated designs, in many jurisdictions that we
consider major markets. We have pending trademark applications
in other major market jurisdictions, including the U.S.
If we do not adequately protect our rights in our various
trademarks from infringement, any goodwill that has been
developed in those marks could be lost or impaired. If the marks
we use are found to infringe upon the trademark or service mark
of another company, we could be forced to stop using those marks
and, as a result, we could lose any goodwill which has been
developed in those marks and could be liable for damages caused
by any such infringement.
Enforcement.
We may deem it necessary or
advisable to commence litigation to enforce our intellectual
property rights. Others may claim that we have infringed upon
their intellectual property rights and commence litigation
against us. We believe that we will be subject to an increasing
number of infringement claims to the extent we produce more
products.
Our commercial success depends in part on our ability to operate
without infringing the patents and other proprietary rights of
third parties. Infringement proceedings in the pharmaceutical
industry are lengthy, costly and time-consuming and their
outcome is uncertain.
We may also be forced to engage in litigation to enforce any
patents issued or licensed to us, or to determine the scope and
validity of third party proprietary rights. Moreover, if our
competitors prepare and file patent applications in the U.S. to
claim technology that is also claimed by us, we may be forced to
participate in interference proceedings declared by the PTO to
determine priority of invention. In addition, in Europe, any
patents issued to us may be challenged by third parties in
opposition proceedings. Litigation and participation in such
proceedings could result in substantial costs and diversion
30
of our efforts, even if the eventual outcome is favorable to us.
Litigation could also subject us to significant liabilities to
third parties, require disputed rights to be licensed from third
parties or require us to cease using certain technology.
If we become involved in any a dispute regarding our
intellectual property rights, including litigation,
interference, opposition or other administrative proceedings,
regardless of whether we prevail, we will have to devote
significant time, incur substantial expense, and divert the
efforts of our technical and management personnel toward
resolving the dispute, which could harm our business.
Intellectual property litigation in the pharmaceutical industry
is common, and we expect this to continue.
If a dispute is resolved not in our favor, we could lose our
proprietary position and be restricted or prevented from
developing, manufacturing and selling the affected products,
incur significant damage awards, including punitive damages, or
be required to seek third-party licenses that may not be
available on commercially acceptable terms, if at all. We may
also be subject to injunctive or other equitable relief. In
addition, we may lack the resources, whether financial or
otherwise, to monitor, prosecute and enforce our intellectual
property rights. Moreover, our collaborators may choose not to
enforce or maintain their intellectual property rights, and we
may be forced to incur substantial additional costs to maintain
or enforce such rights or may incur additional risks should we
choose not to maintain or enforce such rights.
The
ability to market
Acticoat
tm
products and any other products we develop is subject to
the intellectual property rights of third parties.
Acticoat
tm
products, and the product candidates we currently are developing
and those we may develop in the future, may infringe patent and
other rights of third parties. In addition, our competitors,
many of which have substantially greater resources than us and
have made significant investments in competing technologies or
products, may seek to apply for and obtain patents that will
prevent, limit or interfere with our ability to make, use and
sell products either in North America or international markets.
Even if we are successful in defending a claim of infringement,
engaging in costly and time-consuming litigation could have an
adverse effect on our business and financial condition.
We may
be subject to damages resulting from claims that we or our
employees have wrongfully used or disclosed alleged trade
secrets of their former employers.
Many of our employees were previously employed at universities
or other medical device or pharmaceutical companies, including
our competitors or potential competitors. Although no claims
against us are currently pending, we may be subject to claims
that these employees or we have inadvertently or otherwise used
or disclosed trade secrets or other proprietary information of
their former employers. Litigation may be necessary to defend
against these claims. Even if we are successful in defending
against these claims, litigation could result in substantial
costs and be a distraction to management. If we fail in
defending such claims, in addition to paying money damages, we
may lose valuable intellectual property rights or personnel. A
loss of key research personnel or their work product could
hamper or prevent our ability to commercialize product
candidates, which could harm our business.
Risks
Related to Our Common Shares
There
has been limited trading in our common shares and, as a result,
the market price of our common shares may be highly
volatile.
There has been low trading volume in our common shares since our
initial public offering in December 2005. We cannot predict the
extent to which an active trading market will develop or how
liquid any market that may develop might become. An active
trading market for our common shares may never develop or may
not be sustained, which could adversely affect your ability to
sell your shares and the market price of your shares.
The market price of our common shares is volatile. Since our
public offering on December 22, 2005 and through
February 11, 2008, our common shares have traded on the
NASDAQ Global Market between $0.46 and $16.88 per share. While
our common shares are also traded on the Toronto Stock Exchange,
the majority of trading in our common shares has taken place on
the NASDAQ Global Market. The stock market in general, and the
market for stocks of medical devices and pharmaceutical
companies in particular, have experienced high volatility. As a
result, the market price of our common shares is likely to
continue to be volatile, and investors in our common shares may
experience a decrease, which could be substantial, in the value
of their shares, including decreases unrelated to our operating
performance or prospects. The
31
market price of our common shares could be subject to wide
fluctuations in response to a number of factors, including those
listed elsewhere in this Item 1A and others such as:
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variations in our operating performance and the performance of
our competitors or companies that are perceived to be similar to
us;
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actual or anticipated fluctuations in our quarterly or annual
operating results;
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results of pre-clinical and clinical trials by us and our
competitors;
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changes in estimates or recommendations by securities analysts;
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publication of research reports by securities analysts about us
or our competitors or our industry;
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our failure or the failure of our competitors to meet
analysts projections or guidance that we or our
competitors may give to the market;
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strategic decisions by us, our controlling shareholder, or our
competitors, such as acquisitions, divestitures, spin-offs,
joint ventures, strategic collaborations or investments or
changes in business strategy;
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the passage of legislation or other regulatory developments
affecting us or our industry;
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speculation in the media or investment community;
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changes in accounting principles;
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litigation; and
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changes in general market and economic conditions.
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In the past, securities class action litigation has often been
initiated against companies following periods of volatility in
their stock price. This type of litigation could result in
substantial costs and divert our managements attention and
resources, and could require us to make substantial payments to
satisfy judgments or to settle litigation.
Future
sales of currently restricted shares could cause the market
price of our common shares to decrease significantly, even if
our business is doing well.
Prior to the issuance of our common shares in our initial public
offering, Westaim held 100% of our outstanding common shares and
currently holds approximately 75% of our outstanding common
shares. Pursuant to the terms of a registration rights agreement
between Westaim and us, Westaim may require us, on no more than
two occasions, to use reasonable best efforts to register all or
a portion of its registrable securities for resale in the public
markets in the U.S. and to file a prospectus qualifying the
common shares it owns for resale in Canada, so long as the
anticipated aggregate proceeds from the sale of such registrable
securities, net of underwriting discounts and expenses would
exceed $5.0 million and subject to our right to defer
filing under certain circumstances. Sales of a significant
number of our common shares, or the perception that these sales
could occur, could materially and adversely affect the market
price of our common shares and impair our ability to raise
capital through the sale of additional equity securities.
The
amount of our net operating loss carryovers may be
limited.
Our tax pools are subject to review and potential disallowance,
in whole or in part, by the Canada Revenue Agency
(CRA) in Canada and the Internal Revenue Service
(IRS) in the United States upon audit of our federal
income tax returns, and we cannot predict the results of any
such review. In 2005, the CRA commenced an examination of our
Canadian income tax returns for 2001 and 2002, and in December
2007, we received correspondence from the CRA proposing certain
transfer pricing adjustments with respect to income allocations
between our Canadian and U.S. entities for those years. In the
third quarter of 2008, we received a report from the CRA which
provided additional information with respect to the proposed
adjustments. We have been working with the CRA to resolve the
audit matters under review and have made a further submission of
information to the CRA in this regard. 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, the potential
impact cannot be reasonably estimated. We have provided
notification to the IRS of our intention to seek competent
authority assistance with respect to the 2001 and 2002 taxation
years.
The amount of net operating loss carryovers, or NOLs, which may
be used by us for U.S. federal income tax purposes in any future
year could be limited by Section 382 of the Internal
Revenue Code of 1986, as amended. In general, Section 382
would limit our ability to use NOLs for U.S. federal income tax
purposes in the event of certain changes in
32
ownership of our company, including as a result of sales of our
common shares by Westaim and future offerings of common shares
by us or as a result of certain changes in ownership of Westaim
including as a result of future offerings of common shares of
Westaim. If such limitations were triggered as a result of
future shifts in ownership of us or Westaim, the use of our NOLs
for U.S. federal income tax purposes would be limited. Any
limitation of our use of NOLs could (depending on the extent of
such limitation and the amount of NOLs previously used) result
in us retaining less cash after payment of U.S. federal income
taxes during any year in which we have taxable income (rather
than losses) than we would be entitled to retain if such NOLs
were available as an offset against such income for U.S. federal
income tax reporting purposes. We have not demonstrated an
ability to produce positive tax income consistently on an annual
basis. Accordingly, we cannot predict when or if we will
generate taxable income and whether and to what extent we will
be able to use our NOLs to offset any such taxable income.
If we
are classified as a passive foreign investment company, it could
have adverse tax consequences to investors.
Special rules apply to certain U.S. holders that own shares in a
non-U.S.
corporation that is classified as a passive foreign investment
company, or PFIC. We do not believe that we will be a PFIC for
the current taxable year and, based on our current business
plan, we do not expect to be a PFIC in the foreseeable future.
Since the determination as to whether or not a corporation is a
PFIC is highly factual, however, there can be no assurance that
we will not become a PFIC in future taxable years. The PFIC
rules are extremely complex and could, if they apply, have
significant adverse effects on the taxation of dividends
received and gains realized by a U.S. holder of our common
shares. Accordingly, prospective U.S. holders are strongly urged
to consult their tax advisers concerning the potential
application of the PFIC rules to their particular circumstances.
As a
foreign private issuer under the U.S. securities
laws, we are subject to different laws and rules than a domestic
U.S. issuer, which may limit the information publicly available
to our shareholders.
As a foreign private issuer we are not required to comply with
certain of the disclosure requirements of the Securities
Exchange Act of 1934, or Exchange Act, (such as proxy
statements) and therefore there may be less publicly available
information about us than if we were a U.S. domestic issuer. In
addition, our officers, directors and principal shareholders are
exempt from the reporting and short-swing profit
recovery provisions of Section 16 of the Exchange Act and
the rules thereunder. All of our directors, officers and
principal shareholders will be subject to the insider reporting
rules under Canadian securities legislation and are required to
file reports in electronic format through the System for
Electronic Disclosure by Insiders, or SEDI, disclosing changes
in beneficial ownership, or control or direction over, our
common shares and other securities. Our shareholders can access
such reports at
www.sedi.ca
. Because we are not subject
to Section 16 of the Exchange Act, our shareholders must
use SEDI, and not the SECs filing system, to track
ownership of our common shares by insiders.
We may
choose to rely on exemptions under the NASDAQ rules for
controlled companies and foreign private issuers, which may
affect the amount and type of information available to
investors.
NASDAQ Marketplace Rule 4350(c)(5) allows controlled
companies to adhere to different NASDAQ listing requirements
with respect to independent directors and certain corporate
governance requirements. As a controlled company, we are
eligible for, but have not opted into, this exemption. In
addition, as a foreign private issuer, we are eligible to follow
home country practice where allowed under Canadian law in lieu
of compliance with certain NASDAQ rules. We may elect to do this
on a
case-by-case
basis, but to date have not so elected. Should we elect to be
treated as a controlled company or to follow home country
practice, it is likely that we would be subject to different and
potentially less stringent disclosure or governance
requirements, which may affect the amount and type of
information available to investors, investor confidence and thus
the trading volume and the market price of our common shares.
You
may be unable to enforce actions against us or certain of our
directors and officers under U.S. federal securities
laws.
We are a corporation organized under the laws of Alberta,
Canada. One half of our directors and certain of our officers
reside outside of the U.S. Service of process upon such persons
may be difficult or impossible to effect within the U.S.
Furthermore, because a substantial portion of our assets, and
substantially all of the assets of our
non-U.S.
directors and officers and the Canadian experts named herein,
are located outside of the U.S., any judgment obtained in the
U.S., including a judgment based upon the civil liability
provisions of U.S. federal securities laws, against us or any of
such persons may not be collectible within the U.S. In addition,
there is doubt as to the applicability of the civil liability
33
provisions of U.S. federal securities law to original actions
instituted in Canada. It may be difficult for an investor, or
any other person or entity, to assert U.S. securities laws
claims in original actions instituted in Canada. Therefore, it
may not be possible to enforce those actions against us or
certain of our directors and officers.
We
have outstanding share options that have the potential to dilute
shareholder value and cause the price of our common shares to
decline.
In the past, we have offered, and we expect to continue to
offer, share options, or other forms of share-based compensation
to our directors, officers and employees. If some or all of
these options are exercised and such shares are sold into the
public market, the market price of our common shares may decline.
Our
articles and certain Canadian laws could delay or deter a change
of control.
Our authorized preferred shares are available for issuance from
time to time at the discretion of our board of directors,
without shareholder approval. Our board of directors may amend
our articles without shareholder approval to fix the number of
preferred shares in, and determine the designation of the shares
of, each series of preferred shares and may create, define and
attach voting, dividend and other rights and restrictions to the
shares of each series, subject to the rights and restrictions
attached to our preferred shares as a class. The economic,
voting and other rights attaching to a particular series of our
preferred shares may be superior to those of our common shares
and may dilute or otherwise adversely affect the voting and
economic interests of the holders of our common shares.
Limitations on the ability to acquire and hold our common shares
may be imposed by the Competition Act (Canada). This legislation
permits the Commissioner of Competition of Canada, or
Commissioner, to review any acquisition of a significant
interest in us. This legislation grants the Commissioner
jurisdiction, for up to three years, to seek a remedial order,
including an order to prohibit the acquisition, from the
Canadian Competition Tribunal, which order may be granted where
the Competition Tribunal finds that the acquisition
substantially prevents or lessens, or is likely to prevent or
lessen, competition in any market in Canada.
The Investment Canada Act (Canada), or Investment Act, requires
each non-Canadian, as determined in the Investment
Act, who commences a new business activity in Canada or acquires
control of an existing Canadian business, where the
establishment or acquisition of control is not a reviewable
transaction by Canadian authorities under the Investment Act, to
file a notification in prescribed form. Subject to certain
exceptions, a transaction that is reviewable under the
Investment Act may not be implemented until an application for
review has been filed and the responsible Minister of the
federal cabinet has determined that the investment is likely to
be of net benefit to Canada taking into account the
factors, where relevant, set out in the Investment Act. An
investment in our common shares by a non-Canadian would be
reviewable under the Investment Act if it were an investment to
acquire control of us and the value of our assets was
C$5.0 million or more as determined pursuant to the
Investment Act.
Any of the foregoing may make it more difficult for shareholders
to replace our management, and could prevent or delay a change
of control of our company and deprive or limit strategic
opportunities for our shareholders to sell their shares.
ITEM 2. PROPERTIES
Our Fort Saskatchewan, Alberta facility is leased and
consists of manufacturing, laboratory and office space. Our
Princeton, NJ facility is leased and consists of only
administrative office space. In December, 2008, we terminated
our office and laboratory space lease in Wakefield,
Massachusetts which had previously been used for administration,
marketing, sales and pharmaceutical research and development.
We estimate that our existing production facility in
Fort Saskatchewan has the capacity to produce
Acticoat
tm
products with a value, expressed in terms of the sales price to
end users, of at least $100 million, based on existing
product mix and current sales prices. Our current manufacturing
capacity is expected to be sufficient to meet our immediate
production capacity needs required in connection with our
development of additional products and the satisfaction of
current Smith & Nephew demand for
Acticoat
tm
.
This estimate is based on a number of assumptions and
uncertainties, and actual increases in capacity may be different.
We believe that our leased facilities in Alberta and New Jersey
are generally in good condition, are well maintained, and are
generally suitable to carry on our business. In 2008, the
Alberta manufacturing facility operated moderately below
34
capacity. We consolidated all of our research and development
activities into our Alberta facility with the closure of our
Massachusetts facility.
ITEM 3. LEGAL
PROCEEDINGS
In the normal course of business, we may be subject to
litigation and claims from third parties. We are not currently a
party to any material legal proceedings.
ITEM 4. SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during
the fourth quarter of 2008.
PART II
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ITEM 5.
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MARKET
FOR THE REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
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Market
Price
Our common shares are traded on the NASDAQ under the symbol
NCST and on the TSX under the symbol
NCS. Our common shares began trading on
December 22, 2005. The table below sets forth, for the
calendar quarter indicated, the high and low sale prices of our
common shares as reported by the NASDAQ and the TSX for the
years ended December 31, 2008 and 2007.
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NASDAQ
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TSX
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High
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Low
|
|
|
High
|
|
|
Low
|
|
|
|
(U.S.$)
|
|
|
(U.S.$)
|
|
|
(CDN$)
|
|
|
(CDN$)
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
2.14
|
|
|
$
|
1.01
|
|
|
$
|
2.02
|
|
|
$
|
1.24
|
|
Second Quarter
|
|
$
|
1.65
|
|
|
$
|
0.97
|
|
|
$
|
1.40
|
|
|
$
|
1.00
|
|
Third Quarter
|
|
$
|
1.10
|
|
|
$
|
0.52
|
|
|
$
|
1.10
|
|
|
$
|
0.68
|
|
Fourth Quarter
|
|
$
|
1.08
|
|
|
$
|
0.46
|
|
|
$
|
1.26
|
|
|
$
|
0.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
5.58
|
|
|
$
|
3.15
|
|
|
$
|
6.50
|
|
|
$
|
3.67
|
|
Second Quarter
|
|
$
|
3.62
|
|
|
$
|
1.95
|
|
|
$
|
5.92
|
|
|
$
|
1.99
|
|
Third Quarter
|
|
$
|
5.84
|
|
|
$
|
1.91
|
|
|
$
|
5.92
|
|
|
$
|
2.01
|
|
Fourth Quarter
|
|
$
|
2.95
|
|
|
$
|
1.40
|
|
|
$
|
2.96
|
|
|
$
|
1.41
|
|
Number of
Shareholders
On February 13, 2009, there were approximately 17 holders
of record of our common shares, one of which was
Cede & Co., a nominee for Depository
Trust Company and one of which was The Canadian Depository
for Securities Limited, or CDS. All of our common shares held by
brokerage firms, banks and other financial institutions in the
United States and Canada as nominees for beneficial owners are
considered to be held of record by Cede & Co. in
respect of brokerage firms, banks and other financial
institutions in the United States, and by CDS in respect of
brokerage firms, banks and other financial institutions located
in Canada. Cede & Co. and CDS are each considered to
be one shareholder of record.
Dividends
and Return of Capital
We did not pay any cash dividends on our share capital in 2008
or 2007. On February 12, 2009, our shareholders approved a
special resolution to reduce the stated capital of our
outstanding common shares for the purpose of distributing $0.80
cash per common share to our shareholders. The record date for
the distribution was set as February 17, 2009. We will
distribute $14.7 million to shareholders on
February 25, 2009.
Any determination to pay dividends to holders of our common
shares in the future will be at the discretion of our board of
directors and will depend on many factors, including our
financial condition, earnings, legal requirements and other
factors as our board of directors deems relevant. In addition,
we may in the future become subject to debt instruments or other
agreements that further limit our ability to pay dividends.
35
Recent
Sales of Unregistered Securities
None.
Repurchases
of Equity Securities
In August 2008, we announced a program to repurchase up to
900,000 shares of our outstanding common stock for an
amount not to exceed $1.3 million. In the fourth quarter of
2008, we used $0.1 million of cash to purchase
65,100 shares of our common stock under this share
repurchase program. The repurchase program was authorized
through June 30, 2009, and may be modified or discontinued
at any time.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ISSUER PURCHASES OF EQUITY SECURITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
(d)
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum Number
|
|
|
|
|
|
|
|
|
|
(c)
|
|
|
(or Approximate
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
Dollar Value) of
|
|
|
|
(a)
|
|
|
|
|
|
Shares Purchased
|
|
|
Shares that May
|
|
|
|
Total Number
|
|
|
(b)
|
|
|
as Part of Publicly
|
|
|
Yet Be Purchased
|
|
|
|
of Shares
|
|
|
Average Price
|
|
|
Announced Plans
|
|
|
Under the Plans
|
|
Period
|
|
Purchased
|
|
|
Paid per Share
|
|
|
or Programs
|
|
|
or Programs
|
|
|
October 1 to October 31, 2008
|
|
|
50,400
|
|
|
$
|
0.79
|
|
|
|
50,400
|
|
|
|
849,600
|
|
November 1 to November 30, 2008
|
|
|
14,700
|
|
|
$
|
0.92
|
|
|
|
14,700
|
|
|
|
834,900
|
|
December 1 to December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
834,900
|
|
Total
|
|
|
65,100
|
|
|
$
|
0.82
|
|
|
|
65,100
|
|
|
|
834,900
|
|
Tax
consequences to U.S. shareholders
If we were to pay dividends or make distributions to
shareholders that are U.S. residents and that are not residents,
or deemed to be residents, in Canada, and do not hold, and are
not deemed to use or hold, common equity in connection with
carrying on a business in Canada (a U.S. Investor),
those dividends would generally be subject to a 25% withholding
tax in Canada. The
Canada-United
States Income Tax Convention generally provides for a reduction
in this withholding tax rate to 15% (and to 5% for U.S. Investor
that is a corporation and the beneficial owner of at least 10%
of our voting stock). Accordingly, under current tax law, our
U.S. Investors would generally be subject to a Canadian
withholding tax at a 15% rate on dividends paid by us, provided
that they have complied with applicable procedural requirements
to claim the benefit of the reduced rate under the tax treaty.
Each U.S. Investor will generally be entitled to claim a foreign
tax credit or a deduction for the Canadian withholding tax,
subject to certain applicable limitations. U.S. Investors should
consult their tax advisors with respect to the tax consequences
and requirements applicable to them, based on their individual
circumstances.
Information regarding our equity compensation plans required by
Item 201(d) of
Regulation S-K
may be found under Item 12 Securities
Authorized for Issuance Under Equity Compensation Plans.
36
Share
Price Performance Graph
For each year ending December 31, 2006, 2007, and 2008 the
following graph shows the total cumulative shareholder return on
a $100 investment in our common stock as of December 31,
2005 compared to the cumulative total return of the NASDAQ
Healthcare Index and the cumulative total return of the NASDAQ
Composite Index.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NASDAQ
|
|
NASDAQ
|
|
|
Date
|
|
Healthcare Index
|
|
Composite Index
|
|
NCST
|
|
2005
|
|
|
100
|
|
|
|
100
|
|
|
|
100
|
|
2006
|
|
|
100
|
|
|
|
110
|
|
|
|
45
|
|
2007
|
|
|
111
|
|
|
|
120
|
|
|
|
13
|
|
2008
|
|
|
92
|
|
|
|
72
|
|
|
|
9
|
|
Information
about our Annual Meeting
Our By-laws set forth the requirements for a quorum for
transaction of business at meetings of our shareholders, and the
NASDAQ Stock Market imposes an additional minimum quorum
requirement. Both requirements must be met at meetings of our
shareholders. Our By-laws provide that quorum is at least two
persons present in person, and each holding or representing by
proxy at least one of our issued common shares. Notwithstanding
the foregoing, if we have only one shareholder, or one
shareholder holding a majority of the shares entitled to vote at
the meeting, that shareholder present in person or by proxy
constitutes a meeting and a quorum for such meeting. In
addition, the NASDAQ Stock Market requires that at least
33
1
/
3
%
of our outstanding common voting stock be represented, in person
or by proxy, in order to have a quorum.
37
ITEM 6.
SELECTED FINANCIAL DATA
We have derived the selected consolidated financial data as of
December 31, 2008 and 2007 and for the years ended
December 31, 2008, 2007 and 2006 from our audited
consolidated financial statements that are included elsewhere in
this annual report. We have derived the selected consolidated
financial data as of December 31, 2006 and 2005 and for the
years ended December 31, 2005 and 2004 from our audited
consolidated financial statements for years prior to our initial
public offering. Our consolidated financial statements have been
prepared in accordance with United States generally accepted
accounting principles or GAAP. Historical results are not
necessarily indicative of the results to be expected in future
periods.
You should read the following selected consolidated financial
data together with our audited consolidated financial
statements, including the related notes, and
Managements Discussion and Analysis of Financial
Condition and Results of Operation included elsewhere in
this annual report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
Amounts in Thousands
|
|
|
Results of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wound care product revenue
|
|
$
|
20,907
|
|
|
$
|
20,092
|
|
|
$
|
24,369
|
|
|
$
|
18,636
|
|
|
$
|
14,682
|
|
Milestone
revenue
(1)
|
|
|
|
|
|
|
10,000
|
|
|
|
|
|
|
|
5,000
|
|
|
|
10,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
20,907
|
|
|
|
30,092
|
|
|
|
24,369
|
|
|
|
23,636
|
|
|
|
24,682
|
|
Costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing
|
|
|
12,842
|
|
|
|
14,477
|
|
|
|
16,053
|
|
|
|
10,015
|
|
|
|
7,141
|
|
Research and development
|
|
|
4,955
|
|
|
|
6,303
|
|
|
|
11,162
|
|
|
|
8,520
|
|
|
|
8,971
|
|
General and administrative
|
|
|
9,062
|
|
|
|
9,481
|
|
|
|
7,195
|
|
|
|
4,245
|
|
|
|
4,122
|
|
Write down of capital assets
|
|
|
174
|
|
|
|
1,173
|
|
|
|
1,049
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from operations
|
|
|
(6,126
|
)
|
|
|
(1,342
|
)
|
|
|
(11,090
|
)
|
|
|
856
|
|
|
|
4,448
|
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange gains (losses)
|
|
|
2,819
|
|
|
|
(3,283
|
)
|
|
|
(298
|
)
|
|
|
193
|
|
|
|
82
|
|
Interest income
|
|
|
347
|
|
|
|
744
|
|
|
|
1,165
|
|
|
|
12
|
|
|
|
66
|
|
Interest
expense
(2)
|
|
|
|
|
|
|
|
|
|
|
(310
|
)
|
|
|
(3,540
|
)
|
|
|
(3,229
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes and cumulative effect of a
change in accounting principle
|
|
|
(2,960
|
)
|
|
|
(3,881
|
)
|
|
|
(10,533
|
)
|
|
|
(2,479
|
)
|
|
|
1,367
|
|
Current income tax (expense)
recovery
(3)
|
|
|
(11
|
)
|
|
|
(140
|
)
|
|
|
41
|
|
|
|
(162
|
)
|
|
|
(19
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before cumulative effect of a change in accounting
principle
|
|
|
(2,971
|
)
|
|
|
(4,021
|
)
|
|
|
(10,492
|
)
|
|
|
(2,641
|
)
|
|
|
1,348
|
|
Cumulative effect of a change in accounting principle
|
|
|
|
|
|
|
|
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(2,971
|
)
|
|
$
|
(4,021
|
)
|
|
$
|
(10,499
|
)
|
|
$
|
(2,641
|
)
|
|
$
|
1,348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per common share basic and diluted
|
|
$
|
(0.16
|
)
|
|
$
|
(0.22
|
)
|
|
$
|
(0.58
|
)
|
|
$
|
(0.27
|
)
|
|
$
|
0.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
basic
|
|
|
18,365,053
|
|
|
|
18,333,810
|
|
|
|
17,964,332
|
|
|
|
9,764,486
|
|
|
|
9,727,500
|
|
diluted
|
|
|
18,365,053
|
|
|
|
18,333,810
|
|
|
|
17,964,332
|
|
|
|
9,764,486
|
|
|
|
9,905,464
|
|
|
|
(1)
|
Certain milestone revenue may relate in part to sales activity
in prior periods.
|
|
(2)
|
Prior to our initial public offering, Westaim provided all of
the external funding necessary to operate our business, and all
of the indebtedness reflected on our consolidated balance sheets
for periods through December 31, 2005 reflects funding from
Westaim.
|
38
|
|
(3)
|
Although we are currently a majority owned subsidiary of
Westaim, Canadian tax laws do not allow for the filing of a
consolidated income tax return with Westaim. Accordingly, we
have filed our own tax returns and the income tax expenses
reflected in the above financial data reflect our actual
consolidated income tax expense for the applicable periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
Amounts in Thousands
|
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
23,388
|
|
|
$
|
17,841
|
|
|
$
|
18,926
|
|
|
$
|
35,901
|
|
|
$
|
948
|
|
Current assets
|
|
|
31,751
|
|
|
|
37,618
|
|
|
|
33,591
|
|
|
|
48,992
|
|
|
|
8,002
|
|
Total assets
|
|
|
41,800
|
|
|
|
51,299
|
|
|
|
45,892
|
|
|
|
59,460
|
|
|
|
15,597
|
|
Current
liabilities
(1)
|
|
|
2,949
|
|
|
|
3,828
|
|
|
|
2,306
|
|
|
|
45,691
|
|
|
|
37,181
|
|
Working capital (deficiency)
|
|
|
28,802
|
|
|
|
33,790
|
|
|
|
31,285
|
|
|
|
3,301
|
|
|
|
(29,179
|
)
|
Shareholders capital
|
|
|
84,954
|
|
|
|
84,287
|
|
|
|
83,154
|
|
|
|
42,629
|
|
|
|
3,534
|
|
Accumulated other comprehensive income (loss)
|
|
|
5,528
|
|
|
|
557
|
|
|
|
(5,490
|
)
|
|
|
(5,281
|
)
|
|
|
(4,180
|
)
|
Accumulated deficit
|
|
|
(41,070
|
)
|
|
|
(38,099
|
)
|
|
|
(34,078
|
)
|
|
|
(23,579
|
)
|
|
|
(20,938
|
)
|
Total shareholders equity (deficit)
|
|
|
38,356
|
|
|
|
46,745
|
|
|
|
43,586
|
|
|
|
13,769
|
|
|
|
(21,584
|
)
|
|
|
(1)
|
Includes indebtedness to Westaim of $39,642, $33,482, as of
December 31, 2005 and 2004, respectively
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
Amounts in Thousands
|
|
|
Additional Revenue and Gross Margin Details:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wound care product revenue
|
|
$
|
25,407
|
|
|
$
|
24,592
|
|
|
$
|
24,369
|
|
|
$
|
18,636
|
|
|
$
|
14,682
|
|
Manufacturing cost rebate
|
|
|
(4,500
|
)
|
|
|
(4,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue excluding milestone
revenue
(1)
|
|
|
20,907
|
|
|
|
20,092
|
|
|
|
24,369
|
|
|
|
18,636
|
|
|
|
14,682
|
|
Manufacturing costs
|
|
|
12,842
|
|
|
|
14,477
|
|
|
|
16,053
|
|
|
|
10,015
|
|
|
|
7,141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin excluding milestone
revenue
(1)
|
|
$
|
8,065
|
|
|
$
|
5,615
|
|
|
$
|
8,316
|
|
|
$
|
8,621
|
|
|
$
|
7,541
|
|
Gross margin percent excluding milestone
revenue
(1)
|
|
|
39%
|
|
|
|
28%
|
|
|
|
34%
|
|
|
|
46%
|
|
|
|
51%
|
|
Milestone
revenue
(2)
|
|
|
|
|
|
|
10,000
|
|
|
|
|
|
|
|
5,000
|
|
|
|
10,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
20,907
|
|
|
|
30,092
|
|
|
|
24,369
|
|
|
|
23,636
|
|
|
|
24,682
|
|
|
|
(1)
|
Total revenue excluding milestone revenue equals wound care
product revenue and the manufacturing cost rebate. Gross margin
excluding milestone revenue is equal to total revenue excluding
milestone revenue minus manufacturing costs and gross margin
percent excluding milestone revenue is equal to gross margin
excluding milestone revenue divided by total revenue excluding
milestone revenue. These non-GAAP measures are used by
management to evaluate how effective our manufacturing
operations are compared to the revenues generated. We believe
this measure is useful to investors for the reasons discussed
under Critical Accounting Policies and Significant
Judgments and Estimates on page 49. We believe that
these measurements should be considered in addition to the full
GAAP presentation of our results.
|
|
(2)
|
Certain milestone revenue may relate in part to sales activity
in prior periods.
|
39
|
|
ITEM 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
Overview &
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 and that currently marketed products
with our
SILCRYST
tm
coatings meet important patient needs. 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
tm
and as a powder, which we refer to as NPI 32101, for use in
medical devices and as an active pharmaceutical ingredient.
We developed and sold advanced wound care products with our
SILCRYST
tm
coating under the
Acticoat
tm
trademark until May 2001 when we entered into a series of
agreements with Smith & Nephew plc
(Smith & Nephew), a global medical device
company. Under these agreements which were amended in 2007, we
license to Smith & Nephew the exclusive right to
market, distribute and sell products with our
SILCRYST
tm
coatings for use on non-minor skin wounds and burns on humans
world-wide, and manufacture these products and supply them
exclusively to Smith & Nephew. We also sold various
assets to Smith & Nephew in connection with the
license and supply agreements, including the
Acticoat
tm
trade name and trademark, various regulatory approvals and
certain manufacturing equipment, which we lease back. Advanced
wound care products with our
SILCRYST
tm
coatings have received FDA clearance and approval of other
regulators and are now sold by Smith & Nephew in over
30 countries around the world, including the United States,
under its
Acticoat
tm
trademark. We continue to work with Smith & Nephew to
develop new
Acticoat
tm
wound care products with our
SILCRYST
tm
coating, and in the fourth quarter of 2008 we announced that
Health Canada granted marketing approval for
Acticoat
tm
Flex barrier dressing for wounds that require up to seven days
of sustained antimicrobial activity. Additional country
approvals for
Acticoat
tm
Flex are anticipated in 2009, including an FDA 510(k) clearance.
Smith & Nephew has indicated that it expects to launch
the
Acticoat
tm
Flex product in North America and Europe during 2009.
We are a majority owned subsidiary of the Westaim Corporation
(Westaim), a Canadian company incorporated in
Alberta and the shares of which are listed on the Toronto Stock
Exchange. Westaim owns approximately 75% of our outstanding
common stock as of the date of filing of this annual 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, including the sale of its NUCRYST
shares to a third party, the distribution of its NUCRYST shares
to shareholders of Westaim or the investment of Westaims
remaining liquid assets 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 an
amount equal to the product of the number of common shares
outstanding on February 17, 2009 and $0.80, for the purpose
of distributing $0.80 cash per common share to shareholders.
This equates to a return of capital of approximately
$14.7 million. The record date for the distribution was set
as February 17, 2009 and we will be completing this
shareholder approved distribution on February 25, 2009.
We experienced changes in management in 2008 and January 2009.
In August 2007, Mr. Thomas E. Gardner was appointed
Chairman of the Board, President and Chief Executive Officer. In
May 2008, Mr. David B. Holtz was appointed our Vice
President, Chief Financial Officer. In January 2009,
Mr. Gardner resigned as our Chairman of the Board,
President and Chief Executive Officer and Mr. Holtz was
appointed interim President and Chief Executive Officer in
addition to his Chief Financial Officer responsibilities.
Mr. Neil Carragher, our lead director, was appointed
Chairman of our board of directors. Mr. Gardner resigned
from his position as a director of our company on
February 11, 2009.
We currently do not have any products being sold in the
marketplace other than
Acticoat
tm
wound care products being sold by Smith & Nephew.
Consequently, our results of operations depend solely on
Acticoat
tm
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
tm
products achieved by Smith & Nephew. On
February 12, 2009, Smith & Nephew reported its
annual 2008 results for its wound care business.
Smith & Nephew reported a 7% growth in the business
prior to the impact of foreign currency changes.
Acticoat
tm
product sales by Smith & Nephew were $60 million
for the years ended December 31, 2008 and 2007. We believe
that market conditions in
40
the advanced would 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 serious wound care products has
had, or will have an impact on
Acticoat
tm
product sales and our revenues in the future, as it will depend
on future events, including Smith & Nephews
response to market conditions. Since the execution of amended
agreements with Smith & Nephew in September 2007,
Smith & Nephew has introduced three new wound care
products with other forms of silver (Algisite Ag, Allevyn Ag and
Biostep Ag). We believe that some of these new silver based
wound care products will serve to simply complement the existing
Acticoat
tm
products marketed by Smith & Nephew without impacting
sales of
Acticoat
tm
products while others may be viewed as alternatives to
Acticoat
tm
products, thereby potentially adversely affecting
Acticoat
tm
product sales and ultimately our operating revenues in the
foreseeable future.
We believe that the demand for
Acticoat
tm
products will be driven by demographic factors, including
population aging, the incidence of medical conditions such as
diabetes and obesity; by the displacement of traditional wound
care products that we believe are clinically less effective than
products using our
SILCRYST
tm
coatings; by the introduction of
Acticoat
tm
products using our
SILCRYST
tm
coatings to new countries and for new applications; and by the
degree to which Smith & Nephew is successful in
selling and marketing these products in view of increasing
competition from other silver-based wound care products,
including any such products that Smith & Nephew may
now introduce pursuant to its ability to do so under our amended
agreements. Any termination of or significant disruptions in our
agreements or relationship with Smith & Nephew, or a
significant reduction in sales of
Acticoat
tm
products, would likely have a material adverse effect on our
business and results of operations.
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.
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. In the
fourth quarter of 2008, we closed our Wakefield, Massachusetts
research center and relocated our corporate headquarters to
Princeton, New Jersey. We remain focused on looking for
development opportunities with third-parties in various clinical
areas, but we do not expect to develop additional
pharmaceuticals applications for NPI 32101 without first
securing commercialization partners.
Revenue
Recognition
Our revenues under our 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
tm
coated products covered by the agreements. The royalty rates
under the amended agreements were maintained except for the
elimination of a supplemental royalty that was payable to us if
certain gross profit margins were achieved on sales of
Acticoat
tm
products over a specified threshold. 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
tm
products. In that regard, Smith & Nephew has authority
to unilaterally determine the selling price for its
Acticoat
tm
products. Moreover, although Smith & Nephew has agreed
to use reasonable commercial efforts to market
Acticoat
tm
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 from a fully
allocated cost of manufacturing reimbursement mechanism to a
system whereby we recover a fixed overhead charge plus all
direct costs incurred in manufacturing
Acticoat
tm
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
tm
products, including administration, labor, rent, insurance,
utilities, repairs and quality control. This fixed floor amount
is payable by Smith & Nephew in each of 2007, 2008 and
2009 regardless of the actual volume of
Acticoat
tm
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 in each of 2007, 2008 and
2009 in anticipation
41
of annual reductions we intend to achieve in our cost of goods
manufactured for Smith & Nephew over the same time
period. We recognize the manufacturing cost rebate as a
reduction to wound care product revenue. In 2008, to control
expenses, we continued making adjustments to our manufacturing
operations, including reductions in our workforce. Through these
workforce reductions, together with the implementation of
manufacturing production efficiencies and overhead cost
reduction initiatives, we achieved actual reductions in our
overhead costs sufficient to offset a significant portion of the
manufacturing cost rebate we paid to Smith & Nephew in
2008. Under the amended supply agreement, we are to negotiate
future product pricing with Smith & Nephew for 2010
and beyond.
We also receive milestone payments upon Smith &
Nephews achievement of specified sales levels of
Acticoat
tm
products and upon the achievement of regulatory events specified
in our agreements with Smith & Nephew. The achievement
of both of these events is out of our control and, therefore, it
is uncertain as to whether or when we will earn future milestone
payments. The amended agreements modified the criteria for the
achievement of one of the milestones such that we immediately
earned a milestone payment of $5.0 million during the
quarter ended September 30, 2007. We earned an additional
$5.0 million milestone in the fourth quarter of 2007
related to the achievement of a specified sales level. The
maximum amount of milestone payments that we may receive under
the Smith & Nephew agreements, including the
$29.0 million of milestone payments we have already
received, is $56.5 million. The timing and receipt of a
milestone payment affects the comparability of
period-to-period
results and may have a material effect on financial results.
Until September 2007, Smith & Nephew reimbursed us for
all costs and expenses incurred in connection with approved
research and development activities for the development of new
products and improvements to existing products covered by our
agreements with Smith & Nephew. Under the amended
agreements, we now only receive reimbursement from
Smith & Nephew for that portion of our internal
development costs incurred in the joint development of new
products with Smith & Nephew that exceed an amount
equal to 1.5% of Smith & Nephews net sales of
Acticoat
tm
products in the year. During the year ended December 31,
2008, no reimbursement for research and development costs was
received from Smith & Nephew.
Product
Development
We bear all costs relating to our research and development
activities for our prospective products outside of our
agreements with Smith & Nephew. In the future, in
order to expand our business, we may consider acquisitions of
intellectual property or companies engaged in the development,
production and sale of drugs or medical devices. Any
acquisitions may require that we obtain additional financing.
We have developed a topical cream formulation containing our NPI
32101 which has been shown in clinical studies to be stable and
cosmetically-acceptable
. In vitro
testing has also shown
the cream formulation to have broad spectrum antimicrobial
activity. We announced on July 19, 2007 that the FDA
granted 510(k) clearance for a prescription topical device
containing our NPI 32101, as a broad-spectrum antimicrobial
barrier cream to organisms including
Pseudomonas aeruginosa,
Staphyloccocus aureus,
including strains resistant to
methicillin or MRSA. We are actively exploring
commercialization options and, as part of this process, market
plans and timing for this product will be determined. We expect
that the market potential for this potential new product will be
largely determined by the distribution channel decisions we are
currently in the process of evaluating.
We filed an additional 510(k) application with the FDA to expand
the claims and indications for our barrier cream. We applied for
a claim that barrier cream relieves the signs and symptoms of
dermatoses. In May 2008, we received a request from the FDA for
additional information regarding this submission. We requested
an extension of time regarding our response to the FDAs
questions as we worked to review commercial alternatives for the
barrier cream. While these additional claims and indications
would expand the potential market for the barrier cream, the
application for this expansion was withdrawn without prejudice.
We will consider the resubmission of this application once we
secure a commercialization partner for the barrier cream.
With the closure of our Wakefield, Massachusetts research
center, we have reduced our pharmaceutical development
activities and we expect to further reduce development costs
around our existing pharmaceutical development programs. We
remain focused on identifying development opportunities with
third-parties in various clinical areas, but we do not expect to
develop additional pharmaceuticals applications for NPI 32101
without first securing commercialization partners.
42
Results
of Operations
The tables below shows our revenues and gross margin for the
three years ended December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
Amounts in Thousands
|
|
|
Wound care product revenue
|
|
$
|
25,407
|
|
|
$
|
24,592
|
|
|
$
|
24,369
|
|
Manufacturing cost rebate
|
|
|
(4,500
|
)
|
|
|
(4,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue excluding milestone revenue
|
|
|
20,907
|
|
|
|
20,092
|
|
|
|
24,369
|
|
Manufacturing costs
|
|
|
12,842
|
|
|
|
14,477
|
|
|
|
16,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin excluding milestone
revenue
(1)
|
|
$
|
8,065
|
|
|
$
|
5,615
|
|
|
$
|
8,316
|
|
Gross margin percent excluding milestone
revenue
(1)
|
|
|
39%
|
|
|
|
28%
|
|
|
|
34%
|
|
Milestone
revenue
(2)
|
|
|
|
|
|
|
10,000
|
|
|
|
|
|
Total revenue
|
|
|
20,907
|
|
|
|
30,092
|
|
|
|
24,369
|
|
|
|
(1)
|
Total revenue excluding milestone revenue equals wound care
product revenue and the manufacturing cost rebate. Gross margin
excluding milestone revenue is equal to total revenue excluding
milestone revenue minus manufacturing costs and gross margin
percent excluding milestone revenue is equal to gross margin
excluding milestone revenue divided by total revenue excluding
milestone revenue. These non-GAAP measures are used by
management to evaluate how effective our manufacturing
operations are compared to the revenues generated. We believe
this measure is useful to investors for the reasons discussed
under Critical Accounting Policies and Significant
Judgments and Estimates on page 49. We believe that
these measurements should be considered in addition to the full
GAAP presentation of our results.
|
|
(2)
|
Certain milestone revenue may relate in part to sales activity
in prior periods.
|
Year
Ended December 31, 2008 and December 31,
2007
Revenue
and Gross Margin
Total revenue, which consist of wound care product revenue (less
the manufacturing cost rebate) and milestone revenue, for the
year ended December 31, 2008 was $20.9 million
compared to $30.1 million for the year ended
December 31, 2007. The decrease of $9.2 million is
attributable primarily to $10.0 million in milestone
payments that were earned from Smith & Nephew in 2007
whereas no milestone payments were earned in 2008. Wound care
revenue less the manufacturing cost rebate increased to
$20.9 million for the year ended December 31, 2008
from $20.1 million for the year ended December 31,
2007. Under the revised supply agreement, we pay
Smith & Nephew an annual $4.5 million
manufacturing cost rebate in 2007, 2008 and 2009 in anticipation
of annual reductions we intend to achieve in our cost of goods
manufactured for Smith & Nephew over the same time
frame. Wound care product revenue, which consists of royalty
revenues and manufacturing cost reimbursements, increased by
$0.8 million to $25.4 million for the year ended
December 31, 2008 compared to $24.6 million for the
year ended December 31, 2007 due primarily to the payment
by Smith & Nephew of additional amounts of our fixed
overhead costs regardless of the volume of products shipped in
2008.
Manufacturing costs for the year ended December 31, 2008
were $12.8 million compared to $14.5 million for the
year ended December 31, 2007. The decrease of
$1.7 million is primarily attributable to the combined
effect of manufacturing cost savings realized in the period
through the implementation of efficiencies in our manufacturing
process, together with a 5% decline in units ordered by and
shipped to Smith & Nephew. During 2008, we continued
to recognize significant cost reductions in our manufacturing
process and overhead structure to offset the $4.5 million
manufacturing cost rebate we pay to Smith & Nephew.
These cost reductions were achieved primarily through lower
headcount, manufacturing process improvements and leased space
consolidations. We expect to continue to manage our
manufacturing costs to achieve further reductions in 2009.
Gross margin excluding milestone revenue for the year ended
December 31, 2008 was $8.1 million, or 39%, compared
to $5.6 million, or 28%, for the year ended
December 31, 2007. The improvement in gross margin is
primarily attributable to the increase in cost reductions
offsetting the fixed manufacturing cost rebate and an increase
in the level of fixed overhead costs we were able to recover
under the amended supply agreement. While we expect to realize
and maintain manufacturing cost reductions sufficient to offset
all or a significant portion of the manufacturing cost rebate in
2009, our actual gross margin in 2009 will vary based on our
actual cost reductions compared to the fixed level of overhead
reimbursement provided by Smith & Nephew and the
$4.5 million manufacturing cost rebate.
We recognize manufacturing revenue when we ship our products to
Smith & Nephew and royalty income when
Smith & Nephew sells our products to its customers. We
accrue the manufacturing cost rebate evenly throughout the year.
43
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 year ended
December 31, 2008 were $5.0 million compared to
$6.3 million for the year ended December 31, 2007. The
decrease of $1.3 million from 2008 to 2007 is due to the
costs savings we achieved in 2008 associated with further
reductions we made in 2008 to our pharmaceutical research and
development programs. In the fourth quarter of 2008, we
completed the closure of our laboratory space in Wakefield,
Massachusetts and transferred all remaining pharmaceutical
development activities to our Fort Saskatchewan, Alberta
facility. We continue to review our development capabilities and
look for additional cost reductions. We do not expect to fund
any new development programs outside of our relationship with
Smith & Nephew until we identify commercial partners
that can support these efforts.
General and administrative costs for the year ended
December 31, 2008 were $9.1 million compared to
$9.5 million for the year ended December 31, 2007. The
decrease of $0.4 million is attributable primarily to a
decrease in general and administrative costs at our
Fort Saskatchewan facility, lower contractual consulting
costs, and a decline in stock option compensation expense
recognized in the year. The decrease in general and
administrative costs was partially offset by costs associated
with the fourth quarter closure of the Wakefield, Massachusetts
facility and higher professional advisory fees. We continue to
review our general and administrative costs and we expect that
the changes we have implemented and expect to implement in 2009
will further reduce our general and administrative costs in 2009.
We incurred a $0.2 million capital asset write off of
leasehold improvements for the year ended December 31, 2008
with the closure of our Wakefield, Massachusetts facility. For
the year ended December 31, 2007, we incurred a
$1.2 million capital asset write down of obsolete capital
equipment.
Non-Operating
Items
We had foreign exchange gains of $2.8 million for the year
ended December 31, 2008 compared to a loss of
$3.3 million for the year ended December 31, 2007. The
changes in the U.S. dollar and Canadian dollar exchange rate
results in unrealized currency gains and losses on our U.S.
dollar working capital amounts held by our Canadian operations.
All of our revenues from Smith & Nephew are received
in U.S. dollars.
Our interest income for the year ended December 31, 2008
was $0.3 million compared to $0.7 million for the year
ended December 31, 2007 due to a decline in interest rates
throughout 2008.
Year
Ended December 31, 2007 and December 31,
2006
Revenue
and Gross Margin
Total revenue for the year ended December 31, 2007 was
$30.1 million compared to $24.4 million for the year
ended December 31, 2006. The increase of $5.7 million is
attributable primarily to $10.0 million in milestone
payments that were earned from Smith & Nephew in 2007.
The impact of this milestone revenue was partially offset by a
$4.5 million manufacturing cost rebate we paid to
Smith & Nephew in 2007 under the revised supply
agreement. Wound care product revenue, which consists of royalty
revenues and manufacturing cost reimbursements less the
manufacturing cost rebate, decreased by approximately
$4.3 million to $20.1 million for the year ended
December 31, 2007 compared to $24.4 million for the
year ended December 31, 2006 due in large part to the
manufacturing cost rebate.
Manufacturing costs for the year ended December 31, 2007
were $14.5 million compared to $16.1 million for the
year ended December 31, 2006. The decrease of
$1.6 million is primarily attributable to the combined
effect of manufacturing cost savings realized in the period
through the implementation of efficiencies in our manufacturing
process, together with the effect of the shipment to
Smith & Nephew in 2007 of products out of our finished
goods inventory that were produced in 2006 at a lower cost per
unit than products produced in 2007. During 2007, we recognized
significant cost reductions in our manufacturing process and
overhead structure to partially offset the $4.5 million
manufacturing cost rebate paid to Smith & Nephew in
2007. These cost reductions were achieved primarily through
lower headcount, manufacturing process improvements and leased
space consolidations.
Gross margin excluding milestone revenue for the year ended
December 31, 2007 was $5.6 million or 28% compared to
$8.3 million or 34% for the year ended December 31,
2006. The decrease of $2.7 million is attributable
primarily to the $4.5 million manufacturing cost rebate
that was recognized in 2007 as a reduction to wound care product
revenue. No such cost rebate amount was recognized in the year
ended December 31, 2006. The effect of the manufacturing
cost rebate on gross margin was only partially offset by
manufacturing cost reductions realized in the period.
44
Other
Operating Costs
Research and development costs for the year ended
December 31, 2007 were $6.3 million compared to
$11.2 million for the year ended December 31, 2006.
The decrease of $4.9 million from 2007 to 2006 is due in
part to the fact that in the third quarter of 2006 we completed
the only clinical study we had underway, our Phase 2
dermatological clinical study. No new clinical studies were
initiated in 2007. The decrease is also partly due to the
reductions we made to our research operations and staff in 2007
to conserve cash and control expenses.
General and administrative costs for the year ended
December 31, 2007 were $9.5 million compared to
$7.2 million for the year ended December 31, 2006. The
increase of $2.3 million is attributable primarily to stock
option compensation expense recognized in the year, severance
and recruiting costs, consulting services relating to business
development, and design services for the consolidation of our
leased manufacturing facility in Fort Saskatchewan, Alberta.
We incurred a $1.2 million capital asset write down of
obsolete capital equipment for the year ended December 31,
2007. For the year ended December 31, 2006, we incurred a
$1.0 million capital asset write down in production
facility design costs when a facility expansion project was
cancelled.
Non-Operating
Items
We had foreign exchange losses of $3.3 million for the year
ended December 31, 2007 compared to a loss of
$0.3 million for the year ended December 31, 2006. Our
interest income for the year ended December 31, 2008 was
$0.7 million compared to interest income, net of interest
expense, of $1.2 million for the year ended
December 31, 2007. Our interest expense of
$0.3 million was related to debt due Westaim prior to the
conversion of the debt to equity in January 2006.
Liquidity
and Capital Resources
In December 2005, we completed our initial public offering of
4.5 million common shares for gross proceeds of
$45.0 million. We used $6.9 million of net proceeds to
partially repay debt owed to Westaim and retained the remaining
net proceeds of $35.0 million to fund our operations. From
our inception through the closing of our initial public
offering, we financed our operations through various financing
arrangements with Westaim. Westaim no longer provides us with
any additional financing or other financial support. In December
2008, pursuant to a requisition received from Westaim, we called
a special meeting of shareholders to consider a return of
capital to shareholders of approximately $14.7 million. The
special meeting of shareholders was held on February 12,
2009 and the special resolution was approved. A record date of
February 17, 2009 was set for the distribution and we will
complete the distribution of the return of capital on
February 25, 2009. The return of capital represents
approximately 63% of our cash and cash equivalents as of
December 31, 2008. At December 31, 2008, we had cash
and cash equivalents of $23.4 million compared to
$17.8 million at December 31, 2007.
We currently have no third party debt or lines of credit or
other financing arrangements in place with banks or other
financial institutions. Additionally, the return of capital will
significantly reduce our available capital to invest in the
maintenance and growth of the business or to conduct strategic
transactions at least until we can achieve consistent positive
operating cash flows.
Cash provided from operations was $9.8 million for the year
ended December 31, 2008 compared to cash used in operations
of $2.7 million and $12.6 million for the years ended
December 31, 2007 and 2006, respectively. We had
$8.9 million in cash provided from operations for the year
ended December 31, 2008 due to reductions in accounts
receivable, $5.0 million of which was from a milestone
earned in the fourth quarter of 2007. Cash used in operations of
$2.7 million for the year ended December 31, 2007 was
primarily the result of a $7.0 million use of cash in
accounts receivable increases which was partially offset by a
$4.0 million decline in inventory. The $12.6 million
use of cash in operations for the year ended December 31,
2006 was primarily from the net loss of $10.5 million and a
$4.9 million increase in non-cash working capital.
Cash used in investing activities amounted to $1.2 million
for the year ended December 31, 2008, $2.0 million for
the year ended December 31, 2007 and $4.6 million for
the year ended December 31, 2006. In each of these years,
the most significant use of cash was for capital expenditures,
which were $1.2 million for the year ended
December 31, 2008, $1.9 million for the year ended
December 31, 2007 and $5.0 million for the year ended
December 31, 2006. In 2005, we began construction of an
expansion of our Fort Saskatchewan production facility
which we completed in the first quarter of 2008. Given the
completion of our production facility expansion, we expect our
2009 capital expenditures to remain consistent with the 2008
level of expenditures.
45
For the year ended December 31, 2008, we used
$0.1 million of cash to purchase 65,100 shares of our
common stock under a share repurchase program. In August 2008,
we announced a program to repurchase up to 900,000 shares
of our outstanding common stock for an amount not to exceed
$1.3 million. The repurchase program was authorized through
June 30, 2009, and may be modified or discontinued at any
time. We had cash provided from financing activities of
$0.8 million for the year ended December 31, 2007 and
$0.3 million for the year ended December 31, 2006.
Payment of $0.8 million was received from Westaim for the
year ended December 31, 2007 as compensation for our
agreement to surrender a portion of the space we leased from
Westaim to facilitate the sale of their Fort Saskatchewan,
Alberta buildings in which we are a tenant.
We expect that our available cash resources remaining after
completion of the return of capital together with the 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 sales
performance of Smith & Nephews
Acticoat
tm
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 are unable to obtain additional
financing if required, we may be forced to 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
Income taxes are recognized for future income tax consequences
attributed to estimated differences between the financial
statement carrying values of existing assets and liabilities and
their respective income tax bases. We have net operating loss
carry forward for income tax purposes of approximately
$33.0 million at December 31, 2008 compared to
$35.0 million at December 31, 2007 and unclaimed
scientific research and experimental development expenditures of
approximately $9.5 million at December 31, 2008
compared to $8.6 million at December 31, 2007, that
can be used to offset taxable income, if any, in future periods.
We also have accumulated capital losses of approximately
$1.7 million at December 31, 2008 compared to
$2.1 million at December 31, 2007 as well as research
and development tax credits of approximately $4.4 million
at December 31, 2008 compared to $4.6 million at
December 31, 2007. Recognized losses and credits have been
fully offset by a valuation allowance. The net operating losses
and research and development tax credits will expire at various
times to the end of 2028.
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. The
ultimate realization of deferred tax assets is dependent upon
the generation of future taxable income, and there can be no
assurance when or if this will occur. Management will continue
to provide a full valuation allowance until it determines that
it is more likely than not the deferred tax assets will be
realized.
Our tax pools are subject to review and potential disallowance,
in whole or in part, by the Canada Revenue Agency
(CRA) in Canada and the Internal Revenue Service
(IRS) in the United States upon audit of our federal
income tax returns, and we cannot predict the results of any
such review. In 2005, the CRA commenced an examination of our
Canadian income tax returns for 2001 and 2002, and in December,
2007, we received correspondence from the CRA proposing certain
transfer pricing adjustments with respect to income allocations
between our Canadian and U.S. entities for those years. These
proposed adjustments, if processed, will not result in any cash
tax liability. In the third quarter of 2008, we received a
report from the CRA which provided additional information with
respect to the proposed adjustments. We have been working with
the CRA to resolve the audit matters under review and have made
a further submission of information to the CRA in this regard.
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, the potential impact cannot be reasonably estimated.
We have
46
provided notification to the IRS of our intention to seek
competent authority assistance with respect to the 2001 and 2002
taxation years.
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.
FIN 48 prescribes a recognition threshold and a measurement
attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a
tax return. Benefits from tax positions should be recognized in
the financial statements only when it is more likely than not
that the tax position will be sustained upon examination by the
appropriate taxing authority that would have full knowledge of
all relevant information. A tax position that meets the
more-likely-than-not recognition threshold is measured at the
largest amount of benefit that is greater than fifty percent
likelihood of being realized upon ultimate settlement. Tax
positions that previously failed to meet the
more-likely-than-not recognition threshold should be recognized
in the first subsequent financial reporting period in which that
threshold is met. Previously recognized tax positions that no
longer meet the more-likely-than-not recognition threshold
should be derecognized in the first subsequent financial
reporting period in which that threshold is no longer met.
FIN 48 also provides guidance on the accounting for and
disclosure of unrecognized tax benefits, interest and penalties.
The implementation of the provisions of FIN 48 did not have
an impact on our financial position or results of operations,
and did not result in any adjustment to our beginning tax
positions at January 1, 2007. As at January 1, 2007
and December 31, 2007, we did not have any unrecognized tax
benefits. During the year ended December 31, 2008, changes
in the amount of our unrecognized tax benefits related to tax
positions of the current year and prior years. The additions
were mostly offset by reductions, resulting in unrecognized tax
benefits of $0.2 million at the end of the year. Although
we believe in the merit of our tax filing positions and intend
to rigorously defend our transfer pricing policies, it is
reasonably possible that the amount of unrecognized tax benefits
could significantly increase or decrease within the next twelve
months. At this time, an estimate of the range of reasonably
possible outcomes cannot be made. Any increase or decrease in
the unrecognized tax benefits will not likely have a significant
impact on our effective tax rate due to the existence of the
valuation allowance. Future changes in our assessment of the
sustainability of tax filing positions may impact our income tax
liability.
The amount of net operating loss carryovers, or NOLs, which may
be used by us for U.S. federal income tax purposes in any future
year could be limited by Section 382 of the Internal
Revenue Code of 1986, as amended. In general, Section 382
would limit our ability to use NOLs for U.S. federal income tax
purposes in the event of certain changes, either directly or
indirectly, in ownership of our Company, including as a result
of sales of our common shares by Westaim, future offerings of
common shares by us, and changes in ownership of Westaim. If
such limitations were triggered as a result of future shifts in
ownership of us, the use of our NOLs for U.S. federal income tax
purposes would be limited. Any limitation of our use of NOLs
could (depending on the extent of such limitation and the amount
of NOLs previously used) result in us retaining less cash after
payment of U.S. federal income taxes during any year in which we
have taxable income (rather than losses) than we would be
entitled to retain if such NOLs were available as an offset
against such income for U.S. federal income tax reporting
purposes.
For alternative minimum tax purposes in the United States, NOLs
can be used to offset no more than 90 percent of
alternative minimum taxable income, or AMTI. Thus, to the extent
our NOLs are used to offset regular taxable income, if any,
alternative income tax will still be required to be paid on
10 percent of AMTI at the alternative minimum tax rate of
20 percent.
We have not demonstrated an ability to produce positive tax
income consistently on an annual basis. Accordingly, we cannot
predict when or if we will generate taxable income and whether
and to what extent we will be able to use our NOLs to offset any
such taxable income.
47
Contractual
Commitments and Obligations at December 31, 2008
The table below reports commitments and obligations that have
been recorded on our consolidated balance sheet as of
December 31, 2008. Certain other obligations and
commitments, while not required under United States generally
accepted accounting principles (GAAP) to be included
in the consolidated balance sheets, may have a material impact
on liquidity. These items, all of which have been entered into
in the ordinary course of business, are also included in the
table below in order to present a more complete picture of our
financial position and liquidity.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
More than
|
|
|
|
|
|
|
1 year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
5 years
|
|
|
Total
|
|
|
|
(in millions)
|
|
|
Consolidated Obligations and Commitments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facilities operating leases
|
|
$
|
0.7
|
|
|
$
|
1.5
|
|
|
$
|
1.5
|
|
|
$
|
1.6
|
|
|
$
|
5.3
|
|
Contractual
Obligations
(1)
|
|
|
4.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.7
|
|
Purchase Obligations
|
|
|
1.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total obligations and commitments
|
|
$
|
6.4
|
|
|
$
|
1.5
|
|
|
$
|
1.5
|
|
|
$
|
1.6
|
|
|
$
|
11.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
This commitment relates primarily to our obligation under our
supply agreement to pay Smith & Nephew a manufacturing
cost rebate in the amount of $4.5 million in 2009.
|
We are unable to make a reasonably reliable estimate as to when
a cash settlement with taxing authorities may occur for our
unrecognized tax benefits. Therefore, our liability for
unrecognized tax benefits is not included in the table above.
See Note 11 to the Consolidated Financial Statements for
additional information.
Other
Agreements with Westaim
We obtain certain corporate and administrative services from
Westaim and we paid rent and operating expenses on our
manufacturing facility in Fort Saskatchewan, Alberta to
Westaim until Westaim sold the buildings on May 8, 2007.
Our leases were assigned to the purchaser of such facility who
is not a related party. The total cost of the services, rent and
operating expenses paid to Westaim were $0.3 million for
the year ended December 31, 2008, $1.1 million for the
year ended December 31, 2007, and $2.6 million for the
year ended December 31, 2006. We have historically
reimbursed Westaim for the cost of providing (or, in certain
cases, for the cost of paying a third party to provide) certain
corporate and administrative services to us. These services have
included insurance and risk management, cash management, legal,
human resources, payroll processing, environmental health and
safety, tax and accounting and intellectual property maintenance
services. These costs have been reflected in our consolidated
financial statements. Westaim continues to supply certain
services to us pursuant to a services agreement which provides
that we reimburse Westaim for the fully allocated costs of
providing (or for the cost of paying a third party to provide)
those services. During 2007, our internal staff began to perform
many of the services previously provided by Westaim. At
December 31, 2008, we continue to receive insurance, risk
management, intellectual property maintenance services and tax
services from Westaim.
Off-Balance
Sheet Commitments as of December 31, 2008
As of December 31, 2008, 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 and described more fully in the following
paragraphs in order to provide a more complete picture of our
financial position and liquidity as of December 31, 2008.
Our Fort Saskatchewan, Alberta facility was originally
rented from Westaim under two separate leases covering a total
of 82,223 square feet of space until May 8, 2007, when
Westaim sold the buildings and assigned the leases to a third
party purchaser. As part of that transaction, Westaim paid us
$0.8 million as compensation for entering into agreements
to amend the leases and our surrender of portions of the leased
premises. During 2007, we surrendered a portion of the leased
premises to the new owner pursuant to the lease surrender
agreements and had our rent and operating costs adjusted
accordingly. As of September 1, 2008, we exercised our
option to lease additional space resulting in a further
adjustment of rent and operating costs. As of December 31,
2008, we occupied an aggregate of approximately 75,535 square
feet of leased premises at our Fort Saskatchewan, Alberta
facility. Our future minimum commitments under the
Fort Saskatchewan, Alberta lease are approximately
$0.6 million for each of the twelve-month periods
commencing from January 1, 2007 to the expiry of the lease.
In the fourth quarter of 2008, we terminated our Wakefield,
Massachusetts offices and laboratory facility lease. In August
2008, we entered into a 5 year lease for approximately
5,100 square feet of office space in Princeton, New Jersey.
48
We were provided temporary space until the full lease space was
delivered to us in January 2009. Our future minimum commitments
under the Princeton, New Jersey lease are approximately
$0.1 million for each of the twelve-month periods to the
expiry of the lease.
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 of 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.
In this report, we present certain information regarding gross
margin and revenue excluding the impact of milestone payments.
We believe that this is a useful financial measure for investors
in evaluating our operating performance for the periods
presented, as when read in conjunction with our changes in
revenue on a U.S. GAAP basis, it presents a useful tool to
evaluate our ongoing operations and provides investors with an
opportunity to evaluate our revenue from operations absent
substantial contractual payments. In addition, these amounts are
some of the factors we use in internal evaluations of the
overall performance of our business. This information, however,
is not a measure of financial performance under U.S. GAAP and
should not be considered a substitute for changes in revenue as
determined in accordance with U.S. GAAP.
Revenue
Recognition
Our revenue from direct sales to third parties is recognized
when persuasive evidence of an arrangement exists, delivery has
occurred, the price to the buyer is fixed or determinable, and
collection is reasonably assured. Our revenues under the
agreements with Smith & Nephew consist primarily of
product revenue, royalties and payments upon the achievement of
specific milestones. Product revenue and royalties are reported
as wound care product revenue in the consolidated statements of
operations as they relate directly to the sale of products to
Smith & Nephew. For products manufactured under
agreements with Smith & Nephew, revenue is recorded at
the date of shipment. Royalty revenue is earned based on a
percentage of Smith & Nephews sales to third
parties. The manufacturing cost rebate is recorded as a
reduction to wound care revenue evenly throughout the year.
Revenue relating to the achievement of milestones under
agreements with Smith & Nephew is recognized when the
milestone event has occurred and is recorded separately as
milestone revenue. We may also derive fees from research
activities under agreements with Smith & Nephew or
through other third parties and this revenue is recognized as
services are performed.
Research
and Development Costs
The costs of materials, equipment, or facilities that are
acquired or constructed for a particular research and
development project and that have no alternative future uses (in
other research and development projects or otherwise) are
expensed as research and development costs at the time the costs
are incurred. Research and development expenditures, which
include the cost of materials consumed in research and
development activities, salaries, wages and other costs of
personnel engaged in research and development, costs of services
performed by others for research and development on
49
our behalf, depreciation on equipment used for research and
development and indirect costs are expensed as research and
development costs when incurred.
Income
Taxes
We use the asset and liability method of accounting for income
taxes. Deferred income taxes are recognized for the tax
consequences in future years of differences between the tax
bases of assets and liabilities and their financial reporting
amounts at each year end, based on enacted tax laws and
statutory tax rates applicable to the years in which the
differences are expected to reverse. Valuation allowances are
established when necessary to reduce deferred tax assets to the
amount that, in the opinion of management, is more likely than
not to be realized. The effect of changes in tax rates is
recognized in the year in which the rate change occurs. Research
and development investment tax credits are accounted for as a
reduction of income taxes in accordance with Accounting
Principle Board Opinion No. 4, Accounting for the
Investment Credit. On January 1, 2007 we adopted FASB
Interpretation No. 48, Accounting for Uncertainty in
Income Taxes (FIN 48). FIN 48
prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return.
FIN 48 requires that we recognize the impact of a tax
position in the financial statements if that position is more
likely than not of being sustained on audit, based on the
technical merits of the position. FIN 48 also provides
guidance on derecognition, classification, interest and
penalties, accounting in interim periods and disclosure.
Translation
of Foreign Currencies
Our functional currency is the Canadian dollar. The functional
currency of our wholly owned subsidiary, NUCRYST
Pharmaceuticals, Inc., is the United States dollar. The balance
sheet accounts of the subsidiary are translated into Canadian
dollars at the period end exchange rate, while income, expense
and cash flows are translated at the average exchange rate for
the period. Translation gains or losses related to net assets of
such operations are shown as a component of accumulated other
comprehensive loss in shareholders equity. Gains and
losses resulting from foreign currency transactions, which are
transaction denominated in a currency other than our functional
currency, are included in the consolidated statement of
operations. We use the U.S. dollar as our reporting currency to
be consistent with other companies in our industry peer group.
The Canadian functional currency consolidated financial
statements are translated to the U.S. dollar reporting currency
using the current rate method of translation.
The table below summarizes the foreign exchange rates used in
the preparation of our consolidated financial statements using
period end and period average noon buying rates reported by the
Bank of Canada as stated as the number of Canadian dollars to
one U.S. dollar. High and low noon buying rates are also
included.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Period End Rate
|
|
|
Period Average Rate
|
|
|
High Rate
|
|
|
Low Rate
|
|
|
2004
|
|
|
1.2034
|
|
|
|
1.3017
|
|
|
|
1.3970
|
|
|
|
1.1775
|
|
2005
|
|
|
1.1656
|
|
|
|
1.2115
|
|
|
|
1.2703
|
|
|
|
1.1507
|
|
2006
|
|
|
1.1652
|
|
|
|
1.1340
|
|
|
|
1.1726
|
|
|
|
1.0989
|
|
2007
|
|
|
0.9881
|
|
|
|
1.0742
|
|
|
|
1.1852
|
|
|
|
0.9168
|
|
2008
|
|
|
1.2246
|
|
|
|
1.0660
|
|
|
|
1.3008
|
|
|
|
0.9711
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Monthly 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January
|
|
|
1.0022
|
|
|
|
1.0111
|
|
|
|
1.0369
|
|
|
|
0.9851
|
|
February
|
|
|
0.9798
|
|
|
|
0.9991
|
|
|
|
1.0199
|
|
|
|
0.9711
|
|
March
|
|
|
1.0279
|
|
|
|
1.0020
|
|
|
|
1.0295
|
|
|
|
0.9765
|
|
April
|
|
|
1.0095
|
|
|
|
1.0139
|
|
|
|
1.0328
|
|
|
|
0.9998
|
|
May
|
|
|
0.9942
|
|
|
|
0.9994
|
|
|
|
1.0245
|
|
|
|
0.9824
|
|
June
|
|
|
1.0186
|
|
|
|
1.0167
|
|
|
|
1.0320
|
|
|
|
0.9948
|
|
July
|
|
|
1.0257
|
|
|
|
1.0127
|
|
|
|
1.0274
|
|
|
|
0.9975
|
|
August
|
|
|
1.0626
|
|
|
|
1.0544
|
|
|
|
1.0716
|
|
|
|
1.0237
|
|
September
|
|
|
1.0599
|
|
|
|
1.0583
|
|
|
|
1.0821
|
|
|
|
1.0298
|
|
October
|
|
|
1.2165
|
|
|
|
1.1848
|
|
|
|
1.2995
|
|
|
|
1.0585
|
|
November
|
|
|
1.2372
|
|
|
|
1.2182
|
|
|
|
1.2952
|
|
|
|
1.1477
|
|
December
|
|
|
1.2246
|
|
|
|
1.2345
|
|
|
|
1.3008
|
|
|
|
1.1872
|
|
50
Stock
Based Compensation
On January 1, 2006, we adopted SFAS 123(R),
Share-Based Payment (SFAS 123(R)),
which requires that all share-based payments to directors and
employees, including grants of stock options, be recognized in
the consolidated financial statements based on their fair values.
SFAS 123(R) requires companies to estimate the fair value
of share-based payment awards on the date of grant using an
option-pricing model. The value of the portion of the award that
is ultimately expected to vest is recognized as expense over the
requisite service periods. Prior to the adoption of
SFAS 123(R), the Corporation accounted for stock-based
awards to employees and directors using the intrinsic value
method in accordance with Accounting Principles Board
(APB) Opinion No. 25, Accounting for
Stock Issued to Employees (APB No. 25),
as allowed under SFAS No. 123, Accounting for
Stock-Based Compensation (SFAS 123).
Under the intrinsic value method, no stock-based compensation
expense had been recognized.
SFAS 123(R) requires companies to estimate the fair value
of share-based payment awards on the date of grant using an
option-pricing model. The value of the portion of the award that
is ultimately expected to vest is recognized as expense over the
requisite service periods in our consolidated statement of
operations. SFAS 123(R) requires that liability classified
awards such as SARs be revalued to estimated fair value at each
reporting date using an option-pricing model. Prior to the
adoption of SFAS 123(R), we valued SARs at the amount by
which the market value exceeded the exercise price at each
measurement date. As a result of implementing SFAS 123(R)
on January 1, 2006, we increased our SAR liability from $90
to $97, with the increase recorded as a cumulative effect of a
change in accounting principle in our consolidated statement of
operations.
We continue to use the Black-Scholes option-pricing model for
valuation of share-based payment awards which was previously
used for our pro forma information required under SFAS 123.
Our determination of fair value of share-based payment awards on
the date of grant using an option-pricing model is affected by
our stock price as well as assumptions regarding a number of
highly complex and subjective variables. These variables
include, but are not limited to, our expected common share price
volatility over the term of the awards, and actual and projected
employee share option exercise behaviors. Option-pricing models
were developed for use in estimating the value of traded options
that have no vesting or hedging restrictions and are fully
transferable. Although the fair value of employee stock options
is determined in accordance with SFAS 123(R) and
SAB 107 using an option-pricing model, that value may not
be indicative of the fair value observed in a willing
buyer/willing seller market transaction.
Recently
Adopted Accounting Pronouncements
SFAS 159
In February 2007, the FASB issued Statement No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities (SFAS 159). SFAS 159
allows entities the option to measure eligible financial
instruments at fair value as of specified dates. Such election,
which may be applied on an instrument by instrument basis, is
typically irrevocable once elected. SFAS 159 is effective
for fiscal years beginning after November 15, 2007, and
early application is allowed under certain circumstances. We
implemented SFAS 159 as of January 1, 2008 and it did
not have a material impact on our consolidated financial
statements.
EITF
07-3
In June 2007, the EITF issued EITF Issue
No. 07-3,
Accounting for Non Refundable Advance Payments for Goods
or Services Received for Use in Future Research and Development
Activities (EITF
07-3).
EITF
07-3
requires that nonrefundable advance payments for goods or
services that will be used or rendered for future research and
development activities be deferred and capitalized and
recognized as an expense as the goods are delivered or the
related services are performed. EITF
07-3
is
effective for fiscal years beginning after December 15,
2007 and we adopted it in the first quarter of 2008. EITF
07-3
did not
have a material impact on our financial position or results of
operations.
Recently
Pending Accounting Pronouncements
SFAS 161
In March 2008, the FASB issued Statement No. 161,
Disclosures about Derivative Instruments and Hedging
Activities, an amendment of FASB Statement No. 133
(SFAS 161). SFAS 161 requires additional
disclosures about the objectives of using derivative
instruments, the method by which the derivative instruments and
related hedged items are accounted for under FASB Statement
No. 133 and its related interpretations, and the effect of
derivative instruments and
51
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. While we are currently assessing the impact of the
adoption of SFAS 161, we do not expect the adoption to have
a material impact on our results of operations or consolidated
financial position.
EITF
07-1
In September 2007, the Emerging Issues Task Force
(EITF) reached a consensus on EITF Issue
No. 07-1
Collaborative Arrangements (EITF
07-1).
EITF
07-1
addresses the accounting for arrangements in which two companies
work together to achieve a commercial objective, without forming
a separate legal entity. The nature and purpose of a
companys collaborative arrangements are required to be
disclosed, along with the accounting policies applied and the
classification and amounts for significant financial activities
related to the arrangements. EITF
07-1
is
effective for fiscal years beginning after December 15,
2008. We are currently assessing the impact EITF
07-1
will
have on our results of operations and consolidated financial
position.
FASB
Business Combinations
The FASB recently completed the second phase of its business
combinations project, to date the most significant convergence
effort with the International Accounting Standards Board
(IASB), and issued the following two accounting
standards:
|
|
|
|
i.
|
Statement No. 141(R), Business Combination; and
|
|
|
ii.
|
Statement No. 160, Noncontrolling Interests in Consolidated
Financial Statements an amendment of ARB No. 51.
|
These statements dramatically change the way companies account
for business combinations and noncontrolling interests (minority
interests in current U.S. GAAP). Compared with their
predecessors, Statements 141(R) and 160 will require:
|
|
|
|
|
More assets acquired and liabilities assumed to be measured at
fair value as of the acquisition date;
|
|
|
|
Liabilities related to contingent consideration to be remeasured
at fair value in each subsequent reporting period;
|
|
|
|
An acquirer in preacquisition periods to expense all acquisition
related costs; and
|
|
|
|
Noncontrolling interests in subsidiaries initially to be
measured at fair value and classified as a separate component of
equity.
|
Statements 141(R) and 160 should both be applied prospectively
for fiscal years beginning on or after December 15, 2008.
However, Statement 160 requires entities to apply the
presentation and disclosure requirements retrospectively (e.g.,
by reclassifying noncontrolling interests to appear in equity)
to comparative financial statements if presented. Both standards
prohibit early adoption. We are currently assessing the impact
these new standards will have on our consolidated financial
statements.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISKS
We are exposed to various market risks, including variability in
currency exchange rates. The Smith & Nephew sales
revenues on which our royalty and milestone revenues are
determined are reported to us in U.S. dollars. Sales by
Smith & Nephew in other currencies will result in
fluctuations in their revenue as reported in U.S. dollars. The
Smith & Nephew contracts ensure recovery of certain
manufacturing costs, which reduces our susceptibility to
production cost variances resulting from foreign exchange
fluctuations. Our accounts receivable from Smith &
Nephew are denominated in U.S. dollars. The functional currency
that we use for accounting purposes is the Canadian dollar and
as a result, accounts receivable and other liabilities recorded
in Canadian dollars are exposed to changes in the exchange rate
between the Canadian and U.S. dollars until these receivables
are collected. We do not maintain derivative instruments to
mitigate our exposure to fluctuations in currency exchange rates.
We are exposed to currency risks as a result of our export to
foreign jurisdictions of goods produced in Canada. These risks
are partially covered by purchases of goods and services in the
foreign currency. For 2008, a 1.0% increase in the exchange rate
from the United States dollar to the Canadian dollar (meaning a
1% appreciation in the value of the United States dollar
compared to the Canadian dollar) would have decreased our loss
before income taxes by less than $0.2 million. Conversely,
a 1.0% decrease in the exchange rate would have increased our
2007 loss before taxes by a similar amount.
52
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of
Independent Registered Chartered Accountants
To the Board
of Directors and Shareholders of
NUCRYST
Pharmaceuticals Corp.
We have audited the consolidated balance sheets of NUCRYST
Pharmaceuticals Corp. as at December 31, 2008 and 2007 and
the consolidated statements of operations, shareholders
equity and cash flows for each of the years in the three-year
period ended December 31, 2008. These financial statements
are the responsibility of the Corporations management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with Canadian generally
accepted auditing standards and the standards of the Public
Company Accounting Oversight Board (United States). Those
standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free
of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, these consolidated financial statements present
fairly, in all material respects, the financial position of
NUCRYST Pharmaceuticals Corp. as at December 31, 2008 and
2007 and the results of its operations and its cash flows for
each of the years in the three-year period ended
December 31, 2008 in accordance with accounting principles
generally accepted in the United States of America.
The Corporation is not required to have, nor were we engaged to
perform, an audit of its internal control over financial
reporting. Our audit included consideration of internal control
over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the Corporations internal control over financial
reporting. Accordingly, we express no such opinion.
/s/
Deloitte &
Touche Llp
Independent Registered Chartered Accountants
Calgary, Canada
February 9, 2009 (except as to Note 19
which is as of February 12, 2009)
53
NUCRYST
Pharmaceuticals Corp.
Consolidated
Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
December 31
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(thousands of U.S. dollars, except share data)
|
|
|
ASSETS
|
Current
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
23,388
|
|
|
$
|
17,841
|
|
Accounts receivable net (note 4)
|
|
|
5,062
|
|
|
|
14,924
|
|
Inventories (note 5)
|
|
|
2,887
|
|
|
|
4,426
|
|
Prepaid expenses
|
|
|
414
|
|
|
|
427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,751
|
|
|
|
37,618
|
|
Restricted cash (note 2g)
|
|
|
145
|
|
|
|
140
|
|
Capital assets net (note 6)
|
|
|
9,379
|
|
|
|
12,734
|
|
Intangible assets net (note 7)
|
|
|
525
|
|
|
|
807
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
41,800
|
|
|
$
|
51,299
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
Current
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities (note 8)
|
|
$
|
2,859
|
|
|
$
|
3,650
|
|
Accounts payable and accrued liabilities to related party
(note 12)
|
|
|
|
|
|
|
67
|
|
Deferred lease inducement (note 2m)
|
|
|
90
|
|
|
|
111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,949
|
|
|
|
3,828
|
|
Long term deferred lease inducement (note 2m)
|
|
|
495
|
|
|
|
726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,444
|
|
|
|
4,554
|
|
|
|
|
|
|
|
|
|
|
Guarantees (note 13)
|
|
|
|
|
|
|
|
|
Commitments (note 14)
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS EQUITY
|
Common shares no par value, unlimited shares authorized:
|
|
|
|
|
|
|
|
|
issued and outstanding 18,320,531 and
18,367,563 shares at
|
|
|
|
|
|
|
|
|
December 31, 2008 and 2007, respectively (note 10)
|
|
|
82,776
|
|
|
|
82,776
|
|
Additional paid-in capital
|
|
|
2,178
|
|
|
|
1,511
|
|
Accumulated other comprehensive (loss) income (note 2d)
|
|
|
(5,528
|
)
|
|
|
557
|
|
Accumulated deficit
|
|
|
(41,070
|
)
|
|
|
(38,099
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
38,356
|
|
|
|
46,745
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
41,800
|
|
|
$
|
51,299
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
54
NUCRYST
Pharmaceuticals Corp.
Consolidated
Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31
|
|
|
December 31
|
|
|
December 31
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(thousands of U.S. dollars except share and
|
|
|
|
per share data)
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Wound care product revenue (note 3)
|
|
$
|
20,907
|
|
|
$
|
20,092
|
|
|
$
|
24,369
|
|
Milestone revenue (note 3)
|
|
|
|
|
|
|
10,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,907
|
|
|
|
30,092
|
|
|
|
24,369
|
|
Costs
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing
|
|
|
12,842
|
|
|
|
14,477
|
|
|
|
16,053
|
|
Research and development
|
|
|
4,955
|
|
|
|
6,303
|
|
|
|
11,162
|
|
General and administrative
|
|
|
9,062
|
|
|
|
9,481
|
|
|
|
7,195
|
|
Write down of capital assets, net of proceeds (note 6)
|
|
|
174
|
|
|
|
1,173
|
|
|
|
1,049
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(6,126
|
)
|
|
|
(1,342
|
)
|
|
|
(11,090
|
)
|
Foreign exchange gains (losses)
|
|
|
2,819
|
|
|
|
(3,283
|
)
|
|
|
(298
|
)
|
Interest income
|
|
|
347
|
|
|
|
744
|
|
|
|
1,165
|
|
Interest expense (note 9)
|
|
|
|
|
|
|
|
|
|
|
(310
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes and cumulative effect of a change in
accounting principle
|
|
|
(2,960
|
)
|
|
|
(3,881
|
)
|
|
|
(10,533
|
)
|
Current income tax (expense) recovery (note 11)
|
|
|
(11
|
)
|
|
|
(140
|
)
|
|
|
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before cumulative effect of a change in accounting principle
|
|
|
(2,971
|
)
|
|
|
(4,021
|
)
|
|
|
(10,492
|
)
|
Cumulative effect of a change in accounting principle
(note 2p)
|
|
|
|
|
|
|
|
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,971
|
)
|
|
$
|
(4,021
|
)
|
|
$
|
(10,499
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share (note 17)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss basic and diluted
|
|
$
|
(0.16
|
)
|
|
$
|
(0.22
|
)
|
|
$
|
(0.58
|
)
|
Weighted average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
basic and diluted
|
|
|
18,365,053
|
|
|
|
18,333,810
|
|
|
|
17,964,332
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
55
NUCRYST
Pharmaceuticals Corp.
Consolidated Statement of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31
|
|
|
December 31
|
|
|
December 31
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(thousands of U.S. dollars)
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,971
|
)
|
|
$
|
(4,021
|
)
|
|
$
|
(10,499
|
)
|
Items not affecting cash
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,825
|
|
|
|
1,638
|
|
|
|
1,656
|
|
Stock-based compensation expense
|
|
|
722
|
|
|
|
1,121
|
|
|
|
496
|
|
Amortization of lease inducement (note 6)
|
|
|
(102
|
)
|
|
|
(71
|
)
|
|
|
|
|
Write down of capital assets
|
|
|
174
|
|
|
|
1,173
|
|
|
|
1,049
|
|
Foreign exchange loss
|
|
|
|
|
|
|
|
|
|
|
(356
|
)
|
Cumulative effect of a change in accounting principle
|
|
|
|
|
|
|
|
|
|
|
7
|
|
Changes in non cash working capital
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
8,938
|
|
|
|
(7,009
|
)
|
|
|
(606
|
)
|
Inventories
|
|
|
757
|
|
|
|
4,001
|
|
|
|
(777
|
)
|
Prepaid expenses
|
|
|
(63
|
)
|
|
|
(13
|
)
|
|
|
(212
|
)
|
Accounts payable and accrued liabilities
|
|
|
581
|
|
|
|
668
|
|
|
|
(2,376
|
)
|
Accounts payable and accrued liabilities to related party
(note 12)
|
|
|
(64
|
)
|
|
|
(177
|
)
|
|
|
(969
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided from (used in) operating activities
|
|
|
9,797
|
|
|
|
(2,690
|
)
|
|
|
(12,587
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash
|
|
|
(5
|
)
|
|
|
(5
|
)
|
|
|
(5
|
)
|
Purchase of short-term investments
|
|
|
|
|
|
|
|
|
|
|
(22,191
|
)
|
Maturity of short-term investments
|
|
|
|
|
|
|
|
|
|
|
22,748
|
|
Capital expenditures
|
|
|
(1,206
|
)
|
|
|
(1,920
|
)
|
|
|
(4,978
|
)
|
Proceeds on sale of capital assets
|
|
|
53
|
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
|
(36
|
)
|
|
|
(66
|
)
|
|
|
(153
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used in investing activities
|
|
|
(1,194
|
)
|
|
|
(1,991
|
)
|
|
|
(4,579
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common shares, net of share issuance costs
(note 10)
|
|
|
|
|
|
|
12
|
|
|
|
286
|
|
Repurchase of common shares (note 10)
|
|
|
(54
|
)
|
|
|
|
|
|
|
|
|
Deferred lease inducement
|
|
|
|
|
|
|
822
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash (used in) provided from financing activities
|
|
|
(54
|
)
|
|
|
834
|
|
|
|
286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(3,002
|
)
|
|
|
2,762
|
|
|
|
(95
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
5,547
|
|
|
|
(1,085
|
)
|
|
|
(16,975
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
17,841
|
|
|
|
18,926
|
|
|
|
35,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
23,388
|
|
|
$
|
17,841
|
|
|
$
|
18,926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents is comprised of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
1,553
|
|
|
$
|
7,563
|
|
|
$
|
1,324
|
|
Cash equivalents
|
|
$
|
21,835
|
|
|
$
|
10,278
|
|
|
$
|
17,602
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash capital asset additions included in accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
payable and accrued liabilities at end of year
|
|
$
|
4
|
|
|
$
|
458
|
|
|
$
|
243
|
|
Cash paid for interest
|
|
$
|
|
|
|
$
|
|
|
|
$
|
310
|
|
Cash paid for income taxes
|
|
$
|
151
|
|
|
$
|
|
|
|
$
|
72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
56
NUCRYST
Pharmaceuticals Corp.
Consolidated
Statements of Shareholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Shares
|
|
|
Additional
|
|
|
Other
|
|
|
|
|
|
Total
|
|
|
Total
|
|
|
|
|
|
|
Stated
|
|
|
Paid-in
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Shareholders
|
|
|
|
Number
|
|
|
Amount
|
|
|
Capital
|
|
|
(Loss) Income
|
|
|
Deficit
|
|
|
Loss
|
|
|
Equity
|
|
|
|
(thousands of U.S. dollars, except share data)
|
|
|
December 31, 2005
|
|
|
14,227,500
|
|
|
$
|
42,629
|
|
|
$
|
|
|
|
$
|
(5,281
|
)
|
|
$
|
(23,579
|
)
|
|
|
|
|
|
$
|
13,769
|
|
Issuance of common shares upon conversion of indebtedness to
related party (note 9)
|
|
|
3,964,200
|
|
|
|
39,642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
39,642
|
|
Issuance of common shares in connection with restricted shares
and exercises of stock options and share appreciation rights
|
|
|
117,913
|
|
|
|
401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
401
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
482
|
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(209
|
)
|
|
|
|
|
|
|
(209
|
)
|
|
|
(209
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,499
|
)
|
|
|
(10,499
|
)
|
|
|
(10,499
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
18,309,613
|
|
|
|
82,672
|
|
|
|
482
|
|
|
|
(5,490
|
)
|
|
|
(34,078
|
)
|
|
|
(10,708
|
)
|
|
|
43,586
|
|
Issuance of common shares in connection with restricted shares
and exercises of stock options
|
|
|
57,950
|
|
|
|
104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
104
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
1,029
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,029
|
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,047
|
|
|
|
|
|
|
|
6,047
|
|
|
|
6,047
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,021
|
)
|
|
|
(4,021
|
)
|
|
|
(4,021
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
18,367,563
|
|
|
|
82,776
|
|
|
|
1,511
|
|
|
|
557
|
|
|
|
(38,099
|
)
|
|
|
2,026
|
|
|
|
46,745
|
|
Issuance of common shares in connection with restricted shares
and exercises of stock options
|
|
|
18,068
|
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54
|
|
Repurchase of common shares
|
|
|
(65,100
|
)
|
|
|
(54
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(54
|
)
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
667
|
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,085
|
)
|
|
|
|
|
|
|
(6,085
|
)
|
|
|
(6,085
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,971
|
)
|
|
|
(2,971
|
)
|
|
|
(2,971
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
18,320,531
|
|
|
$
|
82,776
|
|
|
$
|
2,178
|
|
|
$
|
(5,528
|
)
|
|
$
|
(41,070
|
)
|
|
$
|
(9,056
|
)
|
|
$
|
38,356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
57
NUCRYST
Pharmaceuticals Corp.
Notes to
Consolidated Financial Statements
For the
years ended December 31, 2008, 2007 and 2006
All amounts are expressed in thousands of U.S. dollars, except
share and per share data
|
|
1.
|
DESCRIPTION
OF BUSINESS
|
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.
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.
Since 2001, the Corporation has sold its advanced wound care
products through a series of agreements with Smith &
Nephew plc (Smith & Nephew), a global
medical device company. Under the agreements, the Corporation
licenses to Smith & Nephew the exclusive right to
market, distribute and sell products with
SILCRYST
tm
coatings for use on non-minor skin wounds and burns in humans
world-wide. The Corporation also sold various assets to
Smith & Nephew, including the
Acticoat
tm
trade name and trademark, various regulatory approvals and
certain manufacturing equipment, that the Corporation then
leased back. The Corporation manufactures
Acticoat
tm
products and supplies them to Smith & Nephew and has
agreed to work with Smith & Nephew to develop new
Acticoat
tm
wound care products made with the Corporations
SILCRYST
tm
coatings. On September 30, 2007 the Corporation signed
amended agreements with Smith & Nephew and summary of
material changes to these agreements is included in Note 3.
The Corporations revenue comprises of wound care product
revenue, which includes manufacturing cost reimbursement on the
sale of product to Smith & Nephew and royalties on the
further sale of that product by Smith & Nephew to
third parties, as well as milestone revenue which are payments
earned upon the achievement of specified Smith &
Nephew sales thresholds or regulatory events. All of the
Corporations revenues since May 2001 have been derived
from sales of product to Smith & Nephew, royalties on
the further sale of that product and milestone payments from
Smith & Nephew.
The Corporation has developed NPI 32101 for use as an active
pharmaceutical ingredient. The Corporation ceased its
development of a pharmaceutical topical cream containing NPI
32101 for the treatment of dermatological conditions in November
2006, following the results of its second Phase 2 clinical
trial. As a statistically significant difference is required to
gain approval as a drug, the Corporation decided to cease the
drug development program for atopic dermatitis and submitted a
510(k) application to market NPI 32101 cream as a broad-spectrum
antimicrobial barrier. The 510(k) application was cleared by the
US Food and Drug Administration in July 2007 for this use.
|
|
2
|
SUMMARY
OF SIGNIFICANT ACCOUNTING PRINCIPLES
|
The Corporations consolidated financial statements are
prepared in accordance with accounting principles generally
accepted in the United States of America (GAAP).
These consolidated financial statements include the accounts of
the Corporation and its wholly owned subsidiary, NUCRYST
Pharmaceuticals Inc., which was incorporated in 1998 under the
laws of the state of Delaware. All intercompany balances and
transactions are eliminated upon consolidation.
The preparation of the consolidated financial statements in
conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and the reported amounts of revenue and expenses
during the year. Actual results could differ from those
estimates. Significant estimates include the useful lives of
capital assets and intangible assets, inventory valuation,
deferred tax asset valuation, uncertain tax positions, financial
instrument valuation and the fair value of stock-based
compensation.
|
|
|
|
c)
|
Translation of foreign currencies
|
The Corporations functional currency is the Canadian
dollar. The functional currency of the Corporations wholly
owned subsidiary, NUCRYST Pharmaceuticals Inc., is the United
States dollar (U.S. dollar). The balance sheet
accounts of the subsidiary are translated into Canadian dollars
at the period end exchange rate, while income, expense and cash
flows are translated at the average exchange rate for the
period. Translation gains or losses related to net assets of
such operations are shown as a component of accumulated other
comprehensive loss in shareholders equity. Gains and
losses resulting from foreign currency transactions, which are
transactions denominated in a currency other than the
entitys functional currency and account balances held in a
currency other than the entitys functional currency, are
included in the consolidated statements of operations.
The Corporation uses the U.S. dollar as its reporting currency
to be consistent with other companies in its industry peer
group. The Canadian functional currency consolidated financial
statements are translated to the U.S. dollar reporting currency
using the current rate method of translation.
|
|
|
|
d)
|
Accumulated other comprehensive (loss) income
|
Comprehensive (loss) income is comprised of net loss and other
comprehensive (loss) income.
58
Other comprehensive (loss) income consists of foreign currency
translation adjustments for the year, which 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 $5,528 and income of $557 for the year-end
December 31, 2008 and 2007, respectively, consists of
foreign currency translation adjustments.
Revenue from direct sales to third parties is recognized when
persuasive evidence of an arrangement exists, delivery has
occurred, the price to the buyer is fixed or determinable, and
collection is reasonably assured. The Corporations
revenues under its agreements with Smith & Nephew
consist primarily of product revenue, royalties and payments
upon the achievement of specific milestones. Product revenue and
royalties are reported as wound care product revenue in the
consolidated statements of operations as they relate directly to
the sale of the Corporations products to Smith &
Nephew. For products manufactured under agreements with
Smith & Nephew, revenue is recorded by the Corporation
at the date of shipment. Royalty revenue is earned based on a
percentage of Smith & Nephews sales to third
parties. Manufacturing cost rebate is recorded as a reduction to
wound care revenue evenly throughout the year. Revenue relating
to the achievement of milestones under agreements with
Smith & Nephew is recognized when the milestone event
has occurred and is recorded separately as milestone revenue.
The Corporation also derives fees from research activities under
agreements with Smith & Nephew and this revenue is
recognized as services are performed.
Wound care products currently sold by the Corporation carry a
limited short term product warranty. No provision for product
warranty claims was required for the years ended
December 31, 2008, 2007 and 2006 as the Corporations
claims experience has been negligible.
|
|
|
|
g)
|
Cash and cash equivalents
|
Cash and cash equivalents consist of cash on deposit and highly
liquid short-term investments with original maturities at the
date of acquisition of 90 days or less and are recorded at
cost.
The Corporation had $145 and $140 on deposit as collateral for
the lease of its Wakefield, Massachusetts facility as of
December 31, 2008 and 2007, respectively.
|
|
|
|
h)
|
Short-term investments
|
Short-term investments consist of money-market instruments with
original maturities of greater than 90 days but less than
one year and are classified as
held-to-maturity
financial assets.
Held-to-maturity
classification will be restricted to fixed maturity instruments
that the Corporation intends, and is able, to hold to maturity
and will be accounted for at amortized cost. On
December 31, 2008 and 2007 the Corporation did not hold any
short-term investments.
|
|
|
|
i)
|
Allowance for doubtful accounts
|
The Corporation evaluates the collectability of accounts
receivable and records an allowance for doubtful accounts, which
reduces the accounts receivable to the amount management
reasonably believes will be collected. A specific allowance is
recorded against customer receivables that are considered to be
impaired based on the Corporations knowledge of the
financial condition of its customers. In determining the amount
of the allowance, the Corporation considers factors, including
the length of time the receivables have been outstanding,
customer and industry concentrations, the current business
environment and historical experience.
Finished product, raw materials and materials in process are
valued at the lower of average cost and market. Inventories
include direct labour and an application of direct and indirect
overhead.
Capital assets are stated at cost. Internal labour costs
directly relating to capital projects are included in the cost
of the specific capital assets. Depreciation is calculated using
a straight-line method based on estimated useful lives of the
particular assets as follows:
|
|
|
|
|
Machinery and equipment
|
|
|
5 to 10 years
|
|
Computer hardware and software
|
|
|
2 to 5 years
|
|
Leasehold improvements
|
|
|
Term of lease 5 to 20 years
|
|
Leasehold improvements are depreciated using the straight-line
method over the lesser of the term of the lease or the estimated
useful life of the asset. The Corporation evaluates the carrying
value of capital assets whenever events or changes in
circumstances indicate that the carrying value may not be
recoverable, and recognizes an impairment charge when estimated
future non-discounted cash flows of the underlying assets are
less than the carrying value of the assets. Where there is an
impairment, the Corporation measures the charge based on the
fair value of the assets using various valuation techniques.
The Corporations definite life intangible assets consist
of the prosecution and application costs of patents and
trademarks and are amortized on a straight-line basis over their
estimated useful lives to a maximum of 10 years. The cost
of maintaining patents and trademarks are expensed as incurred.
The Corporation evaluates the carrying value of definite life
intangible assets whenever events or changes in circumstances
indicate that the carrying value may not be recoverable. Any
impairment in the carrying value which is based on the fair
value of the intangible assets is charged to expense in the
period that impairment has been determined.
Indefinite life intangible assets are recorded at fair value. On
a regular basis, the Corporation reviews the carrying value of
these assets for impairment. As at December 31, 2008 and
2007, the Corporation had no indefinite life intangible assets.
59
|
|
|
|
m)
|
Deferred lease inducement
|
Deferred lease inducement represents a lease inducement received
from the Parent and is amortized over the term of the lease
using the straight line method. During the second quarter of
2007, the Corporation received $822 from the Parent related to
its Fort Saskatchewan facility. Amortization of $106 and $71 was
recorded as a reduction of general and administrative expenses
for the years ended December 31, 2008 and 2007,
respectively.
|
|
|
|
n)
|
Research and development costs
|
The costs of materials, equipment, or facilities that are
acquired or constructed for a particular research and
development project and that have no alternative future uses (in
other research and development projects or otherwise) are
expensed as research and development costs at the time the costs
are incurred. Research and development expenditures, which
include the cost of materials consumed in research and
development activities, salaries, wages and other costs of
personnel engaged in research and development, costs of services
performed by others for research and development on behalf of
the Corporation, depreciation on equipment used for research and
development and indirect costs are expensed as research and
development costs when incurred.
The Corporation uses the asset and liability method of
accounting for income taxes. Deferred income taxes are
recognized for the tax consequences in future years of
differences between the tax bases of assets and liabilities and
their financial reporting amounts at each year end, based on
enacted tax laws and statutory tax rates applicable to the years
in which the differences are expected to reverse. Valuation
allowances are established when necessary to reduce deferred tax
assets to the amount that, in the opinion of management, is more
likely than not to be realized. The effect of changes in tax
rates is recognized in the year in which the rate change occurs.
Research and development investment tax credits are accounted
for as a reduction of income taxes in accordance with Accounting
Principle Board Opinion No. 4, Accounting for the
Investment Credit. On January 1, 2007 the Corporation
adopted FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes (FIN 48).
(Note 2s)
|
|
|
|
p)
|
Stock-based compensation plans
|
On January 1, 2006, the Corporation adopted
SFAS 123(R), Share-Based Payment (SFAS
123(R)) utilizing the modified prospective transition
method, that requires all share-based payments to directors and
employees, including grants of stock options, be recognized in
the financial statements based on their fair values.
SFAS 123(R) requires companies to estimate the fair value
of share-based payment awards on the date of grant using an
option-pricing model. The value of the portion of the award that
is ultimately expected to vest is recognized as expense over the
requisite service periods in the Corporations consolidated
statements of operations. Prior to the adoption of
SFAS 123(R), the Corporation accounted for stock-based
awards to employees and directors using the intrinsic value
method in accordance with Accounting Principles Board
(APB) Opinion No. 25, Accounting for
Stock Issued to Employees (APB No. 25),
as allowed under SFAS No. 123, Accounting for
Stock-Based Compensation (SFAS 123).
Under the intrinsic value method, no stock-based compensation
expense had been recognized in the Corporations
consolidated statements of operations because the exercise price
of the Corporations stock options granted to employees and
directors equaled the fair market value of the underlying stock
at the date of grant.
SFAS 123(R) requires that liability classified awards such
as stock appreciation rights (SARs) be revalued to
estimated fair value at each reporting date using an
option-pricing model. Prior to the adoption of SFAS 123(R),
the Corporation valued SARs at the amount by which the market
value exceeded the exercise price at each measurement date. As a
result of implementing SFAS 123(R) on January 1, 2006,
the Corporation increased its SAR liability from $90 to $97,
with the increase recorded as a cumulative effect of a change in
accounting principle in the consolidated statements of
operations.
The Corporation continues to use the Black-Scholes
option-pricing model for valuation of share-based payment awards
which was previously used for the Corporations pro forma
information required under SFAS 123. The Corporations
determination of fair value of share-based payment awards on the
date of grant using an option-pricing model is affected by the
Corporations stock price as well as assumptions regarding
a number of highly complex and subjective variables. These
variables include, but are not limited to, the
Corporations expected stock price volatility over the term
of the awards, and actual and projected employee stock option
exercise behaviors. Option-pricing models were developed for use
in estimating the value of traded options that have no vesting
or hedging restrictions and are fully transferable. Although the
fair value of employee stock options is determined in accordance
with SFAS 123(R) and Staff Accounting Bulletin 107,
Share-Based Payment (SAB 107) using
an option-pricing model, that value may not be indicative of the
fair value observed in a willing buyer/willing seller market
transaction.
Basic earnings per common share is calculated using the weighted
average number of common shares outstanding during the period.
Diluted earnings per share is calculated on the basis of the
average number of shares outstanding during the period plus the
additional common shares that would have been outstanding if
potentially dilutive common shares had been issued using the
treasury stock method.
|
|
|
|
r)
|
Employee future benefits
|
The Corporation maintains a 401(k) retirement plan and
registered retirement savings plan (Note 16). All employee
future benefits are accounted for on an accrual basis.
|
|
|
|
s)
|
Recently adopted accounting pronouncements
|
FIN 48
In June 2006, the FASB issued Accounting for Uncertainty
in Income Taxes (FIN 48), an
interpretation of FASB Statement No. 109, Accounting
for Income Taxes. FIN 48 prescribes a recognition
threshold and measurement attribute for the financial statement
recognition
60
and measurement of a tax position
taken or expected to be taken in a tax return. FIN 48
requires that the Corporation recognize the impact of a tax
position in the financial statements if that position is more
likely than not of being sustained on audit, based on the
technical merits of the position. FIN 48 also provides
guidance on derecognition, classification, interest and
penalties, accounting in interim periods and disclosure. The
provisions of FIN 48 were effective beginning
January 1, 2007. (Note 11)
SFAS 157
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements (SFAS 157).
SFAS 157 defines fair value, establishes a framework for
measuring fair value and expands disclosures regarding fair
value measurements. SFAS 157 does not require any new fair
value measurements but rather eliminates inconsistencies in
guidance found in various prior accounting pronouncements.
SFAS 157 is effective for fiscal years beginning after
November 15, 2007. The Corporation has evaluated the impact
of SFAS 157 and it does not have a material impact on its
consolidated financial statements.
SFAS 159
In February 2007, the FASB issued Statement No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities (SFAS 159). SFAS 159
allows entities the option to measure eligible financial
instruments at fair value as of specified dates. Such election,
which may be applied on an instrument by instrument basis, is
typically irrevocable once elected. SFAS 159 is effective
for fiscal years beginning after November 15, 2007, and
early application is allowed under certain circumstances. The
Corporation implemented SFAS 159 as of January 1, 2008
and it did not have a material impact on its consolidated
financial statements.
EITF
07-3
In June 2007, the EITF issued EITF Issue
No. 07-3,
Accounting for Non Refundable Advance Payments for Goods
or Services Received for Use in Future Research and Development
Activities (EITF
07-3).
EITF
07-3
requires that nonrefundable advance payments for goods or
services that will be used or rendered for future research and
development activities be deferred and capitalized and
recognized as an expense as the goods are delivered or the
related services are performed. EITF
07-3
is
effective for fiscal years beginning after December 15,
2007 and was adopted in the first quarter of 2008. EITF
07-3
did not
have a material impact on the Corporations financial
position or results of operations.
|
|
|
|
t)
|
Recently pending accounting pronouncements
|
SFAS 161
In March 2008, the FASB issued Statement No. 161,
Disclosures about Derivative Instruments and Hedging
Activities, an amendment of FASB Statement No. 133
(SFAS 161). SFAS 161 requires additional
disclosures about the objectives of using derivative
instruments, the method by which the derivative instruments and
related hedged items are accounted for under FASB Statement
No. 133 and its related interpretations, and the effect of
derivative instruments and related hedged items on financial
position, financial performance and cash flows. SFAS 161
also requires disclosure of the fair values of derivative
instruments and their gains and losses in a tabular format.
SFAS 161 is effective for fiscal years beginning after
November 15, 2008. While the Corporation is currently
assessing the impact of the adoption of SFAS 161, it does
not expect the adoption to have a material impact on its results
of operations or consolidated financial position.
EITF
07-1
In September 2007, the Emerging Issues Task Force
(EITF) reached a consensus on EITF Issue
No. 07-1
Collaborative Arrangements (EITF
07-1).
EITF
07-1
addresses the accounting for arrangements in which two companies
work together to achieve a commercial objective, without forming
a separate legal entity. The nature and purpose of a
companys collaborative arrangements are required to be
disclosed, along with the accounting policies applied and the
classification and amounts for significant financial activities
related to the arrangements. EITF
07-1
is
effective for fiscal years beginning after December 15,
2008. The Company is currently assessing the impact EITF
07-1
will
have on its results of operations and financial position.
FASB Business Combinations
The FASB recently completed the second phase of its business
combinations project, to date the most significant convergence
effort with the International Accounting Standards Board
(IASB), and issued the following two accounting
standards:
|
|
|
|
i.
|
Statement No. 141(R), Business Combination; and
|
|
|
ii.
|
Statement No. 160, Noncontrolling Interests in Consolidated
Financial Statements an amendment of ARB No. 51.
|
These statements change the way companies account for business
combinations and noncontrolling interests (minority interests in
current U.S. GAAP). Compared with their predecessors, Statements
141(R) and 160 will require:
|
|
|
|
|
More assets acquired and liabilities assumed to be measured at
fair value as of the acquisition date;
|
|
|
|
Liabilities related to contingent consideration to be remeasured
at fair value in each subsequent reporting period;
|
|
|
|
An acquirer in preacquisition periods to expense all acquisition
related costs; and
|
|
|
|
Noncontrolling interests in subsidiaries initially to be measure
at fair value and classified as a separate component of equity.
|
Statements 141(R) and 160 should both be applied prospectively
for fiscal years beginning on or after December 15, 2008.
However, Statement 160 requires entities to apply the
presentation and disclosure requirements retrospectively (e.g.,
by reclassifying noncontrolling interests to appear in equity)
to comparative financial statements if presented. Both standards
prohibit early adoption. The Company is currently assessing the
impact these new standards will have on its consolidated
financial statements.
61
|
|
3
|
AGREEMENTS
WITH SMITH & NEPHEW
|
On September 30, 2007, the Corporation and
Smith & Nephew signed amended agreements for the sale
to Smith & Nephew of
Acticoat
tm
wound care dressings manufactured by the Corporation. The new
agreements amended the criteria for the achievement of sales
milestones that resulted in a $5,000 sales milestone earned by
the Corporation in the third quarter of 2007. The cost to
manufacture
Acticoat
tm
products was previously fully reimbursed by Smith &
Nephew to the Corporation. The cost recovery structure has been
amended so that the parties will annually come to an agreement
on the amount of fixed overhead costs subject to reimbursement
and direct costs for manufacturing these products. The
Corporation will receive the amount of fixed overhead costs
amount regardless of the product supplied to Smith &
Nephew. Under the amended agreements, the Corporation must
provide Smith & Nephew with a manufacturing cost
rebate of $4,500 in the fourth quarter of the years 2007, 2008
and 2009. The manufacturing cost rebate is recorded as a
reduction in wound care product revenue evenly over the course
of the year. After 2009, the parties have agreed to renegotiate
the product pricing provisions of the agreement.
Milestone revenue was not earned for the year ended
December 31, 2008. For the year ended December 31,
2007, $10,000 was earned with a corresponding increase in cash
and cash equivalents of $5,000 and accounts receivable of $5,000
which was collected during the year.
As at December 31, 2008 and 2007, no allowance for doubtful
accounts was required.
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
Raw materials
|
|
$
|
2,226
|
|
|
$
|
2,793
|
|
Materials in process
|
|
|
316
|
|
|
|
1,394
|
|
Finished product
|
|
|
345
|
|
|
|
239
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,887
|
|
|
$
|
4,426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
December 31, 2008
|
|
Cost
|
|
|
Depreciation
|
|
|
Net Book Value
|
|
|
Machinery and equipment
|
|
$
|
11,394
|
|
|
$
|
3,565
|
|
|
$
|
7,829
|
|
Leasehold improvements
|
|
|
1,772
|
|
|
|
527
|
|
|
|
1,245
|
|
Computer hardware and software
|
|
|
569
|
|
|
|
564
|
|
|
|
5
|
|
Construction in progress
|
|
|
300
|
|
|
|
|
|
|
|
300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14,035
|
|
|
$
|
4,656
|
|
|
$
|
9,379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Machinery and equipment
|
|
$
|
9,044
|
|
|
$
|
2,875
|
|
|
$
|
6,169
|
|
Leasehold improvements
|
|
|
2,734
|
|
|
|
1,542
|
|
|
|
1,192
|
|
Computer hardware and software
|
|
|
880
|
|
|
|
632
|
|
|
|
248
|
|
Construction in progress
|
|
|
5,125
|
|
|
|
|
|
|
|
5,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
17,783
|
|
|
$
|
5,049
|
|
|
$
|
12,734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in capital assets is construction in progress which is
not currently subject to depreciation. Depreciation related to
capital assets was $1,641, $1,429 and $1,445 for the years ended
December 31, 2008, 2007 and 2006, respectively.
In the fourth quarter of 2008, the Corporations Wakefield,
Massachusetts facility was closed. As a result, the Corporation
recorded a write down of the obsolete equipment in an amount of
$227. For the year ended December 31, 2007, certain capital
assets previously used for the production of wound care
dressings and NPI 32101 powder were replaced by existing
production equipment that runs more efficiently and
economically. As a result, the Corporation recorded a write down
of the obsolete equipment in an amount of $1,173.
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
Patents
|
|
$
|
2,165
|
|
|
$
|
2,642
|
|
Less accumulated amortization
|
|
|
(1,640
|
)
|
|
|
(1,835
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
525
|
|
|
$
|
807
|
|
|
|
|
|
|
|
|
|
|
Amortization related to intangible assets was $184, $209, and
$211 for the years ended December 31, 2008, 2007 and 2006.
62
The following is the estimated annual amortization expense of
intangible assets commencing with 2009:
|
|
|
|
|
2009
|
|
$
|
137
|
|
2010
|
|
|
118
|
|
2011
|
|
|
89
|
|
2012
|
|
|
64
|
|
2013 and thereafter
|
|
|
117
|
|
|
|
|
|
|
Total
|
|
$
|
525
|
|
|
|
|
|
|
|
|
8
|
ACCOUNTS
PAYABLE AND ACCRUED LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
Compensation liabilities
|
|
$
|
897
|
|
|
$
|
1,737
|
|
Royalty liabilities
|
|
|
193
|
|
|
|
340
|
|
Professional services liabilities
|
|
|
670
|
|
|
|
179
|
|
Production liabilities
|
|
|
736
|
|
|
|
311
|
|
Capital project liabilities
|
|
|
7
|
|
|
|
458
|
|
Facility liabilities
|
|
|
231
|
|
|
|
236
|
|
Other trade payables and accrued liabilities
|
|
|
125
|
|
|
|
389
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,859
|
|
|
$
|
3,650
|
|
|
|
|
|
|
|
|
|
|
|
|
9
|
INDEBTEDNESS
TO RELATED PARTY
|
The Corporation was indebted to the Parent for a term loan with
a five-year maturity which bore interest at a rate of 10%. The
Corporation repaid $6,850 of the term loan with net proceeds
from the initial public offering. In accordance with the terms
of the prospectus of the initial public offering on
December 29, 2005, the remaining balance owing in the
amount of $39,642 was converted into 3,964,200 common shares of
the Corporation on January 27, 2006. For the year ended
December 31, 2006, interest paid on the term loan amounted
to $310.
The Corporations authorized share capital consists of an
unlimited number of voting common shares and preferred shares.
|
|
|
|
a)
|
Common shares issued and outstanding
|
Changes in the Corporations common shares outstanding
during 2008 and 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
Stated Capital
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Balance at beginning of year
|
|
|
18,367,563
|
|
|
|
18,309,613
|
|
|
$
|
82,776
|
|
|
$
|
82,672
|
|
Stock options exercised
|
|
|
|
|
|
|
4,540
|
|
|
|
|
|
|
|
12
|
|
Restricted shares
|
|
|
18,068
|
|
|
|
53,410
|
|
|
|
54
|
|
|
|
92
|
|
Repurchase of shares
|
|
|
(65,100
|
)
|
|
|
|
|
|
|
(54
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
|
18,320,531
|
|
|
|
18,367,563
|
|
|
$
|
82,776
|
|
|
$
|
82,776
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were not any stock options exercised during the year ended
December 31, 2008. During the year ended December 31,
2007, 4,540 options were exercised at a weighted average price
of $3.11. There were 18,068 and 53,410 restricted shares issued
with a fair value of $54 and $92 for the years ended
December 31, 2008 and 2007, respectively.
During the year, the Corporation repurchased 65,100 shares
through its normal course issuer bid at an average price of
$0.83 per share for an aggregate consideration of $54.
|
|
|
|
b)
|
Stock-based compensation plans
|
The Corporation maintains an equity incentive plan (the
Plan) for employees under which stock options, stock
appreciation rights and restricted share units
(RSUs) may be granted. In May 2008, the Corporation
amended the Plan to increase the maximum number of common shares
reserved for issuance under the Plan from 2,200,000 common
shares to an amount that is equal to 15% of the issued and
outstanding common shares of the Corporation. As of
December 31, 2008, 15% of the issued and outstanding shares
represent 2,748,080 shares and 1,123,882 of this amount are
available for grant under the Corporations equity-based
compensation plans. 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. In April 2008, the
Corporation granted 250,000 options to its Chief Executive
Officer that vest based on certain price targets for the
Corporations common stock being achieved. All stock
options expire ten years from the date of grant. RSUs generally
vest evenly over a period between two to three years. Awards
that expire or are forfeited generally become available for
issuance under the plan
Independent directors who were appointed to the
Corporations board of directors prior to May 2, 2006
were granted an initial award of 20,000 options. Effective
May 2, 2006, independent directors are granted an initial
award of 8,000 options upon appointment to the board. Each
independent director is entitled to a subsequent annual award of
2,000 options. Effective May 2, 2006, independent directors
are also granted 5,000 restricted share units upon appointment
to the board. These units vest immediately and are subject to
trading restrictions, with
63
1,000 restricted shares available
for sale on the first anniversary date and the remaining 4,000
restricted shares upon retirement from the board. Each
independent director is entitled to a subsequent annual grant of
3,000 restricted share units, 50% of which is subject to a
one-year vesting and the remaining 50% to a two-year vesting.
Employees are granted options in the quarter of their hire and
subsequently upon the approval by the board of directors.
Total stock-based compensation expense recognized under
SFAS 123(R) for the years ended December 31, 2008,
2007, and 2006 was $722, $1,121 and $464 and is included in
general and administrative expense.
A summary of the status of the Corporations stock option
plans as at December 31, 2008, 2007 and 2006 and changes
during the years ended on those dates is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
Number of Options
|
|
|
Exercise Price
|
|
|
|
December 31
|
|
|
December 31
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Balance at beginning of year
|
|
|
1,405,638
|
|
|
|
766,352
|
|
|
|
713,770
|
|
|
$
|
3.72
|
|
|
$
|
5.04
|
|
|
$
|
3.07
|
|
Granted
|
|
|
684,458
|
|
|
|
821,757
|
|
|
|
209,849
|
|
|
|
1.83
|
|
|
|
2.90
|
|
|
|
12.35
|
|
Exercised
|
|
|
|
|
|
|
(4,540
|
)
|
|
|
(105,303
|
)
|
|
|
|
|
|
|
2.51
|
|
|
|
2.52
|
|
Forfeited
|
|
|
(493,897
|
)
|
|
|
(177,931
|
)
|
|
|
(51,964
|
)
|
|
|
3.91
|
|
|
|
5.70
|
|
|
|
12.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
|
1,596,199
|
|
|
|
1,405,638
|
|
|
|
766,352
|
|
|
$
|
2.85
|
|
|
$
|
3.72
|
|
|
$
|
5.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average remaining contractual life of options
outstanding at December 31, 2008, 2007, and 2006 was 8.5,
7.5, and 6.4 years, respectively.
The following table summarizes information regarding stock
options outstanding as at December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
Average
|
|
|
Weighted-
|
|
|
|
|
|
Number
|
|
|
Weighted-
|
|
|
|
|
|
|
Outstanding at
|
|
|
Remaining
|
|
|
Average
|
|
|
Aggregate
|
|
|
Exercisable at
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
December 31,
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Intrinsic
|
|
|
December 31,
|
|
|
Exercise
|
|
|
Intrinsic
|
|
Range of Exercise Prices
|
|
2008
|
|
|
Life (Years)
|
|
|
Price
|
|
|
Value
|
|
|
2008
|
|
|
Price
|
|
|
Value
|
|
|
$0.62 to $0.93
|
|
|
29,486
|
|
|
|
9.98
|
|
|
$
|
0.81
|
|
|
$
|
3
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
$0.94 to $1.41
|
|
|
500,810
|
|
|
|
9.27
|
|
|
$
|
1.10
|
|
|
$
|
|
|
|
|
2,000
|
|
|
$
|
1.40
|
|
|
$
|
|
|
$1.42 to $2.13
|
|
|
237,269
|
|
|
|
8.92
|
|
|
$
|
1.99
|
|
|
$
|
|
|
|
|
25,756
|
|
|
$
|
1.97
|
|
|
$
|
|
|
$2.13 to $3.20
|
|
|
603,364
|
|
|
|
8.15
|
|
|
$
|
2.56
|
|
|
$
|
|
|
|
|
424,697
|
|
|
$
|
2.56
|
|
|
$
|
|
|
$3.21 to $4.81
|
|
|
122,662
|
|
|
|
7.42
|
|
|
$
|
4.03
|
|
|
$
|
|
|
|
|
77,275
|
|
|
$
|
4.01
|
|
|
$
|
|
|
$4.82 to $7.23
|
|
|
8,885
|
|
|
|
7.07
|
|
|
$
|
5.50
|
|
|
$
|
|
|
|
|
6,507
|
|
|
$
|
5.46
|
|
|
$
|
|
|
$7.24 to $15.50
|
|
|
93,723
|
|
|
|
7.11
|
|
|
$
|
11.18
|
|
|
$
|
|
|
|
|
82,482
|
|
|
$
|
10.89
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.62 to $15.50
|
|
|
1,596,199
|
|
|
|
8.53
|
|
|
$
|
2.85
|
|
|
$
|
3
|
|
|
|
618,717
|
|
|
$
|
3.85
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value in the preceding table represents
the total pre-tax intrinsic value based on the
Corporations closing stock price of $0.90 as of
December 31, 2008 which would have been received by the
stock option holders had all stock option holders exercised
their options as of that date. There were 29,486
in-the-money
options as of December 31, 2008, based on the closing
market value of the Corporations common shares at that
date.
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 for the years ended December 31, 2008,
2007, and 2006 was $1.03, $1.97, and $7.56, respectively. As of
December 31, 2008, total non-vested stock options amounted
to 977,481 with a weighted average grant date fair value of
$1.18. Total compensation cost related to non-vested stock
options not yet recognized was $802, which is expected to be
recognized over the next 36 months on a weighted-average
basis.
The expected volatility of stock options is currently based upon
the historical volatility of the Corporation. The dividend yield
reflects the Corporations intention not to pay cash
dividends in the foreseeable future. The life of options is
based on observed historical exercise patterns of the
Corporation. Groups of directors and employees that have similar
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31
|
|
Stock options
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Expected volatility
|
|
|
93
|
%
|
|
|
66
|
%
|
|
|
58
|
%
|
Dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected life
|
|
|
7 years
|
|
|
|
7 years
|
|
|
|
7 years
|
|
Risk free rate
|
|
|
4.05
|
%
|
|
|
4.63
|
%
|
|
|
3.89
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the year ended December 31, 2008, 12,000
(2007 49,700) RSUs were granted to certain directors
and executives. RSUs vest evenly over a period of between two to
three years. Unvested RSUs are subject to forfeiture upon
termination.
64
In addition, no fully vested RSUs were granted to new directors
or executives during the year and 48,910 RSUs were granted
during the year ended December 31, 2007.
A summary of the Corporations non-vested restricted share
units as of December 31, 2008 and 2007 and changes during
the years ended on those dates is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
Number of RSUs
|
|
|
Grant Date Fair Value
|
|
|
|
December 31
|
|
|
December 31
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Balance at beginning of year
|
|
|
39,200
|
|
|
|
9,000
|
|
|
$
|
3.02
|
|
|
$
|
3.85
|
|
Granted
|
|
|
12,000
|
|
|
|
49,700
|
|
|
|
1.00
|
|
|
|
3.27
|
|
Exercised
|
|
|
(18,068
|
)
|
|
|
(4,500
|
)
|
|
|
3.00
|
|
|
|
3.85
|
|
Forfeited
|
|
|
(5,133
|
)
|
|
|
(15,000
|
)
|
|
|
4.08
|
|
|
|
4.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
|
27,999
|
|
|
|
39,200
|
|
|
$
|
1.98
|
|
|
$
|
3.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a reconciliation of income taxes, calculated at
the statutory income tax rate, to the income tax provision
included in the consolidated statements of operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Loss before income taxes and cumulative effect of a change in
accounting principle
|
|
$
|
(2,960
|
)
|
|
$
|
(3,881
|
)
|
|
$
|
(10,533
|
)
|
Statutory income tax rate
|
|
|
29.50
|
%
|
|
|
32.12
|
%
|
|
|
32.12
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected income tax recovery
|
|
|
(873
|
)
|
|
|
(1,247
|
)
|
|
|
(3,383
|
)
|
Losses and temporary differences valuation allowance
|
|
|
884
|
|
|
|
1,387
|
|
|
|
3,347
|
|
Large corporations tax
|
|
|
|
|
|
|
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (recovery)
|
|
$
|
11
|
|
|
$
|
140
|
|
|
$
|
(41
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes are recognized for future income tax consequences
attributed to estimated differences between the financial
statement carrying values of existing assets and liabilities and
their respective income tax bases.
The net deferred income tax asset is comprised of:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
Deferred income tax assets:
|
|
|
|
|
|
|
|
|
Tax benefit of loss carry-forwards and tax credits
|
|
$
|
16,673
|
|
|
$
|
21,138
|
|
Less valuation allowance
|
|
|
(16,122
|
)
|
|
|
(20,896
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
551
|
|
|
|
242
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax liabilities:
|
|
|
|
|
|
|
|
|
Capital, intangible and other assets
|
|
|
(551
|
)
|
|
|
(242
|
)
|
|
|
|
|
|
|
|
|
|
Deferred income tax assets, net
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
The deferred income tax asset valuation allowance is in respect
of tax loss carry-forwards and tax credits.
The Corporation had net accumulated operating losses for income
tax purposes at December 31, 2008 of approximately $32,994
(2007 $35,047; 2006 $32,256) and
unclaimed scientific research and experimental development
expenditures of approximately $9,494 (2007 $8,612;
2006 $5,720) that can be used to offset taxable
income, if any, in future periods. At December 31, 2008,
the Corporation also had capital losses of approximately $1,721
(2007 $2,133; 2006 $1,809) as well as
research and development tax credits of approximately $4,367
(2007 $4,579; 2006 $3,368). The net
accumulated operating losses and research and development tax
credits will expire at various times to the end of 2028.
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. The
ultimate realization of deferred tax assets is dependent upon
the generation of future taxable income. Management considers
the scheduled reversal of deferred tax liabilities, projected
future taxable income and tax planning strategies in making this
assessment. At December 31, 2008, 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 the deferred
tax assets will be realized.
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. In December, 2007, the CRA
proposed certain transfer pricing adjustments with respect to
income allocations between the Corporation and its U.S.
subsidiary for the 2001 and 2002 taxation years. These proposed
adjustments, if processed, will not result in any cash tax
liability for the Corporation. In the third quarter of 2008, the
Corporation received a report from the CRA which provided
additional information with respect to the proposed adjustments.
The Corporation has been working with the CRA to resolve the
audit matters under review and has made a further submission of
information to the CRA in this regard. Resolution of the audit
matters under review may apply to taxation years beyond 2002.
65
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. The Corporation has
provided notification to the U.S. Internal Revenue Service of
its intention to seek competent authority assistance with
respect to the 2001 and 2002 taxation years.
The Corporation adopted the provisions of FIN 48 on
January 1, 2007. The implementation of FIN 48 did not
result in any adjustment to the Corporations beginning tax
positions. As at January 1, 2007 and December 31,
2007, the Corporation did not have any unrecognized tax benefits.
A reconciliation of the beginning and ending amount of
unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
(in thousands)
|
|
Balance at December 31, 2007
|
|
$
|
|
|
Additions for tax positions of prior years
|
|
|
3,023
|
|
Reductions for tax positions of prior years
|
|
|
(2,567
|
)
|
Additions for tax positions of current year
|
|
|
1,204
|
|
Reductions for tax positions of current year
|
|
|
(1,429
|
)
|
Settlements
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
$
|
231
|
|
|
|
|
|
|
Notwithstanding managements belief in the merit of the
Corporations tax filing positions and its intention to
rigorously defend its transfer pricing policies, it is
reasonably possible that the amount of unrecognized tax benefits
could significantly increase or decrease within the next twelve
months. These changes cannot be estimated at this time and may
result from the settlement of ongoing examinations or other
regulatory developments. Any increase or decrease in the
unrecognized tax benefits will not likely have a significant
impact on the Corporations effective tax rate due to the
existence of the valuation allowance. Future changes in
managements assessment of the sustainability of tax filing
positions may impact the Corporations income tax liability.
The Corporation recognizes any interest accrued related to
unrecognized tax benefits in interest expense and penalties in
operating expenses. During the years ended December 31,
2008, 2007 and 2006, there was no such interest or penalty.
|
|
12
|
RELATED
PARTY TRANSACTIONS
|
The Corporation engaged in the following related party
transactions with the Parent that have not been disclosed
elsewhere in these consolidated financial statements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Building rent, including operating costs
|
|
$
|
|
|
|
$
|
593
|
|
|
$
|
1,606
|
|
Services
|
|
|
347
|
|
|
|
530
|
|
|
|
1,033
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
347
|
|
|
$
|
1,123
|
|
|
$
|
2,639
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Corporation leased its Fort Saskatchewan, Alberta
facility from the Parent until May 8, 2007 when the Parent
sold the buildings and assigned the leases to the purchaser. The
Corporation was charged building rent at a rate which, in
managements view, approximates current market rates, plus
actual operating costs. Corporate and administrative services
are provided by the Parent on a fully-allocated cost recovery
basis.
Accounts payable and accrued liabilities to the Parent were $Nil
at December 31, 2008. At December 31, 2007, $67 was
owed by the Corporation to the Parent for services rendered by
the Parent and invoices paid by the Parent on behalf of the
Corporation.
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
indemnifications that are often standard contractual terms to
counterparties in transactions such as purchase and sale
agreements, service agreements, director/officer contracts and
leasing transactions. These indemnification agreements may
require the Corporation to compensate the counterparties for
costs incurred as a result of various events, such as litigation
claims or statutory sanctions that may be suffered by the
counterparty as a consequence of the transaction. The terms of
these indemnification agreements will vary based upon the
agreement, the nature of 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 indemnifications and no amounts have been accrued in the
consolidated financial statements with respect to these
indemnification guarantees.
The Corporation is committed to capital expenditures of $33 and
$42 as of December 31, 2008 and 2007, respectively. In
addition, the Corporation will make future annual payments under
operating leases for office and facility space, equipment leases
and amounts owed to Smith & Nephew under the supply
agreement for a manufacturing cost rebate are as follows:
|
|
|
|
|
|
|
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
|
2013
|
|
$5,454
|
|
$737
|
|
$737
|
|
$739
|
|
$741
|
66
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.
Foreign
currency risk
The Corporation is exposed to currency risks as a result of its
export to foreign jurisdictions of goods produced in Canada.
These risks are partially covered by purchases of goods and
services in the foreign currency.
Concentration
of credit risk
The Corporations financial instruments that are exposed to
concentrations of credit risk consist primarily of accounts
receivables. This risk is limited due to the contractual
relationship with Smith & Nephew.
The Corporation has a 401(k) retirement plan (the
Plan) for the benefit of permanent United States
employees. These employees may elect to contribute to the Plan
through payroll deductions of up to $16 of their annual
compensation, subject to statutory limitations. The Corporation
may declare discretionary matching contributions of up to 50% of
employees contributions up to a maximum of 3% of employee
earnings. The Corporations matching contributions for the
years ended December 31, 2008, 2007 and 2006 were $12, $37
and $58, respectively.
The Corporation also participated in a registered retirement
savings plan for its Canadian employees that was effective
January 1, 2008. Prior to this, the Corporation
participated in a defined contribution pension plan that was
administered by the Parent. In 2008, the Corporation contributed
4% of employee earnings and matched contributions made by
employees up to a maximum of 2% of employee earnings. The
Corporations contributions to this plan for the years
ended December 31, 2008, 2007 and 2006 were $436, $261, and
$274, respectively.
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 reconciliation of the denominator in calculating diluted
loss per share is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Weighted average number of common shares outstanding
basic
|
|
|
18,365,053
|
|
|
|
18,333,810
|
|
|
|
17,964,332
|
|
Effect of dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
diluted
|
|
|
18,365,053
|
|
|
|
18,333,810
|
|
|
|
17,964,332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The impact of all dilutive securities on loss per share is
anti-dilutive for the years ended December 31, 2008, 2007
and 2006, including all outstanding options and RSUs.
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
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
Canada
|
|
$
|
29,436
|
|
|
$
|
37,251
|
|
United States
|
|
|
12,364
|
|
|
|
14,048
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
41,800
|
|
|
$
|
51,299
|
|
|
|
|
|
|
|
|
|
|
67
|
|
|
|
b)
|
Capital assets and intangible assets by geographic
segment
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
Canada
|
|
$
|
9,871
|
|
|
$
|
12,800
|
|
United States
|
|
|
33
|
|
|
|
741
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,904
|
|
|
$
|
13,541
|
|
|
|
|
|
|
|
|
|
|
All of the Corporations revenues in 2008, 2007 and 2006
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.
On January 21, 2009, the Corporation mailed to its
shareholders an information circular and proxy materials for the
Special Meeting of the Corporations shareholders held on
February 12, 2009. The shareholders voted and passed the
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 the shareholders of the Corporation as of
the record date, February 17, 2009. The Corporation will
distribute $14,656 to shareholders on February 25, 2009.
In January 2009, Mr. Gardner resigned as Chairman of the
Board, President and Chief Executive Officer of the Company and
Mr. Holtz was appointed interim President and Chief
Executive Officer in addition to his Chief Financial Officer
responsibilities. Mr. Carragher was appointed Chairman of
the board of directors.
68
|
|
ITEM 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
|
None.
ITEM 9A. CONTROLS
AND PROCEDURES
Evaluation
of disclosure controls and procedures.
We maintain disclosure controls and procedures (as
such term is defined in
Rule 13a-15(e)
under the Securities Exchange Act of 1934) that are
designed to ensure that information required to be disclosed in
our reports filed or submitted under the Securities Exchange Act
of 1934 is recorded, processed, summarized and reported within
time periods specified in the Securities and Exchange
Commissions rules and forms, and that such information is
accumulated and communicated to our management, including our
Chief Executive Officer and our Chief Financial Officer, as
appropriate, to allow for timely decisions regarding required
disclosure.
In designing and evaluating our disclosure controls and
procedures, our management recognized that any controls and
procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired
control objectives. In addition, the design of disclosure
controls and procedures must reflect the fact that there are
resource constraints and that management is required to apply
its judgment in evaluating the benefits of possible controls and
procedures relative to their costs.
Our management, with the participation of our interim Chief
Executive Officer and Chief Financial Officer, has carried out
an evaluation of the effectiveness of the design and operation
of our disclosure controls and procedures as of
December 31, 2008. Based on this evaluation our management
concluded that, as of December 31, 2008, our disclosure
controls and procedures were effective.
Managements
annual report on internal control over financial
reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting. Internal
control over financial reporting is defined in
Rules 13a-15(f) or 15d-15(f) promulgated under the Exchange
Act as a process designed by, or under the supervision of, our
principal executive and principal financial officer and effected
by our Board of Directors, management and other personnel, to
provide reasonable assurance regarding the reliability of
financial reporting and the preparation of our financial
statements for external purposes in accordance with generally
accepted accounting principles and includes those policies and
procedures that:
|
|
|
|
|
Pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions
of the assets of the issuer;
|
|
|
|
Provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and
that receipts and expenditures of the issuer are being made only
in accordance with authorizations of management and directors of
the issuer; and
|
|
|
|
Provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the
issuers assets that could have a material effect on the
financial statements.
|
Our management, with the participation of our interim Chief
Executive Officer and Chief Financial Officer, assessed the
effectiveness of the Companys internal control over
financial reporting as of December 31, 2008. In making this
assessment, our management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission
in
Internal Control-Integrated Framework
. Based on that
assessment under such criteria, our management concluded that
the Companys internal control over financial reporting was
effective as of December 31, 2008.
Attestation
report of the registered public accounting firm
Under current SEC rules, the Company is not required to file an
auditors attestation report on our managements
assessment of the Companys internal control over financial
reporting until we file our annual report on
Form 10-K
for the fiscal year ended December 31, 2009. Accordingly,
this annual report on
Form 10-K
for the fiscal year ended December 31, 2008 does not
include an auditors attestation report on our
managements assessment of the Companys internal
control over financial reporting set forth above, and our
auditor, Deloitte & Touche LLP, has not attested to
such report.
69
Changes
in internal control over financial reporting
There has been no change in our internal control over financial
reporting during the fiscal quarter ended December 31, 2008
that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
ITEM 9B.
OTHER MATTERS
None.
PART III
ITEM 10.
DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
The following table sets forth certain information, as of
February 13, 2009, regarding our executive officers and
directors:
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
David B. Holtz
|
|
|
42
|
|
|
Interim President and Chief Executive Officer,
Chief Financial Officer
|
Carol L. Amelio
|
|
|
47
|
|
|
Vice President, General Counsel and Corporate Secretary
|
David C. McDowell
|
|
|
53
|
|
|
Vice President, Operations
|
Barry M. Heck
|
|
|
47
|
|
|
Director
|
Neil
Carragher
(1)(2)(3)
|
|
|
70
|
|
|
Director and Chairman of the Board
|
Roger G.H. Downer,
Ph.D.
(2)(3)
|
|
|
66
|
|
|
Director
|
David Poorvin,
Ph.D.
(1)(2)(3)
|
|
|
62
|
|
|
Director
|
Richard W.
Zahn
(1)(3)
|
|
|
57
|
|
|
Director
|
G.A. (Drew) Fitch
|
|
|
56
|
|
|
Director
|
|
|
(1)
|
Member of our Audit Committee.
|
|
(2)
|
Member of our Human Resources and Compensation Committee.
|
|
(3)
|
Member of our Corporate Governance and Nominating Committee.
|
David B. Holtz
was appointed as Interim President and
Chief Executive Officer on January 19, 2009. Mr. Holtz
was appointed as Chief Financial Officer on May 8, 2008.
Before joining NUCRYST, Mr. Holtz served as financial
management consultant for various
start-up
companies, including Virium Pharmaceuticals, Inc. Previously he
worked in various managerial roles of increasing importance at
Integra LifeSciences Holdings Corporation from October 1993
through December 2006, most recently as Senior Vice President
Finance. While at Integra, Mr. Holtz oversaw Integras
European operations to support the transition of acquisitions in
Europe and managed all worldwide financial reporting and
accounting functions. Prior to Integra, he worked for
Coopers & Lybrand LLP and Cono Leasing Corporation.
Mr. Holtz received a B.S. in Business Administration with
an emphasis on finance from Susquehanna University and is a
Certified Public Accountant. Mr. Holtz resides in
Allentown, New Jersey.
Carol L. Amelio
has been our Vice President, General
Counsel and Corporate Secretary since February 2006. From May
2001 to January 2006, she served as legal counsel for Westaim,
our parent company. From 1992 to 2001, she held senior legal and
management positions with TELUS Communications, a
telecommunications company. Ms. Amelio holds a B.Comm. and
LL.B. from the University of Alberta and was admitted to the bar
of the Province of Alberta in 1987. Ms Amelio resides in
Edmonton, Alberta.
David C. McDowell
has been our Vice President, Operations
since July 2005. From January 2003 to July 2005, he was General
Manager Sterile Manufacturing and Head of Lens Care Products
Global Supply of Novartis CIBA Vision where he was
responsible for global manufacturing and supply of lens care and
ophthalmic products. From June 1984 to January 2003, he held
senior positions with GlaxoSmithKline and Sterling Winthrop.
Mr. McDowell has a B.A.Sc. in Industrial Engineering from
the University of Toronto. Mr. McDowell resides in
Edmonton, Alberta.
Barry M. Heck
has served as a director since December
1997. Mr. Heck was the President, Chief Executive Officer
and a director of Westaim, our parent company, from January 2003
to May 2007. From January 1997 to January 2003, Mr. Heck
served as a Senior Vice President of Westaim. Mr. Heck is
President and Principle Partner of El Merchant Capital, a
private merchant capital, finance and M&A firm.
Mr. Heck holds an LL.B. from the University of Alberta.
Mr. Heck resides in Calgary, Alberta.
70
Neil Carragher
has served as a director since December,
2005. Mr. Carragher was appointed as Chairman of the Board
on January 19, 2009. Mr. Carragher has been the
Chairman of The Corporate Partnership Ltd., a management
consulting group, for more than five years. Mr. Carragher
is a director of Westaim, our parent company, and Agrium Inc.
Mr. Carragher holds a B.Sc. from the University of Glasgow
and a M.Sc. from the University of London. Mr. Carragher
resides in Toronto, Ontario.
Roger G.H. Downer, Ph.D
has served as a director since
December 2005. Dr. Downer has been the President and
Vice-Chancellor of the University of Limerick, Ireland since
1998 until his retirement in 2006 when he became President
Emeritus. From 1996 to 1998 Dr. Downer was President of the
Asian Institute of Technology. Dr. Downer is a director of
Westaim, our parent company. Dr. Downer holds a B.Sc. and
M.Sc. from Queens University Belfast and a Ph.D from the
University of Western Ontario. Dr. Downer resides in
Killaloe, Ireland.
David Poorvin, Ph.D
has served as a director since May
2006. Dr. Poorvin has been a consultant for Poorvin
Enterprises, a health care consulting company and has served as
Executive-in-Residence
for Oxford Biosciences Partners a venture capital firm since May
2004. Dr. Poorvin is a director of Enanta Pharmaceuticals
and Repros Therapeutics Inc. From 1981 to 2003, Dr. Poorvin
held numerous senior management positions with Schering-Plough
Corporation, a global research-based company engaged in the
discovery, development, manufacturing and marketing of
pharmaceutical, biotechnology and health care products,
including Vice President of Business Development Operations from
1993 until 2003, and Director of Cardiovascular Clinical
Research from 1986 to 1989. Dr. Poorvin holds a B.A. from
Hunter College of the City University of New York, and a Ph.D
from Rutgers University. Dr. Poorvin resides in Oakhurst,
New Jersey.
Richard W. Zahn
has served as a director since December
2005. From 1992 to 2003, Mr. Zahn held numerous senior
management positions within the Schering Plough Corporation, a
global research-based company engaged in the discovery,
development, manufacturing and marketing of pharmaceutical
biotechnology products and health care products, including
President of Schering Laboratories from 1996 until July 2003,
and Corporate Vice President of Schering-Plough Corporation,
from 2001 to December 2003. Schering Laboratories is the U.S.
prescription marketing arm for Schering Plough. Mr. Zahn is
a director of Norwood Abbey, Ltd. Mr. Zahn holds a B.S. in
Business Administration from Kansas State Teachers College.
Mr. Zahn resides in Long Beach Island, New Jersey.
G.A. (Drew) Fitch
was appointed as a director on
January 16, 2009. Mr. Fitch is the President, Chief
Executive Officer and Chief Financial Officer of Westaim, our
parent company. Prior to his appointment as President and Chief
Executive Officer on May 23, 2007, Mr. Fitch was
Senior Vice President and Chief Financial Officer of Westaim,
our parent company. Mr. Fitch resides in Calgary, Alberta.
There are no family relationships between any of our executive
officers or directors. The business address of each of our
executive officers and directors is 101 College Road East,
Princeton, New Jersey 08540.
Code of
Ethics
Our board of directors has adopted a Code of Conduct and Ethics
for Directors, Officers and Employees (the Code of
Conduct). The original Code of Conduct was filed on and is
accessible through SEDAR at
www.sedar.com
and EDGAR at
www.sec.gov.
A copy of the most recent version of our
Code of Conduct is available on our website at
www.nucryst.com
and may also be obtained by any person
without charge, upon written request delivered to NUCRYST at
10102 114th Street, Fort Saskatchewan, AB T8L
3W4, Attention: Vice President, General Counsel and Corporate
Secretary.
Composition
of our Board of Directors
Our board of directors currently consists of six directors. Our
board of directors may consist of seven directors, but one seat
is currently vacant. Our directors are elected at each annual
general meeting of our shareholders and serve until their
successors are elected or appointed, unless their office is
earlier vacated. Our articles currently provide that the number
of directors may be between three and 15; provided that, between
annual general meetings of our shareholders, the directors may
appoint one or more additional directors, but the number of
additional directors may not at any time exceed one-third of the
number of directors who held office at the expiration of the
last meeting of our shareholders. Under the Business
Corporations Act (Alberta), at least 25% of our directors must
be resident Canadians.
71
Director
Independence
Our board has determined that Messrs. Carragher and Zahn,
Dr. Poorvin and Dr. Downer are independent members of
our board of directors under the current requirements of the
NASDAQ, the TSX and the rules and regulations of the SEC and
Canadian provincial securities regulatory authorities.
Audit
Committee and Financial Expert
The members of our Audit Committee are Neil Carragher, Richard
W. Zahn, and David W. Poorvin each of whom is a non-employee
member of our board of directors. Mr. Carragher chairs the
committee. Our board has determined that Neil Carragher is an
Audit Committee financial expert (as defined under SEC rules
implementing Section 407 of the Sarbanes-Oxley Act of
2002). In addition, our board has determined that each member of
our Audit Committee is financially literate and at least one
member of our Audit Committee meets the financial sophistication
requirements of the NASDAQ. Our board of directors has
determined that Messrs. Carragher and Zahn and
Dr. Poorvin are independent members of our board of
directors based on the director independence criteria adopted by
our board and based on the current requirements of the NASDAQ,
the TSX and the rules and regulations of the SEC and Canadian
provincial securities regulatory authorities. A copy of our
Audit Committees charter is available on our website at
www.nucryst.com
.
Nomination
of Directors
Our board of directors has determined not to adopt policies and
procedures by which shareholders may recommend nominees to our
board of directors other than those that currently exist at law.
Pursuant to the Business Corporations Act (Alberta), a
registered shareholder entitled to vote at our annual meeting of
shareholders, or a beneficial owner of shares, may, subject to
the provisions of that Act, submit a proposal for nominations
for the election of directors for consideration at our annual
meeting if the proposal is signed by one or more registered
holders of shares representing in the aggregate not less than 5%
of our issued common shares that have the right to vote at the
meeting to which the proposal is to be presented, or by
beneficial owners of shares representing in the aggregate the
same percentage. To be eligible to make a proposal, a person
must: (i) be a registered shareholder or beneficial owner
of the prescribed number of shares or have the prescribed level
of support of other shareholders or beneficial owners of shares;
(ii) provide NUCRYST with his or her name and address and
the names and addresses of those registered holders or
beneficial owners of shares who support the proposal;
(iii) and continue to hold or own the prescribed number of
shares up to and including the day of the meeting at which the
proposal is made. The proposal must be in writing and received
by our offices at 10102 114th Street, Fort Saskatchewan, AB
T8L 3W4, Attention: Vice President, General Counsel and
Corporate Secretary by February 8, 2009. However, nothing
in the provisions of the Act relating to shareholder proposals
precludes nominations for the election of directors made at a
meeting of shareholders by registered shareholders or
proxyholders (provided the proxy stipulates the proxy holder has
such authority).
Section 16(a)
Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities and Exchange Act of 1934,
requires a registrants directors and executive officers,
and persons who beneficially own more than 10% of a registered
class of a registrants securities, to file with the SEC
initial reports of changes in ownership of common shares and
other equity securities of the registrant. As we are a
foreign private issuer pursuant to
Rule 3a12-3
of the Securities Exchange Act of 1934, persons referred to
above are exempt from the reporting and liability provisions of
Section 16(a). However, under Canadian provincial
securities laws, the persons referred to above are required to
file reports in electronic format through the System for
Electronic Disclosure by Insiders, or SEDI, disclosing changes
in beneficial ownership of or control or direction over, our
common shares and other securities. Our shareholders can access
such reports at
www.sedi.ca
.
Scientific
Advisory Board
We have temporarily disbanded our scientific advisory board as
we re-evaluate the optimal composition of the board to assist us
with our research and development plans. In the meantime, we
have retained certain members of the board on an individual
basis to continue providing us with advice and guidance.
72
ITEM 11.
EXECUTIVE COMPENSATION
Compensation
Disclosure
For 2008, we are providing compensation disclosure that complies
with the requirements of the Canadian Securities Administrators,
together with certain additional disclosure, without
compromising required Canadian disclosure. As a foreign private
issuer (as defined under the applicable SEC rules), we are
permitted by Item 402(a)(i) of SEC
Regulation S-K
to respond to this Item 11 by providing the information
required by Items 6.B. and 6.E.2 of
Form 20-F.
This compensation disclosure describes the material elements of
compensation awarded to, earned by, or paid to each of our
executive officers who were named executive officers
(determined in accordance with National Instrument
51-102)
during the last completed fiscal year. This compensation
discussion focuses on the information contained in the following
tables and related footnotes and narrative for the last
completed fiscal year.
STATEMENT
OF EXECUTIVE COMPENSATION
The following sets forth the information concerning the annual
and long term compensation awarded to, or earned by, our
President and Chief Executive Officer, our Chief Financial
Officer, and our next three most highly compensated executive
officers who were employed by us as of December 31, 2008
and whose total compensation exceeded CDN$150,000 during 2008.
We refer to these individuals elsewhere in this annual report as
our named executive officers or named
executives and we refer to our President and Chief
Executive Officer as our CEO.
Compensation
Discussion and Analysis
Overview
This compensation discussion describes the material elements of
compensation awarded to, earned by, or paid to each of our
executive officers who were named executives during the last
completed fiscal year. This compensation discussion focuses on
the information contained in the following tables and related
footnotes and narrative for primarily the last completed fiscal
year, but we also describe compensation actions taken before or
after the last completed fiscal year to the extent it enhances
the understanding of our executive compensation disclosure.
Oversight
of Executive Compensation Program
The Human Resources and Compensation Committee of our board of
directors, which we refer to as the Compensation Committee in
this compensation discussion, oversees our executive
compensation program for our CEO and our other named executives.
Prior to December 2008, our Compensation Committee was
responsible for reviewing and approving named executive
compensation, including base salary, bonuses and stock-based
compensation for recommendation to our board of directors for
approval. In December 2008, our board delegated to the
Compensation Committee the responsibility for reviewing and
finally approving named executive compensation. Our Compensation
Committee also reviews and recommends to our board the specific
performance targets for use in our annual non-equity incentive
program.
Executive
Compensation Objectives and Philosophy
The key objectives of our executive compensation program are:
|
|
|
|
|
to attract, retain and reward highly qualified executives that
demonstrate the ability to achieve business success; and
|
|
|
|
to motivate those individuals to create and enhance long-term
shareholder value and to achieve corporate objectives.
|
To that end, our executive compensation program is designed to
reward performance and the creation or enhancement of
shareholder wealth by providing to our named executives
short-term cash incentives that reward the meeting or exceeding
of challenging annual corporate goals. The cash incentives are
reduced or eliminated if the goals are not achieved. In this
manner, executive compensation is linked to the achievement of
corporate objectives. Stock-based compensation is used in our
program as a mechanism for rewarding long-term performance,
aligning our executives interests with those of our
shareholders, and retaining skilled executives.
Role of
Committee and Executive Officers in Compensation
Decisions
When establishing base salaries and equity grants for each named
executive, our Compensation Committee considers the
recommendations of our CEO (for compensation other than his
own). While our Compensation Committee
73
gives significant consideration to the recommendations of our
CEO, it may accept or adjust such recommendations based on its
own judgment. Our Compensation Committee also considers each
named executives current salary and the appropriate
balance between incentives for long-term and short-term
performance. There is no pre-established policy or target for
the allocation between cash and non-cash, and short-term and
long-term, incentive compensation. Rather, our Compensation
Committee relies upon its own judgment and not on
rigid formulas in determining the amount and mix of
compensation elements and whether each particular payment or
award provides an appropriate incentive and reward for
performance. Our committees philosophy is that the
allocation should remain flexible to recognize the shifting
trends in the marketplace and variations by executive role. Key
factors affecting our committees judgment in determining a
named executives compensation package as a whole and each
element individually include:
|
|
|
|
|
the named executives performance;
|
|
|
|
the nature, scope and level of the named executives
responsibilities;
|
|
|
|
level of experience of the named executive in his or her
respective field; and
|
|
|
|
the prevailing market rates for individuals performing similar
functions at comparable companies.
|
Compensation
Consultant
Since 2006, our Compensation Committee has engaged the services
of an independent compensation consultant, ORC Worldwide
(ORC), to provide research, analysis and
recommendations to our committee regarding reviews of named
executives and outside directors compensation. ORC
has not provided any other services to us and has received no
compensation other than with respect to the services provided to
our Compensation Committee.
ORC has provided guidance to our Compensation Committee to
assist in determining:
|
|
|
|
|
competitive base salaries, short term cash incentive and
long-term incentives in the form of equity awards for the named
executives and other officer positions;
|
|
|
|
short-term and long-term incentive plan design; and
|
|
|
|
trends and issues in executive compensation.
|
In 2006, with the assistance of ORC, our Compensation Committee
completed a review of our executives and directors compensation.
With respect to our executives compensation, ORC provided our
Compensation Committee with comparative market data on executive
base salary and total cash compensation practices based on an
analysis of three executive compensation surveys conducted by
national organizations and a sample of data from filed proxies
of companies in our and related industries and within a revenue
range of $0 to $150 million. In completing its analysis,
ORCs approach was to use multiple sources of executive
compensation data in order to avoid reliance on a single source
of information. In developing its recommendations, ORC focused
on data sources appropriate in light of our relative size, the
nature of our business and the particular job functions of each
named executive.
In support of the review of directors compensation, ORC
recommended to our Compensation Committee revisions to the
structure of meeting fees and retainers paid to our
non-management directors as well as to other equity and
non-equity compensation awarded to non-management directors. ORC
also recommended the establishment of minimum equity ownership
levels for non-management directors.
Our Compensation Committee received ORCs recommendations
regarding directors compensation in May 2006 and those regarding
executive compensation in December 2006. Our committee took
these recommendations into consideration when it revised our
directors compensation in 2006 and when it set executive
compensation for 2007.
Our Compensation Committee retained ORC in 2007 to prepare a
report of confidential market data and compensation
recommendations to assist our Compensation Committee in
determining the components of a competitive compensation package
in connection with the appointment of our former CEO to the
combined position of President and Chief Executive Officer and
Chairman of the board. During 2008, ORC provided guidance to the
Compensation Committee in determining the terms of a
supplemental grant of options to our former CEO. ORC was
retained again by our Compensation Committee in January 2009 to
assist in determining a competitive compensation package for our
interim President and Chief Executive Officer, including a
retention package.
Elements
of Our Compensation Program
For the fiscal year ended December 31, 2008, the principal
components of our compensation for named executives were base
salary, a cash incentive bonus under our Employee Variable Pay
Incentive Program (which we refer to as our
74
variable pay program), stock options under our 1998 Equity
Incentive Plan (which we refer to as our Equity Plan), and other
benefits.
The elements of our compensation program are described as
follows:
Base Salary.
We provide named executives and
other employees with base salary to compensate them for services
rendered during the fiscal year. Base salary levels are
typically reviewed annually as part of our performance review
process, as well as upon a promotion or other change in job
responsibility. Increases to base salaries of our named
executives for cost of living increases and other changes are
based on our Compensation Committees assessment of the
individuals performance, the individuals position
within the salary range, and the recommendation of our CEO (for
compensation other than his own). In determining base salary,
our Compensation Committee also considers other factors such as
skill set, prior experience, the named executives time in
his/her position, internal consistency regarding pay levels for
similar positions or skill levels, external pressures to attract
and retain key talent, and market conditions generally. Our
Compensation Committee also reviews the performance of our CEO
and establishes his/her base salary. We intend to periodically
review executive compensation base salary using comparative
North American industry data provided by our independent
professional compensation consultant. Such a review was
undertaken by our Compensation Committee in 2006, when it
conducted an independent review of our named executives
compensation with the assistance of ORC. The results of the
independent review were received by our Compensation Committee
in December 2006 and were used by our Compensation Committee in
determining named executive compensation for 2007.
For fiscal 2008, our CEO made recommendations to our
Compensation Committee with respect to the proposed salaries for
each of our named executives (other than himself). In
determining whether adjustments should be made to the base
salaries of any of our named executives, our Compensation
Committee considered our CEOs recommendations in
conjunction with its overall review of the factors discussed
above. Through this analysis, and with particular attention
given to the competitive market place for compensation and the
demand for executive talent, our Compensation Committee
determined that increases to the base salaries of
Ms. Amelio (of eight percent) and Mr. McDowell (of
four percent) were appropriate, effective January 1, 2008.
Performance-Based Incentive
Compensation.
While we view competitive base pay
as a critical component of total compensation, an equally
important component is linking compensation to company
performance. This is accomplished through our variable pay
program. The variable pay program is an annual cash incentive
program that provides all of our employees, including named
executives, the opportunity to earn cash incentive bonuses based
on the achievement of specific company or business unit
performance goals. The bonuses paid to named executives for 2008
appear in the Summary Compensation Table under the column
heading Non-Equity Incentive Annual Plan
Compensation. In the first quarter of each year, following
approval of the business plan for the year by our board of
directors, senior management develops specific financial and
non-financial performance metrics for all levels in our
organization (including named executives) that are designed to
motivate the achievement of the objectives set out in business
plan. Each performance target has a weight within the plan, and
the sum of the weights is 100%. For fiscal 2008, we set the
following five corporate performance targets and weightings for
named executives:
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40% Earnings Target
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25% New Product Development Target
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15% Business Development Target
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10% Intellectual Property Target
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10% Investor Relations Target
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With respect to each corporate performance target there are
three performance levels:
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Threshold:
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the minimum level of performance required to receive a payout
and for which there is at least a 50% chance of achieving the
target
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Target:
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the expected level of performance and for which there is a good
probability of achieving the target
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Stretch:
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performance beyond Target and for which there is a low
probability of achieving the target
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On the basis of its compensation consultants
recommendations, our Compensation Committee sets variable payout
ranges for our named executives. For all named executives, other
than our CEO, the pay out ranges as a percentage of base salary
are 20% at Threshold performance, 40% at Target performance and
70% at Stretch performance. Our CEOs payout range is 25%,
50% and 100%.
75
We achieved earnings in 2008 that were slightly above our
earnings target translating into performance of 112% of target
for this measure which was weighted at 40%. We did not achieve
threshold performance in respect of the targets related to new
product development processes, intellectual property or investor
relations and, therefore, named executives received no payout in
respect of these targets. We achieved 75% of target in respect
of the business development target, which was weighted at 15%.
Although specific goals are established annually for each of the
three levels in respect of each performance target, actual
results may come in at any number from below the
minimum Threshold level through to the maximum Stretch level.
Typically, the Incentive Program will interpolate between the
three performance levels. However, if a performance target is
defined as a definitive milestone the corporation must achieve,
no interpolation is made. There is also no payout for
performance below the Threshold performance target.
Unlike in 2007, the 2008 performance targets for our named
executives did not include individual performance objectives.
Therefore, our named executives variable pay in 2008
depended entirely on corporate performance based on the metrics
noted above. As a result, named executives, other than
Mr. Holtz (who, pursuant to the terms of his employment
agreement, received an annual bonus of 40% of his base salary
for 2008 prorated from the start date of his employment to the
end of the calendar year, in lieu of variable pay), earned
variable pay for 2008 at 56% of their respective target range
payouts.
Our board of directors can exercise discretion to pay
compensation even if performance does not meet our performance
goals. Our board did not exercise this discretion in 2008 in
respect of any of our named executives. We have not established
a policy to address the adjustment or recovery of performance
based awards if we restate or otherwise adjust the relevant
performance measures in a manner that would reduce the size of
an award or payment to a named executive.
Long-Term Equity Incentive Compensation.
We
provide long-term equity incentive compensation to named
executives through awards under our Equity Plan of stock options
and, commencing in 2007, restricted stock units, both of which
generally vest over multiple years. In December of 2008, our
board of directors delegated responsibility for administration
of the Equity Plan to our Compensation Committee. The Equity
Plan, as a component of total named executive compensation, is
intended to assist us in:
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enhancing the link between the interests of our named executives
and those of our shareholders by creating an incentive for our
named executives to maximize shareholder value;
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providing an opportunity for increased equity ownership by named
executives and fostering a long term business perspective; and
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retaining our named executives despite very competitive labor
markets by maintaining competitive levels of total compensation.
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The determination by our Compensation Committee of the amount
and type of equity grants made to named executives is not made
according to a strict formula, but rather is based on an
objective review of several factors in respect of each of our
named executives including the recommendation of our CEO (for
equity awards other than to himself); job responsibilities; an
evaluation of the executives past performance; competitive
market guidance from our compensation consultant; corporate
performance; and the amount of the executives vested and
unvested equity holdings relative to other executives.
Stock option grants are made to new executives upon commencement
of employment as part of the executives negotiated total
compensation package. Our Compensation Committee considers the
recommendation of our CEO (other than for himself) in
determining the amount of options granted to any new named
executive and may accept or adjust such recommendations based on
its own judgment. Our Compensation Committee also considers the
amount of the recommended grant as it relates to the overall mix
of the initial total compensation package offered upon
commencement of employment; internal consistency; and the nature
of the new named executives roles and responsibilities.
Our Compensation Committee also grants stock options to
executives on a periodic basis following a review of the above
noted performance metrics and performance levels The
Compensation Committee typically grant options to our named
executives with 10 year expiry periods and upon terms that
provide that they will become exercisable (or vest)
in annual or other periodic installments (most commonly, 1/3 per
year over 3 years), so that if a named executives
employment is terminated, whether by us or by the named
executive, prior to the full vesting of the options, the
unvested portion terminates automatically, thereby creating and
incentive for the named executive to remain in our employ for at
least the vesting period. The exercise price of each option is
set under the Equity Plan as the fair market price of our
76
common shares on the date of grant which is defined in the plan
as the market closing price of our common shares on the NASDAQ
for the trading day immediately preceding the date on which the
granting of the option is approved by our Compensation
Committee. In addition, in 2006, our board of directors adopted
a policy to only grant options during open trading windows. In
accordance with this policy, if the date of an equity grant
falls within a trading black-out period, then the grant date
will be set as the second trading day after the trading
black-out period ends. This policy was adapted to ensure that
when options are granted the stock price at the time can
reasonably be expected to fairly represent the markets
view of our then-current results and prospects.
Upon the recommendation of the compensation consultant, our
board of directors considered the long-term equity incentive
program in light of market changes and the importance of
employee retention and decided to add restricted stock units to
the mix of long-term equity incentive granted to named
executives as a means of increasing our named executives
equity ownership and fostering a long term business perspective.
The restricted stock units vest as to 1/3 each over 3 years
and if an executives employment is terminated, whether by
us or the executive, prior to the full vesting of the restricted
stock units, the unvested portion terminates automatically,
thereby creating and incentive for the executive to remain in
our employ for at least the vesting period.
Other Benefits.
We provide various employee
benefit programs to our named executives, including medical,
dental and life insurance benefits. For employees located in
Canada, including named executives, we contribute 4% of their
earnings to a company sponsored Registered Retirement Savings
Plan and match contributions made by employees up to a maximum
of 2% of the employees earnings. For employees located in
the United States, including named executives, we may match
contributions made by such employees to their 401(K) accounts
each year up to 50% of the employees contributions up to a
maximum of 3% of the employees earnings, subject to
statutory limitations. Except for a perquisite allowance
provided to Mr. McDowell, these benefits are generally
available to all our employees. Mr. McDowell receives an
allowance of $20,000 per year in lieu of full reimbursement of
his travel costs from his home province of British Columbia
to his work location at our Fort Saskatchewan, Alberta
facilities.
Compensation
Committee Interlocks and Insider Participation
During fiscal 2008, the following directors were members of our
Compensation Committee: Neil Carragher, Roger Downer and
David Poorvin. None of the current members of the Compensation
Committee has at any time been one of our officers or employees.
None of our named executives serves, or in the past fiscal year,
has served as a member of the board of directors or Compensation
Committee of any entity that has one or more of its executive
officers serving on our board of directors or Compensation
Committee.
Share
Price Performance Graph
The share price performance graph may be found under
Item 5
Share Price Performance
Graph.
Human
Resources and Compensation Committee Report
The information contained in this report shall not be deemed
to be soliciting material or filed with
the SEC or subject to the liabilities of Section 18 of the
Exchange Act, except to the extent that we specifically
incorporate it by reference into any document filed under the
Securities and Exchange Act.
Our Compensation Committee has reviewed and discussed with our
management the Compensation Discussion and Analysis for fiscal
2008. Based on the review and discussions, our committee
recommended to our board of directors, and our board of
directors has approved, that the Compensation Discussion and
Analysis be included in our annual report on
Form 10-K
for 2008.
This report is submitted by our Compensation Committee.
Roger G.H. Downer
Neil Carragher
David W. Poorvin
77
Summary
Compensation Table
The following table provides a summary of the compensation for
each of our named executive officers in U.S. dollars for the
financial year ended December 31, 2008.
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Non-equity
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Option-
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Annual Incentive
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based
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Plan
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All Other
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Total
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Fiscal
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Salary
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Awards
(4)
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Compensation
(5)
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Compensation
(6)
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Compensation
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Name and Principal Position
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Year
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($)
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($)
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($)
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($)
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($)
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Thomas E. Gardner
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2008
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400,000
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206,969
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112,208
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719,177
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Former Chairman, President and Chief Executive Officer
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David B.
Holtz
(1)
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2008
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145,817
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212,123
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58,327
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416,267
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Interim President & Chief Executive Officer Chief
Financial Officer
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Eliot M. Lurier,
CPA
(2)
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2008
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49,875
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90,446
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140,321
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Former Vice President, Finance & Administration, Chief
Financial Officer
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David C.
McDowell
(3)
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2008
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234,280
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162,174
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52,479
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42,797
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491,730
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Vice President, Manufacturing Operations
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Edward Gaj, Jr.
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2008
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210,000
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30,000
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124,829
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364,829
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Former Vice President, Corporate Development
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Carol L.
Amelio
(3)
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2008
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196,795
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81,087
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44,082
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32,643
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354,607
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Vice President, General Counsel and Corporate Secretary
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(1)
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Mr. Holtz was appointed our Vice President and Chief
Financial Officer on May 7, 2008 at an annual salary of
$225,000. Mr. Holtz was appointed to the additional role of
Interim President and Chief Executive Officer in January 2009.
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(2)
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Mr. Luriers employment ceased on April 15, 2008.
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(3)
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Mr. McDowells and Ms. Amelios compensation
is denominated in Canadian dollars and has been translated into
U.S. dollars for purposes of this table at an average 2008
exchange rate of U.S. $1.00 = C$1.0671.
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(4)
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Amounts shown in this column do not reflect compensation
actually received by the named executive. These compensation
costs reflect option awards granted in the year pursuant to our
Equity Plan. The fair value of each stock-based award is
estimated on the date of grant using the Black-Scholes option
pricing model. Assumptions used in calculation of this amount
are included in Note 10 in our audited financial statements
for the fiscal year ended December 31, 2008 included in
this Annual Report on
Form 10-K.
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(5)
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Amounts in this column reflect amounts earned in each year under
our variable pay program. The awards are paid to the executive
in the following calendar year. A discussion of the material
terms of our variable pay program can be found in the
Compensation Discussion and Analysis section of this document.
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(6)
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Mr. Lurier received payment of $3,946 for vacation earned
but not taken, $85,500 for severance and $1,000 for transition
services. Mr. McDowell received a cash allowance of $18,742
in lieu of perquisites, payment of $15,404 to our registered
retirement savings plan and $8,651 for vacation earned but not
taken. Mr. Gaj received payment of $16,154 for vacation
earned but not taken, payment of $3,675 to our 401(k) plan and
payment of severance in the amount of $135,000. Ms. Amelio
received payment of $17,950 for vacation earned but not taken
and payment of $14,693 to our registered retirement savings plan.
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Summary
of Employment Agreements for each named executive
officer
The significant terms of each named executive officers
employment agreement are described below. For a description of
the termination and change of control benefits payable by us for
each named executive, see below under the heading
Termination and Change of Control Benefits.
David
B. Holtz
In May 2008, we entered into an employment agreement with
Mr. Holtz, under which he served as our Vice President and
Chief Financial Officer and received an annual base salary of
$225,000. Pursuant to that agreement, for the calendar year of
2008, in lieu of an annual cash incentive award, Mr. Holtz
is to be paid a bonus of 40% of his base salary prorated
78
from May 7, 2008. Mr. Holtz was granted a stock option
to purchase 240,000 of our common shares at an exercise price of
$1.09. The stock options vest (subject to accelerated vesting as
provided in the employment agreement) as to 1/3 of the shares on
each of the first, second and third anniversaries of the date of
the grant. In January 2009, we announced the appointment of
Mr. Holtz as our interim President and CEO and his annual
base salary was increased to $310,000. We are currently
negotiating the other terms of an amended and restated
employment agreement to reflect his expanded duties and
responsibilities.
Thomas
E. Gardner
In December 2008, we entered into an amended and restated
employment agreement with Mr. Gardner, our former Chairman
and CEO, effective as of August of 2007, under which
Mr. Gardner served as our Chairman, President and Chief
Executive Officer until January 19, 2009. Under that
agreement, Mr. Gardner received an annual base salary of
$400,000 with an annual target bonus of 50% of his base salary
based on meeting financial and performance targets set by our
board. Mr. Gardner did not receive any additional
compensation for serving as Chairman. In lieu of receiving a
bonus in 2007, Mr. Gardner was granted 38,910 restricted
stock units (RSUs) on August 22, 2007 at an
issue price of $2.75. The RSUs vested immediately but are
restricted from sale until Mr. Gardner is neither employed
by nor a director of NUCRYST. Pursuant to the employment
agreement, Mr. Gardner was also granted options to purchase
500,000 shares of our common stock on August 22, 2007,
of which 1/3 vest immediately on the date of the grant, an
additional 1/3 vest on the first anniversary of the date of the
grant and the final 1/3 vest on the second anniversary of the
date of the grant. The employment agreement had an initial term
ending December 31, 2008 and provided for automatic
extensions for successive one year periods on the same terms and
conditions unless either party gives the other written notice at
least 60 days prior to the then scheduled date of
expiration of the term. Pursuant to the employment agreement,
Mr. Gardner was also granted stock options to purchase an
additional 161,090 of our common shares vesting over a two-year
period with an effective grant date of January 22, 2009 and
an exercise price of $1.09. In January, 2009, we announced the
departure of Mr. Gardner as our CEO.
Eliot
M. Lurier
In March 2005, we entered into an employment agreement with
Eliot M. Lurier, under which he served as our Vice President,
Finance and Administration until April 15, 2008.
Mr. Lurier received an annual base salary of $171,000 and
was eligible for non-equity incentive compensation under our
variable pay program of up to 70% of his annual base salary. On
April 21, 2008, we entered into a separation agreement and
general release with Mr. Lurier pursuant to which
Mr. Luriers employment was terminated without cause,
effective as of April 15, 2008. Pursuant to the terms of
the separation agreement, we paid Mr. Lurier a lump sum of
$85,500, representing six months base salary.
David
C. McDowell
In June 2005, we entered into an employment agreement with David
C. McDowell, our Vice President, Manufacturing.
Mr. McDowell currently receives an annual base salary of
C$250,000 and an annual cash allowance of C$20,000 in lieu of
perquisites. Mr. McDowell was eligible in 2008 for
non-equity incentive compensation under our variable pay program
of up 70% of his annual base salary.
Ed
Gaj, Jr.
In June 2007, we entered into an employment agreement with Ed
Gaj, Jr., under which he served as our Vice President, Corporate
Development until December 31, 2008. Pursuant to the
employment agreement, Mr. Gaj received a base salary of
$210,000 and was also eligible in 2008 for non-equity incentive
compensation under our variable pay program of up 70% of his
annual base salary. On December 24, 2008, we entered into a
separation agreement and general release pursuant to which
Mr. Gajs employment was terminated without cause and
he resigned effective December 31, 2008. Pursuant to the
terms of the separation agreement, we paid Mr. Gaj a lump
sum of $135,000, representing six months base salary and
an additional $30,000 in lieu of variable pay for 2008. In
addition, we agreed to pay the cost associated with
Mr. Gajs continued participation in our benefit plans
for a period of six months.
Carol
L. Amelio
In February 2006, we entered into an employment agreement with
Carol L. Amelio, our Vice President, General Counsel and
Corporate Secretary. Ms. Amelio currently receives an
annual base salary of C$210,000. Ms. Amelio was also
eligible in 2008 for non-equity incentive compensation under our
variable pay program of up to 70% of her annual base salary in
2007.
79
Incentive
Plan Awards
Outstanding
Share-Base Awards and Option Base Awards
The following table shows for each named executive officer all
awards outstanding as of December 31, 2008. No options to
purchase our common shares were exercised by our named executive
officers during the year ended December 31, 2008.
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Option-Based Awards
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Share-Based Awards
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Market or
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Number of
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Payout Value
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Value of
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Shares or
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of Share-
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Number of
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Unexercised
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Units of
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Based
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Securities
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In-the-
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Shares That
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Awards That
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Underlying
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Option
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Option
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Money
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Have Not
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Have Not
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Unexercised
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Exercise
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Expiration
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Options
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Vested
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Vested
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Named Executive
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Options (#)
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Price
($)
(1)
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Date
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($)
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(#)
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($)
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Thomas E. Gardner
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500,000
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2.57
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August 22, 2017
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250,000
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2.57
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April 10, 2018
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David B. Holtz
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240,000
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1.09
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May 8, 2018
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David C. McDowell
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38,910
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4.16
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July 11, 2015
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30,000
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4.08
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February 21, 2017
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100,000
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2.00
|
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February 21, 2018
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3,333
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13,599
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Edward Gaj, Jr.
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70,000
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2.00
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June 1, 2017
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3,333
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6,666
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Carol L. Amelio
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10,000
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9.16
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March 16, 2016
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35,000
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4.08
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February 21, 2017
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50,000
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2.00
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February 21, 2018
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3,333
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13,599
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Notes:
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(1)
|
Exercise prices for David McDowells first option is
denominated in Canadian dollars and has been translated into
U.S. dollars for purposes of this table at the noon rate on
December 31, 2008 of U.S.$1.00 = C$1.2246.
|
Incentive
Plan Awards Value Vested or Earned During the
Year
The following table shows for each named executive officer the
value of all incentive plan awards vested or earned during the
year ended December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option-Based Awards
|
|
Share-Based Awards
|
|
Non-Equity Incentive Plan
|
|
|
Value Vested During the
|
|
Value Vested During the
|
|
Compensation Value
|
Named Executive
|
|
Year ($)
|
|
Year ($)
|
|
Earned During the Year ($)
|
|
Thomas E. Gardner
|
|
|
|
|
|
|
|
|
|
|
112,028
|
|
David B. Holtz
|
|
|
|
|
|
|
|
|
|
|
58,327
|
|
Eliot M. Lurier
|
|
|
|
|
|
|
|
|
|
|
|
|
David C. McDowell
|
|
|
|
|
|
|
6,800
|
|
|
|
52,479
|
|
Edward Gaj, Jr.
|
|
|
|
|
|
|
3,334
|
|
|
|
30,000
|
|
Carol L. Amelio
|
|
|
|
|
|
|
6,800
|
|
|
|
44,082
|
|
Summary
of 1998 Equity Incentive Plan
The following is a description of the Equity Plan as presently
constituted. This description is qualified in its entirety by
the full text of the Equity Plan which can be located as
Exhibit 10.55 to our Report of
Form 8-K
filed on EDGAR on May 8, 2008. The Equity Plan is
administered by our Compensation Committee. Under the Equity
Plan, our Compensation Committee may grant options to purchase
our common shares, share appreciation rights, restricted share
units, or RSUs, other share-based awards and incentive awards.
Eligible Participants.
The eligible
participants under the Equity Plan include certain of our
directors, officers, employees, consultants and other service
providers of NUCRYST or its subsidiaries, which we refer to as
participants. Each of our named executives is a participant
under the Equity Plan.
Options.
Under the Equity Plan, we may grant
options intended to qualify as incentive stock options under
Section 422 of the U.S. Internal Revenue Code of 1986, as
amended, or the Code, and non-qualified stock options. The
exercise price of options granted under the Equity Plan will be
established by our Compensation Committee at the time of
80
grant. However, the exercise price at the time of grant will not
be lower than the fair market price per common share
on the date of grant. The fair market price shall be the closing
price of the common shares on the exchange (as described below)
for the trading day immediately preceding the date on which the
granting of the option is approved by our Compensation Committee
or grant committee. The exchange means the NASDAQ
or, if the common shares are not then listed and posted for
trading on the NASDAQ, on such stock exchange or quotation
system on which such shares are listed, posted for trading or
quoted.
Share Appreciation Rights.
Share appreciation
rights, or SARS, may entitle the holder to a payment in cash,
common shares or both, at our option, valued by reference to, or
otherwise based on or related to the value of, our common
shares. The following three types of SARs are authorized for
issuance under the Equity Plan:
|
|
|
|
|
Tandem Rights.
A tandem right is a
SAR granted in connection with an option that is subject to the
same terms and conditions applicable to the particular option
grant to which it pertains with the following exceptions: the
tandem right shall require the holder to elect between the
exercise of the underlying option to purchase common shares and
the surrender, in whole or in part, of such option in exchange
for a payment of cash or, if provided in the award agreement, at
our option in common shares, in an amount equal to the excess of
(A) the fair market price of the number of common shares
covered by that portion of the surrendered option in which the
option holder is vested over (B) the aggregate exercise
price payable for such vested shares. For the purposes of tandem
rights, fair market price shall be equal to the closing price
immediately preceding the date of the option surrender.
|
|
|
|
Concurrent Rights.
A concurrent
right is a SAR granted in connection with an option that
applies to all or a portion of common shares subject to the
underlying option and which is subject to the same terms and
conditions applicable to the particular option grant to which it
pertains with the following exceptions: a concurrent right shall
be exercised automatically at the same time the underlying
option is exercised with respect to the common shares to which
the concurrent right pertains and, on exercise, entitles the
holder to receive a payment of cash or, if provided in the award
agreement, at our option in common shares, in an amount equal to
the excess of (A) the aggregate fair market price of the
common shares purchased under the underlying option over
(B) the aggregate exercise price paid for such shares. For
the purposes of concurrent rights, fair market price shall be
equal to the closing price immediately preceding the date of the
exercise of the concurrent right.
|
|
|
|
Independent Rights.
An independent
right means a SAR granted independently of any option but
that is subject to the same terms and conditions applicable to
an option with the following exceptions: an independent right
shall be denominated in share equivalents. Upon exercise,
independent rights will be payable in cash or, if provided in
the award agreement, at our option in common shares, in an
amount equal to the excess of (A) the aggregate fair market
price of a number of common shares equal to the number of share
equivalents in which the holder is vested under such independent
right, and with respect to which the holder is exercising the
independent right on such date, over (B) the aggregate
exercise price for the independent right exercised. For the
purposes of independent rights, fair market price shall be equal
to the closing price immediately preceding the date of exercise
of the independent right.
|
Restricted Share Units.
Restricted share
units, or RSUs, are grants of common shares that are subject to
vesting based upon the passage of time or other criteria
specified in the award agreement and which entitle the holder to
the issuance of common shares upon the vesting of RSUs. RSUs may
be granted in consideration of the performance of services or
payments by a participant. Depending on the terms of the award
agreement, participants may be entitled to dividends declared by
us on our common shares and to vote the restricted common shares
during the restricted period. Depending on the terms of the
award agreement, the common shares issued upon vesting of the
RSUs may themselves be subject to restrictions, such as
restrictions on disposition for certain periods of time.
Other Stock-Based Awards.
Other stock based
awards are awards other than options, SARs or RSUs that are
denominated in, valued in whole or in part by reference to, or
otherwise based on or related to our common shares.
Incentive Awards.
Incentive awards are
performance based awards that are denominated in dollars. Both
annual and long-term incentive awards may be granted under the
Equity Plan. Performance goals for incentive awards under the
Equity Plan are established by the Compensation Committee, as
previously noted. Performance goals for awards intended to
constitute performance-based compensation under
Section 162(m) of the Code may include a wide variety of
specified measures of our operating results or other criteria
established by our Compensation Committee at the time of grant.
Shares Reserved; Equity Plan Limits.
At a
meeting of the Shareholders held on May 8, 2008, the Equity
Plan was amended to increase the maximum number of common shares
reserved for issuance under the Equity Plan from 2,200,000
81
common shares to an amount equal to 15% of the issued and
outstanding common shares. The Equity Plan provides that the
aggregate number of common shares issued to any one participant
pursuant to the Equity Plan, within a one-year period, shall not
exceed 5% of the outstanding issue on a non-fully diluted basis,
and the number of common shares reserved for issuance to any one
participant pursuant to the Equity Plan may not exceed 7% of the
outstanding issue on a non-fully diluted basis. Common shares
issued upon the exercise of awards granted under the Equity Plan
will again become available for issuance under the Equity Plan.
No financial assistance is provided by NUCRYST to participants
to facilitate the purchase of common shares under the incentive
Equity Plan.
Termination
and Change of Control Benefits
Pursuant to the employment agreements entered into by the
company with each named executive officer, we are required to
make the following payments upon termination, resignation,
retirement, change of control or change in the named executive
officers responsibilities. The following descriptions are
subject to any applicable implied term or terms recognized at
common law.
David
B. Holtz
Resignation or Retirement.
Mr. Holtz is
entitled to resign at any time by giving us at least
90 days prior written notice.
Termination with or without Cause.
Upon the
termination of Mr. Holtzs employment with cause, we
are not responsible to make any payments to Mr. Holtz,
other than for salary earned up to the date of termination. If
we terminate Mr. Holtzs employment without
cause (as defined in the employment agreement) or we
elect not to extend the employment agreement at the end of any
one-year period, we will be obligated to pay Mr. Holtz an
amount equal to six months annual base salary (at the rate
in effect on the termination date), a pro-rata performance bonus
payment for the year of termination and any stock options or
RSUs then scheduled to vest prior to the first anniversary of
the termination date will vest and remain exercisable until
120 days after the termination date.
Constructive Termination Without Cause.
If an
event of constructive termination without cause (as
defined in his employment agreement) occurs, Mr. Holtz will
have the same entitlements as provided to him in the event of a
termination without cause described above.
Change in Control.
If Mr. Holtzs
employment is terminated or constructively terminated without
cause or due to non-extension of the employment agreement in
connection with a change in control (as defined in
his employment agreement). Mr. Holtz is also entitled to a
severance payment equal to one years annual base salary
and any stock options or RSUs then scheduled to vest prior to
the second anniversary of the termination date will vest and
remain exercisable until 120 days after the termination
date.
Termination due to Death or Disability.
If
Mr. Holtzs employment is terminated due to his death,
his estate is entitled to payment of his base salary for a
period of 90 days following the date of his death and shall
have the continued right to exercise any stock options that
vested on or before the date of death for a period of
180 days following the date of his death. If
Mr. Holtzs employment is terminated due to disability
(as defined in the employment agreement), Mr. Holtz is
entitled to payment of the prorate portion of the annual
incentive bonus for the year in which his employment is
terminated.
Non-Competition
Restrictions.
Mr. Holtzs
confidentiality agreement provides for certain restrictions on
Mr. Holtzs ability to: (i) solicit customers,
prospective customers, vendors, strategic partners, or business
associates or employees of the company for a period of
12 months after the termination of his employment;
(ii) for a period of 12 months after the termination
of his employment, manage, operate, advise, invest in, or
otherwise engage, directly or indirectly in, any business or
undertaking that carries on any business, research, development
or investigation that competes with any business carried on by
the company during or after the term of his employment for the
purpose of offering competitive products or for the purpose of
encouraging or enticing such person to cease doing business with
the company; (iii) disclose or use (during or after his
employment with the company) the confidential information of the
company.
Mr. Holtzs annual base salary was increased to $310,000 in
January 2009. We are currently negotiating with Mr. Holtz
an amended and restated employment agreement to reflect his
expanded duties and responsibilities as interim President and
CEO.
82
Thomas
E. Gardner
Resignation or Retirement.
Mr. Gardner
was entitled to resign at any time by giving us at least
90 days prior written notice.
Termination with or without
Cause.
Mr. Gardners employment with us
ceased on January 19, 2009 and, therefore, we have only
summarized the remaining elements of Mr. Gardners
employment contract that are still relevant. Upon the
termination of Mr. Gardners employment without
cause (as defined in his employment agreement), we
were obligated to pay Mr. Gardner an amount equal to one
years annual base salary (at the rate in effect on the
termination date) and a pro-rata performance bonus payment for
the year of termination, and any stock options or RSUs then
scheduled to vest prior to the first anniversary of the
termination date will vest and remain exercisable until one year
after the termination date. However, as part of the severance
agreement entered into with Mr. Gardner on
February 11, 2009, Mr. Gardner surrendered all of his
vested and unvested stock options.
Change in Control.
In the event a change
in control (as defined in the employment agreement) occurs
within 120 days after Mr. Gardner is terminated
without cause, Mr. Gardner is entitled to payment of an
additional one years annual base salary and to the
accelerated vesting of all remaining stock options, which will
remain exercisable until one year after the termination date.
Non-Competition
Restrictions.
Mr. Gardners
confidentiality agreement provides for certain restrictions on
Mr. Gardners ability to: (i) solicit customers,
prospective customers, vendors, strategic partners, or business
associates or employees of the company for a period of
12 months after the termination of his employment;
(ii) for a period of 12 months after the termination
of his employment, manage, operate, advise, invest in, or
otherwise engage, directly or indirectly in, any business or
undertaking that carries on any business, research, development
or investigation that competes with any business carried on by
the company during or after the term of his employment for the
purpose of offering competitive products or for the purpose of
encouraging or enticing such person to cease doing business with
the company; (iii) disclose or use (during or after his
employment with the company) the confidential information of the
company.
Eliot
M. Lurier
Resignation or Retirement.
Mr. Lurier was
entitled to resign at any time.
Termination with or without
Cause.
Mr. Luriers employment with us
ceased on April 15, 2008. Upon the termination of Mr.
Luriers employment without cause (as defined
in the employment agreement), we were obligated to pay a lump
sum amount equal to six months annual base salary (at the
rate in effect on the termination date).
Non-Competition
Restrictions.
Mr. Luriers
confidentiality agreement provides for certain restrictions on
Mr. Luriers ability to: (i) solicit customers,
prospective customers, vendors, strategic partners, or business
associates or employees of the company for a period of
12 months after the termination of his employment;
(ii) for a period of 12 months after the termination
of his employment, manage, operate, advise, invest in, or
otherwise engage, directly or indirectly in, any business or
undertaking that carries on any business, research, development
or investigation that competes with any business carried on by
the company during or after the term of his employment for the
purpose of offering competitive products or for the purpose of
encouraging or enticing such person to cease doing business with
the company; (iii) disclose or use (during or after his
employment with the company) the confidential information of the
company.
David
C. McDowell
Resignation or Retirement.
Mr. McDowell
is entitled to resign at any time.
Termination with or without Cause.
Upon the
termination of Mr. McDowells employment without
cause (as defined in the employment agreement), we
will be obligated to pay him a lump sum amount equal to one
years annual base salary (at the rate in effect on the
termination date).
Non-Competition
Restrictions.
Mr. McDowells employment
agreement provides for certain restrictions on
Mr. McDowells ability to: (i) solicit customers,
prospective customers, vendors, strategic partners, or business
associates or employees of the company for a period of
12 months after the termination of his employment;
(ii) for a period of 12 months after the termination
of his employment, manage, operate, advise, invest in, or
otherwise engage, directly or indirectly in, any business or
undertaking that carries on any business, research, development
or investigation that competes with any business carried on by
the company during or after the term of his employment for the
purpose of
83
offering competitive products or for the purpose of encouraging
or enticing such person to cease doing business with the
company; (iii) disclose or use (during or after his
employment with the company) the confidential information of the
company.
Ed
Gaj, Jr.
Resignation or Retirement.
Mr. Gaj was
entitled to resign at any time.
Termination with or without
Cause.
Mr. Gajs employment was
terminated effective December 31, 2008. Upon the
termination of his employment without cause (as
defined in the employment agreement), we were obligated to pay
him a lump sum amount equal to six months annual base
salary (at the rate in effect on the termination date).
Non-Competition
Restrictions.
Mr. Gajs confidentiality
agreement provides for certain restrictions on
Mr. Gajs ability to: (i) solicit customers,
prospective customers, vendors, strategic partners, or business
associates or employees of the company for a period of
2 years after termination of his employment; (ii) for
a period of 18 months after the termination of his
employment, manage, operate, advise, invest in, or otherwise
engage, directly or indirectly in, any business or undertaking
that carries on any business, research, development or
investigation that competes with any business carried on by the
company during or after the term of his employment for the
purpose of offering competitive products or for the purpose of
encouraging or enticing such person to cease doing business with
the company; (iii) disclose or use (during or after his
employment with the company) the confidential information of the
company.
Carol
L. Amelio
Resignation or Retirement.
Ms. Amelio is
entitled to resign at any time.
Non-Competition
Restrictions.
Ms. Amelios
confidentiality agreement provides for certain restrictions on
Ms. Amelios ability to: (i) solicit customers,
prospective customers, vendors, strategic partners, or business
associates or employees of the company for a period of
12 months after the termination of her employment;
(ii) for a period of 12 months after the termination
of her employment, manage, operate, advise, invest in, or
otherwise engage, directly or indirectly in, any business or
undertaking that carries on any business, research, development
or investigation that competes with any business carried on by
the company during or after the term of her employment for the
purpose of offering competitive products or for the purpose of
encouraging or enticing such person to cease doing business with
the company; (iii) disclose or use (during or after his
employment with the company) the confidential information of the
company.
84
The following table provides, for each of the following named
executives, an estimate of the payments payable by the company
(or its subsidiaries), assuming that the triggering events
described above took place on December 31, 2008.
Termination
and Change of Control Benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vesting of Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
Based
|
|
Employee
|
|
Total
|
|
|
|
|
|
|
Incentive
|
|
Compensation
(4)
|
|
Benefits
|
|
Compensation
|
Named Executive
|
|
Type of Payment
|
|
Salary ($)
|
|
Payment ($)
|
|
($)
|
|
($)
|
|
($)
|
|
Thomas Gardner
|
|
Termination without Cause or Constructive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination
|
|
|
400,000
|
|
|
|
112,028
|
(2)
|
|
|
|
|
|
|
|
|
|
|
512,028
|
|
|
|
Change in Control
|
|
|
800,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
800,000
|
|
|
|
Death
|
|
|
100,000
|
|
|
|
112,028
|
|
|
|
|
|
|
|
|
|
|
|
212,028
|
|
|
|
Disability
|
|
|
|
|
|
|
112,028
|
|
|
|
|
|
|
|
|
|
|
|
112,028
|
|
David Holtz
|
|
Termination without Cause or Constructive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination
|
|
|
112,500
|
|
|
|
58,327
|
(3)
|
|
|
|
|
|
|
|
|
|
|
170,827
|
|
|
|
Change in Control
|
|
|
225,000
|
|
|
|
58,327
|
|
|
|
|
|
|
|
|
|
|
|
283,327
|
|
|
|
Death
|
|
|
56,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56,250
|
|
|
|
Disability
|
|
|
|
|
|
|
58,327
|
|
|
|
|
|
|
|
|
|
|
|
58,327
|
|
David McDowell
|
|
Termination without Cause
|
|
|
234,281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
234,281
|
|
|
|
Change in Control
|
|
|
234,281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
234,281
|
|
Edward Gaj, Jr.
|
|
Termination without Cause
|
|
|
105,000
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
105,000
|
|
|
|
Change in Control
|
|
|
105,000
|
|
|
|
|
|
|
|
|
|
|
|
8,952
|
|
|
|
113,952
|
|
|
|
(1)
|
Pursuant to his employment agreement, Mr. Gaj was entitled
to a lump-sum payment equal to six months of base salary. In
addition, we agreed to pay $30,000 relative to our
performance-based incentive program and the cost associated with
Mr. Gajs continued participation in our health and
dental benefit plans for a period of 6 months.
|
|
(2)
|
Mr. Gardners payout range under the variable pay
program is set as a percentage of his 2008 base salary at 30% at
Threshold, 50% at Target and 100% at Stretch. For the year ended
December 31, 2008, a payout of approximately 28% of base
salary was achieved.
|
|
(3)
|
In the event of termination without cause, Mr. Holtz is
entitled to payment of a pro-rata performance bonus for the year
of termination. However, for the calendar year 2008, in lieu of
an annual incentive award, Mr. Holtz was entitled to be
paid a bonus of 40% of base salary prorated from the effective
date of May 7, 2008.
|
|
(4)
|
In respect of each of the named executives, the closing market
price of our common shares on the NASDAQ Global Market as at
December 31, 2008 was less than the exercise price of the
vested options.
|
85
DIRECTOR
COMPENSATION
The following table sets forth director compensation for
non-management directors for the fiscal year ended
December 31, 2008. Directors who are also officers of the
company are not entitled to any compensation for their services
as directors.
Director
Compensation Table
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-
|
|
|
|
|
|
Annual
|
|
|
|
|
|
|
|
|
|
Fees
|
|
|
Based
|
|
|
Option-based
|
|
|
Incentive Plan
|
|
|
All Other
|
|
|
Total
|
|
|
|
Earned
|
|
|
Awards
(1)
|
|
|
Awards
(2)
|
|
|
Compensation
|
|
|
Compensation
|
|
|
Compensation
|
|
Name
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
Neil Carragher
|
|
|
69,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
69,450
|
|
Roger Downer
|
|
|
60,400
|
|
|
|
2,430
|
|
|
|
1,313
|
|
|
|
|
|
|
|
|
|
|
|
64,143
|
|
Richard Zahn
|
|
|
112,000
|
|
|
|
2,430
|
|
|
|
1,313
|
|
|
|
|
|
|
|
|
|
|
|
115,743
|
|
David Poorvin
|
|
|
103,200
|
|
|
|
3,570
|
|
|
|
1,930
|
|
|
|
|
|
|
|
|
|
|
|
108,700
|
|
Barry Heck
|
|
|
84,000
|
|
|
|
3,570
|
|
|
|
1,930
|
|
|
|
|
|
|
|
|
|
|
|
89,500
|
|
|
|
(1)
|
Messrs. Downer & Zahn were each granted 3,000
Restricted Stock Units (RSUs) on the anniversary
date of their appointment to our board being December 21,
2008, 50% of which vest on the first anniversary of the grant
date and the remaining 50% of which vest on the second
anniversary date of the grant date. The trading price of our
common shares on NASDAQ on the grant date was $0.81.
Messrs. Poorvin & Heck were each granted 3,000
Restricted Stock Units (RSUs) on the anniversary
date of their appointment to our board being May 30, 2008,
50% of which vest on the first anniversary of the grant date and
the remaining 50% of which vest on the second anniversary date
of the grant date. The trading price of our common shares on
NASDAQ on the grant date was $1.19.
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(2)
|
Pursuant to our board compensation plan,
Messrs. Downer & Zahn were each granted 2,000
options to purchase our common shares on the anniversary date of
their appointment to our board, being December 21, 2008.
The options vest each as to 1/3 on the first, second and third
anniversary of the grant date and have an exercise price of
$0.81. Messrs. Poorvin & Heck were granted 2,000
options on May 30, 2008 with the same vesting schedule and
with an exercise price of $1.19
|
Our director compensation currently includes annual retainers,
meeting fees, fees for additional duties and extra-ordinary
travel and equity-based compensation in the form of stock option
and restricted stock unit grants. All of the elements of our
director compensation underwent an independent review by our
compensation consultant in 2006 and, based on the
recommendations of the compensation consultant, our board
adopted the existing director compensation plan.
Director
Fees
Annual board and committee retainers are paid quarterly, in
advance, and are pro-rated for partial service, if appropriate.
All of the directors are also reimbursed for reasonable
out-of-pocket
expenses incurred in attending board and committee meetings.
From January 1, 2008, non-executive directors were paid the
following fees:
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each non-employee director receives an annual retainer of
$15,000 and a further $2,000 for each board meeting attended
(attendance for purposes of the policy includes attendance in
person, by teleconference or by video);
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the chairman of our Audit Committee receives a $7,500 retainer
and a further $1,500 for each committee meeting attended, while
each other member of such committee receives $1,200 per
committee meeting attended;
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the chairmen of each of the Human Resources and Compensation
Committee and Corporate Governance and Nominating Committee
receives a $5,000 retainer and a further $1,000 per committee
meeting attended, while each other member of such committees
receives $800 per committee meeting attended;
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the chairman of any special committees of the board receives a
$20,000 retainer, each special committee member receives a
$10,000 retainer, and each special committee member receives
$2,000 for each special committee meeting attended;
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non-management directors receive a daily fee of $1,500 when
carrying out, at the request of our board or committees of our
board, additional directors duties or services on behalf of our
board or committees;
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any non-management director receives payment of $1,000 if such
director is required to travel more than four hours by air
one-way in North America to attend a board meeting and payment
of $2,000 if such director is required to travel from another
continent.
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86
Director
Equity Incentive
Each non-management director will receive, upon election to the
board, a grant of 5,000 RSUs and a stock option grant to
purchase 8,000 of our common shares. The RSUs vest immediately,
with 1,000 shares available for sale in one year and
4,000 shares to be held for the duration of board service.
The stock options will vest in equal annual installments on the
first three anniversaries of the date of grant.
Messrs. Carragher, Downer and Zahn each received an initial
grant of options under the prior directors compensation
policy in connection with our initial public offering. These
options covered 20,000 common shares each, had an exercise price
of $10.00 per common share and vest in equal annual installments
on the first three anniversaries of the date of grant.
Each non-management director receives, on the anniversary date
of their respective appointments to our board, an annual equity
incentive grant of 2,000 options to purchase our common
shares and 3,000 RSUs. The options vest each as to
1
/
3
on the first, second and third anniversary of the grant date.
The RSUs vest each as to
1
/
2
on the first and second anniversary of the grant date.
Our board of directors has adopted a policy that each member of
the board is required to hold minimum equity in NUCRYST equal in
value to 2.5 times the annual retainer, or $37,500 at the
current retainer level. Directors have three years from the
later of the date of the adoption of this policy or their
initial appointment to our board to hold such minimum equity.
Our Board has established a Deferred Share Unit Plan, or DSU
plan, to accommodate those directors who have stated that they
would be willing to take all or a portion of their cash
directors fees in the form of Deferred Share Units, or
DSUs, in order to increase their exposure to our share price
performance. Under the DSU plan, eligible directors may elect to
receive all or a portion of their fees in the form of DSUs. A
DSU will be attributed a value based on the closing price of our
common shares on the NASDAQ for the trading day immediately
preceding the date of grant, which we refer to in this paragraph
as the market price. The DSUs may be granted at
attributed values that are less than, equal to, or greater than
the market price. All DSUs will be paid out in cash only. The
value of each DSU, when converted into cash, will be equivalent
to the market price of a common share at the time the conversion
takes place. Under the DSU plan, a DSU cannot be converted to
cash until the director ceases to be a member of our board. As
of February 13, 2009, we have not granted any DSUs to our
directors.
Share-based
Awards, Option-based Awards and Non-equity Incentive Plan
Compensation for Directors.
Outstanding
Share-Base Awards and Option Base Awards
The following table shows for each non-management director all
awards outstanding as of December 31, 2008. No options to
purchase our common shares were exercised by our directors
during the year ended December 31, 2008.
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Option-Based Awards
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Share-Based Awards
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Market or
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Number of
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Payout Value
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Number of
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Shares or
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of Share-
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Securities
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Value of
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Units of
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Based
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Underlying
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Option
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Unexercised
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Shares That
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Awards That
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Unexercised
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Exercise
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Option Expiration
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In-the-Money
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Have Not
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Have Not
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Name
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Options (#)
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Price ($)
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Date
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Options ($)
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Vested (#)
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Vested ($)
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Neil Carragher
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20,000
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10.00
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December 29, 2015
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2,000
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3.95
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December 21, 2016
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2,000
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1.40
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December 21, 2017
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1,500
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2,100
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Roger Downer
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20,000
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10.00
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December 29, 2015
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2,000
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3.95
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December 21, 2016
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2,000
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1.40
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December 21, 2017
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2,000
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0.81
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December 24, 2018
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180
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4,500
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4,530
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Richard Zahn
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20,000
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10.00
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December 29, 2015
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2,000
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3.95
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December 21, 2016
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2,000
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1.40
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December 21, 2017
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2,000
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0.81
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December 24, 2018
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180
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4,500
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4,530
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David Poorvin
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8,000
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14.66
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May 30, 2016
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2,000
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2.13
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May 30, 2017
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2,000
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1.19
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May 30, 2018
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4,500
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6,765
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Barry Heck
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8,000
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2.13
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May 30, 2017
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2,000
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1.19
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May 30, 2018
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3,000
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3,570
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87
Incentive
Plan Awards Value Vested or Earned During the
Year
The following table shows for each non-management director the
value of all incentive plan awards issued during the year ended
December 31, 2008.
Incentive
Plan Awards Value Vested or Earned During the
Year
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Option-Based Awards
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Share-Based Awards
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Non-Equity Incentive Plan
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Value Vested During the
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Value Vested During the
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Compensation Value
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Name
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Year ($)
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Year ($)
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Earned During the Year ($)
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Neil Carragher
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7,875
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Roger Downer
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7,875
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Richard Zahn
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7,875
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David Poorvin
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3,195
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Barry Heck
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ITEM 12.
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SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
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The following table sets forth information regarding beneficial
ownership of our common shares as of February 13, 2009 by:
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each person known by us to be the beneficial owner of more than
5% of our common shares;
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our named executive officers;
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our directors; and
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our directors and executive officers as a group.
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Beneficial ownership is determined in accordance with the rules
of the Securities and Exchange Commission and generally includes
voting or investment power with respect to securities. As
required by those rules, the number of common shares
beneficially owned by any person includes any shares the
individual has the right to acquire within 60 days of
February 13, 2009. For purposes of calculating each
persons or groups percentage ownership, stock
options exercisable within 60 days are included for that
person or group, but not for the share ownership of any other
person or group.
Except as noted by footnote, and subject to community property
laws where applicable, the persons named in the table below have
sole voting and investment power with respect to all common
shares shown as beneficially owned by them.
The table below lists the applicable percentage ownership based
on 18,320,531 common shares outstanding as of February 13,
2009.
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Number of
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Percentage of
|
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Shares Beneficially
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Shares Beneficially
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Name and Address of Beneficial Owner
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Owned
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Owned
(2)
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The Westaim Corporation
10102 114 Street
Fort Saskatchewan, Alberta
T8L 3W4
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13,691,700
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74.7
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%
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Thomas E. Gardner
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43,910
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*
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Eliot M. Lurier
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1,667
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*
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David B. Holtz
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14,300
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*
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David C.
McDowell
(1)
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95,577
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*
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Carol L. Amelio
(1)
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53,334
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|
*
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Edward Gaj, Jr.
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1,667
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|
*
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Barry M.
Heck
(1)
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17,567
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*
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Neil
Carragher
(1)
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35,750
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*
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Roger G.H. Downer,
Ph.D
(1)
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28,250
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*
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Richard W.
Zahn
(1)
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37,250
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*
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|
David Poorvin,
Ph.D
(1).
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13,250
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*
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All directors and executive officers as a group (10 persons)
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342,522
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1.9
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%
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*
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Less than one percent.
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(1)
|
Includes options to purchase common shares exercisable within
60 days of as follows: 22,000 shares for
Mr. Carragher, 22,000 shares for Mr. Zahn,
22,000 shares for Dr. Downer, 6,000 shares for
Dr. Poorvin, 2,667 shares for Mr. Heck,
50,000 shares for Mr. McDowell and 35,00 shares
for Ms. Amelio.
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(2)
|
For each person and group included in this table, percentage
ownership is calculated by dividing the number of shares
beneficially owned by such person or group by the sum of
18,320,531 common shares outstanding at, plus the number of
common shares that such person or group had the right to acquire
within 60 days after February 13, 2009.
|
88
Securities
Authorized for Issuance Under Equity Compensation
Plans
The following table provides certain information with respect to
our Equity Incentive Plan in effect as of December 31, 2008:
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|
|
|
|
|
Number of
|
|
|
|
Number of
|
|
|
|
|
|
securities remaining
|
|
|
|
securities to be
|
|
|
|
|
|
available for future
|
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|
|
issued upon
|
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|
Weighted-average
|
|
|
issuance under
|
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|
|
exercise of
|
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exercise price of
|
|
|
equity compensation
|
|
|
|
outstanding
|
|
|
outstanding
|
|
|
plans (excluding
|
|
|
|
options, warrants
|
|
|
options, warrants
|
|
|
securities reflected
|
|
Equity compensation plans
|
|
and rights
|
|
|
and rights
|
|
|
in column
(a)
(1)
|
|
approved by security holders
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
1998 Equity Incentive Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
a) Options
|
|
|
1,596,199
|
|
|
$
|
2.85
|
|
|
|
1,123,882
|
|
b) Restricted Stock Units
|
|
|
27,999
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The maximum number of shares reserved for issuance under the
Equity Plan is an amount equal to 15% of our issued and
outstanding common shares. Common shares issued upon the
exercise of awards under the Equity Plan will again become
available for issuance under the Equity Plan.
|
1998
Equity Incentive Plan (as amended)
The Equity Plan is administered by our Compensation Committee.
Under the Equity Plan, the Compensation Committee may grant
options to purchase our common shares, share appreciation
rights, restricted share units, or RSUs, other share-based
awards and incentive awards.
Grant Committee.
On May 2, 2006, our
board of directors also appointed a non-executive option grant
committee consisting of our President & Chief
Executive Officer, our Vice President, Chief Financial Officer,
and our Vice President, General Counsel and Corporate Secretary.
We refer to this committee as the grant committee. The grant
committee has the power and authority to grant awards (as that
term is defined in the Equity Plan), subject to the terms and
upon the conditions of the Equity Plan, to a participant
provided that the participant is neither a director nor an
executive officer of NUCRYST. We refer to such participants as
permitted participants. Each member of the grant committee is
authorized to enter into award agreements for and on behalf of
NUCRYST with permitted participants in respect of awards
approved by the grant committee. On December 9, 2008, our
board of directors approved an amendment to the Plan Resolution
appointing the grant committee by revising the restrictions on
the grants of Awards that can be made by the grant committee as
follows:
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(a)
|
The aggregate number of all shares granted pursuant to all
awards to any one permitted participant by the grant committee
shall not exceed 25,000 per annum; and
|
|
|
(b)
|
The aggregate number of all shares granted pursuant to all
awards to all permitted participants by the grant committee
shall not exceed 150,000 per annum.
|
The grant committee does not have the power or authority to
grant any awards under the Equity Plan to directors or executive
officers of NUCRYST.
For a detailed description of our Equity Plan as presently
constituted, see Executive Compensation
Summary of 1998 Equity Incentive Plan. This description is
qualified in its entirety by the full text of the Equity Plan
which can be located as Exhibit 10.55 to our Report of
Form 8-K
filed on EDGAR on May 8, 2008.
|
|
ITEM 13
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
Certain
Relationships and Related Transactions
We have entered into the following agreements with our named
executive officers, our directors and Westaim.
Employment
Agreements
We have entered into employment agreements with our executive
officers. For more information regarding these agreements, see
Executive Compensation Summary of Employment
Agreements for each named executive officer.
Director
and Officer Indemnification
Our by-laws contain provisions for the indemnification of our
directors and officers. Additionally we have entered into
indemnity agreements with all of our directors and executive
officers.
89
Under the Business Corporations Act (Alberta)
(ABCA), we may indemnify an individual who:
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is or was our director or officer; or
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|
is or was a director or officer of another corporation, of which
we are or were a shareholder or creditor, at our request;
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|
against all costs, charges and expenses, including an amount
paid to settle an action or satisfy a judgment, reasonably
incurred by the director or officer in respect of any civil,
criminal or administrative action or proceeding, in which such
eligible party is involved because of that association with us
or the other entity.
|
However, indemnification is prohibited under ABCA if:
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|
|
such eligible party did not act honestly and in good faith with
a view to our best interests (or the best interests of the other
entity, as the case may be); and
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|
|
in the case of a criminal or administrative proceeding that is
enforced by monetary penalty, such eligible party did not have
reasonable grounds for believing that such persons conduct
was lawful.
|
Subject to the foregoing, we may, with the approval of the Court
of Queens Bench of Alberta, indemnify or pay all costs,
charges and expenses reasonably incurred by an eligible party in
respect of an action brought against the eligible party by or on
behalf of us to which the eligible party is made a party by
reason of being or having been a director or officer of us (or
the other entity as the case may be).
The ABCA provides that we may purchase and maintain insurance
for the benefit of an eligible party (or their heirs and
personal or other legal representatives or the eligible party)
against any liability that may be incurred by reason of the
eligible party being or having been a director or officer, or in
an equivalent position of ours or that of an associated
corporation. Our directors and officers are insured against
certain losses under liability insurance obtained and maintained
by Westaim for the protection of all the directors and officers
of Westaim and NUCRYST against liability incurred by them in
their capacities as directors and officers of Westaim and
NUCRYST and their respective past and present subsidiaries. The
policy also insures Westaim and NUCRYST against certain
obligations to indemnify their respective officers and
directors. Under the policy of insurance, there is a deductible
of CDN$250,000 per occurrence payable by NUCRYST. We expect to
be covered by Westaims policy at least until
September 30, 2009 when Westaims coverage expires at
which time we intend to obtain our own insurance policies or
continue our coverage under Westaims renewed policies,
unless Westaim no longer holds more than 50% of our outstanding
common shares, and subject to the earlier termination of the
services agreement we entered into with Westaim or that portion
of the services agreement relating to the provision of insurance
to us by Westaim.
We have entered into indemnity agreements with all of our
directors and executive officers to effectuate the provisions
described above. Under these agreements, we have agreed to
indemnify our directors and executive officers against all costs
and liabilities arising out of or incurred in respect of any
action suit, proceeding, investigation or claim, or pursuant to
any statute, in connection with our affairs or the affairs of
any subsidiary, or the exercise of the powers of the performance
of the duties of the director or officer, unless it is finally
determined by a court that in so acting the director or officer
was not acting honestly and in good faith with a view to the
best interests of us or any affiliated entity or, in the case of
a criminal or administrative action or proceeding that is
enforced by a monetary penalty, that the director or officer did
not have reasonable grounds for believing that his conduct was
lawful.
Relationship
with Westaim
We have entered into the following agreements and arrangements
with Westaim, our controlling shareholder. The following summary
of certain provisions of the agreements described below is not
complete. For more detailed information, please see the copies
of forms of these agreements that are incorporated by reference
as exhibits to this annual report.
Services Agreement.
Pursuant to a services
agreement we have entered into with Westaim, Westaim provided
specified corporate and administrative services, including, but
not limited to, insurance and risk management; cash management;
legal services; human resources services; payroll processing
services; environmental, health and safety services; specified
tax and accounting services; and intellectual property licensing
services. We reimburse Westaim for its fully allocated costs (or
in the case of services provided by third parties, for the
amount it pays to third parties) for providing those services.
In 2008, these services cost approximately $0.5 million. We
have brought most services in-house which were absorbed by our
staff. At December 31, 2008, we continue to receive
insurance and risk management services, as well as tax and
intellectual property management services from Westaim.
Additional services may be agreed upon
90
between the parties from time to time. The agreement may be
terminated at any time, in whole or part, (1) by agreement
between us and Westaim, (2) upon six months written notice
from either party given on or after the first anniversary of the
date of the agreement, (3) by Westaim if it wishes to
discontinue provision of any service due to the resignation or
termination of any key employee or contractor reasonably
necessary for the performance of such service or (4) upon
written notice from either party in the event of a breach of the
agreement not remedied for ten business days following written
notice of the breach.
As noted above under
Director and Officer
Indemnification
, Westaim provides liability insurance
obtained and maintained by Westaim for the protection of all the
directors and officers of Westaim and NUCRYST against liability
incurred by them in their capacities as directors and officers
of Westaim and NUCRYST and their respective past and present
subsidiaries. We reimburse Westaim for the costs of that
coverage under the arrangements described earlier in this
paragraph. We expect to be covered by Westaims policy at
least until September 30, 2009 when Westaims coverage
expires, at which time we intend to obtain our own insurance
policies or continue our coverage under Westaims renewed
policies, unless Westaim no longer holds more than 50% of our
outstanding common shares, and subject to the earlier
termination of the services agreement we entered into with
Westaim or that portion of the services agreement relating to
the provision of insurance to us by Westaim. In the event we are
no longer covered by Westaims insurance policies, we would
have to obtain our own insurance policies, which could result in
increased costs or reduced insurance coverage.
Master Separation Agreement.
In connection
with our initial public offering, we entered into a Master
Separation Agreement with Westaim providing for the separation
of our business from the business of Westaim. The agreement sets
forth certain covenants relating to the ongoing relationship
between Westaim and us with respect to intellectual property,
access to information, retention of records and confidentiality
of certain information exchanged between Westaim and us. The
agreement requires us to indemnify Westaim for certain losses
that may occur as a result of any claims brought by third
parties relating to our initial public offering. The agreement
also contains mutual releases with respect to certain claims and
liabilities arising prior to the completion of our initial
public offering.
Registration Rights Agreement.
We entered into
an agreement with Westaim pursuant to which Westaim has, among
other things, registration rights under the Securities Act with
respect to their common shares and the right to cause us to file
a prospectus qualifying the common shares it owns in Canada
under applicable Canadian securities laws.
Westaim Directors and Officers.
Three of our
directors are also directors of Westaim. One such director is
currently the President and Chief Executive Officer of Westaim
and another such director served as President and Chief
Executive Officer of Westaim until May 23, 2007 when he
resigned his position with Westaim.
Distribution of Capital.
In May 2008, Westaim
announced that as a part of an overall strategic review, it was
reviewing alternatives for monetizing its investment in NUCRYST,
including the sale of its NUCRYST shares, the distribution of
its NUCRYST shares to shareholders of Westaim or the investment
of Westaims remaining liquid assets 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 NUCRYST shareholders. After evaluating
various alternatives regarding the request for a return of
capital, our board of directors called a special meeting of
shareholders to consider a special resolution pursuant to
section 38(1) of the ABCA to reduce the stated capital of
our outstanding common shares by an amount equal to the product
of the number of common shares outstanding on the date of the
meeting and $0.80 for the purpose of distributing $0.80 cash per
common share to our shareholders. The meeting was held on
Thursday, February 12, 2009, the special resolution was
approved. The return of capital distribution will total
$14.7 million and we have set a payable date of
February 25, 2009.
Policies
and Procedures for Review, Approval or Ratification of
Transactions with Related Persons
The Charters of our Audit Committee and Corporate Governance and
Nominating Committee require that each committee, each of which
is comprised entirely of independent directors, review and
approve related party transactions as defined under the
applicable rules of the SEC. NUCRYSTs By-Laws also require
that a director or officer who is a party to a material contract
or proposed material contract with NUCRYST, or is a director or
an officer of or has a material interest in any person who is a
party to a material contract or proposed material contract with
NUCRYST shall disclose the nature and extent of his interest at
the time and in the manner provided in the
Business
Corporations Act
(Alberta). NUCRYSTs By-laws further
provided that, except as provided in that Act, no such director
shall vote on any resolution to approve such contract.
91
In addition, under NUCRYSTs Code of Conduct, all
directors, officers and employees of NUCRYST are expected to
avoid any apparent or actual conflicts of interest between their
personal and professional relationships and are prohibited from:
Any violations of NUCRYSTs Code of Conduct are to be
promptly reported to our Chief Financial Officer. Pursuant to
our Code, our Board, Audit Committee or Corporate Governance and
Nominating Committee may waive compliance with our Code, subject
to the disclosure and other provisions of the applicable
Canadian and U.S. securities legislation and the applicable
rules of the stock exchanges upon which our shares trade from
time to time.
ITEM 14. PRINCIPAL
ACCOUNTANT FEES AND SERVICES
During 2008, we retained our principal accountants,
Deloitte & Touche LLP, to provide services in the
following categories and amounts:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(in thousands)
|
|
|
Audit Fees
|
|
$
|
252
|
|
|
$
|
200
|
|
Audit-Related Fees
|
|
|
13
|
|
|
|
26
|
|
Tax Fees
|
|
|
105
|
|
|
|
39
|
|
All Other Fees
|
|
|
55
|
|
|
|
|
|
Audit
Fees
Audit fees are fees for services related to the audit of our
annual financial statements for the 2008 and 2007 fiscal years
and for the review of the financial statements included in our
Quarterly Reports on
Form 10-Q
for those years.
Audit-Related
Fees
Amounts paid under Audit-Related Fees in 2008 were
$13 and $26 in 2007, which related to consultation and advise on
various transactions.
Tax
Fees
Amounts paid under Tax Fees were $104 in 2008 and
$39 in 2007 for tax compliance and consulting.
All Other
Fees
Amounts paid under All Other Fees were $55 in 2008
and $nil in 2007 for transaction support services.
The Audit Committee has considered the compatibility of the
non-audit services and audit related services provided by
Deloitte & Touche LLP with their independence.
The Audit Committee is required to pre-approve the audit and
non-audit services performed by our independent auditors in
order to assure that the provision of such services does not
impair the auditors independence. Unless a type of service
to be provided by the independent auditors has received general
pre-approval, it requires specific pre-approval by the Audit
Committee. Any proposed services exceeding pre-approved cost
levels require specific pre-approval by the Audit Committee. The
Audit Committee at least annually reviews and pre-approves the
services that may be provided by the independent auditors
without obtaining specific pre-approval from the Audit
Committee. The Audit Committee does not delegate its
responsibilities to pre-approve services performed by the
independent auditors to management. The Audit Committee may
delegate pre-approval authority to one or more of its members.
The annual audit services engagement terms and fees are subject
to the specific pre-approval of the Audit Committee.
All audit fees in 2008 were pre-approved by the Audit Committee.
92
PART IV
ITEM 15. EXHIBITS,
FINANCIAL STATEMENTS AND SCHEDULES
|
|
1.
|
Consolidated
Financial Statements
|
The following documents are filed as part of this Annual
Report on
Form 10-K:
Report of Deloitte & Touche LLP, Independent
Registered Chartered Accountants
Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Cash Flows Statements
Consolidated Statements of Shareholders Equity
(Deficit)
Notes to Consolidated Financial Statements
|
|
2.
|
Financial
Statement Schedules
|
None.
|
|
|
|
|
|
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
|
|
|
|
|
Filed
|
No.
|
|
Description
|
|
Form
|
|
Exhibit
|
|
Date
|
|
Herewith
|
|
|
2
|
.1
|
|
Asset Purchase Agreement, dated May 8, 2001, between the
Registrant and Smith & Nephew, Inc.
|
|
Form F-1 Amendment No. 3
|
|
2.1
|
|
19-12-05
|
|
|
|
3
|
.1
|
|
Articles of the Registrant
|
|
Form F-1 Amendment No. 2
|
|
3.1
|
|
16-12-05
|
|
|
|
3
|
.2
|
|
Articles of Amendment
|
|
Form F-1 Amendment No. 2
|
|
3.2
|
|
16-12-05
|
|
|
|
3
|
.3
|
|
By-laws of the Registrant
|
|
Form F-1 Amendment No. 2
|
|
3.3
|
|
16-12-05
|
|
|
|
4
|
.1
|
|
Specimen certificate evidencing common shares
|
|
Form F-1 Amendment No. 2
|
|
4.1
|
|
16-12-05
|
|
|
|
10
|
.1
|
|
Form of Master Separation Agreement between the Registrant and
The Westaim Corporation (Westaim)
|
|
Form F-1 Amendment No. 2
|
|
10.1
|
|
16-12-05
|
|
|
|
10
|
.2
|
|
Form of Services Agreement between the Registrant and Westaim
|
|
Form F-1 Amendment No. 2
|
|
10.2
|
|
16-12-05
|
|
|
|
10
|
.3
|
|
Form of Registration Rights Agreement between the Registrant and
Westaim
|
|
Form F-1 Amendment No. 3
|
|
10.3
|
|
19-12-05
|
|
|
|
10
|
.4
|
|
Amended and Restated License and Development Agreement, dated as
of February 20, 2002, among the Registrant, NUCRYST
Pharmaceuticals Inc., Smith & Nephew, Inc. and T.J.
Smith & Nephew Limited
|
|
Form F-1 Amendment No. 3
|
|
10.6
|
|
19-12-05
|
|
|
|
10
|
.5
|
|
Letter Agreement, dated March 14, 2002, among the
Registrant, NUCRYST Pharmaceuticals Inc., Smith &
Nephew, Inc. and T.J. Smith & Nephew Limited
|
|
Form F-1 Amendment No. 3
|
|
10.7
|
|
19-12-05
|
|
|
|
10
|
.6
|
|
Amending Agreement, dated November 3, 2003, among the
Registrant, NUCRYST Pharmaceuticals Inc., Smith &
Nephew, Inc. and T.J. Smith & Nephew Limited
|
|
Form F-1 Amendment No. 3
|
|
10.8
|
|
19-12-05
|
|
|
93
|
|
|
|
|
|
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
|
|
|
|
|
Filed
|
No.
|
|
Description
|
|
Form
|
|
Exhibit
|
|
Date
|
|
Herewith
|
|
|
10
|
.7
|
|
Supply Agreement, dated May 8, 2001, among the Registrant,
Smith & Nephew, Inc. and T.J. Smith & Nephew
Limited
|
|
Form F-1 Amendment No. 3
|
|
10.9
|
|
14-12-05
|
|
|
|
10
|
.8
|
|
Manufacturing Technology Escrow Agreement, dated May 8,
2001, among the Registrant, Smith & Nephew, Inc., T.J.
Smith & Nephew Limited and Montreal Trust Company
of Canada, as escrow agent
|
|
Form F-1 Amendment No. 1
|
|
10.10
|
|
14-12-05
|
|
|
|
10
|
.9
|
|
Security Trust Agreement, dated as of May 8, 2001,
between the Registrant and Montreal Trust Company of
Canada, as trustee
|
|
Form F-1 Amendment No. 1
|
|
10.11
|
|
14-12-05
|
|
|
|
10
|
.10
|
|
Trust Indenture, dated May 8, 2001, among the
Registrant, NUCRYST Pharmaceuticals Inc. and Montreal
Trust Company of Canada, as trustee
|
|
Form F-1 Amendment No. 3
|
|
10.12
|
|
19-12-05
|
|
|
|
10
|
.11
|
|
Subordination and Non-Disturbance Agreement, dated as of
May 8, 2001, among the Registrant, NUCRYST Pharmaceuticals
Inc., Smith & Nephew, Inc., T.J. Smith &
Nephew Limited and Montreal Trust Company of Canada
|
|
Form F-1 Amendment No. 1
|
|
10.13
|
|
14-12-05
|
|
|
|
10
|
.12
|
|
Memorandum of Lease Agreement, dated as of July 1, 2005,
between the Registrant and The Westaim Corporation
|
|
Form F-1 Amendment No. 2
|
|
10.14
|
|
16-12-05
|
|
|
|
10
|
.13*
|
|
1998 Equity Incentive Plan
|
|
Form F-1 Amendment No. 2
|
|
10.16
|
|
16-12-05
|
|
|
|
10
|
.14*
|
|
Form of Stock Option Agreements under the 1998 Equity Incentive
Plan
|
|
Form F-1 Amendment No. 2
|
|
10.17
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|
16-12-05
|
|
|
|
10
|
.15*
|
|
Form of Amended and Restated 1998 Equity Incentive Plan
|
|
Form F-1 Amendment No. 2
|
|
10.18
|
|
16-12-05
|
|
|
|
10
|
.16*
|
|
Form of Stock Option Agreement under the Amended and Restated
1998 Equity Incentive Plan
|
|
Form F-1 Amendment No. 3
|
|
10.19
|
|
19-12-05
|
|
|
|
10
|
.17*
|
|
Letter Agreement, dated March 16, 2005, between the
Registrant and Mr. Eliot M. Lurier
|
|
Form F-1 Amendment No. 2
|
|
10.22
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|
16-12-05
|
|
|
|
10
|
.18*
|
|
Letter Agreement, dated June 15, 2005, between the
Registrant and Mr. David C. McDowell
|
|
Form F-1 Amendment No. 2
|
|
10.23
|
|
16-12-05
|
|
|
|
10
|
.19*
|
|
Summary of Non-Employee Director Compensation
|
|
Form F-1 Amendment No. 3
|
|
10.25
|
|
19-12-05
|
|
|
|
10
|
.20
|
|
Form of Indemnification Agreement
|
|
Form F-1 Amendment No. 2
|
|
10.26
|
|
16-12-05
|
|
|
|
10
|
.21*
|
|
Summary of Changes to 2008 Compensation of Named Executive
Officers
|
|
|
|
|
|
|
|
|
94
|
|
|
|
|
|
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
|
|
|
|
|
Filed
|
No.
|
|
Description
|
|
Form
|
|
Exhibit
|
|
Date
|
|
Herewith
|
|
|
10
|
.22*
|
|
Summary of Employment arrangement between Registrant and
Mr. Barry M. Heck, effective May 23, 2007.
|
|
Form 10-Q/A
|
|
10.2
|
|
7-11-07
|
|
|
|
10
|
.23*
|
|
Letter Agreement between Registrant and Dr. Katherine
Turner dated May 19, 2006.
|
|
Form 10-Q/A
|
|
10.4
|
|
7-11-07
|
|
|
|
10
|
.24*
|
|
Summary of Amendments made effective July 1, 2007 to Letter
Agreement between Registrant and Dr. Katherine Turner dated
May 19, 2006
|
|
Form 10-Q/A
|
|
10.5
|
|
7-11-07
|
|
|
|
10
|
.25*
|
|
Summary of Non-Employee Director Compensation, as amended
effective May 2, 2006
|
|
Form 10-Q/A
|
|
10.6
|
|
7-11-07
|
|
|
|
10
|
.26*
|
|
Deferred Share Unit Plan adopted by Registrant effective
March 16, 2006
|
|
Form 10-Q/A
|
|
10.7
|
|
7-11-07
|
|
|
|
10
|
.27*
|
|
Summary of Non-Employee Director Compensation, as amended
effective June 14, 2007
|
|
Form 10-Q/A
|
|
10.8
|
|
7-11-07
|
|
|
|
10
|
.28*
|
|
Summary of 2007 Named Executive Performance Targets under
Registrants variable pay program
|
|
Form 10-Q/A
|
|
10.9
|
|
7-11-07
|
|
|
|
10
|
.29*
|
|
Form of Director Restricted Stock Unit Award Agreement
|
|
Form 8-K
|
|
99.1
|
|
20-12-06
|
|
|
|
10
|
.30*
|
|
Form of Restricted Stock Unit Award Agreement
Executive Officer
|
|
Form 10-Q/A
|
|
10.12
|
|
7-11-07
|
|
|
|
10
|
.31*
|
|
Employment Agreement between the Registrant and Mr. Thomas
E. Gardner dated Aug 21, 2007
|
|
Form 8-K
|
|
10.29
|
|
23-08-07
|
|
|
|
10
|
.32*
|
|
Summary of Termination of employment arrangement with
Mr. Barry M. Heck effective August 22, 2007
|
|
Form 10-Q
|
|
10.6
|
|
7-11-07
|
|
|
|
10
|
.33
|
|
Amended and Restated Supply Agreement, dated September 30,
2007, among the Registrant, Smith & Nephew, Inc. and
T.J. Smith & Nephew Limited, effective
January 1, 2007
|
|
Form 8-K/A
|
|
99.1
|
|
6-11-07
|
|
|
|
10
|
.34
|
|
Second Amended and Restated License and Development Agreement,
dated September 30, 2007, among the Registrant, NUCRYST
Pharmaceuticals Inc., Smith & Nephew, Inc., and T.J.
Smith & Nephew Limited
|
|
Form 8-K/A
|
|
99.2
|
|
6-11-07
|
|
|
|
10
|
.35*
|
|
Letter Agreement made effective September 1, 2007 amending
the Letter Agreement between the Registrant and Mr. David
C. McDowell dated June 15, 2005
|
|
Form 10-K
|
|
10.46
|
|
28-02-08
|
|
|
95
|
|
|
|
|
|
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
|
|
|
|
|
Filed
|
No.
|
|
Description
|
|
Form
|
|
Exhibit
|
|
Date
|
|
Herewith
|
|
|
10
|
.36*
|
|
Letter Agreement made effective January 1, 2008 amending
the Letter Agreement between the Registrant and Mr. Eliot
Lurier dated March 16, 2005
|
|
Form 10-K
|
|
10.47
|
|
28-02-08
|
|
|
|
10
|
.37*
|
|
Letter Agreement made effective January 1, 2008 amending
the Letter Agreement between the Registrant and
Dr. Katherine Turner dated May 19, 2006
|
|
Form 10-K
|
|
10.48
|
|
28-02-08
|
|
|
|
10
|
.38*
|
|
Form of Employee Incentive Program
|
|
Form 10-K
|
|
10.49
|
|
28-02-08
|
|
|
|
10
|
.39*
|
|
Letter Agreement between Ms. Carol L. Amelio and the
Registrant dated February 1, 2006.
|
|
Form 10-K
|
|
10.50
|
|
28-02-08
|
|
|
|
10
|
.40*
|
|
Summary of 2008 Variable Pay Targets
|
|
Form 10-K
|
|
10.51
|
|
28-02-08
|
|
|
|
10
|
.41*
|
|
Stock Option Award Agreement dated April 10, 2008 between
the Registrant and Thomas E. Gardner
|
|
Form 8-K
|
|
10.52
|
|
10-04-08
|
|
|
|
10
|
.42*
|
|
Confidential Separation and General Release Agreement dated
April 15, 2008 between the Registrant and Eliot M. Lurier
|
|
Form 8-K
|
|
99.1
|
|
29-04-08
|
|
|
|
10
|
.43*
|
|
Employment Agreement dated May 8, 2008 between the
Registrant and David B. Holtz
|
|
Form 8-K
|
|
10.53
|
|
7-05-08
|
|
|
|
10
|
.44*
|
|
Stock Option Award Agreement dated May 8, 2008 between the
Registrant and David B. Holtz
|
|
Form 8-K
|
|
10.54
|
|
7-05-08
|
|
|
|
10
|
.45*
|
|
1998 Equity Incentive Plan As further amended
|
|
Form 8-K
|
|
10.55
|
|
8-05-08
|
|
|
|
10
|
.46
|
|
Registration of Securities dated May 14, 2008
|
|
Form S-8
|
|
5.1
23.1
23.2
24.1
|
|
14-05-08
|
|
|
|
10
|
.47
|
|
Post Effective Amendment No. to
Form S-8
|
|
Form S-8
|
|
4.1
|
|
14-05-08
|
|
|
|
10
|
.48*
|
|
Confidential Separation and General Release Agreement dated
April 30, 2008 between the Registrant and Katherine J.
Turner
|
|
Form 8-K
|
|
10.56
|
|
21-05-08
|
|
|
|
10
|
.49*
|
|
Summary of Non Employee Director Compensation, as amended
effective June 6, 2008
|
|
Form 10-Q
|
|
10.58
|
|
30-06-08
|
|
|
|
10
|
.50*
|
|
1998 Equity Incentive Plan as further amended on May 8, 2008
|
|
Form 10-Q
|
|
10.59
|
|
30-06-08
|
|
|
|
10
|
.51
|
|
Letter Agreement dated August 18, 2008 between T.J.
Smith & Nephew Limited and Smith & Nephew
Inc. and the Registrant
|
|
Form 10-Q
|
|
10.60
|
|
30-09-08
|
|
|
96
|
|
|
|
|
|
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
|
|
|
|
|
Filed
|
No.
|
|
Description
|
|
Form
|
|
Exhibit
|
|
Date
|
|
Herewith
|
|
|
10
|
.52
|
|
Amendment to Lease #2 dated September 4, 2008 between
Cummings Properties, LLC and the Registrant
|
|
Form 10-Q
|
|
10.61
|
|
30-09-08
|
|
|
|
10
|
.53*
|
|
Amended and Restated Employment Agreement dated
December 18, 2008 between Thomas E. Gardner and the
Registrant
|
|
Form 8-K
|
|
10.56
|
|
18-12-08
|
|
|
|
10
|
.54*
|
|
Amending Agreement to Stock Option Award Agreement dated
December 18, 2008 between Thomas E. Gardner and the
Registrant
|
|
Form 8-K
|
|
10.57
|
|
18-12-08
|
|
|
|
10
|
.55*
|
|
Confidential Separation and General Release Agreement dated
December 24, 2008 between Edward Gaj, Jr. and the Registrant
|
|
Form 8-K/A
|
|
10.58
|
|
9-12-08
|
|
|
|
10
|
.56
|
|
Consulting Agreement dated effective January 1, 2009
between Edward Gaj, Jr. and the Registrant
|
|
Form 8-K/A
|
|
10.59
|
|
9-12-08
|
|
|
|
10
|
.57
|
|
Confidential Separation Agreement and General Release dated
effective February 11, 2009 between Thomas E. Gardner and
the Registrant
|
|
Form 8-K
|
|
99.1
|
|
18-02-09
|
|
|
|
21
|
.1
|
|
Subsidiaries of the Registrant
|
|
Form F-1
|
|
21.1
|
|
2-12-05
|
|
|
|
23
|
.1
|
|
Consent of Deloitte & Touche LLP
|
|
|
|
|
|
|
|
X
|
|
24
|
.1
|
|
Power of Attorney (included on signature page hereto)
|
|
|
|
|
|
|
|
|
|
31
|
.1
|
|
Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
|
|
|
|
|
|
|
X
|
|
32
|
.1
|
|
Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
|
|
|
|
|
|
|
|
X
|
|
|
|
Confidential treatment has been granted for portions of this
exhibit.
|
|
|
*
|
Indicates management compensatory plan, contract or arrangement.
|
97
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 February 18, 2009.
NUCRYST PHARMACEUTICALS CORP.
David B. Holtz
Interim President and Chief Executive Officer
Chief Financial Officer
POWER OF
ATTORNEY
We, the undersigned officers and directors of NUCRYST
Pharmaceuticals Corp., hereby severally constitute and appoint
David B. Holtz, our true and lawful attorney, with full power to
him to sign for us in our names in the capacities indicated
below, all amendments to this Annual Report on
Form 10-K,
and generally to do all things in our names and on our behalf in
such capacities to enable NUCRYST Pharmaceuticals Corp. to
comply with the provisions of the Securities Act of 1934, as
amended, and all requirements of the Securities and Exchange
Commission. Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the
capacities and effective February 18, 2009.
|
|
|
|
|
|
|
Name
|
|
Title
|
|
/s/
David
B. Holtz
David
B. Holtz
|
|
Interim President and Chief Executive Officer
Chief Financial Officer
(Principal Executive Officer, Principal Financial Officer and
Principal Accounting Officer)
|
|
|
|
/s/
Richard
Zahn
Richard
Zahn
|
|
Director
|
|
|
|
/s/
Barry
M. Heck
Barry
M. Heck
|
|
Director
|
|
|
|
/s/
Neil
Carragher
Neil
Carragher
|
|
Director
|
|
|
|
/s/
Roger
G.H. Downer
Roger
G.H. Downer
|
|
Director
|
|
|
|
/s/
David
Poorvin
David
Poorvin
|
|
Director
|
|
|
|
/s/
G.A.
(Drew) Fitch
G.A.
(Drew) Fitch
|
|
Director
|
98
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