UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
[ ]
[X]
[ ]
[ ]
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF
1934
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended November 30, 2013
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
OR
OR
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report …………
For the transition period from ________ to ________
Commission File No. 0-53805
INTELLIPHARMACEUTICS INTERNATIONAL
INC.
(Exact name of registrant as specified in its charter)
Canada
(Jurisdiction of Incorporation or organization)
30 Worcester Road
Toronto, Ontario M9W 5X2
(Address of principal executive offices)
Shameze Rampertab, Vice President Finance and Chief Financial Officer, Intellipharmaceutics International Inc., 30 Worcester Road,
Toronto, Ontario M9W 5X2, Telephone: (416) 798-3001, Fax: (416) 798-3007
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each class
Common shares, no par value
Name of each exchange
on which registered
NASDAQ
TSX
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
As of November 30, 2013, the registrant had 21,430,611 common shares outstanding.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes [ ] No [x]
If this report is an annual report or transition report, indicate by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934.
Yes [ ] No [x]
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 [x] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T(§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes [x] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition
of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [x]
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP [x]
International Financial Reporting Standards as issued by
the International Accounting Standards Board [ ]
Other [ ]
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant
has elected to follow:
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).
Item 17 [ ] Item 18 [ ]
Yes [ ] No [x]
TABLE OF CONTENTS
History and Development of the Company
Business Overview
Organizational Structure
Property, Plant and Equipment
Operating Results
Liquidity and Capital Resources
Research and development, patents, and licenses, etc
Trend Information
Off-balance sheet arrangements
Tabular disclosure of contractual obligations
Safe Harbor
Identity of Directors, Senior Management and Advisors
Offer Statistics and Expected Timetable
Key Information
Selected Financial Data
A.
Capitalization and Indebtedness
B.
Reasons for the Offer and Use of Proceeds
C.
D.
Risk Factors
Information on the Company
A.
B.
C.
D.
Unresolved Staff Comments.
Operating and Financial Review and Prospects
A.
B.
C.
D.
E.
F.
G.
Directors, Senior Management and Employees
Directors and Senior Management
A.
Compensation
B.
Board Practices
C.
Employees
D.
E.
Share Ownership
Major Shareholders and Related Party Transactions
A.
B.
Financial Information
A.
B.
The Offer and Listing
Additional Information
A.
B.
C.
D.
E.
F.
G.
H.
I.
Qualitative and Quantitative Disclosures about Market Risk
Description of Securities Other than Equity Securities
Share Capital
Articles and By-laws
Material Contracts
Exchange Controls
Taxation
Dividends and Paying Agents
Statement by Experts
Documents on Display
Subsidiary Information
Major Shareholders
Related Party Transactions
Consolidated Statements and Other Financial Information
Significant changes
Defaults, Dividends Arrearages and Delinquencies
Material Modifications to the Rights of Security Holders and Use of Proceeds
Controls and Procedures
Audit Committee Financial Expert
Code of Ethics
Principal Accountant Fees and Services
Part I.
Item 1.
Item 2.
Item 3.
Item 4.
Item 4A.
Item 5.
Item 6.
Item 7.
Item 8.
Item 9.
Item 10.
Item 11.
Item 12.
Part II.
Item 13.
Item 14.
Item 15.
Item 16A.
Item 16B.
Item 16C.
Page
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TABLE OF CONTENTS
(continued)
Exemptions from the Listing Standards for Audit Committees
Item 16D.
Purchases of Equity Securities by the Issuer and Affiliated Purchases
Item 16E.
Change in Registrant’s Certifying Accountant
Item 16F.
Corporate Governance
Item 16G.
Item 16H. Mine Safety Disclosure
Part III.
Item 17
Item 18
Item 19
Financial Statements
Financial Statements
Exhibits
Page
90
90
90
90
91
91
91
91
92
DISCLOSURE REGARDING FORWARD-LOOKING INFORMATION
Certain statements in this annual report constitute “forward-looking statements” within the meaning of the United States Private
Securities Litigation Reform Act of 1995 and/or “forward-looking information” under the Securities Act (Ontario). These statements include,
without limitation, statements expressed or implied regarding our plans, goals and milestones, status of developments or expenditures relating
to our business, plans to fund our current activities, statements concerning our partnering activities, health regulatory submissions, strategy,
future operations, future financial position, future sales, revenues and profitability, projected costs and market penetration. In some cases, you
can identify forward-looking statements by terminology such as “may”, “will”, “should”, “expects”, “plans”, “anticipates”, “believes”,
“estimates”, “predicts”, “potential”, “continue”, “intends”, “could”, or the negative of such terms or other comparable terminology. We made a
number of assumptions in the preparation of our forward-looking statements. You should not place undue reliance on our forward-looking
statements, which are subject to a multitude of known and unknown risks and uncertainties that could cause actual results, future
circumstances or events to differ materially from those stated in or implied by the forward-looking statements.
Risks, uncertainties and other factors that could affect our actual results include, but are not limited to, the estimated proceeds we
may receive from any offering of our securities, our expected use of any proceeds from any offering, the effects of general economic
conditions, securing and maintaining corporate alliances, our estimates regarding our capital requirements, and the effect of capital market
conditions and other factors, including the current status of our product development programs, on capital availability, the potential dilutive
effects of any future financing, our programs regarding research, development and commercialization of our product candidates, the timing of
such programs, the timing, costs and uncertainties regarding obtaining regulatory approvals to market our product candidates, and the timing
and amount of any available investment tax credits (“ITCs”). Other factors that could cause actual results to differ materially include but are
not limited to:
·
·
·
·
·
·
·
·
·
·
the actual or perceived benefits to users of our drug delivery technologies, products and product candidates as compared to others;
our ability to establish and maintain valid and enforceable intellectual property rights in our drug delivery technologies, products and
product candidates;
the scope of protection provided by intellectual property for our drug delivery technologies, products and product candidates;
the actual size of the potential markets for any of our products and product candidates compared to our market estimates;
our selection and licensing of products and product candidates;
our ability to attract distributors and collaborators with the ability to fund patent litigation and with acceptable development,
regulatory and commercialization expertise and the benefits to be derived from such collaborative efforts;
sources of revenues and anticipated revenues, including contributions from distributors and collaborators, product sales, license
agreements and other collaborative efforts for the development and commercialization of product candidates;
our ability to create an effective direct sales and marketing infrastructure for products we elect to market and sell directly;
the rate and degree of market acceptance of our products;
the difficulty of predicting the impact of competitive products and pricing and the timing and success of product launches;
-1-
·
·
·
·
·
·
·
·
the timing and amount of insurance reimbursement for our products;
changes in the laws and regulations, including Medicare and Medicaid, affecting among other things, pricing and reimbursement of
pharmaceutical products;
the success and pricing of other competing therapies that may become available;
our ability to retain and hire qualified employees;
the availability and pricing of third-party sourced products and materials;
difficulties or delays in manufacturing;
the manufacturing capacity of third-party manufacturers that we may use for our products; and
the successful compliance with United States Food and Drug Administration (“ FDA”) and other governmental regulations
applicable to us and our third party manufacturers’ facilities, products and/or businesses.
Additional risks and uncertainties relating to us and our business can be found in the “Risk Factors” section in Item 3.D below, as well
as in our reports, public disclosure documents and other filings with the securities commissions and other regulatory bodies in Canada and the
U.S., which are available on www.sedar.com and www.sec.gov. The forward-looking statements reflect our current views with respect to
future events, and are based on what we believe are reasonable assumptions as of the date of this document. We disclaim any intention and
have no obligation or responsibility, except as required by law, to update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
Nothing contained in this document should be construed to imply that the results discussed herein will necessarily continue or that any
conclusion reached herein will necessarily be indicative of actual operating results of the Company.
In this annual report, unless the context otherwise requires, the terms “we”, “us”, “our”, “Intellipharmaceutics” and the “Company”
refer to Intellipharmaceutics International Inc. and its subsidiaries. Any reference in this annual report to our “products” includes a reference to
our product candidates and future products we may develop. In this annual report, we refer to information regarding potential markets for our
products, product candidates and other industry data. We believe that all such information has been obtained from reliable sources that are
customarily relied upon by companies in our industry. However, we have not independently verified any such information.
Intellipharmaceutics™, Hypermatrix™, Drug Delivery Engine™,
IntelliMatrix™,
IntelliOsmotics™, IntelliPaste™, IntelliPellets™, IntelliShuttle™, Rexista™, nPODDDS™ and Regabatin™ are our trademarks. These
trademarks are important to our business. Although we may have omitted the “TM” trademark designation for such trademarks in this annual
report, all rights to such trademarks are nevertheless reserved. Unless otherwise noted, other trademarks used in this annual report are the
property of their respective holders.
IntelliGITransporter™,
IntelliFoam™,
Item 1.
Identity of Directors, Senior Management and Advisers
PART I.
A.
Directors and senior management
Not applicable.
-2-
B.
Advisors
Not applicable.
C.
Auditors
Not applicable.
Item 2.
Offer Statistics and Expected Timetable
A.
Offer statistics
Not applicable.
B.
Method and expected timetable
Not applicable.
Item 3.
Key Information
A.
Selected Financial Data
The following selected financial data of Intellipharmaceutics has been derived from the audited consolidated financial statements of
the Company as at and for the years ended November 30, 2013, 2012, 2011 and 2010, and the eleven month period ended November 30, 2009.
As a result of the IPC Arrangement Transaction (as defined and described in Item 4.A below) completed on October 22, 2009, we selected a
November 30 year end. The comparative number of shares issued and outstanding, basic and diluted loss per share have been amended to give
effect to this arrangement transaction. These statements were prepared in accordance with accounting principles generally accepted in the
United States of America (“ U.S. GAAP”). All dollar amounts in this annual report are expressed in United States dollars (“ U.S. dollars”),
unless otherwise indicated.
Revenue
Loss for the period
Total assets
Total liabilities
Net assets
Capital stock (1)
Loss per share - basic and diluted
Dividends
Weighted average common shares
Periods ended
(in thousands, except for per share data)
As at and for the
year ended
November 30,
2013
As at and for
the year ended
November 30,
2012
As at and for the
year ended
November 30,
2011
As at and for the
year ended
November 30,
2010
As at and for
the eleven
month period
ended
November 30,
2009
107
(6,137)
2,475
4,243
(1,768)
6,129
(0.36)
Nil
17,259
1,527
(11,495)
4,380
10,335
(5,955)
11,721
(0.58)
Nil
19,671
-3-
502
(4,880)
6,247
9,340
(3,093)
902
(0.33)
Nil
14,994
1,459
(5,761)
3,268
3,175
93
17
(0.53)
Nil
10,907
630
(1,839)
11,081
6,449
4,632
17
(0.19)
Nil
9,512
Notes:
(1)
As restated for the year ended November 30, 2012 and 2011 and discussed in Items 5.A and 10.A
The following table sets forth the average exchange rate for one Canadian dollar expressed in terms of one U.S. dollar for the eleven
month period ended November 30, 2009 and for fiscal years 2010, 2011, 2012 and 2013. The average rate is calculated using the average of
the exchange rates on the last day of each month during the period.
2009 (11 months)
2010
2011
2012
2013
AVERAGE
0.8696
0.9673
1.0123
0.9977
1.0241
The following table sets forth the high and low exchange rates for each month during the previous six months.
August 2013
September 2013
October 2013
November 2013
December 2013
January 2014
February 2014 (through February 14, 2014)
LOW
0.9476
0.9494
0.9564
0.9435
0.9348
0.8952
0.9011
HIGH
0.9712
0.9768
0.9724
0.9602
0.9454
0.9422
0.9110
The exchange rates are based upon the noon buying rate as quoted by The Bank of Canada. At February 14, 2014, the exchange rate
for one Canadian dollar expressed in terms of one U.S. dollar, as quoted by The Bank of Canada at 4 p.m. Eastern Time, equaled $0.9105.
B.
Capitalization and Indebtedness
Not Applicable.
C.
Reasons for the Offer and Use of Proceeds
Not Applicable.
D.
Risk Factors
Prospects for companies in the pharmaceutical industry generally may be regarded as uncertain given the research and development
nature of the industry and uncertainty regarding the prospects of successfully commercializing product candidates and, accordingly,
investments in companies such as ours should be regarded as very speculative. An investor should carefully consider the risks and
uncertainties described below, as well as other information contained in this annual report. The list of risks and uncertainties described below
is not an exhaustive list. Additional risks and uncertainties not presently known to us or that we believe to be immaterial may also adversely
affect our business. If any one or more of the following risks occur, our business, financial condition and results of operations could be
seriously harmed. Further, if we fail to meet the expectations of the public market in any given period, the market price of our common shares
could decline. If any of the following risks actually occurs, our business, operating results, or financial condition could be materially adversely
affected.
Our activities entail significant risks. In addition to the usual risks associated with a business, the following is a general description of
certain significant risk factors which may be applicable to us.
-4-
Risks related to our Company
Our business is capital intensive and requires significant investment to conduct research and development, clinical and regulatory
activities necessary to bring our products to market, which capital may not be available in amounts or on terms acceptable to us, if at
all.
Our business requires substantial capital investment in order to conduct the research and development, clinical and regulatory
activities necessary to bring our products to market and to establish commercial manufacturing, marketing and sales capabilities. As of
November 30, 2013, we had a cash balance of $0.8 million. As of February 18, 2014, our cash balance was $6.1 million, which we currently
expect will fund our current operations through November 2014. We will need additional capital to fund our current operations commencing in
November 2014, and to fund any significant expansion of our operations. Although there can be no assurances, such financing may come from
revenues from proceeds of our at-the-market offering program (see “Prior Sales”, in Item 10, below for a further description of our at-the-
market offering program) and from sales of our dexmethylphenidate hydrochloride extended-release products. Other potential sources of capital
may include the collection of anticipated revenues resulting from future commercialization activities, development agreements or marketing
license agreements, cost savings associated with managing operating expense levels, equity and/or debt financings, and/or new strategic
partnership agreements funding some or all costs of development, although there can be no assurance that we will be able to obtain any such
capital on terms or in amounts sufficient to meet our needs or at all. The availability of equity or debt financing will be affected by, among
other things, the results of our research and development, our ability to obtain regulatory approvals, the market acceptance of our products, the
state of the capital markets generally, strategic alliance agreements, and other relevant commercial considerations. In addition, if we raise
additional funds by issuing equity securities, our then existing security holders will likely experience dilution, and the incurring of
indebtedness would result in increased debt service obligations and could require us to agree to operating and financial covenants that would
restrict our operations. In the event that we do not obtain additional capital, there may be substantial doubt about our ability to continue as a
going concern and realize our assets and pay our liabilities as they become due. Any failure on our part to raise additional funds on terms
favorable to us or at all, may require us to significantly change or curtail our current or planned operations in order to conserve cash until such
time, if ever, that sufficient proceeds from operations are generated, and could result in our not taking advantage of business opportunities, in
the termination or delay of clinical trials for one or more of our product candidates, in curtailment of our product development programs
designed to identify new product candidates, in the sale or assignment of rights to our technologies, products or product candidates, and/or our
inability to file abbreviated new drug applications (“ANDAs”) or new drug applications (“NDAs”) at all or in time to competitively market our
products or product candidates.
Delays, suspensions and terminations in our preclinical studies and clinical trials could result in increased costs to us and delay our
ability to generate product revenues.
The commencement of clinical trials can be delayed for a variety of reasons, including delays in:
·
·
·
·
·
·
demonstrating sufficient safety and efficacy to obtain regulatory approval to commence a clinical trial;
reaching agreement on acceptable terms with prospective contract research organizations and clinical trial sites;
manufacturing sufficient quantities of a drug candidate;
obtaining institutional review board approval to conduct a clinical trial at a prospective clinical trial site;
patient enrollment; and
for controlled substances, obtaining specific permission to conduct a study, and obtaining import and export permits to ship
study samples.
-5-
Once a clinical trial has begun, it may be delayed, suspended or terminated due to a number of factors, including:
·
·
·
·
·
·
·
·
·
the number of patients that participate in the trial;
the length of time required to enroll suitable subjects;
the duration of patient follow-up;
the number of clinical sites included in the trial;
changes in regulatory requirements or regulatory delays or clinical holds requiring suspension or termination of the trials;
delays, suspensions or termination of clinical trials due to the institutional review board overseeing the study at a particular
site;
failure to conduct clinical trials in accordance with regulatory requirements;
unforeseen safety issues, including serious adverse events or side effects experienced by participants; and
inability to manufacture, through third party manufacturers, adequate supplies of the product candidate being tested.
Based on results at any stage of product development, we may decide to repeat or redesign preclinical studies or clinical trials,
conduct entirely new studies or discontinue development of products for one or all indications. In addition, our product candidates may not
demonstrate sufficient safety and efficacy in pending or any future preclinical testing or clinical trials to obtain the requisite regulatory
approvals. Even if such approvals are obtained for our products, they may not be accepted in the market as a viable alternative to other
products already approved or pending approvals.
If we experience delays, suspensions or terminations in a preclinical study or clinical trial, the commercial prospects for our products
will be harmed, and our ability to generate product revenues will be delayed or we may never be able to generate such revenues.
We have a history of operating losses, which may continue in the foreseeable future.
We have incurred net losses from inception through November 30, 2013 and had an accumulated deficit of $41.6 million as of such
date and have incurred additional losses since such date. As we engage in the development of products in our pipeline, we will continue to
incur further losses. There can be no assurance that we will ever be able to achieve or sustain profitability or positive cash flow. Our ultimate
success will depend on whether our product candidates receive the approval of the FDA or other applicable regulatory agencies and we are
able to successfully market approved products. We cannot be certain that we will be able to receive FDA approval for any of our current or
future product candidates, or that we will reach the level of sales and revenues necessary to achieve and sustain profitability.
Loss of key scientists and failure to attract qualified personnel could limit our growth and negatively impact our operations.
We are dependent upon the scientific expertise of Dr. Isa Odidi, our Chairman and Chief Executive Officer, and Dr. Amina Odidi, our
President and Chief Operating Officer. Although we employ other qualified scientists, Drs. Isa and Amina Odidi are our only employees with
the knowledge and experience necessary for us to continue development of controlled-release products. We do not maintain key-person life
insurance on any of our officers or employees. Although we have employment agreements with key members of our management team, each
of our employees may terminate his or her employment at any time. The success of our business depends, in large part, on our continued ability
to attract and retain highly qualified management, scientific, manufacturing and sales and marketing personnel, on our ability to successfully
integrate many new employees, and on our ability to develop and maintain important relationships with leading research and medical
institutions and key distributors. If we lose the services of our executive officers or other qualified personnel or are unable to attract and retain
qualified individuals to fill these roles or develop key relationships, our business, financial condition and results of operations could be
materially adversely affected.
-6-
Our intellectual property may not provide meaningful protection for our products and product candidates.
We hold certain U.S., Canadian and foreign patents and have pending applications for additional patents outstanding. We intend to
continue to seek patent protection for, or maintain as trade secrets, all of our commercially promising drug delivery platforms and
technologies. Our success depends, in part, on our and our collaborative partners’ ability to obtain and maintain patent protection for products
and product candidates, maintain trade secret protection and operate without infringing the proprietary rights of third parties. Without patent
and other similar protection, other companies could offer substantially identical products without incurring sizeable development costs which
could diminish our ability to recover expenses of and realize profits on our developed products. If our pending patent applications are not
approved, or if we are unable to obtain patents for additional developed technologies, the future protection for our technologies will remain
uncertain. Furthermore, third parties may independently develop similar or alternative technologies, duplicate some or all of our technologies,
design around our patented technologies or challenge our issued patents. Such third parties may have filed patent applications, or hold issued
patents, relating to products or processes competitive with those we are developing or otherwise restricting our ability to do business in a
particular area. If we are unable to obtain patents or otherwise protect our trade secrets or other intellectual property and operate without
infringing on the proprietary rights of others, our business, financial condition and results of operations could be materially adversely affected.
We may be subject to intellectual property claims that could be costly and could disrupt our business.
Third parties may claim we have infringed their patents, trademarks, copyrights or other rights. We may be unsuccessful in defending
against such claims, which could result in the inability to protect our intellectual property rights or liability in the form of substantial damages,
fines or other penalties such as injunctions precluding our manufacture, importation or sales of products. The resolution of a claim could also
require us to change how we do business or enter into burdensome royalty or license agreements. Insurance coverage may be denied or may
not be adequate to cover every claim that third parties could assert against us. Even unsuccessful claims could result in significant legal fees
and other expenses, diversion of management’s time and disruptions in our business. Any of these claims could also harm our reputation.
We rely on maintaining as trade secrets our competitively sensitive know-how and other information. Intentional or unintentional
disclosure of this information could impair our competitive position.
As to many technical aspects of our business, we have concluded that competitively sensitive information is either not patentable or
that for competitive reasons it is not commercially advantageous to seek patent protection. In these circumstances, we seek to protect this
know-how and other proprietary information by maintaining it in confidence as a trade secret. To maintain the confidentiality of our trade
secrets, we generally enter into agreements that contain confidentiality provisions with our employees, consultants, collaborators, contract
manufacturers and advisors upon commencement of their relationships with us. These provisions generally require that all confidential
information developed by the individual or made known to the individual by us during the course of the individual’s relationship with us be
kept confidential and not disclosed to third parties. We may not have these arrangements in place in all circumstances, and the confidentiality
provisions in our favour may be breached. We may not become aware of, or have adequate remedies in the event of, any such breach. In
addition, in some situations, the confidentiality provisions in our favour may conflict with, or be subject to, the rights of third parties with
whom our employees, consultants, collaborators, contract manufacturers or advisors have previous employment or consulting
relationships. To the extent that our employees, consultants, collaborators, contract manufacturers or advisors use trade secrets or know-how
owned by others in their work for us, disputes may arise as to the ownership of relative inventions. Also, others may independently develop
substantially equivalent trade secrets, processes and know-how, and competitors may be able to use this information to develop products that
compete with our products, which could adversely impact our business. The disclosure of our trade secrets could impair our competitive
position. Adequate remedies may not exist in the event of unauthorized use or disclosure of our confidential information.
-7-
Approvals for our product candidates may be delayed or become more difficult to obtain if the FDA institutes changes to its approval
requirements.
The FDA may institute changes to its ANDA approval requirements, which may make it more difficult or expensive for us to obtain
approval for our new generic products. For instance, in July 2012, the Generic Drug Fee User Amendments of 2012 (“GDUFA”) were enacted
into law. The GDUFA legislation implemented substantial fees for new ANDAs, Drug Master Files, product and establishment fees and a one-
time fee for back-logged ANDAs pending approval as of October 1, 2012. Under GDUFA, generic product companies face significant
penalties for failure to pay the new user fees, including rendering an ANDA not “substantially complete” until the fee is paid. It is currently
uncertain the effect the new fees will have on our ANDA process and business. However, any failure by us or our suppliers to pay the fees or
to comply with the other provisions of GDUFA may adversely impact or delay our ability to file ANDAs, obtain approvals for new generic
products, generate revenues and thus may have a material adverse effect on our business, results of operations and financial condition.
We operate in a highly litigious environment.
From time to time, we are subject to legal proceedings. As of the date of this annual report, we are not aware of any pending or
threatened litigation claims against us. Litigation to which we are, or may be, subject could relate to, among other things, our patent and other
intellectual property rights, or such rights of others, business or licensing arrangements with other persons, product liability or financing
activities. Such litigation could include an injunction against the manufacture or sale of one or more of our products or potential products or a
significant monetary judgment, including a possible punitive damages award, or a judgment that certain of our patent or other intellectual
property rights are invalid or unenforceable or infringe the intellectual property rights of others. If such litigation is commenced, our business,
results of operations, financial condition and cash flows could be materially adversely affected.
There has been substantial litigation in the pharmaceutical industry concerning the manufacture, use and sale of new products that are
the subject of conflicting patent rights. When we file an ANDA for a bioequivalent version of a drug, we may, in some circumstances, be
required to certify to the FDA that any patent which has been listed with the FDA as covering the branded product has expired, the date any
such patent will expire, or that any such patent is invalid or will not be infringed by the manufacture, sale or use of the new drug for which the
application is submitted. Approval of an ANDA is not effective until each listed patent expires, unless the applicant certifies that the patents at
issue are not infringed or are invalid and so notifies the patent holder and the holder of the branded product. A patent holder may challenge a
notice of non-infringement or invalidity by suing for patent infringement within 45 days of receiving notice. Such a challenge prevents FDA
approval for a period which ends 30 months after the receipt of notice, or sooner if an appropriate court rules that the patent is invalid or not
infringed. From time to time, in the ordinary course of business, we face and have faced such challenges and may continue to do so in the
future.
Brand-name pharmaceutical manufacturers routinely bring patent infringement litigation against ANDA applicants seeking FDA
approval to manufacture and market generic forms of their branded products. We are routinely subject to patent litigation that can delay or
prevent our commercialization of products, force us to incur substantial expense to defend, and expose us to substantial liability.
We cannot ensure the availability of raw materials.
Certain raw materials necessary for the development and subsequent commercial manufacture of our product candidates may be
proprietary products of other companies. While we attempt to manage the risk associated with such proprietary raw materials, if our efforts
fail, or if there is a material shortage, contamination, and/or recall of such materials, the resulting scarcity could adversely affect our ability to
develop or manufacture our product candidates. In addition, many third party suppliers are subject to governmental regulation and,
accordingly, we are dependent on the regulatory compliance of, as well as on the strength, enforceability and terms of our various contracts
with, these third party suppliers.
Further, the FDA requires identification of raw material suppliers in applications for approval of drug products. If raw materials are
unavailable from a specified supplier, the supplier does not give us access to its technical information for our application or the supplier is not
in compliance with FDA or other applicable requirements, FDA approval of the supplier could delay the manufacture of the drug
involved. Any inability to obtain raw materials on a timely basis, or any significant price increases which cannot be passed on to customers,
could have a material adverse effect on our business, results of operations, financial condition and cash flows.
-8-
Our product candidates may not be successfully developed or commercialized.
Successful development of our product candidates is highly uncertain and is dependent on numerous factors, many of which are
beyond our control. Products that appear promising in research or early phases of development may fail to reach later stages of development or
the market for several reasons including:
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for ANDA candidates, bioequivalence studies results may not meet regulatory requirements or guidelines for the
demonstration of bioequivalence;
for NDA candidates, a product may not demonstrate acceptable large-scale clinical trial results, even though it
demonstrated positive preclinical or initial clinical trial results;
for NDA candidates, a product may not be effective in treating a specified condition or illness;
a product may have harmful side effects on humans;
products may fail to receive the necessary regulatory approvals from the FDA or other regulatory bodies, or there may be
delays in receiving such approvals;
difficulties may be encountered in formulating products, scaling up manufacturing processes or in getting approval for
manufacturing;
manufacturing costs, pricing or reimbursement issues, other competitive therapeutics, or other commercial factors may
make the product uneconomical; and
the proprietary rights of others, and their competing products and technologies, may prevent the product from being
developed or commercialized.
Further, success in preclinical and early clinical trials does not ensure that large-scale clinical trials will be successful, nor does
success in preliminary studies for ANDA candidates ensure that bioequivalence studies will be successful. Results are frequently susceptible
to varying interpretations that may delay, limit or prevent regulatory approvals. The length of time necessary to complete bioequivalence
studies or clinical trials and to submit an application for marketing approval for a final decision by a regulatory authority varies significantly
and may be difficult to predict.
As a result, there can be no assurance that any of our product candidates currently in development will ever be successfully
commercialized.
Near-term revenue depends significantly on the success of our first filed ANDA (“lead”) product, our once daily dexmethylphenidate
hydrochloride extended-release generic.
We have invested significant time and effort in the development of our lead product, our once daily generic dexmethylphenidate
hydrochloride extended-release capsules, which has only recently received final FDA approval for the 15 and 30 mg strengths. Our 5, 10, 20
and 40 mg strengths were also tentatively FDA approved, subject to the right of another party or parties to 180 days of generic exclusivity from
the date of first launch of such products by such parties. We believe that our development partner, Par Pharmaceutical, Inc. (“Par”), intends to
launch these strengths immediately upon the expiry of those exclusivity periods but there can be no assurance as to when or if such launch will
occur. There can be no assurance as to when or if final FDA approval will be received for the remaining product strengths we have applied for
or that any of these strengths tentatively approved will ever be successfully commercialized. We depend significantly on the actions of our
development partner Par in the prosecution, regulatory approval and commercialization of our generic dexmethylphenidate hydrochloride
extended-release products and on their timely payment to us of the contracted quarterly payments as they come due. Our near term ability to
generate significant revenue will depend upon successful commercialization of this product in the United States, where the branded Focalin
XR® product is in the market. Although we have several other products in our pipeline, they are at earlier stages of development.
-9-
Our significant expenditures on research and development may not lead to successful product introductions.
We conduct research and development primarily to enable us to manufacture and market pharmaceuticals in accordance with FDA
regulations. Typically, research expenses related to the development of innovative compounds and the filing of NDAs are significantly greater
than those expenses associated with ANDAs. As we continue to develop new products, our research expenses will likely increase. We are
required to obtain FDA approval before marketing our drug products and the approval process is costly and time consuming. Because of the
inherent risk associated with research and development efforts in our industry, particularly with respect to new drugs, our research and
development expenditures may not result in the successful introduction of FDA approved new pharmaceuticals.
We may not have the ability to develop or license, or otherwise acquire, and introduce new products on a timely basis.
Product development is inherently risky, especially for new drugs for which safety and efficacy have not been established and the
market is not yet proven. Likewise, product licensing involves inherent risks including uncertainties due to matters that may affect the
achievement of milestones, as well as the possibility of contractual disagreements with regard to terms such as license scope or termination
rights. The development and commercialization process, particularly with regard to new drugs, also requires substantial time, effort and
financial resources. The process of obtaining FDA or other regulatory approval to manufacture and market new and generic pharmaceutical
products is rigorous, time consuming, costly and largely unpredictable. We, or a partner, may not be successful in obtaining FDA or other
required regulatory approval or in commercializing any of the product candidates that we are developing or licensing.
We may not achieve our projected development goals in the time frames we announce and expect.
We set goals regarding the expected timing of meeting certain corporate objectives, such as the commencement and completion of
clinical trials, anticipated regulatory approval and product launch dates. From time to time, we may make certain public statements regarding
these goals. The actual timing of these events can vary dramatically due to, among other things, insufficient funding, delays or failures in our
clinical trials or bioequivalence studies, the uncertainties inherent in the regulatory approval process, such as requests for additional
information, delays in achieving manufacturing or marketing arrangements necessary to commercialize our product candidates and failure by
our collaborators, marketing and distribution partners, suppliers and other third parties to fulfill contractual obligations.
Our products may not achieve expected levels of market acceptance, thereby limiting our potential to generate revenue.
Even if we are able to obtain regulatory approvals for our product candidates, the success of any of our products will be dependent
upon market acceptance. Levels of market acceptance for any products marketed by us could be affected by several factors, including:
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the availability of alternative products from competitors;
the prices of our products relative to those of our competitors;
the timing of our market entry;
the ability to market our products effectively at the retail level; and
the acceptance of our products by government and private formularies.
Some of these factors are not within our control, and our proposed products may not achieve levels of market acceptance anticipated
by us. Additionally, continuing and increasingly sophisticated studies of the proper utilization, safety and efficacy of pharmaceutical products
are being conducted by the industry, government agencies and others which can call into question the utilization, safety and efficacy of our
products and any product candidates we are currently developing or may develop in the future. These studies could also impact a future
product after it has been marketed. In some cases, studies have resulted, and may in the future result, in the discontinuance of product
marketing or requirement of other risk management programs such as the need for a patient registry. The failure of our products and any of our
product candidates, once approved, to achieve market acceptance would limit our ability to generate revenue and would adversely affect our
results of operations.
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The risks and uncertainties inherent in conducting clinical trials could delay or prevent the development and commercialization of our
own branded products, which could have a material adverse effect on our results of operations, liquidity, financial condition, and
growth prospects.
There are a number of risks and uncertainties associated with clinical trials, which may be exacerbated by our relatively limited
experience in conducting and supervising clinical trials and preparing NDAs. The results of initial clinical trials may not be indicative of results
that would be obtained from large scale testing. Clinical trials are often conducted with patients having advanced stages of disease and, as a
result, during the course of treatment these patients can die or suffer adverse medical effects for reasons that may not be related to the
pharmaceutical agents being tested, but which nevertheless affect the clinical trial results. In addition, side effects experienced by the patients
may cause delay of approval of our product candidates or a limited application of an approved product. Moreover, our clinical trials may not
demonstrate sufficient safety and efficacy to obtain FDA approval.
Failure can occur at any time during the clinical trial process and, in addition, the results from early clinical trials may not be
predictive of results obtained in later and larger clinical trials, and product candidates in later clinical trials may fail to show the desired safety
or efficacy despite having progressed successfully through earlier clinical testing. A number of companies in the pharmaceutical industry have
suffered significant setbacks in clinical trials, even in advanced clinical trials after showing positive results in earlier clinical trials. In the
future, the completion of clinical trials for our product candidates may be delayed or halted for many reasons, including those relating to the
following:
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delays in patient enrollment, and variability in the number and types of patients available for clinical trials;
regulators or institutional review boards may not allow us to commence or continue a clinical trial;
our inability, or the inability of our partners, to manufacture or obtain from third parties materials sufficient to complete our
clinical trials;
delays or failures in reaching agreement on acceptable clinical trial contracts or clinical trial protocols with prospective
clinical trial sites;
risks associated with trial design, which may result in a failure of the trial to show statistically significant results even if the
product candidate is effective;
difficulty in maintaining contact with patients after treatment commences, resulting in incomplete data;
poor effectiveness of product candidates during clinical trials;
safety issues, including adverse events associated with product candidates;
the failure of patients to complete clinical trials due to adverse side effects, dissatisfaction with the product candidate, or
other reasons;
governmental or regulatory delays or changes in regulatory requirements, policy and guidelines; and
varying interpretation of data by the FDA or other applicable foreign regulatory agencies.
In addition, our product candidates could be subject to competition for clinical study sites and patients from other therapies under
development by other companies which may delay the enrolment in or initiation of our clinical trials. Many of these companies have
significantly more resources than we do.
The FDA or other foreign regulatory authorities may require us to conduct unanticipated additional clinical trials, which could result
in additional expense and delays in bringing our product candidates to market. Any failure or delay in completing clinical trials for our product
candidates would prevent or delay the commercialization of our product candidates. There can be no assurance our expenses related to clinical
trials will lead to the development of brand-name drugs which will generate revenues in the near future. Delays or failure in the development
and commercialization of our own branded products could have a material adverse effect on our results of operations, liquidity, financial
condition, and our growth prospects.
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We rely on third parties to conduct clinical trials for our product candidates, and if they do not properly and successfully perform
their legal and regulatory obligations, as well as their contractual obligations to us, we may not be able to obtain regulatory approvals
for our product candidates.
We design the clinical trials for our product candidates, but rely on contract research organizations and other third parties to assist us
in managing, monitoring and otherwise carrying out these trials, including with respect to site selection, contract negotiation and data
management. We do not control these third parties and, as a result, they may not treat our clinical studies as their highest priority, or in the
manner in which we would prefer, which could result in delays. Although we rely on third parties to conduct our clinical trials, we are
responsible for confirming that each of our clinical trials is conducted in accordance with our general investigational plan and
protocol. Moreover, the FDA and foreign regulatory agencies require us to comply with regulations and standards, commonly referred to as
good clinical practices, for conducting, recording and reporting the results of clinical trials to ensure that the data and results are credible and
accurate and that the trial participants are adequately protected. Our reliance on third parties does not relieve us of these responsibilities and
requirements. The FDA enforces good clinical practices through periodic inspections of trial sponsors, principal investigators and trial sites. If
we, our contract research organizations or our study sites fail to comply with applicable good clinical practices, the clinical data generated in
our clinical trials may be deemed unreliable and the FDA may require us to perform additional clinical trials before approving our marketing
applications. There can be no assurance that, upon inspection, the FDA will determine that any of our clinical trials comply with good clinical
practices. In addition, our clinical trials must be conducted with product manufactured under the FDA’s current Good Manufacturing Practices
(“cGMP”) regulations. Our failure, or the failure of our contract manufacturers (if any are involved in the process) to comply with these
regulations may require us to repeat clinical trials, which would delay the regulatory approval process.
If third parties do not successfully carry out their duties under their agreements with us; if the quality or accuracy of the data they
obtain is compromised due to failure to adhere to our clinical protocols or regulatory requirements; or if they otherwise fail to comply with
clinical trial protocols or meet expected deadlines, our clinical trials may not meet regulatory requirements. If our clinical trials do not meet
regulatory requirements or if these third parties need to be replaced, such clinical trials may be extended, delayed, suspended or terminated. If
any of these events occur, we may not be able to obtain regulatory approval of our product candidates, which could have a material adverse
effect on our results of operations, financial condition and growth prospects.
Competition in our industry is intense, and developments by other companies could render our products and product candidates
obsolete.
Many of our competitors, including medical technology, pharmaceutical or biotechnology and other companies, universities,
government agencies, or research organizations, have substantially greater financial and technical resources and production and marketing
capabilities than we have. They also may have greater experience in conducting bioequivalence studies, preclinical testing and clinical trials of
pharmaceutical products, obtaining FDA and other regulatory approvals, and ultimately commercializing any approved products. Therefore,
our competitors may succeed in developing and commercializing technologies and products that are more effective than the drug delivery
technologies we have developed or we are developing or that will cause our technologies or products to become obsolete or non-competitive,
and in obtaining FDA approval for products faster than we could. These developments could render our products obsolete and uncompetitive,
which would have a material adverse effect on our business, financial condition and results of operations. Even if we commence further
commercial sales of our products, we will be competing against the greater manufacturing efficiency and marketing capabilities of our
competitors, areas in which we have limited or no experience.
We rely on collaborative arrangements with third parties that provide manufacturing and/or marketing support for some or all of our
products and product candidates. Even if we find a potential partner, we may not be able to negotiate an arrangement on favourable terms or
achieve results that we consider satisfactory. In addition, such arrangements can be terminated under certain conditions and do not assure a
product’s success. We also face intense competition for collaboration arrangements with other pharmaceutical and biotechnology companies.
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Although we believe that our ownership of patents for some of our drug delivery products will limit direct competition with these
products, we must also compete with established existing products and other promising technologies and other products and delivery
alternatives that may be more effective than our products and proposed products. In addition, we may not be able to compete effectively with
other commercially available products or drug delivery technologies.
We require regulatory approvals for any products that use our drug delivery technologies.
Our drug delivery technologies can be quite complex, with many different components. The development required to take a
technology from its earliest stages to its incorporation in a product that is sold commercially can take many years and cost a substantial amount
of money. Significant technical challenges are common as additional products incorporating our technologies progress through development.
Any particular technology such as our abuse-deterrent technology may not perform in the same manner when used with different
therapeutic agents, and therefore this technology may not prove to be as useful or valuable as originally thought, resulting in additional
development work.
If our efforts do not repeatedly lead to successful development of product candidates, we may not be able to grow our pipeline or to
enter into agreements with marketing and distribution partners or collaborators that are willing to distribute or develop our product candidates.
Delays or unanticipated increases in costs of development at any stage, or failure to solve a technical challenge, could adversely affect our
operating results.
If contract manufacturers fail to devote sufficient time and resources to our concerns, or if their performance is substandard, the
commercialization of our products could be delayed or prevented, and this may result in higher costs or deprive us of potential product
revenues.
We rely on contract manufacturers for certain components and ingredients of our clinical trial materials, such as active pharmaceutical
ingredients (“APIs”), and we may rely on such manufacturers for commercial sales purposes as well. Our reliance on contract manufacturers
in these respects will expose us to several risks which could delay or prevent the commercialization of our products, result in higher costs, or
deprive us of potential product revenues, including:
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Difficulties in achieving volume production, quality control and quality assurance, or technology transfer, as well as with
shortages of qualified personnel;
The failure to establish and follow cGMP and to document adherence to such practices;
The need to revalidate manufacturing processes and procedures in accordance with FDA and other nationally mandated
cGMPs and potential prior regulatory approval upon a change in contract manufacturers;
Failure to perform as agreed or to remain in the contract manufacturing business for the time required to produce, store and
distribute our products successfully;
The potential for an untimely termination or non-renewal of contracts; and
The potential for us to be in breach of our collaboration and marketing and distribution arrangements with third parties for
the failure of our contract manufacturers to perform their obligations to us.
In addition, drug manufacturers are subject to ongoing periodic unannounced inspection by the FDA and corresponding state and
foreign agencies to ensure strict compliance with cGMP and other government regulations. While we may audit the performance of third-party
contractors, we will not have complete control over their compliance with these regulations and standards. Failure by either our third-party
manufacturers or by us to comply with applicable regulations could result in sanctions being imposed on us, including fines, injunctions, civil
penalties, failure of applicable regulatory authorities to grant review of submissions or market approval of drugs, delays, suspension or
withdrawal of approvals, product seizures or recalls, operating restrictions, facility closures and criminal prosecutions, any of which could
harm our business.
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We are subject to currency rate fluctuations that may impact our financial results.
A large majority of our expenses are payable in Canadian dollars and our financial results are reported in U.S. dollars. There may be
instances where we have net foreign currency exposure. Any fluctuations in exchange rates will impact our financial results.
We have limited sales, marketing and distribution experience.
We have limited experience in the sales, marketing, and distribution of pharmaceutical products. There can be no assurance that, if
required, we would be able to establish sales, marketing, and distribution capabilities or make arrangements with our collaborators, licensees,
or others to perform such activities or that such efforts would be successful. If we fail to establish successful marketing and sales capabilities
or to make arrangements with third parties, our business, financial condition and results of operations will be materially adversely affected.
Our significant shareholders have the ability to exercise significant influence over certain corporate actions.
Our principal shareholders, Drs. Amina and Isa Odidi, our President and Chief Operating Officer and our Chairman and Chief
Executive Officer, respectively, and Odidi Holdings Inc., a privately-held company controlled by Drs. Amina and Isa Odidi, owned in the
aggregate approximately 26.3% of our issued and outstanding common shares as of the date of this annual report (and collectively beneficially
owned in the aggregate approximately 34.6% of our common shares, including common shares issuable upon the exercise of outstanding
options and the conversion of the convertible debenture held by Drs. Amina and Isa Odidi that are exercisable or convertible within 60 days of
the date hereof) . As a result, the principal shareholders have the ability to exercise significant influence over all matters submitted to our
shareholders for approval whether subject to approval by a majority of holders of our common shares or subject to a class vote or special
resolution requiring the approval of 66⅔% of the votes cast by holders of our common shares, in person or by proxy.
Our effective tax rate may vary.
Various internal and external factors may have favorable or unfavorable effects on our future effective tax rate. These factors
include, but are not limited to, changes in tax laws, regulations and/or rates, changing interpretations of existing tax laws or regulations, future
levels of research and development spending, the availability of tax credit programs for the reimbursement of all or a significant proportion of
research and development spending, and changes in overall levels of pre-tax earnings. At present, we qualify in Canada for certain research
tax credits for qualified scientific research and experimental development pertaining to our drug delivery technologies and drug products in
research stages. If Canadian tax laws relating to research tax credits were substantially negatively altered or eliminated, or if a substantial
portion of our claims for tax credits were denied by the relevant taxing authorities, pursuant to an audit or otherwise, it would have a material
adverse effect upon our financial results.
Risks related to our Industry
Generic drug manufacturers will increase competition for certain products and may reduce our expected royalties.
Part of our product development strategy includes making NDA filings relating to product candidates involving the novel
reformulation of existing drugs with active ingredients that are off-patent. Such NDA product candidates, if approved, are likely to face
competition from generic versions of such drugs in the future. Regulatory approval for generic drugs may be obtained without investing in
costly and time consuming clinical trials. Because of substantially reduced development costs, manufacturers of generic drugs are often able to
charge much lower prices for their products than the original developer of a new product. If we face competition from manufacturers of generic
drugs on products we may commercialize, such as our once-daily Rexista™ oxycodone product, the prices at which such of our products are
sold and the revenues we may receive could be reduced.
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Market acceptance of our products will be limited if users of our products are unable to obtain adequate reimbursement from third-
party payers.
Government health administration authorities, private health insurers and other organizations generally provide reimbursement for
products like ours, and our commercial success will depend in part on whether appropriate reimbursement levels for the cost of our products
and related treatments are obtained from government authorities, private health insurers and other organizations, such as health maintenance
organizations and managed care organizations. Even if we succeed in bringing any of our products to market, third-party payers may not
provide reimbursement in whole or in part for their use.
Significant uncertainty exists as to the reimbursement status of newly approved health care products. Some of our product candidates,
such as our once-daily Rexista™ abuse-deterrent oxycodone product, are intended to replace or alter existing therapies or procedures. These
third-party payers may conclude that our products are less safe, less effective or less economical than those existing therapies or procedures.
Therefore, third-party payers may not approve our products for reimbursement. We may be required to make substantial pricing concessions in
order to gain access to the formularies of large managed-care organizations. If third party payers do not approve our products for
reimbursement or fail to reimburse them adequately, sales will suffer as some physicians or their patients may opt for a competing product that
is approved for reimbursement or is adequately reimbursed. Even if third-party payers make reimbursement available, these payers’
reimbursement policies may adversely affect our ability and our potential marketing and distribution partners’ ability to sell our products on a
profitable basis.
We are subject to significant costs and uncertainties related to compliance with the extensive regulations that govern the
manufacturing, labeling, distribution, and promotion of pharmaceutical products as well as environmental, safety and health
regulations.
Governmental authorities in the United States and Canada regulate the research and development, testing and safety of
pharmaceutical products. The regulations applicable to our existing and future products may change. Regulations require extensive clinical
trials and other testing and government review and final approval before we can market our products. The cost of complying with government
regulation can be substantial and may exceed our available resources, causing delay or cancellation of our product introductions.
Some abbreviated application procedures for controlled-release drugs and other products, including those related to our ANDA
filings, or to the ANDA filings of unrelated third parties in respect of drugs similar to or chemically related to those of our ANDA filings, are
or may become the subject of petitions filed by brand-name drug manufacturers or other ANDA filers seeking changes from the FDA in the
interpretation of the statutory approval requirements for particular drugs as part of their strategy to thwart or advance generic competition. We
cannot predict whether the FDA will make any changes to its interpretation of the requirements applicable to our ANDA applications as a
result of these petitions, or whether unforeseen delays will occur in our ANDA filings while the FDA considers such petitions or changes or
otherwise, or the effect that any changes may have on us. Any such changes in FDA interpretation of the statutes or regulations, or any
legislated changes in the statutes or regulations, may make it more difficult for us to file ANDAs or obtain further approval of our ANDAs and
generate revenues and thus may materially harm our business and financial results.
Any failure or delay in obtaining regulatory approvals could make it so that we are unable to market any products we develop and
therefore adversely affect our business, results of operations, financial condition and cash flows. Even if product candidates are approved in
the United States or Canada, regulatory authorities in other countries must approve a product prior to the commencement of marketing the
product in those countries. The time required to obtain any such approval may be longer than in the United States or Canada, which could
cause the introduction of our products in other countries to be cancelled or materially delayed.
The manufacturing, distribution, processing, formulation, packaging, labeling and advertising of our products are subject to extensive
regulation by federal agencies, including in the United States, the FDA, Drug Enforcement Administration, Federal Trade Commission,
Consumer Product Safety Commission and Environmental Protection Agency, among others. We are also subject to state and local laws,
regulations and agencies. Compliance with these regulations requires substantial expenditures of time, money and effort in such areas as
production and quality control to ensure full technical compliance. Failure to comply with FDA and other governmental regulations can result
in fines, disgorgement, unanticipated compliance expenditures, recall or seizure of products, total or partial suspension of production or
distribution, suspension of the FDA’s review of NDAs or ANDAs, enforcement actions, injunctions and civil or criminal prosecution.
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Environmental laws have changed in recent years and we may become subject to stricter environmental standards in the future and
face larger capital expenditures in order to comply with environmental laws. We are subject to extensive federal, state, provincial and local
environmental laws and regulations which govern the discharge, emission, storage, handling and disposal of a variety of substances that may be
used in, or result from, our operations. We are also subject periodically to environmental compliance reviews by environmental, safety, and
health regulatory agencies and to potential liability for the remediation of contamination associated with both present and past hazardous waste
generation, handling, and disposal activities. We cannot accurately predict the outcome or timing of future expenditures that we may be
required to make in order to comply with the federal, state, local and provincial environmental, safety, and health laws and regulations that are
applicable to our operations and facilities.
We are subject to product liability costs for which we may not have or be able to obtain adequate insurance coverage.
The testing and marketing of pharmaceutical products entails an inherent risk of product liability. Liability exposures for
pharmaceutical products can be extremely large and pose a material risk. In some instances, we may be or may become contractually obligated
to indemnify third parties for such liability. Our business may be materially and adversely affected by a successful product liability claim or
claims in excess of any insurance coverage that we may have. Further, even if claims are not successful, the costs of defending such claims and
potential adverse publicity could be harmful to our business.
While we currently have, and in some cases are contractually obligated to maintain, insurance for our business, property and our
products as they are administered in bioavailability/bioequivalence studies, first and third party insurance is increasingly costly and narrow in
scope. Therefore, we may be unable to meet such contractual obligations or we may be required to assume more risk in the future. If we are
subject to third party claims or suffer a loss or damage in excess of our insurance coverage, we may be required to bear that risk in excess of
our insurance limits. Furthermore, any first or third party claims made on our insurance policy may impact our ability to obtain or maintain
insurance coverage at reasonable costs or at all in the future.
Our products involve the use of hazardous materials and waste, and as a result we are exposed to potential liability claims and to costs
associated with complying with laws regulating hazardous waste.
Our research and development activities involve the use of hazardous materials, including chemicals, and are subject to Canadian
federal, provincial and local laws and regulations governing the use, manufacture, storage, handling and disposal of hazardous materials and
waste products. It is possible that accidental injury or contamination from these materials may occur. In the event of an accident, we could be
held liable for any damages, which could exceed our available financial resources. Further, we may not be able to maintain insurance to cover
these costs on acceptable terms, or at all. In addition, we may be required to incur significant costs to comply with environmental laws and
regulations in the future.
Our operations may be adversely affected by risks associated with international business.
We may be subject to certain risks that are inherent in an international business, including:
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varying regulatory restrictions on sales of our products to certain markets and unexpected changes in regulatory
requirements;
tariffs, customs, duties, and other trade barriers;
difficulties in managing foreign operations and foreign distribution partners;
longer payment cycles and problems in collecting accounts receivable;
political risks;
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foreign exchange controls that may restrict or prohibit repatriation of funds;
export and import restrictions or prohibitions, and delays from customs brokers or government agencies;
seasonal reductions in business activity in certain parts of the world; and
potentially adverse tax consequences.
Depending on the countries involved, any or all of the foregoing factors could materially harm our business, financial condition and
results of operations.
Risks related to our common shares
Our share price has been highly volatile and our shares could suffer a further decline in value.
The trading price of our common shares has been highly volatile and could continue to be subject to wide fluctuations in price in
response to various factors, many of which are beyond our control, including:
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sales of our common shares, including any sales made in connection with future financings;
announcements regarding new or existing corporate relationships or arrangements;
announcements by us of significant acquisitions, joint ventures, or capital commitments;
actual or anticipated period-to-period fluctuations in financial results;
clinical and regulatory development regarding our product candidates;
litigation or threat of litigation;
failure to achieve, or changes in, financial estimates by securities analysts;
comments or opinions by securities analysts or members of the medical community;
announcements regarding new or existing products or services or technological innovations by us or our competitors;
conditions or trends in the pharmaceutical and biotechnology industries;
additions or departures of key personnel or directors;
economic and other external factors or disasters or crises;
limited daily trading volume; and
developments regarding our patents or other intellectual property or that of our competitors.
In addition, the stock market in general and the market for drug development companies in particular have experienced significant
price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Further,
there has been significant volatility in the market prices of securities of life science companies. In the past, following periods of volatility in the
market price of a company’s securities, securities class action litigation has often been instituted. A securities class action suit against us could
result in substantial costs, potential liabilities, and the diversion of management’s attention and resources.
A large number of our common shares could be sold in the market in the near future, which could depress our stock price.
As of the date of this annual report, we had approximately 22.8 million common shares outstanding. In addition, a substantial portion
of our shares are currently freely trading without restriction under the Securities Act of 1933, as amended (“ U.S. Securities Act”), having been
registered for resale or held by their holders for over one year and are eligible for sale under Rule 144. In addition, we may sell up to 5,305,484
of our common shares for up to an aggregate of $16.8 million (or such lesser amount as may be permitted under applicable securities laws and
regulations) through at-the-market issuances on NASDAQ or otherwise, of which 1,312,100 of our common shares have been sold for net
proceeds to us of $4,808,054 as of the date of this annual report. Roth Capital Partners, LLC (“Roth”) received compensation of $135,960 in
connection with such sales.
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On October 22, 2009, IntelliPharmaCeutics Ltd. (“IPC Ltd.”) and Vasogen Inc. (“Vasogen”) completed a plan of arrangement and
merger (the “IPC Arrangement Agreement”), resulting in the formation of the Company. Our shareholders who received shares under the IPC
Arrangement Agreement who were not deemed “affiliates” of either Vasogen, IPC Ltd. or us prior to the IPC Arrangement Agreement were
able to resell the common shares that they received without restriction under the U.S. Securities Act. The common shares received by an
“affiliate” after the IPC Arrangement Agreement or who were “affiliates” of either Vasogen, IPC Ltd. or us prior to the IPC Arrangement
Agreement are subject to certain restrictions on resale under Rule 144.
As of the date of this annual report, there are currently common shares issuable upon the exercise of outstanding options and warrants
and the conversion of an outstanding convertible debenture for an aggregate of approximately 7.5 million common shares. To the extent any of
our options and warrants are exercised and the convertible debenture is converted, a shareholder’s percentage ownership will be diluted and our
stock price could be further adversely affected. Moreover, as the underlying shares are sold, the market price could drop significantly if the
holders of these restricted shares sell them or if the market perceives that the holders intend to sell these shares.
We have no history or foreseeable prospect of paying cash dividends.
We have not paid any cash dividends on our common shares and do not intend to pay cash dividends in the foreseeable future. We
intend to retain future earnings, if any, for reinvestment in the development and expansion of our business. Dividend payments in the future
may also be limited by loan agreements or covenants contained in other securities we may issue. Any future determination to pay cash
dividends will be at the discretion of our board of directors and depend on our financial condition, results of operations, capital and legal
requirements and such other factors as our board of directors deems relevant.
There may not be an active, liquid market for our common shares.
There is no guarantee that an active trading market for our common shares will be maintained on the NASDAQ Capital Market
(“NASDAQ”) or the Toronto Stock Exchange (“TSX”). Investors may not be able to sell their shares quickly or at the latest market price if
trading in our common shares is not active.
Future issuances of our shares could adversely affect the trading price of our common shares and could result in substantial dilution to
shareholders.
We may need to issue substantial amounts of common shares in the future. In this regard, in November 2013, we entered into an at-
the-market program pursuant to which we may, from time to time, sell up to 5,305,484 of our common shares for up to an aggregate of $16.8
million (or such lesser amount as may be permitted under applicable securities laws and regulations) of our common shares on NASDAQ or
otherwise. As of the date of this annual report, 1,312,100 of our common shares have been sold for net proceeds to us of $4,808,054. There
can be no assurance that any additional shares will be sold under our at-the-market program. To the extent that the market price of our common
shares declines, we will need to issue an increasing number of common shares per dollar of equity investment. In addition to our common
shares issuable in connection with the exercise of our outstanding warrants, our employees, and directors will hold rights to acquire substantial
amounts of our common shares. In order to obtain future financing if required, it is likely that we will issue additional common shares or
financial instruments that are exchangeable for or convertible into common shares. Also, in order to provide incentives to employees and
induce prospective employees and consultants to work for us, we may offer and issue options to purchase common shares and/or rights
exchangeable for or convertible into common shares. Future issuances of shares could result in substantial dilution to shareholders. Capital
raising activities, if available, and dilution associated with such activities could cause our share price to decline. In addition, the existence of
common share purchase warrants may encourage short selling by market participants. Also, in order to provide incentives to current employees
and directors and induce prospective employees and consultants to work for us, we have historically granted options and deferred share units
(“DSUs”), and intend to continue to do so or offer and issue other rights exchangeable for or convertible into common shares. Future
issuances of shares could result in substantial dilution to all our shareholders. In addition, future public sales by holders of our common shares
could impair our ability to raise capital through any future equity offerings.
-18-
We may in the future issue preference shares which could adversely affect the rights of holders of our common shares and the value of
such shares.
Our board of directors has the ability to authorize the issue of an unlimited number of preference shares in series, and to determine the
price, rights, preferences and privileges of those shares without any further vote or action by the holders of our common shares. Although we
have no preference shares issued and outstanding, preference shares issued in the future could adversely affect the rights and interests of
holders of our common shares.
Our common shares may not continue to be listed on the TSX.
Failure to maintain the applicable continued listing requirements of the TSX could result in our common shares being delisted from
the TSX. The TSX will normally consider the delisting of securities if, in the opinion of the exchange, it appears that the public distribution,
price, or trading activity of the securities has been so reduced as to make further dealings in the securities on TSX unwarranted. Specifically,
participating securities may be delisted from the TSX if, among other things, the market value of an issuer’s securities is less than C$3,000,000
over any period of 30 consecutive trading days. In such circumstances, the TSX may place an issuer under a delisting review pursuant to
which the issuer would be reviewed under the TSX’s remedial review process and typically be granted 120 days to comply with all
requirements for continued listing. If the market price of our common shares declines further or we are unable to maintain other listing
requirements, the TSX could commence a remedial review process that could lead to the delisting of our common shares from the
TSX. Further, if we complete a sale, merger, acquisition, or alternative strategic transaction, we will have to consider if the continued listing
of our common shares on the TSX is appropriate, or possible.
If our common shares are no longer listed on the TSX, they may be eligible for listing on the TSX Venture Exchange. In the event
that we are not able to maintain a listing for our common shares on the TSX or the TSX Venture Exchange, it may be extremely difficult or
impossible for shareholders to sell their common shares in Canada. Moreover, if we are delisted from the TSX, but obtain a substitute listing
for our common shares on the TSX Venture Exchange, our common shares will likely have less liquidity and more price volatility than
experienced on the TSX.
Shareholders may not be able to sell their common shares on any such substitute exchange in the quantities, at the times, or at the
prices that could potentially be available on a more liquid trading market. As a result of these factors, if our common shares are delisted from
the TSX, the price of our common shares is likely to decline.
Our common shares may not continue to be listed on NASDAQ.
Failure to meet the applicable quantitative and/or qualitative maintenance requirements of NASDAQ could result in our common
shares being delisted from NASDAQ. For continued listing, NASDAQ requires, among other things, that listed securities maintain a minimum
bid price of not less than $1.00 per share. If the bid price falls below the $1.00 minimum for more than 30 consecutive trading days, an issuer
will typically have 180 days to satisfy the $1.00 minimum bid price, which must be maintained for a period of at least ten trading days in order
to regain compliance.
If we are delisted from NASDAQ, our common shares may be eligible for trading on an over-the-counter market in the United
States. In the event that we are not able to obtain a listing on another U.S. stock exchange or quotation service for our common shares, it may
be extremely difficult or impossible for shareholders to sell their common shares in the United States. Moreover, if we are delisted from
NASDAQ, but obtain a substitute listing for our common shares in the United States, it will likely be on a market with less liquidity, and
therefore potentially more price volatility, than NASDAQ. Shareholders may not be able to sell their common shares on any such substitute
U.S. market in the quantities, at the times, or at the prices that could potentially be available on a more liquid trading market. As a result of
these factors, if our common shares are delisted from NASDAQ, the price of our common shares is likely to decline. In addition, a decline in
the price of our common shares will impair our ability to obtain financing in the future.
-19-
Our common shares are listed for trading in the United States and may become subject to the Securities and Exchange Commission’s
penny stock rules.
Transactions in securities that are traded in the United States by companies with net tangible assets of $5,000,000 or less and a market
price per share of less than $5.00 that are not traded on NASDAQ or on other securities exchanges may be subject to the “penny stock” rules
promulgated under the Securities Exchange Act of 1934, as amended (“U.S. Exchange Act”). Under these rules, broker-dealers who
recommend such securities to persons other than institutional investors must:
·
·
·
·
make a special written suitability determination for the purchaser;
receive the purchaser’s written agreement to a transaction prior to sale;
provide the purchaser with risk disclosure documents which identify risks associated with investing in “penny stocks” and
which describe the market for these “penny stocks” as well as a purchaser’s legal remedies; and
obtain a signed and dated acknowledgment from the purchaser demonstrating that the purchaser has actually received the
required risk disclosure document before a transaction in a “penny stock” can be completed.
As a result of these requirements, if our common shares are at such time subject to the “penny stock” rules, broker-dealers may find it
difficult to effectuate customer transactions and trading activity in these shares in the United States may be significantly limited. Accordingly,
the market price of the shares may be depressed, and investors may find it more difficult to sell the shares.
As a foreign private issuer in the United States, we are subject to different U.S. securities laws and rules than a domestic U.S. issuer.
As a foreign private issuer under U.S. securities laws we are not required to comply with all the periodic disclosure requirements of
the U.S. Exchange Act applicable to domestic United States companies and therefore the publicly available information about us may be
different or more limited than if we were a United States domestic issuer. In addition, our officers, directors, and principal shareholders are
exempt from the “real time” reporting and ‘‘short swing’’ profit recovery provisions of Section 16 of the U.S. Exchange Act and the rules
thereunder. Although under Canadian rules, our officers, directors and principal shareholders are generally required to file on SEDI
(www.sedi.ca) reports of transactions involving our common shares within five calendar days of such transaction, our shareholders may not
know when our officers, directors and principal shareholders purchase or sell our common shares as timely as they would if we were a United
States domestic issuer.
We are exposed to risks if we are unable to comply with laws and future changes to laws affecting public companies, including the
Sarbanes-Oxley Act of 2002, and also to increased costs associated with complying with such laws.
Any future changes to the laws and regulations affecting public companies, as well as compliance with existing provisions of the
Sarbanes-Oxley Act of 2002 (“SOX”) in the United States and applicable Canadian securities laws, regulations, rules and policies, may cause
us to incur increased costs to comply with such laws and requirements, including, among others, hiring additional personnel and increased
legal, accounting and advisory fees. Delays, or a failure to comply with applicable laws, rules and regulations could result in enforcement
actions, the assessment of other penalties and civil suits. The new laws and regulations may increase potential costs to be borne under
indemnities provided by us to our officers and directors and may make it more difficult to obtain certain types of insurance, including liability
insurance for directors and officers; as such, we may be forced to accept reduced policy limits and coverage or incur substantially higher costs
to obtain the same or similar coverage. The impact of these events could also make it more difficult to attract and retain qualified persons to
serve on our board of directors, or as executive officers.
-20-
We are required annually to review and report on the effectiveness of our internal control over financial reporting in accordance with
SOX Section 404 and Multilateral Instrument 52-109 – Certification of Disclosure in Issuer’s Annual and Interim Filings of the Canadian
Securities Administrators. The results of this review are reported in our Annual Report on Form 20-F and in our Management Discussion and
Analysis.
Management’s review is designed to provide reasonable, not absolute, assurance that all material weaknesses in our internal controls
are identified. Material weaknesses represent deficiencies in our internal controls that may not prevent or detect a misstatement occurring
which could have a material adverse effect on our quarterly or annual financial statements. In addition, there can be no assurance that any
remedial actions we take to address any material weaknesses identified will be successful, nor can there be any assurance that further material
weaknesses will not be identified in future years. Material errors, omissions or misrepresentations in our disclosures that occur as a result of
our failure to maintain effective internal control over financial reporting could have a material adverse effect on our business, financial
condition, results of operations, and the value of our common shares.
We may be classified as a “passive foreign investment company” or “PFIC” for U.S. income tax purposes, which could have significant
and adverse tax consequences to U.S. investors.
The possible classification of our company as a passive foreign investment company (“PFIC”) for U.S. federal income tax purposes
could have significant and adverse tax consequences for U.S. holders of our common shares and preference shares (collectively, “ shares”). It
may be possible for U.S. Holders (as defined in Item 10 below) of shares to mitigate certain of these consequences by making an election to
treat us as a “qualified electing fund” or “QEF” under Section 1295 of the Code (a “QEF Election”) or a mark-to-market election under
Section 1296 of the Internal Revenue Code of 1986, as amended (the “Code”). A non-U.S. corporation generally will be a PFIC if, for a
taxable year (a) 75% or more of the gross income of such corporation for such taxable year consists of specified types of passive income or (b)
on average, 50% or more of the assets held by such corporation either produce passive income or are held for the production of passive
income, based on the fair market value of such assets (or on the adjusted tax basis of such assets, if such non-U.S. corporation is not publicly
traded and either is a “controlled foreign corporation” under Section 957(a) of the Code, or makes an election to determine whether it is a PFIC
based on the adjusted basis of the assets).
The determination of whether we are, or will be, a PFIC for a taxable year depends, in part, on the application of complex U.S. federal
income tax rules, which are subject to various interpretations. Although the matter is not free from doubt, we believe that we were not a PFIC
during our 2013 taxable year and may not be a PFIC during our 2014 taxable year. Because PFIC status is based on our income, assets and
activities for the entire taxable year, and our market capitalization, it is not possible to determine whether we will be characterized as a PFIC
for the 2014 taxable year until after the close of the taxable year. The tests for determining PFIC status are subject to a number of
uncertainties. These tests are applied annually, and it is difficult to accurately predict future income, assets and activities relevant to this
determination. In addition, because the market price of our common shares is likely to fluctuate, the market price may affect the determination
of whether we will be considered a PFIC. There can be no assurance that we will not be considered a PFIC for any taxable year (including our
2014 taxable year). Absent one of the elections described above, if we are a PFIC for any taxable year during which a U.S. holder holds our
shares, we generally will continue to be treated as a PFIC regardless of whether we cease to meet the PFIC tests in one or more subsequent
years. Accordingly, no assurance can be given that we will not constitute a PFIC in the current (or any future) tax year or that the Internal
Revenue Service (the “IRS”) will not challenge any determination made by us concerning our PFIC status.
If we are a PFIC, the U.S. federal income tax consequences to a U.S. holder of the ownership and disposition of our shares will
depend on whether such U.S. holder makes a QEF or mark-to-market election. Unless otherwise provided by the IRS, a U.S. holder of our
shares is generally required to file an informational return annually to report its ownership interest in the PFIC during any year in which we are
a PFIC.
The foregoing does not purport to be a complete enumeration or explanation of the tax risks involved in an investment in our
company. Prospective investors should read this entire annual report and consult with their own legal, tax and financial advisors
before deciding to invest in our company.
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It may be difficult to obtain and enforce judgments against us because of our Canadian residency.
We are governed by the laws of Canada. Most of our directors and officers are residents of Canada or other jurisdictions outside of
the United States and all or a substantial portion of our assets and the assets of such persons may be located outside of the United States. As a
result, it may be difficult for shareholders to effect service of process upon us or such persons within the United States or to realize in the
United States on judgments of courts of the United States predicated upon the civil liability provisions of the U.S. federal securities laws or
other laws of the United States. In addition, there is doubt as to the enforceability in Canada of liabilities predicated solely upon U.S. federal
securities law against us, our directors, controlling persons and officers who are not residents of the United States, in original actions or in
actions for enforcements of judgments of U.S. courts.
Item 4.
Information on the Company
A.
History and Development of the Company
The Company was incorporated under the Canada Business Corporations Act by certificate and articles of arrangement dated October
22, 2009.
Our registered principal office is located at 30 Worcester Road, Toronto, Ontario, Canada M9W 5X2. Our telephone number is (416)
798-3001 and our facsimile number is (416) 798-3007.
On October 19, 2009, the shareholders of IPC Ltd. and Vasogen approved the IPC Arrangement Agreement that resulted in the
October 22, 2009 court-approved merger of IPC Ltd. and another U.S. subsidiary of Intellipharmaceutics Inc., coincident with an arrangement
pursuant to which a predecessor of the Company combined with 7231971 Canada Inc., a new Vasogen company that acquired substantially all
of the assets and certain liabilities of Vasogen, including the proceeds from its non-dilutive financing transaction with Cervus LP (the “ IPC
Arrangement Transaction”). The completion of the IPC Arrangement Transaction on October 22, 2009 resulted in the formation of the
Company, which is incorporated under the laws of Canada. The common shares of the Company are traded on the TSX and NASDAQ.
For the years ended November 30, 2013, 2012 and 2011, we spent a total of $5,060,853, $5,992,417, and $5,125,608, respectively, on
research and development. Over the past three fiscal years and up to February 18, 2014, we have raised approximately $24,696,800 in gross
proceeds from the issuance of equity and convertible debt securities. Our common shares are listed on the TSX under the symbol “I” and on
NASDAQ under the symbol “IPCI”.
During the last and current financial year, we have not been aware of any indications of public takeover offers by third parties in
respect of the Company’s shares or by the Company in respect of other companies’ shares.
For additional information on key events, see Item 4.B below.
B.
Business Overview
We are a pharmaceutical company specializing in the research, development and manufacture of novel and generic controlled-release
and targeted-release oral solid dosage drugs. Our patented Hypermatrix™ technology is a multidimensional controlled-release drug delivery
platform that can be applied to the efficient development of a wide range of existing and new pharmaceuticals. Based on this technology
platform, we have developed several drug delivery systems and a pipeline of products (our dexmethylphenidate hydrochloride extended-release
capsules for the 15 and 30 mg strengths which recently received final FDA approval) and product candidates in various stages of development,
including ANDAs filed with the FDA in therapeutic areas that include neurology, cardiovascular, gastrointestinal tract (“ GIT”), diabetes and
pain.
We were granted final FDA approval to market our dexmethylphenidate hydrochloride extended-release capsules for the 15 and 30 mg
strengths on November 18, 2013. Commercial sales of these strengths were launched immediately by our commercialization partner in the
United States, Par. As the first-filer for the drug product in the 15 mg strength, we will have 180 days of exclusivity of generic sales from the
date of launch of such product in the United States by our partner, Par. Our 5, 10, 20 and 40 mg strengths were also tentatively FDA approved,
subject to the right of another party or parties to 180 days of generic exclusivity from the date of first launch of such products by such parties.
We believe that Par intends to launch these strengths immediately upon the expiry of those exclusivity periods, but there can be no assurance
as to when or if any launch will occur. There can be no assurance as to when or if final FDA approval will be received for the remaining
product strengths we have applied for or that any of these strengths tentatively approved will ever be successfully commercialized.
-22-
Our goal is to leverage our proprietary technologies and know-how in order to build a diversified portfolio of commercialized
products that generate revenue. We intend to do this by advancing our products from the formulation stage through product development,
regulatory approval and manufacturing. We believe that full integration of development and manufacturing should maximize the value
inherent in our drug delivery technologies, products and product candidates and will create long term growth and value. Out-licensing sales
and marketing to established organizations, when it makes economic sense to do so, should maximize revenues from our products while
allowing us to focus on our core competencies.
Our Strategy
We believe that our Hypermatrix™ technologies are a multidimensional controlled-release drug delivery platform that can be applied
to the efficient development of a wide range of existing and new pharmaceuticals. We believe that the flexibility of these technologies allow
us to develop complex drug delivery solutions within a relatively rapid timeframe. Based on this technology platform, we have developed
several drug delivery systems and a pipeline of products (our dexmethylphenidate hydrochloride extended-release capsules for the 15 and 30
mg strengths which recently received final FDA approval) and product candidates in various stages of development, including ANDAs filed
with the FDA. Certain, but not all, of the products in our pipeline may be developed from time to time for third parties pursuant to drug
development agreements with those third parties, under which our development partner generally pays certain of the expenses of development,
sometimes makes certain milestone payments to us and receives a share of revenues or profits if the drug is developed successfully to
completion, the control of which is generally in the discretion of our drug development partner.
The Hypermatrix™ technologies are applied to the development of both existing and new pharmaceuticals across a range of
therapeutic classes. The competitive advantages of these technologies allow us to focus our development activities in two areas; difficult-to-
develop controlled-release generic drugs, which follow an ANDA regulatory path; and improved current therapies through controlled release,
which follow a NDA 505(b)(2) regulatory path.
The market we operate in is created by the expiration of drug product patents, challengeable patents and drug product exclusivity
periods. There are three ways that we employ our controlled-release technologies, which we believe represent substantial opportunities for us
to commercialize on our own or develop products or out-license our technologies and products:
·
·
For existing controlled-release (once-a-day) products whose APIs are covered by drug molecule patents about to expire or
already expired, or whose formulations are covered by patents about to expire, already expired or which we believe we do
not infringe, we can seek to formulate generic products which are bioequivalent to the branded products. Our scientists have
demonstrated a successful track record with such products, having previously developed several drug products which have
been commercialized in the United States by their former employer/clients. The regulatory pathway for this approach
requires ANDAs for the United States and corresponding pathways for other jurisdictions.
For branded immediate-release (multiple-times-per-day) drugs, we can formulate improved replacement products, typically
by developing new, potentially patentable, controlled-release once-a-day drugs. Among other out-licensing opportunities,
these drugs can be licensed to and sold by the pharmaceutical company that made the original immediate-release
product. These can potentially protect against revenue erosion in the brand by providing a clinically attractive patented
product that competes favorably with the generic immediate-release competition that arises on expiry of the original
patent(s). The regulatory pathway for this approach requires NDAs via a 505(b)(2) application for the U.S. or
corresponding pathways for other jurisdictions where applicable. The 505(b)(2) pathway (which relies in part upon the
approving agency’s findings for a previously approved drug) both accelerates development timelines and reduces costs in
comparison to NDAs for new chemical entities.
-23-
·
Some of our technologies are also focused on the development of abuse-deterrent pain medications. The growing abuse and
diversion of prescription “painkillers”, specifically opioid analgesics, is well documented and is a major health and social
concern. We believe that our technologies and know-how are aptly suited to developing abuse-deterrent pain medications.
The regulatory pathway for this approach requires NDAs via a 505(b)(2) application for the U.S. or corresponding
pathways for other jurisdictions where applicable.
We intend to collaborate in the development and/or marketing of one or more products with partners, when we believe that such
collaboration may enhance the outcome of the project. We also plan to seek additional collaborations as a means of developing additional
products. We believe that our business strategy enables us to reduce our risk by (a) having a diverse product portfolio that includes both
branded and generic products in various therapeutic categories, and (b) building collaborations and establishing licensing agreements with
companies with greater resources thereby allowing us to share costs of development and to improve cash-flow. There can be no assurance that
we will be able to enter into additional collaborations or, if we do, that such arrangements will be beneficial.
We may also, from time to time, provide incidental consulting advice to other organizations regarding FDA standards.
Our Drug Delivery Technologies
Our scientists have developed drug delivery technology systems, based on the Hypermatrix™ platform, that facilitate controlled-
release delivery of a wide range of pharmaceuticals. These systems include several core technologies, which enable us to flexibly respond to a
wide range of drug attributes and patient requirements, producing a desired controlled-release effect. Our technologies have been incorporated
in drugs manufactured and sold by major pharmaceutical companies.
This group of drug delivery technology systems is based upon the drug active ingredient (“drug active”) being imbedded in, and an
integral part of, a homogeneous (uniform), core and/or coatings consisting of one or more polymers which affect the release rates of drugs,
other excipients (compounds other than the drug active), such as for instance lubricants which control handling properties of the matrix during
fabrication, and the drug active itself. The Hypermatrix™ technologies are the core of our current marketing efforts and the technologies
underlying our existing development agreements.
Our platform of Hypermatrix™ drug delivery technologies include, but are not limited to, IntelliFoam™, IntelliGITransporter™,
IntelliMatrix™, IntelliOsmotics™, IntelliPaste™, IntelliPellets™, IntelliShuttle™ and nPODDDS™. Some of their key attributes are
described below.
These technologies provide a broad range of release profiles, taking into account the physical and chemical characteristics of a drug
product, the therapeutic use of the particular drug, and the optimal site for release of the API in the GIT. At present those technologies have
been applied in the laboratory and/or in bioavailability/bioequivalence studies in man to such orally administered small molecule drugs as are
used in the treatment of neurological, cardiovascular, GIT, diabetes, pain and other significant indications.
The Hypermatrix™ Family of Technologies
IntelliFoam™
The IntelliFoam™ technology is based on the drug active being embedded in, but separate from a syntactic foam substrate, the
properties of which are used to modulate the release of the drug active. The drug actives are embedded in a resin polymer matrix.
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IntelliGITransporter™
The IntelliGITransporter™ technology consists of an active drug immobilized in a homogeneous (uniform) matrix structure. A
precise choice of mix ratios, polymers, and other ingredients imparts characteristics which protect the drug composition from mechanical
degradation due to digestion, and/or from chemical degradation in the acidic stomach environment, and ensures that this technology allows
control of release as well as releasing the medication at certain parts of the stomach or intestines without significant food effects or
unintentional premature release of the entire drug dose. We believe that this technology is most useful for drug molecules with characteristics
such as very low or very high potency, opiate analgesics (pain medications derived from the chemical compounds found in opium), or
susceptibility to acid degradation. It is also useful for products where a zero-order (constant rate over time, independent of the amount of drug
available for dissolution) release profile is desirable.
IntelliMatrix™
The IntelliMatrix™ technology is a proprietary blend of several polymers. Depending on the constituents of the blend and the manner
in which these interact, the use of the blend with a drug allows the drug to be released at predetermined rates, while imparting protective
characteristics to both the drug and the GIT. This is most useful for drugs which require precisely controlled first-order release profiles, where
the amount released with time is dependent on one component like the amount of drug available for dissolution.
IntelliOsmotics™
The IntelliOsmotics™ technology is based upon the inclusion of multiple populations of polymers with distinct chemical bonding
characteristics. These set up a complex matrix of hydrophilic (water attracting) and hydrophobic (water repelling) domains. When the tablet
or bead is in an aqueous environment, like gastric contents, a “mixture” of water-soluble polymer and drug core is surrounded by gel layer(s)
of water-insoluble polymer. Osmotic pressure drives the drug out when solvent passes through the gel layer while the polymer molecules
remain. This permits control of the rate of release of the drug active by the variation of polymer ratios. This technology is most useful for
drug molecules which require precisely controlled pseudo-first-order release profiles, where the rate of release is proportional to the amount
available for dissolution as well as being proportional to one other component; however the effect of the amount of drug is overriding, so that
the rate appears first-order. This type of release control can be useful when attempting to match difficult profiles for generic formulation.
IntelliPaste™
The IntelliPaste™ technology is comprised of blends of multiple polymers, oils, excipients and drug active(s) which result in a paste-
in-a-capsule dosage form. The physical attributes of the paste include that it is thixotropic, pseudoplastic and non-Newtonian or, in layman’s
terms, like toothpaste. Typically, it is formulated as having very low solubility in water or oil, and low solubility in alcohol. These
characteristics enable the resulting drug product to have tamper-deterrent properties, and to resist dissolution in even high concentrations of
alcohol. As a result, IntelliPaste™ is the Company’s preferred delivery technology for the controlled delivery of opiates, narcotics and other
central nervous system drug products which are susceptible to unlawful diversion or abuse.
IntelliPellets™
The IntelliPellets™ technology consists of one or more type (population) of granule, bead, pellet, or tablet in a holding chamber or
reservoir, such as a hard gelatin capsule. Each type (population) may be uniquely different from the other in the manner or rate it releases the
drug. Our IntelliPellets™ technology is designed to control, prolong, delay or modify the release of drugs. It is particularly useful for the
delivery of multiple drugs, for delayed, timed, pulsed or for chronotherapeutic drug delivery, designed to mimic our internal clocks for
therapeutic optimization (the drug is delivered in the right amount for the patient at the right time). This technology is most useful for the
delivery of multiple-drug cocktails, or in situations where the timing of a single dose or the sequencing of multiple doses of the same drug is
important.
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IntelliShuttle™
The IntelliShuttle™ technology provides for drug release past the stomach, such as for drugs required for action beyond the stomach,
for drugs which could be destroyed by the stomach environment, or for drugs which could harm the stomach itself. This technology “shuttles”
the drug past the stomach to be released at predetermined times or sites where appropriate for optimum therapeutic effect. This technology is
most useful for acid labile drug molecules (drugs that are destroyed in acid environment), such as the proton pump inhibitors, of which well-
known omeprazole (Prilosec) and lansoprazole (Prevacid) are examples, or for drug molecules which may harm the stomach, of which the
well-known aspirin is an example.
Each of the above-noted proprietary technologies was fully developed and ready for application to client drug delivery requirements
from the date of our inception. Each of them has been utilized and applied to client drug delivery requirements under our existing and previous
development contracts; in several instances more than one technology has been applied to a single drug development. We continue to develop
all of our existing technologies and to conduct the necessary research to develop new products and technologies.
nPODDDS™ (novel point of divergence drug delivery system)
The nPODDDS™ technology platform is designed to provide for certain unique drug delivery features in a product. These include the
release of the active substance to show a divergence in a dissolution and/or bioavailability profile. The divergence represents a point or a
segment in a release timeline where the release rate, represented by the slope of the curve, changes from an initial rate or set of rates to another
rate or set of rates, the former representing the usually higher rate of release shortly after ingesting a dose of the drug, and the latter
representing the rate of release over a later and longer period of time, being more in the nature of a controlled-release or sustained action. It is
applicable for the delivery of opioid analgesics in which it is desired to discourage common methods of tampering associated with misuse and
abuse of a drug, and also dose dumping in the presence of alcohol. It can potentially retard tampering without interfering with the
bioavailability of the product.
Our Products
The table below shows the present status of our ANDA and NDA product candidates that have been disclosed to the public.
Generic name
Brand
Indication
Stage of Development(1) Regulatory
Pathway
Dexmethylphenidate
hydrochloride
extended-release
capsules
Venlafaxine
hydrochloride
extended-release
capsules
Pantoprazole
sodium delayed-
release tablets
Metformin
hydrochloride
extended-release
tablets
Quetiapine
fumarate extended-
release tablets
Focalin XR® Attention deficit
hyperactivity disorder
Effexor XR® Depression
Protonix®
Conditions associated
with gastroesophageal
reflux disease
Glucophage®
XR
Management of type 2
diabetes
Seroquel XR® Schizophrenia, bipolar
disorder & major
depressive disorder
Received final approval for
15 and 30 mg, and tentative
approval for 5, 10, 20 and
40 mg, strengths from FDA
ANDA application for
commercialization
approval for 3 strengths
under review by FDA
ANDA application for
commercialization
approval for 2 strengths
under review by FDA
ANDA application for
commercialization
approval for 2 strengths
under review by FDA
ANDA application for
commercialization
approval for 5 strengths
under review by FDA
-26-
Market Size
(in
millions)(2)
$691
Rights(3)
Intellipharmaceutics
and Par
ANDA
ANDA
$709
Intellipharmaceutics
ANDA
$330
Intellipharmaceutics
ANDA
$553
Intellipharmaceutics
ANDA
$1,142
Intellipharmaceutics
Lamictal®
XR™
Anti-convulsant for
epilepsy
Keppra XR® Partial onset seizures
for epilepsy
Pristiq®
Depression
Coreg CR®
Heart failure,
hypertension
ANDA application for
commercialization
approval for 4 strengths
under review by FDA
ANDA application for
commercialization for 2
strengths under review by
FDA
ANDA application for
commercialization
approval for 2 strengths
filed with the FDA
Late-stage development
OxyContin® Pain
Phase I clinical trial
Lyrica®
Neuropathic pain
Phase I clinical trial
ANDA
$367
Intellipharmaceutics
ANDA
$157
Intellipharmaceutics
ANDA
$722
Intellipharmaceutics
ANDA
$268
Intellipharmaceutics
NDA 505(b)
(2)
NDA 505(b)
(2)
$2,302
Intellipharmaceutics
$2,547
Intellipharmaceutics
Lamotrigine
extended-release
tablets
Levetiracetam
extended-release
tablets
Desvenlafaxine
extended-release
tablets
Carvedilol
phosphate
extended- release
capsules
Oxycodone
hydrochloride
controlled-release
capsules
Pregabalin
extended-release
capsules
Notes:
(1)
(2)
(3)
There can be no assurance when, or if at all, the FDA will approve any product candidate for sale in the U.S. market.
Represents sales for the 12 months ended January 2014 in the U.S., including sales of generics in TRx MBS Dollars, which
represents projected new and refilled prescriptions representing a standardized dollar metric based on manufacturer’s
published catalog or list prices to wholesalers, and does not represent actual transaction prices and does not include prompt
pay or other discounts, rebates or reductions in price. Source: Source Healthcare Analytics.
For unpartnered products, we are exploring licensing agreement opportunities or other possibilities. While we believe that a
licensing agreement is possible, there can be no assurance that one can be secured.
We typically select products for development that we anticipate could achieve FDA approval for commercial sales several years in the
future. However, the length of time necessary to bring a product to the point where the product can be commercialized can vary significantly
and depends on, among other things, the availability of funding, design and formulation challenges, safety or efficacy, patent issues associated
with the product, and FDA review times.
Dexmethylphenidate Hydrochloride – Generic Focalin XR® (a registered trademark of the brand manufacturer)
Dexmethylphenidate hydrochloride, a Schedule II restricted product (drugs with a high potential for abuse) in the United States, is
indicated for the treatment of attention deficit hyperactivity disorder. On November 21, 2005, we entered into a license and commercialization
agreement with Par pursuant to which we granted Par an exclusive, royalty-free license to make and distribute in the United States all strengths
of our generic versions of the branded product Focalin XR® for a period of 10 years from the date of commercial launch (which was
November 19, 2013). Under the Par agreement, we own the related ANDA, as approved by the FDA, and we retain the right to make and
distribute all generic strengths of the product outside of the United States. Quarterly payments are payable by Par to us as calculated pursuant
to a formula depending on a number of factors applicable to each strength. The Par agreement also provides the potential, in limited
circumstances, for certain milestone payments being payable to us by Par, with the amount of such payments dependent upon the number of
competitors in the market within the first 180 days of commercialization, on a strength by strength basis. We are responsible under the Par
agreement for the development of the product and most related costs which, with the applications to and recent approvals by the FDA, we now
consider to be completed.
Our FDA filings for approval to market generic versions of Focalin XR® in various strengths gave rise in the usual course to
Paragraph IV patent litigation against the Company and Par by Novartis Pharmaceuticals Corporation, Novartis Pharma AG, Celgene
Corporation, Elan Corporation, plc and Elan Pharma International Ltd. and Alkermes Pharma Ireland Limited (successor in title to Elan
Pharma International Ltd) in the United States District Courts for New Jersey and Delaware. In each case, such litigation was settled by
stipulations of dismissal together with settlement and license agreements among the parties. By these agreements, Par and the Company may
market these generic versions of the product in the U.S., subject to agreed market entry dates and FDA approvals.
-27-
On November 18, 2013, the FDA granted us final approval to market our dexmethylphenidate hydrochloride extended-release
capsules for the 15 and 30 mg strengths. Commercial sales of these strengths were launched immediately by our commercialization partner in
the United States, Par. As the first-filer for the drug product in the 15 mg strength, we will have 180 days of exclusivity of generic sales from
the date of launch of such product in the United States by our partner, Par. Our 5, 10, 20 and 40 mg strengths were also tentatively FDA
approved, subject to the right of another party or parties to 180 days of generic exclusivity from the date of first launch of such products by
such parties. We believe that Par intends to launch these strengths immediately upon the expiry of those exclusivity periods, but there can be
no assurance as to when or if any launch will occur. There can be no assurance as to when or if final FDA approval will be received for the
remaining product strengths we have applied for or that any of these strengths tentatively approved will ever be successfully commercialized.
In February 2014, we announced the receipt of approximately $3.1 million as our first payment relating to commercial sales of
dexmethylphenidate hydrochloride extended-release capsules by Par. This represents our licensing revenue for the 15 and 30 mg strengths of
the drug product for the period commencing with the first commercial sales of those strengths on November 19, 2013 and ended December 31,
2013 under our license and commercialization agreement with Par. Future payments are expected on a quarterly basis, although the amounts of
any such payments cannot now be determined and may vary significantly from time-to-time.
Rexista™ Oxycodone (Oxycodone Hydrochloride)
One of our non-generic products under development is Rexista™ oxycodone hydrochloride, intended as an abuse- and alcohol-
deterrent controlled-release oral formulation of oxycodone hydrochloride for the relief of pain. Rexista™ oxycodone is an investigational
drug, with a unique long acting oral formulation of oxycodone intended to treat moderate-to-severe pain when a continuous, around the clock
opioid analgesic is needed for an extended period of time. Rexista™ oxycodone is designed to discourage common methods of tampering
associated with misuse and abuse of such prescription opioid analgesic.
Rexista™ is intended to provide deterrence against intentional drug abuse and unintentional dose dumping. Dose dumping is the rapid
release of an active ingredient from a controlled-release drug into the blood stream that can result in increased toxicity, side effects, and a loss
of efficacy. Dose dumping can result by consuming the drug through crushing, taking with alcohol, extracting with other beverages, vaporizing
or injecting.
We conducted a randomized, cross-over, comparative bioavailability, Phase I clinical trial on 12 subjects in a fasted state comparing a
single dose of 40 mg Rexista™ oxycodone with a single dose of 40 mg OxyContin®. In this study, the bioavailability of a single dose of
Rexista™ oxycodone was equivalent to that of OxyContin®, as measured by the respective areas under the curve (“AUC”). The value for
AUC essentially provides an estimation of total drug exposure by comparing ratios between Rexista™ oxycodone and OxyContin®. The ratios
obtained were within 80% - 125% at the 90% confidence interval. This indicates that the technology platform in our formulation of Rexista™
oxycodone, nPODDDS™, does not interfere with the bioavailability of oxycodone. We intend to apply the nPODDDS™ technology platform
to other opioid drug candidates (e.g., oxymorphone, hydrocodone, and morphine).
The FDA is actively developing a regulatory program for the narcotic analgesic class of products. In January 2013, the FDA issued a
draft guidance document, “Guidance for Industry: Abuse-Deterrent Opioids – Evaluation and Labeling”, to assist the industry in developing
new formulations of opioid drugs with abuse-deterrent properties. In April 2013, the FDA approved updated labeling for reformulated
OxyContin® tablets. The new labeling indicates that the physical and chemical properties of reformulated OxyContin® are expected to make
abuse via injection difficult, and to reduce abuse via the intranasal route. The original OxyContin® was withdrawn for reasons of safety or
effectiveness, resulting in the FDA refusing to accept or approve any ANDA of original OxyContin®.
-28-
In July 2012, the FDA approved a new Risk Evaluation and Mitigation Strategy (“ REMS”) requirement for all extended-release and
long-acting opioid medications. The new safety measures require companies to make education programs available to prescribers based on an
FDA Blueprint, make available FDA-approved patient education materials on the safe use of these drugs, and perform periodic assessments of
the implementation of the REMS and the success of the program in meeting its goals. Education programs are currently offered to prescribers.
We believe that the REMS will ultimately drive prescribing of newer tamper-deterrent extended-release opioids. Several “tamper-deterrent”
formulations of oral opioid analgesics are being developed by other companies. We believe that the FDA’s opioid REMS should benefit
tamper-deterrent products.
We believe that we can leverage our core competencies in drug delivery and formulation for the development of products targeted
towards tamper-deterrent opioid analgesics used in pain management. The advantage of our strategy for development of NDA drugs is that our
products can, if approved for sale, enjoy a sales exclusivity period. Furthermore, it may be possible to establish and defend the intellectual
property surrounding our tamper-deterrent opioid analgesic products.
There can be no assurance as to whether or when the FDA will approve any Intellipharmaceutics' Rexista™ oxycodone application.
Regabatin™ XR (Pregabalin Extended-Release)
Another Intellipharmaceutics non-generic controlled-release product under development is Regabatin™ XR, pregabalin extended-
release capsules. Pregabalin is indicated for the management of neuropathic pain associated with diabetic peripheral neuropathy, postherpetic
neuralgia, spinal cord injury and fibromyalgia. There is no controlled-release formulation on the market at this time. A controlled-release
version of pregabalin should reduce the number of doses patients take, potentially improving patient compliance, and therefore potentially
improving clinical outcomes.
The Company successfully completed an initial Phase I clinical trial of a controlled-release pregabalin formulation. This was the first
bioavailability study of our controlled-release pregabalin versus Lyrica® (immediate release pregabalin). The study was carried out in 14
subjects. The results showed that our 150 mg pregabalin once-a-day dosage was comparable in bioavailability to Lyrica® 50 mg three-times-a-
day dosage. We plan to initiate additional Phase I clinical trials in 2014. There can be no assurance that additional clinical trials will meet our
expectations, that we will be successful in submitting a NDA 505(b)(2) filing with the FDA, that the FDA will approve this product candidate
for sale in the U.S. market, or that it will ever be successfully commercialized.
COMPETITIVE ENVIRONMENT
We are engaged in a business characterized by extensive research efforts, rapid technological developments and intense competition.
Our competitors include medical technology, pharmaceutical, biotechnology and other companies, universities and research institutions. All of
these competitors currently engage in, have engaged in or may engage in the future, in development, manufacturing, marketing and
commercialization of new pharmaceuticals and existing pharmaceuticals, some of which may compete with our present or future products and
product candidates.
Our drug delivery technologies may compete with existing drug delivery technologies, as well as new drug delivery technologies that
may be developed or commercialized in the future. Any of these drugs and drug delivery technologies may receive government approval or
gain market acceptance more rapidly than our products and product candidates. As a result, our products and product candidates may become
noncompetitive or obsolete.
We believe that our ability to successfully compete will depend on, among other things, the efficacy, safety and reliability of our
products and product candidates, the timing and scope of regulatory approval, the speed at which we develop product candidates, our, or our
commercialization partners’, ability to manufacture and sell commercial quantities of a product to the market, product acceptance by
physicians and other professional healthcare providers, the quality and breadth of our technologies, the skills of our employees and our ability
to recruit and retain skilled employees, the protection of our intellectual property, and the availability of substantial capital resources to fund
development and commercialization activities.
-29-
MANUFACTURING
We have internal manufacturing capabilities consisting of current Good Laboratory Practices (“ cGLP”) research laboratories and a
cGMP manufacturing plant for solid oral dosage forms at our 30 Worcester Road facility in Toronto. Raw materials used in manufacturing our
products are available from a number of commercial sources and the prices for such raw materials are generally not particularly volatile.
INTELLECTUAL PROPERTY
Proprietary rights are an important aspect of our business. These include know-how, trade secrets and patents. Know-how and trade
secrets are protected by internal company policies and operating procedures, and where necessary, by contractual provisions with development
partners and suppliers. We also seek patent protection for inventive advances which form the bases of our drug delivery technologies. With
respect to particular products, we may seek patent protection on the commercial composition, our methods of production and our uses, to
prevent the unauthorized marketing and sale of competitive products.
Patents which relate to and protect various aspects of our Hypermatrix™ family of drug delivery technologies include the following
United States, Japanese and Canadian patents which have been issued to us:
Country
U.S.A
U.S.A.
U.S.A
U.S.A
U.S.A
U.S.A
U.S.A
U.S.A
U.S.A
U.S.A
Japan
Canada
Canada
Canada
Canada
Issue Date
Dec 10, 2013
Mar 12, 2013
Mar 15, 2011
Dec 28, 2010
Aug 15, 2006
Oct 5, 2004
Nov 25, 2003
Aug 19, 2003
Nov 12, 2002
Oct 2, 2001
Aug 30, 2013
Jun 19, 2012
Sep 25, 2012
Feb 22, 2011
Mar 15, 2005
Issue No.
8,603,520
8,394,409
7,906,143
7,858,119
7,090,867
6,800,668
6,652,882
6,607,751
6,479,075
6,296,876
5,349,290
2,626,558
2,529,984
2,459,857
2,435,276
Title
Oral Multi-functional Pharmaceutical Capsule Preparations of Proton Pump Inhibitors
Controlled Extended Drug Release Technology
Controlled Release Pharmaceutical Delivery Device and Process for Preparation Thereof
Extended Release Pharmaceuticals
Novel Controlled Release Delivery Device for Pharmaceutical Agents Incorporating
Microbial Polysaccharide Gum
Syntactic Deformable Foam Compositions and Methods for Making
Controlled Release Formulation Containing Bupropion
Novel Controlled Release Delivery Device for Pharmaceutical Agents Incorporating
Microbial Polysaccharide Gum
Pharmaceutical Formulations for Acid Labile Substances
Pharmaceutical Formulations for Acid Labile Substances
Drug Delivery Composition
Pharmaceutical Composition having Reduced Abuse Potential
Oral Multi-Functional Pharmaceutical Capsule Preparations of Proton Pump Inhibitors
Combinatorial Type Controlled Release Drug Delivery Device
Syntactic Deformable Foam Compositions and Methods for Making
In addition to these issued patents, we have several U.S. patent applications, and corresponding foreign applications pending,
including Patent Cooperation Treaty - national stage processing and entry applications, relating to various aspects of our HyperMatrix™ drug
delivery technologies, including methods and compositions for coating of tablets and beads, compositions incorporating disintegrants to assist
in controlled release, compositions incorporating multiple drug actives, and compositions directed to classes of drug actives designed as
therapies for specific indications and compositions intended to enhance deterrence of willful abuse of narcotic compositions.
REGULATORY REQUIREMENTS
We focus on the development of both branded drug products (which require NDAs) and generic drug products (which require
ANDAs). The research and development, manufacture and marketing of controlled-release pharmaceuticals are subject to regulation by U.S.,
Canadian and other governmental authorities and agencies. Such national agencies and other federal, state, provincial and local entities
regulate the testing, manufacturing, safety and promotion of our products. The regulations applicable to our products may change as the
currently limited number of approved controlled-release products increases and regulators acquire additional experience in this area.
-30-
United States Regulation
New Drug Application
We will be required by the FDA to comply with NDA procedures for our branded products prior to commencement of marketing by
us or our licensees. New drug compounds and new formulations for existing drug compounds which cannot be filed as ANDAs are subject to
NDA procedures. These procedures include (a) preclinical laboratory and animal toxicology tests; (b) scaling and testing of production
batches; (c) submission of an Investigational New Drug Application (“IND”), and subsequent approval is required before any human clinical
trials can commence; (d) adequate and well controlled replicate human clinical trials to establish the safety and efficacy of the drug for its
intended indication; (e) the submission of an NDA to the FDA; and (f) FDA approval of an NDA prior to any commercial sale or shipment of
the product, including pre-approval and post-approval inspections of our manufacturing and testing facilities. If all of this data in the product
application is owned by the applicant, the FDA will issue its approval without regard to patent rights that might be infringed or exclusivity
periods that would affect the FDA’s ability to grant an approval if the application relied upon data which the applicant did not own. We intend
to generate all data necessary to support FDA approval of the applications we file.
Preclinical laboratory and animal toxicology tests may have to be performed to assess the safety and potential efficacy of the
product. The results of these preclinical tests, together with information regarding the methods of manufacture of the products and quality
control testing, are then submitted to the FDA as part of an IND requesting authorization to initiate human clinical trials. Once the IND notice
period has expired, clinical trials may be initiated, unless an FDA hold on clinical trials has been issued.
Clinical trials involve the administration of a pharmaceutical product to individuals under the supervision of qualified medical
investigators who are experienced in conducting studies under “Good Clinical Practice” guidelines. Clinical studies are conducted in
accordance with protocols that detail the objectives of a study, the parameters to be used to monitor safety and the efficacy criteria to be
evaluated. Each protocol is submitted to the FDA and to an Institutional Review Board prior to the commencement of each clinical
trial. Clinical studies are typically conducted in three sequential phases, which may overlap. In Phase I, the initial introduction of the product
into human subjects, the compound is tested for absorption, safety, dosage, tolerance, metabolic interaction, distribution, and excretion. Phase
II involves studies in a limited patient population with the disease to be treated to (1) determine the efficacy of the product for specific targeted
indications, (2) determine optimal dosage and (3) identify possible adverse effects and safety risks. In the event Phase II evaluations
demonstrate that a pharmaceutical product is effective and has an acceptable safety profile, Phase III clinical trials are undertaken to further
evaluate clinical efficacy of the product and to further test its safety within an expanded patient population at geographically dispersed clinical
study sites. Periodic reports on the clinical investigations are required.
We, or the FDA, may suspend clinical trials at any time if either party believes the clinical subjects are being exposed to unacceptable
health risks. The results of the product development, analytical laboratory studies and clinical studies are submitted to the FDA as part of an
NDA for approval of the marketing and commercialization of a pharmaceutical product.
Abbreviated New Drug Application
In certain cases, where the objective is to develop a generic version of an approved product already on the market in controlled-release
dosages, an ANDA may be filed in lieu of filing an NDA. Under the ANDA procedure, the FDA waives the requirement to submit complete
reports of preclinical and clinical studies of safety and efficacy and instead requires the submission of bioequivalency data, that is,
demonstration that the generic drug produces the same effect in the body as its brand-name counterpart and has the same pharmacokinetic
profile, or change in blood concentration over time. The ANDA procedure is available to us for a generic version of a drug product approved
by the FDA. In certain cases, an ANDA applicant may submit a suitability petition to the FDA requesting permission to submit an ANDA for
a drug product that differs from a previously approved reference drug product (the “Listed Drug”) when the change is one authorized by
statute. Permitted variations from the Listed Drug include changes in: (1) route of administration, (2) dosage form, (3) strength and (4) one of
the active ingredients of the Listed Drug when the Listed Drug is a combination product. The FDA must approve the petition before the
ANDA may be submitted. An applicant is not permitted to petition for any other kinds of changes from Listed Drugs. The information in a
suitability petition must demonstrate that the change from the Listed Drug requested for the proposed drug product may be adequately
evaluated for approval without data from investigations to show the proposed drug product’s safety or effectiveness. The advantages of an
ANDA over an NDA include reduced research and development costs associated with bringing a product to market, and generally a shorter
review and approval time at the FDA.
-31-
GDUFA implemented substantial fees for new ANDAs, Drug Master Files, product and establishment fees and a one-time fee for
back-logged ANDAs pending approval as of October 1, 2012. In return, the program is intended to provide faster and more predictable ANDA
reviews by the FDA and increased inspections of drug facilities. For the FDA's fiscal years 2013 and 2014, respectively, the user fee rates are
$51,520 and $63,860 for new ANDAs, $25,760 and $31,930 for Prior Approval Supplements, and $17,434 for each ANDA already on file at
the FDA. For the FDA’s fiscal year 2013 and 2014, there is also an annual facility user fee of $190,389 and $235,152, respectively. Under
GDUFA, generic product companies face significant penalties for failure to pay the new user fees, including rendering an ANDA not
“substantially complete” until the fee is paid. It is currently uncertain the effect the new fees will have on our ANDA process and business.
However, any failure by us or our suppliers to pay the fees or to comply with the other provisions of GDUFA may adversely impact or delay
our ability to file ANDAs, obtain approvals for new generic products, generate revenues and thus may have a material adverse effect on our
business, results of operations and financial condition.
Patent Certification and Exclusivity Issues
ANDAs are required to include certifications with respect to any third party patents that claim the Listed Drug or that claim a use for
the Listed Drug for which the applicant is seeking approval. If applicable third party patents are in effect and this information has been
submitted to the FDA, the FDA must delay approval of the ANDA until the patents expire. If the applicant believes it will not infringe the
patents, it can make a patent certification to the holder of patents on the drug for which a generic drug approval is being sought, which may
result in patent infringement litigation which could delay the FDA approval of the ANDA for up to 30 months. If the drug product covered by
an ANDA were to be found by a court to infringe another company’s patents, approval of the ANDA could be delayed until the patents
expire. Under the Food Drug and Cosmetic Act (“FDC”), the first filer of an ANDA with a “non-infringement” certification is entitled to
receive 180 days of market exclusivity. Subsequent filers of generic products would be entitled to market their approved product six months
after the earlier of the first commercial marketing of the first filer’s generic product or a successful defense of a patent infringement suit. A
company having approval and permission from the original brand owner is able to market an authorized generic at any time. In the case of our
15 mg dexmethylphenidate hydrochloride extended-release capsules, commercial sales commenced on or about November 19, 2013 and
therefore subsequent filers will be entitled to enter the market no earlier than 180 days after such commencement date.
The 180-day exclusivity period can be forfeited if the first applicant withdraws its application or the FDA considers the application to
have been withdrawn, the first applicant amends or withdraws Paragraph IV Certification for all patents qualifying for 180 day exclusivity, or
the first applicant fails to obtain tentative approval within 30 months after the date filed unless, failure is due to a change in review
requirements. The preservation of the 180 day exclusivity period related to the first-to-file status of a drug not approved within 30 months after
the date filed, generally requires that an application be made to the FDA for extension of the time period where the delay has been due to a
change in the review requirements for the drug. The approval of the continued first-to-file status in such circumstances is subject to the
discretion of the FDA. There can be no assurance that the FDA would accede to such a request if made.
Patent expiration refers to expiry of U.S. patents (inclusive of any extensions) on drug compounds, formulations and uses. Patents
outside the United States may differ from those in the United States. Under U.S. law, the expiration of a patent on a drug compound does not
create a right to make, use or sell that compound. There may be additional patents relating to a person’s proposed manufacture, use or sale of a
product that could potentially prohibit such person’s proposed commercialization of a drug compound.
-32-
The FDC contains non-patent market exclusivity provisions that offer additional protection to pioneer drug products and are
independent of any patent coverage that might also apply. Exclusivity refers to the fact that the effective date of approval of a potential
competitor’s ANDA to copy the pioneer drug may be delayed or, in certain cases, an ANDA may not be submitted until the exclusivity period
expires. Five years of exclusivity are granted to the first approval of a “new chemical entity”. Three years of exclusivity may apply to
products which are not new chemical entities, but for which new clinical investigations are essential to the approval. For example, a new
indication for use, or a new dosage strength of a previously approved product, may be entitled to exclusivity, but only with respect to that
indication or dosage strength. Exclusivity only offers protection against a competitor entering the market via the ANDA route, and does not
operate against a competitor that generates all of its own data and submits a full NDA.
If applicable regulatory criteria are not satisfied, the FDA may deny approval of an NDA or an ANDA or may require additional
testing. Product approvals may be withdrawn if compliance with regulatory standards is not maintained or if problems occur after the product
reaches the market. The FDA may require further testing and surveillance programs to monitor the pharmaceutical product that has been
commercialized. Non-compliance with applicable requirements can result in additional penalties, including product seizures, injunction
actions and criminal prosecutions.
Canadian Regulation
The requirements for selling pharmaceutical drugs in Canada are substantially similar to those of the United States described above.
Investigational New Drug Application
Before conducting clinical trials of a new drug in Canada, we must submit a Clinical Trial Application (“CTA”) to the Therapeutic
Products Directorate (“TPD”). This application includes information about the proposed trial, the methods of manufacture of the drug and
controls, preclinical laboratory and animal toxicology tests on the safety and potential efficacy of the drug, and information on any previously
executed clinical trials with the new drug. If, within 30 days of receiving the application, the TPD does not notify us that our application is
unsatisfactory, we may proceed with clinical trials of the drug. The phases of clinical trials are the same as those described above under
“United States Regulation – New Drug Application”.
New Drug Submission
Before selling a new drug in Canada, we must submit a New Drug Submission (“NDS”) or Supplemental New Drug Submission
(“sNDS”) to the TPD and receive a Notice of Compliance (“NOC”) from the TPD to sell the drug. The submission includes information
describing the new drug, including its proper name, the proposed name under which the new drug will be sold, a quantitative list of ingredients
in the new drug, the methods of manufacturing, processing, and packaging the new drug, the controls applicable to these operations, the tests
conducted to establish the safety of the new drug, the tests to be applied to control the potency, purity, stability and safety of the new drug, the
results of bio-pharmaceutics and clinical trials as appropriate, the intended indications for which the new drug may be prescribed and the
effectiveness of the new drug when used as intended. The TPD reviews the NDS or sNDS. If the submission meets the requirements of
Canada’s Food and Drugs Act and Regulations, the TPD will issue an NOC for the new drug.
Where the TPD has already approved a drug for sale in controlled-release dosages, we may seek approval from the TPD to sell an
equivalent generic drug through an Abbreviated New Drug Submission (“ ANDS”). In certain cases, the TPD does not require the
manufacturer of a proposed drug that is claimed to be equivalent to a drug that has already been approved for sale and marketed, to conduct
clinical trials; instead, the manufacturer must satisfy the TPD that the drug is bioequivalent to the drug that has already been approved and
marketed.
The TPD may deny approval or may require additional testing of a proposed new drug if applicable regulatory criteria are not
met. Product approvals may be withdrawn if compliance with regulatory standards is not maintained or if problems occur after the product
reaches the market. Contravention of Canada’s Food and Drugs Act and Regulations can result in fines and other sanctions, including product
seizures and criminal prosecutions.
-33-
Proposals have recently been made that, if implemented, would significantly change Canada’s drug approval system. In general, the
recommendations emphasize the need for efficiency in Canadian drug review. Proposals include establishment of a separate agency for drug
regulation and modeling the approval system on those found in European Union countries. There is no assurance, however, that such changes
will be implemented or, if implemented, will expedite the approval of new drugs.
The Canadian government has regulations which can prohibit the issuance of an NOC for a patented medicine to a generic competitor,
provided that the patentee or an exclusive licensee has filed a list of its Canadian patents covering that medicine with the Minister of Health
and Welfare. After submitting the list, the patentee or an exclusive licensee can commence a proceeding to obtain an order of prohibition
directed to the Minister prohibiting him or her from issuing an NOC. The minister may be prohibited from issuing an NOC permitting the
importation or sale of a patented medicine to a generic competitor until patents on the medicine expire or the waiver of infringement and/or
validity of the patent(s) in question is resolved by litigation in the manner set out in such regulations. There may be additional patents relating
to a company’s proposed manufacture, use or sale of a product that could potentially prohibit such company’s proposed commercialization of a
drug compound.
Certain provincial regulatory authorities in Canada have the ability to determine whether the consumers of a drug sold within such
province will be reimbursed by a provincial government health plan for that drug by listing drugs on formularies. The listing or non-listing of
a drug on provincial formularies may affect the prices of drugs sold within provinces and the volume of drugs sold within provinces.
Additional Regulatory Considerations
Sales of our products by our licensees outside the United States and Canada will be subject to regulatory requirements governing the
testing, registration and marketing of pharmaceuticals, which vary widely from country to country.
Under the U.S. Generic Drug Enforcement Act, ANDA applicants (including officers, directors and employees) who are convicted of
a crime involving dishonest or fraudulent activity (even outside the FDA regulatory context) are subject to debarment. Debarment is
disqualification from submitting or participating in the submission of future ANDAs for a period of years or permanently. The Generic Drug
Enforcement Act also authorizes the FDA to refuse to accept ANDAs from any company which employs or uses the services of a debarred
individual. We do not believe that we receive any services from any debarred person.
In addition to the regulatory approval process, pharmaceutical companies are subject to regulations under provincial, state and federal
law, including requirements regarding occupational safety, laboratory practices, environmental protection and hazardous substance control, and
may be subject to other present and future local, provincial, state, federal and foreign regulations, including possible future regulations of the
pharmaceutical industry. We believe that we are in compliance in all material respects with such regulations as are currently in effect.
Before medicinal products can be distributed commercially, a submission providing detailed information must be reviewed and
approved by the applicable government or agency in the jurisdiction in which the product is to be marketed. The regulatory review and
approval process varies from country to country.
C.
Organizational Structure
The following chart shows the corporate relationship structure of Intellipharmaceutics and its three wholly-owned subsidiaries,
including jurisdictions of incorporation, as at February 18, 2014.
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D.
Property, Plant and Equipment
For nine years, we have occupied a 25,000 square foot facility at 30 Worcester Road, Toronto, Ontario, Canada M9W 5X2, that we
lease at a present rental rate of approximately $90,000 per year. The lease has been renewed to November 2014, with an option to extend the
lease on comparable terms for five additional years. We use our facilities as a cGLP research laboratory, office space, and cGMP scale-up and
small to medium-scale manufacturing plant for solid oral dosage forms. The facility now consists of approximately 4,900 sq. ft. for
administrative space, 4,300 sq. ft. for R&D, 9,200 sq. ft. for manufacturing, and 3,000 sq. ft. for warehousing.
We continually monitor our facility requirements in the context of our needs and we expect these requirements to change
commensurately with our activities.
Item 4A.
Unresolved Staff Comments
None.
Item 5.
Operating and Financial Review and Prospects
The following discussion and analysis should be read in conjunction with the audited annual consolidated financial statements of the
Company and notes thereto. See “Item 18. Financial Statements.” The consolidated financial statements have been prepared in accordance
with U.S. GAAP. All amounts are expressed in United States dollars unless otherwise noted. Annual references are to the Company’s fiscal
years, which ended on November 30, 2013, 2012 and 2011.
A.
Operating Results
Our results of operations have fluctuated significantly from period to period in the past and are likely to do so in the future. We
anticipate that our quarterly and annual results of operations will be impacted for the foreseeable future by several factors, including the timing
of approvals to market our product candidates in various jurisdictions and any resulting licensing revenue, milestone revenue, product sales, the
timing and amount of payments received pursuant to our current and future collaborations with third parties, and the progress and timing of
expenditures related to our research, development and commercialization efforts. Due to these fluctuations, we presently believe that the
period-to-period comparisons of our operating results are not a reliable indication of our future performance.
-35-
The following are selected financial data for the years ended November 30, 2013, 2012 and 2011.
November 30,
2013
For years ended
November 30,
2012
November 30,
2011
Dollar and Percentage change
2013 vs 2012
2012 vs 2011
Revenue
Licensing
Milestone
Research and development
Other incidental services
$
Expenses
Research and development
Selling, general and
administrative
Depreciation
Write-down on long lived
assets
$
$
1,481,719
43,209
-
2,546
1,527,474
$
$
-
-
107,091
-
107,091
-
-
501,814
-
501,814
$ 1,481,719
43,209
(107,091)
2,546
1,420,383
$
-
-
N/A
N/A
-100% $ (394,723)
N/A
1326%
-
(394,723
5,076,236
5,992,417
5,125,608
(916,181)
-15%
866,809
2,873,091
396,814
3,672,313
452,303
2,925,454
227,456
(799,222)
(55,489)
-22%
-12%
746,859
224,847
N/A
N/A
-79%
N/A
-79%
17%
26%
99%
-
8,346,141
107,123
10,224,156
-
8,278,518
(107,123)
(1,878,015)
-100%
107,123
-18% 1,945,638
N/A
24%
Loss from operations
(6,818,667)
(10,117,065)
(7,776,704) 3,298,398
-33% (2,340,361)
30%
Fair value adjustment of
derivative liabilities
Financing expense
Net foreign exchange (loss) gain
Interest income
Interest expense
Net loss
Loss per common share, basic and
diluted
(3,873,649)
(115,056)
(359,554)
2,839
(314,896)
$ (11,478,983) $
3,841,233
-
181,682
20,691
(63,406)
(6,136,865) $
5,346,878
(2,357,732)
(70,036)
60,790
(83,473)
(7,714,882)
(115,056)
(541,236)
(17,852)
(251,490)
(4,880,277) $(5,342,118)
-201% (1,505,645)
N/A
-298%
-86%
397%
87% $(1,256,588)
2,357,732
251,718
(40,099)
20,067
-28%
-100%
-359%
-66%
-24%
26%
$
(0.58) $
(0.36) $
(0.33) $
(0.22)
61% $
(0.03)
9%
Year Ended November 30, 2013 Compared to the Year Ended November 30, 2012
Revenue
The Company recorded revenues of $1,527,474 for the year ended November 30, 2013 versus $107,091 for 2012. In November 2013
the Company received FDA approval of dexmethylphenidate hydrochloride extended-release capsules for the 15 and 30 mg strengths.
Commercial sales of these strengths were launched immediately by our commercialization partner in the United States, Par. As the first-filer
for the drug product in the 15 mg strength, we will have 180 days of exclusivity of generic sales from the date of launch in the United States
by our partner, Par. We recognized licensing revenue of $1,481,719 which is our licensing revenue from 12 days of commercial sales of 15 and
30 mg strengths of dexmethylphenidate hydrochloride extended-release capsules under the license and commercialization agreement with Par.
This revenue represents the first commercial generic sales of those strengths and may not be representative of post-launch sales. In 2013 we
also accrued milestone revenue of $43,209 under the Par agreement, which is tied to the achievement of our product being either the only
generic in the market or if there is only one generic competitor. In 2013 we also recorded other incidental services revenue of $2,546 related to
consulting services provided to other organizations regarding FDA standards.
In 2011, additional strengths of generic Focalin XR® were added to the existing license and commercialization agreement with Par.
Under the terms of the expanded agreement, the Company received a cash payment of $600,000 from Par, of which $492,909 was recognized
in the year ended November 30, 2011. During the year ended November 30, 2012, the remaining deferred revenue of $107,091 was
recognized as revenue mainly related to development work completed for the 40 mg strength.
-36-
Research and Development
Expenditures for research and development (“R&D”) for the year ended November 30, 2013 were $5,076,236 in comparison to
$5,992,417 in the prior year, a decrease of $916,181. These included spending for R&D activities as well as expenses on stock options as
detailed below.
In the year ended November 30, 2013, we recorded $837,206 as expenses for stock options for R&D employees; this amount includes
$442,800 expense for performance-based stock options. In the prior year we recorded $1,505,061 as expenses for stock options for R&D
employees; there was no expense for performance-based stock options.
After adjusting for the stock options expenses discussed above, expenditures for R&D for the year ended November 30, 2013 were
slightly lower by $248,326 compared to the prior year. This is primarily attributed to the fact that during the year ended November 30, 2012,
more R&D activities were conducted compared to the year ended November 30, 2013.
Selling, General and Administrative
Selling, general and administrative expenses were $2,873,091 for the year ended November 30, 2013 in comparison to $3,672,313 for
the year ended November 30, 2012, a decrease of $799,222. The decrease is due to a decrease in expenses related to wages, marketing cost and
occupancy costs which are discussed in greater detail below.
Expenditure for wages and benefits for the year ended November 30, 2013 were $1,313,082 in comparison to $1,946,535 in the prior
year. This decrease is attributable to the issuance of options in the prior year. In the year ended November 30, 2013, we recorded $316,676
as expenses for stock options compared to an expense of $818,784 for the prior year. After adjusting for the stock options expenses,
expenditures for wages and benefits for the year ended November 30, 2013 were slightly lower by $131,345 compared to the prior period,
which is primarily attributed to the resignation of an executive of IPC Ltd.
Administrative costs for the year ended November 30, 2013 were $1,078,441 in comparison to $1,279,696 in the prior year. The
decrease is primarily due to business development expenses in the prior year, as well as higher expenditures in patents prosecution.
Marketing costs for the year ended November 30, 2013 were $388,889 in comparison to $352,803 in the prior year. There was no
significant change in these expenses.
Occupancy costs for the year ended November 30, 2013 were $92,679 in comparison to $93,279 in the prior year. The decrease is due
to the termination of a leased office for IPC Ltd.
Depreciation
Depreciation expenses for the year ended November 30, 2013 were $396,814 in comparison to $452,303 in the prior year. The
decrease is primarily due to lower investment in production, laboratory and computer equipment in the year ended November 30, 2013
compared to the prior year.
Fair Value Adjustment of Derivative Liabilities
In July 2013, the Company completed an underwritten public offering for gross proceeds of approximately $3.1 million at a price of
$2.05 per unit. The Company sold an aggregate of 1,500,000 units of common shares and warrants to purchase an additional 375,000 common
shares. The warrants are exercisable for a term of five years and have an exercise price of $2.55 per common share. In March 2013, the
Company completed a registered direct unit offering for gross proceeds of approximately $3.1 million at a price of $1.72 per unit. The
Company sold an aggregate of 1,815,000 common shares and warrants to purchase an additional 453,750 common shares. The warrants are
exercisable for a term of five years and have an exercise price of $2.10 per common share. In February 2011, the Company completed a private
offering for the sale and issuance of 4,800,000 units of the Company, each unit consisting of one share of common stock, a five year Series A
common share purchase warrant to purchase one half of a share of common stock at an exercise price of $2.50 per whole share and a two year
Series B common share purchase warrant to purchase one half of a share of common stock at an exercise price of $2.50 per whole share. In
February 2011, the Company also issued to the placement agents 96,000 warrants to purchase a whole share of common stock at an exercise
price of $3.125 per whole share.
-37-
Under U.S. GAAP, when the strike price of warrants is denominated in a currency other than an entity's functional currency, the
warrants would not be considered indexed to the entity’s own stock. As a result, the Company determined that these warrants are not
considered indexed to the Company’s own stock and therefore would consequently be considered to be derivative liability. Also under U.S.
GAAP, warrants with the cashless exercise option satisfying the explicit net settlement criteria are considered a derivative liability.
In January 2013, the Company completed the private placement financing of an unsecured convertible debenture (the “Debenture”) in
the aggregate principal amount of $1.5 million. The Debenture will mature January 1, 2015, bears interest at a rate of 12% per annum, payable
monthly, is pre-payable at any time at the option of the Company, and is convertible at any time into 500,000 common shares at a conversion
price of $3.00 per common share at the option of the holder. The conversion price of the Debenture is in U.S. dollars and the Company’s
functional currency is Canadian dollars. Under U.S. GAAP, when the conversion price of the Debenture is denominated in a currency other
than an entity's functional currency, the conversion option meets the definition of an embedded derivative. The conversion option is bifurcated
from its host contract and the fair value of the conversion option characterized as an embedded derivative upon issuance. The embedded
derivative is presented on a combined basis with the host contract. The derivative is re-measured at the end of every reporting period with the
change in value reported in the consolidated statements of operations and comprehensive loss.
U.S. GAAP requires the fair value of these liabilities be re-valued at the end of every reporting period with the change in value
reported in the consolidated statements of operations and comprehensive loss. Accordingly, the fair values of the warrant derivative liabilities
from the Series A, Placement Agents, March 2013 and July 2013 Warrants, and conversion option embedded derivative from the Debenture
have been re-valued at November 30, 2013 using the Black-Scholes Option Pricing Model, resulting in an increase in the fair value of the
derivative liabilities and a fair value adjustment of the derivative liabilities for a loss of $3,889,683.
Financing Expense
Financing expense was $115,056 for the year ended November 30, 2013 compared to $Nil for the prior year. This expense was
related to the March 2013 registered direct unit offering for gross proceeds of $3.1 million and the July 2013 underwritten public offering of
units for gross proceeds of $3.1 million. These costs were expensed as they were attributable to the warrant liability. In March 2012 the
Company closed a registered direct common share offering for gross proceeds of $5 million; for this financing the costs were recorded in
shareholder equity.
Foreign Exchange Loss
Foreign exchange loss was $359,554 for the year ended November 30, 2013 in comparison to a gain of $181,682 for the prior
year. The foreign exchange loss for the year ended November 30, 2013 was due to the weakening of the Canadian dollar against the U.S.
dollar throughout the year as the exchange rate averaged $1.00 for C$1.0241 compared to $1.00 for C$0.9977 for prior year. Based on year end
dates, the Canadian dollar weakened against the U.S. dollar as the exchange rates changed to $1.00 for C$1.0620 at November 30, 2013 from
$1.00 for C$0.9936 at November 30, 2012.
-38-
Interest Income
Interest income was $2,839 for the year ended November 30, 2013 in comparison to $20,691 for the year ended November 30, 2012,
a decrease of $17,852. The current year interest was lower largely due to a lower average amount of cash equivalents on hand during 2013.
Interest Expense
Interest expense was $314,896 for the year ended November 30, 2013 in comparison to $63,406 for the year ended November 30,
2012, an increase of $251,490. On January 10, 2013 we issued the $1,500,000 Debenture, which accrues interest payable at 12% annually.
Also, the Debenture proceeds of $1.5 million less the initial fair value of the conversion option embedded derivative of $220,100, amounts to
$1,279,900 and are accreted at an annual imputed interest rate of 8%, over the life of the Debenture. We also continue to have another related
party loan outstanding which accrues interest at 6% annually during 2013 and 2012.
Net Loss
The Company recorded a net loss for the year ended November 30, 2013 of $11,495,017 or $0.58 per common share, compared with a loss of
$6,136,865 or $0.36 per common share for the year ended November 30, 2012. The increased loss can be attributed to the loss in the fair
value adjustment of derivative liabilities compared to a gain in the fair value adjustment of derivative liabilities in the prior year. This was
partially offset by a decrease in R&D and selling, general and administrative expenses in the year ended November 30, 2013 compared to the
prior year. Stock-based compensation expense in the year ended November 30, 2013 was $1,153,882 versus $2,323,845 in the prior year. The
fair value adjustment of derivative liabilities in the year ended November 30, 2013 was a loss of $3,889,683 versus a gain of $3,841,233 in the
prior year. The fair values of the derivative liabilities have been re-valued at November 30, 2013 using the Black-Scholes Option Pricing
Model, resulting in an increase in the fair value of the derivative liabilities and a fair value adjustment of the derivative liabilities for a loss.
Year Ended November 30, 2012 Compared to the Year Ended November 30, 2011
Revenue
The Company recorded revenues of $107,091 for the year ended November 30, 2012 versus $501,814 for 2011. In the prior year
additional strengths of generic Focalin XR® were added to the existing license and commercialization agreement with Par. Under the terms of
the expanded agreement, the Company received a cash payment of $600,000 from Par, of which $492,909 was recognized in the year ended
November 30, 2011. During the year ended November 30, 2012, the remaining deferred revenue of $107,091 was recognized as revenue
mainly related to development work completed for the 40 mg strength.
Research and Development
Expenditures for R&D for the year ended November 30, 2012 were $5,992,417 in comparison to $5,125,608 in the prior year, an
increase of $866,809. These included spending for R&D activities as well as expenses on stock options as detailed below.
In the year ended November 30, 2012, we recorded $1,505,061 as expenses for stock options for R&D employees; there was no
expense for performance-based stock options. In the prior year we recorded $601,424 as expenses for stock options for R&D employees;
composed of $158,624 related to stock options issued to non-executive employees involved in R&D activities, and $442,800 related to 276,394
performance-based stock options issued to Dr. Isa Odidi and Dr. Amina Odidi, principal shareholders, directors and executive officers of the
Company. We recorded these expenses as we determined it was probable as at November 30, 2011 we would satisfy the performance criteria
that will allow vesting of the options.
After adjusting for the stock options expenses discussed above, expenditures for R&D for the year ended November 30, 2012 were
slightly lower by $36,829 compared to the prior year.
-39-
Selling, General and Administrative
Selling, general and administrative expenses were $3,672,313 for the year ended November 30, 2012 in comparison to $2,925,454 for
the year ended November 30, 2011, an increase of $746,859. The increase was due to an increase in expenses related to wages, marketing cost
and occupancy costs which are discussed in greater detail below.
Expenditure for wages and benefits for the year ended November 30, 2012 were $1,946,535 in comparison to $1,066,307 in the prior
year. This increase was attributable to the issuance of options. In the year ended November 30, 2012, we recorded $855,511 as expenses for
stock options compared to an expense of Nil for the prior year. After adjusting for the stock options expenses, expenditures for wages and
benefits for the year ended November 30, 2012 were slightly higher by $24,717 compared to the prior period.
Administrative costs for the year ended November 30, 2012 were $1,279,696 in comparison to $1,537,203 in the prior year. The
decrease was primarily due to a decrease in legal and accounting costs for year end regulatory filings from the prior year. The decrease was
partially offset by higher business development consulting costs for a period of 12 months for the year ended November 30, 2012 compared to
only ten months in the prior year.
Marketing costs for the year ended November 30, 2012 were $352,803 in comparison to $251,720 in the prior year. This increase was
primarily the result of an increase in travel expenditures for business development activities and the retention of an investor relations firm.
Occupancy costs for the year ended November 30, 2012 were $93,279 in comparison to $70,224 in the prior year. The increase was
due to higher utilities and a new leased office for IPC Ltd.
Depreciation
Depreciation expenses for the year ended November 30, 2012 were $452,303 in comparison to $227,456 in the prior year. The
increase was primarily due to the additional investment in production, laboratory and computer equipment.
Fair Value Adjustment of Derivative Liabilities
On February 1, 2011 the Company completed a private offering for the sale of 4,800,000 units of the Company, each unit consisting
of one share of common stock, a five year Series A common share purchase warrant to purchase one half of a share of common stock at an
exercise price of $2.50 per whole share and a two year Series B common share purchase warrant to purchase one half of a share of common
stock at an exercise price of $2.50 per whole share. The Company also issued to the placement agents 96,000 warrants to purchase a whole
share of common stock at an exercise price of $3.125 per whole share.
Under U.S. GAAP, where the strike price of warrants is denominated in a currency other than an entity's functional currency, the
warrants would not be considered indexed to the entity’s own stock. As a result, the Company determined that these warrants are not
considered indexed to the Company’s own stock and therefore would consequently be considered to be a derivative liability. Also under U.S.
GAAP, warrants with the cashless exercise option satisfying the explicit net settlement criteria are considered a derivative liability.
U.S. GAAP requires the fair value of these liabilities be re-valued at the end of every reporting period with the change in value
reported in the statement of operations. Accordingly, the fair value of the warrant derivative liability from the IPC Arrangement Agreement,
the Series A, the Series B and the placement agents’ warrants have been re-valued at November 30, 2012 using the Black-Scholes Options
Pricing Model, resulting in a decrease in the fair value of the derivative liabilities and a fair value adjustment of the derivative liabilities for a
gain of $3,841,233.
Financing Expense
Financing expense was $Nil for the year ended November 30, 2012 compared to $2,357,732 for the prior year. On March 15, 2012
the Company closed a registered direct common share offering for gross proceeds of $5 million; for this financing the costs were recorded in
shareholder equity. For the year ended November 30, 2011, financing expense included other direct costs related to the registration statement
filed as part of the February 1, 2011 private placement financing for gross proceeds of $12,000,000. These costs were expensed as they were
attributable to the warrant liability.
-40-
Foreign Exchange Gain
Foreign exchange gain was $181,682 for the year ended November 30, 2012 in comparison to a loss of $70,036 for the prior
year. The foreign exchange gain for the year ended November 30, 2012 was due to the weakening of the Canadian dollar against the U.S.
dollar throughout the year as the exchange rate averaged $1.00 for C$0.9977 compared to $1.00 for C$0.9879 for prior year. Based on year end
dates, the Canadian dollar strengthened against the U.S. dollar as the exchange rates changed to $1.00 for C$0.9936 at November 30, 2012
from $1.00 for C$1.0203 at November 30, 2011.
The loss for the year ended November 30, 2011, was due to the strength of the Canadian dollar during the year ended November 30,
2011 as the exchange rate averaged $1.00 for C$0.9879 compared to $1.00 for C$1.0345 for the prior year. During 2011 most of our cash was
held in U.S. dollars. Based on year end dates, the Canadian dollar modestly strengthened against the U.S. dollar as the rates changed to $1.00
for C$1.0203 at November 30, 2011 from $1.00 for C$1.0266 at November 30, 2010.
Interest Income
Interest income was $20,691 for the year ended November 30, 2012 in comparison to $60,790 for the year ended November 30, 2011,
a decrease of $40,099. The interest income in the year ended November 30, 2012 was lower largely due to a lower average amount of cash
equivalents on hand during 2012.
Interest Expense
Interest expense was $63,406 for the year ended November 30, 2012 in comparison to $83,473 for the year ended November 30,
2011, a decrease of $20,067. The amount outstanding on a related party loan which accrues interest at 6% annually was lower in the year
ended November 30, 2012 in comparison to the prior year.
Net Loss
The Company recorded a net loss for the year ended November 30, 2012 of $6,136,865, or $0.36 per common share, compared with a
loss of $4,880,277, or $0.33 per common share for the year ended November 30, 2011. The increased loss can be attributed to an increase in
stock-based compensation, a reduction in the fair value adjustment of derivative liability, and a reduction in revenue in the year ended
November 30, 2012 compared to the prior year. This was partially offset by a nil financing expense in the year ended November 30, 2012
compared to financing expense of $2,357,732 in the prior year related to the Company's February 2011 private placement financing. Stock-
based compensation expense in the year ended November 30, 2012 was $2,323,845 versus $702,460 in the prior year. The fair value
adjustment of derivative liability in the year ended November 30, 2012 was $3,841,233 versus $5,346,878 in the prior year. Revenues related
to the amendment of the license and commercialization agreement with Par in the year ended November 30, 2012 was $107,091 versus
$501,814 in the prior year.
Restatement of Comparative Amounts
For the years ended November 30, 2012 and 2011, we previously classified the issuance of common shares as a credit to additional
paid in capital. In accordance with U.S. GAAP, shares issued with no par value are required to be classified under capital stock. The adjustment
is a reclassification from additional paid in capital into capital stock and has an immaterial impact on the consolidated statement of
shareholder’s deficiency. Items previously reported have been reclassified to conform to U.S. GAAP and did not have any impact on the
Company’s earnings per share calculations.
-41-
B.
Liquidity and Capital Resources
The Company had cash and cash equivalents of $760,586 as at November 30, 2013 compared to $497,016 as at November 30, 2012,
and compared to $4,817,088 at November 30, 2011. The increase in cash during the year ended November 30, 2013 is mainly a result of an
increase in financing activities, partially offset by a decrease in cash flows used in operating activities related to R&D activities, and the
decrease in purchases of production, laboratory and computer equipment, as noted below. The decrease in cash during the year ended
November 30, 2012 is mainly a result of cash flows used in operating activities related to R&D activities and the purchase of production,
laboratory and computer equipment due to the acceleration of product development activities, as noted below. The increase in cash during the
year ended November 30, 2011 is mainly a result of cash flows from financing activities, as noted below.
For the year ended November 30, 2013, net cash flows used in operating activities decreased to $6,926,796 as compared to
$7,654,361 and $6,981,448 for the years ended November 30, 2012 and 2011, respectively. The November 30, 2013 decrease was due to lower
cash expenditures in R&D activities as well as for selling, general and administrative activities. The November 30, 2012 increase in cash flows
used in operating activities compared to November 30, 2011 can be attributed to the November 30, 2011 periods’ cash receipt of $600,000
from Par based on the terms of the expanded agreement for development and commercialization of Focalin XR® generics, and C$1,188,668 of
ITCs received from the Canada Revenue Agency (“CRA”) and the Ontario Ministry of Finance (“OMF”) for research and development
activities described more fully below.
Research and development costs related to continued internal research and development programs are expensed as incurred. However,
materials and equipment are capitalized and amortized over their useful lives if they have alternative future uses. For the years ended
November 30, 2013, 2012, and 2011, R&D expense was $5,076,236, $5,992,417 and $5,125,608, respectively. For the years ended November
30, 2013, 2012, and 2011, R&D expense before stock option expense was $4,239,030, $4,487,356 and $4,524,185, respectively.
As a research and development company, Intellipharmaceutics Corp., a wholly-owned subsidiary of the Company (“IPC Corp”) is
eligible to receive ITCs from various levels of government under the SR&ED incentive programs. Depending on the financial condition of
IPC Corp, research and development expenses in any fiscal year could be claimed. Eligible research and development expenses included
salaries for employees involved in research and development, cost of materials, equipment purchase as well as third party contract
services. This amount is not a reduction in income taxes but a form of government refundable credits based on the level of research and
development that the Company carries out.
In fiscal year 2013 and 2012, the Company received C$300,000 in each year for the ITCs with the OMF for research and
development activities carried out during the fiscal years 2012 and 2011, respectively.
In fiscal year 2011, the Company received C$640,081 from the CRA and the OMF comprised of ITCs for research and development
activities carried out to the period ended October 21, 2009. The Company received another refund of C$207,370 for the ITC with the OMF for
research and development activities carried out during the fiscal year 2010. Finally, the Company also received C$341,217 in other tax credits
receivable that were acquired in the October 22, 2009 IPC Arrangement Agreement. Subsequent to the IPC Arrangement, the Company is no
longer a Canadian-controlled private corporation, reducing the amounts that we would otherwise be eligible for. Realization of these credits is
subject to government approval.
For the year ended November 30, 2013, net cash flows provided from financing activities of $7,328,420 relate principally to an
underwritten public offering for gross proceeds of approximately $3.1 million in July 2013, a registered direct unit offering for gross proceeds
of approximately $3.1 million in March 2013, a 2013 Debenture financing in the aggregate principal amount of $1.5 million in January 2013,
and several warrant exercises, partially offset by issuance costs.
For the year ended November 30, 2012, net cash flows provided from financing activities of $4,363,865 related principally to the
registered direct common share offering for gross proceeds of $5 million completed in March 2012, and several warrant exercises, partially
offset by issuance costs.
-42-
For the year ended November 30, 2011, net cash flows provided from financing activities of $11,269,162 related mainly to the gross
proceeds of $12,000,000 from the issuance of shares and warrants from the private placement completed on February 1, 2011. This cash flow
provided from financing activities was partially offset by the repayment of $801,551 (C$817,822) for a related party loan payable to Dr. Isa
Odidi and Dr. Amina Odidi, principal stockholders, directors and executive officers of Intellipharmaceutics, for cash advances made by them
to us as a shareholder loan, in accordance with the terms of the loan. This repayment was not sourced from the gross proceeds of the private
placement. See the next paragraph and Item 7.B “Related Party Transactions” below for repayment restrictions.
Repayments of the related party loan are restricted under the terms of the loan such that the principal amount thereof shall be payable
when payment is required solely out of (i) revenues earned by IPC Corp, following the effective date of October 22, 2009 (“effective date”),
and/or proceeds received by IPC Corp or its affiliates from the offering of its securities after the effective date (other than the proceeds from
the transactions completed in February 2011, March 2012, March 2013 and July 2013), and/or amounts received by IPC Corp for scientific
research tax credits of IPC Corp and (ii) up to C$800,000 of the Net Cash from the Vasogen transaction (as defined in the IPC Arrangement
Agreement). As at November 30, 2013, interest payable on this loan was accrued in the amount of $39,365 (C$41,806). During the year ended
November 30, 2013, no principal repayment was made and interest payments of $16,640 (C$17,671) in respect of the promissory note were
made by the Company in accordance with the IPC Arrangement Agreement. In November 2013, we entered into an at-the-market equity
distribution agreement pursuant to which we may, from time to time, sell up to an aggregate of $16.8 million (or such lesser amount as may be
permitted under applicable securities laws and regulations) of our common shares; we plan to apply up to approximately $0.8 million of any
offering proceeds therefrom in payment of the related party loan. During the year ended November 30, 2013, no sales of our common shares
were made under the at-the-market offering. As of the date of this document, 1,312,100 of our common shares have been sold under the at-the-
market offering for net proceeds to us of $4,808,054, and no proceeds from the sales of our common shares under the at-the-market offering
have been used to repay this loan. As at November 30, 2012, interest payable on this loan was accrued in the amount of $13,938 (C$13,849).
During the year ended November 30, 2012, no repayment was made and interest payments of $39,173 (C$39,083) were made. As at
November 30, 2011, interest payable on this loan was accrued in the amount of $7,493 (C$7,645). During the year ended November 30, 2011
the shareholder loan principal of $801,551 (C$817,822) was repaid and interest of $163,099 (C$166,410) was paid in accordance with the
terms of the IPC Arrangement Agreement.
For the year ended November 30, 2013, net cash flows used in investing activities of $122,017 related mainly to a decrease in
purchases of production and laboratory equipment as compared with the year ended November 30, 2012. For the year ended November 30,
2012, net cash flows used in investing activities of $1,036,092 related mainly to purchases of production, laboratory and computer equipment
due to the acceleration of product development activities. For the year ended November 30, 2011, net cash flows used in investing activities of
$262,142 related mainly to purchases of production and laboratory equipment due to the acceleration of product development activities.
All non-cash items have been eliminated from the consolidated statements of cash flows.
The Company has not been profitable and has incurred losses from operations since inception. The Company has funded its research
and development activities principally through the issuance of securities, loans from related parties, funds from the IPC Arrangement
Agreement and funds received under development agreements. Currently, the Company does not anticipate generating sufficient cash flows
from operations as it pursues the development of a portfolio of ANDA and NDA 505(b)(2) products. Our future operations are highly
dependent upon our ability to raise additional capital to support advancing our product pipeline through continued research and development
activities. Although there can be no assurances, such financing may come from revenues from proceeds of the Company’s at-the-market
offering program, and from sales of our dexmethylphenidate hydrochloride extended-release products. Our ultimate success will depend on
whether our product candidates receive the approval of the FDA or other applicable regulatory agencies and we are able to successfully market
approved products. We cannot be certain that we will be able to receive FDA approval for any of our current or future product candidates, or
that we will reach the level of sales and revenues necessary to achieve and sustain profitability.
-43-
In July 2013, the Company completed an underwritten public offering for gross proceeds of approximately $3.1 million as described
above. In March 2013, the Company completed a registered direct unit offering for gross proceeds of approximately $3.1 million as described
above. In January 2013, the Company completed the Debenture financing in the aggregate principal amount of $1.5 million described
elsewhere herein. In March 2012, the Company completed a registered direct common share offering for gross proceeds of $5 million as
described above.
On November 18, 2013, the FDA granted us final approval to market our once daily generic dexmethylphenidate hydrochloride
extended-release capsules for the 15 and 30 mg strengths. Commercial sales of these strengths were launched immediately by our
commercialization partner in the United States, Par. Our 5, 10, 20 and 40 mg strengths were also tentatively FDA approved, subject to the right
of another party or parties to 180 days of generic exclusivity from the date of first launch of such products by such parties. We believe that Par
intends to launch these strengths immediately upon the expiry of those exclusivity periods, but there can be no assurance as to when or if any
launch will occur. There can be no assurance as to when or if final FDA approval will be received for the remaining product strengths we have
applied for or that any of these strengths tentatively approved will ever be successfully commercialized. We depend significantly on the
actions of our development partner Par in the prosecution, regulatory approval and commercialization of our generic dexmethylphenidate
hydrochloride extended-release products and on their timely payment to us of the contracted quarterly payments as they come due. Our near
term ability to generate significant revenue will depend upon successful commercialization of this product in the United States, where the
branded Focalin XR® product is in the market. Although we have several other products in our pipeline, they are at earlier stages of
development.
As of February 18, 2014, our cash balance was $6.1 million. We currently expect to satisfy our operating cash requirements through
the end of November 2014 from cash on hand. We will need additional capital to fund our current operations commencing in November 2014,
and to fund any significant expansion of our operations. Although there can be no assurances, such financing may come from revenues from
proceeds of the Company’s at-the-market offering program, and from sales of our dexmethylphenidate hydrochloride extended-release
products. Other potential sources of capital may include the collection of anticipated revenues resulting from future commercialization
activities, development agreements or marketing license agreements, cost savings associated with managing operating expense levels, equity
and/or debt financings, and/or new strategic partnership agreements funding some or all costs of development, although there can be no
assurance that we will be able to obtain any such capital on terms or in amounts sufficient to meet our needs or at all. The availability of equity
or debt financing will be affected by, among other things, the results of our research and development, our ability to obtain regulatory
approvals, the market acceptance of our products, the state of the capital markets generally, strategic alliance agreements, and other relevant
commercial considerations. In addition, if we raise additional funds by issuing equity securities, our then existing security holders will likely
experience dilution, and the incurring of indebtedness would result in increased debt service obligations and could require us to agree to
operating and financial covenants that would restrict our operations. In the event that we do not obtain additional capital, there may be
substantial doubt about our ability to continue as a going concern and realize our assets and pay our liabilities as they become due. Any failure
on our part to raise additional funds on terms favorable to us or at all, may require us to significantly change or curtail our current or planned
operations in order to conserve cash until such time, if ever, that sufficient proceeds from operations are generated, and could result in our not
taking advantage of business opportunities, in the termination or delay of clinical trials for one or more of our product candidates, in
curtailment of our product development programs designed to identify new product candidates, in the sale or assignment of rights to our
technologies, products or product candidates, and/or our inability to file ANDAs or NDAs at all or in time to competitively market our
products or product candidates.
C.
Research and development, patents, and licenses, etc.
We expense R&D costs. For the years ended November 30, 2013, 2012 and 2011, R&D expense was $5,076,236, $5,992,417 and
$5,125,608, respectively.
D.
Trend Information
It is important to note that historical patterns of expenditures cannot be taken as an indication of future expenditures. Net income and
loss has been variable over the last eight quarters, and is impacted primarily by the availability of funding, the level of our R&D spending, and
the fair value adjustment of derivative liabilities. The higher loss during the fourth quarter of 2013 when compared to the loss in the third
quarter of 2013 can be mainly attributed to the fair value adjustment of derivative liabilities for a loss of $5.1 million due to the significant
increase in common share price driving the fair market valuation of derivative liabilities. This was partially offset by the timing of certain
R&D activities which have been deferred, and licensing revenue of $1.5 million related to commercial sales of dexmethylphenidate
hydrochloride extended-release capsules for the 15 and 30 mg strengths under the license and commercialization agreement with Par. This
revenue represents the first commercial generic sales of those strengths and may not be representative of post-launch sales. The increase in the
Company’s net loss for the third quarter ended August 31, 2013, as compared to the Company’s net loss for the second quarter ended May 31,
2013, can be attributed to the loss of $0.2 million in the fair value adjustment of derivative liabilities. In contrast, for the second quarter ended
May 31, 2013, there was a gain of $0.2 million in the fair value adjustment of derivative liabilities.
-44-
The following selected financial information is derived from our unaudited interim consolidated financial statements.
Quarter Ended
November 30, 2013
August 31, 2013
May 31, 2013
February 29, 2013
November 30, 2012
August 31, 2012
May 31, 2012
February 29, 2012
Revenues
Net income (loss)
$
1,527,474
-
-
-
-
-
-
107,091
$
(6,309,405)
(2,047,783)
(1,781,662)
(1,340,133)
(1,346,735)
(1,458,238)
(1,357,843)
(1,936,519)
Income (loss) per share
Diluted
$
(0.30)
(0.10)
(0.09)
(0.07)
(0.08)
(0.08)
(0.08)
(0.12)
Basic
$
(0.30)
(0.10)
(0.09)
(0.07)
(0.08)
(0.08)
(0.08)
(0.12)
E.
Off-balance sheet arrangements
The Company, as part of its ongoing business, does not participate in transactions that generate relationships with unconsolidated
entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities (“SPE”), which would have
been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of
November 30, 2013, the Company was not involved in any material unconsolidated SPE transactions.
F.
Tabular disclosure of contractual obligations
In the table below, we set forth our enforceable and legally binding obligations and future commitments and obligations related to all
contracts. Some of the figures we include in this table are based on management’s estimate and assumptions about these obligations, including
their duration, the possibility of renewal, anticipated actions by third parties, and other factors. The Company has entered into capital lease
agreements for laboratory equipment where the lease obligation will end in fiscal 2014. Operating lease obligations related to the lease of
premises will expire in November 2014, with an option to extend the lease on comparable terms for five additional years.
-45-
Contractual Obligations
Third parties
Accounts payable
Capital lease
Operating lease
Related parties
Employee costs payable
Due to related parties
Convertible debenture
G.
Safe Harbor
Total
Less than 1 Year 1 - 3 Years 3 - 5 Years
More than 5 Years
Payments Due by Period
$ 810,381 $
43,264
84,356
508,616
759,564
1,694,661
$3,900,842 $
810,381 $
43,264
84,356
- $
-
-
-
508,616
-
759,564
178,891 1,515,770
2,385,072 $1,515,770 $
- $
-
-
-
-
-
- $
-
-
-
-
-
-
-
See “Disclosure Regarding Forward-Looking Information” in the introduction to this annual report.
Item 6.
Directors, Senior Management and Employees
A.
Directors and Senior Management
DIRECTORS AND OFFICERS
The name and province/state of residence of each of our directors and officers as at the date hereof, the office presently held, principal
occupation, and the year each director first became a director of the Company or its predecessor, IPC Ltd., are set out below. Each director is
elected to serve until the next annual meeting of our shareholders or until his or her successor is elected or appointed. Officers are appointed
annually and serve at the discretion of the board of directors (the “Board”).
Name and
Province of Residence
Dr. Isa Odidi
Ontario, Canada
Dr. Amina Odidi
Ontario, Canada
John Allport (2)
Ontario, Canada
Position held
with the Company
Chairman of the Board and
Chief Executive Officer of
the Company
President, Chief Operating
Officer and Director of the
Company
Vice-President, Legal
Affairs and Licensing and
Director of the Company
Principal Occupations
During the Last 5 Years
Officer of the Company
Other Public
Company Boards
None
Director
Since
September 2004
Officer of the Company
None
September 2004
Officer of the Company
None
September 2004
-46-
Name and
Province of Residence
Dr. Eldon R. Smith (1) (2)
Alberta, Canada
Position held
with the Company
Director of the Company
Principal Occupations
During the Last 5 Years
President and CEO of
Eldon R. Smith and
Associates Ltd., a
consulting business, and
Professor Emeritus at the
University of Calgary,
Faculty of Medicine
Other Public
Company Boards
Aston Hill Financial;
Canadian Natural
Resources Limited;
Resverlogix Corp.
Director
Since
October 2009
Director of the Company CEO of Equiprop
None
March 2006
Bahadur Madhani (1)
Ontario, Canada
Kenneth Keirstead (1)(2)
New Brunswick, Canada
Director of the Company
Dr. Patrick Yat
Ontario, Canada
Vice-President,
Pharmaceutical Analysis
and Chemistry of the
Company
Shameze Rampertab
Ontario, Canada
Vice President, Finance
and Chief Financial
Officer of the Company
Management Limited, a
consulting business.
Executive Manager of
Lyceum Group, a
consulting business.
Officer of the Company
None
None
January 2006
N/A
None
N/A
Officer of the Company
since November 2010;
Partner, Healthcare
Investment Banking at
Loewen Ondaatje
McCutcheon Limited from
June 2008 to November
2010.
Notes:
(1)
(2)
Member of the Audit Committee and Compensation Committees.
Member of the Corporate Governance Committee.
Each of the foregoing individuals has been engaged in the principal occupation set forth opposite his or her name during the past five
years or in a similar capacity with a predecessor organization except for: (i) Shameze Rampertab, who prior to November 2010 was Partner,
Healthcare Investment Banking at Loewen, Ondaatje, McCutcheon Ltd. since June 2008.
As of February 18, 2014, the directors and executive officers of the Company as a group owned, directly and indirectly, or exercise
control or direction over 6,166,647 common shares, representing approximately 27.0% of the issued and outstanding common shares of the
Company (and beneficially owned approximately 9,721,678 common shares representing 42.6% of our common shares including common
shares issuable upon the exercise of outstanding options and the conversion of the outstanding convertible debenture that are exercisable or
convertible within 60 days of the date hereof). Our principal shareholders, Drs. Amina and Isa Odidi, our President and Chief Operating
Officer and our Chairman and Chief Executive Officer, respectively, and Odidi Holdings Inc., a privately-held company controlled by Drs.
Amina and Isa Odidi, owned in the aggregate directly and indirectly 5,997,751 common shares, representing approximately 26.3% of our
issued and outstanding common shares of the Company (and collectively beneficially owned in the aggregate approximately 8,906,115
common shares representing 34.6% of our common shares including common shares issuable upon the exercise of outstanding options and the
conversion of the outstanding convertible debenture that are exercisable or convertible within 60 days of the date hereof). (Reference is made
to the section entitled “E. Share Ownership” under this “Item 6. Directors, Senior Management and Employees” for additional information
regarding the options to purchase common shares held by directors and officers of the Company and the convertible debenture held by Drs.
Amina and Isa Odidi.) As a result, the principal shareholders will have the ability to exercise significant influence over all matters submitted to
our shareholders for approval whether subject to approval by a majority of holders of our common shares or subject to a class vote or special
resolution requiring the approval of 66⅔% of the votes cast by holders of our common shares, in person or by proxy.
-47-
On June 25, 2004, Mr. Keirstead filed a voluntary assignment in bankruptcy and was issued a discharge on September 23, 2006.
Drs. Isa Odidi and Amina Odidi are spouses to each other.
B.
Compensation
Compensation Discussion and Analysis
Background – The Company is a pharmaceutical company specializing in the research, development and manufacture of novel and
generic controlled-release and targeted-release oral solid dose drugs. The Company’s patented Hypermatrix™ technology is a
multidimensional controlled-release drug delivery platform that can be applied to the efficient development of a wide range of existing and new
pharmaceuticals. Based on this technology platform, the Company has developed several drug delivery systems and a pipeline of products (our
dexmethylphenidate hydrochloride extended-release capsules for the 15 and 30 mg strengths which recently received final FDA approval) and
product candidates in various stages of development, including ANDAs filed with the FDA in therapeutic areas that include neurology,
cardiovascular, gastrointestinal tract, diabetes and pain. Several of these products are partnered. As of November 30, 2013, the Company had
38 full-time employees engaged in administration and research and development.
Compensation Governance - The Company’s Compensation Committee is comprised of three directors, Messrs. Madhani, Keirstead
and Smith, each of whom is considered “independent” within the meaning of section 2.4 of Form 51-102F6 – Statement of Executive
Compensation. Each member of the Compensation Committee has sufficient experience in order to make decisions on the suitability of the
Company’s compensation policies and practices.
The Compensation Committee recommends compensation policies concerning officers and senior management to the Board. The
Corporate Governance Committee recommends compensation policies concerning independent directors to the Board. The Board makes the
final determinations regarding the adequacy and form of the compensation for non-executive directors to ensure that such compensation
realistically reflects the responsibilities and risks involved, without compromising a director’s independence. Further details relating to the
role and function of the Compensation Committee and the Corporate Governance Committee is provided in Item 6.C.
Risk Management - The Board is responsible for identifying the principal risks of the Company’s business and ensuring the
implementation of appropriate systems to manage these risks. Through the Compensation Committee, the Board is involved in the design of
compensation policies to meet the specific compensation objectives discussed below and considers the risks relating to such policies, if any.
The Compensation Committee is ultimately responsible for ensuring compliance of the compensation policies and practices of the Company.
To date, the Board and Compensation Committee have not identified any risks arising from the Company’s compensation policies and
practices that would be reasonably likely to have a material adverse effect on the Company.
Objectives - The overall objectives of the Company’s compensation program include: (a) attracting and retaining talented executive
officers; (b) aligning the interests of those executive officers with those of the Company; and (c) linking individual executive officer
compensation to the performance of the Company. The Company’s compensation program is currently designed to compensate executive
officers for performance of their duties and to reward certain executive officers for performance relative to certain milestones applicable to
their services.
-48-
Elements of Compensation - The elements of compensation awarded to, earned by, paid to, or payable to the Named Executive
Officers (as hereinafter defined) for the most recently completed financial year are: (a) base salary and discretionary bonuses; (b) long-term
incentives in the form of stock options; (c) restricted and deferred share unit awards; and (d) perquisites and personal benefits. Prior to the most
recently completed financial year, the Named Executive Officers have also received option-based awards which were assumed by the
Company pursuant to the plan of arrangement completed on October 22, 2009.
Base Salary - Base salary is a fixed element of compensation payable to each Named Executive Officer for performing his or her
position’s specific duties. The amount of base salary for a Named Executive Officer has been determined through negotiation of an
employment agreement with each Named Executive Officer (see “Employment Agreements” below). While base salary is intended to fit into
the Company’s overall compensation objectives by serving to attract and retain talented executive officers, the size of the Company and the
nature and stage of its business also impact the level of base salary. To date, the level of base salary has not impacted the Company’s decisions
about any other element of compensation.
Option-Based Awards - Option-based awards are a variable element of compensation that rewards each Named Executive Officer for
individual and corporate performance overall determined by the Board. Option-based awards are intended to fit into the Company’s overall
compensation objectives by aligning the interests of all Named Executive Officers with those of the Company, and linking individual Named
Executive Officer compensation to the performance of the Company. The Board, which includes three of the five Named Executive Officers,
is responsible for setting and amending any equity incentive plan under which an option-based award is granted.
The Company has in place a stock option plan (the “Option Plan”) for the benefit of certain officers, directors, employees and
consultants of the Company, including the Named Executive Officers (as described in greater detail in Item 6.E below). Named Executive
Officers have been issued options under such plan. The Company has also granted performance-based options to Dr. Isa Odidi and Dr. Amina
Odidi pursuant to a separate option agreement, which was negotiated at the same time as their employment agreements. These options vest
upon the Company attaining certain milestones relating to FDA filings and approvals for Company drugs, such that 276,394 options vest in
connection with each of the FDA filings for the first five Company drugs and 276,394 options vest in connection with each of the FDA
approvals for the first five Company drugs.
The Company’s Option Plan was adopted effective October 22, 2009 as part of the IPC Arrangement Agreement approved by the
shareholders of IPC Ltd., the predecessor company, at the meeting of shareholders on October 19, 2009. Subject to the requirements of the
Option Plan, the Board, with the assistance of the Compensation Committee, has the authority to select those directors, officers, employees and
consultants to whom options will be granted, the number of options to be granted to each person and the price at which common shares of the
Company may be purchased. Grants are determined based on individual and aggregate performance as determined by the Board.
RSUs - The Company established a restricted share unit plan (the “RSU Plan”) to form part of its incentive compensation
arrangements available for officers and employees of the Company and its designated affiliates (as described in greater detail it Item 6.E) as of
May 28, 2010, when the RSU Plan received shareholder approval.
Perquisites and personal benefits - The Company also provides perquisites and personal benefits to its Named Executive Officers,
including basic employee benefit plans, which are available to all employees, and a car allowance to cover the cost of an automobile for
business purposes. These perquisites and personal benefits were determined through negotiation of an employment agreement with each
Named Executive Officer (see “Employment Agreements” below). While perquisites and personal benefits are intended to fit into the
Company’s overall compensation objectives by serving to attract and retain talented executive officers, the size of the Company and the nature
and stage of its business also impact the level of perquisites and benefits. To date, the level of perquisites and benefits has not impacted the
Company’s decisions about any other element of compensation.
Other Compensation-Related Matters - The Company’s Share Trading Policy prohibits all directors and officers of the Company
from, among other things, engaging in any short sales designed to hedge or offset a decrease in market value of the securities of the Company.
-49-
Executive Compensation
The following table sets forth all direct and indirect compensation for, or in connection with, services provided to the Company for
the financial years ended November 30, 2013, November 30, 2012 and November 30, 2011 in respect of the Chief Executive Officer of the
Company, the Chief Operating Officer of the Company, the Chief Financial Officer and two other officers of the Company who earned
greater than $150,000 in total compensation in the fiscal year ended November 30, 2013 (“Named Executive Officers”).
SUMMARY COMPENSATION TABLE
Name and
principal position
(a)
Year
(b)
Salary
(U.S.$)(1)
(c)
Share-
based
awards
(U.S.$)
(d)
Option-
based
awards
(U.S.$)(2)
(e)
Non-equity incentive
plan compensation
(U.S.$)
(f)
Pension
value
(U.S.$)
(g)
All other
compensation
(U.S.$) (4)
(h)
Total
compensation
(U.S.$)
(i)
Dr. Isa Odidi,
Chairman & Chief
Executive Officer
Dr. Amina Odidi,
President & Chief
Operating Officer
Shameze
Rampertab, VP
Finance & Chief
Financial Officer
John Allport,
VP Legal Affairs &
Licensing
2013
2012
2011
2013
2012
2011
2013
2012
2011
2013
2012
2011
509,716
454,912
457,611
509,716
454,912
457,611
244,117
251,610
182,205
141,588
145,934
138,339
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
368,832
701,741
Nil
368,832
701,741
Nil
81,645
52,049
Nil
68,922
589,411
Nil
Annual
incentive
plans(3)
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
70,857
N/A
N/A
N/A
Long-
term
incentive
plans
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
11,718
12,077
12,147
11,718
12,077
12,147
11,718
12,077
12,147
11,718
12,077
N/A
890,266
1,168,730
469,758
890,266
1,168,730
469,758
337,480
315,736
265,209
222,227
747,422
138,339
Notes:
(1)
(2)
(3)
(4)
Salaries paid by the Company to each Named Executive Officer are paid in Canadian dollars. All amounts are expressed in U.S.
dollars converted at the exchange rate of U.S.$0.9765 to C$1.00 (2012 – U.S.$1.0064; 2011 – U.S.$1.0122) being the average
closing exchange rate quoted by the Bank of Canada for the respective periods. Salary includes all amounts paid or payable to the
Named Executive Officer. Actual amount paid to each Named Executive Officer in fiscal 2013, 2012 and 2011 are as disclosed in
the table. During the year ended November 30, 2013, the Company paid U.S.$136,293 in salary to Dr. Isa Odidi and Dr. Amina
Odidi, related to years prior to 2010. As at November 30, 2013 the Company had U.S.$336,327 in unpaid salary to Dr. Isa Odidi and
Dr. Amina Odidi related to years prior to 2010.
The Company entered into a separate acknowledgement and agreement with Drs. Isa and Amina Odidi dated October 22, 2009 to be
bound by the performance-based stock option agreement dated September 10, 2004 pursuant to which Drs. Isa and Amina Odidi are
entitled to purchase up to 2,763,940 of the Company’s common shares upon payment of U.S.$3.62 per share, subject to satisfaction
of the performance vesting conditions. The value of the option-based awards are determined using the Black-Scholes pricing model
calculated as at the award date.
Amount awarded at the discretion of the Board. This bonus was paid in the first quarter of 2012.
“All other compensation” includes car allowances and other miscellaneous benefits.
Significant factors necessary to understand the information disclosed in the Summary Compensation Table above include the terms of
each Named Executive Officer’s employment agreement and the terms of the separate option agreement described below.
-50-
Employment Agreements
The employment agreement with Dr. Isa Odidi, the Chief Executive Officer of the Company, effective September 1, 2004 entitles Dr.
Isa Odidi to receive a base salary of U.S.$200,000 per year, which is paid in Canadian dollars, to be increased annually each year during the
term of the agreement by twenty percent of the prior year’s salary. In addition, he is entitled to: (a) participate in the Option Plan; (b)
participate in all employee benefit plans and programs, except for the RSU Plan and DSU Plan; and (c) a car allowance of up to U.S.$1,000 per
month. The initial term of the employment agreement was until September 30, 2007, at which time, pursuant to the terms of the agreement, the
agreement was deemed to be extended automatically for an additional three-year period on the same terms and conditions (i.e. until September
30, 2010). The agreement will continue to be extended automatically for successive additional three-year periods on the same terms unless the
Company gives Dr. Odidi contrary written notice at least two years prior to the date on which the agreement would otherwise be extended. See
“Termination and Change of Control Benefits” below. Dr. Odidi’s employment agreement was amended on August 1, 2007 and June 8, 2009
to include intellectual property, non-competition and non-solicitation provisions in favour of the Company. In April 2010, Dr. Isa Odidi
offered and agreed to amend his employment agreement effective as of December 1, 2009, to eliminate the right to annual increases in his base
salary of twenty per cent each year; and agreed to roll back his base salary effective December 1, 2009 to the level payable under the
employment agreement for the period from September 2008 to August 2009, being C$452,000 per year. Under this amendment, the base
salary is open to potential increase on an annual basis at the discretion of the Board and Dr. Isa Odidi is eligible to receive a performance
bonus, based on the performance, including that of Dr. Odidi and the Company, as may be determined in the discretion of the Board. In
February 2012, Dr. Isa Odidi received a grant of 300,000 options of which 200,000 vested immediately on issuance and the remaining 100,000
options vested on February 17, 2013. In April 2013, Dr. Isa Odidi received a grant of 75,000 options of which 37,500 vested immediately on
issuance and the remaining 37,500 options vested on November 30, 2013.
The employment agreement with Dr. Amina Odidi, the President and Chief Operating Officer of the Company, effective September
1, 2004 entitles Dr. Amina Odidi to receive a base salary of U.S.$200,000, which is paid in Canadian dollars, per year, to be increased annually
each year during the term of the agreement by twenty percent of the prior year’s salary. In addition, she is entitled to: (a) participate in the
Option Plan; (b) participate in all employee benefit plans and programs, except for the RSU Plan and DSU Plan; and (c) a car allowance of up
to U.S.$1,000 per month. The initial term of the employment agreement was until September 30, 2007, at which time, pursuant to the terms of
the agreement, the agreement was deemed to be extended automatically for an additional three-year period on the same terms and conditions
(i.e. until September 30, 2010). The agreement will continue to be extended automatically for successive additional three-year periods on the
same terms unless the Company gives Dr. Odidi contrary written notice at least two years prior to the date on which the agreement would
otherwise be extended. See “Termination and Change of Control Benefits” below. Dr. Odidi’s employment agreement was amended on
August 1, 2007 and June 8, 2009 to include intellectual property, non-competition and non-solicitation provisions in favour of the Company. In
April 2010, Dr. Amina Odidi offered and agreed to amend her employment agreement effective as of December 1, 2009, to eliminate the right
to annual increases in her base salary of twenty per cent each year; and agreed to roll back her base salary effective December 1, 2009 to the
level payable under the employment agreement for the period from September 2008 to August 2009, being C$452,000 per year. Under this
amendment, the base salary is open to potential increase on an annual basis at the discretion of the Board and Dr. Amina Odidi is eligible to
receive a performance bonus, based on the performance, including that of Dr. Odidi and the Company, as may be determined in the discretion
of the Board. In February 2012, Dr. Amina Odidi received a grant of 300,000 options of which 200,000 vested immediately on issuance and
the remaining 100,000 options vested on February 17, 2013. In April 2013, Dr. Amina Odidi received a grant of 75,000 options of which
37,500 vested immediately on issuance and the remaining 37,500 options vested on November 30, 2013.
In addition, the Company entered into a separate acknowledgement and agreement with Drs. Isa and Amina Odidi dated October 22,
2009 to be bound by the performance-based stock option agreement dated September 10, 2004 pursuant to which Drs. Isa and Amina Odidi are
entitled to purchase up to 2,763,940 of the Company’s common shares. These options vest upon the Company attaining certain milestones
related to the FDA filings and approvals for Company drugs. The options are exercisable at a price of U.S.$3.62 per share and expire on
September 10, 2014. As of the date hereof, 1,658,364 of these options have vested and are exercisable. These options were not granted under
the Option Plan.
-51-
The employment agreement with Shameze Rampertab, the Chief Financial Officer of the Company, effective November 29, 2010
entitles Mr. Rampertab to receive a base salary of C$180,000, which is paid in Canadian dollars, per year. In addition, he is entitled to: (a)
participate in the Option Plan; (b) participate in all employee benefit plans and programs; and (c) a car allowance of C$1,000 per month. The
agreement provides for automatic renewal from year to year in absence of notice of termination from the Company at least 60 days prior to the
anniversary date. Mr. Rampertab was granted 60,000 options, of which 15,000 vested immediately on issuance and the remaining options vest
as to 15,000 each year on November 29, 2011, 2012 and 2013. The agreement has been extended and currently entitles Mr. Rampertab to
receive a base salary of C$250,000, which is paid in Canadian dollars, per year, and a grant of 40,000 options, which vest 13,334 each year on
February 16, 2013, 2014 and 2015. Mr. Rampertab’s employment agreement includes intellectual property, non-competition and non-
solicitation provisions in favour of the Company. In April 2013, Mr. Rampertab received a grant of 25,000 options of which 12,500 vested
immediately on issuance and the remaining 12,500 options vested on November 30, 2013.
The employment agreement with John Allport, the Vice President Legal Affairs and Licensing, effective September 1, 2004 entitles
Mr. Allport to receive a base salary of C$95,000, which is paid in Canadian dollars, per year. In addition, he is entitled to: (a) participate in the
Option Plan; (b) participate in all employee benefit plans and programs; and (c) a car allowance of C$1,000 per month. The employment
agreement is for an indefinite term subject to termination on six months’ notice. In December 2011, Mr. Allport’s base salary was increased to
C$145,000. In February 2012, Mr. Allport received a grant of 250,000 options of which 175,000 vested immediately on issuance and the
remaining 75,000 options vested on February 17, 2013. Mr. Allport’s employment agreement includes intellectual property, non-competition
and non-solicitation provisions in favour of the Company. In April 2013, Mr. Allport received a grant of 25,000 options of which 12,500
vested immediately on issuance and the remaining 12,500 options vested on November 30, 2013.
Incentive Plan Awards
Outstanding Option-Based Awards and Share-Based Awards – The following table sets forth for each Named Executive Officer all
awards outstanding at the end of the most recently completed financial year, including awards granted before the most recently completed
financial year. Each option grant allows the holder to purchase one common share of the Company’s common shares.
Option-based Awards
Share-based Awards
Name
(a)
Drs. Isa Odidi
and Amina Odidi(1)
Dr. Isa Odidi
Dr. Amina Odidi
Shameze
Rampertab
John Allport
Number of
securities
underlying
unexercised
options
(#)
(b)
2,763,940
300,000
75,000
300,000
75,000
60,000
40,000
25,000
250,000
25,000
Option
exercise
price
(U.S.$)
(c)
3.62
C$3.27
C$1.81
C$3.27
C$1.81
C$2.62
C$3.27
C$1.81
C$3.27
C$1.81
Option
expiration
date
Value of
unexercised
in-the-money
options
(U.S.$)
Number of
shares or
units of
shares that
have not vested
(#)
Market or
payout value
of share-
based awards
that have not
vested
(U.S.$)
(d)
Sept. 10, 2014
(e) (2)
$884,461
C$246,000
C$171,000
C$246,000
C$171,000
C$88,200
C$32,800
C$57,000
C$205,000
C$57,000
Feb. 16, 2022
Apr. 13, 2020
Feb. 16, 2022
Apr. 13, 2020
Nov. 29, 2020
Feb. 16, 2017
Apr. 13, 2020
Feb. 16, 2022
Apr. 13, 2020
-52-
(f)
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
(g)
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
Notes
(1)
(2)
These option-based awards are held jointly.
The value of unexercised options at year-end is calculated by subtracting the option exercise price from the closing price of the
common shares of the Company on the TSX for C$ exercise prices and Nasdaq for US$ exercise prices on November 30, 2013
(C$4.09 and $3.94, respectively) and multiplying the result by the number of common shares underlying an option.
Incentive Plan Awards – Value Vested or Earning During the Year – The following table sets forth details of the value vested or
earned during the most recently completed financial year for each incentive plan award.
Name
Option-based awards -
Value vested during
the year
(U.S.$)
Share-based awards -
Value vested during
the year
(U.S.$)
(a)
Drs. Isa Odidi
Dr. Amina Odidi
Shameze Rampertab
John Allport
(b)(1)
C$8,250
C$8,250
C$23,425
C$1,375
(c)
N/A
N/A
N/A
N/A
Non-equity incentive
plan compensation -
Value earned during
the year
(U.S.$)
(d)
Nil
Nil
Nil
Nil
Notes
(1)
The amount represents the theoretical total value if the options had been exercised on the vesting date, established by calculating the
difference between the closing price of the common shares of the Company on the TSX on the vesting date and the exercise price.
Pension Plan Benefits
The Company does not provide a defined benefit pension plan or a defined contribution pension plan for any of its Named Executive
Officers, nor does it have a deferred compensation pension plan for any of its Named Executive Officers. There are no amounts set aside or
accrued by the Company or its subsidiaries to provide pension, retirement or similar benefits.
Termination and Change of Control Benefits
The employment agreement with each of the Named Executive Officers, Dr. Isa Odidi and Dr. Amina Odidi, by virtue of it being a
fixed-term agreement with automatic renewal provisions, effectively provides for payments to the applicable Named Executive Officer
following termination of the employment agreement unless the agreement has been terminated in accordance with its terms. As a result, if
either Named Executive Officer had been terminated on the last business day of the Company’s most recently completed financial year, it is
estimated that an amount of up to approximately C$1.3 million would be payable to such Named Executive Officer, which is the amount that
would have been payable through to September 30, 2016, at each Named Executive Officer’s current annual salary level. Given their nature as
fixed term employment agreements, if notice is properly provided to not renew the agreement following the term ending September 30, 2016,
then as such date approaches the amount payable upon termination to the Named Executive Officer will decrease to the point where no amount
would be payable upon termination as at September 30, 2016. Any termination of the employment of a Named Executive Officer must be
undertaken by and is subject to the prior approval of the Board. There are no payments applicable under the employment agreements of the
Named Executive Officers relating to a change of control of the Company.
Director Compensation
The following table sets forth all amounts of compensation provided to the non-executive directors for the Company’s most recently
completed financial year.
-53-
Name
(a)
Eldon Smith
Kenneth Keirstead
Bahadur Madhani
Fees earned
(b)
Nil
C$10,375
C$9,750
Share-based
awards
(c) (1)
C$44,500
N/A
N/A
Option-based
awards
(d) (2)
C$29, 210
C$29, 210
C$29, 210
Non-equity
incentive plan
compensation Pension value
(e)
N/A
N/A
N/A
(f)
N/A
N/A
N/A
All other
compensation
(g)
N/A
N/A
N/A
Total
(h)
C$73,710
C$39,585
C$38,960
Notes:
(1)
(2)
DSUs that were earned. Does not include DSUs earned in the previous financial year and granted in the most recently completed
financial year.
Option-based awards for fiscal year 2013 were issued on April 13, 2013.
Significant factors necessary to understand the information disclosed in the Director Compensation Table above include the
following: Non-management directors receive an annual retainer of $25,000 paid in Canadian dollars. The Audit Committee chair receives an
annual retainer of $10,000 paid in Canadian dollars. The Corporate Governance Committee chair and Compensation Committee Chair, each
receives an annual retainer of $5,000 paid in Canadian dollars. Non-chair committee members, are paid an additional $2,500 per year per
committee paid in Canadian dollars. Meetings will result in an additional $1,000 per day per meeting paid in Canadian dollars.
Outstanding Option-Based Awards and Share-Based Awards – The following table sets forth all amounts of option-based and share-based
awards to the non-executive directors for the Company’s most recently completed financial year.
Name
(a)
Eldon Smith
Kenneth Keirstead
Bahadur Madhani
Number of
securities
underlying
unexercised
options
(#)
(b)
5,000
25,000
10,000
25,000
5,000
25,000
10,000
25,000
5,000
25,000
10,000
25,000
Option-based Awards
Share-based Awards
Option
exercise
price
(U.S.$)
(c)
C$2.88
C$3.25
C$2.88
C$1.81
C$2.88
C$3.25
C$2.88
C$1.81
C$2.88
C$3.25
C$2.88
C$1.81
Option
expiration
date
(d)
Nov. 30, 2016
Nov. 30, 2016
Oct. 22, 2019
Apr. 13, 2020
Nov. 30, 2016
Nov. 30, 2016
Oct. 22, 2019
Apr. 13, 2020
Nov. 30, 2016
Nov. 30, 2016
Oct. 22, 2019
Apr. 13, 2020
Value of
unexercised
in-the-money
options
(U.S.$)
Number of
shares or
units of
shares that
have not vested
(#)
(e) (1)
C$6,050
C$21,000
C$12,100
C$57,000
C$6,050
C$21,000
C$12,100
C$57,000
C$6,050
C$21,000
C$12,100
C$57,000
(f) (2)
43,040
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Market or
payout value
of share-
based awards
that have not
vested
(U.S.$)
(g) (3)
C$176,034
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Notes:
(1)
(2)
(3)
The value of unexercised options at year-end is calculated by subtracting the option exercise price from the closing price of the
common shares of the Company on the TSX on November 30, 2013 (C$4.09) and multiplying the result by the number of common
shares underlying an option.
These DSUs are permitted to be redeemed only following termination of Board service. Includes DSUs earned as at November 30,
2013.
The value of DSUs at year-end is calculated from the closing price of the common shares of the Company on the TSX on
November 30, 2013 (C$4.09) and multiplying by the number of common shares underlying a DSU.
-54-
Incentive Plan Awards – Value Vested or Earned During The Year – The following table sets forth all amounts of option-based and share-
based awards vested to the non-executive directors of the Company for the most recently completed financial year and no non-equity incentive
plan compensation was earned during the most recently completed financial year.
Name
Option-based awards -
Value vested during
the year
(U.S.$)
Share-based awards -
Value vested during
the year
(U.S.$)
(a)
Eldon Smith
Kenneth Keirstead
Bahadur Madhani
(b) (1)
C$40,375
C$40,375
C$40,375
(c) (2)
Nil
N/A
N/A
Non-equity incentive plan
compensation -
Value earned during
the year
(U.S.$)
(d)
Nil
Nil
Nil
Notes:
(1)
(2)
The amount represents the theoretical total value if the options had been exercised on the vesting date, established by calculating the
difference between the closing price of the common shares of the Company on the TSX on the vesting date and the exercise price.
The amount represents the theoretical total value of DSUs which were fully vested on their respective dates of issuance. DSUs are
issued at the calculated market value of a common share on the date of issuance.
Directors’ and Officers’ Liability Insurance
The Company maintains insurance for the liability of its directors and officers arising out of the performance of their duties. The total
amount of such insurance maintained is $8,000,000 subject to a deductible loss payable of $50,000 to $100,000 by the Company. The
premium payable by the Company for the period from October 25, 2013 to October 25, 2014 is $91,375.
C.
Board Practices
Board of Directors
See Items 6.A and 6.B.
Committees of the Board of Directors
AUDIT COMMITTEE
The Audit Committee of the Board monitors our financial activities, policies, and internal control procedures. The Audit Committee
assists the Board in fulfilling its oversight responsibility to shareholders, potential shareholders, the investment community, and others with
respect to the Company’s financial statements, financial reporting process, systems of internal accounting and disclosure controls, performance
of the external auditors, and risk assessment and management. The Audit Committee has the power to conduct or authorize investigations into
any matters within its scope of responsibilities, with full access to all books, records, facilities and personnel of the Company, its auditors and
its legal advisors. In connection with such investigations or otherwise in the course of fulfilling its responsibilities under the Audit Committee
Charter, the Audit Committee has the authority to independently retain special legal, accounting, or other consultants to advise it.
Audit Committee Charter
The charter of the Audit Committee can be found on the Company’s website at www.intellipharmaceutics.com.
-55-
Composition of the Audit Committee
Our Audit Committee is comprised of Kenneth Keirstead, Bahadur Madhani and Dr. Eldon Smith, each of whom is considered
independent and financially literate (as such terms are defined under applicable Canadian securities legislation) and satisfies the independence
criteria of Rule 10A3-(b)(1) under the U.S. Exchange Act. The members of the Audit Committee have selected a Chair from amongst
themselves, being Mr. Madhani.
Under the Securities and Exchange Commission rules implementing the Sarbanes-Oxley Act of 2002, Canadian issuers filing reports
in the United States must disclose whether their audit committees have at least one “audit committee financial expert”. Additionally, under
NASDAQ Listing Rule 5605(c)(2)(A), NASDAQ requires that one member of the audit committee be financially sophisticated, meaning that
they must have “past employment experience in finance or accounting, requisite professional certification in accounting, or any other
comparable experience or background which results in the individual’s financial sophistication, including being or having been a chief
executive officer, chief financial officer or other senior officer with financial oversight responsibilities.” The Board has determined that Mr.
Madhani qualifies as an audit committee financial expert under the applicable Securities and Exchange Commission rules and as financially
sophisticated under the applicable NASDAQ rules.
Relevant Education and Experience
Kenneth Keirstead is educated in clinical biochemistry as a graduate of the Pathology Institute in Halifax; and business administration,
as a graduate of the College of William and Mary and Columbia University. Mr. Keirstead has been a director of the Company since January
2006. He has worked in the healthcare delivery and pharmaceutical industries for over 45 years. He was President and CEO, Sanofi Winthrop
Canada Inc.; General Manager, Squibb Medical Systems International; President, Chemfet International and President, Quinton Instruments
among other positions. Mr. Keirstead has published studies and reports on healthcare and related services topics. Since 1998 Mr. Keirstead’s
principal occupation has been as Executive Manager of the Lyceum Group, a Canadian consulting services company primarily active in the
healthcare field, of which Mr. Keirstead is the founder.
Bahadur Madhani is a chartered accountant who has been a director of the Company since March 31, 2006. He was a member of the
advisory board of Quebecor Ontario and former Chairman of United Way of Toronto, former Chair of YMCA of Greater Toronto, former
Chair of Nelson Mandela Children’s Fund Canada, former Vice-Chair of YMCA Canada and former Chair, Toronto Grants Review Team of
the Ontario Trillium Foundation. He was awarded membership in the Order of Canada in 2001. Since 1983, Mr. Madhani’s principal
occupation has been as President and CEO of Equiprop Management Limited, a Canadian property management company of which Mr.
Madhani is the principal shareholder. He is currently the Chair of YMCA Canada.
Dr. Eldon Smith is a medical doctor who graduated from the Dalhousie University Medical School and who has been a director of the
Company since October 2009. He is president and CEO of Eldon R. Smith and Associates Ltd. a private healthcare consulting company. He
is also professor emeritus at the University of Calgary, where he served as the Dean of the Faculty of Medicine subsequent to being Head of
the Department of Medicine and the Division of Cardiology. Dr. Smith is past-President of the Canadian Cardiovascular Society and served as
Chairman of the Scientific Review Committee of the Heart and Stroke Foundation of Canada. Dr. Smith was appointed as an Officer of the
Order of Canada in November 2005. In October 2006, Dr. Smith was appointed by the Honourable Tony Clement, Minister of Health, to chair
the Steering Committee responsible for developing a new Heart-Health strategy to fight heart disease in Canada. Dr. Smith currently serves on
the boards of Canadian Natural Resources Limited, Aston Hill Financial Inc., and Resverlogix Corp.
Pre-Approval Policies and Procedures
The Audit Committee reviewed with the independent auditor (who is responsible for expressing an opinion on the conformity of the
Company’s audited financial statements with Canadian and United States generally accepted accounting principles) their judgments as to the
quality, not just the acceptability, of the Company’s accounting principles and such other matters as are required to be discussed with the Audit
Committee under Canadian and United States generally accepted auditing standards. In addition, the Audit Committee has discussed with the
independent auditor the auditor’s independence from management and the Company including the matters in the written disclosures provided
to the Audit Committee by the independent auditor, and considered the compatibility of non-audit services with the auditor’s independence.
-56-
The Company’s independent auditor is accountable to the Board and to the Audit Committee. The Board, through the Audit
Committee, has the ultimate responsibility to evaluate the performance of the independent auditor, and through the shareholders, to appoint,
replace and compensate the independent auditor. Under the Sarbanes-Oxley Act of 2002, the independent auditor of a public company is
prohibited from performing certain non-audit services. The Audit Committee has adopted procedures and policies for the pre-approval of non-
audit services, as described in the Audit Committee Charter. Under the terms of such policies and procedures, the Audit Committee has
adopted a list of pre-approved services, including audit and audit-related services and tax services, and a list of prohibited non-audit services
deemed inconsistent with an auditor’s independence.
The list of pre-approved services includes:
1.
Audit Services
·
·
·
·
·
·
·
Audits of the Company’s consolidated financial statements;
Statutory audits of the financial statements of the Company’s subsidiaries;
Reviews of the quarterly consolidated financial statements of the Company;
Services associated with registration statements, prospectuses, periodic reports and other documents filed with securities
regulatory bodies (such as the SEC and Ontario Securities Commission) or other documents issued in connection with
securities offerings (e.g., comfort letters and consent letters) and assistance in responding to comment letters from securities
regulatory bodies;
Special attest services as required by regulatory and statutory requirements;
Regulatory attestation of management reports on internal controls as required by the regulators; and
Consultations with the Company’s management as to the accounting or disclosure treatment of transactions or events and/or
the actual or potential impact of final or proposed rules, standards or interpretations by the securities regulatory authorities,
accounting standard setting bodies (such as the Financial Accounting Standards Board or Canadian Institute of Chartered
Accountants), or other regulatory or standard setting bodies.
2.
Audit-Related Services
·
·
·
Presentations or training on accounting or regulatory pronouncements;
Due diligence services related to accounting and tax matters in connection with potential acquisitions / dispositions; and
Advice and documentation assistance with respect to internal controls over financial reporting and disclosure controls and
procedures of the Company.
3.
Tax Services
a.
Compliance Services
·
·
·
Assistance with the preparation of corporate income tax returns and related schedules for the Company and its subsidiaries;
Assistance with the preparation of Scientific Research & Experimental Development investment tax credit claims and
amended tax returns of the Company; and
Assistance in responding to Canada Revenue Agency or Internal Revenue Service on proposed reassessments and other
matters.
-57-
b.
Canadian & International Planning Services
·
·
·
·
·
·
Advice with respect to cross-border/transfer pricing tax issues;
Advice related to the ownership of corporate intellectual property in jurisdictions outside of Canada;
Assistance in interpreting and understanding existing and proposed domestic and international legislation, and the
administrative policies followed by various jurisdictions in administering the law, including assisting in applying for and
requesting advance tax rulings or technical interpretations;
Assistance in interpreting and understanding the potential impact of domestic and foreign judicial tax decisions;
Assistance and advising on routine planning matters; and
Assistance in advising on the implications of the routine financing of domestic and foreign operations, including the tax
implications of using debt or equity in structuring such financing, the potential impact of non-resident withholding tax and
the taxation of the repatriation of funds as a return of capital, a payment of a dividend, or a payment of interest.
c.
Commodity Tax Services
·
·
·
·
·
Assistance regarding Harmonized Sales Tax/Goods and Services Sales Tax/Provincial Sales Tax/Customs/Property Tax
filings and assessments;
Commodity tax advice and compliance assistance with business reorganizations;
Advice and assistance with respect to government audits/assessments;
Advice with respect to other provincial tax filings and assessments; and
Assistance with interpretations or rulings.
The list of prohibited services includes:
·
·
·
·
·
·
·
·
·
·
Bookkeeping or other services related to the preparation of accounting records or financial statements;
Financial information systems design and implementation;
Appraisal or valuation services for financial reporting purposes;
Actuarial services for items recorded in the financial statements;
Internal audit outsourcing services;
Management functions;
Human resources;
Certain corporate finance and other services;
Legal services; and
Certain expert services unrelated to the audit.
The Audit Committee also discusses with the Company’s independent auditor the overall scope and plans for their audit. The Audit
Committee meets with the independent auditor, with and without management present, to discuss the results of their examination, their
evaluations of the Company’s internal controls, and the overall quality of the Company’s financial reporting. The Audit Committee held four
meetings during the period from December 1, 2012 to November 30, 2013.
-58-
In reliance on the reviews and discussions referred to above, the Audit Committee recommended to the Board (and the Board
approved) that the audited consolidated financial statements be included in the Annual Report for the year ended November 30, 2013 for filing
with the Canadian provincial securities commissions and the SEC.
COMPENSATION, NOMINATING, AND CORPORATE GOVERNANCE COMMITTEE
Compensation Committee Mandate and Purpose
The Compensation Committee of the Board is a standing committee of the Board whose primary function is to assist the Board in
fulfilling its responsibilities relating to:
·
·
·
·
·
the development, review and periodic approval of the Company's compensation philosophy that attracts and retains key
executives and employees, while supporting the overall business strategy and objectives and links compensation with
business objectives and organizational performance;
evaluate and approve all compensation of executive officers including salaries, bonuses and equity compensation that are
required to be determined;
review the Company's Option Plan, the employee RSU plan and the DSU plan on an annual basis;
review and make recommendations to the Board on compensation payable to senior officers of the Company to be hired
subsequent to the adoption of the Charter; and
produce a report annually on executive officer compensation for inclusion in the proxy circular of the Company.
Compensation Committee Charter
The charter of the Compensation Committee can be found on the Company’s website at www.intellipharmaceutics.com.
Composition of the Compensation Committee
The Compensation Committee is composed of Kenneth Keirstead, Bahadur Madhani and Dr. Eldon Smith, each of whom is
considered independent and is a director of the Company. All of the members shall be "independent" as such term is defined in applicable
securities legislation. In no case shall a member be a current employee or immediate family member of a current employee. The members of
the Compensation Committee have selected a Chair from amongst themselves, being Dr. Eldon Smith.
Corporate Governance Committee Mandate and Purpose
The Corporate Governance Committee of the Board is a standing committee of the Board whose primary function is to assist the
Board in dealing with the corporate governance matters described in the Charter.
Corporate Governance Committee Charter
The charter of the Corporate Governance Committee can be found the Company’s website at www.intellipharmaceutics.com.
Composition of the Corporate Governance Committee
The Corporate Governance Committee is composed of three directors, two of whom shall be “independent” as such term is defined in
applicable securities legislation. Kenneth Keirstead and Dr. Eldon Smith is each considered independent and is a director of the Company.
John Allport, an officer of the Company, is not considered independent and is a director of the Company. The members of the Corporate
Governance Committee have selected a Chair from amongst themselves, being Kenneth Keirstead.
-59-
D.
Employees
The number of full-time employees as of each of last three fiscal years is as follows:
Research Employees
Administrative Employees
November 30,
2013
30
8
November 30,
2012
29
8
November 30,
2011
24
9
November 30,
2010
19
10
Our employees are not governed by a collective agreement. We have not experienced a work stoppage and believe our employee
relations are satisfactory. For each of the last three fiscal years, all employees of the Company were employed at the Company’s offices in
Toronto. In February 2012, the Company appointed its first U.S. employee in its U.S. subsidiary, IPC Ltd. and this employee resigned in
December 2012.
E.
Share Ownership
The following table states the names of the directors and officers of the Company, the positions within the Company now held by
them, and the approximate number of common shares of the Company beneficially owned or over which control or direction is exercised by
each of them as of February 18, 2014.
Percentage
of
Common
Shares
Owned
Number
of Stock
Options
Held(2)
Exercise
Price
Option
Expiry
dd/mm/yyyy
Number of
Currently
Exercisable
Options(4)
Position
with
the
Company
Number of
Common
Shares
Owned
5,997,751(1)
26.29%
2,763,940
300,000
75,000
$3.62
C$3.27
C$1.81
10/09/2014
16/02/2022
13/04/2020
1,658,364
300,000
75,000
Number of
Common
Shares
Issuable on
Conversion
of
Convertible
Debt
500,000(3)
Number of
Deferred
Share
Units
Held
Number
of
Restricted
Share
Units
Held
N/A
N/A
5,997,751(1)
26.29% 2,763,940
300,000
75,000
$3.62
C$3.27
C$1.81
10/09/2014
16/02/2022
13/04/2020
1,658,364
300,000
75,000
500,000(3)
N/A
N/A
110,558
0.48%
250,000
25,000
C$3.27
C$1.81
16/02/2022
13/04/2020
250,000
25,000
N/A
N/A
Nil
21,731
0.10%
10,000
5,000
25,000
25,000
C$2.88
C$2.88
C$3.25
C$1.81
22/10/2019
30/11/2016
30/11/2016
13/04/2020
10,000
5,000
25,000
25,000
N/A
45,365
N/A
-60-
Name
Dr. Isa
Odidi
Dr.
Amina
Odidi
John N.
Allport
Dr. Eldon
R. Smith
Chief
Executive
Officer and
Chairman of
the Board
and Director
of the
Company
President,
Chief
Operating
Officer and
Director of
the
Company
Vice-
President,
Legal
Affairs and
Licensing
and Director
of the
Company
Director of
the
Company
Kenneth
Keirstead
Director of the
Company
Nil
Nil
Bahadur
Madhani
Director of the
Company
4,007
0.02%
27,600
0.12%
10,000
5,000
25,000
25,000
10,000
5,000
25,000
25,000
50,000
15,000
C$2.88
C$2.88
C$3.25
C$1.81
C$2.88
C$2.88
C$3.25
C$1.81
C$3.82
C$1.81
22/10/2019
30/11/2016
30/11/2016
13/04/2020
22/10/2019
30/11/2016
30/11/2016
13/04/2020
24/05/2021
13/04/2020
10,000
5,000
25,000
25,000
10,000
5,000
25,000
25,000
50,000
15,000
N/A
Nil
N/A
N/A
Nil
N/A
N/A
N/A
Nil
5,000
0.02%
60,000
40,000
25,000
C$2.62
C$3.27
C$1.81
29/11/2020
16/02/2017
13/04/2020
60,000
26,667
25,000
N/A
N/A
Nil
Dr. Patrick
Yat
Shameze
Rampertab
Vice-President
Pharmaceutical
Analysis and
Chemistry of
the Company
Vice President
Finance and
Chief
Financial
Officer of the
Company
Totals
Notes:
(1)
(2)
(3)
(4)
6,166,647
27.03% 4,173,940
3,055,031
500,000
45,365
Nil
2,763,940 performance-based options held by Odidi Holdings Inc., a private company owned and controlled by Dr. Isa Odidi, Dr.
Amina Odidi and their family trust, 300,000 stock options held by each of Dr. Isa Odidi and Dr. Amina Odidi.
For information regarding option expiration dates and exercise price refer to the tables included under Item 6.B.
On January 10, 2013, the Company completed a private placement financing of an unsecured convertible debenture in the aggregate
principal amount of $1.5 million, which will mature January 1, 2015. The debenture bears interest at a rate of 12% per annum,
payable monthly, is pre-payable at any time at the option of the Company, and is convertible at any time into 500,000 common
shares at a conversion price of US$3.00 per common share at the option of the holder. Drs. Isa and Amina Odidi, principal
stockholders, directors and executive officers of the Company provided the Company with the $1.5 million of the proceeds for the
debenture.
Includes options exercisable within 60 days of the date of this filing.
As of February 18, 2014, the directors and executive officers of the Company as a group owned, directly or indirectly, or exercised
control or direction over 6,166,647 common shares, representing approximately 27.0% of the issued common shares of the Company (and
beneficially owned approximately 9,721,678 common shares representing 36.9% of our common shares including common shares issuable
upon the exercise of outstanding options and the conversion of the convertible debenture that are exercisable or convertible within 60 days of
the date hereof).
The Company has in place a stock option plan (the “Option Plan”) for the benefit of certain officers, directors, employees and
consultants of the Company, including the Named Executive Officers (see below under “Employee Stock Option Plan”). Certain Named
Executive Officers have been issued options under such plan. The Company has also granted performance-based options to Dr. Isa Odidi and
Dr. Amina Odidi pursuant to a separate option agreement, which was negotiated with the Named Executive Officers at the same time as their
employment agreements. These options vest upon the Company attaining certain milestones relating to FDA filings and approvals for
company drugs, such that 276,394 options vest in connection with each of the FDA filings for the first five Company drugs and 276,394
options vest in connection with each of the FDA approvals for the first five Company drugs. To date, the level of these performance-based
options has been taken into account by the Board and impacted the Company’s decisions about base salary and option-based awards under the
Option Plan for the Named Executive Officers. No other performance-based options have been granted to any other Named Executive Officer.
Employee Stock Option Plan
The Option Plan was adopted effective October 22, 2009 as part of the IPC Arrangement Transaction approved by the shareholders of
IPC Ltd., our predecessor company, at the meeting of shareholders on October 19, 2009. Subject to the requirements of the Option Plan, the
Board, with the assistance of the Compensation Committee, has the authority to select those directors, officers, employees and consultants to
whom options will be granted, the number of options to be granted to each person and the price at which common shares of the Company may
be purchased. Grants are determined based on individual and aggregate performance determined by the Board.
-61-
The key features of the Option Plan are as follows:
·
·
·
·
·
·
·
·
The eligible participants are full-time and part-time employees, officers and directors of, or consultants to, the Company or its
affiliates, which may be designated from time to time by the Board.
The fixed maximum percentage of common shares issuable under the Option Plan is 10% of the issued and outstanding common
shares from time to time. The Option Plan will automatically “reload” after the exercise of a an option provided that the number of
common shares issuable under the Option Plan does not then exceed the maximum percentage of 10%.
There are no restrictions on the maximum number of options which may be granted to insiders of the Company other than not more
than 1% of the total common shares outstanding on a non-diluted basis can be issued to non-executive directors of the Company
pursuant to options granted under the Option Plan and the value of any options granted to any non-executive director of the
Company, shall not, on an annual basis, exceed $100,000.
The Board determine the exercise price of each option at the time the option is granted, provided that such price is not lower than
the “market price” of common shares at the time the option is granted. “Market price” means the volume weighted average trading
price of common shares on the TSX, or another stock exchange where the majority of the trading volume and value of common
shares occurs, for the five trading days immediately preceding the relevant date, calculated in accordance with the rules of such
stock exchange.
Unless otherwise determined by the Board, each option becomes exercisable as to 33⅓% on a cumulative basis, at the end of each of
the first, second and third years following the date of grant.
The period of time during which a particular option may be exercised is determined by the Board, subject to any Employment
Contract or Consulting Contract (both as hereinafter defined), provided that no such option term shall exceed 10 years.
If an option expiration date falls within a “black-out period” (a period during which certain persons cannot trade common shares
pursuant to a policy of the Company’s respecting restrictions on trading), or immediately following a black-out period, the expiration
date is automatically extended to the date which is the tenth business day after the end of the black-out period.
Options may terminate prior to expiry of the option term in the following circumstances:
·
·
on death of an optionee, options vested as at the date of death are immediately exercisable until the earlier of 180 days
from such date and expiry of the option term; and
if an optionee ceases to be a director, officer, employee or consultant of the Company for any reason other than death,
including receipt of notice from the Company of the termination of his, her or its Employment Contract or Consulting
Contract (as defined below), options vested as at the date of termination are exercisable until the earlier of 120 days
following such date and expiry of the option term,
subject however to any contract between the Company and any employee relating to, or entered into in connection with, the
employment of the employee or between the Company and any director with respect to his or her directorship or resignation there from
(an “Employment Contract”), any contract between the Company and any consultant relating to, or entered into in connection with,
services to be provided to the Company (a “Consulting Contract”) or any other agreement to which the Company is a party with
respect to the rights of such person upon termination or change in control of the Company.
-62-
·
·
·
·
Options and rights related thereto held by an optionee are not to be assignable or transferable except on the death of the optionee.
If there is a take-over bid (within the meaning of the Securities Act (Ontario)) made for all or any of the issued and outstanding
common shares of the Company, then all options outstanding become immediately exercisable in order to permit common shares
issuable under such options to be tendered to such bid.
If there is a consolidation, merger, amalgamation or statutory arrangement involving the Company, separation of the business of the
Company into two or more entities or sale of all or substantially all of the assets of the Company to another entity, the optionees
will receive, on exercise of their options, the consideration they would have received had they exercised their options immediately
prior to such event. In such event and in the event of a securities exchange take-over bid, the Board may, in certain circumstances,
require optionees to surrender their options if replacement options are provided. In the context of a cash take-over bid for 100% of
the issued and outstanding common shares of the Company, optionees may elect to conditionally surrender their options or, if
provided for in an agreement with the offeror, automatically exchange their options for options of the offeror.
The Board may from time to time in its absolute discretion amend, modify and change the provisions of the Option Plan or any
options granted pursuant to the Option Plan, provided that any amendment, modification or change to the provisions of the Option
Plan or any options granted pursuant to the Option Plan shall:
·
·
·
·
·
not adversely alter or impair any option previously granted;
be subject to any regulatory approvals, where required, including, where applicable, the approval of the TSX and/or
such other exchange as may be required; and
not be subject to shareholder approval in any circumstances, except where the amendment, modification or change to
the Option Plan or option would:
(i)
(ii)
reduce the exercise price of an option held by an insider of the Company;
extend the term of an option held by an insider beyond the original expiration date (subject to such date
being extended in a black-out extension situation);
(iii)
increase the fixed maximum percentage of common shares issuable under the Option Plan; or
(iv)
amend the amendment provision of the Option Plan;
in which case the amendment, modification or change will be subject to shareholder approval in accordance with the rules
of the TSX and/or such other exchange as may be required. Amendments to the Option Plan not requiring shareholder
approval may for example include, without limitation:
amendments of a “housekeeping nature”, including any amendment to the Option Plan or an option that is necessary to
comply with applicable law or the requirements of any regulatory authority or stock exchange;
changes to the exercise price of an option to an exercise price not below the “market price” unless the change is a
reduction in the exercise price of an option held by an insider of the Company;
-63-
·
·
·
·
·
·
·
·
amendments altering, extending or accelerating any vesting terms or conditions in the Option Plan or any options;
changes amending or modifying any mechanics for exercising an option;
amendments changing the expiration date (including acceleration thereof) or changing any termination provision in
any option, provided that such change does not entail an extension beyond the original expiration date of such option
(subject to such date being extended in a black-out extension situation);
amendments introducing a cashless exercise feature, payable in securities, whether or not such feature provides for a full
deduction of the number of underlying securities from the Option Plan maximum;
amendments changing the application of the provisions of the Option Plan dealing with adjustments in the number of
shares, consolidations and mergers and take-over bids;
amendments adding a form of financial assistance or amending a financial assistance provision which is adopted;
amendments changing the eligible participants of the Option Plan; and
amendments adding a deferred or restricted share unit provision or any other provision which results in participants
receiving securities while no cash consideration is received by the Company.
The Board may discontinue the Option Plan at any time without consent of the participants under the Option Plan provided that such
discontinuance shall not adversely alter or impair any option previously granted.
A copy of the Option Plan is available upon request in writing to the Chief Financial Officer of the Company at 30 Worcester Road,
Toronto, Ontario, M9W 5X2 or on www.sedar.com.
The 2,281,971 shares that are currently authorized for issuance under the Option Plan represent 10% of the common shares issued and
outstanding as at February 18, 2014. Of the options authorized for issuance under the Option Plan, a total of 1,679,132 have been issued,
representing 7.4% of the shares issued and outstanding as of February 18, 2014. As of February 18, 2014, 40,500 options have been exercised
under the Plan.
Restricted Share Unit Plan
The Company established a restricted share unit plan (the “RSU Plan”) to form part of its incentive compensation arrangements
available for officers and employees of the Company and its designated affiliates as of May 28, 2010, when the RSU Plan received shareholder
approval.
The key features of the RSU Plan are as follows:
·
·
The stated purpose of the RSU Plan is to advance the interests of the Company through the motivation, attraction and retention of
employees and officers of the Company and the designated affiliates of the Company and to secure for the Company and the
shareholders of the Company the benefits inherent in the ownership of common shares by employees and officers of the Company,
it being generally recognized that share incentive plans aid in attracting, retaining and encouraging employees and officers due to the
opportunity offered to them to acquire a proprietary interest in the Company.
Employees and officers, including both full-time and part-time employees, of the Company and any designated affiliate of the
Company, but not any directors of the Company, are eligible to participate under the RSU Plan. By the terms of the RSU Plan, Dr.
Isa Odidi and Dr. Amina Odidi are specifically not eligible to participate.
-64-
·
·
·
·
·
·
·
·
·
The RSU Plan is administered by the Board or a committee thereof, which will determine, from time to time, who may participate in
the RSU Plan, the number of RSUs to be awarded and the terms of each RSU, all such determinations to be made in accordance with
the terms and conditions of the RSU Plan.
The number of common shares available for issuance upon the vesting of RSUs awarded under the RSU Plan is limited to 330,000
common shares of the Company.
A separate notional account will be maintained for each participant under the RSU Plan. Each such account will be credited with
RSUs awarded to the participant from time to time by way of a bookkeeping entry in the books of the Company. On the vesting of
the RSUs and the corresponding issuance of common shares to the participant, or on the forfeiture and cancellation of the RSUs, the
RSUs credited to the participant’s account will be cancelled.
At the time of the award of RSUs, the Board will determine in its sole discretion the vesting criteria (whether based on time or
performance measures) applicable to the awarded RSUs. Unless otherwise determined by the Board at the time of the award, RSUs
will vest in respect of 33 1/3 % of the common shares subject to the RSUs on the first day after each of the first three anniversaries
of the award date of such RSU. Notwithstanding the foregoing, all vesting and issuances or payments, as applicable, will be
completed no later than December 15 of the third calendar year commencing after an award date.
The RSU Plan provides that any unvested RSUs will vest at such time as determined by the Board in its sole discretion such that
participants in the RSU Plan will be able to participate in a change of control transaction, including by surrendering such RSUs to
the Company or a third party or exchanging such RSUs, for consideration in the form of cash and/or securities.
Under the RSU Plan, should the vesting of an RSU fall within a blackout period or within nine business days following the
expiration of a blackout period, the vesting will be automatically extended to the tenth business day after the end of the blackout
period.
If an “event of termination” has occurred, any and all common shares corresponding to any vested RSUs in a participant’s account, if
any, will be issued as soon as practicable after the event of termination to the former participant. If an event of termination has
occurred, any unvested RSUs in the participant’s account will, unless otherwise determined by the Board in its discretion, forthwith
and automatically be forfeited by the participant and cancelled. Notwithstanding the foregoing, if a participant is terminated for just
cause, each unvested RSU in the participant’s account will be forfeited by the participant and cancelled. An “event of termination” is
defined under the RSU Plan as an event whereby a participant ceases to be eligible under the RSU Plan and is deemed to have
occurred by the giving of any notice of termination of employment (whether voluntary or involuntary and whether with or without
cause), retirement, or any cessation of employment for any reason whatsoever, including disability or death.
No rights under the RSU Plan and no RSUs awarded pursuant to the provisions of the RSU Plan are assignable or transferable by
any participant other than pursuant to a will or by the laws of descent and distribution.
Under the RSU Plan, the Board may from time to time in its absolute discretion amend, modify and change the provisions of the
RSU Plan or any RSUs awarded pursuant to the Plan, provided that any amendment will:
·
·
·
not adversely alter or impair any RSU previously awarded except as permitted by the adjustment provisions in the RSU
Plan;
be subject to any regulatory approvals including, where required, the approval of the TSX;
be subject to shareholder approval in accordance with the rules of the TSX in circumstances where the amendment,
modification or change to the RSU Plan or RSUs would:
(i)
(ii)
allow for the assignment or transfer of any right under the RSU Plan or a RSU awarded pursuant to the
provisions of the RSU Plan other than as provided for under the assignability provisions in the RSU Plan;
increase the fixed maximum number of common shares which may be issued pursuant to the RSU Plan;
or
-65-
(iii)
amend the amendment provisions of the RSU Plan; and
·
not be subject to shareholder approval in circumstances (other than those listed in the paragraph immediately above), including, but
not limited to, circumstances where the amendment, modification or change to the RSU Plan or RSU would:
(i)
be of a “housekeeping nature”, including any amendment to the RSU Plan or a RSU that is necessary to
comply with applicable law or the requirements of any regulatory authority or stock exchange and any
amendment to the RSU Plan or a RSU to correct or rectify any ambiguity, defective provision, error or
omission therein, including any amendment to any definitions therein;
(ii)
alter, extend or accelerate any vesting terms or conditions in the RSU Plan or any RSU;
(iii)
change any termination provision in any RSU;
(iv)
(v)
(vi)
introduce features to the RSU Plan that would permit the Company to, instead of issuing common shares
from treasury upon the vesting of the RSUs, retain a broker and make payments for the benefit of
participants to such broker who would purchase common shares through the facilities of the TSX for such
participants;
introduce features to the RSU Plan that would permit the Company to, instead of issuing common shares
from treasury upon the vesting of the RSUs, make lump sum cash payments to participants;
change the application of the adjustment provisions of the RSU Plan or the change of control provisions
of the RSU Plan; or
(vii)
change the eligible participants under the RSU Plan.
A copy of the RSU Plan is available upon request in writing to the Chief Financial Officer of the Company at 30 Worcester Road,
Toronto, Ontario, M9W 5X2.
The 330,000 common shares that are currently authorized under the RSU Plan represent approximately 1.4% of the Company’s
common shares issued and outstanding as at February 18, 2014. There are no RSUs outstanding as of February 18, 2014.
Deferred Share Unit Plan
The Company established as of May 28, 2010 when it received shareholder approval, a deferred share unit plan (the “ DSU Plan”) to
permit directors who are not officers of the Company, to defer receipt of all or a portion of their Board fees until termination of Board service
and to receive such fees in the form of common shares at that time.
The key features of the DSU Plan are as follows:
·
·
·
The DSU Plan is administered by the Board or a committee thereof. Members of the Board who are not salaried officers or
employees of the Company or a related corporation are eligible to participate under the DSU Plan. By the terms of the DSU Plan,
Dr. Isa Odidi and Dr. Amina Odidi are specifically not eligible to participate.
The number of common shares available for issuance upon redemption of DSUs issued under the DSU Plan is limited to 110,000
common shares of the Company, representing approximately 1% of the total number of issued and outstanding Common Shares as
of the date hereof.
Each participant may elect to be paid a minimum of 20% up to a maximum of 100%, in 10% increments, of Board fees in the form
of DSUs in lieu of being paid such fees in cash. On the date on which Board fees are payable (on a quarterly basis), the number of
DSUs to be credited to the participant is determined by dividing an amount equal to the designated percentage of the Board fees that
the participant has elected to have credited in DSUs on that fee payment date, by the calculated market value of a common share
(typically on the Toronto Stock Exchange) on that fee payment date. The market value of a common share is the weighted average
trading price of the common shares on any exchange where the common shares are listed (including the TSX) for the last five
trading days prior to such day. If dividends are declared by the Company, a participant will also be credited with dividend
equivalents in the form of additional DSUs based on the number of DSUs the participant holds on the record date for the payment of
a dividend. Dividend equivalents are calculated by dividing (i) the amount obtained by multiplying the amount of the dividend
declared and paid per common share by the number of DSUs in the participant? account on the record date for the payment of
such dividend, by (ii) the market value of a common share on that dividend payment date. The market value of a common share is
the weighted average trading price of the common shares on any exchange where the common shares are listed (including the TSX)
for the last five trading days prior to such day.
-66-
·
·
·
·
A participant is permitted to redeem his/her DSUs only following termination of Board service by way of retirement, non-re-election
as a director, resignation or death. Upon redemption of DSUs, the Company will issue to the participant common shares of the
Company equal to the number of DSUs to be redeemed.
A separate notional account is maintained for each participant under the DSU Plan. Each such account will be credited with DSUs
issued to the participant from time to time by way of a bookkeeping entry in the books of the Company. The DSUs credited to the
participant’s account will be cancelled as of the applicable redemption date and following redemption of all DSUs credited to the
participant’s account, such participant’s account will be closed.
No rights under the DSU Plan and no DSUs credited pursuant to the provisions of the DSU Plan are assignable or transferable by
any participant other than pursuant to a will or by the laws of descent and distribution.
Under the DSU Plan, the Board may from time to time in its absolute discretion amend, modify and change the provisions of the
DSU Plan or any DSUs issued pursuant to the DSU Plan, provided that any amendment will:
·
·
·
·
not adversely alter or impair any DSU previously credited without such participant’s consent in writing except as
permitted by the adjustment provisions in the DSU Plan;
be subject to any regulatory approvals including, where required, the approval of the TSX;
be subject to shareholder approval in accordance with the rules of the TSX in circumstances where the amendment,
modification or change to the DSU Plan or DSU would:
(i)
(ii)
allow for the assignment or transfer of any right under the DSU Plan or a DSU credited pursuant to the
provisions of the DSU Plan other than as provided for under the assignability provisions in the DSU Plan;
increase the fixed maximum number of common shares which may be issued pursuant to the DSU Plan;
or
(iii)
amend the amendment provisions of the DSU Plan; and
not be subject to shareholder approval in circumstances (other than those listed in the paragraph immediately above),
including, but not limited to, circumstances where the amendment, modification or change to the DSU Plan or DSU
would:
(i)
be of a “housekeeping nature”, including any amendment to the DSU Plan or a DSU that is necessary to
comply with applicable law or the requirements of any regulatory authority or stock exchange and any
amendment to the DSU Plan or a DSU to correct or rectify any ambiguity, defective provision, error or
omission therein, including any amendment to any definitions therein;
-67-
(ii)
introduce features to the DSU Plan that would permit the Company to, instead of issuing common shares
from treasury upon the redemption of the DSUs, retain a broker and make payments for the benefit of
participants to such broker who would purchase common shares through the facilities of the TSX for such
participants;
(iii)
introduce features to the DSU Plan that would permit the Company to, instead of issuing common shares
from treasury upon the redemption of the DSUs, make lump sum cash payments to participants;
(iv)
change the application of the adjustment provisions of the DSU Plan; or
(v)
change the eligible participants under the DSU Plan.
A copy of the DSU Plan is available upon request in writing to the Chief Financial Officer of the Company at 30 Worcester Road,
Toronto, Ontario, M9W 5X2.
The 110,000 common shares that are currently authorized under the DSU Plan represent approximately 0.5% of the Company’s
common shares issued and outstanding as at February 18, 2014. The total of 43,040 DSUs that have been authorized for issuance for the
period ended November 30, 2013 represent common share rights that comprise approximately 0.2% of the common shares issued and
outstanding as at February 18, 2014. As at February 18, 2014, 45,365 DSUs have been issued under the DSU Plan.
Item 7.
Major Shareholders and Related Party Transactions
A.
Major Shareholders
In March 2013 we completed a registered direct offering of units of common shares and warrants, in July 2013 we completed an
underwritten public offering of units of common shares and warrants, and in November 2013 we entered into an at-the-market equity
distribution agreement pursuant to which we may, from time to time, sell our common shares, all of which resulted in a significant change in
the percentage ownership of our principal shareholders, Drs. Amina and Isa Odidi, our President and Chief Operating Officer and our
Chairman and Chief Executive Officer, respectively, and Odidi Holdings Inc., a privately-held company controlled by Drs. Amina and Isa
Odidi (a decrease to approximately 28.0%) of our then-issued and outstanding common shares of the Company subsequent to the offering). As
of the date of this annual report, Drs. Amina and Isa Odidi, our President and Chief Operating Officer and our Chairman and Chief Executive
Officer, respectively, and Odidi Holdings Inc., a privately-held company controlled by Drs. Amina and Isa Odidi, own in the aggregate directly
and indirectly 5,997,751 common shares, representing approximately 26.3% of our issued and outstanding common shares of the Company
(and collectively beneficially owned in the aggregate approximately 8,906,115 common shares representing 34.6% of our common shares
including common shares issuable upon the exercise of outstanding options and the conversion of the outstanding convertible debenture that
are exercisable or convertible within 60 days of the date hereof). (Reference is made to the section entitled “E. Share Ownership” under “Item
6. Directors, Senior Management and Employees” for additional information regarding the options to purchase common shares and the
convertible debenture held by Drs. Amina and Isa Odidi.) We believe Tekla Capital Management LLC currently owns 1,404,000 common
shares representing 6.2% of the issued and outstanding common shares as of the date of this annual report (and beneficially owned
approximately 2,184,000 common shares representing 9.3% of our common shares including common shares issuable upon the exercise of
outstanding warrants that are exercisable within 60 days of the date hereof). To our knowledge, no other shareholder owns more than 5% of
the issued and outstanding common shares of the Company.
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There are no arrangements, known to the Company, the operation of which may at a subsequent date result in a change in control of
the Company.
No holder of common shares has different voting rights from any other holders of common shares.
As at December 31, 2013, there were a total of 353 holders of record of our common shares, of which 251 were registered with
addresses in Canada holding in the aggregate approximately 32% of our outstanding common shares, 53 were registered with addresses in the
United States holding in the aggregate approximately 68% of our outstanding common shares, and 49 were registered with addresses in other
nations holding in the aggregate less than 1% of our outstanding common shares. We believe that the number of beneficial owners of our
common shares is substantially greater than the number of record holders, because a large portion of our common shares are held in broker
“street names”.
B.
Related Party Transactions
As at November 30, 2013 and February 18, 2014, we had an outstanding related party payable to Dr. Isa Odidi and Dr. Amina Odidi,
our principal stockholders, directors and executive officers, in the amount of $759,564. Repayments of the related party loan are restricted
under the terms of the loan such that the principal amount thereof shall be payable when payment is required solely out of (i) revenues earned
by IPC Corp, following the effective date of October 22, 2009 (“effective date”), and/or proceeds received by IPC Corp or its affiliates from
the offering of its securities after the effective date (other than the proceeds from the transactions completed in February 2011, March 2012,
March 2013 and July 2013), and/or amounts received by IPC Corp for scientific research tax credits of IPC Corp and (ii) up to C$800,000 of
the Net Cash from the Vasogen transaction (as defined in the IPC Arrangement Agreement). During the year ended November 30, 2013, no
principal repayment was made and interest payments of $16,640 (C$17,671) in respect of the promissory note were made by us in accordance
with the IPC Arrangement Agreement. In November 2013, we entered into an at-the-market equity distribution agreement pursuant to which
we may, from time to time, sell up to an aggregate of $16.8 million (or such lesser amount as may be permitted under applicable securities laws
and regulations) of our common shares; we plan to apply up to approximately $0.8 million of any offering proceeds therefrom in payment of
the related party loan. During the year ended November 30, 2013, no sales of our common shares were made under the at-the-market offering.
As of the date of this annual report, 1,312,100 of our common shares have been sold under the at-the-market offering for net proceeds to us of
$4,808,054, and no proceeds from the sales of our common shares under the at-the-market offering have been used to repay this loan.
In addition, on January 10, 2013, we completed a private placement financing of an unsecured convertible debenture in the aggregate
principal amount of $1.5 million, which will mature January 1, 2015. The debenture bears interest at a rate of 12% per annum, payable
monthly, is pre-payable at any time at the option of the Company, and is convertible at any time into 500,000 common shares at a conversion
price of $3.00 per common share at the option of the holder. Drs. Isa and Amina Odidi, our principal stockholders, directors and executive
officers provided us with the $1.5 million of the proceeds for the debenture.
Since the beginning of the Company’s preceding three financial years to the date hereof, other than discussed above in this item 7,
there have been no transactions or proposed transactions which are material to the Company or to any associate, holder of 10% of the
Company’s outstanding shares, director or officer or any transactions that are unusual in their nature or conditions to which the Company or
any of its subsidiaries was a party.
Item 8.
Financial Information
A.
Consolidated Statements and Other Financial Information
Reference is made to “Item 18. Financial Statements” for the financial statements included in this annual report.
-69-
Legal Proceedings and Regulatory Actions
From time to time, we may be exposed to claims and legal actions in the normal course of business, including those which we may
initiate. As of the date of this annual report, we are not aware of any pending or threatened litigation claims outstanding.
Pursuant to an arrangement agreement between Vasogen and Cervus LP (“Cervus”) dated August 14, 2009 (the " Cervus
Agreement"), Vasogen and a Vasogen subsidiary (“New Vasogen”) entered into an indemnity agreement (the "Indemnity Agreement"),
which became an obligation of the Company as of October 22, 2009. The Indemnity Agreement is designed to provide Cervus with
indemnification for claims relating to Vasogen's and New Vasogen's business that are brought against Cervus in the future, subject to certain
conditions and limitations. The Company's obligations under the Indemnity Agreement relating to the Tax pools defined in the Indemnity
Agreement are limited to an aggregate of C$1,455,000 with a threshold amount of C$50,000 before there is an obligation to make a
compensation payment. The Company does not presently expect to have to pay any amount under this indemnity agreement.
Dividend Policy
The Company has not paid, and has no current plans to pay, dividends on its common shares. We currently intend to retain future
earnings, if any, to finance the development of our business. Any future dividend policy will be determined by the Board of Directors, and will
depend upon, among other factors, our earnings, if any, financial condition, capital requirements, any contractual restrictions with respect to
the payment of dividends, the impact of the distribution of dividends on our financial condition, tax liabilities, and such economic and other
conditions as the Board of Directors may deem relevant.
B.
Significant changes
No significant changes occurred since the date of our annual consolidated financial statements included elsewhere in this annual
report.
Item 9.
The Offer and Listing
Not Applicable, except for Item 9.A.4 and Item 9.C.
Our common shares are currently listed on NASDAQ and on the TSX under the symbols “IPCI” and “I”, respectively. Our shares
began trading on October 22, 2009, when the transaction with Vasogen was completed. The following table indicates, for the relevant periods,
the high and low prices of our common shares on NASDAQ and on the TSX:
Annual
2013
2012
2011
2010
2009 (partial)
Quarterly
2013
Fourth quarter
Third quarter
Second quarter
First quarter
NASDAQ (U.S.$)
High
6.46
3.82
6.12
5.05
5.00
Low
1.50
1.88
2.30
1.41
1.40
TSX (C$)
High
6.70
3.55
6.05
5.36
6.10
Low
1.55
1.81
2.21
1.50
1.52
6.46
3.72
2.23
2.59
1.63
1.50
1.57
1.72
6.70
3.84
2.35
2.56
1.72
1.55
1.60
1.77
-70-
2012
Fourth quarter
Third quarter
Second quarter
First quarter
2011
Fourth quarter
Third quarter
Second quarter
First quarter
2010
Fourth quarter
Third quarter
Second quarter
First quarter
2009
Fourth quarter (partial)
Most recent 6 months
February 2014 (through to February 14, 2014)
January 2014
December 2013
November 2013
October 2013
September 2013
August 2013
Item 10.
Additional Information
A.
Share Capital
3.16
3.49
3.19
3.82
3.50
4.35
5.25
6.12
3.26
3.30
5.05
2.63
5.00
NASDAQ (U.S.$)
High
4.48
4.75
4.09
6.46
2.10
2.34
2.39
1.88
2.40
2.64
2.41
2.66
2.50
2.87
2.30
2.11
2.05
1.45
1.41
1.40
Low
3.80
3.65
3.05
1.63
1.75
1.81
1.76
3.17
3.54
3.38
3.55
3.59
4.20
5.04
6.05
3.35
3.39
5.36
2.66
6.10
TSX (C$)
High
4.82
4.37
4.37
6.70
2.14
2.39
2.50
1.81
2.49
2.51
2.53
2.43
2.21
2.76
2.41
2.20
2.15
1.50
1.50
1.52
Low
4.22
3.30
3.28
1.72
1.85
1.86
1.83
Our authorized share capital consists of an unlimited number of common shares, all without nominal or par value and an unlimited
number of preference shares issuable in series. At November 30, 2013, 21,430,611 common shares and no preference shares were issued and
outstanding compared to 17,906,937 common and no preference shares issued and outstanding at December 1, 2012. As at February 18, 2014,
there were 22,819,711 common shares and no preference shares issued and outstanding.
The reason for the increase in common shares issued was that (i) in March 2013, we completed a registered direct unit offering for
gross proceeds of $3,121,800 in which we sold an aggregate of 1,815,000 units at a price of $1.72 per unit, each unit comprised of an aggregate
of 1,815,000 common shares and warrants to purchase an additional 453,750 common shares, (ii) in July 2013, we completed an underwritten
public offering of 1,500,000 units of common shares and warrants for gross proceeds of $3,075,000 at a price of $2.05 per unit, each unit
comprised of an aggregate of 1,500,000 common shares and warrants to purchase an additional 375,000 common shares, and (iii) in November
2013, we entered into an equity distribution agreement with Roth, pursuant to which we may from time to time sell up to 5,305,484 of our
common shares for up to an aggregate of $16.8 million (or such lesser amount as may be permitted under applicable securities laws and
regulations) through at-the-market issuances on the NASDAQ or otherwise. As of the date of this annual report, 1,312,100 of our common
shares have been sold for net proceeds to us of $4,808,054. There can be no assurance that any additional shares will be sold under our at-the-
market program.
-71-
For the years ended November 30, 2012 and 2011, we previously classified the issuance of common shares as a credit to additional
paid in capital. In accordance with U.S. GAAP, shares issued with no par value are required to be classified under capital stock. The adjustment
is a reclassification from additional paid in capital into capital stock and has a net impact of nil on the consolidated statement of shareholder’s
deficiency. Items previously reported have been reclassified to conform to U.S. GAAP.
Common Shares
Each of our common shares entitles the holder thereof to one vote at any meeting of shareholders of the Company, except meetings at
which only holders of a specified class of shares are entitled to vote. Common shares are entitled to receive, as and when declared by the board
of directors, dividends in such amounts as shall be determined by the board of directors. The holders of common shares have the right to
receive the remaining property of the Company in the event of liquidation, dissolution, or winding-up of the Company, whether voluntary or
involuntary.
Preference Shares
The preference shares may at any time and from time to time be issued in one or more series. The board of directors will, by
resolution, from time to time, before the issue thereof, fix the rights, privileges, restrictions and conditions attaching to the preference shares of
each series. Except as required by law, the holders of any series of preference shares will not as such be entitled to receive notice of, attend or
vote at any meeting of the shareholders of the Company. Holders of preference shares will be entitled to preference with respect to payment of
dividends and the distribution of assets in the event of liquidation, dissolution or winding-up of the Company, whether voluntary or
involuntary, or any other distribution of the assets of the Company among its shareholders for the purpose of winding up its affairs, on such
shares over the common shares and over any other shares ranking junior to the preference shares.
Warrants
At November 30, 2013, an aggregate of 2,579,575 common shares were issuable upon the exercise of outstanding common share
purchase warrants, with a weighted average exercise price of $2.46 per common share. At February 18, 2014, an aggregate of 2,514,575
common shares were issuable upon the exercise of outstanding common share purchase warrants, with a weighted average exercise price of
$2.46 per common share.
Options
At November 30, 2013, an aggregate of 4,455,072 common shares were issuable upon the exercise of outstanding options, with a
weighted average exercise price of $3.97 per common share. Up to 451,929 additional common shares are reserved for issuance under our
stock option plan.
-72-
Exercise
price
Number
outstanding
Weighted
average
exercise
price per
share
Options outstanding
Weighted
average
grant
due
fair value
Weighted
average
remaining
contract
life (years)
$
$
Number
exercisable
Options exercisable
Weighted
average
grant
date
fair value
$
Weighted
average
exercise
price per
share
$
Under 2.50
2.51
5.00
-
5.01
7.50
-
10.00
7.51
-
100.00
-
10.01
500.00
300.00 -
1,000.00
500.01 -
1,500.00
1,000.01-
-
4,415,333
-
-
35,702
3,971
33
33
4,455,072
-
3.38
-
-
39.75
331.15
770.13
1,149.13
3.97
-
3.10
-
-
3.87
2.30
1.29
0.45
-
1.77
-
-
31.19
223.52
493.31
709.18
-
3,282,091
-
-
35,702
3,971
33
33
3,321,830
-
3.28
-
-
39.75
331.15
770.13
1,149.13
4.09
-
1.82
-
-
31.19
223.52
493.31
709.18
As of February 18, 2014, there were 4,443,072 common shares issuable upon the exercise of outstanding options. The weighted
average exercise price of these options is $3.97 per common share. As at February 18, 2014, up to 602,839 additional common shares were
reserved for issuance under our Option Plan.
Convertible Debenture
On January 10, 2013, we completed a private placement financing of an unsecured convertible debenture in the aggregate principal
amount of $1.5 million, which will mature January 1, 2015. The debenture bears interest at a rate of 12% per annum, payable monthly, is pre-
payable at any time at the option of the Company, and is convertible at any time into 500,000 common shares at a conversion price of $3.00
per common share at the option of the holder. Drs. Isa and Amina Odidi, our principal stockholders, directors and executive officers provided
us with the $1.5 million of the proceeds for the debenture.
Deferred Share Units
At November 30, 2013, there were 43,040 DSUs issued to one non-management director. From November 30, 2013 to the date of this
annual report, an additional 2,325 DSUs have been issued. At the date of this annual report, 64,635 additional DSUs are reserved for issuance
under our DSU plan..
Registration Rights
We conducted a private placement issuance of units comprised of common shares and warrants in February, 2011, which was exempt
from registration under the U.S. Securities Act pursuant to Regulation D and Section 4(2) and/or Regulation S thereof and such other available
exemptions. As such, the common shares, the warrants, and the common shares underlying the warrants may not be offered or sold in the
United States unless they are registered under the U.S. Securities Act, or an exemption from the registration requirements of the U.S. Securities
Act is available.
In connection with the private placement, we agreed to file a registration statement on Form F-3 (“Registration Statement”) within
40 days after the closing and use our best efforts to have it declared effective within 150 days after the closing to register (i) 100% of the
common shares issued in the private placement; and (ii) 100% of the common shares underlying the investor warrants issued in the private
placement (collectively, the private placement or the “Registrable Securities”).
The Registration Statement was declared effective as of March 30, 2011. If (i) the Registration Statement ceases to be continuously
effective for more than twenty consecutive calendar days or more than an aggregate of thirty calendar days during any consecutive 12-month
period, or (ii) at a time in which the Registrable Securities cannot be sold under the Registration Statement, we shall fail for any reason to
satisfy the current public information requirement under Rule 144 as to the applicable Registrable Securities, we shall pay to the investors, on
a pro rata basis, partial liquidated damages of one percent (1%) of the aggregate purchase price paid by each investor on the occurrence of an
event listed above and for each calendar month (pro rata for any period less than a calendar month) from an event, until cured.
-73-
The securities shall cease to be Registrable Securities when (i) they have been sold (A) pursuant to a registration statement; or (B) in
accordance with Rule 144 or any other rule of similar effect; or (ii) such securities become eligible for resale without volume or manner-of-
sale restrictions, and when either we are compliant with any current public information requirements pursuant to Rule 144 or the current public
information requirements no longer apply.
Prior Sales
On February 1, 2011, we completed a private offering of 4,800,000 units for gross proceeds of $12,000,000. Each unit consisted of
one common share, a five year warrant to purchase one half of a common share at an exercise price of $2.50 per whole share and a two year
warrant to purchase one half of a common share at an exercise price of $2.50 per whole share. In conjunction with the private placement, we
issued 96,000 placement agent warrants with a term of three years and an exercise price of $3.125 per share.
On March 15, 2012, we completed a registered direct common share offering for gross proceeds of $5,000,000. We sold an aggregate
of 1,818,182 shares to U.S. institutional investors at a price of $2.75 per share.
In January 2013, we completed a private placement financing of a Debenture in the aggregate principal amount of $1.5 million, which
will mature January 1, 2015. The Debenture bears interest at a rate of 12% per annum, payable monthly, is pre-payable at any time at our
option, and is convertible at any time into 500,000 common shares at a conversion price of US$3.00 per common share at the option of the
holder. Drs. Isa and Amina Odidi, our principal stockholders, directors and executive officers provided us with the $1.5 million of the
proceeds for the Debenture.
In March 2013, we completed a registered direct unit offering for gross proceeds of $3,121,800. We sold an aggregate of 1,815,000
units at a price of $1.72 per unit. The units were comprised of an aggregate of 1,815,000 common shares and warrants to purchase an additional
453,750 common shares. The warrants are exercisable for a term of five years and have an exercise price of $2.10 per common share.
In July 2013, we completed an underwritten public offering of 1,500,000 units of common shares and warrants for gross proceeds of
$3,075,000 at a price of $2.05 per unit. The units were comprised of an aggregate of 1,500,000 common shares and warrants to purchase an
additional 375,000 common shares. The warrants have a term of five years and an exercise price of $2.55 per common share.
In November 2013, we entered into an equity distribution agreement with Roth, pursuant to which we may from time to time sell up to
5,305,484 of our common shares for up to an aggregate of $16.8 million (or such lesser amount as may be permitted under applicable securities
laws and regulations) through at-the-market issuances on the NASDAQ or otherwise. Under the equity distribution agreement, we may at our
discretion, from time to time, offer and sell common shares through Roth or directly to Roth for resale. Sales of common shares through Roth,
if any, will be made at such time and at such price as are acceptable to us, from time to time, by means of ordinary brokers' transactions on the
NASDAQ or otherwise at market prices prevailing at the time of sale or as determined by us. We plan to use any net proceeds from the at-the-
market offering for working capital, research and development and general corporate purposes, and to apply up to approximately $0.8 million
of any such proceeds in payment of an outstanding related party loan. We are not required to sell shares under the equity distribution
agreement. We will pay Roth a commission, or allow a discount, of 2.75% of the gross proceeds we receive from any sales of our common
shares under the equity distribution agreement. Any sales of shares under our at-the-market offering program will be made pursuant to an
effective shelf registration statement on Form F-3 filed with the Securities and Exchange Commission. We have also agreed to reimburse Roth
for certain expenses relating to the offering. During the year ended November 30, 2013, no sales of our common shares were made under the
at-the-market offering. As of the date of this annual report, 1,312,100 of our common shares have been sold for net proceeds to us of
$4,808,054. Roth received compensation of $135,960 in connection with such sales. There can be no assurance that any additional shares will
be sold under our at-the-market program. Subsequent to the year ended November 30, 2013, share issuance costs of $419,777 were recorded
against the cost of the shares issued and recognized in capital stock. As at November 30, 2013, $419,777 of the share issuance costs has been
deferred on the consolidated balance sheet.
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During the 12 month period ended November 30, 2013, 391,000 options were granted and 2,500 options were exercised.
B.
Articles and By-laws
The Company was formed under the Canada Business Corporations Act (the “CBCA”) by articles of arrangement dated October 22,
2009 (the “Articles”) in the IPC Arrangement Transaction discussed in Item 15. The Company is the successor issuer to Vasogen Inc. for
reporting purposes under the U.S. Exchange Act. The authorized share capital of the Company consists of an unlimited number of common
shares, all without nominal or par value and an unlimited number of preference shares issuable in series.
Provisions as to the modification, amendment or variation of rights and provisions of each class of shares are contained in the CBCA
and the regulations promulgated thereunder. Certain fundamental changes to the Articles will require the approval of at least two-thirds of the
votes cast on a resolution submitted to a special meeting of the Company’s shareholders called for the purpose of considering the resolution.
These items include (i) certain amendments to the provisions relating to the outstanding capital of the Company, (ii) a sale of all or
substantially all of the assets of the Company, (iii) an amalgamation of the Company with another company, other than a subsidiary, (iv) a
winding-up of the Company, (v) a continuance of the Company into another jurisdiction, (vi) a statutory court approved arrangement under the
CBCA (essentially a corporate reorganization such as an amalgamation, sale of assets, winding-up, etc.), or (vii) a change of name.
Under the CBCA, a corporation cannot repurchase its shares or pay or declare dividends if there are reasonable grounds for believing
that (a) the corporation is, or after payment would be, unable to pay its liabilities as they become due, or (b) after the payment, the realizable
value of the corporation’s assets would be less than the aggregate of (i) its liabilities and (ii) its stated capital of all classes of its securities.
Generally, stated capital is the amount paid on the issuance of a share unless the stated capital has been adjusted in accordance with the CBCA.
General
The Articles do not contain any restrictions on the business the Company may carry on.
Directors
The Company’s By-Law No. 1 (a by-law relating generally to the transaction of the business and affairs of the Company) provides for
the indemnification of the directors and officers of the Company, former directors and officers of the Company against all costs, charges and
expenses, including an amount paid to settle an action or satisfy a judgment, reasonably incurred by the individual in respect of any civil,
criminal, administrative, investigative or other proceeding in which the individual is involved because of that association with the Company,
subject to certain limitations in By-Law No. 1 and the limitations in the CBCA.
The Company may also indemnify other individuals who act or acted at the Company’s request as a director or officer, or an
individual acting in a similar capacity, of another entity.
Annual and Special Meetings
Meetings of shareholders are held at such place, at such time, on such day and in such manner as the Board may, subject to the CBCA
and any other applicable laws, determine from time to time. The only persons entitled to attend a meeting of shareholders are those persons
entitled to notice thereof, those entitled to vote thereat, the directors, the auditors of the Company and any others who may be entitled or
required under the CBCA to be present at the meeting. Under the CBCA, notice of the meeting is required to be given not less than 21 days
and not more than 60 days prior to the meeting. Shareholders on the record date are entitled to attend and vote at the meeting. The quorum for
the transaction of business at any meeting of shareholders is at least two persons present at the opening of the meeting who are entitled to vote
either as shareholders or proxyholders, representing collectively not less than 5% of the outstanding shares of the Company entitled to be voted
at the meeting.
-75-
Other
There is no by-law provisions governing the ownership threshold above which shareholder ownership must be disclosed. However,
there are disclosure requirements pursuant to applicable Canadian law.
There are no provisions in either the Company’s Articles or By-Law No. 1 that would have the effect of delaying, deferring or
preventing a change in control of the Company and that would operate only with respect to a merger, acquisition or corporate restructuring
involving the Company or its subsidiary.
There are no limitations on the rights to own securities, including the rights of non-resident or foreign shareholders to hold or exercise
voting rights on the securities imposed by foreign law or by the charter or other constituent document of the Company.
C.
Material Contracts
Except for contracts entered into in the ordinary course of business and not required to be filed under Canadian securities rules, the
only contracts which are regarded as material and which were entered into by the Company within the two years immediately preceding the
date of this annual report, are:
·
·
·
·
on November 21, 2005, the Company entered into a license and commercialization agreement with Par pursuant to which the
Company granted Par an exclusive, royalty-free license to make and distribute in the United States all strengths of our generic
versions of the branded product Focalin XR® for a period of 10 years from the date of commercial launch (which was November
19, 2013). Under the Par agreement, the Company owns the related ANDA, as approved by the FDA, and the Company retains the
right to make and distribute all generic strengths of the product outside of the United States. Quarterly payments are payable by Par
to the Company as calculated pursuant to a formula depending on a number of factors applicable to each strength. The Par
agreement also provides the potential, in limited circumstances, for certain milestone payments being payable to the Company by
Par, with the amount of such payments dependent upon the number of competitors in the market within the first 180 days of
commercialization, on a strength by strength basis. The Company is responsible under the Par agreement for the development of the
product and most related costs which, with the applications to and recent approvals by the FDA, the Company now considers to be
completed;
the acknowledgement and agreement of the Company dated October 22, 2009 to be bound by the performance based stock option
agreement dated September 10, 2004 pursuant to which Drs. Isa and Amina Odidi are entitled to purchase up to 2,763,940 of the
Company’s common shares upon payment of $3.62 per share, subject to satisfaction of the performance vesting conditions being the
acceptance by the FDA of the filing of an application for approval of a drug product or the approval of such an application;
the amended and restated promissory note dated October 22, 2009 for up to C$2,300,000 issued by IPC Corp to Isa Odidi and Amina
Odidi for advances that may be made by them from time to time to the Company. As at November 30, 2013, an amount of $761,209
was outstanding. No at-the-market offering proceeds have been used in payment of the promissory note as of the date of this annual
report; and
the Debenture dated January 10, 2013 for $1.5 million, which will mature January 1, 2015 issued by the Company to Isa Odidi and
Amina Odidi for the loan of $1.5 million made by them to the Company.
D.
Exchange Controls
Canada has no system of currency exchange controls. There are no governmental laws, decrees or regulations in Canada that restrict
the export or import of capital, including but not limited to, foreign exchange controls, or that affect the remittance of dividends, interest or
other payments to non-resident holders of the Company’s securities.
-76-
E.
Taxation
United States Taxation
Certain Material United States Federal Income Tax Considerations
The following discussion is a general summary of certain material United States federal income tax considerations applicable to a U.S.
holder arising from and relating to the consequences of the ownership and disposition of our common shares and warrants that are generally
applicable to a United States person that holds our common shares as capital assets (a “U.S. Holder”) within the meaning of Section 1221 of
the Code. This discussion does not address holders of other securities. This discussion assumes that we are not a “controlled foreign
corporation” for U.S. federal income tax purposes. The following discussion does not purport to be a complete analysis of all of the potential
United States federal income tax considerations that may be relevant to particular holders of our common shares or warrants in light of their
particular circumstances nor does it deal with persons that are subject to special tax rules, such as brokers, dealers in securities or
currencies, financial institutions, insurance companies, tax-exempt organizations, persons liable for alternative minimum tax, U.S. expatriates,
partnerships or other pass-through entities, U.S. Holders who own (directly, indirectly or by attribution) ten percent or more of the total
combined voting power of all classes of stock entitled to vote, persons holding our common shares as part of a straddle, hedge or conversion
transaction or as part of a synthetic security or other integrated transaction, traders in securities that elect to use a mark-to-market method of
accounting for their securities holdings, holders whose “functional currency” is not the United States dollar, and holders who are not U.S.
Holders. In addition, the discussion below does not address the tax consequences of the law of any state, locality or foreign jurisdiction or
United States federal tax consequences (e.g., estate or gift tax) other than those pertaining to the income tax. There can be no assurance that
the United States Internal Revenue Service (the “IRS”) will take a similar view as to any of the tax consequences described in this summary.
The following is based on currently existing provisions of the Code, existing and proposed Treasury regulations under the Code and
current administrative rulings and court decisions. Everything listed in the previous sentence may change, possibly on a retroactive basis, and
any change could affect the continuing validity of this discussion.
Each U.S. Holder and each holder of common shares that is not a U.S. Holder should consult its tax adviser regarding the United
States federal income tax consequences of holding our common shares applicable to such holder in light of its particular situation, as well as
any tax consequences that may arise under the laws of any other relevant foreign, state, local, or other taxing jurisdiction.
As used in this section, the term “United States person” means a beneficial owner of our common shares that is:
(i)
(ii)
(iii)
(iv)
a citizen or an individual resident of the United States;
a corporation (or an entity taxable as a corporation for United States federal income tax purposes) created or
organized in or under the laws of the United States or any political subdivision of the United States;
an estate the income of which is subject to United States federal income taxation regardless of its source; or
a trust which (A) is subject to the supervision of a court within the United States and the control of a United States
person as described in Section 7701(a)(30) of the Code; or (B) is subject to a valid election under applicable
Treasury Regulations to be treated as a United States person.
If a partnership (including for this purpose any entity treated as a partnership for U.S. federal income tax purposes) holds our common
shares, the United States federal income tax treatment of a partner generally will depend on the status of the partner and the activities of the
partnership. A United States person that is a partner of the partnership holding our common shares should consult its own tax adviser.
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Passive Foreign Investment Company Considerations
Special, generally unfavorable, U.S. federal income tax rules apply to the ownership and disposition of the stock or warrants of a
passive foreign investment company (“PFIC”). As discussed below, however, a U.S. Holder of our common shares (but not our warrants) may
be able to mitigate these consequences by making a timely and effective election to treat the Company as a qualified electing fund (a “QEF
Election”) or by making a timely and effective mark-to-market election with respect to its common shares.
For U.S. federal income tax purposes, a foreign corporation is classified as a PFIC for each taxable year in which, applying the
relevant look-through rules, either:
·
·
at least 75% of its gross income for the taxable year consists of specified types of “passive” income (referred to as the
“income test”); or
at least 50% of the average value of its assets during the taxable year is attributable to certain types of assets that produce
passive income or are held for the production of passive income (referred to as the “asset test”).
For purposes of the income and asset tests, if a foreign corporation owns directly or indirectly at least 25% (by value) of the stock of
another corporation, that foreign corporation will be treated as if it held its proportionate share of the assets of the other corporation and
received its proportionate share of the income of that other corporation. Also, for purposes of the income and asset tests, passive income does
not include any income that is an interest, dividend, rent or royalty payment if it is received or accrued from a related person to the extent that
amount is properly allocable to the active income of the related person. Under applicable attribution rules, if the Company is a PFIC, U.S.
Holders of common shares will be treated as holding stock of the Company’s subsidiaries that are PFICs in certain circumstances. In these
circumstances, certain dispositions of, and distributions on, stock of such subsidiaries may have consequences for U.S. Holders under the PFIC
rules.
Although the matter is not free from doubt, we believe that we were not a PFIC during our 2013 taxable year and may not be a PFIC
during our 2014 taxable year. Because PFIC status is based on our income, assets and activities for the entire taxable year, and our market
capitalization, it is not possible to determine whether we will be characterized as a PFIC for the 2014 taxable year until after the close of the
taxable year. The tests for determining PFIC status are subject to a number of uncertainties. These tests are applied annually, and it is difficult
to accurately predict future income, assets and activities relevant to this determination. In addition, because the market price of our common
shares is likely to fluctuate, the market price may affect the determination of whether we will be considered a PFIC. There can be no assurance
that we will not be considered a PFIC for any taxable year (including our 2014 taxable year). Absent one of the elections described below, if
we are a PFIC for any taxable year during which a U.S. Holder holds our common shares, we generally will continue to be treated as a PFIC
subject to the regime described below with respect to such U.S. Holder, regardless of whether we cease to meet the PFIC tests in one or more
subsequent years. Accordingly, no assurance can be given that we will not constitute a PFIC in the current (or any future) tax year or that the
IRS will not challenge any determination made by us concerning our PFIC status.
If we are a PFIC, the U.S. federal income tax consequences to a U.S. Holder of the ownership and disposition of our shares will
depend on whether such U.S. Holder makes a QEF or mark-to-market election. Unless otherwise provided by the IRS, a U.S. Holder of our
shares is generally required to file an informational return annually to report its ownership interest in the PFIC during any year in which we are
a PFIC.
U.S. HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISERS ABOUT THE PFIC RULES, THE POTENTIAL APPLICABILITY
OF THESE RULES TO THE COMPANY CURRENTLY AND IN THE FUTURE, AND THEIR FILING OBLIGATIONS IF THE
COMPANY IS A PFIC.
The “No Election” Alternative – Taxation of Excess Distributions
If we are classified as a PFIC for any year during which a U.S. Holder has held common shares or warrants and, in the case of our
common shares, that U.S. Holder has not made a QEF Election or a mark-to-market election, special rules may subject that U.S. Holder to
increased tax liability, including loss of favorable capital gains rates and the imposition of an interest charge upon the sale or other disposition
of the common shares or warrants or upon the receipt of any excess distribution (as defined below). Under these rules:
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·
·
·
·
the gain, if any, realized on such disposition will be allocated ratably over the U.S. Holder’s holding period;
the amount of gain allocated to the current taxable year and any year prior to the first year in which we are a PFIC will be
taxed as ordinary income in the current year;
the amount of gain allocated to each of the other taxable years will be subject to tax at the highest ordinary income tax rate
in effect for that year; and
an interest charge for the deemed deferral benefit will be imposed with respect to the resulting tax attributable to each of the
other taxable years.
These rules will continue to apply to the U.S. Holder even after we cease to meet the definition of a PFIC, unless the U.S. Holder elects to be
treated as having sold our common shares on the last day of the last taxable year in which we qualified as a PFIC.
An "excess distribution," in general, is any distribution on common shares received in a taxable year by a U.S. Holder that is greater
than 125% of the average annual distributions received by that U.S. Holder in the three preceding taxable years or, if shorter, that U.S. Holder’s
holding period for common shares.
Any portion of a distribution paid to a U.S. Holder that does not constitute an excess distribution will be treated as ordinary dividend
income to the extent of our current and accumulated earnings and profits (as computed for U.S. federal income tax purposes). Such dividends
generally will not qualify for the dividends-received deduction otherwise available to U.S. corporations. Any amounts treated as dividends
paid by a PFIC generally will not constitute “qualified dividend income” within the meaning of Section 1(h)(11) of the Code and will,
therefore, not be eligible for the preferential 20% rate for such income generally in effect under current law. Any such amounts in excess of our
current and accumulated earnings and profits will be applied against the U.S. Holder’s tax basis in the common shares and, to the extent in
excess of such tax basis, will be treated as gain from a sale or exchange of such shares. It is possible that any such gain may be treated as an
excess distribution.
The QEF Election Alternative
A U.S. Holder of common shares (but not warrants) who elects (an “Electing U.S. Holder”) in a timely manner to treat us as a QEF
would generally include in gross income (and be subject to current U.S. federal income tax on) its pro rata share of (a) the Company’s ordinary
earnings, as ordinary income, and (b) our net capital gains, as long-term capital gain. An Electing U.S. Holder will generally be subject to U.S.
federal income tax on such amounts for each taxable year in which we are classified as a PFIC, regardless of whether such amounts are
actually distributed to the Electing U.S. Holder. An Electing U.S. Holder may further elect, in any given taxable year, to defer payment of U.S.
federal income tax on such amounts, subject to certain limitations. However, if deferred, the taxes will be subject to an interest charge.
A U.S. Holder may not make a QEF election with respect to its warrants to acquire our common shares. As a result, if a U.S. Holder
sells or otherwise disposes of such warrants (other than upon exercise of such warrants), any gain recognized generally will be subject to the
special tax and interest charge rules treating the gain as an excess distribution, as described above, if we were a PFIC at any time during the
period the U.S. Holder held the warrants. If a U.S. Holder that exercises such warrants properly makes a QEF election with respect to the
newly acquired common shares (or has previously made a QEF election with respect to our common shares), the QEF election will apply to the
newly acquired common shares, but the adverse tax consequences relating to PFIC common shares, adjusted to take into account the current
income inclusions resulting from the QEF election, will continue to apply with respect to such newly acquired common shares (which
generally will be deemed to have a holding period for purposes of the PFIC rules that includes the period the U.S. Holder held the warrants),
unless the U.S. Holder makes a purging election under the PFIC rules. The purging election creates a deemed sale of such common shares at
their fair market value. The gain recognized by the purging election will be subject to the special tax and interest charge rules treating the gain
as an excess distribution, as described above. As a result of the purging election, the U.S. Holder will have a new basis and holding period in
the common shares acquired upon the exercise of the warrants for purposes of the PFIC rules.
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A U.S. Holder may make a QEF Election only if the Company furnishes the U.S. Holder with certain tax information. If the
Company should determine that it is a PFIC, it is anticipated that it will attempt to timely and accurately disclose such information to its U.S.
Holders and provide U.S. Holders with information reasonably required to make such election.
A U.S. Holder that makes a QEF Election with respect to the Company generally (a) may receive a tax-free distribution from the
Company to the extent that such distribution represents “earnings and profits” of the Company that were previously included in income by the
U.S. Holder because of such QEF Election and (b) will adjust such U.S. Holder’s tax basis in his, her or its common shares to reflect the
amount included in income (resulting in an increase in basis) or allowed as a tax-free distribution (resulting in a decrease in basis) because of
the QEF Election.
Similarly, if any of our non-U.S. subsidiaries were classified as PFICs, a U.S. Holder that makes a timely QEF Election with respect to
any of our subsidiaries would be subject to the QEF rules as described above with respect to the Holder’s pro rata share of the ordinary
earnings and net capital gains of any of our subsidiaries. Our earnings (or earnings of any of our subsidiaries) attributable to distributions from
any of our subsidiaries that had previously been included in the income of an Electing U.S. Holder under the QEF rules would generally not be
taxed to the Electing U.S. Holder again.
Upon the sale or other disposition of common shares, an Electing U.S. Holder who makes a QEF Election for the first taxable year in
which he owns common shares will recognize capital gain or loss for U.S. federal income tax purposes in an amount equal to the difference
between the net amount realized on the disposition and the U.S. Holder’s adjusted tax basis in the common shares. Such gain or loss will be
long-term capital gain or loss if the U.S. Holder’s holding period in the common shares is more than one year, otherwise it will be short-term
capital gain or loss. The deductibility of capital losses is subject to certain limitations. A U.S. Holder’s gain realized upon the disposition of
shares generally will be treated as U.S. source income, and losses from the disposition generally will be allocated to reduce U.S. source
income.
A QEF Election must be made in a timely manner as specified in applicable Treasury Regulations. Generally, the QEF Election must
be made by filing the appropriate QEF election documents at the time such U.S. Holder timely files its U.S. federal income tax return for the
first taxable year of the Company during which it was, at any time, a PFIC.
Each U.S. Holder should consult its own tax advisor regarding the availability of, procedure for making, and consequences of a QEF
Election with respect to the Company.
Mark-to-Market Election Alternative
Assuming that our common shares are treated as marketable stock (as defined for these purposes), a U.S. Holder that does not make a
QEF Election may avoid the application of the excess distribution rules, at least in part, by electing to mark the common shares to market
annually. Consequently, the U.S. Holder will generally recognize as ordinary income or loss each year an amount equal to the difference as of
the close of the taxable year between the fair market value of its common shares and the U.S. Holder’s adjusted tax basis in the common
shares. Any mark-to-market loss is treated as an ordinary deduction, but only to the extent of the net mark-to-market gain that the Holder has
included pursuant to the election in prior tax years. Any gain on a disposition of our common shares by an electing U.S. Holder would be
treated as ordinary income. The electing U.S. Holder’s basis in its common shares would be adjusted to reflect any of these income or loss
amounts. Currently, a mark-to-market election may not be made with respect to warrants. We do not anticipate that the preference shares will
be treated as marketable stock for these purposes.
For purposes of making this election, stock of a foreign corporation is “marketable” if it is “regularly traded” on certain “qualified
exchanges”. Under applicable Treasury Regulations, a “qualified exchange” includes a national securities exchange that is registered with the
SEC or the national market system established pursuant to Section 11A of the U.S. Exchange Act, and certain foreign securities exchanges.
Currently, our common shares are traded on a “qualified exchange.” Under applicable Treasury Regulations, PFIC stock traded on a qualified
exchange is “regularly traded” on such exchange for any calendar year during which such stock is traded, other than in de minimis quantities,
on at least 15 days during each calendar quarter. Special rules apply if an election is made after the beginning of the taxpayer’s holding period
in PFIC stock.
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To the extent available, a mark-to-market election applies to the taxable year in which such mark-to-market election is made and to
each subsequent taxable year, unless the Company’s common shares cease to be “marketable stock” or the IRS consents to revocation of such
election. In addition, a U.S. Holder that has made a mark-to-market election does not include mark-to-market gains, or deduct mark-to-market
losses, for years when the Company ceases to be treated as a PFIC.
The mark-to-market rules generally do not appear to prevent the application of the excess distribution rules in respect of stock of any
of our subsidiaries in the event that any of our subsidiaries were considered PFICs. Accordingly, if Intellipharmaceutics and any of our
subsidiaries were both considered PFICs and a U.S. Holder made a mark-to-market election with respect to its common shares, the U.S. Holder
may remain subject to the excess distribution rules described above with respect to its indirectly owned shares of subsidiary stock.
U.S. HOLDERS ARE URGED TO CONSULT THEIR TAX ADVISORS REGARDING THE POSSIBLE APPLICABILITY OF THE PFIC
RULES AND THE AVAILABILITY OF, PROCEDURES FOR MAKING, AND CONSEQUENCES OF A QEF ELECTION OR MARK-
TO-MARKET ELECTION WITH RESPECT TO THE COMPANY’S COMMON SHARES.
Ownership and Disposition of Common Shares and Warrants to the Extent that the PFIC Rules do not Apply
Distributions on Common Shares
A U.S. Holder that receives a distribution, including a constructive distribution, with respect to a Share will be required to include the
amount of such distribution in gross income as a dividend (without reduction for any Canadian income tax withheld from such distribution) to
the extent of the current or accumulated “earnings and profits” of the Company, as computed for U.S. federal income tax purposes. To the
extent that a distribution exceeds the current and accumulated “earnings and profits” of the Company, such distribution will be treated first as a
tax-free return of capital to the extent of a U.S. Holder’s tax basis in the common shares and thereafter as gain from the sale or exchange of
such common shares. (See “Sale or Other Taxable Disposition of Common Shares” below). However, the Company may not maintain the
calculations of earnings and profits in accordance with U.S. federal income tax principles, and each U.S. Holder should (unless advised to the
contrary) therefore assume that any distribution by the Company with respect to the common shares will constitute ordinary dividend
income. Dividends received on common shares generally will not be eligible for the “dividends received deduction”. The dividend rules are
complex, and each U.S. Holder should consult its own tax advisor regarding the application of such rules.
The terms of a warrant may provide for an adjustment to the number of common shares for which the warrant may be exercised or to
the exercise price of the warrant in certain events. An adjustment which has the effect of preventing dilution generally is not taxable. However,
the U.S. Holders of the warrants would be treated as receiving a constructive distribution from us if, for example, the adjustment increases the
warrant holders’ proportionate interest in our assets or earnings and profits (e.g., through an increase in the number of common shares that
would be obtained upon exercise) as a result of a distribution of cash to the holders of our common shares which is taxable to the U.S. Holders
of such common shares as described under “Distributions on Common Shares” above. Such constructive distribution would be subject to tax as
described under that section in the same manner as if the U.S. Holders of the warrants received a cash distribution from us equal to the fair
market value of such increased interest.
Sale or Other Taxable Disposition of Common Shares
Upon the sale or other taxable disposition of common shares, a U.S. Holder generally will recognize capital gain or loss in an amount
equal to the difference between the U.S. dollar value of cash received plus the fair market value of any property received and such U.S.
Holder’s tax basis in such common shares sold or otherwise disposed of. A U.S. Holder’s tax basis in common shares generally will be such
Holder’s U.S. dollar cost for such common shares.
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Gain or loss recognized on such sale or other disposition generally will be long-term capital gain or loss if, at the time of the sale or
other disposition, the common shares have been held for more than one year. The long-term capital gains realized by non-corporate U.S.
Holders are generally subject to a lower marginal U.S. federal income tax rate than ordinary income other than qualified dividend income, as
defined above. Currently, the maximum rate on long-term capital gains is 20%, although the actual rates may be higher due to the phase out of
certain tax deductions, exemptions and credits. However, given the uncertain economic conditions in the United States and the size of the
federal deficit, tax rates are subject to change and prospective U.S. Holders should consult their tax advisors. The deductibility of losses may
be subject to limitations.
Warrants
Generally, no U.S. federal income tax will be imposed upon the U.S. Holder of a warrant upon exercise of such warrant to acquire our
common shares. A U.S. Holder’s tax basis in a warrant will generally be the amount of the purchase price that is allocated to the
warrant. Upon exercise of a warrant, the tax basis of the new common shares would be equal to the sum of the tax basis of the warrants in the
hands of the U.S. Holder plus the exercise price paid, and the holding period of the new common shares would begin on the date that the
warrants are exercised. If a warrant lapses without exercise, the U.S. Holder will generally realize a capital loss equal to its tax basis in the
warrant. Prospective U.S. Holders should consult their tax advisors regarding the tax consequences of acquiring, holding and disposing of
warrants.
The tax consequences of a cashless exercise of a warrant are not clear under current tax law. A cashless exercise may be tax-free,
either because the exercise is not a gain realization event or because the exercise is treated as a recapitalization for U.S. federal income tax
purposes. In either tax-free situation, a U.S. Holder’s basis in the common shares received would equal the U.S. holder’s basis in the warrant.
If the cashless exercise were treated as not being a gain realization event, a U.S. Holder’s holding period in the common shares would be
treated as commencing on the date following the date of exercise of the warrant. If the cashless exercise were treated as a recapitalization, the
holding period of the common shares would include the holding period of the warrant. It is also possible that a cashless exercise could be
treated as a taxable exchange in which gain or loss would be recognized. In such event, a U.S. Holder could be deemed to have surrendered
warrants equal to the number of common shares having a value equal to the exercise price for the total number of warrants to be exercised. The
U.S. Holder would recognize capital gain or loss in an amount equal to the difference between the fair market value of the common shares
represented by the warrants deemed surrendered and the U.S. Holder’s tax basis in the warrants deemed surrendered. In this case, a U.S.
Holder’s tax basis in the common shares received would equal the sum of the fair market value of the common shares represented by the
warrants deemed surrendered and the U.S. Holder’s tax basis in the warrants exercised. A U.S. Holder’s holding period for the common shares
would commence on the date following the date of exercise of the warrant. Due to the absence of authority on the U.S. federal income tax
treatment of a cashless exercise, there can be no assurance which, if any, of the alternative tax consequences and holding periods described
above would be adopted by the IRS or a court of law. Accordingly, U.S. Holders should consult their tax advisors regarding the tax
consequences of a cashless exercise.
Additional Considerations
Tax-Exempt Investors
Special considerations apply to U.S. persons that are pension plans and other investors that are subject to tax only on their unrelated
business taxable income. Such a tax-exempt investor’s income from an investment in our common shares or warrants generally will not be
treated as resulting in unrelated business taxable income under current law, so long as such investor’s acquisition of common shares or
warrants is not debt-financed. Tax-exempt investors should consult their own tax advisors regarding an investment in our common shares or
warrants.
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Additional Tax on Passive Income
Certain individuals, estates and trusts whose income exceeds certain thresholds will generally be required to pay a 3.8% Medicare
surtax on the lesser of (1) the U.S. Holder’s “net investment income” for the relevant taxable year and (2) the excess of the U.S. Holder’s
modified gross income for the taxable year over a certain threshold (which, in the case of individuals, will generally be between U.S.$125,000
and U.S.$250,000 depending on the individual’s circumstances). A U.S. Holder’s “net investment income” may generally include, among
other items, certain interest, dividends, gain, and other types of income from investments, minus the allowable deductions that are properly
allocable to that gross income or net gain. U.S. Holders are urged to consult with their own tax advisors regarding the effect, if any, of this tax
on their ownership and disposition of common shares or warrants.
Receipt of Foreign Currency
The amount of any distribution paid to a U.S. Holder in foreign currency, or on the sale, exchange or other taxable disposition of
common shares or warrants, generally will be equal to the U.S. dollar value of such foreign currency based on the exchange rate applicable on
the date of receipt (regardless of whether such foreign currency is converted into U.S. dollars at that time). A U.S. Holder will have a basis in
the foreign currency equal to its U.S. dollar value on the date of receipt. Any U.S. Holder who converts or otherwise disposes of the foreign
currency after the date of receipt may have a foreign currency exchange gain or loss that would be treated as ordinary income or loss, and
generally will be U.S. source income or loss for foreign tax credit purposes. Each U.S. Holder should consult its own U.S. tax advisor
regarding the U.S. federal income tax consequences of receiving, owning, and disposing of foreign currency.
Foreign Tax Credit
Subject to the PFIC rules discussed above, a U.S. Holder that pays (whether directly or through withholding) Canadian income tax
with respect to dividends paid on the common shares generally will be entitled, at the election of such U.S. Holder, to receive either a
deduction or a credit for such Canadian income tax paid. Generally, a credit will reduce a U.S. Holder’s U.S. federal income tax liability on a
dollar-for-dollar basis, whereas a deduction will reduce a U.S. Holder’s income subject to U.S. federal income tax. This election is made on a
year-by-year basis and generally applies to all foreign taxes paid (whether directly or through withholding) or accrued by a U.S. Holder during
a year.
Complex limitations apply to the foreign tax credit, including the general limitation that the credit cannot exceed the proportionate
share of a U.S. Holder’s U.S. federal income tax liability that such U.S. Holder’s “foreign source” taxable income bears to such U.S. Holder’s
worldwide taxable income. In applying this limitation, a U.S. Holder’s various items of income and deduction must be classified, under
complex rules, as either “foreign source” or “U.S. source.” Generally, dividends paid by a foreign corporation should be treated as foreign
source for this purpose, and gains recognized on the sale of stock of a foreign corporation by a U.S. Holder should generally be treated as U.S.
source for this purpose, except as otherwise provided in an applicable income tax treaty or if an election is properly made under the
Code. However, the amount of a distribution with respect to the common shares that is treated as a “dividend” may be lower for U.S. federal
income tax purposes than it is for Canadian federal income tax purposes, resulting in a reduced foreign tax credit allowance to a U.S.
Holder. In addition, this limitation is calculated separately with respect to specific categories of income. The foreign tax credit rules are
complex, and each U.S. Holder should consult its own U.S. tax advisor regarding the foreign tax credit rules.
Payments to Foreign Financial Institutions After 2013
The Hiring Incentives to Restore Employment Act of March 2010 (the “HIRE Act”), including the Foreign Account Tax Compliance
Act (“FATCA”) provisions promulgated thereunder, generally provides that, beginning July 1, 2014, a 30% withholding tax may be imposed
on payments of U.S. source income and proceeds from the sale of property that could give rise to U.S. source interest or dividends to certain
non-U.S. entities unless such entities enter into an agreement with the IRS to disclose the name, address and taxpayer identification number of
certain U.S. persons that own, directly or indirectly, interests in such entities, as well as certain other information relating to such
interests. U.S. Holders are encouraged to consult with their own tax advisors regarding the possible implications and obligations of FATCA
and the HIRE Act.
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Information Reporting
In general, U.S. Holders of common shares are subject to certain information reporting under the Code relating to their purchase
and/or ownership of stock of a foreign corporation such as the Company. Failure to comply with these information reporting requirements
may result in substantial penalties.
For example, recently enacted legislation generally requires certain individuals who are U.S. Holders to file Form 8938 to report the
ownership of specified foreign financial assets if the total value of those assets exceeds an applicable threshold amount (subject to certain
exceptions). For these purposes, a specified foreign financial asset includes not only a financial account (as defined for these purposes)
maintained by a foreign financial institution, but also any stock or security issued by a non-U.S. person, any financial instrument or contract
held for investment that has an issuer or counterparty other than a U.S. person and any interest in a foreign entity, provided that the asset is not
held in an account maintained by a financial institution. The minimum applicable threshold amount is generally U.S.$50,000 in the aggregate,
but this threshold amount varies depending on whether the individual lives in the U.S., is married, files a joint income tax return with his or her
spouse, etc. Certain domestic entities that are U.S. Holders may also be required to file Form 8938 in the near future. U.S. Holders are urged
to consult with their tax advisors regarding their reporting obligations, including the requirement to file IRS Form 8938.
In addition, in certain circumstances, a U.S. Holder of common shares who disposes of such common shares in a transaction resulting
in the recognition by such Holder of losses in excess of certain significant threshold amounts may be obligated to disclose its participation in
such transaction in accordance with the Treasury Regulations governing tax shelters and other potentially tax-motivated transactions or tax
shelter regulations. Potential purchasers of common shares should consult their tax advisors concerning any possible disclosure obligation
under the tax shelter rules with respect to the disposition of their common shares.
Backup Withholding
Generally, information reporting requirements will apply to distributions on our common shares or proceeds on the disposition of our
common shares or warrants paid within the U.S. (and, in certain cases, outside the U.S.) to U.S. Holders. Such payments will generally be
subject to backup withholding tax at the rate of 28% if: (a) a U.S. Holder fails to furnish such U.S. Holder’s correct U.S. taxpayer
identification number to the payor (generally on Form W-9), as required by the Code and Treasury Regulations, (b) the IRS notifies the payor
that the U.S. Holder’s taxpayer identification number is incorrect, (c) a U.S. Holder is notified by the IRS that it has previously failed to
properly report interest and dividend income, or (d) a U.S. Holder fails to certify, under penalty of perjury, that such U.S. Holder has furnished
its correct U.S. taxpayer identification number. However, certain exempt persons generally are excluded from these information reporting and
backup withholding rules.
Backup withholding is not an additional tax. Any amounts withheld under the U.S. backup withholding tax rules will be allowed as a
credit against a U.S. Holder’s U.S. federal income tax liability, if any, or will be refunded, if such U.S. Holder furnishes required information to
the IRS in a timely manner. Each U.S. Holder should consult its own tax advisor regarding the backup withholding rules.
Canadian Federal Income Tax Considerations
Taxation
The following summary describes the principal Canadian federal income tax considerations generally applicable to a holder of the
Company’s common shares who, for purposes of the Income Tax Act (Canada) (the “ Canadian Tax Act ”) and the Canada – United States
Income Tax Convention (the “Treaty”) and at all relevant times, is resident in the United States and was not and is not resident in Canada nor
deemed to be resident in Canada, deals at arm’s length and is not affiliated with the Company, holds the Company’s common shares as capital
property, does not use or hold and is not deemed to use or hold the Company’s common shares in or in the course of carrying on business in
Canada and who otherwise qualifies for the full benefit of the Treaty (a “United States Holder”). Special rules which are not discussed in this
summary may apply to a United States Holder that is a financial institution, as defined in the Canadian Tax Act, or an insurer whom the
Company’s common shares are designed as insurance property.
-84-
This following summary is based on the current provisions of the Treaty, the Canadian Tax Act and the regulations thereunder, all
specific proposals to amend the Canadian Tax Act and the regulations announced by the Minister of Finance (Canada) prior to the date hereof
and the Company’s understanding of the administrative practices published in writing by the Canada Revenue Agency prior to the date hereof.
This summary does not take into account or anticipate any other changes in the governing law, whether by judicial, governmental or legislative
decision or action, nor does it take into account the tax legislation or considerations of any province, territory or non-Canadian (including U.S.)
jurisdiction, which legislation or considerations may differ significantly from those described herein.
All amounts relevant in computing a United States Holder’s liability under the Canadian Tax Act are to be computed in Canadian
currency based on the relevant exchange rate applicable thereto.
This summary is of a general nature only and is not intended to be, and should not be interpreted as legal or tax advice to any
prospective purchaser or holder of the Company’s common shares and no representation with respect to the Canadian federal income tax
consequences to any such prospective purchaser is made. Accordingly, prospective purchasers and holders of the Company’s shares should
consult their own tax advisors with respect to their particular circumstances.
Dividends on the Company’s Common Shares
Generally, dividends paid or credited by Canadian corporations to non-resident shareholders are subject to a withholding tax of 25%
of the gross amount of such dividends. Pursuant to the Treaty, the withholding tax rate on the gross amount of dividends paid or credited to
United States Holders is reduced to 15% or, in the case of a United States Holder that is a U.S. corporation that beneficially owns at least 10%
of the voting stock of the Canadian corporation paying the dividends, to 5% of the gross amount of such dividends.
Pursuant to the Treaty, certain tax-exempt entities that are United States Holders may be exempt from Canadian withholding taxes,
including any withholding tax levied in respect of dividends received on the Company’s common shares.
Disposition of the Company’s Common Shares
In general, a United States Holder will not be subject to Canadian income tax on capital gains arising on the disposition of the
Company’s common shares, unless such shares are “taxable Canadian property” within the meaning of the Canadian Tax Act. Generally, the
shares of a corporation resident in Canada will not be taxable Canadian property of a United States Holder at the time of disposition unless at
any time during the 60-month period immediately preceding the disposition, more than 50% of the value of the Company’s common shares
was derived directly or indirectly from properties that are “real or immovable properties”, “Canadian resource properties”, or “timber resource
properties”, within the meaning of the Canadian Tax Act. The value of the Company’s common shares is not now, and is not expected to be in
the future, derived more than 50% from any of these properties. Consequently, any gain realized by a United States Holder upon the
disposition of the Company’s common shares should be exempt from tax under the Canadian Tax Act.
F.
Dividends and Paying Agents
Not Applicable.
G.
Statement by Experts
Not Applicable.
-85-
H.
Documents on Display
Copies of the documents referred to in this annual report may be inspected, during normal business hours, at the Company’s
headquarters located at 30 Worcester Road, Toronto, Ontario, M9W 5X2, Canada.
We are required to file reports and other information with the SEC under the U.S. Exchange Act. Reports and other information filed
by us with the SEC may be inspected and copied at the SEC’s public reference facilities located at 100 F Street, N.E. in Washington D.C. The
SEC also maintains a website at http://www.sec.gov that contains certain reports and other information that we file electronically with the
SEC. As a foreign private issuer, we are exempt from the rules under the U.S. Exchange Act prescribing the furnishing and content of proxy
statements and our officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions
contained in Section 16 of the U.S. Exchange Act. Under the U.S. Exchange Act, as a foreign private issuer, we are not required to publish
financial statements as frequently or as promptly as United States companies.
I.
Subsidiary Information
See Item 4.C of this annual report.
Item 11.
Qualitative and Quantitative Disclosures about Market Risk
Interest rate and credit risk
We are exposed to interest rate risk, which is affected by changes in the general level of interest rates. Due to the fact that the
Company’s cash is deposited with major financial institutions in an interest savings account, we do not believe that the results of operations or
cash flows would be affected to any significant degree by a sudden change in market interest rates given their relative short-term nature.
Trade accounts receivable potentially subjects the Company to credit risk. The Company provides an allowance for doubtful accounts
equal to the estimated losses expected to be incurred in the collection of accounts receivable.
The following table sets forth details of the aged accounts receivable that are not overdue as well as an analysis of overdue amounts
and the related allowance for doubtful accounts:
Total accounts receivable
Less: allowance for doubtful accounts
Total accounts receivable, net
Not past due
Past due for more than 31 days but no more than 60 days
Total accounts receivable, net
November 30,
2013
$
November 30,
2012
$
1,475,745
-
1,475,745
1,473,097
2,648
1,475,745
2,778
-
2,778
2,778
-
2,778
Financial instruments that potentially subject the Company to concentration of credit risk consist principally of uncollateralized
accounts receivable. The Company’s maximum exposure to credit risk is equal to the potential amount of financial assets. For the year ended
November 30, 2013, Par accounted for substantially all the revenue of the Company and all of the accounts receivable of the Company. For
the year ended November 30, 2012, Par accounted for all the revenue and all the accounts receivable of the Company. For the year ended
November 30, 2011, Par accounted for substantially all the revenue and all the accounts receivable of the Company.
-86-
The Company is also exposed to credit risk at period end from the carrying value of its cash. The Company manages this risk by
maintaining bank accounts with a Canadian chartered bank. The Company’s cash is not subject to any external restrictions.
Foreign exchange risk
The Company has balances in Canadian dollars that give rise to exposure to foreign exchange (“FX”) risk relating to the impact of
translating certain non-U.S. dollar balance sheet accounts as these statements are presented in U.S. dollars. A strengthening U.S. dollar will
lead to a FX loss while a weakening U.S. dollar will lead to a FX gain. For each Canadian dollar balance of $1.0 million, a +/- 10% movement
in the Canadian currency held by the Company versus the U.S. dollar would affect the Company’s loss and other comprehensive loss by $0.1
million.
Balances denominated in foreign currencies that are considered financial instruments are as follows:
FX rates used to translate to U.S.
Assets
Cash
Liabilities
Accounts payable
Employee cost payable
Capital lease
Due to related party
Net exposure
Liquidity risk
November 30, 2013
Canadian
U.S.
November 30, 2012
Canadian
U.S.
1.0620
$
0.9936
$
$
$
461,002
461,002
434,089
434,089
247,397
247,397
248,991
248,991
484,300
182,970
45,946
806,657
1,519,873
(1,058,871)
456,026
172,288
43,264
759,564
1,431,142
284,727
189,383
51,194
778,701
1,304,005
286,561
190,603
51,524
783,716
1,312,404
(997,053) (1,056,608) (1,063,413)
Liquidity risk is the risk that the Company will encounter difficulty raising liquid funds to meet commitments as they fall due. In
meeting its liquidity requirements, the Company closely monitors its forecasted cash requirements with expected cash drawdown.
The following are the contractual maturities of the undiscounted cash flows of financial liabilities as at November 30, 2013:
Third parties
Accounts payable
Capital lease
Related parties
Employee costs payable
Due to related parties
Convertible debenture
Less than
3 months
3 to 6
months
$
$
6 to 9
months
$
9 months
1 year
$
Greater
than 1 year
$
Total
$
810,381
13,189
508,616
759,564
44,353
2,136,103
-
13,676
-
-
44,353
58,029
-
14,198
-
-
45,339
59,537
-
2,201
-
-
810,381
43,264
-
-
44,846
47,047
-
-
1,515,770
1,515,770
508,616
759,564
1,694,661
3,816,486
-87-
Limitations:
The above discussion includes only those exposures that existed as of November 30, 2013 and, as a result, does not consider
exposures or positions that could arise after that date. The Company’s ultimate realized gain or loss with respect to interest rate and exchange
rate fluctuations would depend on the exposures that arise during the period and interest and foreign exchange rates.
Item 12.
Description of Securities Other than Equity Securities.
A.
Debt Securities
Not applicable.
B.
Warrants and Rights
Not applicable.
C.
Other Securities
Not applicable.
D.
American Depositary Shares
Not applicable.
Item 13.
Defaults, Dividend Arrearages and Delinquencies
PART II.
There have been no material defaults in the payment of any principal or interest owing. Neither the Company nor its subsidiaries has
any preferred shares outstanding.
Item 14.
Material Modifications to the Rights of Security Holders and Use of Proceeds
There has been no material modification of the instruments defining the rights of holders of any class of registered securities. There
has been no withdrawal or substitution of assets securing any class of registered securities.
Item 15.
Controls and Procedures
Internal Control Over Financial Reporting
The management of our Company is responsible for establishing and maintaining adequate internal controls over financial reporting
for the Company. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles and includes those
policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the Company’s assets, (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that the Company’s receipts and expenditures are being
made only in accordance with authorizations of the Company’s management and directors, and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the
financial statements.
-88-
Management assessed the effectiveness of the Company's internal control over financial reporting using the Internal Control-
Integrated Framework developed by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on this assessment, management concluded that the Company’s internal control over financial reporting was effective as of
November 30, 2013. Management has not identified any material weaknesses in the Company’s internal control over financial reporting as of
November 30, 2013.
Changes In Internal Control Over Financial Reporting
There were no changes made to the Company’s internal control over financial reporting that have materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting. Specifically, there were no changes in accounting functions,
board or related committees and charters, or auditors; no functions, controls or financial reporting processes of any constituent entities were
adopted as Intellipharmaceutics’ functions, controls and financial processes; no other significant business processes were implemented; and no
consultants assisting management in the assessment and documentation of internal controls were engaged.
Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including the Chief Executive Officer and the Vice President
Finance and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures as at November 30, 2013.
Disclosure controls and procedures are designed to ensure that the information required to be disclosed by the Company in the reports it files
or submits under securities legislation is recorded, processed, summarized and reported on a timely basis and that such information is
accumulated and reported to management, including the Company’s Chief Executive Officer and Vice President Finance and Chief Financial
Officer, as appropriate, to allow required disclosures to be made in a timely fashion. Based on that evaluation, management has concluded that
these disclosure controls and procedures were effective as at November 30, 2013.
Attestation of Internal Control Over Financial Reporting
This annual report does not include an attestation report of our independent registered public accounting firm regarding internal
control over financial reporting for the Company. As the Company is a non-accelerated filer, management's report is not subject to attestation
by our independent registered public accounting firm pursuant to Section 404(c) of the Sarbanes-Oxley Act of 2002
Item 16A.
Audit Committee Financial Expert.
Our Audit Committee is comprised of Kenneth Keirstead, Bahadur Madhani and Dr. Eldon Smith, each of whom is considered
independent and financially literate (as such terms are defined under National Instrument 52-110 – Audit Committee). The members of the
Audit Committee have selected a Chair from amongst themselves, being Mr. Madhani.
Under the SEC rules implementing the Sarbanes-Oxley Act of 2002, Canadian issuers filing reports in the United States must disclose
whether their audit committees have at least one “audit committee financial expert”. Additionally, under NASDAQ Listing Rule 5605(c)(2)
(A), NASDAQ requires that one member of the audit committee have “past employment experience in finance or accounting, requisite
professional certification in accounting, or any other comparable experience or background which results in the individual’s financial
sophistication, including being or having been a chief executive officer, chief financial officer, or other senior officer with financial oversight
responsibilities.” The Board has determined that Mr. Madhani qualifies as an Audit Committee financial expert under the SEC rules and as
financially sophisticated under the NASDAQ rules.
-89-
Item 16B.
Code of Ethics.
The Code of Business Conduct and Ethics (the “Code of Ethics”) has been implemented. It may be viewed on our website at
www.intellipharmaceutics.com. During the year ended November 30, 2013, no waivers or requests for exemptions from the Code of Ethics
were either requested or granted.
Item 16C.
Principal Accountant Fees and Services.
Our auditor is Deloitte LLP (“Deloitte”), Independent Registered Public Accounting Firm, 5140 Yonge Street, Suite 1700, Toronto,
ON M2N 6L7. Deloitte is independent under Rule 2-01 of Regulation S-X.
The aggregate amounts billed by our auditors to us for the years ended November 30, 2013 and 2012 for audit fees, audit-related fees,
tax fees and all other fees are set forth below:
Audit Fees (1)
Audit-Related Fees (2)
Tax Fees (3)
All Other Fees (4)
Total Fees
2013
C$147,660
-
40,237
164,870
C$352,767
2012
C$205,810
-
35,215
63,778
C$304,803
Notes:
(1)
(2)
(3)
(4)
Audit fees consist of fees related to the audit of the Company’s consolidated financial statements and reviews of quarterly interim
financial statements.
Audit-related fees consist of consultation on accounting and disclosure matters.
Tax fees consist of fees for tax consultation, tax advice and tax compliance services for the Company and its subsidiaries.
All other fees include accounting related matters, Form 20-F, Form F-3, base shelf prospectus activities, prospectus supplement
activities and internal control reviews.
The Company’s related party pre-approval policies and procedures are described in Item 6.C.
Under applicable Canadian securities regulations, the Company is required to disclose whether its Audit Committee has adopted
specific policies and procedures for the engagement of non-audit services and to prepare a summary of these policies and procedures. The
Audit Committee’s responsibility is to approve all audit engagement fees and terms as well as reviewing policies for the provision of non-audit
services by the external auditors and, when required, the framework for pre-approval of such services. The Audit Committee delegates to its
Chairman the pre-approval of such non-audit fees. For each of the years ended November 30, 2013 and 2012, all of the non-audit services
provided by the Company’s external auditor were approved by the Chairman of the Audit Committee.
Item 16D.
Exemptions from the Listing Standards for Audit Committees.
Not Applicable.
Item 16E.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers.
Neither the Company nor, to our knowledge, any affiliated purchaser has made any purchases of our registered shares during the last
financial year although shares were received by affiliated purchasers in connection with the IPC Arrangement Agreement (see Item 4.A).
Item 16F.
Change in Registrant’s Certifying Accountant
None.
Item 16G.
Corporate Governance.
The Company is the successor issuer to Vasogen Inc. for reporting purposes under the U.S. Exchange Act. Our common shares are
currently listed on the TSX and quoted for trading on NASDAQ under the symbols “I” and “IPCI”, respectively. Our shares began trading on
October 22, 2009, when the IPC Arrangement Agreement with Vasogen was completed.
-90-
Variations from Certain NASDAQ Rules
NASDAQ listing rules permit the Company to follow certain home country practices in lieu of compliance with certain NASDAQ
corporate governance rules. Set forth below are the requirements of NASDAQ’s Rule 5600 Series that the Company does not follow and the
home country practices that it follows in lieu thereof and other differences from domestic U.S. companies that apply to us under NASDAQ’s
corporate governance rules.
Shareholder Approval in Connection with Certain Transactions: NASDAQ’s Rule 5635 requires each issuer to obtain shareholder
approval prior to certain dilutive events, including: (i) a transaction other than a public offering involving the sale under certain circumstances
of 20% or more of the issuer’s common shares outstanding prior to the transaction at a price less than the greater of book value or market
value, (ii) the acquisition of the stock or assets of another company; (iii) equity-based compensation of officers, directors, employees or
consultants and (iv) a change of control. Under the exemption available to foreign private issuers under NASDAQ Rule 5615(a)(3), the
Company does not follow NASDAQ Rule 5635. Instead, and in accordance with the NASDAQ exemption, the Company complies with
applicable TSX rules and applicable Canadian corporate and securities regulatory requirements.
Independence of the Majority of the Board of Directors; Independent Director Oversight of Executive Compensation and Board
Nominations: NASDAQ’s Rule 5605(b)(1) requires that the Board of Directors be comprised of a majority of independent directors, as
defined in Rule 5605(a)(2). NASDAQ’s Rule 5605(b)(2) requires the independent members of the Board to regularly hold executive sessions
where only those directors are present. Moreover, NASDAQ’s Rule 5605(d) requires independent director oversight of executive officer
compensation arrangements by approval of such compensation by a majority of the independent directors or by a compensation committee
comprised solely of independent directors, and Rule 5605(e) requires similar oversight with respect to the process of selecting nominees to the
Board. Under the exemption available to foreign private issuers under Rule 5615(a)(3), the Company does not follow NASDAQ Rules 5605(b)
(1), 5605(d) or 5605(e). Instead, and in accordance with the NASDAQ exemption, the Company complies with the applicable TSX rules and
applicable Canadian corporate and securities regulatory requirements.
Disclosure of Waivers of Code of Business Conduct and Ethics: Domestic U.S. NASDAQ listed companies are required under
NASDAQ Rule 5610 to disclose any waivers of their codes of conduct for directors or executive officers in a Form 8-K within four business
days. As a foreign private issuer we are required to disclose any such waivers either in a Form 6-K or in the Company’s next Form 20-F or 40-
F.
Item 16H.
Mine Safety Disclosure.
Not applicable.
Item 17.
Financial Statements.
See Item 18 below.
Item 18.
Financial Statements.
PART III.
-91-
Consolidated financial statements of
Intellipharmaceutics
International Inc.
November 30, 2013, 2012 and 2011
Intellipharmaceutics International Inc.
November 30, 2013, 2012 and 2011
Table of contents
Report of Independent Registered Public Accounting Firm
Consolidated balance sheets
Consolidated statements of operations and comprehensive loss
Consolidated statements of shareholders’ deficiency
Consolidated statements of cash flows
Notes to the consolidated financial statements
1
2
3
4
5
6-32
Deloitte
5140 Yonge Street
Suite 1700
Toronto, ON M2N 6L7
Canada
Tel: 416-601-6150
Fax: 416-601-6151
www.deloitte.ca
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
Intellipharmaceutics International Inc.
We have audited the accompanying consolidated financial statements of Intellipharmaceutics International Inc. and subsidiaries (the
“Company”), which comprise the consolidated balance sheets as at November 30, 2013 and November 30, 2012, and the consolidated
statements of operations and comprehensive loss, shareholders' deficiency, and cash flows for each of the years in the three-year period
ended November 30, 2013 and a summary of significant accounting policies and other explanatory information.
Management's Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting
principles generally accepted in the United States of America, and for such internal control as management determines is necessary to enable
the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditor's Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in
accordance with the Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free from material misstatement. We were not engaged to perform an audit
of the Company’s internal control over financial reporting. Our audits 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 Company’s internal control over financial reporting. Accordingly, we express no such opinion.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements.
The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the consolidated
financial statements, whether due to fraud or error. An audit also includes evaluating the appropriateness of accounting policies used and the
reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial
statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as at
November 30, 2013 and 2012, and the results of its operations and its cash flows for each of the years in the three-year period ended
November 30, 2013 in accordance with accounting principles generally accepted in the United States of America.
Emphasis of Matter
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in
Note 1 to the financial statements, the Company's recurring losses from operations and the accumulated deficit raise substantial doubt about
its ability to continue as a going concern. Management's plans concerning these matters are also discussed in Note 1 to the financial
statements. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Deloitte LLP
Chartered Professional Accountants, Chartered Accountants
Licensed Public Accountants
February 18, 2014
Toronto, Canada
Intellipharmaceutics International Inc.
Consolidated balance sheets
As at November 30, 2013 and 2012 (restated)
(Stated in U.S. dollars)
Assets
Current
Cash and cash equivalents
Accounts receivable (Note 4)
Investment tax credits
Prepaid expenses, sundry and other assets
Deferred offering costs (Note 10)
Property and equipment, net (Note 5)
Liabilities
Current
Accounts payable
Accrued liabilities (Note 6)
Employee costs payable (Note 8)
Current portion of capital lease obligations (Note 9)
Due to related parties (Note 7)
Convertible debenture (Note 7)
Capital lease obligations (Note 9)
Warrant liabilities (Note 14)
Shareholders' deficiency
Capital stock (Notes 10,11 and 19)
Authorized
Unlimited common shares without par value
Unlimited preference shares
Issued and outstanding
21,430,611 common shares (2012 - 17,906,937)
Additional paid-in capital (Note 19)
Accumulated other comprehensive loss
Accumulated deficit
Contingencies (Note 16)
On behalf of the Board:
2013
$
2012
As Restated
Note 19
$
760,586
1,475,745
179,551
312,533
2,728,415
419,777
1,231,309
4,379,501
810,381
669,321
508,616
43,264
759,564
2,791,146
2,105,406
-
5,438,022
10,334,574
497,016
2,778
301,932
137,449
939,175
-
1,535,703
2,474,878
512,360
224,797
663,222
51,524
783,717
2,235,620
-
46,242
1,960,893
4,242,755
11,721,152
23,619,055
284,421
6,128,697
22,428,120
(240,010)
(41,579,701) (30,084,684)
(1,767,877)
(5,955,073)
4,379,501
2,474,878
/s/ Dr. Isa Odidi
Dr. Isa Odidi, Chairman of the Board
/s/ Bahadur Madhani
Bahadur Madhani, Director
See accompanying notes to consolidated financial statements
Page 2
Intellipharmaceutics International Inc.
Consolidated statements of operations and comprehensive loss
for the years ended November 30, 2013, 2012 and 2011
(Stated in U.S. dollars)
Revenues
Licensing (Note 3)
Milestone
Research and development
Other incidental services
Expenses
Research and development
Selling, general and administrative
Depreciation (Note 5)
Write-down on long lived assets (Note 5)
Loss from operations
Fair value adjustment of derivative liabilities (Note 7 and 14)
Financing expense (Note 10)
Net foreign exchange (loss) gain
Interest income
Interest expense
Net loss
Other comprehensive income (loss)
Foreign exchange translation adjustment
Comprehensive loss
2013
$
2012
$
2011
$
1,481,719
43,209
-
2,546
1,527,474
-
-
107,091
-
107,091
-
-
501,814
-
501,814
5,076,236
2,873,091
396,814
-
8,346,141
5,992,417
3,672,313
452,303
107,123
10,224,156
5,125,608
2,925,454
227,456
-
8,278,518
(6,818,667) (10,117,065) (7,776,704)
5,346,878
3,841,233
(3,889,683)
(2,357,732)
-
(115,056)
(70,036)
181,682
(359,554)
60,790
20,691
2,839
(314,896)
(83,473)
(63,406)
(6,136,865) (4,880,277)
(11,495,017)
524,431
(10,970,586)
(124,975)
110,441
(6,261,840) (4,769,836)
Loss per common share, basic and diluted
(0.58)
(0.36)
(0.33)
Weighted average number of common shares outstanding, basic and diluted
19,671,093
17,258,686
14,994,118
See accompanying notes to consolidated financial statements
Page 3
Intellipharmaceutics International Inc.
Consolidated statements of shareholders' deficiency
for the years ended November 30, 2013, 2012 and 2011(restated)
(Stated in U.S. dollars)
Number
Capital stock
amount
$
Additional
paid-in
capital
$
Accumulated
other
comprehensive
(loss) income
$
Total
shareholders'
equity
(deficiency)
$
Accumulated
deficit
$
Balance, November 30, 2010
10,907,054
Issuance of common shares (Note 10)
Shares issued for options exercised (Note 11)
Stock options to employees (Note 11)
Stock options to non-management board members (Note 11)
DSU's to non-management board members (Note 12)
Issuance of shares on exercise of cashless warrants (Note 14)
Other comprehensive gain (net of tax - $Nil)
Net loss
Cancellation on shares exchanged
4,800,000
25,000
-
-
176,469
-
-
(79)
5,001,390
Balance, November 30, 2011 (as restated Note 19)
Issuance of common shares (Note 10)
Share issuance cost (Note 10)
Stock options to employees (Note 11)
Stock options to non-management board members (Note 11)
DSU's to non-management board members (Note 12)
Issuance of shares on exercise of cashless warrants (Note 14)
Other comprehensive loss (net of tax - $Nil)
Net loss
Cancellation on shares exchanged
15,908,444
1,818,182
-
-
-
-
180,315
-
-
(4)
1,998,493
As restated
As restated
Note 19
Note 19
16,969 19,369,005
-
130,183
-
-
-
755,124
-
-
-
885,307
-
(37,018)
674,746
27,714
33,101
-
-
-
-
698,543
5,000,000
(779,271)
902,276 20,067,548
-
-
- 2,251,325
72,520
-
36,727
-
-
1,005,692
-
-
-
-
-
-
5,226,421 2,360,572
Balance, November 30, 2012 (as restated Note 19)
Issuance of common shares (Note 10)
Share issuance cost (Note 10)
Stock options to employees (Note 11)
Stock options to non-management board members (Note 11)
DSU's to non-management board members (Note 12)
Shares issued for options exercised (Note 11)
Issuance of shares on exercise of warrants (Note 14)
Other comprehensive gain (net of tax - $Nil)
Net loss
Cancellation on shares exchanged
Balance, November 30, 2013
See accompanying notes to consolidated financial statements
6,128,697 22,428,120
17,906,937
-
5,460,892
3,315,000
-
(857,278)
-
- 1,017,908
-
135,974
-
-
39,547
-
-
(2,494)
8,459
3,500
-
980,382
205,175
-
-
-
-
-
-
-
-
(1)
3,523,674
5,592,455 1,190,935
21,430,611 11,721,152 23,619,055
(225,476) (19,067,542)
92,956
-
-
-
-
-
-
110,441
-
-
110,441
-
-
-
-
-
-
-
(4,880,277)
-
(4,880,277)
(115,035) (23,947,819)
-
-
-
-
-
-
-
(6,136,865)
-
(6,136,865)
-
-
-
-
-
-
(124,975)
-
-
(124,975)
-
93,165
674,746
27,714
33,101
755,124
110,441
(4,880,277)
-
(3,185,986)
(3,093,030)
5,000,000
(779,271)
2,251,325
72,520
36,727
1,005,692
(124,975)
(6,136,865)
-
1,325,153
-
-
-
-
-
-
-
524,431
(1,767,877)
(240,010) (30,084,684)
5,460,892
-
(857,278)
-
1,017,908
-
135,974
-
39,547
-
5,965
-
980,382
-
524,431
-
- (11,495,017) (11,495,017)
-
-
-
524,431 (11,495,017)
(4,187,196)
284,421 (41,579,701)
(5,955,073)
Page 4
Intellipharmaceutics International Inc.
Consolidated statements of cash flows
for the years ended November 30, 2013, 2012 and 2011
(Stated in U.S. dollars)
Loss
Items not affecting cash
Depreciation
Stock-based compensation (Note 11)
Deferred share units (Note 12)
Interest accrual
Fair value adjustment of derivative liabilities (Note 7 and 14)
Write-down on long lived assets (Note 5)
Financing expense (Note 10)
Unrealized foreign exchange loss (gain)
Change in non-cash operating assets & liabilities
Accounts receivable
Investment tax credits
Prepaid expenses and sundry assets
Accounts payable and accrued liabilities
Deferred revenue
Cash flows used in operating activities
Financing activities
Payments to related parties (Note 7)
Repayment of capital lease obligations
Issuance of shares on exercise of stock options (Note 11)
Proceeds from issuance of shares and warrants, gross (Note 10)
Proceeds from issuance of shares on exercise of warrants (Note 14)
Proceeds from convertible debenture (Note 7)
Proceeds from issuance of shares, gross (Note 10)
Share issuance cost (Note 10)
Cash flows provided from financing activities
Investing activity
Purchase of property and equipment
Cash flows used in investing activities
2013
$
2012
$
2011
$
(11,495,017) (6,136,865) (4,880,277)
396,814
1,153,882
39,548
43,538
3,889,683
-
115,056
403,180
452,303
2,323,845
36,727
45,278
227,456
702,460
33,101
7,739
(3,841,233) (5,346,878)
-
884,587
203,604
107,123
-
(145,724)
(1,472,966)
106,744
(181,402)
74,144
-
(1,764)
869,406
17,189
203,743
98,186
(6,926,796) (7,654,361) (6,981,448)
605
96,264
(10,206)
(475,387)
(107,091)
-
-
(44,364)
(49,989)
5,965
6,196,800
511,743
1,500,000
-
(836,099)
7,328,420
-
-
187,500
-
5,000,000
(779,271)
4,363,865
(801,551)
(22,452)
93,165
12,000,000
-
-
-
-
11,269,162
(122,017) (1,036,092)
(262,142)
(122,017) (1,036,092)
(262,142)
Effect of foreign exchange gain on cash held in foreign currency
(16,037)
6,516
2,380
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Supplemental cash flow information
Interest paid (Note 7)
Taxes paid
See accompanying notes to consolidated financial statements
263,570
497,016
(4,320,072) 4,027,952
789,136
4,817,088
760,586
497,016
4,817,088
176,311
-
39,173
-
163,099
-
Page 5
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2013, 2012 and 2011
(Stated in U.S. dollars)
1.
Nature of operations
Intellipharmaceutics International Inc. (“IPC” or the “Company”) is a pharmaceutical company specializing in the research,
development and manufacture of novel and generic controlled-release and targeted-release oral solid dosage drugs.
On October 22, 2009, IntelliPharmaCeutics Ltd. (“IPC Ltd. “) and Vasogen Inc. (“Vasogen”) completed a court approved plan of
arrangement and merger (the “IPC Arrangement Agreement”), resulting in the formation of the Company, which is incorporated
under the laws of Canada. The Company’s common shares are traded on the Toronto Stock Exchange and NASDAQ.
The Company earns revenues from development contracts which provide upfront fees, milestone payments, reimbursement of
certain expenditures and licensing income upon commercialization of its products. In November 2013, U.S. Food and Drug
Administration (“FDA”) granted the Company final approval to market the Company’s first product, dexmethylphenidate
hydrochloride extended-release capsules for the 15 and 30 mg strengths.
The Company has incurred losses from operations since inception, and has an accumulated deficit of $41,579,701 as at November
30, 2013 (November 30, 2012 and 2011 - $30,084,684 and $23,947,819) respectively. The Company has funded its research and
development activities principally through the issuance of securities, loans from related parties, funds from the IPC Arrangement
Agreement and funds received under development agreements. There is no certainty that any funding will be available going
forward.
Going concern
The consolidated financial statements are prepared on a going concern basis and substantial doubt exists on the appropriateness of this.
In order for the Company to continue operations at existing levels and fund any significant expansion of its operation, the Company
will require significant additional capital. Although there can be no assurances, such financing may come from revenues from proceeds
of the Company’s at-the-market offering program, and from sales of the Company’s dexmethylphenidate hydrochloride extended-
release products. Other potential sources of capital may include collection of anticipated revenues resulting from future
commercialization activities, development agreements or marketing license agreements, cost savings associated with managing
operating expense levels, equity and/or debt financings, and/or new strategic partnership agreements funding some or all costs of
development, although there can be no assurance that the Company will be able to obtain any such capital on terms or in amounts
sufficient to meet its needs or at all. The availability of equity or debt financing will be affected by, among other things, the results of
the Company’s research and development, its ability to obtain regulatory approvals, the market acceptance of its products, the state of
the capital markets generally, strategic alliance agreements, and other relevant commercial considerations. In addition, if the Company
raises additional funds by issuing equity securities, its then existing security holders will likely experience dilution, and the incurring of
indebtedness would result in increased debt service obligations and could require the Company to agree to operating and financial
covenants that would restrict its operations. In the event that the Company does not obtain additional capital, there may be substantial
doubt about its ability to continue as a going concern and realize its assets and pay its liabilities as they become due. Any failure by the
Company to raise additional funds on terms favorable to the Company, or at all, may require the Company to significantly change or
curtail its current or planned operations in order to conserve cash until such time, if ever, that sufficient proceeds from operations are
generated, and could result in its not taking advantage of business opportunities, in the termination or delay of clinical trials for one or
more of its product candidates, in curtailment of its product development programs designed to identify new product candidates, in the
sale or assignment of rights to its technologies, products or product candidates, and/or its inability to file abbreviated new drug
applications (“ANDAs”) or New Drug Applications (“NDAs”) at all or in time to competitively market its products or product
candidates.
The audited consolidated financial statements do not include any adjustments that might result from the outcome of uncertainties
described above. If the going concern assumption was not appropriate for these financial statements, then adjustments would be
necessary to the carrying values of assets and liabilities, the reported expenses and the balance sheet classifications used. Such
adjustments could be material.
Page 6
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2013, 2012 and 2011
(Stated in U.S. dollars)
2.
Basis of presentation
(a)
Basis of consolidation
These consolidated financial statements include the accounts of the Company and its wholly owned operating subsidiaries,
IPC Ltd., Intellipharmaceutics Corp. (“IPC Corp”), and Vasogen Corp. These consolidated financial statements also include
the results of Vasogen Ireland Ltd. up to June 27, 2012, the date of its dissolution.
All inter-company accounts and transactions have been eliminated on consolidation.
(b)
Use of estimates
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the
United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the year. Actual results could differ from those estimates.
Areas where significant judgment is involved in making estimates are: the determination of estimated useful lives of property
and equipment; the fair values of financial assets and liabilities; the determination of units of accounting for revenue
recognition; the accrual of licensing and milestone revenue; the fair value of stock options and the determination of
performance criteria for expensing stock-based payments; the fair value of warrants; the fair value of conversion option
embedded derivative; evaluation of income tax positions; the determination of valuation allowances; the determination of
investment tax credits; deferred revenue; forecasting future cash flows for assessing whether there are any impairments of
long-lived assets; and the going concern assumption.
3.
Significant accounting policies
(a)
Cash and cash equivalents
The Company considers all highly liquid securities with an original maturity of three months or less to be cash equivalents.
Cash equivalent balances consist of bankers’ acceptances and bank accounts with variable, market rates of interest.
The financial risks associated with these instruments are minimal and the Company has not experienced any losses from
investments in these securities. The carrying amount of cash and cash equivalents approximates its fair value due to its short-
term nature.
(b)
Accounts receivable
The Company reviews its sales and accounts receivable aging and determines whether an allowance for doubtful accounts is
required.
(c)
Financial instruments
The Company evaluates all of its financial instruments to determine if such instruments are derivatives or contain features that
qualify as embedded derivatives. For derivative financial instruments that are classified as liabilities, the derivative instrument
is initially recorded at its fair value using the appropriate valuation methodology and is then re-valued at each reporting date,
with changes in the fair value reported in the consolidated statements of operations and comprehensive loss.
Page 7
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2013, 2012 and 2011
(Stated in U.S. dollars)
3.
Significant accounting policies (continued)
(d)
Investment tax credits
The investment tax credits (“ITC") receivable are amounts considered recoverable from the Canadian federal and provincial
governments under the Scientific Research & Experimental Development (“SR&ED”) incentive program. The amounts
claimed under the program represent the amounts submitted by management based on research and development costs
incurred during the year up to November 30, 2013. Realization is subject to government approval. Any adjustment to the
amounts claimed will be recognized in the year in which the adjustment occurs. Refundable ITCs claimed relating to capital
expenditures are credited to property and equipment. Refundable ITCs claimed relating to current expenditures are netted
against research and development expenditures.
(e)
Property and equipment
Property and equipment are recorded at cost. Equipment acquired under capital leases are recorded net of imputed interest,
based upon the net present value of future payments. Assets under capital leases are pledged as collateral for the related lease
obligation. Repairs and maintenance expenditures are charged to operations; major betterments and replacements are
capitalized. Depreciation bases and rates are as follows:
Assets
Basis
Rate
Computer equipment
Computer software
Furniture and fixtures
Laboratory equipment
Leasehold improvements
Declining balance
Declining balance
Declining balance
Declining balance
Straight line
30%
50%
20%
20%
Over term of lease
Leasehold improvements and assets acquired under capital leases are depreciated over the term of their useful lives or the lease
period, whichever is shorter. The charge to operations resulting from depreciation of assets acquired under capital leases is
included with depreciation expense.
(f)
Impairment of long-lived assets
Long-lived assets are reviewed for impairment when events or circumstances indicate that the carrying value of an asset may
not be recoverable. For assets that are to be held and used, impairment is recognized when the sum of estimated undiscounted
cash flows associated with the asset or group of assets is less than its carrying value. If impairment exists, an adjustment is
made to write the asset down to its fair value, and a loss is recorded as the difference between the carrying value and fair
value. Fair values are determined based on internal or external appraisals.
(g)
Warrants
The Company issued warrants as described in Notes 10 and 14. The warrants are presented as a liability because they do not
meet the criteria of Accounting Standard Codification (“ASC”) topic 480 for equity classification. Subsequent changes in the
fair value of the warrants are recorded in the consolidated statements of operations and comprehensive loss.
(h)
Convertible debenture
The Company issued a convertible debenture as described in Note 7. The conversion option is bifurcated from its host
contract and the fair value of the conversion option is characterized as an embedded derivative upon issuance as it meets the
criteria of ASC Topic ASC815-15-25-1 Embedded Derivatives. Subsequent changes in the fair value of the embedded
derivative are recorded in the consolidated statements of operations and comprehensive loss. The proceeds received from the
Debenture less the initial amount allocated to the embedded derivative are allocated to the liability and are accreted over the
life of the Debenture using the imputed rate of interest.
Page 8
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2013, 2012 and 2011
(Stated in U.S. dollars)
3.
Significant accounting policies (continued)
(i)
Revenue recognition
The Company accounts for revenue in accordance with the provision of ASC topic 605 Revenue Recognition. The Company
earns revenue from non-refundable upfront fees, milestone payments upon achievement of specified research or
development, exclusivity milestone payments and licensing payments on sales of resulting products and other incidental
services. Revenue is realized or realizable and earned when persuasive evidence of an arrangement exists, delivery has
occurred or services have been rendered, the price to the customer is fixed or determinable, and collectability is reasonably
assured. From time to time, the Company enters into transactions that represent multiple-element arrangements. Management
evaluates arrangements with multiple deliverables to determine whether the deliverables represent one or more units of
accounting for the purpose of revenue recognition.
A delivered item is considered a separate unit of accounting if the delivered item has stand-alone value to the customer, the
fair value of any undelivered items can be reliably determined, and the delivery of undelivered items is probable and
substantially in the Company's control.
The relevant revenue recognition accounting policy is applied to each separate unit of accounting.
Licensing
The Company recognizes license revenue from the licensing of the Company's drug delivery technologies, products and
product candidates. Licensing revenue is recognized as earned in accordance with the contract terms when the amounts can
be reasonably estimated and collectability is reasonably assured.
The Company has a License and Commercialization Agreement with Par. Under the exclusive territorial license rights
granted to Par, the agreement requires that Par manufacture, promote, market, sell and distribute the product. License
revenue amounts receivable by the Company under this agreement are calculated and reported to the Company by Par, with
such amounts generally based upon net product sales and net profit which include estimates for chargebacks, rebates, product
returns, and other adjustments. License revenue payments received by the Company from Par under this agreement are not
subject to deductions for chargebacks, rebates, product returns, and other pricing adjustments. Based on this arrangement
and the guidance per ASC topic 605, the Company records license revenue as earned in the consolidated statements of
operations and comprehensive loss.
Milestones
In connection with the License and Commercialization Agreement with Par, if the Company’s product is the only generic in
the market or if there is only one generic competitor, a milestone payment is earned. Revenue is recognized when the
milestones are achieved. The milestone method recognizes revenue on substantive milestone payments in the period the
milestone is achieved. Milestones are considered substantive if all of the following conditions are met: (i) the milestone is
commensurate with either the vendor’s performance to achieve the milestone or the enhancement of the value of the delivered
item or items as a result of a specific outcome resulting from the vendor’s performance to achieve the milestone; (ii) the
milestone relates solely to past performance; and (iii) the milestone is reasonable relative to all of the deliverables and payment
terms within the arrangement. Nonsubstantive milestone payments that might be paid to the Company based on the passage of
time or as a result of a partner’s performance are allocated to the units of accounting within the arrangement; they are
recognized as revenue in a manner similar to those units of accounting.
Research and development
Under arrangements where the license fees and research and development activities can be accounted for as a separate unit of
accounting, non-refundable upfront license fees are deferred and recognized as revenue on a straight-line basis over the
expected term of the Company's continued involvement in the research and development process.
Page 9
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2013, 2012 and 2011
(Stated in U.S. dollars)
3.
Significant accounting policies (continued)
(i)
Revenue recognition (continued)
Research and development (continued)
Deferred revenue represents the funds received from clients, for which the revenues have not yet been earned, as the
milestones have not been achieved, or in the case of upfront fees for drug development, where the work remains to be
completed.
Other incidental services
Incidental services which we may provide from time to time include, consulting advice provided to other organizations
regarding FDA standards. Revenue is earned and realized when all of the following conditions are met: (i) there is persuasive
evidence of an arrangement; (ii) service has been rendered; (iii) the sales price is fixed or determinable; and (iv) collectability
is reasonably assured.
(j)
Research and development costs
Research and development costs related to continued research and development programs are expensed as incurred in
accordance with ASC topic 730. However, materials and equipment are capitalized and amortized over their useful lives if
they have alternative future uses.
(k)
Income taxes
The Company uses the liability method of accounting for income taxes. Under the liability method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases and for losses and tax credit carry forwards. Significant
judgment is required in determining whether deferred tax assets will be realized in full or in part. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the year that includes the
date of enactments. A valuation allowance is provided for the portion of deferred tax assets that is more likely than not to
remain unrealized.
The Company accounts in accordance with ASC topic 740-10. This ASC topic requires that uncertain tax positions are
evaluated in a two-step process, whereby (i) the Company determines whether it is more likely than not that the tax positions
will be sustained based on the technical merits of the position and (ii) those tax positions that meet the more likely than not
recognition threshold, the Company would recognize the largest amount of tax benefit that is greater than 50% likely of being
realized upon ultimate settlement with the related tax authority. Changes in recognition or measurement are reflected in the
period in which the change in judgment occurs. The cumulative effects of the application of the provisions of ASC topic 740-
10 are described in Note 15.
The Company records any interest related to income taxes in interest expense and penalties in selling, general and
administrative expense.
(l)
Share issue costs
Share issue costs are recorded as a reduction of the proceeds from the issuance of capital stock. Share issue costs incurred in
respect of issuing common shares in the at-the-market offering facility have been deferred and are recorded as deferred
offering costs in 2013.
Page 10
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2013, 2012 and 2011
(Stated in U.S. dollars)
3.
Significant accounting policies (continued)
(m)
Translation of foreign currencies
The consolidated financial statements of the Company are measured using the Canadian dollar as the functional currency. The
Company's reporting currency is the U.S. dollar. The financial results of the Canadian operations are measured using the
Canadian dollar as the functional currency. Assets and liabilities of the Canadian operations have been translated at year end
exchange rates and related revenue and expenses have been translated at average exchange rates for the year. Accumulated
gains and losses resulting from the translation of the consolidated financial statements of the Canadian operations are included
as part of accumulated other comprehensive (loss) income, a separate component of shareholders' equity.
In respect of other transactions denominated in currencies other than the respective entities' functional currencies, the
monetary assets and liabilities are translated at the year end rates. Revenue and expenses are translated at rates of exchange
prevailing on the transaction dates. Non-monetary balance sheet and related income statement accounts are remeasured into
U.S. dollar using historical exchange rates. All of the exchange gains or losses resulting from these other transactions are
recognized in the consolidated statements of operations and comprehensive loss.
(n)
Stock-based compensation
The Company has a stock-based compensation plan which authorizes the granting of various equity-based incentives including
stock options and restricted share units (“RSU”s). The Company calculates stock-based compensation using the fair value
method, under which the fair value of the options at the grant date is calculated using the Black-Scholes Option Pricing
Model, and subsequently expensed over the expected life of the option. The provisions of the Company's stock-based
compensation plans do not require the Company to settle any options by transferring cash or other assets, and therefore the
Company classifies the awards as equity.
Stock-based compensation expense recognized during the period is based on the value of stock-based payment awards that are
ultimately expected to vest. The Company estimates forfeitures at the time of grant and revised, if necessary, in subsequent
periods if actual forfeitures differ from those estimates. The stock-based compensation expense is recorded in the consolidated
statements of operations and comprehensive loss under research and development expense and under selling, general and
administration expense. Note 11 provides supplemental disclosure of the Company's stock options.
(o)
Deferred Share Units
Deferred Share Units (“DSU”s) are valued based on the trading price of the Company’s common shares on the Toronto Stock
Exchange. The Company records the value of the DSU’s owing to non-management board members in the consolidated
statement of deficiency.
(p)
Loss per share
Basic loss per share (“EPS”) is computed by dividing the loss attributable to common shareholders by the weighted average
number of common shares outstanding. Diluted EPS reflects the potential dilution that could occur from common shares
issuable through the exercise or conversion of stock options, restricted stock awards, warrants and convertible securities. In
certain circumstances, the conversion of options, warrants and convertible securities are excluded from diluted EPS if the
effect of such inclusion would be anti-dilutive.
The dilutive effect of stock options is determined using the treasury stock method. Stock options and warrants to purchase
7,034,647, 7,830,059 and 7,876,229 common shares of the Company during fiscal 2013, 2012, and 2011, respectively, were
not included in the computation of diluted EPS because the Company has incurred a loss for the years ended November 30,
2013, 2012 and 2011 as the effect would be anti-dilutive.
Page 11
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2013, 2012 and 2011
(Stated in U.S. dollars)
3.
Significant accounting policies (continued)
(q)
Comprehensive loss
The Company follows ASC topic 810-10. This statement establishes standards for reporting and display of comprehensive
(loss) income and its components. Comprehensive loss is net loss plus certain items that are recorded directly to shareholders'
equity. Other than foreign exchange gains and losses arising from cumulative translation adjustments, the Company has no
other comprehensive loss items.
(r)
Fair value measurement
Under ASC topic 820, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants at the measurement date (i.e., an exit price). ASC topic 820 establishes a
hierarchy for inputs to valuation techniques used in measuring fair value that maximizes the use of observable inputs and
minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable
inputs are inputs that reflect assumptions market participants would use in pricing the asset or liability developed based on
market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company's
own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the
best information available in the circumstances. There are three levels to the hierarchy based on the reliability of inputs, as
follows:
● Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
● Level 2 - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either
directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, or quoted
prices for identical or similar assets and liabilities in markets that are not active.
● Level 3 - Unobservable inputs for the asset or liability.
The degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3.
(s)
Recently adopted accounting pronouncements
In February 2013, the FASB provided amendments to Accounting Standards Update (“ASU”) No. 2013-02 “Comprehensive
Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income”. The
amendments are effective prospectively for reporting periods beginning after December 15, 2012. Early adoption is permitted.
The Company adopted the amendments on March 1, 2013. The adoption did not have an impact on the Company’s financial
position, results of operations or cash flow.
(t)
Future Accounting pronouncements
In March 2013, the FASB provided amendments to ASU No. 2013-05 “Foreign Currency Matters (Topic 830): Parent’s
Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets
within a Foreign Entity or of an Investment in a Foreign Entity (a consensus of the FASB Emerging Issues Task Force)”. The
amendments are effective prospectively for reporting periods beginning after December 15, 2013. The Company does not
expect the adoption of the amendments to have a material impact on the Company’s financial position, results of operations or
cash flow.
Page 12
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2013, 2012 and 2011
(Stated in U.S. dollars)
3.
Significant accounting policies (continued)
(t)
Future Accounting pronouncements (continued)
In July 2013, the FASB issued ASU No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss
Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists, which requires an entity to present an unrecognized
tax benefit as a reduction of a deferred tax asset for an net operating loss (NOL) carryforward, or similar tax loss or tax credit
carryforward, rather than as a liability when (1) the uncertain tax position would reduce the NOL or other carryforward under
the tax law of the applicable jurisdiction and (2) the entity intends to use the deferred tax asset for that purpose. The ASU does
not require new recurring disclosures. It is effective prospectively for fiscal years, and interim periods within those years,
beginning after December 15, 2013. Early adoption and retrospective application are permitted. The Company does not expect
the adoption of the amendments to have a material impact on the Company’s financial position, results of operations or cash
flow.
4.
Accounts receivable
The Company currently has no debt agreements in place whereby any amount of receivables serve as collateral. The Company has no
off-balance-sheet credit exposures and has no foreclosed or repossessed assets. The Company has had no impaired loans related to
receivables and has identified no loss contingencies related to the receivables at November 30, 2013 and November 30, 2012. Risks
and uncertainties and credit quality information related to accounts receivable have been disclosed in Note 17.
5.
Property and equipment
Computer equipment
Computer software
Furniture and fixtures
Laboratory equipment
Leasehold improvements
Laboratory equipment under capital lease
Computer equipment under capital lease
Computer equipment
Computer software
Furniture and fixtures
Laboratory equipment
Leasehold improvements
Laboratory equipment under capital lease
Computer equipment under capital lease
November 30, 2013
Net book
value
$
Accumulated
amortization
$
Cost
$
228,854
113,862
126,690
2,378,621
1,111,731
202,584
76,458
4,238,800
177,831
79,603
91,335
51,023
34,259
35,355
1,404,479 974,142
24,648
1,087,083
100,138 102,446
67,022
9,436
3,007,491 1,231,309
November 30, 2012
Net book
value
$
Accumulated
amortization
$
Cost
$
243,798
126,568
140,829
2,602,478
1,108,246
225,192
84,990
4,532,101
188,935
53,916
98,091
54,863
72,652
42,738
1,383,709 1,218,769
-
1,108,246
88,617 136,575
74,884
10,106
2,996,398 1,535,703
Depreciation for the year ended November 30, 2013 was $396,814 (2012 - $452,303; 2011 - $227,456).
Page 13
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2013, 2012 and 2011
(Stated in U.S. dollars)
5.
Property and equipment (continued)
Property and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of
an asset may not be recoverable. Impairment is assessed by comparing the carrying amount of an asset with the sum of the
undiscounted cash flows expected from its use and disposal, and as such requires the Company to make significant estimates on
expected revenues from the commercialization of its products and services and the related expenses. The Company records a write-
down for long-lived assets which have been abandoned and do not have any residual value. For the year ended November 30, 2013, the
Company recorded a $Nil write-down of long-lived assets (2012 - $107,123; 2011 – $Nil).
6.
Accrued liabilities
Professional fees
Other
7.
Due to related parties
November 30,
2013
$
November 30,
2012
$
468,986
200,335
669,321
116,179
108,618
224,797
Amounts due to the related parties are payable to entities controlled by two shareholders who are also officers and directors of the
Company.
Promissory note payable to two directors and officers of the Company,
unsecured, 6% annual interest rate on the outstanding loan balance (i) (2013 -
C$778,491; 2012 - C$750,534)
Note payable to an entity controlled by shareholders, officers and directors of
the Company, unsecured, non-interest bearing with no fixed repayment terms
(2013 - C$28,167; 2012 - C$28,167)
November 30,
2013
$
November 30,
2012
$
733,042
755,368
26,522
759,564
28,349
783,717
Convertible debenture payable to two directors and officers of the Company,
unsecured, 12% annual interest rate, payable monthly(ii)
2,105,406
-
(i)
Promissory note payable
The promissory note dated September 10, 2004 issued by IPC Corp to Dr. Isa Odidi and Dr. Amina Odidi (the “Promissory
Note”), principal shareholders, directors and executive officers of the Company was amended effective October 22, 2009
(“effective date”), to provide that the principal amount thereof shall be payable when payment is required solely out of
(i) revenues earned by IPC Corp following the effective date, and/or proceeds received by any IPC Company from any
offering of its securities following the effective date, other than the proceeds from the transactions completed in February
2011, March 2012, March 2013 and July 2013 (Note 10) and/or amounts received by IPC Corp for scientific research tax
credits of IPC Corp and (ii) up to C$800,000 from the Net Cash (as defined in the IPC Arrangement Agreement). During the
year ended November 30, 2013, no principal repayment was made (2012 - $Nil; 2011 -$801,551) and interest payment of
$16,640 (C$17,671) (2012 - $39,173; 2011 - $163,099) in respect of the promissory note was made by the Company in
accordance with the terms of the IPC Arrangement Agreement.
Page 14
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2013, 2012 and 2011
(Stated in U.S. dollars)
7.
Due to related parties (continued)
(i)
Promissory note payable (continued)
Interest expense on the promissory note payable to related parties for the year ended November 30, 2013 is $43,538 (2012 -
$45,278; 2011 - $73,011) and has been included in the consolidated statement of operations and comprehensive loss.
(ii)
Convertible debenture
On January 10, 2013, the Company completed a private placement financing (the "Financing") of an unsecured convertible
debenture in the principal amount of $1.5 million (the "Debenture"), which will mature January 1, 2015. The Debenture bears
interest at a rate of 12% per annum, payable monthly, is pre-payable at any time at the option of the Company, and is
convertible at any time into 500,000 common shares at a conversion price of $3.00 per common share at the option of the
holder.
Dr. Isa Odidi and Dr. Amina Odidi, principal shareholders, directors and executive officers of the Company purchased the
Debenture and provided the Company with the $1.5 million of the proceeds for the Debenture.
The conversion price of the Debenture is in U.S. dollars and IPC’s functional currency is Canadian dollars. Under U.S. GAAP
where the conversion price of the Debenture is denominated in a currency other than an entity's functional currency, the
conversion option meets the definition of an embedded derivative. The conversion option is bifurcated from its host contract
and the fair value of the conversion option characterized as an embedded derivative upon issuance. The embedded derivative
is presented together on a combined basis with the host contract. The derivative is re-measured at the end of every reporting
period with the change in value reported in the consolidated statements of operations and comprehensive loss.
The proceeds received from the Debenture less the initial amount allocated to the embedded derivative were allocated to the
liability and are accreted over the life of the Debenture using the imputed rate of interest.
The fair value of the conversion option at January 10, 2013 using the Black-Scholes Option Pricing Model were initially
estimated to be $220,100, using volatility of 46.6%, risk-free interest rate of 0.26%, expected life of two years, and dividend
yield of Nil. The fair value of the conversion option at November 30, 2013 using the Black-Scholes Option Pricing Model was
estimated to be $728,950, using volatility of 64.6%, risk-free interest rate of 0.12%, expected life of 1.1 years, and dividend
yield of Nil. This amount has been recorded in the convertible debenture line on the consolidated balance sheet. The change
in fair value of the conversion option from the previously recorded amount to the year ended November 30, 2013 is a loss of
$533,149 (2012 - $Nil; 2011 - $Nil), and has been recorded as a fair value adjustment of derivative liabilities in the
consolidated statements of operations and comprehensive loss.
The proceeds of $1.5 million less the initial fair value of the conversion option embedded derivative of $220,100, totaled
$1,279,900 and is accreted at an annual imputed interest rate of 8%, over the life of the Debenture.
Accreted interest expense during year ended November 30, 2013 is $96,556 (2012 - $Nil; 2011 -$Nil), and has been included
in the consolidated statements of operations and comprehensive loss. In addition, the coupon interest on the Debenture for the
year ended November 30, 2013 is $159,671 (2012 - $Nil; 2011 - $Nil), and has also been included in the consolidated
statements of operations and comprehensive loss.
As described in Note 8, the Company had salaries payable to the two principal shareholders.
Page 15
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2013, 2012 and 2011
(Stated in U.S. dollars)
8.
Employee costs payable
As at November 30, 2013, the Company had $336,327 (2012 - $472,619) salaries payable to Dr. Isa Odidi and Dr. Amina Odidi,
principal shareholders, directors and executive officers of the Company and $172,289 (2012 - $190,603) for other amounts payable to
certain employees. These balances are due on demand and therefore presented as current in nature.
9.
Lease obligations
The Company leases facilities under an operating lease which expires in November 2014, with an option to extend the lease on
comparable terms for five additional years. The Company also leases various computers and equipment under capital leases. Future
minimum lease payments under leases with terms of one year or more are as follows at November 30, 2013:
Year ending November 30,
2014
Less: amounts representing interest at 14%
Less: current portion
Balance, long-term portion
10.
Capital stock
Authorized, issued and outstanding
Capital
Lease
$
Operating
Lease
$
46,079
46,079
2,815
43,264
43,264
-
84,356
84,356
-
84,356
84,356
-
(a)
The Company is authorized to issue an unlimited number of common shares, all without nominal or par value and an
unlimited number of preference shares. As at November 30, 2013 the Company has 21,430,611 (2012 – 17,906,937)
common shares issued and outstanding, and no preference shares issued and outstanding.
Two officers and directors of IPC owned directly and through their family holding company (“Odidi Holdco”) 5,997,751
(2012 - 6,005,751) common shares or approximately 28% (2012 – 34%) of IPC.
Each common share of the Company entitles the holder thereof to one vote at any meeting of shareholders of the Company,
except meetings at which only holders of a specified class of shares are entitled to vote.
Common shares of the Company are entitled to receive, as and when declared by the board of directors of the Company,
dividends in such amounts as shall be determined by the board. The holders of common shares of the Company have the right
to receive the remaining property of the Company in the event of liquidation, dissolution, or winding-up of the Company,
whether voluntary or involuntary.
The preference shares may at any time and from time to time be issued in one or more series. The board of directors will, by
resolution, from time to time, before the issue thereof, fix the rights, privileges, restrictions and conditions attaching to the
preference shares of each series. Except as required by law, the holders of any series of preference shares will not as such be
entitled to receive notice of, attend or vote at any meeting of the shareholders of the Company. Holders of preference shares
will be entitled to preference with respect to payment of dividends and the distribution of assets in the event of liquidation,
dissolution or winding-up of the Company, whether voluntary or involuntary, or any other distribution of the assets of the
Company among its shareholders for the purpose of winding up its affairs, on such shares over the common shares of the
Company and over any other shares ranking junior to the preference shares.
Page 16
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2013, 2012 and 2011
(Stated in U.S. dollars)
10.
Capital stock (continued)
Authorized, issued and outstanding (continued)
(b)
On February 1, 2011, the Company completed a private offering for the sale and issuance of 4,800,000 units of the
Company. Each unit consisted of one share of common stock, a five year Series A common share purchase warrant to
purchase one half of a share of common stock at an exercise price of $2.50 per whole share and a two year Series B
common share purchase warrant to purchase one half of a share of common stock at an exercise price of $2.50 per whole
share for gross proceeds of $12,000,000. The Company also issued to the placement agents 96,000 warrants to purchase a
share of common stock at an exercise price of $3.125 per whole share.
The holders of Series A and Series B common share purchase warrants and placement agents warrants are entitled to a cashless
exercise under which the number of shares to be issued will be based on the number of shares for which warrants are exercised
times the difference between the market price of the common share and the exercise price divided by the market price.
Under U.S. GAAP where the strike price of the warrants is denominated in a currency other than an entity's functional
currency, the warrants would not be considered indexed to the entity’s own stock, and would consequently be considered to be
a derivative liability. Also under U.S. GAAP, warrants with the cashless exercise option satisfying the explicit net settlement
criteria are considered a derivative liability.
The Series A, Series B common share purchase warrants and placement agents warrants are denominated in U.S. dollars and
IPC’s functional currency is Canadian dollars. As a result, the Company determined that these warrants are not considered
indexed to the Company’s own stock and characterized the fair value of these warrants as derivative liabilities upon issuance.
The derivative has been subsequently marked to market through the consolidated statements of operations and comprehensive
loss.
The Company incurred financing expenses of $2,357,732, which includes placement agent warrants with a fair value of
$229,005 and $655,582 as the cost of the private offering.
The Company determined that the fair value of the warrant liability at issuance to be $12,655,582 based upon a Black-Scholes
Options Pricing Model calculation (Note 14). The Company recorded the full value of the derivative as a liability at issuance
with an offset to valuation discount. As the fair value of the liability of $12,655,582 exceeded the proceeds of $12,000,000,
the excess of the liability over the proceeds amount of $655,582 was considered to be a cost of the private offering, which was
included in the financing expenses.
(c)
(d)
In March 2012, the Company completed a registered direct common share offering for gross proceeds of $5,000,000. The
Company sold an aggregate of 1,818,182 shares to U.S. institutional investors at a price of $2.75 per share. Professional,
regulatory and other costs in the amount of $779,271 directly attributable to the common share offering have been recorded
as share issuance costs in shareholders’ deficiency.
In March 2013, the Company completed a registered direct unit offering for gross proceeds of $3,121,800 at a price of
$1.72 per unit. The Company sold units comprised of an aggregate of 1,815,000 common shares and warrants to purchase
an additional 453,750 common shares. The warrants are exercisable for a term of five years and an exercise price of $2.10
per common share. After placement agent fees and offering expenses, the Company received net proceeds from the offering
of approximately $2.7 million. The Company determined the fair value of the warrant liability at issuance to be $407,558
using the Black-Scholes Option Pricing Model (Note 14). The direct costs related to the issuance of the common shares
were $389,289 and were recorded as an offset against shareholders’ deficiency and the direct costs related to the issuance of
the warrants were $57,531 were recorded in the consolidated statements of operations and comprehensive loss.
Page 17
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2013, 2012 and 2011
(Stated in U.S. dollars)
10.
Capital stock (continued)
Authorized, issued and outstanding (continued)
(e)
(f)
In July 2013, the Company completed an underwritten public offering for gross proceeds of $3,075,000 at a price of $2.05
per unit. The Company sold units comprised of an aggregate of 1,500,000 common shares and warrants to purchase an
additional 375,000 common shares. The warrants are exercisable for a term of five years and have an exercise price of
$2.55 per common share. After placement agent fees and estimated offering expenses, the Company received net proceeds
from the offering of approximately $2.5 million. The Company determined the fair value of the warrant liability at issuance
to be $328,350 using the Black-Scholes Option Pricing Model (Note 14). The direct costs related to the issuance of the
common shares were $467,989 and were recorded as an offset against shareholders’ deficiency and the direct costs related
to the issuance of the warrants were $57,525 were recorded in the consolidated statements of operations and comprehensive
loss.
In November 2013, the Company entered into an equity distribution agreement with Roth Capital Partners, LLC (“Roth”),
pursuant to which the Company may from time to time sell up to 5,305,484 of the Company’s common shares for up to an
aggregate of $16.8 million (or such lesser amount as may be permitted under applicable securities laws and regulations)
through at-the-market issuances on the NASDAQ or otherwise. Under the equity distribution agreement, the Company
may at its discretion, from time to time, offer and sell common shares through Roth or directly to Roth for resale. Sales of
common shares through Roth, if any, will be made at such time and at such price as are acceptable to the Company, from
time to time, by means of ordinary brokers' transactions on the NASDAQ or otherwise at market prices prevailing at the
time of sale or as determined by the Company. The Company is not required to sell shares under the equity distribution
agreement. The Company will pay Roth a commission, or allow a discount, of 2.75% of the gross proceeds that the
Company received from any sales of common shares under the equity distribution agreement. The Company has also
agreed to reimburse Roth for certain expenses relating to the offering. The direct costs related to the facility were recorded
as deferred offering costs as at November 30, 2013. No sales were made under the equity distribution agreement in the
year ended November 30, 2013.
11.
Options
All grants of options to employees after October 22, 2009 are made from the Employee Stock Option Plan (the “Employee Stock
Option Plan”). The maximum number of common shares issuable under the Employee Stock Option Plan is limited to 10% of the
issued and outstanding common shares of the Company from time to time, or 2,143,061 based on the number of issued and outstanding
common shares as at November 30, 2013. As at November 30, 2013, 1,691,132 options are outstanding and there were 451,929 options
available for grant under the Employee Stock Option Plan. Each option granted allows the holder to purchase one common share at an
exercise price not less than the closing price of the Company's common shares on the Toronto Stock Exchange on the last trading day
prior to the grant of the option. Options granted under these plans generally have a maximum term of 10 years and generally vest over a
period of up to three years.
In August 2004, the Board of Directors of IPC Ltd. approved a grant of 2,763,940 performance-based stock options, to two executives
who were also the principal shareholders of IPC Ltd. The vesting of these options is contingent upon the achievement of certain
performance milestones. A total of 1,658,364 performance-based stock options have been vested as of November 30, 2013. These
options were still outstanding as at November 30, 2013 and are scheduled to expire in September 2014.
In the year ended November 30, 2013, 391,000 (2012 – 955,000) stock options to management, directors and employees were granted.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes Option-Pricing Model, consistent with the
provisions of ASC topic 718.
Option pricing models require the use of subjective assumptions, changes in these assumptions can materially affect the fair value of
the options.
Page 18
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2013, 2012 and 2011
(Stated in U.S. dollars)
11.
Options (continued)
The Company calculates expected volatility based on historical volatility of the Company’s peer group that is publicly traded for
options that have an expected life than is more than four years. For options that have an expected life of less than four years the
Company uses its own volatility.
The expected term, which represents the period of time that options granted are expected to be outstanding, is estimated based on an
average of the term of the options.
The risk-free rate assumed in valuing the options is based on the U.S. treasury yield curve in effect at the time of grant for the expected
term of the option. The expected dividend yield percentage at the date of grant is Nil as the Company is not expected to pay dividends
in the foreseeable future.
The weighted average fair value of employee stock options granted was estimated using the following assumptions:
Volatility
Risk-free interest rate
Expected life (in years)
Dividend yield
The weighted average grant date fair value per options granted
Details of stock option transactions are as follows:
November 30,
2013
November 30,
2012
64.0%
0.01%
7.00
-
3.09
$
64.7%
0.08%
10.00
-
2.51
$
November 30, 2013
November 30, 2012
November 30, 2011
Weighted
average
exercise
price per
share
$
Weighted
average
grant date
fair value
$
Number of
options
Weighted
average
exercise
price per
share
$
Weighted
average
grant date
fair value
$
Number of
options
Weighted
average
exercise
price per
share
$
Weighted
average
grant date
fair value
$
Number of
options
4.86
4,139,059
1.81
391,000
1.81
(3,500)
(67,000)
-
(4,487) 654.48
2.76 3,216,954
1.05 955,000
-
0.09
(32,862)
-
(33)
403.93
5.33
3.27
-
-
69.74
2.82 3,038,698
2.51 328,000
(25,000)
(4,667)
53.82 (120,077)
-
-
5.53
3.51
3.73
-
6.01
2.87
1.84
1.55
-
1.61
4,455,072
3.97
2.21 4,139,059
4.86
2.76 3,216,954
5.33
2.82
3,321,830
4.09
2.41 2,286,589
5.94
3.55 1,585,816
7.11
4.03
Outstanding,
beginning
of period,
Granted
Exercised
Forfeiture
Expired
Balance at end
of period
Options
exercisable,
end of year
As of November 30, 2013, the exercise prices, weighted average remaining contractual life of outstanding options and weighted
average grant date fair values were as follows:
Page 19
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2013, 2012 and 2011
(Stated in U.S. dollars)
11.
Options (continued)
Options outstanding
Exercise
price
Number
outstanding
Weighted
average
exercise
price per
share
$
Weighted
average
remaining
contract
life (years)
Weighted
average
grant
due
fair value
$
Number
exercisable
Weighted
average
exercise
price per
share
$
Options exercisable
Weighted
average
grant
date
fair value
$
Under2.50
5.00
-
2.51
7.50
-
5.01
10.00
-
7.51
100.00
10.01
-
500.00
300.00 -
1,000.00
500.01 -
1,500.00
1,000.01-
-
-
3.38
4,415,333
-
-
-
-
35,702
39.75
3,971 331.15
33 770.13
33 1,149.13
3.97
4,455,072
-
-
3.10
-
-
-
-
3.87
31.19
2.30 223.52
1.29 493.31
0.45 709.18
-
-
3.28
1.77 3,282,091
-
-
-
-
35,702
39.75
3,971 331.15
33 770.13
33 1,149.13
4.09
3,321,830
-
1.82
-
-
31.19
223.52
493.31
709.18
Total unrecognized compensation cost relating to the unvested performance-based stock options at November 30, 2013 is
approximately $1,771,200 (2012 - $2,214,000). During the year ended November 30, 2013, a performance condition was met as the
FDA approved an ANDA for a certain drug, resulting in the vesting of 276,394 performance-based stock options. As a result, a stock-
based compensation expense of $442,800 relating to these stock options was recognized in research and development expense in the
year ended November 30, 2013 (2012 - $Nil).
For the year ended November 30, 2013, 3,500 options were exercised for a cash consideration of $5,965. For the year ended
November 30, 2012, no options were exercised and for the year ended November 30, 2011, 25,000 options were exercised for a cash
consideration of $93,165.
The following table summarizes the components of stock-based compensation expense.
Research and development
Selling, general and administrative
November 30,
November 30,
2013
2012
November 30,
2011
837,206
316,676
1,153,882
1,505,061
818,784
2,323,845
601,423
101,037
702,460
The Company has estimated its stock option forfeitures to be $Nil at November 30, 2013 (2012 - $Nil; 2011 - $7,302).
12.
Deferred share units
Effective May 28, 2010, the Company’s shareholders approved a Deferred Share Unit (“DSU”) Plan to grant DSUs to its non-
management directors and reserved a maximum of 110,000 common shares for issuance under the plan. The DSU Plan permits certain
non-management directors to defer receipt of all or a portion of their board fees until termination of the board service and to receive
such fees in the form of common shares at that time. A DSU is a unit equivalent in value to one common share of the Company based
on the trading price of the Company's common shares on the Toronto Stock Exchange.
Upon termination of board service, the director will be able to redeem DSUs based upon the then market price of the Company's
common shares on the date of redemption in exchange for any combination of cash or common shares as the Company may determine.
Page 20
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2013, 2012 and 2011
(Stated in U.S. dollars)
12.
Deferred share units (continued)
During the year ended November 30, 2013, one non-management board member elected to receive director fees in the form of DSUs
under the Company’s DSU Plan. As at November 30, 2013, 43,040 DSUs are outstanding and 66,960 DSUs are available for grant
under the DSU Plan.
November 30, 2013 November 30, 2012 November 30, 2011
$
shares
$
shares
$
shares
Additional paid in capital
Accrued liability
39,547
9,181
20,591 36,727
9,688
2,325
12,199 33,101
6,569
4,611
10,250
2,050
13.
Restricted share units
Effective May 28, 2010, the Company’s shareholders approved a Restricted Share Unit (“RSU”) Plan for officers and employees of the
Company and reserved a maximum of 330,000 common shares for issuance under the plan. The RSU Plan will form part of the
incentive compensation arrangements available to officers and employees of the Company and its designated affiliates. An RSU is a
unit equivalent in value to one common share of the Company. Upon vesting of the RSUs and the corresponding issuance of common
shares to the participant, or on the forfeiture and cancellation of the RSUs, the RSUs credited to the participant’s account will be
cancelled. No RSUs have been issued under the plan.
14.
Warrants
All the warrants issued to date by the Company are denominated in U.S. dollars and IPC’s functional currency is Canadian dollars.
Under U.S. GAAP, where the strike price of warrants is denominated in a currency other than an entity's functional currency the
warrants would not be considered indexed to the entity’s own stock and would consequently be considered to be a derivative liability.
The warrants, in specified situations, provide for certain compensation remedies to a holder if the Company fails to timely deliver the
shares underlying the warrants in accordance with the warrant terms.
In connection with the February 1, 2011 private offering, the Company issued 4,800,000 five year Series A common share purchase
warrants to purchase one half of a share of common stock at an exercise price of $2.50 per whole share and 4,800,000 two year Series B
common share purchase warrants to purchase one half of a share of common stock at an exercise price of $2.50 per whole share. The
Company also issued to the placement agents 96,000 warrants to purchase a share of common stock at an exercise price of $3.125 per
share.
The fair value of the Series A warrants of $7,214,366 and Series B warrants of $5,441,216 were initially estimated at February 1, 2011
using the Black-Scholes Option Pricing Model, using volatilities of 70% and 59%, risk free interest rates of 0.99% and 0.29%, expected
lives of 5 and 2 years, and dividend yields in each case of Nil, respectively. The fair value of the placement agents’ warrants were
initially estimated at February 1, 2011 as $229,005 using the Black-Scholes Option Pricing Model, using volatility of 67%, a risk free
interest rate of 0.99%, an expected life of 3 years, and a dividend yield of Nil. These placement agent warrants were expensed and are
included in financing expense.
The holders of Series A common share purchase warrants and placement agents warrants are entitled to a cashless exercise under which
the number of shares to be issued will be based on the number of shares for which warrants are exercised multiplied by the difference
between market price of common share and the exercise price divided by the market price. Also under U.S. GAAP, warrants with the
cashless exercise option satisfying the explicit net settlement criteria are considered a derivative liability.
In the registered direct unit offering completed in March 2013, gross proceeds of $3,121,800 were received through the sale of the
Company’s units comprised of common stock and warrants.
The offering was the sale of 1,815,000 units at a price of $1.72 per unit, with each unit consisting of one share of common stock and a
five year warrant to purchase 0.25 of a share of common stock at an exercise price of $2.10 per share (“March 2013 Warrants”).
Page 21
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2013, 2012 and 2011
(Stated in U.S. dollars)
14.
Warrants (continued)
The fair value of the March 2013 Warrants of $407,558 were initially estimated at closing using the Black-Scholes Option Pricing
Model, using volatilities of 63%, risk free interest rates of 0.40%, expected life of 5 years, and dividend yield of Nil.
In the underwritten public offering completed in July 2013, gross proceeds of $3,075,000 were received through the sale of the
Company’s units comprised of common stock and warrants. The offering was the sale of 1,500,000 units at a price of $2.05 per unit,
each unit consisting of one share of common stock and a five year warrant to purchase 0.25 of a share of common stock at an exercise
price of $2.55 per share (“July 2013 Warrants”).
The fair value of the July 2013 Warrants of $328,350 were initially estimated at closing using the Black-Scholes Option Pricing
Model, using volatilities of 62.4%, risk free interest rates of 0.58%, expected life of 5 years, and dividend yield of Nil.
The following table provides information on the 6,360,300 warrants outstanding and exercisable as of November 30, 2013:
Warrant
Exercise price
Number
outstanding
Expiry
Shares issuable
upon exercise
Placement Agent Warrants
3.125
96,000 March 30, 2014
96,000
Series A Warrants
March 2013 Warrants
July 2013 Warrants
2.50
2.10
2.55
February 1,
2016
3,670,000
1,724,300 March 22, 2018
July 31, 2018
870,000
6,360,300
1,835,000
431,075
217,500
2,579,575
During the year ended November 30, 2013, there were cash exercises in respect of 770,700 warrants (2012 – 150,000) and no cashless
exercise (2012 – 1,300,000) of warrants, resulting in the issuance of 205,175 (2012 – 75,000) and Nil (2012 – 105,315) common shares,
respectively. The fair value of $980,382 (2012- $1,005,692) for these shares was recorded as a charge to capital stock.
Details of warrant transactions are as follows:
Series A
Warrants
Series B
Warrants
Placement
March 2013
Agent Warrants
Warrants
July 2013
Warrants
Total
Outstanding, December 1,
2012
Issued
Exercised
Expired
Outstanding, November 30,
2013
3,720,000 3,470,000
-
-
- (3,470,000)
-
(50,000)
96,000
-
- 7,286,000
- 1,815,000 1,500,000 3,315,000
(770,700)
-
- (3,470,000)
-
(90,700) (630,000)
-
3,670,000
-
96,000 1,724,300 870,000 6,360,300
Series A
Warrants
Series B
Warrants
Placement
Agent Warrants
May-07
Warrants
Total
Outstanding, December 1, 2011
Issued
Exercised
Expired
Outstanding, November 30, 2012
4,695,000 3,945,000
-
-
(975,000) (475,000)
-
-
3,720,000 3,470,000
96,000 243,275 8,979,275
-
-
- (1,450,000)
(243,275)
- 7,286,000
-
-
- (243,275)
96,000
Page 22
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2013, 2012 and 2011
(Stated in U.S. dollars)
14.
Warrants (continued)
U.S. GAAP requires the fair value of these liabilities be re-measured at the end of every reporting period with the change in value
reported in the consolidated statements of operations and comprehensive loss.
Accordingly, using the Black-Scholes Option Pricing Model, the fair market value of the warrants are as follows:
Warrants
Series B Warrants
Placement Agent Warrants
Series A Warrants
March 2013 Warrants
July 2013 Warrants
November 30, 2013 November 30, 2012
$
$
-
112,550
3,790,736
1,040,788
493,947
5,438,021
276,038
25,363
1,659,492
-
-
1,960,893
Using the following assumptions as of November 30, 2013 and 2012 respectively:
Number
Risk-free
Warrant
Placement Agent Warrants
Series A Warrants
March 2013 Warrants
July 2013 Warrants
Warrant
Series A
Series B
Placement Agent Warrants
outstanding Volatility
%
86.51
67.93
54.84
55.51
96,000
3,670,000
1,724,300
870,000
Expected
life
years
0.2
2.2
4.3
4.7
rate
%
0.12
0.12
0.64
0.64
Warrants
outstanding Volatility
%
Risk free
rate
%
Expected
life (years)
3,720,000
3,470,000
96,000
54.90
48.20
46.15
0.37%
0.18%
0.18%
3.1
0.2
1.1
The change in the fair value of the warrants from the previously recorded amount to November 30, 2013 amounting to a loss of
$3,356,534 (2012 – gain of $3,841,233: 2011 – gain of $5,346,878) has been recorded as a fair value adjustment of derivative
liability in the consolidated statements of operations and comprehensive loss.
15.
Income taxes
The Company files Canadian income tax returns for its Canadian operations. Separate income tax returns are filed as locally required.
The total provision for income taxes differs from the amount which would be computed by applying the Canadian income tax rate to
loss before income taxes. The reasons for these differences are as follows:
Page 23
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2013, 2012 and 2011
(Stated in U.S. dollars)
15.
Income taxes (continued)
Statutory income tax rate
26.5
27.0
28.0
November 30,
November 30,
2013
%
2012
%
November 30,
2011
%
Statutory income tax recovery
Increase (decrease) in income taxes
Non-deductible expenses/ non-taxable income
Change in valuation allowance
Investment tax credit
Financing costs booked to equity
Ontario tax rate change
Foreign exchange change
True up of tax returns, etc.
$
$
$
(3,046,180)
(1,632,406)
(1,366,478)
1,446,008
1,248,045
(164,308)
(307,262)
-
746,667
77,030
-
(399,748)
3,217,198
(561,988)
-
(420,990)
(230,695)
28,629
-
(1,324,979)
2,452,926
-
-
-
-
238,531
-
The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of temporary differences between
the carrying amounts and the tax basis of assets and liabilities and certain carry-forward balances. Significant temporary differences
and carry-forwards are as follows:
Deferred tax assets
Non-capital loss carry-forwards
Book and tax basis differences on assets and liabilities
Other
Ontario harmonization tax credit
Investment tax credit
Undeducted research and development expenditures
Valuation allowances for deferred tax assets
Net deferred tax assets
November 30,
November 30,
2013
$
2012
$
November 30,
2011
$
6,831,991
992,378
37,136
399,831
2,324,856
2,180,640
12,766,832
(12,766,832)
-
6,031,917
773,590
17,590
427,355
2,089,238
2,179,097
11,518,787
(11,518,787)
-
4,147,325
824,640
8,635
361,888
1,351,859
1,607,242
8,301,589
(8,301,589)
-
Page 24
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2013, 2012 and 2011
(Stated in U.S. dollars)
15.
Income taxes (continued)
At November 30, 2013, the Company had cumulative operating losses available to reduce future years’ income for income tax
purposes:
Canadian income tax losses expiring in the year ended November 30,
2013
2014
2025
2026
2027
2028
2029
2030
2031
2032
2033
United States Federal income tax losses expiring in the year ended November 30,
2024
2025
2026
Federal
$
(1,162,039)
(2,129,847)
(513,476)
-
(1,372,624)
(808,024)
(597,768)
(3,629,479)
(4,938,324)
(5,380,452)
(5,165,818)
(25,697,851)
$
35,957
16,234
34,523
86,714
At November 30, 2013, the Company had a cumulative carry-forward pool of Federal SR&ED expenditures in the amount of
approximately $10,310,000 (2012 - $9,822,000) which can be carried forward indefinitely.
At November 30, 2013, the Company had approximately $400,000 (2012 - $427,000) of Ontario harmonization credits, which will
expire in the November 30, 2014 taxation year. These credits are subject to a full valuation allowance as they are not more likely than
not to be realized.
At November 30, 2013, the Company had approximately $2,325,000 (November 30, 2012 - 2,089,000) of unclaimed ITCs which
expire from 2025 to 2033. These credits are subject to a full valuation allowance as they are not more likely than not to be realized.
The net deferred tax assets have been fully offset by a valuation allowance because it is not more likely than not the Company will
realize the benefit of these deferred tax assets. The Company does not have any recognized tax benefits as of November 30, 2013 or
November 30, 2012.
The Company files unconsolidated federal income tax returns domestically and in foreign jurisdictions. The Company has open tax
years from 2007 to 2013 with tax jurisdictions including Canada and the U.S. These open years contain certain matters that could be
subject to differing interpretations of applicable tax laws and regulations, as they relate to amount, timing, or inclusion of revenues and
expenses.
The Company did not incur any interest expense related to uncertain tax positions in 2013, 2012 and 2011 or any penalties in those
years. The Company had no accrued interest and penalties as of November 30, 2013 and 2012.
The Company had no unrecognized tax benefits in 2013, 2012 and 2011, and the Company does not expect that the unrecognized tax
benefit will increase within the next twelve months.
Page 25
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2013, 2012 and 2011
(Stated in U.S. dollars)
16.
Contingencies
From time to time, the Company may be exposed to claims and legal actions in the normal course of business, including those which the
Company may initiate. The Company is not aware of any pending or threatened litigation claims outstanding.
Pursuant to an arrangement agreement between Vasogen and Cervus LP (“Cervus”) dated August 14, 2009 (the "Cervus Agreement"),
Vasogen and a Vasogen subsidiary (“New Vasogen”) entered into an indemnity agreement (the "Indemnity Agreement"), which
became an obligation of the Company as of October 22, 2009. The Indemnity Agreement is designed to provide Cervus with
indemnification for claims relating to Vasogen's and New Vasogen's business that are brought against Cervus in the future, subject to
certain conditions and limitations. The Company's obligations under the Indemnity Agreement relating to the Tax pools defined in the
Indemnity Agreement are limited to an aggregate of C$1,455,000 with a threshold amount of C$50,000 before there is an obligation to
make a compensation payment. The Company does not presently expect to have to pay any amount under this indemnity agreement.
17.
Financial instruments
(a)
Fair values
The Company follows ASC topic 820, “Fair Value Measurements” which defines fair value, establishes a framework for
measuring fair value, and expands disclosures about fair value measurements. The provisions of ASC 820 apply to other
accounting pronouncements that require or permit fair value measurements. ASC 820 defines fair value as the exchange price
that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for
the asset or liability in an orderly transaction between market participants at the measurement date; and establishes a three
level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of
the measurement date.
Inputs refers broadly to the assumptions that market participants would use in pricing the asset or liability, including
assumptions about risk. To increase consistency and comparability in fair value measurements and related disclosures, the fair
value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The three
levels of the hierarchy are defined as follows:
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either
directly or indirectly for substantially the full term of the financial instrument.
Level 3 inputs are unobservable inputs for asset or liabilities. There were no transfers in or out of Level 3 instruments during
the year ended November 30, 2013.
The categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value
measurement.
The following table presents for each of the fair value hierarchies, the assets and liabilities that are measured at fair value on a
recurring basis as of November 30, 2013 and November 30, 2012:
Page 26
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2013, 2012 and 2011
(Stated in U.S. dollars)
17.
Financial instruments (continued)
(a)
Fair values (continued)
(a) Cash and cash equivalents
(b) Convertible debt 1
(c) Warrant liabilities2
(a) Cash and cash equivalents
(b) Warrant liabilities2
November 30, 2013
Fair Value Level 1 Level 2
Level 3
$
$
-
-
-
728,950
- 5,438,022
- 6,166,972
$
$
760,586 760,586
-
728,950
5,438,022
-
6,927,558 760,586
November 30, 2012
Fair Value Level 1 Level 2
Level 3
$
$
-
-
- 1,960,893
- 1,960,893
$
$
497,016 497,016
1,960,893
-
2,457,909 497,016
(1) Conversion options are included in the convertible debenture on the consolidated balance sheet.
(2) Warrant liabilities are included on the consolidated balance sheet.
The key unobservable inputs related to valuing the conversion option and warrant liabilities are as follows:
Quantitative information about Level 3 Fair Value Measurements
Fair value at
November 30, 2013
$
Valuation
Techniques
Unobservable Input
Range
728,950 Black-Scholes
Discount rate
Volatility
0.12%
64.6%
5,422,560 Black-Scholes
Discount rate
comparable annualized
volatility(i)
0.12% -
0.64%
54% -
87%
Conversion
option
Warrant
liabilities
(i)
(ii)
The Company calculates expected volatility based on historical volatility of the Company’s peer group that is
publicly traded for options that have an expected life that is more than four years.
The Company calculates the interest rate for the conversion option based on the Company’s estimated cost of
raising capital.
An increase/decrease in the volatility and/or an decrease/increase in the discount rate would result in an increase/decrease in
the fair value of the conversion option and warrant liabilities.
The change in fair value of the conversion option and the warrant liabilities has been recorded as a fair value adjustment of
derivative liabilities in the consolidated statements of operations and comprehensive loss.
Page 27
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2013, 2012 and 2011
(Stated in U.S. dollars)
17.
Financial instruments (continued)
(a)
Fair values (continued)
Reconciliation of Level 3 fair value measurements:
Opening balance
Total gains or losses:
- in net loss(a)
- translation adjustment
Additions
Exercise
Closing balance
Opening balance
Total gains or losses:
- in net loss(a)
- translation adjustment
Additions
Exercise
Closing balance
November 30, 2013
Conversion
Warrant
liability
Option
Total
$
$
$
- 1,960,893 1,960,893
533,149 3,356,534 3,889,683
(24,299) (449,224) (473,523)
220,100 735,908 956,008
- (166,089) (166,089)
728,950 5,438,022 6,166,972
November 30, 2012
Conversion
Warrant
liability
Option
Total
$
$
$
- 6,611,015 6,611,015
-
- (3,841,233) (3,841,233)
(20,026)
-
-
-
(788,863)
- 1,960,893 1,960,893
(20,026)
-
(788,863)
(a)
The total net loss related to the conversion option and warrant liability has been recorded under fair value
adjustment derivative liabilities on the consolidated statements of operations and comprehensive loss.
Fair value of financial assets and financial liabilities that are not measured at fair value on a recurring basis are as follows:
Carrying
November 30, 2013 November 30, 2012
Fair
value
$
Fair
value
$
amount
$
amount
$
Carrying
Financial Liabilities
Due to related parties(iii)
Convertible debt(iii)
759,564 515,130 783,717 531,510
1,376,456 1,290,683
-
-
(iii)
The Company calculates the interest rate for the convertible debt and due to related parties based on the
Company’s estimated cost of raising capital and uses the discounted cash flow model to calculate the fair value of
the convertible debt and the amounts due to related parties.
Page 28
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2013, 2012 and 2011
(Stated in U.S. dollars)
17.
Financial instruments (continued)
(a)
Fair values (continued)
The carrying values accounts receivable, and accounts payable, employee cost payable and capital lease obligations and
approximates their fair values because of the short-term nature of these instruments.
(b)
Interest rate and credit risk
Interest rate risk is the risk that the value of a financial instrument might be adversely affected by a change in interest rates.
The Company does not believe that the results of operations or cash flows would be affected to any significant degree by a
sudden change in market interest rates, relative to interest rates on cash and cash equivalents, due to related parties and capital
lease obligations due to the short-term nature of these balances.
Trade accounts receivable potentially subjects the Company to credit risk. The Company provides an allowance for doubtful
accounts equal to the estimated losses expected to be incurred in the collection of accounts receivable.
The following table sets forth details of the cash and cash equivalents:
Cash
Bankers acceptance (30 days maturity, interest 0.10%)
Total cash and cash equivalents
November 30,
2013
$
November 30,
2012
$
760,586
-
760,586
447,016
50,000
497,016
The following table sets forth details of the aged accounts receivable that are not overdue as well as an analysis of overdue
amounts and the related allowance for doubtful accounts:
Total accounts receivable
Less allowance for doubtful accounts
Total accounts receivable, net
Not past due
Past due for more than 31 days but no more than 60 days
Total accounts receivable, net
November 30,
2013
$
November 30,
2012
$
1,475,745
-
1,475,745
1,473,097
2,648
1,475,745
2,778
-
2,778
2,778
-
2,778
Financial instruments that potentially subject the Company to concentration of credit risk consist principally of
uncollateralized accounts receivable. The Company’s maximum exposure to credit risk is equal to the potential amount of
financial assets. For the year ended November 30, 2013, Par accounted for substantially all the revenue and all the
accounts receivable of the Company. For the year ended November 30, 2012, Par accounted for all the revenue and all the
accounts receivable of the Company. For the year ended November 30, 2011, Par accounted for substantially all the
revenue and all the accounts receivable of the Company.
Page 29
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2013, 2012 and 2011
(Stated in U.S. dollars)
17.
Financial instruments (continued)
(b)
Interest rate and credit risk (continued)
The Company is also exposed to credit risk at period end from the carrying value of its cash. The Company manages this risk
by maintaining bank accounts with a Canadian Chartered Bank. The Company’s cash is not subject to any external restrictions.
(c)
Foreign exchange risk
The Company has balances in Canadian dollars that give rise to exposure to foreign exchange (“FX”) risk relating to the
impact of translating certain non-U.S. dollar balance sheet accounts as these statements are presented in U.S. dollars. A
strengthening U.S. dollar will lead to a FX loss while a weakening U.S. dollar will lead to a FX gain. For each Canadian dollar
balance of $1.0 million, a +/- 10% movement in the Canadian currency held by the Company versus the US dollar would
affect the Company’s loss and other comprehensive loss by $0.1 million.
Balances denominated in foreign currencies that are considered financial instruments are as follows:
FX rates used to translate to U.S.
Assets
Cash
Liabilities
Accounts payable
Employee cost payable
Capital lease
Due to related party
Net exposure
(d)
Liquidity risk
November 30, 2013
Canadian
1.0620
$
U.S Canadian
0.9936
$
$
November 30, 2012
U.S
$
461,002 434,089
461,002 434,089
247,397
247,397
248,991
248,991
484,299 456,025
182,970 172,288
45,947
43,265
806,657 759,564
286,561
190,603
51,524
783,716
1,519,873 1,431,142 1,304,005 1,312,404
(1,058,871) (997,053) (1,056,608) (1,063,413)
284,727
189,383
51,194
778,701
Liquidity risk is the risk that the Company will encounter difficulty raising liquid funds to meet commitments as they fall due.
In meeting its liquidity requirements, the Company closely monitors its forecasted cash requirements with expected cash
drawdown.
The following are the contractual maturities of the undiscounted cash flows of financial liabilities as at November 30, 2013:
Third parties
Accounts payable
Capital lease
Related parties
Employee costs payable
(Note 7)
Due to related parties
(Note 6)
Convertible debenture
(Note 6)
November 30, 2013
9 months
Greater than
Less than
3 months
$
3 to 6
months
$
6 to 9
months
$
810,381
-
13,189 13,676 14,198
-
1 year
$
-
2,201
508,616
759,564
-
-
-
-
-
-
1 year
$
Total
$
- 810,381
43,264
-
- 508,616
- 759,564
44,353 44,353 45,339 44,846 1,515,770 1,694,661
2,136,103 58,029 59,537 47,047 1,515,770 3,816,486
Page 30
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2013, 2012 and 2011
(Stated in U.S. dollars)
18.
Segmented information
The Company's operations comprise a single reporting segment engaged in the research, development and manufacture of novel and
generic controlled-release and targeted-release oral solid dosage drugs. As the operations comprise a single reporting segment, amounts
disclosed in the financial statements for revenue, loss for the year, depreciation and total assets also represent segmented amounts. In
addition, all of the Company's long-lived assets are in Canada.
Revenue
United States
Total assets
Canada
Total property and equipment
Canada
19.
Restatement of comparative amounts
November 30,
November 30,
2013
$
2012
$
November 30,
2011
$
1,527,474
1,527,474
107,091
107,091
501,814
501,814
4,379,501
2,474,878
6,247,228
1,231,309
1,535,703
951,914
The Company previously classified the issuance of common shares as a credit to additional paid in capital. In accordance with U.S.
GAAP, shares issued with no par value are required to be classified under capital stock. The adjustment is a reclassification from
additional paid in capital into capital stock and has an immaterial impact on the consolidated statement of shareholder’s deficiency.
Items previously reported have been reclassified to conform to U.S. GAAP and did not have any impact on the Company’s earnings per
share calculations.
The following table summarizes the impact of the restatement adjustments on the Company’s previously reported consolidated
financial statements:
As previously
reported Adjustment As restated
$
$
$
Consolidated balance sheet and consolidated statements of
shareholders' deficiency
November 30, 2011
Capital stock
Additional paid in capital
November 30, 2012
Capital stock
Additional paid in capital
147,152
20,822,672
902,276
755,124
(755,124) 20,067,548
147,152 5,981,545 6,128,697
28,409,665 (5,981,545) 22,428,120
Page 31
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2013, 2012 and 2011
(Stated in U.S. dollars)
20.
Subsequent events
Subsequent to the year end, pursuant to the equity distribution agreement with Roth as disclosed in note 10, the Company sold through
at-the-market issuances 1,312,100 of its common shares on the NASDAQ, for net proceeds of $4,808,054 to the Company and paid
commission fees of $135,960 to Roth. Share issuance costs of $419,777 were recorded against the cost of the shares issued and
recognized in capital stock. As at November 30, 2013, $419,777 of the share issuance costs have been deferred on the consolidated
balance sheet.
Page 32
Item 19.
Exhibits
Number
1.1
1.2
4.1
4.2
EXHIBIT INDEX
Exhibit
Articles of Incorporation of the Company and Amendments thereto
By-laws of the Company
IPC Arrangement Agreement
The acknowledgement and agreement of the Company dated October 22, 2009 to be bound by the
performance based stock option agreement dated September 10, 2004 pursuant to which Drs. Isa and Amina
Odidi are entitled to purchase up to 2,763,940 of the Company’s shares upon payment of U.S.$3.62 per
share, subject to satisfaction of the performance vesting conditions
Footnote
(4)
(4)
(4)
(4)
4.3
The amended and restated promissory note dated October 22, 2009 for up to $2,300,000 issued by
4.51
4.52
4.53
4.54
4.55
4.56
4.57
Intellipharmaceutics Corp. to Isa Odidi and Amina Odidi for advances that may be made by them from time
to time to the Company
Securities purchase agreement for February 1, 2011 private placement
Registration rights agreement for February 1, 2011 private placement
Combined Series A/B common share purchase warrant for February 1, 2011 private placement
Placement Agent Agreement between Intellipharmaceutics International Inc. and Roth Capital Partners,
LLC, dated March 9, 2012
Form of Subscription Agreement (incorporated by reference to Exhibit A attached to Exhibit 4.54
12% convertible term debenture dated January 10, 2013 in principal amount of $1,500,000
Lease as amended between Finley W. McLachlan Ltd. and Intellipharmaceutics Corp. for premises at 30
Worcester Road, Toronto, Ontario, Canada.
4.58
Placement Agent Agreement between Intellipharmaceutics International Inc. and Roth Capital Partners,
LLC, Brean Capital, LLC and Maxim Group, LLC, dated March 19, 2013
4.59
4.60
4.61
4.62
4.63
Form of Subscription Agreement (incorporated by reference to Exhibit A attached to Exhibit 4.58)
Form of Warrants (incorporated by reference to Exhibit B attached to Exhibit 4.58)
Underwriting Agreement between Intellipharmaceutics International Inc. and Maxim Group, LLC, as
representative of the underwriters named in Schedule I thereto, dated July 26, 2013
Form of Warrants
Equity Distribution Agreement between Intellipharmaceutics International Inc. and Roth Capital Partners,
LLC, dated November 27, 2013
4.64 (†)
License and Commercialization Agreement dated as of November 21, 2005, between Intellipharmaceutics
Corp., and Par Pharmaceutical, Inc., as amended by the First Amendment To License and
Commercialization Agreement dated as of August 2011, and as further amended by the Second
Amendment to License and Commercialization Agreement dated as of September 24, 2013
8.1
11.1
12.1
List of subsidiaries
Code of Business Conduct and Ethics
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of
1934
12.2
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of
1934
13.1
13.2
15.1
Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Consent of Independent Registered Public Accounting Firm
(4)
(3)
(3)
(3)
(5)
(5)
(2)
(2)
(6)
(6)
(6)
(7)
(7)
(8)
(1)
(1)
(4)
(1)
(1)
(1)
(1)
(1)
-92-
101
XBRL (Extensible Business Reporting Language). The following materials from Intellipharmaceutics
(9)
International Inc.’s Annual Report on Form 20-F for the fiscal year-ended November 30, 2013, formatted
in XBRL:
(i) Consolidated balance sheets as at November 30, 2013 and 2012 (restated)
(ii) Consolidated statements of operations and comprehensive loss for the years ended November 30,
2013, 2012 and 2011
(iii) Consolidated statements of shareholders’ deficiency for the years ended November 30, 2013, 2012
and 2011(restated)
(iv) Consolidated statements of cash flows for the years ended November 30, 2013, 2012 and 2011
(v) Notes to the consolidated financial statements
Filed as exhibits to this annual report on Form 20-F for the fiscal year ended November 30, 2013.
Incorporated herein by reference to the Company’s annual report on Form 20-F for the fiscal year ended November 30, 2012 as filed
on January 31, 2013.
Incorporated herein by reference to the Company’s annual report on Form 20-F for the fiscal year ended November 30, 2010 as filed
on May 31, 2011.
Incorporated herein by reference to the Company’s annual report on Form 20-F for the fiscal year ended November 30, 2009 as filed
on June 1, 2010.
Incorporated herein by reference to the Company’s report on Form 6-K for the month of March 2012 as filed on March 9, 2012.
Incorporated herein by reference to the Company’s report on Form 6-K for the month of March 2013 as filed on March 19, 2013.
Incorporated herein by reference to the Company’s report on Form 6-K for the month of July 2013 as filed on July 26, 2013 (SEC
Accession No. 0001171843-13-002968).
Incorporated herein by reference to the Company’s report on Form 6-K for the month of November 2013 as filed on November 27,
2013.
XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of
the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as
amended, and otherwise is not subject to liability under these sections.
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
† Confidential treatment has been requested for certain portions of this exhibit. Omitted portions have been filed separately with the Securities
and Exchange Commission.
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the
undersigned to sign this annual report on its behalf.
SIGNATURES
Intellipharmaceutics International Inc.
/s/ Shameze Rampertab
Shameze Rampertab
Vice President Finance and Chief Financial Officer (Principal Financial Officer),
Intellipharmaceutics International Inc.
February 18, 2014
Exhibit 4.64
CERTAIN PORTIONS OF THIS EXHIBIT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL
TREATMENT. THE OMITTED PORTIONS ARE MARKED AS “[*]” ALONG WITH A FOOTNOTE INDICATING THAT THE
INFORMATION HAS BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT. AN UNREDACTED
COPY OF THIS EXHIBIT HAS BEEN FILED SEPARATELY WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION
PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.
LICENSE AND COMMERCIALIZATION AGREEMENT
This License and Commercialization Agreement (the “Agreement”) is hereby entered into and effective as of November 21, 2005 (the
“Effective Date”) by and between IntelliPharmaCeutics Corp. ("IPC"), a Nova Scotia corporation, with offices located at 30 Worcester
Road, Toronto, Ontario, Canada and Par Pharmaceutical, Inc. (“Par”), a Delaware corporation with offices located at 300 Tice Boulevard,
Woodcliff Lake, New Jersey 07677, USA. IPC and Par shall each be defined as a “Party” and together as the “Parties” under this
Agreement.
WHEREAS, IPC is engaged in the development of pharmaceutical products and Par is engaged in the promotion, marketing,
sales and distribution of pharmaceutical products;
WHEREAS, IPC desires to develop a generic Focalin XR product and have Par promote, market, sell and distribute such
product in the Territory, and whereas Par desires to import, promote, market, sell and distribute such product in the Territory;
NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the
Parties hereby agree as follows:
ARTICLE 1. DEFINITIONS
1.1. “Affiliate(s)” means as to a Party, any party which directly or indirectly controls, is controlled by, or under common
control with such Party including any corporation or business entity of which fifty percent (50%) or more of the securities or other
ownership interests representing the equity, the voting stock or general partnership interest are owned, controlled or held, directly or
indirectly, by such Party. For purposes of the foregoing definition, the term “control” (including with correlative meaning, the terms
“controlling”, “controlled by”, and “under common control with”) as used with respect to any Party, shall mean the possession, directly
or indirectly, of the power to direct or cause the direction of the management and policies of such Party, whether through ownership of
voting securities, by contract, or otherwise.
1.2 “Agreement” shall have the meaning given to such term in the recitals to this Agreement.
1.3 “ANDA” means an Abbreviated New Drug Application pursuant to 21 U.S.C. 355(j) and 21 C.F.R § 314.3.
1.4 “API” means the active pharmaceutical ingredient dexmethylphenidate.
1.5 “Applicable Laws” means all laws, rules, regulations and guidelines pertinent to the development, manufacturing,
exportation, importation, promotion, marketing, sale or distribution of the Product and/or the performance of a Party’s obligations under
this Agreement, to the extent applicable and relevant, and including specifically, but without limitation, all current Good Manufacturing
Practices (“cGMP”) and current Good Clinical Practices or similar standards or guidelines of the FDA and including trade association
guidelines, where applicable, as well as U.S. export control laws and the U.S. Foreign Corrupt Practices Act.
1.6 “Authorized Generic Product” means any Drug Product other than the Product herein, promoted, distributed,
marketed, offered for sale and/or sold in the Territory as a Generic of the Brand Product or is sold under the NDA for the Branded
Product under and pursuant to an agreement with the owner of the Brand Product.
1.7 “Brand Product” means the product marketed in the Territory under the trademark Focalin XR®.
1.8 “cGMP” means current Good Manufacturing Practices promulgated or adopted by the FDA.
1.9 “Commercial Launch” means the first sale in the Territory of the Product or an Authorized Generic Product by Par,
or a Par Affiliate, to an unaffiliated third party, after the FDA has approved the ANDA, or the Suitability Petition, for such Product.
1.10 “Commercially Reasonable Efforts” means with respect to each Party, efforts and commitment of resources in
accordance with such Party’s reasonable business, legal, medical, and scientific judgment that are consistent with the efforts and resources
such Party uses for other products owned by it or to which it has exclusive rights, which are of similar market potential and at a similar
stage in their life cycle, taking into account the competitiveness of the marketplace, the regulatory structure involved and other relevant
factors.
1.11 “Confidential Information” means with respect to a Party (as the “Disclosing Party”), all non-public information of
any kind whatsoever (including without limitation, data, materials, compilations, formulae, models, patent disclosures, procedures,
processes, projections, protocols, results of experimentation and testing, specifications, strategies, techniques and all non-public
Intellectual Property (defined below)), and all tangible and intangible embodiments thereof of any kind whatsoever (including without
limitation, apparatus, compositions, documents, drawings, machinery, patent applications, records and reports), which is disclosed by the
Disclosing Party to the other Party (as the “Receiving Party”). Notwithstanding the foregoing, Confidential Information of a Disclosing
Party shall not include information which the Receiving Party can establish by competent proof (a) to have been publicly known prior to
disclosure of such information by the Disclosing Party to the Receiving Party, (b) to have become publicly known, without fault on the
part of the Receiving Party, subsequent to disclosure of such information by the Disclosing Party to the Receiving Party, (c) to have been
received by the Receiving Party free of an obligation of confidentiality from a source rightfully having possession of and the right to
disclose such information free of an obligation of confidentiality, (d) to have been otherwise known by the Receiving Party prior to
disclosure of such information by the Disclosing Party to the Receiving Party, or (e) to have been independently developed by employees
or agents of the Receiving Party without the use of Confidential Information of the Disclosing Party.
1.12 “Development Costs and Expenses” means the costs and expenses relating to research and development for the
Product for the Territory, namely costs and expenses related to materials (e.g., API), analytical testing (e.g., outside laboratory expenses),
process development costs, exhibit batch and validation costs, costs of stability studies, processing and conversion
2
costs of materials required for regulatory filings but excluding, costs and expenses associated with legal due diligence, litigation, and
ANDA submissions and prosecutions.
1.13 “Dollar” means US dollar.
1.14 “Direct Manufacturing Cost” means the direct out-of-pocket costs actually incurred for the manufacturing, Labeling
and Packaging of the Product including the cost of all API and excipient raw material ingredients, packaging components, and direct labor,
including quality control and assurance testing that are a necessary part of manufacturing. Manufacturing Costs shall not include any
allocations for overhead, depreciation or other indirect costs.
1.15 “Drug Product” means a drug product as defined in 21 C.F.R. § 314.3 for administration to human subjects.
1.16 “Effective Date” shall have the meaning given to such term in the recitals to this Agreement.
1.17 “Generic” means a Drug Product that is (i) a Therapeutic Equivalent of a brand name drug or (ii) approved by the
FDA pursuant to a Suitability Petition under 505 (j)(2)(c) of the Federal Food, Drug and Cosmetics Act and FDA regulation 21 C.F.R
314.93.
1.18 “FDA” means the United States Food and Drug Administration or any successor agency thereto.
1.19 “Intellectual Property ” means without limitation all of the following: (i) patent applications, continuation
applications, continuation in part applications, divisional applications, any corresponding foreign patent applications to any of the
foregoing, and any patents that may grant or may have been granted on any of the foregoing, including without limitation reissues, re-
examinations and extensions; (ii) all know-how, trade secrets, inventions (whether patentable or otherwise), data, processes, techniques,
procedures, compositions, devices, methods, formulas, protocols and information, whether patentable or not; (iii) copyrightable works,
copyrights and applications, registrations and renewals; (iv) logos, trademarks, service marks, and all applications and registrations
relating thereto; (v) other proprietary rights; and (vi) copies and tangible embodiments of any one or more of the foregoing.
1.20 “IPC” shall bear the meaning given to such term in the recitals to this Agreement.
1.21 “Label,” “Labeled” or “Labeling” shall refer to such labels and other written, printed or graphic matter, (i) upon the
Product or any container or wrapper utilized with the Product, or (ii) accompanying the Product, including without limitation,
package inserts, which in either case may be subject to FDA review.
1.22 “Net Profit” means the difference between Net Sales of the Product or the Authorized Generic Product and Par’s Total
Cost for the Product or Authorized Generic Product.
1.23 “Net Sales” means the Dollar amount determined by deducting from the gross amount invoiced for the Product or
Authorized Generic Product sold by Par, or by an Affiliate of Par, or by a permitted sub-licensee, as the case may be, in the
Territory the
3
following to the extent they relate directly to the sale of the Product or Authorized Generic Product by Par: (i) all applicable sales
credits accrued in accordance with accounting principles generally accepted in the United States (ii) payments or rebates incurred
pursuant to federal, state and local government assistance programs, whether in existence now or enacted at any time hereafter,
(iii) costs for transit insurance, freight, handling or other transportation, (iv) customs duty, sales, use or excise taxes, (v) the write-
off of any unsold inventory or batches, and (vi) the write-off of applicable bad debt. Sales credits accrued in accordance with
accounting principles generally accepted in the United States include credits or discounts related to the following: (i) customer
returns, returned goods allowances, billing and shipping errors, rejected goods and damaged goods (ii) cash or terms discounts (iii)
customer rebate programs (iv) chargebacks and administration fees or similar credits or payments granted to customers pursuant to
contract or other purchases (v) sales promotions, trade show discounts and stocking allowances (vi) price adjustments, including
those on customer inventories following price changes, and (vii) Product recall.
1.24 “Packaging” means all primary containers, including bottles, cartons, shipping cases or any other like matter used in
packaging or accompanying the Product.
1.25 “Par” shall have the meaning given to such term in the recitals of this Agreement.
1.26 “Party” and “Parties” shall have the meaning given to such terms in the recitals of this Agreement.
1.27 “Person” means an individual, corporation, partnership, limited liability company, firm, association, joint venture,
estate, trust, governmental or administrative body or agency, or any other entity.
1.28 “Proceedings” means, without limitation, governmental, judicial, administrative or adversarial proceedings (public or
private), litigation, suits, arbitration, disputes, claims, causes of action or investigations.
1.29 “Product” means a Drug Product developed by IPC that is a Therapeutic Equivalent of the Brand Product. The term
Product shall refer to all dosage strengths of the Brand Product approved by the FDA unless otherwise specified in the Agreement.
1.30 “Product Specifications” means the specifications for the Product as they may in the future be approved in the
Regulatory Approval for such Product, including (as applicable) statements of pharmaceutical manufacturing, labeling, filling,
packaging, storage and quality control procedures, and Labeling and Packaging specifications (as such may be revised from time
to time in accordance with Applicable Law) together with any additional specifications that may be agreed to between the Parties.
1.31 “Regulatory Approvals” shall mean any approvals, product and/or establishment licenses, registrations, permits or
authorizations for the Product in the Territory, including without limitation approvals under an ANDA which are necessary for the
commercial
4
manufacture, use, storage, importation, transport, promotion, pricing, distribution or sale of the Product in the Territory or other
territories having a direct relation to the Product.
1.32 “Territory” means the United States, its territories, possessions, protectorates and the Commonwealth of Puerto Rico.
1.33 “Therapeutic Equivalent” shall have the meaning given to it by the FDA in the edition of the “Approved Drug
Product with Therapeutic Equivalence Evaluations” (the “Orange Book”), as may be amended from time to time during the term of
this Agreement.
1.34 “Total Cost” means [*] percent ([*]%) of Net Sales to account and in recognition of Par’s marketing and
commercialization expenses, plus any royalties or license fees paid to the owner of the Brand Product in respect of an Authorized
Generic and/or royalties or lump sum payments paid to third parties to settle patent infringement claims directly in relation to the
sale of the Product or Authorized Generic Product, plus (i) the Transfer Price in the event the Product or Authorized Generic
Product is manufactured by IPC, (ii) Par’s Direct Manufacturing Costs plus a [*] percent ( [*] %) mark-up of such Direct
Manufacturing Costs, in the event Par is manufacturing the Product or Authorized Generic Product, or (iii) the price paid by Par
for Product or Authorized Generic Product (including any development, startup, excess inventory or transfer costs relating directly
to the Product), in the event a third party is manufacturing the Product.
1.35 “Transfer Price” means, in the event that IPC and Par agree that IPC will be the supplier to Par of the Product, the
price, in US Dollars, of IPC’s Direct Manufacturing Cost for the Product plus a [*] percent ([*] %) mark-up of such Direct
Manufacturing Cost.
2.1 General Development Obligations. IPC shall use Commercially Reasonable Efforts to develop the Product in
accordance with this Agreement. IPC's development responsibilities shall include, without limitation, the following:
2 DEVELOPMENT
2.1.1
IPC shall use Commercially Reasonable Efforts to develop a stable final dosage form of the Product, such that
each dosage strength thereof shall be a Therapeutic Equivalent of the respective strength of the Brand Product
as listed in the Orange Book as of the Effective Date, according to a proposed timetable to be agreed to by the
Development Committee (as defined below) within thirty (30) days of the Effective Date.
2.1.2
IPC shall comply with all laws and regulations applicable to the development and manufacture of the Product,
including the associated analytical methods, and including cGMP requirements.
*Omitted and filed separately with the Securities and Exchange Commission under a request for confidential treatment.
5
2.1.3
2.1.4
(i)
(ii)
IPC shall be responsible for, and maintain, materials, facilities and personnel reasonably necessary to fulfill its
obligations under this Agreement.
IPC shall keep Par informed of the progress of the development of the Product at all times, as practical and
reasonable, and shall cooperate with Par and its legal counsel in assessing and avoiding infringement of third
party Intellectual Property. To the extent that Par requests access to certain IPC Confidential Information
including, without limitation, formulation information, methods and processes, analytical and processing
techniques, product and API samples, processing techniques and any other information or materials
reasonably necessary or useful in assessing any regulatory or Intellectual Property infringement concerns
(collectively, the “Product Information”), for these purposes, IPC will disclose to Par the Product Information
on the following basis:
Before at least one dosage strength of the Product enters a pivotal bioequivalence study the Product
Information disclosure shall be limited to out-side counsel designated and paid for by Par except that such
outside counsel shall be permitted to meaningfully discuss any regulatory or Intellectual Property
infringement concerns with Par. During such discussion Par’s outside counsel shall be, however, specifically
prohibited from revealing to Par the actual formulation for the Product.
After at least one dosage strength of the Product enters a pivotal bioequivalence study Par’s outside counsel
may reveal to Par all Product Information previously disclosed by IPC and Par shall be allowed full access to
all further Product Information from such time forward.
2.1.5
IPC shall conduct, or shall oversee, all clinical testing and analytical studies, and all manufacturing scale-up
activities, all as required by the FDA to support an ANDA for the Product as applicable.
2.2 Development Compliance. IPC shall comply with, and shall require compliance by its third party contractors with, all
Applicable Laws in the conduct of all activities associated with the development of the Product including in the practice of all associated
analytical methods.
2.3 Development Costs and Expenses. IPC shall be responsible for all Development Costs and Expenses for the
Product, except as provided for in Section 2.4, 2.5 and 2.6 below.
6
2.4 Bioequivalence Costs and Expenses. The Parties agree that IPC shall bear all out-of-pocket costs and expenses for
any pilot bioequivalence studies related to the Product commenced prior to the Effective Date, and Par shall bear all out-of-pocket costs
and expenses for any other required pilot or pivotal bioequivalence studies related to the Product.
2.5 Development API Supply. Par shall be responsible for the costs of procurement of API and excipient supply for
development of the Product. Par and IPC shall work together in procuring a commercially acceptable source of API supply for IPC’s
development work under this Agreement and in the event IPC directly pays for any such API, IPC shall invoice Par monthly, and Par shall
promptly pay IPC for such costs and expenses. Par shall be responsible for procuring and paying for all API used in any development
activity not under IPC’s direct control, including, without limitation, for bioequivalence studies, scale-up and stability work and testing.
2.6 Scale-up and Stability Expenses. In the event the Product is manufactured by IPC under Section 5.1 of this
Agreement, or the Parties otherwise mutually agree that IPC will be responsible for the scale-up and stability associated with the Product,
Par shall be responsible for the payment of reasonable IPC labor and material costs, or alternatively the third party costs, associated with
industrial process scale-up, including analytical method transfer, as required, production of three pivotal batches per strength, as
necessary, for pivotal studies and stability testing, together with all batch records, sampling and release testing of pivotal batches, and
accelerated and long-term stability testing of each strength for pivotal batches, all in relation to the Product. IPC shall invoice Par
quarterly, and Par shall pay IPC, for such costs and expenses. Par shall be responsible for payment of such expenses only up to a total of
USD $ [*]. In the event such costs and expenses are expected to exceed $ [*] the Parties will mutually agree on the source of additional
funding.
2.7 Development Committee. Promptly after the Effective Date, the Parties will form a committee (the “Development
Committee”) to be comprised of an equal number of representatives from each of IPC and Par. The chairperson of the Development
Committee shall be a Par representative, and each Party shall have the right from time to time to substitute new members, on a permanent
or temporary basis, for any of its previously designated members of the Development Committee. Each Party shall bear its own costs
associated with participation in the Development Committee.
2.8 Purpose and Responsibilities of the Development Committee.
2.8.1
The Development Committee shall oversee the development of the Product, including establishing timelines
for and occurrence of milestones and such other matters as are provided to the Development Committee by
mutual agreement of the Parties. The Parties shall keep each other informed of their respective status through
the Development Committee. The Development Committee shall not have any authority to impose financial,
cost or other obligations on either Party in excess of those expressly set forth in this Agreement unless
expressly consented to in writing by such Party.
*Omitted and filed separately with the Securities and Exchange Commission under a request for confidential treatment.
7
2.8.2
The Development Committee shall work together in deciding what bioequivalence studies may be necessary
and the standards for passing any such bioequivalence study. Par, however, shall have final say in
determining whether to run any bioequivalence study under this Agreement and where any such study shall
take place.
2.9 Development Committee Meetings. During the term of this Agreement, the Development Committee shall meet
within thirty (30) days of the Effective Date and at least once each calendar quarter after that or at such other frequency as the
Development Committee agrees. The Parties shall meet on a date and time and at a location agreed to by the Development
Committee. Upon written notice by either Party to the other that a meeting is required or requested, a meeting will be held within thirty
(30) calendar days of such notice on a date and time and at a location to be agreed upon by the Parties, or sooner if warranted by the
circumstances. Notice requesting such a meeting shall include adequate information describing the activity to be reviewed. Any
meetings of the Development Committee may be held in person at a location to be agreed to by the Parties, or by videoconference or
teleconference. A reasonable number of additional representatives of either Party including outside consultants and independent
contractors (subject to confidentiality agreements and the other Party’s reasonable consent) may attend meetings of the Development
Committee in a non-voting capacity. At least one week prior to any meeting of the Development Committee, each Party shall provide the
other with a proposed agenda of the matters to be discussed at such meeting. Within thirty (30) days after each meeting, the Development
Committee chairperson will provide the Parties with a written report describing, in reasonable detail, the status of the Product, a summary
of the results and progress to date, the issues requiring resolution and the agreed resolution of previously reported issues.
3.1 ANDA Ownership. The ANDA for the Product shall be owned exclusively by IPC and IPC shall maintain the
3 REGULATORY
ANDA during the term of this Agreement.
3.2 Prosecution.
3.2.1
3.2.2
3.2.3
IPC hereby appoints Par, and Par hereby agrees to act, as IPC’s exclusive filing agent (“Agent”) with the
FDA in the Territory in connection with the Product.
IPC shall make available to Par all authorizing documentation reasonably required in order for Par to act as
IPC’s exclusive Agent with the FDA in the Territory in connection with the Product.
Par shall file the Product ANDA with the FDA as IPC’s Agent in the Territory for the Product and thereafter,
act as IPC’s exclusive Agent in the Territory with the FDA in connection with the
8
Product, all communications to and from the FDA shall be through Par as such Agent.
3.2.4
Par will provide IPC with copies of all such communications from the FDA forthwith upon their receipt, and
will not respond substantively to the FDA without first discussing with IPC the nature of the proposed
response, and obtaining IPC’s instructions as to the form and content of the response. The Parties shall use
Commercially Reasonable Efforts to cooperate in all communications to the FDA with respect to prosecution
of the Product ANDA including, but not limited to, making any changes or amendments, as applicable to each
ANDA to facilitate final FDA approval of such ANDA. Notwithstanding the foregoing, and subject to prior
communication and discussion with IPC, Par shall have sole control of and responsibility for preparing any
patent certifications and related notice letters in connection with each ANDA and the prosecution and/or
defense of any citizen’s petition associated with an ANDA.
3.3 Expenses. Each Party shall bear responsibility for its own expenses associated with gaining Regulatory Approval for the
Product in the Territory. Par shall be responsible for all filing fees required by the FDA or other regulatory authorities, and for all
duplication and other document preparation and handling costs associated with making the filing.
4 COMMERCIALIZATION
4.1 License Grant. IPC hereby grants to Par for the Term of the Agreement an exclusive royalty-free license, in the Territory
only, under its rights in and to the ANDA and under its Intellectual Property rights associated with the Product, to import, manufacture,
have manufactured, market, promote, distribute and sell the Product in the Territory (“the License”). The foregoing License shall include
the limited right for Par to grant sub-Licenses and appoint sub-contractors to market, distribute and sell the Product within the Territory,
on the prior consent of IPC, which consent will not be unreasonably withheld or delayed provided that, notwithstanding the foregoing:
(b)
(a)
The Parties expressly agree that they will not use or apply, or assist others to use or apply any Confidential Information
disclosed by the other Party for any purpose other than fulfilling their respective obligations under this Agreement.
IPC expressly retains all rights to the Product outside the Territory and expressly retains the right to apply its
intellectual property rights, its drug delivery technologies, and its know-how to all other Drug Products except the
Product in the Territory, and to all drug products without limitation outside the Territory.
4.2 Commercial API Supply. Regardless of who supplies Par with Product under this Agreement, Par shall have the sole
right to procure, and responsibility for procuring, API
9
(including entering into associated API supply contracts) to be used in the manufacturing of Product for commercial sale.
4.3 Promotion, Marketing, Sales and Distribution Obligations.
4.3.1
Par shall use Commercially Reasonable Efforts to launch, market, promote, forecast, distribute and sell the
Product, or any Authorized Generic, in the Territory. Ultimate responsibility and decision-making control
with regard to marketing and pricing of the Product, or any Authorized Generic, shall belong solely to Par.
4.3.2
The above notwithstanding, Par shall not use the Product as a loss leader.
4.3.3
The label for the Product shall be a Par label in accordance with Par's customary practices and with the
Applicable Laws. The label shall designate IPC’s contribution under this Agreement in a manner to be agreed
to by the Parties, each acting reasonably. The above notwithstanding, the Parties agree that Par’s name shall
be displayed prominently as compared to IPC’s name. IPC hereby grants to Par the limited right to reproduce
and print on the Labeling and Packaging IPC’s corporate name and logo, and/or other trademarks, trade dress
and/or trade names of IPC as may be utilized therein provided that IPC has first received a copy of any text
accompanying same and acting reasonably has consented to same
4.4 Launch Timing. The Parties agree that Par will have the ultimate decision-making authority on the timing of the
Product Commercial Launch, based upon it’s evaluation of market conditions, legal obligations and concerns, manufacturing
preparedness, and regulatory approval. The forgoing notwithstanding in the event Par fails to Commercially Launch the Product within
six (6) months of a non-appealable decision from an appellate court ruling or a district court ruling from which an appeal can no longer be
sought of non-infringement or invalidity in favor of Par in a patent litigation regarding the Product between Par and the owner of the
Branded Product, Par shall be deemed in be in material breach of this Agreement unless IPC is the designated manufacturer of the Product
and such delay can be attributed to a manufacturing delay by IPC.
4.5 Exclusivity. IPC agrees that during the term of this Agreement it will not by itself, and will not enable or contract with
any third party to, market, sell or distribute any Product or Therapeutic Equivalent to the Brand Product to third parties for distribution or
sale in the Territory or work on the development of any Product or Therapeutic Equivalent to the Brand Product for sale in the Territory,
except for the development of the Product in co-operation with Par as provided for in this Agreement. Subject to Par’s right to sell an
Authorized Generic Product described below, Par agrees that during the term of this Agreement it will not by itself, and will not enable or
contract with any third party to, market, sell or distribute any other
10
Therapeutic Equivalent to the Brand Product to third parties for distribution or sale in the Territory or work on the development of any
other Product except for the development of the Product in co-operation with IPC as provided for in this Agreement. Par agrees, during
the term of this Agreement, to market, promote, sell and distribute the Product solely and exclusively in the Territory as provided for in
this Agreement. Notwithstanding anything to the contrary in this Agreement, Par shall be allowed to enter into an agreement with the
owner of the Branded Product under which Par shall sell an Authorized Generic Product (an “AG Agreement”). In the event Par enters
into an AG Agreement Par shall continue to be bound to its financial obligations to IPC, including milestone payments and its percentage
of Net Profits as set forth in Sections 6.2, 6.4 and 6.5 of this Agreement and Par shall be allowed to sell the Authorized Generic Product
and have no obligation with respect to the commercialization and development of the Product and IPC shall continue to be bound by the
its exclusivity obligations under this Section.
5 PRODUCT SUPPLY
5.1 Product Supply. Par and IPC shall work together to determine the best manner of securing the Product supply
required for submission and prosecution of the Product ANDA and for commercial supply of Product. Par may commercially
manufacture the Product at its own or a third party’s facility or Par may request of IPC to have the Product manufactured by IPC. Par
will have the ultimate decision-making authority as to where and by whom the Product shall be manufactured. Such decision shall be
based upon Par’s evaluation of manufacturing costs and quality and timing considerations. If Par so requests to have the Product
manufactured by IPC, and IPC agrees, the Parties shall enter into a manufacturing and supply agreement for the Product (a “Supply
Agreement”), under which Par shall pay the Transfer Price for such Product, which shall be manufactured according to the Product
Specifications. Such Supply Agreement shall contain customary product warranties, indemnities and delivery terms. If Par chooses not to
enter into a Supply Agreement for the Product with IPC, Par shall be free to enter into a supply relationship with a third party for the
manufacture and supply of the Product or manufacture the Product at its own facility, and IPC shall assist Par, as necessary, in a transfer,
with industry-appropriate protections and safeguards as to confidentiality and Intellectual Property, of a technical package and any FDA or
regulatory requirement, at Par’s expense, to Par or Par’s designated supply source. The technical package shall include all pertinent
materials, processes and methods as may be required to produce commercial quantities of Product that meet the Product Specifications.
6.1 Product Supply Price. To the extent that IPC supplies Product to Par pursuant to this Agreement, Par shall pay IPC
for such Product an amount equal to the Transfer Price for the applicable Product.
6 FINANCIAL PROVISIONS
6.2 Net Profits.
11
6.2.1
In the event IPC is the first to file an ANDA pursuant 21 U.S.C. § 355(j)(2)(vii)(IV) against the Brand
Product (“First-to-File”), and the Product or the Authorized Generic Product is the only Therapeutic
Equivalent product commercially sold on the market for a period of at least seven (7) days following
commercial launch, Net Profits shall be split [*] percent ([*] %) to Par and [*] percent ([*] %) to IPC during
such period, and shall be payable on a quarterly basis and within thirty (30) of the end of each applicable
quarter.
6.2.2
In the event IPC is not the First-to-File or the Product or Authorized Generic Product is not the only
Therapeutic Equivalent product commercially sold on the market, Net Profits shall be split [*] percent ([*] %)
to Par and [*] percent ([*] %) to IPC, and shall be payable on a quarterly basis and within thirty (30) of the
end of each applicable quarter.
6.3 Records and Audits. Each Party shall have the right once per calendar year, at its own expense, during the term of
this Agreement and for one (1) year thereafter, to have an independent public accountant, acceptable to the Party being audited; acting
reasonably, audit the relevant financial books and records of account of the other Party at normal business hours, upon reasonable
advance notice, to determine or verify the amounts due and payable and/or any applicable costs and expenses hereunder. If errors of five
percent (5%) or more in the auditing Party's favor are discovered as a result of such audit, the Party being audited shall reimburse the
auditing Party for the expense of such audit and pay the deficiency with interest immediately. As a condition to such examination, the
independent public accountant selected by the auditing Party may not be hired on a contingency basis and shall execute a written
confidentiality agreement, satisfactory in form and substance with regard to confidentiality to the Party being audited acting reasonably, to
maintain in confidence all information obtained during the course of any such examination except for disclosure to the auditing Party as
necessary for the above purpose.
6.4 Development Milestone Payments.
6.4.1
Par shall pay to IPC, on January 2, 2006, an initial one-time payment of [*] Dollars ($[*]).
6.4.2
6.4.3
Par shall pay to IPC within thirty (30) days of the successful completion of all bioequivalence studies
necessary for the filing of an ANDA for the 20mg dosage strength of the Product, a onetime payment of [*]
Dollars ($[*]).
Par shall pay to IPC within thirty (30) days of the FDA’s acceptance for filing of an ANDA for all dosage
strengths of the Product, a onetime payment of [*] Dollars ($[*]). For clarity, such ANDA may only contain
bioequivalence studies for one strengths of the Product but this milestone shall become payable upon the
FDA’s acceptance of a filing or filings for all strengths of Branded Product being sold as of the Effective
Date.
*Omitted and filed separately with the Securities and Exchange Commission under a request for confidential treatment.
12
6.5 First-to-File Milestone Payments. In addition to the milestone payments in Section 6.4 above, Par shall make the
following milestone payments to IPC in the event Par launches commercially with Product manufactured under an ANDA for the IPC
Product.
6.5.1
6.5.2
If the IPC Product is the first filed ANDA against the Brand Product, and in the event Par is the only party to
market and sell a Therapeutic Equivalent or a Generic or an Authorized Generic of the Brand Product for a
number of days (N1) up to one hundred and eighty (180) days following the Commercial Launch, then Par
will pay to IPC the fraction of [*] Dollars ($[*]) that N1 is to 180. Such payment shall be due upon the later
of (i) hundred and eighty (180) days following the Commercial Launch, or (ii) a non-appealable decision from
an appellate court ruling or a district court ruling from which an appeal can no longer be sought of non-
infringement or invalidity in favor of Par in a patent litigation regarding the Product between Par and the
owner of the Branded Product.
In the event Par and a single third party are the only parties to market and sell a Therapeutic Equivalent or a
Generic or an Authorized Generic of the Brand Product for a number of days (N2) up to one hundred and
eighty (180) days following the Commercial Launch, then Par will pay to IPC the fraction of [*] Dollars
($[*]) that N2 is to 180. Such payment shall be due upon the later of (i) hundred and eighty (180) days
following the Commercial Launch, or (ii) a non-appealable decision from an appellate court ruling or a district
court ruling from which an appeal can no longer be sought of non-infringement or invalidity in favor of Par in
a patent litigation regarding the Product between Par and the marketer of the Branded Product.
6.6 Characterization of Payments. Each Party agrees that the payments made by Par to IPC hereunder are not royalty
payments.
7
INTELLECTUAL PROPERTY
7.1 General ownership. Each Party shall own its own Intellectual Property consistent with U.S., Canadian or other
applicable international patent, trademark, and copyright law. Each Party agrees to promptly and fully disclose any and all Intellectual
Property relating to the Product to the other Party. In the event the Parties jointly develop Intellectual Property related to a Product then
the Parties shall jointly control and own such Intellectual Property.
7.2 Possible Infringement of Either Party’s Patents by Third Parties. The Parties agree to cooperate with one another
in good faith in connection with any claims against any third party related to the Intellectual Property associated with the Product, owned
or controlled by the Parties, including disclosing to each other as reasonable and practicable, such Intellectual Property as may be
available to assert against third party infringers.
7.2.1
If, at any time on or after the Effective Date, either Party shall become aware of any infringement or
threatened infringement
*Omitted and filed separately with the Securities and Exchange Commission under a request for confidential treatment.
13
within the Territory of any Intellectual Property associated with the Product that is owned or controlled by
either Party, or any unfair competition, inappropriate or unauthorized use, disparagement or other tortious act
within the Territory by any third party in relation to the Product, then the Party having such knowledge shall
give notice thereof to the other Party as promptly as reasonably practicable.
7.2.2
7.2.3
7.2.4
The Party whose rights have been infringed shall have the first right to take such action as it deems
appropriate to enforce the applicable Intellectual Property against any third party that may be infringing such
Intellectual Property within the Territory, including initiating an appropriate Proceeding or threatening to
initiate an appropriate Proceeding to prevent or eliminate the infringement of such Intellectual Property, or the
unfair competition, inappropriate or unauthorized use, disparagement or other tortious act by any third party
in relation to such Product in the Territory. In the event that the Party having such first right declines to take
any action, then the other Party may institute such action or Proceeding to the extent that it has standing to do
so, and may join the other Party as necessary in such Proceeding. All such actions as are undertaken are at the
sole ongoing expense, subject to reimbursement as below, of the Party taking such action. The Party not
initiating the Proceeding agrees to fully cooperate with the other Party in the Proceeding including, as
necessary, becoming a client of the other Party’s legal counsel and agreeing that such legal counsel will act
solely under the instruction of the other Party and will sign a waiver with such legal counsel to that effect.
Neither Party shall enter into any settlement, agreement, consent judgment or other voluntary final disposition
of a Proceeding or threatened Proceeding under this Section 7.2, in whole or in part, without the prior written
consent of the other Party
All amounts awarded as damages, profits or otherwise in connection with any action specified in this Section
7.2 shall be deemed to be Net Profits split pursuant to Section 6.2 after the fees, costs and expenses of each
Party in respect of the Proceeding have first been reimbursed from such amounts.
7.3 Possible Infringement of Third Party Patents. To the extent that any third party asserts patent infringement against
Par or IPC or any of their Affiliates in connection with this Agreement or the Product in the Territory or the ANDA for the Product, Par
shall have sole control in addressing such assertions and in managing and conducting any related litigation using counsel of its choice. Par
shall conduct such litigation, at its sole cost and expense, in the best interests of this Agreement and the Parties. IPC shall fully cooperate
with Par and Par's counsel
14
and IPC shall become a client of Par’s legal counsel and agrees that such legal counsel will act solely under the instruction of Par and IPC
shall sign a waiver with such legal counsel to that effect. Par’s legal counsel shall keep IPC, or IPC’s nominated legal counsel, informed
with respect to the progress of such claims and to disclose to IPC or IPC’s nominated legal counsel, all material decisions issued by the
courts in such matters. Par shall have sole control of the related litigation, and Par shall bear all expenses, costs, fees, including attorney’s
fees and any award of damages or litigation costs associated with all of the foregoing set forth in this Section 7.3.
7.3.1
IPC shall not enter into any settlement, agreement, consent judgment or other voluntary final disposition of
any proceeding or threatened proceeding relating to a Product under this Section 7.3, in whole or in part,
without the prior written consent of Par.
7.4 Cooperation. Each party agrees to promptly notify the other of any potential infringement of third party intellectual
property rights by the making, using or selling of a Product, as it may become aware of such potential infringement, and to cooperate in
addressing such potential infringement issues. With respect to all development work conducted following the Effective Date, IPC agrees
to cooperate with Par and Par’s legal counsel, on the basis as set out at s.2.1.4 (i) & (ii), so as to avoid infringement of any third party’s
Intellectual Property.
8 CONFIDENTIALITY AND PUBLIC DISCLOSURE
8.1 Neither Party shall disclose to any third party (other than its parent or an Affiliate company which is to be advised in
writing of the confidentiality obligations herein) any Confidential Information received by it hereunder or use any such Confidential
Information for its own benefit (except as expressly set forth above) or that of any third party without the written consent of the Party that
disclosed such Confidential Information. Each Party agrees to protect Confidential Information received from the other Party at least as
well as it would its own proprietary and confidential information.
8.2 Each Party shall bind all persons having access through it to any Confidential Information to take no steps inconsistent
with or preventing such Party from carrying out the terms of this Agreement. Each Party hereby represents to the other that the receiving
Party will be responsible for the acts of any officer and/or employee receiving the Confidential Information.
8.3 Each Party, at the request of the other, shall return all Confidential Information disclosed to it hereunder, in whatever
form contained, including all notes or memoranda made by its employees, agents, or representatives obtained or derived from any such
Confidential Information, including any listing which identifies the documents which were provided, except that the Confidential
Information may be retained at each Party’s Office of Counsel, to maintain a record of the same.
8.4 Notwithstanding anything to the contrary in this Agreement, the Parties understand and agree that either Party, as the
Receiving Party of Confidential Information from the
15
Disclosing Party, may, if so required, disclose some or all of the information included in this Agreement or other Confidential Information
of the other Party (i) in order to comply with its obligations under law, including the United States Securities Act of 1933, the United
States Securities Exchange Act of 1934 (“SEC”), and the listing standards or agreements of any national or international securities
exchange or The NASDAQ Stock Market or other similar laws of a governmental authority, (ii) to respond to an inquiry of a
governmental authority, or (iii) in a judicial, administrative or arbitration proceeding. In any such event the Receiving Party making such
disclosure shall (A) provide the Disclosing Party with as much advance notice as reasonably practicable of the required disclosure, (B)
cooperate with the Disclosing Party in any attempt to prevent or limit the disclosure, and (C) limit any disclosure to the specific purpose at
issue.
9 REPRESENTATIONS AND WARRANTIES
9.1
IPC here hereby represents and warrants that:
9.1.1
9.1.2
9.1.3
IPC is a company duly organized, validly existing and in good standing under the laws of the jurisdiction of
its formation;
IPC has the power and authority to enter into and be bound by the terms and conditions of this Agreement and
to perform its obligations hereunder;
IPC has taken all necessary action on its part to authorize the execution and delivery of this Agreement and
this Agreement has been duly executed and delivered on behalf of IPC and constitutes a legal, valid, binding
obligation, enforceable against IPC in accordance with its terms; and
9.1.4
IPC is subject to no legal, contractual or other restrictions, limitations or conditions which conflict with its
rights and obligations under this Agreement or which might affect adversely its ability to perform hereunder.
9.2
Par hereby represents and warrants that:
9.2.1
9.2.2
9.2.3
Par is a company duly organized, validly existing and in good standing under the laws of the jurisdiction of its
formation;
Par has the power and authority to enter into and be bound by the terms and conditions of this Agreement and
to perform its obligations hereunder;
Par has taken all necessary action on its part to authorize the execution and delivery of this Agreement and
this Agreement has been duly executed and delivered on behalf of Par and constitutes a
16
legal, valid, binding obligation, enforceable against Par in accordance with its terms; and,
9.2.4
Par is subject to no legal, contractual or other restrictions, limitations or conditions which conflict with its
rights and obligations under this Agreement or which might affect adversely its ability to perform hereunder.
10
INDEMNIFICATION
10.1 Par Indemnification. Par shall at all times during the term of this Agreement and thereafter, indemnify, defend and
hold IPC, its officers, directors, employees and agents and Affiliates, and the successors and assigns of the foregoing, harmless from and
against all expenses, damages, costs and liabilities of any kind whatsoever, including legal expenses and reasonable attorneys’ fees as a
result of a third party claim, suit, or cause of action (collectively, “Losses”), arising out of a material breach by Par of any representation,
warranty or obligation of Par under this Agreement, or by a failure of Par, or its Affiliates, to comply with all Applicable Laws during the
term of this Agreement, or the gross negligence or willful misconduct of Par, except to the extent that such Losses arise solely out of the
gross negligence or willful misconduct or illegal acts of IPC;
10.2 IPC Indemnification. IPC shall at all times during the term of this Agreement and thereafter, indemnify, defend and
hold Par, its officers, directors, employees and agents and Affiliates, and the successors and assigns of the foregoing, harmless from any
and all Losses arising out of a material breach by IPC of any representation, warranty or obligation of IPC under this Agreement, or by a
failure of IPC, or its Affiliates, to comply with all Applicable Laws during the term of this Agreement, or the gross negligence or willful
misconduct of IPC, except to the extent that such Losses arise solely out of the gross negligence or willful misconduct or illegal acts of
Par.
10.3 Intellectual Property. Par shall defend, indemnify and hold IPC, its Affiliates, and each of its respective officers,
directors, agents, employees, shareholders or members harmless from and against any and all Losses IPC may incur, or suffer, or with
which any of them may be faced arising out of the infringement of any Intellectual Property of any third party with respect to any
activities associated with the Product.
10.4 Obligations of the Indemnified Party. Each indemnified Party under this Agreement shall give the indemnifying
Party prompt written notice of any claim it receives. The indemnifying Party shall not be liable for attorneys' fees or expenses of litigation
of the indemnified Party unless the indemnified Party gives the indemnifying Party the opportunity to assume full control of the defense
or settlement (subject to the paragraph below). In addition, if the indemnifying Party assumes such control, it shall only be responsible for
the legal fees and litigation expenses of the attorneys it designates to assume control of the litigation.
17
10.5 Settlement. In no event shall the indemnified Party be entitled to settle any of the above-mentioned claims without
the consent of the indemnifying Party, which consent shall not be unreasonably withheld or delayed. Notwithstanding the foregoing, the
indemnifying party shall not settle any claim without the indemnified party’s written consent, which shall not be unreasonably withheld or
delayed, unless such settlement is solely monetary.
11 LIMITATION OF LIABILITY
11.1 NOTWITHSTANDING ANYTHING TO THE CONTRARY IN THIS AGREEMENT, EXCEPT WITH RESPECT
TO A BREACH OF ARTICLE 8 (CONFIDENTIALITY) HEREOF AND EXCEPT WITH RESPECT TO THIRD PARTY CLAIMS
PURSUANT TO THE INDEMNIFICATION OBLIGATIONS SET FORTH IN ARTICLE 10, NEITHER PARTY SHALL BE LIABLE
TO THE OTHER FOR ANY CONSEQUENTIAL, INCIDENTAL OR INDIRECT DAMAGES, INCLUDING FOR LOST PROFITS,
OR LOSS OF OPPORTUNITY OR USE OF ANY KIND SUFFERED BY THE OTHER PARTY, WHETHER IN CONTRACT, TORT
OR OTHERWISE.
12 TERM AND TERMINATION
12.1 Term. Unless earlier terminated pursuant to this Article 12, the term of this Agreement shall continue in force and
effect from the Effective Date until the date that is ten (10) years following the Commercial Launch of the Product or the first sale by Par
of an Authorized Generic Product. This Agreement may be renewed upon mutual written agreement on an annual basis thereafter. If it is
not so renewed, it shall be deemed to have been terminated without fault, and the termination provisions relating thereto shall apply.
12.2 Termination for Breach. Either Party may terminate this Agreement, or suspend performance under this Agreement
upon written notice to the other Party at any time during the term of this Agreement, if the other Party is in material breach of a material
term of this Agreement and has not cured such material breach, if capable of cure, within ninety (90) days after notice requesting cure of
the breach.
12.2.1
In the event of a termination by Par of this Agreement due to a material breach by IPC, the ANDA for the Product shall
transfer to Par, at no cost to Par, and notwithstanding the termination of this agreement, Par shall retain its exclusive
license under Section 4.1, for the Product. If such termination was due to an uncured material breach by IPC of its
obligations under Article 2, 3, 4.5 or Section 7, Par shall not be required to make any payments to IPC under Article
6. If such termination was due to an uncured material breach by IPC of any other provision in this Agreement Par shall
still be required to make such payments under to IPC under Article 6.
12.2.2
In the event of such a termination by IPC of this Agreement as it relates to the Product, due to an uncured material
breach by Par, the License to Par is terminated. In such event, the provisions of s.12.4 apply to the termination.
18
12.3 Termination for Failure of a Bioequivalence Study. In the event that a bioequivalence study for any dosage
strength of the Product does not meet, as reasonably determined by the Parties acting together, the FDA criteria for bioequivalence, Par
may terminate this Agreement upon five (5) days notice to IPC.
12.4 Reversion of Rights to IPC upon Termination. The Parties agree that, upon termination of this Agreement, except a
termination by Par in accordance with s.12.2.1, the License is terminated forthwith and all rights in the Product, the formulation or
formulations of the Product, the methods and processes applicable to the Product, clinical data and documentation associated with Product
testing, and regulatory documentation in relation to applications for approval to market the Product, remain with or revert to IPC, which
may then use each or all of them for its own purposes in its sole discretion, including in the development, testing, manufacture,
distribution and sale of a Product or any Drug Product in the Territory or any drug product in any other territory.
12.5 Survival. Articles 1, 8, 10, 13 and any other provisions necessary and proper to give effect to the intention of the
Parties as to the effect of the Agreement after termination shall survive any expiration or termination of this Agreement. In addition,
unless otherwise expressly set forth herein, no expiration or termination of this Agreement shall have any affect on any payment,
obligation, representation or warranty under this Agreement accruing or arising prior to or subsequent to such expiration or termination.
13
INSURANCE
13.1 Each Party shall obtain and maintain at all times during the term of this Agreement, prudent comprehensive general
liability coverage appropriate to its activities with reputable and financially secure insurance carriers to cover its activities related to this
Agreement. Additionally such insurance coverage shall include, without limitation, product liability coverage of an appropriate amount,
not less than [*] US dollars ($[*]) per occurrence, to be in place prior to the Commercial Launch and for so long as any Product is being
sold pursuant to this Agreement.
14 MISCELLANEOUS
14.1 Interpretation and Construction. Unless the context of this Agreement otherwise requires, (i) the terms “include,”
“includes,” or “including” shall be deemed to be followed by the words “without limitation” unless otherwise indicated; (ii) words using
the singular or plural number also include the other; (ii) the terms “hereof,” “herein,” “hereby,” and derivative or similar words refer to
this entire Agreement; (iv) the terms “Article,” “Section” and “Exhibit” refer to the specified Article, Section and Exhibit of this
Agreement, and (v) words of any gender include each other gender . Whenever this Agreement refers to a number of days, unless
otherwise specified, such number shall refer to calendar days. The headings and paragraph captions in this Agreement are for reference
and convenience purposes only and shall not affect the meaning or interpretation of this Agreement. This Agreement shall not be
interpreted or constructed in favor of or against either Party because of its effort in preparing it.
*Omitted and filed separately with the Securities and Exchange Commission under a request for confidential treatment.
19
14.2 Independent Contractor Status. It is understood and agreed that nothing in this Agreement nor any agreements
related hereto is intended to nor shall create a partnership between the Parties. The Parties hereto are independent contractors and are
engaged in the operation of their own respective businesses, and neither Party hereto is to be considered the agent, partner, joint venturer
or employee of the other Party for any purpose whatsoever, except for Par acting as IPC’s Agent as set forth in Section 3.2, and neither
Party shall have any authority to enter into any contracts or assume any obligations for the other Party nor make any warranties or
representations on behalf of that other Party.
14.3 Waiver. The waiver by either Party of a breach of any provision contained herein shall be in writing and shall in no
way be construed as a waiver of any succeeding breach of such provision or the waiver of the provision itself.
14.4 Assignment. This Agreement shall be binding upon and inure to the benefit of each of the Parties hereto and their
respective successors and approved assigns, provided neither Party may assign this Agreement without the prior written consent of the
other party, except that no consent shall be required if such assignment is in connection with a merger or sale of all or substantially all of
the assets of the assigning Party.
14.5 Modification. This Agreement may not be changed, modified, amended or supplemented except by an express written
instrument signed by both Parties.
14.6 Severability. If any provision of this Agreement shall be held illegal or unenforceable, that provision shall be limited
or eliminated to the minimum extent necessary so that this Agreement shall otherwise remain in full force and effect and enforceable.
14.7 Further Assurances. Each Party hereto agrees to execute, acknowledge and deliver such further instruments and
documents, and to do all such other acts, as may be reasonably necessary or appropriate in order to carry out the purposes and intent of
this Agreement.
14.8 Use of Party's Name. Except as to Labeling activities in connection with Section 4.2.2, no right, express or implied,
is granted by this Agreement to either Party to use in any manner the name of the other or any other trade name or trademark of the other
in connection with the performance of this Agreement. For clarity, it is understood that nothing herein shall prohibit either Party from
using the name of the other Party (i) in certain of such Party’s disclosure documents including those filed or disclosed in order to comply
with its obligations under Applicable Law or the listing standards or agreements of any national or international securities exchange or
The NASDAQ Stock Market or other similar laws of a governmental authority, (ii) to respond to an inquiry of a governmental authority,
or (iii) in a judicial, administrative or arbitration proceeding, or from disclosing the fact that it has granted or obtained a license to any
Intellectual Property of the other Party so long as such use of the other’s name is limited to statements of fact and is not done in a manner
to suggest or imply endorsement by the other Party.
14.8.1 Notices. Any notice or other communication to be given under this Agreement by any Party to any other Party shall be
in writing and shall be either (a) personally delivered, (b)
20
mailed by registered or certified mail, postage prepaid with return receipt requested, (c) delivered by overnight express delivery service or
same-day local courier service, or (d) delivered by telex or facsimile transmission, to the address of the applicable Party as set forth below,
or to such other address as may be designated by the Parties from time to time in accordance with this section. Notices delivered
personally, by overnight express delivery service or by local courier service shall be deemed given as of actual receipt. Mailed notices
shall be deemed given three (3) business days after mailing. Notices delivered by telex or facsimile transmission shall be deemed given
upon receipt by the sender of the answerback (in the case of a telex) or transmission confirmation (in the case of a facsimile
transmission).
If to Par at: Par Pharmaceutical, Inc.
300 Tice Boulevard
Woodcliff Lake, New Jersey 07677
ATTENTION: General Counsel
Facsimile Number: (201) 802-4224
If to IPC at: IntelliPharmaCeutics Corp.
30 Worcester Road
Toronto, Ontario
Canada, M9W 5X2
ATTENTION: The President
Facsimile Number: (416) 798-3007
or to such other address as each Party may designate for itself by like notice.
14.9 Governing Law and Jurisdiction. This Agreement shall be governed by and construed in accordance with the laws
of the State of New York without regard to the conflicts of law provisions thereof. The Parties hereby submit to the exclusive jurisdiction
of the State and Federal Courts located in the State, City, and County of New York.
14.10 Force Majeure. A Party shall not be liable for nonperformance or delay in performance, except for defaulted
obligations of payment, to the extent that such nonperformance or delay in performance is caused by any event reasonably beyond the
control of such Party including, but not limited to wars, hostilities, revolutions, riots, civil commotion, national emergency, strikes,
lockouts, unavailability of supplies, epidemics, fire, flood, earthquake, force of nature, explosion, terrorist act, embargo, or any other Act
of God, or any law, proclamation, regulation, ordinance, or other act or order of any court, government or governmental agency (each a
“Force Majeure Event”). In the event of any such delay, the delayed party may defer its performance for a period equal to the time of
such delay, provided that the delayed party gives the other party written notice thereof promptly and, in any event, within thirty (30)
calendar days of discovery thereof, and uses its good faith efforts to cure the excused breach.
14.11 Entire Agreement. This Agreement and any Exhibits attached hereto, constitute the entire agreement between IPC
and Par with respect to the Product and supersede all prior
21
representations, understandings and agreements with respect to such Product. This Agreement and any Exhibits attached hereto shall
prevail over those of any purchase order, agreement, or other document or understanding any kind pertaining to such sale, except that to
the extent there is a conflict between the standard shipping terms and this Agreement, the later shall control.
14.12 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall for all purposes are
deemed to be an original and all of which shall constitute on instrument.
22
IN WITNESS WHEREOF, the Parties hereto have executed this License and Commercialization Agreement to be effective as of the
Effective Date.
INTELLIPHARMACEUTICS CORP.
By:
Name:
Title:
/s/ A. Muhtar
Dr. Amina
President
PAR PHARMACEUTICAL, INC.
By:
Name:
Title:
/s/ Paul Campanelli
Paul Campanelli
Sr. Vice President
Business Development
& Licensing
23
FIRST AMENDMENT TO LICENSE AND COMMERCIALIZATION AGREEMENT
THIS FIRST AMENDMENT TO LICENSE AND COMMERCIALIZATION AGREEMENT (this “ First Amendment”) is hereby
entered into and effective as of August 12, 2011, by and between IntelliPharmaCeutics Corp. (“IPC”) and Par Pharmaceutical, Inc.
(“Par”) (each individually, a “Party” and collectively, the “Parties”).
WHEREAS, IPC and Par are parties to that certain License and Commercialization Agreement, dated November 21, 2005 (the
“Agreement”); and
WHEREAS, IPC and Par are mutually desirous to amend the Agreement in the manner hereinafter provided;
AND WHEREAS it is intended that the intent and the spirit of the Agreement is not be affected by this First Amendment, other than
the specific aspects that are provided for herein, and that the Agreement, as amended, be interpreted, mutatis mutandis, to give effect to
the following changes;
NOW THEREFORE in consideration of the mutual covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged by the Parties, the Parties agree that the Agreement is hereby amended in
accordance with Section 14.5 of the Agreement as follows, with effect as of the date hereof:
Article I.
Capitalized Terms and Section References
Capitalized terms used but not otherwise defined in this First Amendment shall have the meaning given to them in the Agreement. All
references herein to Sections and Articles shall, unless otherwise specified, be references to provisions of the Agreement.
Article II.
Effect of Amendments Provided for Herein
The Agreement is amended solely:
A. with respect to certain payment arrangements;
B. with respect to the addition of a 25 mg, a 30 mg, a 35 mg and a 40 mg strength of the Product, and solely in the respects
provided for herein;
C. with respect to the inclusion under the Agreement of the Drug Product which is the subject matter of the Par ANDA; and
D.
in keeping with the spirit and intent of the Agreement, such other sections as may be affected by the said changes should be
interpreted, mutatis mutandis, to give effect to such spirit and intent.
Article III.
Amendment and Restatement of Portions of Article 1 of the Agreement
Section 1.9 is hereby amended and restated, such that the current provision is deleted and the following is substituted in its place as of
the date hereof:
1.9
“Commercial Launch” means the first sale by or on behalf of Par or a Par Affiliate in the Territory of any Generic
of the Brand Product (whether under the IPC ANDA or Par ANDA) or Authorized Generic Product, on a strength-
by-strength basis, to an unaffiliated third party, after (in the case of a Generic) the FDA has approved the ANDA, or
a suitability petition, for such strength.
Section 1.29 is hereby amended and restated, such that the current provision is deleted and the following is substituted in its place as of
the date hereof:
1.29
“Product” means a Drug Product developed by IPC that is a Therapeutic Equivalent of the Brand Product in the 5,
10, 15, 20, 25, 30, 35 and 40 mg strengths, unless otherwise specified in the Agreement.
Article 1 of the Agreement is hereby amended by adding thereto the following new sections:
1.20.5
“IPC ANDA” means ANDA No. 078992 filed by IPC, as amended from time to time.
1.25.5
“Par ANDA” means ANDA No. 202842 filed by Par, as amended from time to time.
Article IV.
Certain Payment and Stipulations as to Sections 2 and 6.4 of the Agreement.
Notwithstanding anything to the contrary in the Agreement:
A. Prior Development Work and Costs. Within 30 days of the execution of this First Amendment by both Parties, Par shall pay
to IPC the sum of exactly [*] Dollars ($[*]) by wire transfer of immediately available funds. The Parties hereby stipulate
and agree that, subject to receipt of such payment, such payment shall be in full and final satisfaction of Par’s payment
obligations, costs and expenses as contemplated by Sections 2 and 6.4 of the Agreement in respect of the 30 mg strength and
IPC shall have no right or claim against Par for reimbursement of costs for any work or expense undertaken by IPC in
respect of the development of the 30 mg strength of the Product. The Parties also stipulate and agree that Par has previously
fulfilled its payment obligations to IPC under Sections 2 and 6.4 of the Agreement in full and final satisfaction thereof in
respect of the development of the 5, 10, 15 and 20 mg strengths of the Product by IPC, and IPC has no right or claim against
Par for reimbursement of costs for any work or expense undertaken by IPC in respect of the development of the 5, 10, 15 and
20 mg strengths of the Product.
B. Site Transfer. The Parties shall cooperate in good faith to complete the transfer of all methods, records, formulae, protocols,
techniques, procedures, information, equipment, know-how, and the like (the “Technology”), solely insofar as necessary and
required for
*Omitted and filed separately with the Securities and Exchange Commission under a request for confidential treatment.
2
Par to manufacture commercial quantities of the Product at Par’s designated manufacturing site at the earliest possible date
(the “Site Transfer”). IPC furthermore hereby provides a license during the Term to the Technology solely and exclusively
for the Site Transfer and use in the manufacturing of commercial quantities of the Product at Par’s designated manufacturing
site. Each Party shall provide to the other Party such information and documentation as reasonably requested and as
reasonably available in connection with carrying out the Site Transfer. IPC shall make qualified IPC personnel who are
knowledgeable of the Technology reasonably available as needed from time to time at the designated Par site, to the extent
necessary to allow and qualify such site to manufacture the Product. Nothing in this Section or this First Amendment
constitutes expressly or by implication a grant of IPC proprietary technology or Intellectual Property from IPC to Par beyond
the scope of the express license grant herein provided, and the provisions of Section 4.1 of the Agreement continue to apply in
respect of the Technology and the Site Transfer. All out-of-pocket (third-party) costs and expenses incurred by the Parties in
effecting the Site Transfer, including for greater certainty all on-going third-party costs of storage in Canada of manufactured
Product required in association with the IPC ANDA and out-of-pocket costs and expenses of on-site follow-up attendances by
IPC, if any, shall be borne by Par; provided, that Par is apprised reasonably in advance and consents to such costs of IPC
before they are incurred. Any regulatory submissions required for the Site Transfer shall be conducted pursuant to Section 3
of the Agreement.
C. Development of 40 mg Strength of the Product. The Parties hereby agree that IPC shall use Commercially Reasonable
Efforts to develop the 40 mg strength of the Product, at its own expense except as specifically set forth below, to be filed,
with a request for a waiver of further bio-equivalence studies, as an amendment or supplement to the IPC ANDA. If the
FDA requires further bio-equivalence studies for the 40 mg strength, IPC may, in its sole discretion, cease developing the
40 mg strength or continue developing the 40 mg strength at its sole cost and expense. The Parties hereby agree that Par may
elect to develop a 40 mg strength of the Product under the Par ANDA and at its own expense. IPC will, at Par’s request and
at IPC’s expense (except as provided below), consult with and advise Par, and cooperate with the filing of an amendment or
supplement to IPC’s ANDA, relating to the technology transfer to Par of a 40 mg strength of the Product developed by IPC,
but Par will bear the costs of manufacturing, packaging, labeling, required biostudies and litigation necessary for such
technology transfer to Par of the 40 mg strength of the Product (and, for the avoidance of doubt, not related to IPC’s other
development costs for the 40 mg strength of the Product). In such event, the Site Transfer and the license granted under
Article IV(B) hereof shall be deemed to extend to the Technology covering such 40 mg strength of the Product. Any
regulatory submissions required for Regulatory Approval of the 40 mg strength of the Product under the IPC ANDA shall be
conducted pursuant to Section 3 of the Agreement.
D. Development of 25 mg and 35 mg Strengths of the Product. The Parties hereby agree that each of Par and IPC may, each in
its sole discretion and at its own expense, develop the 25 mg and/or 35 mg strength(s) of the Product. If and when so
developed, the Parties agree that any filings made with the FDA in respect of applications for approval to commercialize
such strengths, or any other strengths as may be introduced into the
3
Territory by the owner of the Brand Product, shall be made as amendments to the IPC ANDA or to the Par ANDA, as the
case may be, and not as new ANDAs.
Article V.
Certain Stipulation and Waiver as to Section 4.1 of the Agreement.
With reference to Section 4.1 of the Agreement, the Parties hereby stipulate and agree that:
A.
IPC has, prior to the date hereof, undertaken development of the 30 mg strength of the Product with Par’s knowledge and
consent, and Par does not now and will not in the future object to or take issue with such prior development of the 30 mg
strength by IPC; and
B. Par has, prior to the date hereof, undertaken a parallel development of a Generic of the Brand Product in the 5, 10, 15, 20, 30
and 40 mg strengths, using Intellectual Property other than IPC Intellectual Property, with IPC’s knowledge and consent, and
has filed the Par ANDA in respect thereof, and IPC does not now and will not in the future object to or take issue with such
prior or further development by Par.
Article VI.
Amendment and Restatement of Section 6.2
Section 6.2 is hereby amended and restated, such that the current provision is deleted and the following is substituted in its place as of
the date hereof.
6.2
Net Profits. The Parties agree that Par shall share with IPC the Net Profits of commercialization for any Generic of
the Brand Product (whether under the IPC ANDA or Par ANDA) or Authorized Generic Product sold by or on
behalf of Par or a Par Affiliate in the Territory as set forth below:
6.2.1
In the event that such product is the only Generic of the Brand Product or Authorized Generic Product in
that strength commercially sold in the Territory (i.e., there is no Generic of the Brand Product or
Authorized Generic Product in that strength commercially sold in the Territory other than that sold by or
on behalf of Par or a Par Affiliate pursuant to the Agreement) for a period of at least seven (7) days
commencing on Commercial Launch of that strength, Net Profits for that strength shall be split [*] percent
([*] %) to Par and [*] percent ([*] %) to IPC for so long as such strength is the only Generic of the Brand
Product or Authorized Generic Product in that strength commercially sold in the Terrotory, and shall be
payable on a quarterly basis and within thirty (30) days of the end of each applicable calendar quarter. For
the avoidance of doubt, once Section 6.2.2 becomes applicable to such strength, the Net Profit split shall be
in accordance with Section 6.2.2, and this Section 6.2.1 shall no longer be applicable to such strength.
6.2.2
In the event and from the time that such product is not the only Generic of the Brand Product or Authorized
Generic Product in that strength commercially sold in the Territory (i.e., there is at least one other Generic
of the Brand Product or Authorized Generic Product in that strength
*Omitted and filed separately with the Securities and Exchange Commission under a request for confidential treatment.
4
commercially sold in the Territory other than that sold by or on behalf of Par or a Par Affiliate pursuant to
the Agreement), Net Profits of that strength shall be split [*] percent ([*] %) to Par and [*] percent ([*] %)
to IPC, and shall be payable on a quarterly basis and within thirty (30) days of the end of each applicable
calendar quarter.
Article VII.
Amendment and Restatement of Section 6.5 of the Agreement
Section 6.5 is hereby amended and restated, such that the current provision is deleted and the following is substituted in its place as of
the date hereof:
6.5
Exclusivity Milestone Payments. In addition to the milestone payments in Section 6.4 above, Par shall make the
following milestone payments to IPC, in respect of the 5, 10, 15 and 20mg strengths only, on a strength-by-strength,
one time per strength basis, in the event Par makes a Commercial Launch with a Generic of the Brand Product
(whether under the IPC ANDA or Par ANDA) or Authorized Generic Product in any such strength:
6.5.1
6.5.2
In the event that such product is the only Generic of the Brand Product or Authorized Generic Product in
that strength commercially sold in the Territory (i.e., there is no Generic of the Brand Product or
Authorized Generic Product in that strength commercially sold in the Territory other than that sold by or
on behalf of Par or a Par Affiliate pursuant to the Agreement) for a number of days (N1) up to one hundred
and eighty (180) days during the period commencing on the Commercial Launch of that strength and
terminating one hundred and eighty (180) days later, then Par will pay to IPC the fraction of [*] Dollars
($[*]) that N1 is to 180. Such payment shall be due upon the later of (i) one hundred and eighty (180) days
following the Commercial Launch of that strength, or (ii) a non-appealable decision from an appellate
court ruling or a district court ruling from which an appeal can no longer be sought of non-infringement or
invalidity in favor of Par in a patent litigation regarding that strength of the Product between IPC and/or
Par and the owner and/or marketer of the Brand Product.
In the event that there is no more than a single third party competitor to such product in the Territory (i.e.,
there is no more than a single Generic of the Brand Product or Authorized Generic Product in that strength
commercially sold in the Territory by a third party other than that sold by or on behalf of Par or a Par
Affiliate pursuant to the Agreement) for a number of days (N2) up to one hundred and eighty (180) days
during the period commencing on the Commercial Launch of that strength and terminating one hundred
and eighty (180) days later, then Par will pay to IPC the fraction of [*] Dollars ($[*]) that N2 is to
180. Such payment shall be due upon the later of (i) one hundred and eighty (180) days following the
Commercial Launch of that strength, or (ii) a non-appealable decision from an appellate court ruling or a
district court ruling from
*Omitted and filed separately with the Securities and Exchange Commission under a request for confidential treatment.
5
which an appeal can no longer be sought of non-infringement or invalidity in favor of Par in a patent
litigation regarding that strength of the Product between IPC and/or Par and the owner and/or marketer of
the Brand Product. For the avoidance of doubt, the payments contemplated herein at subsections 6.5.1 and
6.5.2 are cumulative on a strength-by-strength basis, provided that the sum of N1+N2 for any one strength
shall not exceed 180 days commencing from the Commercial Launch of that strength.
Article VIII.
No Other Modifications.
Except as specifically provided in this First Amendment, the terms and provisions of the Agreement remain in full force and effect. No
provision of this First Amendment may be modified or amended except expressly in a writing signed by both Parties, nor shall any
terms be waived except expressly in a writing signed by the Party charged therewith.
Article IX.
Governing Law and Jurisdiction.
This First Amendment shall be governed by and construed in accordance with the laws of the State of New York without regard to the
conflicts of law provisions thereof with the exception of Sections 5-1401 and 5-1402 of the New York General Obligations Law. The
Parties hereby submit to the exclusive jurisdiction of the State and Federal Courts located in the State, City, and County of New York.
Article X.
Counterparts.
This First Amendment may be executed in one or more counterparts, including by transmission of facsimile or PDF copies of signature
pages, each of which shall for all purposes are deemed to be an original and all of which together shall constitute one instrument.
[Signature page follows.]
6
IN WITNESS WHEREOF, the Parties hereto have executed this First Amendment as of the date and year first set forth above.
INTELLIPHARMACEUTICS CORP.
By:
/s/ John Allport
Name: John Allport
Title: V.P. Legal Affairs
PAR PHARMACEUTICAL, INC.
/s/ Paul Campanelli
Name: Paul Campanelli
Title: President, Par.
By:
7
AMENDMENT TO
LICENSE AND COMMERCIALIZATION AGREEMENT
This AMENDMENT TO LICENSE AND COMMERCIALIZATION AGREEMENT is hereby entered into and made this 24th
day of September, 2013 (this “Amendment”) by and between IntelliPharmaCeutics Corp., a Nova Scotia corporation (“IPC”), and Par
Pharmaceutical, Inc., a Delaware corporation (“Par”).
WHEREAS the Parties are mutually desirous to amend the License and Commercialization Agreement between them, dated
November 21, 2005, and as amended from time to time (the “L&C Agreement”), so as to clarify certain matters relating to the costs
associated with the pharmacovigilance in relation to the Product as required by law, and with respect to the provision of a Safety Data
Exchange Agreement between the Parties in respect of such pharmacovigilance, and with respect to the provision of a Quality
Agreement between the Parties to allocate responsibilities of quality assurance and control during commercialization of the Product,
without affecting the financial, intellectual property or other rights of the Parties in respect of the operation of the L&C Agreement
generally, and without otherwise affecting the operation of the L&C Agreement in any way;
AND WHEREAS it is intended that the intent and the spirit of the L&C Agreement is not be affected by this amendment, other than
the specific aspects that are provided for herein, and that the L&C Agreement, as amended, be interpreted, mutatis mutandis, to give
effect to the changes set forth in this Amendment.
NOW THEREFORE in consideration of the mutual covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged by the Parties, the Parties agree that the L&C Agreement is hereby
amended in accordance with Section 14.5 of the L&C Agreement as follows, with effect as of the date hereof:
Section 1
Capitalized Terms and Section References
Terms capitalized in this Amendment shall, unless otherwise defined, have the meaning given to them in the L&C Agreement. All
references herein to Sections and Articles shall, unless otherwise specified, be references to provisions of the L&C Agreement.
Section 2
Effect of Amendments Provided for Herein
The L&C Agreement is amended:
(a)
(b)
with respect to the provision of a Safety Data Exchange Agreement between the Parties in respect of the allocation
of the responsibilities for pharmacovigilance, and further to account for the costs of pharmacovigilance required
by law in association with sales of Product in the Territory, and solely in the respects provided for herein;
with respect to the provision of a Quality Agreement between the Parties in respect of the allocation of the
responsibilitiesfor quality assurance and control in respect of the manufacture, distribution and sale of the Product
in the Territory;
(c)
in keeping with the spirit and intent of the L&C Agreement, such other sections as may be affected by the said
changes should be interpreted, mutatis mutandis, to give effect to such spirit and intent.
Section 3
Amendment and Restatement of Section 1.23 of the L&C Agreement
Section 1.23 is hereby amended and restated, such that the current provision is deleted and the following is substituted in its place:
1.23 “Net Sales” means the Dollar amount determined by deducting from the gross amount invoiced for the Product or
Authorized Generic Product sold by Par, or by an Affiliate of Par, or by a permitted sub-licensee, as the case may be, in the
Territory the following to the extent they relate directly to the sale of the Product or Authorized Generic Product by Par: (i)
all applicable sales credits accrued in accordance with accounting principles generally accepted in the United States (ii)
payments or rebates incurred pursuant to federal, state and local government assistance programs, whether in existence now or
enacted at any time hereafter, (iii) costs for transit insurance, freight, handling or other transportation, (iv) customs duty, sales,
use or excise taxes, (v) the write-off of any unsold inventory or batches, (vi) the write-off of applicable bad debt, and those
actual Pharmacovigilance Costs which are directly related to sales of the Product in the Territory as are necessarily and
reasonably incurred by Par, whether incurred directly by Par or indirectly by re-imbursement of IPC for such costs, but only to
the extent that such Pharmacovigilance Costs are consistent with and do not exceed the rates for such costs set forth on Exhibit
A. Where IPC incurs any such Pharmacovigilance Costs, it shall invoice them immediately to Par and Par shall credit IPC for
such costs in the quarter in which such invoice is received; provided, however, that in no event shall Par be required to credit
IPC for any such costs that are not consistent with or are in excess of the rates for such costs set forth on Exhibit A. Sales
credits accrued in accordance with accounting principles generally accepted in the United States include credits or discounts
related to the following: (i) customer returns, returned goods allowances, billing and shipping errors, rejected goods and
damaged goods; (ii) cash or terms discounts; (iii) customer rebate programs; (iv) chargebacks and administration fees or
similar credits or payments granted to customers pursuant to contract or other purchases; (v) sales promotions, trade show
discounts and stocking allowances (vi) price adjustments, including those on customer inventories following price changes;
and (vii) Product recall.
Section 4
Addition of new Section 1.36 to the L&C Agreement.
New Section 1.36 is hereby added to the L&C Agreement as follows:
1.36 “Safety Data Exchange Agreement ” means that safety data exchange agreement to be executed by the Parties in
writing prior to commercialization in the Territory concerning the allocation of the responsibilities for pharmacovigilance for
the Product during such commercialization.
Section 5
Addition of new Section 1.37 to the L&C Agreement.
New Section 1.37 is hereby added to the L&C Agreement as follows:
1.37 “Quality Agreement ” means that quality agreement to be executed by the Parties in writing prior to
commercialization in the Territory concerning the allocation of the responsibilities for quality assurance and control in respect
of the manufacture, distribution and sale of the Product in the Territory.
Section 6
Addition of new Section 1.38 to the L&C Agreement.
New Section 1.38 is hereby added to the L&C Agreement as follows:
“Pharmacovigilance Costs” means those costs in relation to sales of the Product in the Territory as are necessarily and reasonably
incurred by either Par or IPC in pursuance of the Parties’ obligations under the Safety Data Exchange Agreement, and includes only
(i) pass-through costs related to sales of the Product in the Territory as invoiced by a third party vendor contracted by either Party to
perform any or all of such obligations, (ii) the cost of quarterly null reports from such vendor in periods in which no adverse events
are reported, (iii) the cost of quarterly periodic reports from such vendor in periods in which there was at least one adverse event, (iv)
the Parties’ incremental costs per individual case evaluation of adverse events, (v) the Parties’ cost of mandatory literature searches
and review thereof, and (vi) any other cost relating to the Parties’ pharmacovigilance obligations which the Parties agree is a
Pharmacovigilance Cost.
Section 7
Addition of new Section 5.2 to the L&C Agreement.
New Section 5.2 is hereby added to the L&C Agreement as follows:
.
5
2 Quality Assurance. Par and IPC will, in good faith, enter into the Quality Agreement prior to the
commercialization of the Product, and will abide by the terms of the Quality Agreement throughout the term of this
Agreement and at all times while the Product is being manufactured for sale in the Territory pursuant to this Agreement.
Section 8
Addition of new Section 5.3 to the L&C Agreement.
New Section 5.3 is hereby added to the L&C Agreement as follows:
5.3 Pharmacovigilance. Par and IPC will, in good faith, enter into the Safety Data Exchange Agreement prior to the
commercialization of the Product, and will abide by the terms of the Safety Data Exchange Agreement throughout the term of
this Agreement and at all times while the Product remains on sale in the Territory pursuant to this Agreement.
Section 9
Addition of Exhibit A to the L&C Agreement.
Exhibit A attached hereto is hereby added to the L&C Agreement.
Section 10
Micellaneous.
10.1 Governing Law and Jurisdiction. This Amendment shall be governed by and construed in accordance with the laws of the State
of New York without regard to the conflicts of law provisions thereof. The Parties hereby submit to the exclusive jurisdiction of the
State and Federal Courts located in the State, City, and County of New York.
10.2 Effect on the L&C Agreement. The terms and provisions set forth in this Amendment shall amend and supersede the terms and
provisions of the L&C Agreement solely to the extent set forth in this Amendment, and except as expressly amended in this
Amendment, the L&C Agreement shall remain in full force and effect. All references in the L&C Agreement shall be deemed to
refer to such agreement as amended by this Amendment.
Counterparts. This Amendment may be executed in one or more counterparts, including by transmission of facsimile or PDF copies
of signature pages, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.
[Signing page follows]
IN WITNESS WHEREOF, the Parties have executed and delivered this Amendment as of the date first above written.
INTELLIPHARMACEUTICS CORP.
By:
/s/ John Allport
Name: John Allport
Title: VP Legal Affairs and Licensing
PAR PHARMACEUTICAL, INC.
By:
/s/ Paul V. Campanelli
Name: Paul V. Campanelli
Title: Chief Executive Officer
[Signature Page to Amendment to
License and Commercialization Agreement]
Exhibit A to L&C Agreement
Pass-through costs from third party vendor:
·
·
$[*] per quarter for quarterly null reports from such vendor in periods in which no adverse events are reported; and
$[*] per quarter for quarterly periodic reports from such vendor in periods in which there was at least one adverse event.
Incremental costs:
·
·
$[*] per individual case evaluation of adverse events; and
$[*] per month for mandatory literature searches and review thereof.
*Omitted and filed separately with the Securities and Exchange Commission under a request for confidential treatment.
LIST OF SUBSIDIARIES
INTELLIPHARMACEUTICS INTERNATIONAL INC.
Exhibit 8.1
INTELLIPHARMACEUTICS INTERNATIONAL INC.
Exhibit 12.1
CERTIFICATION PURSUANT TO RULE 13a-14 OR 15d-14 OF
THE SECURITIES EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Isa Odidi, certify that:
1. I have reviewed this Annual Report on Form 20-F of Intellipharmaceutics International Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the
period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;
4. The company's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the company and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the company's disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and;
d) Disclosed in this report any change in the company's internal control over financial reporting that occurred during the period covered
by the annual report that has materially affected, or is reasonably likely to materially affect, the company's internal control over financial
reporting; and
5. The company's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the company's auditors and the audit committee of the company's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the company's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the company's internal
control over financial reporting.
Date: February 18, 2014
By:
/s/ Isa Odidi
Isa Odidi
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
INTELLIPHARMACEUTICS INTERNATIONAL INC.
Exhibit 12.2
CERTIFICATION PURSUANT TO RULE 13a-14 OR 15d-14 OF
THE SECURITIES EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Shameze Rampertab, certify that:
1. I have reviewed this Annual Report on Form 20-F of Intellipharmaceutics International Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the
period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;
4. The company's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the company and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the company's disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and;
d) Disclosed in this report any change in the company's internal control over financial reporting that occurred during the period covered
by the annual report that has materially affected, or is reasonably likely to materially affect, the company's internal control over financial
reporting; and
5. The company's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the company's auditors and the audit committee of the company's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the company's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the company's internal
control over financial reporting.
Date: February 18, 2014
By:
/s/ Shameze Rampertab
Shameze Rampertab
Vice President Finance and Chief Financial Officer
(Principal Financial Officer)
INTELLIPHARMACEUTICS INTERNATIONAL INC.
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002
Exhibit 13.1
In connection with the Annual Report of Intellipharmaceutics International Inc. (the “Company”) on Form 20-F for the period
ending November 30, 2013 (the “Report”), I, Isa Odidi, the Chairman of the Board and Chief Executive Officer of the Company, certify,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my
knowledge:
(1)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of
the Company.
By: /s/ Isa Odidi
Isa Odidi
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
Date: February 18, 2014
INTELLIPHARMACEUTICS INTERNATIONAL INC.
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002
Exhibit 13.2
In connection with the Annual Report of Intellipharmaceutics International Inc. (the “Company”) on Form 20-F for the period
ending November 30, 2013 (the “Report”), I, Shameze Rampertab, Vice President, Finance and Chief Financial Officer of the Company,
certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my
knowledge:
(1)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of
the Company.
By: /s/ Shameze Rampertab
Shameze Rampertab
Vice President, Finance and Chief Financial Officer
(Principal Financial Officer)
Date: February 18, 2014
Exhibit 15.1
Deloitte LLP
5140 Yonge Street
Suite 1700
Toronto, ON M2N 6L7
Canada
Tel: 416-601-6150
Fax: 416-601-6151
www.deloitte.ca
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in Registration Statement No(s). 333-178190 and 333-172796 on Form F-3 of our report
dated February 18, 2014, relating to the consolidated financial statements and financial statement schedules of Intellipharmaceutics
International Inc. (the “Company”) (which report expresses an unqualified opinion and includes an explanatory paragraph relating to the
conditions and events that raise substantial doubt on the Company’s ability to continue as a going concern) appearing in the Form 20-F for
the year ended November 30, 2013, and to the reference to us under the heading "Experts" in the Registration Statements noted above.
/s/ Deloitte LLP
Chartered Professional Accountants, Chartered Accountants
Licensed Public Accountants
February 18, 2014
Toronto, Canada