UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
[_]
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
[X]
[_]
[_]
OR
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended November 30, 2016
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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)
Domenic Della Penna, 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, 2016, the registrant had 29,789,992 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:
Item 17 [_] Item 18 [_]
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).
Yes [_] No [X]
TABLE OF CONTENTS
PART I
Item 1. Identity of Directors, Senior Management and Advisers
A. Directors and senior management
B. Advisors
C. Auditors
Item 2. Offer Statistics and Expected Timetable
A. Offer statistics
B. Method and expected timetable
Item 3. Key Information
A. Selected Financial Data
B. Capitalization and Indebtedness
C. Reasons for the Offer and use of Proceeds
D. Risk Factors
Item 4. Information on the Company
A. History and Development of the Company
B. Business Overview
C. Organizational Structure
D. Property, Plant and Equipment
Unresolved Staff Comments
Item
4A.
Item 5. Operating and Financial Review and Prospects
A. Operating Results
B. Liquidity and Capital Resources
C. Research and development, patents, and Licenses, etc
D. Trend Information
E. Off-balance sheet arrangements
F. Tabular disclosure of contractual obligations
G. Safe Harbor
Item 6. Directors, Senior Management and Employees
A. Directors and Senior Management
B. Compensation
C. Board Practices
D. Employees
E. Share Ownership
Item 7. Major Shareholders and related Party Transactions
A. Major Shareholders
B. Related Party Transactions
Item 8. Financial Information
A. Consolidated Statements and Other Financial Information
B. Significant changes
Item 9. The Offer and Listing
Item 10.Additional Information
A. Share Capital
B. Articles and By-Laws
C. Material Contracts
D. Exchange Controls
E. Taxation
F. Dividends and Paying Agents
G. Statement by Experts
H. Documents on Display
I. Subsidiary Information
Item 11.Qualitative and Quantitative Disclosures about Market Risk
Item 12.Description of Securities Other than equity Securities
Page
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A. Debt Securities
B. Warrants and Rights
C. Other Securities
D. American Depositary Shares
Code of Ethics
Audit Committee Financial Expert
Principal Accountant Fees and Services
Exemptions from the Listing Standards for Audit Committees
PART
II
Item 13.Defaults, Dividend Arrearages and delinquencies
Item 14.Material Modifications to the Rights of Security Holders and Use of Proceeds
Item 15.Controls and Procedures
Item 16.[Reserved]
Item
16A.
Item
16B.
Item
16C.
Item
16D.
Item
16E.
Item
16F.
Item
16G.
Item
16H.
PART
III
Item 17.Financial Statements
Item 18.Financial Statements
Item 19.Exhibits
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Change in registrant’s Certifying Accountant
Mine Safety Disclosure
Corporate Governance
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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”, “plans to”, “anticipates”, “believes”, “estimates”,
“predicts”, “confident”, “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 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 and the expected use of any proceeds from any offering of our securities, our ability to maintain compliance with the
continued listing requirements of the principal markets on which our securities are traded, 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 difficulty in predicting the timing and results of any product launches, 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;
● delays that may be caused by changing regulatory requirements;
● the difficulty in predicting the timing of regulatory approval and launch of competitive products;
● the difficulty in predicting the impact of competitive products on volume, pricing, rebates and other allowances;
● the inability to forecast wholesaler demand and/or wholesaler buying patterns;
● the seasonal fluctuation in the numbers of prescriptions written for our Focalin XR® (dexmethylphenidate hydrochloride extended-
release) capsules, which may produce substantial fluctuations in revenues;
● the timing and amount of insurance reimbursement for our products;
1
● changes in laws and regulations affecting the conditions required by the United States Food and Drug Administration (“ FDA”) for
approval, testing and labeling of drugs including abuse or overdose deterrent properties, and changes affecting how opioids are regulated
and prescribed by physicians;
● changes in 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;
● challenges related to the development, commercialization, technology transfer, scale-up, and/or process validation of manufacturing
processes for our products or product candidates;
● the manufacturing capacity of third-party manufacturers that we may use for our products;
● the successful compliance with FDA, Health Canada and other governmental regulations applicable to us and our third party
manufacturers’ facilities, products and/or businesses;
● difficulties, delays or changes in the FDA approval process or test criteria for abbreviated new drug applications (“ ANDAs”) and new
drug applications (“NDAs”);
● challenges in securing final FDA approval for our product candidates, including Rexista™ in particular, if a patent infringement suit is
filed against us, which could delay the FDA’s final approval of such product candidates;
● healthcare reform measures could hinder or prevent the commercial success of our products and product candidates;
● the FDA may not approve requested product labeling for our product candidate(s) having abuse-deterrent properties;
● risks associated with cyber-security and the potential for vulnerability of the digital information of the Company or a current and/or future
drug development or commercialization partner of the Company; and
● risks arising from the ability and willingness of our third-party commercialization partners to provide documentation that may be required
to support information on revenues earned by us from those commercialization partners.
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 into the future
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. Whenever we refer to any of our current product candidates (including additional product
strengths of products we are currently marketing, such as generic Focalin XR® (dexmethylphenidate hydrochloride extended-release capsules) and
future products we may develop, no assurances can be given that we, or any of our strategic partners, will successfully complete the development
of any of such product candidates or future products under development or proposed for development, that regulatory approvals will be granted for
any such product candidate or future product, or that any approved product will be produced in commercial quantities or sold profitably.
Unless stated otherwise, all references to “$” are to the lawful currency of the United States and all references to “C$” are to the lawful
currency of Canada. 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.
2
Intellipharmaceutics™, Hypermatrix™, Drug Delivery Engine™,
IntelliMatrix™,
IntelliOsmotics™, IntelliPaste™, IntelliPellets™, IntelliShuttle™, Rexista™, nPODDDS™, PODRAS™ 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™,
3
PART I.
Item 1.
Identity of Directors, Senior Management and Advisers
A.
Directors and senior management
Not applicable.
B.
Advisers
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, 2016, 2015, 2014, 2013, and 2012. 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.
(in thousands of U.S. dollars, except for per share data)
Revenue
Loss for the period
Total assets
Total liabilities
Net assets
Capital stock
Loss per share - basic and diluted
Dividends
Weighted average common shares
As at and
for the
year
ended
November
30, 2016
$
2,247
(10,144)
7,974
6,858
1,116
29,831
As at and
for the
year
ended
November
30, 2015
$
4,094
(7,436)
5,224
5,362
(138)
As at and
for the
year
ended
November
30, 2014
$
8,770
(3,856)
7,875
2,966
4,909
18,941
As at and
for the
year
ended
November
30, 2013
$
1,527
(11,495)
4,380
10,335
(5,955)
11,721
21,481
(0.38)
Nil
26,700
(0.31)
Nil
23,768
(0.17)
Nil
23,051
4
(0.58)
Nil
19,671
As at and
for the
year
ended
November
30, 2012
$
107
(6,137)
2,475
4,243
(1,768)
6,129
(0.36)
Nil
17,259
The following table sets forth the average exchange rate for one Canadian dollar expressed in terms of one U.S. dollar for the fiscal years
2012, 2013, 2014, 2015 and 2016. The average rate is calculated using the average of the exchange rates on the last day of each month during the
period.
2012
2013
2014
2015
2016
AVERAGE
0.9977
1.0241
0.9115
0.7934
0.7532
The following table sets forth the high and low exchange rates for each month during the previous six months.
August 2016
September 2016
October 2016
November 2016
December 2016
January 2017
February 2017 (through February 27, 2017)
LOW
0.7587
0.7548
0.7461
0.7363
0.7377
0.7442
0.7680
HIGH
0.7828
0.7786
0.7631
0.7498
0.7622
0.7675
0.7595
The exchange rates are based upon the noon buying rate as quoted by The Bank of Canada. At February 27, 2017, 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 $0.7597.
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.
5
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 more fully discussed
under “Item 5. Operating and Financial Review and Prospects - B. “Liquidity and Capital Resources,” as of November 30, 2016, we had a cash
balance of $4.1 million. As of February 27, 2017, our cash balance was $2.7 million. We currently expect to satisfy our operating cash
requirements until June 2017 from cash on hand. However, we may need to obtain additional funding prior to that time as we pursue the
development of our product candidates and if we accelerate our product commercialization activities. If necessary, we expect to utilize our at-the-
market offering program to bridge any funding shortfall in the first and second quarters of 2017. In the second half of fiscal 2017, we expect
revenues to improve as we prepare for the launch of our tentatively approved generic Seroquel XR® (quetiapine fumarate extended release tablet)
on the expiry of the first filer exclusivity periods of Par Pharmaceutical, Inc. (“Par”) and Accord Healthcare (“Accord”) in May 2017, although
there can be no assurance as to when or if any launch will occur, or if generic Seroquel XR® will be successfully commercialized. 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 which are at higher-than-currently projected levels and to fund any significant expansion of our operations. Although
there can be no assurances, such capital may come from revenues from the sales of our generic Focalin XR® capsules, from proceeds of our at-the-
market offering program (see “Share Capital – Prior Sales”, in Item 10, below for a further description of our at-the-market offering program),
from potential revenues from the sales of our tentatively approved generic Seroquel XR® and from potential partnering opportunities. Other
potential sources of capital may include payments from licensing agreements, cost savings associated with managing operating expense levels,
other equity and/or debt financings, and/or new strategic partnership agreements which fund some or all costs of product development. Our
ultimate success will depend on whether our product candidates receive the approval of the FDA or Health Canada and whether we are able to
successfully market approved products. We cannot be certain that we will be able to receive FDA or Health Canada approval for any of our current
or future product candidates, that we will reach the level of sales and revenues necessary to achieve and sustain profitability, or that we can secure
other capital sources 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, our success in commercializing approved products with our commercialization partners and 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 sufficient additional capital, it will raise substantial doubt about our ability to
continue as a going concern and realize our assets and pay our liabilities as they become due. Our cash outflows are expected to consist primarily of
internal and external research and development expenditures to advance our product pipeline. Depending upon the results of our research and
development programs and the availability of financial resources, we could decide to accelerate, terminate, or reduce certain projects, or commence
new ones. 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 or our not taking any necessary actions
required by the FDA or Health Canada 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, Abbreviated New Drug Submissions (“ANDSs”), or 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.
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, 2016 and had an accumulated deficit of $63,016,019 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 Health Canada and whether we are able to successfully market
approved products. We cannot be certain that we will be able to receive FDA or Health Canada 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
6
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.
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
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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.
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”) was 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. In return, the program is intended to provide faster and more predictable ANDA
reviews by the FDA and more timely inspections of drug facilities. For the FDA’s fiscal years 2016 and 2017, respectively, the user fee rates are
$76,030 and $70,480 for new ANDAs, $38,020 and $35,240 for “Prior Approval Supplements,” and $17,434 for each ANDA already on file at the
FDA. For the FDA’s fiscal year 2016 and 2017, there is also an annual facility user fee of $258,905 and $273,646, 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.
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
material litigation claims against us other than as described under Item 8.A below. 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 or 505(b)(2) NDA 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.
Our NDA seeking authorization to market our Rexista™ product candidate (abuse-deterrent oxycodone hydrochloride extended release
tablets) in the 10, 15, 20, 30, 40, 60 and 80 mg strengths was filed under Paragraph IV of the Hatch-Waxman Act, as amended. The FDA has
accepted the filing for further review. We have, within the period provided in Paragraph IV, notified the brand owner of Oxycontin ®, and all
holders of patents associated with the branded product Oxycontin® (the “Oxycontin® patents”) listed in the FDA’s Approved Drug Products with
Therapeutic Equivalence Evaluations, commonly known as the Orange Book (the “Orange Book”), that we have filed an NDA with the FDA for
marketing approval for Rexista™, and have certified that Rexista™ would not infringe the Oxycontin® patents or that the Oxycontin ® patents are
invalid. This notice may give rise, within a prescribed time of 45 days, to patent infringement litigation against us by the owner of the branded
product Oxycontin® and by the holders of the Oxycontin® patents. If such litigation is instituted within the prescribed time
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limits, the FDA will be stayed for 30 months from the date of such notice from granting final marketing approval to us for Rexista™, unless prior to
the expiry of such 30 months all parties settle the litigation in such way as to permit the marketing of Rexista™ (if then approved), or there is a
final decision of the courts that either the Oxycontin® patents were not valid or that Rexista™ did not infringe the Oxycontin® patents.
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.
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:
● 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;
● changes in the approval process of the FDA or other regulatory bodies during the development period or changes in regulatory review for
each submitted product application may also cause delays in the approval or result in rejection of an application;
● 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
9
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 generic Focalin XR®
(dexmethylphenidate hydrochloride extended-release).
We have invested significant time and effort in the development of our lead ANDA product, our once daily generic Focalin XR®
(dexmethylphenidate hydrochloride extended-release) capsules, for which we received final approval from the FDA in November 2013 under the
Company ANDA (as defined below) to launch the 15 and 30 mg strengths. Commercial sales of these strengths were launched immediately by our
commercialization partner in the U.S., Par. Our 5, 10, 20 and 40 mg strengths were also then tentatively FDA approved, subject to the right of Teva
Pharmaceuticals USA, Inc. (“Teva”) to 180 days of generic exclusivity from the date of first launch of such products. Teva launched its own 5, 10,
20 and 40 mg strengths of generic Focalin XR® capsules on November 11, 2014, February 2, 2015, June 22, 2015 and November 19, 2013,
respectively. In January 2017, Par launched the 25 and 35 mg strengths of its generic Focalin XR® capsules in the U.S., complementing the 15 and
30 mg strengths of our generic Focalin XR® currently marketed by Par. The FDA recently had granted final approval under the Par ANDA (as
defined below) for its generic Focalin XR® capsules in the 5, 10, 15, 20, 25, 30, 35 and 40 mg strengths. As the first filer of an ANDA for generic
Focalin XR® in the 25 and 35 mg strengths, Par has 180 days of U.S. generic marketing exclusivity for those strengths. We believe Par is
preparing to launch all the remaining strengths in the first half of 2017. Under a license and commercialization agreement between us and Par (as
amended, the “Par agreement”), we receive quarterly profit-share payments on Par’s U.S. sales of generic Focalin XR®. We expect sales of the
25 and 35 mg strength to improve our revenues significantly in 2017. There can be no assurance as to when or if any further launches will occur for
the remaining strengths, or if they will be successfully commercialized. We depend significantly on the actions of our commercialization partner
Par in the prosecution, regulatory approval and commercialization of our generic Focalin XR® capsules 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 our products in the U.S., where the branded Focalin XR® product is in the market. Although we have several other products
in our pipeline, and recently received final approval from the FDA for our generic Keppra XR® (levetiracetam extended-release tablets), and our
generic Glucophage® XR, for the 500 and 750 mg strengths, and tentative approval for all strengths of our generic Seroquel XR® (quetiapine
fumarate extended release) which is partnered with Mallinckrodt LLC (“Mallinckrodt”), the majority of the products in our pipeline are at earlier
stages of development. We will be exploring licensing and commercial alternatives for our generic Keppra XR® product strengths that have been
recently approved by the FDA. We are also actively evaluating options to realize commercial returns from the new approval of our generic
Glucophage® XR.
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
10
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.
Our business and operations are increasingly dependent on information technology and accordingly we would suffer in the event of
computer system failures, cyber-attacks or a deficiency in cyber-security.
Our internal computer systems, and those of a current and/or future drug development or commercialization partner of ours, may be
vulnerable to damage from cyber-attacks, computer viruses, malware, natural disasters, terrorism, war, telecommunication and electrical failures.
The risk of a security breach or disruption, particularly through cyber-attacks, including by computer hackers, foreign governments, and cyber
terrorists, has generally increased as the number, intensity and sophistication of attempted attacks and intrusions have increased. If such an event
were to occur and cause interruptions in our operations or those of a drug development or commercialization partner, it could result in a material
disruption of our product development programs. For example, the loss of clinical trial data from completed or ongoing or planned clinical trials
could result in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data. To the extent that any
disruption or security breach was to result in a loss of or damage to our data or applications, or inappropriate disclosure of confidential or
proprietary information, we could incur material legal claims and liability, damage to our reputation, and the further development of our drug
candidates could be adversely affected.
Our business can be impacted by wholesaler buying patterns, increased generic competition and, to a lesser extent, seasonal fluctuations,
which may cause our operating results to fluctuate.
We believe that the revenues derived from our generic Focalin XR® capsules are subject to wholesaler buying patterns, increased generic
competition negatively impacting price, margins and market share consistent with industry post-exclusivity experience and, to a lesser extent,
seasonal fluctuations (as these products are indicated for conditions including attention deficit hyperactivity disorder which we expect may see
increases in prescription rates during the school term and declines in prescription rates during the summer months). Accordingly, these factors may
cause our operating results to fluctuate.
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 failure to secure appropriate product labeling
approvals, 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. In addition, the possibility of a patent infringement suit regarding one or more of our product candidates could delay final FDA
approval of such candidates. If we fail to achieve one or more of these planned goals, the price of our common shares could decline.
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:
● the availability of alternative products from competitors;
● the prices of our products relative to those of our competitors;
● the timing of our market entry;
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● 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.
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:
● 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 enrollment 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
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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.
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,
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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.
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:
● 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.
Our financial results are reported in U.S. dollars and our revenues are payable in U.S. dollars, but the majority of our expenses are payable
in Canadian dollars. There may be instances where we have net foreign currency exposure. Any fluctuations in exchange rates will impact our
financial results.
We are exposed to risks arising from the ability and willingness of our third-party commercialization partners to provide documentation
that may be required to support information on revenues earned by us from those commercialization partners.
If our third-party commercialization partners, from whom we receive revenues, are unable or unwilling to supply necessary or sufficient
documentation to support the revenue numbers in our financial statements in a timely manner to the satisfaction of our auditors, this may lead to
delays in the timely publication of our financial results, our ability to obtain an auditor’s report on our financial statements and our possible
inability to access the financial markets during the time our results remain unpublished.
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 19.17% of our issued and outstanding common shares as of February 27, 2017 (and collectively beneficially owned in the aggregate
approximately 28.2% of our common shares, including common shares issuable upon the exercise of outstanding options and the conversion of the
debenture in respect of the loan to us in the original principal amount of $1,500,000 by Drs. Isa and Amina Odidi (the “Debenture”), of which
$1,350,000 remains outstanding, 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.
“Comprehensive tax reform” remains a topic of discussion in the United States Congress. Such legislation could significantly alter the
existing Code. We cannot predict whether, when, or to what extent U.S. federal tax laws, regulations, interpretations, or rulings will be issued, nor
is the long-term impact of proposed comprehensive tax reforms known at this time. We could be adversely affected by changes as a result of
comprehensive tax reform.
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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 RexistaTM product candidate (abuse-deterrent oxycodone hydrochloride extended release tablets), the prices
at which such of our products are sold and the revenues we may receive could be reduced.
Revenues from generic pharmaceutical products typically decline as a result of competition, both from other pharmaceutical companies
and as a result of increased governmental pricing pressure.
Our generic drugs face intense competition. Prices of generic drugs typically decline, often dramatically, especially as additional generic
pharmaceutical companies (including low-cost generic producers based in China and India) receive approvals and enter the market for a given
product and competition intensifies. Consequently, our ability to sustain our sales and profitability on any given product over time is affected by the
number of new companies selling such product and the timing of their approvals.
In addition, intense pressure from government healthcare authorities to reduce their expenditures on prescription drugs could result in
lower pharmaceutical pricing, causing decreases in our revenues.
Furthermore, brand pharmaceutical companies continue to defend their products vigorously. For example, brand companies often sell or
license their own generic versions of their products, either directly or through other generic pharmaceutical companies (so-called “authorized
generics”). No significant regulatory approvals are required for authorized generics, and brand companies do not face any other significant barriers
to entry into such market. Brand companies may seek to delay introductions of generic equivalents through a variety of commercial and regulatory
tactics. These actions may increase the costs and risks of our efforts to introduce generic products and may delay or prevent such introduction
altogether.
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 hydrochloride extended release tablets), 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.
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We are subject to significant costs and uncertainties related to compliance with the extensive regulations that govern the manufacturing,
labeling, distribution, cross-border imports 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, cross-border importation 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 in the U.S., and Health Canada and Canada Border
Services Agency in Canada, 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 Health Canada 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 or Health Canada’s
review of NDAs, ANDAs or ANDSs, as the case may be, enforcement actions, injunctions and civil or criminal prosecution.
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.
Healthcare reform measures could hinder or prevent the commercial success of our products and product candidates.
In the United States, there have been, and we expect there will continue to be, a number of legislative and regulatory changes to the
healthcare system that could affect our future revenues and potential profitability. Federal and state lawmakers regularly propose and, at times,
enact legislation that results in significant changes to the
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healthcare system, some of which are intended to contain or reduce the costs of medical products and services. An example of this is the Patient
Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, or, collectively, the Affordable Care Act.
In addition, other legislative changes have been proposed and adopted in the U.S. since the Affordable Care Act was enacted.
There is also increasing legislative attention to opioid abuse in the U.S., including passage of the 2016 Comprehensive Addiction and
Recovery Act and the 21st Century Cures Act, which, among other things, strengthens state prescription drug monitoring programs and expands
educational efforts for certain populations. These laws could result in fewer prescriptions being written for opioid drugs, which could impact
future sales of our Rexista and related opioid product candidates.
We expect that the new presidential administration and U.S. Congress will seek to modify, repeal, or otherwise invalidate all, or certain
provisions of, the Affordable Care Act. Since taking office, President Trump has continued to support the repeal of all or portions of the
Affordable Care Act and the House and Senate have recently taken certain action in furtherance of this goal.
We also expect that additional state and federal healthcare reform measures will be adopted in the future, any of which could limit the
amounts that federal and state governments will pay for healthcare products and services, and which could result in reduced demand for our
products once approved or additional pricing pressures, and may adversely affect our operating results.
Our ability to market and promote our Rexista™ product candidate (abuse-deterrent oxycodone hydrochloride extended release tablets)
and its abuse-deterrent features will be determined by FDA-approved labeling requirements.
The commercial success of our Rexista™ product candidate (abuse-deterrent oxycodone hydrochloride extended release tablets) will
depend upon our ability to obtain requested FDA-approved labeling describing its abuse-deterrent features. Our failure to achieve FDA approval of
requested product labeling containing such information will prevent us from advertising and promoting the abuse-deterrent features of our product
candidate in a way to differentiate it from competitive products. This would make our product candidate less competitive in the market. Moreover,
FDA approval is required in order to make claims that a product has an abuse-deterrent effect.
In April 2015, the FDA published final guidance with respect to the evaluation and labeling of abuse-deterrent opioids. The guidance
provides direction as to the studies and data required for obtaining abuse-deterrent claims in a product label. If a product is approved by the FDA to
include such claims in its label, the applicant may use the approved labeling information about the abuse-deterrent features of the product in its
marketing efforts to physicians.
Although we intend to provide data to the FDA to support approval of abuse-deterrence label claims for Rexista™, there can be no
assurance that Rexista™ or any of our other product candidates will receive FDA-approved labeling that describes the abuse-deterrent features of
such products. The FDA may find that our studies and data do not support our requested abuse-deterrent labeling or that our product candidate does
not provide substantial abuse-deterrence benefits because, for example, its deterrence mechanisms do not address the way it is most likely to be
abused. Furthermore, the FDA could change its guidance, which could require us to conduct additional studies or generate additional data. If the
FDA does not approve our requested abuse-deterrent labeling, we will be limited in our ability to promote Rexista™ based on its abuse-deterrent
features and, as a result, our business may suffer.
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
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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:
● 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;
● 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:
● 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;
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● 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 February 27, 2017, we had approximately 30.0 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, in November 2013, we established an at-the-
market equity program pursuant to which we could 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 then be permitted under applicable securities laws and regulations). As of February 27, 2017 we have issued and sold
3,853,557 common shares with an aggregate offering price of $11,908,312 under the at-the-market program. We currently may offer and sell our
common shares with an aggregate purchase price of up to $4,891,688 pursuant to the at-the-market program. Roth Capital Partners, LLC (“Roth”)
received compensation of $335,987 in connection with such sales.
Pursuant to an Underwriting Agreement between the Company and Dawson James Securities, Inc., dated May 27, 2016 (the “Dawson
James Underwriting Agreement”), in June 2016, we completed an underwritten public offering of 3,229,814 units of common shares and
warrants, at a price of $1.61 per unit. The warrants are currently exercisable, have a term of five years and an exercise price of $1.93 per common
share. We issued at the initial closing of the offering an aggregate of 3,229,814 common shares and warrants to purchase an additional 1,614,907
common shares. The underwriter also purchased at such closing additional warrants to acquire 242,236 common shares pursuant to the over-
allotment option exercised in part by the underwriter. We subsequently sold an aggregate of 459,456 additional common shares at the public
offering price of $1.61 per share in connection with subsequent partial exercises of the underwriter’s over-allotment option. The closings of these
partial exercises brought the total net proceeds from the offering to approximately $5.1 million, after deducting the underwriter’s discount and
offering expenses.
On June 4, 2014, the Company’s most recent registration statement on Form F-3 was declared effective by the United States Securities
and Exchange Commission (“SEC”) (the “Shelf Registration Statement”), and on June 5, 2014, the Company filed a final short form base shelf
prospectus with securities regulatory authorities in each of the provinces and territories of Canada, except Quebec. These documents allow for,
subject to securities regulatory requirements and limitations, the potential offering of up to an aggregate of US$100 million of the Company’s
common shares, preference shares, warrants, subscription receipts and units, or any combination thereof, from time to time in one or more
offerings, and are intended to give the Company the flexibility to take advantage of financing opportunities when, and if, market conditions are
favorable to the Company. The specific terms of such future offerings, if any, would be established, subject to the approval of the Company’s board
of directors, at the time of such offering and will be described in detail in a prospectus supplement filed at the time of any such offering. To the
extent any securities of the Company are issued by the Company under the Shelf Registration Statement or the shelf prospectus, a shareholder’s
percentage ownership will be diluted and our stock price could be further adversely affected. As of February 27, 2017, the Company has not sold
any securities under the Shelf Registration Statement or the shelf prospectus, other than (i) the sale since June 4, 2014 of 2,164,057 common shares
under the Company’s at-the-market program referred to above, (ii) the sale of units, common shares and warrants under the Dawson James
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Underwriting Agreement referred to above, and (iii) and the issuance of 1,015,068 common shares pursuant to warrants previously issued, and
there can be no assurance that any additional securities will be sold under the Shelf Registration Statement or the shelf prospectus.
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 February 27, 2017, 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 7,845,603 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 then be permitted under applicable securities laws and regulations) of our common shares on NASDAQ or
otherwise. As of February 27, 2017, we have issued and sold 3,853,557 common shares with an aggregate offering price of $11,908,312 under the
at-the-market program. We currently may offer and sell our common shares with an aggregate purchase price of up to $4,891,688 pursuant to the
at-the-market program. 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
21
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.
On June 4, 2014, the Shelf Registration Statement was declared effective by the SEC and on June 5, 2014, the Company filed a final short
form base shelf prospectus with securities regulatory authorities in each of the provinces and territories of Canada, except Quebec. These
documents allow for, subject to securities regulatory requirements and limitations, the potential offering of up to an aggregate of US $100 million
of the Company’s common shares, preference shares, warrants, subscription receipts and units, or any combination thereof, from time to time in one
or more offerings, and are intended to give the Company the flexibility to take advantage of financing opportunities when, and if, market conditions
are favorable to the Company. The specific terms of such future offerings, if any, would be established, subject to the approval of the Company’s
board of directors, at the time of such offering and will be described in detail in a prospectus supplement filed at the time of any such offering. As
of February 27, 2017, the Company has not sold any securities under the Shelf Registration Statement or the shelf prospectus, other than (i) the sale
since June 4, 2014 of 2,164,057 common shares under the Company’s at-the-market program referred to above, (ii) the sale of units, common
shares and warrants under the Dawson James Underwriting Agreement referred to above, and (iii) the issuance of 1,015,068 common shares
pursuant to warrants previously issued, and there can be no assurance that any additional securities will be sold under the Shelf Registration
Statement or the shelf prospectus.
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.
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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 experience potentially
more price volatility than experienced on 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.
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.
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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.
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 (as defined in Item 10 below) of our common shares and preference shares
(collectively, “shares”). It may be possible for U.S. holders 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 2016 taxable year and will not likely be a PFIC during our 2017 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
2017 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 2017 taxable
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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 Company during any year in which we are a PFIC.
It is unclear how corporate tax reform currently being considered in the United States will affect the PFIC rules or QEF elections. The
foregoing only speaks to the United States federal income tax considerations as to the Code in effect on January 1, 2017.
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.
It may be difficult to obtain and enforce judgments against us because of our Canadian residency.
We are governed by the laws of Canada. All of our directors and officers are residents of Canada 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.
Our agent for service in the United States is Corporation Service Company at 1090 Vermont Avenue N.W., Washington, D.C. 20005.
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, 2016, 2015 and 2014, we spent a total of $8,166,736, $7,247,473 and $8,020,201, respectively, on
research and development. Over the past three fiscal years and up to February 27, 2017, we have raised approximately $17,848,279 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”.
25
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
Recent Corporate Developments
● In February 2017, we received final approval from the FDA for our ANDA for metformin hydrochloride extended release tablets in the
500 mg and 750 mg strengths. Our newly approved product is a generic equivalent for the corresponding strengths of the branded product
Glucophage® XR sold in the United States by Bristol-Myers Squibb. We are actively evaluating options to realize commercial returns from this
new approval.
● In February 2017, the FDA accepted for filing the NDA we filed in November 2016 seeking authorization to market our
Rexista™ product candidate (abuse-deterrent oxycodone hydrochloride extended release tablets) in the 10, 15, 20, 30, 40, 60 and 80 mg strengths.
The FDA has determined that our application is sufficiently complete to permit a substantive review, and has set a target action date under the
Prescription Drug User Fee Act (“PDUFA”) of September 25, 2017. Rexista™ is indicated for the management of pain severe enough to require
daily, around-the-clock, long-term opioid treatment and for which alternative treatment options are inadequate. The submission is supported by
pivotal pharmacokinetic studies that demonstrated that RexistaTM is bioequivalent to OxyContin® (oxycodone hydrochloride extended release). The
submission also includes abuse-deterrent studies conducted to support abuse-deterrent label claims related to abuse of the drug by various
pathways, including oral, intra-nasal and intravenous, having reference to the FDA’s “ Abuse-Deterrent Opioids — Evaluation and Labeling”
guidance published in April 2015.
● In January 2017, our U.S. commercialization partner, Par, launched the 25 and 35 mg strengths of its generic Focalin XR®
(dexmethylphenidate hydrochloride extended-release) capsules in the U.S., complementing the 15 and 30 mg strengths of our generic Focalin XR®
currently marketed by Par. The FDA had recently granted final approval to Par’s ANDA for its generic Focalin XR ® capsules in the 5, 10, 15, 20,
25, 30, 35 and 40 mg strengths. We expect sales of the 25 and 35 mg strengths to significantly improve our revenues in 2017. As the first filer of an
ANDA for generic Focalin XR® in the 25 and 35 mg strengths, Par has 180 days of U.S. generic marketing exclusivity for these strengths. We
believe Par is preparing to launch all the remaining strengths in the first half of 2017. Under the Par agreement, we receive quarterly profit-share
payments on Par's U.S. sales of generic Focalin XR®.
● In December 2016, U.S. Patent No. 9,522,119 and Canadian Patent No. 2,910,865 were issued by the U.S. Patent and Trademark Office
and the Canadian Intellectual Property Office in respect of “Compositions and Methods for Reducing Overdose”. The issued patents cover aspects
of our Paradoxical OverDose Resistance Activating System (“ PODRAS™”) delivery technology, which is designed to prevent overdose when
more pills than prescribed are swallowed intact. Preclinical studies of prototypes of oxycodone with PODRAS™ technology suggest that, unlike
other third-party abuse-deterrent oxycodone products in the marketplace, if more tablets than prescribed are deliberately or inadvertently
swallowed, the amount of drug active released over 24 hours may be substantially less than expected. However, if the prescribed number of pills is
swallowed, the drug release should be as expected. The issuance of these patents provides us with the opportunity to accelerate our PODRAS™
development plan by pursuing proof of concept studies in humans. We intend to incorporate this technology in an alternate Rexista ™ product
candidate.
● In October 2016, we entered into a license and commercial supply agreement with Mallinckrodt, granting Mallinckrodt an exclusive
license to market, sell and distribute in the U.S. the following extended release drug product candidates (the "licensed products") for which we
have ANDAs filed with the FDA (the “Mallinckrodt agreement”):
■ Quetiapine fumarate extended-release tablets (generic Seroquel XR®) – ANDA Tentatively Approved by FDA
■ Desvenlafaxine extended-release tablets (generic Pristiq®) – ANDA Under FDA Review
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■ Lamotrigine extended-release tablets (generic Lamictal® XR™) – ANDA Under FDA Review
Under the terms of this 10-year agreement, we received a non-refundable upfront payment of $3 million in October 2016. In addition, the
Mallinckrodt agreement also provides for a long-term profit sharing arrangement with respect to these licensed products (which includes up to $11
million in cost recovery payments to us). We have agreed to manufacture and supply the licensed products exclusively for Mallinckrodt on a cost
plus basis, and Mallinckrodt has agreed that we will be its sole supplier of the licensed products marketed in the U.S.
● In October 2016, we received tentative approval from the FDA for our ANDA for quetiapine fumarate extended-release tablets in the
50, 150, 200, 300 and 400 mg strengths. Our tentatively-approved product is a generic equivalent for the corresponding strengths of the branded
product Seroquel XR® sold in the U.S. by AstraZeneca Pharmaceuticals LP (“ AstraZeneca”). Pursuant to a settlement agreement between us and
AstraZeneca dated July 30, 2012, we were permitted to launch our generic versions of the 50, 150, 200, 300 and 400 mg strengths of generic
Seroquel XR®, on November 1, 2016, subject to FDA final approval of our ANDA for those strengths. Such FDA final approval is subject to a 180
day exclusivity period relating to a prior filer or filers of a generic equivalent of the branded product. The first filer rights are shared by Par and
Accord. We believe that in early November 2016, Par launched the 50, 100, 200, and 300 mg strengths, and Accord launched the 400 mg strength.
We and our marketing and distribution partner for generic Seroquel XR® in the U.S., Mallinckrodt, are working diligently towards a launch of all
such strengths upon their respective final FDA approvals.
● In July 2016, the FDA completed its review of our previously requested waiver of the NDA user fee related to our Rexista™ (abuse
deterrent oxycodone hydrochloride extended release tablets) NDA product candidate. The FDA, under the small business waiver provision section
736(d)(1)(D) of the Federal Food, Drug, and Cosmetics Act, granted us a waiver of the $1,187,100 application fee for Rexista™.
● In July 2016, we announced the results of a food effect study conducted on its behalf for Rexista™. The study design was a randomized,
one-treatment two periods, two sequences, crossover, open label, laboratory-blind bioavailability study for Rexista™ following a single 80 mg oral
dose to healthy adults under fasting and fed conditions. The study showed that RexistaTM can be administered with or without a meal (i.e., no food
effect). Rexista™ met the bioequivalence criteria (90% confidence interval of 80% to 125%) for all matrices, involving maximum plasma
concentration and area under the curve (i.e., Cmax ratio of RexistaTM taken under fasted conditions to fed conditions, and AUC metrics taken under
fasted conditions to fed conditions). We believe that Rexista™ is well differentiated from currently marketed oral oxycodone extended release
products.
● In June 2016, we completed an underwritten public offering of 3,229,814 units of common shares and warrants, at a price of $1.61 per
unit. The warrants are currently exercisable, have a term of five years and an exercise price of $1.93 per common share. We issued at the initial
closing of the offering an aggregate of 3,229,814 common shares and warrants to purchase an additional 1,614,907 common shares. The
underwriter also purchased at such closing additional warrants to acquire 242,236 common shares pursuant to the over-allotment option exercised
in part by the underwriter. We subsequently sold an aggregate of 459,456 additional common shares at the public offering price of $1.61 per share
in connection with subsequent partial exercises of the underwriter’s over-allotment option. The closings of these partial exercises brought the total
net proceeds from the offering to approximately $5.1 million, after deducting the underwriter’s discount and offering expenses.
● In February 2016, we announced that the FDA granted final approval of our ANDA for levetiracetam extended release tablets for the
500 and 750 mg strengths. Our approved product is the generic equivalent of the branded product KeppraXR® sold in the U.S. by UCB, Inc.
KeppraXR®, and the drug active levetiracetam, are indicated for use in the treatment of partial onset seizures associated with epilepsy. We are
actively exploring the best approach to commercialize the product.
● In January 2016, we announced that pivotal bioequivalence trials of our RexistaTM (abuse deterrent oxycodone hydrochloride extended
release tablets), dosed under fasted and fed conditions, had demonstrated bioequivalence to Oxycontin® (oxycodone hydrochloride) extended
release tablets as manufactured and sold in the U.S. by Purdue Pharma LP. The study design was based on FDA recommendations and compared
the lowest and highest strengths of exhibit batches of our RexistaTM to the same strengths of Oxycontin®. The results show that the ratios of the
pharmacokinetic metrics, Cmax, AUC0-t and AUC0-f for Rexista TM vs. Oxycontin®, are within the interval of 80% - 125% required by the FDA
with a confidence level exceeding 90%. Having now demonstrated
27
such bioequivalence, we believe we will not be required to conduct Phase III studies. The FDA notification is significant as it provides a basis for
an accelerated development plan for our RexistaTM product candidate, without the need for more costly and time consuming Phase III studies.
We are unable to state or estimate an actual launch date of any or all remaining strengths of Par’s generic Focalin XR ®. In addition, there can
be no assurance as to when or if any of the above-mentioned licensed products will receive final FDA approval or that, if so approved, the licensed
products will be successfully commercialized and produce significant revenues for us. Also, there can be no assurance that we will not be required
to conduct further studies for RexistaTM, that the FDA will ultimately approve the NDA for the sale of Rexista TM in the U.S. market, or that it will
ever be successfully commercialized, that our approved generic versions of Keppra XR® or Glucophage® XR will be successfully
commercialized, that we will be successful in submitting any additional ANDAs or NDAs with the FDA or ANDSs with Health Canada, that the
FDA or Health Canada will approve any of our current or future product candidates for sale in the U.S. market and Canadian market, or that they
will ever be successfully commercialized and produce significant revenue for us.
Our Company
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 (some of which have received FDA approval) and product candidates in various
stages of development, including ANDAs filed with the FDA (and one ANDS filed with Health Canada) and one NDA filing, in therapeutic areas
that include neurology, cardiovascular, gastrointestinal tract (“GIT”), diabetes and pain.
We received final approval from the FDA in November 2013 under the Company ANDA to launch the 15 and 30 mg strengths of our
generic Focalin XR® (dexmethylphenidate hydrochloride extended-release) capsules. Commercial sales of these strengths were launched
immediately by our commercialization partner in the U.S., Par.
Our 5, 10, 20 and 40 mg strengths were also then tentatively FDA approved, subject to the right of Teva to 180 days of generic exclusivity
from the date of first launch of such products. Teva launched its own 5, 10, 20 and 40 mg strengths of generic Focalin XR® capsules on November
11, 2014, February 2, 2015, June 22, 2015 and November 19, 2013, respectively. In January 2017, Par launched the 25 and 35 mg strengths of its
generic Focalin XR® capsules in the U.S., complementing the 15 and 30 mg strengths of our generic Focalin XR® currently marketed by Par. The
FDA recently had granted final approval under the Par ANDA for its generic Focalin XR ® capsules in the 5, 10, 15, 20, 25, 30, 35 and 40 mg
strengths. We believe Par is preparing to launch all the remaining strengths in the first half of 2017. As the first filer of an ANDA for generic
Focalin XR® in the 25 and 35 mg strengths, Par has 180 days of U.S. generic marketing exclusivity for those strengths. Under the Par agreement,
we receive quarterly profit share payments on Par’s U.S. sales of generic Focalin XR ®. We expect sales of the 25 and 35 mg strength to improve
our revenues significantly in 2017. There can be no assurance as to when or if any further launches will occur for the remaining strengths, or if
they will be successfully commercialized. In February 2016, we received final approval from the FDA of our ANDA for generic Keppra XR ®
(levetiracetam extended-release tablets) for the 500 and 750 mg strengths. Our generic Keppra XR® is a generic equivalent for the corresponding
strengths of the branded product Keppra XR® sold in the U.S. by UCB, Inc., and is indicated for use in the treatment of partial onset seizures
associated with epilepsy. We are aware that several other generic versions of this product are currently available and serve to limit the overall
market opportunity. We are actively exploring the best approach to maximize our commercial returns from this approval. There can be no
assurance that our generic Keppra XR® for the 500 and 750 mg strengths will be successfully commercialized. In February 2017, we received final
approval from the FDA for our ANDA for metformin hydrochloride extended release tablets in the 500 mg and 750 mg strengths. Our newly
approved product is a generic equivalent for the corresponding strengths of the branded product Glucophage® XR sold in the United States by
Bristol-Myers Squibb. We are aware that other generic versions of this product are currently available in the market. We are actively evaluating
options to realize commercial returns from this new approval. There can be no assurance that our metformin extended-release tablets for the 500
mg and 750 mg strengths will be successfully commercialized.
28
In October 2016, we received tentative approval from the FDA for its ANDA for quetiapine fumarate extended-release tablets in the 50,
150, 200, 300 and 400 mg strengths. Our tentatively-approved product is a generic equivalent for the corresponding strengths of the branded
product Seroquel XR® sold in the U.S. by AstraZeneca. Pursuant to a settlement agreement between us and AstraZeneca dated July 30, 2012, we
are permitted to launch our generic versions of the 50, 150, 200, 300 and 400 mg strengths of generic Seroquel XR®, on November 1, 2016, subject
to FDA final approval of our ANDA for those strengths. Such FDA final approval is subject to a 180 day exclusivity period relating to a prior filer
or filers of a generic equivalent of the branded product. The first filer rights are shared by Par and Accord. We believe that in early November
2016, Par launched the 50, 100, 200, and 300 mg strengths, and Accord launched the 400 mg strength. If we receive final approval to launch our
generic version of the 50, 100, 200, 300, and 400 mg strengths of Seroquel XR® six months after the date of launch by the respective first filers, we
and our marketing and distribution partner for generic Seroquel XR® in the U.S., Mallinckrodt, are working diligently towards a launch of these
strengths upon final approval. There can be no assurance that our quetiapine fumarate extended-release tablets in any of the 50, 150, 200, 300 and
400 mg strengths will receive final FDA approval, or if approved, that they will be successfully commercialized.
In October 2016, we announced the Mallinckrodt agreement, granting Mallinckrodt an exclusive license to market, sell and distribute in
the U.S. the following extended release licensed products for which we have ANDAs filed with the FDA:
■ Quetiapine fumarate extended-release tablets (generic Seroquel XR®) – ANDA Tentatively Approved by FDA
■ Desvenlafaxine extended-release tablets (generic Pristiq®) – ANDA Under FDA Review
■ Lamotrigine extended-release tablets (generic Lamictal® XR™) – ANDA Under FDA Review
Under the terms of the 10-year agreement, we received a non-refundable upfront payment of $3 million in October 2016. In addition, the
agreement also provides for a long-term profit sharing arrangement with respect to these licensed products (which includes up to $11 million in cost
recovery payments to us). We have agreed to manufacture and supply the licensed products exclusively for Mallinckrodt on a cost plus basis. The
Mallinckrodt agreement contains customary terms and conditions for an agreement of this kind, and is subject to early termination in the event we
do not obtain FDA approvals of the Mallinckrodt licensed products by specified dates, or pursuant to any one of several termination rights of each
party.
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 will help maximize the value of our drug delivery
technologies, products and product candidates. We also believe that out-licensing sales and marketing to established organizations, when it makes
economic sense to do so, will improve our return from our products while allowing us to focus on our core competencies. We expect expenditures
in investing activities for the purchase of production, laboratory and computer equipment and the expansion of manufacturing and warehousing
capability to be higher as we prepare for the commercialization of ANDAs, one NDA and one ANDS that are pending FDA and Health Canada
approval, respectively.
Our Strategy
Our Hypermatrix™ technologies are central to the development and manufacture of novel and generic controlled-release and targeted-
release oral solid dosage drugs. The Hypermatrix™ technologies are a multidimensional controlled-release drug delivery platform that we believe
can be applied to the efficient development of a wide range of existing and new pharmaceuticals. We believe that the flexibility of these
technologies allows us to develop complex drug delivery solutions within an industry-competitive timeframe. Based on this technology platform,
we have developed several drug delivery systems and a pipeline of products (some of which have received FDA approval) and product candidates
in various stages of development, including ANDAs filed with the FDA (and one ANDS filed with Health Canada) and one NDA filing, in
therapeutic areas that include neurology, cardiovascular, GIT, diabetes and pain. 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 commercialization
partner generally pays certain of the expenses of development, sometimes
29
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 principal focus of our development activities previously targeted difficult-to-develop controlled-release generic drugs which follow
an ANDA regulatory path. Our current development effort is increasingly directed towards improved difficult-to-develop controlled-release drugs
which follow an NDA 505(b)(2) regulatory pathway. We have increased our research and development (“ R&D”) emphasis towards specialty new
product development, facilitated by the 505(b)(2) regulatory pathway, by advancing the product development program for both Rexista™ and
Regabatin™. The technology that is central to our abuse deterrent formulation of our Rexista™ is the Point of Divergence Drug Delivery System
(“nPODDDS™”). nPODDDS™ 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.
In addition, our PODRAS™ delivery technology was initially introduced to enhance our Rexista™ (abuse deterrent oxycodone
hydrochloride extended release tablets) product candidate. The PODRAS™ delivery technology platform was designed to prevent overdose when
more pills than prescribed are swallowed intact. Preclinical studies of prototypes of oxycodone with PODRAS technology suggest that, unlike
other third-party abuse-deterrent oxycodone products in the marketplace, if more tablets than prescribed are deliberately or inadvertently
swallowed, the amount of drug active released over 24 hours may be substantially less than expected. However, if the prescribed number of pills is
swallowed, the drug release should be as expected. Certain aspects of our PODRAS technology are covered by U.S. and Canadian patents recently
issued in respect of “Compositions and Methods for Reducing Overdose.”
The NDA 505(b)(2) pathway (which relies in part upon the FDA’s findings for a previously approved drug) both accelerates development
timelines and reduces costs in comparison to NDAs for new chemical entities.
An advantage of our strategy for development of NDA 505(b)(2) drugs is that our product candidates can, if approved for sale by the
FDA, potentially enjoy an exclusivity period which may provide for greater commercial opportunity relative to the generic ANDA route.
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 U.S. by their
former employer/clients. The regulatory pathway for this approach requires ANDAs for the U.S. and ANDSs for Canada.
● 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.
30
● Some of our technologies are also focused on the development of abuse-deterrent and overdose preventive 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.
Our Drug Delivery Technologies
Hypermatrix™
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.
nPODDDSTM
In addition to continuing efforts with Hypermatrix™ as a core technology, our scientists continue to pursue novel research activities that
address unmet needs. Rexista™ (abuse deterrent oxycodone hydrochloride extended release tablets) is an NDA candidate, with a unique long acting
oral formulation of oxycodone intended to treat moderate-to-severe pain. The formulation is intended to present a significant barrier to tampering
when subjected to various forms of physical and chemical manipulation commonly used by abusers. It is also designed to prevent dose dumping
when inadvertently co-administered with alcohol. The technology that supports our abuse deterrent formulation of oxycodone is the nPODDDS™
Point of Divergence Drug Delivery System. The use of nPODDDS™ does not interfere with the bioavailability of oxycodone. We intend to apply
the nPODDDS™ technology platforms to other extended release opioid drug candidates (e.g., oxymorphone, hydrocodone, hydromorphone and
morphine) utilizing the 505(b)(2) regulatory pathway.
PODRASTM
Our Paradoxical OverDose Resistance Activating System (PODRAS™) delivery technology is designed to prevent overdose when more
pills than prescribed are swallowed intact. Preclinical studies of prototypes of oxycodone with PODRAS technology suggest that, unlike other
third-party abuse-deterrent oxycodone products in the marketplace, if more tablets than prescribed are deliberately or inadvertently swallowed, the
amount of drug active released over 24 hours may be substantially less than expected. However, if the prescribed number of pills is swallowed, the
drug release should be as expected. We are currently working on an alternate Rexista TM product candidate incorporating our PODRAS™ delivery
technology. In April 2015, the FDA published Guidance for Industry: Abuse-Deterrent Opioids — Evaluation and Labeling , which cited the need
for more efficacious abuse-deterrence
31
technology. In this Guidance, the FDA stated, “opioid products are often manipulated for purposes of abuse by different routes of administration or
to defeat extended-release properties, most abuse-deterrent technologies developed to date are intended to make manipulation more difficult or to
make abuse of the manipulated product less attractive or less rewarding. It should be noted that these technologies have not yet proven successful
at deterring the most common form of abuse—swallowing a number of intact capsules or tablets to achieve a feeling of euphoria.” The FDA
reviewed our request for Fast Track designation for our abuse deterrent RexistaTM development program incorporating PODRAS™, and in May
2015 notified us that the FDA had concluded that we met the criteria for Fast Track designation. Fast Track is a designation assigned by the FDA in
response to an applicant’s request which meets FDA criteria. The designation mandates the FDA to facilitate the development and expedite the
review of drugs intended to treat serious or life threatening conditions and that demonstrate the potential to address unmet medical needs. This
could potentially result in accelerated approval for Rexista™ incorporating PODRAS™, thereby making it available to patients earlier than would
be traditionally possible.
In December 2016, we announced that U.S. Patent No. 9,522,119 and Canadian Patent No. 2,910,865 were issued by the U.S. Patent and
Trademark Office and the Canadian Intellectual Property Office in respect of “Compositions and Methods for Reducing Overdose”. The issued
patents cover aspects of the PODRAS™ delivery technology. The issuance of these patents represents a significant advance in our abuse
deterrence technology platform. The PODRAS™ platform has the potential to positively differentiate our technology from others of which we are
aware, and may represent an important step toward addressing the FDA’s concern over the ingestion of a number of intact pills or tablets. In
addition to its use with opioids, the PODRAS™ platform is potentially applicable to a wide range of drug products, inclusive of over-the-counter
drugs, that are intentionally or inadvertently abused and cause harm by overdose to those who ingest them. The issuance of these patents provides
us the opportunity to accelerate our PODRAS™ development plan by pursuing proof of concept studies in humans. We intend to incorporate this
technology in an alternate RexistaTM product candidate. We intend to apply the PODRAS ™ technology platforms to other extended release opioid
drug candidates (e.g., oxymorphone, hydrocodone, hydromorphone and morphine) utilizing the 505(b)(2) regulatory pathway.
The Hypermatrix™ Family of Technologies
Our platform of HypermatrixTM drug delivery technologies include, but are not limited to, IntelliFoamTM, IntelliGITransporterTM,
IntelliMatrixTM, IntelliOsmoticsTM, IntelliPasteTM, IntelliPelletsTM, IntelliShuttleTM, nPODDDSTM and PODRAS™. 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.
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.
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.
32
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 our 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.
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.
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Our Products and Product Candidates
The table below shows the present status of our ANDA, ANDS and NDA products and product candidates that have been disclosed to the
public.
Generic name
Brand
Indication
Dexmethylphenidate
hydrochloride
extended-release
capsules
Focalin XR®
Attention deficit
hyperactivity
disorder
Keppra XR®
Partial onset
seizures for
epilepsy
Effexor XR®
Depression
Levetiracetam
extended-release
tablets
Venlafaxine
hydrochloride
extended-release
capsules
Pantoprazole sodium
delayed- release
tablets
Protonix®
Conditions
associated with
gastroesophageal
reflux disease
Glucophage®
XR
Management of
type 2 diabetes
Metformin
hydrochloride
extended-release
tablets
(500 and 750 mg only)
Stage of
Development(1)
Received final
approval for 5, 10,
15,20, 25, 30, 35
and 40 mg
strengths from
FDA(4)
Received final
approval for the
500 and 750
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
Received final
approval for 500
and 750 mg
strengths from
FDA
34
Regulatory
Pathway
ANDA
Market Size
(in millions)(2)
$787
Rights(3)
Intellipharmaceutics
and Par
ANDA
$150
Intellipharmaceutics
ANDA
$648
Intellipharmaceutics
ANDA
$336
Intellipharmaceutics
ANDA
$591
(500 and 750
mg only)
Intellipharmaceutics
Generic name
Brand
Indication
Seroquel XR® Schizophrenia,
bipolar disorder
& major
depressive
disorder
Lamictal®
XR™
Anti-convulsant
for epilepsy
Pristiq®
Depression
Oleptro™
Depression
Quetiapine fumarate
extended-release
tablets
Lamotrigine
extended-release
tablets
Desvenlafaxine
extended-release
tablets
Trazodone
hydrochloride
extended release
tablets
Coreg CR®
Heart failure,
hypertension
OxyContin®
Pain
Carvedilol phosphate
extended-release
capsules
Oxycodone
hydrochloride
controlled-release
capsules
Pregabalin extended-
release capsules
Lyrica®
Neuropathic
pain
Ranolazine extended-
release tablets
Ranexa®
Chronic angina
Stage of
Development(1)
Received tentative
FDA approval for
all 5 strengths.
ANDS under
review by Health
Canada
ANDA application
for
commercialization
approval for 6
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
Late-stage
development
NDA application
accepted February
2017 and under
review by FDA.
PDUFA date
September 25, 2017
Investigational
New Drug (“IND”)
application
submitted in
August 2015
ANDA application
for
commercialization
approval for 2
strengths under
review by FDA
Regulatory
Pathway
ANDA
ANDS
Market Size (in
millions)(2)
$1,039
Rights(3)
Intellipharmaceutics
and Mallinckrodt
ANDA
$519
Intellipharmaceutics
and Mallinckrodt
ANDA
$889
Intellipharmaceutics
and Mallinckrodt
ANDA
$1
Intellipharmaceutics
ANDA
$233
Intellipharmaceutics
NDA 505(b)(2)
$2,116
Intellipharmaceutics
NDA 505(b)(2)
$4,237
Intellipharmaceutics
ANDA
$867
Intellipharmaceutics
Notes:
(1) There can be no assurance as to when, or if at all, the FDA or Health Canada will approve any product candidate for sale in the U.S. or
Canadian markets.
(2) Represents sales for all strengths, unless otherwise noted, for the 12 months ended January 2017 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: Symphony Health Solutions.
(3) For unpartnered products, we are exploring licensing agreement opportunities or other forms of distribution. While we believe that licensing
agreements are possible, there can be no assurance that any can be secured.
(4) Includes a Company ANDA final approval for our 15 and 30 mg strengths, and a Par ANDA final approval for their 5, 10, 15, 20, 25, 30, 35
and 40 mg strengths. Profit sharing payments to us under the Par agreement are the same irrespective of the ANDA owner.
We typically select products for development that we anticipate could achieve FDA or Health Canada 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,
35
the availability of funding, design and formulation challenges, safety or efficacy, patent issues associated with the product, and FDA and Health
Canada 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 U.S., is indicated for the
treatment of attention deficit hyperactivity disorder. In November 2005, we entered into the Par agreement, pursuant to which we granted Par an
exclusive, royalty-free license to make and distribute in the U.S. all strengths of our generic Focalin XR® (dexmethylphenidate hydrochloride
extended-release) capsules for a period of 10 years from the date of commercial launch (which was November 19, 2013). Under the Par agreement,
we made a filing with the FDA for approval to market generic Focalin XR® capsules in various strengths in the U.S. (the “Company ANDA”), and
are the owner of that Company ANDA, as approved in part by the FDA. We retain the right to make and distribute all strengths of the generic
product outside of the U.S. Calendar quarterly profit-sharing payments for its U.S. sales under the Company ANDA are payable by Par to us as
calculated pursuant to the Par agreement. Within the purview of the Par agreement, Par also applied for and owns an ANDA pertaining to all
marketed strengths of generic Focalin XR® (the “Par ANDA”), and is now approved by the FDA, to market generic Focalin XR® capsules in all
marketed strengths in the U.S. As with the Company ANDA, calendar quarterly profit-sharing payments are payable by Par to us for its U.S. sales
of generic Focalin XR® under the Par ANDA as calculated pursuant to the Par agreement.
We received final approval from the FDA in November 2013 under the Company ANDA to launch the 15 and 30 mg strengths of our
generic Focalin XR® (dexmethylphenidate hydrochloride extended-release) capsules. Commercial sales of these strengths were launched
immediately by our commercialization partner in the U.S., Par. Our 5, 10, 20 and 40 mg strengths were also then tentatively FDA approved, subject
to the right of Teva to 180 days of generic exclusivity from the date of first launch of such products. Teva launched its own 5, 10, 20 and 40 mg
strengths of generic Focalin XR® capsules on November 11, 2014, February 2, 2015, June 22, 2015 and November 19, 2013, respectively. In
January 2017, Par launched the 25 and 35 mg strengths of its generic Focalin XR® capsules in the U.S. complementing the 15 and 30 mg strengths
of our generic Focalin XR® currently marketed by Par. The FDA recently had granted final approval under the Par ANDA for its generic Focalin
XR® capsules in the 5, 10, 15, 20, 25, 30, 35 and 40 mg strengths. We believe Par is preparing to launch all the remaining strengths in the first half
of 2017. As the first filer of an ANDA for generic Focalin XR® in the 25 and 35 mg strengths, Par has 180 days of U.S. generic marketing
exclusivity for those strengths. We expect sales of the 25 and 35 mg strength to significantly improve our revenues in 2017. Under the Par
agreement, we receive quarterly profit share payments on Par’s U.S. sales of generic Focalin XR®. There can be no assurance as to when or if any
further launches will occur for the remaining strengths, or if they will be successfully commercialized.
Levetiracetam – Generic Keppra XR® (a registered trademark of the brand manufacturer)
We received final approval from the FDA in February 2016 for the 500 mg and 750 mg strengths of our generic Keppra XR®
(levetiracetam extended-release) tablets. Keppra XR®, and the drug active levetiracetam, are indicated for use in the treatment of partial onset
seizures associated with epilepsy. We are actively exploring the best approach to maximize the commercial returns from the new approval. There
can be no assurance that the Company's generic Keppra XR® for the 500 and 750 mg strengths will be successfully commercialized.
Metformin hydrochloride – Glucophage® XR (a registered trademark of the brand manufacturer)
We received final approval from the FDA in February 2017 for the 500 mg and 750 mg strengths of our generic Glucophage® XR
(metformin hydrochloride extended release) tablets. Glucophage® XR, and the drug active metformin, are indicated for use in the management of
type 2 diabetes treatment. We are actively evaluating options to realize commercial returns from this new approval. There can be no assurance that
our metformin extended-release tablets for the 500 mg and 750 mg strengths will be successfully commercialized.
Rexista™ (Abuse Deterrent Oxycodone Hydrochloride Extended-Release Tablets)
One of our non-generic products under development is our Rexista™ (abuse deterrent oxycodone hydrochloride extended release tablets)
product candidate, intended as an abuse- and alcohol-deterrent controlled-release oral formulation of oxycodone hydrochloride for the relief of
pain. Rexista™ is a new drug candidate, with a
36
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. The formulation is intended to present a significant barrier to tampering when subjected to various forms
of physical and chemical manipulation commonly used by abusers. It is also designed to prevent dose dumping when inadvertently co-administered
with alcohol. 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. In addition, when crushed or pulverized and hydrated, the proposed extended release
formulation is designed to coagulate instantaneously and entrap the drug in a viscous hydrogel, which is intended to prevent syringing, injecting
and snorting. Our Rexista™ formulation is difficult to abuse through the application of heat or an open flame, making it difficult to inhale the
active ingredient from burning. Our Rexista™ formulation contains a blue dye that is emitted once the tablet is tampered with or crushed. This
stigmatizing blue dye may act as a deterrent if abused orally or via the intra-nasal route and may also serve as an early warning mechanism to flag
potential misuse or abuse.
In March 2015, we announced the results of three definitive open label, blinded, randomized, cross-over, Phase I pharmacokinetic clinical
trials in which Rexista™ was compared to the existing branded drug Oxycontin® under single dose fasting, single dose steady-state fasting and
single dose fed conditions in healthy volunteers. We had reported that the results from all three studies showed that Rexista™ met the
bioequivalence criteria (90% confidence interval of 80% to 125%) for all matrices, i.e., on the measure of maximum plasma concentration or
Cmax, on the measure of area under the curve time (AUCt) and on the measure of area under the curve infinity (AUCinf).
In May 2015, the FDA provided us with notification regarding our IND submission for Rexista™ indicating that we would not be required
to conduct Phase III studies if bioequivalence to Oxycontin® was demonstrated based on pivotal bioequivalence studies.
In January 2016, we announced that pivotal bioequivalence trials of our Rexista™, dosed under fasted and fed conditions, had
demonstrated bioequivalence to Oxycontin® (oxycodone hydrochloride) extended release tablets as manufactured and sold in the U.S. by Purdue
Pharma LP. The study design was based on FDA recommendations and compared the lowest and highest strengths of exhibit batches of our
Rexista™ to the same strengths of Oxycontin®. The results show that the ratios of the pharmacokinetic metrics, Cmax, AUC0-t and AUC0-f for
Rexista™ vs. Oxycontin®, are within the interval of 80% - 125% required by the FDA with a confidence level exceeding 90%.
Having now demonstrated such bioequivalence, we believe we will not be required to conduct Phase III studies although no assurance can
be given that we will not be required to conduct further studies for Rexista™. The FDA notification is significant as it provides a basis for an
accelerated development plan for our Rexista™ product candidate, without the need for more costly and time consuming Phase III studies.
In July 2016, the FDA completed its review of our previously requested waiver of the NDA user fee related to our Rexista™ NDA
product candidate. The FDA, under the small business waiver provision section 736(d)(1)(D) of the Federal Food, Drug, and Cosmetics Act,
granted the Company a waiver of the $1,187,100 application fee for Rexista™.
In July 2016, we announced the results of a food effect study conducted on our behalf for Rexista™. The study design was a randomized,
one-treatment two periods, two sequences, crossover, open label, laboratory-blind bioavailability study for Rexista™ following a single 80 mg oral
dose to healthy adults under fasting and fed conditions. The study showed that Rexista™ can be administered with or without a meal (i.e., no food
effect). Rexista™ met the bioequivalence criteria (90% confidence interval of 80% to 125%) for all matrices, involving maximum plasma
concentration and area under the curve (i.e., Cmax ratio of Rexista™ taken under fasted conditions to fed conditions, and AUC metrics taken under
fasted conditions to fed conditions). We believe that Rexista™ is well differentiated from currently marketed oral oxycodone extended release
products.
In November 2016, we filed an NDA seeking authorization to market our Rexista™ (abuse-deterrent oxycodone hydrochloride extended
release tablets) in the 10, 15, 20, 30, 40, 60 and 80 mg strengths. In February 2017, the FDA accepted for filing this NDA. The FDA has set a
PDUFA target action date of September 25, 2017.
37
The submission is supported by pivotal pharmacokinetic studies that demonstrated that Rexista™ is bioequivalent to OxyContin® (oxycodone
hydrochloride extended release). The submission also includes abuse-deterrent studies conducted to support abuse-deterrent label claims related to
abuse of the drug by various pathways, including oral, intra-nasal and intravenous, having reference to the FDA's "Abuse-Deterrent Opioids —
Evaluation and Labeling" guidance published in April 2015.
Our NDA was filed under Paragraph IV of the Hatch-Waxman Act, as amended. The FDA has accepted the filing for further review. We
have, within the period provided in Paragraph IV, notified the brand owner of Oxycontin ®, and all holders of the Oxycontin® patents listed in the
Orange Book that we have filed an NDA with the FDA for marketing approval for Rexista™, and have certified that Rexista ™ would not infringe
the Oxycontin® patents or that the Oxycontin ® patents are invalid. This notice may give rise, within a prescribed time of 45 days, to patent
infringement litigation against us by the owner of the branded product Oxycontin® and by the holders of the Oxycontin® patents. If such litigation
is instituted within the prescribed time limits, the FDA will be stayed for 30 months from the date of such notice from granting final marketing
approval to us for Rexista™, unless prior to the expiry of such 30 months all parties settle the litigation in such way as to permit the marketing of
Rexista™ (if then approved), or there is a final decision of the courts that either the Oxycontin® patents were not valid or that Rexista™ did not
infringe the Oxycontin® patents.
The FDA is actively developing a regulatory program for the narcotic analgesic class of products. In April 2015, the FDA issued a
guidance document, “Abuse-Deterrent Opioids – Evaluation and Labeling,” to assist the industry in developing new formulations of opioid drugs
with abuse-deterrent properties. We adhered to the April 2015 guidance document in pursuing various abuse deterrent label claims when we filed
our NDA for Rexista™.
We believe that we can leverage our core competencies in drug delivery and formulation for the development of products targeted
towards abuse-deterrent opioid analgesics used in pain management. The advantage of our strategy for development of NDA drugs is that our
products, if approved for sale, may 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 that we will not be required to conduct further studies for Rexista™, that the FDA will ultimately approve our
NDA for the sale of Rexista™ in the U.S. market, or that it will ever be successfully commercialized.
Quetiapine fumarate extended-release tablets - Generic Seroquel XR® (a registered trademark of the brand manufacturer)
In October 2016, we received tentative approval from the FDA for our ANDA for quetiapine fumarate extended-release tablets in the 50,
150, 200, 300 and 400 mg strengths. Our tentatively-approved product is a generic equivalent for the corresponding strengths of the branded
product Seroquel XR® sold in the U.S. by AstraZeneca. Pursuant to a settlement agreement between us and AstraZeneca dated July 30, 2012, we
are permitted to launch our generic versions of the 50, 150, 200, 300 and 400 mg strengths of generic Seroquel XR®, on November 1, 2016, subject
to FDA final approval of our ANDA for those strengths. Such FDA final approval is subject to a 180 day exclusivity period relating to a prior filer
or filers of a generic equivalent of the branded product. The first filer rights are shared by Par and Accord. We believe that in early November
2016, Par launched the 50, 100, 200, and 300 mg strengths, and Accord launched the 400 mg strength. If we receive final approval to launch our
generic version of the 50, 100, 200, 300, and 400 mg strengths of Seroquel XR® six months after the date of launch by the respective first filers, we
and our marketing and distribution partner for generic Seroquel XR® in the U.S., Mallinckrodt, are working diligently towards a launch of these
strengths upon final approval. There can be no assurance that our quetiapine fumarate extended-release tablets in any of the 50, 150, 200, 300 and
400 mg strengths will receive final FDA approval, or if approved, that they will be successfully commercialized.
In October 2016, we announced the Mallinckrodt agreement, granting Mallinckrodt an exclusive license to market, sell and distribute in
the U.S. the following extended release licensed products for which we have ANDAs filed with the FDA:
■ Quetiapine fumarate extended-release tablets (generic Seroquel XR®) – ANDA Tentatively Approved by FDA
38
■ Desvenlafaxine extended-release tablets (generic Pristiq®) – ANDA Under FDA Review
■ Lamotrigine extended-release tablets (generic Lamictal® XR™) – ANDA Under FDA Review
Under the terms of the 10-year agreement, we received a non-refundable upfront payment of $3 million in October 2016. In addition, the
agreement also provides for a long-term profit sharing arrangement with respect to these licensed products (which includes up to $11 million in cost
recovery payments to us). We have agreed to manufacture and supply the licensed products exclusively for Mallinckrodt on a cost plus basis. The
Mallinckrodt agreement contains customary terms and conditions for an agreement of this kind, and is subject to early termination in the event we
do not obtain FDA approvals of the Mallinckrodt licensed products by specified dates, or pursuant to any one of several termination rights of each
party. There can be no assurance as to when or if our quetiapine fumarate extended-release tablets will receive final FDA approval or that, if so
approved, the product will be successfully commercialized and produce significant revenues for us.
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. A controlled-release version of pregabalin should reduce the number of doses patients take, which could
improve patient compliance, and therefore possibly enhance clinical outcomes. Lyrica® pregabalin, twice-a-day (“BID”) dosage and three-times-a-
day (“TID”) dosage, are drug products marketed in the U.S. by Pfizer Inc. 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.
In 2014, we conducted and analyzed the results of six Phase I clinical trials involving a twice-a-day formulation and a once-a-day
formulation. For formulations directed to certain indications which include fibromyalgia, the results suggested that Regabatin™ XR 82.5 mg BID
dosage was comparable in bioavailability to Lyrica® 50 mg (immediate-release pregabalin) TID dosage. For formulations directed to certain other
indications which include neuropathic pain associated with diabetic peripheral neuropathy, the results suggested that Regabatin™ XR 165 mg
once-a-day dosage was comparable in bioavailability to Lyrica® 75 mg BID dosage.
In March 2015, the FDA accepted a Pre-Investigational New Drug (“Pre-IND”) meeting request for our once-a-day Regabatin™ XR non-
generic controlled release version of pregabalin under the NDA 505(b)(2) regulatory pathway, with a view to possible commercialization in the
U.S. at some time following the December 30, 2018 expiry of the patent covering the pregabalin molecule. Regabatin™ XR is based on our
controlled release drug delivery technology platform which utilizes the symptomatology and chronobiology of fibromyalgia in a formulation
intended to provide a higher exposure of pregabalin during the first 12 hours of dosing. Based on positive feedback and guidance from the FDA, we
submitted an IND application for Regabatin™ XR in August 2015. The FDA completed its review of the IND application and provided
constructive input that we will use towards further development of the program.
There can be no assurance that any additional Phase I or other clinical trials we conduct will meet our expectations, that we will have
sufficient capital to conduct such trials, that we will be successful in submitting an 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.
39
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 non-competitive
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.
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. In October 2014,
the FDA provided us with written notification that our Toronto, Canada manufacturing facility at 30 Worcester Road had received an “acceptable”
classification. Such inspections are carried out on a regular basis by the FDA and an “acceptable” classification is necessary to permit us to be in a
position to receive final approvals for ANDAs and NDAs and to permit manufacturing of drug products intended for commercial sales in the
United States after any such approvals. Similarly, Health Canada completed an inspection of our 30 Worcester Road facility in September 2015
which resulted in a “compliant” rating. Once we have completed certain renovations to our newly-leased property at 22 Worcester Road property
(see “D. Property, Plant and Equipment”, below for a further description of our facilities), we would request an inspection by regulatory agencies
which will determine compliance of the facility with cGMP.
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 HypermatrixTM family of drug delivery technologies include the following
United States, Japanese, Chinese, Indian, Canadian and European 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.
Issue Date
Dec 20, 2016
July 14, 2015
Aug 12, 2014
Dec 10, 2013
Mar 12, 2013
Mar 15, 2011
Dec 28, 2010
Issue No.
9,522,119
9,078,827
8,802,139
8,603,520
8,394,409
7,906,143
7,858,119
40
Title
Compositions and Methods For Reducing Overdose
Pharmaceutical Composition Having Reduced Abuse Potential
Proton Pump-Inhibitor-Containing Capsules Which Comprise
Subunits Differently Structured For A Delayed Release Of The
Active Ingredient
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
Country
U.S.A.
Issue Date
Aug 15, 2006
U.S.A.
U.S.A.
U.S.A.
U.S.A.
U.S.A.
Japan
Japan
Japan
Japan
India
Europe
Oct 5, 2004
Nov 25, 2003
Aug 19, 2003
Nov 12, 2002
Oct 2, 2001
Aug 28, 2015
Jan 17, 2014
Aug 8, 2014
Aug 30, 2013
Feb 10, 2015
Nov 26, 2014
Issue No.
7,090,867
6,800,668
6,652,882
6,607,751
6,479,075
6,296,876
5,798,293
5,457,830
5,592,547
5,349,290
265,141
2,007,360
Canada
May 26, 2015
2,579,382
Canada
Canada
Canada
Canada
Canada
Canada
Canada
Canada
China
China
Jan 28, 2014
Apr 8, 2014
Mar 11, 2014
Jun 19, 2012
Sep 25, 2012
Feb 22, 2011
Mar 15, 2005
Nov 29, 2016
May 11, 2016
Nov 25, 2015
2,571,897
2,576,556
2,648,280
2,626,558
2,529,984
2,459,857
2,435,276
2,910,865
ZL200780019665.5
ZL200780025611.X
Title
Novel Controlled Release Delivery Device for Pharmaceutical
Agents Incorporating Microbial Gum
Syntactic Deformable Foam Compositions and Methods for
Making
Controlled Release Formulation Containing Bupropion
Novel Controlled Release Delivery Device for Pharmaceutical
Agents Incorporating Microbial Gum
Pharmaceutical Formulations for Acid Labile Substances
Pharmaceutical Formulations for Acid Labile Substances
Pharmaceutical Composition Having Reduced Abuse Potential
Controlled Release Delivery Device Comprising An Organosol
Coat
Drug Delivery Composition
Drug Delivery Composition
Pharmaceutical Composition Having Reduced Abuse Potential
Controlled Release Delivery Device Comprising an Organosol
Coat
Controlled Release Composition Using Transition Coating,
And Method Of Preparing Same
Controlled Extended Drug Release Technology
Disintegrant Assisted Controlled Release Technology
Controlled Release Delivery Device Comprising an Organosol
Coat
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
Compositions and Methods For Reducing Overdose
Drug Delivery Composition
Pharmaceutical Composition Having Reduced Abuse Potential
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 HyperMatrixTM 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.
41
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, but follow a 505(b)(2)
regulatory pathway, are subject to NDA procedures.
These procedures for a new drug compound include (a) preclinical laboratory and animal toxicology tests; (b) scaling and testing of
production batches; (c) submission of an 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.
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.
A new formulation for an existing drug compound requires a 505(b)(2) application. This application contains full reports of investigations
of safety and effectiveness but at least some information required for approval comes from studies not conducted by or for the applicant for which
the applicant has not obtained a right of reference. A 505(b)(2) application is submitted when some specific information necessary for approval is
obtained from: (1) published literature and/or (2) the FDA findings of safety and effectiveness for an approved drug. The FDA has implemented
this approach to encourage innovation in drug development without requiring duplicative studies while protecting the patent and exclusivity rights
for the approved drug. A 505(b)(2) application can be submitted for a New Chemical Entity, a New Molecular Entity or any changes to previously
approved drugs such as dosage form, strength, route of administration, formulation, indication, or bioinequivalence where the application may rely
on the FDA’s finding on safety and effectiveness of the previously approved drug. In addition, the applicant may also submit a 505(b)(2)
application for a change in drug product that is eligible for consideration pursuant to a suitability petition. For example, a 505(b)(2) application
would be appropriate for a controlled-release product that is bioinequivalent to a reference listed drug where the proposed product is at least as
bioavailable and the pattern of release is at least as favorable as the approved pharmaceutically equivalent product. A 505(b)(2) application may be
granted three years of exclusivity if one or more clinical investigations, other than bioavailability/bioequivalence studies, was essential to the
approval and conducted or sponsored by the applicant; five years of exclusivity granted if it is for a new chemical entity. A 505(b)(2) application
may also be eligible for orphan drug and pediatric exclusivity.
A 505(b)(2) application must contain the following: (1) identification of those portions of the application that rely on the information the
applicant does not have a right of reference, (2) identification of any or all listed drugs by established name, proprietary name, dosage form,
strength, route of administration, name of the listed drug’s sponsor, and the application number if application relies on the FDA’s previous findings
of safety and effectiveness for a listed drug, (3) information with respect to any patents that claim the drug or the use of the drug for which
approval is sought, (4) patent certifications or statement with respect to any relevant patents that claim the listed drug, (5) if approval for a new
indication, and not for the indications approved for the listed drug, a certification so stating, (6) a statement as to whether the listed drug has
received a period of marketing exclusivity, (7) Bioavailability/Bioequivalence studies comparing the proposed product to the listed drug (if any)
and (8) studies necessary to support the change or modification from the listed drugs or drugs (if any). Before submitting the application, the
applicant should submit a plan to identify the types of bridging studies that should be conducted and also the components of application that rely on
the FDA’s findings of safety and effectiveness of a previously approved drug product. We intend to generate all data necessary to support FDA
approval of the applications we
42
file. A 505(b)(2) application must provide notice of certain patent certifications to the NDA holder and patent owner, and approval may be delayed
due to patent or exclusivity protections covering an approved product.
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.
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 more timely inspections of drug facilities. For the FDA’s fiscal years 2016 and 2017, respectively, the user fee rates are $76,030
and $70,480 for new ANDAs, $38,020 and $35,240 for Prior Approval Supplements, and $17,434 for each ANDA already on file at the FDA. For
the FDA’s fiscal years 2016 and 2017, there is also an annual facility user fee of $258,905 and $273,646, 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
43
ANDAs and/or NDAs, filed under Paragraph IV of the Hatch Waxman Act, which seek approval by a non-brand owner to market a
generic version of a branded drug product prior to the expiry of patents owned or listed in the Orange Book (the “Listed Patents”) as applicable to
the brand owner’s product, are required to include certifications pursuant to Paragraph IV that either the Listed Patents are invalid or that the
applicant’s drug product does not infringe the Listed Patents. In such circumstances, the owner of the branded drug and/or the holder of the patents
may commence patent infringement litigation against the applicant. In such a case, the FDA is not empowered to approve such pending ANDA or
NDA until the expiry of 30 months from the commencement of such litigation, unless within such 30 month period the said patents are found to be
invalid, or the drug product covered by the ANDA or NDA is finally found by a court not to infringe such patents.
Under the U.S. Food, Drug and Cosmetic Act (“FDC Act ”), the first filer of an ANDA (but not an NDA) with a “non-infringement”
certification is entitled, if its drug product is approved, to receive 180 days of market exclusivity. Subsequent filers of generic products, if non-
infringing and approved by the FDA, are entitled to market their products six months after the first commercial marketing of the first filer’s generic
product. A company having FDA approval and permission from the original brand owner is able to market an authorized generic at any time. 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.
The FDC Act contains other market exclusivity provisions that offer additional protection to pioneer drug products which 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 for
a generic of 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 current or future 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
44
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 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.
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
45
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 of February 27, 2017.
D.
Property, Plant and Equipment
For over ten years, we have occupied a 25,000 square foot facility at 30 Worcester Road, Toronto, Ontario, Canada M9W 5X2, that we
leased up to the year ended November 30, 2015 at a rental rate of approximately $90,000
46
per year, and with us responsible for utilities, municipal taxes and operating expenses for the leased property. On December 1, 2015, we entered
into a new lease agreement for the combined properties comprising our premises that we currently operate from at 30 Worcester Road (“30
Worcester Road”, as well as a 40,000 square foot building on the adjoining property located at 22 Worcester Road, which is owned indirectly by
the same landlord (“22 Worcester Road” and collectively with 30 Worcester Road, the “combined properties”) for a five-year term with a five-
year renewal option. Basic rent over the five-year term is C$240,000 per annum, subject to an annual consumer price inflation adjustment, and we
are responsible for utilities, municipal taxes and operating expenses for the leased property. With these two leased premises, we now have use of
65,000 square feet of commercial space to accommodate our growth objectives over the next several years. We also have an option to purchase the
combined properties after March 1, 2017 and up to November 30, 2020 based on a fair value purchase formula. We use our facility at 30 Worcester
Road as a current Good Laboratory Practices research laboratory, office space, and current Good Manufacturing Practices scale-up and small to
medium-scale manufacturing plant for solid oral dosage forms. The facility at 30 Worcester Road consists of approximately 4,900 square ft. for
administrative space, 4,300 square ft. for R&D, 9,200 square ft. for manufacturing, and 3,000 square ft. for warehousing. The 22 Worcester Road
building provides approximately 35,000 square feet of warehouse space and approximately 5,000 square feet of office space. The current lease also
provides us with a right of first refusal to purchase the combined properties. The landlord is required to provide us with prior written notice and the
desired sale price for the combined properties prior to offering the premises to a third party or on the open market. We have five business days to
accept such offer and purchase price for a transaction to close within 60 days of the notice. If we decline the offer, the landlord is entitled to offer
and sell the properties for a purchase price of not less than the price offered to us for a period of 180 days, after which time the landlord is again
obliged to offer the properties to us before offering them to a third party or on the open market.
We continually monitor our facility requirements in the context of our needs and we expect these requirements to change commensurately
with our activities.
In October 2014, the FDA provided us with written notification that our Toronto, Canada manufacturing facility at 30 Worcester Road
had received an “acceptable” classification. Such inspections are carried out on a regular basis by the FDA and an “acceptable” classification is
necessary to permit us to be in a position to receive final approvals for ANDAs and NDAs and to permit manufacturing of drug products intended
for commercial sales in the United States after any such approvals. Similarly, Health Canada completed an inspection of our 30 Worcester Road
facility in September 2015 which resulted in a “compliant” rating. Once we have completed certain renovations to our newly-leased warehouse and
office property at 22 Worcester Road property, we would request an inspection by regulatory agencies which will determine compliance of the
facility with cGMP.
Item4A.
Unresolved Staff Comments
Not applicable.
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, 2016, 2015 and 2014.
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, competitive entries,
market pricing, wholesaler buying patterns, the timing and amount of payments received pursuant to our current and future collaborations with
third parties, the existence of any first-to-file exclusivity periods, and the progress and timing of expenditures related to our research, development
and commercialization efforts. Due to these fluctuations, we
47
presently believe that the period-to-period comparisons of our operating results are not a reliable indication of our future performance.
Over the last several years, the FDA, through the Office of Generic Drugs (“OGD”) that approves ANDAs, has experienced a significant
deterioration in ANDA approval timelines. The Company believes that the median ANDA approval time for ANDAs filed in 2012 or prior is
approximately 47 months. The FDA has attributed this backlog principally to:
● significant growth in ANDA submissions, particularly foreign submissions
● an increase in the number of complex products
● an increase in the number of foreign site inspections
● limited resources to handle the growth and complexity of submissions
In order to address the significant backlog, GDUFA was passed. Under GDUFA, the OGD has been collecting new user fees from generic
drug companies designed, among other things, to fund the increase in resources required to deal with the approval backlog as well as restructure the
OGD to effectively deal with ANDA timelines on a go forward basis. The Company currently has 6 ANDAs that were filed in 2012 or prior that
are still pending final FDA approval that exceed the 47 month median. We believe that the FDA has made positive strides in restructuring the
OGD to address the ANDA approval backlog and we remain optimistic that the FDA will be successful in reducing the backlog; however, there
can be no assurance as to when or if the FDA will approve any of our ANDA product candidates.
Revised Prior Quarter Amounts
While preparing our November 30, 2016 year-end financial statements, we identified and corrected a non-cash error related to the
accounting for the modification of performance-based stock options. In April 2016, our shareholders approved a two-year extension of the expiry
date of the performance-based options from September 2016 to September 2018. We have determined that this modification resulted in a non-cash
expense that should have been reflected in our 2016 second quarter results. As stock-based compensation is a non-cash item, this error did not
impact net cash provided from operations in the second quarter, nor does it have any impact on our annual financial statements for the year ended
November 30, 2016. This error resulted in an understatement of second quarter stock-based compensation charged to R&D expense, with a
corresponding understatement of additional paid in capital, of $1,177,782. We have determined to record the expense in the 2016 fourth quarter
ended November 30, 2016.
The following are selected financial data for the years ended November 30, 2016, 2015 and 2014.
For the years ended
Change
Change
November
30, 2016
$
November
30, 2015
$
November
30, 2014
2016 vs 2015
$
$
%
2015 vs 2014
$
%
Revenue:
Licensing
Milestone
Up-front fees
2,209,502
-
37,500
2,247,002
4,093,781
-
-
4,093,781
8,415,540
354,153
-
8,769,693
(1,884,279)
-
37,500
(1,846,779)
-46% (4,321,759)
N/A
(354,153)
N/A
-45% (4,675,912)
-
Expenses:
Research and development
Selling, general and administrative
Depreciation
8,166,736
3,546,132
385,210
12,098,078
7,247,473
3,581,913
377,849
11,207,235
8,020,201
3,900,803
381,385
12,302,389
919,263
(35,781)
7,361
890,843
(772,728)
13%
(318,890)
-1%
2%
(3,536)
8% (1,095,154)
-51%
-100%
N/A
-53%
-10%
-8%
-1%
-9%
Loss from operations
(9,851,076) (7,113,454) (3,532,696) (2,737,622)
38% (3,580,758)
101%
Net foreign exchange (loss) gain
Interest income
Interest expense
Extinguishment loss
Net loss
(22,470)
207
(270,238)
-
46,211
1,507
(256,629)
(114,023)
10,896
4,898
(339,451)
-
(68,681)
(1,300)
(13,609)
114,023
(10,143,577) (7,436,388) (3,856,353) (2,707,189)
48
-149%
-86%
5%
35,315
(3,391)
82,822
(114,023)
36% (3,580,035)
N/A
324%
-69%
-24%
N/A
93%
Year Ended November 30, 2016 Compared to the Year Ended November 30, 2015
Revenue
The Company recorded revenues of $2,247,002 for the year ended November 30, 2016 versus $4,093,781 for the year ended November
30, 2015. For the year ended November 30, 2016, we recognized licensing revenue of $2,209,502 from commercial sales of 15 and 30 mg
strengths of generic Focalin XR® (dexmethylphenidate hydrochloride extended-release) capsules under the Par agreement. The decrease in
revenues is primarily due to increased competition and a softening of pricing conditions for our generic Focalin XR® capsules. A fifth generic
competitor entered the market in the second half of 2015, resulting in increased price competition and lower market share. Based on the most recent
two month trend, our market share for the 15 and 30 mg strengths is approximately 30% for the combined strengths of our generic Focalin XR®
capsules. Revenue under the Par agreement represents the commercial sales of the generic product in those strengths and may not be representative
of future sales. In addition, during the year ended November 30, 2016, the Company received a non-refundable up-front payment of $3,000,000
from Mallinckrodt pursuant to the Mallinckrodt agreement, of which $37,500 was recognized as revenue. Such up-front fees are recognized over
the expected 10 year term of the contract. There were no up-front fees recognized in the year ended November 30, 2015.
Research and Development
Expenditures for R&D for the year ended November 30, 2016 were higher by $919,263 compared to the year ended November 30, 2015.
The increase is primarily due to higher stock option compensation expense as a result of certain performance based stock options vesting upon
FDA approval of generic Keppra XR®, and additional compensation costs related to vested performance options as a result of the Company’s
shareholders approving a two year extension of the expiry date of the performance-based options from September 2016 to September 2018,
partially offset by lower spending for ongoing R&D work, as detailed below.
In the year ended November 30, 2016 we recorded $1,995,805 as expense for stock based compensation for R&D employees, of which
$620,632 was for expenses related to performance-based stock options which vested on FDA approval of our generic Keppra XR® in February
2016. As a result of the modification of the performance based stock option expiry date, we recorded additional compensation costs of $1,177,782
related to vested performance options during the year ended November 30, 2016. In the year ended November 30, 2015, we recorded $152,231 as
expenses for stock-based compensation expense.
After adjusting for the stock-based compensation expenses discussed above, expenditures for R&D for the year ended November 30, 2016
were lower by $924,311 compared to the year ended November 30, 2015. This is primarily due to the fact that during the year ended November 30,
2016 we incurred lower expenditures on the development of several generic product candidates (specifically for clinical studies), partially offset by
an accrual of bonuses to certain management employees, compared to the year ended November 30, 2015. There were no management bonuses
paid in the year ended November 30, 2015.
Selling, General and Administrative
Selling, general and administrative expenses were $3,546,132 for the year ended November 30, 2016 in comparison to $3,581,913 for the
year ended November 30, 2015, a decrease of $35,781. The decrease is due to a decrease in corporate legal activities and other professional fees,
offset by an expense for management bonuses discussed in greater detail below.
Expenditures for wages and benefits for the year ended November 30, 2016 were $1,454,501 in comparison to $1,305,614 in the year
ended November 30, 2015, an increase of $148,887, primarily due to the accrual of bonuses to certain management employees. There were no
bonuses paid in the year ended November 30, 2015. For
49
the year ended November 30, 2016, we recorded $265,639 as an expense for stock-based compensation compared to an expense of $265,587 for
the year ended November 30, 2015.
Administrative costs for the year ended November 30, 2016 were $1,558,633 in comparison to $1,751,315 in the year ended November
30, 2015. The decrease is primarily due to a decrease in expenditures in corporate legal activities and other professional fees.
Marketing costs for the year ended November 30, 2016 were $413,646 in comparison to $434,902 in the year ended November 30, 2015.
The decrease is attributable to the decrease in travel expenditures related to business development and investor relations activities.
Occupancy costs for the year ended November 30, 2016 were $119,352 in comparison to $90,082 for the year ended November 30, 2015.
The increase is due to the incremental cost of leasing an adjoining facility in order to meet the Company’s anticipated growth requirements.
Depreciation
Depreciation expenses for the year ended November 30, 2016 were $385,210 in comparison to $377,849 in the year ended November 30,
2015. The increase is primarily due to the additional investment in production, laboratory and computer equipment during the year ended
November 30, 2016.
Net Foreign Exchange (Loss) Gain
Foreign exchange loss was $22,470 for the year ended November 30, 2016 in comparison to a gain of $46,211 in the year ended
November 30, 2015. The foreign exchange loss for the year ended November 30, 2016 was due to the weakening of the Canadian dollar against
the U.S. dollar during the year ended November 30, 2016 as the exchange rates changed to $1.00 for C$1.3429 as at November 30, 2016 from
$1.00 for C$1.3353 as at November 30, 2015. During the year ended November 30, 2016, the exchange rate averaged $1.00 for C$1.3276
compared to the year ended November 30, 2015, when the exchange rate averaged $1.00 for C$1.2603.
Interest Income
Interest income for the year ended November 30, 2016 was lower by $1,300 in comparison to the prior period. For the year ended
November 30, 2016 interest was lower largely due to lower average amounts of cash on hand compared to the year ended November 30, 2015.
Interest Expense
Interest expense for the year ended November 30, 2016 was higher by $13,609 compared with the prior period. This is primarily because
the interest expense paid on the Debenture which accrues interest payable at 12% annually and the related conversion option embedded derivative
accreted at an annual imputed interest of approximately 6.6% in fiscal 2016. During the fiscal year 2015, the conversion option embedded
derivative accreted at an annual imputed interest of approximately 15%, offset by a credit to interest expense at an imputed interest rate of 14.6%,
during the third quarter of 2015, due to the extinguishment of the debt from an accounting perspective.
Net Loss
The Company recorded net loss for the year ended November 30, 2016 of $10,143,577 or $0.38 per common share, compared with a net
loss of $7,436,388 or $0.31 per common share for the year ended November 30, 2015. In the year ended November 30, 2016, the higher net loss is
primarily attributed to lower licensing revenues from commercial sales of generic Focalin XR® for 2016. To a lesser extent, the higher loss for the
2016 period was due to the accrual of management bonuses and additional compensation costs related to vested performance options as a result of
the FDA approval of generic Keppra XR® and the Company’s shareholders approving an extension of the expiry date of the performance based
stock options. In the year ended November 30, 2015, the net loss is attributed to the ongoing R&D and selling, general and administrative expense,
partially offset by licensing revenue.
50
Year Ended November 30, 2015 Compared to the Year Ended November 30, 2014
Revenue
The Company recorded revenues of $4,093,781 for the year ended November 30, 2015 versus $8,769,693 for the year ended November
30, 2014. As the first-filer for generic Focalin XR® (dexmethylphenidate hydrochloride extended-release) capsules in the 15 mg strength, we had
180 days (up to May 19, 2014) of exclusivity of sales for that strength from the date of launch on November 19, 2013 in the United States by our
partner, Par. During the year ended November 30, 2014, we recognized licensing revenue of $8,415,540 from commercial sales of 15 and 30 mg
strengths of generic Focalin XR® capsules under the Par agreement. This revenue included the commercial sales occurring in the early stages of
the marketing of the generic product in those strengths during an exclusivity period. In the year ended November 30, 2014, we also recorded
milestone revenue, tied to the achievement of our product being either the only generic in the market or having only one generic competitor, of
$354,153 under the Par agreement. Subsequent to May 19, 2014, we no longer retained generic exclusivity of the 15 mg strength. Consequently,
we faced four generic competitors in 2014 through the first half of 2015, and a softening of pricing conditions and market share, consistent with
industry post-exclusivity experience. In the second half of 2015 we faced one additional competitor on the 15 mg strength, and while we were able
to preserve market share, it came at the expense of price/margin erosion. Revenue under the Par agreement represents the commercial sales of the
generic product in those strengths and may not be representative of future sales. We believe sales of generic Focalin XR® are subject to wholesaler
buying patterns, increased generic competition negatively impacting price, margins and market share consistent with industry post-exclusivity
experience and, to a lesser extent, seasonality.
Research and Development
Expenditures for R&D for the year ended November 30, 2015 were $7,247,473 in comparison to $8,020,201 in the prior year, a decrease
of $772,728. These included reduced spending for R&D activities as well as lower stock options expense as detailed below.
In the year ended November 30, 2015, we recorded $152,231 as an expense for stock based compensation for R&D employees, and there
was no expense for performance-based stock options. In the year ended November 30, 2014, we recorded $1,270,307 as an expense for stock-
based compensation and this higher expense was primarily due to a modification of performance-based stock options. Effective March 27, 2014,
the Company’s shareholders approved a two year extension of the performance-based stock option expiry date of these options to September 10,
2016. As a result of the modification of the performance based stock option expiry date, we recorded additional compensation costs of $1,066,991
related to vested performance options during the year ended November 30, 2014.
After adjusting for the stock-based compensation expenses discussed above, expenditures for R&D for the year ended November 30, 2015
were higher by $345,348 compared to the prior year. This increase over the prior year is primarily due to the fact that during the year ended
November 30, 2015 we incurred increased expenses on furthering the development of generic and NDA 505(b)(2) product candidates, compared to
the year ended November 30, 2014, as well as a modest increase in the number of non-management employees for the year ended November 30,
2015.
Selling, General and Administrative
Selling, general and administrative expenses were $3,581,913 for the year ended November 30, 2015 in comparison to $3,900,803 for the
year ended November 30, 2014, a decrease of $318,890. The decrease is due to lower expenses related to wages, partially offset by an increase in
administrative costs and marketing costs which are discussed in greater detail below.
Expenditures for wages and benefits for the year ended November 30, 2015 were $1,305,614 in comparison to $1,749,046 in the prior
year. For the year ended November 30, 2015, we recorded $265,587 as an expense for stock-based compensation compared to an expense of
$478,300 for the prior year. The decrease is attributable to the issuance of options in the second quarter of 2014 to certain management employees
and the non-management directors. After adjusting for the stock option based compensation expenses, expenditures for wages and benefits for
51
the year ended November 30, 2015 were lower by $230,719 compared to the prior period. The decrease was primarily due to the payment of
bonuses to certain management and non-management employees, and salary increases for certain non-management employees during the year
ended November 30, 2014, and due to no bonuses paid during the year ended November 30, 2015.
Administrative costs for the year ended November 30, 2015 were $1,751,315 in comparison to $1,651,790 in the year ended November
30, 2014. The increase is primarily due to an increase in expenditures in corporate legal activities and professional fees.
Marketing costs for the year ended November 30, 2015 were $434,902 in comparison to $418,473 in the prior year. This increase is
primarily the result of higher travel expenditures related to business development activities.
Depreciation
Depreciation expenses for the year ended November 30, 2015 was $377,849 in comparison to $381,385 in the prior year. The decrease is
primarily due to the timing of additional investment in production, laboratory equipment and computer equipment during the year ended November
30, 2015.
Exchange (Loss) Gain
Foreign exchange gain was $46,211 for the year ended November 30, 2015 in comparison to a gain of $10,896 for the year ended
November 30, 2014. The increase in foreign exchange gain for the year ended November 30, 2015 was due to the strengthening of the U.S. dollar
against the Canadian dollar throughout the year as the exchange rate averaged $1.00 for C$1.2603 compared to $1.00 for C$1.0973 in the prior
year. The Canadian dollar weakened against the U.S. dollar during the year ended November 30, 2015 as the exchange rates changed to $1.00 for
C$1.3353 as at November 30, 2015 from $1.00 for C$1.1440 at November 30, 2014.
Interest Income
Interest income was $1,507 for the year ended November 30, 2015 in comparison to $4,898 for the year ended November 30, 2014, a
decrease of $3,391. For the year ended November 30, 2015, interest was lower largely due to a lower average amount of cash on hand during 2015
compared to 2014.
Interest Expense
Interest expense was $256,629 for the year ended November 30, 2015 in comparison to $339,451 for the year ended November 30, 2014,
a decrease of $82,822. This results from interest paid in 2015 on the Debenture which accrues interest payable at 12% annually and the related
conversion option embedded derivative accreted at an annual imputed interest of approximately 15%, offset by a credit to interest expense at an
imputed interest rate of 14.6% during the second half of fiscal 2015, due to the extinguishment of the debt on an accounting basis, in comparison to
fiscal 2014 when the conversion option embedded derivative accreted at an annual imputed interest of approximately 8%.
B.
Liquidity and Capital Resources
For the years ended
Cash flows used in operating activities
Cash flows provided from financing
activities
Cash flows used in investing activities
Increase (decrease) in cash
Cash, beginning of period
Cash, end of period
November
30, 2016
November
30, 2015
$
$
November
30, 2014 Change (2016 vs 2015)
%
65% (2,067,251)
Change (2015 vs 2014)
%
121%
$
$
$
(6,254,985) (3,782,164) (1,714,913) (2,472,821)
9,159,623
1,733,865
5,957,275
7,425,758
(515,410)
(430,480)
(768,973)
(84,930)
2,389,228
1,755,196
4,144,424
(2,478,779) 3,473,389
4,233,975
760,586
4,233,975
1,755,196
4,868,007
(2,478,779)
2,389,228
338,493
428% (4,223,410)
20%
196% (5,952,168)
-59% 3,473,389
136% (2,478,779)
-71%
-44%
-171%
457%
-59%
52
The Company had cash of $4,144,424 as at November 30, 2016 compared to $1,755,196 as at November 30, 2015 and compared to
$4,233,975 as at November 30, 2014. The increase in cash during the year ended November 30, 2016 was mainly a result of an increase in cash
flows provided from financing activities which were mainly from the Company’s underwritten public offering and common share sales under the
Company’s at-the-market offering program, the receipt of a non-refundable upfront payment of $3,000,000 under the Mallinckrodt agreement,
partially offset by lower cash receipts relating to commercialized sales of our generic Focalin XR® and a reduction in accounts payable and accrued
liabilities. The decrease in cash during the year ended November 30, 2015 was mainly a result of lower cash receipts relating to commercial sales
of our generic Focalin XR® capsules for the 15 and 30 mg strengths, an increase in cash flow used in operating activities related to R&D activities,
a decrease in cash flows provided from financing activities which were mainly from common share sales under the Company’s at-the-market
offering program, partially offset by a decrease in purchases of production, laboratory and computer equipment. The increase in cash during the
year ended November 30, 2014 was mainly a result of the decrease in cash flows used in operating activities due to payments received from the
commercial sales of our generic Focalin XR® capsules for the 15 and 30 mg strengths, cash flows from financing activities which were mainly
from our at-the-market financing and several warrant exercise, partially offset by an increase in purchases of production, laboratory and computer
equipment.
For the year ended November 30, 2016, net cash flows used in operating activities increased to $6,254,985 as compared to net cash flows
used in operating activities for the year ended November 30, 2015 of $3,782,164. The November 30, 2016 increase was due to lower cash receipts
relating to commercial sales of our generic Focalin XR® capsules by Par for the 15 and 30 mg strengths and a reduction in accounts payable and
accrued liabilities, partially offset by the receipt of a non-refundable upfront payment of $3,000,000 under the Mallinckrodt agreement. For the
year ended November 30, 2015, net cash flows used in operating activities increased to $3,782,164 as compared to net cash flows used in operating
activities for the year ended November 30, 2014 of $1,714,913. The increase from 2014 was due to the receipt of approximately $4,622,157, as our
payment relating to commercial sales of generic Focalin XR® capsules by Par for the 15 and 30 mg strengths of the drug product under the Par
agreement for the period December 1, 2014 to November 30, 2015 compared to the payment to us of $8,465,466 for the period December 1, 2013
to November 30, 2014.
R&D costs, which are a significant portion of the cash flows used in operating activities, related to continued internal research and
development programs are expensed as incurred. However, equipment and supplies are capitalized and amortized over their useful lives if they
have alternative future uses. For the year ended November 30, 2016 and year ended November 30, 2015, R&D expense was $8,166,736 and
$7,247,473, respectively. The increase was mainly due to stock based compensation expenses of $1,177,782 related to vested performance options
during the year ended November 30, 2016, management bonuses and an increase in stock options expense, partially offset by lower expenditures on
third party R&D expenditures. For the year ended November 30, 2015 and year ended November 30, 2014, R&D expense before stock option
expense was $7,095,242 and $6,749,894, respectively. The increase in expenses in 2015 relative to 2014 was in part as a result of capital
expenditures on production and analytical equipment and expenses for the procurement of active raw materials, conducting clinical studies and, to a
lesser extent, hiring of additional personnel.
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 Scientific Research & Experimental Development 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.
For the year ended November 30, 2016, net cash flows provided from financing activities of $9,159,623 principally related to the June
2016 underwritten public offering. The Company issued at the initial closing of the offering an aggregate of 3,229,814 common shares and
warrants to purchase an additional 1,614,907 common shares. The underwriter also purchased at such closing additional warrants to acquire
242,236 common shares pursuant to the over-allotment option exercised in part by the underwriter. The Company subsequently sold an aggregate
of 459,456 additional common shares at the public offering price of $1.61 per share in connection with subsequent partial exercises of the
underwriter’s over-allotment option. The closings of these partial exercises
53
brought the total net proceeds from the offering to $5,137,638, after deducting the underwriter’s discount and estimated offering expenses. In
addition, during the year ended November 30, 2016, an aggregate of 1,471,260 common shares were sold on NASDAQ for gross proceeds of
$3,469,449, with net proceeds to us of $3,368,674, under the at-the-market offering program. During the year ended November 30, 2015, an
aggregate of 471,439 common shares were sold for gross proceeds of $1,290,168, with net proceeds to us of $1,254,178 under the at-the-market
offering program. During the year ended November 30, 2014, an aggregate of 1,689,500 common shares were sold for gross proceeds of
$6,571,673, with net proceeds to us of $6,390,670 under the at-the-market offering program. As a result of prior sales of the Company’s common
shares under the equity distribution agreement, the Company currently may offer and sell its common shares with an aggregate purchase price of
up to $4,891,688 (or such lesser amount as may then be permitted under applicable securities laws and regulations) pursuant to our at-the-market
program. There can be no assurance that any additional shares will be sold under the at-the-market program.
For the year ended November 30, 2016, net cash flows used in investing activities of $515,410 related mainly to purchase of production,
laboratory and computer equipment. For the year ended November 30, 2015, net cash flows used in investing activities of $430,480 related mainly
to the purchase of production, laboratory and computer equipment due to the acceleration of product development activities. For the year ended
November 30, 2014, net cash flows used in investing activities of $768,973 related mainly to the purchases of production, laboratory and computer
equipment due to the acceleration of product development activities.
All non-cash items have been eliminated from the consolidated statements of cash flows.
Other than the net income for the three months ended February 28, 2014, the Company has incurred losses from operations since
inception. To date, 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. Since November 2013, research
has also been funded from revenues from sales of our generic Focalin XR® (dexmethylphenidate hydrochloride extended-release) capsules for the
15 and 30 mg strengths. With the launch of 25 and 35 mg strength by Par in January 2017, we expect revenues of generic Focalin XR® to
significantly improve in 2017. As of November 30, 2016, the Company had a cash balance of $4.1 million. As of February 27, 2017, our cash
balance was $2.7 million. We currently expect to satisfy our operating cash requirements until June 2017 from cash on hand. However, we may
need to obtain additional funding prior to that time as we pursue the development of our product candidates and if we accelerate our product
commercialization activities. If necessary, we expect to utilize our at-the-market offering program to bridge any funding shortfall in the first and
second quarters of 2017. In the second half of fiscal 2017, we expect revenues to improve as we prepare for the launch of our tentatively approved
generic Seroquel XR® (quetiapine fumarate extended release tablet) on the expiry of Par’s and Accord’s first filer exclusivity periods in May 2017,
although there can be no assurance as to when or if any launch will occur, or if generic Seroquel XR® will be successfully commercialized. 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 which are at higher-than-currently projected levels and to fund any significant expansion of our operations.
Although there can be no assurances, such capital may come from revenues from the sales of our generic Focalin XR® capsules, from proceeds of
the Company’s at-the-market offering program, from potential revenues from the sales of our tentatively approved generic Seroquel XR® and from
potential partnering opportunities. Other potential sources of capital may include payments from licensing agreements, cost savings associated with
managing operating expense levels, other equity and/or debt financings, and/or new strategic partnership agreements which fund some or all costs
of product development. Our ultimate success will depend on whether our product candidates receive the approval of the FDA or Health Canada
and whether we are able to successfully market approved products. We cannot be certain that we will be able to receive FDA or Health Canada
approval for any of our current or future product candidates, that we will reach the level of sales and revenues necessary to achieve and sustain
profitability, or that we can secure other capital sources on terms or in amounts sufficient to meet our needs or at all. Our cash requirements for
R&D during any period depend on the number and extent of the R&D activities we focus on. At present, we are working principally on our
RexistaTM XR and RegabatinTM XR 505(b)(2), and selected generic, product candidate development projects. For our Regabatin TM XR 505(b)(2)
product candidate, Phase III clinical trials can be capital intensive, and will only be undertaken consistent with the availability of funds and a
prudent cash management
54
strategy. We anticipate some investment in fixed assets and equipment over the next several months, the extent of which will depend on cash
availability.
On December 1, 2015, the Company entered into a new lease agreement for the combined properties comprising the Company’s premises
that it currently operates from at 30 Worcester Road, as well as a 40,000 square foot building on the adjoining property located at 22 Worcester
Road, which is owned indirectly by the same landlord (collectively, the “ combined properties”), for a five-year term with a five-year renewal
option. Basic rent over the five year term is C$240,000 per annum, subject to an annual consumer price inflation adjustment and the Company
responsible for utilities, municipal taxes and operating expenses for the leased property. With these two leased premises, the Company now has
use of 65,000 square feet of commercial space to accommodate its growth objectives over the next several years. The Company also has an option
to purchase the combined properties after March 1, 2017 and up to November 30, 2020 based on a fair value purchase formula. The Company uses
its facility at 30 Worcester Road as a current Good Laboratory Practices research laboratory, office space, and current Good Manufacturing
Practices scale-up and small to medium-scale manufacturing plant for solid oral dosage forms. The facility at 30 Worcester Road consists of
approximately 4,900 square ft. for administrative space, 4,300 square ft. for R&D, 9,200 square ft. for manufacturing, and 3,000 square ft. for
warehousing. The 22 Worcester Road building provides approximately 35,000 square feet of warehouse space and approximately 5,000 square feet
of office space. The current lease also provides the Company with a right of first refusal to purchase the combined properties. The landlord is
required to provide the Company with prior written notice and the desired sale price for the combined properties prior to offering the premises to a
third party or on the open market. The Company has five business days to accept such offer and purchase price for a transaction to close within 60
days of the notice. If the Company declines the offer, the landlord is entitled to offer and sell the properties for a purchase price of not less than the
price offered to the Company for a period of 180 days, after which time the landlord is again obliged to offer the properties to the Company before
offering them to a third party or on the open market.
Effective December 1, 2016, the maturity date for the Debenture in respect of the $1,500,000 loan to the Company by Drs. Isa and Amina
Odidi was extended to April 1, 2017 and a principal repayment of $150,000 was made at the time of the extension. The Company currently expects
to repay the current net amount of $1,350,000 on or about April 1, 2017, if the Company then has cash available.
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, our success in commercializing approved products with our commercialization partners and 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 sufficient additional capital, it will raise substantial doubt about our ability to
continue as a going concern and realize our assets and pay our liabilities as they become due. Depending upon the results of our research and
development programs and the availability of financial resources, we could decide to accelerate, terminate, or reduce certain projects, or commence
new ones. 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 or our not taking any necessary actions
required by the FDA or Health Canada 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, ANDSs, 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, 2016, 2015 and 2014, R&D expense was $8,166,736, $7,247,473 and
$8,020,201, respectively.
55
D.
Trend Information
It is important to note that historical patterns of revenue and expenditures cannot be taken as an indication of future revenue and
expenditures. Net loss has been variable over the last eight quarters, and has been impacted primarily by the commercial sales of generic Focalin
XR® capsules for the 15 and 30 mg strengths, the level of our R&D spending, availability of funding, the modification of performance based stock
options, and the fair value adjustment of derivative liabilities. The higher net loss in the fourth quarter of 2016 is attributable to the lower licensing
revenues from commercial sales of generic Focalin XR® for the fourth quarter of 2016, the accrual of management bonuses (there were no
management bonuses paid in fiscal 2015) and additional compensation costs related to vested performance options as a result of the Company’s
shareholders approving an extension of the expiry date of the performance-based stock option. As noted above under “Revised Prior Quarter
Amounts”, the latter item represents a non-cash error related to the modification of performance-based stock options that should have been
expensed in the second quarter of 2016, resulting in the fourth quarter net loss being overstated by $1,177,782 and the second quarter net loss
understated by the same amount. This non-cash error has no effect on the full year 2016 results. The higher net loss in the third quarter of 2016 is
attributable to the lower licensing revenues from commercial sales of generic Focalin XR® for the third quarter of 2016, as the Company continued
to face stiffer generic competition throughout fiscal 2016. The net loss in the second quarter of 2016 relative to the second quarter of 2015 is
attributed to lower licensing revenues from commercial sales of generic Focalin XR® for the second quarter of 2016 due to increased competition, a
softening of pricing conditions and margin compression. As noted above, second quarter 2016 net loss was understated by $1,177,782 due to a
non-cash error related to the modification of performance-based stock options for which the expense was charged to the fourth quarter of 2016. The
net loss in the first quarter of 2016 relative to the first quarter of 2015 was attributed to lower licensing revenues compared to the prior period and
higher R&D expenses, mainly due to higher stock options expense as a result of certain performance based stock options vesting upon FDA
approval of generic Keppra XR®, partially offset by lower selling, general and administrative expenses. The higher net loss in the fourth quarter of
2015 in comparison to the third quarter of 2015 is attributed to ongoing R&D and selling, general and administrative expense, including a
significant increase in third party clinical studies. The higher net loss in the third quarter of 2015 in comparison to the second quarter of 2015 is
attributed to the lower licensing revenue from generic Focalin XR® capsules due to the entry of a fifth generic competitor and ongoing R&D and
selling, general and administrative expense, including a significant increase in third party clinical studies. The net loss in the second quarter of
2015 is attributed to the ongoing R&D and selling, general and administrative expense, including an increase in third party clinical studies, partially
offset by licensing revenue from generic Focalin XR® capsules. The net loss in the first quarter of 2015 was attributed to lower licensing revenues
compared to the prior period, partially offset by lower R&D and selling, general and administrative expenses. This is primarily due to the loss of
exclusivity on the 15 mg strength of our generic Focalin XR® capsules. In the first quarter of 2015 we faced four generic competitors and a
softening of pricing conditions and market share, consistent with industry post-exclusivity experience. The net loss in the third and fourth quarter
of 2014 is attributed to the ongoing R&D and selling, general and administrative expense, as well as the loss of exclusivity period for the 15 mg
strength of generic Focalin XR® capsules in the third quarter, allowing more competitors into the market, which negatively impacted our licensing
revenue from generic Focalin XR® capsules. The net loss in the second quarter of 2014 is attributed to the ongoing R&D and selling, general and
administrative expense, including an increase in stock-based compensation expense, payment of bonuses to certain management employees,
increased salaries to certain non-management employees, partially offset by licensing revenue and milestone revenue from our generic Focalin XR®
capsules.
The following selected financial information is derived from our unaudited interim consolidated financial statements.
(Loss) per share
Revenue
Net loss
Basic(1)
Quarter Ended
November 30, 2016
August 31, 2016
May 31, 2016
February 29, 2016
November 30, 2015
August 31, 2015
May 31, 2015
February 28, 2015
(1) Quarterly per share amounts may not sum due to rounding.
56
$
569,096
554,925
556,004
566,937
845,103
840,748
1,268,245
1,139,685
$
(3,913,304)
(2,110,156)
(2,000,077)
(2,120,040)
(3,132,788)
(1,881,670)
(1,507,270)
(914,660)
Diluted(1)
$
(0.13)
(0.07)
(0.08)
(0.09)
(0.13)
(0.08)
(0.06)
(0.04)
$
(0.13)
(0.07)
(0.08)
(0.09)
(0.13)
(0.08)
(0.06)
(0.04)
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,
2016, 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 2017. Operating lease obligations relate to the lease of premises for the
combined properties which will expire in November 2020, with a 5 year renewal option. The Company also has an option to purchase the
combined properties after March 1, 2017 and up to November 30, 2020 based on a fair value purchase formula, but does not currently expect to
exercise this option in 2017.
Contractual Obligations
Third parties
Accounts payable
Accrued liabilities
Capital lease
Operating lease
Related parties
Employee costs payable
Convertible debenture
Total contractual obligations
G.
Safe Harbor
Payments Due by Period
Total
Less than
1 Year
1 - 3
Years
3 - 5
Years
$ 807,295
384,886
14,829
718,944
$ 807,295
384,886
14,829
179,736
$
-
-
-
539,208
$
1,044,151
1,574,908
$4,545,013
1,044,151
1,574,908
$4,005,805
-
-
$ 539,208
$
-
-
-
-
-
-
-
$
$
More
than 5
Years
-
-
-
-
-
-
-
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”).
57
Name and Province of Residence
Dr. Isa OdidiOntario, Canada
Dr. Amina OdidiOntario, Canada
John Allport(2)Ontario, Canada
Dr. Eldon R. Smith(1) (2) Alberta,
Canada
Position held with
the Company
Chairman of the
Board and Chief
Executive Officer
President, Chief
Operating Officer
and Director
Vice-President,
Legal Affairs and
Licensing and
Director
Director
Bahadur Madhani(1)Ontario,
Canada
Kenneth Keirstead(1)(2)New
Brunswick, Canada
Dr. Patrick Yat
Ontario, Canada
Domenic Della PennaOntario,
Canada
Director
Director
Vice-President,
Pharmaceutical
Analysis and
Chemistry
Chief Financial
Officer
Principal Occupations During the
Last 5 Years
Officer of the Company
Other Public
Company Boards Director Since
September 2004
None
September 2004
September 2004
October 2009
March 2006
January 2006
N/A
N/A
Officer of the Company
Officer of the Company
None
None
Logiq Asset
Management Inc.
formerly (Aston
Hill Financial
Inc.); Zenith
Epigenetics Corp,
and Resverlogix
Corp
None
None
None
None
President and CEO of Eldon R.
Smith and Associates Ltd., a
consulting business and Professor
Emeritus at the University of
Calgary, Faculty of Medicine
Chief Executive Officer of Equiprop
Management Limited, a consulting
business.
Executive Manager of Lyceum
Group, a consulting business.
Officer of the Company
Officer of the Company since
November 2014; Chief Financial
Officer (Interim) of Teva North
America Generics from December
2013 to September 2014; Chief
Financial Officer of Teva Canada
Limited from December 2010 to
September 2014; Chief Financial
Officer of Timothy’s Coffees of the
World from 2008-2010.
Notes:
(1) Member of the Audit Committee and Compensation Committee.
(2) Member of the Corporate Governance Committee.
Each of the foregoing individuals named in the above table has been engaged in the principal occupation set forth opposite his or her name during
the past five years.
As of February 27, 2017, the directors and executive officers of the Company as a group owned, directly and indirectly, or exercise
control or direction over 6,121,980 common shares, representing approximately 20.3% of the issued and outstanding common shares of the
Company (and beneficially owned approximately 10,996,132 common
58
shares representing 31.4% 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 5,781,312 common shares,
representing approximately 19.17% of our issued and outstanding common shares of the Company (and collectively beneficially owned in the
aggregate approximately 9,552,464 common shares representing 28.2% 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 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.
Drs. Isa Odidi and Amina Odidi are spouses to each other.
B.
Compensation
Compensation Discussion and Analysis
Background – 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 (some of which have received FDA approval)
and product candidates in various stages of development, including ANDAs filed with the FDA (and one ANDS filed with Health Canada) and one
NDA filing, in therapeutic areas that include neurology, cardiovascular, GIT, diabetes and pain. As of November 30, 2016, the Company had 54
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,
59
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.
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 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 and Discretionary Bonus - 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 and the Board may consider discretionary bonuses for individual employees based on exceptional performance by
such individuals in a particular fiscal year.
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.
60
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.
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, 2016, November 30, 2015 and November 30, 2014 in respect of the Chief Executive Officer of the Company,
the Chief Financial Officer, and two other officers of the Company who earned greater than $150,000 in total compensation in the fiscal year
ended November 30, 2016 (“Named Executive Officers”).
SUMMARY COMPENSATION TABLE
Name and principal position(a) Year(b)
Salary
(U.S.$)(1)(c)
Share-based
awards
(U.S.$)(d)
Option-
based
awards
(U.S.$)(2)(e)
Dr. Isa Odidi,Chairman &
Chief Executive Officer
Dr. Amina Odidi,President &
Chief Operating Officer
John Allport,VP Legal Affairs
& Licensing
Domenic Della Penna, Chief
Financial Officer(5)
2016
2015
2014
2016
2015
2014
2016
2015
2014
2016
2015
2014
340,464
358,617
581,965
340,464
358,617
581,965
109,220
115,043
132,167
225,972
218,185
5,222
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
$703,016
68,644
99,615
$703,016
68,644
99,615
$50,346
39,225
99,615
$64,076
76,810
34,573
61
Non-equity incentive plan
compensation (U.S.$)(f)
Long-term
incentive
plans
Annual
incentive
plans(3)
Pension
value (U.S.$)
(g)
All other
compensation
(U.S.$)(4)(h)
Total
compensation
(U.S.$)(i)
340,464
N/A
182,299
340,464
N/A
182,299
56,493
N/A
91,149
112,986
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
13,558
14,678
10,938
13,558
14,678
10,938
13,558
14,678
10,938
13,558
14,281
342
1,397,502
441,939
775,202
1,397,502
441,939
775,202
229,617
168,946
333,869
416,592
309,276
40,137
Notes:
(1) Salaries paid by the Company to each Named Executive Officer are paid in Canadian dollars. All amounts are expressed in U.S. dollars
converted at the exchange rate of U.S.$ 0.7532 to C$1.00 (2015 – U.S. $0.7934; 2014 – U.S. $0.9115) 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 2016, 2015 and 2014 are as disclosed in the table.
(2) 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.
(3) Amount awarded at the discretion of the Board. This bonus was paid in the second quarter of 2017.
(4) “All other compensation” includes car allowances and other miscellaneous benefits.
(5) Mr. Della Penna was appointed as Chief Financial Officer of the Company effective November 24, 2014.
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 agreement relating to performance-based options applicable
to Drs. Isa and Amina Odidi described below.
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 at an exercise price of $3.27 per
share. 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 at an exercise price of $1.81 per share. In March 2014, Dr. Isa Odidi received a grant of 50,000 options of
which 25,000 vested immediately on issuance and the remaining 25,000 options vested on November 30, 2014 at an exercise price of $4.29 per
share. In November 2015, Dr. Isa Odidi received a grant of 70,000 options of which 49,000 vested immediately on issuance, with the remaining
21,000 options vested on November 30, 2016 at an exercise price of $2.52 per share. In August 2016, Dr. Isa Odidi received a grant of 90,000
options of which 60,000 vested immediately on issuance, with the remaining 30,000 to vest on November 30, 2017 at an exercise price of $2.43 per
share.
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
62
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 at an exercise price of
$3.27 per share. 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 at an exercise price of $1.81 per share. In March 2014, Dr. Amina Odidi received a grant
of 50,000 options of which 25,000 vested immediately on issuance and the remaining 25,000 options vested on November 30, 2014 at an exercise
price of $4.29 per share. In November 2015 Dr. Amina Odidi received a grant of 70,000 options of which 49,000 vested immediately on issuance,
with the remaining 21,000 options vested on November 30, 2016 at an exercise price of $2.52 per share. In August 2016, Dr. Amina Odidi
received a grant of 90,000 options of which 60,000 vested immediately on issuance, with the remaining 30,000 to vest on November 30, 2017 at an
exercise price of $2.43 per share.
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 were not granted under the Option Plan. 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 were to expire in September 2014. Effective March 27, 2014, the Company’s shareholders approved a two year extension
of the performance-based stock option expiry date to September 2016. Effective April 19, 2016, the Company’s shareholders approved a further
two year extension of the performance-based stock option expiry date to September 2018. As of the date hereof, 2,211,152 of these options have
vested and are exercisable. These options were not granted under the Option Plan.
The employment agreement with Domenic Della Penna, the Chief Financial Officer of the Company, effective November 24, 2014 entitles Mr.
Della Penna to receive a base salary of C$275,000, which is paid in Canadian dollars, per year and which was increased by the Board on a
discretionary basis for 2015 to C$300,000 and C$325,000 for 2017 and future years. 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$1,500 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. If the agreement is
terminated without cause, it requires payment to Mr. Della Penna based upon a formula that commences with the equivalent of approximately three
months’ base salary and increases by approximately six weeks of base salary for every full year of service. If such termination without cause
occurs within six months of a change of control of the Company that occurs after November 24, 2015, it requires payment to Mr. Della Penna
based on a formula that commences with the equivalent of approximately thirteen months’ base salary and increases by approximately six weeks
for every full year of service. Mr. Della Penna’s employment agreement contains intellectual property, non-competition and non-solicitation
provisions in favour of the Company. Mr. Della Penna was granted 60,000 options, of which 15,000 vested immediately on issuance, 15,000
vested on November 30, 2015 and the remaining options vest as to 15,000 each year on November 30, 2016 and 2017 at an exercise price of $3.22
per share. In November 2015, Mr. Della Penna received a grant of 50,000 options of which 35,000 vested immediately on issuance, with the
remaining 15,000 options vested on November 30, 2016 at an exercise price of $2.52 per share. In August 2016, Mr. Della Penna received a grant
of 70,000 options, of
63
which 47,000 vested immediately, with the remaining 23,000 to vest on November 30, 2017 at an exercise price of $2.43 per share.
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 at an exercise price of $3.27 per share. 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 at an exercise price of $1.81 per share. In March 2014,
Mr. Allport received a grant of 50,000 options of which 25,000 vested immediately on issuance and the remaining 25,000 options vested on
November 30, 2014 at an exercise price of $4.29 per share. In November 2015, Mr. Allport received a grant of 40,000 options of which 28,000
vested immediately on issuance, with the remaining 12,000 options vested on November 30, 2016 at an exercise price of $2.52 per share. In
August 2016, Mr. Allport received a grant of 55,000 options of which 37,000 vested on issuance, with the remaining 18,000 to vest on November
30, 2017 at an exercise price of $2.43 per share.
Incentive Plan Awards
Outstanding Option-Based Awards and Share-Based Awards – The following table sets forth for each Named Executive Officer all
awards outstanding at the end of the most recently completed financial year, including awards granted before the most recently completed financial
year. Each option grant allows the holder to purchase one of the Company’s common shares.
64
Option-based Awards
Share-based Awards
Name(a)
Number of
securities
underlying
unexercised
options (#)(b)
Option exercise
price (U.S.$)(c)
Option
expiration
date(d)
Value of
unexercised in-
the-money
options (U.S.$)
(e)(2)
Number of
shares or units of
shares that have
not vested (#)(f)
Drs. Isa Odidi and
Amina Odidi(1)
Dr. Isa Odidi
Dr. Amina Odidi
John Allport
Domenic Della
Penna(3)
2,763,940
US$3.62
Sept. 10, 2018
N/A
300,000
75,000
50,000
70,000
90,000
300,000
75,000
50,000
70,000
90,000
250,000
25,000
50,000
40,000
55,000
60,000
50,000
70,000
C$3.27
C$1.81
C$4.29
C$2.52
C$2.43
C$3.27
C$1.81
C$4.29
C$2.52
C$2.43
C$3.27
C$1.81
C$4.29
C$2.52
C$2.43
C$3.22
C$2.52
C$2.43
Feb. 16, 2022
Apr. 13. 2020
Feb. 28, 2019
Nov. 30, 2020
Aug. 31, 2021
Feb. 16, 2022
Apr. 13. 2020
Feb. 28, 2019
Nov. 30, 2020
Aug. 31, 2021
Feb. 16. 2022
Apr. 13, 2020
Feb. 28, 2019
Nov. 30, 2020
Aug. 31, 2021
Nov. 30, 2024
Nov. 30, 2020
Aug. 31, 2021
C$129,000
C$141,750
N/A
C$82,600
C$114,300
C$129,000
C$141,750
N/A
C$82,600
C$114,300
C$107,500
C$47,250
N/A
C$47,200
C$69,850
C$28,800
C$59,000
C$88,900
65
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
Market or
payout value of
share-based
awards that have
not vested
(U.S.$)(g)
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
Notes
(1) These option-based awards are held jointly.
(2) 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, 2016 (C$3.70 and $2.79,
respectively) and multiplying the result by the number of common shares underlying an option.
(3) Mr. Della Penna was appointed as Chief Financial Officer of the Company effective November 24, 2014.
Incentive Plan Awards – Value Vested or Earning During the Year – The following table sets forth details of the value vested or earned
during the most recently completed financial year for each incentive plan award.
Name
(a)
Drs. Isa Odidi
Dr. Amina Odidi
John Allport
Domenic Della Penna(2)
Option-based
awards -
Value vested
during the
year (U.S.$)
Share-based
awards -
Value vested
during the
year (U.S.$)
(b)(1)
C$100,980
C$100,980
C$61,150
C$84,590
(c)
N/A
N/A
N/A
N/A
Non-equity
incentive plan
compensation
- Value
earned during
the year
(U.S.$)
(d)
340,464
340,464
56,493
112,986
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.
(2) Mr. Della Penna was appointed as Chief Financial Officer of the Company effective November 24, 2014.
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 Dr. Isa Odidi and Dr. Amina Odidi (collectively the “ Odidis”), by virtue of it being a fixed-term
agreement with automatic renewal provisions, effectively provides for payments to the Odidis following termination of the employment agreement
unless the agreement has been terminated in accordance with its terms. As a result, if either of the Odidis 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$1.4 million would be
payable to each of the Odidis, which is the amount that would have been payable to September 30, 2019, at each of the Odidis’ 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, 2019, then as such date approaches the amount payable upon termination to the Odidis will decrease to the point where no
amount would be payable upon termination as at September 30, 2019. Any termination of the employment of the Odidis 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 Odidis relating to a change
of control of the Company.
For a discussion of certain termination and change of control benefits under the employment agreement with Mr. Della Penna, see the
description of his employment agreement under the heading “Employment Agreements” above.
66
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.
Name
Fees earned
Share-based
awards
Option-based
awards
(a)
Eldon Smith
Kenneth
Keirstead
Bahadur Madhani
(b)
-
(c)(1)
C$41,000
C$40,000
C$46,000
N/A
N/A
(d) (2)
C$42,534
C$42,534
C$42,534
Non-equity
incentive plan
compensation
(e)
N/A
N/A
N/A
Pension value
All other
compensation
Total
(f)
N/A
N/A
N/A
(g)
N/A
N/A
N/A
(h)
C$83,534
C$82,534
C$88,534
Notes:
(1) DSUs that were earned. Does not include DSUs earned in the previous financial year and granted in the most recently completed financial
year.
(2) Option-based awards for fiscal year 2016 were issued on November 30, 2016.
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 $1,000 per day per meeting paid in Canadian dollars.
Outstanding Option-Based Awards and Share-Based Awards – The following table sets forth all amounts of option-based and share-
based awards to the non-executive directors for the Company’s most recently completed financial year.
Option-based Awards
Share-based Awards
Name
(a)
Eldon Smith
Kenneth Keirstead
Bahadur Madhani
Notes:
Number of
securities
underlying
unexercised
options (#)
Option
exercise price
(U.S.$)
Option
expiration date
Value of
unexercised in-
the-money
options (U.S.$)
(b)
10,000
25,000
37,500
37,500
20,000
35,000
10,000
25,000
37,500
37,500
20,000
35,000
10,000
25,000
37,500
37,500
20,000
35,000
(c)
C$2.88
C$1.81
C$3.22
C$4.29
C$2.52
C$2.43
C$2.88
C$1.81
C$3.22
C$4.29
C$2.52
C$2.43
C$2.88
C$1.81
C$3.22
C$4.29
C$2.52
C$2.43
(d)
Oct. 22, 2019
Apr. 13, 2020
Nov. 30, 2019
Feb. 28, 2019
Nov. 30, 2020
Aug. 31, 2021
Oct. 22, 2019
Apr. 13, 2020
Nov. 30, 2019
Feb. 28, 2019
Nov. 30, 2020
Aug. 31, 2021
Oct. 22, 2019
Apr. 13, 2020
Nov. 30, 2019
Feb. 28, 2019
Nov. 30, 2020
Aug. 31, 2021
(e)(1)
8,200
47,250
18,000
N/A
23,600
44,450
8,200
47,250
18,000
N/A
23,600
44,450
8,200
47,250
18,000
N/A
23,600
44,450
Number of
shares or
units of
shares that
have not
vested (#)
(f)(2)
Market or
payout value of
share-based
awards that
have not vested
(U.S.$)
(g)(3)
76,743
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
C$283,948
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
(1) 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, 2016 (C$3.70) and multiplying the result by the number of common shares underlying
an option.
67
(2) These DSUs are permitted to be redeemed only following termination of Board service. Includes DSUs earned as at November 30, 2016.
(3) 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, 2016
(C$3.70) and multiplying by the number of common shares underlying a DSU.
Incentive Plan Awards – Value Vested or Earned During the Year – The following table sets forth all amounts of option-based and
share-based awards vested to the non-executive directors of the Company for the most recently completed financial year and no non-equity
incentive plan compensation was earned during the most recently completed financial year.
Name
(a)
Eldon Smith
Kenneth Keirstead
Bahadur Madhani
Notes:
Option-based awards - Value
vested during the year (U.S.$)
Share-based awards - Value
vested during the year (U.S.$)
(b)(1)
C$37,560
C$37,560
C$37,560
(c)(2)
N/A
N/A
N/A
Non-equity incentive plan
compensation - Value earned
during the year (U.S.$)
(d)
Nil
Nil
Nil
(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.
(2) 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 $150,000 to $250,000 by the Company. The premium
payable by the Company for the period from October 25, 2016 to October 25, 2017 is $99,775.
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.
68
Audit Committee Charter
The charter of the Audit Committee can be found on the Company’s website at www.intellipharmaceutics.com.
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 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.
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 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 as Chairman of the Libin
Cardiovascular Institute of Alberta and of Logiq Asset Management Inc. (formerly Aston Hill Financial Inc.) and is a director of Resverlogix Corp,
and Zenith Epigenetics Corp, and is a past director of Canadian Natural Resources Limited.
69
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 accounting principles generally accepted in the United States of America) 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.
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;
2. Audit-Related Services
● 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 the 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 Chartered Professional
Accountants of Canada), or other regulatory or standard setting bodies.
● Presentations or training on accounting or regulatory pronouncements;
● Due diligence services related to accounting and tax matters in connection with potential acquisitions / dispositions; and
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
70
● Assistance in responding to Canada Revenue Agency or Internal Revenue Service on proposed reassessments and other
matters.
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.
4. All Other Services
● Advice and documentation assistance with respect to internal controls over financial reporting and disclosure controls and
procedures of the Company.
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, 2015 to November 30, 2016.
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
71
for the year ended November 30, 2016 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.
D.
Employees
The number of full-time employees as of each of last three fiscal years is as follows:
72
Research Employees
Administrative Employees
November 30, 2016
44
10
November 30, 2015
40
12
November 30, 2014
35
11
Our employees are not governed by a collective agreement. We have not experienced a work stoppage and believe our employee relations
are satisfactory.
The nature of our business requires the recruitment and retention of a highly educated and skilled workforce, including highly qualified
management, scientific and manufacturing personnel for innovation, research and development. Typically a high proportion of our employees have
a Bachelor’s degree or higher. For each of the last three fiscal years, all employees of the Company were employed at the Company’s offices in
Toronto.
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 27, 2017.
Name
Position with
the Company
Number of
Common
Shares
Owned
Percentage
of
Common
Shares
Owned
Number
of Stock
Options
Held(2)
Exercise
Price
Option
Expiry
dd/mm/yyyy
Number of
Currently
Exercisable
Options(4)
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
5,781,312(1)
5,781,312(1)
110,558
19.17% 2,763,940
300,000
75,000
50,000
70,000
90,000
19.17% 2,763,940
300,000
75,000
50,000
70,000
90,000
250,000
25,000
50,000
40,000
55,000
0.37%
21,731
0.07%
Kenneth
Keirstead
Director of the
Company
Nil
Nil
Bahadur
Madhani
Director of the
Company
7,507
0.03%
27,172
0.09%
173,700
0.58%
Vice-President
Pharmaceutical
Analysis and
Chemistry of
the Company
Chief
Financial
Officer of the
Company
Dr.
Patrick
Yat
Domenic
Della
Penna
Totals
$3.62
C$3.27
C$1.81
C$4.29
C$2.52
C$2.43
$3.62
C$3.27
C$1.81
C$4.29
C$2.52
C$2.43
C$3.27
C$1.8
1C$4.29
C$2.52
C$2.43
C$2.88
C$1.81
C$4.29
C$3.22
C$2.52
C$2.43
C$2.88
C$1.81
C$4.29
C$3.22
C$2.52
C$2.43
C$2.88
C$1.81
C$4.29
C$3.22
C$2.52
C$2.43
C$3.82
C$1.81
C$2.52
C$2.43
C$3.22
C$2.52
C$2.43
10/09/2016
16/02/2022
13/04/2020
28/02/2019
30/11/2020
31/08/2021
10/09/2016
16/02/2022
13/04/2020
28/02/2019
30/11/2020
31/08/2021
16/02/2022
13/04/2020
28/02/2019
30/11/2020
31/08/2021
22/10/2019
13/04/2020
28/02/2019
30/11/2019
30/11/2020
31/08/2021
22/10/2019
13/04/2020
28/02/2019
30/11/2019
30/11/2020
31/08/2021
22/10/2019
13/04/2020
28/02/2019
30/11/2019
30/11/2020
31/08/2021
24/05/2021
13/04/2020
30/11/2020
31/08/2021
30/11/2024
30/11/2020
31/08/2021
2,211,152
300,000
75,000
50,000
70,000
60,000
2,211,152
300,000
75,000
50,000
70,000
60,000
250,000
25,000
50,000
40,000
37,000
10,000
25,000
37,500
37,500
20,000
24,000
10,000
25,000
37,500
37,500
20,000
24,000
10,000
25,000
37,500
37,500
20,000
24,000
50,000
15,000
15,000
17,000
45,000
50,000
47,000
10,000
25,000
37,500
37,500
20,000
35,000
10,000
25,000
37,500
37,500
20,000
35,000
10,000
25,000
37,500
37,500
20,000
35,000
50,000
15,000
15,000
25,000
60,000
50,000
70,000
Number of
Common
Shares
Issuable on
Conversion
of
Convertible
Debt
450,000(3)
Number
of
Deferred
Share
Units
Held
Number
of
Restricted
Share
Units
Held
N/A
N/A
450,000(3)
N/A
N/A
N/A
N/A
Nil
N/A
79,099
N/A
N/A
Nil
N/A
N/A
Nil
N/A
N/A
N/A
Nil
N/A
N/A
Nil
6,121,980
20.30% 5,133,940
4,424,152
450,000
79,099
Nil
73
Notes:
(1) Represents shares owned of record by Odidi Holdings Inc., a privately-held company controlled by Drs. Amina and Isa Odidi. In addition,
2,763,940 performance-based options are held by Drs. Amina and Isa Odidi, and 585,000 stock options are held by each of Dr. Isa Odidi and
Dr. Amina Odidi.
(2) For information regarding option expiration dates and exercise price refer to the tables included under Item 6.B.
(3) On January 10, 2013, the Company completed a private placement financing of the Debenture in the original principal amount of $1.5 million,
which was originally due to 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 was 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. Effective October 1, 2014, the original maturity date for the
Debenture was extended to July 1, 2015; effective June 29, 2015, the July 1, 2015 maturity date was extended to January 1, 2016; effective as
of December 8, 2015, the maturity date was extended to July 1, 2016; and effective May 26, 2016, the maturity date of the Debenture was
further extended to December 1, 2016. Effective December 1, 2016, the maturity date for the Debenture was extended to April 1, 2017 and a
principal repayment of $150,000 was made at the time of the extension. After giving effect to such partial repayment, the Debenture is
convertible at any time into 450,000 common shares at a conversion price of $3.00 per common share at the option of the holder. The
Company currently expects to repay the current net amount of $1,350,000 on or about April 1, 2017, if the Company then has cash available.
(4) Includes options exercisable within 60 days of the date of this filing.
As of February 27, 2017, the directors and executive officers of the Company as a group owned, directly or indirectly, or exercised control
or direction over 6,121,980 common shares, representing approximately 20.3% of the issued common shares of the Company (and beneficially
owned approximately 10,996,132 common shares representing 31.4% 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 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.
74
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 as determined by the Board.
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 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 determines 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.
● Options and rights related thereto held by an optionee are not to be assignable or transferable except on the death of the optionee.
75
● 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) reduce the exercise price of an option held by an insider of the Company;
(ii) 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;
● 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.
76
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 3,015,584 shares that are currently authorized for issuance under the Option Plan represent 10% of the common shares issued and
outstanding as at February 27, 2017. Of the options authorized for issuance under the Option Plan, a total of 2,621,344 have been issued,
representing 8.7% of the shares issued and outstanding as of February 27, 2017. As of February 27, 2017, 156,500 options have been exercised
under the 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 the development of 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 said Named Executive Officers.
Restricted Share Unit Awards for Officers & Employees
The Company established 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 and to align their interests with those of 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, the Chief Executive Officer of
the Company, and Dr. Amina Odidi, the President and Chief Operating Officer of the Company, are specifically not eligible to
participate.
● 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, based on individual and/or corporate performance factors as determined by the Board.
● The number of common shares available for issuance upon the vesting of RSUs awarded under the RSU Plan is limited to an aggregate of
330,000 common shares of the Company representing approximately 1.4% of the issued and outstanding common shares of the Company
as of February 27, 2017.
● 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 of individual and/or corporate performance) 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.
77
● 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” of employment 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) 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;
(ii) increase the fixed maximum number of common shares which may be issued pursuant to the RSU Plan; or
(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) 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;
(v) 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;
(vi) change the application of the adjustment provisions of the RSU Plan or the change of control provisions of the RSU Plan; or
78
(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 for issuance under the RSU Plan represent approximately 1.4% of the
Company’s common shares issued and outstanding as at February 27, 2017. No RSUs have been issued and none are outstanding as of February
27, 2017.
Deferred Share Unit Awards for Outside Directors
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, the
Chief Executive Officer of the Company, and Dr. Amina Odidi, the President and Chief Operating Officer of the Company, 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 0.4% 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 TSX)
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’s 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.
● 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:
79
● 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) 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;
(ii) 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;
(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 for issuance under the DSU Plan represent approximately 0.4% of the
Company’s common shares issued and outstanding as at February 27, 2017. A total of 79,099 DSUs have been issued, representing common share
rights that comprise approximately 0.26% of the common shares issued and outstanding as at February 27, 2017.
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”
above). 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.
80
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 19.17%) of our then-issued and outstanding common shares of the Company subsequent to the offering). As of February 27, 2017,
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 5,781,312 common
shares, representing approximately 19.17% of our issued and outstanding common shares of the Company (and collectively beneficially owned in
the aggregate approximately 9,552,464 common shares representing 28.2% 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.) To
our knowledge, no other shareholder owns more than 5% of the issued and outstanding common shares of the Company.
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, 2016, there were a total of 346 holders of record of our common shares, of which 248 were registered with addresses
in Canada holding in the aggregate approximately 23.51% of our outstanding common shares, 47 were registered with addresses in the United
States holding in the aggregate approximately 76.49% of our outstanding common shares, and 51 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
During the year ended November 30, 2014, we had repaid an outstanding related party loan payable to Dr. Isa Odidi and Dr. Amina
Odidi, our principal stockholders, directors and executive officers. Repayments of the related party loan were restricted under the terms of the loan
such that the principal amount thereof was payable when payment was 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). In March 2014, we repaid the entire outstanding related party loan principal, in the
amount of $690,049 (C$764,851) out of licensing revenues earned by IPC Corp and made interest payments of $48,504 (C$53,762) in respect of
the promissory note in accordance with the IPC Arrangement Agreement.
In January 2013, we completed a private placement financing of an unsecured Debenture in the original principal amount of $1.5 million.
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 original $1.5 million of the proceeds for the
Debenture. Effective December 1, 2016, the maturity date for the Debenture was extended to April 1, 2017 and a
81
principal repayment of $150,000 was made at the time of the extension. The Company currently expects to repay the current net amount of
$1,350,000 on or about April 1, 2017, if the Company then has cash available.
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.
Legal Proceedings and Regulatory Actions
From time to time, we may be exposed to claims and legal actions in the normal course of business. As at November 30, 2016, and
continuing as at February 27, 2017, we are not aware of any pending or threatened material litigation claims against us.
Dividend Policy
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.
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:
82
Annual
2016
2015
2014
2013
2012
Quarterly
2016
Fourth quarter
Third quarter
Second quarter
First quarter
2015
Fourth quarter
Third quarter
Second quarter
First quarter
2014
Fourth quarter
Third quarter
Second quarter
First quarter
2013
Fourth quarter
Third quarter
Second quarter
First quarter
2012
Fourth quarter
Third quarter
Second quarter
First quarter
Most recent 6 months
February 2017
January 2017
December 2016
November 2016
October 2016
September 2016
August 2016
Item 10.
Additional Information
A.
Share Capital
NASDAQ (U.S.$)
TSX (C$)
High
3.35
3.92
5.18
6.46
3.82
3.35
2.06
2.42
3.19
2.32
3.87
3.92
2.94
4.48
5.18
4.19
3.80
6.46
3.72
2.23
2.59
3.16
3.49
3.19
3.82
Low
1.41
1.73
1.94
1.50
1.88
1.69
1.41
1.53
1.83
1.73
1.92
2.28
1.96
3.05
3.21
1.94
2.51
1.63
1.50
1.57
1.72
1.88
2.40
2.64
2.41
High
4.50
4.99
5.77
6.70
3.55
4.50
2.61
3.22
4.20
2.95
4.99
4.86
3.33
4.17
4.49
5.77
4.82
6.70
3.84
2.35
2.56
3.17
3.54
3.38
3.55
NASDAQ (U.S.$)
TSX (C$)
High
2.99
2.96
3.05
3.35
3.33
2.34
2.06
Low
2.11
2.46
2.63
2.44
2.08
1.69
1.71
High
4.05
3.91
4.09
4.50
4.40
2.95
2.61
Low
1.78
2.16
2.14
1.55
1.81
2.21
1.78
2.00
2.46
2.16
2.25
2.95
2.49
2.77
2.14
3.53
3.28
1.72
1.55
1.60
1.77
1.81
2.49
2.51
2.53
Low
2.78
3.24
3.50
3.28
2.75
2.21
2.23
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, 2016, there were 29,789,992 common shares and no preference shares issued and
outstanding compared to 24,244,050 common shares and no preference shares issued and outstanding at December 1, 2016. As of February 27,
2017, there were 30,155,836 common shares and no preference shares issued and outstanding.
83
The reasons for the increase in common shares issued were as follows. In our June 2016 underwritten public offering we issued at the
initial closing of the offering an aggregate of 3,229,814 common shares and warrants to purchase an additional 1,614,907 common shares. The
underwriter also purchased at such closing additional warrants to acquire 242,236 common shares pursuant to the over-allotment option exercised
in part by the underwriter. We subsequently sold an aggregate of 459,456 additional common shares at the public offering price of $1.61 per share
in connection with subsequent partial exercises of the underwriter’s over-allotment option. The closings of these partial exercises brought the total
net proceeds from the offering to $5,137,638, after deducting the underwriter’s discount and estimated offering expenses. In November 2013, we
established an at-the-market equity program pursuant to which we could 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 then be permitted under applicable securities laws and regulations). As of February 27, 2017 we have issued
and sold 3,853,557 common shares with an aggregate offering price of $11,908,312 under the at-the-market program. Roth received compensation
of $335,987 in connection with such sales. During the three months ended November 30, 2016, an aggregate of 497,949 (2015 – 170,439) of our
common shares were sold on NASDAQ for gross proceeds of $1,507,400 (2015 – 319,805) and net proceeds of $1,464,759 (2015 – 310,939) under
the at-the-market offering program. Roth received aggregate compensation of $42,641 in connection with such sales. During the year ended
November 30, 2016, an aggregate of 1,471,260 (2015 – 471,439) of our common shares were sold on NASDAQ for gross proceeds of $3,469,449
(2015 - $1,290,168) and net proceeds of $3,368,674 (2015 - $1,254,178) under the at-the-market offering program. Roth received aggregate
compensation of $100,775 (2015 - $38,889) in connection with such sales. There can be no assurance that any additional shares will be sold under
our at-the-market program.
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, 2016, an aggregate of 2,147,806 common shares were issuable upon the exercise of outstanding common share purchase
warrants, with a weighted average exercise price of $2.02 per common share. At February 27, 2017, an aggregate of 2,010,319 common shares
were issuable upon the exercise of outstanding common share purchase warrants, with a weighted average exercise price of $2.03 per common
share.
Options
At November 30, 2016, an aggregate of 5,392,460 common shares were issuable upon the exercise of outstanding options, with a
weighted average exercise price of $3.48 per common share and up to 350,479 additional common shares were reserved for issuance under our
stock option plan.
84
Options outstanding
Options exercisable
Exercise price
$
Under 2.50
-
2.51 - 5.00
5.01 - 10.00
10.01 - 100.00
Number
outstanding
-
5,360,835
-
31,625
5,392,460
Weighted
average
exercise price
per share
$
-
3.31
-
33.02
3.48
Weighted
average
remaining
contract life
(years)
-
0.96
-
0.99
Weighted
average grant
due fair value
$
-
1.74
-
25.98
Weighted
average
exercise price
per share
$
Weighted
average grant
date fair
value
$
-
3.27
-
33.02
3.49
-
1.78
-
25.98
Number
exercisable
-
4,364,985
-
31,625
4,396,610
As of February 27, 2017, there were 5,385,284 common shares issuable upon the exercise of outstanding options. The weighted average exercise
price of these options is $3.44 per common share. As at February 27, 2017, up to 394,240 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 Debenture in the original principal amount of $1.5
million. The Debenture was originally due to mature on January 1, 2015, but effective October 1, 2014, the maturity date was extended to July 1,
2015; effective June 29, 2015, the July 1, 2015 maturity date was extended to January 1, 2016; and effective as of December 8, 2015, the maturity
date was extended to July 1, 2016. Effective May 26, 2016, the maturity date of the Debenture was further extended to December 1, 2016. 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 was
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.
Effective December 1, 2016, the maturity date for the Debenture was extended to April 1, 2017 and a principal repayment of $150,000 was made
at the time of the extension. After giving effect to such partial repayment, the Debenture is convertible at any time into 450,000 common shares at
a conversion price of $3.00 per common share at the option of the holder. The Company currently expects to repay the current net amount of
$1,350,000 on or about April 1, 2017, if the Company then has cash available.
Deferred Share Units
At November 30, 2016, there were 76,743 DSUs issued and outstanding. From November 30, 2016 to February 27, 2017, an additional
2,356 DSUs have been issued. At February 27, 2017, 30,901 additional DSUs are reserved for issuance under our DSU plan.
Restricted Share Units
At November 30, 2016, there were no restricted share units (“RSUs”) issued and outstanding. From November 30, 2016 to the date of this
report, no RSUs have been issued. At the date of this report, 330,000 RSUs are reserved for issuance under our RSU 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”).
85
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.
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 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 original principal amount of $1.5 million. The
Debenture was originally due to mature on January 1, 2015, but effective October 1, 2014, the maturity date was extended to July 1, 2015; effective
June 29, 2015, the maturity date was extended to January 1, 2016; effective as of December 8, 2015, the maturity date was extended to July 1,
2016; and effective May 26, 2016, the maturity date of the Debenture was further extended to December 1, 2016. The Debenture bears interest at a
rate of 12% per annum, payable monthly, is pre-payable at any time at our option, and was 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. Effective December 1, 2016, the maturity date for the
Debenture was extended to April 1, 2017 and a principal repayment of $150,000 was made at the time of the extension. After giving effect to such
partial repayment, the Debenture is convertible at any time into 450,000 common shares at a conversion price of $3.00 per common share at the
option of the holder. We currently expect to repay the current net amount of $1,350,000 on or about April 1, 2017, if we then have cash available.
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 then 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 currently plan to use any net proceeds from the
at-the-market offering for general corporate purposes, including funding research, product development and other corporate development
opportunities and to possibly fund costs and other expenses relating to our current leased facility or any additional space, and, although we have no
present
86
understanding, commitments or agreements to do so, potential acquisition of, or investment in, companies and technologies that complement our
business. 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 SEC. We have also
agreed to reimburse Roth for certain expenses relating to the offering. As of February 27, 2017, we have issued and sold 3,853,557 common shares
with an aggregate offering price of $11,908,312 under the at-the-market program. Roth received aggregate compensation of $335,987 in
connection with such sales. We currently may offer and sell our common shares with an aggregate purchase price of up to $4,891,688 pursuant to
the at-the-market program. 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, 2016, share issuance costs of Nil were recorded against the cost of the shares issued and recognized in capital stock. As
at November 30, 2016, $951,551 of the share issuance costs has been recorded against the cost of the shares issued and recognized in capital stock.
Pursuant to the Dawson James Underwriting Agreement, in June 2016, we completed an underwritten public offering of 3,229,814 units of
common shares and warrants, at a price of $1.61 per unit. The warrants are currently exercisable, have a term of five years and an exercise price of
$1.93 per common share. We issued at the initial closing of the offering an aggregate of 3,229,814 common shares and warrants to purchase an
additional 1,614,907 common shares. The underwriter also purchased at such closing additional warrants to acquire 242,236 common shares
pursuant to the over-allotment option exercised in part by the underwriter. We subsequently sold an aggregate of 459,456 additional common
shares at the public offering price of $1.61 per share in connection with subsequent partial exercises of the underwriter’s over-allotment option.
The closings of these partial exercises brought the total net proceeds from the offering to approximately $5.1 million, after deducting the
underwriter’s discount and offering expenses.
On June 4, 2014, the Shelf Registration Statement was declared effective by the SEC and on June 5, 2014, the Company filed a final short
form base shelf prospectus with securities regulatory authorities in each of the provinces and territories of Canada, except Quebec. These
documents allow for, subject to securities regulatory requirements and limitations, the potential offering of up to an aggregate of US $100 million
of the Company’s common shares, preference shares, warrants, subscription receipts and units, or any combination thereof, from time to time in one
or more offerings, and are intended to give the Company the flexibility to take advantage of financing opportunities when, and if, market conditions
are favorable to the Company. The specific terms of such future offerings, if any, would be established, subject to the approval of the Company’s
board of directors, at the time of such offering and will be described in detail in a prospectus supplement filed at the time of any such offering. To
the extent that any securities are issued by the Company under the shelf prospectus, a shareholder’s’ percentage ownership will be diluted and our
stock price could be adversely affected. As of February 27, 2017, the Company has not sold any securities under the Shelf Registration Statement
or the shelf prospectus, other than the sale since June 4, 2014 of (i) 2,164,057 common shares under the Company’s at-the-market program
referred to above, (ii) the sale of units, common shares and warrants under the Dawson James Underwriting Agreement referred to above, and (iii)
the issuance of 1,015,068 common shares pursuant to warrants previously issued, and there can be no assurance that any additional securities will
be sold under the Shelf Registration Statement or the shelf prospectus.
During the 12-month period ended November 30, 2016, warrants to purchase an aggregate of 357,912 common shares were exercised.
During the 12-month period ended November 30, 2016, 460,000 options were granted and 27,500 options were exercised.
Also during the 12-month period ended November 30, 2016, a total of 16,741 deferred share units were granted.
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
87
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.
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.
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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 laws, 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 the Par agreement 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, we filed the Company
ANDA with the FDA for approval to market generic Focalin XR® capsules in various strengths in the U.S., and are the owner of that
Company ANDA, as approved in part by the FDA. We retain the right to make and distribute all strengths of the generic product outside
of the U.S. Calendar quarterly profit-sharing payments for its U.S. sales under the Company ANDA are payable by Par to us as calculated
pursuant to the Par agreement. Within the purview of the Par agreement, Par also applied for and owns the Par ANDA pertaining to all
marketed strengths of generic Focalin XR®, and is now approved by the FDA, to market generic Focalin XR® capsules in all marketed
strengths in the U.S. As with the Company ANDA, calendar quarterly profit-sharing payments are payable by Par to us for its U.S. sales of
generic Focalin XR® under the Par ANDA as calculated pursuant to the Par agreement. 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.
● In October 2016, the Company entered into the Mallinckrodt agreement, granting Mallinckrodt an exclusive license to market, sell and
distribute in the U.S. the following extended release drug product candidates (the “licensed products”) for which the Company has
ANDAs filed with the FDA:
■ Quetiapine fumarate extended-release tablets (generic Seroquel XR®) – ANDA Tentatively Approved by FDA
■ Desvenlafaxine extended-release tablets (generic Pristiq®) – ANDA Under FDA Review
■ Lamotrigine extended-release tablets (generic Lamictal® XR™) – ANDA Under FDA Review
Under the terms of this 10-year agreement, the Company received a non-refundable upfront payment of $3 million in October 2016. In
addition, the Mallinckrodt agreement also provides for a long-term profit sharing arrangement with respect to these licensed products
(which includes up to $11 million in cost recovery payments to the Company). The Company has agreed to manufacture and supply the
licensed products exclusively for Mallinckrodt on a cost plus basis, and Mallinckrodt has agreed that the Company will be its sole supplier
of the licensed products marketed in the U.S. The Mallinckrodt agreement contains customary terms and conditions for an agreement of
this kind, and is subject to early termination in the event we do not obtain FDA approvals of the Mallinckrodt licensed products by
specified dates, or pursuant to any one of several termination rights of each party.
● 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 $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, 2015 and November 30, 2014, no
amount was outstanding. No at-the-market offering proceeds were used in payment of the promissory note; and
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● The Debenture dated January 10, 2013 for $1.5 million issued by the Company to Isa Odidi and Amina Odidi for the loan of $1.5 million
made by them to the Company. The Debenture was originally due to mature on January 1, 2015, but effective October 1, 2014, the
maturity date was extended to July 1, 2015; effective June 29, 2015, the maturity date was extended to January 1, 2016; and effective as of
December 8, 2015, the maturity date was further extended to July 1, 2016; and effective May 26, 2016, the maturity date of the Debenture
was extended to December 1, 2016. Effective December 1, 2016, the maturity date for the Debenture was extended to April 1, 2017 and a
principal repayment of $150,000 was made at the time of the extension. After giving effect to such partial repayment, the Debenture is
convertible at any time into 450,000 common shares at a conversion price of $3.00 per common share at the option of the holder. The
Company currently expects to repay the current net amount of $1,350,000 on or about April 1, 2017, if the Company then has cash
available.
● Pursuant to the Dawson James Underwriting Agreement, in June 2016, we completed an underwritten public offering of 3,229,814 units of
common shares and warrants, at a price of $1.61 per unit. The warrants are currently exercisable, have a term of five years and an exercise
price of $1.93 per common share. We issued at the initial closing of the offering an aggregate of 3,229,814 common shares and warrants
to purchase an additional 1,614,907 common shares. The underwriter also purchased at such closing additional warrants to acquire
242,236 common shares pursuant to the over-allotment option exercised in part by the underwriter. We subsequently sold an aggregate of
459,456 additional common shares at the public offering price of $1.61 per share in connection with subsequent partial exercises of the
underwriter’s over-allotment option. The closings of these partial exercises brought the total net proceeds from the offering to
approximately $5.1 million, after deducting the underwriter’s discount and offering expenses.
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.
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
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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. “Comprehensive tax reform” remains a topic of discussion in the United States
Congress. Such legislation could significantly alter the existing Code. We cannot predict whether, when, or to what extent U.S. federal tax laws,
regulations, interpretations, or rulings will be issued, nor is the long-term impact of proposed comprehensive tax reforms known at this time.
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) a citizen or an individual resident of the United States;
(ii) 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;
(iii) an estate the income of which is subject to United States federal income taxation regardless of its source; or
(iv) 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.
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
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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 2016 taxable year and may not be a PFIC
during our 2017 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 2017 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 2016 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:
● 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
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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”) under Section 1295 of the Code, 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.
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.
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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, under Section 1296 of the Code, 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.
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
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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.
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
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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.
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.
96
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
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 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.
State and Local Tax
In addition to the U.S. federal income tax discussed above, U.S. Holders may also be subject to state and local income taxation for
amounts received on the disposition of common shares and on dividends received. Amounts paid to U.S. Holders will not have state and local tax
amounts withheld from payments and U.S. Holders should consult with a tax advisor regarding the state and local taxation implications of such
amounts received.
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
97
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 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 carrying on business in Canada and
elsewhere.
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 common 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.
98
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
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
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:
99
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
Past due for more than 91 days but no more than 120 days
Total accounts receivable, net
November
30, 2016
$
472,474
-
472,474
427,519
3,319
41,636
472,474
November
30, 2015
$
478,674
-
478,674
453,662
5,003
20,009
478,674
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 years ended November 30,
2016 and November 30, 2015, Par accounted for substantially all the revenue and all the accounts receivable of the Company.
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
We are exposed to changes in foreign exchange rates between the Canadian and U.S. dollar which could affect the value of our cash. The
Company had no foreign currency hedges or other derivative financial instruments as of November 30, 2016. The Company did not enter into
financial instruments for trading or speculative purposes and does not currently utilize derivative financial instruments.
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
Net exposure
Liquidity risk
November 30, 2016
Canadian
U.S.
November 30, 2015
Canadian
U.S.
1.3429
$
$
182,714
136,059
1.3353
$
116,096
116,096
$
86,944
86,944
449,900
1,402,108
19,914
1,871,922
(1,689,208)
335,021
1,044,151
14,829
1,394,001
(1,257,942)
1,372,196
233,906
48,231
1,654,333
(1,538,237)
1,027,631
175,171
36,120
1,238,922
(1,151,978)
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.
100
The following are the contractual maturities of the undiscounted cash flows of financial liabilities as at November 30, 2016:
Third parties
Accounts payable
Accrued liabilities
Capital lease
Related parties
Employee costs payable
Convertible debenture
Limitations:
November 30, 2016
Less than
3 months
$
3 to 6
months
$
6 to 9
months
$
9 months 1
year
$
Greater
than 1 year
$
807,295
384,886
5,437
-
-
5,585
707,547
59,138
1,964,303
-
1,515,770
1,521,355
-
-
3,807
-
-
3,807
-
-
-
336,604
-
336,604
-
-
-
-
-
-
Total
$
807,295
384,886
14,829
1,044,151
1,574,908
3,826,069
The above discussion includes only those exposures that existed as of November 30, 2016, 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
None.
PART II.
Item 13.
Defaults, Dividend Arrearages and Delinquencies
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.
101
Item 15.
Controls and Procedures
Internal Control over Financial Reporting
The management of our Company is responsible for establishing and maintaining adequate internal control 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.
Management assessed the effectiveness of the Company’s internal control over financial reporting using the 1992 Internal Control-
Integrated Framework developed by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
Based on this assessment, management concluded that the Company’s internal control over financial reporting was effective as of
November 30, 2016.
A third party consultant was engaged to assist management in conducting a gap assessment relative to the Company’s plans to implement
the COSO 2013 Internal Control – Integrated Framework. In the first quarter of 2017, we will initiate the transition from the COSO 1992 Internal
Control - Integrated Framework to the COSO 2013 Internal Control - Integrated Framework. We expect this transition to be completed in the
second quarter of fiscal 2017. Although we do not expect to experience significant changes in internal control over financial reporting as a result of
our transition, we may identify significant deficiencies or material weaknesses and incur additional costs in the future as a result of our transition.
Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including the Chief Executive Officer and the Chief Financial
Officer, we have evaluated the effectiveness of our disclosure controls and procedures as of November 30, 2016. 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 communicated to
management, including the Company’s Chief Executive Officer 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 of
November 30, 2016.
Changes in Internal Control over Financial Reporting
During the fourth quarter of 2016, the Company recognized a deficiency in the design of the Company’s internal control over financial
reporting and disclosure controls and procedures used in evaluating stock-based compensation expense as it relates to the second quarter non-cash
error noted above in “Revised Prior Quarter Amounts.” In evaluating this internal control deficiency, we considered a number of qualitative and
quantitative factors, and concluded that the internal control deficiency was not a significant control deficiency or material weakness, partly due to
the fact that the internal control deficiency was corrected as part of a more rigorous set of financial reporting internal controls put in place during
the fourth quarter leading up to the release of our audited annual results. The Company has remediated the deficiency by recruiting additional
experienced personnel to strengthen the Company’s quarterly and annual internal controls over financial reporting and disclosure controls and
procedures.
During the year ended November 30, 2016, other than as noted above, there were no changes made to the Company’s internal control
over financial reporting that have materially affected, or are reasonably likely to
102
materially affect, our internal control over financial reporting or disclosure controls and procedures, and specifically, there were no changes in
accounting functions, board or related committees and charters, or (except as described below) auditors; no functions, controls or financial
reporting processes of any constituent entities were adopted as Intellipharmaceutics’ functions, controls and financial processes; and no other
significant business processes were implemented.
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 16.
[Reserved]
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.
Item 16B. Code of Ethics.
The Code of Business Conduct and Ethics (the “Code of Ethics”) has been implemented and it applies to all directors, officers,
employees of the Company and its subsidiaries. It may be viewed on our website at www.intellipharmaceutics.com. During the year ended
November 30, 2016, no waivers or requests for exemptions from the Code of Ethics were either requested or granted.
Item 16C. Principal Accountant Fees and Services.
Our former auditor was Deloitte LLP (“Deloitte”), Independent Registered Public Accounting Firm.
The aggregate amounts billed by Deloitte to us for the years ended November 30, 2016 and 2015 for audit fees, audit-related fees, tax fees
and all other fees are set forth below:
103
Audit Fees(1)
Audit-Related Fees(2)
Tax Fees(3)
All Other Fees(4)
Total Fees
Notes:
2016
C$124,387
C$174,738
C$45,460
--
C$344,585
2015
C$169,850
C$188,855
C$38,160
C$2,953
C$399,818
(1) Audit fees consist of fees related to the audit of the Company’s consolidated financial statements.
(2) Audit-related fees consist of consultation on accounting and disclosure matters and review of quarterly interim financial statements, prospectus
and base shelf activities and Form 20-F reviews.
(3) Tax fees consist of fees for tax consultation, tax advice and tax compliance services for the Company and its subsidiaries.
(4) All other fees related to Canadian Public Accountability Board fees.
Our current auditor is MNP LLP (“MNP”), Independent Registered Public Accounting Firm, 111 Richmond Street West, Suite 300,
Toronto, ON M5H 2G4. MNP is independent with respect to the Company within the meaning of the Rules of Professional Conduct of the
Chartered Professional Accountants of Ontario, the rules and standards of the Public Company Accounting Oversight Board (United States) and
the securities laws and regulations administered by the SEC.
The aggregate amounts billed by MNP to us for the years ended November 30, 2016 and 2015 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
Notes:
2016
-
C$75,664
-
C$24,075
C$99,739
2015
-
-
-
-
-
(1) Audit fees consist of fees related to the audit of the Company’s consolidated financial statements.
(2) Audit-related fees consist of consultation on accounting and disclosure matters and review of quarterly interim financial statements, prospectus
and base shelf activities and Form 20-F reviews.
(3) Tax fees consist of fees for tax consultation, tax advice and tax compliance services for the Company and its subsidiaries.
(4) All other fees related to 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, 2016 and 2015, 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.
104
Item 16F. Change in Registrant’s Certifying Accountant.
On July 27, 2016, at the request of the Company, Deloitte LLP (“ Former Auditor” or “Deloitte”) resigned as auditor of the Company.
On July 27, 2016, the Audit Committee and Board of Directors of the Company approved and appointed MNP LLP (“MNP”) as the Company’s
successor auditor. There were no disagreements or unresolved issues with the Former Auditor on any matter of auditing scope or procedures,
accounting principles or practices, or financial statement disclosure.
Deloitte's report on our consolidated financial statements for the years ended November 30, 2015 and 2014 did not contain an adverse
opinion or disclaimer of opinions and was not qualified or modified as to uncertainty, audit scope or accounting principles.
In connection with the audit of our consolidated financial statements for the years ended November 30, 2015 and 2014, and through the
period ended July 27, 2016, there were no disagreements with Deloitte on any matters of accounting principles or practices, financial statement
disclosure, or auditing scope and procedures which, if not resolved to the satisfaction of Deloitte, would have caused Deloitte to make reference to
the subject matter of such disagreements in their reports.
In connection with the audit of our consolidated financial statements for the years ended November 30, 2015 and 2014, and through the
period ended July 27, 2016, none of the events described in paragraphs (A) through (D) of Item 16F(a)(1)(v) of Form 20-F occurred.
We engaged MNP as our new independent registered public accounting firm to audit our 2016 consolidated financial statements. In
connection with the audit of our financial statements for the fiscal years ended November 30, 2015 and 2014, and through the period ended July
27, 2016, neither the Company nor anyone on its behalf have consulted with MNP on the application of accounting principles to a specified
transaction, either completed or proposed; or the type of audit opinion that might be rendered on the Company's financial statements or any matter
that was the subject of a disagreement, as that term is defined in Item 16F(a)(1)(iv) of Form 20-F and the related instructions to Item 16F of Form
20-F, or a reportable event, as that term is defined in Item 16F(a)(1)(v).
The Company has provided Deloitte with a copy of these disclosures prior to the filing hereof and has requested that Deloitte furnish to
the Company a letter addressed to the Securities and Exchange Commission stating whether Deloitte agrees with the statements made by the
Company in this item. Deloitte has furnished such letter, which letter is filed as Exhibit 16.1 hereto as required by Item 16F(a)(3) of Form 20-F.
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.
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),
105
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.
PART III.
Item 17.
Financial Statements.
See Item 18 below.
Item 18.
Financial Statements.
106
Consolidated financial statements of
Intellipharmaceutics
International Inc.
November 30, 2016, 2015 and 2014
Intellipharmaceutics International Inc.
November 30, 2016, 2015 and 2014
Table of contents
Reports of Independent Registered Public Accounting Firms
Consolidated balance sheets
Consolidated statements of operations and comprehensive loss
Consolidated statements of shareholders’ equity (deficiency)
Consolidated statements of cash flows
Notes to the consolidated financial statements
1-2
3
4
5
6
7-31
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Intellipharmaceutics International Inc.
We have audited the accompanying consolidated balance sheet of Intellipharmaceutics International Inc. and its subsidiaries (the "Company"), as of
November 30, 2016, and the related consolidated statement of operations and comprehensive loss, cash flows and shareholders’ equity
(deficiency), for the year ended November 30, 2016. These financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States) and Canadian
generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of
November 30, 2016, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally
accepted in the United States of America.
The accompanying financial statements have been prepared with the assumption 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 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.
Other Matters
The consolidated financial statements of Intellipharmaceutics International Inc. and its subsidiaries as at November 30, 2015 and for each of the
years in the two-year period ended November 30, 2015 were audited by another firm of Chartered Professional Accountants who expressed an
unmodified opinion in their report dated February 26, 2016.
Toronto, Canada
February 9, 2017
/s/ MNP LLP
Chartered Professional Accountants
Licensed Public Accountants
Page 1
Deloitte LLP
Bay Adelaide East
22 Adelaide Street West
Suite 200
Toronto ON M5H 0A9
Canada
Tel: 416-601-6150
Fax: 416-601-6610
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 balance sheet of Intellipharmaceutics International Inc. and subsidiaries (the “Company”) as of
November 30, 2015, and the related consolidated statements of operations and comprehensive loss, cash flows and shareholders’ (deficiency)
equity for each of the years in the two-year period ended November 30, 2015. These financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States) and Canadian
generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its
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 includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, such financial statements present fairly, in all material respects, the financial position of the Company as of November 30, 2015,
and the results of its operations and its cash flows for each of the years in the two-year period ended November 30, 2015, in conformity with
accounting principles generally accepted in the United States of America.
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 shareholders' deficiency 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
Licensed Public Accountants
February 26, 2016
Page 2
Intellipharmaceutics International Inc.
Consolidated balance sheets
As at November 30, 2016 and 2015
(Stated in U.S. dollars)
Assets
Current
Cash
Accounts receivable, net (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)
Convertible debenture (Note 7)
Deferred revenue (Note 3)
Capital lease obligations (Note 9)
Deferred revenue (Note 3)
Shareholders' equity (deficiency)
Capital stock (Notes 10 and 11)
Authorized
Unlimited common shares without par value
Unlimited preference shares
Issued and outstanding
29,789,992 common
shares
(2015 - 24,244,050)
Additional paid-in capital
Accumulated other comprehensive income
Accumulated deficit
Contingencies (Note 16)
On behalf of the Board:
/s/ Dr. Isa Odidi
Dr. Isa Odidi, Chairman of the Board
/s/ Bahadur Madhani
Bahadur Madhani, Director
See accompanying notes to consolidated financial statements
2016
2015
$
$
4,144,424
472,474
681,136
400,642
5,698,676
386,375
1,889,638
7,974,689
807,295
384,886
1,044,151
14,829
1,494,764
450,000
4,195,925
-
2,662,500
6,858,425
1,755,196
478,674
458,021
229,225
2,921,116
543,745
1,759,438
5,224,299
3,027,974
454,290
175,172
20,460
1,518,429
-
5,196,325
15,660
150,000
5,361,985
29,830,791
21,481,242
34,017,071
284,421
30,969,093
284,421
(63,016,019) (52,872,442)
(137,686)
1,116,264
7,974,689
5,224,299
Page 3
Intellipharmaceutics International Inc.
Consolidated statements of operations and comprehensive loss
for the years ended November 30, 2016, 2015 and 2014
(Stated in U.S. dollars)
Revenues
Licensing (Note 3)
Milestone (Note 3)
Up-front fees (Note 3)
Expenses
Research and development
Selling, general and administrative
Depreciation (Note 5)
Loss from operations
Net foreign exchange gain (loss)
Interest income
Interest expense
Extinguishment loss (Note 7)
Net loss and comprehensive loss
Loss per common share, basic and diluted
Weighted average number of common
shares outstanding, basic and diluted
See accompanying notes to consolidated financial statements
2016
2015
2014
$
$
$
2,209,502
-
37,500
2,247,002
4,093,781
-
-
4,093,781
8,415,540
354,153
-
8,769,693
8,166,736
3,546,132
385,210
12,098,078
7,247,473
3,581,913
377,849
11,207,235
8,020,201
3,900,803
381,385
12,302,389
(9,851,076)
(7,113,454)
(3,532,696)
(22,470)
207
(270,238)
-
(10,143,577)
46,211
1,507
(256,629)
(114,023)
(7,436,388)
10,896
4,898
(339,451)
-
(3,856,353)
(0.38)
(0.31)
(0.17)
26,699,579
23,767,677
23,050,618
Page 4
Intellipharmaceutics International Inc.
Consolidated statements of shareholders' equity (deficiency)
for the years ended November 30, 2016, 2015 and 2014
(Stated in U.S. dollars)
Balance, November 30, 2013
Reclass of warrant liabilities (Note 14)
Reclass of conversion option in convertible
debenture (Note 7)
DSU's to non-management board members (Note
12)
Stock options to employees (Note 11)
Shares issued for options exercised (Note 11)
Proceeds from at-the-market financing (Note 10)
Share issuance cost (Note 10)
Issuance of shares on exercise of warrants (Note
14)
Adjustment of conversion option in convertible
debenture (Note 7)
Net loss
Balance, November 30, 2014
DSU's to non-management board members (Note
12)
Stock options to employees (Note 11)
Shares issued for options exercised (Note 11)
Proceeds from at-the-market financing (Note 10)
Share issuance cost (Note 10)
Issuance of shares on exercise of warrants (Note
14)
Net loss
Balance, November 30, 2015
DSU's to non-management board members (Note
12)
Stock options to employees (Note 11)
Shares issued for options exercised (Note 11)
Proceeds from at-the-market financing (Note 10)
Proceeds from issuance of shares and warrants
(Note 10 & 14)
Share issuance cost (Note 10)
Issuance of shares on exercise of warrants (Note
14)
Modification of convertible debt (Note 7)
Net loss
Number
Capital stock
amount
Additional
paid-in
capital
Accumulated
other
comprehensive
income
Accumulated
deficit
Total
shareholders'
equity
(deficiency)
$
$
$
$
$
21,430,611
-
11,721,152
-
23,619,055
5,438,022
284,421
-
(41,579,701)
-
(5,955,073)
5,438,022
-
-
728,950
-
-
48,000
1,689,500
-
-
-
168,693
6,571,673
(811,887)
20,807
1,748,607
(51,709)
-
-
288,500
1,291,436
(510,216)
-
-
2,026,000
-
-
7,219,915
126,414
-
7,500,875
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(3,856,353)
(3,856,353)
728,950
20,807
1,748,607
116,984
6,571,673
(811,887)
781,220
126,414
(3,856,353)
10,864,437
23,456,611
18,941,067
31,119,930
284,421
(45,436,054)
4,909,364
-
-
91,000
471,439
-
225,000
-
787,439
-
-
300,869
1,290,168
(78,166)
1,027,304
-
2,540,175
29,056
417,818
(132,907)
-
-
(464,804)
-
(150,837)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(7,436,388)
(7,436,388)
29,056
417,818
167,962
1,290,168
(78,166)
562,500
(7,436,388)
(5,047,050)
24,244,050
21,481,242
30,969,093
284,421
(52,872,442)
(137,686)
-
-
27,500
1,471,260
3,689,270
-
357,912
-
-
5,545,942
-
-
87,259
3,469,449
4,764,777
(1,002,655)
1,030,719
-
-
8,349,549
31,628
2,261,444
(34,391)
-
1,175,190
(158,736)
(330,066)
102,909
-
3,047,978
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(10,143,577)
(10,143,577)
31,628
2,261,444
52,868
3,469,449
5,939,967
(1,161,391)
700,653
102,909
(10,143,577)
1,253,950
Balance, November 30, 2016
29,789,992
29,830,791
34,017,071
284,421
(63,016,019)
1,116,264
See accompanying notes to consolidated financial statements
Page 5
Intellipharmaceutics International Inc.
Consolidated statements of cash flows
for the years ended November 30, 2016, 2015 and 2014
(Stated in U.S. dollars)
Net loss
Items not affecting cash
Depreciation (Note 5)
Stock-based compensation (Note 11)
Deferred share units (Note 12)
Accreted interest (Note 7)
Loss on extinguishment (Note 7)
Unrealized foreign exchange loss (gain)
Change in non-cash operating assets & liabilities
Accounts receivable
Investment tax credits
Prepaid expenses, sundry and other assets
Accounts payable and accrued liabilities
Deferred revenue
Cash flows used in operating activities
Financing activities
Repayment of related party loans
Repayment of capital lease obligations
Issuance of shares on exercise of stock options (Note 11)
Issuance of common shares on at-the-market financing, gross (Note 10)
Proceeds from issuance of shares and warrants (Note 10)
Proceeds from issuance of shares on exercise of warrants (Note 14)
Offering costs (Note 10)
Cash flows provided from financing activities
Investing activity
Purchase of property and equipment
Cash flows used in investing activities
Increase (decrease) in cash
Cash, beginning of year
Cash, end of year
Supplemental cash flow information
Interest paid
Taxes paid
See accompanying notes to consolidated financial statements
2016
2015
2014
$
$
$
(10,143,577)
(7,436,388)
(3,856,353)
385,210
2,261,444
31,628
79,245
-
22,916
377,849
417,818
29,056
27,103
114,023
(81,063)
381,385
1,748,607
20,807
127,261
-
3,057
6,200
(223,115)
(171,417)
(1,466,019)
2,962,500
(6,254,985)
532,459
(133,035)
185,438
2,034,576
150,000
(3,782,164)
464,611
(145,436)
(102,130)
(356,722)
-
(1,714,913)
-
(21,291)
52,868
3,469,449
5,939,967
700,653
(982,023)
9,159,623
-
(27,489)
167,962
1,290,168
-
562,500
(259,276)
1,733,865
(739,208)
(53,557)
116,984
6,571,673
-
781,220
(719,837)
5,957,275
(515,410)
(515,410)
(430,480)
(430,480)
(768,973)
(768,973)
2,389,228
1,755,196
4,144,424
(2,478,779)
4,233,975
1,755,196
3,473,389
760,586
4,233,975
165,585
-
179,878
-
213,637
-
Page 6
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2016, 2015 and 2014
(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 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. In November 2013, the
U.S. Food and Drug Administration (“FDA”) granted the Company final approval to market the Company’s first product, the 15 mg and 30
mg strengths of our generic Focalin XR® (dexmethylphenidate hydrochloride extended-release) capsules.
Going concern
The consolidated financial statements are prepared on a going concern basis, which assumes that the Company will be able to meet its
obligations and continue its operations for the next twelve months. The Company has incurred losses from operations since inception and
has reported losses of $10,143,577 for the year ended November 30, 2016 (2015 - $7,436,388; 2014 - $3,856,353), and has an accumulated
deficit of $63,016,019 as at November 30, 2016 (November 30, 2015 - $52,872,442). The Company has funded its research and
development (“R&D”) 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 such funding will be available going forward.
These conditions raise substantial doubt about its ability to continue as a going concern and realize its assets and pay its liabilities as they
become due.
In order for the Company to continue as a going concern and fund any significant expansion of its operation or R&D activities, the Company
will require significant additional capital. Although there can be no assurances, such funding may come from revenues from the sales of the
Company’s generic Focalin XR® (dexmethylphenidate hydrochloride extended-release) capsules, from proceeds of the Company’s at-the-
market offering program and from potential partnering opportunities. Other potential sources of capital may include payments from licensing
agreements, cost savings associated with managing operating expense levels, other equity and/or debt financings, and/or new strategic
partnership agreements which fund some or all costs of product 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 Company’s ultimate success will depend on
whether its product candidates receive the approval of the FDA or Health Canada and whether it is able to successfully market approved
products. The Company cannot be certain that it will be able to receive FDA or Health Canada approval for any of its current or future
product candidates, or that it will reach the level of sales and revenues necessary to achieve and sustain profitability.
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. Any failure on its
part 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 the Company not taking advantage of business opportunities, in the termination or delay of clinical trials or the Company not
taking any necessary actions required by the FDA or Health Canada for one or more of the Company’s
Page 7
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2016, 2015 and 2014
(Stated in U.S. dollars)
1.
Nature of operations (Continued)
Going concern (continued)
product candidates, in curtailment of the Company’s 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”), Abbreviated New Drug Submissions (“ANDSs”) or New Drug Applications (“NDAs”) at all or in time to competitively market
its products or product candidates.
The consolidated financial statements do not include any adjustments that might result from the outcome of uncertainties described above. If
the going concern assumption no longer becomes appropriate for these consolidated 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.
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.
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 the functional currency; the fair values
of financial assets and liabilities; the determination of units of accounting for revenue recognition; the accrual of licensing and
milestone revenue; and forecasting future cash flows for assessing 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. As at November 30,
2016 and 2015, the Company had no cash equivalents.
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 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 8
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2016, 2015 and 2014
(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 based on management estimates of eligible research and development costs incurred
during the year. 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.
(g) Warrants
The Company previously issued warrants as described in Notes 10 and 14. In fiscal 2013, the outstanding warrants were presented
as a liability because they did not meet the criteria of Accounting Standard Codification (“ASC”) topic 480 Distinguishing
Liabilities from Equity for equity classification. Subsequent changes in the fair value of the warrants were recorded in the
consolidated statements of operations and comprehensive loss. As discussed in Note 3(m) the Company changed its functional
currency effective December 1, 2013 such that these warrants met the criteria for prospective equity classification in ASC topic
480, and the U.S. dollar translated amount of the warrant liability at December 1, 2013 became the amount reclassified to equity.
Page 9
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2016, 2015 and 2014
(Stated in U.S. dollars)
3.
Significant accounting policies (continued)
(h)
Convertible debenture
In fiscal 2013, the Company issued an unsecured convertible debenture in the principal amount of $1.5 million (the “Debenture”)
as described in Note 7. At issuance, the conversion option was bifurcated from its host contract and the fair value of the conversion
option was characterized as an embedded derivative upon issuance as it met the criteria of ASC topic 815 Derivatives and Hedging.
Subsequent changes in the fair value of the embedded derivative were 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 were
allocated to the liability and were accreted over the life of the Debenture using the imputed rate of interest. As discussed in Note
3(m), the Company changed its functional currency effective December 1, 2013 such that the conversion option no longer met the
criteria for bifurcation and was prospectively reclassified to shareholders’ equity under ASC Topic 815 at the U.S. dollar translated
amount at December 1, 2013.
(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 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 Pharmaceutical Inc. (“Par”). Under the exclusive territorial
license rights granted to Par, the agreement requires that Par manufacture, promote, market, sell and distribute the product.
Licensing 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. Licensing revenue payments received by the Company from Par under this agreement are not
subject to further deductions for chargebacks, rebates, product returns, and other pricing adjustments. Based on this arrangement
and the guidance per ASC topic 605, the Company records licensing revenue as earned in the consolidated statements of operations
and comprehensive loss.
Page 10
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2016, 2015 and 2014
(Stated in U.S. dollars)
3.
Significant accounting policies (continued)
(i)
Revenue recognition (continued)
Milestones
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. Non-substantive
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. In connection with the license and commercialization agreement with Par, for each day up to a maximum of 180 days
from the date of launch 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. The Company recognized milestone revenue of $Nil (2015 - $Nil; 2014 – $354,153) upon
achievement of the milestone.
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.
Deferred revenue
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. During the
year ended November 30, 2016, the Company received an up-front payment of $3,000,000 from Mallinckrodt LLC pursuant to the
Mallinckrodt agreement, and initially recorded it as deferred revenue, as it did not meet the criteria for recognition. As of
November 30, 2016, the Company recognized $37,500 of revenue based on a straight-line basis over the expected term of the
Mallinckrodt agreement of 10 years. In 2015, the Company received an up-front payment of $150,000 from Teva Pharmaceuticals
USA, Inc. which it continues to record as deferred revenue as the criteria for revenue recognition have not been met. As of
November 30, 2016, the Company has recorded a deferred revenue balance of $3,112,500 (2015 - $150,000) relating to the
underlying contracts.
Other incidental services
Incidental services which the Company 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
Page 11
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2016, 2015 and 2014
(Stated in U.S. dollars)
3.
Significant accounting policies (continued)
(k)
Income taxes (continued)
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 for income taxes 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.
(m)
Translation of foreign currencies
Previously, operations of the Company were comprised of only research and development activities conducted in Canada. The
Company generated no cash from operations, though funding for the operations (as in previous years) was primarily through U.S.
dollar equity financings. The functional currency was assessed to be Canadian dollars. By obtaining the final approval of the
Company’s generic Focalin XR® (dexmethylphenidate hydrochloride extended-release) capsules for the 15 and 30 mg strengths
with Par in November 2013, the Company generated and collected U.S. dollar revenues in the year ended November 30, 2014
which represents a significant and material change in economic facts and circumstances. Management had assessed the functional
currency for the fiscal year commencing December 1, 2013 and concluded that the Company and its wholly owned operating
subsidiaries should be measured using the U.S. dollar as the functional currency. Effective December 1, 2013, the change in
functional currency was applied on a prospective basis. The U.S. dollar translated amounts of nonmonetary assets and liabilities at
December 1, 2013 became the historical accounting basis for those assets and liabilities at December 1, 2013. The impact of the
change in functional currency on the measurement and reporting of warrants and the Debenture is discussed in Note 3(g) and 3(h)
above. The change in functional currency resulted in no change in cumulative translation adjustment going forward as the
Company and its wholly owned operating subsidiaries have U.S. dollar functional currencies.
In respect of other transactions denominated in currencies other than the Company and its wholly owned operating subsidiaries’
functional currencies, the monetary assets and liabilities are translated at the period end rates. Revenue and expenses are translated
at rates of exchange prevailing on the transaction dates. All of the exchange gains or losses resulting from these other transactions
are recognized in the consolidated statements of operations and comprehensive loss.
The Company’s reporting currency is the U.S. dollar.
(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 vesting period of the option. The provisions of the Company's
Page 12
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2016, 2015 and 2014
(Stated in U.S. dollars)
3.
Significant accounting policies (continued)
(n)
Stock-based compensation (continued)
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 shareholders’ equity (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
7,540,266, 7,128,082 and 7,149,283 common shares of the Company during fiscal 2016, 2015, and 2014, respectively, were not
included in the computation of diluted EPS because the Company has incurred a loss for the years ended November 30, 2016, 2015
and 2014 as the effect would be anti-dilutive.
(q)
Comprehensive loss
The Company follows ASC topic 220. 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.
Page 13
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2016, 2015 and 2014
(Stated in U.S. dollars)
3.
Significant accounting policies (continued)
(r)
Fair value measurement (continued)
●
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)
Future Accounting pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (“ASU”) No. 2014-09,
Revenue from Contracts with Customers, requiring an entity to recognize the amount of revenue to which it expects to be entitled
for the transfer of promised goods or services to customers. The updated standard will replace most existing revenue recognition
guidance in U.S. GAAP when it becomes effective.
In March 2016, the FASB issued ASU No. 2016-08 to clarify the implementation guidance on considerations of whether an entity
is a principal or an agent, impacting whether an entity reports revenue on a gross or net basis. In April 2016, the FASB issued ASU
No. 2016-10 to clarify guidance on identifying performance obligations and the implementation guidance on licensing. In May
2016, the FASB issued amendments ASU No. 2016-11 and 2016-12 to amend certain aspects of the new revenue guidance
(including transition, collectability, noncash consideration and the presentation of sales and other similar taxes) and provided
certain practical expedients. The guidance is effective for annual reporting periods beginning after December 15, 2017 (including
interim reporting periods). Early adoption is permitted but not before the annual reporting period (and interim reporting period)
beginning January 1, 2017. Entities have the option of using either a full retrospective or a modified approach to adopt the
guidance. The Company is in the process of evaluating the amendments to determine if they have a material impact on the
Company’s financial position, results of operations, cash flows or disclosures.
In June 2014, the FASB issued ASU No. 2014-12 in response to the consensus of the Emerging Issues Task Force on EITF Issue
13-D.2 The ASU clarifies that entities should treat performance targets that can be met after the requisite service period of a share-
based payment award as performance conditions that affect vesting. Therefore, an entity would not record compensation expense
(measured as of the grant date without taking into account the effect of the performance target) related to an award for which
transfer to the employee is contingent on the entity’s satisfaction of a performance target until it becomes probable that the
performance target will be met. No new disclosures are required under the ASU. The ASU’s guidance is effective for all entities
for reporting periods (including interim periods) beginning after December 15, 2015. Early adoption is 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. In March 2016, the FASB issued new guidance ASU No. 2016-09 which simplifies several aspects of the
accounting for employee share-based payment transactions, including the income tax consequences, classification of awards as
either equity or liabilities, accounting for forfeitures, and classification on the statement of cash flows. The guidance is effective for
reporting periods (including interim periods) beginning after December 15, 2016. Early adoption is permitted. The Company is in
the process of evaluating the amendments to determine if they have a material impact on the Company’s financial position, results
of operations, cash flows or disclosures.
In 2014, the FASB issued ASU No. 2014-15, which provides guidance on determining when and how to disclose going-concern
uncertainties in the financial statements. The new standard requires management to perform interim and annual assessments of an
entity’s ability to continue as a going concern within one year of the date the financial statements are issued. An entity must
provide certain disclosures if “conditions or events raise substantial doubt about the entity’s ability to continue as a going concern.”
The ASU applies to all entities and is effective for annual periods ending after December 15, 2016, and interim periods thereafter,
with early adoption permitted. The
Page 14
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2016, 2015 and 2014
(Stated in U.S. dollars)
3.
Significant accounting policies (continued)
(s)
Future Accounting pronouncements (continued)
Company is in the process of evaluating the amendments to determine if they have a material impact on the Company’s financial
position, results of operations, cash flows or disclosures.
In November 2014, the FASB issued ASU No. 2014-16, Derivatives and Hedging (Topic 815): Determining Whether the Host
Contract in a Hybrid Financial Instrument Issued in the Form of a Share is More Akin to Debt or to Equity, which applies to any
entity that is an issuer of, or invests in, hybrid financial instruments that are issued in the form of a share. The amendments in ASU
No. 2014-16 clarify that an entity must take into account all relevant terms and features when reviewing the nature of the host
contract. Additionally, the amendments state that no one term or feature would define the host contract’s economic characteristics
and risks. Instead, the economic characteristics and risks of the hybrid financial instrument as a whole would determine the nature
of the host contract. ASU No. 2014-16’s amendments will be effective for public business entities for fiscal years, and interim
periods within those fiscal years, starting after December 15, 2015, with early adoption permitted. The Company is in the process
of evaluating the amendments to determine if they have a material impact on the Company’s financial position, results of
operations, cash flows or disclosures.
In January 2016, the FASB issued ASU No. 2016-01, which makes limited amendments to the guidance in U.S. GAAP on the
classification and measurement of financial instruments. The new standard significantly revises an entity’s accounting related to (1)
the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for
financial liabilities measured at fair value. It also amends certain disclosure requirements associated with the fair value of financial
instruments. ASU No. 2016-01 is effective for fiscal years beginning after December 15, 2017, and interim periods within those
annual periods. The Company is in the process of evaluating the amendments to determine if they have a material impact on the
Company’s financial position, results of operations, cash flows or disclosures.
In February 2016, the FASB issued new guidance, ASU No. 2016-02, Leases (Topic 842). The main difference between current
U.S. GAAP and the new guidance is the recognition of lease liabilities based on the present value of remaining lease payments and
corresponding lease assets for operating leases under current U.S. GAAP with limited exception. Additional qualitative and
quantitative disclosures are also required by the new guidance. Topic 842 is effective for annual reporting periods (including
interim reporting periods) beginning after December 15, 2018. Early adoption is permitted. The Company is in the process of
evaluating the amendments to determine if they have a material impact on the Company’s financial position, results of operations,
cash flows or disclosures.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and
Cash Payments, which will make eight targeted changes to how cash receipts and cash payments are presented and classified in the
Statement of Cash Flows. ASU 2016-15 will be effective on May 1, 2018, and will require adoption on a retrospective basis unless
it is impracticable to apply, in which case the Company would be required to apply the amendments prospectively as of the earliest
date practicable. The Company is in the process of evaluating the amendments to determine if they have a material impact on the
Company’s financial position, results of operations, cash flows or disclosures.
Page 15
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2016, 2015 and 2014
(Stated in U.S. dollars)
3.
Significant accounting policies (continued)
(s)
Future Accounting pronouncements (continued)
In August 2016, the FASB issued ASU 2017-01 that changes the definition of a business to assist entities with evaluating when a
set of transferred assets and activities is a business. The guidance requires an entity to evaluate if substantially all of the fair value
of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the set of
transferred assets and activities is not a business. ASU 2017-01 also requires a business to include at least one substantive process
and narrows the definition of outputs by more closely aligning it with how outputs are described in ASC 606.1. ASU 2017-01 is
effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those years.
Early adoption is permitted. The Company is in the process of evaluating the amendments to determine if they have a material
impact on the Company’s financial position, results of operations, cash flows or disclosures.
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, 2016 and November 30, 2015. 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, 2016
Accumulated
amortization
$
$
Net book
value
$
Cost
295,296
124,151
129,860
3,933,693
1,205,810
276,300
76,458
6,041,568
238,672
117,506
109,243
2,290,074
1,143,792
179,422
73,221
4,151,930
56,624
6,645
20,617
1,643,619
62,018
96,878
3,237
1,889,638
November 30, 2015
Cost
Accumulated
amortization
$
$
Net book
value
$
293,870
124,151
129,860
3,483,398
1,142,122
276,300
76,458
5,526,159
214,525
110,860
104,089
1,968,088
1,142,122
155,203
71,834
3,766,721
79,345
13,291
25,771
1,515,310
-
121,097
4,624
1,759,438
Depreciation for the year ended November 30, 2016 was $385,210 (2015 -$377,849; 2014 - $381,385).
Page 16
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2016, 2015 and 2014
(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, 2016, the Company recorded a $Nil write-down
of long-lived assets (2015 - $Nil; 2014 – $Nil).
6. Accrued liabilities
Professional fees
Other
7.
Due to related parties
Convertible debenture
November
30,
2016
November
30,
2015
$
$
190,485
194,401
384,886
163,552
290,738
454,290
Amounts due to the related parties are payable to entities controlled by two shareholders who are also officers and directors of the
Company.
Convertible debenture payable to two directors and officers
of the Company, unsecured, 12% annual interest rate,
payable monthly
November
30,
2016
November
30,
2015
$
$
1,494,764
1,518,429
On January 10, 2013, the Company completed a private placement financing of the Debenture, which had an original maturity date of
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
at issuance IPC’s functional currency at the time of issuance was 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 was bifurcated from its host contract and the fair value of the conversion option characterized
as an embedded derivative upon issuance. The embedded derivative was presented together on a combined basis with the host contract. The
derivative was 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
were accreted over the life of the Debenture using the imputed rate of interest.
Effective December 1, 2013, the Company changed its functional currency such that the conversion option no longer met the criteria for
bifurcation and was prospectively reclassified to equity under
Page 17
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2016, 2015 and 2014
(Stated in U.S. dollars)
7.
Due to related parties (continued)
Convertible debenture
ASC 815. The conversion option value at December 1, 2013 of $728,950 was reclassified from convertible debenture to additional paid-in
capital.
Effective October 1, 2014, the maturity date of the Debenture was extended to July 1, 2015. Under ASC 470-50, the change in the debt
instrument was accounted for as a modification of debt. The increase in the fair value of the conversion option at the date of the
modification, in the amount of $126,414, was recorded as a reduction in the carrying value of the debt instrument with a corresponding
increase to additional paid-in-capital. The carrying amount of the debt instrument is accreted over the remaining life of the Debenture using
a 15% imputed rate of interest.
Effective June 29, 2015, the July 1, 2015 maturity date for the Debenture was further extended to January 1, 2016. Under ASC 470-50, the
change in the maturity date of the debt instrument resulted in a constructive extinguishment of the original Debenture as the change in the
fair value of the embedded conversion option was greater than 10% of the carrying amount of the debt. In accordance with ASC 470-50-40,
the Debenture was recorded at fair value. The difference between the fair value of the convertible Debenture after the extension and the net
carrying value of the Debenture prior to the extension of $114,023 was recognized as a loss on the statement of operations and
comprehensive loss. The carrying amount of the debt instrument will be accreted down to the face amount of the Debenture over the
remaining life of the Debenture using a 14.6% imputed rate of interest.
Effective December 8, 2015, the January 1, 2016 maturity date of the Debenture was extended to July 1, 2016. Under ASC 470-50, the
change in the debt instrument was accounted for as a modification of debt. The increase in the fair value of the conversion option at the date
of the modification, in the amount of $83,101, was recorded as a reduction in the carrying value of the debt instrument with a corresponding
increase to additional paid-in-capital. The carrying amount of the debt instrument is accreted over the remaining life of the Debenture using
a 6.6% imputed rate of interest.
Effective May 26, 2016, the July 1, 2016 maturity date of the Debenture was extended to December 1, 2016. Under ASC 470-50, the change
in the debt instrument was accounted for as a modification of debt. The increase in the fair value of the conversion option at the date of the
modification, in the amount of $19,808, was recorded as a reduction in the carrying value of the debt instrument with a corresponding
increase to additional paid-in-capital. The carrying amount of the debt instrument is accreted over the remaining life of the Debenture using
a 4.2% imputed rate of interest.
Accreted interest expense during the year ended November 30, 2016 is $79,245 (2015 - $27,103; 2014 - $127,261), 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, 2016 is $180,370 (2015 - $179,878; 2014 - $179,877),
and has also been included in the consolidated statements of operations and comprehensive loss.
8.
Employee costs payable
As at November 30, 2016, the Company had $838,905 (2015 - $Nil) accrued bonus payable to executive officers of the Company and had
$205,246 (2015 - $175,172) accrued vacation payable to certain employees. These balances are due on demand and therefore presented as
current liabilities.
9.
Lease obligations
On December 1, 2015, the Company entered into a new lease agreement for the premises that it currently operates from, as well the
adjoining property which is owned by the same landlord, for a 5 year term with a 5 year renewal option. The Company also has an option to
purchase the combined properties after March 1, 2017 and up to November 30, 2020 based on a fair value purchase formula. 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, 2016:
Page 18
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2016, 2015 and 2014
(Stated in U.S. dollars)
9.
Lease obligations (continued)
Year ending November 30,
2017
2018
2019
2020
Less: amounts representing interest at 14%
Less: current portion
Balance, long-term portion
10.
Capital stock
Authorized, issued and outstanding
Capital
Lease
Operating
Lease
$
$
15,489
-
-
-
15,489
660
14,829
14,829
-
179,736
179,736
179,736
179,736
718,944
-
718,944
179,736
539,208
(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, 2016, the Company has 29,784,992 (2015 - 24,244,050; 2014 - 23,456,611)
common shares issued and outstanding and 5,000 common shares to be issued subsequent to November 30, 2016, and no preference
shares issued and outstanding.
Two officers and directors of IPC owned directly and through their family holding company (“Odidi Holdco”) 5,781,312 (2015 -
5,781,312) common shares or approximately 19% (2015 - 24%; 2014 - 26%) 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.
Holders of 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.
(b)
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. The Company will pay Roth a commission, or allow a discount,
of 2.75% of the gross proceeds that the Company received from any additional sales of common shares under the equity
Page 19
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2016, 2015 and 2014
(Stated in U.S. dollars)
10.
Capital stock (continued)
Authorized, issued and outstanding
(c)
(d)
distribution agreement. The Company has also agreed to reimburse Roth for certain expenses relating to the offering. For the year
ended November 30, 2016, an aggregate of 1,471,260 common shares were sold on NASDAQ for gross proceeds of $3,469,449,
with net proceeds to the Company of $3,368,674, respectively, under the at-the-market offering program. During the year ended
November 30, 2015, an aggregate of 471,439 common shares were sold for gross proceeds of $1,290,168, with net proceeds to the
Company of $1,254,178. During the year ended November 30, 2014, an aggregate of 1,689,500 common shares were sold for gross
proceeds of $6,571,673, with net proceeds to the Company of $6,390,670. As a result of prior sales of the Company’s common
shares under the equity distribution agreement, as at November 30, 2016, the Company may in the future offer and sell its common
shares with an aggregate purchase price of up to $5,468,711 (or such lesser amount as may be permitted under applicable securities
laws and regulations, such amount the Company currently can offer and sell being limited to approximately $5.4 million) pursuant
to our at-the-market program. There can be no assurance that any additional shares will be sold under the at-the-market program.
Direct costs related to the Company’s filing of a base shelf prospectus filed in May 2014 and declared effective in June 2014 and
certain other on-going costs related to the at the-market facility are recorded as deferred offering costs and are being amortized and
recorded as share issuance costs against share offerings. For the year ended November 30, 2016, costs directly related to the at the-
market facility of $100,775 (2015 - $38,889; 2014 - $811,887) were recorded in share offering costs and an additional $258,287
(2015 - $39,277; 2014 - $Nil) of deferred costs were amortized and recorded in share offering costs related to the at the-market
facility.
In June 2016, the Company completed an underwritten public offering of 3,229,814 units of common shares and warrants, at a
price of $1.61 per unit. The warrants are currently exercisable, have a term of five years and an exercise price of $1.93 per common
share. The Company issued at the initial closing of the offering an aggregate of 3,229,814 common shares and warrants to purchase
an additional 1,614,907 common shares. The underwriter also purchased at such closing additional warrants at a purchase price of
$0.001 per warrant to acquire 242,236 common shares pursuant to the over-allotment option exercised in part by the underwriter.
The Company subsequently sold an aggregate of 459,456 additional common shares at the public offering price of $1.61 per share
in connection with subsequent partial exercises of the underwriter’s over-allotment option. The closings of these partial exercises
brought the total net proceeds from the offering to $5,137,638, after deducting the underwriter’s discount and offering expenses.
The warrants are considered to be indexed to the Company’s own stock and are therefore classified as equity under ASC topic 480
Distinguishing Liabilities from Equity for equity classification. The Company recorded $4,764,777 as the value of common shares
under Capital stock and $1,175,190 as the value of the warrants under Additional Paid in Capital in the consolidated statements of
shareholders’ equity (deficiency). The Company has disclosed the terms used to value the warrants in Note 14.
The direct costs related to the issuance of the unit shares were $802,329 and were recorded as an offset against the statement of
shareholders’ equity (deficiency) with $643,593 being recorded under Capital stock and $158,736 being recorded under Additional
Paid in Capital.
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 2,978,999 based on the number of issued and outstanding common shares
as at November 30, 2016. As at November 30, 2016, 2,628,520 options are outstanding and there were 350,479 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.
Page 20
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2016, 2015 and 2014
(Stated in U.S. dollars)
11.
Options (continued)
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 1,934,758 performance-based stock options have vested as of November 30, 2016. Under the terms of the original
agreement these options were to expire in September 2014. Effective March 27, 2014, the Company’s shareholders approved the two year
extension of the performance-based stock option expiry date to September 2016. As a result of the modification of the performance based
stock option expiry date, the Company recorded additional compensation costs of $1,066,991 related to vested performance options during
the year ended November 30, 2014. Effective April 19, 2016, the Company’s shareholders approved a further two year extension of the
performance-based stock option expiry date to September 2018. As a result of the modification of the performance based stock option
expiry date, the Company recorded additional compensation costs of $1,177,782 related to vested performance options during the year
ended November 30, 2016. These options were outstanding as at November 30, 2016.
In the year ended November 30, 2016, 355,000 (2015 - 295,000; 2014 - 254,001) stock options were granted to management and other
employees and 105,000 (2015 - 60,000; 2014 - 225,000) stock options were granted to members of the Board of Directors.
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.
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 six years. For options that have an expected life of less than six 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 the
historical average of the term and historical exercises 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 of options granted
November
30,
2016
November
30,
2015
2014
65.2%
0.620%
5.00
-
68.6%
0.580%
5.00
-
55.0%
1.45%
5.60
-
$
1.20
$
1.66
$
2.10
Page 21
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2016, 2015 and 2014
(Stated in U.S. dollars)
11. Options (continued)
Details of stock option transactions in Canadian dollars (“C$”) are as follows:
November 30,
2016
November 30,
2015
Weighted
average
grant date
fair value
$
Weighted
average
exercise
Number of
options
price per
share
$
Weighted
average
grant date
fair value
$
Number
of
options
November 30,
2014
Weighted
average
exercise
Weighted
average
price per
share
$
grant date
fair value
$
2.21
1.20
1.68
-
13.29
4,858,208
355,000
(91,000)
(60,168)
(33)
3.96
2.52
2.34
-
770.13
2.21
1.66
1.86
-
493.31
4,455,072
479,001
(48,000)
(27,832)
(33)
3.97
3.86
2.45
-
709.18
2.21
2.10
1.07
-
709.18
Weighted
average
exercise
Number of
options
price per
share
$
3.89
2.42
2.57
-
19.24
5,062,007
460,000
(27,500)
-
(102,047)
Outstanding
beginning
of
period,
Granted
Exercised
Forfeiture
Expired
Balance at
end of
period
Options
5,392,460
3.48
1.88
5,062,007
3.89
2.21
4,858,208
3.96
2.21
exercisable,
end of year 4,396,610
3.49
1.96
3,812,930
4.01
2.35
3,640,381
4.09
2.40
As of November 30, 2016, the exercise prices, weighted average remaining contractual life of outstanding options and weighted average
grant date fair values were as follows:
price
Number
outstanding
$
Under
2.50
2.51 - 5.00
5.01 - 10.00
10.01 - 100.00
-
5,360,835
-
31,625
5,392,460
Weighted
average
exercise
price per
share
Options outstanding
Weighted
average
remaining
contract
life (years)
Weighted
average
grant
due
fair value
$
-
3.31
-
33.02
3.48
$
-
1.74
-
25.98
-
0.96
-
0.99
Options exercisable
Weighted
average
exercise
price per
share
Weighted
average
grant
date
fair value
$
-
3.27
-
33.02
3.49
$
-
1.78
-
25.98
Number
exercisable
-
4,364,985
-
31,625
4,396,610
Total unrecognized compensation cost relating to the unvested performance-based stock options at November 30, 2016 is approximately
$2,366,659 (2015 - $2,482,528; 2014 - $2,482,528). During the year ended November 30, 2016, 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 $620,632 relating to these stock options was recognized in 2016 in research and development expense (2015 -
$Nil; 2014 - $Nil).
For the year ended November 30, 2016, 27,500 options were exercised for a cash consideration of $52,868. For the year ended November
30, 2015, 91,000 options were exercised for cash consideration of $167,962. For the year ended November 30, 2014, 48,000 options were
exercised for cash consideration of $116,984.
Page 22
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2016, 2015 and 2014
(Stated in U.S. dollars)
11.
Options (continued)
The following table summarizes the components of stock-based compensation expense.
Research and development
Selling, general and administrative
November
30,
2016
November
30,
2015
November
30,
2014
$
$
$
1,995,805
265,639
2,261,444
152,231
265,587
417,818
1,270,307
478,300
1,748,607
The Company has estimated its stock option forfeitures to be approximately 4% at November 30, 2016 (2015 - 4%; 2014 - 3%).
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.
During the year ended November 30, 2016 and 2015, 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, 2016, 76,743 (2015 - 60,002) DSUs are outstanding and 33,257 (2015 - 49,998)
DSUs are available for grant under the DSU Plan. The Company recorded the following amounts related to DSUs for each of the three
years ended November 30, 2016, 2015 and 2014 in additional paid in capital and accrued the following amounts as at November 30, 2016,
2015 and 2014:
November 30, 2016
$
shares
November 30, 2015
shares
$
November 30, 2014
shares
$
Additional paid in capital
Accrued liability
31,628
7,261
16,741
2,356
29,056
8,051
10,993
4,272
20,807
3,759
5,968
1,338
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.
Page 23
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2016, 2015 and 2014
(Stated in U.S. dollars)
14. Warrants
Prior to November 30, 2015, all the warrants issued to date by the Company are denominated in U.S. dollars and at issuance IPC’s
functional currency was the Canadian dollar. 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. Subsequent changes in the fair
value of the warrants were recorded in the consolidated statements of operations and comprehensive loss.
In connection with the February 1, 2011 private offering, the Company issued 4,800,000 five year Series A common share purchase
warrants (“Series A 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 holders of Series A 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”).
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.
Effective December 1, 2013, the Company changed its functional currency to the U.S. dollar such that the warrants are considered indexed
to the Company’s own stock and were prospectively classified as equity under ASC 480. The warrant liability value at December 1, 2013 of
$5,438,022 was reclassified from warrant liabilities to additional paid-in capital.
In the underwritten public offering completed in June 2016, gross proceeds of $5,200,000 were received through the sale of the Company’s
units comprised of common stock and warrants. The Company issued at the initial closing of the offering an aggregate of 3,229,814
common shares and warrants to purchase an additional 1,614,907 common shares, at a price of $1.61 per unit. The warrants are currently
exercisable, have a term of five years and an exercise price of $1.93 per common share. The underwriter also purchased at such closing
additional warrants (collectively with the warrants issued at the initial closing, the “June 2016 Warrants”) at a purchase price of $0.001 per
warrant to acquire 242,236 common shares pursuant to the over-allotment option exercised in part by the underwriter. The fair value of the
June 2016 Warrants of $1,175,190 was initially estimated at closing using the Black-Scholes Option Pricing Model, using volatility of
64.1%, risk free interest rates of 0.92%, expected life of 5 years, and dividend yield of Nil.
Page 24
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2016, 2015 and 2014
(Stated in U.S. dollars)
14. Warrants (continued)
The following table provides information on the 5,476,482 warrants outstanding and exercisable as of November 30, 2016:
Warrant
March 2013 Warrants
July 2013 Warrants
June 2016 Warrants
Exercise
price
Number
outstanding
Expiry
$
$
$
2.10
2.55
1.93
1,491,742
870,000
3,114,740
5,476,482
March 22, 2018
July 31, 2018
June 02, 2021
Shares
issuable
upon
exercise
372,936
217,500
1,557,370
2,147,806
During the year ended November 30, 2016, there were cash exercises in respect of 832,104 warrants (2015 - 450,000; 2014 - 481,000) and
no cashless exercise (2015 - $Nil; 2014 - $Nil) of warrants, resulting in the issuance of 357,912 (2015 - 225,000; 2014 - 288,500) and $Nil
(2015 - $Nil; 2014 - $Nil) common shares, respectively. For the warrants exercised, the Company recorded a charge to capital stock of
$1,030,719 (2015 - $1,027,304; 2014 - $1,291,436) comprised of proceeds of $700,653 (2015 - $562,500; 2014 - $781,220) and the
associated amount of $330,066 (2015 - $464,804; 2014 - $510,216) previously recorded in additional paid in capital.
Details of warrant transactions are as follows:
Outstanding, December 1, 2015
Issued
Exercised
Expired
Outstanding, November 30, 2016
Outstanding, December 1, 2014
Exercised
Outstanding, November 30, 2015
Series A
Warrants
2,835,000
-
-
March
2013
Warrants
1,724,300
-
(232,558)
(2,835,000)
-
1,491,742
-
July 2013
Warrants
June 2016
Warrants
Total
870,000
-
-
-
870,000
5,429,300
-
3,714,286
3,714,286
(599,546) (832,104)
(2,835,000)
5,476,482
-
3,114,740
Series A
Warrants
March 2013
Warrants
July 2013
Warrants
3,285,000
(450,000)
2,835,000
1,724,300
-
1,724,300
870,000
-
870,000
Total
5,879,300
(450,000)
5,429,300
Page 25
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2016, 2015 and 2014
(Stated in U.S. dollars)
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:
Statutory income tax rate
Statutory income tax recovery
Increase (decrease) in income taxes
Non-deductible expenses/
non-taxable income
Change in valuation allowance
Difference in net income before taxes
between Canadian and U.S dollar
Investment tax credit
Financing costs booked to equity
FCR Election
Foreign exchange change
True up of tax returns
Tax loss expired and other
November
30,
2016
November
30,
2015
November
30,
2014
%
26.5
$
%
26.5
$
%
26.5
$
(2,688,048)
(1,970,643)
(1,021,934)
640,481
2,683,775
164,723
1,804,406
-
-
(281,063)
-
-
(356,095)
950
-
-
(168,591)
(23,348)
(253,856)
-
(15,991)
463,300
-
417,879
(995,957)
160,316
(9,114)
(208,271)
-
985,544
82,939
588,598
-
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,
2016
November
30,
2015
November
30,
2014
$
$
$
7,427,516
6,019,380
6,528,099
3,409,343
-
-
2,405,365
2,854,916
-
-
-
1,006,667
47,180
371,160
2,327,722
3,710,274
16,952,498
5,394,426
14,268,722
2,183,486
12,464,314
(16,952,498) (14,268,722) (12,464,314)
-
-
-
Page 26
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2016, 2015 and 2014
(Stated in U.S. dollars)
15. Income taxes (continued)
At November 30, 2016, 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,
2028
2029
2030
2031
2032
2033
2034
2035
2036
United States Federal net operating losses expiring
in the year ended November 30,
2024
2025
2026
Federal
$
182,195
555,539
3,373,079
5,532,739
5,750,053
4,562,538
149,927
2,634,823
5,195,985
27,936,878
$
18,512
16,234
34,522
69,268
At November 30, 2016, the Company had a cumulative carry-forward pool of Federal SR&ED expenditures in the amount of approximately
$14,000,000 (2015 - $12,408,000) which can be carried forward indefinitely.
At November 30, 2016, the Company had approximately $3,273,000 (2015 - 2,710,000) of unclaimed ITCs which expire from 2025 to
2036. 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, 2016 or November 30,
2015.
The Company files unconsolidated federal income tax returns domestically and in foreign jurisdictions. The Company has open tax years
from 2008 to 2016 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 2016, 2015 and 2014 or any penalties in those years.
The Company had no accrued interest and penalties as of November 30, 2016, 2015 and 2014.
The Company had no unrecognized tax benefits in 2016, 2015 and 2014, and the Company does not expect that the unrecognized tax benefit
will increase within the next twelve months.
16. Contingencies
From time to time, the Company may be exposed to claims and legal actions in the normal course of business. As at November 30, 2016,
and continuing as at February 9, 2017, the Company is not aware of any pending or threatened material litigation claims against the
Company.
Page 27
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2016, 2015 and 2014
(Stated in U.S. dollars)
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
topic 820 apply to other accounting pronouncements that require or permit fair value measurements. ASC topic 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.
The categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value
measurement.
(i) 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 six years.
(ii) 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 a decrease/increase in the discount rate would have resulted 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 was recorded as a fair value adjustment of derivative
liabilities in the consolidated statements of operations and comprehensive loss.
Reconciliation of Level 3 fair value measurements:
Opening balance
Transfer out from level 3(a)
Closing balance
November 30, 2014
Conversion
Option
$
728,950
Warrant
liability
$
5,438,022
Total
$
6,166,972
(728,950) (5,438,022) (6,166,972)
-
-
-
(a) As discussed in Note 7 and 14, the conversion option value of $728,950 and the warrant value of $5,438,022 at December 1,
2013 were reclassified to additional paid-in capital due to the change in functional currency.
Page 28
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2016, 2015 and 2014
(Stated in U.S. dollars)
17. Financial instruments (continued)
(a)
Fair values (continued)
Fair value of financial assets and financial liabilities that are not measured at fair value on a recurring basis are as follows:
Financial Liabilities
Convertible debt(i)
November 30, 2016
Fair
value
Carrying
amount
November 30, 2015
Fair
value
Carrying
amount
$
$
$
$
1,494,764
1,500,000
1,518,429
1,481,663
(i) 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.
The carrying values of cash, accounts receivable, accounts payable, accrued liabilities and employee cost payable 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, convertible debenture 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 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
Past due for more than 91 days
but no more than 120 days
Total accounts receivable, net
November
30,
2016
November
30,
2015
$
$
472,474
-
472,474
478,674
-
478,674
427,519
453,662
3,319
5,003
41,636
472,474
20,009
478,674
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
years ended November 30, 2016 and November 30, 2015, 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, 2016, 2015 and 2014
(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 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
Net exposure
(d)
Liquidity risk
November 30, 2016
November 30, 2015
Canadian
1.3,429
$
U.S.
Canadian
1.3,353
$
$
U.S.
$
182,714
182,714
136,059
136,059
116,096
116,096
86,944
86,944
449,900
1,027,631
1,402,108
175,171
19,914
36,120
1,238,922
1,871,922
(1,689,208) (1,257,942) (1,538,237) (1,151,978)
1,372,196
233,906
48,231
1,654,333
335,021
1,044,151
14,829
1,394,001
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, 2016:
November 30, 2016
3 to 6
Less than
6 to 9 9 months
3 months months months to 1 year
$
$
$
$
Third parties
Accounts payable
Accrued liabilities
Capital lease (note 9)
Related parties
Employee costs payable (Note 8)
Convertible debenture (Note 7)
807,295
384,886
5,437
-
-
5,585
-
-
3,807
-
-
-
707,547
-
59,138 1,515,770
1,964,303 1,521,355
- 336,604
-
-
3,807 336,604
Greater
than
1 year
Total
$
$
- 807,295
- 384,886
14,829
-
- 1,044,151
- 1,574,908
- 3,826,069
Page 30
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2016, 2015 and 2014
(Stated in U.S. dollars)
18. Segmented information
The Company's operations comprise a single reportable 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 reportable 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. The Company’s license and commercialization agreement with Par accounts
for substantially all of the revenue of the Company.
Revenue
United States
Total assets
Canada
Total property and equipment
Canada
19. Subsequent event
November
30,
2016
November
30,
2015
November
30,
2014
$
$
$
2,247,002
2,247,002
4,093,781
4,093,781
8,769,693
8,769,693
7,974,689
5,224,299
7,875,035
1,889,638
1,759,438
1,618,897
Effective December 1, 2016, the maturity date for the Debenture in respect of the $1,500,000 loan to the Company by Drs. Isa and Amina
Odidi was extended to April 1, 2017 and a principal repayment of $150,000 was made at the time of the extension.
Page 31
Item 19.
Exhibits
Number
1.1
1.2
4.1
4.2
4.3
4.51
4.52
4.53
4.54
4.55
4.56
4.57
4.58
4.59
4.60
4.61
4.62
4.63
4.64(†)
4.65
4.66
4.67
4.68
4.69
4.70
4.71
4.72
4.73
4.74(††)
8.1
11.1
12.1
12.2
13.1
13.2
15.1
15.2
16.1
101
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
The amended and restated promissory note dated October 22, 2009 for up to $2,300,000 issued by
Intellipharmaceutics Corp. to Isa Odidi and Amina Odidi
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.
Placement Agent Agreement between Intellipharmaceutics International Inc. and Roth Capital
Partners, LLC, Brean Capital, LLC and Maxim Group, LLC, dated March 19, 2013
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
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 12, 2011, and as further amended by
the Second Amendment to License and Commercialization Agreement dated as of September 24,
2013
Fifth Amendment to Lease Agreement dated November 28, 2014 between Finley W. McLachlan
Properties Inc. and Intellipharmaceutics Corp. for premises at 30 Worcester Road, Toronto, Ontario,
Canada
Extension of Debenture Maturity Date dated October 1, 2014 to that certain 12% convertible term
debenture dated January 10, 2013 in principal amount of $1,500,000
Indenture of Lease dated as of December 1, 2015 between Finley W. McLachlan Properties Inc. and
Dufferin Lumber And Supply Company Limited, and Intellipharmaceutics Corp. for premises at 22
Worcester Road and 30 Worcester Road, Toronto, Ontario, Canada
Extension of Debenture Maturity Date dated as of June 29, 2015 to that certain 12% convertible term
debenture dated January 10, 2013 in principal amount of $1,500,000
Extension of Debenture Maturity Date dated as of December 8, 2015 to that certain 12% convertible
term debenture dated January 10, 2013 in principal amount of $1,500,000
Underwriting Agreement between Intellipharmaceutics International Inc. and Dawson James
Securities, Inc., dated May 27, 2016.
Form of Common Share Purchase Warrant
Extension of Debenture Maturity Date dated as of May 26, 2016 to that certain 12% convertible term
debenture dated January 10, 2013
Extension of Debenture Maturity Date dated as of December 1, 2016 to that certain 12% convertible
term debenture dated January 10, 2013
License and Commercial Supply Agreement dated effective October 11, 2016, between Mallinckrodt
LLC and Intellipharmaceutics Corp.
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
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange
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 (MNP LLP)
Consent of Independent Registered Public Accounting Firm (Deloitte LLP)
Letter dated February 27, 2017 of Deloitte LLP, as required by Item 16F of Form 20-F
XBRL (Extensible Business Reporting Language). The following materials from
Intellipharmaceutics International Inc.’s Annual Report on Form 20-F for the fiscal year-ended
November 30, 2016, formatted in XBRL:
(i) Consolidated balance sheets as at November 30, 2016 and 2015
Footnote
(7)
(7)
(7)
(7)
(7)
(6)
(6)
(6)
(8)
(8)
(5)
(5)
(9)
(9)
(9)
(10)
(10)
(11)
(4)
(3)
(3)
(2)
(2)
(2)
(12)
(12)
(1)
(1)
(1)
(1)
(7)
(1)
(1)
(1)
(1)
(1)
(1)
(1)
(1) (13)
(ii) Consolidated statements of operations and comprehensive loss for the years ended
November 30, 2016, 2015 and 2014
(iii) Consolidated statements of shareholders’ equity (deficiency) for the years ended
November 30, 2016, 2015 and 2014
(iv) Consolidated statements of cash flows for the years ended November 30, 2016, 2015
and 2014
(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, 2016.
Incorporated herein by reference to the Company’s annual report on Form 20-F for the fiscal year
ended November 30, 2015 as filed on March 21, 2016.
Incorporated herein by reference to the Company’s annual report on Form 20-F for the fiscal year
ended November 30, 2014 as filed on February 27, 2015.
Incorporated herein by reference to the Company’s Amendment No. 1 on Form 20-F/A for the fiscal
year ended November 30, 2013 as filed on April 14, 2014.
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.
Incorporated herein by reference to the Company’s report on Form 6-K for the month of May 2016
as filed on May 27, 2016.
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)
(10)
(11)
(12)
(13)
(†) Confidential treatment has been granted for certain portions of this exhibit. Omitted portions have been filed separately with the Securities and
Exchange Commission.
(††) 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
SIGNATURES
undersigned to sign this annual report on its behalf.
Intellipharmaceutics International Inc.
/s/ Domenic Della Penna
Domenic Della Penna
Chief Financial Officer (Principal Financial Officer)
Intellipharmaceutics International Inc.
February 27, 2017
Extension of Debenture Maturity Date
Exhibit 4.72
TO Intellipharmaceutics International Inc. (the "Company")
RE:
Debenture dated January 1, 2013, for a face amount of US $1,500,000 issued by the Company to Isa Odidi and Amina Odidi
(the "Debenture") and the Maturity Date (as defined in the Debenture) of such Debenture
The undersigned hereby agree that the current Maturity Date of the Debenture of July 1, 2016, is extended to December 1, 2016.
DATED as of May 26th, 2016.
/s/ Dr. Isa Odidi
Dr. Isa Odidi
/s/ Dr. Amina Odidi
Dr. Amina Odidi
Extension of Debenture Maturity Date
Exhibit 4.73
TO Intellipharmaceutics International Inc. (the "Company")
RE:
Debenture dated January 1, 2013, for a face amount of US $1,500,000 issued by the Company to Isa Odidi and Amina Odidi
(the "Debenture") and the Maturity Date (as defined in the Debenture) of such Debenture
This is in respect of the US $1,500,000 Debenture. Kindly pay the amount of US $150,000 out of the US $1,500,000 to Isa Odidi. The
undersigned hereby agree that the current Maturity Date of the remainder of the Debenture of December 1, 2016, is extended to April 1,
2017.
DATED as of December 1st, 2016.
/s/ Dr. Isa Odidi
Dr. Isa Odidi
/s/ Dr. Amina Odidi
Dr. Amina Odidi
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.
Exhibit 4.74
LICENSE AND COMMERCIAL SUPPLY AGREEMENT
THIS LICENSE AND COMMERCIAL SUPPLY AGREEMENT (“ Agreement”) is made and entered into effective this October
11, 2016 (“Effective Date”) by and between Mallinckrodt LLC, a Delaware limited liability company (for and on behalf of its affiliated
entities) (“Mallinckrodt”) and Intellipharmaceutics Corp., a company organized under the laws of Canada (for and on behalf of its affiliated
entities) (“Intellipharmaceutics”).
RECITALS
WHEREAS, Intellipharmaceutics and its affiliates are in the business of selling various generic pharmaceutical dosage products in
the United States as well as in other countries, WHEREAS, Mallinckrodt has a significant sales and marketing presence in the United
States generic market as a consequence of its sales of a portfolio various proprietary and licensed generic products and, thus, also has the
capability effectively to distribute Intellipharmaceutics’ generic pharmaceutical products in the United States, and
WHEREAS, Intellipharmaceutics wishes to giant to Mallinckrodt the exclusive right in the United States to market, sell and
distribute certain generic pharmaceutical dosage products once they have been approved for sale in the United States by the United States
Food and Drug Administration (“FDA”) and to ensure that Mallinckrodt will be continuously supplied a sufficient quantity of finished
product for each generic pharmaceutical dosage product for which rights are granted to Mallinckrodt hereunder,
NOW THEREFORE, in consideration of the premises and of the covenants herein and for
other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:
1. Marketing and Sale Rights.
(a) Subject to the terms and limitations set forth herein, Intellipharmaceutics hereby grants to Mallinckrodt an exclusive
right and license (with the right to sublicense to a third party subject to approval and written consent of Intellipharmaceutics, such consent
not to be unreasonably withheld) to market, sell, offer for sale and distribute only in the United States and, if allowed, in Puerto Rico and in
any United States territories, protectorates or those areas with commonwealth status (collectively hereinafter referred to as the “Exclusive
Market”), for its own account, a bioequivalent generic dosage pharmaceutical version of every approved strength of each of the following
generic dosage pharmaceutical products: (1) Quetiapine ER, a product to be AB- rated to the branded pharmaceutical product known as
Seroquel XR (“Product One”), (ii) Desvenlafaxine, a product to be AB-rated to the branded pharmaceutical product known as Pristiq
(“Product Two”) and (iii) Lamotrigine ER, a product to be AB-rated to the branded pharmaceutical product known as Lamictal XR
(“Product Three”). Products One, Two and Three shall hereinafter be jointly referred to as “Products” or, individually and generically, as a
“Product.” The Products will be supplied by Intellipharmaceutics to Mallinckrodt in finished and fully labeled (in accordance with Section
1(b) set forth immediately below) and packaged form, and in all approved strengths. The foregoing rights shall be coextensive with this
Agreement and, subject to any
CSK/Intellipharmaceutics CommercializationAgr5
September 28, 2016
1
specific provisions set forth in Section 11 hereof, shall terminate on and as of the effective date of termination or expiration hereof. In no
event and on no occasion shall the exclusive rights granted to Mallinckrodt hereunder be interpreted as permitting Mallinckrodt to sell
Product outside of the Exclusive Market.
(b) All Products sold or offered for sale by Mallinckrodt shall be labeled with Mallinckrodt’s name, trademarks and trade
dress as per label artwork provided and paid for by Mallinckrodt, in a manner consistent with all applicable laws, rules and regulations, in
accordance with the requirements of the approved Abbreviated New Drug Application (“ ANDA”) relative to each Product and otherwise in
a manner reasonably agreed upon by the parties. In particular, it is agreed that the phrase (or a substantially similar phrase) “Licensed from
and manufactured by Intellipharmaceutics (IPCI) for Mallinckrodt,” shall be evident on the packaging and labeling for all Products.
Mallinckrodt shall not alter the labeling or package inserts associated with Product that are received from Intellipharmaceutics without the
advance written permission of Intellipharmaceutics and, upon receipt of such approval, only in compliance with any applicable laws, rules
and regulations. Intellipharmaceutics shall own the ANDA for each of the Products for which exclusive rights are granted hereunder and,
subject to any express terms herein to the contrary, shall thus have the responsibility and expense to maintain each of the ANDAs in full
force and effect for so long as this Agreement is in effect with respect to any such ANDA, which responsibility includes, but is not limited
to, meeting all applicable regulatory requirements that exist with respect to the Products under all applicable laws, rules and regulations.
(c) It is understood by the parties that (i) none of the Products are, as of the Effective Date, approved for marketing and
sale in the United States by the FDA and (ii) the value of the exclusive rights granted hereunder to Mallinckrodt is intimately related to the
time when such Products can be marketed and sold. Therefore, in addition to any other rights of termination that Mallinckrodt may have
hereunder, Mallinckrodt shall have the right, upon thirty (30) days advance written notice of Mallinckrodt’s intention to terminate the
Agreement to Intellipharmaceutics hereunder (and, with respect to any given Product, before it has been approved by the FDA), to
terminate this Agreement (i) as to Product One if the FDA has not approved the ANDA for Product One on or before December 31, 2017,
(ii) as to Product Two if the FDA has not approved the ANDA for Product Two on or before December 31, 2018, (iii) as to Product Three if
the FDA has not approved the ANDA for Product Three on or before December 31, 2018 and (iv) in its entirety, if any two (2) or more of
the Products are not approved by the FDA on or before the dates specified in clauses (ii) or (iii) of this sentence, as such clauses may be
applicable in any given case. Notwithstanding the immediately preceding sentence, prior to providing any notice of termination of this
Agreement in accordance with the immediately preceding sentence, Mallinckrodt shall inform Intellipharmaceutics of any commercial or
other reasons that may underlie Mallinckrodt’s decision to terminate this Agreement in whole or in part.
(d) Notwithstanding the other provisions of this Section 1, Intellipharmaceutics retains all rights in and to the Products if
and to the extent such rights are not specifically granted to Mallinckrodt hereunder, including (without limitation) the right to sell, distribute
and to appoint distributors for Products outside the Exclusive Market.
CSK/Intellipharmaceutics CommercializationAgr5
September 28, 2016
2
2. Term.
Unless sooner terminated in accordance herewith, this Agreement will have an initial term of ten (10) Contract Years (as defined
in the immediately succeeding sentence) and shall be automatically renewed for additional and consecutive terms of one (1) Contract Year,
absent written notice of non-renewal given by one party to the other at least one hundred and eighty (180) days prior to the end of the initial
term or any renewal term, as applicable. For purposes hereof, the term “Contract Year” shall mean the first and each successive twelve (12)
month period (coinciding with Mallinckrodt’s regularly established fiscal months) elapsing while this Agreement is in full force and effect,
commencing with the first full fiscal month in which the first commercial sale of any of the Products by Mallinckrodt in the Exclusive
Market occurs; provided that, the last Contract Year hereof shall end on and as of the effective date of termination hereof, whether or not
such Contract Year is a full twelve (12) month period.
3. Consideration.
(a) In partial consideration for the grant of exclusive rights hereunder by Intellipharmaceutics to Mallinckrodt, within ten
(10) days after the Effective Date and by wire transfer of immediately available funds to an account designated in advance by
Intellipharmaceutics, Mallinckrodt shall pay to Intellipharmaceutics the total sum of the Three Million Dollars ($3,000,000) in United
States currency, allocated to each of the Products to which exclusive rights are granted hereunder, specifically allocable to each Product as
follows: (i) [*] Dollars ($[*]) for the exclusive rights for Product One, (ii) [*] Dollars ($[*]) for the exclusive rights for Product Two and
(iii) [*] Dollars ($[*]) for the exclusive rights for Product Three. The amount paid to Intellipharmaceutics by Mallinckrodt pursuant to this
Section 3(a) shall not be refundable by Intellipharmaceutics to Mallinckrodt for any reason, absent fraud.
(b) In further and partial consideration for the grant hereunder by Intellipharmaceutics to Mallinckrodt of the rights for
the Products in the Exclusive Market, Mallinckrodt shall make a payment to Intellipharmaceutics, with respect to each strength of each
Product (each a “Product SKU”), on a quarterly basis coinciding with Mallinckrodt’s fiscal quarters (the end dates of such fiscal quarters
are as listed on Schedule 1 attached hereto), based on a percentage of Mallinckrodt’s Standard Margin (as defined below in this Section
3(b)) earned on sales of Products in the Exclusive Market, calculated in accordance with the percentages in Section 3(c) set forth
immediately below (the aggregate of all such payments for any given fiscal quarter of Mallinckrodt hereinafter referred to as “Quarterly
Aggregate Standard Margin Payments” and, with respect to any given Product SKU, a “Quarterly Standard Margin Payment”). For
purposes hereof, (i) the term “Standard Margin” shall mean, with respect to any given volume of any Product SKU and for any given fiscal
quarter of Mallinckrodt, the Net Sales of such volume of any Product SKU minus the Cost of Goods Sold for such volume of any such
Product SKU, (ii) the term “Cost of Goods Sold” shall mean, with respect to any given volume of any Product SKU included in any
calculation of Standard Margin for purposes of this Section 3(b) the applicable Transfer Price (as defined below in Section 6(a)) of any
such volume of any Product SKU in finished, labeled and fully packaged form (the calculation and meaning of Standard Cost being defined
herein below in Section 6(d)), and (iii) the term “Net Sales” shall mean, with respect to any Product SKU and for any given fiscal quarter of
Mallinckrodt, the remainder of (A) the gross
*Omitted and filed separately with the Securities and Exchange Commission under a request for confidential treatment.
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sales price of all amounts of any Product SKU invoiced and booked by Mallinckrodt as gross revenue in such fiscal quarter minus (B) the
sum of (1) the amount of all discounts, chargebacks, rebates, product returns and any similar allowances allocable to such Product SKU and
taken against the gross revenue of such Product SKU in such fiscal quarter, (2) the allocable amount of freight and delivery cost incurred by
Mallinckrodt with respect to such Product SKU and in such quarter (i.e., the freight cost to ship Products from Intellipharmaceutics to any
Mallinckrodt designated location) and (3) the allocable amount of sales and use taxes and other governmental charges incurred by
Mallinckrodt with respect to such Product SKU and in such fiscal quarter. In no event will any amounts covered by any one or more of
clauses (1), (2) and/or (3) set forth in the immediately preceding sentence be deducted more than once in connection with the calculation of
Net Sales for any given period of time. If, for any given fiscal quarter, the Cost of Goods Sold for the volume of any Product SKU sold in
such fiscal quarter exceeds the Standard Margin of any such Product SKU properly allocable to such fiscal quarter (“Negative SKU
Balance”), then (i) Mallinckrodt shall not be required to make any payment in accordance with this Section 3 and with respect to such
Product SKU for such fiscal quarter and (ii) any Negative SKU Balance with respect to a Product SKU shall be deducted from the Quarterly
Standard Margin Payment otherwise due by Mallinckrodt to Intellipharmaceutics for such fiscal quarter. In calculating the amount of any
payments due under this Section 3 by Mallinckrodt to Intellipharmaceutics, the amount of any Negative SKU Balances applicable to all
Product SKUs and in any fiscal quarter, to the extent in excess of the aggregate Standard Margin owed by Mallinckrodt on all other Product
SKUs will be carried forward for the calculation of payments (if any) for any subsequent fiscal quarters.
(c) The Quarterly Standard Margin Payment for each Product SKU shall be equal to [*] Percent ([*]%) of Mallinckrodt’s
Standard Margin for each such Product SKU in any given fiscal quarter. Notwithstanding the immediately preceding sentence, the
Quarterly Standard Margin Payment for all Product SKUs included in any given Product shall be reduced to [*] Percent ([*]%) of
Mallinckrodt’s Standard Margin in any given fiscal quarter for each Product SKU included in any given Product from and after the point at
which the following aggregate Standard Margin payment targets have been met as to any given Product:
(i) with respect to Product One, at such time (and for every dollar of Standard Margin earned
thereafter) as [*] ([*]) of the total amount of all Quarterly Aggregate Standard Margin Payments due by Mallinckrodt
hereunder and allocable to Standard Margin earned in respect of Product One equals [*] Dollars ($[*]) in United States
currency,
(ii) with respect to Product Two, at such time (and for every dollar of Standard Margin earned
thereafter) as [*] ([*]) of the total amount of all Quarterly Aggregate Standard Margin Payment due by Mallinckrodt
hereunder and allocable to Standard Margin earned in respect of Product Two equals [*] Dollars ($[*]) in United States
currency, and
thereafter) as [*] ([*]) of the total amount of all Quarterly Aggregate Standard Margin Payments due by Mallinckrodt
hereunder
(iii) with respect to Product Three, at such time (and for every dollar of Standard Margin earned
*Omitted and filed separately with the Securities and Exchange Commission under a request for confidential treatment.
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and allocable to Standard Margin earned in respect of Product Three equal [*] Dollars ($[*]) in United States currency.
(d) The calculation of any Quarterly Standard Margin Payments shall be based on information contained in a quarterly
sales report (“Quarterly Report”), in form and substance reasonably satisfactory to both parties, delivered by Mallinckrodt to
Intellipharmaceutics in writing within [*] ([*]) days after the end of any Mallinckrodt fiscal quarter to which the report relates, and the
Quarterly Aggregate Standard Margin Payments that are due, if any, by Mallinckrodt to Intellipharmaceutics with respect to any fiscal
quarter to which any such Quarterly Report relates shall be made within [*] ([*]) days after the end of Mallinckrodt’s fiscal quarter. All
calculations of amounts due by Mallinckrodt to Intellipharmaceutics will be made in accordance with generally accepted accounting
principles as consistently applied by Mallinckrodt and will be based on accruals, as consistently and typically made by Mallinckrodt.
Further, at the same time as any Quarterly Aggregate Standard Margin Payment is made to Intellipharmaceutics for any given fiscal
quarter, Mallinckrodt will also deduct from or add to such payment to reflect any true-up of actual results with respect to rebates,
chargebacks and other relevant expenses to the extent related to quarterly periods occurring prior to the quarter for which any such
Quarterly Aggregate Standard Margin Payment is being submitted, the underlying details of any such true-up additions or deductions to be
submitted by Mallinckrodt to Intellipharmaceutics in connection with any Quarterly Report related to the payment then being made.
(e) On or before the fifteenth (15 th) day after the end of each month of this Agreement, Mallinckrodt shall provide a
report detailing the estimated monthly Standard Margin amounts due to Intellipharmaceutics for that month. It is the understanding of both
parties that such monthly Standard Margin estimates may change once actual amounts are known and can be adjusted prospectively in
accordance herewith.
4. Audit Rights.
(a) At any time while this Agreement is in effect with respect to any given Product and for a period of ninety (90) days
after this Agreement expires or is terminated with respect to such Product, appropriate representatives of Mallinckrodt shall have the right
on an annual basis or at any reasonable time for cause, and at Mallinckrodt’s own expense (except as otherwise specifically
noted in this Section 4(a)), (i) to review all batch records and other records relevant to manufacture, testing and release of any volume of
any Product SKU and (ii) to audit any records relating to any calculation of, or increase or decrease in, the Standard Cost of any Product
SKU based on any calculation, increase or decrease by Intellipharmaceutics of, its Standard Cost of manufacture whether or not in
connection with any Annual Standard Cost Notice provided to Mallinckrodt in accordance with Section 6(d) (“Standard Cost Calculation”),
provided that, Mallinckrodt shall not be allowed to audit any records or data on more than one occasion or more often than annually or,
with respect to any Standard Cost Calculation, more than six (6) months following the effective date hereunder of the establishment of or a
change in any Standard Cost for any one or more Product SKUs in accordance with the procedures set forth below in Section 6(d), and
provided further and subject to the procedures set forth below in this Section 4(a), in the event that any audit of any Standard Cost
Calculation applicable to any one or more Product SKUs reveals, and Intellipharmaceutics does not dispute in good faith and with
substantial reason, that the amount of any such Standard Cost Calculation for any one or more Product SKUs was overstated for any
*Omitted and filed separately with the Securities and Exchange Commission under a request for confidential treatment.
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applicable period by an amount in excess of [*] percent ([*]%), Intellipharmaceutics shall promptly refund the amount of any overcharge,
as well as the amount of the [*] percent ([*]%) additional charge levied hereunder to reach the Transfer Price for any Product SKU or
SKUs allocable to the volume of any Product SKUs and the period of time for which such overcharge is applicable; the cost and expense of
any audit by Mallinckrodt to the extent allocable to any such overstated Standard Cost shall be for the account and expense of
Intellipharmaceutics. Consistent with the immediately preceding sentence, in the event that, as a consequence of any such audit or
examination, Mallinckrodt reasonably disagrees with any amounts invoiced by or payable to Intellipharmaceutics
hereunder to the extent such amount relates to the Standard Cost of any one or more Product SKUs, Mallinckrodt shall inform
Intellipharmaceutics in writing and in reasonable detail of the amounts to be refunded and the specific manner in which any Standard Cost
Calculation was inaccurate and, unless and to the extent Intellipharmaceutics disputes, in good faith and with substantial reason, the amount
set forth by Mallinckrodt in any such notice from Mallinckrodt, Intellipharmaceutics will refund to Mallinckrodt any such undisputed
amounts within thirty (30) days of the receipt of any such notice from Mallinckrodt. In the event Intellipharmaceutics does dispute all or
any portion of any refund claimed by Mallinckrodt, Intellipharmaceutics will so notify Mallinckrodt within such thirty (30) day period and
the parties will attempt thereafter to resolve such dispute amicably and if, within thirty (30) days thereafter, the parties are unable to resolve
such dispute, the matter will be referred to an independent third party expert selected by and acceptable to both parties. The decision of
such expert shall be final and binding upon both parties as to whether any refund is owed and, if so, the appropriate amount of such refund,
and the costs and expenses of such independent third party expert shall be paid as follows herein. Where it is determined that a full or
partial refund is owed to Mallinckrodt, the costs of such expert shall be allocated as between the parties in inverse proportion to the percent
of refund request actually recovered. For greater certainty, and by way of example only, if Mallinckrodt obtains 70% of a requested refund,
it will be required to pay 30% of the expert costs and Intellipharmaceutics will be required to pay 70% of such costs. The amount of any
refund finally determined to be due to Mallinckrodt in accordance with the agreement or deemed agreement of the parties or in accordance
with the dispute resolution procedures set forth above in this Section 4(a)
may be deducted by Mallinckrodt from any calculation of the Cost of Goods Sold used in connection with the calculation of Standard
Margin for the applicable Product relative to the next occurring fiscal quarter for which any Quarterly Standard Margin Payment is or may
be due. In connection with any audit by Mallinckrodt, Intellipharmaceutics will provide copies of all relevant documentation and
appropriate personnel will be made available to answer questions and provide information in connection with any such audit.
(b) At any time while this Agreement is in effect with respect to any given product and for a period of ninety (90) days
after this Agreement expires or is terminated with respect to such Product, appropriate representatives of Intellipharmaceutics shall have the
right, on an annual basis or at any reasonable time for cause, and at Intellipharmaceutics expense (except as otherwise specifically noted in
this Section 4(b)), (i) to audit Mallinckrodt’s compliance with applicable laws, rules and regulations in connection with the marketing, sale,
offering for sale and handling of Products and (ii) any records and data that support, explain or relate to any Quarterly Aggregate Standard
Margin Payments or that relate to the information contained in any Quarterly Report, provided that, Intellipharmaceutics shall not be
allowed to audit any such records and data on more than one occasion or more often than annually or, with respect to the matters referred to
in clause (ii) of this sentence, more than one (1) year following the issuance of any Quarterly Report or the making of any Quarterly
Aggregate Standard Margin Payment to which it relates,
*Omitted and filed separately with the Securities and Exchange Commission under a request for confidential treatment.
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and provided further that and subject to the procedures set forth in this Section 4(b), in the event that any such audit reveals, and
Mallinckrodt does not dispute in good faith and with substantial reason, that the amount of any Quarterly Aggregate Standard Margin
Payment was understated by an amount in excess of [*] percent ([*]%) as a result of the information contained or that reasonably should
have been contained in any relevant Quarterly Report or any other relevant information concerning any Quarterly Aggregate Standard
Margin, Mallinckrodt shall promptly pay Intellipharmaceutics any such shortfall, and the cost and expense of any audit by
Intellipharmaceutics to the extent allocable to such Quarterly Report shall be for the account and expense of Mallinckrodt. Consistent with
the immediately preceding sentence, in the event that, as a consequence of any such audit or examination, Intellipharmaceutics reasonably
disagrees with any amounts payable to Intellipharmaceutics hereunder to the extent such amount relates to any Quarterly Aggregate
Standard Margin Payment and the correlative Quarterly Report, Intellipharmaceutics shall inform Mallinckrodt in writing and in reasonable
detail of the amounts still owed and the specific manner in which any Quarterly Aggregate Standard Margin Payment was deficient and the
information in any correlative Quarterly Report that was inaccurate and/or misleading and, unless and to the extent Mallinckrodt disputes,
in good faith and with substantial reason, the amount set forth by Intellipharmaccutics as being owed in any such notice from
Intellipharmaceutics, Mallinckrodt will pay to Intellipharmaceutics any such undisputed amounts within thirty (30) days of the receipt of
any such notice from Intellipharmaceutics. In the event Mallinckrodt does dispute all or any portion of any amount claimed by
Intellipharmaccutics, Mallinckrodt will so notify Intellipharmaceutics within such thirty (30) day period and the parties will attempt
thereafter to resolve such dispute amicably and if, within thirty (30) days thereafter, the parties are unable to resolve such dispute, the
matter will be referred to an independent third party expert selected by and acceptable to both parties. The decision of such expert shall be
final and binding upon both parties as to whether any additional payment is owed and, if so, the appropriate amount of such payment, and
the costs and expenses of such independent third party expert shall be paid as follows herein. Where it is determined that a full or partial
additional payment request is owed to Intellipharmaceutics, the costs of such expert shall be allocated as between the parties in inverse
proportion to the percent of additional payment request actually recovered. For greater certainty, and by way of example only, if
Intellipharmaceutics obtains 70% of a requested additional payment, it will be required to pay 30% of the expert costs and Mallinckrodt
will be required to pay 70% of such costs. In connection with any audit by Intellipharmaceutics, Mallinckrodt will provide copies of all
relevant documentation and appropriate personnel will be made available to answer questions and provide information in connection with
any such audit.
5. Manufacture and Supply of Products.
(a) It is understood that, for so long as this Agreement is in effect, Intellipharmaceutics will be the exclusive manufacturer
and supplier of Products to Mallinckrodt, such Products to be manufactured at Intellipharmaceutics’ Toronto, Canada manufacturing plant
(“Facility”). Manufacturing of Products will be accomplished by Intellipharmaceutics in accordance with current Good Manufacturing
Practices (“cGMP”) as defined by the United States Food, Drug and Cosmetic Act, as amended, and regulations issued thereunder, and as
administered by the FDA. All raw materials (including, without limitation, all active pharmaceutical ingredients and intermediates) and
other resources required in connection with production hereunder shall be provided by Intellipharmaceutics. Intellipharmaceutics represents
and warrants that it currently has access to, and during the entire term hereof will make commercially reasonable efforts to ensure that
*Omitted and filed separately with the Securities and Exchange Commission under a request for confidential treatment.
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it will continue to have access to, sufficient supplies of raw materials and all other required items to perform the services required of it
hereunder without interruption, subject to the occurrence of any events covered by the provisions of Section 13(a) hereof. In the event there
is a shortage of any raw materials to be supplied by Intellipharmaceutics for the purpose of manufacturing hereunder to the
extent that Intellipharmaceutics, without some form of allocation or rationing, is unable to supply Mallinckrodt and all other parties with
whom Intellipharmaceutics has supply arrangements, Intellipharmaceutics agrees to use commercially reasonable efforts to allocate its
supply of such raw materials among all of its customers in a manner reasonably designed not unfairly to disadvantage
Mallinckrodt.
(b) All Products supplied by Intellipharmaceutics hereunder shall be manufactured in accordance with the specifications
for Product that have been developed by Intellipharmaceutics, which specifications for each of the Products as they currently exist are set
forth and described in detail on Exhibit A attached hereto. If the specifications for any Product are not currently available, because the
ANDA for any Product has not yet been approved by the FDA, Intellipharmaceutics will ensure that, when finalized, any such
specifications are promptly attached hereto as part of Exhibit A. Intellipharmaceutics will not change the specifications for any Product
unless deemed reasonably necessary by Intellipharmaceutics to comply with applicable law or regulatory requirements, in which case such
changes will be made no sooner than necessary to comply with any applicable legal and regulatory requirements and, in any event, will only
become effective upon written notice by Intellipharmaceutics to Mallinckrodt. In the event Mallinckrodt requests a change in specifications
for Product (which request shall be set forth with particularity in a written notice to Intellipharmaceutics) and Intellipharmaceutics believes
that any specification change requested by Mallinckrodt is reasonably necessary to meet any applicable law or regulatory requirements or is
reasonably necessary to allow the effective sale, marketing and distribution of that Product in the Exclusive Market, then such specification
change shall be made by Intellipharmaceutics as promptly as reasonably possible, and Intellipharmaceutics shall inform Mallinckrodt in
writing of the effective date of any such change. All cost and expense associated with any changes in specifications requested by
Mallinckrodt shall be paid for by Mallinckrodt and any changes in specifications required to be made as a result of any applicable laws,
rules or regulations shall be the cost and expense of Intellipharmaceutics. Regardless of the reason and nature of any change in
specifications, Exhibit A hereto will be formally amended to reflect any changes in specifications for any Product.
(c) Products manufactured by Intellipharmaceutics shall be manufactured in accordance with Intellipharmaceutics’
manufacturing processes and in material compliance with all applicable laws, rules and regulations. Further, Intellipharmaceutics represents
and warrants that the Facility has all, and will continue to have all relevant regulatory permits and approvals necessary for the manufacture
of Products hereunder. Intellipharmaceutics shall, at its own expense, take whatever actions are reasonably necessary to ensure that all
manufacturing and related processes used are and remain validated for any Product for so long as Intellipharmaceutics is supplying
Mallinckrodt with any quantities of that Product hereunder. Intellipharmaceutics shall retain all batch records and other documentation
relative to its manufacture of Products hereunder to the extent necessary to demonstrate its compliance with the provisions of this Section 5
and as otherwise may be required by cGMP or the requirements of any other applicable law, rule or regulation.
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6. Purchase of Product.
(a) While this Agreement is in effect, Mallinckrodt shall purchase all of its requirements for each strength of each of the
Products in multiples of the minimum batch size from Intellipharmaceutics hereunder at Standard Cost plus [*] percent ([*]%) (for each
strength of each Product, its “Transfer Price”). For absolute clarity, no purchase order shall be less than the minimum batch size for each
SKU of the Product. All purchases of Products shall be made by written purchase order delivered to Intellipharmaceutics at least ninety
(90) days prior to the requested date of shipment for Products so ordered. Each purchase order shall specify the amount of each strength of
any Product being ordered and the requested delivery date for all ordered Products. Intellipharmaceutics will acknowledge each purchase
order received in writing to Mallinckrodt within five (5) business days of receipt and Intellipharmaceutics shall not withhold its acceptance
of any purchase order absent substantial and justifiable reasons. No term, condition or provision of any purchase order, acknowledgement
or any other document issued by a party in connection herewith shall be deemed in any case to create any requirements or specify any terms
that are in conflict with or (except for volume and delivery terms) are additional to the terms and conditions hereof, and any such
conflicting or additional terms and requirements are hereby expressly rejected. Payment for all Products invoiced and shipped hereunder by
Intellipharmaceutics shall be made by Mallinckrodt in United States dollars within [*] ([*]) days after the date Mallinckrodt receives any
invoice from Intellipharmaceutics. Intellipharmaceutics may issue an invoice for any shipment of Product on or after the date on which any
volume of Product to be shipped has been delivered by Intellipharmaceutics to an appropriate carrier for shipment. All Products shall be
shipped by Intellipharmaceutics to Mallinckrodt by such method as Mallinckrodt shall reasonably designate and Mallinckrodt shall be
responsible for the selection of the carrier and for the payment of all freight and transportation charges, which, if paid by
Intellipharmaceutics, shall be reimbursed by Mallinckrodt to Intellipharmaceutics promptly upon written request, which request shall be
accompanied by all relevant supporting documentation. Title to any shipped Products sold hereunder shall transfer to Mallinckrodt and
Mallinckrodt shall bear all risk of loss with respect to shipped Products when delivered by Intellipharmaceutics to the carrier designated by
Mallinckrodt. Mallinckrodt shall be solely responsible for proper storage of Product in accordance with applicable specifications once
Products have been delivered, but Intellipharmaceutics shall be solely responsible for all pre-shipment quality assurance testing and/or
release of Products for distribution, in accordance with all applicable laws, rules and regulations.
(b) Orders for Products placed by Mallinckrodt may be decreased or cancelled by Mallinckrodt after they have been
acknowledged by Intellipharmaceutics upon written notice to Intellipharmaceutics. Mallinckrodt shall pay Intellipharmaceutics, with
respect to a decreased or cancelled order, an amount equal to Intellipharmaceutics’ actual direct costs with respect to such decreased portion
of such order or such cancelled order (including the cost to Intellipharmaceutics of documented and no cancellable commitments to third
parties, if reasonable in amount and reasonably related to supply by Intellipharmaceutics hereunder) incurred prior to the date Mallinckrodt
notifies Intellipharmaceutics of such decrease or cancellation; provided that, in no event shall Mallinckrodt be required to pay
Intellipharmaceutics more than Mallinckrodt would have paid Intellipharmaceutics had Mallinckrodt not decreased or cancelled any such
order. All costs payable in accordance with this Section 6(b) must be invoiced by Intellipharmaceutics
*Omitted and filed separately with the Securities and Exchange Commission under a request for confidential treatment.
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with appropriate supporting documentation, and such invoice shall be payable by Mallinckrodt within [*] ([*]) days of its receipt of an
appropriate invoice.
(c) Mallinckrodt shall, for every Mallinckrodt fiscal quarter during the term hereof and beginning with the first full fiscal
quarter occurring after the first date of commercial sale in the Exclusive Market by Mallinckrodt of any of the Products, submit to
Intellipharmaceutics in writing a rolling forecast of its requirements for each of the Product SKUs then available for marketing and sale by
Mallinckrodt in the Exclusive Market during the next twelve (12) months (“Rolling Forecast”). In no event shall any such forecasted
amounts be deemed to represent an order for Products hereunder, but each such Rolling Forecast shall be submitted by Mallinckrodt to
Intellipharmaceutics in good faith and shall be as accurate as possible under the applicable circumstances. In no event shall
Intellipharmaceutics be required to supply during any period covered by any Rolling Forecast more than one hundred twenty five percent
(125%) of the total amount of Products covered by such forecast, but Intellipharmaceutics shall use reasonable commercial efforts to supply
any amounts of Product ordered hereunder by Mallinckrodt to the extent in excess of such amount.
(d) For purposes hereof “Standard Cost” shall mean, with respect to any unit of any Product SKU, the standard
manufacturing cost incurred by Intellipharmaceutics to manufacture and package in labeled and fully finished form any such unit,
calculated as of any given time in accordance with generally accepting accounting principles as consistently applied and otherwise in
accordance with the principles set forth on Exhibit A attached hereto and excluding the amount of any capital expenditure unless and to the
extent (i) related solely to the supply of Products hereunder and (ii) approved in advance by Mallinckrodt (which approval shall not
unreasonably be withheld) (collectively the “Calculation Principles”). The Standard Cost of each Product SKU then available or that will
soon be available shall be notified in writing to Mallinckrodt by Intellipharmaceutics at least thirty (30) days prior to the beginning of each
Contract Year during the term hereof along with all supporting information and documentation necessary to demonstrate that the
calculation of (including any increase or decrease of) each such Standard Cost was accomplished in accordance with the Calculation
Principles (“Annual Standard Cost Notice”). Any Standard Costs so notified to Mallinckrodt will be effective as of the beginning of the
applicable Contract Year and shall remain firm for orders placed for any Products by Mallinckrodt at any time during such Contract Year.
Standard Cost for all Product SKUs will be adjusted effective for the immediately subsequent Contract Year (for each Contract Year that
occurs during the term hereof), upward or downward, based on manufacturing variances experienced during the immediately preceding
Contract Year (i.e., increases or decreases in the cost to Intellipharmaceutics of all raw materials, directly associated regulatory compliance
costs, directly allocated labor costs, any allocation of directed overhead and burden) consistent in all cases with the Calculation Principles,
and the calculation of and supporting information and documentation associated with any such increase or decrease of the Transfer Price of
any Product SKU shall form part of the Annual Standard Cost Notice required to be given by Intellipharmaceutics to Mallinckrodt in
accordance with this Section 6(d).
(e) Mallinckrodt shall collect and pay all customs duties or sales, use, excise, or other similar taxes and any personal
property taxes or other similar taxes (but not any income taxes) in connection with any transactions contemplated hereby.
Intellipharmaceutics agrees to collect and remit any such taxes, if and as required to do so under the laws of any jurisdiction. To
*Omitted and filed separately with the Securities and Exchange Commission under a request for confidential treatment.
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the extent any such taxes must be paid by Intellipharmaceutics, Mallinckrodt shall pay Intellipharmaceutics for the amount of such taxes no
later than ten (10) days before Intellipharmaceutics is required to remit the amount of such taxes to any governmental authorities, if and to
the extent Mallinckrodt has been made aware of such payment deadline by Intellipharmaceutics at least thirty (30) days in advance of the
occurrence of such deadline. Each party shall cooperate with the other party and take any action reasonably requested which docs not cause
such party to incur any material cost or inconvenience in order to minimize any such taxes that may be payable in connection with any
transactions contemplated hereby, including providing sales and use exemption certificates or other documentation necessary to support
sales or use tax exemptions. Intellipharmaceutics and Mallinckrodt agree to provide each other information and data that each may from
time to time reasonably request and otherwise fully cooperate with each other in connection with (i) the reporting of any such taxes
payable, (ii) any relevant audit, and (iii) any assessment, refund claim or proceeding relating to any such taxes payable.
7. Certain Other Matters Relative to Supply of Products.
(a) If, within twenty (20) days after its receipt of any volume of any Product (or, in the case of latent defects, within
twenty (20) business days after any defect becomes known), Mallinckrodt reasonably determines that any volume of any Product is
defective in material or workmanship, not in conformance with the applicable specifications, is adulterated or otherwise fails to meet any
requirement hereof (any Product meeting any or all of the foregoing circumstances being hereinafter referred to as “Defective Product”),
then Mallinckrodt, at its sole option, may reject and return any such Defective Product. At the time of any such rejection, Mallinckrodt
shall provide Intellipharmaceutics with a written notice describing in detail the circumstances surrounding the rejection and Mallinckrodt’s
reasons therefor. Any Product received by Mallinckrodt from Intellipharmaceutics that has not been rejected by Mallinckrodt within twenty
(20) days after receipt (or, in the case of latent defects, within twenty (20) days after any defect becomes known) shall be deemed to have
been accepted for all purposes hereof. If, within twenty (20) days of being notified by Mallinckrodt of its rejection of any Product as
Defective Product, Intellipharmaceutics reasonably disagrees that such Product was properly rejected by Mallinckrodt as Defective
Product, Intellipharmaceutics shall notify Mallinckrodt in writing of such fact and the specific reasons therefor, but if Intellipharmaceutics
fails to so notify Mallinckrodt within such twenty (20) day period, the Product in question will be deemed properly to have been rejected
by Mallinckrodt. After receipt by Mallinckrodt of any such notice from Intellipharmaceutics, Intellipharmaceutics and Mallinckrodt will
attempt amicably to settle the dispute concerning any allegedly Defective Product, but if they are unable to do so within thirty (30) days
after the date of any Intellipharmaceutics notice, the parties will jointly select a third party expert acceptable to each party to make a final
determination as to whether or not Product in question was Defective Product and therefore properly rejected. The fees and expenses of
such third party expert will be paid by the party whose determination was in error as to whether or not Product was Defective Product and
therefore properly rejected. If Mallinckrodt has properly rejected Defective Product, the Defective Product will be destroyed by
Mallinckrodt in a manner meeting all applicable laws, rules and regulations and Intellipharmaceutics shall be responsible for the costs of
any such destruction or disposal. The amount already paid (if any) by Mallinckrodt to Intellipharmaceutics for any properly rejected
Defective Product that is destroyed or disposed of shall be refunded by Intellipharmaceutics to Mallinckrodt or credited against other
payments due hereunder (at Mallinckrodt’s option) promptly upon written request from Mallinckrodt. Intellipharmaceutics shall, if no
refund is to be issued or credited, replace any Defective Product
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properly rejected by Mallinckrodt in accordance herewith at no additional cost to Mallinckrodt, and it is understood that Mallinckrodt’s sole
remedy for Product that has been properly rejected shall be either the refund or crediting of any amounts paid for such Product or the
replacement of any properly rejected Product with new Product that meets all applicable specifications and all other requirements hereof.
(b) Mallinckrodt shall be responsible for handling all complaints relating to and any recalls or similar actions with respect
to Product distributed and sold by Mallinckrodt, but Intellipharmaceutics will make available appropriate personnel to provide consultation
and assistance to Mallinckrodt at all reasonable times to help Mallinckrodt provide the appropriate response to any Product complaints it
receives. If Mallinckrodt reasonably decides to or is required to initiate a product recall or withdrawal with respect to, or if there is any
governmental seizure of, any Product sold or offered for sale in the Exclusive Market, Mallinckrodt will notify Intellipharmaceutics
promptly of the details regarding such action, including providing copies of all relevant documentation concerning such action.
Notwithstanding the preceding provisions of this Section 7(b), Intellipharmaceutics shall have the right to initiate any recall or product
withdrawal of Product sold or offered for sale in the Exclusive Market in the event Mallinckrodt fails to do so if, in any given set of
circumstances, Intellipharmaceutics becomes aware of facts or circumstances from which it determines that any such action is reasonably
necessary given the requirements of applicable law. Regardless of which party initiates a recall or withdrawal, each party will assist the
other as required in investigating any such situation, and the party initiating any such action will handle required contact and
communication with regulatory agencies. If any such recall, withdrawal or seizure occurs due solely to (i) a failure of any lot of Product
manufactured by Intellipharmaceutics hereunder to conform to applicable specifications, required manufacturing processes, or any warranty
or other requirement set forth in this Agreement, (ii) the failure by Intellipharmaceutics (or anyone on its behalf) to comply in all material
respects with any applicable law, rule, regulation, standard, court order or decree or (iii) the negligent or intentional wrongful act or
omission of Intellipharmaceutics in connection with the production of any such Product, then Intellipharmaceutics shall bear the full cost
and expense of, any such seizure, recall, withdrawal or field correction, including without limitation finished product replacement to the
market from which there was a seizure, recall, withdrawal or field correction and any and all third party fees such as (by way of example)
fees charged by wholesalers whose aid might be required in connection with the recall process; provided that, such cost and expense shall
be limited to reasonable, actual and documented expense incurred by Mallinckrodt for such seizure, recall, withdrawal or correction, and
replacement of or refund for Product withdrawn or recalled. If any such recall, withdrawal or seizure occurs due solely to (i) the failure by
Mallinckrodt (or anyone on its behalf) to comply with any applicable law, rule, regulation, standard court order or decree, (ii) the negligent
or intentional wrongful act or omission of Mallinckrodt in connection with this Agreement or (iii) any act or omission to act by
Mallinckrodt (or anyone on its behalf) in connection with the use, marketing, promotion, sale, distribution, storage, possession, handling or
transportation of Product, then Mallinckrodt shall bear the full cost and expense of any such seizure, recall or withdrawal in a manner
consistent with the limitations set forth in the immediately preceding sentence. If both Intellipharmaceutics and Mallinckrodt contribute to
the cause of a seizure, recall or withdrawal, the cost and expenses thereof will be shared in proportion to each party’s contribution to the
problem in accordance with the principles of responsibility and
limitations set forth in this Section 7(b).
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(c) Upon request, Intellipharmaceutics will furnish to Mallinckrodt pertinent portions of all inspection reports and
correspondence from any governmental authority (including the FDA) related to or in any manner affecting Intellipharmaceutics’ supply of
Product hereunder as and when these become available to Intellipharmaceutics. Intellipharmaceutics will also notify Mallinckrodt promptly
(i.e., within five (5) business days) of any warning (including any FDA Form 483), citation, indictment, claim, lawsuit or proceeding issued
or instituted by any governmental entity or agency (including the FDA) against Intellipharmaceutics or any of its affiliates or of any
revocation of any relevant license or permit issued to Intellipharmaceutics, to the extent that any relate directly to Intellipharmaceutics’
supply of Product or performance of its other obligations hereunder. Mallinckrodt shall, finally, have the right, once during each Contract
Year, upon reasonable advance written request, and during the term hereof, to inspect Intellipharmaceutics’ batch records relative to
production hereunder.
(d) In the event either party becomes aware of (i) any adverse drug experience or reaction or other information indicating
that any Products have any toxicity, sensitivity reactions or have otherwise been alleged to cause illness or injury of any kind or are
adulterated, (ii) any product complaints made by customers or that will or could cause a field alert to be issued or (iii) any out-of-
specification results or deviations from the approved manufacturing process that might in any manner adversely affect any Product or its
supply hereunder, that party shall provide the other party with all data or other information reasonably available that the other party may
reasonably require in connection with any reports or correspondence that either party is required to file with any governmental authority
relative to the Product(s) in question. At all times during the term hereof, either party will notify the other promptly (i.e., within three (3)
business days) if a party becomes aware of an occurrence of any of the events described in clauses (i), (ii) or (iii) of the immediately
preceding sentence. It is understood by the parties that Mallinckrodt shall, with respect to the Products sold and offered for sale in the
Exclusive Market, have sole and complete responsibility for responding to any adverse drug reaction reports or product complaints or for
making any contact with customers or any regulatory agencies concerning any such problems, consistent with Mallinckrodt’s then existing
procedures for handling such matters; provided that, Intellipharmaceutics shall provide Mallinckrodt with any available information or
data, or with any available expertise that Mallinckrodt reasonably requires in connection therewith. Notwithstanding the provisions of
Section 1(b), Mallinckrodt shall be solely responsible for conducting and paying for any required pharmacovigilance program relative to
the Products consistent with then applicable laws, rules and regulations in the Territory.
(e) Within five (5) business days of Intellipharmaceutics’ discovery that any lot of Product is out-of-specification (which
would include, without limitation, any stability failure or trend analysis indicating a likely stability failure prior to lot expiration date),
Intellipharmaceutics will notify Mallinckrodt of such fact along with details concerning the nature of any such failure to meet applicable
specifications. Intellipharmaceutics will make such further internal investigation of any failure to meet applicable specifications that is
appropriate under the circumstances and otherwise consistent with its obligations hereunder.
(f) [*] during the term, Mallinckrodt, through its employees, consultants or other representatives, will have the right
during normal business hours and upon advance arrangement with Intellipharmaceutics to inspect Intellipharmaceutics’ operations at the
Facility to determine whether or not Intellipharmaceutics is complying in all material respects with
*Omitted and filed separately with the Securities and Exchange Commission under a request for confidential treatment.
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any of its manufacturing obligations hereunder. Mallinckrodt warrants that all such inspections and audits shall be carried out in a manner
calculated not to unreasonably interfere with Intellipharmaceutics’ conduct of business at the Facility and to insure the continued
confidentiality of Intellipharmaceutics’ other business and technical information. Further, Mallinckrodt agrees to comply with all of
Intellipharmaceutics’ safety and security requirements during any visits to the Facility.
(g) Within sixty (60) days after the date hereof, the parties will enter into a mutually acceptable quality and
pharmacovigilance agreement relative to the supply and commercial distribution of the Products hereunder, which shall be attached hereto
as Exhibit B. In the event of any conflict or inconsistency between the provisions of this Agreement and the provisions of any quality and
pharmacovigilance agreement, the provisions of this Agreement shall prevail in every case.
8. Distribution by Mallinckrodt.
(a) Mallinckrodt shall have the right to sell Products in the Exclusive Market and, subject to any amounts due and payable
by Mallinckrodt to Intellipharmaceutics in accordance with the express provisions hereof (including, without limitation, any payments to be
made in accordance with Section 3 hereof), all revenues, profits and other amounts derived by Mallinckrodt from any such sales shall be for
the sole account of Mallinckrodt. Further, the prices at which Mallinckrodt resells Products shall, in every case, be entirely at the discretion
of Mallinckrodt and Mallinckrodt shall not seek consultation with Intellipharmaceutics on the appropriate level of pricing to be invoiced or
quoted in any one or more circumstances.
(b) During the existence of this Agreement, Mallinckrodt shall use commercially reasonable efforts to market and sell
Products in the Exclusive Market. In particular, but without limitation, Intellipharmaceutics and Mallinckrodt are also agreed on the
following:
(i)
(ii)
Mallinckrodt shall establish and maintain such places of business and shall maintain such sales force as shall be
necessary to provide good customer service and support and good marketing coverage and promotion for the
Products throughout the Exclusive Market.
Mallinckrodt will utilize, at its own expense, such advertising relative to the sale, marketing and use of Products
as may be commercially useful and necessary. Mallinckrodt shall be responsible for printing and providing all
product literature and promotional brochures (if any) relative to Products at its own cost and expense, provided
that, the substantive content of all such literature will be subject to review and approval by Intellipharmaceutics
prior to use by Mallinckrodt, which approval will not unreasonably be withheld or delayed. During the existence
of this Agreement, Mallinckrodt shall not discount the Product to promote other products of Mallinckrodt.
(iii)
In order to focus its marketing efforts to achieve maximum results Mallinckrodt shall confine its marketing and
sales efforts relative to Products to the Exclusive Market, absent the advance written agreement of
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(iv)
(v)
(vi)
(vii)
(vii)
(ix)
(x)
(xi)
Intellipharmaceutics to the contrary; provided that, the foregoing shall not be interpreted as preventing
Mallinckrodt from continuing or commencing, in any market or to any set of customers, the sale or marketing of
any current or future product offering of Mallinckrodt or any of its affiliates.
At no time during the performance of its duties hereunder will Mallinckrodt disparage Products, cast Products in
an unfavorable light, or misrepresent in any fashion the capabilities, qualities or characteristics of Product.
Mallinckrodt shall comply in all material respects with all applicable laws, rules and regulations affecting or
relating to the purchase, storage, handling, registration, distribution and sale of Products (as applicable).
Mallinckrodt shall maintain for a period of at least five (5) years from the date of creation, accurate and
transparent books and records in accordance with generally accepted accounting principles for all sales,
transactions, marketing or other activities relating to Product.
Mallinckrodt will book all sales of Products in accordance with generally accepted accounting principles, as
consistently applied by Mallinckrodt, and will, in connection therewith, process and settle all Product returns,
discounts, chargebacks, rebates and other allowances and adjustments.
Mallinckrodt shall pay all disbursements, costs and expenses incidental to Mallinckrodt’s performance under this
Agreement, including, without limitation, (i) sales and office expenses, (ii) travel, salary, commission or other
compensation expenses of Mallinckrodt’s employees, representatives, agents, contractors and consultants, and (iii)
postal, courier, telephone and facsimile charges.
Mallinckrodt shall not appoint sub-distributors or other representatives or agents, or otherwise subcontract any of
Mallinckrodt’s duties hereunder, without Intellipharmaceutics’ prior written consent (which shall not
unreasonably be withheld or delayed), and Mallinckrodt will, in any event, remain responsible for performance of
its obligations as distributor for Products in the Exclusive Market.
Mallinckrodt will perform any other tasks and obligations reasonably necessary for or incident to the
commercially reasonable marketing, sale and distribution of Products to the Exclusive Market.
During the Term, neither Party nor its Affiliates will, directly or through a Third Party, develop, make, have made,
import, market or sell a “Competing Product” in the Exclusive Market. A “Competing Product”, for this purpose
shall mean any product that is not the Product and is not sold under the Intellipharmaceutics ANDA, which is AB-
Rated to the Reference Product. Notwithstanding the preceding portions of this clause (xi), the foregoing
restriction shall not apply with respect to any product or
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line of products (whether or not they are Competing Products for purposes hereof) that may be acquired by
Mallinckrodt from any third party in connection with the acquisition by Mallinckrodt of any entity or entities, or
business unit from such third party (regardless of the form of any transaction or that may be acquired in
connection with any acquisition of all or a relevant portion of the Mallinckrodt family of companies or its assets,
or in connection with any merger with or combination of Mallinckrodt and/or its affiliates with any third party
(regardless of the form of any transaction) provided that the aggregate revenue of any product or line of products
so acquired that would otherwise be treated as Competing Products hereunder represent no more than [*] percent
([*]%) of the total revenue of the business, entity or entities or assets so acquired by Mallinckrodt. In the event
that Mallinckrodt continues to market, sell or offer for sale any such Competing Product in the Exclusive Market
for a period extending more than one (1) year beyond the effective date of acquisition of such Competing Product,
Intellipharmaceutics shall have the right to terminate this Agreement effective upon thirty (30) days’ notice to
Mallinckrodt as to the Product hereunder affected by the continued commercialization of such Competing Product
by Mallinckrodt and, if and only if the Product has been commercialized by Mallinckrodt for a period of at least
[*] ([*]) [*] prior to the effective date of termination, shall receive from Mallinckrodt a termination payment equal
to the sum of the Aggregate Standard Margin Payments due in respect of the Product with respect to the [*] ([*])
[*] elapsing immediately prior to the effective date of termination.
9. Confidentiality.
(a) Except as otherwise provided in this Section 9, while this Agreement is in effect and for a period of five (5) years
thereafter, each party shall maintain in confidence and use only for purposes specifically authorized under this Agreement all confidential
and/or proprietary information and data, received from the other party (whether in written or recorded form, disclosed orally or disclosed
by means of examination or inspection), which information and data shall be referred to hereinafter as “Information.”
(b) To the extent it is reasonably necessary or appropriate to fulfill its obligations or exercise its rights under this
Agreement, a party may disclose Information to its affiliates, consultants, agents and representatives it is otherwise obligated under this
Section 9 not to disclose, only on a need-to-know basis and only on condition that such entities or persons agree to keep the Information
confidential for the same time periods and to the same extent as such party is required to keep the Information confidential and agree to use
such Information only for purposes relevant to the performance by a party of its obligations under this Agreement, or any agreement entered
into in connection herewith.
(c) In addition to the exceptions to non-disclosure set forth in Section 9(b) above, the obligation not to disclose or to
misuse Information shall not apply to any part of such Information that: (i) is or becomes part of the public domain other than by
unauthorized acts of the party obligated not to disclose such Information or those of its affiliates, or its or their consultants,
*Omitted and filed separately with the Securities and Exchange Commission under a request for confidential treatment.
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agents and representatives, (ii) can be shown by competent evidence to have been disclosed to the receiving party or its affiliates, or to its
or their consultants, agents and representatives, by a third party without violation of an obligation of confidentiality with respect to such
disclosure, (iii) can be demonstrated by competent evidence already to have been in possession of the receiving party or its affiliates, or its
or their consultants, agents, representatives and clinical investigators prior to disclosure under this Agreement, provided such Information
was not obtained directly or indirectly from any third party that was under an obligation of confidentiality with respect to such Information
and in violation of such obligation, (iv) can be demonstrated by competent evidence to have been independently developed by the receiving
party or its affiliates, or by its or their consultants, agents and representatives, without breach of any of the provisions of this Agreement, or
(v) is disclosed by the receiving party or its affiliates, or by its or their consultants, agents and representatives, pursuant to interrogatories,
requests for information or documents, subpoenas or civil investigative demands (or similar process) issued by a court or governmental
agency or pursuant to any other requirement of law, provided that the party so disclosing, if at all possible, notifies the other party prior to
any such disclosure so that such other party (at its own expense, but with the cooperation of the receiving party) can seek a protective order
or other order limiting or preventing disclosure (if and to the extent available under the circumstances), and provided further that the party
so disclosing furnishes only that portion of the Information which it is legally required to disclose under the circumstances. The party
relying on one or more of the above exceptions shall have the burden of establishing the applicability of such exception in any particular set
of circumstances.
(d) Intellipharmaceutics and Mallinckrodt each agree not to disclose any terms or conditions of this Agreement (or any
agreement entered into in connection herewith) to any third party without the prior consent of the other party, except as required by
applicable law. If either party determines that it is required to file this Agreement (or any agreement entered into in connection herewith)
with any governmental agency for any reason, such party shall request confidential treatment of such portions of this Agreement (or such
other agreement) as either party hereto shall deem appropriate.
(e) In protecting the other party’s Information from improper use or disclosure, the receiving party shall exercise the
same degree of care in protecting such Information as it uses in protecting the confidentiality of its own Information, but in any event shall
exercise no less than a reasonable degree of care.
(f) The parties hereto agree that remedies at law may be inadequate to protect a party against any breach by the other
party (or any other person acting in concert with such other party or on its behalf) of any of the provisions of this Section 9. Accordingly,
each party shall be entitled to seek the granting of injunctive relief or other equitable relief (or any similar remedy) from a court of
competent jurisdiction against any action that constitutes any breach of this Section 9, in addition to any monetary damages or other similar
relief to which a party may be entitled, without the necessity of posting a bond or any other form of financial assurance.
10. Indemnification and Limitations of Liability.
hold Mallinckrodt and its affiliates harmless
(a) Subject to all of the applicable provisions of this Section 10, Intellipharmaceutics agrees to defend, indemnify and
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from and against any and all demands, claims, actions, causes of action, assessments, losses, damages, injuries, liabilities, costs and
expenses (including, without limitation, reasonable attorneys’ fees and expenses) of Mallinckrodt and its affiliates, directly or indirectly
related to, arising out of or resulting from:
Intellipharmaceutics contained herein,
(i) any breach or failure of or liability under any of the representations, warranties or covenants of
(ii) actual or asserted violations of any applicable law by Intellipharmaceutics or its affiliates,
(iii) Intellipharmaceutics’ manufacture and supply of Products hereunder, and
manner in connection with performance hereunder.
(iv) any negligent or wrongful act or omission to act by Intellipharmaceutics or its affiliates in any
(b) Subject to all of the applicable provisions of this Section 10, Mallinckrodt agrees to defend, indemnify and hold
Intellipharmaceutics and its affiliates harmless from and against any and all demands, claims, actions, causes of action, assessments, losses,
damages, injuries, liabilities, costs and expenses (including, without limitation, reasonable attorneys’ fees and expenses) of
Intellipharmaceutics and its affiliates, directly or indirectly related to, arising out of or resulting from:
Mallinckrodt contained herein,
(i) any breach or failure of or liability under any of the representations, warranties and covenants of
representatives,
(ii) actual or asserted violations of any applicable law by Mallinckrodt or any of its affiliates or
handling and storage of Product, and
(iii) Mallinckrodt’s, its affiliates’ and its representatives’ marketing, distribution, sale, offer for sale,
any manner in connection with performance hereunder.
(iv) any negligent or wrongful act or omission to act by Mallinckrodt or its affiliates or representatives in
(c) Unless and to the extent otherwise specifically provided herein, a party or any of its affiliates (the “Indemnitee”) that
intends to claim indemnification under this Section 10 with respect to any third party claim or action shall promptly notify the other party
(the “Indemnitor”) of any loss, claim, damage, or liability arising out of any third party claim or action in respect of which the Indemnitee
intends to claim such indemnification, and the Indemnitor shall assume the defense thereof with counsel of its own choosing; provided,
however, that an Indemnitee shall have the right to retain its own counsel, with the fees and expenses to be paid by the Indemnitor only if
representation of such Indemnitee by the counsel retained by the Indemnitor, in the opinion of an independent counsel chosen by both
parties, would be inappropriate due to actual or potential differing interests between such Indemnitee and any other party represented by
such counsel in such proceedings. An Indemnitee shall not be entitled to indemnification under
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this Section 10 if any settlement or compromise of a third party claim is effected by the Indemnitee without the consent of the Indemnitor,
which consent shall not be unreasonably withheld or delayed. An Indemnitee shall not be entitled to indemnification with respect to any
third party claim in an amount in excess of the amount which such third party has unequivocally, without other conditions and in writing
agreed with the Indemnitor it is willing to accept in settlement or compromise of any such third party claim. An Indemnitor shall not enter
into any settlement or compromise of any third party claim or consent to the entry of any judgment or other order with respect to any claim
which does not contain, as a part thereof, an unconditional release of the Indemnitee for liability for all loss, cost or damage that may arise
from such claim or which does contain any injunctive or other non-monetary relief that might in any way interfere with the future conduct
of business by the Indemnitee. The failure by the Indemnitee to deliver notice to the Indemnitor within a reasonable time after the
commencement of any such third party claim or action, if materially prejudicial to the Indemnitor’s ability to defend such action, shall
relieve such Indemnitor of any liability to the Indemnitee under this Section 10. An Indemnitee, and its employees, agents and
representatives, shall cooperate fully with the Indemnitor and its legal representatives, at the Indemnitor’s expense for out-of-pocket costs,
in the investigation of any action, claim or liability covered by this indemnification.
(d) In no event shall either party (or any of its affiliates) be liable for any special, indirect, consequential,
exemplary or punitive damages of any nature (including, without limitation, lost profits, business interruption, lost opportunities or loss of
goodwill) relating to its performance hereunder, regardless of whether such damages arise out of this Agreement or out of any form of
action arising in tort, strict liability or otherwise, and regardless of whether a party has been advised of the possibility of such damages and
whether or not such damages are reasonably foreseeable under the circumstances.
11. Termination and Expiration.
(a) In addition to any other rights a party may have to terminate set forth elsewhere in this Agreement (including, without
limitation, Mallinckrodt’s rights to terminate this Agreement pursuant to Section 1(c) above), this Agreement may be terminated by either
party, as to all or any one or more Products, effective upon notice (i) by reason of a material breach or breaches of this Agreement (other
than as provided in clauses (ii) or (iii) below) if the breaching party fails to remedy such breach or breaches within sixty (60) days after
written notice thereof by the non-breaching party, (ii) if the other party fails to make any payments of any kind as and when due hereunder
and such failure is not remedied within sixty (60) days after written notice thereof by the nonbreaking party (unless and to the extent there
exists a good faith dispute as to the amount of any such payment due), or (iii) upon the bankruptcy, insolvency, dissolution or winding up
the other party, except, in the case of a petition relative to any of the immediately foregoing filed involuntarily against a party if such
petition is dismissed within sixty (60) days of the date of its filing. Notwithstanding the immediately preceding portions of this Section
11(a), a party shall not be deemed to be in breach hereof if any acts or omissions to act that would otherwise constitute a breach hereunder
are the subject of a good faith dispute that is subject to resolution in accordance with internal procedures established herein unless and until
such internal procedures have been fully exhausted.
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(b) Unless and to the extent otherwise explicitly set forth herein, the expiration or termination of this Agreement for any
reason shall not relieve the parties of any obligation that accrued hereunder or under any agreement entered into in connection herewith
prior to such expiration or termination.
Mallinckrodt pursuant to Section 1(c) above, as to any one or more Products, the following shall apply:
(c) In the event that this Agreement expires or is rightfully terminated by either party pursuant to Section 11(a), or by
(i) Subject to clause (ii) of this Section 11(c) set forth below, Mallinckrodt, and any permitted
distributor or sub-licensee, shall cease the marketing, sale and distribution of any applicable Product(s) effective upon the
date of expiration or termination as to such Product(s) except that Mallinckrodt shall have one (1) year subsequent to the
effective date of any expiration or termination to sell or otherwise dispose of its inventory of such Product(s) on hand as of
the effective date of termination or expiration as well as the amount of any such Product(s) purchased by Mallinckrodt or
such permitted distributor or sub-licensee pursuant to purchase orders accepted by Intellipharmaceutics prior to the
effective date of termination or expiration (unless and to the extent the parties agree on the cancellation of any such
purchase orders),
(ii) Mallinckrodt shall, from and after the effective date of termination or expiration hereof, (A)
continue to perform all of its obligations as a distributor hereunder with respect to any sales of applicable Product(s) made
after the date of termination or expiration pursuant to clause (i) of this Section 11(c), (B) continue to perform its obligations
under any contracts or arrangements it has entered into with third parties relative to the supply or sale of Product(s) if and
to the extent any such contracts are not terminable on or before the effective date of termination or expiration without
penalty, (C) continue to honor all warranty or service obligations or any other standard commercial obligations (e.g.,
product returns, rebates, allowances, chargebacks, etc.) made by Mallinckrodt or anyone on Mallinckrodt’s behalf with
respect to Product(s) sold either before or after the effective date of termination or expiration, until the expiration of all
such warranties or other obligations, and (D) continue to fulfill all regulatory obligations under the quality and
pharmacovigilance agreement between the parties,
which this Agreement has been terminated or expired shall become due and payable within one hundred twenty (120) days
after the effective date of any termination or expiration, and
(iii) all amounts payable by one party to the other hereunder with respect to any Product as to
(iv) upon any termination of this Agreement with respect to any Product or Products, all rights in
such Product or Products shall revert forthwith and in full to Intellipharmaceutics, including all rights to license or sell such
Product or Products to third parties in the sole discretion of Intellipharmaceutics.
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(d) The provisions of this Agreement shall survive termination or expiration hereof in whole or in part, to the extent
necessary for them to be fully performed in accordance with their express terms or in accordance with the intent of the parties hereto.
12. Licenses.
(a) Mallinckrodt hereby grants to Intellipharmaceutics a non-exclusive license in and to Mallinckrodt’s trade names,
trademarks and trade dress for the sole purpose and only to the extent necessary for carrying out Intellipharmaceutics’ obligations to label
Product in a manner consistent with the requirements of Section 1(b) above. The foregoing license shall be co-extensive with this
Agreement and, therefore, will automatically terminate on the date of expiration or termination hereof, subject only to the requirements of
Section 11(c) above. The goodwill associated with the trade names, trademarks and trade dress licensed under this Section 12(a) shall
remain the property of and inure to the benefit of Mallinckrodt, and Intellipharmaceutics shall follow all of Mallinckrodt’s reasonable
directions concerning the use of such trade names, trademarks and trade dress and shall take no action or omit to take any action that might
disparage or otherwise damage the goodwill or any other value associated therewith.
(b) Intellipharmaceutics will grant to Mallinckrodt a non-exclusive license in and to the ANDA for each Product (as and
when granted by the FDA) for the sole purpose and only to the extent necessary for carrying out Mallinckrodt’s obligations hereunder to
market, sell and distribute Products in the Exclusive Market. The foregoing license shall be coextensive with this Agreement and, therefore,
will automatically terminate on the date of expiration or termination hereof, subject only to the requirements of Section 11(c) above.
13. Miscellaneous.
(a) Neither party shall be held liable or responsible to the other party nor be deemed to have defaulted under or breached
this Agreement for failure or delay in fulfilling or performing any term of this Agreement when such failure or delay is caused by or results
from causes beyond the reasonable control of the affected party, including but not limited to fire, floods, earthquakes, embargoes, war, acts
of war (whether war is declared or not), epidemics, insurrections, riots, civil commotions, the existence or administration of any laws, rules
or regulations, strikes, lockouts or other labor disturbances, acts of God or acts, omissions or delays in acting by any governmental
authority or the other party; provided, however, that the party so affected shall use reasonable commercial efforts to avoid or remove such
causes of nonperformance, and shall continue performance hereunder with reasonable dispatch whenever such causes are removed, and
provided further that such occurrence is not the result of any failure by such party to perform fully its obligations hereunder, which failure
is not itself caused by an event of force majeure. Each party shall provide the other party with prompt written notice of any delay or failure
to perform that occurs by reason of force majeure. The parties shall mutually seek a resolution of the delay or the failure to perform as
noted above.
(b) This Agreement may not be assigned or otherwise transferred by either party without the prior written consent of the
other party, except that either party may, without such consent, assign its rights and obligations under this Agreement (i) in connection with
a corporate reorganization to any affiliate or (ii) to an unrelated third party in connection with a
CSK/Intellipharmaceutics CommercializationAgr5
September 28, 2016
21
merger, consolidation or a sale of substantially all of its assets relating to the performance of its obligations hereunder. Any purported
assignment in violation of the preceding sentence shall be void. Any permitted assignee shall be deemed to have assumed all obligations of
its assignor under this Agreement.
(c) Should one or more provisions of this Agreement be or become invalid or unenforceable, the parties hereto shall
substitute, by mutual consent, valid and enforceable provisions for such invalid or unenforceable provisions which new provisions, in their
economic and other effects, are sufficiently similar to the invalid or unenforceable provisions that it can be reasonably assumed that the
parties would have originally entered into this Agreement with such new provisions. In case such new provisions cannot be agreed upon,
the invalidity or unenforceability of one or several provisions of this Agreement shall not affect the validity of this Agreement as a whole or
the validity of any portions hereof, unless the invalid or unenforceable provisions are of such essential importance to this Agreement that it
is to be reasonably assumed that the parties would not originally have entered into this Agreement without such invalid or unenforceable
provisions.
(d) Any consent, notice or report required or permitted to be given or made under this Agreement by one of the parties
hereto to the other shall be in writing, delivered personally or by facsimile (and promptly confirmed by telephone, personal delivery or
courier) or courier, postage prepaid (where applicable), addressed to such other party at its address indicated below, or to such other address
as the addressee shall have last furnished in writing to the addressor and shall be effective upon receipt by the addressee.
If to Intellipharmaceutics:
Intellipharmaceutics Corp.
30 Worcester Road,
Toronto, Ontario
Canada M9W 5X2
Attn: Dr. Amina Odidi, President
Telephone: (416) 798-3001 Ext. 103
Facsimile: (416) 798-3007
Email: aodidi@intellipharmaceutics.com
with a copy to:
Intellipharmaceutics Corp.
If to Mallinckrodt:
30 Worcester Road,
Toronto, Ontario
Canada M9W 5X2
Attn: Vice President, Legal Affairs & Licensing
Telephone: (416) 798-3001 Ext. 104
Facsimile: (416) 798-3007
Mallinckrodt LLC
675 McDonnell Boulevard
Hazelwood, Missouri 63042
Attn: George Kegler, Interim President Multisource
and VIP, Finance
Telephone: 314-654-6883
CSK/Intellipharmaceutics CommercializationAgr5
September 28, 2016
22
with a copy to:
Mallinckrodt LLC
325 McDonnell Boulevard
Hazelwood, Missouri 63042
Attn: Jerad G. Seurer, Vice President and Group
General Counsel
Telephone: (314) 654-3814
States of America, without giving effect to its conflict of laws provisions that might apply the law of another jurisdiction.
(e) This Agreement shall be governed by and construed in accordance with the laws of the State of New York, United
(f) Unless and to the extent there is already a dispute resolution mechanism provided herein with respect to any dispute or
controversy relative to one or more specific issues that is expressly applicable to such dispute or controversy, in the event of any dispute
between the parties, they will work in good faith to resolve any such dispute as soon as possible through discussion and negotiation
between appropriate members of their executive management. In the event that, within a reasonable period of time, not to exceed sixty (60)
days from and after the date when such dispute arises, they are unable to resolve any such dispute, each party submits to the exclusive
jurisdiction of any court sitting in the State of New York (but with preference for a United States federal court in the Southern District of
New York with appropriate subject matter jurisdiction), in any action or proceeding arising out of or relating to this Agreement. Each party
will waive any defense of inconvenient forum to the maintenance of any such action or proceeding and waives any bond, surety, or other
security that might be required of any other party with respect thereto. Each party will agree that a final judgment in any such action or
proceeding shall be conclusive and may be enforced anywhere in the world by suit on the judgment or in any other manner provided by law
or in equity. Notwithstanding the preceding portions of this subsection (f), including the immediately preceding sentence, neither party shall
not be precluded from filing a lawsuit or other action with a court of appropriate jurisdiction in New York at any time, for any legal or
equitable remedy (including injunctive relief), to redress any violation of Section 9 hereof.
(g) This Agreement, together with the exhibits and appendices hereto, contains the entire understanding of the parties with
respect to the subject matter hereof. All express or implied agreements and understandings, either oral or written, heretofore made are
expressly merged in and made a part of this Agreement. This Agreement may be amended, or any term hereof modified, only by a written
instrument duly executed by authorized representatives of both parties hereto.
labels to assist in locating and reading the several articles and sections hereof.
(h) The captions to the several articles and sections hereof are not a part of this Agreement, but are merely guides or
(i) The waiver by a party hereto of any right hereunder or the failure of a party to object on any occasion to a breach or
failure of performance by the other party shall not be deemed a waiver of a party’s other rights hereunder or its right, on any subsequent
occasion, to object to a breach by the other party of any terms hereof or to insist upon the performance by the other party of its obligations
hereunder.
CSK/Intellipharmaceutics CommercializationAgr5
September 28, 2016
23
which together shall constitute one and the same instrument.
(j) This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of
(k) This Agreement will not constitute or create any relationship of agency, partnership or joint venture between
Mallinckrodt and Intellipharmaceutics and neither Mallinckrodt nor Intellipharmaceutics will have power to incur any obligations on behalf
of or to pledge the credit of the other party in any manner whatsoever. No provision of this Agreement is intended or shall be construed to
benefit any third party.
(l) Each party acknowledges that: (i) it has had the opportunity to seek legal counsel with respect to the negotiation and
drafting of this Agreement, (ii) the terms of this Agreement are the result of arms’ length negotiations, and (iii) the terms of this Agreement
shall not be construed against either party as the drafter.
(m) Neither party will issue any press release or make any other public disclosure of the nature of or existence of this
Agreement without the prior written consent of the other party; provided that, either party may make such disclosure of the nature and
existence of this Agreement as its counsel shall determine, in the exercise of reasonable judgment, is legally required.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first set forth above.
INTELLIPHARMACEUTICS CORP.
By: /s/ Amina Odidi
MALLINCKRODT LLC
By: /s/ Matthew Harbaugh
CSK/Intellipharmaceutics CommercializationAgr5
September 28, 2016
24
Term
Agreement
ANDA
Annual Standard Cost Notice
Calculation Principles
Competing Product
Contract Year
Cost of Goods Sold
Defective Product
Effective Date
Exclusive Market
Facility
Indemnitee
Indemnitor
Information
Intellipharmaceutics
Mallinckrodt
Negative SKU Balance
Net Sales
Product One
Product SKU
Product Three
Product Two
Product, Products
Quarterly Aggregate Standard Margin Payments
Quarterly Report
Quarterly Standard Margin Payment
Standard Cost
Standard Cost Calculation
Standard Margin
Transfer Price
Location of Defined Terms
Location
Preamble
Section 1(b)
Section 6(d)
Section 6(d)
Section 8(b)(xi)
Section 2
Section 3(b)
Section 7(a)
Preamble
Section 1(a)
Section 5(a)
Section 10(c)
Section 10(c)
Section 9(a)
Preamble
Preamble
Section 3(b)
Section 3(b)
Section 1(a)
Section 3(b)
Section 1(a)
Section 1(a)
Section 1(a)
Section 3(b)
Section 3(d)
Section 3(b)
Section 6(d)
Section 4(a)
Section 3(b)
Section 6(a)
CSK/Intellipharmaceutics CommercializationAgr5
September 28, 2016
25
Schedule 1
Mallinckrodt Fiscal Quarter End Dates
JDE Period End
Dates
Period
3
6
9
12
Day
Friday
Friday
Friday
Friday
Calendar
2017
03/31/17
06/30/17
09/29/17
12/29/17
Calendar
2018
03/30/18
06/29/18
09/28/18
12/28/18
Calendar
2019
03/29/19
06/28/19
09/27/19
12/27/19
Leap Year
Calendar
2020
03/27/20
06/26/20
09/25/20
12/25/20
Calendar
2021
03/26/21
06/25/21
09/24/21
12/31/21
Calendar
2022
04/01/22
07/01/22
09/30/22
12/30/22
Calendar
2023
03/31/23
06/30/23
09/29/23
12/29/23
Leap Year
Calendar
2024
03/29/24
06/28/24
09/27/24
12/27/24
Calendar
2025
03/28/25
06/27/25
09/26/25
12/26/25
Calendar
2026
03/27/26
06/26/26
09/25/26
12/25/26
53weeks
EXHIBIT A
Products Specifications
[*]
[Redacted in its entirety—1 page omitted]
*Omitted and filed separately with the Securities and Exchange Commission under a request for confidential treatment.
EXHIBIT B
Quality Agreement
[*]
[Redacted in its entirety—32 pages omitted]
*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.
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
Exhibit 12.1
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 27, 2017
By:
/s/ Isa Odidi
Isa Odidi
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
INTELLIPHARMACEUTICS INTERNATIONAL INC.
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
Exhibit 12.2
I, Domenic Della Penna, 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 27, 2017
By:
/s/ Domenic Della Penna
Domenic Della Penna
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, 2016 (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)
(2)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
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 27, 2017
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, 2016 (the “Report”), I, Domenic Della Penna, 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)
(2)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of
the Company.
By: /s/ Domenic Della Penna
Domenic Della Penna
Chief Financial Officer
(Principal Financial Officer)
Date: February 27, 2017
Exhibit 15.1
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in Registration Statement No.(s). 333-172796 and 333-196112 on Form F-3 of our auditors’
report dated February 9, 2017, relating to the 2016 consolidated financial statements of Intellipharmaceutics International Inc. and its
subsidiaries (the “Company) (which 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 this Annual Report on Form 20-F
for the year ended November 30, 2016.
/s/ MNP LLP
Chartered Professional Accountants
Licensed Public Accountants
February 27, 2017
Toronto, Canada
Exhibit 15.2
Deloitte LLP
Bay Adelaide East
22 Adelaide Street West
Suite 200
Toronto ON M5H 0A9
Canada
Tel: 416-601-6150
Fax: 416-601-6610
www.deloitte.ca
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in Registration Statement No(s). 333-172796 and 333-196112 on Form F-3 of our report
dated February 26, 2016, relating to the 2015 consolidated financial statements of Intellipharmaceutics International Inc. and subsidiaries
(the “Company”) for the years ended November 30, 2015 and 2014 (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 this Annual Report on Form 20-F for the year ended November 30, 2016.
/s/ Deloitte LLP
Chartered Professional Accountants
Licensed Public Accountants
February 27, 2017
Toronto, Canada
Exhibit 16.1
Deloitte LLP
Bay Adelaide East
22 Adelaide Street West
Suite 200
Toronto ON M5H 0A9
Canada
Tel: 416-601-6150
Fax: 416-601-6610
www.deloitte.ca
February 27, 2017
Private and confidential
Securities and Exchange Commission
100 F Street, N.E.
Washington, DC
U.S.A. 20549
We have read the Intellipharmaceutics International Inc.’s statements included under Item 16F of its annual report on Form 20-F for the
year ended November 30, 2016 and agree with such statements, except that we have no basis on which to agree or disagree with the
statements that the newly engaged auditors (a) were approved by the Audit Committee and the Board of Directors of the Company and (b)
were not consulted regarding any of the matters or events set forth in the fifth paragraph therein.
Yours truly,
/s/ Deloitte LLP
Chartered Professional Accountants
Licensed Public Accountants