UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20547
FORM 20-F
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT
OF 1934
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended November 30, 2017
OR
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 ________
[_]
[X]
[_]
[_]
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)
Andrew Patient, 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, 2017, the registrant had 34,704,515 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.
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 [_] No [X]
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, a non-accelerated filer or an
emerging growth company. See definition of “large accelerated filer”, “accelerated filer” and “emerging growth company” in Rule 12b-2 of
the Exchange Act. (Check one):
Large accelerated filer [_] Accelerated filer [_] Non-accelerated filer [X] Emerging growth company [_]
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if
the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards†
provided pursuant to Section 13(a) of the Exchange Act. [_]
† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards
Board to its Accounting Standards Codification after April 5, 2012.
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 theInternational Accounting
Standards Board [_]
Other [_]
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the
registrant has elected to follow:
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Item 17 [_] Item 18 [_]
Yes [_] No [X]
PART I
Item 1.
Identity of Directors, Senior Management and Advisers
TABLE OF CONTENTS
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
Item 4A. Unresolved Staff Comments
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.
Item 10. Additional Information
The Offer and Listing
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
i
3
3
3
3
3
3
3
3
3
3
4
4
4
31
31
31
51
52
53
53
53
58
61
61
62
62
63
63
63
64
74
79
79
88
88
89
89
89
90
90
91
91
96
97
98
99
107
108
108
108
108
110
A. Debt Securities
B. Warrants and Rights
C. Other Securities
D. American Depositary Shares
PART II
Controls and Procedures
[Reserved]
Item 13. Defaults, Dividend Arrearages and delinquencies
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
Item 15.
Item 16.
Item 16A. Audit Committee Financial Expert
Item 16B. Code of Ethics
Item 16C. Principal Accountant Fees and Services
Item 16D. Exemptions from the Listing Standards for Audit Committees
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Item 16F. Change in registrant’s Certifying Accountant
Item 16G. Corporate Governance
Item 16H. Mine Safety Disclosure
PART III
Item 17.
Item 18.
Item 19.
Financial Statements
Financial Statements
Exhibits
ii
110
110
110
110
110
110
110
111
112
112
112
112
113
113
113
113
114
114
114
114
115
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, and 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 “appear”, “unlikely”, “target”,
“may”, “will”, “should”, “expects”, “plans”, “plans to”, “anticipates”, “believes”, “estimates”, “predicts”, “confident”, “prospects”,
“potential”, “continue”, “intends”, “look forward”, “could”, “would”, “projected”, “set to”, “seeking” 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
estimated proceeds (and the expected use of any proceeds) we may receive from any offering of our securities, the potential dilutive effects
of any future financing, potential liability from and costs of defending pending or future litigation, our ability to maintain compliance with
the continued listing requirements of the principal markets on which our securities are traded including risks or uncertainties related to our
ability to implement and execute a plan to regain compliance with the Nasdaq Stock Market LLC (“Nasdaq”) continued listing standards,
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, the timing and amount of profit-share payments from our commercial partners, and the timing and
amount of any available investment tax credits, 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, recent and future legal developments in the United States and elsewhere that could make it
more difficult and costly for us to obtain regulatory approvals for our product candidates and negatively affect the prices we may charge,
increased public awareness and government scrutiny of the problems associated with the potential for abuse of opioid based medications,
pursuing growth through international operations could strain our resources, our limited manufacturing, sales, marketing or distribution
capability and our reliance on third parties for such, 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/or
commercial partners with the ability to fund patent litigation and with acceptable product 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 commercial partners, 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 in product approvals 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
number of competitive product entries, and the nature and extent of any aggressive pricing and rebate activities that may follow, the
inability to forecast wholesaler demand and/or wholesaler buying patterns, seasonal fluctuations in the number of prescriptions written for
our generic Focalin XR® (dexmethylphenidate hydrochloride extended-release) capsules, and our generic Seroquel XR® (quetiapine
fumarate extended-release) tablets, which may produce substantial fluctuations in revenue, the timing and amount of insurance
reimbursement regarding our products, 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 effect of recently-enacted changes in U.S. federal
income tax laws, including but not limited to, limitations on the deductibility of business interest, limitations on the use of net operating
losses and application of the base erosion minimum tax, on our U.S. corporate income tax burden, our ability to retain and hire qualified
employees, the availability and pricing of third-party
1
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, potential product liability risks, the recoverability of the cost of any pre-launch inventory, should a planned
product launch encounter a denial or delay of approval by regulatory bodies, a delay in commercialization, or other potential issues, the
successful compliance with FDA, Health Canada and other governmental regulations applicable to us and our third party manufacturers’
facilities, products and/or businesses, our reliance on commercial partners, and any future commercial partners, to market and
commercialize our products and, if approved, our product candidates, 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 our oxycodone hydrochloride extended release tablets (previously referred to as Rexista™)
(“Oxycodone ER”) product candidate, in particular, if a patent infringement suit is filed against us with respect to any particular product
candidates (such as in the case of Oxycodone ER), which could delay the FDA’s final approval of such product candidates, healthcare
reform measures that 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 and targeting common forms of abuse (oral,
intra-nasal and intravenous), risks associated with cyber-security and the potential for vulnerability of our digital information or the digital
information of a current and/or future drug development or commercialization partner of ours, 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 and 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 our actual operating results.
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) and future products we may develop, no
assurances can be given that we, or any of our strategic partners, will successfully commercialize or 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.
Intellipharmaceutics™, Hypermatrix™, Drug Delivery Engine™, IntelliFoam™, IntelliGITransporter™, 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.
2
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, 2017, 2016, 2015, 2014, and 2013. 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 year
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, 2017
$
5,504
(8,857)
7,397
7,010
386
35,290
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)
21,481
(0.29)
Nil
31,014
(0.38)
Nil
26,700
(0.31)
Nil
23,768
3
As at and
for the
year
ended
November
30, 2014
$
8,770
(3,856)
7,875
2,966
4,909
18,941
(0.17)
Nil
23,051
As at and
for the
year
ended
November
30, 2013
$
1,527
(11,495)
4,380
10,335
(5,955)
11,721
(0.58)
Nil
19,671
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 2013, 2014, 2015, 2016 and 2017. The average rate is calculated using the average of the exchange rates on the last day of each
month during the period.
2013
2014
2015
2016
2017
AVERAGE
1.0241
0.9115
0.7934
0.7532
0.7598
The following table sets forth the high and low exchange rates for each month during the previous six months.
August 2017
September 2017
October 2017
November 2017
December 2017
January 2018
February 2018 (through February 27, 2018)
LOW
0.7840
0.8013
0.7756
0.7759
0.7760
0.7978
0.7849
HIGH
0.8012
0.8245
0.8018
0.7885
0.7971
0.8135
0.8138
The exchange rates are based upon the noon buying rate as quoted by The Bank of Canada. At February 27, 2018, 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
$0.7849.
B. Capitalization and Indebtedness
Not applicable.
C. Reasons for the Offer and Use of Proceeds
Not applicable.
D. Risk Factors
Prospects for companies in the pharmaceutical industry generally may be regarded as uncertain given the research and
development nature of the industry and uncertainty regarding the prospects of successfully commercializing product candidates and,
accordingly, investments in companies such as ours should be regarded as very speculative. An investor should carefully consider the risks
and uncertainties described below, as well as other information contained in this annual report. The list of risks and uncertainties described
below is not an exhaustive list. Additional risks and uncertainties not presently known to us or that we believe to be immaterial may also
adversely affect our business. If any one or more of the following risks occur, our business, financial condition and results of operations
could be seriously harmed. Further, if we fail to meet the expectations of the public market in any given period, the market price of our
common shares could decline. If any of the following risks actually occurs, our business, operating results, or financial condition could be
materially adversely affected.
Our activities entail significant risks. In addition to the usual risks associated with a business, the following is a general
description of certain significant risk factors which may be applicable to us.
4
Risks related to our Company
Our business is capital intensive and requires significant investment to conduct research and development, clinical and regulatory
activities necessary to bring our products to market, which capital may not be available in amounts or on terms acceptable to us, if
at all.
Our business requires substantial capital investment in order to conduct the R&D, clinical and regulatory activities necessary and
to defend against patent litigation claims in order to bring our products to market and to establish commercial manufacturing, marketing and
sales capabilities. As of November 30, 2017, we had a cash balance of $1.9 million. As of February 15, 2018 (the date of filing of the
Company’s Management Discussion and Analysis of Financial Condition and Results of Operations and Audited Annual Financial
Statements for the year ended November 30, 2017), our cash balance was $0.6 million. We currently expect to satisfy our operating cash
requirements until June 2018 from cash on hand and quarterly profit share payments from Par Pharmaceutical, Inc., or Par, and
Mallinckrodt LLC, or Mallinckrodt. We may need to obtain additional funding prior to that time as we further the development of our
product candidates and if we accelerate our product commercialization activities. Other potential sources of capital may include payments
from licensing agreements, cost savings associated with managing operating expense levels, and/or new strategic partnership agreements
which fund some or all costs of product development. If necessary, and conditions permit, we may utilize the equity markets to bridge any
funding shortfall and to provide capital to continue to advance our most promising product candidates. Our future operations are highly
dependent upon our ability to source additional capital to support advancing our product pipeline through continued R&D activities and to
fund any significant expansion of our operations. 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 Oxycodone ER 505(b)(2), and selected generic, product candidate development projects. Our
development of Oxycodone ER will require significant expenditures, including costs to defend against the Purdue litigation. For our
RegabatinTM 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 strategy. We anticipate some investment in fixed assets and equipment over the
next several months, the extent of which will depend on cash availability.
The availability of equity or debt financing will be affected by, among other things, the results of our R&D, our ability to obtain
regulatory approvals, our success in commercializing approved products with our commercial 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 R&D, legal and consulting expenditures to advance our product pipeline and selling,
general and administrative expenses to support our commercialization efforts. Depending upon the results of our R&D programs, the
Purdue litigation (as defined below) 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 successfully commercialize approved products or 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 us not taking advantage of business
opportunities, in the termination or delay of clinical trials or us 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.
5
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.
6
We have a history of operating losses, which may continue in the foreseeable future.
We have incurred net losses from inception through November 30, 2017 and had an accumulated deficit of $71,873,459 as of such
date, and have incurred additional losses since such date. As we engage in the development of products in our pipeline, we may 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 how many of 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 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.
7
We are a defendant in purported securities class-action litigation matter and are at risk of additional similar litigation in the future
that could divert management’s attention and adversely affect our business and could subject us to significant liabilities.
We are a defendant in a purported securities class action litigation matter as described under Item 8.A below. The defense of such
litigation matters may increase our expenses and divert our management’s attention and resources and any unfavorable outcome could have
a material adverse effect on our business and results of operations. Any adverse determination in such litigation matters, or any amounts
paid to settle such litigation matters could require that we make significant payments. In addition, we may in the future be the target of
other securities class actions or similar litigation. See Item 8.A below.
We rely on maintaining as trade secrets our competitively sensitive know-how and other information. Intentional or unintentional
disclosure of this information could impair our competitive position.
As to many technical aspects of our business, we have concluded that competitively sensitive information is either not patentable
or that for competitive reasons it is not commercially advantageous to seek patent protection. In these circumstances, we seek to protect this
know-how and other proprietary information by maintaining it in confidence as a trade secret. To maintain the confidentiality of our trade
secrets, we generally enter into agreements that contain confidentiality provisions with our employees, consultants, collaborators, contract
manufacturers and advisors upon commencement of their relationships with us. These provisions generally require that all confidential
information developed by the individual or made known to the individual by us during the course of the individual’s relationship with us be
kept confidential and not disclosed to third parties. We may not have these arrangements in place in all circumstances, and the
confidentiality provisions in our favour may be breached. We may not become aware of, or have adequate remedies in the event of, any
such breach. In addition, in some situations, the confidentiality provisions in our favour may conflict with, or be subject to, the rights of
third parties with whom our employees, consultants, collaborators, contract manufacturers or advisors have previous employment or
consulting relationships. To the extent that our employees, consultants, collaborators, contract manufacturers or advisors use trade secrets
or know-how owned by others in their work for us, disputes may arise as to the ownership of relative inventions. Also, others may
independently develop substantially equivalent trade secrets, processes and know-how, and competitors may be able to use this information
to develop products that compete with our products, which could adversely impact our business. The disclosure of our trade secrets could
impair our competitive position. Adequate remedies may not exist in the event of unauthorized use or disclosure of our confidential
information.
Approvals for our product candidates may be delayed or become more difficult to obtain if the FDA institutes changes to its
approval requirements.
The FDA may institute changes to its ANDA approval requirements, which may make it more difficult or expensive for us to
obtain approval for our new generic products. For instance, in July 2012, the Generic Drug Fee User Amendments of 2012 (“GDUFA”)
were enacted into law. The GDUFA legislation implemented substantial fees for new ANDAs, Drug Master Files, product and
establishment fees and a one-time fee for back-logged ANDAs pending approval as of October 1, 2012. 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. Effective October 1, 2017, for the FDA’s fiscal year 2018, the FDA will charge an
annual facility user fee of $226,087 plus a new general program fee of $159,079. 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.
8
Recent and future legal developments could make it more difficult and costly for us to obtain regulatory approvals for our product
candidates and negatively affect the prices we may charge.
In the United States and elsewhere, recent and proposed legal and regulatory changes to healthcare systems could prevent or delay
our receipt of regulatory approval for our product candidates, restrict or regulate our post-approval marketing activities, and adversely
affect our ability to profitably sell our products. We do not know whether additional legislative changes will be enacted, or whether the
FDA’s regulations, guidance or interpretations will be changed, or what impact any such changes will have, if any, on our ability to obtain
regulatory approvals for our product candidates. Further, the U.S. Centers for Medicare and Medicaid Services, or CMS, frequently
changes product descriptors, coverage policies, product and service codes, payment methodologies and reimbursement values. Also,
increased scrutiny by the U.S. Congress of the FDA’s approval process could significantly delay or prevent our receipt of regulatory
approval for our product candidates and subject us to more stringent product labeling and post-marketing testing and other requirements.
In addition, the current U.S. White House administration has expressed concerns regarding existing trade agreements, such as
North American Free Trade Agreement (NAFTA), and raised the possibility of imposing significant increases on tariffs on goods imported
into the United States, which could adversely impact our sale of products into the United States.
We operate in a highly litigious environment.
From time to time, we may be exposed to claims and legal actions in the normal course of business. 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 below and 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.
In November 2016, we filed an NDA for our Oxycodone ER product candidate, relying on the 505(b)(2) regulatory pathway,
which allowed us to reference data from Purdue Pharma L.P.’s file for its OxyContin ® extended release oxycodone hydrochloride. Our
Oxycodone ER application was accepted by the FDA for further review in February 2017. We certified to the FDA that we believed that
our Oxycodone ER product candidate would not infringe any of the sixteen (16) patents associated with the branded product OxyContin®,
or the OxyContin® patents, listed in the FDA’s Approved Drug Products with Therapeutic Equivalence Evaluations, commonly known as
the Orange Book, or the Orange Book, or that such patents are invalid, and so notified Purdue Pharma L.P. and the other owners of the
subject patents listed in the Orange Book of such certification. On April 7, 2017, we received notice that Purdue Pharma L.P., Purdue
Pharmaceuticals L.P., The P.F. Laboratories, Inc., or collectively the Purdue parties, Rhodes Technologies, and Grünenthal GmbH, or
collectively the Purdue litigation plaintiffs or plaintiffs, had commenced patent infringement proceedings, or the Purdue litigation, against
us in the U.S. District Court for the District of Delaware in respect of our NDA filing for Oxycodone ER, alleging that Oxycodone ER
infringes six (6) out of the sixteen (16) patents. The complaint seeks injunctive relief as well as attorneys’ fees and costs and such other and
further relief as the Court may deem just and proper. An answer and counterclaim have been filed.
9
As a result of the commencement of these legal proceedings, the FDA is stayed for 30 months from granting final approval to our
Oxycodone ER product candidate. That time period commenced on February 24, 2017, when the Purdue litigation plaintiffs received notice
of our certification concerning the patents, and will expire on August 24, 2019, unless the stay is earlier terminated by a final declaration of
the courts that the patents are invalid, or are not infringed, or the matter is otherwise settled among the parties. A trial date for the Purdue
litigation has been set for October 22, 2018. We are confident that we do not infringe the subject patents, and will vigorously defend
against these claims.
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.
In July 2017, three complaints were filed in the U.S. District Court for the Southern District of New York asserting claims under
the federal securities laws against us and two of our executive officers on behalf of a putative class of purchasers of our securities (the
“S.D.N.Y. Action ”). In a subsequent order, the Court consolidated the three actions under the caption Shanawaz v. Intellipharmaceutics
Int’l Inc., et al., No. 1:17-cv-05761 (S.D.N.Y.), appointed lead plaintiffs in the consolidated action, and approved lead plaintiffs’ selection
of counsel. Lead plaintiffs filed a consolidated amended complaint on January 29, 2018. In the amended complaint, lead plaintiffs purport
to assert claims on behalf of a putative class consisting of purchasers of our securities between May 21, 2015 and July 26, 2017. The
amended complaint alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended
(“U.S. Exchange Act”) and Rule 10b-5 promulgated thereunder by making allegedly false and misleading statements or failing to disclose
certain information regarding our NDA for Oxycodone ER abuse-deterrent oxycodone hydrochloride extended release tablets. The
complaint seeks, among other remedies, unspecified damages, attorneys’ fees and other costs, equitable and/or injunctive relief, and such
other relief as the court may find just and proper. Under a scheduling order approved by the Court, the defendants must respond to the
amended complaint by March 30, 2018. We intend to vigorously defend our company against the claims asserted in the consolidated action.
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;
10
● 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;
● difficulties may be encountered in the manufacture and/or packaging of our products;
● once manufactured, our products may not meet prescribed quality assurance and stability tests;
● manufacturing costs, pricing or reimbursement issues, other competitive therapeutics, or other commercial factors may make
the product uneconomical; and
● the proprietary rights of others, and their competing products and technologies, may prevent the product from being developed
or commercialized.
Further, success in preclinical and early clinical trials does not ensure that large-scale clinical trials will be successful, nor does
success in preliminary studies for ANDA candidates ensure that bioequivalence studies will be successful. Results are frequently
susceptible to varying interpretations that may delay, limit or prevent regulatory approvals. The length of time necessary to complete
bioequivalence studies or clinical trials and to submit an application for marketing approval for a final decision by a regulatory authority
varies significantly and may be difficult to predict.
As a result, there can be no assurance that any of our product candidates currently in development will ever be successfully
commercialized.
Near-term revenue depends significantly on the success of our first commercialized product, our once daily generic Focalin XR®
(dexmethylphenidate hydrochloride extended-release), and our second commercialized product, generic Seroquel XR® (quetiapine
fumarate extended release).
We have invested significant time and effort in the development of our first ANDA product, our once daily generic Focalin XR ®
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., and in May 2017, Par launched
the 10 and 20 mg strengths, complementing the 15 and 30 mg strengths of our generic Focalin XR® marketed by Par. The FDA 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 had 180 days of U.S. generic marketing
exclusivity for those strengths. In November 2017, Par launched the remaining 5 and 40 mg strengths of generic Focalin XR®,
complementing the 10, 15, 20, 25, 30 and 35 mg strengths previously launched and marketed by Par and providing us with the full line of
general Focalin XR® strengths available in the U.S. market. Under a license and commercialization agreement between us and Par (as
amended, the “Par agreement”), we receive calendar quarterly profit-share payments on Par’s U.S. sales of generic Focalin XR ®. There
can be no assurance whether any strengths will be successfully commercialized. We depend significantly on the actions of our marketing
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 calendar quarterly payments as they come due.
11
We have also invested significant time and effort in the development of our second ANDA product, our generic Seroquel XR ® tablets in
the 50, 150, 200, 300 and 400 mg strengths, and in May 2017 our ANDA received final FDA approval for all of these strengths. Our
approved product is a generic equivalent for the corresponding strengths of the branded product Seroquel XR® sold in the U.S. by
AstraZeneca. The Company manufactured and shipped commercial quantities of all strengths of generic Seroquel XR® to our marketing
and distribution partner Mallinckrodt, and Mallinckrodt launched all strengths in June 2017. In October 2016, we announced 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”) which have either been launched (generic Seroquel XR®) or
for which we have ANDAs filed with the FDA (the “Mallinckrodt agreement”):
● Quetiapine fumarate extended-release tablets (generic Seroquel XR®) – Approved by FDA and launched
● 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 that are payable on future sales of licensed product). 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 whether any strengths of our generic Seroquel XR® will be successfully commercialized. We depend significantly on the actions
of our marketing partner Mallinckrodt in the commercialization of our generic Seroquel XR® tablets and on their timely payment to us of
the contracted 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 and the branded Seroquel XR ® product are in the market. Although we have several other
products in our pipeline, and received final approval from the FDA for our generic Keppra XR ® (levetiracetam extended-release tablets) for
the 500 and 750 mg strengths and final approval from the FDA for our metformin hydrochloride extend release tablets in the 500 and 750
mg strengths, 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 approved by the FDA. We are also actively
evaluating options to realize commercial returns from the 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.
12
We may not have the ability to develop or license, or otherwise acquire, and introduce new products on a timely basis.
Product development is inherently risky, especially for new drugs for which safety and efficacy have not been established and the
market is not yet proven. Likewise, product licensing involves inherent risks including uncertainties due to matters that may affect the
achievement of milestones, as well as the possibility of contractual disagreements with regard to terms such as license scope or termination
rights. The development and commercialization process, particularly with regard to new drugs, also requires substantial time, effort and
financial resources. The process of obtaining FDA or other regulatory approval to manufacture and market new and generic pharmaceutical
products is rigorous, time consuming, costly and largely unpredictable. We, or a partner, may not be successful in obtaining FDA or other
required regulatory approval or in commercializing any of the product candidates that we are developing or licensing.
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 and generic Seroquel XR® tablets 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 in relation to generic Focalin XR® capsules (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.
13
We have limited manufacturing, sales, marketing or distribution capability and we must rely upon third parties for such.
While we have built our own manufacturing facility onsite in Toronto, we depend on third-party manufacturers to supply
pharmaceutical ingredients and will be reliant on a third-party manufacturer to produce certain of our products and product candidates.
Third-party manufacturers must be able to meet our deadlines, as well as adhere to quality standards and specifications. Our reliance on
third parties for the manufacture of pharmaceutical ingredients and finished products creates a dependency that could severely disrupt our
research and development, our clinical testing, and ultimately our sales and marketing efforts if the source of such supply proves to be
unreliable or unavailable. If our own manufacturing operation or any contracted manufacturing operation is unreliable or unavailable, we
may not be able to move forward and our entire business plan could fail. There is no assurance that our own manufacturing operation or
any third-party manufacturers will be able to meet commercialized scale production requirements in a timely manner or in accordance with
applicable standards or current cGMP.
If our manufacturing facility is unable to manufacture our product(s) or the manufacturing process is interrupted due to failure to
comply with regulations or for other reasons, it could have a material adverse impact on our business.
If our manufacturing facility fails to comply with regulatory requirements or encounter other manufacturing difficulties, it could
adversely affect our ability to supply products. All facilities and manufacturing processes used for the manufacture of pharmaceutical
products are subject to inspection by regulatory agencies at any time and must be operated in conformity with cGMP regulations.
Compliance with FDA and Health Canada cGMP requirements applies to both drug products seeking regulatory approval and to approved
drug products. In complying with cGMP requirements, pharmaceutical manufacturing facilities must continually expend significant time,
money and effort in production, record-keeping and quality assurance and control so that their products meet applicable specifications and
other requirements for product safety, efficacy and quality. Failure to comply with applicable legal requirements subjects our
manufacturing facility to possible legal or regulatory action, including shutdown, which may adversely affect our ability to manufacture
product. Were we not able to manufacture products at our manufacturing facility because of regulatory, business or any other reasons, the
manufacture and marketing of these products would be interrupted. This could have a material adverse impact on our business, results of
operations, financial condition, cash flows and competitive position.
The use of legal and regulatory strategies by competitors with innovator products, including the filing of citizen petitions, may
delay or prevent the introduction or approval of our product candidates, increase our costs associated with the introduction or
marketing of our products, or significantly reduce the profit potential of our product candidates.
Companies with innovator drugs often pursue strategies that may serve to prevent or delay competition from alternatives to their
innovator products. These strategies include, but are not limited to:
● filing “citizen petitions” with the FDA that may delay competition by causing delays of our product approvals;
● seeking to establish regulatory and legal obstacles that would make it more difficult to demonstrate a product’s bioequivalence
or “sameness” to the related innovator product;
● filing suits for patent infringement that automatically delay FDA approval of products seeking approval based on the Section
505(b)(2) pathway;
● obtaining extensions of market exclusivity by conducting clinical trials of innovator drugs in pediatric populations or by other
methods;
● persuading the FDA to withdraw the approval of innovator drugs for which the patents are about to expire, thus allowing the
innovator company to develop and launch new patented products serving as substitutes for the withdrawn products;
14
● seeking to obtain new patents on drugs for which patent protection is about to expire; and
● initiating legislative and administrative efforts in various states to limit the substitution of innovator products by pharmacies.
These strategies could delay, reduce or eliminate our entry into the market and our ability to generate revenues from our products
and product candidates.
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 number of competitive product entries, and the nature and extent of any aggressive pricing and rebate activities that may
follow;
● the timing of our market entry;
● the ability to market our products effectively at the retail level; and
● the acceptance of our products by government and private formularies.
Some of these factors are not within our control, and our proposed products may not achieve levels of market acceptance
anticipated by us. Additionally, continuing and increasingly sophisticated studies of the proper utilization, safety and efficacy of
pharmaceutical products are being conducted by the industry, government agencies and others which can call into question the utilization,
safety and efficacy of our products and any product candidates we are currently developing or may develop in the future. These studies
could also impact a future product after it has been marketed. In some cases, studies have resulted, and may in the future result, in the
discontinuance of product marketing or requirement of other risk management programs such as the need for a patient registry. The failure
of our products and any of our product candidates, once approved, to achieve market acceptance would limit our ability to generate revenue
and would adversely affect our results of operations.
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.
15
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 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
16
may require us to perform additional clinical trials before approving our marketing applications. There can be no assurance that, upon
inspection, the FDA will determine that any of our clinical trials comply with good clinical practices. In addition, our clinical trials must be
conducted with product manufactured under the FDA’s current Good Manufacturing Practices (“cGMP”) regulations. Our failure, or the
failure of our contract manufacturers, if any are involved in the process, to comply with these regulations may require us to repeat clinical
trials, which would delay the regulatory approval process.
If third parties do not successfully carry out their duties under their agreements with us; if the quality or accuracy of the data they
obtain is compromised due to failure to adhere to our clinical protocols or regulatory requirements; or if they otherwise fail to comply with
clinical trial protocols or meet expected deadlines, our clinical trials may not meet regulatory requirements. If our clinical trials do not meet
regulatory requirements or if these third parties need to be replaced, such clinical trials may be extended, delayed, suspended or terminated.
If any of these events occur, we may not be able to obtain regulatory approval of our product candidates, which could have a material
adverse effect on our results of operations, financial condition and growth prospects.
Competition in our industry is intense, and developments by other companies could render our products and product candidates
obsolete.
Many of our competitors, including medical technology, pharmaceutical or biotechnology and other companies, universities,
government agencies, or research organizations, have substantially greater financial and technical resources and production and marketing
capabilities than we have. They also may have greater experience in conducting bioequivalence studies, preclinical testing and clinical
trials of pharmaceutical products, obtaining FDA and other regulatory approvals, and ultimately commercializing any approved products.
Therefore, our competitors may succeed in developing and commercializing technologies and products that are more effective than the
drug delivery technologies we have developed or we are developing or that will cause our technologies or products to become obsolete or
non-competitive, and in obtaining FDA approval for products faster than we could. These developments could render our products obsolete
and uncompetitive, which would have a material adverse effect on our business, financial condition and results of operations. Even if we
commence further commercial sales of our products, we will be competing against the greater manufacturing efficiency and marketing
capabilities of our competitors, areas in which we have limited or no experience.
We rely on collaborative arrangements with third parties that provide manufacturing and/or marketing support for some or all of
our products and product candidates. Even if we find a potential partner, we may not be able to negotiate an arrangement on favourable
terms or achieve results that we consider satisfactory. In addition, such arrangements can be terminated under certain conditions and do not
assure a product’s success. We also face intense competition for collaboration arrangements with other pharmaceutical and biotechnology
companies.
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.
17
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.
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.
18
We rely on commercial partners, and may rely on future commercial partners, to market and commercialize our products and, if
approved, our product candidates, and one or more of those commercial partners may fail to develop and effectively commercialize
our current, and any future, products.
Our core competency and strategic focus is on drug development and we now, and may in the future, utilize strategic commercial
partners to assist in the commercialization of our products and our product candidates, if approved by the FDA. If we enter into strategic
partnerships or similar arrangements, we will rely on third parties for financial resources and for commercialization, sales and marketing.
Our commercial partners may fail to develop or effectively commercialize our current, and any future products, for a variety of reasons,
including, among others, because they may face intense competition, they lack adequate financial or other resources or they decide to focus
on other initiatives or priorities. Any failure of our third-party commercial partners to successfully market and commercialize our products
and product candidates would diminish our revenues.
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 16.7% of our issued and outstanding common shares as of February 27, 2018 (and collectively beneficially owned
in the aggregate approximately 25.6% 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.
The effect of U.S. federal income tax law changes enacted in 2017 on the U.S. corporate income tax burden on our future U.S.
operations cannot be predicted. Although such legislation reduced the maximum corporate income tax rate from 35% to 21%, it also
introduced several changes that could increase our effective rate of tax on our net operating income. For example, if our operations are
highly leveraged, the new limitations on business interest deductions may prevent us from being able to reduce our corporate income tax
base by a significant amount of interest incurred on debt necessary to fund operations. In addition, newly enacted limitations on a
corporation’s ability to reduce its taxable income
19
by net operating loss carryovers may prevent us from using prior year accumulated losses fully to offset taxable income earned in
profitable years. Finally, if we make significant payments for interest, royalties, services and otherwise deductible items to our foreign
affiliates, the base erosion minimum tax enacted last year may apply to increase our effective rate of U.S. corporate income tax.
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 Oxycodone ER product candidate, 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 Oxycodone ER, 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.
20
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 the FDA, Drug Enforcement Administration, Federal Trade
Commission, Consumer Product Safety Commission and Environmental Protection Agency in the United States, 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.
There has been an increased public awareness of the problems associated with the potential for abuse of opioid-based medications.
There has been 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 Oxycodone ER and related opioid product candidates.
21
Federal, state and local governmental agencies have increased their level of scrutiny of commercial practices of companies
marketing and distributing opioid products, resulting in investigations, litigation and regulatory intervention affecting other companies. A
number of counties and municipalities have filed lawsuits against pharmaceutical wholesale distributors, pharmaceutical manufacturers and
retail chains related to the distribution of prescription opioid pain medications. Policy makers and regulators are seeking to reduce the
impact of opioid abuse on families and communities and are focusing on policies aimed at reversing the potential for abuse. In furtherance
of those efforts, the FDA has developed an Action Plan and has committed to enhance safety labeling, require new data, strengthen post-
market requirements, update the REMS program, expand access to and encourage the development of abuse-deterrent formulations and
alternative treatments, and re-examine the risk-benefit profile of opioids to consider the wider public health effects of opioids, including the
risk of misuse. Several states also have passed laws and have employed other clinical and public health strategies to curb prescription drug
abuse, including prescription limitations, increased physician education requirements, enhanced monitoring programs, tighter restrictions on
access, and greater oversight of pain clinics. This increasing scrutiny and related governmental and private actions, even if not related to a
product that we intend to make, could have an unfavorable impact on the overall market for opioid-based products such as our Oxycodone
ER product candidate, or otherwise negatively affect our business.
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 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.
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 Oxycodone ER product candidate and its abuse-deterrent features will be determined by
FDA-approved labeling requirements.
The commercial success of our Oxycodone ER product candidate 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.
22
Although we intend to provide data to the FDA to support approval of abuse-deterrence label claims for Oxycodone ER, there can
be no assurance that Oxycodone ER 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 Oxycodone ER 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 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;
23
● 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.
In the event we pursue growth through international operations, such growth could strain our resources, and if we are unable to
manage any growth we may experience, we may not be able to successfully implement our business plan.
In connection with any geographic expansion we may pursue, international operations would involve substantial additional risks,
including, among others: difficulties complying with the U.S. Foreign Corrupt Practices Act and other applicable anti-bribery laws.
difficulties maintaining compliance with the various laws and regulations of multiple jurisdictions that may be applicable to our business,
many of which may be unfamiliar to us. more complexity in our regulatory and accounting compliance. differing or changing obligations
regarding taxes, duties or other fees. limited intellectual property protection in some jurisdictions. risks associated with currency exchange
and convertibility, including vulnerability to appreciation and depreciation of foreign currencies. uncertainty related to developing legal and
regulatory systems and standards for economic and business activities in some jurisdictions. trade restrictions or barriers, including tariffs or
other charges and import-export regulations, changes in applicable laws or policies. the impact of and response to natural disasters. and the
potential for war, civil or political unrest and economic and financial instability. The occurrence of any of these risks could limit our ability
to pursue international expansion, increase our costs or expose us to fines or other legal sanctions, any of which could negatively impact
our business, reputation and financial condition.
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;
● 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;
24
● 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, such as the S.D.N.Y. Action. 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, 2018, we had approximately 34.7 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 six months 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 originally could, 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 exchange rules
and securities laws and regulations). As of February 27, 2018 we have issued and sold an aggregate of 4,740,350 common shares with an
aggregate offering price of $13,872,929 under the at-the-market program. Roth Capital Partners, LLC (“Roth”) received compensation of
$392,827 in connection with such sales. We are not required to sell shares under the equity distribution agreement. There can be no
assurance that any additional shares will be sold under our at-the-market program.
On July 17, 2017, the Company’s most recent registration statement on Form F-3 was declared effective by the SEC (the “ Shelf
Registration Statement”). The Shelf Registration Statement allows 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, subscription rights 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 February27, 2018, the Company has not sold any
securities under the Shelf Registration Statement, other than (i) the sale since July 17, 2017 of 485,239 common shares under the
Company’s at-the-market program referred to above and (ii) the sale of 3,636,364 common shares under the Wainwright Agreement (as
defined below), 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, 2018, 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 10,257,909 common shares. To the extent any of
our options and warrants is 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.
25
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 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.
There may be future sales or other dilution of our equity, which may adversely affect the market price of our common shares.
The Company may, from time to time, issue additional common shares, including any securities that are convertible into or
exchangeable for, or that represent the right to receive, common shares. The market price of our common shares could decline as a result of
sales of common shares or securities that are convertible into or exchangeable for, or that represent the right to receive, common shares
after this offering or the perception that such sales could occur.
Future sales of our common shares may cause the prevailing market price of our common shares to decrease.
We have registered a substantial number of outstanding common shares and common shares that are issuable upon the exercise of
outstanding warrants. If the holders of our registered common shares choose to sell such shares in the public market or if holders of our
warrants exercise their purchase rights and sell the underlying common shares in the public market, or if holders of currently restricted
common shares choose to sell such shares in the public market, the prevailing market price for our common shares may decline. The sale of
shares issued upon the exercise of our warrants (and options) could also further dilute the holdings of our then existing shareholders. In
addition, future public sales by holders of our common shares could impair our ability to raise capital through equity offerings.
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 originally could, 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). As of
February 27, 2018 we have issued and sold an aggregate of 4,740,350 common shares with an aggregate offering price of $13,872,929
under the original 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 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.
26
On July 17, 2017, the Shelf Registration Statement was declared effective by the SEC. The Shelf Registration Statement allows
for, subject to securities regulatory requirements and limitations, the potential offering of up to an aggregate of $100 million of the
Company’s common shares, preference shares, warrants, subscription receipts, subscription rights 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, 2018, the Company has not sold any securities under the
Shelf Registration Statement other than (i) the sale since July 17, 2017 of 485,239 common shares under the Company’s at-the-market
program referred to above and (ii) the sale 3,636,364 common shares under the Wainwright Agreement referred to above, 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. For example, participating securities may be delisted from the TSX if, among other things, the market value of an issuer’s
securities that are listed on the TSX is less than C$3,000,000 over any period of 30 consecutive trading days. In such circumstances, the
TSX may notify an issuer that it is under delisting review and the issuer will normally be given up to 120 days from the date of such
notification (the “delisting review period”) to correct the fall in market value and such other deficiencies noted by the TSX. At any time
prior to the end of the delisting review period, the TSX will provide the issuer with an opportunity to be heard where the issuer may present
submissions to satisfy the TSX that all deficiencies identified in the TSX’s notice have been rectified. If at the conclusion of the hearing the
issuer cannot satisfy the TSX that the deficiencies identified have been rectified and that no other delisting criteria are then applicable to
the issuer, the TSX will determine whether to delist the issuer’s securities.
If the market price of our common shares declines further or we are unable to maintain other listing requirements, the TSX may
determine to delist our common shares. 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.
27
Our common shares may not continue to be listed on Nasdaq.
Failure to meet the applicable quantitative and/or qualitative maintenance requirements of Nasdaq could result in our common
shares being delisted from Nasdaq. For continued listing, Nasdaq requires, among other things, that listed securities maintain a minimum
bid price of not less than $1.00 per share. If the bid price falls below the $1.00 minimum for more than 30 consecutive trading days, an
issuer will typically have 180 days to satisfy the $1.00 minimum bid price, which must be maintained for a period of at least ten trading
days in order to regain compliance.
If we are delisted from Nasdaq, our common shares may be eligible for trading on an over-the-counter market in the United States.
In the event that we are not able to obtain a listing on another U.S. stock exchange or quotation service for our common shares, it may be
extremely difficult or impossible for shareholders to sell their common shares in the United States. Moreover, if we are delisted from
Nasdaq, but obtain a substitute listing for our common shares in the United States, it will likely be on a market with less liquidity, and
therefore 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.
In September 2017, the Company announced that it has received written notification from Nasdaq notifying the Company that it is
not in compliance with the minimum market value of listed securities requirement set forth in Nasdaq Rules for continued listing on
Nasdaq. Nasdaq Listing Rule 5550(b)(2) requires listed securities to maintain a minimum market value of $35.0 million, and Listing Rule
5810(c)(3)(C) provides that a failure to meet the minimum market value requirement exists if the deficiency continues for a period of 30
consecutive business days. Based on the market value of the Company’s common shares for the 30 consecutive business days from August
8, 2017, the Company no longer meets the minimum market value of listed securities requirement. In accordance with Nasdaq Listing Rule
5810(c)(3)(C), the Company has been provided 180 calendar days, or until March 19, 2018, to regain compliance with Nasdaq Listing Rule
5550(b)(2). To regain compliance, the Company’s common shares must have a market value of at least $35.0 million for a minimum of 10
consecutive business days. In the event the Company does not regain compliance by March 19, 2018, the Company may be eligible for
additional time to regain compliance. If not, our securities may be delisted from Nasdaq.
In December 2017, we announced that we were notified by Nasdaq that the minimum bid price per share for our common shares
was below $1.00 for a period of 30 consecutive business days and that we did not meet the minimum bid price requirement set forth in
Nasdaq Listing Rule 5550(a)(2). We have a period of 180 calendar days, or until June 4, 2018, to regain compliance with Nasdaq’s
minimum bid price requirement. To regain compliance, our common shares must have a closing bid price of at least $1.00 for a minimum
of 10 consecutive business days. In the event we do not regain compliance by June 4, 2018, we may be eligible for additional time to regain
compliance. If not, our securities may be delisted from Nasdaq.
There can be no assurance that we will be able to comply with all applicable Nasdaq continued listing standards. If we are unable
to do so, our common shares may no longer be listed on Nasdaq or another national securities exchange and the liquidity and market price
of our common shares may be adversely affected. If our common shares are delisted from Nasdaq, they may trade on the over-the-counter
market, which may be a less liquid market. In such case, our shareholders’ ability to trade, or obtain quotations of the market value of,
common shares of the Company would be severely limited because of lower trading volumes and transaction delays. These factors could
contribute to lower prices and larger spreads in the bid and ask prices for our securities.
If our common shares are not listed on a national securities exchange, compliance with applicable state securities laws may be
required for subsequent offers, transfers and sales of the common shares.
Because our common shares are listed on Nasdaq, we are not required to register or qualify in any state the subsequent offer,
transfer or sale of the common shares. If our common shares are delisted from Nasdaq and are not eligible to be listed on another national
securities exchange, subsequent transfers of our common shares by U.S. holders may not be exempt from state securities laws. In such
event, it will be the responsibility of the holder of common shares to register or qualify the common shares for any subsequent offer,
transfer or sale in the United States or to determine that any such offer, transfer or sale is exempt under applicable state securities laws.
28
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 U.S. Exchange Act. Under these rules, broker-dealers who recommend such securities to persons other than
institutional investors must:
● make a special written suitability determination for the purchaser;
● receive the purchaser’s written agreement to a transaction prior to sale;
● provide the purchaser with risk disclosure documents which identify risks associated with investing in “penny stocks” and
which describe the market for these “penny stocks” as well as a purchaser’s legal remedies; and
● obtain a signed and dated acknowledgment from the purchaser demonstrating that the purchaser has actually received the
required risk disclosure document before a transaction in a “penny stock” can be completed.
As a result of these requirements, if our common shares are at such time subject to the “penny stock” rules, broker-dealers may
find it difficult to effectuate customer transactions and trading activity in these shares in the United States may be significantly limited.
Accordingly, the market price of the shares may be depressed, and investors may find it more difficult to sell the shares.
As a foreign private issuer in the United States, we are subject to different U.S. securities laws and rules than a domestic U.S.
issuer.
As a foreign private issuer under U.S. securities laws we are not required to comply with all the periodic disclosure requirements
of the U.S. Exchange Act applicable to domestic United States companies and therefore the publicly available information about us may be
different or more limited than if we were a United States domestic issuer. In addition, our officers, directors, and principal shareholders are
exempt from the “real time” reporting and “short swing” profit recovery provisions of Section 16 of the U.S. Exchange Act and the rules
thereunder. Although under Canadian rules, our officers, directors and principal shareholders are generally required to file on SEDI
(www.sedi.ca) reports of transactions involving our common shares within five calendar days of such transaction, our shareholders may not
know when our officers, directors and principal shareholders purchase or sell our common shares as timely as they would if we were a
United States domestic issuer.
We are exposed to risks if we are unable to comply with laws and future changes to laws affecting public companies, including the
Sarbanes-Oxley Act of 2002, and also to increased costs associated with complying with such laws.
Any future changes to the laws and regulations affecting public companies, as well as compliance with existing provisions of the
Sarbanes-Oxley Act of 2002 (“SOX”) in the United States and applicable Canadian securities laws, regulations, rules and policies, may
cause us to incur increased costs to comply with such laws and requirements, including, among others, hiring additional personnel and
increased legal, accounting and advisory fees. Delays, or a failure to comply with applicable laws, rules and regulations could result in
enforcement actions, the assessment of other penalties and civil suits. The new laws and regulations may increase potential costs to be
borne under indemnities provided by us to our officers and directors and may make it more difficult to obtain certain types of insurance,
including liability insurance for directors and officers; as such, we may be forced to accept reduced policy limits and coverage or incur
substantially higher costs to obtain the same or similar coverage. The impact of these events could also make it more difficult to attract and
retain qualified persons to serve on our board of directors, or as executive officers.
29
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 during the year, 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. We believe that we were not a PFIC during our 2017 taxable year and
will not likely be a PFIC during our 2018 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 2018 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 2018 taxable year).
Absent one of the elections described above, if we are a PFIC for any taxable year during which a U.S. holder holds our shares, some of the
consequences from PFIC status during that year will affect such holder’s U.S. income tax treatment in subsequent years during which we do
not meet the PFIC tests. 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.
30
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 Corporate Services Company at 1180 Avenue of the Americas, New York New York,
10036.
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, 2017, 2016 and 2015, we spent a total of $9,271,353, $8,166,736 and $7,247,473, respectively,
on research and development. Over the past three fiscal years and up to February 27, 2018, we have raised approximately $17,241,223 in
gross proceeds from the issuance of equity and convertible debt securities. Our common shares are listed on the TSX and on Nasdaq under
the symbol “IPCI”.
During the last and current financial year, we have not been aware of any indications of public takeover offers by third parties in
respect of the Company’s shares or by the Company in respect of other companies’ shares.
For additional information on key events, see Item 4.B below.
B. Business Overview
Recent Corporate Developments
● In February 2018, we and the FDA discussed a previously-announced Complete Response Letter (“ CRL”) for Oxycodone ER,
including issues related to the blue dye in the product candidate. Based on the meeting, the product candidate will no longer
include the blue dye. The blue dye was intended to act as an additional deterrent if Oxycodone ER is abused and serve as an
early warning mechanism to flag potential misuse or abuse. The FDA confirmed that the removal of the blue dye is unlikely to
have any impact on formulation quality and performance. As a result, we will not be required to repeat in vivo bioequivalence
studies and pharmacokinetic studies submitted in the Oxycodone ER NDA. The FDA also indicated that, from an abuse liability
perspective, Category 1 studies will not have to be repeated on Oxycodone ER with the blue dye removed.
31
● In December 2017, we were notified by Nasdaq that the minimum bid price per share for our common shares was below $1.00
for a period of 30 consecutive business days and that we did not meet the minimum bid price requirement set forth in Nasdaq
Listing Rule 5550(a)(2). We have a period of 180 calendar days, or until June 4, 2018, to regain compliance with Nasdaq’s
minimum bid price requirement. To regain compliance, our common shares must have a closing bid price of at least $1.00 for a
minimum of 10 consecutive business days. In the event we do not regain compliance by June 4, 2018, we may be eligible for
additional time to regain compliance. If not, our securities may be delisted from Nasdaq.
● In November 2017, our U.S. marketing partner, Par, launched the 5 and 40 mg strengths of its generic Focalin XR® capsules in
the United States, which followed the launch in May 2017 of the 10 and 20 mg strengths in the United States. The launch of the
5 and 40 mg strengths and the 10 and 20 mg strengths complements the 15, 25, 30 and 35 mg strengths of generic Focalin XR®
previously launched and marketed by Par. Under a licensing and commercialization agreement between us and Par, we receive
quarterly profit-share payments on Par’s U.S. sales of generic Focalin XR ®. The Par launches of the additional strengths
provided us with the full line of generic Focalin XR® strengths available in the U.S. market. In January 2017, Par had 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® already being marketed by Par.
● In October 2017, we completed a registered direct offering consisting of 3,636,364 common shares at a price of $1.10 per share
for gross proceeds of approximately $4 million. We also issued to the investors warrants to purchase an aggregate of 1,818,182
common shares at an exercise price of $1.25 per share. The warrants are exercisable six months following the October 13, 2017
closing date and will expire 30 months after the date they become exercisable. The common shares (but not the warrants or the
common shares underlying the warrants) were offered by us through a prospectus supplement pursuant to our shelf registration
statement on Form F-3 as previously filed and declared effective by the Securities and Exchange Commission (“SEC”) and the
base prospectus contained therein (Registration Statement No. 333-218297). The warrants described above were offered in a
private placement under Section 4(a)(2) of the U.S Securities Act, and Regulation D promulgated thereunder and, along with
the common shares underlying the warrants, have not been registered under the U.S. Securities Act, or applicable state
securities laws.
● In September 2017, we were notified by Nasdaq that we are not in compliance with the minimum market value of listed
securities requirement set forth in Nasdaq Rules for continued listing on Nasdaq. Nasdaq Listing Rule 5550(b)(2) requires listed
securities to maintain a minimum market value of $35.0 million. A failure to meet the minimum market value requirement
exists if the deficiency continues for a period of 30 consecutive business days. Based on the market value of our common
shares for the 30 consecutive business days from August 8, 2017, we no longer meet the minimum market value of listed
securities requirement. We were provided 180 calendar days, or until March 19, 2018, to regain compliance with Nasdaq
Listing Rule 5550(b)(2). To regain compliance, our common shares must have a market value of at least $35.0 million for a
minimum of 10 consecutive business days. In the event we do not regain compliance by March 19, 2018, we may be eligible
for additional time to regain compliance. If not, our securities may be delisted from Nasdaq.
● In September 2017, we received the above referenced CRL for our Oxycodone ER NDA, indicating that the FDA could not
approve the application in its present form. In its CRL, the FDA provided certain recommendations and requests for
information, including that we complete the relevant Category 2 and Category 3 studies to assess the abuse-deterrent properties
of Oxycodone ER by the oral and nasal routes of administration. The FDA also requested additional information related to the
inclusion of the blue dye in the Oxycodone ER formulation, and that we submit an alternate proposed proprietary name for
Oxycodone ER. We were given one year from September 2017 to respond to the CRL, and can request additional time if
necessary.
32
● In July 2017, three complaints were filed in the U.S. District Court for the Southern District of New York asserting claims
under the federal securities laws against us and two of our executive officers on behalf of a putative class of purchasers of our
securities. In a subsequent order, the Court consolidated the three actions under the caption Shanawaz v. Intellipharmaceutics
Int’l Inc., et al., No. 1:17-cv-05761 (S.D.N.Y.), appointed lead plaintiffs in the consolidated action, and approved lead
plaintiffs’ selection of counsel. Lead plaintiffs filed a consolidated amended complaint on January 29, 2018. In the amended
complaint, lead plaintiffs purport to assert claims on behalf of a putative class consisting of purchasers of our securities between
May 21, 2015 and July 26, 2017. The amended complaint alleges that the defendants violated Sections 10(b) and 20(a) of the
U.S. Exchange Act and Rule 10b-5 promulgated thereunder by making allegedly false and misleading statements or failing to
disclose certain information regarding our NDA for Oxycodone ER abuse-deterrent oxycodone hydrochloride extended release
tablets. The complaint seeks, among other remedies, unspecified damages, attorneys’ fees and other costs, equitable and/or
injunctive relief, and such other relief as the court may find just and proper. Under a scheduling order approved by the Court,
the defendants must respond to the amended complaint by March 30, 2018. We intend to vigorously defend our company
against the claims asserted in the consolidated action.
● In July 2017, a joint meeting of the Anesthetic and Analgesic Drug Products Advisory Committee and Drug Safety and Risk
Management Advisory Committee of the FDA (the “ Advisory Committees”) was held to review our NDA for Oxycodone ER
abuse-deterrent oxycodone hydrochloride extended release tablets. The Advisory Committees voted 22 to 1 in finding that our
NDA for Oxycodone ER should not be approved at that time. The Advisory Committees also voted 19 to 4 that we did not
demonstrate that Oxycodone ER has properties that can be expected to deter abuse by the intravenous route of administration,
and 23 to 0 that there is not sufficient data for Oxycodone ER to support inclusion of language regarding abuse-deterrent
properties in the product label for the intravenous route of administration. The Advisory Committees expressed a desire to
review the additional safety and efficacy data for Oxycodone ER that may be obtained from human abuse potential studies for
the oral and intranasal routes of administration.
● In June 2017, Mallinckrodt, in its capacity as our marketing and distribution partner, launched all strengths of our generic
Seroquel XR® in the United States. This launch followed the final approval in May 2017 from the FDA for our ANDA for
quetiapine fumarate extended-release tablets in the 50, 150, 200, 300 and 400 mg strengths. The approved product is a generic
equivalent of the corresponding strengths of the branded product Seroquel XR® sold in the United States by Astra Zeneca
Pharmaceuticals LP (“AstraZeneca”). Under its license and commercial supply agreement with Mallinckrodt, we manufacture
and supply generic Seroquel XR® for Mallinckrodt to market, sell and distribute in the United States. That agreement also
includes two other product candidates, our generic Pristiq® and generic Lamictal® XR™, for which we have ANDAs under
FDA review.
● In April 2017, we received notice that the Purdue litigation plaintiffs had commenced patent infringement proceedings against
us in the U.S. District Court for the District of Delaware in respect of our NDA filing for our Oxycodone ER product candidate,
alleging that it infringes six (6) out of the sixteen (16) patents associated with the branded product OxyContin ® listed in the
Orange Book. In our NDA filed in November 2016 for Oxycodone ER, we relied on the 505(b)(2) regulatory pathway and
referenced data from Purdue Pharma L.P.’s file for its OxyContin ® extended release oxycodone hydrochloride. Our Oxycodone
ER application was accepted by the FDA for further review in February 2017. We certified to the FDA that we believed that
our Oxycodone ER product candidate would not infringe the OxyContin® patents, or that such patents are invalid, and so
notified Purdue Pharma L.P. and the other owners of the subject patents listed in the Orange Book of such certification. The
complaint seeks injunctive relief as well as attorneys’ fees and costs and such other and further relief as the Court may deem
just and proper. As a result of the commencement of these legal proceedings, the FDA is stayed for 30 months from granting
final approval to our Oxycodone ER product candidate. That time period commenced on February 24, 2017, when the Purdue
litigation plaintiffs received notice of our certification concerning the patents, and will expire on August 24, 2019, unless the
stay is earlier terminated by a final declaration of the courts that the patents are invalid, or are not infringed, or the matter is
otherwise settled among the parties. A trial date for the Purdue litigation has been set for October 22, 2018. We are confident
that we do not infringe the subject patents, and will vigorously defend against these claims.
33
● In February 2017, the FDA accepted for filing the NDA we filed in November 2016 seeking authorization to market our
Oxycodone ER product candidate in the 10, 15, 20, 30, 40, 60 and 80 mg strengths. The submission is supported by pivotal
pharmacokinetic studies that demonstrated that our Oxycodone ER product candidate is bioequivalent to OxyContin®. The
submission also includes abuse-deterrent studies conducted to support abuse-deterrent label claims related to abuse of the drug
by various pathways.
● In February 2017, we received final approval from the FDA for our ANDA for metformin hydrochloride extended release
tablets in the 500 and 750 mg strengths. Our 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 approval.
There can be no assurance that our products will be successfully commercialized or produce significant revenues for us. Also,
there can be no assurance that we will not be required to conduct further studies for our Oxycodone ER product candidate, that the FDA
will approve any of our requested abuse-deterrence label claims or that the FDA will ultimately approve the NDA for the sale of our
Oxycodone ER product in the U.S. market, or that it will ever 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. Also, there can be no assurance that we can achieve Nasdaq’s minimum market value of listed
securities, minimum bid-price or other requirements.
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.
In November 2005, we entered into the license and commercialization agreement between Par and us, 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® 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® capsules. Commercial sales of these strengths were launched immediately by our commercialization partner in the
U.S., Par. In January 2017, Par launched the 25 and 35 mg strengths of its generic Focalin XR® capsules in the U.S., and in May 2017, Par
launched the 10 and 20 mg strengths, complementing the 15 and 30 mg strengths of our generic Focalin XR® marketed by Par. The FDA
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, and
subsequently Par launched the remaining 5 and 40 mg strengths in November 2017. Under the Par agreement, we receive quarterly profit
share payments on Par’s U.S. sales of generic Focalin XR ®. We expect revenues from sales of the generic Focalin XR ® capsules to show
some growth for the next several quarters as we believe the newly approved strengths will begin to gain market share. There can be no
assurance as to whether generic Focalin XR® capsules will be successfully commercialized.
34
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 and serve to limit the overall market opportunity. We are actively evaluating options to realize commercial
returns from this new approval through a potential partnership arrangement. There can be no assurance that our metformin extended-release
tablets for the 500 mg and 750 mg strengths will be successfully commercialized.
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 and in May 2017, our ANDA received final FDA approval for all of these strengths. Our
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 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. We have manufactured and shipped commercial quantities of all strengths of generic Seroquel XR ® to our
marketing and distribution partner Mallinckrodt, and Mallinckrodt launched all strengths in June 2017. 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 be successfully commercialized.
In October 2016, we announced the Mallinckrodt agreement, which grants Mallinckrodt an exclusive license to market, sell and
distribute in the U.S. the licensed products which have either been launched (generic Seroquel XR®) or for which we have ANDAs filed
with the FDA:
● Quetiapine fumarate extended-release tablets (generic Seroquel XR®) –Approved by FDA and launched
● 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 that are payable on future sales of licensed product). 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.
35
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 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 Oxycodone ER and Regabatin™. The technology that is central to our abuse deterrent formulation of our
Oxycodone ER is the novel 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 Paradoxical OverDose Resistance Activating Systems (“ PODRAS™”) delivery technology was initially
introduced to enhance our Oxycodone ER 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 PODRASTM
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. Patent Nos. 9,522,119, 9,700,515, 9,700,516 and 9,801,939 and Canadian Patent No. 2,910,865 issued by
the U.S. Patent and Trademark Office and the Canadian Intellectual Property Office in respect of “Compositions and Methods for Reducing
Overdose” in December 2016, July 2017 and October 2017. The issuance of these patents provides us with the opportunity to accelerate our
PODRASTM development in the first half of 2018 by pursuing proof of concept studies in humans. We intend to incorporate this technology
in an alternate Oxycodone ER product candidate.
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.
36
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.
● 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 commercially viable or 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.
37
nPODDDS™
In addition to continuing efforts with Hypermatrix™ as a core technology, our scientists continue to pursue novel research
activities that address unmet needs. Oxycodone ER 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.
PODRAS™
Our 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 Oxycodone ER 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 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 Oxycodone ER 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.
In December 2016, July 2017 and October 2017, we obtained that U.S. Patent Nos. 9,522,119, 9,700,515, 9,700,516 and 9,801,939
and Canadian Patent No. 2,910,865 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. We intend to incorporate this technology in an alternate
Oxycodone ER 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 Hypermatrix™ drug delivery technologies include, but are not limited to, IntelliFoam™, IntelliGITransporter™,
IntelliMatrix™, IntelliOsmotics™, IntelliPaste™, IntelliPellets™, IntelliShuttle™, nPODDDS™ 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.
38
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.
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.
39
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.
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
Levetiracetam
extended-release
tablets
Focalin XR®
Keppra XR®
Attention deficit
hyperactivity
disorder
Partial onset
seizures for
epilepsy
Venlafaxine
hydrochloride
extended-release
capsules
Pantoprazole
sodium delayed-
release tablets
Metformin
hydrochloride
extended-release
tablets
Effexor XR®
Depression
Conditions
associated with
gastroesophageal
reflux disease
Protonix®
Glucophage® XR
Management of
type 2 diabetes
Quetiapine fumarate
extended-release
tablets
Seroquel XR®
Schizophrenia,
bipolar disorder &
major depressive
disorder
Lamotrigine
extended-release
tablets
Lamictal® XR™
Anti-convulsant for
epilepsy
Desvenlafaxine
extended-release
tablets
Trazodone
hydrochloride
extended release
tablets
Carvedilol
Pristiq®
Depression
Oleptro™
Depression
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
Received final
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
Regulatory
Pathway
Market Size
(in
millions)(2)
Rights(3)
ANDA
$802
Intellipharmaceutics
and Par
ANDA
$131
Intellipharmaceutics
ANDA
$721
Intellipharmaceutics
ANDA
$341
Intellipharmaceutics
$466
(500 and 750 mg
only)
ANDA
Intellipharmaceutics
ANDA
ANDS
$316
Intellipharmaceutics
and Mallinckrodt
ANDA
$541
Intellipharmaceutics
and Mallinckrodt
ANDA
$250
Intellipharmaceutics
and Mallinckrodt
ANDA
$1
Intellipharmaceutics
phosphate extended-
release capsules
Oxycodone
hydrochloride
controlled-release
capsules
Pregabalin
extended-release
capsules
Ranolazine
extended-release
tablets
Coreg CR®
Heart failure,
hypertension
OxyContin®
Pain
Lyrica®
Neuropathic pain
Ranexa®
Chronic angina
Late-stage
development
NDA application
accepted February
2017 and under
review by FDA
Investigational
New Drug (“IND”)
application
submitted in
August 2015
ANDA application
for
commercialization
approval for 2
strengths under
review by FDA
40
ANDA
$179
Intellipharmaceutics
NDA 505(b)(2)
$1,821
Intellipharmaceutics
NDA 505(b)(2)
$4,917
Intellipharmaceutics
ANDA
$964
Intellipharmaceutics
Notes:
(1)
(2)
(3)
(4)
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.
Represents sales for all strengths, unless otherwise noted, for the 12 months ended January 2018 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 Corporation. The
information attributed to Symphony Health Solutions Corporation herein is provided as is, and Symphony makes no representation
and/or warranty of any kind, including but not limited to, the accuracy and/or completeness of such information.
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.
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, 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 of our FDA approved strengths of our generic Focalin
XR® capsules for a period of 10 years from the date of commercial launch (which was November 19, 2013). 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 of all
strengths of generic Focalin XR® are payable by Par to us 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® 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. In January 2017, Par launched the 25 and 35 mg strengths of its generic Focalin
XR® capsules in the U.S., and in May 2017, Par launched the 10 and 20 mg strengths, complementing the 15 and 30 mg strengths of our
generic Focalin XR® marketed by Par. In November 2017, Par launched the remaining 5 and 40 mg strengths providing us with the full line
of generic Focalin XR® strengths available in the U.S. market.
41
Levetiracetam – Generic Keppra XR® (a registered trademark of the brand manufacturer)
We received final approval from the FDA in February 2016 for the 500 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 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 the 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.
Metformin hydrochloride –Glucophage® XR (a registered trademark of the brand manufacturer)
We received final approval from the FDA in February 2017 for the 500 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 aware that several other generic versions of this product are currently available and serve
to limit the overall market opportunity. We are continuing to evaluate options to realize commercial returns from this approval. There can
be no assurance that our metformin extended-release tablets for the 500 and 750 mg strengths will be successfully commercialized.
Oxycodone ER (Abuse Deterrent Oxycodone Hydrochloride Extended-Release Tablets) (previously referred to as Rexista™)
One of our non-generic products under development is our Oxycodone ER product candidate, intended as an abuse- and alcohol-
deterrent controlled-release oral formulation of oxycodone hydrochloride for the relief of pain. Our Oxycodone ER is a new drug
candidate, with a unique long acting oral formulation of oxycodone intended to treat moderate-to-severe pain when a continuous, around
the clock opioid analgesic is needed for an extended period of time. 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 Oxycodone ER formulation is difficult to
abuse through the application of heat or an open flame, making it difficult to inhale the active ingredient from burning.
In March 2015, we announced the results of three definitive open label, blinded, randomized, cross-over, Phase I pharmacokinetic
clinical trials in which our Oxycodone ER 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
Oxycodone ER 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 Oxycodone ER indicating that we would
not be required to conduct Phase III studies if bioequivalence to OxyContin® was demonstrated based on pivotal bioequivalence studies.
42
In January 2016, we announced that pivotal bioequivalence trials of our Oxycodone ER, dosed under fasted and fed conditions,
had demonstrated bioequivalence to OxyContin® extended release tablets as manufactured and sold in the U.S. by Purdue Pharma L.P. The
study design was based on FDA recommendations and compared the lowest and highest strengths of exhibit batches of our Oxycodone ER
to the same strengths of OxyContin®. The results show that the ratios of the pharmacokinetic metrics, Cmax, AUC0-t and AUC0-f for
Oxycodone ER vs. OxyContin®, are within the interval of 80% - 125% required by the FDA with a confidence level exceeding 90%.
In July 2016, we announced the results of a food effect study conducted on our behalf for Oxycodone ER. The study design was a
randomized, one-treatment two periods, two sequences, crossover, open label, laboratory-blind bioavailability study for Oxycodone ER
following a single 80 mg oral dose to healthy adults under fasting and fed conditions. The study showed that Oxycodone ER can be
administered with or without a meal (i.e., no food effect). Oxycodone ER 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 Oxycodone ER taken
under fasted conditions to fed conditions, and AUC metrics taken under fasted conditions to fed conditions). We believe that Oxycodone
ER is well differentiated from currently marketed oral oxycodone extended release products.
In November 2016, we filed an NDA seeking authorization to market our Oxycodone ER in the 10, 15, 20, 30, 40, 60 and 80 mg
strengths, relying on the 505(b)(2) regulatory pathway which allowed us to reference data from Purdue Pharma L.P.’s file for its
OxyContin®. In February 2017, the FDA accepted for filing our NDA and set a Prescription Drug User Fee Act (“ PDUFA”) target action
date of September 25, 2017.
Our submission is supported by pivotal pharmacokinetic studies that demonstrated that Oxycodone ER is bioequivalent to
OxyContin®. 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. We certified to the FDA that we believed that
our Oxycodone ER product candidate would not infringe any of the OxyContin® patents listed in the Orange Book, or that such patents are
invalid, and so notified all holders of the subject patents of such certification. On April 7, 2017, we received notice that the Purdue
litigation plaintiffs had commenced patent infringement proceedings against us in the U.S. District Court for the District of Delaware in
respect of our NDA filing for Oxycodone ER, alleging that our Oxycodone ER product infringes six (6) out of the sixteen (16) patents. The
complaint seeks injunctive relief as well as attorneys’ fees and costs and such other and further relief as the Court may deem just and
proper. An answer and counterclaim have been filed. As a result of the commencement of these legal proceedings, the FDA is stayed for 30
months from granting final approval to our Oxycodone ER product candidate. That time period commenced on February 24, 2017, when
the Purdue litigation plaintiffs received notice of our certification concerning the patents, and will expire on August 24, 2019, unless the
stay is earlier terminated by a final declaration of the courts that the patents are invalid, or are not infringed, or the matter is otherwise
settled among the parties. A trial date for the Purdue litigation has been set for October 22, 2018. We are confident that we do not infringe
the subject patents, and will vigorously defend against these claims.
In June 2017, we announced that a FDA Advisory Committees meeting was scheduled for July 26, 2017 to review our NDA for
Oxycodone ER. The submission requested that our Oxycodone ER product candidate include product label claims to support the inclusion
of language regarding abuse-deterrent properties for the intravenous route of administration.
In July 2017, we announced that the FDA Advisory Committees voted 22 to 1 in finding that our NDA for Oxycodone ER should
not be approved at this time. The Advisory Committees also voted 19 to 4 that the Company had not demonstrated that Oxycodone ER has
properties that can be expected to deter abuse by the intravenous route of administration, and 23 to 0 that there was not sufficient data for
Oxycodone ER to support inclusion of language regarding abuse-deterrent properties in the product label for the intravenous route of
administration. The Advisory Committees expressed a desire to review the additional safety and efficacy data for Oxycodone ER that may
be obtained from human abuse potential studies for the oral and intranasal routes of administration.
In September 2017, we received a CRL from the FDA for the Oxycodone ER NDA. In its CRL, the FDA provided certain
recommendations and requests for information, including that we complete Category 2 and Category 3 studies to assess the abuse-deterrent
properties of Oxycodone ER by the oral and nasal routes of administration. The FDA also requested additional information related to the
inclusion of the blue dye in the Oxycodone ER formulation, which is intended to deter abuse. The FDA also requested that we submit an
alternate proposed proprietary name for Oxycodone ER. The FDA determined that it could not approve the application in its present form.
We were given one year from September 2017 to respond to the CRL, and can request additional time if necessary.
43
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 Oxycodone ER.
In February 2018, we and the FDA discussed the above-referenced CRL for Oxycodone ER, including issues related to the blue
dye in the product candidate. Based on the meeting, the product candidate will no longer include the blue dye. The blue dye was intended
to act as an additional deterrent if Oxycodone ER is abused and serve as an early warning mechanism to flag potential misuse or abuse. The
FDA confirmed that the removal of the blue dye is unlikely to have any impact on formulation quality and performance. As a result, we
will not be required to repeat in vivo bioequivalence studies and pharmacokinetic studies submitted in the Oxycodone ER NDA. The FDA
also indicated that, from an abuse liability perspective, Category 1 studies will not have to be repeated on Oxycodone ER with the blue dye
removed.
There can be no assurance that the studies will be adequate, that we will not be required to conduct further studies for Oxycodone
ER, that the FDA will approve any of our requested abuse-deterrence label claims or that the FDA will ultimately approve our NDA for the
sale of Oxycodone ER 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, and in May 2017, our ANDA received final FDA approval for all of these strengths. Our
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 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. Our final FDA approval followed the expiry of 180 day exclusivity periods granted to the first filers of
generic equivalents to the branded product, which were shared by Par and Accord Healthcare.
We manufactured and shipped commercial quantities of all strengths of generic Seroquel XR ® to our marketing and distribution
partner Mallinckrodt, and Mallinckrodt launched all strengths in June 2017.
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. In October 2017, Pfizer also
received approval for a Lyrica CR, a controlled-release version of pregabalin.
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.
44
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.
We believe our product candidate has significant additional benefits to existing treatments and are currently evaluating strategic options to
advance this opportunity.
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.
Other Potential Products and Markets
We continue efforts to identify opportunities overseas, including in China that could if effectuated provide product distribution
alternatives through partnerships and therefore would not likely require an investment or asset acquisition by us. We recently visited China
where discussions toward establishing a partnership to facilitate future development activities are ongoing. We have not at this time entered
into and may not ever enter into any such arrangements. These opportunities could potentially involve out-licensing of our products, third-
party manufacturing supply and more efficient access to pharmaceutical ingredients and therefore assist with the development of our
product pipeline.
COMPETITIVE ENVIRONMENT
We are engaged in a business characterized by extensive research efforts, rapid technological developments and intense
competition. Our competitors include medical technology, pharmaceutical, biotechnology and other companies, universities and research
institutions. All of these competitors currently engage in, have engaged in or may engage in the future, in development, manufacturing,
marketing and commercialization of new pharmaceuticals and existing pharmaceuticals, some of which may compete with our present or
future products and product candidates.
Our drug delivery technologies may compete with existing drug delivery technologies, as well as new drug delivery technologies
that may be developed or commercialized in the future. Any of these drugs and drug delivery technologies may receive government
approval or gain market acceptance more rapidly than our products and product candidates. As a result, our products and product
candidates may become 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
45
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.
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.
INTELLECTUAL PROPERTY
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
Issue Date
Issue No.
Title
U.S.A.
U.S.A.
U.S.A.
U.S.A.
U.S.A.
U.S.A.
U.S.A.
U.S.A.
U.S.A.
U.S.A.
U.S.A.
U.S.A.
U.S.A.
U.S.A.
U.S.A.
U.S.A.
Japan
Japan
Japan
Japan
India
Europe
Canada
Canada
Canada
Canada
Canada
Canada
Canada
Canada
October 31, 2017
July 11, 2017
July 11, 2017
Dec 20, 2016
July 14, 2015
Aug 12, 2014
Dec 10, 2013
Mar 12, 2013
Mar 15, 2011
Dec 28, 2010
Aug 15, 2006
Oct 5, 2004
Nov 25, 2003
Aug 19, 2003
Nov 12, 2002
Oct 2, 2001
Aug 28, 2015
Jan 17, 2014
Aug 8, 2014
Aug 30, 2013
Feb 10, 2015
Nov 26, 2014
May 26, 2015
Jan 28, 2014
Apr 8, 2014
Mar 11, 2014
Jun 19, 2012
Sep 25, 2012
Feb 22, 2011
Mar 15, 2005
9,801,939 Compositions and Methods For Reducing Overdose
9,700,516 Compositions and Methods For Reducing Overdose
9,700,515 Compositions and Methods For Reducing Overdose
9,522,119 Compositions and Methods For Reducing Overdose
9,078,827
8,802,139
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
8,603,520
8,394,409 Controlled Extended Drug Release Technology
7,906,143
Controlled Release Pharmaceutical Delivery Device
and Process for Preparation Thereof
6,652,882
6,800,668
6,607,751
7,090,867
7,858,119
Extended Release Pharmaceuticals
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
5,457,830
Organosol Coat
5,592,547 Drug Delivery Composition
5,349,290 Drug Delivery Composition
6,479,075
5,798,293
6,296,876
265,141
Pharmaceutical Composition Having Reduced Abuse
Potential
Controlled Release Delivery Device Comprising an
Organosol Coat
2,007,360
2,579,382 Controlled Release Composition Using Transition
Coating, And Method Of Preparing Same
2,571,897 Controlled Extended Drug Release Technology
2,576,556 Disintegrant Assisted Controlled Release Technology
2,648,280
2,626,558
2,529,984
2,459,857
2,435,276
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
46
Canada
China
China
Nov 29, 2016
May 11, 2016
Nov 25, 2015
2,910,865 Compositions and Methods For Reducing Overdose
ZL200780019665.5 Drug Delivery Composition
ZL200780025611.X
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.
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
47
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 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.
48
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. Effective October 1, 2017, for the FDA’s fiscal year 2018, the FDA will charge an annual facility user fee of $226,087 plus a
new general program fee of $159,079. Under GDUFA, generic product companies face significant penalties for failure to pay the new user
fees, including rendering an ANDA not “substantially complete” until the fee is paid. It is currently uncertain the effect the new fees will
have on our ANDA process and business. However, any failure by us or our suppliers to pay the fees or to comply with the other provisions
of GDUFA may adversely impact or delay our ability to file ANDAs, obtain approvals for new generic products, generate revenues and
thus may have a material adverse effect on our business, results of operations and financial condition.
Patent Certification and Exclusivity Issues
ANDAs 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.
49
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
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.
50
The Canadian government has regulations which can prohibit the issuance of an NOC for a patented medicine to a generic
competitor, provided that the patentee or an exclusive licensee has filed a list of its Canadian patents covering that medicine with the
Minister of Health and Welfare. After submitting the list, the patentee or an exclusive licensee can commence a proceeding to obtain an
order of prohibition directed to the Minister prohibiting him or her from issuing an NOC. The minister may be prohibited from issuing an
NOC permitting the importation or sale of a patented medicine to a generic competitor until patents on the medicine expire or the waiver of
infringement and/or validity of the patent(s) in question is resolved by litigation in the manner set out in such regulations. There may be
additional patents relating to a company’s proposed manufacture, use or sale of a product that could potentially prohibit such company’s
proposed commercialization of a drug compound.
Certain provincial regulatory authorities in Canada have the ability to determine whether the consumers of a drug sold within such
province will be reimbursed by a provincial government health plan for that drug by listing drugs on formularies. The listing or non-listing
of a drug on provincial formularies may affect the prices of drugs sold within provinces and the volume of drugs sold within provinces.
Additional Regulatory Considerations
Sales of our products by our licensees outside the United States and Canada will be subject to regulatory requirements governing
the testing, registration and marketing of pharmaceuticals, which vary widely from country to country.
Under the U.S. Generic Drug Enforcement Act, ANDA applicants (including officers, directors and employees) who are convicted
of a crime involving dishonest or fraudulent activity (even outside the FDA regulatory context) are subject to debarment. Debarment is
disqualification from submitting or participating in the submission of future ANDAs for a period of years or permanently. The Generic
Drug Enforcement Act also authorizes the FDA to refuse to accept ANDAs from any company which employs or uses the services of a
debarred individual. We do not believe that we receive any services from any debarred person.
In addition to the regulatory approval process, pharmaceutical companies are subject to regulations under provincial, state and
federal law, including requirements regarding occupational safety, laboratory practices, environmental protection and hazardous substance
control, and may be subject to other present and future local, provincial, state, federal and foreign regulations, including possible future
regulations of the pharmaceutical industry. We believe that we are in compliance in all material respects with such regulations as are
currently in effect.
Before medicinal products can be distributed commercially, a submission providing detailed information must be reviewed and
approved by the applicable government or agency in the jurisdiction in which the product is to be marketed. The regulatory review and
approval process varies from country to country.
C. Organizational Structure
The following chart shows the corporate relationship structure of Intellipharmaceutics and its three wholly-owned subsidiaries,
including jurisdictions of incorporation, as of February 27, 2018.
51
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 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.
52
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.
Item 4A. 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, 2017, 2016 and 2015.
A. Operating Results
Our results of operations have fluctuated significantly from period to period in the past and are likely to do so in the future. We
anticipate that our quarterly and annual results of operations will be impacted for the foreseeable future by several factors, including the
timing of approvals to market our product candidates in various jurisdictions and any resulting licensing revenue, milestone revenue,
product sales, the number of competitive products and the extent of any aggressive pricing activity, 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 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 4ANDAs 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
53
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, 2017, 2016 and 2015.
For the years ended
November
30,
2016
$
November
30,
2017
$
November
30,
2015
$
Change
2017 vs 2016
Change
2016 vs 2015
$
%
$
%
Revenue:
Licensing
Up-front fees
5,025,350
479,102
5,504,452
2,209,502
37,500
2,247,002
4,093,781
-
4,093,781
2,815,848
441,602
3,257,450
127% (1,884,279)
1178%
145% (1,846,779)
37,500
Cost of goods sold
Gross Margin
704,006
4,800,446
-
2,247,002
-
4,093,781
704,006
2,553,444
N/A
114% (1,846,779)
-
Expenses:
Research and development
Selling, general and administrative
Depreciation
9,271,353
3,287,914
506,961
13,066,228
8,166,736
3,546,132
385,210
12,098,078
7,247,473
3,581,913
377,849
11,207,235
1,104,617
(258,218)
121,751
968,150
14% 919,263
(35,781)
-7%
32%
7,361
8% 890,843
Loss from operations
(8,265,782) (9,851,076) (7,113,454) 1,585,294
-16% (2,737,622)
Net foreign exchange (loss) gain
Interest income
Interest expense
Financing cost
Extinguishment loss
Net loss
(80,093)
15,037
(22,470)
207
46,211
1,507
(57,623)
14,830
(389,239) (270,238) (256,629) (119,001)
(137,363)
(137,363)
-
-
-
(8,857,440) (10,143,577) (7,436,388) 1,286,137
(114,023)
-
-
256%
7164%
44%
(68,681)
(1,300)
(13,609)
-
N/A
N/A
114,023
-13% (2,707,189)
-46%
N/A
-45%
N/A
-45%
13%
-1%
2%
8%
38%
-149%
-86%
5%
N/A
N/A
36%
Year Ended November 30, 2017 Compared to the Year Ended November 30, 2016
Revenue
The Company recorded revenues of $5,504,452 for the year ended November 30, 2017 versus $2,247,002 for the year ended
November 30, 2016. Revenues consisted primarily of licensing revenues from commercial sales of the 10,15, 20, 25, 30 and 35 mg of
generic Focalin XR® under the Par agreement. The increase in revenues in the current year period is primarily due to the launch in January
2017 of the 25 and 35 mg strengths of generic Focalin XR® capsules in the U.S and also reflects revenue from the Company’s generic
Seroquel XR® launched by Mallinckrodt in June 2017. The Company’s revenues on the 25 and 35 mg strengths of generic Focalin XR ®
showed some decline commencing July 2017 when their 6 month exclusivity expired, but have since leveled off. The 15 and 30mg
strengths continue to perform well, with the 10 and 20 mg strengths contributing less due to their launch date being late August 2017. The 5
and 40 mg strengths did not contribute at all to top line revenue in fiscal 2017 as the products were not in the market until after year end.
Revenues from generic Seroquel XR® were considerably lower than originally anticipated, primarily due to timing of the product launch,
which was several weeks after other generics entered the market. As such, it is expected to take some time to gain market share as
wholesaler contracts come up for renewal. Revenues under the Par and Mallinckrodt agreements represents the commercial sales of the
generic products in those strengths and may not be representative of future sales.
54
Cost of goods sold
The Company recorded cost of goods sold of $704,006 for the year ended November 30, 2017 versus $Nil for the year ended
November 30, 2016. Cost of sales for the year ended November 30, 2017, reflects the Company’s shipments of generic Seroquel XR ® to
Mallinckrodt which are manufactured by the Company and supplied to Mallinckrodt on a cost-plus basis. This product was not marketed or
sold prior to fiscal 2017.
Research and Development
Expenditures for R&D for the year ended November 30, 2017 were higher by $1,104,617 compared to the year ended November
30, 2016. 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 quetiapine fumarate extended release tablets in the 50, 150, 200, 300 and 400 mg strengths, as detailed
below. R&D expenses are also higher due to higher third party consulting fees associated with our preparation for the FDA Advisory
Committee meeting in relation to our Oxycodone ER NDA filing. As noted above under “Revised Prior Quarter Amounts”, the R&D
expenses for the year ended November 30, 2016 were revised higher by $1,177,782 as a result of our shareholders approving an extension
of the expiry date of certain performance based stock options.
In the year ended November 30, 2017, we recorded $1,654,051 of expenses for stock-based compensation for R&D employees, of
which $1,577,772 was for expenses related to performance based stock options which vested on FDA approval for metformin
hydrochloride extended release tablets in February 2017 and FDA approval of our quetiapine fumarate extended release tablets in May
2017. 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.
After adjusting for the stock-based compensation expenses discussed above, expenditures for R&D for the year ended November
30, 2017 were higher by $1,446,371 compared to the year ended November 30, 2016. The increase was primarily due to costs related to
preparing for the FDA Advisory Committee meeting, an increase in third party R&D expenditures and higher compensation expense.
Selling, General and Administrative
Selling, general and administrative expenses were $3,287,914 for the year ended November 30, 2017 in comparison to $3,546,132
for the year ended November 30, 2016, a decrease of $258,218. The decrease is due to lower wages and benefits and administrative costs
offset by higher expenses related to marketing cost and occupancy cost discussed in greater detail below.
Expenditures for wages and benefits for the year ended November 30, 2017 were $1,240,361 in comparison to $1,454,501 in the
year ended November 30, 2016. For the year ended November 30, 2017, we recorded $95,948 as expense for stock-based compensation
compared to an expense of $265,639 for the year ended November 30, 2016. After adjusting for the stock-based compensation expenses,
expenditures for wages for the year ended November 30, 2017 were lower by $44,449 compared to the year ended November 30, 2016.
The decrease is attributable to the accrual of bonuses to certain management employees in the year ended November 30, 2016, there were
no bonuses paid in the year ended November 30, 2017.
Administrative costs for the year ended November 30, 2017 were $1,402,253 in comparison to $1,558,633 in the year ended
November 30, 2016. The decrease relates primarily to lower professional fees.
Marketing costs for the year ended November 30, 2017 were $502,688 in comparison to $413,646 in the year ended November
30, 2016. The increase is primarily the result of an increase in travel expenditures related to business development and investor relations
activities.
55
Occupancy costs for the year ended November 30, 2017 were $142,612 in comparison to $119,352 for the year ended November
30, 2016. 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, 2017 were $506,961 in comparison to $385,210 in the year ended
November 30, 2016. The increase is primarily due to the additional investment in production, laboratory and computer equipment during
the year ended November 30, 2017.
Foreign Exchange Loss
Foreign exchange loss was $80,093 for the year ended November 30, 2017 in comparison to a loss of $22,470 in the year ended
November 30, 2016. The foreign exchange loss for the year ended November 30, 2017 was due to the weakening of the Canadian dollar
against the U.S. dollar during the year ended November 30, 2017 as the exchange rates changed to $1.00 for C$1.2888 as at November 30,
2017 from $1.00 for C$1.3429 as at November 30, 2016. 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.
Interest Income
Interest income for the year ended November 30, 2017 was higher by $14,830 in comparison to the prior period. For the year
ended November 30, 2017 interest was higher largely due to interest received on input tax credit refunds under the SR&ED program.
Interest Expense
Interest expense for the year ended November 30, 2017 was higher by $119,001 compared with the prior period. This is due to
interest expense paid in 2017 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 15.2%, in comparison to the first nine months of 2016 when the
Debenture imputed interest was approximately 4.2%.
Net Loss
The Company recorded net loss for the year ended November 30, 2017 of $8,857,440 or $0.29 per common share, compared with
a net loss of $10,143,577 or $0.38 per common share for the year ended November 30, 2016. In the year ended November 30, 2017, the
net loss was attributed to the ongoing R&D and selling, general and administrative expenses, partially offset by licensing revenues from
commercial sales of generic Focalin XR® and to a lesser extent, sales of generic Seroquel XR® shipped to Mallinckrodt. The net loss in
2017 is lower compared to 2016 due to higher licensing revenues which were partially offset by an increase in performance based stock
option expense and higher third party R&D expenditures. Revenue from commercial sales of generic Focalin XR® and generic Seroquel
XR® in the year ended November 30, 2017, was $4,269,691 versus $2,209,502 in fiscal 2016. This is primarily due to the launch of
additional strengths of generic Focalin XR® in 2017 as well as the launch of generic Seroquel XR ®, In the year ended November 30, 2016,
the higher net loss was 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.
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® 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
56
strengths was approximately 30% for the combined strengths of our generic Focalin XR® capsules. 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 stock 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 was 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 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 was 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 was 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 was due to the incremental cost of leasing an adjoining facility in order to meet the Company’s anticipated growth
requirements.
57
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 was 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 was 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 was attributed to
the ongoing R&D and selling, general and administrative expense, partially offset by licensing revenue.
B. Liquidity and Capital Resources
For the years ended
November
30,
2016
November
30,
2017
November
30,
2015
Change
(2017 vs 2016)
Change
(2016 vs 2015)
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 year
Cash, end of year
$
(6,105,785) (6,254,985) (3,782,164) 149,200
$
$
$
9,159,623
1,733,865
(3,477,455)
5,682,168
(1,823,746) (515,410) (430,480) (1,308,336)
(2,478,779) (4,636,591)
(2,247,363) 2,389,228
4,233,975
1,755,196
4,144,424
1,755,196
4,144,424
1,897,061
2,389,228
(2,247,363)
58
%
-2% (2,472,821)
$
(84,930)
-38% 7,425,758
254%
-194% 4,868,007
136% (2,478,779)
-54% 2,389,228
%
65%
428%
20%
-196%
-59%
136%
The Company had cash of $1,897,061 as at November 30, 2017 compared to $4,144,424 as at November 30, 2016. The decrease
in cash during the year ended November 30, 2017 was mainly a result of our ongoing expenditures in R&D and selling, general, and
administrative expenses, which includes increased consulting fees incurred to prepare for the July 26, 2017 FDA Advisory Committee
meeting and an increase in purchases of plant and production equipment to support our generic Seroquel XR® launch, which were only
partially offset by higher cash receipts from commercialized sales of our generic Focalin XR® and cash receipts provided from financing
activities derived from common share sales under the Company’s at-the-market offering program and the Company’s underwritten public
offering in October 2017. 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 in June 2016 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.
For the year ended November 30, 2017, net cash flows used in operating activities decreased to $6,105,785 as compared to net
cash flows used in operating activities for the year ended November 30, 2016 of $6,254,985. The decrease was primarily due to a
significant reduction in accounts payable and accrued liabilities in fiscal 2016 as well as a reduction of inventory and accounts receivable
levels in fiscal 2017. The November 30, 2016 decrease 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.
R&D costs, which are a significant portion of the cash flows used in operating activities, related to continued internal R&D
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, 2017 and the year ended November 30, 2016, R&D expense was $9,271,353, and
$8,166,736, respectively. The increase was mainly due to consulting fees associated with our preparation for the FDA Advisory Committee
meeting in relation to our Oxycodone ER NDA filing and the increase due to stock based compensation expenses of $1,577,772 related to
vested performance options during the year ended November 30, 2017. 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 in fiscal 2016 over fiscal 2015 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, 2017, net cash flows provided from financing activities of $5,682,168 principally related to the
Company completing an underwritten public offering in October 2017 of 3,636,364 common shares, at a price of $1.10 per share and
warrants to purchase an aggregate of 1,818,182 common shares, for gross proceeds of $4,000,000, at-the-market issuances of common
shares, and to the exercise of warrants, offset by payments on the convertible debenture. The warrants are exercisable six months from
issuance, will expire 30 months after they become exercisable and have an exercise price of $1.25 per common share. The Company also
issued to the placement agents 181,818 warrants to purchase a share of common stock at an exercise price of $1.375 per share. The total net
proceeds from the offering were $3,499,508, after deducting offering expenses. 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 brought the total net proceeds from the June 2016 offering to approximately $5,137,638, after
deducting the underwriter’s discount and estimated offering expenses. In addition, the increase in financing activities during the year ended
November 30, 2016, was related to the at-the-market issuances of common shares.
59
For the year ended November 30, 2017, net cash flows used in investing activities of $1,823,746 related primarily to purchase of
plant and production equipment required to support our generic Seroquel XR® launch. 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.
All non-cash items have been added back or deducted from the consolidated audited statements of cash flows.
With the exception of the quarter ended February 28, 2014, the Company has incurred losses from operations since inception. To
date, the Company has funded its R&D activities principally through the issuance of securities, loans from related parties, funds from the
IPC Arrangement Agreement and funds received under commercial license agreements. Since November 2013, research has also been
funded from revenues from sales of our generic Focalin XR® capsules for the 15 and 30 mg strengths. With the launch of the 25 and 35 mg
strengths by Par in January 2017, the launch of the 10 and 20 mg strengths in May 2017 along with the launch of the 5 and 40 mg strengths
in November 2017, we expect revenues of generic Focalin XR® to show some improvement going forward. As of November 30, 2017, the
Company had a cash balance of $1.9 million. As of February 15, 2018 (the date of filing of the Company’s Management Discussion and
Analysis of Financial Condition and Results of Operations and Audited Annual Financial Statements for the year ended November 30,
2017), our cash balance was $0.6 million. We currently expect to satisfy our operating cash requirements until June 2018 from cash on hand
and quarterly profit share payments from Par and Mallinckrodt. The Company may need to obtain additional funding prior to that time as
we further the development of our product candidates and if we accelerate our product commercialization activities. Other potential sources
of capital may include payments from licensing agreements, cost savings associated with managing operating expense levels, and/or new
strategic partnership agreements which fund some or all costs of product development. If necessary, and conditions permit, we may utilize
the equity markets to bridge any funding shortfall and to provide capital to continue to advance our most promising product candidates. Our
future operations are highly dependent upon our ability to source additional capital to support advancing our product pipeline through
continued R&D activities and to fund any significant expansion of our operations. 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 Oxycodone ER 505(b)(2), and selected generic,
product candidate development projects. Our development of Oxycodone ER will require significant expenditures, including costs to
defend against the Purdue litigation. For our Regabatin™ 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 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.
60
Effective September 28, 2017, the maturity date for the Debenture was extended to October 1, 2018. The Company currently
expects to repay the current outstanding principal amount of $1,350,000 on or about October 1, 2018, 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 R&D, our ability to obtain
regulatory approvals, our success in commercializing approved products with our commercial 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 R&D, legal and consulting expenditures to advance our product pipeline and selling,
general and administrative expenses to support our commercialization efforts. Depending upon the results of our R&D programs, the
Purdue plaintiffs patent litigation case 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 successfully commercialize approved products or 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 us not taking advantage of business
opportunities, in the termination or delay of clinical trials or us 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, 2017, 2016 and 2015, R&D expense was $9,271,353, $8,166,736 and
$7,247,473, respectively.
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 somewhat variable over the last eight quarters, and has been impacted primarily by the commercial sales of
generic Focalin XR® capsules, the level of our R&D spending, availability of funding and the vesting or modification of performance based
stock options. The lower net loss in the fourth quarter of 2017 is primarily attributed to lower R&D spending and selling, general and
administrative expenses, partially offset by lower licensing revenues. The higher net loss in the third quarter of 2017 is primarily due to
lower licensing revenue as a result of the expiration of exclusivity on the 25 and 35 mg strengths of generic Focalin XR® resulting in higher
than normal wholesaler returns, along with higher expenses related to the FDA Advisory Committee meeting in July 2017. The lower net
loss in the second quarter of 2017 is primarily attributed to higher licensing revenues from commercial sales of generic Focalin XR® in the
25 and 35 mg strengths complementing the 15 and 30 mg strengths of our generic Focalin XR® marketed by Par, partially offset by an
increase in performance based options expense and higher third party consulting fees. The lower net loss in the first quarter of 2017 is
primarily attributed to higher licensing revenues from commercial sales of generic Focalin XR® due to Par’s launch of the 25 and 35 mg
strengths of its generic Focalin XR® capsules in that quarter, partially offset by an increase in performance based stock options expense and
legal and other professional fees. The higher net loss in the fourth quarter of 2016 is attributable to the accrual of management bonuses
(there were no management bonuses paid in fiscal 2015) and additional compensation costs related to vested performance based stock
options as a result of the Company’s shareholders approving an extension of the expiry date of the performance based stock options. As
noted above under “Revised Prior Quarter Amounts”, the latter item represents a non-cash error 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. The net losses in the first, second and third quarter of 2016 are fairly consistent and attributable to lower licensing
revenues from commercial sales of generic Focalin XR® as the Company continued to face stiff generic competition throughout fiscal 2016.
The higher net loss in the fourth quarter of 2015 is attributed to ongoing R&D and selling, general and administrative expense, including a
significant increase in third party clinical studies.
61
The following selected financial information is derived from our unaudited interim consolidated financial statements.
Quarter Ended
November 30, 2017
August 31, 2017
May 31, 2017
February 28, 2017
November 30, 2016
August 31, 2016
May 31, 2016
February 29, 2016
Revenue
Net loss
Loss per share
Basici
Dilutedi
$
1,077,835
1,189,739
2,001,512
1,235,366
569,096
554,925
556,044
566,937
$
(2,510,936)
(2,550,314)
(1,805,329)
(1,990,861)
(3,913,304)
(2,110,156)
(2,000,077)
(2,120,040)
$
(0.08)
(0.08)
(0.06)
(0.07)
(0.13)
(0.07)
(0.08)
(0.09)
$
(0.08)
(0.08)
(0.06)
(0.07)
(0.13)
(0.07)
(0.08)
(0.09)
(1)
Quarterly per share amounts may not sum due to rounding.
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, 2017, 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. Operating lease obligations relate
to the lease of premises for the combined properties, comprising the Company’s premises that it currently operates from at 30 Worcester
Road as well as the adjoining property at 22 Worcester Road, which is indirectly owned by the same landlord, 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 2018.
62
Contractual Obligations
Third parties
Accounts payable
Accrued liabilities
Operating lease
Related parties
Employee costs payable
Convertible debenture
Total contractual obligations
G. Safe Harbor
Payments Due by Year
Total
$
Less than
1 Year
$
1 - 3
Years
$
3 - 5
Years
$
2,060,084
782,369
558,660
2,060,084
782,369
186,220
-
-
372,440
214,980
1,512,332
5,128,425
214,980
1,512,332
4,755,985
-
-
372,440
-
-
-
-
-
-
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
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”).
DIRECTORS AND OFFICERS
Name and Province of
Residence
Dr. Isa Odidi
Ontario, Canada
Dr. Amina Odidi
Ontario, Canada
Position held with the
Company
Chairman of the Board and
Chief Executive Officer
President, Chief Operating
Officer and Director
Dr. Eldon R. Smith (1)
Alberta, Canada
Director
Bahadur Madhani(1)
Ontario, Canada
Director
Kenneth Keirstead(1)
New Brunswick, Canada
Dr. Patrick Yat
Ontario, Canada
Director
Vice-President, Chemistry
and Analytical Services
Principal Occupations
During the Last 5 Years
Other Public Company
Boards
Officer of the Company
None
Director
Since
September
2004
September
2004
None
Officer of the Company
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
LOGiQ Asset Management
Inc. (formerly Aston Hill
Financial Inc.); Zenith Capital
Corp, and Resverlogix Corp
October
2009
None
None
March 2006
January
2006
Officer of the Company
None
N/A
63
Andrew Patient(2)
Ontario, Canada
Chief Financial Officer
Officer of the Company since
September 2017; Chief
Financial Officer of Merus
Labs International Inc. from
December 2011-August 2016 None
N/A
Notes:
(1)
(2)
Member of the Audit Committee, Compensation Committee and Corporate Governance Committee.
Mr. Patient was appointed as Chief Financial Officer of the Company effective September 6, 2017. Domenic Della Penna had
served as the Company's Chief Financial Officer from November 2014 until his resignation (effective September 6, 2017) to pursue
another opportunity in the healthcare industry.
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.
John Allport served as the Company’s Vice President, Legal Affairs and Licensing and as a director from September 2004 until his
resignation (effective May 17, 2017) for personal reasons. Mr. Allport entered into a consulting agreement with the Company effective
May 17, 2017 to provide ongoing services to the Company on an as-needed basis. Michael Campbell served as General Counsel and
Corporate Secretary from July 10, 2017 until his resignation (effective February 22, 2018) for personal reasons.
As of February 27, 2018, the directors and executive officers of the Company as a group owned, directly and indirectly, or
exercise control or direction over 5,948,280 common shares, representing approximately 17.1% of the issued and outstanding common
shares of the Company (and beneficially owned approximately 11,220,830 common shares representing 28.1% 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 16.7% of our issued and outstanding common shares of the Company (and collectively beneficially owned in the aggregate
approximately 9,935,526 common shares representing 25.6% of our common shares including common shares issuable upon the exercise of
outstanding options and the conversion of the outstanding convertible debenture that are exercisable or convertible within 60 days of the
date hereof). (Reference is made to the section entitled “E. Share Ownership” under this “Item 6. Directors, Senior Management and
Employees” for additional information regarding the options to purchase common shares held by directors and officers of the Company
and the convertible debenture held by Drs. Amina and Isa Odidi.) As a result, the principal shareholders 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, 2017, the Company had 62 full-time employees engaged in administration and research and development.
64
Compensation Governance – The Company’s Compensation Committee is comprised of three directors, Messrs. Madhani,
Keirstead and Smith, each of whom is considered “independent” within the meaning of section 2.4 of Form 51-102F6 – Statement of
Executive Compensation. Each member of the Compensation Committee has sufficient experience in order to make decisions on the
suitability of the Company’s compensation policies and practices.
The Compensation Committee recommends compensation policies concerning officers and senior management to the Board. The
Corporate Governance Committee recommends compensation policies concerning independent directors to the Board. The Board makes
the final determinations regarding the adequacy and form of the compensation for non-executive directors to ensure that such compensation
realistically reflects the responsibilities and risks involved, without compromising a director’s independence. Further details relating to the
role and function of the Compensation Committee and the Corporate Governance Committee is provided in Item 6.C.
Risk Management – The Board is responsible for identifying the principal risks of the Company’s business and ensuring the
implementation of appropriate systems to manage these risks. Through the Compensation Committee, the Board is involved in the design of
compensation policies to meet the specific compensation objectives discussed below and considers the risks relating to such policies, if any.
The Compensation Committee is ultimately responsible for ensuring compliance of the compensation policies and practices of the
Company. To date, the Board and Compensation Committee have not identified any risks arising from the Company’s compensation
policies and practices that would be reasonably likely to have a material adverse effect on the Company.
Objectives – The overall objectives of the Company’s compensation program include: (a) attracting and retaining talented
executive officers; (b) aligning the interests of those executive officers with those of the Company; and (c) linking individual executive
officer compensation to the performance of the Company. The Company’s compensation program is currently designed to compensate
executive officers for performance of their duties and to reward certain executive officers for performance relative to certain milestones
applicable to their services.
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 two of the five Named
Executive Officers, is responsible for setting and amending any equity incentive plan under which an option-based award is granted.
65
The Company has in place a stock option plan (the “Option Plan”) for the benefit of certain officers, directors, employees and
consultants of the Company, including the Named Executive Officers (as described in greater detail in Item 6.E below). Named Executive
Officers have been issued options under such plan.
The Company has also granted performance-based options to Dr. Isa Odidi and Dr. Amina Odidi pursuant to a separate option
agreement, which was negotiated at the same time as their employment agreements. These options vest upon the Company attaining certain
milestones relating to FDA filings and approvals for Company drugs, such that 276,394 options vest in connection with each of the FDA
filings for the first five Company drugs and 276,394 options vest in connection with each of the FDA approvals for the first five Company
drugs.
The Company’s Option Plan was adopted effective October 22, 2009 as part of the IPC Arrangement Agreement approved by the
shareholders of IPC Ltd., the predecessor company, at the meeting of shareholders on October 19, 2009. Subject to the requirements of the
Option Plan, the Board, with the assistance of the Compensation Committee, has the authority to select those directors, officers, employees
and consultants to whom options will be granted, the number of options to be granted to each person and the price at which common shares
of the Company may be purchased. Grants are determined based on individual and aggregate performance as determined by the Board.
RSUs – The Company established a restricted share unit plan (the “RSU Plan”) to form part of its incentive compensation
arrangements available for officers and employees of the Company and its designated affiliates (as described in greater detail it Item 6.E) as
of May 28, 2010, when the RSU Plan received shareholder approval.
Perquisites and personal benefits – The Company also provides perquisites and personal benefits to its Named Executive Officers,
including basic employee benefit plans, which are available to all employees, and a car allowance to cover the cost of an automobile for
business purposes. These perquisites and personal benefits were determined through negotiation of an employment agreement with each
Named Executive Officer (see “Employment Agreements” below). While perquisites and personal benefits are intended to fit into the
Company’s overall compensation objectives by serving to attract and retain talented executive officers, the size of the Company and the
nature and stage of its business also impact the level of perquisites and benefits. To date, the level of perquisites and benefits has not
impacted the Company’s decisions about any other element of compensation.
Other Compensation-Related Matters – The Company’s Share Trading Policy prohibits all directors and officers of the Company
from, among other things, engaging in any short sales designed to hedge or offset a decrease in market value of the securities of the
Company.
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, 2017, November 30, 2016 and November 30, 2015 in respect of the Chief Executive Officer of
the Company, the Chief Financial Officers (current and former), and two other officers of the Company who earned greater than $150,000
in total compensation in the fiscal year ended November 30, 2017(“Named Executive Officers”).
SUMMARY COMPENSATION TABLE
Non-equity incentive
plan compensation
(U.S.$)(f)
Name and principal
position(a)
Dr. Isa Odidi, Chairman &
Chief Executive Officer
Salary
(U.S.$)
(1)(c)
Year(b)
Share-
based
awards
(U.S.$)
(d)
Option-
based
awards
(U.S.$)
(2)(e)
Annual
incentive
plans(3)
Long-
term
incentive
plans
Pension
value
(U.S.$)
(g)
All other
compensation
(U.S.$)(4)
(h)
Total
compensation
(U.S.$)(i)
2017
2016
2015
343,430
340,464
358,617
N/A
N/A
N/A
1,609,573
703,016
68,644
N/A
340,464
N/A
N/A
N/A
N/A
N/A
N/A
N/A
13,676
13,558
14,678
1,966,680
1,397,502
441,939
66
Dr. Amina Odidi, President
& Chief Operating Officer
2017
2016
2015
343,430
340,464
358,617
N/A 1,609,573
N/A 703,016
N/A 68,644
N/A
340,464
N/A
John Allport, Former VP
Legal Affairs & Licensing(5) 2017
2016
2015
59,676
109,220
115,043
N/A
N/A
N/A 50,346
N/A 39,225
N/A
56,493
N/A
Domenic Della Penna,
Former Chief Financial
Officer(6)
Andrew Patient, Chief
Financial Officer(7)
2017
2016
2015
2017
189,662
225,972
218,185
N/A
N/A
N/A 64,076
N/A 76,810
N/A
112,986
N/A
54,395
N/A 19,800
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
13,676
13,558
14,678
1,966,680
1,397,502
441,939
N/A
N/A
N/A
7,408
13,558
14,678
67,084
229,617
168,946
N/A
N/A
N/A
10,257
13,558
14,281
199,919
416,592
309,276
N/A
3,419
77,614
Notes:
(1)
(2)
(3)
(4)
(5)
(6)
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.$ 0.7598 to C$1.00 (2016 – U.S. $0.7932; 2015 – U.S. $0.7934) 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 2017, 2016 and 2015 are as disclosed in
the table.
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 $3.62 per share, subject to satisfaction of
the performance vesting conditions. The value of the option-based awards are determined using the Black-Scholes pricing model
calculated as at the award date.
Amount awarded at the discretion of the Board. This bonus was paid in the second quarter of 2017.
“All other compensation” includes car allowances and other miscellaneous benefits.
Mr. Allport, a consultant to the Company, served as the Company’s Vice President, Legal Affairs and Licensing and as a director
from September 2004 until his resignation effective on May 17, 2017.
Mr. Della Penna served as the Company’s Chief Financial Officer from November 24, 2014 until his resignation effective on
September 6, 2017.
(7) Mr. Patient was appointed as Chief Financial Officer of the Company effective September 6, 2017.
During the fiscal year ended November 30, 2017, Mr. Campbell received salary, option-based awards, all other compensation and
total compensation of $90,226, $20,825, $5,414, and $116,465, respectively.
67
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 $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 $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 C$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 C$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 C$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 C$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 C$2.42 per share. In November 2017, Dr. Isa Odidi received a grant of 70,000 options of which 23,334
vested immediately on issuance, with the remaining 23,333 to vest on November 30, 2018 and 23,333 to vest on November 30, 2019 at an
exercise price of C$1.15 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 $200,000, which is paid in Canadian dollars, per year, to be
increased annually each year during the term of the agreement by twenty percent of the prior year’s salary. In addition, she is entitled to: (a)
participate in the Option Plan; (b) participate in all employee benefit plans and programs, except for the RSU Plan and DSU Plan; and (c) a
car allowance of up to $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
68
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 C$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 C$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 C$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 C$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 C$2.42 per share. In November
2017, Dr. Isa Odidi received a grant of 70,000 options of which 23,334 vested immediately on issuance, with the remaining 23,333 to vest
on November 30, 2018 and 23,333 to vest on November 30, 2019 at an exercise price of C$1.15 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 $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, 2,487,546 of these options have vested and are exercisable.
Domenic Della Penna had served as the Company’s Chief Financial Officer from November 2014 until his resignation effective on
September 6, 2017. The employment agreement with Mr. Della Penna, effective November 24, 2014, provided for Mr. Della Penna to
receive a base salary of C$275,000, which was 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. In addition, he was 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 provided 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 was
terminated without cause, it required 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 occurred within six months of a change of control of the Company that occurred after November 24, 2015, it
required 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 contained 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 C$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 C$2.52 per share. In August 2016, Mr. Della Penna received a grant of 70,000 options, of which 47,000 vested immediately, with
the remaining 23,000 to vest on November 30, 2017 at an exercise price of C$2.42 per share. Mr. Della Penna’s options ceased to be
exercisable 120 days after he ceased to be employed by the Company.
The employment agreement with Andrew Patient, the Chief Financial Officer of the Company, dated August 30, 2017, effective
September 6, 2017 entitles Mr. Patient to receive a base salary of C$300,000, 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$1,500
per month. The agreement provides for automatic renewal on December 31 each year from year to year in absence of notice of termination
from the Company at least 90 days prior to the end of the then applicable term. If the agreement is terminated without cause, it requires
payment to Mr. Patient of 3 months' base salary, plus 6 weeks' base salary for every full year of service, up to a combined maximum of 12
months. If such termination occurs within six months of a change of control of the Company, it requires payment to Mr. Patient of thirteen
months' base salary, plus 6 weeks' base salary for every full year of service, up to a combined maximum of 18
69
months. Mr. Patient’s employment agreement contains intellectual property, non-competition and non-solicitation provisions in favour of
the Company. Mr. Patient was granted 60,000 options, of which 20,000 vested immediately on issuance, 20,000 vest on October 20, 2018
and the remaining 20,000 vest on October 20, 2019 at an exercise price of C$1.27 per share. In November 2017, Mr. Patient received a
grant of 15,000 options of which 5,000 vested immediately on issuance, 5,000 vest on November 30, 2018 and the remaining 5,000 vest on
November 30, 2019 at an exercise price of C$1.15 per share.
John Allport had served as the Company’s Vice President Legal Affairs and Licensing and as a director from September 2004 until
his resignation effective on May 17, 2017. The employment agreement with Mr. Allport, effective September 1, 2004, provided for Mr.
Allport to receive a base salary of C$95,000, which was paid in Canadian dollars, per year. In addition, he was 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 was 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 C$3.27 per share. Mr.
Allport’s employment agreement included 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 C$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 C$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 C$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 C$2.42 per share. Mr. Allport entered into a consulting agreement with the Company effective May 17, 2017 to provide
on-going services to the Company on an as-needed basis. The consulting agreement provides that Mr. Allport is to serve as a consultant to
the Company to provide pharmaceutical business consulting services when requested from time to time. The agreement is terminable by
either the Company or Mr. Allport on less than one-month notice and provides for such consideration as is mutually agreed from time to
time. The consulting agreement includes intellectual property, non-competition and non-solicitation provisions in favour of the Company.
The employment agreement with Michael Campbell, the former General Counsel & Corporate Secretary of the Company,
effective June 15, 2017 entitled Mr. Campbell to receive a base salary of C$300,000, which is paid in Canadian dollars, per year. In
addition, he was 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 provided for automatic renewal on December 31 each year from year to year in absence
of notice of termination from the Company at least 90 days prior to the end of the then applicable term. If the agreement was terminated
without cause, it required payment to Mr. Campbell of 3 months' base salary, plus 6 weeks' base salary for every full year of service, up to
a combined maximum of 12 months. If such termination occurred within six months of a change of control of the Company, it required
payment to Mr. Campbell of thirteen months' base salary, plus 6 weeks' base salary for every full year of service, up to a combined
maximum of 18 months. Mr. Campbell's employment agreement contains intellectual property, non-competition and non-solicitation
provisions in favour of the Company. Mr. Campbell was granted 60,000 options, of which 20,000 vested immediately on issuance, 20,000
vest on October 20, 2018 and the remaining 20,000 vest on October 20, 2019 at an exercise price of C$1.27 per share. In November 2017,
Mr. Campbell received a grant of 25,000 options of which 8,334 vested immediately on issuance, 8,333 vest on November 30, 2018 and
the remaining 8,333 vest on November 30, 2019 at an exercise price of C$1.15 per share. Mr. Campbell’s options will cease to be
exercisable 120 days after ceasing to be employed by the Company.
Incentive Plan Awards
Outstanding Option-Based Awards and Share-Based Awards – The following table sets forth for each Named Executive Officer
all awards outstanding at the end of the most recently completed financial year, including awards granted before the most recently
completed financial year. Each option grant allows the holder to purchase one of the Company’s common shares.
70
Number of
securities
underlying
unexercised
options (#)(b)
2,763,940
Option exercise
price (U.S.$)(c)
US$3.62
Option expiration
date(d)
Sept. 10, 2018
300,000
75,000
50,000
70,000
90,000
70,000
300,000
75,000
50,000
70,000
90,000
70,000
250,000
25,000
50,000
40,000
55,000
60,000
50,000
70,000
60,000
15,000
C$3.27
C$1.81
C$4.29
C$2.52
C$2.42
C$1.15
C$3.27
C$1.81
C$4.29
C$2.52
C$2.42
C$1.15
C$3.27
C$1.81
C$4.29
C$2.52
C$2.42
C$3.22
C$2.52
C$2.42
C$1.27
C$1.15
Feb. 16, 2022
Apr. 13. 2020
Feb. 28, 2019
Nov. 30, 2020
Aug. 31, 2021
Nov. 30, 2022
Feb. 16, 2022
Apr. 13. 2020
Feb. 28, 2019
Nov. 30, 2020
Aug. 31, 2021
Nov. 30, 2022
Feb. 16. 2022
Apr. 13, 2020
Feb. 28, 2019
Nov. 30, 2020
Aug. 31, 2021
Nov. 30, 2024
Nov. 30, 2020
Aug. 31, 2021
Oct. 20, 2027
Nov. 30, 2022
Name(a)
Drs. Isa Odidi and
Amina Odidi(1)
Dr. Isa Odidi
Dr. Amina Odidi
John Allport(2)
Domenic Della
Penna(4)
Andrew Patient,
Chief Financial
Officer(5)
Notes:
Value of
unexercised in-
the-money
options (U.S.$)
(e)(3)
Number of shares or
units of shares that
have not vested (#)
(f)
Market or payout
value of share-based
awards that have not
vested (U.S.$)(g)
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
(1)
(2)
(3)
(4)
These option-based awards are held jointly.
Mr. Allport, a consultant to the Company, served as the Company’s Vice President Legal Affairs and Licensing and as a director
from September 2004, until his resignation May 17, 2017.
The value of unexercised options at year-end is calculated by subtracting the option exercise price from the closing price of the
common shares of the Company on the TSX for C$ exercise prices and Nasdaq for US$ exercise prices on November 30, 2017
(C$1.09 and $0.85, respectively) and multiplying the result by the number of common shares underlying an option.
Mr. Della Penna served as the Company’s Chief Financial Officer from November 24, 2014 until his resignation effective
September 6, 2017. Mr. Della Penna’s options ceased to be exercisable 120 days after he ceased to be employed by the Company.
(5)
Mr. Patient was appointed as Chief Financial Officer of the Company effective September 6, 2017.
As of November 30, 2017, Mr. Campbell had unexercised options to acquire (i) 60,000 common shares at a price of C$1.27
(expiring October 20, 2027) and (ii) 25,000 common shares at a price of C$1.15 (expiring November 30, 2022); and no other share-based
awards. Mr. Campbell’s options will cease to be exercisable 120 days after he ceases to be employed by the Company. Mr. Campbell’s
options have no value vested or earned during the most recently completed financial year.
Incentive Plan Awards – Value Vested or Earned During the Year – The following table sets forth details of the value vested or
earned during the most recently completed financial year for each incentive plan award.
71
Name
(a)
Drs. Isa Odidi
Dr. Amina Odidi
John Allport(2)
Domenic Della Penna(3)
Andrew Patient, Chief Financial Officer(4)
Option-
based
awards -
Value
vested
during the
year (U.S.$)
(b)(1)
Share-
based
awards -
Value
vested
during the
year (U.S.$)
(c)
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
Non-equity
incentive
plan
compensation
- Value
earned
during the
year
(U.S.$)
(d)
N/A
N/A
N/A
N/A
N/A
Notes:
(1)
(2)
(3)
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.
Mr. Allport, a consultant to the Company, served as the Company’s Vice President Legal Affairs and Licensing and as a director
from September 2004, until his resignation May 17, 2017.
Mr. Della Penna served as the Company’s Chief Financial Officer from November 24, 2014 until his resignation effective
September 6, 2017. Mr. Della Penna’s options ceased to be exercisable 120 days after he ceased to be employed by the Company.
(4)
Mr. Patient was appointed as Chief Financial Officer of the Company effective September 6, 2017.
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$2.2 million would be payable to each of the Odidis, which is the amount that would have been payable to September 30,
2022, 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, 2022, 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, 2022.
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. Patient, see the
description of his employment agreement under the heading “Employment Agreements” above.
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.
72
Name
(a)
Eldon Smith
Kenneth Keirstead
Bahadur Madhani
Fees
earned
(b)
-
$ C40,000
$ C45,000
Share-
based
awards
(c)(1)
$ C40,000
N/A
N/A
Option-
based
awards
(d)(2)
$ C18,442
$ C18,442
$ C18,442
Non-
equity
incentive
plan
compensation
(e)
N/A
N/A
N/A
Pension
value
(f)
N/A
N/A
N/A
All other
compensation
Total
(g)
N/A
N/A
N/A
(h)
$ C58,442
$ C58,442
$ C63,442
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 2017 were issued on November 30, 2017.
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 $1,000 per day per meeting paid in Canadian dollars.
Outstanding Option-Based Awards and Share-Based Awards – The following table sets forth all amounts of option-based and
share-based awards to the non-executive directors for the Company’s most recently completed financial year.
Option-based Awards
Share-based Awards
Name
(a)
Eldon Smith
Kenneth Keirstead
Bahadur Madhani
Number of
securities
underlying
unexercised
options (#)
(b)
10,000
25,000
37,500
37,500
20,000
35,000
40,000
10,000
25,000
37,500
37,500
20,000
35,000
40,000
10,000
25,000
37,500
37,500
20,000
35,000
40,000
Option
exercise price
(U.S.$)
(c)
C$2.88
C$1.81
C$3.22
C$4.29
C$2.52
C$2.42
C$1.15
C$2.88
C$1.81
C$3.22
C$4.29
C$2.52
C$2.42
C$1.15
C$2.88
C$1.81
C$3.22
C$4.29
C$2.52
C$2.42
C$1.15
Option expiration
date
(d)
Oct. 22, 2019
Apr. 13, 2020
Nov. 30, 2019
Feb. 28, 2019
Nov. 30, 2020
Aug. 31, 2021
Nov. 30, 2022
Oct. 22, 2019
Apr. 13, 2020
Nov. 30, 2019
Feb. 28, 2019
Nov. 30, 2020
Aug. 31, 2021
Nov. 30, 2022
Oct. 22, 2019
Apr. 13, 2020
Nov. 30, 2019
Feb. 28, 2019
Nov. 30, 2020
Aug. 31, 2021
Nov. 30, 2022
Value of unexercised in-
the-money options
(U.S.$)
(e)(1)
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
73
Number of
shares or units
of shares that
have not
vested (#)
(f)(2)
94,131
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
Market or
payout value of
share-based
awards that
have not vested
(U.S.$)
(g)(3)
C$102,603
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
Notes:
(1)
(2)
(3)
The value of unexercised options at year-end is calculated by subtracting the option exercise price from the closing price of the
common shares of the Company on the TSX on November 30, 2017 (C$1.09) and multiplying the result by the number of common
shares underlying an option.
These DSUs are permitted to be redeemed only following termination of Board service. Includes DSUs earned as at November 30,
2017.
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, 2017 (C$1.09) and multiplying by the number of common shares underlying a DSU.
Incentive Plan Awards – Value Vested or Earned During the Year – The following table sets forth all amounts of option-based
and share-based awards vested to the non-executive directors of the Company for the most recently completed financial year and no non-
equity incentive plan compensation was earned during the most recently completed financial year.
Name
(a)
Eldon Smith
Kenneth Keirstead
Bahadur Madhani
Option-
based
awards -
Value
vested
during the
year (U.S.$)
(b)(1)
Share-
based
awards -
Value
vested
during the
year (U.S.$)
(c)(2)
N/A
N/A
N/A
N/A
N/A
N/A
Non-equity incentive plan compensation - Value
earned during the year (U.S.$)
(d)
Nil
Nil
Nil
Notes:
(1)
The amount represents the theoretical total value if the options had been exercised on the vesting date, established by calculating
the difference between the closing price of the common shares of the Company on the TSX on the vesting date and the exercise
price.
(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 $10,000,000 subject to a deductible loss payable by the Company of $1,000,000 (for securities
claims) or $500,000 (for other claims). The premium payable by the Company for the period from November 30, 2017 to November 30,
2018 is $194,500.
C. Board Practices
Board of Directors
See Items 6.A and 6.B.
Committees of the Board of Directors
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,
AUDIT COMMITTEE
74
systems of internal accounting and disclosure controls, performance of the external auditors, and risk assessment and management. The
Audit Committee has the power to conduct or authorize investigations into any matters within its scope of responsibilities, with full access
to all books, records, facilities and personnel of the Company, its auditors and its legal advisors. In connection with such investigations or
otherwise in the course of fulfilling its responsibilities under the Audit Committee Charter, the Audit Committee has the authority to
independently retain special legal, accounting, or other consultants to advise it.
Audit Committee Charter
The charter of the Audit Committee can be found on the Company’s website at www.intellipharmaceutics.com.
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 Capital Corp.
75
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;
● 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;
3. Tax Services
a. Compliance Services
76
● 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;
● 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;
● 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;
● 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;
77
● Internal audit outsourcing services;
● Management functions;
● Human resources;
● Certain corporate finance and other services;
● Legal services;
● 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 4 meetings during the period from December 1, 2016 to November 30, 2017.
In reliance on the reviews and discussions referred to above, the Audit Committee recommended to the Board (and the Board
approved) that the audited consolidated financial statements be included in the Annual Report for the year ended November 30, 2017 for
filing with the Canadian provincial securities commissions and the SEC.
Compensation Committee Mandate and Purpose
COMPENSATION COMMITTEE AND CORPORATE GOVERNANCE COMMITTEE
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.
78
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 Kenneth Keirstead, Dr. Eldon Smith and Bahadur Madhani, each of whom
is 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:
Research Employees
Administrative Employees
November
30, 2017
51
11
November
30, 2016
40
12
November
30, 2015
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, 2018.
Name
Dr. Isa
Odidi
Dr.
Amina
Odidi
Position with
the Company
Chief Executive
Officer and
Chairman of the
Board and
Director of the
Company
President, Chief
Operating
Officer and
Director of the
Company
Number of
Common
Shares
Owned
5,781,312(1)
5,781,312(1)
Percentage of
Common
Shares
Owned
Number of
Stock
Options
Held(2)
Exercise
Price
16.66% 2,763,940
300,000
75,000
50,000
70,000
90,000
70,000
16.66% 2,763,940
300,000
75,000
50,000
70,000
90,000
70,000
$3.62
C$3.27
C$1.81
C$4.29
C$2.52
C$2.42
C$1.15
$3.62
C$3.27
C$1.81
C$4.29
C$2.52
C$2.42
C$1.15
79
Option
Expiry
dd/mm/yyyy
10/09/2018
16/02/2022
13/04/2020
28/02/2019
30/11/2020
31/08/2021
30/11/2022
10/09/2018
16/02/2022
13/04/2020
28/02/2019
30/11/2020
31/08/2021
30/11/2022
Number of
Currently
Exercisable
Options(4)
2,487,546
300,000
75,000
50,000
70,000
90,000
23,334
2,487,546
300,000
75,000
50,000
70,000
90,000
23,334
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
110,558
0.32% 250,000
25,000
50,000
40,000
55,000
C$3.27
C$1.81
C$4.29
C$2.52
C$2.42
16/02/2022
13/04/2020
28/02/2019
30/11/2020
31/08/2021
250,000
25,000
50,000
40,000
55,000
N/A
N/A
Nil
John N.
Allport
Dr.
Eldon R.
Smith
Consultant;
Former Vice-
President,
Legal Affairs
and Licensing
and Former
Director of the
Company
Director of the
Company
21,731
0.06%
Kenneth
Keirstead
Director of the
Company
Nil
Nil
Bahadur
Madhani
Director of the
Company
7,507
0.02%
Dr.
Patrick
Yat
Vice-President,
Chemistry and
Analytical
Services
Andrew
Patient
Chief Financial
Officer of the
Company
27,172
0.08%
Nil
Nil
10,000
25,000
37,500
37,500
20,000
35,000
40,000
10,000
25,000
37,500
37,500
20,000
35,000
40,000
10,000
25,000
37,500
37,500
20,000
35,000
40,000
50,000
15,000
15,000
25,000
15,000
60,000
15,000
C$2.88
C$1.81
C$4.29
C$3.22
C$2.52
C$2.42
C$1.15
C$2.88
C$1.81
C$4.29
C$3.22
C$2.52
C$2.42
C$1.15
C$2.88
C$1.81
C$4.29
C$3.22
C$2.52
C$2.42
C$1.15
C$3.82
C$1.81
C$2.52
C$2.42
C$1.15
C$1.27
C$1.15
22/10/2019
13/04/2020
28/02/2019
30/11/2019
30/11/2020
31/08/2021
30/11/2022
22/10/2019
13/04/2020
28/02/2019
30/11/2019
30/11/2020
31/08/2021
30/11/2022
22/10/2019
13/04/2020
28/02/2019
30/11/2019
30/11/2020
31/08/2021
30/11/2022
24/05/2021
13/04/2020
30/11/2020
31/08/2021
30/11/2022
20/10/2027
30/11/2022
10,000
25,000
37,500
37,500
20,000
35,000
13,334
10,000
25,000
37,500
37,500
20,000
35,000
13,334
10,000
25,000
37,500
37,500
20,000
35,000
13,334
50,000
15,000
15,000
25,000
5,000
20,000
5,000
N/A
94,131
N/A
N/A
Nil
N/A
N/A
Nil
N/A
N/A
N/A
Nil
N/A
N/A
Nil
Nil
Totals
Notes:
(1)
(2)
(3)
5,948,280
17.14% 5,388,940
4,822,550
450,000
94,131
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 655,000 stock options are held by each of
Dr. Isa Odidi and Dr. Amina Odidi.
For information regarding option expiration dates and exercise price refer to the tables included under Item 6.B.
On January 10, 2013, the Company completed a private placement financing of 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 maturity date of the
Debenture has been further extended to October 1, 2018. The Company currently expects to repay the current net amount of
$1,350,000 on or about October 1, 2018, if the Company then has cash available.
80
(4)
Includes options exercisable within 60 days of the date of this filing.
As of February 27, 2018, the directors and executive officers of the Company as a group owned, directly or indirectly, or exercised
control or direction over 5,948,280 common shares, representing approximately 17.1% of the issued common shares of the Company (and
beneficially owned approximately 11,220,830 common shares representing 28.1% 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). As of February 27, 2018, Mr. Campbell owned options (exercisable until October 20, 2027) to purchase 60,000
common shares at a price of C$1.27 and options (exercisable until November 30, 2022) to purchase 25,000 common shares at a price of
C$1.15. Mr. Campbell’s options will cease to be exercisable 120 days after he ceases to be employed by the Company.
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.
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.
81
● 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.
● 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
82
● 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.
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.
A total of 3,064,172 options to purchase common shares have been issued, representing 8.8% of the shares issued and outstanding
as of February 27, 2018. As of February 27, 2018, 172,000 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.
83
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 1.0% of the issued and outstanding common
shares of the Company as of February 27, 2018.
● 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.
● 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.
84
● 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;
85
(vi) change the application of the adjustment provisions of the RSU Plan or the change of control provisions of the RSU Plan;
or
(vii)change the eligible participants under the RSU Plan.
A copy of the RSU Plan is available upon request in writing to the Chief Financial Officer of the Company at 30 Worcester Road,
Toronto, Ontario, M9W 5X2.
The 330,000 common shares that are currently authorized for issuance under the RSU Plan represent approximately 1.0% of the
Company’s common shares issued and outstanding as at February 27, 2018. No RSUs have been issued and none are outstanding as of
February 27, 2018.
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 0.3% of the total number of issued and outstanding
common shares as of February 27, 2018.
● 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.
86
● No rights under the DSU Plan and no DSUs credited pursuant to the provisions of the DSU Plan are assignable or transferable
by any participant other than pursuant to a will or by the laws of descent and distribution.
● Under the DSU Plan, the Board may from time to time in its absolute discretion amend, modify and change the provisions of
the DSU Plan or any DSUs issued pursuant to the DSU Plan, provided that any amendment will:
● not adversely alter or impair any DSU previously credited without such participant’s consent in writing except as permitted
by the adjustment provisions in the DSU Plan;
● be subject to any regulatory approvals including, where required, the approval of the TSX;
● be subject to shareholder approval in accordance with the rules of the TSX in circumstances where the amendment,
modification or change to the DSU Plan or DSU would:
(i) 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 0.3% of the
Company’s common shares issued and outstanding as at February 27, 2018. A total of 102,791 DSUs have been issued, representing
common share rights that comprise approximately 0.3% of the common shares issued and outstanding as at February 27, 2018.
87
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.
Item 7. Major Shareholders and Related Party Transactions
A. Major Shareholders
In October 2017 we completed a registered direct offering of common shares and a private placement of common share purchase
warrants. In June 2016 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 16.7%) of our then-issued and outstanding common shares
of the Company (subsequent to the offering) (See “Prior Sales”). As of February 27, 2018, 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
16.7% of our issued and outstanding common shares of the Company (and collectively beneficially owned in the aggregate approximately
9,935,526 common shares representing 25.6% of our common shares including common shares issuable upon the exercise of outstanding
options and the conversion of the outstanding convertible debenture that are exercisable or convertible within 60 days of the date hereof).
(Reference is made to the section entitled “E. Share Ownership” under “Item 6. Directors, Senior Management and Employees” for
additional information regarding the options to purchase common shares and the convertible debenture held by Drs. Amina and Isa Odidi.)
On February 14, 2018, Armistice Capital, LLC filed a Schedule 13G amendment with the SEC disclosing beneficial ownership of
1,936,000 common shares, representing approximately 5.58% of our outstanding common shares. 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, 2017 there were a total of 346 registered holders of record of our common shares, of which 248 holders were
registered with addresses in Canada holding in the aggregate approximately 20.29% of our outstanding common shares, 47 holders were
registered with addresses in the United States holding in the aggregate approximately 79.71% of our 34,704,515 outstanding common
shares, and 51 holders 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”.
88
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 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. In December 2016, a principal repayment of $150,000 was made on the Debenture and the maturity date was
extended. The maturity date of the Debenture has been further extended to October 1, 2018. The Company currently expects to repay the
current net amount of $1,350,000 on or about October 1, 2018, 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.
The Company’s Corporate Governance Committee, made up of independent directors, oversees any potential transaction and
negotiation that could give rise to a related party transaction or create a conflict of interest, and conducts an appropriate review.
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, 2017, and
continuing as at February 27, 2018, we are not aware of any pending or threatened material litigation claims against us other than the
following matters.
In November 2016, we filed an NDA for our Oxycodone ER product candidate relying on the 505(b)(2) regulatory pathway,
which allowed us to reference data from Purdue Pharma L.P.’s file for its OxyContin ® extended release oxycodone hydrochloride. Our
Oxycodone ER application was accepted by the FDA for further review in February 2017. We certified to the FDA that we believed that
our Oxycodone ER product candidate would not infringe any of the OxyContin® patents listed in the Orange Book, or that such patents are
invalid, and so notified Purdue Pharma L.P. and the other owners of the subject patents listed in the Orange Book of such certification. On
April 7, 2017, we received notice that the Purdue litigation plaintiffs had commenced patent infringement proceedings against us in the U.S.
District Court for the District of Delaware in respect of our NDA filing for Oxycodone ER, alleging that Oxycodone ER infringes six (6)
out of the sixteen (16) patents. The complaint seeks injunctive relief as well as attorneys’ fees and costs and such other and further relief as
the Court may deem just and proper. An answer and counterclaim have been filed.
89
As a result of the commencement of these legal proceedings, the FDA is stayed for 30 months from granting final approval to our
Oxycodone ER product candidate. That time period commenced on February 24, 2017, when the Purdue litigation plaintiffs received notice
of our certification concerning the patents, and will expire on August 24, 2019, unless the stay is earlier terminated by a final declaration of
the courts that the patents are invalid, or are not infringed, or the matter is otherwise settled among the parties. A trial date for the Purdue
litigation has been set for October 22, 2018. We are confident that we do not infringe the subject patents, and will vigorously defend
against these claims.
In July 2017 , three complaints were filed in the U.S. District Court for the Southern District of New York asserting claims under
the federal securities laws against us and two of our executive officers on behalf of a putative class of purchasers of our securities. In a
subsequent order, the Court consolidated the three actions under the caption Shanawaz v. Intellipharmaceutics Int’l Inc., et al., No. 1:17-cv-
05761 (S.D.N.Y.), appointed lead plaintiffs in the consolidated action, and approved lead plaintiffs’ selection of counsel. Lead plaintiffs
filed a consolidated amended complaint on January 29, 2018. In the amended complaint, lead plaintiffs purport to assert claims on behalf of
a putative class consisting of purchasers of our securities between May 21, 2015 and July 26, 2017. The amended complaint alleges that the
defendants violated Sections 10(b) and 20(a) of the U.S Exchange Act and Rule 10b-5 promulgated thereunder by making allegedly false
and misleading statements or failing to disclose certain information regarding our NDA for Oxycodone ER abuse-deterrent oxycodone
hydrochloride extended release tablets. The complaint seeks, among other remedies, unspecified damages, attorneys’ fees and other costs,
equitable and/or injunctive relief, and such other relief as the court may find just and proper. Under a scheduling order approved by the
Court, the defendants must respond to the amended complaint by March 30, 2018. We intend to vigorously defend our company against the
claims asserted in the consolidated action.
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, in each case under the symbol “IPCI.” Our shares began
trading on October 22, 2009, when the transaction with Vasogen was completed. The following table indicates, for the relevant periods, the
high and low prices of our common shares on Nasdaq and on the TSX:
Annual
2017
2016
2015
2014
2013
Quarterly
2017
Fourth quarter
Third quarter
NASDAQ (U.S.$)
TSX (C$)
High
Low
High
Low
3.12
3.35
3.92
5.18
6.46
1.25
2.92
0.81
1.41
1.73
1.94
1.50
0.82
0.81
4.09
4.50
4.99
5.77
6.70
1.58
3.73
1.00
1.78
2.16
2.14
1.55
1.00
1.00
90
Second quarter
First quarter
2016
Fourth quarter
Third quarter
Second quarter
First quarter
2015
Fourth quarter
Third quarter
Second quarter
First quarter
2014
Fourth quarter
Third quarter
Second quarter
First quarter
2013
Fourth quarter
Third quarter
Second quarter
First quarter
Most recent 6 months
February 2018
January 2018
December 2017
November 2017
October 2017
September 2017
August 2017
Item 10. Additional Information
A. Share Capital
2.69
3.12
3.35
2.06
2.42
3.19
2.32
3.87
3.92
2.94
4.48
5.18
4.19
3.80
6.46
3.72
2.23
2.59
1.81
2.11
1.69
1.41
1.53
1.83
1.73
1.92
2.28
1.96
3.05
3.21
1.94
2.51
1.63
1.50
1.57
1.72
3.57
4.09
4.50
2.61
3.22
4.20
2.95
4.99
4.86
3.33
4.17
4.49
5.77
4.82
6.70
3.84
2.35
2.56
2.48
2.78
2.21
1.78
2.00
2.46
2.16
2.25
2.95
2.49
2.77
2.14
3.53
3.28
1.72
1.55
1.60
1.77
NASDAQ (U.S.$)
TSX (C$)
High
Low
High
Low
0.82
1.05
0.89
0.97
1.25
1.17
1.30
0.61
0.77
0.70
0.84
0.88
0.82
0.81
1.02
1.29
1.15
1.23
1.58
1.50
1.62
0.78
0.97
0.92
1.09
1.13
1.00
1.00
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, 2017, there were 34,704,515 common shares and no preference shares
issued and outstanding compared to 34,704,515 common shares and no preference shares issued and outstanding at December 1, 2017. As
of February 27, 2018, there were 34,704,515 common shares and no preference shares issued and outstanding.
The reasons for the increase in common shares issued were as follows. In October 2017, the Company completed an underwritten
public offering of 3,636,364 common shares at a price of $1.10 per share. The Company also issued to the investors warrants to purchase an
aggregate of 1,818,182 common shares. The warrants will be exercisable six months following the closing date and will expire 30 months
after the date they become exercisable, have a term of three years and an exercise price of $1.25 per common share. 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
91
such lesser amount as may then be permitted under applicable securities laws and regulations). As of February 27, 2018, we have issued and
sold 4,740,350 common shares with an aggregate offering price of $13,872,929 under the at-the-market program. Roth received
compensation of $392,827 in connection with such sales. During the three months ended November 30, 2017, an aggregate of 50,000 (2016
– 497,949) of our common shares were sold on Nasdaq for gross proceeds of $46,025 (2016 – $1,507,400) and net proceeds of $44,853
(2016 – $1,464,759) under the at-the-market offering program. Roth received aggregate compensation of $1,171 in connection with such
sales. During the year ended November 30, 2017, an aggregate of 1,108,150 (2016 – 1,471,260) of our common shares were sold on
Nasdaq for gross proceeds of $2,541,640 (2016 - $3,469,449) and net proceeds of $2,468,474 (2016 - $3,368,674) under the at-the-market
offering program. Roth received aggregate compensation of $73,166 (2016 - $100,775) 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, 2017, an aggregate of 3,979,797 common shares were issuable upon the exercise of outstanding common share
purchase warrants, with a weighted average exercise price of $1.64 per common share. At February 27, 2018, an aggregate of 3,979,797
common shares were issuable upon the exercise of outstanding common share purchase warrants, with a weighted average exercise price of
$1.64 per common share.
Options
At November 30, 2017, an aggregate of 5,828,112 common shares were issuable upon the exercise of outstanding options, with a
weighted average exercise price of $3.20 per common share and up to 406,280 additional common shares were reserved for issuance under
our stock option plan.
As of February 27, 2018, there were 5,669,835 common shares issuable upon the exercise of outstanding options. The weighted
average exercise price of these options is $3.13 per common share. As at February 27, 2018, up to 564,557 additional common shares were
reserved for issuance under our Option Plan.
Exercise
price
Number
outstanding
Weighted
average
exercise
price per
share
$
Weighted
average
remaining
contract
life (years)
Options
outstanding
Weighted
average
grant
due
fair value
$
Options
exercisable
Weighted
average
grant
date
fair value
$
Weighted
average
exercise
price per
share
$
Number
exercisable
Under
2.50
2.51 - 5.00
5.01 - 10.00
10.01 - 100.00
1,251,000
4,560,835
-
16,277
5,828,112
1.43
3.50
-
29.11
3.20
0.99
1.84
-
22.89
920,341
4,284,441
-
16,277
5,221,059
1.49
3.49
-
29.11
3.30
1.07
1.86
-
22.89
3.93
1.81
-
0.21
92
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.
Effective March 28, 2017, the maturity date of the Debenture was extended to October 1, 2017. Effective September 28, 2017, the maturity
date of the Debenture was further extended to October 1, 2018. The Company currently expects to repay the current net amount of
$1,350,000 on or about October 1, 2018, if the Company then has cash available.
Deferred Share Units
At November 30, 2017, there were 94,131 DSUs issued and outstanding. From November 30, 2017 to February 27, 2018, an
additional 8,660 DSUs have been issued. At February 27, 2018, 7,209 additional DSUs are reserved for issuance under our DSU plan.
Restricted Share Units
At November 30, 2017, there were no restricted share units (“RSUs”) issued and outstanding. From November 30, 2017 to the
date of this report, no RSUs have been issued. At February 27, 2018, 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”).
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.
93
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 $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 maturity date of the Debenture has been further
extended to October 1, 2018. The Company currently expects to repay the current net amount of $1,350,000 on or about October 1, 2018, if
the Company then has 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 exchange rules and 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 facilities to accommodate our anticipated growth requirements, and, although we have no present 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 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, 2018, we have issued and sold 4,740,350
common shares with an aggregate offering price of $13,872,929 under the at-the-market program. Roth received aggregate compensation
of $392,827 in connection with such sales. As a result of prior sales of the Company’s common shares under the equity distribution
agreement, the Company may in the future offer and sell its common shares with an aggregate purchase price up to $2,927,071, or such
lesser amount as may then be permitted under applicable exchange rules and securities laws and regulations, pursuant to the at-the-market
program. Under Toronto Stock Exchange rules, the number of common shares that may currently be offered under the at-the-market
program is 565,134 common shares. The Company intends to remove or amend this limitation, although no assurance can be given that the
limitation will be removed or amended. There can be no assurance that any additional shares will be sold under our at-the-market program.
Subsequent
94
to the year ended November 30, 2017, share issuance costs of Nil were recorded against the cost of the shares issued and recognized in
capital stock. As at November 30, 2017, $1,334,873 of the share issuance costs has been recorded against the cost of the shares issued and
recognized in capital stock. 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 July 17, 2017, the Shelf Registration Statement was declared effective by the SEC. The Shelf Registration Statement allows
for, subject to securities regulatory requirements and limitations, the potential offering of up to an aggregate of $100 million of the
Company’s common shares, preference shares, warrants, subscription receipts, subscription rights and units, or any combination thereof,
from time to time in one or more offerings, and is 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 Registration
Statement, a shareholder’s percentage ownership will be diluted and our stock price could be adversely affected. As of February 27, 2018,
the Company has not sold any securities under the Shelf Registration Statement, other than the sale since July 17, 2017 of (i) 485,239
common shares under the Company’s at-the-market program referred to above and (ii) the sale of 3,636,364 common shares under the
Wainwright Agreement referred to above, and there can be no assurance that any additional securities will be sold under the Shelf
Registration Statement or the shelf prospectus.
Pursuant to a placement agent agreement dated October 10, 2017 between the Company and H.C. Wainwright & Co., LLC (the
“Wainwright Agreement”), in October 2017, we completed a registered direct offering consisting of 3,636,364 common shares at a price
of $1.10 per share for gross proceeds of approximately $4 million. We also issued to the investors warrants to purchase an aggregate of
1,818,182 common shares at an exercise price of $1.25 per share. The warrants are exercisable six months following the October 13, 2017
closing date and will expire 30 months after the date they become exercisable. The common shares (but not the warrants or the common
shares underlying the warrants) were offered by us through a prospectus supplement pursuant to our shelf registration statement on Form F-
3 as previously filed and declared effective by the SEC and the base prospectus contained therein (Registration Statement No. 333-
218297). The warrants described above were offered in a private placement under Section 4(a)(2) of the U.S. Securities Act, and Regulation
D promulgated thereunder and, along with the common shares underlying the warrants, have not been registered under the U.S. Securities
Act, or applicable state securities laws. The Company also issued to the placement agents 181,818 warrants to purchase a share of common
stock at an exercise price of $1.375 per share. The total net proceeds from the offering were $3.5 million, after deducting offering expenses.
During the 12-month period ended November 30, 2017, warrants to purchase an aggregate of 168,009 common shares were
exercised.
During the 12-month period ended November 30, 2017, 496,000 options were granted and 2,000 options were exercised.
Also during the 12-month period ended November 30, 2017, a total of 17,388 deferred share units were granted.
95
B. Articles and By-laws
The Company was formed under the Canada Business Corporations Act (the “ CBCA”) by articles of arrangement dated October
22, 2009 (the “Articles”) in the IPC Arrangement Transaction discussed in Item 15. The Company is the successor issuer to Vasogen Inc.
for reporting purposes under the U.S. Exchange Act. The authorized share capital of the Company consists of an unlimited number of
common shares, all without nominal or par value and an unlimited number of preference shares issuable in series.
Provisions as to the modification, amendment or variation of rights and provisions of each class of shares are contained in the
CBCA and the regulations promulgated thereunder. Certain fundamental changes to the Articles will require the approval of at least two-
thirds of the votes cast on a resolution submitted to a special meeting of the Company’s shareholders called for the purpose of considering
the resolution. These items include (i) certain amendments to the provisions relating to the outstanding capital of the Company, (ii) a sale
of all or substantially all of the assets of the Company, (iii) an amalgamation of the Company with another company, other than a
subsidiary, (iv) a winding-up of the Company, (v) a continuance of the Company into another jurisdiction, (vi) a statutory court approved
arrangement under the CBCA (essentially a corporate reorganization such as an amalgamation, sale of assets, winding-up, etc.), or (vii) a
change of name.
Under the CBCA, a corporation cannot repurchase its shares or pay or declare dividends if there are reasonable grounds for
believing that (a) the corporation is, or after payment would be, unable to pay its liabilities as they become due, or (b) after the payment, the
realizable value of the corporation’s assets would be less than the aggregate of (i) its liabilities and (ii) its stated capital of all classes of its
securities. Generally, stated capital is the amount paid on the issuance of a share unless the stated capital has been adjusted in accordance
with the CBCA.
General
The Articles do not contain any restrictions on the business the Company may carry on.
Directors
The Company’s By-Law No. 1 (a by-law relating generally to the transaction of the business and affairs of the Company) provides
for the indemnification of the directors and officers of the Company, former directors and officers of the Company against all costs,
charges and expenses, including an amount paid to settle an action or satisfy a judgment, reasonably incurred by the individual in respect of
any civil, criminal, administrative, investigative or other proceeding in which the individual is involved because of that association with the
Company, subject to certain limitations in By-Law No. 1 and the limitations in the CBCA.
The Company may also indemnify other individuals who act or acted at the Company’s request as a director or officer, or an
individual acting in a similar capacity, of another entity.
Annual and Special Meetings
Meetings of shareholders are held at such place, at such time, on such day and in such manner as the Board may, subject to the
CBCA and any other applicable laws, determine from time to time. The only persons entitled to attend a meeting of shareholders are those
persons entitled to notice thereof, those entitled to vote thereat, the directors, the auditors of the Company and any others who may be
entitled or required under the CBCA to be present at the meeting. Under the CBCA, notice of the meeting is required to be given not less
than 21 days and not more than 60 days prior to the meeting. Shareholders on the record date are entitled to attend and vote at the meeting.
The quorum for the transaction of business at any meeting of shareholders is at least two persons present at the opening of the meeting
who are entitled to vote either as shareholders or proxyholders, representing collectively not less than 5% of the outstanding shares of the
Company entitled to be voted at the meeting.
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.
96
There are no provisions in either the Company’s Articles or By-Law No. 1 that would have the effect of delaying, deferring or
preventing a change in control of the Company and that would operate only with respect to a merger, acquisition or corporate restructuring
involving the Company or its subsidiary.
There are no limitations on the rights to own securities, including the rights of non-resident or foreign shareholders to hold or
exercise voting rights on the securities imposed by foreign law or by the charter or other constituent document of the Company.
C. Material Contracts
Except for contracts entered into in the ordinary course of business and not required to be filed under Canadian securities 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®)–Approved by FDA and launched.
● 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.
97
● 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.
● 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 maturity date of the Debenture has
been further extended to October 1, 2018. The Company currently expects to repay the current net amount of $1,350,000 on or
about October 1, 2018, 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.
● Pursuant to the Wainwright Agreement, in October 2017, we completed a registered direct offering consisting of 3,636,364
common shares at a price of $1.10 per share for gross proceeds of approximately $4 million. We also issued to the investors
warrants to purchase an aggregate of 1,818,182 common shares at an exercise price of $1.25 per share. The warrants are
exercisable six months following the October 13, 2017 closing date and will expire 30 months after the date they become
exercisable. The common shares (but not the warrants or the common shares underlying the warrants) were offered by us
through a prospectus supplement pursuant to our shelf registration statement on Form F-3 as previously filed and declared
effective by the SEC and the base prospectus contained therein (Registration Statement No. 333-218297). The warrants
described above were offered in a private placement under Section 4(a)(2) of the U.S. Securities Act, and Regulation D
promulgated thereunder and, along with the common shares underlying the warrants, have not been registered under the U.S.
Securities Act, or applicable state securities laws. The Company also issued to the placement agents 181,818 warrants to
purchase a share of common stock at an exercise price of $1.375 per share. The total net proceeds from the offering were $3.5
million, after deducting 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.
98
E. Taxation
United States Taxation
Certain Material United States Federal Income Tax Considerations
The following discussion is a general summary of certain material United States federal income tax considerations applicable to a
U.S. holder arising from and relating to the consequences of the ownership and disposition of our common shares and warrants that are
generally applicable to a United States person that holds our common shares as capital assets (a “U.S. Holder”) within the meaning of
Section 1221 of the Code. This discussion does not address holders of other securities. This discussion assumes that we are not a
“controlled foreign corporation” for U.S. federal income tax purposes. The following discussion does not purport to be a complete analysis
of all of the potential United States federal income tax considerations that may be relevant to particular holders of our common shares or
warrants in light of their particular circumstances nor does it deal with persons that are subject to special tax rules, such as brokers, dealers
in securities or currencies, financial institutions, insurance companies, tax-exempt organizations, persons liable for alternative minimum
tax, U.S. expatriates, partnerships or other pass-through entities, U.S. Holders who own (directly, indirectly or by attribution) ten percent or
more of the total combined voting power of all classes of stock entitled to vote, persons holding our common shares as part of a straddle,
hedge or conversion transaction or as part of a synthetic security or other integrated transaction, traders in securities that elect to use a
mark-to-market method of accounting for their securities holdings, holders whose “functional currency” is not the United States dollar, and
holders who are not U.S. Holders. In addition, the discussion below does not address the tax consequences of the law of any state, locality
or foreign jurisdiction or United States federal tax consequences (e.g., estate or gift tax) other than those pertaining to the income tax.
There can be no assurance that the United States Internal Revenue Service (the “IRS”) will take a similar view as to any of the tax
consequences described in this summary.
The following is based on currently existing provisions of the Code, existing and proposed Treasury regulations under the Code
and current administrative rulings and court decisions. Everything listed in the previous sentence may change, possibly on a retroactive
basis, and any change could affect the continuing validity of this discussion. We cannot predict whether, when, or to what extent U.S.
federal tax laws will be changed, or regulations, interpretations, or rulings will be issued or revoked, nor is the long-term impact of the
significant changes made to the Code in 2017 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)
(ii)
a citizen or an individual resident of the United States;
a corporation (or an entity taxable as a corporation for United States federal income tax purposes) created or organized in
or under the laws of the United States or any political subdivision of the United States;
(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.
99
Passive Foreign Investment Company Considerations
Special, generally unfavorable, U.S. federal income tax rules apply to a U.S. Holder’s ownership and disposition of the stock or
warrants of a passive foreign investment company (“PFIC”). As discussed below, however, a U.S. Holder of our common shares (but not
our warrants) may be able to mitigate these consequences by making a timely and effective election to treat the Company as a qualified
electing fund (a “QEF Election”) or by making a timely and effective mark-to-market election with respect to its common shares.
For U.S. federal income tax purposes, a foreign corporation is classified as a PFIC for each taxable year in which, applying the
relevant look-through rules, either:
● at least 75% of its gross income for the taxable year consists of specified types of “passive” income (referred to as the “income
test”); or
● at least 50% of the average value of its assets during the taxable year is attributable to certain types of assets that produce
passive income or are held for the production of passive income (referred to as the “asset test”).
For purposes of the income and asset tests, if a foreign corporation owns directly or indirectly at least 25% (by value) of the stock
of another corporation, that foreign corporation will be treated as if it held its proportionate share of the assets of the other corporation and
received its proportionate share of the income of that other corporation. Also, for purposes of the income and asset tests, passive income
does not include any income that is an interest, dividend, rent or royalty payment if it is received or accrued from a related person to the
extent that amount is properly allocable to the active income of the related person. Under applicable attribution rules, if the Company is a
PFIC, U.S. Holders of common shares will be treated as holding stock of the Company’s subsidiaries that are PFICs in certain
circumstances. In these circumstances, certain dispositions of, and distributions on, stock of such subsidiaries may have consequences for
U.S. Holders under the PFIC rules.
We believe that we were not a PFIC during our 2017 taxable year and are unlikely to be a PFIC during our 2018 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 2018 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 2018 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, such U.S. Holder’s share of our income for such year will
continue to be subject to the regime described below, 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.
100
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 taxable years other than the year in which the excess distribution occurs and pre-FIC
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, during
that U.S. Holder’s holding period for common shares.
Any portion of a distribution paid to a U.S. Holder that does not constitute an excess distribution will be treated as ordinary
dividend income to the extent of our current and accumulated earnings and profits (as computed for U.S. federal income tax purposes).
Such dividends generally will not qualify for the dividends-received deduction otherwise available to U.S. corporations. Any amounts
treated as dividends paid by a PFIC generally will not constitute “qualified dividend income” within the meaning of Section 1(h)(11) of the
Code and will, therefore, not be eligible for the preferential 20% rate for such income generally in effect for individuals 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 to the extent they remain undistributed, subject to
certain limitations. However, if payment of such tax is deferred, the taxes will be subject to an interest charge calculated from the due date
of the tax return for the relevant year with respect to which the QEF election applies until the date the tax is paid.
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
101
common shares, but the adverse tax consequences attributable to the period prior to exercise of the warrants, 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) takes a 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) as a result 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 it owns common shares (which election remains in effect throughout such U.S. Holder’s ownership of common shares) will
recognize capital gain or loss for U.S. federal income tax purposes in an amount equal to the difference between the net amount realized on
the disposition and the U.S. Holder’s adjusted tax basis in the common shares. Such gain or loss will be long-term capital gain or loss if the
U.S. Holder’s holding period in the common shares is more than one year, otherwise it will be short-term capital gain or loss. The
deductibility of capital losses is subject to certain limitations. A U.S. Holder’s gain realized upon the disposition of shares generally will be
treated as U.S. source income, and losses from the disposition generally will be allocated to reduce U.S. source income.
A QEF Election must be made in a timely manner as specified in applicable Treasury Regulations. Generally, the QEF Election
must be made by filing the appropriate QEF election documents at the time such U.S. Holder timely files its U.S. federal income tax return
for the first taxable year of the Company during which it was 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 a U.S. Holder that has made such a mark-to-market election would be treated as ordinary income. Such 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.
102
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
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. Any amount considered to be a dividend received by a U.S. Holder who is an individual should be eligible for the 20% maximum
rate of U.S. federal income tax under Section 1(h)(11) of the Code. 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.
103
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 upon exercise would equal the U.S. holder’s
basis in the warrant. If the cashless exercise were treated as not being a gain realization event, a U.S. Holder’s holding period in the
common shares would be treated as commencing on the date following the date of exercise of the warrant. If the cashless exercise were
treated as a recapitalization, the holding period of the common shares would include the holding period of the warrant. It is also possible
that a cashless exercise could be treated as a taxable exchange in which gain or loss would be recognized. In such event, a U.S. Holder
could be deemed to have surrendered warrants equal to the number of common shares having a value equal to the exercise price for the
total number of warrants to be exercised. The U.S. Holder would recognize capital gain or loss in an amount equal to the difference
between the fair market value of the common shares represented by the warrants deemed surrendered and the U.S. Holder’s tax basis in the
warrants deemed surrendered. If taxable exchange treatment applied, 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.
104
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, subject to the limitations described in the next paragraph, a credit will
reduce a U.S. Holder’s U.S. federal income tax liability on a dollar-for-dollar basis, whereas a deduction will reduce a U.S. Holder’s income
subject to U.S. federal income tax. This election is made on a year-by-year basis and generally applies to all foreign taxes paid (whether
directly or through withholding) or accrued by a U.S. Holder during a year.
Complex limitations apply to the foreign tax credit, including the general limitation that the credit cannot exceed the proportionate
share of a U.S. Holder’s U.S. federal income tax liability (determined before application of the foreign tax credit) 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.
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.
105
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, U.S. federal income tax information reporting rules generally require 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 if both (i) such entities are owned at least 80% by an individual who is a U.S. citizen or U.S. tax resident (or, in some cases, by a
nonresident alien who meets certain criteria) or are trusts with beneficiaries that are such individuals and (ii) more than 50% of their
income consists of certain passive income or more than 50% of their assets is held for the production of such income. U.S. Holders are
urged to consult with their tax advisors regarding their reporting obligations, including the requirement to file IRS Form 8938.
In addition, in certain circumstances, a U.S. Holder of common shares who disposes of such common shares in a transaction
resulting in the recognition by such Holder of losses in excess of certain significant threshold amounts may be obligated to disclose its
participation in such transaction in accordance with the Treasury Regulations governing tax shelters and other potentially tax-motivated
transactions or tax shelter regulations. Potential purchasers of common shares should consult their tax advisors concerning any possible
disclosure obligation under the tax shelter rules with respect to the disposition of their common shares.
Backup Withholding
Generally, information reporting requirements will apply to distributions on our common shares or proceeds on the disposition of
our common shares or warrants paid within the U.S. (and, in certain cases, outside the U.S.) to U.S. Holders. Such payments will generally
be subject to backup withholding tax at the rate of 28% if: (a) a U.S. Holder fails to furnish such U.S. Holder’s correct U.S. taxpayer
identification number to the payor (generally on Form W-9), as required by the Code and Treasury Regulations, (b) the IRS notifies the
payor that the U.S. Holder’s taxpayer identification number is incorrect, (c) a U.S. Holder is notified by the IRS that it has previously failed
to properly report interest and dividend income, or (d) a U.S. Holder fails to certify, under penalty of perjury, that such U.S. Holder has
furnished its correct U.S. taxpayer identification number. However, certain exempt persons generally are excluded from these information
reporting and backup withholding rules.
Backup withholding is not an additional tax. Any amounts withheld under the U.S. backup withholding tax rules will be allowed
as a credit against a U.S. Holder’s U.S. federal income tax liability, if any, or will be refunded, if such U.S. Holder furnishes required
information to the IRS in a timely manner. Each U.S. Holder should consult its own tax advisor regarding the backup withholding rules.
Canadian Federal Income Tax Considerations
Taxation
The following summary describes the principal Canadian federal income tax considerations generally applicable to a holder of the
Company’s common shares who, for purposes of the Income Tax Act (Canada) (the “ Canadian Tax Act”) and the Canada – United States
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.
106
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.
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 or deemed
disposition of the Company’s common shares, unless such shares are “taxable Canadian property” within the meaning of the Canadian Tax
Act. Generally, a share listed on a designated stock exchange for purposes of the Canadian Tax Act (which includes the TSX and
NASDAQ) will not be “taxable Canadian property” to a United States Holder unless, at any particular time during the 60 month period
immediately preceding the disposition (i) 25% or more of the issued shares of any class or series of the particular corporation were owned
by: (a) such United States Holder, (b) by persons with whom the United States Holder did not deal at arm’s length, (c) a partnership in
which the United States Holder, or persons with whom the United States Holder did not deal at arm’s length, holds a membership interest
directly or indirectly through one or more partnerships, or (d) any combination thereof, and (ii) the shares derived more than 50% of their
fair market value directly or indirectly from one or any combination of real property situated in Canada, “timber resource property”,
“Canadian resource property” (each as defined under the Canadian Tax Act), or options in respect of, or interests or rights in any of the
foregoing.
F. Dividends and Paying Agents.
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.
Not Applicable
107
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:
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, gross
November
30,
2017
$
November
30,
2016
$
756,468
(66,849)
689,619
472,474
-
472,474
689,619
427,519
5,176
3,319
61,673
756,468
41,636
472,474
Financial instruments that potentially subject the Company to concentration of credit risk consist principally of uncollateralized
accounts receivable. The Company’s maximum exposure to credit risk is equal to the potential amount of financial assets. For the year
ended November 30, 2017, two customers accounted for substantially all the revenue and all the accounts receivable of the Company. For
the year ended November 30, 2016, Par accounted for substantially all the revenue and all the accounts receivable of the Company.
108
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, 2017. 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 and accrued liabilities
Employee cost payable
Capital lease
Net exposure
Liquidity risk
November
30, 2017
U.S.
$
156,950
156,950
November
30, 2016
U.S.
$
136,059
136,059
Canadian
1.3429
$
182,714
182,714
Canadian
1.2888
$
202,277
202,277
1,704,086
277,080
-
1,981,166
(1,778,889)
707,358
1,322,227
1,044,151
214,980
14,828
-
1,537,207
1,766,338
(1,380,257) (2,189,219) (1,630,278)
949,911
1,402,108
19,912
2,371,933
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, 2017:
109
Less than
3 months
$
3 to 6
months
$
6 to 9
months
$
9 months
to 1 year
$
2,060,084
Accrued liabilities 782,369
-
-
-
-
-
-
214,980
66,973
3,124,406
-
40,805
40,805
-
40,805
40,805
-
1,363,749
1,363,749
November 30, 2017
Greater
than
1 year
$
Total
$
-
-
-
-
-
2,060,084
782,369
214,980
1,512,332
4,569,765
Third parties
Accounts payable
Related parties
Employee costs payable
Convertible debenture
Limitations:
The above discussion includes only those exposures that existed as of November 30, 2017, 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.
110
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, 2017.
In the second quarter of 2017, we initiated the transition from the COSO 1992 Internal Control - Integrated Framework to the
COSO 2013 Internal Control - Integrated Framework. Progress thus far has centered on strengthening our risk assessment process as well
as our information technology policies and related documentation. We expect this transition to continue for the remainder of fiscal 2018.
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, 2017. 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, 2017.
Changes in Internal Control over Financial Reporting
During the year ended November 30, 2017, there were no changes made to the Company’s internal control over financial
reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial
reporting, and specifically, there were no changes in accounting functions, board or related committees and charters, or auditors; no
functions, controls or financial reporting processes of any constituent entities were adopted as the Company’s functions, controls and
financial processes; and no other significant business processes were implemented.
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.
Attestation of Internal Control over Financial Reporting
111
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, 2017, no waivers or requests for exemptions from the Code of Ethics were either requested or granted.
Item 16C. Principal Accountant Fees and Services.
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, 2017 and 2016 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
2017
C$ 129,342
C$ 210,791
-
-
C$ 340,133
C$
C$
C$
2016
-
75,664
-
24,075
99,739
Notes:
(1)
(2)
(3)
(4)
Audit fees consist of fees related to the audit of the Company’s consolidated financial statements.
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.
Tax fees consist of fees for tax consultation, tax advice and tax compliance services for the Company and its subsidiaries.
All other fees related to internal control reviews.
112
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, 2017 and 2016, 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.
Item 16F. Change in Registrant’s Certifying Accountant.
The disclosure related to Item 16-F was previously reported, as that term is defined in Rule 12b-2 under the U.S. Exchange Act, in
our Form 20-F filed on February 28, 2017.
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, in each case under the symbols “IPCI.” 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 Nasdaqs Rule 5600 Series that the Company does not follow and the
home country practices that it follows in lieu thereof and other differences from domestic U.S. companies that apply to us under Nasdaq’s
corporate governance rules.
Shareholder Approval in Connection with Certain Transactions: Nasdaq’s Rule 5635 requires each issuer to obtain shareholder
approval prior to certain dilutive events, including: (i) a transaction other than a public offering involving the sale under certain
circumstances of 20% or more of the issuer’s common shares outstanding prior to the transaction at a price less than the greater of book
value or market value, (ii) the acquisition of the stock or assets of another company; (iii) equity-based compensation of officers, directors,
employees or consultants and (iv) a change of control. Under the exemption available to foreign private issuers under Nasdaq Rule 5615(a)
(3), the Company does not follow Nasdaq Rule 5635. Instead, and in accordance with the Nasdaq exemption, the Company complies with
applicable TSX rules and applicable Canadian corporate and securities regulatory requirements.
Independence of the Majority of the Board of Directors; Independent Director Oversight of Executive Compensation and Board
Nominations: Nasdaq’s Rule 5605(b)(1) requires that the Board of Directors be comprised of a majority of independent directors, as
defined in Rule 5605(a)(2). Nasdaq’s Rule 5605(b)(2) requires the independent members of the Board to regularly hold executive sessions
where only those directors are present. Moreover, Nasdaq’s Rule 5605(d) requires independent director oversight of executive officer
compensation arrangements by approval of such compensation by a majority of the independent directors or by a compensation committee
comprised solely of independent directors, and Rule 5605(e) requires similar oversight with respect to the process of selecting nominees to
the Board. Under the exemption available to foreign private issuers under Rule 5615(a)(3), the Company does not follow Nasdaq Rules
5605(b)(1), 5605(d) or 5605(e). Instead, and in accordance with the Nasdaq exemption, the Company complies with the applicable TSX
rules and applicable Canadian corporate and securities regulatory requirements.
113
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.
114
Item 18. Financial Statements.
Consolidated financial statements of
Intellipharmaceutics
International Inc.
November 30, 2017, 2016 and 2015
Intellipharmaceutics International Inc.
November 30, 2017, 2016 and 2015
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 sheets of Intellipharmaceutics International Inc. and its subsidiaries (the
“Company”) as of November 30, 2017 and 2016, and the related consolidated statements of operations and comprehensive loss,
shareholders’ equity (deficiency) and cash flows, for each of the years in the two-year period ended November 30, 2017. The Company’s
management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated
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
also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the
Company as of November 30, 2017 and 2016, and the results of its operations and its cash flows for each of the years in the two-year
period ended November 30, 2017, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As
discussed in Note 1 to the consolidated 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 consolidated
financial statements. The consolidated 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 the
year ended November 30, 2015 were audited by another firm of Chartered Professional Accountants who expressed an unqualified opinion
in their report dated February 26, 2016.
Toronto, Canada
February 15, 2018
/s/ MNP LLP
Chartered Professional Accountants
Licensed Public Accountants
1
Deloitte LLP
Bay Adelaide East
8 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 statements of operations and comprehensive loss, cash flows and shareholders’
(deficiency) equity of Intellipharmaceutics International Inc. and subsidiaries (the “Company”) for the year ended November 30, 2015.
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion
on these consolidated 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 consolidated financial statements are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the results of the Company’s operations and
its cash flows for the year ended November 30, 2015, in conformity with accounting principles generally accepted in the United States
of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As
discussed in Note 1 to the consolidated 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 consolidated financial statements. The consolidated 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
2
Intellipharmaceutics International Inc.
Consolidated balance sheets
As at November 30, 2017 and 2016
(Stated in U.S. dollars)
Assets
Current
Cash
Accounts receivable, net (Note 4)
Investment tax credits
Prepaid expenses, sundry and other assets
Inventory (Note 3)
Deferred offering costs (Note 10)
Property and equipment, net (Note 5)
Liabilities
Current
Accounts payable
Accrued liabilities (Note 6)
Employee costs payable (Note 8)
Capital lease obligations (Note 9)
Convertible debenture (Note 7)
Deferred revenue (Note 3)
Deferred revenue (Note 3)
Shareholders' equity
Capital stock (Note 10)
Authorized
Unlimited common shares without par value
Unlimited preference shares
Issued and outstanding
34,704,515 common shares
(November 30, 2016 - 29,789,992)
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
See accompanying notes to consolidated financial statements
3
2017
$
2016
$
1,897,061
689,619
636,489
225,092
115,667
3,563,928
565,302
3,267,551
7,396,781
4,144,424
472,474
681,136
400,642
-
5,698,676
386,375
1,889,638
7,974,689
2,060,084
782,369
214,980
-
1,290,465
300,000
4,647,898
807,295
384,886
1,044,151
14,829
1,494,764
450,000
4,195,925
2,362,500
7,010,398
2,662,500
6,858,425
35,290,034
29,830,791
36,685,387
284,421
(71,873,459)
386,383
34,017,071
284,421
(63,016,019)
1,116,264
7,396,781
7,974,689
/s/ Bahadur Madhani
Bahadur Madhani
Intellipharmaceutics International Inc.
Consolidated statements of operations and comprehensive loss
for the years ended November 30, 2017, 2016 and 2015
(Stated in U.S. dollars)
Revenues
Licensing (Note 3)
Up-front fees (Note 3)
Cost of goods sold
Gross Margin
Expenses
Research and development
Selling, general and administrative
Depreciation (Note 5)
Loss from operations
Net foreign exchange (loss) gain
Interest income
Interest expense
Financing cost (Note 10)
Extinguishment loss (Note 7)
Net loss and comprehensive loss
2017
$
2016
$
2015
$
5,025,350
479,102
5,504,452
2,209,502
37,500
2,247,002
4,093,781
-
4,093,781
704,006
4,800,446
-
2,247,002
-
4,093,781
9,271,353
3,287,914
506,961
13,066,228
8,166,736
3,546,132
385,210
12,098,078
7,247,473
3,581,913
377,849
11,207,235
(8,265,782)
(9,851,076)
(7,113,454)
(80,093)
15,037
(389,239)
(137,363)
-
(8,857,440)
(22,470)
207
(270,238)
-
-
(10,143,577)
46,211
1,507
(256,629)
-
(114,023)
(7,436,388)
Loss per common share, basic and diluted
(0.29)
(0.38)
(0.31)
Weighted average number of common
shares outstanding, basic and diluted
31,014,482
26,699,579
23,767,677
See accompanying notes to consolidated financial statements
4
Intellipharmaceutics International Inc.
Consolidated statements of shareholders' equity (deficiency)
for the years ended November 30, 2017, 2016 and 2015
(Stated in U.S. dollars)
Additional
Accumulated
other
Number
Capital stock
amount
$
paid-incomprehensive Accumulated
deficit
income
capital
$
$
$
Total
shareholders'
equity
(deficiency)
$
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
23,456,611
-
-
91,000
471,439
-
225,000
-
787,439
18,941,067 31,119,930
29,056
417,818
(132,907)
-
-
(464,804)
-
(150,837)
-
-
300,869
1,290,168
(78,166)
1,027,304
-
2,540,175
284,421 (45,436,054)
-
-
-
-
-
-
4,909,364
29,056
417,818
167,962
1,290,168
(78,166)
562,500
(7,436,388) (7,436,388)
(7,436,388) (5,047,050)
-
-
-
-
-
-
-
-
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
24,244,050
-
-
27,500
1,471,260
21,481,242 30,969,093
31,628
2,261,444
(34,391)
-
-
-
87,259
3,469,449
284,421 (52,872,442)
-
-
-
-
-
-
-
-
(137,686)
31,628
2,261,444
52,868
3,469,449
3,689,270
-
357,912
-
-
5,545,942
4,764,777
(1,002,655)
1,030,719
-
-
8,349,549
1,175,190
(158,736)
(330,066)
102,909
-
3,047,978
5,939,967
-
-
(1,161,391)
-
-
700,653
-
-
-
102,909
-
- (10,143,577) (10,143,577)
1,253,950
- (10,143,577)
Balance, November 30, 2016
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)
Cost of warrants issued to placement agent (Note 14)
Share issuance cost (Note 10)
Issuance of shares on exercise of warrants (Note 14)
Modification of convertible debt (Note 7)
Net loss
29,789,992
-
-
2,000
1,108,150
29,830,791 34,017,071
30,355
1,749,999
642
-
-
-
1,100
2,541,640
284,421 (63,016,019)
-
-
-
-
-
-
-
-
1,116,264
30,355
1,749,999
1,742
2,541,640
3,636,364
-
-
168,009
-
-
4,914,523
3,257,445
(86,196)
(685,319)
430,573
-
-
5,459,243
742,555
86,196
(108,912)
(106,315)
273,796
-
2,668,316
-
-
-
-
-
-
-
-
-
-
-
-
4,000,000
-
(794,231)
324,258
273,796
(8,857,440) (8,857,440)
(729,881)
(8,857,440)
Balance, November 30, 2017
34,704,515
35,290,034 36,685,387
284,421 (71,873,459)
386,383
See accompanying notes to consolidated financial statements
5
Intellipharmaceutics International Inc.
Consolidated statements of cash flows
for the years ended November 30, 2017, 2016 and 2015
(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)
Financing cost (Note 10)
Provision for doubtful debts (Note 4)
Unrealized foreign exchange loss (gain)
Change in non-cash operating assets & liabilities
Accounts receivable
Investment tax credits
Prepaid expenses, sundry and other assets
Inventory
Accounts payable, accrued liabilities and employee costs payable
Deferred revenue
Cash flows used in operating activities
Financing activities
Repayment of convertible debenture (Note 7)
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
Cash flows provided from financing activities
Investing activity
Purchase of property and equipment (Note 5)
Cash flows used in investing activities
(Decrease) Increase 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
6
2017
$
2016
$
2015
$
(8,857,440)
(10,143,577)
(7,436,388)
520,838
1,749,999
30,355
219,497
-
137,363
66,849
56,998
385,210
2,261,444
31,628
79,245
-
-
-
22,916
377,849
417,818
29,056
27,103
114,023
-
-
(81,063)
(283,994)
44,647
175,550
(115,667)
599,220
(450,000)
(6,105,785)
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)
(150,000)
(14,829)
1,742
2,541,640
4,000,000
324,258
(1,020,643)
5,682,168
-
(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
(1,823,746)
(1,823,746)
(515,410)
(515,410)
(430,480)
(430,480)
(2,247,363)
4,144,424
1,897,061
2,389,228
1,755,196
4,144,424
(2,478,779)
4,233,975
1,755,196
123,204
-
165,585
-
179,878
-
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2017, 2016 and 2015
(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 and cost plus 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 the Company’s generic Focalin XR® (dexmethylphenidate hydrochloride
extended-release) capsules. In 2017, the FDA granted final approval for the remaining 6 (six) strengths, all of which have been
launched. In May 2017, the FDA granted the Company final approval for its second commercialized product, the 50, 150, 200, 300
and 400 mg strengths of generic Seroquel XR® (quetiapine fumarate extended release) tablets, and the Company commenced
shipment of all strengths that same month.
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 $8,857,440 for the year ended November 30, 2017 (2016 - $10,143,577; 2015 - $7,436,388), and has an
accumulated deficit of $71,873,459 as at November 30, 2017 (November 30, 2016 - $63,016,019). The Company also has a working
capital deficiency of $1,083,970 as at November 30, 2017. 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 may 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 revenues
from the sales of the Company’s generic Seroquel XR® (quetiapine fumarate extended-release) tablets, 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. 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, or that the Company can secure other capital sources on terms or in amounts sufficient to meet its needs at
all.
The availability of equity or debt financing will be affected by, among other things, the results of the Company’s R&D, its ability to
obtain regulatory approvals, its success in commercializing approved products with its commercial partners and 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
7
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2017, 2016 and 2015
(Stated in U.S. dollars)
1.
Nature of operations (continued)
Going concern (continued)
would restrict its operations. Any failure on its part to successfully commercialize approved products or 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 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, 2017 and 2016, 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.
8
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2017, 2016 and 2015
(Stated in U.S. dollars)
3.
Significant accounting policies (continued)
(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.
(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
Computer equipment
Computer software
Furniture and fixtures
Laboratory equipment
Leasehold improvements
Basis
Declining balance
Declining balance
Declining balance
Declining balance
Straight line
Rate
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. 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.
9
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2017, 2016 and 2015
(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. 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 provisions 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.
The Company also has a license and commercial supply agreement with Mallinckrodt LLC (“Mallinckrodt”) which provides
Mallinckrodt an exclusive license to market sell and distribute in the U.S. three drug product candidates for which the Company
has ANDAs filed with the FDA. Under the terms of this agreement, the Company is responsible for the manufacture of
approved products for subsequent sale by Mallinckrodt in the U.S. market, one of which (the Company’s generic Seroquel
XR®) received final approval from the FDA in 2017. Following receipt of final FDA approval for its generic Seroquel XR®,
the Company began shipment of manufactured product to Mallinckrodt.
10
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2017, 2016 and 2015
(Stated in U.S. dollars)
3.
Significant accounting policies (continued)
Licensing (continued)
Licensing revenue in respect of manufactured product is reported as revenue in accordance with ASC topic 605. Once product
is sold by Mallinckrodt, the Company receives downstream licensing revenue amounts calculated and reported by
Mallinckrodt, with such amounts generally based upon net product sales and net profit which includes estimates for
chargebacks, rebates, product returns, and other adjustments. Such downstream licensing revenue payments received by the
Company under this agreement are not subject to further deductions for chargebacks, rebates, product returns, and other pricing
adjustments. Based on this agreement and the guidance per ASC topic 605, the Company records licensing revenue as earned in
the consolidated statements of operations and comprehensive loss.
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.
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 pursuant to
the Mallinckrodt license and commercial supply agreement, and initially recorded it as deferred revenue, as it did not meet the
criteria for recognition. For the year ended November 30, 2017, the Company recognized $300,000 (2016 - $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 the Company recognized as revenue
during the year ended November 30, 2017.
As of November 30, 2017, the Company has recorded a deferred revenue balance of $2,662,500 (November 30, 2016 -
$3,112,500) relating to the underlying contracts, of which $300,000 (November 30, 2016 - $450,000) is considered a current
portion of deferred revenue.
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.
11
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2017, 2016 and 2015
(Stated in U.S. dollars)
3.
Significant accounting policies (continued)
(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)
Inventory
Inventories comprise raw material, work in process, and finished goods, which are valued at the lower of cost or market, on
a first-in, first-out basis. Cost for work in process and finished goods inventories includes materials, direct labor, and an
allocation of manufacturing overhead. Market for raw materials is replacement cost, and for work in process and finished
goods is net realizable value. The Company evaluates the carrying value of inventories on a regular basis, taking into
account such factors as historical and anticipated future sales compared with quantities on hand, the price the Company
expects to obtain for products in their respective markets compared with historical cost and the remaining shelf life of
goods on hand. As of November 30, 2017, the Company had raw materials inventories of $115,667 relating to the
Company’s generic Seroquel XR® product. The recoverability of the cost of any pre-launch inventories with a limited
shelf life is evaluated based on the specific facts and circumstances surrounding the timing of the anticipated product
launch.
(l)
Income taxes
The Company uses the liability method of accounting for income taxes. Under the liability method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax bases and for losses and tax credit carry
forwards. Significant judgment is required in determining whether deferred tax assets will be realized in full or in part.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the year that includes the date of enactments. A valuation allowance is
provided for the portion of deferred tax assets that is more likely than not to remain unrealized.
The Company accounts 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.
(m)
Share issue costs
Share issue costs are recorded as a reduction of the proceeds from the issuance of capital stock.
(n)
Translation of foreign currencies
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 functional and reporting currency is the U.S. dollar.
12
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2017, 2016 and 2015
(Stated in U.S. dollars)
3.
Significant accounting policies (continued)
(o)
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 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 year 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 are 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.
(p)
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).
(q)
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
9,807,909, 7,540,266 and 7,128,082 common shares of the Company during fiscal 2017, 2016, and 2015, respectively, were not
included in the computation of diluted EPS because the Company has incurred a loss for the years ended November 30, 2017,
2016 and 2015 as the effect would be anti-dilutive.
(r)
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.
(s)
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
13
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2017, 2016 and 2015
(Stated in U.S. dollars)
3.
Significant accounting policies (continued)
(s)
Fair value measurement (continued)
best information available in the circumstances. There are three levels to the hierarchy based on the reliability of inputs, as
follows:
● Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
● Level 2 - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or
indirectly. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, or quoted prices for
identical or similar assets and liabilities in markets that are not active.
● Level 3 - Unobservable inputs for the asset or liability.
The degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3.
(t)
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 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.
14
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2017, 2016 and 2015
(Stated in U.S. dollars)
3.
Significant accounting policies (continued)
(t)
Future accounting pronouncements (continued)
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.
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.
In May 2017, the FASB issued ASU 2017-09 in relation to Compensation —Stock Compensation (Topic 718), Modification
Accounting. The amendments provide guidance about which changes to the terms or conditions of a share-based payment
award require an entity to apply modification accounting in Topic 718. The amendments are effective for all entities for annual
periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted,
including adoption in any interim period, for (1) public business entities for reporting periods for which financial statements
have not yet been issued and (2) all other entities for reporting periods for which financial statements have not yet been made
available for issuance. The amendments should be applied prospectively to an award modified on or after the adoption date.
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. Accounts receivable are carried on the
consolidated balance sheet net of allowance for doubtful accounts. This provision is established based on the Company’s best
estimates regarding the ultimate recovery of balances for which collection is uncertain. As at November 30, 2017, the Company has
an account receivable balance of $756,468 (2016 - $472,474) and an allowance for doubtful accounts of $66,849 (2016 - $Nil).
Risks and uncertainties and credit quality information related to accounts receivable have been disclosed in Note 17.
15
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2017, 2016 and 2015
(Stated in U.S. dollars)
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
Total
$293,870
1,426
$124,151
-
$129,860 $3,483,398
450,295
-
$1,142,122
63,689
$276,300
-
$76,458 $5,526,159
515,410
-
295,296
235,454
124,151
31,908
129,860
42,638
3,933,693
1,353,110
1,205,811
235,641
276,300
-
76,458
-
6,041,569
1,898,751
530,750
156,059
172,498
5,286,803
1,441,452
276,300
76,458
7,940,320
214,525
24,147
110,860
6,646
104,089
5,154
1,968,088
321,986
1,142,122
1,670
155,203
24,219
71,834
1,388
3,766,721
385,210
238,672
47,811
117,506
13,622
109,243
10,747
2,290,074
379,158
1,143,792
49,154
179,422
19,376
73,222
970
4,151,931
520,838
286,483
131,128
119,990
2,669,232
1,192,946
198,798
74,192
4,672,769
$56,624
$6,645
$20,617 $1,643,619
$62,019
$96,878
$3,236 $1,889,638
$244,267
$24,931
$52,508 $2,617,571
$248,506
$77,502
$2,266 $3,267,551
Cost
Balance at November 30,
2015
Additions
Balance at November 30,
2016
Additions
Balance at November 30,
2017
Accumulated
depreciation
Balance at November 30,
2015
Depreciation
Balance at November 30,
2016
Depreciation
Balance at November 30,
2017
Net book value at:
November 30, 2016
Balance at November 30,
2017
As at November 30, 2017, there was $728,309 (2016 - $266,963; 2015 - $Nil) of laboratory equipment that was not available for
use and therefore, no depreciation has been recorded for such laboratory equipment.
As at November 30, 2017, there was $75,005 (2016 - $Nil) unpaid balance for purchased equipment. During the year ended
November 30, 2017, the Company recorded depreciation expense within cost of goods sold of $13,877 (2016 - $Nil; 2015 - $Nil).
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, 2017,
the Company recorded a $Nil write-down of long-lived assets (2016 - $Nil; 2015 – $Nil).
16
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2017, 2016 and 2015
(Stated in U.S. dollars)
6.
Accrued liabilities
Professional fees
Property taxes
Interest
Other
7.
Due to related parties
Convertible debenture
November 30,
2017
$
November 30,
2016
$
400,796
111,970
54,110
215,493
782,369
190,485
-
14,784
179,617
384,886
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,
2017
November 30,
2016
$1,290,465
$1,494,764
On January 10, 2013, the Company completed a private placement financing of an unsecured convertible debenture in the original
principal amount of $1.5 million, 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
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.
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 an 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 Debenture. 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 was accreted 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.
17
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2017, 2016 and 2015
(Stated in U.S. dollars)
7.
Due to related parties (continued)
Convertible debenture
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 was accreted
over the remaining life of the Debenture using a 4.2% imputed rate of interest.
Effective December 1, 2016, the maturity date of the Debenture was extended to April 1, 2017 and a principal repayment of
$150,000 was made at the time of the extension. 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
$106,962, 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 26.3% imputed
rate of interest.
Effective March 28, 2017, the maturity date of the Debenture was extended to October 1, 2017. 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 $113,607, 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 15.2% imputed rate of interest.
Effective September 28, 2017, the maturity date of the Debenture was extended to October 1, 2018. 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 $53,227, 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 4.9% imputed rate of interest.
Accreted interest expense during the year ended November 30, 2017 is $219,497 (2016 - $79,245; 2015 - $27,103), 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, 2017 is $162,530 (2016 - $180,370; 2015 -
$179,878), and has also been included in the consolidated statements of operations and comprehensive loss.
8.
Employee costs payable
As at November 30, 2017, the Company had $214,980 (2016 - $205,246) accrued vacation payable to certain employees and had
$Nil (2016 - $838,905) accrued bonus payable to executive officers of the Company. 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, 2017:
18
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2017, 2016 and 2015
(Stated in U.S. dollars)
9.
Lease obligations (continued)
Year ending November 30,
2018
2019
2020
Less: current portion
Balance, long-term portion
As at November 30, 2017, capital lease obligation balance is $Nil (2016 - $14,829).
10.
Capital stock
Authorized, issued and outstanding
Operating
Lease
$
186,220
186,220
186,220
558,660
186,220
372,440
(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, 2017, the Company had 34,704,515 (2016 - 29,789,992; 2015 -
24,244,050) common shares issued and outstanding and no preference shares issued and outstanding.
Two officers and directors of IPC owned directly and through their family holding company (“Odidi Holdco”) 5,781,312
(2016 - 5,781,312) common shares or approximately 17% (2016 - 19%; 2015 - 24%) 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 exchange rules and 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 distribution agreement. The Company has also agreed to
reimburse Roth for certain expenses relating to the offering.
19
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2017, 2016 and 2015
(Stated in U.S. dollars)
10.
Capital stock (continued)
Authorized, issued and outstanding (continued)
(c)
(d)
During the year ended November 30, 2017, an aggregate of 1,108,150 common shares were sold on Nasdaq for gross
proceeds of $2,541,640, with net proceeds to the Company of $2,468,474, respectively, under the at-the-market offering
program. 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 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. As a result of prior sales of the Company’s
common shares under the equity distribution agreement, as at November 30, 2017, the Company may in the future offer and
sell its common shares with an aggregate purchase price of up to $2,927,071 pursuant to the at-the-market program (or such
lesser amount as may then be permitted under applicable exchange rules and securities laws and regulations). 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,
direct costs related to the base shelf prospectus filed in May 2017 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, 2017, costs directly related to the at the-market facility of $73,166 (2016 -
$100,775; 2015 - $38,889) were recorded in share offering costs and an additional $220,573 (2016 - $258,287; 2015 -
$39,277) of deferred costs were amortized and recorded in share offering costs related to the at the-market facility and base
shelf prospectus. For the year ended November 30, 2017, the Company recorded $137,363 as a financing cost in the
statements of operations and comprehensive loss related to the base shelf prospectus filed in May 2014 and expired in July
2017.
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.
(e)
In October 2017, the Company completed an underwritten public offering of 3,636,364 common shares at a price of $1.10
per share. The Company also issued to the investors warrants to purchase an aggregate of 1,818,182 common shares. The
warrants will be exercisable six months following the closing date and will expire 30 months after the date they become
exercisable, have a term of three years and an exercise price of $1.25 per common share. The Company also issued to the
placement agents (the “Placement Agent Warrants”) warrants to purchase 181,818 common shares at an exercise price of
$1.375 per share.
20
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2017, 2016 and 2015
(Stated in U.S. dollars)
10.
Capital stock (continued)
Authorized, issued and outstanding (continued)
The holders of October 2017 Warrants (as defined below) and Placement Agent Warrants are entitled to a cashless exercise under
which the number of shares to be issued will be based on the number of shares for which warrants are exercised times the difference
between the market price of the common share and the exercise price divided by the market price. 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 $3,257,445 as the value of common shares under Capital stock and $742,555 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 common shares and warrants were $500,492 and were recorded as an offset against the
statement of shareholders’ equity (deficiency) with $391,580 being recorded under Capital stock and $108,912 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 3,470,452 based on the number of issued and
outstanding common shares as at November 30, 2017. As at November 30, 2017, 3,064,172 options are outstanding and there were
406,280 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 typically have a term of 5 years with a
maximum term of 10 years and generally vest over a period of up to three years.
In August 2004, the Board of Directors of IPC Ltd. approved a grant of 2,763,940 performance-based stock options, to two
executives who were also the principal shareholders of IPC Ltd. The vesting of these options is contingent upon the achievement of
certain performance milestones. A total of 2,487,546 performance-based stock options have vested as of November 30, 2017. 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. 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, 2017.
In the year ended November 30, 2017, 376,000 (2016 - 355,000; 2015 - 295,000) stock options were granted to management and
other employees and 120,000 (2016 - 105,000; 2015 - 60,000) 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 eight years. For options that have an expected life of less than eight 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.
21
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2017, 2016 and 2015
(Stated in U.S. dollars)
11.
Options (continued)
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:
November
30,
2016
November
30,
2017
November
30,
2015
Volatility
Risk-free interest rate
Expected life (in years)
Dividend yield
The weighted average grant date
fair value of options granted
71.7%
1.56%
5.49
-
65.2%
0.620%
5.00
-
68.6%
0.580%
5.00
-
$
0.75
$
1.20
$
1.66
Details of stock option transactions in Canadian dollars (“C$”) are as follows:
November 30, 2017
Weighted
November 30, 2016
Weighted
November 30, 2015
Weighted
Number of
options
average Weighted
exercise
average
price per grant date Number of
options
fair value
$
$
share
average Weighted
exercise
average
price per grant date Number of
options
fair value
$
share
$
average Weighted
exercise
average
price per grant date
fair value
$
share
$
Outstanding,
beginning of year
5,392,460
3.48
1.88 5,062,007
3.89
2.21 4,858,208
3.96
2.21
Granted
Exercised
Forfeiture
Expired
Balance,
496,000
(2,000)
-
(58,348)
1.17
2.32
-
12.64
0.75
1.20
-
460,000
(27,500)
-
9.60 (102,047)
2.42
2.57
-
19.24
1.20
1.68
-
13.29
355,000
(91,000)
(60,168)
(33)
2.52
2.34
-
770.13
1.66
1.86
-
493.31
end of year
5,828,112
3.20
1.72 5,392,460
3.48
1.88 5,062,007
3.89
2.21
Options
exercisable,
end of year
5,221,059
3.30
1.79 4,396,610
3.49
1.96 3,812,930
4.01
2.35
As of November 30, 2017, the exercise prices, weighted average remaining contractual life of outstanding options and weighted
average grant date fair values were as follows:
Exercise
price
Number
outstanding
Weighted
average
exercise
price per
share
$
Weighted
average
remaining
contract
life (years)
Options
outstanding
Weighted
average
grant
due
fair value
$
Number
exercisable
Options
exercisable
Weighted
average
grant
date
fair value
$
Weighted
average
exercise
price per
share
$
Under
2.50
2.51 - 5.00
5.01 - 10.00
10.01 - 100.00
1,251,000
4,560,835
-
16,277
1.43
3.50
-
29.11
3.93
1.81
-
0.21
0.99
1.84
-
22.89
920,341
4,284,441
-
16,277
1.49
3.49
-
29.11
1.07
1.86
-
22.89
5,828,112
3.20
5,221,059
3.30
22
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2017, 2016 and 2015
(Stated in U.S. dollars)
11.
Options (continued)
Total unrecognized compensation cost relating to the unvested performance-based stock options at November 30, 2017 is
approximately $788,887 (2016 - $2,366,659; 2015 - $2,482,528). During the year ended November 30, 2017, specific performance
conditions were met as the FDA approved two ANDAs for certain drugs, resulting in the vesting of 552,788 performance-based
stock options. As a result, a stock-based compensation expense of $1,577,772 relating to these stock options was recognized in
research and development expense (2016 - $620,632; 2015 - $Nil).
For the year ended November 30, 2017, 2,000 options were exercised for cash consideration of $1,742. 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.
The following table summarizes the components of stock-based compensation expense.
Research and development
Selling, general and administrative
November 30,
2017
$
November 30,
2016
$
November 30,
2015
$
1,654,051
95,948
1,749,999
1,995,805
265,639
2,261,444
152,231
265,587
417,818
The Company has estimated its stock option forfeitures to be approximately 4% at November 30, 2017 (2016 – 4%; 2015 – 4%).
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, 2017 and 2016, 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, 2017, 94,131 (2016 - 76,743) DSUs are outstanding and
15,869 (2016 - 33,257) 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, 2017, 2016 and 2015 in additional paid in capital and accrued the following
amounts as at November 30, 2017, 2016 and 2015:
November 30, 2017
$
shares
November 30, 2016
$
shares
November 30, 2015
$
shares
Additional paid in capital
Accrued liability
30,355
7,562
17,388
8,660
31,628
7,261
16,741
2,356
29,056
8,051
10,993
4,272
23
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2017, 2016 and 2015
(Stated in U.S. dollars)
13.
Restricted share units
Effective May 28, 2010, the Company’s shareholders approved a Restricted Share Unit (“RSU”) Plan for officers and employees of
the Company and reserved a maximum of 330,000 common shares for issuance under the plan. The RSU Plan will form part of the
incentive compensation arrangements available to officers and employees of the Company and its designated affiliates. An RSU is a
unit equivalent in value to one common share of the Company. Upon vesting of the RSUs and the corresponding issuance of
common shares to the participant, or on the forfeiture and cancellation of the RSUs, the RSUs credited to the participant’s account
will be cancelled. No RSUs have been issued under the plan.
14.
Warrants
All of the Company’s outstanding warrants are considered to be indexed to the Company’s own stock and are therefore classified as
equity under ASC 480. The warrants, in specified situations, provide for certain compensation remedies to a holder if the Company
fails to timely deliver the shares underlying the warrants in accordance with the warrant terms.
In 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 share 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 common share and a five
year warrant to purchase 0.25 of a common share 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 shares 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 common share and a five year warrant to purchase 0.25 of a common share 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.
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 shares 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.
In the underwritten public offering completed in October 2017, gross proceeds of $4,000,000 were received through the sale of the
Company’s common shares and warrants. The Company issued at the closing of the offering an aggregate of 3,636,364 common
shares at a price of $1.10 per share and warrants to purchase an additional 1,818,182 common shares. The warrants will be
exercisable six months following the closing date and will expire 30 months after the date they become exercisable, and have an
exercise price of $1.25 per common share. (“October 2017 Warrants”). The Company also issued to the Placement Agents Warrants
to purchase 181,818 common shares at an exercise price of $1.375 per share. The holders of October 2017 Warrants and Placement
Agent Warrants are entitled to a cashless exercise under which the number of shares to be issued will be based on the number of
24
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2017, 2016 and 2015
(Stated in U.S. dollars)
14.
Warrants (continued)
share for which warrants are exercised times the difference between the market price of the common share and the exercise price
divided by the market price. The fair value of the October 2017 Warrants of $742,555 was initially estimated at closing using the
Black- Scholes Option Pricing Model, using volatility of 73.67%, risk free interest rates of 1.64%, expected life of 3 years, and
dividend yield of Nil.
The fair value of the Placement Agents Warrants were estimated at $86,196 using the Black-Scholes Option Pricing Model, using
volatility of 73.67%, a risk free interest rate of 1.64%, an expected life of 3 years, and a dividend yield of Nil.
The following table provides information on the 7,140,464 warrants outstanding and exercisable as of November 30, 2017:
Warrant
Exercise price
March 2013 Warrants
July 2013 Warrants
June 2016 Warrants
October 2017 Warrants
Placement Agent Warrants
$2.10
$2.55
$1.93
$1.25
$1.375
Number
outstanding
1,491,742
870,000
2,778,722
1,818,182
181,818
7,140,464
Shares issuable
Expiry
upon exercise
March 22, 2018
July 31, 2018
June 02, 2021
October 13, 2020
October 13, 2020
372,936
217,500
1,389,361
1,818,182
181,818
3,979,797
During the year ended November 30, 2017, there were cash exercises in respect of 336,018 warrants (2016 – 832,104; 2015 -
450,000) and no cashless exercise (2016 - $Nil; 2015 - $Nil) of warrants, resulting in the issuance of 168,009 (2016 – 357,912; 2015
- 225,000) and $Nil (2016 - $Nil; 2015 - $Nil) common shares, respectively. For the warrants exercised, the Company recorded a
charge to capital stock of $430,573 (2016 - $1,030,719; 2015 - $1,027,304) comprised of proceeds of $324,258 (2016 - $700,653;
2015 - $562,500) and the associated amount of $106,315 (2016 - $330,066; 2015 - $464,804) previously recorded in additional
paid-in-capital.
Details of warrant transactions are as follows:
Outstanding, December 1, 2016
Issued
Exercised
Outstanding, November 30, 2017
Outstanding, December 1, 2015
Issued
Exercised
Expired
Outstanding, November 30, 2016
March 2013
Warrants
1,491,742
-
-
1,491,742
July 2013
Warrants
870,000
-
-
870,000
June 2016
Warrants
3,114,740
-
(336,018)
2,778,722
October
2017
Warrants
-
1,818,182
-
1,818,182
Placement
Agent
Warrants
-
181,818
-
181,818
Total
5,476,482
2,000,000
(336,018)
7,140,464
Series A
Warrants
March 2013
Warrants
July 2013
Warrants
June 2016
Warrants
Total
2,835,000
-
-
(2,835,000)
-
1,724,300
-
(232,558)
-
1,491,742
870,000
-
-
-
870,000
25
-
3,714,286
(599,546)
5,429,300
3,714,286
(832,104)
- (2,835,000)
5,476,482
3,114,740
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2017, 2016 and 2015
(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
Investment tax credit
Financing costs booked to equity
FCR Election
Difference in foreign tax rates
True up of tax returns
Tax loss expired and other
November 30,
2017
%
November 30,
2016
%
November 30,
2015
%
26.5
$
26.5
$
26.5
$
(2,347,222)
(2,688,048)
(1,970,643)
488,769
2,128,819
-
(269,715)
-
(651)
-
-
-
640,481
2,683,775
-
(281,063)
-
-
(356,095)
950
-
164,723
1,804,406
(168,591)
(23,348)
(253,856)
-
(15,991)
463,300
-
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
Investment tax credit
Undeducted research and
development expenditures
Capital loss carryforwards
Share issuance cost
Net operating loss carryforwards
Valuation allowances for
deferred tax assets
Net deferred tax assets
26
November 30,
2017
$
November 30,
2016
$
November 30,
2015
$
8,972,285
7,427,516
6,019,380
863,215
2,681,375
2,865,404
4,158,178
326,064
436,427
14,135
20,317,083
3,409,343
-
2,405,365
3,710,274
-
-
-
16,952,498
2,854,916
-
-
5,394,426
-
-
-
14,268,722
(20,317,083)
-
(16,952,498)
-
(14,268,722)
-
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2017, 2016 and 2015
(Stated in U.S. dollars)
15.
Income taxes (continued)
At November 30, 2017, 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
2037
United States Federal net operating losses expiring
in the year ended November 30,
2025
2026
Federal
$
182,222
555,539
3,373,079
5,532,739
5,750,053
4,562,538
149,927
2,634,823
5,341,606
5,775,154
33,857,680
$
5,865
34,522
40,387
At November 30, 2017, the Company had a cumulative carry-forward pool of Federal SR&ED expenditures in the amount of
approximately $15,690,203 (2016 - $14,000,000) which can be carried forward indefinitely.
At November 30, 2017, the Company had approximately $2,976,546 (2016 - $3,273,000) of unclaimed ITCs which expire from
2025 to 2037. 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, 2017 or
November 30, 2016.
The Company files unconsolidated federal income tax returns domestically and in foreign jurisdictions. The Company has open tax
years from 2008 to 2017 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 2017, 2016 and 2015 or any penalties in those
years. The Company had no accrued interest and penalties as of November 30, 2017, 2016 and 2015.
The Company had no unrecognized tax benefits in 2017, 2016 and 2015, and the Company does not expect that the unrecognized
tax benefit will increase within the next twelve months.
27
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2017, 2016 and 2015
(Stated in U.S. dollars)
16.
Contingencies
From time to time, the Company may be exposed to claims and legal actions in the normal course of business. As at November 30,
2017, and continuing as at February 15, 2018, the Company is not aware of any pending or threatened material litigation claims
against the Company, other than as described below.
In November 2016, the Company filed an NDA for its abuse-deterrent oxycodone hydrochloride extended release tablets (formerly
referred to as RexistaTM) (“Oxycodone ER”) product candidate, relying on the 505(b)(2) regulatory pathway, which allowed the
Company to reference data from Purdue Pharma L.P.'s file for its OxyContin® extended release oxycodone hydrochloride. The
Oxycodone ER application was accepted by the FDA for further review in February 2017. The Company certified to the FDA that it
believed that its Oxycodone ER product candidate would not infringe any of sixteen (16) 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”), or that such patents are invalid, and so notified Purdue
Pharma L.P. and the other owners of the subject patents listed in the Orange Book of such certification. On April 7, 2017, the
Company received notice that Purdue Pharma L.P., Purdue Pharmaceuticals L.P., The P.F. Laboratories, Inc., or collectively the
Purdue parties, Rhodes Technologies, and Grünenthal GmbH, or collectively the Purdue litigation plaintiffs or plaintiffs, had
commenced patent infringement proceedings against the Company in the U.S. District Court for the District of Delaware in respect
of the Company's NDA filing for Oxycodone ER, alleging that Oxycodone ER infringes six (6) out of the sixteen (16) patents. The
complaint seeks injunctive relief as well as attorneys' fees and costs and such other and further relief as the Court may deem just and
proper. An answer and counterclaim have been filed.
As a result of the commencement of these legal proceedings, the FDA is stayed for 30 months from granting final approval to the
Company’s Oxycodone ER product candidate. That time period commenced on February 24, 2017, when the plaintiffs received
notice of the Company’s certification concerning the patents, and will expire on August 24, 2019, unless the stay is earlier
terminated by a final declaration of the courts that the patents are invalid, or are not infringed, or the matter is otherwise settled
among the parties. A trial date for the Purdue litigation has been set for October 22, 2018. The Company is confident that it does
not infringe the subject patents, and will vigorously defend against these claims.
In July 2017, three complaints were filed in the U.S. District Court for the Southern District of New York asserting claims under
the federal securities laws against the Company and two of its executive officers on behalf of a putative class of purchasers of the
Company’s securities. In a subsequent order, the Court consolidated the three actions under the caption Shanawaz v.
Intellipharmaceutics Int’l Inc., et al., No. 1:17-cv-05761 (S.D.N.Y.), appointed lead plaintiffs in the consolidated action, and
approved lead plaintiffs’ selection of counsel. Lead plaintiffs filed a consolidated amended complaint on January 29, 2018. In the
amended complaint, lead plaintiffs purport to assert claims on behalf of a putative class consisting of purchasers of the Company’s
securities between May 21, 2015 and July 26, 2017. The amended complaint alleges that the defendants violated Sections 10(b) and
20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by making allegedly false and misleading
statements or failing to disclose certain information regarding the Company’s NDA for Oxycodone ER abuse-deterrent oxycodone
hydrochloride extended release tablets. The complaint seeks, among other remedies, unspecified damages, attorneys’ fees and other
costs, equitable and/or injunctive relief, and such other relief as the court may find just and proper. Under a scheduling order
approved by the Court, defendants’ must respond to the amended complaint by March 30, 2018. The Company and the other
defendants intend to vigorously defend themselves against the claims asserted in the consolidated action.
28
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2017, 2016 and 2015
(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 eight years (Level 2) while the Company uses its own
historical volatility for options that have an expected life of eight years or less (Level 1).
(ii) The Company calculates the interest rate for the conversion option based on the Company’s estimated cost of raising
capital (Level 2).
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 warrants.
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 debenture(i)
November 30, 2017
Carrying
amount
$
Fair
value
$
November 30, 2016
Carrying
amount
$
Fair
value
$
1,290,465
1,316,386
1,494,764
1,500,000
(i) The Company calculates the interest rate for the Debenture 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 Debenture 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.
29
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2017, 2016 and 2015
(Stated in U.S. dollars)
17.
Financial instruments (continued)
(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 obligations.
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, gross
November 30,
2017
$
November 30,
2016
$
756,468
(66,849)
689,619
472,474
-
472,474
689,619
427,519
5,176
3,319
61,673
756,468
41,636
472,474
Financial instruments that potentially subject the Company to concentration of credit risk consist principally of
uncollateralized accounts receivable. The Company’s maximum exposure to credit risk is equal to the potential amount of
financial assets. For the year ended November 30, 2017, two customers accounted for substantially all the revenue and all
the accounts receivable of the Company. For the year ended November 30, 2016, 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.
(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.
(d) Liquidity risk
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.
30
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2017, 2016 and 2015
(Stated in U.S. dollars)
17.
Financial instruments (continued)
(d) Liquidity risk (continued)
The following are the contractual maturities of the undiscounted cash flows of financial liabilities as at November 30, 2017:
November 30, 2017
Less than
3 months
$
3 to 6
months
$
6 to 9
months
$
9 months
to 1 year
$
2,060,084
782,369
-
-
-
-
-
-
214,980
66,973
3,124,406
-
40,805
40,805
-
-
40,805 1,363,749
40,805 1,363,749
Greater
than
1 year
$
Total
$
- 2,060,084
782,369
-
214,980
-
- 1,512,332
- 4,569,765
Third parties
Accounts payable
Accrued liabilities
Related parties
Employee costs payable
Convertible debenture (Note 7)
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 period, 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
31
November 30,
2017
$
November 30,
2016
$
November 30,
2015
$
5,504,452
5,504,452
2,247,002
2,247,002
4,093,781
4,093,781
7,396,781
7,974,689
5,224,299
3,267,551
1,889,638
1,759,438
Item 19. Exhibits.
Number
1.1
1.2
4.1
4.2
4.3
4.51
4.52
EXHIBIT INDEX
Exhibit
Articles of Incorporation of the Company and Amendments thereto (incorporated herein by reference to Exhibit
10.1 to the Company's annual report on Form 20-F for the fiscal year ended November 30, 2009 as filed on June
1, 2010)
By-Laws of the Company (incorporated herein by reference to Exhibit 10.2 to the Company's annual report on
Form 20-F for the fiscal year ended November 30, 2009 as filed on June 1, 2010)
IPC Arrangement Agreement (incorporated herein by reference to Exhibit 4.1 to the Company's annual report on
Form 20-F for the fiscal year ended November 30, 2009 as filed on June 1, 2010)
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 (incorporated herein by reference to Exhibit 4.2 to the Company's annual
report on Form 20-F for the fiscal year ended November 30, 2009 as filed on June 1, 2010)
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 (incorporated herein by reference to Exhibit 4.3 to the
Company's annual report on Form 20-F for the fiscal year ended November 30, 2009 as filed on June 1, 2010)
Securities purchase agreement for February 1, 2011 private placement (incorporated herein by reference to Exhibit
4.51 to the Company's annual report on Form 20-F for the fiscal year ended November 30, 2010 as filed on May
31, 2011)
Registration rights agreement for February 1, 2011 private placement (incorporated herein by reference to Exhibit
4.52 to the Company's annual report on Form 20-F for the fiscal year ended November 30, 2010 as filed on May
31, 2011)
115
4.53
4.54
4.55
4.56
4.57
4.58
4.59
4.60
4.61
4.62
4.63
4.64(†)
Combined Series A/B common share purchase warrant for February 1, 2011 private placement (incorporated
herein by reference to Exhibit 4.53 to the Company's annual report on Form 20-F for the fiscal year ended
November 30, 2010 as filed on May 31, 2011)
Placement Agent Agreement between Intellipharmaceutics International Inc. and Roth Capital Partners, LLC,
dated March 9, 2012 (incorporated herein by reference to Exhibit 99.1 to the Company's report on Form 6-K for
the month of March 2012 as filed on March 9, 2012)
Form of Subscription Agreement (incorporated by reference to Exhibit A attached to Exhibit 99.1 to the
Company's report on Form 6-K for the month of March 2012 as filed on March 9, 2012)
12% convertible term debenture dated January 10, 2013 in principal amount of $1,500,000 (incorporated herein by
reference to Exhibit 4.56 to the Company's annual report on Form 20-F for the fiscal year ended November 30,
2012 as filed on January 31, 2013)
Lease as amended between Finley W. McLachlan Ltd. and Intellipharmaceutics Corp. for premises at 30
Worcester Road, Toronto, Ontario, Canada (incorporated herein by reference to Exhibit 4.57 to the Company's
annual report on Form 20-F for the fiscal year ended November 30, 2012 as filed on January 31, 2013)
Placement Agent Agreement between Intellipharmaceutics International Inc. and Roth Capital Partners, LLC,
Brean Capital, LLC and Maxim Group, LLC, dated March 19, 2013 (incorporated herein by reference to Exhibit
99.1 to the Company's report on Form 6-K for the month of March 2013 as filed on March 19, 2013)
Form of Subscription Agreement (incorporated by reference to Exhibit A attached to Exhibit 99.1 to the
Company's report on Form 6-K for the month of March 2013 as filed on March 19, 2013)
Form of Warrants (incorporated by reference to Exhibit B attached to Exhibit 99.1 to the Company's report on
Form 6-K for the month of March 2013 as filed on March 19, 2013)
Underwriting Agreement between Intellipharmaceutics International Inc. and Maxim Group, LLC, as
representative of the underwriters named in Schedule I thereto, dated July 26, 2013(incorporated herein by
reference to Exhibit 99.1 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))
Form of Warrants (incorporated herein by reference to Exhibit 99.2 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))
Equity Distribution Agreement between Intellipharmaceutics International Inc. and Roth Capital Partners, LLC,
dated November 27, 2013 (incorporated herein by reference to Exhibit 99.1 to the Company's report on Form 6-K
for the month of November 2013 as filed on 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 (incorporated herein by reference to Exhibit 4.64
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)
4.65
4.66
4.67
4.68
4.69
4.70
4.71
4.72
4.73
4.74(†)
4.75
4.76
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 (incorporated herein
by reference to Exhibit 4.65 to the Company's annual report on Form 20-F for the fiscal year ended November 30,
2014 as filed on February 27, 2015)
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 (incorporated herein by reference to Exhibit 4.66 to the
Company's annual report on Form 20-F for the fiscal year ended November 30, 2014 as filed on February 27,
2015)
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 (incorporated herein by reference to Exhibit 4.67 to the Company's
annual report on Form 20-F for the fiscal year ended November 30, 2015 as filed on March 21, 2016)
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 (incorporated herein by reference to Exhibit 4.68 to the
Company's annual report on Form 20-F for the fiscal year ended November 30, 2015 as filed on March 21, 2016)
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 (incorporated herein by reference to Exhibit
4.69 to the Company's annual report on Form 20-F for the fiscal year ended November 30, 2015 as filed on March
21, 2016)
Underwriting Agreement between Intellipharmaceutics International Inc. and Dawson James Securities, Inc., dated
May 27, 2016 (incorporated herein by reference to Exhibit 99.1 to the Company's report on Form 6-K for the
month of May 2016 as filed on May 27, 2016)
Form of Common Share Purchase Warrant (incorporated herein by reference to Exhibit 99.2 to the Company's
report on Form 6-K for the month of May 2016 as filed on May 27, 2016)
Extension of Debenture Maturity Date dated as of May 26, 2016 to that certain 12% convertible term debenture
dated January 10, 2013 (incorporated herein by reference to Exhibit 4.72 to the Company's annual report on Form
20-F for the fiscal year ended November 30, 2016 as filed on February 28, 2017)
Extension of Debenture Maturity Date dated as of December 1, 2016 to that certain 12% convertible term
debenture dated January 10, 2013 (incorporated herein by reference to Exhibit 4.73 to the Company's annual
report on Form 20-F for the fiscal year ended November 30, 2016 as filed on February 28, 2017)
License and Commercial Supply Agreement dated effective October 11, 2016, between Mallinckrodt LLC and
Intellipharmaceutics Corp. (incorporated herein by reference to Exhibit 4.74 to the Company's annual report on
Form 20-F for the fiscal year ended November 30, 2016 as filed on February 28, 2017)
Form of Securities Purchase Agreement, dated October 11, 2017, by and between Intellipharmaceutics
International Inc. and the purchaser named therein (incorporated herein by reference to Exhibit 99.1 to the
Company's report on Form 6-K for the month of October 2017 as filed on October 12, 2017)
Form of Warrant (incorporated herein by reference to Exhibit 99.2 to the Company's report on Form 6-K for the
month of October 2017 as filed on October 12, 2017)
4.77
4.78
4.79(1)
4.80(1)
8.1(1)
11.1
12.1(1)
12.2(1)
13.1(1)
13.2(1)
15.1(1)
15.2(1)
16.1
101(1)(2)
(1)
(2)
Form of Wainwright Warrant (incorporated herein by reference to Exhibit 99.3 to the Company's report on Form
6-K for the month of October 2017 as filed on October 12, 2017)
Engagement Letter between Intellipharmaceutics International Inc. and H.C. Wainwright & Co., LLC, dated as of
October 10, 2017 (incorporated herein by reference to Exhibit 99.4 to the Company's report on Form 6-K for the
month of October 2017 as filed on October 12, 2017)
Extension of Debenture Maturity Date dated as of March 28, 2017 to that certain 12% convertible term debenture
dated January 10, 2013
Extension of Debenture Maturity Date dated as of September 28, 2017 to that certain 12% convertible term
debenture dated January 10, 2013
List of subsidiaries
Code of Business Conduct and Ethics (incorporated herein by reference to Exhibit 11.1 to the Company's annual
report on Form 20-F for the fiscal year ended November 30, 2009 as filed on June 1, 2010)
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 (incorporated herein by
reference to Exhibit 16.1 to the Company's annual report on Form 20-F for the fiscal year ended November 30,
2016 as filed on February 28, 2017)
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, 2017, formatted in
XBRL:
(i) Consolidated balance sheets as at November 30, 2017 and 2016
(ii) Consolidated statements of operations and comprehensive loss for the years ended November 30, 2017, 2016
and 2015
(iii) Consolidated statements of shareholders' equity (deficiency) for the years ended November 30, 2017, 2016
and 2015
(iv) Consolidated statements of cash flows for the years ended November 30, 2017, 2016 and 2015
(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, 2017.
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.
(†) Confidential treatment has been granted 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
SIGNATURES
authorized the undersigned to sign this annual report on its behalf.
Intellipharmaceutics International Inc.
/s/ Andrew Patient
Andrew Patient
Chief Financial Officer (Principal Financial Officer)
Intellipharmaceutics International Inc.
February 28, 2018
EXHIBIT 4.79
Extension of Debenture Maturity Date
To: lntellipharmaceutics International Inc. (the “Company”)
Re:
Debenture dated January 10, 2013, with an original face amount of US$1,500,000 issued by the Company to Dr. Isa Odidi
and Dr. 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 April 1, 2017 is extended to October 1, 2017.
DATED as of March 28, 2017
/s/ Isa Odidi
Isa Odidi
/s/ Amina Odidi
Amina Odidi
EXHIBIT 4.80
Extension of Debenture Maturity Date
To: lntellipharmaceutics International Inc. (the “Company”)
Re:
Debenture dated January 10, 2013, with an original face amount of US$1,500,000 issued by the Company to Dr. Isa Odidi
and Dr. Amina Odidi (the “Debenture”) and the Maturity Date (as defined in the Debenture) of such Debenture
The undersigned hereby agree that the Maturity Date of the Debenture (currently October 1, 2017) is extended to October 1, 2018.
DATED as of September 28, 2017
/s/ Amina Odidi /s/ Isa Odidi
Amina Odidi Isa Odidi
Accepted and agreed to this 28th day of September, 2017
Intellipharmaceutics International Inc.
By: /s/ Michael Campbell
Name: Michael Campbell
Position: Corporate Secretary
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 28, 2018
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, Andrew Patient, 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 28, 2018
By:
/s/ Andrew Patient
Andrew Patient
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, 2017 (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 28, 2018
Exhibit 13.2
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
In connection with the Annual Report of Intellipharmaceutics International Inc. (the “Company”) on Form 20-F for the period
ending November 30, 2017 (the “Report”), I, Andrew Patient, 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/ Andrew Patient
Andrew Patient
Chief Financial Officer
(Principal Financial Officer)
Date: February 28, 2018
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 333-218297 on Form F-3 of our auditors’
report, dated February 15, 2018, relating to the consolidated financial statements of Intellipharmaceutics International Inc. and its
subsidiaries (the “Company), for the years ended November 30, 2017 and 2016 (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, 2017.
/s/ MNP LLP
Chartered Professional Accountants
Licensed Public Accountants
February 28, 2018
Toronto, Canada
Exhibit15.2
Deloitte LLP
Bay Adelaide East
8 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 333-218297 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 year ended November 30, 2015 (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, 2017.
/s/ Deloitte LLP
Chartered Professional Accountants
Licensed Public Accountants
February 28, 2018