UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
[_]
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
[X]
OR
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended November 30, 2018
OR
[_]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
[_]
OR
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report
For the transition period from ________ to ________
Commission File No. 0-53805
INTELLIPHARMACEUTICS
INTERNATIONAL INC.
(Exact name of registrant as specified in its charter)
Canada
(Jurisdiction of incorporation or organization)
30 Worcester Road
Toronto, Ontario M9W 5X2
(Address of principal executive offices)
Greg Powell, 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, 2018, the registrant had 18,252,243 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]
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted
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 such files).
Yes [X] No [_]
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:
Item 17 [_] Item 18 [_]
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes [_] No [X]
TABLE OF CONTENTS
PART I
Item 1.
Identity of Directors, Senior Management and Advisers
A. Directors and senior management
B. Advisors
C. Auditors
Item 2.
Offer Statistics and Expected Timetable
A. Offer statistics
B. Method and expected timetable
Item 3.
Key Information
A. Selected Financial Data
B. Capitalization and Indebtedness
C. Reasons for the Offer and use of Proceeds
D. Risk Factors
Item 4.
Information on the Company
A. History and Development of the Company
B. Business Overview
C. Organizational Structure
D. Property, Plant and Equipment
Item 4A.
Item 5.
Unresolved Staff Comments
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.
The Offer and Listing
Additional Information
A. Share Capital
B. Articles and By-Laws
C. Material Contracts
D. Exchange Controls
E. Taxation
F. Dividends and Paying Agents
G. Statement by Experts
H. Documents on Display
I. Subsidiary Information
Item 11.
Item 12.
PART II
Qualitative and Quantitative Disclosures about Market Risk
Description of Securities Other than equity Securities
A. Debt Securities
B. Warrants and Rights
C. Other Securities
D. American Depositary Shares
Defaults, Dividend Arrearages and delinquencies
Material Modifications to the Rights of Security Holders and Use of Proceeds
Controls and Procedures
[Reserved]
Item 13.
Item 14.
Item 15.
Item 16.
Item 16A. Audit Committee Financial Expert
Item 16B.
Item 16C.
Item 16D.
Item 16E.
Item 16F.
Item 16G. Corporate Governance
Code of Ethics
Principal Accountant Fees and Services
Exemptions from the Listing Standards for Audit Committees
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Change in registrant’s Certifying Accountant
3
3
3
3
3
3
3
3
3
3
4
4
4
32
32
33
56
56
58
58
58
63
66
66
67
67
67
68
68
71
81
86
87
95
95
96
96
96
98
98
98
98
103
105
107
107
116
116
116
116
116
118
118
118
118
118
118
118
118
119
120
120
120
120
121
121
121
121
Item 16H. Mine Safety Disclosure
PART III
Item 17.
Item 18.
Item 19.
Financial Statements
Financial Statements
Exhibits
ii
122
122
122
123
124
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 expectations, 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”, “goals”, “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, 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
comply with the Nasdaq Stock Market LLC (“Nasdaq”) and the Toronto Stock Exchange (“TSX”) continued listing standards and our
ability to develop and implement a plan of compliance with the Nasdaq continued listing standards acceptable to a Nasdaq Hearings Panel
(the “Nasdaq Panel”), 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
rights 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 sales 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® capsules, 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 recent changes in U.S. federal
income tax laws, including but not limited to, limitations
1
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, the success and pricing of other competing therapies that may become available, our ability to retain
and hire qualified employees, the availability and pricing of third-party sourced products and materials, challenges related to the
development, commercialization, technology transfer, scale-up, and/or process validation of manufacturing processes for our products or
product candidates, the manufacturing capacity of third-party manufacturers that we may use for our products, 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 (“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 risk that 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
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, the
“Risk Factors" sections of our latest annual information form and our latest registration statements on Form F-1 and F-3 (including any
documents forming a part thereof or incorporated by reference therein), as amended, 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 “$”, “U.S.$”, or “U.S. Dollars” 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™, 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
Unless the context otherwise requires, references in this document to (i) share amounts, per share data, share prices, exercise prices
and conversion rates have been adjusted to reflect the effect of the 1-for-10 reverse split (the “reverse split”) which became effective on
each of Nasdaq and TSX at the open of market on September 14, 2018, and (ii) “consolidation” or “share consolidation” are intended to
refer to such reverse split.
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 the Company has been derived from the audited consolidated financial statements of the
Company as at and for the years ended November 30, 2018, 2017, 2016, 2015, and 2014. 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 U.S. dollars, unless otherwise indicated.
3
(in thousands of U.S. dollars, except for per share data)
As at and
for the
year
ended
November
30, 2018
As at and
for the
year
ended
November
30, 2017
As at and
for the
year
ended
November
30, 2016
As at and
for the
year
ended
November
30, 2015
$
1,713
(13,747)
11,474
7,372
4,102
44,328
(2.89)
Nil
4,762
$
5,504
(8,857)
7,397
7,010
386
35,290
(2.86)
Nil
3,101
$
2,247
(10,144)
7,975
6,858
1,116
29,831
(3.80)
Nil
2,670
Revenue
Loss for the year
Total assets
Total liabilities
Net assets
Capital stock
Loss per share - basic and diluted
Dividends
Weighted average common shares
B. Capitalization and Indebtedness
Not applicable.
C. Reasons for the Offer and Use of Proceeds
Not applicable.
D. Risk Factors
As at and
for the
year
ended
November
30, 2014
$
8,770
(3,856)
7,875
2,966
4,909
18,941
(1.67)
Nil
2,305
$
4,094
(7,436)
5,224
5,362
(138)
21,481
(3.13)
Nil
2,377
Prospects for companies in the pharmaceutical industry generally may be regarded as uncertain given the research and
development (“R&D”) 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.
Risks related to our Company
Our business is capital intensive and requires significant investment to conduct the 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 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, 2018, we had a cash balance of $6.6 million. As of February 28, 2019, our cash balance was $3.0 million.
While we expect to satisfy short term operational needs from cash on hand and profit transfer payments from our commercial partners, we
need to obtain additional funding as we further the development of our product candidates. 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. We intend to utilize the equity markets
to bridge any funding shortfall and to provide capital
4
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 approval by the FDA, Health Canada, and the
regulatory authorities of other countries in which are products are proposed to be sold and whether we are able to successfully market our
approved products. We cannot be certain that we will receive FDA, Health Canada, or such other regulatory 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), PODRAS™ technology (as defined in Item 4.B. below), additional 505(b)(2) product candidates for development in various
areas, and selected generic product candidate development projects. Our development of Oxycodone ER will require significant
expenditures, including costs to defend against the Purdue litigation (as described below). 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.
Effective October 1, 2018, the maturity date for the 2013 Debenture (as defined below) was extended to April 1, 2019. The
Company currently expects to repay the current outstanding principal amount of $1,050,000 on or about April 1, 2019, if the Company
then has cash available. In addition, the 2018 Debenture (as defined below) will mature on September 1, 2020.
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, 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 impact of the
litigation against us 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.
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;
5
● the length of time required to enroll suitable subjects;
● the duration of patient follow-up;
● the number of clinical sites included in the trial;
● changes in regulatory requirements or regulatory delays or clinical holds requiring suspension or termination of the trials;
● delays, suspensions or termination of clinical trials due to the institutional review board overseeing the study at a particular site;
● failure to conduct clinical trials in accordance with regulatory requirements;
● unforeseen safety issues, including serious adverse events or side effects experienced by participants; and
● inability to manufacture, through third party manufacturers, adequate supplies of the product candidate being tested.
Based on results at any stage of product development, we may decide to repeat or redesign preclinical studies or clinical trials,
conduct entirely new studies or discontinue development of products for one or all indications. In addition, our product candidates may not
demonstrate sufficient safety and efficacy in pending or any future preclinical testing or clinical trials to obtain the requisite regulatory
approvals. Even if such approvals are obtained for our products, they may not be accepted in the market as a viable alternative to other
products already approved or pending approvals.
If we experience delays, suspensions or terminations in a preclinical study or clinical trial, the commercial prospects for our
products will be harmed, and our ability to generate product revenues will be delayed or we may never be able to generate such revenues.
We have a history of operating losses, which may continue in the foreseeable future.
We have incurred net losses from inception. We had an accumulated deficit of $85,620,939 as of November 30, 2018 and have
incurred additional losses since such date. As we engage in the development of products in our pipe line, 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. In addition to the other
factors described in this annual report, our ultimate success will depend on how many of our product candidates receive approval by the
FDA, Health Canada, and the regulatory authorities of the other countries in which are products are proposed to be sold and whether we are
able to successfully market approved products. We cannot be certain that we will be able to receive FDA, Health Canada or such other
regulatory 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. If we are unsuccessful in commercializing our products and/or securing sufficient financing, we may need
to cease or curtail our operations.
Loss of key scientists and/or 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, Chief Executive Officer and Co-Chief Scientific
Officer, and Dr. Amina Odidi, our President, Chief Operating Officer and Co-Chief Scientific 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 the
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 new employees, and on our ability to
develop and maintain important relationships with leading research and medical institutions and key distributors. If we lose the services of
our executive officers or other qualified personnel or are unable to attract and retain qualified individuals to fill these roles or develop key
relationships, our business, financial condition and results of operations could be materially adversely affected.
6
Our intellectual property may not provide meaningful protection for our products and product candidates.
We hold certain U.S., Canadian and foreign patents and have pending applications for additional patents outstanding. We intend to
continue to seek patent protection for, or maintain as trade secrets, all of our commercially promising drug delivery platforms and
technologies. Our success depends, in part, on our and our collaborative partners’ ability to obtain and maintain patent protection for
products and product candidates, maintain trade secret protection and operate without infringing the proprietary rights of third parties.
Without patent and other similar protection, other companies could offer substantially identical products without incurring sizeable
development costs which could diminish our ability to recover expenses of and realize profits on our developed products. If our pending
patent applications are not approved, or if we are unable to obtain patents for additional developed technologies, the future protection for
our technologies will remain uncertain. Furthermore, third parties may independently develop similar or alternative technologies, duplicate
some or all of our technologies, design around our patented technologies or challenge our issued patents. Such third parties may have filed
patent applications, or hold issued patents, relating to products or processes competitive with those we are developing or otherwise
restricting our ability to do business in a particular area. If we are unable to obtain patents or otherwise protect our trade secrets or other
intellectual property and operate without infringing on the proprietary rights of others, our business, financial condition and results of
operations could be materially adversely affected.
We may be subject to intellectual property claims that could be costly and could disrupt our business.
Third parties may claim we have infringed their patents, trademarks, copyrights or other rights. We may be unsuccessful in
defending against such claims, which could result in the inability to protect our intellectual property rights or liability in the form of
substantial damages, fines or other penalties such as injunctions precluding our manufacture, importation or sales of products. The
resolution of a claim could also require us to change how we do business or enter into burdensome royalty or license agreements; provided,
however, we may not be able to obtain the necessary licenses on acceptable terms, or at all. 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.
Any of the foregoing may have a material adverse effect upon our business and financial condition.
We are a defendant in litigation 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 the litigation matters described below and under Item 8.A. The defense of such litigation 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, or any settlement of such litigation matters could require
that we make significant payments. In addition, we may be the target of other litigation in the future. Any negative outcome in any ongoing
or future litigation may have a material adverse effect on our business and financial condition.
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.
7
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 the file of Purdue Pharma L.P.(“Purdue”) 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 FDA’s Approved
Drug Products with Therapeutic Equivalence Evaluations, commonly known as the “Orange Book”, or that such patents are invalid, and so
notified Purdue 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, 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 (docket number 17-392) in respect of our NDA filing for
Oxycodone ER, alleging that our proposed Oxycodone ER infringes 6 out of the 16 patents associated with the branded product
OxyContin®, or the OxyContin® patents, listed in the Orange Book. 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.
Subsequent to the above-noted filing of lawsuit, 4 further such patents were listed and published in the Orange Book. We then
similarly certified to the FDA concerning such further patents. On March 16, 2018, we received notice that the Purdue litigation plaintiffs
had commenced further such patent infringement proceedings against us adding the 4 further patents. This lawsuit is also in the District of
Delaware federal court under docket number 18-404.
As a result of the commencement of the first 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.
On or about June 26, 2018, the court issued an order to sever 6 “overlapping” patents from the second Purdue case, but ordered
litigation to proceed on the 4 new (2017-issued) patents. An answer and counterclaim was filed on July 9, 2018. The existence and
publication of additional patents in the Orange Book, and litigation arising therefrom, is an ordinary and to be expected occurrence in the
course of such litigation.
8
On July 6, 2018, the court issued a so-called “Markman” claim construction ruling on the first case and the October 22, 2018 trial
date remained unchanged. We believe that we have non-infringement and/or invalidity defenses to all of the asserted claims of the subject
patents in both of the cases and will vigorously defend against these claims.
On July 24, 2018, the parties to the case mutually agreed to and did have dismissed without prejudice the infringement claims
related to the Grünenthal ‘060 patent. The Grünenthal ‘060 patent is one of the six patents included in the original litigation case, however,
the dismissal does not by itself result in a termination of the 30-month litigation stay.
On October 4, 2018, the parties mutually agreed to postpone the scheduled court date pending a case status conference scheduled
for December 17, 2018. At that time, further trial scheduling and other administrative matters were postponed pending the Company’s
anticipated resubmission of the Oxycodone ER NDA to the FDA, which is due no later than February 28, 2019.
In July 2017, three complaints were filed in the U.S. District Court for the Southern District of New York that were later
consolidated under the caption Shanawaz v. Intellipharmaceutics Int’l Inc., et al., No. 1:17-cv-05761 (S.D.N.Y.). The lead plaintiffs filed a
consolidated amended complaint on January 29, 2018. In the amended complaint, the lead plaintiffs 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. Securities Exchange Act of 1934, as amended (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. On March 30, 2018, the Company and the other defendants filed a motion to dismiss the amended complaint for failure to state a
valid claim. The defendants’ motion to dismiss was granted in part, and denied in part, in an Order dated December 17, 2018. In its Order,
the court dismissed certain of the plaintiffs’ securities claims, to the extent that the claims were based upon statements describing the
Oxycodone ER product’s abuse-deterrent features and its bioequivalence to OxyContin. However, the court allowed the claims to proceed
to the extent plaintiffs challenged certain public statements describing the contents of the Company’s Oxycodone ER NDA. Defendants
filed an answer to the amended complaint on January 7, 2019, and discovery is ongoing. We intend to vigorously defend against the
remainder of the claims asserted in the consolidated action.
On February 21, 2019, the Company and its CEO, Dr. Isa Odidi, received a Statement of Claim concerning an action against them
in the Superior Court of Justice of Ontario under the caption Victor Romita, plaintiff, and Intellipharmaceutics International Inc. and Isa
Odidi, defendants. The action seeks certification as a class action and alleges that certain public statements made by the Company in the
period February 29, 2016 to July 26, 2017 knowingly or negligently contained or omitted material facts concerning the Company’s NDA
for Oxycodone ER abuse-deterrent oxycodone hydrochloride extended release tablets. The plaintiff alleges that he suffered loss and
damages as a result of trading in the Company’s shares on TSX during the above-noted period. The claim seeks, among other remedies,
unspecified damages, legal fees and court and other costs as the court may permit. At this time, the action has not been certified as a class
action. The Company intends to vigorously defend against the claims asserted in this action.
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 favor 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 favor 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.
9
Approvals for our product candidates may be delayed or become more difficult to obtain if the FDA changes 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 User Fee Amendments of 2012, or GDUFA,
was enacted into law. The GDUFA legislation implemented substantial fees for new ANDAs, Drug Master Files, product and establishment
fees. 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 year 2019, the user fee rate is $178,799 for new ANDAs. For the FDA ’s fiscal year 2019, the FDA
will also charge an annual facility user fee of $226,305 plus a new general program fee of $186,217. 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 and generate revenues and thus may have a material adverse effect on our business, results of
operations and financial condition.
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 through
contractual provisions in supply contracts, by management of inventory and by continuing to search for alternative authorized suppliers of
such materials or their equivalents, 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 our
customers, could have a material adverse effect on our business, results of operations, financial condition and cash flows.
Our product candidates may not be successfully developed or commercialized.
Successful development of our product candidates is highly uncertain and is dependent on numerous factors, many of which are
beyond our control. Products that appear promising in research or early phases of development may fail to reach later stages of
development or the market for several reasons including:
● for ANDA candidates, bioequivalence studies results may not meet regulatory requirements or guidelines for the demonstration
of bioequivalence;
● for NDA candidates, a product may not demonstrate acceptable large-scale clinical trial results, even though it demonstrated
positive preclinical or initial clinical trial results;
● for NDA candidates, a product may not be effective in treating a specified condition or illness;
● a product may have harmful side effects on humans;
10
● 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 in Item 4.B.
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 Pharmaceutical, Inc. (“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 granted final approval under the Par ANDA (as defined in Item 4.B. 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 we entered into with Par in November 2015, as amended on August 12, 2011 and September 24, 2013 (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 Pharmaceuticals LP (“AstraZeneca”). The Company manufactured and shipped commercial quantities of all strengths of
generic Seroquel XR® to our marketing and distribution partner Mallinckrodt LLC (“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 (tentatively approved)
● 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 R&D may not lead to successful product introductions.
We conduct R&D 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 R&D efforts in our industry, particularly with respect to new drugs, our R&D expenditures may not result
in the successful introduction of FDA approved new pharmaceuticals.
We may not have the ability to develop or license, or otherwise acquire, and introduce new products on a timely basis.
Product development is inherently risky, especially for new drugs for which safety and efficacy have not been established and the
market is not yet proven. Likewise, product licensing involves inherent risks including uncertainties due to matters that may affect the
achievement of milestones, as well as the possibility of contractual disagreements with regard to terms such as license scope or termination
rights. The development and commercialization process, particularly with regard to new drugs, also requires substantial time, effort and
financial resources. The process of obtaining FDA or other regulatory approval to manufacture and market new and generic pharmaceutical
products is rigorous, time consuming, costly and largely unpredictable. We, or a partner, may not be successful in obtaining FDA or other
required regulatory approval or in commercializing any of the product candidates that we are developing or licensing.
12
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 our vendors and current and/or future drug development or commercialization
partners 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 results in a loss of or
damage to our data or applications, or inappropriate disclosure of confidential or proprietary information, we could incur significant
liability and damage to our reputation. In addition, further development of our drug candidates could be adversely affected.
In addition, the unauthorized dissemination of sensitive personal information could expose us or other third parties to regulatory
fines or penalties, litigation and potential liability, or otherwise harm our business.
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.
We have limited manufacturing, sales, marketing or distribution capability and we must rely upon third parties for such.
While we have our own manufacturing facility in Toronto, we rely on third-party manufacturers to supply pharmaceutical
ingredients, and we will be reliant upon a third-party manufacturer to produce certain of our products and product candidates. Third-party
manufacturers may not be able to meet our deadlines or 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 such third party manufacturers fail to perform
satisfactorily, or do not adequately fulfill their obligations. If our manufacturing operation or any contracted manufacturing operation is
unreliable or unavailable, we may not be able to move forward with our intended business operations and our entire business plan could
fail. There is no assurance that our 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 Good Manufacturing Process.
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 the current Good
Manufacturing Practices (“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
13
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;
● 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.
14
Our products and product candidates, if approved for sale, may not gain acceptance among physicians, patients and the medical
community, 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 by physicians, healthcare professionals and third-party payers and our profitability and growth will depend on a
number of factors, including:
● demonstration of safety and efficacy;
● changes in the practice guidelines and the standard of care for the targeted indication;
● relative convenience and ease of administration;
● the prevalence and severity of any adverse side effects;
● the availability of alternative products from competitors;
● the prices of our products relative to those of our competitors;
● pricing, reimbursement and cost effectiveness, which may be subject to regulatory control;
● 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;
● the acceptance of our products by government and private formularies; and
● the availability of adequate third-party insurance coverage or reimbursement.
If any product candidate that we develop does not provide a treatment regimen that is as beneficial as, or is perceived as being as
beneficial as, the current standard of care or otherwise does not provide patient benefit, that product candidate, if approved for commercial
sale by the FDA or other regulatory authorities, likely will not achieve market acceptance. Our ability to effectively promote and sell any
approved products will also depend on pricing and cost-effectiveness, including our ability to produce a product at a competitive price and
our ability to obtain sufficient third-party coverage or reimbursement. If any product candidate is approved but does not achieve an
adequate level of acceptance by physicians, patients and third-party payers, our ability to generate revenues from that product would be
substantially reduced. In addition, our efforts to educate the medical community and third-party payers on the benefits of our product
candidates may require significant resources, may be constrained by FDA rules and policies on product promotion, and may never be
successful.
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 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. In addition, such competitors may obtain FDA approval for products faster than us. Any of the foregoing 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 favorable 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 for such
products, we must also compete with established existing products and other technologies, 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.
17
Any particular technology such as our abuse-deterrent technology may not perform in the same manner when used with different
therapeutic agents, and therefore this technology may not prove to be as useful or valuable as originally thought, resulting in additional
development work.
If our efforts do not repeatedly lead to successful development of product candidates, we may not be able to grow our pipeline or
to enter into agreements with marketing and distribution partners or collaborators that are willing to distribute or develop our product
candidates. Delays or unanticipated increases in costs of development at any stage, or failure to solve a technical challenge, could adversely
affect our operating results.
If contract manufacturers fail to devote sufficient time and resources to our concerns, or if their performance is substandard, the
commercialization of our products could be delayed or prevented, and this may result in higher costs or deprive us of potential product
revenues.
We rely on contract manufacturers for certain components and ingredients of our clinical trial materials, such as active
pharmaceutical ingredients (“APIs”), and we may rely on such manufacturers for commercial sales purposes as well. Our reliance on
contract manufacturers in these respects will expose us to several risks which could delay or prevent the commercialization of our products,
result in higher costs, or deprive us of potential product revenues, including:
● Difficulties in achieving volume production, quality control and quality assurance, or technology transfer, as well as with
shortages of qualified personnel;
● The failure to establish and follow cGMP and to document adherence to such practices;
● The need to revalidate manufacturing processes and procedures in accordance with FDA and other nationally mandated cGMPs
and potential prior regulatory approval upon a change in contract manufacturers;
● Failure to perform as agreed or to remain in the contract manufacturing business for the time required to produce, store and
distribute our products successfully;
● The potential for an untimely termination or non-renewal of contracts; and
● The potential for us to be in breach of our collaboration and marketing and distribution arrangements with third parties for the
failure of our contract manufacturers to perform their obligations to us.
In addition, drug manufacturers are subject to ongoing periodic unannounced inspection by the FDA and corresponding state and
foreign agencies to ensure strict compliance with cGMP and other government regulations. While we may audit the performance of third-
party contractors, we will not have complete control over their compliance with these regulations and standards. Failure by either our third-
party manufacturers or by us to comply with applicable regulations could result in sanctions being imposed on us, including fines,
injunctions, civil penalties, failure of applicable regulatory authorities to grant review of submissions or market approval of drugs, delays,
suspension or withdrawal of approvals, product seizures or recalls, operating restrictions, facility closures and criminal prosecutions, any of
which could harm our business.
We are subject to currency rate fluctuations that may impact our financial results.
Although our financial results are reported in U.S. dollars and our revenues are payable in U.S. dollars, a majority of our expenses
are payable in Canadian dollars. Our financial condition may be affected by movements of the U.S. dollar against the Canadian dollar.
There may be instances where we have net foreign currency exposure. Any fluctuations in exchange rates may have an adverse effect on
our financial results.
18
We are exposed to risks arising from the ability and willingness of our third-party commercialization partners to provide
documentation that may be required to support information on revenues earned by us from those commercialization partners.
If our third-party commercialization partners, from whom we receive revenues, are unable or unwilling to supply necessary or
sufficient documentation to support the revenue numbers in our financial statements in a timely manner to the satisfaction of our auditors,
this may lead to delays in the timely publication of our financial results, our ability to obtain an auditor’s report on our financial statements
and our possible inability to access the financial markets during the time our results remain unpublished.
We 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, intense competition, lack of adequate financial or other resources or 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 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 R&D spending, the availability of tax credit programs for the reimbursement of all or a significant proportion of R&D
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 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 in 2017 may apply to increase our effective rate
of U.S. corporate income tax.
19
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 the use of such products.
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 Risk Evaluation and Mitigation Strategy 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 manufacture and commercialize, 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.
Members of the U. S. Congress and the Trump administration have expressed an intent to pass legislation or adopt executive
orders to fundamentally change or repeal parts of the Affordable Care Act.
The cost of prescription pharmaceuticals has also been the subject of considerable discussion in the U.S. Members of Congress
and the Trump administration have indicated that they will address such costs through new legislative and administrative measures. To
date, there have been several U.S. Congressional inquiries and proposed and enacted federal and state legislation designed to, among other
things, bring more transparency to drug pricing, review the relationship between pricing and manufacturer patient programs, reduce the
costs of drugs under Medicare and reform government program reimbursement methodologies for drug products. At the federal level,
Congress and the Trump administration have each indicated that it will continue to pursue new legislative and/or administrative measures
to control drug costs. The Trump administration has proposed a plan to reduce the cost of drugs. The Trump administration’s plan contains
certain measures that the U.S. Department of Health and Human Services is already working to implement. For example, on October 25,
2018, CMS issued an Advanced Notice of Proposed Rulemaking, or ANPRM, indicating it is considering issuing a proposed rule in the
Spring of 2019 on a model called the International Pricing Index. This model would utilize a basket of other countries’ prices as a reference
for the Medicare program to use in reimbursing for drugs covered under Part B. The ANPRM also included an updated version of the
Competitive Acquisition Program, as an alternative to current “buy and bill” payment methods for Part B drugs. Such a proposed rule could
limit our product pricing and have material adverse effects on our business.
Individual state legislatures in the U.S. have become increasingly aggressive in passing legislation and implementing regulations
designed to control pharmaceutical and biological product pricing. Some of these measures include price or patient reimbursement
constraints, discounts, restrictions on certain product access, marketing cost disclosure and transparency measures, and, in some cases,
measures designed to encourage importation from other countries and bulk purchasing. In addition, regional health care authorities and
individual hospitals are increasingly using bidding procedures to determine what pharmaceutical products and which suppliers will be
included in their prescription drug and other health care programs. These measures could reduce the ultimate demand for our products, once
approved, or put pressure on our product pricing.
22
We 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.
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 may be subject to product liability claims 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. Any of the foregoing may have a material adverse effect on our
business and financial condition.
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 R&D 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.
23
In the event of an accident, we could be held liable for any damages, which could exceed our available financial resources. Further, we may
not be able to maintain insurance to cover these costs on acceptable terms, or at all. In addition, we may be required to incur significant
costs to comply with environmental laws and regulations in the future.
Our operations may be adversely affected by risks associated with international business.
We may be subject to certain risks that are inherent in an international business, including:
● varying regulatory restrictions on sales of our products to certain markets and unexpected changes in regulatory requirements;
● tariffs, customs, duties, and other trade barriers;
● difficulties in managing foreign operations and foreign distribution partners;
● longer payment cycles and problems in collecting accounts receivable;
● political risks;
● foreign exchange controls that may restrict or prohibit repatriation of funds;
● export and import restrictions or prohibitions, and delays from customs brokers or government agencies;
● seasonal reductions in business activity in certain parts of the world; and
● potentially adverse tax consequences.
Depending on the countries involved, any or all of the foregoing factors could materially harm our business, financial condition
and results of operations.
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:
24
● sales of our common shares, including any sales made in connection with future financings;
● announcements regarding new or existing corporate relationships or arrangements;
● announcements by us of significant acquisitions, joint ventures, or capital commitments;
● actual or anticipated period-to-period fluctuations in financial results;
● clinical and regulatory development regarding our product candidates;
● litigation or threat of litigation;
● failure to achieve, or changes in, financial estimates by securities analysts;
● comments or opinions by securities analysts or members of the medical community;
● announcements regarding new or existing products or services or technological innovations by us or our competitors;
● conditions or trends in the pharmaceutical and biotechnology industries;
● additions or departures of key personnel or directors;
● economic and other external factors or disasters or crises;
● limited daily trading volume; and
● developments regarding our patents or other intellectual property or that of our competitors.
In addition, the stock market in general and the market for drug development companies in particular have experienced significant
price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Further,
there has been significant volatility in the market prices of securities of life science companies. In the past, following periods of volatility in
the market price of a company’s securities, securities class action litigation has often been instituted.. Litigation of this type has been
instituted 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 28, 2019, we had approximately 21,925,577 common shares outstanding. In addition, a substantial portion of our
shares are currently freely trading without restriction under the U.S. 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.
On July 17, 2017, the Company’s most recent registration statement on Form F-3 (the “ Shelf Registration Statement”) was
declared effective by the Securities and Exchange Commission (“SEC”). 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 (the “Board”), at the time of such offering and will be described in detail in a prospectus supplement
filed at the time of any such offering. To the extent any securities of the Company are issued by the Company under the Shelf Registration
Statement or the shelf prospectus, a shareholder’s percentage ownership will be diluted and our stock price could be further adversely
affected. As of February 28, 2019, the Company has issued 1,246,969 common shares using the Shelf Registration Statement, and there can
be no assurance that any additional securities will be sold under the Shelf Registration Statement or the shelf prospectus.
25
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 28, 2019, there are currently common shares issuable upon the exercise of outstanding options and warrants and
DSUs and the conversion of the Debentures for an aggregate of approximately 22,762,481 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.
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 and depend on our financial condition, results of operations, capital and legal requirements
and such other factors as our Board 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 Nasdaq or 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.
26
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. There can be no assurance that we will be able to sell
any additional shares. 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.
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, 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 28, 2019, the Company has issued 1,246,969 common shares using the
Shelf Registration Statement, and there can be no assurance that any additional securities will be sold under the Shelf Registration
Statement. In March 2018, the Company terminated its continuous offering under the prospectus supplement dated July 18, 2017 and
prospectus dated July 17, 2017 in respect of its at-the-market program.
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 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 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.
27
Shareholders may not be able to sell their common shares on any such substitute exchange in the quantities, at the times, or at the
prices that could potentially be available on a more liquid trading market. As a result of these factors, if our common shares are delisted
from the TSX, the price of our common shares is likely to decline.
Our common shares may not continue to be listed on Nasdaq.
Failure to meet the applicable quantitative and/or qualitative maintenance requirements of Nasdaq could result in our common
shares being delisted from Nasdaq. For continued listing, Nasdaq requires, among other things, that listed securities maintain a minimum
bid price of not less than $1.00 per share. If the bid price falls below the $1.00 minimum for more than 30 consecutive trading days, an
issuer will typically have 180 days to satisfy the $1.00 minimum bid price, which must be maintained for a period of at least ten trading
days in order to regain compliance.
If we are delisted from Nasdaq, our common shares may be eligible for trading on an over-the-counter market in the United States.
In the event that we are not able to obtain a listing on another U.S. stock exchange or quotation service for our common shares, it may be
extremely difficult or impossible for shareholders to sell their common shares in the United States. Moreover, if we are delisted from
Nasdaq, but obtain a substitute listing for our common shares in the United States, it will likely be on a market with less liquidity, and
therefore 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.
We are currently not in compliance with the requirements for the continued listing of our common shares on Nasdaq. As described
below, if we are not in compliance with those requirements by March 7, 2019, a Nasdaq Panel will determine whether we will be provided
with an extension of time for that purpose.
In September 2017, we were notified by Nasdaq that we were not in compliance with the minimum market value of listed
securities required for continued listing on Nasdaq. Nasdaq Listing Rule 5550(b) requires listed securities to maintain a minimum market
value of $35.0 million, among other alternatives, including minimum stockholders’ equity of $2.5 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 did not satisfy the minimum market value of listed securities
requirement. By rule, we were provided 180 calendar days, or until March 19, 2018, to regain compliance with that requirement. To regain
compliance, our common shares were required to have a market value of at least $35.0 million for a minimum of 10 consecutive business
days prior to March 19, 2018, which they did not. In the alternative, if the minimum market value requirement for continued listing is not
met, an issuer may maintain continued listing under Nasdaq Listing Rule 5550(b) if it has stockholders’ equity of at least $2.5 million.
On April 20, 2018, we received notice that the Nasdaq Listings Qualification staff (the “ Nasdaq Staff”) had determined to delist
our common shares as a result of our failure to meet either the minimum market value of listed securities requirement or the minimum
stockholders’ equity requirement for continued listing. However, any delisting action by the Nasdaq Staff was stayed pending the ultimate
conclusion of our hearing before the Nasdaq Panel.
In addition to not meeting the minimum market value of listed securities or minimum stockholders’ equity requirements, we were
separately notified in December 2017 that our common shares no longer satisfied the minimum $1.00 per share bid requirement under
Nasdaq Listing Rule 5550(a)(2).
We attended a hearing before the Nasdaq Panel on May 17, 2018, and subsequently received formal notice that the Nasdaq Panel
had granted our request for continued listing provided that by September 28, 2018, we (i) comply with Nasdaq’s $1.00 bid price
requirement by having a closing bid price of over $1.00 for ten consecutive trading days, (ii) have stockholders’ equity position of over
$2.5 million, and (iii) provide the Nasdaq Panel with updated financial projections demonstrating our ability to maintain compliance with
the stockholders’ equity rule for the coming year. Following receipt of shareholder approval for a reverse stock split (known as a share
consolidation under Canadian law) at our August 15, 2018 shareholders meeting, on September 12, 2018, we filed articles of amendment to
effectuate a 1-for-10 reverse split, and our common shares began trading on each of Nasdaq and TSX on a post-reverse split basis on
September 14, 2018. As a result of the closing bid price of our common shares exceeding $1.00 for the period from September 14, 2018 to
September 27, 2018, we received a letter from Nasdaq Listing Qualification notifying us that we had regained compliance with Nasdaq’s
minimum bid price requirement. On September 29, 2018, we were advised that the Nasdaq Panel granted an extension through October 17,
2018 for us to regain compliance with Nasdaq’s stockholders’ equity continued listing requirement.
28
On October 17, 2018, we filed with the SEC a report on Form 6-K reporting that we believed we had regained compliance with
Nasdaq’s stockholders’ equity requirement after giving effect to the proceeds from the October 2018 offering.
On October 26, 2018, we announced that we had regained compliance with Nasdaq’s stockholders’ equity requirement and that
the Nasdaq Panel determined that we would remain subject to a "Panel Monitor” until October 22, 2019.
In November 2018, we received written notification from Nasdaq notifying us 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, as a result, we were not in compliance with
Nasdaq’s minimum bid price requirement.
In December 2018, we received written notification from Nasdaq notifying us that a hearing with a Nasdaq Panel had been
scheduled for January 10, 2019.
At a hearing held on January 10, 2019, we presented to the Nasdaq Panel our plan to regain and maintain compliance with
Nasdaq’s continued listing requirements.
On January 28, 2019, we announced that we had received notice from the Nasdaq Panel extending the continued listing of our
common shares until March 7, 2019, subject to certain conditions, while we work to regain compliance with Nasdaq’s requirements.
Following the March 7, 2019 deadline, the Nasdaq Panel will determine whether a further extension period is warranted in the event we
have not regained compliance. However, there can be no assurance that the Nasdaq Panel will grant such an extension. Moreover, there can
be no assurance that we will be able to regain compliance with Nasdaq's requirements or, if we do, that we will be able to maintain
compliance with all applicable requirements for continued listing on Nasdaq over the long term. The Nasdaq Panel's determination requires
us to promptly notify Nasdaq of any significant events that occur during the extension period that may affect our compliance with Nasdaq
requirements.
There is no assurance that the Company will be able to regain compliance with Nasdaq’s listing requirements, or if it does, that the
Company will be able to maintain compliance with Nasdaq’s listing requirements. If we are unable to maintain compliance with Nasdaq’s
continued listing requirements, our common shares may no longer be listed on Nasdaq or another U.S. 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 in the U.S. on the over-the-counter market, which is a less liquid market. In such case, our shareholders’ ability to trade, or obtain
quotations of the market value of, our common shares 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. In addition, delisting could
harm our ability to raise capital through alternative financing sources on terms acceptable to us, or at all, and may result in the potential
loss of confidence by investors, employees and fewer business development opportunities.
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 currently 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.
29
If our common shares are not listed on a national securities exchange, they may become subject to the SEC’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 principal
shareholders may not know when our officers, directors and 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 (“SOX”), 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 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,
or as executive officers.
We are required annually to review and report on the effectiveness of our internal control over financial reporting in accordance
with SOX Section 404 and Multilateral Instrument 52-109 – Certification of Disclosure in Issuer’s Annual and Interim Filings of the
Canadian Securities Administrators. The results of this review are reported in our Annual Report on Form 20-F and in our Management
Discussion and Analysis.
30
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” 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 below) of our common shares and warrants. It
may be possible for U.S. Holders of common shares, but not holders of warrants with respect to periods prior to exercise, 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 Internal Revenue
Code (the “Code”) (a “QEF Election”) or a mark-to-market election under Section 1296 of the Code. A non-U.S. corporation generally
will be a PFIC if, for a taxable year (a) 75% or more of the gross income of such corporation for such taxable year consists of specified
types of passive income or (b) on average, 50% or more of the assets held by such corporation either produce passive income or are held for
the production of passive income, based on the fair market value of such assets (or on the adjusted tax basis of such assets, if such non-U.S.
corporation is not publicly traded and either is a “controlled foreign corporation” under Section 957(a) of the Code, or makes an election to
determine whether it is a PFIC based on the adjusted basis of the assets).
The determination of whether we are, or will be, a PFIC for a taxable year depends, in part, on the application of complex U.S.
federal income tax rules, which are subject to various interpretations. Although the matter is not free from doubt, we believe that we were
not a PFIC during our 2018 taxable year and will not likely be a PFIC during our 2019 taxable year. Because PFIC status is based on the
composition of our income and assets and the nature of our activities for the entire taxable year, and on our market capitalization, it is not
possible to determine whether we will be characterized as a PFIC for the 2019 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 for any given year. There can be
no assurance that we will not be considered a PFIC for any taxable year (including our 2019 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 common shares, we generally will continue to
be treated as a PFIC with respect to such holder’s proportionate share of our income arising in any year in which we are a PFIC regardless
of whether we cease to meet the PFIC tests in one or more subsequent years. Accordingly, no assurance can be given that we will not
constitute a PFIC in the current (or any future) tax year or that the United States 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 common
shares will depend on whether such U.S. Holder makes a QEF or mark-to-market election. A U.S. Holder may only make a QEF election if
we agree to provide certain tax information to such holder annually. At this time, we do not intend to provide U.S. Holders with such
information as may be required to make a QEF election effective.
Unless otherwise provided by the IRS, a U.S. holder of our common 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. If we are a PFIC for one or more years in
which a U.S. Holder holds a warrant prior to exercise, it is possible that such holder could recognize gain on the sale, exchange or
disposition of that warrant that it would not otherwise recognize if we were not a PFIC. Any U.S. income tax imposed on the holder with
respect to the inclusion of such gain or the inclusion of a pro rata share of our income in his, her or its income following exercise of such
warrant could result in an interest charge payable on such holder’s tax liability that is calculated back to the first year in which such holder
held that warrant in which we were considered to be a PFIC.
31
The foregoing only speaks to the United States federal income tax considerations as to the Code in effect on the date of this annual
report.
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, Intellipharmaceutics International Inc., was incorporated under the Canada Business Corporations Act (the
“CBCA”) by certificate and articles of arrangement dated October 22, 2009.
Our registered principal office is located at 30 Worcester Road, Toronto, Ontario, Canada M9W 5X2. Our telephone number is
(416) 798-3001 and our facsimile number is (416) 798-3007.
Our agent for service in the United States is Corporation Service Company at 1090 Vermont Avenue N.W., Washington, D.C.
20005.
On October 19, 2009, the shareholders of IPC Ltd. and Vasogen approved the IPC Arrangement Agreement that resulted in the
October 22, 2009 court-approved merger of IPC Ltd. and another U.S. subsidiary of Intellipharmaceutics Inc., coincident with an
arrangement pursuant to which a predecessor of the Company combined with 7231971 Canada Inc., a new Vasogen company that acquired
substantially all of the assets and certain liabilities of Vasogen, including the proceeds from its non-dilutive financing transaction with
Cervus LP (the “IPC Arrangement Transaction ”). The completion of the IPC Arrangement Transaction on October 22, 2009 resulted in
the formation of the Company, which is incorporated under the laws of Canada and governed by the CBCA. The common shares of the
Company are traded on the TSX and Nasdaq.
For the years ended November 30, 2018, 2017 and 2016, we spent a total of $10,827,293, $9,271,353, and $8,166,736,
respectively, on research and development. Over the past three fiscal years and up to February 28, 2019, we have raised approximately
$36,095,962 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.
For information on the availability of, and access to, information regarding the Company filed with the SEC or presented on the
Company’s website, see Item 10.H. below.
32
B. Business Overview
Corporate Developments
● In February 2019, we received tentative approval from the FDA for our ANDA for desvenlafaxine extended-release tablets in the 50
and 100 mg strengths. This product is a generic equivalent of the branded product Pristiq® sold in the U.S. by Wyeth
Pharmaceuticals, LLC.
● As more fully described below (under “NASDAQ NOTICES AND NASDAQ HEARINGS PANEL GRANT OF REQUEST FOR
CONTINUED LISTING”), in January 2019, we announced that we had received notice from the Nasdaq Panel extending the
continued listing of our common shares until March 7, 2019, subject to certain conditions, while we work to regain compliance with
Nasdaq’s requirements.
● In January 2019, we announced that we had commenced a R&D program of pharmaceutical cannabidiol (“CBD”) based products.
As part of this R&D program, we filed provisional patent applications with the United States Patent and Trademark Office
pertaining to the delivery and application of cannabinoid-based therapeutics, began talks with potential commercialization partners
in the cannabidiol industry, and identified a potential supplier of CBD. We hold a Health Canada Drug Establishment License and a
dealer's license under the Narcotics Control Regulations (“NCR”). Under the NCR license, we are currently authorized to possess,
produce, sell and deliver drug products containing various controlled substances, including CBD, in Canada.
● In November 2018, we announced that we had received final approval from the FDA for our ANDA for venlafaxine hydrochloride
extended-release capsules in the 37.5, 75 and 150 mg strengths. The approved product is a generic equivalent of the branded product
Effexor® XR sold in the U.S. by Wyeth Pharmaceuticals, LLC. We are actively exploring the best approach to maximize our
commercial returns from this approval.
● In November 2018, we announced that we had submitted an investigational new drug (“IND”) application to the FDA for our
oxycodone hydrochloride immediate release (“IPCI006”) tablets in the 5, 10, 15, 20 and 30 mg strengths. This novel drug
formulation incorporates our Paradoxical OverDose Resistance Activating System (“PODRAS™”) delivery technology and our
novel Point Of Divergence Drug Delivery System (“nPODDDS™”) technology. IPCI006 is designed to prevent, delay or limit the
release of oxycodone hydrochloride when more intact tablets than prescribed are ingested, thus delaying or preventing overdose and
allowing for sufficient time for a rescue or medical intervention to take place. It is also intended to present a significant barrier to
abuse by snorting, "parachuting," injecting or smoking finely crushed oxycodone hydrochloride immediate release tablets.
● In November 2018, we announced that we had entered into an exclusive licensing and distribution agreement for our abuse resistant
Oxycodone ER product candidate and four generic drug products with a pharmaceutical distributor in the Philippines. A Philippines-
based pharmaceutical distributor was granted the exclusive right, subject to regulatory approval, to import and market our first novel
drug formulation, abuse-deterrent Oxycodone ER, in the Philippines. Additionally, this distributor was granted, subject to regulatory
approval, the exclusive right to import and market our generic Seroquel XR®, Focalin XR®, Glucophage® XR, and Keppra XR®
in the Philippines. Under the terms of the agreement, the distributor will be required to purchase a minimum yearly quantity of all
products included in the agreement and we will be the exclusive supplier of these products.
● In November 2018, we announced that we had entered into two exclusive licensing and distribution agreements with pharmaceutical
distributors in Malaysia and Vietnam:
33
o A Malaysian pharmaceutical distribution company was granted the exclusive right, subject to regulatory approval, to
import and market our generic Seroquel XR® (quetiapine fumarate extended-release) in Malaysia. Under the terms of the
agreement, four strengths (50, 200, 300 and 400 mg) of generic Seroquel XR® will be manufactured and supplied by us for
distribution in Malaysia. We are also in discussions to include other products in the agreement with this distributor, who
will be required to purchase a minimum yearly quantity of all products included in the agreement.
o A Vietnamese pharmaceutical distributor was granted the exclusive right, subject to regulatory approval, to import and
market our generic Seroquel XR®, Glucophage® XR, and Keppra XR® in Vietnam. Under the terms of the agreement,
two strengths (500 and 750mg) of generic Glucophage® XR, three strengths (50, 150 and 200mg) of generic Seroquel
XR® and one strength (500 mg) of generic Keppra XR® will be manufactured and supplied by us for distribution in
Vietnam. The Vietnamese distributor will be required to purchase a minimum yearly quantity of all products included in
the agreement.
● In October 2018, we completed an underwritten public offering in the United States, resulting in the sale to the public of 827,970
Units at $0.75 per Unit, which were comprised of one common share and one warrant (the “2018 Unit Warrants”) exercisable at
$0.75 per share. We concurrently sold an additional 1,947,261 common shares and warrants to purchase 2,608,695 common
shares exercisable at $0.75 per share (the “2018 Option Warrants”) pursuant to the over-allotment option exercised in part by the
underwriter. The price for the common shares issued in connection with exercise of the overallotment option was $0.74 per share
and the price for the warrants issued in connection with the exercise of the overallotment option was $0.01 per warrant, less in
each case the underwriting discount. In addition, we issued 16,563,335 pre-funded units (“2018 Pre-Funded Units”), each 2018
Pre-Funded Unit consisting of one pre-funded warrant (a “2018 Pre-Funded Warrant”) to purchase one common share and one
warrant (a “2018 Warrant”, and together with the 2018 Unit Warrants and the 2018 Option Warrants, the “2018 Firm
Warrants”) to purchase one common share. The 2018 Pre-Funded Units were offered to the public at $0.74 each and a 2018 Pre-
Funded Warrant is exercisable at $0.01 per share. Each 2018 Firm Warrant is exercisable immediately and has a term of five years
and each 2018 Pre-Funded Warrant is exercisable immediately and until all 2018 Pre-Funded Warrants are exercised. We also
issued warrants to the placement agents to purchase 1,160,314 common shares at an exercise price of $0.9375 per share (the
“October 2018 Placement Agent Warrants ”), which were exercisable immediately upon issuance. In aggregate, we issued
2,775,231 common shares, 16,563,335 2018 Pre-Funded Warrants and 20,000,000 2018 Firm Warrants in addition to 1,160,314
October 2018 Placement Agent Warrants.
● In October 2018, we announced that we had completed the clinical portion of our Category 2 and 3 human abuse liability studies
for our Oxycodone ER product candidate to support its abuse-deterrent label claims for both the oral and intranasal route of
administration. Bioanalytical samples and statistical analysis for such studies are pending. Results from the studies will be
included in our response to the FDA Complete Response Letter which is due no later than February 28, 2019.
● In September 2018, we announced a one-for-ten share consolidation (reverse split). The reverse split was implemented in order to
qualify for continued listing on Nasdaq, whereby we have to meet certain continued listing criteria, including a closing bid price
of at least $1.00 for a minimum of 10 consecutive business days. On September 12, 2018, we filed articles of amendment which
implemented the reverse split, and our shares began trading on each of Nasdaq and TSX on a post-split basis under our existing
trade symbol “IPCI” at the market open on September 14, 2018. The reverse split reduced the number of outstanding common
shares from approximately 43.5 million to approximately 4.35 million at that time.
● In September 2018, we announced that we issued in a private placement financing (the “2018 Debenture Financing”) an
unsecured convertible debenture in the principal amount of $0.5 million (the “2018 Debenture”), which will mature on
September 1, 2020. The 2018 Debenture bears interest at a rate of 10% per annum, payable monthly, is pre-payable at any time at
our option, 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. The 2018 Debenture Financing was non-brokered and the net proceeds were used for working capital and general
corporate purposes.
34
● In July 2018, we announced that infringement claims related to one of the six original patents included in the Purdue litigation
were dismissed without prejudice (as described below). As previously announced, in April 2017, we had received notice that
Purdue, Purdue Pharmaceuticals L.P., The P.F. Laboratories, Inc., Rhodes Technologies, and another party 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. The parties to the case mutually agreed to and did have dismissed without prejudice the infringement claims
related to the Grünenthal ‘060 patent (which is one of the six patents included in the original litigation case). On October 4, 2018,
the parties mutually agreed to postpone the scheduled court date pending a case status conference scheduled for December 17,
2018. At that time, further trial scheduling and other administrative matters were postponed pending the Company’s anticipated
resubmission of the Oxycodone ER NDA to the FDA, which is due no later than February 28, 2019.
● In March 2018, we announced the closing of two registered direct offerings. The first offering consisted of 583,333 common shares
at a price of $6.00 per share for gross proceeds of approximately $3.5 million. We also issued to the investors unregistered warrants
to purchase an aggregate of 291,666 common shares at an exercise price of $6.00 per share. The warrants became exercisable six
months following the closing date and will expire 30 months after the date they became exercisable. After commissions and
offering expenses, we received net proceeds of approximately $3.0 million. We also issued to the placement agents warrants to
purchase 29,166 common shares at an exercise price of $7.50 per share. In the second registered direct offering, we issued 300,000
common shares at a price of $6.00 per share for gross proceeds of $1.8 million. We also issued to the investors unregistered warrants
to purchase an aggregate of 150,000 common shares at an exercise price of $6.00 per share. The warrants became exercisable six
months following the closing date and will expire 30 months after the date they became exercisable. After commissions and
offering expenses, we received net proceeds of approximately $1.6 million. We also issued to the placement agents warrants to
purchase 15,000 common shares at an exercise price of $7.50 per share.
● In February 2018, we met with the FDA to discuss a previously-announced Complete Response Letter (“ CRL”) for Oxycodone ER,
including issues related to the blue dye in the product candidate. Based on those discussions, 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 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 candidate in the U.S. market 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, that any of our products or product candidates will receive regulatory approval for sale in other jurisdictions
(including the Philippines, Malaysia and Vietnam) that our desvenlafaxine extended-release will receive final FDA approval or that any of
our products will ever be successfully commercialized and produce significant revenue for us. Furthermore, there can be no assurances
regarding our ability to comply with the Nasdaq continued listing standards acceptable to a Nasdaq Panel, as described below. Moreover,
there can be no assurance that any of our provisional patent applications will successfully mature into patents, or that any cannabidiol-based
product candidates we develop will ever be successfully commercialized or produce significant revenue for us.
35
NASDAQ NOTICES AND NASDAQ HEARINGS PANEL GRANT OF REQUEST FOR CONTINUED LISTING
● We are currently not in compliance with the requirements for the continued listing of our common shares on Nasdaq. As described
below, if we are not in compliance with those requirements by March 7, 2019, a Nasdaq Panel will determine whether we will be
provided with an extension of time for that purpose.
In September 2017, we were notified by Nasdaq that we were not in compliance with the minimum market value of listed securities
required for continued listing on Nasdaq. Nasdaq Listing Rule 5550(b) requires listed securities to maintain a minimum market
value of $35.0 million, among other alternatives, including minimum stockholders’ equity of $2.5 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 did not satisfy the minimum
market value of listed securities requirement. By rule, we were provided 180 calendar days, or until March 19, 2018, to regain
compliance with that requirement. To regain compliance, our common shares were required to have a market value of at least $35.0
million for a minimum of 10 consecutive business days prior to March 19, 2018, which they did not. In the alternative, if the
minimum market value requirement for continued listing is not met, an issuer may maintain continued listing under Nasdaq Listing
Rule 5550(b) if it has stockholders’ equity of at least $2.5 million.
● On April 20, 2018, we received notice that the Nasdaq Staff had determined to delist our common shares as a result of our failure to
meet either the minimum market value of listed securities requirement or the minimum stockholders’ equity requirement for
continued listing. However, any delisting action by the Nasdaq Staff was stayed pending the ultimate conclusion of our hearing
before the Nasdaq Panel.
● In addition to not meeting the minimum market value of listed securities or minimum stockholders’ equity requirements, we were
separately notified in December 2017 that our common shares no longer satisfied the minimum $1.00 per share bid requirement
under Nasdaq Listing Rule 5550(a)(2).
● We attended a hearing before the Nasdaq Panel on May 17, 2018, and subsequently received formal notice that the Nasdaq Panel
had granted our request for continued listing provided that by September 28, 2018, we (i) comply with Nasdaq’s $1.00 bid price
requirement by having a closing bid price of over $1.00 for ten consecutive trading days, (ii) have stockholders’ equity position of
over $2.5 million, and (iii) provide the Nasdaq Panel with updated financial projections demonstrating our ability to maintain
compliance with the stockholders’ equity rule for the coming year. Following receipt of shareholder approval for a reverse stock
split (known as a share consolidation under Canadian law) at our August 15, 2018 shareholders meeting, on September 12, 2018, we
filed articles of amendment to effectuate a 1-for-10 reverse split, and our common shares began trading on each of Nasdaq and TSX
on a post-reverse split basis on September 14, 2018. As a result of the closing bid price of our common shares exceeding $1.00 for
the period from September 14, 2018 to September 27, 2018, we received a letter from Nasdaq Listing Qualification notifying us that
we had regained compliance with Nasdaq’s minimum bid price requirement. On September 29, 2018, we were advised that the
Nasdaq Panel granted an extension through October 17, 2018 for us to regain compliance with Nasdaq’s stockholders’ equity
continued listing requirement.
● On October 17, 2018, we filed with the SEC a report on Form 6-K reporting that we believed we had regained compliance with
Nasdaq’s stockholders’ equity requirement after giving effect to the proceeds from the October 2018 offering.
36
● On October 26, 2018, we announced that we had regained compliance with Nasdaq’s stockholders’ equity requirement and that the
Nasdaq Panel determined that we would remain subject to a "Panel Monitor” until October 22, 2019.
● In November 2018, we received written notification from Nasdaq notifying us 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, as a result, we were not in compliance with Nasdaq’s
minimum bid price requirement.
● In December 2018, we received written notification from Nasdaq notifying us that a hearing with a Nasdaq Panel had been
scheduled for January 10, 2019.
● At a hearing held on January 10, 2019, we presented to the Nasdaq Panel our plan to regain and maintain compliance with Nasdaq’s
continued listing requirements.
● On January 28, 2019, we announced that we had received notice from the Nasdaq Panel extending the continued listing of our
common shares until March 7, 2019, subject to certain conditions, while we work to regain compliance with Nasdaq’s requirements.
Following the March 7, 2019 deadline, the Nasdaq Panel will determine whether a further extension period is warranted in the event
we have not regained compliance. However, there can be no assurance that the Nasdaq Panel will grant such an extension.
Moreover, there can be no assurance that we will be able to regain compliance with Nasdaq's requirements or, if we do, that we will
be able to maintain compliance with all applicable requirements for continued listing on Nasdaq over the long term. The Nasdaq
Panel's determination requires us to promptly notify Nasdaq of any significant events that occur during the extension period that
may affect our compliance with Nasdaq requirements.
NEW LITIGATION
On February 21, 2019, the Company and its CEO, Dr. Isa Odidi, received a Statement of Claim concerning an action against them in the
Superior Court of Justice of Ontario under the caption Victor Romita, plaintiff, and Intellipharmaceutics International Inc. and Isa Odidi,
defendants. The action seeks certification as a class action and alleges that certain public statements made by the Company in the period
February 29, 2016 to July 26, 2017 knowingly or negligently contained or omitted material facts concerning the Company’s NDA for
Oxycodone ER abuse-deterrent oxycodone hydrochloride extended release tablets. The plaintiff alleges that he suffered loss and damages as
a result of trading in the Company’s shares on TSX during the above-noted period. The claim seeks, among other remedies, unspecified
damages, legal fees and court and other costs as the court may permit. At this time, the action has not been certified as a class action. The
Company intends to vigorously defend against the claims asserted in this action.
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 Par agreement (as amended on August 12, 2011 and September 24, 2013), pursuant to
which we granted Par an exclusive, royalty-free license to make and distribute in the U.S. all strengths of our generic Focalin XR®
(dexmethylphenidate hydrochloride extended-release) capsules for a period of 10 years from the date of commercial launch (which was
November 19, 2013) Under the Par agreement, we made a filing with the FDA for approval to market generic Focalin XR® capsules in
various strengths in the U.S. (the “Company ANDA”), and are the owner of that Company ANDA, as approved in part by the FDA. We
retain the right to make and distribute all strengths of the generic product outside of the U.S. Calendar quarterly profit-sharing payments for
its U.S. sales under the Company ANDA are payable by Par to us as calculated pursuant to the Par agreement. Within the purview of the
Par agreement, Par also applied for and owns an ANDA pertaining to all marketed strengths of generic Focalin XR® (the “ Par ANDA ”),
and is now approved by the FDA, to market generic Focalin XR® capsules in all marketed strengths in the U.S. As with the Company
ANDA, calendar quarterly profit-sharing payments are payable by Par to us for its U.S. sales of generic Focalin XR® under the Par ANDA
as calculated pursuant to the Par agreement.
37
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. Under the Par agreement, we receive quarterly profit share payments on
Par’s U.S. sales of generic Focalin XR®. We currently expect revenues from sales of the generic Focalin XR® capsules to continue to be
impacted by ongoing competitive pressures in the generic market. There can be no assurance whether revenues from this product will
improve going forward or that any recently launched 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 its
timely payment to us of the contracted calendar quarterly payments as they come due.
In February 2019, we received tentative approval from the FDA for our ANDA for desvenlafaxine extended-release tablets in the
50 and 100 mg strengths. This product is a generic equivalent of the branded product Pristiq® sold in the U.S. by Wyeth Pharmaceuticals,
LLC. There can be no assurance that our desvenlafaxine extended-release tablets in the 50 and 100 mg strengths will receive final FDA
approval or, if approved, that they will be successfully commercialized and produce significant revenue for us. We previously announced
that we had entered into a license and commercial supply agreement with Mallinckrodt, which granted Mallinckrodt, subject to its terms, an
exclusive license to market, sell and distribute in the U.S. the Company's desvenlafaxine extended-release tablets (generic Pristiq®). Among
other things, the agreement provides for the Company to have a long-term profit sharing arrangement with respect to the licensed product.
Intellipharmaceutics has agreed to manufacture and supply the licensed product exclusively for Mallinckrodt on a cost-plus basis, and
Mallinckrodt has agreed that Intellipharmaceutics will be its sole supplier of the licensed product marketed in the U.S.
In November 2018, we received final approval from the FDA for our ANDA for venlafaxine hydrochloride extended-release
capsules in the 37.5, 75 and 150 mg strengths. The approved product is a generic equivalent of the branded product Effexor® XR sold in
the U.S. by Wyeth Pharmaceuticals, LLC. We are actively exploring the best approach to maximize our commercial returns from this
approval. There can be no assurance that our generic Effexor XR® for the 37.5, 75 and 150 mg strengths will be successfully
commercialized and produce significant revenue for us.
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, a generic equivalent for the corresponding strengths of the branded product Glucophage® XR sold in the
U.S. by Bristol-Myers Squibb. The Company is aware that several other generic versions of this product are currently available that serve
to limit the overall market opportunity for this product. We have been continuing to evaluate options to realize commercial returns on this
product, particularly in international markets. In November 2018, we announced that we entered into two exclusive licensing and
distribution agreements with pharmaceutical distributors in Vietnam and the Philippines pursuant to which the distributors were granted the
exclusive right, subject to regulatory approval, to import and market our generic Glucophage® XR in Vietnam and the Philippines,
respectively. There can be no assurance as to when and if such product will receive regulatory approval for the sale in Vietnam or the
Philippines. Moreover, there can be no assurance that our metformin hydrochloride extended release tablets will be successfully
commercialized and produce significant revenues for us.
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 that serve to limit the overall market
opportunity. We have been actively exploring the best approach to maximize our commercial returns from this approval and have been
looking at several international
38
markets where, despite lower volumes, product margins are typically higher than in the U.S. In November 2018, we announced that we
entered into two exclusive licensing and distribution agreements with pharmaceutical distributors in Vietnam and the Philippines pursuant
to which the distributors were granted the exclusive right, subject to regulatory approval, to import and market our generic Keppra XR® in
Vietnam and the Philippines, respectively. There can be no assurance as to when and if such product will receive regulatory approval for
the sale in Vietnam or the Philippines. Moreover, there can be no assurance that our generic Keppra XR® for the 500 and 750 mg strengths
will be successfully commercialized and produce significant revenues for us.
In May 2017, we received final approval from the FDA for our ANDA for quetiapine fumarate extended-release tablets in the 50,
150, 200, 300 and 400 mg 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. 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, as licensed products, the following extended release drug product candidates 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 and launched
■ Desvenlafaxine extended-release tablets (generic Pristiq®) – ANDA Under FDA Review (tentatively approved)
■ Lamotrigine extended-release tablets (generic Lamictal® XR™) – ANDA under FDA Review
Under the terms of the 10-year agreement with Mallinckrodt, 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. Upon the expiration of the initial
term, and absent any early termination actions, the Mallinckrodt agreement will be automatically renewed for additional and consecutive
terms of one year (the 12-month period coinciding with Mallinckrodt’s regularly established fiscal months), absent notice of non-renewal
given by one party to the other at least 180 days prior to the end of the initial or renewal term.
Our goal is to leverage our proprietary technologies and know-how in order to build a diversified portfolio of revenue generating
commercial products. 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, will improve our return from our products while allowing us to focus on our core competencies. We expect
our expenditures for the purchase of production, laboratory and computer equipment and the expansion of manufacturing and warehousing
capability to be higher as we prepare for the commercialization of ANDAs, one NDA and one ANDS that are pending FDA and Health
Canada approval, respectively.
Our Strategy
Our Hypermatrix™ technologies are central to the development and manufacture of novel and generic controlled-release and
targeted-release oral solid dosage drugs. The Hypermatrix™ technologies are a multidimensional controlled-release drug delivery platform
that we believe can be applied to the efficient development of a wide range of existing and new pharmaceuticals. We believe that the
flexibility of these technologies allows us to develop complex drug delivery solutions within an industry-competitive timeframe. Based on
this technology platform, we have developed several drug delivery systems and a pipeline of products (some of which have received FDA
approval) and product candidates in various stages of development, including ANDAs filed with the FDA (and one ANDS filed with Health
Canada) and one NDA filing, in therapeutic areas that include neurology, cardiovascular, GIT, diabetes and pain. We expect that certain,
but not all, of the products in our pipeline may be developed from time to time for third parties pursuant to drug
39
development agreements with those third parties, under which our commercialization partner may pay certain of the expenses of
development, make certain milestone payments to us and receive a share of revenues or profits if the drug is developed successfully to
completion, the control of which would generally be 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 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 RegabatinTM. We have also identified several additional 505(b)(2) product candidates for development in various
indication areas including cardiovascular, dermatology, pulmonary disease and oncology. The technology that is central to our abuse
deterrent formulation of our Oxycodone ER is the nPODDDS™, or novel Point of Divergence Drug Delivery System. nPODDDS™ is
designed to provide for certain unique drug delivery features in a product. These include the release of the active substance to show a
divergence in a dissolution and/or bioavailability profile. The divergence represents a point or a segment in a release timeline where the
release rate, represented by the slope of the curve, changes from an initial rate or set of rates to another rate or set of rates, the former
representing the usually higher rate of release shortly after ingesting a dose of the drug, and the latter representing the rate of release over a
later and longer period of time, being more in the nature of a controlled-release or sustained action. It is applicable for the delivery of
opioid analgesics in which it is desired to discourage common methods of tampering associated with misuse and abuse of a drug, and also
dose dumping in the presence of alcohol. It can potentially retard tampering without interfering with the bioavailability of the product.
In addition, our PODRAS™ or Paradoxical OverDose Resistance Activating System delivery technology was initially introduced
to enhance our Oxycodone ER (abuse deterrent oxycodone hydrochloride extended release tablets) product candidate. The PODRASTM
delivery technology platform was designed to prevent overdose when more pills than prescribed are swallowed intact. Preclinical studies of
prototypes of oxycodone with PODRAS™ technology suggest that, unlike other third-party abuse-deterrent oxycodone products in the
marketplace, if more tablets than prescribed are deliberately or inadvertently swallowed, the amount of drug active ingredient (“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,
respectively. The issuance of these patents provides us with the opportunity to accelerate our PODRAS™ development plan by pursuing
proof of concept studies in humans. We intend to incorporate this technology in future product candidates, including Oxycodone ER and
other similar pain products, as well as pursuing out-licensing opportunities. The Company is currently working on the development of an
Oxycodone immediate-release (IR) product incorporating this technology.
The NDA 505(b)(2) pathway (which relies in part upon the FDA’s findings for a previously approved drug) both accelerates
development timelines and reduces costs in comparison to NDAs for new chemical entities. An advantage of our strategy for development
of NDA 505(b)(2) drugs is that our product candidates can, if approved for sale by the FDA, potentially enjoy an exclusivity period which
may provide for greater commercial opportunity relative to the generic ANDA route.
The market we operate in is created by the expiration of drug product patents, challengeable patents and drug product exclusivity
periods. There are three ways that we employ our controlled-release technologies, which we believe represent substantial opportunities for
us to commercialize on our own or develop products or out-license our technologies and products:
●
For 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.
40
●
●
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.
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.
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 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.
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 (abuse deterrent oxycodone hydrochloride extended release tablets) is an NDA
candidate, with a unique long acting oral formulation of oxycodone intended to treat moderate-to-severe pain. The formulation is intended
to present a significant barrier to tampering when subjected to various forms of physical and chemical manipulation commonly used by
abusers. It is also designed to prevent dose dumping when inadvertently co-administered with alcohol. The technology that supports our
abuse deterrent formulation of oxycodone is the nPODDDS™ Point of Divergence Drug Delivery System. The use of nPODDDS™ does
not interfere with the bioavailability of oxycodone. We intend to apply the nPODDDS™ technology platforms to other extended release
opioid drug candidates (e.g., oxymorphone, hydrocodone, hydromorphone and morphine) utilizing the 505(b)(2) regulatory pathway.
41
PODRAS™
Our Paradoxical OverDose Resistance Activating System (PODRAS™) delivery technology is designed to prevent overdose when
more pills than prescribed are swallowed intact. Preclinical studies of prototypes of oxycodone with PODRAS™ technology suggest that,
unlike other third-party abuse-deterrent oxycodone products in the marketplace, if more tablets than prescribed are deliberately or
inadvertently swallowed, the amount of drug active released over 24 hours may be substantially less than expected. However, if the
prescribed number of pills is swallowed, the drug release should be as expected. We are currently working on an alternate 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, U.S. Patent Nos. 9,522,119, 9,700,515, 9,700,516 and 9,801,939 and Canadian
Patent No. 2,910,865 were issued by the U.S. Patent and Trademark Office and the Canadian Intellectual Property Office in respect of
“Compositions and Methods for Reducing Overdose”. The issued patents cover aspects of the PODRAS™ delivery technology. The
issuance of these patents represents a significant advance in our abuse deterrence technology platform. The PODRAS™ platform has the
potential to positively differentiate our technology from others of which we are aware, and may represent an important step toward
addressing the FDA’s concern over the ingestion of a number of intact pills or tablets. In addition to its use with opioids, the PODRAS TM
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 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.
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.
42
IntelliMatrix™
The IntelliMatrix™ technology is a proprietary blend of several polymers. Depending on the constituents of the blend and the
manner in which these interact, the use of the blend with a drug allows the drug to be released at predetermined rates, while imparting
protective characteristics to both the drug and the GIT. This is most useful for drugs which require precisely controlled first-order release
profiles, where the amount released with time is dependent on one component like the amount of drug available for dissolution.
IntelliOsmotics™
The IntelliOsmotics™ technology is based upon the inclusion of multiple populations of polymers with distinct chemical bonding
characteristics. These set up a complex matrix of hydrophilic (water attracting) and hydrophobic (water repelling) domains. When the tablet
or bead is in an aqueous environment, like gastric contents, a “mixture” of water-soluble polymer and drug core is surrounded by gel
layer(s) of water-insoluble polymer. Osmotic pressure drives the drug out when solvent passes through the gel layer while the polymer
molecules remain. This permits control of the rate of release of the drug active by the variation of polymer ratios. This technology is most
useful for drug molecules which require precisely controlled pseudo-first-order release profiles, where the rate of release is proportional to
the amount available for dissolution as well as being proportional to one other component; however the effect of the amount of drug is
overriding, so that the rate appears first-order. This type of release control can be useful when attempting to match difficult profiles for
generic formulation.
IntelliPaste™
The IntelliPaste™ technology is comprised of blends of multiple polymers, oils, excipients and drug active(s) which result in a
paste-in-a-capsule dosage form. The physical attributes of the paste include that it is thixotropic, pseudoplastic and non-Newtonian or, in
layman’s terms, like toothpaste. Typically, it is formulated as having very low solubility in water or oil, and low solubility in alcohol. These
characteristics enable the resulting drug product to have tamper-deterrent properties, and to resist dissolution in even high concentrations of
alcohol. As a result, IntelliPaste™ is our preferred delivery technology for the controlled delivery of opiates, narcotics and other central
nervous system drug products which are susceptible to unlawful diversion or abuse.
IntelliPellets™
The IntelliPellets™ technology consists of one or more type (population) of granule, bead, pellet, or tablet in a holding chamber or
reservoir, such as a hard gelatin capsule. Each type (population) may be uniquely different from the other in the manner or rate it releases
the drug. Our IntelliPellets™ technology is designed to control, prolong, delay or modify the release of drugs. It is particularly useful for
the delivery of multiple drugs, for delayed, timed, pulsed or for chronotherapeutic drug delivery, designed to mimic our internal clocks for
therapeutic optimization (the drug is delivered in the right amount for the patient at the right time). This technology is most useful for the
delivery of multiple-drug cocktails, or in situations where the timing of a single dose or the sequencing of multiple doses of the same drug
is important.
IntelliShuttle™
The IntelliShuttle™ technology provides for drug release past the stomach, such as for drugs required for action beyond the
stomach, for drugs which could be destroyed by the stomach environment, or for drugs which could harm the stomach itself. This
technology “shuttles” the drug past the stomach to be released at predetermined times or sites where appropriate for optimum therapeutic
effect. This technology is most useful for acid labile drug molecules (drugs that are destroyed in acid environment), such as the proton
pump inhibitors, of which well-known omeprazole (Prilosec) and lansoprazole (Prevacid) are examples, or for drug molecules which may
harm the stomach, of which the well-known aspirin is an example.
43
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
Focalin XR®
Attention deficit
hyperactivity disorder
Received final approval for
5, 10,15, 20, 25, 30, 35 and
40 mg strengths from
FDA(4)
Stage of Development(1)` Regulatory
Pathway
ANDA
Market Size
(in millions)(2) Rights(3)
$851
Intellipharmaceutics
and Par (US)
Levetiracetam
extended-release
tablets
Keppra XR®
Partial onset seizures
for epilepsy
Received final approval for
the 500 and 750 mg
strengths from FDA
ANDA
$126
Venlafaxine
hydrochloride
extended-release
capsules
Pantoprazole sodium
delayed- release
tablets
Metformin
hydrochloride
extended-release
tablets
Effexor XR®
Depression
Protonix®
Conditions associated
with gastroesophageal
reflux disease
Glucophage®
XR
Management of type 2
diabetes
Received final approval for
37.5, 75 and 150 mg
strengths from FDA
ANDA application for
commercialization
approval for 2 strengths
under review by FDA
Received final approval for
500 and 750 mg strengths
from FDA
ANDA
$774
ANDA
$367
Intellipharmaceutics
ANDA
$388
(500 and 750
mg only)
Quetiapine fumarate
extended-release
tablets
Seroquel
XR®
Schizophrenia, bipolar
disorder & major
depressive disorder
Received final FDA
approval for all 5 strengths.
ANDS under review by
Health Canada
ANDA
$190
Lamotrigine
extended-release
tablets
Desvenlafaxine
extended-release
tablets
Trazodone
hydrochloride
extended-release
tablets
Lamictal®
XR™
Anti-convulsant for
epilepsy
Pristiq®
Depression
Oleptro™
Depression
ANDA application for
commercialization
approval for 6 strengths
under review by FDA
Received tentative
approval for the 50 and
100 mg strengths from
FDA
ANDA application for
commercialization
approval for 2 strengths
under review by FDA
ANDA
$525
ANDA
$279
ANDA
N/A(5)
Intellipharmaceutics
Carvedilol phosphate
extended- release
capsules
Coreg CR®
Heart failure,
hypertension
Late-stage development
ANDA
$66
Intellipharmaceutics
Oxycodone
OxyContin® Pain
NDA application accepted NDA 505(b) $1,471
Intellipharmaceutics
Philippines rights
subject to licensing
and distribution
agreement
Intellipharmaceutics
Philippines and
Vietnamese rights
subject to licensing
and distribution
agreements
Intellipharmaceutics
Intellipharmaceutics
Philippines and
Vietnamese rights
subject to licensing
and distribution
agreements
Intellipharmaceutics
and Mallinckrodt
(US)
Philippines,
Malaysian and
Vietnamese rights
subject to licensing
and distribution
agreements
Intellipharmaceutics
and Mallinckrodt
(US)
Intellipharmaceutics
and Mallinckrodt
(US)
hydrochloride
controlled-release
capsules
Pregabalin extended-
release capsules
Ranolazine extended-
release tablets
Oxycodone
hydrochloride
immediate release
tablets (IPCI006)
February 2017 and under
review by FDA
(2)
Lyrica®
Neuropathic pain
IND application submitted
in August 2015
NDA 505(b)
(2)
$5,425
Philippines rights
subject to licensing
and distribution
agreement
Intellipharmaceutics
Ranexa®
Chronic angina
Roxicodone®
Pain
ANDA application for
commercialization
approval for 2 strengths
under review by FDA
IND application submitted
in November 2018
ANDA
$1,013
Intellipharmaceutics
NDA 505(b)
(2)
$653
Intellipharmaceutics
44
Notes:
(1) There can be no assurance as to when, or if at all, the FDA or Health Canada will approve any product candidate for sale in the U.S.
or Canadian markets.
(2) Represents sales for all strengths, unless otherwise noted, for the 12 months ended January 2019 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.
(3) For information regarding the Par agreement, the Mallinckrodt agreement and the licensing and distribution agreements with
pharmaceutical distributors in Malaysia, Vietnam and the Philippines, see “Our Company” and “Other Potential Products and
Markets”. There can be no assurance as to when, or if at all, any of our products or product candidates, as the case may be, will
receive regulatory approval for sale in the Philippines, Malaysia or Vietnam. For unpartnered products, we are exploring licensing
agreement opportunities or other forms of distribution. While we believe that licensing agreements are possible, there can be no
assurance that any can be secured.
(4) Includes a Company ANDA final approval for our 15 and 30 mg strengths, and a Par ANDA final approval for their 5, 10, 15, 20,
25, 30, 35 and 40 mg strengths. Profit sharing payments to us under the Par agreement are the same irrespective of the ANDA
owner.
(5) Trazodone Hydrochloride extended release tablets are not currently being marketed in the United States.
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® (dexmethylphenidate hydrochloride extended-release) 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.
In November 2018, we announced that we entered into an exclusive licensing and distribution agreement with a pharmaceutical
distributor in the Philippines pursuant to which the distributor was granted the exclusive right, subject to regulatory approval, to import and
market our generic Focalin XR® in the Philippines. Under the terms of the agreement, the distributor will be required to purchase a
minimum yearly quantity of our generic Focalin XR® and we will be the exclusive supplier of such product. This multi-year agreement is
subject to early termination. There can be no assurance as to when and if such product will receive regulatory approval for the sale in the
Philippines or that, if so approved, the product will be successfully commercialized there and produce significant revenues for us.
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 have been actively exploring the best approach to maximize our commercial returns from this
approval and have been looking at several international markets where, despite lower volumes, product margins are typically higher than in
the U.S.
In November 2018, we announced that we entered into two exclusive licensing and distribution agreements with pharmaceutical
distributors in Vietnam and the Philippines pursuant to which the distributors were granted the exclusive right, subject to regulatory
approval, to import and market our generic Keppra XR® in Vietnam and the Philippines, respectively. Under the terms of the agreements,
the distributors will be required to purchase a minimum yearly quantity of our generic Keppra XR®. These multi-year agreements are each
subject to early termination.
There can be no assurance that the Company's generic Keppra XR® for the 500 and 750 mg strengths will be successfully
commercialized. Further, there can be no assurance as to when and if such product will receive regulatory approval for the sale in Vietnam
or the Philippines or that, if so approved, the product will be successfully commercialized there and produce significant revenues for us.
45
Metformin hydrochloride – Generic 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. The Company is aware that several other generic versions of this product are currently available
and serve to limit the overall market opportunity, however, we are continuing to evaluate options to realize commercial returns on this
product, particularly in international markets.
In November 2018, we announced that we entered into two exclusive licensing and distribution agreements with pharmaceutical
distributors in the Vietnam and the Philippines pursuant to which the distributors were granted the exclusive right, subject to regulatory
approval, to import and market our generic Glucophage® XR in Vietnam and the Philippines, respectively. Under the terms of the
agreements, the distributors will be required to purchase a minimum yearly quantity of our generic Glucophage® XR. These multi-year
agreements are each subject to early termination.
There can be no assurance that our generic Glucophage® XR for the 500 and 750 mg strengths will be successfully
commercialized. Further, there can be no assurance as to when and if such product will receive regulatory approval for the sale in Vietnam
or the Philippines or that, if so approved, the product will be successfully commercialized there and produce significant revenues for us.
Venlafaxine hydrochloride – Effexor XR® (a registered trademark of the brand manufacturer)
We received final approval from the FDA in November 2018 for our ANDA for venlafaxine hydrochloride extended-release
capsules in the 37.5, 75 and 150 mg strengths. The approved product is a generic equivalent of the branded product Effexor® XR sold in
the U.S. by Wyeth Pharmaceuticals, LLC. Effexor® XR, and the drug active venlafaxine hydrochloride, are indicated for the treatment of
major depressive disorder, or MDD. We are actively exploring the best approach to maximize our commercial returns from this approval.
We are aware that several other generic versions of this product are currently available and serve to limit the overall market opportunity.
There can be no assurance that the Company's venlafaxine hydrochloride extended-release capsules for the 37.5 mg, 75 mg, and 150 mg
will be successfully commercialized and produce significant revenue for us.
Oxycodone ER (Abuse Deterrent Oxycodone Hydrochloride Extended-Release Tablets)
One of our non-generic products under development is our Oxycodone ER (abuse deterrent oxycodone hydrochloride extended
release tablets) product candidate, intended as an abuse and alcohol-deterrent controlled-release oral formulation of oxycodone
hydrochloride for the relief of pain. 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® (extended release oxycodone
hydrochloride) 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).
46
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.
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. 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’s file for its OxyContin®. In
February 2017, the FDA accepted for filing our NDA, and set a Prescription Drug User Fee Act, or 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 FDA’s 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 Purdue,
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, had commenced patent infringement proceedings, or the Purdue litigation, against us in the
U.S. District Court for the District of Delaware (docket number 17-392) in respect of our NDA filing for Oxycodone ER, alleging that our
proposed Oxycodone ER infringes 6 out of the 16 patents associated with the branded product OxyContin®, or the OxyContin® patents,
listed in the Orange Book. 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.
Subsequent to the above-noted filing of lawsuit, 4 further such patents were listed and published in the Orange Book. We then
similarly certified to the FDA concerning such further patents. On March 16, 2018, we received notice that the Purdue litigation plaintiffs
had commenced further such patent infringement proceedings adding the 4 further patents. This lawsuit is also in the District of Delaware
federal court under docket number 18-404.
As a result of the commencement of the first 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.
On or about June 26, 2018, the court issued an order to sever 6 “overlapping” patents from the second Purdue case, but ordered
litigation to proceed on the 4 new (2017-issued) patents. An answer and counterclaim was filed on July 9, 2018. The existence and
publication of additional patents in the Orange Book, and litigation arising therefrom, is an ordinary and to be expected occurrence in the
course of such litigation.
47
On July 6, 2018, the court issued a so-called “Markman” claim construction ruling on the first case and the October 22, 2018 trial
date remained unchanged. We believe that we have non-infringement and/or invalidity defenses to all of the asserted claims of the subject
patents in both of the cases and will vigorously defend against these claims.
On July 24, 2018, the parties to the case mutually agreed to and did have dismissed the infringement claims related to the
Grünenthal ‘060 patent. The Grünenthal ‘060 patent is one of the six patents included in the original litigation case, however, the dismissal
does not by itself result in a termination of the 30-month litigation stay.
On October 4, 2018, the parties mutually agreed to postpone the scheduled court date pending a case status conference scheduled
for December 17, 2018.At that time, further trial scheduling and other administrative matters were postponed pending the Company’s
anticipated resubmission of the Oxycodone ER NDA to the FDA, which is due no later than February 28, 2019.
In June 2017, we announced that a joint meeting of the Anesthetic and Analgesic Drug Products Advisory Committee and Drug
Safety and Risk Management Advisory Committee of the FDA (together, the “ 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, the Company announced that the FDA Advisory Committees voted 22 to 1 in finding that the Company’s 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, the Company 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 Intellipharmaceutics 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 Intellipharmaceutics submit an alternate proposed proprietary name for Oxycodone ER. The FDA determined that it could
not approve the application in its present form. The FDA has granted our request for an extension to February 28, 2019 to resubmit our
NDA for Oxycodone ER under section 505(b)(2) of the U.S. Federal Food, Drug and Cosmetic Act.
In February 2018, the Company met with the FDA to discuss the above-referenced CRL for Oxycodone ER, including issues
related to the blue dye in the product candidate. Based on those discussions, 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, the Company 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.
The abuse liability studies for the intranasal route of abuse commenced in May 2018 with subject screening, while the studies to
support abuse-deterrent label claims for the oral route of abuse commenced in June 2018. The clinical part of both studies has now been
completed. Bioanalytical testing and statistical analysis for such studies are pending.
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 the Company’s 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 and produce significant revenue
for us
In November 2018, we announced that we entered into an exclusive licensing and distribution agreement with a pharmaceutical
distributor in the Philippines pursuant to which the distributor was granted the exclusive right, subject to regulatory approval, to import and
market Oxycodone ER in the Philippines. Under the terms of the agreement, the distributor will be required to purchase a minimum yearly
quantity of our Oxycodone ER and we will be the exclusive supplier of our Oxycodone ER. This multi-year agreement is subject to early
termination. There can be no assurance as to when and if such product candidate will receive regulatory approval for the sale in the
Philippines or that, if so approved, the product will be successfully commercialized there and produce significant revenues for us.
48
Oxycodone Hydrochloride IR Tablets (IPCI006) (Abuse Deterrent and Overdose Resistant Oxycodone Hydrochloride Immediate
Release Tablets) – ROXICODONE®
In November 2018, we announced that we had submitted an IND application to the FDA for our IPCI006 oxycodone
hydrochloride immediate release tablets in the 5, 10, 15, 20 and 30 mg strengths. This novel drug formulation incorporates the Company's
PODRAS™, or Paradoxical OverDose Resistance Activating System, delivery technology and its nPODDDS™, or novel Point Of
Divergence Drug Delivery System, technology. IPCI006 is designed to prevent, delay or limit the release of oxycodone hydrochloride
when more intact tablets than prescribed are ingested, thus delaying or preventing overdose and allowing for sufficient time for a rescue or
medical intervention to take place. It is also intended to present a significant barrier to abuse by snorting, "parachuting," injecting or
smoking finely crushed oxycodone hydrochloride immediate release tablets. The data generated from the studies conducted under this IND
is expected to form part of an NDA seeking FDA approval for IPCI006 tablets.
If approved, IPCI006 may be the first immediate release formulation of oxycodone hydrochloride intended to simultaneously
prevent or delay overdose and prevent abuse by intranasal or intravenous routes.
There can be no assurance that we will be successful in submitting any NDA with the FDA, that the FDA will approve the
Company's IPCI006 product candidate for sale in the U.S. market or any related abuse-deterrent label claims, or that it will ever be
successfully commercialized and produce significant revenue for us.
Quetiapine fumarate extended-release tablets - Generic Seroquel XR® (a registered trademark of the brand manufacturer)
In May 2017, we received final approval from the FDA for our ANDA for quetiapine fumarate extended-release tablets in the 50,
150, 200, 300 and 400 mg 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. 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 November 2018, we announced that we entered into three exclusive licensing and distribution agreements with pharmaceutical
distributors in Malaysia, Vietnam and the Philippines pursuant to which the distributors were granted the exclusive right, subject to
regulatory approval, to import and market our generic Seroquel XR® in Malaysia, Vietnam and the Philippines, respectively. Under the
terms of the agreements, the distributors will be required to purchase a minimum yearly quantity of our generic Seroquel XR®. The multi-
year agreements are each subject to early termination. There can be no assurance as to when and if such product will receive regulatory
approval for the sale in Malaysia, Vietnam or the Philippines or that, if so approved, the product will be successfully commercialized there
and produce significant revenues for us.
Desvenlafaxine succinate extended-release tablets – Generic Pristiq® (a registered trademark of the brand manufacturer)
In February 2019, we received tentative approval from the FDA for our ANDA for desvenlafaxine extended-release tablets in the 50 and
100 mg strengths. This product is a generic equivalent of the branded product Pristiq® sold in the U.S. by Wyeth Pharmaceuticals, LLC.
There can be no assurance that our desvenlafaxine extended-release tablets in the 50 and 100 mg strengths will receive final FDA approval
or, if approved, that they will be successfully commercialized and produce significant revenue for us. We previously announced that we
had entered into a license and commercial supply agreement with Mallinckrodt, which granted Mallinckrodt, subject to its terms, an
exclusive license to market, sell and distribute in the U.S. the Company's desvenlafaxine extended-release tablets (generic Pristiq®). Among
other things, the agreement provides for the Company to have a long-term profit sharing arrangement with respect to the licensed product.
Intellipharmaceutics has agreed to manufacture and supply the licensed product exclusively for Mallinckrodt on a cost-plus basis, and
Mallinckrodt has agreed that Intellipharmaceutics will be its sole supplier of the licensed product marketed in the U.S.
49
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.
In March 2015, the FDA accepted a Pre-Investigational New Drug (or 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 RegabatinTM 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 are continuing our efforts to identify opportunities internationally, particularly 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.
Discussions toward establishing a partnership to facilitate future development activities in China are ongoing. We have not at this time
entered into and may not ever enter into any such arrangements.
In addition, we are seeking to develop key relationships in several other international jurisdictions where we believe there may be
substantial demand for our generic products. 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.
In November 2018, we announced that we had entered into an exclusive licensing and distribution agreement for our abuse
resistant Oxycodone ER product candidate and four generic drug products with a pharmaceutical distributor in the Philippines. Under the
terms of the agreement the distributor was granted the exclusive right, subject to regulatory approval, to import and market our first novel
drug formulation, abuse-deterrent Oxycodone ER, in the Philippines. Additionally, this distributor was granted, subject to regulatory
approval, the exclusive right to import and market our generic Seroquel XR®, Focalin XR®, Glucophage® XR, and Keppra XR® in the
Philippines. Under the terms of the agreement, the distributor will be required to purchase a minimum yearly quantity of all products
included in the agreement and we will be the exclusive supplier of said products. The multi-year agreement with the Philippines distributor
is subject to early termination. Financial terms of the agreement have not been disclosed. There can be no assurance as to when or if any of
our products or product candidates will receive regulatory approval for sale in the Philippines or that, if so approved, any such products
will be successfully commercialized there and produce significant revenues for us. Moreover, there can be no assurance that we will not be
required to conduct further studies for Oxycodone ER, that the FDA will approve any of our requested abuse-deterrent label claims or that
the FDA will ultimately approve the NDA for the sale of Oxycodone ER in the U.S. market, or that it will ever be successfully
commercialized.
50
In November 2018, we announced that we had entered into two exclusive licensing and distribution agreements with
pharmaceutical distributors in Malaysia and Vietnam.
A Malaysian pharmaceutical distribution company was granted the exclusive right, subject to regulatory approval, to import and
market our generic Seroquel XR® (quetiapine fumarate extended-release) in Malaysia. Under the terms of the agreement, four strengths
(50, 200, 300 and 400 mg) of generic Seroquel XR® will be manufactured and supplied by us for distribution in Malaysia. We are also in
discussions to include other products in the agreement with said distributor, who will be required to purchase a minimum yearly quantity of
all products included in the agreement.
A Vietnamese pharmaceutical distributor was granted the exclusive right, subject to regulatory approval, to import and market our
generic Seroquel XR®, Glucophage® XR, and Keppra XR® in Vietnam. Under the terms of the agreement, two strengths (500 and 750
mg) of generic Glucophage® XR, three strengths (50, 150 and 200 mg) of generic Seroquel XR® and one strength (500 mg) of generic
Keppra XR® will be manufactured and supplied by us for distribution in Vietnam. The Vietnamese distributor will be required to purchase
a minimum yearly quantity of all products included in the agreement.
The multi-year agreements with the Malaysian and Vietnamese distributors are each subject to early termination. Financial terms
of the agreements have not been disclosed. There can be no assurance as to when or if any of our products will receive regulatory approval
for sale in Malaysia or Vietnam or that, if so approved, the products will be successfully commercialized there and produce significant
revenues for the Company.
Additionally, in January 2018, we announced we had commenced a R&D program for CBD based products. As part of this R&D
program, we filed multiple provisional patent applications with the United States Patent and Trademark Office pertaining to the delivery
and application of cannabinoid-based therapeutics, began talks with potential commercialization partners in the cannabidiol industry, and
identified a potential supplier of CBD. The patent filings, together with certain of our already issued drug delivery patents, are intended to
form the basis of the development of a pipeline of novel controlled-release product candidates with CBD as the main active ingredient.
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.
51
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 (as defined in Item 4.D. below). 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 the 30 Worcester Road Facility 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
22 Worcester Road Facility (as defined in Item 4.D. below), we plan to request an inspection by regulatory agencies which will determine
compliance of the facility with cGMP.
INTELLECTUAL PROPERTY
Proprietary rights are an important aspect of our business. These include know-how, trade secrets and patents. Know-how and
trade secrets are protected by internal company policies and operating procedures, and where necessary, by contractual provisions with
development partners and suppliers. We also seek patent protection for inventive advances which form the basis of our drug delivery
technologies. With respect to particular products, we may seek patent protection on the commercial composition, our methods of
production and our uses, to prevent the unauthorized marketing and sale of competitive products.
Patents which relate to and protect various aspects of our Hypermatrix™ family of drug delivery technologies include the
following United States, Japanese, Chinese, Indian, Canadian and European patents which have been issued to us:
Country
U.S.A.
U.S.A.
U.S.A.
U.S.A.
U.S.A.
U.S.A.
U.S.A.
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
Issue Date
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
Issue No.
Title
9,801,939
9,700,516
9,700,515
9,522,119
9,078,827
8,802,139
8,603,520
8,394,409
Compositions and Methods For
Reducing Overdose
Compositions and Methods For
Reducing Overdose
Compositions and Methods For
Reducing Overdose
Compositions and Methods For
Reducing Overdose
Pharmaceutical Composition Having
Reduced Abuse Potential
Proton Pump-Inhibitor-Containing
Capsules Which Comprise Subunits
Differently Structured For A Delayed
Release Of The Active Ingredient
Oral Multi-functional Pharmaceutical
Capsule Preparations of Proton Pump
Inhibitors
Controlled Extended Drug Release
Technology
Controlled Release Pharmaceutical
Delivery Device and Process for
Preparation Thereof
7,906,143
7,858,119 Extended Release Pharmaceuticals
7,090,867
6,800,668
6,652,882
6,607,751
6,479,075
6,296,876
5,798,293
Controlled Release Delivery Device for
Pharmaceutical Agents Incorporating
Microbial Polysaccharide Gum
Syntactic Deformable Foam
Compositions and Methods for Making
Controlled Release Formulation
Containing Bupropion
Novel Controlled Release Delivery
Device for Pharmaceutical Agents
Incorporating Microbial Polysaccharide
Gum
Pharmaceutical Formulations for Acid
Labile Substances
Pharmaceutical Formulations for Acid
Labile Substances
Pharmaceutical Composition Having
Reduced Abuse Potential
Controlled Release Delivery Device
Comprising An Organosol Coat
5,457,830
5,592,547 Drug Delivery Composition
5,349,290 Drug Delivery Composition
Pharmaceutical Composition Having
India
Europe
Canada
Canada
Canada
Canada
Canada
Canada
Canada
Canada
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
52
2,007,360
265,141 Reduced Abuse Potential
Controlled Release Delivery Device
Comprising an Organosol Coat
Controlled Release Composition Using
Transition Coating, And Method Of
Preparing Same/ Controlled Release
Delivery Device
Controlled Extended Drug Release
2,571,897
Technology
2,576,556 /Drug Delivery Device
2,579,382
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
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 and for which the applicant has not obtained a right of reference. A 505(b)(2) application is submitted when some specific
information necessary for approval is obtained from: (1) published literature and/or (2) the FDA findings of safety and effectiveness for an
approved drug. The FDA has implemented this approach to encourage innovation in drug development without requiring duplicative
studies while protecting the patent and exclusivity rights for the approved drug. A 505(b)(2) application can be submitted for a new
chemical entity, a new molecular entity or any changes to previously approved drugs such as dosage form, strength, route of administration,
formulation, indication, or bioinequivalence where the application may rely on the FDA’s finding on safety and effectiveness of the
previously approved drug. In addition, the applicant may also submit a 505(b)(2) application for a change in drug product that is eligible for
consideration pursuant to a suitability petition. For example, a 505(b)(2) application would be appropriate for a controlled-release product
that is bioinequivalent to a reference listed drug where the proposed product is at least as bioavailable and the pattern of release is at least
as favorable as the approved pharmaceutically equivalent product. A 505(b)(2) application may be granted three years of exclusivity if one
or more clinical investigations, other than bioavailability/bioequivalence studies, was essential to the approval and conducted or sponsored
by the applicant; five years of exclusivity is granted if it is for a new chemical entity. A 505(b)(2) application may also be eligible for
orphan drug and pediatric exclusivity.
53
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 R&D costs associated with bringing a product to market, and
generally a shorter review and approval time at the FDA.
GDUFA implemented substantial fees for new ANDAs, Drug Master Files, product and establishment fees. 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 year 2019, the user fee rate is $178,799 . For the FDA ’s fiscal year 2019, the FDA will also charge an annual facility user fee
of $226,305 plus a new general program fee of $186,217. 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.
54
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 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.
55
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 28, 2019.
56
D. Property, Plant and Equipment
On December 1, 2015, we entered into a lease agreement for a 25,000 square foot facility located at 30 Worcester Road Toronto,
Ontario, Canada M9W 5X2 (“30 Worcester Road Facility”), as well as a 40,000 square foot facility on the adjoining property located at
22 Worcester Road, Toronto, Ontario, Canada M9W 5X2, both of which are owned indirectly by the same landlord ( “22 Worcester Road
Facility”, and together with 30 Worcester Road Facility, 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 for the Combined Properties, 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 until November 30, 2020 based on a fair value purchase
formula. We use our 30 Worcester Road Facility as a cGLP research laboratory, office space, and cGMP scale-up and small to medium-
scale manufacturing plant for solid oral dosage forms. The 30 Worcester Road Facility consists of approximately 4,900 square feet for
administrative space, 4,300 square feet for R&D, 9,200 square feet for manufacturing, and 3,000 square feet for warehousing. The 22
Worcester Road Facility 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 at least 60 days 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. On September 17, 2018, the Company entered into a lease default agreement with the landlord with
respect to past-due amounts owing under the lease. Pursuant to the terms of the agreement, the Company has acknowledged the amounts
owing and agreed to payment terms beginning October 31, 2018. In return, the landlord has agreed to forbear from enforcing any rights or
remedies under the agreement, subject to payments being made as scheduled. The Company subsequently paid all past due amounts and
currently is not in default of the lease.
57
We continually monitor our facility requirements in the context of our needs and we expect these requirements to change
commensurately with our activities.
Item 4A. Unresolved Staff Comments
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, 2018, 2017 and 2016.
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.
The following are selected financial data for the years ended November 30, 2018, 2017 and 2016.
November
30,
2018
For the years ended
November
30,
2017
November
30,
2016
Change
2018 vs 2017
Change
2017 vs 2016
$
$
$
$
%
$
%
Revenue:
Licensing
Up-front fees
Cost of goods sold
Gross Margin
Expenses:
Research and development
Selling, general and administrative
Depreciation
1,370,607
342,124
5,025,350
479,102
2,209,502
37,500
1,712,731
5,504,452
2,247,002
(3,654,743)
(136,978)
(3,791,721)
-73% 2,815,848
-29%
441,602
-69% 3,257,450
124,870
1,587,861
704,006
4,800,446
-
2,247,002
(579,136)
(3,212,585)
704,006
-82%
-67% 2,553,444
10,827,293
3,476,450
610,384
9,271,353
3,287,914
506,961
8,166,736
3,546,132
385,210
14,914,127
13,066,228
12,098,078
1,555,940
188,536
103,423
1,847,899
17% 1,104,617
6%
20%
14%
(258,218)
121,751
968,150
Loss from operations
(13,326,266) (8,265,782) (9,851,076) (5,060,484)
61% 1,585,294
Net foreign exchange (loss) gain
Interest income
Interest expense
Financing cost
Net loss and comprehensive loss
8,592
227
(255,231)
(174,802)
88,685
(14,810)
134,008
(37,439)
(13,747,480) (8,857,440) (10,143,577) (4,890,040)
(80,093)
15,037
(389,239)
(137,363)
(22,470)
207
(270,238)
-
-111%
-98%
-34%
27%
(57,623)
14,830
(119,001)
(137,363)
55% 1,286,137
127%
1178%
145%
N/A
114%
14%
-7%
32%
8%
-16%
256%
7164%
44%
N/A
-13%
58
Year Ended November 30, 2018 Compared to the Year Ended November 30, 2017
Revenue
The Company recorded revenues of $1,712,731 for the year ended November 30, 2018 versus $5,504,452 for the year ended
November 30, 2017. Such revenues consisted primarily of licensing revenues from commercial sales of the 15, 25, 30 and 35 mg strengths
of our generic Focalin XR® under the Par agreement. The decrease in revenues in the year ended November 30, 2018 compared to year
ended November 30, 2017 is primarily due to considerably lower profit share payments from sales of generic Focalin XR® capsules in the
U.S. Beginning in early 2018, we began to see a significant impact from aggressive pricing by competitors, resulting in a marked increase
in gross-to-net deductions such as wholesaler rebates, chargebacks and pricing adjustments. While the gross-to-net deductions fluctuate on a
quarter over quarter basis, profit share payments for the last several quarters have shown decline over the same period in the prior year.
Revenues from generic Seroquel XR® are still well below levels expected at the launch of the product in 2017, primarily due to
the Company’s commercial partner entering the market later than planned. Several initiatives to gain market share have shown some
improved returns. However, it will take some time to determine if the product can achieve meaningful market penetration. Management is
continuing to evaluate strategic options to improve returns from this product.
Cost of goods sold
The Company recorded cost of goods sold of $124,870 for the year ended November 30, 2018 versus $704,006 for the year ended
November 30, 2017. Cost of sales reflects the Company’s manufacturing shipments of generic Seroquel XR® to Mallinckrodt.
Research and Development
Expenditures for R&D for the year ended November 30, 2018 were higher by $1,555,940 compared to the year ended November
30, 2017. The increase is primarily due to higher third party consulting fees and higher patent litigation expenses.
In the year ended November 30, 2018, we recorded $883,064 of expenses for stock-based compensation for R&D employees
compared to $1,654,051 for the year ended November 30, 2017, of which $793,795 was for expenses related to performance-based stock
options which vested on FDA approval for venlafaxine hydrochloride extended-release capsules in November 2018, and for the year ended
November 30, 2017, $1,577,772 of the expenses for stock-based compensation 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.
After adjusting for the stock-based compensation expenses discussed above, expenditures for R&D for the year ended November
30, 2018 were higher by $2,326,927 compared to the year ended November 30, 2017. The increase was primarily due to an increase in third
party R&D expenditures as a result of clinical trials for Oxycodone ER and higher patent litigation expenses.
Selling, General and Administrative
Selling, general and administrative expenses were $3,476,450 for the year ended November 30, 2018 in comparison to $3,287,914
for the year ended November 30, 2017, an increase of $188,536. The increase is due to higher expenses related to administrative costs,
partially offset by a decrease in wages and marketing cost.
Administrative costs for the year ended November 30, 2018 were $1,793,724 in comparison to $1,402,253 in the year ended
November 30, 2017. The increase for the year ended November 30, 2018 was due to the increase in professional fees and legal fees.
Expenditures for wages and benefits for the year ended November 30, 2018 were $1,124,568 in comparison to $1,240,361 in the
year ended November 30, 2017. For the year ended November 30, 2018, we recorded $44,622 as expense for stock-based compensation
compared to an expense of $95,948 for the year ended November 30, 2017. After adjusting for the stock-based compensation expenses,
expenditures for wages for the year ended November 30, 2018 were lower by $64,467 compared to the year ended November 30, 2017.
59
Marketing costs for the year ended November 30, 2018 were $421,401 in comparison to $502,688 in the year ended November
30, 2017. This decrease is primarily the result of a decrease in travel expenditures related to business development and investor relations
activities.
Occupancy costs for the year ended November 30, 2018 were $136,757 in comparison to $142,612 for the year ended November
30, 2017. The slight decrease is due to lower facility operating expenses.
Depreciation
Depreciation expenses for the year ended November 30, 2018 were $610,384 in comparison to $506,961 in the year ended
November 30, 2017. The increase is primarily due to the additional investment in production, laboratory and computer equipment during
the year ended November 30, 2018.
Foreign Exchange Gain
Foreign exchange gain was $8,592 for the year ended November 30, 2018 in comparison to a loss of $80,093 in the year ended
November 30, 2017. The foreign exchange gain for the year ended November 30, 2018 was due to the strengthening of the U.S. dollar
against the Canadian dollar during the year ended November 30, 2018 as the exchange rates changed to $1.00 for C$1.3301 as at
November 30, 2018 from $1.00 for C$1.2888 as at November 30, 2017. The foreign exchange loss for the year ended November 30, 2017
was due to the weakening of the U.S. dollar against the Canadian 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.
Interest Income
Interest income for the year ended November 30, 2018 was lower by $14,810 in comparison to the prior period. For the year
ended November 30, 2018 interest was lower largely due to interest received on input tax credit refunds under the SR&ED incentive
program in the third quarter of 2017.
Interest Expense
Interest expense for the year ended November 30, 2018 was lower by $134,008 compared with the prior year. This is primarily
due to interest expense paid on the 2013 Debenture, which accrues interest payable at 12% annually, as well as the 2018 Debenture, which
accrues interest payable at 10% annually, and the related conversion option embedded derivative accreted at an annual effective interest of
approximately 4.9% during the 2018 fiscal year in comparison to the fiscal year 2017 when the 2013 Debenture effective interest was
approximately 15.2%.
Net Loss
The Company recorded net loss for the year ended November 30, 2018 of $13,747,480 or $2.89 per common share, compared
with a net loss of $8,857,440 or $2.86 per common share for the year ended November 30, 2017. In the year ended November 30, 2018,
the higher net loss is attributed to the lower licensing revenues from commercial sales of generic Focalin XR® and lower licensing
revenues from Quetiapine ER our generic Seroquel XR® (quetiapine fumarate extended-release) combined with increased third party R&D
expenses primarily related to clinical trials for the Company’s Oxycodone ER product, legal and other administrative expenses. 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.
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 for the year ended November 30, 2017 was 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 levelled 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. Revenues under the Par agreement and Mallinckrodt
agreement represent the commercial sales of the generic products in those strengths and may not be representative of future sales.
60
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. 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.
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 was 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 were also higher due to higher third party consulting fees associated with our preparation for the FDA
Advisory Committees meeting in relation to our Oxycodone ER NDA filing. 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 Committees 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
partially 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 was 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.
61
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 was primarily the result of an increase in travel expenditures related to business development and investor relations
activities.
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 was 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 income 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 2013 Debenture which accrues interest payable at 12% annually and the related conversion option
embedded derivative accreted at an annual effective interest of approximately 15.2%, in comparison to the fiscal year 2016 when the 2013
Debenture effective interest was approximately 4.2%.
Net Loss
The Company recorded net loss for the year ended November 30, 2017 of $8,857,440 or $2.86 per common share, compared with
a net loss of $10,143,577 or $3.80 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.
62
B. Liquidity and Capital Resources
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
For the years ended
November
30,
2017
$
November
30,
2018
$
November
30,
2016
$
Change (2017 vs 2016)
$
%
$
%
(12,508,960) (6,105,785) (6,254,985) (6,403,175)
105% 149,200
-2%
9,159,623
5,682,168
17,354,954
11,672,786
(101,178) (1,823,746) (515,410) 1,722,568
6,992,179
(2,247,363) 2,389,228
4,744,816
(2,247,363)
1,755,196
4,144,424
1,897,061
4,744,816
4,144,424
1,897,061
6,641,877
205% (3,477,455)
-94% (1,308,336)
-311% (4,636,591)
-54% 2,389,228
250% (2,247,363)
-38%
254%
-194%
136%
-54%
The Company had cash of $6,641,877 as at November 30, 2018 compared to $1,897,061 as at November 30, 2017. The increase
in cash was mainly due to the cash receipts provided from financing activities derived from the Company’s two registered direct offerings in
March 2018, the 2018 Debenture Financing in September 2018 and an underwritten public offering in October 2018, offset by ongoing
expenditures in R&D and selling, general and administrative expenses. 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 included increased consulting
fees incurred to prepare for the July 26, 2017 FDA Advisory Committees 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. In November 2013,
the Company entered into an equity distribution agreement with Roth Capital Partners, LLC (“Roth”), pursuant to which the Company
originally could from time to time sell up to 530,548 of the Company’s 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 Nasdaq or otherwise. Under the equity distribution agreement, the Company was able at its discretion, from time to time, offer
and sell common shares through Roth or directly to Roth for resale to the extent permitted under Rule 415 under the U.S. Securities Act at
such time and at such price as were acceptable to the Company by means of ordinary brokers’ transactions on Nasdaq or otherwise at
market prices prevailing at the time of sale or as determined by the Company. The Company has paid Roth a commission, or allowed a
discount, of 2.75% of the gross proceeds that the Company received from any sales of common shares under the equity distribution
agreement. The Company also agreed to reimburse Roth for certain expenses relating to the at-the-market offering program. During the
year ended November 30, 2018, an aggregate of Nil (adjusted to reflect the reverse split: 2017 - 110,815; 2016 – 147,126) common shares
were sold on Nasdaq for gross proceeds of $Nil (2017- $2,541,640; 2016 - $3,469,449), with net proceeds to the Company of $Nil (2017 -
$2,468,474; 2016 - $3,368,674), respectively, under the at-the-market offering program. In March 2018, the Company terminated its
continuous offering under the prospectus supplement dated July 18, 2017 and prospectus dated July 17, 2017 in respect of its at-the-market
program. The underwriting agreement relating to the October 2018 offering restricts the Company's ability to use this equity distribution
agreement. It contains a prohibition on the Company: (i) for a period of two years following the date of the underwriting agreement, from
directly or indirectly in any at-the-market or continuous equity transaction, offer to sell, or otherwise dispose of shares of capital stock of
the Company or any securities convertible into or exercisable or exchangeable for its shares of capital stock or (ii) for a period of five years
following the closing, effecting or entering into an agreement to effect any issuance by the Company of common shares or common share
equivalents involving a certain variable rate transactions under an at-the-market offering agreement, whereby the Company may issue
securities at a future determined price, except that, on or after the date that is two years after the closing, the Company may enter into an at-
the-market offering agreement.
63
For the year ended November 30, 2018, net cash flows used in operating activities increased to $12,508,960 as compared to net
cash flows used in operating activities for the year ended November 30, 2017 of $6,105,785. The increase was primarily a result of the
higher loss from operations, an increase in prepaid expenses, and accounts payable, partially offset by a decrease in accounts receivable. 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.
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, 2018 and the year ended November 30, 2017, R&D expense was $10,827,293,
and $9,271,353, respectively. The increase was primarily due to an increase in third party R&D expenditures as a result of clinical trials for
Oxycodone ER and higher patent litigation expenses. 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 for the year ended November 30, 2017 was mainly due to consulting
fees associated with our preparation for the FDA Advisory Committees meeting in relation to our Oxycodone ER NDA filing and the
increase in 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, 2018, net cash flows provided from financing activities of $17,354,954 principally relate to two
registered direct offerings of an aggregate of 883,333 common shares at a price of $6.00 per share (post reverse split) for gross proceeds of
$5,300,000 in March 2018, and the 2018 Debenture Financing in the aggregate principal amount of $0.5 million in September 2018, and an
underwritten public offering in October 2018 (described below) which raised $14,344,906 in gross proceeds. In October 2018, we
completed an underwritten public offering in the United States, resulting in the sale to the public of 827,970 units at $0.75 per unit, which
were comprised of one common share and one 2018 Unit Warrant exercisable at $0.75 per share. We concurrently sold an additional
1,947,261 common shares and 2018 Option Warrants to purchase 2,608,695 common shares exercisable at $0.75 per share pursuant to the
over-allotment option exercised in part by the underwriter. The price for the common shares issued in connection with exercise of the
overallotment option was $0.74 per share and the price for the warrants issued in connection with the exercise of the overallotment option
was $0.01 per warrant, less in each case the underwriting discount. In addition, we issued 16,563,335 2018 Pre-Funded Units, each 2018
Pre-Funded Unit consisting of one 2018 Pre-Funded Warrant to purchase one common share and one 2018 Warrant to purchase one
common share. The 2018 Pre-Funded Units were offered to the public at $0.74 each, and a 2018 Pre-Funded Warrant is exercisable at
$0.01 per share. Each 2018 Firm Warrant is exercisable immediately and has a term of five years and each 2018 Pre-Funded Warrant is
exercisable immediately and until all 2018 Pre-Funded Warrants are exercised. We also issued October 2018 Placement Agent Warrants to
the placement agents to purchase 1,160,314 common shares at an exercise price of $0.9375 per share, which were exercisable immediately
upon issuance. In aggregate, the Company issued 2,775,231 common shares, 16,563,335 2018 Pre-Funded Warrants and 20,000,000 2018
Firm Warrants in addition to 1,160,314 October 2018 Placement Agent Warrants. During the year ended November 30, 2018, 12,153,334
2018 Pre-Funded Warrants were exercised for proceeds of $121,553.
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 363,636 common shares, at a price of $11.00 per share and
warrants to purchase an aggregate of 181,818 common shares, for gross proceeds of $4,000,000. The warrants became exercisable six
months from issuance, will expire 30 months after they become exercisable and have an exercise price of $12.50 per common share. The
Company also issued to the placement agents warrants to purchase 18,181 shares of common stock at an exercise price of $13.75 per share.
The total net proceeds from the offering were $3,499,508, after deducting offering expenses at-the-market issuances of common shares, and
the exercise of warrants, offset by payments on the 2013 Debenture.
64
For the year ended November 30, 2018, net cash flows used in investing activities of $101,178 related mainly to the purchase of
production, laboratory and computer equipment.
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.
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 sales of generic Focalin XR®, due to continued competitive pressures, to be negatively impacted for the next
several quarters. As of November 30, 2018, the Company had a cash balance of $6.6 million. As of February 28, 2019, our cash balance
was $3.0 million. We currently expect to satisfy our operating cash requirements until May 2019 from cash on hand and quarterly profit
share payments from Par and Mallinckrodt. The Company will need to obtain additional funding as we further the development of our
product candidates. Potential sources of capital may include payments from licensing agreements, cost savings associated with managing
operating expense levels, equity and/or debt financings and/or new strategic partnership agreements which fund some or all costs of
product development. We intend to 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), PODRASTM technology (as defined in Item 4.B. above), additional 505(b)(2) product candidates for development in various
indication areas 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. In October 2018, we raised $14,344,906 in gross proceeds as part of an underwritten public offering from the sale of
827,970 Units at $0.75 per one common share and one warrant exercisable at $0.75 per share. We concurrently sold an additional 1,947,261
common shares at $0.74 per share and 2,608,695 2018 Option Warrants exercisable at $0.75 per share pursuant to the over-allotment option
exercised in part by the underwriter. In addition, we issued 16,563,335 2018 Pre-Funded Units, each 2018 Pre-Funded Unit consisted of
one 2018 Pre-Funded Warrant to purchase one common share and one 2018 Warrant to purchase one common share. The 2018 Pre-Funded
Units were offered at $0.74 each, and the 2018 Pre-Funded Warrant is exercisable at $0.01 per share. During the year ended November 30,
2018, 12,153,334 2018 Pre-Funded Warrants were exercised for proceeds of $121,553.
On September 10, 2018, the Company completed a private placement financing of the 2018 Debenture in the principal amount of
$0.5 million. The 2018 Debenture is due to mature on September 1, 2020. The 2018 Debenture bears interest at a rate of 10% 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, who are directors, executive officers
and shareholders of our Company, provided us with the original $500,000 of the proceeds for the 2018 Debenture.
Effective October 1, 2018, the maturity date for the 2013 Debenture was extended to April 1, 2019. In December 2018, a principal
repayment of $300,000 was made on the 2013 Debenture in respect of the $1,500,000 loan. The Company currently expects to repay the
current outstanding principal amount of $1,050,000 on or about April 1, 2019, if the Company then has cash available.
65
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, 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
impact of the litigation against us 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 in 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 in 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, 2018, 2017 and 2016, R&D expense was $10,827,293, $9,271,353
and $8,166,736, 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 is reflective of varying levels of commercial sales of
generic Focalin XR® capsules, the level of our R&D spending, and the vesting or modification of performance based stock options. The
lower net loss in the fourth quarter of 2018 is primarily attributed to lower R&D spending and selling, general and administrative expenses,
offset by licensing revenues. The higher net loss in the third quarter of 2018 is primarily attributed to higher third party R&D expenses as a
result of clinical trials for Oxycodone ER, as well as increased patent litigation expenses. The lower net loss in the second quarter of 2018 is
primarily attributed to slightly higher licensing revenues and lower R&D spending. The net loss in the first quarter of 2018 is primarily
attributed to lower licensing revenues from commercial sales of generic Focalin XR®, along with higher R&D expenses. The lower net loss
in the fourth quarter of 2017 is primarily attributed to higher licensing revenues and lower R&D spending and selling, general and
administrative expenses. The net loss in the third quarter of 2017 was primarily due to higher licensing revenue, partially offset by
higher expenses related to the FDA Advisory Committees meeting in July 2017. The lower net loss in the second quarter of 2017 was
primarily attributed to higher than normal 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 was attributable to the accrual of management bonuses 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.
The table below outlines financial data for the eight most recent quarters. The quarterly results are unaudited and have been
prepared in accordance with U.S. GAAP, for interim financial information:
66
Quarter Ended
November 30, 2018
August 31, 2018
May 31, 2018
February 28, 2018
November 30, 2017
August 31, 2017
May 31, 2017
February 28, 2017
Revenue
Net loss
Loss per share
Basici
Dilutedi
$
$
387,691
413,555
576,967
334,518
1,077,835
1,189,739
2,001,512
1,235,366
$
(3,784,512)
(3,954,104)
(2,859,276)
(3,149,588)
(2,510,936)
(2,550,314)
(1,805,329)
(1,990,861)
$
(0.67)
(0.91)
(0.68)
(0.91)
(0.76)
(0.83)
(0.59)
(0.66)
(0.67)
(0.91)
(0.68)
(0.91)
(0.76)
(0.83)
(0.59)
(0.66)
(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, 2018, 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 (as defined in Item 4.B. above), comprising the Company’s premises that it operates
from in the 30 Worcester Road Facility (as defined in Item 4.B. above) as well as the adjoining 22 Worcester Road Facility (as defined in
Item 4.B. above), which is indirectly owned by the same landlord, which will expire in November 2020, subject to a 5 year renewal option.
The Company also has an option to purchase the Combined Properties up to November 30, 2020 based on a fair value purchase formula,
but does not currently expect to exercise this option in 2019.
Payments Due by Period
Contractual Obligations
Third parties
Accounts payable
Accrued liabilities
Related parties
Employee costs payable
Convertible debentures
Total contractual obligations
G. Safe Harbor
Total
$
Less than 1
Year 1 - 3 Years 3 - 5 Years
$
$
$
2,643,437
353,147
2,643,437
353,147
222,478
1,991,956
5,211,018
222,478
1,454,148
4,673,210
-
-
-
-
537,808
537,808
-
-
-
-
-
More than
5 Years
$
-
-
-
-
-
See “Disclosure Regarding Forward-Looking Information” in the introduction to this annual report.
67
Item 6. Directors, Senior Management and Employees
A. Directors and Senior Management
The name and province 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 .
DIRECTORS AND OFFICERS
Name and Province of Residence
Position held with the Company
Dr. Isa Odidi
Ontario, Canada
Dr. Amina Odidi
Ontario, Canada
Norman Betts(1),
New Brunswick, Canada
Shawn Graham (2) (3),
New Brunswick, Canada
Kenneth Keirstead(1)(2)(3)
New Brunswick, Canada
Bahadur Madhani(1) Ontario, Canada
Greg Powell(5)Ontario, Canada
Dr. Patrick Yat
Ontario, Canada
Chairman of the Board and Chief
Executive Officer
President, Chief Operating and Director
Director(4)
Director
Director
Director
Chief Financial Officer
Vice-President, Chemistry and Analytical
Services
Officer/Director Since
September 2004
September 2004
January 2019
May 2018
January 2006
March 2006
February 2019
N/A
Notes:
(1)
(2)
(3)
(4)
(5)
Member of the Audit Committee.
Member of the Compensation Committee.
Member of the Compensation Committee and Corporate Governance Committee.
Dr. Betts was appointed a director of the Company on January 22, 2019 to fill the vacancy created by the resignation of Dr. Eldon
Smith.
Mr. Powell was appointed the Company’s Chief Financial Officer effective February 11, 2019 after the resignation of the
Company’s former Chief Financial Officer, Andrew Patient. Between the time of Mr. Patient’s resignation and Mr. Powell’s
appointment, Dr. Amina Odidi assumed the responsibilities of the Company’s Chief Financial Officer.
Eldon Smith served as a Director to the Company from October 2009 until his resignation effective January 8, 2019) to pursue
other opportunities. During the 2018 fiscal year, he served on the Audit Committee, the Compensation Committee and the Corporate
Governance Committee. In the last 5 years, he has been the President and CEO of Eldon R. Smith and Associates Ltd., a consulting
business, and since January 19, 2017, he has been Chief Medical Officer of Cardiol Therapeutics Inc. He is a director of the following
public companies: Zenith Capital Corp. and Resverlogix Corp.
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.
68
Michael Campbell served as General Counsel and Corporate Secretary of the Company from July 10, 2017 until his resignation
(effective February 22, 2018) for personal reasons.
Isa Odidi, Ph.D., MBA – Chairman, CEO, Co-Chief Scientific Officer and Executive Director
Dr. Isa Odidi has served as Chairman of the Board of the Company and Chief Executive Officer and Co-Chief Scientific Officer
of the Company since September 2004. In 1998, Dr. Odidi co-founded Intellipharmaceutics Inc., the predecessor of publicly-traded
Intellipharmaceutics International Inc. From 1995 to 1998, Dr. Odidi held positions, first as Director, then as Vice President of Research of
Drug Development and New Technologies, at Biovail Corporation International, (now Valeant Pharmaceutical International, Inc.), a drug
delivery company. Dr. Odidi currently holds a Chair as Professor of Pharmaceutical Technology at the Toronto Institute of Pharmaceutical
Technology in Canada and is an Adjunct Professor at the Institute for Molecular Medicine in California. Dr. Isa Odidi is also the Chairman
of Smart Pharmaceutical (Shanghai) Ltd, China. Dr. Odidi holds a bachelor of science degree in pharmacy from Ahmadu Bello University,
Nigeria, a master of science in pharmaceutical technology, Ph.D. pharmaceutics from the University of London, and his MBA from Joseph
L. Rotman School of Management, University of Toronto. He is also a graduate of the Western Executive Program, Ivey School of
Business at the University of Western Ontario. Dr. Odidi was recently awarded an Honorary Doctor of Science degree (Honoris causa)
from the University of Benin, Nigeria.
Amina Odidi, Ph.D. – President, COO, Co-Chief Scientific Officer and Executive Director
Dr. Amina Odidi has served as President, Chief Operating Officer and Co-Chief Scientific Officer of the Company since
September 2004. In 1998, Dr. Odidi co-founded Intellipharmaceutics Inc., the predecessor of publicly-traded Intellipharmaceutics
International Inc. She has extensive experience developing and applying proprietary technologies to the development of controlled-release
drug products for third-party pharmaceutical companies. She has invented or co-invented various proprietary controlled delivery devices for
the delivery of pharmaceutical, nutraceutical, biological, agricultural and chemical agents. In the past she has worked for the
pharmaceutical and health care industry. Dr. Odidi has co-authored eight articles, papers and textbooks. Dr. Odidi holds a bachelor of
science in pharmacy, a master of science in biopharmaceutics, and a Ph.D. in pharmaceutics from the University of London.
Greg Powell, CPA-CGA – Chief Financial Officer
Greg Powell has served as the Chief Financial Officer of the Company since February 2019. Mr. Powell has over 15 years of
extensive experience as a senior financial professional, in large as well as small scale operations in industries ranging from international
mining, exploration and construction to technology sector operations in multiple jurisdictions. In 2013, Mr. Powell became the Director of
Finance for ViXS System Inc. (now Pixelworks Canada), a multimedia solutions innovator, where he was instrumental in streamlining the
financial reporting process to meet public company standards. In August 2018, he became Director of Finance at Wave Financial, Inc., a
private company that provides financial services for small businesses. Mr. Powell is a Chartered Professional Accountant – Certified
General Accountant, and in 2012 was awarded Fellowship in the Association of Chartered Certified Accountants.
Bahadur Madhani, CM – Non-Executive Director
Bahadur Madhani, an accountant by training, has been a director since March 2006. Since 1983, Mr. Madhani’s principal
occupation has been President and CEO of Equiprop Management Limited, a Canadian property management company of which he is the
principal shareholder. At present, he is also on the Board of the YMCA of Toronto and YMCA Canada. He was previously a member of
the advisory board of Quebecor Ontario. He has also served as Chairman of United Way of Toronto, Chairman of the YMCA of greater
Toronto, and Chairman of the Nelson Mandela Children’s Fund of Canada. Mr. Madhani was awarded membership in the Order of Canada
in 2001.
69
Kenneth Keirstead – Non-Executive Director
Kenneth Keirstead has served as a director of the Company since January 2006. Mr. Keirstead is educated in clinical biochemistry
and business administration. He has worked in the health care delivery and pharmaceutical industries for over 45 years. Since 1998, Mr.
Keirstead’s principal occupation has been Executive Manager of the Lyceum Group, a Canadian consulting services company primarily
active in the health care field, of which he is the founder. In addition, he was President and CEO of Sanofi Winthrop Canada Inc., General
Manager of Squibb Medical Systems International, President of Chemfet International and President of Quinton Instruments, among other
positions. He has published studies and reports on health care and related services.
Shawn Graham – Non-Executive Director
Shawn Graham has been a director of the Company since May 2018. Mr. Graham is the President and CEO of G&R Holdings
Inc., which assists companies with developing and implementing global projects and business alliance strategies with a special focus on
globalizing with China. From October 2006 until October 2010, Mr. Graham served as 31st Premier of Province of New Brunswick. He is
a former Chair of the Council of The Federation, Co-chair of Northeastern Governors and Eastern Canadian Premiers, and Co-chair of a
Pan-Canadian trade mission to China. He is currently a member of the advisory board of the faculty of business, University of New
Brunswick, Saint John as well as a national board member to Ducks Unlimited Canada. Mr. Graham has been awarded an Honorary Doctor
of Laws Degree from the University of New Brunswick.
Norman Betts – Non-Executive Director
Norman Betts is a Professor, Faculty of Business Administration, University of New Brunswick, a Chartered Professional
Accountant Fellow (FCPA) and a member of the Institute of Corporate Directors (ICD). Dr. Betts currently serves as a director and member
of the audit committees of Tanzanian Royalty Exploration Corporation, 49 North Resources, Biotricity Inc and Adex Mning Inc. He has
extensive public company and Crown Corporation experience including having served on boards including Tembec Inc, New Brunswick
Power Corporation, and the Bank of Canada. He is also co-chair of the board of trustees of the University of New Brunswick Pension Plan
for Academic Employees. Dr. Betts is a former Finance Minister and Minister of Business New Brunswick with the Province of New
Brunswick. He was awarded a Ph.D. in Management from the School of Business at Queens University in 1992.
From March 2006 until June 2013, Dr. Norman Betts served as a director of Starfield Resources Inc. (TSX: SRU) (“Starfield”).
On August 22, 2013, Starfield was the subject of a cease trade order issued by the Ontario Securities Commission as a result of Starfield’s
failure to file, inter alia, its audited annual financial statements, related management’s discussion and analysis and officer certifications for
the year ended February 28, 2013. The order is still in effect. On April 18, 2013, Starfield’s shares were delisted from the TSX. On July 2,
2013, Starfield announced that it was deemed to have made an assignment in bankruptcy, effective at the close of business on June 28,
2013 for failure to file a proposal before the time for doing so had past pursuant to the provisions of the Bankruptcy and Insolvency Act
(Canada). Starfield had previously filed a Notice of Intention to Make a Proposal (“Notice of Intention”) pursuant to the provisions of Part
III of the Bankruptcy and Insolvency Act (Canada). Pursuant to the Notice of Intention, PriceWaterhouseCoopers Inc. (“ PwC”) was
appointed as the trustee (“Proposal Trustee”) in Starfield’s proposal proceedings. Pursuant to a Order of the Ontario Superior Court of
Justice (Commercial List), the time for Starfield to file a proposal expired at the end of the day on June 28, 2013. Starfield completed a sale
of substantially all of its assets related to its Ferguson Lake Project in early June 2013. However, in consultation with the Proposal Trustee,
Starfield determined that it would not be able to put forward a viable proposal and would not be filing a proposal by the deadline. As a
result, Starfield was deemed to have made an assignment in bankruptcy at the end of the day on June 28, 2013. PwC acted as the trustee in
bankruptcy for Starfield.
As of February 28, 2019, the directors and executive officers of the Company as a group owned, directly and indirectly, or
exercise control or direction over 594,828 common shares, representing approximately 2.7% of the issued and outstanding common shares
of the Company (and beneficially owned approximately 1,325,501 common shares representing 5.9% of our common shares including
common shares issuable upon the exercise of outstanding options and the conversion of the outstanding Debentures that are exercisable or
convertible within 60 days of the date hereof). 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 578,131 common shares, representing approximately 2.6% of our issued and outstanding common
shares of the Company (and collectively beneficially owned in the aggregate approximately 1,182,525 common shares representing 5.2%
of our common shares including common shares issuable upon the exercise of outstanding options and the conversion of the outstanding
Debentures 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 Debentures held by Drs. Amina and Isa Odidi.).
70
Family Relationships
Except Drs. Isa Odidi and Amina Odidi who are spouses to each other, there are no other family relationships among any of our
officers and directors.
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, 2018, the Company had 59 full-time employees engaged in administration and research and development.
Compensation Governance – The Company’s Compensation Committee is comprised of three directors, Messrs. Graham,
Madhani and Keirstead, 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 the 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.
71
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 in order 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 Officers’ compensation to the performance of the Company. The Board, which includes two of the Named
Executive Officers, is responsible for setting and amending any equity incentive plan under which an option-based award is granted.
The Company has in place a stock option plan (the “Option Plan”) for the benefit of certain officers, directors, employees and
consultants of the Company, including the Named Executive Officers (as described in greater detail in Item 6.E below). Named Executive
Officers have been issued options under such plan.
The Company has also granted performance-based options to Dr. Isa Odidi and Dr. Amina Odidi pursuant to a separate option
agreement which was negotiated at the same time as their employment agreements. These options vest upon the Company attaining certain
milestones relating to FDA filings and approvals for Company drugs, such that 27,639 options vest in connection with each of the FDA
filings for the first five Company drugs and 27,639 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 of the Company, at the meeting of shareholders held 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 in 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.
72
Executive Compensation
The following table sets forth all direct and indirect compensation for, or in connection with, services provided to the Company
for the fiscal years ended November 30, 2018, November 30, 2017 and November 30, 2016 in respect of the Chief Executive Officer, the
Chief Operating Officer, and the Chief Financial Officers (current and former) (“Named Executive Officers”). No other officers of the
Company earned greater than C$150,000 in total compensation in the fiscal year ended November 30, 2018.
SUMMARY COMPENSATION TABLE
Name and
principal
position(a) Year(b)
Non-equity incentive plan compensation (U.S.$)(f)
Share-
based
awards
(U.S.$)(d)
N/A
N/A
N/A
Option-based
awards
(U.S.$)(2)(e)
$811,208
$1,609,573
$703,016
Long-term
incentive
plans
N/A
N/A
N/A
Annual
incentive
plans(3)
N/A
N/A
$340,464
Salary (U.S.$)
(1)(c)
$350,306
$343,430
$340,464
Pension
value
(U.S.$)(g)
N/A
N/A
N/A
All other
compensation
(U.S.$)(4)(h)
Total
compensation
(U.S.$)(i)
$13,950
$13,676
$13,558
$1,175,465
$1,966,680
$1,397,502
2018
2017
2016
2018
2017
2016
$350,306
$343,430
$340,464
N/A
N/A
N/A
$811,208
$1,609,573
$703,016
N/A
N/A
$340,464
N/A
N/A
N/A
N/A
N/A
N/A
$13,950
$13,676
$13,558
$1,175,465
$1,966,680
$1,397,502
2018
2017
$232,504
$54,395
N/A
N/A
$11,619
$19,800
N/A
N/A
N/A
N/A
N/A
N/A
$13,950
$3,419
$258,073
$77,614
2018
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
73
Dr. Isa Odidi,
Chairman,
Chief
Executive
Officer and
Co-Chief
Scientific
Officer
Dr. Amina
Odidi,
President,
Chief
Operating
Officer and
Co-Chief
Scientific
Officer
Andrew
Patient,
Former Chief
Financial
Officer(5)
Greg Powell,
Chief
Financial
Officer (6)
Notes:
(1)
(2)
(3)
(4)
(5)
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.$0.7750 to C$1.00 (2017 - U.S.$ 0.7598; 2016 – U.S. $0.7932) 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 2018, 2017 and 2016 are as disclosed in
the table.
The Company entered into a separate acknowledgement and agreement with Drs. Isa Odidi 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 Odidi and
Amina Odidi are entitled to purchase up to 276,394 of the Company’s common shares upon payment of $36.20 per share, subject to
satisfaction of the performance vesting conditions. The value of the option-based awards is determined using the Black-Scholes
pricing model calculated as at the award date.
Amount awarded at the discretion of the Board. These bonuses were paid in the second quarter of 2017; no bonuses were paid
during the fiscal year 2018
“All other compensation” includes car allowances and other miscellaneous benefits.
Mr. Patient served as the Company's Chief Financial Officer from September 6, 2017 until his resignation effective on November
30, 2018.
(6)
Mr. Powell was appointed as Chief Financial Officer of the Company effective February 11, 2019.
During the fiscal year ended November 30, 2018, Mr. Campbell, General Counsel and Corporate Secretary from July 10, 2017
until his resignation (effective February 22, 2018) did not receive option-based awards and received salary, all other compensation and total
compensation of $89,279, $4,511 and $93,790, respectively.
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 and Co-Chief Scientific 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, and is
increased annually each year during the term of the agreement by 20% of the prior year’s base 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 Company’s deferred share unit plan
(the “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. Isa Odidi 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. Isa 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 April 2010, Dr. Isa Odidi’s employment agreement was amended effective as of December
1, 2009, to eliminate the right to annual increases in his base salary of 20% each year and 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 or C$452,000 per year.
Pursuant to such amendment, Dr. Isa Odidi’s base salary is subject to increase on an annual basis at the discretion of the Board, and Dr. Isa
Odidi is eligible to receive a bonus, based on his performance, and that of the Company, as determined by the Board. In February 2012, Dr.
Isa Odidi received a grant of 30,000 options of which 20,000 vested immediately on issuance and the remaining 10,000 vested on February
17, 2013 at an exercise price of C$32.70 per share. In April 2013, Dr. Isa Odidi received a grant of 7,500 options of which 3,750 vested
immediately on issuance and the remaining 3,750 vested on November 30, 2013 at an exercise price of C$18.10 per share. In March 2014,
Dr. Isa Odidi received a grant of 5,000 options of which 2,500 vested immediately on issuance and the remaining 2,500 vested on
November 30, 2014 at an exercise price of C$42.90 per share. In November 2015, Dr. Isa Odidi received a grant of 7,000 options of which
4,900 vested immediately on issuance, with the remaining 2,100 options vested on November 30, 2016 at an exercise price of C$25.20 per
share. In August 2016, Dr. Isa Odidi received a grant of 9,000 options of which 6,000 vested immediately on issuance, with the remaining
3,000 vested on November 30, 2017 at an exercise price of C$24.20 per share. In November 2017, Dr. Isa Odidi received a grant of 7,000
options of which 2,333 vested immediately on issuance, 2,333 vested on November 30, 2018 and 2,334 will vest on November 30, 2019 at
an exercise price of C$11.50 per share.
74
The employment agreement with Dr. Amina Odidi, the President, Chief Operating Officer and Co-Chief Scientific Officer of the
Company, effective September 1, 2004, entitles Dr. Amina Odidi to receive a base salary of $200,000 per year, which is paid in Canadian
dollars, and is increased annually by 20% of the prior year’s base 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 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. Amina Odidi 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. Amina 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 April 2010, Dr.
Amina Odidi’s employment agreement was amended effective as of December 1, 2009, to eliminate the right to annual increases in her
base salary of 20% each year and 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. Pursuant to such amendment, Dr. Amina
Odidi’s base salary is subject to increase on an annual basis at the discretion of the Board, and Dr. Amina Odidi is eligible to receive a
bonus, based on her performance and the Company, as determined by the Board. In February 2012, Dr. Amina Odidi received a grant of
30,000 options of which 20,000 vested immediately on issuance and the remaining 10,000 vested on February 17, 2013 at an exercise price
of C$32.70 per share. In April 2013, Dr. Amina Odidi received a grant of 7,500 options of which 3,750 vested immediately on issuance and
the remaining 3,750 vested on November 30, 2013 at an exercise price of C$18.10 per share. In March 2014, Dr. Amina Odidi received a
grant of 5,000 options of which 2,500 vested immediately on issuance and the remaining 2,500 vested on November 30, 2014 at an
exercise price of C$42.90 per share. In November 2015, Dr. Amina Odidi received a grant of 7,000 options of which 4,900 vested
immediately on issuance, with the remaining 2,100 options vested on November 30, 2016 at an exercise price of C$25.20 per share. In
August 2016, Dr. Amina Odidi received a grant of 9,000 options of which 6,000 vested immediately on issuance, with the remaining 3,000
vested on November 30, 2017 at an exercise price of C$24.20 per share. In November 2017, Dr. Amina Odidi received a grant of 7,000
options of which 2,333 vested immediately on issuance, 2,333 vested on November 30, 2018 and 2,334 will vest on November 30, 2019 at
an exercise price of C$11.50 per share.
In addition, the Company entered into a separate acknowledgement and agreement with Drs. Isa Odidi 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 Odidi
and Amina Odidi are entitled to purchase up to 276,394 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
products and product candidates. The options are exercisable at a price of $36.20 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. Effective May 15, 2018, the Company’s shareholders approved a further two year extension of
the performance-based stock option expiry date to September 2020. As of the date hereof, 276,394 of these options have vested and are
exercisable.
Andrew Patient had served as the Company’s Chief Financial Officer from September 6, 2017 until his resignation effective on
November 30, 2018. The employment agreement with Andrew Patient, dated August 30, 2017, effective September 6, 2017, entitled Mr.
Patient to receive a base salary of C$300,000, 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$1,500 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. 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
occurred within six months of a change of control of the Company, it required 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 months. Mr. Patient’s employment agreement contains
intellectual property, non-competition and non-solicitation provisions in favor of the Company. Mr. Patient was granted 6,000 options, of
which 2,000 vested immediately on issuance, 2,000 vested on October 20, 2018 and the remaining 2,000 were to vest on October 20, 2019
at an exercise price of C$12.70 per share. In November 2017, Mr. Patient received a grant of 1,500 options of which 500 vested
immediately on issuance, 500 to vest on November 30, 2018 and the remaining 500 to vest on November 30, 2019 at an exercise price of
C$11.50 per share. Mr. Patient’s options will cease to be exercisable 120 days after the date on which he ceased to be employed by the
Company, i.e. will cease to be exercisable on March 30, 2019.
The employment agreement with Greg Powell, the Chief Financial Officer of the Company , effective February 11, 2019 entitles
Mr. Powell to receive a base salary of C$180,000 per year, which is paid in Canadian dollars. In addition, he is entitled to: (a) participate in
the Option Plan; (b) participate in all employee benefit plans and programs; and (c) a car allowance of C$1,000 per month. The
employment agreement is for an indefinite term. The Company can terminate this agreement without cause upon 3 to 12 months’ notice,
depending on the length of employment. If the agreement is terminated without cause, payment instead of notice can be provided/it will
require payment to Mr. Powell 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 6 months of a change of control of the Company, it requires payment to Mr. Powell of 12
months' base salary, plus 6 weeks' base salary for every full year of service, up to a combined maximum of 12 months. Mr. Powell’s
employment agreement contains intellectual property, non-competition and non-solicitation provisions in favor of the Company.
75
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 25,000 options of which 17,500 vested immediately
on issuance and the remaining 7,500 options vested on February 17, 2013 at an exercise price of C$65.40 per share. Mr. Allport’s
employment agreement included intellectual property, non-competition and non-solicitation provisions in favor of the Company. In April
2013, Mr. Allport received a grant of 2,500 options of which 1,250 vested immediately on issuance and the remaining 1,250 options vested
on November 30, 2013 at an exercise price of C$18.10 per share. In March 2014, Mr. Allport received a grant of 5,000 options of which
2,500 vested immediately on issuance and the remaining 2,500 vested on November 30, 2014 at an exercise price of C$42.90 per share. In
November 2015, Mr. Allport received a grant of 4,000 options of which 2,800 vested immediately on issuance, with the remaining 1,200
vested on November 30, 2016 at an exercise price of C$25.20 per share. In August 2016, Mr. Allport received a grant of 5,500 options of
which 3,700 vested on issuance, with the remaining 1,800 were to vest on November 30, 2017 at an exercise price of C$24.20 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 favor 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 favor of the Company. Mr. Campbell served as the Company’s General Counsel & Corporate Secretary until his resignation
effective on April 5, 2018. Mr. Campbell was granted 6,000 options, of which 2,000 vested immediately on issuance, 2,000 were to vest on
October 20, 2018 and the remaining 2,000 were to vest on October 20, 2019 at an exercise price of C$12.70 per share. In November 2017,
Mr. Campbell received a grant of 2,500 options of which 834 vested immediately on issuance, 833 were to vest on November 30, 2018 and
the remaining 833 were to vest on November 30, 2019 at an exercise price of C$11.50 per share. Mr. Campbell’s options ceased to be
exercisable 120 days after the date on which he ceased to be employed by the Company, i.e. ceased to be exercisable on August 3, 2018.
Incentive Plan Awards
Outstanding Option-Based Awards and Share-Based Awards – The following table sets forth for each Named Executive Officer
all awards outstanding at the end of the most recently completed financial year, including awards granted before the most recently
completed financial year. Each option grant allows the holder to purchase one of the Company’s common shares.
76
Option-based Awards
Number of
securities
underlying
unexercised
options (#)(b)
Option exercise
price (C$)(c)
Option expiration
date(d)
276,394
U.S.$36.20
Sept. 10, 2020
Value of
unexercised in-
the-money
options (C$)(e)(3)
N/A
30,000
7,500
5,000
7,000
9,000
7,000
30,000
7,500
5,000
7,000
9,000
7,000
25,000
2,500
5,000
4,000
5,500
6,000
1,500
10,000
32.70
18.10
42.90
25.20
24.20
11.50
32.70
18.10
42.90
25.20
24.20
11.50
32.70
18.10
42.90
25.20
24.20
12.70
11.50
N/A
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
Oct. 20, 2027(5)
Nov. 30, 2022(5)
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
Share-based Awards
Number of shares
or units of shares
that have not
vested (#)(f)
Market or payout
value of share-
based awards that
have not vested
(C$)(g)
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
Name(a)
Drs. Isa Odidi and Amina
Odidi(1)
Dr. Isa Odidi
Dr. Amina Odidi
John Allport(2)
Andrew Patient(5)
Greg Powell(6)
Notes:
(1)
(2)
(3)
(4)
(5)
These option-based awards are held jointly.
Mr. Allport, a consultant to the Company, served as the Company’s Vice President Legal Affairs and Licensing and as a director
from September 2004, until his resignation May 17, 2017.
The value of unexercised options at year-end is calculated by subtracting the option exercise price from the closing price of the
common shares of the Company on the TSX for C$ exercise prices and Nasdaq for US$ exercise prices on November 30, 2018
(C$0.45 and US$0.33, respectively) and multiplying the result by the number of common shares underlying an option.
Mr. Patient served as the Company’s Chief Financial Officer from September 6, 2017 until his resignation effective November 30,
2018. Mr. Patient’s options will cease to be exercisable 120 days after he ceased to be employed by the Company, i.e. will cease to
be exercisable on March 30, 2019.
Mr. Powell was appointed as Chief Financial Officer of the Company effective February 11, 2019. Mr. Powell was granted 10,000
options, of which 4,000 vested immediately on issuance, 3,000 to vest on February 11, 2020 and the remaining 3,000 were to vest
on February 11, 2021.
As of November 30, 2017, Mr. Campbell had unexercised options to acquire (i) 6,000 common shares at a price of C$12.70
(expiring October 20, 2027) and (ii) 2,500 common shares at a price of C$11.50 (expiring November 30, 2022); and no other share-based
awards. Mr. Campbell’s options ceased to be exercisable 120 days after he ceases to be employed by the Company, i.e. ceased to be
exercisable on August 3, 2018. Mr. Campbell’s options have no value vested or earned during the most recently completed financial year.
77
Incentive Plan Awards – Value Vested or Earned During the Year – The following table sets forth details of the value vested or
earned during the most recently completed financial year for each incentive plan award.
Name
(a)
Drs. Isa Odidi
Dr. Amina Odidi
Andrew Patient(2)
Option-
based
awards -
Value
vested
during the
year (U.S.$)
(b)(1)
N/A
N/A
N/A
Share-
based
awards -
Value
vested
during the
year (U.S.$)
(c)
N/A
N/A
N/A
Non-equity
incentive
plan
compensation
- Value
earned
during the
year (U.S.$)
(d)
N/A
N/A
N/A
Notes:
(1)
The amount represents the theoretical total value if the options had been exercised on the vesting date, established by calculating
the difference between the closing price of the common shares of the Company on the TSX on the vesting date and the exercise
price.
(2)
Mr. Patient served as the Company’s Chief Financial Officer from September 6, 2017 until his resignation effective November 30,
2018. Mr. Patient’s options will cease to be exercisable 120 days after he date on which he ceased to be employed by the Company
i.e. will cease to be exercisable on March 30, 2019.
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 fiscal 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 through to
September 30, 2022, at each of the Odidis’ current annual base salary level. Given their nature as fixed term employment agreements, if
notice is properly provided to not renew the agreement following the term ending September 30, 2019, then as such date approaches the
amount payable upon termination to the Odidis will decrease to the point where no amount would be payable upon termination as at
September 30, 2019. Any termination of the employment of the Odidis must be undertaken by and is subject to the prior approval of the
Board. There are no payments applicable under the employment agreements of the Odidis relating to a change of control of the Company.
For a discussion of certain termination and change of control benefits under the employment agreement with Mr. Patient, see the
description of his employment agreement under the heading “Employment Agreements” above.
78
Director Compensation
The following table sets forth all amounts of compensation provided to the non-executive directors (except for Mr. Betts who was
elected to the Board in January 2019) for the Company’s most recently completed financial year.
Name
(a)
Eldon Smith(1)
Kenneth Keirstead
Bahadur Madhani
Shawn Graham
Fees
earned
(b)
C$33,250
C$43,000
C$48,000
C$16,375
Share-
based
awards
(c)(2)
Option-
based
awards
(d)(3)
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
Non-
equity
incentive
plan
compensation
(e)
N/A
N/A
N/A
N/A
Pension
value
(f)
N/A
N/A
N/A
N/A
(g)
All other
compensation Total
(h)
C$33,250
C$43,000
C$48,000
C$16,375
N/A
N/A
N/A
N/A
Notes:
(1)
(2)
Eldon Smith served as a Director to the Company from October 2009 until his resignation (effective January 9, 2019) to pursue
other opportunities
DSUs that were earned. Does not include DSUs earned in the previous financial year and granted in the most recently completed
financial year.
(3)
Option-based awards for fiscal year 2018 were issued on November 30, 2018.
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.
79
Number of
securities
underlying
unexercised
options (#)
(b)
1,000
2,500
3,750
3,750
2,000
3,500
4,000
1,000
2,500
3,750
3,750
2,000
3,500
4,000
1,000
2,500
3,750
3,750
2,000
3,500
4,000
N/A
Option-based Awards
Share-based Awards
Option
exercise price
(c)
C$28.80
C$18.10
C$32.20
C$42.90
C$25.20
C$24.20
C$11.50
C$28.80
C$18.10
C$32.20
C$42.90
C$25.20
C$24.20
C$11.50
C$28.80
C$18.10
C$32.20
C$42.90
C$25.20
C$24.20
C$11.50
N/A
Option expiration
date
(d)
May 08, 2019
May 08, 2029
May 08, 2019
Feb. 28, 2019
May 08, 2020
May 08, 2021
May 08, 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
N/A
Value of unexercised in-
the-money options
(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
N/A
Number of
shares or units
of shares that
have not vested
(#)
(f)(2)
10,279
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
Market or
payout value of
share-based
awards that
have not vested
(g)(3)
C$4,626
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
Name
(a)
Eldon Smith
Kenneth Keirstead
Bahadur Madhani
Shawn Graham
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, 2018 (C$0.45) 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,
2018.
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, 2018 (C$0.45) 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.
80
Name
(a)
Eldon Smith
Kenneth Keirstead
Bahadur Madhani
Option-
based
awards -
Value
vested
during the
year
(b)(1)
Share-
based
awards -
Value
vested
during the
year
(c)(2)
N/A
N/A
N/A
N/A
N/A
N/A
Non-equity incentive plan compensation - Value
earned during the year
(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
AUDIT COMMITTEE
The Audit Committee of the Board monitors our financial activities, policies, and internal control procedures. The Audit
Committee assists the Board in fulfilling its oversight responsibility to shareholders, potential shareholders, the investment community, and
others with respect to the Company’s financial statements, financial reporting process, systems of internal accounting and disclosure
controls, performance of the external auditors, and risk assessment and management. The Audit Committee has the power to conduct or
authorize investigations into any matters within its scope of responsibilities, with full access to all books, records, facilities and personnel
of the Company, its auditors and its legal advisors. In connection with such investigations or otherwise in the course of fulfilling its
responsibilities under the Audit Committee Charter, the Audit Committee has the authority to independently retain special legal,
accounting, or other consultants to advise it.
81
Audit Committee Charter
The charter of the Audit Committee can be found on the Company’s website at w ww.intellipharmaceutics.com.
Composition of the Audit Committee
Our Audit Committee is comprised of Norman Betts, Kenneth Keirstead and Bahadur Madhani, 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 SEC rules implementing SOX, 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 such member 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 SEC rules and as financially sophisticated under the applicable Nasdaq rules.
Relevant Education and Experience
Norman Betts is a Professor, Faculty of Business Administration, University of New Brunswick, a Chartered Professional
Accountant Fellow (FCPA) and a member of the Institute of Corporate Directors (ICD). Dr. Betts currently serves as a director and member
of the audit committees of Tanzanian Royalty Exploration Corporation, 49 North Resources, Biotricity Inc and Adex Mning Inc. He has
extensive public company and Crown Corporation experience including having served on boards including Tembec Inc, New Brunswick
Power Corporation, and the Bank of Canada. He is also co-chair of the board of trustees of the University of New Brunswick Pension Plan
for Academic Employees. Dr. Betts is a former Finance Minister and Minister of Business New Brunswick with the Province of New
Brunswick. He was awarded a Ph.D. in Management from the School of Business at Queens University in 1992.
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 of Sanofi Winthrop Canada Inc.; General Manager of Squibb Medical Systems International; President of Chemfet International
and President of 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.
See also Item 6.A.
82
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 U.S. GAAP) 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 SOX, 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
o Audits of the Company’s consolidated financial statements;
o
Statutory audits of the financial statements of the Company’s subsidiaries;
2. Audit-Related Services
o Reviews of the quarterly consolidated financial statements of the Company;
o
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;
o
Special attest services as required by regulatory and statutory requirements;
o Regulatory attestation of management reports on internal controls as required by the regulators;
o 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.
o
Presentations or training on accounting or regulatory pronouncements;
o Due diligence services related to accounting and tax matters in connection with potential acquisitions / dispositions;
3. Tax Services
a. Compliance Services
● Assistance with the preparation of corporate income tax returns and related schedules for the Company and its
subsidiaries;
83
● 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 IRS 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
o Advice and documentation assistance with respect to internal controls over financial reporting and disclosure controls and
procedures of the Company.
The list of prohibited services includes:
● Bookkeeping or other services related to the preparation of accounting records or financial statements;
● Financial information systems design and implementation;
● Appraisal or valuation services for financial reporting purposes;
● Actuarial services for items recorded in the financial statements;
● Internal audit outsourcing services;
84
● 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, 2017 to November 30, 2018.
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, 2018 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.
85
Composition of the Compensation Committee
The Compensation Committee is composed of Shawn Graham, Kenneth Keirstead and Bahadur Madhani, 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 Mr. Graham.
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 its 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, Shawn Graham 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 Mr. Keirstead.
D. Employees
The number of full-time employees as of the end of each of last three fiscal years is as follows:
Research Employees
Administrative Employees
November
30, 2018
November
30, 2017
49
10
51
11
November
30, 2016
40
12
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.
86
E. Share Ownership
The following table states the names of the directors and officers of the Company (current and during the last year), 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 28, 2019.
Number of
Common
Shares
Owned
578,131(1)
Percentage
of
Common
Shares
Owned
2.64%
578,131(1)
2.64%
11,055
0.5%
2,173
0.1%
Name
Dr. Isa
Odidi
Dr.
Amina
Odidi
John N.
Allport
Dr.
Eldon
Smith
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
Consultant;
Former Vice-
President,
Legal Affairs
and Licensing
and Former
Director of
the Company
Former
Director of
the Company
Kenneth
Keirstead
Director of
the Company
Nil
Nil
Bahadur
Madhani
Director of
the Company
750
0.003%
2,717
0.01%
Dr.
Patrick
Yat
Vice-
President,
Chemistry
and
Analytical
Services
Andrew
Patient
Former Chief
Financial
Officer of the
Company
Number of
Common
Shares
Issuable on
Conversion
of
Convertible
Debt
35,000(3)
166,667
Number of
DSU Held
N/A
Number of
RSU Held
N/A
35,000(3)
166,667
N/A
N/A
N/A
N/A
Nil
Number of
Stock
Options
Held(2)
276,394
30,000
7,500
5,000
7,000
9,000
7,000
276,394
30,000
7,500
5,000
7,000
9,000
7,000
25,000
2,500
5,000
4,000
5,500
Exercise
Price
$36.20
C$32.70
C$18.10
C$42.90
C$25.20
C$24.20
C$11.50
$36.20
C$32.70
C$18.10
C$42.90
C$25.20
C$24.20
C$11.50
C$32.70
C$18.10
C$42.90
C$25.20
C$24.30
Option
Expiry
dd/mm/yyyy
10/09/2020
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
16/02/2022
13/04/2020
28/02/2019
30/11/2020
31/08/2021
Number of
Currently
Exercisable
Options(4)
276,394
30,000
7,500
5,000
7,000
9,000
4,667
276,394
30,000
7,500
5,000
7,000
9,000
4,667
25,000
2,500
5,000
4,000
5,500
1,000
2,500
3,750
3,750
2,000
3,500
2,667
1,000
2,500
3,750
3,750
2,000
3,500
4,000
1,000
2,500
3,750
3,750
2,000
3,500
4,000
5,000
1,500
1,500
2,500
1,500
C$28.80
C$18.10
C$42.90
C$32.20
C$25.20
C$24.20
C$11.50
C$28.80
C$18.10
C$42.90
C$32.20
C$25.20
C$24.20
C$11.50
C$28.80
C$18.10
C$42.90
C$32.20
C$25.20
C$24.20
C$11.50
C$38.20
C$18.10
C$25.20
C$24.20
C$11.50
08/05/2019
08/05/2020
28/02/2019
08/05/2019
08/05/2020
08/05/2021
08/05/2022
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
1,000
2,500
3,750
3,750
2,000
3,500
2,667
1,000
2,500
3,750
3,750
2,000
3,500
2,667
1,000
2,500
3,750
3,750
2,000
3,500
2,667
5,000
1,500
1,500
2,500
1,000
4,000
1,000
N/A
10,279
N/A
N/A
Nil
N/A
N/A
Nil
N/A
N/A
N/A
Nil
N/A
N/A
Nil
Nil
Nil
4,000
1,000
C$12.70
C$11.50
30/03/2019
30/03/2019
Totals
594,828
2.71%
526,561
518,728
201,666
10,279
Nil
87
Notes:
(1)
(2)
(3)
Represents shares owned of record by Odidi Holdings Inc., a privately-held company controlled by Drs. Amina and Isa Odidi. In
addition, 276,394 performance-based options are held by Drs. Amina and Isa Odidi, and 65,500 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 a convertible debenture in the original principal
amount of $1.5 million (the “2013 Debenture” and collectively with the 2018 Debenture, the “Debentures”)), which was originally
due to mature January 1, 2015. The 2013 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 50,000 common shares at a conversion price of
US$30.00 per common share at the option of the holder. Drs. Isa and Amina Odidi, shareholders, directors and executive officers of
the Company provided the Company with the $1.5 million of the proceeds for the 2013 Debenture. Effective October 1, 2014, the
original maturity date for the 2013 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 2013 Debenture was further extended to December 1, 2016. Effective December 1, 2016, the
maturity date for the 2013 Debenture was extended to April 1, 2017 and a principal repayment of $150,000 was made at the time of
the extension. The maturity date of the 2013 Debenture has been further extended to October 1, 2018. Effective October 1, 2018,
the maturity date for the 2013 Debenture was extended to April 1, 2019. In December 2018, a principal repayment of $300,000 was
made for the 2013 Debenture. After giving effect to such partial repayment, the 2013 Debenture is convertible at any time into
35,000 common shares at a conversion price of $30.00 per common share at the option of the holder. The Company currently
expects to repay the current outstanding principal amount of $1,050,000 on or about April 1, 2019, if the Company then has cash
available. On September 10, 2018, the Company completed 2018 Debenture Financing in the principal amount of $0.5 million. The
2018 Debenture is due to mature on September 1, 2020. The 2018 Debenture bears interest at a rate of 10% 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 Odidi and Amina Odidi provided us with the original $500,000
of the proceeds for the 2018 Debenture.
(4)
Includes options exercisable within 60 days of the date of this filing.
As of February 28, 2019, the directors and executive officers of the Company as a group owned, directly or indirectly, or exercised
control or direction over 594,828 common shares, representing approximately 2.71% of the issued common shares of the Company (and
beneficially owned approximately 1,325,501 common shares representing 5.9% of our common shares including common shares issuable
upon the exercise of outstanding options and the conversion of the Debentures that are exercisable or convertible within 60 days of the date
hereof).
The Company has in place the Option Plan for the benefit of certain officers, directors, employees and consultants of the
Company, including the Named Executive Officers (see below under “Employee Stock Option Plan”). Certain Named Executive Officers
have been issued options under such plan. The Company has also granted performance-based options to Dr. Isa Odidi and Dr. Amina Odidi
pursuant to a separate option agreement, which was negotiated with the Named Executive Officers at the same time as their employment
agreements. These options vest upon the Company attaining certain milestones relating to FDA filings and approvals for Company drugs,
such that 27,639 options vest in connection with each of the FDA filings for the first five Company drugs and 27,639 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%.
88
● There are no restrictions on the maximum number of options which may be granted to insiders of the Company other than not
more than 1% of the total common shares outstanding on a non-diluted basis can be issued to non-executive directors of the
Company pursuant to options granted under the Option Plan and the value of any options granted to any non-executive director
of the Company, shall not, on an annual basis, exceed $100,000.
● The Board determines the exercise price of each option at the time the option is granted, provided that such price is not lower
than the “market price” of common shares at the time the option is granted. “Market price” means the volume weighted
average trading price of common shares on the TSX, or another stock exchange where the majority of the trading volume and
value of common shares occurs, for the five trading days immediately preceding the relevant date, calculated in accordance
with the rules of such stock exchange.
● Unless otherwise determined by the Board, each option becomes exercisable as to 33⅓% on a cumulative basis, at the end of
each of the first, second and third years following the date of grant.
● The period of time during which a particular option may be exercised is determined by the Board, subject to any Employment
Contract or Consulting Contract (both as hereinafter defined), provided that no such option term shall exceed 10 years.
● If an option expiration date falls within a “black-out period” (a period during which certain persons cannot trade common
shares pursuant to a policy of the Company’s respecting restrictions on trading), or immediately following a black-out period,
the expiration date is automatically extended to the date which is the tenth business day after the end of the black-out period.
Options may terminate prior to expiry of the option term in the following circumstances:
● on death of an optionee, options vested as at the date of death are immediately exercisable until the earlier of 180 days from
such date and expiry of the option term; and
● if an optionee ceases to be a director, officer, employee or consultant of the Company for any reason other than death, including
receipt of notice from the Company of the termination of his, her or its Employment Contract or Consulting Contract (as
defined below), options vested as at the date of termination are exercisable until the earlier of 120 days following such date and
expiry of the option term, subject however to any contract between the Company and any employee relating to, or entered into
in connection with, the employment of the employee or between the Company and any director with respect to his or her
directorship or resignation there from (an “Employment Contract”), any contract between the Company and any consultant
relating to, or entered into in connection with, services to be provided to the Company (a “Consulting Contract”) or any other
agreement to which the Company is a party with respect to the rights of such person upon termination or change in control of
the Company.
● Options and rights related thereto held by an optionee are not to be assignable or transferable except on the death of the
optionee.
● 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.
89
● 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:
o
o
o
o
o
o
o
o
o
o
o
o
o
not adversely alter or impair any option previously granted;
be subject to any regulatory approvals, where required, including, where applicable, the approval of the TSX and/or such
other exchange as may be required; and
not be subject to shareholder approval in any circumstances, except where the amendment, modification or change to the
Option Plan or option would:
(i)
reduce the exercise price of an option held by an insider of the Company;
(ii) extend the term of an option held by an insider beyond the original expiration date (subject to such date being
extended in a black-out extension situation);
(iii) increase the fixed maximum percentage of common shares issuable under the Option Plan; or
(iv) amend the amendment provision of the Option Plan;
in which case the amendment, modification or change will be subject to shareholder approval in accordance with the rules
of the TSX and/or such other exchange as may be required. Amendments to the Option Plan not requiring shareholder
approval may for example include, without limitation:
amendments of a “housekeeping nature”, including any amendment to the Option Plan or an option that is necessary to
comply with applicable law or the requirements of any regulatory authority or stock exchange;
changes to the exercise price of an option to an exercise price not below the “market price” unless the change is a reduction
in the exercise price of an option held by an insider of the Company;
amendments altering, extending or accelerating any vesting terms or conditions in the Option Plan or any options;
changes amending or modifying any mechanics for exercising an option;
amendments changing the expiration date (including acceleration thereof) or changing any termination provision in any
option, provided that such change does not entail an extension beyond the original expiration date of such option (subject
to such date being extended in a black-out extension situation);
amendments introducing a cashless exercise feature, payable in securities, whether or not such feature provides for a full
deduction of the number of underlying securities from the Option Plan maximum;
amendments changing the application of the provisions of the Option Plan dealing with adjustments in the number of
shares, consolidations and mergers and take-over bids;
amendments adding a form of financial assistance or amending a financial assistance provision which is adopted;
amendments changing the eligible participants of the Option Plan; and
amendments adding a deferred or restricted share unit provision or any other provision which results in participants
receiving securities while no cash consideration is received by the Company.
90
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 555,651 options to purchase common shares have been issued, representing 2.5% of the shares issued and outstanding as
of February 28, 2019. As of February 28, 2019, 17,200 options have been exercised under the Plan since inception. 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 27,639 options vest in connection with each of the FDA filings for the first
five Company drugs and 27,639 options vest in connection with each of the FDA approvals for the first five Company drugs. To date, the
level of these performance-based options has been taken into account by the Board and impacted the Company’s decisions about base
salary and option-based awards under the Option Plan for the said Named Executive Officers.
Restricted Share Unit Awards for Officers & Employees
The Company established the RSU Plan to form part of its incentive compensation arrangements available for officers and
employees of the Company and its designated affiliates as of May 28, 2010, when the RSU Plan received shareholder approval.
The key features of the RSU Plan are as follows:
● The stated purpose of the RSU Plan is to advance the interests of the Company through the motivation, attraction and retention
of employees and officers of the Company and the designated affiliates of the Company and to secure for the Company and the
shareholders of the Company the benefits inherent in the ownership of common shares by employees and officers of the
Company, it being generally recognized that share incentive plans aid in attracting, retaining and encouraging employees and
officers due to the opportunity offered to them to acquire a proprietary interest in the Company and to align their interests with
those of the Company. Employees and officers, including both full-time and part-time employees, of the Company and any
designated affiliate of the Company, but not any directors of the Company, are eligible to participate under the RSU Plan. By
the terms of the RSU Plan, Dr. Isa Odidi, the Chief Executive Officer of the Company, and Dr. Amina Odidi, the President and
Chief Operating Officer of the Company, are specifically not eligible to participate.
● The RSU Plan is administered by the Board or a committee thereof, which will determine, from time to time, who may
participate in the RSU Plan, the number of RSUs to be awarded and the terms of each RSU, all such determinations to be made
in accordance with the terms and conditions of the RSU Plan, based on individual and/or corporate performance factors as
determined by the Board.
● The number of common shares available for issuance upon the vesting of RSUs awarded under the RSU Plan is limited to an
aggregate of 33,000 common shares of the Company representing approximately 0.15% of the issued and outstanding common
shares of the Company as of February 28, 2019.
● 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.
91
● The RSU Plan provides that any unvested RSUs will vest at such time as determined by the Board in its sole discretion such that
participants in the RSU Plan will be able to participate in a change of control transaction, including by surrendering such RSUs
to the Company or a third party or exchanging such RSUs, for consideration in the form of cash and/or securities.
● Under the RSU Plan, should the vesting of an RSU fall within a blackout period or within nine business days following the
expiration of a blackout period, the vesting will be automatically extended to the tenth business day after the end of the
blackout period.
● If an “event of termination” of employment has occurred, any and all common shares corresponding to any vested RSUs in a
participant’s account, if any, will be issued as soon as practicable after the event of termination to the former participant. If an
event of termination has occurred, any unvested RSUs in the participant’s account will, unless otherwise determined by the
Board in its discretion, forthwith and automatically be forfeited by the participant and cancelled. Notwithstanding the foregoing,
if a participant is terminated for just cause, each unvested RSU in the participant’s account will be forfeited by the participant
and cancelled. An “event of termination” is defined under the RSU Plan as an event whereby a participant ceases to be eligible
under the RSU Plan and is deemed to have occurred by the giving of any notice of termination of employment (whether
voluntary or involuntary and whether with or without cause), retirement, or any cessation of employment for any reason
whatsoever, including disability or death.
● No rights under the RSU Plan and no RSUs awarded pursuant to the provisions of the RSU Plan are assignable or transferable
by any participant other than pursuant to a will or by the laws of descent and distribution.
● Under the RSU Plan, the Board may from time to time in its absolute discretion amend, modify and change the provisions of the
RSU Plan or any RSUs awarded pursuant to the Plan, provided that any amendment will:
● not adversely alter or impair any RSU previously awarded except as permitted by the adjustment provisions in the RSU Plan;
● be subject to any regulatory approvals including, where required, the approval of the TSX;
● be subject to shareholder approval in accordance with the rules of the TSX in circumstances where the amendment,
modification or change to the RSU Plan or RSUs would:
(i) allow for the assignment or transfer of any right under the RSU Plan or a RSU awarded pursuant to the provisions of the
RSU Plan other than as provided for under the assignability provisions in the RSU Plan;
(ii) increase the fixed maximum number of common shares which may be issued pursuant to the RSU Plan; or
(iii) amend the amendment provisions of the RSU Plan; and
● not be subject to shareholder approval in circumstances (other than those listed in the paragraph immediately above), including,
but not limited to, circumstances where the amendment, modification or change to the RSU Plan or RSU would:
(i) be of a “housekeeping nature”, including any amendment to the RSU Plan or a RSU that is necessary to comply with
applicable law or the requirements of any regulatory authority or stock exchange and any amendment to the RSU Plan or a
RSU to correct or rectify any ambiguity, defective provision, error or omission therein, including any amendment to any
definitions therein;
92
(ii) alter, extend or accelerate any vesting terms or conditions in the RSU Plan or any RSU;
(iii) change any termination provision in any RSU;
(iv) introduce features to the RSU Plan that would permit the Company to, instead of issuing common shares from treasury
upon the vesting of the RSUs, retain a broker and make payments for the benefit of participants to such broker who would
purchase common shares through the facilities of the TSX for such participants;
(v) Introduce features to the RSU Plan that would permit the Company to, instead of issuing common shares from treasury
upon the vesting of the RSUs, make lump sum cash payments to participants;
(vi) change the application of the adjustment provisions of the RSU Plan or the change of control provisions of the RSU Plan;
or
(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 33,000 common shares that are currently authorized for issuance under the RSU Plan represent approximately 0.15% of the
Company’s common shares issued and outstanding as at February 28, 2019. No RSUs have been issued and none are outstanding as of
February 28, 2019.
Deferred Share Unit Awards for Outside Directors
The Company established as of May 28, 2010 when it received shareholder approval, a 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 11,000
common shares of the Company, representing approximately 0.05% of the total number of issued and outstanding common
shares as of February 28, 2019.
● 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.
93
● A participant is permitted to redeem his/her DSUs only following termination of Board service by way of retirement, non-re-
election as a director, resignation or death. Upon redemption of DSUs, the Company will issue to the participant common
shares of the Company equal to the number of DSUs to be redeemed.
● A separate notional account is maintained for each participant under the DSU Plan. Each such account will be credited with
DSUs issued to the participant from time to time by way of a bookkeeping entry in the books of the Company. The DSUs
credited to the participant’s account will be cancelled as of the applicable redemption date and following redemption of all
DSUs credited to the participant’s account, such participant’s account will be closed.
● No rights under the DSU Plan and no DSUs credited pursuant to the provisions of the DSU Plan are assignable or transferable
by any participant other than pursuant to a will or by the laws of descent and distribution.
● Under the DSU Plan, the Board may from time to time in its absolute discretion amend, modify and change the provisions of
the DSU Plan or any DSUs issued pursuant to the DSU Plan, provided that any amendment will:
o
o
o
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;
94
(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 11,000 common shares that are currently authorized for issuance under the DSU Plan represent approximately 0.05% of the
Company’s common shares issued and outstanding as at February 28, 2019. A total of 10,279 DSUs have been issued, representing
common share rights that comprise approximately 0.05% of the common shares issued and outstanding as at February 28, 2019.
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
We completed a registered direct offering in October 2017, registered direct offerings in March 2018 and an underwritten public
offering completed in October 2018 all of which resulted in a significant change in the percentage ownership of our then-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
14.3%) of our then-issued and outstanding common shares of the Company (subsequent to the offering) (See “Prior Sales”). As of February
28, 2019, Drs. Amina and Isa Odidi and Odidi Holdings Inc. own in the aggregate directly and indirectly 578,131 common shares,
representing approximately 2.6% of our issued and outstanding common shares of the Company (and collectively beneficially owned in the
aggregate approximately 1,182,525 common shares representing 5.2% of our common shares including common shares issuable upon the
exercise of outstanding options and the conversion of the Debentures 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 Debentures held by Drs. Amina and Isa Odidi.) Sabby
Volatility Warrant Master Fund, Ltd., Sabby Management, LLC and Hal Mintz reported on a Schedule 13-G/A, filed with the SEC on
February 01, 2019, that they were each the beneficial owner of 1,944,978 common shares of the Company, representing approximately
9.96% of the Company’s common shares. Armistice Capital, LLC, Armistice Capital Master Fund, Ltd., and Steven Boyd (collectively
“Armistice”) reported on a Schedule 13-G/A, filed with the SEC on February 14, 2019, that they were each the beneficial owner of
575,099 common shares of the Company representing 9.99% of the Company’s common shares; however, based on the number of
common shares of the Company outstanding as at February 28, 2019, these 575,099 common shares currently represent approximately
2.6% of the Company’s common shares. To our knowledge, no other shareholder beneficially owns more than 5% of the issued and
outstanding common shares of the Company. To our knowledge, no other shareholder beneficially 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.
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.
95
As at December 31, 2018 there were a total of 343 registered holders of record of our common shares, of which 245 holders were
registered with addresses in Canada holding in the aggregate approximately 3.6% of our outstanding common shares, 47 holders were
registered with addresses in the United States holding in the aggregate approximately 96.39% of our 19,525,577 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”.
B. Related Party Transactions
In January 2013, we completed a private placement financing of the unsecured 2013 Debenture in the original principal amount of
$1.5 million. The 2013 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 $30.00 per common share at the option of the
holder. Drs. Isa and Amina Odidi, who are directors, executive officers and shareholders of our Company, provided us with the original
$1.5 million of the proceeds for the 2013 Debenture. In December 2016, a principal repayment of $150,000 was made on the 2013
Debenture and the maturity date was extended until April 1, 2017. Effective March 28, 2017, the maturity date of the 2013 Debenture was
extended to October 1, 2017. Effective September 28, 2017, the maturity date of the 2013 Debenture was further extended to October 1,
2018. Effective October 1, 2018, the maturity date for the 2013 Debenture was further extended to April 1, 2019. In December 2018, a
principal repayment of $300,000 was made for the 2013 Debenture. The Company currently expects to repay the current outstanding
principal amount of $1,050,000 on the 2013 Debenture on or about April 1, 2019, if the Company then has cash available.
On September 10, 2018, the Company completed the 2018 Debenture Financing. The 2018 Debenture bears interest at a rate of
10% per annum, payable monthly, may be prepaid at any time at our option, and is convertible into common shares at any time prior to the
maturity date at a conversion price of $3.00 per common share at the option of the holder. Drs. Isa and Amina Odidi, who are directors,
executive officers and shareholders of our Company, provided us with the original $500,000 of proceeds for the 2018 Debenture. The
maturity date for the 2018 Debenture is September 1, 2020.
To the Company’s knowledge, Armistice (as defined above), previously a holder of in excess of 10% of the Company’s
outstanding common shares, participated in (i) a registered direct offering in October 2017, pursuant to a placement agent agreement dated
October 10, 2017 between the Company and H.C. Wainwright & Co., LLC (“Wainwright”), and (ii) the registered direct offerings
completed in March 2018, pursuant to the March 2018 Wainwright Agreements (as defined below); and (iii) the underwritten public
offering completed in October 2018. Armistice reported on a Schedule 13-G/A, filed with the SEC on February 14, 2019, that it was the
beneficial owner of less than 10% of the Company’s common shares.
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.
96
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, 2018, and
continuing as at February 28, 2019, we are not aware of any pending or threatened material litigation claims against us other than the
following as described below.
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’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 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 (docket number 17-392) in respect of our NDA filing for Oxycodone ER, alleging
that our proposed Oxycodone ER infringes 6 out of the 16 patents associated with the branded product OxyContin®, or the OxyContin®
patents, listed in the Orange Book. 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.
Subsequent to the above-noted filing of lawsuit, 4 further such patents were listed and published in the Orange Book. The
Company then similarly certified to the FDA concerning such further patents. On March 16, 2018, we received notice that the Purdue
litigation plaintiffs had commenced further such patent infringement proceedings against us adding the 4 further patents. This lawsuit is
also in the District of Delaware federal court under docket number 18-404.
As a result of the commencement of the first 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.
On or about June 26, 2018 the court issued an order to sever 6 “overlapping” patents from the second Purdue case, but ordered
litigation to proceed on the 4 new (2017-issued) patents. An answer and counterclaim was filed on July 9, 2018. The existence and
publication of additional patents in the Orange Book, and litigation arising therefrom, is an ordinary and to be expected occurrence in the
course of such litigation.
On July 6, 2018 the court issued a so-called “Markman” claim construction ruling on the first case and the October 22, 2018 trial
date remained unchanged. We believe that we have non-infringement and/or invalidity defenses to all of the asserted claims of the subject
patents in both of the cases and will vigorously defend against these claims.
On July 24, 2018, the parties to the case mutually agreed to and did have dismissed without prejudice the infringement claims
related to the Grünenthal ‘060 patent. The Grünenthal ‘060 patent is one of the six patents included in the original litigation case, however,
the dismissal does not by itself result in a termination of the 30-month litigation stay.
On October 4, 2018, the parties mutually agreed to postpone the scheduled court date pending a case status conference scheduled
for December 17, 2018. At that time, further trial scheduling and other administrative matters were postponed pending the Company’s
anticipated resubmission of the Oxycodone ER NDA to the FDA, which is due no later than February 28, 2019.
In July 2017, three complaints were filed in the U.S. District Court for the Southern District of New York that were later
consolidated under the caption Shanawaz v. Intellipharmaceutics Int’l Inc., et al., No. 1:17-cv-05761 (S.D.N.Y.). The lead plaintiffs filed a
consolidated amended complaint on January 29, 2018. In the amended complaint, the lead plaintiffs 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. On March 30, 2018, the Company and the
other defendants filed a motion to dismiss the amended complaint for failure to state a valid claim. The defendants’ motion to dismiss was
granted in part, and denied in part, in an Order dated December 17, 2018. In its Order, the court dismissed certain of the plaintiffs’
securities claims, to the extent that the claims were based upon statements describing the Oxycodone ER product’s abuse-deterrent features
and its bioequivalence to OxyContin. However, the court allowed the claims to proceed to the extent plaintiffs challenged certain public
statements describing the contents of the Company’s Oxycodone ER NDA. Defendants filed an answer to the amended complaint on
January 7, 2019, and discovery is ongoing. We intend to vigorously defend against the remainder of the claims asserted in the consolidated
action.
97
On February 21, 2019, the Company and its CEO, Dr. Isa Odidi, received a Statement of Claim concerning an action against them
in the Superior Court of Justice of Ontario under the caption Victor Romita, plaintiff, and Intellipharmaceutics International Inc. and Isa
Odidi, defendants. The action seeks certification as a class action and alleges that certain public statements made by the Company in the
period February 29, 2016 to July 26, 2017 knowingly or negligently contained or omitted material facts concerning the Company’s NDA
for Oxycodone ER abuse-deterrent oxycodone hydrochloride extended release tablets. The plaintiff alleges that he suffered loss and
damages as a result of trading in the Company’s shares on the TSX during the above-noted period. The claim seeks, among other remedies,
unspecified damages, legal fees and court and other costs as the court may permit. At this time, the action has not been certified as a class
action. The Company intends to vigorously defend against the claims asserted in this 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 and depend on our financial condition, results of operations, capital and legal requirements
and such other factors as our Board 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 TSX, in each case under the symbol “IPCI.” Our shares began trading
on October 22, 2009, when the transaction with Vasogen was completed. Additional Information. See Item 4.B.
Item 10. Additional Information
A. Share Capital
Following receipt of shareholder approval for a reverse stock split (known as a share consolidation under Canadian law) at our
August 15, 2018 shareholders meeting, on September 12, 2018, we filed articles of amendment to effectuate a 1-for-10 reverse split, and
our common shares began trading on each of Nasdaq and TSX on a post-reverse split basis on September 14, 2018.
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, 2018, there were 18,252,243 common shares (November 30, 2017 –
3,470,451; November 30, 2016 – 2,978,999) and no preference shares issued and outstanding. As of February 28, 2019, there were
21,925,577 common shares and no preference shares issued and outstanding.
98
The number of shares outstanding increased as a result of the completion of the registered direct offerings of an aggregate of
883,333 common shares in March 2018 and the completion of the underwritten public offering in October 2018 for an aggregate of 827,970
Units, comprised of one common share and one 2018 Unit Warrant, an additional 1,947,261 common shares and 2,608,695 2018 Option
Warrants pursuant to the over-allotment option exercised in part by the underwriter. In addition, we also issued 2018 Pre-Funded Warrants
exercisable for 16,563,335 common shares, of which 12,153,334 2018 Pre-Funded Warrants were exercised as of November 30, 2018. As
at November 30, 2017, the Company had 3,470,451 common shares issued and outstanding, which was an increase of 491,452 when
compared to November 30, 2016. This increase was principally a result of the completion of the underwritten public offering of 363,636
common shares in October 2017 as well as exercises of existing warrants for 16,801 common shares, the sale of 110,815 common shares
under our at-the-market offering program and exercises of options for 200 common shares. In November 2013, we entered into an equity
distribution agreement with Roth, pursuant to which we originally could from time to time sell up to 530,548 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. . As of February 28, 2019, we have issued and sold an aggregate
of Nil (2017 – 110,815; 2016 – 147,126) common shares with an aggregate offering price of $Nil under the at-the-market program. During
the year ended November 30, 2018, Roth received compensation of $Nil (2017 - $73,166; 2016 - $100,775) in connection with such sales.
During the three months ended November 30, 2018, an aggregate of Nil (2017 – 5,000; 2016 – 49,794) of our common shares were sold on
Nasdaq for gross proceeds of $Nil (2017 – $46,025; 2016 – $1,507,400) and net proceeds of $Nil (2017 – $44,853; 2016 – $1,464,759)
under the at-the-market offering program. Roth received aggregate compensation of $Nil in connection with such sales. During the year
ended November 30, 2018, an aggregate of Nil (2017 - 110,815; 2016 – 147,126) of our common shares were sold on Nasdaq for gross
proceeds of $Nil (2017 - $2,541,640; 2016 - $3,469,449) and net proceeds of $Nil (2017 - $2,468,474; 2016 - $3,368,674) under the at-the-
market offering program. Roth received aggregate compensation of $Nil (2017 - $73,166; 2016 - $100,775) in connection with such sales.
In March 2018, the Company terminated its continuous offering under the prospectus supplement dated July 18, 2017 and
prospectus dated July 17, 2017 in respect of its at-the-market program. The underwriting agreement relating to the October 2018 offering
restricts the Company's ability to use this equity distribution agreement. It contains a prohibition on the Company: (i) for a period of two
years following the date of the underwriting agreement, from directly or indirectly in any at-the-market or continuous equity transaction,
offer to sell, or otherwise dispose of shares of capital stock of the Company or any securities convertible into or exercisable or
exchangeable for its shares of capital stock or (ii) for a period of five years following the closing, effecting or entering into an agreement to
effect any issuance by the Company of common shares or common share equivalents involving a certain variable rate transactions under an
at-the-market offering agreement, whereby the Company may issue securities at a future determined price, except that, on or after the date
that is two years after the closing, the Company may enter into an at-the-market offering agreement.
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. Subject to the prior rights of the holders of any preference
shares, the holders of common shares of the Company are entitled to receive, as and when declared by the Board, dividends in such
amounts as shall be determined by the Board of the Company. 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.
Preference Shares
The preference shares may at any time and from time to time be issued in one or more series. The Board 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.
99
Warrants
At November 30, 2018, an aggregate of 26,394,885 common shares were issuable upon the exercise of outstanding common share
purchase warrants, with a weighted average exercise price of $0.92 per common share. At February 28, 2019, an aggregate of 23,751,551
common shares were issuable upon the exercise of outstanding common share purchase warrants, with a weighted average exercise price of
$1.02 per common share.
Options
At November 30, 2018, an aggregate of 555,651 common shares were issuable upon the exercise of outstanding options, with a
weighted average exercise price of $31.75 per common share and up to 1,545,967 additional common shares were reserved for issuance
under our Option Plan.
Options outstanding
Weighted
average
remaining
contract
life (years)
Weighted
average
exercise
price per
share
$
Number
outstanding
Options exercisable
Weighted
average
grant
date
fair value
$
Number
exercisable
Weighted
average
exercise
price per
share
$
Weighted
average
grant
date
fair value
$
109,067
446,584
555,651
17.99
35.11
31.75
2.66
1.98
9.75
29.25
98,035
446,584
544,619
14.14
35.11
32.16
10.15
29.25
Exercise
price
$
Under 25
26.00 - 50.00
As of February 28, 2019, there were 555,651 common shares issuable upon the exercise of outstanding options. The weighted
average exercise price of these options is $31.75 per common share. As at February 28, 2019, up to 1,545,967 additional common shares
were reserved for issuance under our Option Plan.
Convertible Debentures
On January 10, 2013, we completed a private placement financing of an unsecured 2013 Debenture in the original principal
amount of $1.5 million. The 2013 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 50,000 common shares at a conversion price of $30.00 per common share at
the option of the holder. Drs. Isa and Amina Odidi, our shareholders, directors and executive officers provided us with the $1.5 million of
the proceeds for the 2013 Debenture. The 2013 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
2013 Debenture was further extended to December 1, 2016. Effective December 1, 2016, the maturity date for the 2013 Debenture was
extended to April 1, 2017 and a principal repayment of $150,000 was made at the time of the extension. Effective March 28, 2017, the
maturity date of the 2013 Debenture was extended to October 1, 2017. Effective September 28, 2017, the maturity date of the 2013
Debenture was further extended to October 1, 2018. Effective October 1, 2018, the maturity date for the 2013 Debenture was extended to
April 1, 2019. In December 2018, a principal repayment of $300,000 was made on the 2013 Debenture. The Company currently expects to
repay the current outstanding principal amount of $1,050,000 on or about April 1, 2019, if the Company then has cash available. The 2013
Debenture is convertible at any time into 35,000 common shares at a conversion price of $30.00 per common share at the option of the
holder.
On September 10, 2018, the Company completed a private placement financing of the unsecured convertible 2018 Debenture (as
defined above) in the principal amount of $0.5 million. The 2018 Debenture will mature on September 1, 2020. The 2018 Debenture bears
interest at a rate of 10% 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 of the Company at a conversion price of $3.00 per common share at the option of the holder. Dr. Isa Odidi and Dr.
Amina Odidi, who are shareholders, directors and executive officers of the Company provided the Company with the $0.5 million of the
proceeds for the 2018 Debenture.
100
Deferred Share Units
At November 30, 2018, there were 10,279 DSUs issued and outstanding. From November 30, 2018 to February 28, 2019, no
additional DSUs have been issued. At February 28, 2019, 721 additional DSUs are reserved for issuance under our DSU Plan.
Restricted Share Units
At November 30, 2018, there were no restricted share units (“RSUs”) issued and outstanding. From November 30, 2018 to the
date of this report, no RSUs have been issued. At February 28, 2019, 33,000 RSUs are reserved for issuance under our RSU Plan.
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 181,818 shares to U.S. institutional investors at a price of $27.50 per share.
In January 2013, we completed a private placement financing of a 2013 Debenture in the original principal amount of $1.5 million.
The 2013 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 50,000 common shares at a conversion price of $30.00 per common share at the option of the holder. Drs. Isa
and Amina Odidi, our shareholders, directors and executive officers provided us with the $1.5 million of the proceeds for the
2013 Debenture. The 2013 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 2013 Debenture was further extended
to December 1, 2016. Effective December 1, 2016, the maturity date for the 2013 Debenture was extended to April 1, 2017 and a principal
repayment of $150,000 was made at the time of the extension. The maturity date of the 2013 Debenture has been further extended to
October 1, 2018. Effective October 1, 2018, the maturity date for the 2013 Debenture was extended to April 1, 2019. In December 2018, a
principal repayment of $300,000 was made on the 2013 Debenture. The Company currently expects to repay the current outstanding
principal amount of $1,050,000 on or about April 1, 2019, if the Company then has cash available. The 2013 Debenture is convertible at
any time into 35,000 common shares at a conversion price of $30.00 per common share at the option of the holder.
In November 2013, we entered into an equity distribution agreement with Roth, pursuant to which we originally could from time to
time sell up to 530,548 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 Nasdaq or otherwise. Under the
equity distribution agreement, we were able at our discretion, from time to time, offer and sell common shares through Roth or directly to
Roth for resale, to the extent permitted under Rule 415 under the U.S. Exchange Act, at such time and at such price as were acceptable to us
by means of ordinary brokers’ transactions on Nasdaq or otherwise at market prices prevailing at the time of sale or as determined by us.
We have paid Roth a commission, or allowed a discount, of 2.75% of the gross proceeds we received from any sales of common shares
under the equity distribution agreement. We have also agreed to reimburse Roth for certain expenses relating to at-the-market the offering
program. During the year ended November 30, 2018, an aggregate of Nil (adjusted to reflect the reverse split: 2017 - 110,815; 2016 –
147,126) common shares were sold on Nasdaq for gross proceeds of $Nil (2017- $2,541,640; 2016 - $3,469,449), with net proceeds to the
Company of $Nil (2017 - $2,468,474; 2016 - $3,368,674), respectively, under the at-the-market offering program.
Pursuant to an Underwriting Agreement between the Company and Dawson James Securities, Inc., dated May 27, 2016, in June
2016, we completed an underwritten public offering of 322,981 units of common shares and warrants, at a price of $16.10 per unit. The
warrants are currently exercisable, have a term of five years and an exercise price of $19.30 per common share. We issued at the initial
closing of the offering an aggregate of 322,981 common shares and warrants to purchase an additional 161,490 common shares. The
underwriter also purchased at such closing additional warrants to acquire 24,223 common shares pursuant to the over-allotment option
exercised in part by the underwriter. We subsequently sold an aggregate of 45,946 additional common shares at the public offering price of
$16.10 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.
101
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, 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 28, 2019, the Company
has not sold any securities under the Shelf Registration Statement, other than the sale since July 17, 2017 of (i) 48,523 common shares
under the Company’s at-the-market program referred to above, (ii) the sale of the securities described below under the Wainwright
Agreements (as defined below), and, (iii) 1,500 common shares issued upon the exercise of warrants. In March 2018, the Company
terminated its continuous offering under the prospectus supplement dated July 18, 2017 and prospectus dated July 17, 2017 in respect of its
at-the-market program.
Pursuant to a placement agent agreement dated October 10, 2017 between the Company and Wainwright & Co., LLC (the “2017
Wainwright Agreement”), in October 2017, we completed a registered direct offering consisting of 363,636 common shares at a price of
$11.00 per share and warrants to purchase an aggregate of 181,818 common shares, for gross proceeds of $4.0 million. The warrants
became exercisable six months from issuance, will expire 30 months after they become exercisable and have an exercise price of $12.50 per
common share. 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 warrants to purchase 18,181 share of common stock at an exercise price of $13.75 per share. The total net
proceeds from the offering were $3.5 million, after deducting offering expenses.
Pursuant to pursuant to placement agent agreements dated March 12, 2018 and March 18, 2018 between the Company and
Wainwright (the “March 2018 Wainwright Agreements ”, together with the 2017 Wainwright Agreement, the “Wainwright
Agreements”), the Company completed, in March 2018, two registered direct offerings. The first offering consisted of 583,333 common
shares at a price of $6.00 per share for gross proceeds of approximately $3.5 million. We also issued to the investors unregistered warrants
to purchase an aggregate of 291,666 common shares at an exercise price of $6.00 per share. The warrants became exercisable six months
following the closing date and will expire 30 months after the date they became exercisable. After commissions and offering expenses, we
received net proceeds of approximately $3.0 million. We also issued to the placement agents warrants to purchase 29,166 common shares
at an exercise price of $7.50 per share. In the second registered direct offering, we issued 300,000 common shares at a price of $6.00 per
share for gross proceeds of $1.8 million. We also issued to the investors unregistered warrants to purchase an aggregate of 150,000
common shares at an exercise price of $6.00 per share. The warrants became exercisable six months following the closing date and will
expire 30 months after the date they became exercisable. After commissions and offering expenses, we received net proceeds of
approximately $1.6 million. We also issued to the placement agents warrants to purchase 15,000 common shares at an exercise price of
$7.50 per share.
For the year ended November 30, 2018, we completed a private placement financing of the unsecured convertible 2018 Debenture
(as defined above) in the principal amount of $0.5 million. The 2018 Debenture will mature on September 1, 2020. The 2018 Debenture
bears interest at a rate of 10% 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 of the Company at a conversion price of $3.00 per common share at the option of the holder. Dr. Isa Odidi
and Dr. Amina Odidi, who are shareholders, directors and executive officers of the Company provided the Company with the $0.5 million
of the proceeds for the 2018 Debenture.
102
Moreover, we completed an underwritten public offering in the United States, resulting in the sale to the public of 827,970 units at
$0.75 per unit, which were comprised of one common share and one 2018 Unit Warrant exercisable at $0.75 per share. We concurrently
sold an additional 1,947,261 common shares and 2018 Option Warrants to purchase 2,608,695 common shares exercisable at $0.75 per
share pursuant to the over-allotment option exercised in part by the underwriter. The price for the common shares issued in connection with
exercise of the overallotment option was $0.74 per share and the price for the warrants issued in connection with the exercise of the
overallotment option was $0.01 per warrant, less in each case the underwriting discount. In addition, we issued 16,563,335 2018 Pre-
Funded Units, each 2018 Pre-Funded Unit consisting of one 2018 Pre-Funded Warrant to purchase one common share and one 2018
Warrant to purchase one common share. The 2018 Pre-Funded Units were offered to the public at $0.74 each, and a 2018 Pre-Funded
Warrant is exercisable at $0.01 per share. Each 2018 Firm Warrant is exercisable immediately and has a term of five years and each 2018
Pre-Funded Warrant is exercisable immediately and until all 2018 Pre-Funded Warrants are exercised. We also issued October 2018
Placement Agent Warrants to the placement agents to purchase 1,160,314 common shares at an exercise price of $0.9375 per share, which
were exercisable immediately upon issuance. In aggregate, the Company issued 2,775,231 common shares, 16,563,335 2018 Pre-Funded
Warrants and 20,000,000 2018 Firm Warrants in addition to 1,160,314 October 2018 Placement Agent Warrants. During the year ended
November 30, 2018, 12,153,334 2018 Pre-Funded Warrants were exercised for proceeds of $121,553.
In March 2018, the Company terminated its continuous offering under the prospectus supplement dated July 18, 2017 and
prospectus dated July 17, 2017 in respect of its at-the-market program. The underwriting agreement relating to the October 2018 offering
restricts the Company's ability to use this equity distribution agreement. It contains a prohibition on the Company: (i) for a period of two
years following the date of the underwriting agreement, from directly or indirectly in any at-the-market or continuous equity transaction,
offer to sell, or otherwise dispose of shares of capital stock of the Company or any securities convertible into or exercisable or
exchangeable for its shares of capital stock or (ii) for a period of five years following the closing, effecting or entering into an agreement to
effect any issuance by the Company of common shares or common share equivalents involving a certain variable rate transactions under an
at-the-market offering agreement, whereby the Company may issue securities at a future determined price, except that, on or after the date
that is two years after the closing, the Company may enter into an at-the-market offering agreement.
During the 12-month period ended November 30, 2018, warrants (including Pre-Funded Warrants) to purchase an aggregate of
12,153,334 common shares were exercised.
During the 12-month period ended November 30, 2018, no options were granted and no options were exercised.
Also during the 12-month period ended November 30, 2018, a total of 866 DSUs were granted.
B. Articles and By-laws
The Company was formed under the CBCA by articles of arrangement dated October 22, 2009 (as amended, the “ Articles”) in the
IPC Arrangement Transaction, as discussed in Item 16. The Company is the successor issuer to Vasogen 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.
Following receipt of shareholder approval for a reverse stock split (known as a share consolidation under Canadian law) at our
August 15, 2018 shareholders meeting, on September 12, 2018, we filed articles of amendment to effectuate a 1-for-10 reverse split, and
our common shares began trading on each of Nasdaq and TSX on a post-reverse split basis on September 14, 2018.
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.
103
Under the CBCA, a corporation cannot repurchase its shares or pay or declare dividends if there are reasonable grounds for
believing that (a) the corporation is, or after payment would be, unable to pay its liabilities as they become due, or (b) after the payment, the
realizable value of the corporation’s assets would be less than the aggregate of (i) its liabilities and (ii) its stated capital of all classes of its
securities. Generally, stated capital is the amount paid on the issuance of a share unless the stated capital has been adjusted in accordance
with the CBCA.
General
The Articles do not contain any restrictions on the business the Company may carry on.
Directors
The Company’s By-Law No. 1 (a by-law relating generally to the transaction of the business and affairs of the Company) provides
for the indemnification of the directors and officers of the Company, former directors and officers of the Company against all costs,
charges and expenses, including an amount paid to settle an action or satisfy a judgment, reasonably incurred by the individual in respect of
any civil, criminal, administrative, investigative or other proceeding in which the individual is involved because of that association with the
Company, subject to certain limitations in By-Law No. 1 and the limitations in the CBCA.
The Company may also indemnify other individuals who act or acted at the Company’s request as a director or officer, or an
individual acting in a similar capacity, of another entity.
Annual and Special Meetings
Meetings of shareholders are held at such place, at such time, on such day and in such manner as the Board may, subject to the
CBCA and any other applicable laws, determine from time to time. The only persons entitled to attend a meeting of shareholders are those
persons entitled to notice thereof, those entitled to vote thereat, the directors, the auditors of the Company and any others who may be
entitled or required under the CBCA to be present at the meeting. Under the CBCA, notice of the meeting is required to be given not less
than 21 days and not more than 60 days prior to the meeting. Shareholders on the record date are entitled to attend and vote at the meeting.
The quorum for the transaction of business at any meeting of shareholders is at least two persons present at the opening of the meeting
who are entitled to vote either as shareholders or proxyholders, representing collectively not less than 5% of the outstanding shares of the
Company entitled to be voted at the meeting.
Other
There is no by-law provisions governing the ownership threshold above which shareholder ownership must be disclosed.
However, there are disclosure requirements pursuant to applicable Canadian law.
There are no provisions in either the Company’s Articles or By-Law No. 1 that would have the effect of delaying, deferring or
preventing a change in control of the Company and that would operate only with respect to a merger, acquisition or corporate restructuring
involving the Company or its subsidiary.
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.
104
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 (as amended on August 12, 2011 and September 24,
2013), 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 Focalin XR® (dexmethylphenidate hydrochloride extended-release) capsules for a period of 10 years
from the date of commercial launch (which was November 19, 2013). Under the Par agreement, we made a filing with the FDA
for approval to market generic Focalin XR® capsules in various strengths in the U.S., 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., as licensed products, the following extended release drug product candidates for which the
Company has ANDAs filed with the FDA:
o Quetiapine fumarate extended-release tablets (generic Seroquel XR®)–Approved by FDA and launched.
o Desvenlafaxine extended-release tablets (generic Pristiq®) – ANDA Under FDA Review (tentatively approved)
o
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 276,394
of the Company’s shares upon payment of $36.20 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.
● On January 10, 2013, the Company completed a private placement financing of the convertible 2013 Debenture in the original
principal amount of $1.5 million, which was originally due to mature January 1, 2015. The 2013 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 50,000 common shares at a conversion price of $30.00 per common share at the option of the holder. Drs. Isa and
Amina Odidi, shareholders, directors and executive officers of the Company provided the Company with the $1.5 million of
the proceeds for the 2013 Debenture. Effective October 1, 2014, the original maturity date for the 2013 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
2013 Debenture was further extended to December 1, 2016. Effective December 1, 2016, the maturity date for the 2013
Debenture was extended to April 1, 2017 and a principal repayment of $150,000 was made at the time of the extension. The
maturity date of the 2013 Debenture has been further extended to October 1, 2018.Effective October 1, 2018, the maturity date
for the 2013 Debenture was extended to April 1, 2019. In December 2018, a principal repayment of $300,000 was made for the
2013 Debenture. After giving effect to such partial repayment, the 2013 Debenture is convertible at any time into 35,000
common shares at a conversion price of $30.00 per common share at the option of the holder. The Company currently expects
to repay the current outstanding principal amount of $1,050,000 on or about April 1, 2019, if the Company then has cash
available. On September 10, 2018, the Company completed 2018 Debenture Financing in the principal amount of $0.5 million.
The 2018 Debenture is due to mature on September 1, 2020. The 2018 Debenture bears interest at a rate of 10% 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 Odidi and Amina Odidi provided us with the
original $500,000 of the proceeds for the 2018 Debenture.
105
● Pursuant to the 2017 Wainwright Agreement, in October 2017, we completed a registered direct offering consisting of 363,636
common shares at a price of $11.00 per share and warrants to purchase an aggregate of 181,818 common shares, for gross
proceeds of $4.0 million. The warrants became exercisable six months from issuance, will expire 30 months after they become
exercisable and have an exercise price of $12.50 per common share. 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 warrants to purchase 18,181 common shares at an exercise price of $13.75 per share. The total net proceeds
from the offering were $3.5 million, after deducting the underwriter’s discount and the offering expenses.
● Pursuant to pursuant to the March 2018 Wainwright Agreements, the Company completed, in March 2018, two registered direct
offerings. The first offering consisted of 583,333 common shares at a price of $6.00 per share for gross proceeds of
approximately $3.5 million. We also issued to the investors unregistered warrants to purchase an aggregate of 291,666 common
shares at an exercise price of $6.00 per share. The warrants became exercisable six months following the closing date and will
expire 30 months after the date they became exercisable. After commissions and offering expenses, we received net proceeds
of approximately $3.0 million. We also issued to the placement agents warrants to purchase 29,166 common shares at an
exercise price of $7.50 per share. In the second registered direct offering, we issued 300,000 common shares at a price of $6.00
per share for gross proceeds of $1.8 million. We also issued to the investors unregistered warrants to purchase an aggregate of
150,000 common shares at an exercise price of $6.00 per share. The warrants became exercisable six months following the
closing date and will expire 30 months after the date they became exercisable. After commissions and offering expenses, we
received net proceeds of approximately $1.6 million. We also issued to the placement agents warrants to purchase 15,000
common shares at an exercise price of $7.50 per share.
● The Company entered into an engagement letter (the “August 2018 Engagement Letter”) with Wainwright on August 15,
2018, pursuant to which Wainwright agreed to serve as (i) exclusive placement agent or underwriter for any offering in the
United States of the securities of the Company to take place within the following 5 months, and (ii) exclusive agent or advisor
in connection with the solicitation in respect of the Company’s outstanding warrants. The Company agreed to pay Wainwright
a cash fee, or as to an underwritten offering an underwriter discount, equal to a maximum of 8% of the aggregate gross
proceeds raised by the Company from the sale of securities in each offering during the term of the engagement. The Company
also agreed to grant to Wainwright, or its designees, warrants to purchase up to a maximum of 6% of the aggregate number of
shares sold in the offering and issued on each closing. The Engagement Letter provides that such warrants should have
substantially the same terms as the other warrants sold in the offering, except that their exercise price should equal 125% of
the offering price per share. The Engagement Letter has indemnity and other customary provisions for transactions of this
nature. The Company agreed to pay Wainwright a management fee equal to 1% of the gross proceeds raised in the offering, a
reimbursement for non-accountable expenses of $35,000 and for up to $100,000 for fees and expenses of legal counsel and
other out-of-pocket expenses, as well as a reimbursement for up to US$10,000 for the out-of-pocket costs of clearing agent
settlement and financing. In addition, the Company granted Wainwright, for a period of 10 months from the closing of an
offering, a right of first refusal to act as sole book-running manager or sole placement agent for every future public or private
equity or debt offering using a manager or agent by the Company, or any of its successors orsubsidiaries. The Company also
agreed to a tail fee equal to the cash and warrant compensation provided in connection an offering if any investor to which
Wainwright introduced the Company, or that Wainwright contacted, with respect to an offering during the term of the
engagement provides the Company with capital in a public or private offering, or financing or capital raising transaction
during the 12 month period following termination of the Company’s engagement of Wainwright.
● In October 2018, we completed an underwritten public offering in the United States, resulting in the sale to the public of
827,970 units at $0.75 per unit, which were comprised of one common share and one 2018 Unit Warrant exercisable at $0.75
per share. We concurrently sold an additional 1,947,261 common shares and 2018 Option Warrants to purchase 2,608,695
common shares exercisable at $0.75 per share pursuant to the over-allotment option exercised in part by the underwriter. The
price for the common shares issued in connection with exercise of the overallotment option was $0.74 per share and the price
for the warrants issued in connection with the exercise of the overallotment option was $0.01 per warrant, less in each case the
underwriting discount. In addition, we issued 16,563,335 2018 Pre-Funded Units, each 2018 Pre-Funded Unit consisting of one
2018 Pre-Funded Warrant to purchase one common share and one 2018 Warrant to purchase one common share. The 2018 Pre-
Funded Units were offered to the public at $0.74 each, and a 2018 Pre-Funded Warrant is exercisable at $0.01 per share. Each
2018 Firm Warrant is exercisable immediately and has a term of five years and each 2018 Pre-Funded Warrant is exercisable
immediately and until all 2018 Pre-Funded Warrants are exercised. We also issued October 2018 Placement Agent Warrants to
the placement agents to purchase 1,160,314 common shares at an exercise price of $0.9375 per share, which were exercisable
immediately upon issuance. In aggregate, the Company issued 2,775,231 common shares, 16,563,335 2018 Pre-Funded
Warrants and 20,000,000 2018 Firm Warrants in addition to 1,160,314 October 2018 Placement Agent Warrants. During the
year ended November 30, 2018, 12,153,334 2018 Pre-Funded Warrants were exercised for proceeds of $121,553.
106
D. Exchange Controls
Canada has no system of currency exchange controls. There are no governmental laws, decrees or regulations in Canada that
restrict the export or import of capital, including but not limited to, foreign exchange controls, or that affect the remittance of dividends,
interest or other payments to non-resident holders of the Company’s securities.
E. Taxation
United States Taxation
Certain Material United States Federal Income Tax Considerations
The following discussion is a general summary of certain material United States federal income tax considerations applicable to a
U.S. holder arising from and relating to the consequences of the ownership and disposition of our common shares and warrants that are
generally applicable to a United States person that holds our common shares as capital assets (a “U.S. Holder”) within the meaning of
Section 1221 of the Code. This discussion does not address holders of other securities. This discussion assumes that we are not a
“controlled foreign corporation” for U.S. federal income tax purposes. The following discussion does not purport to be a complete analysis
of all of the potential United States federal income tax considerations that may be relevant to particular holders of our common shares or
warrants in light of their particular circumstances nor does it deal with persons that are subject to special tax rules, such as brokers, dealers
in securities or currencies, financial institutions, insurance companies, tax-exempt organizations, persons liable for alternative minimum
tax, U.S. expatriates, partnerships or other pass-through entities, U.S. Holders who own (directly, indirectly or by attribution) ten percent or
more of the total combined voting power of all classes of stock entitled to vote, persons holding our common shares as part of a straddle,
hedge or conversion transaction or as part of a synthetic security or other integrated transaction, traders in securities that elect to use a
mark-to-market method of accounting for their securities holdings, holders whose “functional currency” is not the United States dollar, and
holders who are not U.S. Holders. In addition, the discussion below does not address the tax consequences of the law of any state, locality
or foreign jurisdiction or United States federal tax consequences (e.g., estate or gift tax) other than those pertaining to the income tax.
There can be no assurance that 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.
107
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.
Passive Foreign Investment Company Considerations (PFIC)
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 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 QEF Election or by making a timely and effective mark-to-market election with respect to
our common shares that are owned by such holder.
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 2018 taxable year and are unlikely to be a PFIC during our 2019 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 2019 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 the
composition of our future income and assets and the nature of our future 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. 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. 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.
108
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 us during any year in which we are a
PFIC.
U.S. HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISERS ABOUT THE PFIC RULES, THE POTENTIAL
APPLICABILITY OF THESE RULES TO THE COMPANY CURRENTLY AND IN THE FUTURE, AND THEIR FILING
OBLIGATIONS IF THE COMPANY IS A PFIC.
The “No Election” Alternative – Taxation of Excess Distributions
If we are classified as a PFIC for any year during which a U.S. Holder has held common shares or warrants and, in the case of our
common shares, that U.S. Holder has not made a QEF Election or a mark-to-market election, special rules may subject that U.S. Holder to
increased tax liability, including loss of favorable capital gains rates and the imposition of an interest charge upon the sale or other
disposition of the common shares or warrants or upon the receipt of any excess distribution (as defined below). Under these rules:
● the gain, if any, realized on such disposition will be allocated ratably over the U.S. Holder’s holding period;
● the amount of gain allocated to the current taxable year and any year prior to the first year in which we are a PFIC will be taxed
as ordinary income in the current year;
● the amount of gain allocated to each of the taxable years other than the year in which the excess distribution occurs and pre-
PFIC years will be subject to tax at the highest ordinary income tax rate for corporations or individuals, as the case may be, 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 such
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 with respect to those shares 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 any dividends-received deduction otherwise available to U.S. corporations. Any amounts paid
by a PFIC that are treated as dividends 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.
109
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 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 causes the U.S. Holder making such election to be treated as selling 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 the relevant 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 is considered to be paid out of “earnings and profits” of the Company that were previously
included in income by the U.S. Holder because of such QEF Election and (b) increases the tax basis in his, her or its common shares by the
amount included in income and reduces that tax basis by any amount treated as a tax-free distribution 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 such 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 the subsidiaries with respect to which the election is made. 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
for which we are a PFIC 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.
110
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 or, if such holder has made a purging election, for the first taxable
year of the Company during which it was a PFIC following such purging election.
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. Such U.S. Holder’s basis in its
common shares would be adjusted to reflect any of these income or loss amounts. 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. 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
and, therefore, do not anticipate that a mark-to-market election could be made with respect to such shares.
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 is not classified 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 we and any of our non-U.S.
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 the shares of stock in our non-U.S. subsidiaries
that such holder owns indirectly.
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
111
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 any “dividends received deduction” otherwise available to certain U.S. corporate shareholders. The
dividend rules are complex, and each U.S. Holder should consult its own tax advisor regarding the application of such rules.
Adjustments to Warrants
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 related 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 in our assets or earnings and profits.
Sale or Other Taxable Disposition of Common Shares
Upon the sale, exchange 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 that are not
subject to the PFIC rules discussed above 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. The deductibility of losses may be subject to limitations. As a result of the
complexities in the rules and the uncertainty as to their future application, prospective U.S. Holders should consult their tax advisors.
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
112
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.
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 income taxes paid
(whether directly or through withholding) or accrued by a U.S. Holder during a year.
113
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, due to differences between Canadian and U.S. income tax
rules, 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.
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 24% 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.
114
Canadian Federal Income Tax Considerations
Taxation
The following summary describes the principal Canadian federal income tax considerations generally applicable to a holder of the
Company’s common shares who, for purposes of the Income Tax Act (Canada) (the “ Canadian Tax Act”) and the Canada – United States
Tax Convention (the “ Treaty”) and at all relevant times, is resident in the United States and was not and is not resident in Canada nor
deemed to be resident in Canada, deals at arm’s length and is not affiliated with the Company, holds the Company’s common shares as
capital property, does not use or hold and is not deemed to use or hold the Company’s common shares in or in the course of carrying on
business in Canada and who otherwise qualifies for the full benefit of the Treaty (a “United States Holder”). Special rules which are not
discussed in this summary may apply to a United States Holder that is a financial institution, as defined in the Canadian Tax Act, or an
insurer carrying on business in Canada and elsewhere.
This following summary is based on the current provisions of the Treaty, the Canadian Tax Act and the regulations thereunder, all
specific proposals to amend the Canadian Tax Act and the regulations announced by the Minister of Finance (Canada) prior to the date
hereof and the Company’s understanding of the administrative practices published in writing by the Canada Revenue Agency prior to the
date hereof. This summary does not take into account or anticipate any other changes in the governing law, whether by judicial,
governmental or legislative decision or action, nor does it take into account the tax legislation or considerations of any province, territory or
non-Canadian (including U.S.) jurisdiction, which legislation or considerations may differ significantly from those described herein.
All amounts relevant in computing a United States Holder’s liability under the Canadian Tax Act are to be computed in Canadian
currency based on the relevant exchange rate applicable thereto.
This summary is of a general nature only and is not intended to be, and should not be interpreted as legal or tax advice to any
prospective purchaser or holder of the Company’s common shares and no representation with respect to the Canadian federal income tax
consequences to any such prospective purchaser is made. Accordingly, prospective purchasers and holders of the Company’s common
shares should consult their own tax advisors with respect to their particular circumstances.
Dividends on the Company’s Common Shares
Generally, dividends paid or credited by Canadian corporations to non-resident shareholders are subject to a withholding tax of
25% of the gross amount of such dividends. Pursuant to the Treaty, the withholding tax rate on the gross amount of dividends paid or
credited to United States Holders is reduced to 15% or, in the case of a United States Holder that is a U.S. corporation that beneficially
owns at least 10% of the voting stock of the Canadian corporation paying the dividends, to 5% of the gross amount of such dividends.
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.
115
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.
The value of the Company’s common shares is not now, and is not expected to be in the future, derived more than 50% from any
of these properties. Consequently, any gain realized by a United States Holder upon the disposition of the Company’s common shares
should be exempt from tax under the Canadian Tax Act.
F. Dividends and Paying Agents.
Not Applicable
G. Statement by Experts
Not Applicable
H. Documents on Display
Copies of the documents referred to in this annual report may be inspected, during normal business hours, at the Company’s
headquarters located at 30 Worcester Road, Toronto, Ontario, M9W 5X2, Canada.
We are required to file reports and other information with the SEC under the U.S. Exchange Act. Reports and other information
filed by us with the SEC may be inspected and copied at the SEC’s public reference facilities located at 100 F Street, N.E. in Washington
D.C. The SEC also maintains a website at http://www.sec.gov that contains certain reports and other information that we file electronically
with the SEC. As a foreign private issuer, we are exempt from the rules under the U.S. Exchange Act prescribing the furnishing and content
of proxy statements and our officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery
provisions contained in Section 16 of the U.S. Exchange Act. Under the U.S. Exchange Act, as a foreign private issuer, we are not required
to publish financial statements as frequently or as promptly as United States companies.
We also make our periodic reports, as well as other information filed with or furnished to the SEC, available free of charge
through our website, at www.intellipharmaceutics.com, as soon as reasonably practicable after those reports and other information are
electronically filed with or furnished to the SEC. The information on our website is not incorporated by reference in this report.
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.
116
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 120 days
Past due for more than 120 days
Total accounts receivable, gross
November 30,
2018
$
305,912
(66,849)
239,063
November 30,
2017
$
756,468
(66,849)
689,619
239,063
689,619
-
66,849
305,912
5,176
61,673
756,468
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, 2018 and 2017, two customers accounted for substantially all the revenue and all the accounts receivable of the
Company.
The Company is also exposed to credit risk at period end from the carrying value of its cash. The Company manages this risk by
maintaining bank accounts with a Canadian Chartered Bank. The Company’s cash is not subject to any external restrictions.
Foreign exchange risk
We are exposed to changes in foreign exchange rates between the Canadian and U.S. dollar which could affect the value of our
cash. The Company had no foreign currency hedges or other derivative financial instruments as of November 30, 2018. 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 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 foreign exchange loss while a weakening U.S. dollar will lead to a foreign exchange 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 libilities
Employee cost payable
Net exposure
(1,592,073)
117
November 30, 2018
Canadian
1.3301
$
$
U.S.
November 30, 2017
Canadian
1.2888
$
$
U.S.
740,620
740,620
556,815
556,815
202,277
202,277
156,950
156,950
2,036,795
295,918
2,332,713
1,531,310
222,478
1,753,788
(1,196,973)
1,704,086
277,080
1,981,166
(1,778,889)
1,322,227
214,980
1,537,207
(1,380,257)
Liquidity risk
Liquidity risk is the risk that the Company will encounter difficulty raising liquid funds to meet its 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, 2018:
Less than
3 months
$
3 to 6
months
$
6 to 9
months
$
9 months
to 1 year
$
Greater
than
1 year
$
Total
$
2,643,437
353,147
-
-
-
-
-
-
-
-
2,643,437
353,147
222,478
52,274
3,271,336
-
1,376,805
1,376,805
-
12,603
12,603
-
12,466
12,466
-
537,808
537,808
222,478
1,991,956
5,211,018
Third parties
Accounts payable
Accrued liabilities
Related parties
Employee costs payable
Convertible debentures
Limitations:
The above discussion includes only those exposures that existed as of November 30, 2018, 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.
118
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, 2018.
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. Management has completed the business risk and information technology
components and is working towards completion of controls over financial reporting as well as fraud risk. We currently expect the transition
to this new framework to continue through the second quarter of fiscal year 2019. 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, 2018. 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, 2018.
Changes in Internal Control over Financial Reporting
During the year ended November 30, 2018, 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 SOX Section 404(c).
Attestation of Internal Control over Financial Reporting
119
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 SOX, 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.
See also Item 6.A.
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, 2018, 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, 2018 and 2017 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
C$139,100
C$160,603
C$29,305
-
C$329,008
2018
2017
C$129,342
C$210,791
-
-
C$340,133
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 reviews 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.
120
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, 2018 and 2017, 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 for reporting purposes under the U.S. Exchange Act. Our common shares are
currently listed on 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 Nasdaq 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 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.
121
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.
122
Item 18. Financial Statements.
Consolidated financial statements of
Intellipharmaceutics
International Inc.
November 30, 2018, 2017 and 2016
Intellipharmaceutics International Inc.
November 30, 2018, 2017 and 2016
Table of contents
Report of Independent Registered Public Accounting Firm
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
7-36
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Intellipharmaceutics International Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated financial statements of Intellipharmaceutics International Inc. and its subsidiaries (the
“Company”), which comprise the consolidated balance sheets as at November 30, 2018 and 2017, and the consolidated statements of
operations and comprehensive loss, shareholders’ equity (deficiency) and cash flows for each of the three years in the period ended
November 30, 2018, and the related notes, comprising a summary of significant accounting policies and other explanatory information
(collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all
material respects, the consolidated financial position of the Company as at November 30, 2018 and 2017, and its consolidated results of
operations and its consolidated cash flows for each of the three years in the period ended November 30, 2018, in conformity with
accounting principles generally accepted in the United States of America (US GAAP).
Material Uncertainty Related to Going Concern
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.
Basis for Opinion
Management’s Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in conformity with US
GAAP, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements
that are free from material misstatement, whether due to error or fraud.
Auditor’s Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in
accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board
(United States) (“PCAOB”). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free from material misstatement, whether due to error or fraud. Those standards also require that we
comply with ethical requirements, including independence. We are required to be independent with respect to the Company in accordance
with the ethical requirements that are relevant to our audits of the consolidated financial statements in Canada, the U.S. federal securities
laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We are a public accounting firm
registered with the PCAOB.
An audit includes performing procedures to assess the risks of material misstatements of the consolidated financial statements, whether due
to error or fraud, and performing procedures to respond to those risks. Such procedures include obtaining and examining, on a test basis,
audit evidence regarding the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our
judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to error or
fraud. In making those risk assessments, we consider internal control relevant to the entity’s preparation and fair presentation of the
consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the entity’s internal control. The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting. Accordingly, we express no such opinion.
An audit also includes evaluating the appropriateness of accounting policies and principles used and the reasonableness of accounting
estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a reasonable basis for our audit
opinion.
Toronto, Canada
February 22, 2019
We have served as the Company’s auditor since 2016.
/s/ MNP LLP
Chartered Professional Accountants
Licensed Public Accountants
Intellipharmaceutics International Inc.
Consolidated balance sheets
As at November 30, 2018 and 2017
(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)
Convertible debentures (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
18,252,243 common shares
(November 30, 2017 - 3,470,451)
Additional paid-in capital
Accumulated other comprehensive income
Accumulated deficit
Contingencies (Note 16)
2018
$
2017
$
6,641,877
239,063
998,849
586,794
251,651
8,718,234
1,897,061
689,619
636,489
225,092
115,667
3,563,928
-
2,755,993
11,474,227
565,302
3,267,551
7,396,781
2,643,437
353,147
222,478
1,790,358
300,000
5,309,420
2,060,084
782,369
214,980
1,290,465
300,000
4,647,898
2,062,500
7,371,920
2,362,500
7,010,398
44,327,952
35,290,034
45,110,873
284,421
36,685,387
284,421
(85,620,939) (71,873,459)
386,383
4,102,307
On behalf of the Board:
/s/ Dr. Isa Odidi
Dr. Isa Odidi, Chairman of the Board
See accompanying notes to consolidated financial statements
/s/ Bahadur Madhani
Bahadur Madhani, Director
11,474,227
7,396,781
Page 3
Intellipharmaceutics International Inc.
Consolidated statements of operations and comprehensive loss
for the years ended November 30, 2018, 2017 and 2016
(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)
Net loss and comprehensive loss
2018
$
2017
$
2016
$
1,370,607
342,124
1,712,731
5,025,350
479,102
5,504,452
2,209,502
37,500
2,247,002
124,870
1,587,861
704,006
4,800,446
-
2,247,002
10,827,293
3,476,450
610,384
14,914,127
9,271,353
3,287,914
506,961
13,066,228
8,166,736
3,546,132
385,210
12,098,078
(13,326,266) (8,265,782) (9,851,076)
8,592
227
(255,231)
(174,802)
(22,470)
207
(270,238)
-
(13,747,480) (8,857,440) (10,143,577)
(80,093)
15,037
(389,239)
(137,363)
Loss per common share, basic and diluted
(2.89)
(2.86)
(3.80)
Weighted average number of common
shares outstanding, basic and diluted
See accompanying notes to consolidated financial statements
4,762,274
3,101,448
2,669,958
Page 4
Intellipharmaceutics International Inc.
Consolidated statements of shareholders' equity (deficiency)
for the years ended November 30, 2018, 2017 and 2016
(Stated in U.S. dollars)
Additional
Accumulated
other
Total
shareholders'
Capital
stock
Number amount
$
paid-in comprehensive
capital
$
income
$
Accumulated
equity
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 2013 Debenture (Note 7)
Net loss
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 2013 Debenture (Note 7)
Net loss
Balance, November 30, 2017
DSU's to non-management board members (Note 12)
Stock options to employees (Note 11)
Proceeds from issuance of shares and warrants (Note 10
& 14)
Proceeds from exercise of Pre-Funded Warrants (Note
14)
Shares to be issued from exercise of Pre-Funded
Warrants (Note 10 & 14)
Cost of warrants issued to placement agent (Note 14)
Share issuance cost (Note 10)
Beneficial conversion feature related to 2018 Debenture
(Note 7)
Net loss
Rounding of fractional shares after consolidation (Note
2)
Balance, November 30, 2018
2,424,405
-
-
2,750
147,126
21,481,242
-
-
87,259
3,469,449
30,969,093
31,628
2,261,444
(34,391)
-
368,927
-
35,791
-
-
2,978,999
-
-
200
110,815
363,636
-
-
16,801
-
-
3,470,451
-
-
1,175,190
4,764,777
(1,002,655)
1,030,719
-
-
29,830,791
-
-
1,100
2,541,640
(158,736)
(330,066)
102,909
-
34,017,071
30,355
1,749,999
642
-
3,257,445
(86,196)
(685,319)
430,573
-
-
35,290,034
-
-
742,555
86,196
(108,912)
(106,315)
273,796
-
36,685,387
7,565
927,686
3,658,564
5,993,472
13,651,434
11,123,334
4,012,528
(3,901,275)
-
-
-
-
-
371,551
(602,981)
(736,652) (2,568,321)
(361,251)
602,981
-
-
66,667
-
284,421
-
-
-
-
-
-
-
-
-
284,421
-
-
-
-
-
-
-
-
-
-
284,421
-
-
-
-
-
-
-
-
18,252,243
(106)
-
44,327,952
See accompanying notes to consolidated financial statements
deficit (deficiency)
$
$
(52,872,442)
-
-
-
-
-
-
-
-
(10,143,577)
(63,016,019)
-
-
-
-
-
-
-
-
-
(8,857,440)
(71,873,459)
-
-
-
-
-
-
(137,686)
31,628
2,261,444
52,868
3,469,449
5,939,967
(1,161,391)
700,653
102,909
(10,143,577)
1,116,264
30,355
1,749,999
1,742
2,541,640
4,000,000
-
(794,231)
324,258
273,796
(8,857,440)
386,383
7,565
927,686
19,644,906
111,253
10,300
-
(3,304,973)
-
(13,747,480)
66,667
(13,747,480)
-
45,110,873
-
284,421
-
(85,620,939)
-
4,102,307
Page 5
Intellipharmaceutics International Inc.
Consolidated statements of cash flows
for the years ended November 30, 2018, 2017 and 2016
(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)
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 2013 Debenture (Note 7)
2018 Debenture financing (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)
Proceeds from shares to be issued from exercise of Pre-Funded Warrants (Note 14)
Offering costs
2018
$
2017
$
2016
$
(13,747,480) (8,857,440) (10,143,577)
612,736
927,686
7,565
66,560
174,802
-
52,613
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
450,556
(362,360)
(361,702)
(135,984)
106,048
(300,000)
6,200
(283,994)
(223,115)
44,647
(171,417)
175,550
-
(115,667)
599,220
(1,466,019)
(450,000) 2,962,500
(12,508,960) (6,105,785) (6,254,985)
-
500,000
(150,000)
-
-
-
-
-
-
19,644,906
111,253
10,300
(14,829)
1,742
2,541,640
4,000,000
324,258
-
(2,911,505) (1,020,643)
(21,291)
52,868
3,469,449
5,939,967
700,653
-
(982,023)
9,159,623
Cash flows provided from financing activities
17,354,954
5,682,168
Investing activity
Purchase of property and equipment (Note 5)
Cash flows used in investing activities
Increase (decrease) in cash
Cash, beginning of year
Cash, end of year
Supplemental cash flow information
Interest paid
Taxes paid
See accompanying notes to consolidated financial statements
(101,178) (1,823,746)
(101,178) (1,823,746)
(515,410)
(515,410)
4,744,816
1,897,061
6,641,877
(2,247,363) 2,389,228
1,755,196
4,144,424
4,144,424
1,897,061
209,675
-
123,204
-
165,585
-
Page 6
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2018, 2017 and 2016
(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 (“TSX”) and the Nasdaq
Capital Market (“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. 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. In November 2018, the FDA granted the Company final approval for its venlafaxine hydrochloride
extended-release capsules in the 37.5, 75, and 150 mg strengths.
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 $13,747,480 for the year ended November 30, 2018 (2017 - $8,857,440; 2016 - $10,143,577),
and has an accumulated deficit of $85,620,939 as at November 30, 2018 (November 30, 2017 - $71,873,459). The Company has a
working capital of $3,408,814 as at November 30, 2018 (November 30, 2017 – working capital deficiency of $1,083,970). 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 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.
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
Page 7
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2018, 2017 and 2016
(Stated in U.S. dollars)
1.
Nature of operations (continued)
Going concern (continued)
holders will likely experience dilution, and the incurring of indebtedness would result in increased debt service obligations and
could require the Company to agree to operating and financial covenants that would restrict its operations. Any failure on its part to
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.
References in these consolidated financial statements to share amounts, per share data, share prices, exercise prices and
conversion rates have been adjusted to reflect the effect of the 1-for-10 reverse split which became effective on each of
Nasdaq and TSX at the opening of the market on September 14, 2018.
In September 2018, the Company announced a one-for-ten share consolidation (the “reverse split”). At a special meeting of
the Company’s shareholders held on August 15, 2018, the Company’s shareholders granted the Company’s Board of
Directors discretionary authority to implement a consolidation of the issued and outstanding common shares of the Company
on the basis of a consolidation ratio within a range from five (5) pre-consolidation common shares for one (1) post-
consolidation common share to fifteen (15) pre-consolidation common shares for one (1) post-consolidation common share.
The Board of Directors selected a share consolidation ratio of ten (10) pre-consolidation shares for one (1) post-consolidation
common share. On September 12, 2018, the Company filed an amendment to the Company’s articles ("Articles of
Amendment") to implement the one-for-10 reverse split. The Company’s common shares began trading on each of the
Nasdaq and TSX on a post-split basis under the Company’s existing trade symbol "IPCI" at the opening of the market on
September 14, 2018. In accordance with accounting principles generally accepted in the United States of America (“U.S.
GAAP”), the change has been applied retroactively.
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 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.
Page 8
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2018, 2017 and 2016
(Stated in U.S. dollars)
2.
Basis of presentation (continued)
(b)
Use of estimates (continued)
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. 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.
As at November 30, 2018 and 2017, the Company had no cash equivalents.
(b)
Accounts receivable
The Company reviews its sales and accounts receivable aging and determines whether an allowance for doubtful accounts is
required.
(c)
Financial instruments
The Company evaluates all of its financial instruments to determine if such instruments are derivatives or contain features
that qualify as embedded derivatives. For derivative financial instruments that are classified as liabilities, the derivative
instrument is initially recorded at its fair value using the appropriate valuation methodology and is then re-valued at each
reporting date, with changes in the fair value reported in the consolidated statements of operations and comprehensive loss.
(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:
Page 9
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2018, 2017 and 2016
(Stated in U.S. dollars)
3.
Significant accounting policies (continued)
(e)
Property and equipment (continued)
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.
(h)
Convertible debentures
In fiscal 2013, the Company issued an unsecured convertible debenture in the principal amount of $1.5 million (the “2013
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 2013 Debenture less the
initial amount allocated to the embedded derivative were allocated to the liability and were accreted over the life of the 2013
Debenture using the effective 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.
On September 10, 2018, the Company completed a private placement financing of an unsecured convertible debenture in the
principal amount of $0.5 million (the “2018 Debenture”) as described in Note 7. At issuance, the conversion price was lower
than the market share price, and the value of the beneficial conversion feature related to the 2018 Debenture was allocated to
shareholders’ equity.
(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. Revenue is realized or
realizable and earned when
Page 10
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2018, 2017 and 2016
(Stated in U.S. dollars)
3.
Significant accounting policies (continued)
(i)
Revenue recognition (continued)
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, one of which (the Company’s generic Seroquel XR®) received final approval
from the FDA in 2017. 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. Following receipt of final FDA approval for its generic
Seroquel XR®, the Company began shipment of manufactured product to Mallinckrodt.
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
Page 11
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2018, 2017 and 2016
(Stated in U.S. dollars)
3.
Significant accounting policies (continued)
(i)
Revenue recognition (continued)
Milestones (continued)
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, 2018, the Company recognized
$300,000 (2017 - $300,000) 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, 2018, the Company has
recorded a deferred revenue balance of $2,362,500 (November 30, 2017 - $2,662,500) relating to the underlying contracts, of
which $300,000 (November 30, 2017 - $300,000) is considered a current portion of deferred revenue.
(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 materials, 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, 2018, the Company had raw materials inventories of $144,659 (2017 - $115,667), work in process of
$73,927 (2017 - $Nil) and finished goods inventory of $33,065 (2017 - $Nil) 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.
Page 12
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2018, 2017 and 2016
(Stated in U.S. dollars)
3.
Significant accounting policies (continued)
(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, 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 functional and reporting currency of the Company and its subsidiaries is the U.S. dollar.
(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.
Page 13
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2018, 2017 and 2016
(Stated in U.S. dollars)
3.
Significant accounting policies (continued)
(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
22,540,535, 980,791 and 754,027 common shares of the Company during fiscal 2018, 2017, and 2016, respectively, were not
included in the computation of diluted EPS because the Company has incurred a loss for the years ended November 30,
2018, 2017 and 2016 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 (deficiency). 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
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.
Page 14
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2018, 2017 and 2016
(Stated in U.S. dollars)
3.
Significant accounting policies (continued)
(t)
Recently adopted accounting pronouncements
In August 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (“ASU”) No.
2016-15, Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments, which makes
eight targeted changes to how cash receipts and cash payments are presented and classified in the Statement of Cash Flows.
ASU 2016-15 became effective on May 1, 2018. The Company adopted ASU 2016-15 and the amendments did not have any
material impact on the Company’s financial position, results of operations, cash flows or disclosures.
(u)
Future accounting pronouncements
In May 2014, the FASB issued ASU No. 2014-09 (“Topic 606”), 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 anticipates that the adoption of Topic 606 will
not have a material impact on the Company’s financial position, results of operations, and cash flows.
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 anticipates that the adoption of this standard will not have a
material impact on the Company’s financial position, results of operations, and cash flows.
In February 2016, the FASB issued new guidance, ASU No. 2016-02, Leases (Topic 842). The main difference between
current U.S. GAAP and the new guidance is the recognition of lease liabilities based on the present value of remaining lease
payments and corresponding lease assets for operating leases under current U.S. GAAP with limited exception. Additional
qualitative and quantitative disclosures are also required by the new guidance. Topic 842 is effective for annual reporting
periods (including interim reporting periods) beginning after December 15, 2018. Early adoption is permitted. The Company
is in the process of evaluating the amendments to determine if they have a material impact on the Company’s financial
position, results of operations, cash flows or disclosures.
In August 2016, the FASB issued ASU 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
Page 15
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2018, 2017 and 2016
(Stated in U.S. dollars)
3.
Significant accounting policies (continued)
(u)
Future accounting pronouncements (continued)
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
does not expect the adoption of the amendments to 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 on changes to the terms or conditions of a share-based payment award,
which 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 does not expect the adoption of the amendments to 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, 2018, the Company has
an account receivable balance of $305,912 (2017 - $756,468) and an allowance for doubtful accounts of $66,849 (2017 - $66,849).
Risks and uncertainties and credit quality information related to accounts receivable have been disclosed in Note 17.
Page 16
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2018, 2017 and 2016
(Stated in U.S. dollars)
5.
Property and equipment
Computer
equipment
Computer
software
Furniture
and
fixtures
Laboratory
equipment
Leasehold
improvements
Laboratory
equipment
under
capital
Computer
equipment
under
capital
lease
lease
Total
Cost
Balance at November 30, 2016 $
Additions
Balance at November 30, 2017
Additions
Balance at November 30, 2018
$
295,296
235,454
530,750
20,336
551,086
124,151
31,908
156,059
-
156,059
$
129,860
42,638
172,498
$ 3,933,693
1,353,110
5,286,803
$ 1,205,811
235,641
1,441,452
$
-
172,498
80,842
5,367,645
-
1,441,452
$
276,300
-
276,300
-
276,300
76,458
-
76,458
$ 6,041,569
1,898,751
7,940,320
-
76,458
101,178
8,041,498
Accumulated depreciation
Balance at November 30, 2016
Depreciation
Balance at November 30, 2017
Depreciation
Balance at November 30, 2018
238,672
47,811
286,483
77,179
363,662
117,506
13,622
131,128
12,465
143,593
109,243
10,747
119,990
2,290,074
379,158
2,669,232
1,143,792
49,154
1,192,946
10,501
130,491
413,576
3,082,808
82,835
1,275,781
179,422
19,376
198,798
15,500
214,298
73,222
970
74,192
4,151,931
520,838
4,672,769
680
74,872
612,736
5,285,505
Net book value at:
November 30, 2017
$
Balance at November 30, 2018 $
244,267
187,424
$
$
24,931
12,466
$
$
52,508
42,007
$ 2,617,571
$ 2,284,837
$
$
248,506
165,671
$
$
77,502
62,002
$
$
2,266
1,586
$ 3,267,551
$ 2,755,993
As at November 30, 2018, there was $595,589 (November 30, 2017 - $728,309; November 30, 2016 - $266,963) of laboratory
equipment that was not available for use and therefore, no depreciation has been recorded for such laboratory equipment.
As at November 30, 2018, there was $Nil (November 30, 2017 - $75,005) unpaid balance for purchased equipment. During the
year ended November 30, 2018, the Company recorded depreciation expense within cost of goods sold of $2,352 (November 30,
2017 - $13,877; November 30, 2016 - $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, 2018,
the Company recorded a $Nil write-down of long-lived assets (2017 - $Nil; 2016 – $Nil).
Page 17
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2018, 2017 and 2016
(Stated in U.S. dollars)
6.
Accrued liabilities
Professional fees
Property taxes
Interest
Other
7.
Due to related parties
Convertible debentures
November
30,
2018
$
November
30,
2017
$
229,170
-
17,413
106,564
353,147
400,796
111,970
54,110
215,493
782,369
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 (“2013 Debenture”)
Convertible debenture payable to two directors and officers of the Company, unsecured, 10%
annual interest rate, Payable monthly (“2018 Debenture”)
November
30,
2018
November
30,
2017
$ 1,350,000
$ 1,290,465
$
440,358
$ 1,790,358
-
$ 1,290,465
On January 10, 2013, the Company completed a private placement financing of the unsecured convertible 2013 Debenture (as
defined above) in the original principal amount of $1.5 million, which had an original maturity date of January 1, 2015. The 2013
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 $30.00 per common share at the option of the holder.
Dr. Isa Odidi and Dr. Amina Odidi, shareholders, directors and executive officers of the Company purchased the 2013 Debenture
and provided the Company with the $1.5 million of the proceeds for the 2013 Debenture.
Effective October 1, 2014, the maturity date of the 2013 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 2013 Debenture using a 15% effective rate of interest.
Effective June 29, 2015, the July 1, 2015 maturity date for the 2013 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 2013 Debenture as the
change in the fair value of the embedded conversion option was greater than 10% of the carrying amount of the 2013 Debenture. In
accordance with ASC 470-50-40, the 2013 Debenture was recorded at fair value. The difference between the fair value of the
convertible 2013 Debenture after the extension and the net carrying value of the 2013 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 2013 Debenture over the remaining life of the 2013 Debenture using a 14.6% effective rate of
interest.
Page 18
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2018, 2017 and 2016
(Stated in U.S. dollars)
7.
Due to related parties (continued)
Convertible debentures (continued)
Effective December 8, 2015, the January 1, 2016 maturity date of the 2013 Debenture was extended to July 1, 2016. Under ASC
470-50, the change in the debt instrument was accounted for as a modification of debt.
The increase in the fair value of the conversion option at the date of the modification, in the amount of $83,101, was recorded as a
reduction in the carrying value of the debt instrument with a corresponding increase to Additional paid-in-capital. The carrying
amount of the debt instrument is accreted over the remaining life of the 2013 Debenture using a 6.6% effective rate of interest.
Effective May 26, 2016, the July 1, 2016 maturity date of the 2013 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 2013 Debenture using a 4.2% effective rate of interest.
Effective December 1, 2016, the maturity date of the 2013 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 2013 Debenture using a 26.3%
effective rate of interest.
Effective March 28, 2017, the maturity date of the 2013 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 2013 Debenture using a 15.2% effective rate of interest.
Effective September 28, 2017, the maturity date of the 2013 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 2013 Debenture using a 4.9% effective rate of interest.
Effective October 1, 2018, the maturity date for the 2013 Debenture was extended to April 1, 2019. Under ASC 470-50, the change
in the debt instrument was accounted for as a modification of debt. There was no change in the fair value of the conversion option
at the date of the modification. The carrying amount of the debt instrument is accreted over the remaining life of the 2013
Debenture using a nominal effective rate of interest.
On September 10, 2018, the Company completed a private placement financing of the unsecured convertible 2018 Debenture (as
defined above) in the principal amount of $0.5 million. The 2018 Debenture will mature on September 1, 2020. The 2018
Debenture bears interest at a rate of 10% 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 of the Company at a conversion price of $3.00 per common share at the option of the
holder. Dr. Isa Odidi and Dr. Amina Odidi, who are shareholders, directors and executive officers of the Company provided the
Company with the $0.5 million of the proceeds for the 2018 Debenture.
At issuance, as the conversion price was lower than the market share price, the beneficial conversion feature valued at September
10, 2018 of $66,667 was allocated to Additional paid-in capital. The fair value of the 2018 Debenture will subsequently be accreted
over the remaining life of the 2018 Debenture using an effective rate of interest of 7.3%.
Page 19
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2018, 2017 and 2016
(Stated in U.S. dollars)
7.
Due to related parties (continued)
Convertible debentures (continued)
Accreted interest expense during the year ended November 30, 2018 is $66,560 (2017 - $219,497; 2016 - $79,245), and has been
included in the consolidated statements of operations and comprehensive loss.
In addition, the coupon interest on the convertible debentures for the year ended November 30, 2018 is $172,977 (2017 - $162,530;
2016 - $180,370), and has also been included in the consolidated statements of operations and comprehensive loss.
8.
Employee costs payable
As at November 30, 2018, the Company had $222,478 (2017 - $214,980) accrued vacation payable to certain employees. This
balance is 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. Future minimum lease payments under leases with terms of one year or more are as follows at November 30, 2018:
Year ending November 30,
2019
2020
10.
Capital stock
Authorized, issued and outstanding
Operating
Lease
$
180,436
180,436
360,872
(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, 2018, the Company had 18,252,243 (November 30, 2017 –
3,470,451; November 30, 2016 – 2,978,999) common shares issued and outstanding and no preference shares issued and
outstanding. As of November 30, 2018, there were 1,030,000 common shares to be issued due to exercise of 2018 Pre-Funded
Warrants (as defined below), which were issued subsequently in December 2018.
Two officers and directors of IPC owned directly and through their family holding company (“Odidi Holdco”) 578,131 (2017
– 578,131) common shares or approximately 3% (2017 – 17%) 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
Page 20
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2018, 2017 and 2016
(Stated in U.S. dollars)
10.
Capital stock (continued)
Authorized, issued and outstanding (continued)
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 originally could from time to time sell up to 530,548 of the Company’s 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 Nasdaq or otherwise. Under the equity distribution
agreement, the Company was able at its discretion, from time to time, offer and sell common shares through Roth or directly
to Roth for resale to the extent permitted under Rule 415 under the Securities Act of 1933, as amended, at such time and at
such price as were acceptable to the Company, from time to time, by means of ordinary brokers’ transactions on Nasdaq or
otherwise at market prices prevailing at the time of sale or as determined by the Company. The Company has paid Roth a
commission, or allowed a discount, of 2.75% of the gross proceeds that the Company received from any sales of common
shares under the equity distribution agreement. The Company also agreed to reimburse Roth for certain expenses relating to
the at-the-market offering program.
During the year ended November 30, 2018, an aggregate of Nil (2017 – 110,815; 2016 – 147,126) common shares were sold
on Nasdaq for gross proceeds of $Nil (2017- $2,541,640; 2016 - $3,469,449), with net proceeds to the Company of $Nil
(2017 - $2,468,474; 2016 - $3,368,674), respectively, under the at-the-market offering program. In March 2018, the
Company terminated its continuous offering under the prospectus supplement dated July 18, 2017 and prospectus dated July
17, 2017 in respect of its at-the-market program.
The underwriting agreement relating to the October 2018 offering described in Note 10 restricts the Company’s ability to use
this equity distribution agreement. It contains a prohibition on the Company: (i) for a period of two years following the date
of the underwriting agreement, from directly or indirectly in any at-the-market or continuous equity transaction, offer to sell,
or otherwise dispose of shares of capital stock of the Company or any securities convertible into or exercisable or
exchangeable for its shares of capital stock or (ii) for a period of five years following the closing, effecting or entering into an
agreement to effect any issuance by the Company of common shares or common shares equivalents involving a certain
variable rate transactions under an at-the-market offering agreement, whereby the Company may issue securities at a future
determined price, except that, on or after the date that is two years after the closing, the Company may enter into an at-the-
market offering agreement.
(c)
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, 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 and to the
at-the-market facility. For the year ended November 30, 2018, costs directly related to the at the-market facility of $Nil
(2017 - $73,166; 2016 - $100,775) were recorded in share offering costs and $337,887 (2017 - $220,573; 2016 - $258,287) 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, 2018, the Company recorded $174,802 as a financing cost in the statements of
operations and comprehensive loss related to the at-the-market offering program filed in November 2013.
(d)
In June 2016, the Company completed an underwritten public offering of 322,981 units of common shares and warrants, at a
price of $16.10 per unit, as further described in Note 14. The warrants are
Page 21
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2018, 2017 and 2016
(Stated in U.S. dollars)
10.
Capital stock (continued)
Authorized, issued and outstanding (continued)
currently exercisable, have a term of five years and an exercise price of $19.30 per common share. The Company issued at
the initial closing of the offering an aggregate of 322,981 common shares and warrants to purchase an additional 161,490
common shares. The underwriter also purchased at such closing additional warrants at a purchase price of $0.01 per warrant
to acquire 24,223 common shares pursuant to the over-allotment option exercised in part by the underwriter. The Company
subsequently sold an aggregate of 45,946 additional common shares at the public offering price of $16.10 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. 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 these units of common shares and warrants 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.
In October 2017, the Company completed a registered direct offering of 363,636 common shares at a price of $11.00 per
share. The Company also issued to the investors warrants to purchase an aggregate of 181,818 common shares (the “October
2017 Warrants”). The warrants became exercisable six months following the closing date, will expire 30 months after the
date they became exercisable, have a term of three years and have an exercise price of $12.50 per common share. The
Company also issued to the placement agents warrants to purchase 18,181 common shares at an exercise price of $13.75 per
share (the “October 2017 Placement Agent Warrants”). The holders of October 2017 Warrants and October 2017 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 October 2017 Warrants and the October 2017 Placement Agent 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.
The Company recorded $3,257,445 as the value of common shares under Capital stock and $742,555 as the value of the
October 2017 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, October 2017 Warrants and October 2017 Placement Agent
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.
In March 2018, the Company completed two registered direct offerings of an aggregate of 883,333 common shares at a price
of $6.00 per share. The Company also issued to the investors warrants to purchase an aggregate of 441,666 common shares
(the “March 2018 Warrants”). The warrants became exercisable six months following the closing date, will expire 30 months
after the date they became exercisable, and have an exercise price of $6.00 per common share. The Company also issued to
the placement agents warrants to purchase 44,166 common shares at an exercise price of $7.50 per share (the “March 2018
Placement Agent Warrants”). The holders of March 2018 Warrants and March 2018 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 March 2018 Warrants and March 2018 Placement Agent Warrants are
(e)
(f)
Page 22
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2018, 2017 and 2016
(Stated in U.S. dollars)
10.
Capital stock (continued)
Authorized, issued and outstanding (continued)
considered to be indexed to the Company’s own stock and are therefore classified as equity under ASC topic 480
Distinguishing Liabilities from Equity.
The Company recorded $4,184,520 as the value of common shares under Capital stock and $1,115,480 as the value of the
March 2018 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 $831,357 including the cost of warrants
issued to the placement agents. These direct costs were recorded as an offset against the statement of shareholders’ equity
(deficiency) with $656,383 being recorded under Capital stock and $174,974 being recorded under Additional paid-in-capital.
(g)
In October 2018, the Company completed an underwritten public offering in the United States, resulting in the sale to the
public of 827,970 Units at $0.75 per Unit, which are comprised of one common share and one warrant (the “2018 Unit
Warrants”) exercisable at $0.75 per share. The Company concurrently sold an additional 1,947,261 common shares and
warrants to purchase 2,608,695 common shares exercisable at $0.75 per share (the “2018 Option Warrants’) pursuant to the
over-allotment option exercised in part by the underwriter. The price of the common shares issued in connection with
exercise of the over-allotment option was $0.74 per share and the price for the warrants issued in connection with the exercise
of the over-allotment option was $0.01 per warrant, less in each case the underwriting discount. In addition, the Company
issued 16,563,335 pre-funded units (“2018 Pre-Funded Units’), each 2018 Pre-Funded Unit comprising of one pre-funded
warrant (a “2018 Pre-Funded Warrant”) to purchase one common share and one warrant (a “2018 Warrant”, and together with
the 2018 Unit Warrants and the 2018 Option Warrants, the “2018 Firm Warrants”) to purchase one common share. The 2018
Pre-Funded Units were offered to the public at $0.74 each and a 2018 Pre-Funded Warrant is exercisable at $0.01 per share.
Each 2018 Firm Warrant is exercisable immediately and has a term of five years and each 2018 Pre-Funded Warrant is
exercisable immediately and until all 2018 Pre-Funded Warrants are exercised. The Company also issued warrants to the
placement agents to purchase 1,160,314 common shares at an exercise price of $0.9375 per share (the “October 2018
Placement Agent Warrants”), which were exercisable immediately upon issuance. In aggregate, the Company issued
2,775,231 common shares, 16,563,335 2018 Pre-Funded Warrants and 20,000,000 2018 Firm Warrants in addition to
1,160,314 October 2018 Placement Agent Warrants.
The Company raised $14,344,906 in gross proceeds as part of October 2018 underwritten public offering. The Company
recorded $1,808,952 as the value of common shares under Capital stock and $279,086 as the value of the 2018 Firm
Warrants and $12,256,868 as the value of the 2018 Pre-Funded Warrants under Additional paid-in-capital in the consolidated
statements of shareholders’ equity (deficiency). During the year ended November 30, 2018, 12,153,334 2018 Pre-Funded
Warrants were exercised for proceeds of $121,553, and the Company recorded a charge of $4,262,526 from Additional paid
in capital to common shares under Capital stock. The Company has disclosed the terms used to value these warrants in Note
14.
As of November 30, 2018, there were 1,030,000 common shares to be issued due to exercise of 2018 Pre-Funded Warrants;
no other October 2018 Warrants had been exercised.
The direct costs related to the issuance of the common shares and warrants issued in October 2018 were $2,738,710 including
the cost of October 2018 Placement Agent Warrants in the amount of $461,697. These direct costs were recorded as an offset
against the statement of shareholders’ equity (deficiency) with $345,363 being recorded under Capital stock and $2,393,347
being recorded under Additional paid-in-capital.
Page 23
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2018, 2017 and 2016
(Stated in U.S. dollars)
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 1,825,224 based on the number of issued and
outstanding common shares as at November 30, 2018. As at November 30, 2018, 279,257 options are outstanding and there were
1,545,967 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 TSX 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 276,394 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 276,394 performance-based stock options have vested as of November 30, 2018. 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.
Effective May 15, 2018, the Company’s shareholders approved a further two year extension of the performance-based stock option
expiry date to September 2020. As a result of the modification of the performance-based stock option expiry date, the Company
recorded additional compensation costs of $45,793 related to vested performance options during the year ended November 30,
2018. These options were outstanding as at November 30, 2018.
In the year ended November 30, 2018, Nil (2017 – 37,600; 2016 - 35,500) stock options were granted to management and other
employees and Nil (2017 – 12,000; 2016 - 10,500) 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 nine years. For options that
have an expected life of less than nine years the Company uses its own volatility. The expected term, which represents the period of
time that options granted are expected to be outstanding, is estimated based on the historical average of the term and historical
exercises of the options. The risk-free rate assumed in valuing the options is based on the U.S. treasury yield curve in effect at the
time of grant for the expected term of the option. The expected dividend yield percentage at the date of grant is Nil as the Company
is not expected to pay dividends in the foreseeable future. The weighted average fair value of employee stock options granted was
estimated using the following assumptions:
Volatility
Risk-free interest rate
Expected life (in years)
Dividend yield
The weighted average grant date
fair value of options granted
November
30,
2018
November
30,
2017
November
30,
2016
-
-
-
-
71.7%
1.56%
5.49
-
65.2%
0.620%
5.00
-
-
$
7.50
$
12.00
Page 24
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2018, 2017 and 2016
(Stated in U.S. dollars)
11.
Options (continued)
Details of stock option transactions in Canadian dollars (“C$”) are as follows:
November 30, 2018
Weighted
average Weighted
exercise average
November 30, 2017
Weighted
average Weighted
exercise average
November 30, 2016
Weighted
average Weighted
exercise average
Number
of
price per
options
share
$
32.00
-
-
20.36
291.07
582,811
-
-
(25,533)
(1,627)
Outstanding,
beginning of year
Granted
Exercised
Forfeiture
Expired
Balance,
Number
of
price per
options
share
grant
date
fair
value
$
17.20
-
-
14.19
228.92
539,246
49,600
(200)
-
(5,835)
$
34.80
11.70
23.20
-
126.40
grant
date
fair
value
$
Number
of
price per
options
share
$
grant
date
fair
value
$
18.80
7.50
12.00
-
96.00
506,200
46,000
(2,750)
-
(10,204)
38.90
24.20
25.70
-
192.40
22.10
12.00
16.80
-
132.90
end of year
555,651
31.75
16.69
582,811
32.00
17.20
539,246
34.80
18.80
Options
exercisable,
end of year
544,619
32.16
16.91
522,106
33.00
17.90
439,661
34.90
19.60
As of November 30, 2018, the exercise prices, weighted average remaining contractual life of outstanding options and weighted
average grant date fair values were as follows:
Options outstanding
Weighted
average
remaining
contract
share life (years)
Weighted
average
exercise
price per
Number
outstanding
Weighted
average
grant
date
Number
fair value exercisable
Options exercisable
Weighted
average
exercise
price per
share
$
Weighted
average
grant
date
fair value
$
$
17.99
35.11
31.75
109,067
446,584
555,651
$
9.75
29.25
2.66
1.98
98,035
446,584
544,619
14.14
35.11
32.16
10.15
29.25
Exercise
price
$
Under
25
26.00 - 50.00
Total unrecognized compensation cost relating to the unvested performance-based stock options at November 30, 2018 is
approximately $Nil (2017 - $788,887; 2016 - $2,366,659). During the year ended November 30, 2018, specific performance
conditions were met as the FDA approved one ANDA for certain drugs, resulting in the vesting of 27,640 performance-based stock
options. As a result, a stock-based compensation expense of $793,795 relating to these stock options was recognized in research and
development expense (2017 - $1,577,772; 2016 - $620,632).
Page 25
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2018, 2017 and 2016
(Stated in U.S. dollars)
11.
Options (continued)
For the year ended November 30, 2018, no options were exercised. For the year ended November 30, 2017, 200 options were
exercised for cash consideration of $1,742. For the year ended November 30, 2016, 2,750 options were exercised for a cash
consideration of $52,868.
The following table summarizes the components of stock-based compensation expense.
Research and development
Selling, general and administrative
883,064
44,622
927,686
1,654,051
95,948
1,749,999
November
30,
2018
$
November
30,
2017
$
November
30,
2016
$
1,995,805
265,639
2,261,444
The Company has estimated its stock option forfeitures to be approximately 4% at November 30, 2018 (2017 – 4%; 2016 – 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 11,000 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 TSX.
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 years ended November 30, 2018 and 2017, 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, 2018, 10,279 (2017 – 9,413) DSUs are outstanding and 721
(2017 – 1,587) 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, 2018, 2017 and 2016 in Additional paid in capital and accrued the following
amounts as at November 30, 2018, 2017 and 2016:
November 30,
2018
$
shares
November 30,
2017
$
shares
November 30,
2016
$
shares
Additional paid in capital
Accrued liability
7,565
-
866
-
30,355
7,562
1,738
866
31,628
7,261
1,674
235
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 33,000 common shares for issuance under the plan. The RSU Plan will form part of the
incentive compensation arrangements available to officers and employees of the Company and its designated affiliates. An RSU is a
unit equivalent in value to one common share of the Company. Upon vesting of the RSUs and the corresponding issuance of
common shares to the participant, or on the forfeiture and cancellation of the RSUs, the RSUs credited to the participant’s account
will be cancelled. No RSUs have been issued under the plan.
Page 26
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2018, 2017 and 2016
(Stated in U.S. dollars)
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 181,500 units at a price of $17.20 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 $21.00 per share (the “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. As at
November 30, 2018, no March 2013 Warrants are outstanding.
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 150,000 units at a price of $20.50 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
$25.50 per share (the “July 2013 Warrants”). As at November 30, 2018, no July 2013 Warrants are outstanding.
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 322,981 common shares and warrants to purchase an additional 161,490 common shares, at a price of $16.10 per unit. The
warrants are currently exercisable, have a term of five years and an exercise price of $19.30 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 $0.01 per warrant to acquire 24,223 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.
The June 2016 Warrants currently outstanding are detailed below.
In the registered direct 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 363,636 common
shares at a price of $11.00 per share and warrants to purchase an additional 181,818 common shares. The October 2017 Warrants
became exercisable six months following the closing date, will expire 30 months after the date they became exercisable, and have
an exercise price of $12.50 per common share. The Company also issued the October 2017 Placement Agents Warrants to purchase
18,181 common shares at an exercise price of $13.75 per share. The holders of October 2017 Warrants and October 2017 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
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 October 2017 Placement Agents Warrants was 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.
Page 27
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2018, 2017 and 2016
(Stated in U.S. dollars)
14.
Warrants (continued)
The October 2017 Warrants and the October 2017 Placement Agent Warrants currently outstanding are detailed below.
In the two registered direct offerings completed in March 2018, gross proceeds of $5,300,000 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 883,333 common
shares at a price of $6.00 per share and the March 2018 Warrants to purchase an additional 441,666 common shares. The March
2018 Warrants became exercisable six months following the closing date, will expire 30 months after the date they became
exercisable and have an exercise price of $6.00 per common share. The Company also issued the March 2018 Placement Agent
Warrants to purchase 44,166 common shares at an exercise price of $7.50 per share. The holders of March 2018 Warrants and
March 2018 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 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 March 2018 Warrants of $1,115,480 was initially estimated
at closing using the Black- Scholes Option Pricing Model, using volatility of 70%, risk free interest rates of 2.44% and 2.46%,
expected life of 3 years, and dividend yield of Nil.
The fair value of the March 2018 Placement Agent Warrants was estimated at $141,284 using the Black-Scholes Option Pricing
Model, using volatility of 70%, risk free interest rates of 2.44% and 2.46%, an expected life of 3 years, and a dividend yield of Nil.
The March 2018 Warrants and the March 2018 Placement Agent Warrants currently outstanding are detailed below.
In October 2018, the Company completed an underwritten public offering in the United States, resulting in the sale to the public of
827,970 Units at $0.75 per Unit, which are comprised of one common share and one 2018 Unit Warrant (as defined above)
exercisable at $0.75 per share. The Company concurrently sold an additional 1,947,261 common shares and 2,608,695 2018 Option
Warrants exercisable at $0.75 per share pursuant to the over-allotment option exercised in part by the underwriter. The price of the
common shares issued in connection with exercise of the over-allotment option was $0.74 per share and the price for the warrants
issued in connection with the exercise of the over-allotment option was $0.01 per warrant, less in each case the underwriting
discount. In addition, the Company issued 16,563,335 2018 Pre-Funded Units (as defined above), each 2018 Pre-Funded Unit
consisting of one 2018 Pre-Funded Warrant (as defined above) to purchase one common share and one 2018 Warrant (as defined
above) to purchase one common share. The 2018 Pre-Funded Units were offered to the public at $0.74 each and a 2018 Pre-Funded
Warrant is exercisable at $0.01 per share. Each 2018 Firm Warrant is exercisable immediately and has a term of five years and each
2018 Pre-Funded Warrant is exercisable immediately and until all 2018 Pre-Funded Warrants are exercised. The Company also
issued the October 2018 Placement Agent Warrants to the placement agents to purchase 1,160,314 common shares at an exercise
price of $0.9375 per share, which were exercisable immediately upon issuance. In aggregate, in October 2018, the Company issued
2,775,231 common shares, 16,563,335 2018 Pre-Funded Warrants and 20,000,000 2018 Firm Warrants in addition to 1,160,314
October 2018 Placement Agent Warrants.
The fair value of the 2018 Firm Warrants of $279,086 was initially estimated at closing using the Black-Scholes Option Pricing
Model, using volatility of 92%, risk free interest rates of 3.02%, expected life of 5 years, and dividend yield of Nil. The fair value of
the October 2018 Placement Agents Warrants was estimated at $461,697 using the Black-Scholes Option Pricing Model, using
volatility of 92%, risk free interest rates of 3.02%, an expected life of 5 years, and a dividend yield of Nil.
The fair value of the 2018 Pre-Funded Warrant of $12,256,868 and the fair value of the 2018 Firm Warrants of $279,086,
respectively, were recorded under Additional paid-in-capital in the consolidated statements of shareholders’ equity (deficiency).
During the year ended November 30, 2018, 12,153,334 2018 Pre-Funded Warrants were exercised for proceeds of $121,553, and
the Company recorded a charge of $4,262,526 from Additional paid-in-capital to common shares under Capital stock.
As at November 30, 2018, 4,410,001 2018 Pre-Funded Warrants are outstanding which are exercisable immediately at $0.01 per
share. In addition, the following table provides information on the 22,123,623 warrants including 2018 Firm Warrants outstanding
and exercisable as of November 30, 2018:
Page 28
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2018, 2017 and 2016
(Stated in U.S. dollars)
14.
Warrants (continued)
Warrant
June 2016 Warrants
October 2017 Warrants
October 2017 Placement
Agent Warrants
March 2018 Warrants
March 2018 Warrants
March 2018 Placement
Agent Warrants
March 2018 Placement
Agent Warrants
2018 Firm Warrants
2018 Pre-Funded Warrants
October 2018 Placement
Agent Warrants
Exercise
price
Number
outstanding
19.30
12.50
13.750
6.00
6.00
277,478
181,818
18,181
291,666
150,000
Expiry
June 2, 2021
October 13, 2020
October 13, 2020
March 16, 2021
March 21, 2021
7.50
29,166
March 16, 2021
7.50
0.75
0.01
15,000
20,000,000
4,410,001
0.9375
1,160,314
26,533,624
March 21, 2021
October 16, 2023
October 16, 2023
October 16, 2023
$
$
$
$
$
$
$
$
$
$
Shares
issuable
upon
exercise
138,739
181,818
18,181
291,666
150,000
29,166
15,000
20,000,000
4,410,001
1,160,314
26,394,885
During the year ended November 30, 2018, other than Pre-Funded Warrants as noted above, there were no cash exercises in respect
of warrants (2017 – 33,602; 2016 – 83,210) and no cashless exercise (2017 - Nil; 2016 - Nil) of warrants, resulting in the issuance of
Nil (2017 – 16,801; 2016 – 35,791) and Nil (2017 - Nil; 2016 - Nil) common shares, respectively. For the warrants exercised, the
Company recorded a charge to capital stock of $Nil (2017 - $430,573; 2016 - $1,030,719) comprised of proceeds of $Nil (2017 -
$324,258; 2016 - $700,653) and the associated amount of $Nil (2017 - $106,315; 2016 - $330,066) previously recorded in
Additional paid-in-capital.
Page 29
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2018, 2017 and 2016
(Stated in U.S. dollars)
14.
Warrants (continued)
Details of warrant transactions for the years ended November 30, 2018 and 2017 are as follows:
March 2013 Warrants
July 2013 Warrants
June 2016 Warrants
October 2017 Warrants
October 2017 Placement
Agent Warrants
March 2018 Warrants
March 2018 Placement
Agent Warrants
2018 Firm Warrants
2018 Pre-Funded Warrants
October 2018 Placement
Agent Warrants
Outstanding, December 1, 2016
Issued
Exercised
Outstanding, November 30, 2017
Outstanding,
December
1, 2017
149,174
87,000
277,872
181,818
Issued Expired Exercised
-
-
-
-
- (149,174)
(87,000)
-
-
-
-
-
Rounding
on
consolidation
-
-
Outstanding,
November
30, 2018
-
-
(394) 277,478
- 181,818
18,181
-
- 441,666
-
-
-
-
-
18,181
- 441,666
-
44,166
- 20,000,000
- 16,563,335
-
-
-
-
- (12,153,334)
-
44,166
- 20,000,000
- 4,410,001
-
714,045 38,209,481 (236,174) (12,153,334)
- 1,160,314
-
- 1,160,314
(394) 26,533,624
March
2013
Warrants
149,174
-
-
149,174
July 2013
Warrants
June 2016
Warrants
87,000 311,474
October
2017
Warrants
-
- 181,818
-
(33,602)
87,000 277,872 181,818
-
-
October
2017
Placement
Agent
Warrants
Total
- 547,648
18,181 199,999
(33,602)
18,181 714,045
-
Page 30
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2018, 2017 and 2016
(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:
November
30,
2018
%
November
30,
2017
%
November
30,
2016
%
Statutory income tax rate
26.5
26.5
26.5
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
Difference in foreign tax rates
True up of tax returns
Tax loss expired and other
$
$
$
(3,643,080) (2,347,222) (2,688,048)
263,650
4,861,770
(466,052)
(1,049,430)
488,769
2,128,819
-
640,481
2,683,775
-
(281,063)
-
(356,095)
950
-
(269,715)
(651)
-
-
-
290
11,029
21,823
-
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
November
30,
2018
$
November
30,
2017
$
November
30,
2016
$
11,847,710
8,972,285
7,427,516
1,041,360
2,586,070
3,354,760
863,215
2,681,375
2,865,404
3,409,343
-
2,405,365
4,870,130
326,060
1,152,750
-
25,178,840
4,158,178
326,064
436,427
14,135
20,317,083
3,710,274
-
-
-
16,952,498
(25,178,840) (20,317,083) (16,952,498)
-
-
-
Page 31
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2018, 2017 and 2016
(Stated in U.S. dollars)
15.
Income taxes (continued)
At November 30, 2018, 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
2038
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
5,694,760
10,931,052
44,708,338
At November 30, 2018, the Company had a cumulative carry-forward pool of Canadian Federal SR&ED expenditures in the amount
of approximately $18,377,849 (2017 - $15,690,203) which can be carried forward indefinitely.
At November 30, 2018, the Company had approximately $3,483,828 (2017 - $2,976,546) of unclaimed ITCs which expire from
2025 to 2038. 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, 2018 or
November 30, 2017.
The Company files unconsolidated federal income tax returns domestically and in foreign jurisdictions. The Company has open tax
years from 2009 to 2018 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 2018, 2017 and 2016 or any penalties in those
years. The Company had no accrued interest and penalties as of November 30, 2018, 2017 and 2016.
The Company had no unrecognized tax benefits in 2018, 2017 and 2016, and the Company does not expect that the unrecognized
tax benefit will increase within the next twelve months.
16.
Contingencies
From time to time, the Company may be exposed to claims and legal actions in the normal course of business. As at November 30,
2018, and continuing as at February 22, 2019, 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 its 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, the Company had received notice that Purdue Pharma L.P., Purdue Pharmaceuticals L.P.,
The P.F. Laboratories, Inc., or collectively
Page 32
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2018, 2017 and 2016
(Stated in U.S. dollars)
16.
Contingencies (continued)
the Purdue parties, Rhodes Technologies, and Grünenthal GmbH, or collectively the Purdue litigation plaintiffs, had commenced
patent infringement proceedings against the Company in the U.S. District Court for the District of Delaware (docket number 17-
392) in respect of the Company’s NDA filing for Oxycodone ER, alleging that its proposed Oxycodone ER infringes 6 out of the 16
patents associated with the branded product OxyContin®, or the OxyContin® patents, listed in the Orange Book. 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.
Subsequent to the above-noted filing of lawsuit, 4 further such patents were listed and published in the Orange Book. The Company
then similarly certified to the FDA concerning such further patents. On March 16, 2018, the Company received notice that the
Purdue litigation plaintiffs had commenced further such patent infringement proceedings against the Company adding the 4 further
patents. This lawsuit is also in the District of Delaware federal court under docket number 18-404.
As a result of the commencement of the first 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 Purdue
litigation 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.
On or about June 26, 2018 the court issued an order to sever 6 overlapping patents from the second Purdue case, but ordered
litigation to proceed on the 4 new (2017-issued) patents. An answer and counterclaim was filed July 9, 2018. The existence and
publication of additional patents in the Orange Book, and litigation arising therefrom, is an ordinary and to be expected occurrence
in the course of such litigation.
On July 6, 2018 the court issued a so-called “Markman” claim construction ruling on the first case and the October 22, 2018 trial
date remained unchanged. The Company believes that it has non-infringement and/or invalidity defenses to all of the asserted
claims of the subject patents in both of the cases and will vigorously defend against these claims.
On July 24, 2018, the parties to the case mutually agreed to and did have dismissed without prejudice the infringement claims
related to the Grünenthal ‘060 patent. The Grünenthal ‘060 patent is one of the six patents included in the original litigation case,
however, the dismissal does not by itself result in a termination of the 30-month litigation stay.
On October 4, 2018, the parties mutually agreed to postpone the scheduled court date pending a case status conference scheduled
for December 17, 2018. At that time, further trial scheduling and other administrative matters were postponed pending the
Company’s anticipated resubmission of the Oxycodone ER NDA to the FDA, which is due no later than February 28, 2019.
In July 2017, three complaints were filed in the U.S. District Court for the Southern District of New York that were later
consolidated under the caption Shanawaz v. Intellipharmaceutics Int’l Inc., et al., No. 1:17-cv-05761 (S.D.N.Y.). The lead plaintiffs
filed a consolidated amended complaint on January 29, 2018. In the amended complaint, the lead plaintiffs 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.
On March 30, 2018, the Company and the other defendants filed a motion to dismiss the amended complaint for failure to state a
valid claim. The defendants’ motion to dismiss was granted in part, and denied in part, in an Order dated December 17, 2018. In its
Order, the court dismissed certain of the plaintiffs’ securities claims to the extent that the claims were based upon statements
describing the Oxycodone ER product’s abuse-deterrent features and its bioequivalence to OxyContin. However, the court allowed
the claims to
Page 33
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2018, 2017 and 2016
(Stated in U.S. dollars)
16.
Contingencies (continued)
proceed to the extent plaintiffs challenged certain public statements describing the contents of the Company’s Oxycodone ER NDA.
Defendants filed an answer to the amended complaint on January 7, 2019, and discovery is ongoing. The Company and the other
defendants intend to vigorously defend themselves against the remainder of the claims asserted in the consolidated action.
On February 21, 2019, the Company and its CEO, Dr. Isa Odidi, received a Statement of Claim concerning an action against them in
the Superior Court of Justice of Ontario under the caption Victor Romita, plaintiff, and Intellipharmaceutics International Inc and
Isa Odidi, defendants. The action seeks certification as a class action and alleges that certain public statements made by the
Company in the period February 29, 2016 to July 26, 2017 knowingly or negligently contained or omitted material facts concerning
the Company’s NDA for Oxycodone ER abuse-deterrent oxycodone hydrochloride extended release tablets. The plaintiff alleges
that he suffered loss and damages as a result of trading in the Company’s shares on the Toronto Stock Exchange during the above-
noted period. The claim seeks, among other remedies, unspecified damages, legal fees and court and other costs as the court may
permit. At this time, the action has not been certified as a class action. The Company intends to vigorously defend against the claims
asserted in this action.
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:
November 30, 2017
November 30, 2018
Carrying
amount
$
Fair Carrying
amount
value
$
$
Fair
value
$
Financial Liabilities
Convertible debentures(i)
1,790,358
1,795,796
1,290,465
1,316,386
(i)
The Company calculates the interest rate for the convertible debentures and due to related parties based on the
Company’s estimated cost of raising capital and uses the discounted cash flow model to calculate the fair value of the
convertible debentures and the amounts due to related parties.
Page 34
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2018, 2017 and 2016
(Stated in U.S. dollars)
17.
Financial instruments (continued)
(a)
Fair values (continued)
The carrying values of cash, accounts receivable, accounts payable, accrued liabilities and employee cost payable
approximates their fair values because of the short-term nature of these instruments.
(b)
Interest rate and credit risk
Interest rate risk is the risk that the value of a financial instrument might be adversely affected by a change in interest rates.
The Company does not believe that the results of operations or cash flows would be affected to any significant degree by a
sudden change in market interest rates, relative to interest rates on cash and the convertible debenture 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 120 days
Past due for more than 120 days
Total accounts receivable, gross
November
30,
2018
$
November
30,
2017
$
305,912
(66,849)
239,063
756,468
(66,849)
689,619
239,063
689,619
-
66,849
305,912
5,176
61,673
756,468
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, 2018 and 2017, two customers 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.
Page 35
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2018, 2017 and 2016
(Stated in U.S. dollars)
17.
Financial instruments (continued)
(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.
The following are the contractual maturities of the undiscounted cash flows of financial liabilities as at November 30, 2018:
Less
than
3 months
$
3 to 6
months
$
6 to 9
9
months
months to 1 year
$
$
Greater
than
1 year
$
Total
$
Third parties
Accounts payable
Accrued liabilities
Related parties
Employee costs payable
Convertible debentures (Note 7)
18.
Segmented information
2,643,437
353,147
-
-
-
-
-
-
-
-
2,643,437
353,147
222,478
-
52,274 1,376,805 12,603
3,271,336 1,376,805 12,603
-
-
12,466
12,466
-
537,808
537,808
222,478
1,991,956
5,211,018
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
19.
Subsequent event
November
30,
2018
$
November
30,
2017
$
November
30,
2016
$
1,712,731
1,712,731
5,504,452
5,504,452
2,247,002
2,247,002
11,474,227
7,396,781
7,974,689
2,755,993
3,267,551
1,889,638
In December 2018, a principal repayment of $300,000 was made for the 2013 Debenture to Drs. Isa and Amina Odidi.
123
Item 19. Exhibits.
Number
1.1
1.2
1.3
4.1
4.2
4.3
4.51
4.52
4.53
4.54
4.55
4.56(†)
4.57
4.58
4.59
4.60
4.61
EXHIBIT INDEX
Exhibit
Articles of Incorporation of the Company and certain 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)
Articles of Amendment to the Articles of Incorporation of the Company (incorporated herein by reference to
Exhibit 99.1 to the Company's report on Form 6-K for the month of September 2018 as filed on September 13,
2018)
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 276,394 of the Company's shares upon payment of $36.20 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)
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)
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)
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)
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)
124
4.62
4.63
4.64
4.65
4.66(†)
4.67
4.68
4.69
4.70
4.71
4.72
4.73
4.74
4.75
4.76
4.77
4.78
4.79
4.80
4.81
4.82
4.83
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)
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 (incorporated herein by reference to Exhibit 4.79 to the Company's annual report on Form
20-F for the fiscal year ended November 30, 2017 as filed on March 1, 2018)
Extension of Debenture Maturity Date dated as of September 28, 2017 to that certain 12% convertible term
debenture dated January 10, 2013 (incorporated herein by reference to Exhibit 4.80 to the Company's annual
report on Form 20-F for the fiscal year ended November 30, 2017 as filed on March 1, 2018)
Extension of Debenture Maturity Date dated as of October 1, 2018 to that certain 12% convertible term debenture
dated January 10, 2013 (incorporated herein by reference to Exhibit 4.29 to Amendment No. 1 to the Company's
Registration Statement on Form F-1 as filed on October 5, 2018 (Registration No. 333-227448)
Form of Securities Purchase Agreement dated March 13, 2018, by and between Intellipharmaceutics International
Inc. and the purchasers (incorporated herein by reference to Exhibit 99.1 to the Company's report on Form 6-K for
the month of March 2018 as filed on March 16, 2018)
Form of Warrant (incorporated herein by reference to Exhibit 99.2 to the Company's report on Form 6-K for the
month of March 2018 as filed on March 16, 2018)
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 March 2018 as filed on March 16, 2018)
Engagement Letter by and between Intellipharmaceutics, Inc. and H.C. Wainwright & Co., LLC dated March 12,
2018 (incorporated herein by reference to Exhibit 99.4 to the Company's report on Form 6-K for the month of
March 2018 as filed on March 16, 2018)
Form of Securities Purchase Agreement dated March 19, 2018, by and between Intellipharmaceutics International
Inc. and the purchasers (incorporated herein by reference to Exhibit 99.1 to the Company's report on Form 6-K for
the month of March 2018 as filed on March 20, 2018)
Form of Warrant (incorporated herein by reference to Exhibit 99.2 to the Company's report on Form 6-K for the
month of March 2018 as filed on March 20, 2018)
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 March 2018 as filed on March 20, 2018)
Engagement Letter by and between Intellipharmaceutics, Inc. and H.C. Wainwright & Co., LLC dated March 18,
2018 (incorporated herein by reference to Exhibit 99.4 to the Company's report on Form 6-K for the month of
March 2018 as filed on March 20, 2018)
10% convertible term debenture dated September 10, 2018 in principal amount of $500,000 (incorporated herein
by reference to Exhibit 4.25 to the Company's Registration Statement on Form F-1 as filed on September 20, 2018
(Registration No. 333-227448))
Form of Notice to Warrant Holders pursuant to that certain Underwriting Agreement by and between the
Company 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 September 2018 as filed on September 21, 2018)
125
4.84
4.85
4.86
4.87
4.88
4.89
4.90
4.91
4.92
4.93
4.94
8.1(1)
11.1
12.1(1)
12.2(1)
13.1(1)
13.2(1)
15.1(1)
101(1)(2)
(1)
(2)
Form of Notice to Warrant Holders pursuant to that certain Engagement Agreement by and between the Company
and H.C. Wainwright & Co., LLC, dated October 10, 2017 (incorporated herein by reference to Exhibit 99.2 to the
Company's report on Form 6-K for the month of September 2018 as filed on September 21, 2018)
Form of Notice to Warrant Holders pursuant to that certain Securities Purchase Agreement by and among the
Company and the purchasers named therein, dated October 11, 2017 (incorporated herein by reference to Exhibit
99.3 to the Company's report on Form 6-K for the month of September 2018 as filed on September 21, 2018)
Form of Notice to Warrant Holders pursuant to that certain Engagement Letter by and between the Company and
H.C. Wainwright & Co., LLC, dated March 12, 2018 (incorporated herein by reference to Exhibit 99.4 to the
Company's report on Form 6-K for the month of September 2018 as filed on September 21, 2018)
Form of Notice to Warrant Holders pursuant to that certain Securities Purchase Agreement by and among the
Company and the purchasers named therein, dated March 13, 2018 (incorporated herein by reference to Exhibit
99.5 to the Company's report on Form 6-K for the month of September 2018 as filed on September 21, 2018)
Form of Notice to Warrant Holders pursuant to that certain Engagement Letter by and between the Company and
H.C. Wainwright & Co., LLC, dated March 18, 2018 (incorporated herein by reference to Exhibit 99.6 to the
Company's report on Form 6-K for the month of September 2018 as filed on September 21, 2018)
Form of Notice to Warrant Holders pursuant to that certain Securities Purchase Agreement by and among the
Company and the purchasers named therein, dated March 19, 2018 (incorporated herein by reference to Exhibit
99.7 to the Company's report on Form 6-K for the month of September 2018 as filed on September 21, 2018)
Engagement Letter between the Company and H.C. Wainwright & Co., LLC, dated as of August 15, 2018
Underwriting Agreement between Intellipharmaceutics International Inc. and H.C. Wainwright & Co., LLC, dated
October 12, 2018 (incorporated herein by reference to Exhibit 99.1 to the Company's report on Form 6-K for the
month of October 2018 as filed on October 12, 2018)
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 2018 as filed on October 12, 2018)
Form of Pre-Funded Warrant (incorporated herein by reference to Exhibit 99.3 to the Company's report on Form
6-K for the month of October 2018 as filed on October 12, 2018)
Form of Underwriter Warrant (incorporated herein by reference to Exhibit 99.4 to the Company's report on Form
6-K for the month of October 2018 as filed on October 12, 2018)
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)
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, 2018, formatted in
XBRL:
(i) Consolidated balance sheets as at November 30, 2018 and 2017
(ii) Consolidated statements of operations and comprehensive loss for the years ended November 30, 2018, 2017
and 2016
(iii) Consolidated statements of shareholders' equity (deficiency) for the years ended November 30, 2018, 2017
and 2016
(iv) Consolidated statements of cash flows for the years ended November 30, 2018, 2017 and 2016
(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, 2018.
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
U.S. Exchange Act, 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 SEC.
126
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/ Greg Powell
Greg Powell
Chief Financial Officer (Principal Financial Officer)
Intellipharmaceutics International Inc.
February 28, 2019
Exhibit 4.98
August 15, 2018
STRICTLY CONFIDENTIAL
Intellipharmaceutics International Inc.
30 Worcester Road
Toronto, Ontario M9W 5X2
Canada
Attn: Isa Odidi, Ph.D., Chairman & Chief Executive Officer
Dear Dr. Odidi:
This letter agreement (this “Agreement”) constitutes the agreement between Intellipharmaceutics International Inc. (the
“Company”) and H.C. Wainwright & Co., LLC (“Wainwright”), that Wainwright shall, subject to the terms hereof, serve as the exclusive
agent or underwriter in any offering (each a “Financing”) in the United States of securities of the Company (the “ Securities”) during the
Term (as hereinafter defined) of this Agreement and the exclusive agent or advisor with respect to the solicitation with respect to the
Company’s outstanding warrants (each, a “Warrant Solicitation” and collectively with the Financing, an “Offering”). The terms of each
Offering and the Securities issued in connection therewith shall be mutually agreed upon by the Company and Wainwright and nothing
herein implies that Wainwright would have the power or authority to bind the Company and nothing herein implies that the Company shall
have an obligation to issue any Securities. It is understood that Wainwright’s assistance in an Offering will be subject to the satisfactory
completion of such investigation and inquiry into the affairs of the Company as Wainwright deems appropriate under the circumstances
and to the receipt of all internal approvals of Wainwright in connection with the transaction. The Company expressly acknowledges and
agrees that Wainwright’s involvement in an Offering is strictly on a reasonable best efforts basis and that the consummation of an Offering
will be subject to, among other things, market conditions. The execution of this Agreement does not constitute a commitment by
Wainwright to purchase the Securities and does not ensure a successful Offering of the Securities or the success of Wainwright with respect
to securing any other financing on behalf of the Company. Wainwright may retain other brokers, dealers, agents or underwriters on its
behalf in connection with an Offering.
Notwithstanding the foregoing, Wainwright’s exclusivity shall not apply to, and the Company shall not be prohibited from (and
shall not be required to pay any fee to Wainwright or any other broker, dealer, agent or other party engaged by Wainwright) in respect of
(i) the Company’s existing at-the market securities program (as the same may be amended, restated, supplemented, replaced or otherwise
modified from time to time), (ii) the Company incurring any non-convertible indebtedness, (iii) the Company’s outstanding convertible
indebtedness (as the same may be amended, restated, supplemented, replaced, refinanced or otherwise modified from time to time) or (iv)
the Company’s issuing and selling securities in: (a) any strategic transactions (including without limitation commercial relationships,
consulting agreements, licenses, partnerships, joint ventures, collaborations, mergers, acquisitions or other business combinations or
otherwise) the primary purpose of which is not to raise capital and/or (b) any transaction with one or more officers, directors or employees
of the Company and any affiliate thereof without the involvement of any investment bank or other broker-dealer.
430 Park Avenue | New York, New York 10022 | 212.356.0500 | www.hcwco.com
Member: FINRA/SIPC
A. Compensation; Reimbursement. At the closing of each Offering (each a “Closing”), the Company shall compensate
Wainwright as follows:
1. Cash Fee. The Company shall pay to Wainwright a cash fee, or as to an underwritten Offering an underwriter discount, equal
to 8.0% of the aggregate gross proceeds raised in each Closing; provided, however, that such cash fee shall be reduced to
7.0% of the aggregate gross proceeds raised in each Closing of each non-public Offering and Warrant Solicitation
transaction.
2. Warrant Coverage . The Company shall issue to Wainwright or its designees at each Closing, warrants (the “ Wainwright
Warrants”) to purchase that number of common shares of the Company equal to 6.0% of the aggregate number of common
shares (or common share equivalents) placed in the Offering and issued at each Closing (and if the Offering includes a
“greenshoe” or “additional investment” option component, such number of common shares underlying such additional option
component, with the additional Wainwright Warrants to be issuable upon the closing of exercise of such option); provided,
however, that such warrant coverage shall be reduced to 5.0% in connection with each non-public Offering and Warrant
Solicitation transaction. If the Securities included in on Offering are convertible, the Wainwright Warrants shall be
determined by dividing the gross proceeds raised in such Offering divided by the Offering Price (as defined hereunder). The
Wainwright Warrants shall have the same terms as the warrants issued to investors in the applicable Offering, except that
such Wainwright Warrants shall have an initial exercise price equal to 125% of the offering price per share (or unit, if
applicable) in the applicable Offering and if such offering price is not available, the market price of the common shares on the
date an Offering is commenced (such price, the “Offering Price”). If no warrants are issued to investors in an Offering, the
Wainwright Warrants shall be in a customary form reasonably acceptable to Wainwright and the Company, have a term of
five (5) years and an exercise price equal to 125% of the Offering Price.
3. Expense Allowance. Out of the proceeds of each Closing, the Company also agrees to pay Wainwright (a) a management fee
equal to 1.0% of the gross proceeds raised in each Financing; (b) $35,000 for non-accountable expenses of Wainwright in
connection with a Financing (to be reduced to $25,000 in connection with each non-public Offering and Warrant Solicitation
transaction) and (c) up to $100,000 for invoiced fees and expenses of legal counsel and other invoiced out-of-pocket expenses
incurred in a Financing (to be reduced to $40,000 in connection with each non-public Offering and Warrant Solicitation
transaction); plus the additional reimbursable amount payable by the Company pursuant to Paragraph D.3 below; provided,
however, that such reimbursement amount in no way limits or impairs the indemnification and contribution provisions of this
Agreement.
4. Tail Fee. Wainwright shall be entitled to compensation under clauses (1) and (2) hereof, calculated in the manner set forth
therein, with respect to any public or private offering or other financing or capital-raising transaction of any kind (“Tail
Financing”) to the extent that such financing or capital is provided to the Company by investors whom Wainwright had
contacted during the Term or introduced to the Company during the Term, if such Tail Financing is consummated at any time
within the 12-month period following the expiration or termination of this Agreement. Upon the Company’s request,
Wainwright shall promptly provide a list to the Company of any such investors.
2
5. Right of First Refusal. Provided that an Offering has occurred, if within the 10-month period following consummation of an Offering,
the Company or any of its subsidiaries (a) decides to finance or refinance any indebtedness (other than the Company’s outstanding
convertible indebtedness (as the same may be amended, restated, supplemented, replaced, refinanced or otherwise modified from
time to time)), using a manager or agent, Wainwright (or any affiliate designated by Wainwright) shall have the right to act as sole
book-runner, sole manager, sole placement agent or sole agent with respect to such financing or refinancing; or (b) decides to raise
funds by means of a public offering or a private placement of equity or debt securities using an underwriter or placement agent,
Wainwright (or any affiliate designated by Wainwright) shall have the right to act as sole book-runner, sole manager, sole underwriter
or sole placement agent for such financing. If Wainwright or one of its affiliates decides to accept any such engagement, the
agreement governing such engagement will contain, among other things, provisions for customary fees for transactions of similar size
and nature and the provisions of this Agreement, including indemnification, which are appropriate to such a transaction.
Notwithstanding anything to the contrary contained herein, this right of first refusal must be exercised by Wainwright within five (5)
business days of written notice from the Company of its intention to seek a transaction described in (a) or (b) above. Notwithstanding
anything herein to the contrary, this provision shall not apply to the Company’s existing at-the-market program, as amended from
time to time after the date hereof.
B . Term and Termination of Engagement; Exclusivity . The term of Wainwright’s exclusive engagement will begin on the
date hereof and end on the earlier of (i) five (5) months after the date hereof and (ii) consummation of the Financing (the “Term”).
Notwithstanding anything to the contrary contained herein, the Company agrees that the provisions relating to the payment of fees,
reimbursement of expenses, right of first refusal, tail, indemnification and contribution, confidentiality, conflicts, independent contractor
and waiver of the right to trial by jury will survive any termination or expiration of this Agreement. Notwithstanding anything to the
contrary contained herein, the Company has the right to terminate the Agreement for cause in compliance with FINRA Rule 5110(f)(2)
(D)(ii). The exercise of such right of termination for cause eliminates the Company’s obligations with respect to the provisions relating to
the tail fees and right of first refusal. Notwithstanding anything to the contrary contained in this Agreement, in the event that an Offering
pursuant to this Agreement shall not be carried out for any reason whatsoever during the Term, the Company shall be obligated to pay to
Wainwright its actual and accountable out-of-pocket expenses related to an Offering (including the reasonable fees and disbursements of
Wainwright’s legal counsel); provided, however, that such expenses shall not exceed $50,000 in the aggregate. During Wainwright’s
engagement hereunder: (i) the Company will not, and will not permit its representatives to, other than in coordination with Wainwright,
contact or solicit institutions, corporations or other entities or individuals as potential purchasers of the Securities and (ii) the Company
will not pursue any financing transaction which would be in lieu of an Offering. Furthermore, the Company agrees that during
Wainwright’s engagement hereunder, all inquiries, whether direct or indirect, from prospective investors will be referred to Wainwright
and will be deemed to have been contacted by Wainwright in connection with an Offering. Additionally, except as set forth herein, the
Company represents, warrants and covenants that no brokerage or finder’s fees or commissions are or will be payable by the Company or
any subsidiary of the Company to any broker, financial advisor or consultant, finder, placement agent, investment banker, bank or other
third-party with respect to an Offering.
3
C . Information; Reliance. The Company shall furnish, or cause to be furnished, to Wainwright all information reasonably
requested by Wainwright for the purpose of rendering services hereunder and conducting due diligence (all such information being the
“Information”). In addition, the Company agrees to make available to Wainwright upon reasonable request from time to time the officers,
directors, accountants, counsel and other advisors of the Company. The Company recognizes and confirms that Wainwright (a) will use
and rely on the Information, including any documents provided to investors in an Offering (the “Offering Documents” which shall include
any Purchase Agreement (as defined below) and applicable prospectus, and on information available from generally recognized public
sources in performing the services contemplated by this Agreement without having independently verified the same; (b) does not assume
responsibility for the accuracy or completeness of the Offering Documents or the Information and such other information; and (c) will not
make an appraisal of any of the assets or liabilities of the Company. Upon reasonable request, the Company will meet with Wainwright or
its representatives to discuss all information relevant for disclosure in the Offering Documents and will cooperate in any investigation
undertaken by Wainwright thereof, including any document included or incorporated by reference therein. At the Closing, at the request
of Wainwright, the Company shall deliver such legal letters (including negative assurance letters), opinions, comfort letters, officers’ and
secretary certificates and good standing certificates, all in form and substance reasonably satisfactory to Wainwright and its counsel as is
customary for such Offering. Wainwright shall be a third party beneficiary of any representations, warranties, covenants and closing
conditions made by the Company in any Offering Documents, including representations, warranties, covenants and closing conditions
made to any investor in an Offering.
D. Related Agreements. At each Offering, the Company shall enter into the following additional agreements:
1. Underwritten Offering. If an Offering is an underwritten Offering, the Company and Wainwright shall enter into a
customary underwriting agreement in form and substance satisfactory to Wainwright and its counsel.
2. Best Efforts Offering. If an Offering is on a best efforts basis, the sale of Securities to the investors in the Offering will
be evidenced by a purchase agreement (“Purchase Agreement”) between the Company and such investors in a form
reasonably satisfactory to the Company and Wainwright. Wainwright shall be a third party beneficiary with respect to
the representations and warranties included in the Purchase Agreement. Prior to the signing of any Purchase Agreement,
officers of the Company with responsibility for financial affairs will be available to answer inquiries from prospective
investors.
4
3. Escrow and Settlement. In respect of an Offering, the Company and Wainwright shall enter into an escrow agreement
with a third party escrow agent, which may also be Wainwright’s clearing agent, pursuant to which Wainwright’s
compensation and expenses shall be paid from the gross proceeds of the Securities sold. If an Offering is settled in
whole or in part via delivery versus payment (“DVP”), Wainwright shall arrange for its clearing agent to provide the
funds to facilitate such settlement. The Company shall bear the cost of the escrow agent and shall reimburse
Wainwright for the actual out-of-pocket cost of such clearing agent settlement and financing, if any, which cost shall not
exceed $10,000.
4. FINRA Amendments. Notwithstanding anything herein to the contrary, in the event that Wainwright determines that any
of the terms provided for hereunder shall not comply with a FINRA rule, including but not limited to FINRA Rule
5110, then the Company shall agree to amend this Agreement (or include such revisions in the final agreement) in
writing upon the request of Wainwright to comply with any such rules; provided that any such amendments shall not
provide for terms that are less favorable to the Company than are reflected in this Agreement.
E . Confidentiality. In the event of the consummation or public announcement of an Offering, Wainwright shall have the
right to disclose its participation in such Offering, including, without limitation, an Offering at its cost of “tombstone” advertisements in
financial and other newspapers and journals. Except as contemplated by the terms hereof or as required by applicable law, Wainwright
will keep strictly confidential (and not disclose) all non-public information concerning the Company provided to Wainwright. No
obligation of confidentiality will apply to information that: (a) is in the public domain as of the date hereof or hereafter enters the public
domain without a breach by Wainwright of this provision, (b) was known or became known by Wainwright prior to the Company’s
disclosure thereof to Wainwright, (c) becomes known to Wainwright from a source other than the Company, and other than by the breach
of an obligation of confidentiality owed to the Company and known to Wainwright, (d) is disclosed by the Company to a third party
without restrictions on its disclosure or (e) is independently developed by Wainwright. In no event shall any information be used by
Wainwright for any purpose other than in connection with Wainwright’s activities on behalf of the Company in respect of an Offering. In
the event that Wainwright is legally required to make disclosure of any such information, Wainwright will give notice to the Company
prior to such disclosure, to the extent that Wainwright can practically do so or unless such notice would violate applicable law, rule or
regulation, legal or regulatory process or professional standard. Wainwright’s obligations of confidentiality hereunder shall extend to its
officers, directors, employees, agents and representatives. References to Wainwright in this paragraph shall be deemed to include
Wainwright and its affiliates, directors, managers, partners, members, officers, employees, accountants, attorneys, advisors and agents
who were in privy to the Company’s confidential information. The foregoing confidentiality covenants shall remain in full force and
effect whether or not an Offering contemplated by this engagement letter is completed and shall survive the termination of this
engagement letter for a period of one year thereafter.
5
F.
Indemnity.
1.
In connection with the Company’s engagement of Wainwright hereunder, the Company hereby agrees to indemnify and
hold harmless Wainwright and its affiliates, and the respective controlling persons, directors, officers, members,
shareholders, agents and employees of any of the foregoing (collectively the “Indemnified Persons”), from and against
any and all claims, actions, suits, proceedings (including those of shareholders), damages (excluding indirect, special
and consequential damages), liabilities and expenses incurred by any of them (including the reasonable fees and
expenses of one counsel for all Indemnified Persons in the same jurisdiction, other than to the extent the applicable
Indemnified Persons use separate counsel for conflict of interest reasons), as incurred, (collectively a “Claim”), that are
(A) related to or arise out of (i) any actions taken or omitted to be taken (including any untrue statements made or any
statements omitted to be made in the Offering Documents) by the Company, or (ii) any actions taken or omitted to be
taken by any Indemnified Person in connection with the Company’s engagement of Wainwright, or (B) otherwise relate
to or arise out of Wainwright’s activities on the Company’s behalf under Wainwright’s engagement, and the Company
shall reimburse any Indemnified Person for all expenses (including the reasonable fees and expenses of one counsel for
all Indemnified Persons in the same jurisdiction, other than to the extent the applicable Indemnified Persons use
separate counsel for conflict of interest reasons) as incurred by such Indemnified Person in connection with
investigating, preparing or defending any such claim, action, suit or proceeding, whether or not in connection with
pending or threatened litigation in which any Indemnified Person is a party. The Company will not, however, be
responsible for any Claim that is finally judicially determined to have resulted from fraud, gross negligence or willful
misconduct of any person seeking indemnification for such Claim. The Company further agrees that no Indemnified
Person shall have any liability to the Company for or in connection with the Company’s engagement of Wainwright
except for any Claim incurred by the Company as a result of such Indemnified Person’s fraud, gross negligence or
willful misconduct.
2. The Company further agrees that it will not, without the prior written consent of Wainwright, settle, compromise or
consent to the entry of any judgment in any pending or threatened Claim in respect of which indemnification may be
sought hereunder (whether or not any Indemnified Person is an actual or potential party to such Claim), unless such
settlement, compromise or consent includes an unconditional, irrevocable release of each Indemnified Person from any
and all liability arising out of such Claim.
3. Promptly upon receipt by an Indemnified Person of notice of any complaint or the assertion or institution of any Claim
with respect to which indemnification is being sought hereunder, such Indemnified Person shall notify the Company in
writing of such complaint or of such assertion or institution but failure to so notify the Company shall not relieve the
Company from any obligation it may have hereunder, except and only to the extent such failure causes actual harm to
the Company, results in the forfeiture by the Company of substantial rights or defenses or results in any material
increase in the obligation which the Company has under this indemnity. If the Company is requested by such
Indemnified Person, the Company will assume the defense of such Claim, including the employment of counsel
reasonably satisfactory to such Indemnified Person and the payment of the reasonable fees and expenses of such
counsel. In the event, however, that legal counsel to such Indemnified Person reasonably determines that having
common counsel would present such counsel with a conflict of interest or if the defendant in, or target of, any such
Claim, includes an Indemnified Person and the Company, and legal counsel to such Indemnified Person reasonably
concludes that there may be legal defenses available to it or other Indemnified Persons different from or in addition to
those available to the Company, then such Indemnified Person may employ its own separate counsel to represent or
defend him, her or it in any such Claim and the Company shall pay the reasonable fees and expenses of such counsel;
provided, however, that in no event shall the Company be responsible to pay the fees and expenses of more than one
firm of attorneys representing Indemnified Persons in the same jurisdiction, other than to the extent the applicable
Indemnified Persons use separate counsel for conflict of interest reasons. Notwithstanding anything herein to the
contrary, if the Company fails timely or diligently to defend, contest, or otherwise protect against any Claim, the
relevant Indemnified Person shall have the right, but not the obligation, to defend, contest, compromise, settle, assert
crossclaims, or counterclaims or otherwise protect against the same, and shall be fully indemnified by the Company
therefor, including without limitation, for the reasonable fees and expenses of its counsel and all amounts paid as a
result of such Claim or the compromise or settlement thereof. In addition, with respect to any Claim in which the
Company assumes the defense, the Indemnified Person shall have the right to participate in such Claim and to retain
his, her or its own counsel therefor at his, her or its own expense. The Company shall not be liable for any settlement of
any action effected without its prior written consent (which consent shall not be unreasonably withheld, delayed or
conditioned).
6
4. The Company agrees that if any indemnity sought by an Indemnified Person hereunder is held by a court to be
unavailable for any reason then (whether or not Wainwright is the Indemnified Person), the Company and Wainwright
shall contribute to the Claim for which such indemnity is held unavailable in such proportion as is appropriate to reflect
the relative benefits to the Company, on the one hand, and Wainwright on the other, in connection with Wainwright’s
engagement referred to above, subject to the limitation that in no event shall the amount of Wainwright’s contribution
to such Claim exceed the amount of fees actually received by Wainwright from the Company pursuant to Wainwright’s
engagement. The Company hereby agrees that the relative benefits to the Company, on the one hand, and Wainwright
on the other, with respect to Wainwright’s engagement shall be deemed to be in the same proportion as (a) the total
value paid or proposed to be paid or received by the Company pursuant to the applicable Offering (whether or not
consummated) for which Wainwright is engaged to render services bears to (b) the fee paid or proposed to be paid to
Wainwright in connection with such engagement.
5. The Company’s indemnity, reimbursement and contribution obligations under this Agreement (a) shall be in addition to,
and shall in no way limit or otherwise adversely affect any rights that any Indemnified Person may have at law or at
equity and (b) shall be effective whether or not the Company is at fault in any way.
G . Limitation of Engagement to the Company. The Company acknowledges that Wainwright has been retained only by
the Company, that Wainwright is providing services hereunder as an independent contractor (and not in any fiduciary or agency capacity)
and that the Company’s engagement of Wainwright is not deemed to be on behalf of, and is not intended to confer rights upon, any
shareholder, owner or partner of the Company or any other person not a party hereto as against Wainwright or any of its affiliates, or any
of its or their respective officers, directors, controlling persons (within the meaning of Section 15 of the Securities Act or Section 20 of
the Securities Exchange Act of 1934, as amended (the “ Exchange Act”)), employees or agents. Unless otherwise expressly agreed in
writing by Wainwright, no one other than the Company is authorized to rely upon this Agreement or any other statements or conduct of
Wainwright, and no one other than the Company is intended to be a beneficiary of this Agreement. The Company acknowledges that any
recommendation or advice, written or oral, given by Wainwright to the Company in connection with Wainwright’s engagement is
intended solely for the benefit and use of the Company’s management and directors in considering a possible Offering, and any such
recommendation or advice is not on behalf of, and shall not confer any rights or remedies upon, any other person or be used or relied upon
for any other purpose. Wainwright shall not have the authority to make any commitment binding on the Company. The Company, in its
sole discretion, shall have the right to reject any investor introduced to it by Wainwright.
H
. Limitation of Wainwright’s Liability to the Company . Wainwright and the Company further agree that neither
Wainwright nor any of its affiliates or any of its their respective officers, directors, controlling persons (within the meaning of Section 15
of the Securities Act or Section 20 of the Exchange Act), employees or agents shall have any liability to the Company, its security holders
or creditors, or any person asserting claims on behalf of or in the right of the Company (whether direct or indirect, in contract, tort, for an
act of negligence or otherwise) for any losses, fees, damages, liabilities, costs, expenses or equitable relief arising out of or relating to this
Agreement or the services rendered hereunder, except for losses, fees, damages, liabilities, costs or expenses that arise out of or are based
on any action of or failure to act by Wainwright and that are finally judicially determined to have resulted solely from fraud, gross
negligence or willful misconduct of Wainwright.
7
I . Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New
York applicable to agreements made and to be fully performed therein. Any disputes that arise under this Agreement, even after the
termination of this Agreement, will be heard only in the state or federal courts located in the City of New York, State of New York. The
parties hereto expressly agree to submit themselves to the jurisdiction of the foregoing courts in the City of New York, State of New
York. The parties hereto expressly waive any rights they may have to contest the jurisdiction, venue or authority of any court sitting in the
City and State of New York. In the event of the bringing of any action, or suit by a party hereto against the other party hereto, arising out
of or relating to this Agreement, the party in whose favor the final judgment or award shall be entered shall be entitled to have and recover
from the other party the costs and expenses incurred in connection therewith, including its reasonable attorneys’ fees. Any rights to trial by
jury with respect to any such action, proceeding or suit are hereby waived by Wainwright and the Company.
J. Notices. All notices hereunder will be in writing and sent by certified mail, hand delivery, overnight delivery or fax, if
sent to Wainwright, at the address set forth on the first page hereof, e-mail: notices@hcwco.com, Attention: Head of Investment Banking,
and if sent to the Company, to the address set forth on the first page hereof, e-mail: apatient@intellipharmaceutics.com, Attention: Chief
Financial Officer. Notices sent by certified mail shall be deemed received five days thereafter, notices sent by hand delivery or overnight
delivery shall be deemed received on the date of the relevant written record of receipt, notices delivered by fax shall be deemed received
as of the date and time printed thereon by the fax machine and notices sent by e-mail shall be deemed received as of the date and time they
were sent.
K
. Conflicts. The Company acknowledges that Wainwright and its affiliates may have and may continue to have
investment banking and other relationships with parties other than the Company pursuant to which Wainwright may acquire information
of interest to the Company. Wainwright shall have no obligation to disclose such information to the Company or to use such information
in connection with any contemplated transaction.
L . Anti-Money Laundering. To help the United States government fight the funding of terrorism and money laundering,
the federal laws of the United States require all financial institutions to obtain, verify and record information that identifies each person
with whom they do business. This means Wainwright must ask the Company for certain identifying information, including a government-
issued identification number (e.g., a U.S. taxpayer identification number) and such other information or documents that Wainwright
considers appropriate to verify the Company’s identity, such as certified articles of incorporation, a government-issued business license, a
partnership agreement or a trust instrument.
M . Miscellaneous. The Company represents and warrants that it has all requisite power and authority to enter into and
carry out the terms and provisions of this Agreement and the execution, delivery and performance of this Agreement does not breach or
conflict with any agreement, document or instrument to which it is a party or bound. This Agreement shall not be modified or amended
except in writing signed by Wainwright and the Company. This Agreement shall be binding upon and inure to the benefit of both
Wainwright and the Company and their respective assigns, successors, and legal representatives. This Agreement constitutes the entire
agreement of Wainwright and the Company with respect to the subject matter hereof and supersedes any prior agreements with respect to
the subject matter hereof; provided, however, that Wainwright’s existing rights pursuant to those certain Engagement Agreement dated as
of October 10, 2017 and as of March 12, 2018 by and between the company and Wainwright shall survive the execution of this
Agreement. If any provision of this Agreement is determined to be invalid or unenforceable in any respect, such determination will not
affect such provision in any other respect, and the remainder of the Agreement shall remain in full force and effect. This Agreement may
be executed in counterparts (including facsimile or electronic counterparts), each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
*********************
8
In acknowledgment that the foregoing correctly sets forth the understanding reached by Wainwright and the Company, please
sign in the space provided below, whereupon this letter shall constitute a binding Agreement as of the date indicated above.
Very truly yours,
H.C. WAINWRIGHT & CO., LLC
/s/ Edward Silvera
By:
Name: Edward Silvera
Title: Chief Operating Officer
Accepted and Agreed:
INTELLIPHARMACEUTICS INTERNATIONAL INC.
By: /s/ Andrew Patient
Name: Andrew Patient
Title: Chief Financial Officer
9
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, 2019
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, Greg Powell, 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, 2019
By:
/s/ Greg Powell
Greg Powell
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, 2018 (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, 2019
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, 2018 (the “Report”), I, Greg Powell, 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/ Greg Powell
Greg Powell
Chief Financial Officer
(Principal Financial Officer)
Date: February 28, 2019
EXHIBIT 23.1
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, and in
Registration Statement No(s). 333-226239, 333-227448 and 333-227794 on Form F-1, of our auditors’ report dated February 22, 2019,
relating to the consolidated financial statements of Intellipharmaceutics International Inc. and its subsidiaries (the “Company”) for the years
ended November 30, 2018, 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 dated February 28, 2019.
/s/ MNP LLP
Chartered Professional Accountants
Licensed Public Accountants
February 28, 2019
Toronto, Canada