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
OR
[X]
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
|
Name of
each exchange on which registered
|
|
Common
shares, no par value
|
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.
Yes [_]
No [X]
Indicate by check
mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90
days.
Yes [X]
No [_]
Indicate by check
mark whether the registrant has submitted electronically 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 [_]
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
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PART
I
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3
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Item
1.
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Identity of
Directors, Senior Management and Advisers
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3
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A. Directors and senior
management
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3
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B. Advisors
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3
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C. Auditors
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3
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Item
2.
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Offer Statistics
and Expected Timetable
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3
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A. Offer statistics
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3
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B. Method and expected
timetable
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3
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Item
3.
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Key
Information
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3
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A. Selected Financial Data
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3
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B. Capitalization and
Indebtedness
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4
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C. Reasons for the Offer and use of
Proceeds
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4
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D. Risk Factors
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4
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Item
4.
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Information on the
Company
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32
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|
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A. History and Development of the
Company
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32
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B. Business Overview
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33
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C. Organizational Structure
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56
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D. Property, Plant and
Equipment
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56
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Item
4A.
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Unresolved Staff
Comments
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58
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Item
5.
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Operating and
Financial Review and Prospects
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58
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A. Operating Results
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58
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B. Liquidity and Capital
Resources
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63
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|
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C. Research and development, patents,
and Licenses, etc
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66
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D. Trend Information
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66
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E. Off-balance sheet
arrangements
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67
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F. Tabular disclosure of contractual
obligations
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67
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G. Safe Harbor
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67
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Item
6.
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Directors, Senior
Management and Employees
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68
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A. Directors and Senior
Management
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68
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B. Compensation
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71
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C. Board Practices
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81
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D. Employees
|
86
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E. Share Ownership
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87
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Item
7.
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Major Shareholders
and related Party Transactions
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95
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A. Major Shareholders
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95
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B. Related Party
Transactions
|
96
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Item
8.
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Financial
Information
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96
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A. Consolidated Statements and Other
Financial Information
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96
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B. Significant changes
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98
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Item
9.
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The Offer and
Listing
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98
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Item
10.
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Additional
Information
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98
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|
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A. Share Capital
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98
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B. Articles and By-Laws
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103
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C. Material Contracts
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105
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D. Exchange Controls
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107
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E. Taxation
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107
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F. Dividends and Paying
Agents
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116
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G. Statement by Experts
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116
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H. Documents on Display
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116
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I. Subsidiary Information
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116
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Item
11.
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Qualitative and
Quantitative Disclosures about Market Risk
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116
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Item
12.
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Description of
Securities Other than equity Securities
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118
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A. Debt
Securities
|
118
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|
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B. Warrants and
Rights
|
118
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C. Other
Securities
|
118
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D. American Depositary
Shares
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118
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PART
II
|
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118
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Item
13.
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Defaults, Dividend
Arrearages and delinquencies
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118
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Item
14.
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Material
Modifications to the Rights of Security Holders and Use of
Proceeds
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118
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Item
15.
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Controls and
Procedures
|
119
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Item
16.
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[Reserved]
|
120
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Item
16A.
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Audit Committee
Financial Expert
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120
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Item
16B.
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Code of
Ethics
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120
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Item
16C.
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Principal
Accountant Fees and Services
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120
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Item
16D.
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Exemptions from the
Listing Standards for Audit Committees
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121
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Item
16E.
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Purchases of Equity
Securities by the Issuer and Affiliated Purchasers
|
121
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Item
16F.
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Change in
registrant’s Certifying Accountant
|
121
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Item
16G.
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Corporate
Governance
|
121
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Item
16H.
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Mine Safety
Disclosure
|
122
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PART
III
|
|
122
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Item
17.
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Financial
Statements
|
122
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|
Item
18.
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Financial
Statements
|
123
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Item
19.
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Exhibits
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124
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ii
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.
Not
applicable.
Not
applicable
Not
applicable
Not
applicable
Not
applicable
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
|
As
at and for the year ended November 30, 2014
|
|
|
$
|
$
|
$
|
$
|
$
|
|
Revenue
|
1,713
|
5,504
|
2,247
|
4,094
|
8,770
|
|
Loss for the
year
|
(13,747)
|
(8,857)
|
(10,144)
|
(7,436)
|
(3,856)
|
|
Total
assets
|
11,474
|
7,397
|
7,975
|
5,224
|
7,875
|
|
Total
liabilities
|
7,372
|
7,010
|
6,858
|
5,362
|
2,966
|
|
Net
assets
|
4,102
|
386
|
1,116
|
(138)
|
4,909
|
|
Capital
stock
|
44,328
|
35,290
|
29,831
|
21,481
|
18,941
|
|
Loss per share -
basic and diluted
|
(2.89)
|
(2.86)
|
(3.80)
|
(3.13)
|
(1.67)
|
|
Dividends
|
Nil
|
Nil
|
Nil
|
Nil
|
Nil
|
|
Weighted average
common shares
|
4,762
|
3,101
|
2,670
|
2,377
|
2,305
|
Not
applicable.
Not
applicable.
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.
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
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 PODRASTM 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
|
Stage
of Development(1)`
|
Regulatory
Pathway
|
Market
Size (in millions)(2)
|
Rights(3)
|
|
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)
|
ANDA
|
$851
|
Intellipharmaceutics
and Par (US)
Philippines rights
subject to licensing and distribution agreement
|
|
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
|
Intellipharmaceutics
Philippines and
Vietnamese rights subject to licensing and distribution
agreements
|
|
Venlafaxine hydrochloride extended-release capsules
|
Effexor XR®
|
Depression
|
Received final
approval for 37.5, 75 and 150 mg strengths from FDA
|
ANDA
|
$774
|
Intellipharmaceutics
|
|
Pantoprazole sodium delayed- release tablets
|
Protonix®
|
Conditions
associated with gastroesophageal reflux disease
|
ANDA application
for commercialization approval for 2 strengths under review by
FDA
|
ANDA
|
$367
|
Intellipharmaceutics
|
|
Metformin hydrochloride extended-release tablets
|
Glucophage® XR
|
Management of type
2 diabetes
|
Received final
approval for 500 and 750 mg strengths from FDA
|
ANDA
|
$388
(500 and 750 mg
only)
|
Intellipharmaceutics
Philippines and
Vietnamese rights subject to licensing and distribution
agreements
|
|
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
|
Intellipharmaceutics
and Mallinckrodt (US)
Philippines,
Malaysian and Vietnamese rights subject to licensing and
distribution agreements
|
|
Lamotrigine extended-release tablets
|
Lamictal® XR™
|
Anti-convulsant for
epilepsy
|
ANDA application
for commercialization approval for 6 strengths under review by
FDA
|
ANDA
|
$525
|
Intellipharmaceutics
and Mallinckrodt (US)
|
|
Desvenlafaxine extended-release tablets
|
Pristiq®
|
Depression
|
Received tentative
approval for the 50 and 100 mg strengths from FDA
|
ANDA
|
$279
|
Intellipharmaceutics
and Mallinckrodt (US)
|
|
Trazodone hydrochloride extended-release tablets
|
Oleptro™
|
Depression
|
ANDA application
for commercialization approval for 2 strengths under review by
FDA
|
ANDA
|
N/A(5)
|
Intellipharmaceutics
|
|
Carvedilol phosphate extended- release capsules
|
Coreg CR®
|
Heart failure,
hypertension
|
Late-stage
development
|
ANDA
|
$66
|
Intellipharmaceutics
|
|
Oxycodone hydrochloride controlled-release capsules
|
OxyContin®
|
Pain
|
NDA application
accepted February 2017 and under review by FDA
|
NDA
505(b)(2)
|
$1,471
|
Intellipharmaceutics
Philippines rights
subject to licensing and distribution agreement
|
|
Pregabalin extended-release capsules
|
Lyrica®
|
Neuropathic
pain
|
IND
application submitted in August 2015
|
NDA
505(b)(2)
|
$5,425
|
Intellipharmaceutics
|
|
Ranolazine extended-release tablets
|
Ranexa®
|
Chronic
angina
|
ANDA application
for commercialization approval for 2 strengths under review by
FDA
|
ANDA
|
$1,013
|
Intellipharmaceutics
|
|
Oxycodone hydrochloride
immediate release tablets (IPCI006)
|
Roxicodone®
|
Pain
|
IND application
submitted in November 2018
|
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.
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
|
Issue
Date
|
Issue
No.
|
Title
|
|
U.S.A.
|
October 31,
2017
|
9,801,939
|
Compositions and
Methods For Reducing Overdose
|
|
U.S.A.
|
July 11,
2017
|
9,700,516
|
Compositions and
Methods For Reducing Overdose
|
|
U.S.A.
|
July 11,
2017
|
9,700,515
|
Compositions and
Methods For Reducing Overdose
|
|
U.S.A.
|
Dec 20,
2016
|
9,522,119
|
Compositions and
Methods For Reducing Overdose
|
|
U.S.A.
|
July 14,
2015
|
9,078,827
|
Pharmaceutical
Composition Having Reduced Abuse Potential
|
|
U.S.A.
|
Aug 12,
2014
|
8,802,139
|
Proton
Pump-Inhibitor-Containing Capsules Which Comprise Subunits
Differently Structured For A Delayed Release Of The Active
Ingredient
|
|
U.S.A.
|
Dec 10,
2013
|
8,603,520
|
Oral
Multi-functional Pharmaceutical Capsule Preparations of Proton Pump
Inhibitors
|
|
U.S.A.
|
Mar 12,
2013
|
8,394,409
|
Controlled Extended
Drug Release Technology
|
|
U.S.A.
|
Mar 15,
2011
|
7,906,143
|
Controlled Release
Pharmaceutical Delivery Device and Process for Preparation
Thereof
|
|
U.S.A.
|
Dec 28,
2010
|
7,858,119
|
Extended Release
Pharmaceuticals
|
|
U.S.A.
|
Aug 15,
2006
|
7,090,867
|
Controlled Release
Delivery Device for Pharmaceutical Agents Incorporating Microbial
Polysaccharide Gum
|
|
U.S.A.
|
Oct 5,
2004
|
6,800,668
|
Syntactic
Deformable Foam Compositions and Methods for Making
|
|
U.S.A.
|
Nov 25,
2003
|
6,652,882
|
Controlled Release
Formulation Containing Bupropion
|
|
U.S.A.
|
Aug 19,
2003
|
6,607,751
|
Novel Controlled
Release Delivery Device for Pharmaceutical Agents Incorporating
Microbial Polysaccharide Gum
|
|
U.S.A.
|
Nov 12,
2002
|
6,479,075
|
Pharmaceutical
Formulations for Acid Labile Substances
|
|
U.S.A.
|
Oct 2,
2001
|
6,296,876
|
Pharmaceutical
Formulations for Acid Labile Substances
|
|
Japan
|
Aug 28,
2015
|
5,798,293
|
Pharmaceutical
Composition Having Reduced Abuse Potential
|
|
Japan
|
Jan 17,
2014
|
5,457,830
|
Controlled Release
Delivery Device Comprising An Organosol Coat
|
|
Japan
|
Aug 8,
2014
|
5,592,547
|
Drug Delivery
Composition
|
|
Japan
|
Aug 30,
2013
|
5,349,290
|
Drug Delivery
Composition
|
|
India
|
Feb 10,
2015
|
265,141
|
Pharmaceutical
Composition Having Reduced Abuse Potential
|
|
Europe
|
Nov 26,
2014
|
2,007,360
|
Controlled Release
Delivery Device Comprising an Organosol Coat
|
|
Canada
|
May 26,
2015
|
2,579,382
|
Controlled Release Composition Using Transition
Coating, And Method Of Preparing Same/ Controlled Release Delivery
Device
|
|
Canada
|
Jan 28,
2014
|
2,571,897
|
Controlled Extended
Drug Release Technology
|
|
Canada
|
Apr 8,
2014
|
2,576,556
|
/Drug Delivery
Device
|
|
Canada
|
Mar 11,
2014
|
2,648,280
|
Controlled Release
Delivery Device Comprising an Organosol Coat
|
|
Canada
|
Jun 19,
2012
|
2,626,558
|
Pharmaceutical
Composition having Reduced Abuse Potential
|
|
Canada
|
Sep 25,
2012
|
2,529,984
|
Oral
Multi-Functional Pharmaceutical Capsule Preparations of Proton Pump
Inhibitors
|
|
Canada
|
Feb 22,
2011
|
2,459,857
|
Combinatorial Type
Controlled Release Drug Delivery Device
|
|
Canada
|
Mar 15,
2005
|
2,435,276
|
Syntactic
Deformable Foam Compositions and Methods for Making
|
52
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.
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
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.
Not
applicable.
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.
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.
|
|
For
the years ended
|
|
|||||
|
|
November
30,
|
November
30,
|
November
30,
|
Change
|
Change
|
||
|
|
2018
|
2017
|
2016
|
2018
vs 2017
|
2017
vs 2016
|
||
|
|
$
|
$
|
$
|
$
|
%
|
$
|
%
|
|
Revenue:
|
|
|
|
|
|
|
|
|
Licensing
|
1,370,607
|
5,025,350
|
2,209,502
|
(3,654,743)
|
-73%
|
2,815,848
|
127%
|
|
Up-front
fees
|
342,124
|
479,102
|
37,500
|
(136,978)
|
-29%
|
441,602
|
1178%
|
|
|
1,712,731
|
5,504,452
|
2,247,002
|
(3,791,721)
|
-69%
|
3,257,450
|
145%
|
|
|
|
|
|
|
|
|
|
|
Cost of goods
sold
|
124,870
|
704,006
|
-
|
(579,136)
|
-82%
|
704,006
|
N/A
|
|
Gross
Margin
|
1,587,861
|
4,800,446
|
2,247,002
|
(3,212,585)
|
-67%
|
2,553,444
|
114%
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
Research
and development
|
10,827,293
|
9,271,353
|
8,166,736
|
1,555,940
|
17%
|
1,104,617
|
14%
|
|
Selling,
general and administrative
|
3,476,450
|
3,287,914
|
3,546,132
|
188,536
|
6%
|
(258,218)
|
-7%
|
|
Depreciation
|
610,384
|
506,961
|
385,210
|
103,423
|
20%
|
121,751
|
32%
|
|
|
14,914,127
|
13,066,228
|
12,098,078
|
1,847,899
|
14%
|
968,150
|
8%
|
|
|
|
|
|
|
|
|
|
|
Loss from
operations
|
(13,326,266)
|
(8,265,782)
|
(9,851,076)
|
(5,060,484)
|
61%
|
1,585,294
|
-16%
|
|
|
|
|
|
|
|
|
|
|
Net foreign exchange
(loss) gain
|
8,592
|
(80,093)
|
(22,470)
|
88,685
|
-111%
|
(57,623)
|
256%
|
|
Interest
income
|
227
|
15,037
|
207
|
(14,810)
|
-98%
|
14,830
|
7164%
|
|
Interest
expense
|
(255,231)
|
(389,239)
|
(270,238)
|
134,008
|
-34%
|
(119,001)
|
44%
|
|
Financing
cost
|
(174,802)
|
(137,363)
|
-
|
(37,439)
|
27%
|
(137,363)
|
N/A
|
|
Net loss and
comprehensive loss
|
(13,747,480)
|
(8,857,440)
|
(10,143,577)
|
(4,890,040)
|
55%
|
1,286,137
|
-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
|
|
For
the years ended
|
|
|
|
|
||
|
|
November
30,
2018
|
November
30,
2017
|
November
30,
2016
|
|
Change
(2017 vs
2016)
|
||
|
|
$
|
$
|
$
|
$
|
%
|
$
|
%
|
|
Cash
flows used in operating activities
|
(12,508,960)
|
(6,105,785)
|
(6,254,985)
|
(6,403,175)
|
105%
|
149,200
|
-2%
|
|
Cash
flows provided from financing activities
|
17,354,954
|
5,682,168
|
9,159,623
|
11,672,786
|
205%
|
(3,477,455)
|
-38%
|
|
Cash
flows used in investing activities
|
(101,178)
|
(1,823,746)
|
(515,410)
|
1,722,568
|
-94%
|
(1,308,336)
|
254%
|
|
Increase
(decrease) in cash
|
4,744,816
|
(2,247,363)
|
2,389,228
|
6,992,179
|
-311%
|
(4,636,591)
|
-194%
|
|
Cash,
beginning of year
|
1,897,061
|
4,144,424
|
1,755,196
|
(2,247,363)
|
-54%
|
2,389,228
|
136%
|
|
Cash,
end of year
|
6,641,877
|
1,897,061
|
4,144,424
|
4,744,816
|
250%
|
(2,247,363)
|
-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.
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.
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
|
Revenue
|
Net
loss
|
Loss
per share
|
|
|
|
|
|
Basici
|
Dilutedi
|
|
|
$
|
$
|
$
|
$
|
|
November
30, 2018
|
387,691
|
(3,784,512)
|
(0.67)
|
(0.67)
|
|
August
31, 2018
|
413,555
|
(3,954,104)
|
(0.91)
|
(0.91)
|
|
May
31, 2018
|
576,967
|
(2,859,276)
|
(0.68)
|
(0.68)
|
|
February
28, 2018
|
334,518
|
(3,149,588)
|
(0.91)
|
(0.91)
|
|
November
30, 2017
|
1,077,835
|
(2,510,936)
|
(0.76)
|
(0.76)
|
|
August
31, 2017
|
1,189,739
|
(2,550,314)
|
(0.83)
|
(0.83)
|
|
May
31, 2017
|
2,001,512
|
(1,805,329)
|
(0.59)
|
(0.59)
|
|
February
28, 2017
|
1,235,366
|
(1,990,861)
|
(0.66)
|
(0.66)
|
(1)
Quarterly per share
amounts may not sum due to rounding.
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.
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
|
Total
|
Less
than 1 Year
|
1 -
3 Years
|
3 -
5 Years
|
More
than 5 Years
|
|
|
$
|
$
|
$
|
$
|
$
|
|
Third
parties
|
|
|
|
|
|
|
Accounts
payable
|
2,643,437
|
2,643,437
|
-
|
-
|
-
|
|
Accrued
liabilities
|
353,147
|
353,147
|
-
|
-
|
-
|
|
Related
parties
|
|
|
-
|
|
|
|
Employee
costs payable
|
222,478
|
222,478
|
-
|
-
|
-
|
|
Convertible
debentures
|
1,991,956
|
1,454,148
|
537,808
|
-
|
-
|
|
Total
contractual obligations
|
5,211,018
|
4,673,210
|
537,808
|
-
|
-
|
See
“Disclosure Regarding Forward-Looking Information” in
the introduction to this annual report.
67
DIRECTORS AND OFFICERS
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 .
|
Name and Province of Residence
|
Position held with the Company
|
Officer/Director Since
|
|
Dr. Isa
Odidi
Ontario,
Canada
|
Chairman
of the Board and Chief Executive Officer
|
September
2004
|
|
Dr.
Amina Odidi
Ontario,
Canada
|
President,
Chief Operating and Director
|
September
2004
|
|
Norman
Betts(1),
New
Brunswick, Canada
|
Director(4)
|
January
2019
|
|
Shawn
Graham(2)
(3),
New
Brunswick, Canada
|
Director
|
May
2018
|
|
Kenneth
Keirstead(1)(2)(3)
New
Brunswick, Canada
|
Director
|
January
2006
|
|
Bahadur
Madhani(1)
Ontario, Canada
|
Director
|
March
2006
|
|
Greg
Powell(5)Ontario,
Canada
|
Chief
Financial Officer
|
February
2019
|
|
Dr.
Patrick Yat
Ontario,
Canada
|
Vice-President,
Chemistry and Analytical Services
|
N/A
|
Notes:
(1)
Member of the Audit
Committee.
(2)
Member of the
Compensation Committee.
(3)
Member of the
Compensation Committee and Corporate Governance
Committee.
(4)
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.
(5)
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.
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$150,000 in total compensation in the fiscal year
ended November 30, 2018.
SUMMARY COMPENSATION TABLE
|
Non-equity
incentive plan compensation (U.S.$)(f)
|
|||||||||
|
Name and principal position(a)
|
Year(b)
|
Salary (U.S.$)(1)(c)
|
Share-based awards (U.S.$)(d)
|
Option-based awards (U.S.$)(2)(e)
|
Annual incentive plans(3)
|
Long-term incentive plans
|
Pension value (U.S.$)(g)
|
All other compensation (U.S.$)(4)(h)
|
Total compensation (U.S.$)(i)
|
|
Dr. Isa
Odidi, Chairman, Chief Executive Officer and Co-Chief Scientific
Officer
|
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
|
|
Dr.
Amina Odidi,
President,
Chief Operating Officer and Co-Chief Scientific
Officer
|
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
|
|
Andrew
Patient, Former Chief Financial Officer(5)
|
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
|
|
Greg
Powell,
Chief
Financial Officer (6)
|
2018
|
N/A
|
N/A
|
N/A
|
N/A
|
N/A
|
N/A
|
N/A
|
N/A
|
73
Notes:
(1)
Salaries paid by
the Company to each Named Executive Officer are paid in Canadian
dollars. All amounts are expressed in U.S. dollars converted at the
exchange rate of U.S.$0.7750 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.
(2)
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.
(3)
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
(4)
“All other
compensation” includes car allowances and other miscellaneous
benefits.
(5)
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$11.50 per share. Mr. Campbell’s options ceased to
be exercisable 120 days after the date on which he ceased to be
employed by the Company, i.e. ceased to be exercisable on
August 3, 2018.
Incentive Plan Awards
Outstanding Option-Based Awards and
Share-Based Awards – The following table sets forth
for each Named Executive Officer all awards outstanding at the end
of the most recently completed financial year, including awards
granted before the most recently completed financial year. Each
option grant allows the holder to purchase one of the
Company’s common shares.
76
|
|
Option-based
Awards
|
Share-based
Awards
|
||||
|
Name(a)
|
Number
of securities underlying unexercised options (#)(b)
|
Option
exercise price (C$)(c)
|
Option
expiration date(d)
|
Value
of unexercised in-the-money options (C$)(e)(3)
|
Number
of shares or units of shares that have not vested
(#)(f)
|
Market
or payout value of share-based awards that have not vested
(C$)(g)
|
|
Drs.
Isa Odidi and Amina Odidi(1)
|
276,394
|
U.S.$36.20
|
Sept.
10, 2020
|
N/A
|
N/A
|
N/A
|
|
Dr. Isa
Odidi
|
30,000
7,500
5,000
7,000
9,000
7,000
|
32.70
18.10
42.90
25.20
24.20
11.50
|
Feb.
16, 2022
Apr.
13. 2020
Feb.
28, 2019
Nov.
30, 2020
Aug.
31, 2021
Nov.
30, 2022
|
N/A
N/A
N/A
N/A
N/A
N/A
|
N/A
N/A
N/A
N/A
N/A
N/A
|
N/A
N/A
N/A
N/A
N/A
N/A
|
|
Dr.
Amina Odidi
|
30,000
7,500
5,000
7,000
9,000
7,000
|
32.70
18.10
42.90
25.20
24.20
11.50
|
Feb.
16, 2022
Apr.
13. 2020
Feb.
28, 2019
Nov.
30, 2020
Aug.
31, 2021
Nov.
30, 2022
|
N/A
N/A
N/A
N/A
N/A
N/A
|
N/A
N/A
N/A
N/A
N/A
N/A
|
N/A
N/A
N/A
N/A
N/A
N/A
|
|
John
Allport(2)
|
25,000
2,500
5,000
4,000
5,500
|
32.70
18.10
42.90
25.20
24.20
|
Feb.
16. 2022
Apr.
13, 2020
Feb.
28, 2019
Nov.
30, 2020
Aug.
31, 2021
|
N/A
N/A
N/A
N/A
N/A
|
N/A
N/A
N/A
N/A
N/A
|
N/A
N/A
N/A
N/A
N/A
|
|
Andrew
Patient(5)
|
6,000
1,500
|
12.70
11.50
|
Oct.
20, 2027(5)
Nov.
30, 2022(5)
|
N/A
|
N/A
|
N/A
|
|
Greg
Powell(6)
|
10,000
|
N/A
|
N/A
|
N/A
|
N/A
|
N/A
|
Notes:
(1)
These option-based
awards are held jointly.
(2)
Mr. Allport, a
consultant to the Company, served as the Company’s Vice
President Legal Affairs and Licensing and as a director from
September 2004, until his resignation May 17, 2017.
(3)
The value of
unexercised options at year-end is calculated by subtracting the
option exercise price from the closing price of the common shares
of the Company on the TSX for C$ 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.
(4)
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.
(5)
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$11.50 (expiring
November 30, 2022); and no other share-based awards. Mr.
Campbell’s options ceased to be exercisable 120 days after he
ceases to be employed by the Company, i.e. ceased to be exercisable
on August 3, 2018. Mr. Campbell’s options have no value
vested or earned during the most recently completed financial
year.
77
Incentive Plan Awards – Value
Vested or Earned During the Year – The following table sets
forth details of the value vested or earned during the most
recently completed financial year for each incentive plan
award.
|
Name
|
Option-based
awards - Value vested during the year (U.S.$)
|
Share-based
awards - Value vested during the year (U.S.$)
|
Non-equity
incentive plan compensation - Value earned during the year
(U.S.$)
|
|
(a)
|
(b)(1)
|
(c)
|
(d)
|
|
Drs. Isa
Odidi
|
N/A
|
N/A
|
N/A
|
|
Dr. Amina
Odidi
|
N/A
|
N/A
|
N/A
|
|
Andrew
Patient(2)
|
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
|
Fees
earned
|
Share-based
awards
|
Option-based
awards
|
Non-equity
incentive plan compensation
|
Pension
value
|
All
other compensation
|
Total
|
|
(a)
|
(b)
|
(c)(2)
|
(d)(3)
|
(e)
|
(f)
|
(g)
|
(h)
|
|
Eldon
Smith(1)
|
C$33,250
|
N/A
|
N/A
|
N/A
|
N/A
|
N/A
|
C$33,250
|
|
Kenneth
Keirstead
|
C$43,000
|
N/A
|
N/A
|
N/A
|
N/A
|
N/A
|
C$43,000
|
|
Bahadur
Madhani
|
C$48,000
|
N/A
|
N/A
|
N/A
|
N/A
|
N/A
|
C$48,000
|
|
Shawn
Graham
|
C$16,375
|
N/A
|
N/A
|
N/A
|
N/A
|
N/A
|
C$16,375
|
Notes:
(1)
Eldon Smith served
as a Director to the Company from October 2009 until his
resignation (effective January 9, 2019) to pursue other
opportunities
(2)
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
|
|
Option-based Awards
|
Share-based Awards
|
||||
|
Name
|
Number of securities underlying unexercised options
(#)
|
Option exercise price
|
Option expiration date
|
Value of unexercised in-the-money options
|
Number of shares or units of shares that have not vested
(#)
|
Market or payout value of share-based awards that have not
vested
|
|
(a)
|
(b)
|
(c)
|
(d)
|
(e)(1)
|
(f)(2)
|
(g)(3)
|
|
Eldon
Smith
|
1,000
2,500
3,750
3,750
2,000
3,500
4,000
|
C$28.80
C$18.10
C$32.20
C$42.90
C$25.20
C$24.20
C$11.50
|
May 08,
2019
May 08,
2029
May 08,
2019
Feb.
28, 2019
May 08,
2020
May 08,
2021
May 08,
2022
|
N/A
N/A
N/A
N/A
N/A
N/A
N/A
|
10,279
N/A
N/A
N/A
N/A
N/A
N/A
|
C$4,626
N/A
N/A
N/A
N/A
N/A
N/A
|
|
Kenneth
Keirstead
|
1,000
2,500
3,750
3,750
2,000
3,500
4,000
|
C$28.80
C$18.10
C$32.20
C$42.90
C$25.20
C$24.20
C$11.50
|
Oct.
22, 2019
Apr.
13, 2020
Nov.
30, 2019
Feb.
28, 2019
Nov.
30, 2020
Aug.
31, 2021
Nov.
30, 2022
|
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
|
|
Bahadur
Madhani
|
1,000
2,500
3,750
3,750
2,000
3,500
4,000
|
C$28.80
C$18.10
C$32.20
C$42.90
C$25.20
C$24.20
C$11.50
|
Oct.
22, 2019
Apr.
13, 2020
Nov.
30, 2019
Feb.
28, 2019
Nov.
30, 2020
Aug.
31, 2021
Nov.
30, 2022
|
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
|
|
Shawn
Graham
|
N/A
|
N/A
|
N/A
|
N/A
|
N/A
|
N/A
|
Notes:
(1)
The value of
unexercised options at year-end is calculated by subtracting the
option exercise price from the closing price of the common shares
of the Company on the TSX on November 30, 2018 (C$0.45) and
multiplying the result by the number of common shares underlying an
option.
(2)
These DSUs are
permitted to be redeemed only following termination of Board
service. Includes DSUs earned as at November 30, 2018.
(3)
The value of DSUs
at year-end is calculated from the closing price of the common
shares of the Company on the TSX on November 30, 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
|
Option-based
awards - Value vested during the year
|
Share-based
awards - Value vested during the year
|
Non-equity
incentive plan compensation - Value earned during the
year
|
|
(a)
|
(b)(1)
|
(c)(2)
|
(d)
|
|
Eldon
Smith
|
N/A
|
N/A
|
Nil
|
|
Kenneth
Keirstead
|
N/A
|
N/A
|
Nil
|
|
Bahadur
Madhani
|
N/A
|
N/A
|
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.
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 www.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 AND CORPORATE GOVERNANCE
COMMITTEE
Compensation Committee Mandate and Purpose
The
Compensation Committee of the Board is a standing committee of the
Board whose primary function is to assist the Board in fulfilling
its responsibilities relating to:
●
the development,
review and periodic approval of the Company’s compensation
philosophy that attracts and retains key executives and employees,
while supporting the overall business strategy and objectives and
links compensation with business objectives and organizational
performance;
●
evaluate and
approve all compensation of executive officers including salaries,
bonuses and equity compensation that are required to be
determined;
●
review the
Company’s Option Plan, the employee RSU Plan and the DSU Plan
on an annual basis;
●
review and make
recommendations to the Board on compensation payable to senior
officers of the Company to be hired subsequent to the adoption of
the Charter; and
●
produce a report
annually on executive officer compensation for inclusion in the
proxy circular of the Company.
Compensation Committee Charter
The
charter of the Compensation Committee can be found on the
Company’s website at www.intellipharmaceutics.com.
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.
The
number of full-time employees as of the end of each of last three
fiscal years is as follows:
|
|
November
30, 2018
|
November
30, 2017
|
November
30, 2016
|
|
Research
Employees
|
49
|
51
|
40
|
|
Administrative
Employees
|
10
|
11
|
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
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.
|
Name
|
Position with the Company
|
Number of Common Shares Owned
|
Percentage of Common Shares Owned
|
Number of Stock Options Held(2)
|
Exercise Price
|
Option Expiry dd/mm/yyyy
|
Number of Currently Exercisable Options(4)
|
Number of Common Shares Issuable on Conversion of Convertible
Debt
|
Number of DSU Held
|
Number of RSU Held
|
|
Dr. Isa
Odidi
|
Chief
Executive Officer and Chairman of the Board and Director of the
Company
|
578,131(1)
|
2.64%
|
276,394
30,000
7,500
5,000
7,000
9,000
7,000
|
$36.20
C$32.70
C$18.10
C$42.90
C$25.20
C$24.20
C$11.50
|
10/09/2020
16/02/2022
13/04/2020
28/02/2019
30/11/2020
31/08/2021
30/11/2022
|
276,394
30,000
7,500
5,000
7,000
9,000
4,667
|
35,000(3)
166,667
|
N/A
|
N/A
|
|
Dr.
Amina Odidi
|
President,
Chief Operating Officer and Director of the Company
|
578,131(1)
|
2.64%
|
276,394
30,000
7,500
5,000
7,000
9,000
7,000
|
$36.20
C$32.70
C$18.10
C$42.90
C$25.20
C$24.20
C$11.50
|
10/09/2018
16/02/2022
13/04/2020
28/02/2019
30/11/2020
31/08/2021
30/11/2022
|
276,394
30,000
7,500
5,000
7,000
9,000
4,667
|
35,000(3)
166,667
|
N/A
|
N/A
|
|
John N.
Allport
|
Consultant;
Former Vice-President, Legal Affairs and Licensing and Former
Director of the Company
|
11,055
|
0.5%
|
25,000
2,500
5,000
4,000
5,500
|
C$32.70
C$18.10
C$42.90
C$25.20
C$24.30
|
16/02/2022
13/04/2020
28/02/2019
30/11/2020
31/08/2021
|
25,000
2,500
5,000
4,000
5,500
|
N/A
|
N/A
|
Nil
|
|
Dr.
Eldon Smith
|
Former
Director of the Company
|
2,173
|
0.1%
|
1,000
2,500
3,750
3,750
2,000
3,500
2,667
|
C$28.80
C$18.10
C$42.90
C$32.20
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
|
1,000
2,500
3,750
3,750
2,000
3,500
2,667
|
N/A
|
10,279
|
N/A
|
|
Kenneth
Keirstead
|
Director
of the Company
|
Nil
|
Nil
|
1,000
2,500
3,750
3,750
2,000
3,500
4,000
|
C$28.80
C$18.10
C$42.90
C$32.20
C$25.20
C$24.20
C$11.50
|
22/10/2019
13/04/2020
28/02/2019
30/11/2019
30/11/2020
31/08/2021
30/11/2022
|
1,000
2,500
3,750
3,750
2,000
3,500
2,667
|
N/A
|
Nil
|
N/A
|
|
Bahadur
Madhani
|
Director
of the Company
|
750
|
0.003%
|
1,000
2,500
3,750
3,750
2,000
3,500
4,000
|
C$28.80
C$18.10
C$42.90
C$32.20
C$25.20
C$24.20
C$11.50
|
22/10/2019
13/04/2020
28/02/2019
30/11/2019
30/11/2020
31/08/2021
30/11/2022
|
1,000
2,500
3,750
3,750
2,000
3,500
2,667
|
N/A
|
Nil
|
N/A
|
|
Dr.
Patrick Yat
|
Vice-President,
Chemistry and Analytical Services
|
2,717
|
0.01%
|
5,000
1,500
1,500
2,500
1,500
|
C$38.20
C$18.10
C$25.20
C$24.20
C$11.50
|
24/05/2021
13/04/2020
30/11/2020
31/08/2021
30/11/2022
|
5,000
1,500
1,500
2,500
1,000
|
N/A
|
N/A
|
Nil
|
|
Andrew
Patient
|
Former
Chief Financial Officer of the Company
|
Nil
|
Nil
|
4,000
1,000
|
C$12.70
C$11.50
|
30/03/2019
30/03/2019
|
4,000
1,000
|
N/A
|
N/A
|
Nil
|
|
Totals
|
|
594,828
|
2.71%
|
526,561
|
|
|
518,728
|
201,666
|
10,279
|
Nil
|
87
Notes:
(1)
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.
(2)
For information
regarding option expiration dates and exercise price refer to the
tables included under Item 6.B.
(3)
On January 10,
2013, the Company completed a private placement financing of 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
not adversely alter
or impair any option previously granted;
o
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
o
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:
o
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;
o
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;
o
amendments
altering, extending or accelerating any vesting terms or conditions
in the Option Plan or any options;
o
changes amending or
modifying any mechanics for exercising an option;
o
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);
o
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;
o
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;
o
amendments adding a
form of financial assistance or amending a financial assistance
provision which is adopted;
o
amendments changing
the eligible participants of the Option Plan; and
o
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
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;
o
be subject to any
regulatory approvals including, where required, the approval of the
TSX;
o
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.
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”.
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.
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.
No
significant changes occurred since the date of our annual
consolidated financial statements included elsewhere in this annual
report.
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.
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
|
Options exercisable
|
|||||
|
|
|
Weighted
|
Weighted
|
Weighted
|
|
Weighted
|
Weighted
|
|
|
|
average
|
average
|
average
|
|
average
|
average
|
|
|
|
exercise
|
remaining
|
grant
|
|
exercise
|
grant
|
|
Exercise
|
Number
|
price
per
|
contract
|
date
|
Number
|
price
per
|
date
|
|
price
|
outstanding
|
share
|
life
(years)
|
fair
value
|
exercisable
|
share
|
fair
value
|
|
$
|
|
$
|
|
$
|
|
$
|
$
|
|
|
|
|
|
|
|
|
|
|
Under
25
|
109,067
|
17.99
|
2.66
|
9.75
|
98,035
|
14.14
|
10.15
|
|
26.00
- 50.00
|
446,584
|
35.11
|
1.98
|
29.25
|
446,584
|
35.11
|
29.25
|
|
|
555,651
|
31.75
|
|
|
544,619
|
32.16
|
|
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.
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
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
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.
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)
a citizen or an
individual resident of the United States;
(ii)
a corporation (or
an entity taxable as a corporation for United States federal income
tax purposes) created or organized in or under the laws of the
United States or any political subdivision of the United
States;
(iii)
an estate the
income of which is subject to United States federal income taxation
regardless of its source; or
(iv)
a trust which (A)
is subject to the supervision of a court within the United States
and the control of a United States person as described in Section
7701(a)(30) of the Code; or (B) is subject to a valid election
under applicable Treasury Regulations to be treated as a United
States person.
If a
partnership (including for this purpose any entity treated as a
partnership for U.S. federal income tax purposes) holds our common
shares, the United States federal income tax treatment of a partner
generally will depend on the status of the partner and the
activities of the partnership. A United States person that is a
partner of the partnership holding our common shares should consult
its own tax adviser.
Passive Foreign Investment Company Considerations
(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.
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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.
Not
Applicable
Not
Applicable
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.
See
Item 4.C of this annual report.
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:
|
|
November
30, 2018
|
November
30, 2017
|
|
|
$
|
$
|
|
Total
accounts receivable
|
305,912
|
756,468
|
|
Less
allowance for doubtful accounts
|
(66,849)
|
(66,849)
|
|
Total
accounts receivable, net
|
239,063
|
689,619
|
|
|
|
|
|
Not
past due
|
239,063
|
689,619
|
|
Past
due for more than 31 days
|
|
|
|
but
no more than 120 days
|
-
|
5,176
|
|
Past
due for more than 120 days
|
66,849
|
61,673
|
|
Total
accounts receivable, gross
|
305,912
|
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:
|
|
November
30, 2018
|
November
30, 2017
|
||
|
|
Canadian
|
U.S.
|
Canadian
|
U.S.
|
|
FX
rates used to translate to U.S.
|
1.3301
|
|
1.2888
|
|
|
|
$
|
$
|
$
|
$
|
|
Assets
|
|
|
|
|
|
Cash
|
740,620
|
556,815
|
202,277
|
156,950
|
|
|
740,620
|
556,815
|
202,277
|
156,950
|
|
Liabilities
|
|
|
|
|
|
Accounts
payable and accrued libilities
|
2,036,795
|
1,531,310
|
1,704,086
|
1,322,227
|
|
Employee
cost payable
|
295,918
|
222,478
|
277,080
|
214,980
|
|
|
2,332,713
|
1,753,788
|
1,981,166
|
1,537,207
|
|
Net
exposure
|
(1,592,073)
|
(1,196,973)
|
(1,778,889)
|
(1,380,257)
|
117
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
to 6
|
6
to 9
|
9
months
|
Greater
than
|
|
|
|
3
months
|
months
|
months
|
to
1 year
|
1
year
|
Total
|
|
|
$
|
$
|
$
|
$
|
$
|
$
|
|
Third
parties
|
|
|
|
|
|
|
|
Accounts
payable
|
2,643,437
|
-
|
-
|
-
|
-
|
2,643,437
|
|
Accrued
liabilities
|
353,147
|
-
|
-
|
-
|
-
|
353,147
|
|
Related
parties
|
|
|
|
|
|
|
|
Employee
costs payable
|
222,478
|
-
|
-
|
-
|
-
|
222,478
|
|
Convertible
debentures
|
52,274
|
1,376,805
|
12,603
|
12,466
|
537,808
|
1,991,956
|
|
|
3,271,336
|
1,376,805
|
12,603
|
12,466
|
537,808
|
5,211,018
|
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.
Not
applicable.
Not
applicable.
Not
applicable.
None.
PART
II.
There
have been no material defaults in the payment of any principal or
interest owing. Neither the Company nor its subsidiaries has any
preferred shares outstanding.
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
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.
Attestation of Internal Control over Financial
Reporting
This
annual report does not include an attestation report of our
independent registered public accounting firm regarding internal
control over financial reporting for the Company. As the Company is
a non-accelerated filer, management’s report is not subject
to attestation by our independent registered public accounting firm
pursuant to SOX Section 404(c).
119
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.
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.
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:
|
|
2018
|
2017
|
|
Audit
Fees(1)
|
C$139,100
|
C$129,342
|
|
Audit-Related
Fees(2)
|
C$160,603
|
C$210,791
|
|
Tax
Fees(3)
|
C$29,305
|
-
|
|
All Other
Fees(4)
|
-
|
-
|
|
Total
Fees
|
C$329,008
|
C$340,133
|
Notes:
(1)
Audit fees consist
of fees related to the audit of the Company’s consolidated
financial statements.
(2)
Audit-related fees
consist of consultation on accounting and disclosure matters and
reviews of quarterly interim financial statements, prospectus and
base shelf activities and Form 20-F reviews.
(3)
Tax fees consist of
fees for tax consultation, tax advice and tax compliance services
for the Company and its subsidiaries.
(4)
All other fees
related to internal control reviews.
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.
Not
applicable.
Neither
the Company nor, to our knowledge, any affiliated purchaser has
made any purchases of our registered shares during the last
financial year.
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.
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.
Not
applicable.
PART
III.
See
Item 18 below.
122
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
|
1-2
|
|
|
|
|
Consolidated
balance sheets
|
3
|
|
|
|
|
Consolidated
statements of operations and comprehensive loss
|
4
|
|
|
|
|
Consolidated
statements of shareholders’ equity (deficiency)
|
5
|
|
|
|
|
Consolidated
statements of cash flows
|
6
|
|
|
|
|
Notes to the
consolidated financial statements
|
7-36
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of
Directors and Shareholders of Intellipharmaceutics International
Inc.:
We
have audited the accompanying consolidated financial statements of
Intellipharmaceutics International Inc. and 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.
|
|
/s/ MNP
LLP
|
|
Toronto,
Canada
|
Chartered
Professional Accountants
|
|
February 22,
2019
|
Licensed Public
Accountants
|
We have served as the Company’s auditor
since 2016.
|
Intellipharmaceutics International Inc.
|
|
Consolidated
balance sheets
|
|
As
at November 30, 2018 and 2017
|
|
(Stated
in U.S. dollars)
|
|
|
2018
|
2017
|
|
|
$
|
$
|
|
|
|
|
|
Assets
|
|
|
|
Current
|
|
|
|
Cash
|
6,641,877
|
1,897,061
|
|
Accounts
receivable, net (Note 4)
|
239,063
|
689,619
|
|
Investment
tax credits
|
998,849
|
636,489
|
|
Prepaid
expenses, sundry and other assets
|
586,794
|
225,092
|
|
Inventory
(Note 3)
|
251,651
|
115,667
|
|
|
8,718,234
|
3,563,928
|
|
|
|
|
|
Deferred
offering costs (Note 10)
|
-
|
565,302
|
|
Property
and equipment, net (Note 5)
|
2,755,993
|
3,267,551
|
|
|
11,474,227
|
7,396,781
|
|
|
|
|
|
Liabilities
|
|
|
|
Current
|
|
|
|
Accounts
payable
|
2,643,437
|
2,060,084
|
|
Accrued
liabilities (Note 6)
|
353,147
|
782,369
|
|
Employee
costs payable (Note 8)
|
222,478
|
214,980
|
|
Convertible
debentures (Note 7)
|
1,790,358
|
1,290,465
|
|
Deferred
revenue (Note 3)
|
300,000
|
300,000
|
|
|
5,309,420
|
4,647,898
|
|
|
|
|
|
Deferred
revenue (Note 3)
|
2,062,500
|
2,362,500
|
|
|
7,371,920
|
7,010,398
|
|
|
|
|
|
Shareholders' equity
|
|
|
|
Capital
stock (Note 10)
|
|
|
|
Authorized
|
|
|
|
Unlimited
common shares without par value
|
|
|
|
Unlimited
preference shares
|
|
|
|
Issued
and outstanding
|
|
|
|
18,252,243
common shares
|
44,327,952
|
35,290,034
|
|
(November
30, 2017 - 3,470,451)
|
|
|
|
Additional
paid-in capital
|
45,110,873
|
36,685,387
|
|
Accumulated
other comprehensive income
|
284,421
|
284,421
|
|
Accumulated
deficit
|
(85,620,939)
|
(71,873,459)
|
|
|
4,102,307
|
386,383
|
|
Contingencies
(Note 16)
|
|
|
|
|
11,474,227
|
7,396,781
|
|
On
behalf of the Board:
|
|
|
|
|
|||||||
|
|
|
|
|
|
|
|
|
||||
|
/s/
Dr. Isa Odidi
|
/s/
Bahadur Madhani
|
|
|
||||||||
|
Dr.
Isa Odidi, Chairman of the Board
|
Bahadur
Madhani, Director
|
|
|
||||||||
See
accompanying notes to consolidated financial
statements
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)
|
|||
|
|
|
|
|
|
|
2018
|
2017
|
2016
|
|
|
$
|
$
|
$
|
|
Revenues
|
|
|
|
|
Licensing
(Note 3)
|
1,370,607
|
5,025,350
|
2,209,502
|
|
Up-front
fees (Note 3)
|
342,124
|
479,102
|
37,500
|
|
|
1,712,731
|
5,504,452
|
2,247,002
|
|
|
|
|
|
|
Cost
of goods sold
|
124,870
|
704,006
|
-
|
|
Gross Margin
|
1,587,861
|
4,800,446
|
2,247,002
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
Research
and development
|
10,827,293
|
9,271,353
|
8,166,736
|
|
Selling,
general and administrative
|
3,476,450
|
3,287,914
|
3,546,132
|
|
Depreciation
(Note 5)
|
610,384
|
506,961
|
385,210
|
|
|
14,914,127
|
13,066,228
|
12,098,078
|
|
|
|
|
|
|
Loss
from operations
|
(13,326,266)
|
(8,265,782)
|
(9,851,076)
|
|
|
|
|
|
|
Net
foreign exchange (loss) gain
|
8,592
|
(80,093)
|
(22,470)
|
|
Interest
income
|
227
|
15,037
|
207
|
|
Interest
expense
|
(255,231)
|
(389,239)
|
(270,238)
|
|
Financing
cost (Note 10)
|
(174,802)
|
(137,363)
|
-
|
|
Net loss and comprehensive loss
|
(13,747,480)
|
(8,857,440)
|
(10,143,577)
|
|
|
|
|
|
|
Loss
per common share, basic and diluted
|
(2.89)
|
(2.86)
|
(3.80)
|
|
|
|
|
|
|
Weighted average number of common
|
|
|
|
|
shares outstanding, basic and diluted
|
4,762,274
|
3,101,448
|
2,669,958
|
See accompanying notes to
consolidated financial statements
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)
|
|
|
|
|
Accumulated
|
|
Total
|
|
|
|
|
Additional
|
other
|
|
shareholders'
|
|
|
|
Capital
stock
|
paid-in
|
comprehensive
|
Accumulated
|
equity
|
|
|
Number
|
amount
|
capital
|
income
|
deficit
|
(deficiency)
|
|
|
|
$
|
$
|
$
|
$
|
$
|
|
|
|
|
|
|
|
|
|
Balance,
November 30, 2015
|
2,424,405
|
21,481,242
|
30,969,093
|
284,421
|
(52,872,442)
|
(137,686)
|
|
DSU's to
non-management board members (Note 12)
|
-
|
-
|
31,628
|
-
|
-
|
31,628
|
|
Stock options to
employees (Note 11)
|
-
|
-
|
2,261,444
|
-
|
-
|
2,261,444
|
|
Shares issued for
options exercised (Note 11)
|
2,750
|
87,259
|
(34,391)
|
-
|
-
|
52,868
|
|
Proceeds from
at-the-market financing (Note 10)
|
147,126
|
3,469,449
|
-
|
-
|
-
|
3,469,449
|
|
Proceeds from
issuance of shares and warrants (Note 10 &
14)
|
368,927
|
4,764,777
|
1,175,190
|
-
|
-
|
5,939,967
|
|
Share issuance cost
(Note 10)
|
-
|
(1,002,655)
|
(158,736)
|
-
|
-
|
(1,161,391)
|
|
Issuance of shares
on exercise of warrants (Note 14)
|
35,791
|
1,030,719
|
(330,066)
|
-
|
-
|
700,653
|
|
Modification of 2013
Debenture (Note 7)
|
-
|
-
|
102,909
|
-
|
-
|
102,909
|
|
Net
loss
|
-
|
-
|
-
|
-
|
(10,143,577)
|
(10,143,577)
|
|
Balance,
November 30, 2016
|
2,978,999
|
29,830,791
|
34,017,071
|
284,421
|
(63,016,019)
|
1,116,264
|
|
DSU's to
non-management board members (Note 12)
|
-
|
-
|
30,355
|
-
|
-
|
30,355
|
|
Stock options to
employees (Note 11)
|
-
|
-
|
1,749,999
|
-
|
-
|
1,749,999
|
|
Shares issued for
options exercised (Note 11)
|
200
|
1,100
|
642
|
-
|
-
|
1,742
|
|
Proceeds from
at-the-market financing (Note 10)
|
110,815
|
2,541,640
|
-
|
-
|
-
|
2,541,640
|
|
Proceeds from
issuance of shares and warrants (Note 10 &
14)
|
363,636
|
3,257,445
|
742,555
|
-
|
-
|
4,000,000
|
|
Cost of warrants
issued to placement agent (Note 14)
|
-
|
(86,196)
|
86,196
|
-
|
-
|
-
|
|
Share issuance cost
(Note 10)
|
-
|
(685,319)
|
(108,912)
|
-
|
-
|
(794,231)
|
|
Issuance of shares
on exercise of warrants (Note 14)
|
16,801
|
430,573
|
(106,315)
|
-
|
-
|
324,258
|
|
Modification of 2013
Debenture (Note 7)
|
-
|
-
|
273,796
|
-
|
-
|
273,796
|
|
Net
loss
|
-
|
-
|
-
|
-
|
(8,857,440)
|
(8,857,440)
|
|
Balance,
November 30, 2017
|
3,470,451
|
35,290,034
|
36,685,387
|
284,421
|
(71,873,459)
|
386,383
|
|
DSU's to
non-management board members (Note 12)
|
-
|
-
|
7,565
|
-
|
-
|
7,565
|
|
Stock options to
employees (Note 11)
|
-
|
-
|
927,686
|
-
|
-
|
927,686
|
|
Proceeds from
issuance of shares and warrants (Note 10 &
14)
|
3,658,564
|
5,993,472
|
13,651,434
|
-
|
-
|
19,644,906
|
|
Proceeds from
exercise of Pre-Funded Warrants (Note 14)
|
11,123,334
|
4,012,528
|
(3,901,275)
|
-
|
-
|
111,253
|
|
Shares to be issued
from exercise of Pre-Funded Warrants (Note 10 &
14)
|
-
|
371,551
|
(361,251)
|
|
|
10,300
|
|
Cost of warrants
issued to placement agent (Note 14)
|
-
|
(602,981)
|
602,981
|
-
|
-
|
-
|
|
Share issuance cost
(Note 10)
|
-
|
(736,652)
|
(2,568,321)
|
-
|
-
|
(3,304,973)
|
|
Beneficial
conversion feature related to 2018 Debenture (Note
7)
|
-
|
-
|
66,667
|
-
|
-
|
66,667
|
|
Net
loss
|
-
|
-
|
-
|
-
|
(13,747,480)
|
(13,747,480)
|
|
Rounding of
fractional shares after consolidation (Note 2)
|
(106)
|
-
|
-
|
-
|
-
|
-
|
|
Balance,
November 30, 2018
|
18,252,243
|
44,327,952
|
45,110,873
|
284,421
|
(85,620,939)
|
4,102,307
|
See accompanying notes to
consolidated financial statements
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)
|
|
2018
|
2017
|
2016
|
|
|
$
|
$
|
$
|
|
|
|
|
|
|
Net loss
|
(13,747,480)
|
(8,857,440)
|
(10,143,577)
|
|
Items
not affecting cash
|
|
|
|
|
Depreciation
(Note 5)
|
612,736
|
520,838
|
385,210
|
|
Stock-based
compensation (Note 11)
|
927,686
|
1,749,999
|
2,261,444
|
|
Deferred
share units (Note 12)
|
7,565
|
30,355
|
31,628
|
|
Accreted
interest (Note 7)
|
66,560
|
219,497
|
79,245
|
|
Financing
cost (Note 10)
|
174,802
|
137,363
|
-
|
|
Provision
for doubtful debts (Note 4)
|
-
|
66,849
|
-
|
|
Unrealized
foreign exchange loss (gain)
|
52,613
|
56,998
|
22,916
|
|
|
|
|
|
|
Change
in non-cash operating assets & liabilities
|
|
|
|
|
Accounts
receivable
|
450,556
|
(283,994)
|
6,200
|
|
Investment
tax credits
|
(362,360)
|
44,647
|
(223,115)
|
|
Prepaid
expenses, sundry and other assets
|
(361,702)
|
175,550
|
(171,417)
|
|
Inventory
|
(135,984)
|
(115,667)
|
-
|
|
Accounts
payable, accrued liabilities and employee costs
payable
|
106,048
|
599,220
|
(1,466,019)
|
|
Deferred
revenue
|
(300,000)
|
(450,000)
|
2,962,500
|
|
Cash
flows used in operating activities
|
(12,508,960)
|
(6,105,785)
|
(6,254,985)
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
Repayment
of 2013 Debenture (Note 7)
|
-
|
(150,000)
|
-
|
|
2018
Debenture financing (Note 7)
|
500,000
|
-
|
-
|
|
Repayment
of capital lease obligations
|
-
|
(14,829)
|
(21,291)
|
|
Issuance
of shares on exercise of stock options (Note 11)
|
-
|
1,742
|
52,868
|
|
Issuance
of common shares on at-the-market financing, gross (Note
10)
|
-
|
2,541,640
|
3,469,449
|
|
Proceeds
from issuance of shares and warrants (Note 10)
|
19,644,906
|
4,000,000
|
5,939,967
|
|
Proceeds
from issuance of shares on exercise of warrants (Note
14)
|
111,253
|
324,258
|
700,653
|
|
Proceeds
from shares to be issued from exercise of Pre-Funded Warrants (Note
14)
|
10,300
|
-
|
-
|
|
Offering
costs
|
(2,911,505)
|
(1,020,643)
|
(982,023)
|
|
Cash
flows provided from financing activities
|
17,354,954
|
5,682,168
|
9,159,623
|
|
|
|
|
|
|
Investing activity
|
|
|
|
|
Purchase
of property and equipment (Note 5)
|
(101,178)
|
(1,823,746)
|
(515,410)
|
|
Cash
flows used in investing activities
|
(101,178)
|
(1,823,746)
|
(515,410)
|
|
|
|
|
|
|
Increase
(decrease) in cash
|
4,744,816
|
(2,247,363)
|
2,389,228
|
|
Cash,
beginning of year
|
1,897,061
|
4,144,424
|
1,755,196
|
|
Cash, end of year
|
6,641,877
|
1,897,061
|
4,144,424
|
|
|
|
|
|
|
Supplemental cash flow information
|
|
|
|
|
Interest
paid
|
209,675
|
123,204
|
165,585
|
|
Taxes
paid
|
-
|
-
|
-
|
See accompanying notes to
consolidated financial statements
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
|
Basis
|
Rate
|
|
|
|
|
|
Computer
equipment
|
Declining
balance
|
30%
|
|
Computer
software
|
Declining
balance
|
50%
|
|
Furniture
and fixtures
|
Declining
balance
|
20%
|
|
Laboratory
equipment
|
Declining
balance
|
20%
|
|
Leasehold
improvements
|
Straight
line
|
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 lease
|
Computer equipment under
capital lease
|
Total
|
|
Cost
|
|
|
|
|
|
|
|
|
|
Balance at November
30, 2016
|
$295,296
|
$124,151
|
$129,860
|
$3,933,693
|
$1,205,811
|
$276,300
|
$76,458
|
$6,041,569
|
|
Additions
|
235,454
|
31,908
|
42,638
|
1,353,110
|
235,641
|
-
|
-
|
1,898,751
|
|
Balance at November
30, 2017
|
530,750
|
156,059
|
172,498
|
5,286,803
|
1,441,452
|
276,300
|
76,458
|
7,940,320
|
|
Additions
|
20,336
|
-
|
-
|
80,842
|
-
|
-
|
-
|
101,178
|
|
Balance at November
30, 2018
|
551,086
|
156,059
|
172,498
|
5,367,645
|
1,441,452
|
276,300
|
76,458
|
8,041,498
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
depreciation
|
|
|
|
|
|
|
|
|
|
Balance at November
30, 2016
|
238,672
|
117,506
|
109,243
|
2,290,074
|
1,143,792
|
179,422
|
73,222
|
4,151,931
|
|
Depreciation
|
47,811
|
13,622
|
10,747
|
379,158
|
49,154
|
19,376
|
970
|
520,838
|
|
Balance at November
30, 2017
|
286,483
|
131,128
|
119,990
|
2,669,232
|
1,192,946
|
198,798
|
74,192
|
4,672,769
|
|
Depreciation
|
77,179
|
12,465
|
10,501
|
413,576
|
82,835
|
15,500
|
680
|
612,736
|
|
Balance at November
30, 2018
|
363,662
|
143,593
|
130,491
|
3,082,808
|
1,275,781
|
214,298
|
74,872
|
5,285,505
|
|
|
|
|
|
|
|
|
|
|
|
Net
book value at:
|
|
|
|
|
|
|
|
|
|
November 30,
2017
|
$244,267
|
$24,931
|
$52,508
|
$2,617,571
|
$248,506
|
$77,502
|
$2,266
|
$3,267,551
|
|
Balance at November
30, 2018
|
$187,424
|
$12,466
|
$42,007
|
$2,284,837
|
$165,671
|
$62,002
|
$1,586
|
$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
|
|
November
30,
2018
|
November
30,
2017
|
|
|
$
|
$
|
|
|
|
|
|
Professional
fees
|
229,170
|
400,796
|
|
Property
taxes
|
-
|
111,970
|
|
Interest
|
17,413
|
54,110
|
|
Other
|
106,564
|
215,493
|
|
|
353,147
|
782,369
|
7.
Due
to related parties
Convertible debentures
Amounts due to the
related parties are payable to entities controlled by two
shareholders who are also officers and directors of the
Company.
|
|
November
30,
|
November
30,
|
|
|
2018
|
2017
|
|
Convertible
debenture payable to two directors and officers of the Company,
unsecured, 12% annual interest rate, Payable monthly (“2013
Debenture”)
|
$1,350,000
|
$1,290,465
|
|
Convertible
debenture payable to two directors and officers of the Company,
unsecured, 10% annual interest rate, Payable monthly (“2018
Debenture”)
|
$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,
|
Operating
Lease
|
|
|
$
|
|
|
|
|
2019
|
180,436
|
|
2020
|
180,436
|
|
|
360,872
|
10.
Capital
stock
Authorized, issued and outstanding
(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.
(e)
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.
(f)
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
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:
|
|
November
30,
|
November
30,
|
November
30,
|
|
|
2018
|
2017
|
2016
|
|
|
|
|
|
|
Volatility
|
-
|
71.7%
|
65.2%
|
|
Risk-free
interest rate
|
-
|
1.56%
|
0.620%
|
|
Expected
life (in years)
|
-
|
5.49
|
5.00
|
|
Dividend
yield
|
-
|
-
|
-
|
|
The
weighted average grant date
|
|
|
|
|
fair
value of options granted
|
-
|
$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
|
November 30, 2017
|
November 30, 2016
|
||||||
|
|
|
Weighted
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
average
|
Weighted
|
|
average
|
Weighted
|
|
average
|
Weighted
|
|
|
|
exercise
|
average
|
|
exercise
|
average
|
|
exercise
|
average
|
|
|
Number of
|
price
per
|
grant
date
|
Number
of
|
price
per
|
grant
date
|
Number
of
|
price
per
|
grant
date
|
|
|
options
|
share
|
fair
value
|
options
|
share
|
fair
value
|
options
|
share
|
fair
value
|
|
|
|
$
|
$
|
|
$
|
$
|
|
$
|
$
|
|
Outstanding,
|
|
|
|
|
|
|
|
|
|
|
beginning of
year
|
582,811
|
32.00
|
17.20
|
539,246
|
34.80
|
18.80
|
506,200
|
38.90
|
22.10
|
|
Granted
|
-
|
-
|
-
|
49,600
|
11.70
|
7.50
|
46,000
|
24.20
|
12.00
|
|
Exercised
|
-
|
-
|
-
|
(200)
|
23.20
|
12.00
|
(2,750)
|
25.70
|
16.80
|
|
Forfeiture
|
(25,533)
|
20.36
|
14.19
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Expired
|
(1,627)
|
291.07
|
228.92
|
(5,835)
|
126.40
|
96.00
|
(10,204)
|
192.40
|
132.90
|
|
Balance,
|
|
|
|
|
|
|
|
|
|
|
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
|
Options exercisable
|
|||||
|
|
|
Weighted
|
Weighted
|
Weighted
|
|
Weighted
|
Weighted
|
|
|
|
average
|
average
|
average
|
|
average
|
average
|
|
|
|
exercise
|
remaining
|
grant
|
|
exercise
|
grant
|
|
Exercise
|
Number
|
price
per
|
contract
|
date
|
Number
|
price
per
|
date
|
|
price
|
outstanding
|
share
|
life
(years)
|
fair
value
|
exercisable
|
share
|
fair
value
|
|
$
|
|
$
|
|
$
|
|
$
|
$
|
|
Under
25
|
109,067
|
17.99
|
2.66
|
9.75
|
98,035
|
14.14
|
10.15
|
|
26.00 - 50.00
|
446,584
|
35.11
|
1.98
|
29.25
|
446,584
|
35.11
|
29.25
|
|
|
555,651
|
31.75
|
|
|
544,619
|
32.16
|
|
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.
|
|
November
30,
|
November
30,
|
November
30,
|
|
|
2018
|
2017
|
2016
|
|
|
$
|
$
|
$
|
|
Research
and development
|
883,064
|
1,654,051
|
1,995,805
|
|
Selling,
general and administrative
|
44,622
|
95,948
|
265,639
|
|
|
927,686
|
1,749,999
|
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
|
November
30,
2017
|
November
30,
2016
|
|||
|
|
$
|
shares
|
$
|
shares
|
$
|
shares
|
|
|
|
|
|
|
|
|
|
Additional
paid in capital
|
7,565
|
866
|
30,355
|
1,738
|
31,628
|
1,674
|
|
Accrued
liability
|
-
|
-
|
7,562
|
866
|
7,261
|
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)
|
|
|
|
|
Shares
issuable
|
|
Warrant
|
Exercise
price
|
Number
outstanding
|
Expiry
|
upon
exercise
|
|
|
|
|
|
|
|
June
2016 Warrants
|
$19.30
|
277,478
|
June
2, 2021
|
138,739
|
|
October
2017 Warrants
|
$12.50
|
181,818
|
October
13, 2020
|
181,818
|
|
October
2017 Placement
|
|
|
|
|
|
Agent
Warrants
|
$13.750
|
18,181
|
October
13, 2020
|
18,181
|
|
March
2018 Warrants
|
$6.00
|
291,666
|
March
16, 2021
|
291,666
|
|
March
2018 Warrants
|
$6.00
|
150,000
|
March
21, 2021
|
150,000
|
|
March
2018 Placement
|
|
|
|
|
|
Agent
Warrants
|
$7.50
|
29,166
|
March
16, 2021
|
29,166
|
|
March
2018 Placement
|
|
|
|
|
|
Agent
Warrants
|
$7.50
|
15,000
|
March
21, 2021
|
15,000
|
|
2018
Firm Warrants
|
$0.75
|
20,000,000
|
October
16, 2023
|
20,000,000
|
|
2018
Pre-Funded Warrants
|
$0.01
|
4,410,001
|
October
16, 2023
|
4,410,001
|
|
October
2018 Placement
|
|
|
|
|
|
Agent
Warrants
|
$0.9375
|
1,160,314
|
October
16, 2023
|
1,160,314
|
|
|
|
26,533,624
|
|
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:
|
|
Outstanding,
December
1, 2017
|
Issued
|
Expired
|
Exercised
|
Rounding
on consolidation
|
Outstanding,
November
30, 2018
|
|
March
2013 Warrants
|
149,174
|
-
|
(149,174)
|
-
|
-
|
-
|
|
July
2013 Warrants
|
87,000
|
-
|
(87,000)
|
-
|
-
|
-
|
|
June
2016 Warrants
|
277,872
|
-
|
-
|
-
|
(394)
|
277,478
|
|
October
2017 Warrants
|
181,818
|
-
|
-
|
-
|
-
|
181,818
|
|
October
2017 Placement
|
|
|
|
|
|
|
|
Agent
Warrants
|
18,181
|
-
|
-
|
-
|
-
|
18,181
|
|
March
2018 Warrants
|
-
|
441,666
|
-
|
-
|
-
|
441,666
|
|
March
2018 Placement
|
|
|
|
|
|
|
|
Agent
Warrants
|
-
|
44,166
|
-
|
-
|
-
|
44,166
|
|
2018
Firm Warrants
|
-
|
20,000,000
|
-
|
-
|
-
|
20,000,000
|
|
2018
Pre-Funded Warrants
|
-
|
16,563,335
|
-
|
(12,153,334)
|
-
|
4,410,001
|
|
October
2018 Placement
|
|
|
|
|
|
|
|
Agent
Warrants
|
-
|
1,160,314
|
-
|
-
|
-
|
1,160,314
|
|
|
714,045
|
38,209,481
|
(236,174)
|
(12,153,334)
|
(394)
|
26,533,624
|
|
|
March 2013
Warrants
|
July
2013 Warrants
|
June
2016 Warrants
|
October 2017
Warrants
|
October 2017
Placement Agent Warrants
|
Total
|
|
Outstanding,
December 1, 2016
|
149,174
|
87,000
|
311,474
|
-
|
-
|
547,648
|
|
Issued
|
-
|
-
|
-
|
181,818
|
18,181
|
199,999
|
|
Exercised
|
-
|
-
|
(33,602)
|
-
|
-
|
(33,602)
|
|
Outstanding,
November 30, 2017
|
149,174
|
87,000
|
277,872
|
181,818
|
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,
|
November
30,
|
November
30,
|
|
|
2018
|
2017
|
2016
|
|
|
%
|
%
|
%
|
|
|
|
|
|
|
Statutory
income tax rate
|
26.5
|
26.5
|
26.5
|
|
|
|
|
|
|
|
$
|
$
|
$
|
|
|
|
|
|
|
Statutory
income tax recovery
|
(3,643,080)
|
(2,347,222)
|
(2,688,048)
|
|
Increase
(decrease) in income taxes
|
|
|
|
|
Non-deductible
expenses/
|
|
|
|
|
non-taxable
income
|
263,650
|
488,769
|
640,481
|
|
Change
in valuation allowance
|
4,861,770
|
2,128,819
|
2,683,775
|
|
Investment
tax credit
|
(466,052)
|
-
|
-
|
|
Financing
costs booked to equity
|
(1,049,430)
|
(269,715)
|
(281,063)
|
|
Difference
in foreign tax rates
|
290
|
(651)
|
-
|
|
True
up of tax returns
|
11,029
|
-
|
(356,095)
|
|
Tax
loss expired and other
|
21,823
|
-
|
950
|
|
|
-
|
-
|
-
|
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:
|
|
November
30,
|
November
30,
|
November
30,
|
|
|
2018
|
2017
|
2016
|
|
|
$
|
$
|
$
|
|
Deferred
tax assets
|
|
|
|
|
Non-capital
loss carry-forwards
|
11,847,710
|
8,972,285
|
7,427,516
|
|
Book
and tax basis differences
|
|
|
|
|
on
assets and liabilities
|
1,041,360
|
863,215
|
3,409,343
|
|
Other
|
2,586,070
|
2,681,375
|
-
|
|
Investment
tax credit
|
3,354,760
|
2,865,404
|
2,405,365
|
|
Undeducted
research and
|
|
|
|
|
development
expenditures
|
4,870,130
|
4,158,178
|
3,710,274
|
|
Capital
loss carryforwards
|
326,060
|
326,064
|
-
|
|
Share
issuance cost
|
1,152,750
|
436,427
|
-
|
|
Net
operating loss carryforwards
|
-
|
14,135
|
-
|
|
|
25,178,840
|
20,317,083
|
16,952,498
|
|
Valuation
allowances for
|
|
|
|
|
deferred
tax assets
|
(25,178,840)
|
(20,317,083)
|
(16,952,498)
|
|
Net
deferred tax assets
|
-
|
-
|
-
|
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,
|
Federal
|
|
|
$
|
|
|
|
|
2028
|
182,222
|
|
2029
|
555,539
|
|
2030
|
3,373,079
|
|
2031
|
5,532,739
|
|
2032
|
5,750,053
|
|
2033
|
4,562,538
|
|
2034
|
149,927
|
|
2035
|
2,634,823
|
|
2036
|
5,341,606
|
|
2037
|
5,694,760
|
|
2038
|
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, 2018
|
November
30, 2017
|
||
|
|
Carrying
|
Fair
|
Carrying
|
Fair
|
|
|
amount
|
value
|
amount
|
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:
|
|
November
30,
|
November
30,
|
|
|
2018
|
2017
|
|
|
$
|
$
|
|
|
|
|
|
Total
accounts receivable
|
305,912
|
756,468
|
|
Less
allowance for doubtful accounts
|
(66,849)
|
(66,849)
|
|
Total
accounts receivable, net
|
239,063
|
689,619
|
|
|
|
|
|
Not
past due
|
239,063
|
689,619
|
|
Past
due for more than 31 days
|
|
|
|
but
no more than 120 days
|
-
|
5,176
|
|
Past
due for more than 120 days
|
66,849
|
61,673
|
|
Total
accounts receivable, gross
|
305,912
|
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
to 6
|
6
to 9
|
9
months
|
Greater
than
|
|
|
|
3
months
|
months
|
months
|
to
1 year
|
1
year
|
Total
|
|
|
$
|
$
|
$
|
$
|
$
|
$
|
|
Third
parties
|
|
|
|
|
|
|
|
Accounts
payable
|
2,643,437
|
-
|
-
|
-
|
-
|
2,643,437
|
|
Accrued
liabilities
|
353,147
|
-
|
-
|
-
|
-
|
353,147
|
|
Related
parties
|
|
|
|
|
|
|
|
Employee
costs payable
|
222,478
|
-
|
-
|
-
|
-
|
222,478
|
|
Convertible
debentures (Note 7)
|
52,274
|
1,376,805
|
12,603
|
12,466
|
537,808
|
1,991,956
|
|
|
3,271,336
|
1,376,805
|
12,603
|
12,466
|
537,808
|
5,211,018
|
18.
Segmented
information
The Company's
operations comprise a single reportable segment engaged in the
research, development and manufacture of novel and generic
controlled-release and targeted-release oral solid dosage drugs. As
the operations comprise a single reportable segment, amounts
disclosed in the financial statements for revenue, loss for the
period, depreciation and total assets also represent segmented
amounts. In addition, all of the Company's long-lived assets are in
Canada. The Company’s license and commercialization agreement
with Par accounts for substantially all of the revenue of the
Company.
|
|
November
30,
|
November
30,
|
November
30,
|
|
|
2018
|
2017
|
2016
|
|
|
$
|
$
|
$
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
United
States
|
1,712,731
|
5,504,452
|
2,247,002
|
|
|
1,712,731
|
5,504,452
|
2,247,002
|
|
|
|
|
|
|
Total
assets
|
|
|
|
|
Canada
|
11,474,227
|
7,396,781
|
7,974,689
|
|
|
|
|
|
|
Total
property and equipment
|
|
|
|
|
Canada
|
2,755,993
|
3,267,551
|
1,889,638
|
19.
Subsequent event
In
December 2018, a principal repayment of $300,000 was made for the
2013 Debenture to Drs. Isa and Amina Odidi.
123
EXHIBIT INDEX
|
Number
|
Exhibit
|
|
1.1
|
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)
|
|
1.2
|
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)
|
|
1.3
|
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)
|
|
4.1
|
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)
|
|
4.2
|
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)
|
|
4.3
|
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)
|
|
4.51
|
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)
|
|
4.52
|
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)
|
|
4.53
|
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)
|
|
4.54
|
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)
|
|
4.55
|
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)
|
|
4.56(†)
|
License and Commercialization Agreement dated as of November 21,
2005, between Intellipharmaceutics Corp., and Par Pharmaceutical,
Inc., as amended by the First Amendment To License and
Commercialization Agreement dated as of August 12, 2011, and as
further amended by the Second Amendment to License and
Commercialization Agreement dated as of September 24, 2013
(incorporated herein by reference to
Exhibit 4.64 to the Company's Amendment No. 1 on Form 20-F/A for
the fiscal year ended November 30, 2013 as filed on April 14,
2014)
|
|
4.57
|
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)
|
|
4.58
|
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)
|
|
4.59
|
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)
|
|
4.60
|
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)
|
|
4.61
|
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
|
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)
|
|
4.63
|
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)
|
|
4.64
|
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)
|
|
4.65
|
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)
|
|
4.66(†)
|
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)
|
|
4.67
|
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)
|
|
4.68
|
Form of Warrant (incorporated herein by reference to Exhibit 99.2
to the Company's report on Form 6-K for the month of October 2017
as filed on October 12, 2017)
|
|
4.69
|
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)
|
|
4.70
|
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)
|
|
4.71
|
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)
|
|
4.72
|
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)
|
|
4.73
|
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)
|
|
4.74
|
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)
|
|
4.75
|
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)
|
|
4.76
|
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)
|
|
4.77
|
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)
|
|
4.78
|
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)
|
|
4.79
|
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)
|
|
4.80
|
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)
|
|
4.81
|
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)
|
|
4.82
|
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))
|
|
4.83
|
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
|
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)
|
|
4.85
|
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)
|
|
4.86
|
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)
|
|
4.87
|
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)
|
|
4.88
|
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)
|
|
4.89
|
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)
|
|
4.90
|
Engagement Letter between the Company and H.C. Wainwright &
Co., LLC, dated as of August 15, 2018
|
|
4.91
|
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)
|
|
4.92
|
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)
|
|
4.93
|
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)
|
|
4.94
|
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)
|
|
8.1(1)
|
List of subsidiaries
|
|
11.1
|
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)
|
|
12.1(1)
|
Certification of the Chief Executive Officer pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934
|
|
12.2(1)
|
Certification of the Chief Financial Officer pursuant to Rule
13a-14(a) of the Securities Exchange
|
|
13.1(1)
|
Certification of the Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
|
|
13.2(1)
|
Certification of the Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
|
|
15.1(1)
|
Consent of Independent Registered Public Accounting Firm (MNP
LLP)
|
|
101(1)(2)
|
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
|
|
|
|
|
(1)
|
Filed as exhibits to this annual report on Form 20-F for the fiscal
year ended November 30, 2018.
|
|
|
|
|
(2)
|
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
SIGNATURES
The
registrant hereby certifies that it meets all of the requirements
for filing on Form 20-F and that it has duly caused and authorized
the undersigned to sign this annual report on its
behalf.
Intellipharmaceutics
International Inc.
/s/ Greg
Powell
Greg
Powell
Chief
Financial Officer (Principal Financial Officer)
Intellipharmaceutics
International Inc.
February
28, 2019