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, 2016
OR
[_]
TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
[_]
SHELL COMPANY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Date of
event requiring this shell company report
…………
For the
transition period from ________ to ________
Commission
File No. 0-53805
INTELLIPHARMACEUTICS
INTERNATIONAL
INC.
(Exact name of registrant as specified in its charter)
Canada
(Jurisdiction of Incorporation or organization)
30
Worcester Road
Toronto,
Ontario M9W 5X2
(Address of principal executive offices)
Domenic
Della Penna, Chief Financial Officer, Intellipharmaceutics
International Inc., 30 Worcester Road,
Toronto,
Ontario M9W 5X2, Telephone: (416) 798-3001, Fax: (416)
798-3007
(Name, Telephone, E-mail and/or Facsimile number and Address of
Company Contact Person)
Securities
registered or to be registered pursuant to Section 12(b) of the
Act:
|
Title
of each class
|
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, 2016, the registrant had 29,789,992
common shares
outstanding.
Indicate by check
mark if the registrant is a well-known seasoned issuer, as defined
in Rule 405 of the Securities Act.
Yes
[_] No [X]
If this
report is an annual report or transition report, indicate by check
mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Securities Exchange Act of
1934.
Yes
[_] No [X]
Indicate by check
mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90
days.
Yes
[X] No [_]
Indicate by check
mark whether the registrant has submitted electronically and posted
on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of
Regulation S-T (§232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant was
required to submit and post such files).
Yes
[X] No [_]
Indicate by check
mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of
“accelerated filer and large accelerated filer” in Rule
12b-2 of the Exchange Act. (Check one):
Large
accelerated filer [_] Accelerated filer [_]
Non-accelerated filer [X]
Indicate by check
mark which basis of accounting the registrant has used to prepare
the financial statements included in this filing:
|
|
International
Financial Reporting Standards as issued by the
|
|
|
U.S.
GAAP [X]
|
International
Accounting Standards Board [_]
|
Other
[_]
|
If
“Other” has been checked in response to the previous
question, indicate by check mark which financial statement item the
registrant has elected to follow:
Item 17
[_] Item 18 [_]
If this
is an annual report, indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange
Act).
Yes
[_] No [X]
TABLE OF CONTENTS
Page
|
PART I
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|
4
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|
Item 1.
|
Identity of
Directors, Senior Management and Advisers
|
4
|
|
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A.
Directors and
senior management
|
4
|
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|
B.
Advisors
|
4
|
|
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C.
Auditors
|
4
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|
Item 2.
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Offer
Statistics and Expected Timetable
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4
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A.
Offer
statistics
|
4
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B.
Method and
expected timetable
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4
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Item 3.
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Key
Information
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4
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A.
Selected Financial
Data
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4
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B.
Capitalization and
Indebtedness
|
5
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|
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C.
Reasons for the
Offer and use of Proceeds
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5
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D.
Risk
Factors
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5
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Item 4.
|
Information on the
Company
|
25
|
|
|
A.
History and
Development of the Company
|
25
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|
|
B.
Business
Overview
|
26
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|
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C.
Organizational
Structure
|
46
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D.
Property, Plant
and Equipment
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46
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Item 4A.
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Unresolved Staff
Comments
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47
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|
Item 5.
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Operating and
Financial Review and Prospects
|
47
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A.
Operating
Results
|
47
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|
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B.
Liquidity and
Capital Resources
|
52
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|
|
C.
Research and
development, patents, and Licenses, etc
|
55
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D.
Trend
Information
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56
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E.
Off-balance sheet
arrangements
|
57
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F.
Tabular disclosure
of contractual obligations
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57
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G.
Safe
Harbor
|
57
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Item 6.
|
Directors, Senior
Management and Employees
|
57
|
|
|
A.
Directors and
Senior Management
|
57
|
|
|
B.
Compensation
|
59
|
|
|
C.
Board
Practices
|
68
|
|
|
D.
Employees
|
72
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|
|
E.
Share
Ownership
|
73
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|
Item 7.
|
Major
Shareholders and related Party Transactions
|
81
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|
|
A.
Major
Shareholders
|
81
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|
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B.
Related Party
Transactions
|
81
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Item 8.
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Financial
Information
|
82
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|
|
A.
Consolidated
Statements and Other Financial Information
|
82
|
|
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B.
Significant
changes
|
82
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Item 9.
|
The
Offer and Listing
|
82
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|
Item 10.
|
Additional
Information
|
83
|
|
|
A.
Share
Capital
|
83
|
|
|
B.
Articles and
By-Laws
|
87
|
|
|
C.
Material
Contracts
|
89
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|
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D.
Exchange
Controls
|
90
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|
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E.
Taxation
|
90
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|
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F.
Dividends and
Paying Agents
|
99
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G.
Statement by
Experts
|
99
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H.
Documents on
Display
|
99
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|
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I.
Subsidiary
Information
|
99
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Item 11.
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Qualitative and
Quantitative Disclosures about Market Risk
|
99
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Item 12.
|
Description of
Securities Other than equity Securities
|
101
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DISCLOSURE
REGARDING FORWARD-LOOKING INFORMATION
Certain
statements in this annual report constitute “forward-looking
statements” within the meaning of the United States Private
Securities Litigation Reform Act of 1995 and/or
“forward-looking information” under the
Securities Act
(Ontario). These
statements include, without limitation, statements expressed or
implied regarding our plans, goals and milestones, status of
developments or expenditures relating to our business, plans to
fund our current activities, statements concerning our partnering
activities, health regulatory submissions, strategy, future
operations, future financial position, future sales, revenues and
profitability, projected costs and market penetration. In some
cases, you can identify forward-looking statements by terminology
such as “may”, “will”,
“should”, “expects”, “plans”,
“plans to”, “anticipates”,
“believes”, “estimates”,
“predicts”, “confident”,
“potential”, “continue”,
“intends”, “could”, or the negative of such
terms or other comparable terminology. We made a number of
assumptions in the preparation of our forward-looking statements.
You should not place undue reliance on our forward-looking
statements, which are subject to a multitude of known and unknown
risks and uncertainties that could cause actual results, future
circumstances or events to differ materially from those stated in
or implied by the forward-looking statements.
Risks,
uncertainties and other factors that could affect our actual
results include, but are not limited to, the effects of general
economic conditions, securing and maintaining corporate alliances,
our estimates regarding our capital requirements, and the effect of
capital market conditions and other factors, including the current
status of our product development programs, on capital
availability, the potential dilutive effects of any future
financing and the expected use of any proceeds from any offering of
our securities, our ability to maintain compliance with the
continued listing requirements of the principal markets on which
our securities are traded, our programs regarding research,
development and commercialization of our product candidates, the
timing of such programs, the timing, costs and uncertainties
regarding obtaining regulatory approvals to market our product
candidates and the difficulty in predicting the timing and results
of any product launches, and the timing and amount of any available
investment tax credits (“
ITCs
”). Other factors that could
cause actual results to differ materially include, but are not
limited to:
●
the actual or
perceived benefits to users of our drug delivery technologies,
products and product candidates as compared to others;
●
our ability to
establish and maintain valid and enforceable intellectual property
rights in our drug delivery technologies, products and product
candidates;
●
the scope of
protection provided by intellectual property for our drug delivery
technologies, products and product candidates;
●
the actual size of
the potential markets for any of our products and product
candidates compared to our market estimates;
●
our selection and
licensing of products and product candidates;
●
our ability to
attract distributors and collaborators with the ability to fund
patent litigation and with acceptable development, regulatory and
commercialization expertise and the benefits to be derived from
such collaborative efforts;
●
sources of revenues
and anticipated revenues, including contributions from distributors
and collaborators, product sales, license agreements and other
collaborative efforts for the development and commercialization of
product candidates;
●
our ability to
create an effective direct sales and marketing infrastructure for
products we elect to market and sell directly;
●
the rate and degree
of market acceptance of our products;
●
delays that may be
caused by changing regulatory requirements;
●
the difficulty in
predicting the timing of regulatory approval and launch of
competitive products;
●
the difficulty in
predicting the impact of competitive products on volume, pricing,
rebates and other allowances;
●
the inability to
forecast wholesaler demand and/or wholesaler buying
patterns;
●
the seasonal
fluctuation in the numbers of prescriptions written for our Focalin
XR® (dexmethylphenidate hydrochloride extended-release)
capsules, which may produce substantial fluctuations in
revenues;
●
the timing and
amount of insurance reimbursement for our products;
●
changes in laws and
regulations affecting the conditions required by the United States
Food and Drug Administration (“
FDA
”) for approval, testing and
labeling of drugs including abuse or overdose deterrent properties,
and changes affecting how opioids are regulated and prescribed by
physicians;
●
changes in laws and
regulations, including Medicare and Medicaid, affecting among other
things, pricing and reimbursement of pharmaceutical
products;
●
the success and
pricing of other competing therapies that may become
available;
●
our ability to
retain and hire qualified employees;
●
the availability
and pricing of third-party sourced products and
materials;
●
challenges related
to the development, commercialization, technology transfer,
scale-up, and/or process validation of manufacturing processes for
our products or product candidates;
●
the manufacturing
capacity of third-party manufacturers that we may use for our
products;
●
the successful
compliance with FDA, Health Canada and other governmental
regulations applicable to us and our third party
manufacturers’ facilities, products and/or
businesses;
●
difficulties,
delays or changes in the FDA approval process or test criteria for
abbreviated new drug applications (“
ANDAs
”) and new drug applications
(“
NDAs
”);
●
challenges in
securing final FDA approval for our product candidates, including
Rexista™ in particular, if a patent infringement suit is
filed against us, which could delay the FDA’s final approval
of such product candidates;
●
healthcare reform
measures could hinder or prevent the commercial success of our
products and product candidates;
●
the FDA may not
approve requested product labeling for our product candidate(s)
having abuse-deterrent properties;
●
risks associated
with cyber-security and the potential for vulnerability of the
digital information of the Company or a current and/or future drug
development or commercialization partner of the Company;
and
●
risks arising from
the ability and willingness of our third-party commercialization
partners to provide documentation that may be required to support
information on revenues earned by us from those commercialization
partners.
Additional risks
and uncertainties relating to us and our business can be found in
the “Risk Factors” section in Item 3.D below, as well
as in our reports, public disclosure documents and other filings
with the securities commissions and other regulatory bodies in
Canada and the U.S., which are available on
www.sedar.com
and
www.sec.gov
. The forward-looking
statements reflect our current views with respect to future events,
and are based on what we believe are reasonable assumptions as of
the date of this document. We disclaim any intention and have no
obligation or responsibility, except as required by law, to update
or revise any forward-looking statements, whether as a result of
new information, future events or otherwise.
Nothing
contained in this document should be construed to imply that the
results discussed herein will necessarily continue into the future
or that any conclusion reached herein will necessarily be
indicative of actual operating results of the Company.
In this
annual report, unless the context otherwise requires, the terms
“we”, “us”, “our”,
“Intellipharmaceutics,” and the “Company”
refer to Intellipharmaceutics International Inc. and its
subsidiaries. Any reference in this annual report to our
“products” includes a reference to our product
candidates and future products we may develop. Whenever we refer to
any of our current product candidates (including additional product
strengths of products we are currently marketing, such as generic
Focalin XR® (dexmethylphenidate hydrochloride extended-release
capsules) and future products we may develop, no assurances can be
given that we, or any of our strategic partners, will successfully
complete the development of any of such product candidates or
future products under development or proposed for development, that
regulatory approvals will be granted for any such product candidate
or future product, or that any approved product will be produced in
commercial quantities or sold profitably.
Unless
stated otherwise, all references to “$” are to the
lawful currency of the United States and all references to
“C$” are to the lawful currency of Canada. In this
annual report, we refer to information regarding potential markets
for our products, product candidates and other industry data. We
believe that all such information has been obtained from reliable
sources that are customarily relied upon by companies in our
industry. However, we have not independently verified any such
information.
Intellipharmaceutics™,
Hypermatrix™, Drug Delivery Engine™,
IntelliFoam™, IntelliGITransporter™,
IntelliMatrix™, IntelliOsmotics™, IntelliPaste™,
IntelliPellets™, IntelliShuttle™, Rexista™,
nPODDDS™, PODRAS™ and Regabatin™ are our
trademarks. These trademarks are important to our business.
Although we may have omitted the “TM” trademark
designation for such trademarks in this annual report, all rights
to such trademarks are nevertheless reserved. Unless otherwise
noted, other trademarks used in this annual report are the property
of their respective holders.
PART
I.
Not
applicable.
Not
applicable
Not
applicable
Not
applicable
Not
applicable
The
following selected financial data of Intellipharmaceutics has been
derived from the audited consolidated financial statements of the
Company as at and for the years ended November 30, 2016, 2015,
2014, 2013, and 2012. As a result of the IPC Arrangement
Transaction (as defined and described in Item 4.A below) completed
on October 22, 2009, we selected a November 30 year end. The
comparative number of shares issued and outstanding, basic and
diluted loss per share have been amended to give effect to this
arrangement transaction. These statements were prepared in
accordance with accounting principles generally accepted in the
United States of America (“
U.S. GAAP
”). All dollar amounts in
this annual report are expressed in United States dollars
(“
U.S.
dollars
”), unless otherwise indicated.
(in
thousands of U.S. dollars, except for per share data)
|
|
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
|
As at and for the year ended November 30, 2013
|
As at and for the year ended November 30, 2012
|
|
|
$
|
$
|
$
|
$
|
$
|
|
Revenue
|
2,247
|
4,094
|
8,770
|
1,527
|
107
|
|
Loss for the
period
|
(10,144
)
|
(7,436
)
|
(3,856
)
|
(11,495
)
|
(6,137
)
|
|
Total
assets
|
7,974
|
5,224
|
7,875
|
4,380
|
2,475
|
|
Total
liabilities
|
6,858
|
5,362
|
2,966
|
10,335
|
4,243
|
|
Net
assets
|
1,116
|
(138
)
|
4,909
|
(5,955
)
|
(1,768
)
|
|
Capital
stock
|
29,831
|
21,481
|
18,941
|
11,721
|
6,129
|
|
Loss per share -
basic and diluted
|
(0.38
)
|
(0.31
)
|
(0.17
)
|
(0.58
)
|
(0.36
)
|
|
Dividends
|
Nil
|
Nil
|
Nil
|
Nil
|
Nil
|
|
Weighted average
common shares
|
26,700
|
23,768
|
23,051
|
19,671
|
17,259
|
The
following table sets forth the average exchange rate for one
Canadian dollar expressed in terms of one U.S. dollar for the
fiscal years 2012, 2013, 2014, 2015 and 2016. The average rate is
calculated using the average of the exchange rates on the last day
of each month during the period.
|
|
AVERAGE
|
|
2012
|
0.9977
|
|
2013
|
1.0241
|
|
2014
|
0.9115
|
|
2015
|
0.7934
|
|
2016
|
0.7532
|
The
following table sets forth the high and low exchange rates for each
month during the previous six months.
|
|
LOW
|
HIGH
|
|
August
2016
|
0.7587
|
0.7828
|
|
September
2016
|
0.7548
|
0.7786
|
|
October
2016
|
0.7461
|
0.7631
|
|
November
2016
|
0.7363
|
0.7498
|
|
December
2016
|
0.7377
|
0.7622
|
|
January
2017
|
0.7442
|
0.7675
|
|
February 2017
(through February 27, 2017)
|
0.7680
|
0.7595
|
The
exchange rates are based upon the noon buying rate as quoted by The
Bank of Canada. At February 27, 2017, the exchange rate for one
Canadian dollar expressed in terms of one U.S. dollar, as quoted by
The Bank of Canada at 4 p.m. Eastern Time, equaled
$0.7597.
Not
applicable.
Not
applicable.
Prospects for
companies in the pharmaceutical industry generally may be regarded
as uncertain given the research and development nature of the
industry and uncertainty regarding the prospects of successfully
commercializing product candidates and, accordingly, investments in
companies such as ours should be regarded as very speculative. An
investor should carefully consider the risks and uncertainties
described below, as well as other information contained in this
annual report. The list of risks and uncertainties described below
is not an exhaustive list. Additional risks and uncertainties not
presently known to us or that we believe to be immaterial may also
adversely affect our business. If any one or more of the following
risks occur, our business, financial condition and results of
operations could be seriously harmed. Further, if we fail to meet
the expectations of the public market in any given period, the
market price of our common shares could decline. If any of the
following risks actually occurs, our business, operating results,
or financial condition could be materially adversely
affected.
Our activities entail significant risks. In addition to the usual
risks associated with a business, the following is a general
description of certain significant risk factors which may be
applicable to us.
Risks
related to our Company
Our business is capital intensive and requires
significant investment to conduct research and development,
clinical and regulatory activities necessary to bring our products
to market, which capital may not be available in amounts or on
terms acceptable to us, if at all
.
Our
business requires substantial capital investment in order to
conduct the research and development, clinical and regulatory
activities necessary to bring our products to market and to
establish commercial manufacturing, marketing and sales
capabilities. As more fully discussed under “
Item 5. Operating and Financial Review and
Prospects - B.
“
Liquidity and Capital Resources
,”
as of November 30, 2016, we had a cash balance of $4.1 million. As
of February 27, 2017, our cash balance was $2.7 million. We
currently expect to satisfy our operating cash requirements until
June 2017 from cash on hand. However, we may need to obtain
additional funding prior to that time as we pursue the development
of our product candidates and if we accelerate our product
commercialization activities. If necessary, we expect to utilize
our at-the-market offering program to bridge any funding shortfall
in the first and second quarters of 2017. In the second half of
fiscal 2017, we expect revenues to improve as we prepare for the
launch of our tentatively approved generic Seroquel XR®
(quetiapine fumarate extended release tablet) on the expiry of the
first filer exclusivity periods of Par Pharmaceutical, Inc.
(“
Par
”) and
Accord Healthcare (“
Accord
”) in May 2017, although
there can be no assurance as to when or if any launch will occur,
or if generic Seroquel XR® will be successfully
commercialized. Our future operations are highly dependent upon our
ability to raise additional capital to support advancing our
product pipeline through continued research and development
activities which are at higher-than-currently projected levels and
to fund any significant expansion of our operations. Although there
can be no assurances, such capital may come from revenues from the
sales of our generic Focalin XR® capsules, from proceeds of
our at-the-market offering program (see “
Share Capital – Prior
Sales
”, in Item 10, below for a further description of
our at-the-market offering program), from potential revenues from
the sales of our tentatively approved generic Seroquel XR® and
from potential partnering opportunities. Other potential sources of
capital may include payments from licensing agreements, cost
savings associated with managing operating expense levels, other
equity and/or debt financings, and/or new strategic partnership
agreements which fund some or all costs of product development. Our
ultimate success will depend on whether our product candidates
receive the approval of the FDA or Health Canada and whether we are
able to successfully market approved products. We cannot be certain
that we will be able to receive FDA or Health Canada approval for
any of our current or future product candidates, that we will reach
the level of sales and revenues necessary to achieve and sustain
profitability, or that we can secure other capital sources on terms
or in amounts sufficient to meet our needs or at all.
The
availability of equity or debt financing will be affected by, among
other things, the results of our research and development, our
ability to obtain regulatory approvals, our success in
commercializing approved products with our commercialization
partners and the market acceptance of our products, the state of
the capital markets generally, strategic alliance agreements, and
other relevant commercial considerations. In addition, if we raise
additional funds by issuing equity securities, our then existing
security holders will likely experience dilution, and the incurring
of indebtedness would result in increased debt service obligations
and could require us to agree to operating and financial covenants
that would restrict our operations. In the event that we do not
obtain sufficient additional capital, it will raise substantial
doubt about our ability to continue as a going concern and realize
our assets and pay our liabilities as they become due. Our cash
outflows are expected to consist primarily of internal and external
research and development expenditures to advance our product
pipeline. Depending upon the results of our research and
development programs and the availability of financial resources,
we could decide to accelerate, terminate, or reduce certain
projects, or commence new ones. Any failure on our part to raise
additional funds on terms favorable to us or at all, may require us
to significantly change or curtail our current or planned
operations in order to conserve cash until such time, if ever, that
sufficient proceeds from operations are generated, and could result
in our not taking advantage of business opportunities, in the
termination or delay of clinical trials or our not taking any
necessary actions required by the FDA or Health Canada for one or
more of our product candidates, in curtailment of our product
development programs designed to identify new product candidates,
in the sale or assignment of rights to our technologies, products
or product candidates, and/or our inability to file ANDAs,
Abbreviated New Drug Submissions (“
ANDSs
”), or NDAs at all or in time
to competitively market our products or product
candidates.
Delays,
suspensions and terminations in our preclinical studies and
clinical trials could result in increased costs to us and delay our
ability to generate product revenues.
The
commencement of clinical trials can be delayed for a variety of
reasons, including delays in:
●
demonstrating
sufficient safety and efficacy to obtain regulatory approval to
commence a clinical trial;
●
reaching agreement
on acceptable terms with prospective contract research
organizations and clinical trial sites;
●
manufacturing
sufficient quantities of a drug candidate;
●
obtaining
institutional review board approval to conduct a clinical trial at
a prospective clinical trial site;
●
patient enrollment;
and
●
for controlled
substances, obtaining specific permission to conduct a study, and
obtaining import and export permits to ship study
samples.
Once a
clinical trial has begun, it may be delayed, suspended or
terminated due to a number of factors, including:
●
the number of
patients that participate in the trial;
●
the length of time
required to enroll suitable subjects;
●
the duration of
patient follow-up;
●
the number of
clinical sites included in the trial;
●
changes in
regulatory requirements or regulatory delays or clinical holds
requiring suspension or termination of the trials;
●
delays, suspensions
or termination of clinical trials due to the institutional review
board overseeing the study at a particular site;
●
failure to conduct
clinical trials in accordance with regulatory
requirements;
●
unforeseen safety
issues, including serious adverse events or side effects
experienced by participants; and
●
inability to
manufacture, through third party manufacturers, adequate supplies
of the product candidate being tested.
Based
on results at any stage of product development, we may decide to
repeat or redesign preclinical studies or clinical trials, conduct
entirely new studies or discontinue development of products for one
or all indications. In addition, our product candidates may not
demonstrate sufficient safety and efficacy in pending or any future
preclinical testing or clinical trials to obtain the requisite
regulatory approvals. Even if such approvals are obtained for our
products, they may not be accepted in the market as a viable
alternative to other products already approved or pending
approvals.
If we
experience delays, suspensions or terminations in a preclinical
study or clinical trial, the commercial prospects for our products
will be harmed, and our ability to generate product revenues will
be delayed or we may never be able to generate such
revenues.
We
have a history of operating losses, which may continue in the
foreseeable future.
We have
incurred net losses from inception through November 30, 2016 and
had an accumulated deficit of $63,016,019 as of such date and have
incurred additional losses since such date. As we engage in the
development of products in our pipeline, we will continue to incur
further losses. There can be no assurance that we will ever be able
to achieve or sustain profitability or positive cash flow. Our
ultimate success will depend on whether our product candidates
receive the approval of the FDA or Health Canada and whether we are
able to successfully market approved products. We cannot be certain
that we will be able to receive FDA or Health Canada approval for
any of our current or future product candidates, or that we will
reach the level of sales and revenues necessary to achieve and
sustain profitability.
Loss
of key scientists and failure to attract qualified personnel could
limit our growth and negatively impact our operations.
We are
dependent upon the scientific expertise of Dr. Isa Odidi, our
Chairman and Chief Executive Officer, and Dr. Amina Odidi, our
President and Chief Operating Officer. Although we employ other
qualified scientists, Drs. Isa and Amina Odidi are our only
employees with the knowledge and experience necessary for us to
continue development of controlled-release products. We do not
maintain key-person life insurance on any of our officers
or
employees. Although
we have employment agreements with key members of our management
team, each of our employees may terminate his or her employment at
any time. The success of our business depends, in large part, on
our continued ability to attract and retain highly qualified
management, scientific, manufacturing and sales and marketing
personnel, on our ability to successfully integrate many new
employees, and on our ability to develop and maintain important
relationships with leading research and medical institutions and
key distributors. If we lose the services of our executive officers
or other qualified personnel or are unable to attract and retain
qualified individuals to fill these roles or develop key
relationships, our business, financial condition and results of
operations could be materially adversely affected.
Our
intellectual property may not provide meaningful protection for our
products and product candidates.
We hold
certain U.S., Canadian and foreign patents and have pending
applications for additional patents outstanding. We intend to
continue to seek patent protection for, or maintain as trade
secrets, all of our commercially promising drug delivery platforms
and technologies. Our success depends, in part, on our and our
collaborative partners’ ability to obtain and maintain patent
protection for products and product candidates, maintain trade
secret protection and operate without infringing the proprietary
rights of third parties. Without patent and other similar
protection, other companies could offer substantially identical
products without incurring sizeable development costs which could
diminish our ability to recover expenses of and realize profits on
our developed products. If our pending patent applications are not
approved, or if we are unable to obtain patents for additional
developed technologies, the future protection for our technologies
will remain uncertain. Furthermore, third parties may independently
develop similar or alternative technologies, duplicate some or all
of our technologies, design around our patented technologies or
challenge our issued patents. Such third parties may have filed
patent applications, or hold issued patents, relating to products
or processes competitive with those we are developing or otherwise
restricting our ability to do business in a particular area. If we
are unable to obtain patents or otherwise protect our trade secrets
or other intellectual property and operate without infringing on
the proprietary rights of others, our business, financial condition
and results of operations could be materially adversely
affected.
We
may be subject to intellectual property claims that could be costly
and could disrupt our business.
Third
parties may claim we have infringed their patents, trademarks,
copyrights or other rights. We may be unsuccessful in defending
against such claims, which could result in the inability to protect
our intellectual property rights or liability in the form of
substantial damages, fines or other penalties such as injunctions
precluding our manufacture, importation or sales of products. The
resolution of a claim could also require us to change how we do
business or enter into burdensome royalty or license agreements.
Insurance coverage may be denied or may not be adequate to cover
every claim that third parties could assert against us. Even
unsuccessful claims could result in significant legal fees and
other expenses, diversion of management’s time and
disruptions in our business. Any of these claims could also harm
our reputation.
We
rely on maintaining as trade secrets our competitively sensitive
know-how and other information. Intentional or unintentional
disclosure of this information could impair our competitive
position.
As to
many technical aspects of our business, we have concluded that
competitively sensitive information is either not patentable or
that for competitive reasons it is not commercially advantageous to
seek patent protection. In these circumstances, we seek to protect
this know-how and other proprietary information by maintaining it
in confidence as a trade secret. To maintain the confidentiality of
our trade secrets, we generally enter into agreements that contain
confidentiality provisions with our employees, consultants,
collaborators, contract manufacturers and advisors upon
commencement of their relationships with us. These provisions
generally require that all confidential information developed by
the individual or made known to the individual by us during the
course of the individual’s relationship with us be kept
confidential and not disclosed to third parties. We may not have
these arrangements in place in all circumstances, and the
confidentiality provisions in our favour may be breached. We may
not become aware of, or have adequate remedies in the event of, any
such breach. In addition, in some situations, the confidentiality
provisions in our favour may conflict with, or be subject to, the
rights of third parties with whom our employees, consultants,
collaborators, contract manufacturers or advisors have previous
employment or consulting relationships. To the extent that our
employees, consultants, collaborators, contract manufacturers or
advisors use trade secrets or know-how owned by others in their
work for us, disputes may arise as to the ownership of relative
inventions. Also, others may independently develop substantially
equivalent trade secrets, processes and know-how, and competitors
may be able to use this information to develop products that
compete with our products, which
could
adversely impact our business. The disclosure of our trade secrets
could impair our competitive position. Adequate remedies may not
exist in the event of unauthorized use or disclosure of our
confidential information.
Approvals
for our product candidates may be delayed or become more difficult
to obtain if the FDA institutes changes to its approval
requirements.
The FDA
may institute changes to its ANDA approval requirements, which may
make it more difficult or expensive for us to obtain approval for
our new generic products. For instance, in July 2012, the Generic
Drug Fee User Amendments of 2012 (“
GDUFA
”) was enacted into law. The
GDUFA legislation implemented substantial fees for new ANDAs, Drug
Master Files, product and establishment fees and a one-time fee for
back-logged ANDAs pending approval as of October 1, 2012. In
return, the program is intended to provide faster and more
predictable ANDA reviews by the FDA and more timely inspections of
drug facilities. For the FDA’s fiscal years 2016 and 2017,
respectively, the user fee rates are $76,030
and $70,480
for new ANDAs, $38,020 and $35,240
for “Prior Approval Supplements,” and $17,434 for each
ANDA already on file at the FDA. For the FDA’s fiscal year
2016 and 2017, there is also an annual facility user fee of
$258,905 and $273,646, respectively. Under GDUFA, generic product
companies face significant penalties for failure to pay the new
user fees, including rendering an ANDA not “substantially
complete” until the fee is paid. It is currently uncertain
the effect the new fees will have on our ANDA process and business.
However, any failure by us or our suppliers to pay the fees or to
comply with the other provisions of GDUFA may adversely impact or
delay our ability to file ANDAs, obtain approvals for new generic
products, generate revenues and thus may have a material adverse
effect on our business, results of operations and financial
condition.
We
operate in a highly litigious environment.
From
time to time, we are subject to legal proceedings. As of the date
of this annual report, we are not aware of any pending or
threatened material litigation claims against us other than as
described under Item 8.A below. Litigation to which we are, or may
be, subject could relate to, among other things, our patent and
other intellectual property rights, or such rights of others,
business or licensing arrangements with other persons, product
liability or financing activities. Such litigation could include an
injunction against the manufacture or sale of one or more of our
products or potential products or a significant monetary judgment,
including a possible punitive damages award, or a judgment that
certain of our patent or other intellectual property rights are
invalid or unenforceable or infringe the intellectual property
rights of others. If such litigation is commenced, our business,
results of operations, financial condition and cash flows could be
materially adversely affected.
There
has been substantial litigation in the pharmaceutical industry
concerning the manufacture, use and sale of new products that are
the subject of conflicting patent rights. When we file an ANDA or
505(b)(2) NDA for a bioequivalent version of a drug, we may, in
some circumstances, be required to certify to the FDA that any
patent which has been listed with the FDA as covering the branded
product has expired, the date any such patent will expire, or that
any such patent is invalid or will not be infringed by the
manufacture, sale or use of the new drug for which the application
is submitted. Approval of an ANDA is not effective until each
listed patent expires, unless the applicant certifies that the
patents at issue are not infringed or are invalid and so notifies
the patent holder and the holder of the branded product. A patent
holder may challenge a notice of non-infringement or invalidity by
suing for patent infringement within 45 days of receiving notice.
Such a challenge prevents FDA approval for a period which ends 30
months after the receipt of notice, or sooner if an appropriate
court rules that the patent is invalid or not infringed. From time
to time, in the ordinary course of business, we face and have faced
such challenges and may continue to do so in the
future.
Our NDA
seeking authorization to market our Rexista™ product
candidate (abuse-deterrent oxycodone hydrochloride extended release
tablets) in the 10, 15, 20, 30, 40, 60 and 80 mg strengths was
filed under Paragraph IV of the Hatch-Waxman Act, as amended. The
FDA has accepted the filing for further review. We have, within the
period provided in Paragraph IV, notified the brand owner of
Oxycontin
®
, and all
holders of patents associated with the branded product
Oxycontin® (the “
Oxycontin® patents
”) listed
in the FDA’s Approved Drug Products with Therapeutic
Equivalence Evaluations, commonly known as the Orange Book (the
“
Orange Book
”),
that we have filed an NDA with the FDA for marketing approval for
Rexista™, and have certified that Rexista
™
would not
infringe the Oxycontin
®
patents or that
the Oxycontin
®
patents are
invalid. This notice may give rise, within a prescribed time of 45
days, to patent infringement litigation against us by the owner of
the branded product Oxycontin
®
and by the
holders of the Oxycontin
®
patents. If
such litigation is instituted within the prescribed
time
limits,
the FDA will be stayed for 30 months from the date of such notice
from granting final marketing approval to us for
Rexista
™
,
unless prior to the expiry of such 30 months all parties settle the
litigation in such way as to permit the marketing of Rexista™
(if then approved), or there is a final decision of the courts that
either the Oxycontin
®
patents were
not valid or that Rexista
™
did not
infringe the Oxycontin
®
patents.
Brand-name
pharmaceutical manufacturers routinely bring patent infringement
litigation against ANDA applicants seeking FDA approval to
manufacture and market generic forms of their branded products. We
are routinely subject to patent litigation that can delay or
prevent our commercialization of products, force us to incur
substantial expense to defend, and expose us to substantial
liability.
We
cannot ensure the availability of raw materials.
Certain
raw materials necessary for the development and subsequent
commercial manufacture of our product candidates may be proprietary
products of other companies. While we attempt to manage the risk
associated with such proprietary raw materials, if our efforts
fail, or if there is a material shortage, contamination, and/or
recall of such materials, the resulting scarcity could adversely
affect our ability to develop or manufacture our product
candidates. In addition, many third party suppliers are subject to
governmental regulation and, accordingly, we are dependent on the
regulatory compliance of, as well as on the strength,
enforceability and terms of our various contracts with, these third
party suppliers.
Further, the FDA
requires identification of raw material suppliers in applications
for approval of drug products. If raw materials are unavailable
from a specified supplier, the supplier does not give us access to
its technical information for our application or the supplier is
not in compliance with FDA or other applicable requirements, FDA
approval of the supplier could delay the manufacture of the drug
involved. Any inability to obtain raw materials on a timely basis,
or any significant price increases which cannot be passed on to
customers, could have a material adverse effect on our business,
results of operations, financial condition and cash
flows.
Our
product candidates may not be successfully developed or
commercialized.
Successful
development of our product candidates is highly uncertain and is
dependent on numerous factors, many of which are beyond our
control. Products that appear promising in research or early phases
of development may fail to reach later stages of development or the
market for several reasons including:
●
for ANDA
candidates, bioequivalence studies results may not meet regulatory
requirements or guidelines for the demonstration of
bioequivalence;
●
for NDA candidates,
a product may not demonstrate acceptable large-scale clinical trial
results, even though it demonstrated positive preclinical or
initial clinical trial results;
●
for NDA candidates,
a product may not be effective in treating a specified condition or
illness;
●
a product may have
harmful side effects on humans;
●
products may fail
to receive the necessary regulatory approvals from the FDA or other
regulatory bodies, or there may be delays in receiving such
approvals;
●
changes in the
approval process of the FDA or other regulatory bodies during the
development period or changes in regulatory review for each
submitted product application may also cause delays in the approval
or result in rejection of an application;
●
difficulties may be
encountered in formulating products, scaling up manufacturing
processes or in getting approval for manufacturing;
●
manufacturing
costs, pricing or reimbursement issues, other competitive
therapeutics, or other commercial factors may make the product
uneconomical; and
●
the proprietary
rights of others, and their competing products and technologies,
may prevent the product from being developed or
commercialized.
Further, success in
preclinical and early clinical trials does not ensure that
large-scale clinical trials will be successful, nor does success in
preliminary studies for ANDA candidates ensure that bioequivalence
studies will be successful. Results are frequently susceptible to
varying interpretations that may delay, limit or prevent regulatory
approvals. The length of time necessary to complete bioequivalence
studies or clinical trials and to submit an
application for
marketing approval for a final decision by a regulatory authority
varies significantly and may be difficult to predict.
As a
result, there can be no assurance that any of our product
candidates currently in development will ever be successfully
commercialized
.
Near-term
revenue depends significantly on the success of our first filed
ANDA (“lead”) product, our once daily generic Focalin
XR® (dexmethylphenidate hydrochloride
extended-release).
We have
invested significant time and effort in the development of our lead
ANDA product, our once daily generic Focalin XR®
(dexmethylphenidate hydrochloride extended-release) capsules, for
which we received final approval from the FDA in November 2013
under the Company ANDA (as defined below) to launch the 15 and 30
mg strengths. Commercial sales of these strengths were launched
immediately by our commercialization partner in the U.S., Par. Our
5, 10, 20 and 40 mg strengths were also then tentatively FDA
approved, subject to the right of Teva Pharmaceuticals USA, Inc.
(“
Teva
”) to 180
days of generic exclusivity from the date of first launch of such
products. Teva launched its own 5, 10, 20 and 40 mg strengths of
generic Focalin XR® capsules on November 11, 2014, February 2,
2015, June 22, 2015 and November 19, 2013, respectively. In January
2017, Par launched the 25 and 35 mg strengths of its generic
Focalin XR® capsules in the U.S., complementing the 15 and 30
mg strengths of our generic Focalin XR® currently marketed by
Par. The FDA recently had granted final approval under the Par ANDA
(as defined below) for its generic Focalin XR® capsules in the
5, 10, 15, 20, 25, 30, 35 and 40 mg strengths. As the first filer
of an ANDA for generic Focalin XR® in the 25 and 35 mg
strengths, Par has 180 days of U.S. generic marketing exclusivity
for those strengths. We believe Par is preparing to launch all the
remaining strengths in the first half of 2017. Under a license and
commercialization agreement between us and Par (as amended, the
“
Par
agreement
”), we receive quarterly profit-share
payments on Par’s U.S. sales of generic Focalin XR®. We
expect sales of the 25 and 35 mg strength to improve our revenues
significantly in 2017. There can be no assurance as to when or if
any further launches will occur for the remaining strengths, or if
they will be successfully commercialized. We depend significantly
on the actions of our commercialization partner Par in the
prosecution, regulatory approval and commercialization of our
generic Focalin XR® capsules and on their timely payment to us
of the contracted quarterly payments as they come due. Our near
term ability to generate significant revenue will depend upon
successful commercialization of our products in the U.S., where the
branded Focalin XR® product is in the market. Although we have
several other products in our pipeline, and recently received final
approval from the FDA for our generic Keppra XR®
(levetiracetam extended-release tablets), and our generic
Glucophage® XR, for the 500 and 750 mg strengths, and
tentative approval for all strengths of our generic Seroquel
XR® (quetiapine fumarate extended release) which is partnered
with Mallinckrodt LLC (“
Mallinckrodt
”), the majority of
the products in our pipeline are at earlier stages of development.
We will be exploring licensing and commercial alternatives for our
generic Keppra XR® product strengths that have been recently
approved by the FDA. We are also actively evaluating options to
realize commercial returns from the new approval of our generic
Glucophage® XR.
Our
significant expenditures on research and development may not lead
to successful product introductions.
We
conduct research and development primarily to enable us to
manufacture and market pharmaceuticals in accordance with FDA
regulations. Typically, research expenses related to the
development of innovative compounds and the filing of NDAs are
significantly greater than those expenses associated with ANDAs. As
we continue to develop new products, our research expenses will
likely increase. We are required to obtain FDA approval before
marketing our drug products and the approval process is costly and
time consuming. Because of the inherent risk associated with
research and development efforts in our industry, particularly with
respect to new drugs, our research and development expenditures may
not result in the successful introduction of FDA approved new
pharmaceuticals.
We
may not have the ability to develop or license, or otherwise
acquire, and introduce new products on a timely basis.
Product
development is inherently risky, especially for new drugs for which
safety and efficacy have not been established and the market is not
yet proven. Likewise, product licensing involves inherent risks
including uncertainties due to matters that may affect the
achievement of milestones, as well as the possibility of
contractual disagreements with regard to terms such as license
scope or termination rights. The development and
commercialization
process, particularly with regard to new drugs, also requires
substantial time, effort and financial resources. The process of
obtaining FDA or other regulatory approval to manufacture and
market new and generic pharmaceutical products is rigorous, time
consuming, costly and largely unpredictable. We, or a partner, may
not be successful in obtaining FDA or other required regulatory
approval or in commercializing any of the product candidates that
we are developing or licensing.
Our
business and operations are increasingly dependent on information
technology and accordingly we would suffer in the event of computer
system failures, cyber-attacks or a deficiency in
cyber-security.
Our
internal computer systems, and those of a current and/or future
drug development or commercialization partner of ours, may be
vulnerable to damage from cyber-attacks, computer viruses, malware,
natural disasters, terrorism, war, telecommunication and electrical
failures. The risk of a security breach or disruption, particularly
through cyber-attacks, including by computer hackers, foreign
governments, and cyber terrorists, has generally increased as the
number, intensity and sophistication of attempted attacks and
intrusions have increased. If such an event were to occur and cause
interruptions in our operations or those of a drug development or
commercialization partner, it could result in a material disruption
of our product development programs. For example, the loss of
clinical trial data from completed or ongoing or planned clinical
trials could result in delays in our regulatory approval efforts
and significantly increase our costs to recover or reproduce the
data. To the extent that any disruption or security breach was to
result in a loss of or damage to our data or applications, or
inappropriate disclosure of confidential or proprietary
information, we could incur material legal claims and liability,
damage to our reputation, and the further development of our drug
candidates could be adversely affected.
Our
business can be impacted by wholesaler buying patterns, increased
generic competition and, to a lesser extent, seasonal fluctuations,
which may cause our operating results to fluctuate.
We
believe that the revenues derived from our generic Focalin XR®
capsules are subject to wholesaler buying patterns, increased
generic competition negatively impacting price, margins and market
share consistent with industry post-exclusivity experience and, to
a lesser extent, seasonal fluctuations (as these products are
indicated for conditions including attention deficit hyperactivity
disorder which we expect may see increases in prescription rates
during the school term and declines in prescription rates during
the summer months). Accordingly, these factors may cause our
operating results to fluctuate.
We
may not achieve our projected development goals in the time frames
we announce and expect.
We set
goals regarding the expected timing of meeting certain corporate
objectives, such as the commencement and completion of clinical
trials, anticipated regulatory approval and product launch dates.
From time to time, we may make certain public statements regarding
these goals. The actual timing of these events can vary
dramatically due to, among other things, insufficient funding,
delays or failures in our clinical trials or bioequivalence
studies, the uncertainties inherent in the regulatory approval
process, such as failure to secure appropriate product labeling
approvals, requests for additional information, delays in achieving
manufacturing or marketing arrangements necessary to commercialize
our product candidates and failure by our collaborators, marketing
and distribution partners, suppliers and other third parties to
fulfill contractual obligations. In addition, the possibility of a
patent infringement suit regarding one or more of our product
candidates could delay final FDA approval of such candidates. If we
fail to achieve one or more of these planned goals, the price of
our common shares could decline.
Our
products may not achieve expected levels of market acceptance,
thereby limiting our potential to generate revenue.
Even if
we are able to obtain regulatory approvals for our product
candidates, the success of any of our products will be dependent
upon market acceptance. Levels of market acceptance for any
products marketed by us could be affected by several factors,
including:
●
the availability of
alternative products from competitors;
●
the prices of our
products relative to those of our competitors;
●
the timing of our
market entry;
●
the ability to
market our products effectively at the retail level;
and
●
the acceptance of
our products by government and private formularies.
Some of
these factors are not within our control, and our proposed products
may not achieve levels of market acceptance anticipated by us.
Additionally, continuing and increasingly sophisticated studies of
the proper utilization, safety and efficacy of pharmaceutical
products are being conducted by the industry, government agencies
and others which can call into question the utilization, safety and
efficacy of our products and any product candidates we are
currently developing or may develop in the future. These studies
could also impact a future product after it has been marketed. In
some cases, studies have resulted, and may in the future result, in
the discontinuance of product marketing or requirement of other
risk management programs such as the need for a patient registry.
The failure of our products and any of our product candidates, once
approved, to achieve market acceptance would limit our ability to
generate revenue and would adversely affect our results of
operations.
The
risks and uncertainties inherent in conducting clinical trials
could delay or prevent the development and commercialization of our
own branded products, which could have a material adverse effect on
our results of operations, liquidity, financial condition, and
growth prospects.
There
are a number of risks and uncertainties associated with clinical
trials, which may be exacerbated by our relatively limited
experience in conducting and supervising clinical trials and
preparing NDAs. The results of initial clinical trials may not be
indicative of results that would be obtained from large scale
testing. Clinical trials are often conducted with patients having
advanced stages of disease and, as a result, during the course of
treatment these patients can die or suffer adverse medical effects
for reasons that may not be related to the pharmaceutical agents
being tested, but which nevertheless affect the clinical trial
results. In addition, side effects experienced by the patients may
cause delay of approval of our product candidates or a limited
application of an approved product. Moreover, our clinical trials
may not demonstrate sufficient safety and efficacy to obtain FDA
approval.
Failure
can occur at any time during the clinical trial process and, in
addition, the results from early clinical trials may not be
predictive of results obtained in later and larger clinical trials,
and product candidates in later clinical trials may fail to show
the desired safety or efficacy despite having progressed
successfully through earlier clinical testing. A number of
companies in the pharmaceutical industry have suffered significant
setbacks in clinical trials, even in advanced clinical trials after
showing positive results in earlier clinical trials. In the future,
the completion of clinical trials for our product candidates may be
delayed or halted for many reasons, including those relating to the
following:
●
delays in patient
enrollment, and variability in the number and types of patients
available for clinical trials;
●
regulators or
institutional review boards may not allow us to commence or
continue a clinical trial;
●
our inability, or
the inability of our partners, to manufacture or obtain from third
parties materials sufficient to complete our clinical
trials;
●
delays or failures
in reaching agreement on acceptable clinical trial contracts or
clinical trial protocols with prospective clinical trial
sites;
●
risks associated
with trial design, which may result in a failure of the trial to
show statistically significant results even if the product
candidate is effective;
●
difficulty in
maintaining contact with patients after treatment commences,
resulting in incomplete data;
●
poor effectiveness
of product candidates during clinical trials;
●
safety issues,
including adverse events associated with product
candidates;
●
the failure of
patients to complete clinical trials due to adverse side effects,
dissatisfaction with the product candidate, or other
reasons;
●
governmental or
regulatory delays or changes in regulatory requirements, policy and
guidelines; and
●
varying
interpretation of data by the FDA or other applicable foreign
regulatory agencies.
In
addition, our product candidates could be subject to competition
for clinical study sites and patients from other therapies under
development by other companies which may delay the enrollment in or
initiation of our clinical trials. Many of these companies have
significantly more resources than we do.
The FDA
or other foreign regulatory authorities may require us to conduct
unanticipated additional clinical trials, which could result in
additional expense and delays in bringing our product candidates to
market. Any failure
or
delay in completing clinical trials for our product candidates
would prevent or delay the commercialization of our product
candidates. There can be no assurance our expenses related to
clinical trials will lead to the development of brand-name drugs
which will generate revenues in the near future. Delays or failure
in the development and commercialization of our own branded
products could have a material adverse effect on our results of
operations, liquidity, financial condition, and our growth
prospects.
We
rely on third parties to conduct clinical trials for our product
candidates, and if they do not properly and successfully perform
their legal and regulatory obligations, as well as their
contractual obligations to us, we may not be able to obtain
regulatory approvals for our product candidates.
We
design the clinical trials for our product candidates, but rely on
contract research organizations and other third parties to assist
us in managing, monitoring and otherwise carrying out these trials,
including with respect to site selection, contract negotiation and
data management. We do not control these third parties and, as a
result, they may not treat our clinical studies as their highest
priority, or in the manner in which we would prefer, which could
result in delays. Although we rely on third parties to conduct our
clinical trials, we are responsible for confirming that each of our
clinical trials is conducted in accordance with our general
investigational plan and protocol. Moreover, the FDA and foreign
regulatory agencies require us to comply with regulations and
standards, commonly referred to as good clinical practices, for
conducting, recording and reporting the results of clinical trials
to ensure that the data and results are credible and accurate and
that the trial participants are adequately protected. Our reliance
on third parties does not relieve us of these responsibilities and
requirements. The FDA enforces good clinical practices through
periodic inspections of trial sponsors, principal investigators and
trial sites. If we, our contract research organizations or our
study sites fail to comply with applicable good clinical practices,
the clinical data generated in our clinical trials may be deemed
unreliable and the FDA may require us to perform additional
clinical trials before approving our marketing applications. There
can be no assurance that, upon inspection, the FDA will determine
that any of our clinical trials comply with good clinical
practices. In addition, our clinical trials must be conducted with
product manufactured under the FDA’s current Good
Manufacturing Practices (“
cGMP
”) regulations. Our failure,
or the failure of our contract manufacturers, if any are involved
in the process, to comply with these regulations may require us to
repeat clinical trials, which would delay the regulatory approval
process.
If
third parties do not successfully carry out their duties under
their agreements with us; if the quality or accuracy of the data
they obtain is compromised due to failure to adhere to our clinical
protocols or regulatory requirements; or if they otherwise fail to
comply with clinical trial protocols or meet expected deadlines,
our clinical trials may not meet regulatory requirements. If our
clinical trials do not meet regulatory requirements or if these
third parties need to be replaced, such clinical trials may be
extended, delayed, suspended or terminated. If any of these events
occur, we may not be able to obtain regulatory approval of our
product candidates, which could have a material adverse effect on
our results of operations, financial condition and growth
prospects.
Competition
in our industry is intense, and developments by other companies
could render our products and product candidates
obsolete.
Many of
our competitors, including medical technology, pharmaceutical or
biotechnology and other companies, universities, government
agencies, or research organizations, have substantially greater
financial and technical resources and production and marketing
capabilities than we have. They also may have greater experience in
conducting bioequivalence studies, preclinical testing and clinical
trials of pharmaceutical products, obtaining FDA and other
regulatory approvals, and ultimately commercializing any approved
products. Therefore, our competitors may succeed in developing and
commercializing technologies and products that are more effective
than the drug delivery technologies we have developed or we are
developing or that will cause our technologies or products to
become obsolete or non-competitive, and in obtaining FDA approval
for products faster than we could. These developments could render
our products obsolete and uncompetitive, which would have a
material adverse effect on our business, financial condition and
results of operations. Even if we commence further commercial sales
of our products, we will be competing against the greater
manufacturing efficiency and marketing capabilities of our
competitors, areas in which we have limited or no
experience.
We rely
on collaborative arrangements with third parties that provide
manufacturing and/or marketing support for some or all of our
products and product candidates. Even if we find a potential
partner, we may not be able to negotiate an arrangement on
favourable terms or achieve results that we consider satisfactory.
In addition,
such
arrangements can be terminated under certain conditions and do not
assure a product’s success. We also face intense competition
for collaboration arrangements with other pharmaceutical and
biotechnology companies.
Although we believe
that our ownership of patents for some of our drug delivery
products will limit direct competition with these products, we must
also compete with established existing products and other promising
technologies and other products and delivery alternatives that may
be more effective than our products and proposed products. In
addition, we may not be able to compete effectively with other
commercially available products or drug delivery
technologies.
We
require regulatory approvals for any products that use our drug
delivery technologies.
Our
drug delivery technologies can be quite complex, with many
different components. The development required to take a technology
from its earliest stages to its incorporation in a product that is
sold commercially can take many years and cost a substantial amount
of money. Significant technical challenges are common as additional
products incorporating our technologies progress through
development.
Any
particular technology such as our abuse-deterrent technology may
not perform in the same manner when used with different therapeutic
agents, and therefore this technology may not prove to be as useful
or valuable as originally thought, resulting in additional
development work.
If our
efforts do not repeatedly lead to successful development of product
candidates, we may not be able to grow our pipeline or to enter
into agreements with marketing and distribution partners or
collaborators that are willing to distribute or develop our product
candidates. Delays or unanticipated increases in costs of
development at any stage, or failure to solve a technical
challenge, could adversely affect our operating
results.
If
contract manufacturers fail to devote sufficient time and resources
to our concerns, or if their performance is substandard, the
commercialization of our products could be delayed or prevented,
and this may result in higher costs or deprive us of potential
product revenues.
We rely
on contract manufacturers for certain components and ingredients of
our clinical trial materials, such as active pharmaceutical
ingredients (“
APIs
”), and we may rely on such
manufacturers for commercial sales purposes as well. Our reliance
on contract manufacturers in these respects will expose us to
several risks which could delay or prevent the commercialization of
our products, result in higher costs, or deprive us of potential
product revenues, including:
●
Difficulties in
achieving volume production, quality control and quality assurance,
or technology transfer, as well as with shortages of qualified
personnel;
●
The failure to
establish and follow cGMP and to document adherence to such
practices;
●
The need to
revalidate manufacturing processes and procedures in accordance
with FDA and other nationally mandated cGMPs and potential prior
regulatory approval upon a change in contract
manufacturers;
●
Failure to perform
as agreed or to remain in the contract manufacturing business for
the time required to produce, store and distribute our products
successfully;
●
The potential for
an untimely termination or non-renewal of contracts;
and
●
The potential for
us to be in breach of our collaboration and marketing and
distribution arrangements with third parties for the failure of our
contract manufacturers to perform their obligations to
us.
In
addition, drug manufacturers are subject to ongoing periodic
unannounced inspection by the FDA and corresponding state and
foreign agencies to ensure strict compliance with cGMP and other
government regulations. While we may audit the performance of
third-party contractors, we will not have complete control over
their compliance with these regulations and standards. Failure by
either our third-party manufacturers or by us to comply with
applicable regulations could result in sanctions being imposed on
us, including fines, injunctions, civil penalties, failure of
applicable regulatory authorities to grant review of submissions or
market approval of drugs, delays, suspension or withdrawal of
approvals, product seizures or recalls, operating restrictions,
facility closures and criminal prosecutions, any of which could
harm our business.
We
are subject to currency rate fluctuations that may impact our
financial results.
Our
financial results are reported in U.S. dollars and our revenues are
payable in U.S. dollars, but the majority of our expenses are
payable in Canadian dollars. There may be instances where we have
net foreign currency exposure. Any fluctuations in exchange rates
will impact our financial results.
We
are exposed to risks arising from the ability and willingness of
our third-party commercialization partners to provide documentation
that may be required to support information on revenues earned by
us from those commercialization partners.
If our
third-party commercialization partners, from whom we receive
revenues, are unable or unwilling to supply necessary or sufficient
documentation to support the revenue numbers in our financial
statements in a timely manner to the satisfaction of our auditors,
this may lead to delays in the timely publication of our financial
results, our ability to obtain an auditor’s report on our
financial statements and our possible inability to access the
financial markets during the time our results remain
unpublished.
We
have limited sales, marketing and distribution
experience.
We have
limited experience in the sales, marketing, and distribution of
pharmaceutical products. There can be no assurance that, if
required, we would be able to establish sales, marketing, and
distribution capabilities or make arrangements with our
collaborators, licensees, or others to perform such activities or
that such efforts would be successful. If we fail to establish
successful marketing and sales capabilities or to make arrangements
with third parties, our business, financial condition and results
of operations will be materially adversely affected.
Our
significant shareholders have the ability to exercise significant
influence over certain corporate actions.
Our
principal shareholders, Drs. Amina and Isa Odidi, our President and
Chief Operating Officer and our Chairman and Chief Executive
Officer, respectively, and Odidi Holdings Inc., a privately-held
company controlled by Drs. Amina and Isa Odidi, owned in the
aggregate approximately 19.17% of our issued and outstanding common
shares as of February 27, 2017 (and collectively beneficially owned
in the aggregate approximately 28.2% of our common shares,
including common shares issuable upon the exercise of outstanding
options and the conversion of the debenture in respect of the loan
to us in the original principal amount of $1,500,000 by Drs. Isa
and Amina Odidi (the “
Debenture
”), of which $1,350,000
remains outstanding, that are exercisable or convertible within 60
days of the date hereof). As a result, the principal shareholders
have the ability to exercise significant influence over all matters
submitted to our shareholders for approval whether subject to
approval by a majority of holders of our common shares or subject
to a class vote or special resolution requiring the approval of
66⅔% of the votes cast by holders of our common shares, in
person or by proxy.
Our
effective tax rate may vary.
Various
internal and external factors may have favorable or unfavorable
effects on our future effective tax rate. These factors include,
but are not limited to, changes in tax laws, regulations and/or
rates, changing interpretations of existing tax laws or
regulations, future levels of research and development spending,
the availability of tax credit programs for the reimbursement of
all or a significant proportion of research and development
spending, and changes in overall levels of pre-tax earnings. At
present, we qualify in Canada for certain research tax credits for
qualified scientific research and experimental development
pertaining to our drug delivery technologies and drug products in
research stages. If Canadian tax laws relating to research tax
credits were substantially negatively altered or eliminated, or if
a substantial portion of our claims for tax credits were denied by
the relevant taxing authorities, pursuant to an audit or otherwise,
it would have a material adverse effect upon our financial
results.
“Comprehensive
tax reform” remains a topic of discussion in the United
States Congress. Such legislation could significantly alter the
existing Code. We cannot predict whether, when, or to what extent
U.S. federal tax laws, regulations, interpretations, or rulings
will be issued, nor is the long-term impact of proposed
comprehensive tax reforms known at this time. We could be adversely
affected by changes as a result of comprehensive tax
reform.
Risks
related to our Industry
Generic
drug manufacturers will increase competition for certain products
and may reduce our expected royalties.
Part of
our product development strategy includes making NDA filings
relating to product candidates involving the novel reformulation of
existing drugs with active ingredients that are off-patent. Such
NDA product candidates, if approved, are likely to face competition
from generic versions of such drugs in the future. Regulatory
approval for generic drugs may be obtained without investing in
costly and time consuming clinical trials. Because of substantially
reduced development costs, manufacturers of generic drugs are often
able to charge much lower prices for their products than the
original developer of a new product. If we face competition from
manufacturers of generic drugs on products we may commercialize,
such as our once-daily Rexista
TM
product candidate
(abuse-deterrent oxycodone hydrochloride extended release tablets),
the prices at which such of our products are sold and the revenues
we may receive could be reduced.
Revenues
from generic pharmaceutical products typically decline as a result
of competition, both from other pharmaceutical companies and as a
result of increased governmental pricing pressure.
Our
generic drugs face intense competition. Prices of generic drugs
typically decline, often dramatically, especially as additional
generic pharmaceutical companies (including low-cost generic
producers based in China and India) receive approvals and enter the
market for a given product and competition intensifies.
Consequently, our ability to sustain our sales and profitability on
any given product over time is affected by the number of new
companies selling such product and the timing of their
approvals.
In
addition, intense pressure from government healthcare authorities
to reduce their expenditures on prescription drugs could result in
lower pharmaceutical pricing, causing decreases in our
revenues.
Furthermore, brand
pharmaceutical companies continue to defend their products
vigorously. For example, brand companies often sell or license
their own generic versions of their products, either directly or
through other generic pharmaceutical companies (so-called
“authorized generics”). No significant regulatory
approvals are required for authorized generics, and brand companies
do not face any other significant barriers to entry into such
market. Brand companies may seek to delay introductions of generic
equivalents through a variety of commercial and regulatory tactics.
These actions may increase the costs and risks of our efforts to
introduce generic products and may delay or prevent such
introduction altogether.
Market
acceptance of our products will be limited if users of our products
are unable to obtain adequate reimbursement from third-party
payers.
Government health
administration authorities, private health insurers and other
organizations generally provide reimbursement for products like
ours, and our commercial success will depend in part on whether
appropriate reimbursement levels for the cost of our products and
related treatments are obtained from government authorities,
private health insurers and other organizations, such as health
maintenance organizations and managed care organizations. Even if
we succeed in bringing any of our products to market, third-party
payers may not provide reimbursement in whole or in part for their
use.
Significant
uncertainty exists as to the reimbursement status of newly approved
health care products. Some of our product candidates, such as our
once-daily Rexista™ (abuse-deterrent oxycodone hydrochloride
extended release tablets), are intended to replace or alter
existing therapies or procedures. These third-party payers may
conclude that our products are less safe, less effective or less
economical than those existing therapies or procedures. Therefore,
third-party payers may not approve our products for reimbursement.
We may be required to make substantial pricing concessions in order
to gain access to the formularies of large managed-care
organizations. If third party payers do not approve our products
for reimbursement or fail to reimburse them adequately, sales will
suffer as some physicians or their patients may opt for a competing
product that is approved for reimbursement or is adequately
reimbursed. Even if third-party payers make reimbursement
available, these payers’ reimbursement policies may adversely
affect our ability and our potential marketing and distribution
partners’ ability to sell our products on a profitable
basis.
We
are subject to significant costs and uncertainties related to
compliance with the extensive regulations that govern the
manufacturing, labeling, distribution, cross-border imports and
promotion of pharmaceutical products as well as environmental,
safety and health regulations.
Governmental
authorities in the United States and Canada regulate the research
and development, testing and safety of pharmaceutical products. The
regulations applicable to our existing and future products may
change. Regulations require extensive clinical trials and other
testing and government review and final approval before we can
market our products. The cost of complying with government
regulation can be substantial and may exceed our available
resources, causing delay or cancellation of our product
introductions.
Some
abbreviated application procedures for controlled-release drugs and
other products, including those related to our ANDA filings, or to
the ANDA filings of unrelated third parties in respect of drugs
similar to or chemically related to those of our ANDA filings, are
or may become the subject of petitions filed by brand-name drug
manufacturers or other ANDA filers seeking changes from the FDA in
the interpretation of the statutory approval requirements for
particular drugs as part of their strategy to thwart or advance
generic competition. We cannot predict whether the FDA will make
any changes to its interpretation of the requirements applicable to
our ANDA applications as a result of these petitions, or whether
unforeseen delays will occur in our ANDA filings while the FDA
considers such petitions or changes or otherwise, or the effect
that any changes may have on us. Any such changes in FDA
interpretation of the statutes or regulations, or any legislated
changes in the statutes or regulations, may make it more difficult
for us to file ANDAs or obtain further approval of our ANDAs and
generate revenues and thus may materially harm our business and
financial results.
Any
failure or delay in obtaining regulatory approvals could make it so
that we are unable to market any products we develop and therefore
adversely affect our business, results of operations, financial
condition and cash flows. Even if product candidates are approved
in the United States or Canada, regulatory authorities in other
countries must approve a product prior to the commencement of
marketing the product in those countries. The time required to
obtain any such approval may be longer than in the United States or
Canada, which could cause the introduction of our products in other
countries to be cancelled or materially delayed.
The
manufacturing, distribution, processing, formulation, packaging,
labeling, cross-border importation and advertising of our products
are subject to extensive regulation by federal agencies, including
in the United States, the FDA, Drug Enforcement Administration,
Federal Trade Commission, Consumer Product Safety Commission and
Environmental Protection Agency in the U.S., and Health Canada and
Canada Border Services Agency in Canada, among others. We are also
subject to state and local laws, regulations and agencies.
Compliance with these regulations requires substantial expenditures
of time, money and effort in such areas as production and quality
control to ensure full technical compliance. Failure to comply with
FDA and Health Canada and other governmental regulations can result
in fines, disgorgement, unanticipated compliance expenditures,
recall or seizure of products, total or partial suspension of
production or distribution, suspension of the FDA’s or Health
Canada’s review of NDAs, ANDAs or ANDSs, as the case may be,
enforcement actions, injunctions and civil or criminal
prosecution.
Environmental laws
have changed in recent years and we may become subject to stricter
environmental standards in the future and face larger capital
expenditures in order to comply with environmental laws. We are
subject to extensive federal, state, provincial and local
environmental laws and regulations which govern the discharge,
emission, storage, handling and disposal of a variety of substances
that may be used in, or result from, our operations. We are also
subject periodically to environmental compliance reviews by
environmental, safety, and health regulatory agencies and to
potential liability for the remediation of contamination associated
with both present and past hazardous waste generation, handling,
and disposal activities. We cannot accurately predict the outcome
or timing of future expenditures that we may be required to make in
order to comply with the federal, state, local and provincial
environmental, safety, and health laws and regulations that are
applicable to our operations and facilities.
Healthcare
reform measures could hinder or prevent the commercial success of
our products and product candidates.
In the
United States, there have been, and we expect there will continue
to be, a number of legislative and regulatory changes to the
healthcare system that could affect our future revenues and
potential profitability. Federal and state lawmakers regularly
propose and, at times, enact legislation that results in
significant changes to the
healthcare system,
some of which are intended to contain or reduce the costs of
medical products and services. An example of this is the
Patient Protection and Affordable Care Act, as amended by the
Health Care and Education Reconciliation Act, or, collectively, the
Affordable Care Act. In addition, other legislative changes
have been proposed and adopted in the U.S. since the Affordable
Care Act was enacted.
There
is also increasing legislative attention to opioid abuse in the
U.S., including passage of the 2016 Comprehensive Addiction and
Recovery Act and the 21st Century Cures Act, which, among other
things, strengthens state prescription drug monitoring programs and
expands educational efforts for certain populations. These
laws could result in fewer prescriptions being written for opioid
drugs, which could impact future sales of our Rexista and related
opioid product candidates.
We
expect that the new presidential administration and U.S. Congress
will seek to modify, repeal, or otherwise invalidate all, or
certain provisions of, the Affordable Care Act. Since taking
office, President Trump has continued to support the repeal of all
or portions of the Affordable Care Act and the House and Senate
have recently taken certain action in furtherance of this
goal.
We also
expect that additional state and federal healthcare reform measures
will be adopted in the future, any of which could limit the amounts
that federal and state governments will pay for healthcare products
and services, and which could result in reduced demand for our
products once approved or additional pricing pressures, and may
adversely affect our operating results.
Our
ability to market and promote our Rexista™ product candidate
(abuse-deterrent oxycodone hydrochloride extended release tablets)
and its abuse-deterrent features will be determined by FDA-approved
labeling requirements.
The
commercial success of our Rexista™ product candidate
(abuse-deterrent oxycodone hydrochloride extended release tablets)
will depend upon our ability to obtain requested FDA-approved
labeling describing its abuse-deterrent features. Our failure to
achieve FDA approval of requested product labeling containing such
information will prevent us from advertising and promoting the
abuse-deterrent features of our product candidate in a way to
differentiate it from competitive products. This would make our
product candidate less competitive in the market. Moreover, FDA
approval is required in order to make claims that a product has an
abuse-deterrent effect.
In
April 2015, the FDA published final guidance with respect to the
evaluation and labeling of abuse-deterrent opioids. The guidance
provides direction as to the studies and data required for
obtaining abuse-deterrent claims in a product label. If a product
is approved by the FDA to include such claims in its label, the
applicant may use the approved labeling information about the
abuse-deterrent features of the product in its marketing efforts to
physicians.
Although we intend
to provide data to the FDA to support approval of abuse-deterrence
label claims for Rexista™, there can be no assurance that
Rexista™ or any of our other product candidates will receive
FDA-approved labeling that describes the abuse-deterrent features
of such products. The FDA may find that our studies and data do not
support our requested abuse-deterrent labeling or that our product
candidate does not provide substantial abuse-deterrence benefits
because, for example, its deterrence mechanisms do not address the
way it is most likely to be abused. Furthermore, the FDA could
change its guidance, which could require us to conduct additional
studies or generate additional data. If the FDA does not
approve our requested abuse-deterrent labeling, we will be limited
in our ability to promote Rexista™ based on its
abuse-deterrent features and, as a result, our business may
suffer.
We
are subject to product liability costs for which we may not have or
be able to obtain adequate insurance coverage.
The
testing and marketing of pharmaceutical products entails an
inherent risk of product liability. Liability exposures for
pharmaceutical products can be extremely large and pose a material
risk. In some instances, we may be or may become contractually
obligated to indemnify third parties for such liability. Our
business may be materially and adversely affected by a successful
product liability claim or claims in excess of any
insurance
coverage that we
may have. Further, even if claims are not successful, the costs of
defending such claims and potential adverse publicity could be
harmful to our business.
While
we currently have, and in some cases are contractually obligated to
maintain, insurance for our business, property and our products as
they are administered in bioavailability/bioequivalence studies,
first and third party insurance is increasingly costly and narrow
in scope. Therefore, we may be unable to meet such contractual
obligations or we may be required to assume more risk in the
future. If we are subject to third party claims or suffer a loss or
damage in excess of our insurance coverage, we may be required to
bear that risk in excess of our insurance limits. Furthermore, any
first or third party claims made on our insurance policy may impact
our ability to obtain or maintain insurance coverage at reasonable
costs or at all in the future.
Our
products involve the use of hazardous materials and waste, and as a
result we are exposed to potential liability claims and to costs
associated with complying with laws regulating hazardous
waste.
Our
research and development activities involve the use of hazardous
materials, including chemicals, and are subject to Canadian
federal, provincial and local laws and regulations governing the
use, manufacture, storage, handling and disposal of hazardous
materials and waste products. It is possible that accidental injury
or contamination from these materials may occur. In the event of an
accident, we could be held liable for any damages, which could
exceed our available financial resources. Further, we may not be
able to maintain insurance to cover these costs on acceptable
terms, or at all. In addition, we may be required to incur
significant costs to comply with environmental laws and regulations
in the future.
Our
operations may be adversely affected by risks associated with
international business.
We may
be subject to certain risks that are inherent in an international
business, including:
●
varying regulatory
restrictions on sales of our products to certain markets and
unexpected changes in regulatory requirements;
●
tariffs, customs,
duties, and other trade barriers;
●
difficulties in
managing foreign operations and foreign distribution
partners;
●
longer payment
cycles and problems in collecting accounts receivable;
●
political
risks;
●
foreign exchange
controls that may restrict or prohibit repatriation of
funds;
●
export and import
restrictions or prohibitions, and delays from customs brokers or
government agencies;
●
seasonal reductions
in business activity in certain parts of the world;
and
●
potentially adverse
tax consequences.
Depending on the
countries involved, any or all of the foregoing factors could
materially harm our business, financial condition and results of
operations.
Risks
related to our common shares
Our
share price has been highly volatile and our shares could suffer a
further decline in value.
The
trading price of our common shares has been highly volatile and
could continue to be subject to wide fluctuations in price in
response to various factors, many of which are beyond our control,
including:
●
sales of our common
shares, including any sales made in connection with future
financings;
●
announcements
regarding new or existing corporate relationships or
arrangements;
●
announcements by us
of significant acquisitions, joint ventures, or capital
commitments;
●
actual or
anticipated period-to-period fluctuations in financial
results;
●
clinical and
regulatory development regarding our product
candidates;
●
litigation or
threat of litigation;
●
failure to achieve,
or changes in, financial estimates by securities
analysts;
●
comments or
opinions by securities analysts or members of the medical
community;
●
announcements
regarding new or existing products or services or technological
innovations by us or our competitors;
●
conditions or
trends in the pharmaceutical and biotechnology
industries;
●
additions or
departures of key personnel or directors;
●
economic and other
external factors or disasters or crises;
●
limited daily
trading volume; and
●
developments
regarding our patents or other intellectual property or that of our
competitors.
In
addition, the stock market in general and the market for drug
development companies in particular have experienced significant
price and volume fluctuations that have often been unrelated or
disproportionate to the operating performance of those companies.
Further, there has been significant volatility in the market prices
of securities of life science companies. In the past, following
periods of volatility in the market price of a company’s
securities, securities class action litigation has often been
instituted. A securities class action suit against us could result
in substantial costs, potential liabilities, and the diversion of
management’s attention and resources.
A
large number of our common shares could be sold in the market in
the near future, which could depress our stock price.
As of
February 27, 2017, we had approximately 30.0 million common shares
outstanding. In addition, a substantial portion of our shares are
currently freely trading without restriction under the Securities
Act of 1933, as amended (“
U.S. Securities Act
”), having been
registered for resale or held by their holders for over one year
and are eligible for sale under Rule 144. In addition, in November
2013, we established an at-the-market equity program pursuant to
which we could sell up to 5,305,484 of our common shares for up to
an aggregate of $16.8 million (or such lesser amount as may then be
permitted under applicable securities laws and regulations). As of
February 27, 2017 we have issued and sold 3,853,557 common shares
with an aggregate offering price of $11,908,312 under the
at-the-market program. We currently may offer and sell our common
shares with an aggregate purchase price of up to $4,891,688
pursuant to the at-the-market program. Roth Capital Partners, LLC
(“
Roth
”)
received compensation of $335,987 in connection with such
sales.
Pursuant to an
Underwriting Agreement between the Company and Dawson James
Securities, Inc., dated May 27, 2016 (the “
Dawson James Underwriting
Agreement
”), in June 2016, we completed an
underwritten public offering of 3,229,814 units of common shares
and warrants, at a price of $1.61 per unit. The warrants are
currently exercisable, have a term of five years and an exercise
price of $1.93 per common share. We issued at the initial closing
of the offering an aggregate of 3,229,814 common shares and
warrants to purchase an additional 1,614,907 common shares. The
underwriter also purchased at such closing additional warrants to
acquire 242,236 common shares pursuant to the over-allotment option
exercised in part by the underwriter. We subsequently sold an
aggregate of 459,456 additional common shares at the public
offering price of $1.61 per share in connection with subsequent
partial exercises of the underwriter’s over-allotment option.
The closings of these partial exercises brought the total net
proceeds from the offering to approximately $5.1 million, after
deducting the underwriter’s discount and offering
expenses.
On June
4, 2014, the Company’s most recent registration statement on
Form F-3 was declared effective by the United States Securities and
Exchange Commission (“
SEC
”) (the “
Shelf Registration Statement
”),
and on June 5, 2014, the Company filed a final short form base
shelf prospectus with securities regulatory authorities in each of
the provinces and territories of Canada, except Quebec. These
documents allow for, subject to securities regulatory requirements
and limitations, the potential offering of up to an aggregate of
US$100 million of the Company’s common shares, preference
shares, warrants, subscription receipts and units, or any
combination thereof, from time to time in one or more offerings,
and are intended to give the Company the flexibility to take
advantage of financing opportunities when, and if, market
conditions are favorable to the Company. The specific terms of such
future offerings, if any, would be established, subject to the
approval of the Company’s board of directors, at the time of
such offering and will be described in detail in a prospectus
supplement filed at the time of any such offering. To the extent
any securities of the Company are issued by the Company under the
Shelf Registration Statement or the shelf prospectus, a
shareholder’s percentage ownership will be diluted and our
stock price could be further adversely affected. As of February 27,
2017, the Company has not sold any securities under the Shelf
Registration Statement or the shelf prospectus, other than (i) the
sale since June 4, 2014 of 2,164,057 common shares under the
Company’s at-the-market program referred to above, (ii) the
sale of units, common shares and warrants under the Dawson
James
Underwriting
Agreement referred to above, and (iii) and the issuance of
1,015,068 common shares pursuant to warrants previously issued, and
there can be no assurance that any additional securities will be
sold under the Shelf Registration Statement or the shelf
prospectus.
On
October 22, 2009, IntelliPharmaCeutics Ltd. (“
IPC Ltd.
”) and Vasogen Inc.
(“
Vasogen
”)
completed a plan of arrangement and merger (the “
IPC Arrangement Agreement
”),
resulting in the formation of the Company. Our shareholders who
received shares under the IPC Arrangement Agreement who were not
deemed “affiliates” of either Vasogen, IPC Ltd. or us
prior to the IPC Arrangement Agreement were able to resell the
common shares that they received without restriction under the U.S.
Securities Act. The common shares received by an
“affiliate” after the IPC Arrangement Agreement or who
were “affiliates” of either Vasogen, IPC Ltd. or us
prior to the IPC Arrangement Agreement are subject to certain
restrictions on resale under Rule 144
.
As of
February 27, 2017, there are currently common shares issuable upon
the exercise of outstanding options and warrants and the conversion
of an outstanding convertible debenture for an aggregate of
approximately 7,845,603 common shares. To the extent any of our
options and warrants are exercised and the convertible debenture is
converted, a shareholder’s percentage ownership will be
diluted and our stock price could be further adversely affected.
Moreover, as the underlying shares are sold, the market price could
drop significantly if the holders of these restricted shares sell
them or if the market perceives that the holders intend to sell
these shares.
We
have no history or foreseeable prospect of paying cash
dividends.
We have
not paid any cash dividends on our common shares and do not intend
to pay cash dividends in the foreseeable future. We intend to
retain future earnings, if any, for reinvestment in the development
and expansion of our business. Dividend payments in the future may
also be limited by loan agreements or covenants contained in other
securities we may issue. Any future determination to pay cash
dividends will be at the discretion of our board of directors and
depend on our financial condition, results of operations, capital
and legal requirements and such other factors as our board of
directors deems relevant.
There
may not be an active, liquid market for our common
shares.
There
is no guarantee that an active trading market for our common shares
will be maintained on the NASDAQ Capital Market
(“
NASDAQ
”) or
the Toronto Stock Exchange (“
TSX
”). Investors may not be able
to sell their shares quickly or at the latest market price if
trading in our common shares is not active.
Future
issuances of our shares could adversely affect the trading price of
our common shares and could result in substantial dilution to
shareholders.
We may
need to issue substantial amounts of common shares in the future.
In this regard, in November 2013, we entered into an at-the-market
program pursuant to which we may, from time to time, sell up to
5,305,484 of our common shares for up to an aggregate of $16.8
million (or such lesser amount as may then be permitted under
applicable securities laws and regulations) of our common shares on
NASDAQ or otherwise. As of February 27, 2017, we have issued and
sold 3,853,557 common shares with an aggregate offering price of
$11,908,312 under the at-the-market program. We currently may offer
and sell our common shares with an aggregate purchase price of up
to $4,891,688 pursuant to the at-the-market program. There can be
no assurance that any additional shares will be sold under our
at-the-market program. To the extent that the market price of our
common shares declines, we will need to issue an increasing number
of common shares per dollar of equity investment. In addition to
our common shares issuable in connection with the exercise of our
outstanding warrants, our employees, and directors will hold rights
to acquire substantial amounts of our common shares. In order to
obtain future financing if required, it is likely that we will
issue additional common shares or financial instruments that are
exchangeable for or convertible into common shares. Also, in order
to provide incentives to employees and induce prospective employees
and consultants to work for us, we may offer and issue options to
purchase common shares and/or rights exchangeable for or
convertible into common shares. Future issuances of shares could
result in substantial dilution to shareholders. Capital raising
activities, if available, and dilution associated with such
activities could cause our share price to decline. In addition, the
existence of common share purchase warrants may encourage short
selling by market participants. Also, in order to provide
incentives to current employees and directors and induce
prospective employees and consultants to work for us, we have
historically granted options and deferred share units
(“
DSUs
”), and
intend to continue to do so or offer and issue other rights
exchangeable for or convertible into common shares. Future
issuances of shares could
result
in substantial dilution to all our shareholders. In addition,
future public sales by holders of our common shares could impair
our ability to raise capital through any future equity
offerings.
On June
4, 2014, the Shelf Registration Statement was declared effective by
the SEC and on June 5, 2014, the Company filed a final short form
base shelf prospectus with securities regulatory authorities in
each of the provinces and territories of Canada, except Quebec.
These documents allow for, subject to securities regulatory
requirements and limitations, the potential offering of up to an
aggregate of US $100 million of the Company’s common shares,
preference shares, warrants, subscription receipts and units, or
any combination thereof, from time to time in one or more
offerings, and are intended to give the Company the flexibility to
take advantage of financing opportunities when, and if, market
conditions are favorable to the Company. The specific terms of such
future offerings, if any, would be established, subject to the
approval of the Company’s board of directors, at the time of
such offering and will be described in detail in a prospectus
supplement filed at the time of any such offering. As of February
27, 2017, the Company has not sold any securities under the Shelf
Registration Statement or the shelf prospectus, other than (i) the
sale since June 4, 2014 of 2,164,057 common shares under the
Company’s at-the-market program referred to above, (ii) the
sale of units, common shares and warrants under the Dawson James
Underwriting Agreement referred to above, and (iii) the issuance of
1,015,068 common shares pursuant to warrants previously issued, and
there can be no assurance that any additional securities will be
sold under the Shelf Registration Statement or the shelf
prospectus
.
We
may in the future issue preference shares which could adversely
affect the rights of holders of our common shares and the value of
such shares.
Our
board of directors has the ability to authorize the issue of an
unlimited number of preference shares in series, and to determine
the price, rights, preferences and privileges of those shares
without any further vote or action by the holders of our common
shares. Although we have no preference shares issued and
outstanding, preference shares issued in the future could adversely
affect the rights and interests of holders of our common
shares.
Our
common shares may not continue to be listed on the
TSX.
Failure
to maintain the applicable continued listing requirements of the
TSX could result in our common shares being delisted from the TSX.
The TSX will normally consider the delisting of securities if, in
the opinion of the exchange, it appears that the public
distribution, price, or trading activity of the securities has been
so reduced as to make further dealings in the securities on TSX
unwarranted. Specifically, participating securities may be delisted
from the TSX if, among other things, the market value of an
issuer’s securities is less than C$3,000,000 over any period
of 30 consecutive trading days. In such circumstances, the TSX may
place an issuer under a delisting review pursuant to which the
issuer would be reviewed under the TSX’s remedial review
process and typically be granted 120 days to comply with all
requirements for continued listing. If the market price of our
common shares declines further or we are unable to maintain other
listing requirements, the TSX could commence a remedial review
process that could lead to the delisting of our common shares from
the TSX. Further, if we complete a sale, merger, acquisition, or
alternative strategic transaction, we will have to consider if the
continued listing of our common shares on the TSX is appropriate,
or possible.
If our
common shares are no longer listed on the TSX, they may be eligible
for listing on the TSX Venture Exchange. In the event that we are
not able to maintain a listing for our common shares on the TSX or
the TSX Venture Exchange, it may be extremely difficult or
impossible for shareholders to sell their common shares in Canada.
Moreover, if we are delisted from the TSX, but obtain a substitute
listing for our common shares on the TSX Venture Exchange, our
common shares will likely have less liquidity and more price
volatility than experienced on the TSX.
Shareholders may
not be able to sell their common shares on any such substitute
exchange in the quantities, at the times, or at the prices that
could potentially be available on a more liquid trading market. As
a result of these factors, if our common shares are delisted from
the TSX, the price of our common shares is likely to
decline.
Our
common shares may not continue to be listed on NASDAQ.
Failure
to meet the applicable quantitative and/or qualitative maintenance
requirements of NASDAQ could result in our common shares being
delisted from NASDAQ. For continued listing, NASDAQ requires, among
other things, that listed securities maintain a minimum bid price
of not less than $1.00 per share. If the bid price falls below the
$1.00 minimum for more than 30 consecutive trading days, an issuer
will typically have 180 days to satisfy the $1.00 minimum bid
price, which must be maintained for a period of at least ten
trading days in order to regain compliance.
If we
are delisted from NASDAQ, our common shares may be eligible for
trading on an over-the-counter market in the United States. In the
event that we are not able to obtain a listing on another U.S.
stock exchange or quotation service for our common shares, it may
be extremely difficult or impossible for shareholders to sell their
common shares in the United States.
Moreover, if we are delisted from NASDAQ,
but obtain a substitute listing for our common shares in the United
States, it will likely be on a market with less liquidity, and
therefore experience potentially more price volatility than
experienced on NASDAQ
. Shareholders may not be able to sell
their common shares on any such substitute U.S. market in the
quantities, at the times, or at the prices that could potentially
be available on a more liquid trading market. As a result of these
factors, if our common shares are delisted from NASDAQ, the price
of our common shares is likely to decline. In addition, a decline
in the price of our common shares will impair our ability to obtain
financing in the future.
Our
common shares are listed for trading in the United States and may
become subject to the Securities and Exchange Commission’s
penny stock rules.
Transactions in
securities that are traded in the United States by companies with
net tangible assets of $5,000,000 or less and a market price per
share of less than $5.00 that are not traded on NASDAQ or on other
securities exchanges may be subject to the “penny
stock” rules promulgated under the Securities Exchange Act of
1934, as amended (“
U.S.
Exchange Act
”). Under these rules, broker-dealers who
recommend such securities to persons other than institutional
investors must:
●
make a special
written suitability determination for the purchaser;
●
receive the
purchaser’s written agreement to a transaction prior to
sale;
●
provide the
purchaser with risk disclosure documents which identify risks
associated with investing in “penny stocks” and which
describe the market for these “penny stocks” as well as
a purchaser’s legal remedies; and
●
obtain a signed and
dated acknowledgment from the purchaser demonstrating that the
purchaser has actually received the required risk disclosure
document before a transaction in a “penny stock” can be
completed.
As a
result of these requirements, if our common shares are at such time
subject to the “penny stock” rules, broker-dealers may
find it difficult to effectuate customer transactions and trading
activity in these shares in the United States may be significantly
limited. Accordingly, the market price of the shares may be
depressed, and investors may find it more difficult to sell the
shares.
As
a foreign private issuer in the United States, we are subject to
different U.S. securities laws and rules than a domestic U.S.
issuer.
As a
foreign private issuer under U.S. securities laws we are not
required to comply with all the periodic disclosure requirements of
the U.S. Exchange Act applicable to domestic United States
companies and therefore the publicly available information about us
may be different or more limited than if we were a United States
domestic issuer. In addition, our officers, directors, and
principal shareholders are exempt from the “real time”
reporting and “short swing” profit recovery provisions
of Section 16 of the U.S. Exchange Act and the rules thereunder.
Although under Canadian rules, our officers, directors and
principal shareholders are generally required to file on SEDI
(
www.sedi.ca
) reports of
transactions involving our common shares within five calendar days
of such transaction, our shareholders may not know when our
officers, directors and principal shareholders purchase or sell our
common shares as timely as they would if we were a United States
domestic issuer.
We
are exposed to risks if we are unable to comply with laws and
future changes to laws affecting public companies, including the
Sarbanes-Oxley Act of 2002, and also to increased costs associated
with complying with such laws.
Any
future changes to the laws and regulations affecting public
companies, as well as compliance with existing provisions of the
Sarbanes-Oxley Act of 2002 (“
SOX
”) in the United States and
applicable Canadian securities laws, regulations, rules and
policies, may cause us to incur increased costs to comply with such
laws and requirements, including, among others, hiring additional
personnel and increased legal, accounting and advisory fees.
Delays, or a failure to comply with applicable laws, rules and
regulations could result in enforcement actions, the assessment of
other penalties and civil suits. The new laws and regulations may
increase potential costs to be borne under indemnities provided by
us to our officers and directors and may make it more difficult to
obtain certain types of insurance, including liability insurance
for directors and officers; as such, we may be forced to accept
reduced policy limits and coverage or incur substantially higher
costs to obtain the same or similar coverage. The impact of these
events could also make it more difficult to attract and retain
qualified persons to serve on our board of directors, or as
executive officers.
We are
required annually to review and report on the effectiveness of our
internal control over financial reporting in accordance with SOX
Section 404 and Multilateral Instrument 52-109 –
Certification of Disclosure in Issuer’s Annual and Interim
Filings of the Canadian Securities Administrators. The results of
this review are reported in our Annual Report on Form 20-F and in
our Management Discussion and Analysis.
Management’s
review is designed to provide reasonable, not absolute, assurance
that all material weaknesses in our internal controls are
identified. Material weaknesses represent deficiencies in our
internal controls that may not prevent or detect a misstatement
occurring which could have a material adverse effect on our
quarterly or annual financial statements. In addition, there can be
no assurance that any remedial actions we take to address any
material weaknesses identified will be successful, nor can there be
any assurance that further material weaknesses will not be
identified in future years. Material errors, omissions or
misrepresentations in our disclosures that occur as a result of our
failure to maintain effective internal control over financial
reporting could have a material adverse effect on our business,
financial condition, results of operations, and the value of our
common shares.
We
may be classified as a “passive foreign investment
company” or “PFIC” for U.S. income tax purposes,
which could have significant and adverse tax consequences to U.S.
investors.
The
possible classification of our company as a passive foreign
investment company (“
PFIC
”) for U.S. federal income tax
purposes could have significant and adverse tax consequences for
U.S. Holders (as defined in Item 10 below) of our common shares and
preference shares (collectively, “
shares
”). It may be possible for
U.S. holders of shares to mitigate certain of these consequences by
making an election to treat us as a “qualified electing
fund” or “QEF” under Section 1295 of the Code (a
“
QEF Election
”)
or a mark-to-market election under Section 1296 of the Internal
Revenue Code of 1986, as amended (the “
Code
”). A non-U.S. corporation
generally will be a PFIC if, for a taxable year (a) 75% or more of
the gross income of such corporation for such taxable year consists
of specified types of passive income or (b) on average, 50% or more
of the assets held by such corporation either produce passive
income or are held for the production of passive income, based on
the fair market value of such assets (or on the adjusted tax basis
of such assets, if such non-U.S. corporation is not publicly traded
and either is a “controlled foreign corporation” under
Section 957(a) of the Code, or makes an election to determine
whether it is a PFIC based on the adjusted basis of the
assets).
The
determination of whether we are, or will be, a PFIC for a taxable
year depends, in part, on the application of complex U.S. federal
income tax rules, which are subject to various interpretations.
Although the matter is not free from doubt, we believe that we were
not a PFIC during our 2016 taxable year and will not likely be a
PFIC during our 2017 taxable year. Because PFIC status is based on
our income, assets and activities for the entire taxable year, and
our market capitalization, it is not possible to determine whether
we will be characterized as a PFIC for the 2017 taxable year until
after the close of the taxable year. The tests for determining PFIC
status are subject to a number of uncertainties. These tests are
applied annually, and it is difficult to accurately predict future
income, assets and activities relevant to this determination. In
addition, because the market price of our common shares is likely
to fluctuate, the market price may affect the determination of
whether we will be considered a PFIC. There can be no assurance
that we will not be considered a PFIC for any taxable year
(including our 2017 taxable
year).
Absent one of the elections described above, if we are a PFIC for
any taxable year during which a U.S. holder holds our shares, we
generally will continue to be treated as a PFIC regardless of
whether we cease to meet the PFIC tests in one or more subsequent
years. Accordingly, no assurance can be given that we will not
constitute a PFIC in the current (or any future) tax year or that
the Internal Revenue Service (the “
IRS
”) will not challenge any
determination made by us concerning our PFIC status.
If we
are a PFIC, the U.S. federal income tax consequences to a U.S.
holder of the ownership and disposition of our shares will depend
on whether such U.S. holder makes a QEF or mark-to-market election.
Unless otherwise provided by the IRS, a U.S. holder of our shares
is generally required to file an informational return annually to
report its ownership interest in the Company during any year in
which we are a PFIC.
It is
unclear how corporate tax reform currently being considered in the
United States will affect the PFIC rules or QEF elections. The
foregoing only speaks to the United States federal income tax
considerations as to the Code in effect on January 1,
2017.
The
foregoing does not purport to be a complete enumeration or
explanation of the tax risks involved in an investment in our
company. Prospective investors should read this entire annual
report and consult with their own legal, tax and financial advisors
before deciding to invest in our company.
It
may be difficult to obtain and enforce judgments against us because
of our Canadian residency.
We are
governed by the laws of Canada. All of our directors and officers
are residents of Canada and all or a substantial portion of our
assets and the assets of such persons may be located outside of the
United States. As a result, it may be difficult for shareholders to
effect service of process upon us or such persons within the United
States or to realize in the United States on judgments of courts of
the United States predicated upon the civil liability provisions of
the U.S. federal securities laws or other laws of the United
States. In addition, there is doubt as to the enforceability in
Canada of liabilities predicated solely upon U.S. federal
securities law against us, our directors, controlling persons and
officers who are not residents of the United States, in original
actions or in actions for enforcements of judgments of U.S.
courts.
The
Company was incorporated under the Canada Business Corporations Act
by certificate and articles of arrangement dated October 22,
2009.
Our
registered principal office is located at 30 Worcester Road,
Toronto, Ontario, Canada M9W 5X2. Our telephone number is (416)
798-3001 and our facsimile number is (416) 798-3007.
Our
agent for service in the United States is Corporation Service
Company at 1090 Vermont Avenue N.W., Washington, D.C.
20005.
On
October 19, 2009, the shareholders of IPC Ltd. and Vasogen approved
the IPC Arrangement Agreement that resulted in the October 22, 2009
court-approved merger of IPC Ltd. and another U.S. subsidiary of
Intellipharmaceutics Inc., coincident with an arrangement pursuant
to which a predecessor of the Company combined with 7231971 Canada
Inc., a new Vasogen company that acquired substantially all of the
assets and certain liabilities of Vasogen, including the proceeds
from its non-dilutive financing transaction with Cervus LP (the
“
IPC Arrangement
Transaction
”). The completion of the IPC Arrangement
Transaction on October 22, 2009 resulted in the formation of the
Company, which is incorporated under the laws of Canada. The common
shares of the Company are traded on the TSX and
NASDAQ.
For the
years ended November 30, 2016, 2015 and 2014, we spent a total of
$8,166,736, $7,247,473 and $8,020,201, respectively, on research
and development. Over the past three fiscal years and up to
February 27, 2017, we have raised approximately $17,848,279 in
gross proceeds from the issuance of equity and convertible debt
securities. Our common shares are listed on the TSX under the
symbol “I” and on NASDAQ under the symbol
“IPCI”.
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.
Recent
Corporate Developments
●
In February 2017, we received
final approval from the FDA for our ANDA for metformin
hydrochloride extended release tablets in the 500 mg and 750 mg
strengths. Our newly approved product is a generic equivalent for
the corresponding strengths of the branded product Glucophage®
XR sold in the United States by Bristol-Myers Squibb.
We are actively evaluating options
to realize commercial returns from this new approval.
●
In February 2017, the FDA
accepted for filing the NDA we filed in November 2016 seeking
authorization to market our Rexista™ product candidate
(abuse-deterrent oxycodone hydrochloride extended release tablets)
in the 10, 15, 20, 30, 40, 60 and 80 mg strengths. The FDA
has determined that our application is sufficiently complete to
permit a substantive review, and has set a target action date under
the Prescription Drug User Fee Act (“
PDUFA
”) of September 25, 2017.
Rexista
™
is
indicated for the management of pain severe enough to require
daily, around-the-clock, long-term opioid treatment and for which
alternative treatment options are inadequate. The submission
is supported by pivotal pharmacokinetic studies that demonstrated
that Rexista
TM
is
bioequivalent to OxyContin
®
(oxycodone
hydrochloride extended release). The submission also includes
abuse-deterrent studies conducted to support abuse-deterrent label
claims related to abuse of the drug by various pathways, including
oral, intra-nasal and intravenous, having reference to the
FDA’s “
Abuse-Deterrent Opioids —
Evaluation and Labelin
g” guidance published in April
2015.
●
In January 2017, our U.S. commercialization partner, Par, launched
the 25 and 35 mg strengths of its generic Focalin
XR
®
(dexmethylphenidate hydrochloride extended-release) capsules in the
U.S., complementing the 15 and 30 mg strengths of our generic
Focalin XR
®
currently
marketed by Par. The FDA had recently granted final approval
to Par’s ANDA for its generic Focalin XR
®
capsules in the
5, 10, 15, 20, 25, 30, 35 and 40 mg strengths. We expect sales of
the 25 and 35 mg strengths to significantly improve our revenues in
2017. As the first filer of an ANDA for generic Focalin
XR
®
in the 25 and 35 mg strengths, Par has 180 days of U.S. generic
marketing exclusivity for these strengths. We believe Par is
preparing to launch all the remaining strengths in the first half
of 2017. Under the Par agreement, we receive quarterly profit-share
payments on Par's U.S. sales of generic Focalin XR
®
.
●
In December 2016, U.S. Patent No. 9,522,119 and Canadian Patent No.
2,910,865 were issued by the U.S. Patent and Trademark Office and
the Canadian Intellectual Property Office in respect of
“Compositions and Methods for Reducing Overdose”.
The issued patents cover aspects of our Paradoxical OverDose
Resistance Activating System (“
PODRAS™
”) delivery
technology, which is designed to prevent overdose when more pills
than prescribed are swallowed intact. Preclinical studies of
prototypes of oxycodone with PODRAS
™
technology
suggest that, unlike other third-party abuse-deterrent oxycodone
products in the marketplace, if more tablets than prescribed are
deliberately or inadvertently swallowed, the amount of drug active
released over 24 hours may be substantially less than expected.
However, if the prescribed number of pills is swallowed, the drug
release should be as expected. The issuance of these patents
provides us with the opportunity to accelerate our
PODRAS
™
development
plan by pursuing proof of concept studies in humans. We intend to
incorporate this technology in an alternate Rexista
™
product
candidate.
●
In October 2016, we entered into a license and commercial supply
agreement with Mallinckrodt, granting Mallinckrodt an exclusive
license to market, sell and distribute in the U.S. the following
extended release drug product candidates (the "
licensed products
") for which we have
ANDAs filed with the FDA (the “
Mallinckrodt
agreement
”):
■
Quetiapine fumarate extended-release tablets (generic Seroquel
XR
®
)
– ANDA Tentatively Approved by FDA
■
Desvenlafaxine extended-release tablets (generic
Pristiq
®
)
– ANDA Under FDA Review
■
Lamotrigine extended-release tablets (generic Lamictal
®
XR
™
) –
ANDA Under FDA Review
Under
the terms of this 10-year agreement, we received a non-refundable
upfront payment of $3 million in October 2016. In addition, the
Mallinckrodt agreement also provides for a long-term profit sharing
arrangement with respect to these licensed products (which includes
up to $11 million in cost recovery payments to us). We have agreed
to manufacture and supply the licensed products exclusively for
Mallinckrodt on a cost plus basis, and Mallinckrodt has agreed that
we will be its sole supplier of the licensed products marketed in
the U.S.
●
In October 2016, we received tentative approval from the FDA for
our ANDA for quetiapine fumarate extended-release tablets in the
50, 150, 200, 300 and 400 mg strengths. Our tentatively-approved
product is a generic equivalent for the corresponding strengths of
the branded product Seroquel XR
®
sold in the
U.S. by AstraZeneca Pharmaceuticals LP (“
AstraZeneca
”). Pursuant to a
settlement agreement between us and AstraZeneca dated July 30,
2012, we were permitted to launch our generic versions of the 50,
150, 200, 300 and 400 mg strengths of generic Seroquel
XR
®
,
on November 1, 2016, subject to FDA final approval of our ANDA for
those strengths. Such FDA final approval is subject to a 180 day
exclusivity period relating to a prior filer or filers of a generic
equivalent of the branded product. The first filer rights are
shared by Par and Accord. We believe that in early November 2016,
Par launched the 50, 100, 200, and 300 mg strengths, and Accord
launched the 400 mg strength. We and our marketing and distribution
partner for generic Seroquel XR® in the U.S., Mallinckrodt,
are working diligently towards a launch of all such strengths upon
their respective final FDA approvals.
●
In July 2016, the FDA completed its review of our previously
requested waiver of the NDA user fee related to our Rexista™
(abuse deterrent oxycodone hydrochloride extended release tablets)
NDA product candidate. The FDA, under the small business waiver
provision section 736(d)(1)(D) of the Federal Food, Drug, and
Cosmetics Act, granted us a waiver of the $1,187,100 application
fee for Rexista
™
.
●
In July 2016, we announced the results of a food effect study
conducted on its behalf for Rexista
™
. The
study design was a randomized, one-treatment two periods, two
sequences, crossover, open label, laboratory-blind bioavailability
study for Rexista
™
following
a single 80 mg oral dose to healthy adults under fasting and fed
conditions. The study showed that Rexista
TM
can be
administered with or without a meal (i.e., no food effect).
Rexista
™
met the
bioequivalence criteria (90% confidence interval of 80% to 125%)
for all matrices, involving maximum plasma concentration and area
under the curve (i.e., Cmax ratio of Rexista
TM
taken under fasted
conditions to fed conditions, and AUC metrics taken under fasted
conditions to fed conditions). We believe that Rexista
™
is well
differentiated from currently marketed oral oxycodone extended
release products.
●
In June 2016, we completed an underwritten public offering of
3,229,814 units of common shares and warrants, at a price of $1.61
per unit. The warrants are currently exercisable, have a term of
five years and an exercise price of $1.93 per common share. We
issued at the initial closing of the offering an aggregate of
3,229,814 common shares and warrants to purchase an additional
1,614,907 common shares. The underwriter also purchased at such
closing additional warrants to acquire 242,236 common shares
pursuant to the over-allotment option exercised in part by the
underwriter. We subsequently sold an aggregate of 459,456
additional common shares at the public offering price of $1.61 per
share in connection with subsequent partial exercises of the
underwriter’s over-allotment option. The closings of these
partial exercises brought the total net proceeds from the offering
to approximately $5.1 million, after deducting the
underwriter’s discount and offering expenses.
●
In February 2016, we announced that the FDA granted final approval
of our ANDA for levetiracetam extended release tablets for the 500
and 750 mg strengths. Our approved product is the generic
equivalent of the branded product KeppraXR
®
sold in the
U.S. by UCB, Inc. KeppraXR
®
, and the drug
active levetiracetam, are indicated for use in the treatment of
partial onset seizures associated with epilepsy. We are actively
exploring the best approach to commercialize the
product.
●
In January 2016, we announced that pivotal bioequivalence trials of
our Rexista
TM
(abuse deterrent
oxycodone hydrochloride extended release tablets), dosed under
fasted and fed conditions, had demonstrated bioequivalence to
Oxycontin
®
(oxycodone
hydrochloride) extended release tablets as manufactured and sold in
the U.S. by Purdue Pharma LP. The study design was based on FDA
recommendations and compared the lowest and highest strengths of
exhibit batches of our Rexista
TM
to the same
strengths of Oxycontin
®
. The results
show that the ratios of the pharmacokinetic metrics, Cmax, AUC0-t
and AUC0-f for Rexista
TM
vs.
Oxycontin
®
, are within the
interval of 80% - 125% required by the FDA with a confidence level
exceeding 90%. Having now demonstrated
such
bioequivalence, we believe we will not be required to conduct Phase
III studies. The FDA notification is significant as it provides a
basis for an accelerated development plan for our
Rexista
TM
product candidate,
without the need for more costly and time consuming Phase III
studies.
We are
unable to state or estimate an actual launch date of any or all
remaining strengths of Par’s generic Focalin XR
®
. In addition,
there can be no assurance as to when or if any of the
above-mentioned licensed products will receive final FDA approval
or that, if so approved, the licensed products will be successfully
commercialized and produce significant revenues for us. Also, there
can be no assurance that we will not be required to conduct further
studies for Rexista
TM
, that the FDA will
ultimately approve the NDA for the sale of Rexista
TM
in the U.S. market,
or that it will ever be successfully commercialized, that our
approved generic versions of Keppra XR
®
or
Glucophage® XR will be successfully commercialized, that we
will be successful in submitting any additional ANDAs or NDAs with
the FDA or ANDSs with Health Canada, that the FDA or Health Canada
will approve any of our current or future product candidates for
sale in the U.S. market and Canadian market, or that they will ever
be successfully commercialized and produce significant revenue for
us.
Our
Company
We are
a pharmaceutical company specializing in the research, development
and manufacture of novel and generic controlled-release and
targeted-release oral solid dosage drugs. Our patented
Hypermatrix
™
technology is
a multidimensional controlled-release drug delivery platform that
can be applied to the efficient development of a wide range of
existing and new pharmaceuticals. Based on this technology
platform, we have developed several drug delivery systems and a
pipeline of products (some of which have received FDA approval) and
product candidates in various stages of development, including
ANDAs filed with the FDA (and one ANDS filed with Health Canada)
and one NDA filing, in therapeutic areas that include neurology,
cardiovascular, gastrointestinal tract (“
GIT
”), diabetes and
pain.
We
received final approval from the FDA in November 2013 under the
Company ANDA to launch the 15 and 30 mg strengths of our generic
Focalin XR
®
(dexmethylphenidate hydrochloride extended-release) capsules.
Commercial sales of these strengths were launched immediately by
our commercialization partner in the U.S., Par.
Our 5,
10, 20 and 40 mg strengths were also then tentatively FDA approved,
subject to the right of Teva to 180 days of generic exclusivity
from the date of first launch of such products. Teva launched its
own 5, 10, 20 and 40 mg strengths of generic Focalin XR
®
capsules on
November 11, 2014, February 2, 2015, June 22, 2015 and November 19,
2013, respectively. In January 2017, Par launched the 25 and 35 mg
strengths of its generic Focalin XR
®
capsules in the
U.S., complementing the 15 and 30 mg strengths of our generic
Focalin XR
®
currently
marketed by Par. The FDA recently had granted final approval under
the Par ANDA for its generic Focalin XR
®
capsules in the
5, 10, 15, 20, 25, 30, 35 and 40 mg strengths. We believe Par is
preparing to launch all the remaining strengths in the first half
of 2017. As the first filer of an ANDA for generic Focalin
XR
®
in the 25 and 35 mg strengths, Par has 180 days of U.S. generic
marketing exclusivity for those strengths. Under the Par agreement,
we receive quarterly profit share payments on Par’s U.S.
sales of generic Focalin XR
®
. We expect
sales of the 25 and 35 mg strength to improve our revenues
significantly in 2017. There can be no assurance as to when or if
any further launches will occur for the remaining strengths, or if
they will be successfully commercialized. In February 2016, we
received final approval from the FDA of our ANDA for generic Keppra
XR
®
(levetiracetam extended-release tablets) for the 500 and 750 mg
strengths. Our generic Keppra XR
®
is a generic
equivalent for the corresponding strengths of the branded product
Keppra XR
®
sold in the
U.S. by UCB, Inc., and is indicated for use in the treatment of
partial onset seizures associated with epilepsy. We are aware that
several other generic versions of this product are currently
available and serve to limit the overall market opportunity. We are
actively exploring the best approach to maximize our commercial
returns from this approval. There can be no assurance that our
generic Keppra XR
®
for the 500 and
750 mg strengths will be successfully commercialized. In February
2017, we received final approval from the FDA for our ANDA for
metformin hydrochloride extended release tablets in the 500 mg and
750 mg strengths. Our newly approved product is a generic
equivalent for the corresponding strengths of the branded product
Glucophage® XR sold in the United States by Bristol-Myers
Squibb. We are aware that other generic versions of this product
are currently available in the market. We are actively evaluating
options to realize commercial returns from this new approval. There
can be no assurance that our metformin extended-release tablets for
the 500 mg and 750 mg strengths will be successfully
commercialized.
In
October 2016, we received tentative approval from the FDA for its
ANDA for quetiapine fumarate extended-release tablets in the 50,
150, 200, 300 and 400 mg strengths. Our tentatively-approved
product is a generic equivalent for the corresponding strengths of
the branded product Seroquel XR
®
sold in the
U.S. by AstraZeneca. Pursuant to a settlement agreement between us
and AstraZeneca dated July 30, 2012, we are permitted to launch our
generic versions of the 50, 150, 200, 300 and 400 mg strengths of
generic Seroquel XR
®
, on November 1,
2016, subject to FDA final approval of our ANDA for those
strengths. Such FDA final approval is subject to a 180 day
exclusivity period relating to a prior filer or filers of a generic
equivalent of the branded product. The first filer rights are
shared by Par and Accord. We believe that in early November 2016,
Par launched the 50, 100, 200, and 300 mg strengths, and Accord
launched the 400 mg strength. If we receive final approval to
launch our generic version of the 50, 100, 200, 300, and 400 mg
strengths of Seroquel XR
®
six months
after the date of launch by the respective first filers, we and our
marketing and distribution partner for generic Seroquel
XR
®
in the U.S., Mallinckrodt, are working diligently towards a launch
of these strengths upon final approval. There can be no assurance
that our quetiapine fumarate extended-release tablets in any of the
50, 150, 200, 300 and 400 mg strengths will receive final FDA
approval, or if approved, that they will be successfully
commercialized.
In
October 2016, we announced the Mallinckrodt agreement, granting
Mallinckrodt an exclusive license to market, sell and distribute in
the U.S. the following extended release licensed products for which
we have ANDAs filed with the FDA:
■
Quetiapine fumarate
extended-release tablets (generic Seroquel XR
®
) – ANDA
Tentatively Approved by FDA
■
Desvenlafaxine
extended-release tablets (generic Pristiq
®
) – ANDA
Under FDA Review
■
Lamotrigine
extended-release tablets (generic Lamictal
®
XR™)
– ANDA Under FDA Review
Under
the terms of the 10-year agreement, we received a non-refundable
upfront payment of $3 million in October 2016. In addition, the
agreement also provides for a long-term profit sharing arrangement
with respect to these licensed products (which includes up to $11
million in cost recovery payments to us). We have agreed to
manufacture and supply the licensed products exclusively for
Mallinckrodt on a cost plus basis. The Mallinckrodt agreement
contains customary terms and conditions for an agreement of this
kind, and is subject to early termination in the event we do not
obtain FDA approvals of the Mallinckrodt licensed products by
specified dates, or pursuant to any one of several termination
rights of each party.
Our
goal is to leverage our proprietary technologies and know-how in
order to build a diversified portfolio of commercialized products
that generate revenue. We intend to do this by advancing our
products from the formulation stage through product development,
regulatory approval and manufacturing. We believe that full
integration of development and manufacturing will help maximize the
value of our drug delivery technologies, products and product
candidates. We also believe that out-licensing sales and marketing
to established organizations, when it makes economic sense to do
so, will improve our return from our products while allowing us to
focus on our core competencies. We expect expenditures in investing
activities for the purchase of production, laboratory and computer
equipment and the expansion of manufacturing and warehousing
capability to be higher as we prepare for the commercialization of
ANDAs, one NDA and one ANDS that are pending FDA and Health Canada
approval, respectively.
Our
Strategy
Our
Hypermatrix™ technologies are central to the development and
manufacture of novel and generic controlled-release and
targeted-release oral solid dosage drugs. The Hypermatrix™
technologies are a multidimensional controlled-release drug
delivery platform that we believe can be applied to the efficient
development of a wide range of existing and new pharmaceuticals. We
believe that the flexibility of these technologies allows us to
develop complex drug delivery solutions within an
industry-competitive timeframe. Based on this technology platform,
we have developed several drug delivery systems and a pipeline of
products (some of which have received FDA approval) and product
candidates in various stages of development, including ANDAs filed
with the FDA (and one ANDS filed with Health Canada) and one NDA
filing, in therapeutic areas that include neurology,
cardiovascular, GIT, diabetes and pain. Certain, but not all, of
the products in our pipeline may be developed from time to time for
third parties pursuant to drug development agreements with those
third parties, under which our commercialization partner generally
pays certain of the expenses of development, sometimes
makes
certain milestone payments to us and receives a share of revenues
or profits if the drug is developed successfully to completion, the
control of which is generally in the discretion of our drug
development partner.
The
principal focus of our development activities previously targeted
difficult-to-develop controlled-release generic drugs which follow
an ANDA regulatory path. Our current development effort is
increasingly directed towards improved difficult-to-develop
controlled-release drugs which follow an NDA 505(b)(2) regulatory
pathway. We have increased our research and development
(“
R&D
”)
emphasis towards specialty new product development, facilitated by
the 505(b)(2) regulatory pathway, by advancing the product
development program for both Rexista™ and Regabatin™.
The technology that is central to our abuse deterrent formulation
of our Rexista™ is the Point of Divergence Drug Delivery
System (“
nPODDDS™
”). nPODDDS™
is designed to provide for certain unique drug delivery features in
a product. These include the release of the active substance to
show a divergence in a dissolution and/or bioavailability profile.
The divergence represents a point or a segment in a release
timeline where the release rate, represented by the slope of the
curve, changes from an initial rate or set of rates to another rate
or set of rates, the former representing the usually higher rate of
release shortly after ingesting a dose of the drug, and the latter
representing the rate of release over a later and longer period of
time, being more in the nature of a controlled-release or sustained
action. It is applicable for the delivery of opioid analgesics in
which it is desired to discourage common methods of tampering
associated with misuse and abuse of a drug, and also dose dumping
in the presence of alcohol. It can potentially retard tampering
without interfering with the bioavailability of the
product.
In
addition, our PODRAS™ delivery technology was initially
introduced to enhance our Rexista™ (abuse deterrent oxycodone
hydrochloride extended release tablets) product candidate. The
PODRAS™ delivery technology platform was designed to prevent
overdose when more pills than prescribed are swallowed intact.
Preclinical studies of prototypes of oxycodone with PODRAS
technology suggest that, unlike other third-party abuse-deterrent
oxycodone products in the marketplace, if more tablets than
prescribed are deliberately or inadvertently swallowed, the amount
of drug active released over 24 hours may be substantially less
than expected. However, if the prescribed number of pills is
swallowed, the drug release should be as expected. Certain aspects
of our PODRAS technology are covered by U.S. and Canadian patents
recently issued in respect of “Compositions and Methods for
Reducing Overdose.”
The NDA
505(b)(2) pathway (which relies in part upon the FDA’s
findings for a previously approved drug) both accelerates
development timelines and reduces costs in comparison to NDAs for
new chemical entities.
An
advantage of our strategy for development of NDA 505(b)(2) drugs is
that our product candidates can, if approved for sale by the FDA,
potentially enjoy an exclusivity period which may provide for
greater commercial opportunity relative to the generic ANDA
route.
The
market we operate in is created by the expiration of drug product
patents, challengeable patents and drug product exclusivity
periods. There are three ways that we employ our controlled-release
technologies, which we believe represent substantial opportunities
for us to commercialize on our own or develop products or
out-license our technologies and products:
●
For existing
controlled-release (once-a-day) products whose APIs are covered by
drug molecule patents about to expire or already expired, or whose
formulations are covered by patents about to expire, already
expired or which we believe we do not infringe, we can seek to
formulate generic products which are bioequivalent to the branded
products. Our scientists have demonstrated a successful track
record with such products, having previously developed several drug
products which have been commercialized in the U.S. by their former
employer/clients. The regulatory pathway for this approach requires
ANDAs for the U.S. and ANDSs for Canada.
●
For branded
immediate-release (multiple-times-per-day) drugs, we can formulate
improved replacement products, typically by developing new,
potentially patentable, controlled-release once-a-day drugs. Among
other out-licensing opportunities, these drugs can be licensed to
and sold by the pharmaceutical company that made the original
immediate-release product. These can potentially protect against
revenue erosion in the brand by providing a clinically attractive
patented product that competes favorably with the generic
immediate-release competition that arises on expiry of the original
patent(s). The regulatory pathway for this approach requires NDAs
via a 505(b)(2) application for the U.S. or corresponding pathways
for other jurisdictions where applicable.
●
Some of our
technologies are also focused on the development of abuse-deterrent
and overdose preventive pain medications. The growing abuse and
diversion of prescription “painkillers”, specifically
opioid analgesics, is well documented and is a major health and
social concern. We believe that our technologies and know-how are
aptly suited to developing abuse-deterrent pain medications. The
regulatory pathway for this approach requires NDAs via a 505(b)(2)
application for the U.S. or corresponding pathways for other
jurisdictions where applicable.
We
intend to collaborate in the development and/or marketing of one or
more products with partners, when we believe that such
collaboration may enhance the outcome of the project. We also plan
to seek additional collaborations as a means of developing
additional products. We believe that our business strategy enables
us to reduce our risk by (a) having a diverse product portfolio
that includes both branded and generic products in various
therapeutic categories, and (b) building collaborations and
establishing licensing agreements with companies with greater
resources thereby allowing us to share costs of development and to
improve cash-flow. There can be no assurance that we will be able
to enter into additional collaborations or, if we do, that such
arrangements will be beneficial.
Our
Drug Delivery Technologies
Hypermatrix
™
Our
scientists have developed drug delivery technology systems, based
on the Hypermatrix™ platform, that facilitate
controlled-release delivery of a wide range of pharmaceuticals.
These systems include several core technologies, which enable us to
flexibly respond to a wide range of drug attributes and patient
requirements, producing a desired controlled-release effect. Our
technologies have been incorporated in drugs manufactured and sold
by major pharmaceutical companies.
This
group of drug delivery technology systems is based upon the drug
active ingredient (“
drug
active
”) being imbedded in, and an integral part of, a
homogeneous (uniform), core and/or coatings consisting of one or
more polymers which affect the release rates of drugs, other
excipients (compounds other than the drug active), such as for
instance lubricants which control handling properties of the matrix
during fabrication, and the drug active itself. The
Hypermatrix™ technologies are the core of our current
marketing efforts and the technologies underlying our existing
development agreements.
nPODDDS
TM
In
addition to continuing efforts with Hypermatrix™ as a core
technology, our scientists continue to pursue novel research
activities that address unmet needs. Rexista™ (abuse
deterrent oxycodone hydrochloride extended release tablets) is an
NDA candidate, with a unique long acting oral formulation of
oxycodone intended to treat moderate-to-severe pain. The
formulation is intended to present a significant barrier to
tampering when subjected to various forms of physical and chemical
manipulation commonly used by abusers. It is also designed to
prevent dose dumping when inadvertently co-administered with
alcohol. The technology that supports our abuse deterrent
formulation of oxycodone is the nPODDDS™ Point of Divergence
Drug Delivery System. The use of nPODDDS™ does not interfere
with the bioavailability of oxycodone. We intend to apply the
nPODDDS™ technology platforms to other extended release
opioid drug candidates (e.g., oxymorphone, hydrocodone,
hydromorphone and morphine) utilizing the 505(b)(2) regulatory
pathway.
PODRAS
TM
Our
Paradoxical OverDose Resistance Activating System (PODRAS™)
delivery technology is designed to prevent overdose when more pills
than prescribed are swallowed intact. Preclinical studies of
prototypes of oxycodone with PODRAS technology suggest that, unlike
other third-party abuse-deterrent oxycodone products in the
marketplace, if more tablets than prescribed are deliberately or
inadvertently swallowed, the amount of drug active released over 24
hours may be substantially less than expected. However, if the
prescribed number of pills is swallowed, the drug release should be
as expected. We are currently working on an alternate
Rexista
TM
product candidate incorporating our PODRAS™ delivery
technology. In April 2015, the FDA published
Guidance for Industry: Abuse-Deterrent
Opioids — Evaluation and Labeling
, which cited the
need for more efficacious abuse-deterrence
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 Rexista
TM
development program
incorporating PODRAS™, and in May 2015 notified us that the
FDA had concluded that we met the criteria for Fast Track
designation. Fast Track is a designation assigned by the FDA in
response to an applicant’s request which meets FDA criteria.
The designation mandates the FDA to facilitate the development and
expedite the review of drugs intended to treat serious or life
threatening conditions and that demonstrate the potential to
address unmet medical needs. This could potentially result in
accelerated approval for Rexista™ incorporating
PODRAS™, thereby making it
available to patients earlier than would be traditionally
possible.
In
December 2016, we announced that U.S. Patent No. 9,522,119 and
Canadian Patent No. 2,910,865 were issued by the U.S. Patent and
Trademark Office and the Canadian Intellectual Property Office in
respect of “Compositions and Methods for Reducing
Overdose”. The issued patents cover aspects of the
PODRAS™ delivery technology. The issuance of these patents
represents a significant advance in our abuse deterrence technology
platform. The PODRAS
™
platform has
the potential to positively differentiate our technology from
others of which we are aware, and may represent an important step
toward addressing the FDA’s concern over the ingestion of a
number of intact pills or tablets. In addition to its use with
opioids, the PODRAS
™
platform is
potentially applicable to a wide range of drug products, inclusive
of over-the-counter drugs, that are intentionally or inadvertently
abused and cause harm by overdose to those who ingest them. The
issuance of these patents provides us the opportunity to accelerate
our PODRAS
™
development
plan by pursuing proof of concept studies in humans. We intend to
incorporate this technology in an alternate Rexista
TM
product candidate.
We intend to apply the PODRAS
™
technology
platforms to other extended release opioid drug candidates (e.g.,
oxymorphone, hydrocodone, hydromorphone and morphine) utilizing the
505(b)(2) regulatory pathway.
The
Hypermatrix™ Family of Technologies
Our
platform of Hypermatrix
TM
drug delivery
technologies include, but are not limited to,
IntelliFoam
TM
,
IntelliGITransporter
TM
,
IntelliMatrix
TM
,
IntelliOsmotics
TM
,
IntelliPaste
TM
,
IntelliPellets
TM
,
IntelliShuttle
TM
,
nPODDDS
TM
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.
IntelliMatrix™
The
IntelliMatrix™ technology is a proprietary blend of several
polymers. Depending on the constituents of the blend and the manner
in which these interact, the use of the blend with a drug allows
the drug to be released at predetermined rates, while imparting
protective characteristics to both the drug and the GIT. This is
most useful for drugs which require precisely controlled
first-order release profiles, where the amount released with time
is dependent on one component like the amount of drug available for
dissolution.
IntelliOsmotics™
The
IntelliOsmotics™ technology is based upon the inclusion of
multiple populations of polymers with distinct chemical bonding
characteristics. These set up a complex matrix of hydrophilic
(water attracting) and hydrophobic (water repelling) domains. When
the tablet or bead is in an aqueous environment, like gastric
contents, a “mixture” of water-soluble polymer and drug
core is surrounded by gel layer(s) of water-insoluble polymer.
Osmotic pressure drives the drug out when solvent passes through
the gel layer while the polymer molecules remain. This permits
control of the rate of release of the drug active by the variation
of polymer ratios. This technology is most useful for drug
molecules which require precisely controlled pseudo-first-order
release profiles, where the rate of release is proportional to the
amount available for dissolution as well as being proportional to
one other component; however the effect of the amount of drug is
overriding, so that the rate appears first-order. This type of
release control can be useful when attempting to match difficult
profiles for generic formulation.
IntelliPaste™
The
IntelliPaste™ technology is comprised of blends of multiple
polymers, oils, excipients and drug active(s) which result in a
paste-in-a-capsule dosage form. The physical attributes of the
paste include that it is thixotropic, pseudoplastic and
non-Newtonian or, in layman’s terms, like toothpaste.
Typically, it is formulated as having very low solubility in water
or oil, and low solubility in alcohol. These characteristics enable
the resulting drug product to have tamper-deterrent properties, and
to resist dissolution in even high concentrations of alcohol. As a
result, IntelliPaste™ is our preferred delivery technology
for the controlled delivery of opiates, narcotics and other central
nervous system drug products which are susceptible to unlawful
diversion or abuse.
IntelliPellets™
The
IntelliPellets™ technology consists of one or more type
(population) of granule, bead, pellet, or tablet in a holding
chamber or reservoir, such as a hard gelatin capsule. Each type
(population) may be uniquely different from the other in the manner
or rate it releases the drug. Our IntelliPellets™ technology
is designed to control, prolong, delay or modify the release of
drugs. It is particularly useful for the delivery of multiple
drugs, for delayed, timed, pulsed or for chronotherapeutic drug
delivery, designed to mimic our internal clocks for therapeutic
optimization (the drug is delivered in the right amount for the
patient at the right time). This technology is most useful for the
delivery of multiple-drug cocktails, or in situations where the
timing of a single dose or the sequencing of multiple doses of the
same drug is important.
IntelliShuttle™
The
IntelliShuttle™ technology provides for drug release past the
stomach, such as for drugs required for action beyond the stomach,
for drugs which could be destroyed by the stomach environment, or
for drugs which could harm the stomach itself. This technology
“shuttles” the drug past the stomach to be released at
predetermined times or sites where appropriate for optimum
therapeutic effect. This technology is most useful for acid labile
drug molecules (drugs that are destroyed in acid environment), such
as the proton pump inhibitors, of which well-known omeprazole
(Prilosec) and lansoprazole (Prevacid) are examples, or for drug
molecules which may harm the stomach, of which the well-known
aspirin is an example.
Each of
the above-noted proprietary technologies was fully developed and
ready for application to client drug delivery requirements from the
date of our inception. Each of them has been utilized and applied
to client drug delivery requirements under our existing and
previous development contracts; in several instances more than one
technology has been applied to a single drug development. We
continue to develop all of our existing technologies and to conduct
the necessary research to develop new products and
technologies.
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
|
$787
|
Intellipharmaceutics
and Par
|
|
Levetiracetam extended-release tablets
|
Keppra XR®
|
Partial onset
seizures for epilepsy
|
Received final
approval for the 500 and 750 mg strengths from
FDA
|
ANDA
|
$150
|
Intellipharmaceutics
|
|
Venlafaxine hydrochloride extended-release capsules
|
Effexor XR®
|
Depression
|
ANDA
application for commercialization approval for 3 strengths under
review by FDA
|
ANDA
|
$648
|
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
|
$336
|
Intellipharmaceutics
|
|
Metformin hydrochloride extended-release tablets
(500
and 750 mg only)
|
Glucophage® XR
|
Management of type
2 diabetes
|
Received final
approval for 500 and 750 mg strengths from FDA
|
ANDA
|
$591
(500
and 750 mg only)
|
Intellipharmaceutics
|
|
Generic name
|
Brand
|
Indication
|
Stage of Development
(1)
|
Regulatory Pathway
|
Market Size (in millions)
(2)
|
Rights
(3)
|
|
Quetiapine fumarate extended-release tablets
|
Seroquel XR®
|
Schizophrenia,
bipolar disorder & major depressive disorder
|
Received tentative
FDA approval for all 5 strengths. ANDS under review by Health
Canada
|
ANDA
ANDS
|
$1,039
|
Intellipharmaceutics
and Mallinckrodt
|
|
Lamotrigine extended-release tablets
|
Lamictal® XR
™
|
Anti-convulsant
for epilepsy
|
ANDA
application for commercialization approval for 6 strengths under
review by FDA
|
ANDA
|
$519
|
Intellipharmaceutics
and Mallinckrodt
|
|
Desvenlafaxine extended-release tablets
|
Pristiq®
|
Depression
|
ANDA
application for commercialization approval for 2 strengths under
review by FDA
|
ANDA
|
$889
|
Intellipharmaceutics
and Mallinckrodt
|
|
Trazodone hydrochloride extended release tablets
|
Oleptro
™
|
Depression
|
ANDA
application for commercialization approval for 2 strengths under
review by FDA
|
ANDA
|
$1
|
Intellipharmaceutics
|
|
Carvedilol phosphate extended-release capsules
|
Coreg CR®
|
Heart
failure, hypertension
|
Late-stage
development
|
ANDA
|
$233
|
Intellipharmaceutics
|
|
Oxycodone hydrochloride controlled-release capsules
|
OxyContin®
|
Pain
|
NDA
application accepted February 2017 and under review by FDA. PDUFA
date September 25, 2017
|
NDA
505(b)(2)
|
$2,116
|
Intellipharmaceutics
|
|
Pregabalin extended-release capsules
|
Lyrica®
|
Neuropathic
pain
|
Investigational
New Drug (“
IND
”) application submitted in
August 2015
|
NDA
505(b)(2)
|
$4,237
|
Intellipharmaceutics
|
|
Ranolazine extended-release tablets
|
Ranexa®
|
Chronic
angina
|
ANDA
application for commercialization approval for 2 strengths under
review by FDA
|
ANDA
|
$867
|
Intellipharmaceutics
|
Notes:
(1)
There can be no
assurance as to when, or if at all, the FDA or Health Canada will
approve any product candidate for sale in the U.S. or Canadian
markets.
(2)
Represents sales
for all strengths, unless otherwise noted, for the 12 months
ended
January
2017
in the U.S.,
including sales of generics in TRx MBS Dollars, which represents
projected new and refilled prescriptions representing a
standardized dollar metric based on manufacturer’s published
catalog or list prices to wholesalers, and does not represent
actual transaction prices and does not include prompt pay or other
discounts, rebates or reductions in price. Source: Symphony Health
Solutions.
(3)
For unpartnered
products, we are exploring licensing agreement opportunities or
other forms of distribution. While we believe that licensing
agreements are possible, there can be no assurance that any can be
secured.
(4) Includes
a Company ANDA final approval for our 15 and 30 mg strengths, and a
Par ANDA final approval for their 5, 10, 15, 20, 25, 30, 35 and 40
mg strengths. Profit sharing payments to us under the Par agreement
are the same irrespective of the ANDA owner.
We
typically select products for development that we anticipate could
achieve FDA or Health Canada approval for commercial sales several
years in the future. However, the length of time necessary to bring
a product to the point where the product can be commercialized can
vary significantly and depends on, among other things,
the
availability of funding, design and formulation challenges, safety
or efficacy, patent issues associated with the product, and FDA and
Health Canada review times.
Dexmethylphenidate Hydrochloride –
Generic Focalin XR®
(a
registered trademark of the brand manufacturer)
Dexmethylphenidate
hydrochloride, a Schedule II restricted product (drugs with a high
potential for abuse) in the U.S., is indicated for the treatment of
attention deficit hyperactivity disorder. In November 2005, we
entered into the Par agreement
,
pursuant to which we granted Par an
exclusive, royalty-free license to make and distribute in the U.S.
all strengths of our generic Focalin XR® (dexmethylphenidate
hydrochloride extended-release) capsules for a period of 10 years
from the date of commercial launch (which was November 19, 2013).
Under the Par agreement, we made a filing with the FDA for approval
to market generic Focalin XR
®
capsules in
various strengths in the U.S. (the “
Company ANDA
”), and are the owner
of that Company ANDA, as approved in part by the FDA. We retain the
right to make and distribute all strengths of the generic product
outside of the U.S. Calendar quarterly profit-sharing payments for
its U.S. sales under the Company ANDA are payable by Par to us as
calculated pursuant to the Par agreement. Within the purview of the
Par agreement, Par also applied for and owns an ANDA pertaining to
all marketed strengths of generic Focalin XR® (the
“
Par ANDA
”), and
is now approved by the FDA, to market generic Focalin XR®
capsules in all marketed strengths in the U.S. As with the Company
ANDA, calendar quarterly profit-sharing payments are payable by Par
to us for its U.S. sales of generic Focalin XR® under the Par
ANDA as calculated pursuant to the Par agreement.
We
received final approval from the FDA in November 2013 under the
Company ANDA to launch the 15 and 30 mg strengths of our generic
Focalin XR® (dexmethylphenidate hydrochloride
extended-release) capsules. Commercial sales of these strengths
were launched immediately by our commercialization partner in the
U.S., Par. Our 5, 10, 20 and 40 mg strengths were also then
tentatively FDA approved, subject to the right of Teva to 180 days
of generic exclusivity from the date of first launch of such
products. Teva launched its own 5, 10, 20 and 40 mg strengths of
generic Focalin XR® capsules on November 11, 2014, February 2,
2015, June 22, 2015 and November 19, 2013, respectively. In January
2017, Par launched the 25 and 35 mg strengths of its generic
Focalin XR® capsules in the U.S. complementing the 15 and 30
mg strengths of our generic Focalin XR® currently marketed by
Par. The FDA recently had granted final approval under the Par ANDA
for its generic Focalin XR® capsules in the 5, 10, 15, 20, 25,
30, 35 and 40 mg strengths. We believe Par is preparing to launch
all the remaining strengths in the first half of 2017. As the first
filer of an ANDA for generic Focalin XR® in the 25 and 35 mg
strengths, Par has 180 days of U.S. generic marketing exclusivity
for those strengths. We expect sales of the 25 and 35 mg strength
to significantly improve our revenues in 2017. Under the Par
agreement, we receive quarterly profit share payments on
Par’s U.S. sales of generic Focalin XR®. There can be no
assurance as to when or if any further launches will occur for the
remaining strengths, or if they will be successfully
commercialized.
Levetiracetam – Generic Keppra
XR®
(a registered
trademark of the brand manufacturer)
We
received final approval from the FDA in February 2016 for the 500
mg and 750 mg strengths of our generic Keppra XR®
(levetiracetam extended-release) tablets. Keppra XR®, and the
drug active levetiracetam, are indicated for use in the treatment
of partial onset seizures associated with epilepsy. We are actively
exploring the best approach to maximize the commercial returns from
the new approval. There can be no assurance that the Company's
generic Keppra XR® for the 500 and 750 mg strengths will be
successfully commercialized.
Metformin hydrochloride –
Glucophage® XR
(a
registered trademark of the brand manufacturer)
We
received final approval from the FDA in February 2017 for the 500
mg and 750 mg strengths of our generic Glucophage® XR
(metformin hydrochloride extended release) tablets.
Glucophage® XR, and the drug active metformin, are indicated
for use in the management of type 2 diabetes treatment. We are
actively evaluating options to realize commercial returns from this
new approval. There can be no assurance that our metformin
extended-release tablets for the 500 mg and 750 mg strengths will
be successfully commercialized.
Rexista™
(Abuse Deterrent Oxycodone Hydrochloride
Extended-Release
Tablets)
One of
our non-generic products under development is our Rexista™
(abuse deterrent oxycodone hydrochloride extended release tablets)
product candidate, intended as an abuse- and alcohol-deterrent
controlled-release oral formulation of oxycodone hydrochloride for
the relief of pain. Rexista™ is a new drug candidate, with
a
unique
long acting oral formulation of oxycodone intended to treat
moderate-to-severe pain when a continuous, around the clock opioid
analgesic is needed for an extended period of time. The formulation
is intended to present a significant barrier to tampering when
subjected to various forms of physical and chemical manipulation
commonly used by abusers. It is also designed to prevent dose
dumping when inadvertently co-administered with alcohol. Dose
dumping is the rapid release of an active ingredient from a
controlled-release drug into the blood stream that can result in
increased toxicity, side effects, and a loss of efficacy. Dose
dumping can result by consuming the drug through crushing, taking
with alcohol, extracting with other beverages, vaporizing or
injecting. In addition, when crushed or pulverized and hydrated,
the proposed extended release formulation is designed to coagulate
instantaneously and entrap the drug in a viscous hydrogel, which is
intended to prevent syringing, injecting and snorting. Our
Rexista™ formulation is difficult to abuse through the
application of heat or an open flame, making it difficult to inhale
the active ingredient from burning. Our Rexista™ formulation
contains a blue dye that is emitted once the tablet is tampered
with or crushed. This stigmatizing blue dye may act as a deterrent
if abused orally or via the intra-nasal route and may also serve as
an early warning mechanism to flag potential misuse or
abuse.
In
March 2015, we announced the results of three definitive open
label, blinded, randomized, cross-over, Phase I pharmacokinetic
clinical trials in which Rexista™ was compared to the
existing branded drug Oxycontin® under single dose fasting,
single dose steady-state fasting and single dose fed conditions in
healthy volunteers. We had reported that the results from all three
studies showed that Rexista™ met the bioequivalence criteria
(90% confidence interval of 80% to 125%) for all matrices, i.e., on
the measure of maximum plasma concentration or Cmax, on the measure
of area under the curve time (AUCt) and on the measure of area
under the curve infinity (AUC
inf
).
In May
2015, the FDA provided us with notification regarding our IND
submission for Rexista™ indicating that we would not be
required to conduct Phase III studies if bioequivalence to
Oxycontin® was demonstrated based on pivotal bioequivalence
studies.
In
January 2016, we announced that pivotal bioequivalence trials of
our Rexista™, dosed under fasted and fed conditions, had
demonstrated bioequivalence to Oxycontin® (oxycodone
hydrochloride) extended release tablets as manufactured and sold in
the U.S. by Purdue Pharma LP. The study design was based on FDA
recommendations and compared the lowest and highest strengths of
exhibit batches of our Rexista™ to the same strengths of
Oxycontin®. The results show that the ratios of the
pharmacokinetic metrics, Cmax, AUC
0-t
and
AUC
0-f
for Rexista™ vs. Oxycontin®, are within the interval of
80% - 125% required by the FDA with a confidence level exceeding
90%.
Having
now demonstrated such bioequivalence, we believe we will not be
required to conduct Phase III studies although no assurance can be
given that we will not be required to conduct further studies for
Rexista™. The FDA notification is significant as it provides
a basis for an accelerated development plan for our Rexista™
product candidate, without the need for more costly and time
consuming Phase III studies.
In July
2016, the FDA completed its review of our previously requested
waiver of the NDA user fee related to our Rexista™ NDA
product candidate. The FDA, under the small business waiver
provision section 736(d)(1)(D) of the Federal Food, Drug, and
Cosmetics Act, granted the Company a waiver of the $1,187,100
application fee for Rexista™.
In July
2016, we announced the results of a food effect study conducted on
our behalf for Rexista™. The study design was a randomized,
one-treatment two periods, two sequences, crossover, open label,
laboratory-blind bioavailability study for Rexista™ following
a single 80 mg oral dose to healthy adults under fasting and fed
conditions. The study showed that Rexista™ can be
administered with or without a meal (i.e., no food effect).
Rexista™ met the bioequivalence criteria (90% confidence
interval of 80% to 125%) for all matrices, involving maximum plasma
concentration and area under the curve (i.e., Cmax ratio of
Rexista™ taken under fasted conditions to fed conditions, and
AUC metrics taken under fasted conditions to fed conditions). We
believe that Rexista™ is well differentiated from currently
marketed oral oxycodone extended release products.
In
November 2016, we filed an NDA seeking authorization to market our
Rexista™ (abuse-deterrent oxycodone hydrochloride extended
release tablets) in the 10, 15, 20, 30, 40, 60 and 80 mg strengths.
In February 2017, the FDA accepted for filing this NDA. The FDA has
set a PDUFA target action date of September 25, 2017.
The
submission is supported by pivotal pharmacokinetic studies that
demonstrated that Rexista™ is bioequivalent to
OxyContin
®
(oxycodone
hydrochloride extended release). The submission also includes
abuse-deterrent studies conducted to support abuse-deterrent label
claims related to abuse of the drug by various pathways, including
oral, intra-nasal and intravenous, having reference to the FDA's
"
Abuse-Deterrent Opioids
— Evaluation and Labeling
" guidance published in April
2015.
Our NDA
was filed under Paragraph IV of the Hatch-Waxman Act, as amended.
The FDA has accepted the filing for further review. We have, within
the period provided in Paragraph IV, notified the brand owner of
Oxycontin
®
, and all
holders of the Oxycontin
®
patents listed
in the Orange Book that we have filed an NDA with the FDA for
marketing approval for Rexista™, and have certified that
Rexista
™
would not
infringe the Oxycontin
®
patents or that
the Oxycontin
®
patents are
invalid. This notice may give rise, within a prescribed time of 45
days, to patent infringement litigation against us by the owner of
the branded product Oxycontin
®
and by the
holders of the Oxycontin
®
patents. If
such litigation is instituted within the prescribed time limits,
the FDA will be stayed for 30 months from the date of such notice
from granting final marketing approval to us for
Rexista
™
,
unless prior to the expiry of such 30 months all parties settle the
litigation in such way as to permit the marketing of Rexista™
(if then approved), or there is a final decision of the courts that
either the Oxycontin
®
patents were
not valid or that Rexista
™
did not
infringe the Oxycontin
®
patents.
The FDA
is actively developing a regulatory program for the narcotic
analgesic class of products. In April 2015, the FDA issued a
guidance document, “
Abuse-Deterrent Opioids –
Evaluation and Labeling
,” to assist the industry in
developing new formulations of opioid drugs with abuse-deterrent
properties. We adhered to the April 2015 guidance document in
pursuing various abuse deterrent label claims when we filed our NDA
for Rexista™.
We
believe that we can leverage our core competencies in drug delivery
and formulation for the development of products targeted towards
abuse-deterrent opioid analgesics used in pain management. The
advantage of our strategy for development of NDA drugs is that our
products, if approved for sale, may enjoy a sales exclusivity
period. Furthermore, it may be possible to establish and defend the
intellectual property surrounding our tamper-deterrent opioid
analgesic products.
There
can be no assurance that we will not be required to conduct further
studies for Rexista™, that the FDA will ultimately approve
our NDA for the sale of Rexista™ in the U.S. market, or that
it will ever be successfully commercialized.
Quetiapine fumarate
extended-release tablets - Generic Seroquel XR®
(a
registered trademark of the brand manufacturer)
In
October 2016, we received tentative approval from the FDA for our
ANDA for quetiapine fumarate extended-release tablets in the 50,
150, 200, 300 and 400 mg strengths. Our tentatively-approved
product is a generic equivalent for the corresponding strengths of
the branded product Seroquel XR
®
sold in the
U.S. by AstraZeneca. Pursuant to a settlement agreement between us
and AstraZeneca dated July 30, 2012, we are permitted to launch our
generic versions of the 50, 150, 200, 300 and 400 mg strengths of
generic Seroquel XR
®
, on November 1,
2016, subject to FDA final approval of our ANDA for those
strengths. Such FDA final approval is subject to a 180 day
exclusivity period relating to a prior filer or filers of a generic
equivalent of the branded product. The first filer rights are
shared by Par and Accord. We believe that in early November 2016,
Par launched the 50, 100, 200, and 300 mg strengths, and Accord
launched the 400 mg strength. If we receive final approval to
launch our generic version of the 50, 100, 200, 300, and 400 mg
strengths of Seroquel XR
®
six months
after the date of launch by the respective first filers, we and our
marketing and distribution partner for generic Seroquel
XR
®
in the U.S., Mallinckrodt, are working diligently towards a launch
of these strengths upon final approval. There can be no assurance
that our quetiapine fumarate extended-release tablets in any of the
50, 150, 200, 300 and 400 mg strengths will receive final FDA
approval, or if approved, that they will be successfully
commercialized.
In
October 2016, we announced the Mallinckrodt agreement, granting
Mallinckrodt an exclusive license to market, sell and distribute in
the U.S. the following extended release licensed products for which
we have ANDAs filed with the FDA:
■
Quetiapine fumarate
extended-release tablets (generic Seroquel XR
®
) – ANDA
Tentatively Approved by FDA
■
Desvenlafaxine
extended-release tablets (generic Pristiq
®
) – ANDA
Under FDA Review
■
Lamotrigine
extended-release tablets (generic Lamictal
®
XR™)
– ANDA Under FDA Review
Under
the terms of the 10-year agreement, we received a non-refundable
upfront payment of $3 million in October 2016. In addition, the
agreement also provides for a long-term profit sharing arrangement
with respect to these licensed products (which includes up to $11
million in cost recovery payments to us). We have agreed to
manufacture and supply the licensed products exclusively for
Mallinckrodt on a cost plus basis. The Mallinckrodt agreement
contains customary terms and conditions for an agreement of this
kind, and is subject to early termination in the event we do not
obtain FDA approvals of the Mallinckrodt licensed products by
specified dates, or pursuant to any one of several termination
rights of each party. There can be no assurance as to when or if
our quetiapine fumarate extended-release tablets will receive final
FDA approval or that, if so approved, the product will be
successfully commercialized and produce significant revenues for
us.
Regabatin™
XR (Pregabalin Extended-Release)
Another
Intellipharmaceutics non-generic controlled-release product under
development is Regabatin™ XR, pregabalin extended-release
capsules. Pregabalin is indicated for the management of neuropathic
pain associated with diabetic peripheral neuropathy, postherpetic
neuralgia, spinal cord injury and fibromyalgia. A
controlled-release version of pregabalin should reduce the number
of doses patients take, which could improve patient compliance, and
therefore possibly enhance clinical outcomes. Lyrica®
pregabalin, twice-a-day (“
BID
”) dosage and three-times-a-day
(“
TID
”) dosage,
are drug products marketed in the U.S. by Pfizer Inc. There is no
controlled-release formulation on the market at this time. A
controlled-release version of pregabalin should reduce the number
of doses patients take, potentially improving patient compliance,
and therefore potentially improving clinical outcomes.
In
2014, we conducted and analyzed the results of six Phase I clinical
trials involving a twice-a-day formulation and a once-a-day
formulation. For formulations directed to certain indications which
include fibromyalgia, the results suggested that Regabatin™
XR 82.5 mg BID dosage was comparable in bioavailability to
Lyrica® 50 mg (immediate-release pregabalin) TID dosage. For
formulations directed to certain other indications which include
neuropathic pain associated with diabetic peripheral neuropathy,
the results suggested that Regabatin™ XR 165 mg once-a-day
dosage was comparable in bioavailability to Lyrica® 75 mg BID
dosage.
In
March 2015, the FDA accepted a Pre-Investigational New Drug
(“
Pre-IND
”)
meeting request for our once-a-day Regabatin™ XR non-generic
controlled release version of pregabalin under the NDA 505(b)(2)
regulatory pathway, with a view to possible commercialization in
the U.S. at some time following the December 30, 2018 expiry of the
patent covering the pregabalin molecule. Regabatin™ XR is
based on our controlled release drug delivery technology platform
which utilizes the symptomatology and chronobiology of fibromyalgia
in a formulation intended to provide a higher exposure of
pregabalin during the first 12 hours of dosing. Based on positive
feedback and guidance from the FDA, we submitted an IND application
for Regabatin™ XR in August 2015. The FDA completed its
review of the IND application and provided constructive input that
we will use towards further development of the
program.
There
can be no assurance that any additional Phase I or other clinical
trials we conduct will meet our expectations, that we will have
sufficient capital to conduct such trials, that we will be
successful in submitting an NDA 505(b)(2) filing with the FDA, that
the FDA will approve this product candidate for sale in the U.S.
market, or that it will ever be successfully
commercialized.
COMPETITIVE
ENVIRONMENT
We are
engaged in a business characterized by extensive research efforts,
rapid technological developments and intense competition. Our
competitors include medical technology, pharmaceutical,
biotechnology and other companies, universities and research
institutions. All of these competitors currently engage in, have
engaged in or may engage in the future, in development,
manufacturing, marketing and commercialization of new
pharmaceuticals and existing pharmaceuticals, some of which may
compete with our present or future products and product
candidates.
Our
drug delivery technologies may compete with existing drug delivery
technologies, as well as new drug delivery technologies that may be
developed or commercialized in the future. Any of these drugs and
drug delivery technologies may receive government approval or gain
market acceptance more rapidly than our products and product
candidates. As a result, our products and product candidates may
become non-competitive or obsolete.
We
believe that our ability to successfully compete will depend on,
among other things, the efficacy, safety and reliability of our
products and product candidates, the timing and scope of regulatory
approval, the speed at which we develop product candidates, our, or
our commercialization partners’, ability to manufacture and
sell commercial quantities of a product to the market, product
acceptance by physicians and other professional healthcare
providers, the quality and breadth of our technologies, the skills
of our employees and our ability to recruit and retain skilled
employees, the protection of our intellectual property, and the
availability of substantial capital resources to fund development
and commercialization activities.
MANUFACTURING
We have
internal manufacturing capabilities consisting of current Good
Laboratory Practices (“
cGLP
”) research laboratories and a
cGMP manufacturing plant for solid oral dosage forms at our 30
Worcester Road facility in Toronto. Raw materials used in
manufacturing our products are available from a number of
commercial sources and the prices for such raw materials are
generally not particularly volatile. In October 2014, the FDA
provided us with written notification that our Toronto, Canada
manufacturing facility at 30 Worcester Road had received an
“acceptable” classification. Such inspections are
carried out on a regular basis by the FDA and an
“acceptable” classification is necessary to permit us
to be in a position to receive final approvals for ANDAs and NDAs
and to permit manufacturing of drug products intended for
commercial sales in the United States after any such approvals.
Similarly, Health Canada completed an inspection of our 30
Worcester Road facility in September 2015 which resulted in a
“compliant” rating. Once we have completed certain
renovations to our newly-leased property at 22 Worcester Road
property (see “D. Property, Plant and Equipment”, below
for a further description of our facilities), we would request an
inspection by regulatory agencies which will determine compliance
of the facility with cGMP.
INTELLECTUAL
PROPERTY
Proprietary rights
are an important aspect of our business. These include know-how,
trade secrets and patents. Know-how and trade secrets are protected
by internal company policies and operating procedures, and where
necessary, by contractual provisions with development partners and
suppliers. We also seek patent protection for inventive advances
which form the bases of our drug delivery technologies. With
respect to particular products, we may seek patent protection on
the commercial composition, our methods of production and our uses,
to prevent the unauthorized marketing and sale of competitive
products.
Patents
which relate to and protect various aspects of our
Hypermatrix
TM
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.
|
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
|
|
Country
|
Issue Date
|
Issue No.
|
Title
|
|
U.S.A.
|
Aug
15, 2006
|
7,090,867
|
Novel
Controlled Release Delivery Device for Pharmaceutical Agents
Incorporating Microbial 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 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
|
|
Canada
|
Jan
28, 2014
|
2,571,897
|
Controlled
Extended Drug Release Technology
|
|
Canada
|
Apr 8,
2014
|
2,576,556
|
Disintegrant
Assisted Controlled Release Technology
|
|
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
|
|
Canada
|
Nov
29, 2016
|
2,910,865
|
Compositions and
Methods For Reducing Overdose
|
|
China
|
May
11, 2016
|
ZL200780019665.5
|
Drug
Delivery Composition
|
|
China
|
Nov
25, 2015
|
ZL200780025611.X
|
Pharmaceutical
Composition Having Reduced Abuse Potential
|
In
addition to these issued patents, we have several U.S. patent
applications, and corresponding foreign applications pending,
including Patent Cooperation Treaty - national stage processing and
entry applications, relating to various aspects of our
HyperMatrix
TM
drug delivery
technologies, including methods and compositions for coating of
tablets and beads, compositions incorporating disintegrants to
assist in controlled release, compositions incorporating multiple
drug actives, and compositions directed to classes of drug actives
designed as therapies for specific indications and compositions
intended to enhance deterrence of willful abuse of narcotic
compositions.
REGULATORY
REQUIREMENTS
We
focus on the development of both branded drug products (which
require NDAs) and generic drug products (which require ANDAs). The
research and development, manufacture and marketing of
controlled-release pharmaceuticals are subject to regulation by
U.S., Canadian and other governmental authorities and agencies.
Such national agencies and other federal, state, provincial and
local entities regulate the testing, manufacturing, safety and
promotion of our products. The regulations applicable to our
products may change as the currently limited number of approved
controlled-release products increases and regulators acquire
additional experience in this area.
United States Regulation
New
Drug Application
We will
be required by the FDA to comply with NDA procedures for our
branded products prior to commencement of marketing by us or our
licensees. New drug compounds and new formulations for existing
drug compounds which cannot be filed as ANDAs, but follow a
505(b)(2) regulatory pathway, are subject to NDA
procedures.
These
procedures for a new drug compound include (a) preclinical
laboratory and animal toxicology tests; (b) scaling and testing of
production batches; (c) submission of an IND, and subsequent
approval is required before any human clinical trials can commence;
(d) adequate and well controlled replicate human clinical trials to
establish the safety and efficacy of the drug for its intended
indication; (e) the submission of an NDA to the FDA; and (f) FDA
approval of an NDA prior to any commercial sale or shipment of the
product, including pre-approval and post-approval inspections of
our manufacturing and testing facilities. If all of this data in
the product application is owned by the applicant, the FDA will
issue its approval without regard to patent rights that might be
infringed or exclusivity periods that would affect the FDA’s
ability to grant an approval if the application relied upon data
which the applicant did not own.
Preclinical
laboratory and animal toxicology tests may have to be performed to
assess the safety and potential efficacy of the product. The
results of these preclinical tests, together with information
regarding the methods of manufacture of the products and quality
control testing, are then submitted to the FDA as part of an IND
requesting authorization to initiate human clinical trials. Once
the IND notice period has expired, clinical trials may be
initiated, unless an FDA hold on clinical trials has been
issued.
A new
formulation for an existing drug compound requires a 505(b)(2)
application. This application contains full reports of
investigations of safety and effectiveness but at least some
information required for approval comes from studies not conducted
by or for the applicant for which the applicant has not obtained a
right of reference. A 505(b)(2) application is submitted when some
specific information necessary for approval is obtained from: (1)
published literature and/or (2) the FDA findings of safety and
effectiveness for an approved drug. The FDA has implemented this
approach to encourage innovation in drug development without
requiring duplicative studies while protecting the patent and
exclusivity rights for the approved drug. A 505(b)(2) application
can be submitted for a New Chemical Entity, a New Molecular Entity
or any changes to previously approved drugs such as dosage form,
strength, route of administration, formulation, indication, or
bioinequivalence where the application may rely on the FDA’s
finding on safety and effectiveness of the previously approved
drug. In addition, the applicant may also submit a 505(b)(2)
application for a change in drug product that is eligible for
consideration pursuant to a suitability petition. For example, a
505(b)(2) application would be appropriate for a controlled-release
product that is bioinequivalent to a reference listed drug where
the proposed product is at least as bioavailable and the pattern of
release is at least as favorable as the approved pharmaceutically
equivalent product. A 505(b)(2) application may be granted three
years of exclusivity if one or more clinical investigations, other
than bioavailability/bioequivalence studies, was essential to the
approval and conducted or sponsored by the applicant; five years of
exclusivity granted if it is for a new chemical entity. A 505(b)(2)
application may also be eligible for orphan drug and pediatric
exclusivity.
A
505(b)(2) application must contain the following: (1)
identification of those portions of the application that rely on
the information the applicant does not have a right of reference,
(2) identification of any or all listed drugs by established name,
proprietary name, dosage form, strength, route of administration,
name of the listed drug’s sponsor, and the application number
if application relies on the FDA’s previous findings of
safety and effectiveness for a listed drug, (3) information with
respect to any patents that claim the drug or the use of the drug
for which approval is sought, (4) patent certifications or
statement with respect to any relevant patents that claim the
listed drug, (5) if approval for a new indication, and not for the
indications approved for the listed drug, a certification so
stating, (6) a statement as to whether the listed drug has received
a period of marketing exclusivity, (7)
Bioavailability/Bioequivalence studies comparing the proposed
product to the listed drug (if any) and (8) studies necessary to
support the change or modification from the listed drugs or drugs
(if any). Before submitting the application, the applicant should
submit a plan to identify the types of bridging studies that should
be conducted and also the components of application that rely on
the FDA’s findings of safety and effectiveness of a
previously approved drug product. We intend to generate all data
necessary to support FDA approval of the applications
we
file. A
505(b)(2) application must provide notice of certain patent
certifications to the NDA holder and patent owner, and approval may
be delayed due to patent or exclusivity protections covering an
approved product.
Clinical trials
involve the administration of a pharmaceutical product to
individuals under the supervision of qualified medical
investigators who are experienced in conducting studies under
“Good Clinical Practice” guidelines. Clinical studies
are conducted in accordance with protocols that detail the
objectives of a study, the parameters to be used to monitor safety
and the efficacy criteria to be evaluated. Each protocol is
submitted to the FDA and to an Institutional Review Board prior to
the commencement of each clinical trial. Clinical studies are
typically conducted in three sequential phases, which may overlap.
In Phase I, the initial introduction of the product into human
subjects, the compound is tested for absorption, safety, dosage,
tolerance, metabolic interaction, distribution, and excretion.
Phase II involves studies in a limited patient population with the
disease to be treated to (1) determine the efficacy of the product
for specific targeted indications, (2) determine optimal dosage and
(3) identify possible adverse effects and safety risks. In the
event Phase II evaluations demonstrate that a pharmaceutical
product is effective and has an acceptable safety profile, Phase
III clinical trials are undertaken to further evaluate clinical
efficacy of the product and to further test its safety within an
expanded patient population at geographically dispersed clinical
study sites. Periodic reports on the clinical investigations are
required.
We, or
the FDA, may suspend clinical trials at any time if either party
believes the clinical subjects are being exposed to unacceptable
health risks. The results of the product development, analytical
laboratory studies and clinical studies are submitted to the FDA as
part of an NDA for approval of the marketing and commercialization
of a pharmaceutical product.
Abbreviated
New Drug Application
In
certain cases, where the objective is to develop a generic version
of an approved product already on the market in controlled-release
dosages, an ANDA may be filed in lieu of filing an NDA. Under the
ANDA procedure, the FDA waives the requirement to submit complete
reports of preclinical and clinical studies of safety and efficacy
and instead requires the submission of bioequivalency data, that
is, demonstration that the generic drug produces the same effect in
the body as its brand-name counterpart and has the same
pharmacokinetic profile, or change in blood concentration over
time. The ANDA procedure is available to us for a generic version
of a drug product approved by the FDA. In certain cases, an ANDA
applicant may submit a suitability petition to the FDA requesting
permission to submit an ANDA for a drug product that differs from a
previously approved reference drug product (the “
Listed Drug
”) when the change is
one authorized by statute. Permitted variations from the Listed
Drug include changes in: (1) route of administration, (2) dosage
form, (3) strength and (4) one of the active ingredients of the
Listed Drug when the Listed Drug is a combination product. The FDA
must approve the petition before the ANDA may be submitted. An
applicant is not permitted to petition for any other kinds of
changes from Listed Drugs. The information in a suitability
petition must demonstrate that the change from the Listed Drug
requested for the proposed drug product may be adequately evaluated
for approval without data from investigations to show the proposed
drug product’s safety or effectiveness. The advantages of an
ANDA over an NDA include reduced research and development costs
associated with bringing a product to market, and generally a
shorter review and approval time at the FDA.
GDUFA
implemented substantial fees for new ANDAs, Drug Master Files,
product and establishment fees and a one-time fee for back-logged
ANDAs pending approval as of October 1, 2012. In return, the
program is intended to provide faster and more predictable ANDA
reviews by the FDA and more timely inspections of drug facilities.
For the FDA’s fiscal years 2016 and 2017, respectively, the
user fee rates are $76,030 and
$
70,480 for new ANDAs,
$
38,020 and $35,240 for Prior Approval
Supplements, and
$
17,434 for
each ANDA already on file at the FDA. For the FDA’s fiscal
years 2016 and 2017, there is also an annual facility user fee of
$258,905 and $273,646, respectively. Under GDUFA, generic product
companies face significant penalties for failure to pay the new
user fees, including rendering an ANDA not “substantially
complete” until the fee is paid. It is currently uncertain
the effect the new fees will have on our ANDA process and business.
However, any failure by us or our suppliers to pay the fees or to
comply with the other provisions of GDUFA may adversely impact or
delay our ability to file ANDAs, obtain approvals for new generic
products, generate revenues and thus may have a material adverse
effect on our business, results of operations and financial
condition.
Patent
Certification and Exclusivity Issues
ANDAs
and/or NDAs, filed under Paragraph IV of the Hatch Waxman Act,
which seek approval by a non-brand owner to market a generic
version of a branded drug product prior to the expiry of patents
owned or listed in the Orange Book (the “
Listed Patents
”) as applicable to
the brand owner’s product, are required to include
certifications pursuant to Paragraph IV that either the Listed
Patents are invalid or that the applicant’s drug product does
not infringe the Listed Patents. In such circumstances, the owner
of the branded drug and/or the holder of the patents may commence
patent infringement litigation against the applicant. In such a
case, the FDA is not empowered to approve such pending ANDA or NDA
until the expiry of 30 months from the commencement of such
litigation, unless within such 30 month period the said patents are
found to be invalid, or the drug product covered by the ANDA or NDA
is finally found by a court not to infringe such
patents.
Under
the U.S. Food, Drug and Cosmetic Act (“
FDC Act
”), the first filer of an
ANDA (but not an NDA) with a “non-infringement”
certification is entitled, if its drug product is approved, to
receive 180 days of market exclusivity. Subsequent filers of
generic products, if non-infringing and approved by the FDA, are
entitled to market their products six months after the first
commercial marketing of the first filer’s generic product. A
company having FDA approval and permission from the original brand
owner is able to market an authorized generic at any time. The
180-day exclusivity period can be forfeited if the first applicant
withdraws its application or the FDA considers the application to
have been withdrawn, the first applicant amends or withdraws
Paragraph IV Certification for all patents qualifying for 180 day
exclusivity, or the first applicant fails to obtain tentative
approval within 30 months after the date filed, unless failure is
due to a change in review requirements. The preservation of the 180
day exclusivity period related to the first-to-file status of a
drug not approved within 30 months after the date filed, generally
requires that an application be made to the FDA for extension of
the time period where the delay has been due to a change in the
review requirements for the drug. The approval of the continued
first-to-file status in such circumstances is subject to the
discretion of the FDA. There can be no assurance that the FDA would
accede to such a request if made.
Patent
expiration refers to expiry of U.S. patents (inclusive of any
extensions) on drug compounds, formulations and uses. Patents
outside the United States may differ from those in the United
States. Under U.S. law, the expiration of a patent on a drug
compound does not create a right to make, use or sell that
compound. There may be additional patents relating to a
person’s proposed manufacture, use or sale of a product that
could potentially prohibit such person’s proposed
commercialization of a drug compound.
The FDC
Act contains other market exclusivity provisions that offer
additional protection to pioneer drug products which are
independent of any patent coverage that might also apply.
Exclusivity refers to the fact that the effective date of approval
of a potential competitor’s ANDA for a generic of the pioneer
drug may be delayed or, in certain cases, an ANDA may not be
submitted until the exclusivity period expires. Five years of
exclusivity are granted to the first approval of a “new
chemical entity”. Three years of exclusivity may apply to
products which are not new chemical entities, but for which new
clinical investigations are essential to the approval. For example,
a new indication for use, or a new dosage strength of a previously
approved product, may be entitled to exclusivity, but only with
respect to that indication or dosage strength. Exclusivity only
offers protection against a competitor entering the market via the
ANDA route, and does not operate against a competitor that
generates all of its own data and submits a full NDA.
If
applicable regulatory criteria are not satisfied, the FDA may deny
approval of an NDA or an ANDA or may require additional testing.
Product approvals may be withdrawn if compliance with current or
future regulatory standards is not maintained or if problems occur
after the product reaches the market. The FDA may require further
testing and surveillance programs to monitor the pharmaceutical
product that has been commercialized. Non-compliance with
applicable requirements can result in additional penalties,
including product seizures, injunction actions and criminal
prosecutions.
Canadian Regulation
The
requirements for selling pharmaceutical drugs in Canada are
substantially similar to those of the United States described
above.
Investigational
New Drug Application
Before
conducting clinical trials of a new drug in Canada, we must submit
a Clinical Trial Application (“
CTA
”) to the Therapeutic Products
Directorate (“
TPD
”). This application includes
information about the proposed trial, the methods of manufacture of
the drug and controls, preclinical laboratory and animal toxicology
tests on the safety and potential efficacy of the drug, and
information on any previously executed clinical trials with the new
drug. If, within 30 days of receiving the application, the TPD does
not notify us that our application is unsatisfactory, we may
proceed with clinical trials of the drug. The phases of clinical
trials are the same as those described above under
“
United States Regulation
– New Drug Application
”.
New
Drug Submission
Before
selling a new drug in Canada, we must submit a New Drug Submission
(“
NDS
”) or
Supplemental New Drug Submission (“
sNDS
”) to the TPD and receive a
Notice of Compliance (“
NOC
”) from the TPD to sell the
drug. The submission includes information describing the new drug,
including its proper name, the proposed name under which the new
drug will be sold, a quantitative list of ingredients in the new
drug, the methods of manufacturing, processing, and packaging the
new drug, the controls applicable to these operations, the tests
conducted to establish the safety of the new drug, the tests to be
applied to control the potency, purity, stability and safety of the
new drug, the results of bio-pharmaceutics and clinical trials as
appropriate, the intended indications for which the new drug may be
prescribed and the effectiveness of the new drug when used as
intended. The TPD reviews the NDS or sNDS. If the submission meets
the requirements of Canada’s Food and Drugs Act and
Regulations, the TPD will issue an NOC for the new
drug.
Where
the TPD has already approved a drug for sale in controlled-release
dosages, we may seek approval from the TPD to sell an equivalent
generic drug through an ANDS. In certain cases, the TPD does not
require the manufacturer of a proposed drug that is claimed to be
equivalent to a drug that has already been approved for sale and
marketed, to conduct clinical trials; instead, the manufacturer
must satisfy the TPD that the drug is bioequivalent to the drug
that has already been approved and marketed.
The TPD
may deny approval or may require additional testing of a proposed
new drug if applicable regulatory criteria are not met. Product
approvals may be withdrawn if compliance with regulatory standards
is not maintained or if problems occur after the product reaches
the market. Contravention of Canada’s Food and Drugs Act and
Regulations can result in fines and other sanctions, including
product seizures and criminal prosecutions.
Proposals have
recently been made that, if implemented, would significantly change
Canada’s drug approval system. In general, the
recommendations emphasize the need for efficiency in Canadian drug
review. Proposals include establishment of a separate agency for
drug regulation and modeling the approval system on those found in
European Union countries. There is no assurance, however, that such
changes will be implemented or, if implemented, will expedite the
approval of new drugs.
The
Canadian government has regulations which can prohibit the issuance
of an NOC for a patented medicine to a generic competitor, provided
that the patentee or an exclusive licensee has filed a list of its
Canadian patents covering that medicine with the Minister of Health
and Welfare. After submitting the list, the patentee or an
exclusive licensee can commence a proceeding to obtain an order of
prohibition directed to the Minister prohibiting him or her from
issuing an NOC. The minister may be prohibited from issuing an NOC
permitting the importation or sale of a patented medicine to a
generic competitor until patents on the medicine expire or the
waiver of infringement and/or validity of the patent(s) in question
is resolved by litigation in the manner set out in such
regulations. There may be additional patents relating to a
company’s proposed manufacture, use or sale of a product that
could potentially prohibit such company’s proposed
commercialization of a drug compound.
Certain
provincial regulatory authorities in Canada have the ability to
determine whether the consumers of a drug sold within such province
will be reimbursed by a provincial government health plan for that
drug by listing drugs on formularies. The listing or non-listing of
a drug on provincial formularies may affect the prices of drugs
sold within provinces and the volume of drugs sold within
provinces.
Additional
Regulatory Considerations
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 27,
2017.
For
over ten years, we have occupied a 25,000 square foot facility at
30 Worcester Road, Toronto, Ontario, Canada M9W 5X2, that we leased
up to the year ended November 30, 2015 at a rental rate of
approximately $90,000
per
year, and with us responsible for utilities, municipal taxes and
operating expenses for the leased property. On December 1, 2015, we
entered into a new lease agreement for the combined properties
comprising our premises that we currently operate from at 30
Worcester Road (“
30 Worcester
Road
”, as well as a 40,000 square foot building on the
adjoining property located at 22 Worcester Road, which is owned
indirectly by the same landlord (“
22 Worcester Road
” and
collectively with 30 Worcester Road, the “
combined properties
”) for a
five-year term with a five-year renewal option. Basic rent over the
five-year term is C$240,000 per annum, subject to an annual
consumer price inflation adjustment, and we are responsible for
utilities, municipal taxes and operating expenses for the leased
property. With these two leased premises, we now have use of 65,000
square feet of commercial space to accommodate our growth
objectives over the next several years. We also have an option to
purchase the combined properties after March 1, 2017 and up to
November 30, 2020 based on a fair value purchase formula. We use
our facility at 30 Worcester Road as a current Good Laboratory
Practices research laboratory, office space, and current Good
Manufacturing Practices scale-up and small to medium-scale
manufacturing plant for solid oral dosage forms. The facility at 30
Worcester Road consists of approximately 4,900 square ft. for
administrative space, 4,300 square ft. for R&D, 9,200 square
ft. for manufacturing, and 3,000 square ft. for warehousing. The 22
Worcester Road building provides approximately 35,000 square feet
of warehouse space and approximately 5,000 square feet of office
space. The current lease also provides us with a right of first
refusal to purchase the combined properties. The landlord is
required to provide us with prior written notice and the desired
sale price for the combined properties prior to offering the
premises to a third party or on the open market. We have five
business days to accept such offer and purchase price for a
transaction to close within 60 days of the notice. If we decline
the offer, the landlord is entitled to offer and sell the
properties for a purchase price of not less than the price offered
to us for a period of 180 days, after which time the landlord is
again obliged to offer the properties to us before offering them to
a third party or on the open market.
We
continually monitor our facility requirements in the context of our
needs and we expect these requirements to change commensurately
with our activities.
In
October 2014, the FDA provided us with written notification that
our Toronto, Canada manufacturing facility at 30 Worcester Road had
received an “acceptable” classification. Such
inspections are carried out on a regular basis by the FDA and an
“acceptable” classification is necessary to permit us
to be in a position to receive final approvals for ANDAs and NDAs
and to permit manufacturing of drug products intended for
commercial sales in the United States after any such approvals.
Similarly, Health Canada completed an inspection of our 30
Worcester Road facility in September 2015 which resulted in a
“compliant” rating. Once we have completed certain
renovations to our newly-leased warehouse and office property at 22
Worcester Road property, we would request an inspection by
regulatory agencies which will determine compliance of the facility
with cGMP.
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,
2016, 2015 and 2014.
Our
results of operations have fluctuated significantly from period to
period in the past and are likely to do so in the future. We
anticipate that our quarterly and annual results of operations will
be impacted for the foreseeable future by several factors,
including the timing of approvals to market our product candidates
in various jurisdictions and any resulting licensing revenue,
milestone revenue, product sales, competitive entries, market
pricing, wholesaler buying patterns, the timing and amount of
payments received pursuant to our current and future collaborations
with third parties, the existence of any first-to-file exclusivity
periods, and the progress and timing of expenditures related to our
research, development and commercialization efforts. Due to these
fluctuations, we
presently believe
that the period-to-period comparisons of our operating results are
not a reliable indication of our future performance.
Over
the last several years, the FDA, through the Office of Generic
Drugs (“
OGD
”)
that approves ANDAs, has experienced a significant deterioration in
ANDA approval timelines. The Company believes that the median ANDA
approval time for ANDAs filed in 2012 or prior is approximately 47
months. The FDA has attributed this backlog principally
to:
●
significant growth
in ANDA submissions, particularly foreign submissions
●
an increase in the
number of complex products
●
an increase in the
number of foreign site inspections
●
limited resources
to handle the growth and complexity of submissions
In
order to address the significant backlog, GDUFA was passed. Under
GDUFA, the OGD has been collecting new user fees from generic drug
companies designed, among other things, to fund the increase in
resources required to deal with the approval backlog as well as
restructure the OGD to effectively deal with ANDA timelines on a go
forward basis. The Company currently has 6 ANDAs that were filed in
2012 or prior that are still pending final FDA approval that exceed
the 47 month median. We believe that the FDA has made positive
strides in restructuring the OGD to address the ANDA approval
backlog and we remain optimistic that the FDA will be successful in
reducing the backlog; however, there can be no assurance as to when
or if the FDA will approve any of our ANDA product
candidates.
Revised Prior Quarter Amounts
While
preparing our November 30, 2016 year-end financial statements, we
identified and corrected a non-cash error related to the accounting
for the modification of performance-based stock options. In April
2016, our shareholders approved a two-year extension of the expiry
date of the performance-based options from September 2016 to
September 2018. We have determined that this modification resulted
in a non-cash expense that should have been reflected in our 2016
second quarter results. As stock-based compensation is a non-cash
item, this error did not impact net cash provided from operations
in the second quarter, nor does it have any impact on our annual
financial statements for the year ended November 30, 2016. This
error resulted in an understatement of second quarter stock-based
compensation charged to R&D expense, with a corresponding
understatement of additional paid in capital, of $1,177,782. We
have determined to record the expense in the 2016 fourth quarter
ended November 30, 2016.
The
following are selected financial data for the years ended November
30, 2016, 2015 and 2014.
|
|
For the years ended
|
Change
|
Change
|
||||
|
|
November
30, 2016
|
November
30, 2015
|
November
30, 2014
|
2016 vs 2015
|
2015 vs
2014
|
||
|
|
$
|
$
|
$
|
$
|
%
|
$
|
%
|
|
Revenue:
|
|
|
|
|
|
|
|
|
Licensing
|
2,209,502
|
4,093,781
|
8,415,540
|
(1,884,279
)
|
-46
%
|
(4,321,759
)
|
-51
%
|
|
Milestone
|
-
|
-
|
354,153
|
-
|
N/A
|
(354,153
)
|
-100
%
|
|
Up-front fees
|
37,500
|
-
|
-
|
37,500
|
N/A
|
-
|
N/A
|
|
|
2,247,002
|
4,093,781
|
8,769,693
|
(1,846,779
)
|
-45
%
|
(4,675,912
)
|
-53
%
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
Research and development
|
8,166,736
|
7,247,473
|
8,020,201
|
919,263
|
13
%
|
(772,728
)
|
-10
%
|
|
Selling, general and administrative
|
3,546,132
|
3,581,913
|
3,900,803
|
(35,781
)
|
-1
%
|
(318,890
)
|
-8
%
|
|
Depreciation
|
385,210
|
377,849
|
381,385
|
7,361
|
2
%
|
(3,536
)
|
-1
%
|
|
|
12,098,078
|
11,207,235
|
12,302,389
|
890,843
|
8
%
|
(1,095,154
)
|
-9
%
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
(9,851,076
)
|
(7,113,454
)
|
(3,532,696
)
|
(2,737,622
)
|
38
%
|
(3,580,758
)
|
101
%
|
|
|
|
|
|
|
|
|
|
|
Net foreign exchange (loss) gain
|
(22,470
)
|
46,211
|
10,896
|
(68,681
)
|
-149
%
|
35,315
|
324
%
|
|
Interest income
|
207
|
1,507
|
4,898
|
(1,300
)
|
-86
%
|
(3,391
)
|
-69
%
|
|
Interest expense
|
(270,238
)
|
(256,629
)
|
(339,451
)
|
(13,609
)
|
5
%
|
82,822
|
-24
%
|
|
Extinguishment loss
|
-
|
(114,023
)
|
-
|
114,023
|
N/A
|
(114,023
)
|
N/A
|
|
Net loss
|
(10,143,577
)
|
(7,436,388
)
|
(3,856,353
)
|
(2,707,189
)
|
36
%
|
(3,580,035
)
|
93
%
|
Year Ended November 30, 2016 Compared to the Year Ended November
30, 2015
Revenue
The
Company recorded revenues of $2,247,002 for the year ended November
30, 2016 versus $4,093,781 for the year ended November 30, 2015.
For the year ended November 30, 2016, we recognized licensing
revenue of $2,209,502 from commercial sales of 15 and 30 mg
strengths of generic Focalin XR
®
(dexmethylphenidate hydrochloride extended-release) capsules under
the Par agreement. The decrease in revenues is primarily due to
increased competition and a softening of pricing conditions for our
generic Focalin XR
®
capsules. A
fifth generic competitor entered the market in the second half of
2015, resulting in increased price competition and lower market
share. Based on the most recent two month trend, our market share
for the 15 and 30 mg strengths is approximately 30% for the
combined strengths of our generic Focalin XR
®
capsules.
Revenue under the Par agreement represents the commercial sales of
the generic product in those strengths and may not be
representative of future sales. In addition, during the year ended
November 30, 2016, the Company received a non-refundable up-front
payment of $3,000,000 from Mallinckrodt pursuant to the
Mallinckrodt agreement, of which $37,500 was recognized as revenue.
Such up-front fees are recognized over the expected 10 year term of
the contract. There were no up-front fees recognized in the year
ended November 30, 2015.
Research and Development
Expenditures for
R&D for the year ended November 30, 2016 were higher by
$919,263 compared to the year ended November 30, 2015. The increase
is primarily due to higher stock option compensation expense as a
result of certain performance based stock options vesting upon FDA
approval of generic Keppra XR
®
, and additional
compensation costs related to vested performance options as a
result of the Company’s shareholders approving a two year
extension of the expiry date of the performance-based options from
September 2016 to September 2018, partially offset by lower
spending for ongoing R&D work, as detailed below.
In the
year ended November 30, 2016 we recorded $1,995,805 as expense for
stock based compensation for R&D employees, of which $620,632
was for expenses related to performance-based stock options which
vested on FDA approval of our generic Keppra XR
®
in February
2016. As a result of the modification of the performance based
stock option expiry date, we recorded additional compensation costs
of $1,177,782 related to vested performance options during the year
ended November 30, 2016. In the year ended November 30, 2015, we
recorded $152,231 as expenses for stock-based compensation
expense.
After
adjusting for the stock-based compensation expenses discussed
above, expenditures for R&D for the year ended November 30,
2016 were lower by $924,311 compared to the year ended November 30,
2015. This is primarily due to the fact that during the year ended
November 30, 2016 we incurred lower expenditures on the development
of several generic product candidates (specifically for clinical
studies), partially offset by an accrual of bonuses to certain
management employees, compared to the year ended November 30, 2015.
There were no management bonuses paid in the year ended November
30, 2015.
Selling, General
and
Administrative
Selling, general
and administrative expenses were $3,546,132 for the year ended
November 30, 2016 in comparison to $3,581,913 for the year ended
November 30, 2015, a decrease of $35,781. The decrease is due to a
decrease in corporate legal activities and other professional fees,
offset by an expense for management bonuses discussed in greater
detail below.
Expenditures for
wages and benefits for the year ended November 30, 2016 were
$1,454,501 in comparison to $1,305,614 in the year ended November
30, 2015, an increase of $148,887, primarily due to the accrual of
bonuses to certain management employees. There were no bonuses paid
in the year ended November 30, 2015. For
the
year ended November 30, 2016, we recorded $265,639 as an expense
for stock-based compensation compared to an expense of $265,587 for
the year ended November 30, 2015.
Administrative
costs for the year ended November 30, 2016 were $1,558,633 in
comparison to $1,751,315 in the year ended November 30, 2015. The
decrease is primarily due to a decrease in expenditures in
corporate legal activities and other professional
fees.
Marketing costs for
the year ended November 30, 2016 were $413,646 in comparison to
$434,902 in the year ended November 30, 2015. The decrease is
attributable to the decrease in travel expenditures related to
business development and investor relations
activities.
Occupancy costs for
the year ended November 30, 2016 were $119,352 in comparison to
$90,082 for the year ended November 30, 2015. The increase is due
to the incremental cost of leasing an adjoining facility in order
to meet the Company’s anticipated growth
requirements.
Depreciation
Depreciation
expenses for the year ended November 30, 2016 were $385,210 in
comparison to $377,849 in the year ended November 30, 2015. The
increase is primarily due to the additional investment in
production, laboratory and computer equipment during the year ended
November 30, 2016.
Net Foreign Exchange (Loss) Gain
Foreign
exchange loss was $22,470 for the year ended November 30, 2016 in
comparison to a gain of $46,211 in the year ended November 30,
2015. The foreign exchange loss for the year ended November 30,
2016 was due to the weakening of the Canadian dollar against the
U.S. dollar during the year ended November 30, 2016 as the exchange
rates changed to $1.00 for C$1.3429 as at November 30, 2016 from
$1.00 for C$1.3353 as at November 30, 2015. During the year ended
November 30, 2016, the exchange rate averaged $1.00 for C$1.3276
compared to the year ended November 30, 2015, when the exchange
rate averaged $1.00 for C$1.2603.
Interest Income
Interest income for
the year ended November 30, 2016 was lower by $1,300 in comparison
to the prior period. For the year ended November 30, 2016 interest
was lower largely due to lower average amounts of cash on hand
compared to the year ended November 30, 2015.
Interest Expense
Interest expense
for the year ended November 30, 2016 was higher by $13,609 compared
with the prior period. This is primarily because the interest
expense paid on the Debenture which accrues interest payable at 12%
annually and the related conversion option embedded derivative
accreted at an annual imputed interest of approximately 6.6% in
fiscal 2016. During the fiscal year 2015, the conversion option
embedded derivative accreted at an annual imputed interest of
approximately 15%, offset by a credit to interest expense at an
imputed interest rate of 14.6%, during the third quarter of 2015,
due to the extinguishment of the debt from an accounting
perspective.
Net Loss
The
Company recorded net loss for the year ended November 30, 2016 of
$10,143,577 or $0.38 per common share, compared with a net loss of
$7,436,388 or $0.31 per common share for the year ended November
30, 2015. In the year ended November 30, 2016, the higher net loss
is primarily attributed to lower licensing revenues from commercial
sales of generic Focalin XR® for 2016. To a lesser extent, the
higher loss for the 2016 period was due to the accrual of
management bonuses and additional compensation costs related to
vested performance options as a result of the FDA approval of
generic Keppra XR® and the Company’s shareholders
approving an extension of the expiry date of the performance based
stock options. In the year ended November 30, 2015, the net loss is
attributed to the ongoing R&D and selling, general and
administrative expense, partially offset by licensing
revenue.
Year
Ended November 30, 2015 Compared to the Year Ended November 30,
2014
Revenue
The
Company recorded revenues of $4,093,781 for the year ended November
30, 2015 versus $8,769,693 for the year ended November 30, 2014. As
the first-filer for generic Focalin XR® (dexmethylphenidate
hydrochloride extended-release) capsules in the 15 mg strength, we
had 180 days (up to May 19, 2014) of exclusivity of sales for that
strength from the date of launch on November 19, 2013 in the United
States by our partner, Par. During the year ended November 30,
2014, we recognized licensing revenue of $8,415,540 from commercial
sales of 15 and 30 mg strengths of generic Focalin XR®
capsules under the Par agreement. This revenue included the
commercial sales occurring in the early stages of the marketing of
the generic product in those strengths during an exclusivity
period. In the year ended November 30, 2014, we also recorded
milestone revenue, tied to the achievement of our product being
either the only generic in the market or having only one generic
competitor, of $354,153 under the Par agreement. Subsequent to May
19, 2014, we no longer retained generic exclusivity of the 15 mg
strength. Consequently, we faced four generic competitors in 2014
through the first half of 2015, and a softening of pricing
conditions and market share, consistent with industry
post-exclusivity experience. In the second half of 2015 we faced
one additional competitor on the 15 mg strength, and while we were
able to preserve market share, it came at the expense of
price/margin erosion. Revenue under the Par agreement represents
the commercial sales of the generic product in those strengths and
may not be representative of future sales.
We believe sales of generic
Focalin XR® are subject to wholesaler buying patterns,
increased generic competition negatively impacting price, margins
and market share consistent with industry post-exclusivity
experience and, to a lesser extent, seasonality.
Research and Development
Expenditures for
R&D for the year ended November 30, 2015 were $7,247,473 in
comparison to $8,020,201 in the prior year, a decrease of $772,728.
These included reduced spending for R&D activities as well as
lower stock options expense as detailed below.
In the
year ended November 30, 2015, we recorded $152,231 as an expense
for stock based compensation for R&D employees, and there was
no expense for performance-based stock options. In the year ended
November 30, 2014, we recorded $1,270,307 as an expense for
stock-based compensation and this higher expense was primarily due
to a modification of performance-based stock options. Effective
March 27, 2014, the Company’s shareholders approved a two
year extension of the performance-based stock option expiry date of
these options to September 10, 2016. As a result of the
modification of the performance based stock option expiry date, we
recorded additional compensation costs of $1,066,991 related to
vested performance options during the year ended November 30,
2014.
After
adjusting for the stock-based compensation expenses discussed
above, expenditures for R&D for the year ended November 30,
2015 were higher by $345,348 compared to the prior year. This
increase over the prior year is primarily due to the fact that
during the year ended November 30, 2015 we incurred increased
expenses on furthering the development of generic and NDA 505(b)(2)
product candidates, compared to the year ended November 30, 2014,
as well as a modest increase in the number of non-management
employees for the year ended November 30, 2015.
Selling, General and Administrative
Selling, general
and administrative expenses were $3,581,913 for the year ended
November 30, 2015 in comparison to $3,900,803 for the year ended
November 30, 2014, a decrease of $318,890. The decrease is due to
lower expenses related to wages, partially offset by an increase in
administrative costs and marketing costs which are discussed in
greater detail below.
Expenditures for
wages and benefits for the year ended November 30, 2015 were
$1,305,614 in comparison to $1,749,046 in the prior year. For the
year ended November 30, 2015, we recorded $265,587 as an expense
for stock-based compensation compared to an expense of $478,300 for
the prior year. The decrease is attributable to the issuance of
options in the second quarter of 2014 to certain management
employees and the non-management directors. After adjusting for the
stock option based compensation expenses, expenditures for wages
and benefits for
the
year ended November 30, 2015 were lower by $230,719 compared to the
prior period. The decrease was primarily due to the payment of
bonuses to certain management and non-management employees, and
salary increases for certain non-management employees during the
year ended November 30, 2014, and due to no bonuses paid during the
year ended November 30, 2015.
Administrative
costs for the year ended November 30, 2015 were $1,751,315 in
comparison to $1,651,790 in the year ended November 30, 2014. The
increase is primarily due to an increase in expenditures in
corporate legal activities and professional fees.
Marketing costs for
the year ended November 30, 2015 were $434,902 in comparison to
$418,473 in the prior year. This increase is primarily the result
of higher travel expenditures related to business development
activities.
Depreciation
Depreciation
expenses for the year ended November 30, 2015 was $377,849 in
comparison to $381,385 in the prior year. The decrease is primarily
due to the timing of additional investment in production,
laboratory equipment and computer equipment during the year ended
November 30, 2015.
Exchange (Loss) Gain
Foreign
exchange gain was $46,211 for the year ended November 30, 2015 in
comparison to a gain of $10,896 for the year ended November 30,
2014. The increase in foreign exchange gain for the year ended
November 30, 2015 was due to the strengthening of the U.S. dollar
against the Canadian dollar throughout the year as the exchange
rate averaged $1.00 for C$1.2603 compared to $1.00 for C$1.0973 in
the prior year. The Canadian dollar weakened against the U.S.
dollar during the year ended November 30, 2015 as the exchange
rates changed to $1.00 for C$1.3353 as at November 30, 2015 from
$1.00 for C$1.1440 at November 30, 2014.
Interest Income
Interest income was
$1,507 for the year ended November 30, 2015 in comparison to $4,898
for the year ended November 30, 2014, a decrease of $3,391. For the
year ended November 30, 2015, interest was lower largely due to a
lower average amount of cash on hand during 2015 compared to
2014.
Interest Expense
Interest expense
was $256,629 for the year ended November 30, 2015 in comparison to
$339,451 for the year ended November 30, 2014, a decrease of
$82,822. This results from interest paid in 2015 on the Debenture
which accrues interest payable at 12% annually and the related
conversion option embedded derivative accreted at an annual imputed
interest of approximately 15%, offset by a credit to interest
expense at an imputed interest rate of 14.6% during the second half
of fiscal 2015, due to the extinguishment of the debt on an
accounting basis, in comparison to fiscal 2014 when the conversion
option embedded derivative accreted at an annual imputed interest
of approximately 8%.
The
Company had cash of
$
4,144,424
as at November 30, 2016 compared to $1,755,196 as at November 30,
2015 and compared to $4,233,975 as at November 30, 2014. The
increase in cash during the year ended November 30, 2016 was mainly
a result of an increase in cash flows provided from financing
activities which were mainly from the Company’s underwritten
public offering and common share sales under the Company’s
at-the-market offering program, the receipt of a non-refundable
upfront payment of $3,000,000 under the Mallinckrodt agreement,
partially offset by lower cash receipts relating to commercialized
sales of our generic Focalin XR® and a reduction in accounts
payable and accrued liabilities. The decrease in cash during the
year ended November 30, 2015 was mainly a result of lower cash
receipts relating to commercial sales of our generic Focalin
XR® capsules for the 15 and 30 mg strengths, an increase in
cash flow used in operating activities related to R&D
activities, a decrease in cash flows provided from financing
activities which were mainly from common share sales under the
Company’s at-the-market offering program, partially offset by
a decrease in purchases of production, laboratory and computer
equipment. The increase in cash during the year ended November 30,
2014 was mainly a result of the decrease in cash flows used in
operating activities due to payments received from the commercial
sales of our generic Focalin XR® capsules for the 15 and 30 mg
strengths, cash flows from financing activities which were mainly
from our at-the-market financing and several warrant exercise,
partially offset by an increase in purchases of production,
laboratory and computer equipment.
For the
year ended November 30, 2016, net cash flows used in operating
activities increased to $6,254,985 as compared to net cash flows
used in operating activities for the year ended November 30, 2015
of $3,782,164. The November 30, 2016 increase was due to lower cash
receipts relating to commercial sales of our generic Focalin
XR® capsules by Par for the 15 and 30 mg strengths and a
reduction in accounts payable and accrued liabilities, partially
offset by the receipt of a non-refundable upfront payment of
$3,000,000 under the Mallinckrodt agreement. For the year ended
November 30, 2015, net cash flows used in operating activities
increased to $3,782,164 as compared to net cash flows used in
operating activities for the year ended November 30, 2014 of
$1,714,913. The increase from 2014 was due to the receipt of
approximately $4,622,157, as our payment relating to commercial
sales of generic Focalin XR® capsules by Par for the 15 and 30
mg strengths of the drug product under the Par agreement for the
period December 1, 2014 to November 30, 2015 compared to the
payment to us of $8,465,466 for the period December 1, 2013 to
November 30, 2014.
R&D
costs, which are a significant portion of the cash flows used in
operating activities, related to continued internal research and
development programs are expensed as incurred. However, equipment
and supplies are capitalized and amortized over their useful lives
if they have alternative future uses. For the year ended November
30, 2016 and year ended November 30, 2015, R&D expense was
$8,166,736 and $7,247,473, respectively. The increase was mainly
due to stock based compensation expenses of $1,177,782 related to
vested performance options during the year ended November 30, 2016,
management bonuses and an increase in stock options expense,
partially offset by lower expenditures on third party R&D
expenditures. For the year ended November 30, 2015 and year ended
November 30, 2014, R&D expense before stock option expense was
$7,095,242 and $6,749,894, respectively. The increase in expenses
in 2015 relative to 2014 was in part as a result of capital
expenditures on production and analytical equipment and expenses
for the procurement of active raw materials, conducting clinical
studies and, to a lesser extent, hiring of additional
personnel.
As a
research and development company, Intellipharmaceutics Corp., a
wholly-owned subsidiary of the Company (“
IPC Corp
”) is eligible to receive
ITCs from various levels of government under the Scientific
Research & Experimental Development incentive programs.
Depending on the financial condition of IPC Corp, research and
development expenses in any fiscal year could be claimed. Eligible
research and development expenses included salaries for employees
involved in research and development, cost of materials, equipment
purchase as well as third party contract services. This amount is
not a reduction in income taxes but a form of government refundable
credits based on the level of research and development that the
Company carries out.
For the
year ended November 30, 2016, net cash flows provided from
financing activities of $9,159,623 principally related to the June
2016 underwritten public offering. The Company issued at the
initial closing of the offering an aggregate of 3,229,814 common
shares and warrants to purchase an additional 1,614,907 common
shares. The underwriter also purchased at such closing additional
warrants to acquire 242,236 common shares pursuant to the
over-allotment option exercised in part by the underwriter. The
Company subsequently sold an aggregate of 459,456 additional common
shares at the public offering price of $1.61 per share in
connection with subsequent partial exercises of the
underwriter’s over-allotment option. The closings of these
partial exercises
brought
the total net proceeds from the offering to $5,137,638, after
deducting the underwriter’s discount and estimated offering
expenses. In addition, during the year ended November 30, 2016, an
aggregate of 1,471,260 common shares were sold on NASDAQ for gross
proceeds of $3,469,449, with net proceeds to us of $3,368,674,
under the at-the-market offering program. During the year ended
November 30, 2015, an aggregate of 471,439 common shares were sold
for gross proceeds of $1,290,168, with net proceeds to us of
$1,254,178 under the at-the-market offering program. During the
year ended November 30, 2014, an aggregate of 1,689,500 common
shares were sold for gross proceeds of $6,571,673, with net
proceeds to us of $6,390,670 under the at-the-market offering
program. As a result of prior sales of the Company’s common
shares under the equity distribution agreement, the Company
currently may offer and sell its common shares with an aggregate
purchase price of up to $4,891,688 (or such lesser amount as may
then be permitted under applicable securities laws and regulations)
pursuant to our at-the-market program. There can be no assurance
that any additional shares will be sold under the at-the-market
program.
For the
year ended November 30, 2016, net cash flows used in investing
activities of $515,410 related mainly to purchase of production,
laboratory and computer equipment. For the year ended November 30,
2015, net cash flows used in investing activities of $430,480
related mainly to the purchase of production, laboratory and
computer equipment due to the acceleration of product development
activities. For the year ended November 30, 2014, net cash flows
used in investing activities of $768,973 related mainly to the
purchases of production, laboratory and computer equipment due to
the acceleration of product development activities.
All
non-cash items have been eliminated from the consolidated
statements of cash flows.
Other
than the net income for the three months ended February 28, 2014,
the Company has incurred losses from operations since inception. To
date, the Company has funded its research and development
activities principally through the issuance of securities, loans
from related parties, funds from the IPC Arrangement Agreement and
funds received under development agreements. Since November 2013,
research has also been funded from revenues from sales of our
generic Focalin XR
®
(dexmethylphenidate hydrochloride extended-release) capsules for
the 15 and 30 mg strengths. With the launch of 25 and 35 mg
strength by Par in January 2017, we expect revenues of generic
Focalin XR
®
to
significantly improve in 2017. As of November 30, 2016, the Company
had a cash balance of $4.1 million. As of February 27, 2017, our
cash balance was $2.7 million. We currently expect to satisfy our
operating cash requirements until June 2017 from cash on hand.
However, we may need to obtain additional funding prior to that
time as we pursue the development of our product candidates and if
we accelerate our product commercialization activities. If
necessary, we expect to utilize our at-the-market offering program
to bridge any funding shortfall in the first and second quarters of
2017. In the second half of fiscal 2017, we expect revenues to
improve as we prepare for the launch of our tentatively approved
generic Seroquel XR
®
(quetiapine
fumarate extended release tablet) on the expiry of Par’s and
Accord’s first filer exclusivity periods in May 2017,
although there can be no assurance as to when or if any launch will
occur, or if generic Seroquel XR
®
will be
successfully commercialized. Our future operations are highly
dependent upon our ability to raise additional capital to support
advancing our product pipeline through continued research and
development activities which are at higher-than-currently projected
levels and to fund any significant expansion of our operations.
Although there can be no assurances, such capital may come from
revenues from the sales of our generic Focalin XR
®
capsules, from
proceeds of the Company’s at-the-market offering program,
from potential revenues from the sales of our tentatively approved
generic Seroquel XR
®
and from
potential partnering opportunities. Other potential sources of
capital may include payments from licensing agreements, cost
savings associated with managing operating expense levels, other
equity and/or debt financings, and/or new strategic partnership
agreements which fund some or all costs of product development. Our
ultimate success will depend on whether our product candidates
receive the approval of the FDA or Health Canada and whether we are
able to successfully market approved products. We cannot be certain
that we will be able to receive FDA or Health Canada approval for
any of our current or future product candidates, that we will reach
the level of sales and revenues necessary to achieve and sustain
profitability, or that we can secure other capital sources on terms
or in amounts sufficient to meet our needs or at all. Our cash
requirements for R&D during any period depend on the number and
extent of the R&D activities we focus on. At present, we are
working principally on our Rexista
TM
XR and
Regabatin
TM
XR 505(b)(2), and
selected generic, product candidate development projects. For our
Regabatin
TM
XR 505(b)(2)
product candidate, Phase III clinical trials can be capital
intensive, and will only be undertaken consistent with the
availability of funds and a prudent cash management
strategy. We
anticipate some investment in fixed assets and equipment over the
next several months, the extent of which will depend on cash
availability.
On
December 1, 2015, the Company entered into a new lease agreement
for the combined properties comprising the Company’s premises
that it currently operates from at 30 Worcester Road, as well as a
40,000 square foot building on the adjoining property located at 22
Worcester Road, which is owned indirectly by the same landlord
(collectively, the “
combined
properties
”), for a five-year term with a five-year
renewal option. Basic rent over the five year term is C$240,000 per
annum, subject to an annual consumer price inflation adjustment and
the Company responsible for utilities, municipal taxes and
operating expenses for the leased property. With these two leased
premises, the Company now has use of 65,000 square feet of
commercial space to accommodate its growth objectives over the next
several years. The Company also has an option to purchase the
combined properties after March 1, 2017 and up to November 30, 2020
based on a fair value purchase formula. The Company uses its
facility at 30 Worcester Road as a current Good Laboratory
Practices research laboratory, office space, and current Good
Manufacturing Practices scale-up and small to medium-scale
manufacturing plant for solid oral dosage forms. The facility at 30
Worcester Road consists of approximately 4,900 square ft. for
administrative space, 4,300 square ft. for R&D, 9,200 square
ft. for manufacturing, and 3,000 square ft. for warehousing. The 22
Worcester Road building provides approximately 35,000 square feet
of warehouse space and approximately 5,000 square feet of office
space. The current lease also provides the Company with a right of
first refusal to purchase the combined properties. The landlord is
required to provide the Company with prior written notice and the
desired sale price for the combined properties prior to offering
the premises to a third party or on the open market. The Company
has five business days to accept such offer and purchase price for
a transaction to close within 60 days of the notice. If the Company
declines the offer, the landlord is entitled to offer and sell the
properties for a purchase price of not less than the price offered
to the Company for a period of 180 days, after which time the
landlord is again obliged to offer the properties to the Company
before offering them to a third party or on the open
market.
Effective December
1, 2016, the maturity date for the Debenture in respect of the
$1,500,000 loan to the Company by Drs. Isa and Amina Odidi was
extended to April 1, 2017 and a principal repayment of $150,000 was
made at the time of the extension. The Company currently expects to
repay the current net amount of $1,350,000 on or about April 1,
2017, if the Company then has cash available.
The
availability of equity or debt financing will be affected by, among
other things, the results of our research and development, our
ability to obtain regulatory approvals, our success in
commercializing approved products with our commercialization
partners and the market acceptance of our products, the state of
the capital markets generally, strategic alliance agreements, and
other relevant commercial considerations. In addition, if we raise
additional funds by issuing equity securities, our then existing
security holders will likely experience dilution, and the incurring
of indebtedness would result in increased debt service obligations
and could require us to agree to operating and financial covenants
that would restrict our operations. In the event that we do not
obtain sufficient additional capital, it will raise substantial
doubt about our ability to continue as a going concern and realize
our assets and pay our liabilities as they become due. Depending
upon the results of our research and development programs and the
availability of financial resources, we could decide to accelerate,
terminate, or reduce certain projects, or commence new ones. Any
failure on our part to raise additional funds on terms favorable to
us or at all, may require us to significantly change or curtail our
current or planned operations in order to conserve cash until such
time, if ever, that sufficient proceeds from operations are
generated, and could result in our not taking advantage of business
opportunities, in the termination or delay of clinical trials or
our not taking any necessary actions required by the FDA or Health
Canada for one or more of our product candidates, in curtailment of
our product development programs designed to identify new product
candidates, in the sale or assignment of rights to our
technologies, products or product candidates, and/or our inability
to file ANDAs, ANDSs, or NDAs at all or in time to competitively
market our products or product candidates.
We
expense R&D costs. For the years ended November 30, 2016, 2015
and 2014, R&D expense was
$
8,166,736, $7,247,473 and $8,020,201,
respectively.
It is
important to note that historical patterns of revenue and
expenditures cannot be taken as an indication of future revenue and
expenditures. Net loss has been variable over the last eight
quarters, and has been impacted primarily by the commercial sales
of generic Focalin XR
®
capsules for
the 15 and 30 mg strengths, the level of our R&D spending,
availability of funding, the modification of performance based
stock options, and the fair value adjustment of derivative
liabilities. The higher net loss in the fourth quarter of 2016 is
attributable to the lower licensing revenues from commercial sales
of generic Focalin XR
®
for the fourth
quarter of 2016, the accrual of management bonuses (there were no
management bonuses paid in fiscal 2015) and additional compensation
costs related to vested performance options as a result of the
Company’s shareholders approving an extension of the expiry
date of the performance-based stock option. As noted above under
“
Revised Prior Quarter
Amounts
”, the latter item represents a non-cash error
related to the modification of performance-based stock options that
should have been expensed in the second quarter of 2016, resulting
in the fourth quarter net loss being overstated by $1,177,782 and
the second quarter net loss understated by the same amount. This
non-cash error has no effect on the full year 2016 results. The
higher net loss in the third quarter of 2016 is attributable to the
lower licensing revenues from commercial sales of generic Focalin
XR
®
for the third quarter of 2016, as the Company continued to face
stiffer generic competition throughout fiscal 2016. The net loss in
the second quarter of 2016 relative to the second quarter of 2015
is attributed to lower licensing revenues from commercial sales of
generic Focalin XR
®
for the second
quarter of 2016 due to increased competition, a softening of
pricing conditions and margin compression. As noted above, second
quarter 2016 net loss was understated by $1,177,782 due to a
non-cash error related to the modification of performance-based
stock options for which the expense was charged to the fourth
quarter of 2016. The net loss in the first quarter of 2016 relative
to the first quarter of 2015 was attributed to lower licensing
revenues compared to the prior period and higher R&D expenses,
mainly due to higher stock options expense as a result of certain
performance based stock options vesting upon FDA approval of
generic Keppra XR
®
, partially
offset by lower selling, general and administrative expenses. The
higher net loss in the fourth quarter of 2015 in comparison to the
third quarter of 2015 is attributed to ongoing R&D and selling,
general and administrative expense, including a significant
increase in third party clinical studies. The higher net loss in
the third quarter of 2015 in comparison to the second quarter of
2015 is attributed to the lower licensing revenue from generic
Focalin XR
®
capsules due to
the entry of a fifth generic competitor and ongoing R&D and
selling, general and administrative expense, including a
significant increase in third party clinical studies. The net loss
in the second quarter of 2015 is attributed to the ongoing R&D
and selling, general and administrative expense, including an
increase in third party clinical studies, partially offset by
licensing revenue from generic Focalin XR
®
capsules. The
net loss in the first quarter of 2015 was attributed to lower
licensing revenues compared to the prior period, partially offset
by lower R&D and selling, general and administrative expenses.
This is primarily due to the loss of exclusivity on the 15 mg
strength of our generic Focalin XR
®
capsules. In
the first quarter of 2015 we faced four generic competitors and a
softening of pricing conditions and market share, consistent with
industry post-exclusivity experience. The net loss in the third and
fourth quarter of 2014 is attributed to the ongoing R&D and
selling, general and administrative expense, as well as the loss of
exclusivity period for the 15 mg strength of generic Focalin
XR
®
capsules in the third quarter, allowing more competitors into the
market, which negatively impacted our licensing revenue from
generic Focalin XR
®
capsules. The
net loss in the second quarter of 2014 is attributed to the ongoing
R&D and selling, general and administrative expense, including
an increase in stock-based compensation expense, payment of bonuses
to certain management employees, increased salaries to certain
non-management employees, partially offset by licensing revenue and
milestone revenue from our generic Focalin XR
®
capsules.
The
following selected financial information is derived from our
unaudited interim consolidated financial statements.
(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, 2016, 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. The
Company has entered into capital lease agreements for laboratory
equipment where the lease obligation will end in fiscal
2017
.
Operating lease
obligations relate to the lease of premises for the combined
properties which will expire in November 2020, with a 5 year
renewal option. The Company also has an option to purchase the
combined properties after March 1, 2017 and up to November 30, 2020
based on a fair value purchase formula, but does not currently
expect to exercise this option in 2017.
|
|
|
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
|
$
807,295
|
$
807,295
|
$
-
|
$
-
|
$
-
|
|
Accrued
liabilities
|
384,886
|
384,886
|
-
|
-
|
-
|
|
Capital
lease
|
14,829
|
14,829
|
-
|
-
|
-
|
|
Operating
lease
|
718,944
|
179,736
|
539,208
|
-
|
-
|
|
Related
parties
|
|
|
|
|
|
|
Employee costs
payable
|
1,044,151
|
1,044,151
|
-
|
-
|
-
|
|
Convertible
debenture
|
1,574,908
|
1,574,908
|
-
|
-
|
-
|
|
Total contractual
obligations
|
$
4,545,013
|
$
4,005,805
|
$
539,208
|
$
-
|
$
-
|
See
“Disclosure Regarding Forward-Looking Information” in
the introduction to this annual report.
DIRECTORS
AND OFFICERS
The
name and province/state of residence of each of our directors and
officers as at the date hereof, the office presently held,
principal occupation, and the year each director first became a
director of the Company or its predecessor, IPC Ltd., are set out
below. Each director is elected to serve until the next annual
meeting of our shareholders or until his or her successor is
elected or appointed. Officers are appointed annually and serve at
the discretion of the board of directors (the “
Board”
)
.
|
Name and Province of Residence
|
Position held with the Company
|
Principal Occupations During the Last 5 Years
|
Other Public Company Boards
|
Director Since
|
|
Dr. Isa
Odidi
Ontario,
Canada
|
Chairman of the
Board and Chief Executive Officer
|
Officer of the
Company
|
None
|
September
2004
|
|
Dr. Amina
Odidi
Ontario,
Canada
|
President, Chief
Operating Officer and Director
|
Officer of the
Company
|
None
|
September
2004
|
|
John
Allport
(2)
Ontario, Canada
|
Vice-President,
Legal Affairs and Licensing and Director
|
Officer of the
Company
|
None
|
September
2004
|
|
Dr. Eldon R.
Smith
(1) (2) Alberta,
Canada
|
Director
|
President and CEO
of Eldon R. Smith and Associates Ltd., a consulting business and
Professor Emeritus at the University of Calgary, Faculty of
Medicine
|
Logiq Asset Management Inc. formerly (Aston Hill
Financial Inc.);
Zenith
Epigenetics Corp, and Resverlogix Corp
|
October
2009
|
|
Bahadur
Madhani
(1)
Ontario, Canada
|
Director
|
Chief
Executive Officer of Equiprop Management Limited, a consulting
business.
|
None
|
March
2006
|
|
Kenneth
Keirstead
(1)(2)
New Brunswick, Canada
|
Director
|
Executive Manager
of Lyceum Group, a consulting business.
|
None
|
January
2006
|
|
Dr. Patrick Yat
Ontario,
Canada
|
Vice-President,
Pharmaceutical Analysis and Chemistry
|
Officer of the
Company
|
None
|
N/A
|
|
Domenic Della
Penna
Ontario,
Canada
|
Chief
Financial Officer
|
Officer of the
Company since November 2014; Chief Financial Officer
(Interim) of Teva North America Generics from December 2013 to
September 2014; Chief Financial Officer of Teva Canada Limited from
December 2010 to September 2014; Chief Financial Officer of
Timothy’s Coffees of the World from 2008-2010.
|
None
|
N/A
|
Notes:
(1)
Member of the Audit
Committee and Compensation Committee.
(2)
Member of the
Corporate Governance Committee.
Each of
the foregoing individuals named in the above table has been engaged
in the principal occupation set forth opposite his or her name
during the past five years.
As of
February 27, 2017, the directors and executive officers of the
Company as a group owned, directly and indirectly, or exercise
control or direction over 6,121,980 common shares, representing
approximately 20.3% of the issued and outstanding common shares of
the Company (and beneficially owned approximately 10,996,132
common
shares
representing 31.4% of our common shares including common shares
issuable upon the exercise of outstanding options and the
conversion of the outstanding convertible debenture that are
exercisable or convertible within 60 days of the date hereof). Our
principal shareholders, Drs. Amina and Isa Odidi, our President and
Chief Operating Officer and our Chairman and Chief Executive
Officer, respectively, and Odidi Holdings Inc., a privately-held
company controlled by Drs. Amina and Isa Odidi, owned in the
aggregate directly and indirectly 5,781,312 common shares,
representing approximately 19.17% of our issued and outstanding
common shares of the Company (and collectively beneficially owned
in the aggregate approximately 9,552,464 common shares representing
28.2% of our common shares including common shares issuable upon
the exercise of outstanding options and the conversion of the
outstanding convertible debenture that are exercisable or
convertible within 60 days of the date hereof). (Reference is made
to the section entitled “E. Share Ownership” under this
“Item 6. Directors, Senior Management and Employees”
for additional information regarding the options to purchase common
shares held by directors and officers of the Company and the
convertible debenture held by Drs. Amina and Isa Odidi.) As a
result, the principal shareholders have the ability to exercise
significant influence over all matters submitted to our
shareholders for approval whether subject to approval by a majority
of holders of our common shares or subject to a class vote or
special resolution requiring the approval of 66⅔% of the
votes cast by holders of our common shares, in person or by
proxy.
Drs.
Isa Odidi and Amina Odidi are spouses to each other.
Compensation
Discussion and Analysis
Background
– We are a
pharmaceutical company specializing in the research, development
and manufacture of novel and generic controlled-release and
targeted-release oral solid dosage drugs. Our patented
Hypermatrix™ technology is a multidimensional
controlled-release drug delivery platform that can be applied to
the efficient development of a wide range of existing and new
pharmaceuticals. Based on this technology platform, we have
developed several drug delivery systems and a pipeline of products
(some of which have received FDA approval) and product candidates
in various stages of development, including ANDAs filed with the
FDA (and one ANDS filed with Health Canada) and one NDA filing, in
therapeutic areas that include neurology, cardiovascular, GIT,
diabetes and pain. As of November 30, 2016, the Company had 54
full-time employees engaged in administration and research and
development.
Compensation Governance
- The
Company’s Compensation Committee is comprised of three
directors, Messrs. Madhani, Keirstead and Smith, each of whom is
considered “independent” within the meaning of section
2.4 of Form 51-102F6 – Statement of Executive Compensation.
Each member of the Compensation Committee has sufficient experience
in order to make decisions on the suitability of the
Company’s compensation policies and practices.
The
Compensation Committee recommends compensation policies concerning
officers and senior management to the Board. The Corporate
Governance Committee recommends compensation policies concerning
independent directors to the Board. The Board makes the final
determinations regarding the adequacy and form of the compensation
for non-executive directors to ensure that such compensation
realistically reflects the responsibilities and risks involved,
without compromising a director’s independence. Further
details relating to the role and function of the Compensation
Committee and the Corporate Governance Committee is provided in
Item 6.C.
Risk Management -
The Board is
responsible for identifying the principal risks of the
Company’s business and ensuring the implementation of
appropriate systems to manage these risks. Through the Compensation
Committee, the Board is involved in the design of compensation
policies to meet the specific compensation objectives discussed
below and considers the risks relating to such policies, if any.
The Compensation Committee is ultimately responsible for ensuring
compliance of the compensation policies and practices of the
Company. To date,
the
Board and Compensation Committee have not identified any risks
arising from the Company’s compensation policies and
practices that would be reasonably likely to have a material
adverse effect on the Company.
Objectives
- The overall objectives of
the Company’s compensation program include: (a) attracting
and retaining talented executive officers; (b) aligning the
interests of those executive officers with those of the Company;
and (c) linking individual executive officer compensation to the
performance of the Company. The Company’s compensation
program is currently designed to compensate executive officers for
performance of their duties and to reward certain executive
officers for performance relative to certain milestones applicable
to their services.
Elements of Compensation
- The elements
of compensation awarded to, earned by, paid to, or payable to the
Named Executive Officers (as hereinafter defined) for the most
recently completed financial year are: (a) base salary and
discretionary bonuses; (b) long-term incentives in the form of
stock options; (c) restricted share unit awards; and (d)
perquisites and personal benefits. Prior to the most recently
completed financial year, the Named Executive Officers have also
received option-based awards which were assumed by the Company
pursuant to the plan of arrangement completed on October 22,
2009.
Base Salary and Discretionary Bonus
-
Base salary is a fixed element of compensation payable to each
Named Executive Officer for performing his or her position’s
specific duties. The amount of base salary for a Named Executive
Officer has been determined through negotiation of an employment
agreement with each Named Executive Officer (see “Employment
Agreements” below). While base salary is intended to fit into
the Company’s overall compensation objectives by serving to
attract and retain talented executive officers, the size of the
Company and the nature and stage of its business also impact the
level of base salary. To date, the level of base salary has not
impacted the Company’s decisions about any other element of
compensation and the Board may consider discretionary bonuses for
individual employees based on exceptional performance by such
individuals in a particular fiscal year.
Option-Based Awards
- Option-based
awards are a variable element of compensation that rewards each
Named Executive Officer for individual and corporate performance
overall determined by the Board. Option-based awards are intended
to fit into the Company’s overall compensation objectives by
aligning the interests of all Named Executive Officers with those
of the Company, and linking individual Named Executive Officer
compensation to the performance of the Company. The Board, which
includes three of the five Named Executive Officers, is responsible
for setting and amending any equity incentive plan under which an
option-based award is granted.
The
Company has in place a stock option plan (the “
Option Plan
”) for the benefit of
certain officers, directors, employees and consultants of the
Company, including the Named Executive Officers (as described in
greater detail in Item 6.E below). Named Executive Officers have
been issued options under such plan.
The
Company has also granted performance-based options to Dr. Isa Odidi
and Dr. Amina Odidi pursuant to a separate option agreement, which
was negotiated at the same time as their employment agreements.
These options vest upon the Company attaining certain milestones
relating to FDA filings and approvals for Company drugs, such that
276,394 options vest in connection with each of the FDA filings for
the first five Company drugs and 276,394 options vest in connection
with each of the FDA approvals for the first five Company
drugs.
The
Company’s Option Plan was adopted effective October 22, 2009
as part of the IPC Arrangement Agreement approved by the
shareholders of IPC Ltd., the predecessor company, at the meeting
of shareholders on October 19, 2009. Subject to the requirements of
the Option Plan, the Board, with the assistance of the Compensation
Committee, has the authority to select those directors, officers,
employees and consultants to whom options will be granted, the
number of options to be granted to each person and the price at
which common shares of the Company may be purchased. Grants are
determined based on individual and aggregate performance as
determined by the Board.
RSUs
- The Company established a
restricted share unit plan (the “
RSU Plan
”) to form part of its
incentive compensation arrangements available for officers and
employees of the Company and its designated affiliates (as
described in greater detail it Item 6.E) as of May 28, 2010, when
the RSU Plan received shareholder approval.
Perquisites and personal benefits
- The
Company also provides perquisites and personal benefits to its
Named Executive Officers, including basic employee benefit plans,
which are available to all employees, and a car allowance to cover
the cost of an automobile for business purposes. These perquisites
and personal benefits were determined through negotiation of an
employment agreement with each Named Executive Officer (see
“Employment Agreements” below). While perquisites and
personal benefits are intended to fit into the Company’s
overall compensation objectives by serving to attract and retain
talented executive officers, the size of the Company and the nature
and stage of its business also impact the level of perquisites and
benefits. To date, the level of perquisites and benefits has not
impacted the Company’s decisions about any other element of
compensation.
Other Compensation-Related Matters -
The Company’s Share Trading Policy prohibits all directors
and officers of the Company from, among other things, engaging in
any short sales designed to hedge or offset a decrease in market
value of the securities of the Company.
Executive
Compensation
The
following table sets forth all direct and indirect compensation
for, or in connection with, services provided to the Company for
the financial years ended November 30, 2016, November 30, 2015 and
November 30, 2014 in respect of the Chief Executive Officer of the
Company, the Chief Financial Officer, and two other officers of the
Company who earned greater than $150,000 in total compensation in
the fiscal year ended November 30, 2016 (“
Named Executive
Officers
”).
SUMMARY
COMPENSATION TABLE
|
|
|
|
|
|
Non-equity
incentive plan compensation (U.S.$)(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
|
2016
|
340,464
|
N/A
|
$703,016
|
340,464
|
N/A
|
N/A
|
13,558
|
1,397,502
|
|
|
2015
|
358,617
|
N/A
|
68,644
|
N/A
|
N/A
|
N/A
|
14,678
|
441,939
|
|
|
2014
|
581,965
|
N/A
|
99,615
|
182,299
|
N/A
|
N/A
|
10,938
|
775,202
|
|
Dr.
Amina Odidi,President & Chief Operating Officer
|
2016
|
340,464
|
N/A
|
$703,016
|
340,464
|
N/A
|
N/A
|
13,558
|
1,397,502
|
|
|
2015
|
358,617
|
N/A
|
68,644
|
N/A
|
N/A
|
N/A
|
14,678
|
441,939
|
|
|
2014
|
581,965
|
N/A
|
99,615
|
182,299
|
N/A
|
N/A
|
10,938
|
775,202
|
|
John
Allport,VP Legal Affairs & Licensing
|
2016
|
109,220
|
N/A
|
$50,346
|
56,493
|
N/A
|
N/A
|
13,558
|
229,617
|
|
|
2015
|
115,043
|
N/A
|
39,225
|
N/A
|
N/A
|
N/A
|
14,678
|
168,946
|
|
|
2014
|
132,167
|
N/A
|
99,615
|
91,149
|
N/A
|
N/A
|
10,938
|
333,869
|
|
Domenic Della
Penna, Chief Financial Officer
(5)
|
2016
|
225,972
|
N/A
|
$64,076
|
112,986
|
N/A
|
N/A
|
13,558
|
416,592
|
|
|
2015
|
218,185
|
N/A
|
76,810
|
N/A
|
N/A
|
N/A
|
14,281
|
309,276
|
|
|
2014
|
5,222
|
N/A
|
34,573
|
N/A
|
N/A
|
N/A
|
342
|
40,137
|
Notes:
(1)
Salaries paid by
the Company to each Named Executive Officer are paid in Canadian
dollars. All amounts are expressed in U.S. dollars converted at the
exchange rate of U.S.$ 0.7532 to C$1.00 (2015 – U.S. $0.7934;
2014 – U.S. $0.9115) being the average closing exchange rate
quoted by the Bank of Canada for the respective periods. Salary
includes all amounts paid or payable to the Named Executive
Officer. Actual amount paid to each Named Executive Officer in
fiscal 2016, 2015 and 2014 are as disclosed in the
table.
(2)
The Company entered
into a separate acknowledgement and agreement with Drs. Isa and
Amina Odidi dated October 22, 2009 to be bound by the
performance-based stock option agreement dated September 10, 2004
pursuant to which Drs. Isa and Amina Odidi are entitled to purchase
up to 2,763,940 of the Company’s common shares upon payment
of U.S. $3.62 per share, subject to satisfaction of the performance
vesting conditions. The value of the option-based awards are
determined using the Black-Scholes pricing model calculated as at
the award date.
(3)
Amount awarded at
the discretion of the Board. This bonus was paid in the second
quarter of 2017.
(4)
“All other
compensation” includes car allowances and other miscellaneous
benefits.
(5)
Mr. Della Penna was
appointed as Chief Financial Officer of the Company effective
November 24, 2014.
Significant factors
necessary to understand the information disclosed in the Summary
Compensation Table above include the terms of each Named Executive
Officer’s employment agreement and the terms of the separate
agreement relating to performance-based options applicable to Drs.
Isa and Amina Odidi described below.
Employment Agreements
The
employment agreement with Dr. Isa Odidi, the Chief Executive
Officer of the Company, effective September 1, 2004 entitles Dr.
Isa Odidi to receive a base salary of U.S. $200,000 per year, which
is paid in Canadian dollars, to be increased annually each year
during the term of the agreement by twenty percent of the prior
year’s salary. In addition, he is entitled to: (a)
participate in the Option Plan; (b) participate in all employee
benefit plans and programs, except for the RSU Plan and DSU Plan;
and (c) a car allowance of up to U.S. $1,000 per month. The initial
term of the employment agreement was until September 30, 2007, at
which time, pursuant to the terms of the agreement, the agreement
was deemed to be extended automatically for an additional
three-year period on the same terms and conditions (i.e. until
September 30, 2010). The agreement will continue to be extended
automatically for successive additional three-year periods on the
same terms unless the Company gives Dr. Odidi contrary written
notice at least two years prior to the date on which the agreement
would otherwise be extended. See “Termination and Change of
Control Benefits” below. Dr. Odidi’s employment
agreement was amended on August 1, 2007 and June 8, 2009 to include
intellectual property, non-competition and non-solicitation
provisions in favour of the Company. In April 2010, Dr. Isa Odidi
offered and agreed to amend his employment agreement effective as
of December 1, 2009, to eliminate the right to annual increases in
his base salary of twenty per cent each year; and agreed to roll
back his base salary effective December 1, 2009 to the level
payable under the employment agreement for the period from
September 2008 to August 2009, being C$452,000 per year. Under this
amendment, the base salary is open to potential increase on an
annual basis at the discretion of the Board and Dr. Isa Odidi is
eligible to receive a performance bonus, based on the performance,
including that of Dr. Odidi and the Company, as may be determined
in the discretion of the Board. In February 2012, Dr. Isa Odidi
received a grant of 300,000 options of which 200,000 vested
immediately on issuance and the remaining 100,000 options vested on
February 17, 2013 at an exercise price of $3.27 per share. In April
2013, Dr. Isa Odidi received a grant of 75,000 options of which
37,500 vested immediately on issuance and the remaining 37,500
options vested on November 30, 2013 at an exercise price of $1.81
per share. In March 2014, Dr. Isa Odidi received a grant of 50,000
options of which 25,000 vested immediately on issuance and the
remaining 25,000 options vested on November 30, 2014 at an exercise
price of $4.29 per share. In November 2015, Dr. Isa Odidi received
a grant of 70,000 options of which 49,000 vested immediately on
issuance, with the remaining 21,000 options vested on November 30,
2016 at an exercise price of $2.52 per share. In August 2016, Dr.
Isa Odidi received a grant of 90,000 options of which 60,000 vested
immediately on issuance, with the remaining 30,000 to vest on
November 30, 2017 at an exercise price of $2.43 per
share.
The
employment agreement with Dr. Amina Odidi, the President and Chief
Operating Officer of the Company, effective September 1, 2004
entitles Dr. Amina Odidi to receive a base salary of U.S.$200,000,
which is paid in Canadian dollars, per year, to be increased
annually each year during the term of the agreement by twenty
percent of the prior year’s salary. In addition, she is
entitled to: (a) participate in the Option Plan; (b) participate
in
all
employee benefit plans and programs, except for the RSU Plan and
DSU Plan; and (c) a car allowance of up to U.S. $1,000 per month.
The initial term of the employment agreement was until September
30, 2007, at which time, pursuant to the terms of the agreement,
the agreement was deemed to be extended automatically for an
additional three-year period on the same terms and conditions (i.e.
until September 30, 2010). The agreement will continue to be
extended automatically for successive additional three-year periods
on the same terms unless the Company gives Dr. Odidi contrary
written notice at least two years prior to the date on which the
agreement would otherwise be extended. See “Termination and
Change of Control Benefits” below. Dr. Odidi’s
employment agreement was amended on August 1, 2007 and June 8, 2009
to include intellectual property, non-competition and
non-solicitation provisions in favour of the Company. In April
2010, Dr. Amina Odidi offered and agreed to amend her employment
agreement effective as of December 1, 2009, to eliminate the right
to annual increases in her base salary of twenty per cent each
year; and agreed to roll back her base salary effective December 1,
2009 to the level payable under the employment agreement for the
period from September 2008 to August 2009, being C$452,000 per
year. Under this amendment, the base salary is open to potential
increase on an annual basis at the discretion of the Board and Dr.
Amina Odidi is eligible to receive a performance bonus, based on
the performance, including that of Dr. Odidi and the Company, as
may be determined in the discretion of the Board. In February 2012,
Dr. Amina Odidi received a grant of 300,000 options of which
200,000 vested immediately on issuance and the remaining 100,000
options vested on February 17, 2013 at an exercise price of $3.27
per share. In April 2013, Dr. Amina Odidi received a grant of
75,000 options of which 37,500 vested immediately on issuance and
the remaining 37,500 options vested on November 30, 2013 at an
exercise price of $1.81 per share. In March 2014, Dr. Amina Odidi
received a grant of 50,000 options of which 25,000 vested
immediately on issuance and the remaining 25,000 options vested on
November 30, 2014 at an exercise price of $4.29 per share. In
November 2015 Dr. Amina Odidi received a grant of 70,000 options of
which 49,000 vested immediately on issuance, with the remaining
21,000 options vested on November 30, 2016 at an exercise price of
$2.52 per share. In August 2016, Dr. Amina Odidi received a grant
of 90,000 options of which 60,000 vested immediately on issuance,
with the remaining 30,000 to vest on November 30, 2017 at an
exercise price of $2.43 per share.
In
addition, the Company entered into a separate acknowledgement and
agreement with Drs. Isa and Amina Odidi dated October 22, 2009 to
be bound by the performance-based stock option agreement dated
September 10, 2004 pursuant to which Drs. Isa and Amina Odidi are
entitled to purchase up to 2,763,940 of the Company’s common
shares. These options were not granted under the Option Plan. These
options vest upon the Company attaining certain milestones related
to the FDA filings and approvals for Company drugs. The options are
exercisable at a price of U.S.$3.62 per share and were to expire in
September 2014. Effective March 27, 2014, the Company’s
shareholders approved a two year extension of the performance-based
stock option expiry date to September 2016. Effective April 19,
2016, the Company’s shareholders approved a further two year
extension of the performance-based stock option expiry date to
September 2018. As of the date hereof, 2,211,152 of these options
have vested and are exercisable. These options were not granted
under the Option Plan.
The
employment agreement with Domenic Della Penna, the Chief Financial
Officer of the Company, effective November 24, 2014 entitles Mr.
Della Penna to receive a base salary of C$275,000, which is paid in
Canadian dollars, per year and which was increased by the Board on
a discretionary basis for 2015 to C$300,000 and C$325,000 for 2017
and future years. In addition, he is entitled to: (a) participate
in the Option Plan; (b) participate in all employee benefit plans
and programs; and (c) a car allowance of C$1,500 per month. The
agreement provides for automatic renewal from year to year in
absence of notice of termination from the Company at least 60 days
prior to the anniversary date. If the agreement is terminated
without cause, it requires payment to Mr. Della Penna based upon a
formula that commences with the equivalent of approximately three
months’ base salary and increases by approximately six weeks
of base salary for every full year of service. If such termination
without cause occurs within six months of a change of control of
the Company that occurs after November 24, 2015, it requires
payment to Mr. Della Penna based on a formula that commences with
the equivalent of approximately thirteen months’ base salary
and increases by approximately six weeks for every full year of
service. Mr. Della Penna’s employment agreement contains
intellectual property, non-competition and non-solicitation
provisions in favour of the Company. Mr. Della Penna was granted
60,000 options, of which 15,000 vested immediately on issuance,
15,000 vested on November 30, 2015 and the remaining options vest
as to 15,000 each year on November 30, 2016 and 2017 at an exercise
price of $3.22 per share. In November 2015, Mr. Della Penna
received a grant of 50,000 options of which 35,000 vested
immediately on issuance, with the remaining 15,000 options vested
on November 30, 2016 at an exercise price of $2.52 per share. In
August 2016, Mr. Della Penna received a grant of 70,000 options,
of
which
47,000 vested immediately, with the remaining 23,000 to vest on
November 30, 2017 at an exercise price of $2.43
per
share
.
The
employment agreement with John Allport, the Vice President Legal
Affairs and Licensing, effective September 1, 2004 entitles Mr.
Allport to receive a base salary of C$95,000, which is paid in
Canadian dollars, per year. In addition, he is entitled to: (a)
participate in the Option Plan; (b) participate in all employee
benefit plans and programs; and (c) a car allowance of C$1,000 per
month. The employment agreement is for an indefinite term subject
to termination on six months’ notice. In December 2011, Mr.
Allport’s base salary was increased to C$145,000. In February
2012, Mr. Allport received a grant of 250,000 options of which
175,000 vested immediately on issuance and the remaining 75,000
options vested on February 17, 2013 at an exercise price of $3.27
per share. Mr. Allport’s employment agreement includes
intellectual property, non-competition and non-solicitation
provisions in favour of the Company. In April 2013, Mr. Allport
received a grant of 25,000 options of which 12,500 vested
immediately on issuance and the remaining 12,500 options vested on
November 30, 2013 at an exercise price of $1.81 per share. In March
2014, Mr. Allport received a grant of 50,000 options of which
25,000 vested immediately on issuance and the remaining 25,000
options vested on November 30, 2014 at an exercise price of $4.29
per share. In November 2015, Mr. Allport received a grant of 40,000
options of which 28,000 vested immediately on issuance, with the
remaining 12,000 options vested on November 30, 2016 at an exercise
price of $2.52 per share. In August 2016, Mr. Allport received a
grant of 55,000 options of which 37,000 vested on issuance, with
the remaining 18,000 to vest on November 30, 2017 at an exercise
price of $2.43 per share.
Incentive Plan Awards
Outstanding Option-Based Awards and
Share-Based Awards
– The following table sets forth
for each Named Executive Officer all awards outstanding at the end
of the most recently completed financial year, including awards
granted before the most recently completed financial year. Each
option grant allows the holder to purchase one of the
Company’s common shares.
|
|
Option-based
Awards
|
Share-based
Awards
|
||||
|
Name(a)
|
Number of
securities underlying unexercised options
(#)(b)
|
Option exercise
price (U.S.$)(c)
|
Option
expiration date(d)
|
Value of
unexercised in-the-money options (U.S.$)(e)
(2)
|
Number of shares
or units of shares that have not vested (#)(f)
|
Market or payout
value of share-based awards that have not vested
(U.S.$)(g)
|
|
Drs. Isa Odidi and Amina
Odidi
(1)
|
2,763,940
|
US$3.62
|
Sept.
10, 2018
|
N/A
|
N/A
|
N/A
|
|
Dr.
Isa Odidi
|
300,000
75,000
50,000
70,000
90,000
|
C$3.27
C$1.81
C$4.29
C$2.52
C$2.43
|
Feb.
16, 2022
Apr.
13. 2020
Feb.
28, 2019
Nov.
30, 2020
Aug.
31, 2021
|
C$129,000
C$141,750
N/A
C$82,600
C$114,300
|
N/A
N/A
N/A
N/A
N/A
|
N/A
N/A
N/A
N/A
N/A
|
|
Dr.
Amina Odidi
|
300,000
75,000
50,000
70,000
90,000
|
C$3.27
C$1.81
C$4.29
C$2.52
C$2.43
|
Feb.
16, 2022
Apr.
13. 2020
Feb.
28, 2019
Nov.
30, 2020
Aug.
31, 2021
|
C$129,000
C$141,750
N/A
C$82,600
C$114,300
|
N/A
N/A
N/A
N/A
N/A
|
N/A
N/A
N/A
N/A
N/A
|
|
John
Allport
|
250,000
25,000
50,000
40,000
55,000
|
C$3.27
C$1.81
C$4.29
C$2.52
C$2.43
|
Feb.
16. 2022
Apr.
13, 2020
Feb.
28, 2019
Nov.
30, 2020
Aug.
31, 2021
|
C$107,500
C$47,250
N/A
C$47,200
C$69,850
|
N/A
N/A
N/A
N/A
N/A
|
N/A
N/A
N/A
N/A
N/A
|
|
Domenic Della Penna
(3)
|
60,000
50,000
70,000
|
C$3.22
C$2.52
C$2.43
|
Nov.
30, 2024
Nov.
30, 2020
Aug.
31, 2021
|
C$28,800
C$59,000
C$88,900
|
N/A
N/A
N/A
|
N/A
N/A
N/A
|
Notes
(1)
These option-based
awards are held jointly.
(2)
The value of
unexercised options at year-end is calculated by subtracting the
option exercise price from the closing price of the common shares
of the Company on the TSX for C$ exercise prices and Nasdaq for US$
exercise prices on November 30, 2016 (C$3.70 and $2.79,
respectively) and multiplying the result by the number of common
shares underlying an option.
(3)
Mr. Della Penna was
appointed as Chief Financial Officer of the Company effective
November 24, 2014.
Incentive Plan Awards
– Value
Vested or Earning During the Year – The following table sets
forth details of the value vested or earned during the most
recently completed financial year for each incentive plan
award.
|
Name
|
Option-based awards - Value vested during the year
(U.S.$)
|
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
|
C$100,980
|
N/A
|
340,464
|
|
Dr.
Amina Odidi
|
C$100,980
|
N/A
|
340,464
|
|
John
Allport
|
C$61,150
|
N/A
|
56,493
|
|
Domenic Della
Penna(2)
|
C$84,590
|
N/A
|
112,986
|
Notes
(1)
The amount
represents the theoretical total value if the options had been
exercised on the vesting date, established by calculating the
difference between the closing price of the common shares of the
Company on the TSX on the vesting date and the exercise
price.
(2)
Mr. Della Penna was
appointed as Chief Financial Officer of the Company effective
November 24, 2014.
Pension Plan Benefits
The
Company does not provide a defined benefit pension plan or a
defined contribution pension plan for any of its Named Executive
Officers, nor does it have a deferred compensation pension plan for
any of its Named Executive Officers. There are no amounts set aside
or accrued by the Company or its subsidiaries to provide pension,
retirement or similar benefits.
Termination and Change of Control Benefits
The
employment agreement with each of Dr. Isa Odidi and Dr. Amina Odidi
(collectively the “
Odidis
”), by virtue of it being a
fixed-term agreement with automatic renewal provisions, effectively
provides for payments to the Odidis following termination of the
employment agreement unless the agreement has been terminated in
accordance with its terms. As a result, if either of the Odidis had
been terminated on the last business day of the Company’s
most recently completed financial year, it is estimated that an
amount of up to approximately C$1.4 million would be payable to
each of the Odidis, which is the amount that would have been
payable to September 30, 2019, at each of the Odidis’ current
annual salary level. Given their nature as fixed term employment
agreements, if notice is properly provided to not renew the
agreement following the term ending September 30, 2019, then as
such date approaches the amount payable upon termination to the
Odidis will decrease to the point where no amount would be payable
upon termination as at September 30, 2019. Any termination of the
employment of the Odidis must be undertaken by and is subject to
the prior approval of the Board. There are no payments applicable
under the employment agreements of the Odidis relating to a change
of control of the Company.
For a
discussion of certain termination and change of control benefits
under the employment agreement with Mr. Della Penna, see the
description of his employment agreement under the heading
“Employment Agreements” above.
Director
Compensation
The
following table sets forth all amounts of compensation provided to
the non-executive directors for the Company’s most recently
completed financial year.
|
Name
|
Fees
earned
|
Share-based
awards
|
Option-based
awards
|
Non-equity
incentive plan compensation
|
Pension
value
|
All
other compensation
|
Total
|
|
(a)
|
(b)
|
(c)
(1)
|
(d)
(2)
|
(e)
|
(f)
|
(g)
|
(h)
|
|
Eldon
Smith
|
-
|
C$41,000
|
C$42,534
|
N/A
|
N/A
|
N/A
|
C$83,534
|
|
Kenneth
Keirstead
|
C$40,000
|
N/A
|
C$42,534
|
N/A
|
N/A
|
N/A
|
C$82,534
|
|
Bahadur
Madhani
|
C$46,000
|
N/A
|
C$42,534
|
N/A
|
N/A
|
N/A
|
C$88,534
|
Notes:
(1)
DSUs that were
earned. Does not include DSUs earned in the previous financial year
and granted in the most recently completed financial
year.
(2)
Option-based awards
for fiscal year 2016 were issued on November 30, 2016
.
Significant factors
necessary to understand the information disclosed in the Director
Compensation Table above include the following: Non-management
directors receive an annual retainer of $25,000 paid in Canadian
dollars. The Audit Committee chair receives an annual retainer of
$10,000 paid in Canadian dollars. The Corporate Governance
Committee chair and Compensation Committee Chair, each receives an
annual retainer of $5,000 paid in Canadian dollars. Non-chair
committee members, are paid an additional $2,500 per year per
committee paid in Canadian dollars. Meetings will result in an
additional $1,000 per day per meeting paid in Canadian
dollars.
Outstanding Option-Based
Awards and Share-Based Awards
– The following table
sets forth all amounts of option-based and share-based awards to
the non-executive directors for the Company’s most recently
completed financial year.
|
|
Option-based Awards
|
Share-based Awards
|
|||||
|
Name
|
Number of securities underlying unexercised options
(#)
|
Option exercise price (U.S.$)
|
Option expiration date
|
Value of unexercised in-the-money options (U.S.$)
|
Number of shares or units of shares that have not vested
(#)
|
Market or payout value of share-based awards that have not vested
(U.S.$)
|
|
|
(a)
|
(b)
|
(c)
|
(d)
|
(e)
(1)
|
(f)
(2)
|
(g)
(3)
|
|
|
Eldon Smith
|
10,000
25,000
37,500
37,500
20,000
35,000
|
C$2.88
C$1.81
C$3.22
C$4.29
C$2.52
C$2.43
|
Oct.
22, 2019
Apr.
13, 2020
Nov.
30, 2019
Feb.
28, 2019
Nov.
30, 2020
Aug.
31, 2021
|
8,200
47,250
18,000
N/A
23,600
44,450
|
76,743
N/A
N/A
N/A
N/A
N/A
|
C$283,948
N/A
N/A
N/A
N/A
N/A
|
|
|
Kenneth Keirstead
|
10,000
25,000
37,500
37,500
20,000
35,000
|
C$2.88
C$1.81
C$3.22
C$4.29
C$2.52
C$2.43
|
Oct.
22, 2019
Apr.
13, 2020
Nov.
30, 2019
Feb.
28, 2019
Nov.
30, 2020
Aug.
31, 2021
|
8,200
47,250
18,000
N/A
23,600
44,450
|
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
|
10,000
25,000
37,500
37,500
20,000
35,000
|
C$2.88
C$1.81
C$3.22
C$4.29
C$2.52
C$2.43
|
Oct.
22, 2019
Apr.
13, 2020
Nov.
30, 2019
Feb.
28, 2019
Nov.
30, 2020
Aug.
31, 2021
|
8,200
47,250
18,000
N/A
23,600
44,450
|
N/A
N/A
N/A
N/A
N/A
N/A
|
N/A
N/A
N/A
N/A
N/A
N/A
|
|
Notes
:
(1)
The value of
unexercised options at year-end is calculated by subtracting the
option exercise price from the closing price of the common shares
of the Company on the TSX on November 30, 2016 (C$3.70) and
multiplying the result by the number of common shares underlying an
option.
(2)
These DSUs are
permitted to be redeemed only following termination of Board
service. Includes DSUs earned as at November 30, 2016.
(3)
The value of DSUs
at year-end is calculated from the closing price of the common
shares of the Company on the TSX on November 30, 2016 (C$3.70) and
multiplying by the number of common shares underlying a
DSU.
Incentive Plan Awards
– Value Vested or Earned During the Year
– The
following table sets forth all amounts of option-based and
share-based awards vested to the non-executive directors of the
Company for the most recently completed financial year and no
non-equity incentive plan compensation was earned during the most
recently completed financial year.
|
Name
|
Option-based awards - Value vested during the year
(U.S.$)
|
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)
(2)
|
(d)
|
|
Eldon
Smith
|
C$37,560
|
N/A
|
Nil
|
|
Kenneth
Keirstead
|
C$37,560
|
N/A
|
Nil
|
|
Bahadur
Madhani
|
C$37,560
|
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 $8,000,000 subject to a
deductible loss payable of $150,000 to $250,000 by the Company. The
premium payable by the Company for the period from October 25, 2016
to October 25, 2017 is $99,775.
Board
of Directors
See
Items 6.A and 6.B.
Committees
of the Board of Directors
AUDIT
COMMITTEE
The
Audit Committee of the Board monitors our financial activities,
policies, and internal control procedures. The Audit Committee
assists the Board in fulfilling its oversight responsibility to
shareholders, potential shareholders, the investment community, and
others with respect to the Company’s financial statements,
financial reporting process, systems of internal accounting and
disclosure controls, performance of the external auditors, and risk
assessment and management. The Audit Committee has the power to
conduct or authorize investigations into any matters within its
scope of responsibilities, with full access to all books, records,
facilities and personnel of the Company, its auditors and its legal
advisors. In connection with such investigations or otherwise in
the course of fulfilling its responsibilities under the Audit
Committee Charter, the Audit Committee has the authority to
independently retain special legal, accounting, or other
consultants to advise it.
Audit
Committee Charter
The
charter of the Audit Committee can be found on the Company’s
website at
www.intellipharmaceutics.com
.
Composition
of the Audit Committee
Our
Audit Committee is comprised of Kenneth Keirstead, Bahadur Madhani
and Dr. Eldon Smith, each of whom is considered independent and
financially literate (as such terms are defined under applicable
Canadian securities legislation) and satisfies the independence
criteria of Rule 10A3-(b)(1) under the U.S. Exchange Act. The
members of the Audit Committee have selected a Chair from amongst
themselves, being Mr. Madhani.
Under
the Securities and Exchange Commission rules implementing the
Sarbanes-Oxley Act of 2002, Canadian issuers filing reports in the
United States must disclose whether their audit committees have at
least one “audit committee financial expert”.
Additionally, under NASDAQ Listing Rule 5605(c)(2)(A), NASDAQ
requires that one member of the audit committee be financially
sophisticated, meaning that they must have “past employment
experience in finance or accounting, requisite professional
certification in accounting, or any other comparable experience or
background which results in the individual’s financial
sophistication, including being or having been a chief executive
officer, chief financial officer or other senior officer with
financial oversight responsibilities.” The Board has
determined that Mr. Madhani qualifies as an audit committee
financial expert under the applicable Securities and Exchange
Commission rules and as financially sophisticated under the
applicable NASDAQ rules.
Relevant
Education and Experience
Kenneth
Keirstead is educated in clinical biochemistry as a graduate of the
Pathology Institute in Halifax; and business administration, as a
graduate of the College of William and Mary and Columbia
University. Mr. Keirstead has been a director of the Company since
January 2006. He has worked in the healthcare delivery and
pharmaceutical industries for over 45 years. He was President and
CEO, Sanofi Winthrop Canada Inc.; General Manager, Squibb Medical
Systems International; President, Chemfet International and
President, Quinton Instruments among other positions. Mr. Keirstead
has published studies and reports on healthcare and related
services topics. Since 1998 Mr. Keirstead’s principal
occupation has been as Executive Manager of the Lyceum Group, a
Canadian consulting services company primarily active in the
healthcare field, of which Mr. Keirstead is the
founder.
Bahadur
Madhani is a chartered accountant who has been a director of the
Company since March 31, 2006. He was a member of the advisory board
of Quebecor Ontario and former Chairman of United Way of Toronto,
former Chair of YMCA of Greater Toronto, former Chair of Nelson
Mandela Children’s Fund Canada, former Chair of YMCA Canada
and former Chair, Toronto Grants Review Team of the Ontario
Trillium Foundation. He was awarded membership in the Order of
Canada in 2001. Since 1983, Mr. Madhani’s principal
occupation has been as President and CEO of Equiprop Management
Limited, a Canadian property management company of which Mr.
Madhani is the principal shareholder.
Dr.
Eldon Smith is a medical doctor who graduated from the Dalhousie
University Medical School and who has been a director of the
Company since October 2009. He is president and CEO of Eldon R.
Smith and Associates Ltd. a private healthcare consulting company.
He is also professor emeritus at the University of Calgary, where
he served as the Dean of the Faculty of Medicine subsequent to
being Head of the Department of Medicine and the Division of
Cardiology. Dr. Smith is past-President of the Canadian
Cardiovascular Society and served as Chairman of the Scientific
Review Committee of the Heart and Stroke Foundation of Canada. Dr.
Smith was appointed as an Officer of the Order of Canada. In
October 2006, Dr. Smith was appointed by the Honourable Tony
Clement, Minister of Health, to chair the Steering Committee
responsible for developing a new Heart-Health strategy to fight
heart disease in Canada. Dr. Smith currently serves as Chairman of
the Libin Cardiovascular Institute of Alberta and of Logiq Asset
Management Inc. (formerly Aston Hill Financial Inc.) and is a
director of Resverlogix Corp, and Zenith Epigenetics Corp, and is a
past director of Canadian Natural Resources Limited.
Pre-Approval
Policies and Procedures
The
Audit Committee reviewed with the independent auditor (who is
responsible for expressing an opinion on the conformity of the
Company’s audited financial statements with accounting
principles generally accepted in the United States of America)
their judgments as to the quality, not just the acceptability, of
the Company’s accounting principles and such other matters as
are required to be discussed with the Audit Committee under
Canadian and United States generally accepted auditing standards.
In addition, the Audit Committee has discussed with the independent
auditor the auditor’s independence from management and the
Company including the matters in the written disclosures provided
to the Audit Committee by the independent auditor, and considered
the compatibility of non-audit services with the auditor’s
independence.
The
Company’s independent auditor is accountable to the Board and
to the Audit Committee. The Board, through the Audit Committee, has
the ultimate responsibility to evaluate the performance of the
independent auditor, and through the shareholders, to appoint,
replace and compensate the independent auditor. Under the
Sarbanes-Oxley Act of 2002, the independent auditor of a public
company is prohibited from performing certain non-audit services.
The Audit Committee has adopted procedures and policies for the
pre-approval of non-audit services, as described in the Audit
Committee Charter. Under the terms of such policies and procedures,
the Audit Committee has adopted a list of pre-approved services,
including audit and audit-related services and tax services, and a
list of prohibited non-audit services deemed inconsistent with an
auditor’s independence.
The
list of pre-approved services includes:
1.
Audit
Services
●
Audits of the
Company’s consolidated financial statements;
●
Statutory audits of
the financial statements of the Company’s
subsidiaries;
2.
Audit-Related
Services
●
Reviews of the
quarterly consolidated financial statements of the
Company;
●
Services associated
with registration statements, prospectuses, periodic reports and
other documents filed with securities regulatory bodies (such as
the SEC and the Ontario Securities Commission) or other documents
issued in connection with securities offerings (e.g., comfort
letters and consent letters) and assistance in responding to
comment letters from securities regulatory bodies;
●
Special attest
services as required by regulatory and statutory
requirements;
●
Regulatory
attestation of management reports on internal controls as required
by the regulators; and
●
Consultations with
the Company’s management as to the accounting or disclosure
treatment of transactions or events and/or the actual or potential
impact of final or proposed rules, standards or interpretations by
the securities regulatory authorities, accounting standard setting
bodies (such as the Financial Accounting Standards Board or
Chartered Professional Accountants of Canada), or other regulatory
or standard setting bodies.
●
Presentations or
training on accounting or regulatory pronouncements;
●
Due diligence
services related to accounting and tax matters in connection with
potential acquisitions / dispositions; and
3.
Tax
Services
a.
Compliance Services
●
Assistance with the
preparation of corporate income tax returns and related schedules
for the Company and its subsidiaries;
●
Assistance with the
preparation of Scientific Research & Experimental Development
investment tax credit claims and amended tax returns of the
Company; and
●
Assistance in
responding to Canada Revenue Agency or Internal Revenue Service on
proposed reassessments and other matters.
b.
Canadian & International Planning Services
●
Advice with respect
to cross-border/transfer pricing tax issues;
●
Advice related to
the ownership of corporate intellectual property in jurisdictions
outside of Canada;
●
Assistance in
interpreting and understanding existing and proposed domestic and
international legislation, and the administrative policies followed
by various jurisdictions in administering the law, including
assisting in applying for and requesting advance tax rulings or
technical interpretations;
●
Assistance in
interpreting and understanding the potential impact of domestic and
foreign judicial tax decisions;
●
Assistance and
advising on routine planning matters; and
●
Assistance in
advising on the implications of the routine financing of domestic
and foreign operations, including the tax implications of using
debt or equity in structuring such financing, the potential impact
of non-resident withholding tax and the taxation of the
repatriation of funds as a return of capital, a payment of a
dividend, or a payment of interest.
c.
Commodity Tax Services
●
Assistance
regarding Harmonized Sales Tax/Goods and Services Sales
Tax/Provincial Sales Tax/Customs/Property Tax filings and
assessments;
●
Commodity tax
advice and compliance assistance with business
reorganizations;
●
Advice and
assistance with respect to government
audits/assessments;
●
Advice with respect
to other provincial tax filings and assessments; and
●
Assistance with
interpretations or rulings.
4.
All Other
Services
●
Advice and
documentation assistance with respect to internal controls over
financial reporting and disclosure controls and procedures of the
Company.
The
list of prohibited services includes:
●
Bookkeeping or
other services related to the preparation of accounting records or
financial statements;
●
Financial
information systems design and implementation;
●
Appraisal or
valuation services for financial reporting purposes;
●
Actuarial services
for items recorded in the financial statements;
●
Internal audit
outsourcing services;
●
Management
functions;
●
Human
resources;
●
Certain corporate
finance and other services;
●
Legal services;
and
●
Certain expert
services unrelated to the audit.
The
Audit Committee also discusses with the Company’s independent
auditor the overall scope and plans for their audit. The Audit
Committee meets with the independent auditor, with and without
management present, to discuss the results of their examination,
their evaluations of the Company’s internal controls, and the
overall quality of the Company’s financial reporting. The
Audit Committee held four meetings during the period from December
1, 2015 to November 30, 2016.
In
reliance on the reviews and discussions referred to above, the
Audit Committee recommended to the Board (and the Board approved)
that the audited consolidated financial statements be included in
the Annual Report
for the
year ended November 30, 2016 for filing with the Canadian
provincial securities commissions and the SEC.
COMPENSATION,
NOMINATING, AND CORPORATE GOVERNANCE COMMITTEE
Compensation
Committee Mandate and Purpose
The
Compensation Committee of the Board is a standing committee of the
Board whose primary function is to assist the Board in fulfilling
its responsibilities relating to:
●
the development,
review and periodic approval of the Company’s compensation
philosophy that attracts and retains key executives and employees,
while supporting the overall business strategy and objectives and
links compensation with business objectives and organizational
performance;
●
evaluate and
approve all compensation of executive officers including salaries,
bonuses and equity compensation that are required to be
determined;
●
review the
Company’s Option Plan, the employee RSU plan and the DSU plan
on an annual basis;
●
review and make
recommendations to the Board on compensation payable to senior
officers of the Company to be hired subsequent to the adoption of
the Charter; and
●
produce a report
annually on executive officer compensation for inclusion in the
proxy circular of the Company.
Compensation
Committee Charter
The
charter of the Compensation Committee can be found on the
Company’s website at
www.intellipharmaceutics.com
.
Composition
of the Compensation Committee
The
Compensation Committee is composed of Kenneth Keirstead, Bahadur
Madhani and Dr. Eldon Smith, each of whom is considered independent
and is a director of the Company. All of the members shall be
“independent” as such term is defined in applicable
securities legislation. In no case shall a member be a current
employee or immediate family member of a current employee. The
members of the Compensation Committee have selected a Chair from
amongst themselves, being Dr. Eldon Smith.
Corporate
Governance Committee Mandate and Purpose
The
Corporate Governance Committee of the Board is a standing committee
of the Board whose primary function is to assist the Board in
dealing with the corporate governance matters described in the
Charter.
Corporate
Governance Committee Charter
The
charter of the Corporate Governance Committee can be found the
Company’s website at
www.intellipharmaceutics.com.
Composition
of the Corporate Governance Committee
The
Corporate Governance Committee is composed of three directors, two
of whom shall be “independent” as such term is defined
in applicable securities legislation. Kenneth Keirstead and Dr.
Eldon Smith is each considered independent and is a director of the
Company. John Allport, an officer of the Company, is not considered
independent and is a director of the Company. The members of the
Corporate Governance Committee have selected a Chair from amongst
themselves, being Kenneth Keirstead.
The
number of full-time employees as of each of last three fiscal years
is as follows:
|
|
November 30, 2016
|
November 30, 2015
|
November 30, 2014
|
|
Research
Employees
|
44
|
40
|
35
|
|
Administrative
Employees
|
10
|
12
|
11
|
Our
employees are not governed by a collective agreement. We have not
experienced a work stoppage and believe our employee relations are
satisfactory.
The
nature of our business requires the recruitment and retention of a
highly educated and skilled workforce, including highly qualified
management, scientific and manufacturing personnel for innovation,
research and development. Typically a high proportion of our
employees have a Bachelor’s degree or higher. For each of the
last three fiscal years, all employees of the Company were employed
at the Company’s offices in Toronto.
The
following table states the names of the directors and officers of
the Company, the positions within the Company now held by them, and
the approximate number of common shares of the Company beneficially
owned or over which control or direction is exercised by each of
them as of February 27, 2017.
|
Name
|
Position with the Company
|
Number of Common Shares Owned
|
Percentage of Common Shares Owned
|
Number of Stock Options Held
(2)
|
Exercise Price
|
Option Expiry dd/mm/yyyy
|
Number of Currently Exercisable Options
(4)
|
Number of Common Shares Issuable on Conversion of Convertible
Debt
|
Number of Deferred Share Units Held
|
Number of Restricted Share Units Held
|
|
Dr. Isa Odidi
|
Chief
Executive Officer and Chairman of the Board and Director of the
Company
|
5,781,312
(1)
|
19.17%
|
2,763,940
300,000
75,000
50,000
70,000
90,000
|
$3.62
C$3.27
C$1.81
C$4.29
C$2.52
C$2.43
|
10/09/2016
16/02/2022
13/04/2020
28/02/2019
30/11/2020
31/08/2021
|
2,211,152
300,000
75,000
50,000
70,000
60,000
|
450,000
(3)
|
N/A
|
N/A
|
|
Dr. Amina Odidi
|
President, Chief
Operating Officer and Director of the Company
|
5,781,312
(1)
|
19.17%
|
2,763,940
300,000
75,000
50,000
70,000
90,000
|
$3.62
C$3.27
C$1.81
C$4.29
C$2.52
C$2.43
|
10/09/2016
16/02/2022
13/04/2020
28/02/2019
30/11/2020
31/08/2021
|
2,211,152
300,000
75,000
50,000
70,000
60,000
|
450,000
(3)
|
N/A
|
N/A
|
|
John N. Allport
|
Vice-President,
Legal Affairs and Licensing and Director of the
Company
|
110,558
|
0.37%
|
250,000
25,000
50,000
40,000
55,000
|
C$3.27
C$1.8
1C$4.29
C$2.52
C$2.43
|
16/02/2022
13/04/2020
28/02/2019
30/11/2020
31/08/2021
|
250,000
25,000
50,000
40,000
37,000
|
N/A
|
N/A
|
Nil
|
|
Dr. Eldon R. Smith
|
Director of the
Company
|
21,731
|
0.07%
|
10,000
25,000
37,500
37,500
20,000
35,000
|
C$2.88
C$1.81
C$4.29
C$3.22
C$2.52
C$2.43
|
22/10/2019
13/04/2020
28/02/2019
30/11/2019
30/11/2020
31/08/2021
|
10,000
25,000
37,500
37,500
20,000
24,000
|
N/A
|
79,099
|
N/A
|
|
Kenneth Keirstead
|
Director of the
Company
|
Nil
|
Nil
|
10,000
25,000
37,500
37,500
20,000
35,000
|
C$2.88
C$1.81
C$4.29
C$3.22
C$2.52
C$2.43
|
22/10/2019
13/04/2020
28/02/2019
30/11/2019
30/11/2020
31/08/2021
|
10,000
25,000
37,500
37,500
20,000
24,000
|
N/A
|
Nil
|
N/A
|
|
Bahadur Madhani
|
Director of the
Company
|
7,507
|
0.03%
|
10,000
25,000
37,500
37,500
20,000
35,000
|
C$2.88
C$1.81
C$4.29
C$3.22
C$2.52
C$2.43
|
22/10/2019
13/04/2020
28/02/2019
30/11/2019
30/11/2020
31/08/2021
|
10,000
25,000
37,500
37,500
20,000
24,000
|
N/A
|
Nil
|
N/A
|
|
Dr. Patrick Yat
|
Vice-President
Pharmaceutical Analysis and Chemistry of the Company
|
27,172
|
0.09%
|
50,000
15,000
15,000
25,000
|
C$3.82
C$1.81
C$2.52
C$2.43
|
24/05/2021
13/04/2020
30/11/2020
31/08/2021
|
50,000
15,000
15,000
17,000
|
N/A
|
N/A
|
Nil
|
|
Domenic Della Penna
|
Chief
Financial Officer of the Company
|
173,700
|
0.58%
|
60,000
50,000
70,000
|
C$3.22
C$2.52
C$2.43
|
30/11/2024
30/11/2020
31/08/2021
|
45,000
50,000
47,000
|
N/A
|
N/A
|
Nil
|
|
Totals
|
|
6,121,980
|
20.30%
|
5,133,940
|
|
|
4,424,152
|
450,000
|
79,099
|
Nil
|
Notes:
(1)
Represents shares
owned of record by Odidi Holdings Inc., a privately-held company
controlled by Drs. Amina and Isa Odidi. In addition, 2,763,940
performance-based options are held by Drs. Amina and Isa Odidi, and
585,000 stock options are held by each of Dr. Isa Odidi and Dr.
Amina Odidi.
(2)
For information
regarding option expiration dates and exercise price refer to the
tables included under Item 6.B.
(3)
On January 10,
2013, the Company completed a private placement financing of the
Debenture in the original principal amount of $1.5 million, which
was originally due to mature January 1, 2015. The Debenture bears
interest at a rate of 12% per annum, payable monthly, is
pre-payable at any time at the option of the Company, and was
convertible at any time into 500,000 common shares at a conversion
price of US$3.00 per common share at the option of the holder. Drs.
Isa and Amina Odidi, principal stockholders, directors and
executive officers of the Company provided the Company with the
$1.5 million of the proceeds for the Debenture. Effective October
1, 2014, the original maturity date for the Debenture was extended
to July 1, 2015; effective June 29, 2015, the July 1, 2015 maturity
date was extended to January 1, 2016; effective as of December 8,
2015, the maturity date was extended to July 1, 2016; and effective
May 26, 2016, the maturity date of the Debenture was further
extended to December 1, 2016. Effective December 1, 2016, the
maturity date for the Debenture was extended to April 1, 2017 and a
principal repayment of $150,000 was made at the time of the
extension. After giving effect to such partial repayment, the
Debenture is convertible at any time into 450,000 common shares at
a conversion price of $3.00 per common share at the option of the
holder. The Company currently expects to repay the current net
amount of $1,350,000 on or about April 1, 2017, if the Company then
has cash available.
(4)
Includes options
exercisable within 60 days of the date of this filing.
As of
February 27, 2017, the directors and executive officers of the
Company as a group owned, directly or indirectly, or exercised
control or direction over 6,121,980 common shares, representing
approximately 20.3% of the issued common shares of the Company (and
beneficially owned approximately 10,996,132 common shares
representing 31.4% of our common shares including common shares
issuable upon the exercise of outstanding options and the
conversion of the convertible debenture that are exercisable or
convertible within 60 days of the date hereof).
The
Company has in place the Option Plan for the benefit of certain
officers, directors, employees and consultants of the Company,
including the Named Executive Officers (see below under
“
Employee Stock Option
Plan
”). Certain Named Executive Officers have been
issued options under such plan. The Company has also granted
performance-based options to Dr. Isa Odidi and Dr. Amina Odidi
pursuant to a separate option agreement, which was negotiated with
the Named Executive Officers at the same time as their employment
agreements. These options vest upon the Company attaining certain
milestones relating to FDA filings and approvals for Company drugs,
such that 276,394 options vest in connection with each of the FDA
filings for the first five Company drugs and 276,394 options vest
in connection with each of the FDA approvals for the first five
Company drugs. To date, the level of these performance-based
options has been taken into account by the Board and impacted the
Company’s decisions about base salary and option-based awards
under the Option Plan for the Named Executive Officers. No other
performance-based options have been granted to any other Named
Executive Officer.
Employee
Stock Option Plan
The
Option Plan was adopted effective October 22, 2009 as part of the
IPC Arrangement Transaction approved by the shareholders of IPC
Ltd., our predecessor company, at the meeting of shareholders on
October 19, 2009. Subject to the requirements of the Option Plan,
the Board, with the assistance of the Compensation Committee, has
the authority to select those directors, officers, employees and
consultants to whom options will be granted, the number of options
to be granted to each person and the price at which common shares
of the Company may be purchased. Grants are determined based on
individual and aggregate performance as determined by the
Board.
The key
features of the Option Plan are as follows:
●
The eligible
participants are full-time and part-time employees, officers and
directors of, or consultants to, the Company or its affiliates,
which may be designated from time to time by the
Board.
●
The fixed maximum
percentage of common shares issuable under the Option Plan is 10%
of the issued and outstanding common shares from time to time. The
Option Plan will automatically “reload” after the
exercise of an option provided that the number of common shares
issuable under the Option Plan does not then exceed the maximum
percentage of 10%.
●
There are no
restrictions on the maximum number of options which may be granted
to insiders of the Company other than not more than 1% of the total
common shares outstanding on a non-diluted basis can be issued to
non-executive directors of the Company pursuant to options granted
under the Option Plan and the value of any options granted to any
non-executive director of the Company, shall not, on an annual
basis, exceed $100,000.
●
The Board
determines the exercise price of each option at the time the option
is granted, provided that such price is not lower than the
“market price” of common shares at the time the option
is granted. “Market price” means the volume weighted
average trading price of common shares on the TSX, or another stock
exchange where the majority of the trading volume and value of
common shares occurs, for the five trading days immediately
preceding the relevant date, calculated in accordance with the
rules of such stock exchange.
●
Unless otherwise
determined by the Board, each option becomes exercisable as to
33⅓% on a cumulative basis, at the end of each of the first,
second and third years following the date of grant.
●
The period of time
during which a particular option may be exercised is determined by
the Board, subject to any Employment Contract or Consulting
Contract (both as hereinafter defined), provided that no such
option term shall exceed 10 years.
●
If an option
expiration date falls within a “black-out period” (a
period during which certain persons cannot trade common shares
pursuant to a policy of the Company’s respecting restrictions
on trading), or immediately following a black-out period, the
expiration date is automatically extended to the date which is the
tenth business day after the end of the black-out
period.
●
Options may
terminate prior to expiry of the option term in the following
circumstances:
●
on death of an
optionee, options vested as at the date of death are immediately
exercisable until the earlier of 180 days from such date and expiry
of the option term; and
●
if an optionee
ceases to be a director, officer, employee or consultant of the
Company for any reason other than death, including receipt of
notice from the Company of the termination of his, her or its
Employment Contract or Consulting Contract (as defined below),
options vested as at the date of termination are exercisable until
the earlier of 120 days following such date and expiry of the
option term, subject however to any contract between the Company
and any employee relating to, or entered into in connection with,
the employment of the employee or between the Company and any
director with respect to his or her directorship or resignation
there from (an “
Employment
Contract
”), any contract between the Company and any
consultant relating to, or entered into in connection with,
services to be provided to the Company (a “
Consulting Contract
”) or any other
agreement to which the Company is a party with respect to the
rights of such person upon termination or change in control of the
Company.
●
Options and rights
related thereto held by an optionee are not to be assignable or
transferable except on the death of the optionee.
●
If there is a
take-over bid (within the meaning of the Securities Act (Ontario))
made for all or any of the issued and outstanding common shares of
the Company, then all options outstanding become immediately
exercisable in order to permit common shares issuable under such
options to be tendered to such bid.
●
If there is a
consolidation, merger, amalgamation or statutory arrangement
involving the Company, separation of the business of the Company
into two or more entities or sale of all or substantially all of
the assets of the Company to another entity, the optionees will
receive, on exercise of their options, the consideration they would
have received had they exercised their options immediately prior to
such event. In such event and in the event of a securities exchange
take-over bid, the Board may, in certain circumstances, require
optionees to surrender their options if replacement options are
provided. In the context of a cash take-over bid for 100% of the
issued and outstanding common shares of the Company, optionees may
elect to conditionally surrender their options or, if provided for
in an agreement with the offeror, automatically exchange their
options for options of the offeror.
●
The Board may from
time to time in its absolute discretion amend, modify and change
the provisions of the Option Plan or any options granted pursuant
to the Option Plan, provided that any amendment, modification or
change to the provisions of the Option Plan or any options granted
pursuant to the Option Plan shall:
●
not adversely alter
or impair any option previously granted;
●
be subject to any
regulatory approvals, where required, including, where applicable,
the approval of the TSX and/or such other exchange as may be
required; and
●
not be subject to
shareholder approval in any circumstances, except where the
amendment, modification or change to the Option Plan or option
would:
(i)
reduce the exercise
price of an option held by an insider of the Company;
(ii)
extend the term of
an option held by an insider beyond the original expiration date
(subject to such date being extended in a black-out extension
situation);
(iii)
increase the fixed
maximum percentage of common shares issuable under the Option Plan;
or
(iv)
amend the amendment
provision of the Option Plan;
in
which case the amendment, modification or change will be subject to
shareholder approval in accordance with the rules of the TSX and/or
such other exchange as may be required. Amendments to the Option
Plan not requiring shareholder approval may for example include,
without limitation:
●
amendments of a
“housekeeping nature”, including any amendment to the
Option Plan or an option that is necessary to comply with
applicable law or the requirements of any regulatory authority or
stock exchange;
●
changes to the
exercise price of an option to an exercise price not below the
“market price” unless the change is a reduction in the
exercise price of an option held by an insider of the
Company;
●
amendments
altering, extending or accelerating any vesting terms or conditions
in the Option Plan or any options;
●
changes amending or
modifying any mechanics for exercising an option;
●
amendments changing
the expiration date (including acceleration thereof) or changing
any termination provision in any option, provided that such change
does not entail an extension beyond the original expiration date of
such option (subject to such date being extended in a black-out
extension situation);
●
amendments
introducing a cashless exercise feature, payable in securities,
whether or not such feature provides for a full deduction of the
number of underlying securities from the Option Plan
maximum;
●
amendments changing
the application of the provisions of the Option Plan dealing with
adjustments in the number of shares, consolidations and mergers and
take-over bids;
●
amendments adding a
form of financial assistance or amending a financial assistance
provision which is adopted;
●
amendments changing
the eligible participants of the Option Plan; and
●
amendments adding a
deferred or restricted share unit provision or any other provision
which results in participants receiving securities while no cash
consideration is received by the Company.
The
Board may discontinue the Option Plan at any time without consent
of the participants under the Option Plan provided that such
discontinuance shall not adversely alter or impair any option
previously granted.
A copy
of the Option Plan is available upon request in writing to the
Chief Financial Officer of the Company at 30 Worcester Road,
Toronto, Ontario, M9W 5X2 or on www.sedar.com.
The
3,015,584 shares that are currently authorized for issuance under
the Option Plan represent 10% of the common shares issued and
outstanding as at February 27, 2017. Of the options authorized for
issuance under the Option Plan, a total of 2,621,344 have been
issued, representing 8.7% of the shares issued and outstanding as
of February 27, 2017. As of February 27, 2017, 156,500 options have
been exercised under the Plan.
The
Company has also granted performance-based options to Dr. Isa Odidi
and Dr. Amina Odidi pursuant to a separate option agreement, which
was negotiated at the same time as their employment agreements.
These options vest upon the Company attaining certain milestones
relating to FDA filings and approvals for the development of
Company drugs, such that 276,394 options vest in connection with
each of the FDA filings for the first five Company drugs and
276,394 options vest in connection with each of the FDA approvals
for the first five Company drugs. To date, the level of these
performance-based options has been taken into account by the Board
and impacted the Company’s decisions about base salary and
option-based awards under the Option Plan for the said Named
Executive Officers.
Restricted
Share Unit Awards for Officers & Employees
The
Company established the RSU Plan to form part of its incentive
compensation arrangements available for officers and employees of
the Company and its designated affiliates as of May 28, 2010, when
the RSU Plan received shareholder approval.
The key
features of the RSU Plan are as follows:
●
The stated purpose
of the RSU Plan is to advance the interests of the Company through
the motivation, attraction and retention of employees and officers
of the Company and the designated affiliates of the Company and to
secure for the Company and the shareholders of the Company the
benefits inherent in the ownership of common shares by employees
and officers of the Company, it being generally recognized that
share incentive plans aid in attracting, retaining and encouraging
employees and officers due to the opportunity offered to them to
acquire a proprietary interest in the Company and to align their
interests with those of the Company. Employees and officers,
including both full-time and part-time employees, of the Company
and any designated affiliate of the Company, but not any directors
of the Company, are eligible to participate under the RSU Plan. By
the terms of the RSU Plan, Dr. Isa Odidi, the Chief Executive
Officer of the Company, and Dr. Amina Odidi, the President and
Chief Operating Officer of the Company, are specifically not
eligible to participate.
●
The RSU Plan is
administered by the Board or a committee thereof, which will
determine, from time to time, who may participate in the RSU Plan,
the number of RSUs to be awarded and the terms of each RSU, all
such determinations to be made in accordance with the terms and
conditions of the RSU Plan, based on individual and/or corporate
performance factors as determined by the Board.
●
The number of
common shares available for issuance upon the vesting of RSUs
awarded under the RSU Plan is limited to an aggregate of 330,000
common shares of the Company representing approximately 1.4% of the
issued and outstanding common shares of the Company as of February
27, 2017.
●
A separate notional
account will be maintained for each participant under the RSU Plan.
Each such account will be credited with RSUs awarded to the
participant from time to time by way of a bookkeeping entry in the
books of the Company. On the vesting of the RSUs and the
corresponding issuance of common shares to the participant, or on
the forfeiture and cancellation of the RSUs, the RSUs credited to
the participant’s account will be cancelled.
●
At the time of the
award of RSUs, the Board will determine in its sole discretion the
vesting criteria (whether based on time or performance measures of
individual and/or corporate performance) applicable to the awarded
RSUs. Unless otherwise determined by the Board at the time of the
award, RSUs will vest in respect of 33 1/3% of the common shares
subject to the RSUs on the first day after each of the first three
anniversaries of the award date of such RSU. Notwithstanding the
foregoing, all vesting and issuances or payments, as applicable,
will be completed no later than December 15 of the third calendar
year commencing after an award date.
●
The RSU Plan
provides that any unvested RSUs will vest at such time as
determined by the Board in its sole discretion such that
participants in the RSU Plan will be able to participate in a
change of control transaction, including by surrendering such RSUs
to the Company or a third party or exchanging such RSUs, for
consideration in the form of cash and/or securities.
●
Under the RSU Plan,
should the vesting of an RSU fall within a blackout period or
within nine business days following the expiration of a blackout
period, the vesting will be automatically extended to the tenth
business day after the end of the blackout period.
●
If an “event
of termination” of employment has occurred, any and all
common shares corresponding to any vested RSUs in a
participant’s account, if any, will be issued as soon as
practicable after the event of termination to the former
participant. If an event of termination has occurred, any unvested
RSUs in the participant’s account will, unless otherwise
determined by the Board in its discretion, forthwith and
automatically be forfeited by the participant and cancelled.
Notwithstanding the foregoing, if a participant is terminated for
just cause, each unvested RSU in the participant’s account
will be forfeited by the participant and cancelled. An “event
of termination” is defined under the RSU Plan as an event
whereby a participant ceases to be eligible under the RSU Plan and
is deemed to have occurred by the giving of any notice of
termination of employment (whether voluntary or involuntary and
whether with or without cause), retirement, or any cessation of
employment for any reason whatsoever, including disability or
death.
●
No rights under the
RSU Plan and no RSUs awarded pursuant to the provisions of the RSU
Plan are assignable or transferable by any participant other than
pursuant to a will or by the laws of descent and
distribution.
●
Under the RSU Plan,
the Board may from time to time in its absolute discretion amend,
modify and change the provisions of the RSU Plan or any RSUs
awarded pursuant to the Plan, provided that any amendment
will:
●
not adversely alter
or impair any RSU previously awarded except as permitted by the
adjustment provisions in the RSU Plan;
●
be subject to any
regulatory approvals including, where required, the approval of the
TSX;
●
be subject to
shareholder approval in accordance with the rules of the TSX in
circumstances where the amendment, modification or change to the
RSU Plan or RSUs would:
(i)
allow for the
assignment or transfer of any right under the RSU Plan or a RSU
awarded pursuant to the provisions of the RSU Plan other than as
provided for under the assignability provisions in the RSU
Plan;
(ii)
increase the fixed
maximum number of common shares which may be issued pursuant to the
RSU Plan; or
(iii)
amend the amendment
provisions of the RSU Plan; and
●
not be subject to
shareholder approval in circumstances (other than those listed in
the paragraph immediately above), including, but not limited to,
circumstances where the amendment, modification or change to the
RSU Plan or RSU would:
(i)
be of a
“housekeeping nature”, including any amendment to the
RSU Plan or a RSU that is necessary to comply with applicable law
or the requirements of any regulatory authority or stock exchange
and any amendment to the RSU Plan or a RSU to correct or rectify
any ambiguity, defective provision, error or omission therein,
including any amendment to any definitions therein;
(ii)
alter, extend or
accelerate any vesting terms or conditions in the RSU Plan or any
RSU;
(iii)
change any
termination provision in any RSU;
(iv)
introduce features
to the RSU Plan that would permit the Company to, instead of
issuing common shares from treasury upon the vesting of the RSUs,
retain a broker and make payments for the benefit of participants
to such broker who would purchase common shares through the
facilities of the TSX for such participants;
(v)
introduce features
to the RSU Plan that would permit the Company to, instead of
issuing common shares from treasury upon the vesting of the RSUs,
make lump sum cash payments to participants;
(vi)
change the
application of the adjustment provisions of the RSU Plan or the
change of control provisions of the RSU Plan; or
(vii)
change the eligible
participants under the RSU Plan.
A copy
of the RSU Plan is available upon request in writing to the Chief
Financial Officer of the Company at 30 Worcester Road, Toronto,
Ontario, M9W 5X2.
The
330,000 common shares that are currently authorized for issuance
under the RSU Plan represent approximately 1.4% of the
Company’s common shares issued and outstanding as at February
27, 2017. No RSUs have been issued and none are outstanding as of
February 27, 2017.
Deferred
Share Unit Awards for Outside Directors
The
Company established as of May 28, 2010 when it received shareholder
approval, a deferred share unit plan (the “
DSU Plan
”) to permit directors who
are not officers of the Company, to defer receipt of all or a
portion of their Board fees until termination of Board service and
to receive such fees in the form of common shares at that
time.
The key
features of the DSU Plan are as follows:
●
The DSU Plan is
administered by the Board or a committee thereof. Members of the
Board who are not salaried officers or employees of the Company or
a related corporation are eligible to participate under the DSU
Plan. By the terms of the DSU Plan, Dr. Isa Odidi, the Chief
Executive Officer of the Company, and Dr. Amina Odidi, the
President and Chief Operating Officer of the Company, are
specifically not eligible to participate.
●
The number of
common shares available for issuance upon redemption of DSUs issued
under the DSU Plan is limited to 110,000 common shares of the
Company, representing approximately 0.4% of the total number of
issued and outstanding common shares as of the date
hereof.
●
Each participant
may elect to be paid a minimum of 20% up to a maximum of 100%, in
10% increments, of Board fees in the form of DSUs in lieu of being
paid such fees in cash. On the date on which Board fees are payable
(on a quarterly basis), the number of DSUs to be credited to the
participant is determined by dividing an amount equal to the
designated percentage of the Board fees that the participant has
elected to have credited in DSUs on that fee payment date, by the
calculated market value of a common share (typically on the TSX) on
that fee payment date. The market value of a common share is the
weighted average trading price of the common shares on any exchange
where the common shares are listed (including the TSX) for the last
five trading days prior to such day. If dividends are declared by
the Company, a participant will also be credited with dividend
equivalents in the form of additional DSUs based on the number of
DSUs the participant holds on the record date for the payment of a
dividend. Dividend equivalents are calculated by dividing (i) the
amount obtained by multiplying the amount of the dividend declared
and paid per common share by the number of DSUs in the
participant’s account on the record date for the payment of
such dividend, by (ii) the market value of a common share on that
dividend payment date. The market value of a common share is the
weighted average trading price of the common shares on any exchange
where the common shares are listed (including the TSX) for the last
five trading days prior to such day.
●
A participant is
permitted to redeem his/her DSUs only following termination of
Board service by way of retirement, non-re-election as a director,
resignation or death. Upon redemption of DSUs, the Company will
issue to the participant common shares of the Company equal to the
number of DSUs to be redeemed.
●
A separate notional
account is maintained for each participant under the DSU Plan. Each
such account will be credited with DSUs issued to the participant
from time to time by way of a bookkeeping entry in the books of the
Company. The DSUs credited to the participant’s account will
be cancelled as of the applicable redemption date and following
redemption of all DSUs credited to the participant’s account,
such participant’s account will be closed.
●
No rights under the
DSU Plan and no DSUs credited pursuant to the provisions of the DSU
Plan are assignable or transferable by any participant other than
pursuant to a will or by the laws of descent and
distribution.
●
Under the DSU Plan,
the Board may from time to time in its absolute discretion amend,
modify and change the provisions of the DSU Plan or any DSUs issued
pursuant to the DSU Plan, provided that any amendment
will:
●
not adversely alter
or impair any DSU previously credited without such
participant’s consent in writing except as permitted by the
adjustment provisions in the DSU Plan;
●
be subject to any
regulatory approvals including, where required, the approval of the
TSX;
●
be subject to
shareholder approval in accordance with the rules of the TSX in
circumstances where the amendment, modification or change to the
DSU Plan or DSU would:
(i)
allow for the
assignment or transfer of any right under the DSU Plan or a DSU
credited pursuant to the provisions of the DSU Plan other than as
provided for under the assignability provisions in the DSU
Plan;
(ii)
increase the fixed
maximum number of common shares which may be issued pursuant to the
DSU Plan; or
(iii)
amend the amendment
provisions of the DSU Plan; and
●
not be subject to
shareholder approval in circumstances (other than those listed in
the paragraph immediately above), including, but not limited to,
circumstances where the amendment, modification or change to the
DSU Plan or DSU would:
(i)
be of a
“housekeeping nature”, including any amendment to the
DSU Plan or a DSU that is necessary to comply with applicable law
or the requirements of any regulatory authority or stock exchange
and any amendment to the DSU Plan or a DSU to correct or rectify
any ambiguity, defective provision, error or omission therein,
including any amendment to any definitions therein;
(ii)
introduce features
to the DSU Plan that would permit the Company to, instead of
issuing common shares from treasury upon the redemption of the
DSUs, retain a broker and make payments for the benefit of
participants to such broker who would purchase common shares
through the facilities of the TSX for such
participants;
(iii)
introduce features
to the DSU Plan that would permit the Company to, instead of
issuing common shares from treasury upon the redemption of the
DSUs, make lump sum cash payments to participants;
(iv)
change the
application of the adjustment provisions of the DSU Plan;
or
(v)
change the eligible
participants under the DSU Plan.
A copy
of the DSU Plan is available upon request in writing to the Chief
Financial Officer of the Company at 30 Worcester Road, Toronto,
Ontario, M9W 5X2.
The
110,000 common shares that are currently authorized for issuance
under the DSU Plan represent approximately 0.4% of the
Company’s common shares issued and outstanding as at February
27, 2017. A total of 79,099 DSUs have been issued, representing
common share rights that comprise approximately 0.26% of the common
shares issued and outstanding as at February 27, 2017.
Perquisites
and Personal Benefits
The
Company also provides perquisites and personal benefits to its
Named Executive Officers, including basic employee benefit plans,
which are available to all employees, and a car allowance to cover
the cost of an automobile for business purposes. These perquisites
and personal benefits were determined through negotiation of an
employment agreement with each Named Executive Officer (see
“Employment Agreements” above). While perquisites and
personal benefits are intended to fit into the Company’s
overall compensation objectives by serving to attract and retain
talented executive officers, the size of the Company and the nature
and stage of its business also impact the level of perquisites and
benefits. To date, the level of perquisites and benefits has not
impacted the Company’s decisions about any other element of
compensation.
Other
Compensation-Related Matters
The
Company’s Share Trading Policy prohibits all directors and
officers of the Company from, among other things, engaging in any
short sales designed to hedge or offset a decrease in market value
of the securities of the Company.
In
March 2013 we completed a registered direct offering of units of
common shares and warrants, in July 2013 we completed an
underwritten public offering of units of common shares and
warrants, and in November 2013 we entered into an at-the-market
equity distribution agreement pursuant to which we may, from time
to time, sell our common shares, all of which resulted in a
significant change in the percentage ownership of our principal
shareholders, Drs. Amina and Isa Odidi, our President and Chief
Operating Officer and our Chairman and Chief Executive Officer,
respectively, and Odidi Holdings Inc., a privately-held company
controlled by Drs. Amina and Isa Odidi (a decrease to approximately
19.17%) of our then-issued and outstanding common shares of the
Company subsequent to the offering). As of February 27, 2017, Drs.
Amina and Isa Odidi, our President and Chief Operating Officer and
our Chairman and Chief Executive Officer, respectively, and Odidi
Holdings Inc., a privately-held company controlled by Drs. Amina
and Isa Odidi, own in the aggregate directly and indirectly
5,781,312 common shares, representing approximately 19.17% of our
issued and outstanding common shares of the Company (and
collectively beneficially owned in the aggregate approximately
9,552,464 common shares representing 28.2% of our common shares
including common shares issuable upon the exercise of outstanding
options and the conversion of the outstanding convertible debenture
that are exercisable or convertible within 60 days of the date
hereof). (Reference is made to the section entitled “E. Share
Ownership” under “Item 6. Directors, Senior Management
and Employees” for additional information regarding the
options to purchase common shares and the convertible debenture
held by Drs. Amina and Isa Odidi.) To our knowledge, no other
shareholder owns more than 5% of the issued and outstanding common
shares of the Company.
There
are no arrangements, known to the Company, the operation of which
may at a subsequent date result in a change in control of the
Company.
No
holder of common shares has different voting rights from any other
holders of common shares.
As at
December 31, 2016, there were a total of 346 holders of record of
our common shares, of which 248 were registered with addresses in
Canada holding in the aggregate approximately 23.51% of our
outstanding common shares, 47 were registered with addresses in the
United States holding in the aggregate approximately 76.49% of our
outstanding common shares, and 51 were registered with addresses in
other nations holding in the aggregate less than 1% of our
outstanding common shares. We believe that the number of beneficial
owners of our common shares is substantially greater than the
number of record holders, because a large portion of our common
shares are held in broker “street names”.
During
the year ended November 30, 2014, we had repaid an outstanding
related party loan payable to Dr. Isa Odidi and Dr. Amina Odidi,
our principal stockholders, directors and executive officers.
Repayments of the related party loan were restricted under the
terms of the loan such that the principal amount thereof was
payable when payment was required solely out of (i) revenues earned
by IPC Corp following the effective date of October 22, 2009
(“
effective
date
”), and/or proceeds received by IPC Corp or its
affiliates from the offering of its securities after the effective
date (other than the proceeds from the transactions completed in
February 2011, March 2012, March 2013 and July 2013), and/or
amounts received by IPC Corp for scientific research tax credits of
IPC Corp and (ii) up to C$800,000 of the Net Cash from the Vasogen
transaction (as defined in the IPC Arrangement Agreement). In March
2014, we repaid the entire outstanding related party loan
principal, in the amount of $690,049 (C$764,851) out of licensing
revenues earned by IPC Corp and made interest payments of $48,504
(C$53,762) in respect of the promissory note in accordance with the
IPC Arrangement Agreement.
In
January 2013, we completed a private placement financing of an
unsecured Debenture in the original principal amount of $1.5
million. The Debenture bears interest at a rate of 12% per annum,
payable monthly, is pre-payable at any time at the option of the
Company, and is convertible at any time into 500,000 common shares
at a conversion price of $3.00 per common share at the option of
the holder. Drs. Isa and Amina Odidi, our principal stockholders,
directors and executive officers provided us with the original $1.5
million of the proceeds for the Debenture. Effective December 1,
2016, the maturity date for the Debenture was extended to April 1,
2017 and a
principal repayment
of $150,000 was made at the time of the extension. The Company
currently expects to repay the current net amount of $1,350,000 on
or about April 1, 2017, if the Company then has cash
available.
Since
the beginning of the Company’s preceding three financial
years to the date hereof, other than discussed above in this item
7, there have been no transactions or proposed transactions which
are material to the Company or to any associate, holder of 10% of
the Company’s outstanding shares, director or officer or any
transactions that are unusual in their nature or conditions to
which the Company or any of its subsidiaries was a
party.
Reference is made
to “Item 18. Financial Statements” for the financial
statements included in this annual report.
Legal
Proceedings and Regulatory Actions
From
time to time, we may be exposed to claims and legal actions in the
normal course of business. As at November 30, 2016, and continuing
as at February 27, 2017, we are not aware of any pending or
threatened material litigation claims against us.
Dividend
Policy
We have
not paid any cash dividends on our common shares and do not intend
to pay cash dividends in the foreseeable future. We intend to
retain future earnings, if any, for reinvestment in the development
and expansion of our business. Dividend payments in the future may
also be limited by loan agreements or covenants contained in other
securities we may issue. Any future determination to pay cash
dividends will be at the discretion of our board of directors and
depend on our financial condition, results of operations, capital
and legal requirements and such other factors as our board of
directors deems relevant.
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 the TSX under
the symbols “IPCI” and “I”, respectively.
Our shares began trading on October 22, 2009, when the transaction
with Vasogen was completed. The following table indicates, for the
relevant periods, the high and low prices of our common shares on
NASDAQ and on the TSX:
|
|
NASDAQ (U.S.$)
|
TSX (C$)
|
||
|
Annual
|
High
|
Low
|
High
|
Low
|
|
2016
|
3.35
|
1.41
|
4.50
|
1.78
|
|
2015
|
3.92
|
1.73
|
4.99
|
2.16
|
|
2014
|
5.18
|
1.94
|
5.77
|
2.14
|
|
2013
|
6.46
|
1.50
|
6.70
|
1.55
|
|
2012
|
3.82
|
1.88
|
3.55
|
1.81
|
|
|
|
|
|
|
|
Quarterly
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
|
|
|
Fourth
quarter
|
3.35
|
1.69
|
4.50
|
2.21
|
|
Third
quarter
|
2.06
|
1.41
|
2.61
|
1.78
|
|
Second
quarter
|
2.42
|
1.53
|
3.22
|
2.00
|
|
First
quarter
|
3.19
|
1.83
|
4.20
|
2.46
|
|
|
|
|
|
|
|
2015
|
|
|
|
|
|
Fourth
quarter
|
2.32
|
1.73
|
2.95
|
2.16
|
|
Third
quarter
|
3.87
|
1.92
|
4.99
|
2.25
|
|
Second
quarter
|
3.92
|
2.28
|
4.86
|
2.95
|
|
First
quarter
|
2.94
|
1.96
|
3.33
|
2.49
|
|
|
|
|
|
|
|
2014
|
|
|
|
|
|
Fourth
quarter
|
4.48
|
3.05
|
4.17
|
2.77
|
|
Third
quarter
|
5.18
|
3.21
|
4.49
|
2.14
|
|
Second
quarter
|
4.19
|
1.94
|
5.77
|
3.53
|
|
First
quarter
|
3.80
|
2.51
|
4.82
|
3.28
|
|
|
|
|
|
|
|
2013
|
|
|
|
|
|
Fourth
quarter
|
6.46
|
1.63
|
6.70
|
1.72
|
|
Third
quarter
|
3.72
|
1.50
|
3.84
|
1.55
|
|
Second
quarter
|
2.23
|
1.57
|
2.35
|
1.60
|
|
First
quarter
|
2.59
|
1.72
|
2.56
|
1.77
|
|
|
|
|
|
|
|
2012
|
|
|
|
|
|
Fourth
quarter
|
3.16
|
1.88
|
3.17
|
1.81
|
|
Third
quarter
|
3.49
|
2.40
|
3.54
|
2.49
|
|
Second
quarter
|
3.19
|
2.64
|
3.38
|
2.51
|
|
First
quarter
|
3.82
|
2.41
|
3.55
|
2.53
|
|
|
|
|
|
|
|
|
NASDAQ (U.S.$)
|
TSX (C$)
|
||
|
Most recent 6 months
|
High
|
Low
|
High
|
Low
|
|
February
2017
|
2.99
|
2.11
|
4.05
|
2.78
|
|
January
2017
|
2.96
|
2.46
|
3.91
|
3.24
|
|
December
2016
|
3.05
|
2.63
|
4.09
|
3.50
|
|
November
2016
|
3.35
|
2.44
|
4.50
|
3.28
|
|
October
2016
|
3.33
|
2.08
|
4.40
|
2.75
|
|
September
2016
|
2.34
|
1.69
|
2.95
|
2.21
|
|
August
2016
|
2.06
|
1.71
|
2.61
|
2.23
|
Our
authorized share capital consists of an unlimited number of common
shares, all without nominal or par value and an unlimited number of
preference shares issuable in series. At November 30, 2016, there
were 29,789,992 common shares and no preference shares issued and
outstanding compared to 24,244,050 common shares and no preference
shares issued and outstanding at December 1, 2016. As of February
27, 2017, there were 30,155,836 common shares and no preference
shares issued and outstanding.
The
reasons for the increase in common shares issued were as follows.
In our June 2016 underwritten public offering we issued at the
initial closing of the offering an aggregate of 3,229,814 common
shares and warrants to purchase an additional 1,614,907 common
shares. The underwriter also purchased at such closing additional
warrants to acquire 242,236 common shares pursuant to the
over-allotment option exercised in part by the underwriter. We
subsequently sold an aggregate of 459,456 additional common shares
at the public offering price of $1.61 per share in connection with
subsequent partial exercises of the underwriter’s
over-allotment option. The closings of these partial exercises
brought the total net proceeds from the offering to $5,137,638,
after deducting the underwriter’s discount and estimated
offering expenses. In November 2013, we established an
at-the-market equity program pursuant to which we could sell up to
5,305,484 of our common shares for up to an aggregate of $16.8
million (or such lesser amount as may then be permitted under
applicable securities laws and regulations). As of February 27,
2017 we have issued and sold 3,853,557 common shares with an
aggregate offering price of $11,908,312 under the at-the-market
program. Roth received compensation of $335,987 in connection with
such sales. During the three months ended November 30, 2016, an
aggregate of 497,949 (2015 – 170,439) of our common shares
were sold on NASDAQ for gross proceeds of $1,507,400 (2015 –
319,805) and net proceeds of $1,464,759 (2015 – 310,939)
under the at-the-market offering program. Roth received aggregate
compensation of $42,641 in connection with such sales. During the
year ended November 30, 2016, an aggregate of 1,471,260 (2015
– 471,439) of our common shares were sold on NASDAQ for gross
proceeds of $3,469,449 (2015 - $1,290,168) and net proceeds of
$3,368,674 (2015 - $1,254,178) under the at-the-market offering
program. Roth received aggregate compensation of $100,775 (2015 -
$38,889) in connection with such sales. There can be no assurance
that any additional shares will be sold under our at-the-market
program.
Common Shares
Each of
our common shares entitles the holder thereof to one vote at any
meeting of shareholders of the Company, except meetings at which
only holders of a specified class of shares are entitled to vote.
Common shares are entitled to receive, as and when declared by the
board of directors, dividends in such amounts as shall be
determined by the board of directors. The holders of common shares
have the right to receive the remaining property of the Company in
the event of liquidation, dissolution, or winding-up of the
Company, whether voluntary or involuntary.
Preference Shares
The
preference shares may at any time and from time to time be issued
in one or more series. The board of directors will, by resolution,
from time to time, before the issue thereof, fix the rights,
privileges, restrictions and conditions attaching to the preference
shares of each series. Except as required by law, the holders of
any series of preference shares will not as such be entitled to
receive notice of, attend or vote at any meeting of the
shareholders of the Company. Holders of preference shares will be
entitled to preference with respect to payment of dividends and the
distribution of assets in the event of liquidation, dissolution or
winding-up of the Company, whether voluntary or involuntary, or any
other distribution of the assets of the Company among its
shareholders for the purpose of winding up its affairs, on such
shares over the common shares and over any other shares ranking
junior to the preference shares.
Warrants
At
November 30, 2016, an aggregate of 2,147,806 common shares were
issuable upon the exercise of outstanding common share purchase
warrants, with a weighted average exercise price of $2.02 per
common share. At February 27, 2017, an aggregate of 2,010,319
common shares were issuable upon the exercise of outstanding common
share purchase warrants, with a weighted average exercise price of
$2.03 per common share.
Options
At
November 30, 2016, an aggregate of 5,392,460 common shares were
issuable upon the exercise of outstanding options, with a weighted
average exercise price of $3.48 per common share and up to 350,479
additional common shares were reserved for issuance under our stock
option plan.
As of
February 27, 2017, there were 5,385,284 common shares issuable upon
the exercise of outstanding options. The weighted average exercise
price of these options is $3.44 per common share. As at February
27, 2017, up to 394,240 additional common shares were reserved for
issuance under our Option Plan.
Convertible Debenture
On
January 10, 2013, we completed a private placement financing of an
unsecured Debenture in the original principal amount of $1.5
million. The Debenture was originally due to mature on January 1,
2015, but effective October 1, 2014, the maturity date was extended
to July 1, 2015; effective June 29, 2015, the July 1, 2015 maturity
date was extended to January 1, 2016; and effective as of December
8, 2015, the maturity date was extended to July 1, 2016. Effective
May 26, 2016, the maturity date of the Debenture was further
extended to December 1, 2016. The Debenture bears interest at a
rate of 12% per annum, payable monthly, is pre-payable at any time
at the option of the Company, and was convertible at any time into
500,000 common shares at a conversion price of $3.00 per common
share at the option of the holder. Drs. Isa and Amina Odidi, our
principal stockholders, directors and executive officers provided
us with the $1.5 million of the proceeds for the Debenture.
Effective December 1, 2016, the maturity date for the Debenture was
extended to April 1, 2017 and a principal repayment of $150,000 was
made at the time of the extension. After giving effect to such
partial repayment, the Debenture is convertible at any time into
450,000 common shares at a conversion price of $3.00 per common
share at the option of the holder. The Company currently expects to
repay the current net amount of $1,350,000 on or about April 1,
2017, if the Company then has cash available.
Deferred Share Units
At
November 30, 2016, there were 76,743 DSUs issued and outstanding.
From November 30, 2016 to February 27, 2017, an additional 2,356
DSUs have been issued. At February 27, 2017, 30,901 additional DSUs
are reserved for issuance under our DSU plan.
Restricted Share Units
At
November 30, 2016, there were no restricted share units
(“
RSUs
”) issued
and outstanding. From November 30, 2016 to the date of this report,
no RSUs have been issued. At the date of this report, 330,000 RSUs
are reserved for issuance under our RSU Plan.
Registration Rights
We
conducted a private placement issuance of units comprised of common
shares and warrants in February, 2011, which was exempt from
registration under the U.S. Securities Act pursuant to Regulation D
and Section 4(2) and/or Regulation S thereof and such other
available exemptions. As such, the common shares, the warrants, and
the common shares underlying the warrants may not be offered or
sold in the United States unless they are registered under the U.S.
Securities Act, or an exemption from the registration requirements
of the U.S. Securities Act is available.
In
connection with the private placement, we agreed to file a
registration statement on Form F-3 (“
Registration Statement
”) within 40
days after the closing and use our best efforts to have it declared
effective within 150 days after the closing to register (i) 100% of
the common shares issued in the private placement; and (ii) 100% of
the common shares underlying the investor warrants issued in the
private placement (collectively, the private placement or the
“
Registrable
Securities
”).
The
Registration Statement was declared effective as of March 30, 2011.
If (i) the Registration Statement ceases to be continuously
effective for more than twenty consecutive calendar days or more
than an aggregate of thirty calendar days during any consecutive
12-month period, or (ii) at a time in which the Registrable
Securities cannot be sold under the Registration Statement, we
shall fail for any reason to satisfy the current public information
requirement under Rule 144 as to the applicable Registrable
Securities, we shall pay to the investors, on a pro rata basis,
partial liquidated damages of one percent (1%) of the aggregate
purchase price paid by each investor on the occurrence of an event
listed above and for each calendar month (pro rata for any period
less than a calendar month) from an event, until
cured.
The
securities shall cease to be Registrable Securities when (i) they
have been sold (A) pursuant to a registration statement; or (B) in
accordance with Rule 144 or any other rule of similar effect; or
(ii) such securities become eligible for resale without volume or
manner-of-sale restrictions, and when either we are compliant with
any current public information requirements pursuant to Rule 144 or
the current public information requirements no longer
apply.
Prior Sales
On
March 15, 2012, we completed a registered direct common share
offering for gross proceeds of $5,000,000. We sold an aggregate of
1,818,182 shares to U.S. institutional investors at a price of
$2.75 per share.
In
January 2013, we completed a private placement financing of a
Debenture in the original principal amount of $1.5 million. The
Debenture was originally due to mature on January 1, 2015, but
effective October 1, 2014, the maturity date was extended to July
1, 2015; effective June 29, 2015, the maturity date was extended to
January 1, 2016; effective as of December 8, 2015, the maturity
date was extended to July 1, 2016; and effective May 26, 2016, the
maturity date of the Debenture was further extended to December 1,
2016. The Debenture bears interest at a rate of 12% per annum,
payable monthly, is pre-payable at any time at our option, and was
convertible at any time into 500,000 common shares at a conversion
price of US $3.00 per common share at the option of the holder.
Drs. Isa and Amina Odidi, our principal stockholders, directors and
executive officers provided us with the $1.5 million of the
proceeds for the Debenture. Effective December 1, 2016, the
maturity date for the Debenture was extended to April 1, 2017 and a
principal repayment of $150,000 was made at the time of the
extension. After giving effect to such partial repayment, the
Debenture is convertible at any time into 450,000 common shares at
a conversion price of $3.00 per common share at the option of the
holder. We currently expect to repay the current net amount of
$1,350,000 on or about April 1, 2017, if we then have cash
available.
In
March 2013, we completed a registered direct unit offering for
gross proceeds of $3,121,800. We sold an aggregate of 1,815,000
units at a price of $1.72 per unit. The units were comprised of an
aggregate of 1,815,000 common shares and warrants to purchase an
additional 453,750 common shares. The warrants are exercisable for
a term of five years and have an exercise price of $2.10 per common
share.
In July
2013, we completed an underwritten public offering of 1,500,000
units of common shares and warrants for gross proceeds of
$3,075,000 at a price of $2.05 per unit. The units were comprised
of an aggregate of 1,500,000 common shares and warrants to purchase
an additional 375,000 common shares. The warrants have a term of
five years and an exercise price of $2.55 per common
share.
In
November 2013, we entered into an equity distribution agreement
with Roth, pursuant to which we may from time to time sell up to
5,305,484 of our common shares for up to an aggregate of $16.8
million (or such lesser amount as may then be permitted under
applicable securities laws and regulations) through at-the-market
issuances on the NASDAQ or otherwise. Under the equity distribution
agreement, we may at our discretion, from time to time, offer and
sell common shares through Roth or directly to Roth for resale.
Sales of common shares through Roth, if any, will be made at such
time and at such price as are acceptable to us, from time to time,
by means of ordinary brokers’ transactions on the NASDAQ or
otherwise at market prices prevailing at the time of sale or as
determined by us. We currently plan to use any net proceeds from
the at-the-market offering for general corporate purposes,
including funding research, product development and other corporate
development opportunities and to possibly fund costs and other
expenses relating to our current leased facility or any additional
space, and, although we have no present
understanding,
commitments or agreements to do so, potential acquisition of, or
investment in, companies and technologies that complement our
business. We are not required to sell shares under the equity
distribution agreement. We will pay Roth a commission, or allow a
discount, of 2.75% of the gross proceeds we receive from any sales
of our common shares under the equity distribution agreement. Any
sales of shares under our at-the-market offering program will be
made pursuant to an effective shelf registration statement on Form
F-3 filed with the SEC. We have also agreed to reimburse Roth for
certain expenses relating to the offering. As of February 27, 2017,
we have issued and sold 3,853,557 common shares with an aggregate
offering price of $11,908,312 under the at-the-market program. Roth
received aggregate compensation of $335,987 in connection with such
sales. We currently may offer and sell our common shares with an
aggregate purchase price of up to $4,891,688 pursuant to the
at-the-market program. There can be no assurance that any
additional shares will be sold under our at-the-market program.
Subsequent to the year ended November 30, 2016, share issuance
costs of Nil were recorded against the cost of the shares issued
and recognized in capital stock. As at November 30, 2016, $951,551
of the share issuance costs has been recorded against the cost of
the shares issued and recognized in capital stock.
Pursuant to the
Dawson James Underwriting Agreement, in June 2016, we completed an
underwritten public offering of 3,229,814 units of common shares
and warrants, at a price of $1.61 per unit. The warrants are
currently exercisable, have a term of five years and an exercise
price of $1.93 per common share. We issued at the initial closing
of the offering an aggregate of 3,229,814 common shares and
warrants to purchase an additional 1,614,907 common shares. The
underwriter also purchased at such closing additional warrants to
acquire 242,236 common shares pursuant to the over-allotment option
exercised in part by the underwriter. We subsequently sold an
aggregate of 459,456 additional common shares at the public
offering price of $1.61 per share in connection with subsequent
partial exercises of the underwriter’s over-allotment option.
The closings of these partial exercises brought the total net
proceeds from the offering to approximately $5.1 million, after
deducting the underwriter’s discount and offering
expenses.
On June
4, 2014, the Shelf Registration Statement was declared effective by
the SEC and on June 5, 2014, the Company filed a final short form
base shelf prospectus with securities regulatory authorities in
each of the provinces and territories of Canada, except Quebec.
These documents allow for, subject to securities regulatory
requirements and limitations, the potential offering of up to an
aggregate of US $100 million of the Company’s common shares,
preference shares, warrants, subscription receipts and units, or
any combination thereof, from time to time in one or more
offerings, and are intended to give the Company the flexibility to
take advantage of financing opportunities when, and if, market
conditions are favorable to the Company. The specific terms of such
future offerings, if any, would be established, subject to the
approval of the Company’s board of directors, at the time of
such offering and will be described in detail in a prospectus
supplement filed at the time of any such offering. To the extent
that any securities are issued by the Company under the shelf
prospectus, a shareholder’s’ percentage ownership will
be diluted and our stock price could be adversely affected. As of
February 27, 2017, the Company has not sold any securities under
the Shelf Registration Statement or the shelf prospectus, other
than the sale since June 4, 2014 of (i) 2,164,057 common shares
under the Company’s at-the-market program referred to above,
(ii) the sale of units, common shares and warrants under the Dawson
James Underwriting Agreement referred to above, and (iii) the
issuance of 1,015,068 common shares pursuant to warrants previously
issued, and there can be no assurance that any additional
securities will be sold under the Shelf Registration Statement or
the shelf prospectus.
During
the 12-month period ended November 30, 2016, warrants to purchase
an aggregate of 357,912 common shares were exercised.
During
the 12-month period ended November 30, 2016, 460,000 options were
granted and 27,500 options were exercised.
Also
during the 12-month period ended November 30, 2016, a total of
16,741 deferred share units were granted.
The
Company was formed under the Canada Business Corporations Act (the
“
CBCA
”) by
articles of arrangement dated October 22, 2009 (the
“
Articles
”) in
the IPC Arrangement Transaction discussed in Item 15. The Company
is the successor issuer to Vasogen Inc. for reporting purposes
under the U.S. Exchange Act. The
authorized share
capital of the Company consists of an unlimited number of common
shares, all without nominal or par value and an unlimited number of
preference shares issuable in series.
Provisions as to
the modification, amendment or variation of rights and provisions
of each class of shares are contained in the CBCA and the
regulations promulgated thereunder. Certain fundamental changes to
the Articles will require the approval of at least two-thirds of
the votes cast on a resolution submitted to a special meeting of
the Company’s shareholders called for the purpose of
considering the resolution. These items include (i) certain
amendments to the provisions relating to the outstanding capital of
the Company, (ii) a sale of all or substantially all of the assets
of the Company, (iii) an amalgamation of the Company with another
company, other than a subsidiary, (iv) a winding-up of the Company,
(v) a continuance of the Company into another jurisdiction, (vi) a
statutory court approved arrangement under the CBCA (essentially a
corporate reorganization such as an amalgamation, sale of assets,
winding-up, etc.), or (vii) a change of name.
Under
the CBCA, a corporation cannot repurchase its shares or pay or
declare dividends if there are reasonable grounds for believing
that (a) the corporation is, or after payment would be, unable to
pay its liabilities as they become due, or (b) after the payment,
the realizable value of the corporation’s assets would be
less than the aggregate of (i) its liabilities and (ii) its stated
capital of all classes of its securities. Generally, stated capital
is the amount paid on the issuance of a share unless the stated
capital has been adjusted in accordance with the CBCA.
General
The
Articles do not contain any restrictions on the business the
Company may carry on.
Directors
The
Company’s By-Law No. 1 (a by-law relating generally to the
transaction of the business and affairs of the Company) provides
for the indemnification of the directors and officers of the
Company, former directors and officers of the Company against all
costs, charges and expenses, including an amount paid to settle an
action or satisfy a judgment, reasonably incurred by the individual
in respect of any civil, criminal, administrative, investigative or
other proceeding in which the individual is involved because of
that association with the Company, subject to certain limitations
in By-Law No. 1 and the limitations in the CBCA.
The
Company may also indemnify other individuals who act or acted at
the Company’s request as a director or officer, or an
individual acting in a similar capacity, of another
entity.
Annual
and Special Meetings
Meetings of
shareholders are held at such place, at such time, on such day and
in such manner as the Board may, subject to the CBCA and any other
applicable laws, determine from time to time. The only persons
entitled to attend a meeting of shareholders are those persons
entitled to notice thereof, those entitled to vote thereat, the
directors, the auditors of the Company and any others who may be
entitled or required under the CBCA to be present at the meeting.
Under the CBCA, notice of the meeting is required to be given not
less than 21 days and not more than 60 days prior to the meeting.
Shareholders on the record date are entitled to attend and vote at
the meeting. The quorum for the transaction of business at any
meeting of shareholders is at least two persons present at the
opening of the meeting who are entitled to vote either as
shareholders or proxyholders, representing collectively not less
than 5% of the outstanding shares of the Company entitled to be
voted at the meeting.
Other
There
is no by-law provisions governing the ownership threshold above
which shareholder ownership must be disclosed. However, there are
disclosure requirements pursuant to applicable Canadian
law.
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.
Except
for contracts entered into in the ordinary course of business and
not required to be filed under Canadian securities laws, the only
contracts which are regarded as material and which were entered
into by the Company within the two years immediately preceding the
date of this annual report, are:
●
On November 21,
2005, the Company entered into the Par agreement pursuant to which
the Company granted Par an exclusive, royalty-free license to make
and distribute in the United States all strengths of our generic
versions of the branded product Focalin XR® for a period of 10
years from the date of commercial launch (which was November 19,
2013). Under the Par agreement, we filed the Company ANDA with the
FDA for approval to market generic Focalin XR® capsules in
various strengths in the U.S., and are the owner of that Company
ANDA, as approved in part by the FDA. We retain the right to make
and distribute all strengths of the generic product outside of the
U.S. Calendar quarterly profit-sharing payments for its U.S. sales
under the Company ANDA are payable by Par to us as calculated
pursuant to the Par agreement. Within the purview of the Par
agreement, Par also applied for and owns the Par ANDA pertaining to
all marketed strengths of generic Focalin XR®, and is now
approved by the FDA, to market generic Focalin XR® capsules in
all marketed strengths in the U.S. As with the Company ANDA,
calendar quarterly profit-sharing payments are payable by Par to us
for its U.S. sales of generic Focalin XR® under the Par ANDA
as calculated pursuant to the Par agreement. The Company is
responsible under the Par agreement for the development of the
product and most related costs which, with the applications to and
recent approvals by the FDA, the Company now considers to be
completed.
●
In October 2016,
the Company entered into the Mallinckrodt agreement, granting
Mallinckrodt an exclusive license to market, sell and distribute in
the U.S. the following extended release drug product candidates
(the “
licensed
products
”) for which the Company has ANDAs filed with
the FDA:
■
Quetiapine fumarate extended-release tablets (generic Seroquel
XR
®
)
– ANDA Tentatively Approved by FDA
■
Desvenlafaxine extended-release tablets (generic
Pristiq
®
)
– ANDA Under FDA Review
■
Lamotrigine extended-release tablets (generic Lamictal
®
XR
™
) – ANDA
Under FDA Review
Under
the terms of this 10-year agreement, the Company received a
non-refundable upfront payment of $3 million in October 2016. In
addition, the Mallinckrodt agreement also provides for a long-term
profit sharing arrangement with respect to these licensed products
(which includes up to $11 million in cost recovery payments to the
Company). The Company has agreed to manufacture and supply the
licensed products exclusively for Mallinckrodt on a cost plus
basis, and Mallinckrodt has agreed that the Company will be its
sole supplier of the licensed products marketed in the U.S. The
Mallinckrodt agreement contains customary terms and conditions for
an agreement of this kind, and is subject to early termination in
the event we do not obtain FDA approvals of the Mallinckrodt
licensed products by specified dates, or pursuant to any one of
several termination rights of each party.
●
The acknowledgement
and agreement of the Company dated October 22, 2009 to be bound by
the performance based stock option agreement dated September 10,
2004 pursuant to which Drs. Isa and Amina Odidi are entitled to
purchase up to 2,763,940 of the Company’s shares upon payment
of $3.62 per share, subject to satisfaction of the performance
vesting conditions being the acceptance by the FDA of the filing of
an application for approval of a drug product or the approval of
such an application;
●
The amended and
restated promissory note dated October 22, 2009 for up to
C$2,300,000 issued by IPC Corp to Isa Odidi and Amina Odidi for
advances that may be made by them from time to time to the Company.
As at November 30, 2015 and November 30, 2014, no amount was
outstanding. No at-the-market offering proceeds were used in
payment of the promissory note; and
●
The Debenture dated
January 10, 2013 for $1.5 million issued by the Company to Isa
Odidi and Amina Odidi for the loan of $1.5 million made by them to
the Company. The Debenture was originally due to mature on January
1, 2015, but effective October 1, 2014, the maturity date was
extended to July 1, 2015; effective June 29, 2015, the maturity
date was extended to January 1, 2016; and effective as of December
8, 2015, the maturity date was further extended to July 1, 2016;
and effective May 26, 2016, the maturity date of the Debenture was
extended to December 1, 2016. Effective December 1, 2016, the
maturity date for the Debenture was extended to April 1, 2017 and a
principal repayment of $150,000 was made at the time of the
extension. After giving effect to such partial repayment, the
Debenture is convertible at any time into 450,000 common shares at
a conversion price of $3.00 per common share at the option of the
holder. The Company currently expects to repay the current net
amount of $1,350,000 on or about April 1, 2017, if the Company then
has cash available.
●
Pursuant to the
Dawson James Underwriting Agreement, in June 2016, we completed an
underwritten public offering of 3,229,814 units of common shares
and warrants, at a price of $1.61 per unit. The warrants are
currently exercisable, have a term of five years and an exercise
price of $1.93 per common share. We issued at the initial closing
of the offering an aggregate of 3,229,814 common shares and
warrants to purchase an additional 1,614,907 common shares. The
underwriter also purchased at such closing additional warrants to
acquire 242,236 common shares pursuant to the over-allotment option
exercised in part by the underwriter. We subsequently sold an
aggregate of 459,456 additional common shares at the public
offering price of $1.61 per share in connection with subsequent
partial exercises of the underwriter’s over-allotment option.
The closings of these partial exercises brought the total net
proceeds from the offering to approximately $5.1 million, after
deducting the underwriter’s discount and offering
expenses.
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 United States Internal Revenue Service (the
“
IRS
”) will take
a similar view as to any of the tax consequences described in this
summary.
The
following is based on currently existing provisions of the Code,
existing and proposed Treasury regulations under the Code and
current administrative rulings and court decisions. Everything
listed in the previous sentence may change, possibly on a
retroactive basis, and any change could affect the continuing
validity of this discussion. “Comprehensive tax reform”
remains a topic of discussion in the United States Congress. Such
legislation could significantly alter the existing Code. We cannot
predict whether, when, or to what extent U.S. federal tax laws,
regulations, interpretations, or rulings will be issued, nor is the
long-term impact of proposed comprehensive tax reforms known at
this time.
Each
U.S. Holder and each holder of common shares that is not a U.S.
Holder should consult its tax adviser regarding the United States
federal income tax consequences of holding our common shares
applicable to such holder in light of its particular situation, as
well as any tax consequences that may arise under the laws of any
other relevant foreign, state, local, or other taxing
jurisdiction.
As used
in this section, the term “United States person” means
a beneficial owner of our common shares that is:
(i)
a citizen or an
individual resident of the United States;
(ii)
a corporation (or
an entity taxable as a corporation for United States federal income
tax purposes) created or organized in or under the laws of the
United States or any political subdivision of the United
States;
(iii)
an estate the
income of which is subject to United States federal income taxation
regardless of its source; or
(iv)
a trust which (A)
is subject to the supervision of a court within the United States
and the control of a United States person as described in Section
7701(a)(30) of the Code; or (B) is subject to a valid election
under applicable Treasury Regulations to be treated as a United
States person.
If a
partnership (including for this purpose any entity treated as a
partnership for U.S. federal income tax purposes) holds our common
shares, the United States federal income tax treatment of a partner
generally will depend on the status of the partner and the
activities of the partnership. A United States person that is a
partner of the partnership holding our common shares should consult
its own tax adviser.
Passive
Foreign Investment Company Considerations
Special, generally
unfavorable, U.S. federal income tax rules apply to the ownership
and disposition of the stock or warrants of a passive foreign
investment company (“
PFIC
”). As discussed below,
however, a U.S. Holder of our common shares (but not our warrants)
may be able to mitigate these consequences by making a timely and
effective election to treat the Company as a qualified electing
fund (a “
QEF
Election
”) or by making a timely and effective
mark-to-market election with respect to its common
shares.
For
U.S. federal income tax purposes, a foreign corporation is
classified as a PFIC for each taxable year in which, applying the
relevant look-through rules, either:
●
at least 75% of its
gross income for the taxable year consists of specified types of
“passive” income (referred to as the “income
test”); or
●
at least 50% of the
average value of its assets during the taxable year is attributable
to certain types of assets that produce passive income or are held
for the production of passive income (referred to as the
“asset test”).
For
purposes of the income and asset tests, if a foreign corporation
owns directly or indirectly at least 25% (by value) of the stock of
another corporation, that foreign corporation will be treated as if
it held its proportionate share of the assets of the other
corporation and received its proportionate share of the income of
that other
corporation. Also,
for purposes of the income and asset tests, passive income does not
include any income that is an interest, dividend, rent or royalty
payment if it is received or accrued from a related person to the
extent that amount is properly allocable to the active income of
the related person. Under applicable attribution rules, if the
Company is a PFIC, U.S. Holders of common shares will be treated as
holding stock of the Company’s subsidiaries that are PFICs in
certain circumstances. In these circumstances, certain dispositions
of, and distributions on, stock of such subsidiaries may have
consequences for U.S. Holders under the PFIC rules.
Although the matter
is not free from doubt, we believe that we were not a PFIC during
our 2016 taxable year and may not be a PFIC during our 2017 taxable
year. Because PFIC status is based on our income, assets and
activities for the entire taxable year, and our market
capitalization, it is not possible to determine whether we will be
characterized as a PFIC for the 2017 taxable year until after the
close of the taxable year. The tests for determining PFIC status
are subject to a number of uncertainties. These tests are applied
annually, and it is difficult to accurately predict future income,
assets and activities relevant to this determination. In addition,
because the market price of our common shares is likely to
fluctuate, the market price may affect the determination of whether
we will be considered a PFIC. There can be no assurance that we
will not be considered a PFIC for any taxable year (including our
2016 taxable year). Absent one of the elections described below, if
we are a PFIC for any taxable year during which a U.S. Holder holds
our common shares, we generally will continue to be treated as a
PFIC subject to the regime described below with respect to such
U.S. Holder, regardless of whether we cease to meet the PFIC tests
in one or more subsequent years. Accordingly, no assurance can be
given that we will not constitute a PFIC in the current (or any
future) tax year or that the IRS will not challenge any
determination made by us concerning our PFIC status.
If we
are a PFIC, the U.S. federal income tax consequences to a U.S.
Holder of the ownership and disposition of our shares will depend
on whether such U.S. Holder makes a QEF or mark-to-market election.
Unless otherwise provided by the IRS, a U.S. Holder of our shares
is generally required to file an informational return annually to
report its ownership interest in the PFIC during any year in which
we are a PFIC.
U.S.
HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISERS ABOUT THE PFIC RULES,
THE POTENTIAL APPLICABILITY OF THESE RULES TO THE COMPANY CURRENTLY
AND IN THE FUTURE, AND THEIR FILING OBLIGATIONS IF THE COMPANY IS A
PFIC.
The “No Election” Alternative – Taxation of
Excess Distributions
If we
are classified as a PFIC for any year during which a U.S. Holder
has held common shares or warrants and, in the case of our common
shares, that U.S. Holder has not made a QEF Election or a
mark-to-market election, special rules may subject that U.S. Holder
to increased tax liability, including loss of favorable capital
gains rates and the imposition of an interest charge upon the sale
or other disposition of the common shares or warrants or upon the
receipt of any excess distribution (as defined below). Under these
rules:
●
the gain, if any,
realized on such disposition will be allocated ratably over the
U.S. Holder’s holding period;
●
the amount of gain
allocated to the current taxable year and any year prior to the
first year in which we are a PFIC will be taxed as ordinary income
in the current year;
●
the amount of gain
allocated to each of the other taxable years will be subject to tax
at the highest ordinary income tax rate in effect for that year;
and
●
an interest charge
for the deemed deferral benefit will be imposed with respect to the
resulting tax attributable to each of the other taxable
years.
These
rules will continue to apply to the U.S. Holder even after we cease
to meet the definition of a PFIC, unless the U.S. Holder elects to
be treated as having sold our common shares on the last day of the
last taxable year in which we qualified as a PFIC.
An
“excess distribution,” in general, is any distribution
on common shares received in a taxable year by a U.S. Holder that
is greater than 125% of the average annual distributions received
by that U.S. Holder in the three preceding taxable years or, if
shorter, that U.S. Holder’s holding period for common
shares.
Any
portion of a distribution paid to a U.S. Holder that does not
constitute an excess distribution will be treated as ordinary
dividend income to the extent of our current and accumulated
earnings and profits (as computed
for
U.S. federal income tax purposes). Such dividends generally will
not qualify for the dividends-received deduction otherwise
available to U.S. corporations. Any amounts treated as dividends
paid by a PFIC generally will not constitute “qualified
dividend income” within the meaning of Section 1(h)(11) of
the Code and will, therefore, not be eligible for the preferential
20% rate for such income generally in effect under current law. Any
such amounts in excess of our current and accumulated earnings and
profits will be applied against the U.S. Holder’s tax basis
in the common shares and, to the extent in excess of such tax
basis, will be treated as gain from a sale or exchange of such
shares. It is possible that any such gain may be treated as an
excess distribution.
The QEF Election Alternative
A U.S.
Holder of common shares (but not warrants) who elects (an
“
Electing U.S.
Holder
”) under Section 1295 of the Code, in a timely
manner to treat us as a QEF would generally include in gross income
(and be subject to current U.S. federal income tax on) its pro rata
share of (a) the Company’s ordinary earnings, as ordinary
income, and (b) our net capital gains, as long-term capital gain.
An Electing U.S. Holder will generally be subject to U.S. federal
income tax on such amounts for each taxable year in which we are
classified as a PFIC, regardless of whether such amounts are
actually distributed to the Electing U.S. Holder. An Electing U.S.
Holder may further elect, in any given taxable year, to defer
payment of U.S. federal income tax on such amounts, subject to
certain limitations. However, if deferred, the taxes will be
subject to an interest charge.
A U.S.
Holder may not make a QEF election with respect to its warrants to
acquire our common shares. As a result, if a U.S. Holder sells or
otherwise disposes of such warrants (other than upon exercise of
such warrants), any gain recognized generally will be subject to
the special tax and interest charge rules treating the gain as an
excess distribution, as described above, if we were a PFIC at any
time during the period the U.S. Holder held the warrants. If a U.S.
Holder that exercises such warrants properly makes a QEF election
with respect to the newly acquired common shares (or has previously
made a QEF election with respect to our common shares), the QEF
election will apply to the newly acquired common shares, but the
adverse tax consequences relating to PFIC common shares, adjusted
to take into account the current income inclusions resulting from
the QEF election, will continue to apply with respect to such newly
acquired common shares (which generally will be deemed to have a
holding period for purposes of the PFIC rules that includes the
period the U.S. Holder held the warrants), unless the U.S. Holder
makes a purging election under the PFIC rules. The purging election
creates a deemed sale of such common shares at their fair market
value. The gain recognized by the purging election will be subject
to the special tax and interest charge rules treating the gain as
an excess distribution, as described above. As a result of the
purging election, the U.S. Holder will have a new basis and holding
period in the common shares acquired upon the exercise of the
warrants for purposes of the PFIC rules.
A U.S.
Holder may make a QEF Election only if the Company furnishes the
U.S. Holder with certain tax information. If the Company should
determine that it is a PFIC, it is anticipated that it will attempt
to timely and accurately disclose such information to its U.S.
Holders and provide U.S. Holders with information reasonably
required to make such election.
A U.S.
Holder that makes a QEF Election with respect to the Company
generally (a) may receive a tax-free distribution from the Company
to the extent that such distribution represents “earnings and
profits” of the Company that were previously included in
income by the U.S. Holder because of such QEF Election and (b) will
adjust such U.S. Holder’s tax basis in his, her or its common
shares to reflect the amount included in income (resulting in an
increase in basis) or allowed as a tax-free distribution (resulting
in a decrease in basis) because of the QEF Election.
Similarly, if any
of our non-U.S. subsidiaries were classified as PFICs, a U.S.
Holder that makes a timely QEF Election with respect to any of our
subsidiaries would be subject to the QEF rules as described above
with respect to the Holder’s pro rata share of the ordinary
earnings and net capital gains of any of our subsidiaries. Our
earnings (or earnings of any of our subsidiaries) attributable to
distributions from any of our subsidiaries that had previously been
included in the income of an Electing U.S. Holder under the QEF
rules would generally not be taxed to the Electing U.S. Holder
again.
Upon
the sale or other disposition of common shares, an Electing U.S.
Holder who makes a QEF Election for the first taxable year in which
he owns common shares will recognize capital gain or loss for U.S.
federal income tax purposes in an amount equal to the difference
between the net amount realized on the disposition and the U.S.
Holder’s adjusted tax basis in the common shares. Such gain
or loss will be long-term capital gain or loss if the
U.S.
Holder’s
holding period in the common shares is more than one year,
otherwise it will be short-term capital gain or loss. The
deductibility of capital losses is subject to certain limitations.
A U.S. Holder’s gain realized upon the disposition of shares
generally will be treated as U.S. source income, and losses from
the disposition generally will be allocated to reduce U.S. source
income.
A QEF
Election must be made in a timely manner as specified in applicable
Treasury Regulations. Generally, the QEF Election must be made by
filing the appropriate QEF election documents at the time such U.S.
Holder timely files its U.S. federal income tax return for the
first taxable year of the Company during which it was, at any time,
a PFIC.
Each
U.S. Holder should consult its own tax advisor regarding the
availability of, procedure for making, and consequences of a QEF
Election with respect to the Company.
Mark-to-Market Election Alternative
Assuming that our
common shares are treated as marketable stock (as defined for these
purposes), a U.S. Holder that does not make a QEF Election may
avoid the application of the excess distribution rules, at least in
part, by electing, under Section 1296 of the Code, to mark the
common shares to market annually. Consequently, the U.S. Holder
will generally recognize as ordinary income or loss each year an
amount equal to the difference as of the close of the taxable year
between the fair market value of its common shares and the U.S.
Holder’s adjusted tax basis in the common shares. Any
mark-to-market loss is treated as an ordinary deduction, but only
to the extent of the net mark-to-market gain that the Holder has
included pursuant to the election in prior tax years. Any gain on a
disposition of our common shares by an electing U.S. Holder would
be treated as ordinary income. The electing U.S. Holder’s
basis in its common shares would be adjusted to reflect any of
these income or loss amounts. Currently, a mark-to-market election
may not be made with respect to warrants. We do not anticipate that
the preference shares will be treated as marketable stock for these
purposes.
For
purposes of making this election, stock of a foreign corporation is
“marketable” if it is “regularly traded” on
certain “qualified exchanges”. Under applicable
Treasury Regulations, a “qualified exchange” includes a
national securities exchange that is registered with the SEC or the
national market system established pursuant to Section 11A of the
U.S. Exchange Act, and certain foreign securities exchanges.
Currently, our common shares are traded on a “qualified
exchange.” Under applicable Treasury Regulations, PFIC stock
traded on a qualified exchange is “regularly traded” on
such exchange for any calendar year during which such stock is
traded, other than in de minimis quantities, on at least 15 days
during each calendar quarter. Special rules apply if an election is
made after the beginning of the taxpayer’s holding period in
PFIC stock.
To the
extent available, a mark-to-market election applies to the taxable
year in which such mark-to-market election is made and to each
subsequent taxable year, unless the Company’s common shares
cease to be “marketable stock” or the IRS consents to
revocation of such election. In addition, a U.S. Holder that has
made a mark-to-market election does not include mark-to-market
gains, or deduct mark-to-market losses, for years when the Company
ceases to be treated as a PFIC.
The
mark-to-market rules generally do not appear to prevent the
application of the excess distribution rules in respect of stock of
any of our subsidiaries in the event that any of our subsidiaries
were considered PFICs. Accordingly, if Intellipharmaceutics and any
of our subsidiaries were both considered PFICs and a U.S. Holder
made a mark-to-market election with respect to its common shares,
the U.S. Holder may remain subject to the excess distribution rules
described above with respect to its indirectly owned shares of
subsidiary stock.
U.S.
HOLDERS ARE URGED TO CONSULT THEIR TAX ADVISORS REGARDING THE
POSSIBLE APPLICABILITY OF THE PFIC RULES AND THE AVAILABILITY OF,
PROCEDURES FOR MAKING, AND CONSEQUENCES OF A QEF ELECTION OR
MARK-TO-MARKET ELECTION WITH RESPECT TO THE COMPANY’S COMMON
SHARES.
Ownership
and Disposition of Common Shares and Warrants to the Extent that
the PFIC Rules do not Apply
Distributions on Common Shares
A U.S.
Holder that receives a distribution, including a constructive
distribution, with respect to a Share will be required to include
the amount of such distribution in gross income as a dividend
(without reduction for any Canadian income tax withheld from such
distribution) to the extent of the current or accumulated
“earnings and profits” of the Company, as computed for
U.S. federal income tax purposes. To the extent that a distribution
exceeds the current and accumulated “earnings and
profits” of the Company, such distribution will be treated
first as a tax-free return of capital to the extent of a U.S.
Holder’s tax basis in the common shares and thereafter as
gain from the sale or exchange of such common shares. (See
“Sale or Other Taxable Disposition of Common Shares”
below). However, the Company may not maintain the calculations of
earnings and profits in accordance with U.S. federal income tax
principles, and each U.S. Holder should (unless advised to the
contrary) therefore assume that any distribution by the Company
with respect to the common shares will constitute ordinary dividend
income. Dividends received on common shares generally will not be
eligible for the “dividends received deduction”. The
dividend rules are complex, and each U.S. Holder should consult its
own tax advisor regarding the application of such
rules.
The
terms of a warrant may provide for an adjustment to the number of
common shares for which the warrant may be exercised or to the
exercise price of the warrant in certain events. An adjustment
which has the effect of preventing dilution generally is not
taxable. However, the U.S. Holders of the warrants would be treated
as receiving a constructive distribution from us if, for example,
the adjustment increases the warrant holders’ proportionate
interest in our assets or earnings and profits (e.g., through an
increase in the number of common shares that would be obtained upon
exercise) as a result of a distribution of cash to the holders of
our common shares which is taxable to the U.S. Holders of such
common shares as described under “Distributions on Common
Shares” above. Such constructive distribution would be
subject to tax as described under that section in the same manner
as if the U.S. Holders of the warrants received a cash distribution
from us equal to the fair market value of such increased
interest.
Sale or Other Taxable Disposition of Common Shares
Upon
the sale or other taxable disposition of common shares, a U.S.
Holder generally will recognize capital gain or loss in an amount
equal to the difference between the U.S. dollar value of cash
received plus the fair market value of any property received and
such U.S. Holder’s tax basis in such common shares sold or
otherwise disposed of. A U.S. Holder’s tax basis in common
shares generally will be such Holder’s U.S. dollar cost for
such common shares.
Gain or
loss recognized on such sale or other disposition generally will be
long-term capital gain or loss if, at the time of the sale or other
disposition, the common shares have been held for more than one
year. The long-term capital gains realized by non-corporate U.S.
Holders are generally subject to a lower marginal U.S. federal
income tax rate than ordinary income other than qualified dividend
income, as defined above. Currently, the maximum rate on long-term
capital gains is 20%, although the actual rates may be higher due
to the phase out of certain tax deductions, exemptions and credits.
However, given the uncertain economic conditions in the United
States and the size of the federal deficit, tax rates are subject
to change and prospective U.S. Holders should consult their tax
advisors. The deductibility of losses may be subject to
limitations.
Warrants
Generally, no U.S.
federal income tax will be imposed upon the U.S. Holder of a
warrant upon exercise of such warrant to acquire our common shares.
A U.S. Holder’s tax basis in a warrant will generally be the
amount of the purchase price that is allocated to the warrant. Upon
exercise of a warrant, the tax basis of the new common shares would
be equal to the sum of the tax basis of the warrants in the hands
of the U.S. Holder plus the exercise price paid, and the holding
period of the new common shares would begin on the date that the
warrants are exercised. If a warrant lapses without exercise, the
U.S. Holder will generally realize a capital loss equal to its tax
basis in the warrant. Prospective U.S. Holders should consult their
tax advisors regarding the tax consequences of acquiring, holding
and disposing of warrants.
The tax
consequences of a cashless exercise of a warrant are not clear
under current tax law. A cashless exercise may be tax-free, either
because the exercise is not a gain realization event or because the
exercise is treated as a recapitalization for U.S. federal income
tax purposes. In either tax-free situation, a U.S. Holder’s
basis in the common shares received would equal the U.S.
holder’s basis in the warrant. If the cashless exercise were
treated as not being a gain realization event, a U.S.
Holder’s holding period in the common shares would be treated
as
commencing on the
date following the date of exercise of the warrant. If the cashless
exercise were treated as a recapitalization, the holding period of
the common shares would include the holding period of the warrant.
It is also possible that a cashless exercise could be treated as a
taxable exchange in which gain or loss would be recognized. In such
event, a U.S. Holder could be deemed to have surrendered warrants
equal to the number of common shares having a value equal to the
exercise price for the total number of warrants to be exercised.
The U.S. Holder would recognize capital gain or loss in an amount
equal to the difference between the fair market value of the common
shares represented by the warrants deemed surrendered and the U.S.
Holder’s tax basis in the warrants deemed surrendered. In
this case, a U.S. Holder’s tax basis in the common shares
received would equal the sum of the fair market value of the common
shares represented by the warrants deemed surrendered and the U.S.
Holder’s tax basis in the warrants exercised. A U.S.
Holder’s holding period for the common shares would commence
on the date following the date of exercise of the warrant. Due to
the absence of authority on the U.S. federal income tax treatment
of a cashless exercise, there can be no assurance which, if any, of
the alternative tax consequences and holding periods described
above would be adopted by the IRS or a court of law. Accordingly,
U.S. Holders should consult their tax advisors regarding the tax
consequences of a cashless exercise.
Additional
Considerations
Tax-Exempt Investors
Special
considerations apply to U.S. persons that are pension plans and
other investors that are subject to tax only on their unrelated
business taxable income. Such a tax-exempt investor’s income
from an investment in our common shares or warrants generally will
not be treated as resulting in unrelated business taxable income
under current law, so long as such investor’s acquisition of
common shares or warrants is not debt-financed. Tax-exempt
investors should consult their own tax advisors regarding an
investment in our common shares or warrants.
Additional Tax on Passive Income
Certain
individuals, estates and trusts whose income exceeds certain
thresholds will generally be required to pay a 3.8% Medicare surtax
on the lesser of (1) the U.S. Holder’s “net investment
income” for the relevant taxable year and (2) the excess of
the U.S. Holder’s modified gross income for the taxable year
over a certain threshold (which, in the case of individuals, will
generally be between U.S.$125,000 and U.S.$250,000 depending on the
individual’s circumstances). A U.S. Holder’s “net
investment income” may generally include, among other items,
certain interest, dividends, gain, and other types of income from
investments, minus the allowable deductions that are properly
allocable to that gross income or net gain. U.S. Holders are urged
to consult with their own tax advisors regarding the effect, if
any, of this tax on their ownership and disposition of common
shares or warrants.
Receipt of Foreign Currency
The
amount of any distribution paid to a U.S. Holder in foreign
currency, or on the sale, exchange or other taxable disposition of
common shares or warrants, generally will be equal to the U.S.
dollar value of such foreign currency based on the exchange rate
applicable on the date of receipt (regardless of whether such
foreign currency is converted into U.S. dollars at that time). A
U.S. Holder will have a basis in the foreign currency equal to its
U.S. dollar value on the date of receipt. Any U.S. Holder who
converts or otherwise disposes of the foreign currency after the
date of receipt may have a foreign currency exchange gain or loss
that would be treated as ordinary income or loss, and generally
will be U.S. source income or loss for foreign tax credit purposes.
Each U.S. Holder should consult its own U.S. tax advisor regarding
the U.S. federal income tax consequences of receiving, owning, and
disposing of foreign currency.
Foreign Tax Credit
Subject
to the PFIC rules discussed above, a U.S. Holder that pays (whether
directly or through withholding) Canadian income tax with respect
to dividends paid on the common shares generally will be entitled,
at the election of such U.S. Holder, to receive either a deduction
or a credit for such Canadian income tax paid. Generally, a credit
will reduce a U.S. Holder’s U.S. federal income tax liability
on a dollar-for-dollar basis, whereas a deduction will reduce a
U.S. Holder’s income subject to U.S. federal income tax. This
election is made on a year-by-year basis and generally applies to
all foreign taxes paid (whether directly or through withholding) or
accrued by a U.S. Holder during a year.
Complex
limitations apply to the foreign tax credit, including the general
limitation that the credit cannot exceed the proportionate share of
a U.S. Holder’s U.S. federal income tax liability that such
U.S. Holder’s “foreign source” taxable income
bears to such U.S. Holder’s worldwide taxable income. In
applying this limitation, a U.S. Holder’s various items of
income and deduction must be classified, under complex rules, as
either “foreign source” or “U.S. source.”
Generally, dividends paid by a foreign corporation should be
treated as foreign source for this purpose, and gains recognized on
the sale of stock of a foreign corporation by a U.S. Holder should
generally be treated as U.S. source for this purpose, except as
otherwise provided in an applicable income tax treaty or if an
election is properly made under the Code. However, the amount of a
distribution with respect to the common shares that is treated as a
“dividend” may be lower for U.S. federal income tax
purposes than it is for Canadian federal income tax purposes,
resulting in a reduced foreign tax credit allowance to a U.S.
Holder. In addition, this limitation is calculated separately with
respect to specific categories of income. The foreign tax credit
rules are complex, and each U.S. Holder should consult its own U.S.
tax advisor regarding the foreign tax credit rules.
Payments to Foreign Financial Institutions
The
Hiring Incentives to Restore Employment Act of March 2010 (the
“
HIRE Act
”),
including the Foreign Account Tax Compliance Act
(“
FATCA
”)
provisions promulgated thereunder, generally provides that a 30%
withholding tax may be imposed on payments of U.S. source income
and proceeds from the sale of property that could give rise to U.S.
source interest or dividends to certain non-U.S. entities unless
such entities enter into an agreement with the IRS to disclose the
name, address and taxpayer identification number of certain U.S.
persons that own, directly or indirectly, interests in such
entities, as well as certain other information relating to such
interests. U.S. Holders are encouraged to consult with their own
tax advisors regarding the possible implications and obligations of
FATCA and the HIRE Act.
State and Local Tax
In
addition to the U.S. federal income tax discussed above, U.S.
Holders may also be subject to state and local income taxation for
amounts received on the disposition of common shares and on
dividends received. Amounts paid to U.S. Holders will not have
state and local tax amounts withheld from payments and U.S. Holders
should consult with a tax advisor regarding the state and local
taxation implications of such amounts received.
Information Reporting
In
general, U.S. Holders of common shares are subject to certain
information reporting under the Code relating to their purchase
and/or ownership of stock of a foreign corporation such as the
Company. Failure to comply with these information reporting
requirements may result in substantial penalties.
For
example, recently enacted legislation generally requires certain
individuals who are U.S. Holders to file Form 8938 to report the
ownership of specified foreign financial assets if the total value
of those assets exceeds an applicable threshold amount (subject to
certain exceptions). For these purposes, a specified foreign
financial asset includes not only a financial account (as defined
for these purposes) maintained by a foreign financial institution,
but also any stock or security issued by a non-U.S. person, any
financial instrument or contract held for investment that has an
issuer or counterparty other than a U.S. person and any interest in
a foreign entity, provided that the asset is not held in an account
maintained by a financial institution. The minimum applicable
threshold amount is generally U.S.$50,000 in the aggregate, but
this threshold amount varies depending on whether the individual
lives in the U.S., is married, files a joint income tax return with
his or her spouse, etc. Certain domestic entities that are U.S.
Holders may also be required to file Form 8938 in the near future.
U.S. Holders are urged to consult with their tax advisors regarding
their reporting obligations, including the requirement to file IRS
Form 8938.
In
addition, in certain circumstances, a U.S. Holder of common shares
who disposes of such common shares in a transaction resulting in
the recognition by such Holder of losses in excess of certain
significant threshold amounts may be obligated to disclose its
participation in such transaction in accordance with the Treasury
Regulations governing tax shelters and other potentially
tax-motivated transactions or tax shelter regulations. Potential
purchasers of common shares should consult their tax advisors
concerning any possible disclosure obligation under the tax shelter
rules with respect to the disposition of their common
shares.
Backup Withholding
Generally,
information reporting requirements will apply to distributions on
our common shares or proceeds on the disposition of our common
shares or warrants paid within the U.S. (and, in certain cases,
outside the U.S.) to U.S. Holders. Such payments will generally be
subject to backup withholding tax at the rate of 28% if: (a) a U.S.
Holder fails to furnish such U.S. Holder’s correct U.S.
taxpayer identification number to the payor (generally on Form
W-9), as required by the Code and Treasury Regulations, (b) the IRS
notifies the payor that the U.S. Holder’s taxpayer
identification number is incorrect, (c) a U.S. Holder is notified
by the IRS that it has previously failed to properly report
interest and dividend income, or (d) a U.S. Holder fails to
certify, under penalty of perjury, that such U.S. Holder has
furnished its correct U.S. taxpayer identification number. However,
certain exempt persons generally are excluded from these
information reporting and backup withholding rules.
Backup
withholding is not an additional tax. Any amounts withheld under
the U.S. backup withholding tax rules will be allowed as a credit
against a U.S. Holder’s U.S. federal income tax liability, if
any, or will be refunded, if such U.S. Holder furnishes required
information to the IRS in a timely manner. Each U.S. Holder should
consult its own tax advisor regarding the backup withholding
rules.
Canadian
Federal Income Tax Considerations
Taxation
The
following summary describes the principal Canadian federal income
tax considerations generally applicable to a holder of the
Company’s common shares who, for purposes of the Income Tax
Act (Canada) (the “
Canadian
Tax Act
”) and the Canada – United States Tax
Convention (the “
Treaty
”) and at all relevant
times, is resident in the United States and was not and is not
resident in Canada nor deemed to be resident in Canada, deals at
arm’s length and is not affiliated with the Company, holds
the Company’s common shares as capital property, does not use
or hold and is not deemed to use or hold the Company’s common
shares in or in the course of carrying on business in Canada and
who otherwise qualifies for the full benefit of the Treaty (a
“
United States
Holder
”). Special rules which are not discussed in
this summary may apply to a United States Holder that is a
financial institution, as defined in the Canadian Tax Act, or an
insurer carrying on business in Canada and elsewhere.
This
following summary is based on the current provisions of the Treaty,
the Canadian Tax Act and the regulations thereunder, all specific
proposals to amend the Canadian Tax Act and the regulations
announced by the Minister of Finance (Canada) prior to the date
hereof and the Company’s understanding of the administrative
practices published in writing by the Canada Revenue Agency prior
to the date hereof. This summary does not take into account or
anticipate any other changes in the governing law, whether by
judicial, governmental or legislative decision or action, nor does
it take into account the tax legislation or considerations of any
province, territory or non-Canadian (including U.S.) jurisdiction,
which legislation or considerations may differ significantly from
those described herein.
All
amounts relevant in computing a United States Holder’s
liability under the Canadian Tax Act are to be computed in Canadian
currency based on the relevant exchange rate applicable
thereto.
This
summary is of a general nature only and is not intended to be, and
should not be interpreted as legal or tax advice to any prospective
purchaser or holder of the Company’s common shares and no
representation with respect to the Canadian federal income tax
consequences to any such prospective purchaser is made.
Accordingly, prospective purchasers and holders of the
Company’s common shares should consult their own tax advisors
with respect to their particular circumstances.
Dividends
on the Company’s Common Shares
Generally,
dividends paid or credited by Canadian corporations to non-resident
shareholders are subject to a withholding tax of 25% of the gross
amount of such dividends. Pursuant to the Treaty, the withholding
tax rate on the gross amount of dividends paid or credited to
United States Holders is reduced to 15% or, in the case of a United
States Holder that is a U.S. corporation that beneficially owns at
least 10% of the voting stock of the Canadian corporation paying
the dividends, to 5% of the gross amount of such
dividends.
Pursuant to the
Treaty, certain tax-exempt entities that are United States Holders
may be exempt from Canadian withholding taxes, including any
withholding tax levied in respect of dividends received on the
Company’s common shares.
Disposition
of the Company’s Common Shares
In
general, a United States Holder will not be subject to Canadian
income tax on capital gains arising on the disposition of the
Company’s common shares, unless such shares are
“taxable Canadian property” within the meaning of the
Canadian Tax Act. Generally, the shares of a corporation resident
in Canada will not be taxable Canadian property of a United States
Holder at the time of disposition unless at any time during the
60-month period immediately preceding the disposition, more than
50% of the value of the Company’s common shares was derived
directly or indirectly from properties that are “real or
immovable properties”, “Canadian resource
properties”, or “timber resource properties”,
within the meaning of the Canadian Tax Act. The value of the
Company’s common shares is not now, and is not expected to be
in the future, derived more than 50% from any of these properties.
Consequently, any gain realized by a United States Holder upon the
disposition of the Company’s common shares should be exempt
from tax under the Canadian Tax Act.
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.
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.
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,
2016
|
November 30,
2015
|
|
|
$
|
$
|
|
Total accounts
receivable
|
472,474
|
478,674
|
|
Less allowance for
doubtful accounts
|
-
|
-
|
|
Total accounts
receivable, net
|
472,474
|
478,674
|
|
Not past
due
|
427,519
|
453,662
|
|
Past due for more
than 31 days but no more than 60 days
|
3,319
|
5,003
|
|
Past due for more
than 91 days but no more than 120 days
|
41,636
|
20,009
|
|
Total accounts
receivable, net
|
472,474
|
478,674
|
Financial
instruments that potentially subject the Company to concentration
of credit risk consist principally of uncollateralized accounts
receivable. The Company’s maximum exposure to credit risk is
equal to the potential amount of financial assets. For the years
ended November 30, 2016 and November 30, 2015, Par accounted for
substantially all the revenue and all the accounts receivable of
the Company.
The
Company is also exposed to credit risk at period end from the
carrying value of its cash. The Company manages this risk by
maintaining bank accounts with a Canadian Chartered Bank. The
Company’s cash is not subject to any external
restrictions.
Foreign
exchange risk
We are
exposed to changes in foreign exchange rates between the Canadian
and U.S. dollar which could affect the value of our cash. The
Company had no foreign currency hedges or other derivative
financial instruments as of November 30, 2016. The Company did not
enter into financial instruments for trading or speculative
purposes and does not currently utilize derivative financial
instruments.
The
Company has balances in Canadian dollars that give rise to exposure
to foreign exchange (“
FX
”) risk relating to the impact
of translating certain non-U.S. dollar balance sheet accounts as
these statements are presented in U.S. dollars. A strengthening
U.S. dollar will lead to a FX loss while a weakening U.S. dollar
will lead to a FX gain. For each Canadian dollar balance of $1.0
million, a +/- 10% movement in the Canadian currency held by the
Company versus the U.S. dollar would affect the Company’s
loss and other comprehensive loss by $0.1 million.
Balances
denominated in foreign currencies that are considered financial
instruments are as follows:
|
|
November 30, 2016
|
November 30,
2015
|
||
|
|
Canadian
|
U.S. |
Canadian
|
U.S. |
|
FX rates used to
translate to U.S.
|
1.3429
|
|
1.3353
|
|
|
|
$
|
$
|
$
|
$
|
|
Assets
|
|
|
|
|
|
Cash
|
182,714
|
136,059
|
116,096
|
86,944
|
|
|
|
|
116,096
|
86,944
|
|
Liabilities
|
|
|
|
|
|
Accounts
payable
|
449,900
|
335,021
|
1,372,196
|
1,027,631
|
|
Employee cost
payable
|
1,402,108
|
1,044,151
|
233,906
|
175,171
|
|
Capital
lease
|
19,914
|
14,829
|
48,231
|
36,120
|
|
|
1,871,922
|
1,394,001
|
1,654,333
|
1,238,922
|
|
Net
exposure
|
(1,689,208
)
|
(1,257,942
)
|
(1,538,237
)
|
(1,151,978
)
|
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, 2016:
Limitations:
The
above discussion includes only those exposures that existed as of
November 30, 2016, and, as a result, does not consider exposures or
positions that could arise after that date. The Company’s
ultimate realized gain or loss with respect to interest rate and
exchange rate fluctuations would depend on the exposures that arise
during the period and interest and foreign exchange
rates.
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.
Internal
Control over Financial Reporting
The
management of our Company is responsible for establishing and
maintaining adequate internal control over financial reporting for
the Company. Internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements
in accordance with generally accepted accounting principles and
includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the
Company’s assets, (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that the Company’s receipts and
expenditures are being made only in accordance with authorizations
of the Company’s management and directors, and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
Company’s assets that could have a material effect on the
financial statements.
Management assessed
the effectiveness of the Company’s internal control over
financial reporting using the 1992 Internal Control-Integrated
Framework developed by the Committee of Sponsoring Organizations of
the Treadway Commission (“
COSO
”).
Based
on this assessment, management concluded that the Company’s
internal control over financial reporting was effective as of
November 30, 2016.
A third
party consultant was engaged to assist management in conducting a
gap assessment relative to the Company’s plans to implement
the COSO 2013 Internal Control – Integrated Framework. In the
first quarter of 2017, we will initiate the transition from the
COSO 1992 Internal Control - Integrated Framework to the COSO 2013
Internal Control - Integrated Framework. We expect this transition
to be completed in the second quarter of fiscal 2017. Although we
do not expect to experience significant changes in internal control
over financial reporting as a result of our transition, we may
identify significant deficiencies or material weaknesses and incur
additional costs in the future as a result of our
transition.
Disclosure
Controls and Procedures
Under
the supervision and with the participation of our management,
including the Chief Executive Officer and the Chief Financial
Officer, we have evaluated the effectiveness of our disclosure
controls and procedures as of November 30, 2016. Disclosure
controls and procedures are designed to ensure that the information
required to be disclosed by the Company in the reports it files or
submits under securities legislation is recorded, processed,
summarized and reported on a timely basis and that such information
is accumulated and communicated to management, including the
Company’s Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow required disclosures to be made
in a timely fashion. Based on that evaluation, management has
concluded that these disclosure controls and procedures were
effective as of November 30, 2016.
Changes
in Internal Control over Financial Reporting
During
the fourth quarter of 2016, the Company recognized a deficiency in
the design of the Company’s internal control over financial
reporting and disclosure controls and procedures used in evaluating
stock-based compensation expense as it relates to the second
quarter non-cash error noted above in “
Revised Prior Quarter Amounts
.”
In evaluating this internal control deficiency, we considered a
number of qualitative and quantitative factors, and concluded that
the internal control deficiency was not a significant control
deficiency or material weakness, partly due to the fact that the
internal control deficiency was corrected as part of a more
rigorous set of financial reporting internal controls put in place
during the fourth quarter leading up to the release of our audited
annual results. The Company has remediated the deficiency by
recruiting additional experienced personnel to strengthen the
Company’s quarterly and annual internal controls over
financial reporting and disclosure controls and
procedures.
During
the year ended November 30, 2016, other than as noted above, there
were no changes made to the Company’s internal control over
financial reporting that have materially affected, or are
reasonably likely to
materially affect,
our internal control over financial reporting or disclosure
controls and procedures, and specifically, there were no changes in
accounting functions, board or related committees and charters, or
(except as described below) auditors; no functions, controls or
financial reporting processes of any constituent entities were
adopted as Intellipharmaceutics’ functions, controls and
financial processes; and no other significant business processes
were implemented.
Attestation
of Internal Control over Financial Reporting
This
annual report does not include an attestation report of our
independent registered public accounting firm regarding internal
control over financial reporting for the Company. As the Company is
a non-accelerated filer, management’s report is not subject
to attestation by our independent registered public accounting firm
pursuant to Section 404(c) of the Sarbanes-Oxley Act of
2002.
Our Audit Committee is comprised of
Kenneth Keirstead, Bahadur Madhani and Dr. Eldon Smith, each of
whom is considered independent and financially literate (as such
terms are defined under National Instrument 52-110 – Audit
Committee). The members of the Audit Committee have selected a
Chair from amongst themselves, being Mr. Madhani.
Under
the SEC rules implementing the Sarbanes-Oxley Act of 2002, Canadian
issuers filing reports in the United States must disclose whether
their audit committees have at least one “audit committee
financial expert”. Additionally, under NASDAQ Listing Rule
5605(c)(2)(A), NASDAQ requires that one member of the audit
committee have “past employment experience in finance or
accounting, requisite professional certification in accounting, or
any other comparable experience or background which results in the
individual’s financial sophistication, including being or
having been a chief executive officer, chief financial officer, or
other senior officer with financial oversight
responsibilities.” The Board has determined that Mr. Madhani
qualifies as an Audit Committee financial expert under the SEC
rules and as financially sophisticated under the NASDAQ
rules.
The
Code of Business Conduct and Ethics (the “
Code of Ethics
”) has been
implemented and it applies to all directors, officers, employees of
the Company and its subsidiaries. It may be viewed on our website
at www.intellipharmaceutics.com. During the year ended November 30,
2016, no waivers or requests for exemptions from the Code of Ethics
were either requested or granted.
Our
former auditor was Deloitte LLP (“
Deloitte
”), Independent Registered
Public Accounting Firm.
The
aggregate amounts billed by Deloitte to us for the years ended
November 30, 2016 and 2015 for audit fees, audit-related fees, tax
fees and all other fees are set forth below:
|
|
2016
|
2015
|
|
Audit
Fees
(1)
|
C$124,387
|
C$169,850
|
|
Audit-Related
Fees
(2)
|
C$174,738
|
C$188,855
|
|
Tax
Fees
(3)
|
C$45,460
|
C$38,160
|
|
All Other
Fees
(4)
|
--
|
C$2,953
|
|
Total
Fees
|
C$344,585
|
C$399,818
|
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
review of quarterly interim financial statements, prospectus and
base shelf activities and Form 20-F reviews.
(3)
Tax fees consist of
fees for tax consultation, tax advice and tax compliance services
for the Company and its subsidiaries.
(4)
All other fees
related to Canadian Public Accountability Board fees.
Our
current auditor is MNP LLP (“
MNP
”), Independent Registered
Public Accounting Firm, 111 Richmond Street West, Suite 300,
Toronto, ON M5H 2G4. MNP is independent with respect to the Company
within the meaning of the Rules of Professional Conduct of the
Chartered Professional Accountants of Ontario, the rules and
standards of the Public Company Accounting Oversight Board (United
States) and the securities laws and regulations administered by the
SEC.
The
aggregate amounts billed by MNP to us for the years ended November
30, 2016 and 2015 for audit fees, audit-related fees, tax fees and
all other fees are set forth below:
|
|
2016
|
2015
|
|
Audit
Fees
(1)
|
-
|
-
|
|
Audit-Related
Fees
(2)
|
C$75,664
|
-
|
|
Tax
Fees
(3)
|
-
|
-
|
|
All Other
Fees
(4)
|
C$24,075
|
-
|
|
Total
Fees
|
C$99,739
|
-
|
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
review of quarterly interim financial statements, prospectus and
base shelf activities and Form 20-F reviews.
(3)
Tax fees consist of
fees for tax consultation, tax advice and tax compliance services
for the Company and its subsidiaries.
(4)
All other fees
related to internal control reviews.
The
Company’s related party pre-approval policies and procedures
are described in Item 6.C.
Under
applicable Canadian securities regulations, the Company is required
to disclose whether its Audit Committee has adopted specific
policies and procedures for the engagement of non-audit services
and to prepare a summary of these policies and procedures. The
Audit Committee’s responsibility is to approve all audit
engagement fees and terms as well as reviewing policies for the
provision of non-audit services by the external auditors and, when
required, the framework for pre-approval of such services. The
Audit Committee delegates to its Chairman the pre-approval of such
non-audit fees. For each of the years ended November 30, 2016 and
2015, all of the non-audit services provided by the Company’s
external auditor were approved by the Chairman of the Audit
Committee.
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.
On July 27, 2016,
at the request of the Company, Deloitte LLP (“
Former Auditor
” or
“
Deloitte
”)
resigned as auditor of the Company. On July 27, 2016, the Audit
Committee and Board of Directors of the Company approved and
appointed MNP LLP (“
MNP
”) as the Company’s
successor auditor. There were no disagreements or unresolved issues
with the Former Auditor on any matter of auditing scope or
procedures, accounting principles or practices, or financial
statement disclosure.
Deloitte's report
on our consolidated financial statements for the years ended
November 30, 2015 and 2014 did not contain an adverse opinion or
disclaimer of opinions and was not qualified or modified as to
uncertainty, audit scope or accounting principles.
In
connection with the audit of our consolidated financial statements
for the years ended November 30, 2015 and 2014, and through the
period ended July 27, 2016, there were no disagreements with
Deloitte on any matters of accounting principles or practices,
financial statement disclosure, or auditing scope and procedures
which, if not resolved to the satisfaction of Deloitte, would have
caused Deloitte to make reference to the subject matter of such
disagreements in their reports.
In
connection with the audit of our consolidated financial statements
for the years ended November 30, 2015 and 2014, and through the
period ended July 27, 2016, none of the events described in
paragraphs (A) through (D) of Item 16F(a)(1)(v) of Form 20-F
occurred.
We
engaged MNP as our new independent registered public accounting
firm to audit our 2016 consolidated financial statements. In
connection with the audit of our financial statements for the
fiscal years ended November 30, 2015 and 2014, and through the
period ended July 27, 2016, neither the Company nor anyone on its
behalf have consulted with MNP on the application of accounting
principles to a specified transaction, either completed or
proposed; or the type of audit opinion that might be rendered on
the Company's financial statements or any matter that was the
subject of a disagreement, as that term is defined in Item
16F(a)(1)(iv) of Form 20-F and the related instructions to Item 16F
of Form 20-F, or a reportable event, as that term is defined in
Item 16F(a)(1)(v).
The
Company has provided Deloitte with a copy of these disclosures
prior to the filing hereof and has requested that Deloitte furnish
to the Company a letter addressed to the Securities and Exchange
Commission stating whether Deloitte agrees with the statements made
by the Company in this item. Deloitte has furnished such letter,
which letter is filed as Exhibit 16.1 hereto as required by Item
16F(a)(3) of Form 20-F.
The
Company is the successor issuer to Vasogen Inc. for reporting
purposes under the U.S. Exchange Act. Our common shares are
currently listed on the TSX and quoted for trading on NASDAQ under
the symbols “I” and “IPCI”, respectively.
Our shares began trading on October 22, 2009, when the IPC
Arrangement Agreement with Vasogen was completed.
Variations
from Certain NASDAQ Rules
NASDAQ
listing rules permit the Company to follow certain home country
practices in lieu of compliance with certain NASDAQ corporate
governance rules. Set forth below are the requirements of
NASDAQ’s Rule 5600 Series that the Company does not follow
and the home country practices that it follows in lieu thereof and
other differences from domestic U.S. companies that apply to us
under NASDAQ’s corporate governance rules.
Shareholder Approval in Connection
with Certain Transactions
: NASDAQ’s Rule 5635 requires
each issuer to obtain shareholder approval prior to certain
dilutive events, including: (i) a transaction other than a public
offering involving the sale under certain circumstances of 20% or
more of the issuer’s common shares outstanding prior to the
transaction at a price less than the greater of book value or
market value, (ii) the acquisition of the stock or assets of
another company; (iii) equity-based compensation of officers,
directors, employees or consultants and (iv) a change of control.
Under the exemption available to foreign private issuers under
NASDAQ Rule 5615(a)(3),
the
Company does not follow NASDAQ Rule 5635. Instead, and in
accordance with the NASDAQ exemption, the Company complies with
applicable TSX rules and applicable Canadian corporate and
securities regulatory requirements.
Independence of the
Majority of the Board of Directors; Independent Director Oversight
of Executive Compensation and Board Nominations: NASDAQ’s
Rule 5605(b)(1) requires that the Board of Directors be comprised
of a majority of independent directors, as defined in Rule
5605(a)(2). NASDAQ’s Rule 5605(b)(2) requires the independent
members of the Board to regularly hold executive sessions where
only those directors are present. Moreover, NASDAQ’s Rule
5605(d) requires independent director oversight of executive
officer compensation arrangements by approval of such compensation
by a majority of the independent directors or by a compensation
committee comprised solely of independent directors, and Rule
5605(e) requires similar oversight with respect to the process of
selecting nominees to the Board. Under the exemption available to
foreign private issuers under Rule 5615(a)(3), the Company does not
follow NASDAQ Rules 5605(b)(1), 5605(d) or 5605(e). Instead, and in
accordance with the NASDAQ exemption, the Company complies with the
applicable TSX rules and applicable Canadian corporate and
securities regulatory requirements.
Disclosure of Waivers of Code of
Business Conduct and Ethics
: Domestic U.S. NASDAQ listed
companies are required under NASDAQ Rule 5610 to disclose any
waivers of their codes of conduct for directors or executive
officers in a Form 8-K within four business days. As a foreign
private issuer we are required to disclose any such waivers either
in a Form 6-K or in the Company’s next Form 20-F or
40-F.
Not
applicable.
PART
III.
See
Item 18 below.
Consolidated
financial statements of
Intellipharmaceutics
International Inc.
November 30, 2016,
2015 and 2014
Intellipharmaceutics
International Inc.
November 30, 2016,
2015 and 2014
Table of
contents
|
Reports of
Independent Registered Public Accounting Firms
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1-2
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Consolidated
balance sheets
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3
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Consolidated
statements of operations and comprehensive loss
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4
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Consolidated
statements of shareholders’ equity (deficiency)
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5
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Consolidated
statements of cash flows
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6
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Notes to the
consolidated financial statements
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7-31
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REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of
Directors and Shareholders of
Intellipharmaceutics
International Inc.
We have audited the
accompanying consolidated balance sheet of Intellipharmaceutics
International Inc. and its subsidiaries (the "Company"), as of
November 30, 2016, and the related consolidated statement of
operations and comprehensive loss, cash flows and
shareholders’ equity (deficiency), for the year ended
November 30, 2016. These financial statements are the
responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our
audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States) and Canadian generally
accepted auditing standards. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an
audit of its internal control over financial reporting. Our audit
included consideration of internal control over financial reporting
as a basis for designing audit procedures that are appropriate in
the circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Company’s internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the
financial statements referred to above present fairly, in all
material respects, the financial position of the Company as of
November 30, 2016, and the results of its operations and its cash
flows for the year then ended in conformity with accounting
principles generally accepted in the United States of
America.
The accompanying
financial statements have been prepared with the assumption that
the Company will continue as a going concern. As discussed in Note
1 to the financial statements, the Company’s recurring losses
from operations raise substantial doubt about its ability to
continue as a going concern. Management’s plans concerning
these matters are also discussed in Note 1 to the financial
statements. The financial statements do not include any adjustments
that might result from the outcome of this
uncertainty.
Other
Matters
The consolidated
financial statements of Intellipharmaceutics International Inc. and
its subsidiaries as at November 30, 2015 and for each of the years
in the two-year period ended November 30, 2015 were audited by
another firm of Chartered Professional Accountants who expressed an
unmodified opinion in their report dated February 26,
2016.
|
|
/s/ MNP LLP
|
|
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|
Toronto,
Canada
|
Chartered
Professional Accountants
|
|
February 9,
2017
|
Licensed
Public Accountants
|
|
|
Report of Independent Registered
Public Accounting Firm
To
the Board of Directors and Shareholders of
Intellipharmaceutics
International Inc.
We
have audited the accompanying consolidated balance sheet of
Intellipharmaceutics International Inc. and subsidiaries (the
“Company”) as of November 30, 2015, and the related
consolidated statements of operations and comprehensive loss, cash
flows and shareholders’ (deficiency) equity for each of the
years in the two-year period ended November 30, 2015. These
financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States) and Canadian
generally accepted auditing standards. Those standards require that
we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement.
The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting.
Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's
internal control over financial reporting. Accordingly, we express
no such opinion. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.
In
our opinion, such financial statements present fairly, in all
material respects, the financial position of the Company as of
November 30, 2015, and the results of its operations and its cash
flows for each of the years in the two-year period ended November
30, 2015, in conformity with accounting principles generally
accepted in the United States of America.
The
accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note
1 to the financial statements, the Company's recurring losses from
operations and shareholders' deficiency raise substantial doubt
about its ability to continue as a going concern. Management's
plans concerning these matters are also discussed in Note 1 to the
financial statements. The financial statements do not include any
adjustments that might result from the outcome of this
uncertainty.
/s/
Deloitte LLP
Chartered
Professional Accountants
Licensed
Public Accountants
February
26, 2016
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On
behalf of the Board:
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|
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/s/ Dr. Isa
Odidi
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/s/ Bahadur Madhani
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Dr.
Isa Odidi, Chairman of the Board
|
Bahadur
Madhani, Director
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See
accompanying notes to consolidated financial
statements
|
|
Intellipharmaceutics International Inc.
Consolidated
statements of operations and comprehensive
loss
for the years ended November 30, 2016, 2015 and 2014
for the years ended November 30, 2016, 2015 and 2014
Intellipharmaceutics International Inc.
Consolidated
statements of shareholders' equity (deficiency)
for
the years ended November 30, 2016, 2015 and 2014
See accompanying notes to
consolidated financial statements
Intellipharmaceutics
International Inc.
Notes
to the consolidated financial statements
November 30, 2016, 2015 and
2014
(Stated in U.S.
dollars)
1.
Nature
of operations
Intellipharmaceutics
International Inc. (“IPC” or the “Company”)
is a pharmaceutical company specializing in the research,
development and manufacture of novel and generic controlled-release
and targeted-release oral solid dosage drugs.
On October 22,
2009, IntelliPharmaCeutics Ltd. (“IPC Ltd. “) and
Vasogen Inc. (“Vasogen”) completed a court approved
plan of arrangement and merger (the “IPC Arrangement
Agreement”), resulting in the formation of the Company, which
is incorporated under the laws of Canada. The Company’s
common shares are traded on the Toronto Stock Exchange and
NASDAQ.
The Company earns
revenue from non-refundable upfront fees, milestone payments upon
achievement of specified research or development, exclusivity
milestone payments and licensing payments on sales of resulting
products and other incidental services. In November 2013, the U.S.
Food and Drug Administration (“FDA”) granted the
Company final approval to market the Company’s first product,
the 15 mg and 30 mg strengths of our generic Focalin XR®
(dexmethylphenidate hydrochloride extended-release)
capsules.
Going concern
The consolidated
financial statements are prepared on a going concern basis, which
assumes that the Company will be able to meet its obligations and
continue its operations for the next twelve months. The Company has
incurred losses from operations since inception and has reported
losses of $10,143,577 for the year ended November 30, 2016 (2015 -
$7,436,388; 2014 - $3,856,353), and has an accumulated deficit of
$63,016,019 as at November 30, 2016 (November 30, 2015 -
$52,872,442). The Company has funded its research and development
(“R&D”) activities principally through the issuance
of securities, loans from related parties, funds from the IPC
Arrangement Agreement, and funds received under development
agreements. There is no certainty that such funding will be
available going forward. These conditions raise substantial doubt
about its ability to continue as a going concern and realize its
assets and pay its liabilities as they become due.
In order for the
Company to continue as a going concern and fund any significant
expansion of its operation or R&D activities, the Company will
require significant additional capital. Although there can be no
assurances, such funding may come from revenues from the sales of
the Company’s generic Focalin XR® (dexmethylphenidate
hydrochloride extended-release) capsules, from proceeds of the
Company’s at-the-market offering program and from potential
partnering opportunities. Other potential sources of capital may
include payments from licensing agreements, cost savings associated
with managing operating expense levels, other equity and/or debt
financings, and/or new strategic partnership agreements which fund
some or all costs of product development, although there can be no
assurance that the Company will be able to obtain any such capital
on terms or in amounts sufficient to meet its needs or at all. The
Company’s ultimate success will depend on whether its product
candidates receive the approval of the FDA or Health Canada and
whether it is able to successfully market approved products. The
Company cannot be certain that it will be able to receive FDA or
Health Canada approval for any of its current or future product
candidates, or that it will reach the level of sales and revenues
necessary to achieve and sustain profitability.
The availability of
equity or debt financing will be affected by, among other things,
the results of the Company’s research and development, its
ability to obtain regulatory approvals, the market acceptance of
its products, the state of the capital markets generally, strategic
alliance agreements, and other relevant commercial considerations.
In addition, if the Company raises additional funds by issuing
equity securities, its then existing security holders will likely
experience dilution, and the incurring of indebtedness would result
in increased debt service obligations and could require the Company
to agree to operating and financial covenants that would restrict
its operations. Any failure on its part to raise additional funds
on terms favorable to the Company or at all, may require the
Company to significantly change or curtail its current or planned
operations in order to conserve cash until such time, if ever, that
sufficient proceeds from operations are generated, and could result
in the Company not taking advantage of business opportunities, in
the termination or delay of clinical trials or the Company not
taking any necessary actions required by the FDA or Health Canada
for one or more of the Company’s
Intellipharmaceutics
International Inc.
Notes
to the consolidated financial statements
November 30, 2016, 2015 and
2014
(Stated in U.S.
dollars)
1.
Nature
of operations (Continued)
Going concern (continued)
product candidates,
in curtailment of the Company’s product development programs
designed to identify new product candidates, in the sale or
assignment of rights to its technologies, products or product
candidates, and/or its inability to file Abbreviated New Drug
Applications (“ANDAs”), Abbreviated New Drug
Submissions (“ANDSs”) or New Drug Applications
(“NDAs”) at all or in time to competitively market its
products or product candidates.
The consolidated
financial statements do not include any adjustments that might
result from the outcome of uncertainties described above. If the
going concern assumption no longer becomes appropriate for these
consolidated financial statements, then adjustments would be
necessary to the carrying values of assets and liabilities, the
reported expenses and the balance sheet classifications used. Such
adjustments could be material.
2.
Basis
of presentation
(a)
Basis of consolidation
These consolidated
financial statements include the accounts of the Company and its
wholly owned operating subsidiaries, IPC Ltd., Intellipharmaceutics
Corp. (“IPC Corp”), and Vasogen Corp.
All inter-company
accounts and transactions have been eliminated on
consolidation.
(b)
Use of estimates
The preparation of
the consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America
(“U.S. GAAP”) requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenue and expenses during the year. Actual results could differ
from those estimates.
Areas where
significant judgment is involved in making estimates are: the
determination of the functional currency; the fair values of
financial assets and liabilities; the determination of units of
accounting for revenue recognition; the accrual of licensing and
milestone revenue; and forecasting future cash flows for assessing
the going concern assumption.
3.
Significant
accounting policies
(a)
Cash and cash equivalents
The Company
considers all highly liquid securities with an original maturity of
three months or less to be cash equivalents. Cash equivalent
balances consist of bankers’ acceptances
and
bank accounts with variable
market rates of interest. As at November 30, 2016 and 2015, the
Company had no cash equivalents.
The financial risks
associated with these instruments are minimal and the Company has
not experienced any losses from investments in these securities.
The carrying amount of cash approximates its fair value due to its
short-term nature.
(b)
Accounts receivable
The Company reviews
its sales and accounts receivable aging and determines whether an
allowance for doubtful accounts is required.
(c)
Financial instruments
The Company
evaluates all of its financial instruments to determine if such
instruments are derivatives or contain features that qualify as
embedded derivatives. For derivative financial instruments that are
classified as liabilities, the derivative instrument is initially
recorded at its fair value using the appropriate valuation
methodology and is then re-valued at each reporting date, with
changes in the fair value reported in the consolidated statements
of operations and comprehensive loss.
Intellipharmaceutics
International Inc.
Notes
to the consolidated financial statements
November 30, 2016, 2015 and
2014
(Stated in U.S.
dollars)
3.
Significant
accounting policies (continued)
(d)
Investment tax credits
The investment tax
credits (“ITC") receivable are amounts considered recoverable
from the Canadian federal and provincial governments under the
Scientific Research & Experimental Development
(“SR&ED”) incentive program. The amounts claimed
under the program represent the amounts based on management
estimates of eligible research and development costs incurred
during the year. Realization is subject to government approval. Any
adjustment to the amounts claimed will be recognized in the year in
which the adjustment occurs. Refundable ITCs claimed relating to
capital expenditures are credited to property and equipment.
Refundable ITCs claimed relating to current expenditures are netted
against research and development expenditures.
(e)
Property and equipment
Property and
equipment are recorded at cost. Equipment acquired under capital
leases are recorded net of imputed interest, based upon the net
present value of future payments. Assets under capital leases are
pledged as collateral for the related lease obligation. Repairs and
maintenance expenditures are charged to operations; major
betterments and replacements are capitalized. Depreciation bases
and rates are as follows:
|
Assets
|
|
Basis
|
|
Rate
|
|
|
|
|
|
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Computer
equipment
|
|
Declining
balance
|
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30%
|
|
Computer
software
|
|
Declining
balance
|
|
50%
|
|
Furniture
and fixtures
|
|
Declining
balance
|
|
20%
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|
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. As
discussed in Note 3(m) the Company changed its functional currency
effective December 1, 2013 such that these warrants met the
criteria for prospective equity classification in ASC topic 480,
and the U.S. dollar translated amount of the warrant liability at
December 1, 2013 became the amount reclassified to
equity.
Intellipharmaceutics
International Inc.
Notes
to the consolidated financial statements
November 30, 2016, 2015 and
2014
(Stated in U.S.
dollars)
3.
Significant
accounting policies (continued)
(h)
Convertible debenture
In fiscal 2013, the
Company issued an unsecured convertible debenture in the principal
amount of $1.5 million (the “Debenture”) as described
in Note 7. At issuance, the conversion option was bifurcated from
its host contract and the fair value of the conversion option was
characterized as an embedded derivative upon issuance as it met the
criteria of ASC topic 815 Derivatives and Hedging. Subsequent
changes in the fair value of the embedded derivative were recorded
in the consolidated statements of operations and comprehensive
loss. The proceeds received from the Debenture less the initial
amount allocated to the embedded derivative were allocated to the
liability and were accreted over the life of the Debenture using
the imputed rate of interest. As discussed in Note 3(m), the
Company changed its functional currency effective December 1, 2013
such that the conversion option no longer met the criteria for
bifurcation and was prospectively reclassified to
shareholders’ equity under ASC Topic 815 at the U.S. dollar
translated amount at December 1, 2013.
(i)
Revenue recognition
The Company
accounts for revenue in accordance with the provision of ASC topic
605 Revenue Recognition. The Company earns revenue from
non-refundable upfront fees, milestone payments upon achievement of
specified research or development, exclusivity milestone payments
and licensing payments on sales of resulting products and other
incidental services. Revenue is realized or realizable and earned
when persuasive evidence of an arrangement exists, delivery has
occurred or services have been rendered, the price to the customer
is fixed or determinable, and collectability is reasonably assured.
From time to time, the Company enters into transactions that
represent multiple-element arrangements. Management evaluates
arrangements with multiple deliverables to determine whether the
deliverables represent one or more units of accounting for the
purpose of revenue recognition.
A delivered item is
considered a separate unit of accounting if the delivered item has
stand-alone value to the customer, the fair value of any
undelivered items can be reliably determined, and the delivery of
undelivered items is probable and substantially in the Company's
control.
The relevant
revenue recognition accounting policy is applied to each separate
unit of accounting.
Licensing
The Company
recognizes revenue from the licensing of the Company's drug
delivery technologies, products and product candidates. Licensing
revenue is recognized as earned in accordance with the contract
terms when the amounts can be reasonably estimated and
collectability is reasonably assured.
The Company has a
license and commercialization agreement with Par Pharmaceutical
Inc. (“Par”). Under the exclusive territorial license
rights granted to Par, the agreement requires that Par manufacture,
promote, market, sell and distribute the product. Licensing revenue
amounts receivable by the Company under this agreement are
calculated and reported to the Company by Par, with such amounts
generally based upon net product sales and net profit which include
estimates for chargebacks, rebates, product returns, and other
adjustments. Licensing revenue payments received by the Company
from Par under this agreement are not subject to further deductions
for chargebacks, rebates, product returns, and other pricing
adjustments. Based on this arrangement and the guidance per ASC
topic 605, the Company records licensing revenue as earned in the
consolidated statements of operations and comprehensive
loss.
Intellipharmaceutics
International Inc.
Notes
to the consolidated financial statements
November 30, 2016, 2015 and
2014
(Stated in U.S.
dollars)
3.
Significant
accounting policies (continued)
(i)
Revenue recognition (continued)
Milestones
The milestone
method recognizes revenue on substantive milestone payments in the
period the milestone is achieved. Milestones are considered
substantive if all of the following conditions are met: (i) the
milestone is commensurate with either the vendor’s
performance to achieve the milestone or the enhancement of the
value of the delivered item or items as a result of a specific
outcome resulting from the vendor’s performance to achieve
the milestone; (ii) the milestone relates solely to past
performance; and (iii) the milestone is reasonable relative to all
of the deliverables and payment terms within the arrangement.
Non-substantive milestone payments that might be paid to the
Company based on the passage of time or as a result of a
partner’s performance are allocated to the units of
accounting within the arrangement; they are recognized as revenue
in a manner similar to those units of accounting. In connection
with the license and commercialization agreement with Par, for each
day up to a maximum of 180 days from the date of launch if the
Company’s product is the only generic in the market or if
there is only one generic competitor, a milestone payment is
earned. The Company recognized milestone revenue of $Nil (2015 -
$Nil; 2014 – $354,153) upon achievement of the
milestone
.
Research and development
Under arrangements
where the license fees and research and development activities can
be accounted for as a separate unit of accounting, non-refundable
upfront license fees are deferred and recognized as revenue on a
straight-line basis over the expected term of the Company's
continued involvement in the research and development
process.
Deferred revenue
Deferred revenue
represents the funds received from clients, for which the revenues
have not yet been earned, as the milestones have not been achieved,
or in the case of upfront fees for drug development, where the work
remains to be completed. During the year ended November 30, 2016,
the Company received an up-front payment of $3,000,000 from
Mallinckrodt LLC pursuant to the Mallinckrodt agreement, and
initially recorded it as deferred revenue, as it did not meet the
criteria for recognition. As of November 30, 2016, the Company
recognized $37,500 of revenue based on a straight-line basis over
the expected term of the Mallinckrodt agreement of 10 years. In
2015, the Company received an up-front payment of $150,000 from
Teva Pharmaceuticals USA, Inc. which it continues to record as
deferred revenue as the criteria for revenue recognition have not
been met. As of November 30, 2016, the Company has recorded a
deferred revenue balance of $3,112,500 (2015 - $150,000) relating
to the underlying contracts.
Other incidental services
Incidental services
which the Company may provide from time to time include, consulting
advice provided to other organizations regarding FDA standards.
Revenue is earned and realized when all of the following conditions
are met: (i) there is persuasive evidence of an arrangement; (ii)
service has been rendered; (iii) the sales price is fixed or
determinable; and (iv) collectability is reasonably
assured.
(j)
Research and development costs
Research and
development costs related to continued research and development
programs are expensed as incurred in accordance with ASC topic 730.
However, materials and equipment are capitalized and amortized over
their useful lives if they have alternative future
uses.
(k)
Income taxes
The Company uses
the liability method of accounting for income taxes. Under the
liability method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and
for losses and tax credit carry forwards. Significant judgment is
required in determining whether deferred tax assets will be
realized in full or in part. Deferred tax
Intellipharmaceutics
International Inc.
Notes
to the consolidated financial statements
November 30, 2016, 2015 and
2014
(Stated in U.S.
dollars)
3.
Significant
accounting policies (continued)
(k)
Income taxes (continued)
assets and
liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
income in the year that includes the date of enactments. A
valuation allowance is provided for the portion of deferred tax
assets that is more likely than not to remain
unrealized.
The Company
accounts for income taxes in accordance with ASC topic 740-10. This
ASC topic requires that uncertain tax positions are evaluated in a
two-step process, whereby (i) the Company determines whether
it is more likely than not that the tax positions will be sustained
based on the technical merits of the position and (ii) those tax
positions that meet the more likely than not recognition threshold,
the Company would recognize the largest amount of tax benefit that
is greater than 50% likely of being realized upon ultimate
settlement with the related tax authority. Changes in recognition
or measurement are reflected in the period in which the change in
judgment occurs. The cumulative effects of the application of the
provisions of ASC topic 740-10 are described in
Note 15.
The Company records
any interest related to income taxes in interest expense and
penalties in selling, general and administrative
expense.
(l)
Share issue costs
Share issue costs
are recorded as a reduction of the proceeds from the issuance of
capital stock.
(m)
Translation of foreign currencies
Previously,
operations of the Company were comprised of only research and
development activities conducted in Canada. The Company generated
no cash from operations, though funding for the operations (as in
previous years) was primarily through U.S. dollar equity
financings. The functional currency was assessed to be Canadian
dollars. By obtaining the final approval of the Company’s
generic Focalin XR® (dexmethylphenidate hydrochloride
extended-release) capsules for the 15 and 30 mg strengths with Par
in November 2013, the Company generated and collected U.S. dollar
revenues in the year ended November 30, 2014 which represents a
significant and material change in economic facts and
circumstances. Management had assessed the functional currency for
the fiscal year commencing December 1, 2013 and concluded that the
Company and its wholly owned operating subsidiaries should be
measured using the U.S. dollar as the functional currency.
Effective December 1, 2013, the change in functional currency was
applied on a prospective basis. The U.S. dollar translated amounts
of nonmonetary assets and liabilities at December 1, 2013 became
the historical accounting basis for those assets and liabilities at
December 1, 2013. The impact of the change in functional currency
on the measurement and reporting of warrants and the Debenture is
discussed in Note 3(g) and 3(h) above. The change in functional
currency resulted in no change in cumulative translation adjustment
going forward as the Company and its wholly owned operating
subsidiaries have U.S. dollar functional currencies.
In respect of other
transactions denominated in currencies other than the Company and
its wholly owned operating subsidiaries’ functional
currencies, the monetary assets and liabilities are translated at
the period end rates. Revenue and expenses are translated at rates
of exchange prevailing on the transaction dates. All of the
exchange gains or losses resulting from these other transactions
are recognized in the consolidated statements of operations and
comprehensive loss.
The Company’s
reporting currency is the U.S. dollar.
(n)
Stock-based compensation
The Company has a
stock-based compensation plan which authorizes the granting of
various equity-based incentives including stock options and
restricted share units (“RSU”s). The Company calculates
stock-based compensation using the fair value method, under which
the fair value of the options at the grant date is calculated using
the Black-Scholes Option Pricing Model, and subsequently expensed
over the vesting period of the option. The provisions of the
Company's
Intellipharmaceutics
International Inc.
Notes to the consolidated financial
statements
November 30, 2016, 2015 and
2014
(Stated in U.S.
dollars)
3.
Significant
accounting policies (continued)
(n)
Stock-based compensation (continued)
stock-based
compensation plans do not require the Company to settle any options
by transferring cash or other assets, and therefore the Company
classifies the awards as equity. Stock-based compensation expense
recognized during the period is based on the value of stock-based
payment awards that are ultimately expected to vest.
The Company
estimates forfeitures at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ from
those estimates. The stock-based compensation expense is recorded
in the consolidated statements of operations and comprehensive loss
under research and development expense and under selling, general
and administration expense. Note 11 provides supplemental
disclosure of the Company's stock options.
(o)
Deferred Share Units
Deferred Share
Units (“DSU”s) are valued based on the trading price of
the Company’s common shares on the Toronto Stock Exchange.
The Company records the value of the DSU’s owing to
non-management board members in the consolidated statement of
shareholders’ equity (deficiency).
(p)
Loss per share
Basic loss per
share (“EPS”) is computed by dividing the loss
attributable to common shareholders by the weighted average number
of common shares outstanding. Diluted EPS reflects the potential
dilution that could occur from common shares issuable through the
exercise or conversion of stock options, restricted stock awards,
warrants and convertible securities. In certain circumstances, the
conversion of options, warrants and convertible securities are
excluded from diluted EPS if the effect of such inclusion would be
anti-dilutive.
The dilutive effect
of stock options is determined using the treasury stock method.
Stock options and warrants to purchase 7,540,266, 7,128,082 and
7,149,283 common shares of the Company during fiscal 2016, 2015,
and 2014, respectively, were not included in the computation of
diluted EPS because the Company has incurred a loss for the years
ended November 30, 2016, 2015 and 2014 as the effect would be
anti-dilutive.
(q)
Comprehensive loss
The Company follows
ASC topic 220. This statement establishes standards for reporting
and display of comprehensive (loss) income and its components.
Comprehensive loss is net loss plus certain items that are recorded
directly to shareholders' equity. Other than foreign exchange gains
and losses arising from cumulative translation adjustments, the
Company has no other comprehensive loss items.
(r)
Fair value measurement
Under ASC topic
820, fair value is defined as the price that would be received to
sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date
(i.e., an exit price). ASC topic 820 establishes a hierarchy for
inputs to valuation techniques used in measuring fair value that
maximizes the use of observable inputs and minimizes the use of
unobservable inputs by requiring that the most observable inputs be
used when available. Observable inputs are inputs that reflect
assumptions market participants would use in pricing the asset or
liability developed based on market data obtained from sources
independent of the Company. Unobservable inputs are inputs that
reflect the Company's own assumptions about the assumptions market
participants would use in pricing the asset or liability developed
based on the best information available in the circumstances. There
are three levels to the hierarchy based on the reliability of
inputs, as follows:
●
Level 1
- Observable inputs that reflect quoted prices (unadjusted) for
identical assets or liabilities in active markets.
Intellipharmaceutics
International Inc.
Notes to the consolidated financial
statements
November 30, 2016, 2015 and
2014
(Stated in U.S.
dollars)
3.
Significant
accounting policies (continued)
(r)
Fair value measurement (continued)
●
Level 2
- Inputs other than quoted prices included in Level 1 that are
observable for the asset or liability, either directly or
indirectly. Level 2 inputs include quoted prices for
simi
lar assets or
liabilities in active markets, or quoted prices for identical or
similar assets and liabilities in markets that are not
active.
●
Level 3
- Unobservable inputs for the asset or liability.
The degree of
judgment exercised by the Company in determining fair value is
greatest for instruments categorized in Level 3.
(s)
Future Accounting pronouncements
In May 2014, the
Financial Accounting Standards Board ("FASB") issued Accounting
Standards Update (“ASU”) No. 2014-09, Revenue from
Contracts with Customers, requiring an entity to recognize the
amount of revenue to which it expects to be entitled for the
transfer of promised goods or services to customers. The updated
standard will replace most existing revenue recognition guidance in
U.S. GAAP when it becomes effective.
In March 2016, the
FASB issued ASU No. 2016-08 to clarify the implementation guidance
on considerations of whether an entity is a principal or an agent,
impacting whether an entity reports revenue on a gross or net
basis. In April 2016, the FASB issued ASU No. 2016-10 to clarify
guidance on identifying performance obligations and the
implementation guidance on licensing. In May 2016, the FASB issued
amendments ASU No. 2016-11 and 2016-12 to amend certain aspects of
the new revenue guidance (including transition, collectability,
noncash consideration and the presentation of sales and other
similar taxes) and provided certain practical expedients. The
guidance is effective for annual reporting periods beginning after
December 15, 2017 (including interim reporting periods). Early
adoption is permitted but not before the annual reporting period
(and interim reporting period) beginning January 1, 2017. Entities
have the option of using either a full retrospective or a modified
approach to adopt the guidance. The Company is in the process of
evaluating the amendments to determine if they have a material
impact on the Company’s financial position, results of
operations, cash flows or disclosures.
In June 2014, the
FASB issued ASU No. 2014-12 in response to the consensus of the
Emerging Issues Task Force on EITF Issue 13-D.2 The ASU clarifies
that entities should treat performance targets that can be met
after the requisite service period of a share-based payment award
as performance conditions that affect vesting. Therefore, an entity
would not record compensation expense (measured as of the grant
date without taking into account the effect of the performance
target) related to an award for which transfer to the employee is
contingent on the entity’s satisfaction of a performance
target until it becomes probable that the performance target will
be met. No new disclosures are required under the ASU. The
ASU’s guidance is effective for all entities for reporting
periods (including interim periods) beginning after December 15,
2015. Early adoption is permitted. The Company does not expect the
adoption of the amendments to have a material impact on the
Company’s financial position, results of operations or cash
flow. In March 2016, the FASB issued new guidance ASU No. 2016-09
which simplifies several aspects of the accounting for employee
share-based payment transactions, including the income tax
consequences, classification of awards as either equity or
liabilities, accounting for forfeitures, and classification on the
statement of cash flows. The guidance is effective for reporting
periods (including interim periods) beginning after December 15,
2016. Early adoption is permitted. The Company is in the process of
evaluating the amendments to determine if they have a material
impact on the Company’s financial position, results of
operations, cash flows or disclosures.
In 2014, the FASB
issued ASU No. 2014-15, which provides guidance on determining when
and how to disclose going-concern uncertainties in the financial
statements. The new standard requires management to perform interim
and annual assessments of an entity’s ability to continue as
a going concern within one year of the date the financial
statements are issued. An entity must provide certain disclosures
if “conditions or events raise substantial doubt about the
entity’s ability to continue as a going concern.” The
ASU applies to all entities and is effective for annual periods
ending after December 15, 2016, and interim periods thereafter,
with early adoption permitted. The
Intellipharmaceutics
International Inc.
Notes to the consolidated financial
statements
November 30, 2016, 2015 and
2014
(Stated in U.S.
dollars)
3.
Significant accounting policies (continued)
(s)
Future
Accounting pronouncements (continued)
Company is in the
process of evaluating the amendments to determine if they have a
material impact on the Company’s financial position, results
of operations, cash flows or disclosures.
In November 2014,
the FASB issued ASU No. 2014-16, Derivatives and Hedging (Topic
815): Determining Whether the Host Contract in a Hybrid Financial
Instrument Issued in the Form of a Share is More Akin to Debt or to
Equity, which applies to any entity that is an issuer of, or
invests in, hybrid financial instruments that are issued in the
form of a share. The amendments in ASU No. 2014-16 clarify that an
entity must take into account all relevant terms and features when
reviewing the nature of the host contract. Additionally, the
amendments state that no one term or feature would define the host
contract’s economic characteristics and risks. Instead, the
economic characteristics and risks of the hybrid financial
instrument as a whole would determine the nature of the host
contract. ASU No. 2014-16’s amendments will be effective for
public business entities for fiscal years, and interim periods
within those fiscal years, starting after December 15, 2015, with
early adoption permitted. The Company is in the process of
evaluating the amendments to determine if they have a material
impact on the Company’s financial position, results of
operations, cash flows or disclosures.
In January 2016,
the FASB issued ASU No. 2016-01, which makes limited amendments to
the guidance in U.S. GAAP on the classification and measurement of
financial instruments. The new standard significantly revises an
entity’s accounting related to (1) the classification and
measurement of investments in equity securities and (2) the
presentation of certain fair value changes for financial
liabilities measured at fair value. It also amends certain
disclosure requirements associated with the fair value of financial
instruments. ASU No. 2016-01 is effective for fiscal years
beginning after December 15, 2017, and interim periods within those
annual periods. The Company is in the process of evaluating the
amendments to determine if they have a material impact on the
Company’s financial position, results of operations, cash
flows or disclosures.
In February 2016,
the FASB issued new guidance, ASU No. 2016-02, Leases (Topic 842).
The main difference between current U.S. GAAP and the new guidance
is the recognition of lease liabilities based on the present value
of remaining lease payments and corresponding lease assets for
operating leases under current U.S. GAAP with limited exception.
Additional qualitative and quantitative disclosures are also
required by the new guidance. Topic 842 is effective for annual
reporting periods (including interim reporting periods) beginning
after December 15, 2018. Early adoption is permitted. The Company
is in the process of evaluating the amendments to determine if they
have a material impact on the Company’s financial position,
results of operations, cash flows or disclosures.
In August 2016, the
FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230)
Classification of Certain Cash Receipts and Cash Payments, which
will make eight targeted changes to how cash receipts and cash
payments are presented and classified in the Statement of Cash
Flows. ASU 2016-15 will be effective on May 1, 2018, and will
require adoption on a retrospective basis unless it is
impracticable to apply, in which case the Company would be required
to apply the amendments prospectively as of the earliest date
practicable. The Company is in the process of evaluating the
amendments to determine if they have a material impact on the
Company’s financial position, results of operations, cash
flows or disclosures.
Intellipharmaceutics
International Inc.
Notes to the consolidated financial
statements
November 30, 2016, 2015 and
2014
(Stated in U.S.
dollars)
3.
Significant
accounting policies (continued)
(s)
Future
Accounting pronouncements (continued)
In August 2016, the
FASB issued ASU 2017-01 that changes the definition of a business
to assist entities with evaluating when a set of transferred assets
and activities is a business. The guidance requires an entity to
evaluate if substantially all of the fair value of the gross assets
acquired is concentrated in a single identifiable asset or a group
of similar identifiable assets; if so, the set of transferred
assets and activities is not a business. ASU 2017-01 also requires
a business to include at least one substantive process and narrows
the definition of outputs by more closely aligning it with how
outputs are described in ASC 606.1. ASU 2017-01 is effective for
public business entities for fiscal years beginning after December
15, 2017, and interim periods within those years. Early adoption is
permitted. The Company is in the process of evaluating the
amendments to determine if they have a material impact on the
Company’s financial position, results of operations, cash
flows or disclosures.
4.
Accounts
receivable
The Company
currently has no debt agreements in place whereby any amount of
receivables serve as collateral. The Company has no
off-balance-sheet credit exposures and has no foreclosed or
repossessed assets. The Company has had no impaired loans related
to receivables and has identified no loss contingencies related to
the receivables at November 30, 2016 and November 30, 2015. Risks
and uncertainties and credit quality information related to
accounts receivable have been disclosed in Note 17.
5.
Property
and equipment
Depreciation for
the year ended November 30, 2016 was $385,210 (2015 -$377,849; 2014
- $381,385).
Intellipharmaceutics
International Inc.
Notes to the consolidated financial
statements
November 30, 2016, 2015 and
2014
(Stated in U.S.
dollars)
5.
Property and equipment (continued)
Property and
equipment are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying value of an asset may not
be recoverable. Impairment is assessed by comparing the carrying
amount of an asset with the sum of the undiscounted cash flows
expected from its use and disposal, and as such requires the
Company to make significant estimates on expected revenues from the
commercialization of its products and services and the related
expenses. The Company records a write-down for long-lived assets
which have been abandoned and do not have any residual value. For
the year ended November 30, 2016, the Company recorded a $Nil
write-down of long-lived assets (2015 - $Nil; 2014 –
$Nil).
6.
Accrued liabilities
|
|
November
30,
|
November
30,
|
|
|
2016
|
2015
|
|
|
$
|
$
|
|
|
|
|
|
Professional
fees
|
190,485
|
163,552
|
|
Other
|
194,401
|
290,738
|
|
|
384,886
|
454,290
|
7.
Due
to related parties
Convertible debenture
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,
|
|
|
2016
|
2015
|
|
|
$
|
$
|
|
Convertible
debenture payable to two directors and officers
|
|
|
|
of
the Company, unsecured, 12% annual interest rate,
|
|
|
|
payable
monthly
|
1,494,764
|
1,518,429
|
On January 10,
2013, the Company completed a private placement financing of the
Debenture, which had an original maturity date of January 1, 2015.
The Debenture bears interest at a rate of 12% per annum, payable
monthly, is pre-payable at any time at the option of the Company,
and is convertible at any time into 500,000 common shares at a
conversion price of $3.00 per common share at the option of the
holder.
Dr. Isa Odidi and
Dr. Amina Odidi, principal shareholders, directors and executive
officers of the Company purchased the Debenture and provided the
Company with the $1.5 million of the proceeds for the Debenture.
The conversion price of the Debenture is in U.S. dollars and at
issuance IPC’s functional currency at the time of issuance
was Canadian dollars. Under U.S. GAAP where the conversion price of
the Debenture is denominated in a currency other than an entity's
functional currency, the conversion option meets the definition of
an embedded derivative. The conversion option was bifurcated from
its host contract and the fair value of the conversion option
characterized as an embedded derivative upon issuance. The embedded
derivative was presented together on a combined basis with the host
contract. The derivative was re-measured at the end of every
reporting period with the change in value reported in the
consolidated statements of operations and comprehensive
loss.
The proceeds
received from the Debenture less the initial amount allocated to
the embedded derivative were allocated to the liability and were
accreted over the life of the Debenture using the imputed rate of
interest.
Effective December
1, 2013, the Company changed its functional currency such that the
conversion option no longer met the criteria for bifurcation and
was prospectively reclassified to equity under
Intellipharmaceutics
International Inc.
Notes to the consolidated financial
statements
November 30, 2016, 2015 and
2014
(Stated in U.S.
dollars)
7.
Due
to related parties (continued)
Convertible debenture
ASC 815. The
conversion option value at December 1, 2013 of $728,950 was
reclassified from convertible debenture to additional paid-in
capital.
Effective October
1, 2014, the maturity date of the Debenture was extended to July 1,
2015. Under ASC 470-50, the change in the debt instrument was
accounted for as a modification of debt. The increase in the fair
value of the conversion option at the date of the modification, in
the amount of $126,414, was recorded as a reduction in the carrying
value of the debt instrument with a corresponding increase to
additional paid-in-capital. The carrying amount of the debt
instrument is accreted over the remaining life of the Debenture
using a 15% imputed rate of interest.
Effective June 29,
2015, the July 1, 2015 maturity date for the Debenture was further
extended to January 1, 2016. Under ASC 470-50, the change in the
maturity date of the debt instrument resulted in a constructive
extinguishment of the original Debenture as the change in the fair
value of the embedded conversion option was greater than 10% of the
carrying amount of the debt. In accordance with ASC 470-50-40, the
Debenture was recorded at fair value. The difference between the
fair value of the convertible Debenture after the extension and the
net carrying value of the Debenture prior to the extension of
$114,023 was recognized as a loss on the statement of operations
and comprehensive loss. The carrying amount of the debt instrument
will be accreted down to the face amount of the Debenture over the
remaining life of the Debenture using a 14.6% imputed rate of
interest.
Effective December
8, 2015, the January 1, 2016 maturity date of the Debenture was
extended to July 1, 2016. Under ASC 470-50, the change in the debt
instrument was accounted for as a modification of debt. The
increase in the fair value of the conversion option at the date of
the modification, in the amount of $83,101, was recorded as a
reduction in the carrying value of the debt instrument with a
corresponding increase to additional paid-in-capital. The carrying
amount of the debt instrument is accreted over the remaining life
of the Debenture using a 6.6% imputed rate of
interest.
Effective May 26,
2016, the July 1, 2016 maturity date of the Debenture was extended
to December 1, 2016. Under ASC 470-50, the change in the debt
instrument was accounted for as a modification of debt. The
increase in the fair value of the conversion option at the date of
the modification, in the amount of $19,808, was recorded as a
reduction in the carrying value of the debt instrument with a
corresponding increase to additional paid-in-capital. The carrying
amount of the debt instrument is accreted over the remaining life
of the Debenture using a 4.2% imputed rate of
interest.
Accreted interest
expense during the year ended November 30, 2016 is $79,245 (2015 -
$27,103; 2014 - $127,261), and has been included in the
consolidated statements of operations and comprehensive
loss.
In addition, the
coupon interest on the Debenture for the year ended November 30,
2016 is $180,370 (2015 - $179,878; 2014 - $179,877), and has also
been included in the consolidated statements of operations and
comprehensive loss.
8.
Employee
costs payable
As at
November 30, 2016, the Company had $838,905 (2015 - $Nil)
accrued bonus payable to executive officers of the Company and had
$205,246 (2015 - $175,172) accrued vacation payable to certain
employees. These balances are due on demand and therefore presented
as current liabilities.
9.
Lease
obligations
On December 1,
2015, the Company entered into a new lease agreement for the
premises that it currently operates from, as well the adjoining
property which is owned by the same landlord, for a 5 year term
with a 5 year renewal option. The Company also has an option to
purchase the combined properties after March 1, 2017 and up to
November 30, 2020 based on a fair value purchase formula. The
Company also leases various computers and equipment under capital
leases. Future minimum lease payments under leases with terms of
one year or more are as follows at November 30, 2016:
Intellipharmaceutics
International Inc.
Notes to the consolidated financial
statements
November 30, 2016, 2015 and
2014
(Stated in U.S.
dollars)
9.
Lease
obligations (continued)
|
|
Capital
|
Operating
|
|
Year
ending November 30,
|
Lease
|
Lease
|
|
|
$
|
$
|
|
|
|
|
|
2017
|
15,489
|
179,736
|
|
2018
|
-
|
179,736
|
|
2019
|
-
|
179,736
|
|
2020
|
-
|
179,736
|
|
|
15,489
|
718,944
|
|
Less:
amounts representing interest at 14%
|
660
|
-
|
|
|
14,829
|
718,944
|
|
Less:
current portion
|
14,829
|
179,736
|
|
Balance,
long-term portion
|
-
|
539,208
|
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, 2016, the Company has 29,784,992 (2015 -
24,244,050; 2014 - 23,456,611) common shares issued and outstanding
and 5,000 common shares to be issued subsequent to November 30,
2016, and no preference shares issued and outstanding.
Two officers and
directors of IPC owned directly and through their family holding
company (“Odidi Holdco”) 5,781,312 (2015 - 5,781,312)
common shares or approximately 19% (2015 - 24%; 2014 - 26%) of
IPC.
Each common share
of the Company entitles the holder thereof to one vote at any
meeting of shareholders of the Company, except meetings at which
only holders of a specified class of shares are entitled to
vote.
Holders of common
shares of the Company are entitled to receive, as and when declared
by the board of directors of the Company, dividends in such amounts
as shall be determined by the board. The holders of common shares
of the Company have the right to receive the remaining property of
the Company in the event of liquidation, dissolution, or winding-up
of the Company, whether voluntary or involuntary.
The preference
shares may at any time and from time to time be issued in one or
more series. The board of directors will, by resolution, from time
to time, before the issue thereof, fix the rights, privileges,
restrictions and conditions attaching to the preference shares of
each series. Except as required by law, the holders of any series
of preference shares will not as such be entitled to receive notice
of, attend or vote at any meeting of the shareholders of the
Company. Holders of preference shares will be entitled to
preference with respect to payment of dividends and the
distribution of assets in the event of liquidation, dissolution or
winding-up of the Company, whether voluntary or involuntary, or any
other distribution of the assets of the Company among its
shareholders for the purpose of winding up its affairs, on such
shares over the common shares of the Company and over any other
shares ranking junior to the preference shares.
(b)
In November 2013,
the Company entered into an equity distribution agreement with Roth
Capital Partners, LLC (“Roth”), pursuant to which the
Company may from time to time sell up to 5,305,484 of the
Company’s common shares for up to an aggregate of $16.8
million (or such lesser amount as may be permitted under applicable
securities laws and regulations) through at-the-market issuances on
the NASDAQ or otherwise. Under the equity distribution agreement,
the Company may at its discretion, from time to time, offer and
sell common shares through Roth or directly to Roth for resale. The
Company will pay Roth a commission, or allow a discount, of 2.75%
of the gross proceeds that the Company received from any additional
sales of common shares under the equity
Intellipharmaceutics
International Inc.
Notes to the consolidated financial
statements
November 30, 2016, 2015 and
2014
(Stated in U.S.
dollars)
10.
Capital
stock (continued)
Authorized, issued and outstanding
distribution
agreement. The Company has also agreed to reimburse Roth for
certain expenses relating to the offering. For the year ended
November 30, 2016, an aggregate of 1,471,260 common shares were
sold on NASDAQ for gross proceeds of $3,469,449, with net proceeds
to the Company of $3,368,674, respectively, under the at-the-market
offering program. During the year ended November 30, 2015, an
aggregate of 471,439 common shares were sold for gross proceeds of
$1,290,168, with net proceeds to the Company of $1,254,178. During
the year ended November 30, 2014, an aggregate of 1,689,500 common
shares were sold for gross proceeds of $6,571,673, with net
proceeds to the Company of $6,390,670. As a result of prior sales
of the Company’s common shares under the equity distribution
agreement, as at November 30, 2016, the Company may in the future
offer and sell its common shares with an aggregate purchase price
of up to $5,468,711 (or such lesser amount as may be permitted
under applicable securities laws and regulations, such amount the
Company currently can offer and sell being limited to approximately
$5.4 million) pursuant to our at-the-market program. There can be
no assurance that any additional shares will be sold under the
at-the-market program.
(c)
Direct costs
related to the Company’s filing of a base shelf prospectus
filed in May 2014 and declared effective in June 2014 and certain
other on-going costs related to the at the-market facility are
recorded as deferred offering costs and are being amortized and
recorded as share issuance costs against share offerings. For the
year ended November 30, 2016, costs directly related to the at
the-market facility of $100,775 (2015 - $38,889; 2014 - $811,887)
were recorded in share offering costs and an additional $258,287
(2015 - $39,277; 2014 - $Nil) of deferred costs were amortized and
recorded in share offering costs related to the at the-market
facility.
(d)
In June 2016, the
Company completed an underwritten public offering of 3,229,814
units of common shares and warrants, at a price of $1.61 per unit.
The warrants are currently exercisable, have a term of five years
and an exercise price of $1.93 per common share. The Company issued
at the initial closing of the offering an aggregate of 3,229,814
common shares and warrants to purchase an additional 1,614,907
common shares. The underwriter also purchased at such closing
additional warrants at a purchase price of $0.001 per warrant to
acquire 242,236 common shares pursuant to the over-allotment option
exercised in part by the underwriter. The Company subsequently sold
an aggregate of 459,456 additional common shares at the public
offering price of $1.61 per share in connection with subsequent
partial exercises of the underwriter’s over-allotment option.
The closings of these partial exercises brought the total net
proceeds from the offering to $5,137,638, after deducting the
underwriter’s discount and offering expenses. The warrants
are considered to be indexed to the Company’s own stock and
are therefore classified as equity under ASC topic 480
Distinguishing Liabilities from Equity for equity classification.
The Company recorded $4,764,777 as the value of common shares under
Capital stock and $1,175,190 as the value of the warrants under
Additional Paid in Capital in the consolidated statements of
shareholders’ equity (deficiency). The Company has disclosed
the terms used to value the warrants in Note 14.
The direct costs
related to the issuance of the unit shares were $802,329 and were
recorded as an offset against the statement of shareholders’
equity (deficiency) with $643,593 being recorded under Capital
stock and $158,736 being recorded under Additional Paid in
Capital.
11.
Options
All grants of
options to employees after October 22, 2009 are made from the
Employee Stock Option Plan (the “Employee Stock Option
Plan”). The maximum number of common shares issuable under
the Employee Stock Option Plan is limited to 10% of the issued and
outstanding common shares of the Company from time to time, or
2,978,999 based on the number of issued and outstanding common
shares as at November 30, 2016. As at November 30, 2016,
2,628,520 options are outstanding and there were 350,479 options
available for grant under the Employee Stock Option Plan. Each
option granted allows the holder to purchase one common share at an
exercise price not less than the closing price of the Company's
common shares on the Toronto Stock Exchange on the last trading day
prior to the grant of the option. Options granted under these plans
generally have a maximum term of 10 years and generally vest over a
period of up to three years.
Intellipharmaceutics
International Inc.
Notes to the consolidated financial
statements
November 30, 2016, 2015 and
2014
(Stated in U.S.
dollars)
11
.
Options (continued)
In August 2004, the
Board of Directors of IPC Ltd. approved a grant of 2,763,940
performance-based stock options, to two executives who were also
the principal shareholders of IPC Ltd. The vesting of these options
is contingent upon the achievement of certain performance
milestones. A total of 1,934,758 performance-based stock options
have vested as of November 30, 2016. Under the terms of the
original agreement these options were to expire in September 2014.
Effective March 27, 2014, the Company’s shareholders approved
the two year extension of the performance-based stock option expiry
date to September 2016. As a result of the modification of the
performance based stock option expiry date, the Company recorded
additional compensation costs of $1,066,991 related to vested
performance options during the year ended November 30, 2014.
Effective April 19, 2016, the Company’s shareholders approved
a further two year extension of the performance-based stock option
expiry date to September 2018. As a result of the modification of
the performance based stock option expiry date, the Company
recorded additional compensation costs of $1,177,782 related to
vested performance options during the year ended November 30, 2016.
These options were outstanding as at November 30,
2016.
In the year ended
November 30, 2016, 355,000 (2015 - 295,000; 2014 - 254,001) stock
options were granted to management and other employees and 105,000
(2015 - 60,000; 2014 - 225,000) stock options were granted to
members of the Board of Directors.
The fair value of
each option grant is estimated on the date of grant using the
Black-Scholes Option-Pricing Model, consistent with the provisions
of ASC topic 718.
Option pricing
models require the use of subjective assumptions, changes in these
assumptions can materially affect the fair value of the
options.
The Company
calculates expected volatility based on historical volatility of
the Company’s peer group that is publicly traded for options
that have an expected life that is more than six years. For options
that have an expected life of less than six years the Company uses
its own volatility.
The expected term,
which represents the period of time that options granted are
expected to be outstanding, is estimated based on the historical
average of the term and historical exercises of the
options.
The risk-free rate
assumed in valuing the options is based on the U.S. treasury yield
curve in effect at the time of grant for the expected term of the
option. The expected dividend yield percentage at the date of grant
is Nil as the Company is not expected to pay dividends in the
foreseeable future.
The weighted
average fair value of employee stock options granted was estimated
using the following assumptions:
Intellipharmaceutics
International Inc.
Notes to the consolidated financial
statements
November 30, 2016, 2015 and
2014
(Stated in U.S.
dollars)
11
.
Options
(continued)
Details of stock
option transactions in Canadian dollars (“C$”) are as
follows:
|
Balance
at
|
|
|
|
|
|
|
|
|
|
|
end
of period
|
5,392,460
|
3.48
|
1.88
|
5,062,007
|
3.89
|
2.21
|
4,858,208
|
3.96
|
2.21
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
|
|
|
|
|
|
|
|
exercisable,
|
|
|
|
|
|
|
|
|
|
|
end
of year
|
4,396,610
|
3.49
|
1.96
|
3,812,930
|
4.01
|
2.35
|
3,640,381
|
4.09
|
2.40
|
|
|
|
|
|
|
|
|
|
|
|
As of
November 30, 2016, the exercise prices, weighted average
remaining contractual life of outstanding options and weighted
average grant date fair values were as follows:
Total unrecognized
compensation cost relating to the unvested performance-based stock
options at November 30, 2016 is approximately $2,366,659 (2015 -
$2,482,528; 2014 - $2,482,528). During the year ended November 30,
2016, a performance condition was met as the FDA approved an ANDA
for a certain drug, resulting in the vesting of 276,394
performance-based stock options. As a result, a stock-based
compensation expense of $620,632 relating to these stock options
was recognized in 2016 in research and development expense (2015 -
$Nil; 2014 - $Nil).
For the year ended
November 30, 2016, 27,500 options were exercised for a cash
consideration of $52,868. For the year ended November 30, 2015,
91,000 options were exercised for cash consideration of $167,962.
For the year ended November 30, 2014, 48,000 options were exercised
for cash consideration of $116,984.
Intellipharmaceutics
International Inc.
Notes to the consolidated financial
statements
November 30, 2016, 2015 and
2014
(Stated in U.S.
dollars)
11
.
Options (continued)
The following table
summarizes the components of stock-based compensation
expense.
|
|
November
30,
|
November
30,
|
November
30,
|
|
|
2016
|
2015
|
2014
|
|
|
$
|
$
|
$
|
|
|
|
|
|
|
Research
and development
|
1,995,805
|
152,231
|
1,270,307
|
|
Selling,
general and administrative
|
265,639
|
265,587
|
478,300
|
|
|
2,261,444
|
417,818
|
1,748,607
|
The Company has
estimated its stock option forfeitures to be approximately 4% at
November 30, 2016 (2015 - 4%; 2014 - 3%).
12.
Deferred
share units
Effective
May 28, 2010, the Company’s shareholders approved a
Deferred Share Unit (“DSU”) Plan to grant DSUs to its
non-management directors and reserved a maximum of 110,000 common
shares for issuance under the plan. The DSU Plan permits certain
non-management directors to defer receipt of all or a portion of
their board fees until termination of the board service and to
receive such fees in the form of common shares at that time. A DSU
is a unit equivalent in value to one common share of the Company
based on the trading price of the Company's common shares on the
Toronto Stock Exchange.
Upon termination of
board service, the director will be able to redeem DSUs based upon
the then market price of the Company's common shares on the date of
redemption in exchange for any combination of cash or common shares
as the Company may determine.
During the year
ended November 30, 2016 and 2015, one non-management board member
elected to receive director fees in the form of DSUs under the
Company’s DSU Plan. As at November 30, 2016, 76,743 (2015 -
60,002) DSUs are outstanding and 33,257 (2015 - 49,998) DSUs are
available for grant under the DSU Plan. The Company recorded the
following amounts related to DSUs for each of the three years ended
November 30, 2016, 2015 and 2014 in additional paid in capital and
accrued the following amounts as at November 30, 2016, 2015 and
2014:
13.
Restricted
share units
Effective
May 28, 2010, the Company’s shareholders approved a
Restricted Share Unit (“RSU”) Plan for officers and
employees of the Company and reserved a maximum of 330,000 common
shares for issuance under the plan. The RSU Plan will form part of
the incentive compensation arrangements available to officers and
employees of the Company and its designated affiliates. An RSU is a
unit equivalent in value to one common share of the Company. Upon
vesting of the RSUs and the corresponding issuance of common shares
to the participant, or on the forfeiture and cancellation of the
RSUs, the RSUs credited to the participant’s account will be
cancelled. No RSUs have been issued under the plan.
Intellipharmaceutics
International Inc.
Notes to the consolidated financial
statements
November 30, 2016, 2015 and
2014
(Stated in U.S.
dollars)
14.
Warrants
Prior to November
30, 2015, all the warrants issued to date by the Company are
denominated in U.S. dollars and at issuance IPC’s functional
currency was the Canadian dollar. Under U.S. GAAP, where the strike
price of warrants is denominated in a currency other than an
entity's functional currency the warrants would not be considered
indexed to the entity’s own stock and would consequently be
considered to be a derivative liability. The warrants, in specified
situations, provide for certain compensation remedies to a holder
if the Company fails to timely deliver the shares underlying the
warrants in accordance with the warrant terms. Subsequent changes
in the fair value of the warrants were recorded in the consolidated
statements of operations and comprehensive loss.
In connection with
the February 1, 2011 private offering, the Company issued 4,800,000
five year Series A common share purchase warrants (“Series A
Warrants”) to purchase one half of a share of common stock at
an exercise price of $2.50 per whole share and 4,800,000 two year
Series B common share purchase warrants to purchase one half of a
share of common stock at an exercise price of $2.50 per whole
share. The Company also issued to the placement agents 96,000
warrants to purchase a share of common stock at an exercise price
of $3.125 per share.
The holders of
Series A Warrants and placement agents warrants are entitled to a
cashless exercise under which the number of shares to be issued
will be based on the number of shares for which warrants are
exercised multiplied by the difference between market price of
common share and the exercise price divided by the market price.
Also under U.S. GAAP, warrants with the cashless exercise option
satisfying the explicit net settlement criteria are considered a
derivative liability.
In the registered
direct unit offering completed in March 2013, gross proceeds of
$3,121,800 were received through the sale of the Company’s
units comprised of common stock and warrants.
The offering was
the sale of 1,815,000 units at a price of $1.72 per unit, with each
unit consisting of one share of common stock and a five year
warrant to purchase 0.25 of a share of common stock at an exercise
price of $2.10 per share (“March 2013
Warrants”).
The fair value of
the March 2013 Warrants of $407,558 were initially estimated at
closing using the Black-Scholes Option Pricing Model, using
volatilities of 63%, risk free interest rates of 0.40%, expected
life of 5 years, and dividend yield of Nil.
In the underwritten
public offering completed in July 2013, gross proceeds of
$3,075,000 were received through the sale of the Company’s
units comprised of common stock and warrants. The offering was the
sale of 1,500,000 units at a price of $2.05 per unit, each unit
consisting of one share of common stock and a five year warrant to
purchase 0.25 of a share of common stock at an exercise price of
$2.55 per share (“July 2013 Warrants”).
The fair value of
the July 2013 Warrants of $328,350 were initially estimated at
closing using the Black-Scholes Option Pricing Model, using
volatilities of 62.4%, risk free interest rates of 0.58%, expected
life of 5 years, and dividend yield of Nil.
Effective December
1, 2013, the Company changed its functional currency to the U.S.
dollar such that the warrants are considered indexed to the
Company’s own stock and were prospectively classified as
equity under ASC 480. The warrant liability value at December 1,
2013 of $5,438,022 was reclassified from warrant liabilities to
additional paid-in capital.
In the underwritten
public offering completed in June 2016, gross proceeds of
$5,200,000 were received through the sale of the Company’s
units comprised of common stock and warrants. The Company issued at
the initial closing of the offering an aggregate of 3,229,814
common shares and warrants to purchase an additional 1,614,907
common shares, at a price of $1.61 per unit. The warrants are
currently exercisable, have a term of five years and an exercise
price of $1.93 per common share. The underwriter also purchased at
such closing additional warrants (collectively with the warrants
issued at the initial closing, the “June 2016
Warrants”) at a purchase price of $0.001 per warrant to
acquire 242,236 common shares pursuant to the over-allotment option
exercised in part by the underwriter. The fair value of the June
2016 Warrants of $1,175,190 was initially estimated at closing
using the Black-Scholes Option Pricing Model, using volatility of
64.1%, risk free interest rates of 0.92%, expected life of 5 years,
and dividend yield of Nil.
Intellipharmaceutics
International Inc.
Notes to the consolidated financial
statements
November 30, 2016, 2015 and
2014
(Stated in U.S.
dollars)
14.
Warrants (continued)
The following table
provides information on the 5,476,482 warrants outstanding and
exercisable as of November 30, 2016:
During the year
ended November 30, 2016, there were cash exercises in respect of
832,104 warrants (2015 - 450,000; 2014 - 481,000) and no cashless
exercise (2015 - $Nil; 2014 - $Nil) of warrants, resulting in the
issuance of 357,912 (2015 - 225,000; 2014 - 288,500) and $Nil (2015
- $Nil; 2014 - $Nil) common shares, respectively. For the warrants
exercised, the Company recorded a charge to capital stock of
$1,030,719 (2015 - $1,027,304; 2014 - $1,291,436) comprised of
proceeds of $700,653 (2015 - $562,500; 2014 - $781,220) and the
associated amount of $330,066 (2015 - $464,804; 2014 - $510,216)
previously recorded in additional paid in capital.
Details of warrant
transactions are as follows:
|
|
Series
A
|
March
2013
|
July
2013
|
June
2016
|
|
|
|
Warrants
|
Warrants
|
Warrants
|
Warrants
|
Total
|
|
|
|
|
|
|
|
|
Outstanding,
December 1, 2015
|
2,835,000
|
1,724,300
|
870,000
|
-
|
5,429,300
|
|
Issued
|
-
|
-
|
-
|
3,714,286
|
3,714,286
|
|
Exercised
|
-
|
(232,558
)
|
-
|
(599,546
)
|
(832,104
)
|
|
Expired
|
(2,835,000
)
|
-
|
-
|
-
|
(2,835,000
)
|
|
Outstanding,
November 30, 2016
|
-
|
1,491,742
|
870,000
|
3,114,740
|
5,476,482
|
|
|
Series
A
|
March
2013
|
July
2013
|
|
|
|
Warrants
|
Warrants
|
Warrants
|
Total
|
|
|
|
|
|
|
|
Outstanding,
December 1, 2014
|
3,285,000
|
1,724,300
|
870,000
|
5,879,300
|
|
Exercised
|
(450,000
)
|
-
|
-
|
(450,000
)
|
|
Outstanding,
November 30, 2015
|
2,835,000
|
1,724,300
|
870,000
|
5,429,300
|
Intellipharmaceutics
International Inc.
Notes to the consolidated financial
statements
November 30, 2016, 2015 and
2014
(Stated in U.S.
dollars)
15.
Income taxes
The Company files
Canadian income tax returns for its Canadian operations. Separate
income tax returns are filed as locally required.
The total provision
for income taxes differs from the amount which would be computed by
applying the Canadian income tax rate to loss before income taxes.
The reasons for these differences are as follows:
|
|
November
30,
|
November
30,
|
November
30,
|
|
|
2016
|
2015
|
2014
|
|
|
%
|
%
|
%
|
|
|
|
|
|
|
Statutory
income tax rate
|
26.5
|
26.5
|
26.5
|
|
|
|
|
|
|
|
$
|
$
|
$
|
|
|
|
|
|
|
Statutory
income tax recovery
|
(2,688,048
)
|
(1,970,643
)
|
(1,021,934
)
|
|
Increase
(decrease) in income taxes
|
|
|
|
|
Non-deductible
expenses/
|
|
|
|
|
non-taxable
income
|
640,481
|
164,723
|
417,879
|
|
Change
in valuation allowance
|
2,683,775
|
1,804,406
|
(995,957
)
|
|
Difference
in net income before taxes
|
|
|
|
|
between
Canadian and U.S dollar
|
-
|
-
|
160,316
|
|
Investment
tax credit
|
-
|
(168,591
)
|
(9,114
)
|
|
Financing
costs booked to equity
|
(281,063
)
|
(23,348
)
|
(208,271
)
|
|
FCR
Election
|
-
|
(253,856
)
|
-
|
|
Foreign
exchange change
|
-
|
-
|
985,544
|
|
True
up of tax returns
|
(356,095
)
|
(15,991
)
|
82,939
|
|
Tax
loss expired and other
|
950
|
463,300
|
588,598
|
|
|
-
|
-
|
-
|
The Company
recognizes deferred tax assets and liabilities for the expected
future tax consequences of temporary differences between the
carrying amounts and the tax basis of assets and liabilities and
certain carry-forward balances. Significant temporary differences
and carry-forwards are as follows:
|
|
November
30,
|
November
30,
|
November
30,
|
|
|
2016
|
2015
|
2014
|
|
|
$
|
$
|
$
|
|
|
|
|
|
|
Deferred
tax assets
|
|
|
|
|
Non-capital
loss carry-forwards
|
7,427,516
|
6,019,380
|
6,528,099
|
|
Book
and tax basis differences
|
|
|
|
|
on
assets and liabilities
|
3,409,343
|
2,854,916
|
1,006,667
|
|
Other
|
-
|
-
|
47,180
|
|
Ontario
harmonization tax credit
|
-
|
-
|
371,160
|
|
Investment
tax credit
|
2,405,365
|
-
|
2,327,722
|
|
Undeducted
research and
|
|
|
|
|
development
expenditures
|
3,710,274
|
5,394,426
|
2,183,486
|
|
|
16,952,498
|
14,268,722
|
12,464,314
|
|
Valuation
allowances for
|
|
|
|
|
deferred
tax assets
|
(16,952,498
)
|
(14,268,722
)
|
(12,464,314
)
|
|
Net
deferred tax assets
|
-
|
-
|
-
|
Intellipharmaceutics
International Inc.
Notes to the consolidated financial
statements
November 30, 2016, 2015 and
2014
(Stated in U.S.
dollars)
15.
Income taxes (continued)
At
November 30, 2016, the Company had cumulative operating losses
available to reduce future years’ income for income tax
purposes:
|
United
States Federal net operating losses expiring
|
|
|
in
the year ended November 30,
|
|
|
|
$
|
|
|
|
|
2024
|
18,512
|
|
2025
|
16,234
|
|
2026
|
34,522
|
|
|
69,268
|
At
November 30, 2016, the Company had a cumulative carry-forward
pool of Federal SR&ED expenditures in the amount of
approximately $14,000,000 (2015 - $12,408,000) which can be carried
forward indefinitely.
At
November 30, 2016, the Company had approximately $3,273,000
(2015 - 2,710,000) of unclaimed ITCs which expire from 2025 to
2036. These credits are subject to a full valuation allowance as
they are not more likely than not to be realized.
The net deferred
tax assets have been fully offset by a valuation allowance because
it is not more likely than not the Company will realize the benefit
of these deferred tax assets. The Company does not have any
recognized tax benefits as of November 30, 2016 or
November 30, 2015.
The Company files
unconsolidated federal income tax returns domestically and in
foreign jurisdictions. The Company has open tax years from 2008 to
2016 with tax jurisdictions including Canada and the U.S. These
open years contain certain matters that could be subject to
differing interpretations of applicable tax laws and regulations,
as they relate to amount, timing, or inclusion of revenues and
expenses.
The Company did not
incur any interest expense related to uncertain tax positions in
2016, 2015 and 2014 or any penalties in those years. The Company
had no accrued interest and penalties as of November 30, 2016,
2015 and 2014.
The Company had no
unrecognized tax benefits in 2016, 2015 and 2014, and the Company
does not expect that the unrecognized tax benefit will increase
within the next twelve months.
16.
Contingencies
From
time to time, the Company may be exposed to claims and legal
actions in the normal course of business. As at November 30, 2016,
and continuing as at February 9, 2017, the Company is not aware of
any pending or threatened material litigation claims against the
Company.
Intellipharmaceutics
International Inc.
Notes to the consolidated financial
statements
November 30, 2016, 2015 and
2014
(Stated in U.S.
dollars)
17.
Financial
instruments
(a)
Fair values
The Company follows
ASC topic 820, “Fair Value Measurements” which defines
fair value, establishes a framework for measuring fair value, and
expands disclosures about fair value measurements. The provisions
of ASC
topic 820 apply to
other accounting pronouncements that require or permit fair value
measurements. ASC topic 820 defines fair value as the exchange
price that would be received for an asset or paid to transfer a
liability (an exit price) in the principal or most advantageous
market for the asset or liability in an orderly transaction between
market participants at the measurement date; and establishes a
three level hierarchy for fair value measurements based upon the
transparency of inputs to the valuation of an asset or liability as
of the measurement date.
Inputs refers
broadly to the assumptions that market participants would use in
pricing the asset or liability, including assumptions about risk.
To increase consistency and comparability in fair value
measurements and related
disclosures, the
fair value hierarchy prioritizes the inputs to valuation techniques
used to measure fair value into three broad levels. The three
levels of the hierarchy are defined as follows:
Level 1 inputs are
quoted prices (unadjusted) in active markets for identical assets
or liabilities.
Level 2 inputs are
inputs other than quoted prices included within Level 1 that are
observable for the asset or liability, either directly or
indirectly for substantially the full term of the financial
instrument.
Level 3 inputs are
unobservable inputs for asset or liabilities.
The categorization
within the valuation hierarchy is based upon the lowest level of
input that is significant to the fair value
measurement.
(i)
The Company
calculates expected volatility based on historical volatility of
the Company’s peer group that is publicly traded for options
that have an expected life that is more than six
years.
(ii)
The Company
calculates the interest rate for the conversion option based on the
Company’s estimated cost of raising capital.
An
increase/decrease in the volatility and/or a decrease/increase in
the discount rate would have resulted in an increase/decrease in
the fair value of the conversion option and warrant
liabilities.
The change in fair
value of the conversion option and the warrant liabilities was
recorded as a fair value adjustment of derivative liabilities in
the consolidated statements of operations and comprehensive
loss.
Reconciliation of
Level 3 fair value measurements:
|
|
|
November
30, 2014
|
|
|
|
Conversion
|
Warrant
|
|
|
|
Option
|
liability
|
Total
|
|
|
$
|
$
|
$
|
|
Opening
balance
|
728,950
|
5,438,022
|
6,166,972
|
|
|
|
|
|
|
Transfer out from level 3
(a)
|
(728,950
)
|
(5,438,022
)
|
(6,166,972
)
|
|
Closing
balance
|
-
|
-
|
-
|
(a)
As discussed in
Note 7 and 14, the conversion option value of $728,950 and the
warrant value of $5,438,022 at December 1, 2013 were reclassified
to additional paid-in capital due to the change in functional
currency.
Intellipharmaceutics
International Inc.
Notes to the consolidated financial
statements
November 30, 2016, 2015 and
2014
(Stated in U.S.
dollars)
17.
Financial instruments (continued)
(a)
Fair values (continued)
Fair value of
financial assets and financial liabilities that are not measured at
fair value on a recurring basis are as follows:
|
|
November
30, 2016
|
November
30, 2015
|
||
|
|
Carrying
|
Fair
|
Carrying
|
Fair
|
|
|
amount
|
value
|
amount
|
value
|
|
|
$
|
$
|
$
|
$
|
|
Financial
Liabilities
|
|
|
|
|
|
Convertible debt
(i)
|
1,494,764
|
1,500,000
|
1,518,429
|
1,481,663
|
(i)
The Company
calculates the interest rate for the convertible debt and due to
related parties based on the Company’s estimated cost of
raising capital and uses the discounted cash flow model to
calculate the fair value of the convertible debt and the amounts
due to related parties.
The carrying values
of cash, accounts receivable, accounts payable, accrued liabilities
and employee cost payable approximates their fair values because of
the short-term nature of these instruments.
(b)
Interest rate and credit risk
Interest rate risk
is the risk that the value of a financial instrument might be
adversely affected by a change in interest rates. The Company does
not believe that the results of operations or cash flows would be
affected to any significant degree by a sudden change in market
interest rates, relative to interest rates on cash, convertible
debenture and capital lease obligations due to the short-term
nature of these balances.
Trade accounts
receivable potentially subjects the Company to credit risk. The
Company provides an allowance for doubtful accounts equal to the
estimated losses expected to be incurred in the collection of
accounts receivable.
The following table
sets forth details of the aged accounts receivable that are not
overdue as well as an analysis of overdue amounts and the related
allowance for doubtful accounts:
|
|
November
30,
|
November
30,
|
|
|
2016
|
2015
|
|
|
$
|
$
|
|
|
|
|
|
Total
accounts receivable
|
472,474
|
478,674
|
|
Less
allowance for doubtful accounts
|
-
|
-
|
|
Total
accounts receivable, net
|
472,474
|
478,674
|
|
|
|
|
|
Not
past due
|
427,519
|
453,662
|
|
Past
due for more than 31 days
|
|
|
|
but
no more than 60 days
|
3,319
|
5,003
|
|
Past
due for more than 91 days
|
|
|
|
but
no more than 120 days
|
41,636
|
20,009
|
|
Total
accounts receivable, net
|
472,474
|
478,674
|
Financial
instruments that potentially subject the Company to concentration
of credit risk consist principally of uncollateralized accounts
receivable. The Company’s maximum exposure to credit risk is
equal to the potential amount of financial assets. For the years
ended November 30, 2016 and November 30, 2015, Par accounted for
substantially all the revenue and all the accounts receivable of
the Company.
Intellipharmaceutics
International Inc.
Notes to the consolidated financial
statements
November 30, 2016, 2015 and
2014
(Stated in U.S.
dollars)
17. Financial
instruments (continued)
(b)
Interest rate and credit risk (continued)
The Company is also
exposed to credit risk at period end from the carrying value of its
cash. The Company manages this risk by maintaining bank accounts
with a Canadian Chartered Bank. The Company’s cash is not
subject to any external restrictions.
(c)
Foreign exchange risk
The Company has
balances in Canadian dollars that give rise to exposure to foreign
exchange (“FX”) risk relating to the impact of
translating certain non-U.S. dollar balance sheet accounts as these
statements are presented in U.S. dollars. A strengthening U.S.
dollar will lead to a FX loss while a weakening U.S. dollar will
lead to a FX gain. For each Canadian dollar balance of
$1.0 million, a +/- 10% movement in the Canadian currency held
by the Company versus the U.S. dollar would affect the
Company’s loss and other comprehensive loss by
$0.1 million.
Balances
denominated in foreign currencies that are considered financial
instruments are as follows:
(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, 2016:
Intellipharmaceutics
International Inc.
Notes to the consolidated financial
statements
November 30, 2016, 2015 and
2014
(Stated in U.S.
dollars)
18.
Segmented
information
The Company's
operations comprise a single reportable segment engaged in the
research, development and manufacture of novel and generic
controlled-release and targeted-release oral solid dosage drugs. As
the operations comprise a single reportable segment, amounts
disclosed in the financial statements for revenue, loss for the
year, depreciation and total assets also represent segmented
amounts. In addition, all of the Company's long-lived assets are in
Canada. The Company’s license and commercialization agreement
with Par accounts for substantially all of the revenue of the
Company.
|
|
November
30,
|
November
30,
|
November
30,
|
|
|
2016
|
2015
|
2014
|
|
|
$
|
$
|
$
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
United
States
|
2,247,002
|
4,093,781
|
8,769,693
|
|
|
2,247,002
|
4,093,781
|
8,769,693
|
|
|
|
|
|
|
Total
assets
|
|
|
|
|
Canada
|
7,974,689
|
5,224,299
|
7,875,035
|
|
|
|
|
|
|
Total
property and equipment
|
|
|
|
|
Canada
|
1,889,638
|
1,759,438
|
1,618,897
|
19.
Subsequent event
Effective
December 1, 2016, the maturity date for the Debenture in respect of
the $1,500,000 loan to the Company by Drs. Isa and Amina Odidi was
extended to April 1, 2017 and a principal repayment of $150,000 was
made at the time of the extension.
Page
31
Item
19.
Exhibits
EXHIBIT INDEX
|
Number
|
Exhibit
|
Footnote
|
|
1.1
|
Articles of
Incorporation of the Company and Amendments thereto
|
(7)
|
|
1.2
|
By-Laws
of the Company
|
(7)
|
|
4.1
|
IPC
Arrangement Agreement
|
(7)
|
|
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 2,763,940 of the Company’s shares
upon payment of U.S.$3.62 per share, subject to satisfaction of the
performance vesting conditions
|
(7)
|
|
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
|
(7)
|
|
4.51
|
Securities purchase
agreement for February 1, 2011 private placement
|
(6)
|
|
4.52
|
Registration rights
agreement for February 1, 2011 private placement
|
(6)
|
|
4.53
|
Combined Series A/B
common share purchase warrant for February 1, 2011 private
placement
|
(6)
|
|
4.54
|
Placement Agent
Agreement between Intellipharmaceutics International Inc. and Roth
Capital Partners, LLC, dated March 9, 2012
|
(8)
|
|
4.55
|
Form of
Subscription Agreement (incorporated by reference to Exhibit A
attached to Exhibit 4.54
|
(8)
|
|
4.56
|
12%
convertible term debenture dated January 10, 2013 in principal
amount of $1,500,000
|
(5)
|
|
4.57
|
Lease
as amended between Finley W. McLachlan Ltd. and
Intellipharmaceutics Corp. for premises at 30 Worcester Road,
Toronto, Ontario, Canada.
|
(5)
|
|
4.58
|
Placement Agent
Agreement between Intellipharmaceutics International Inc. and Roth
Capital Partners, LLC, Brean Capital, LLC and Maxim Group, LLC,
dated March 19, 2013
|
(9)
|
|
4.59
|
Form of
Subscription Agreement (incorporated by reference to Exhibit A
attached to Exhibit 4.58)
|
(9)
|
|
4.60
|
Form of
Warrants (incorporated by reference to Exhibit B attached to
Exhibit 4.58)
|
(9)
|
|
4.61
|
Underwriting
Agreement between Intellipharmaceutics International Inc. and Maxim
Group, LLC, as representative of the underwriters named in Schedule
I thereto, dated July 26, 2013
|
(10)
|
|
4.62
|
Form of
Warrants
|
(10)
|
|
4.63
|
Equity
Distribution Agreement between Intellipharmaceutics International
Inc. and Roth Capital Partners, LLC, dated November 27,
2013
|
(11)
|
|
4.64
(†)
|
License
and Commercialization Agreement dated as of November 21, 2005,
between Intellipharmaceutics Corp., and Par Pharmaceutical, Inc.,
as amended by the First Amendment To License and Commercialization
Agreement dated as of August 12, 2011, and as further amended by
the Second Amendment to License and Commercialization Agreement
dated as of September 24, 2013
|
(4)
|
|
4.65
|
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
|
(3)
|
|
4.66
|
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
|
(3)
|
|
4.67
|
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
|
(2)
|
|
4.68
|
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
|
(2)
|
|
4.69
|
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
|
(2)
|
|
4.70
|
Underwriting
Agreement between Intellipharmaceutics International Inc. and
Dawson James Securities, Inc., dated May 27, 2016.
|
(12)
|
|
4.71
|
Form of
Common Share Purchase Warrant
|
(12)
|
|
4.72
|
Extension of
Debenture Maturity Date dated as of May 26, 2016 to that certain
12% convertible term debenture dated January 10, 2013
|
(1)
|
|
4.73
|
Extension of
Debenture Maturity Date dated as of December 1, 2016 to that
certain 12% convertible term debenture dated January 10,
2013
|
(1)
|
|
4.74(††)
|
License
and Commercial Supply Agreement dated effective October 11, 2016,
between Mallinckrodt LLC and Intellipharmaceutics
Corp.
|
(1)
|
|
8.1
|
List of
subsidiaries
|
(1)
|
|
11.1
|
Code of
Business Conduct and Ethics
|
(7)
|
|
12.1
|
Certification of
the Chief Executive Officer pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934
|
(1)
|
|
12.2
|
Certification of
the Chief Financial Officer pursuant to Rule 13a-14(a) of the
Securities Exchange
|
(1)
|
|
13.1
|
Certification of
the Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
(1)
|
|
13.2
|
Certification of
the Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
(1)
|
|
15.1
|
Consent
of Independent Registered Public Accounting Firm (MNP
LLP)
|
(1)
|
|
15.2
|
Consent
of Independent Registered Public Accounting Firm (Deloitte
LLP)
|
(1)
|
|
16.1
|
Letter
dated February 27, 2017 of Deloitte LLP, as required by Item 16F of
Form 20-F
|
(1)
|
|
101
|
XBRL
(Extensible Business Reporting Language). The following materials
from Intellipharmaceutics International Inc.’s Annual Report
on Form 20-F for the fiscal year-ended November 30, 2016, formatted
in XBRL:
|
(1)
(13)
|
|
|
(i)
Consolidated
balance sheets as at November 30, 2016 and 2015
|
|
|
|
(ii)
Consolidated
statements of operations and comprehensive loss for the years ended
November 30, 2016, 2015 and 2014
|
|
|
|
(iii)
Consolidated
statements of shareholders’ equity (deficiency) for the years
ended November 30, 2016, 2015 and 2014
|
|
|
|
(iv)
Consolidated
statements of cash flows for the years ended November 30, 2016,
2015 and 2014
|
|
|
|
(v)
Notes to the
consolidated financial statements
|
|
|
(1)
|
Filed
as exhibits to this annual report on Form 20-F for the fiscal year
ended November 30, 2016.
|
|
|
(2)
|
Incorporated herein
by reference to the Company’s annual report on Form 20-F for
the fiscal year ended November 30, 2015 as filed on March 21,
2016.
|
|
|
(3)
|
Incorporated herein
by reference to the Company’s annual report on Form 20-F for
the fiscal year ended November 30, 2014 as filed on February 27,
2015.
|
|
|
(4)
|
Incorporated herein
by reference to the Company’s Amendment No. 1 on Form 20-F/A
for the fiscal year ended November 30, 2013 as filed on April 14,
2014.
|
|
|
(5)
|
Incorporated herein
by reference to the Company’s annual report on Form 20-F for
the fiscal year ended November 30, 2012 as filed on January 31,
2013.
|
|
|
(6)
|
Incorporated herein
by reference to the Company’s annual report on Form 20-F for
the fiscal year ended November 30, 2010 as filed on May 31,
2011.
|
|
|
(7)
|
Incorporated herein
by reference to the Company’s annual report on Form 20-F for
the fiscal year ended November 30, 2009 as filed on June 1,
2010.
|
|
|
(8)
|
Incorporated herein
by reference to the Company’s report on Form 6-K for the
month of March 2012 as filed on March 9, 2012.
|
|
|
(9)
|
Incorporated herein
by reference to the Company’s report on Form 6-K for the
month of March 2013 as filed on March 19, 2013.
|
|
|
(10)
|
Incorporated herein
by reference to the Company’s report on Form 6-K for the
month of July 2013 as filed on July 26, 2013 (SEC Accession No.
0001171843-13-002968).
|
|
|
(11)
|
Incorporated herein
by reference to the Company’s report on Form 6-K for the
month of November 2013 as filed on November 27, 2013.
|
|
|
(12)
|
Incorporated herein
by reference to the Company’s report on Form 6-K for the
month of May 2016 as filed on May 27, 2016.
|
|
|
(13)
|
XBRL
information is furnished and not filed or a part of a registration
statement or prospectus for purposes of Sections 11 or 12 of the
Securities Act of 1933, as amended, is deemed not filed for
purposes of Section 18 of the Securities Exchange Act of 1934, as
amended, and otherwise is not subject to liability under these
sections.
|
|
(†)
Confidential treatment has been granted for certain portions of
this exhibit. Omitted portions have been filed separately with the
Securities and Exchange Commission.
(††)
Confidential treatment has been requested for certain portions of
this exhibit. Omitted portions have been filed separately with the
Securities and Exchange Commission.
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/ Domenic Della Penna
Domenic
Della Penna
Chief
Financial Officer (Principal Financial Officer)
Intellipharmaceutics
International Inc.
February 27,
2017
