UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20547
FORM 20-F
[_]
REGISTRATION
STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES
EXCHANGE ACT OF 1934
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, 2017
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)
Andrew Patient, Chief Financial Officer, Intellipharmaceutics
International Inc., 30 Worcester Road,
Toronto, Ontario M9W 5X2, Telephone: (416) 798-3001, Fax: (416)
798-3007
(Name, Telephone, E-mail and/or Facsimile number and Address of
Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b)
of the Act:
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Title of each
class
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Name
of each exchange on which registered
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Common shares,
no par value
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NASDAQ
TSX
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Securities registered or to be registered pursuant to Section 12(g)
of the Act:
None
Securities for which there is a reporting obligation pursuant to
Section 15(d) of the Act:
None
As of
November 30, 2017, the registrant had 34,704,515 common shares
outstanding.
Indicate by check
mark if the registrant is a well-known seasoned issuer, as defined
in Rule 405 of the Securities Act.
Yes [_]
No [X]
If this
report is an annual report or transition report, indicate by check
mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Securities Exchange Act of
1934.
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, a non-accelerated filer or an emerging growth
company. See definition of “large accelerated filer”,
“accelerated filer” and “emerging growth
company” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer [_] Accelerated filer [_] Non-accelerated filer
[X] Emerging growth company [_]
If an
emerging growth company that prepares its financial statements in
accordance with U.S. GAAP, indicate by check mark if the registrant
has elected not to use the extended transition period for complying
with any new or revised financial accounting standards†
provided pursuant to Section 13(a) of the Exchange Act.
[_]
†
The term “new or revised financial accounting standard”
refers to any update issued by the Financial Accounting Standards
Board to its Accounting Standards Codification after April 5,
2012.
Indicate by check
mark which basis of accounting the registrant has used to prepare
the financial statements included in this filing:
|
U.S.
GAAP [X]
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International
Financial Reporting Standards as issued by theInternational
Accounting Standards Board [_]
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Other
[_]
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If
“Other” has been checked in response to the previous
question, indicate by check mark which financial statement item the
registrant has elected to follow:
Item 17
[_] Item 18 [_]
If this
is an annual report, indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange
Act).
Yes [_]
No [X]
TABLE OF CONTENTS
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PART I
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Item
1.
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Item
2.
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Item
3.
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Item
4.
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Item
4A.
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Item
5.
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Item
6.
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Item
7.
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Item
8.
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Item
9.
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Item
10.
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Item
11.
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Item
12.
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PART II
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Item
13.
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Item
14.
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Item
15.
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Item
16.
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Item
16A.
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Item
16B.
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Item
16C.
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Item
16D.
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Item
16E.
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Item
16F.
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Item
16G.
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Item
16H.
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PART III
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Item
17.
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Item
18.
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Item
19.
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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, and statements concerning our
partnering activities, health regulatory submissions, strategy,
future operations, future financial position, future sales,
revenues and profitability, projected costs and market penetration.
In some cases, you can identify forward-looking statements by
terminology such as “appear”, “unlikely”,
“target”, “may”, “will”,
“should”, “expects”, “plans”,
“plans to”, “anticipates”,
“believes”, “estimates”,
“predicts”, “confident”,
“prospects”, “potential”,
“continue”, “intends”, “look
forward”, “could”, “would”,
“projected”, “set to”,
“seeking” or the negative of such terms or other
comparable terminology. We made a number of assumptions in the
preparation of our forward-looking statements. You should not place
undue reliance on our forward-looking statements, which are subject
to a multitude of known and unknown risks and uncertainties that
could cause actual results, future circumstances or events to
differ materially from those stated in or implied by the
forward-looking statements. Risks, uncertainties and other factors
that could affect our actual results include, but are not limited
to, the effects of general economic conditions, securing and
maintaining corporate alliances, our estimates regarding our
capital requirements, and the effect of capital market conditions
and other factors, including the current status of our product
development programs, on capital availability, the estimated
proceeds (and the expected use of any proceeds) we may receive from
any offering of our securities, the potential dilutive effects of
any future financing, potential liability from and costs of
defending pending or future litigation, our ability to maintain
compliance with the continued listing requirements of the principal
markets on which our securities are traded including risks or
uncertainties related to our ability to implement and execute a
plan to regain compliance with the Nasdaq Stock Market LLC
(“
Nasdaq
”)
continued listing standards, our programs regarding research,
development and commercialization of our product candidates, the
timing of such programs, the timing, costs and uncertainties
regarding obtaining regulatory approvals to market our product
candidates and the difficulty in predicting the timing and results
of any product launches, the timing and amount of profit-share
payments from our commercial partners, and the timing and amount of
any available investment tax credits, the actual or perceived
benefits to users of our drug delivery technologies, products and
product candidates as compared to others, our ability to establish
and maintain valid and enforceable intellectual property rights in
our drug delivery technologies, products and product candidates,
the scope of protection provided by intellectual property for our
drug delivery technologies, products and product candidates, recent
and future legal developments in the United States and elsewhere
that could make it more difficult and costly for us to obtain
regulatory approvals for our product candidates and negatively
affect the prices we may charge, increased public awareness and
government scrutiny of the problems associated with the potential
for abuse of opioid based medications, pursuing growth through
international operations could strain our resources, our limited
manufacturing, sales, marketing or distribution capability and our
reliance on third parties for such, the actual size of the
potential markets for any of our products and product candidates
compared to our market estimates, our selection and licensing of
products and product candidates, our ability to attract
distributors and/or commercial partners with the ability to fund
patent litigation and with acceptable product development,
regulatory and commercialization expertise and the benefits to be
derived from such collaborative efforts, sources of revenues and
anticipated revenues, including contributions from distributors and
commercial partners, product sales, license agreements and other
collaborative efforts for the development and commercialization of
product candidates, our ability to create an effective direct sales
and marketing infrastructure for products we elect to market and
sell directly, the rate and degree of market acceptance of our
products, delays in product approvals that may be caused by
changing regulatory requirements, the difficulty in predicting the
timing of regulatory approval and launch of competitive products,
the difficulty in predicting the impact of competitive products on
volume, pricing, rebates and other allowances, the number of
competitive product entries, and the nature and extent of any
aggressive pricing and rebate activities that may follow, the
inability to forecast wholesaler demand and/or wholesaler buying
patterns, seasonal fluctuations in the number of prescriptions
written for our generic Focalin XR
®
(dexmethylphenidate hydrochloride extended-release) capsules, and
our generic Seroquel XR
®
(quetiapine
fumarate extended-release) tablets, which may produce substantial
fluctuations in revenue, the timing and amount of insurance
reimbursement regarding our products, changes in laws and
regulations affecting the conditions required by the United States
Food and Drug Administration (“
FDA
”) for approval, testing and
labeling of drugs including abuse or overdose deterrent properties,
and changes affecting how opioids are regulated and prescribed by
physicians, changes in laws and regulations, including Medicare and
Medicaid, affecting among other things, pricing and reimbursement
of pharmaceutical products, the effect of recently-enacted changes
in U.S. federal income tax laws, including but not limited to,
limitations on the deductibility of business interest, limitations
on the use of net operating losses and application of the base
erosion minimum tax, on our U.S. corporate income tax burden,
our ability to retain and hire qualified employees, the
availability and pricing of third-party
sourced
products and materials, challenges related to the development,
commercialization, technology transfer, scale-up, and/or process
validation of manufacturing processes for our products or product
candidates, the manufacturing capacity of third-party manufacturers
that we may use for our products, potential product liability
risks, the recoverability of the cost of any pre-launch inventory,
should a planned product launch encounter a denial or delay of
approval by regulatory bodies, a delay in commercialization, or
other potential issues, the successful compliance with FDA, Health
Canada and other governmental regulations applicable to us and our
third party manufacturers’ facilities, products and/or
businesses, our reliance on commercial partners, and any future
commercial partners, to market and commercialize our products and,
if approved, our product candidates, difficulties, delays or
changes in the FDA approval process or test criteria for
abbreviated new drug applications (“
ANDAs
”) and new drug applications
(“
NDAs
”),
challenges in securing final FDA approval for our product
candidates, including our oxycodone hydrochloride extended release
tablets (previously referred to as Rexista™)
(“
Oxycodone ER
”)
product candidate, in particular, if a patent infringement suit is
filed against us with respect to any particular product candidates
(such as in the case of Oxycodone ER), which could delay the
FDA’s final approval of such product candidates, healthcare
reform measures that could hinder or prevent the commercial success
of our products and product candidates, the FDA may not approve
requested product labeling for our product candidate(s) having
abuse-deterrent properties and targeting common forms of abuse
(oral, intra-nasal and intravenous), risks associated with
cyber-security and the potential for vulnerability of our digital
information or the digital information of a current and/or future
drug development or commercialization partner of ours, and risks
arising from the ability and willingness of our third-party
commercialization partners to provide documentation that may be
required to support information on revenues earned by us from those
commercialization partners.
Additional risks
and uncertainties relating to us and our business can be found in
the “Risk Factors” section in Item 3.D below, as well
as in our reports, public disclosure documents and other filings
with the securities commissions and other regulatory bodies in
Canada and the U.S., which are available on
www.sedar.com
and
www.sec.gov
. The forward-looking
statements reflect our current views with respect to future events,
and are based on what we believe are reasonable assumptions as of
the date of this document and we disclaim any intention and have no
obligation or responsibility, except as required by law, to update
or revise any forward-looking statements, whether as a result of
new information, future events or otherwise.
Nothing
contained in this document should be construed to imply that the
results discussed herein will necessarily continue into the future
or that any conclusion reached herein will necessarily be
indicative of our actual operating results.
In this
annual report, unless the context otherwise requires, the terms
“we”, “us”, “our”,
“Intellipharmaceutics,” and the “Company”
refer to Intellipharmaceutics International Inc. and its
subsidiaries. Any reference in this annual report to our
“products” includes a reference to our product
candidates and future products we may develop. Whenever we refer to
any of our current product candidates (including additional product
strengths of products we are currently marketing) and future
products we may develop, no assurances can be given that we, or any
of our strategic partners, will successfully commercialize or
complete the development of any of such product candidates or
future products under development or proposed for development, that
regulatory approvals will be granted for any such product candidate
or future product, or that any approved product will be produced in
commercial quantities or sold profitably.
Unless
stated otherwise, all references to “
$
” are to the lawful currency of
the United States and all references to “
C$
” are to the lawful currency of
Canada. In this annual report, we refer to information regarding
potential markets for our products, product candidates and other
industry data. We believe that all such information has been
obtained from reliable sources that are customarily relied upon by
companies in our industry. However, we have not independently
verified any such information.
Intellipharmaceutics™,
Hypermatrix™, Drug Delivery Engine™,
IntelliFoam™, IntelliGITransporter™,
IntelliMatrix™, IntelliOsmotics™, IntelliPaste™,
IntelliPellets™, IntelliShuttle™, Rexista™,
nPODDDS™, PODRAS™ and Regabatin™ are our
trademarks. These trademarks are important to our business.
Although we may have omitted the “TM” trademark
designation for such trademarks in this annual report, all rights
to such trademarks are nevertheless reserved. Unless otherwise
noted, other trademarks used in this annual report are the property
of their respective holders.
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, 2017, 2016,
2015, 2014, and 2013. As a result of the IPC Arrangement
Transaction (as defined and described in Item 4.A below) completed
on October 22, 2009, we selected a November 30 year end. The
comparative number of shares issued and outstanding, basic and
diluted loss per share have been amended to give effect to this
arrangement transaction. These statements were prepared in
accordance with accounting principles generally accepted in the
United States of America (“
U.S. GAAP
”). All dollar amounts in
this annual report are expressed in United States dollars
(“
U.S.
dollars
”), unless otherwise indicated.
(in thousands of U.S. dollars, except for per share
data)
|
|
As
at and for the year ended November 30, 2017
|
As
at and for the year ended November 30, 2016
|
As
at and for the year ended November 30, 2015
|
As
at and for the year ended November 30, 2014
|
As
at and for the year ended November 30, 2013
|
|
|
$
|
$
|
$
|
$
|
$
|
|
Revenue
|
5,504
|
2,247
|
4,094
|
8,770
|
1,527
|
|
Loss for the
year
|
(8,857
)
|
(10,144
)
|
(7,436
)
|
(3,856
)
|
(11,495
)
|
|
Total
assets
|
7,397
|
7,974
|
5,224
|
7,875
|
4,380
|
|
Total
liabilities
|
7,010
|
6,858
|
5,362
|
2,966
|
10,335
|
|
Net
assets
|
386
|
1,116
|
(138
)
|
4,909
|
(5,955
)
|
|
Capital
stock
|
35,290
|
29,831
|
21,481
|
18,941
|
11,721
|
|
Loss per share -
basic and diluted
|
(0.29
)
|
(0.38
)
|
(0.31
)
|
(0.17
)
|
(0.58
)
|
|
Dividends
|
Nil
|
Nil
|
Nil
|
Nil
|
Nil
|
|
Weighted average
common shares
|
31,014
|
26,700
|
23,768
|
23,051
|
19,671
|
T
he following table sets forth the average exchange rate
for one Canadian dollar expressed in terms of one U.S. dollar for
the fiscal years 2013, 2014, 2015, 2016 and 2017. The average rate
is calculated using the average of the exchange rates on the last
day of each month during the period.
|
|
AVERAGE
|
|
2013
|
1.0241
|
|
2014
|
0.9115
|
|
2015
|
0.7934
|
|
2016
|
0.7532
|
|
2017
|
0.7598
|
The
following table sets forth the high and low exchange rates for each
month during the previous six months.
|
|
LOW
|
HIGH
|
|
August
2017
|
0.7840
|
0.8012
|
|
September
2017
|
0.8013
|
0.8245
|
|
October
2017
|
0.7756
|
0.8018
|
|
November
2017
|
0.7759
|
0.7885
|
|
December
2017
|
0.7760
|
0.7971
|
|
January
2018
|
0.7978
|
0.8135
|
|
February 2018
(through February 27, 2018)
|
0.7849
|
0.8138
|
The
exchange rates are based upon the noon buying rate as quoted by The
Bank of Canada. At February 27, 2018, the exchange rate for one
Canadian dollar expressed in terms of one U.S. dollar, as quoted by
The Bank of Canada at 4 p.m. Eastern Time, equaled
$0.7849.
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 R&D, clinical and regulatory activities necessary
and to defend against patent litigation claims in order to bring
our products to market and to establish commercial manufacturing,
marketing and sales capabilities. As of November 30, 2017, we had a
cash balance of $1.9 million. As of February 15, 2018 (the date of
filing of the Company’s Management Discussion and Analysis of
Financial Condition and Results of Operations and Audited Annual
Financial Statements for the year ended November 30, 2017), our
cash balance was $0.6 million. We currently expect to satisfy our
operating cash requirements until June 2018 from cash on hand and
quarterly profit share payments from Par Pharmaceutical, Inc., or
Par, and Mallinckrodt LLC, or Mallinckrodt. We may need to obtain
additional funding prior to that time as we further the development
of our product candidates and if we accelerate our product
commercialization activities. Other potential sources of capital
may include payments from licensing agreements, cost savings
associated with managing operating expense levels, and/or new
strategic partnership agreements which fund some or all costs of
product development. If necessary, and conditions permit, we may
utilize the equity markets to bridge any funding shortfall and to
provide capital to continue to advance our most promising product
candidates. Our future operations are highly dependent upon our
ability to source additional capital to support advancing our
product pipeline through continued R&D activities and to fund
any significant expansion of our operations. Our ultimate success
will depend on whether our product candidates receive the approval
of the FDA or Health Canada and whether we are able to successfully
market approved products. We cannot be certain that we will be able
to receive FDA or Health Canada approval for any of our current or
future product candidates, that we will reach the level of sales
and revenues necessary to achieve and sustain profitability, or
that we can secure other capital sources on terms or in amounts
sufficient to meet our needs or at all. Our cash requirements for
R&D during any period depend on the number and extent of the
R&D activities we focus on. At present, we are working
principally on our Oxycodone ER 505(b)(2), and selected generic,
product candidate development projects. Our development of
Oxycodone ER will require significant expenditures, including costs
to defend against the Purdue litigation. For our
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.
The
availability of equity or debt financing will be affected by, among
other things, the results of our R&D, our ability to obtain
regulatory approvals, our success in commercializing approved
products with our commercial partners and the market acceptance of
our products, the state of the capital markets generally, strategic
alliance agreements, and other relevant commercial considerations.
In addition, if we raise additional funds by issuing equity
securities, our then existing security holders will likely
experience dilution, and the incurring of indebtedness would result
in increased debt service obligations and could require us to agree
to operating and financial covenants that would restrict our
operations. In the event that we do not obtain sufficient
additional capital, it will raise substantial doubt about our
ability to continue as a going concern and realize our assets and
pay our liabilities as they become due. Our cash outflows are
expected to consist primarily of internal and external R&D,
legal and consulting expenditures to advance our product pipeline
and selling, general and administrative expenses to support our
commercialization efforts. Depending upon the results of our
R&D programs, the Purdue litigation (as defined below) and the
availability of financial resources, we could decide to accelerate,
terminate, or reduce certain projects, or commence new ones. Any
failure on our part to successfully commercialize approved products
or raise additional funds on terms favorable to us or at all, may
require us to significantly change or curtail our current or
planned operations in order to conserve cash until such time, if
ever, that sufficient proceeds from operations are generated, and
could result in us not taking advantage of business opportunities,
in the termination or delay of clinical trials or us not taking any
necessary actions required by the FDA or Health Canada for one or
more of our product candidates, in curtailment of our product
development programs designed to identify new product candidates,
in the sale or assignment of rights to our technologies, products
or product candidates, and/or our inability to file ANDAs,
Abbreviated New Drug Submissions (“
ANDSs
”) or NDAs, at all or in time
to competitively market our products or product
candidates.
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, 2017 and
had an accumulated deficit of $71,873,459 as of such date, and have
incurred additional losses since such date. As we engage in the
development of products in our pipeline, we may continue to incur
further losses.There can be no assurance that we will ever be able
to achieve or sustain profitability or positive cash flow. Our
ultimate success will depend on how many of our product candidates
receive the approval of the FDA or Health Canada and whether we are
able to successfully market approved products. We cannot be certain
that we will be able to receive FDA or Health Canada approval for
any of our current or future product candidates, or that we will
reach the level of sales and revenues necessary to achieve and
sustain profitability.
Loss of key scientists and failure to attract qualified personnel
could limit our growth and negatively impact our
operations.
We are
dependent upon the scientific expertise of Dr. Isa Odidi, our
Chairman and Chief Executive Officer, and Dr. Amina Odidi, our
President and Chief Operating Officer. Although we employ other
qualified scientists, Drs. Isa and Amina Odidi are our only
employees with the knowledge and experience necessary for us to
continue development of controlled-release products. We do not
maintain key-person life insurance on any of our officers or
employees. Although we have employment agreements with key members
of our management team, each of our employees may terminate his or
her employment at any time. The success of our business depends, in
large part, on our continued ability to attract and retain highly
qualified management, scientific, manufacturing and sales and
marketing personnel, on our ability to successfully integrate many
new employees, and on our ability to develop and maintain important
relationships with leading research and medical institutions and
key distributors. If we lose the services of our executive officers
or other qualified personnel or are unable to attract and retain
qualified individuals to fill these roles or develop key
relationships, our business, financial condition and results of
operations could be materially adversely affected.
Our intellectual property may not provide meaningful protection for
our products and product candidates.
We hold
certain U.S., Canadian and foreign patents and have pending
applications for additional patents outstanding. We intend to
continue to seek patent protection for, or maintain as trade
secrets, all of our commercially promising drug delivery platforms
and technologies. Our success depends, in part, on our and our
collaborative partners’ ability to obtain and maintain patent
protection for products and product candidates, maintain trade
secret protection and operate without infringing the proprietary
rights of third parties. Without patent and other similar
protection, other companies could offer substantially identical
products without incurring sizeable development costs which could
diminish our ability to recover expenses of and realize profits on
our developed products. If our pending patent applications are not
approved, or if we are unable to obtain patents for additional
developed technologies, the future protection for our technologies
will remain uncertain. Furthermore, third parties may independently
develop similar or alternative technologies, duplicate some or all
of our technologies, design around our patented technologies or
challenge our issued patents. Such third parties may have filed
patent applications, or hold issued patents, relating to products
or processes competitive with those we are developing or otherwise
restricting our ability to do business in a particular area. If we
are unable to obtain patents or otherwise protect our trade secrets
or other intellectual property and operate without infringing on
the proprietary rights of others, our business, financial condition
and results of operations could be materially adversely
affected.
We may be subject to intellectual property claims that could be
costly and could disrupt our business.
Third
parties may claim we have infringed their patents, trademarks,
copyrights or other rights. We may be unsuccessful in defending
against such claims, which could result in the inability to protect
our intellectual property rights or liability in the form of
substantial damages, fines or other penalties such as injunctions
precluding our manufacture, importation or sales of products. The
resolution of a claim could also require us to change how we do
business or enter into burdensome royalty or license agreements.
Insurance coverage may be denied or may not be adequate to cover
every claim that third parties could assert against us. Even
unsuccessful claims could result in significant legal fees and
other expenses, diversion of management’s time and
disruptions in our business. Any of these claims could also harm
our reputation.
We are a defendant in purported securities class-action litigation
matter and are at risk of additional similar litigation in the
future that could divert management’s attention and adversely
affect our business and could subject us to significant
liabilities.
We are
a defendant in a purported securities class action litigation
matter as described under Item 8.A below. The defense of such
litigation matters may increase our expenses and divert our
management’s attention and resources and any unfavorable
outcome could have a material adverse effect on our business and
results of operations. Any adverse determination in such litigation
matters, or any amounts paid to settle such litigation matters
could require that we make significant payments. In addition, we
may in the future be the target of other securities class actions
or similar litigation. See Item 8.A below.
We rely on maintaining as trade secrets our competitively sensitive
know-how and other information. Intentional or unintentional
disclosure of this information could impair our competitive
position.
As to
many technical aspects of our business, we have concluded that
competitively sensitive information is either not patentable or
that for competitive reasons it is not commercially advantageous to
seek patent protection. In these circumstances, we seek to protect
this know-how and other proprietary information by maintaining it
in confidence as a trade secret. To maintain the confidentiality of
our trade secrets, we generally enter into agreements that contain
confidentiality provisions with our employees, consultants,
collaborators, contract manufacturers and advisors upon
commencement of their relationships with us. These provisions
generally require that all confidential information developed by
the individual or made known to the individual by us during the
course of the individual’s relationship with us be kept
confidential and not disclosed to third parties. We may not have
these arrangements in place in all circumstances, and the
confidentiality provisions in our favour may be breached. We may
not become aware of, or have adequate remedies in the event of, any
such breach. In addition, in some situations, the confidentiality
provisions in our favour may conflict with, or be subject to, the
rights of third parties with whom our employees, consultants,
collaborators, contract manufacturers or advisors have previous
employment or consulting relationships. To the extent that our
employees, consultants, collaborators, contract manufacturers or
advisors use trade secrets or know-how owned by others in their
work for us, disputes may arise as to the ownership of relative
inventions. Also, others may independently develop substantially
equivalent trade secrets, processes and know-how, and competitors
may be able to use this information to develop products that
compete with our products, which could adversely impact our
business. The disclosure of our trade secrets could impair our
competitive position. Adequate remedies may not exist in the event
of unauthorized use or disclosure of our confidential
information.
Approvals for our product candidates may be delayed or become more
difficult to obtain if the FDA institutes changes to its approval
requirements.
The FDA
may institute changes to its ANDA approval requirements, which may
make it more difficult or expensive for us to obtain approval for
our new generic products. For instance, in July 2012, the Generic
Drug Fee User Amendments of 2012 (“
GDUFA
”) were enacted into law. The
GDUFA legislation implemented substantial fees for new ANDAs, Drug
Master Files, product and establishment fees and a one-time fee for
back-logged ANDAs pending approval as of October 1, 2012. In
return, the program is intended to provide faster and more
predictable ANDA reviews by the FDA and more timely inspections of
drug facilities. For the FDA’s fiscal years 2016 and 2017,
respectively, the user fee rates are $76,030 and $70,480 for new
ANDAs, $38,020 and $35,240 for “Prior Approval
Supplements,” and $17,434 for each ANDA already on file at
the FDA. For the FDA’s fiscal year 2016 and 2017, there is
also an annual facility user fee of $258,905 and $273,646,
respectively. Effective October 1, 2017, for the FDA’s fiscal
year 2018, the FDA will charge an annual facility user fee of
$226,087 plus a new general program fee of $159,079. Under GDUFA,
generic product companies face significant penalties for failure to
pay the new user fees, including rendering an ANDA not
“substantially complete” until the fee is paid. It is
currently uncertain the effect the new fees will have on our ANDA
process and business. However, any failure by us or our suppliers
to pay the fees or to comply with the other provisions of GDUFA may
adversely impact or delay our ability to file ANDAs, obtain
approvals for new generic products, generate revenues and thus may
have a material adverse effect on our business, results of
operations and financial condition.
Recent and future legal developments could make it more difficult
and costly for us to obtain regulatory approvals for our product
candidates and negatively affect the prices we may
charge.
In the
United States and elsewhere, recent and proposed legal and
regulatory changes to healthcare systems could prevent or delay our
receipt of regulatory approval for our product candidates, restrict
or regulate our post-approval marketing activities, and adversely
affect our ability to profitably sell our products. We do not know
whether additional legislative changes will be enacted, or whether
the FDA’s regulations, guidance or interpretations will be
changed, or what impact any such changes will have, if any, on our
ability to obtain regulatory approvals for our product candidates.
Further, the U.S. Centers for Medicare and Medicaid Services, or
CMS, frequently changes product descriptors, coverage policies,
product and service codes, payment methodologies and reimbursement
values. Also, increased scrutiny by the U.S. Congress of the
FDA’s approval process could significantly delay or prevent
our receipt of regulatory approval for our product candidates and
subject us to more stringent product labeling and post-marketing
testing and other requirements.
In
addition, the current U.S. White House administration has expressed
concerns regarding existing trade agreements, such as North
American Free Trade Agreement (NAFTA), and raised the possibility
of imposing significant increases on tariffs on goods imported into
the United States
,
which
could adversely impact our sale of products into the United
States.
We operate in a highly litigious environment.
From
time to time, we may be exposed to claims and legal actions in the
normal course of business. As of the date of this annual report, we
are not aware of any pending or threatened material litigation
claims against us other than as described below and under Item 8.A
below. Litigation to which we are, or may be, subject could relate
to, among other things, our patent and other intellectual property
rights or such rights of others, business or licensing arrangements
with other persons, product liability or financing activities. Such
litigation could include an injunction against the manufacture or
sale of one or more of our products or potential products or a
significant monetary judgment, including a possible punitive
damages award, or a judgment that certain of our patent or other
intellectual property rights are invalid or unenforceable or
infringe the intellectual property rights of others. If such
litigation is commenced, our business, results of operations,
financial condition and cash flows could be materially adversely
affected.
There
has been substantial litigation in the pharmaceutical industry
concerning the manufacture, use and sale of new products that are
the subject of conflicting patent rights. When we file an ANDA or
505(b)(2) NDA for a bioequivalent version of a drug, we may, in
some circumstances, be required to certify to the FDA that any
patent which has been listed with the FDA as covering the branded
product has expired, the date any such patent will expire, or that
any such patent is invalid or will not be infringed by the
manufacture, sale or use of the new drug for which the application
is submitted. Approval of an ANDA is not effective until each
listed patent expires, unless the applicant certifies that the
patents at issue are not infringed or are invalid and so notifies
the patent holder and the holder of the branded product. A patent
holder may challenge a notice of non-infringement or invalidity by
suing for patent infringement within 45 days of receiving notice.
Such a challenge prevents FDA approval for a period which ends 30
months after the receipt of notice, or sooner if an appropriate
court rules that the patent is invalid or not infringed. From time
to time, in the ordinary course of business, we face and have faced
such challenges and may continue to do so in the
future.
In
November 2016, we filed an NDA for our Oxycodone ER product
candidate, relying on the 505(b)(2) regulatory pathway, which
allowed us to reference data from Purdue Pharma L.P.’s file
for its OxyContin
®
extended
release oxycodone hydrochloride. Our Oxycodone ER application was
accepted by the FDA for further review in February 2017. We
certified to the FDA that we believed that our Oxycodone ER product
candidate would not infringe any of the sixteen (16) patents
associated with the branded product OxyContin
®
, or the
OxyContin
®
patents, listed
in the FDA’s Approved Drug Products with Therapeutic
Equivalence Evaluations, commonly known as the Orange Book, or the
Orange Book, or that such patents are invalid, and so notified
Purdue Pharma L.P. and the other owners of the subject patents
listed in the Orange Book of such certification. On April 7, 2017,
we received notice that Purdue Pharma L.P., Purdue Pharmaceuticals
L.P., The P.F. Laboratories, Inc., or collectively the Purdue
parties, Rhodes Technologies, and Grünenthal GmbH, or
collectively the Purdue litigation plaintiffs or plaintiffs, had
commenced patent infringement proceedings, or the Purdue
litigation, against us in the U.S. District Court for the District
of Delaware in respect of our NDA filing for Oxycodone ER, alleging
that Oxycodone ER infringes six (6) out of the sixteen (16)
patents. The complaint seeks injunctive relief as well as
attorneys’ fees and costs and such other and further relief
as the Court may deem just and proper. An answer and counterclaim
have been filed.
As a
result of the commencement of these legal proceedings, the FDA is
stayed for 30 months from granting final approval to our Oxycodone
ER product candidate. That time period commenced on February 24,
2017, when the Purdue litigation plaintiffs received notice of our
certification concerning the patents, and will expire on August 24,
2019, unless the stay is earlier terminated by a final declaration
of the courts that the patents are invalid, or are not infringed,
or the matter is otherwise settled among the parties. A trial date
for the Purdue litigation has been set for October 22, 2018. We are
confident that we do not infringe the subject patents, and will
vigorously defend against these claims.
Brand-name
pharmaceutical manufacturers routinely bring patent infringement
litigation against ANDA applicants seeking FDA approval to
manufacture and market generic forms of their branded products. We
are routinely subject to patent litigation that can delay or
prevent our commercialization of products, force us to incur
substantial expense to defend, and expose us to substantial
liability.
In July
2017, three complaints were filed in the U.S. District Court for
the Southern District of New York asserting claims under the
federal securities laws against us and two of our executive
officers on behalf of a putative class of purchasers of our
securities (the “
S.D.N.Y.
Action
”). In a subsequent order, the Court
consolidated the three actions under the caption
Shanawaz v. Intellipharmaceutics Int’l
Inc., et al.
, No. 1:17-cv-05761 (S.D.N.Y.), appointed lead
plaintiffs in the consolidated action, and approved lead
plaintiffs’ selection of counsel. Lead plaintiffs filed a
consolidated amended complaint on January 29, 2018. In the amended
complaint, lead plaintiffs purport to assert claims on behalf of a
putative class consisting of purchasers of our securities between
May 21, 2015 and July 26, 2017. The amended complaint alleges that
the defendants violated Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934, as amended (“
U.S. Exchange Act
”) and Rule 10b-5
promulgated thereunder by making allegedly false and misleading
statements or failing to disclose certain information regarding our
NDA for Oxycodone ER abuse-deterrent oxycodone hydrochloride
extended release tablets. The complaint seeks, among other
remedies, unspecified damages, attorneys’ fees and other
costs, equitable and/or injunctive relief, and such other relief as
the court may find just and proper. Under a scheduling order
approved by the Court, the defendants must respond to the amended
complaint by March 30, 2018. We intend to vigorously defend our
company against the claims asserted in the consolidated
action.
We cannot ensure the availability of raw materials.
Certain
raw materials necessary for the development and subsequent
commercial manufacture of our product candidates may be proprietary
products of other companies. While we attempt to manage the risk
associated with such proprietary raw materials, if our efforts
fail, or if there is a material shortage, contamination, and/or
recall of such materials, the resulting scarcity could adversely
affect our ability to develop or manufacture our product
candidates. In addition, many third party suppliers are subject to
governmental regulation and, accordingly, we are dependent on the
regulatory compliance of, as well as on the strength,
enforceability and terms of our various contracts with, these third
party suppliers.
Further, the FDA
requires identification of raw material suppliers in applications
for approval of drug products. If raw materials are unavailable
from a specified supplier, the supplier does not give us access to
its technical information for our application or the supplier is
not in compliance with FDA or other applicable requirements, FDA
approval of the supplier could delay the manufacture of the drug
involved. Any inability to obtain raw materials on a timely basis,
or any significant price increases which cannot be passed on to
customers, could have a material adverse effect on our business,
results of operations, financial condition and cash
flows.
Our product candidates may not be successfully developed or
commercialized.
Successful
development of our product candidates is highly uncertain and is
dependent on numerous factors, many of which are beyond our
control. Products that appear promising in research or early phases
of development may fail to reach later stages of development or the
market for several reasons including:
●
for ANDA
candidates, bioequivalence studies results may not meet regulatory
requirements or guidelines for the demonstration of
bioequivalence;
●
for NDA candidates,
a product may not demonstrate acceptable large-scale clinical trial
results, even though it demonstrated positive preclinical or
initial clinical trial results;
●
for NDA candidates,
a product may not be effective in treating a specified condition or
illness;
●
a product may have
harmful side effects on humans;
●
products may fail
to receive the necessary regulatory approvals from the FDA or other
regulatory bodies, or there may be delays in receiving such
approvals;
●
changes in the
approval process of the FDA or other regulatory bodies during the
development period or changes in regulatory review for each
submitted product application may also cause delays in the approval
or result in rejection of an application;
●
difficulties may be
encountered in formulating products, scaling up manufacturing
processes or in getting approval for manufacturing;
●
difficulties may be
encountered in the manufacture and/or packaging of our
products;
●
once manufactured,
our products may not meet prescribed quality assurance and
stability tests;
●
manufacturing
costs, pricing or reimbursement issues, other competitive
therapeutics, or other commercial factors may make the product
uneconomical; and
●
the proprietary
rights of others, and their competing products and technologies,
may prevent the product from being developed or
commercialized.
Further, success in
preclinical and early clinical trials does not ensure that
large-scale clinical trials will be successful, nor does success in
preliminary studies for ANDA candidates ensure that bioequivalence
studies will be successful. Results are frequently susceptible to
varying interpretations that may delay, limit or prevent regulatory
approvals. The length of time necessary to complete bioequivalence
studies or clinical trials and to submit an application for
marketing approval for a final decision by a regulatory authority
varies significantly and may be difficult to predict.
As a
result, there can be no assurance that any of our product
candidates currently in development will ever be successfully
commercialized.
Near-term revenue depends significantly on the success of our first
commercialized product, our once daily generic Focalin
XR
®
(dexmethylphenidate hydrochloride extended-release), and our second
commercialized product, generic Seroquel XR
®
(quetiapine
fumarate extended release).
We have
invested significant time and effort in the development of our
first ANDA product, our once daily generic Focalin XR
®
capsules, for
which we received final approval from the FDA in November 2013
under the Company ANDA (as defined below) to launch the 15 and 30
mg strengths. Commercial sales of these strengths were launched
immediately by our commercialization partner in the U.S., Par. Our
5, 10, 20 and 40 mg strengths were also then tentatively FDA
approved, subject to the right of Teva Pharmaceuticals USA, Inc.
(“
Teva
”) to 180
days of generic exclusivity from the date of first launch of such
products. Teva launched its own 5, 10, 20 and 40 mg strengths of
generic Focalin XR
®
capsules on
November 11, 2014, February 2, 2015, June 22, 2015 and November 19,
2013, respectively. In January 2017, Par launched the 25 and 35 mg
strengths of its generic Focalin XR
®
capsules in the
U.S., and in May 2017, Par launched the 10 and 20 mg strengths,
complementing the 15 and 30 mg strengths of our generic Focalin
XR
®
marketed by Par. The FDA had granted final approval under the Par
ANDA (as defined below) for its generic Focalin XR
®
capsules in the
5, 10, 15, 20, 25, 30, 35 and 40 mg strengths. As the first filer
of an ANDA for generic Focalin XR
®
in the 25 and
35 mg strengths, Par had 180 days of U.S. generic marketing
exclusivity for those strengths. In November 2017, Par launched the
remaining 5 and 40 mg strengths of generic Focalin XR
®
, complementing
the 10, 15, 20, 25, 30 and 35 mg strengths previously launched and
marketed by Par and providing us with the full line of general
Focalin XR
®
strengths
available in the U.S. market. Under a license and commercialization
agreement between us and Par (as amended, the “
Par agreement
”), we receive
calendar quarterly profit-share payments on Par’s U.S. sales
of generic Focalin XR
®
. There can be
no assurance whether any strengths will be successfully
commercialized. We depend significantly on the actions of our
marketing partner Par in the prosecution, regulatory approval and
commercialization of our generic Focalin XR
®
capsules and on
their timely payment to us of the contracted calendar quarterly
payments as they come due.
We have
also invested significant time and effort in the development of our
second ANDA product, our generic Seroquel XR
®
tablets in the
50, 150, 200, 300 and 400 mg strengths, and in May 2017 our ANDA
received final FDA approval for all of these strengths. Our
approved product is a generic equivalent for the corresponding
strengths of the branded product Seroquel XR
®
sold in the
U.S. by AstraZeneca. The Company manufactured and shipped
commercial quantities of all strengths of generic Seroquel
XR
®
to our marketing and distribution partner Mallinckrodt, and
Mallinckrodt launched all strengths in June 2017. In October 2016,
we announced a license and commercial supply agreement with
Mallinckrodt, granting Mallinckrodt an exclusive license to market,
sell and distribute in the U.S. the following extended release drug
product candidates (the “
licensed products
”) which have
either been launched (generic Seroquel XR
®
) or for which
we have ANDAs filed with the FDA (the “
Mallinckrodt
agreement
”):
●
Quetiapine fumarate
extended-release tablets (generic Seroquel XR
®
) –
Approved by FDA and launched
●
Desvenlafaxine
extended-release tablets (generic Pristiq
®
) – ANDA
Under FDA Review
●
Lamotrigine
extended-release tablets (generic Lamictal
®
XR™)
– ANDA Under FDA Review
Under
the terms of the 10-year agreement, we received a non-refundable
upfront payment of $3 million in October 2016. In addition, the
agreement also provides for a long-term profit sharing arrangement
with respect to these licensed products (which includes up to $11
million in cost recovery payments that are payable on future sales
of licensed product). We have agreed to manufacture and supply the
licensed products exclusively for Mallinckrodt on a cost plus
basis. The Mallinckrodt agreement contains customary terms and
conditions for an agreement of this kind, and is subject to early
termination in the event we do not obtain FDA approvals of the
Mallinckrodt licensed products by specified dates, or pursuant to
any one of several termination rights of each party. There can be
no assurance whether any strengths of our generic Seroquel
XR
®
will be successfully commercialized. We depend significantly on the
actions of our marketing partner Mallinckrodt in the
commercialization of our generic Seroquel XR
®
tablets and on
their timely payment to us of the contracted payments as they come
due.
Our
near term ability to generate significant revenue will depend upon
successful commercialization of our products in the U.S., where the
branded Focalin XR
®
product and the
branded Seroquel XR
®
product are in
the market. Although we have several other products in our
pipeline, and received final approval from the FDA for our generic
Keppra XR
®
(levetiracetam
extended-release tablets) for the 500 and 750 mg strengths and
final approval from the FDA for our metformin hydrochloride extend
release tablets in the 500 and 750 mg strengths, the majority of
the products in our pipeline are at earlier stages of development.
We will be exploring licensing and commercial alternatives for our
generic Keppra XR
®
product
strengths that have been approved by the FDA. We are also actively
evaluating options to realize commercial returns from the approval
of our generic Glucophage
®
XR.
Our significant expenditures on research and development may not
lead to successful product introductions.
We
conduct research and development primarily to enable us to
manufacture and market pharmaceuticals in accordance with FDA
regulations. Typically, research expenses related to the
development of innovative compounds and the filing of NDAs are
significantly greater than those expenses associated with ANDAs. As
we continue to develop new products, our research expenses will
likely increase. We are required to obtain FDA approval before
marketing our drug products and the approval process is costly and
time consuming. Because of the inherent risk associated with
research and development efforts in our industry, particularly with
respect to new drugs, our research and development expenditures may
not result in the successful introduction of FDA approved new
pharmaceuticals.
We may not have the ability to develop or license, or otherwise
acquire, and introduce new products on a timely basis.
Product
development is inherently risky, especially for new drugs for which
safety and efficacy have not been established and the market is not
yet proven. Likewise, product licensing involves inherent risks
including uncertainties due to matters that may affect the
achievement of milestones, as well as the possibility of
contractual disagreements with regard to terms such as license
scope or termination rights. The development and commercialization
process, particularly with regard to new drugs, also requires
substantial time, effort and financial resources. The process of
obtaining FDA or other regulatory approval to manufacture and
market new and generic pharmaceutical products is rigorous, time
consuming, costly and largely unpredictable. We, or a partner, may
not be successful in obtaining FDA or other required regulatory
approval or in commercializing any of the product candidates that
we are developing or licensing.
Our business and operations are increasingly dependent on
information technology and accordingly we would suffer in the event
of computer system failures, cyber-attacks or a deficiency in
cyber-security.
Our
internal computer systems, and those of a current and/or future
drug development or commercialization partner of ours, may be
vulnerable to damage from cyber-attacks, computer viruses, malware,
natural disasters, terrorism, war, telecommunication and electrical
failures. The risk of a security breach or disruption, particularly
through cyber-attacks, including by computer hackers, foreign
governments, and cyber terrorists, has generally increased as the
number, intensity and sophistication of attempted attacks and
intrusions have increased. If such an event were to occur and cause
interruptions in our operations or those of a drug development or
commercialization partner, it could result in a material disruption
of our product development programs. For example, the loss of
clinical trial data from completed or ongoing or planned clinical
trials could result in delays in our regulatory approval efforts
and significantly increase our costs to recover or reproduce the
data. To the extent that any disruption or security breach was to
result in a loss of or damage to our data or applications, or
inappropriate disclosure of confidential or proprietary
information, we could incur material legal claims and liability,
damage to our reputation, and the further development of our drug
candidates could be adversely affected.
Our business can be impacted by wholesaler buying patterns,
increased generic competition and, to a lesser extent, seasonal
fluctuations, which may cause our operating results to
fluctuate.
We
believe that the revenues derived from our generic Focalin
XR
®
capsules and generic Seroquel XR
®
tablets are
subject to wholesaler buying patterns, increased generic
competition negatively impacting price, margins and market share
consistent with industry post-exclusivity experience and, to a
lesser extent, seasonal fluctuations in relation to generic Focalin
XR
®
capsules (as these products are indicated for conditions including
attention deficit hyperactivity disorder which we expect may see
increases in prescription rates during the school term and declines
in prescription rates during the summer months). Accordingly, these
factors may cause our operating results to fluctuate.
We may not achieve our projected development goals in the time
frames we announce and expect.
We set
goals regarding the expected timing of meeting certain corporate
objectives, such as the commencement and completion of clinical
trials, anticipated regulatory approval and product launch dates.
From time to time, we may make certain public statements regarding
these goals. The actual timing of these events can vary
dramatically due to, among other things, insufficient funding,
delays or failures in our clinical trials or bioequivalence
studies, the uncertainties inherent in the regulatory approval
process, such as failure to secure appropriate product labeling
approvals, requests for additional information, delays in achieving
manufacturing or marketing arrangements necessary to commercialize
our product candidates and failure by our collaborators, marketing
and distribution partners, suppliers and other third parties to
fulfill contractual obligations. In addition, the possibility of a
patent infringement suit regarding one or more of our product
candidates could delay final FDA approval of such candidates. If we
fail to achieve one or more of these planned goals, the price of
our common shares could decline.
We have limited manufacturing, sales, marketing or distribution
capability and we must rely upon third parties for
such.
While
we have built our own manufacturing facility onsite in Toronto, we
depend on third-party manufacturers to supply pharmaceutical
ingredients and will be reliant on a third-party manufacturer to
produce certain of our products and product candidates. Third-party
manufacturers must be able to meet our deadlines, as well as adhere
to quality standards and specifications. Our reliance on third
parties for the manufacture of pharmaceutical ingredients and
finished products creates a dependency that could severely disrupt
our research and development, our clinical testing, and ultimately
our sales and marketing efforts if the source of such supply proves
to be unreliable or unavailable. If our own manufacturing operation
or any contracted manufacturing operation is unreliable or
unavailable, we may not be able to move forward and our entire
business plan could fail. There is no assurance that our own
manufacturing operation or any third-party manufacturers will be
able to meet commercialized scale production requirements in a
timely manner or in accordance with applicable standards or current
cGMP.
If our manufacturing facility is unable to manufacture our
product(s) or the manufacturing process is interrupted due to
failure to comply with regulations or for other reasons, it could
have a material adverse impact on our business.
If our
manufacturing facility fails to comply with regulatory requirements
or encounter other manufacturing difficulties, it could adversely
affect our ability to supply products. All facilities and
manufacturing processes used for the manufacture of pharmaceutical
products are subject to inspection by regulatory agencies at any
time and must be operated in conformity with cGMP regulations.
Compliance with FDA and Health Canada cGMP requirements applies to
both drug products seeking regulatory approval and to approved drug
products. In complying with cGMP requirements, pharmaceutical
manufacturing facilities must continually expend significant time,
money and effort in production, record-keeping and quality
assurance and control so that their products meet applicable
specifications and other requirements for product safety, efficacy
and quality. Failure to comply with applicable legal requirements
subjects our manufacturing facility to possible legal or regulatory
action, including shutdown, which may adversely affect our ability
to manufacture product. Were we not able to manufacture products at
our manufacturing facility because of regulatory, business or any
other reasons, the manufacture and marketing of these products
would be interrupted. This could have a material adverse impact on
our business, results of operations, financial condition, cash
flows and competitive position.
The use of legal and regulatory strategies by competitors with
innovator products, including the filing of citizen petitions, may
delay or prevent the introduction or approval of our product
candidates, increase our costs associated with the introduction or
marketing of our products, or significantly reduce the profit
potential of our product candidates.
Companies with
innovator drugs often pursue strategies that may serve to prevent
or delay competition from alternatives to their innovator products.
These strategies include, but are not limited to:
●
filing
“citizen petitions” with the FDA that may delay
competition by causing delays of our product
approvals;
●
seeking to
establish regulatory and legal obstacles that would make it more
difficult to demonstrate a product’s bioequivalence or
“sameness” to the related innovator
product;
●
filing suits for
patent infringement that automatically delay FDA approval of
products seeking approval based on the Section 505(b)(2)
pathway;
●
obtaining
extensions of market exclusivity by conducting clinical trials of
innovator drugs in pediatric populations or by other
methods;
●
persuading the FDA
to withdraw the approval of innovator drugs for which the patents
are about to expire, thus allowing the innovator company to develop
and launch new patented products serving as substitutes for the
withdrawn products;
●
seeking to obtain
new patents on drugs for which patent protection is about to
expire; and
●
initiating
legislative and administrative efforts in various states to limit
the substitution of innovator products by pharmacies.
These
strategies could delay, reduce or eliminate our entry into the
market and our ability to generate revenues from our products and
product candidates.
Our products may not achieve expected levels of market acceptance,
thereby limiting our potential to generate revenue.
Even if
we are able to obtain regulatory approvals for our product
candidates, the success of any of our products will be dependent
upon market acceptance. Levels of market acceptance for any
products marketed by us could be affected by several factors,
including:
●
the availability of
alternative products from competitors;
●
the prices of our
products relative to those of our competitors;
●
the number of
competitive product entries, and the nature and extent of any
aggressive pricing and rebate activities that may
follow;
●
the timing of our
market entry;
●
the ability to
market our products effectively at the retail level;
and
●
the acceptance of
our products by government and private formularies.
Some of
these factors are not within our control, and our proposed products
may not achieve levels of market acceptance anticipated by us.
Additionally, continuing and increasingly sophisticated studies of
the proper utilization, safety and efficacy of pharmaceutical
products are being conducted by the industry, government agencies
and others which can call into question the utilization, safety and
efficacy of our products and any product candidates we are
currently developing or may develop in the future. These studies
could also impact a future product after it has been marketed. In
some cases, studies have resulted, and may in the future result, in
the discontinuance of product marketing or requirement of other
risk management programs such as the need for a patient registry.
The failure of our products and any of our product candidates, once
approved, to achieve market acceptance would limit our ability to
generate revenue and would adversely affect our results of
operations.
The risks and uncertainties inherent in conducting clinical trials
could delay or prevent the development and commercialization of our
own branded products, which could have a material adverse effect on
our results of operations, liquidity, financial condition, and
growth prospects.
There
are a number of risks and uncertainties associated with clinical
trials, which may be exacerbated by our relatively limited
experience in conducting and supervising clinical trials and
preparing NDAs. The results of initial clinical trials may not be
indicative of results that would be obtained from large scale
testing. Clinical trials are often conducted with patients having
advanced stages of disease and, as a result, during the course of
treatment these patients can die or suffer adverse medical effects
for reasons that may not be related to the pharmaceutical agents
being tested, but which nevertheless affect the clinical trial
results. In addition, side effects experienced by the patients may
cause delay of approval of our product candidates or a limited
application of an approved product. Moreover, our clinical trials
may not demonstrate sufficient safety and efficacy to obtain FDA
approval.
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 rely on commercial partners, and may rely on future commercial
partners, to market and commercialize our products and, if
approved, our product candidates, and one or more of those
commercial partners may fail to develop and effectively
commercialize our current, and any future, products.
Our
core competency and strategic focus is on drug development and we
now, and may in the future, utilize strategic commercial partners
to assist in the commercialization of our products and our product
candidates, if approved by the FDA. If we enter into strategic
partnerships or similar arrangements, we will rely on third parties
for financial resources and for commercialization, sales and
marketing. Our commercial partners may fail to develop or
effectively commercialize our current, and any future products, for
a variety of reasons, including, among others, because they may
face intense competition, they lack adequate financial or other
resources or they decide to focus on other initiatives or
priorities. Any failure of our third-party commercial partners to
successfully market and commercialize our products and product
candidates would diminish our revenues.
We have limited sales, marketing and distribution
experience.
We have
limited experience in the sales, marketing, and distribution of
pharmaceutical products. There can be no assurance that, if
required, we would be able to establish sales, marketing, and
distribution capabilities or make arrangements with our
collaborators, licensees, or others to perform such activities or
that such efforts would be successful. If we fail to establish
successful marketing and sales capabilities or to make arrangements
with third parties, our business, financial condition and results
of operations will be materially adversely affected.
Our significant shareholders have the ability to exercise
significant influence over certain corporate actions.
Our
principal shareholders, Drs. Amina and Isa Odidi, our President and
Chief Operating Officer and our Chairman and Chief Executive
Officer, respectively, and Odidi Holdings Inc., a privately-held
company controlled by Drs. Amina and Isa Odidi, owned in the
aggregate approximately 16.7% of our issued and outstanding common
shares as of February 27, 2018 (and collectively beneficially
owned in the aggregate approximately 25.6% of our common shares,
including common shares issuable upon the exercise of outstanding
options and the conversion of the debenture in respect of the loan
to us in the original principal amount of $1,500,000 by Drs. Isa
and Amina Odidi (the “
Debenture
”), of which $1,350,000
remains outstanding, that are exercisable or convertible within 60
days of the date hereof). As a result, the principal shareholders
have the ability to exercise significant influence over all matters
submitted to our shareholders for approval whether subject to
approval by a majority of holders of our common shares or subject
to a class vote or special resolution requiring the approval of
66⅔% of the votes cast by holders of our common shares, in
person or by proxy.
Our effective tax rate may vary.
Various
internal and external factors may have favorable or unfavorable
effects on our future effective tax rate. These factors include,
but are not limited to, changes in tax laws, regulations and/or
rates, changing interpretations of existing tax laws or
regulations, future levels of research and development spending,
the availability of tax credit programs for the reimbursement of
all or a significant proportion of research and development
spending, and changes in overall levels of pre-tax earnings. At
present, we qualify in Canada for certain research tax credits for
qualified scientific research and experimental development
pertaining to our drug delivery technologies and drug products in
research stages. If Canadian tax laws relating to research tax
credits were substantially negatively altered or eliminated, or if
a substantial portion of our claims for tax credits were denied by
the relevant taxing authorities, pursuant to an audit or otherwise,
it would have a material adverse effect upon our financial
results.
The
effect of U.S. federal income tax law changes enacted in 2017 on
the U.S. corporate income tax burden on our future U.S. operations
cannot be predicted. Although such legislation reduced the maximum
corporate income tax rate from 35% to 21%, it also introduced
several changes that could increase our effective rate of tax on
our net operating income. For example, if our operations are highly
leveraged, the new limitations on business interest deductions may
prevent us from being able to reduce our corporate income tax base
by a significant amount of interest incurred on debt necessary to
fund operations. In addition, newly enacted limitations on a
corporation’s ability to reduce its taxable
income
by net
operating loss carryovers may prevent us from using prior year
accumulated losses fully to offset taxable income earned in
profitable years. Finally, if we make significant payments for
interest, royalties, services and otherwise deductible items to our
foreign affiliates, the base erosion minimum tax enacted last year
may apply to increase our effective rate of U.S. corporate income
tax.
Risks related to our Industry
Generic drug manufacturers will increase competition for certain
products and may reduce our expected royalties.
Part of
our product development strategy includes making NDA filings
relating to product candidates involving the novel reformulation of
existing drugs with active ingredients that are off-patent. Such
NDA product candidates, if approved, are likely to face competition
from generic versions of such drugs in the future. Regulatory
approval for generic drugs may be obtained without investing in
costly and time consuming clinical trials. Because of substantially
reduced development costs, manufacturers of generic drugs are often
able to charge much lower prices for their products than the
original developer of a new product. If we face competition from
manufacturers of generic drugs on products we may commercialize,
such as our once-daily Oxycodone ER product candidate, the prices
at which such of our products are sold and the revenues we may
receive could be reduced.
Revenues from generic pharmaceutical products typically decline as
a result of competition, both from other pharmaceutical companies
and as a result of increased governmental pricing
pressure.
Our
generic drugs face intense competition. Prices of generic drugs
typically decline, often dramatically, especially as additional
generic pharmaceutical companies (including low-cost generic
producers based in China and India) receive approvals and enter the
market for a given product and competition intensifies.
Consequently, our ability to sustain our sales and profitability on
any given product over time is affected by the number of new
companies selling such product and the timing of their
approvals.
In
addition, intense pressure from government healthcare authorities
to reduce their expenditures on prescription drugs could result in
lower pharmaceutical pricing, causing decreases in our
revenues.
Furthermore, brand
pharmaceutical companies continue to defend their products
vigorously. For example, brand companies often sell or license
their own generic versions of their products, either directly or
through other generic pharmaceutical companies (so-called
“authorized generics”). No significant regulatory
approvals are required for authorized generics, and brand companies
do not face any other significant barriers to entry into such
market. Brand companies may seek to delay introductions of generic
equivalents through a variety of commercial and regulatory tactics.
These actions may increase the costs and risks of our efforts to
introduce generic products and may delay or prevent such
introduction altogether.
Market acceptance of our products will be limited if users of our
products are unable to obtain adequate reimbursement from
third-party payers.
Government health
administration authorities, private health insurers and other
organizations generally provide reimbursement for products like
ours, and our commercial success will depend in part on whether
appropriate reimbursement levels for the cost of our products and
related treatments are obtained from government authorities,
private health insurers and other organizations, such as health
maintenance organizations and managed care organizations. Even if
we succeed in bringing any of our products to market, third-party
payers may not provide reimbursement in whole or in part for their
use.
Significant
uncertainty exists as to the reimbursement status of newly approved
health care products. Some of our product candidates, such as our
once-daily Oxycodone ER, are intended to replace or alter existing
therapies or procedures. These third-party payers may conclude that
our products are less safe, less effective or less economical than
those existing therapies or procedures. Therefore, third-party
payers may not approve our products for reimbursement. We may be
required to make substantial pricing concessions in order to gain
access to the formularies of large managed-care organizations. If
third party payers do not approve our products for reimbursement or
fail to reimburse them adequately, sales will suffer as some
physicians or their patients may opt for a competing product that
is approved for reimbursement or is adequately reimbursed. Even if
third-party payers make reimbursement available, these
payers’ reimbursement policies may adversely affect our
ability and our potential marketing and distribution
partners’ ability to sell our products on a profitable
basis.
We are subject to significant costs and uncertainties related to
compliance with the extensive regulations that govern the
manufacturing, labeling, distribution, cross-border imports and
promotion of pharmaceutical products as well as environmental,
safety and health regulations.
Governmental
authorities in the United States and Canada regulate the research
and development, testing and safety of pharmaceutical products. The
regulations applicable to our existing and future products may
change. Regulations require extensive clinical trials and other
testing and government review and final approval before we can
market our products. The cost of complying with government
regulation can be substantial and may exceed our available
resources, causing delay or cancellation of our product
introductions.
Some
abbreviated application procedures for controlled-release drugs and
other products, including those related to our ANDA filings, or to
the ANDA filings of unrelated third parties in respect of drugs
similar to or chemically related to those of our ANDA filings, are
or may become the subject of petitions filed by brand-name drug
manufacturers or other ANDA filers seeking changes from the FDA in
the interpretation of the statutory approval requirements for
particular drugs as part of their strategy to thwart or advance
generic competition. We cannot predict whether the FDA will make
any changes to its interpretation of the requirements applicable to
our ANDA applications as a result of these petitions, or whether
unforeseen delays will occur in our ANDA filings while the FDA
considers such petitions or changes or otherwise, or the effect
that any changes may have on us. Any such changes in FDA
interpretation of the statutes or regulations, or any legislated
changes in the statutes or regulations, may make it more difficult
for us to file ANDAs or obtain further approval of our ANDAs and
generate revenues and thus may materially harm our business and
financial results.
Any
failure or delay in obtaining regulatory approvals could make it so
that we are unable to market any products we develop and therefore
adversely affect our business, results of operations, financial
condition and cash flows. Even if product candidates are approved
in the United States or Canada, regulatory authorities in other
countries must approve a product prior to the commencement of
marketing the product in those countries. The time required to
obtain any such approval may be longer than in the United States or
Canada, which could cause the introduction of our products in other
countries to be cancelled or materially delayed.
The
manufacturing, distribution, processing, formulation, packaging,
labeling, cross-border importation and advertising of our products
are subject to extensive regulation by federal agencies, including
the FDA, Drug Enforcement Administration, Federal Trade Commission,
Consumer Product Safety Commission and Environmental Protection
Agency in the United States, and Health Canada and Canada Border
Services Agency in Canada, among others. We are also subject to
state and local laws, regulations and agencies. Compliance with
these regulations requires substantial expenditures of time, money
and effort in such areas as production and quality control to
ensure full technical compliance. Failure to comply with FDA and
Health Canada and other governmental regulations can result in
fines, disgorgement, unanticipated compliance expenditures, recall
or seizure of products, total or partial suspension of production
or distribution, suspension of the FDA’s or Health
Canada’s review of NDAs, ANDAs or ANDSs, as the case may be,
enforcement actions, injunctions and civil or criminal
prosecution.
Environmental laws
have changed in recent years and we may become subject to stricter
environmental standards in the future and face larger capital
expenditures in order to comply with environmental laws. We are
subject to extensive federal, state, provincial and local
environmental laws and regulations which govern the discharge,
emission, storage, handling and disposal of a variety of substances
that may be used in, or result from, our operations. We are also
subject periodically to environmental compliance reviews by
environmental, safety, and health regulatory agencies and to
potential liability for the remediation of contamination associated
with both present and past hazardous waste generation, handling,
and disposal activities. We cannot accurately predict the outcome
or timing of future expenditures that we may be required to make in
order to comply with the federal, state, local and provincial
environmental, safety, and health laws and regulations that are
applicable to our operations and facilities.
There has been an increased public awareness of the problems
associated with the potential for abuse of opioid-based
medications.
There
has been increasing legislative attention to opioid abuse in the
U.S., including passage of the 2016 Comprehensive Addiction and
Recovery Act and the 21st Century Cures Act, which, among other
things, strengthens state prescription drug monitoring programs and
expands educational efforts for certain populations. These laws
could result in fewer prescriptions being written for opioid drugs,
which could impact future sales of our Oxycodone ER and related
opioid product candidates.
Federal, state and
local governmental agencies have increased their level of scrutiny
of commercial practices of companies marketing and distributing
opioid products, resulting in investigations, litigation and
regulatory intervention affecting other companies. A number of
counties and municipalities have filed lawsuits against
pharmaceutical wholesale distributors, pharmaceutical manufacturers
and retail chains related to the distribution of prescription
opioid pain medications. Policy makers and regulators are seeking
to reduce the impact of opioid abuse on families and communities
and are focusing on policies aimed at reversing the potential for
abuse. In furtherance of those efforts, the FDA has developed an
Action Plan and has committed to enhance safety labeling, require
new data, strengthen post-market requirements, update the REMS
program, expand access to and encourage the development of
abuse-deterrent formulations and alternative treatments, and
re-examine the risk-benefit profile of opioids to consider the
wider public health effects of opioids, including the risk of
misuse. Several states also have passed laws and have employed
other clinical and public health strategies to curb prescription
drug abuse, including prescription limitations, increased physician
education requirements, enhanced monitoring programs, tighter
restrictions on access, and greater oversight of pain clinics. This
increasing scrutiny and related governmental and private actions,
even if not related to a product that we intend to make, could have
an unfavorable impact on the overall market for opioid-based
products such as our Oxycodone ER product candidate, or otherwise
negatively affect our business.
Healthcare reform measures could hinder or prevent the commercial
success of our products and product candidates.
In the
United States, there have been, and we expect there will continue
to be, a number of legislative and regulatory changes to the
healthcare system that could affect our future revenues and
potential profitability. Federal and state lawmakers regularly
propose and, at times, enact legislation that results in
significant changes to the healthcare system, some of which are
intended to contain or reduce the costs of medical products and
services. An example of this is the Patient Protection and
Affordable Care Act, as amended by the Health Care and Education
Reconciliation Act, or, collectively, the Affordable Care Act. In
addition, other legislative changes have been proposed and adopted
in the U.S. since the Affordable Care Act was enacted.
We
expect that the new presidential administration and U.S. Congress
will seek to modify, repeal, or otherwise invalidate all, or
certain provisions of, the Affordable Care Act. Since taking
office, President Trump has continued to support the repeal of all
or portions of the Affordable Care Act and the House and Senate
have recently taken certain action in furtherance of this
goal.
We also
expect that additional state and federal healthcare reform measures
will be adopted in the future, any of which could limit the amounts
that federal and state governments will pay for healthcare products
and services, and which could result in reduced demand for our
products once approved or additional pricing pressures, and may
adversely affect our operating results.
Our ability to market and promote our Oxycodone ER product
candidate and its abuse-deterrent features will be determined by
FDA-approved labeling requirements.
The
commercial success of our Oxycodone ER product candidate will
depend upon our ability to obtain requested FDA-approved labeling
describing its abuse-deterrent features. Our failure to achieve FDA
approval of requested product labeling containing such information
will prevent us from advertising and promoting the abuse-deterrent
features of our product candidate in a way to differentiate it from
competitive products. This would make our product candidate less
competitive in the market. Moreover, FDA approval is required in
order to make claims that a product has an abuse-deterrent
effect.
In
April 2015, the FDA published final guidance with respect to the
evaluation and labeling of abuse-deterrent opioids. The guidance
provides direction as to the studies and data required for
obtaining abuse-deterrent claims in a product label. If a product
is approved by the FDA to include such claims in its label, the
applicant may use the approved labeling information about the
abuse-deterrent features of the product in its marketing efforts to
physicians.
Although we intend
to provide data to the FDA to support approval of abuse-deterrence
label claims for Oxycodone ER, there can be no assurance that
Oxycodone ER or any of our other product candidates will receive
FDA-approved labeling that describes the abuse-deterrent features
of such products. The FDA may find that our studies and data do not
support our requested abuse-deterrent labeling or that our product
candidate does not provide substantial abuse-deterrence benefits
because, for example, its deterrence mechanisms do not address the
way it is most likely to be abused. Furthermore, the FDA could
change its guidance, which could require us to conduct additional
studies or generate additional data. If the FDA does not approve
our requested abuse-deterrent labeling, we will be limited in our
ability to promote Oxycodone ER based on its abuse-deterrent
features and, as a result, our business may suffer.
We are subject to product liability costs for which we may not have
or be able to obtain adequate insurance coverage.
The
testing and marketing of pharmaceutical products entails an
inherent risk of product liability. Liability exposures for
pharmaceutical products can be extremely large and pose a material
risk. In some instances, we may be or may become contractually
obligated to indemnify third parties for such liability. Our
business may be materially and adversely affected by a successful
product liability claim or claims in excess of any insurance
coverage that we may have. Further, even if claims are not
successful, the costs of defending such claims and potential
adverse publicity could be harmful to our business.
While
we currently have, and in some cases are contractually obligated to
maintain, insurance for our business, property and our products as
they are administered in bioavailability/bioequivalence studies,
first and third party insurance is increasingly costly and narrow
in scope. Therefore, we may be unable to meet such contractual
obligations or we may be required to assume more risk in the
future. If we are subject to third party claims or suffer a loss or
damage in excess of our insurance coverage, we may be required to
bear that risk in excess of our insurance limits. Furthermore, any
first or third party claims made on our insurance policy may impact
our ability to obtain or maintain insurance coverage at reasonable
costs or at all in the future.
Our products involve the use of hazardous materials and waste, and
as a result we are exposed to potential liability claims and to
costs associated with complying with laws regulating hazardous
waste.
Our
research and development activities involve the use of hazardous
materials, including chemicals, and are subject to Canadian
federal, provincial and local laws and regulations governing the
use, manufacture, storage, handling and disposal of hazardous
materials and waste products. It is possible that accidental injury
or contamination from these materials may occur. In the event of an
accident, we could be held liable for any damages, which could
exceed our available financial resources. Further, we may not be
able to maintain insurance to cover these costs on acceptable
terms, or at all. In addition, we may be required to incur
significant costs to comply with environmental laws and regulations
in the future.
Our operations may be adversely affected by risks associated with
international business.
We may
be subject to certain risks that are inherent in an international
business, including:
●
varying regulatory
restrictions on sales of our products to certain markets and
unexpected changes in regulatory requirements;
●
tariffs, customs,
duties, and other trade barriers;
●
difficulties in
managing foreign operations and foreign distribution
partners;
●
longer payment
cycles and problems in collecting accounts receivable;
●
political
risks;
●
foreign exchange
controls that may restrict or prohibit repatriation of
funds;
●
export and import
restrictions or prohibitions, and delays from customs brokers or
government agencies;
●
seasonal reductions
in business activity in certain parts of the world;
and
●
potentially adverse
tax consequences.
Depending on the
countries involved, any or all of the foregoing factors could
materially harm our business, financial condition and results of
operations.
In the event we pursue growth through international operations,
such growth could strain our resources, and if we are unable to
manage any growth we may experience, we may not be able to
successfully implement our business plan.
In
connection with any geographic expansion we may pursue,
international operations would involve substantial additional
risks, including, among others: difficulties complying with the
U.S. Foreign Corrupt Practices Act and other applicable
anti-bribery laws. difficulties maintaining compliance with the
various laws and regulations of multiple jurisdictions that may be
applicable to our business, many of which may be unfamiliar to us.
more complexity in our regulatory and accounting compliance.
differing or changing obligations regarding taxes, duties or other
fees. limited intellectual property protection in some
jurisdictions. risks associated with currency exchange and
convertibility, including vulnerability to appreciation and
depreciation of foreign currencies. uncertainty related to
developing legal and regulatory systems and standards for economic
and business activities in some jurisdictions. trade restrictions
or barriers, including tariffs or other charges and import-export
regulations, changes in applicable laws or policies. the impact of
and response to natural disasters. and the potential for war, civil
or political unrest and economic and financial instability. The
occurrence of any of these risks could limit our ability to pursue
international expansion, increase our costs or expose us to fines
or other legal sanctions, any of which could negatively impact our
business, reputation and financial condition.
Risks related to our common shares
Our share price has been highly volatile and our shares could
suffer a further decline in value.
The
trading price of our common shares has been highly volatile and
could continue to be subject to wide fluctuations in price in
response to various factors, many of which are beyond our control,
including:
●
sales of our common
shares, including any sales made in connection with future
financings;
●
announcements
regarding new or existing corporate relationships or
arrangements;
●
announcements by us
of significant acquisitions, joint ventures, or capital
commitments;
●
actual or
anticipated period-to-period fluctuations in financial
results;
●
clinical and
regulatory development regarding our product
candidates;
●
litigation or
threat of litigation;
●
failure to achieve,
or changes in, financial estimates by securities
analysts;
●
comments or
opinions by securities analysts or members of the medical
community;
●
announcements
regarding new or existing products or services or technological
innovations by us or our competitors;
●
conditions or
trends in the pharmaceutical and biotechnology
industries;
●
additions or
departures of key personnel or directors;
●
economic and other
external factors or disasters or crises;
●
limited daily
trading volume; and
●
developments
regarding our patents or other intellectual property or that of our
competitors.
In
addition, the stock market in general and the market for drug
development companies in particular have experienced significant
price and volume fluctuations that have often been unrelated or
disproportionate to the operating performance of those companies.
Further, there has been significant volatility in the market prices
of securities of life science companies. In the past, following
periods of volatility in the market price of a company’s
securities, securities class action litigation has often been
instituted, such as the S.D.N.Y. Action. A securities class action
suit against us could result in substantial costs, potential
liabilities, and the diversion of management’s attention and
resources.
A large number of our common shares could be sold in the market in
the near future, which could depress our stock price.
As of
February 27, 2018, we had approximately 34.7 million common shares
outstanding. In addition, a substantial portion of our shares are
currently freely trading without restriction under the Securities
Act of 1933, as amended (“
U.S. Securities Act
”), having been
registered for resale or held by their holders for over six months
and are eligible for sale under Rule 144. In addition, in November
2013, we established an at-the-market equity program pursuant to
which we originally could, from time to time, sell up to 5,305,484
of our common shares for up to an aggregate of $16.8 million (or
such lesser amount as may then be permitted under applicable
exchange rules and securities laws and regulations). As of February
27, 2018 we have issued and sold an aggregate of 4,740,350 common
shares with an aggregate offering price of $13,872,929 under the
at-the-market program. Roth Capital Partners, LLC
(“
Roth
”)
received compensation of $392,827 in connection with such sales. We
are not required to sell shares under the equity distribution
agreement. There can be no assurance that any additional shares
will be sold under our at-the-market program.
On July
17, 2017, the Company’s most recent registration statement on
Form F-3 was declared effective by the SEC (the “
Shelf Registration Statement
”).
The Shelf Registration Statement allows for, subject to securities
regulatory requirements and limitations, the potential offering of
up to an aggregate of US$100 million of the Company’s common
shares, preference shares, warrants, subscription receipts,
subscription rights and units, or any combination thereof, from
time to time in one or more offerings, and are intended to give the
Company the flexibility to take advantage of financing
opportunities when, and if, market conditions are favorable to the
Company. The specific terms of such future offerings, if any, would
be established, subject to the approval of the Company’s
board of directors, at the time of such offering and will be
described in detail in a prospectus supplement filed at the time of
any such offering. To the extent any securities of the Company are
issued by the Company under the Shelf Registration Statement or the
shelf prospectus, a shareholder’s percentage ownership will
be diluted and our stock price could be further adversely affected.
As of February27, 2018, the Company has not sold any securities
under the Shelf Registration Statement, other than (i) the sale
since July 17, 2017 of 485,239 common shares under the
Company’s at-the-market program referred to above and (ii)
the sale of 3,636,364 common shares under the Wainwright Agreement
(as defined below), and there can be no assurance that any
additional securities will be sold under the Shelf Registration
Statement or the shelf prospectus.
On
October 22, 2009, IntelliPharmaCeutics Ltd. (“
IPC Ltd.
”) and Vasogen Inc.
(“
Vasogen
”)
completed a plan of arrangement and merger (the “
IPC Arrangement Agreement
”),
resulting in the formation of the Company. Our shareholders who
received shares under the IPC Arrangement Agreement who were not
deemed “affiliates” of either Vasogen, IPC Ltd. or us
prior to the IPC Arrangement Agreement were able to resell the
common shares that they received without restriction under the U.S.
Securities Act. The common shares received by an
“affiliate” after the IPC Arrangement Agreement or who
were “affiliates” of either Vasogen, IPC Ltd. or us
prior to the IPC Arrangement Agreement are subject to certain
restrictions on resale under Rule 144.
As of
February 27, 2018, there are currently common shares issuable upon
the exercise of outstanding options and warrants and the conversion
of an outstanding convertible debenture for an aggregate of
approximately 10,257,909 common shares. To the extent any of our
options and warrants is exercised and the convertible debenture is
converted, a shareholder’s percentage ownership will be
diluted and our stock price could be further adversely affected.
Moreover, as the underlying shares are sold, the market price could
drop significantly if the holders of these restricted shares sell
them or if the market perceives that the holders intend to sell
these shares.
We have no history or foreseeable prospect of paying cash
dividends.
We have
not paid any cash dividends on our common shares and do not intend
to pay cash dividends in the foreseeable future. We intend to
retain future earnings, if any, for reinvestment in the development
and expansion of our business. Dividend payments in the future may
also be limited by loan agreements or covenants contained in other
securities we may issue. Any future determination to pay cash
dividends will be at the discretion of our board of directors and
depend on our financial condition, results of operations, capital
and legal requirements and such other factors as our board of
directors deems relevant.
There may not be an active, liquid market for our common
shares.
There
is no guarantee that an active trading market for our common shares
will be maintained on the Nasdaq or the Toronto Stock Exchange
(“
TSX
”).
Investors may not be able to sell their shares quickly or at the
latest market price if trading in our common shares is not
active.
There
may be future sales or other dilution of our equity, which may
adversely affect the market price of our common
shares.
The
Company may, from time to time, issue additional common shares,
including any securities that are convertible into or exchangeable
for, or that represent the right to receive, common shares. The
market price of our common shares could decline as a result of
sales of common shares or securities that are convertible into or
exchangeable for, or that represent the right to receive, common
shares after this offering or the perception that such sales could
occur.
Future sales of our common shares may cause the prevailing market
price of our common shares to decrease.
We have
registered a substantial number of outstanding common shares and
common shares that are issuable upon the exercise of outstanding
warrants. If the holders of our registered common shares choose to
sell such shares in the public market or if holders of our warrants
exercise their purchase rights and sell the underlying common
shares in the public market, or if holders of currently restricted
common shares choose to sell such shares in the public market, the
prevailing market price for our common shares may decline. The sale
of shares issued upon the exercise of our warrants (and options)
could also further dilute the holdings of our then existing
shareholders. In addition, future public sales by holders of our
common shares could impair our ability to raise capital through
equity offerings.
Future issuances of our shares could adversely affect the trading
price of our common shares and could result in substantial dilution
to shareholders.
We may
need to issue substantial amounts of common shares in the future.
In this regard, in November 2013, we entered into an at-the-market
program pursuant to which we originally could, from time to time,
sell up to 5,305,484 of our common shares for up to an aggregate of
$16.8 million (or such lesser amount as may then be permitted under
applicable securities laws and regulations). As of February 27,
2018 we have issued and sold an aggregate of 4,740,350 common
shares with an aggregate offering price of $13,872,929 under the
original at-the-market program. There can be no assurance that any
additional shares will be sold under our at-the-market program. To
the extent that the market price of our common shares declines, we
will need to issue an increasing number of common shares per dollar
of equity investment. In addition to our common shares issuable in
connection with the exercise of our outstanding warrants, our
employees, and directors will hold rights to acquire substantial
amounts of our common shares. In order to obtain future financing
if required, it is likely that we will issue additional common
shares or financial instruments that are exchangeable for or
convertible into common shares. Also, in order to provide
incentives to employees and induce prospective employees and
consultants to work for us, we may offer and issue options to
purchase common shares and/or rights exchangeable for or
convertible into common shares. Future issuances of shares could
result in substantial dilution to shareholders. Capital raising
activities, if available, and dilution associated with such
activities could cause our share price to decline. In addition, the
existence of common share purchase warrants may encourage short
selling by market participants. Also, in order to provide
incentives to current employees and directors and induce
prospective employees and consultants to work for us, we have
historically granted options and deferred share units
(“
DSUs
”), and
intend to continue to do so or offer and issue other rights
exchangeable for or convertible into common shares. Future
issuances of shares could result in substantial dilution to all our
shareholders. In addition, future public sales by holders of our
common shares could impair our ability to raise capital through any
future equity offerings.
On July
17, 2017, the Shelf Registration Statement was declared effective
by the SEC. The Shelf Registration Statement allows for, subject to
securities regulatory requirements and limitations, the potential
offering of up to an aggregate of $100 million of the
Company’s common shares, preference shares, warrants,
subscription receipts, subscription rights and units, or any
combination thereof, from time to time in one or more offerings,
and are intended to give the Company the flexibility to take
advantage of financing opportunities when, and if, market
conditions are favorable to the Company. The specific terms of such
future offerings, if any, would be established, subject to the
approval of the Company’s board of directors, at the time of
such offering and will be described in detail in a prospectus
supplement filed at the time of any such offering. As of February
27, 2018, the Company has not sold any securities under the Shelf
Registration Statement other than (i) the sale since July 17, 2017
of 485,239 common shares under the Company’s at-the-market
program referred to above and (ii) the sale 3,636,364 common shares
under the Wainwright Agreement referred to above, and there can be
no assurance that any additional securities will be sold under the
Shelf Registration Statement or the shelf prospectus.
We may in the future issue preference shares which could adversely
affect the rights of holders of our common shares and the value of
such shares.
Our
board of directors has the ability to authorize the issue of an
unlimited number of preference shares in series, and to determine
the price, rights, preferences and privileges of those shares
without any further vote or action by the holders of our common
shares. Although we have no preference shares issued and
outstanding, preference shares issued in the future could adversely
affect the rights and interests of holders of our common
shares.
Our common shares may not continue to be listed on the
TSX.
Failure
to maintain the applicable continued listing requirements of the
TSX could result in our common shares being delisted from the TSX.
The TSX will normally consider the delisting of securities if, in
the opinion of the exchange, it appears that the public
distribution, price, or trading activity of the securities has been
so reduced as to make further dealings in the securities on TSX
unwarranted. For example, participating securities may be delisted
from the TSX if, among other things, the market value of an
issuer’s securities that are listed on the TSX is less than
C$3,000,000 over any period of 30 consecutive trading days. In such
circumstances, the TSX may notify an issuer that it is under
delisting review and the issuer will normally be given up to 120
days from the date of such notification (the “delisting
review period”) to correct the fall in market value and such
other deficiencies noted by the TSX. At any time prior to the end
of the delisting review period, the TSX will provide the issuer
with an opportunity to be heard where the issuer may present
submissions to satisfy the TSX that all deficiencies identified in
the TSX’s notice have been rectified. If at the conclusion of
the hearing the issuer cannot satisfy the TSX that the deficiencies
identified have been rectified and that no other delisting criteria
are then applicable to the issuer, the TSX will determine whether
to delist the issuer’s securities.
If the
market price of our common shares declines further or we are unable
to maintain other listing requirements, the TSX may determine to
delist our common shares. If our common shares are no longer listed
on the TSX, they may be eligible for listing on the TSX Venture
Exchange. In the event that we are not able to maintain a listing
for our common shares on the TSX or the TSX Venture Exchange, it
may be extremely difficult or impossible for shareholders to sell
their common shares in Canada. Moreover, if we are delisted from
the TSX, but obtain a substitute listing for our common shares on
the TSX Venture Exchange, our common shares will likely have less
liquidity and more price volatility than experienced on the
TSX.
Shareholders may
not be able to sell their common shares on any such substitute
exchange in the quantities, at the times, or at the prices that
could potentially be available on a more liquid trading market. As
a result of these factors, if our common shares are delisted from
the TSX, the price of our common shares is likely to
decline.
Our common shares may not continue to be listed on
Nasdaq.
Failure
to meet the applicable quantitative and/or qualitative maintenance
requirements of Nasdaq could result in our common shares being
delisted from Nasdaq. For continued listing, Nasdaq requires, among
other things, that listed securities maintain a minimum bid price
of not less than $1.00 per share. If the bid price falls below the
$1.00 minimum for more than 30 consecutive trading days, an issuer
will typically have 180 days to satisfy the $1.00 minimum bid
price, which must be maintained for a period of at least ten
trading days in order to regain compliance.
If we
are delisted from Nasdaq, our common shares may be eligible for
trading on an over-the-counter market in the United States. In the
event that we are not able to obtain a listing on another U.S.
stock exchange or quotation service for our common shares, it may
be extremely difficult or impossible for shareholders to sell their
common shares in the United States. Moreover, if we are delisted
from Nasdaq, but obtain a substitute listing for our common shares
in the United States, it will likely be on a market with less
liquidity, and therefore experience potentially more price
volatility than experienced on Nasdaq. Shareholders may not be able
to sell their common shares on any such substitute U.S. market in
the quantities, at the times, or at the prices that could
potentially be available on a more liquid trading market. As a
result of these factors, if our common shares are delisted from
Nasdaq, the price of our common shares is likely to decline. In
addition, a decline in the price of our common shares will impair
our ability to obtain financing in the future.
In
September 2017, the Company announced that it has received written
notification from Nasdaq notifying the Company that it is not in
compliance with the minimum market value of listed securities
requirement set forth in Nasdaq Rules for continued listing on
Nasdaq. Nasdaq Listing Rule 5550(b)(2) requires listed securities
to maintain a minimum market value of $35.0 million, and Listing
Rule 5810(c)(3)(C) provides that a failure to meet the minimum
market value requirement exists if the deficiency continues for a
period of 30 consecutive business days. Based on the market value
of the Company’s common shares for the 30 consecutive
business days from August 8, 2017, the Company no longer meets the
minimum market value of listed securities requirement. In
accordance with Nasdaq Listing Rule 5810(c)(3)(C), the Company has
been provided 180 calendar days, or until March 19, 2018, to regain
compliance with Nasdaq Listing Rule 5550(b)(2). To regain
compliance, the Company’s common shares must have a market
value of at least $35.0 million for a minimum of 10 consecutive
business days. In the event the Company does not regain compliance
by March 19, 2018, the Company may be eligible for additional time
to regain compliance. If not, our securities may be delisted from
Nasdaq.
In
December 2017, we announced that we were notified by Nasdaq that
the minimum bid price per share for our common shares was below
$1.00 for a period of 30 consecutive business days and that we did
not meet the minimum bid price requirement set forth in Nasdaq
Listing Rule 5550(a)(2). We have a period of 180 calendar days, or
until June 4, 2018, to regain compliance with Nasdaq’s
minimum bid price requirement. To regain compliance, our common
shares must have a closing bid price of at least $1.00 for a
minimum of 10 consecutive business days. In the event we do not
regain compliance by June 4, 2018, we may be eligible for
additional time to regain compliance. If not, our securities may be
delisted from Nasdaq.
There
can be no assurance that we will be able to comply with all
applicable Nasdaq continued listing standards. If we are unable to
do so, our common shares may no longer be listed on Nasdaq or
another national securities exchange and the liquidity and market
price of our common shares may be adversely affected. If our common
shares are delisted from Nasdaq, they may trade on the
over-the-counter market, which may be a less liquid market. In such
case, our shareholders’ ability to trade, or obtain
quotations of the market value of, common shares of the Company
would be severely limited because of lower trading volumes and
transaction delays. These factors could contribute to lower prices
and larger spreads in the bid and ask prices for our
securities.
If our common shares are not listed on a national securities
exchange, compliance with applicable state securities laws may be
required for subsequent offers, transfers and sales of the common
shares.
Because
our common shares are listed on Nasdaq, we are not required to
register or qualify in any state the subsequent offer, transfer or
sale of the common shares. If our common shares are delisted from
Nasdaq and are not eligible to be listed on another national
securities exchange, subsequent transfers of our common shares by
U.S. holders may not be exempt from state securities laws. In such
event, it will be the responsibility of the holder of common shares
to register or qualify the common shares for any subsequent offer,
transfer or sale in the United States or to determine that any such
offer, transfer or sale is exempt under applicable state securities
laws.
Our common shares are listed for trading in the United States and
may become subject to the Securities and Exchange
Commission’s penny stock rules.
Transactions in
securities that are traded in the United States by companies with
net tangible assets of $5,000,000 or less and a market price per
share of less than $5.00 that are not traded on Nasdaq or on other
securities exchanges may be subject to the “penny
stock” rules promulgated under the U.S. Exchange Act. Under
these rules, broker-dealers who recommend such securities to
persons other than institutional investors must:
●
make a special
written suitability determination for the purchaser;
●
receive the
purchaser’s written agreement to a transaction prior to
sale;
●
provide the
purchaser with risk disclosure documents which identify risks
associated with investing in “penny stocks” and which
describe the market for these “penny stocks” as well as
a purchaser’s legal remedies; and
●
obtain a signed and
dated acknowledgment from the purchaser demonstrating that the
purchaser has actually received the required risk disclosure
document before a transaction in a “penny stock” can be
completed.
As a
result of these requirements, if our common shares are at such time
subject to the “penny stock” rules, broker-dealers may
find it difficult to effectuate customer transactions and trading
activity in these shares in the United States may be significantly
limited. Accordingly, the market price of the shares may be
depressed, and investors may find it more difficult to sell the
shares.
As a foreign private issuer in the United States, we are subject to
different U.S. securities laws and rules than a domestic U.S.
issuer.
As a
foreign private issuer under U.S. securities laws we are not
required to comply with all the periodic disclosure requirements of
the U.S. Exchange Act applicable to domestic United States
companies and therefore the publicly available information about us
may be different or more limited than if we were a United States
domestic issuer. In addition, our officers, directors, and
principal shareholders are exempt from the “real time”
reporting and “short swing” profit recovery provisions
of Section 16 of the U.S. Exchange Act and the rules thereunder.
Although under Canadian rules, our officers, directors and
principal shareholders are generally required to file on SEDI
(www.sedi.ca) reports of transactions involving our common shares
within five calendar days of such transaction, our shareholders may
not know when our officers, directors and principal shareholders
purchase or sell our common shares as timely as they would if we
were a United States domestic issuer.
We are exposed to risks if we are unable to comply with laws and
future changes to laws affecting public companies, including the
Sarbanes-Oxley Act of 2002, and also to increased costs associated
with complying with such laws.
Any
future changes to the laws and regulations affecting public
companies, as well as compliance with existing provisions of the
Sarbanes-Oxley Act of 2002 (“
SOX
”) in the United States and
applicable Canadian securities laws, regulations, rules and
policies, may cause us to incur increased costs to comply with such
laws and requirements, including, among others, hiring additional
personnel and increased legal, accounting and advisory fees.
Delays, or a failure to comply with applicable laws, rules and
regulations could result in enforcement actions, the assessment of
other penalties and civil suits. The new laws and regulations may
increase potential costs to be borne under indemnities provided by
us to our officers and directors and may make it more difficult to
obtain certain types of insurance, including liability insurance
for directors and officers; as such, we may be forced to accept
reduced policy limits and coverage or incur substantially higher
costs to obtain the same or similar coverage. The impact of these
events could also make it more difficult to attract and retain
qualified persons to serve on our board of directors, or as
executive officers.
We are
required annually to review and report on the effectiveness of our
internal control over financial reporting in accordance with SOX
Section 404 and Multilateral Instrument 52-109 –
Certification of Disclosure in Issuer’s Annual and Interim
Filings of the Canadian Securities Administrators. The results of
this review are reported in our Annual Report on Form 20-F and in
our Management Discussion and Analysis.
Management’s
review is designed to provide reasonable, not absolute, assurance
that all material weaknesses in our internal controls are
identified. Material weaknesses represent deficiencies in our
internal controls that may not prevent or detect a misstatement
occurring which could have a material adverse effect on our
quarterly or annual financial statements. In addition, there can be
no assurance that any remedial actions we take to address any
material weaknesses identified will be successful, nor can there be
any assurance that further material weaknesses will not be
identified in future years. Material errors, omissions or
misrepresentations in our disclosures that occur as a result of our
failure to maintain effective internal control over financial
reporting could have a material adverse effect on our business,
financial condition, results of operations, and the value of our
common shares.
We may be classified as a “passive foreign investment
company” or “PFIC” for U.S. income tax purposes,
which could have significant and adverse tax consequences to U.S.
investors.
The
possible classification of our company as a passive foreign
investment company (“
PFIC
”) for U.S. federal income tax
purposes could have significant and adverse tax consequences for
U.S. Holders (as defined in Item 10 below) of our common shares and
preference shares (collectively, “
shares
”). It may be possible for
U.S. holders of shares to mitigate certain of these consequences by
making an election to treat us as a “qualified electing
fund” or “QEF” under Section 1295 of the Code (a
“
QEF Election
”)
or a mark-to-market election under Section 1296 of the Internal
Revenue Code of 1986, as amended (the “
Code
”). A non-U.S. corporation
generally will be a PFIC if, for a taxable year (a) 75% or more of
the gross income of such corporation for such taxable year consists
of specified types of passive income or (b) on average during the
year, 50% or more of the assets held by such corporation either
produce passive income or are held for the production of passive
income, based on the fair market value of such assets (or on the
adjusted tax basis of such assets, if such non-U.S. corporation is
not publicly traded and either is a “controlled foreign
corporation” under Section 957(a) of the Code, or makes an
election to determine whether it is a PFIC based on the adjusted
basis of the assets).
The
determination of whether we are, or will be, a PFIC for a taxable
year depends, in part, on the application of complex U.S. federal
income tax rules, which are subject to various interpretations. We
believe that we were not a PFIC during our 2017 taxable year and
will not likely be a PFIC during our 2018 taxable year. Because
PFIC status is based on our income, assets and activities for the
entire taxable year, and our market capitalization, it is not
possible to determine whether we will be characterized as a PFIC
for the 2018 taxable year until after the close of the taxable
year. The tests for determining PFIC status are subject to a number
of uncertainties. These tests are applied annually, and it is
difficult to accurately predict future income, assets and
activities relevant to this determination. In addition, because the
market price of our common shares is likely to fluctuate, the
market price may affect the determination of whether we will be
considered a PFIC. There can be no assurance that we will not be
considered a PFIC for any taxable year (including our 2018 taxable
year). Absent one of the elections described above, if we are a
PFIC for any taxable year during which a U.S. holder holds our
shares, some of the consequences from PFIC status during that year
will affect such holder’s U.S. income tax treatment in
subsequent years during which we do not meet the PFIC tests.
Accordingly, no assurance can be given that we will not constitute
a PFIC in the current (or any future) tax year or that the Internal
Revenue Service (the “
IRS
”) will not challenge any
determination made by us concerning our PFIC status.
If we
are a PFIC, the U.S. federal income tax consequences to a U.S.
holder of the ownership and disposition of our shares will depend
on whether such U.S. holder makes a QEF or mark-to-market election.
Unless otherwise provided by the IRS, a U.S. holder of our shares
is generally required to file an informational return annually to
report its ownership interest in the Company during any year in
which we are a PFIC.
T
he 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 Corporate Services
Company at 1180 Avenue of the Americas, New York New York,
10036.
On
October 19, 2009, the shareholders of IPC Ltd. and Vasogen approved
the IPC Arrangement Agreement that resulted in the October 22, 2009
court-approved merger of IPC Ltd. and another U.S. subsidiary of
Intellipharmaceutics Inc., coincident with an arrangement pursuant
to which a predecessor of the Company combined with 7231971 Canada
Inc., a new Vasogen company that acquired substantially all of the
assets and certain liabilities of Vasogen, including the proceeds
from its non-dilutive financing transaction with Cervus LP (the
“
IPC Arrangement
Transaction
”). The completion of the IPC Arrangement
Transaction on October 22, 2009 resulted in the formation of the
Company, which is incorporated under the laws of Canada. The common
shares of the Company are traded on the TSX and
Nasdaq.
For the
years ended November 30, 2017, 2016 and 2015, we spent a total of
$9,271,353, $8,166,736 and $7,247,473, respectively, on research
and development. Over the past three fiscal years and up to
February 27, 2018, we have raised approximately $17,241,223 in
gross proceeds from the issuance of equity and convertible debt
securities. Our common shares are listed on the TSX and on Nasdaq
under the symbol “IPCI”.
During
the last and current financial year, we have not been aware of any
indications of public takeover offers by third parties in respect
of the Company’s shares or by the Company in respect of other
companies’ shares.
For
additional information on key events, see Item 4.B
below.
Recent Corporate Developments
●
In February 2018,
we and the FDA discussed a previously-announced Complete Response
Letter (“
CRL
”)
for Oxycodone ER, including issues related to the blue dye in the
product candidate. Based on the meeting, the product candidate will
no longer include the blue dye. The blue dye was intended to act as
an additional deterrent if Oxycodone ER is abused and serve as an
early warning mechanism to flag potential misuse or abuse. The FDA
confirmed that the removal of the blue dye is unlikely to have any
impact on formulation quality and performance. As a result, we will
not be required to repeat in vivo bioequivalence studies and
pharmacokinetic studies submitted in the Oxycodone ER NDA. The FDA
also indicated that, from an abuse liability perspective, Category
1 studies will not have to be repeated on Oxycodone ER with the
blue dye removed.
●
In December 2017,
we were notified by Nasdaq that the minimum bid price per share for
our common shares was below $1.00 for a period of 30 consecutive
business days and that we did not meet the minimum bid price
requirement set forth in Nasdaq Listing Rule 5550(a)(2). We have a
period of 180 calendar days, or until June 4, 2018, to regain
compliance with Nasdaq’s minimum bid price requirement. To
regain compliance, our common shares must have a closing bid price
of at least $1.00 for a minimum of 10 consecutive business days. In
the event we do not regain compliance by June 4, 2018, we may be
eligible for additional time to regain compliance. If not, our
securities may be delisted from Nasdaq.
●
In November 2017,
our U.S. marketing partner, Par, launched the 5 and 40 mg strengths
of its generic Focalin XR
®
capsules in the
United States, which followed the launch in May 2017 of the 10 and
20 mg strengths in the United States. The launch of the 5 and 40 mg
strengths and the 10 and 20 mg strengths complements the 15, 25, 30
and 35 mg strengths of generic Focalin XR
®
previously
launched and marketed by Par. Under a licensing and
commercialization agreement between us and Par, we receive
quarterly profit-share payments on Par’s U.S. sales of
generic Focalin XR
®
. The Par
launches of the additional strengths provided us with the full line
of generic Focalin XR
®
strengths
available in the U.S. market. In January 2017, Par had launched the
25 and 35 mg strengths of its generic Focalin XR
®
capsules in the
U.S., complementing the 15 and 30 mg strengths of our generic
Focalin XR
®
already being
marketed by Par.
●
In October 2017, we
completed a registered direct offering consisting of 3,636,364
common shares at a price of $1.10 per share for gross proceeds of
approximately $4 million. We also issued to the investors warrants
to purchase an aggregate of 1,818,182 common shares at an exercise
price of $1.25 per share. The warrants are exercisable six months
following the October 13, 2017 closing date and will expire 30
months after the date they become exercisable. The common shares
(but not the warrants or the common shares underlying the warrants)
were offered by us through a prospectus supplement pursuant to our
shelf registration statement on Form F-3 as previously filed and
declared effective by the Securities and Exchange Commission
(“
SEC
”) and the
base prospectus contained therein (Registration Statement No.
333-218297). The warrants described above were offered in a private
placement under Section 4(a)(2) of the U.S Securities Act, and
Regulation D promulgated thereunder and, along with the common
shares underlying the warrants, have not been registered under the
U.S. Securities Act, or applicable state securities
laws.
●
In September 2017,
we were notified by Nasdaq that we are not in compliance with the
minimum market value of listed securities requirement set forth in
Nasdaq Rules for continued listing on Nasdaq. Nasdaq Listing Rule
5550(b)(2) requires listed securities to maintain a minimum market
value of $35.0 million. A failure to meet the minimum market value
requirement exists if the deficiency continues for a period of 30
consecutive business days. Based on the market value of our common
shares for the 30 consecutive business days from August 8, 2017, we
no longer meet the minimum market value of listed securities
requirement. We were provided 180 calendar days, or until March 19,
2018, to regain compliance with Nasdaq Listing Rule 5550(b)(2). To
regain compliance, our common shares must have a market value of at
least $35.0 million for a minimum of 10 consecutive business days.
In the event we do not regain compliance by March 19, 2018, we may
be eligible for additional time to regain compliance. If not, our
securities may be delisted from Nasdaq.
●
In September 2017,
we received the above referenced CRL for our Oxycodone ER NDA,
indicating that the FDA could not approve the application in its
present form. In its CRL, the FDA provided certain recommendations
and requests for information, including that we complete the
relevant Category 2 and Category 3 studies to assess the
abuse-deterrent properties of Oxycodone ER by the oral and nasal
routes of administration. The FDA also requested additional
information related to the inclusion of the blue dye in the
Oxycodone ER formulation, and that we submit an alternate proposed
proprietary name for Oxycodone ER. We were given one year from
September 2017 to respond to the CRL, and can request additional
time if necessary.
●
In July 2017, three
complaints were filed in the U.S. District Court for the Southern
District of New York asserting claims under the federal securities
laws against us and two of our executive officers on behalf of a
putative class of purchasers of our securities. In a subsequent
order, the Court consolidated the three actions under the caption
Shanawaz v. Intellipharmaceutics Int’l Inc., et al., No.
1:17-cv-05761 (S.D.N.Y.), appointed lead plaintiffs in the
consolidated action, and approved lead plaintiffs’ selection
of counsel. Lead plaintiffs filed a consolidated amended complaint
on January 29, 2018. In the amended complaint, lead plaintiffs
purport to assert claims on behalf of a putative class consisting
of purchasers of our securities between May 21, 2015 and July 26,
2017. The amended complaint alleges that the defendants violated
Sections 10(b) and 20(a) of the U.S. Exchange Act and Rule 10b-5
promulgated thereunder by making allegedly false and misleading
statements or failing to disclose certain information regarding our
NDA for Oxycodone ER abuse-deterrent oxycodone hydrochloride
extended release tablets. The complaint seeks, among other
remedies, unspecified damages, attorneys’ fees and other
costs, equitable and/or injunctive relief, and such other relief as
the court may find just and proper. Under a scheduling order
approved by the Court, the defendants must respond to the amended
complaint by March 30, 2018. We intend to vigorously defend our
company against the claims asserted in the consolidated
action.
●
In July 2017, a
joint meeting of the Anesthetic and Analgesic Drug Products
Advisory Committee and Drug Safety and Risk Management Advisory
Committee of the FDA (the “
Advisory Committees
”) was held to
review our NDA for Oxycodone ER abuse-deterrent oxycodone
hydrochloride extended release tablets. The Advisory Committees
voted 22 to 1 in finding that our NDA for Oxycodone ER should not
be approved at that time. The Advisory Committees also voted 19 to
4 that we did not demonstrate that Oxycodone ER has properties that
can be expected to deter abuse by the intravenous route of
administration, and 23 to 0 that there is not sufficient data for
Oxycodone ER to support inclusion of language regarding
abuse-deterrent properties in the product label for the intravenous
route of administration. The Advisory Committees expressed a desire
to review the additional safety and efficacy data for Oxycodone ER
that may be obtained from human abuse potential studies for the
oral and intranasal routes of administration.
●
In June 2017,
Mallinckrodt, in its capacity as our marketing and distribution
partner, launched all strengths of our generic Seroquel
XR
®
in the United States. This launch followed the final approval in
May 2017 from the FDA for our ANDA for quetiapine fumarate
extended-release tablets in the 50, 150, 200, 300 and 400 mg
strengths. The approved product is a generic equivalent of the
corresponding strengths of the branded product Seroquel
XR
®
sold in the United States by Astra Zeneca Pharmaceuticals LP
(“
AstraZeneca
”).
Under its license and commercial supply agreement with
Mallinckrodt, we manufacture and supply generic Seroquel
XR
®
for Mallinckrodt to market, sell and distribute in the United
States. That agreement also includes two other product candidates,
our generic Pristiq
®
and generic
Lamictal
®
XR™, for
which we have ANDAs under FDA review.
●
In April 2017, we
received notice that the Purdue litigation plaintiffs had commenced
patent infringement proceedings against us in the U.S. District
Court for the District of Delaware in respect of our NDA filing for
our Oxycodone ER product candidate, alleging that it infringes six
(6) out of the sixteen (16) patents associated with the branded
product OxyContin
®
listed in the
Orange Book. In our NDA filed in November 2016 for Oxycodone ER, we
relied on the 505(b)(2) regulatory pathway and referenced data from
Purdue Pharma L.P.’s file for its OxyContin
®
extended
release oxycodone hydrochloride. Our Oxycodone ER application was
accepted by the FDA for further review in February 2017. We
certified to the FDA that we believed that our Oxycodone ER product
candidate would not infringe the OxyContin
®
patents, or
that such patents are invalid, and so notified Purdue Pharma L.P.
and the other owners of the subject patents listed in the Orange
Book of such certification. The complaint seeks injunctive relief
as well as attorneys’ fees and costs and such other and
further relief as the Court may deem just and proper. As a result
of the commencement of these legal proceedings, the FDA is stayed
for 30 months from granting final approval to our Oxycodone ER
product candidate. That time period commenced on February 24, 2017,
when the Purdue litigation plaintiffs received notice of our
certification concerning the patents, and will expire on August 24,
2019, unless the stay is earlier terminated by a final declaration
of the courts that the patents are invalid, or are not infringed,
or the matter is otherwise settled among the parties. A trial date
for the Purdue litigation has been set for October 22, 2018. We are
confident that we do not infringe the subject patents, and will
vigorously defend against these claims.
●
In February 2017,
the FDA accepted for filing the NDA we filed in November 2016
seeking authorization to market our Oxycodone ER product candidate
in the 10, 15, 20, 30, 40, 60 and 80 mg strengths. The submission
is supported by pivotal pharmacokinetic studies that demonstrated
that our Oxycodone ER product candidate is bioequivalent to
OxyContin
®
. The submission
also includes abuse-deterrent studies conducted to support
abuse-deterrent label claims related to abuse of the drug by
various pathways.
●
In February 2017,
we received final approval from the FDA for our ANDA for metformin
hydrochloride extended release tablets in the 500 and 750 mg
strengths. Our approved product is a generic equivalent for the
corresponding strengths of the branded product
Glucophage
®
XR sold in the
United States by Bristol-Myers Squibb. We are actively evaluating
options to realize commercial returns from this
approval.
There
can be no assurance that our products will be successfully
commercialized or produce significant revenues for us. Also, there
can be no assurance that we will not be required to conduct further
studies for our Oxycodone ER product candidate, that the FDA will
approve any of our requested abuse-deterrence label claims or that
the FDA will ultimately approve the NDA for the sale of our
Oxycodone ER product in the U.S. market, or that it will ever be
successfully commercialized, that we will be successful in
submitting any additional ANDAs or NDAs with the FDA or ANDSs with
Health Canada, that the FDA or Health Canada will approve any of
our current or future product candidates for sale in the U.S.
market and Canadian market, or that they will ever be successfully
commercialized and produce significant revenue for us. Also, there
can be no assurance that we can achieve Nasdaq’s minimum
market value of listed securities, minimum bid-price or other
requirements.
Our Company
We are
a pharmaceutical company specializing in the research, development
and manufacture of novel and generic controlled-release and
targeted-release oral solid dosage drugs. Our patented
Hypermatrix™ technology is a multidimensional
controlled-release drug delivery platform that can be applied to
the efficient development of a wide range of existing and new
pharmaceuticals. Based on this technology platform, we have
developed several drug delivery systems and a pipeline of products
(some of which have received FDA approval) and product candidates
in various stages of development, including ANDAs filed with the
FDA (and one ANDS filed with Health Canada) and one NDA filing, in
therapeutic areas that include neurology, cardiovascular,
gastrointestinal tract (“
GIT
”), diabetes and
pain.
In
November 2005, we entered into the license and commercialization
agreement between Par and us, pursuant to which we granted Par an
exclusive, royalty-free license to make and distribute in the U.S.
all strengths of our generic Focalin XR
®
capsules for a
period of 10 years from the date of commercial launch (which was
November 19, 2013). Under the Par agreement, we made a filing with
the FDA for approval to market generic Focalin XR
®
capsules in
various strengths in the U.S. (the “
Company ANDA
”), and are the owner
of that Company ANDA, as approved in part by the FDA. We retain the
right to make and distribute all strengths of the generic product
outside of the U.S. Calendar quarterly profit-sharing payments for
its U.S. sales under the Company ANDA are payable by Par to us as
calculated pursuant to the Par agreement. Within the purview of the
Par agreement, Par also applied for and owns an ANDA pertaining to
all marketed strengths of generic Focalin XR
®
(the
“
Par ANDA
”), and
is now approved by the FDA, to market generic Focalin
XR
®
capsules in all marketed strengths in the U.S. As with the Company
ANDA, calendar quarterly profit-sharing payments are payable by Par
to us for its U.S. sales of generic Focalin XR
®
under the Par
ANDA as calculated pursuant to the Par agreement.
We
received final approval from the FDA in November 2013 under the
Company ANDA to launch the 15 and 30 mg strengths of our generic
Focalin XR
®
capsules.
Commercial sales of these strengths were launched immediately by
our commercialization partner in the U.S., Par. In January 2017,
Par launched the 25 and 35 mg strengths of its generic Focalin
XR
®
capsules in the U.S., and in May 2017, Par launched the 10 and 20
mg strengths, complementing the 15 and 30 mg strengths of our
generic Focalin XR
®
marketed by
Par. The FDA granted final approval under the Par ANDA for its
generic Focalin XR
®
capsules in the
5, 10, 15, 20, 25, 30, 35 and 40 mg strengths, and subsequently Par
launched the remaining 5 and 40 mg strengths in November 2017.
Under the Par agreement, we receive quarterly profit share payments
on Par’s U.S. sales of generic Focalin XR
®
. We expect
revenues from sales of the generic Focalin XR
®
capsules to
show some growth for the next several quarters as we believe the
newly approved strengths will begin to gain market share. There can
be no assurance as to whether generic Focalin XR
®
capsules will
be successfully commercialized.
In
February 2016, we received final approval from the FDA of our ANDA
for generic Keppra XR
®
(levetiracetam
extended-release) tablets for the 500 and 750 mg strengths. Our
generic Keppra XR
®
is a generic
equivalent for the corresponding strengths of the branded product
Keppra XR sold in the U.S. by UCB, Inc., and is indicated for use
in the treatment of partial onset seizures associated with
epilepsy. We are aware that several other generic versions of this
product are currently available and serve to limit the overall
market opportunity. We are actively exploring the best approach to
maximize our commercial returns from this approval. There can be no
assurance that our generic Keppra XR
®
for the 500 and
750 mg strengths will be successfully commercialized.
In
February 2017, we received final approval from the FDA for our ANDA
for metformin hydrochloride extended release tablets in the 500 mg
and 750 mg strengths. Our newly approved product is a generic
equivalent for the corresponding strengths of the branded product
Glucophage
®
XR sold in the
United States by Bristol-Myers Squibb. We are aware that other
generic versions of this product are currently available in the
market and serve to limit the overall market opportunity. We are
actively evaluating options to realize commercial returns from this
new approval through a potential partnership arrangement. There can
be no assurance that our metformin extended-release tablets for the
500 mg and 750 mg strengths will be successfully
commercialized.
In
October 2016, we received tentative approval from the FDA for our
ANDA for quetiapine fumarate extended-release tablets in the 50,
150, 200, 300 and 400 mg strengths and in May 2017, our ANDA
received final FDA approval for all of these strengths. Our
approved product is a generic equivalent for the corresponding
strengths of the branded product Seroquel XR
®
sold in the
U.S. by AstraZeneca. Pursuant to a settlement agreement between us
and AstraZeneca dated July 30, 2012, we were permitted to launch
our generic versions of the 50, 150, 200, 300 and 400 mg strengths
of generic Seroquel XR
®
, on November 1,
2016, subject to FDA final approval of our ANDA for those
strengths. We have manufactured and shipped commercial quantities
of all strengths of generic Seroquel XR
®
to our
marketing and distribution partner Mallinckrodt, and Mallinckrodt
launched all strengths in June 2017. There can be no assurance that
our quetiapine fumarate extended-release tablets in any of the 50,
150, 200, 300 and 400 mg strengths will be successfully
commercialized.
In
October 2016, we announced the Mallinckrodt agreement, which grants
Mallinckrodt an exclusive license to market, sell and distribute in
the U.S. the licensed products which have either been launched
(generic Seroquel XR
®
) or for which
we have ANDAs filed with the FDA:
●
Quetiapine fumarate
extended-release tablets (generic Seroquel XR
®
)
–Approved by FDA and launched
●
Desvenlafaxine
extended-release tablets (generic Pristiq
®
) – ANDA
Under FDA Review
●
Lamotrigine
extended-release tablets (generic Lamictal
®
XR™)
– ANDA Under FDA Review
Under
the terms of the 10-year agreement, we received a non-refundable
upfront payment of $3 million in October 2016. In addition, the
agreement also provides for a long-term profit sharing arrangement
with respect to these licensed products (which includes up to $11
million in cost recovery payments that are payable on future sales
of licensed product). We have agreed to manufacture and supply the
licensed products exclusively for Mallinckrodt on a cost plus
basis. The Mallinckrodt agreement contains customary terms and
conditions for an agreement of this kind, and is subject to early
termination in the event we do not obtain FDA approvals of the
Mallinckrodt licensed products by specified dates, or pursuant to
any one of several termination rights of each party.
Our
goal is to leverage our proprietary technologies and know-how in
order to build a diversified portfolio of commercialized products
that generate revenue. We intend to do this by advancing our
products from the formulation stage through product development,
regulatory approval and manufacturing. We believe that full
integration of development and manufacturing will help maximize the
value of our drug delivery technologies, products and product
candidates. We also believe that out-licensing sales and marketing
to established organizations, when it makes economic sense to do
so, will improve our return from our products while allowing us to
focus on our core competencies. We expect expenditures in investing
activities for the purchase of production, laboratory and computer
equipment and the expansion of manufacturing and warehousing
capability to be higher as we prepare for the commercialization of
ANDAs, one NDA and one ANDS that are pending FDA and Health Canada
approval, respectively.
Our Strategy
Our
Hypermatrix™ technologies are central to the development and
manufacture of novel and generic controlled-release and
targeted-release oral solid dosage drugs. The Hypermatrix™
technologies are a multidimensional controlled-release drug
delivery platform that we believe can be applied to the efficient
development of a wide range of existing and new pharmaceuticals. We
believe that the flexibility of these technologies allows us to
develop complex drug delivery solutions within an
industry-competitive timeframe. Based on this technology platform,
we have developed several drug delivery systems and a pipeline of
products (some of which have received FDA approval) and product
candidates in various stages of development, including ANDAs filed
with the FDA (and one ANDS filed with Health Canada) and one NDA
filing, in therapeutic areas that include neurology,
cardiovascular, GIT, diabetes and pain. Certain, but not all, of
the products in our pipeline may be developed from time to time for
third parties pursuant to drug development agreements with those
third parties, under which our commercialization partner generally
pays certain of the expenses of development, sometimes makes
certain milestone payments to us and receives a share of revenues
or profits if the drug is developed successfully to completion, the
control of which is generally in the discretion of our drug
development partner.
The
principal focus of our development activities previously targeted
difficult-to-develop controlled-release generic drugs which follow
an ANDA regulatory path. Our current development effort is
increasingly directed towards improved difficult-to-develop
controlled-release drugs which follow an NDA 505(b)(2) regulatory
pathway. We have increased our research and development
(“
R&D
”)
emphasis towards specialty new product development, facilitated by
the 505(b)(2) regulatory pathway, by advancing the product
development program for both Oxycodone ER and Regabatin™. The
technology that is central to our abuse deterrent formulation of
our Oxycodone ER is the novel Point of Divergence Drug Delivery
System (“
nPODDDS™
”). nPODDDS™
is designed to provide for certain unique drug delivery features in
a product. These include the release of the active substance to
show a divergence in a dissolution and/or bioavailability profile.
The divergence represents a point or a segment in a release
timeline where the release rate, represented by the slope of the
curve, changes from an initial rate or set of rates to another rate
or set of rates, the former representing the usually higher rate of
release shortly after ingesting a dose of the drug, and the latter
representing the rate of release over a later and longer period of
time, being more in the nature of a controlled-release or sustained
action. It is applicable for the delivery of opioid analgesics in
which it is desired to discourage common methods of tampering
associated with misuse and abuse of a drug, and also dose dumping
in the presence of alcohol. It can potentially retard tampering
without interfering with the bioavailability of the
product.
In
addition, our Paradoxical OverDose Resistance Activating Systems
(“
PODRAS™
”) delivery
technology was initially introduced to enhance our Oxycodone ER
product candidate. The PODRAS™ delivery technology platform
was designed to prevent overdose when more pills than prescribed
are swallowed intact. Preclinical studies of prototypes of
oxycodone with PODRAS
TM
technology suggest
that, unlike other third-party abuse-deterrent oxycodone products
in the marketplace, if more tablets than prescribed are
deliberately or inadvertently swallowed, the amount of drug active
released over 24 hours may be substantially less than expected.
However, if the prescribed number of pills is swallowed, the drug
release should be as expected. Certain aspects of our PODRAS
technology are covered by U.S. Patent Nos. 9,522,119, 9,700,515,
9,700,516 and 9,801,939 and Canadian Patent No. 2,910,865 issued by
the U.S. Patent and Trademark Office and the Canadian Intellectual
Property Office in respect of “Compositions and Methods for
Reducing Overdose” in December 2016, July 2017 and October
2017. The issuance of these patents provides us with the
opportunity to accelerate our PODRAS
TM
development in the
first half of 2018 by pursuing proof of concept studies in humans.
We intend to incorporate this technology in an alternate Oxycodone
ER product candidate.
The NDA
505(b)(2) pathway (which relies in part upon the FDA’s
findings for a previously approved drug) both accelerates
development timelines and reduces costs in comparison to NDAs for
new chemical entities.
An
advantage of our strategy for development of NDA 505(b)(2) drugs is
that our product candidates can, if approved for sale by the FDA,
potentially enjoy an exclusivity period which may provide for
greater commercial opportunity relative to the generic ANDA
route.
The
market we operate in is created by the expiration of drug product
patents, challengeable patents and drug product exclusivity
periods. There are three ways that we employ our controlled-release
technologies, which we believe represent substantial opportunities
for us to commercialize on our own or develop products or
out-license our technologies and products:
●
For existing
controlled-release (once-a-day) products whose APIs are covered by
drug molecule patents about to expire or already expired, or whose
formulations are covered by patents about to expire, already
expired or which we believe we do not infringe, we can seek to
formulate generic products which are bioequivalent to the branded
products. Our scientists have demonstrated a successful track
record with such products, having previously developed several drug
products which have been commercialized in the U.S. by their former
employer/clients. The regulatory pathway for this approach requires
ANDAs for the U.S. and ANDSs for Canada.
●
For branded
immediate-release (multiple-times-per-day) drugs, we can formulate
improved replacement products, typically by developing new,
potentially patentable, controlled-release once-a-day drugs. Among
other out-licensing opportunities, these drugs can be licensed to
and sold by the pharmaceutical company that made the original
immediate-release product. These can potentially protect against
revenue erosion in the brand by providing a clinically attractive
patented product that competes favorably with the generic
immediate-release competition that arises on expiry of the original
patent(s). The regulatory pathway for this approach requires NDAs
via a 505(b)(2) application for the U.S. or corresponding pathways
for other jurisdictions where applicable.
●
Some of our
technologies are also focused on the development of abuse-deterrent
and overdose preventive pain medications. The growing abuse and
diversion of prescription “painkillers”, specifically
opioid analgesics, is well documented and is a major health and
social concern. We believe that our technologies and know-how are
aptly suited to developing abuse-deterrent pain medications. The
regulatory pathway for this approach requires NDAs via a 505(b)(2)
application for the U.S. or corresponding pathways for other
jurisdictions where applicable.
We
intend to collaborate in the development and/or marketing of one or
more products with partners, when we believe that such
collaboration may enhance the outcome of the project. We also plan
to seek additional collaborations as a means of developing
additional products. We believe that our business strategy enables
us to reduce our risk by (a) having a diverse product portfolio
that includes both branded and generic products in various
therapeutic categories, and (b) building collaborations and
establishing licensing agreements with companies with greater
resources thereby allowing us to share costs of development and to
improve cash-flow. There can be no assurance that we will be able
to enter into additional collaborations or, if we do, that such
arrangements will be commercially viable or
beneficial.
Our Drug Delivery Technologies
Hypermatrix™
Our
scientists have developed drug delivery technology systems, based
on the Hypermatrix™ platform, that facilitate
controlled-release delivery of a wide range of pharmaceuticals.
These systems include several core technologies, which enable us to
flexibly respond to a wide range of drug attributes and patient
requirements, producing a desired controlled-release effect. Our
technologies have been incorporated in drugs manufactured and sold
by major pharmaceutical companies.
This
group of drug delivery technology systems is based upon the drug
active ingredient (“drug active”) being imbedded in,
and an integral part of, a homogeneous (uniform), core and/or
coatings consisting of one or more polymers which affect the
release rates of drugs, other excipients (compounds other than the
drug active), such as for instance lubricants which control
handling properties of the matrix during fabrication, and the drug
active itself. The Hypermatrix™ technologies are the core of
our current marketing efforts and the technologies underlying our
existing development agreements.
nPODDDS™
In
addition to continuing efforts with Hypermatrix™ as a core
technology, our scientists continue to pursue novel research
activities that address unmet needs. Oxycodone ER is an NDA
candidate, with a unique long acting oral formulation of oxycodone
intended to treat moderate-to-severe pain. The formulation is
intended to present a significant barrier to tampering when
subjected to various forms of physical and chemical manipulation
commonly used by abusers. It is also designed to prevent dose
dumping when inadvertently co-administered with alcohol. The
technology that supports our abuse deterrent formulation of
oxycodone is the nPODDDS™ Point of Divergence Drug Delivery
System. The use of nPODDDS™ does not interfere with the
bioavailability of oxycodone. We intend to apply the nPODDDS™
technology platforms to other extended release opioid drug
candidates (e.g., oxymorphone, hydrocodone, hydromorphone and
morphine) utilizing the 505(b)(2) regulatory pathway.
PODRAS™
Our
PODRAS™ delivery technology is designed to prevent overdose
when more pills than prescribed are swallowed intact. Preclinical
studies of prototypes of oxycodone with PODRAS technology suggest
that, unlike other third-party abuse-deterrent oxycodone products
in the marketplace, if more tablets than prescribed are
deliberately or inadvertently swallowed, the amount of drug active
released over 24 hours may be substantially less than expected.
However, if the prescribed number of pills is swallowed, the drug
release should be as expected. We are currently working on an
alternate Oxycodone ER product candidate incorporating our
PODRAS™ delivery technology. In April 2015, the FDA published
Guidance for Industry: Abuse-Deterrent Opioids — Evaluation
and Labeling, which cited the need for more efficacious
abuse-deterrence technology. In this Guidance, the FDA stated,
“opioid products are often manipulated for purposes of abuse
by different routes of administration or to defeat extended-release
properties, most abuse-deterrent technologies developed to date are
intended to make manipulation more difficult or to make abuse of
the manipulated product less attractive or less rewarding. It
should be noted that these technologies have not yet proven
successful at deterring the most common form of
abuse—swallowing a number of intact capsules or tablets to
achieve a feeling of euphoria.” The FDA reviewed our request
for Fast Track designation for our abuse deterrent Oxycodone ER
development program incorporating PODRAS™, and in May 2015
notified us that the FDA had concluded that we met the criteria for
Fast Track designation. Fast Track is a designation assigned by the
FDA in response to an applicant’s request which meets FDA
criteria. The designation mandates the FDA to facilitate the
development and expedite the review of drugs intended to treat
serious or life threatening conditions and that demonstrate the
potential to address unmet medical needs.
In
December 2016, July 2017 and October 2017, we obtained that U.S.
Patent Nos. 9,522,119, 9,700,515, 9,700,516 and 9,801,939 and
Canadian Patent No. 2,910,865 issued by the U.S. Patent and
Trademark Office and the Canadian Intellectual Property Office in
respect of “Compositions and Methods for Reducing
Overdose”. The issued patents cover aspects of the
PODRAS™ delivery technology. The issuance of these patents
represents a significant advance in our abuse deterrence technology
platform. The PODRAS™ platform has the potential to
positively differentiate our technology from others of which we are
aware, and may represent an important step toward addressing the
FDA’s concern over the ingestion of a number of intact pills
or tablets. In addition to its use with opioids, the PODRAS™
platform is potentially applicable to a wide range of drug
products, inclusive of over-the-counter drugs, that are
intentionally or inadvertently abused and cause harm by overdose to
those who ingest them. We intend to incorporate this technology in
an alternate Oxycodone ER product candidate. We intend to apply the
PODRAS™ technology platforms to other extended release opioid
drug candidates (e.g., oxymorphone, hydrocodone, hydromorphone and
morphine) utilizing the 505(b)(2) regulatory pathway.
The Hypermatrix™ Family of Technologies
Our
platform of Hypermatrix™ drug delivery technologies include,
but are not limited to, IntelliFoam™,
IntelliGITransporter™, IntelliMatrix™,
IntelliOsmotics™, IntelliPaste™, IntelliPellets™,
IntelliShuttle™, nPODDDS™ and PODRAS™. Some of
their key attributes are described below.
These
technologies provide a broad range of release profiles, taking into
account the physical and chemical characteristics of a drug
product, the therapeutic use of the particular drug, and the
optimal site for release of the API in the GIT. At present those
technologies have been applied in the laboratory and/or in
bioavailability/bioequivalence studies in man to such orally
administered small molecule drugs as are used in the treatment of
neurological, cardiovascular, GIT, diabetes, pain and other
significant indications.
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
|
$
802
|
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
|
$
131
|
Intellipharmaceutics
|
|
Venlafaxine
hydrochloride extended-release capsules
|
Effexor
XR®
|
Depression
|
ANDA application
for commercialization approval for 3 strengths under review by
FDA
|
ANDA
|
$
721
|
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
|
$
341
|
Intellipharmaceutics
|
|
Metformin
hydrochloride extended-release tablets
|
Glucophage®
XR
|
Management of type
2 diabetes
|
Received final
approval for 500 and 750 mg strengths from FDA
|
ANDA
|
$466
(500 and
750 mg only)
|
Intellipharmaceutics
|
|
Quetiapine fumarate
extended-release tablets
|
Seroquel
XR®
|
Schizophrenia,
bipolar disorder & major depressive disorder
|
Received final FDA
approval for all 5 strengths. ANDS under review by Health
Canada
|
ANDA
ANDS
|
$
316
|
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
|
$
541
|
Intellipharmaceutics
and Mallinckrodt
|
|
Desvenlafaxine
extended-release tablets
|
Pristiq®
|
Depression
|
ANDA application
for commercialization approval for 2 strengths under review by
FDA
|
ANDA
|
$
250
|
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
|
$
179
|
Intellipharmaceutics
|
|
Oxycodone
hydrochloride controlled-release capsules
|
OxyContin®
|
Pain
|
NDA application
accepted February 2017 and under review by FDA
|
NDA
505(b)(2)
|
$
1,821
|
Intellipharmaceutics
|
|
Pregabalin
extended-release capsules
|
Lyrica®
|
Neuropathic
pain
|
Investigational New
Drug (“
IND
”)
application submitted in August 2015
|
NDA
505(b)(2)
|
$
4,917
|
Intellipharmaceutics
|
|
Ranolazine
extended-release tablets
|
Ranexa®
|
Chronic
angina
|
ANDA application
for commercialization approval for 2 strengths under review by
FDA
|
ANDA
|
$
964
|
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 2018 in the U.S., including sales of generics in TRx MBS
Dollars, which represents projected new and refilled prescriptions
representing a standardized dollar metric based on
manufacturer’s published catalog or list prices to
wholesalers, and does not represent actual transaction prices and
does not include prompt pay or other discounts, rebates or
reductions in price. Source: Symphony Health Solutions Corporation.
The information attributed to Symphony Health Solutions Corporation
herein is provided as is, and Symphony makes no representation
and/or warranty of any kind, including but not limited to, the
accuracy and/or completeness of such information.
(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 of our FDA approved strengths of our generic Focalin
XR
®
capsules for a period of 10 years from the date of commercial
launch (which was November 19, 2013). We retain the right to make
and distribute all strengths of the generic product outside of the
U.S. Calendar quarterly profit-sharing payments for its U.S. sales
of all strengths of generic Focalin XR
®
are payable by
Par to us as calculated pursuant to the Par agreement.
We
received final approval from the FDA in November 2013 under the
Company ANDA to launch the 15 and 30 mg strengths of our generic
Focalin XR
®
capsules.
Commercial sales of these strengths were launched immediately by
our commercialization partner in the U.S., Par. Our 5, 10, 20 and
40 mg strengths were also then tentatively FDA approved, subject to
the right of Teva to 180 days of generic exclusivity from the date
of first launch of such products. In January 2017, Par launched the
25 and 35 mg strengths of its generic Focalin XR
®
capsules in the
U.S., and in May 2017, Par launched the 10 and 20 mg strengths,
complementing the 15 and 30 mg strengths of our generic Focalin
XR
®
marketed by Par. In November 2017, Par launched the remaining 5 and
40 mg strengths providing us with the full line of generic Focalin
XR
®
strengths available in the U.S. market.
Levetiracetam – Generic Keppra XR
®
(a registered trademark of the brand
manufacturer)
We
received final approval from the FDA in February 2016 for the 500
and 750 mg strengths of our generic Keppra XR
®
(levetiracetam
extended-release) tablets. Keppra XR
®
, and the drug
active levetiracetam, are indicated for use in the treatment of
partial onset seizures associated with epilepsy. We are aware that
several other generic versions of this product are currently
available and serve to limit the overall market opportunity. We are
actively exploring the best approach to maximize the commercial
returns from this approval. There can be no assurance that our
generic Keppra XR
®
for the 500 and
750 mg strengths will be successfully commercialized.
Metformin hydrochloride –Glucophage
®
XR
(a registered trademark of the brand
manufacturer)
We
received final approval from the FDA in February 2017 for the 500
and 750 mg strengths of our generic Glucophage
®
XR (metformin
hydrochloride extended release) tablets. Glucophage
®
XR, and the
drug active metformin, are indicated for use in the management of
type 2 diabetes treatment. We are aware that several other generic
versions of this product are currently available and serve to limit
the overall market opportunity. We are continuing to evaluate
options to realize commercial returns from this approval. There can
be no assurance that our metformin extended-release tablets for the
500 and 750 mg strengths will be successfully
commercialized.
Oxycodone ER
(Abuse Deterrent
Oxycodone Hydrochloride Extended-Release Tablets)
(previously referred to as Rexista™)
One of
our non-generic products under development is our Oxycodone ER
product candidate, intended as an abuse- and alcohol-deterrent
controlled-release oral formulation of oxycodone hydrochloride for
the relief of pain. Our Oxycodone ER is a new drug candidate, with
a unique long acting oral formulation of oxycodone intended to
treat moderate-to-severe pain when a continuous, around the clock
opioid analgesic is needed for an extended period of time. The
formulation is intended to present a significant barrier to
tampering when subjected to various forms of physical and chemical
manipulation commonly used by abusers. It is also designed to
prevent dose dumping when inadvertently co-administered with
alcohol. Dose dumping is the rapid release of an active ingredient
from a controlled-release drug into the blood stream that can
result in increased toxicity, side effects, and a loss of efficacy.
Dose dumping can result by consuming the drug through crushing,
taking with alcohol, extracting with other beverages, vaporizing or
injecting. In addition, when crushed or pulverized and hydrated,
the proposed extended release formulation is designed to coagulate
instantaneously and entrap the drug in a viscous hydrogel, which is
intended to prevent syringing, injecting and snorting. Our
Oxycodone ER formulation is difficult to abuse through the
application of heat or an open flame, making it difficult to inhale
the active ingredient from burning.
In
March 2015, we announced the results of three definitive open
label, blinded, randomized, cross-over, Phase I pharmacokinetic
clinical trials in which our Oxycodone ER was compared to the
existing branded drug OxyContin
®
under single
dose fasting, single dose steady-state fasting and single dose fed
conditions in healthy volunteers. We had reported that the results
from all three studies showed that Oxycodone ER met the
bioequivalence criteria (90% confidence interval of 80% to 125%)
for all matrices, i.e., on the measure of maximum plasma
concentration or Cmax, on the measure of area under the curve time
(AUCt) and on the measure of area under the curve infinity
(AUCinf).
In May
2015, the FDA provided us with notification regarding our IND
submission for Oxycodone ER indicating that we would not be
required to conduct Phase III studies if bioequivalence to
OxyContin
®
was
demonstrated based on pivotal bioequivalence studies.
In
January 2016, we announced that pivotal bioequivalence trials of
our Oxycodone ER, dosed under fasted and fed conditions, had
demonstrated bioequivalence to OxyContin
®
extended
release tablets as manufactured and sold in the U.S. by Purdue
Pharma L.P. The study design was based on FDA recommendations and
compared the lowest and highest strengths of exhibit batches of our
Oxycodone ER to the same strengths of OxyContin
®
. The results
show that the ratios of the pharmacokinetic metrics, Cmax, AUC0-t
and AUC0-f for Oxycodone ER vs. OxyContin
®
, are within the
interval of 80% - 125% required by the FDA with a confidence level
exceeding 90%.
In July
2016, we announced the results of a food effect study conducted on
our behalf for Oxycodone ER. The study design was a randomized,
one-treatment two periods, two sequences, crossover, open label,
laboratory-blind bioavailability study for Oxycodone ER following a
single 80 mg oral dose to healthy adults under fasting and fed
conditions. The study showed that Oxycodone ER can be administered
with or without a meal (i.e., no food effect). Oxycodone ER met the
bioequivalence criteria (90% confidence interval of 80% to 125%)
for all matrices, involving maximum plasma concentration and area
under the curve (i.e., Cmax ratio of Oxycodone ER taken under
fasted conditions to fed conditions, and AUC metrics taken under
fasted conditions to fed conditions). We believe that Oxycodone ER
is well differentiated from currently marketed oral oxycodone
extended release products.
In
November 2016, we filed an NDA seeking authorization to market our
Oxycodone ER in the 10, 15, 20, 30, 40, 60 and 80 mg strengths,
relying on the 505(b)(2) regulatory pathway which allowed us to
reference data from Purdue Pharma L.P.’s file for its
OxyContin
®
. In February
2017, the FDA accepted for filing our NDA and set a Prescription
Drug User Fee Act (“
PDUFA
”) target action date of
September 25, 2017.
Our
submission is supported by pivotal pharmacokinetic studies that
demonstrated that Oxycodone ER is bioequivalent to
OxyContin
®
. The submission
also includes abuse-deterrent studies conducted to support
abuse-deterrent label claims related to abuse of the drug by
various pathways, including oral, intra-nasal and intravenous,
having reference to the FDA’s “
Abuse-Deterrent Opioids —
Evaluation and Labeling
” guidance published in April
2015.
Our NDA
was filed under Paragraph IV of the Hatch-Waxman Act, as amended.
We certified to the FDA that we believed that our Oxycodone ER
product candidate would not infringe any of the
OxyContin
®
patents listed
in the Orange Book, or that such patents are invalid, and so
notified all holders of the subject patents of such certification.
On April 7, 2017, we received notice that the Purdue litigation
plaintiffs had commenced patent infringement proceedings against us
in the U.S. District Court for the District of Delaware in respect
of our NDA filing for Oxycodone ER, alleging that our Oxycodone ER
product infringes six (6) out of the sixteen (16) patents. The
complaint seeks injunctive relief as well as attorneys’ fees
and costs and such other and further relief as the Court may deem
just and proper. An answer and counterclaim have been filed. As a
result of the commencement of these legal proceedings, the FDA is
stayed for 30 months from granting final approval to our Oxycodone
ER product candidate. That time period commenced on February 24,
2017, when the Purdue litigation plaintiffs received notice of our
certification concerning the patents, and will expire on August 24,
2019, unless the stay is earlier terminated by a final declaration
of the courts that the patents are invalid, or are not infringed,
or the matter is otherwise settled among the parties. A trial date
for the Purdue litigation has been set for October 22, 2018. We are
confident that we do not infringe the subject patents, and will
vigorously defend against these claims.
In June
2017, we announced that a FDA Advisory Committees meeting was
scheduled for July 26, 2017 to review our NDA for Oxycodone ER. The
submission requested that our Oxycodone ER product candidate
include product label claims to support the inclusion of language
regarding abuse-deterrent properties for the intravenous route of
administration.
In July
2017, we announced that the FDA Advisory Committees voted 22 to 1
in finding that our NDA for Oxycodone ER should not be approved at
this time. The Advisory Committees also voted 19 to 4 that the
Company had not demonstrated that Oxycodone ER has properties that
can be expected to deter abuse by the intravenous route of
administration, and 23 to 0 that there was not sufficient data for
Oxycodone ER to support inclusion of language regarding
abuse-deterrent properties in the product label for the intravenous
route of administration. The Advisory Committees expressed a desire
to review the additional safety and efficacy data for Oxycodone ER
that may be obtained from human abuse potential studies for the
oral and intranasal routes of administration.
In
September 2017, we received a CRL from the FDA for the Oxycodone ER
NDA. In its CRL, the FDA provided certain recommendations and
requests for information, including that we complete Category 2 and
Category 3 studies to assess the abuse-deterrent properties of
Oxycodone ER by the oral and nasal routes of administration. The
FDA also requested additional information related to the inclusion
of the blue dye in the Oxycodone ER formulation, which is intended
to deter abuse. The FDA also requested that we submit an alternate
proposed proprietary name for Oxycodone ER. The FDA determined that
it could not approve the application in its present form. We were
given one year from September 2017 to respond to the CRL, and can
request additional time if necessary.
The FDA
is actively developing a regulatory program for the narcotic
analgesic class of products. In April 2015, the FDA issued a
guidance document, “
Abuse-Deterrent Opioids —
Evaluation and Labeling
,” to assist the industry in
developing new formulations of opioid drugs with abuse-deterrent
properties. We adhered to the April 2015 guidance document in
pursuing various abuse deterrent label claims when we filed our NDA
for Oxycodone ER
.
In
February 2018, we and the FDA discussed the above-referenced CRL
for Oxycodone ER, including issues related to the blue dye in the
product candidate. Based on the meeting, the product candidate will
no longer include the blue dye. The blue dye was intended to act as
an additional deterrent if Oxycodone ER is abused and serve as an
early warning mechanism to flag potential misuse or abuse. The FDA
confirmed that the removal of the blue dye is unlikely to have any
impact on formulation quality and performance. As a result, we will
not be required to repeat in vivo bioequivalence studies and
pharmacokinetic studies submitted in the Oxycodone ER NDA. The FDA
also indicated that, from an abuse liability perspective, Category
1 studies will not have to be repeated on Oxycodone ER with the
blue dye removed.
There
can be no assurance that the studies will be adequate, that we will
not be required to conduct further studies for Oxycodone ER, that
the FDA will approve any of our requested abuse-deterrence label
claims or that the FDA will ultimately approve our NDA for the sale
of Oxycodone ER in the U.S. market, or that it will ever be
successfully commercialized.
Quetiapine fumarate extended-release tablets – Generic
Seroquel XR
®
(a registered trademark of the brand
manufacturer)
In
October 2016, we received tentative approval from the FDA for our
ANDA for quetiapine fumarate extended-release tablets in the 50,
150, 200, 300 and 400 mg strengths, and in May 2017, our ANDA
received final FDA approval for all of these strengths. Our
approved product is a generic equivalent for the corresponding
strengths of the branded product Seroquel XR
®
sold in the
U.S. by AstraZeneca. Pursuant to a settlement agreement between us
and AstraZeneca dated July 30, 2012, we were permitted to launch
our generic versions of the 50, 150, 200, 300 and 400 mg strengths
of generic Seroquel XR
®
, on November 1,
2016, subject to FDA final approval of our ANDA for those
strengths. Our final FDA approval followed the expiry of 180 day
exclusivity periods granted to the first filers of generic
equivalents to the branded product, which were shared by Par and
Accord Healthcare.
We
manufactured and shipped commercial quantities of all strengths of
generic Seroquel XR
®
to our
marketing and distribution partner Mallinckrodt, and Mallinckrodt
launched all strengths in June 2017.
Regabatin™ XR
(Pregabalin
Extended-Release)
Another
Intellipharmaceutics non-generic controlled-release product under
development is Regabatin™ XR, pregabalin extended-release
capsules. Pregabalin is indicated for the management of neuropathic
pain associated with diabetic peripheral neuropathy, postherpetic
neuralgia, spinal cord injury and fibromyalgia. A
controlled-release version of pregabalin should reduce the number
of doses patients take, which could improve patient compliance, and
therefore possibly enhance clinical outcomes. Lyrica
®
pregabalin,
twice-a-day (“
BID
”) dosage and three-times-a-day
(“
TID
”) dosage,
are drug products marketed in the U.S. by Pfizer Inc. In October
2017, Pfizer also received approval for a Lyrica CR, a
controlled-release version of pregabalin.
In
2014, we conducted and analyzed the results of six Phase I clinical
trials involving a twice-a-day formulation and a once-a-day
formulation. For formulations directed to certain indications which
include fibromyalgia, the results suggested that Regabatin™
XR 82.5 mg BID dosage was comparable in bioavailability to
Lyrica
®
50 mg
(immediate-release pregabalin) TID dosage. For formulations
directed to certain other indications which include neuropathic
pain associated with diabetic peripheral neuropathy, the results
suggested that Regabatin™ XR 165 mg once-a-day dosage was
comparable in bioavailability to Lyrica
®
75 mg BID
dosage.
In
March 2015, the FDA accepted a Pre-Investigational New Drug
(“
Pre-IND
”)
meeting request for our once-a-day Regabatin™ XR non-generic
controlled release version of pregabalin under the NDA 505(b)(2)
regulatory pathway, with a view to possible commercialization in
the U.S. at some time following the December 30, 2018 expiry of the
patent covering the pregabalin molecule. Regabatin™ XR is
based on our controlled release drug delivery technology platform
which utilizes the symptomatology and chronobiology of fibromyalgia
in a formulation intended to provide a higher exposure of
pregabalin during the first 12 hours of dosing. Based on positive
feedback and guidance from the FDA, we submitted an IND application
for Regabatin™ XR in August 2015. The FDA completed its
review of the IND application and provided constructive input that
we will use towards further development of the program. We believe
our product candidate has significant additional benefits to
existing treatments and are currently evaluating strategic options
to advance this opportunity.
There
can be no assurance that any additional Phase I or other clinical
trials we conduct will meet our expectations, that we will have
sufficient capital to conduct such trials, that we will be
successful in submitting an NDA 505(b)(2) filing with the FDA, that
the FDA will approve this product candidate for sale in the U.S.
market, or that it will ever be successfully
commercialized.
Other Potential Products and Markets
We
continue efforts to identify opportunities overseas, including in
China that could if effectuated provide product distribution
alternatives through partnerships and therefore would not likely
require an investment or asset acquisition by us. We recently
visited China where discussions toward establishing a partnership
to facilitate future development activities are ongoing. We have
not at this time entered into and may not ever enter into any such
arrangements. These opportunities could potentially involve
out-licensing of our products, third-party manufacturing supply and
more efficient access to pharmaceutical ingredients and therefore
assist with the development of our product pipeline.
COMPETITIVE ENVIRONMENT
We are
engaged in a business characterized by extensive research efforts,
rapid technological developments and intense competition. Our
competitors include medical technology, pharmaceutical,
biotechnology and other companies, universities and research
institutions. All of these competitors currently engage in, have
engaged in or may engage in the future, in development,
manufacturing, marketing and commercialization of new
pharmaceuticals and existing pharmaceuticals, some of which may
compete with our present or future products and product
candidates.
Our
drug delivery technologies may compete with existing drug delivery
technologies, as well as new drug delivery technologies that may be
developed or commercialized in the future. Any of these drugs and
drug delivery technologies may receive government approval or gain
market acceptance more rapidly than our products and product
candidates. As a result, our products and product candidates may
become non-competitive or obsolete.
We
believe that our ability to successfully compete will depend on,
among other things, the efficacy, safety and reliability of our
products and product candidates, the timing and scope of regulatory
approval, the speed at which we develop product candidates, our, or
our commercialization partners’, ability to manufacture and
sell commercial quantities of a product to the market, product
acceptance by physicians and other professional healthcare
providers, the quality and breadth of our technologies, the skills
of our employees and our ability to recruit and retain skilled
employees, the protection of our intellectual property, and the
availability of substantial capital resources to fund development
and commercialization activities.
MANUFACTURING
We have
internal manufacturing capabilities consisting of current Good
Laboratory Practices (“
cGLP
”) research laboratories and a
cGMP manufacturing plant for solid oral dosage forms at our 30
Worcester Road facility in Toronto. Raw materials used in
manufacturing our products are available from a number of
commercial sources and the prices for such raw materials are
generally not particularly volatile. In October 2014, the FDA
provided us with written notification that our Toronto, Canada
manufacturing facility at 30 Worcester Road had received an
“acceptable” classification. Such inspections are
carried out on a regular basis by the FDA and an
“acceptable” classification is necessary to
permit
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.
|
October 31,
2017
|
9,801,939
|
Compositions and
Methods For Reducing Overdose
|
|
U.S.A.
|
July 11,
2017
|
9,700,516
|
Compositions and
Methods For Reducing Overdose
|
|
U.S.A.
|
July 11,
2017
|
9,700,515
|
Compositions and
Methods For Reducing Overdose
|
|
U.S.A.
|
Dec 20,
2016
|
9,522,119
|
Compositions and
Methods For Reducing Overdose
|
|
U.S.A.
|
July 14,
2015
|
9,078,827
|
Pharmaceutical
Composition Having Reduced Abuse Potential
|
|
U.S.A.
|
Aug 12,
2014
|
8,802,139
|
Proton
Pump-Inhibitor-Containing Capsules Which Comprise Subunits
Differently Structured For A Delayed Release Of The Active
Ingredient
|
|
U.S.A.
|
Dec 10,
2013
|
8,603,520
|
Oral
Multi-functional Pharmaceutical Capsule Preparations of Proton Pump
Inhibitors
|
|
U.S.A.
|
Mar 12,
2013
|
8,394,409
|
Controlled Extended
Drug Release Technology
|
|
U.S.A.
|
Mar 15,
2011
|
7,906,143
|
Controlled Release
Pharmaceutical Delivery Device and Process for Preparation
Thereof
|
|
U.S.A.
|
Dec 28,
2010
|
7,858,119
|
Extended Release
Pharmaceuticals
|
|
U.S.A.
|
Aug 15,
2006
|
7,090,867
|
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. Effective October 1, 2017, for the
FDA’s fiscal year 2018, the FDA will charge an annual
facility user fee of $226,087 plus a new general program fee of
$159,079. Under GDUFA, generic product companies face significant
penalties for failure to pay the new user fees, including rendering
an ANDA not “substantially complete” until the fee is
paid. It is currently uncertain the effect the new fees will have
on our ANDA process and business. However, any failure by us or our
suppliers to pay the fees or to comply with the other provisions of
GDUFA may adversely impact or delay our ability to file ANDAs,
obtain approvals for new generic products, generate revenues and
thus may have a material adverse effect on our business, results of
operations and financial condition.
Patent Certification and Exclusivity Issues
ANDAs
and/or NDAs, filed under Paragraph IV of the Hatch Waxman Act,
which seek approval by a non-brand owner to market a generic
version of a branded drug product prior to the expiry of patents
owned or listed in the Orange Book (the “
Listed Patents
”) as applicable to
the brand owner’s product, are required to include
certifications pursuant to Paragraph IV that either the Listed
Patents are invalid or that the applicant’s drug product does
not infringe the Listed Patents. In such circumstances, the owner
of the branded drug and/or the holder of the patents may commence
patent infringement litigation against the applicant. In such a
case, the FDA is not empowered to approve such pending ANDA or NDA
until the expiry of 30 months from the commencement of such
litigation, unless within such 30 month period the said patents are
found to be invalid, or the drug product covered by the ANDA or NDA
is finally found by a court not to infringe such
patents.
Under
the U.S. Food, Drug and Cosmetic Act (“
FDC Act
”), the first filer of an
ANDA (but not an NDA) with a “non-infringement”
certification is entitled, if its drug product is approved, to
receive 180 days of market exclusivity. Subsequent filers of
generic products, if non-infringing and approved by the FDA, are
entitled to market their products six months after the first
commercial marketing of the first filer’s generic product. A
company having FDA approval and permission from the original brand
owner is able to market an authorized generic at any time. The
180-day exclusivity period can be forfeited if the first applicant
withdraws its application or the FDA considers the application to
have been withdrawn, the first applicant amends or withdraws
Paragraph IV Certification for all patents qualifying for 180 day
exclusivity, or the first applicant fails to obtain tentative
approval within 30 months after the date filed, unless failure is
due to a change in review requirements. The preservation of the 180
day exclusivity period related to the first-to-file status of a
drug not approved within 30 months after the date filed, generally
requires that an application be made to the FDA for extension of
the time period where the delay has been due to a change in the
review requirements for the drug. The approval of the continued
first-to-file status in such circumstances is subject to the
discretion of the FDA. There can be no assurance that the FDA would
accede to such a request if made.
Patent
expiration refers to expiry of U.S. patents (inclusive of any
extensions) on drug compounds, formulations and uses. Patents
outside the United States may differ from those in the United
States. Under U.S. law, the expiration of a patent on a drug
compound does not create a right to make, use or sell that
compound. There may be additional patents relating to a
person’s proposed manufacture, use or sale of a product that
could potentially prohibit such person’s proposed
commercialization of a drug compound.
The FDC
Act contains other market exclusivity provisions that offer
additional protection to pioneer drug products which are
independent of any patent coverage that might also apply.
Exclusivity refers to the fact that the effective date of approval
of a potential competitor’s ANDA for a generic of the pioneer
drug may be delayed or, in certain cases, an ANDA may not be
submitted until the exclusivity period expires. Five years of
exclusivity are granted to the first approval of a “new
chemical entity”. Three years of exclusivity may apply to
products which are not new chemical entities, but for which new
clinical investigations are essential to the approval. For example,
a new indication for use, or a new dosage strength of a previously
approved product, may be entitled to exclusivity, but only with
respect to that indication or dosage strength. Exclusivity only
offers protection against a competitor entering the market via the
ANDA route, and does not operate against a competitor that
generates all of its own data and submits a full NDA.
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.
T
he 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,
2018.
D.
Property, Plant and
Equipmen
t
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.
I
n 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,
2017, 2016 and 2015.
Our
results of operations have fluctuated significantly from period to
period in the past and are likely to do so in the future. We
anticipate that our quarterly and annual results of operations will
be impacted for the foreseeable future by several factors,
including the timing of approvals to market our product candidates
in various jurisdictions and any resulting licensing revenue,
milestone revenue, product sales, the number of competitive
products and the extent of any aggressive pricing activity,
wholesaler buying patterns, the timing and amount of payments
received pursuant to our current and future collaborations with
third parties, the existence of any first-to-file exclusivity
periods, and the progress and timing of expenditures related to our
research, development and commercialization efforts. Due to these
fluctuations, we presently believe that the period-to-period
comparisons of our operating results are not a reliable indication
of our future performance.
Over
the last several years, the FDA, through the Office of Generic
Drugs (“
OGD
”)
that approves ANDAs, has experienced a significant deterioration in
ANDA approval timelines. The Company believes that the median ANDA
approval time for ANDAs filed in 2012 or prior is approximately 47
months. The FDA has attributed this backlog principally
to:
●
significant growth
in ANDA submissions, particularly foreign submissions
●
an increase in the
number of complex products
●
an increase in the
number of foreign site inspections
●
limited resources
to handle the growth and complexity of submissions
In
order to address the significant backlog, GDUFA was passed. Under
GDUFA, the OGD has been collecting new user fees from generic drug
companies designed, among other things, to fund the increase in
resources required to deal with the approval backlog as well as
restructure the OGD to effectively deal with ANDA timelines on a go
forward basis. The Company currently has 4ANDAs that were filed in
2012 or prior that are still pending final FDA approval that exceed
the 47 month median. We believe that the FDA has made positive
strides in restructuring the OGD to address the ANDA approval
backlog and we remain optimistic that the FDA will be successful in
reducing the backlog; however, there can be no assurance as to when
or if the FDA will approve any of our ANDA product
candidates.
Revised Prior Quarter Amounts
While
preparing our November 30, 2016 year-end financial statements, we
identified and corrected a non-cash error related to the accounting
for the modification of performance-based stock options. In April
2016, our shareholders approved a two-year extension of the expiry
date of the performance-based options from September 2016 to
September
2018.
We have determined that this modification resulted in a non-cash
expense that should have been reflected in our 2016 second quarter
results. As stock-based compensation is a non-cash item, this error
did not impact net cash provided from operations in the second
quarter, nor does it have any impact on our annual financial
statements for the year ended November 30, 2016. This error
resulted in an understatement of second quarter stock-based
compensation charged to R&D expense, with a corresponding
understatement of additional paid in capital, of $1,177,782. We
have determined to record the expense in the 2016 fourth quarter
ended November 30, 2016.
The following are selected financial data for the years ended
November 30, 2017, 2016 and 2015.
|
|
For
the years ended
|
|
|
|
|
||
|
|
November 30,
|
November 30,
|
November 30,
|
Change
|
Change
|
||
|
|
2017
|
2016
|
2015
|
2017
vs 2016
|
2016
vs 2015
|
||
|
|
$
|
$
|
$
|
$
|
%
|
$
|
%
|
|
Revenue:
|
|
|
|
|
|
|
|
|
Licensing
|
5,025,350
|
2,209,502
|
4,093,781
|
2,815,848
|
127
%
|
(1,884,279
)
|
-46
%
|
|
Up-front
fees
|
479,102
|
37,500
|
-
|
441,602
|
1178
%
|
37,500
|
N/A
|
|
|
5,504,452
|
2,247,002
|
4,093,781
|
3,257,450
|
145
%
|
(1,846,779
)
|
-45
%
|
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold
|
704,006
|
-
|
-
|
704,006
|
N/A
|
-
|
N/A
|
|
Gross
Margin
|
4,800,446
|
2,247,002
|
4,093,781
|
2,553,444
|
114
%
|
(1,846,779
)
|
-45
%
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
Research
and development
|
9,271,353
|
8,166,736
|
7,247,473
|
1,104,617
|
14
%
|
919,263
|
13
%
|
|
Selling,
general and administrative
|
3,287,914
|
3,546,132
|
3,581,913
|
(258,218
)
|
-7
%
|
(35,781
)
|
-1
%
|
|
Depreciation
|
506,961
|
385,210
|
377,849
|
121,751
|
32
%
|
7,361
|
2
%
|
|
|
13,066,228
|
12,098,078
|
11,207,235
|
968,150
|
8
%
|
890,843
|
8
%
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
(8,265,782
)
|
(9,851,076
)
|
(7,113,454
)
|
1,585,294
|
-16
%
|
(2,737,622
)
|
38
%
|
|
|
|
|
|
|
|
|
|
|
Net
foreign exchange (loss) gain
|
(80,093
)
|
(22,470
)
|
46,211
|
(57,623
)
|
256
%
|
(68,681
)
|
-149
%
|
|
Interest
income
|
15,037
|
207
|
1,507
|
14,830
|
7164
%
|
(1,300
)
|
-86
%
|
|
Interest
expense
|
(389,239
)
|
(270,238
)
|
(256,629
)
|
(119,001
)
|
44
%
|
(13,609
)
|
5
%
|
|
Financing
cost
|
(137,363
)
|
-
|
-
|
(137,363
)
|
N/A
|
-
|
N/A
|
|
Extinguishment
loss
|
-
|
-
|
(114,023
)
|
-
|
N/A
|
114,023
|
N/A
|
|
Net
loss
|
(8,857,440
)
|
(10,143,577
)
|
(7,436,388
)
|
1,286,137
|
-13
%
|
(2,707,189
)
|
36
%
|
Year Ended November 30, 2017 Compared to the Year Ended November
30, 2016
Revenue
The
Company recorded revenues of $5,504,452 for the year ended November
30, 2017 versus $2,247,002 for the year ended November 30, 2016.
Revenues consisted primarily of licensing revenues from commercial
sales of the 10,15, 20, 25, 30 and 35 mg of generic Focalin
XR
®
under the Par agreement. The increase in revenues in the current
year period is primarily due to the launch in January 2017 of the
25 and 35 mg strengths of generic Focalin XR
®
capsules in the
U.S and also reflects revenue from the Company’s generic
Seroquel XR
®
launched by
Mallinckrodt in June 2017. The Company’s revenues on the 25
and 35 mg strengths of generic Focalin XR
®
showed some
decline commencing July 2017 when their 6 month exclusivity
expired, but have since leveled off. The 15 and 30mg strengths
continue to perform well, with the 10 and 20 mg strengths
contributing less due to their launch date being late August 2017.
The 5 and 40 mg strengths did not contribute at all to top line
revenue in fiscal 2017 as the products were not in the market until
after year end. Revenues from generic Seroquel XR
®
were
considerably lower than originally anticipated, primarily due to
timing of the product launch, which was several weeks after other
generics entered the market. As such, it is expected to take some
time to gain market share as wholesaler contracts come up for
renewal. Revenues under the Par and Mallinckrodt agreements
represents the commercial sales of the generic products in those
strengths and may not be representative of future
sales.
Cost of goods sold
The
Company recorded cost of goods sold of $704,006 for the year ended
November 30, 2017 versus $Nil for the year ended November 30, 2016.
Cost of sales for the year ended November 30, 2017, reflects the
Company’s shipments of generic Seroquel XR
®
to Mallinckrodt
which are manufactured by the Company and supplied to Mallinckrodt
on a cost-plus basis. This product was not marketed or sold prior
to fiscal 2017.
Research and Development
Expenditures for
R&D for the year ended November 30, 2017 were higher by
$1,104,617 compared to the year ended November 30, 2016. The
increase is primarily due to higher stock option compensation
expense as a result of certain performance based stock options
vesting upon FDA approval of quetiapine fumarate extended release
tablets in the 50, 150, 200, 300 and 400 mg strengths, as detailed
below. R&D expenses are also higher due to higher third party
consulting fees associated with our preparation for the FDA
Advisory Committee meeting in relation to our Oxycodone ER NDA
filing. As noted above under “Revised Prior Quarter
Amounts”, the R&D expenses for the year ended November
30, 2016 were revised higher by $1,177,782 as a result of our
shareholders approving an extension of the expiry date of certain
performance based stock options.
In the
year ended November 30, 2017, we recorded $1,654,051 of expenses
for stock-based compensation for R&D employees, of which
$1,577,772 was for expenses related to performance based stock
options which vested on FDA approval for metformin hydrochloride
extended release tablets in February 2017 and FDA approval of our
quetiapine fumarate extended release tablets in May 2017. In the
year ended November 30, 2016, we recorded $1,995,805 as expense for
stock based compensation for R&D employees, of which $620,632
was for expenses related to performance based stock options which
vested on FDA approval of our generic Keppra XR
®
in February
2016.
After
adjusting for the stock-based compensation expenses discussed
above, expenditures for R&D for the year ended November 30,
2017 were higher by $1,446,371 compared to the year ended November
30, 2016. The increase was primarily due to costs related to
preparing for the FDA Advisory Committee meeting, an increase in
third party R&D expenditures and higher compensation
expense.
Selling, General and Administrative
Selling, general
and administrative expenses were $3,287,914 for the year ended
November 30, 2017 in comparison to $3,546,132 for the year ended
November 30, 2016, a decrease of $258,218. The decrease is due to
lower wages and benefits and administrative costs offset by higher
expenses related to marketing cost and occupancy cost discussed in
greater detail below.
Expenditures for
wages and benefits for the year ended November 30, 2017 were
$1,240,361 in comparison to $1,454,501 in the year ended November
30, 2016. For the year ended November 30, 2017, we recorded $95,948
as expense for stock-based compensation compared to an expense of
$265,639 for the year ended November 30, 2016. After adjusting for
the stock-based compensation expenses, expenditures for wages for
the year ended November 30, 2017 were lower by $44,449 compared to
the year ended November 30, 2016. The decrease is attributable to
the accrual of bonuses to certain management employees in the year
ended November 30, 2016, there were no bonuses paid in the year
ended November 30, 2017.
Administrative
costs for the year ended November 30, 2017 were $1,402,253 in
comparison to $1,558,633 in the year ended November 30, 2016. The
decrease relates primarily to lower professional fees.
Marketing costs for
the year ended November 30, 2017 were $502,688 in comparison to
$413,646 in the year ended November 30, 2016. The increase is
primarily the result of an increase in travel expenditures related
to business development and investor relations
activities.
Occupancy costs for
the year ended November 30, 2017 were $142,612 in comparison to
$119,352 for the year ended November 30, 2016. The increase is due
to the incremental cost of leasing an adjoining facility in order
to meet the Company’s anticipated growth
requirements.
Depreciation
Depreciation
expenses for the year ended November 30, 2017 were $506,961 in
comparison to $385,210 in the year ended November 30, 2016. The
increase is primarily due to the additional investment in
production, laboratory and computer equipment during the year ended
November 30, 2017.
Foreign Exchange Loss
Foreign
exchange loss was $80,093 for the year ended November 30, 2017 in
comparison to a loss of $22,470 in the year ended November 30,
2016. The foreign exchange loss for the year ended November 30,
2017 was due to the weakening of the Canadian dollar against the
U.S. dollar during the year ended November 30, 2017 as the exchange
rates changed to $1.00 for C$1.2888 as at November 30, 2017 from
$1.00 for C$1.3429 as at November 30, 2016. The foreign exchange
loss for the year ended November 30, 2016 was due to the weakening
of the Canadian dollar against the U.S. dollar during the year
ended November 30, 2016 as the exchange rates changed to $1.00 for
C$1.3429 as at November 30, 2016 from $1.00 for C$1.3353 as at
November 30, 2015.
Interest Income
Interest income for
the year ended November 30, 2017 was higher by $14,830 in
comparison to the prior period. For the year ended November 30,
2017 interest was higher largely due to interest received on input
tax credit refunds under the SR&ED program.
Interest Expense
Interest expense
for the year ended November 30, 2017 was higher by $119,001
compared with the prior period. This is due to interest expense
paid in 2017 on the Debenture which accrues interest payable at 12%
annually and the related conversion option embedded derivative
accreted at an annual imputed interest of approximately 15.2%, in
comparison to the first nine months of 2016 when the Debenture
imputed interest was approximately 4.2%.
Net Loss
The
Company recorded net loss for the year ended November 30, 2017 of
$8,857,440 or $0.29 per common share, compared with a net loss of
$10,143,577 or $0.38 per common share for the year ended November
30, 2016. In the year ended November 30, 2017, the net loss was
attributed to the ongoing R&D and selling, general and
administrative expenses, partially offset by licensing revenues
from commercial sales of generic Focalin XR
®
and to a lesser
extent, sales of generic Seroquel XR
®
shipped to
Mallinckrodt. The net loss in 2017 is lower compared to 2016 due to
higher licensing revenues which were partially offset by an
increase in performance based stock option expense and higher third
party R&D expenditures. Revenue from commercial sales of
generic Focalin XR
®
and generic
Seroquel XR
®
in the year
ended November 30, 2017, was $4,269,691 versus $2,209,502 in fiscal
2016. This is primarily due to the launch of additional strengths
of generic Focalin XR
®
in 2017 as well
as the launch of generic Seroquel XR
®
, In the year
ended November 30, 2016, the higher net loss was primarily
attributed to lower licensing revenues from commercial sales of
generic Focalin XR
®
for 2016. To a
lesser extent, the higher loss for the 2016 period was due to the
accrual of management bonuses and additional compensation costs
related to vested performance options as a result of the FDA
approval of generic Keppra XR
®
and the
Company’s shareholders approving an extension of the expiry
date of the performance based stock options.
Year Ended November 30, 2016 Compared to the Year Ended November
30, 2015
Revenue
The
Company recorded revenues of $2,247,002 for the year ended November
30, 2016 versus $4,093,781 for the year ended November 30, 2015.
For the year ended November 30, 2016, we recognized licensing
revenue of $2,209,502 from commercial sales of 15 and 30 mg
strengths of generic Focalin XR
®
capsules under
the Par agreement. The decrease in revenues is primarily due to
increased competition and a softening of pricing conditions for our
generic Focalin XR
®
capsules. A
fifth generic competitor entered the market in the second half of
2015, resulting in increased price competition and lower market
share. Based on the most recent two month trend, our market share
for the 15 and 30 mg
strengths was
approximately 30% for the combined strengths of our generic Focalin
XR
®
capsules. In addition, during the year ended November 30, 2016, the
Company received a non-refundable up-front payment of $3,000,000
from Mallinckrodt pursuant to the Mallinckrodt agreement, of which
$37,500 was recognized as revenue. Such up-front fees are
recognized over the expected 10 year term of the contract. There
were no up-front fees recognized in the year ended November 30,
2015.
Research and Development
Expenditures for
R&D for the year ended November 30, 2016 were higher by
$919,263 compared to the year ended November 30, 2015. The increase
is primarily due to higher stock option compensation expense as a
result of certain performance based stock options vesting upon FDA
approval of generic Keppra XR
®
, and additional
compensation costs related to vested performance options as a
result of the Company’s shareholders approving a two year
extension of the expiry date of the performance based stock options
from September 2016 to September 2018, partially offset by lower
spending for ongoing R&D work, as detailed below.
In the
year ended November 30, 2016 we recorded $1,995,805 as expense for
stock based compensation for R&D employees, of which $620,632
was for expenses related to performance based stock options which
vested on FDA approval of our generic Keppra XR
®
in February
2016. As a result of the modification of the performance based
stock option expiry date, we recorded additional compensation costs
of $1,177,782 related to vested performance options during the year
ended November 30, 2016. In the year ended November 30, 2015, we
recorded $152,231 as expenses for stock-based compensation
expense.
After
adjusting for the stock-based compensation expenses discussed
above, expenditures for R&D for the year ended November 30,
2016 were lower by $924,311 compared to the year ended November 30,
2015. This is primarily due to the fact that during the year ended
November 30, 2016 we incurred lower expenditures on the development
of several generic product candidates (specifically for clinical
studies), partially offset by an accrual of bonuses to certain
management employees, compared to the year ended November 30, 2015.
There were no management bonuses paid in the year ended November
30, 2015.
Selling, General and Administrative
Selling, general
and administrative expenses were $3,546,132 for the year ended
November 30, 2016 in comparison to $3,581,913 for the year ended
November 30, 2015, a decrease of $35,781. The decrease was due to a
decrease in corporate legal activities and other professional fees,
offset by an expense for management bonuses discussed in greater
detail below.
Expenditures for
wages and benefits for the year ended November 30, 2016 were
$1,454,501 in comparison to $1,305,614 in the year ended November
30, 2015, an increase of $148,887, primarily due to the accrual of
bonuses to certain management employees. There were no bonuses paid
in the year ended November 30, 2015. For the year ended November
30, 2016, we recorded $265,639 as an expense for stock-based
compensation compared to an expense of $265,587 for the year ended
November 30, 2015.
Administrative
costs for the year ended November 30, 2016 were $1,558,633 in
comparison to $1,751,315 in the year ended November 30, 2015. The
decrease was primarily due to a decrease in expenditures in
corporate legal activities and other professional
fees.
Marketing costs for
the year ended November 30, 2016 were $413,646 in comparison to
$434,902 in the year ended November 30, 2015. The decrease was
attributable to the decrease in travel expenditures related to
business development and investor relations
activities.
Occupancy costs for
the year ended November 30, 2016 were $119,352 in comparison to
$90,082 for the year ended November 30, 2015. The increase was due
to the incremental cost of leasing an adjoining facility in order
to meet the Company’s anticipated growth
requirements.
D
e
preciation
Depreciation
expenses for the year ended November 30, 2016 were $385,210 in
comparison to $377,849 in the year ended November 30, 2015. The
increase was primarily due to the additional investment in
production, laboratory and computer equipment during the year ended
November 30, 2016.
Net Foreign Exchange (Loss) Gain
Foreign
exchange loss was $22,470 for the year ended November 30, 2016 in
comparison to a gain of $46,211 in the year ended November 30,
2015. The foreign exchange loss for the year ended November 30,
2016 was due to the weakening of the Canadian dollar against the
U.S. dollar during the year ended November 30, 2016 as the exchange
rates changed to $1.00 for C$1.3429 as at November 30, 2016 from
$1.00 for C$1.3353 as at November 30, 2015. During the year ended
November 30, 2016, the exchange rate averaged $1.00 for C$1.3276
compared to the year ended November 30, 2015, when the exchange
rate averaged $1.00 for C$1.2603.
Interest Income
Interest income for
the year ended November 30, 2016 was lower by $1,300 in comparison
to the prior period. For the year ended November 30, 2016 interest
was lower largely due to lower average amounts of cash on hand
compared to the year ended November 30, 2015.
Interest Expense
Interest expense
for the year ended November 30, 2016 was higher by $13,609 compared
with the prior period. This is primarily because the interest
expense paid on the Debenture which accrues interest payable at 12%
annually and the related conversion option embedded derivative
accreted at an annual imputed interest of approximately 6.6% in
fiscal 2016. During the fiscal year 2015, the conversion option
embedded derivative accreted at an annual imputed interest of
approximately 15%, offset by a credit to interest expense at an
imputed interest rate of 14.6%, during the third quarter of 2015,
due to the extinguishment of the debt from an accounting
perspective.
Net Loss
The
Company recorded net loss for the year ended November 30, 2016 of
$10,143,577 or $0.38 per common share, compared with a net loss of
$7,436,388 or $0.31 per common share for the year ended November
30, 2015. In the year ended November 30, 2016, the higher net loss
was primarily attributed to lower licensing revenues from
commercial sales of generic Focalin XR
®
for 2016. To a
lesser extent, the higher loss for the 2016 period was due to the
accrual of management bonuses and additional compensation costs
related to vested performance options as a result of the FDA
approval of generic Keppra XR
®
and the
Company’s shareholders approving an extension of the expiry
date of the performance based stock options. In the year ended
November 30, 2015, the net loss was attributed to the ongoing
R&D and selling, general and administrative expense, partially
offset by licensing revenue.
The
Company had cash of $1,897,061 as at November 30, 2017 compared to
$4,144,424 as at November 30, 2016. The decrease in cash during the
year ended November 30, 2017 was mainly a result of our ongoing
expenditures in R&D and selling, general, and administrative
expenses, which includes increased consulting fees incurred to
prepare for the July 26, 2017 FDA Advisory Committee meeting and an
increase in purchases of plant and production equipment to support
our generic Seroquel XR
®
launch, which
were only partially offset by higher cash receipts from
commercialized sales of our generic Focalin XR
®
and cash
receipts provided from financing activities derived from common
share sales under the Company’s at-the-market offering
program and the Company’s underwritten public offering in
October 2017. The increase in cash during the year ended November
30, 2016 was mainly a result of an increase in cash flows provided
from financing activities which were mainly from the
Company’s underwritten public offering in June 2016 and
common share sales under the Company’s at-the-market offering
program, the receipt of a non-refundable upfront payment of
$3,000,000 under the Mallinckrodt agreement, partially offset by
lower cash receipts relating to commercialized sales of our generic
Focalin XR
®
and a reduction
in accounts payable and accrued liabilities. The decrease in cash
during the year ended November 30, 2015 was mainly a result of
lower cash receipts relating to commercial sales of our generic
Focalin XR
®
capsules for
the 15 and 30 mg strengths, an increase in cash flow used in
operating activities related to R&D activities, a decrease in
cash flows provided from financing activities which were mainly
from common share sales under the Company’s at-the-market
offering program, partially offset by a decrease in purchases of
production, laboratory and computer equipment.
For the
year ended November 30, 2017, net cash flows used in operating
activities decreased to $6,105,785 as compared to net cash flows
used in operating activities for the year ended November 30, 2016
of $6,254,985. The decrease was primarily due to a significant
reduction in accounts payable and accrued liabilities in fiscal
2016 as well as a reduction of inventory and accounts receivable
levels in fiscal 2017. The November 30, 2016 decrease was due to
lower cash receipts relating to commercial sales of our generic
Focalin XR
®
capsules by Par
for the 15 and 30 mg strengths and a reduction in accounts payable
and accrued liabilities, partially offset by the receipt of a
non-refundable upfront payment of $3,000,000 under the Mallinckrodt
agreement. For the year ended November 30, 2015, net cash flows
used in operating activities increased to $3,782,164 as compared to
net cash flows used in operating activities for the year ended
November 30, 2014 of $1,714,913.
R&D
costs, which are a significant portion of the cash flows used in
operating activities, related to continued internal R&D
programs are expensed as incurred. However, equipment and supplies
are capitalized and amortized over their useful lives if they have
alternative future uses. For the year ended November 30, 2017 and
the year ended November 30, 2016, R&D expense was $9,271,353,
and $8,166,736, respectively. The increase was mainly due to
consulting fees associated with our preparation for the FDA
Advisory Committee meeting in relation to our Oxycodone ER NDA
filing and the increase due to stock based compensation expenses of
$1,577,772 related to vested performance options during the year
ended November 30, 2017. For the year ended November 30, 2016 and
year ended November 30, 2015, R&D expense was $8,166,736, and
$7,247,473, respectively. The increase in fiscal 2016 over fiscal
2015 was mainly due to stock based compensation expenses of
$1,177,782 related to vested performance options during the year
ended November 30, 2016, management bonuses and an increase in
stock options expense, partially offset by lower expenditures on
third party R&D expenditures.
For the
year ended November 30, 2017, net cash flows provided from
financing activities of $5,682,168 principally related to the
Company completing an underwritten public offering in October 2017
of 3,636,364 common shares, at a price of $1.10 per share and
warrants to purchase an aggregate of 1,818,182 common shares, for
gross proceeds of $4,000,000, at-the-market issuances of common
shares, and to the exercise of warrants, offset by payments on the
convertible debenture. The warrants are exercisable six months from
issuance, will expire 30 months after they become exercisable and
have an exercise price of $1.25 per common share. The Company also
issued to the placement agents 181,818 warrants to purchase a share
of common stock at an exercise price of $1.375 per share. The total
net proceeds from the offering were $3,499,508, after deducting
offering expenses. For the year ended November 30, 2016, net cash
flows provided from financing activities of $9,159,623 principally
related to the June 2016 underwritten public offering. The Company
issued at the initial closing of the offering an aggregate of
3,229,814 common shares and warrants to purchase an additional
1,614,907 common shares. The underwriter also purchased at such
closing additional warrants to acquire 242,236 common shares
pursuant to the over-allotment option exercised in part by the
underwriter. The Company subsequently sold an aggregate of 459,456
additional common shares at the public offering price of $1.61 per
share in connection with subsequent partial exercises of the
underwriter’s over-allotment option. The closings of these
partial exercises brought the total net proceeds from the June 2016
offering to approximately $5,137,638, after deducting the
underwriter’s discount and estimated offering expenses. In
addition, the increase in financing activities during the year
ended November 30, 2016, was related to the at-the-market issuances
of common shares.
For the
year ended November 30, 2017, net cash flows used in investing
activities of $1,823,746 related primarily to purchase of plant and
production equipment required to support our generic Seroquel
XR
®
launch. For the year ended November 30, 2016, net cash flows used
in investing activities of $515,410 related mainly to purchase of
production, laboratory and computer equipment. For the year ended
November 30, 2015, net cash flows used in investing activities of
$430,480 related mainly to the purchase of production, laboratory
and computer equipment due to the acceleration of product
development activities.
All
non-cash items have been added back or deducted from the
consolidated audited statements of cash flows.
With
the exception of the quarter ended February 28, 2014, the Company
has incurred losses from operations since inception. To date, the
Company has funded its R&D activities principally through the
issuance of securities, loans from related parties, funds from the
IPC Arrangement Agreement and funds received under commercial
license agreements. Since November 2013, research has also been
funded from revenues from sales of our generic Focalin
XR
®
capsules for the 15 and 30 mg strengths. With the launch of the 25
and 35 mg strengths by Par in January 2017, the launch of the 10
and 20 mg strengths in May 2017 along with the launch of the 5 and
40 mg strengths in November 2017, we expect revenues of generic
Focalin XR
®
to show some
improvement going forward. As of November 30, 2017, the Company had
a cash balance of $1.9 million. As of February 15, 2018 (the date
of filing of the Company’s Management Discussion and Analysis
of Financial Condition and Results of Operations and Audited Annual
Financial Statements for the year ended November 30, 2017), our
cash balance was $0.6 million. We currently expect to satisfy our
operating cash requirements until June 2018 from cash on hand and
quarterly profit share payments from Par and Mallinckrodt. The
Company may need to obtain additional funding prior to that time as
we further the development of our product candidates and if we
accelerate our product commercialization activities. Other
potential sources of capital may include payments from licensing
agreements, cost savings associated with managing operating expense
levels, and/or new strategic partnership agreements which fund some
or all costs of product development. If necessary, and conditions
permit, we may utilize the equity markets to bridge any funding
shortfall and to provide capital to continue to advance our most
promising product candidates. Our future operations are highly
dependent upon our ability to source additional capital to support
advancing our product pipeline through continued R&D activities
and to fund any significant expansion of our operations. Our
ultimate success will depend on whether our product candidates
receive the approval of the FDA or Health Canada and whether we are
able to successfully market approved products. We cannot be certain
that we will be able to receive FDA or Health Canada approval for
any of our current or future product candidates, that we will reach
the level of sales and revenues necessary to achieve and sustain
profitability, or that we can secure other capital sources on terms
or in amounts sufficient to meet our needs or at all. Our cash
requirements for R&D during any period depend on the number and
extent of the R&D activities we focus on. At present, we are
working principally on our Oxycodone ER 505(b)(2), and selected
generic, product candidate development projects. Our development of
Oxycodone ER will require significant expenditures, including costs
to defend against the Purdue litigation. For our Regabatin™
XR 505(b)(2) product candidate, Phase III clinical trials can be
capital intensive, and will only be undertaken consistent with the
availability of funds and a prudent cash management strategy. We
anticipate some investment in fixed assets and equipment over the
next several months, the extent of which will depend on cash
availability.
On
December 1, 2015, the Company entered into a new lease agreement
for the combined properties comprising the Company’s premises
that it currently operates from at 30 Worcester Road, as well as a
40,000 square foot building on the adjoining property located at 22
Worcester Road, which is owned indirectly by the same landlord
(collectively, the “
combined
properties
”), for a five-year term with a five-year
renewal option. Basic rent over the five year term is C$240,000 per
annum, subject to an annual consumer price inflation adjustment and
the Company responsible for utilities, municipal taxes and
operating expenses for the leased property. With these two leased
premises, the Company now has use of 65,000 square feet of
commercial space to accommodate its growth objectives over the next
several years. The Company also has an option to purchase the
combined properties after March 1, 2017 and up to November 30, 2020
based on a fair value purchase formula. The Company uses its
facility at 30 Worcester Road as a current Good Laboratory
Practices research laboratory, office space, and current Good
Manufacturing Practices scale-up and small to medium-scale
manufacturing plant for solid oral dosage forms. The facility at 30
Worcester Road consists of approximately 4,900 square ft. for
administrative space, 4,300 square ft. for R&D, 9,200 square
ft. for manufacturing, and 3,000 square ft. for warehousing. The 22
Worcester Road building provides approximately 35,000 square feet
of warehouse space and approximately 5,000 square feet of office
space. The current lease also provides the Company with a right of
first refusal to purchase the combined properties. The landlord is
required to provide the Company with prior written notice and the
desired sale price for the combined properties prior to offering
the premises to a third party or on the open market. The Company
has five business days to accept such offer and purchase price for
a transaction to close within 60 days of the notice. If the Company
declines the offer, the landlord is entitled to offer and sell the
properties for a purchase price of not less than the price offered
to the Company for a period of 180 days, after which time the
landlord is again obliged to offer the properties to the Company
before offering them to a third party or on the open
market.
Effective September
28, 2017, the maturity date for the Debenture was extended to
October 1, 2018. The Company currently expects to repay the current
outstanding principal amount of $1,350,000 on or about October 1,
2018, if the Company then has cash available.
The
availability of equity or debt financing will be affected by, among
other things, the results of our R&D, our ability to obtain
regulatory approvals, our success in commercializing approved
products with our commercial partners and the market acceptance of
our products, the state of the capital markets generally, strategic
alliance agreements, and other relevant commercial considerations.
In addition, if we raise additional funds by issuing equity
securities, our then existing security holders will likely
experience dilution, and the incurring of indebtedness would result
in increased debt service obligations and could require us to agree
to operating and financial covenants that would restrict our
operations. In the event that we do not obtain sufficient
additional capital, it will raise substantial doubt about our
ability to continue as a going concern and realize our assets and
pay our liabilities as they become due. Our cash outflows are
expected to consist primarily of internal and external R&D,
legal and consulting expenditures to advance our product pipeline
and selling, general and administrative expenses to support our
commercialization efforts. Depending upon the results of our
R&D programs, the Purdue plaintiffs patent litigation case and
the availability of financial resources, we could decide to
accelerate, terminate, or reduce certain projects, or commence new
ones. Any failure on our part to successfully commercialize
approved products or raise additional funds on terms favorable to
us or at all, may require us to significantly change or curtail our
current or planned operations in order to conserve cash until such
time, if ever, that sufficient proceeds from operations are
generated, and could result in us not taking advantage of business
opportunities, in the termination or delay of clinical trials or us
not taking any necessary actions required by the FDA or Health
Canada for one or more of our product candidates, in curtailment of
our product development programs designed to identify new product
candidates, in the sale or assignment of rights to our
technologies, products or product candidates, and/or our inability
to file ANDAs, ANDSs or NDAs at all or in time to competitively
market our products or product candidates.
We
expense R&D costs. For the years ended November 30, 2017, 2016
and 2015, R&D expense was $9,271,353, $8,166,736 and
$7,247,473, respectively.
It is
important to note that historical patterns of revenue and
expenditures cannot be taken as an indication of future revenue and
expenditures. Net loss has been somewhat variable over the last
eight quarters, and has been impacted primarily by the commercial
sales of generic Focalin XR
®
capsules, the
level of our R&D spending, availability of funding and the
vesting or modification of performance based stock options. The
lower net loss in the fourth quarter of 2017 is primarily
attributed to lower R&D spending and selling, general and
administrative expenses, partially offset by lower licensing
revenues. The higher net loss in the third quarter of 2017 is
primarily due to lower licensing revenue as a result of the
expiration of exclusivity on the 25 and 35 mg strengths of generic
Focalin XR
®
resulting in
higher than normal wholesaler returns, along with higher expenses
related to the FDA Advisory Committee meeting in July 2017. The
lower net loss in the second quarter of 2017 is primarily
attributed to higher licensing revenues from commercial sales of
generic Focalin XR
®
in the 25 and
35 mg strengths complementing the 15 and 30 mg strengths of our
generic Focalin XR
®
marketed by
Par, partially offset by an increase in performance based options
expense and higher third party consulting fees. The lower net loss
in the first quarter of 2017 is primarily attributed to higher
licensing revenues from commercial sales of generic Focalin
XR
®
due to Par’s launch of the 25 and 35 mg strengths of its
generic Focalin XR
®
capsules in
that quarter, partially offset by an increase in performance based
stock options expense and legal and other professional fees. The
higher net loss in the fourth quarter of 2016 is attributable to
the accrual of management bonuses (there were no management bonuses
paid in fiscal 2015) and additional compensation costs related to
vested performance based stock options as a result of the
Company’s shareholders approving an extension of the expiry
date of the performance based stock options. As noted above under
“Revised Prior Quarter Amounts”, the latter item
represents a non-cash error that should have been expensed in the
second quarter of 2016, resulting in the fourth quarter net loss
being overstated by $1,177,782 and the second quarter net loss
understated by the same amount. The net losses in the first, second
and third quarter of 2016 are fairly consistent and attributable to
lower licensing revenues from commercial sales of generic Focalin
XR
®
as the Company continued to face stiff generic competition
throughout fiscal 2016. The higher net loss in the fourth quarter
of 2015 is attributed to ongoing R&D and selling, general and
administrative expense, including a significant increase in third
party clinical studies.
T
he following selected financial information is derived
from our unaudited interim consolidated financial
statements.
|
Quarter Ended
|
Revenue
|
Net loss
|
Loss per share
|
|
|
|
|
|
Basic
i
|
Diluted
i
|
|
|
$
|
$
|
$
|
$
|
|
November
30, 2017
|
1,077,835
|
(2,510,936
)
|
(0.08
)
|
(0.08
)
|
|
August
31, 2017
|
1,189,739
|
(2,550,314
)
|
(0.08
)
|
(0.08
)
|
|
May
31, 2017
|
2,001,512
|
(1,805,329
)
|
(0.06
)
|
(0.06
)
|
|
February
28, 2017
|
1,235,366
|
(1,990,861
)
|
(0.07
)
|
(0.07
)
|
|
November
30, 2016
|
569,096
|
(3,913,304
)
|
(0.13
)
|
(0.13
)
|
|
August
31, 2016
|
554,925
|
(2,110,156
)
|
(0.07
)
|
(0.07
)
|
|
May
31, 2016
|
556,044
|
(2,000,077
)
|
(0.08
)
|
(0.08
)
|
|
February
29, 2016
|
566,937
|
(2,120,040
)
|
(0.09
)
|
(0.09
)
|
(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, 2017, the Company was not
involved in any material unconsolidated SPE
transactions.
In the
table below, we set forth our enforceable and legally binding
obligations and future commitments and obligations related to all
contracts. Some of the figures we include in this table are based
on management’s estimate and assumptions about these
obligations, including their duration, the possibility of renewal,
anticipated actions by third parties, and other factors. Operating
lease obligations relate to the lease of premises for the combined
properties, comprising the Company’s premises that it
currently operates from at 30 Worcester Road as well as the
adjoining property at 22 Worcester Road, which is indirectly owned
by the same landlord, which will expire in November 2020 with a 5
year renewal option. The Company also has an option to purchase the
combined properties after March 1, 2017 and up to November 30, 2020
based on a fair value purchase formula, but does not currently
expect to exercise this option in 2018.
|
|
Payments Due by Year
|
||||
|
Contractual Obligations
|
Total
|
Less than 1 Year
|
1 - 3 Years
|
3 - 5 Years
|
More than 5 Years
|
|
|
$
|
$
|
$
|
$
|
$
|
|
Third
parties
|
|
|
|
|
|
|
Accounts
payable
|
2,060,084
|
2,060,084
|
-
|
-
|
-
|
|
Accrued
liabilities
|
782,369
|
782,369
|
-
|
-
|
-
|
|
Operating
lease
|
558,660
|
186,220
|
372,440
|
-
|
-
|
|
Related
parties
|
|
|
|
|
|
|
Employee
costs payable
|
214,980
|
214,980
|
-
|
-
|
-
|
|
Convertible
debenture
|
1,512,332
|
1,512,332
|
-
|
-
|
-
|
|
Total
contractual obligations
|
5,128,425
|
4,755,985
|
372,440
|
-
|
-
|
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
|
|
Dr. Eldon R.
Smith
(1)
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
Capital 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)
New Brunswick,
Canada
|
Director
|
Executive Manager
of Lyceum Group, a consulting business
|
None
|
January
2006
|
|
Dr. Patrick
Yat
Ontario,
Canada
|
Vice-President,
Chemistry and Analytical Services
|
Officer of the
Company
|
None
|
N/A
|
|
Andrew
Patient
(2)
Ontario,
Canada
|
Chief Financial
Officer
|
Officer of the
Company since September 2017; Chief Financial Officer of Merus Labs
International Inc. from December 2011-August 2016
|
None
|
N/A
|
Notes
:
(1)
Member of the Audit
Committee, Compensation Committee and Corporate Governance
Committee.
(2)
Mr. Patient was
appointed as Chief Financial Officer of the Company effective
September 6, 2017. Domenic Della Penna had served as the Company's
Chief Financial Officer from November 2014 until his resignation
(effective September 6, 2017) to pursue another opportunity in the
healthcare industry.
Each of
the foregoing individuals named in the above table has been engaged
in the principal occupation set forth opposite his or her name
during the past five years.
John
Allport served as the Company’s Vice President, Legal Affairs
and Licensing and as a director from September 2004 until his
resignation (effective May 17, 2017) for personal reasons. Mr.
Allport entered into a consulting agreement with the Company
effective May 17, 2017 to provide ongoing services to the Company
on an as-needed basis. Michael Campbell served as General Counsel
and Corporate Secretary from July 10, 2017 until his resignation
(effective February 22, 2018) for personal reasons.
As of
February 27, 2018, the directors and executive officers of the
Company as a group owned, directly and indirectly, or exercise
control or direction over 5,948,280 common shares, representing
approximately 17.1% of the issued and outstanding common shares of
the Company (and beneficially owned approximately 11,220,830 common
shares representing 28.1% of our common shares including common
shares issuable upon the exercise of outstanding options and the
conversion of the outstanding convertible debenture that are
exercisable or convertible within 60 days of the date hereof). Our
principal shareholders, Drs. Amina and Isa Odidi, our President and
Chief Operating Officer and our Chairman and Chief Executive
Officer, respectively, and Odidi Holdings Inc., a privately-held
company controlled by Drs. Amina and Isa Odidi, owned in the
aggregate directly and indirectly 5,781,312 common shares,
representing approximately 16.7% of our issued and outstanding
common shares of the Company (and collectively beneficially owned
in the aggregate approximately 9,935,526 common shares representing
25.6% of our common shares including common shares issuable upon
the exercise of outstanding options and the conversion of the
outstanding convertible debenture that are exercisable or
convertible within 60 days of the date hereof). (Reference is made
to the section entitled “E. Share Ownership” under this
“Item 6. Directors, Senior Management and Employees”
for additional information regarding the options to purchase common
shares held by directors and officers of the Company and the
convertible debenture held by Drs. Amina and Isa Odidi.) As a
result, the principal shareholders have the ability to exercise
significant influence over all matters submitted to our
shareholders for approval whether subject to approval by a majority
of holders of our common shares or subject to a class vote or
special resolution requiring the approval of 66⅔% of the
votes cast by holders of our common shares, in person or by
proxy.
Drs.
Isa Odidi and Amina Odidi are spouses to each other.
Compensation Discussion and Analysis
Background
– We are a
pharmaceutical company specializing in the research, development
and manufacture of novel and generic controlled-release and
targeted-release oral solid dosage drugs. Our patented
Hypermatrix™ technology is a multidimensional
controlled-release drug delivery platform that can be applied to
the efficient development of a wide range of existing and new
pharmaceuticals. Based on this technology platform, we have
developed several drug delivery systems and a pipeline of products
(some of which have received FDA approval) and product candidates
in various stages of development, including ANDAs filed with the
FDA (and one ANDS filed with Health Canada) and one NDA filing, in
therapeutic areas that include neurology, cardiovascular, GIT,
diabetes and pain. As of November 30, 2017, the Company had 62
full-time employees engaged in administration and research and
development.
Compensation Governance
– The
Company’s Compensation Committee is comprised of three
directors, Messrs. Madhani, Keirstead and Smith, each of whom is
considered “independent” within the meaning of section
2.4 of Form 51-102F6 – Statement of Executive Compensation.
Each member of the Compensation Committee has sufficient experience
in order to make decisions on the suitability of the
Company’s compensation policies and practices.
The
Compensation Committee recommends compensation policies concerning
officers and senior management to the Board. The Corporate
Governance Committee recommends compensation policies concerning
independent directors to the Board. The Board makes the final
determinations regarding the adequacy and form of the compensation
for non-executive directors to ensure that such compensation
realistically reflects the responsibilities and risks involved,
without compromising a director’s independence. Further
details relating to the role and function of the Compensation
Committee and the Corporate Governance Committee is provided in
Item 6.C.
Risk Management
– The Board is
responsible for identifying the principal risks of the
Company’s business and ensuring the implementation of
appropriate systems to manage these risks. Through the Compensation
Committee, the Board is involved in the design of compensation
policies to meet the specific compensation objectives discussed
below and considers the risks relating to such policies, if any.
The Compensation Committee is ultimately responsible for ensuring
compliance of the compensation policies and practices of the
Company. To date, the Board and Compensation Committee have not
identified any risks arising from the Company’s compensation
policies and practices that would be reasonably likely to have a
material adverse effect on the Company.
Objectives
– The overall
objectives of the Company’s compensation program include: (a)
attracting and retaining talented executive officers; (b) aligning
the interests of those executive officers with those of the
Company; and (c) linking individual executive officer compensation
to the performance of the Company. The Company’s compensation
program is currently designed to compensate executive officers for
performance of their duties and to reward certain executive
officers for performance relative to certain milestones applicable
to their services.
Elements of Compensation
– The
elements of compensation awarded to, earned by, paid to, or payable
to the Named Executive Officers (as hereinafter defined) for the
most recently completed financial year are: (a) base salary and
discretionary bonuses; (b) long-term incentives in the form of
stock options; (c) restricted share unit awards; and (d)
perquisites and personal benefits. Prior to the most recently
completed financial year, the Named Executive Officers have also
received option-based awards which were assumed by the Company
pursuant to the plan of arrangement completed on October 22,
2009.
Base Salary and Discretionary Bonus
– Base salary is a fixed element of compensation payable to
each Named Executive Officer for performing his or her
position’s specific duties. The amount of base salary for a
Named Executive Officer has been determined through negotiation of
an employment agreement with each Named Executive Officer (see
“Employment Agreements” below). While base salary is
intended to fit into the Company’s overall compensation
objectives by serving to attract and retain talented executive
officers, the size of the Company and the nature and stage of its
business also impact the level of base salary. To date, the level
of base salary has not impacted the Company’s decisions about
any other element of compensation and the Board may consider
discretionary bonuses for individual employees based on exceptional
performance by such individuals in a particular fiscal
year.
Option-Based Awards
–
Option-based awards are a variable element of compensation that
rewards each Named Executive Officer for individual and corporate
performance overall determined by the Board. Option-based awards
are intended to fit into the Company’s overall compensation
objectives by aligning the interests of all Named Executive
Officers with those of the Company, and linking individual Named
Executive Officer compensation to the performance of the Company.
The Board, which includes two of the five Named Executive Officers,
is responsible for setting and amending any equity incentive plan
under which an option-based award is granted.
The
Company has in place a stock option plan (the “
Option Plan
”) for the benefit of
certain officers, directors, employees and consultants of the
Company, including the Named Executive Officers (as described in
greater detail in Item 6.E below). Named Executive Officers have
been issued options under such plan.
The
Company has also granted performance-based options to Dr. Isa Odidi
and Dr. Amina Odidi pursuant to a separate option agreement, which
was negotiated at the same time as their employment agreements.
These options vest upon the Company attaining certain milestones
relating to FDA filings and approvals for Company drugs, such that
276,394 options vest in connection with each of the FDA filings for
the first five Company drugs and 276,394 options vest in connection
with each of the FDA approvals for the first five Company
drugs.
The
Company’s Option Plan was adopted effective October 22, 2009
as part of the IPC Arrangement Agreement approved by the
shareholders of IPC Ltd., the predecessor company, at the meeting
of shareholders on October 19, 2009. Subject to the requirements of
the Option Plan, the Board, with the assistance of the Compensation
Committee, has the authority to select those directors, officers,
employees and consultants to whom options will be granted, the
number of options to be granted to each person and the price at
which common shares of the Company may be purchased. Grants are
determined based on individual and aggregate performance as
determined by the Board.
RSUs
– The Company established a
restricted share unit plan (the “
RSU Plan
”) to form part of its
incentive compensation arrangements available for officers and
employees of the Company and its designated affiliates (as
described in greater detail it Item 6.E) as of May 28, 2010, when
the RSU Plan received shareholder approval.
Perquisites and personal benefits
– The Company also provides perquisites and personal benefits
to its Named Executive Officers, including basic employee benefit
plans, which are available to all employees, and a car allowance to
cover the cost of an automobile for business purposes. These
perquisites and personal benefits were determined through
negotiation of an employment agreement with each Named Executive
Officer (see “Employment Agreements” below). While
perquisites and personal benefits are intended to fit into the
Company’s overall compensation objectives by serving to
attract and retain talented executive officers, the size of the
Company and the nature and stage of its business also impact the
level of perquisites and benefits. To date, the level of
perquisites and benefits has not impacted the Company’s
decisions about any other element of compensation.
Other Compensation-Related Matters
– The Company’s Share Trading Policy prohibits all
directors and officers of the Company from, among other things,
engaging in any short sales designed to hedge or offset a decrease
in market value of the securities of the Company.
Executive Compensation
The
following table sets forth all direct and indirect compensation
for, or in connection with, services provided to the Company for
the financial years ended November 30, 2017, November 30, 2016 and
November 30, 2015 in respect of the Chief Executive Officer of the
Company, the Chief Financial Officers (current and former), and two
other officers of the Company who earned greater than $150,000 in
total compensation in the fiscal year ended November 30,
2017(“
Named Executive
Officers
”).
SUMMARY COMPENSATION TABLE
|
|
|
|
|
|
Non-equity incentive
plan compensation (U.S.$)(f)
|
|
|
|
|
|
Name and principal
position(a)
|
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
|
2017
|
343,430
|
N/A
|
1,609,573
|
N/A
|
N/A
|
N/A
|
13,676
|
1,966,680
|
|
|
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
|
|
Dr. Amina Odidi,
President & Chief Operating Officer
|
2017
|
343,430
|
N/A
|
1,609,573
|
N/A
|
N/A
|
N/A
|
13,676
|
1,966,680
|
|
|
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
|
|
John Allport,
Former VP Legal Affairs & Licensing(5)
|
2017
|
59,676
|
N/A
|
N/A
|
N/A
|
N/A
|
N/A
|
7,408
|
67,084
|
|
|
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
|
|
Domenic Della
Penna, Former Chief Financial Officer(6)
|
2017
|
189,662
|
N/A
|
N/A
|
N/A
|
N/A
|
N/A
|
10,257
|
199,919
|
|
|
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
|
|
Andrew Patient,
Chief Financial Officer(7)
|
2017
|
54,395
|
N/A
|
19,800
|
N/A
|
N/A
|
N/A
|
3,419
|
77,614
|
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.$ 0.7598 to C$1.00 (2016 – U.S. $0.7932;
2015 – U.S. $0.7934) being the average closing exchange rate
quoted by the Bank of Canada for the respective periods. Salary
includes all amounts paid or payable to the Named Executive
Officer. Actual amount paid to each Named Executive Officer in
fiscal 2017, 2016 and 2015 are as disclosed in the
table.
(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 $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. Allport, a
consultant to the Company, served as the Company’s Vice
President, Legal Affairs and Licensing and as a director from
September 2004 until his resignation effective on May 17,
2017.
(6)
Mr. Della Penna
served as the Company’s Chief Financial Officer from November
24, 2014 until his resignation effective on September 6,
2017.
(7) Mr.
Patient was appointed as Chief Financial Officer of the Company
effective September 6, 2017.
During
the fiscal year ended November 30, 2017, Mr. Campbell received
salary, option-based awards, all other compensation and total
compensation of $90,226, $20,825, $5,414, and $116,465,
respectively.
Significant factors
necessary to understand the information disclosed in the Summary
Compensation Table above include the terms of each Named Executive
Officer’s employment agreement and the terms of the separate
agreement relating to performance-based options applicable to Drs.
Isa and Amina Odidi described below.
Employment Agreements
The
employment agreement with Dr. Isa Odidi, the Chief Executive
Officer of the Company, effective September 1, 2004 entitles Dr.
Isa Odidi to receive a base salary of $200,000 per year, which is
paid in Canadian dollars, to be increased annually each year during
the term of the agreement by twenty percent of the prior
year’s salary. In addition, he is entitled to: (a)
participate in the Option Plan; (b) participate in all employee
benefit plans and programs, except for the RSU Plan and DSU Plan;
and (c) a car allowance of up to $1,000 per month. The initial term
of the employment agreement was until September 30, 2007, at which
time, pursuant to the terms of the agreement, the agreement was
deemed to be extended automatically for an additional three-year
period on the same terms and conditions (i.e. until September 30,
2010). The agreement will continue to be extended automatically for
successive additional three-year periods on the same terms unless
the Company gives Dr. Odidi contrary written notice at least two
years prior to the date on which the agreement would otherwise be
extended. See “Termination and Change of Control
Benefits” below. Dr. Odidi’s employment agreement was
amended on August 1, 2007 and June 8, 2009 to include intellectual
property, non-competition and non-solicitation provisions in favour
of the Company. In April 2010, Dr. Isa Odidi offered and agreed to
amend his employment agreement effective as of December 1, 2009, to
eliminate the right to annual increases in his base salary of
twenty per cent each year; and agreed to roll back his base salary
effective December 1, 2009 to the level payable under the
employment agreement for the period from September 2008 to August
2009, being C$452,000 per year. Under this amendment, the base
salary is open to potential increase on an annual basis at the
discretion of the Board and Dr. Isa Odidi is eligible to receive a
performance bonus, based on the performance, including that of Dr.
Odidi and the Company, as may be determined in the discretion of
the Board. In February 2012, Dr. Isa Odidi received a grant of
300,000 options of which 200,000 vested immediately on issuance and
the remaining 100,000 options vested on February 17, 2013 at an
exercise price of C$3.27 per share. In April 2013, Dr. Isa Odidi
received a grant of 75,000 options of which 37,500 vested
immediately on issuance and the remaining 37,500 options vested on
November 30, 2013 at an exercise price of C$1.81 per share. In
March 2014, Dr. Isa Odidi received a grant of 50,000 options of
which 25,000 vested immediately on issuance and the remaining
25,000 options vested on November 30, 2014 at an exercise price of
C$4.29 per share. In November 2015, Dr. Isa Odidi received a grant
of 70,000 options of which 49,000 vested immediately on issuance,
with the remaining 21,000 options vested on November 30, 2016 at an
exercise price of C$2.52 per share. In August 2016, Dr. Isa Odidi
received a grant of 90,000 options of which 60,000 vested
immediately on issuance, with the remaining 30,000 to vest on
November 30, 2017 at an exercise price of C$2.42 per share. In
November 2017, Dr. Isa Odidi received a grant of 70,000 options of
which 23,334 vested immediately on issuance, with the remaining
23,333 to vest on November 30, 2018 and 23,333 to vest on November
30, 2019 at an exercise price of C$1.15 per share.
The
employment agreement with Dr. Amina Odidi, the President and Chief
Operating Officer of the Company, effective September 1, 2004
entitles Dr. Amina Odidi to receive a base salary of $200,000,
which is paid in Canadian dollars, per year, to be increased
annually each year during the term of the agreement by twenty
percent of the prior year’s salary. In addition, she is
entitled to: (a) participate in the Option Plan; (b) participate in
all employee benefit plans and programs, except for the RSU Plan
and DSU Plan; and (c) a car allowance of up to $1,000 per month.
The initial term of the employment agreement was until September
30, 2007, at which time, pursuant to the terms of the agreement,
the agreement was deemed to be extended automatically for an
additional three-year period on the same terms and conditions (i.e.
until September 30, 2010). The agreement will continue to be
extended automatically for successive additional three-year periods
on the same terms unless the Company gives Dr. Odidi contrary
written notice at least two years prior to the date on which the
agreement would otherwise be extended. See “Termination and
Change of Control Benefits” below. Dr. Odidi’s
employment agreement was amended on August 1, 2007 and June 8, 2009
to include intellectual property, non-competition and
non-solicitation provisions in favour of the Company. In April
2010, Dr. Amina Odidi offered and agreed to amend her employment
agreement effective as of December 1, 2009, to eliminate the right
to annual increases in her base salary of twenty per cent each
year; and agreed to roll back her base salary effective December 1,
2009 to the level payable under the employment agreement for the
period from September 2008 to August 2009, being C$452,000 per
year. Under this amendment, the base salary is open to potential
increase on an annual basis at the discretion of the Board and Dr.
Amina Odidi is eligible to receive a performance bonus, based on
the performance, including that of Dr. Odidi and the Company, as
may be determined in the discretion of the Board. In February 2012,
Dr. Amina Odidi received
a grant
of 300,000 options of which 200,000 vested immediately on issuance
and the remaining 100,000 options vested on February 17, 2013 at an
exercise price of C$3.27 per share. In April 2013, Dr. Amina Odidi
received a grant of 75,000 options of which 37,500 vested
immediately on issuance and the remaining 37,500 options vested on
November 30, 2013 at an exercise price of C$1.81 per share. In
March 2014, Dr. Amina Odidi received a grant of 50,000 options of
which 25,000 vested immediately on issuance and the remaining
25,000 options vested on November 30, 2014 at an exercise price of
C$4.29 per share. In November 2015 Dr. Amina Odidi received a grant
of 70,000 options of which 49,000 vested immediately on issuance,
with the remaining 21,000 options vested on November 30, 2016 at an
exercise price of C$2.52 per share. In August 2016, Dr. Amina Odidi
received a grant of 90,000 options of which 60,000 vested
immediately on issuance, with the remaining 30,000 to vest on
November 30, 2017 at an exercise price of C$2.42 per share. In
November 2017, Dr. Isa Odidi received a grant of 70,000 options of
which 23,334 vested immediately on issuance, with the remaining
23,333 to vest on November 30, 2018 and 23,333 to vest on November
30, 2019 at an exercise price of C$1.15 per share .
In
addition, the Company entered into a separate acknowledgement and
agreement with Drs. Isa and Amina Odidi dated October 22, 2009 to
be bound by the performance-based stock option agreement dated
September 10, 2004 pursuant to which Drs. Isa and Amina Odidi are
entitled to purchase up to 2,763,940 of the Company’s common
shares. These options were not granted under the Option Plan. These
options vest upon the Company attaining certain milestones related
to the FDA filings and approvals for Company drugs. The options are
exercisable at a price of $3.62 per share and were to expire in
September 2014. Effective March 27, 2014, the Company’s
shareholders approved a two year extension of the performance-based
stock option expiry date to September 2016. Effective April 19,
2016, the Company’s shareholders approved a further two year
extension of the performance-based stock option expiry date to
September 2018. As of the date hereof, 2,487,546 of these options
have vested and are exercisable.
Domenic
Della Penna had served as the Company’s Chief Financial
Officer from November 2014 until his resignation effective on
September 6, 2017. The employment agreement with Mr. Della Penna,
effective November 24, 2014, provided for Mr. Della Penna to
receive a base salary of C$275,000, which was paid in Canadian
dollars, per year and which was increased by the Board on a
discretionary basis for 2015 to C$300,000 and C$325,000 for 2017.
In addition, he was entitled to: (a) participate in the Option
Plan; (b) participate in all employee benefit plans and programs;
and (c) a car allowance of C$1,500 per month. The agreement
provided for automatic renewal from year to year in absence of
notice of termination from the Company at least 60 days prior to
the anniversary date. If the agreement was terminated without
cause, it required payment to Mr. Della Penna based upon a formula
that commences with the equivalent of approximately three
months’ base salary and increases by approximately six weeks
of base salary for every full year of service. If such termination
without cause occurred within six months of a change of control of
the Company that occurred after November 24, 2015, it required
payment to Mr. Della Penna based on a formula that commences with
the equivalent of approximately thirteen months’ base salary
and increases by approximately six weeks for every full year of
service. Mr. Della Penna’s employment agreement contained
intellectual property, non-competition and non-solicitation
provisions in favour of the Company. Mr. Della Penna was granted
60,000 options, of which 15,000 vested immediately on issuance,
15,000 vested on November 30, 2015 and the remaining options vest
as to 15,000 each year on November 30, 2016 and 2017 at an exercise
price of C$3.22 per share. In November 2015, Mr. Della Penna
received a grant of 50,000 options of which 35,000 vested
immediately on issuance, with the remaining 15,000 options vested
on November 30, 2016 at an exercise price of C$2.52 per share. In
August 2016, Mr. Della Penna received a grant of 70,000 options, of
which 47,000 vested immediately, with the remaining 23,000 to vest
on November 30, 2017 at an exercise price of C$2.42 per share. Mr.
Della Penna’s options ceased to be exercisable 120 days after
he ceased to be employed by the Company.
The
employment agreement with Andrew Patient, the Chief Financial
Officer of the Company, dated August 30, 2017, effective September
6, 2017 entitles Mr. Patient to receive a base salary of C$300,000,
which is paid in Canadian dollars, per year. In addition, he is
entitled to: (a) participate in the Option Plan; (b) participate in
all employee benefit plans and programs; and (c) a car allowance of
C$1,500 per month. The agreement provides for automatic renewal on
December 31 each year from year to year in absence of notice of
termination from the Company at least 90 days prior to the end of
the then applicable term. If the agreement is terminated without
cause, it requires payment to Mr. Patient of 3 months' base salary,
plus 6 weeks' base salary for every full year of service, up to a
combined maximum of 12 months. If such termination occurs within
six months of a change of control of the Company, it requires
payment to Mr. Patient of thirteen months' base salary, plus 6
weeks' base salary for every full year of service, up to a combined
maximum of 18
months.
Mr. Patient’s employment agreement contains intellectual
property, non-competition and non-solicitation provisions in favour
of the Company. Mr. Patient was granted 60,000 options, of which
20,000 vested immediately on issuance, 20,000 vest on October 20,
2018 and the remaining 20,000 vest on October 20, 2019 at an
exercise price of C$1.27 per share. In November 2017, Mr. Patient
received a grant of 15,000 options of which 5,000 vested
immediately on issuance, 5,000 vest on November 30, 2018 and the
remaining 5,000 vest on November 30, 2019 at an exercise price of
C$1.15 per share.
John
Allport had served as the Company’s Vice President Legal
Affairs and Licensing and as a director from September 2004 until
his resignation effective on May 17, 2017. The employment agreement
with Mr. Allport, effective September 1, 2004, provided for Mr.
Allport to receive a base salary of C$95,000, which was paid in
Canadian dollars, per year. In addition, he was entitled to: (a)
participate in the Option Plan; (b) participate in all employee
benefit plans and programs; and (c) a car allowance of C$1,000 per
month. The employment agreement was for an indefinite term subject
to termination on six months’ notice. In December 2011, Mr.
Allport’s base salary was increased to C$145,000. In February
2012, Mr. Allport received a grant of 250,000 options of which
175,000 vested immediately on issuance and the remaining 75,000
options vested on February 17, 2013 at an exercise price of C$3.27
per share. Mr. Allport’s employment agreement included
intellectual property, non-competition and non-solicitation
provisions in favour of the Company. In April 2013, Mr. Allport
received a grant of 25,000 options of which 12,500 vested
immediately on issuance and the remaining 12,500 options vested on
November 30, 2013 at an exercise price of C$1.81 per share. In
March 2014, Mr. Allport received a grant of 50,000 options of which
25,000 vested immediately on issuance and the remaining 25,000
options vested on November 30, 2014 at an exercise price of C$4.29
per share. In November 2015, Mr. Allport received a grant of 40,000
options of which 28,000 vested immediately on issuance, with the
remaining 12,000 options vested on November 30, 2016 at an exercise
price of C$2.52 per share. In August 2016, Mr. Allport received a
grant of 55,000 options of which 37,000 vested on issuance, with
the remaining 18,000 to vest on November 30, 2017 at an exercise
price of C$2.42 per share. Mr. Allport entered into a consulting
agreement with the Company effective May 17, 2017 to provide
on-going services to the Company on an as-needed basis. The
consulting agreement provides that Mr. Allport is to serve as a
consultant to the Company to provide pharmaceutical business
consulting services when requested from time to time. The agreement
is terminable by either the Company or Mr. Allport on less than
one-month notice and provides for such consideration as is mutually
agreed from time to time. The consulting agreement includes
intellectual property, non-competition and non-solicitation
provisions in favour of the Company.
The
employment agreement with Michael Campbell, the former General
Counsel & Corporate Secretary of the Company, effective June
15, 2017 entitled Mr. Campbell to receive a base salary of
C$300,000, which is paid in Canadian dollars, per year. In
addition, he was entitled to: (a) participate in the Option Plan;
(b) participate in all employee benefit plans and programs; and (c)
a car allowance of C$1,500 per month. The agreement provided for
automatic renewal on December 31 each year from year to year in
absence of notice of termination from the Company at least 90 days
prior to the end of the then applicable term. If the agreement was
terminated without cause, it required payment to Mr. Campbell of 3
months' base salary, plus 6 weeks' base salary for every full year
of service, up to a combined maximum of 12 months. If such
termination occurred within six months of a change of control of
the Company, it required payment to Mr. Campbell of thirteen
months' base salary, plus 6 weeks' base salary for every full year
of service, up to a combined maximum of 18 months. Mr. Campbell's
employment agreement contains intellectual property,
non-competition and non-solicitation provisions in favour of the
Company. Mr. Campbell was granted 60,000 options, of which 20,000
vested immediately on issuance, 20,000 vest on October 20, 2018 and
the remaining 20,000 vest on October 20, 2019 at an exercise price
of C$1.27 per share. In November 2017, Mr. Campbell received a
grant of 25,000 options of which 8,334 vested immediately on
issuance, 8,333 vest on November 30, 2018 and the remaining 8,333
vest on November 30, 2019 at an exercise price of C$1.15 per share.
Mr. Campbell’s options will cease to be exercisable 120 days
after ceasing to be employed by the Company.
Incentive Plan Awards
Outstanding Option-Based Awards and
Share-Based Awards
– The following table sets forth
for each Named Executive Officer all awards outstanding at the end
of the most recently completed financial year, including awards
granted before the most recently completed financial year. Each
option grant allows the holder to purchase one of the
Company’s common shares.
|
Name(a)
|
Number
of securities underlying unexercised options (#)(b)
|
Option
exercise price (U.S.$)(c)
|
Option
expiration date(d)
|
Value
of unexercised in-the-money options (U.S.$)(e)
(3)
|
Number
of shares or units of shares that have not vested
(#)(f)
|
Market
or payout value of share-based awards that have not vested
(U.S.$)(g)
|
|
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
70,000
|
C$3.27
C$1.81
C$4.29
C$2.52
C$2.42
C$1.15
|
Feb.
16, 2022
Apr.
13. 2020
Feb.
28, 2019
Nov.
30, 2020
Aug.
31, 2021
Nov.
30, 2022
|
N/A
N/A
N/A
N/A
N/A
N/A
|
N/A
N/A
N/A
N/A
N/A
N/A
|
N/A
N/A
N/A
N/A
N/A
N/A
|
|
Dr.
Amina Odidi
|
300,000
75,000
50,000
70,000
90,000
70,000
|
C$3.27
C$1.81
C$4.29
C$2.52
C$2.42
C$1.15
|
Feb.
16, 2022
Apr.
13. 2020
Feb.
28, 2019
Nov.
30, 2020
Aug.
31, 2021
Nov.
30, 2022
|
N/A
N/A
N/A
N/A
N/A
N/A
|
N/A
N/A
N/A
N/A
N/A
N/A
|
N/A
N/A
N/A
N/A
N/A
N/A
|
|
John
Allport
(2)
|
250,000
25,000
50,000
40,000
55,000
|
C$3.27
C$1.81
C$4.29
C$2.52
C$2.42
|
Feb.
16. 2022
Apr.
13, 2020
Feb.
28, 2019
Nov.
30, 2020
Aug.
31, 2021
|
N/A
N/A
N/A
N/A
N/A
|
N/A
N/A
N/A
N/A
N/A
|
N/A
N/A
N/A
N/A
N/A
|
|
Domenic
Della Penna
(4)
|
60,000
50,000
70,000
|
C$3.22
C$2.52
C$2.42
|
Nov.
30, 2024
Nov.
30, 2020
Aug.
31, 2021
|
N/A
N/A
N/A
|
N/A
N/A
N/A
|
N/A
N/A
N/A
|
|
Andrew
Patient, Chief Financial Officer(5)
|
60,000
15,000
|
C$1.27
C$1.15
|
Oct.
20, 2027
Nov.
30, 2022
|
N/A
|
N/A
|
N/A
|
Notes:
(1)
These option-based
awards are held jointly.
(2)
Mr. Allport, a
consultant to the Company, served as the Company’s Vice
President Legal Affairs and Licensing and as a director from
September 2004, until his resignation May 17, 2017.
(3)
The value of
unexercised options at year-end is calculated by subtracting the
option exercise price from the closing price of the common shares
of the Company on the TSX for C$ exercise prices and Nasdaq for US$
exercise prices on November 30, 2017 (C$1.09 and $0.85,
respectively) and multiplying the result by the number of common
shares underlying an option.
(4)
Mr. Della Penna
served as the Company’s Chief Financial Officer from November
24, 2014 until his resignation effective September 6, 2017. Mr.
Della Penna’s options ceased to be exercisable 120 days after
he ceased to be employed by the Company.
(5)
Mr. Patient was
appointed as Chief Financial Officer of the Company effective
September 6, 2017.
As of
November 30, 2017, Mr. Campbell had unexercised options to acquire
(i) 60,000 common shares at a price of C$1.27 (expiring October 20,
2027) and (ii) 25,000 common shares at a price of C$1.15 (expiring
November 30, 2022); and no other share-based awards. Mr.
Campbell’s options will cease to be exercisable 120 days
after he ceases to be employed by the Company. Mr. Campbell’s
options have no value vested or earned during the most recently
completed financial year.
Incentive Plan Awards
– Value
Vested or Earned During the Year – The following table sets
forth details of the value vested or earned during the most
recently completed financial year for each incentive plan
award.
|
Name
|
Option-based awards - Value vested during the year
(U.S.$)
|
Share-based awards - Value vested during the year
(U.S.$)
|
Non-equity incentive plan compensation - Value earned during the
year (U.S.$)
|
|
(a)
|
(b)(1)
|
(c)
|
(d)
|
|
Drs. Isa
Odidi
|
N/A
|
N/A
|
N/A
|
|
Dr. Amina
Odidi
|
N/A
|
N/A
|
N/A
|
|
John
Allport(2)
|
N/A
|
N/A
|
N/A
|
|
Domenic Della
Penna(3)
|
N/A
|
N/A
|
N/A
|
|
Andrew Patient,
Chief Financial Officer(4)
|
N/A
|
N/A
|
N/A
|
Notes
:
(1)
The amount
represents the theoretical total value if the options had been
exercised on the vesting date, established by calculating the
difference between the closing price of the common shares of the
Company on the TSX on the vesting date and the exercise
price.
(2)
Mr. Allport, a
consultant to the Company, served as the Company’s Vice
President Legal Affairs and Licensing and as a director from
September 2004, until his resignation May 17, 2017.
(3)
Mr. Della Penna
served as the Company’s Chief Financial Officer from November
24, 2014 until his resignation effective September 6, 2017. Mr.
Della Penna’s options ceased to be exercisable 120 days after
he ceased to be employed by the Company.
(4)
Mr. Patient was
appointed as Chief Financial Officer of the Company effective
September 6, 2017.
Pension Plan Benefits
The
Company does not provide a defined benefit pension plan or a
defined contribution pension plan for any of its Named Executive
Officers, nor does it have a deferred compensation pension plan for
any of its Named Executive Officers. There are no amounts set aside
or accrued by the Company or its subsidiaries to provide pension,
retirement or similar benefits.
Termination and Change of Control Benefits
The
employment agreement with each of Dr. Isa Odidi and Dr. Amina Odidi
(collectively the “
Odidis
”), by virtue of it being a
fixed-term agreement with automatic renewal provisions, effectively
provides for payments to the Odidis following termination of the
employment agreement unless the agreement has been terminated in
accordance with its terms. As a result, if either of the Odidis had
been terminated on the last business day of the Company’s
most recently completed financial year, it is estimated that an
amount of up to approximately C$2.2 million would be payable to
each of the Odidis, which is the amount that would have been
payable to September 30, 2022, at each of the Odidis’ current
annual salary level. Given their nature as fixed term employment
agreements, if notice is properly provided to not renew the
agreement following the term ending September 30, 2022, then as
such date approaches the amount payable upon termination to the
Odidis will decrease to the point where no amount would be payable
upon termination as at September 30, 2022. Any termination of the
employment of the Odidis must be undertaken by and is subject to
the prior approval of the Board. There are no payments applicable
under the employment agreements of the Odidis relating to a change
of control of the Company.
For a
discussion of certain termination and change of control benefits
under the employment agreement with Mr. Patient, see the
description of his employment agreement under the heading
“Employment Agreements” above.
Director Compensation
The
following table sets forth all amounts of compensation provided to
the non-executive directors for the Company’s most recently
completed financial year.
|
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
|
-
|
$
C40,000
|
$
C18,442
|
N/A
|
N/A
|
N/A
|
$
C58,442
|
|
Kenneth
Keirstead
|
$
C40,000
|
N/A
|
$
C18,442
|
N/A
|
N/A
|
N/A
|
$
C58,442
|
|
Bahadur
Madhani
|
$
C45,000
|
N/A
|
$
C18,442
|
N/A
|
N/A
|
N/A
|
$
C63,442
|
Notes
:
(1)
DSUs that were
earned. Does not include DSUs earned in the previous financial year
and granted in the most recently completed financial
year.
(2)
Option-based awards
for fiscal year 2017 were issued on November 30, 2017.
Significant factors
necessary to understand the information disclosed in the Director
Compensation Table above include the following: Non-management
directors receive an annual retainer of $25,000 paid in Canadian
dollars. The Audit Committee chair receives an annual retainer of
$10,000 paid in Canadian dollars. The Corporate Governance
Committee chair and Compensation Committee Chair, each receives an
annual retainer of $5,000 paid in Canadian dollars. Non-chair
committee members, are paid an additional $2,500 per year per
committee paid in Canadian dollars. Meetings will result in an
additional $1,000 per day per meeting paid in Canadian
dollars.
Outstanding Option-Based Awards and
Share-Based Awards
– The following table sets forth
all amounts of option-based and share-based awards to the
non-executive directors for the Company’s most recently
completed financial year.
|
|
Option-based Awards
|
Share-based Awards
|
||||
|
Name
|
Number of securities underlying unexercised options
(#)
|
Option exercise price (U.S.$)
|
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
40,000
|
C$2.88
C$1.81
C$3.22
C$4.29
C$2.52
C$2.42
C$1.15
|
Oct.
22, 2019
Apr.
13, 2020
Nov.
30, 2019
Feb.
28, 2019
Nov.
30, 2020
Aug.
31, 2021
Nov.
30, 2022
|
N/A
N/A
N/A
N/A
N/A
N/A
N/A
|
94,131
N/A
N/A
N/A
N/A
N/A
N/A
|
C$102,603
N/A
N/A
N/A
N/A
N/A
N/A
|
|
Kenneth
Keirstead
|
10,000
25,000
37,500
37,500
20,000
35,000
40,000
|
C$2.88
C$1.81
C$3.22
C$4.29
C$2.52
C$2.42
C$1.15
|
Oct.
22, 2019
Apr.
13, 2020
Nov.
30, 2019
Feb.
28, 2019
Nov.
30, 2020
Aug.
31, 2021
Nov.
30, 2022
|
N/A
N/A
N/A
N/A
N/A
N/A
N/A
|
N/A
N/A
N/A
N/A
N/A
N/A
N/A
|
N/A
N/A
N/A
N/A
N/A
N/A
N/A
|
|
Bahadur
Madhani
|
10,000
25,000
37,500
37,500
20,000
35,000
40,000
|
C$2.88
C$1.81
C$3.22
C$4.29
C$2.52
C$2.42
C$1.15
|
Oct.
22, 2019
Apr.
13, 2020
Nov.
30, 2019
Feb.
28, 2019
Nov.
30, 2020
Aug.
31, 2021
Nov.
30, 2022
|
N/A
N/A
N/A
N/A
N/A
N/A
N/A
|
N/A
N/A
N/A
N/A
N/A
N/A
N/A
|
N/A
N/A
N/A
N/A
N/A
N/A
N/A
|
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, 2017 (C$1.09) 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, 2017.
(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, 2017 (C$1.09) and
multiplying by the number of common shares underlying a
DSU.
Incentive Plan Awards – Value Vested or
Earned During the Year
– The following table sets
forth all amounts of option-based and share-based awards vested to
the non-executive directors of the Company for the most recently
completed financial year and no non-equity incentive plan
compensation was earned during the most recently completed
financial year.
|
Name
|
Option-based awards - Value vested during the year
(U.S.$)
|
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
|
N/A
|
N/A
|
Nil
|
|
Kenneth
Keirstead
|
N/A
|
N/A
|
Nil
|
|
Bahadur
Madhani
|
N/A
|
N/A
|
Nil
|
Notes
:
(1)
The amount
represents the theoretical total value if the options had been
exercised on the vesting date, established by calculating the
difference between the closing price of the common shares of the
Company on the TSX on the vesting date and the exercise
price.
(2)
The amount
represents the theoretical total value of DSUs which were fully
vested on their respective dates of issuance. DSUs are issued at
the calculated market value of a common share on the date of
issuance.
Directors’ and Officers’ Liability
Insurance
The
Company maintains insurance for the liability of its directors and
officers arising out of the performance of their duties. The total
amount of such insurance maintained is $10,000,000 subject to a
deductible loss payable by the Company of $1,000,000 (for
securities claims) or $500,000 (for other claims). The premium
payable by the Company for the period from November 30, 2017 to
November 30, 2018 is $194,500.
Board of Directors
See
Items 6.A and 6.B.
Committees of the Board of Directors
AUDIT COMMITTEE
The
Audit Committee of the Board monitors our financial activities,
policies, and internal control procedures. The Audit Committee
assists the Board in fulfilling its oversight responsibility to
shareholders, potential shareholders, the investment community, and
others with respect to the Company’s financial statements,
financial reporting process,
systems
of internal accounting and disclosure controls, performance of the
external auditors, and risk assessment and management. The Audit
Committee has the power to conduct or authorize investigations into
any matters within its scope of responsibilities, with full access
to all books, records, facilities and personnel of the Company, its
auditors and its legal advisors. In connection with such
investigations or otherwise in the course of fulfilling its
responsibilities under the Audit Committee Charter, the Audit
Committee has the authority to independently retain special legal,
accounting, or other consultants to advise it.
Audit Committee Charter
The
charter of the Audit Committee can be found on the Company’s
website at
www.intellipharmaceutics.com
.
Composition of the Audit Committee
Our
Audit Committee is comprised of Kenneth Keirstead, Bahadur Madhani
and Dr. Eldon Smith, each of whom is considered independent and
financially literate (as such terms are defined under applicable
Canadian securities legislation) and satisfies the independence
criteria of Rule 10A3-(b)(1) under the U.S. Exchange Act. The
members of the Audit Committee have selected a Chair from amongst
themselves, being Mr. Madhani.
Under
the Securities and Exchange Commission rules implementing the
Sarbanes-Oxley Act of 2002, Canadian issuers filing reports in the
United States must disclose whether their audit committees have at
least one “audit committee financial expert”.
Additionally, under Nasdaq Listing Rule 5605(c)(2)(A), Nasdaq
requires that one member of the audit committee be financially
sophisticated, meaning that they must have “past employment
experience in finance or accounting, requisite professional
certification in accounting, or any other comparable experience or
background which results in the individual’s financial
sophistication, including being or having been a chief executive
officer, chief financial officer or other senior officer with
financial oversight responsibilities.” The Board has
determined that Mr. Madhani qualifies as an audit committee
financial expert under the applicable Securities and Exchange
Commission rules and as financially sophisticated under the
applicable Nasdaq rules.
Relevant Education and Experience
Kenneth
Keirstead is educated in clinical biochemistry as a graduate of the
Pathology Institute in Halifax; and business administration, as a
graduate of the College of William and Mary and Columbia
University. Mr. Keirstead has been a director of the Company since
January 2006. He has worked in the healthcare delivery and
pharmaceutical industries for over 45 years. He was President and
CEO, Sanofi Winthrop Canada Inc.; General Manager, Squibb Medical
Systems International; President, Chemfet International and
President, Quinton Instruments among other positions. Mr. Keirstead
has published studies and reports on healthcare and related
services topics. Since 1998 Mr. Keirstead’s principal
occupation has been as Executive Manager of the Lyceum Group, a
Canadian consulting services company primarily active in the
healthcare field, of which Mr. Keirstead is the
founder.
Bahadur
Madhani is a chartered accountant who has been a director of the
Company since March 31, 2006. He was a member of the advisory board
of Quebecor Ontario and former Chairman of United Way of Toronto,
former Chair of YMCA of Greater Toronto, former Chair of Nelson
Mandela Children’s Fund Canada, former Chair of YMCA Canada
and former Chair, Toronto Grants Review Team of the Ontario
Trillium Foundation. He was awarded membership in the Order of
Canada in 2001. Since 1983, Mr. Madhani’s principal
occupation has been as President and CEO of Equiprop Management
Limited, a Canadian property management company of which Mr.
Madhani is the principal shareholder.
Dr.
Eldon Smith is a medical doctor who graduated from the Dalhousie
University Medical School and who has been a director of the
Company since October 2009. He is president and CEO of Eldon R.
Smith and Associates Ltd. a private healthcare consulting company.
He is also professor emeritus at the University of Calgary, where
he served as the Dean of the Faculty of Medicine subsequent to
being Head of the Department of Medicine and the Division of
Cardiology. Dr. Smith is past-President of the Canadian
Cardiovascular Society and served as Chairman of the Scientific
Review Committee of the Heart and Stroke Foundation of Canada. Dr.
Smith was appointed as an Officer of the Order of Canada. In
October 2006, Dr. Smith was appointed by the Honourable Tony
Clement, Minister of Health, to chair the Steering Committee
responsible for developing a new Heart-Health strategy to fight
heart disease in Canada. Dr. Smith currently serves as Chairman of
the Libin Cardiovascular Institute of Alberta and of Logiq Asset
Management Inc. (formerly Aston Hill Financial Inc.) and is a
director of Resverlogix Corp, and Zenith Capital Corp.
Pre-Approval Policies and Procedures
The
Audit Committee reviewed with the independent auditor (who is
responsible for expressing an opinion on the conformity of the
Company’s audited financial statements with accounting
principles generally accepted in the United States of America)
their judgments as to the quality, not just the acceptability, of
the Company’s accounting principles and such other matters as
are required to be discussed with the Audit Committee under
Canadian and United States generally accepted auditing standards.
In addition, the Audit Committee has discussed with the independent
auditor the auditor’s independence from management and the
Company including the matters in the written disclosures provided
to the Audit Committee by the independent auditor, and considered
the compatibility of non-audit services with the auditor’s
independence.
The
Company’s independent auditor is accountable to the Board and
to the Audit Committee. The Board, through the Audit Committee, has
the ultimate responsibility to evaluate the performance of the
independent auditor, and through the shareholders, to appoint,
replace and compensate the independent auditor. Under the
Sarbanes-Oxley Act of 2002, the independent auditor of a public
company is prohibited from performing certain non-audit services.
The Audit Committee has adopted procedures and policies for the
pre-approval of non-audit services, as described in the Audit
Committee Charter. Under the terms of such policies and procedures,
the Audit Committee has adopted a list of pre-approved services,
including audit and audit-related services and tax services, and a
list of prohibited non-audit services deemed inconsistent with an
auditor’s independence.
The
list of pre-approved services includes:
1.
Audit
Services
●
Audits of the
Company’s consolidated financial statements;
●
Statutory audits of
the financial statements of the Company’s
subsidiaries;
2.
Audit-Related
Services
●
Reviews of the
quarterly consolidated financial statements of the
Company;
●
Services associated
with registration statements, prospectuses, periodic reports and
other documents filed with securities regulatory bodies (such as
the SEC and the Ontario Securities Commission) or other documents
issued in connection with securities offerings (e.g., comfort
letters and consent letters) and assistance in responding to
comment letters from securities regulatory bodies;
●
Special attest
services as required by regulatory and statutory
requirements;
●
Regulatory
attestation of management reports on internal controls as required
by the regulators;
●
Consultations with
the Company’s management as to the accounting or disclosure
treatment of transactions or events and/or the actual or potential
impact of final or proposed rules, standards or interpretations by
the securities regulatory authorities, accounting standard setting
bodies (such as the Financial Accounting Standards Board or
Chartered Professional Accountants of Canada), or other regulatory
or standard setting bodies.
●
Presentations or
training on accounting or regulatory pronouncements;
●
Due diligence
services related to accounting and tax matters in connection with
potential acquisitions / dispositions;
3.
Tax
Services
a.
Compliance Services
●
Assistance with the
preparation of corporate income tax returns and related schedules
for the Company and its subsidiaries;
●
Assistance with the
preparation of Scientific Research & Experimental Development
investment tax credit claims and amended tax returns of the
Company;
●
Assistance in
responding to Canada Revenue Agency or Internal Revenue Service on
proposed reassessments and other matters;
b.
Canadian & International Planning Services
●
Advice with respect
to cross-border/transfer pricing tax issues;
●
Advice related to
the ownership of corporate intellectual property in jurisdictions
outside of Canada;
●
Assistance in
interpreting and understanding existing and proposed domestic and
international legislation, and the administrative policies followed
by various jurisdictions in administering the law, including
assisting in applying for and requesting advance tax rulings or
technical interpretations;
●
Assistance in
interpreting and understanding the potential impact of domestic and
foreign judicial tax decisions;
●
Assistance and
advising on routine planning matters;
●
Assistance in
advising on the implications of the routine financing of domestic
and foreign operations, including the tax implications of using
debt or equity in structuring such financing, the potential impact
of non-resident withholding tax and the taxation of the
repatriation of funds as a return of capital, a payment of a
dividend, or a payment of interest;
c.
Commodity Tax Services
●
Assistance
regarding Harmonized Sales Tax/Goods and Services Sales
Tax/Provincial Sales Tax/Customs/Property Tax filings and
assessments;
●
Commodity tax
advice and compliance assistance with business
reorganizations;
●
Advice and
assistance with respect to government
audits/assessments;
●
Advice with respect
to other provincial tax filings and assessments;
●
Assistance with
interpretations or rulings;
4.
All Other
Services
●
Advice and
documentation assistance with respect to internal controls over
financial reporting and disclosure controls and procedures of the
Company.
The
list of prohibited services includes:
●
Bookkeeping or
other services related to the preparation of accounting records or
financial statements;
●
Financial
information systems design and implementation;
●
Appraisal or
valuation services for financial reporting purposes;
●
Actuarial services
for items recorded in the financial statements;
●
Internal audit
outsourcing services;
●
Management
functions;
●
Human
resources;
●
Certain corporate
finance and other services;
●
Legal
services;
●
Certain expert
services unrelated to the audit.
The
Audit Committee also discusses with the Company’s independent
auditor the overall scope and plans for their audit. The Audit
Committee meets with the independent auditor, with and without
management present, to discuss the results of their examination,
their evaluations of the Company’s internal controls, and the
overall quality of the Company’s financial reporting. The
Audit Committee held 4 meetings during the period from December 1,
2016 to November 30, 2017.
In
reliance on the reviews and discussions referred to above, the
Audit Committee recommended to the Board (and the Board approved)
that the audited consolidated financial statements be included in
the Annual Report for the year ended November 30, 2017 for filing
with the Canadian provincial securities commissions and the
SEC.
COMPENSATION COMMITTEE 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 Kenneth Keirstead,
Dr. Eldon Smith and Bahadur Madhani, each of whom is considered
independent and is a director of the Company. The members of the
Corporate Governance Committee have selected a Chair from amongst
themselves, being Kenneth Keirstead.
The
number of full-time employees as of each of last three fiscal years
is as follows:
|
|
November 30, 2017
|
November 30, 2016
|
November 30, 2015
|
|
Research
Employees
|
51
|
40
|
35
|
|
Administrative
Employees
|
11
|
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.
E.
Share Ownershi
p
The
following table states the names of the directors and officers of
the Company, the positions within the Company now held by them, and
the approximate number of common shares of the Company beneficially
owned or over which control or direction is exercised by each of
them as of February 27, 2018.
|
Name
|
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)
|
16.66%
|
2,763,940
300,000
75,000
50,000
70,000
90,000
70,000
|
$3.62
C$3.27
C$1.81
C$4.29
C$2.52
C$2.42
C$1.15
|
10/09/2018
16/02/2022
13/04/2020
28/02/2019
30/11/2020
31/08/2021
30/11/2022
|
2,487,546
300,000
75,000
50,000
70,000
90,000
23,334
|
450,000(3)
|
N/A
|
N/A
|
|
Dr.
Amina Odidi
|
President, Chief
Operating Officer and Director of the Company
|
5,781,312
(1)
|
16.66%
|
2,763,940
300,000
75,000
50,000
70,000
90,000
70,000
|
$3.62
C$3.27
C$1.81
C$4.29
C$2.52
C$2.42
C$1.15
|
10/09/2018
16/02/2022
13/04/2020
28/02/2019
30/11/2020
31/08/2021
30/11/2022
|
2,487,546
300,000
75,000
50,000
70,000
90,000
23,334
|
450,000(3)
|
N/A
|
N/A
|
|
John
N. Allport
|
Consultant;
Former Vice-President, Legal Affairs and Licensing and Former
Director of the Company
|
110,558
|
0.32%
|
250,000
25,000
50,000
40,000
55,000
|
C$3.27
C$1.81
C$4.29
C$2.52
C$2.42
|
16/02/2022
13/04/2020
28/02/2019
30/11/2020
31/08/2021
|
250,000
25,000
50,000
40,000
55,000
|
N/A
|
N/A
|
Nil
|
|
Dr.
Eldon R. Smith
|
Director of the
Company
|
21,731
|
0.06%
|
10,000
25,000
37,500
37,500
20,000
35,000
40,000
|
C$2.88
C$1.81
C$4.29
C$3.22
C$2.52
C$2.42
C$1.15
|
22/10/2019
13/04/2020
28/02/2019
30/11/2019
30/11/2020
31/08/2021
30/11/2022
|
10,000
25,000
37,500
37,500
20,000
35,000
13,334
|
N/A
|
94,131
|
N/A
|
|
Kenneth
Keirstead
|
Director of the
Company
|
Nil
|
Nil
|
10,000
25,000
37,500
37,500
20,000
35,000
40,000
|
C$2.88
C$1.81
C$4.29
C$3.22
C$2.52
C$2.42
C$1.15
|
22/10/2019
13/04/2020
28/02/2019
30/11/2019
30/11/2020
31/08/2021
30/11/2022
|
10,000
25,000
37,500
37,500
20,000
35,000
13,334
|
N/A
|
Nil
|
N/A
|
|
Bahadur
Madhani
|
Director of the
Company
|
7,507
|
0.02%
|
10,000
25,000
37,500
37,500
20,000
35,000
40,000
|
C$2.88
C$1.81
C$4.29
C$3.22
C$2.52
C$2.42
C$1.15
|
22/10/2019
13/04/2020
28/02/2019
30/11/2019
30/11/2020
31/08/2021
30/11/2022
|
10,000
25,000
37,500
37,500
20,000
35,000
13,334
|
N/A
|
Nil
|
N/A
|
|
Dr.
Patrick Yat
|
Vice-President,
Chemistry and Analytical Services
|
27,172
|
0.08%
|
50,000
15,000
15,000
25,000
15,000
|
C$3.82
C$1.81
C$2.52
C$2.42
C$1.15
|
24/05/2021
13/04/2020
30/11/2020
31/08/2021
30/11/2022
|
50,000
15,000
15,000
25,000
5,000
|
N/A
|
N/A
|
Nil
|
|
Andrew
Patient
|
Chief Financial
Officer of the Company
|
Nil
|
Nil
|
60,000
15,000
|
C$1.27
C$1.15
|
20/10/2027
30/11/2022
|
20,000
5,000
|
N/A
|
N/A
|
Nil
|
|
Totals
|
|
5,948,280
|
17.14%
|
5,388,940
|
|
|
4,822,550
|
450,000
|
94,131
|
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
655,000 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 maturity date of the Debenture has been further
extended to October 1, 2018. The Company currently expects to repay
the current net amount of $1,350,000 on or about October 1, 2018,
if the Company then has cash available.
(4)
Includes options
exercisable within 60 days of the date of this filing.
As of
February 27, 2018, the directors and executive officers of the
Company as a group owned, directly or indirectly, or exercised
control or direction over 5,948,280 common shares, representing
approximately 17.1% of the issued common shares of the Company (and
beneficially owned approximately 11,220,830 common shares
representing 28.1% of our common shares including common shares
issuable upon the exercise of outstanding options and the
conversion of the convertible debenture that are exercisable or
convertible within 60 days of the date hereof). As of February 27,
2018, Mr. Campbell owned options (exercisable until October 20,
2027) to purchase 60,000 common shares at a price of C$1.27 and
options (exercisable until November 30, 2022) to purchase 25,000
common shares at a price of C$1.15. Mr. Campbell’s options
will cease to be exercisable 120 days after he ceases to be
employed by the Company.
The
Company has in place the Option Plan for the benefit of certain
officers, directors, employees and consultants of the Company,
including the Named Executive Officers (see below under
“Employee Stock Option Plan”). Certain Named Executive
Officers have been issued options under such plan. The Company has
also granted performance-based options to Dr. Isa Odidi and Dr.
Amina Odidi pursuant to a separate option agreement, which was
negotiated with the Named Executive Officers at the same time as
their employment agreements. These options vest upon the Company
attaining certain milestones relating to FDA filings and approvals
for Company drugs, such that 276,394 options vest in connection
with each of the FDA filings for the first five Company drugs and
276,394 options vest in connection with each of the FDA approvals
for the first five Company drugs. To date, the level of these
performance-based options has been taken into account by the Board
and impacted the Company’s decisions about base salary and
option-based awards under the Option Plan for the Named Executive
Officers. No other performance-based options have been granted to
any other Named Executive Officer.
Employee Stock Option Plan
The
Option Plan was adopted effective October 22, 2009 as part of the
IPC Arrangement Transaction approved by the shareholders of IPC
Ltd., our predecessor company, at the meeting of shareholders on
October 19, 2009. Subject to the requirements of the Option Plan,
the Board, with the assistance of the Compensation Committee, has
the authority to select those directors, officers, employees and
consultants to whom options will be granted, the number of options
to be granted to each person and the price at which common shares
of the Company may be purchased. Grants are determined based on
individual and aggregate performance as determined by the
Board.
The key
features of the Option Plan are as follows:
●
The eligible
participants are full-time and part-time employees, officers and
directors of, or consultants to, the Company or its affiliates,
which may be designated from time to time by the
Board.
●
The fixed maximum
percentage of common shares issuable under the Option Plan is 10%
of the issued and outstanding common shares from time to time. The
Option Plan will automatically “reload” after the
exercise of an option provided that the number of common shares
issuable under the Option Plan does not then exceed the maximum
percentage of 10%.
●
There are no
restrictions on the maximum number of options which may be granted
to insiders of the Company other than not more than 1% of the total
common shares outstanding on a non-diluted basis can be issued to
non-executive directors of the Company pursuant to options granted
under the Option Plan and the value of any options granted to any
non-executive director of the Company, shall not, on an annual
basis, exceed $100,000.
●
The Board
determines the exercise price of each option at the time the option
is granted, provided that such price is not lower than the
“market price” of common shares at the time the option
is granted. “Market price” means the volume weighted
average trading price of common shares on the TSX, or another stock
exchange where the majority of the trading volume and value of
common shares occurs, for the five trading days immediately
preceding the relevant date, calculated in accordance with the
rules of such stock exchange.
●
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.
A total
of 3,064,172 options to purchase common shares have been issued,
representing 8.8% of the shares issued and outstanding as of
February 27, 2018. As of February 27, 2018, 172,000 options have
been exercised under the Plan. The Company has also granted
performance-based options to Dr. Isa Odidi and Dr. Amina Odidi
pursuant to a separate option agreement, which was negotiated at
the same time as their employment agreements. These options vest
upon the Company attaining certain milestones relating to FDA
filings and approvals for the development of Company drugs, such
that 276,394 options vest in connection with each of the FDA
filings for the first five Company drugs and 276,394 options vest
in connection with each of the FDA approvals for the first five
Company drugs. To date, the level of these performance-based
options has been taken into account by the Board and impacted the
Company’s decisions about base salary and option-based awards
under the Option Plan for the said Named Executive
Officers.
Restricted Share Unit Awards for Officers &
Employees
The
Company established the RSU Plan to form part of its incentive
compensation arrangements available for officers and employees of
the Company and its designated affiliates as of May 28, 2010, when
the RSU Plan received shareholder approval.
The key
features of the RSU Plan are as follows:
●
The stated purpose
of the RSU Plan is to advance the interests of the Company through
the motivation, attraction and retention of employees and officers
of the Company and the designated affiliates of the Company and to
secure for the Company and the shareholders of the Company the
benefits inherent in the ownership of common shares by employees
and officers of the Company, it being generally recognized that
share incentive plans aid in attracting, retaining and encouraging
employees and officers due to the opportunity offered to them to
acquire a proprietary interest in the Company and to align their
interests with those of the Company. Employees and officers,
including both full-time and part-time employees, of the Company
and any designated affiliate of the Company, but not any directors
of the Company, are eligible to participate under the RSU Plan. By
the terms of the RSU Plan, Dr. Isa Odidi, the Chief Executive
Officer of the Company, and Dr. Amina Odidi, the President and
Chief Operating Officer of the Company, are specifically not
eligible to participate.
●
The RSU Plan is
administered by the Board or a committee thereof, which will
determine, from time to time, who may participate in the RSU Plan,
the number of RSUs to be awarded and the terms of each RSU, all
such determinations to be made in accordance with the terms and
conditions of the RSU Plan, based on individual and/or corporate
performance factors as determined by the Board.
●
The number of
common shares available for issuance upon the vesting of RSUs
awarded under the RSU Plan is limited to an aggregate of 330,000
common shares of the Company representing approximately 1.0% of the
issued and outstanding common shares of the Company as of February
27, 2018.
●
A separate notional
account will be maintained for each participant under the RSU Plan.
Each such account will be credited with RSUs awarded to the
participant from time to time by way of a bookkeeping entry in the
books of the Company. On the vesting of the RSUs and the
corresponding issuance of common shares to the participant, or on
the forfeiture and cancellation of the RSUs, the RSUs credited to
the participant’s account will be cancelled.
●
At the time of the
award of RSUs, the Board will determine in its sole discretion the
vesting criteria (whether based on time or performance measures of
individual and/or corporate performance) applicable to the awarded
RSUs. Unless otherwise determined by the Board at the time of the
award, RSUs will vest in respect of 33 1/3% of the common shares
subject to the RSUs on the first day after each of the first three
anniversaries of the award date of such RSU. Notwithstanding the
foregoing, all vesting and issuances or payments, as applicable,
will be completed no later than December 15 of the third calendar
year commencing after an award date.
●
The RSU Plan
provides that any unvested RSUs will vest at such time as
determined by the Board in its sole discretion such that
participants in the RSU Plan will be able to participate in a
change of control transaction, including by surrendering such RSUs
to the Company or a third party or exchanging such RSUs, for
consideration in the form of cash and/or securities.
●
Under the RSU Plan,
should the vesting of an RSU fall within a blackout period or
within nine business days following the expiration of a blackout
period, the vesting will be automatically extended to the tenth
business day after the end of the blackout period.
●
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 1.0% of the
Company’s common shares issued and outstanding as at February
27, 2018. No RSUs have been issued and none are outstanding as of
February 27, 2018.
Deferred Share Unit Awards for Outside Directors
The
Company established as of May 28, 2010 when it received shareholder
approval, a deferred share unit plan (the “
DSU Plan
”) to permit directors who
are not officers of the Company, to defer receipt of all or a
portion of their Board fees until termination of Board service and
to receive such fees in the form of common shares at that
time.
The key
features of the DSU Plan are as follows:
●
The DSU Plan is
administered by the Board or a committee thereof. Members of the
Board who are not salaried officers or employees of the Company or
a related corporation are eligible to participate under the DSU
Plan. By the terms of the DSU Plan, Dr. Isa Odidi, the Chief
Executive Officer of the Company, and Dr. Amina Odidi, the
President and Chief Operating Officer of the Company, are
specifically not eligible to participate.
●
The number of
common shares available for issuance upon redemption of DSUs issued
under the DSU Plan is limited to 110,000 common shares of the
Company, representing approximately 0.3% of the total number of
issued and outstanding common shares as of February 27,
2018.
●
Each participant
may elect to be paid a minimum of 20% up to a maximum of 100%, in
10% increments, of Board fees in the form of DSUs in lieu of being
paid such fees in cash. On the date on which Board fees are payable
(on a quarterly basis), the number of DSUs to be credited to the
participant is determined by dividing an amount equal to the
designated percentage of the Board fees that the participant has
elected to have credited in DSUs on that fee payment date, by the
calculated market value of a common share (typically on the TSX) on
that fee payment date. The market value of a common share is the
weighted average trading price of the common shares on any exchange
where the common shares are listed (including the TSX) for the last
five trading days prior to such day. If dividends are declared by
the Company, a participant will also be credited with dividend
equivalents in the form of additional DSUs based on the number of
DSUs the participant holds on the record date for the payment of a
dividend. Dividend equivalents are calculated by dividing (i) the
amount obtained by multiplying the amount of the dividend declared
and paid per common share by the number of DSUs in the
participant’s account on the record date for the payment of
such dividend, by (ii) the market value of a common share on that
dividend payment date. The market value of a common share is the
weighted average trading price of the common shares on any exchange
where the common shares are listed (including the TSX) for the last
five trading days prior to such day.
●
A participant is
permitted to redeem his/her DSUs only following termination of
Board service by way of retirement, non-re-election as a director,
resignation or death. Upon redemption of DSUs, the Company will
issue to the participant common shares of the Company equal to the
number of DSUs to be redeemed.
●
A separate notional
account is maintained for each participant under the DSU Plan. Each
such account will be credited with DSUs issued to the participant
from time to time by way of a bookkeeping entry in the books of the
Company. The DSUs credited to the participant’s account will
be cancelled as of the applicable redemption date and following
redemption of all DSUs credited to the participant’s account,
such participant’s account will be closed.
●
No rights under the
DSU Plan and no DSUs credited pursuant to the provisions of the DSU
Plan are assignable or transferable by any participant other than
pursuant to a will or by the laws of descent and
distribution.
●
Under the DSU Plan,
the Board may from time to time in its absolute discretion amend,
modify and change the provisions of the DSU Plan or any DSUs issued
pursuant to the DSU Plan, provided that any amendment
will:
●
not adversely alter
or impair any DSU previously credited without such
participant’s consent in writing except as permitted by the
adjustment provisions in the DSU Plan;
●
be subject to any
regulatory approvals including, where required, the approval of the
TSX;
●
be subject to
shareholder approval in accordance with the rules of the TSX in
circumstances where the amendment, modification or change to the
DSU Plan or DSU would:
(i)
allow for the
assignment or transfer of any right under the DSU Plan or a DSU
credited pursuant to the provisions of the DSU Plan other than as
provided for under the assignability provisions in the DSU
Plan;
(ii)
increase the fixed
maximum number of common shares which may be issued pursuant to the
DSU Plan; or
(iii)
amend the amendment
provisions of the DSU Plan; and
●
not be subject to
shareholder approval in circumstances (other than those listed in
the paragraph immediately above), including, but not limited to,
circumstances where the amendment, modification or change to the
DSU Plan or DSU would:
(i)
be of a
“housekeeping nature”, including any amendment to the
DSU Plan or a DSU that is necessary to comply with applicable law
or the requirements of any regulatory authority or stock exchange
and any amendment to the DSU Plan or a DSU to correct or rectify
any ambiguity, defective provision, error or omission therein,
including any amendment to any definitions therein;
(ii)
introduce features
to the DSU Plan that would permit the Company to, instead of
issuing common shares from treasury upon the redemption of the
DSUs, retain a broker and make payments for the benefit of
participants to such broker who would purchase common shares
through the facilities of the TSX for such
participants;
(iii)
introduce features
to the DSU Plan that would permit the Company to, instead of
issuing common shares from treasury upon the redemption of the
DSUs, make lump sum cash payments to participants;
(iv)
change the
application of the adjustment provisions of the DSU Plan;
or
(v)
change the eligible
participants under the DSU Plan.
A copy
of the DSU Plan is available upon request in writing to the Chief
Financial Officer of the Company at 30 Worcester Road, Toronto,
Ontario, M9W 5X2.
The
110,000 common shares that are currently authorized for issuance
under the DSU Plan represent approximately 0.3% of the
Company’s common shares issued and outstanding as at February
27, 2018. A total of 102,791 DSUs have been issued, representing
common share rights that comprise approximately 0.3% of the common
shares issued and outstanding as at February 27, 2018.
Perquisites and Personal Benefits
The
Company also provides perquisites and personal benefits to its
Named Executive Officers, including basic employee benefit plans,
which are available to all employees, and a car allowance to cover
the cost of an automobile for business purposes. These perquisites
and personal benefits were determined through negotiation of an
employment agreement with each Named Executive Officer (see
“Employment Agreements” above). While perquisites and
personal benefits are intended to fit into the Company’s
overall compensation objectives by serving to attract and retain
talented executive officers, the size of the Company and the nature
and stage of its business also impact the level of perquisites and
benefits. To date, the level of perquisites and benefits has not
impacted the Company’s decisions about any other element of
compensation.
Other Compensation-Related Matters
The
Company’s Share Trading Policy prohibits all directors and
officers of the Company from, among other things, engaging in any
short sales designed to hedge or offset a decrease in market value
of the securities of the Company.
Item
7.
Major Shareholders and Related
Party Transaction
s
In
October 2017 we completed a registered direct offering of common
shares and a private placement of common share purchase warrants.
In June 2016 we completed an underwritten public offering of units
of common shares and warrants, and in November 2013 we entered into
an at-the-market equity distribution agreement pursuant to which we
may, from time to time, sell our common shares, all of which
resulted in a significant change in the percentage ownership of our
principal shareholders, Drs. Amina and Isa Odidi, our President and
Chief Operating Officer and our Chairman and Chief Executive
Officer, respectively, and Odidi Holdings Inc., a privately-held
company controlled by Drs. Amina and Isa Odidi (a decrease to
approximately 16.7%) of our then-issued and outstanding common
shares of the Company (subsequent to the offering) (See
“Prior Sales”). As of February 27, 2018, Drs. Amina and
Isa Odidi, our President and Chief Operating Officer and our
Chairman and Chief Executive Officer, respectively, and Odidi
Holdings Inc., a privately-held company controlled by Drs. Amina
and Isa Odidi, own in the aggregate directly and indirectly
5,781,312 common shares, representing approximately 16.7% of our
issued and outstanding common shares of the Company (and
collectively beneficially owned in the aggregate approximately
9,935,526 common shares representing 25.6% of our common shares
including common shares issuable upon the exercise of outstanding
options and the conversion of the outstanding convertible debenture
that are exercisable or convertible within 60 days of the date
hereof). (Reference is made to the section entitled “E. Share
Ownership” under “Item 6. Directors, Senior Management
and Employees” for additional information regarding the
options to purchase common shares and the convertible debenture
held by Drs. Amina and Isa Odidi.) On February 14, 2018, Armistice
Capital, LLC filed a Schedule 13G amendment with the SEC disclosing
beneficial ownership of 1,936,000 common shares, representing
approximately 5.58% of our outstanding common shares. To our
knowledge, no other shareholder owns more than 5% of the issued and
outstanding common shares of the Company.
There
are no arrangements, known to the Company, the operation of which
may at a subsequent date result in a change in control of the
Company.
No
holder of common shares has different voting rights from any other
holders of common shares.
As at
December 31, 2017 there were a total of 346 registered holders of
record of our common shares, of which 248 holders were registered
with addresses in Canada holding in the aggregate approximately
20.29% of our outstanding common shares, 47 holders were registered
with addresses in the United States holding in the aggregate
approximately 79.71% of our 34,704,515 outstanding common shares,
and 51 holders were registered with addresses in other nations
holding in the aggregate less than 1% of our outstanding common
shares. We believe that the number of beneficial owners of our
common shares is substantially greater than the number of record
holders, because a large portion of our common shares are held in
broker “street names”.
B.
Related Party
Transaction
s
During
the year ended November 30, 2014, we had repaid an outstanding
related party loan payable to Dr. Isa Odidi and Dr. Amina Odidi,
our principal stockholders, directors and executive officers.
Repayments of the related party loan were restricted under the
terms of the loan such that the principal amount thereof was
payable when payment was required solely out of (i) revenues earned
by IPC Corp following the effective date of October 22, 2009
(“
effective
date
”), and/or proceeds received by IPC Corp or its
affiliates from the offering of its securities after the effective
date (other than the proceeds from the transactions completed in
February 2011, March 2012, March 2013 and July 2013), and/or
amounts received by IPC Corp for scientific research tax credits of
IPC Corp and (ii) up to C$800,000 of the Net Cash from the Vasogen
transaction (as defined in the IPC Arrangement Agreement). In March
2014, we repaid the entire outstanding related party loan
principal, in the amount of $690,049 (C$764,851) out of licensing
revenues earned by IPC Corp and made interest payments of $48,504
(C$53,762) in respect of the promissory note in accordance with the
IPC Arrangement Agreement.
In
January 2013, we completed a private placement financing of an
unsecured Debenture in the original principal amount of $1.5
million. The Debenture bears interest at a rate of 12% per annum,
payable monthly, is pre-payable at any time at the option of the
Company, and is convertible at any time into common shares at a
conversion price of $3.00 per common share at the option of the
holder. Drs. Isa and Amina Odidi, our principal stockholders,
directors and executive officers provided us with the original $1.5
million of the proceeds for the Debenture. In December 2016, a
principal repayment of $150,000 was made on the Debenture and the
maturity date was extended. The maturity date of the Debenture has
been further extended to October 1, 2018. The Company currently
expects to repay the current net amount of $1,350,000 on or about
October 1, 2018, if the Company then has cash
available.
Since
the beginning of the Company’s preceding three financial
years to the date hereof, other than discussed above in this item
7, there have been no transactions or proposed transactions which
are material to the Company or to any associate, holder of 10% of
the Company’s outstanding shares, director or officer or any
transactions that are unusual in their nature or conditions to
which the Company or any of its subsidiaries was a
party.
The
Company’s Corporate Governance Committee, made up of
independent directors, oversees any potential transaction and
negotiation that could give rise to a related party transaction or
create a conflict of interest, and conducts an appropriate
review.
Reference is made
to “Item 18. Financial Statements” for the financial
statements included in this annual report.
Legal Proceedings and Regulatory Actions
From
time to time, we may be exposed to claims and legal actions in the
normal course of business. As at November 30, 2017, and continuing
as at February 27, 2018, we are not aware of any pending or
threatened material litigation claims against us other than the
following matters.
In
November 2016, we filed an NDA for our Oxycodone ER product
candidate relying on the 505(b)(2) regulatory pathway, which
allowed us to reference data from Purdue Pharma L.P.’s file
for its OxyContin
®
extended
release oxycodone hydrochloride. Our Oxycodone ER application was
accepted by the FDA for further review in February 2017. We
certified to the FDA that we believed that our Oxycodone ER product
candidate would not infringe any of the OxyContin
®
patents listed
in the Orange Book, or that such patents are invalid, and so
notified Purdue Pharma L.P. and the other owners of the subject
patents listed in the Orange Book of such certification. On April
7, 2017, we received notice that the Purdue litigation plaintiffs
had commenced patent infringement proceedings against us in the
U.S. District Court for the District of Delaware in respect of our
NDA filing for Oxycodone ER, alleging that Oxycodone ER infringes
six (6) out of the sixteen (16) patents. The complaint seeks
injunctive relief as well as attorneys’ fees and costs and
such other and further relief as the Court may deem just and
proper. An answer and counterclaim have been filed.
As a
result of the commencement of these legal proceedings, the FDA is
stayed for 30 months from granting final approval to our Oxycodone
ER product candidate. That time period commenced on February 24,
2017, when the Purdue litigation plaintiffs received notice of our
certification concerning the patents, and will expire on August 24,
2019, unless the stay is earlier terminated by a final declaration
of the courts that the patents are invalid, or are not infringed,
or the matter is otherwise settled among the parties. A trial date
for the Purdue litigation has been set for October 22, 2018. We are
confident that we do not infringe the subject patents, and will
vigorously defend against these claims.
In July
2017 , three complaints were filed in the U.S. District Court for
the Southern District of New York asserting claims under the
federal securities laws against us and two of our executive
officers on behalf of a putative class of purchasers of our
securities. In a subsequent order, the Court consolidated the three
actions under the caption Shanawaz v. Intellipharmaceutics
Int’l Inc., et al., No. 1:17-cv-05761 (S.D.N.Y.), appointed
lead plaintiffs in the consolidated action, and approved lead
plaintiffs’ selection of counsel. Lead plaintiffs filed a
consolidated amended complaint on January 29, 2018. In the amended
complaint, lead plaintiffs purport to assert claims on behalf of a
putative class consisting of purchasers of our securities between
May 21, 2015 and July 26, 2017. The amended complaint alleges that
the defendants violated Sections 10(b) and 20(a) of the U.S
Exchange Act and Rule 10b-5 promulgated thereunder by making
allegedly false and misleading statements or failing to disclose
certain information regarding our NDA for Oxycodone ER
abuse-deterrent oxycodone hydrochloride extended release tablets.
The complaint seeks, among other remedies, unspecified damages,
attorneys’ fees and other costs, equitable and/or injunctive
relief, and such other relief as the court may find just and
proper. Under a scheduling order approved by the Court, the
defendants must respond to the amended complaint by March 30, 2018.
We intend to vigorously defend our company against the claims
asserted in the consolidated action.
Dividend Polic
y
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, in
each case under the symbol “IPCI.” Our shares began
trading on October 22, 2009, when the transaction with Vasogen was
completed. The following table indicates, for the relevant periods,
the high and low prices of our common shares on Nasdaq and on the
TSX:
|
|
NASDAQ
(U.S.$)
|
TSX
(C$)
|
||
|
Annual
|
High
|
Low
|
High
|
Low
|
|
2017
|
3.12
|
0.81
|
4.09
|
1.00
|
|
2016
|
3.35
|
1.41
|
4.50
|
1.78
|
|
2015
|
3.92
|
1.73
|
4.99
|
2.16
|
|
2014
|
5.18
|
1.94
|
5.77
|
2.14
|
|
2013
|
6.46
|
1.50
|
6.70
|
1.55
|
|
|
|
|
|
|
|
Quarterly
|
|
|
|
|
|
2017
|
|
|
|
|
|
Fourth
quarter
|
1.25
|
0.82
|
1.58
|
1.00
|
|
Third
quarter
|
2.92
|
0.81
|
3.73
|
1.00
|
|
Second
quarter
|
2.69
|
1.81
|
3.57
|
2.48
|
|
First
quarter
|
3.12
|
2.11
|
4.09
|
2.78
|
|
|
|
|
|
|
|
2016
|
|
|
|
|
|
Fourth
quarter
|
3.35
|
1.69
|
4.50
|
2.21
|
|
Third
quarter
|
2.06
|
1.41
|
2.61
|
1.78
|
|
Second
quarter
|
2.42
|
1.53
|
3.22
|
2.00
|
|
First
quarter
|
3.19
|
1.83
|
4.20
|
2.46
|
|
|
|
|
|
|
|
2015
|
|
|
|
|
|
Fourth
quarter
|
2.32
|
1.73
|
2.95
|
2.16
|
|
Third
quarter
|
3.87
|
1.92
|
4.99
|
2.25
|
|
Second
quarter
|
3.92
|
2.28
|
4.86
|
2.95
|
|
First
quarter
|
2.94
|
1.96
|
3.33
|
2.49
|
|
|
|
|
|
|
|
2014
|
|
|
|
|
|
Fourth
quarter
|
4.48
|
3.05
|
4.17
|
2.77
|
|
Third
quarter
|
5.18
|
3.21
|
4.49
|
2.14
|
|
Second
quarter
|
4.19
|
1.94
|
5.77
|
3.53
|
|
First
quarter
|
3.80
|
2.51
|
4.82
|
3.28
|
|
|
|
|
|
|
|
2013
|
|
|
|
|
|
Fourth
quarter
|
6.46
|
1.63
|
6.70
|
1.72
|
|
Third
quarter
|
3.72
|
1.50
|
3.84
|
1.55
|
|
Second
quarter
|
2.23
|
1.57
|
2.35
|
1.60
|
|
First
quarter
|
2.59
|
1.72
|
2.56
|
1.77
|
|
|
|
|
|
|
|
|
NASDAQ
(U.S.$)
|
TSX
(C$)
|
||
|
Most recent 6 months
|
High
|
Low
|
High
|
Low
|
|
February
2018
|
0.82
|
0.61
|
1.02
|
0.78
|
|
January
2018
|
1.05
|
0.77
|
1.29
|
0.97
|
|
December
2017
|
0.89
|
0.70
|
1.15
|
0.92
|
|
November
2017
|
0.97
|
0.84
|
1.23
|
1.09
|
|
October
2017
|
1.25
|
0.88
|
1.58
|
1.13
|
|
September
2017
|
1.17
|
0.82
|
1.50
|
1.00
|
|
August
2017
|
1.30
|
0.81
|
1.62
|
1.00
|
Our
authorized share capital consists of an unlimited number of common
shares, all without nominal or par value and an unlimited number of
preference shares issuable in series. At November 30, 2017, there
were 34,704,515 common shares and no preference shares issued and
outstanding compared to 34,704,515 common shares and no preference
shares issued and outstanding at December 1, 2017. As of February
27, 2018, there were 34,704,515 common shares and no preference
shares issued and outstanding.
The
reasons for the increase in common shares issued were as follows.
In October 2017, the Company completed an underwritten public
offering of 3,636,364 common shares at a price of $1.10 per share.
The Company also issued to the investors warrants to purchase an
aggregate of 1,818,182 common shares. The warrants will be
exercisable six months following the closing date and will expire
30 months after the date they become exercisable, have a term of
three years and an exercise price of $1.25 per common share. In
November 2013, we established an at-the-market equity program
pursuant to which we could sell up to 5,305,484 of our common
shares for up to an aggregate of $16.8 million (or
such
lesser amount as may then be permitted under applicable securities
laws and regulations). As of February 27, 2018, we have issued and
sold 4,740,350 common shares with an aggregate offering price of
$13,872,929 under the at-the-market program. Roth received
compensation of $392,827 in connection with such sales. During the
three months ended November 30, 2017, an aggregate of 50,000 (2016
– 497,949) of our common shares were sold on Nasdaq for gross
proceeds of $46,025 (2016 – $1,507,400) and net proceeds of
$44,853 (2016 – $1,464,759) under the at-the-market offering
program. Roth received aggregate compensation of $1,171 in
connection with such sales. During the year ended November 30,
2017, an aggregate of 1,108,150 (2016 – 1,471,260) of our
common shares were sold on Nasdaq for gross proceeds of $2,541,640
(2016 - $3,469,449) and net proceeds of $2,468,474 (2016 -
$3,368,674) under the at-the-market offering program. Roth received
aggregate compensation of $73,166 (2016 - $100,775) in connection
with such sales. There can be no assurance that any additional
shares will be sold under our at-the-market program.
Common Shares
Each of
our common shares entitles the holder thereof to one vote at any
meeting of shareholders of the Company, except meetings at which
only holders of a specified class of shares are entitled to vote.
Common shares are entitled to receive, as and when declared by the
board of directors, dividends in such amounts as shall be
determined by the board of directors. The holders of common shares
have the right to receive the remaining property of the Company in
the event of liquidation, dissolution, or winding-up of the
Company, whether voluntary or involuntary.
Preference Shares
The
preference shares may at any time and from time to time be issued
in one or more series. The board of directors will, by resolution,
from time to time, before the issue thereof, fix the rights,
privileges, restrictions and conditions attaching to the preference
shares of each series. Except as required by law, the holders of
any series of preference shares will not as such be entitled to
receive notice of, attend or vote at any meeting of the
shareholders of the Company. Holders of preference shares will be
entitled to preference with respect to payment of dividends and the
distribution of assets in the event of liquidation, dissolution or
winding-up of the Company, whether voluntary or involuntary, or any
other distribution of the assets of the Company among its
shareholders for the purpose of winding up its affairs, on such
shares over the common shares and over any other shares ranking
junior to the preference shares.
Warrants
At
November 30, 2017, an aggregate of 3,979,797 common shares were
issuable upon the exercise of outstanding common share purchase
warrants, with a weighted average exercise price of $1.64 per
common share. At February 27, 2018, an aggregate of 3,979,797
common shares were issuable upon the exercise of outstanding common
share purchase warrants, with a weighted average exercise price of
$1.64 per common share.
Options
At
November 30, 2017, an aggregate of 5,828,112 common shares were
issuable upon the exercise of outstanding options, with a weighted
average exercise price of $3.20 per common share and up to 406,280
additional common shares were reserved for issuance under our stock
option plan.
As of
February 27, 2018, there were 5,669,835 common shares issuable upon
the exercise of outstanding options. The weighted average exercise
price of these options is $3.13 per common share. As at February
27, 2018, up to 564,557 additional common shares were reserved for
issuance under our Option Plan.
Convertible Debenture
On
January 10, 2013, we completed a private placement financing of an
unsecured Debenture in the original principal amount of $1.5
million. The Debenture was originally due to mature on January 1,
2015, but effective October 1, 2014, the maturity date was extended
to July 1, 2015; effective June 29, 2015, the July 1, 2015 maturity
date was extended to January 1, 2016; and effective as of December
8, 2015, the maturity date was extended to July 1, 2016. Effective
May 26, 2016, the maturity date of the Debenture was further
extended to December 1, 2016. The Debenture bears interest at a
rate of 12% per annum, payable monthly, is pre-payable at any time
at the option of the Company, and was convertible at any time into
500,000 common shares at a conversion price of $3.00 per common
share at the option of the holder. Drs. Isa and Amina Odidi, our
principal stockholders, directors and executive officers provided
us with the $1.5 million of the proceeds for the Debenture.
Effective December 1, 2016, the maturity date for the Debenture was
extended to April 1, 2017 and a principal repayment of $150,000 was
made at the time of the extension. After giving effect to such
partial repayment, the Debenture is convertible at any time into
450,000 common shares at a conversion price of $3.00 per common
share at the option of the holder. Effective March 28, 2017, the
maturity date of the Debenture was extended to October 1, 2017.
Effective September 28, 2017, the maturity date of the Debenture
was further extended to October 1, 2018. The Company currently
expects to repay the current net amount of $1,350,000 on or about
October 1, 2018, if the Company then has cash
available.
Deferred Share Units
At
November 30, 2017, there were 94,131 DSUs issued and outstanding.
From November 30, 2017 to February 27, 2018, an additional 8,660
DSUs have been issued. At February 27, 2018, 7,209 additional DSUs
are reserved for issuance under our DSU plan.
Restricted Share Units
At
November 30, 2017, there were no restricted share units
(“
RSUs
”) issued
and outstanding. From November 30, 2017 to the date of this report,
no RSUs have been issued. At February 27, 2018, 330,000 RSUs are
reserved for issuance under our RSU Plan.
Registration Rights
We
conducted a private placement issuance of units comprised of common
shares and warrants in February, 2011, which was exempt from
registration under the U.S. Securities Act pursuant to Regulation D
and Section 4(2) and/or Regulation S thereof and such other
available exemptions. As such, the common shares, the warrants, and
the common shares underlying the warrants may not be offered or
sold in the United States unless they are registered under the U.S.
Securities Act, or an exemption from the registration requirements
of the U.S. Securities Act is available.
In
connection with the private placement, we agreed to file a
registration statement on Form F-3 (“
Registration Statement
”) within 40
days after the closing and use our best efforts to have it declared
effective within 150 days after the closing to register (i) 100% of
the common shares issued in the private placement; and (ii) 100% of
the common shares underlying the investor warrants issued in the
private placement (collectively, the private placement or the
“
Registrable
Securities
”).
The
Registration Statement was declared effective as of March 30, 2011.
If (i) the Registration Statement ceases to be continuously
effective for more than twenty consecutive calendar days or more
than an aggregate of thirty calendar days during any consecutive
12-month period, or (ii) at a time in which the Registrable
Securities cannot be sold under the Registration Statement, we
shall fail for any reason to satisfy the current public information
requirement under Rule 144 as to the applicable Registrable
Securities, we shall pay to the investors, on a pro rata basis,
partial liquidated damages of one percent (1%) of the aggregate
purchase price paid by each investor on the occurrence of an event
listed above and for each calendar month (pro rata for any period
less than a calendar month) from an event, until
cured.
The
securities shall cease to be Registrable Securities when (i) they
have been sold (A) pursuant to a registration statement; or (B) in
accordance with Rule 144 or any other rule of similar effect; or
(ii) such securities become eligible for resale without volume or
manner-of-sale restrictions, and when either we are compliant with
any current public information requirements pursuant to Rule 144 or
the current public information requirements no longer
apply.
Prior Sales
On
March 15, 2012, we completed a registered direct common share
offering for gross proceeds of $5,000,000. We sold an aggregate of
1,818,182 shares to U.S. institutional investors at a price of
$2.75 per share.
In
January 2013, we completed a private placement financing of a
Debenture in the original principal amount of $1.5 million. The
Debenture was originally due to mature on January 1, 2015, but
effective October 1, 2014, the maturity date was extended to July
1, 2015; effective June 29, 2015, the maturity date was extended to
January 1, 2016; effective as of December 8, 2015, the maturity
date was extended to July 1, 2016; and effective May 26, 2016, the
maturity date of the Debenture was further extended to December 1,
2016. The Debenture bears interest at a rate of 12% per annum,
payable monthly, is pre-payable at any time at our option, and was
convertible at any time into 500,000 common shares at a conversion
price of $3.00 per common share at the option of the holder. Drs.
Isa and Amina Odidi, our principal stockholders, directors and
executive officers provided us with the $1.5 million of the
proceeds for the Debenture. Effective December 1, 2016, the
maturity date for the Debenture was extended to April 1, 2017 and a
principal repayment of $150,000 was made at the time of the
extension. After giving effect to such partial repayment, the
Debenture is convertible at any time into 450,000 common shares at
a conversion price of $3.00 per common share at the option of the
holder. The maturity date of the Debenture has been further
extended to October 1, 2018. The Company currently expects to repay
the current net amount of $1,350,000 on or about October 1, 2018,
if the Company then has cash available.
In
March 2013, we completed a registered direct unit offering for
gross proceeds of $3,121,800. We sold an aggregate of 1,815,000
units at a price of $1.72 per unit. The units were comprised of an
aggregate of 1,815,000 common shares and warrants to purchase an
additional 453,750 common shares. The warrants are exercisable for
a term of five years and have an exercise price of $2.10 per common
share.
In July
2013, we completed an underwritten public offering of 1,500,000
units of common shares and warrants for gross proceeds of
$3,075,000 at a price of $2.05 per unit. The units were comprised
of an aggregate of 1,500,000 common shares and warrants to purchase
an additional 375,000 common shares. The warrants have a term of
five years and an exercise price of $2.55 per common
share.
In
November 2013, we entered into an equity distribution agreement
with Roth, pursuant to which we may from time to time sell up to
5,305,484 of our common shares for up to an aggregate of $16.8
million (or such lesser amount as may then be permitted under
applicable exchange rules and securities laws and regulations)
through at-the-market issuances on the Nasdaq or otherwise. Under
the equity distribution agreement, we may at our discretion, from
time to time, offer and sell common shares through Roth or directly
to Roth for resale. Sales of common shares through Roth, if any,
will be made at such time and at such price as are acceptable to
us, from time to time, by means of ordinary brokers’
transactions on the Nasdaq or otherwise at market prices prevailing
at the time of sale or as determined by us. We currently plan to
use any net proceeds from the at-the-market offering for general
corporate purposes, including funding research, product development
and other corporate development opportunities and to possibly fund
costs and other expenses relating to our current leased facilities
to accommodate our anticipated growth requirements, and, although
we have no present understanding, commitments or agreements to do
so, potential acquisition of, or investment in, companies and
technologies that complement our business. We are not required to
sell shares under the equity distribution agreement. We pay Roth a
commission, or allow a discount, of 2.75% of the gross proceeds we
receive from any sales of our common shares under the equity
distribution agreement. Any sales of shares under our at-the-market
offering program will be made pursuant to an effective shelf
registration statement on Form F-3 filed with the SEC. We have also
agreed to reimburse Roth for certain expenses relating to the
offering. As of February 27, 2018, we have issued and sold
4,740,350 common shares with an aggregate offering price of
$13,872,929 under the at-the-market program. Roth received
aggregate compensation of $392,827 in connection with such sales.
As a result of prior sales of the Company’s common shares
under the equity distribution agreement, the Company may in the
future offer and sell its common shares with an aggregate purchase
price up to $2,927,071, or such lesser amount as may then be
permitted under applicable exchange rules and securities laws and
regulations, pursuant to the at-the-market program. Under Toronto
Stock Exchange rules, the number of common shares that may
currently be offered under the at-the-market program is 565,134
common shares. The Company intends to remove or amend this
limitation, although no assurance can be given that the limitation
will be removed or amended. There can be no assurance that any
additional shares will be sold under our at-the-market program.
Subsequent
to the
year ended November 30, 2017, share issuance costs of Nil were
recorded against the cost of the shares issued and recognized in
capital stock. As at November 30, 2017, $1,334,873 of the share
issuance costs has been recorded against the cost of the shares
issued and recognized in capital stock. Pursuant to an Underwriting
Agreement between the Company and Dawson James Securities, Inc.,
dated May 27, 2016 (the “
Dawson James Underwriting
Agreement
”), in June 2016, we completed an
underwritten public offering of 3,229,814 units of common shares
and warrants, at a price of $1.61 per unit. The warrants are
currently exercisable, have a term of five years and an exercise
price of $1.93 per common share. We issued at the initial closing
of the offering an aggregate of 3,229,814 common shares and
warrants to purchase an additional 1,614,907 common shares. The
underwriter also purchased at such closing additional warrants to
acquire 242,236 common shares pursuant to the over-allotment option
exercised in part by the underwriter. We subsequently sold an
aggregate of 459,456 additional common shares at the public
offering price of $1.61 per share in connection with subsequent
partial exercises of the underwriter’s over-allotment option.
The closings of these partial exercises brought the total net
proceeds from the offering to approximately $5.1 million, after
deducting the underwriter’s discount and offering
expenses.
On July
17, 2017, the Shelf Registration Statement was declared effective
by the SEC. The Shelf Registration Statement allows for, subject to
securities regulatory requirements and limitations, the potential
offering of up to an aggregate of $100 million of the
Company’s common shares, preference shares, warrants,
subscription receipts, subscription rights and units, or any
combination thereof, from time to time in one or more offerings,
and is intended to give the Company the flexibility to take
advantage of financing opportunities when, and if, market
conditions are favorable to the Company. The specific terms of such
future offerings, if any, would be established, subject to the
approval of the Company’s board of directors, at the time of
such offering and will be described in detail in a prospectus
supplement filed at the time of any such offering. To the extent
that any securities are issued by the Company under the Shelf
Registration Statement, a shareholder’s percentage ownership
will be diluted and our stock price could be adversely affected. As
of February 27, 2018, the Company has not sold any securities under
the Shelf Registration Statement, other than the sale since July
17, 2017 of (i) 485,239 common shares under the Company’s
at-the-market program referred to above and (ii) the sale of
3,636,364 common shares under the Wainwright Agreement referred to
above, and there can be no assurance that any additional securities
will be sold under the Shelf Registration Statement or the shelf
prospectus.
Pursuant to a
placement agent agreement dated October 10, 2017 between the
Company and H.C. Wainwright & Co., LLC (the “
Wainwright Agreement
”), in October
2017, we completed a registered direct offering consisting of
3,636,364 common shares at a price of $1.10 per share for gross
proceeds of approximately $4 million. We also issued to the
investors warrants to purchase an aggregate of 1,818,182 common
shares at an exercise price of $1.25 per share. The warrants are
exercisable six months following the October 13, 2017 closing date
and will expire 30 months after the date they become exercisable.
The common shares (but not the warrants or the common shares
underlying the warrants) were offered by us through a prospectus
supplement pursuant to our shelf registration statement on Form F-3
as previously filed and declared effective by the SEC and the base
prospectus contained therein (Registration Statement No.
333-218297). The warrants described above were offered in a private
placement under Section 4(a)(2) of the U.S. Securities Act, and
Regulation D promulgated thereunder and, along with the common
shares underlying the warrants, have not been registered under the
U.S. Securities Act, or applicable state securities laws. The
Company also issued to the placement agents 181,818 warrants to
purchase a share of common stock at an exercise price of $1.375 per
share. The total net proceeds from the offering were $3.5 million,
after deducting offering expenses.
During
the 12-month period ended November 30, 2017, warrants to purchase
an aggregate of 168,009 common shares were exercised.
During
the 12-month period ended November 30, 2017, 496,000 options were
granted and 2,000 options were exercised.
Also
during the 12-month period ended November 30, 2017, a total of
17,388 deferred share units were granted.
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
®
)–Approved
by FDA and launched.
●
Desvenlafaxine
extended-release tablets (generic Pristiq
®
) – ANDA
Under FDA Review
●
Lamotrigine
extended-release tablets (generic Lamictal
®
XR™)
– ANDA Under FDA Review
Under
the terms of this 10-year agreement, the Company received a
non-refundable upfront payment of $3 million in October 2016. In
addition, the Mallinckrodt agreement also provides for a long-term
profit sharing arrangement with respect to these licensed products
(which includes up to $11 million in cost recovery payments to the
Company). The Company has agreed to manufacture and supply the
licensed products exclusively for Mallinckrodt on a cost plus
basis, and Mallinckrodt has agreed that the Company will be its
sole supplier of the licensed products marketed in the U.S. The
Mallinckrodt agreement contains customary terms and conditions for
an agreement of this kind, and is subject to early termination in
the event we do not obtain FDA approvals of the Mallinckrodt
licensed products by specified dates, or pursuant to any one of
several termination rights of each party.
●
The acknowledgement
and agreement of the Company dated October 22, 2009 to be bound by
the performance based stock option agreement dated September 10,
2004 pursuant to which Drs. Isa and Amina Odidi are entitled to
purchase up to 2,763,940 of the Company’s shares upon payment
of $3.62 per share, subject to satisfaction of the performance
vesting conditions being the acceptance by the FDA of the filing of
an application for approval of a drug product or the approval of
such an application.
●
The amended and
restated promissory note dated October 22, 2009 for up to
C$2,300,000 issued by IPC Corp to Isa Odidi and Amina Odidi for
advances that may be made by them from time to time to the Company.
As at November 30, 2015 and November 30, 2014, no amount was
outstanding. No at-the-market offering proceeds were used in
payment of the promissory note.
●
The Debenture dated
January 10, 2013 for $1.5 million issued by the Company to Isa
Odidi and Amina Odidi for the loan of $1.5 million made by them to
the Company. The Debenture was originally due to mature on January
1, 2015, but effective October 1, 2014, the maturity date was
extended to July 1, 2015; effective June 29, 2015, the maturity
date was extended to January 1, 2016; and effective as of December
8, 2015, the maturity date was further extended to July 1, 2016;
and effective May 26, 2016, the maturity date of the Debenture was
extended to December 1, 2016. Effective December 1, 2016, the
maturity date for the Debenture was extended to April 1, 2017 and a
principal repayment of $150,000 was made at the time of the
extension. After giving effect to such partial repayment, the
Debenture is convertible at any time into 450,000 common shares at
a conversion price of $3.00 per common share at the option of the
holder. The maturity date of the Debenture has been further
extended to October 1, 2018. The Company currently expects to repay
the current net amount of $1,350,000 on or about October 1, 2018,
if the Company then has cash available.
●
Pursuant to the
Dawson James Underwriting Agreement, in June 2016, we completed an
underwritten public offering of 3,229,814 units of common shares
and warrants, at a price of $1.61 per unit. The warrants are
currently exercisable, have a term of five years and an exercise
price of $1.93 per common share. We issued at the initial closing
of the offering an aggregate of 3,229,814 common shares and
warrants to purchase an additional 1,614,907 common shares. The
underwriter also purchased at such closing additional warrants to
acquire 242,236 common shares pursuant to the over-allotment option
exercised in part by the underwriter. We subsequently sold an
aggregate of 459,456 additional common shares at the public
offering price of $1.61 per share in connection with subsequent
partial exercises of the underwriter’s over-allotment option.
The closings of these partial exercises brought the total net
proceeds from the offering to approximately $5.1 million, after
deducting the underwriter’s discount and offering
expenses.
●
Pursuant to the
Wainwright Agreement, in October 2017, we completed a registered
direct offering consisting of 3,636,364 common shares at a price of
$1.10 per share for gross proceeds of approximately $4 million. We
also issued to the investors warrants to purchase an aggregate of
1,818,182 common shares at an exercise price of $1.25 per share.
The warrants are exercisable six months following the October 13,
2017 closing date and will expire 30 months after the date they
become exercisable. The common shares (but not the warrants or the
common shares underlying the warrants) were offered by us through a
prospectus supplement pursuant to our shelf registration statement
on Form F-3 as previously filed and declared effective by the SEC
and the base prospectus contained therein (Registration Statement
No. 333-218297). The warrants described above were offered in a
private placement under Section 4(a)(2) of the U.S. Securities Act,
and Regulation D promulgated thereunder and, along with the common
shares underlying the warrants, have not been registered under the
U.S. Securities Act, or applicable state securities laws. The
Company also issued to the placement agents 181,818 warrants to
purchase a share of common stock at an exercise price of $1.375 per
share. The total net proceeds from the offering were $3.5 million,
after deducting offering expenses.
D.
Exchange Control
s
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. We cannot predict whether, when, or to
what extent U.S. federal tax laws will be changed, or regulations,
interpretations, or rulings will be issued or revoked, nor is the
long-term impact of the significant changes made to the Code in
2017 known at this time.
Each
U.S. Holder and each holder of common shares that is not a U.S.
Holder should consult its tax adviser regarding the United States
federal income tax consequences of holding our common shares
applicable to such holder in light of its particular situation, as
well as any tax consequences that may arise under the laws of any
other relevant foreign, state, local, or other taxing
jurisdiction.
As used
in this section, the term “
United States person
” means a
beneficial owner of our common shares that is:
(i)
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 a U.S.
Holder’s ownership and disposition of the stock or warrants
of a passive foreign investment company (“
PFIC
”). As discussed below,
however, a U.S. Holder of our common shares (but not our warrants)
may be able to mitigate these consequences by making a timely and
effective election to treat the Company as a qualified electing
fund (a “
QEF
Election
”) or by making a timely and effective
mark-to-market election with respect to its common
shares.
For
U.S. federal income tax purposes, a foreign corporation is
classified as a PFIC for each taxable year in which, applying the
relevant look-through rules, either:
●
at least 75% of its
gross income for the taxable year consists of specified types of
“passive” income (referred to as the “income
test”); or
●
at least 50% of the
average value of its assets during the taxable year is attributable
to certain types of assets that produce passive income or are held
for the production of passive income (referred to as the
“asset test”).
For
purposes of the income and asset tests, if a foreign corporation
owns directly or indirectly at least 25% (by value) of the stock of
another corporation, that foreign corporation will be treated as if
it held its proportionate share of the assets of the other
corporation and received its proportionate share of the income of
that other corporation. Also, for purposes of the income and asset
tests, passive income does not include any income that is an
interest, dividend, rent or royalty payment if it is received or
accrued from a related person to the extent that amount is properly
allocable to the active income of the related person. Under
applicable attribution rules, if the Company is a PFIC, U.S.
Holders of common shares will be treated as holding stock of the
Company’s subsidiaries that are PFICs in certain
circumstances. In these circumstances, certain dispositions of, and
distributions on, stock of such subsidiaries may have consequences
for U.S. Holders under the PFIC rules.
We
believe that we were not a PFIC during our 2017 taxable year and
are unlikely to be a PFIC during our 2018 taxable year. Because
PFIC status is based on our income, assets and activities for the
entire taxable year, and our market capitalization, it is not
possible to determine whether we will be characterized as a PFIC
for the 2018 taxable year until after the close of the taxable
year. The tests for determining PFIC status are subject to a number
of uncertainties. These tests are applied annually, and it is
difficult to accurately predict future income, assets and
activities relevant to this determination. In addition, because the
market price of our common shares is likely to fluctuate, the
market price may affect the determination of whether we will be
considered a PFIC. There can be no assurance that we will not be
considered a PFIC for any taxable year (including our 2018 taxable
year). Absent one of the elections described below, if we are a
PFIC for any taxable year during which a U.S. Holder holds our
common shares, such U.S. Holder’s share of our income for
such year will continue to be subject to the regime described
below, regardless of whether we cease to meet the PFIC tests in one
or more subsequent years. Accordingly, no assurance can be given
that we will not constitute a PFIC in the current (or any future)
tax year or that the IRS will not challenge any determination made
by us concerning our PFIC status.
If we
are a PFIC, the U.S. federal income tax consequences to a U.S.
Holder of the ownership and disposition of our shares will depend
on whether such U.S. Holder makes a QEF or mark-to-market election.
Unless otherwise provided by the IRS, a U.S. Holder of our shares
is generally required to file an informational return annually to
report its ownership interest in the PFIC during any year in which
we are a PFIC.
U.S. HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISERS ABOUT THE PFIC
RULES, THE POTENTIAL APPLICABILITY OF THESE RULES TO THE COMPANY
CURRENTLY AND IN THE FUTURE, AND THEIR FILING OBLIGATIONS IF THE
COMPANY IS A PFIC.
The “No Election” Alternative – Taxation of
Excess Distributions
If we
are classified as a PFIC for any year during which a U.S. Holder
has held common shares or warrants and, in the case of our common
shares, that U.S. Holder has not made a QEF Election or a
mark-to-market election, special rules may subject that U.S. Holder
to increased tax liability, including loss of favorable capital
gains rates and the imposition of an interest charge upon the sale
or other disposition of the common shares or warrants or upon the
receipt of any excess distribution (as defined below). Under these
rules:
●
the gain, if any,
realized on such disposition will be allocated ratably over the
U.S. Holder’s holding period;
●
the amount of gain
allocated to the current taxable year and any year prior to the
first year in which we are a PFIC will be taxed as ordinary income
in the current year;
●
the amount of gain
allocated to each of the taxable years other than the year in which
the excess distribution occurs and pre-FIC years will be subject to
tax at the highest ordinary income tax rate in effect for that
year; and
●
an interest charge
for the deemed deferral benefit will be imposed with respect to the
resulting tax attributable to each of the other taxable
years.
These
rules will continue to apply to the U.S. Holder even after we cease
to meet the definition of a PFIC, unless the U.S. Holder elects to
be treated as having sold our common shares on the last day of the
last taxable year in which we qualified as a PFIC.
An
“excess distribution,” in general, is any distribution
on common shares received in a taxable year by a U.S. Holder that
is greater than 125% of the average annual distributions received
by that U.S. Holder in the three preceding taxable years or, if
shorter, during that U.S. Holder’s holding period for common
shares.
Any
portion of a distribution paid to a U.S. Holder that does not
constitute an excess distribution will be treated as ordinary
dividend income to the extent of our current and accumulated
earnings and profits (as computed for U.S. federal income tax
purposes). Such dividends generally will not qualify for the
dividends-received deduction otherwise available to U.S.
corporations. Any amounts treated as dividends paid by a PFIC
generally will not constitute “qualified dividend
income” within the meaning of Section 1(h)(11) of the Code
and will, therefore, not be eligible for the preferential 20% rate
for such income generally in effect for individuals under current
law. Any such amounts in excess of our current and accumulated
earnings and profits will be applied against the U.S.
Holder’s tax basis in the common shares and, to the extent in
excess of such tax basis, will be treated as gain from a sale or
exchange of such shares. It is possible that any such gain may be
treated as an excess distribution.
The QEF Election Alternative
A U.S.
Holder of common shares (but not warrants) who elects (an
“
Electing U.S.
Holder
”) under Section 1295 of the Code, in a timely
manner to treat us as a QEF would generally include in gross income
(and be subject to current U.S. federal income tax on) its pro rata
share of (a) the Company’s ordinary earnings, as ordinary
income, and (b) our net capital gains, as long-term capital gain.
An Electing U.S. Holder will generally be subject to U.S. federal
income tax on such amounts for each taxable year in which we are
classified as a PFIC, regardless of whether such amounts are
actually distributed to the Electing U.S. Holder. An Electing U.S.
Holder may further elect, in any given taxable year, to defer
payment of U.S. federal income tax on such amounts to the extent
they remain undistributed, subject to certain limitations. However,
if payment of such tax is deferred, the taxes will be subject to an
interest charge calculated from the due date of the tax return for
the relevant year with respect to which the QEF election applies
until the date the tax is paid.
A U.S.
Holder may not make a QEF election with respect to its warrants to
acquire our common shares. As a result, if a U.S. Holder sells or
otherwise disposes of such warrants (other than upon exercise of
such warrants), any gain recognized generally will be subject to
the special tax and interest charge rules treating the gain as an
excess distribution, as described above, if we were a PFIC at any
time during the period the U.S. Holder held the warrants. If a U.S.
Holder that exercises such warrants properly makes a QEF election
with respect to the newly acquired common shares (or has previously
made a QEF election with respect to our common shares), the QEF
election will apply to the newly acquired
common
shares, but the adverse tax consequences attributable to the period
prior to exercise of the warrants, adjusted to take into account
the current income inclusions resulting from the QEF election, will
continue to apply with respect to such newly acquired common shares
(which generally will be deemed to have a holding period for
purposes of the PFIC rules that includes the period the U.S. Holder
held the warrants), unless the U.S. Holder makes a purging election
under the PFIC rules. The purging election creates a deemed sale of
such common shares at their fair market value. The gain recognized
by the purging election will be subject to the special tax and
interest charge rules treating the gain as an excess distribution,
as described above. As a result of the purging election, the U.S.
Holder will have a new basis and holding period in the common
shares acquired upon the exercise of the warrants for purposes of
the PFIC rules.
A U.S.
Holder may make a QEF Election only if the Company furnishes the
U.S. Holder with certain tax information. If the Company should
determine that it is a PFIC, it is anticipated that it will attempt
to timely and accurately disclose such information to its U.S.
Holders and provide U.S. Holders with information reasonably
required to make such election.
A U.S.
Holder that makes a QEF Election with respect to the Company
generally (a) may receive a tax-free distribution from the Company
to the extent that such distribution represents “earnings and
profits” of the Company that were previously included in
income by the U.S. Holder because of such QEF Election and (b)
takes a tax basis in his, her or its common shares to reflect the
amount included in income (resulting in an increase in basis) or
allowed as a tax-free distribution (resulting in a decrease in
basis) as a result of the QEF Election.
Similarly, if any
of our non-U.S. subsidiaries were classified as PFICs, a U.S.
Holder that makes a timely QEF Election with respect to any of our
subsidiaries would be subject to the QEF rules as described above
with respect to the Holder’s pro rata share of the ordinary
earnings and net capital gains of any of our subsidiaries. Our
earnings (or earnings of any of our subsidiaries) attributable to
distributions from any of our subsidiaries that had previously been
included in the income of an Electing U.S. Holder under the QEF
rules would generally not be taxed to the Electing U.S. Holder
again.
Upon
the sale or other disposition of common shares, an Electing U.S.
Holder who makes a QEF Election for the first taxable year in which
it owns common shares (which election remains in effect throughout
such U.S. Holder’s ownership of common shares) will recognize
capital gain or loss for U.S. federal income tax purposes in an
amount equal to the difference between the net amount realized on
the disposition and the U.S. Holder’s adjusted tax basis in
the common shares. Such gain or loss will be long-term capital gain
or loss if the U.S. Holder’s holding period in the common
shares is more than one year, otherwise it will be short-term
capital gain or loss. The deductibility of capital losses is
subject to certain limitations. A U.S. Holder’s gain realized
upon the disposition of shares generally will be treated as U.S.
source income, and losses from the disposition generally will be
allocated to reduce U.S. source income.
A QEF
Election must be made in a timely manner as specified in applicable
Treasury Regulations. Generally, the QEF Election must be made by
filing the appropriate QEF election documents at the time such U.S.
Holder timely files its U.S. federal income tax return for the
first taxable year of the Company during which it was a
PFIC.
Each
U.S. Holder should consult its own tax advisor regarding the
availability of, procedure for making, and consequences of a QEF
Election with respect to the Company.
Mark-to-Market Election Alternative
Assuming that our
common shares are treated as marketable stock (as defined for these
purposes), a U.S. Holder that does not make a QEF Election may
avoid the application of the excess distribution rules, at least in
part, by electing, under Section 1296 of the Code, to mark the
common shares to market annually. Consequently, the U.S. Holder
will generally recognize as ordinary income or loss each year an
amount equal to the difference as of the close of the taxable year
between the fair market value of its common shares and the U.S.
Holder’s adjusted tax basis in the common shares. Any
mark-to-market loss is treated as an ordinary deduction, but only
to the extent of the net mark-to-market gain that the Holder has
included pursuant to the election in prior tax years. Any gain on a
disposition of our common shares by a U.S. Holder that has made
such a mark-to-market election would be treated as ordinary income.
Such U.S. Holder’s basis in its common shares would be
adjusted to reflect any of these income or loss amounts. Currently,
a mark-to-market election may not be made with respect to warrants.
We do not anticipate that the preference shares will be treated as
marketable stock for these purposes.
For
purposes of making this election, stock of a foreign corporation is
“marketable” if it is “regularly traded” on
certain “qualified exchanges”. Under applicable
Treasury Regulations, a “qualified exchange” includes a
national securities exchange that is registered with the SEC or the
national market system established pursuant to Section 11A of the
U.S. Exchange Act, and certain foreign securities exchanges.
Currently, our common shares are traded on a “qualified
exchange.” Under applicable Treasury Regulations, PFIC stock
traded on a qualified exchange is “regularly traded” on
such exchange for any calendar year during which such stock is
traded, other than in de minimis quantities, on at least 15 days
during each calendar quarter. Special rules apply if an election is
made after the beginning of the taxpayer’s holding period in
PFIC stock.
To the
extent available, a mark-to-market election applies to the taxable
year in which such mark-to-market election is made and to each
subsequent taxable year, unless the Company’s common shares
cease to be “marketable stock” or the IRS consents to
revocation of such election. In addition, a U.S. Holder that has
made a mark-to-market election does not include mark-to-market
gains, or deduct mark-to-market losses, for years when the Company
ceases to be treated as a PFIC.
The
mark-to-market rules generally do not appear to prevent the
application of the excess distribution rules in respect of stock of
any of our subsidiaries in the event that any of our subsidiaries
were considered PFICs. Accordingly, if Intellipharmaceutics and any
of our subsidiaries were both considered PFICs and a U.S. Holder
made a mark-to-market election with respect to its common shares,
the U.S. Holder may remain subject to the excess distribution rules
described above with respect to its indirectly owned shares of
subsidiary stock.
U.S. HOLDERS ARE URGED TO CONSULT THEIR TAX ADVISORS REGARDING THE
POSSIBLE APPLICABILITY OF THE PFIC RULES AND THE AVAILABILITY OF,
PROCEDURES FOR MAKING, AND CONSEQUENCES OF A QEF ELECTION OR
MARK-TO-MARKET ELECTION WITH RESPECT TO THE COMPANY’S COMMON
SHARES.
Ownership and Disposition of Common Shares and Warrants to the
Extent that the PFIC Rules do not Apply
Distributions on Common Shares
A U.S.
Holder that receives a distribution, including a constructive
distribution, with respect to a Share will be required to include
the amount of such distribution in gross income as a dividend
(without reduction for any Canadian income tax withheld from such
distribution) to the extent of the current or accumulated
“earnings and profits” of the Company, as computed for
U.S. federal income tax purposes. Any amount considered to be a
dividend received by a U.S. Holder who is an individual should be
eligible for the 20% maximum rate of U.S. federal income tax under
Section 1(h)(11) of the Code. To the extent that a distribution
exceeds the current and accumulated “earnings and
profits” of the Company, such distribution will be treated
first as a tax-free return of capital to the extent of a U.S.
Holder’s tax basis in the common shares and thereafter as
gain from the sale or exchange of such common shares. (See
“Sale or Other Taxable Disposition of Common Shares”
below). However, the Company may not maintain the calculations of
earnings and profits in accordance with U.S. federal income tax
principles, and each U.S. Holder should (unless advised to the
contrary) therefore assume that any distribution by the Company
with respect to the common shares will constitute ordinary dividend
income. Dividends received on common shares generally will not be
eligible for the “dividends received deduction”. The
dividend rules are complex, and each U.S. Holder should consult its
own tax advisor regarding the application of such
rules.
The
terms of a warrant may provide for an adjustment to the number of
common shares for which the warrant may be exercised or to the
exercise price of the warrant in certain events. An adjustment
which has the effect of preventing dilution generally is not
taxable. However, the U.S. Holders of the warrants would be treated
as receiving a constructive distribution from us if, for example,
the adjustment increases the warrant holders’ proportionate
interest in our assets or earnings and profits (e.g., through an
increase in the number of common shares that would be obtained upon
exercise) as a result of a distribution of cash to the holders of
our common shares which is taxable to the U.S. Holders of such
common shares as described under “Distributions on Common
Shares” above. Such constructive distribution would be
subject to tax as described under that section in the same manner
as if the U.S. Holders of the warrants received a cash distribution
from us equal to the fair market value of such increased
interest.
Sale or Other Taxable Disposition of Common Shares
Upon
the sale or other taxable disposition of common shares, a U.S.
Holder generally will recognize capital gain or loss in an amount
equal to the difference between the U.S. dollar value of cash
received plus the fair market value of any property received and
such U.S. Holder’s tax basis in such common shares sold or
otherwise disposed of. A U.S. Holder’s tax basis in common
shares generally will be such Holder’s U.S. dollar cost for
such common shares.
Gain or
loss recognized on such sale or other disposition generally will be
long-term capital gain or loss if, at the time of the sale or other
disposition, the common shares have been held for more than one
year. The long-term capital gains realized by non-corporate U.S.
Holders are generally subject to a lower marginal U.S. federal
income tax rate than ordinary income other than qualified dividend
income, as defined above. Currently, the maximum rate on long-term
capital gains is 20%, although the actual rates may be higher due
to the phase out of certain tax deductions, exemptions and credits.
However, given the uncertain economic conditions in the United
States and the size of the federal deficit, tax rates are subject
to change and prospective U.S. Holders should consult their tax
advisors. The deductibility of losses may be subject to
limitations.
Warrants
Generally, no U.S.
federal income tax will be imposed upon the U.S. Holder of a
warrant upon exercise of such warrant to acquire our common shares.
A U.S. Holder’s tax basis in a warrant will generally be the
amount of the purchase price that is allocated to the warrant. Upon
exercise of a warrant, the tax basis of the new common shares would
be equal to the sum of the tax basis of the warrants in the hands
of the U.S. Holder plus the exercise price paid, and the holding
period of the new common shares would begin on the date that the
warrants are exercised. If a warrant lapses without exercise, the
U.S. Holder will generally realize a capital loss equal to its tax
basis in the warrant. Prospective U.S. Holders should consult their
tax advisors regarding the tax consequences of acquiring, holding
and disposing of warrants.
The tax
consequences of a cashless exercise of a warrant are not clear
under current tax law. A cashless exercise may be tax-free, either
because the exercise is not a gain realization event or because the
exercise is treated as a recapitalization for U.S. federal income
tax purposes. In either tax-free situation, a U.S. Holder’s
basis in the common shares received upon exercise would equal the
U.S. holder’s basis in the warrant. If the cashless exercise
were treated as not being a gain realization event, a U.S.
Holder’s holding period in the common shares would be treated
as commencing on the date following the date of exercise of the
warrant. If the cashless exercise were treated as a
recapitalization, the holding period of the common shares would
include the holding period of the warrant. It is also possible that
a cashless exercise could be treated as a taxable exchange in which
gain or loss would be recognized. In such event, a U.S. Holder
could be deemed to have surrendered warrants equal to the number of
common shares having a value equal to the exercise price for the
total number of warrants to be exercised. The U.S. Holder would
recognize capital gain or loss in an amount equal to the difference
between the fair market value of the common shares represented by
the warrants deemed surrendered and the U.S. Holder’s tax
basis in the warrants deemed surrendered. If taxable exchange
treatment applied, a U.S. Holder’s tax basis in the common
shares received would equal the sum of the fair market value of the
common shares represented by the warrants deemed surrendered and
the U.S. Holder’s tax basis in the warrants exercised. A U.S.
Holder’s holding period for the common shares would commence
on the date following the date of exercise of the warrant. Due to
the absence of authority on the U.S. federal income tax treatment
of a cashless exercise, there can be no assurance which, if any, of
the alternative tax consequences and holding periods described
above would be adopted by the IRS or a court of law. Accordingly,
U.S. Holders should consult their tax advisors regarding the tax
consequences of a cashless exercise.
Additional Considerations
Tax-Exempt Investors
Special
considerations apply to U.S. persons that are pension plans and
other investors that are subject to tax only on their unrelated
business taxable income. Such a tax-exempt investor’s income
from an investment in our common shares or warrants generally will
not be treated as resulting in unrelated business taxable income
under current law, so long as such investor’s acquisition of
common shares or warrants is not debt-financed. Tax-exempt
investors should consult their own tax advisors regarding an
investment in our common shares or warrants.
Additional Tax on Passive Income
Certain
individuals, estates and trusts whose income exceeds certain
thresholds will generally be required to pay a 3.8% Medicare surtax
on the lesser of (1) the U.S. Holder’s “net investment
income” for the relevant taxable year and (2) the excess of
the U.S. Holder’s modified gross income for the taxable year
over a certain threshold (which, in the case of individuals, will
generally be between U.S.$125,000 and U.S.$250,000 depending on the
individual’s circumstances). A U.S. Holder’s “net
investment income” may generally include, among other items,
certain interest, dividends, gain, and other types of income from
investments, minus the allowable deductions that are properly
allocable to that gross income or net gain. U.S. Holders are urged
to consult with their own tax advisors regarding the effect, if
any, of this tax on their ownership and disposition of common
shares or warrants.
Receipt of Foreign Currency
The
amount of any distribution paid to a U.S. Holder in foreign
currency, or on the sale, exchange or other taxable disposition of
common shares or warrants, generally will be equal to the U.S.
dollar value of such foreign currency based on the exchange rate
applicable on the date of receipt (regardless of whether such
foreign currency is converted into U.S. dollars at that time). A
U.S. Holder will have a basis in the foreign currency equal to its
U.S. dollar value on the date of receipt. Any U.S. Holder who
converts or otherwise disposes of the foreign currency after the
date of receipt may have a foreign currency exchange gain or loss
that would be treated as ordinary income or loss, and generally
will be U.S. source income or loss for foreign tax credit purposes.
Each U.S. Holder should consult its own U.S. tax advisor regarding
the U.S. federal income tax consequences of receiving, owning, and
disposing of foreign currency.
Foreign Tax Credit
Subject
to the PFIC rules discussed above, a U.S. Holder that pays (whether
directly or through withholding) Canadian income tax with respect
to dividends paid on the common shares generally will be entitled,
at the election of such U.S. Holder, to receive either a deduction
or a credit for such Canadian income tax paid. Generally, subject
to the limitations described in the next paragraph, a credit will
reduce a U.S. Holder’s U.S. federal income tax liability on a
dollar-for-dollar basis, whereas a deduction will reduce a U.S.
Holder’s income subject to U.S. federal income tax. This
election is made on a year-by-year basis and generally applies to
all foreign taxes paid (whether directly or through withholding) or
accrued by a U.S. Holder during a year.
Complex
limitations apply to the foreign tax credit, including the general
limitation that the credit cannot exceed the proportionate share of
a U.S. Holder’s U.S. federal income tax liability (determined
before application of the foreign tax credit) that such U.S.
Holder’s “foreign source” taxable income bears to
such U.S. Holder’s worldwide taxable income. In applying this
limitation, a U.S. Holder’s various items of income and
deduction must be classified, under complex rules, as either
“foreign source” or “U.S. source.”
Generally, dividends paid by a foreign corporation should be
treated as foreign source for this purpose, and gains recognized on
the sale of stock of a foreign corporation by a U.S. Holder should
generally be treated as U.S. source for this purpose, except as
otherwise provided in an applicable income tax treaty or if an
election is properly made under the Code. However, the amount of a
distribution with respect to the common shares that is treated as a
“dividend” may be lower for U.S. federal income tax
purposes than it is for Canadian federal income tax purposes,
resulting in a reduced foreign tax credit allowance to a U.S.
Holder. In addition, this limitation is calculated separately with
respect to specific categories of income. The foreign tax credit
rules are complex, and each U.S. Holder should consult its own U.S.
tax advisor regarding the foreign tax credit rules.
State and Local Tax
In
addition to the U.S. federal income tax discussed above, U.S.
Holders may also be subject to state and local income taxation for
amounts received on the disposition of common shares and on
dividends received. Amounts paid to U.S. Holders will not have
state and local tax amounts withheld from payments and U.S. Holders
should consult with a tax advisor regarding the state and local
taxation implications of such amounts received.
Information Reporting
In
general, U.S. Holders of common shares are subject to certain
information reporting under the Code relating to their purchase
and/or ownership of stock of a foreign corporation such as the
Company. Failure to comply with these information reporting
requirements may result in substantial penalties.
For
example, U.S. federal income tax information reporting rules
generally require certain individuals who are U.S. Holders to file
Form 8938 to report the ownership of specified foreign financial
assets if the total value of those assets exceeds an applicable
threshold amount (subject to certain exceptions). For these
purposes, a specified foreign financial asset includes not only a
financial account (as defined for these purposes) maintained by a
foreign financial institution, but also any stock or security
issued by a non-U.S. person, any financial instrument or contract
held for investment that has an issuer or counterparty other than a
U.S. person and any interest in a foreign entity, provided that the
asset is not held in an account maintained by a financial
institution. The minimum applicable threshold amount is generally
U.S.$50,000 in the aggregate, but this threshold amount varies
depending on whether the individual lives in the U.S., is married,
files a joint income tax return with his or her spouse, etc.
Certain domestic entities that are U.S. Holders may also be
required to file Form 8938 if both (i) such entities are owned at
least 80% by an individual who is a U.S. citizen or U.S. tax
resident (or, in some cases, by a nonresident alien who meets
certain criteria) or are trusts with beneficiaries that are such
individuals and (ii) more than 50% of their income consists of
certain passive income or more than 50% of their assets is held for
the production of such income. U.S. Holders are urged to consult
with their tax advisors regarding their reporting obligations,
including the requirement to file IRS Form 8938.
In
addition, in certain circumstances, a U.S. Holder of common shares
who disposes of such common shares in a transaction resulting in
the recognition by such Holder of losses in excess of certain
significant threshold amounts may be obligated to disclose its
participation in such transaction in accordance with the Treasury
Regulations governing tax shelters and other potentially
tax-motivated transactions or tax shelter regulations. Potential
purchasers of common shares should consult their tax advisors
concerning any possible disclosure obligation under the tax shelter
rules with respect to the disposition of their common
shares.
Backup Withholding
Generally,
information reporting requirements will apply to distributions on
our common shares or proceeds on the disposition of our common
shares or warrants paid within the U.S. (and, in certain cases,
outside the U.S.) to U.S. Holders. Such payments will generally be
subject to backup withholding tax at the rate of 28% if: (a) a U.S.
Holder fails to furnish such U.S. Holder’s correct U.S.
taxpayer identification number to the payor (generally on Form
W-9), as required by the Code and Treasury Regulations, (b) the IRS
notifies the payor that the U.S. Holder’s taxpayer
identification number is incorrect, (c) a U.S. Holder is notified
by the IRS that it has previously failed to properly report
interest and dividend income, or (d) a U.S. Holder fails to
certify, under penalty of perjury, that such U.S. Holder has
furnished its correct U.S. taxpayer identification number. However,
certain exempt persons generally are excluded from these
information reporting and backup withholding rules.
Backup
withholding is not an additional tax. Any amounts withheld under
the U.S. backup withholding tax rules will be allowed as a credit
against a U.S. Holder’s U.S. federal income tax liability, if
any, or will be refunded, if such U.S. Holder furnishes required
information to the IRS in a timely manner. Each U.S. Holder should
consult its own tax advisor regarding the backup withholding
rules.
Canadian Federal Income Tax Considerations
Taxation
The
following summary describes the principal Canadian federal income
tax considerations generally applicable to a holder of the
Company’s common shares who, for purposes of the Income Tax
Act (Canada) (the “
Canadian
Tax Act
”) and the Canada – United States Tax
Convention (the “
Treaty
”) and at all relevant
times, is resident in the United States and was not and is not
resident in Canada nor deemed to be resident in Canada, deals at
arm’s length and is not affiliated with the Company, holds
the Company’s common shares as capital property, does not use
or hold and is not deemed to use or hold the Company’s common
shares in or in the course of carrying on business in Canada and
who otherwise qualifies for the full benefit of the Treaty (a
“
United States
Holder
”). Special rules which are not discussed in
this summary may apply to a United States Holder that is a
financial institution, as defined in the Canadian Tax Act, or an
insurer carrying on business in Canada and elsewhere.
This
following summary is based on the current provisions of the Treaty,
the Canadian Tax Act and the regulations thereunder, all specific
proposals to amend the Canadian Tax Act and the regulations
announced by the Minister of Finance (Canada) prior to the date
hereof and the Company’s understanding of the administrative
practices published in writing by the Canada Revenue Agency prior
to the date hereof. This summary does not take into account or
anticipate any other changes in the governing law, whether by
judicial, governmental or legislative decision or action, nor does
it take into account the tax legislation or considerations of any
province, territory or non-Canadian (including U.S.) jurisdiction,
which legislation or considerations may differ significantly from
those described herein.
All
amounts relevant in computing a United States Holder’s
liability under the Canadian Tax Act are to be computed in Canadian
currency based on the relevant exchange rate applicable
thereto.
This
summary is of a general nature only and is not intended to be, and
should not be interpreted as legal or tax advice to any prospective
purchaser or holder of the Company’s common shares and no
representation with respect to the Canadian federal income tax
consequences to any such prospective purchaser is made.
Accordingly, prospective purchasers and holders of the
Company’s common shares should consult their own tax advisors
with respect to their particular circumstances.
Dividends on the Company’s Common Shares
Generally,
dividends paid or credited by Canadian corporations to non-resident
shareholders are subject to a withholding tax of 25% of the gross
amount of such dividends. Pursuant to the Treaty, the withholding
tax rate on the gross amount of dividends paid or credited to
United States Holders is reduced to 15% or, in the case of a United
States Holder that is a U.S. corporation that beneficially owns at
least 10% of the voting stock of the Canadian corporation paying
the dividends, to 5% of the gross amount of such
dividends.
Pursuant to the
Treaty, certain tax-exempt entities that are United States Holders
may be exempt from Canadian withholding taxes, including any
withholding tax levied in respect of dividends received on the
Company’s common shares.
Disposition of the Company’s Common Shares
In
general, a United States Holder will not be subject to Canadian
income tax on capital gains arising on the disposition or deemed
disposition of the Company’s common shares, unless such
shares are “taxable Canadian property” within the
meaning of the Canadian Tax Act. Generally, a share listed on a
designated stock exchange for purposes of the Canadian Tax Act
(which includes the TSX and NASDAQ) will not be “taxable
Canadian property” to a United States Holder unless, at any
particular time during the 60 month period immediately preceding
the disposition (i) 25% or more of the issued shares of any class
or series of the particular corporation were owned by: (a) such
United States Holder, (b) by persons with whom the United States
Holder did not deal at arm’s length, (c) a partnership in
which the United States Holder, or persons with whom the United
States Holder did not deal at arm’s length, holds a
membership interest directly or indirectly through one or more
partnerships, or (d) any combination thereof, and (ii) the shares
derived more than 50% of their fair market value directly or
indirectly from one or any combination of real property situated in
Canada, “timber resource property”, “Canadian
resource property” (each as defined under the Canadian Tax
Act), or options in respect of, or interests or rights in any of
the foregoing.
F.
Dividends and Paying
Agents
.
The
value of the Company’s common shares is not now, and is not
expected to be in the future, derived more than 50% from any of
these properties. Consequently, any gain realized by a United
States Holder upon the disposition of the Company’s common
shares should be exempt from tax under the Canadian Tax
Act.
Not
Applicable
G.
Statement by Expert
s
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,
|
November
30,
|
|
|
2017
|
2016
|
|
|
$
|
$
|
|
|
|
|
|
Total
accounts receivable
|
756,468
|
472,474
|
|
Less
allowance for doubtful accounts
|
(66,849
)
|
-
|
|
Total
accounts receivable, net
|
689,619
|
472,474
|
|
|
|
|
|
Not
past due
|
689,619
|
427,519
|
|
Past
due for more than 31 days
|
|
|
|
but
no more than 60 days
|
5,176
|
3,319
|
|
Past
due for more than 91 days
|
|
|
|
but
no more than 120 days
|
61,673
|
41,636
|
|
Total
accounts receivable, gross
|
756,468
|
472,474
|
Financial
instruments that potentially subject the Company to concentration
of credit risk consist principally of uncollateralized accounts
receivable. The Company’s maximum exposure to credit risk is
equal to the potential amount of financial assets. For the year
ended November 30, 2017, two customers accounted for substantially
all the revenue and all the accounts receivable of the Company. For
the year ended November 30, 2016, Par accounted for substantially
all the revenue and all the accounts receivable of the
Company.
The
Company is also exposed to credit risk at period end from the
carrying value of its cash. The Company manages this risk by
maintaining bank accounts with a Canadian Chartered Bank. The
Company’s cash is not subject to any external
restrictions.
Foreign exchange risk
We are
exposed to changes in foreign exchange rates between the Canadian
and U.S. dollar which could affect the value of our cash. The
Company had no foreign currency hedges or other derivative
financial instruments as of November 30, 2017. The Company did not
enter into financial instruments for trading or speculative
purposes and does not currently utilize derivative financial
instruments.
The
Company has balances in Canadian dollars that give rise to exposure
to foreign exchange (“
FX
”) risk relating to the impact
of translating certain non-U.S. dollar balance sheet accounts as
these statements are presented in U.S. dollars. A strengthening
U.S. dollar will lead to a FX loss while a weakening U.S. dollar
will lead to a FX gain. For each Canadian dollar balance of $1.0
million, a +/- 10% movement in the Canadian currency held by the
Company versus the U.S. dollar would affect the Company’s
loss and other comprehensive loss by $0.1 million.
Balances
denominated in foreign currencies that are considered financial
instruments are as follows:
|
|
|
November
30, 2017
|
|
November
30, 2016
|
|
|
Canadian
|
U.S.
|
Canadian
|
U.S.
|
|
FX
rates used to translate to U.S.
|
1.2888
|
|
1.3429
|
|
|
|
$
|
$
|
$
|
$
|
|
Assets
|
|
|
|
|
|
Cash
|
202,277
|
156,950
|
182,714
|
136,059
|
|
|
202,277
|
156,950
|
182,714
|
136,059
|
|
Liabilities
|
|
|
|
|
|
Accounts
payable and accrued liabilities
|
1,704,086
|
1,322,227
|
949,911
|
707,358
|
|
Employee
cost payable
|
277,080
|
214,980
|
1,402,108
|
1,044,151
|
|
Capital
lease
|
-
|
-
|
19,912
|
14,828
|
|
|
1,981,166
|
1,537,207
|
2,371,933
|
1,766,338
|
|
Net
exposure
|
(1,778,889
)
|
(1,380,257
)
|
(2,189,219
)
|
(1,630,278
)
|
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,
2017:
Limitations:
The
above discussion includes only those exposures that existed as of
November 30, 2017, and, as a result, does not consider exposures or
positions that could arise after that date. The Company’s
ultimate realized gain or loss with respect to interest rate and
exchange rate fluctuations would depend on the exposures that arise
during the period and interest and foreign exchange
rates.
Item
12.
Description of Securities Other
than Equity Securities
.
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.
Item
15.
Controls and Procedure
s
Internal Control over Financial Reporting
The
management of our Company is responsible for establishing and
maintaining adequate internal control over financial reporting for
the Company. Internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements
in accordance with generally accepted accounting principles and
includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the
Company’s assets, (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that the Company’s receipts and
expenditures are being made only in accordance with authorizations
of the Company’s management and directors, and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
Company’s assets that could have a material effect on the
financial statements.
Management assessed
the effectiveness of the Company’s internal control over
financial reporting using the 1992 Internal Control-Integrated
Framework developed by the Committee of Sponsoring Organizations of
the Treadway Commission (“
COSO
”).
Based
on this assessment, management concluded that the Company’s
internal control over financial reporting was effective as of
November 30, 2017.
In the
second quarter of 2017, we initiated the transition from the COSO
1992 Internal Control - Integrated Framework to the COSO 2013
Internal Control - Integrated Framework. Progress thus far has
centered on strengthening our risk assessment process as well as
our information technology policies and related documentation. We
expect this transition to continue for the remainder of fiscal
2018. Although we do not expect to experience significant changes
in internal control over financial reporting as a result of our
transition, we may identify significant deficiencies or material
weaknesses and incur additional costs in the future as a result of
our transition.
Disclosure Controls and Procedures
Under
the supervision and with the participation of our management,
including the Chief Executive Officer and the Chief Financial
Officer, we have evaluated the effectiveness of our disclosure
controls and procedures as of November 30, 2017. Disclosure
controls and procedures are designed to ensure that the information
required to be disclosed by the Company in the reports it files or
submits under securities legislation is recorded, processed,
summarized and reported on a timely basis and that such information
is accumulated and communicated to management, including the
Company’s Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow required disclosures to be made
in a timely fashion. Based on that evaluation, management has
concluded that these disclosure controls and procedures were
effective as of November 30, 2017.
Changes in Internal Control over Financial Reporting
During
the year ended November 30, 2017, there were no changes made to the
Company’s internal control over financial reporting that have
materially affected, or are reasonably likely to materially affect,
the Company’s internal control over financial reporting, and
specifically, there were no changes in accounting functions, board
or related committees and charters, or auditors; no functions,
controls or financial reporting processes of any constituent
entities were adopted as the Company’s functions, controls
and financial processes; and no other significant business
processes were implemented.
Attestation of Internal Control over Financial
Reporting
This
annual report does not include an attestation report of our
independent registered public accounting firm regarding internal
control over financial reporting for the Company. As the Company is
a non-accelerated filer, management’s report is not subject
to attestation by our independent registered public accounting firm
pursuant to Section 404(c) of the Sarbanes-Oxley Act of
2002.
Item
16.
[Reserved
]
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,
2017, no waivers or requests for exemptions from the Code of Ethics
were either requested or granted.
Our
current auditor is MNP LLP (“
MNP
”), Independent Registered
Public Accounting Firm, 111 Richmond Street West, Suite 300,
Toronto, ON M5H 2G4. MNP is independent with respect to the Company
within the meaning of the Rules of Professional Conduct of the
Chartered Professional Accountants of Ontario, the rules and
standards of the Public Company Accounting Oversight Board (United
States) and the securities laws and regulations administered by the
SEC.
The
aggregate amounts billed by MNP to us for the years ended November
30, 2017 and 2016 for audit fees, audit-related fees, tax fees and
all other fees are set forth below:
|
|
2017
|
2016
|
|
Audit
Fees(1)
|
C$
129,342
|
-
|
|
Audit-Related
Fees(2)
|
C$
210,791
|
C$
75,664
|
|
Tax
Fees(3)
|
-
|
-
|
|
All Other
Fees(4)
|
-
|
C$
24,075
|
|
Total
Fees
|
C$
340,133
|
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, 2017 and
2016, all of the non-audit services provided by the Company’s
external auditor were approved by the Chairman of the Audit
Committee.
Item 16D. Exemptions from
the Listing Standards for Audit Committees
.
Not
applicable.
Neither
the Company nor, to our knowledge, any affiliated purchaser has
made any purchases of our registered shares during the last
financial year.
The
disclosure related to Item 16-F was previously reported, as that
term is defined in Rule 12b-2 under the U.S. Exchange Act, in our
Form 20-F filed on February 28, 2017.
The
Company is the successor issuer to Vasogen Inc. for reporting
purposes under the U.S. Exchange Act. Our common shares are
currently listed on the TSX and quoted for trading on Nasdaq, in
each case under the symbols “
IPCI.
” Our shares began trading on
October 22, 2009, when the IPC Arrangement Agreement with Vasogen
was completed.
Variations from Certain Nasdaq Rules
Nasdaq
listing rules permit the Company to follow certain home country
practices in lieu of compliance with certain Nasdaq corporate
governance rules. Set forth below are the requirements of Nasdaqs
Rule 5600 Series that the Company does not follow and the home
country practices that it follows in lieu thereof and other
differences from domestic U.S. companies that apply to us under
Nasdaq’s corporate governance rules.
Shareholder Approval in Connection
with Certain Transactions
: Nasdaq’s Rule 5635 requires
each issuer to obtain shareholder approval prior to certain
dilutive events, including: (i) a transaction other than a public
offering involving the sale under certain circumstances of 20% or
more of the issuer’s common shares outstanding prior to the
transaction at a price less than the greater of book value or
market value, (ii) the acquisition of the stock or assets of
another company; (iii) equity-based compensation of officers,
directors, employees or consultants and (iv) a change of control.
Under the exemption available to foreign private issuers under
Nasdaq Rule 5615(a)(3), the Company does not follow Nasdaq Rule
5635. Instead, and in accordance with the Nasdaq exemption, the
Company complies with applicable TSX rules and applicable Canadian
corporate and securities regulatory requirements.
Independence of the Majority of the
Board of Directors; Independent Director Oversight of Executive
Compensation and Board Nominations
: Nasdaq’s Rule
5605(b)(1) requires that the Board of Directors be comprised of a
majority of independent directors, as defined in Rule 5605(a)(2).
Nasdaq’s Rule 5605(b)(2) requires the independent members of
the Board to regularly hold executive sessions where only those
directors are present. Moreover, Nasdaq’s Rule 5605(d)
requires independent director oversight of executive officer
compensation arrangements by approval of such compensation by a
majority of the independent directors or by a compensation
committee comprised solely of independent directors, and Rule
5605(e) requires similar oversight with respect to the process of
selecting nominees to the Board. Under the exemption available to
foreign private issuers under Rule 5615(a)(3), the Company does not
follow Nasdaq Rules 5605(b)(1), 5605(d) or 5605(e). Instead, and in
accordance with the Nasdaq exemption, the Company complies with the
applicable TSX rules and applicable Canadian corporate and
securities regulatory requirements.
Disclosure of Waivers of Code of
Business Conduct and Ethics
: Domestic U.S. Nasdaq listed
companies are required under Nasdaq Rule 5610 to disclose any
waivers of their codes of conduct for directors or executive
officers in a Form 8-K within four business days. As a foreign
private issuer we are required to disclose any such waivers either
in a Form 6-K or in the Company’s next Form 20-F or
40-F.
Item 16H. Mine
Safety Disclosure
.
Not
applicable.
PART
III.
See
Item 18 below.
114
Consolidated
financial statements of
Intellipharmaceutics
International
Inc.
November 30, 2017,
2016 and 2015
Intellipharmaceutics
International Inc.
November 30, 2017,
2016 and 2015
Table of
contents
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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 sheets of Intellipharmaceutics
International Inc. and its subsidiaries (the “Company”)
as of November 30, 2017 and 2016, and the related consolidated
statements of operations and comprehensive loss,
shareholders’ equity (deficiency) and cash flows, for each of
the years in the two-year period ended November 30, 2017. The
Company’s management is responsible for these consolidated
financial statements. Our responsibility is to express an opinion
on these consolidated financial statements based on our
audits.
We conducted our
audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States) and Canadian generally
accepted auditing standards. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an
audit of its internal control over financial reporting. Our audits
included consideration of internal control over financial reporting
as a basis for designing audit procedures that are appropriate in
the circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Company’s internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the
consolidated financial statements referred to above present fairly,
in all material respects, the financial position of the Company as
of November 30, 2017 and 2016, and the results of its operations
and its cash flows for each of the years in the two-year period
ended November 30, 2017, in conformity with accounting principles
generally accepted in the United States of America.
The accompanying
consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note
1 to the consolidated financial statements, the Company’s
recurring losses from operations raise substantial doubt about its
ability to continue as a going concern. Management’s plans
concerning these matters are also discussed in Note 1 to the
consolidated financial statements. The consolidated financial
statements do not include any adjustments that might result from
the outcome of this uncertainty.
Other
Matters
The consolidated
financial statements of Intellipharmaceutics International Inc. and
its subsidiaries as at November 30, 2015 and for the year ended
November 30, 2015 were audited by another firm of Chartered
Professional Accountants who expressed an unqualified opinion in
their report dated February 26, 2016.
|
|
/s/ MNP LLP
|
|
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Toronto,
Canada
|
Chartered
Professional Accountants
|
|
February 15,
2018
|
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 statements of operations and
comprehensive loss, cash flows and shareholders’ (deficiency)
equity of Intellipharmaceutics International Inc. and subsidiaries
(the “Company”) for the year ended November 30, 2015.
These consolidated financial statements are the responsibility of
the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audit.
We conducted our
audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States) and Canadian generally
accepted auditing standards. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether
the consolidated financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for our
opinion.
In our opinion,
such consolidated financial statements present fairly, in all
material respects, the results of the Company’s operations
and its cash flows for the year ended November 30, 2015, in
conformity with accounting principles generally accepted in the
United States of America.
The accompanying
consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note
1 to the consolidated financial statements, the Company's recurring
losses from operations and shareholders' deficiency raise
substantial doubt about its ability to continue as a going concern.
Management's plans concerning these matters are also discussed in
Note 1 to the consolidated financial statements. The consolidated
financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ Deloitte
LLP
Chartered
Professional Accountants
Licensed Public
Accountants
February 26,
2016
Intellipharmaceutics
International Inc.
Notes
to the consolidated financial statements
November 30, 2017, 2016 and
2015
(Stated in U.S.
dollars)
1.
Nature
of operations
Intellipharmaceutics
International Inc. (“IPC” or the “Company”)
is a pharmaceutical company specializing in the research,
development and manufacture of novel and generic controlled-release
and targeted-release oral solid dosage drugs.
On October 22,
2009, IntelliPharmaCeutics Ltd. (“IPC Ltd. “) and
Vasogen Inc. (“Vasogen”) completed a court approved
plan of arrangement and merger (the “IPC Arrangement
Agreement”), resulting in the formation of the Company, which
is incorporated under the laws of Canada. The Company’s
common shares are traded on the Toronto Stock Exchange and
NASDAQ.
The Company earns
revenue from non-refundable upfront fees, milestone payments upon
achievement of specified research or development, exclusivity
milestone payments and licensing and cost plus payments on sales of
resulting products and other incidental services. In November 2013,
the U.S. Food and Drug Administration (“FDA”) granted
the Company final approval to market the Company’s first
product, the 15 mg and 30 mg strengths of the Company’s
generic Focalin XR® (dexmethylphenidate hydrochloride
extended-release) capsules. In 2017, the FDA granted final approval
for the remaining 6 (six) strengths, all of which have been
launched. In May 2017, the FDA granted the Company final approval
for its second commercialized product, the 50, 150, 200, 300 and
400 mg strengths of generic Seroquel XR® (quetiapine fumarate
extended release) tablets, and the Company commenced shipment of
all strengths that same month.
Going concern
The consolidated
financial statements are prepared on a going concern basis, which
assumes that the Company will be able to meet its obligations and
continue its operations for the next twelve months. The Company has
incurred losses from operations since inception and has reported
losses of $8,857,440 for the year ended November 30, 2017 (2016 -
$10,143,577; 2015 - $7,436,388), and has an accumulated deficit of
$71,873,459 as at November 30, 2017 (November 30, 2016 -
$63,016,019). The Company also has a working capital deficiency of
$1,083,970 as at November 30, 2017. The Company has funded its
research and development (“R&D”) activities
principally through the issuance of securities, loans from related
parties, funds from the IPC Arrangement Agreement, and funds
received under development agreements. There is no certainty that
such funding will be available going forward. These conditions
raise substantial doubt about its ability to continue as a going
concern and realize its assets and pay its liabilities as they
become due.
In order for the
Company to continue as a going concern and fund any significant
expansion of its operation or R&D activities, the Company may
require significant additional capital. Although there can be no
assurances, such funding may come from revenues from the sales of
the Company’s generic Focalin XR® (dexmethylphenidate
hydrochloride extended-release) capsules, from revenues from the
sales of the Company’s generic Seroquel XR® (quetiapine
fumarate extended-release) tablets, from proceeds of the
Company’s at-the-market offering program and from potential
partnering opportunities. Other potential sources of capital may
include payments from licensing agreements, cost savings associated
with managing operating expense levels, other equity and/or debt
financings, and/or new strategic partnership agreements which fund
some or all costs of product development. The Company’s
ultimate success will depend on whether its product candidates
receive the approval of the FDA or Health Canada and whether it is
able to successfully market approved products. The Company cannot
be certain that it will be able to receive FDA or Health Canada
approval for any of its current or future product candidates, or
that it will reach the level of sales and revenues necessary to
achieve and sustain profitability, or that the Company can secure
other capital sources on terms or in amounts sufficient to meet its
needs at all.
The availability of
equity or debt financing will be affected by, among other things,
the results of the Company’s R&D, its ability to obtain
regulatory approvals, its success in commercializing approved
products with its commercial partners and the market acceptance of
its products, the state of the capital markets generally, strategic
alliance agreements, and other relevant commercial considerations.
In addition, if the Company raises additional funds by issuing
equity securities, its then existing security holders will likely
experience dilution, and the incurring of indebtedness would result
in increased debt service obligations and could require the Company
to agree to operating and financial covenants that
Notes
to the consolidated financial statements
November 30, 2017, 2016 and
2015
(Stated in U.S.
dollars)
1.
Nature
of operations (continued)
Going concern (continued)
would restrict its
operations. Any failure on its part to successfully commercialize
approved products or raise additional funds on terms favorable to
the Company or at all, may require the Company to significantly
change or curtail its current or planned operations in order to
conserve cash until such time, if ever, that sufficient proceeds
from operations are generated, and could result in the Company not
taking advantage of business opportunities, in the termination or
delay of clinical trials or the Company not taking any necessary
actions required by the FDA or Health Canada for one or more of the
Company’s product candidates, in curtailment of the
Company’s product development programs designed to identify
new product candidates, in the sale or assignment of rights to its
technologies, products or product candidates, and/or its inability
to file Abbreviated New Drug Applications (“ANDAs”),
Abbreviated New Drug Submissions (“ANDSs”) or New Drug
Applications (“NDAs”) at all or in time to
competitively market its products or product
candidates.
The consolidated
financial statements do not include any adjustments that might
result from the outcome of uncertainties described above. If the
going concern assumption no longer becomes appropriate for these
consolidated financial statements, then adjustments would be
necessary to the carrying values of assets and liabilities, the
reported expenses and the balance sheet classifications used. Such
adjustments could be material.
2.
Basis
of presentation
(a)
Basis of consolidation
These consolidated
financial statements include the accounts of the Company and its
wholly owned operating subsidiaries, IPC Ltd., Intellipharmaceutics
Corp. (“IPC Corp”), and Vasogen Corp.
All inter-company
accounts and transactions have been eliminated on
consolidation.
(b)
Use of estimates
The preparation of
the consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America
(“U.S. GAAP”) requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenue and expenses during the year. Actual results could differ
from those estimates.
Areas where
significant judgment is involved in making estimates are: the
determination of the functional currency; the fair values of
financial assets and liabilities; the determination of units of
accounting for revenue recognition; the accrual of licensing and
milestone revenue; and forecasting future cash flows for assessing
the going concern assumption.
3.
Significant
accounting policies
(a)
Cash and cash equivalents
The Company
considers all highly liquid securities with an original maturity of
three months or less to be cash equivalents. Cash equivalent
balances consist of bankers’ acceptances
and
bank accounts with variable
market rates of interest. As at November 30, 2017 and 2016, the
Company had no cash equivalents.
The financial risks
associated with these instruments are minimal and the Company has
not experienced any losses from investments in these securities.
The carrying amount of cash approximates its fair value due to its
short-term nature.
(b)
Accounts receivable
The Company reviews
its sales and accounts receivable aging and determines whether an
allowance for doubtful accounts is required.
Notes
to the consolidated financial statements
November 30, 2017, 2016 and
2015
(Stated in U.S.
dollars)
3.
Significant
accounting policies (continued)
(c) Financial
instruments
The Company
evaluates all of its financial instruments to determine if such
instruments are derivatives or contain features that qualify as
embedded derivatives. For derivative financial instruments that are
classified as liabilities, the derivative instrument is initially
recorded at its fair value using the appropriate valuation
methodology and is then re-valued at each reporting date, with
changes in the fair value reported in the consolidated statements
of operations and comprehensive loss.
(d) Investment tax credits
The investment tax
credits (“ITC") receivable are amounts considered recoverable
from the Canadian federal and provincial governments under the
Scientific Research & Experimental Development
(“SR&ED”) incentive program. The amounts claimed
under the program represent the amounts based on management
estimates of eligible research and development costs incurred
during the year. Realization is subject to government approval. Any
adjustment to the amounts claimed will be recognized in the year in
which the adjustment occurs. Refundable ITCs claimed relating to
capital expenditures are credited to property and equipment.
Refundable ITCs claimed relating to current expenditures are netted
against research and development expenditures.
(e) Property and
equipment
Property and
equipment are recorded at cost. Equipment acquired under capital
leases are recorded net of imputed interest, based upon the net
present value of future payments. Assets under capital leases are
pledged as collateral for the related lease obligation. Repairs and
maintenance expenditures are charged to operations; major
betterments and replacements are capitalized. Depreciation bases
and rates are as follows:
Leasehold
improvements and assets acquired under capital leases are
depreciated over the term of their useful lives or the lease
period, whichever is shorter. The charge to operations resulting
from depreciation of assets acquired under capital leases is
included with depreciation expense.
(f) Impairment of long-lived
assets
Long-lived assets
are reviewed for impairment when events or circumstances indicate
that the carrying value of an asset may not be recoverable. For
assets that are to be held and used, impairment is recognized when
the sum of estimated undiscounted cash flows associated with the
asset or group of assets is less than its carrying value. If
impairment exists, an adjustment is made to write the asset down to
its fair value, and a loss is recorded as the difference between
the carrying value and fair value.
(g) Warrants
The Company
previously issued warrants as described in Notes 10 and 14. In
fiscal 2013, the outstanding warrants were presented as a liability
because they did not meet the criteria of Accounting Standard
Codification (“ASC”) topic 480 Distinguishing
Liabilities from Equity for equity classification. Subsequent
changes in the fair value of the warrants were recorded in the
consolidated statements of operations and comprehensive loss. The
Company changed its functional currency effective December 1, 2013
such that these warrants met the criteria for prospective equity
classification in ASC topic 480, and the U.S. dollar translated
amount of the warrant liability at December 1, 2013 became the
amount reclassified to equity.
Intellipharmaceutics
International Inc.
Notes
to the consolidated financial statements
November 30, 2017, 2016 and
2015
(Stated in U.S.
dollars)
3.
Significant
accounting policies (continued)
(h) Convertible
debenture
In fiscal 2013, the
Company issued an unsecured convertible debenture in the principal
amount of $1.5 million (the “Debenture”) as described
in Note 7. At issuance, the conversion option was bifurcated from
its host contract and the fair value of the conversion option was
characterized as an embedded derivative upon issuance as it met the
criteria of ASC topic 815 Derivatives and Hedging. Subsequent
changes in the fair value of the embedded derivative were recorded
in the consolidated statements of operations and comprehensive
loss. The proceeds received from the Debenture less the initial
amount allocated to the embedded derivative were allocated to the
liability and were accreted over the life of the Debenture using
the imputed rate of interest. The Company changed its functional
currency effective December 1, 2013 such that the conversion option
no longer met the criteria for bifurcation and was prospectively
reclassified to shareholders’ equity under ASC Topic 815 at
the U.S. dollar translated amount at December 1, 2013.
(i) Revenue recognition
The Company
accounts for revenue in accordance with the provisions of ASC topic
605 Revenue Recognition. The Company earns revenue from
non-refundable upfront fees, milestone payments upon achievement of
specified research or development, exclusivity milestone payments
and licensing payments on sales of resulting products and other
incidental services. Revenue is realized or realizable and earned
when persuasive evidence of an arrangement exists, delivery has
occurred or services have been rendered, the price to the customer
is fixed or determinable, and collectability is reasonably assured.
From time to time, the Company enters into transactions that
represent multiple-element arrangements. Management evaluates
arrangements with multiple deliverables to determine whether the
deliverables represent one or more units of accounting for the
purpose of revenue recognition.
A delivered item is
considered a separate unit of accounting if the delivered item has
stand-alone value to the customer, the fair value of any
undelivered items can be reliably determined, and the delivery of
undelivered items is probable and substantially in the Company's
control.
The relevant
revenue recognition accounting policy is applied to each separate
unit of accounting.
Licensing
The Company
recognizes revenue from the licensing of the Company's drug
delivery technologies, products and product candidates. Licensing
revenue is recognized as earned in accordance with the contract
terms when the amounts can be reasonably estimated and
collectability is reasonably assured.
The Company has a
license and commercialization agreement with Par Pharmaceutical
Inc. (“Par”). Under the exclusive territorial license
rights granted to Par, the agreement requires that Par manufacture,
promote, market, sell and distribute the product. Licensing revenue
amounts receivable by the Company under this agreement are
calculated and reported to the Company by Par, with such amounts
generally based upon net product sales and net profit which include
estimates for chargebacks, rebates, product returns, and other
adjustments. Licensing revenue payments received by the Company
from Par under this agreement are not subject to further deductions
for chargebacks, rebates, product returns, and other pricing
adjustments. Based on this arrangement and the guidance per ASC
topic 605, the Company records licensing revenue as earned in the
consolidated statements of operations and comprehensive
loss.
The Company also
has a license and commercial supply agreement with Mallinckrodt LLC
(“Mallinckrodt”) which provides Mallinckrodt an
exclusive license to market sell and distribute in the U.S. three
drug product candidates for which the Company has ANDAs filed with
the FDA. Under the terms of this agreement, the Company is
responsible for the manufacture of approved products for subsequent
sale by Mallinckrodt in the U.S. market, one of which (the
Company’s generic Seroquel XR®) received final approval
from the FDA in 2017. Following receipt of final FDA approval for
its generic Seroquel XR®, the Company began shipment of
manufactured product to Mallinckrodt.
Intellipharmaceutics
International Inc.
Notes
to the consolidated financial statements
November 30, 2017, 2016 and
2015
(Stated in U.S.
dollars)
3.
Significant
accounting policies (continued)
Licensing (continued)
Licensing revenue
in respect of manufactured product is reported as revenue in
accordance with ASC topic 605. Once product is sold by
Mallinckrodt, the Company receives downstream licensing revenue
amounts calculated and reported by Mallinckrodt, with such amounts
generally based upon net product sales and net profit which
includes estimates for chargebacks, rebates, product returns, and
other adjustments. Such downstream licensing revenue payments
received by the Company under this agreement are not subject to
further deductions for chargebacks, rebates, product returns, and
other pricing adjustments. Based on this agreement and the guidance
per ASC topic 605, the Company records licensing revenue as earned
in the consolidated statements of operations and comprehensive
loss.
Milestones
The milestone
method recognizes revenue on substantive milestone payments in the
period the milestone is achieved. Milestones are considered
substantive if all of the following conditions are met: (i) the
milestone is commensurate with either the vendor’s
performance to achieve the milestone or the enhancement of the
value of the delivered item or items as a result of a specific
outcome resulting from the vendor’s performance to achieve
the milestone; (ii) the milestone relates solely to past
performance; and (iii) the milestone is reasonable relative to all
of the deliverables and payment terms within the arrangement.
Non-substantive milestone payments that might be paid to the
Company based on the passage of time or as a result of a
partner’s performance are allocated to the units of
accounting within the arrangement; they are recognized as revenue
in a manner similar to those units of accounting.
Research and development
Under arrangements
where the license fees and research and development activities can
be accounted for as a separate unit of accounting, non-refundable
upfront license fees are deferred and recognized as revenue on a
straight-line basis over the expected term of the Company's
continued involvement in the research and development
process.
Deferred revenue
Deferred revenue
represents the funds received from clients, for which the revenues
have not yet been earned, as the milestones have not been achieved,
or in the case of upfront fees for drug development, where the work
remains to be completed. During the year ended November 30, 2016,
the Company received an up-front payment of $3,000,000 from
Mallinckrodt pursuant to the Mallinckrodt license and commercial
supply agreement, and initially recorded it as deferred revenue, as
it did not meet the criteria for recognition. For the year ended
November 30, 2017, the Company recognized $300,000 (2016 - $37,500)
of revenue based on a straight-line basis over the expected term of
the Mallinckrodt agreement of 10 years. In 2015, the Company
received an up-front payment of $150,000 from Teva Pharmaceuticals
USA, Inc. which the Company recognized as revenue during the year
ended November 30, 2017.
As of November 30,
2017, the Company has recorded a deferred revenue balance of
$2,662,500 (November 30, 2016 - $3,112,500) relating to the
underlying contracts, of which $300,000 (November 30, 2016 -
$450,000) is considered a current portion of deferred
revenue.
Other incidental services
Incidental services
which the Company may provide from time to time include consulting
advice provided to other organizations regarding FDA standards.
Revenue is earned and realized when all of the following conditions
are met: (i) there is persuasive evidence of an arrangement; (ii)
service has been rendered; (iii) the sales price is fixed or
determinable; and (iv) collectability is reasonably
assured.
Intellipharmaceutics
International Inc.
Notes
to the consolidated financial statements
November 30, 2017, 2016 and
2015
(Stated in U.S.
dollars)
3.
Significant
accounting policies (continued)
(j)
Research and development costs
Research and
development costs related to continued research and development
programs are expensed as incurred in accordance with ASC topic 730.
However, materials and equipment are capitalized and amortized over
their useful lives if they have alternative future
uses.
(k)
Inventory
Inventories
comprise raw material, work in process, and finished goods, which
are valued at the lower of cost or market, on a first-in, first-out
basis. Cost for work in process and finished goods inventories
includes materials, direct labor, and an allocation of
manufacturing overhead. Market for raw materials is replacement
cost, and for work in process and finished goods is net realizable
value. The Company evaluates the carrying value of inventories on a
regular basis, taking into account such factors as historical and
anticipated future sales compared with quantities on hand, the
price the Company expects to obtain for products in their
respective markets compared with historical cost and the remaining
shelf life of goods on hand. As of November 30, 2017, the Company
had raw materials inventories of $115,667 relating to the
Company’s generic Seroquel XR® product. The
recoverability of the cost of any pre-launch inventories with a
limited shelf life is evaluated based on the specific facts and
circumstances surrounding the timing of the anticipated product
launch.
(l)
Income taxes
The Company uses
the liability method of accounting for income taxes. Under the
liability method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and
for losses and tax credit carry forwards. Significant judgment is
required in determining whether deferred tax assets will be
realized in full or in part. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
income in the year that includes the date of enactments. A
valuation allowance is provided for the portion of deferred tax
assets that is more likely than not to remain
unrealized.
The Company
accounts for income taxes in accordance with ASC topic 740-10. This
ASC topic requires that uncertain tax positions are evaluated in a
two-step process, whereby (i) the Company determines whether
it is more likely than not that the tax positions will be sustained
based on the technical merits of the position and (ii) those tax
positions that meet the more likely than not recognition threshold,
the Company would recognize the largest amount of tax benefit that
is greater than 50% likely of being realized upon ultimate
settlement with the related tax authority. Changes in recognition
or measurement are reflected in the period in which the change in
judgment occurs. The cumulative effects of the application of the
provisions of ASC topic 740-10 are described in
Note 15.
The Company records
any interest related to income taxes in interest expense and
penalties in selling, general and administrative
expense.
(m)
Share issue costs
Share issue costs
are recorded as a reduction of the proceeds from the issuance of
capital stock.
(n)
Translation of foreign currencies
Transactions
denominated in currencies other than the Company and its wholly
owned operating subsidiaries’ functional currencies, the
monetary assets and liabilities are translated at the period end
rates. Revenue and expenses are translated at rates of exchange
prevailing on the transaction dates. All of the exchange gains or
losses resulting from these other transactions are recognized in
the consolidated statements of operations and comprehensive
loss.
The Company’s
functional and reporting currency is the U.S. dollar.
Intellipharmaceutics
International Inc.
Notes
to the consolidated financial statements
November 30, 2017, 2016 and
2015
(Stated in U.S.
dollars)
3.
Significant
accounting policies (continued)
(o)
Stock-based compensation
The Company has a
stock-based compensation plan which authorizes the granting of
various equity-based incentives including stock options and
restricted share units (“RSU”s). The Company calculates
stock-based compensation using the fair value method, under which
the fair value of the options at the grant date is calculated using
the Black-Scholes Option Pricing Model, and subsequently expensed
over the vesting period of the option. The provisions of the
Company's stock-based compensation plans do not require the Company
to settle any options by transferring cash or other assets, and
therefore the Company classifies the awards as equity. Stock-based
compensation expense recognized during the year is based on the
value of stock-based payment awards that are ultimately expected to
vest.
The Company
estimates forfeitures at the time of grant and are revised, if
necessary, in subsequent periods if actual forfeitures differ from
those estimates. The stock-based compensation expense is recorded
in the consolidated statements of operations and comprehensive loss
under research and development expense and under selling, general
and administration expense. Note 11 provides supplemental
disclosure of the Company's stock options.
(p)
Deferred Share Units
Deferred Share
Units (“DSU”s) are valued based on the trading price of
the Company’s common shares on the Toronto Stock Exchange.
The Company records the value of the DSU’s owing to
non-management board members in the consolidated statement of
shareholders’ equity (deficiency).
(q)
Loss per share
Basic loss per
share (“EPS”) is computed by dividing the loss
attributable to common shareholders by the weighted average number
of common shares outstanding. Diluted EPS reflects the potential
dilution that could occur from common shares issuable through the
exercise or conversion of stock options, restricted stock awards,
warrants and convertible securities. In certain circumstances, the
conversion of options, warrants and convertible securities are
excluded from diluted EPS if the effect of such inclusion would be
anti-dilutive.
The dilutive effect
of stock options is determined using the treasury stock method.
Stock options and warrants to purchase 9,807,909, 7,540,266 and
7,128,082 common shares of the Company during fiscal 2017, 2016,
and 2015, respectively, were not included in the computation of
diluted EPS because the Company has incurred a loss for the years
ended November 30, 2017, 2016 and 2015 as the effect would be
anti-dilutive.
(r)
Comprehensive loss
The Company follows
ASC topic 220. This statement establishes standards for reporting
and display of comprehensive (loss) income and its components.
Comprehensive loss is net loss plus certain items that are recorded
directly to shareholders' equity. Other than foreign exchange gains
and losses arising from cumulative translation adjustments, the
Company has no other comprehensive loss items.
(s)
Fair value measurement
Under ASC topic
820, fair value is defined as the price that would be received to
sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date
(i.e., an exit price). ASC topic 820 establishes a hierarchy for
inputs to valuation techniques used in measuring fair value that
maximizes the use of observable inputs and minimizes the use of
unobservable inputs by requiring that the most observable inputs be
used when available. Observable inputs are inputs that reflect
assumptions market participants would use in pricing the asset or
liability developed based on market data obtained from sources
independent of the Company. Unobservable inputs are inputs that
reflect the Company's own assumptions about the assumptions market
participants would use in pricing the asset or liability developed
based on the
Intellipharmaceutics
International Inc.
Notes
to the consolidated financial statements
November 30, 2017, 2016 and
2015
(Stated in U.S.
dollars)
3.
Significant
accounting policies (continued)
(s)
Fair value measurement (continued)
best information
available in the circumstances. There are three levels to the
hierarchy based on the reliability of inputs, as
follows:
● Level
1 - Observable inputs that reflect quoted prices (unadjusted) for
identical assets or liabilities in active markets.
● Level
2 - Inputs other than quoted prices included in Level 1 that are
observable for the asset or liability, either directly or
indirectly. Level 2 inputs include quoted prices for similar assets
or liabilities in active markets, or quoted prices for identical or
similar assets and liabilities in markets that are not
active.
● Level
3 - Unobservable inputs for the asset or liability.
The degree of
judgment exercised by the Company in determining fair value is
greatest for instruments categorized in Level 3.
(t)
Future accounting pronouncements
In May 2014, the
Financial Accounting Standards Board ("FASB") issued Accounting
Standards Update (“ASU”) No. 2014-09, Revenue from
Contracts with Customers, requiring an entity to recognize the
amount of revenue to which it expects to be entitled for the
transfer of promised goods or services to customers. The updated
standard will replace most existing revenue recognition guidance in
U.S. GAAP when it becomes effective. In March 2016, the FASB issued
ASU No. 2016-08 to clarify the implementation guidance on
considerations of whether an entity is a principal or an agent,
impacting whether an entity reports revenue on a gross or net
basis. In April 2016, the FASB issued ASU No. 2016-10 to clarify
guidance on identifying performance obligations and the
implementation guidance on licensing. In May 2016, the FASB issued
amendments ASU No. 2016-11 and 2016-12 to amend certain aspects of
the new revenue guidance (including transition, collectability,
noncash consideration and the presentation of sales and other
similar taxes) and provided certain practical expedients. The
guidance is effective for annual reporting periods beginning after
December 15, 2017 (including interim reporting periods). Early
adoption is permitted but not before the annual reporting period
(and interim reporting period) beginning January 1, 2017. Entities
have the option of using either a full retrospective or a modified
approach to adopt the guidance. The Company is in the process of
evaluating the amendments to determine if they have a material
impact on the Company’s financial position, results of
operations, cash flows or disclosures.
In January 2016,
the FASB issued ASU No. 2016-01, which makes limited amendments to
the guidance in U.S. GAAP on the classification and measurement of
financial instruments. The new standard significantly revises an
entity’s accounting related to (1) the classification and
measurement of investments in equity securities and (2) the
presentation of certain fair value changes for financial
liabilities measured at fair value. It also amends certain
disclosure requirements associated with the fair value of financial
instruments. ASU No. 2016-01 is effective for fiscal years
beginning after December 15, 2017, and interim periods within those
annual periods. The Company is in the process of evaluating the
amendments to determine if they have a
material impact on
the Company’s financial position, results of operations, cash
flows or disclosures.
In February 2016,
the FASB issued new guidance, ASU No. 2016-02, Leases (Topic 842).
The main difference between current U.S. GAAP and the new guidance
is the recognition of lease liabilities based on the present value
of remaining lease payments and corresponding lease assets for
operating leases under current U.S. GAAP with limited exception.
Additional qualitative and quantitative disclosures are also
required by the new guidance. Topic 842 is effective for
annual
reporting periods
(including interim reporting periods) beginning after December 15,
2018. Early adoption is permitted. The Company is in the process of
evaluating the amendments to determine if they have a material
impact on the Company’s financial position, results of
operations, cash flows or disclosures.
Intellipharmaceutics
International Inc.
Notes
to the consolidated financial statements
November 30, 2017, 2016 and
2015
(Stated in U.S.
dollars)
3.
Significant
accounting policies (continued)
(t)
Future accounting pronouncements (continued)
In August 2016, the
FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230)
Classification of Certain Cash Receipts and Cash Payments, which
will make eight targeted changes to how cash receipts and cash
payments are presented and classified in the Statement of Cash
Flows. ASU 2016-15 will be effective on May 1, 2018 and will
require adoption on a retrospective basis unless it is
impracticable to apply, in which case the Company would be required
to apply the amendments prospectively as of the earliest date
practicable. The Company is in the process of evaluating the
amendments to determine if they have a material impact on the
Company’s financial position, results of operations, cash
flows or disclosures.
In August 2016, the
FASB issued ASU 2017-01 that changes the definition of a business
to assist entities with evaluating when a set of transferred assets
and activities is a business. The guidance requires an entity to
evaluate if substantially all of the fair value of the gross assets
acquired is concentrated in a single identifiable asset or a group
of similar identifiable assets; if so, the set of transferred
assets and activities is not a business. ASU 2017-01 also requires
a business to include at least one substantive process and narrows
the definition of outputs by more closely aligning it with how
outputs are described in ASC 606.1. ASU 2017-01 is effective for
public business entities for fiscal years beginning after December
15, 2017, and interim periods within those years. Early adoption is
permitted. The Company is in the process of evaluating the
amendments to determine if they have a material impact on the
Company’s financial position, results of operations, cash
flows or disclosures.
In May 2017, the
FASB issued ASU 2017-09 in relation to Compensation —Stock
Compensation (Topic 718), Modification Accounting. The amendments
provide guidance about which changes to the terms or conditions of
a share-based payment award require an entity to apply modification
accounting in Topic 718. The amendments are effective for all
entities for annual periods, and interim periods within those
annual periods, beginning after December 15, 2017. Early adoption
is permitted, including adoption in any interim period, for (1)
public business entities for reporting periods for which financial
statements have not yet been issued and (2) all other entities for
reporting periods for which financial statements have not yet been
made available for issuance. The amendments should be applied
prospectively to an award modified on or after the adoption date.
The Company is in the process of evaluating the amendments to
determine if they have a material impact on the Company’s
financial position, results of operations, cash flows or
disclosures.
4.
Accounts
receivable
The Company
currently has no debt agreements in place whereby any amount of
receivables serve as collateral. The Company has no
off-balance-sheet credit exposures and has no foreclosed or
repossessed assets. Accounts receivable are carried on the
consolidated balance sheet net of allowance for doubtful accounts.
This provision is established based on the Company’s best
estimates regarding the ultimate recovery of balances for which
collection is uncertain. As at November 30, 2017, the Company has
an account receivable balance of $756,468 (2016 - $472,474) and an
allowance for doubtful accounts of $66,849 (2016 - $Nil). Risks and
uncertainties and credit quality information related to accounts
receivable have been disclosed in Note 17.
Intellipharmaceutics
International Inc.
Notes
to the consolidated financial statements
November 30, 2017, 2016 and
2015
(Stated in U.S.
dollars)
5.
Property
and equipment
|
|
Computer
equipment
|
Computer
software
|
Furniture
and fixtures
|
Laboratory
equipment
|
Leasehold
improvements
|
Laboratory
equipment under capital lease
|
Computer
equipment under capital lease
|
Total
|
|
Cost
|
|
|
|
|
|
|
|
|
|
Balance
at November 30, 2015
|
$
293,870
|
$
124,151
|
$
129,860
|
$
3,483,398
|
$
1,142,122
|
$
276,300
|
$
76,458
|
$
5,526,159
|
|
Additions
|
1,426
|
-
|
-
|
450,295
|
63,689
|
-
|
-
|
515,410
|
|
Balance
at November 30, 2016
|
295,296
|
124,151
|
129,860
|
3,933,693
|
1,205,811
|
276,300
|
76,458
|
6,041,569
|
|
Additions
|
235,454
|
31,908
|
42,638
|
1,353,110
|
235,641
|
-
|
-
|
1,898,751
|
|
Balance
at November 30, 2017
|
530,750
|
156,059
|
172,498
|
5,286,803
|
1,441,452
|
276,300
|
76,458
|
7,940,320
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated depreciation
|
|
|
|
|
|
|
|
|
|
Balance
at November 30, 2015
|
214,525
|
110,860
|
104,089
|
1,968,088
|
1,142,122
|
155,203
|
71,834
|
3,766,721
|
|
Depreciation
|
24,147
|
6,646
|
5,154
|
321,986
|
1,670
|
24,219
|
1,388
|
385,210
|
|
Balance
at November 30, 2016
|
238,672
|
117,506
|
109,243
|
2,290,074
|
1,143,792
|
179,422
|
73,222
|
4,151,931
|
|
Depreciation
|
47,811
|
13,622
|
10,747
|
379,158
|
49,154
|
19,376
|
970
|
520,838
|
|
Balance
at November 30, 2017
|
286,483
|
131,128
|
119,990
|
2,669,232
|
1,192,946
|
198,798
|
74,192
|
4,672,769
|
|
|
|
|
|
|
|
|
|
|
|
Net book value at:
|
|
|
|
|
|
|
|
|
|
November
30, 2016
|
$
56,624
|
$
6,645
|
$
20,617
|
$
1,643,619
|
$
62,019
|
$
96,878
|
$
3,236
|
$
1,889,638
|
|
Balance
at November 30, 2017
|
$
244,267
|
$
24,931
|
$
52,508
|
$
2,617,571
|
$
248,506
|
$
77,502
|
$
2,266
|
$
3,267,551
|
As at November 30,
2017, there was $728,309 (2016 - $266,963; 2015 - $Nil) of
laboratory equipment that was not available for use and therefore,
no depreciation has been recorded for such laboratory
equipment.
As at November 30,
2017, there was $75,005 (2016 - $Nil) unpaid balance for purchased
equipment. During the year ended November 30, 2017, the Company
recorded depreciation expense within cost of goods sold of $13,877
(2016 - $Nil; 2015 - $Nil).
Property and
equipment are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying value of an asset may not
be recoverable. Impairment is assessed by comparing the carrying
amount of an asset with the sum of the undiscounted cash flows
expected from its use and disposal, and as such requires the
Company to make significant estimates on expected revenues from the
commercialization of its products and services and the related
expenses. The Company records a write-down for long-lived assets
which have been abandoned and do not have any residual value. For
the year ended November 30, 2017, the Company recorded a $Nil
write-down of long-lived assets (2016 - $Nil; 2015 –
$Nil).
Intellipharmaceutics
International Inc.
Notes
to the consolidated financial statements
November 30, 2017, 2016 and
2015
(Stated in U.S.
dollars)
6.
Accrued
liabilities
|
|
November 30,
2017
|
November 30,
2016
|
|
|
$
|
$
|
|
|
|
|
|
Professional
fees
|
400,796
|
190,485
|
|
Property
taxes
|
111,970
|
-
|
|
Interest
|
54,110
|
14,784
|
|
Other
|
215,493
|
179,617
|
|
|
782,369
|
384,886
|
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,
|
|
|
2017
|
2016
|
|
Convertible
debenture payable to two directors and officers of the Company,
unsecured,
12% annual interest
rate,
Payable
monthly
|
$1,290,465
|
$1,494,764
|
On January 10,
2013, the Company completed a private placement financing of an
unsecured convertible debenture in the original principal amount of
$1.5 million, which had an original maturity date of January 1,
2015. The Debenture bears interest at a rate of 12% per annum,
payable monthly, is pre-payable at any time at the option of the
Company and is convertible at any time into common shares at a
conversion price of $3.00 per common share at the option of the
holder.
Dr. Isa Odidi and
Dr. Amina Odidi, principal shareholders, directors and executive
officers of the Company purchased the Debenture and provided the
Company with the $1.5 million of the proceeds for the
Debenture.
Effective October
1, 2014, the maturity date of the Debenture was extended to July 1,
2015. Under ASC 470-50, the change in the debt instrument was
accounted for as a modification of debt. The increase in the fair
value of the conversion option at the date of the modification, in
the amount of $126,414, was recorded as a reduction in the carrying
value of the debt instrument with a corresponding increase to
additional paid-in-capital. The carrying amount of the debt
instrument is accreted over the remaining life of the Debenture
using a 15% imputed rate of interest.
Effective June 29,
2015, the July 1, 2015 maturity date for the Debenture was further
extended to January 1, 2016. Under ASC 470-50, the change in the
maturity date of the debt instrument resulted in an extinguishment
of the original Debenture as the change in the fair value of the
embedded conversion option was greater than 10% of the carrying
amount of the Debenture. In accordance with ASC 470-50-40, the
Debenture was recorded at fair value. The difference between the
fair value of the convertible Debenture after the extension and the
net carrying value of the Debenture prior to the extension of
$114,023 was recognized as a loss on the statement of operations
and comprehensive loss. The carrying amount of the debt instrument
was accreted to the face amount of the Debenture over the remaining
life of the Debenture using a 14.6% imputed rate of
interest.
Effective December
8, 2015, the January 1, 2016 maturity date of the Debenture was
extended to July 1, 2016. Under ASC 470-50, the change in the debt
instrument was accounted for as a modification of
debt.
Intellipharmaceutics
International Inc.
Notes
to the consolidated financial statements
November 30, 2017, 2016 and
2015
(Stated in U.S.
dollars)
7.
Due
to related parties (continued)
Convertible debenture
The increase in the
fair value of the conversion option at the date of the
modification, in the amount of $83,101, was recorded as a reduction
in the carrying value of the debt instrument with a corresponding
increase to additional paid-in-capital. The carrying amount of the
debt instrument is accreted over the remaining life of the
Debenture using a 6.6% imputed rate of interest.
Effective May 26,
2016, the July 1, 2016 maturity date of the Debenture was extended
to December 1, 2016. Under ASC 470-50, the change in the debt
instrument was accounted for as a modification of debt. The
increase in the fair value of the conversion option at the date of
the modification, in the amount of $19,808, was recorded as a
reduction in the carrying value of the debt instrument with a
corresponding increase to additional paid-in-capital. The carrying
amount of the debt instrument was accreted over the remaining life
of the Debenture using a 4.2% imputed rate of
interest.
Effective December
1, 2016, the maturity date of the Debenture was extended to April
1, 2017 and a principal repayment of $150,000 was made at the time
of the extension. Under ASC 470-50, the change in the debt
instrument was accounted for as a modification of debt. The
increase in the fair value of the conversion option at the date of
the modification, in the amount of $106,962, was recorded as a
reduction in the carrying value of the debt instrument with a
corresponding increase to additional paid-in-capital. The carrying
amount of the debt instrument is accreted over the remaining life
of the Debenture using a 26.3% imputed rate of
interest.
Effective March 28,
2017, the maturity date of the Debenture was extended to October 1,
2017. Under ASC 470-50, the change in the debt instrument was
accounted for as a modification of debt. The increase in the fair
value of the conversion option at the date of the modification, in
the amount of $113,607, was recorded as a reduction in the carrying
value of the debt instrument with a corresponding increase to
additional paid-in-capital. The carrying amount of the debt
instrument is accreted over the remaining life of the Debenture
using a 15.2% imputed rate of interest.
Effective September
28, 2017, the maturity date of the Debenture was extended to
October 1, 2018. Under ASC 470-50, the change in the debt
instrument was accounted for as a modification of debt. The
increase in the fair value of the conversion option at the date of
the modification, in the amount of $53,227, was recorded as a
reduction in the carrying value of the debt instrument with a
corresponding increase to additional paid-in-capital. The carrying
amount of the debt instrument is accreted over the remaining life
of the Debenture using a 4.9% imputed rate of
interest.
Accreted interest
expense during the year ended November 30, 2017 is $219,497 (2016 -
$79,245; 2015 - $27,103), and has been included in the consolidated
statements of operations and comprehensive loss.
In addition, the
coupon interest on the Debenture for the year ended November 30,
2017 is $162,530 (2016 - $180,370; 2015 - $179,878), and has also
been included in the consolidated statements of operations and
comprehensive loss.
8.
Employee
costs payable
As at
November 30, 2017, the Company had $214,980 (2016 - $205,246)
accrued vacation payable to certain employees and had $Nil (2016 -
$838,905) accrued bonus payable to executive officers of the
Company. These balances are due on demand and therefore presented
as current liabilities.
9.
Lease
obligations
On December 1,
2015, the Company entered into a new lease agreement for the
premises that it currently operates from, as well the adjoining
property which is owned by the same landlord, for a 5 year term
with a 5 year renewal option. The Company also has an option to
purchase the combined properties after March 1, 2017 and up to
November 30, 2020 based on a fair value purchase formula. The
Company also leases various computers and equipment under capital
leases. Future minimum lease payments under leases with terms of
one year or more are as follows at November 30, 2017:
Intellipharmaceutics
International Inc.
Notes
to the consolidated financial statements
November 30, 2017, 2016 and
2015
(Stated in U.S.
dollars)
9.
Lease
obligations (continued)
|
|
Operating
|
|
Year
ending November 30,
|
Lease
|
|
|
$
|
|
|
|
|
2018
|
186,220
|
|
2019
|
186,220
|
|
2020
|
186,220
|
|
|
558,660
|
|
|
|
|
Less:
current portion
|
186,220
|
|
Balance,
long-term portion
|
372,440
|
As at November 30,
2017, capital lease obligation balance is $Nil (2016 -
$14,829).
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, 2017, the Company had 34,704,515 (2016 -
29,789,992; 2015 - 24,244,050) common shares issued and outstanding
and no preference shares issued and outstanding.
Two officers and
directors of IPC owned directly and through their family holding
company (“Odidi Holdco”) 5,781,312 (2016 - 5,781,312)
common shares or approximately 17% (2016 - 19%; 2015 - 24%) of
IPC.
Each common share
of the Company entitles the holder thereof to one vote at any
meeting of shareholders of the Company, except meetings at which
only holders of a specified class of shares are entitled to
vote.
Holders of common
shares of the Company are entitled to receive, as and when declared
by the board of directors of the Company, dividends in such amounts
as shall be determined by the board. The holders of common shares
of the Company have the right to receive the remaining property of
the Company in the event of liquidation, dissolution, or winding-up
of the Company, whether voluntary or involuntary.
The preference
shares may at any time and from time to time be issued in one or
more series. The board of directors will, by resolution, from time
to time, before the issue thereof, fix the rights, privileges,
restrictions and conditions attaching to the preference shares of
each series. Except as required by law, the holders of any series
of preference shares will not as such be entitled to receive notice
of, attend or vote at any meeting of the shareholders of the
Company. Holders of preference shares will be entitled to
preference with respect to payment of dividends and the
distribution of assets in the event of liquidation, dissolution or
winding-up of the Company, whether voluntary or involuntary, or any
other distribution of the assets of the Company among its
shareholders for the purpose of winding up its affairs, on such
shares over the common shares of the Company and over any other
shares ranking junior to the preference shares.
(b)
In November 2013,
the Company entered into an equity distribution agreement with Roth
Capital Partners, LLC (“Roth”), pursuant to which the
Company may from time to time sell up to 5,305,484 of the
Company’s common shares for up to an aggregate of $16.8
million (or such lesser amount as may be permitted under applicable
exchange rules and securities laws and regulations) through
at-the-market issuances on the NASDAQ or otherwise. Under the
equity distribution agreement, the Company may at its discretion,
from time to time, offer and sell common shares through Roth or
directly to Roth for resale. The Company will pay Roth a
commission, or allow a discount, of 2.75% of the gross proceeds
that the Company received from any additional sales of common
shares under the equity distribution agreement. The Company has
also agreed to reimburse Roth for certain expenses relating to the
offering.
Intellipharmaceutics
International Inc.
Notes
to the consolidated financial statements
November 30, 2017, 2016 and
2015
(Stated in U.S.
dollars)
10.
Capital
stock (continued)
Authorized, issued and outstanding (continued)
During the year
ended November 30, 2017, an aggregate of 1,108,150 common shares
were sold on Nasdaq for gross proceeds of $2,541,640, with net
proceeds to the Company of $2,468,474, respectively, under the
at-the-market offering program. During the year ended November 30,
2016, an aggregate of 1,471,260 common shares were sold on Nasdaq
for gross proceeds of $3,469,449, with net proceeds to the Company
of $3,368,674, respectively, under the at-the-market offering
program. During the year ended November 30, 2015, an aggregate
of 471,439 common shares were sold for gross proceeds of
$1,290,168, with net proceeds to the Company of $1,254,178. As a
result of prior sales of the Company’s common shares under
the equity distribution agreement, as at November 30, 2017, the
Company may in the future offer and sell its common shares with an
aggregate purchase price of up to $2,927,071 pursuant to the
at-the-market program (or such lesser amount as may then be
permitted under applicable exchange rules and securities laws and
regulations). There can be no assurance that any additional shares
will be sold under the at-the-market program.
(c)
Direct costs
related to the Company’s filing of a base shelf prospectus
filed in May 2014 and declared effective in June 2014, direct costs
related to the base shelf prospectus filed in May 2017 and certain
other on-going costs related to the at the-market facility are
recorded as deferred offering costs and are being amortized and
recorded as share issuance costs against share offerings. For the
year ended November 30, 2017, costs directly related to the at
the-market facility of $73,166 (2016 - $100,775; 2015 - $38,889)
were recorded in share offering costs and an additional $220,573
(2016 - $258,287; 2015 - $39,277) of deferred costs were amortized
and recorded in share offering costs related to the at the-market
facility and base shelf prospectus. For the year ended November 30,
2017, the Company recorded $137,363 as a financing cost in the
statements of operations and comprehensive loss related to the base
shelf prospectus filed in May 2014 and expired in July
2017.
(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.
(e)
In October 2017,
the Company completed an underwritten public offering of 3,636,364
common shares at a price of $1.10 per share. The Company also
issued to the investors warrants to purchase an aggregate of
1,818,182 common shares.
The warrants
will be exercisable six months following the closing date and will
expire 30 months after the date they become exercisable
,
have a term of three years and an exercise price of $1.25 per
common share. The Company also issued to the placement agents (the
“Placement Agent Warrants”) warrants to purchase
181,818 common shares at an exercise price of $1.375 per
share.
Intellipharmaceutics
International Inc.
Notes
to the consolidated financial statements
November 30, 2017, 2016 and
2015
(Stated in U.S.
dollars)
10.
Capital
stock (continued)
Authorized, issued and outstanding
(continued)
The holders of
October 2017 Warrants (as defined below) and Placement Agent
Warrants are entitled to a cashless exercise under which the number
of shares to be issued will be based on the number of shares for
which warrants are exercised times the difference between the
market price of the common share and the exercise price divided by
the market price. The warrants are considered to be indexed to the
Company’s own stock and are therefore classified as equity
under ASC topic 480 Distinguishing Liabilities from Equity for
equity classification.
The Company
recorded $3,257,445 as the value of common shares under Capital
stock and $742,555 as the value of the warrants under additional
paid-in-capital in the consolidated statements of
shareholders’ equity (deficiency). The Company has disclosed
the terms used to value the warrants in Note 14.
The direct costs
related to the issuance of the common shares and warrants were
$500,492 and were recorded as an offset against the statement of
shareholders’ equity (deficiency) with $391,580 being
recorded under Capital stock and $108,912 being recorded under
additional paid-in-capital.
11.
Options
All grants of
options to employees after October 22, 2009 are made from the
Employee Stock Option Plan (the “Employee Stock Option
Plan”). The maximum number of common shares issuable under
the Employee Stock Option Plan is limited to 10% of the issued and
outstanding common shares of the Company from time to time, or
3,470,452 based on the number of issued and outstanding common
shares as at November 30, 2017. As at November 30, 2017, 3,064,172
options are outstanding and there were 406,280 options available
for grant under the Employee Stock Option Plan. Each option granted
allows the holder to purchase one common share at an exercise price
not less than the closing price of the Company's common shares on
the Toronto Stock Exchange on the last trading day prior to the
grant of the option. Options granted under these plans typically
have a term of 5 years with a maximum term of 10 years and
generally vest over a period of up to three years.
In August 2004, the
Board of Directors of IPC Ltd. approved a grant of 2,763,940
performance-based stock options, to two executives who were also
the principal shareholders of IPC Ltd. The vesting of these options
is contingent upon the achievement of certain performance
milestones. A total of 2,487,546 performance-based stock options
have vested as of November 30, 2017. Under the terms of the
original agreement these options were to expire in September 2014.
Effective March 27, 2014, the Company’s shareholders approved
the two year extension of the performance-based stock option expiry
date to September 2016. Effective April 19, 2016, the
Company’s shareholders approved a further two year extension
of the performance-based stock option expiry date to September
2018. As a result of the modification of the performance-based
stock option expiry date, the Company recorded additional
compensation costs of $1,177,782 related to vested performance
options during the year ended November 30, 2016. These options were
outstanding as at November 30, 2017.
In the year ended
November 30, 2017, 376,000 (2016 - 355,000; 2015 - 295,000) stock
options were granted to management and other employees and 120,000
(2016 - 105,000; 2015 - 60,000) stock options were granted to
members of the Board of Directors.
The fair value of
each option grant is estimated on the date of grant using the
Black-Scholes Option-Pricing Model, consistent with the provisions
of ASC topic 718.
Option pricing
models require the use of subjective assumptions, changes in these
assumptions can materially affect the fair value of the
options.
The Company
calculates expected volatility based on historical volatility of
the Company’s peer group that is publicly traded for options
that have an expected life that is more than eight years. For
options that have an expected life of less than eight years the
Company uses its own volatility.
The expected term,
which represents the period of time that options granted are
expected to be outstanding, is estimated based on the historical
average of the term and historical exercises of the
options.
Intellipharmaceutics
International Inc.
Notes
to the consolidated financial statements
November 30, 2017, 2016 and
2015
(Stated in U.S.
dollars)
11.
Options
(continued)
The risk-free rate
assumed in valuing the options is based on the U.S. treasury yield
curve in effect at the time of grant for the expected term of the
option. The expected dividend yield percentage at the date of grant
is Nil as the Company is not expected to pay dividends in the
foreseeable future.
The weighted
average fair value of employee stock options granted was estimated
using the following assumptions:
Details of stock
option transactions in Canadian dollars (“C$”) are as
follows:
As of
November 30, 2017, the exercise prices, weighted average
remaining contractual life of outstanding options and weighted
average grant date fair values were as follows:
|
|
|
|
|
Options
outstanding
|
|
|
Options
exercisable
|
|
|
|
Weighted
|
Weighted
|
Weighted
|
|
Weighted
|
Weighted
|
|
|
|
average
|
average
|
average
|
|
average
|
average
|
|
|
|
exercise
|
remaining
|
grant
|
|
exercise
|
grant
|
|
Exercise
|
Number
|
price
per
|
contract
|
due
|
Number
|
price
per
|
date
|
|
price
|
outstanding
|
share
|
life
(years)
|
fair
value
|
exercisable
|
share
|
fair
value
|
|
|
|
$
|
|
$
|
|
$
|
$
|
|
|
|
|
|
|
|
|
|
|
Under
2.50
|
1,251,000
|
1.43
|
3.93
|
0.99
|
920,341
|
1.49
|
1.07
|
|
2.51
- 5.00
|
4,560,835
|
3.50
|
1.81
|
1.84
|
4,284,441
|
3.49
|
1.86
|
|
5.01
- 10.00
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
10.01
- 100.00
|
16,277
|
29.11
|
0.21
|
22.89
|
16,277
|
29.11
|
22.89
|
|
|
5,828,112
|
3.20
|
|
|
5,221,059
|
3.30
|
|
Intellipharmaceutics
International Inc.
Notes
to the consolidated financial statements
November 30, 2017, 2016 and
2015
(Stated in U.S.
dollars)
11.
Options
(continued)
Total unrecognized
compensation cost relating to the unvested performance-based stock
options at November 30, 2017 is approximately $788,887 (2016 -
$2,366,659; 2015 - $2,482,528). During the year ended November 30,
2017, specific performance conditions were met as the FDA approved
two ANDAs for certain drugs, resulting in the vesting of 552,788
performance-based stock options. As a result, a stock-based
compensation expense of $1,577,772 relating to these stock options
was recognized in research and development expense (2016 -
$620,632; 2015 - $Nil).
For the year ended
November 30, 2017, 2,000 options were exercised for cash
consideration of $1,742. For the year ended November 30, 2016,
27,500 options were exercised for a cash consideration of $52,868.
For the year ended November 30, 2015, 91,000 options were exercised
for cash consideration of $167,962.
The following table
summarizes the components of stock-based compensation
expense.
|
|
November
30,
|
November
30,
|
November
30,
|
|
|
2017
|
2016
|
2015
|
|
|
$
|
$
|
$
|
|
|
|
|
|
|
Research
and development
|
1,654,051
|
1,995,805
|
152,231
|
|
Selling,
general and administrative
|
95,948
|
265,639
|
265,587
|
|
|
1,749,999
|
2,261,444
|
417,818
|
The Company has
estimated its stock option forfeitures to be approximately 4% at
November 30, 2017 (2016 – 4%; 2015 – 4%).
12.
Deferred
share units
Effective
May 28, 2010, the Company’s shareholders approved a
Deferred Share Unit (“DSU”) Plan to grant DSUs to its
non-management directors and reserved a maximum of 110,000 common
shares for issuance under the plan. The DSU Plan permits certain
non-management directors to defer receipt of all or a portion of
their board fees until termination of the board service and to
receive such fees in the form of common shares at that time. A DSU
is a unit equivalent in value to one common share of the Company
based on the trading price of the Company's common shares on the
Toronto Stock Exchange.
Upon termination of
board service, the director will be able to redeem DSUs based upon
the then market price of the Company's common shares on the date of
redemption in exchange for any combination of cash or common shares
as the Company may determine.
During the year
ended November 30, 2017 and 2016, one non-management board member
elected to receive director fees in the form of DSUs under the
Company’s DSU Plan. As at November 30, 2017, 94,131 (2016 -
76,743) DSUs are outstanding and 15,869 (2016 - 33,257) DSUs are
available for grant under the DSU Plan. The Company recorded the
following amounts related to DSUs for each of the three years ended
November 30, 2017, 2016 and 2015 in additional paid in capital and
accrued the following amounts as at November 30, 2017, 2016 and
2015:
Intellipharmaceutics
International Inc.
Notes
to the consolidated financial statements
November 30, 2017, 2016 and
2015
(Stated in U.S.
dollars)
13.
Restricted
share units
Effective
May 28, 2010, the Company’s shareholders approved a
Restricted Share Unit (“RSU”) Plan for officers and
employees of the Company and reserved a maximum of 330,000 common
shares for issuance under the plan. The RSU Plan will form part of
the incentive compensation arrangements available to officers and
employees of the Company and its designated affiliates. An RSU is a
unit equivalent in value to one common share of the Company. Upon
vesting of the RSUs and the corresponding issuance of common shares
to the participant, or on the forfeiture and cancellation of the
RSUs, the RSUs credited to the participant’s account will be
cancelled. No RSUs have been issued under the plan.
14.
Warrants
All of the
Company’s outstanding warrants are considered to be indexed
to the Company’s own stock and are therefore classified as
equity under ASC 480. The warrants, in specified situations,
provide for certain compensation remedies to a holder if the
Company fails to timely deliver the shares underlying the warrants
in accordance with the warrant terms.
In the registered
direct unit offering completed in March 2013, gross proceeds of
$3,121,800 were received through the sale of the Company’s
units comprised of common share and warrants.
The offering was
the sale of 1,815,000 units at a price of $1.72 per unit, with each
unit consisting of one common share and a five year warrant to
purchase 0.25 of a common share at an exercise price of $2.10 per
share (“March 2013 Warrants”).
The fair value of
the March 2013 Warrants of $407,558 were initially estimated at
closing using the Black-Scholes Option Pricing Model, using
volatilities of 63%, risk free interest rates of 0.40%, expected
life of 5 years, and dividend yield of Nil.
In the underwritten
public offering completed in July 2013, gross proceeds of
$3,075,000 were received through the sale of the Company’s
units comprised of common shares and warrants. The offering was the
sale of 1,500,000 units at a price of $2.05 per unit, each unit
consisting of one common share and a five year warrant to purchase
0.25 of a common share at an exercise price of $2.55 per share
(“July 2013 Warrants”).
The fair value of
the July 2013 Warrants of $328,350 were initially estimated at
closing using the Black-Scholes Option Pricing Model, using
volatilities of 62.4%, risk free interest rates of 0.58%, expected
life of 5 years, and dividend yield of Nil.
In the underwritten
public offering completed in June 2016, gross proceeds of
$5,200,000 were received through the sale of the Company’s
units comprised of common shares and warrants. The Company issued
at the initial closing of the offering an aggregate of 3,229,814
common shares and warrants to purchase an additional 1,614,907
common shares, at a price of $1.61 per unit. The warrants are
currently exercisable, have a term of five years and an exercise
price of $1.93 per common share. The underwriter also purchased at
such closing additional warrants (collectively with the warrants
issued at the initial closing, the “June 2016
Warrants”) at a purchase price of $0.001 per warrant to
acquire 242,236 common shares pursuant to the over-allotment option
exercised in part by the underwriter. The fair value of the June
2016 Warrants of $1,175,190 was initially estimated at closing
using the Black-Scholes Option Pricing Model, using volatility of
64.1%, risk free interest rates of 0.92%, expected life of 5 years,
and dividend yield of Nil.
In the underwritten
public offering completed in October 2017, gross proceeds of
$4,000,000 were received through the sale of the Company’s
common shares and warrants. The Company issued at the closing of
the offering an aggregate of 3,636,364 common shares at a price of
$1.10 per share and warrants to purchase an additional 1,818,182
common shares.
The warrants will be
exercisable six months following the closing date and will expire
30 months after the date they become exercisable
, and have
an exercise price of $1.25 per common share. (“October 2017
Warrants”). The Company also issued to the Placement Agents
Warrants to purchase 181,818 common shares at an exercise price of
$1.375 per share. The holders of October 2017 Warrants and
Placement Agent Warrants are entitled to a cashless exercise under
which the number of shares to be issued will be based on the number
of
Intellipharmaceutics
International Inc.
Notes
to the consolidated financial statements
November 30, 2017, 2016 and
2015
(Stated in U.S.
dollars)
14.
Warrants
(continued)
share for which
warrants are exercised times the difference between the market
price of the common share and the exercise price divided by the
market price. The fair value of the October 2017 Warrants of
$742,555 was initially estimated at closing using the Black-
Scholes Option Pricing Model, using volatility of 73.67%, risk free
interest rates of 1.64%, expected life of 3 years, and dividend
yield of Nil.
The fair value of
the Placement Agents Warrants were estimated at $86,196 using the
Black-Scholes Option Pricing Model, using volatility of 73.67%, a
risk free interest rate of 1.64%, an expected life of 3 years, and
a dividend yield of Nil.
The following table
provides information on the 7,140,464 warrants outstanding and
exercisable as of November 30, 2017:
|
|
|
|
Shares
issuable
|
|
|
Warrant
|
Exercise
price
|
Number
outstanding
|
Expiry
|
upon
exercise
|
|
|
|
|
|
|
|
March
2013 Warrants
|
$
2.10
|
1,491,742
|
March
22, 2018
|
372,936
|
|
July
2013 Warrants
|
$
2.55
|
870,000
|
July
31, 2018
|
217,500
|
|
June
2016 Warrants
|
$
1.93
|
2,778,722
|
June
02, 2021
|
1,389,361
|
|
October
2017 Warrants
|
$
1.25
|
1,818,182
|
October
13, 2020
|
1,818,182
|
|
Placement
Agent Warrants
|
$
1.375
|
181,818
|
October
13, 2020
|
181,818
|
|
|
|
7,140,464
|
|
3,979,797
|
During the year
ended November 30, 2017, there were cash exercises in respect of
336,018 warrants (2016 – 832,104; 2015 - 450,000) and no
cashless exercise (2016 - $Nil; 2015 - $Nil) of warrants, resulting
in the issuance of 168,009 (2016 – 357,912; 2015 - 225,000)
and $Nil (2016 - $Nil; 2015 - $Nil) common shares, respectively.
For the warrants exercised, the Company recorded a charge to
capital stock of $430,573 (2016 - $1,030,719; 2015 - $1,027,304)
comprised of proceeds of $324,258 (2016 - $700,653; 2015 -
$562,500) and the associated amount of $106,315 (2016 - $330,066;
2015 - $464,804) previously recorded in additional
paid-in-capital.
Details of warrant
transactions are as follows:
|
|
March 2013
Warrants
|
July 2013
Warrants
|
June 2016
Warrants
|
October 2017
Warrants
|
Placement Agent
Warrants
|
Total
|
|
Outstanding,
December 1, 2016
|
1,491,742
|
870,000
|
3,114,740
|
-
|
-
|
5,476,482
|
|
Issued
|
-
|
-
|
-
|
1,818,182
|
181,818
|
2,000,000
|
|
Exercised
|
-
|
-
|
(336,018
)
|
-
|
-
|
(336,018
)
|
|
Outstanding,
November 30, 2017
|
1,491,742
|
870,000
|
2,778,722
|
1,818,182
|
181,818
|
7,140,464
|
|
|
Series A
Warrants
|
March 2013
Warrants
|
July 2013
Warrants
|
June 2016
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
|
Intellipharmaceutics
International Inc.
Notes
to the consolidated financial statements
November 30, 2017, 2016 and
2015
(Stated in U.S.
dollars)
15.
Income
taxes
The Company files
Canadian income tax returns for its Canadian operations. Separate
income tax returns are filed as locally required.
The total provision
for income taxes differs from the amount which would be computed by
applying the Canadian income tax rate to loss before income taxes.
The reasons for these differences are as follows:
|
|
November
30,
|
November
30,
|
November
30,
|
|
|
2017
|
2016
|
2015
|
|
|
%
|
%
|
%
|
|
|
|
|
|
|
Statutory
income tax rate
|
26.5
|
26.5
|
26.5
|
|
|
|
|
|
|
|
$
|
$
|
$
|
|
|
|
|
|
|
Statutory
income tax recovery
|
(2,347,222
)
|
(2,688,048
)
|
(1,970,643
)
|
|
Increase
(decrease) in income taxes
|
|
|
|
|
Non-deductible
expenses/
|
|
|
|
|
non-taxable
income
|
488,769
|
640,481
|
164,723
|
|
Change
in valuation allowance
|
2,128,819
|
2,683,775
|
1,804,406
|
|
Investment
tax credit
|
-
|
-
|
(168,591
)
|
|
Financing
costs booked to equity
|
(269,715
)
|
(281,063
)
|
(23,348
)
|
|
FCR
Election
|
-
|
-
|
(253,856
)
|
|
Difference
in foreign tax rates
|
(651
)
|
-
|
-
|
|
True
up of tax returns
|
-
|
(356,095
)
|
(15,991
)
|
|
Tax
loss expired and other
|
-
|
950
|
463,300
|
|
|
-
|
-
|
-
|
The Company
recognizes deferred tax assets and liabilities for the expected
future tax consequences of temporary differences between the
carrying amounts and the tax basis of assets and liabilities and
certain carry-forward balances. Significant temporary differences
and carry-forwards are as follows:
|
|
November
30,
|
November
30,
|
November
30,
|
|
|
2017
|
2016
|
2015
|
|
|
$
|
$
|
$
|
|
|
|
|
|
|
Deferred
tax assets
|
|
|
|
|
Non-capital
loss carry-forwards
|
8,972,285
|
7,427,516
|
6,019,380
|
|
Book
and tax basis differences
|
|
|
|
|
on
assets and liabilities
|
863,215
|
3,409,343
|
2,854,916
|
|
Other
|
2,681,375
|
-
|
-
|
|
Investment
tax credit
|
2,865,404
|
2,405,365
|
-
|
|
Undeducted
research and
|
|
|
|
|
development
expenditures
|
4,158,178
|
3,710,274
|
5,394,426
|
|
Capital
loss carryforwards
|
326,064
|
-
|
-
|
|
Share
issuance cost
|
436,427
|
-
|
-
|
|
Net
operating loss carryforwards
|
14,135
|
-
|
-
|
|
|
20,317,083
|
16,952,498
|
14,268,722
|
|
Valuation
allowances for
|
|
|
|
|
deferred
tax assets
|
(20,317,083
)
|
(16,952,498
)
|
(14,268,722
)
|
|
Net
deferred tax assets
|
-
|
-
|
-
|
Intellipharmaceutics
International Inc.
Notes
to the consolidated financial statements
November 30, 2017, 2016 and
2015
(Stated in U.S.
dollars)
15.
Income
taxes (continued)
At
November 30, 2017, the Company had cumulative operating losses
available to reduce future years’ income for income tax
purposes:
|
United
States Federal net operating losses expiring
|
|
|
in
the year ended November 30,
|
|
|
|
$
|
|
|
|
|
2025
|
5,865
|
|
2026
|
34,522
|
|
|
40,387
|
At
November 30, 2017, the Company had a cumulative carry-forward
pool of Federal SR&ED expenditures in the amount of
approximately $15,690,203 (2016 - $14,000,000) which can be carried
forward indefinitely.
At
November 30, 2017, the Company had approximately $2,976,546
(2016 - $3,273,000) of unclaimed ITCs which expire from 2025 to
2037. These credits are subject to a full valuation allowance as
they are not more likely than not to be realized.
The net deferred
tax assets have been fully offset by a valuation allowance because
it is not more likely than not the Company will realize the benefit
of these deferred tax assets. The Company does not have any
recognized tax benefits as of November 30, 2017 or
November 30, 2016.
The Company files
unconsolidated federal income tax returns domestically and in
foreign jurisdictions. The Company has open tax years from 2008 to
2017 with tax jurisdictions including Canada and the U.S. These
open years contain certain matters that could be subject to
differing interpretations of applicable tax laws and regulations,
as they relate to amount, timing, or inclusion of revenues and
expenses.
The Company did not
incur any interest expense related to uncertain tax positions in
2017, 2016 and 2015 or any penalties in those years. The Company
had no accrued interest and penalties as of November 30, 2017,
2016 and 2015.
The Company had no
unrecognized tax benefits in 2017, 2016 and 2015, and the Company
does not expect that the unrecognized tax benefit will increase
within the next twelve months.
Intellipharmaceutics
International Inc.
Notes
to the consolidated financial statements
November 30, 2017, 2016 and
2015
(Stated in U.S.
dollars)
16.
Contingencies
From
time to time, the Company may be exposed to claims and legal
actions in the normal course of business. As at November 30, 2017,
and continuing as at February 15, 2018, the Company is not aware of
any pending or threatened material litigation claims against the
Company, other than as described below.
In November 2016,
the Company
filed an
NDA for its abuse-deterrent oxycodone hydrochloride extended
release tablets (formerly referred to as RexistaTM)
(“Oxycodone ER”) product candidate, relying on the
505(b)(2) regulatory pathway, which allowed the Company to
reference data from Purdue Pharma L.P.'s file for its
OxyContin® extended release oxycodone hydrochloride. The
Oxycodone ER application was accepted by the FDA for further review
in February 2017. The Company certified to the FDA that it believed
that its Oxycodone ER product candidate would not infringe any of
sixteen (16) patents associated with the branded product
Oxycontin® (the “Oxycontin® patents”) listed
in the FDA’s Approved Drug Products with Therapeutic
Equivalence Evaluations, commonly known as the Orange Book (the
“Orange Book”), or that such patents are invalid, and
so notified Purdue Pharma L.P. and the other owners of the subject
patents listed in the Orange Book of such certification. On April
7, 2017, the Company received notice that Purdue Pharma L.P.,
Purdue Pharmaceuticals L.P., The P.F. Laboratories, Inc., or
collectively the Purdue parties, Rhodes Technologies, and
Grünenthal GmbH, or collectively the Purdue litigation
plaintiffs or plaintiffs, had commenced patent infringement
proceedings against the Company in the U.S. District Court for the
District of Delaware in respect of the Company's NDA filing for
Oxycodone ER, alleging that Oxycodone ER infringes six (6) out of
the sixteen (16) patents. The complaint seeks injunctive relief as
well as attorneys' fees and costs and such other and further relief
as the Court may deem just and proper. An answer and counterclaim
have been filed.
As a
result of the commencement of these legal proceedings, the FDA is
stayed for 30 months from granting final approval to the
Company’s Oxycodone ER product candidate. That time period
commenced on February 24, 2017, when the plaintiffs received notice
of the Company’s certification concerning the patents, and
will expire on August 24, 2019, unless the stay is earlier
terminated by a final declaration of the courts that the patents
are invalid, or are not infringed, or the matter is otherwise
settled among the parties. A trial date for the Purdue litigation
has been set for October 22, 2018. The Company is confident that it
does not infringe the subject patents, and will vigorously defend
against these claims.
In July
2017, three complaints were filed in the U.S. District Court for
the Southern District of New York asserting claims under the
federal securities laws against the Company and two of its
executive officers on behalf of a putative class of purchasers of
the Company’s securities. In a subsequent order, the Court
consolidated the three actions under the caption Shanawaz v.
Intellipharmaceutics Int’l Inc., et al., No. 1:17-cv-05761
(S.D.N.Y.), appointed lead plaintiffs in the consolidated action,
and approved lead plaintiffs’ selection of counsel. Lead
plaintiffs filed a consolidated amended complaint on January 29,
2018. In the amended complaint, lead plaintiffs purport to assert
claims on behalf of a putative class consisting of purchasers of
the Company’s securities between May 21, 2015 and July 26,
2017. The amended complaint alleges that the defendants violated
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and
Rule 10b-5 promulgated thereunder by making allegedly false and
misleading statements or failing to disclose certain information
regarding the Company’s NDA for Oxycodone ER abuse-deterrent
oxycodone hydrochloride extended release tablets. The complaint
seeks, among other remedies, unspecified damages, attorneys’
fees and other costs, equitable and/or injunctive relief, and such
other relief as the court may find just and proper. Under a
scheduling order approved by the Court, defendants’ must
respond to the amended complaint by March 30, 2018. The Company and
the other defendants intend to vigorously defend themselves against
the claims asserted in the consolidated action.
Intellipharmaceutics
International Inc.
Notes
to the consolidated financial statements
November 30, 2017, 2016 and
2015
(Stated in U.S.
dollars)
17.
Financial
instruments
(a) Fair values
The Company follows
ASC topic 820, “Fair Value Measurements” which defines
fair value, establishes a framework for measuring fair value, and
expands disclosures about fair value measurements. The provisions
of ASC topic 820 apply to other accounting pronouncements that
require or permit fair value measurements. ASC topic 820 defines
fair value as the exchange price that would be received for an
asset or paid to transfer a liability (an exit price) in the
principal or most advantageous market for the asset or liability in
an orderly transaction between market participants at the
measurement date; and establishes a three level hierarchy for fair
value measurements based upon the transparency of inputs to the
valuation of an asset or liability as of the measurement
date.
Inputs refers
broadly to the assumptions that market participants would use in
pricing the asset or liability, including assumptions about risk.
To increase consistency and comparability in fair value
measurements and related disclosures, the fair value hierarchy
prioritizes the inputs to valuation techniques used to measure fair
value into three broad levels. The three levels of the hierarchy
are defined as follows:
Level 1 inputs are
quoted prices (unadjusted) in active markets for identical assets
or liabilities.
Level 2 inputs are
inputs other than quoted prices included within Level 1 that are
observable for the asset or liability, either directly or
indirectly for substantially the full term of the financial
instrument.
Level 3 inputs are
unobservable inputs for asset or liabilities.
The categorization
within the valuation hierarchy is based upon the lowest level of
input that is significant to the fair value
measurement.
(i)
The Company
calculates expected volatility based on historical volatility of
the Company’s peer group that is publicly traded for options
that have an expected life that is more than eight years (Level 2)
while the Company uses its own historical volatility for options
that have an expected life of eight years or less (Level
1).
(ii)
The Company
calculates the interest rate for the conversion option based on the
Company’s estimated cost of raising capital (Level
2).
An
increase/decrease in the volatility and/or a decrease/increase in
the discount rate would have resulted in an increase/decrease in
the fair value of the conversion option and warrants.
Fair value of
financial assets and financial liabilities that are not measured at
fair value on a recurring basis are as follows:
|
|
November
30, 2017
|
November
30, 2016
|
||
|
|
Carrying
|
Fair
|
Carrying
|
Fair
|
|
|
amount
|
value
|
amount
|
value
|
|
|
$
|
$
|
$
|
$
|
|
Financial
Liabilities
|
|
|
|
|
|
Convertible debenture
(i)
|
1,290,465
|
1,316,386
|
1,494,764
|
1,500,000
|
(i)
The Company
calculates the interest rate for the Debenture and due to related
parties based on the Company’s estimated cost of raising
capital and uses the discounted cash flow model to calculate the
fair value of the Debenture and the amounts due to related
parties.
The carrying values
of cash, accounts receivable, accounts payable, accrued liabilities
and employee cost payable approximates their fair values because of
the short-term nature of these instruments.
Intellipharmaceutics
International Inc.
Notes
to the consolidated financial statements
November 30, 2017, 2016 and
2015
(Stated in U.S.
dollars)
17.
Financial
instruments (continued)
(b) Interest rate
and credit risk
Interest rate risk
is the risk that the value of a financial instrument might be
adversely affected by a change in interest rates. The Company does
not believe that the results of operations or cash flows would be
affected to any significant degree by a sudden change in market
interest rates, relative to interest rates on cash, convertible
debenture and capital lease obligations due to the short-term
nature of these obligations.
Trade accounts
receivable potentially subjects the Company to credit risk. The
Company provides an allowance for doubtful accounts equal to the
estimated losses expected to be incurred in the collection of
accounts receivable.
The following table
sets forth details of the aged accounts receivable that are not
overdue as well as an analysis of overdue amounts and the related
allowance for doubtful accounts:
|
|
November
30,
|
November
30,
|
|
|
2017
|
2016
|
|
|
$
|
$
|
|
|
|
|
|
Total
accounts receivable
|
756,468
|
472,474
|
|
Less
allowance for doubtful accounts
|
(66,849
)
|
-
|
|
Total
accounts receivable, net
|
689,619
|
472,474
|
|
|
|
|
|
Not
past due
|
689,619
|
427,519
|
|
Past
due for more than 31 days
|
|
|
|
but
no more than 60 days
|
5,176
|
3,319
|
|
Past
due for more than 91 days
|
|
|
|
but
no more than 120 days
|
61,673
|
41,636
|
|
Total
accounts receivable, gross
|
756,468
|
472,474
|
Financial
instruments that potentially subject the Company to concentration
of credit risk consist principally of uncollateralized accounts
receivable. The Company’s maximum exposure to credit risk is
equal to the potential amount of financial assets. For the year
ended November 30, 2017, two customers accounted for substantially
all the revenue and all the accounts receivable of the Company. For
the year ended November 30, 2016, Par accounted for substantially
all the revenue and all the accounts receivable of the
Company.
The Company is also
exposed to credit risk at period end from the carrying value of its
cash. The Company manages this risk by maintaining bank accounts
with a Canadian Chartered Bank. The Company’s cash is not
subject to any external restrictions.
(c)
Foreign exchange risk
The Company has
balances in Canadian dollars that give rise to exposure to foreign
exchange (“FX”) risk relating to the impact of
translating certain non-U.S. dollar balance sheet accounts as these
statements are presented in U.S. dollars. A strengthening U.S.
dollar will lead to a FX loss while a weakening U.S. dollar will
lead to a FX gain. For each Canadian dollar balance of
$1.0 million, a +/- 10% movement in the Canadian currency held
by the Company versus the U.S. dollar would affect the
Company’s loss and other comprehensive loss by
$0.1 million.
(d) Liquidity risk
Liquidity risk is
the risk that the Company will encounter difficulty raising liquid
funds to meet commitments as they fall due. In meeting its
liquidity requirements, the Company closely monitors its forecasted
cash requirements with expected cash drawdown.
Intellipharmaceutics
International Inc.
Notes
to the consolidated financial statements
November 30, 2017, 2016 and
2015
(Stated in U.S.
dollars)
17.
Financial
instruments (continued)
(d) Liquidity risk
(continued)
The following are
the contractual maturities of the undiscounted cash flows of
financial liabilities as at November 30, 2017:
18.
Segmented
information
The Company's
operations comprise a single reportable segment engaged in the
research, development and manufacture of novel and generic
controlled-release and targeted-release oral solid dosage drugs. As
the operations comprise a single reportable segment, amounts
disclosed in the financial statements for revenue, loss for the
period, depreciation and total assets also represent segmented
amounts. In addition, all of the Company's long-lived assets are in
Canada. The Company’s license and commercialization agreement
with Par accounts for substantially all of the revenue of the
Company.
|
|
November
30,
|
November
30,
|
November
30,
|
|
|
2017
|
2016
|
2015
|
|
|
$
|
$
|
$
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
United
States
|
5,504,452
|
2,247,002
|
4,093,781
|
|
|
5,504,452
|
2,247,002
|
4,093,781
|
|
|
|
|
|
|
Total
assets
|
|
|
|
|
Canada
|
7,396,781
|
7,974,689
|
5,224,299
|
|
|
|
|
|
|
Total
property and equipment
|
|
|
|
|
Canada
|
3,267,551
|
1,889,638
|
1,759,438
|
Item
19.
Exhibits
.
EXHIBIT INDEX
|
Number
|
Exhibit
|
|
1.1
|
|
|
1.2
|
|
|
4.1
|
|
|
4.2
|
|
|
4.3
|
|
|
4.51
|
|
|
4.52
|
|
4.65
|
|
|
4.66
|
|
|
4.67
|
|
|
4.68
|
|
|
4.69
|
|
|
4.70
|
|
|
4.71
|
|
|
4.72
|
|
|
4.73
|
|
|
4.74(†)
|
|
|
4.75
|
|
|
4.76
|
|
4.77
|
|
|
4.78
|
|
|
4.79(1)
|
|
|
4.80(1)
|
|
|
8.1(1)
|
|
|
11.1
|
|
|
12.1(1)
|
|
|
12.2(1)
|
|
|
13.1(1)
|
|
|
13.2(1)
|
|
|
15.1(1)
|
|
|
15.2(1)
|
|
|
16.1
|
|
|
101(1)(2)
|
XBRL (Extensible Business Reporting Language). The following
materials from Intellipharmaceutics International Inc.'s Annual
Report on Form 20-F for the fiscal year-ended November 30, 2017,
formatted in XBRL:
|
|
|
(i) Consolidated balance sheets as at November 30, 2017 and
2016
|
|
|
(ii) Consolidated statements of operations and comprehensive
loss for the years ended November 30, 2017, 2016 and
2015
|
|
|
(iii) Consolidated statements of shareholders' equity
(deficiency) for the years ended November 30, 2017, 2016 and
2015
|
|
|
(iv) Consolidated statements of cash flows for the years ended
November 30, 2017, 2016 and 2015
|
|
|
(v)
Notes to the consolidated financial statements
|
|
|
|
|
(1)
|
Filed as exhibits to this annual report on Form 20-F for the fiscal
year ended November 30, 2017.
|
|
|
|
|
(2)
|
XBRL information is furnished and not filed or a part of a
registration statement or prospectus for purposes of Sections 11 or
12 of the Securities Act of 1933, as amended, is deemed not filed
for purposes of Section 18 of the 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.
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/ Andrew Patient
Andrew
Patient
Chief
Financial Officer (Principal Financial Officer)
Intellipharmaceutics
International Inc.
February
28, 2018
