Intellipharmaceutics International Inc.
August
31, 2018
Table
of contents
|
Condensed unaudited
interim consolidated balance sheets
|
2
|
|
Condensed unaudited
interim consolidated statements of operations and comprehensive
loss
|
3
|
|
Condensed unaudited
interim consolidated statements of shareholders’ equity
(deficiency)
|
4
|
|
Condensed unaudited
interim consolidated statements of cash flows
|
5
|
|
Notes to the
condensed unaudited interim consolidated financial
statements
|
6-24
|
|
Intellipharmaceutics International Inc.
|
|
|
|
Condensed
unaudited interim consolidated balance sheets
|
|
|
|
As
at
|
|
|
|
(Stated
in U.S. dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
$
|
|
Assets
|
|
|
|
Current
|
|
|
|
Cash
|
57,388
|
1,897,061
|
|
Accounts
receivable, net
|
263,340
|
689,619
|
|
Investment
tax credits
|
771,490
|
636,489
|
|
Prepaid
expenses, sundry and other assets
|
566,638
|
225,092
|
|
Inventory
(Note 3)
|
250,322
|
115,667
|
|
|
1,909,178
|
3,563,928
|
|
|
|
|
|
Deferred
offering costs (Note 6)
|
814,881
|
565,302
|
|
Property
and equipment, net (Note 4)
|
2,909,927
|
3,267,551
|
|
|
5,633,986
|
7,396,781
|
|
|
|
|
|
Liabilities
|
|
|
|
Current
|
|
|
|
Accounts
payable
|
5,857,726
|
2,060,084
|
|
Accrued
liabilities
|
741,875
|
782,369
|
|
Employee
costs payable
|
216,926
|
214,980
|
|
Convertible
debenture (Note 5)
|
1,338,975
|
1,290,465
|
|
Deferred
revenue (Note 3)
|
300,000
|
300,000
|
|
|
8,455,502
|
4,647,898
|
|
|
|
|
|
Deferred
revenue (Note 3)
|
2,137,500
|
2,362,500
|
|
|
10,593,002
|
7,010,398
|
|
|
|
|
|
Shareholders' (deficiency)/equity
|
|
|
|
Capital
stock (Note 6,7 and 9)
|
|
|
|
Authorized
|
|
|
|
Unlimited
common shares without par value
|
|
|
|
Unlimited
preference shares
|
|
|
|
Issued
and outstanding
|
|
|
|
4,353,678
common shares
|
38,697,900
|
35,290,034
|
|
(November
30, 2017 - 3,470,451)
|
|
|
|
Additional
paid-in capital
|
37,895,090
|
36,685,387
|
|
Accumulated
other comprehensive income
|
284,421
|
284,421
|
|
Accumulated
deficit
|
(81,836,427
)
|
(71,873,459
)
|
|
|
(4,959,016
)
|
386,383
|
|
Contingencies
(Note 11)
|
|
|
|
|
5,633,986
|
7,396,781
|
|
|
|
|
|
See
accompanying notes to condensed unaudited interim consolidated
financial statements
|
|
Intellipharmaceutics International Inc.
|
|
|
|
|
|
Condensed
unaudited interim consolidated statements of operations and
comprehensive loss
|
|
(Stated
in U.S. dollars)
|
|
|
|
|
|
|
|
Nine months ended
|
|
|
|
|
|
|
|
|
$
|
$
|
$
|
$
|
|
Revenue
|
|
|
|
|
|
Licensing
(Note 3)
|
320,330
|
1,114,739
|
1,062,597
|
4,201,617
|
|
Up-front
fees (Note 3)
|
93,225
|
75,000
|
262,443
|
225,000
|
|
|
413,555
|
1,189,739
|
1,325,040
|
4,426,617
|
|
|
|
|
|
|
|
Cost of good sold
|
|
|
|
|
|
Cost
of goods sold
|
45,299
|
376,054
|
111,173
|
587,426
|
|
Gross Margin
|
368,256
|
813,685
|
1,213,867
|
3,839,191
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
Research
and development
|
3,324,221
|
2,298,804
|
7,783,549
|
7,007,503
|
|
Selling,
general and administrative
|
792,379
|
756,635
|
2,773,698
|
2,468,436
|
|
Depreciation
|
155,288
|
126,316
|
457,314
|
331,102
|
|
|
4,271,888
|
3,181,755
|
11,014,561
|
9,807,041
|
|
Loss
from operations
|
(3,903,632
)
|
(2,368,070
)
|
(9,800,694
)
|
(5,967,850
)
|
|
Net
foreign exchange gain (loss)
|
9,406
|
(90,875
)
|
17,106
|
(73,569
)
|
|
Interest
income
|
8
|
5
|
22
|
15,030
|
|
Interest
expense
|
(59,886
)
|
(91,374
)
|
(179,402
)
|
(320,115
)
|
|
Net
loss and comprehensive loss
|
(3,954,104
)
|
(2,550,314
)
|
(9,962,968
)
|
(6,346,504
)
|
|
|
|
|
|
|
|
Loss
per common share, basic and diluted
|
(0.91
)
|
(0.83
)
|
(2.49
)
|
(2.09
)
|
|
|
|
|
|
|
|
Weighted average number of common
|
|
|
|
|
|
shares outstanding, basic and diluted
|
4,353,678
|
3,071,378
|
4,006,582
|
3,035,906
|
|
|
|
|
|
|
|
See
accompanying notes to condensed unaudited interim consolidated
financial statements
|
|
Intellipharmaceutics International Inc.
|
|
|
|
|
|
|
|
Condensed
unaudited interim consolidated statements of shareholders' equity
(deficiency)
|
|
for
the nine months ended August 31, 2018 and August 31,
2017
|
|
(Stated
in U.S. dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
$
|
$
|
$
|
$
|
|
Balance, November 30, 2016
|
2,978,999
|
29,830,791
|
34,017,071
|
284,421
|
(63,016,019
)
|
1,116,264
|
|
DSU's
to non-management board members (Note 8)
|
-
|
-
|
22,577
|
-
|
-
|
22,577
|
|
Stock
options to employees (Note 7)
|
-
|
-
|
1,676,974
|
-
|
-
|
1,676,974
|
|
Proceeds
from ATM financing (Note 6)
|
105,815
|
2,495,615
|
-
|
-
|
-
|
2,495,615
|
|
Financing
cost for shares issued (Note 6)
|
-
|
(314,989
)
|
-
|
-
|
-
|
(314,989
)
|
|
Issuance
of common shares on exercise of warrants (Note 9)
|
16,801
|
430,573
|
(106,315
)
|
-
|
-
|
324,258
|
|
Common
shares issued for options exercised (Note 7)
|
700
|
18,935
|
(6,470
)
|
-
|
-
|
12,465
|
|
Modification
of convertible debenture (Note 5)
|
-
|
-
|
220,569
|
-
|
-
|
220,569
|
|
Net
loss and comprehensive loss
|
-
|
-
|
-
|
-
|
(6,346,504
)
|
(6,346,504
)
|
|
Balance, August 31, 2017
|
3,102,315
|
32,460,925
|
35,824,406
|
284,421
|
(69,362,523
)
|
(792,771
)
|
|
|
|
|
|
|
|
|
|
Balance, November 30, 2017
|
3,470,451
|
35,290,034
|
36,685,387
|
284,421
|
(71,873,459
)
|
386,383
|
|
DSU's
to non-management board members (Note 8)
|
-
|
-
|
7,565
|
-
|
-
|
7,565
|
|
Stock
options to employees (Note 7)
|
-
|
-
|
120,348
|
-
|
-
|
120,348
|
|
Proceeds
from issuance of shares and warrants (Note 6)
|
883,333
|
4,184,520
|
1,115,480
|
-
|
-
|
5,300,000
|
|
Cost
of warrant issued to placement agent (Note 9)
|
-
|
(141,284
)
|
141,284
|
-
|
-
|
-
|
|
Share
issuance cost (Note 6)
|
-
|
(635,370
)
|
(174,974
)
|
-
|
-
|
(810,344
)
|
|
Net
loss and comprehensive loss
|
-
|
-
|
-
|
-
|
(9,962,968
)
|
(9,962,968
)
|
|
Rounding
of fractional shares after consolidation (Note 2)
|
(106
)
|
-
|
-
|
-
|
-
|
-
|
|
Balance, August 31, 2018
|
4,353,678
|
38,697,900
|
37,895,090
|
284,421
|
(81,836,427
)
|
(4,959,016
)
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to condensed unaudited interim consolidated
financial statements
|
|
Intellipharmaceutics International Inc.
|
|
|
|
|
|
Condensed
unaudited interim consolidated statements of cash
flows
|
|
(Stated
in U.S. dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
$
|
$
|
$
|
|
|
|
|
|
|
|
Net loss
|
(3,954,104
)
|
(2,550,314
)
|
(9,962,968
)
|
(6,346,504
)
|
|
Items
not affecting cash
|
|
|
|
|
|
Depreciation
|
155,288
|
138,401
|
457,314
|
343,187
|
|
Stock-based
compensation (Note 7)
|
25,542
|
32,105
|
120,348
|
1,676,974
|
|
Deferred
share units (Note 8)
|
-
|
7,222
|
7,565
|
22,577
|
|
Accreted
interest on convertible debenture (Note 5)
|
16,369
|
48,675
|
48,510
|
192,320
|
|
Unrealized
foreign exchange loss (gain)
|
(14,882
)
|
95,834
|
(11,365
)
|
76,339
|
|
|
|
|
|
|
|
Change
in non-cash operating assets & liabilities
|
|
|
|
|
|
Accounts
receivable
|
182,558
|
137,446
|
426,279
|
(372,889
)
|
|
Investment
tax credits
|
(45,000
)
|
(72,627
)
|
(135,001
)
|
17,539
|
|
Inventory
|
(64,804
)
|
305,201
|
(134,655
)
|
(187,416
)
|
|
Prepaid
expenses, sundry and other assets
|
(108,178
)
|
296,071
|
(341,546
)
|
226,194
|
|
Accounts
payable, accrued liabilities and employee costs
payable
|
2,594,283
|
282,273
|
3,329,225
|
549,240
|
|
Deferred
revenue (Note 3)
|
(75,000
)
|
(75,000
)
|
(225,000
)
|
(225,000
)
|
|
Cash
flows used in operating activities
|
(1,287,928
)
|
(1,354,713
)
|
(6,421,294
)
|
(4,027,439
)
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
Repayment
of principal on convertible debenture (Note 5)
|
-
|
-
|
-
|
(150,000
)
|
|
Repayment
of capital lease obligations
|
-
|
(3,787
)
|
-
|
(14,829
)
|
|
Proceeds
from issuance of common shares on at-the-market financing (Note
6)
|
-
|
1,047,143
|
-
|
2,495,615
|
|
Proceeds
from issuance of common shares on exercise of warrants (Note 6 and
9)
|
-
|
28,950
|
-
|
324,258
|
|
Proceeds
from issuance of common shares on option exercise (Note
7)
|
-
|
-
|
-
|
12,465
|
|
Proceed
from issuance of shares and warrants (Note 6 and 9)
|
-
|
-
|
5,300,000
|
-
|
|
Offering
costs
|
-
|
(151,972
)
|
(618,689
)
|
(223,640
)
|
|
Cash
flows provided from financing activities
|
-
|
920,334
|
4,681,311
|
2,443,869
|
|
|
|
|
|
|
|
Investing activity
|
|
|
|
|
|
Purchase
of property and equipment (Note 4)
|
(15,358
)
|
(306,083
)
|
(99,690
)
|
(1,825,698
)
|
|
Cash
flows used in investing activities
|
(15,358
)
|
(306,083
)
|
(99,690
)
|
(1,825,698
)
|
|
|
|
|
|
|
|
Decrease
in cash
|
(1,303,286
)
|
(740,462
)
|
(1,839,673
)
|
(3,409,268
)
|
|
Cash,
beginning of period
|
1,360,674
|
1,475,618
|
1,897,061
|
4,144,424
|
|
Cash, end of period
|
57,388
|
735,156
|
57,388
|
735,156
|
|
|
|
|
|
|
|
Supplemental cash flow information
|
|
|
|
|
|
Interest
paid
|
12,419
|
-
|
92,029
|
82,398
|
|
Taxes
paid
|
-
|
-
|
-
|
-
|
|
|
|
|
|
|
|
See
accompanying notes to condensed unaudited interim consolidated
financial statements
|
Intellipharmaceutics International Inc.
Notes
to the condensed unaudited interim consolidated financial
statements
For the
three and nine months ended August 31, 2018 and 2017
(Stated
in U.S. dollars)
Intellipharmaceutics
International Inc. (“IPC” or the “Company”)
is a pharmaceutical company specializing in the research,
development and manufacture of novel and generic controlled-release
and targeted-release oral solid dosage drugs.
On
October 22, 2009, IntelliPharmaCeutics Ltd. (“IPC Ltd.
“) and Vasogen Inc. (“Vasogen”) completed a court
approved plan of arrangement and merger (the “IPC Arrangement
Agreement”), resulting in the formation of the Company, which
is incorporated under the laws of Canada. The Company’s
common shares are traded on the Toronto Stock Exchange
(“TSX”)
and the Nasdaq Capital Market
(“Nasdaq”)
.
The
Company earns revenue from non-refundable upfront fees, milestone
payments upon achievement of specified research or development,
exclusivity milestone payments and licensing and cost plus payments
on sales of resulting products 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
condensed unaudited interim 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 $3,954,104
and $9,962,968 for the three and nine months ended August 31, 2018
(three and nine months ended August 31, 2017 – loss of
$2,550,314 and $6,346,504), and has an accumulated deficit of
$81,836,427 as at August 31, 2018 (November 30, 2017 -
$71,873,459). The Company also has a working capital deficiency of
$6,546,324 as at August 31, 2018 (November 30, 2017 - $1,083,970).
The Company has funded its research and development
(“R&D”) activities principally through the issuance
of securities, loans from related parties, funds from the IPC
Arrangement Agreement, and funds received under development
agreements. There is no certainty that such funding will be
available going forward. These conditions raise substantial doubt
about its ability to continue as a going concern and realize its
assets and pay its liabilities as they become due.
In
order for the Company to continue as a going concern and fund any
significant expansion of its operation or R&D activities, the
Company may require significant additional capital. Although there
can be no assurances, such funding may come from revenues from the
sales of the Company’s generic Focalin XR®
(dexmethylphenidate hydrochloride extended-release) capsules, from
revenues from the sales of the Company’s generic Seroquel
XR® (quetiapine fumarate extended-release) tablets, and from
potential partnering opportunities. Other potential sources of
capital may include payments from licensing agreements, cost
savings associated with managing operating expense levels, other
equity and/or debt financings, and/or new strategic partnership
agreements which fund some or all costs of product development. The
Company’s ultimate success will depend on whether its product
candidates receive the approval of the
FDA
or Health Canada and whether it is
able to successfully market approved products. The Company cannot
be certain that it will be able to receive FDA or Health Canada
approval for any of its current or future product candidates, or
that it will reach the level of sales and revenues necessary to
achieve and sustain profitability, or that the Company can secure
other capital sources on terms or in amounts sufficient to meet its
needs 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
Intellipharmaceutics International Inc.
Notes
to the condensed unaudited interim consolidated financial
statements
For the
three and nine months ended August 31, 2018 and 2017
(Stated
in U.S. dollars)
1.
Nature
of operations (continued)
Going concern (continued)
service
obligations and could require the Company to agree to operating and
financial covenants that would restrict its operations. Any failure
on its part to successfully commercialize approved products or
raise additional funds on terms favorable to the Company or at all,
may require the Company to significantly change or curtail its
current or planned operations in order to conserve cash until such
time, if ever, that sufficient proceeds from operations are
generated, and could result in the Company not taking advantage of
business opportunities, in the termination or delay of clinical
trials or the Company not taking any necessary actions required by
the FDA or Health Canada for one or more of the Company’s
product candidates, in curtailment of the Company’s product
development programs designed to identify new product candidates,
in the sale or assignment of rights to its technologies, products
or product candidates, and/or its inability to file Abbreviated New
Drug Applications (“ANDAs”), Abbreviated New Drug
Submissions (“ANDSs”) or New Drug Applications
(“NDAs”) at all or in time to competitively market its
products or product candidates.
The
condensed unaudited interim 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.
(a) Basis of consolidation
These
condensed unaudited interim consolidated financial statements
include the accounts of the Company and its wholly owned operating
subsidiaries, IPC Ltd., Intellipharmaceutics Corp. (“IPC
Corp”), and Vasogen Corp.
References in these condensed unaudited interim consolidated
financial statements to share amounts, per share data, share
prices, exercise prices and conversion rates have been adjusted to
reflect the effect of the 1-for-10 reverse split which became
effective on each of Nasdaq and TSX at the open of market on
September 14, 2018
In
September 2018, the Company announced a one-for-ten share
consolidation (the “reverse split”). At a special
meeting of the Company’s shareholders held on August 15,
2018, the Company’s shareholders granted the Company’s
Board of Directors discretionary authority to implement a
consolidation of the issued and outstanding common shares of the
Company on the basis of a consolidation ratio within a range from
five (5) pre-consolidation common shares for one (1)
post-consolidation common share to fifteen (15) pre-consolidation
common shares for one (1) post-consolidation common share. The
Board of Directors selected a share consolidation ratio of ten (10)
pre-consolidation shares for one (1) post-consolidation common
share. On September 12, 2018, the Company filed an amendment to the
Company’s articles ("Articles of Amendment") to implement the
one-for-10 reverse split. The Company’s common shares began
trading on each of the Nasdaq and TSX on a post-split basis under
the Company’s existing trade symbol "IPCI" at the market open
on September 14, 2018. Under accounting principles generally
accepted in the U.S. (“U.S. GAAP”) the change has been
disclosed retroactively.
The
condensed unaudited interim consolidated financial statements do
not conform in all respects to the annual requirements of U.S.
GAAP. Accordingly, these condensed unaudited interim consolidated
financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto for the year
ended November 30, 2017.
These
condensed unaudited interim consolidated financial statements have
been prepared using the same accounting policies and methods as
those used by the Company in the annual audited consolidated
financial statements for the year ended November 30, 2017. The
condensed unaudited interim consolidated financial statements
reflect all adjustments necessary for the fair presentation of the
Company’s financial position and results of operation for the
interim periods presented. All such adjustments are normal and
recurring in nature.
Intellipharmaceutics International Inc.
Notes
to the condensed unaudited interim consolidated financial
statements
For the
three and nine months ended August 31, 2018 and 2017
(Stated
in U.S. dollars)
2.
Basis
of presentation (continued)
(a) Basis of consolidation
(continued)
All
inter-company accounts and transactions have been eliminated on
consolidation.
(b) Use of estimates
The
preparation of the condensed unaudited interim 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 period. Actual results could differ from those
estimates.
3.
Significant
accounting policies
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.
The
Company accounts for revenue in accordance with the provisions of
Accounting Standards Codification (“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 condensed unaudited interim 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
Intellipharmaceutics International Inc.
Notes
to the condensed unaudited interim consolidated financial
statements
For the
three and nine months ended August 31, 2018 and 2017
(Stated
in U.S. dollars)
3.
Significant
accounting policies (continued)
(a)
Revenue recognition (continued)
Licensing (continued)
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.
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 condensed unaudited interim 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 three and
nine months ended August 31, 2018, the Company recognized $75,000
and $225,000 (three and nine months ended August 31, 2017 - $75,000
and $225,000) of revenue based on a straight-line basis over the
expected term of the Mallinckrodt agreement of 10
years.
As of
August 31, 2018, the Company has recorded a deferred revenue
balance of $2,437,500 (November 30, 2017 -$2,662,500) relating to
the underlying contracts, of which $300,000 (November 30, 2017 -
$300,000) is considered a current portion of deferred
revenue.
(b)
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.
Intellipharmaceutics International Inc.
Notes
to the condensed unaudited interim consolidated financial
statements
For the
three and nine months ended August 31, 2018 and 2017
(Stated
in U.S. dollars)
3.
Significant
accounting policies (continued)
Inventories
comprise raw materials, work in process, and finished goods, which
are valued at the lower of cost or market, on a first-in, first-out
basis. Cost for work in process and finished goods inventories
includes materials, direct labor, and an allocation of
manufacturing overhead. Market for raw materials is replacement
cost, and for work in process and finished goods is net realizable
value. The Company evaluates the carrying value of inventories on a
regular basis, taking into account such factors as historical and
anticipated future sales compared with quantities on hand, the
price the Company expects to obtain for products in their
respective markets, compared with historical cost and the remaining
shelf life of goods on hand. As of August 31, 2018, the Company had
inventories of $250,322 (November 30, 2017 - $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.
(d)
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 condensed unaudited interim consolidated statements of
operations and comprehensive loss.
The
Company’s functional and reporting currency is the U.S.
dollar.
(e)
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
Intellipharmaceutics International Inc.
Notes
to the condensed unaudited interim consolidated financial
statements
For the
three and nine months ended August 31, 2018 and 2017
(Stated
in U.S. dollars)
3.
Significant
accounting policies (continued)
(e)
Future accounting pronouncements (continued)
operating leases
under current U.S. GAAP with limited exception. Additional
qualitative and quantitative disclosures are also required by the
new guidance. Topic 842 is effective for annual reporting periods
(including interim reporting periods) beginning after December 15,
2018. Early adoption is permitted. The Company is in the process of
evaluating the amendments to determine if they have a material
impact on the Company’s financial position, results of
operations, cash flows or disclosures.
In
August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows
(Topic 230) Classification of Certain Cash Receipts and Cash
Payments, which will make eight targeted changes to how cash
receipts and cash payments are presented and classified in the
Statement of Cash Flows. ASU 2016-15 will be effective on May 1,
2018 and will require adoption on a retrospective basis unless it
is impracticable to apply, in which case the Company would be
required to apply the amendments prospectively as of the earliest
date practicable. The Company adopted ASU 2016-15 on May 1, 2018.
The adoption did not have an impact on the Company’s interim
consolidated financial statements for the three and nine months
ended August 31, 2018.
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.
Intellipharmaceutics International Inc.
Notes
to the condensed unaudited interim consolidated financial
statements
For the
three and nine months ended August 31, 2018 and 2017
(Stated
in U.S. dollars)
4.
Property
and equipment
|
|
|
|
|
|
|
Laboratory equipment under capital lease
|
Computer equipment under capital lease
|
|
|
|
$
|
$
|
$
|
$
|
$
|
$
|
$
|
$
|
|
Cost
|
|
|
|
|
|
|
|
|
|
Balance
at November 30, 2016
|
295,296
|
124,151
|
129,860
|
3,933,693
|
1,205,811
|
276,300
|
76,458
|
6,041,569
|
|
Additions
|
235,454
|
31,908
|
42,638
|
1,353,110
|
235,641
|
-
|
-
|
1,898,751
|
|
Balance
at November 30, 2017
|
530,750
|
156,059
|
172,498
|
5,286,803
|
1,441,452
|
276,300
|
76,458
|
7,940,320
|
|
Additions
|
20,336
|
-
|
-
|
79,354
|
-
|
-
|
-
|
99,690
|
|
Balance
at August 31, 2018
|
551,086
|
156,059
|
172,498
|
5,366,157
|
1,441,452
|
276,300
|
76,458
|
8,040,010
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated depreciation
|
|
|
|
|
|
|
|
|
|
Balance
at November 30, 2016
|
238,672
|
117,506
|
109,243
|
2,290,074
|
1,143,792
|
179,422
|
73,222
|
4,151,931
|
|
Depreciation
|
47,811
|
13,622
|
10,747
|
379,158
|
49,154
|
19,376
|
970
|
520,838
|
|
Balance
at November 30, 2017
|
286,483
|
131,128
|
119,990
|
2,669,232
|
1,192,946
|
198,798
|
74,192
|
4,672,769
|
|
Depreciation
|
57,334
|
9,349
|
7,876
|
308,494
|
62,126
|
11,625
|
510
|
457,314
|
|
Balance
at August 31, 2018
|
343,817
|
140,477
|
127,866
|
2,977,726
|
1,255,072
|
210,423
|
74,702
|
5,130,083
|
|
|
|
|
|
|
|
|
|
|
|
Net book value at:
|
|
|
|
|
|
|
|
|
|
November
30, 2017
|
244,267
|
24,931
|
52,508
|
2,617,571
|
248,506
|
77,502
|
2,266
|
3,267,551
|
|
August
31, 2018
|
207,269
|
15,582
|
44,632
|
2,388,431
|
186,380
|
65,877
|
1,756
|
2,909,927
|
As at
August 31, 2018, there was $595,589 (November 30, 2017 - $728,309)
of laboratory equipment that was not available for use and
therefore, no depreciation has been recorded for such laboratory
equipment.
Intellipharmaceutics International Inc.
Notes
to the condensed unaudited interim consolidated financial
statements
For the
three and nine months ended August 31, 2018 and 2017
(Stated
in U.S. dollars)
5.
Due
to releated 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.
|
|
|
|
|
|
|
|
|
Convertible
debenture payable to two directors and officers of the Company,
unsecured, 12% annual interest rate,
Payable
monthly
|
$
1,338,975
|
$
1,290,465
|
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 (the “Debenture”),
which had an original maturity date of January 1, 2015. The
Debenture bears interest at a rate of 12% per annum, payable
monthly, is pre-payable at any time at the option of the Company
and is convertible at any time into common shares at a conversion
price of $30.00 per common share at the option of the
holder.
Dr. Isa
Odidi and Dr. Amina Odidi, 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. 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.
Intellipharmaceutics International Inc.
Notes
to the condensed unaudited interim consolidated financial
statements
For the
three and nine months ended August 31, 2018 and 2017
(Stated
in U.S. dollars)
5.
Due
to releated parties (continued)
Convertible debenture (continued)
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 three and nine months ended August 31, 2018 is
$16,369 and $48,510 (three and nine months ended August 31, 2017 -
$48,675 and $192,320) and has been included in the condensed
unaudited interim consolidated statements of operations and
comprehensive loss. In addition, the coupon interest on the
Debenture for the three and nine months ended August 31, 2018 is
$40,805 and $121,528 (three and nine months ended August 31, 2017
– $40,805 and $122,168) and has also been included in the
condensed unaudited interim consolidated statements of operations
and comprehensive loss.
Effective October
1, 2018, the maturity date for the Debenture was extended to April
1, 2019.
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 August 31, 2018, the Company had 4,353,678 (November
30, 2017 – 3,470,451) 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”) 578,131 (November 30, 2017
– 578,131) common shares or approximately 13% (November 30,
2017 – 17%) of IPC.
(b)
In November 2013,
the Company entered into an equity distribution agreement with Roth
Capital Partners, LLC (“Roth”), pursuant to which the
Company from time to time was able to sell up to 530,548 of the
Company’s common shares for up to an aggregate of $16.8
million (or such lesser amount as may be permitted under applicable
exchange rules and securities laws and regulations) through
at-the-market issuances on the Nasdaq or
otherwise.
Intellipharmaceutics International Inc.
Notes
to the condensed unaudited interim consolidated financial
statements
For the
three and nine months ended August 31, 2018 and 2017
(Stated
in U.S. dollars)
6.
Capital
stock (continued)
Authorized, issued and outstanding (continued)
During
the three and nine months ended August 31, 2018, an aggregate of
Nil (three and nine months ended August 31, 2017 – 46,498 and
105,815) common shares were sold on Nasdaq for gross proceeds of
$Nil (three and nine months ended August 31, 2017 –
$1,047,143 and $2,495,615), with net proceeds to the Company of
$Nil (three and nine months ended August 31, 2017 –
$1,017,378 and $2,423,621), respectively, under the at-the-market
offering program. In March 2018, the Company terminated its
continuous offering under the prospectus supplement dated July 18,
2017 and prospectus dated July 17, 2017 in respect of its
at-the-market program. There can be no assurance that any
additional shares will be sold under the at-the-market
program.
Direct
costs related to the Company’s filing of a base shelf
prospectus filed in May 2014 and declared effective in June 2014,
direct costs related to the base shelf prospectus filed in May 2017
and certain other on-going costs related to the at the-market
facility are recorded as deferred offering costs and are being
amortized and recorded as share issuance costs against share
offerings. For the three and nine months ended August 31, 2018,
costs directly related to the at the-market facility of $Nil (three
and nine months ended August 31, 2017 – $29,766 and $71,994)
were recorded in share offering costs and an additional $Nil and
$120,271 (three and nine months ended August 31, 2017 - $103,452
and $172,520) of deferred costs were amortized and recorded in
share offering costs related to the base shelf prospectus and to
the at-the-market facility.
(c)
In October 2017,
the Company completed a registered direct offering of 363,636
common shares at a price of $11.00 per share. The Company also
issued to the investors warrants to purchase an aggregate of
181,818 common shares (the “October 2017 Warrants”).
The warrants 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 $12.50 per common share. The Company also
issued to the placement agents warrants to purchase 18,181 common
shares at an exercise price of $13.75 per share (the
“Placement Agent Warrants”).
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 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 9.
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.
(d)
In March 2018, the
Company completed two registered direct offerings of an aggregate
of 883,333 common shares at a price of $6.00 per share. The Company
also issued to the investors warrants to purchase an aggregate of
441,666 common shares (the “March 2018 Warrants”).
The warrants will be exercisable six
months following the closing date and will expire 30 months after
the date they become exercisable
, and an exercise price of
$6.00 per common share. The Company also issued to the placement
agents warrants to purchase 44,166 common shares at an exercise
price of $7.50 per share (the “March Placement Agent
Warrants”).
Intellipharmaceutics International Inc.
Notes
to the condensed unaudited interim consolidated financial
statements
For the
three and nine months ended August 31, 2018 and 2017
(Stated
in U.S. dollars)
6.
Capital
stock (continued)
Authorized, issued and outstanding (continued)
The
holders of March 2018 Warrants and March 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 $4,184,520 as the value of common shares under
Capital stock and $1,115,480 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 9.
The
direct costs related to the issuance of the common shares and
warrants were $831,357 including the cost of warrants issued to the
placement agents. These direct costs were recorded as an offset
against the statement of shareholders’ equity (deficiency)
with $656,383 being recorded under Capital stock and $174,974 being
recorded under additional paid-in-capital.
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 4,353,678 based on the number of issued and outstanding
common shares as at August 31, 2018. As at August 31, 2018, 282,090
options are outstanding and there were 153,277 options available
for grant under the Employee Stock Option Plan. Each option granted
allows the holder to purchase one common share at an exercise price
not less than the closing price of the Company's common shares on
the TSX on the last trading day prior to the grant of the
option.
Options
granted under these plans typically have a term of 5 years with a
maximum term of 10 years and generally vest over a period of up to
three years.
In
August 2004, the Board of Directors of IPC Ltd. approved a grant of
276,394 performance-based stock options, to two executives who were
also the principal shareholders of IPC Ltd. The vesting of these
options is contingent upon the achievement of certain performance
milestones. A total of 248,754 performance-based stock options have
vested as of August 31, 2018. Under the terms of the original
agreement these options were to expire in September 2014. Effective
March 27, 2014, the Company’s shareholders approved the two
year extension of the performance-based stock option expiry date to
September 2016. Effective April 19, 2016, the Company’s
shareholders approved a further two year extension of the
performance-based stock option expiry date to September 2018.
Effective May 15, 2018, the Company’s shareholders approved a
further two year extension of the performance-based stock option
expiry date to September 2020. As a result of the modification of
the performance-based stock option expiry date, the Company
recorded additional compensation costs of $45,793 related to vested
performance options during the nine months ended August 31, 2018.
These options were outstanding as at August 31, 2018.
In the
three and nine months ended August 31, 2018, Nil (three and nine
months ended August 31, 2017 – Nil) stock options were
granted.
The
fair value of each option grant is estimated on the date of grant
using the Black-Scholes Option-Pricing Model, consistent with the
provisions of ASC topic 718.
Option
pricing models require the use of subjective assumptions, changes
in these assumptions can materially affect the fair value of the
options.
The
Company calculates expected volatility based on historical
volatility of the Company’s peer group that is publicly
traded for options that have an expected life that is more than
eight years. For options that have an expected life of less than
eight years the Company uses its own volatility.
Intellipharmaceutics International Inc.
Notes
to the condensed unaudited interim consolidated financial
statements
For the
three and nine months ended August 31, 2018 and 2017
(Stated
in U.S. dollars)
The
expected term, which represents the period of time that options
granted are expected to be outstanding, is estimated based on the
historical average of the term and historical exercises of the
options.
The
risk-free rate assumed in valuing the options is based on the U.S.
treasury yield curve in effect at the time of grant for the
expected term of the option. The expected dividend yield percentage
at the date of grant is Nil as the Company is not expected to pay
dividends in the foreseeable future.
Details
of stock option transactions in Canadian dollars (“C$”)
are as follows:
|
|
August 31, 2018
|
August 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
#
|
$
|
|
#
|
$
|
$
|
|
Outstanding,
beginning of period
|
582,811
|
32.0
|
17.2
|
539,246
|
34.8
|
18.8
|
|
Exercised
|
-
|
-
|
-
|
(700
)
|
23.2
|
12.0
|
|
Expired
|
(15,827
)
|
54.2
|
39.2
|
(215
)
|
679.7
|
524.8
|
|
Forfeited
|
(8,500
)
|
11.9
|
10.2
|
-
|
-
|
-
|
|
Balance
at end of period
|
558,484
|
31.6
|
16.7
|
538,331
|
34.5
|
18.6
|
|
|
|
|
|
|
|
|
|
Options
exercisable end of period
|
503,444
|
32.5
|
17.2
|
494,024
|
34.7
|
19.0
|
Total
unrecognized compensation cost relating to the unvested
performance-based stock options at August 31, 2018 is approximately
$793,795 (August 31, 2017 - $788,887). For the three and nine
months ended August 31, 2018, no compensation cost has been
recognized for the remaining unvested performance-based options
(three and nine months ended August 31, 2017 - $Nil and
$1,577,772).
For the
three and nine months ended August 31, 2018, no options were
exercised. For the three and nine months ended August 31, 2017, Nil
and 700 options were exercised for cash consideration of $Nil and
$12,465, respectively.
The
following table summarizes the components of stock-based
compensation expense.
|
|
|
|
|
Stock-based compensation
related
to:
|
|
|
|
|
|
|
$
|
$
|
$
|
$
|
|
Research and
development
|
11,072
|
12,951
|
79,067
|
1,614,977
|
|
Selling, general
and administrative
|
14,470
|
19,154
|
41,281
|
61,997
|
|
|
25,542
|
32,105
|
120,348
|
1,676,974
|
The
Company has estimated its stock option forfeitures to be
approximately 4% for the three and nine months ended August 31,
2018 (three and nine months ended August 31, 2017 –
4%).
Effective
May 28, 2010, the Company’s shareholders approved a
Deferred Share Unit (“DSU”) Plan to grant DSUs to its
non-management directors and reserved a maximum of 11,000 common
shares for issuance under the plan. The DSU Plan permits certain
non-management directors to defer receipt of all or a portion of
their board fees until termination of the board service and to
receive such fees in the form of common shares at that time. A DSU
is a unit equivalent in value to one common share of the Company
based on the trading price of the Company's common shares on the
TSX.
Upon
termination of board service, the director will be able to redeem
DSUs based upon the then market price of the Company's common
shares on the date of redemption in exchange for any combination of
cash or common shares as the Company may determine.
Intellipharmaceutics International Inc.
Notes
to the condensed unaudited interim consolidated financial
statements
For the
three and nine months ended August 31, 2018 and 2017
(Stated
in U.S. dollars)
8.
Deferred
share units (continued)
During
the three and nine months ended August 31, 2018, one non-management
board member elected to receive director fees in the form of DSUs
under the Company’s DSU Plan. As at August 31, 2018, 10,279
DSUs are outstanding and 721 DSUs are available for grant under the
DSU Plan.
The
Company recorded the following amounts related to DSUs for each of
the three and nine months ended August 31, 2018 and three and nine
months ended August 31, 2017 in additional paid in capital and
accrued the following amounts as at August 31, 2018 and August 31,
2017:
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
$
|
|
$
|
|
$
|
|
|
Additional
paid in capital
|
-
|
-
|
7,222
|
372
|
7,565
|
866
|
22,577
|
920
|
|
Accrued
liability
|
-
|
-
|
7,778
|
818
|
-
|
-
|
7,778
|
818
|
All of
the Company’s outstanding warrants are considered to be
indexed to the Company’s own stock and are therefore
classified as equity under ASC 480. The warrants, in specified
situations, provide for certain compensation remedies to a holder
if the Company fails to timely deliver the shares underlying the
warrants in accordance with the warrant terms.
In the
registered direct unit offering completed in March 2013, gross
proceeds of $3,121,800 were received through the sale of the
Company’s units comprised of common share and
warrants.
The
offering was the sale of 181,500 units at a price of $17.20 per
unit, with each unit consisting of one common share and a five year
warrant to purchase 0.25 of a common share at an exercise price of
$21.00 per share (the “March 2013
Warrants”).
The
fair value of the March 2013 Warrants of $407,558 were initially
estimated at closing using the Black-Scholes Option Pricing Model,
using volatilities of 63%, risk free interest rates of 0.40%,
expected life of 5 years, and dividend yield of Nil.
In the
underwritten public offering completed in July 2013, gross proceeds
of $3,075,000 were received through the sale of the Company’s
units comprised of common shares and warrants. The offering was the
sale of 150,000 units at a price of $20.50 per unit, each unit
consisting of one common share and a five year warrant to purchase
0.25 of a common share at an exercise price of $25.50 per share
(the “July 2013 Warrants”).
The
fair value of the July 2013 Warrants of $328,350 were initially
estimated at closing using the Black-Scholes Option Pricing Model,
using volatilities of 62.4%, risk free interest rates of 0.58%,
expected life of 5 years, and dividend yield of Nil.
In the
underwritten public offering completed in June 2016, gross proceeds
of $5,200,000 were received through the sale of the Company’s
units comprised of common shares and warrants. The Company issued
at the initial closing of the offering an aggregate of 322,981
common shares and warrants to purchase an additional 161,490 common
shares, at a price of $16.10 per unit. The warrants are currently
exercisable, have a term of five years and an exercise price of
$19.30 per common share. The underwriter also purchased at such
closing additional warrants (collectively with the warrants issued
at the initial closing, the “June 2016 Warrants”) at a
purchase price of $0.01 per warrant to acquire 24,223 common shares
pursuant to the over-allotment option exercised in part by the
underwriter. The fair value of the June 2016 Warrants of $1,175,190
was initially estimated at closing using the Black-Scholes Option
Pricing Model, using volatility of 64.1%, risk free interest rates
of 0.92%, expected life of 5 years, and dividend yield of
Nil.
In the
registered direct offering completed in October 2017, gross
proceeds of $4,000,000 were received through the sale of the
Company’s common shares and warrants. The Company issued at
the closing of the offering an aggregate of 363,636 common shares
at a price of $11.00 per share and warrants to
Intellipharmaceutics International Inc.
Notes
to the condensed unaudited interim consolidated financial
statements
For the
three and nine months ended August 31, 2018 and 2017
(Stated
in U.S. dollars)
purchase an
additional 181,818 common shares.
The
October 2017 Warrants are exercisable six months following the
closing date and will expire 30 months after the date they become
exercisable
, and have an exercise price of $12.50 per common
share. The Company also issued the Placement Agents Warrants to
purchase 18,181 common shares at an exercise price of $13.75 per
share. The holders of October 2017 Warrants and Placement Agent
Warrants are entitled to a cashless exercise under which the number
of shares to be issued will be based on the number of share for
which warrants are exercised times the difference between the
market price of the common share and the exercise price divided by
the market price. The fair value of the October 2017 Warrants of
$742,555 was initially estimated at closing using the Black-
Scholes Option Pricing Model, using volatility of 73.67%, risk free
interest rates of 1.64%, expected life of 3 years, and dividend
yield of Nil.
The
fair value of the Placement Agents Warrants was estimated at
$86,196 using the Black-Scholes Option Pricing Model, using
volatility of 73.67%, a risk free interest rate of 1.64%, an
expected life of 3 years, and a dividend yield of Nil.
In the
two registered direct offerings completed in March 2018, gross
proceeds of $5,300,000 were received through the sale of the
Company’s common shares and warrants. The Company issued at
the closing of the offering an aggregate of 883,333 common shares
at a price of $6.00 per share and warrants to purchase an
additional 441,666 common shares.
The
March 2018 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 $6.00 per common
share. The Company also issued the March Placement Agent Warrants
to purchase 44,166 common shares at an exercise price of $7.50 per
share. The holders of March 2018 Warrants and March Placement Agent
Warrants are entitled to a cashless exercise under which the number
of shares to be issued will be based on the number of share for
which warrants are exercised times the difference between the
market price of the common share and the exercise price divided by
the market price. The fair value of the March 2018 Warrants of
$1,115,480 was initially estimated at closing using the Black-
Scholes Option Pricing Model, using volatility of 70%, risk free
interest rates of 2.44% and 2.46%, expected life of 3 years, and
dividend yield of Nil.
The
fair value of the Placement Agents Warrants was estimated at
$141,284 using the Black-Scholes Option Pricing Model, using
volatility of 70%, risk free interest rates of 2.44% and 2.46%, an
expected life of 3 years, and a dividend yield of Nil.
The
following table provides information on the 963,309 warrants
outstanding and exercisable as of August 31, 2018:
|
Warrant
|
|
|
|
Shares issuable upon exercise
|
|
June
2016 Warrants
|
$
19.30
|
277,478
|
June
2, 2021
|
138,739
|
|
October
2017 Warrants
|
$
12.50
|
181,818
|
October
13, 2020
|
181,818
|
|
March
2018 Warrants
|
$
6.00
|
291,666
|
March
16, 2021
|
291,666
|
|
March
2018 Warrants
|
$
6.00
|
150,000
|
March
21, 2021
|
150,000
|
|
Placement
Agent Warrants
|
$
13.750
|
18,181
|
October
13, 2020
|
18,181
|
|
March
Placement Agent Warrants
|
$
7.50
|
29,166
|
March
16, 2021
|
29,166
|
|
March
Placement Agent Warrants
|
$
7.50
|
15,000
|
March
21, 2021
|
15,000
|
|
|
|
963,309
|
|
824,570
|
During
the three and nine months ended August 31, 2018, there were no cash
exercises in respect of warrants (three and nine months ended
August 31, 2017 – 3,000 and 33,601) and no cashless exercise
(three and nine months ended August 31, 2017 - Nil) of warrants,
resulting in the issuance of Nil (three and nine months ended
August 31, 2017 – 1,500 and 16,801) and Nil (three and nine
months ended August 31, 2017 - Nil) common shares,
respectively.
For the
warrants exercised, the Company recorded a charge to capital stock
of $Nil (three and nine months ended August 31, 2017 - $38,442 and
$430,573) comprised of proceeds of $Nil (three and nine months
ended August 31, 2017 – $28,950 and $324,258) and the
associated amount of $Nil (three and nine months ended August 31,
2017 - $9,492 and $106,315) previously recorded in additional
paid-in-capital.
Intellipharmaceutics International Inc.
Notes
to the condensed unaudited interim consolidated financial
statements
For the
three and nine months ended August 31, 2018 and 2017
(Stated
in U.S. dollars)
Details
of warrant transactions are as follows:
|
|
|
|
|
|
|
|
|
Total
|
|
Outstanding,
December 1, 2017
|
149,174
|
87,000
|
277,478
|
181,818
|
18,181
|
-
|
-
|
713,651
|
|
Issued
|
-
|
-
|
-
|
-
|
-
|
441,666
|
44,166
|
485,832
|
|
Expired
|
(149,174
)
|
(87,000
)
|
-
|
-
|
-
|
-
|
-
|
(236,174
)
|
|
Outstanding,
August
31, 2018
|
-
|
-
|
277,478
|
181,818
|
18,181
|
441,666
|
44,166
|
963,309
|
|
|
|
|
|
|
|
Outstanding,
December 1, 2016
|
149,174
|
87,000
|
311,474
|
547,648
|
|
Exercised
|
-
|
-
|
(30,601
)
|
(30,601
)
|
|
Outstanding,
August
31, 2017
|
149,174
|
87,000
|
280,873
|
517,047
|
The
Company has had no taxable income under the Federal and Provincial
tax laws of Canada for the three and nine months ended August 31,
2018 and August 31, 2017. The Company has non-capital loss
carry-forwards at August 31, 2018, totaling $43,236,241 in Canada
and $47,132 in United States federal income tax losses that must be
offset against future taxable income. If not utilized, the loss
carry-forwards will expire between 2028 and 2038.
For the
three and nine months ended August 31, 2018, the Company had a
cumulative carry-forward pool of Canadian Federal Scientific
Research & Experimental Development expenditures in the amount
of approximately $15,700,000 which can be carried forward
indefinitely.
For the
three and nine months ended August 31, 2018, the Company had
approximately $3,000,000 of unclaimed Investment Tax Credits 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.
From
time to time, the Company may be exposed to claims and legal
actions in the normal course of business. As at August 31, 2018,
and continuing as at October 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
its Oxycodone ER product candidate would not infringe any of the
OxyContin® patents listed in the Orange Book, or that such
patents are invalid, and so notified Purdue Pharma L.P. and the
other owners of the subject patents listed in the Orange Book of
such certification. On April 7, 2017, the Company 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, had commenced patent infringement
proceedings against the Company in the U.S. District Court for the
District of Delaware (docket number 17-392) in respect of the
Company’s NDA filing for Oxycodone ER, alleging that its
proposed Oxycodone ER infringes 6 out of the 16 patents associated
with the branded
Intellipharmaceutics International Inc.
Notes
to the condensed unaudited interim consolidated financial
statements
For the
three and nine months ended August 31, 2018 and 2017
(Stated
in U.S. dollars)
11.
Contingencies
(continued)
product
OxyContin®, or the OxyContin® patents, listed in the
Orange Book. The complaint seeks injunctive relief as well as
attorneys' fees and costs and such other and further relief as the
Court may deem just and proper. An answer and counterclaim have
been filed.
Subsequent
to the above-noted filing of lawsuit, 4 further such patents were
listed and published in the Orange Book. The Company then similarly
certified to the FDA concerning such further patents. On March 16,
2018, the Company received notice that the Purdue litigation
plaintiffs had commenced further such patent infringement
proceedings against the Company adding the 4 further patents. This
lawsuit is also in the District of Delaware federal court under
docket number 18-404.
As
a result of the commencement of the first of these legal
proceedings, the FDA is stayed for 30 months from granting final
approval to the Company’s Oxycodone ER product candidate.
That time period commenced on February 24, 2017, when the Purdue
litigation plaintiffs received notice of the Company’s
certification concerning the patents, and will expire on August 24,
2019, unless the stay is earlier terminated by a final declaration
of the courts that the patents are invalid, or are not infringed,
or the matter is otherwise settled among the parties.
On
or about June 26, 2018 the court issued an order to sever 6
overlapping patents from the second Purdue case, but ordered
litigation to proceed on the 4 new (2017-issued) patents. An answer
and counterclaim was filed July 9, 2018. The existence and
publication of additional patents in the Orange Book, and
litigation arising therefrom, is an ordinary and to be expected
occurrence in the course of such litigation.
On
July 6, 2018 the court issued a so-called “Markman”
claim construction ruling on the first case and the October 22,
2018 trial date remains unchanged. The Company believes that it has
non-infringement and/or invalidity defenses to all of the asserted
claims of the subject patents in both of the cases and will
vigorously defend against these claims.
On
July 24, 2018, the parties to the case mutually agreed to dismiss
the infringement claims related to the Grünenthal ‘060
patent. The Grünenthal ‘060 patent is one of the six
patents included in the original litigation case, however, the
dismissal does not by itself result in a termination of the
30-month litigation stay. Infringement claims related to this
patent have been dismissed without prejudice.
On
October 4, 2018, the parties to the case mutually agreed to
postpone the scheduled court date pending a case status conference
scheduled for December 17, 2018.
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. On March 30,
2018, the Company filed a motion to dismiss in response to the
claim. A response by the plaintiffs was filed May 31, 2018. A reply
in support of the motion to dismiss was filed by the Company on
June 29, 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 condensed unaudited interim consolidated financial
statements
For the
three and nine months ended August 31, 2018 and 2017
(Stated
in U.S. dollars)
12.
Financial
instruments
The
Company follows ASC topic 820, “Fair Value
Measurements” which defines fair value, establishes a
framework for measuring fair value, and expands disclosures about
fair value measurements. The provisions of ASC topic 820 apply to
other accounting pronouncements that require or permit fair value
measurements. ASC topic 820 defines fair value as the exchange
price that would be received for an asset or paid to transfer a
liability (an exit price) in the principal or most advantageous
market for the asset or liability in an orderly transaction between
market participants at the measurement date; and establishes a
three level hierarchy for fair value measurements based upon the
transparency of inputs to the valuation of an asset or liability as
of the measurement date.
Inputs
refers broadly to the assumptions that market participants would
use in pricing the asset or liability, including assumptions about
risk. To increase consistency and comparability in fair value
measurements and related disclosures, the fair value hierarchy
prioritizes the inputs to valuation techniques used to measure fair
value into three broad levels. The three levels of the hierarchy
are defined as follows:
Level 1
inputs are quoted prices (unadjusted) in active markets for
identical assets or liabilities.
Level 2
inputs are inputs other than quoted prices included within Level 1
that are observable for the asset or liability, either directly or
indirectly for substantially the full term of the financial
instrument.
Level 3
inputs are unobservable inputs for asset or
liabilities.
The
categorization within the valuation hierarchy is based upon the
lowest level of input that is significant to the fair value
measurement.
(i)
The Company
calculates expected volatility based on historical volatility of
the Company’s peer group that is publicly traded for options
that have an expected life that is more than eight years (Level 2)
while the Company uses its own historical volatility for options
that have an expected life of eight years or less (Level
1).
(ii)
The Company
calculates the interest rate for the conversion option based on the
Company’s estimated cost of raising capital (Level
2).
An
increase/decrease in the volatility and/or a decrease/increase in
the discount rate would have resulted in an increase/decrease in
the fair value of the conversion option and warrants.
Fair
value of financial assets and financial liabilities that are not
measured at fair value on a recurring basis are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
$
|
$
|
$
|
|
Financial
Liabilities
|
|
|
|
|
|
Convertible debenture
(i)
|
1,338,975
|
1,346,445
|
1,290,465
|
1,316,386
|
(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 condensed unaudited interim consolidated financial
statements
For the
three and nine months ended August 31, 2018 and 2017
(Stated
in U.S. dollars)
12.
Financial
instruments (continued0
(b)
Interest rate and credit risk
Interest rate risk
is the risk that the value of a financial instrument might be
adversely affected by a change in interest rates. The Company does
not believe that the results of operations or cash flows would be
affected to any significant degree by a sudden change in market
interest rates, relative to interest rates on cash and the
convertible debenture due to the short-term nature of these
obligations.
Trade
accounts receivable potentially subjects the Company to credit
risk. The Company provides an allowance for doubtful accounts equal
to the estimated losses expected to be incurred in the collection
of accounts receivable.
The
following table sets forth details of the aged accounts receivable
that are not overdue as well as an analysis of overdue amounts and
the related allowance for doubtful accounts:
|
|
|
|
|
|
|
|
|
|
$
|
$
|
|
Total
accounts receivable
|
330,189
|
756,468
|
|
Less
allowance for doubtful accounts
|
(66,849
)
|
(66,849
)
|
|
Total
accounts receivable, net
|
263,340
|
689,619
|
|
|
|
|
|
Not
past due
|
263,330
|
689,619
|
|
Past
due for more than 31 days
|
|
|
|
but no
more than 90 days
|
-
|
5,176
|
|
Past
due for more than 120 days
|
66,859
|
61,673
|
|
Total
accounts receivable, gross
|
330,189
|
756,468
|
Financial
instruments that potentially subject the Company to concentration
of credit risk consist principally of uncollateralized accounts
receivable. The Company’s maximum exposure to credit risk is
equal to the potential amount of financial assets. For the three
and nine months ended August 31, 2018, two customers accounted for
substantially all the revenue and all the accounts receivable of
the Company and for the three and nine months ended August 31,
2017, Par accounted for substantially all of the revenue and all of
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.
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 August 31, 2018:
Intellipharmaceutics International Inc.
Notes
to the condensed unaudited interim consolidated financial
statements
For the
three and nine months ended August 31, 2018 and 2017
(Stated
in U.S. dollars)
12.
Financial
instruments (continued)
(d)
Liquidity risk (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
$
|
$
|
$
|
$
|
$
|
|
Third
parties
|
|
|
|
|
|
|
|
Accounts
payable
|
5,857,726
|
-
|
-
|
-
|
-
|
5,857,726
|
|
Accrued
liabilities
|
741,875
|
-
|
-
|
-
|
-
|
741,875
|
|
Related
parties
|
|
|
|
|
|
|
|
Employee
costs payable
|
216,926
|
-
|
-
|
-
|
-
|
216,926
|
|
Convertible
debenture (Note 5)
|
1,363,750
|
-
|
-
|
-
|
-
|
1,363,750
|
|
|
8,180,277
|
-
|
-
|
-
|
-
|
8,180,277
|
13.
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.
|
|
Three
months ended
|
Nine
months ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
$
|
$
|
$
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
Canada
|
-
|
-
|
-
|
-
|
|
United
States
|
413,555
|
1,189,739
|
1,325,040
|
4,426,617
|
|
|
413,555
|
1,189,739
|
1,325,040
|
4,426,617
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
2017
|
|
|
|
|
$
|
$
|
|
Total
assets
|
|
|
|
|
|
Canada
|
|
|
5,633,986
|
7,396,781
|
|
|
|
|
|
|
|
Total
property and equipment
|
|
|
|
|
|
Canada
|
|
|
2,909,927
|
3,267,551
|
14.
Subsequent
event
On September 10,
2018, the Company completed a private placement financing of an
unsecured convertible debenture in the principal amount of $0.5
million (the “2018 Debenture”), The 2018 Debenture has
is due to mature on September 1, 2020. The 2018 Debenture bears
interest at a rate of 10% per annum, payable monthly, is
pre-payable at any time at the option of the Company and is
convertible at any time into common shares at a conversion price of
$3.00 per common share at the option of the holder. Dr. Isa Odidi
and Dr. Amina Odidi, who are principal shareholders, directors and
executive officers of the Company provided the Company with the
$0.5 million of the proceeds for the 2018 Debenture.
2018 Third
Quarter
Management
Discussion and Analysis
MANAGEMENT
DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED AUGUST 31, 2018
The
following Management Discussion and Analysis
(“MD&A”) should be read in conjunction with the
August 31, 2018 condensed unaudited interim consolidated financial
statements of Intellipharmaceutics International Inc. The condensed
unaudited interim consolidated financial statements have been
prepared in accordance with accounting principles generally
accepted in the United States of America (“U.S. GAAP”),
as outlined in the Financial Accounting Standards Board
(“FASB”) Accounting Standards Codification
(“ASC”). Our accounting policies have the potential to
have a significant impact on our condensed unaudited interim
consolidated financial statements, either due to the significance
of the financial statement item to which they relate or because
they require judgment and/or estimation due to the uncertainty
involved in measuring, at a specific point in time, events which
are continuous in nature. The information contained in this
document is current in all material respects as of October 15, 2018
unless otherwise noted.
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 document 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), 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. We refer in
this document 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
TM
, 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 document, all
rights to such trademarks are nevertheless reserved. Unless
otherwise noted, other trademarks used in this document are the
property of their respective holders.
Unless
the context otherwise requires, references in this document to (i)
share amounts, per share data, share prices, exercise prices and
conversion rates have been adjusted to reflect the effect of the
1-for-10 reverse split which became effective on each of Nasdaq and
TSX at the open of market on September 14, 2018, (ii)
“consolidation” or “share consolidation”
are intended to refer to such reverse split, and (iii)
“pre-consolidation” and
“post-consolidation” are intended to refer to
“pre-reverse split” and “post-reverse
split”, respectively.
FORWARD-LOOKING STATEMENTS
Certain
statements in this document constitute “forward-looking
statements” within the meaning of the United States Private
Securities Litigation Reform Act of 1995 and/or
“forward-looking information” under the Securities Act
(Ontario). These statements include, without limitation, statements
expressed or implied regarding our expectations regarding our
recent reverse stock split, 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”,
“goals”, “set to”, “seeking” or
the negative of such terms or other comparable terminology. We made
a number of assumptions in the preparation of our forward-looking
statements. You should not place undue reliance on our
forward-looking statements, which are subject to a multitude of
known and unknown risks and uncertainties that could cause actual
results, future circumstances or events to differ materially from
those stated in or implied by the forward-looking
statements.
Risks,
uncertainties and other factors that could affect our actual
results include, but are not limited to
,
the
effects of general economic conditions, securing and maintaining
corporate alliances, our estimates regarding our capital
requirements and the effect of capital market conditions and other
factors, including the current status of our product development
programs, 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 our plan to comply 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. Other factors that could
cause actual results to differ materially include but are not
limited to:
●
the actual or
perceived benefits to users of our drug delivery technologies,
products and product candidates as compared to others;
●
our ability to
establish and maintain valid and enforceable intellectual property
rights in our drug delivery technologies, products and product
candidates;
●
the scope of
protection provided by intellectual property rights for our drug
delivery technologies, products and product
candidates;
●
recent and future
legal developments in the United States and elsewhere that could
make it more difficult and costly for us to obtain regulatory
approvals for our product candidates and negatively affect the
prices we may charge;
●
increased public
awareness and government scrutiny of the problems associated with
the potential for abuse of opioid based medications;
●
pursuing growth
through international operations could strain our
resources;
●
our limited
manufacturing, sales, marketing or distribution capability and our
reliance on third parties for such;
●
the actual size of
the potential markets for any of our products and product
candidates compared to our market estimates;
●
our selection and
licensing of products and product candidates;
●
our ability to
attract distributors and/or commercial partners with the ability to
fund patent litigation and with acceptable product development,
regulatory and commercialization expertise and the benefits to be
derived from such collaborative efforts;
●
sources of revenues
and anticipated revenues, including contributions from distributors
and commercial partners, product sales, license agreements and
other collaborative efforts for the development and
commercialization of product candidates;
●
our ability to
create an effective direct sales and marketing infrastructure for
products we elect to market and sell directly;
●
the rate and degree
of market acceptance of our products;
●
delays in product
approvals that may be caused by changing regulatory
requirements;
●
the difficulty in
predicting the timing of regulatory approval and launch of
competitive products;
●
the difficulty in
predicting the impact of competitive products on volume, pricing,
rebates and other allowances;
●
the number of
competitive product entries, and the nature and extent of any
aggressive pricing and rebate activities that may
follow;
●
the inability to
forecast wholesaler demand and/or wholesaler buying
patterns;
●
seasonal
fluctuations in the number of prescriptions written for our generic
Focalin XR® capsules and our generic Seroquel XR®
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;
●
the success and
pricing of other competing therapies that may become
available;
●
our ability to
retain and hire qualified employees;
●
the availability
and pricing of third-party sourced products and
materials;
●
challenges related
to the development, commercialization, technology transfer,
scale-up, and/or process validation of manufacturing processes for
our products or product candidates;
●
the manufacturing
capacity of third-party manufacturers that we may use for our
products;
●
potential product
liability risks;
●
the recoverability
of the cost of any pre-launch inventory should a planned product
launch encounter a denial or delay
of
approval by regulatory bodies, a delay in commercialization, or
other potential issues;
●
the successful
compliance with FDA, Health Canada and other governmental
regulations applicable to us and our third party
manufacturers’ facilities, products and/or
businesses;
●
our reliance on
commercial partners, and any future commercial partners, to market
and commercialize our products and, if approved, our product
candidates;
●
difficulties,
delays, or changes in the FDA approval process or test criteria for
Abbreviated New Drug Applications (“ANDAs”) and New
Drug Applications (“NDAs”);
●
challenges in
securing final FDA approval for our product candidates, including
our oxycodone hydrochloride extended release tablets (previously
referred to as Rexista
TM
) (“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 our reports, public disclosure documents and other filings
with the securities commissions and other regulatory bodies in
Canada and the U.S. which are available on
www.sedar.com
and
www.sec.gov
. The forward-looking
statements reflect our current views with respect to future events
and are based on what we believe are reasonable assumptions as of
the date of this document. We disclaim any intention and have no
obligation or responsibility, except as required by law, to update
or revise any forward-looking statements, whether as a result of
new information, future events or otherwise.
This
discussion should not 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.
CORPORATE DEVELOPMENTS
●
In October 2018, we
entered into an Underwriting Agreement (the “Underwriting
Agreement”) with H.C. Wainwright & Co., LLC (“H.C.
Wainwright”), pursuant to which we agreed to issue and sell,
in an underwritten public offering (the “October 2018
Offering”), 827,970 common shares and an aggregate of
16,563,335 pre-funded warrants (“Pre-Funded Warrants”)
exercisable into an aggregate of 16,563,335 common shares (the
“Warrant Shares”) together with common share purchase
warrants to purchase up to an aggregate of 17,391,305 common shares
(“Firm Warrants”). We also granted H.C. Wainwright an
option to purchase up to
2,608,695 additional common shares at a
purchase price of $0.74 per share and/or additional warrants to
purchase up to 2,608,695 additional common shares at a purchase
price of $0.01 each, less the underwriting discount, to cover
over-allotments (if any). The common shares are being offered
and sold to purchasers in units (“Units”), each of
which includes one common share and one Firm Warrant, and the
Pre-Funded Warrants are being offered and sold to purchasers in
units (“Pre-Funded Units”), each of which includes one
Pre-Funded Warrant and one Firm Warrant. The offering price is
$0.75 per Unit and $0.74 per Pre-Funded Unit. Each Firm Warrant
will be exercisable for one common share immediately upon the
closing of the offering at a price of $0.75 per common share,
subject to adjustment in certain circumstances, and will expire
five years from the date of issuance. Each Pre-Funded Warrant will
be immediately exercisable for one common share at an exercise
price of $0.01 per Pre-Funded Warrant and may be exercised at any
time after closing until all of the Pre-Funded Warrants are
exercised in full. The Pre-Funded Units are being offered and
sold to purchasers whose purchase of Units in the offering would
otherwise result in the purchaser, together with its affiliates and
certain related parties, beneficially owning more than 4.99% (or,
at the election of such purchaser, 9.99%) of our outstanding common
shares immediately following the consummation of the October 2018
Offering.
The closing of the
October 2018 Offering is expected to take place on or about October
16, 2018, subject to the satisfaction of customary closing
conditions.
●
In October 2018, we
announced that we had completed the clinical portion of our
Category 2 and 3 human abuse liability studies for our Oxycodone ER
product candidate to support its abuse-deterrent label claims for
both the oral and intranasal route of administration.
Bioanalytical samples
and statistical analysis for such studies are pending. Results from
the studies will be included in our response to the FDA Complete
Response Letter which is due no later than February 28,
2019.
●
As more fully
described below, in October 2018, we announced that we had regained
compliance with the Nasdaq minimum bid price requirement and that
the Nasdaq Hearings Panel (the “Hearings Panel”) had
granted our request for continued listing through October 17, 2018
while we work to regain compliance with Nasdaq’s $2.5 million
stockholders’ equity continued listing
requirement.
●
In September 2018,
we announced a one-for-ten share consolidation (the “reverse
split”). At a special meeting of our shareholders held on
August 15, 2018, our shareholders granted our Board of Directors
discretionary authority to implement a consolidation of our issued
and outstanding common shares on the basis of a consolidation ratio
within a range from five (5) pre-consolidation common shares for
one (1) post-consolidation common share to fifteen (15)
pre-consolidation common shares for one (1) post-consolidation
common share. The Board of Directors selected a share consolidation
ratio of ten (10) pre-consolidation shares for one (1)
post-consolidation common share. The reverse split was implemented
in order to qualify for continued listing on Nasdaq, whereby we
have to meet certain continued listing criteria, including a
closing bid price of at least $1.00 for a minimum of 10 consecutive
business days. On September 12, 2018, the Company filed articles of
amendment which implemented the reverse split, and our shares began
trading on each of The NASDAQ Capital Market (“Nasdaq”)
and the Toronto Stock exchange (“TSX”) on a post-split
basis under the Company’s existing trade symbol
“IPCI” at the market open on September 14, 2018. The
reverse split reduced the number of outstanding common shares from
approximately 43.5 million to approximately 4.35
million.
●
In September 2018,
we announced that we issued in a private placement financing (the
''Debenture Financing'') an unsecured convertible debenture in the
principal amount of $0.5 million (the ''2018 Debenture''), which
will mature September 1, 2020. The 2018 Debenture bears interest at
a rate of 10% per annum, payable monthly, is pre-payable at any
time at the option of the Company, and is convertible at any time
into common shares at a conversion price of $3.00 per common share
at the option of the holder. The Debenture Financing was
non-brokered and the net proceeds are to be used for working
capital and general corporate purposes.
●
In July 2018, we
announced that infringement claims related to one of the six
original patents included in the Purdue litigation (as described
below) have been dismissed without prejudice. As previously
announced, in April 2017, we received notice that Purdue Pharma
L.P., Purdue Pharmaceuticals L.P., The P.F. Laboratories, Inc.,
Rhodes Technologies, and another party 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 new drug application filing for Oxycodone ER. The
parties to the case mutually agreed to dismiss the infringement
claims related to the Grünenthal ‘060 patent (which is
one of the six patents included in the original litigation case).
Infringement claims related to this patent have been dismissed
without prejudice. On October 4, 2018, the parties to the case
mutually agreed to postpone the scheduled court date pending a case
status conference scheduled for December 17, 2018.
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.
NASDAQ NOTICES AND NASDAQ HEARINGS PANEL GRANT OF REQUEST FOR
CONTINUED LISTING
●
While
we are currently not in compliance with the requirements for the
continued listing of our common shares on Nasdaq, as described
below, we have until October 17, 2018 to satisfy those
requirements. The October 2018 Offering and our recent reverse
split are important parts of our plan to regain compliance with
Nasdaq’s requirements for the continued listing of our common
shares.
●
In
September 2017, we were notified by Nasdaq that we were not in
compliance with the minimum market value of listed securities
required for continued listing on Nasdaq. Nasdaq Listing Rule
5550(b) requires listed securities to maintain a minimum market
value of $35.0 million, among other alternatives, including minimum
stockholders’ equity of $2.5 million. A failure to meet the
minimum market value requirement exists if the deficiency continues
for a period of 30 consecutive business days. Based on the market
value of our common shares for the 30 consecutive business days
from August 8, 2017, we did not satisfy the minimum market value of
listed securities requirement. By rule, we were provided 180
calendar days, or until March 19, 2018, to regain compliance with
that requirement. To regain compliance, our common shares were
required to have a market value of at least $35.0 million for a
minimum of 10 consecutive business days prior to March 19, 2018,
which they did not. In the alternative, if the minimum market value
requirement for continued listing is not met, an issuer may
maintain continued listing under Nasdaq Listing Rule 5550(b) if it
has stockholders’ equity of at least $2.5
million.
●
On
April 20, 2018, we received notice that the Nasdaq Listings
Qualification staff (the “Nasdaq Staff”) had determined
to delist our common shares as a result of our failure to meet
either the minimum market value of listed securities requirement or
the minimum stockholders’ equity requirement for continued
listing. However, any delisting action by the Nasdaq Staff was
stayed pending the ultimate conclusion of the Company’s
hearing before the Panel.
●
In addition to not meeting the minimum market
value of listed securities or minimum stockholders’ equity
requirements, we were separately notified
in December 2017 that our common shares no longer
satisfied the minimum $1.00 per share bid requirement under Nasdaq
Listing Rule 5550(a)(2).
●
We
attended a hearing before the Hearings Panel on May 17, 2018, and
subsequently received formal notice that the Hearings Panel had
granted our request for continued listing provided that by
September 28, 2018, we (i) comply with Nasdaq’s $1.00 bid
price requirement by having a closing bid price of over $1.00 for
ten consecutive trading days, (ii) have stockholders’ equity
position of over $2.5 million, and (iii) provide the Hearings Panel
with updated financial projections demonstrating our ability to
maintain compliance with the stockholders’ equity rule for
the coming year. Following receipt of shareholder approval for a
reverse stock split (known as a share consolidation under Canadian
law) at our August 15, 2018 shareholders meeting, on September 12,
2018, we filed articles of amendment to effectuate a 1-for-10
reverse split, and our common shares began trading on each of
Nasdaq and the Toronto Stock Exchange on a post-reverse split basis
on September 14, 2018. As a result of the closing bid price of our
common shares exceeding $1.00 for the period from September 14,
2018 to September 27, 2018, we received a letter from Nasdaq
Listing Qualification notifying the Company that it had regained
compliance with Nasdaq’s minimum bid price requirement. On
September 29, 2018, we were advised that the Hearings Panel granted
an extension through October 17, 2018 for us to regain compliance
with Nasdaq’s stockholders’ equity continued listing
requirement. There is no assurance that we will be able to regain
compliance with Nasdaq’s stockholders’ equity
requirements, or if we do, that we will be able to maintain
compliance with Nasdaq’s listing requirements.
There is no assurance that we will be able to regain or maintain
compliance with the Nasdaq listing requirements or, if we do regain
compliance, that we will be able to maintain such compliance over
the long term. If we are unable to do so, our common shares may be
delisted from Nasdaq and the liquidity and market price of our
common shares may be adversely impacted as a result. If our common
shares are delisted from Nasdaq, they may trade in the
over-the-counter system, which may be a less liquid market. In such
case, our shareholders’ ability to trade, or obtain
quotations of the market value of, our common shares could be
severely limited because of lower trading volumes and transaction
delays.
BUSINESS OVERVIEW
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 and the
common shares of which are traded on the Toronto Stock Exchange and
Nasdaq.
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 a license and commercialization
agreement between Par Pharmaceutical, Inc. (“Par”) and
us (as amended on August 12, 2011 and September 24, 2013, the
“Par agreement”), pursuant to which we granted Par an
exclusive, royalty-free license to make and distribute in the U.S.
all strengths of our generic Focalin XR® (dexmethylphenidate
hydrochloride extended-release) capsules for a period of 10 years
from the date of commercial launch which was November 19, 2013.
Under the Par agreement, we made a filing with the FDA for approval
to market generic Focalin XR® capsules in various strengths in
the U.S. (the “Company ANDA”), and are the owner of
that Company ANDA, as approved in part by the FDA. We retain the
right to make and distribute all strengths of the generic product
outside of the U.S. Calendar quarterly profit-sharing payments for
its U.S. sales under the Company ANDA are payable by Par to us as
calculated pursuant to the Par agreement. Within the purview of the
Par agreement, Par also applied for and owns an ANDA pertaining to
all marketed strengths of generic Focalin XR® (the “Par
ANDA”), and is now approved by the FDA, to market generic
Focalin XR® capsules in all marketed strengths in the U.S. As
with the Company ANDA, calendar quarterly profit-sharing payments
are payable by Par to us for its U.S. sales of generic Focalin
XR® under the Par ANDA as calculated pursuant to the Par
agreement.
We
received final approval from the FDA in November 2013 under the
Company ANDA to launch the 15 and 30 mg strengths of our generic
Focalin XR
®
capsules.
Commercial sales of these strengths were launched immediately by
our commercialization partner in the U.S., Par. In January 2017,
Par launched the 25 and 35 mg strengths of its generic Focalin
XR
®
capsules in the U.S., and in May 2017, Par launched the 10 and 20
mg strengths, complementing the 15 and 30 mg strengths of our
generic Focalin XR
®
marketed by
Par. The FDA granted final approval under the Par ANDA for its
generic Focalin XR
®
capsules in the
5, 10, 15, 20, 25, 30, 35 and 40 mg strengths, and subsequently Par
launched the remaining 5 and 40 mg strengths. Under the Par
agreement, we receive quarterly profit share payments on
Par’s U.S. sales of generic Focalin XR
®
. We currently
expect revenues from sales of the generic Focalin XR
®
capsules to
improve over the longer term; however, results for the next several
quarters are expected to continue to be impacted by ongoing
competitive pressures in the generic market.
There can be no
assurance whether revenues from this product will improve going
forward or that any recently launched strengths will be
successfully commercialized. We depend significantly on the actions
of our marketing partner Par in the prosecution, regulatory
approval and commercialization of our generic Focalin
XR
®
capsules and on its timely payment to us of the contracted calendar
quarterly payments as they come due.
In
February 2017, we received final approval from the FDA for our ANDA
for metformin hydrochloride extended release tablets in the 500 and
750 mg strengths, a generic equivalent for the corresponding
strengths of the branded product Glucophage
®
XR sold in the
U.S. by Bristol-Myers Squibb. The Company is aware that several
other generic versions of this product are currently available that
serve to limit the overall market opportunity for this product. We
are continuing to evaluate options to realize commercial returns on
this product, particularly in international markets. There can be
no assurance that our metformin hydrochloride extended release
tablets for the 500 and 750 mg strengths 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 that serve to limit the overall market opportunity. We
are actively exploring the best approach to maximize our commercial
returns from this approval and are looking at several international
markets where, despite lower volumes, product margins are typically
higher than in the U.S. There can be no assurance that our generic
Keppra XR
®
for the 500 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 Pharmaceuticals LP (“AstraZeneca”).
Pursuant to a settlement agreement between us and AstraZeneca dated
July 30, 2012, we were permitted to launch our generic versions of
the 50, 150, 200, 300 and 400 mg strengths of generic Seroquel
XR®, on November 1, 2016, subject to FDA final approval of our
ANDA for those strengths. The Company manufactured and shipped
commercial quantities of all strengths of generic Seroquel XR®
to our marketing and distribution partner Mallinckrodt LLC
(“Mallinckrodt”), and Mallinckrodt launched all
strengths in June 2017.
In
October 2016, we announced a license and commercial supply
agreement with Mallinckrodt, granting Mallinckrodt an exclusive
license to market, sell and distribute in the U.S. the following
extended release drug product candidates (the "licensed products")
which have either been launched (generic Seroquel XR) or for which
we have ANDAs filed with the FDA (the “Mallinckrodt
agreement”):
■
Quetiapine fumarate
extended-release tablets (generic Seroquel XR®) –
Approved 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 with Mallinckrodt, we received a
non-refundable upfront payment of $3 million in October 2016. In
addition, the agreement also provides for a long-term profit
sharing arrangement with respect to these licensed products (which
includes up to $11 million in cost recovery payments that are
payable on future sales of licensed product). We have agreed to
manufacture and supply the licensed products exclusively for
Mallinckrodt on a cost plus basis. The Mallinckrodt agreement
contains customary terms and conditions for an agreement of this
kind and is subject to early termination in the event we do not
obtain FDA approvals of the Mallinckrodt licensed products by
specified dates, or pursuant to any one of several termination
rights of each party.
Upon the expiration of
the initial term, and absent any early termination actions, the
Mallinckrodt agreement will be automatically renewed for additional
and consecutive terms of one year (the 12-month period coinciding
with Mallinckrodt’s regularly established fiscal months),
absent notice of non-renewal given by one party to the other at
least 180 days prior to the end of the initial or renewal
term.
Our
goal is to leverage our proprietary technologies and know-how in
order to build a diversified portfolio of revenue generating
commercial products. We intend to do this by advancing our products
from the formulation stage through product development, regulatory
approval and manufacturing. We believe that full integration of
development and manufacturing will help maximize the value of our
drug delivery technologies, products and product candidates. We
also believe that out-licensing sales and marketing to established
organizations, when it makes economic sense, will improve our
return from our products while allowing us to focus on our core
competencies. We expect our expenditures for the purchase of
production, laboratory and computer equipment and the expansion of
manufacturing and warehousing capability to be higher as we prepare
for the commercialization of ANDAs, one NDA and one ANDS that are
pending FDA and Health Canada approval, respectively.
STRATEGY
Our
Hypermatrix™ technologies are central to the development and
manufacture of novel and generic controlled-release and
targeted-release oral solid dosage drugs. The Hypermatrix™
technologies are a multidimensional controlled-release drug
delivery platform that we believe can be applied to the efficient
development of a wide range of existing and new pharmaceuticals. We
believe that the flexibility of these technologies allows us to
develop complex drug delivery solutions within an
industry-competitive timeframe. Based on this technology platform,
we have developed several drug delivery systems and a pipeline of
products (some of which have received FDA approval) and product
candidates in various stages of development, including ANDAs filed
with the FDA (and one ANDS filed with Health Canada) and one NDA
filing, in therapeutic areas that include neurology,
cardiovascular, GIT, diabetes and pain. We expect that certain, but
not all, of the products in our pipeline may be developed from time
to time for third parties pursuant to drug development agreements
with those third parties, under which our commercialization partner
may pay certain of the expenses of development, make certain
milestone payments to us and receive a share of revenues or profits
if the drug is developed successfully to completion, the control of
which would generally be in the discretion of our drug development
partner.
The
principal focus of our development activities previously targeted
difficult-to-develop controlled-release generic drugs which follow
an ANDA regulatory path. Our current development effort is
increasingly directed towards improved difficult-to-develop
controlled-release drugs which follow an NDA 505(b)(2) regulatory
pathway. We have increased our 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
TM
. We have also
identified several additional 505(b)(2) product candidates for
development in various indication areas including cardiovascular,
dermatology, pulmonary disease and oncology. The technology that is
central to our abuse deterrent formulation of our Oxycodone ER is
the 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 System
(“PODRAS™”) delivery technology was initially
introduced to enhance our Oxycodone ER product candidate. The
PODRAS
TM
delivery technology platform was designed to prevent overdose when
more pills than prescribed are swallowed intact. Preclinical
studies of prototypes of oxycodone with PODRAS technology suggest
that, unlike other third-party abuse-deterrent oxycodone products
in the marketplace, if more tablets than prescribed are
deliberately or inadvertently swallowed, the amount of drug active
released over 24 hours may be substantially less than expected.
However, if the prescribed number of pills is swallowed, the drug
release should be as expected. Certain aspects of our PODRAS
technology are covered by U.S. Patent Nos. 9,522,119, 9,700,515,
9,700,516 and 9,801,939 and Canadian Patent No. 2,910,865 issued by
the U.S. Patent and Trademark Office and the Canadian Intellectual
Property Office in respect of “Compositions and Methods for
Reducing Overdose” in December 2016, July 2017 and October
2017, respectively. The issuance of these patents provides us with
the opportunity to accelerate our PODRAS™ development plan by
pursuing proof of concept studies in humans. We intend to
incorporate this technology in future product candidates, including
Oxycodone ER and other similar pain products, as well as pursuing
out-licensing opportunities.
The NDA
505(b)(2) pathway (which relies in part upon the FDA’s
findings for a previously approved drug) both accelerates
development timelines and reduces costs in comparison to NDAs for
new chemical entities. An advantage of our strategy for development
of NDA 505(b)(2) drugs is that our product candidates can, if
approved for sale by the FDA, potentially enjoy an exclusivity
period which may provide for greater commercial opportunity
relative to the generic ANDA route.
The
market we operate in is created by the expiration of drug product
patents, challengeable patents and drug product exclusivity
periods. There are three ways that we employ our controlled-release
technologies, which we believe represent substantial opportunities
for us to commercialize on our own or develop products or
out-license our technologies and products:
●
For branded
immediate-release (multiple-times-per-day) drugs, we can formulate
improved replacement products, typically by developing new,
potentially patentable, controlled-release once-a-day drugs. Among
other out-licensing opportunities, these drugs can be licensed to
and sold by the pharmaceutical company that made the original
immediate-release product. These can potentially protect against
revenue erosion in the brand by providing a clinically attractive
patented product that competes favorably with the generic
immediate-release competition that arises on expiry of the original
patent(s). The regulatory pathway for this approach requires NDAs
via a 505(b)(2) application for the U.S. or corresponding pathways
for other jurisdictions where applicable.
●
Some of our
technologies are also focused on the development of abuse-deterrent
and overdose preventive pain medications. The growing abuse and
diversion of prescription “painkillers”, specifically
opioid analgesics, is well documented and is a major health and
social concern. We believe that our technologies and know-how are
aptly suited to developing abuse-deterrent pain medications. The
regulatory pathway for this approach requires NDAs via a 505(b)(2)
application for the U.S. or corresponding pathways for other
jurisdictions where applicable.
●
For existing
controlled-release (once-a-day) products whose active
pharmaceutical ingredients (“APIs”) are covered by drug
molecule patents about to expire or already expired, or whose
formulations are covered by patents about to expire, already
expired or which we believe we do not infringe, we can seek to
formulate generic products which are bioequivalent to the branded
products. Our scientists have demonstrated a successful track
record with such products, having previously developed several drug
products which have been commercialized in the U.S. by their former
employer/clients. The regulatory pathway for this approach requires
ANDAs for the U.S. and ANDSs for Canada.
We
intend to collaborate in the development and/or marketing of one or
more products with partners, when we believe that such
collaboration may enhance the outcome of the project. We also plan
to seek additional collaborations as a means of developing
additional products. We believe that our business strategy enables
us to reduce our risk by (a) having a diverse product portfolio
that includes both branded and generic products in various
therapeutic categories, and (b) building collaborations and
establishing licensing agreements with companies with greater
resources thereby allowing us to share costs of development and to
improve cash-flow. There can be no assurance that we will be able
to enter into additional collaborations or, if we do, that such
arrangements will be commercially viable or
beneficial.
OUR DRUG DELIVERY TECHNOLOGIES
Hypermatrix
TM
Our
scientists have developed drug delivery technology systems, based
on the Hypermatrix™ platform, that facilitate
controlled-release delivery of a wide range of pharmaceuticals.
These systems include several core technologies, which enable us to
flexibly respond to a wide range of drug attributes and patient
requirements, producing a desired controlled-release effect. Our
technologies have been incorporated in drugs manufactured and sold
by major pharmaceutical companies.
This
group of drug delivery technology systems is based upon the drug
active ingredient (“drug active”) being imbedded in,
and an integral part of, a homogeneous (uniform), core and/or
coatings consisting of one or more polymers which affect the
release rates of drugs, other excipients (compounds other than the
drug active), such as for instance lubricants which control
handling properties of the matrix during fabrication, and the drug
active itself. The Hypermatrix™ technologies are the core of
our current marketing efforts and the technologies underlying our
existing development agreements.
nPODDDS
TM
In
addition to continuing efforts with Hypermatrix™ as a core
technology, our scientists continue to pursue novel research
activities that address unmet needs. 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
TM
Our
Paradoxical OverDose Resistance Activating System (PODRAS™)
delivery technology is designed to prevent overdose when more pills
than prescribed are swallowed intact. Preclinical studies of
prototypes of oxycodone with PODRAS technology suggest that, unlike
other third-party abuse-deterrent oxycodone products in the
marketplace, if more tablets than prescribed are deliberately or
inadvertently swallowed, the amount of drug active released over 24
hours may be substantially less than expected. However, if the
prescribed number of pills is swallowed, the drug release should be
as expected. In April 2015, the FDA published
Guidance for Industry: Abuse-Deterrent
Opioids — Evaluation and Labeling
, which cited the
need for more efficacious abuse-deterrence technology. In this
Guidance, the FDA stated, “opioid products are often
manipulated for purposes of abuse by different routes of
administration or to defeat extended-release properties, most
abuse-deterrent technologies developed to date are intended to make
manipulation more difficult or
to make
abuse of the manipulated product less attractive or less rewarding.
It should be noted that these technologies have not yet proven
successful at deterring the most common form of
abuse—swallowing a number of intact capsules or tablets to
achieve a feeling of euphoria.” The FDA reviewed our request
for Fast Track designation for our abuse deterrent Oxycodone ER
development program incorporating PODRAS™, and in May 2015
notified us that the FDA had concluded that we met the criteria for
Fast Track designation. Fast Track is a designation assigned by the
FDA in response to an applicant’s request which meets FDA
criteria. The designation mandates the FDA to facilitate the
development and expedite the review of drugs intended to treat
serious or life threatening conditions and that demonstrate the
potential to address unmet medical needs.
In
December 2016, July 2017 and October 2017, U.S. Patent Nos.
9,522,119, 9,700,515, 9,700,516 and 9,801,939 and Canadian Patent
No. 2,910,865 were issued by the U.S. Patent and Trademark Office
and the Canadian Intellectual Property Office in respect of
“Compositions and Methods for Reducing Overdose”. The
issued patents cover aspects of the PODRAS™ delivery
technology. The issuance of these patents represents a significant
advance in our abuse deterrence technology platform. The
PODRAS™ platform has the potential to positively
differentiate our technology from others of which we are aware, and
may represent an important step toward addressing the FDA’s
concern over the ingestion of a number of intact pills or tablets.
In addition to its use with opioids, the PODRAS
TM
platform is
potentially applicable to a wide range of drug products, inclusive
of over-the-counter drugs, that are intentionally or inadvertently
abused and cause harm by overdose to those who ingest them. We
intend to incorporate this technology in our 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.
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
|
$828
|
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
|
$127
|
Intellipharmaceutics
|
|
Venlafaxine hydrochloride extended-release capsules
|
Effexor XR
®
|
Depression
|
ANDA
application for commercialization approval for 3 strengths under
review by FDA
|
ANDA
|
$745
|
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
|
$354
|
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
|
$406
(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
|
$157
|
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
|
$96
|
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
|
$208
|
Intellipharmaceutics
|
|
Oxycodone hydrochloride controlled-release capsules
|
OxyContin®
|
Pain
|
NDA
application accepted February 2017 and under review by
FDA
|
NDA
505(b)(2)
|
$1,625
|
Intellipharmaceutics
|
|
Pregabalin extended-release capsules
|
Lyrica®
|
Neuropathic
pain
|
Investigational
New Drug (“IND”) application submitted in August
2015
|
NDA
505(b)(2)
|
$5,299
|
Intellipharmaceutics
|
|
Ranolazine extended-release tablets
|
Ranexa®
|
Chronic
angina
|
ANDA
application for commercialization approval for 2 strengths under
review by FDA
|
ANDA
|
$1,001
|
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
August 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®
(dexmethylphenidate hydrochloride extended-release) capsules for a
period of 10 years from the date of commercial launch (which was
November 19, 2013). We retain the right to make and distribute all
strengths of the generic product outside of the U.S. Calendar
quarterly profit-sharing payments for its U.S. sales of all
strengths of generic Focalin XR® are payable by Par to us as
calculated pursuant to the Par agreement.
We
received final approval from the FDA in November 2013 under the
Company ANDA to launch the 15 and 30 mg strengths of our generic
Focalin XR
®
) capsules.
Commercial sales of these strengths were launched immediately by
our commercialization partner in the U.S., Par. Our 5, 10, 20 and
40 mg strengths were also then tentatively FDA approved, subject to
the right of Teva Pharmaceuticals USA, Inc. 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 our commercial returns from
this approval and are looking at several international markets
where, despite lower volumes, product margins are typically higher
than in the U.S. There can be no assurance that the Company's
generic Keppra XR® for the 500 and 750 mg strengths will be
successfully commercialized.
Metformin hydrochloride – Glucophage® XR
(a registered trademark of the
brand manufacturer)
We
received final approval from the FDA in February 2017 for the 500
and 750 mg strengths of our generic Glucophage® XR (metformin
hydrochloride extended release) tablets. Glucophage® XR, and
the drug active metformin, are indicated for use in the management
of type 2 diabetes treatment. The Company is aware that several
other generic versions of this product are currently available and
serve to limit the overall market opportunity, however, we are
continuing to evaluate options to realize commercial returns on
this product, particularly in international markets. 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) (formerly known as Rexista
TM
)
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® (extended release oxycodone
hydrochloride) under single dose fasting, single dose steady-state
fasting and single dose fed conditions in healthy volunteers. We
had reported that the results from all three studies showed that
Oxycodone ER met the bioequivalence criteria (90% confidence
interval of 80% to 125%) for all matrices, i.e., on the measure of
maximum plasma concentration or Cmax, on the measure of area under
the curve time (AUC
t
) and on the
measure of area under the curve infinity (AUC
inf
).
In May
2015, the FDA provided us with notification regarding our IND
submission for 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.
(“Purdue”). The study design was based on FDA
recommendations and compared the lowest and highest strengths of
exhibit batches of our Oxycodone ER to the same strengths of
OxyContin®. The results show that the ratios of the
pharmacokinetic metrics, Cmax, AUC
0-t
and
AUC
0-f
for Oxycodone ER vs OxyContin®, are within the interval of 80%
- 125% required by the FDA with a confidence level exceeding
90%.
In July
2016, we announced the results of a food effect study conducted on
our behalf for Oxycodone ER. The study design was a
randomized, one-treatment two periods, two sequences, crossover,
open label, laboratory-blind bioavailability study for Oxycodone ER
following a single 80 mg oral dose to healthy adults under fasting
and fed conditions. The study showed that Oxycodone ER can be
administered with or without a meal (i.e., no food effect).
Oxycodone ER met the bioequivalence criteria (90% confidence
interval of 80% to 125%) for all matrices, involving maximum plasma
concentration and area under the curve (i.e., Cmax ratio of
Oxycodone ER taken under fasted conditions to fed conditions, and
AUC metrics taken under fasted conditions to fed conditions). We
believe that Oxycodone ER is well differentiated from currently
marketed oral oxycodone extended release products.
In
November 2016, we filed an NDA seeking authorization to market our
Oxycodone ER in the 10, 15, 20, 30, 40, 60 and 80 mg strengths,
relying on the 505(b)(2) regulatory pathway which allowed us to
reference data from Purdue’s file for its OxyContin®. In
February 2017, the FDA accepted for filing our NDA, and set a
Prescription Drug User Fee Act (“PDUFA”) target action
date of September 25, 2017. Our submission is supported by pivotal
pharmacokinetic studies that demonstrated that Oxycodone ER is
bioequivalent to OxyContin®. The submission also includes
abuse-deterrent studies conducted to support abuse-deterrent label
claims related to abuse of the drug by various pathways, including
oral, intra-nasal and intravenous, having reference to the FDA's
"Abuse-Deterrent Opioids - Evaluation and Labeling" guidance
published in April 2015.
Our NDA
was filed under Paragraph IV of the Hatch-Waxman Act, as amended.
We certified to the FDA that we believed that our Oxycodone
ER
product
candidate would not infringe any of the OxyContin® patents
listed in the FDA’s 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 all holders of the subject patents of such
certification. On April 7, 2017, we received notice that Purdue,
Purdue Pharmaceuticals L.P., The P.F. Laboratories, Inc., or
collectively the Purdue parties, Rhodes Technologies, and
Grünenthal GmbH, or collectively the Purdue litigation
plaintiffs, had commenced patent infringement proceedings, or the
Purdue litigation, against us in the U.S. District Court for the
District of Delaware (docket number 17-392) in respect of our NDA
filing for Oxycodone ER, alleging that our proposed Oxycodone ER
infringes 6 out of the 16 patents associated with the branded
product OxyContin®, or the OxyContin® patents, listed in
the Orange Book. The complaint seeks injunctive relief as well as
attorneys' fees and costs and such other and further relief as the
Court may deem just and proper. An answer and counterclaim have
been filed.
Subsequent
to the above-noted filing of lawsuit, 4 further such patents were
listed and published in the Orange Book. We then similarly
certified to the FDA concerning such further patents. On March 16,
2018, we received notice that the Purdue litigation plaintiffs had
commenced further such patent infringement proceedings adding the 4
further patents. This lawsuit is also in the District of Delaware
federal court under docket number 18-404.
As a
result of the commencement of the first of these legal proceedings,
the FDA is stayed for 30 months from granting final approval to our
Oxycodone ER product candidate. That time period commenced on
February 24, 2017, when the Purdue litigation plaintiffs received
notice of our certification concerning the patents, and will expire
on August 24, 2019, unless the stay is earlier terminated by a
final declaration of the courts that the patents are invalid, or
are not infringed, or the matter is otherwise settled among the
parties.
On or
about June 26, 2018, the court issued an order to sever 6
“overlapping” patents from the second Purdue case, but
ordered litigation to proceed on the 4 new (2017-issued) patents.
An answer and counterclaim was filed July 9, 2018. The existence
and publication of additional patents in the Orange Book, and
litigation arising therefrom, is an ordinary and to be expected
occurrence in the course of such litigation.
On July
6, 2018, the court issued a so-called “Markman” claim
construction ruling on the first case and the October 22, 2018
trial date remained unchanged. We believe that we have
non-infringement and/or invalidity defenses to all of the asserted
claims of the subject patents in both of the cases and will
vigorously defend against these claims.
On July
24, 2018, the parties to the case mutually agreed to dismiss the
infringement claims related to the Grünenthal ‘060
patent. The Grünenthal ‘060 patent is one of the six
patents included in the original litigation case, however, the
dismissal does not by itself result in a termination of the
30-month litigation stay. Infringement claims related to this
patent have been dismissed without prejudice.
On
October 4, 2018, the parties to the case mutually agreed to
postpone the scheduled court date pending a case status conference
scheduled for December 17, 2018.
In June
2017, we announced that a joint meeting of the Anesthetic and
Analgesic Drug Products Advisory Committee and Drug Safety and Risk
Management Advisory Committee of the FDA (the “Advisory
Committees”) meeting was scheduled for July 26, 2017 to
review our NDA for Oxycodone ER. The submission requested that our
Oxycodone ER product candidate include product label claims to
support the inclusion of language regarding abuse-deterrent
properties for the intravenous route of
administration.
In July
2017, the Company announced that the FDA Advisory Committees voted
22 to 1 in finding that the Company’s NDA for Oxycodone ER
should not be approved at this time. The 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 committees expressed a desire to
review the additional safety and efficacy data for Oxycodone ER
that may be obtained from human abuse potential studies for the
oral and intranasal routes of administration.
In
September 2017 the Company received a CRL from the FDA for the
Oxycodone ER NDA. In its CRL, the FDA provided certain
recommendations and requests for information, including that
Intellipharmaceutics complete Category 2 and Category 3 studies to
assess the abuse-deterrent properties of Oxycodone ER by the oral
and nasal routes of administration. The FDA also requested
additional information related to the inclusion of the blue dye in
the Oxycodone ER formulation, which is intended to deter abuse. The
FDA also requested that Intellipharmaceutics submit an alternate
proposed proprietary name for Oxycodone ER. The FDA determined that
it could not approve the application in its present form. The FDA
has granted our request for an extension to February 28, 2019 to
resubmit our NDA for Oxycodone ER under section 505(b)(2) of the
U.S. Federal Food, Drug and Cosmetic Act. However, we plan to
resubmit the application later this year.
In
February 2018, the Company met with the FDA to discuss the
above-referenced CRL for Oxycodone ER, including issues related to
the blue dye in the product candidate. Based on those discussions,
the product candidate will no longer include the blue dye. The blue
dye was intended to act as an additional deterrent if Oxycodone ER
is abused and serve as an early warning mechanism to flag potential
misuse or abuse. The FDA confirmed that the removal of the blue dye
is unlikely to have any impact on formulation quality and
performance. As a result, the Company will not be required to
repeat in vivo bioequivalence studies and pharmacokinetic studies
submitted in the Oxycodone ER NDA. The FDA also indicated that,
from an abuse liability perspective, Category 1 studies will not
have to be repeated on Oxycodone ER with the blue dye
removed.
The
abuse liability studies for the intranasal route of abuse commenced
in May 2018 with subject screening, while the studies to support
abuse-deterrent label claims for the oral route of abuse commenced
in June 2018. The clinical part of both studies has now been
completed. Bioanalytical samples and statistical analysis for such
studies are pending.
There
can be no assurance that the studies will be adequate, that we will
not be required to conduct further studies for Oxycodone ER, that
the FDA will approve any of the Company’s requested
abuse-deterrence label claims or that the FDA will ultimately
approve our NDA for the sale of Oxycodone ER in the U.S. market, or
that it will ever be successfully commercialized.
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. 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.
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
TM
XR in August 2015.
The FDA completed its review of the IND application and provided
constructive input that we will use towards further development of
the program. We believe our product candidate has significant
additional benefits to existing treatments and are currently
evaluating strategic options to advance this
opportunity.
There
can be no assurance that any additional Phase I or other clinical
trials we conduct will meet our expectations, that we will have
sufficient capital to conduct such trials, that we will be
successful in submitting an NDA 505(b)(2) filing with the FDA, that
the FDA will approve this product candidate for sale in the U.S.
market, or that it will ever be successfully
commercialized.
Other Potential Products and Markets
We are
continuing our efforts to identify opportunities internationally,
particularly in China, that could if effectuated provide product
distribution alternatives through partnerships and therefore would
not likely require an investment or asset acquisition by us.
Discussions toward establishing a partnership to facilitate future
development activities in China are ongoing. We have not at this
time entered into and may not ever enter into any such
arrangements. In addition, we are seeking to develop key
relationships in several other international jurisdictions where we
believe there may be substantial demand for our generic products.
These opportunities could potentially involve out-licensing of our
products, third-party manufacturing supply and more efficient
access to pharmaceutical ingredients and therefore assist with the
development of our product pipeline.
SELECTED FINANCIAL INFORMATION
|
|
For the three months ended
|
For the nine months ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
$
|
$
|
$
|
|
Revenue:
|
413,555
|
1,189,739
|
1,325,040
|
4,426,617
|
|
Expenses:
|
4,271,888
|
3,181,755
|
11,014,561
|
9,807,041
|
|
Loss
from operations
|
(3,954,104
)
|
(2,550,314
)
|
(9,962,968
)
|
(6,346,504
)
|
|
Loss
per common share, basic and diluted
|
(0.91
)
|
(0.83
)
|
(2.49
)
|
(2.09
)
|
|
|
|
|
|
|
|
|
As at
|
|
|
|
|
August 31,
|
November 30,
|
|
|
|
|
2018
|
2017
|
|
|
|
|
(UNAUDITED)
|
(AUDITED)
|
|
|
|
|
$
|
$
|
|
|
|
Cash
|
57,388
|
1,897,061
|
|
|
|
Total
assets
|
5,633,986
|
7,396,781
|
|
|
|
|
|
|
|
|
|
Convertible
debenture
|
1,338,975
|
1,290,465
|
|
|
|
Total
liabilities
|
10,593,002
|
7,010,398
|
|
|
|
Shareholders'
(deficit) equity
|
(4,959,016
)
|
386,383
|
|
|
|
Total
liabilities and shareholders equity
|
5,633,986
|
7,396,781
|
|
|
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We have
identified the following accounting policies that we believe
require application of management’s most significant
judgments, often requiring the need to make estimates about the
effect of matters that are inherently uncertain and may change in
subsequent periods.
Disclosure
regarding our ability to continue as a going concern is included in
Note 1 to our condensed unaudited interim consolidated financial
statements for the three and nine months ended August 31,
2018.
Use of Estimates
The
preparation of the condensed unaudited interim consolidated
financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during
the period. 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.
Revenue recognition
The
Company accounts for revenue in accordance with the provisions of
ASC topic 605 Revenue Recognition. The Company earns revenue from
non-refundable upfront fees, milestone payments upon achievement of
specified research or development, exclusivity milestone payments
and licensing payments on sales of resulting products. Revenue is
realized or realizable and earned when 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.
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 condensed unaudited interim consolidated
statements of operations and comprehensive loss.
The
Company also has a license and commercial supply agreement with
Mallinckrodt which provides Mallinckrodt an exclusive license to
market sell and distribute in the U.S. three drug product
candidates for which the Company has ANDAs filed with the FDA, one
of which (the Company’s generic Seroquel XR®) received
final approval from the FDA in 2017. Under the terms of this
agreement, the Company is responsible for the manufacture of
approved products for subsequent sale by Mallinckrodt in the U.S.
market. Following receipt of final FDA approval for its generic
Seroquel XR®, the Company began shipment of manufactured
product to Mallinckrodt. Licensing revenue in respect of
manufactured product is reported as revenue in accordance with ASC
topic 605. Once product is sold by Mallinckrodt, the Company
receives downstream licensing revenue amounts calculated and
reported by Mallinckrodt, with such amounts generally based upon
net product sales and net profit which includes estimates for
chargebacks, rebates, product returns, and other adjustments. Such
downstream licensing revenue payments received by the Company under
this agreement are not subject to further deductions for
chargebacks, rebates, product returns, and other pricing
adjustments. Based on this agreement and the guidance per ASC topic
605, the Company records licensing revenue as earned in the
condensed unaudited interim 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 R&D 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 R&D 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 three and nine months ended August 31, 2018, the Company
recognized $75,000 and $225,000 (three and nine months ended August
31, 2017 - $75,000 and $225,000) of revenue based on a
straight-line basis over the expected term of the Mallinckrodt
agreement of 10 years.
As of
August 31, 2018, the Company has recorded a deferred revenue
balance of $2,437,500 (November 30, 2017 -$2,662,500) relating to
the underlying contracts, of which $300,000 (November 30, 2017 -
$300,000) is considered a current portion of deferred
revenue.
Research and development costs
Research
and development costs related to continued R&D 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.
Inventory
Inventories
comprise raw materials, work in process, and finished goods, which
are valued at the lower of cost or market, on a first-in, first-out
basis. Cost for work in process and finished goods inventories
includes materials, direct labor, and an allocation of
manufacturing overhead. Market for raw materials is replacement
cost, and for work in process and finished goods is net realizable
value. The Company evaluates the carrying value of inventories on a
regular basis, taking into account such factors as historical and
anticipated future sales compared with quantities on hand, the
price the Company expects to obtain for products in their
respective markets, compared with historical cost and the remaining
shelf life of goods on hand. As of August 31, 2018, the Company had
inventories of $250,322 (November 30, 2017 - $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.
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 condensed unaudited interim consolidated statements of
operations and comprehensive loss.
The
Company’s functional and reporting currency is the U.S.
dollar.
Convertible debenture
In
fiscal 2013, the Company issued an unsecured convertible debenture
in the principal amount of $1.5 million (the “2013
Debenture”) as described in Note 5 to our condensed unaudited
interim consolidated financial statements. At issuance, the
conversion option was bifurcated from its host contract and the
fair value of the conversion option was characterized as an
embedded derivative upon issuance as it met the criteria of ASC
Topic 815 Derivatives and Hedging. Subsequent changes in the fair
value of the embedded derivative were recorded in the consolidated
statements of operations and comprehensive loss. The proceeds
received from the 2013 Debenture less the initial amount allocated
to the embedded derivative were allocated to the liability and were
accreted over the life of the 2013 Debenture using the 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.
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.
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 adopted ASU 2016-15 on May 1, 2018.
The adoption did not have an impact on the Company’s interim
consolidated financial statements for the nine months ended August
31, 2018.
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.
RESULTS OF OPERATIONS
Our
results of operations have fluctuated significantly from period to
period in the past and are likely to do so in the future. We
anticipate that our quarterly and annual results of operations will
be impacted for the foreseeable future by several factors,
including the timing of approvals to market our product candidates
in various jurisdictions and any resulting licensing revenue,
milestone revenue, product sales, the number of competitive
products and the extent of any aggressive pricing activity,
wholesaler buying patterns, the timing and amount of payments
received pursuant to our current and future collaborations with
third parties, the existence of any first-to-file exclusivity
periods, and the progress and timing of expenditures related to our
research, development and commercialization efforts. Due to these
fluctuations, we presently believe that the period-to-period
comparisons of our operating results are not a reliable indication
of our future performance.
The
following are selected financial data for the three and nine months
ended August 31, 2018 and 2017.
|
|
For the three months ended
|
For the nine months ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
|
Chagne
|
|
|
$
|
$
|
|
%
|
$
|
$
|
$
|
%
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
Licensing
|
320,330
|
1,114,739
|
(794,409
)
|
-71
%
|
1,062,597
|
4,201,617
|
(3,139,020
)
|
-75
%
|
|
Up-front
fees
|
93,225
|
75,000
|
18,225
|
24
%
|
262,443
|
225,000
|
37,443
|
17
%
|
|
|
413,555
|
1,189,739
|
(776,184
)
|
-65
%
|
1,325,040
|
4,426,617
|
(3,101,577
)
|
-70
%
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold
|
45,299
|
376,054
|
(330,755
)
|
-88
%
|
111,173
|
587,426
|
(476,253
)
|
-81
%
|
|
Gross
margin
|
368,256
|
813,685
|
(445,429
)
|
-55
%
|
1,213,867
|
3,839,191
|
(2,625,324
)
|
-68
%
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
Research
and development
|
3,324,221
|
2,298,804
|
1,025,417
|
45
%
|
7,783,549
|
7,007,503
|
776,046
|
11
%
|
|
Selling,
general and administrative
|
792,379
|
756,635
|
35,744
|
5
%
|
2,773,698
|
2,468,436
|
305,262
|
12
%
|
|
Depreciation
|
155,288
|
126,316
|
28,972
|
23
%
|
457,314
|
331,102
|
126,212
|
38
%
|
|
|
4,271,888
|
3,181,755
|
1,090,133
|
34
%
|
11,014,561
|
9,807,041
|
1,207,520
|
12
%
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
(3,903,632
)
|
(2,368,070
)
|
(1,535,562
)
|
65
%
|
(9,800,694
)
|
(5,967,850
)
|
(3,832,844
)
|
64
%
|
|
|
|
|
|
|
|
|
|
|
|
Net
foreign exchange gain/(loss)
|
9,406
|
(90,875
)
|
100,281
|
-110
%
|
17,106
|
(73,569
)
|
90,675
|
-123
%
|
|
Interest
income
|
8
|
5
|
3
|
60
%
|
22
|
15,030
|
(15,008
)
|
-100
%
|
|
Interest
expense
|
(59,886
)
|
(91,374
)
|
31,488
|
-34
%
|
(179,402
)
|
(320,115
)
|
140,713
|
-44
%
|
|
Net
loss and comprehensive loss
|
(3,954,104
)
|
(2,550,314
)
|
(1,403,790
)
|
55
%
|
(9,962,968
)
|
(6,346,504
)
|
(3,616,464
)
|
57
%
|
Three months ended August 31, 2018 compared to the three months
ended August 31, 2017
Revenue
The
Company recorded revenues of $413,555 for the three months ended
August 31, 2018 versus $1,189,739 for the three months ended August
31, 2017. Revenues consisted primarily of licensing revenues from
commercial sales of the 5,10, 15, 20, 25, 30, 35 and 40 mg
strengths of our generic Focalin XR® under the Par agreement.
Pursuant to the Par agreement, we receive quarterly profit share
payments on Par’s U.S. sales of generic Focalin
XR
®
.
The decrease in revenues in the three months ended August 31, 2018
is primarily due to considerably lower profit share payments from
sales of generic Focalin XR® capsules in the U.S. 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 subsequently levelled off
for the balance of 2017. Profit share payments from the various
strengths of generic Focalin XR® for the third quarter of 2018
showed continuation of competitive pressures on price. While gross
sales improved slightly in the second quarter of 2018, third
quarter sales show some decline and results continue to be impacted
by significant gross-to-net deductions such as chargebacks, rebates
and price adjustments. The 15, 25 and 30 mg strengths provide the
majority of the product’s gross sales, however, the other
strengths are not providing the material contribution to gross
sales or net profits expected since their launch in May and
November of last year. Pricing pressures on all strengths have
meant that chargebacks, rebates and pricing adjustments continue to
remain high and net profitability of the product has suffered as a
result. We currently expect revenues from this product to show
incremental improvement over the longer term, however, pricing
adjustments and similar deductions will likely continue to
negatively impact results for the next several
quarters.
Revenues
from generic Seroquel XR® showed some incremental improvement
in the third quarter of 2018, however, sales volumes are still well
below original expectations and market share gains have proven
difficult to achieve. Sales and net profits are improving
incrementally, however, any significant market share gains are
expected to take considerably more time to achieve, if at
all.
Revenues
under the Par and Mallinckrodt agreements represent the commercial
sales of the generic products in those strengths and may not be
representative of future sales.
Research and Development
Expenditures
for R&D for the three months ended August 31, 2018 were higher
by $1,025,417 compared to the three months ended August 31, 2017.
The increase was primarily due to an increase in third party
R&D expenditures as a result of clinical trials for Oxycodone
ER and higher patent litigation expense.
In the
three months ended August 31, 2018, we recorded $11,072 as expense
for stock based compensation for R&D employees. In the three
months ended August 31, 2017, we recorded $12,951 as expense for
stock based compensation for R&D employees.
Selling, General
and
Administrative
Selling,
general and administrative expenses were $792,379 for the three
months ended August 31, 2018 in comparison to $756,635 for the
three months ended August 31, 2017, an increase of $35,744. The
increase is primarily due to higher administrative costs, offset by
a decrease in wages and benefits and marketing costs.
Administrative
costs for the three months ended August 31, 2018 were $433,967 in
comparison to $251,876 in the three months ended August 31, 2017.
The increase relates primarily to higher professional
fees.
Expenditures
for wages and benefits for the three months ended August 31, 2018
were $248,587 in comparison to $308,572 in the three months ended
August 31, 2017. For the three months ended August 31, 2018, we
recorded $14,470 as expense for stock-based compensation compared
to an expense of $19,154 for the three months ended August 31,
2017.
Marketing
costs for the three months ended August 31, 2018 were $80,220 in
comparison to $160,957 in the three months ended August 31, 2017.
The decrease is primarily the result of a decrease in travel
expenditures related to business development and investor relations
activities.
Occupancy
costs for the three months ended August 31, 2018 were $29,605,
relatively consistent with $35,230 for the three months ended
August 31, 2017.
Depreciation
Depreciation
expenses for the three months ended August 31, 2018 were $155,288
in comparison to $126,316 in the three months ended August 31,
2017. The increase is primarily due to the additional investment in
production, laboratory and computer equipment during the year ended
November 30, 2017.
Foreign Exchange Gain
Foreign
exchange gain was $9,406 for the three months ended August 31, 2018
in comparison to a loss of $90,875 in the three months ended August
31, 2017. The foreign exchange gain for the three months ended
August 31, 2018 was due to the strengthening of the U.S. dollar
against the Canadian dollar during the three months ended August
31, 2018 as the exchange rates changed to $1.00 for C$1.3055 as at
August 31, 2018 from $1.00 for C$1.2948 as at May 31, 2018. The
foreign exchange gain for the three months ended August 31, 2017
was due to the weakening of the U.S. dollar against the Canadian
dollar during the three months ended August 31, 2017 as the
exchange rates changed to $1.00 for C$1.2536 as at August 31, 2017
from $1.00 for C$1.3500 as at May 31, 2017.
Interest Expense
Interest
expense for the three months ended August 31, 2018 was lower by
$31,488 compared with the same period in 2017. This is due to
interest expense paid on the 2013 Debenture which accrues interest
payable at 12% annually and the related conversion option embedded
derivative accreted at an annual imputed interest of approximately
4.9% in the third quarter of 2018 in comparison to the third
quarter of 2017 when the 2013 Debenture imputed interest was
approximately 15.2%.
Net Loss
The
Company recorded net loss for the three months ended August 31,
2018 of $3,954,104 or $0.91 per common share, compared with a net
loss of $2,550,314 or $0.83 per common share for the three months
ended August 31, 2017. In the three months ended August 31, 2018,
the net loss is primarily attributed to the lower licensing
revenues from commercial sales of generic Focalin XR®,
combined with increased third party R&D expenses and patent
litigation expenses. In the three months ended August 31, 2017, the
lower net loss was primarily attributed to lower third-party
R&D expenditures, as well as higher licensing revenue from
commercial sales of generic Focalin XR® and generic Seroquel
XR® in the third quarter of 2017.
Nine Months Ended August 31, 2018 Compared to the Nine Month Ended
August 31, 2017
Revenue
The
Company recorded revenues of $1,325,040 for the nine months ended
August 31, 2018 versus $4,426,617 for the nine months ended August
31, 2017. Such revenues consisted primarily of licensing revenues
from commercial sales of the 15, 25, 30 and 35 mg strengths of our
generic Focalin XR® under the Par agreement. The decrease in
revenues in the nine months ended August 31, 2018 compared to nine
months ended August 31, 2017 is primarily due to considerably lower
profit share payments from sales of generic Focalin XR®
capsules in the U.S. Beginning in early 2018, we began to see
significant impact from aggressive pricing by competitors,
resulting in a marked increase in gross-to-net deductions such as
wholesaler rebates, chargebacks and pricing adjustments. While the
gross-to-net deductions fluctuate on a quarter over quarter basis,
profit share payments for the last several quarters have showed
decline over the same period in the prior year.
Revenues
from generic Seroquel XR® are still well below levels expected
at the launch of the product in 2017, primarily due to the
Company’s commercial partner entering the market later than
planned. Several initiatives to gain market share have shown some
improved returns, however, it is expected to take some time to
determine if the product can achieve meaningful market penetration.
Management is continuing to evaluate strategic options to improve
returns from this product.
Cost of goods sold
The
Company recorded cost of goods sold of $111,173 for the nine months
ended August 31, 2018 versus $587,426 for the nine months ended
August 31, 2017. Cost of sales reflects the Company’s
manufacturing shipments of generic Seroquel XR® to
Mallinckrodt.
Research and Development
Expenditures
for R&D for the nine months ended August 31, 2018 were higher
by $776,046 compared to the nine months ended August 31, 2017. The
increase is primarily due to higher third party consulting fees and
higher patent litigation expenses, offset by higher non-cash
stock-based compensation expenses in the nine months ended August
31, 2017.
In the
nine months ended August 31, 2018, we recorded $79,067 of expenses
for stock-based compensation for R&D employees compared to
$1,614,977 for the nine months ended August 31, 2017, 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.
After
adjusting for the stock-based compensation expenses discussed
above, expenditures for R&D for the nine months ended August
31, 2018 were higher by $2,311,956 compared to the nine months
ended August 31, 2017. The increase was primarily due to an
increase in third party R&D expenditures as a result of
clinical trials for Oxycodone ER and higher patent litigation
expenses.
Selling, General
and
Administrative
Selling,
general and administrative expenses were $2,773,698 for the nine
months ended August 31, 2018 in comparison to $2,468,436 for the
nine months ended August 31, 2017, an increase of $305,262. The
increase is due to higher expenses related to administrative
costs.
Administrative
costs for the nine months ended August 31, 2018 were $1,476,609 in
comparison to $1,084,435 in the nine months ended August 31, 2017.
The increase in the nine months ended August 31, 2018 was due to
the increase in professional fees and legal fees.
Expenditures
for wages and benefits for the nine months ended August 31, 2018
were $878,454 in comparison to $891,274 in the nine months ended
August 31, 2017. For the nine months ended August 31, 2018, we
recorded $41,281 as expense for stock-based compensation compared
to an expense of $61,997 for the nine months ended August 31, 2017.
After adjusting for the stock-based compensation expenses,
expenditures for wages for the nine months ended August 31, 2018
were higher by $7,896 compared to the nine months ended August 31,
2017.
Marketing
costs for the nine months ended August 31, 2018 were $318,853 in
comparison to $390,012 in the nine months ended August 31, 2017.
This decrease is primarily the result of a decrease in travel
expenditures related to business development and investor relations
activities.
Occupancy
costs for the nine months ended August 31, 2018 were $99,782 in
comparison to $102,715 for the nine months ended August 31, 2017.
The slight decrease is due to lower facility operating
expenses.
Depreciation
Depreciation
expenses for the nine months ended August 31, 2018 were $457,314 in
comparison to $331,102 in the nine months ended August 31, 2017.
The increase is primarily due to the additional investment in
production, laboratory and computer equipment during the nine
months ended August 31, 2018.
Foreign Exchange Gain
Foreign
exchange gain was $17,106 for the nine months ended August 31, 2018
in comparison to a loss of $73,569 in the nine months ended August
31, 2017. The foreign exchange gain for the nine months ended
August 31, 2018 was due to the strengthening of the U.S. dollar
against the Canadian dollar during the nine months ended August 31,
2018 as the exchange rates changed to $1.00 for C$1.3055 as at
August 31, 2018 from $1.00 for C$1.2888 as at November 30, 2017.
The foreign exchange loss for the nine months ended August 31, 2017
was due to the weakening of the U.S. dollar against the Canadian
dollar during the nine months ended August 31, 2017 as the exchange
rates changed to $1.00 for C$1.3500 as at August 31, 2017 from
$1.00 for C$1.3429 as at November 30, 2016.
Interest Income
Interest
income for the nine months ended August 31, 2018 was lower by
$15,008 in comparison to the prior period. For the nine months
ended August 31, 2018 interest was lower largely due to interest
received on input tax credit refunds under the Scientific Research
& Experimental Development incentive program in the third
quarter of 2017.
Interest Expense
Interest
expense for the nine months ended August 31, 2018 was lower by
$140,713 compared with the prior period. This is due to interest
expense paid on the 2013 Debenture which accrues interest payable
at 12% annually and the related conversion option embedded
derivative accreted at an annual imputed interest of approximately
4.9% in the first nine months of 2018 in comparison to the first
nine months of 2017 when the 2013 Debenture imputed interest was
approximately 15.2%.
Net Loss
The
Company recorded net loss for the nine months ended August 31, 2018
of $9,962,968 or $2.49 per common share, compared with a net loss
of $6,346,504 or $2.09 per common share for the nine months ended
August 31, 2017. In the nine months ended August 31, 2018, the
higher net loss is attributed to the lower licensing revenues from
commercial sales of generic Focalin XR® combined with
increased third party R&D expenses primarily related to
clinical trials for the Company’s Oxycodone ER product, legal
and other administrative expenses. In the nine months ended August
31, 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.
SUMMARY OF QUARTERLY RESULTS
The
table below outlines selected financial data for the eight most
recent quarters. The quarterly results are unaudited and have been
prepared in accordance with U.S. GAAP, for interim financial
information.
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
$
|
$
|
$
|
|
August
31, 2018
|
413,555
|
(3,954,104
)
|
(0.91
)
|
(0.91
)
|
|
May
31, 2018
|
576,967
|
(2,859,276
)
|
(0.68
)
|
(0.68
)
|
|
February
28, 2018
|
334,518
|
(3,149,588
)
|
(0.91
)
|
(0.91
)
|
|
November
30, 2017
|
1,077,835
|
(2,510,936
)
|
(0.76
)
|
(0.76
)
|
|
August
31, 2017
|
1,189,739
|
(2,550,314
)
|
(0.83
)
|
(0.83
)
|
|
May
31, 2017
|
2,001,512
|
(1,805,329
)
|
(0.59
)
|
(0.59
)
|
|
February
28, 2017
|
1,235,366
|
(1,990,861
)
|
(0.66
)
|
(0.66
)
|
|
November
30, 2016
|
569,096
|
(3,913,304
)
|
(1.34
)
|
(1.34
)
|
(i)
Quarterly per share amounts may not sum due to
rounding
It is
important to note that historical patterns of revenue and
expenditures cannot be taken as an indication of future revenue and
expenditures. Net loss has been somewhat variable over the last
eight quarters and is reflective of varying levels of commercial
sales of generic Focalin XR® capsules, the level of our
R&D spending, and the vesting or modification of performance
based stock options. The higher net loss in the third quarter of
2018 is primarily attributed to higher third party R&D expenses
as a result of clinical trials for Oxycodone ER, as well as
increased patent litigation expenses. The lower net loss in the
second quarter of 2018 is primarily attributed to slightly higher
licensing revenues and lower R&D
spending.
The net loss in the first quarter of 2018 is primarily attributed
to lower licensing revenues from commercial sales of generic
Focalin XR®, along with higher R&D expenses. The lower net
loss in the fourth quarter of 2017 is primarily attributed to
higher licensing revenues and lower R&D spending and selling,
general and administrative expenses. The net loss in the third
quarter of 2017 was primarily due to higher licensing revenue,
partially offset by higher expenses related to the FDA Advisory
Committees meeting in July 2017. The lower net loss in the second
quarter of 2017 was primarily attributed to higher than normal
licensing revenues from commercial sales of generic Focalin
XR® in the 25 and 35 mg strengths complementing the 15 and 30
mg strengths of our generic Focalin XR
®
marketed by
Par, partially offset by an increase in performance based options
expense and higher third party consulting fees. The lower net loss
in the first quarter of 2017 is primarily attributed to higher
licensing revenues from commercial sales of generic Focalin
XR® due to Par’s launch of the 25 and 35 mg strengths of
its generic Focalin XR® capsules in that quarter, partially
offset by an increase in performance based stock options expense
and legal and other professional fees. The higher net loss in the
fourth quarter of 2016 is attributable to the accrual of management
bonuses and additional compensation costs related to vested
performance based stock options as a result of the Company’s
shareholders approving an extension of the expiry date of the
performance based stock options.
LIQUIDITY AND CAPITAL RESOURCES
|
|
For the three months ended
|
|
For the nine months ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
|
Change
|
|
|
$
|
$
|
$
|
%
|
$
|
$
|
$
|
%
|
|
Cash
flows used in operating activities
|
(1,287,928
)
|
(1,354,713
)
|
66,785
|
-5
%
|
(6,421,294
)
|
(4,027,439
)
|
(2,393,855
)
|
59
%
|
|
Cash
flows from financing activities
|
-
|
920,334
|
(920,334
)
|
-100
%
|
4,681,311
|
2,443,869
|
2,237,442
|
92
%
|
|
Cash
flows used in investing activities
|
(15,358
)
|
(306,083
)
|
290,725
|
-95
%
|
(99,690
)
|
(1,825,698
)
|
1,726,008
|
-95
%
|
|
Decrease
in cash
|
(1,303,286
)
|
(740,462
)
|
(562,824
)
|
76
%
|
(1,839,673
)
|
(3,409,268
)
|
1,569,595
|
-46
%
|
|
Cash,
beginning of period
|
1,360,674
|
1,475,618
|
(114,944
)
|
-8
%
|
1,897,061
|
4,144,424
|
(2,247,363
)
|
-54
%
|
|
Cash,
end of period
|
57,388
|
735,156
|
(677,768
)
|
-92
%
|
57,388
|
735,156
|
(677,768
)
|
-92
%
|
The
Company had cash of $57,388 as at August 31, 2018 compared to
$1,360,674 as at May 31, 2018. The decrease in cash during the
three months ended August 31, 2018 was mainly a result of
expenditures for R&D related to our ongoing product development
activities for Oxycodone ER and selling, general, and
administrative expenses. The decrease in cash during the three
months ended August 31, 2017 was mainly a result of our ongoing
expenditures in R&D and selling, general, and administrative
expenses, which included increased consulting fees incurred to
prepare for the July 26, 2017 FDA Advisory Committees meeting and
an increase in purchases of plant and production equipment to
support our generic Seroquel XR® launch, which were only
partially offset by higher cash receipts from commercialized sales
of our generic Focalin XR® and cash receipts provided from
financing activities derived from common share sales under the
Company’s at-the-market offering program.
In
November 2013, the Company entered into an equity distribution
agreement with Roth Capital Partners, LLC (“Roth”),
pursuant to which the Company originally could from time to time
sell up to 530,548 of the Company’s common shares for up to
an aggregate of $16.8 million (or such lesser amount as may then be
permitted under applicable exchange rules and securities laws and
regulations) through at-the-market issuances on 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 to the extent permitted
under Rule 415 under the Securities Act of 1933, as amended. Sales
of common shares through Roth, if any, will be made at such time
and at such price as are acceptable to the Company, from time to
time, by means of ordinary brokers’ transactions on Nasdaq or
otherwise at market prices prevailing at the time of sale or as
determined by the Company. The Company will pay Roth a commission,
or allow a discount, of 2.75% of the gross proceeds that the
Company receives from any sales of common shares under the equity
distribution agreement. The Company also agreed to reimburse Roth
for certain expenses relating to the at-the-market offering
program. As of August 31, 2018, the Company has issued and sold
474,035 common shares with an aggregate offering price of
$13,872,929. During the three and nine months ended August 31,
2018, an aggregate of Nil (three and nine months ended August 31,
2017 – 46,498 and 105,815) common shares were sold on Nasdaq
for gross proceeds of $Nil (three and nine months ended August 31,
2017 – $1,047,143 and $2,495,615), with net proceeds to the
Company of $Nil (three and nine months ended August 31, 2017
– $1,017,378 and $2,423,621), respectively, under the
at-the-market offering program. In March 2018, the Company
terminated its continuous offering under the prospectus supplement
dated July 18, 2017 and prospectus dated July 17, 2017 in respect
of its at-the-market program. If the Company seeks to offer and
sell common shares under its at-the-market program, the Company
will file another prospectus supplement prior to making such
additional offers and sales. As a result of prior sales of the
Company’s common shares under the equity distribution
agreement, as at August 31, 2018, except as set forth below, the
Company may in the future (if funding is then available thereunder
and the Company files a prospectus supplement as noted below) offer
and sell its common shares with an aggregate purchase price of 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. In March 2018, the Company
terminated
its
continuous offering under the prospectus supplement dated July 18,
2017 and prospectus dated July 17, 2017 in respect of its
at-the-market program. If the Company seeks to offer and sell
common shares under its at-the-market program, it will file another
prospectus supplement prior to making such additional offers and
sales. The Company is not required to sell shares under the equity
distribution agreement. Under Toronto Stock Exchange rules, the
number of common shares that may currently be offered under the
at-the-market program is 56,513. If the Company seeks to offer and
sell additional common shares under the at-the-market program, 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 the Company’s at-the-market
program.
The
underwriting agreement relating to the October 2018 Offering
contains various covenants, including a prohibition on the sales of
common shares or securities convertible or exchangeable into common
shares by the Company for a period of ninety days following the
date of the underwriting agreement, subject to certain exceptions.
The underwriting agreement also contains a prohibition on the
Company: (i) for a period of two years following the date of the
underwriting agreement, from directly or indirectly in any
at-the-market or continuous equity transaction, offer to sell, or
otherwise dispose of shares of capital stock of the Company or any
securities convertible into or exercisable or exchangeable for its
shares of capital stock or (ii) for a period of five years
following the closing, effecting or entering into an agreement to
effect any issuance by the Company of common shares or common share
equivalents involving a certain variable rate transactions under an
at-the-market offering agreement, whereby the Company may issue
securities at a future determined price, except that, on or after
the date that is two years after the closing, the Company may enter
into an at-the-market offering agreement.
For the
three months ended August 31, 2018, net cash flows used in
operating activities decreased to $1,287,928 as compared to net
cash flows used in operating activities for the three months ended
August 31, 2017 of $1,354,713. The decrease was primarily a result
of the higher loss from operations, offset by an increase in
accounts payable and decrease in accounts receivable.
For the
nine months ended August 31, 2018, net cash flows used in operating
activities increased to $6,421,294 as compared to net cash flows
used in operating activities for the nine months ended August 31,
2017 of $4,027,439. The increase was primarily a result of the
higher loss from operations, offset by an increase in accounts
payable and a decrease in accounts receivable.
R&D
costs, which are a significant portion of the cash flows used in
operating activities, related to continued internal research and
development programs are expensed as incurred. Equipment and
supplies are capitalized and amortized over their useful lives if
they have alternative future uses.
For the
three and nine months ended August 31, 2018, net cash flows
provided from financing activities were $Nil and $4,681,311,
compared to $920,334 and $2,443,869 respectively, for the three and
nine months ended August 31, 2017. Net cash flows from financing
activities in the nine months ended August 31, 2018 were related to
two registered direct offerings of an aggregate of 883,333 common
shares at a price of $6.00 per share (post reverse split) for gross
proceeds of $5,300,000. Net cash flows from financing activities in
the three and nine months ended August 31, 2017 principally related
to at-the-market issuances of common shares and the exercise of
previously issued warrants.
All
non-cash items have been added back or deducted from the condensed
unaudited interim consolidated statements of cash
flows.
With
the exception of the quarter ended February 28, 2014, the Company
has incurred losses from operations since inception. To date, the
Company has funded its R&D activities principally through the
issuance of securities, loans from related parties, funds from the
IPC Arrangement Agreement and funds received under commercial
license agreements. Since November 2013, research has also been
funded from revenues from sales of our generic Focalin XR®
capsules for the 15 and 30 mg strengths. With the launch of the 25
and 35 mg strengths by Par in January 2017, the launch of the 10
and 20 mg strengths in May 2017 along with the launch of the 5 and
40 mg strengths in November 2017, we expect sales of
generic
Focalin XR® to show some improvement longer term. However, due
to continued competitive pressures, we expect net profit payments
from this product to be negatively impacted for the next several
quarters. As of August 31, 2018, the Company had a cash balance of
$0.1 million. As of October 15, 2018, our cash balance was $0.1
million. On October 12, 2018, we entered into an Underwriting
Agreement, pursuant to which we agreed to issue and sell, in an
underwritten public offering 827,970 common shares and an aggregate
of 16,563,335 pre-funded warrants exercisable into an aggregate of
16,563,335 common shares, together with common share purchase
warrants to purchase up to an aggregate of 17,391,305 common
shares. We also granted the Underwriter an option to purchase up to
2,608,695 additional common shares and/or additional warrants to
purchase up to 2,608,695 additional common shares at a purchase
price of $0.75 each, less the underwriting discount, to cover
over-allotments (if any). The net proceeds to us from this
offering will be approximately $11.1 million after deducting
underwriting discounts and commissions and estimated offering
expenses payable by us (or $12.9 million if the underwriter’s
option to purchase additional shares and/or warrants is exercised
in full). We currently intend to use the net proceeds from this
offering for general corporate purposes, which may include working
capital, capital expenditures, research and development, accounts
payable, and other commercial expenditures. The Company may need to
obtain additional funding as we further the development of our
product candidates. Other potential sources of capital may include
payments from licensing agreements, cost savings associated with
managing operating expense levels, equity and/or debt financings
and/or new strategic partnership agreements which fund some or all
costs of product development. We intend to utilize the equity
markets to bridge any funding shortfall and to provide capital to
continue to advance our most promising product candidates. Our
future operations are highly dependent upon our ability to source
additional capital to support advancing our product pipeline
through continued R&D activities and to fund any significant
expansion of our operations. Our ultimate success will depend on
whether our product candidates receive the approval of the FDA or
Health Canada and whether we are able to successfully market
approved products. We cannot be certain that we will be able to
receive FDA or Health Canada approval for any of our current or
future product candidates, that we will reach the level of sales
and revenues necessary to achieve and sustain profitability, or
that we can secure other capital sources on terms or in amounts
sufficient to meet our needs or at all. Our cash requirements for
R&D during any period depend on the number and extent of the
R&D activities we focus on. At present, we are working
principally on our Oxycodone ER 505(b)(2), PODRAS
TM
technology,
additional 505(b)(2) product candidates for development in various
indication areas and selected generic product candidate development
projects. Our development of Oxycodone ER will require significant
expenditures, including costs to defend against the Purdue
litigation. For our Regabatin
TM
XR 505(b)(2) product candidate, Phase III clinical trials can be
capital intensive, and will only be undertaken consistent with the
availability of funds and a prudent cash management strategy. We
anticipate some investment in fixed assets and equipment over the
next several months, the extent of which will depend on cash
availability.
On
September 10, 2018, the Company completed a private placement
financing of the 2018 Debenture in the principal amount of $0.5
million. The 2018 Debenture is due to mature on September 1, 2020.
The 2018 Debenture bears interest at a rate of 10% per annum,
payable monthly, is pre-payable at any time at the option of the
Company and is convertible at any time into common shares at a
conversion price of $3.00 per common share at the option of the
holder.
Drs.
Isa and Amina Odidi, who are directors, executive officers and
principal shareholders of our Company, provided us with the
original $500,000 of the proceeds for the 2018
Debenture.
Effective
October 1, 2018, the maturity date for the 2013 Debenture was
extended to April 1, 2019. The Company currently expects to repay
the current outstanding principal amount of $1,350,000 on or about
April 1, 2019, 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, realize our assets and pay
our liabilities as they become due. Our cash outflows are expected
to consist primarily of internal and external R&D, legal and
consulting expenditures to advance our product pipeline and
selling, general and administrative expenses to support our
commercialization efforts. Depending upon the results of our
R&D programs, the impact of the Purdue litigation 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.
OUTSTANDING SHARE INFORMATION
As at
August 31, 2018 the Company has 4,353,678 common shares issued and
outstanding, which is an increase of 883,227 when compared to
November 30, 2017. The number of shares outstanding increased as a
result of the completion of the registered direct offerings of an
aggregate of 883,333 common shares in March 2018. The number of
options outstanding as of August 31, 2018 is 558,484, a decrease of
24,327 from November 30, 2017, due to the expiry of 15,827 options
and forfeiting of 8,500 options during the nine months ended August
31, 2018. The warrants outstanding as of August 31, 2018 represent
824,570 common shares issuable upon the exercise of 963,309
outstanding warrants, which represents an increase of 249,658
common shares (426,789 warrants) from November 30, 2017, due to the
issuance of 485,832 warrants to purchase 485,832 common shares and
the expiry of 236,174 warrants to purchase 59,043 common shares
during the nine months ended August 31, 2018. There were no
warrants exercised during the nine months ended August 31, 2018.
The number of deferred share units outstanding as of August 31,
2018 is 10,279, an increase of 866 from November 30, 2017. As of
October 15, 2018, the number of shares outstanding is
4,353,678.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT LIQUIDITY AND MARKET
RISK
Liquidity
risk is the risk that we will encounter difficulty raising liquid
funds to meet our commitments as they fall due. In meeting our
liquidity requirements, we closely monitor our forecasted cash
requirements with expected cash drawdown.
We are
exposed to interest rate risk, which is affected by changes in the
general level of interest rates. Due to the fact that our 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 us to credit risk. We
provide an allowance for doubtful accounts equal to the estimated
losses expected to be incurred in the collection of accounts
receivable.
We are
also exposed to credit risk at period end from the carrying value
of our cash. We manage this risk by maintaining bank accounts with
a Canadian Chartered Bank. Our cash is not subject to any external
restrictions.
We are
exposed to changes in foreign exchange rates between the Canadian
and United States dollar which could affect the value of our cash.
We had no foreign currency hedges or other derivative financial
instruments as of August 31, 2018. We did not enter into financial
instruments for trading or speculative purposes and we do not
currently utilize derivative financial instruments.
We have
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 us
versus the U.S. dollar would affect our loss and other
comprehensive loss by $0.1 million.
WORKING CAPITAL
Working
capital (defined as current assets minus current liabilities) has
decreased by approximately $5.5 million at August 31, 2018 from
November 30, 2017, mainly a result of an increase in accounts
payable and decrease in cash, partially offset by an increase in
prepaid expenses and inventory. We are actively exploring
partnership opportunities for both currently approved and
yet-to-be-approved products, as well as potential international
partnership opportunities for both existing and future products.
While the Company has some flexibility with its level of
expenditures, 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.
As a
R&D company, Intellipharmaceutics is eligible to receive
investment tax credits from various levels of government under the
SR&ED incentive programs. Depending on the financial condition
of our operating subsidiary Intellipharmaceutics Corp., R&D
expenses in any fiscal year could be claimed. Eligible R&D
expenses included salaries for employees involved in R&D, cost
of materials, equipment purchase as well as third party contract
services. This amount is not a reduction in income taxes but a form
of government refundable credits based on the level of R&D that
the Company carries out.
Effective
October 1, 2018, the maturity date for the 2013 Debenture was
extended to April 1, 2019.The Company currently expects to repay
the current outstanding principal amount of $1,350,000 on or about
April 1, 2019, if the Company then has cash available.
CAPITAL EXPENDITURES
Total
cash capital expenditures in the three and nine months ended August
31, 2018 were $15,358 and $99,690 compared to $306,083 and
$1,825,698 in the three and nine months ended August 31, 2017.
Capital expenditures in fiscal 2017 related primarily to the
purchase of plant and production equipment required to support our
generic Seroquel XR® launch. We anticipate limited investment
in fixed assets and equipment over the next several months due to
the acceleration of product commercialization activities, the
extent of which will depend on cash availability.
CONTRACTUAL OBLIGATIONS
In the
table below, we set forth our enforceable and legally binding
obligations and future commitments and obligations related to all
contracts. Some of the figures we include in this table are based
on management’s estimate and assumptions about these
obligations, including their duration, the possibility of renewal,
anticipated actions by third parties, and other factors. Operating
lease obligations relate to the lease of premises for the combined
properties, comprising the Company’s premises that it
currently operates from at 30 Worcester Road as well as the
adjoining property at 22 Worcester Road, which is indirectly owned
by the same landlord, which will expire in November 2020 with a 5
year renewal option. The Company also has an option to purchase the
combined properties up to November 30, 2020 based on a fair value
purchase formula but does not currently expect to exercise this
option in 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
$
|
$
|
$
|
$
|
$
|
|
Third
parties
|
|
|
|
|
|
|
|
Accounts
payable
|
5,857,726
|
-
|
-
|
-
|
-
|
5,857,726
|
|
Accrued
liabilities
|
741,875
|
-
|
-
|
-
|
-
|
741,875
|
|
Related
parties
|
|
|
|
|
|
|
|
Employee
costs payable
|
216,926
|
-
|
-
|
-
|
-
|
216,926
|
|
Convertible
debenture (Note 5)
|
1,363,750
|
-
|
-
|
-
|
-
|
1,363,750
|
|
|
8,180,277
|
-
|
-
|
-
|
-
|
8,180,277
|
CONTINGENCIES AND LITIGATION
From
time to time, we may be exposed to claims and legal actions in the
normal course of business. As at August 31, 2018, and continuing as
at October 15, 2018, we are not aware of any pending or threatened
material litigation claims against us, other than as described
below.
In
November 2016, we filed an NDA for our Oxycodone ER product
candidate, relying on the 505(b)(2) regulatory pathway, which
allowed us to reference data from Purdue 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 (docket
number 17-392) in respect of our NDA filing for Oxycodone ER,
alleging that our proposed Oxycodone ER infringes 6 out of the 16
patents associated with the branded product OxyContin
®
, or the
OxyContin
®
patents, listed
in the Orange Book. The complaint seeks injunctive relief as well
as attorneys' fees and costs and such other and further relief as
the Court may deem just and proper. An answer and counterclaim have
been filed.
Subsequent
to the above-noted filing of lawsuit, 4 further such patents were
listed and published in the Orange Book. The Company then similarly
certified to the FDA concerning such further patents. On March 16,
2018, we received notice that the Purdue litigation plaintiffs had
commenced further such patent infringement proceedings against us
adding the 4 further patents. This lawsuit is also in the District
of Delaware federal court
under
docket number 18-404.
As a
result of the commencement of the first of these legal proceedings,
the FDA is stayed for 30 months from granting final approval to our
Oxycodone ER product candidate. That time period commenced on
February 24, 2017, when the Purdue litigation plaintiffs received
notice of our certification concerning the patents, and will expire
on August 24, 2019, unless the stay is earlier terminated by a
final declaration of the courts that the patents are invalid, or
are not infringed, or the matter is otherwise settled among the
parties.
On or
about June 26, 2018 the court issued an order to sever 6
“overlapping” patents from the second Purdue case, but
ordered litigation to proceed on the 4 new (2017-issued) patents.
An answer and counterclaim was filed July 9, 2018. The existence
and publication of additional patents in the Orange Book, and
litigation arising therefrom, is an ordinary and to be expected
occurrence in the course of such litigation.
On July
6, 2018 the court issued a so-called “Markman” claim
construction ruling on the first case and the October 22, 2018
trial date remained unchanged. We believe that we have
non-infringement and/or invalidity defenses to all of the asserted
claims of the subject patents both of the cases and will vigorously
defend against these claims.
On July
24, 2018, the parties to the case mutually agreed to dismiss the
infringement claims related to the Grünenthal ‘060
patent. The Grünenthal ‘060 patent is one of the six
patents included in the original litigation case, however, the
dismissal does not by itself result in a termination of the
30-month litigation stay. Infringement claims related to this
patent have been dismissed without prejudice.
On
October 4, 2018, the parties to the case mutually agreed to
postpone the scheduled court date pending a case status conference
scheduled for December 17, 2018.
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.
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 our NDA for
Oxycodone ER abuse-deterrent oxycodone hydrochloride extended
release tablets. The complaint seeks, among other remedies,
unspecified damages, attorneys’ fees and other costs,
equitable and/or injunctive relief, and such other relief as the
court may find just and proper. On March 30, 2018, we filed a
motion to dismiss in response to the claim. A response by the
plaintiffs was filed on May 31, 2018. A reply in support of the
motion to dismiss was filed by the Company on June 29, 2018. We
intend to vigorously defend against the claims asserted in the
consolidated action.
RELATED PARTY TRANSACTIONS
In
January 2013, the Company completed the private placement financing
of the 2013 Debenture. The 2013 Debenture bears interest at a rate
of 12% per annum, payable monthly, is pre-payable at any time at
the option of the Company and is convertible at any time into
common shares at a conversion price of $30.00 per common share at
the option of the holder. Drs. Isa and Amina Odidi, who are
directors, executive officers and principal shareholders of our
Company, provided us with the original $1.5 million of the proceeds
for the 2013 Debenture. In December 2016, a principal repayment of
$150,000 was made on the 2013 Debenture and the maturity date was
extended until April 1, 2017. Effective September 28, 2017, the
maturity date for the 2013 Debenture was further extended to
October 1, 2018. Effective October 1, 2018, the maturity date for
the 2013 Debenture was further extended to April 1, 2019.The
Company currently expects to repay the current outstanding
principal amount of $1,350,000 on the 2013 Debenture on or about
April 1, 2019, if the Company then has cash available.
On
September 10, 2018, the Company completed a private placement
financing of the 2018 Debenture. The 2018 Debenture bears interest
at a rate of 10% per annum, payable monthly, may be prepaid at any
time at our option, and is convertible into Common Shares at any
time prior to the maturity date at a conversion price of $3.00 per
Common Share at the option of the holder. Drs. Isa and Amina Odidi,
who are directors, executive officers and principal shareholders of
our Company, provided us with the original $500,000 of proceeds for
the 2018 Debenture. The maturity date for the 2018 Debenture is
September 1, 2020.
To the
Company’s knowledge, Armistice Capital Master Fund, Ltd.
and/or its affiliates (collectively “Armistice”),
currently a holder of in excess of 10% of the Company’s
outstanding Common Shares, participated in (i) a registered direct
offering in October 2017, pursuant to a placement agent agreement
dated October 10, 2017 between the Company and H.C. Wainwright, and
(ii) the registered direct offerings completed in March 2018,
pursuant to placement agent agreements dated March 12, 2018 and
March 18, 2018 between the Company and H.C. Wainwright; and
Armistice is participating in the October 2018
Offering.
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.
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 August 31, 2018. Disclosure controls
and procedures are designed to ensure that the information required
to be disclosed by the Company in the reports it files or submits
under securities legislation is recorded, processed, summarized and
reported on a timely basis and that such information is accumulated
and communicated to management, including the Company’s Chief
Executive Officer and Chief Financial Officer, as appropriate, to
allow required disclosures to be made in a timely fashion. Based on
that evaluation, management has concluded that these disclosure
controls and procedures were effective as of August 31,
2018.
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
August 31, 2018.
In the
second quarter of 2017, we initiated the transition from the COSO
1992 Internal Control - Integrated Framework to the COSO
2013 Internal Control - Integrated Framework. Management has
completed the business risk and information technology components
and is working towards completion of controls over financial
reporting as well as fraud risk. We expect the transition to the
new framework 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.
Changes in Internal Control over Financial Reporting
During
the three and nine months ended August 31, 2018, there were no
changes made to the Company’s internal control over financial
reporting that have materially affected, or are reasonably likely
to materially affect, the Company’s internal control over
financial reporting, and specifically, there were no changes in
accounting functions, board or related committees and charters, or
auditors; no functions, controls or financial reporting processes
of any constituent entities were adopted as the Company’s
functions, controls and financial processes; and no other
significant business processes were implemented.
OFF-BALANCE SHEET ARRANGEMENTS
The
Company, as part of its ongoing business, does not participate in
transactions that generate relationships with unconsolidated
entities or financial partnerships, such as entities often referred
to as structured finance or special purpose entities
(“SPE”), which would have been established for the
purpose of facilitating off-balance sheet arrangements or other
contractually narrow or limited purposes. As of August 31, 2018,
the Company was not involved in any material unconsolidated SPE
transactions.
RISKS AND UNCERTAINTIES
We are
a R&D company that received final FDA approval of our once
daily generic Focalin XR® capsules for the 15 and 30 mg
strengths in November 2013. We depend significantly on the actions
of our development partner Par in the prosecution, regulatory
approval and commercialization of our generic Focalin XR®
capsules and on its timely payment to us of the contracted
quarterly payments as they come due. Our near term ability to
generate significant revenue will depend upon successful
commercialization of our products in the U.S., where the branded
Focalin XR® product is in the market. Although we have several
other products in our pipeline, and received final approval from
the FDA for our generic
Keppra
XR® for the 500 and 750 mg strengths, final approval from the
FDA for our generic Glucophage XR® in the 500 and 750 mg
strengths and of our generic Seroquel XR® which is partnered
with Mallinckrodt, the majority of the products in our pipeline are
at earlier stages of development. We are exploring licensing and
commercial alternatives for our generic Keppra XR® and generic
Glucophage XR® product strengths that have been approved by
the FDA. Because of these characteristics, the Company is subject
to certain risks and uncertainties, or risk factors. The Company
cannot predict or identify all such risk factors nor can it predict
the impact, if any, of the risk factors on its business operations
or the extent to which a factor, event or any such combination may
materially change future results of financial position from those
reported or projected in any forward looking statements.
Accordingly, the Company cautions the reader not to rely on
reported financial information and forward-looking statements to
predict actual future results. This document and the accompanying
financial information should be read in conjunction with this
statement concerning risks and uncertainties. Some of the risks,
uncertainties and events that may affect the Company, its business,
operations and results of operations are given in this section.
However, the factors and uncertainties are not limited to those
stated.
We
believe that the revenues derived from our generic Focalin XR®
capsules are subject to wholesaler buying patterns, increased
generic competition negatively impacting price, margins and market
share consistent with industry post-exclusivity experience and, to
a lesser extent, seasonality (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.
Since
we commenced operations, we have incurred accumulated losses
through August 31, 2018. We had an accumulated deficit of
$81,836,427 as of August 31, 2018 and have incurred additional
losses since such date. As we engage in the development of products
in our pipeline, we will continue to incur further losses. There
can be no assurance that we will ever be able to achieve or sustain
profitability or positive cash flow. Our ultimate success will
depend on whether our product candidates receive the approval of
the FDA or Health Canada and whether we are able to successfully
market approved products. We cannot be certain that we will be able
to receive FDA or Health Canada approval for any of our current or
future product candidates, 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
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. 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 impact of the Purdue
litigation 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 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 requested 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, such as the Purdue litigation, regarding
one or more of our product candidates could delay final FDA
approval of such candidates and materially adversely affect our
ability to market our products. Even if we are found not to
infringe Purdue’s or any other plaintiff’s patent
claims or the claims are found invalid or unenforceable, defending
any such infringement claims could be expensive and time-consuming
and could distract management from their normal responsibilities.
If we fail to achieve one or more of our planned goals, the price
of our common shares could decline.
Further risks and uncertainties affecting us can be found elsewhere
in this document, in our latest Annual Information Form, our latest
Form F-1 and F-3, as amended or supplemented (including any
documents forming a part thereof or incorporated by reference
therein), and our latest Form 20-F, and other public documents
filed on SEDAR and EDGAR.
ADDITIONAL INFORMATION
Additional
information relating to the Company, including the Company’s
latest Annual Information Form, our latest Form F-1 and F-3, as
amended or supplemented (including any documents forming a part
thereof or incorporated by reference therein), and latest Form
20-F, can be located under the Company’s profile on the SEDAR
website at www.sedar.com and on the EDGAR section of the
SEC’s website at
www.sec.gov
.
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