· | The board of directors of the CompanyThe Board may discontinue the Option Plan at any time without consent of the participants under the Option Plan provided that such discontinuance shall not adversely alter or impair any option previously granted.A copy of the Option Plan is available upon request in writing to the Chief Financial Officer of the Company at 30 Worcester Road, Toronto, Ontario, M9W 5X2 or on www.sedar.com. The 1,775,163 shares that are currently authorized for issuance under the Option Plan represent 10% of the common shares issued and outstanding as at May 10, 2012. Of the options authorized for issuance under the Option Plan, a total of 1,376,818 have been issued, representing 7.8% of the shares issued and outstanding as of May 10, 2012. As of May 10, 2012, 25,000 options have been exercised under the Plan. Restricted Share Unit Plan The Company established a restricted share unit plan (the “RSU Plan”) to form part of its incentive compensation arrangements available for officers and employees of the Company and its designated affiliates as of May 28, 2010, when the RSU Plan received shareholder approval. The key features of the RSU Plan are as follows: | · | The stated purpose of the RSU Plan is to advance the interests of the Company through the motivation, attraction and retention of employees and officers of the Company and the designated affiliates of the Company and to secure for the Company and the shareholders of the Company the benefits inherent in the ownership of common shares by employees and officers of the Company, it being generally recognized that share incentive plans aid in attracting, retaining and encouraging employees and officers due to the opportunity offered to them to acquire a proprietary interest in the Company. |
| · | Employees and officers, including both full-time and part-time employees, of the Company and any designated affiliate of the Company, but not any directors of the Company, are eligible to participate under |
| · | the RSU Plan. By the terms of the RSU Plan, Dr. Isa Odidi and Dr. Amina Odidi are specifically not eligible to participate. |
| · | The RSU Plan is administered by the Board or a committee thereof, which will determine, from time to time, who may participate in the RSU Plan, the number of RSUs to be awarded and the terms of each RSU, all such determinations to be made in accordance with the terms and conditions of the RSU Plan. |
| · | The number of common shares available for issuance upon the vesting of RSUs awarded under the RSU Plan is limited to 330,000 common shares of the Company. |
| · | A separate notional account will be maintained for each participant under the RSU Plan. Each such account will be credited with RSUs awarded to the participant from time to time by way of a bookkeeping entry in the books of the Company. On the vesting of the RSUs and the corresponding issuance of common shares to the participant, or on the forfeiture and cancellation of the RSUs, the RSUs credited to the participant’s account will be cancelled. |
| · | At the time of the award of RSUs, the Board will determine in its sole discretion the vesting criteria (whether based on time or performance measures) applicable to the awarded RSUs. Unless otherwise determined by the Board at the time of the award, RSUs will vest in respect of 33 1/3 % of the common shares subject to the RSUs on the first day after each of the first three anniversaries of the award date of such RSU. Notwithstanding the foregoing, all vesting and issuances or payments, as applicable, will be completed no later than December 15 of the third calendar year commencing after an award date. |
| · | The RSU Plan provides that any unvested RSUs will vest at such time as determined by the Board in its sole discretion such that participants in the RSU Plan will be able to participate in a change of control transaction, including by surrendering such RSUs to the Company or a third party or exchanging such RSUs, for consideration in the form of cash and/or securities. |
| · | Under the RSU Plan, should the vesting of an RSU fall within a blackout period or within nine business days following the expiration of a blackout period, the vesting will be automatically extended to the tenth business day after the end of the blackout period. |
| · | If an “event of termination” has occurred, any and all common shares corresponding to any vested RSUs in a participant’s account, if any, will be issued as soon as practicable after the event of termination to the former participant. If an event of termination has occurred, any unvested RSUs in the participant’s account will, unless otherwise determined by the Board in its discretion, forthwith and automatically be forfeited by the participant and cancelled. Notwithstanding the foregoing, if a participant is terminated for just cause, each unvested RSU in the participant’s account will be forfeited by the participant and cancelled. An “event of termination” is defined under the RSU Plan as an event whereby a participant ceases to be eligible under the RSU Plan and is deemed to have occurred by the giving of any notice of termination of employment (whether voluntary or involuntary and whether with or without cause), retirement, or any cessation of employment for any reason whatsoever, including disability or death. |
| · | No rights under the RSU Plan and no RSUs awarded pursuant to the provisions of the RSU Plan are assignable or transferable by any participant other than pursuant to a will or by the laws of descent and distribution. |
| · | Under the RSU Plan, the Board may from time to time in its absolute discretion amend, modify and change the provisions of the RSU Plan or any RSUs awarded pursuant to the Plan, provided that any amendment will: |
| · | not adversely alter or impair any optionRSU previously granted.awarded except as permitted by the adjustment provisions in the RSU Plan; |
The foregoing description| · | be subject to any regulatory approvals including, where required, the approval of the TSX; |
| · | be subject to shareholder approval in accordance with the rules of the TSX in circumstances where the amendment, modification or change to the RSU Plan or RSUs would: |
| (i) | allow for the assignment or transfer of any right under the RSU Plan or a RSU awarded pursuant to the provisions of the RSU Plan other than as provided for under the assignability provisions in the RSU Plan; |
| (ii) | increase the fixed maximum number of common shares which may be issued pursuant to the RSU Plan; or |
| (iii) | amend the amendment provisions of the RSU Plan; and |
| · | not be subject to shareholder approval in circumstances (other than those listed in the paragraph immediately above), including, but not limited to, circumstances where the amendment, modification or change to the RSU Plan or RSU would: |
| (i) | be of a “housekeeping nature”, including any amendment to the RSU Plan or a RSU that is necessary to comply with applicable law or the requirements of any regulatory authority or stock exchange and any amendment to the RSU Plan or a RSU to correct or rectify any ambiguity, defective provision, error or omission therein, including any amendment to any definitions therein; |
| (ii) | alter, extend or accelerate any vesting terms or conditions in the RSU Plan or any RSU; |
| (iii) | change any termination provision in any RSU; |
| (iv) | introduce features to the RSU Plan that would permit the Company to, instead of issuing common shares from treasury upon the vesting of the RSUs, retain a broker and make payments for the benefit of participants to such broker who would purchase common shares through the facilities of the TSX for such participants; |
| (v) | introduce features to the RSU Plan that would permit the Company to, instead of issuing common shares from treasury upon the vesting of the RSUs, make lump sum cash payments to participants; |
| (vi) | change the application of the adjustment provisions of the RSU Plan or the change of control provisions of the RSU Plan; or |
| (vii) | change the eligible participants under the RSU Plan. |
A copy of the OptionRSU Plan is qualifiedavailable upon request in its entirety by referencewriting to the full text thereof, which was attachedChief Financial Officer of the Company at 30 Worcester Road, Toronto, Ontario, M9W 5X2. The 330,000 common shares that are currently authorized under the RSU Plan represent approximately 1.9% of the Company’s common shares issued and outstanding as Appendix “P”at May 10, 2012. There are no RSUs outstanding as of May 10, 2012. Deferred Share Unit Plan The Company established as of May 28, 2010 when it received shareholder approval, a deferred share unit plan (the “DSU Plan”) to permit directors who are not officers of the Company, to defer receipt of all or a portion of their Board fees until termination of Board service and to receive such fees in the form of common shares at that time. The key features of the DSU Plan are as follows: | · | The DSU Plan is administered by the Board or a committee thereof. Members of the Board who are not salaried officers or employees of the Company or a related corporation are eligible to participate under the DSU Plan. By the terms of the DSU Plan, Dr. Isa Odidi and Dr. Amina Odidi are specifically not eligible to participate. |
| · | The number of common shares available for issuance upon redemption of DSUs issued under the DSU Plan is limited to 110,000 common shares of the Company, representing approximately 1% of the total number of issued and outstanding Common Shares as of the date hereof. |
| · | Each participant may elect to be paid a minimum of 20% up to a maximum of 100%, in 10% increments, of Board fees in the form of DSUs in lieu of being paid such fees in cash. On the date on which Board fees are payable (on a quarterly basis), the number of DSUs to be credited to the participant is determined by dividing an amount equal to the designated percentage of the Board fees that the participant has elected to have credited in DSUs on that fee payment date, by the calculated market value of a common share (typically on the Toronto Stock Exchange) on that fee payment date. The market value of a common share is the weighted average trading price of the common shares on any exchange where the common shares are listed (including the TSX) for the last five trading days prior to such day. If dividends are declared by the Company, a participant will also be credited with dividend equivalents in the form of additional DSUs based on the number of DSUs the participant holds on the record date for the payment of a dividend. Dividend equivalents are calculated by dividing (i) the amount obtained by multiplying the amount of the dividend declared and paid per common share by the number of DSUs in the participant’s account on the record date for the payment of such dividend, by (ii) the market value of a common share on that dividend payment date. The market value of a common share is the weighted average trading price of the common shares on any exchange where the common shares are listed (including the TSX) for the last five trading days prior to such day. |
| · | A participant is permitted to redeem his/her DSUs only following termination of Board service by way of retirement, non-re-election as a director, resignation or death. Upon redemption of DSUs, the Company will issue to the participant common shares of the Company equal to the number of DSUs to be redeemed. |
| · | A separate notional account is maintained for each participant under the DSU Plan. Each such account will be credited with DSUs issued to the participant from time to time by way of a bookkeeping entry in the books of the Company. The DSUs credited to the participant’s account will be cancelled as of the applicable redemption date and following redemption of all DSUs credited to the participant’s account, such participant’s account will be closed. |
| · | No rights under the DSU Plan and no DSUs credited pursuant to the provisions of the DSU Plan are assignable or transferable by any participant other than pursuant to a will or by the laws of descent and distribution. |
| · | Under the DSU Plan, the Board may from time to time in its absolute discretion amend, modify and change the provisions of the DSU Plan or any DSUs issued pursuant to the DSU Plan, provided that any amendment will: |
| · | not adversely alter or impair any DSU previously credited without such participant’s consent in writing except as permitted by the adjustment provisions in the DSU Plan; be subject to any regulatory approvals including, where required, the approval of the TSX; be subject to shareholder approval in accordance with the rules of the TSX in circumstances where the amendment, modification or change to the DSU Plan or DSU would: |
| (i) | allow for the assignment or transfer of any right under the DSU Plan or a DSU credited pursuant to the provisions of the DSU Plan other than as provided for under the assignability provisions in the DSU Plan; |
| (ii) | increase the fixed maximum number of common shares which may be issued pursuant to the DSU Plan; or |
| (iii) | amend the amendment provisions of the DSU Plan; and |
| · | not be subject to shareholder approval in circumstances (other than those listed in the paragraph immediately above), including, but not limited to, circumstances where the amendment, modification or change to the DSU Plan or DSU would: |
| (i) | be of a “housekeeping nature”, including any amendment to the DSU Plan or a DSU that is necessary to comply with applicable law or the requirements of any regulatory authority or stock exchange and any amendment to the DSU Plan or a |
| (ii) | DSU to correct or rectify any ambiguity, defective provision, error or omission therein, including any amendment to any definitions therein; |
| (iii) | introduce features to the DSU Plan that would permit the Company to, instead of issuing common shares from treasury upon the redemption of the DSUs, retain a broker and make payments for the benefit of participants to such broker who would purchase common shares through the facilities of the TSX for such participants; |
| (iv) | introduce features to the DSU Plan that would permit the Company to, instead of issuing common shares from treasury upon the redemption of the DSUs, make lump sum cash payments to participants; |
| (v) | change the application of the adjustment provisions of the DSU Plan; or |
| (vi) | change the eligible participants under the DSU Plan. |
A copy of the DSU Plan is available upon request in writing to the joint management information circular VasogenChief Financial Officer of the Company at 30 Worcester Road, Toronto, Ontario, M9W 5X2. The 110,000 common shares that are currently authorized under the DSU Plan represent approximately 0.6% of the Company’s common shares issued and IPC Ltd. dated September 16, 2009 filed withoutstanding as at May 10, 2011. The total of 10,250 DSUs that have been authorized for issuance for the Securitiesperiod ended November 30, 2011 represent common share rights that comprise less than 0.1% of the common shares issued and Exchange Commission.outstanding as at May 10, 2012. As at May 10, 2012, 15,495 DSUs have been issued under the DSU Plan. Item 7.Major Shareholders and Related Party Transactions OurOn March 15, 2012 we completed a registered direct common share offering resulting in a significant change in the percentage ownership of our principal shareholder, is Odidi Holdings Inc., a private company controlled by Drs. Isa and Amina Odidi. Odidi whichHoldings Inc. owns 5,997,751 common shares representing a decrease to approximately 54.99%33.79% of our issued and outstanding common shares of the Company subsequent to the offering. As a result of the offering, Hambrecht and Quest Capital Management LLC we believe beneficially own 1,735,000 common shares representing 9.77% of the issued and outstanding common shares of the Company. ThereAs part of the February 1, 2011 private placement financing, the March 15, 2012 registered direct common share offering and open market purchases, Broadfin Capital, LLC we believe beneficially owns 1,728,221 common shares representing 9.74% of the issued and outstanding common shares of the Company. To our knowledge, there has been no other significant change in the percentage ownership of common shares in the Company during the past three years involving any party owning more than 5% of our common shares. To our knowledge, no other shareholder owns more than 5% of the issued and outstanding common shares of the Company.
There are no arrangements, known to the Company, the operation of which may at a subsequent date result in a change in control of the Company. As at March 31, 2012, there were a total of 393 holders of record of our common shares, of which 86 were registered with addresses in the United States holding in the aggregate approximately 59.53% of our outstanding common shares. We believe that the number of beneficial owners of our common shares is substantially greater than the number of record holders, because a large portion of our common shares are held in broker “street names”. B. | Related Party Transactions |
Certain directorsAs at November 30, 2011 and senior officers of the CompanyFebruary 29, 2012, we had interests in the IPC Arrangement Agreement that was completed on October 22, 2009 (as described in Item 4.A) that are different from the interests of the Company’s shareholders generally. Specifically up to Cdn$800,000 of the principal amount owing pursuant to the Shareholder Loan (as defined below) may be repaidan outstanding related party payable to Dr. Isa Odidi and Dr. Amina Odidi, pursuant toprincipal stockholders, directors and executive officers, in the amount of approximately $0.8 million. Repayments of the related party loan are restricted under the terms of the loan such that the principal amount thereof shall be payable when payment is required solely out of (i) revenues earned by IPC Corp. following the effective date of October 22, 2009 (“effective date”), and/or proceeds received by any Intellipharmaceutics company from any offering of its securities, (other than the proceeds from the transaction completed on February 1, 2011 and conditionson March 15, 2012) following the effective date and/or amounts received by IPC Corp. for scientific research tax credits received after the effective date for research expenses of IPC Corp. incurred before the effective date and (ii) up to C$800,000 of the Net Cash from the Vasogen transaction (as defined in the IPC Arrangement Agreement). During the year ended November 30, 2011, the related party loan was decreased by $801,551 (C$817,822) and an interest payment of $163,099 (C$166,410) of the promissory note was paid in accordance with the terms of the IPC Arrangement Agreement. The Company entered into the amended and restated promissory note dated October 22, 2009 for up to Cdn$2,300,000 issued by Intellipharmaceutics Corp. to Dr. Isa Odidi and Dr. Amina Odidi for advances that may be made by them from time to time to the Company (the “Shareholder Loan”).
As at November 30, 2009, the Shareholder Loan was outstanding. Repayments of the Shareholder Loan are restricted such that repayment can only be made from revenues received or proceeds from the issuance of securities received by us, scientific tax credits received in cash by us and up to a maximum of Cdn$800,000 from proceeds received by us in the IPC Arrangement Agreement. Thus, our current cash reserves will not be used for such
repayment other than to the limited extent described above. Subsequent to November 30, 2009, the Shareholder Loan was repaid by C$800,000 from proceeds received by us in the IPC Arrangement Agreement.
Since the beginning of the Company’s preceding three financial years to the date hereof, other than discussed above in this item 7, there have been no transactions or proposed transactions which are material to the Company or to any associate, holder of 10% of the Company’s outstanding shares, director or officer or any transactions that are unusual in their nature or conditions to which the Company or any of its subsidiaries was a party. Item 8.Financial Information A. | Consolidated Statements and Other Financial Information |
A. Consolidated Statements and Other Financial Information Reference is made to “Item 18. Financial Statements” for the financial statements included in this annual report. Legal Proceedings and Regulatory Actions Intellipharmaceutics is not awareFrom time to time, the Company may be exposed to claims and legal actions in the normal course of anybusiness, which may be initiated by the Company. As at April 30, 2012, there were no pending litigation or threatened claim that materially affectslitigation claims outstanding other than the operationsones described in the following paragraphs.
Elan Corporation, plc and Elan Pharma International Ltd., filed a Complaint against Intellipharmaceutics Corp., Intellipharmaceutics Ltd., and Par, Intellipharmaceutics’ development and commercialization partner for generic Focalin XR®, for alleged patent infringement in the United States District Court for the District of Delaware, relating to Intellipharmaceutics’ generic version of 30 mg Focalin XR® (dexmethylphenidate hydrochloride) extended-release capsules. Separately, Celgene Corporation, Novartis Pharmaceuticals Corporation and Novartis Pharma AG, filed a Complaint against Intellipharmaceutics Corp. for alleged patent infringement in the United States District Court for the District of New Jersey, relating to Intellipharmaceutics’ generic version of 30 mg Focalin XR®. In view of the Company.previous settlement of litigation earlier filed by the same parties related to 5, 10, 15 and 20 mg dosage strengths, the Company believes it is reasonable to expect that the litigation relating to the 30 mg strength could also be settled on terms satisfactory to the Company, although no assurance can be provided to this effect. Lawsuits such as these are an ordinary and expected part of the process of obtaining approval to commercialize a generic drug product in the United States. The Company remains confident that its generic version of 30 mg Focalin XR® does not in any event infringe the patents in issue. The Company has determined that the likelihood to pay any damages or other penalty to Elan Corporation, plc and Elan Pharma International Ltd., Celgene Corporation, Novartis Pharmaceuticals Corporation and Novartis Pharma AG in connection with the resolutions of these Complaints in its reasonably anticipated course is remote. On or about May 25, 2011, AstraZeneca Pharmaceuticals LP and AstraZeneca UK Limited (together “AstraZeneca”), the owners of the rights in the United States in Seroquel XR®, filed a lawsuit for patent infringement against the Company in the United States District Court for the District of New Jersey, relating to Intellipharmaceutics' generic version of the 150, 200, 300 and 400 mg dosage forms of Seroquel XR® (quetiapine fumarate extended-release) tablets. AstraZeneca served the Company with the Complaint in the District of New Jersey on May 25, 2011. The Company has filed a motion to contest New Jersey as a proper forum for the litigation. That motion was successful, and the litigation against the Company in the United States District Court for the District of New Jersey was dismissed on February 15, 2012. To the Company’s knowledge, at this time, no appeal has been taken from that dismissal. On or about June 30, 2011, the same AstraZeneca entities also filed a substantially identical lawsuit for patent infringement against the Company in the United States District Court for the Southern District of New York., to preserve their right to a 30 month stay of possible approval of the Company’s generic version of Seroquel XR® by the FDA should the Company’s challenge of jurisdiction in New Jersey be successful. That matter was subsequently stayed on consent pending the result of the jurisdictional challenge in New Jersey. Following the successful jurisdictional challenge in New Jersey, the stay in New York was lifted automatically, and the litigation continues at this time in the pleadings stage. On or about April 11, 2012, the same AstraZeneca entities filed a lawsuit for patent infringement against the Company in the United States District Court for the Southern District of New York, relating to Intellipharmaceutics' generic version of the 50 mg dosage form of Seroquel XR® (quetiapine fumarate extended-release) tablets. The Company has now filed its Answer to that Complaint, and it is anticipated that this lawsuit will be consolidated with the one above-noted, and that they will proceed together in the United States District Court for the Southern District of New York. Lawsuits such as these are an ordinary and expected part of the process of obtaining approval to commercialize a generic drug product in the United States. The Company remains confident that Intellipharmaceutics’ generic versions of Seroquel XR® do not in any event infringe the patents asserted in the above-noted lawsuits. Dividend Policy The Company has not paid, and has no current plans to pay, dividends on its common shares. We currently intend to retain future earnings, if any, to finance the development of our business. Any future dividend policy will be determined by the Board of Directors, and will depend upon, among other factors, our earnings, if any, financial condition, capital requirements, any contractual restrictions with respect to the payment of dividends, the impact of the distribution of dividends on our financial condition, tax liabilities, and such economic and other conditions as the Board of Directors may deem relevant. No significant changes occurred since the date of our annual consolidated financial statements included elsewhere in this annual report. Not Applicable, except for Item 9A (4) and Item 9C. Our common shares are currently listed on the Toronto Stock Exchange (the “TSX”)NASDAQ and quoted for trading on the NASDAQ Capital Market (“NASDAQ”)TSX under the symbols “I”“IPCI” and “IPCI”“I”, respectively. Our shares began trading on October 22, 2009, when the transaction with Vasogen was completed. The following table sets forthindicates, for the monthly trading history fromrelevant periods, the time of listing through the fiscal year ended November 30, 2009, the reported high and low and closing prices (in Canadian dollars) and total volume traded of our common shares on the TSXNASDAQ and reported high, low and closing prices (in United States dollars) and total volume of our common shares traded on the NASDAQ Capital Market.TSX: | | TSX | | NASDAQ | | Date | High | Low | Close | Volume Traded | | High | Low | Close | Volume Traded | | Oct-09 (partial) | $6.10 | $2.37 | $2.48 | 20,600 | | $5.00 | $2.15 | $2.20 | 102,661 | | Nov-09 | $3.00 | $1.52 | $2.21 | 99,200 | | $2.90 | $1.40 | $2.25 | 311,429 |
| | | NASDAQ (U.S.$) | | | TSX (C$) | | | | | High | | | Low | | | High | | | Low | | | Annual | | | | | | | | | | | | | | 2011 | | | 6.12 | | | | 2.30 | | | | 6.05 | | | | 2.21 | | | 2010 | | | 5.05 | | | | 1.41 | | | | 5.36 | | | | 1.50 | | | 2009 (partial) | | | 5.00 | | | | 1.40 | | | | 6.10 | | | | 1.52 | | Quarterly | | | | | | | | | | | | | | | | | | 2012 | | | | | | | | | | | | | | | | | | First quarter | | | 3.82 | | | | 2.41 | | | | 3.55 | | | | 2.53 | | | 2011 | | | | | | | | | | | | | | | | | | Fourth quarter | | | 3.50 | | | | 2.66 | | | | 3.59 | | | | 2.43 | | | Third quarter | | | 4.35 | | | | 2.50 | | | | 4.20 | | | | 2.21 | | | Second quarter | | | 5.25 | | | | 2.87 | | | | 5.04 | | | | 2.76 | | | First quarter | | | 6.12 | | | | 2.30 | | | | 6.05 | | | | 2.41 | | | 2010 | | | | | | | | | | | | | | | | | | Fourth quarter | | | 3.26 | | | | 2.11 | | | | 3.35 | | | | 2.20 | | | Third quarter | | | 3.30 | | | | 2.05 | | | | 3.39 | | | | 2.15 | | | Second quarter | | | 5.05 | | | | 1.45 | | | | 5.36 | | | | 1.50 | | | First quarter | | | 2.63 | | | | 1.41 | | | | 2.66 | | | | 1.50 | | | 2009 | | | | | | | | | | | | | | | | | | Fourth quarter (partial) | | | 5.00 | | | | 1.40 | | | | 6.10 | | | | 1.52 | |
| | | NASDAQ (U.S.$) | | | TSX (C$) | | | | | High | | | Low | | | High | | | Low | | | Most recent 6 months | | | | | | | | | | | | | | | April 2012 | | | 2.99 | | | | 2.64 | | | | 2.89 | | | | 2.62 | | | March 2012 | | | 3.15 | | | | 2.75 | | | | 3.38 | | | | 2.61 | | | February 2012 | | | 3.82 | | | | 2.95 | | | | 3.55 | | | | 3.00 | | | January 2012 | | | 3.10 | | | | 2.41 | | | | 3.10 | | | | 2.53 | | | December 2011 | | | 3.15 | | | | 2.51 | | | | 3.25 | | | | 2.55 | | | November 2011 | | | 3.50 | | | | 2.66 | | | | 3.59 | | | | 2.75 | |
Item 10.Additional Information Our authorized share capital consists of an unlimited number of common shares, all without nominal or par value and an unlimited number of preference shares issuable in series. At November 30, 2009 and May 25, 2010, 10,907,0572011, 15,908,444 common shares and no preference shares were issued and outstanding. As at May 10, 2012, there were 17,751,626 common shares and no preference shares issued and outstanding. The reason for the increase in common shares issued was that (i) on March 15, 2012 we completed a registered direct common share offering for gross proceeds of $5,000,000 in which the Company sold an aggregate of 1,818,182 shares to U.S. institutional investors at a price of $2.75 per share and (ii) on February 1, 2011, we completed a private offering of investment Units for gross proceeds of $12,000,000 (the “Private Placement”), each Unit consisting of one common share, a five-year warrant to purchase one-half of a common share at an exercise price of $2.50 per whole share (“Class A Warrants”) and a two-year warrant to purchase one-half of a common share at an exercise price of $2.50 per whole share (“Class B Warrants”). Pursuant to the Securities Purchase Agreements, we issued to the investors a total of 4,800,000 common shares, Class A Warrants to purchase an aggregate of 2,400,000 common shares of the Company, and Class B Warrants to purchase an aggregate of 2,400,000 common shares of the Company. Common Shares Each common share of the Company entitles the holder thereof to one vote at any meeting of shareholders of the Company, except meetings at which only holders of a specified class of shares are entitled to vote. Common shares of the Company are entitled to receive, as and when declared by the board of directors,Board, dividends in such amounts as shall be determined by the board of directors.Board. The holders of common shares of the Company have the right to receive the remaining property of the Company in the event of liquidation, dissolution, or winding-up of the Company, whether voluntary or involuntary. Preference Shares The preference shares may at any time and from time to time be issued in one or more series. The board of directorsBoard will, by resolution, from time to time, before the issue thereof, fix the rights, privileges, restrictions and conditions attaching to the preference shares of each series. Except as required by law, the holders of any series of preference shares will not as such be entitled to receive notice of, attend or vote at any meeting of the shareholders of the Company. Holders of preference shares will be entitled to preference with respect to payment of dividends and the distribution of assets in the event of liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, or any other distribution of the assets of the Company among its shareholders for the purpose of winding up its affairs, on such shar esshares over the common shares of the Company and over any other shares ranking junior to the preference shares. Warrants At November 30, 2009,2011, there were 376,6994,659,275 common shares issuable upon the exercise of outstanding common share purchase warrants, with a current weighted average exercise price of U.S.$62.82$4.88 per common share. As of May 10, 2012, there were 4,634,275 common shares issuable upon the exercise of outstanding common share purchase warrants, with a weighted average exercise price of $4.90 per common share.
Options At November 30, 2009,2011, there were 2,939,1883,216,953 common shares issuable upon the exercise of outstanding options. The weighted average exercise price of these options is $6.48$5.33 per common share. UpAs at November 30, 2011, up to 1,090,7061,137,831 additional common shares arewere reserved for issuance under our Option Plan. | | | | | | | | | | | Options outstanding | | | | Options exercisable | | | | | | | Weighted average remaining contract | | | | | | | | | | | | | | $ | | | | $ | | | | $ | | $ | | | | | | | | | | | | | | | | | | | | Under 2.50 | | - | | - | | - | | - | | - | | - | | - | | 2.51 - 5.00 | | 3,167,167 | | 3.60 | | 3.40 | | 1.65 | | 1,536,029 | | 3.58 | | 1.66 | | 5.01 - 7.50 | | 5,528 | | 5.43 | | 4.00 | | 0.01 | | 5,528.00 | | 5.43 | | 0.01 | | 7.51 - 10.00 | | - | | - | | - | | - | | - | | - | | - | | 10.01 - 100.00 | | 36,065 | | 39.52 | | 5.82 | | 31.02 | | 36,065 | | 39.52 | | 31.02 | | 300.00 - 500.00 | | 3,971 | | 331.15 | | 4.31 | | 223.52 | | 3,971 | | 331.15 | | 223.52 | | 500.01 - 1,000.00 | | 4,190 | | 705.99 | | 1.29 | | 435.71 | | 4,190 | | 705.99 | | 435.71 | | 1,000.01 - 1,500.00 | | 33 | | 1,149.13 | | 2.45 | | 709.18 | | 33 | | 1,149.13 | | 709.18 | | | | | | 3,216,954 | | 5.33 | | | | | | 1,585,816 | | 7.11 | | |
As of May 10, 2012, there were 4,154,092 common shares issuable upon the exercise of outstanding options. The weighted average exercise price of these options is $4.86 per common share. As at May 10, 2012, up to the date of this annual report, no options to purchase our385,011 additional common shares were granted, no optionsreserved for issuance under our Option Plan. Deferred Share Units At November 30, 2011, there were 10,250 DSUs issued to purchase ourone non-management director. As of May XX, 2012, there were 15,495 DSUs issued to one non-management director. Registration Rights The February 1, 2011 Private Placement issuance of the Units was exempt from registration under the U.S. Securities Act pursuant to Regulation D and Section 4(2) and/or Regulation S thereof and such other available exemptions. As such, the common shares, were exercised, 9,686 options to purchase ourthe warrants, and the common shares expired,underlying the warrants may not be offered or sold in the United States unless they are registered under the U.S. Securities Act, or an exemption from the registration requirements of the U.S. Securities Act is available.
In connection with the Private Placement, we agreed to file a registration statement on Form F-3 (“Registration Statement”) within 40 days after the closing and no optionsuse our best efforts to purchase ourhave it declared effective within 150 days after the closing to register (i) 100% of the common shares were cancelled.issued in the Private Placement; and (ii) 100% of the common shares underlying the investor warrants issued in the Private Placement (collectively, the “Registrable Securities”).
The Registration Statement was declared effective as of March 30, 2011. If (i) the Registration Statement ceases to be continuously effective for more than twenty consecutive calendar days or more than an aggregate of thirty calendar days during any consecutive 12-month period, or (ii) at a time in which the Registrable Securities cannot be sold under the Registration Statement, the Company shall fail for any reason to satisfy the current public information requirement under Rule 144 as to the applicable Registrable Securities, the Company shall pay to the investors, on a pro rata basis, partial liquidated damages of one percent (1%) of the aggregate purchase price paid by each investor on the occurrence of an event listed above and for each calendar month (pro rata for any period less than a calendar month) from an event, until cured.
The securities shall cease to be Registrable Securities for so long as (i) they have been sold (A) pursuant to a registration statement; or (B) in accordance with Rule 144 or any other rule of similar effect; or (ii) such securities become eligible for resale without volume or manner-of-sale restrictions, and when either the Company is compliant with any current public information requirements pursuant to Rule 144 or the current public information requirements no longer apply. Each investor has the right, up to February 1, 2013, to participate in any subsequent issuance by the Company of common shares or common share equivalents for cash consideration, indebtedness or a combination of units (“Subsequent Financing”), up to an amount to maintain their percentage ownership interest in the Company immediately prior to the Subsequent Financing following such Subsequent Financing on the same terms, conditions and price provided for in the Subsequent Financing. Prior Sales DuringOn February 1, 2011, the financialCompany completed a private offering of 4,800,000 units for gross proceeds of $12,000,000. Each unit consisted of one common share, a five year ended November 30, 2009,warrant to purchase one half of a common share at an exercise price of $2.50 per whole share and a two year warrant to purchase one half of a common share at an exercise price of $2.50 per whole share. In conjunction with the private placement, the Company issued the following securities, all96,000 placement agent warrants with a term of which were issued on October 22, 2009 in connection with the IPC Arrangement Agreement for no cash consideration in exchange for previously issued securitiesthree years and an exercise price of IPC Ltd. and Vasogen, as the case may be.$3.125 per share.
· | 113,962 warrants issued in exchange for former Vasogen warrants and exercisable at U.S.$95.51 until November 14, 2011. |
On March 15, 2012, the Company completed a registered direct common share offering for gross proceeds of $5,000,000. The Company sold an aggregate of 1,818,182 shares to U.S. institutional investors at a price of $2.75 per share. · | 243,275 warrants issued in exchange for former Vasogen warrants and exercisable at U.S.$47.91 until May 24, 2012. |
· | 2,856,003 stock options issued in exchange for former IPC Ltd. stock options and former Vasogen stock options with exercise prices ranging from $3.34 to $1,149.13. |
· | 87,256 broker compensation options issued in exchange for former IPC Ltd. broker compensation options and exercisable at $6.55 until December 31, 2011. |
· | 16,884 broker warrants issued in exchange for former Vasogen broker warrants and exercisable at U.S.$95.51 until November 14, 2009. Expired unexercised. |
· | 19,462 broker warrants issued in exchange for former Vasogen broker warrants and exercisable at U.S.$57.76 until May 24, 2010. |
The Company was formed under the Canada Business Corporations Act (the “CBCA”) by articles of arrangement dated October 22, 2009 (the “Articles”) in the IPC Arrangement Transaction discussed in Item 15. The Company is the successor issuer to Vasogen Inc. for reporting purposes under the SecuritiesU.S. Exchange Act of 1934, as amended.Act. The authorized share capital of the Company consists of an unlimited number of common shares, all without nominal or par value and an unlimited number of preference shares issuable in series. Provisions as to the modification, amendment or variation of rights and provisions of each class of shares are contained in the CBCA and the regulations promulgated thereunder. Certain fundamental changes to the articles of the CompanyArticles will require the approval of at least two-thirds of the votes cast on a resolution submitted to a special meeting of the Company’s shareholders called for the purpose of considering the resolution. These items include (i) certain amendments to the provisions relating to the outstanding capital of the Company, (ii) a sale of all or substantially all of the assets of the Company, (iii) an amalgamation of the Company with another company, other than a subsidiary, (iv) a winding-up of the Company, (v) a continuance of the Company into another jurisdiction, (vi) a statutory court approved arrangement u nderunder the CBCA (essentially a corporate reorganization such as an amalgamation, sale of assets, winding-up, etc.), or (vii) a change of name. Under the CBCA, a corporation cannot repurchase its shares or pay or declare dividends if there are reasonable grounds for believing that (a) the corporation is, or after payment would be, unable to pay its liabilities as they become due, or (b) after the payment, the realizable value of the corporation’s assets would be less than the aggregate of (i) its liabilities and (ii) its stated capital of all classes of its securities. Generally, stated capital is the amount paid on the issuance of a share unless the stated capital has been adjusted in accordance with the CBCA. ARTICLES AND BY-LAWS
General The Articles do not contain any restrictions on the business the Company may carry on. Directors The Company’s By-Law No. 1 (a by-law relating generally to the transaction of the business and affairs of the Company) provides for the indemnification of the directors and officers of the Company, former directors and officers of the Company against all costs, charges and expenses, including an amount paid to settle an action or satisfy a judgment, reasonably incurred by the individual in respect of any civil, criminal, administrative, investigative or other proceeding in which the individual is involved because of that association with the Company, subject to certain limitations in By-Law No. 1 and the limitations in the CBCA. The Company may also indemnify other individuals who act or acted at the Company’s request as a director or officer, or an individual acting in a similar capacity, of another entity. Annual and Special Meetings Meetings of shareholders are held at such place, at such time, on such day and in such manner as the Board may, subject to the CBCA and any other applicable laws, determine from time to time. The only persons entitled to attend a meeting of shareholders are those persons entitled to notice thereof, those entitled to vote thereat, the directors, the auditors of the Company and any others who may be entitled or required under the CBCA to be present at the meeting. Under the CBCA, notice of the meeting is required to be given not less than 21 days and not more than 60 days prior to the meeting. Shareholders on the record date are entitled to attend and vote at the meeting. The quorum for the transaction of business at any meeting of shareholders is at least two persons present at the opening of the meeting who are entitled to vote either as shareholders or proxyholders, representing collectively not less than 5% of the outstanding shares of the Company entitled to be voted at the meeting. Other There areis no by-law provisions governing the ownership threshold above which shareholder ownership must be disclosed. However, there are disclosure requirements pursuant to applicable Canadian law. There are no provisions in either the Company’s Articles or By-Law No. 1 that would have the effect of delaying, deferring or preventing a change in control of the Company and that would operate only with respect to a merger, acquisition or corporate restructuring involving the Company or its subsidiary. There are no limitations on the rights to own securities, including the rights of non-resident or foreign shareholders to hold or exercise voting rights on the securities imposed by foreign law or by the charter or other constituent document of the Company. Except for contracts entered into in the ordinary course of business and not required to be filed under Canadian securities rules, the only contracts which are regarded as material and which were entered into by the Company within the most recently completed financial year or before the most recently completed financial year, but are still in effect,two years immediately preceding this annual report, are: | · | the IPC Arrangement Agreement (described above in Item 4.A); |
| · | the acknowledgement and agreement of the Company dated October 22, 2009 to be bound by the performance based stock option agreement dated September 10, 2004 pursuant to which Drs. Isa and Amina Odidi are entitled to purchase up to 2,763,940 of the Company’s common shares upon payment of U.S.$3.62$3.62 per share, subject to satisfaction of the performance vesting conditions; |
| · | the amended and restated promissory note dated October 22, 2009 for up to $2,300,000C$2,300,000 issued by Intellipharmaceutics Corp. to Isa Odidi and Amina Odidi for advances that may be made by them from time to time to the Company; and |
| · | the escrow agreement dated October 22, 2009 between the Company, CIBC Mellon Trust Company (as escrow agent) and Odidi Holdings Inc. under which the common shares of the Company held by Odidi Holdings Inc. are held in escrow pursuant to the TSX Escrow Policy Statement. In accordance with the escrow agreement, the escrow securities were fully released from escrow in August 2011. |
Canada has no system of currency exchange controls. There are no governmental laws, decrees or regulations in Canada that restrict the export or import of capital, including but not limited to, foreign exchange controls, or that affect the remittance of dividends, interest or other payments to non-resident holders of the Company’s securities. United States Taxation Certain Material United States Federal Income Tax Considerations The following summary describes certain material United States federal income tax consequences of the ownership and disposition of our common shares that are generally applicable to a United States person that holds our common shares as capital assets (a “U.S. Holder”) within the meaning of Section 1221 of the Code. This discussion does not address holders of other securities, including holders of our warrants. This discussion assumes that we are not a “controlled foreign corporation” for U.S. federal income tax purposes. The following discussion does not purport to be a complete analysis of all of the potential United States federal income tax considerations that may be relevant to particular holders of our common shares i nin light of their particular circumstances nor does it deal with persons that are subject to special tax rules, such as brokers, dealers in securities or currencies, financial institutions, insurance companies, tax-exempt organizations, persons liable for alternative minimum tax, U.S. expatriates, partnerships or other pass-through entities, U.S. Holders who own (directly, indirectly or by attribution) ten percent or more of the total combined voting power of all classes of stock entitled to vote, persons holding our common shares as part of a straddle, hedge or conversion transaction or as part of a synthetic security or other integrated transaction, traders in securities that elect to use a mark-to-market method of accounting for their securities holdings, holders whose “functional currency” is not the United States dollar, and holders who are not U.S. Holders. In addition, the discussion below does not address the tax cons equencesconsequences of the law of any state, locality or foreign jurisdiction or United States federal tax consequences (e.g., estate or gift tax) other than those pertaining to the income tax. There can be no assurance that the United States Internal Revenue Service (the “IRS”) will take a similar view as to any of the tax consequences described in this summary. The following is based on currently existing provisions of the Code, existing and proposed Treasury regulations under the Code and current administrative rulings and court decisions. Everything listed in the previous sentence may change, possibly on a retroactive basis, and any change could affect the continuing validity of this discussion. Each U.S. Holder and each holder of common shares that is not a U.S. Holder should consult its tax adviser regarding the United States federal income tax consequences of holding our common shares applicable to such holder in light of its particular situation, as well as any tax consequences that may arise under the laws of any other relevant foreign, state, local, or other taxing jurisdiction. As used in this section, the term “United States person” means a beneficial owner of our common shares that is: | (i) | a citizen or an individual resident of the United States; |
| (ii) | a corporation (or an entity taxable as a corporation for United States federal income tax purposes) created or organized in or under the laws of the United States or any political subdivision of the United States; |
| (iii) | an estate the income of which is subject to United States federal income taxation regardless of its source; or |
| (iv) | a trust which (A) is subject to the supervision of a court within the United States and the control of a United States person as described in Section 7701(a)(30) of the Code; or (B) is subject to a valid election under applicable Treasury Regulations to be treated as a United States person. |
If a partnership (including for this purpose any entity treated as a partnership for U.S. federal income tax purposes) holds our common shares, the United States federal income tax treatment of a partner generally will depend on the status of the partner and the activities of the partnership. A United States person that is a partner of the partnership holding our common shares should consult its own tax adviser. Passive Foreign Investment Company Considerations Special, generally unfavourableunfavorable, U.S. federal income tax rules apply to the ownership and disposition of the stock of a passive foreign investment company (“PFIC”). As discussed below, however, ita U.S. Holder may well be possibleable to mitigate these consequences by making a so-calledtimely and effective election to treat the Company as a qualified electing fund (“(a “QEF Election”) election.or by making a timely and effective mark-to-market election with respect to its common shares (a “Mark-to-Market Election”). For United StatesU.S. federal income tax purposes, a foreign corporation is classified as a PFIC for each taxable year in which, applying the relevant look-through rules, either: | · | at least 75% of its gross income isfor the taxable year consists of specified types of “passive” income (referred to as the “income test”); or |
| · | at least 50% of the average value of its assets during the taxable year is attributable to certain types of assets that produce passive income or are held for the production of passive income (referred to as the “asset test”). |
For purposes of the income test and the asset test,tests, if a foreign corporation owns directly or indirectly at least 25% (by value) of the stock of another corporation, that foreign corporation will be treated as if it held its proportionate share of the assets of the other corporation and received directly its proportionate share of the income of that other corporation. Also, for purposes of the income test and the asset test,tests, passive income does not include any income that is an interest, a dividend, or a rent or royalty whichpayment if it is received or accrued from a related person to the extent that amount is properly allocable to the active income of the related person that is not passive income. We believe that we were not a PFIC during our 2009 taxable year and expect that we will not be a PFIC during our 2010 taxable year.
person. Under applicable attribution rules, if Intellipharmaceutics is a PFIC, U.S. Holders of common shares will be treated as holding for certain purposes of the PFIC rules, stock of Intellipharmaceutics’ subsidiaries that are PFIC’s.PFICs in certain circumstances. In such case,these circumstances, certain dispositions of, and distributions on, stock of such subsidiaries may have consequences for U.S. Holders under the rules directly to U.S. Holders.PFIC rules. Although the matter is not free from doubt, we believe that we were not a PFIC during our 2011 taxable year and expect that we will not be a PFIC during our 2012 taxable year. However, the tests for determining PFIC status are subject to a number of uncertainties. These tests are applied annually, and it is difficult to accurately predict future income and assets relevant to this determination. In addition, because the absencemarket price of our common shares is likely to fluctuate, the market price may affect the determination of whether we will be considered a PFIC. Accordingly, there can be no assurance that the Company will not be considered a PFIC for any election,taxable year. Absent one of the elections described below, if the Company is a PFIC for any taxable year during which a U.S. Holder holds the Company’s common shares, the Company generally will continue to be treated as a PFIC subject to the regime described below with respect to such U.S. Holder, regardless of whether the Company ceases to meet the PFIC tests in one or more subsequent years. Unless otherwise provided by the IRS, a U.S. Holder of common shares is generally required to file an information return annually to report its ownership interest in the Company during any year in which the Company is a PFIC. U.S. HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISERS ABOUT THE PFIC RULES, THE POTENTIAL APPLICABILITY OF THESE RULES TO THE COMPANY CURRENTLY AND IN THE FUTURE, AND THEIR FILING OBLIGATIONS IF THE COMPANY IS A PFIC. The “No Election” Alternative – Taxation of Excess Distributions If we are classified as a PFIC will be taxed under the generally unfavourablefor any year during which a U.S. Holder has held common shares and that Holder has not made a QEF Election or a Mark-to-Market Election, special rules described below,may subject that Holder to increased tax liability, including loss of favourablefavorable capital gains rates and the imposition of an interest charge that apply if the holder recognizes gain onupon the sale or other disposition of the PFIC stockcommon shares or receives certain distributionsupon the receipt of any excess distribution (as defined below). Under these rules: | · | the gain, if any, realized on such disposition will be allocated ratably over the U.S. Holder’s holding period; |
| · | the amount of gain allocated to the current taxable year and any year prior to the first year in which we are a PFIC will be taxed as ordinary income in the current year; |
| · | the amount of gain allocated to each of the other taxable years will be subject to tax at the highest ordinary income tax rate in effect for that year; and |
| · | an interest charge for the deemed deferral benefit will be imposed with respect to the resulting tax attributable to each of the other taxable years. |
These rules will continue to apply to the stock (see “--The “No Election” Alternative--TaxationHolder even after we cease to meet the definition of Excess Distributions”). U.S. Holders may avoid mosta PFIC, unless the Holder elects to be treated as having sold our common shares on the last day of these consequencesthe last taxable year in which we qualified as a PFIC. An “excess distribution,” in general, is any distribution on common shares received in a taxable year by making a QEF Election with respect to Intellipharmaceutics, which will have the consequences described in “--The QEF Election Alternative.” A U.S. Holder may also consider makingthat is greater than 125% of the average annual distributions received by that Holder in the three preceding taxable years or, if shorter, that Holder’s holding period for common shares. Any portion of a distribution paid to a U.S. Holder that does not constitute an electionexcess distribution will be treated as ordinary dividend income to markthe extent of our current and accumulated earnings and profits (as computed for U.S. federal income tax purposes). Such dividends generally will not qualify for the dividends-received deduction otherwise available to U.S. corporations. Any amounts treated as dividends paid by a PFIC generally will not constitute “qualified dividend income” within the meaning of Section 1(h)(11) of the Code and will, therefore, not be eligible for the preferential 15% rate for such income currently in effect. Any such amounts in excess of our current and accumulated earnings and profits will be applied against the U.S. Holder’s tax basis in the common shares and, to market (a “Mark-to-Market E lection”).the extent in excess of such tax basis, will be treated as gain from a sale or exchange of such shares. It is possible that any such gain may be treated as an excess distribution. S. HOLDERS ARE URGED TO CONSULT THEIR TAX ADVISORS ABOUT THE POSSIBLE APPLICABILITY OF THE PFIC RULES AND THE AVAILABILITY OF MAKING A QEF ELECTION TO AVOID ADVERSE U.S. TAX CONSEQUENCES.
The QEF Election Alternative A U.S. Holder who elects (an “Electing U.S. Holder”) in a timely manner to treat Intellipharmaceutics as a QEF (a “QEF Election”) would generally include in gross income (and be subject to current U.S. federal income tax on) the U.S. dollar value of both its pro rata share of (a) Intellipharmaceutics’ ordinary earnings, as ordinary income, and its pro rata share of(b) Intellipharmaceutics’ net capital gains, as long-term capital gain, during anygain. An Electing U.S. Holder will generally be subject to U.S. federal income tax on such amounts for each taxable years of the U.S. Holderyear in which we are classified as a PFIC, regardless of whether such amounts are actually distributed.distributed to the Electing U.S. Holder. An Electing U.S. Holder may further elect, in any given taxable year, to defer payment of the taxes owing as a result of i ncluding our ordinary earnings and net capital gains currently inU.S. federal income tax on such amounts, subject to certain limitations. However, if deferred, the taxes will be subject to an interest charge, which will be non-deductible to U.S. Holders that are not corporations. Distributions paid out of earnings and profits that previously were taxed to the Electing U.S. Holder shall not be subject to tax again upon distribution.charge. We believeA U.S. Holder may make a QEF Election only if the Company furnishes the U.S. Holder with certain tax information. If the Company should determine that we will not have any earnings and profits (as computed for U.S. federal income tax purposes) for the current taxable year and little, if any, earnings and profits for any future taxable year in which our companyit is a PFIC. InPFIC, it is anticipated that event,it will attempt to timely and accurately disclose such information to its U.S. Holders and provide U.S. Holders with information reasonably required to make such election.
A U.S. Holder that makes a QEF Election with respect to ourthe Company generally (a) may receive a tax-free distribution from the Company to the extent that such distribution represents “earnings and profits” of the Company that were previously included in income by the U.S. Holder because of such QEF Election and (b) will adjust such U.S. Holder’s tax basis in his, her or its common shares would subjectto reflect the amount included in income (resulting in an increase in basis) or allowed as a U.S. Holder to correspondingly little, if any, current taxation. However, there can be no assurance as to these matters.tax-free distribution (resulting in a decrease in basis) because of the QEF Election. Similarly, if any of our subsidiaries were classified as a PFIC,PFICs, a U.S. Holder that makes a timely QEF Election with respect to any of our subsidiaries would be subject to the QEF rules as described above with respect to the holder’sHolder’s pro rata share of the ordinary earnings and net capital gains of any of our subsidiaries. Earnings of Intellipharmaceutics (or any of our subsidiaries) attributable to distributions from any of our subsidiaries that had previously been included in the income of an Electing U.S. Holder under the QEF rules would generally not be taxed to the Electing U.S. Holder again. Upon the sale or other disposition of common shares, an Electing U.S. Holder who makes a QEF Election for the first taxable year in which he owns common shares will recognize capital gain or loss for U.S. federal income tax purposes in an amount equal to the difference between the net amount realized on the disposition and the U.S. Holder’s adjusted tax basis in the common shares. Such gain or loss will be capital gain or loss, which will be long-term capital gain or loss if the U.S. Holder’s holding period in the common shares is more than one year, and otherwise it will be short-term capital gain or loss. The deductibility of capital losses is subject to certain limitations. If theA U.S. Holder is a United States resident (as defined in section 865 of the Code), gainsHolder’s gain realized upon the disposition of a common share by such U.S. Holdershares generally will be treated as U.S. source income, and losses from the disposition losses generally will be allocated to reduce U.S. source income. A QEF Election must be made in a timely manner as specified in applicable Treasury regulations.Regulations. Generally, the QEF Election must be made in aby filing the appropriate QEF election documents at the time such U.S. Holder timely filedfiles its U.S. federal income tax return of a U.S. Holder for the first taxable year of the foreign corporationCompany during which the corporationit was, at any time, a PFIC. Although Each U.S. Holder should consult its own tax advisor regarding the availability of, procedure for making, and consequences of a QEF Election may be made after the PFIC’s first taxable year that was included in the Electing U.S. Holder’s holding period, the Electing U.S. Holder would continue to be subjectwith respect to the excess distribution rules described below (see “--The “No Election” Alternative--Taxation of Excess Distributions”) unless the holder makes a Mark-to-Market Election, which would result in a deemed disposition of the PFIC stock to which the excess distribution rules may apply. The QEF Election is made on a shareholder-by-shareholder basis and can be revoked only with the consent of the IRS. A shareholder makes a QEF Election by attaching a completed IRS Form 8621, including a PFIC annual information statement, to a timely filed United States federal income tax return. Even if a QEF Election is not made, a shareholder in a PFIC who is a U.S. person must file a completed IRS Form 8621 every year.
We intend to make available to U.S. Holders timely and accurate information as to our status as a PFIC and intend to comply with all applicable record keeping, reporting and other requirements so that each U.S. Holder may elect to treat our company as a QEF.
The “No Election” Alternative--Taxation of Excess Distributions
If we are classified as a PFIC for any year during which a U.S. Holder has held common shares and that holder has not made a QEF Election or a Mark-to-Market Election, special rules may subject that holder to increased tax liability, including loss of favourable capital gains rates and the imposition of an interest charge, upon the sale or other disposition of the common shares or upon the receipt of any excess distribution (as defined below). Under these rules:
· | the gain or excess distribution will be allocated rateably over the U.S. Holder’s holding period; |
· | the amount allocated to the current taxable year and any year prior to the first year in which we are a PFIC will be taxed as ordinary income in the current year; |
· | the amount allocated to each of the other taxable years will be subject to tax at the highest rate of tax in effect for the applicable class of taxpayer for that year; and |
· | an interest charge for the deemed deferral benefit will be imposed with respect to the resulting tax attributable to each of the other taxable years. |
These rules will continue to apply to the holder even after we cease to meet the definition of a PFIC, unless the holder elects to be treated as having sold our common shares on the last day of the last taxable year in which we qualified as a PFIC.
An “excess distribution,” in general, is any distribution on common shares received in a taxable year by a US Holder that is greater than 125% of the average annual distributions received by that holder in the three preceding taxable years or, if shorter, that holder’s holding period for common shares.
Any portion of a distribution paid to a U.S. Holder that does not constitute an excess distribution will be treated as ordinary dividend income to the extent of our current and accumulated earnings and profits (as computed for U.S. federal income tax purposes). Such dividends generally will not qualify for the dividends-received deduction otherwise available to U.S. corporations. Any amounts treated as dividends paid by a PFIC do not constitute “qualified dividend income” within the meaning of Section 1(h)(11) of the Code, and will therefore be ineligible for taxation at the maximum rate of 15% applicable to individuals who receive such income. Any such amounts in excess of our current and accumulated earnings and profits will be applied against the Electing U.S.
Holder’s tax basis in the common shares and, to the extent in excess of such tax basis, will be treated as gain from a sale or exchange of such common shares. It is possible that any such gain might be treated as an excess distribution.Company.
Mark-to-Market Election Alternative Assuming that our common shares are treated as marketable stock (as defined for these purposes), a U.S. Holder that does not make a QEF Election may avoid the application of the excess distribution rules, at least in part, by electing to mark the common shares to market annually, recognizingannually. Consequently, the U.S. Holder will generally recognize as ordinary income or loss each year an amount equal to the difference as of the close of the taxable year between the fair market value of its common shares and the holder’sHolder’s adjusted tax basis in the common shares. Any mark-to-market loss is treated as an ordinary deduction, but only to the extent of the ordinary incomenet mark-to-market gain that the holderHolder has included pursuant to the election in prior tax years. Any gain on a disposition of our common shares by an electing U.S. Holder would be treated as ordinary income. The electing U.S. Holder’s basis in its common shares would be adjusted to reflect any of these income or loss amounts. Any gain on a disposition of our common share s by an electing U.S. Holder would be treated as ordinary income. Any loss on such a disposition would be treated as an ordinary deduction, but only to the extent of the ordinary income that the holder has included pursuant to the election in prior tax years. For purposes of making this election, stock of a foreign corporation is “marketable” if it is regularly traded“regularly traded” on certain qualified exchanges.“qualified exchanges”. Under applicable Treasury regulations,Regulations, a “qualified exchange” includes a national securities exchange that is registered with the SEC or the national market system established underpursuant to Section 11A of the SecuritiesU.S. Exchange Act, of 1934, as amended (the “1934 Act”) and certain foreign securities exchanges. Currently, our common shares are traded on a “qualified exchange.” Under applicable Treasury Regulations, PFIC stock traded on a qualified exchange is regularly traded“regularly traded” on such exchange for any c alendarcalendar year during which such stock is traded, other than in de minimis quantities, on at least 15 days during each calendar quarter. We cannot assure U.S. Holders that our common shares will be treated as regularly tradedSpecial rules apply if an election is made after the beginning of the taxpayer’s holding period in PFIC stock. With respect to its direct ownership of common shares,To the extent available, a U.S. Holder that receives a distribution with respect to its common shares will avoid the unfavourable consequences applicable to excess distributions described above if the holder has made a timely Mark-to-Market Election in the first year of its holding period during which we are treated as a PFIC. Such distribution would instead be taxed under the rules described in the final paragraph of the above section (“--The “No Election” Alternative--Taxation of Excess Distributions”). If a U.S. Holder has held common shares for one or more taxable years during which we are treated as a PFIC and does not make a timely Mark-to-Market Election with respect to the common shares held during the first of those years, a coordination rule applies to ensure t hat a later Mark-to-Market Election does not cause the holder to avoid the interest charge on excess distributions with respect to amounts attributable to periods before the election.
Anmark-to-market election to mark to market applies to the taxable year forin which thesuch mark-to-market election is made and the following yearsto each subsequent taxable year, unless the PFIC stock ceasesCompany’s common shares cease to be marketable“marketable stock” or the IRS consents to the revocation of thesuch election. In addition, a U.S. Holder that has made a Mark-to-Market Election does not include mark-to-market gains, or deduct mark-to-market losses, for years when the corporationCompany ceases to be treated as a PFIC. If a timely QEF Election were made by a U.S. Holder, the mark-to-market rules would not apply.
The mark-to-market rules generally do not appear to prevent the application of the excess distribution rules in respect of stock of any of our subsidiaries in the event that any of our subsidiaries were a considered PFIC.PFICs. Accordingly, if Intellipharmaceutics and any of our subsidiaries were both considered PFIC’s,PFICs and a U.S. Holder made a Mark-to-Market Election with respect to its common shares, the U.S. Holder may remain subject to the excess distribution rules described above with respect to its indirectly owned anyshares of our subsidiariessubsidiary stock. U.S. HOLDERS ARE URGED TO CONSULT THEIR TAX ADVISORS REGARDING THE POSSIBLE APPLICABILITY OF THE PFIC RULES AND THE AVAILABILITY OF, PROCEDURES FOR MAKING, AND CONSEQUENCES OF A QEF ELECTION OR MARK-TO-MARKET ELECTION WITH RESPECT TO THE COMPANY’S COMMON SHARES. RegardlessOwnership and Disposition of which ofCommon Shares to the above alternatives applies to aExtent that the PFIC Rules do not Apply
Distributions on Common Shares A U.S. Holder any tax withheld by Canadian taxing authoritiesthat receives a distribution, including a constructive distribution, with respect to distributions on our common shares may, subjecta Share will be required to a numberinclude the amount of complex limitations, be claimedsuch distribution in gross income as a foreign tax credit against a U.S. Holder’s United States federaldividend (without reduction for any Canadian income tax liabilitywithheld from such distribution) to the extent of the current or may be claimedaccumulated “earnings and profits” of the Company, as a deductioncomputed for United StatesU.S. federal income tax purposes. The limitation on foreign taxes eligible for credit is calculated separatelyTo the extent that a distribution exceeds the current and accumulated “earnings and profits” of the Company, such distribution will be treated first as a tax-free return of capital to the extent of a U.S. Holder’s tax basis in the common shares and thereafter as gain from the sale or exchange of such common shares. (See “Sale or Other Taxable Disposition of Common Shares” below). However, the Company may not maintain the calculations of earnings and profits in accordance with U.S. federal income tax principles, and each U.S. Holder should (unless advised to the contrary) therefore assume that any distribution by the Company with respect to specific classes of income. For this purpose, dividends we distribute with respect to ourthe common shares will constitute ordinary dividend income. Dividends received on common shares generally will not be “passive income” or “general income.” Because ofeligible for the complexity of those limitations,“dividends received deduction”. The dividend rules are complex, and each U.S. Holder should consult its own tax adviser with respectadvisor regarding the application of such rules. Sale or Other Taxable Disposition of Common Shares Upon the sale or other taxable disposition of common shares, a U.S. Holder generally will recognize capital gain or loss in an amount equal to the difference between the U.S. dollar value of cash received plus the fair market value of any property received and such U.S. Holder’s tax basis in such common shares sold or otherwise disposed of. A U.S. Holder’s tax basis in common shares generally will be such Holder’s U.S. dollar cost for such common shares. Gain or loss recognized on such sale or other disposition generally will be long-term capital gain or loss if, at the time of the sale or other disposition, the common shares have been held for more than one year. The long-term capital gains realized by non-corporate U.S. Holders are generally subject to a lower marginal U.S. federal income tax rate than ordinary income other than qualified dividend income, as defined above. Currently, the long-term capital gains rate is 15%, although the actual rates may be higher due to the phase out of certain tax deductions, exemptions and credits. After 2012, the maximum rate on long-term capital gains is scheduled to be 20%. However, given the uncertain economic conditions in the United States and the size of the federal deficit, tax rates are subject to change and prospective U.S. Holders should consult their tax advisors. The deductibility of losses may be subject to limitations. Warrants Generally, no U.S. federal income tax will be imposed upon the U.S. Holder of a warrant upon exercise of such warrant to acquire Stock of the Company. A U.S. Holder’s tax basis in a warrant will generally be the amount of foreign taxesthe purchase price that mayis allocated to the warrant. Upon exercise of a warrant, the tax basis of the new stock would be claimed asequal to the sum of the tax basis of the warrants in the hands of the U.S. Holder plus the exercise price paid, and the holding period of the new stock would begin on the date that the warrants are exercised. If a credit.warrant lapses without exercise, the Holder will generally realize a capital loss equal to its tax basis in the warrant. Prospective U.S. Holders should consult their tax advisors regarding the tax consequences of acquiring, holding and disposing of warrants. Additional Considerations Tax-Exempt Investors Special considerations apply to U.S. persons that are pension plans and other investors that are subject to tax only on their unrelated business taxable income. Such a tax-exempt investor’s income from an investment in our common shares generally will not be treated as resulting in unrelated business taxable income under current law, so long as such investor’s acquisition of common shares is not debt-financed. Tax-exempt investors should consult their own tax advisors regarding an investment in our common shares.
Additional Tax on Passive Income For tax years beginning after December 31, 2012, certain individuals, estates and trusts whose income exceeds certain thresholds will generally be required to pay a 3.8% Medicare surtax on the lesser of (1) the U.S. Holder’s “net investment income” for the relevant taxable year and (2) the excess of the U.S. Holder’s modified gross income for the taxable year over a certain threshold (which, in the case of individuals, will generally be between U.S.$125,000 and U.S.$250,000 depending on the individual’s circumstances). A U.S. Holder’s “net investment income” may generally include, among other items, certain interest, dividends, gain, and other types of income from investments, minus the allowable deductions that are properly allocable to that gross income or net gain. U.S. Holders are urged to consult with their own tax advisors regarding the effect, if any, of this tax on their ownership and disposition of common shares. Receipt of Foreign Currency The amount of any distribution paid to a U.S. Holder in foreign currency, or on the sale, exchange or other taxable disposition of common shares, generally will be equal to the U.S. dollar value of such foreign currency based on the exchange rate applicable on the date of receipt (regardless of whether such foreign currency is converted into U.S. dollars at that time). A U.S. Holder will have a basis in the foreign currency equal to its U.S. dollar value on the date of receipt. Any U.S. Holder who converts or otherwise disposes of the foreign currency after the date of receipt may have a foreign currency exchange gain or loss that would be treated as ordinary income or loss, and generally will be U.S. source income or loss for foreign tax credit purposes. Each U.S. Holder should consult its own U.S. tax advisor regarding the U.S. federal income tax consequences of receiving, owning, and disposing of foreign currency. Foreign Tax Credit Subject to the PFIC rules discussed above, a U.S. Holder that pays (whether directly or through withholding) Canadian income tax with respect to dividends paid on the common shares generally will be entitled, at the election of such U.S. Holder, to receive either a deduction or a credit for such Canadian income tax paid. Generally, a credit will reduce a U.S. Holder’s U.S. federal income tax liability on a dollar-for-dollar basis, whereas a deduction will reduce a U.S. Holder’s income subject to U.S. federal income tax. This election is made on a year-by-year basis and generally applies to all foreign taxes paid (whether directly or through withholding) or accrued by a U.S. Holder during a year. Complex limitations apply to the foreign tax credit, including the general limitation that the credit cannot exceed the proportionate share of a U.S. Holder’s U.S. federal income tax liability that such U.S. Holder’s “foreign source” taxable income bears to such U.S. Holder’s worldwide taxable income. In applying this limitation, a U.S. Holder’s various items of income and deduction must be classified, under complex rules, as either “foreign source” or “U.S. source.” Generally, dividends paid by a foreign corporation should be treated as foreign source for this purpose, and gains recognized on the sale of stock of a foreign corporation by a U.S. Holder should generally be treated as U.S. source for this purpose, except as otherwise provided in an applicable income tax treaty or if an election is properly made under the Code. However, the amount of a distribution with respect to the common shares that is treated as a “dividend” may be lower for U.S. federal income tax purposes than it is for Canadian federal income tax purposes, resulting in a reduced foreign tax credit allowance to a U.S. Holder. In addition, this limitation is calculated separately with respect to specific categories of income. The foreign tax credit rules are complex, and each U.S. Holder should consult its own U.S. tax advisor regarding the foreign tax credit rules. Information Reporting In general, U.S. Holders of common shares are subject to certain information reporting under the Code relating to their purchase and/or ownership of stock of a foreign corporation such as the Company. Failure to comply with these information reporting requirements may result in substantial penalties. For example, recently enacted legislation generally requires certain individuals who are U.S. Holders to file Form 8938 to report the ownership of specified foreign financial assets for tax years beginning after March 18, 2010 if the total value of those assets exceeds an applicable threshold amount (subject to certain exceptions). For these purposes, a specified foreign financial asset includes not only a financial account (as defined for these purposes) maintained by a foreign financial institution, but also any stock or security issued by a non-U.S. person, any financial instrument or contract held for investment that has an issuer or counterparty other than a U.S. person and any interest in a foreign entity, provided that the asset is not held in an account maintained by a financial institution. The minimum applicable threshold amount is generally U.S.$50,000 in the aggregate, but this threshold amount varies depending on whether the individual lives in the U.S., is married, files a joint income tax return with his or her spouse, etc. Certain domestic entities that are U.S. Holders may also be required to file Form 8938 in the near future. U.S. Holders are urged to consult with their tax advisors regarding their reporting obligations, including the requirement to file IRS Form 8938. In addition, in certain circumstances, a U.S. Holder of common shares who disposes of such common shares in a transaction resulting in the recognition by such Holder of losses in excess of certain significant threshold amounts may be obligated to disclose its participation in such transaction in accordance with the Treasury Regulations governing tax shelters and other potentially tax-motivated transactions or tax shelter regulations. Potential purchasers of common shares should consult their tax advisors concerning any possible disclosure obligation under the tax shelter rules with respect to the disposition of their common shares. Backup Withholding In general,Generally, information reporting requirements will apply to certain payments of dividendsdistributions on the Company’s common shares and to certain paymentsor proceeds on the disposition of proceeds from the sale or exchange ofCompany’s common shares madepaid within the U.S. (and, in certain cases, outside the U.S.) to U.S. Holders other than certain exempt recipients (such as corporations). A U.S. Holder that is not an exempt recipientHolders. Such payments will generally be subject to backup withholding with respect to such payments (currentlytax at athe rate of 28%) unless the (increasing to 31% for payments made after December 31, 2012) if: (a) a U.S. Holder provides an accuratefails to furnish such U.S. Holder’s correct U.S. taxpayer identification number to the payor (generally on Form W-9), as required by the Code and otherwise complies with applicable requirementsTreasury Regulations, (b) the IRS notifies the payor that the U.S. Holder’s taxpayer identification number is incorrect, (c) a U.S. Holder is notified by the IRS that it has previously failed to properly report interest and dividend income, or (d) a U.S. Holder fails to certify, under penalty of theperjury, that such U.S. Holder has furnished its correct U.S. taxpayer identification number. However, certain exempt persons generally are excluded from these information reporting and backup withholding rules. Under recently passed legislation, unless otherwise provided by the IRS, if Intellipharmaceutics is a PFIC, a U.S. Holder will generally be required to file an informational return annually to report its ownership interest in the Company.
Backup withholding is not an additional tax. Any amounts withheld under the U.S. backup withholding tax rules will be allowed as a credit against thea U.S. Holder’s United StatesU.S. federal income tax liability, if any, or refundablewill be refunded, if such U.S. Holder furnishes required information to the extent that it exceeds such liability if the required information isIRS in a timely furnished to the IRS. Amanner. Each U.S. Holder who does not provide a correct taxpayer identification number may be subject to penalties imposed byshould consult its own tax advisor regarding the IRS.backup withholding rules. Canadian Federal Income Tax Considerations Taxation The following summary describes the principal Canadian federal income tax considerations generally applicable to a holder of the Company’s Sharescommon shares who, for purposes of the Income Tax Act (Canada) (the “Canadian Tax Act”) and the Canada – United States Income Tax Convention (the “Treaty”) and at all relevant times, is resident in the United States and was not and is not resident in Canada nor deemed to be resident in Canada, deals at arm’s length and is not affiliated with the Company, holds the Company’s Sharescommon shares as capital property, does not use or hold and is not deemed to use or hold the Company’s Sharescommon shares in or in the course of carrying on business in Canada and who otherw iseotherwise qualifies for the full benefit of the Treaty (a “United States Holder”). Special rules which are not discussed in this summary may apply to a United States Holder that is a financial institution, as defined in the Canadian Tax Act, or an insurer whom the Company’s Sharescommon shares are designed as insurance property. This following summary is based on the current provisions of the Treaty, the Canadian Tax Act and the regulations thereunder, all specific proposals to amend the Canadian Tax Act and the regulations announced by the Minister of Finance (Canada) prior to the date hereof and the Company’s understanding of the administrative practices published in writing by the Canada Revenue Agency prior to the date hereof. This summary does not take into account or anticipate any other changes in the governing law, whether by judicial, governmental or legislative decision or action, nor does it take into account the tax legislation or considerations of any province, territory or non-Canadian (including U.S.) jurisdiction, which legislation or considerations may differ significantly from those described herein. All amounts relevant in computing a United States Holder’s liability under the Canadian Tax Act are to be computed in Canadian currency based on the relevant exchange rate applicable thereto. This summary is of a general nature only and is not intended to be, and should not be interpreted as legal or tax advice to any prospective purchaser or holder of the Company’s Sharescommon shares and no representation with respect to the Canadian federal income tax consequences to any such prospective purchaser is made. Accordingly, prospective purchasers and holders of the Company’s shares should consult their own tax advisors with respect to their particular circumstances. Dividends on the Company’s Common Shares Generally, dividends paid or credited by Canadian corporations to non-resident shareholders are subject to a withholding tax of 25% of the gross amount of such dividends. Pursuant to the Treaty, the withholding tax rate on the gross amount of dividends paid or credited to United States Holders is reduced to 15% or, in the case of a United States Holder that is a U.S. corporation that beneficially owns at least 10% of the voting stock of the Canadian corporation paying the dividends, to 5% of the gross amount of such dividends. Pursuant to the Treaty, certain tax-exempt entities that are United States Holders may be exempt from Canadian withholding taxes, including any withholding tax levied in respect of dividends received on the Company’s Shares.common shares. Disposition of the Company’s Common Shares In general, a United States Holder will not be subject to Canadian income tax on capital gains arising on the disposition of the Company’s Shares,common shares, unless such shares are “taxable Canadian property” within the meaning of the CanadaCanadian Tax Act and no relief is afforded under the Treaty.Act. Generally, the shares of a corporation resident in Canada that are listed on a designated stock exchange (which includes the TSX and NASDAQ) will not be taxable Canadian property of a United States Holder at the time of disposition unless at any time during the sixty month60-month period immediately preceding athe disposition, by the United States Holder of such shares, not less than 25% of the issued shares of any class or series of a class of shares of the corporation belonged to the United States Holder, to persons with whom the United States Holder did not deal a t arm’s length (within the meaning of the Canadian Tax Act), or to the United States Holder and persons with whom the non-resident did not deal at arm’s length (within the meaning of the Canadian Tax Act). The recent Federal Budget proposes to amend the definition of “taxable Canadian property”, effective March 5, 2010 to further exclude shares of Canadian corporations (whether or not listed on a designate stock exchange) provided that, at all times during the previous 60 months, not more than 50% of the value of the Company’s Shares iscommon shares was derived principallydirectly or indirectly from real property (as defined inproperties that are “real or immovable properties”, “Canadian resource properties”, or “timber resource properties”, within the Treaty) situated in Canada.meaning of the Canadian Tax Act. The value of the Company’s Sharescommon shares is not now, and is not expected to be in the future, derived principallymore than 50% from real property.any of these properties.�� Consequently, any gain realized by a United States Holder upon the disposition of the Company’s Shares will generallycommon shares should be exempt from tax under the Canadian Tax Act. F. | Dividends and Paying Agents |
F. Dividends and Paying Agents Not Applicable. Not Applicable. Copies of the documents referred to in this annual report may be inspected, during normal business hours, at the Company’s headquarters located at 30 Worcester Road, Toronto, Ontario, M9W 5X2, Canada. We are required to file reports and other information with the SEC under the SecuritiesU.S. Exchange Act of 1934.Act. Reports and other information filed by us with the SEC may be inspected and copied at the SEC’s public reference facilities located at 100F100 F Street, N.E. in Washington D.C. The SEC also maintains a website at http://www.sec.gov that contains certain reports and other information that we file electronically with the SEC. As a foreign private issuer, we are exempt from the rules under the U.S. Exchange Act prescribing the furnishing and content of proxy statements and our officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the U.S. Exchange Act. Under the U.S. Exchange Act, as a foreign private issuer, we are not required to publish financial statements as frequently or as promptly as United States companies. I. | Subsidiary Information |
I. Subsidiary Information See Item 4.C of this annual report. Item 11.Qualitative and Quantitative Disclosures about Market Risk Interest rate and credit risk InterestWe are exposed to interest rate risk, which is affected by changes in the riskgeneral level of interest rates. Due to the fact that the value of aCompany’s cash is deposited with major financial instrument might be adversely affected by a changeinstitutions in an interest rates. The Company doessavings 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 to interest rates on the investment due to the short term nature of the investments of the Company.short-term nature.
Trade accounts receivable potentially subjects the Company to credit risk. The Company provides an allowance for doubtful accounts equal to the estimated losses expected to be incurred in the collection of accounts receivable. The following table sets forth details of the aged accounts receivable that are not overdue as well as an analysis of overdue amounts and the related allowance for doubtful accounts: | | | November 30, 2009 | | | December 31, 2008 | | | November 30, 2011 | | | November 30, 2010 | | | | | $ | | | | $ | | | | | $ | | | | $ | | | Total accounts receivable | | | 5,427 | | | | 22,326 | | | | 3,383 | | | | 1,619 | | | Less: allowance for doubtful accounts | | | - | | | | - | | | | - | | | | - | | | Total accounts receivable, net | | | 5,427 | | | | 22,326 | | | | 3,383 | | | | 1,619 | | | | | | | | | | | | | | | | | | | | | Not past due | | | 521 | | | | 21,443 | | | | 1,122 | | | | 536 | | | Past due for more than 31 days | | | | | | | | | | | but no more than 60 days | | | 3,589 | | | | 445 | | | | Past due for more than 61 days | | | | | | | | | | | but no more than 90 days | | | - | | | | 438 | | | | Past due for more than 91 days | | | | | | | | | | | but no more than 120 days | | | - | | | | - | | | | Past due for more than 31 days but no more than 60 days | | | | 1,096 | | | | 539 | | | Past due for more than 61 days but no more than 90 days | | | | 1,165 | | | | 544 | | | Past due for more than 91 days but no more than 120 days | | | | - | | | | - | | | Past due for more than 120 days | | | 1,317 | | | | - | | | | - | | | | - | | | Less: Allowance for doubtful accounts | | | - | | | | - | | | | - | | | | - | | | Total accounts receivable, net | | | 5,427 | | | | 22,326 | | | | 3,383 | | | | 1,619 | |
Financial instruments that potentially subject the Company to concentration of credit risk consist principally of uncollateralized accounts receivable. The Company’s maximum exposure to credit risk is equal to the potential amount of financial assets. For the year ended November 30, 2011, two customers accounted for 98% and 2% of revenue of the Company and 100% of accounts receivable of the Company. In the fiscal year ended November 30, 2010, one customer accounted for 100% of revenue of the Company and 100% of the accounts receivable of the Company. In fiscal year 2009, two customers accounted for 90% and 10%, respectively, of net revenue of the Company and one customer accounted for 100% of accounts receivable.
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.bank. The Company’s cash is not subject to any external restrictions. 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 foreign exchange (“FX”) of translating certain non-USnon-U.S. dollar balance sheet accounts as these statements are presented in USU.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 USU.S. dollar would affect the Company’s loss and other comprehensive loss by $0.1 million. Balances denominated in foreign currencies that are considered financial instruments are as follows: | | | November 30, 2009 | | | | | | November 30, 2011 | | | November 30, 2010 | | | | | USD Total | | | Canadian | | | U.S. | | | Canadian | | | U.S. | | | Canadian | | | FX rates used to translate to USD | | | 1.00 | | | | 1.0556 | | | | FX rates used to translate to U.S. | | | | 1.00 | | | | 1.0203 | | | | 1.00 | | | | 1.0266 | | | | | $ | | | | $ | | | | | $ | | | | $ | | | | $ | | | | $ | | | Assets | | | | | | | | | | | | | | | | | | | | | | | | | | Cash | | | 8,014,492 | | | | 8,460,098 | | | | 569,399 | | | | 580,958 | | | | 386,038 | | | | 396,306 | | | Accounts receivable | | | 5,427 | | | | 5,729 | | | | - | | | | - | | | | - | | | | - | | | Investment tax credits | | | 1,840,044 | | | | 1,942,350 | | | | 349,861 | | | | 356,963 | | | | 814,059 | | | | 835,713 | | | | | | | | | | | | | | 919,260 | | | | 937,921 | | | | 1,200,097 | | | | 1,232,019 | | | Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | Accounts payable | | | 1,323,368 | | | | 1,396,948 | | | | 382,427 | | | | 390,190 | | | | 378,660 | | | | 388,732 | | | Accrued liabilities | | | 540,604 | | | | 570,662 | | | | 327,838 | | | | 334,493 | | | | 301,776 | | | | 309,803 | | | Employee cost payable | | | 501,114 | | | | 528,976 | | | | 259,324 | | | | 264,588 | | | | 103,006 | | | | 105,746 | | | Capital lease | | | 48,457 | | | | 51,151 | | | | 43,382 | | | | 44,263 | | | | 13,229 | | | | 13,582 | | | Due to related party | | | 2,360,181 | | | | 2,491,407 | | | | 757,126 | | | | 772,496 | | | | 1,635,842 | | | | 1,679,355 | | | | | | | 1,770,097 | | | | 1,806,030 | | | | 2,432,513 | | | | 2,497,218 | | | Net exposure | | | | (850,837 | ) | | | (868,109 | ) | | | (1,232,416 | ) | | | (1,265,199 | ) |
Liquidity risk Liquidity risk is the risk that the Company will encounter difficulty raising liquid funds to meet commitments as they fall due. In meeting its liquidity requirements, the Company closely monitors its forecast cash requirements with expected cash drawdown. The following are the contractual maturities of the undiscounted cash flows of financial liabilities as at November 30, 2009:2011: | | | Less than 3 months | | | 3 to 6 months | | | 6 to 9 months | | | 9 months 1 year | | | Greater than 1 year | | | Less than 3 months | | | 3 to 6 months | | | 6 to 9 months | | | 9 months 1 year | | | Greater than 1 year | | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Accounts payable | | | 1,323,368 | | | | - | | | | - | | | | - | | | | - | | | | 554,210 | | | | - | | | | - | | | | - | | | | - | | | Accrued liabilities | | | 540,604 | | | | - | | | | - | | | | - | | | | - | | | | 436,154 | | | | - | | | | - | | | | - | | | | - | | | Employee cost payable | | | 501,114 | | | | | | | | | | | | | | | | | | | | 736,073 | | | | - | | | | - | | | | - | | | | - | | | Lease obligations | | | 9,941 | | | | 8,544 | | | | 8,560 | | | | 8,550 | | | | 12,862 | | | | 10,261 | | | | 10,641 | | | | 11,035 | | | | 11,446 | | | | 95,206 | | | Due to related party | | | 800,000 | | | | 1,560,181 | | | | - | | | | - | | | | - | | | | 757,126 | | | | - | | | | - | | | | - | | | | - | | | | | | | 2,493,824 | | | | 10,641 | | | | 11,035 | | | | 11,446 | | | | 95,206 | |
Limitations: The above discussion includes only those exposures that existed as of November 30, 20092011 and, as a result, does not consider exposures or positions that could arise after that date. The Company’s ultimate realized gain or loss with respect to interest rate and exchange rate fluctuations would depend on the exposures that arise during the period and interest and foreign exchange rates. Item 12.Description of Securities Other than Equity Securities. Not applicable. Not applicable. Not applicable. | D. | American Depositary Shares |
Not applicable. Item 13.Defaults, DividendsDividend Arrearages and Delinquencies There have been no material defaults in the payment of any principal or interest owing. Neither the Company nor its subsidiaries has any preferred shares outstanding. Item 14.Material Modifications to the Rights of Security Holders and Use of Proceeds There has been no material modification of the instruments defining the rights of holders of any class of registered securities. There has been no withdrawal or substitution of assets securing any class of registered securities. Item 15.Controls and Procedures INTERNAL CONTROL OVER FINANCIAL REPORTINGInternal Control Over Financial Reporting
This Annual Report on Form 20-F does not include a report of management’s assessment regarding internal control over financial reporting or an attestation reportThe management of our independent registered public accounting firm regarding internal control over financial reporting. We are a successor issuer to Vasogen for reporting purposes under the Securities Exchange Act of 1934, as amended. Vasogen was a development stage company, the management of which sought to engage in a sale of the company or a merger or acquisition, and the monetization of certain tangible and intangible assets. On October 22, 2009, Vasogen, IntelliPharmaCeutics Ltd. (“IPC US”) and certain affiliates of Vasogen and IPC US completed a court-approved plan of arrang ement and merger (the “IPC Arrangement Agreement”), which resulted in an amalgamated corporation, IntelliPharmaCeutics International Inc. (“Intellipharmaceutics”) that acquired the assets and liabilities of Vasogen. Upon the completion of the IPC Arrangement Agreement, the legacy internal controls of Vasogen were replaced entirely by controls relevant to IPC US. While our managementCompany is responsible for establishing and maintaining adequate internal controls over financial reporting for the Company. Internal control over financial reporting dueis 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 IPC Arrangement Agreementmaintenance of records that, in late 2009reasonable detail, accurately and fairly reflect the complete replacementtransactions and dispositions of our internal controls,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 has excludedand directors, and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the assessmentCompany’s assets that could have a material effect on the financial statements.
Management assessed the effectiveness of all of ourthe Company’s internal control over financial reporting andusing the Internal Control-Integrated Framework developed by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management concluded that the Company’s internal control over financial reporting was effective as of November 30, 2011. Management has not conducted, and is not required to conduct, an evaluation or assessment ofidentified any material weaknesses in the effectiveness of ourCompany’s internal control over financial reporting as of November 30, 2009.&# 160; Management considers the IPC Arrangement Agreement involving Vasogen, IPC US and the above-referenced affiliates to be material and significant to our consolidated financial statements and internal control over financial reporting process.2011. Changes In Internal Control Over Financial Reporting The following changes were made to our internal control over financial reporting during the fiscal quarter and year ended November 30, 2009. As noted above, as a result of the completion of the transactions contemplated by the IPC Arrangement Agreement, the legacy internal controls of our Exchange Act predecessor, Vasogen, were replaced by the controls relevant to IPC US. In connection therewith:
· | The management team of IPC US assumed the same positions with the Company as they had previously had with IPC US; and the accounting team of IPC US assumed the same control of accounting matters for the Company as they previously had for IPC US, as the executive team of Vasogen and its Board of Directors resigned their offices as part of the transaction contemplated by the IPC Arrangement Agreement; |
· | The functions, controls and financial reporting processes of IPC US were adopted as the functions, controls and financial processes for the Company, which include those addressing financial reporting, accounting close, revenue and receivables, purchasing and payables, fixed assets, treasury, inventory, payroll, employee benefits and tax accounting; |
· | A new audit committee was appointed for the Company, including its Chairperson Mr. Bahadur Madhani, a Chartered Accountant, and a new audit committee charter was adopted for the Company; |
· | The Board of the Company changed to be comprised of five members of the Board of IPC US and one member of the Board of Vasogen; |
· | The auditors of IPC US became the auditors for the Company; |
· | Subsequent to the November 30, 2009 year end, we hired Mr. Graham Neil, the former Chief Financial Officer of Vasogen, to serve as Vice President Finance and Chief Financial Officer of the Company. Mr. Neil is a Chartered Accountant with substantial prior public company and public accounting experience. |
Except as described above, thereThere were no changes made to the Company'sCompany’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 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 Intellipharmaceutics’ functions, controls and financial processes; no other significant business processes were implemented; and no consultants assisting management in the assessment and documentation of internal controls were engaged.
DISCLOSURE CONTROLS AND PROCEDURESDisclosure Controls and Procedures
Disclosure controlsUnder the supervision and procedures are designed to provide reasonable assurance that all material information required to be publicly disclosed by a public company is gathered and communicated towith the participation of our management, including the certifying officers, on a timely basis so that the appropriate decisions can be made regarding public disclosure. As at November 30, 2009, the Chief Executive Officer and the Vice President Finance and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures (as this term is definedas at November 30, 2011. Disclosure controls and procedures are designed to ensure that the information required to be disclosed by the Company in the rules adopted by Canadianreports it files or submits under securities regulatory authoritieslegislation is recorded, processed, summarized and the United States Securitiesreported on a timely basis and Exchange Commission). This evaluation included a review of our existing disclosure policy, compliance with regard to that policy, the disclosure controls currently in place surrounding our interimsuch information is accumulated and ann ual financial statements, management’s discussion and analysis, and other required documents, and discussions with management surrounding the process of communicating material informationreported to management, and in turnincluding the Company’s Chief Executive Officer and theVice President Finance and Chief Financial Officer, and all procedures, taking into consideration the size of the Company and the number of employees.as appropriate, to allow required disclosures to be made in a timely fashion. Based on thethat evaluation, described above, the Chief Executive Officer and the Chief Financial Officer havemanagement has concluded that as at November 30, 2009, thethese disclosure controls and procedures were effective to provide reasonable assurance that the information we are required to disclose on a continuous basis in annual and interim filings and other reports is recorded, processed, summarized, and reported or disclosed on a timely basis as required.at November 30, 2011.
| Audit Committee Financial Expert. |
Attestation of Internal Control Over Financial Reporting This annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting for the Company. As the Company is a non-accelerated filer, management's report is not subject to attestation by our independent registered public accounting firm pursuant to Section 404(c) of the Sarbanes-Oxley Act of 2002
Item 16A. Audit Committee Financial Expert. Under the SEC rules implementing the Sarbanes-Oxley Act of 2002, Canadian issuers filing reports in the United States must disclose whether their audit committees have at least one “audit committee financial expert”. Additionally, under NASDAQ Listing Rule 5605(c)(3), the NASDAQ requires that one member of the audit committee be financially sophisticated, meaning that they must have “past employment experience in finance or accounting, requisite professional certification in accounting, or any other comparable experience or background which results in the individual’s financial sophistication, including being or having been a chief executive officer, chief financial officer, or other senior officer with financial oversight responsibilities.” The Board has determined that Mr. Madhani qualifies as an Audit Committee financial expert under the SEC rules and as financially sophisticated under the NASDAQ rules. In addition, all members of the Audit Committee are considered financially literate under applicable Canadian laws. The Code of Business Conduct and Ethics (the “Code of Ethics”) has been implemented. It may be viewed on our website at www.intellipharmaceutics.com. During the year ended November 30, 2009,2011, no waivers or requests for exemptions from the Code of Ethics were either requested or granted. | Principal Accountant Fees and Services. |
Our auditor is Deloitte & Touche LLP (“Deloitte”), Chartered Accountants, 5140 Yonge Street, Suite 1700, Toronto, ON M2N 6L7. Deloitte has confirmed that it is independent with respect to the Company within the meaning of the Rules of Professional Conduct of the Institute of Chartered Accountants of Ontario. Deloitte provides tax and audit-related services to the Company and its subsidiaries. Our Audit Committee has concluded that the provision of these non-audit services by Deloitte is compatible with Deloitte maintaining its independence. The aggregate amounts billed by our auditors to us for the eleven month periodyears ended November 30, 20092011 and the year ended December 31, 20082010 for audit fees, audit-related fees, tax fees and all other fees are set forth below: | | Eleven Months Ended November 30, 2009 | Year Ended December 31, 2008 (3) | Year Ended November 30, 2011 | Year Ended November 30, 2010 | Audit Fees (1) | $115,000 | 0 | C$162,105 | C$120,000 | Audit-Related Fees (2) | $205,770 | 0 | 75,293 | 45,000 | Tax Fees | $23,250 | 0 | 118,471 | 33,600 | All Other Fees | $9,664 | 0 | 60,408 | 25,150 | | | | | | | | Totals | $353,684 | 0 | | | Total Fees | | C$416,277 | C$223,750 |
| (1) | Audit fees consist of fees related to the audit of the Company’s consolidated financial statements,statements. |
| (2) | Audit-related fees consist of reviews of quarterly interim financial statements and auditor involvement with the joint management information circular for the IPC Arrangement Agreement completed during 2009.consultation on accounting and disclosure treatments. |
(2)(3) | Tax fees consist of fees for tax consultation, tax advice and tax compliance services for the Company and its subsidiaries. |
(3)(4) | NoAll other fees were paid to Deloitte in 2008 since all fees paid to Deloitte in relation to the 2008 fiscal year were paid in 2009include accounting related matters, Form 20-F, Form F-3, base shelf prospectus activities and are included in the amounts indicated above for the 2009 fiscal year.internal control reviews. |
Item 16D. The Company’s related party pre-approval policies and procedures are described in Item 6.C.
Under applicable Canadian securities regulations, the Company is required to disclose whether its Audit Committee has adopted specific policies and procedures for the engagement of non-audit services and to prepare a summary of these policies and procedures. The Audit Committee’s responsibility is to approve all audit engagement fees and terms as well as reviewing policies for the provision of non-audit services by the external auditors and, when required, the framework for pre-approval of such services. The Audit Committee delegates to its Chairman the pre-approval of such non-audit fees. For each of the years ended November 30, 2011 and 2010, all of the non-audit services provided by the Company’s external auditor were approved by the Chairman of the Audit Committee. Item 16D. Exemptions from the Listing Standards for Audit Committees. | Exemptions from the Listing Standards for Audit Committees. |
Not Applicable. Item 16E. Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers. | Purchases of Equity Securities by the Issuer and Affiliated Purchasers. |
Neither the Company nor, to our knowledge, any affiliated purchaser has made any purchases of our registered shares during the last financial year although shares were received by affiliated purchasers in connection with the IPC Arrangement Agreement (see Item 4.1). Item 16F. Changes in Registrant’s Certifying Accountant | Corporate Governance. |
None. Item 16G. Corporate Governance. The Company is the successor issuer to Vasogen Inc. for reporting purposes under the SecuritiesU.S. Exchange Act of 1934, as amended.Act. Our common shares are currently listed on the Toronto Stock Exchange (the “TSX”) and quoted for trading on the NASDAQ Capital Market (“NASDAQ”) under the symbols “I” and “IPCI”, respectively. Our shares began trading on October 22, 2009, when the IPC Arrangement Agreement with Vasogen was completed. Variations from Certain NASDAQ Rules NASDAQ listing rules permit the Company to follow certain home country practices in lieu of compliance with certain NASDAQ corporate governance rules. Set forth below are the requirements of NASDAQ’s Rule 5600 Series that the Company does not follow and the home country practices that it follows in lieu thereof and other differences from domestic U.S. companies that apply to us under NASDAQ’s corporate governance rules. Shareholder Approval in Connection with Certain Transactions: NASDAQ’s Rule 5635 requires each issuer to obtain shareholder approval prior to certain dilutive events, including: (i) a transaction other than a public offering involving the sale under certain circumstances of 20% or more of the issuer’s common shares outstanding prior to the transaction at a price less than the greater of book value or market value, (ii) the acquisition of the stock or assets of another company; (iii) equity-based compensation of officers, directors, employees or consultants and (iv) a change of control. Under the exemption available to foreign private issuers under NASDAQ Rule 5615(a)(3), the Company does not follow NASDAQ Rule 5635. Instead, and in accordance with the NASDAQ exemption, the Company complies with appl icableapplicable TSX rules and applicable Canadian corporate and securities regulatory requirements. Independence of the Majority of the Board of Directors; Independent Director Oversight of Executive Compensation and Board Nominations: NASDAQ’s Rule 5605(b)(1) requires that the Board of Directors be comprised of a majority of independent directors, as defined in Rule 5605(a)(2). NASDAQ’s Rule 5605(b)(2) requires the independent members of the Board to regularly hold executive sessions where only those directors are present. [Moreover,Moreover, NASDAQ’s Rule 5605(d) requires independent director oversight (by way of approval or recommendations to the Board) of executive officer compensation arrangements by approval of such compensation by a majority of the independent directors or by a compensation committee comprised solely of independent directors, and Rule 5605(e) requires similar oversight with respect to the process of selecting nominees to the Board].Board. Under the exemption available to foreign private issuers under Rule 5615(a)(3), the Company does not follow NASDAQ Rule[s]Rules 5605(b)(1) [,, 5605(d) or 5605(e)]. Instead, and in accordance with the NASDAQ exemption, the Company complies with the applicable TSX rules and applicable Canadian corporate and securities regulatory requirements..requirements. Disclosure of Waivers of Code of Business Conduct and Ethics: Domestic U.S. NASDAQ listed companies are required under NASDAQ Rule 5610 to disclose any waivers of their codes of conduct for directors or executive officers in a Form 8-K within four business days. As a foreign private issuersissuer we are required to disclose any such waivers either in a Form 6-K or in the Company’s next Form 20-F or 40-F.40- F. Item 16H. Mine Safety Disclosure. Not applicable. See Item 18 below.
Consolidated financial statements of Intellipharmaceutics International Inc. November 30, 2009, December 31, 20082011, 2010, and 2007 2009
Intellipharmaceutics International Inc. November 30, 2009, December 31, 20082011, 2010, and 20072009
Table of contents
 | Deloitte & Touche LLP 5140 Yonge Street Suite 1700 Toronto ON M2N 6L7 Canada Tel: 416-601-6150 Fax: 416-601-6151 www.deloitte.ca |
Report of Independent Registered Chartered Accountants
To the Board of Directors and Shareholders of Intellipharmaceutics International Inc.
We have audited the accompanying consolidated balance sheets of Intellipharmaceutics International Inc. and subsidiaries (the "Company") as at November 30, 20092011 and December 31, 2008,2010, and the related consolidated statements of operations and comprehensive loss, shareholders' equity (deficiency), and cash flows for the years ended November 30, 2011 and 2010 and the 11 month period ended November 30, 2009 and year ended December 31, 2008.2009. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. The consolidated financial statements of the Company for the year ended December 31, 2007 were audited by other auditors whose report, dated October 17, 2008, expressed an unqu alified opinion on those financial statements and included an explanatory paragraph concerning going concern uncertainties discussed in Note 2 to the consolidated financial statements.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our auditaudits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as at November 30, 20092011 and December 31, 2008,2010, and the results of its operations and its cash flows for the years ended November 30, 2011 and 2010 and, the 11 month period ended November 30, 2009 and the year ended December 31, 2008, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements for the 11 month period ended November 30, 2009 and the year ended December 31, 2008 have been prepared assuming that the Company will continue as a going concern. As discussed in Note 21 to the consolidated financial statements, the Company's recurring losses from operations and inability to generate sufficient cash flows to meet its obligations and sustain its operationsstockholders' capital deficiency raise substantial doubt about its ability to continue as a going concern. Management's plans concerning these matters are also discussed in Note 21 to the consolidated financial statements. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncer tainty.uncertainty. /s/ Deloitte & Touche LLP
Independent Registered Chartered Accountants Licensed Public Accountants February 26, 2010 except for note 20, which is dated May 31, 2010  | | | | | | | | Consolidated balance sheets | | | | | | | | as at November 30, 2009 and December 31, 2008 | | | | | | | | (Stated in U.S. dollars) | | | | | | | | | | November 30, | | | | | | | | 2009 | | | December 31, | | | | | (Notes 1 and 2) | | | 2008 | | | | | $ | | | | $ | | | Assets | | | | | | | | | Current | | | | | | | | | Cash | | | 8,014,492 | | | | 902,213 | | | Accounts receivable | | | 5,427 | | | | 22,326 | | | Investment tax credits | | | 1,840,044 | | | | 871,784 | | | Prepaid expenses and sundry assets | | | 175,248 | | | | 95,053 | | | | | | 10,035,211 | | | | 1,891,376 | | | | | | | | | | | | | Property and equipment, net (Note 5) | | | 1,046,121 | | | | 1,134,648 | | | | | | 11,081,332 | | | | 3,026,024 | | | | | | | | | | | | | Liabilities | | | | | | | | | | Current | | | | | | | | | | Accounts payable | | | 1,323,368 | | | | 328,477 | | | Accrued liabilities (Note 6) | | | 540,604 | | | | 161,553 | | | Employee cost payable (Note 7) | | | 501,114 | | | | 154,311 | | | Current portion of capital | | | | | | | | | | lease obligations (Note 9) | | | 35,595 | | | | 32,285 | | | Deferred revenue | | | - | | | | 497,149 | | | Due to related parties (Note 8) | | | 2,360,181 | | | | 925,830 | | | | | | 4,760,862 | | | | 2,099,605 | | | | | | | | | | | | | Warrant liability (Note 12) | | | 226,268 | | | | - | | | Capital lease obligations (Note 9) | | | 12,862 | | | | 39,305 | | | Deferred revenue (Note 14) | | | 1,449,326 | | | | 1,470,189 | | | | | | 6,449,318 | | | | 3,609,099 | | | | | | | | | | | | | Shareholders' equity (deficiency) | | | | | | | | | | Capital stock (Note 10 and 11) | | | | | | | | | | Authorized | | | | | | | | | | Unlimited common shares without par value | | | | | | | | | | Unlimited preference shares | | | | | | | | | | Issued and outstanding | | | | | | | | | | 10,907,057 common shares | | | 16,969 | | | | 16,874 | | | (December 31, 2008 - 5,997,751 special voting shares | | | | | | | | | | 3,329,965 common shares), with $0.01 par value | | | | | | | | | | Additional paid-in capital | | | 18,263,340 | | | | 10,482,120 | | | Accumulated other comprehensive (loss) income | | | (341,844 | ) | | | 385,647 | | | Deficit | | | (13,306,451 | ) | | | (11,467,716 | ) | | | | | 4,632,014 | | | | (583,075 | ) | | Commitments and contingencies (Notes 9 and 15) | | | | | | | | | | | | | 11,081,332 | | | | 3,026,024 | |
On behalf of the Board:
____________________________ ____________________________
Dr. Isa Odidi, Chairman of the Board Bahadur Madhani, Director
See accompanying notes to consolidated financial statements
| | | | | | | | | | | Consolidated statements of operations and comprehensive loss | | | | | | | | | | | for the 11 month period ended November 30, 2009 and | | | | | | | | | | | years ended December 31, 2008 and 2007 | | | | | | | | | | | (Stated in U.S. dollars) | | | | | | | | | | | | | 2009 | | | | | | | | | | | (11 months) | | | 2008 | | | 2007 | | | | | (Notes 1 and 2) | | | (12 months) | | | (12 months) | | | | | $ | | | $ | | | $ | | | | | | | | | | | | | | | | | | | | | | | | | | | | Revenue | | | | | | | | | | | | Research and development | | | 630,179 | | | | 733,653 | | | | 1,435,684 | | | Other services | | | - | | | | 544,051 | | | | 861,632 | | | | | | 630,179 | | | | 1,277,704 | | | | 2,297,316 | | | | | | | | | | | | | | | | | Expenses | | | | | | | | | | | | | | Cost of revenue | | | 382,597 | | | | 1,885,790 | | | | 1,641,245 | | | Research and development | | | 1,554,859 | | | | 419,187 | | | | 483,050 | | | Selling, general and administrative | | | 975,197 | | | | 1,365,461 | | | | 1,137,780 | | | Depreciation | | | 344,768 | | | | 574,851 | | | | 399,160 | | | | | | 3,257,421 | | | | 4,245,289 | | | | 3,661,235 | | | | | | | | | | | | | | | | | Loss before the undernoted | | | (2,627,242 | ) | | | (2,967,585 | ) | | | (1,363,919 | ) | | Fair value adjustment of warrants | | | 286,983 | | | | - | | | | - | | | Net foreign exchange gain (loss) | | | 587,642 | | | | (817,407 | ) | | | 85,634 | | | Interest income | | | 1,822 | | | | 95,282 | | | | 91,985 | | | Interest expense | | | (87,940 | ) | | | (75,464 | ) | | | (104,492 | ) | | Loss | | | (1,838,735 | ) | | | (3,765,174 | ) | | | (1,290,792 | ) | | Other comprehensive (loss) income | | | | | | | | | | | | | | Foreign exchange translation adjustment | | | (727,491 | ) | | | 417,743 | | | | 73,523 | | | Comprehensive loss | | | (2,566,226 | ) | | | (3,347,431 | ) | | | (1,217,269 | ) | | | | | | | | | | | | | | | | Loss per common share, basic and diluted | | | (0.19 | ) | | | (0.40 | ) | | | (0.14 | ) | | | | | | | | | | | | | | | | Weighted average number of common | | | | | | | | | | | | | | shares outstanding, basic and diluted | | | 9,512,131 | | | | 9,327,716 | | | | 9,087,000 | |
See accompanying notes to consolidated financial statements
| | | | | | | | | | | | | | | | | | | | | | | | Consolidated statements of shareholders' equity (deficiency) | | | | | | | | | | | | | | | | | | | | | for the 11 month period ended November 30, 2009 and years ended December 31, 2008 and 2007 | | | | | | | | | | | | (Stated in U.S. dollars) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Additional | | | Accumulated | | | | | | shareholders' | | | | | Special voting shares | | | Common shares | | | paid-in | | | Other | | | comprehensive | | | equity | | | | | Number | | | Amount | | | Number | | | Amount | | | capital | | | income (loss) | | | Deficit | | | (deficiency) | | | | | | | | $ | | | | | | $ | | | $ | | | $ | | | $ | | | | $ | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance, December 31, 2006 | | | 5,997,751 | | | | 10,850 | | | | 2,898,791 | | | | 5,244 | | | | 6,961,156 | | | | (105,619 | ) | | | (6,411,750 | ) | | | 459,881 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Proceeds from private placement, | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | net of issue costs | | | - | | | | - | | | | 429,681 | | | | 777 | | | | 2,617,546 | | | | - | | | | - | | | | 2,618,323 | | | Share issued as compensation | | | - | | | | - | | | | 1,493 | | | | 3 | | | | 9,447 | | | | - | | | | - | | | | 9,450 | | | Stock-based compensation | | | - | | | | - | | | | - | | | | - | | | | 451,171 | | | | - | | | | - | | | | 451,171 | | | Other comprehensive income (net of tax - $nil) | | | - | | | | - | | | | - | | | | | | | | - | | | | 73,523 | | | | | | | | 73,523 | | | Loss for the year | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (1,290,792 | ) | | | (1,290,792 | ) | | | | | - | | | | - | | | | 431,174 | | | | 780 | | | | 3,078,164 | | | | 73,523 | | | | (1,290,792 | ) | | | 1,861,675 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance, December 31, 2007 | | | 5,997,751 | | | | 10,850 | | | | 3,329,965 | | | | 6,024 | | | | 10,039,320 | | | | (32,096 | ) | | | (7,702,542 | ) | | | 2,321,556 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Other comprehensive income | | | - | | | | - | | | | - | | | | - | | | | - | | | | 417,743 | | | | - | | | | 417,743 | | | Stock-based compensation (net of tax - $nil) | | | - | | | | - | | | | - | | | | - | | | | 442,800 | | | | - | | | | - | | | | 442,800 | | | Loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (3,765,174 | ) | | | (3,765,174 | ) | | | | | - | | | | - | | | | - | | | | - | | | | 442,800 | | | | 417,743 | | | | (3,765,174 | ) | | | (2,904,631 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance, December 31, 2008 | | | 5,997,751 | | | | 10,850 | | | | 3,329,965 | | | | 6,024 | | | | 10,482,120 | | | | 385,647 | | | | (11,467,716 | ) | | | (583,075 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Shares issued as compensation | | | - | | | | - | | | | 52,356 | | | | 95 | | | | 394,764 | | | | - | | | | - | | | | 394,859 | | | Share cancellation | | | (5,997,751 | ) | | | (10,850 | ) | | | (3,382,321 | ) | | | (6,119 | ) | | | (10,876,884 | ) | | | - | | | | - | | | | (10,893,853 | ) | | Shares issued | | | - | | | | - | | | | 10,907,057 | | | | 16,969 | | | | 10,876,884 | | | | - | | | | - | | | | 10,893,853 | | | Broker options issued in connection with | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | acquisition | | | - | | | | - | | | | - | | | | - | | | | 161,833 | | | | - | | | | - | | | | 161,833 | | | Share issuance cost | | | - | | | | - | | | | - | | | | - | | | | (1,767,935 | ) | | | - | | | | - | | | | (1,767,935 | ) | | Excess of assets over liabilities assumed on | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | acquisition | | | - | | | | - | | | | - | | | | - | | | | 8,992,558 | | | | - | | | | - | | | | 8,992,558 | | | Other comprehensive loss (net of tax - $nil) | | | - | | | | - | | | | - | | | | - | | | | - | | | | (727,491 | ) | | | - | | | | (727,491 | ) | | Loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (1,838,735 | ) | | | (1,838,735 | ) | | | | | (5,997,751 | ) | | | (10,850 | ) | | | 7,577,092 | | | | 10,945 | | | | 7,781,220 | | | | (727,491 | ) | | | (1,838,735 | ) | | | 5,215,089 | | | Balance, November 30, 2009 | | | - | | | | - | | | | 10,907,057 | | | | 16,969 | | | | 18,263,340 | | | | (341,844 | ) | | | (13,306,451 | ) | | | 4,632,014 | |
See accompanying notes to consolidated financial statements
Consolidated statements of cash flows
| | Consolidated balance sheets | | As at November 30, 2011 and 2010 | | (Stated in U.S. dollars) |
for the 11 month period ended November 30, 2009 and years ended December 31, 2008 and 2007| | | 2011 | | | 2010 | | | | | $ | | | | $ | | | | | | | | | | | | Assets | | | | | | | | | Current | | | | | | | | | Cash and cash equivalents | | | 4,817,088 | | | | 789,136 | | | Accounts receivable | | | 3,383 | | | | 1,619 | | | Investment tax credits | | | 349,861 | | | | 1,184,345 | | | Prepaid expenses, sundry and other assets | | | 124,982 | | | | 142,379 | | | | | | 5,295,314 | | | | 2,117,479 | | | | | | | | | | | | | Deferred offering cost (Note 10) | | | - | | | | 224,673 | | | Property and equipment, net (Note 5) | | | 951,914 | | | | 925,554 | | | | | | 6,247,228 | | | | 3,267,706 | | | | | | | | | | | | | Liabilities | | | | | | | | | | Current | | | | | | | | | | Accounts payable | | | 554,210 | | | | 612,957 | | | Accrued liabilities (Note 6) | | | 436,154 | | | | 321,030 | | | Employee cost payable (Note 8) | | | 736,073 | | | | 575,625 | | | Current portion of capital lease obligations (Note 9) | | | 43,383 | | | | 13,230 | | | Due to related parties (Note 7) | | | 757,126 | | | | 1,635,842 | | | | | | 2,526,946 | | | | 3,158,684 | | | | | | | | | | | | | Deferred revenue | | | 107,091 | | | | 8,905 | | | Capital lease obligations (Note 9) | | | 95,206 | | | | - | | | Warrant liability (Note 14) | | | 6,611,015 | | | | 7,161 | | | | | | 9,340,258 | | | | 3,174,750 | | | | | | | | | | | | | Shareholders' equity (deficiency) | | | | | | | | | | Capital stock (Notes 10 and 11) | | | | | | | | | | Authorized | | | | | | | | | | Unlimited common shares without par value | | | | | | | | | | Unlimited preference shares | | | | | | | | | | Issued and outstanding | | | | | | | | | 15,908,444 common shares (2010 - 10,907,054) | | | 147,152 | | | | 16,969 | | | | | | | | | | | | | Additional paid-in capital | | | 20,822,672 | | | | 19,369,005 | | | Accumulated other comprehensive loss | | | (115,035 | ) | | | (225,476 | ) | | Deficit | | | (23,947,819 | ) | | | (19,067,542 | ) | | | | | (3,093,030 | ) | | | 92,956 | | | Contingencies (Note 16) | | | | | | | | | | | | | 6,247,228 | | | | 3,267,706 | |
(Stated in U.S. dollars) | | | 2009 | | | 2008 | | | 2007 | | | | | (11 months) | | | (12 months) | | | (12 months) | | | | | $ | | | $ | | | | $ | | | | | | | | | | | | | | | Loss | | | (1,838,735 | ) | | | (3,765,174 | ) | | | (1,290,792 | ) | | Items not affecting cash | | | | | | | | | | | | | | Depreciation | | | 344,768 | | | | 574,851 | | | | 399,160 | | | Stock-based compensation | | | 18,529 | | | | 442,800 | | | | 460,621 | | | Interest accrual | | | 82,381 | | | | - | | | | - | | | Fair value adjustment of warrants | | | (286,983 | ) | | | - | | | | - | | | Unrealized foreign exchange (gain) loss | | | (669,379 | ) | | | 662,766 | | | | 115,610 | | | | | | (2,349,419 | ) | | | (2,084,757 | ) | | | (315,401 | ) | | | | | | | | | | | | | | | | Change in non-cash operating assets & liabilities | | | | | | | | | | | | | | Accounts receivable | | | 12,042 | | | | 454,638 | | | | (225,325 | ) | | Investment tax credits | | | (411,228 | ) | | | 130,595 | | | | (290,816 | ) | | Prepaid expenses and sundry assets | | | 43,969 | | | | (37,946 | ) | | | (19,884 | ) | | Accounts payable and accrued liabilities | | | (1,631,804 | ) | | | 277,336 | | | | (31,342 | ) | | Deferred revenue | | | (521,543 | ) | | | (475,593 | ) | | | 1,562,889 | | | Cash flows (used in) from operating activities | | | (4,857,983 | ) | | | (1,735,727 | ) | | | 680,121 | | | | | | | | | | | | | | | | | Financing activities | | | | | | | | | | | | | | Due to related parties | | | 1,164,367 | | | | (316,392 | ) | | | (300,864 | ) | | Repayment of capital lease obligations | | | (31,363 | ) | | | (38,405 | ) | | | (12,803 | ) | | Share issuance costs | | | (334,508 | ) | | | - | | | | 2,618,323 | | | Cash flows from (used in) financing activities | | | 798,496 | | | | (354,797 | ) | | | 2,304,656 | | | | | | | | | | | | | | | | | Investing activity | | | | | | | | | | | | | | Purchase of property and equipment | | | (93,412 | ) | | | (91,542 | ) | | | (175,725 | ) | | Cash received on acquisition of Vasogen (Note 4) | | | 11,334,855 | | | | - | | | | - | | | Cash flows from (used in) investing activities | | | 11,241,443 | | | | (91,542 | ) | | | (175,725 | ) | | | | | | | | | | | | | | | | Increase (decrease) in cash | | | 7,181,956 | | | | (2,182,066 | ) | | | 2,809,052 | | | Cash, beginning of year | | | 902,213 | | | | 3,202,294 | | | | 375,054 | | | Effect of foreign exchange (loss) gain on | | | | | | | | | | | | | | cash held in foreign currency | | | (69,677 | ) | | | (118,015 | ) | | | 18,188 | | | Cash, end of year | | | 8,014,492 | | | | 902,213 | | | | 3,202,294 | | | | | | | | | | | | | | | | | Supplemental cash flow information | | | | | | | | | | | | | | Interest paid | | | - | | | | 141,822 | | | | 104,492 | | | Taxes paid | | | - | | | | - | | | | - | |
See accompanying notes to consolidated financial statements
| On behalf of the Board: | | | | | | | | | | | | | | /s/ Dr. Isa Odidi | /s/ Bahadur Madhani | | | | __________________________________ | __________________________________ | | Dr. Isa Odidi, Chairman of the Board | Bahadur Madhani, Director | | | | | | | | | | | See accompanying notes to consolidated financial statements | | | | | | | | | | | |
Page 2
| | Consolidated statements of operations and comprehensive loss | | for the years ended November 30, 2011, 2010 and 11 months ended | | November 30, 2009 | | (Stated in U.S. dollars) |
| | | 2011 (12 months)(Notes 1 and 2) | | | 2010 (12 months)(Notes 1 and 2) | | | 2009 (11 months)(Notes 1 and 2) | | | | | $ | | | $ | | | | $ | | | | | | | | | | | | | | | Revenue | | | | | | | | | | | | Research and development | | | 501,814 | | | | 1,459,385 | | | | 630,179 | | | | | | 501,814 | | | | 1,459,385 | | | | 630,179 | | | | | | | | | | | | | | | | | Expenses | | | | | | | | | | | | | | Research and development | | | 5,125,608 | | | | 4,533,310 | | | | 1,937,456 | | | Selling, general and administrative | | | 2,925,454 | | | | 2,699,204 | | | | 975,197 | | | Depreciation | | | 227,456 | | | | 242,778 | | | | 344,768 | | | Write-down on long lived assets (Note 5) | | | - | | | | 36,481 | | | | - | | | | | | 8,278,518 | | | | 7,511,773 | | | | 3,257,421 | | | | | | | | | | | | | | | | | Loss from operations | | | (7,776,704 | ) | | | (6,052,388 | ) | | | (2,627,242 | ) | | Fair value adjustment of derivative liabilty (Note 14) | | | 5,346,878 | | | | 223,782 | | | | 286,983 | | | Financing expense (Note 10) | | | (2,357,732 | ) | | | - | | | | - | | | Net foreign exchange (loss) gain | | | (70,036 | ) | | | 138,949 | | | | 587,642 | | | Interest income | | | 60,790 | | | | 27,001 | | | | 1,822 | | | Interest expense | | | (83,473 | ) | | | (98,435 | ) | | | (87,940 | ) | | Loss | | | (4,880,277 | ) | | | (5,761,091 | ) | | | (1,838,735 | ) | | Other comprehensive income (loss) | | | | | | | | | | | | | | Foreign exchange translation adjustment | | | 110,441 | | | | 116,368 | | | | (727,491 | ) | | Comprehensive loss | | | (4,769,836 | ) | | | (5,644,723 | ) | | | (2,566,226 | ) | | | | | | | | | | | | | | | | Loss per common share, basic and diluted | | | (0.33 | ) | | | (0.53 | ) | | | (0.19 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Weighted average number of common shares outstanding, basic and diluted | | | 14,994,118 | | | | 10,907,054 | | | | 9,512,131 | |
| See accompanying notes to consolidated financial statements | | |
Page 3 | | Consolidated statements of shareholders' equity (deficiency) | | for the years ended November 30, 2011, 2010 and 11 months ended November 30, 2009 |
| (Stated in U.S. dollars - Notes 1 and 2) | | | | | | | | | | | | |
| | | Number | | | Common shares Amount | | | Additional paid-in capital | | | Accumulated other comprehensive income (loss) | | | Deficit | | | | | | | | | | | $ | | | $ | | | $ | | | $ | | | | $ | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance, December 31, 2008 | | | 3,329,965 | | | | 6,024 | | | | 10,482,120 | | | | 385,647 | | | | (11,467,716 | ) | | | (583,075 | ) | | Shares issued as compensation | | | 52,356 | | | | 95 | | | | 394,764 | | | | - | | | | - | | | | 394,859 | | | Share cancellation (Note 10b) | | | (3,382,321 | ) | | | (6,119 | ) | | | (10,876,884 | ) | | | - | | | | - | | | | (10,893,853 | ) | | Shares issued | | | 10,907,057 | | | | 16,969 | | | | 10,876,884 | | | | - | | | | - | | | | 10,893,853 | | | Broker options issued in connection with acquisition | | | - | | | | - | | | | 161,833 | | | | - | | | | - | | | | 161,833 | | | Share issuance cost | | | - | | | | - | | | | (1,767,935 | ) | | | - | | | | - | | | | (1,767,935 | ) | Excess of assets over liabilities assumed on acquisition (Note 4) | | | - | | | | - | | | | 8,992,558 | | | | - | | | | - | | | | 8,992,558 | | | Other comprehensive loss (net of tax - $Nil) | | | - | | | | - | | | | - | | | | (727,491 | ) | | | - | | | | (727,491 | ) | | Loss | | | - | | | | - | | | | - | | | | - | | | | (1,838,735 | ) | | | (1,838,735 | ) | | | | | 7,577,092 | | | | 10,945 | | | | 7,781,220 | | | | (727,491 | ) | | | (1,838,735 | ) | | | 5,215,089 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance, November 30, 2009 | | | 10,907,057 | | | | 16,969 | | | | 18,263,340 | | | | (341,844 | ) | | | (13,306,451 | ) | | | 4,632,014 | | Adjustment for rounding of shares exchanged under the transaction described in Note 1 | | | (3 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | Balance, November 30, 2009 | | | 10,907,054 | | | | 16,969 | | | | 18,263,340 | | | | (341,844 | ) | | | (13,306,451 | ) | | | 4,632,014 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Adjustment of share issuance cost (Note 10a) | | | - | | | | - | | | | 68,328 | | | | - | | | | - | | | | 68,328 | | | Stock options to broker | | | - | | | | - | | | | 13,711 | | | | - | | | | - | | | | 13,711 | | | Stock options to employees | | | - | | | | - | | | | 964,016 | | | | - | | | | - | | | | 964,016 | | Stock options to non-management board members | | | - | | | | - | | | | 59,610 | | | | - | | | | - | | | | 59,610 | | | Other comprehensive gain (net of tax - $Nil) | | | - | | | | - | | | | - | | | | 116,368 | | | | - | | | | 116,368 | | | Loss | | | - | | | | - | | | | - | | | | - | | | | (5,761,091 | ) | | | (5,761,091 | ) | | | | | - | | | | - | | | | 1,105,665 | | | | 116,368 | | | | (5,761,091 | ) | | | (4,539,058 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance, November 30, 2010 | | | 10,907,054 | | | | 16,969 | | | | 19,369,005 | | | | (225,476 | ) | | | (19,067,542 | ) | | | 92,956 | | | Issuance of common shares (Note 10c) | | | 4,800,000 | | | | - | | | | - | | | | - | | | | - | | | | - | | | Shares issued for options exercised (Note 11) | | | 25,000 | | | | 130,183 | | | | (37,018 | ) | | | - | | | | - | | | | 93,165 | | | Stock options to employees | | | - | | | | - | | | | 674,746 | | | | - | | | | - | | | | 674,746 | | | Stock options to non-management board members | | | - | | | | - | | | | 27,714 | | | | - | | | | - | | | | 27,714 | | | DSU's to non-management board members (Note 12) | | | | | | | - | | | | 33,101 | | | | - | | | | - | | | | 33,101 | | | Issuance of shares on exercise of cashless warrants (note 14) | | | | 755,124 | | | | - | | | | - | | | | 755,124 | | | Other comprehensive gain (net of tax - $Nil) | | | - | | | | - | | | | - | | | | 110,441 | | | | - | | | | 110,441 | | | Loss | | | - | | | | - | | | | - | | | | - | | | | (4,880,277 | ) | | | (4,880,277 | ) | | Cancellation on shares exchanged | | | (79 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | | | 5,001,390 | | | | 130,183 | | | | 1,453,667 | | | | 110,441 | | | | (4,880,277 | ) | | | (3,185,986 | ) | | Balance, November 30, 2011 | | | 15,908,444 | | | | 147,152 | | | | 20,822,672 | | | | (115,035 | ) | | | (23,947,819 | ) | | | (3,093,030 | ) |
| See accompanying notes to consolidated financial statements | | | | | | | |
Page 4 | | Consolidated statements of cash flows | | for the years ended November 30, 2011, 2010 and 11 months ended November 30, 2009 | | (Stated in U.S. dollars) |
| | | | | | | | | | | | | | | | | 2010 (12 months) | | | | | | | | | | | | | | | | | | | | | $ | | | | $ | | | | $ | | | Loss | | | (4,880,277 | ) | | | (5,761,091 | ) | | | (1,838,735 | ) | | Items not affecting cash | | | | | | | | | | | | | | Depreciation | | | 227,456 | | | | 242,778 | | | | 344,768 | | | Stock-based compensation (Notes 10 & 11) | | | 702,461 | | | | 1,023,626 | | | | 18,529 | | | Deferred share units (Note 12) | | | 33,101 | | | | 12,426 | | | | - | | | Interest accrual | | | 7,739 | | | | 95,113 | | | | 82,381 | | | Investment tax credit written off (Note 19) | | | - | | | | 26,832 | | | | - | | | Fair value adjustment of derivative liability (Note 14) | | | (5,346,878 | ) | | | (223,782 | ) | | | (286,983 | ) | | Write down on long lived assets | | | - | | | | 36,481 | | | | - | | | Financing expense (Note 10) | | | 884,587 | | | | - | | | | - | | | Unrealized foreign exchange loss (gain) | | | 203,603 | | | | 195,361 | | | | (669,379 | ) | | | | | | | | | | | | | | | | Change in non-cash operating assets & liabilities | | | | | | | | | | | | | | Accounts receivable | | | (1,764 | ) | | | 3,808 | | | | 12,042 | | | Investment tax credits | | | 869,406 | | | | 675,461 | | | | (411,228 | ) | | Prepaid expenses and sundry assets | | | 17,189 | | | | 36,776 | | | | 43,969 | | | Accounts payable and accrued liabilities | | | 203,743 | | | | (1,117,563 | ) | | | (1,631,804 | ) | | Deferred revenue | | | 98,186 | | | | (1,440,421 | ) | | | (521,543 | ) | | Cash flows used in operating activities | | | (6,981,448 | ) | | | (6,194,195 | ) | | | (4,857,983 | ) | | | | | | | | | | | | | | | | Financing activities | | | | | | | | | | | | | | Payments to related parties (Note 7) | | | (801,551 | ) | | | (860,703 | ) | | | - | | | Receipts from due to related parties | | | - | | | | - | | | | 1,164,367 | | | Repayment of capital lease obligations | | | (22,452 | ) | | | (36,317 | ) | | | (31,363 | ) | | Deferred offering cost | | | - | | | | (9,981 | ) | | | - | | | Share issuance costs | | | - | | | | - | | | | (334,508 | ) | | Issuance of common shares on exercise of stock options (Note 11) | | | 93,165 | | | | - | | | | - | | | Proceeds from issuance of shares and warrants, gross (Note 10) | | | 12,000,000 | | | | - | | | | - | | | Cash flows provided from (used in) financing activities | | | 11,269,162 | | | | (907,001 | ) | | | 798,496 | | | | | | | | | | | | | | | | | Investing activity | | | | | | | | | | | | | | Purchase of property and equipment | | | (262,142 | ) | | | (133,878 | ) | | | (93,412 | ) | | Cash received on acquisition of Vasogen (Note 4) | | | - | | | | - | | | | 11,334,855 | | | Cash flows (used in) provided from investing activities | | | (262,142 | ) | | | (133,878 | ) | | | 11,241,443 | | | | | | | | | | | | | | | | Effect of foreign exchange gain on cash held in foreign currency | | | 2,380 | | | | 9,718 | | | | (69,677 | ) | | | | | | | | | | | | | | | | Increase (decrease) in cash | | | 4,027,952 | | | | (7,225,356 | ) | | | 7,112,279 | | | Cash, beginning of period | | | 789,136 | | | | 8,014,492 | | | | 902,213 | | | | | | | | | | | | | | | | | Cash and cash equivalents, end of period | | | 4,817,088 | | | | 789,136 | | | | 8,014,492 | | | | | | | | | | | | | | | | | Supplemental cash flow information | | | | | | | | | | | | | | Interest paid (Note 7) | | | 163,099 | | | | 104,943 | | | | - | | | Taxes paid | | | - | | | | - | | | | - | |
| See accompanying consolidated financial statements | | | | | |
Page 5
Notes to the consolidated financial statements November 30, 2009, December 31, 20082011, 2010, and 20072009
Intellipharmaceutics International Inc. (“IPC” or the “Company”) is a pharmaceutical company specializing in the research, development and manufacture of controllednovel or generic controlled-release and targeted once-a-day noveltargeted-release oral solid dosedosage drugs. The shareholders of IntelliPharmaCeutics Ltd. (“IPC Ltd”Ltd.”), and Vasogen Inc. (“Vasogen”) approved a plan of arrangement and merger whereby IPC Ltd. combined with Vasogen to continue as a newly incorporated publicly traded entity to be called Intellipharmaceutics International Inc. (“the IPC Arrangement Agreement”) at their respective shareholder meetings on October 19, 2009. All court and regulatory approvals required to effectThe completion of the arrangement were received. The arrangementon October 22, 2009 resulted in essentially IPC Ltd. combining with 7231971a publicly traded company, Intellipharmaceutics International Inc., incorporated under the laws of Canada Inc. (“New Vasogen”), a new Vasogen company, that acquired substantially all ofand traded on the assets of Vasogen, including the proceeds from its non-dilutive financing transaction with Cervus LP as described further below. TSX and NASDAQ. Separately, Vasogen entered into an arrangement agreement with Cervus LP (“Cervus”), an Alberta based limited partnership that reorganized Vasogen prior to completion of the transaction with the Company and provided gross proceeds to Vasogen of approximately Cdn $7.5C$7.5 million in non-dilutive capital. The completion of the arrangement on October 22, 2009 resulted in a new publicly-traded company, Intellipharmaceutics International Inc. Incorporated under the laws of Canada and traded on the TSX and NASDAQ. As a result of the arrangement transaction, IPC Ltd shareholders owned approximately 86% of the outstanding common shares of the Company and Vasogen's shareholders owned approximately 14% of the outstanding common shares of the Company.
As a result of the transaction the Company selected a November 30 year end which resulted in the Company having an eleven month fiscal period in 2009. All comparable information is that of the predecessor Company IPC Ltd. which had a December 31 year end.
| (a) | Basis of consolidation |
These consolidated financial statements include the accounts of the Company and its wholly owned operating subsidiaries, IPC Ltd, Intellipharmaceutics Corp. (“IPC Corp”), Vasogen Ireland Ltd. (“VIL”) and Vasogen Corp. (“VUS”).
On October 22, 2009, the Company, formerly IPC Ltd, as part of the acquisition discussed in Note 1, issued 1,526,987 shares of stock in exchange for all the outstanding shares of Vasogen Inc. (“Vasogen”) and 9,380,070 shares of stock in exchange for all the outstanding shares of IPC Ltd as per the exchange ratio described in Note 8. Under accounting principles generally accepted in the United States of America (“GAAP”), this transaction is considered to be a continuity of Interest transaction followed by the acquisition of assets and assumption of certain liabilities of Vasogen. On acquisition, the difference between the fair value of assets acquired and liabilities assumed has been recorded as a credit to additional paid in capital as described in note 4.
The comparative number of shares issued and outstanding, options, warrants, basic and diluted loss per common share have been amended to give effect to reflect the merger.
All significant inter-company accounts and transactions have been eliminated on consolidation.
2. | Basis of presentation (continued) |
The consolidated financial statements have been prepared in accordance with GAAP, as outlined in the FASB Accounting Standards Codification (“ASC”), assuming that the Company will continue as a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business.
The Company’s principal business activities are focused on the research, development and manufacture of controllednovel or generic controlled-release and targeted once-a-daytargeted-release oral dose solid dosage drugs. The Company earns revenues from development contracts which provide upfront fees, milestone payments, reimbursement of certain expenditures and royalty income upon commercialization of its products. The Company has incurred losses from operations since inception, and has an accumulated deficit of $13,306,451 (2008$23,947,819 as at November 30, 2011 (November 30, 2010 and 2009 - $11,467,716). The$19,067,542 and $13,306,451) respectively. Previously, the Company has funded its research and development activities through the issuance of capital stock, 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. As the Company has several projects in the research and development stage, it expects to incur additional losses and require additional financial resources to support its operating activities for the foreseeable future. The continuation of the Company’s research and development activities and the commercialization of its products are dependent upon the Company’s ability to successfully complete its research programs, protect its intellectual property, obtain regulatory approvals and finance its cash requirements on an ongoing basis. Management believes The consolidated financial statements are prepared on a going concern basis and substantial doubt exists on the appropriateness of this. In order for us to continue operations at existing levels, we expect that over the Companynext twelve months we will require significant additional capital. While we expect to satisfy our operating cash requirements over the next twelve months from cash on hand, collection of anticipated revenues resulting from future commercialization activities, development agreements or marketing license agreements, through managing operating expense levels, equity and/or debt financings, and/or strategic partners funding some or all costs of development, there can be no assurance that we will be able to obtain additionalany such capital on terms or in amounts sufficient to meet our needs or at all. The availability of financing to fund operations forwill be affected by, among other things, the foreseeable future. However, there is an uncertainty about the outcomeresults of management’s efforts to raise additional financing and futureour research and development, activities. Ifour ability to obtain regulatory approvals, the Company is not able tomarket 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 finance its operations foragree to operating and financial covenants that would restrict our operations. In the foreseeable future,event that we do not obtain additional capital over the next twelve months, there ismay be substantial doubt about the Company’sour ability to continue as a going concern and realize itsour assets and pay itsour liabilities as they become due. Any failure by us to raise additional funds on terms favorable to us, or at all, may require us to significantly change or curtail our current or planned operations in order to conserve cash until such time, if ever, that sufficient proceeds from operations are generated, and could result in our not taking advantage of business opportunities, in the termination or delay of clinical trials 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 abbreviated new drug applications (“ANDAs”) or New Drug Applications (“NDAs”) at all or in time to competitively market our products or product candidates.
Intellipharmaceutics International Inc. Notes to the consolidated financial statements November 30, 2011, 2010, and 2009 | 1. | Nature of operations (continued) |
The audited consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. | | (c)(a) | Basis of consolidation |
These consolidated financial statements include the accounts of the Company and its wholly owned operating subsidiaries, IPC Ltd., Intellipharmaceutics Corp. (“IPC Corp”), Vasogen Ireland Ltd. (“VIL”) and Vasogen Corp. (“VUS”). On October 22, 2009, the Company, formerly IPC Ltd., as part of the acquisition discussed in Note 1, issued 1,526,987 shares of stock in exchange for all the outstanding shares of Vasogen and 9,380,070 shares of stock in exchange for all the outstanding shares of IPC Ltd. Under accounting principles generally accepted in the United States of America (“U.S. GAAP”), this transaction is considered to be a continuity of interest transaction followed by the acquisition of assets and assumption of certain liabilities of Vasogen. On acquisition, the difference between the fair value of assets acquired and liabilities assumed was recorded as a credit to additional paid in capital, as described in Note 4. The comparative number of shares issued and outstanding, options, warrants, basic and diluted loss per common share have been amended to give effect to reflect the arrangement and merger. All significant inter-company accounts and transactions have been eliminated on consolidation. The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the year. Actual results could differ from those estimates. Areas where significant judgment is involved in making estimates are: the determination of estimated useful lives of property and equipment; the fair values of financial assets and liabilities; the determination of units of accounting for revenue recognition; the expected term of the Company’sCompany's continued involvement in the research and development of each contract; the fair value of stock options and the determination of performance criteria for expensing share-based payments; the fair value of warrants; evaluation of income tax positions; the determination of valuation allowances; the determination of investment tax credits: accrued liabilities; deferred revenue; the fair value option for financial assets and liabilities; and forecasting future cash flows for assessing whether there are any impairments of long-lived assets. | 3. | Significant accounting policies |
| | (a) | Investment tax creditsCash and cash equivalents |
The Company considers all highly liquid securities with an original maturity of three months or less to be cash equivalents. Cash equivalent balances consist of bankers acceptances and bank accounts with variable, market rates of interest. The financial risks associated with these instruments are minimal and the Company has not experienced any losses from investments in these securities. The carrying amount of cash and cash equivalents approximates its fair value due to its short-term nature.
Intellipharmaceutics International Inc. Notes to the consolidated financial statements November 30, 2011, 2010, and 2009
| 3. | Significant accounting policies (continued) |
| (b) | Investment tax credits (continued) |
The investment tax credits (“ITC”("ITC") receivable are amounts considered recoverable from the Canadian federal and provincial governments under the Scientific Research & Experimental Development (“SR&ED”) incentive program. The amounts claimed under the program represent the amounts submitted by management based on research and development costs incurred during the year up to October 21, 2009. November 30, 2011. Realization is subject to government approval. Any adjustment to the amounts claimed will be recognized in the year in which the adjustment occurs. Refundable ITCs claimed relating to capital expenditures are credited to property and equipment. Refundable ITCs claimed relating to current expenditure isexpenditures are netted against research and development expenditure.expenditures. | | (b)(c) | Property and equipment |
Property and equipment are recorded at cost. Equipment acquired under capital leases are recorded net of imputed interest, based upon the net present value of future payments. Assets under capital leases are pledged as collateral for the related lease obligation. Repairs and maintenance expenditures are charged to operations; major betterments and replacements are capitalized. Depreciation bases and rates are as follows: | Assets | Basis | Rate | | | | | | | | | | | Computer equipment | Declining balance | 30% | | | Computer software | Declining balance | 50% | | | Furniture and fixtures | Declining balance | 20% | | | Laboratory equipment | Declining balance | 20% | | | Leasehold improvements | Declining balance
Declining balance
Declining balance
Declining balance
Straight line | 30%
50%
20%
20%
Over term of lease |
Leasehold improvements and assets acquired under capital leases are depreciated over the term of their useful lives or the lease period, whichever is shorter. The charge to operations resulting from depreciation of assets acquired under capital leases is included with depreciation expense. | | (c)(d) | Impairment of long-lived assets |
Long-lived assets are reviewed for impairment when events or circumstances indicate that the carrying value of an asset may not be recoverable. For assets that are to be held and used, impairment is recognized when the sum of estimated undiscounted cash flows associated with the asset or group of assets is less than its carrying value. If impairment exists, an adjustment is made to write the asset down to its fair value, and a loss is recorded as the difference between the carrying value and fair value. Fair values are determined based on discounted cash flows or internal/external appraisals, as applicable. As a result of the transaction described in Note 1, the Company acquired certain assets and assumed liabilities including warrants. In addition, the Company also issued warrants as described in Note 10c. The warrants are presented as a liability because they do not meet the criteria of Accounting StandardsStandard Codification (”ASC”) topic ASC 480 formerly EITF 00-19 for equity classification. Subsequent changes in the fair value of the warrants are recorded in the consolidated statements of operations.
Intellipharmaceutics International Inc. Notes to the consolidated financial statements November 30, 2011, 2010, and 2009 | 3. | Significant accounting policies (continued) |
| | (e)(f) | Revenue recognition |
The Company accounts for revenue in accordance with the provision of ASC topic 605 Revenue Recognition. The Company earns revenue from non-refundable upfront fees, milestone payments upon achievement of specified research or development, research and development support payments, scale-up services and royalty 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 deliverabledeliverables 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 alonestand-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’sCompany's control. The relevant revenue recognition accounting policy is applied to each separate unit of accounting. 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 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. For contracts that have been put on hold, the Company does not recognize any upfront fees from the period in which the product was on hold. For contracts that are terminated or abandoned;abandoned, the Company recognizes all of the remaining unrecognized upfront fees in the period in which the contract was terminated, and net of amounts that are reimbursable, if any. Revenue from the achievement of research and development milestones, if deemed substantive, is recognized as revenue when the milestones are achieved, and the milestone payments are due and collectible. Milestones are considered substantive if all of the following conditions are met: (i) the milestone is non-refundable; (ii) achievement of the milestone was not reasonably assured at the inception of the arrangement; (iii) substantive effort is involved to achieve the milestone; and (iv) the amount of the milestone appears reasonable in relation to the effort expended, the other milestones in the arrangement and the related risk associated with achievement of the milestone. If any of these conditions are not met, the Company recognizes a proportionate amount of the milestone payment upon receipt as revenue that correlates to work already performed and the remaining portion of the milestone payment would be deferred and recognized as revenue as the Company completes its performance obligations.
Intellipharmaceutics International Inc. Notes to the consolidated financial statements November 30, 2011, 2010, and 2009 | 3. | Significant accounting policies (continued) |
| | (e)(f) | Revenue recognition (continued) |
Research and development (continued)
Pursuant to the guidance in ASC topic 605, formerly EITF Issue 99-19, “Reporting Revenue Gross as a Principal Versus Net as an Agent” (“EITF 99-19”). The Company analyzes whether to categorize reimbursed expenses from customers as a) the gross amount billed or b) the net amount retained, the Company will analyze the relevant facts and circumstances related to these expenses and considered the factors, as specified in the EITF Issue noted above.
Other services Scale-up is the process of translating a laboratory batch to a much larger (manufacturing scale) batch. Revenue generated from any scale-up activities is recorded under ASC topic 605, formerly SAB 104.605. Costs and profit margin related to these services that are in excess of amountamounts billed are recorded in accounts receivable, and amounts billed related to these services that are in excess of costs and profit margin are recorded in deferred revenue. The Company will recognize revenue from royalties based on licensees' sales of the Company's products or technologies. Royalties are recognized as earned in accordance with the contract terms when royalties from licenses can be reasonably estimated and collectibilitycollectability is reasonablereasonably assured. To date, the Company has not yet recognized any royalty revenue. | | (f)(g) | Research and development cost |
Research and development costs related to continued research and development programs are expensed as incurred in accordance with ASC topic 730, formerly Statement of Financial Accounting Standards ("SFAS") No. 2, Accounting for Research and Development Costs.730. However, materials and equipment are capitalized and amortized over their useful lives if they have alternative future uses. The Company uses the liability method of accounting for income taxes. Under the liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and for losses and tax credit carry forwards. Significant judgment is required in determining whether deferred tax assets will be realized in full or in part. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the year that includes the date of enactments. A valuati onvaluation allowance is provided for the portion of deferred tax assets that is more likely than not to remain unrealized. 3. | Significant accounting policies (continued) |
| (g) | Income taxes (continued) |
The Company adoptedaccounts in accordance with ASC topic 740-10, formerly Financial Accounting Standards Board (FASB) Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB No. 109 ("FIN 48"), on January 1, 2007. FIN 48740-10. This ASC topic requires that uncertain tax positions are evaluated in a two-step process, whereby (i) the Company determines whether it is more likely than not that the tax positions will be sustained based on the technical merits of the position and (ii) or those tax positions that meet the more-likely-than-notmore likely than not recognition threshold, the Company would recognize the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with the related tax authority. Changes in recognition or measurement are reflected in the period in which the chang echange in judgment occurs. Prior to the adoption of FIN 48, the Company recognized the effect of income tax positions only if such positions were probable of being sustained. The cumulative effects of the application of the provisions of FIN 48ASC topic 740-10 are described in Note 13.15. The Company records any interest related to income taxes in interest expense and penalties in selling, general and administrative expense.
Intellipharmaceutics International Inc. Notes to the consolidated financial statements November 30, 2011, 2010, and 2009 | 3. | Significant accounting policies (continued) |
IncrementalShare issue costs incurred in respect of issuing capital stock are recorded as a reduction of additional paid-in capital.the proceeds from the issuance of capital stock. Share issuance cost incurred in 2010 were deferred and recorded as deferred offering cost in 2010. These costs were then written off in 2011.
| | (i)(j) | Translation of foreign currencies |
The financial statements of Intellipharmaceutics International Inc. are measured using the Canadian dollar as the functional currency. The Company’sCompany's reporting currency is the USU.S. dollar. The financial results of the Canadian operations are measured using the Canadian dollar as the functional currency. Assets and liabilities of the Canadian operations have been translated at year-endyear end exchange rates and related revenue and expenses have been translated at average exchange rates for the year. Accumulated gains and losses resulting from the translation of the financial statements of the Canadian operations are included as part of accumulated other comprehensive (loss) income, a separate component of shareholders' equity. In respect of other transactions denominated in currencies other than the respective entities' functional currencies, the monetary assets and liabilities are translated at the year-endyear end rates. Revenue and expenses are translated at rates of exchange prevailing on the transaction dates. Non-monetary balance sheet and related income statement accounts are remeasured into USU.S. dollar using historical exchange rates. All of the exchange gains or losses resulting from these other transactions are recognized in income.the statement of operations. | | (j)(k) | Stock-based compensation |
The Company calculates stock-based compensation using the fair value method, under which the fair value of the options at the grant date is calculated using the Black-Scholes Option Pricing Model, and subsequently expensed over the appropriate term. The provisions of the Company’sCompany's stock-based compensation plans do not require the Company to settle any options by transferring cash or other assets, and therefore the Company classifies the awards as equity. Share-based compensation expense recognized during the period is based on the value of share-based payment awards that are ultimately expected to vest. The Company estimates forfeitures at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The share based compensation expense is recorded in the income statement of operations under research and development expense and under selling, general and administration expense. Note 11 provides supplemental disclosure of the Company's stock options. 3. | Significant accounting policies (continued) |
| (k) | Allowance for doubtful accounts |
An allowance for doubtful accounts, if any, is estimated on a case-by-case basis after review of the outstanding receivable amounts and the probability of collection within a reasonable period of time.
Basic loss per share ("EPS") is computed by dividing the loss attributable to common shares' shareholders by the weighted average number of common shares outstanding. Diluted EPS reflects the potential dilution that could occur from common shares issuable through the exercise or conversion of stock options, restricted stock awards, warrants and convertible securities. In certain circumstances, the conversion of options, warrants and convertible securities are excluded from diluted EPS if the effect of such inclusion would be anti-dilutive. The dilutive effect of stock options is determined using the treasury stock method. Stock options and warrants to purchase 828,341, 312,6527,876,229, 1,687,914, and 476,736828,341 common shares of the Company during 2009, 2008fiscal 2011, 2010, and 2007,2009, respectively, were not included in the computation of diluted EPS because the Company has incurred a loss for the 11years ended November 30, 2011 and 2010 and the eleven month period ended November 30, 2009 and the years ended December 31, 2008 and 2007 as the effect would have beenbe anti-dilutive.
Intellipharmaceutics International Inc. Notes to the consolidated financial statements November 30, 2011, 2010, and 2009 | 3. | Significant accounting policies (continued) |
| | (m) | Comprehensive (loss) income |
The Company follows ASC topic 810-10, formerly SFAS No. 130, Reporting Comprehensive Income.810-10. This statement establishes standards for reporting and display of comprehensive (loss) income and its components. Comprehensive (loss) income is net (loss) income plus certain items that are recorded directly to shareholders' equity. Other than foreign exchange gains and losses arising from cumulative translation adjustments, the Company has no other comprehensive (loss) income items.
| | (n) | Fair value measurement |
In September 2006, the FASB issuedUnder ASC topic 820, formerly FASB Statement No. 157, Fair Value Measurement ("Statement 157") for financial assets and financial liabilities. Statement 157 defines fair value, establishes a framework for the measurement of fair value, and enhances disclosures about fair value measurements. The Statement does not require any new fair value measures. The Statement is effective for fair value measures already required or permitted by other standards for fiscal years beginning after November 15, 2007. The Company is required to adopt Statement 157 beginning on January 1, 2008.
Under SFAS 157, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e., an exit price). SFAS 157ASC topic 820 establishes a hierarchy for inputs to valuation techniques used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that reflect assumptions market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’sCompany's own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. There are three levels to the hierarchy based on the reliability of inputs, as follows:
| | ● | Level 1 –- Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets. |
| | ● | Level 2 –- Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, or quoted prices for identical or similar assets and liabilities in markets that are not active. |
| | ● | Level 3 –- Unobservable inputs for the asset or liability. |
3. | Significant accounting policies (continued) |
| (n) | Fair value measurement (continued) |
The degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. The adoption of SFAS 157ASC topic 820 for financial assets and liabilities did not have a material effect on the Company’sCompany's consolidated financial statements, or result in any significant changes to its valuation techniques or key considerations used in valuations. | | (o) | Recently adoptedFuture accounting pronouncements |
In November 2007,May 2011, the EITF reachedFASB provided amendments ASU 2011-4 “Amendment to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS to achieve common fair value measurement and disclosure requirements in U.S. GAAP and International Financial Reporting Standards. The amendments provide clarification and/or additional requirements relating to the following: a) application of the highest and best use and valuation premise concepts, b) measurement of the fair value of instruments classified in an entity’s shareholders’ equity, c) measurement of the fair value of financial instruments that are managed within a final consensus on accounting standards related to collaborative arrangements, referred to as FASB ASC Topic 808. The FASB ASC Topic 808 is focused on how the parties toportfolio, d) application of premiums and discounts in a collaborative agreement should accountfair value measurement, and e) disclosures about fair value measurements. These amendments will be effective prospectively for costs incurredinterim and revenue generated on sales to third parties, how sharing payments pursuant to a collaborative agreement should be presented in the income statement and certain related disclosure questions. The FASB ASC Topic 808 is effective for fiscal yearsannual periods beginning after December 15, 2008 and interim periods within those fiscal years. Upon becoming effective, FASB ASC Topic 808 did2011. The Company does not expect the adoption of the amendments to have a material impact on the Company’s consolidatedIPC’s financial statements.position, results of operations or cash flows.
In December 2007, the FASB issued the Business Combinations Topic (“Business Combinations”) of the ASC. Business Combinations replaces previously issued guidance with respect to business combinations. It applies to all transactions and events in which an entity obtains control over one or more other businesses. Business Combinations substantially increases the use of fair value and makes significant changes to the way companies account for business combinations and noncontrolling interests. Some of the more significant requirements are that it requires more assets acquired and liabilities assumed to be measured at fair value as of the acquisition date, liabilities related to contingent consideration to be remeasured at fair value in each subsequent reporting period, acquisit ion-related costs to be expensed, and noncontrolling interests in subsidiaries to be initially measured at fair value and classified as a separate component of equity. Business Combinations is effective for fiscal years beginning after December 15, 2008, with early adoption prohibited, and is to be applied prospectively, with one exception relating to income taxes. The Company was required to adopt Business Combinations effective January 1, 2009. As the Company did not acquire any businesses during 2009, the adoption of Business Combinations has had no impact on the Company’s consolidated statements. The transaction as disclosed in Note 1 was accounted for as an acquisition of assets and liabilities.
In April 2009, the FASB amended the Fair Value of Financial Instruments Subsection of the ASC to require publicly traded companies to make disclosures about fair value of financial instruments for interim reporting periods as well as in annual financial statements. The amendment also requires those disclosures in summarized financial information at interim reporting periods. The amendment is effective for financial statements issued after June 15, 2009, with early application permitted. The adoption did not have an impact on the Company 2009 consolidated financial statements.
In April 2009, the FASB issued guidance in the Fair Value Measurements and Disclosures Topic of the ASC regarding the determination of when a market is not active and whether a transaction is not orderly. The guidance also requires disclosures in interim and annual periods of the inputs and valuation techniques used to measure fair value and a discussion of changes in valuation techniques and related inputs, if any, during the period. The new guidance is effective for financial statements issued after June 15, 2009, with early application permitted. The adoption did not have an impact on the Company 2009 consolidated financial statements.
Intellipharmaceutics International Inc. Notes to the consolidated financial statements November 30, 2011, 2010, and 2009 | 3. | Significant accounting policies (continued) |
| | (o) | Recently adoptedFuture accounting pronouncements (continued) |
In April 2009,June 2011, the FASB provided amendments ASU 2011-05 “Presentation of Comprehensive Income” requiring an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements, eliminating the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. Additionally, the amendments require an entity to present reclassification adjustments on the face of the financial statements from other comprehensive income to net income. These amendments will be effective retrospectively for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company does not expect the adoption of the amendments to have a material impact on IPC’s financial position, results of operations or cash flows. On December 23, 2011, the FASB issued updated guidance relatedASU 2011-12, which defers certain provisions of ASU 2011-05.One of ASU 2011-05’s provisions required entities to business combinations,present reclassification adjustments out of accumulated other comprehensive income by component in both the statement in which net income is includedpresented and the statement in the Codification in ASC 805-20, “Business Combinations — Identifiable Assets, Liabilities and Any Noncontrolling Interest” (ASC 805-20). ASC 805-20 amends the provisions in ASC 805 for the initial recognition and measurement, subsequent measurement and accounting, and disclosures for assets and liabilities arising from contingencies in business combinations. ASC 805-20which other comprehensive income is effective for contingent assets or contingent liabilities acquired in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The adoption did not have an impact on the Company’s 2009 consolidated financial statements. In May 2009, the FASB issued the Subsequent Events Topic of the ASC (“Subsequent Events”). Subsequent Events applies to all entities, and provides guidance on management’s assessment of events that occur after the balance sheet date but before the issuance of the financial statements. It distinguishes between subsequent events that should and should not be recognized in the financial statements, and requires disclosure of certain nonrecognized subsequent events. It requires that management assess subsequent events forpresented (for both interim and annual reporting periods. Subsequent Eventsfinancial statements). Accordingly, this requirement is not expectedindefinitely deferred by ASU 2011-12 and will be further deliberated by the FASB at a future date. The new ASU is in response to significantly change practice because its guidance is similarconstituents' concerns about whether the requirements under ASU 2011-05 for the presentation of reclassification adjustments were operational.
The FASB also decided that during the deferral period, entities would be required to comply with all existing requirements for reclassification adjustments in ASC 220, which indicates that in previously-existing U.S. auditing literature for assessing and disclosing subsequent events. 0;Rather, it represents guidance directed specifically to management. The adoption did not have an impact"[a]n entity may display reclassification adjustments on the Company’s 2009 consolidated financial statements. In June 2009, the FASB issued Accounting Standards Update 2009-01, The FASB Accounting Standards CodificationTM and the Hierarchy of Generally Accepted Accounting Principles — a replacement of FASB Statement No. 162 (“ASU 2009-01”). ASU 2009-01 is intended to be the source of authoritative U.S. GAAP for nongovernmental entities, and allface of the contentfinancial statement in which comprehensive income is considered authoritative. As a result,reported, or it may disclose reclassification adjustments in the GAAP hierarchy now includes only two levels of GAAP, authoritative and nonauthoritative. ASU 2009-01 is effective for financial statements issued for interim or annual periods ending after September 15, 2009. ASU 2009-01 does not change existing GAAP, and therefore there was no changenotes to the Company’s financial statements upon its adoption.
In August 2009,statements." The effective date of ASU 2011-12 is the FASB issued Accounting Standards Update 2009-05, Fair Value Measurements and Disclosures (Topic 820) (“ASU 2009-05”). ASU 2009-05 clarifiessame as that in circumstances in which a quoted price in an active market for the identical liabilityunaffected provisions of ASU 2011-05 (i.e., those related to the requirement to report the components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements). Accordingly, for public entities, the effective date is not available, a reporting entity is required to measure fair value using either a valuation technique that uses the quoted price of the identical liability when traded as an asset, or quoted prices for similar liabilities or similar liabilities when traded as assets. Should this information be unavailable, the entity is required to use another valuation technique that is consistent with the principles of Topic 820. ASU 2009-05 is effective in the firstfiscal years, and interim or annual periodperiods within those fiscal years, beginning after issuance, with early adoption permitted. 0;The adoption did not have an impact on the Company 2009 consolidated financial statements.December 15, 2011.
Intellipharmaceutics International Inc. 3. | Significant accounting policies (continued) |
| (p) | Future accounting pronouncements |
In June 2009, the FASB issued new guidance on “Accounting for Transfers of Financial Assets”. It addresses concerns raised by the SEC, members of Congress, and financial statement users about the accounting and disclosures required by existing guidance in the wake of the subprime mortgage crisis and the global credit market deterioration, and is intended to improve the accounting and disclosure for transfers of financial assets. The new guidance is effective for financial asset transfers occurring after the beginning of an entity’s first fiscal year that begins after November 15, 2009, with early adoption prohibited. The Company has adopted it on December 1, 2009. The adoption did not have an impact on the Company’s 2009 financial statements.
In June 2009, the FASB updated “Consolidation – Consolidation of Variable Interest Entities” (“Consolidation”). The update amends the consolidation guidance that applies to variable interest entities (“VIEs”), and will significantly affect an entity’s overall consolidation analysis. The amendmentsNotes to the consolidation guidance affect all entities currently within the scope of Consolidation as well as qualifying special-purpose entities that are outside of its scope. An enterprise will need to reconsider its previous conclusions regarding the entities that it consolidates, as the update involves a shift to a qualitative approach that identifies which entities have the power to direct the activities that most significantly impact the VIE’s econom ic performance and the obligation to absorb its losses or the right to receive benefits from it, as compared to the existing quantitative-based risks and rewards calculation. The update also requires ongoing assessment of whether an entity is the primary beneficiary of a VIE, modifies the presentation of consolidated VIE assets and liabilities, and requires additional disclosures. The updated guidance is effective as of the beginning of an entity’s first fiscal year that begins after financial statements
November 15, 2009, with early adoption prohibited. The Company has adopted it on December 1, 2009. The adoption did not have an impact on the Company’s 2009 financial statements. In October 2009, the FASB issued Accounting Standards Update 2009-13, Revenue Recognition (“ASU 2009-13”). ASU 2009-13 amends the criteria for separating consideration in multiple-deliverable revenue arrangements, and establishes a hierarchy of selling prices to determine the selling price of each specific deliverable. As part of this, ASU 2009-13 eliminates the residual method for allocating revenue among the elements of an arrangement and requires that consideration be allocated at the inception of an arrangement. As well, it expands disclosure requirements. ASU 2009-13 is effective for fiscal years beginning on or after June 15,30, 2011, 2010, and therefore will be adopted by the Company on December 1, 2010.2009
The FASB, the EITF and the SEC have issued other accounting pronouncements and regulations during 2009 and 2008 that will become effective(Stated in subsequent periods. The Company’s management does not believe that these pronouncements will have a significant impact on the Company’s financial statements at the time they become effective.U.S. dollars)
As disclosed in Note 1, in October 2009 the Company entered into an acquisition transaction acquiring certain assets and assumed liabilities from Vasogen. As Vasogen did not meet the definition of business under ASC paragraphs 805-10-55-4 through 55-9, the transaction was accounted as an asset acquisition recorded at carrying value which approximatesapproximated fair value. The excess of the Vasogen assets acquired over liabilities assumed on the acquisition iswas recorded as a credit to the additional paid in capital of the Company as follows: | | | | $ | | | | | | | | | Assets | | | | | | Cash | | | 11,334,855 | | | Investment tax credits and prepaid expenses and sundry assets | | | 489,255 | | | Fixed assets | | | 11,406 | | | | | | 11,835,516 | | | | | | | | | Liabilities assumed | | | | | Accounts payable &and accrued liabilities | | | 2,299,289 | | | Warrant liability | | | 543,669 | | | | | | 2,842,958 | | | Additional paid in capital | | | 8,992,558 | |
| | | | | | | | | November 30, | | | | | | | | | | | | 2009 | | | | | | | | | Accumulated | | | Net book | | | | | | | | | November 30, 2011 | | | | | Cost | | | amortization | | | value | | | Cost | | | Accumulated amortization | | | | | | | | | $ | | | | $ | | | | $ | | | $ | | | $ | | | | $ | | | | | | | | | | | | | | | | | | | | | | | | | | | Computer equipment | | | 149,969 | | | | 109,353 | | | | 40,616 | | | | 185,662 | | | | 145,070 | | | | 40,592 | | | Computer software | | | 17,050 | | | | 14,087 | | | | 2,963 | | | | 39,355 | | | | 27,808 | | | | 11,547 | | | Furniture and fixtures | | | 85,149 | | | | 59,301 | | | | 25,848 | | | | 111,255 | | | | 76,187 | | | | 35,068 | | | Laboratory equipment | | | 1,808,372 | | | | 910,055 | | | | 898,317 | | | | 1,941,659 | | | | 1,264,505 | | | | 677,154 | | | Leasehold improvements | | | 895,511 | | | | 895,511 | | | | - | | | | 940,362 | | | | 927,021 | | | | 13,341 | | | Lab equipment under | | | | | | | | | | | | | | | capital lease | | | 61,712 | | | | 22,868 | | | | 38,844 | | | | Computer under | | | | | | | | | | | | | | | capital lease | | | 76,920 | | | | 37,387 | | | | 39,533 | | | | Laboratory equipment under capital lease | | | | 201,622 | | | | 44,128 | | | | 157,494 | | | Computer equipment under capital lease | | | | 76,093 | | | | 59,375 | | | | 16,718 | | | | | | 3,094,683 | | | | 2,048,562 | | | | 1,046,121 | | | | 3,496,008 | | | | 2,544,094 | | | | 951,914 | |
| | | | | | | | | November 30, 2010 | | | | | Cost | | | | | | Carrying value | | | | | $ | | | $ | | | $ | | | | | | | | | | | | | | Computer equipment | | | 176,068 | | | | 129,050 | | | | 47,018 | | | Computer software | | | 31,664 | | | | 20,415 | | | | 11,249 | | | Furniture and fixtures | | | 103,140 | | | | 68,066 | | | | 35,074 | | | Laboratory equipment | | | 1,867,965 | | | | 1,096,161 | | | | 771,804 | | | Leasehold improvements | | | 920,808 | | | | 920,808 | | | | - | | | Lab equipment under capital lease | | | 63,455 | | | | 31,501 | | | | 31,954 | | | Computer under capital lease | | | 79,093 | | | | 50,638 | | | | 28,455 | | | | | | 3,242,193 | | | | 2,316,639 | | | | 925,554 | |
Intellipharmaceutics International Inc. Notes to the consolidated financial statements November 30, 2011, 2010, and 2009 | 5. | Property and equipment (continued) |
| | | | | | | | | December 31, | | | | | | | | | | | 2008 | | | | | | | | Accumulated | | | Net book | | | | | Cost | | | amortization | | | value | | | | | | $ | | | | $ | | | | $ | | | | | | | | | | | | | | | | | Computer equipment | | | 118,479 | | | | 85,090 | | | | 33,389 | | | Computer software | | | 14,777 | | | | 10,667 | | | | 4,110 | | | Furniture and fixtures | | | 73,796 | | | | 46,365 | | | | 27,431 | | | Laboratory equipment | | | 1,735,133 | | | | 885,875 | | | | 849,258 | | | Leasehold improvements | | | 776,109 | | | | 638,826 | | | | 137,283 | | | Lab equipment under | | | | | | | | | | | | | | capital lease | | | 53,484 | | | | 12,261 | | | | 41,223 | | | Computer under | | | | | | | | | | | | | | capital lease | | | 66,664 | | | | 24,710 | | | | 41,954 | | | | | | 2,838,442 | | | | 1,703,794 | | | | 1,134,648 | |
Depreciation for the 11 month periodyear ended November 30, 2011 was $227,456 (November 30, 2010 - $242,778; November 30, 2009 was $344,768 (December 31, 2008 - $574,851; December 31, 2007$344,768). Property and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Impairment is assessed by comparing the carrying amount of an asset with the sum of the undiscounted cash flows expected from its use and disposal, and as such requires the Company to make significant estimates on expected revenues from the commercialization of our products and services and the related expenses. The Company records a write-down for long-lived assets which have been abandoned and do not have any residual value. For the year ended November 30, 2011, the Company recorded no write-down of long-lived assets (2010 - $399,160)$36,481; 2009 – $Nil).
6. Accrued liabilities
| | | November 30, | | | | | | December 31, | | | | | 2009 | | | | | | 2008 | | | | | | | | $ | | | | $ | | | | | | | | | | | | | | | | | Professional fee | | | 482,624 | | | | | | | | 148,458 | | | Other | | | 57,980 | | | | | | | | 13,095 | | | | | | 540,604 | | | | | | | | 161,553 | |
7.6. | Employee cost payableAccrued liabilities |
As at November 30, 2009, the Company had $462,986 (December 31, 2008 - $142,000) in unpaid salary payable to Dr. Isa Odidi and Dr. Amina Odidi, principal stockholders, directors and executive officers of the Company and $38,128 (December 31, 2008 - $12,311) for other employees.| | | November 30, 2011 | | | November 30, 2010 | | | | | $ | | | | $ | | | | | | | | | | | | | Professional fees | | | 307,465 | | | | 242,107 | | | Other | | | 128,689 | | | | 78,923 | | | | | | 436,154 | | | | 321,030 | |
8.7. | Due to related parties |
Amounts due to the related parties are payable to entities controlled by two shareholders and towho are also officers and directors of the Company. | | | November 30, | | | December 31, | | | | | 2009 | | | 2008 | | | | | $ | | | $ | | | | | | | | | | | | | Promissory note payable to two directors | | | | | | | | | and officers of the Company, unsecured, | | | | | | | | | 6% annual interest rate on the outstanding | | | | | | | | | loan balance (i) | | | | | | | | | (2009 - Cdn $2,463,240; 2008 - Cdn $1,099,495) | | | 2,333,498 | | | | 902,705 | | | Note payable to an entity controlled by | | | | | | | | | | shareholders, officers and directors of the | | | | | | | | | | Company, unsecured, non-interest bearing | | | | | | | | | | with no fixed repayment terms. | | | | | | | | | | (2009 - Cdn $28,167; 2008 - | | | | | | | | | | Cdn $28,167) | | | 26,683 | | | | 23,125 | | | | | | 2,360,181 | | | | 925,830 | |
| | | | | | November 30, 2010 | | | | | $ | | | | $ | | Promissory note payable to two directors and officers of the Company, unsecured 6% annual interest rate on the outstanding loan balance (i) (2011 - C$774,330; 2010 - C$1,651,188) | | | 729,520 | | | | 1,608,405 | | Note payable to an entity controlled by shareholders, officers and directors of the Company, unsecured, non-interest bearing with no fixed repayment terms. (2011 - C$28,167; 2010 - C$28,167) | | | 27,606 | | | | 27,437 | | | | | | 757,126 | | | | 1,635,842 | |
Interest expense on the promissory note payable to related parties for the 11 month periodyear ended November 30, 2011 is $7,493 (November 30, 2010 - $94,055; November 30, 2009 is $85,113 (December 31, 2008 - $65,750; December 31, 2007 - $99,090)$85,113) and has been included in the consolidated statement of operations. | (i) | As a result of the transactions, as described in Note 1, effectiveEffective October 22, 2009 (“effective date”), the promissory note dated September 10, 2004 issued by IPC Corp.Corp to Dr. Isa Odidi and Dr. Amina Odidi (the “Promissory Note”) was amended to provide that the principal amount thereof shall be payable when payment is required solely out of (i) revenues earned by IPC Corp following the effective date, and/or proceeds received by any IPC Company from any offering of its securities following the effective date, other than the securities offering completed on February 1, 2011, and/or amounts received by IPC Corp for the scientific research tax credits received after the effective date for research expenses of IPC Corp incurred before the effective date and (ii) up to $800,000C$800,000 from the Net Cash (as defined in the IPC Arrangement Agreement). Subsequent toDuring the year end $800,000ended November 30, 2011, $801,551 (C$817,822) (2010 - $755,760) and an interest payment of $163,099 (C$166,410) (2010 - $104,943) in respect of the shar eholderpromissory note was repaid by the Company in accordance with the terms of the IPC Arrangement Agreement. |
These transactions areAs described in Note 8 certain salary payable is owing to the normal course of operations and have been measured at the exchange amount which is the amount of consideration established and agreed to by the related parties.two shareholders. Intellipharmaceutics International Inc. Notes to the consolidated financial statements November 30, 2011, 2010, and 2009
As at November 30, 2011, the Company had $472,619 (November 30, 2010 - $472,619) in unpaid salary payable to Dr. Isa Odidi and Dr. Amina Odidi, principal shareholders, directors and executive officers of the Company and $263,454 (November 30, 2010 - $103,006) for other amounts payable to certain employees. The Company leases facilities under an operating lease which expires on November 2010.2012. The Company also leases various computers and equipment under capital leases. Future minimum lease payments under leases with terms of one year or more are as follows at November 30, 2009:2011: | | | Capital | | | Operating | | | Years ending December 31, | | leases | | | lease | | | | | $ | | | $ | | | | | | | | | | | | | 2010 | | | 38,764 | | | | 96,000 | | | 2011 | | | 13,376 | | | | - | | | | | | 52,140 | | | | 96,000 | | | Less: amounts representing interest at 11% | | | 3,683 | | | | - | | | | | | 48,457 | | | | 96,000 | | | Less: current portion | | | 35,595 | | | | - | | | | | | 12,862 | | | | 96,000 | |
| | | | | | | | | Year ending November 30, 2011 | | Capital Lease | | | Operating Lease | | | | | | | | | | | | | | | $ | | | | $ | | | 2012 | | | 60,835 | | | | 95,188 | | | 2013 | | | 60,835 | | | | - | | | 2014 | | | 47,962 | | | | - | | | | | | 169,632 | | | | 95,188 | | | Less: amounts representing interest at 14% | | | 31,043 | | | | - | | | | | | 138,589 | | | | 95,188 | | | Less: Current portion | | | 43,383 | | | | - | | | Balance, long-term portion | | | 95,206 | | | | 95,188 | |
It is the Company’s present intension to renew the lease for its premises before the lease expires before November 2010.
Authorized, issued and outstanding | | Authorized, issued and outstanding |
| (a) | The Company is authorized to issue an unlimited number of common shares, all without nominal or par value and an unlimited number of preference shares. As at November 30, 2009,2011 the Company has 10,907,05715,908,444 (2010 – 10,907,054) common shares issued and outstanding, and no preference shares issued and outstanding.outstanding. |
A company (“Odidi Holdco”) owned by two officers and directors of the IPC ownowns 5,997,751 (2010 - 5,997,751) common shares or approximately 38% (2010 – 55%) of IPC. Each common share of the Company entitles the holder thereof to one vote at any meeting of shareholders of the Company, except meetings at which only holders of a specified class of shares are entitled to vote. Common shares of the Company are entitled to receive, as and when declared by the board of the Company, dividends in such amounts as shall be determined by the board of the Company. The holders of common shares of the Company have the right to receive the remaining property of the Company in the event of liquidation, dissolution, or winding-up of the Company, whether voluntary or involuntary. The preference shares may at any time and from time to time be issued in one or more series. The board of directors will, by resolution, from time to time, before the issue thereof, fix the rights, privileges, restrictions and conditions attaching to the preference shares of each series. Except as required by law, the holders of any series of preference shares will not as such be entitled to receive notice of, attend or vote at any meeting of the shareholders of the Company. Holders of preference shares will be entitled to preference with respect to payment of dividends and the distribution of assets in the event of liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, or any other distribution of the assets of the Company among its shareholders for the purpose of winding up its affairs, on such shares over the common shares of the Company and over any other shares ranking junior to the preference shares.
Intellipharmaceutics International Inc. Notes to the consolidated financial statements November 30, 2011, 2010, and 2009 | 10. | Capital stock (continued) |
| Authorized, issued and outstanding (continued) |
Authorized, issued and outstanding (continued) AsThe Company was able to negotiate certain reduced stock issuance costs in connection with becoming a resultpublicly traded company in 2009. The estimate used in preparation of the transactions,November 30, 2009 financial statements was higher than the amount eventually paid during the second quarter of fiscal 2010, which resulted in an adjustment of $54,454 in the statement of shareholders’ equity (deficiency) for the year ended November 30, 2010. In addition as described in Note 1, effective October 22, 2009 former shareholders11, the Company issued an additional 32,722 broker options related to this transaction.
The fair value of IPC Ltd. owned approximately 86%these stock options using the Black-Scholes options pricing model was less than the estimated fair value of the outstanding common shares of IPC and former shareholders of Vasogen owned approximately 14% of the outstanding common shares of IPC. Each former Vasogen Inc. shareholder received 0.065963061 common shares of IPC, and each former equity shareholder of IPC Ltd and its operating affiliate IPC Corp. received 0.552788117 common shares of IPC, for each share they exchangedthese stock options recorded in the transaction.2009 year end financial statements which resulted in a further adjustment of $13,874 for the year ended November 30, 2010. These adjustments have been recorded as credits to additional paid in capital. As described in noteNote 2(a) the comparative share information havehas been amended to give effect of the transaction described in noteNote 1. | (b) | As a result of the transactions, as described in Note 1, effective October 22, 2009 former shareholders of IPC Ltd. owned approximately 86% of the outstanding common shares of IPC and former shareholders of Vasogen owned approximately 14% of the outstanding common shares of IPC. Each former Vasogen Inc. shareholder received 0.065963061 common shares of IPC, and each former equity shareholder of IPC Ltd. and its operating affiliate IPC Corp. received 0.552788117 common shares of IPC, for each share they exchanged in the transaction. |
As at December 31, 2008, and 2007, IPC LtdLtd. had 3,329,965 common shares issued and outstanding (6,023,944 prior to exchange as described above). In connection with the October 2009 transaction IPC LTDLtd. issued an additional 52,356 common shares to a broker before all of the common shares outstanding of IPC LtdLtd. were converted to common shares in the Company. As a result of the transactions, as described in noteNote 1, effective October 22, 2009 these shares were cancelled and the holders of these shares received shares in the Company. As at December 31, 2008, and 2007, IPC LtdLtd. had 5,997,751 Special Voting Shares issued and outstanding (10,850,000 prior to exchange as described above). The Special Voting Shares outstanding in IPC LtdLtd. gave their holders voting rights on a one vote per share basis. The Special Voting Shares had no right to dividends or distributions from IPC LtdLtd. and had no equity interest in IPC Ltd. These Special Voting Shares were all owned by a company controlled by two officers and directors of the Company (“("Odidi Holdco”Holdco"). As a result of the transactions, as described in Note 1, effective October 22, 2009 these non equitynon-equity shares were cancelled and the holders of these shares received no shares in the Company. As a result of the transactions described in noteNote 1 effective October 22, 2009 the 5,997,751 (10,850,00 0(10,850,000 prior to exchange described above) equity shares owned by Odidi Holdco, were exchanged for common shares in the Company. | | (b)(c) | DuringOn February 1, 2011, the Company completed a private offering for the sale and issuance of 4,800,000 units of the Company. Each unit consisted of one share of common stock, a five year ended December 31, 2007, IPC Ltd. issued 34,833Series A common sharesshare purchase warrant to various investorspurchase one half of a share of common stock at an exercise price of $2.50 per whole share and a two year Series B common share purchase warrant to purchase one half of a share of common stock at an exercise price of $2.50 per whole share for gross proceeds of $220,545. Further, during$12,000,000. The Company also issued to the year ended December 31, 2007, IPC Ltd. entered intoplacement agents 96,000 warrants to purchase a privateshare of common stock at an exercise price of $3.125 per whole share. The holders of Series A and Series B common share purchase warrants and placement agreement andagents warrants are entitled to a revenue arrangement with a pharmaceutical company. IPC Ltd. issued 394,848 commoncashless exercise under which the number of shares to this pharmaceutical companybe issued will be based on the number of shares for gross proceedswhich warrants are exercised times the difference between market price of $4,999,995. IPC Ltd. allocated $2,500,000common share and the exercise price divided by the market price. Under U.S. GAAP where the strike price of the warrants is denominated in a currency other than an entity's functional currency, the warrants would not be considered indexed to the common shares issuedentity’s own stock, and would consequently be considered to this pharmaceutical company beingbe a derivative liability. Also under U.S. GAAP, warrants with the estimated fair value ofcashless exercise option satisfying the common shares, and the residual amount of $2,499,995 was allocated asexplicit net settlement criteria are considered a non-refundable upfront fee on the revenue agreement.derivative liability. |
The gross proceeds from the private placements in the year ended December 31, 2007 aggregated to $2,720,545. IPC Ltd. recorded the aggregate par value of $777 as common shares and the balance amount of $2,617,546, net of the costs of issuance of $102,222 was recorded as additional paid-in-capital.
Intellipharmaceutics International Inc. Notes to the consolidated financial statements November 30, 2011, 2010, and 2009 | 10. | Capital stock (continued) |
| (c) | During the year ended December 31, 2007, IPC Ltd. issued 1,493 common shares to employees for services rendered. The fair value of the common shares amounted to $9,450, based on the price at which common shares were issued for cash to arm’s-length investors in a private placement transaction at or around the same time as common shares were granted to the employees. This amount has been expensed as selling, general and administrative costs. IPC Ltd. recorded the par value of these shares, amounting to $3.50, as common shares and the balance of $9,447 has been recorded as additional paid-in capital. |
The Series A, Series B common share purchase warrants and placement agents warrants are denominated in U.S. dollars and IPC’s functional currency is Cdn dollars. As a result, the Company determined that these warrants are not considered indexed to the Company’s own stock and characterized the fair value of these warrants as derivative liabilities upon issuance. The derivative has been subsequently marked to market through statement of operations. | (d) | As of December 31, 2008 and 2007 IPC Ltd. had 2,288,026; restricted common shares. Restricted stock is unregistered shares that has been issued but can’t yet be sold in the market. The share certificate normally bears a written legend stating the restriction. When the shares can legally be sold, the legend is removed from the certificate and the shares are moved from restricted to the free trading on the company ledger. As a result of the transactions, as described in Note 10(a), effective October 22, 2009 these shares were cancelled and the holders of these shares received unrestricted shares in the Company as described above. |
The Company incurred financing expenses of $2,357,732, which includes placement agent warrants with a fair value of $229,005 and $655,582 as the cost of the private offering. The Company determined that the fair value of the warrant liability at issuance to be $12,655,582 based upon a Black-Scholes Options Pricing Model calculation (Note 14). The Company recorded the full value of the derivative as a liability at issuance with an offset to valuation discount. As the fair value of the liability of $12,655,582 exceeded the proceeds of $12,000,000, the excess of the liability over the proceeds amount of $655,582 was considered to be a cost of the private offering, which was included in the financing expenses. As a result of the transactions, as described in Note 1, effective October 22, 2009, the Company adopted a new stock option plan (the "Employee“Employee Stock Option Plan"Plan”). All grants of options to employees after October 22, 2009 are made from the Employee Stock Option Plan.Plan (the “Employee Stock Option Plan”). The maximum number of common shares issuable under the Employee Stock Option Plan is limited to 10% of the issued and outstanding common shares of the Company from time to time, or 1,090,7061,590,844 based on the number of issued and outstanding common shares as at November 30, 2009.2011. As at November 30, 2009 87,9912011, 453,013 options are outstanding under the employee stock option plan. Each option granted allows the holder to purchase one common share at an exercise price not less than the closing price of the Company's common shares on the Toronto Stock Exchan geExchange on the last trading day prior to the grant of the option. Options granted under these plans generally have a maximum term of 10 years and generally vest over a period of up to three years. As at November 30, 2009,2011, there were 1.0 million1,137,831 options available for grant under the Employee Stock Option Plan. As a result of the transactions, as described in Note 1, effective October 22, 2009 each former Vasogen option holder received 0.065963061 options to purchase common shares of IPC, and each former Intellipharmaceutics Ltd. Option holder received 0.552788117 options to purchase common shares of IPC, for each option they exchange in the transaction. As a result 72,386 IPC options were issued to Vasogen option holders, 2,783,617 options were issued to IPC Ltd option holders. Previously issued performance based options in the amount of 2,763,941 were included in the IPC options issued to IPC option holders.
In August 2004, the Board of Directors of IPC LtdLtd. approved a grant of 2,763,9412,763,940 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. These options were still outstanding as at November 30, 2011 and will expire in 2014. In addition to the Employee Stock Option Plan, in connection with the Octoberbecoming a publicly traded company in 2009 transaction IPC LtdLtd. issued an additional 87,256 broker options to purchase common shares of IPC Ltd which upon completion of the acquisition transaction become options to purchase common shares of IPC.that were expired as at November 30, 2011. The fair valuevalues of these broker options of $161,833 were recorded as a charge to additional paid in Capitalpaid-in capital and a charge to share issuance costs in additional paid inpaid-in capital. In the year ended November 30, 2011, 120,000 (2010 – 45,000) stock options to non-management board members and a grant of 208,000 (2010 – 120,000) stock options to employees 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 Accounting Standards Codification topic ASC 718, formally SFAS No. 123(R) and SAB No. 107.
Because option-pricingOption pricing models require the use of subjective assumptions, changes in these assumptions can materially affect the fair value of the options. The assumptions presented in the table below represent the weighted average of the applicable assumption used to value stock options at their grant date.
The Company calculates expected volatility based on historical volatility of the Company’s peer group that is publicly traded. traded for options that has an expected life than is more than two years. For options that have an expected life of less than two years the Company uses its own volatility. Intellipharmaceutics International Inc. Notes to the consolidated financial statements November 30, 2011, 2010, and 2009 The expected term, which represents the period of time that options granted are expected to be outstanding, is estimated based on an average of the term of the options.
The risk-freerisk 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 nilNil as the Company is not expected to pay dividends in the foreseeable future.
The weighted average fair value of employee stock options granted in 2011 and 2010 and the fair value of broker options granted in 20092011 and the value of stock options granted in 20072010 was estimated using the following assumptions. In 2008 there were no stock options granted. | | | | Broker options | | | Employee stock options | | | | | | | | | | | | | | | | | | | | 2009 | | | 2007 | | | 2011 | | | 2010 | | | 2011 | | | 2010 | | | | | | | | | | | | | | | | | | | | | | | Volatility | | | 142.3 | % | | | 50 | % | | | - | | | | 142.3 | % | | | 63.8 | % | | | 90.4 | % | | Risk-free interest rate | | | 1.5 | % | | | 5 | % | | | - | | | | 1.5 | % | | | 0.02 | % | | | 3.38 | % | | Expected life (in years) | | | 1 | | | | 1 - 10 | | | | - | | | | 1 | | | | 7.77 | | | | 6.49 | | | Dividend yield | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | The weighted average grant date | | | | | | | | | | | fair value per options granted | | $ | 1.85 | | | $ | 2.70 | | | | The weighted average grant date fair value per options granted | | | $ | - | | | $ | 1.85 | | | $ | 1.86 | | | $ | 2.03 | |
Details of Stockstock option transactions are as follows: | | | | | | | | | November 30, | | | | | | | | | December 31, | | | | | | | | | December 31, | | | | | | | | | | | 2009 | | | | | | | | | 2008 | | | | | | | | | 2007 | | | | | | | | Weighted | | | Weighted | | | | | | Weighted | | | Weighted | | | | | | Weighted | | | Weighted | | | | | | | | average | | | average | | | | | | average | | | average | | | | | | average | | | average | | | | | | | | exercise | | | grant | | | | | | exercise | | | grant | | | | | | exercise | | | grant | | | | | Number of | | | price per | | | date | | | Number of | | | price per | | | date | | | Number of | | | price per | | | date | | | | | options | | | share | | | fair value | | | options | | | share | | | fair value | | | options | | | share | | | fair value | | | | | | | | | $ | | | $ | | | | | | | | $ | | | $ | | | | | | | | $ | | | | $ | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Outstanding, | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | beginning | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | of period | | | 2,800,199 | | | | 3.64 | | | | 1.59 | | | | 2,837,970 | | | | 3.65 | | | | 1.59 | | | | 2,834,877 | | | | 3.65 | | | | 1.59 | | | Granted | | | 87,256 | | | | 6.26 | | | | 1.85 | | | | - | | | | - | | | | - | | | | 3,093 | | | | 5.43 | | | | 2.70 | | | Vasogen options | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | exchanged for | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | IPC options | | | 72,386 | | | | 116.40 | | | | 78.82 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | Expired | | | (20,653 | ) | | | 5.90 | | | | 1.80 | | | | (37,771 | ) | | | 5.83 | | | | 0.85 | | | | - | | | | - | | | | - | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Outstanding, | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | end of period | | | 2,939,188 | | | | 6.48 | | | | 3.46 | | | | 2,800,199 | | | | 3.64 | | | | 1.59 | | | | 2,837,970 | | | | 3.65 | | | | 1.59 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Options | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | exercisable, | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | end of | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | period | | | 451,642 | | | | 22.22 | | | | 13.67 | | | | 312,652 | | | | 3.80 | | | | 1.57 | | | | 350,423 | | | | 4.02 | | | | 1.50 | |
| | | | | | November 30, 2011 | | | | | | November 30, 2010 | | | | | | November 30, 2009 | | | | | Number of options | | | Weighted average exercise price per share | | | Weighted average grant date fair value | | | | | | | | | Weighted average grant date fair value | | | | | | Weighted average exercise price per share | | | Weighted average grant date fair value | | | | | | | | | | $ | | | | $ | | | | | | | | $ | | | | $ | | | | | | | | $ | | | | $ | | Outstanding, beginning of period, | | | 3,038,698 | | | | 5.53 | | | | 2.87 | | | | 2,939,188 | | | | 6.48 | | | | 3.46 | | | | 2,800,199 | | | | 3.64 | | | | 1.59 | | | Granted | | | 328,000 | | | | 3.51 | | | | 1.84 | | | | 152,722 | | | | 3.36 | | | | 1.59 | | | | 87,256 | | | | 6.26 | | | | 1.85 | | Vasogen options exchanged for IPC options | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 72,386 | | | | 116.40 | | | | 78.82 | | | Exercised | | | (25,000 | ) | | | 3.73 | | | | 1.55 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | Forfeiture | | | (4,667 | ) | | | - | | | | - | | | | (25,000 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | Expired | | | (120,077 | ) | | | 6.01 | | | | 1.61 | | | | (28,212 | ) | | | 51.47 | | | | 25.29 | | | | (20,653 | ) | | | 5.90 | | | | 1.80 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 3,216,954 | | | | 5.33 | | | | 2.82 | | | | 3,038,698 | | | | 5.53 | | | | 2.87 | | | | 2,939,188 | | | | 6.48 | | | | 3.46 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Options exercisable, end of year | | | 1,585,816 | | | | 7.11 | | | | 4.03 | | | | 1,328,667 | | | | 8.00 | | | | 4.45 | | | | 451,642 | | | | 22.22 | | | | 13.67 | |
Intellipharmaceutics International Inc. Notes to the consolidated financial statements November 30, 2011, 2010, and 2009 As of November 30, 2009,2011, the exercise prices, weighted average remaining contractual life of outstanding options and weighted average grant date fair values were as follows: | | | | | | | | | | | | Options outstanding | | | | | | Options exercisable | | | | | | | | Weighted | | | Weighted | | | Weighted | | | | | | Weighted | | | Weighted | | | | | | | | average | | | average | | | average | | | | | | average | | | average | | | | | | | | exercise | | | remaining | | | grant | | | | | | exercise | | | grant | | | Exercise | | Number | | | price per | | | contract | | | date | | | Number | | | price per | | | date | | | price | | outstanding | | | share | | | life (years) | | | fair value | | | exercisable | | | share | | | fair value | | | $ | | | | | $ | | | | | | $ | | | | | | $ | | | $ | | | | | | | | | | | | | | | | | | | | | | | | | | | | Under 10.00 | | | 2,881,698 | | | | 3.71 | | | | 4.7 | | | | 1.61 | | | | 394,152 | | | | 4.26 | | | | 1.66 | | | 10.00-100.00 | | | 45,649 | | | | 36.24 | | | | 6.4 | | | | 28.43 | | | | 45,649 | | | | 36.24 | | | | 28.43 | | | 100.00-500.00 | | | 5,550 | | | | 364.98 | | | | 4.7 | | | | 238.08 | | | | 5,550 | | | | 364.98 | | | | 288.08 | | | 500.00-1,000.00 | | | 6,126 | | | | 732.53 | | | | 2.4 | | | | 454.53 | | | | 6,126 | | | | 732.53 | | | | 454.53 | | | 1,000.00-1,500.00 | | | 165 | | | | 1,149.13 | | | | 1.4 | | | | 709.18 | | | | 165 | | | | 1,149.13 | | | | 709.18 | | | | | | 2,939,188 | | | | 6.48 | | | | | | | | | | | | 451,642 | | | | 22.22 | | | | | |
| | | | | | | | | Options outstanding | | | | Options exercisable | Exercise price | | | | | | life (years) | | | | | Weighted average exercise price per share | | Weighted average grant date fair value | | | | | | $ | | | | $ | | | $ | | $ | | Under 2.50 | | - | | - | | - | | - | | - | - | | - | | 2.51 - 5.00 | | 3,167,167 | | 3.60 | | 3.40 | | 1.65 | | 1,536,029 | 3.58 | | 1.66 | | 5.01 - 7.50 | | 5,528 | | 5.43 | | 4.00 | | 0.01 | | 5,528.00 | 5.43 | | 0.01 | | 7.51 - 10.00 | | - | | - | | - | | - | | - | - | | - | | 10.01 - 100.00 | 36,065 | | 39.52 | | 5.82 | | 31.02 | | 36,065 | 39.52 | | 31.02 | | 300.00 - 500.00 | 3,971 | | 331.15 | | 4.31 | | 223.52 | | 3,971 | 331.15 | | 223.52 | | 500.01 - 1,000.00 | 4,190 | | 705.99 | | 1.29 | | 435.71 | | 4,190 | 705.99 | | 435.71 | | 1,000.01 - 1,500.00 | 33 | | 1,149.13 | | 2.45 | | 709.18 | | 33 | 1,149.13 | | 709.18 | | | | | | 3,216,954 | | 5.33 | | | | | | 1,585,816 | 7.11 | | |
Total unrecognized compensation cost relating to the unvested performance based stock options at November 30, 20092011 is approximately $3,542,400 (December 31, 2008$2,214,000 (November 30, 2010 - 3,542,400)$2,656,800,). Of theA total of 2,763,940 performance-based stock options have been granted up to date of which 1,381,970 vested as of November 30, 2009, 2,763,940 stock options will2011. These vest upon the achievement of certain performance conditions. During
For the year ended December 31, 2007, a performance condition was met as the U.S. Food and Drug Administration accepted an abbreviated new drug application for a certain drug, resulting in the vesting of 276,394 stock options. As a result, a stock-based compensation expense of $442,800 relating to these stock options was recognized in research and development expense in the year ended December 31, 2007. The Company determined that it is probable as at December 31, 2008 thatNovember 30, 2011, the Company will meet the performance criteria related to 276,394 stock options. Accordingly, the Company recorded an additional stock based compensation expense of $442,800 (2010 - $885,600) related to thesemeeting the performance criteria of 276,394 (2010 – 552,788) options. As at December 31, 2008, 2,487,546 performance-based stock options remains unvested. No other compensation cost has been recognized for the remaining unvested performance-based options as their vesting is not considered probable at this time. On a pro forma basis, if all performance conditions are achieved prior to the expiry of the term of these options in 2014, a stock-based compensation expense of approximately $3,542,400 will be recognized. For the year ended November 30, 2011, 25,000 options were exercised for a cash consideration of $93,165. No options were exercised in the 11year ended November 30, 2010 and the eleven month period ended November 30, 2009. During the year ended November 30, 2011 the Company granted 208,000 stock options to employees (2010 – 120,000). During the year ended November 30, 2010 the Company issued 32,722 broker options to purchase common shares of IPC, in connection with the October 2009 and yearstransaction. In fiscal 2009 the Company recorded a stock-based compensation expense of $18,529 related to 12,500 stock options. This accrued amount was recognized in additional paid in capital upon issuance of these options during the year ended December 31, 2008 and 2007.November 30, 2010. The Company's total stock basedstock-based compensation including DSU’s for the 11 month periodfiscal years ended November 30, 2011 and 2010 and 2009 and years ended December 31, 2008 and 2007 was $735,561, $1,023,626, $18,529 $442,800 and $460,621 respectively. The Company recorded stock-based compensation relating to option grants amounting to $18,529$134,138 recorded in selling, general and administration expense for the 11year ended November 30, 2011, $137,573 for the year ended November 30, 2010 and $18,529 for the eleven month period ended November 30, 2009, and $9,450 for the year ended December 31, 2007.2009. The Company recorded stock-based compensation expense relating to option grants amounting $442, 800$601,424 recorded in research and development expenses for the year ended December 31, 2008 and $451,171November 30, 2011, $885,600 for the year ended December 31, 2007.November 30, 2010 and $Nil for the eleven month period ended November 30, 2009. The Company has estimated its stock option forfeitures to be $7,302 at November 30, 2011 (2010 - $nil; 2009 - $nil).
Intellipharmaceutics International Inc. Notes to the consolidated financial statements November 30, 2011, 2010, and 2009 Effective May 28, 2010, the Company’s shareholders approved a Deferred Share Unit (“DSU”) Plan to grant DSUs to its non-management directors and reserved a maximum of 110,000 common shares for issuance under the plan. The DSU Plan permits certain non-management directors to defer receipt of all or a portion of their board fees until termination of the board service and to receive such fees in the form of common shares at that time. A DSU is a unit equivalent in value to one common share of the Company based on the trading price of the Company's common shares on the Toronto Stock Exchange. Upon termination of board service, the director will be able to redeem DSUs based upon the then market price of the Company's common shares on the date of redemption in exchange for any combination of cash or common shares as the Company may determine. During the year ended November 30, 2011, one non-management board member elected to receive director fees in the form of DSUs under the Company’s DSU Plan. During the year ended November 30, 2011 the Company recorded $33,101 (2010- $Nil) as a charge to additional paid in capital for 10,250 (2010 – Nil) DSU’s. As at November 30, 2011, the Company has accrued an additional expense of $6,371 (2010 - $12,426) for 2,050 (2010 - 5,041; 2009 - $Nil) DSUs. The value of DSUs issued has been recorded as a charge to selling, general and administration expense and accrued liabilities. | 13. | Restricted share units |
Effective May 28, 2010, the Company’s shareholders approved a Restricted Share Unit (“RSU”) Plan for officers and employees of the Company and reserved a maximum of 330,000 common shares for issuance under the plan. The RSU Plan will form part of the incentive compensation arrangements available to officers and employees of the Company and its designated affiliates. An RSU is a unit equivalent in value to one common share of the Company. Upon vesting of the RSUs and the corresponding issuance of common shares to the participant, or on the forfeiture and cancellation of the RSUs, the RSUs credited to the participant’s account will be cancelled. No RSUs have been issued under the plan. AsUnder U.S. GAAP, where the strike price of warrants is denominated in a result ofcurrency other than an entity's functional currency the transactions, as described in Notewarrants would not be considered indexed to the entity’s own stock. In connection with the February 1, effective October 22, 2009 certain former Vasogen warrant holders that held warrants received 0.065963061 2011 private offering, the Company issued 4,800,000 five year Series A common shares purchase warrants to purchase one half of a share of common stock at an exercise price of $2.50 per whole share and 4,800,000 two year Series B common shares purchase warrants to purchase one half of IPC for each warrant they exchange in the transaction, asa share of common stock at an exercise price of $2.50 per whole share. As noted in the tables below. Note 10 these warrants are considered to be a derivative liability.
The fair value of thesethe Series A warrants onof $7,214,366 and Series B warrants of $5,441,216 have been initially estimated at February 1, 2011 using the effective dateBlack-Scholes Options Pricing Model, using volatilities of 70% and 59%, risk free interest rates of 0.99% and 0.29%, expected lives of 5 and 2 years, and dividend yields in each case of Nil, respectively.
The Company also issued to the placement agents 96,000 warrants to purchase a share of common stock at an exercise price of $3.125 per share. The fair value of the placement agents’ warrants was $543,669. initially estimated at February 1, 2011 as $229,005 using the Black-Scholes Options Pricing Model, using volatility of 67%, a risk free interest rate of 0.99%, an expected life of 3 years, and a dividend yield of Nil. These placement agent warrants were expensed and are included in financing expense.
Intellipharmaceutics International Inc. Notes to the consolidated financial statements November 30, 2011, 2010, and 2009 The following table provides information on the 376,699 8,979,275 warrants outstanding and exercisable as of November 30, 20112009:: | | | Number | | | | | Shares issuable | | Exercise price | | outstanding | | | Expiry | | upon exercise | | $ | | | | | | | | | | | | | | | | | | U.S. 95.51 | | 113,962 | | November 14, 2011 | | 113,962 | | U.S. 47.91 | | 243,275 | | May 24, 2012 | | 243,275 | | U.S. 57.76 | | 19,462 | | May 24, 2010 | | 19,462 | | | | 376,699 | | | | | 376,699 |
IPC Ltd had 126,312 warrants previously issued that expired unexercised on September 10, 2008.| Exercise price | | Number outstanding | | Expiry | | Shares issuableupon exercise | | 47.91 | | 243,275 | | May 24, 2012 | | 243,275 | | 2.50 | | 3,945,000 | | February 1, 2013 | | 1,972,500 | | 3.125 | | 96,000 | | March 30, 2014 | | 96,000 | | 2.50 | | 4,695,000 | | February 1, 2016 | | 2,347,500 | | | | 8,979,275 | | | | 4,659,275 |
During the year ended November 30, 2011, there were cashless exercises in respect of 960,000 warrants resulting in the issuance of 176,469 common shares. The fair value of $755,124 for these shares was recorded as a charge to additional paid-in capital. Details of warrant transactions are as follows: | | 2009 | | | | | | Outstanding in beginning of period | | | - | | IPC warrants issued in exchanged for Vasogen warrants | | | 393,583 | | Expired | | | (16,884 | ) | | | | 376,699 | |
| | | November 30, 2011 | | | November 30, 2010 | | | | | | | | | | | Outstanding, beginning of year | | | 357,237 | | | | 376,699 | | | Issued during the year | | | 9,696,000 | | | | - | | | Exercised during the year | | | (960,000 | ) | | | - | | | Expired during the year | | | (113,962 | ) | | | (19,462 | ) | | Outstanding, end of year | | | 8,979,275 | | | | 357,237 | |
U.S. GAAP requires the fair value of these liabilities be re-measured at the end of every reporting period with the change in value reported in the statement of operations. Accordingly, the fair value of the Series A and Series B warrants at November 30, 2011 using the Black-Scholes Options Pricing Model was estimated to be $3,786,049 and $2,741,185 respectively, and the fair value of the agent warrants was estimated to be $83,781, using the following assumptions as of November 30, 2011: Warrants outstanding | | | Dividend | | | Volatility | | | | | | | | | | | | | | | % | | | % | | | | | | | | | | | | | | | | | | | | | | 4,695,000 | | | | - | | | | 57.8 | | | | 0.47 | % | | | 4.2 | | | | 3,945,000 | | | | - | | | | 88.7 | | | | 0.11 | % | | | 1.2 | | | | 96,000 | | | | - | | | | 47.7 | | | | 0.11 | % | | | 2.2 | |
The fair value of the warrants obtained through the IPC Arrangement Agreement described in Note 1, outstanding at November 30, 20092011 using the Black-Scholes Options Pricing Model was $226,268 and was estimated to be $Nil (November 30, 2010 - $7,161), using the following assumptions:assumptions as of November 30, 2011: | Warrants | | | | | | Risk free | | Expected | | outstanding | | Dividend | | Volatility | | rate | | life | | | | | | % | | % | | | | | | | | | | | | | | 113,962 | | - | | 153.50 | | 1.41 | | 2 yrs | | 243,275 | | - | | 153.50 | | 1.75 | | 2.5 yrs | | 19,462 | | - | | 49.80 | | 0.41 | | 0.5 years |
Warrants outstanding | | | Dividend | | | Volatility | | | | | | Expected life | | | | | | | | | % | | | % | | | | | | | | | | | | | | | | | | | | | | 243,275 | | | | - | | | | 55.4 | | | | 0.11 | % | | | 0.5 | |
The change in the fair value of the warrants from the previously recorded amount to November 30, 2011 amounting to a gain of $5,346,878 (2010 - $7,161: 2009 - $226,268) has been recorded as fair value adjustment of derivative liability in the statement of operations. Intellipharmaceutics International Inc. Notes to the consolidated financial statements November 30, 2011, 2010, and 2009 The Company files Canadian income tax returns for its Canadian operations. Separate income tax returns are filed as locally required. The total provision for income taxes differs from the amount which would be computed by applying the Canadian income tax rate to loss before income taxes. The reasons for these differences are as follows: | | | November 30, | | | December 31, | | | December 31, | | | | | 2009 | | | 2008 | | | 2007 | | | | | % | | | % | | | % | | | | | | | | | | | | | | Statutory income tax rate | | | 33 | | | | 35 | | | | 35 | | | | | | | | | | | | | | | | | | | $ | | | | $ | | | | $ | | | | | | | | | | | | | | | | | | Statutory income tax recovery | | | (606,782 | ) | | | (1,317,811 | ) | | | (451,777 | ) | | Increase (decrease) in income taxes | | | | | | | | | | | | | | Non-deductible expenses/ | | | | | | | | | | | | | | non-taxable income | | | (30,210 | ) | | | 244,412 | | | | 191,526 | | | Change in valuation allowance | | | 1,177,092 | | | | 653,572 | | | | (198,158 | ) | | Recognized tax benefit of loss | | | | | | | | | | | | | | carry-forwards | | | - | | | | - | | | | (174,714 | ) | | Change in substantively enacted | | | | | | | | | | | | | | rates, other changes in tax rates | | | | | | | | | | | | | | applied, changes in foreign | | | | | | | | | | | | | | exchange rates and other | | | (540,100 | ) | | | 419,827 | | | | 633,123 | | | | | | - | | | | - | | | | - | |
13. | Income taxes (continued) |
| | | | | | | | | | | | | | % | | | % | | | % | | | | | | | | | | | | | | Statutory income tax rate | | | 28 | | | | 31 | | | | 33 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | | | | $ | | | | $ | | | Statutory income tax recovery | | | (1,366,478 | ) | | | (1,785,938 | ) | | | (606,782 | ) | | Increase (decrease) in income taxes | | | | | | | | | | | | | | Non-deductible expenses/non-taxable income | | | (1,324,979 | ) | | | 323,643 | | | | (30,210 | ) | | Change in valuation allowance | | | 2,452,926 | | | | 1,782,583 | | | | 1,177,092 | | | Change in substantively enacted rates, other changes in tax rates applied, changes in foreign exchange rates and other | | | 238,531 | | | | (320,288 | ) | | | (540,100 | ) | | | | | - | | | | - | | | | - | |
The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities and certain carry-forward balances. Significant temporary differences and carry-forwards are as follows: | | | November 30, | | | December 31, | | | December 31, | | | | | 2009 | | | 2008 | | | 2007 | | | | | $ | | | $ | | | $ | | | | | | | | | | | | | | | Deferred tax assets | | | | | | | | | | | | Non-capital loss carry-forwards | | | 2,343,338 | | | | 1,533,384 | | | | 996,458 | | | Book and tax basis differences | | | | | | | | | | | | | | on assets and liabilities | | | 628,859 | | | | 141,252 | | | | 19,858 | | | Undeducted regulatory fees | | | - | | | | - | | | | 65,401 | | | Other reserve | | | 21,060 | | | | 63,694 | | | | - | | | Undeducted research and | | | | | | | | | | | | | | development expenditures | | | 1,072,822 | | | | 1,150,657 | | | | 1,163,636 | | | | | | 4,066,079 | | | | 2,888,987 | | | | 2,245,353 | | | Valuation allowances for | | | | | | | | | | | | | | deferred tax assets | | | (4,066,079 | ) | | | (2,888,987 | ) | | | (2,235,415 | ) | | | | | - | | | | - | | | | 9,938 | | | Deferred tax liabilities | | | | | | | | | | | | | | Book and tax basis differences | | | | | | | | | | | | | | on assets and liabilities | | | - | | | | - | | | | (9,938 | ) | | Net deferred tax assets | | | - | | | | - | | | | - | |
| | | November 30, 2011 | | | November 30, 2010 | | | November 30, 2009 | | | | | | | | | | | | | | | Deferred tax assets | | | | | | | | | | | | | | | $ | | | | $ | | | | $ | | | Non-capital loss carry-forwards | | | 4,147,325 | | | | 2,813,049 | | | | 2,343,338 | | Book and tax basis differences on assets and liabilities | | | 824,640 | | | | 632,422 | | | | 628,859 | | | Other | | | 8,635 | | | | 10,380 | | | | 21,060 | | | Ontario harmonization tax credit | | | 361,888 | | | | 431,601 | | | | - | | | Investment tax credit | | | 1,351,859 | | | | 740,213 | | | | - | | Undeducted research and development expenditures | | | 1,607,242 | | | | 1,220,998 | | | | 1,072,822 | | | | | | 8,301,589 | | | | 5,848,663 | | | | 4,066,079 | | | | | | | | | | | | | | | | Valuation allowances for deferred tax assets | | | (8,301,589 | ) | | | (5,848,663 | ) | | | (4,066,079 | ) | | Net deferred tax assets | | | - | | | | - | | | | - | |
At November 30, 2009,2011, the Company had cumulative operating losses available to reduce future years’ income for income tax purposes:
| Canadian income tax losses expiring | | | | | in the period ended November 30, | | Federal | | | | | | | | 2014 | | | 1,682,382 | | | 2015 | | | 2,142,761 | | | 2026 | | | 516,589 | | | 2027 | | | - | | | 2028 | | | 1,681,943 | | | 2029 | | | 1,916,677 | | | | | | 7,940,352 | |
| United States Federal income tax losses expiring | | | | | in the period ended November 30, | | | | | | | | | | 2024 | | | 65,348 | | | 2025 | | | 16,234 | | | 2026 | | | 34,523 | | | | | | 116,105 | |
Intellipharmaceutics International Inc. Notes to the consolidated financial statements November 30, 2011, 2010, and 2009 13.15. | Income taxes (continued) |
Canadian income tax losses expiring in the year ended November 30, | | Federal | | | | | | $ | | | | | | | | | 2014 | | | 1,740,588 | | | 2015 | | | 2,216,895 | | | 2026 | | | 534,461 | | | 2027 | | | - | | | 2028 | | | 1,428,724 | | | 2029 | | | 1,463,277 | | | 2030 | | | 3,777,817 | | | 2031 | | | 5,259,206 | | | | | | 16,420,968 | |
| United States Federal income tax losses expiring in the year ended November 30, | | | | | | $ | | | | | | | | | 2024 | | | 69,480 | | | 2025 | | | 16,234 | | | 2026 | | | 34,523 | | | | | | 120,237 | |
At November 30, 20092011, the Company had a cumulative carry-forward pool of Federal SR&ED expenditures in the amount of $4,288,287 Federal,approximately $7,549,000 (2010 - $5,518,500) which can be carried forward indefinitely. At November 30, 2009,2011, the Company had approximately $328,069$362,000 (2010 - $431,600) of Ontario harmonization credits, which will expire on the November 30, 2014 taxation year. These credits are subject to a full valuation allowance as they doare not meet the more likely than not test.to be realized. At November 30, 2009,2011, the Company had approximately $156,138 (December 31, 2008$1,352,000 (November 30, 2010 - 163,822; December 31, 2007740,200; November 30, 2009 - $183,600)$239,000) of unclaimed Canadian investment tax credits (ITCs)ITCs which expire from 20242025 to 2029.2031. These credits are subject to a full valuation allowance as they doare not meet the more likely than not test.to be realized. The net deferred tax assets have been fully offset by a valuation allowance because it is not more likely than not the Company will realize the benefit of these deferred tax assets. The Company does not have any unrecognizedrecognized tax benefits as of November 30, 2009, December 31, 20082011, November 30, 2010, and 2007.November 30, 2009. The Company files unconsolidated federal income tax returns domestically and in foreign jurisdictions. The Company has open tax years from 20022004 to 20092011 with taxingtax jurisdictions including Canada and the U.S. These open years contain certain matters that could be subject to differing interpretations of applicable tax laws and regulations, as they relate to amount, timing, or inclusion of revenues and expenses. The Company did not incur any interest expense related to uncertain tax positions in 2009, 20082011, 2010 and 2007,2009 or any penalties in those years. The Company had no accrued interest and penalties as of November 30, 20092011 and December 31, 2008.2010. Management has determined that it cannot reasonably estimate how much work, if any, will be done on the two remaining product candidates under the agreement with ParThe Company had no unrecognized tax benefits in fiscal2011, 2010 thereforeand 2009, and the Company does not anticipate recognizing any revenue under this agreement inexpect that the unrecognized tax benefit will increase within the next twelve months.
| | | 2011 | | | 2010 | | | 2009 | | | | | $ | | | $ | | | $ | | | | | | | | | | | | | | Unrecognized tax benefit - beginning | | | - | | | | - | | | | - | | | Adjustment | | | - | | | | - | | | | - | | | Unrecognized tax benefit - ending | | | - | | | | - | | | | - | |
Intellipharmaceutics International Inc. Notes to the consolidated financial statements November 30, 2011, 2010, and have recorded the entire amount as long term.2009
From time to time the Company may be exposed to claims and legal actions in the normal course of business, some of which may be initiated by the Company. As at November 30, 2009,2011, there were no pending litigation or threatened claim isclaims outstanding other than the oneones described in the following paragraph.paragraphs.
In October 2008, the Company, together with a drug development partner, Par Pharmaceutical, Inc. (“Par”), was named as a defendant in two litigation actions in respect of the filing with the U.S. Federal Drug Agency of the Company’s generic drug application for a drug product it has developed for Par. The plaintiffs in each action have claimed to hold patents relating to the drug product developed by the Company. The Company believes that its product does not infringe such patents. Par is responsible for defense of the litigation and the related costs.
Pursuant to an arrangement agreement between Vasogen and Cervus dated August 14, 2009 (the "Cervus Agreement"), Vasogen and a Vasogen subsidiary (“New VasogenVasogen”) entered into an indemnity agreement (the "Indemnity"Indemnity Agreement"), which became an obligation of the Company as of October 22, 2009. 15. | Contingencies (continued) |
The Indemnity Agreement is designed to provide Cervus with indemnification for claims relating to Vasogen's and New Vasogen's business that are brought against Cervus in the future, subject to certain conditions and limitations. The Company’sCompany's obligations under the Indemnity Agreement relating to the Tax Pools (aspools defined in the Indemnity Agreement)Agreement are limited to an aggregate of Cdn$C$1,455,000 with a threshold amount of Cdn$C$50,000 before there is an obligation to make a compensation payment. The Company does not expect to have to pay any amount under this indemnity agreement.
Elan Corporation, plc and Elan Pharma International Ltd., filed a Complaint against Intellipharmaceutics Corp., Intellipharmaceutics Ltd., and Par Pharmaceutical, Inc., development and commercialization partner for generic Focalin XR®, for alleged patent infringement in the United States District Court for the District of Delaware, relating to Intellipharmaceutics’ generic version of 30 mg Focalin XR® (dexmethylphenidate hydrochloride) extended-release capsules. Separately, Celgene Corporation, Novartis Pharmaceuticals Corporation and Novartis Pharma AG, filed a Complaint against Intellipharmaceutics Corp. for alleged patent infringement in the United States District Court for the District of New Jersey, relating to Intellipharmaceutics’ generic version of 30 mg Focalin XR®. In view of the previous settlement of litigation earlier filed by the same parties related to 5, 10, 15 and 20 mg dosage strengths, the Company believes it is reasonable to expect that the litigation relating to the 30 mg strength could also be settled on terms satisfactory to the Company, although no assurance can be provided to this effect. Lawsuits such as these are an ordinary and expected part of the process of obtaining approval to commercialize a generic drug product in the United States. The Company remains confident that its generic version of 30 mg Focalin XR® does not in any event infringe the patents in issue. The Company has determined that the likelihood to pay any damages or other penalty to Elan Corporation, plc and Elan Pharma International Ltd., Celgene Corporation, Novartis Pharmaceuticals Corporation and Novartis Pharma AG in connection with the resolutions of these Complaints in its reasonably anticipated course is remote.
AstraZeneca Pharmaceuticals LP and AstraZeneca UK Limited (together “AstraZeneca”), the owners of the rights in the United States in Seroquel XR®, filed a lawsuit for patent infringement against the Company in the United States District Court for the District of New Jersey, relating to Intellipharmaceutics' generic version of Seroquel XR® (quetiapine fumarate extended-release) tablets. AstraZeneca served the Company with the Complaint in the District of New Jersey on May 25, 2011. The Company has filed a motion to contest New Jersey as a proper forum for the litigation. That motion, if it proceeds to a hearing, may be heard by the District Court for New Jersey in or about the first or second quarter of the Company’s 2012 fiscal year. The same AstraZeneca entities also filed a substantially identical lawsuit for patent infringement against the Company in the United States District Court for the Southern District of New York. In response, the Company filed its Answer and Counterclaim in the New York litigation, and that litigation has now been stayed by the consent of all parties pending the results of the jurisdictional challenge in New Jersey. Lawsuits such as these are an ordinary and expected part of the process of obtaining approval to commercialize a generic drug product in the United States. The Company remains confident that Intellipharmaceutics’ generic versions of Seroquel XR® do not in any event infringe the patents asserted in the above-noted lawsuit.
Intellipharmaceutics International Inc. Notes to the consolidated financial statements November 30, 2011, 2010, and 2009
| 17. | Financial instruments |
16. Financial instruments
Effective January 1, 2008, we adopted Accounting Standards CodificationThe Company follows ASC topic 820, Fair“Fair Value Measurements and Disclosures (“ASC 820”)Disclosures” which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The provisions of ASC 820 apply to other accounting pronouncements that require or permit fair value measurements. ASC 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 d ate.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. 16. Financial instruments (continued)
| (a) | Fair values (continued) |
Fair value of cash is measured based on Level 1 inputs and fair value of warrant liability is measured based on Level 2 inputs referred to in the three levels of the hierarchy noted above. The carrying values of cash and cash equivalents, accounts receivable, investment tax credits and accounts payable, and accrued liabilities, employee cost payable and due to related party loan approximates their fair values because of the short-term nature of these instruments. The fair values of amounts due to related parties are not determinable due to the nature of the amounts.
| | (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 the investmentcash and cash equivalents, due to related parties and capital lease obligations due to the short termshort-term nature of the investments.these balances. Trade accounts receivable potentially subjects the Company to credit risk. The Company provides an allowance for doubtful accounts equal to the estimated losses expected to be incurred in the collection of accounts receivable. The following table sets forth details of the cash and cash equivalents: | | | | | | | | | | | $ | | | | $ | | | | | | | | | | | | Cash | | | 3,817,158 | | | | 789,136 | | | Bankers acceptance | | | 999,930 | | | | - | | | (30 days maturity, interest 0.10%) | | | | | | | | | | Total cash and cash equivalents | | | 4,817,088 | | | | 789,136 | |
Intellipharmaceutics International Inc. Notes to the consolidated financial statements November 30, 2011, 2010, and 2009 16.
| 17. | Financial instruments (continued) |
| | (b) | Interest rate and credit risk (continued) |
The following table sets forth details of the aged accounts receivable that are not overdue as well as an analysis of overdue amounts and the related allowance for doubtful accounts: | | | November 30, 2009 | | | December 31, 2008 | | | | | | | | | | | | | | | | | | | Total accounts receivable | | | 5,427 | | | | 22,326 | | | Less: allowance for doubtful accounts | | | - | | | | - | | | Total accounts receivable, net | | | 5,427 | | | | 22,326 | | | | | | | | | | | | | Not past due | | | 521 | | | | 21,443 | | | Past due for more than 31 days | | | | | | | | | | but no more than 60 days | | | 3,589 | | | | 445 | | | Past due for more than 61 days | | | | | | | | | | but no more than 90 days | | | - | | | | 438 | | | Past due for more than 91 days | | | | | | | | | | but no more than 120 days | | | - | | | | - | | | Past due for more than 120 days | | | 1,317 | | | | - | | | Less: Allowance for doubtful accounts | | | - | | | | - | | | Total accounts receivable, net | | | 5,427 | | | | 22,326 | |
| | | | | | | | | | | $ | | | | $ | | | | | | | | | | | | Total accounts receivable | | | 3,383 | | | | 1,619 | | | Less allowance for doubtful accounts | | | - | | | | - | | | Total accounts receivable, net | | | 3,383 | | | | 1,619 | | | Not past due | | | 1,122 | | | | 536 | | Past due for more than 31 days but no more than 60 days | | | 1,096 | | | | 539 | | Past due for more than 61 days but no more than 90 days | | | 1,165 | | | | 544 | | Past due for more than 91 days but no more than 120 days | | | - | | | | - | | | Past due for more than 120 days | | | - | | | | - | | | Less allowance for doubtful accounts | | | - | | | | - | | | Total accounts receivable, net | | | 3,383 | | | | 1,619 | |
Financial instruments that potentially subject the Company to concentration of credit risk consist principally of uncollateralized accounts receivable. The Company’s maximum exposure to credit risk is equal to the potential amount of financial assets. For the year ended November 30, 2011, two customers accounted for 98% and 2% of the revenue of the Company and 100% of accounts receivable of the Company. In fiscal year November 30, 2010, one customer accounted for 100% of revenue of the Company and 100% of the accounts receivable of the Company. In fiscal year 2009, two customers accounted for 90% and 10% of the revenue of the Company and one customer accounted for 100% of the accounts receivable at November 30, 2009. 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 charteredChartered Bank. The Company’s cash is not subject to any external restrictions. The Company has balances in Canadian dollars that give rise to exposure to foreign exchange (“FX”) risk relating to the impact of foreign exchange (“FX”) of translating certain non-USnon-U.S. dollar balance sheet accounts as these statements are presented in USU.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 US dollar would affect the Corporation’s loss and other comprehensive loss by $0.1 million.
16. Financial instruments (continued)
| (c) | Foreign exchange risk (continued) |
Balances denominated in foreign currencies that are considered financial instruments are as follows:
| | | November 30, 2009 | | | | | | | | USD total | | | Canadian | | | FX rates used to translate to USD | | | | | | 1.0556 | | | | | $ | | | | $ | | | Assets | | | | | | | | | Cash | | | 8,014,492 | | | | 8,460,098 | | | Accounts receivable | | | 5,427 | | | | 5,729 | | | Investment tax credits | | | 1,840,044 | | | | 1,942,350 | | | | | | | | | | | | | Liabilities | | | | | | | | | | Accounts payable | | | 1,323,368 | | | | 1,396,948 | | | Accrued liabilities | | | 540,604 | | | | 570,662 | | | Employee cost payable | | | 501,114 | | | | 528,976 | | | Capital lease | | | 48,457 | | | | 51,151 | | | Due to related party | | | 2,360,181 | | | | 2,491,407 | |
Intellipharmaceutics International Inc. Notes to the consolidated financial statements November 30, 2011, 2010, and 2009
| 17. | Financial instruments (continued) |
| (c) | Foreign exchange risk (continued) |
| | | November 30, 2011 | | November 30, 2010 | | | | | U.S. | | | Canadian | | | U.S. | | | Canadian | | | FX rates used to translate to U.S. | | | | | | 1.0203 | | | | | | | 1.0266 | | | | | $ | | | | $ | | | $ | | | | $ | | | Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash | | | 569,399 | | | | 580,958 | | | | 386,038 | | | | 396,306 | | | Accounts receivable | | | - | | | | - | | | | - | | | | - | | | Investment tax credits | | | 349,861 | | | | 356,963 | | | | 814,059 | | | | 835,713 | | | | | | 919,260 | | | | 937,921 | | | | 1,200,097 | | | | 1,232,019 | | | Liabilities | | | | | | | | | | | | | | | | | | Accounts payable | | | 382,427 | | | | 390,190 | | | | 378,660 | | | | 388,732 | | | Accrued liabilities | | | 327,838 | | | | 334,493 | | | | 301,776 | | | | 309,803 | | | Employee cost payable | | | 259,324 | | | | 264,588 | | | | 103,006 | | | | 105,746 | | | Capital lease | | | 43,382 | | | | 44,263 | | | | 13,229 | | | | 13,582 | | | Due to related party | | | 757,126 | | | | 772,496 | | | | 1,635,842 | | | | 1,679,355 | | | | | | 1,770,097 | | | | 1,806,030 | | | | 2,432,513 | | | | 2,497,218 | | | Net exposure | | | (850,837 | ) | | | (868,109 | ) | | | (1,232,416 | ) | | | (1,265,199 | ) |
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 forecast cash requirements with expected cash drawdown. The following are the contractual maturities of the undiscounted cash flows of financial liabilities as at November 30, 2009:2011: | | | Less than | | | 3 to 6 | | | 6 to 9 | | | 9 months | | | Greater than | | | | | | 3 months | | | months | | | months | | | 1 year | | | 1 year | | | Less than 3 months | | | 3 to 6 months | | | 6 to 9 months | | | | | | | | | | | $ | | | $ | | | $ | | | $ | | | $ | | | | $ | | | $ | | | | $ | | | $ | | | | $ | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Accounts payable | | | 1,323,368 | | | | - | | | | - | | | | - | | | | - | | | | 554,210 | | | | - | | | | - | | | | - | | | | - | | | Accrued liabilities | | | 540,604 | | | | - | | | | - | | | | - | | | | - | | | | 436,154 | | | | - | | | | - | | | | - | | | | - | | | Employee cost payable | | | 501,114 | | | | - | | | | - | | | | - | | | | - | | | | 736,073 | | | | - | | | | - | | | | - | | | | - | | | Lease obligations | | | 9,941 | | | | 8,544 | | | | 8,560 | | | | 8,550 | | | | 12,862 | | | | 10,261 | | | | 10,641 | | | | 11,035 | | | | 11,446 | | | | 95,206 | | | Due to related party | | | 800,000 | | | | 1,560,181 | | | | - | | | | - | | | | - | | | | Due to related parties | | | | 757,126 | | | | - | | | | - | | | | - | | | | - | | | | | | | 2,493,824 | | | | 10,641 | | | | 11,035 | | | | 11,446 | | | | 95,206 | |
Intellipharmaceutics International Inc. Notes to the consolidated financial statements November 30, 2011, 2010, and 2009 17.18. | Segmented information |
The Company's operations comprise a single reporting segment engaged in the research, development licensing and marketingmanufacture of both new andnovel or generic controlled-release pharmaceutical products.and targeted-release oral solid dosage drugs. As the operations comprise a single reporting segment, amounts disclosed in the financial statements for revenue, loss for the year, depreciation and total assets also represent segmented amounts. In addition, all of the Company's long-lived assets are in North America. | | | November 30, | | | December 31, | | | December 31, | | | | | | 2009 | | | 2008 | | | 2007 | | | | | | $ | | | $ | | | $ | | | | | | | | | | | | | | | | | | | | | | | | | $ | | | $ | | | | $ | | | Revenue | | | | | | | | | | | | | | | | | | | | | | Canada | | | 62,615 | | | | 21,574 | | | | 158,638 | | | | - | | | | - | | | | 62,615 | | | United States | | | 567,564 | | | | 1,256,130 | | | | 2,138,678 | | | | 501,814 | | | | 1,459,385 | | | | 567,564 | | | | | | 630,179 | | | | 1,277,704 | | | | 2,297,316 | | | | 501,814 | | | | 1,459,385 | | | | 630,179 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total assets | | | | | | | | | | | | | | | | | | | | | | | | | | Canada | | | 11,081,332 | | | | 3,026,024 | | | | | | | | 6,247,228 | | | | 3,267,706 | | | | 11,081,332 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total property and equipment | | | | | | | | | | | | | | | | | | | | | | | | | | Canada | | | 1,046,121 | | | | 1,134,648 | | | | | | | | 951,914 | | | | 925,554 | | | | 1,046,121 | |
18.19. | Major customers and concentration of credit riskNon-cash transactions |
Financial instruments that potentially subject the Company to concentrationIn fiscal 2010, included in research and development expenses is an amount of credit risk consist principally of uncollateralized accounts receivable. The Company’s maximum exposure to credit risk is equal$26,832 related to the potential amountwrite-off of financial assets. In fiscal year 2009, two customers accounted for 90% and 10% of net revenue of the Company and one customer accounted for 100% of accounts receivable of November 30, 2009. In fiscal year 2008, one customer accounted for 98% of net revenue of the Company and three customers accounted for 52%, 31% and 11% of accounts receivable at December 31, 2008. In fiscal year 2007, two customers accounted for 81% and 10% of net revenue of the Company and 29% and 68% of accounts receivable at December 31, 2007. All of the Company's major customers are located in the U.S.
a previously recorded investment tax credit. In connection with the acquisition transaction dated October 22, 2009 described in Note 4, the Company acquired certain assets and assumed certain liabilities that were non-cash. There were no non-cash transactions in 2008 and 2007. | | | 2009 | | | | | | $ | | | | | | | | Investment tax credits and prepaid expenses and sundry assets | | | 489,255 | | | Accounts payable and assumed liabilities | | | 2,299,289 | | | Warrant liability | | | 543,669 | | | | | | |
EXHIBIT INDEX | | | | | 1.1 | Articles of Incorporation of the Company and Amendments thereto | | (3) | | 1.2 | By-laws of the Company | | (3) | | 4.1 | IPC Arrangement Agreement | | (3) | | 4.2 | The acknowledgement and agreement of the Company dated October 22, 2009 to be bound by the performance based stock option agreement dated September 10, 2004 pursuant to which Drs. Isa and Amina Odidi are entitled to purchase up to 2,763,940 of the Company’s shares upon payment of U.S.$3.62 per share, subject to satisfaction of the performance vesting conditions | | (3) | | 4.3 | The amended and restated promissory note dated October 22, 2009 for up to $2,300,000 issued by Intellipharmaceutics Corp. to Isa Odidi and Amina Odidi for advances that may be made by them from time to time to the Company | | (3) | | 4.4 | The escrow agreement dated October 22, 2009 between the Company, CIBC Mellon Trust Company (as escrow agent) and Odidi Holdings Inc. under which the common shares of the Company held by Odidi Holdings Inc. are held in escrow pursuant to the TSX Escrow Policy Statement | | (3) | | 4.51 | Securities purchase agreement for February 1, 2011 private placement | | (2) | | 4.52 | Registration rights agreement for February 1, 2011 private placement | | (2) | | 4.53 | Combined Series A/B common share purchase warrant for February 1, 2011 private placement | | (2) | | 4.54 | Placement Agent Agreement between Intellipharmaceutics International Inc. and Roth Capital Partners, LLC, dated March 9, 2012 | | (4) | | 4.55 | Form of Subscription Agreement (incorporated by reference to Exhibit A attached to Exhibit 4.54 filed herewith) | | (4) | | 8.1 | List of subsidiaries | | (1) | | 11.1 | Code of Business Conduct and Ethics | | (3) | | 12.1 | Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 | | (1) | | 12.2 | Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 | | (1) | | 13.1 | Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | (1) | | 13.2 | Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | (1) | | 15.1 | Consent of Independent Registered Chartered Accountants | | (1) | | 101 | XBRL (Extensible Business Reporting Language). The following materials from Intellipharmaceutics International Inc.’s Annual Report on Form 20-F for the fiscal year-ended November 30, 2011, formatted in XBRL: (i) Consolidated balance sheets as at November 30, 2011 and 2010 (ii) Consolidated statements of operations and comprehensive loss for the years ended November 30, 2011, 2010 and 11 months ended November 30, 2009 (iii) Consolidated statements of shareholders’ equity for the years ended November 30, 2011, 2010 and 11 months ended November 30, 2009 (iv) Consolidated statements of cash flows for the years ended November 30, 2011, 2010 and 11 months ended November 30, 2009 (v) Notes to the consolidated financial statements | | (5) |
20.(1) | Subsequent eventsFiled as exhibits to this annual report on Form 20-F for the fiscal year ended November 30, 2011. |
The Company has evaluated its operations during the period subsequent to November 30, 2009. During the subsequent period, a drug development agreement has been mutually terminated by the Company and the other party. Under the termination agreement, the Company is not required to refund any amounts received by the Company under this agreement. As a result, all unearned revenue of approximately $1,439,000 will be brought into income during the second quarter of fiscal 2010. There have been no additional material events requiring disclosure in these consolidated financial statements.| (2) | Incorporated herein by reference to the Company's annual report on Form 20-F for the fiscal year ended November 30, 2010 as filed on May 31, 2011. |
| (3) | Incorporated herein by reference to the Company's annual report on Form 20-F for the fiscal year ended November 30, 2009 as filed on June 1, 2010. |
Item 19. Exhibits| (4) | Incorporated herein by reference to the Corporation’s report on Form 6-K for the month of March 2012 as filed on March 9, 2012. |
| (5) | | | 4.1 | | IPC Arrangement Agreement* | | | | 4.2 | | AcknowledgementXBRL information is furnished and agreementnot filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Company dated October 22, 2009 to be bound by the performance based stock option agreement dated September 10, 2004 pursuant to which Drs. Isa and Amina Odidi are entitled to purchase up to 2,763,940Securities Act of the Company’s shares upon payment1933, as amended, is deemed not filed for purposes of U.S.$3.62 per share, subject to satisfaction of the performance vesting conditions | | | | 4.3 | | Amended and restated promissory note dated October 22, 2009 for up to $2,300,000 issued by Intellipharmaceutics Corp. to Isa Odidi and Amina Odidi for advances that may be made by them from time to time to the Company | | | | 4.4 | | Escrow agreement dated October 22, 2009 between the Company, CIBC Mellon Trust Company (as escrow agent) and Odidi Holdings Inc. under which the common shares of the Company held by Odidi Holdings Inc. are held in escrow pursuant to the TSX Escrow Policy Statement | | | | 10.1 | | Articles of Incorporation of the Company and Amendments thereto | | | | 10.2 | | By-laws of the Company | | | | 11.1 | | Code of Business Conduct and Ethics | | | | 12.1 | | Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)Section 18 of the Securities Exchange Act of 1934. | | | | 12.2 | | Certification of the Chief Financial Officer pursuant1934, as amended, and otherwise is not subject to Rule 13a-14(a) of the Securities Exchange Act of 1934. | | | | 13.1 | | Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | | | | 13.2 | | Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | | | | * | | The Registrant has omitted certain schedules and exhibits pursuant to Item 601(b)(2) of Regulation S-K and shall furnish supplementally to the Securities and Exchange Commission (the “SEC”), copies of any of the omitted schedules and exhibits upon request by the SEC.liability under these sections. |
SIGNATURES The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf. Intellipharmaceutics International Inc.
/s/ Graham D. NeilShameze Rampertab Graham D. Neil
Shameze Rampertab Vice President Finance and Chief Financial Officer (Principal Financial Officer), Intellipharmaceutics International Inc.
May 31, 201010, 2012
|
