UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
 
o
[  ]
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g)
OF THE SECURITIES EXCHANGE ACT OF 1934; or
x
[x]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended November 30, 2009;2012; or
o[  ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934; or
o[  ]
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 Date of event
requiring this shell company report …………
 
For the transition period from ________ to ________
 
Commission File No. 0-53805
 
INTELLIPHARMACEUTICS
INTERNATIONAL INC.
(Exact name of registrant as specified in its charter)
 
Canada
(Jurisdiction of Incorporation or organization)
 
30 Worcester Road
Toronto, Ontario M9W 5X2
(Address of principal executive offices)
 
Graham Neil,Shameze Rampertab, Vice President Finance and Chief Financial Officer, Intellipharmaceutics International Inc., 30 Worcester Road, Toronto,
Ontario M9W 5X2, Telephone: (416) 798-3001, Fax:  (416) 798-3007
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
 
Securities registered or to be registered pursuant to Section 12(b) of the Act:
 
Title of each class 
Name of each exchange
on which registered
Common shares, no par value 
NASDAQ
TSX

Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
 
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
 
 

 
As of November 30, 2009,2012, the registrant had 10,907,05717,906,937 common shares outstanding.
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
 
Yes o[  ]      No x[x]
 
If this report is an annual report or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
 
Yes o[  ]      No x[x]
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes x[x]      No [  ]
oIndicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes [x]      No [  ]
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer o[  ]      Accelerated filer o[  ]      Non-accelerated filer x[x]
 
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
 
U.S. GAAP x
[x]
 
International Financial Reporting Standards as issued by
the International Accounting Standards Board o[  ]
 
Other o
[  ]
 
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow:
 
Item  17 o[  ]    Item 18 o[  ]
 
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes o[   ]     No x[x]
 
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TABLE OF CONTENTS
 
 Page
  
Part I. 
1
 
A.
B.
Selected Financial Data2
 
B.
C.
Capitalization and Indebtedness4
C.
Reasons for the Offer and Use of Proceeds
 
 
 22
 33
 34
 34
 38
 40
 40
 41
 Contractual41
 41
 42
 44
 48
 52
 52
 56
 56
 57
 57
 58
 59
 60
 60
 60
 66
 66
 66
 66
    

TABLE OF CONTENTS
(continued)
 
 
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TABLE OF CONTENTS
(continued)

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DISCLOSURE REGARDING FORWARD-LOOKING INFORMATION
 
Certain statements in this document constitute “forward-looking statements” within the meaning of the United States Private Securities Litigation Reform Act of 1995 and/or “forward-looking information” under the Securities Act (Ontario). These statements include, without limitation, statements expressed or implied regarding theour plans and milestones, status of development,developments or expenditures relating to our business, plans to fund our current activities, statements concerning our partnering activities, health regulatory submissions, strategy, future operations, future financial position, future sales,  revenues and profitability, projected costs.costs and market penetration. In some cases, you can identify forward-looking statements can be identified by terminology such as “may”, “will”, “should”, “expects”, “plans& #8221;“plans”, “anticipates”, “believes”, “estimates”, “predicts”“predicts���, “potential”, “continue”, “intends”, “could”, or the negative of such terms or other comparable terminology. We made a number of assumptions in the preparation of theseour forward-looking statements. You should not place undue reliance on our forward-looking statements, which are subject to a multitude of known and unknown risks and uncertainties that may change, thus causingcould cause actual results, future resultscircumstances or anticipated events to differ materially from those expressedstated in or implied in anyby the forward-looking information or statements. These assumptions
Risks,  uncertainties and other factors that could affect our actual results include, but are not limited to, the effects of general economic conditions, securing and maintaining corporate alliances, our ability to commercialize products, receiptestimates regarding our capital requirements, and the effect of regulatory approvals, positive resultscapital market conditions and other factors, including the current status of current and future clinical trials or bioequivalence studies, our ability to maintain and establish intellectual property rights in our drug delivery technologies and product candidates, our ability to obtain additional financing, existence of potential markets for our product candidates,development programs, on capital availability, the potential dilutive effects of any future financing, our ability to attract distributors and collaborators with acc eptable development, regulatory and commercialization expertise, sufficient working capital for theprograms regarding research, development and commercialization of our product candidates our ability to create an effective direct sales and marketing infrastructure for any products we may elect to marketthe timing of such programs, the timing, costs and sell directly, market acceptance of any products that we bringuncertainties regarding  obtaining regulatory approvals to market our ability to retain and hire qualified employees, and general improvement of economic and capital market conditions in Canadaproduct candidates, and the United States.
Forward-looking information involves knowntiming and unknown risks, uncertainties and otheramount of any available investment tax credits (“ITCs”).  Other factors that could cause actual results to differ materially. Such factorsmaterially include but are not limited to, uncertainty regarding: the timing of our programs to research, develop and commercialize our products candidates; the timing and costs of obtaining regulatory approvals; the benefits of our drug delivery technologies and product candidates as compared to others; the scope of protection provided by intellectual property for our drug delivery technologies and product candidates; our estimates regarding our capital requirements and future revenues and profitability; our estimates of the size of the potential markets for our product candidates; our selection and licensing of product candidates; the benefits to be derived from collaborative efforts with distributors; sources of revenues and anticipated revenues, including contributions from distributors and collaborators, product sales, license agreements and other collaborative efforts for the development and commercialization of product candidates; the rate and degree of market acceptance of our products; the timing and amount of reimbursement of our products; the success and pricing of other competing therapies that may become available; the manufacturing capacity of third-party manufacturers that we may use for our products; and other risk factors discussed from time to time in our reports, public disclosure documents and other filings with the securities commissions in Canada and the United States. to:
·  the actual or perceived benefits to users of our drug delivery technologies and product candidates as compared to others;
·  our ability to maintain and establish intellectual property rights in our drug delivery technologies and product candidates;
·  the actual size of the potential markets for any of our product candidates compared to our market  estimates;
·  our selection and licensing of product candidates;
·  our ability to attract distributors and collaborators with the ability to fund patent litigation and with acceptable development, regulatory and commercialization expertise and the benefits to be derived from such collaborative efforts;
·  sources of revenues and anticipated revenues, including contributions from distributors and collaborators, product sales, license agreements and other collaborative efforts for the development and commercialization of product candidates;
·  our ability to create an effective direct sales and marketing infrastructure for products we elect to market and sell directly;
·  the rate and degree of market acceptance of our products;
·  the timing and amount of insurance reimbursement for our products;
·  the success and pricing of other competing therapies that may become available;
·  our ability to retain and hire qualified employees;
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·  the regulatory status and compliance of third-party contract research organizations, suppliers and manufacturers that we may use for our products; and
·  the manufacturing capacity of third-party manufacturers that we may use for our products.
Additional risks and uncertainties relating to the Company and our business can be found in the “Risk Factors” section of this annual report,in Item 3.D below, as well as in our reports, public disclosure documents and other public filings.filings with the securities commissions and other regulatory bodies in Canada and the U.S. The forward-looking statements reflect our current views with respect to future events, and are madebased on what we believe are reasonable assumptions as of the date hereof, and wehereof. We disclaim any intention and have no oblig ationobligation or responsibility, except as required by law, to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
 
In this annual report, unless the context otherwise requires, the terms “we”, “us”, “our”, “Intellipharmaceutics” and the “Company” refer to Intellipharmaceutics International Inc. and its subsidiaries. Any reference in this annual report to our “products” includes a reference to our product candidates and future products we may develop.
 
PART I.Intellipharmaceutics™, Hypermatrix™, Drug Delivery Engine™, IntelliFoam™, IntelliGITransporter™, IntelliMatrix™, IntelliOsmotics™, IntelliPaste™, IntelliPellets™, IntelliShuttle™ and Rexista™ are our trademarks.  These trademarks are important to our business.  Although we may have omitted the “TM” trademark designation for such trademarks in this annual report, all rights to such trademarks are nevertheless reserved.  Unless otherwise noted, other trademarks used in this annual report are the property of their respective holders.
 
Identity of Directors, Senior Management and Advisers
 
NameBusiness AddressOffice/Function for the Company
Dr. Isa Odidi
30 Worcester Road
Toronto, ON   M9W 5X2
Chief Executive Officer and Chairman of the Board and Director of the Company
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Dr. Amina Odidi
30 Worcester Road
Toronto, ON   M9W 5X2
President, Chief Operating Officer and Director of the Company
John N. Allport
30 Worcester Road
Toronto, ON   M9W 5X2
Vice-President, Legal Affairs and Licensing and Director of the Company
Dr. Eldon R. Smith
Faculty of Medicine
University of Calgary
3330 Hospital Drive NW
Calgary, AB T2N 4Z1
Director of the Company
Kenneth Keirstead
541 Charlotte Street
Fredericton, NB   E3B 1M1
Director of the Company
Bahadur Madhani
117 Dundas Street East, Suite 101,
Toronto, ON   M5G 1E1
Director of the Company
Dr. Patrick N. Yat
30 Worcester Road
Toronto, ON   M9W 5X2
Vice-President, Pharmaceutical Analysis and Chemistry of the Company
Graham D. Neil
30 Worcester Road
Toronto, ON   M9W 5X2
Vice President, Finance and Chief Financial Officer of the Company

The Company’s auditors for the preceding 3 years are as follows:
Fiscal Year EndedAuditor (each a member of the Canadian Institute of Chartered Accountants)
November 30, 2009
&
December 31, 2008
Deloitte & Touche LLP
5140 Yonge Street,
Toronto, Ontario  M2N 2L7
December 31, 2007
KPMG LLP
Yonge Corporate Centre
4100 Yonge Street, Suite 200
Toronto, Ontario   M2P 2H3

Item 2.Item 1.Identity of Directors, Senior Management and Advisers
Offer Statistics and Expected Timetable
Not Applicable.
 
Key InformationDirectors and senior management
 
Not applicable.
B.  
Advisors
Not applicable.
Auditors
 Not applicable.
Item 2.Offer Statistics and Expected Timetable
A.  
Offer statistics
Not applicable.
B.  
Method and expected timetable
Not applicable.
Item 3.Key Information
Selected Financial Data
 
The following selected financial data of Intellipharmaceutics has been derived from the audited consolidated financial statements of the Company as at and for the years ended November 30, 2012, 2011 and 2010, the eleven month period ended November 30, 2009, and of our predecessor company for accounting purposes, Intellipharmaceutics Ltd. (“IPC Ltd.”) which had a December 31 fiscal year end, for the yearsyear ended December 31, 2008, 2007, 2006 and 2005.2008. As a result of the IPC Arrangement AgreementTransaction (as defined and described in Item 4.A below) completed on October 22, 2009, we selected a November 30 year end. The comparative number of shares issued and outstanding, basic and diluted loss per share have been amended to give effect to this arrangement transaction.  These statements were prepared in accordance with accounting principles generally accepted in the United States of America (“USU.S. GAAP”). All dollar amounts herein are expressed in United States dollars (“USU.S. dollars”), unless otherwise indicated.
 
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Periods ended
(in thousands of USU.S. dollars, except for per share data)
  
As at and for
the year
ended
November 30,
2012
  
As at and for
the year
ended
November 30,
2011
  
As at and for
the year
ended
November 30,
2010
  
As at and for
the eleven
month period
ended
November 30,
2009
  
As at and for
the year
ended
December 31,
2008
 
                
Revenue 107  502  1,459  630  1,278 
Loss for the period (6,137)  (4,880)  (5,761)  (1,839)  (3,765) 
Total assets 2,475  6,247  3,268  11,081  3,026 
Total liabilities 4,243  9,340  3,175  6,449  3,609 
Net assets (1,768)  (3,093)  93  4,632  (583) 
Capital stock 147  147  17  17  17 
Loss per share - basic and diluted (0.36)  (0.33)  (0.53)  (0.19)  (0.40) 
Dividends Nil  Nil  Nil  Nil  Nil 
Weighted average common shares 17,259  14,994  10,907  9,512  9,328 
 
  
As at and for
the eleven
month period
ended
November
30, 2009
  
As at and for
the year
ended
December 31,
2008
  
As at and for
the year
ended
December 31,
2007
  
As at and for
the year
ended
December 31,
2006
  
As at and for
the year
ended
December 31,
2005
 
                
                
Revenue  630   1,278   2,297   1,490  Nil 
Loss  (1,839)  (3,765)  (1,291)  (1,320)  (2,453)
Total assets  11,081   3,026   6,878   3,027   4,068 
Total liabilities  6,449   3,609   4,557   2,567   2,508 
Net Assets  4,632   (583)  2,322   460   1,558 
Capital Stock  16,969   16,874   16,874   16,094   16,044 
Loss per share – basic and diluted  (0.19)  (0.40)  (0.14)  (0.15)  (0.28)
Dividends Nil  Nil  Nil  Nil  Nil 
Weighted average common shares  9,512   9,328   9,087   8,877   8,685 
The following table sets forth the average exchange rate for one Canadian dollar expressed in terms of one USU.S. dollar for the fiscal years 2005 throughyear 2008, for the 11-montheleven month period ended November 30, 2009 and for November 2009 through April 2010.fiscal years 2010, 2011 and 2012. The average rate is calculated using the average of the exchange rates on the last day of each month during the period.
  AVERAGE 
2008  0.9381 
2009 (11 months)  0.8696 
2010  0.9673 
2011  1.0123 
2012  0.9977 
 
The following table sets forth the high and low exchange rates for each month during the previous six months.
 AVERAGE 
 2005.8254 
 2006.8817 
 2007.9304 
 2008.9381 
 2009 (11 months).8696 
    
 LOWHIGH
November 20090.92820.9560
December 20090.93340.9611
January 20100.93840.9755
February 20100.93160.9597
March 20100.95960.9888
April 20100.98031.0039
   LOW   HIGH 
August 2012  0.9938   1.0139 
September 2012  1.0099   1.0299 
October 2012  0.9996   1.0243 
November 2012  0.9972   1.0074 
December 2012  1.0048   1.0162 
January 2013 (through January 29, 2013)  0.9923   1.0164 
 
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The exchange rates are based upon the noon buying rate as quoted by The Bank of Canada.  At May 25, 2010,January 29, 2013, the exchange rate for one Canadian dollar expressed in terms of one U.S. dollar, as quoted by The Bank of Canada at 4 p.m. Eastern Time, equalled $0.9346.equaled $1.0024.
 
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B.  
B.  
Capitalization and Indebtedness
 
The following table sets forth the capitalization and indebtedness of the Company as of November 30, 2009.  As of November 30, 2009, the Company has cash totalling $8,014,492 and short-term investments totalling Nil.  
Short term debt-due to related parties (1)
 $2,360,181 
Shareholder’s Equity    
Common shares, unlimited amount authorized, 10,907,057 issued and outstanding:
 $16,969 
Preference shares, unlimited amount authorized, none issued:
  - 
Additional paid-in capital:
 $18,263,340 
Accumulated other comprehensive loss:
  (341,844)
Deficit: $(13,306,451)
Total Shareholders’ Equity:
 $4,632,014 

(1)Amounts due to related parties are current liabilities payable to entities controlled by principal shareholders who are officers and directors of the Company for cash advanced by them to the Company and are represented by unsecured promissory notes. As of November 30, 2009 the Company had no outstanding capital lease obligations, guaranteed debt or secured debt.
Not Applicable.
 
C.  
C.  
Reasons for the Offer and Use of Proceeds
 
Not Applicable.
 
Risk Factors
The risks and uncertainties described below are those that we currently believe may materially affect us.  Additional risks and uncertainties that we are unaware of or that we currently deem immaterial may also become important factors that affect us.  If any of the following risks actually occurs, our business, operating results or financial condition could be materially adversely affected.
RISKS RELATING TO OUR BUSINESS
 
Prospects for companies in the pharmaceutical industry generally may be regarded as uncertain given the research and development nature of the industry and uncertainty regarding the prospects of successfully commercializing product candidates and, accordingly, investments in companies such as ours should be regarded as very speculative.   An investor should carefully consider the risks and uncertainties described below, as well as other information contained in this annual report.  The list of risks and uncertainties described below is not an exhaustive list. Additional risks and uncertainties not presently known to us or that we believe to be immaterial may also adversely affect our business.  If any one or more of the following risks occur, our business, financial condition and results of oper ationsoperations could be seriously harmed.  Further, if we fail to meet the expectations of the public market in any given period, the market price of our common shares could decline.  If any of the following risks actually occurs, our business, operating results, or financial condition could be materially adversely affected.
 
Our activities entail significant risks. In addition to the usual risks associated with a business, the following is a general description of certain significant risk factors which may be applicable to us.
 
Risks related to our Company
 
WeOur business is capital intensive and requires significant investment to conduct research and development, clinical and regulatory activities necessary to bring our products to market, which capital may require additional fundsnot be available in our business that may be difficult to obtain when neededamounts or on terms acceptable to us.us, if at all.
 
As of November 30, 2009, we had a cash balance of U.S. $8.0 million.  As of February 28, 2010, our cash balance was U.S.$5.0 million. In the future, we will requireOur business requires substantial future capital investment in order to continue to conduct
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the research and development, clinical and regulatory activities we believe are necessary to bring our products to market and to establish commercial manufacturing, marketing and sales capabilities.  It may be difficult or impossibleAs of November 30, 2012, we had a cash balance of $0.5 million. As of December 31, 2012, our cash balance was $0.1 million.
In order for us to continue operations at existing levels, we expect that for at least the next 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, using funds from senior management through the convertible debenture described elsewhere herein, equity and/or debt financings, and/or new strategic partnership agreements funding some or all costs of development, there can be no assurance that we will be able to obtain any such capital on terms or in amounts sufficient to meet our needs or at all.  The availability of equity or debt financing will be affected by, among other things, the results of our research and development, our ability to obtain regulatory approvals, the market acceptance of our products, the state of the capital markets generally, strategic alliance agreements, and other relevant commercial considerations.  In addition, if we raise additional funds by issuing equity securities, our then existing security holders will likely experience dilution, and the incurring of indebtedness would result in increased debt service obligations and could require us to agree to operating and financial covenants that would restrict our operations.  In the event that we do not obtain additional capital when needed orover the next twelve months, there may be substantial doubt about our ability to continue as a going concern and realize our assets and pay our liabilities as they become due. Any failure by the Company to raise additional funds on terms acceptablefavorable to us.
Inthe Company, or at all, may require the Company to significantly change or curtail our current or planned operations in order to secure future financing,conserve cash until such time, if it is even available, it is likelyever, that we would need to sell additional common sharessufficient proceeds from operations are generated, and could result in our not taking advantage of business opportunities, in the termination or financial instruments that are exchangeable for or convertible into common shares and/or enter into development, distribution and/or licensing relationships. Any future debt financing arrangements we enter into would likely contain restrictive covenants that would impose significant operating and financial restrictions on us.
Our ability to obtain funding will depend in part upon prevailing capital market conditions and our business performance. Any additional financing may not be obtained at favourable terms, if at all. Any future equity financing may also be dilutive to existing shareholders. If we cannot obtain adequate funding on reasonable terms, we may terminate or delay of clinical trials for one or more of our product candidates, curtail significantin curtailment of our product development programs that are designed to identify new product candidates, and/in the sale or sell or assignassignment 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.
 
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Delays, suspensions and terminations in our preclinical studies and clinical trials could result in increased costs to us and delay our ability to generate product revenues.
The commencement of clinical trials can be delayed for a variety of reasons, including delays in:
·  demonstrating sufficient safety and efficacy to obtain regulatory approval to commence a clinical trial;
·  reaching agreement on acceptable terms with prospective contract research organizations and clinical trial sites;
·  manufacturing sufficient quantities of a drug candidate;
·  obtaining institutional review board approval to conduct a clinical trial at a prospective clinical trial site; and
·  patient enrollment.
Once a clinical trial has begun, it may be delayed, suspended or terminated due to a number of factors, including:
·  the number of patients that participate in the trial;
·  the length of time required to enroll suitable subjects;
·  the duration of patient follow-up;
·  the number of clinical sites included in the trial;
·  changes in regulatory requirements or regulatory delays or clinical holds requiring suspension or termination of the trials;
·  delays, suspensions or termination of clinical trials due to the institutional review board overseeing the study at a particular site;
·  failure to conduct clinical trials in accordance with regulatory requirements;
·  unforeseen safety issues, including serious adverse events or side effects experienced by participants; and
·  inability to manufacture, through third party manufacturers, adequate supplies of the product candidate being tested.
Based on results at any stage of product development, we may decide to repeat or redesign preclinical studies or clinical trials, conduct entirely new studies or discontinue development of products for one or all indications.  In addition, our products may not demonstrate sufficient safety and efficacy in pending or any future preclinical testing or clinical trials to obtain the requisite regulatory approvals.  Even if such approvals are obtained for our products, they may not be accepted in the market as a viable alternative to other products already approved or pending approvals.
If we experience delays, suspensions or terminations in a preclinical study or clinical trial, the commercial prospects for our products will be harmed, and our ability to generate product revenues will be delayed or we may never be able to generate such revenues.
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We have a history of losses.operating losses, which may continue in the foreseeable future.
 
We have incurred net losses from 2002 (when Intellipharmaceutics Ltd., our predecessor company, commenced operations)inception through November 30, 2009 and continue to incur losses.  As at November 30, 2009, we2012 had an accumulated deficit of U.S.$13.3 million.  For the year ended November 30, 2009 we had a loss$30.1 million as of U.S.$1.8 million.  Oursuch date and have incurred additional losses for the fiscal periods ended December 31, 2008, 2007, 2006, and 2005 were U.S.$3.8 million, U.S.$1.3 million, U.S.$1.3 million, and U.S.$2.5 million, respectively.  These historical financial losses and our continued losses and financial condition could make it more difficult for us to obtain financing in the future or could reduce the value the market places on our common shares.
since such date.  As we engage in the development of product candidatesproducts in our pipeline, we will continue to incur further losses.  There can be no assurance that we will ever be able to achieve or sustain profitability or positive cash flow.  Our ultimate success will depend on whether our drug formulations receive the approval of the U.S.United States Food and Drug Administration (“FDA”) or other applicable regulatory agencies needed to commercially market them and if we will beare able to successfully market approved products.  We cannot be certain that we will be able to receive FDA approval for any of our drug formulations, or if we do, that we will reach the level of sales and revenues necessary to achieve and sustain profitability.
 
If the Company is not ableLoss of key scientists and failure to raise additional funds to finance its operations for the foreseeable future, the Company’s recurring losses from operations raise substantial doubt about the Company’s ability to continue as a going concern.
We are dependent on key personnel.attract qualified personnel could limit our growth and negatively impact our operations.
 
We are dependent upon the scientific expertise of Dr. Isa Odidi, our Chairman and Chief Executive Officer, and Dr. Amina Odidi, our President and Chief Operating Officer.  Although we now employ, and will in the future expect to continue to employ other qualified scientists, we are substantially dependent upon the efforts of Drs. Isa and Amina Odidi as they are our only employees who havewith the knowledge and know-how relating to the development of controlled-release products that we believe isexperience necessary for us to continue development of controlled-release products. We do not maintain key-person life insurance on any of our products.
officers or employees.  Although we have employment agreements with key members of our management team, each of our employees may terminate his or her employment at any time. The success of our business depends, in large part, on our continued ability to attract and retain highly qualified management, scientific, manufacturing and sales and marketing personnel, on our ability to successfully integrate large number ofmany new employees, into our corporate culture, and on our ability to develop and maintain important relationships with leading research and medical institutions and key distributors.   Competition for these typesIf we lose the services of our executive officers or other qualified personnel and relationships is intense, and the failureor are unable to obtainattract and retain such personnelqualified individuals to fill these roles or develop key relationships, our business, financial condition and results of operations could have material adverse consequences.be materially adversely affected.
 
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Our intellectual property may not provide meaningful protection for our product candidates.
 
We hold certain U.S., Canadian and foreign patents and have pending applications for additional patents.patents outstanding.  We intend to continue to seek patent protection for, or maintain as trade secrets, all of theour commercially promising drug delivery platforms and technologies that we have discovered, developed or acquired that we believe may be commercially promising.technologies.  Our success depends, in part, on our ability, and our collaborative partners’ ability to obtain and maintain patent protection for new product candidates, maintain trade secret protection and operate without infringing the proprietary rights of third parties.  As with most pharmaceutical companies, our patent position is highly uncertain and involves complex legal and factual questions.  Without patent and other similar protection, other companies could offer substantially identic alidentical products for sale without incurring the sizeable development costs that we have incurred.  Ourwhich could diminish our ability to recover these expendituresexpenses of and realize profits upon the sale of products could be diminished.  The process of obtaining patents can be time-consuming and expensive, with no certainty of success.  Even if we spend the necessary time and money, a patent may not be issued or it may insufficiently protect the technology it was intended to protect.  We can never be certain that we were first to develop the technology or that we were the first to file a patent application for the particular technology because of the time that elapses between patent filing and publication, and because publications in the scientific or patent literature lag behind actual discoveries.on our developed products.  If our pending patent applications are not approved, for any reason, or if we are unable to receive patent protectionobtain patents for additional proprietarydeveloped technologies, that we develop, the degree of future protection for our proprietary technologytechnologies will remain uncertain.  Furthermore, third parties may independently develop similar or alternative technologies, duplicate some or all of our technologies, design around our patented technologies or challenge our issued patents.  Such third parties may have filed patent applications, or hold issued patents, relating to products or processes competitive with those we are developing.  The patents of our competitors may impairdeveloping or otherwise restricting our ability to do business in a particular area.  Our success will depend, in part, on our abilityIf we are unable to obtain patents or otherwise protect our trade secrets andor other proprietary informationintellectual property and operate without infringing on the proprietary rights of others.others, our business, financial condition and results of operations could be materially adversely affected.
 We may be subject to intellectual property claims that could be costly and could disrupt our business.
Third parties may claim we have infringed their patents, trademarks, copyrights or other rights.  We may be unsuccessful in defending against such claims, which could result in the inability to protect our intellectual property rights or in substantial damages, fines or other penalties.  The resolution of a claim could also require us to change how we do business or enter into burdensome royalty or license agreements.  Insurance coverage may not be adequate to cover every claim that third parties could assert against us.  Even unsuccessful claims could result in significant legal fees and other expenses, diversion of management’s time and disruptions in our business.  Any of these claims could also harm our reputation.
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We rely on maintaining as trade secrets our competitively sensitive know-how and other information.  Intentional or unintentional disclosure of this information could impair our competitive position.
As to many technical aspects of our business, we have concluded that competitively sensitive information is either not patentable or that for competitive reasons it is not commercially advantageous to seek patent protection.  In these circumstances, we seek to protect this know-how and other proprietary information by maintaining it in confidence as a trade secret.  To maintain the confidentiality of our trade secrets, we generally enter into agreements that contain confidentiality provisions with our employees, consultants, collaborators, contract manufacturers and advisors upon commencement of their relationships with us.  These provisions generally require that all confidential information developed by the individual or made known to the individual by us during the course of the individual’s relationship with us be kept confidential and not disclosed to third parties.  We may not have these arrangements in place in all circumstances, and the confidentiality provisions in our favour may be breached.  We may not become aware of, or have adequate remedies in the event of, any such breach.  In addition, in some situations, the confidentiality provisions in our favour may conflict with, or be subject to, the rights of third parties with whom our employees, consultants, collaborators, contract manufacturers or advisors have previous employment or consulting relationships.  To the extent that our employees, consultants, collaborators, contract manufacturers or advisors use trade secrets or know-how owned by others in their work for us, disputes may arise as to the ownership of relative inventions.  Also, others may independently develop substantially equivalent trade secrets, processes and know-how, and competitors may be able to use this information to develop products that compete with our products, which could adversely impact our business.  The disclosure of our trade secrets could impair our competitive position.  Adequate remedies may not exist in the event of unauthorized use or disclosure of our confidential information.
 
We operate in a highly litigious environment.
 
The costFrom time to time, we are subject to legal proceedings.  As of commencing or defending litigation, if necessary, could be significant and could significantly drain our limited financial resources and disrupt our business operations.  While therethe date of this annual report, the Company is nonot aware of any material litigation pending or threatened against us litigationother than as described under Item 8.A. below. Litigation to which we are, or may be, subjectedsubject could relate to, among other things, our patent and other intellectual property rights, or such rights of others, business or licensing arrangements with other persons, product liability andor financing activities.  Such litigation could include an injunction against the manufacture or sale of a productone or more of our products or potential productproducts or a significant monetary judgment, including a possible punitive damages award, or a judgment that certain of our patent or other intellectual property rights are invalid or unenforceable or infringe the intellectual property rights of others.   0;If such litigation is commenced, our business, results of operations, financial condition and cash flows could be materially adversely affected.
 
There has been substantial litigation in the pharmaceutical industry concerning the manufacture, use and sale of new products that are the subject of conflicting patent rights.  When we file an abbreviated new drug application (“ANDA”) for a bioequivalent version of a drug, we may, in some circumstances, be required to certify to the FDA that any patent which has been listed with the FDA as covering the branded product has expired, the date any such patent will expire, or that any such patent is invalid or will not be infringed by the manufacture, sale or use of the new drug for which the application is submitted.  Approval of an ANDA is not effective until each listed patent expires, unless the applicant certifies that the patents at issue are not infringed or are invalid and so notifies the patent holder and the holder of the branded product.  A patent holder may challenge a notice of non-infringement or invalidity by suing for patent infringement within 45 days of receiving notice.  Such a challenge would preventprevents FDA approval for a period which ends 30 months after the receipt of notice, or sooner if an appropriate court rules that the patent is invalid or not infringed.  From time to time, in the ordinary course of business, we face and have faced such challenges and may continue to do so in the future.
 
Brand-name pharmaceutical manufacturers routinely bring patent infringement litigation against ANDA applicants seeking FDA approval to manufacture and market generic forms of their branded products. We are routinely subject to patent litigation that can delay or prevent our commercialization of products, force us to incur substantial expense to defend, and expose us to substantial liability.
 
Brand-name pharmaceutical manufacturers routinely bring patent infringement litigation against ANDA applicants seeking FDA approval to manufacture and market generic forms of their branded products. Likewise, patent holders may bring patent infringement suits against companies that are currently marketing and selling their approved generic products. Patent infringement litigation involves many complex technical and legal issues and its

 
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outcome is often difficult to predict, and the risk involved in doing so can be substantial, because the remedies available to the owner of a patent in the event of an unfavourable outcome include damages measured by the profits lost by the patent owner rather than the profits earned by the infringer. Such litigation usually involves significant expense and can delay or prevent introduction or sale of our products.
We have a reliance on key proprietary information.
We rely on trade secrets, know-how and other proprietary information as well as requiring our employees and other vendors and suppliers to sign confidentiality agreements.  However, these confidentiality agreements may be breached, and they may not have adequate remedies for such breaches.  Others may independently develop substantially equivalent proprietary information without infringing upon any proprietary technology.  Third parties may otherwise gain access to our proprietary information and adopt it in a competitive manner.
We cannot ensure the availability of raw materials.
 
Certain raw materials which may be necessary for the development and subsequent commercial manufacturingmanufacture of our product candidates may be proprietary products of other companies.  WeWhile we attempt to manage the risk associated with such proprietary raw materials, by the imposition of contractual provisions in supply contracts that we believe are favourable to us, by management of inventories and by the continued search for alternative authorized suppliers of such materials or their equivalents. If this fails,if our efforts fail, or if there is a material shortage, contamination, and/or recall of such materials, the resulting scarcity could adversely affect our ability to develop or manufacture our product candidates.  In addition, many third party suppliers are subject to governmental regulation and, accordingly, we are dependent on the regulatory compliance of, as well as on the strength, enforceability and terms of our various contracts with, these third party suppliers.
 
TheFurther, the FDA requires identification of raw material suppliers in applications for approval of drug products. If raw materials wereare unavailable from a specified supplier, or if the supplier does not give us access to its technical information in respect offor our application or the supplier wasis not in compliance with FDA or other applicable requirements, the FDA approval of a newthe supplier could delay the manufacture of the drug involved. As a result, there is no guarantee we will always have timely and sufficient access to a required raw material or other product.  Any inability to obtain raw materials on a timely basis, or any significant price increases which cannot be passed on to customers, could have a material adverse effect on our business, results of operations, financial condition and cash flows could be materially adversely affected.
Many third-party suppliers are subject to governmental regulation and, accordingly, we are dependent on the regulatory compliance of these third parties.  We also depend on the strength, enforceability and terms of our various contracts with our third-party suppliers.flows.
 
Our product candidates may not be successfully developed or commercialized.
 
Successful development of our products is highly uncertain and is dependent on numerous factors, many of which are beyond our control.  Products that appear promising in research or early phases of development may fail to reach later stages of development or the market for several reasons including:
 
·  for ANDA candidates, bioequivalence studies results may not meet regulatory requirements or guidelines for the demonstration of bioequivalence;
·  
for new drug application (“NDA”) candidates, a product may not demonstrate acceptable large-scale clinical trial results, even though it demonstrated positive pre-clinicalpreclinical or initial clinical trial results;
·  for NDA candidates, a product may not be effective in treating a specified condition or illness;
·  a product may have harmful side effects on humans;
·  products may fail to receive the necessary regulatory approvals from the FDA or other regulatory bodies, or there may be delays in receiving such approvals.  Among other things, such delays may be caused by slow enrolment in clinical studies, extended lengths of time to achieve study endpoints, additional time requirements for data analysis, discussions with the FDA, FDA requests for additional pre-clinical or clinical data, or unexpected safety, efficacy or manufacturing issues;approvals;
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·  difficulties may be encountered in formulating products, scaling up manufacturing processes or in getting approval for manufacturing;
·  manufacturing costs, pricing or reimbursement issues, other competitive therapeutics, or other commercial factors may make the product uneconomical; and
·  the proprietary rights of others, and their competing products and technologies, may prevent the product from being developed or commercialized.
 
For both ANDA and NDA products,Further, success in pre-clinicalpreclinical and early clinical trials does not ensure that large-scale clinical trials will be successful.  As well, for ANDA candidates,successful, nor does success in preliminary studies does notfor ANDA candidates ensure that bioequivalence studies will be successful.  Results are frequently susceptible to varying interpretations that may delay, limit or prevent regulatory approvals.  The length of time necessary to complete bioequivalence studies or clinical trials and to submit an application for marketing approval for a final decision by a regulatory authority varies significantly and may be difficult to predict.
 
As a result, there can be no assurance that any of our products currently in development will ever be successfully commercialized.
 
A failure or a significant delay inNear term revenue depends significantly on the marketingsuccess of our leadfirst filed ANDA (“lead”) product, our extended releaseonce daily dexmethylphenidate (aXR generic, of Focalin XR®) would have a material adverse effect on our future results of operations, liquidity, financial condition, and growth prospects.regulatory approval for which has yet to be received.
 
We have invested a significant portion of our financial resourcestime and effort in the development of our lead product, our extended releaseonce daily generic dexmethylphenidate hydrochloride (dexmethylphenidate XR).XR. Although it remains our most advanced product, it has not yet received regulatory approval, and  there can be no assurance as to when or if such regulatory approval will  be received. We anticipate thatdepend significantly on the actions of our development partner Par Pharmaceutical, Inc. (“Par”) in the mid-termprosecution, regulatory approval and commercialization of our generic dexmethylphenidate XR product.  Our near term ability to generate significant revenuesrevenue will depend substantially on theupon receipt of regulatory approval and successful commercialization of this product especially in the United States, where the branded Focalin XR® product remains under review byis in the FDA.market. Although we have several other products under development,in our pipeline, they also remain subject to regulatory approval or are at an earlier stagestages of development.
In August of 2007, we announced that the Company had received acceptance from the U.S. Food and Drug Administration for the filing of the Company’s generic dexmethylphenidae XR for commercialization with a drug development partner, Par Pharmaceutical, Inc. (Par) using the Company’s proprietary controlled release drug delivery technology. The application seeks the FDA’s approval to commercialize generic versions of each of 4 strengths of a branded drug called Focalin XR® (Focalin XR® is a registered trademark of Novartis Pharmaceuticals Corporation)
The Company also filed the FDA’s customary form of Paragraph IV certification which the Company had delivered to the owners of certain patents listed with the FDA as pertaining to FOCALIN XR®. This certification contained the Company’s indication that it believed that its generic versions of FOCALIN XR® do not infringe those patents and/or that the patents are invalid or unenforceable.
These generic drug products have been developed by the Company under a collaboration arrangement with Par Pharmaceutical, Inc. (“Par” or “Par Pharmaceutical”) under which Par is responsible for litigation and its costs. Par is the agent for the Company in respect of its filing with the FDA for approval to commercialize the generic versions of FOCALIN XR®.  Company management expects that marketing of generic versions of the products will commence no sooner than the fourth quarter of 2012.  Commercial launch of the product within the anticipated timeframe remains dependent upon FDA approval of the product. There can be no assurance that such approval will be granted within the anticipated timeframe for launch, or at all.
The introduction of other generic extended release dexmethylphenidate products into the U.S. market could have a material adverse effect on our U.S. market share and our overall business.
We are aware that at least Teva Pharmaceuticals USA. Inc. (Teva), Barr Laboratories (Barr), KV Pharmaceutical Company (KV), and Actavis Inc. (Actavis) have each submitted an ANDA to the FDA seeking approval in the United States to market generic versions of Focalin XR®, an extended release form of dexmethylphenidate hydrochloride, currently being sold in the United States by Novartis Pharmaceuticals. (Barr and Teva have subsequently merged.)  If the applications filed by those parties are approved by the FDA and/or if the
 
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Company does not obtain the timely approval of the FDA, those parties may be able to launch their own generic dexmethylphenidate XR products in the United States ahead of that of the Company. Such launches could have an adverse effect on our market share and our business, including a shortfall in revenues and an inability to successfully commercialize our dexmethylphenidate XR product.
The Company is aware that, in December 2009, Elan settled similar patent litigation with Teva and Barr in respect of the applications to the FDA by those companies to commercialize generic dexmethylphenidate XR products and  Elan announced that it  had granted Teva and Barr rights to Elan intellectual property for Focalin XR no sooner than June 2012. The launch of generic dexmethylphenidate XR products in the United States by Teva/Barr in that timeframe could have an adverse effect on our market share and our business.
Our significant expenditures on research and development may not lead to successful product introductions.
 
We conduct research and development primarily to enable us to manufacture and market pharmaceuticals in accordance with FDA regulations.  We are required to obtain FDA approval before marketing our drug products. The FDA approval process is rigorous, time consuming and costly.  Typically, research expenses related to the development of innovative compounds and the filing of NDAs are significantly greater than those expenses associated with ANDAs.  As we continue to develop new products, our research expenses will likely increase.  We are required to obtain FDA approval before marketing our drug products and the approval process is costly and time consuming. Because of the inherent risk associated with research and development efforts in our industry, particularly with respect to new drugs, our research and development expenditures may not result in the successful introduction of FDA approved new pharmaceuticals that have been approved by the FDA .
Factors affecting our R&D expenses include, but are not limited to, the number of, and the outcomes of, bioavailability/bioequivalence studies currently being conducted by us and/or our collaborators.  For example, our R&D expenses may increase based on the number of bioavailability/bioequivalence studies or clinical trials being conducted by us and/or our collaborators during a certain period.pharmaceuticals.
 
We may not have the ability to develop or license, or otherwise acquire, and introduce new products on a timely basis.
 
Product development is inherently risky, especially for new drugs for which safety and efficacy have not been established and the market is not yet proven.  Likewise, product licensing involves inherent risks including uncertainties due to matters that may affect the achievement of milestones, as well as the possibility of contractual disagreements with regard to terms such as license scope or termination rights.  The development and commercialization process, particularly with regard to new drugs, also requires substantial time, effort and financial resources. The process of obtaining FDA or other regulatory approval to manufacture and market new and generic pharmaceutical products is rigorous, time consuming, costly and largely unpredictable.  We, or a partner, may not be successful in obtaining FDA or other required regulatory approval or in commercializing any of the products that we are currently developing or licensing or any future products.licensing.
 
We may not achieve our projected development goals in the time frames we announce and expect.
 
We set goals for and make public statements regarding ourthe expected timing of meeting thecertain corporate objectives, material to our success, such as the commencement and completion of clinical trials, anticipated regulatory approval and product launch dates. From time to time, we may make certain public statements regarding these goals. The actual timing of these forward looking events can vary dramatically due to, factors such asamong other things, insufficient funding, delays or failures in our clinical trials or bioequivalence studies, the need to develop additional data required by regulators as a condition of approval, the uncertainties inherent in the regulatory approval process, such as requests for additional information, delays in achieving manufacturing or marketing arrangements necessary to commercialize our product candidates and failure by our collaborators, marketing and distribution partners, suppliers and other third parties with whom we have contractual arrangements, to fulfill in whole or in par t, their contractual obligations towards us.obligations.
 
Our products may not achieve expected levels of market acceptance.acceptance, thereby limiting our potential to generate revenue.
 
Even if we are able to obtain regulatory approvals for our proposed products, the success of those products will be dependent upon market acceptance.  Levels of market acceptance for any products to be marketed by us could be affected by several factors, including:
 
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·  the availability of alternative products from competitors;
·  the prices of our products relative to those of our competitors;
·  the timing of our market entry;
·  the ability to market our products effectively at the retail level; and
·  the acceptance of our products by government and private formularies.
 
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Some of these factors are not within our control, and our proposed products may not achieve levels of market acceptance anticipated by us.  Additionally, continuing and increasingly sophisticated studies of the proper utilization, safety and efficacy of pharmaceutical products are being conducted by the industry, government agencies and others which can call into question the utilization, safety and efficacy of products we are currently developing or may develop in the future.  These studies could also impact a future product after it has been marketed.  In some cases, studies have resulted, and may in the future result, in the discontinuance of product marketing or requirement of other risk management programs such as the need for a patient registry. The failure of our product candidates, once approved, to achieve market acceptance would limit our ability to generate revenue and would adversely affect our results of operations.
 
We do not have experienceThe risks and uncertainties inherent in conducting clinical trials and submitting NDAs.
With respect to products that we develop that are not generic equivalents of existing brand-name drugs and thus do not qualify for the FDA’s abbreviated application procedures, we must demonstrate through clinical trials that these products are safe and effective for use. We have only limited experience in conducting and supervising clinical trials. The process of completing clinical trials and preparing an NDA may take several years and requires substantial resources. Our studies and filings may not result in FDA approval to market our new drug products and, if the FDA grants approval, we cannot predict the timing of any approval. There are substantial filing fees for NDAs that are not refundable if FDA approval is not obtained.
There is no assurance that our expenses related to NDAs and clinical trials will lead to the development of brand-name drugs that will generate revenues in the future. Delayscould delay or failure inprevent the development and commercialization of our own branded products, which could have a material adverse effect on our results of operations, liquidity, financial condition, and financial condition.
We face risks and uncertainties inherent in conducting clinical trials.growth prospects.
 
There are a number of risks and uncertainties associated with clinical trials.trials, which may be exacerbated by our relatively limited experience in conducting and supervising clinical trials and preparing NDAs. The results of initial clinical trials may not be indicative of results that would be obtained from large scale testing. Clinical trials are often conducted with patients having advanced stages of disease and, as a result, during the course of treatment these patients can die or suffer adverse medical effects for reasons that may not be related to the pharmaceutical agents being tested, but which nevertheless affect the clinical trial results. In addition, side effects experienced by the patients may cause delay of approval of our product or a limited application of an approved product. Moreover, our clinical trials may not demonstrate sufficient safety and efficacy to obtain FDA approval.
 
Failure can occur at any time during the clinical trial process and, in addition, the results from early clinical trials may not be predictive of results obtained in later and larger clinical trials, and product candidates in later clinical trials may fail to show the desired safety or efficacy despite having progressed successfully through earlier clinical testing. A number of companies in the pharmaceutical industry have suffered significant setbacks in clinical trials, even in advanced clinical trials after showing positive results in earlier clinical trials. In the future, the completion of clinical trials for our product candidates may be delayed or halted for many reasons, including:including those relating to the following:
 
·  delays in patient enrolment,enrollment, and variability in the number and types of patients available for  clinical trials;
·  regulators or institutional review boards may not allow us to commence or continue a clinical trial;
·  our inability, or the inability of our partners, to manufacture or obtain from third parties materials sufficient to complete our clinical trials;
·  delays or failures in reaching agreement on acceptable clinical trial contracts or clinical trial protocols with prospective clinical trial sites;
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·  risks associated with trial design, which may result in a failure of the trial to show statistically significant results even if the product candidate is effective;
·  difficulty in maintaining contact with patients after treatment commences, resulting in incomplete data;
·  poor effectiveness of product candidates during clinical trials;
·  safety issues, including adverse events associated with product candidates;
·  the failure of patients to complete clinical trials due to adverse side effects, dissatisfaction with the product candidate, or other reasons;
·  governmental or regulatory delays or changes in regulatory requirements, policy and guidelines; and
·  varying interpretation of data by the FDA or other applicable foreign regulatory agencies.
 
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In addition, our product candidates could be subject to competition for clinical study sites and patients from other therapies under development by other companies which may delay the enrolment in or initiation of our clinical trials. Many of these companies have significantly more significant resources than we do.
 
The FDA or other foreign regulatory authorities may require us to conduct unanticipated additional clinical trials, which could result in additional expense and delays in bringing our product candidates to market. Any failure or delay in completing clinical trials for our product candidates would prevent or delay the commercialization of our product candidates. There iscan be no assurance our expenses related to clinical trials will lead to the development of brand-name drugs which will generate revenues in the near future. Delays or failure in the development and commercialization of our own branded products could have a material adverse effect on our results of operations, liquidity, financial condition, and our growth prospects.
 
We rely on third parties to conduct clinical trials.trials for our product candidates, and if they do not properly and successfully perform their legal and regulatory obligations, as well as their contractual obligations to us, we may not be able to obtain regulatory approvals for our product candidates.
 
Although we mayWe design or have control in the design of the clinical trials for our product candidates, webut rely on contract research organizations and other third parties to assist itus in managing, monitoring and otherwise carrying out these trials, including with respect to site selection, contract negotiation and data management. We do not control these third parties and, as a result, they may not treat our clinical studies as their highest priority, or in the manner in which we would prefer, which could result in delays.
Morever, although  Although we rely on third parties to conduct our clinical trials, we are responsible for confirming that each of our clinical trials is conducted in accordance with our general investigational plan and protocol.  In addition,Moreover, the FDA and other similarforeign regulatory agencies outside the United States require us to comply with regulations and standards, commonly referred to as good clinical practices, for conducting, recording and reporting the results of clinical trials to ensure that the data and results are credible and accurate and that the trial participants are adequately protected. Our reliance on third parties does not relieve us of these responsibilities and requirements.  The FDA enforces good clinical practices through periodic inspections of trial sponsors, principal investigators and trial sites. If we, our contract research organizations or our study sites fail to comply with applicable good clinical practices, the clinical data generated in our clinical trials may be deemed unreliable and the FDA or other regulatory agencies may require us to perform additional clinical trials before approving our marketing applications. There can be no assurance that, upon inspection, the FDA or such other agencies will determine that any of our clinical trials comply with good clinical practices. In addition, our clinical trials must be conducted using productswith product manufactured under the FDA’s current Good Manufacturing Practices (“GMPcGMP”), regulations.  Our failure, or the failure of our contract manufacturers, if any are involved in the process, to comply with these regulations may require us to repeat clinical trials, which would delay and increase the cost of the regulatory approval process.
 
If third parties do not successfully carry out their duties under their agreements with us; if the quality or accuracy of the data they obtain is compromised due to failure to adhere to our clinical protocols or regulatory requirements; or if they otherwise fail to comply with clinical trial protocols or meet expected deadlines, our clinical trials may not meet regulatory requirements. If our clinical trials do not meet regulatory requirements or if these third parties need to be replaced, such clinical trials may be extended, delayed, suspended or terminated. If any of these events occur, we may not be able to obtain regulatory approval of our product candidates.candidates, which could have a material adverse effect on our results of operations, financial condition and growth prospects.
 
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Competition in our industry is intense, and developments by other companies could render our product candidates obsolete.
 
The pharmaceutical industry is highly competitive and anyMany of our competitors, including medical technology, companies, pharmaceutical or biotechnology and other companies, universities, government agencies, or research organizations, have substantially greater financial and technical resources and production and marketing capabilities than we have.  They also may have greater experience in conducting bioequivalence studies, pre-clinicalpreclinical testing and clinical trials of pharmaceutical products, and obtaining FDA and other regulatory approvals.approvals, and ultimately commercializing any approved products.  Therefore, our competitors may succeed in developing and commercializing technologies and products that are more effective than the drug delivery technologytechnologies we are developing or that will cause our technologytechnologies or products to become obsolete or non-competitive, and in obtaining FDA approval for products faster than we could.  These developments could render our products obsolete and uncompetitive, which would have a material adverse effect on our business, financial condition and results of operations. Even if we commence commercial sales of our products, we will be competing against the greater manufacturing efficiency and marketing capabilities of our competitors, areas in which we have limited or no experience.
 
In the past, we have relied on, and expect to continue to
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We rely on collaborative arrangements with third parties whothat provide manufacturing and/or marketing support for some or all of our product candidates.  Even if we find a potential partner, we may not be able to negotiate an arrangement on favourable terms or achieve results that we consider satisfactory.  In addition, such arrangements can be terminated under certain conditions and do not assure a product’s success.  We also face and will continue to face, intense competition from other companies for collaboration arrangements with other pharmaceutical and biotechnology companies.
 
Although we believe that our ownership of patents for some of our drug delivery products will limit direct competition with these products, we must also compete with established existing products and other promising technologies and other products and delivery alternatives that may be more effective than our products and proposed products.  In addition, we may not be able to compete effectively with other commercially available products or drug delivery technologies.
 
We have not received regulatory approval for any product that uses our drug delivery technologies.
 
Our drug delivery technologies can be quite complex, with many different components. The development required to take a technology from its earliest stages to its incorporation in a product that is sold commercially can take many years and cost a substantial amount of money. Significant technical challenges are common as products incorporating our technologies progress through development, particularly in the first product candidate incorporating a new technology.
 
Our RexistaRexista™ product for an abuse-deterrent form of oxycodone is one such new technology. No product employing our abuse deterrent technology has received regulatory approval.  In addition, any particular technology such as our abuse-deterrent technology may not perform in the same manner when used with different therapeutic agents, and therefore this technology may not prove to be as useful or valuable as originally thought, resulting in additional development work and expenditures.work.
 
If our efforts do not repeatedly lead to successful development of product candidates, we may not be able to grow our pipeline or to enter into agreements with marketing and distribution partners or collaborators that are willing to distribute or develop our product candidates. Delays or unanticipated increases in costs of development at any stage, or failure to solve a technical challenge, could adversely affect our operating results.
 
If third-partycontract manufacturers of our product ingredients or products fail to devote sufficient time and resources to our concerns, or if their performance is substandard, the commercialization of our products could be delayed or prevented, and this may result in higher costs or deprive us of potential product revenues.
 
Although we manufacture clinical trial supplies in-house, weWe rely on third partiescontract manufacturers for the manufacturing of certain components and ingredients of our clinical trial materials, and in particular, thesuch as active pharmaceutical ingredients (APIs).  In addition, while we have the equipment(“APIs”), and ability to manufacture drugs to a certain extent on a commercial scale, we may rely on third partiessuch manufacturers for commercial scale manufacturing.sales purposes as well.  Our reliance on contract manufacturers in these
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respects will expose us to the followingseveral risks any of which could delay or prevent the commercialization of our products, result in higher costs, or deprive us of potential product revenues:revenues, including:
 
·  Contract manufacturers can encounter difficultiesDifficulties in achieving volume production, quality control and quality assurance, or technology transfer, as well as with shortages of qualified personnel. Accordingly, a manufacturer might not be able to manufacture sufficient quantities to meet our clinical trial needs or to commercialize our products.personnel;
·  
Contract manufacturers are required to undergo a satisfactory current Good Manufacturing Practices (“cGMP”) inspection prior to regulatory approval and are obliged to operate in accordance with the GMP regulations of the FDA regulations and those of other jurisdictions we may manufacture in or apply for approval for some of our products.  These regulations govern manufacturing processes, stability testing, record keeping and quality standards. AnyThe failure of these contract manufacturers to establish and follow GMP or other similar applicable regulationscGMP and to document their adherence to such practices may lead to significant delays in the availability of material for clinical studies, may delay or prevent filing or approval of marketing applications for our products or resu lt in sanctions being imposed on us.
practices;
·  For some or all of our current product candidates and possibly for any future products we may initially rely on a single or a limited number of contract manufacturers. Changing these or future manufacturers may be difficult and the number of potential manufacturers is limited. Changing manufacturers generally requires re-validation of theThe need to revalidate manufacturing processes and procedures in accordance with FDA and other applicable national GMPsnationally mandated cGMPs and may requirepotential prior regulatory approval. It may be difficult or impossible for us to quickly find replacement manufacturers on acceptable terms, if at all. Such re-validation may be costly and time-consuming and we could suffer important delaysapproval upon a change in advancing our product candidates in clinical trials or in supplying the commercial market with our products.contract manufacturers;
·  With respectFailure to any of our products that we may market, our ability to reach full commercial scale manufacturing depends upon the ability of our own plant or a designated commercial scale contract manufacturer to be approved under such GMP. Reaching full commercial scale has a direct impact on our overall costs of goods, which, in turn, directly affects our operating margins. Any delay in obtaining GMP approval beyond the time we anticipate may have a negative impact on our operating margins and other financial results, as well as our ability to adequately supply the market with our product.
·  Our contract manufacturers may not perform as agreed or may notto remain in the contract manufacturing business for the time required to produce, store and distribute our products successfully.successfully;
·  OurThe potential for an untimely termination or non-renewal of contracts; and
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·  The potential for us to be in breach of our collaboration and marketing and distribution arrangements with third parties for the failure of our contract manufacturers may terminate or not renew our agreements based onto perform their own priorities and such actions could be both costly and inconvenient forobligations to us.
 
DrugIn addition, drug manufacturers are subject to ongoing periodic unannounced inspection by the FDA and by applicablecorresponding state and foreign agencies in other nations to ensure strict compliance with GMPcGMP and other government regulations. While we may audit the performance of third-party contractors, we will not have complete control over our third-party manufacturers’their compliance with these regulations and standards. Failure by either our third-party manufacturers or by us to comply with applicable regulations could result in sanctions being imposed on us, including fines, injunctions, civil penalties, failure of the governmentapplicable regulatory authorities to grant review of submissions or market approval of drugs, delays, suspension or withdrawal of approvals, product seizures or recalls, operating restrictions, facility closures and criminal prosecutions, any of which could harm our business.
 
UnderWe are subject to currency rate fluctuations that may impact our collaborationfinancial results.
A large majority of our expenses are payable in Canadian dollars and our financial results are reported in U.S. dollars.  There may be instances where we have net foreign currency exposure.  Any fluctuations in exchange rates will impact our financial results.
We have limited sales, marketing and distribution experience.
We have limited experience in the sales, marketing, and distribution of pharmaceutical products.  There can be no assurance that, if required, we would be able to establish sales, marketing, and distribution capabilities or make arrangements with third-party manufacturers,our collaborators, licensees, or others to perform such activities or that such efforts would be successful.  If we may commitfail to supply theseestablish successful marketing and sales capabilities or to make arrangements with third parties, with product. Inour business, financial condition and results of operations will be materially adversely affected.
Our significant shareholders will have the eventability to exercise significant influence over certain corporate actions.
Our principal shareholders, Drs. Amina and Isa Odidi, our President and Chief Operating Officer and our Chairman and Chief Executive Officer, respectively, and Odidi Holdings Inc., a privately-held company controlled by Drs. Amina and Isa Odidi, owned in the aggregate approximately 33.5% of our issued and outstanding common shares as of the date of this annual report (and collectively beneficially owned in the aggregate approximately 40.8% of our common shares, including common shares issuable upon the exercise of outstanding options and the conversion of the convertible debenture held by Drs. Amina and Isa Odidi that we are unable to fulfill such obligations asexercisable or convertible within 60 days of the date hereof).  As a result, the principal shareholders will have the ability to exercise significant influence over all matters submitted to our shareholders for approval whether subject to approval by a majority of a failureholders of our contract manufacturers, we may be in breachcommon shares or subject to a class vote or special resolution requiring the approval of 66⅔% of the votes cast by holders of our obligations under those arrangements.common shares, in person or by proxy.
Our effective tax rate may vary.
Various internal and external factors may have favorable or unfavorable effects on our future effective tax rate.  These factors include, but are not limited to, changes in tax laws, regulations and/or rates, changing interpretations of existing tax laws or regulations, future levels of research and development spending, the availability of tax credit programs for the reimbursement of all or a significant proportion of research and development spending, and changes in overall levels of pre-tax earnings.  At present, we qualify in Canada for certain research tax credits for qualified scientific research and experimental development pertaining to our drug delivery technologies and drug products in research stages.  If Canadian tax laws relating to research tax credits were substantially negatively altered or eliminated, or if a substantial portion of our claims for tax credits were denied by the relevant taxing authorities, pursuant to an audit or otherwise, it would have a material adverse effect upon our financial results.
 
 
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Risks related to our Industry
 
Competition from genericGeneric drug manufacturers will increase competition for certain products and may reduce our expected royalties.
 
Because part of our product development strategy involves the novel reformulation of existing drugs with active ingredients that are off-patent, our products are likely to face competition from generic versions of such drugs. Regulatory approval for generic drugs may be obtained without investing in costly and time-consumingtime consuming clinical trials. Because of substantially reduced development costs, manufacturers of generic drugs are often able to charge much lower prices for their products than the original developer of a new product. If we face competition from manufacturers of generic drugs on products we may commercialize, such as our once-daily Rexista abuse-deterrentRexista™ oxycodone product, the prices at which such products are sold and the revenues we expect tomay receive maycould be reduced.
 
Market acceptance of our products will be limited if users of our products are unable to obtain adequate reimbursement from third-party payers.
 
Government health administration authorities, private health insurers and other organizations generally provide reimbursement for products like ours, and our commercial success will depend in part on whether appropriate reimbursement levels for the cost of our products and related treatments are obtained from government authorities, private health insurers and other organizations, such as health maintenance organizations and managed care organizations. Even if we succeed in bringing any of our products to market, third-party payers may not provide reimbursement in whole or in part for their use.
 
A trend in the United States healthcare industry and elsewhere is cost containment. We expect recent changes in the Medicare program, such as were included in the Health Care and Education Reconciliation Act of 2010, and increasing emphasis on managed care to continue to put pressure on pharmaceutical product pricing.
Significant uncertainty exists as to the reimbursement status of newly approved health care products. Some of our product candidates, such as our once-daily RexistaRexista™ abuse-deterrent oxycodone product, are intended to replace or alter existing therapies or procedures. These third-party payers may conclude that our products are less safe, less effective or less economical than those existing therapies or procedures. Therefore, third-party payers may not approve our products for reimbursement. We may be required to make substantial pricing concessions in order to gain access to the formularies of large managed-care organizations. If third party payers do not approve our products for reimbursement or fail to reimburse them adequately, sales will suffer as some physicians or their patients may opt for a competing product that is approved fo rfor reimbursement or is adequately reimbursed. Even if third-party payers make reimbursement available, these payers’ reimbursement policies may adversely affect our ability and our potential marketing and distribution partners’ ability to sell our products on a profitable basis.
 
We are subject to significant costs and uncertainties related to compliance with the extensive regulations that govern the manufacturing, labelling,labeling, distribution, and promotion of pharmaceutical products as well as environmental, safety and health regulations.
 
Governmental authorities in the United States and Canada regulate the research and development, testing and safety of pharmaceutical products.  The regulations applicable to our existing and future products may change.  Regulations require extensive clinical trials and other testing and government review and final approval before we can market our products.  The cost of complying with government regulation can be substantial and may exceed our available resources, causing delay or cancellation of our product introductions.
 
Some abbreviated application procedures for controlled-release drugs and other products, including those related to our ANDA filings, or to the ANDA filings of unrelated third parties in respect of drugs similar to or chemically related to those of our ANDA filings, are or may become the subject of petitions filed by brand-name drug manufacturers or other ANDA filers seeking changes from the FDA in the interpretation of the statutory approval requirements for particular drugs as part of their strategy to thwart or advance generic competition.  We cannot predict whether the FDA will make any changes to its interpretation of the requirements applicable to our ANDA applicationapplications as a result of these petitions, or whether unforeseen delays will occur in our ANDA filings while the FDA considers such petitions or changes or otherwise, or the effect that any changes may have on us. Any such changes in FDA interpretation of the statutes or regulations, or any legislated changes in the statutes or regulations, may make it more difficult for us to file ANDAs or obtain approval of our ANDAs and generate revenues and thus may materially harm our business and financial results.
 
 
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Any failure or delay in obtaining regulatory approvals could make it so that we are unable to market any products we develop and therefore adversely affect our business, results of operations, financial condition and cash flows.  Even if approved in the United States or Canada, regulatory authorities in other countries must approve a product prior to the commencement of marketing the product in those countries.  The time required to obtain any such approval may be longer than in the United States or Canada, which could cause the introduction of our products in other countries to be cancelled or materially delayed.
 
The manufacturing, distribution, processing, formulation, packaging, labellinglabeling and advertising of our products are subject to extensive regulation by federal agencies, including in the United States, the FDA, Drug Enforcement Administration, Federal Trade Commission, Consumer Product Safety Commission and Environmental Protection Agency, among others. We are also subject to state and local laws, regulations and agencies. Compliance with these regulations requires substantial expenditures of time, money and effort in such areas as production and quality control to ensure full technical compliance. Failure to comply with FDA and other governmental regulations can result in fines, disgorgement, unanticipated compliance expenditures, recall or seizure of products, total or partial suspension of production or distribution, suspension of th ethe FDA’s review of NDAs or ANDAs, enforcement actions, injunctions and civil or criminal prosecution.
 
Environmental laws have changed in recent years and we may become subject to stricter environmental standards in the future and face larger capital expenditures in order to comply with environmental laws.  We are subject to extensive federal, state, provincial and local environmental laws and regulations which govern the discharge, emission, storage, handling and disposal of a variety of substances that may be used in, or result from, our operations.  We are also subject periodically to environmental compliance reviews by environmental, safety, and health regulatory agencies and to potential liability for the remediation of contamination associated with both present and past hazardous waste generation, handling, and disposal activities.  We cannot accurately predict the outcome or timing of future expenditures that we may be required to make in order to comply with the federal, state, local and localprovincial environmental, safety, and health laws and regulations that are applicable to our operations and facilities.
 
We are subject to product liability costs for which we may not have or be able to obtain adequate insurance coverage.
The testing and marketing of pharmaceutical products entails an inherent risk of product liability.  Liability exposures for pharmaceutical products can be extremely large and pose a material risk.  In some instances, we may be or may become contractually obligated to indemnify third parties for such liability.  Our researchbusiness may be materially and development activitiesadversely affected by a successful product liability claim or claims in excess of any insurance coverage that we may have.  Further, even if claims are not successful, the costs of defending such claims and potential adverse publicity could be harmful to our business.
While we currently have, and in some cases are contractually obligated to maintain, insurance for our business, property and our products as they are administered in bioavailability/bioequivalence studies, first and third party insurance is increasingly costly and narrow in scope.  Therefore, we may be unable to meet such contractual obligations or we may be required to assume more risk in the future.  If we are subject to third party claims or suffer a loss or damage in excess of our insurance coverage, we may be required to bear that risk in excess of our insurance limits.  Furthermore, any first or third party claims made on our insurance policy may impact our ability to obtain or maintain insurance coverage at reasonable costs or at all in the future.
Our products involve the use of hazardous materials and waste, and as a result we are exposed to potential liability claims and to costs associated with complying with laws regulating hazardous waste.
 
Our research and development activities involve the use of hazardous materials, including chemicals, and are subject to Canadian federal, provincial and local laws and regulations governing the use, manufacture, storage, handling and disposal of hazardous materials and waste products.  It is possible that accidental injury or contamination from these materials may occur.  In the event of an accident, we could be held liable for any damages, which could exceed our available financial resources.  Further, we may not be able to maintain insurance to cover these costs on acceptable terms, or at all.  In addition, we may be required to incur significant costs to comply with environmental laws and regulations in the future.
 
We are subject to environmental laws and regulations.
We are also subject to potential liability for the remediation of contamination associated with both present and past hazardous waste generation, handling, and disposal activities. We are subject periodically to environmental compliance reviews by environmental, safety, and health regulatory agencies. Environmental laws have changed in recent years and we may become subject to stricter environmental standards in the future and face larger capital expenditures in order to comply with environmental laws.
We may incur substantial costs to comply with environmental laws and regulations.  In addition, we may discover currently unknown environmental problems or conditions.  We are subject to extensive federal, state, provincial and local environmental laws and regulations which govern the discharge, emission, storage, handling and disposal of a variety of substances that may be used in, or result from, our operations.  Environmental laws or regulations (or their interpretation) may become more stringent in the future.
We are subject to currency rate fluctuations.
A large majority of our expenses are payable in Canadian dollars.  There may be instances where we have net foreign currency exposure.  Any fluctuations in exchange rates will impact our reported financial results.
We are subject to product liability costs for which we may not have or be able to obtain adequate insurance coverage.
The testing and marketing of pharmaceutical products entails an inherent risk of product liability.  Liability exposures for pharmaceutical products can be extremely large and pose a material risk.  In some instances, we may be or may become contractually obligated to indemnify third parties for such liability.  Our business may be
 
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materially and adversely affected by a successful product liability claim or claims in excess of any insurance coverage that we may have.
While we currently have, and in some cases are contractually obligated to maintain, insurance for our business, property and our products as they are administered in bioavailability/bioequivalence studies, first- and third-party insurance is increasingly costly and narrow in scope.  Therefore, we may be unable to meet such contractual obligations or we may be required to assume more risk in the future.  If we are subject to third-party claims or suffer a loss or damage in excess of our insurance coverage, we may be required to bear that risk in excess of our insurance limits.  Furthermore, any first or third-party claims made on our insurance policy may impact our ability to obtain or maintain insurance coverage at reasonable costs or at all in the future.
We have limited sales, marketing and distribution experience.
We have limited experience in the sales, marketing, and distribution of pharmaceutical products.  There can be no assurance that, if required, we would be able to establish sales, marketing, and distribution capabilities or make arrangements with our collaborators, licensees, or others to perform such activities or that such efforts would be successful.  If we fail to establish successful marketing and sales capabilities or to make arrangements with third parties, our business, financial condition and results of operations will be materially adversely affected.
Our significant shareholders will have the ability to control certain corporate actions.
Our principal shareholder is a privately-held company controlled by Drs. Amina and Isa Odidi, and it owns approximately 55% of our issued and outstanding shares.  As a result, the principal shareholder will have the ability to control all matters submitted to our shareholders for approval that are not subject to a class vote or special resolution requiring the approval of 66⅔% of the votes cast by holders of our shares, in person or by proxy.  The controlling shareholder will have the ability to control matters submitted to our shareholders requiring approval of the majority of holders of our shares including the election and removal of directors.
Our operations may be adversely affected by risks associated with international business.
 
We may be subject to certain risks that are inherent in an international business. These include:business, including:
 
·  varying regulatory restrictions on sales of our products to certain markets and unexpected changes in regulatory requirements;
·  tariffs, customs, duties, and other trade barriers;
·  difficulties in managing foreign operations and foreign distribution partners;
·  longer payment cycles and problems in collecting accounts receivable;
·  fluctuations in currency exchange rates;
·  political risks;
·  foreign exchange controls that may restrict or prohibit repatriation of funds;
·  export and import restrictions or prohibitions, and delays from customs brokers or government agencies;
·  seasonal reductions in business activity in certain parts of the world; and
·  potentially adverse tax consequences.
 
Depending on the countries involved, any or all of the foregoing factors could materially harm our business, financial condition and results of operations.
 
Our effective tax rate may vary.
Various internal and external factors may have favourable or unfavourable effects on our future effective tax rate.  These factors include but are not limited to changes in tax laws, regulations and/or rates, changing
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interpretations of existing tax laws or regulations, future levels of research and development spending, the availability of tax credit programs for the reimbursement of all or a significant proportion of research and development spending, and changes in overall levels of pre-tax earnings.  Our corporate structure was designed in part to allow us to qualify for certain substantial tax credits in Canada.  In particular, at present, we take advantage of favourable tax treatment in Canada for certain research work pertaining to our drug delivery technologies and drug products in research stages.  If those Canadian tax laws as pertain to such research were substantially negatively altered or eliminated, or if our applications for tax credits are refused, it would have a material adverse effect upon our financial results.
Risks related to our Common Shares
 
Our share price has been highly volatile and our shares could suffer a further decline in value.
 
The trading price of our common shares has been highly volatile and could continue to be subject to wide fluctuations in price in response to various factors, many of which are beyond our control, including:
 
·  sales of our common shares, including any sales made in connection with future financings;
·  announcements regarding new or existing corporate partnerships;relationships or arrangements;
·  announcements by us of significant acquisitions, joint ventures, or capital commitments;
·  actual or anticipated period-to-period fluctuations in financial results;
·  clinical and regulatory development regarding our product candidates;
·  litigation or threat of litigation;
·  failure to achieve, or changes in, financial estimates by securities analysts;
·  comments or opinions by securities analysts or members of the medical community;
·  announcements regarding new or existing products or services or technological innovations by us or our competitors;
·  conditions or trends in the pharmaceutical and biotechnology industries;
·  additions or departures of key personnel or directors;
·  economic and other external factors or disasters or crises;
·  limited daily trading volume; and
·  developments regarding our patents or other intellectual property or that of our competitors.
 
Our shares have in the past, and may continue to, experience significant volume and price volatility. This volatility could reduce the future market price of our shares, regardless of our operating performance. In addition, both the volume and the trading price of our shares could change significantly over short periods of time in response to, among other things, actual or anticipated variations in quarterly operating results, announcements by us, and/or changes in national or regional economic conditions, making it more difficult for our shares to be sold at a favourable price or at all.
In addition, the stock market in general and the market for drug development companies in particular  have experienced significant price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Further, there has been significant volatility in the market prices of securities of pharmaceutical and biotechnologylife science companies. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted. A securities class action suit against us could result in substantial costs, potential liabilities, and the diversion of management’s attention and resources.
 
 
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We may not achieve projected development goalsA large number of our common shares could be sold in the time frames announced and expected.market in the near future, which could depress our stock price.
 
From time to time, we may set goals for and make public statements regarding timingAs of the accomplishmentdate of objectives material to our success.  The actual timing of these events can vary dramatically due tothis annual report, we had approximately 17.9 million common shares outstanding.  In addition, a number of factors such as delays or failures in clinical trials or bioequivalence studies, the uncertainties inherent in the regulatory approval process, and delays in achieving product development, manufacturing, or marketing milestones necessary to commercialize products.  There can be no assurance that any clinical trials or bioequivalence studies that are necessary for regulatory approvals will be completed, that we will make regulatory submissions, or receive regulatory approvals.  If we fail to achieve one or more milestones, the pricesubstantial portion of our shares could decline.are currently freely trading without restriction under the Securities Act of 1933, as amended (“U.S. Securities Act”), having been registered for resale or held by their holders for over one year and are eligible for sale under Rule 144.
 
NoOur shareholders who received shares under the IPC Arrangement Agreement (as defined in Item 4.A) who were not deemed “affiliates” of either Vasogen, IPC Ltd., or us prior to the IPC Arrangement Agreement were able to resell the common shares that they received without restriction under the U.S. Securities Act.  The common shares received by an “affiliate” after the IPC Arrangement Agreement or who were “affiliates” of either Vasogen, IPC Ltd., or us prior to the IPC Arrangement Agreement are subject to certain restrictions on resale under Rule 144.
As of the date of this annual report, there are currently common shares issuable upon the exercise of outstanding options and warrants and the conversion of the outstanding convertible debenture for an aggregate of approximately 8.3 million common shares.  To the extent any of our options and warrants are exercised and the convertible debenture is converted, a shareholder’s percentage ownership will be diluted and our stock price could be further adversely affected. Moreover, as the underlying shares are sold, the market price could drop significantly if the holders of these restricted shares sell them or if the market perceives that the holders intend to sell these shares.
We have no history or foreseeable prospect of paying cash dividends.
 
We have not paid any cash dividends on our common shares and do not intend to pay cash dividends in the foreseeable future. We intend to retain future earnings, if any, for reinvestment in the development and expansion of our business. Dividend payments in the future may also be limited by other loan agreements or covenants contained in other securities which we may issue.  Any future determination to pay cash dividends will be at the discretion of our board of directors and depend on our financial condition, results of operations, capital and legal requirements and such other factors as our board of directors deems relevant.
 
There may not be an active, liquid market for our common shares.
 
There is no guarantee that an active trading market for our common shares will be maintained on the NASDAQ Capital Market (“NASDAQ”), or the Toronto Stock Exchange (“TSX”) or elsewhere..  Investors may not be able to sell their shares quickly or at the latest market price if trading in our common shares is not active or if our shares cease to trade on a recognized securities exchange.active.
 
Future issuances of our shares could adversely affect the trading price of our common shares and could result in substantial dilution to shareholders.
 
We may need to issue substantial amounts of our common shares in the future.  To the extent that the market price of our common shares declines, we will need to issue an increasing number of common shares per dollar of equity investment. In addition to our common shares issuable in connection with the exercise of our outstanding warrants, our employees, and directors will hold rights to acquire substantial amounts of our common shares.  In order to obtain future financing if required, it is likely that we will issue additional common shares or financial instruments that are exchangeable for or convertible into common shares.
Also, in order to provide incentives to employees and induce prospective employees and consultants to work for us, we may offer and issue options to purchase common shares and/or rights exchangeable for or convertible into common shares.  Future issuances of shares could result in substantial dilution to shareholders.  Capital raising activities, if available, and dilution associated with such activities could cause our share price to decline.  In addition, the existence of common share purchase warrants may encourage short selling by market participants. Also, in order to provide incentives to current employees and directors and induce prospective employees and consultants to work for us, we have historically granted options and deferred share units (“DSUs”),  and intend to continue to do so or offer and issue options to purchase common shares and/orother rights exchangeable for or convertible into common shares.  These activitiesFuture issuances of shares could result in substantial dilution to all our shareholders.  Capital raising activities and dilution associated with such activities could cause our share price to decline.
 
In addition, the existence of common share purchase warrants may encourage short selling by market participants.
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We may in the future issue preference shares which could adversely affect the rights of holders of our common shares and the value of such shares.
 
Our board of directors has the ability to authorize the issue of an unlimited number of preference shares in series, and to determine the price, rights, preferences and privileges of those shares without any further vote or action by the holders of our common shares.
Although we have no preference shares issued and outstanding, preference shares issued in the future could adversely affect the rights and interests of holders of our common shares.
 
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If there are substantial sales of our common shares, the market price of our common shares could decline.
Sales of substantial numbers of our common shares could cause a decline in the market price of our common shares.  Any sales by existing shareholders or holders of options or warrants may have an adverse effect on our ability to raise capital and may adversely affect the market price of our common shares.
Our common shares may not continue to be listed on the TSX.
 
Our failureFailure to maintain the applicable continued listing requirements of the TSX could result in our common shares being delisted from the TSX.  The TSX will normally consider the delisting of securities if, in the opinion of the exchange, it appears that the public distribution, price, or trading activity of the securities has been so reduced as to make further dealings in the securities on TSX unwarranted.  Specifically, participating securities may be delisted from the TSX if, among other things, the market value of an issuer’s securities is less than C$3,000,000 over any period of 30 consecutive trading days.  In such circumstances, the TSX may place an issuer under a delisting review pursuant to which the issuer would be reviewed under the TSX’s remedial review process and typically be granted 120 days to comply with all requirements for continued listing.  If the market price of our common shares declines below applicable exchange minimumsfurther or we are unable to maintain other listing requirements, the TSX could commence a remedial review process that could lead to the delisting of our common shares from the TSX.  Further, if we complete a sale, merger, acquisition, or alternative strategic transaction, we will have to consider if the continued listing of our common shares on the TSX is appropriate, or possible.
 
If our common shares are no longer listed on the TSX, they may be eligible for listing on the TSX Venture Exchange.  In the event that we are not able to maintain a listing for our common shares on the TSX or the TSX Venture Exchange, it may be extremely difficult or impossible for shareholders to sell their common shares in Canada.  Moreover, if we are delisted andfrom the TSX, but obtain a substitute listing for our common shares on the TSX Venture Exchange, our common shares will likely have less liquidity and more price volatility than experienced on the TSX.
 
Shareholders may not be able to sell their common shares on any such substitute exchange in the quantities, at the times, or at the prices that could potentially be available on a more liquid trading market.  As a result of these factors, if our common shares are delisted from the TSX, the price of our common shares is likely to decline.  In addition, a decline in the price of our common shares will impair our ability to obtain financing in the future.
 
Our common shares may not continue to be listed on NASDAQ.
 
Our failureFailure to meet the applicable quantitative and/or qualitative listing maintenance requirements of NASDAQ could result in our common shares being delisted from the NASDAQ Capital Market.  For continued listing, NASDAQ requires, among other things, that listed securities maintain a minimum bid price of not less than U.S.$1.00$1.00 per share (the “Minimum Bid Price Rule”).share.  If the bid price falls below the $1.00 minimum for more than 30 consecutive trading days, an issuer will typically have 180 days to satisfy the $1.00 minimum bid price, which must be maintained for a period of at least ten trading days in order to regain compliance.
 
If our common shareswe are no loner listed ondelisted from the NASDAQ whether as a result of a failure to meet the Minimum Bid Price Rule or otherwise,Capital Market, our common shares may be eligible for trading on an over-the-counter market in the United States.  In the event that we doare not able to obtain a listing on another U.S. stock exchange or quotation service for our common shares, it may be extremely difficult or impossible for shareholders to sell their common shares in the United States.  Moreover, if our common shares cease to be listed onwe are delisted from the NASDAQ and weCapital Market, but obtain a substitute listing for our common shares in the United States, it will likely be on a market with less liquidity, and therefore potentially more price volatility, than Thethe NASDAQ Capital Market.  Shareholders may not be able to sell their common shares on any such substitute U.S. market in the quantities, at the times, or at the prices that could potentially be available on a more liquid trading market.  As a result of these factors, if our common shares are delisted from NASDAQ, the price of our common shares is likely to decline.  In addition, a decline in the price of our common shares will impair our ability to obtain financing in the future.
 
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Our shares are listed for trading in the United States and may become subject to the SEC’s penny stock rules.
 
Transactions in securities that are traded in the United States that are not traded on NASDAQ or on other securities exchange by companies with net tangible assets of U.S.$5,000,000$5,000,000 or less and a market price per share of less than U.S.$5.00,$5.00 that are not traded on NASDAQ or on other securities exchanges  may be subject to the “penny stock” rules promulgated under the Securities Exchange Act of 1934.1934, as amended (“U.S. Exchange Act”). Under these rules, broker-dealers who recommend such securities to persons other than institutional investors:investors must:
 
·  must make a special written suitability determination for the purchaser;
·  receive the purchaser’s written agreement to a transaction prior to sale;
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·  provide the purchaser with risk disclosure documents which identify risks associated with investing  in “penny stocks” and which describe the market for these “penny stocks” as well as a purchaser’s legal remedies; and
·  obtain a signed and dated acknowledgment from the purchaser demonstrating that the purchaser has actually received the required risk disclosure document before a transaction in a “penny stock” can be completed.
 
As a result of these requirements, if our common shares are at such time subject to the “penny stock” rules, broker-dealers may find it difficult to effectuate customer transactions and trading activity in these shares in the United States may be significantly limited. Accordingly, the market price of the shares may be depressed, and investors may find it more difficult to sell the shares.
 
As a foreign private issuer in the United States, we are subject to different U.S. securities laws and rules than a domestic U.S. issuer.
 
As a foreign private issuer under U.S. securities laws we are not required to comply with all the periodic disclosure requirements of the SecuritiesU.S. Exchange Act of 1934 (“Exchange Act”) applicable to domestic United States companies and therefore the publicly available information about us may be different or more limited than if we were a United States domestic issuer. In addition, our officers, directors, and principal shareholders are exempt from the “real time” reporting and ‘‘short swing’’ profit recovery provisions of Section 16 of the U.S. Exchange Act and the rules thereunder. Although under Canadian rules, our officers, directors and principal shareholders are generally required to file on SEDI (www.sedi.ca) reports of transact ionstransactions involving our common shares within tenfive calendar days of such transaction, (five calendar days effective after October 31, 2010), our shareholders may not know when our officers, directors and principal shareholders purchase or sell our common shares as timely as they would if we were a United States domestic issuer.
 
We are exposed to risks if we are unable to comply with laws and future changes to laws affecting public companies, including the Sarbanes-Oxley Act of 2002, and also to increased costs associated with complying with such laws.
 
Any future changes to the laws and regulations affecting public companies, as well as compliance with existing provisions of the Sarbanes-Oxley Act of 2002 (“SOX”) in the United States and applicable Canadian securities laws, regulations, rules and policies, may cause us to incur increased costs to comply with such laws and requirements, including, among others, hiring additional personnel and increased legal, accounting and advisory fees. Delays or a failure to comply with the new laws, rules and regulations could result in enforcement actions, the assessment of other penalties and civil suits.  The new laws and regulations may increase potential costs to be borne under indemnities provided by us to our officers and directors and may make it more difficult to obtain certain types of insurance, including liability insurance for directors and officers; as such, we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these events could also make it more difficult to attract and retain qualified persons to serve on our board of directors, or as executive officers.
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We are required annually to review and report on the effectiveness of our internal control over financial reporting in accordance with Sarbanes Oxley Act of 2002 (‘‘SOX’’) section 404 and Multilateral Instrument 52-109 – Certification of Disclosure in Issuer’s Annual and Interim Filings of the Canadian Securities Administrators. The results of this review are reported in our Annual Report.  Our independent registered public accounting firm is also required to reportReport on the effectiveness ofForm 20-F and in our internal control over financial reporting beginning in fiscal 2010.Management Discussion and Analysis.
 
Management’s review is designed to provide reasonable, assurance, not absolute, assurance that all material weaknesses existing withinin our internal controls are identified. Material weaknesses represent deficiencies existing in our internal controls that may not prevent or detect a misstatement occurring which could have a material adverse affecteffect on our  quarterly or annual financial statements. In addition, we cannot assure youthere can be no assurance that any remedial actions taken by uswe take to address any material weaknesses identified will be successful, nor can we assure youthere be any assurance that nofurther material weaknesses will not be identified within our internal controls over financial reporting in future years.
If we fail to maintain effective internal controls over financial reporting, there is the possibility of  Material errors, or omissions occurring or misrepresentations in our disclosures whichthat occur as a result of our failure to maintain effective internal control over financial reporting could have a material adverse effect on our business, financial statements,condition, results of operations, and the value of our common shares.
 
We may be classified as a “passive foreign investment company” or “PFIC” for U.S. income tax purposes, which could have significant and adverse tax consequences to U.S. investors.
 
The possible classification of our company as a passive foreign investment company (“PFIC”) for U.S. federal income tax purposes could have significant and adverse tax consequences for U.S. holders of our common shares.shares and preference shares (collectively, “shares”).  It may be possible for U.S. holders of common shares to mitigate certain of these consequences by making an election to treat us as a “qualified electing fund” or “QEF” under Section 1295 of the Internal Revenue Code of 1986, as amended (the “Code”) (a “QEF Election”) or a mark-to-market election under Section 1296 of the Internal Revenue Code of 1986, as amended (the “Code”), (a “Mark-to-Market Election”).  A QEF Election requires treating the PFIC as a pass-through entity for federal income tax pu rposes, and the Mark-to-Market Election requires inclusion as taxable income or loss the increase or decrease in the fair market value of the PFIC stock each year, even if there is no
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disposition.  A non-U.S. corporation generally will be a PFIC if, for a taxable year (a) 75% or more of the gross income of such corporation for such taxable year consists of specified types of passive income or (b) on average, 50% or more of the assets held by such corporation either produce passive income or are held for the production of passive income, based on the fair market value of such assets (or on the adjusted tax basis of such assets, as determined for the purposes of computing earnings and profits, if such non-U.S. corporation is not publicly traded and either is a “controlled foreign corporation” under Section 957(a) of the Code, or makes an election to determine whether it is a PFIC based on the adjusted basesbasis of the assets).  For purposes of this test, if a corporation owns at least 25% by value of the stock of another corporation, it is treated as if it held its proportionate share of the assets of such other corp oration and received directly its proportionate share of the income of such other corporation.
 
The determination of whether we are, or will be, a PFIC for a taxable year depends, in part, on the application of complex U.S. federal income tax rules, which are subject to various interpretations.  In addition, whether we will be a PFIC for the current taxable year and each subsequent taxable year depends on our assets and income over the course of each such taxable year and, as a result, cannot be predicted with certainty.  Absent one of the elections described above, if we are a PFIC for any taxable year during which a U.S. holder holds our ordinary shares, we generally will continue to be treated as a PFIC regardless of whether we cease to meet the PFIC tests in one or more subsequent years.  Accordingly, no assurance can be given that we will not constitute a PFIC in the current (or any future) tax year or that the Internal Revenue Service (the “IRS”) will not challenge any determination made by us concerning our PFIC status.
 
If we are a PFIC, the U.S. federal income tax consequences to a U.S. Holderholder of the ownership and disposition of our shares will depend on whether such U.S. Holderholder makes a QEF or Mark-to-Market Election.  Under recently passed legislation, unlessUnless otherwise provided by the Internal Revenue Service,IRS, a U.S. holder of our shares during any year in which we are a PFIC willis generally be required to file an informational return annually to report its ownership interest in the PFIC during any year in which we are a PFIC.
The foregoing does not purport to be a complete enumeration or explanation of the tax risks involved in an investment in our company.  Prospective investors should read this entire annual report and consult with their own legal, tax and financial advisors before deciding to invest in our company.
 
It may be difficult to obtain and enforce judgments against us because of our Canadian residency.
 
We are governed by the laws of Canada.  Most of our directors and officers are residents of Canada or other jurisdictions outside of the United States and all or a substantial portion of our assets and the assets of such persons may be located outside of the United States.  As a result, it may be difficult for shareholders to effect service of process upon us or such persons within the United States or to realize in the United States on judgments of courts of the United States predicated upon the civil liability provisions of the U.S. federal securities laws or other laws of the United States.  In addition, there is doubt as to the enforceability in Canada of liabilities predicated solely upon U.S. federal securities law against us, our directors, controlling persons and officers who are not residents of the United States, in original actions or in actions for enforcements of judgments of U.S. courts.
 
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Information on the Company
 
A.  
 
IntellipharmaceuticsThe Company was incorporated under the Canada Business Corporations Act by certificate and articles of arrangement dated October 22, 2009.
 
Our registered principal office is located at 30 Worcester Road, Toronto, Ontario, Canada M9W 5X2.  Our telephone number is (416) 798-3001 and our facsimile number is (416) 798-3007.
 
On October 19, 2009, the shareholders of Intellipharmaceutics Ltd. (“IPC Ltd.”) and Vasogen Inc. (“Vasogen”) approved the court approved plan of arrangement and merger (the “IPC Arrangement Agreement”) that resulted in the October 22, 2009 combination of IPC Ltd. and Intellipharmaceutics Corp. combining with 7231971 Canada Inc., a new Vasogen company that acquired substantially all of the assets and certain liabilities of Vasogen, including the proceeds from its non-dilutive financing transaction with Cervus LP (“Cervus”) as described further below.below (the “IPC Arrangement Transaction”).  The completion of the IPC Arrangement AgreementTransaction on October 22, 2009, resulted in a new pub licly-tradedpublicly-traded company, Intellipharmaceutics International Inc., incorporated under the laws of Canada, and whose common shares are traded on the TSX and NASDAQ.  IPC Ltd. shareholders were issued approximately 86% of the outstanding common shares of Intellipharmaceutics and Vasogen’s shareholders were issued approximately 14% of the outstanding common shares of Intellipharmaceutics. Each former Vasogen shareholder received 0.065963061 common shares of
 
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Intellipharmaceutics, and each former IPC Ltd. shareholder received 0.552788117 common shares of Intellipharmaceutics, for each share they exchanged in the transaction.
Separately, Vasogen entered into an arrangement agreement with Cervus, LP (“Cervus”), an Alberta based limited partnership that resulted in Vasogen being reorganized prior to completion of the arrangement transaction with IPC Ltd. and provided gross proceeds to Vasogen of approximately Cdn.$C$7.5 million in non-dilutive capital.
 
As a result of the transaction we 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 accounting predecessor company, IPC Ltd., which had a December 31 year end.
 
For the eleven month periodyears ended November 30, 2009,2012, 2011 and the years ended December 31, 2008, and 2007,2010, we spent a total of $1,554,859, $419,187,$5,992,417, $5,125,608, and $483,050,$4,533,310, respectively, on research and development.  Over the past three fiscal years and up to January 31, 2013, we have raised approximately $14,055,400$18,500,000 in gross proceeds from the issuance of equity and convertible debt and equity securities to investors.securities. Our common shares are listed on the TSX under the symbol “I” and on the NASDAQ under the symbol “IPCI”.
 
During the last and current financial year, we have not been aware of any indications of public takeover offers by third parties in respect of the Company’s shares or by the Company in respect of other companies’ shares.
 
For additional information on key events, see Item 4.B below.
 
B.  Business Overview
Our Strategy
We are a pharmaceutical company specializing in the research, development and manufacture of controlled and targeted novel oral solid drugs. Our patented Hypermatrix™ technology is a unique multidimensional controlled-release drug delivery platform that can be applied to the development of a wide range of existing and new pharmaceuticals. Based on this technology, we have a pipeline of products in various stages of development in therapeutic areas that include neurology, cardiovascular, gastrointestinal tract (“GIT”), pain and infection. Certain products in our pipeline are being developed for third parties pursuant to drug development agreements with those third parties, under which our development partner generally pays the expenses of development, sometimes m akes certain milestone payments to us and receives a share of revenues or profits if the drug is developed successfully to completion, the control of which is generally in the discretion of our drug development partner.
We apply our technologies to the development of both existing and new pharmaceuticals across a range of therapeutic classes.  We believe that our Hypermatrix™ technology allow us to focus our development activities in two areas; difficult-to-produce controlled-release generic drugs, which follow an ANDA regulatory path; and improved current therapies through controlled release, which follow an NDA 505 (b)(2) regulatory path.
We operate in a market created by the expiration of drug product patents, challengeable patents and drug product exclusivity periods. There are two ways that we employ our controlled-release technologies, which represent substantial opportunities for us to license our technologies and products:
·  For existing controlled-release (once-a-day) products covered by patents about to expire or already expired, we can formulate generic products, which are bioequivalent to the branded products. Such products can be licensed to and sold by distributors of generic products.  The regulatory pathway for this approach requires an ANDA application.
·  For branded immediate-release (multiple-times-per-day) drugs, we can formulate improved replacement products, typically by developing new, patentable, controlled-release once-a-day drugs. These drugs can be licensed to and sold by the pharmaceutical company that made the original immediate-release product.  This protects against revenue erosion in the brand by providing a clinically attractive patented product that competes favourably with the generic immediate-release competition that typically arises on expiry of the original patent(s). The regulatory pathway for this approach requires an NDA submission under Section 505 (b)(2) of the
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Federal Food and Drug and Cosmetic Act (“FDC”) which both accelerates development timelines and reduces costs in comparison to regular new drug applications for new chemical entities.Business Overview
We are also specifically focusing our technologies on the development of abuse resistant pain medications.  The growing abuse of prescription “painkillers”, specifically opiod analgesics, is well documented and is a major health concern. We believe that our technologies and know-how are uniquely suited to developing abuse-resistant pain medications.
PRODUCTS AND MARKETS
 
Our Drug Delivery Technology
Our Hypermatrix™ technology platform is at the core of a family of drug delivery technologies that underlie our development and marketing programs. Hypermatrix™ technologies are based upon the active drug ingredient (“drug active”), and an integral part of, a homogeneous (uniform) core and/or coatings consisting of one or more polymers that affect the release rates of drugs.  Our technology allows for the intelligent and efficient design of drugs through the precise manipulation of a number of key variables.  This allows us to respond to varying drug attributes and patient requirements, producing a desired controlled-release effect in a timely and cost effective manner.
Our patented Hypermatrix™ technology is a unique multidimensional controlled-release drug delivery platform that we believe can be applied to the efficient development of a wide range of existing and new pharmaceuticals. Based on this technology, Intellipharmaceutics has built a pipeline of products in various stages of development in therapeutic areas that include neurology, cardiovascular, GIT, pain and infection. Certain products in our pipeline are developed for third parties pursuant to drug development agreements with those third parties, under which our development partner generally pays the expenses of development, sometimes makes certain milestone payments to us and receives a share of revenues or profits if the drug is developed successfully to completion, the control of which is generally in the discretion of our drug development partner.  As a company whose business relates to the development and manufacture of drug products for sale and licensing, we refer to such products throughout this document.  These products remain subject to approval from the FDA and other industry conditions to permit the sale and manufacture of such products for human consumption.  We develop both new and generic controlled-release pharmaceutical products and we typically license these developed products for commercialization.  At present, no such licensed product has been commercialized.  Controlled-release means releasing a drug into the bloodstream or a target site in the body, over an extended period of time or at predetermined times.  Controlled drug delivery can be both safer and more effective than conventional immediate-release tablets and capsules in administering drugs.
Our business focus has been to apply our proprietary controlled-release technologies to existing drugs.  The release technologies, and the excipients utilized in them, were designed and chosen to be compatible with, and to orally deliver, a wide range of small-molecule active pharmaceutical ingredients.  At present, those technologies have been applied in the laboratory and/or in bioavailability/bioequivalence studies in humans to orally administer small molecule drugs including those used in the treatment of cardiovascular, central nervous system, gastro-intestinal, pain, diabetes and other significant indications.
We apply our proprietary technology in two ways: (1) developing improved controlled-release (once-a-day) versions of existing immediate-release branded drugs (requiring NDAs), and (2) developing and commercializing generic drugs that are bioequivalent to existing controlled-release branded products (requiring ANDAs).  An ANDA must show that, when taken orally in bioequivalence studies conditions, levels of the active ingredient as measured in the bloodstream are the same for the generic product as for the branded product, within tolerances set by the FDA.
Our proposed products target the niche market created by the expiration of drug product patents and drug product exclusivity periods, for which we believe we will generally have the following two opportunities to license our technologies and products:
·  for branded immediate-release (multiple-times-per-day) products, we can seek to formulate improved replacement products, typically by developing a new, patentable, controlled-release (once-a-day) product.  Such products may be licensed to and sold by the pharmaceutical company
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that made the original immediate-release product, thereby protecting the pharmaceutical company against revenue loss in the brand by providing a clinically attractive patented product that is expected to compete favourably with the generic immediate-release competition that arises on expiry of the original patent(s); and
·  for existing controlled-release (once-a-day) products covered by patents about to expire or already expired, we can seek to formulate generic products which are bioequivalent to the branded products.  Such products may be licensed to and sold by distributors of generic products.
Technologies
 
Our scientists have developed drug delivery technology systems, based on the Hypermatrix™ platform, that facilitate controlled-release delivery of a wide range of pharmaceuticals.    We have branded these technology systems collectively as the Drug Delivery Engine™.  These systems include several core technologies, which enable us to flexibly respond to varyinga wide range of drug attributes and patient requirements, producing a desired controlled-release effect. In our opinion, these systems offer superior performance to traditional drug delivery systems, while retaining simplicity and cost effectiveness associated with their manufacture for the reasons described below:
·  Our delivery technologies offer competitive development times.  They have demonstrated themselves suited to the delivery of a wide range of small molecule drugs.  They are robust in that the predicted delivery results have been repeatedly substantiated by actual bioavailability/bioequivalence studies.  They were developed by our chief scientists, who have substantial experience in applying them successfully to the delivery of small drug molecules under existing development contracts and in support of our pipeline.  For these reasons, we believe that our development times are relatively short and competitive.
·  Our delivery technologies offer competitive development costs, because the technologies use only readily available, low-cost ingredients already acceptable to regulatory authorities such as the FDA, and because development times are short, we believe in the opinion of management our development costs are low when compared to our competitors.
·  Large pharmaceutical companies may license our improved products for life-cycle management and franchise extension of their branded products as they come off patent.  Our management believes that, with impending loss of branded product revenues, a new generic version of that product such as we develop, which offers the advantage of once-a-day dosing, should be attractive to a large pharmaceutical company facing revenue loss in a patented branded-product franchise.
·  Manufacturers and distributors of generic drugs may license our technologies and products.  Because our development times are, in our opinion comparatively short and cost-effective, our generic once-a-day products represent a cost-effective opportunity for generic distributors to add valuable generic products to their portfolios.
We are currently focusing our efforts on the following areas:
·  Obtaining regulatory approval for 15 products, including (i) 11 generic, controlled-release pharmaceutical products (ANDAs), and (ii) four new controlled-release pharmaceutical products (NDAs) which are a reformulation of an existing successful immediate release product.  At present, the Company has 2 ANDA’s on file at the FDA; dexmethylphenidate hydrochloride XR, a generic of Focalin XR, filed in May 2007, and venlafaxine hydrochloride XR, a generic of Effexor XR, filed in January 2010.  There is no assurance that the FDA will approve either of these products for sale in the United States, or that any of the Company’s other products will be filed with the FDA.
·  Commercial exploitation of these products either by license and the collection of royalties, or through the manufacture of tablets and capsules using our developed formulations.
·  Development of new products and increasing the number of licensing agreements with other pharmaceutical companies beyond those already in place, including collaborating in contract research and development, joint ventures and other drug development and commercialization projects.
We intend to collaborate in the development of products with partners, when we believe that such collaboration may enhance the outcome of the project.  We also plan to seek additional collaborations as a means of
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developing additional products.  We believe that our business strategy enables us to reduce our risk by (a) having a diverse product portfolio that includes both branded and generic products in various therapeutic categories, and (b) building collaborations and establishing licensing agreements with companies with greater resources thereby allowing us to share costs of development and to improve cash-flow.  There can be no assurance that we will be able to enter into additional collaborations or that such arrangements will be beneficial.
Our scientists have developed proprietary controlled-release drug delivery technologies based on the Hypermatrix™ platform, branded Drug Delivery Engine™.  These technologies consist of drug delivery systems that facilitate timed release delivery of a wide range of pharmaceuticals.  Our Drug Delivery Engine™ technologies have been usedincorporated in drugs manufactured and sold by major pharmaceutical companies.
 
One
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This group of our Drug Delivery Engine™ technologies, our Hypermatrix™ technologiesdrug delivery technology systems are based upon the drug active ingredient (“drug active”) being imbedded in, and an integral part of, a homogeneous (uniform), core and/or coatings consisting of one or more polymers which affect the release rates of drugs, other excipients (compounds other than the drug active), such as for instance lubricants which control handling properties of the matrix during fabrication, and the drug active itself.  The Hypermatrix™ technologies are the core of our current marketingproduct development efforts and the technologies underlying our existing development agreements.
 
We currently have one active drug development agreement in place.  Under this agreement, we are engaged by the other party to develop a bioequivalent generic of a specific controlled-release product, using our proprietary technology and know-how.  The development of each product is divided into a number of phases, with milestone payments payable to us on the completion of each phase, and either a royalty payable to us based on annual net sales of the product during a fixed period, or a share of the profits resulting from the distribution and sale of the product.  All of our intellectual property continues to be exclusively owned by us.  However, we do grant a sole license to the other party to the drug development agreement within a defined territory for specific drugs that we develop for them b ut only insofar as our  intellectual property relates to the specific product developed for them, for which we receive various payments, and not for use in any other products.  If the other party fails to make a commercial sale of the product within a certain time period after final regulatory approval to market the product is received, usually this sole license becomes non-exclusive and we are entitled to then directly market and sell the product itself.  The drug development agreement contains customary representations and warranties, covenants, indemnification and confidentiality provisions for agreements of this type.  If the other party terminates the agreement, we are entitled to proceed with the development of the specific product at our own expense.
Our platform of Hypermatrix™ drug delivery technology includes IntelliGIT™technologies include, but are not limited to, IntelliFoam™, IntelliGITransporter™,  IntelliMatrix™, IntelliOsmotics™, IntelliPaste™, IntelliPellets™, IntelliShuttle™ and Intellifoam™IntelliShuttle™.  Some of their key attributes are described below.
 
These technologies provide a broad range of release profiles, taking into account the physical and chemical characteristics of a drug product, the therapeutic use of the particular drug, and the optimal site for release of the active pharmaceutical ingredientAPI in the GIT.gastrointestinal tract (“GIT”).  At present those technologies have been applied in the laboratory and/or in bioavailability/bioequivalence studies in man to such orally administered small molecule drugs as are used in the treatment of neurological, cardiovascular, central nervous system, gastrointestinal,GIT, diabetes, pain diabetes and other significant disorders.indications.
 
The Hypermatrix™ Family of Drug Delivery Engine™ Technologies
 
IntelliGIT™IntelliFoam™
 
The IntelliGIT™IntelliFoam™ technology is based on the drug active being embedded in, but separate from a syntactic foam substrate, the properties of which are used to modulate the release of the drug active.  The drug actives are embedded in a resin polymer matrix.
IntelliGITransporter™
The IntelliGITransporter™ technology consists of an active drug immobilized in a homogeneous (uniform) matrix structure.  A precise choice of mix ratios, polymers, and other ingredients imparts characteristics which protect the drug composition from mechanical degradation due to digestion, and/or from chemical degradation in the acidic stomach environment, and ensures that this technology allows control of release as well as releasing the medication at certain parts of the stomach or intestines without significant food effects or unintentional premature release of the entire drug dose.  We believe that this technology is most useful for drug molecules with characteristics such as very low or very high potency, opiate analgesics (pain medications derived from the chemical compounds found in opium), or susceptibility to acid degradation.  It is also useful for products where a zero-order (constant rate over time, independent of the amount of drug available for dissolution) release profile is desirable.
 
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IntelliMatrix™
 
The IntelliMatrix™ technology is a proprietary blend of several polymers.  Depending on the constituents of the blend and the manner in which these interact, the use of the blend with a drug allows the drug to be released at predetermined rates, while imparting protective characteristics to both the drug and the GIT. This results in protection from the delivered active drug, for the stomach, if required.  This is most useful for drugs which require precisely controlled first orderfirst-order release profiles, where the amount released with time is dependent on one component like the amount of drug available for dissolution.
 
IntelliOsmotics™
 
The IntelliOsmotics™ technology is based upon the inclusion of multiple populations of polymers with distinct chemical bonding characteristics.  These set up a complex matrix of hydrophilic (water attracting) and hydrophobic (water repelling) domains.  When the tablet or bead is in an aqueous environment, like gastric contents, a “mixture” of water-soluble polymer and drug core is surrounded by gel layer(s) of water-insoluble polymer.  Osmotic pressure drives the drug out when solvent passes through the gel layer while the polymer molecules remain.  This permits control of the rate of release of the drug active by the variation of polymer ratios.  This technology is most useful for drug molecules which require precisely controlled pseudo-first-order release profiles, where the rate of release is proportional to the amount available for dissolution as well as being proportional to one other component; however the effect of the amount of drug is overriding, so that the rate appears first order.first-order.  This type of release control can be useful when attempting to match difficult profiles for generic formulation.
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IntelliPaste™
The IntelliPaste™ technology is comprised of blends of multiple polymers, oils, excipients and drug active(s) which result in a paste-in-a-capsule dosage form. The physical attributes of the paste include that it is thixotropic, pseudoplastic and non-Newtonian or, in layman’s terms, like toothpaste. Typically, it is formulated as having very low solubility in water or oil, and low solubility in alcohol. These characteristics enable the resulting drug product to have tamper-deterrent properties, and to resist dissolution in even high concentrations of alcohol. As a result, IntelliPaste™ is the Company’s preferred delivery technology for the controlled delivery of opiates, narcotics and other central nervous system drug products which are susceptible to unlawful diversion or abuse.
 
IntelliPellets™
 
The IntelliPellets™ technology consists of one or more type (population) of granule, bead, pellet, or tablet in a holding chamber or reservoir, such as a hard gelatin capsule.  Each type (population) may be uniquely different from the other in the manner or rate it releases the drug.  Our IntelliPellets™ technology is designed to control, prolong, delay or modify the release of drugs.  It is particularly useful for the delivery of multiple drugs, for delayed, timed, pulsed or for chronotherapeutic drug delivery, designed to mimic our internal clocks for therapeutic optimization (the drug is delivered in the right amount for the patient at the right time).  This technology is most useful for the delivery of multiple-drug cocktails, or in situations where the timing of a single dose or the sequencing of multiple doses of the same drug is important.
 
IntelliShuttle™
 
The IntelliShuttle™ technology provides for drug release past the stomach, such as for drugs required for action beyond the stomach, for drugs which could be destroyed by the stomach environment, or for drugs which could harm the stomach itself.  This technology “shuttles” the drug past the stomach to be released at predetermined times or sites where appropriate for optimum therapeutic effect.  This technology is most useful for acid labile drug molecules (drugs that are destroyed in acid environment), such as the proton pump inhibitors, of which well-known omeprazole (Prilosec) and lansoprazole (Prevacid) are examples, or for drug molecules which may harm the stomach, of which the well-known aspirin is an example.
 
Intellifoam™
The technology is based on the drug active being embedded in, but separate from, a syntactic foam substrate, the properties of which are used to modulate the release of the drug active.  The drug actives are embedded in a resin polymer matrix.
Each of the above-noted proprietary technologies has beenwas fully developed and is ready for application to potential product candidates.client drug delivery requirements from the date of our inception.  Each of them has been utilized and applied to client drug delivery requirements under our existing and previous development contracts; in several instances more than one technology has been applied to a single drug development.  We continue to marketdevelop all of our existing technologies and to conduct the necessary research to develop new products and technologies.  To date, none of the development contracts has proceeded to the point of commercialization, and therefore we have not yet seen our proprietary technologies utilized in products sold to consumers.
 
Our Strategy
We believe that our Hypermatrix™ technologies are a multidimensional controlled-release drug delivery platform that can be applied to the efficient development of a wide range of existing and new pharmaceuticals.  We believe that the flexibility of these technologies allow us to develop complex drug delivery solutions within a rapid timeframe. Based on our technologies, we have a pipeline of product candidates in various stages of development, including eight ANDAs filed with the FDA in therapeutic areas that include neurology, cardiovascular, GIT, diabetes and pain.  Certain, but not all, of the products in our pipeline may be developed from time to time for third parties pursuant to drug development agreements with those third parties, under which our development partner generally pays certain of the expenses of development, sometimes makes certain milestone payments to us and receives a share of revenues or profits if the drug is developed successfully to completion, the control of which is generally in the discretion of our drug development partner.  At this time, there is one such product in multiple strengths being developed in cooperation with a development partner.
 
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The Hypermatrix™ technologies are applied to the development of both existing and new pharmaceuticals across a range of therapeutic classes.  The competitive advantages of these technologies allow us to focus our development activities in two areas; difficult-to-develop controlled-release generic drugs, which follow an ANDA regulatory path; and improved current therapies through controlled release, which follow a NDA 505(b)(2) regulatory path.
The market we operate in is created by the expiration of drug product patents, challengeable patents and drug product exclusivity periods. There are three ways that we employ our controlled-release technologies, which we believe represent substantial opportunities for us to commercialize on our own or develop products or out-license our technologies and products:
·  For existing controlled-release (once-a-day) products whose APIs are covered by drug molecule patents about to expire or already expired, or whose formulations are covered by patents about to expire, already expired or which we believe we do not infringe, we can seek to formulate generic products which are bioequivalent to the branded products. Our scientists have demonstrated a successful track record with such products, having previously developed several drug products which have been commercialized in the United States by their former employer/clients.  The regulatory pathway for this approach requires ANDAs for the United States and corresponding pathways for other jurisdictions.
·  For branded immediate-release (multiple-times-per-day) drugs, we can formulate improved replacement products, typically by developing new, potentially patentable, controlled-release once-a-day drugs. Among other out-licensing opportunities, these drugs can be licensed to and sold by the pharmaceutical company that made the original immediate-release product.  This can potentially protect against revenue erosion in the brand by providing a clinically attractive patented product that competes favorably with the generic immediate-release competition that arises on expiry of the original patent(s). The regulatory pathway for this approach requires NDAs via a 505(b)(2) application for the U.S. or corresponding pathways for other jurisdictions where applicable.  The 505(b)(2) pathway (which relies in part upon the approving agency’s findings for a previously approved drug) both accelerates development timelines and reduces costs in comparison to NDAs for new chemical entities.
·  Some of our technologies are also focused on the development of abuse-deterrent pain medications. The growing abuse and diversion of prescription “painkillers”, specifically opioid analgesics, is well documented and is a major health and social concern. We believe that our technologies and know-how are aptly suited to developing abuse-deterrent pain medications. The regulatory pathway for this approach requires NDAs via a 505(b)(2) application for the U.S. or corresponding pathways for other jurisdictions where applicable.
We intend to collaborate in the development and/or marketing of one or more products with partners, when we believe that such collaboration may enhance the outcome of the project.  We also plan to seek additional collaborations as a means of developing additional products.  We believe that our business strategy enables us to reduce our risk by (a) having a diverse product portfolio that includes both branded and generic products in various therapeutic categories, and (b) building collaborations and establishing licensing agreements with companies with greater resources thereby allowing us to share costs of development and to improve cash-flow.  There can be no assurance that we will be able to enter into additional collaborations or, if we do, that such arrangements will be beneficial.
Our Products
 
The table below shows the present status of our ANDA and NDA product candidates that have been disclosed publicly.
 
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Generic nameBrandIndicationStage of DevelopmentRegulatory PathwayRights
Dexmethylphenidate
Hydrochloride
extended release
hydrochloride extended-release capsules
Focalin XR®
Attention-
deficit
Attention-deficit hyperactivity
disorder
Application
acceptedANDA application for commercialization approval for 6 strengths under review by
FDA for
review
ANDA
Partnered withIntellipharmaceutics and Par
Pharmaceuticals.  (Par
is licensed to use
Intellipharmaceutics’
technology.)
Venlafaxine HCI
extended release
hydrochloride extended-release capsules
Effexor XR®Depression
Application
acceptedANDA application for commercialization approval for 3 strengths under review by
FDA for
review
ANDAIntellipharmaceutics
Pantoprazole sodium delayed- release tabletsProtonix®Conditions associated with gastroesophageal reflux diseaseANDA application for commercialization approval for 2 strengths under review by FDAANDAIntellipharmaceutics
Metformin hydrochloride extended-release tabletsGlucophage® XRManagement of type 2 diabetesANDA application for commercialization approval for 2 strengths under review by FDAANDAIntellipharmaceutics
Quetiapine fumarate extended-release tabletsSeroquel XR®Schizophrenia,  bipolar disorder & major depressive disorderANDA application for commercialization approval for 5 strengths under review by FDAANDAIntellipharmaceutics
Lamotrigine extended-release tablets
CarvedilolLamictal®
Phosphate extendedXR™
Anti-convulsant for epilepsyANDA application for commercialization approval for 4 strengths under review by FDAANDAIntellipharmaceutics
Levetiracetam extended-release tabletsKeppra XR®Partial onset seizures for epilepsyANDA application for commercialization for 2 strengths under review by FDAANDAIntellipharmaceutics
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Desvenlafaxine extended-release tabletsPristiq®DepressionANDA application for commercialization approval for 2 strengths filed with the FDAANDAIntellipharmaceutics
Carvedilol phosphate extended- release capsulesCoreg CR®Heart failure, hypertension
Late Stage
Development
Late-stage development
ANDAIntellipharmaceutics
Oxycodone ERhydrochloride controlled-release capsulesN/APain
Early Stage
Development
Phase I clinical trial
NDA 505(b)(2)Intellipharmaceutics
Pregabalin extended-release capsulesLyrica®Neuropathic painPhase I clinical trialNDA 505(b)(2)Intellipharmaceutics
 
We typically select products for development that we intend to licenseanticipate could achieve FDA approval for commercial sales several years in the future. However, the length of time necessary to bring a product to the point where wethe product can license the productbe commercialized can vary significantly and depends on, among other things, the availability of funding, design and formulation challenges, safety or efficacy, and patent issues associated with the product.product, and FDA review times.
 
ANDA Product Candidates
 
Dexmethylphenidate Hydrochloride – Generic Focalin XR® (a registered trademark of the brand manufacturer)
 
In 2005, we entered into a license and commercialization arrangement with Par for the development of a generic version of Focalin XR®.  Under the arrangement, we
Our dexmethylphenidate hydrochloride extended-release capsules are responsible for all laboratory development costs and Par is responsible for bioequivalence costs, API costs, scale up / stability costs and marketing.  Par is also responsible for costs associated with litigation.  This includes a ten year profit-sharing agreement with Par which commences with the commercial launchgeneric version of the product.marketed drug Focalin XR contains dexmethylphenidateXR®. Dexmethylphenidate hydrochloride, anda Schedule II restricted product in the United States, is usedindicated for the treatment of Attention Deficit Hyperactivity Disorder. In 2008, Focalin®, includingattention deficit hyperactivity disorder (“ADHD”). According to Source Healthcare Analytics, sales for the 12 months ended December 2012 of Focalin XR®, had in the U.S. sales ofwere approximately U.S. $350 million.$614 million (TRx MBS Dollars, which represents projected new and refilled prescriptions representing a standardized dollar metric based on manufacturer’s published catalog or list prices to wholesalers, and does not represent actual transaction prices and does not include prompt pay or other discounts, rebates or reductions in price).
 
Effective May 2007, we filed an ANDA for our generic Dexmethylphenidate XR,version of Focalin XR® with the FDA. As at that date, the application was accepted by the FDA as being complete and in condition for further review. In the period since our filing, we have filed a number of amendments to the application, some of which were at the request of the FDA.
Intellipharmaceutics and Par, together with five complainants in patent litigation in the District Courts for New Jersey and Delaware (Novartis Pharmaceuticals Corporation, Novartis Pharma AG, Celgene Corporation, Elan Corporation, plc and Elan Pharma International Ltd) stipulated to the dismissal of that litigation and, in 2010, entered into settlement and license agreements with the Company and with Par in respect of our ANDA application to the FDA for 5, 10, 15 and 20 mg strengths of dexmethylphenidate hydrochloride. Subject to FDA approval, we may market these generic versions of the product in the U.S.  We have a ten year profit-sharing agreement with Par for the sale of dexmethylphenidate hydrochloride extended-release capsules in the U.S., which commences with the commercial launch of the product by Par.
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In December 2010, we filed an amendment to the ANDA to include the 30 mg strength of dexmethylphenidate hydrochloride extended-release capsules. Elan Corporation, plc and Elan Pharma International Ltd., filed a Complaint against Intellipharmaceutics Corp., IPC Ltd., and Par 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®. 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 July 2012, the parties stipulated to a full and final dismissal of the pending patent litigation in the states of New Jersey and Delaware.
In February 2012, we filed an amendment to the ANDA for a generic version of Focalin XR® to include the 40 mg strength of dexmethylphenidate hydrochloride extended-release capsules.  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. Also, Alkermes Pharma Ireland Limited (successor in title to Elan Pharma International Limited) filed a Complaint against Intellipharmaceutics Corp. and Intellipharmaceutics Ltd., in June 29, 2012, for alleged patent infringement in the United States District Court for the District of Delaware. Both Complaints are in relation to Intellipharmaceutics’ generic version of 40 mg Focalin XR®.  Both of these actions have been stayed on the consent of all parties pending settlement discussions. In view of the previous settlements related to the five dosage strengths of the same drug product, the Company believes it is reasonable to expect that the litigation relating to the 40 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. Intellipharmaceutics remains confident that its generic version of 40 mg Focalin XR® does not in any event infringe the patents in issue.
On August 18, 2011, we announced that we had added the development and commercialization of additional strengths of generic Focalin XR® to the existing license and commercialization arrangement with Par for the U.S. market. This includes the 30 and 40 mg strengths.
Our ANDA application for all of the above strengths remains under review, and there can be no assurance when, or if at all, the FDA will approve the various dosages of the product for commercial launchsale in the U.SU.S. market.
 
During the fourth quarter of 2009, the 30 month stay on FDA approval for our ANDA for Dexmethylphenidate XR expired.  As we did not receive tentative approval from the FDA within the 30 months, the 180-day exclusivity period associated with our first to file opportunity on the 15 mg strength capsule may no longer be available or may require that a special request, open to FDA discretion be made to avoid the loss of the status.  While we believe that the making of such a special request is a possible scenario, there can be no assurance that the
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FDA would accede to this request if made.  Intellipharmaceutics’ management presently expects that marketing of generic versions of the products will commence no sooner than the fourth quarter of 2012.
Venlafaxine Hydrochloride – Generic Effexor XR® (a registered trademark of the brand manufacturer)
 
Another product in our generics pipeline isOur venlafaxine hydrochloride extended-release capsules are a generic version of the marketed drug Effexor XR®.  Effexor XR® is an extended-release capsule for oral administration that contains venlafaxine hydrochloride.  ItVenlafaxine hydrochloride is indicated for the treatment of symptoms of depressive disorders. EffexorAccording to Source Healthcare Analytics, sales of venlafaxine hydrochloride extended-release capsules in the U.S. were approximately $815 million (TRx MBS Dollars) for the 12 months ended December 2012.
Our ANDA in respect of this product is under review; there can be no assurance when, or if at all, the FDA will approve the product for sale in the U.S. market.
Wyeth LLC, a wholly owned subsidiary of Pfizer Inc., had filed a Complaint for patent infringement against us in the United States District Court for the District of Delaware and for the Southern District of New York, relating to our generic version of Effexor XR® branded products had estimatedcapsules. On June 21, 2011, the Company announced that the patent infringement litigation was settled, granting the Company a non-exclusive license to the patents in suit that will permit the Company to launch a generic version of Effexor XR® in the U.S. salesfollowing FDA approval of approximately $3.0 billion in 2009.this product. There can be no assurance that such approval will be granted.
 
In January 2010 we filed this product with the FDA and weWe are exploring licensing agreement opportunities or other possibilities for this product.  While we believe that a licensing agreement is possible, there can be no assurance that one can be secured.  No assurance can be given as to when or if the FDA will approve our application for the product.
 
Carvedilol PhosphatePantoprazole Sodium – Generic Coreg CR®Protonix® (a registered trademark of the brand manufacturer)
 
AnotherOur pantoprazole sodium delayed-release tablets are a generic version of the marketed drug Protonix®.  Pantoprazole sodium inhibits gastric acid secretion and is indicated for the short-term treatment of conditions such as stomach ulcers associated with gastroesophageal reflux disease, as well as the long term treatment of pathological hypersecretory conditions including Zollinger-Ellison syndrome. According to Source Healthcare Analytics, sales of pantoprazole sodium delayed-release tablets in the United States were approximately $674 million (TRx MBS Dollars) for the 12 months ended December 2012.
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An ANDA has been filed with the FDA, and the application is under review. The brand owner did not initiate patent infringement litigation. There are no unexpired patents associated with this product. As a result, we will not be subject to the automatic 30-month stay of FDA approval to market the product and we will be in a position to market our product in the United States upon FDA approval. There can be no assurance when, or if at all, the FDA will approve the product for sale in the U.S. market.
We are exploring licensing agreement opportunities or other possibilities for this product.  While we believe that a licensing agreement is possible, there can be no assurance that one can be secured.
Metformin Hydrochloride – Generic Glucophage® XR (a registered trademark of the brand manufacturer)
Our metformin hydrochloride extended-release tablets are a generic version of the marketed drug Glucophage® XR.  Metformin hydrochloride is an oral antihyperglycemia drug indicated for the management of type 2 diabetes. According to Source Healthcare Analytics, sales of metformin hydrochloride extended-release tablets in the United States were approximately $388 million (TRx MBS Dollars) for the 12 months ended December 2012.
An ANDA has been filed with the FDA, and the application is under review. The brand owner did not initiate patent infringement litigation. As a result, we will not be subject to the automatic 30-month stay of FDA approval to market the product and we will be in a position to market our generics pipelineproduct in the United States upon FDA approval. There can be no assurance when, or if at all, the FDA will approve the product for sale in the U.S. market.
We are exploring licensing agreement opportunities or other possibilities for this product.  While we believe that a licensing agreement is possible, there can be no assurance that one can be secured.
Quetiapine Fumarate – Generic Seroquel XR®(a registered trademark of the brand manufacturer)

Our quetiapine fumarate extended-release tablets are a generic version of the marketed drug Seroquel XR®.  Quetiapine fumarate is an oral psychotropic agent indicated for the treatment of schizophrenia, bipolar disorder, and major depressive disorder. According to Source Healthcare Analytics, sales of Seroquel XR® in the United States were approximately $1.1 billion (TRx MBS Dollars) for the 12 months ended December 2012.
The ANDA application is under review and there can be no assurance when, or if at all, the FDA will accept our application for further review or approve the product for sale in the U.S. market.
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® tablets, 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®.  The Company 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.
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. 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®. On July 30, 2012, and pursuant to the settlement, AstraZeneca and the Company filed proposed Consent Judgments in the District Court for the Southern District of New York to conclude the litigation, subject to other regulatory review. There was no further regulatory comment or action, and the settlement is now final. The settlement provides, in part, that the Company is permitted to launch its generic versions of the 50, 150, 200, 300 and 400 mg strengths of Seroquel XR® on November 1, 2016, or earlier in certain circumstances, subject only to prior FDA approval of the Company's ANDA for those strengths. All other terms of the settlement are confidential. The Company's actual launch may also be subject to a six month statutory delay relating to a prior filer of a generic equivalent of the branded product, such delay to commence from the first date of commercialization by the prior filer.
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We are exploring licensing agreement opportunities or other possibilities for this product.  While we believe that a licensing agreement is possible, there can be no assurance that one can be secured.
Lamotrigine – Generic Lamictal® XR™(a registered trademark of the brand manufacturer)
Our lamotrigine extended-release tablets are a generic version of the marketed drug Lamictal®XR™. Lamotrigine is an oral anticonvulsant drug used in the treatment of epilepsy. According to Source Healthcare Analytics, sales of Lamictal®XR™ in the United States were approximately $279 million (TRx MBS Dollars) for the 12 months ended December 2012.
An ANDA has been filed with the FDA, and the application is under review. The brand owner did not initiate patent infringement litigation. There are no unexpired patents associated with this product. As a result, we will not be subject to the automatic 30-month stay of FDA approval to market the product and we will be in a position to market our product in the United States upon FDA approval. There can be no assurance when, or if at all, the FDA will approve the product for sale in the U.S. market.
We are exploring licensing agreement opportunities or other possibilities for this product.  While we believe that a licensing agreement is possible, there can be no assurance that one can be secured.
Levetiracetam – Generic Keppra XR® (a registered trademark of the brand manufacturer)
Our levetiracetam extended-release tablets are a generic version of the marketed drug Keppra XR®. Levetiracetam is an oral antiepileptic drug used in the treatment of partial onset seizures in patients with epilepsy. According to Source Healthcare Analytics, sales of levetiracetam extended-release tablets in the United States were approximately $145 million (TRx MBS Dollars) for the 12 months ended December 2012.
An ANDA has been filed with the FDA, and the application is under review. There can be no assurance when, or if at all, the FDA will approve the product for sale in the U.S. market.
We are exploring licensing agreement opportunities or other possibilities for this product.  While we believe that a licensing agreement is possible, there can be no assurance that one can be secured.
Desvenlafaxine – Generic Pristiq® (a registered trademark of the brand manufacturer)
Our desvenlafaxine extended-release tablets are a generic version of the marketed drug Pristiq®. Desvenlafaxine is a selective serotonin and norepinephrine reuptake inhibitor indicated for the treatment of major depressive disorder. According to Source Healthcare Analytics, sales of Pristiq® in the United States were approximately $640 million (TRx MBS Dollars) for the 12 months ended December 2012.
An ANDA has been filed with the FDA. There can be no assurance when, or if at all, the FDA will approve the product for sale in the U.S. market.
We are exploring licensing agreement opportunities or other possibilities for this product.  While we believe that a licensing agreement is possible, there can be no assurance that one can be secured.
Carvedilol Phosphate – Generic Coreg CR® (a registered trademark of the brand manufacturer)
Our carvedilol phosphate extended release capsule. It iscontrolled-release capsules, in development, are intended to be a generic version of the marketed drug Coreg CR®.  COREG CRCarvedilol phosphate is available for once-a-day administration as controlled-release oral capsules containing 10, 20, 40, or 80 mg of the active pharmaceutical agent. It is usedindicated for the treatment of hypertension and heart conditions.failure. According to Source Healthcare Analytics, sales of Coreg CR® in the United States were approximately $282 million (TRx MBS Dollars) for the 12 months ended December 2012.
 
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This product is currently in late-stage development and we are planning on conducting additional pivotal bioequivalence studies later in fiscal 2010.late stage development. We are exploring licensing agreement opportunities or other possibilities for this product.  There iscan be no assurance that an ANDA will be filed, or if filed, that an approval to market can be obtained, or if approved, that a licensing agreement can be secured.secured to market the product.
 
NDA 505 (b)(2) Product CandidateRexista™ Oxycodone (Oxycodone Hydrochloride)
 
Rexista™
Our leadOne of our non-generic product under development is Rexista™, oxycodone hydrochloride, intended as an abuse- and alcohol-resistantalcohol-deterrent controlled-release oral formulation of oxycodone formulationhydrochloride for the relief of pain.  Rexista™ is a unique dosage form designed to be resistanta deterrent to some of the well-documented abuses associated with some currently marketed controlled-release oxycodone products.  This includes abuse of these drugs by nasal inhalation when crushed or powdered, and,or by injection when combined with solvents.  Rexista™ oxycodone is also designed to resist release of the entire dose when consumed with alcohol, a significant problem with some opioid drugs.  In 2008, oxycodone based products had estimated U.S.According to Source Healthcare Analytics, sales of OxyContin® in the United States were approximately U.S. $2 billion.$2.4 billion (TRx MBS Dollars)  for the 12 months ended December 2012.  OxyContin® (oxycodone ER) currently holds the leading total prescription sharerepresents 99% of the U.S. e xtended-release opioid market, with an estimated 23% total prescription share.$2.4 billion (TRx MBS Dollars) oxycodone sustained-release market.
 
In February 2009,July 2012, the FDA announced that it plans to implementapproved a new Risk Evaluation and Mitigation Strategy (“REMS”) requirement for all extended-release and long-acting opioid analgesics.medications. The new safety measures requires companies to make education programs available to prescribers based on an FDA Blueprint, make available FDA-approved patient education materials on the safe use of these drugs, and perform periodic assessments of the implementation of the REMS and the success of the program in meeting its goals.  By March 1, 2013, the first education programs are expected to be offered to prescribers. Also in April 2011, a mandatory training program on responsible opioid prescribing practices was endorsed by the U.S. Government.  We believe that the REMS will ultimately drive prescribing of newer tamper-resistant extended releasetamper-deterrent extended-release opioids.  Several “tamper-resistant”“tamper-deterrent” formulations of oral opioid analgesics are being developed by other companies. We believe that the FDA’s move to restrict prescribing of extended-release opioid analgesicsREMS should benefit tamper-resistanttamper-deterrent products.
 
We believe that we can leverage our core competencecompetencies in drug delivery and formulation for the development of products targeted towards tamper-resistanttamper-deterrent opioid analgesics used in pain management. The advantage of our strategy for development of NDA drugs is that our products can, if approved for sale, enjoy a sales exclusivity period. Furthermore, we believe it ismay be possible to establish and defend the intellectual property surrounding our tamper-resistanttamper-deterrent opioid analgesic products.
 
We have completed proofa proof-of-concept Phase I clinical study of concept pilotRexista™ oxycodone, which yielded positive results. We have also concluded a pre-Investigational New Drug (“pre-IND”) meeting with a panel of the FDA’s Center for Drug Evaluation and Research clarifying the Rexista™ oxycodone development plan.  Finally, we have completed clinical batch manufacturing of Rexista™ oxycodone, and initiated Phase I studies of Rexista andRexista™ oxycodone. Preliminary Phase I data from this trial is expected in fiscal 2010 plan to complete manufacture clinical batches of Rexista™ for use in phase 1 clinical trials.  We also plan to initiate discussions with the FDA on the clinical development plan for Rexista™.early 2013. There can be no assurance that thethis and additional clinical trials will meet the expected outcomes or that we will be able to successfully produce scaled up batches for use in clinical trials orour expectations, that we will be successful in submitting ana NDA 505 (b)505(b)(2) filing.filing with the FDA, that the FDA will approve this product candidate for sale in the U.S. market, or that it will ever be successfully commercialized.
There can be no assurance as to whether or when the FDA will approve any Intellipharmaceutics' application.
Pregabalin (Pregabalin Extended-Release)
Another Intellipharmaceutics non-generic controlled-release product is pregabalin extended-release capsules. Pregabalin is indicated for the management of neuropathic pain associated with diabetic peripheral neuropathy, postherpetic neuralgia, spinal cord injury and fibromyalgia. There is no controlled-release formulation on the market at this time. A controlled-release version of pregabalin should reduce the number of doses patients take, potentially improving patient compliance, and therefore potentially improving clinical outcomes. According to Source Healthcare Analytics, U.S. sales for the 12 months ended December 2012 for Lyrica® (pregabalin capsules) were approximately $2.0 billion (TRx MBS Dollars).
 
 
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The company successfully completed an initial Phase I clinical trial of a controlled-release pregabalin formulation. This was the first bioavailability study of our controlled-release pregabalin versus Lyrica® (immediate release pregabalin). The study was carried out in 14 subjects. The results showed that our 150 mg pregabalin once-a-day dosage was comparable in bioavailability to Lyrica® 50 mg three-times-a-day dosage. We plan to initiate additional Phase I clinical trials in 2013. There can be no assurance that additional clinical trials will meet our expectations, that we will be successful in submitting a NDA 505(b)(2) filing with the FDA, that the FDA will approve this product candidate for sale in the U.S. market, or that it will ever be successfully commercialized.
There can be no assurance as to whether or when the FDA will approve any Intellipharmaceutics' application.
COMPETITIVE ENVIRONMENT
 
We are engaged in a business characterized by extensive research efforts, rapid technological developments and intense competition. Our competitors include medical technology, pharmaceutical, biotechnology and other companies, universities and research institutions. All of these competitors currently engage in, have engaged in or may engage in the future, in the development, manufacturing, marketing and commercialization of new pharmaceuticals and existing pharmaceuticals, some of which may compete with our present or future product candidates.
 
Our drug delivery technologies willmay compete with existing drug delivery technologies, as well as new drug delivery technologies that may be developed or commercialized in the future. Any of these drugs and drug delivery technologies may receive government approval or gain market acceptance more rapidly than our product candidates. As a result, our product candidates may become non-competitivenoncompetitive or obsolete.
 
We believe that our ability to successfully compete will depend on, among other things,  the efficacy, safety and reliability of our product candidates,  the timing and scope of regulatory approval, the speed at which we develop product candidates, our ability to manufacture and sell commercial quantities of a product to the market,  product acceptance by physicians and other professional health carehealthcare providers, the quality and breadth of our technology,technologies, the skills of our employees and our ability to recruit and retain skilled employees, the protection of our intellectual property, and the availability of substantial capital resources to fund development and commercialization activities.
 
MANUFACTURING
 
We have internal manufacturing capabilities consisting of Current Good Laboratory Practices (“cGLP”) research laboratories and a cGMP manufacturing plant for solid oral dosage forms at our 30 Worcester Road facility in Toronto.  Raw materials used in manufacturing our products are available from a number of commercial sources and the prices for such raw materials are generally not particularly volatile.
 
INTELLECTUAL PROPERTY
 
Proprietary rights are an important aspect of our business.  These include know-how, trade secrets and patents.  Know-how and trade secrets are protected by internal company policies and operating procedures, and where necessary, by contractual provisions with development partners and suppliers.  We also seek patent protection for inventive advances which form the bases of our drug delivery technologies.  With respect to particular products, we may seek patent protection on the commercial composition, theour methods of production and the intended uses of drug productsour uses, to prevent the unauthorized marketing and sale of competitive products.
 
Patents which relate to and protect various aspects of our familiesHypermatrix™ family of propriety drug delivery technologies includedinclude the following United States and Canadian patents which have been issued to us:  (i) U.S. Patent No.  6,296,876, issued October 2, 2001 and projected to expire October 6, 2017 and U.S. Patent No. 6,479,075, issued November 12, 2002 and projected to expire October 1, 2018, which concern pharmaceutical formulations for acid labile [drug actives] and compositions which protect the drug active and composition from destruction in acidic environments in the GIT; and (ii) U.S. Patent No.  6,607,751, issued August 19, 2003 and projected to expire October 10, 2017 and U.S. Patent No. 7,090,867, issued on August 15, 2006 and projected to expire October 9, 2018, which describe a controlled-release drug delivery tec hnology incorporating a microbial polysaccharide gum.  Other patents relate to and protect various aspects of our Intellifoam drug delivery technologies. These include U.S. Patent No. 6,800,668, issued October 15, 2004 and projected to expire January 19, 2021, and the corresponding issued Canadian Patent No. 2,435,276, which relate to novel syntactic deformable foam compositions used as a carrier or substrate for drug actives, and methods for making these compositions.
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CountryIssue DateIssue No.Title
U.S.AMar 15, 20117,906,143Controlled Release Pharmaceutical Delivery Device and Process of Preparation Thereof
U.S.ADec 28, 20107,858,119Extended Release Pharmaceuticals
U.S.AAug 15, 20067,090,867Novel Controlled Release Delivery Device for Pharmaceutical Agents Incorporating Microbial Polysaccharide Gum
U.S.AOct 5, 20046,800,668Syntactic Deformable Foam Compositions and Methods for Making
U.S.ANov 25, 20036,652,882Controlled Release Formulation Containing Bupropion
U.S.AAug 19, 20036,607,751Novel Controlled Release Delivery Device for Pharmaceutical Agents Incorporating Microbial Polysaccharide Gum
U.S.ANov 12, 20026,479,075Pharmaceutical Formulations for Acid Labile Substances
U.S.AOct 2, 20016,296,876Pharmaceutical Formulations for Acid Labile Substances
CanadaJun 19, 20122,626,558Pharmaceutical Composition Having Reduced Abuse Potential
CanadaSep 25, 20122,529,984Oral Multi-Functional Pharmaceutical Capsule Preparations Of Proton Pump Inhibitors
CanadaFeb 22, 20112,459,857Combinatorial Type Controlled Release Drug Delivery Device
CanadaMar 15, 20052,435,276Syntactic Deformable Foam Compositions and Methods for Making
 
In addition to these issued patents, we have several U.S. Patentpatent applications, and corresponding foreign applications pending, including Patent Cooperation Treaty - national stage processing and entry applications, relating to various aspects of our HyperMatrix drug delivery technologies, including methods and compositions for coating of tablets and beads, compositions incorporating disintegrants to assist in controlled release, compositions incorporating multiple drug actives, and compositions directed to classes of drug actives designed
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as therapies for specific indications and compositions intended to enhance deterrence of wilfulwillful abuse of narcotic compositions.
 
REGULATORY REQUIREMENTS
 
We focus on the development of both branded drug products (which require NDAs) and generic drug products (which require ANDAs).  The research and development, manufacture and marketing of controlled-release pharmaceuticals are subject to regulation by U.S., Canadian and other governmental authorities and agencies.  Such national agencies and other federal, state, provincial and local entities regulate the testing, manufacturing, safety and promotion of our products.  The regulations applicable to our products may change as the currently limited number of approved controlled-release products increases and regulators acquire additional experience in this area.
 
United States Regulation
 
New Drug Application
 
We will be required by the FDA to comply with NDA procedures for our branded products prior to commencement of marketing these products in the United States by us or our licensees.  New drug compounds and new formulations for existing drug compounds which cannot be filed as ANDAs are subject to NDA procedures.  These procedures include (a) pre-clinicalpreclinical laboratory and animal toxicology tests; (b) scaling and testing of production batches; (c) submission of an Investigational New Drug Application (“IND”), and subsequent approval is required before any human clinical trials can commence; (d) adequate and well controlled replicate human clinical trials to establish the safety and efficacy of the drug for its intended indication; (e) the submission of a nan NDA to the FDA; and (f) FDA approval of an NDA prior to any commercial sale or shipment of the product, including pre-approval and post-approval inspections of our manufacturing and testing facilities.  If all of this data in the product application is owned by the applicant, the FDA will issue its approval without regard to patent rights that might be infringed or exclusivity periods that would affect the FDA’s ability to grant an approval if the application relied upon data which the applicant did not own.  We intend to generate all data necessary to support FDA approval of the applications we file.
 
Pre-clinical
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Preclinical laboratory and animal toxicology tests may have to be performed to assess the safety and potential efficacy of the product.  The results of these pre-clinicalpreclinical tests, together with information regarding the methods of manufacture of the products and quality control testing, are then submitted to the FDA as part of an IND requesting authorization to initiate human clinical trials.  Once the IND notice period has expired, clinical trials may be initiated, unless an FDA hold on clinical trials has been issued.
 
Clinical trials involve the administration of a pharmaceutical product to individuals under the supervision of qualified medical investigators who are experienced in conducting studies under “Good Clinical Practice” guidelines.  Clinical studies are conducted in accordance with protocols that detail the objectives of a study, the parameters to be used to monitor safety and the efficacy criteria to be evaluated.  Each protocol is submitted to the FDA and to an Institutional Review Board prior to the commencement of each clinical trial.  Clinical studies are typically conducted in three sequential phases, which may overlap.  In Phase I, the initial introduction of the product into human subjects, the compound is tested for absorption, safety, dosage, tolerance, metabolic interaction, d istribution,distribution, and excretion.  Phase II involves studies in a limited patient population with the disease to be treated to (1) determine the efficacy of the product for specific targeted indications, (2) determine optimal dosage and (3) identify possible adverse effects and safety risks.  In the event Phase II evaluations demonstrate that a pharmaceutical product is effective and has an acceptable safety profile, Phase III clinical trials are undertaken to further evaluate clinical efficacy of the product and to further test its safety within an expanded patient population at geographically dispersed clinical study sites.  Periodic reports on the clinical investigations are required.
 
We, or the FDA, may suspend clinical trials at any time if either party believes the clinical subjects are being exposed to unacceptable health risks.  The results of the product development, analytical laboratory studies and clinical studies are submitted to the FDA as part of an NDA for approval of the marketing and commercialization of a pharmaceutical product.
 
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Abbreviated New Drug Application
 
In certain cases, where the objective is to develop a generic version of an approved product already on the market in controlled-release dosages, an ANDA may be filed in lieu of filing an NDA.  Under the ANDA procedure, the FDA waives the requirement to submit complete reports of pre-clinicalpreclinical and clinical studies of safety and efficacy and instead requires the submission of bioequivalency data, demonstratingthat is, demonstration that the generic drug produces the same effect in the body as its brand-name counterpart and has the same pharmacokinetic profile, or change in blood concentration over time.  The ANDA procedure is available to us for a generic version of a drug product approved by the FDA.  In certain cases, an ANDA applicant may submit a suitability petition to the FDA requesting permission to submit an ANDA for a dr ugdrug product that differs from a previously approved reference drug product (the “Listed Drug”) when the change is one authorized by statute.  Permitted variations from the Listed Drug include changes in: (1) route of administration, (2) dosage form, (3) strength and (4) one of the active ingredients of the Listed Drug when the Listed Drug is a combination product.  The FDA must approve the petition before the ANDA may be submitted.  An applicant is not permitted to petition for any other kinds of changes from Listed Drugs.  The information in a suitability petition must demonstrate that the change from the Listed Drug requested for the proposed drug product may be adequately evaluated for approval without data from investigations to show the proposed drug product’s safety or effectiveness.  The advantages of an ANDA over an NDA include reduced research and development costs associated wi thwith bringing a product to market, and generally a shorter review and approval time at the FDA.
 
Patent Certification and Exclusivity Issues
 
ANDAs are required to include certifications with respect to any third party patents that claim the Listed Drug or that claim a use for the Listed Drug for which the applicant is seeking approval.  If applicable third party patents are in effect and this information has been submitted to the FDA, the FDA must delay approval of the ANDA until the patents expire.  If the applicant believes it will not infringe the patents, it can make a patent certification to the holder of patents on the drug for which a generic drug approval is being sought, which may result in patent infringement litigation which could delay the FDA approval of the ANDA for up to 30 months.  If the drug product covered by an ANDA were to be found by a court to infringe another company’s patents, approval of the ANDA could be delaye ddelayed until the patents expire.  Under the Food Drug and Cosmetic Act (“FDC”), the first filer of an ANDA with a “non-infringement” certification is entitled to receive 180 days of market exclusivity.  Subsequent filers of generic products would be entitled to market their approved product six months after the earlier of the first commercial marketing of the first filer’s generic product or a successful defense of a patent infringement suit.
 
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The 180-day exclusivity period can be forfeited if the first applicant withdraws its application or the FDA considers the application to have been withdrawn, the first applicationapplicant amends or withdraws Paragraph IV Certification for all patents qualifying for 180 day exclusivity, or failure of the first applicant fails to obtain tentative approval within 30 months after the date filed unless, such failure wasis due to a change in review requirements.  The preservation of the 180 day exclusivity period related to the first-to-file status of a drug not approved within 30 months after the date filed, generally requires that an application be made to the FDA for extension of the time period where the delay has been due to a change in the review requirements for the drug.  The approval of the continued first-to-file status in such circumstances is subject to the discretion of the FDA.  There can be no assurance that the FDA would accede to such a request if made.
 
Patent expiration refers to expiry of U.S. patents (inclusive of any extensions) on drug compounds, formulations and uses.  Patents outside the United States may differ from those in the United States.  Under U.S. law, the expiration of a patent on a drug compound does not create a right to make, use or sell that compound.  There may be additional patents relating to a person’s proposed manufacture, use or sale of a product that could potentially prohibit such person’s proposed commercialization of a drug compound.
 
The FDC contains non-patent market exclusivity provisions that offer additional protection to pioneer drug products and are independent of any patent coverage that might also apply.  Exclusivity refers to the fact that the effective date of approval of a potential competitor’s ANDA to copy the pioneer drug may be delayed or, in certain cases, an ANDA may not be submitted until the exclusivity period expires.  Five years of exclusivity are granted to the first approval of a “new chemical entity”.  Three years of exclusivity may apply to products which are not new chemical entities, but for which new clinical investigations are essential to the approval.  For example, a new indication for use, or a new dosage strength of a previously approved product, may be entitled to exclusivi ty,exclusivity, but
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only with respect to that indication or dosage strength.  Exclusivity only offers protection against a competitor entering the market via the ANDA route, and does not operate against a competitor that generates all of its own data and submits a full NDA.
 
If applicable regulatory criteria are not satisfied, the FDA may deny approval of an NDA or an ANDA or may require additional testing.  Product approvals may be withdrawn if compliance with regulatory standards is not maintained or if problems occur after the product reaches the market.  The FDA may require further testing and surveillance programs to monitor the pharmaceutical product that has been commercialized.  Non-compliance with applicable requirements can result in additional penalties, including product seizures, injunction actions and criminal prosecutions.
 
Canadian Regulation
 
The requirements for selling pharmaceutical drugs in Canada are substantially similar to those of the United States described above.
 
Investigational New Drug Application
 
Before conducting clinical trials of a new drug in Canada, we must submit a Clinical Trial Application (“CTA”) to the Therapeutic Products Directorate (“TPD”).  This application includes information about the proposed trial, the methods of manufacture of the drug and controls, pre-clinicalpreclinical laboratory and animal toxicology tests on the safety and potential efficacy of the drug, and information on any previously executed clinical trials with the new drug.  If, within 30 days of receiving the application, the TPD does not notify us that our application is unsatisfactory, we may proceed with clinical trials of the drug.  The phases of clinical trials are the same as those des cribeddescribed above under “United States RegulationNew Drug Application”.
 
New Drug Submission
 
Before selling a new drug in Canada, we must submit a New Drug Submission (“NDS”) or Supplemental New Drug Submission (“sNDS”) to the TPD and receive a Notice of Compliance (“NOC”) from the TPD to sell the drug.  The submission includes information describing the new drug, including its proper name, the proposed name under which the new drug will be sold, a quantitative list of ingredients in the new drug, the methods of manufacturing, processing, and packaging the new drug, the controls applicable to these operations, the tests conducted to establish the safety of the new drug, the tests to be applied to control the potency, , purity, stability and safety of the new drug, the results of bio-pharmaceutics and clinical trials as appropriate, the intended indications for which the new drug may be prescribed and the effectiveness of the new drug when used as intended.  The TPD reviews the NDS or sNDS.  If the submission meets the requirements of Canada’s Food and Drugs Act and Regulations, the TPD will issue an NOC for the new drug.
 
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Where the TPD has already approved a drug for sale in controlled-release dosages, we may seek approval from the TPD to sell an equivalent generic drug through an Abbreviated New Drug Submission (“ANDS”).  In certain cases, the TPD does not require the manufacturer of a proposed drug that is claimed to be equivalent to a drug that has already been approved for sale and marketed, to conduct clinical trials; instead, the manufacturer must satisfy the TPD that the drug is bioequivalent to the drug that has already been approved and marketed.
 
The TPD may deny approval or may require additional testing of a proposed new drug if applicable regulatory criteria are not met.  Product approvals may be withdrawn if compliance with regulatory standards is not maintained or if problems occur after the product reaches the market.  Contravention of Canada’s Food and Drugs Act and Regulations can result in fines and other sanctions, including product seizures and criminal prosecutions.
 
Proposals have recently been made that, if implemented, would significantly change Canada’s drug approval system.  In general, the recommendations emphasize the need for efficiency in Canadian drug review.  Proposals include establishment of a separate agency for drug regulation and modeling the approval system on those found in European Union countries.  There is no assurance, however, that such changes will be implemented or, if implemented, the changes will expedite the approval of new drugs.
 
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The Canadian government has regulations which can prohibit the issuance of an NOC for a patented medicine to a generic competitor, provided that the patentee or an exclusive licensee has filed a list of its Canadian patents covering that medicine with the Minister of Health and Welfare.  After submitting the list, the patentee or an exclusive licensee can commence a proceeding to obtain an order of prohibition directed to the Minister prohibiting him or her from issuing an NOC.  The minister may be prohibited from issuing an NOC permitting the importation or sale of a patented medicine to a generic competitor until patents on the medicine expire or the waiver of infringement and/or validity of the patent(s) in question is resolved by litigation in the manner set out in such regulations.  There may be addi tionaladditional patents relating to a company’s proposed manufacture, use or sale of a product that could potentially prohibit such company’s proposed commercialization of a drug compound.
 
Certain provincial regulatory authorities in Canada have the ability to determine whether the consumers of a drug sold within such province will be reimbursed by a provincial government health plan for that drug by listing drugs on formularies.  The listing or non-listing of a drug on provincial formularies may affect the prices of drugs sold within provinces and the volume of drugs sold within provinces.
 
Additional Regulatory Considerations
 
Sales of our products by our licensees outside the United States and Canada arewill be subject to regulatory requirements governing the testing, registration and marketing of pharmaceuticals, which vary widely from country to country.
 
Under the U.S. Generic Drug Enforcement Act, ANDA applicants (including officers, directors and employees) who are convicted of a crime involving dishonest or fraudulent activity (even outside the FDA regulatory context) are subject to debarment.  Debarment is disqualification from submitting or participating in the submission of future ANDAs for a period of years or permanently.  The Generic Drug Enforcement Act also authorizes the FDA to refuse to accept ANDAs from any company which employs or uses the services of a debarred individual.  We do not believe that we receive any services from any debarred person.
 
In addition to the regulatory approval process, pharmaceutical companies are subject to regulations under provincial, state and federal law, including requirements regarding occupational safety, laboratory practices, environmental protection and hazardous substance control, and may be subject to other present and future local, provincial, state, federal and foreign regulations, including possible future regulations of the pharmaceutical industry.  We believe that we are in compliance in all material respects with such regulations as are currently in effect.
 
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Before medicinal products can be distributed commercially, a submission providing detailed information must be reviewed and approved by the applicable government or agency in the jurisdiction in which the product is to be marketed.  The regulatory review and approval process varies from country to country.
 
C.  
 
The following chart shows the corporate relationship structure of Intellipharmaceutics and its fourthree wholly-owned subsidiaries, including jurisdictions of incorporation, as at May 24, 2010.January 31, 2013.
 
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Notes:
(1)The Company owns 64.3% of the common shares of IPC Corp. directly and 35.7% of such shares indirectly through the wholly-owned IPC Ltd.

D.  
 
On October 1, 2004,For eight years, we entered into a 5-year lease agreement forhave occupied a 25,000 square foot facility at 30 Worcester Road, Toronto, Ontario, Canada M9W 5X2, that we lease at a present rental rate of approximately $100,000$89,000 per year.  The lease washas been renewed for a one year term on October 1, 2009, which expires on October 1, 2010to November 30, 2013, with an option to renew.  We intend to renewextend the lease.lease on comparable terms for five additional years.  We use our facilities as a laboratory, office space, and cGMP scale-up and small to medium-scale manufacturing.
 
In the second quarter of 2006, we completed renovation and construction of our administrative facilities and cGLP research laboratories and construction of a cGMP manufacturing plant for solid oral dosage forms at our 30 Worcester Road facility in Toronto.  The cost of the build-out and equipping of our administrative, laboratory and manufacturing facility was approximately $1,685,000, includingwith approximately $810,000 for plant and $950,000 for equipment.  The facility now consists of approximately 4,900 sq. ft.  for administrative space, 4,300 sq. ft. for research and development (“R&D”), 9,200 sq. ft. for manufacturing, and 3,000 sq. ft. for warehousing.
We continually monitor our facility requirements in the context of our needs and we expect these requirements to change commensurately with our activities.
 
Item 4A.
None.
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Item 5.
 
The following discussion and analysis should be read in conjunction with the audited annual consolidated financial statements of the Company and notes thereto.  See “Item 18. Financial Statements”Statements.” The consolidated financial statements have been prepared in accordance with USU.S. GAAP. All amounts are expressed in United States dollars unless otherwise noted. Annual references are to the Company’s fiscal years, which ended on November 30, 20102012, 2011 and December 31 of 2008 and 2009.2010.
 
A.  
 
Our results of operations have fluctuated significantly from period to period in the past and are likely to do so in the future. We anticipate that our quarterly and annual results of operations will be impacted for the foreseeable future by several factors, including the timing of approvals to market our productsproduct candidates in various jurisdictions and any resulting product sales, the timing and amount of payments received pursuant to our current and future collaborations with third-parties,third parties, and the progress and timing of expenditures related to our research,
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development and commercialization efforts. Due to these fluctuations, we presently believe that the period-to-period comparisons of our operating results are not a reliable indication of our future performance.

As a result of the IPC Arrangement Agreement completed on October 22, 2009, we selected a November 30 year end.  All comparable information is that of our predecessor company, IPC Ltd. which had a December 31 year end. The following are key selected financial data for the eleven month periodyears ended November 30, 20092012, 2011 and the years ended December 31, 2008 and 2007.2010.
 
 For periods ended  Dollar and Percentage change 
 
November 30
2009
  
December 31
2008
  
December 31
2007
  2009 vs 2008  2008 vs 2007  For years ended  Dollar and Percentage change 
 (11 Months)  (12 Months)  (12 Months)  
November 30,
2012
  
November 30,
2011
  
November 30,
2010
  
2012 vs 2011
  
2011 vs 2010
 
Revenue                                          
Research and Development $630,179  $1,277,704  $2,297,316   (647,525)  -50.7%  (1,019,612)  -44.4%
Research and development $107,091  $501,814  $1,459,385  $(394,723)  -79% $(957,571)  -66%
Expenses                                                        
Cost of revenue  382,597   1,885,790   1,641,245   (1,503,193)  -79.7%  244,545   14.9%
Research and development  1,554,859   419,187   483,050   1,135,672   270.9%  (63,863)  -13.2%  5,992,417   5,125,608   4,533,310   866,809   17%  592,298   13%
Selling , general and administrative  975,197   1,365,461   1,137,780   (390,264)  -28.6%  227,681   20.0%  3,672,313   2,925,454   2,699,204   746,859   26%  226,250   8%
Depreciation  344,768   574,851   399,160   (230,083)  -40.0%  175,691   44.0%  452,303   227,456   242,778   224,847   99%  (15,322)  -6%
Write-down on long lived assets  107,123   -   36,481   107,123   N/A   (36,481)  -100%
  3,257,421   4,245,289   3,661,235   (987,868)  -23.3%  584,054   16.0%  10,224,156   8,278,518   7,511,773   1,945,638   24%  766,745   10%
Loss before the undernoted  (2,627,242)  (2,967,585)  (1,363,919)  340,343   -11.5%  (1,603,666)  117.6%
FMV on adjustment of warrants  286,983   -   -   286,983   -   -   - 
Foreign exchange (loss) gain  587,642   (817,407)  85,634   1,405,049   -171.9%  (903,041)  -1054.5%
                            
Loss from operations  (10,117,065)  (7,776,704)  (6,052.388)  (2,340,361)  30%  (1,724,316)  28%
                            
Fair value adjustment of derivative liability  3,841,233   5,346,878   223,782   (1,505,645)  -28%  5,123,096   2289%
Financing expense  -   (2,357,732)  -   2,357,732   -100%  (2,357,732)  N/A 
Net foreign exchange gain (loss)  181,682   (70,036)  138,949   251,718   -359%  (208,985)  -150%
Interest income  1,822   95,282   91,985   (93,460)  -98.1%  3,297   3.6%  20,691   60,790   27,001   (40,099)  -66%  33,789   125%
Interest expense  (87,940)  (75,464)  (104,492   (12,476)  16.5%  29,028   -27.8%  (63,406)  (83,473)  (98,435)  20,067   -24%  14,962   -15%
Loss for the year  (1,838,735)  (3,765,174)  (1,290,792)  1,926,439   -51.2%  (2,474,382)  191.7%
Loss $(6,136,865) $(4,880,277) $(5,761,091) $(1,256,588)  26% $880,814   -15%
Loss per common share, basic and diluted $(0.36) $(0.33) $(0.53) $(0.03)  9% $0.20   -38%
 
Eleven Month PeriodYear Ended November 30, 20092012 Compared to the Year Ended December 31, 2008November 30, 2011
 
Revenue
 
The Company recorded revenues of $630,179$107,091 for the 11 month period ended November 30, 2009 versus $1,277,704 for the year ended December 31, 2008. Revenue in 2009 was comprised of recognition of upfront fees of $480,655 received in a prior years, research and development service fees of $144,295 and cost reimbursements in the amount of $5,229 compared to upfront fees of $620,282, research and development service fees of $544,051 and cost reimbursements in the amount of $113,371 in the year ended December 31, 2008.  The decrease in revenue can be primarily attributed to the Company having more late stage development activity with its partnered projects in 2008, compared to 2009 when the Company was not as actively involved in such activities for its partnered projects.  Also, 2009 revenue reflects activities for 11 m onths in comparison to the 12 month period in 2008.
Cost of Revenue
Cost of revenue for the 11 month period ended November 30, 2009 was lower when compared with the year ended December 31, 2008 primarily as the Company performed less activity on partnered projects during the year ended November 30, 2009, when compared2012 versus $501,814 for 2011. In the prior year additional strengths of generic Focalin XR® were added to the 12 month periodexisting development and commercialization agreement between the Company and Par. Under the terms of the expanded agreement, the Company received a cash payment of $600,000 from Par, of which $492,909 was recognized in 2008.the year ended November 30, 2011. During the year ended November 30, 2012, the remaining deferred revenue of $107,091 was recognized as revenue mainly related to development work completed for the 40 mg strength.
 
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Research and Development
 
Expenditures for research and developmentR&D for the 11 month period ended November 30, 2009 were higher when compared with the year ended December 31, 2008 primarily as the Company performed more activity on its own projects during the year ended November 30, 2009, when2012 were $5,992,417 in comparison to $5,125,608 in the prior year, an increase of $866,809. These included spending for R&D activities as well as expenses on stock options as detailed below.
In the year ended November 30, 2012, we recorded $1,505,061 as expenses for stock options for R&D employees; there was no expense for performance-based stock options. In the prior year we recorded $601,424 as expenses for stock options for R&D employees; composed of $158,624 related to stock options issued to non-executive employees involved in R&D activities, and $442,800 related to 276,394 performance-based stock options issued to Dr. Isa Odidi and Dr. Amina Odidi, principal shareholders, directors and executive officers of the Company. We recorded these expenses as we determined it was probable as at November 30, 2011 we would satisfy the performance criteria that will allow vesting of the options.
After adjusting for the stock options expenses discussed above, expenditures for R&D for the year ended November 30, 2012 were slightly lower by $36,829 compared to the 12 month period in 2008.prior year.
 
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Selling, General and Administrative
 
Selling, general and administrative expenses were $975,197 for the 11 month period ended November 30, 2009 as compared to $1,365,461$3,672,313 for the year ended December 31, 2008, a reductionNovember 30, 2012 in comparison to $2,925,454 for the year ended November 30, 2011, an increase of $390,264 or 28.6%.$746,859.  The increase is due to an increase in expenses related to wages, marketing cost and occupancy costs which are discussed in greater detail below.
Expenditure for wages and benefits for the year ended November 30, 2012 were $1,946,535 in comparison to $1,066,307 in the prior year.   This increase is attributable to the issuance of options.  In the year ended November 30, 2012, we recorded $855,511 as expenses for stock options compared to an expense of Nil for the prior year. After adjusting for the stock options expenses, expenditures for wages and benefits for the year ended November 30, 2012 were slightly higher by $24,717 compared to the prior period.
Administrative costs for the year ended November 30, 2012 were $1,279,696 in comparison to $1,537,203 in the prior year.  The decrease is primarily due to a decrease in legal and accounting costs for year end regulatory filings when compared with the prior year. The decrease was partially offset by higher business development consulting costs for a period of 12 months for the year ended November 30, 2012 compared to only ten months in the prior year.
Marketing costs for the year ended November 30, 2012 were $352,803 in comparison to $251,720 in the prior year.  This increase is primarily the result of an increase in travel expenditures for business development activities and the retention of an investor relations firm.
Occupancy costs for the year ended November 30, 2012 were $93,279 in comparison to $70,224 in the prior year. The increase is due to higher utilities and a new leased office for IPC Ltd.
Depreciation
Depreciation expenses for the year ended November 30, 2012 were $452,303 in comparison to $227,456 in the prior year. The increase is primarily due to the additional investment in production, laboratory and computer equipment.
Fair Value Adjustment of Derivative Liability
On February 1, 2011 the Company completed a private offering for the sale of 4,800,000 units of the Company, each unit consisting of one share of common stock, a five year Series A common share purchase warrant to purchase 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. The Company also issued to the placement agents 96,000 warrants to purchase a whole share of common stock at an exercise price of $3.125 per whole share.
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Under U.S. GAAP, where the strike price of warrants is denominated in a currency other than an entity's functional currency, the warrants would not be considered indexed to the entity’s own stock.  As a result, the Company determined that these warrants are not considered indexed to the Company’s own stock and therefore would consequently be considered to be a derivative liability. Also under U.S. GAAP, warrants with the cashless exercise option satisfying the explicit net settlement criteria are considered a derivative liability.
U.S. GAAP requires the fair value of these liabilities be re-valued at the end of every reporting period with the change in value reported in the statement of operations. Accordingly, the fair value of the warrant derivative liability from the IPC Arrangement Agreement, the Series A, the Series B and the placement agents’ warrants have been re-valued at November 30, 2012 using the Black-Scholes Options Pricing Model, resulting in a decrease in the fair value of the warrant derivative liability of $3,841,233.
Financing Expense
Financing expense was $Nil for the year ended November 30, 2012 compared to $2,357,732 for the prior year. On March 15, 2012 the Company closed a registered direct common share offering for gross proceeds of $5 million; for this financing the costs were recorded in shareholder equity. For the year ended November 30, 2011 financing expense included other direct costs related to the registration statement filed as part of the February 1, 2011 private placement financing for gross proceeds of $12,000,000. These costs were expensed as they were attributable to the warrant liability.
Foreign Exchange Gain
Foreign exchange gain was $181,682 for the year ended November 30, 2012 in comparison to a loss of $70,036 for the prior year.  The foreign exchange gain for the year ended November 30, 2012 was due to the weakening of the Canadian dollar against the U.S. dollar throughout the year as the exchange rate averaged $1.00 for C$0.9977 compared to $1.00 for C$0.9879 for prior year. Based on year end dates, the Canadian dollar strengthened against the U.S. dollar as the exchange rates changed to $1.00 for C$0.9936 at November 30, 2012 from $1.00 for C$1.0203 at November 30, 2011.
The loss for the year ended November 30, 2011, was due to the strength of the Canadian dollar during the year ended November 30, 2011 as the exchange rate averaged $1.00 for C$0.9879 compared to $1.00 for C$1.0345 for the prior year. During 2011 most of our cash was held in U.S. dollars. Based on year end dates, the Canadian dollar modestly strengthened against the U.S. dollar as the rates changed to $1.00 for C$1.0203 at November 30, 2011 from $1.00 for C$1.0266 at November 30, 2010.
Interest Income
Interest income was $20,691 for the year ended November 30, 2012 in comparison to $60,790 for the year ended November 30, 2011, a decrease of $40,099. The current year interest was lower largely due to a lower average amount of cash equivalents on hand during 2012.
Interest Expense
Interest expense was $63,406 for the year ended November 30, 2012 in comparison to $83,473 for the year ended November 30, 2011, a decrease of $20,607. The amount outstanding on a related party loan which accrues interest at 6% annually was lower in the year ended November 30, 2012 in comparison to the prior year.
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Year Ended November 30, 2011 Compared to the Year Ended November 30, 2010
Revenue
The Company recorded revenues of $501,814 for the year ended November 30, 2011 versus $1,459,385 for 2010. In 2011, additional strengths of generic Focalin XR® were added to the existing development and commercialization agreement between the Company and Par. Under the terms of the expanded agreement, Intellipharmaceutics received a cash payment from Par of $600,000. As at November 30, 2011, $492,909 of the payment was recognized as revenue mainly related to development work completed for the 30mg strength. Included in revenue in 2010 was recognition of an upfront fee of $1,449,624 and cost reimbursements in the amount of $9,761. The 2010 upfront fee revenue recognition can be primarily attributed to a drug development agreement that was mutually terminated by us and another party as a result of which unearned revenue of approximately $1,439,000 was recognized as income.
Research and Development
Expenditures for R&D for the year ended November 30, 2011 were higher by $592,298 compared to the year ended November 30, 2010. These included spending for research and development activities as well as expenses on stock options as detailed below.
In the year ended November 30, 2011, we recorded $601,424 as expenses for stock options for R&D employees; composed of $158,624 related to stock options issued to non-executive employees involved in R&D activities, and $442,800 related to 276,394 performance-based stock options issued to Dr. Isa Odidi and Dr. Amina Odidi, the principal shareholders, officers and directors of the Company. These performance-based stock options related to services provided for R&D activities leading to an ANDA being filed. These options vest upon the achievement of certain performance criteria. Included in the prior year is an expense of $885,600 relating to 552,788 performance-based stock options issued to Dr. Isa Odidi and Dr. Amina Odidi.
After adjusting for the stock options expenses discussed above, expenditures for research and development for the year ended November 30, 2011 were higher by $876,474 compared to the prior year. This is primarily attributed to the fact that during the year ended November 30, 2011 we advanced development of several generic product candidates including two multi-strength products that were filed as ANDAs during the year, and the development of a number of other pipeline product candidates.  Although we had four ANDA filings in 2010, some of the development for the products had been carried out in prior periods, and fewer projects were initiated in 2010.
Selling, General and Administrative
Selling, general and administrative expenses were $2,925,454 for the year ended November 30, 2011 in comparison to $2,699,204 for the year ended November 30, 2010, an increase of $226,250.  The increase is due to an increase in expenses related to legal fees, wages marketing cost and occupancy costsbenefits which are discussed in greater detail below.
 
Expenditures for wages and benefits for the 11 month periodyear ended November 30, 20092011 were $338,110 compared with $373,717$1,066,307 in comparison to $835,184 for the prior year.   This increase is attributable to the issuance of options, higher salaries in two executive positions, and an increase in the level of salaries to non-executive employees during the year ended December 31, 2008.  This reduction is attributable to a decrease in administrative staffing levels and salary reductions during a portion of the 11 month period ending November 30, 20092011 when compared to the prior period.year.
 
Administrative costs for the 11 month periodyear ended November 30, 20092011 were $498,241 compared with $798,724$1,537,203 in comparison to $1,556,087 for the year ended December 31, 2008.  The decrease is primarily due to a reductionprior year.  There was no notable change in accounting and legal costs expensed when compared with the period in 2008. Accounting and legal expenses incurred in connection with the transaction whereby IPC Ltd. combined with Vasogen under a plan of arrangement and merger (the “IPC Arrangement Agreement”) , were charged to shareholders’ equity as share issuance costs for the 11 month period ended November 30, 2009.  In the prior period these fees were expensed as incurred.administrative costs.
 
Marketing costs for the 11 month periodyear ended November 30, 20092011 were $90,780 compared with $131,021 for the year ended December 31, 2008.  This decrease is mainly a result of a reduction primarily in travel and advertising expenditures during these periods.  Also 2009 marketing costs reflect activities for 11 months$251,720 in comparison to 12 months$239,638 for the prior year.  There was no notable change in 2008.marketing costs.
 
Occupancy costs for the 11 month periodyear ended November 30, 20092011 were $48,066 compared with $61,999$70,224 in comparison to $68,295 for the year ended December 31, 2008.  This decrease is mainly a result of an eleven month fiscal period for November 30, 2009 being compared with a twelve month fiscal period for December 31, 2008.prior year.  There was no notable change in occupancy costs.
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Depreciation
 
Depreciation expense for the 11 month period ended November 30, 2009 was lower when compared with the year ended December 31, 2008 primarily as a result of reduced investment in property and equipment and leasehold improvements as the Company cut down on investments until additional financing could be secured.  Also 2009 depreciation reflects charges for 11 months in comparison to 12 months in 2008.
Foreign Exchange (Loss) Gain
Gain on foreign exchange was $587,642 for the 11 month period ended November 30, 2009 compared to a loss of $817,407 for the same period in 2008.  The gain for the year ended November 30, 20092011 was $227,456 in comparison to $242,778 for the year ended November 30, 2010. There was no notable change in depreciation as fixed assets additions were made late in the year.
Fair Value Adjustment of Derivative Liability
As part of the IPC Arrangement Agreement we have 243,275 warrants outstanding. On February 1, 2011 the Company completed a private offering for the sale and issuance of 4,800,000 units of the Company, each unit consisting of one share of common stock, a five year Series A common share purchase warrant to purchase 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. The Company also issued to the placement agents 96,000 warrants to purchase a whole share of common stock at an exercise price of $3.125 per whole share.
Under U.S. GAAP, where the strike price of warrants is denominated in a currency other than an entity's functional currency, the warrants would not be considered indexed to the entity’s own stock.  As a result, the Company determined that these warrants are not considered indexed to the Company’s own stock and therefore would consequently be considered to be derivative liability. Also under U.S. GAAP, warrants with the cashless exercise option satisfying the explicit net settlement criteria are considered a derivative liability.
U.S. GAAP requires the fair value of these liabilities be re-valued at the end of every reporting period with the change in value reported in the statement of operations. Accordingly, the fair value of the warrant derivative liability from the IPC Arrangement Agreement, the Series A, the Series B and the placement agents’ warrants have been re-valued at November 30, 2011 using the Black-Scholes Options Pricing Model, resulting in a decrease in the fair value of the warrant derivative liability for $5,346,878.
Financing Expense
Financing expense for the year ended November 30, 2011 was $2,357,732 related to the private placement financing for gross proceeds of $12,000,000 and a related registration statement. There was no financing expense for the year ended November 30, 2010.
Foreign Exchange Loss
Foreign exchange loss was $70,036 for the year ended November 30, 2011 in comparison to a lossgain of $138,949 in the period in 2008prior year.  The foreign exchange loss was due to the weakeningstrength of the USCanadian dollar during the year ended November 30, 2011 as the exchange rate averaged $1.00 for C$0.9879 compared to $1.00 for C$1.0345 for the year ended November 30, 2010. During 2011 most of our cash was held in U.S. dollars. Based on year end dates, the Canadian dollar modestly strengthened against the CanadianU.S. dollar as the rates changed from ($1.00 (US) for $1.2180 (Cdn) at December 31, 2008 to $1.00 (US) for $1.0556 (Cdn)C$1.0203 at November 30, 2009. Over the course2011 from $1.00 for C$1.0266 at November 30, 2010. The foreign exchange gain of $138,949 for the year ended November 30, 20092010, was because most of our cash was being held in Canadian dollars, the exchange rate averagedaverage of $1.00 (US) for $1.1493 (Cdn) comparedC$1.0345, and based on year end dates the Canadian dollar strengthened against the U.S. dollar as the rates changed to $1.00 (US) for $1.0671 (Cdn)C$1.0266 at November 30, 2010 from $1.00 for the year ended December 31, 2008.C$1.0556 at November 30, 2009.
 
Interest Income
 
Interest income was $60,790 for the 11 month periodyear ended November 30, 20092011 in comparison to $27,001 for the year ended November 30, 2010, an increase of $33,789. The current year interest was lower when compared with December 31, 2008 primarily ashigher largely due to a result of a lowerhigher average amount of cash equivalents on hand during 2011 largely due to the net proceeds of $10.5 million from the issuance of shares and lower rates of returnswarrants from the private placement completed on our investments.February 1, 2011.
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Interest Expense
 
Interest expense was $83,473 for 2009 was higher when compared with 2008 primarily asthe year ended November 30, 2011 in comparison to $98,435 for the year ended November 30, 2010, a resultdecrease of a higher$14,962.The average amount outstanding on the related party loan.  The amount outstanding on thedue to related party loan which accrues interest at 6% annually was higherlower during 2011 in 2009 as a result of additional funds advanced by the related party during 2009comparison to support operations until the IPC Arrangement Agreement with Vasogen was completed on October 22, 2009.2010.

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Year Ended December 31, 2008 Compared to the Year Ended December 31, 2007
Revenue
B.  
 
The Company recorded revenues of $1,277,704 for the year ended December 31, 2008 compared to $2,297,316 for the year ended December 31, 2007; a decrease of $1,019,612 or 44.4%. Revenue for the fiscal year 2008 was comprised of up-front fees recognized of $620,282, research and development service fees of $544,051 and $113,371 as cost reimbursements compared to up-front fees recognized of $641,704, milestone payments earned of $610,128, research and development service fees of $861,632 and cost reimbursements of $183,852 for the year ended 2007.
During fiscal 2007 development milestones were attained in respect of partnered project for which the Company received milestone payments that were recognized in 2007.  In addition to these milestone payments, the Company was engaged in increased late stage development activities in 2007. Payments received for these activities were recognized as revenue, although activities were also performed in 2008, it was to a lesser degree.
Cost of Revenue
Expenditures for cost of revenue on products being developed in collaboration with partners increased to $1,885,790 for the year ended December 31, 2008 compared to $1,641,245 for the same period in 2007, an increase of $244,545 or 14.9%.  The increase in cost of revenue was due to increase in research and development activity as more partnered projects were obtained towards the end of the fourth quarter of 2007 which resulted in more work being completed in 2008 when compared with 2007.  Furthermore, there was an increase in staff engaged in research and development to accommodate the increase in activity as well as an increase in salaries for the existing staff.  This also contributed to the increase in the cost of revenue.
Research and Development
Our expenditures for research and development decreased to $419,187 for the year ended December 31, 2008 compared to $483,050 for the same period in 2007, a decrease of $63,863 or 13.2%. This small difference is attributable to a decrease in expenditure on research & development activity in respect of in-house projects in the year ended December 31, 2008 compared to the same period in 2007.
Selling, General and Administrative
Selling, general and administrative expenses were $1,365,461 for the year ended December 31, 2008 as compared to $1,137,780 for the year ended December 31, 2007.
Expenditure for wages and benefits increased to $373,717 for the year ended December 31, 2008 compared to $313,619 for the same period in 2007, an increase of $60,098 or 19.2%.  Administrative expenditure was $798,724 for the year ended December 31, 2008 compared to $549,701 for the same period in 2007, an increase of $249,023 or 45.3%.  The increase is primarily due to an increase in legal costs by $104,081 and accounting fees by $175,610 from 2007. During the year ended December 31, 2008 the Company commenced exploring financing avenues through primarily a business combination with a public company in Canada thereby incurring legal and accounting expenses.
Occupancy costs increased to $61,999 in the year ended December 31, 2008 from $54,663 for the same period in 2007.  The increase is due to the increases in cost of utilities and repairs and maintenance attributed to greater utilisation of the cGMP (current Good Manufacturing Practices) facility within our premises as several products were scaled to large batches during the period.
Marketing costs were $131,021 for the year ended December 31, 2008 compared to $219,797 for the same period in 2007, a decrease of $88,776 or 40.4%.  Some consulting contracts terminated in 2007, and management did not have the need to have these renewed.
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Depreciation
For the fiscal year 2008 depreciation expense was $574,851 representing an increase of $175,691 or 44% from $399,160 for the same period in 2007.  The increase is primarily due to the additional investment in equipment, computer equipment and leasehold improvements consistent with equipping and out-fitting of our research and development facility and upgrading computer equipment.
Foreign Exchange (Loss) Gain
The Company enters into foreign currency transactions in the normal course of business.  Loss on foreign exchange was $817,407 for the year ended December 31, 2008 compared to a gain of $85,634 for the same period in 2007.  The increase in the foreign exchange loss was due to the decrease in exchange rate at December 31, 2008 which was at $0.8210 USD as compared to $1.0087 USD in 2007.
Interest Income
For the fiscal year 2008 interest income was $95,282 compared to $91,985 for the same period in 2007 a decrease of $3,297 or 3.6%. The decrease is due to the foreign exchange rate being lower in 2008 as compared to 2007.
Interest Expense
The decrease in the interest expense by $29,028 is due to the repayment of funds advanced from related parties with an interest rate of 6% per annum.
B.  Liquidity and Capital Resources
Sources of cash have been financing activities and revenues from development contracts, and in 2009, cash was obtained as a result of the IPC Arrangement Agreement with Vasogen.  The Company had cash and cash equivalents of $8,014,492$497,016 as at November 30, 2009,2012 compared to $902,213$4,817,088 as at December 31, 2008.November 30, 2011, and compared to $789,136 at November 30, 2010. The increasedecrease in cash during the year ended November 30, 2012 is mainly a result of the IPC Arrangement Agreement, as described in Item 4.A, effective October 22, 2009 which resulted in us receiving $9.0 million in net cash in addition to $0.5 million from a prior loan from Vasogen for which the repayment obligation ceased at the time of the transaction and an additional $0.5 million in receivables from tax credits recoverable that were earned by Vasogen from the Ontario Innovation Tax Credit, the Goods and Services Tax Credits and other recoverable tax amounts.
Net cash flows used in operating activities was $4,857,983 forrelated to research and development activities, as noted below. The increase in cash during the 11 month periodyear ended November 30, 2009,2011 is mainly a result of cash flows from financing activities, as noted below.
For the year ended November 30, 2012 net cash flows used in operating activities increased to $7,654,361, as compared to net cash flows used in operating activities of $1,735,727 for the year ended December 31, 2008 and net cash flows from operating activities, of $680,121 for the year ended December 31, 2007. The fluctuations in cash flows from operations are influenced by our net loss.  We had net losses of $1,838,735 from continuing operations in 2009, as compared to net losses of $3,765,154 and $1,290,792 in 2008 and 2007, respectively.
Net cash flows from financing activities was $798,496 for the 11 month periodyears ended November 30, 2009, as compared to net2011 and 2010 of $6,981,448 and $6,194,195, respectively. The November 30, 2012 increase in cash flows used in financingoperating activities of $354,797 for the year ended December 31, 2008 and net cash flows from financing activities of $2,304,656 for the year ended December 31, 2007.  During the year ended November 30, 2009 the Company received $1,164,367 that was advanced from related parties and paid $2,299,289 for liabilities assumed from the cash received as a result of the IPC Arrangement Agreement, as described in Item 4.A.  In 2008, the Company repaid $316,392 that was advanced by related parties and repaid its capital lease obligations of $38,405.  During the year ended December 31, 2007 the Company repaid $300,864 that was advanced by related parties and received $2,618,323 from the issuance of capital stock.
All non-cash items, including items relatedcan be attributed to the acquisitionprior years’ cash receipt of assets and assumption of liabilities related to the asset acquisition transaction described in Item 4.A have been eliminated.
Currently, the Company does not anticipate generating sufficient cash flows$0.6 million from operations as it pursues the development of a portfolio of ANDA and 505 (b) (2) NDA products.  The Company’s future liquidity and cash
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requirements will dependPar based on a wide range of factors, including the success of development programs, securing licensing contracts as well as procurement of co-development or other collaborations. Therefore, as development of products continues, it will be necessary to raise capital or seek additional financing.  There can be no assurance that such raising of capital would be available in the amounts and on terms acceptable to us.
During 2009 we undertook initiatives to lower operating expenses. Cost reduction initiatives included reducing the staff head count by seven effective April 30, 2009, a 10-15% percentage decrease in salaries for the remaining staff, as well as a hold on equipment purchase and clinical trials in the short term.
Repayments for a related party loan are restricted under the terms of the loan such that repayment can only be made from revenuesexpanded agreement for development and commercialization of Focalin XR® generics, and C$1,188,668 received or proceeds from the issuanceCanada Revenue Agency (“CRA”) and the Ontario Ministry of securities received by us, scientific tax credits receivedFinance (“OMF”) of ITCs for research and development activities described more fully below. During these years the Company incurred similar cash expenditures in research and development activities, as described below, and incurred similar cash by usexpenditures in selling, general and up to a maximum of Cdn$800,000 from proceeds received by us in the merger and arrangement transaction recently completed with Vasogen. Thus our current cash reserves will not be used for such repayment other than to the limited extentadministrative expenses, as described in greater detail above.
Research and development costs related to continued internal research and development programs are expensed as incurred. However, materials and equipment are capitalized and amortized over their useful lives if they have alternative future uses. For the preceding sentence.  Subsequent to the end of the year the related party loan was repaid by Cdn$800,000 from proceeds received by us from the merger and arrangement transaction.  Interest payable on this loan was accrued in the amount of $110,000 as atyears ended November 30, 2009. Subsequent to2012, 2011, and 2010, R&D expense was $5,992,417, $5,125,608 and $4,533,310, respectively. For the end of the year this amountyears ended November 30, 2012, 2011, and 2010, R&D expense before stock option expense was als o repaid.$4,487,356, $4,524,185 and $3,647,710, respectively.
 
As a research and development company, IPC Corp wasis eligible to receive investment tax credits (“ITC”)ITCs from various levels of government under the Scientific Research & Experimental Development (“SR&ED”) incentive programs.  Depending on the financial condition of IPC Corp., up to 35% ofCorp, research and development expenses in any fiscal year could be claimed.  Eligible research and development expenses included salaries for employees involved in research and development, cost of materials, equipment purchase as well as third party contract services.  This amount wasis not a reduction in income taxes but a form of government grantrefundable credits based on the level of research and development that the Company carries out.
 
Based on management’s best estimate,In fiscal 2012, the Company expects to receive $864,868 fromreceived C$300,000 for the Canada Revenue Agency andITCs with the Ontario Ministry of Finance during the first half of fiscal 2010 comprised of research & development creditsOMF for research and development activities carried out during the fiscal year 2008. Realization of these credits is subject to government approval; however, management is reasonably assured that we may receive a substantial amount during the first half of2011.
In fiscal 2010. Based on management’s best estimate,2011, the Company expects to receive $577,222received C$640,081 from the Canada Revenue AgencyCRA and the Ontario Ministry of Finance during the second half of fiscal 2010OMF comprised of ITCs for research &and development creditsactivities carried out to the period ended October 21, 2009.  The Company received another refund of C$207,370 for the ITC with the OMF for research and development activities carried out during the period endedfiscal year 2010. Finally, the Company also received C$341,217 in other tax credits receivable that were acquired in the October 21, 2009.22, 2009 IPC Arrangement Agreement. Subsequent to the IPC Arrangement, the Company is no longer a Canadian-controlled private corporation, reducing the amounts that we would otherwise be eligible for.  Realization of these credits is subject to government approval; however, management is reasonably assuredapproval.
During the year ended November 30, 2010 net cash flows used in operating activities has been partially offset by approximately C$931,000 that we may receive a substantial amountwas received from the CRA and the OMF being payments of claims for SR&ED tax credit and an Ontario Innovation Tax Credit in respect of research and development activities carried out by IPC Ltd. during the first halffiscal year 2008.  The fluctuations in cash flows from operations are influenced by our net loss. We had net losses of fiscal$4,880,277 in 2011, as compared to net losses of $5,761,091 in 2010.  The Company has claimed these
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For the year ended November 30, 2012, net cash flows provided from financing activities of $4,363,865 related principally to the registered direct common share offering for gross proceeds of $5 million completed in March 2012, warrant exercises, and partially offset by share issuance costs from the financing.
For the year ended November 30, 2011, net cash flows provided from financing activities of $11,269,162 related mainly to the gross proceeds of $12,000,000 from the issuance of shares and warrants from the private placement completed on February 1, 2011. This cash flow provided from financing activities was partially offset by the repayment of $801,551 (C$817,822) for a related party loan payable to Dr. Isa Odidi and Dr. Amina Odidi, principal stockholders, directors and executive officers of Intellipharmaceutics, for cash advances made by them to us as a shareholder loan, in accordance with the terms of the loan. This repayment was not sourced from the gross proceeds of the private placement. See Related Party Transactions below for repayment restrictions. For the year ended November 30, 2010 net cash flows used in financing activities of $907,001 related mainly to the repayment of the related party loan payable to Dr. Isa Odidi and Dr. Amina Odidi, principal stockholders, directors and executive officers, for cash advances made by them to the Company. In addition, during the year ended November 30, 2010 net cash flows used in financing activities also included the repayment of capital lease obligations.
Repayment of the related party loan is restricted under the terms of the loan such that repayment can only be made from revenues received or proceeds from the issuance of securities received by us, other than the securities offerings completed on March 15, 2012 and February 1, 2011; scientific research tax credits for several years,received in cash by us; and up to date the Company hasa maximum of C$800,000 from proceeds received government approval for the estimated expenses within the expected timing.
As a result of the transactions, as describedby us in Item 4.A, 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 share they exchanged in the transaction. As a result, as at November 30, 2009, we had 2,939,188 options to purchase common shares of the Company outstanding, including 87,256 broker options issued in exchange for broker options previously issued.
In connection with the IPC Arrangement Agreement describedcompleted with Vasogen in Item 4.A, effective October 22, 2009 certain common share purchase warrants previously issued by Vasogen were exchanged for warrants of IPC based on the same exchange ratio as the common shares Vasogen exchanged in the transaction.2009. As a result, as at November 30, 2009, we have 376,699 warrants to purchase common shares2012, interest payable on this loan was accrued in the amount of $13,938 (C$13,849). During the year ended November 30, 2012, no repayment was made and interest payments of $39,173 (C$39,083) were made. As at November 30, 2011, interest payable on this loan was accrued in the amount of $7,493 (C$7,645). During the year ended November 30, 2010, the shareholder loan principal of $755,760 (C$800,000) was repaid from proceeds received by us from the IPC Arrangement and interest of $104,943 (C$110,453) was paid in accordance with the terms of the Company outstanding.IPC Arrangement Agreement.
For the year ended November 30, 2012, net cash flows used in investing activities of $1,036,092 related mainly to the purchase of production, laboratory and computer equipment due to the acceleration of product development activities. For the year ended November 30, 2011, net cash flows used in investing activities of $262,142 related mainly to the purchase of production and laboratory equipment due to the acceleration of product development activities. For the year ended November 30, 2010, net cash flows used in investing activities of $133,878 related mainly to the delivery and qualification of our primary manufacturing equipment for the manufacture of an abuse-deterrent formulation of controlled-release oxycodone hydrochloride.
All non-cash items have been eliminated from the consolidated statements of cash flows.
 
The Company’s principal business activities are focused on the research, developmentCompany has not been profitable and manufacture of controlled and targeted once-a-day oral dose solid drugs. The Company earns revenues from development contracts which typically 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 and $11,467,716 at November 30, 2009 and December 31, 2008, respectively.inception. The Company has funded its research and development activities through the issuance of capital stock,securities, loans from related parties, funds from the IPC Arrangement Agreement and funds received under development agreements. Currently, the Company does not anticipate generating sufficient cash flows from operations as it pursues the development of a portfolio of ANDA and NDA 505(b)(2) products.  Our future operations are highly dependent upon our ability to raise additional capital to support advancing our product pipeline through continued research and development activities.
On January 10, 2013, the Company completed a private placement financing of an unsecured convertible debenture (the “Debenture”) in the principal amount of $1.5 million, which will mature January 1, 2015. The Debenture bears interest at a rate of 12% per annum, payable monthly, is pre-payable at any time at the option of the Company, and is convertible at any time into 500,000 common shares at a conversion price of $3.00 per common share at the option of the holder. On March 15, 2012, the Company completed a registered direct common share offering for gross proceeds of $5 million. The Company sold an aggregate of 1,818,182 shares to U.S. institutional investors at a price of $2.75 per share. After placement agent fees and estimated offering expenses, the Company received net proceeds from the offering of approximately $4.2 million. On February 1, 2011, the Company completed a private placement financing to institutional investors for gross proceeds of $12,000,000 through the sale of its common stock and warrants to support product pipeline development. Financing expense of $2,357,732 is comprised of the issuance of broker warrants valued at $229,005, the excess of the fair value of the warrant liability over the financing proceeds of $655,582, and $1,473,145 of other direct costs related to the financing.
 
 
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AsIn order for us to continue operations at existing levels, we expect that over the Company has several projects in the research and development stage, it expectsnext twelve months we will require significant additional capital.  While we expect to incur additional losses and require additional financial resources to support itssatisfy our 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 and finance its cash requirements at least the next twelve months from cash on an ongoing basis. Management believeshand, collection of anticipated revenues resulting from future commercialization activities, development agreements or marketing license agreements, through managing operating expense levels, using funds from senior management through the convertible debenture described elsewhere herein, equity and/or debt financings, and/or new strategic partners funding some or all costs of development, there can be no assurance that the Companywe will be able to obtain additionalany such capital on terms or in amounts sufficient to meet our needs or at all.  The availability of equity or debt 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 revenues from licensing arrangements,by issuing equity issuancessecurities, our then existing security holders will likely experience dilution, and other sourcesthe 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.  The consolidated financial statements doAny 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 include any adjustments that might result fromtaking advantage of business opportunities, in the outcometermination or delay of this uncertainty.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 ANDAs or NDAs at all or in time to competitively market our products or product candidates.
 
C.  
 
We expense R&D costs.  For the eleven month periodyears ended November 30, 2009,2012, 2011, and the years ended December 31, 2008,2010, R&D expense was $5,992,417, $5,125,608 and 2007, we spent a total of $1,554,859, $419,187, and $483,050, respectively, on research and development.
The Company earns revenue from non-refundable upfront fees and milestone payments upon achievement of specified research or development events under development agreements, from payments for research and development services such as analytical chemistry, scale-up, stability studies and product testing, and potentially from royalty payments or share of net profits on sales of products. Revenue is realized or realizable and earned when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price to the customer is fixed or determinable, and collectability is reasonably assured. From time to time, the Company enters into transactions that represent multiple-element arrangements. Management evaluates arrangements with multiple deliverables to determine whether the deliverables represent one or more units of accounting for the purpose of revenue recognition.  A delivered item is considered a separate unit of accounting if the delivered item has stand-alone value to the customer, the fair value of any undelivered items can be reliably determined, and the delivery of undelivered items is probable and substantially in the Company’s control.$4,533,310, respectively.
 
D.  
 
It is important to note that historical patterns of expenditures cannot be taken as an indication of future expenditures. The amountNet income and timing of expendituresloss has been variable over the last twelve quarters, and is impacted primarily by the availability of capital resources vary substantially from period to period, depending onfunding, the level of research and development activity being undertaken at any one timeour R&D spending, and the availabilityfair value adjustment of funding.  In generalderivative liability. The Company’s reduced net loss in the quarterly expenditures were higher in 2008 when compared to 2009 is duesecond quarter ended May 31, 2012, can be attributed to the fact we were in a stronger financial position during 2008 when compared with 2009.  As discussed previously this decreasedfair value adjustment of derivative liability of $0.8 million and the timing of certain R&D activities. The Company’s increased net loss is duein the first quarter ended February 29, 2012, can be attributed to initiatives takenan increase in options expense for options issued during the period. The Company’s net income in the third quarter ended August 31, 2011, can be attributed to lower operating expenses.  This included a decreasethe $0.5 million in wagesrevenue received for the expanded agreement between the Company and benefitsPar for both administrativethe development and research and development staffcommercialization of Focalin XR® generics, as well as a reductionthe fair value adjustment of the derivative liability for $2.5 million. The Company’s increased net loss in overall staffing level s.the first quarter ended February 28, 2011, can be attributed to financing expenses of $2.2 million related to the February 1, 2011 financing which was only partially offset by the fair value adjustment of derivative liability of $1.0 million.
 
The following selected financial information is derived from our unaudited interim consolidated financial statements for the period ended November 30, 2009.  All comparable information for the periods prior to October 22, 2009 is that of our predecessor company, IPC Ltd., which had a December 31 year end.  Loss per share has been adjusted to reflect the impact of the IPC Arrangement Agreement, as described in Item 4.A.statements.
 
Quarter Ended RevenuesNet LossLoss per share
November 30,2009(2 Months)161,757(875,322)(0.09)
September 30,2009 125,590(165,739)(0.02)
June 30, 2009 118,460(224,662)(0.02)
March 31, 2009 224,372(573,012)(0.06)
December 31,2008 117,740(2,081,991)(0.22)
September 30,2008 180,388(915,596)(0.10)
June 30, 2008 268,426(470,335)(0.05)
March 31, 2008 711,150(297,252)(0.03)
Quarter Ended  Revenues  Net income (loss)  Income (loss) per share 
         Basic  Diluted 
    $   $   $   $ 
November 30, 2012   -   (1,346,735)  (0.08)  (0.08)
August 31, 2012   -   (1,458,238)  (0.08)  (0.08)
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Quarter Ended
   
Revenues
   
Net income (loss)
   
Income (loss) per share
 
            
Basic
   
Diluted
 
May 31, 2012   -   (1,357,843)  (0.08)  (0.08)
February 29, 2012   107,091   (1,936,519)  (0.12)  (0.12)
November 30, 2011   -   (1,285,132)  (0.09)  (0.09)
August 31, 2011   501,814   1,097,131   0.07   0.05 
May 31, 2011   -   (1,968,783)  (0.12)  (0.12)
February 28, 2011   -   (2,723,493)  (0.22)  (0.22)
November 30, 2010   7,164   (1,903,629)  (0.18)  (0.18)
August 31, 2010   -   (2,113,462)  (0.19)  (0.19)
May 31, 2010   1,449,624   (316,447)  (0.03)  (0.03)
February 28, 2010   2,597   (1,427,553)  (0.13)  (0.13)
E.  
The Company, as part of its ongoing business, does not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities (“SPE”), which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of November 30, 2012, the Company was not involved in any material unconsolidated SPE transactions.
F.  
In the table below, we set forth our enforceable and legally binding obligations and future commitments and obligations related to all contracts. Some of the figures we include in this table are based on management’s estimate and assumptions about these obligations, including their duration, the possibility of renewal, anticipated actions by third parties, and other factors.  The Company has entered into capital lease agreements for laboratory equipment where the lease obligation will end in fiscal 2014.  Operating lease obligations related to the lease of premises will expire in November 2013, with an option to extend the lease on comparable terms for five additional years.
     Payments Due by Period 
Contractual Obligations Total  
Less than
1 Year
  1-3 Years  4-5 Years  
After 5
Years
 
Capital Lease Obligations $97,766  $51,524  $46,242  $---  $--- 
Operating Lease Obligations  89,016   89,016   ---   ---   --- 
Total Contractual Obligations $186,782  $140,540  $46,242  $---  $--- 

G.  
See “Disclosure Regarding Forward-Looking Information” in the introduction to this annual report.
 
 
- 4045 -

 
E.  Item 6.Off-balance sheet arrangements
We have no debt, guarantees, off-balance sheet arrangements, or capital lease obligations. Other long-term obligations are discussed below.
F.  Contractual obligations
Our contractual obligations as of November 30, 2009 are as follows:
  Payments Due by Period
Contractual ObligationsTotal
Less than
1 Year
1-3 Years3-5 Years
After 5
Years
Capital Lease Obligations
$   48,457
$   35,595
$   12,862
$          ---
$          ---
Operating Obligations96,00096,000---------
Total Contractual Obligations
144,457
131,59512,862------

G.  Safe Harbour
Certain statements in this document constitute “forward-looking statements” within the meaning of the United States Private Securities Litigation Reform Act of 1995 and/or “forward-looking information” under the Securities Act (Ontario). These statements include, without limitation, statements regarding the status of development, or expenditures relating to our business, plans to fund our current activities, statements concerning our partnering activities, health regulatory submissions, strategy, future operations, future financial position, future revenues and projected costs. In some cases, forward-looking statements can be identified by terminology such as “may”, “will”, “should”, “expects”, “plans”, “anticipates”, “believes”, “estimates”, “predicts”, “potential”, “continue”, “intends”, “could”, or the negative of such terms or other comparable terminology. We made a number of assumptions in the preparation of these forward-looking statements. Undue reliance should not be placed on our forward-looking statements, which are subject to a multitude of risks and uncertainties that could cause actual results, future circumstances or events to differ materially from those projected in or implied by the forward-looking statements. These risks include, but are not limited to, securing and maintaining corporate alliances, the need for additional capital and the effect of capital market conditions and other factors, including the current status of our programs, on capital availability, the potential dilutive effects of any financing and other risks detailed from time to time in our public disclosure documents or other filings with the securities commissions or other se curities regulatory bodies in Canada and the U.S. Additional risks and uncertainties relating to IPC and our business can be found in the “Risk Factors” section of this document, as well as in our other public filings. The forward-looking statements are made as of the date hereof, and we disclaim any intention and have no obligation or responsibility, except as required by law, to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.  Factors that could cause actual results to differ materially include, but are not limited, to:
·  our plans to research, develop and commercialize products and the timing of these development programs;
·  whether we will receive, and the timing and costs of obtaining, regulatory approvals for our products;
·  development of our product candidates, including the results of current and future clinical trials or bioequivalence studies;
·  the benefits of our drug delivery technologies and product candidates as compared to others;
- 41 -

·  our ability to maintain and establish intellectual property rights in our drug delivery technologies and product candidates;
·  our need for, and ability to obtain, additional financing and our estimates regarding our capital requirements and future revenues and profitability;
·  our estimates of the size of the potential markets for our product candidates;
·  our selection and licensing of product candidates;
·  our ability to attract distributors and collaborators with acceptable development, regulatory and commercialization expertise and the benefits to be derived from such collaborative efforts;
·  sources of revenues and anticipated revenues, including contributions from distributors and collaborators, product sales, license agreements and other collaborative efforts for the development and commercialization of product candidates;
·  our ability to create an effective direct sales and marketing infrastructure for products we elect to market and sell directly;
·  the rate and degree of market acceptance of any products that we may market;
·  the timing and amount of reimbursement for any products that we may market;
·  the success and pricing of other competing therapies that may become available;
·  our ability to retain and hire qualified employees;
·  the manufacturing capacity of third-party manufacturers that me may use for our products; and
·  other risk factors discussed from time to time in our reports, public disclosure documents and other filings with the securities commissions in Canada and the United States.
Item 6.Directors, Senior Management and Employees
 
A.  
 
DIRECTORS AND OFFICERS
 
The name and province/state of residence of each of our directors and officers as at the date hereof, the office presently held, principal occupation, and the year each director first became a director of the Company or its predecessor, IPC Ltd., are set out below. Each director is elected to serve until the next annual meeting of our shareholders or until his or her successor is elected or appointed. Officers are appointed annually and serve at the discretion of the board of directors (the “Board”).
 
- 42 -

Name and
Province of Residence
Position held
with the Company
Principal Occupation
Other Public
Company Boards
Director
Since
Dr. Isa Odidi
Ontario, Canada
Chairman of the Board and Chief Executive Officer of the CompanyOfficer of the CompanyNoneSeptember 2004
Dr. Amina Odidi
Ontario, Canada
President, Chief Operating Officer and Director of the CompanyOfficer of the CompanyNoneSeptember 2004
John N. Allport(2)
Ontario, Canada
Vice-President, Legal Affairs and Licensing and Director of the Company
Officer of the CompanyNoneSeptember 2004
Dr. Eldon R. Smith(1) (2)
Alberta, Canada
Director of the Company
President and CEO of Eldon R. Smith and Associates Ltd., a consulting business, and Professor Emeritus at the University of Calgary, Faculty of Medicine
Aston Hill Financial;
Canadian Natural Resources Limited;
Resverlogix Corp.
October 2009
Bahadur Madhani (1)
Ontario, Canada
Director of the CompanyPresident and CEO of Eldon R. Smith and Associates Ltd. and Professor Emeritus at the University of Calgary, Faculty of MedicineAston Hill Financial Inc.; Canadian Natural Resources Limited;October 2009
Bahadur Madhani(1)
Ontario, Canada
Director of the CompanyChief Executive Officer of Equiprop Management Limited, a consulting business.NoneMarch 2006
Kenneth Keirstead(1)(2)
New Brunswick, Canada
Director of the CompanyExecutive Manager of Lyceum Group, a consulting business.NoneJanuary 2006
Dr. Patrick N. Yat
Ontario, Canada
Vice-President, Pharmaceutical Analysis and Chemistry of the CompanyOfficer of the CompanyNoneN/A
Graham D. NeilShameze Rampertab
Ontario, Canada
Vice President, Finance and Chief Financial Officer of the CompanyOfficer of the CompanyNoneN/A

Notes:
 
(1)Member of the Audit Committee and Compensation Committees.
(2)Member of the Corporate Governance Committee.
 
- 46 -

Each of the foregoing individuals has been engaged in the principal occupation set forth opposite his or her name during the past five years or in a similar capacity with a predecessor organization except for: (i) Graham Neil,Shameze Rampertab, who prior to October 2009November 2010 was Vice-President of Finance and Chief Financial Officer of Vasogen.Partner, Healthcare Investment Banking at Loewen, Ondaatje, McCutcheon Ltd.
 
As of November 30, 2009,January 31, 2013, the directors and executive officers of the Company as a group beneficially own,owned, directly orand indirectly, or exercise control or direction over 6,140,5816,173,114 common shares, representing approximately 56%34.5% of the issued and outstanding common shares of the Company.
In MayCompany  (and beneficially owned approximately 9,079,251 common shares representing 43.6% of 2002,our common shares including common shares issuable upon the British Columbia Securities Commission –exercise of outstanding options and the conversion of the outstanding convertible debenture that are exercisable or convertible within 60 days of the date hereof). Our principal shareholders, Drs. Amina and Isa Odidi, our President and Chief Operating Officer and our Chairman and Chief Executive Officer, respectively, and Odidi Holdings Inc., a privately-held company controlled by Drs. Amina and Isa Odidi, owned in Julythe aggregate directly and indirectly 6,005,751 common shares, representing approximately 33.5% of 2002,our issued and outstanding common shares of the Alberta Securities Commission – each issued cease trade ordersCompany (and collectively beneficially owned in the aggregate approximately 8,187,721 common shares representing 40.8% of our common shares including common shares issuable upon the exercise of outstanding options and the conversion of the outstanding convertible debenture that are exercisable or convertible within 60 days of the date hereof).  (Reference is made to the section entitled “E. Share Ownership” under this “Item 6. Directors, Senior Management and Employees” for additional information regarding the options to purchase common shares held by directors and officers of the Company and the convertible debenture held by Drs. Amina and Isa Odidi.) As a result, the principal shareholders will have the ability to exercise significant influence over all matters submitted to our shareholders for approval whether subject to approval by a majority of holders of our common shares or subject to a class vote or special resolution requiring the approval of 66⅔% of the votes cast by holders of our common shares, in BioMax Technologies Inc. for failure to file financial statements. Dr. Smith was a Director and Vice Chairman of that company at the time. He subsequently resigned and subsequent to that date, the Company was delisted for failure to file financial statements and the payment of penalties. The company has not declared bankruptcy and continues as a solvent private company.person or by proxy.
 
- 43 -

On June 25, 2004, Mr. Keirstead filed a voluntary assignment in bankruptcy and was issued a discharge on September 23, 2006.
 
Drs. Isa Odidi and Amina Odidi are spouses to each other.
B.  Compensation
 
Compensation Discussion and Analysis
 
Background - The Company develops bothis a pharmaceutical company specializing in the research, development and manufacture of controlled and targeted once-a-day novel oral solid dose drugs. The Company’s patented Hypermatrix™ technology is a unique and validated multidimensional controlled-release drug delivery platform that can be applied to the efficient development of a wide range of existing and new pharmaceuticals. Based on this technology, the Company has a pipeline of products in various stages of development in therapeutic areas that include neurology, cardiovascular, gastrointestinal tract and generic controlled-release pharmaceuticalpain. Several of these products and licenses these developed products for commercialization. At present, no such licensed product has been commercialized and the primary focus is on obtaining regulatory approval for 15 proposed products.are partnered. As of November 30, 2009,2012, the Company had 2339 full-time employees engaged in administration and research and development.
 
Objectives - The overall objectives of the Company’s compensation program include: (a) attracting and retaining talented executive officers; (b) aligning the interests of those executive officers with those of the Company; and (c) linking individual executive officer compensation to the performance of the Company.  The Company’s compensation program is currently designed to compensate executive officers for performance of their duties and to reward certain executive officers for performance relative to certain milestones.
 
- 47 -

Elements of Compensation - The elements of compensation awarded to, earned by, paid to, or payable to the Named Executive Officers (as hereinafter defined) for the most recently completed financial year are: (a) base salary;salary and discretionary bonuses; (b) long-term incentives in the form of stock options; (c) restricted and (c)deferred share unit awards; and (d) perquisites and personal benefits. Prior to the most recently completed financial year, the Named Executive Officers have also received option-based awards which were assumed by the Company pursuant to the plan of arrangement completed on October 22, 2009.
 
Base Salary - Base salary is a fixed element of compensation payable to each Named Executive Officer for performing his or her position’s specific duties. The amount of base salary for a Named Executive Officer has been determined through negotiation of an employment agreement with each Named Executive Officer (see Employment Agreements“Employment Agreements” below). While base salary is intended to fit into the Company’s overall compensation objectives by serving to attract and retain talented executive officers, the size of the Company and the nature and stage of its business also impact the level of base salary.  To date, the level of base salary has not impacted the Company’s decisions about any other element of compensation.
 
Option-Based Awards - Option-based awards are a variable element of compensation that rewardrewards each Named Executive Officer for individual and corporate performance overall.overall determined by the Board. Option-based awards are intended to fit into the Company’s overall compensation objectives by aligning the interests of theall Named Executive Officers with those of the Company, and linking individual Named Executive Officer compensation to the performance of the Company. The Board, which includes three of the five Named Executive Officers, is responsible for setting and amending any equity incentive plan under which an option-based award is granted.
 
The Company has in place a stock option plan (the “Option Plan”) for the benefit of certain officers, directors, employees and consultants of the Company, including the Named Executive Officers (as described in greater detail itin Item 6.E). However, to date, the6.E.  Named Executive Officers have not been issued options under such plan. Rather, theThe Company has also granted performance-based options to the Named Executive OfficersDr. Isa Odidi and Dr. Amina Odidi pursuant to a separate option agreement, which was negotiated with the Named Executive Officers at the same time as their employment agreements. These options vest upon the Company attaining certain milestones relating to FDA filings and approvals for companyCompany drugs, such that 276,394 options vest in connection with each of the FDA filings for the first five companyCompany drugs and 276,394 options vest in connection with each of the FDA approvals for the first five companyCompany drugs. To date, the level of these performance-based options has been taken into account by the Board and impacted the Company’s decisions about base salary and option-based awards under the Option Plan for the Named Executive Officers.
 
The Company’s Option Plan was adopted effective October 22, 2009 as part of the IPC Arrangement Agreement approved by the shareholders of IntellipharmaceuticsIPC Ltd., the predecessor company, at the meeting of shareholders on October 19, 2009.  Subject to the requirements of the Option Plan, the Board of the Company has the authority to select those directors, officers, employees and consultants to whom options will be granted, the
- 44 -

number of options to be granted to each person and the price at which common shares of the Company may be purchased.
 
RSUs - The Company established a restricted share unit plan (the “RSU Plan”) to form part of its incentive compensation arrangements available for officers and employees of the Company and its designated affiliates (as described in greater detail it Item 6.E) as of May 28, 2010, when the RSU Plan received shareholder approval.
Perquisites and personal benefits - The Company also provides perquisites and personal benefits to its Named Executive Officers, including basic employee benefit plans, which are available to all employees, and a car allowance to cover the cost of an automobile for business purposes. These perquisites and personal benefits were determined through negotiation of an employment agreement with each Named Executive Officer (see Employment Agreements“Employment Agreements” below). While perquisites and personal benefits are intended to fit into the Company’s overall compensation objectives by serving to attract and retain talented executive officers, the size of the Company and the nature and stage of its business also impact the level of perquisites and benefits.  To date, the level of perquisites and benefits ha shas not impacted the Company’s decisions about any other element of compensation.
 
- 48 -

Executive Compensation
 
The following table sets forth all direct and indirect compensation for, or in connection with, services provided to the Company (and prior to the October 22, 2009 transaction, to Intellipharmaceutics Ltd. and Intellipharmaceutics Corp.) for the financial years ended November 30, 2009, December 31, 20082012, November 30, 2011 and 2007November 30, 2010 in respect of the Chief Executive Officer of the Company, and the Chief Operating Officer of the Company, the Chief Financial Officer and two other officers of the Company who earned greater than $150,000 in total compensation in the fiscal year ended November 30, 2012 (“Named Executive Officers”).
 
2009 SUMMARY COMPENSATION TABLE
 
Name and
principal position
Year
Salary
(U.S.$)(1)
Share-basedShare-
based
awards
(U.S.$)
Option-basedOption-
based
awards
(U.S.$)(2)
Non-equity incentive
incentive plan
compensation
(U.S.$)
Pension
value
(U.S.$)
All other
compensation
(U.S.(U.S.$) (7)
Total
compensation
(U.S.$)
(a)(b)(c)(d)(e)(f)(g)(h)(i)
     
Annual
incentive
plans
(f1)(3)
Long-termLong-
term
incentive
plans
(f2)
   
Dr. Isa Odidi,
Chairman& Chief
Executive Officer
2009
2008
2007
 383,4812012
341,1342011
309,0822010
454,912
457,611
436,997
N/A
N/A
N/A
Nil701,741
Nil
Nil
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
8,70112,077
11,24512,147
11,17011,600
392,1821,168,730
352,379   469,758
320,252   448,597
Dr. Amina Odidi,
President & Chief
Operating Officer (3)(4)
20092012
20082011
20072010
 383,481454,912
341,134457,611
309,082436,997
N/A
N/A
N/A
Nil701,741
Nil
Nil
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
8,70112,077
11,24512,147
11,17011,600
392,1821,168,730
352,379   469,758
320,252   448,597
Shameze
Rampertab, VP
Finance & Chief
Financial Officer(5)
2012
2011
2010
251,610
182,205
4,614
N/A
N/A
N/A
52,049
Nil
130,256
N/A
70,857
N/A
N/A
N/A
N/A
N/A
N/A
N/A
12,077
12,147
308
315,736
265,209
135,178
Ira Baeringer,
VP Business
Development,
Intellipharmaceutics
Ltd. (6)
2012
2011
2010
150,966
N/A
N/A
N/A
N/A
N/A
80,017
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
230,983
N/A
N/A
John Allport,
VP Legal Affairs &
Licensing
2012
2011
2010
145,934
138,339
116,667
N/A
N/A
N/A
589,411
Nil
Nil
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
12,077
N/A
N/A
747,422
138,339
116,667

Notes:
(1)Salaries payablepaid by the Company to each Named Executive Officer are paid in Canadian dollars.  All amounts are expressed in U.S. dollars converted at the exchange rate of U.S.$0.87011.0064 to C$1.00 (2008(2011 – U.S.$0.9371; 20071.0122; 2010 – U.S.$0.9309)0.9667) being the average closing exchange rate quoted by the Bank of Canada for the respective periods.  Salary includes all amounts paid or payable to the Named Executive Officer.  Actual amount paid to each Named Executive Officer in fiscal 2009 was $223,197 (2008 - $290,462; 2007 - $288,545) with2012, 2011 and 2010 are as disclosed in the balance being deferred at the election of the Named Executive Officer.table. As at November 30, 20092012 the Company had $462,986U.S$472,619 in unpaid salary owed to DrDr. Isa Odidi and Dr. Amina Odidi.Odidi related to years prior to 2010.
(2)The Company entered into a separate acknowledgement and agreement with Drs. Isa and Amina Odidi dated October 22, 2009 to be bound by the performance basedperformance-based stock option agreement dated September 10, 2004 pursuant to which Drs. Isa and Amina Odidi are entitled to purchase up to 2,763,940 of the Company’s common shares upon payment of U.S.$3.62 per share, subject to satisfaction of the performance vesting conditions. The value of the option-based awards are determined using the Black-Scholes pricing model calculated as at the award date.
- 45 -

(3)Amount awarded at the discretion of the Board. These bonuses were paid in the first quarter of 2012.
(4)Dr. Amina Odidi was acting Chief Financial Officer until February 12, 2010.
(5)Shameze Rampertab was appointed Vice President Finance and Chief Financial Officer on November 29, 2010.
- 49 -

(6)Ira Baeringer was appointed Vice President Business Development of Intellipharmaceutics Ltd., a wholly-owned subsidiary of the Company, on February 1, 2012, and resigned on December 15, 2012.
(7)“All other compensation” includes car allowances and miscellaneous other benefits.
 
Significant factors necessary to understand the information disclosed in the Summary Compensation Table above include the terms of each Named Executive Officer’s employment agreement and the terms of the separate option agreement.agreement described below.
 
Employment Agreements
 
The employment agreement with Dr. Isa Odidi, the Chief Executive Officer of the Company, effective September 1, 2004 entitles Dr. Isa Odidi to receive a base salary of U.S.$200,000 per year, which is paid in Canadian dollars, to be increased annually each year during the term of the agreement by twenty percent of the prior year’s salary. In addition, he is entitled to: (a) participate in the Option Plan; (b) participate in all employee benefit plans and programs;programs, except for the RSU Plan and DSU Plan; and (c) a car allowance of up to U.S.$1,000 per month. The initial term of the employment agreement was until September 30, 2007, at which time, pursuant to the terms of the agreement, the agreement was deemed to be extended automatically for an additional three-year period on the same terms and conditions (i.e. until September 30, 2010). The agreement will continue to be extended automatically for successive addi tionaladditional three-year periods on the same terms unless the Company gives Dr. Odidi contrary written notice at least two years prior to the date on which the agreement would otherwise be extended. See “Termination and Change of Control Benefits” below.  Dr. Odidi’s employment agreement was amended on August 1, 2007 and June 8, 2009 to provide for additionalinclude intellectual property, and non-competition provisions and to provide for non-solicitation provisions respectively.in favour of the Company.  In April 2010, Dr. Isa Odidi offered and agreed to amend his employment agreement effective as of December 1, 2009, to eliminate the right to annual increases in his base salary of twenty per cent each year; and agreed to roll back his base salary effective December 1, 2009 to the level payable under the employment agreement for the period from September 2008 to August 2009, being Cdn. $452,000C$452,000 per year.  Under this amendment, the base salary is open to potential increase on an annual basis at the discretion of the Board and Dr. Isa Odidi is eligible to receive a performance bonus, based on the performance, including that of Dr. Isa Odidi and the Company, as may be determined in the discretion of the Board. In February 2012, Dr. Isa Odidi received a grant of 300,000 options of which 200,000 vested immediately on issuance and the remaining 100,000 options vest on February 17, 2013.
 
The employment agreement with Dr. Amina Odidi, the President and Chief Operating Officer of the Company, effective September 1, 2004 entitles Dr. Amina Odidi to receive a base salary of U.S.$200,000, which is paid in Canadian dollars, per year, to be increased annually each year during the term of the agreement by twenty percent of the prior year’s salary. In addition, she is entitled to: (a) participate in the Option Plan; (b) participate in all employee benefit plans and programs;programs, except for the RSU Plan and DSU Plan; and (c) a car allowance of up to U.S.$1,000 per month. The initial term of the employment agreement was until September 30, 2007, at which time, pursuant to the terms of the agreement, the agreement was deemed to be extended automatically for an additional three-year period on the same terms and conditions (i.e. until September 30, 2010). The agreement will continue to be extended automatically for successiv esuccessive additional three-year periods on the same terms unless the Company gives Dr. Odidi contrary written notice at least two years prior to the date on which the agreement would otherwise be extended. See “Termination and Change of Control Benefits” below.  Dr. Odidi’s employment agreement was amended on August 1, 2007 and June 8, 2009 to provide for additionalinclude intellectual property, and non-competition provisions and to provide for non-solicitation provisions respectively.in favour of the Company. In April 2010, Dr. Amina Odidi offered and agreed to amend her employment agreement effective as of December 1, 2009, to eliminate the right to annual increases in her base salary of twenty per cent each year; and agreed to roll back her base salary effective December 1, 2009 to the level payable under the employment agreement for the period from September 2008 to August 2009, being Cdn. $452,000C$452,000 per year.  Under this amendment, the base salary is open to potential increase on an annual basis at the disc retiondiscretion of the Board of Directors and Dr. Amina Odidi is eligible to receive a performance bonus, based on the performance, including that of Dr. Amina Odidi and the Company, as may be determined in the discretion of the BoardBoard. In February 2012, Dr. Amina Odidi received a grant of Directors.300,000 options of which 200,000 vested immediately on issuance and the remaining 100,000 options vest on February 17, 2013.
 
In addition, the Company entered into a separate acknowledgement and agreement with Drs. Isa and Amina Odidi dated October 22, 2009 to be bound by the performance basedperformance-based stock option agreement dated September 10, 2004 pursuant to which Drs. Isa and Amina Odidi are entitled to purchase up to 2,763,940 of the Company’s common shares. These options vest upon the Company attaining certain milestones related to the FDA filings and approvals for Company drugs.  The options are exercisable at a price of U.S.$3.62 per share and expire on September 10, 2014.  As of November 30, 2009, 276,340the date hereof, 1,381,970 of these options have vested and are exercisable.  These options were not granted under the Option Plan.
 
 
- 4650 -

 
The employment agreement with Shameze Rampertab, the Chief Financial Officer of the Company, effective November 29, 2010 entitles Mr. Rampertab to receive a base salary of C$180,000, which is paid in Canadian dollars, per year. In addition, he is entitled to: (a) participate in the Option Plan; (b) participate in all employee benefit plans and programs; and (c) a car allowance of C$1,000 per month. The agreement provides for automatic renewal from year to year in absence of notice of termination from the Company at least 60 days prior to the anniversary date. Mr. Rampertab was granted 60,000 options, of which 15,000 vested immediately on issuance and the remaining options vest as to 15,000 each year on November 29, 2011, 2012 and 2013. The agreement has been extended and currently entitles Mr. Rampertab to receive a base salary of C$250,000, which is paid in Canadian dollars, per year, and a grant of 40,000 options, which vest 13, 334 each year on February 16, 2013, 2014 and 2015. Mr. Rampertab’s employment agreement includes intellectual property, non-competition and non-solicitation provisions in favour of the Company.
The employment agreement with Ira Baeringer, the Vice President Business Development of the Company`s subsidiary, Intellipharmaceutics Ltd., effective February 1, 2012 entitled Mr. Baeringer to receive an annual base salary of U.S.$200,000. In addition, he was entitled to: (a) participate in the Option Plan; and (b) participate in an employee benefit plan. The agreement was for an indefinite term, subject to termination on notice at least 60 days before the anniversary of the agreement. Mr. Baeringer was granted 65,000 options, of which 20,000 vested immediately on issuance and the remaining options vest as to 15,000 each year on January 1, 2013, 2014 and 2015. Mr. Baeringer’s employment agreement includes intellectual property, non-competition and non-solicitation provisions in favour of Intellipharmaceutics Ltd. Mr. Baeringer`s employment was terminated as of December 15, 2012 and all remaining unvested options were cancelled.
The employment agreement with John Allport, the Vice President Legal Affairs and Licensing, effective September 1, 2004 entitles Mr. Allport to receive a base salary of C$95,000, which is paid in Canadian dollars, per year. In addition, he is entitled to: (a) participate in the Option Plan; (b) participate in all employee benefit plans and programs; and (c) a car allowance of C$1,000 per month. The employment agreement is for an indefinite term subject to termination on six months’ notice. In December 2011, Mr. Allport’s base salary was increased to C$145,000. In February 2012, Mr. Allport received a grant of 250,000 options of which 175,000 vested immediately on issuance and the remaining 75,000 options vest on February 17, 2013. Mr. Allport’s employment agreement includes intellectual property, non-competition and non-solicitation provisions in favour of the Company.
Incentive Plan Awards
 
Outstanding Option-Based Awards and Share-Based Awards – The following table sets forth for each Named Executive Officer all awards outstanding at the end of the most recently completed financial year, including awards granted before the most recently completed financial year. Each option grant allows the holder to purchase one common share of the Company’s common shares.
 
Option-based AwardsShare-based AwardsOption-based AwardsShare-based Awards
Name
Number of
securities
underlying
unexercised
options
(#)
Option
exercise
price
(U.S.$)
Option
expiration
date
Value of
unexercised
in-the-money
options
(U.S.$)
Number of
shares or
units of
shares that
have not
vested
(#)
Market or
payout value
of share-
based
awards that
have not
vested
(U.S.$)
Number of
securities
underlying
unexercised
options
(#)
Option
exercise
price
(U.S.$)
Option
expiration
date
Value of
unexercised
in-the-money
options
(U.S.$)
Number of shares or
units of
shares that
have not vested
(#)
Market or
payout value
of share-
based awards
that have not
vested
(U.S.$)
(a)(b)(c)(d)(e)(f)(f)  
(a)(b)(c)(d)
(e) (2)
(f)(g)
Drs. Isa Odidi and Amina Odidi(1)
2,763,9403.62Sept. 10, 2014N/AN/A
2,763,940
 
3.62
 
Sept. 10, 2014
 
Nil
 
N/AN/A
Dr. Isa Odidi300,000C$3.27Feb. 16, 2022NilN/AN/A
Dr. Amina Odidi300,000C$3.27Feb. 16, 2022NilN/AN/A
Shameze Rampertab
60,000
40,000
C$2.62
C$3.27
Nov. 29, 2020
Feb. 16, 2017
Nil
Nil
N/A
N/A
N/A
N/A
Ira Baeringer65,000C$3.27Feb. 16, 2022NilN/AN/A
John Allport250,000C$3.27Feb. 16, 2022NilN/AN/A

Notes
(1)These option-based awards are held jointly.
(2)The value of unexercised options at year-end is calculated by subtracting the option exercise price from the closing price of the common shares of the Company on the TSX on November 30, 2012 (C$2.41) and multiplying the result by the number of common shares underlying an option.
- 51 -

Incentive Plan Awards – Value Vested or Earning During The Year – The following table sets forth details of the value vested or earned during the most recently completed financial year for each incentive plan award.
 
Name
Option-based awards -
Value vested during
the year
(U.S.$)
Share-based awards -
Value vested during
the year
(U.S.$)
Non-equity incentive
plan compensation -
Value earned during
the year
(U.S.$)
(a)(b)(c)(d)
Dr. Isa Odidi0N/A0
Dr. Amina Odidi0N/A0
Name
Option-based awards -
Value vested during
the year
(U.S.$)
Share-based awards -
Value vested during
the year
(U.S.$)
Non-equity incentive
plan compensation -
Value earned during
the year
(U.S.$)
(a)
(b)(1)
(c)(d)
Drs. Isa OdidiC$6,000N/ANil
Dr. Amina OdidiC$6,000N/ANil
Shameze RampertabNilN/ANil
Ira BaeringerC$600N/ANil
John AllportC$5,250N/ANil
Notes
(1)The amount represents the theoretical total value if the options had been exercised on the vesting date, established by calculating the difference between the closing price of the common shares of the Company on the TSX on the vesting date and the exercise price.

Pension Plan Benefits
 
The Company does not provide a defined benefit plan or a defined contribution plan for any of its Named Executive Officers, nor does it have a deferred compensation plan for any of its Named Executive Officers. There are no amounts set aside or accrued by the Company or its subsidiaries to provide pension, retirement or similar benefits.
 
Termination and Change of Control Benefits
 
The employment agreement with each of the Named Executive Officers, Dr. Isa Odidi and Dr. Amina Odidi, by virtue of it being a fixed-term agreement with automatic renewal provisions, effectively provides for payments to the applicable Named Executive Officer following termination of the employment agreement unless the agreement has been terminated in accordance with its terms.  As a result, if either Named Executive Officer had been terminated on the last business day of the Company’s most recently completed financial year, it is estimated that an amount of up to approximately U.S.$1.7C$1.8 million would be payable to such Named Executive Officer, which is the amount that would have been payable through to September 30, 2013, assuming2016, at each Named Executive Officer’s current annual salary was increased in the period in accordance with the terms of their respective cont racts.level.  Given their nature as fixed term employment agreements, if notice is properly provided to not renew the agreement following the term ending September 30, 2013, then as such date approaches the amount payable upon termination to the Named Executive Officer will decrease to the point where no amount would be payable upon termination as at September 30, 2013.2016.  Any termination of the employment of a Named Executive Officer must be undertaken by and is subject to the prior approval of the BoardBoard.  There are no payments applicable under the employment agreements of Directorsthe Named Executive Officers relating to a change of control of the Company.
 
 
- 4752 -

Director Compensation
 
The following table sets forth all amounts of compensation provided to the non-executive directors for the Company’s most recently completed financial year.
 
NameFees earned
FeesShare-based
earned
(U.S.$)awards
Share-
basedOption-based
awards
(U.S.$)
Option-
based
awards
(U.S.$)
Non-equity
incentive
plan
compensation
(U.S.$)
Pension
value
(U.S.$)
All other
compensation
(U.S.$)
Total
(U.S.$)
(a)(b)
(c) (1)
(d)(e)(f)(g)(h)
Eldon Smith(1)
NilN/ANilC$42,000N/AN/AN/ANil
Kenneth Keirstead(2)
C$22,000N/ANilN/AN/AN/AC$22,00042,000
Bahadur Madhani(2)
Kenneth Keirstead
C$22,00042,000N/ANilN/AN/AN/AN/AC$22,00042,000
Bahadur MadhaniC$43,500N/AN/AN/AN/AN/AC$43,500

Notes:
Notes:
(1)Dr. Smith was elected a director on October 22, 2009 pursuant toDSUs that were earned. Does not include DSUs that were earned in the IPC Arrangement Agreement.previous financial year and granted in the most recently completed financial year.
(2)Includes directors fees paid byOption-based awards for fiscal year 2012 were issued on November 30, 2011. These were disclosed in the Company’s accounting predecessor, IntelliPharmaCeutics Ltd.prior year Management Proxy Circular for the year ended November 30, 2011.
 
Significant factors necessary to understand the information disclosed in the Director Compensation Table above include the following:  Messrs Keirstead and MadhaniNon-management directors receive a monthlyan annual retainer of $2,000C$25,000 paid in Canadian dollars. The audit committee chair receives an annual retainer of C$10,000 paid in Canadian dollars. The corporate governance committee chair and compensation committee chair, each receives an annual retainer of C$5,000 paid in Canadian dollars. Non-chair committee members, are paid an additional C$2,500 per monthyear per committee paid in Canadian dollars. Meetings will result in an additional C$1,000 per day per meeting paid in Canadian dollars.
 
Outstanding Option-Based Awards and Share-Based AwardsForThe following table sets forth all amounts of option-based and share-based awards to the non-executive directors offor the Company, no option-based or share-based awards were outstanding at the end of theCompany’s most recently completed financial year.
 
Option-based AwardsShare-based Awards
Name
Number of
securities
underlying
unexercised
options
(#)
Option
exercise
price
(U.S.$)
Option
expiration
date
Value of
unexercised
in-the-money
options
(U.S.$)
Number of
shares or
units of
shares that
have not vested
(#)
Market or
payout value
of share-
based awards
that have not
vested
(U.S.$)
(a)(b)(c)(d)
(e) (1)
(f) (2)
(g) (3)
Eldon Smith
5,000
25,000
10,000
C$2.88
C$3.25
C$2.88
Nov. 30, 2016
Nov. 30, 2016
Oct. 22, 2019
Nil
Nil
Nil
22,449
Nil
Nil
C$54,102
Nil
Nil
Kenneth Keirstead
5,000
25,000
10,000
C$2.88
C$3.25
C$2.88
Nov. 30, 2016
Nov. 30, 2016
Oct. 22, 2019
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Bahadur Madhani
5,000
25,000
10,000
C$2.88
C$3.25
C$2.88
Nov. 30, 2016
Nov. 30, 2016
Oct. 22, 2019
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Notes:
(1)The value of unexercised options at year-end is calculated by subtracting the option exercise price from the closing price of the common shares of the Company on the TSX on November 30, 2012 (C$2.41) and multiplying the result by the number of common shares underlying an option.
(2)These DSUs are permitted to be redeemed only following termination of Board service. Includes DSUs earned as at November 30, 2012 and granted December 3, 2012.
(3)The value of DSUs at year-end is calculated from the closing price of the common shares of the Company on the TSX on November 30, 2012 (C$2.41) and multiplying by the number of common shares underlying a DSU.
- 53 -

Incentive Plan Awards – Value Vested or EarningEarned During The YearForThe following table sets forth all amounts of option-based and share-based awards vested to the non-executive directors of the Company no option-based or share-based awards vested duringfor the most recently completed financial year and no non-equity incentive plan compensation was earned during the most recently completed financial year.
Name
Option-based awards -
Value vested during
the year
(U.S.$)
Share-based awards -
Value vested during
the year
(U.S.$)
Non-equity incentive plan
compensation -
Value earned during
the year
(U.S.$)
(a)
(b) (1)
(c) (2)
(d)
Eldon SmithNilNilNil
Kenneth KeirsteadNilN/ANil
Bahadur MadhaniNilN/ANil
Notes:
(1)The amount represents the theoretical total value if the options had been exercised on the vesting date, established by calculating the difference between the closing price of the common shares of the Company on the TSX on the vesting date and the exercise price.
(2)The amount represents the theoretical total value of DSUs which were fully vested on their respective dates of issuance. DSUs are issued at the calculated market value of a common share on the date of issuance.
 
Directors’ and Officers’ Liability Insurance
 
The Company maintains insurance for the liability of its directors and officers arising out of the performance of their duties.  The total amount of such insurance maintained is $5,000,000$8,000,000 subject to a deductible loss payable of $25,000$50,000 to $50,000$100,000 by the Company.  The premium payable by the Company for the period from October 25, 20092012 to October 25, 20102013 is $74,000.$85,000.
 
C.  
 
Board of Directors
 
See Items 6.A and 6.B.
 
Committees of the Board of Directors
 
AUDIT COMMITTEE
 
The Audit Committee of the Board monitors our financial activities, policies, and internal control procedures.  The Audit Committee assists the Board in fulfilling its oversight responsibility to shareholders, potential shareholders, the investment community, and others with respect to the Company’s financial statements, financial reporting process, systems of internal accounting and disclosure controls, performance of the external auditors, and risk assessment and management.  The Audit Committee has the power to conduct or authorize investigations into any matters within its scope of responsibilities, with full access to all books, records, facilities
- 48 -

and personnel of the Company, its auditors and its legal advisors. In connection with such investigations or otherwise in the course of fulfilling its responsibilities under the Audit Committee Charter, the Audit Committee has the authority to independently retain special legal, accounting, or other consultants to advise it.
 
- 54 -

Audit Committee Charter
 
The charter of the Audit Committee can be found on the Company’s website at www.intellipharmaceutics.com.www.intellipharmaceutics.com.
 
Composition of the Audit Committee
 
Our Audit Committee is comprised of Kenneth Keirstead, Bahadur Madhani and Dr. Eldon Smith, each of whom is considered independent and financially literate (as such terms are defined under applicable Canadian securities legislation) and satisfies the independence criteria of Rule 10A3-(b)(1) under the SecuritiesU.S. Exchange Act of 1934.Act.  The members of the Audit Committee have selected a Chair from amongst themselves, being Mr. Madhani.
 
Under the United States Securities and Exchange Commission (the “SEC”) rules implementing the Sarbanes-Oxley Act of 2002, Canadian issuers filing reports in the United States must disclose whether their audit committees have at least one “audit committee financial expert”.  Additionally, under NASDAQ Listing Rule 5605(c)(2)(A), 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. Madha niMadhani qualifies as an Audit Committeeaudit committee financial expert under the applicable SEC rules and as financially sophisticated under the applicable NASDAQ rules.
 
Relevant Education and Experience
 
Kenneth Keirstead is educated in clinical biochemistry as a graduate of the Pathology Institute in Halifax; and business administration, as a graduate of the College of William and Mary and Columbia University. Mr. Keirstead has been a director of the Company since January 2006.  He has worked in the health carehealthcare delivery and pharmaceutical industries for over 45 years.  He was President and CEO, Sanofi Winthrop Canada Inc.; General Manager, Squibb Medical Systems International; President, Chemfet International and President, Quinton Instruments among other positions.  Mr. Keirstead has published studies and reports on health carehealthcare and related services topics.  Since 1998 Mr. Keirstead’s principal occupation has been as Executive Manager of the Lyceum Group, a Canadian consulting services company primarily active in the health carehealthcare field, of which Mr. Keirstead is the founder.
 
Bahadur Madhani is ana chartered accountant by training andwho has been a director of the Company since March 31, 2006.  He was a member of the advisory board of Quebecor Ontario and former chairman of United Way of Toronto, former chair of YMCA of Greater Toronto and former chair of Nelson Mandela Children’s Fund Canada.  He was awarded membership in the Order of Canada in 2001.  Since 1983, Mr. Madhani’s principal occupation has been as President and CEO of Equiprop Management Limited, a Canadian property management company of which Mr. Madhani is the principal shareholder.  He is currently on the boardsVice-Chair of YMCA Canada and Chair, Toronto Grants Review Team of the YMCA of Toronto and YMCA Canada.Ontario Trillium Foundation.
 
Dr. Eldon Smith is a medical doctor who graduated from the Dalhousie University Medical School and who has been a director of the Company since October 2009.  He is president and CEO of Eldon R. Smith and Associates Ltd. a private healthcare consulting company.  He is also professor emeritus at the University of Calgary, where he served as the Dean of the Faculty of Medicine subsequent to being Head of the Department of Medicine and the Division of Cardiology.  Dr. Smith is past-President of the Canadian Cardiovascular Society and served as Chairman of the Scientific Review Committee of the Heart and Stroke Foundation of Canada.  Dr. Smith was appointed as an Officer of the Order of Canada in November 2005.  In October 2006, Dr. Smith was appointed by the Honourable Tony Clement, Minister of Health, to chair the Steering Committee responsible for developing a new Heart-H ealthHeart-Health strategy to fight heart disease in Canada.  Dr. Smith currently serves on the boards of Canadian Natural Resources Limited, and Aston Hill Financial Inc.
, and Resverlogix Corp.
 
- 4955 -

 
Pre-Approval Policies and Procedures
 
The Audit Committee reviewed with the independent auditor (who is responsible for expressing an opinion on the conformity of the Company’s audited financial statements with Canadian and United States generally accepted accounting principles) their judgments as to the quality, not just the acceptability, of the Company’s accounting principles and such other matters as are required to be discussed with the Audit Committee under Canadian and United States generally accepted auditing standards. In addition, the Audit Committee has discussed with the independent auditor the auditor’s independence from management and the Company including the matters in the written disclosures provided to the Audit Committee by the independent auditor, and considered the compatibility of non-audit services with the auditor’s independ ence.independence.
 
The Company’s independent auditor is accountable to the Board and to the Audit Committee. The Board, through the Audit Committee, has the ultimate responsibility to evaluate the performance of the independent auditor, and through the shareholders, to appoint, replace and compensate the independent auditor. Under the Sarbanes-Oxley Act of 2002, the independent auditor of a public company is prohibited from performing certain non-audit services.  The Audit Committee has adopted procedures and policies for the pre-approval of non-audit services, as described in the Audit Committee Charter.  Under the terms of such policies and procedures, the Audit Committee has adopted a list of pre-approved services, including audit and audit-related services and tax services, and a list of prohibited non-audit services deemed inconsistent with an auditor’s independence.
 
The list of pre-approved services includes:
 
1.Audit Services
 
·  Audits of the Company’s consolidated financial statements;
 
·  Statutory audits of the financial statements of the Company’s subsidiaries;
 
·  Reviews of the quarterly consolidated financial statements of the Company;
 
·  Services associated with registration statements, prospectuses, periodic reports and other documents filed with securities regulatory bodies (such as the SEC and OSC)Ontario Securities Commission) or other documents issued in connection with securities offerings (e.g., comfort letters and consent letters) and assistance in responding to comment letters from securities regulatory bodies;
 
·  Special attest services as required by regulatory and statutory requirements;
 
·  Regulatory attestation of management reports on internal controls as required by the regulators; and
 
·  Consultations with the Company’s management as to the accounting or disclosure treatment of transactions or events and/or the actual or potential impact of final or proposed rules, standards or interpretations by the securities regulatory authorities, accounting standard setting bodies (such as the FASBFinancial Accounting Standards Board or CICA)Canadian Institute of Chartered Accountants), or other regulatory or standard setting bodies.
 
2.Audit-Related Services
 
·  Presentations or training on accounting or regulatory pronouncements;
 
·  Due diligence services related to accounting and tax matters in connection with potential acquisitions / dispositions; and
 
·  Advice and documentation assistance with respect to internal controls over financial reporting and disclosure controls and procedures of the Company.
 
3.Tax Services
 
a.  Compliance Services
- 56 -

 
·  Assistance with the preparation of corporate income tax returns and related schedules for the Company and its subsidiaries;
 
- 50 -

·  Assistance with the preparation of Scientific Research & Experimental Development investment tax credit claims and amended tax returns of the Company; and
 
·  Assistance in responding to Canada Revenue Agency or Internal Revenue Service on proposed reassessments and other matters.
 
b.  Canadian & International Planning Services
 
·  Advice with respect to cross-border/transfer pricing tax issues;
 
·  Advice related to the ownership of corporate intellectual property in jurisdictions outside of Canada;
 
·  Assistance in interpreting and understanding existing and proposed domestic and international legislation, and the administrative policies followed by various jurisdictions in administering the law, including assisting in applying for and requesting advance tax rulings or technical interpretations;
 
·  Assistance in interpreting and understanding the potential impact of domestic and foreign judicial tax decisions;
 
·  Assistance and advising on routine planning matters; and
 
·  Assistance in advising on the implications of the routine financing of domestic and foreign operations, including the tax implications of using debt or equity in structuring such financing, the potential impact of non-resident withholding tax and the taxation of the repatriation of funds as a return of capital, a payment of a dividend, or a payment of interest.
 
c.  Commodity Tax Services
 
·  Assistance regarding GST/PST/Harmonized Sales Tax/Goods and Services Sales Tax/Provincial Sales Tax/Customs/Property Tax filings and assessments;
 
·  Commodity tax advice and compliance assistance with business reorganizations;
 
·  Advice and assistance with respect to government audits/assessments;
 
·  Advice with respect to other provincial tax filings and assessments; and
 
·  Assistance with interpretations or rulings.
 
The list of prohibited services includes:
 
·  Bookkeeping or other services related to the preparation of accounting records or financial statements;
 
·  Financial information systems design and implementation;
 
·  Appraisal or valuation services for financial reporting purposes;
 
·  Actuarial services for items recorded in the financial statements;
 
·  Internal audit outsourcing services;
 
·  Management functions;
 
·  Human resources;
 
·  Certain corporate finance and other services;
 
·  Legal services; and
 
·  Certain expert services unrelated to the audit.
- 57 -

The Audit Committee also discusses with the Company’s independent auditor the overall scope and plans for their audit.  The Audit Committee meets with the independent auditor, with and without management present, to discuss the results of their examination, their evaluations of the Company’s internal controls, and the overall quality
- 51 -

of the Company’s financial reporting. The Audit Committee held twofour meetings during the period from October 22, 2009December 1, 2011 to the period ended November 30, 2009.2012.
 
In reliance on the reviews and discussions referred to above, the Audit Committee recommended to the Board (and the Board approved) that the audited consolidated financial statements be included in the Annual Report for the eleven-month periodyear ended November 30, 20092012 for filing with the Canadian provincial securities commissions and the United States Securities and Exchange Commission.SEC.
 
COMPENSATION, NOMINATING, AND CORPORATE GOVERNANCE COMMITTEE
 
Given the Company’s small size, the Board has determined that the Board as a whole will be charged with the responsibility of reviewing the Company’s compensation policiesCompensation Committee Mandate and practices, compensation of officers (including the CEO), succession planning, and corporate governance practices.  None of the executive membersPurpose
The Compensation Committee of the Board participates in voting on his/her compensation.
The objectivesis a standing committee of the Company’s compensation policies and programs for executive officers areBoard whose primary function is to assist the Board in fulfilling its responsibilities relating to:
 
(a)·  motivatethe development, review and reward executive officers forperiodic approval of the achievement of corporateCompany's compensation philosophy that attracts and functional objectives;retains key executives and employees, while supporting the overall business strategy and objectives and links compensation with business objectives and organizational performance;
 
(b)·  recruitevaluate and retainapprove all compensation of executive officers of a high caliber by offeringincluding salaries, bonuses and equity compensation that is competitive with that offered for comparable positions in other biotechnology companies;are required to be determined;
·  review the Company's Option Plan, the employee RSU plan and the DSU plan on an annual basis;
·  review and make recommendations to the Board on compensation payable to senior officers of the Company to be hired subsequent to the adoption of the Charter; and
 
(c)·  alignproduce a report annually on executive officer compensation for inclusion in the interests of the executive officers with the long-term interests of shareholders and the intermediate and long-term objectivesproxy circular of the Company.
 
Compensation Committee Charter
The charter of the Compensation Committee can be found on the Company’s website at www.intellipharmaceutics.com.
Composition of the Compensation Committee
The Compensation Committee is composed of Kenneth Keirstead, Bahadur Madhani and Dr. Eldon Smith, each of whom is considered independent and is a director of the Company. All of the members shall be "independent" as such term is defined in applicable securities legislation. In no case shall a member be a current employee or immediate family member of a current employee. The members of the Compensation Committee have selected a Chair from amongst themselves, being Dr. Eldon Smith.
Corporate Governance Committee Mandate and Purpose
The Corporate Governance Committee of the Board is a standing committee of the Board whose primary function is to assist the Board in dealing with the corporate governance matters described in the Charter.
Corporate Governance Committee Charter
The charter of the Corporate Governance Committee can be found the Company’s website at www.intellipharmaceutics.com.
Composition of the Corporate Governance Committee
- 58 -

The Corporate Governance Committee is composed of three directors, two of whom shall be “independent” as such term is defined in applicable securities legislation. Kenneth Keirstead and Dr. Eldon Smith is each considered independent and is a director of the Company. John Allport, an officer of the Company, is not considered independent and is a director of the Company. The members of the Corporate Governance Committee have selected a Chair from amongst themselves, being Kenneth Keirstead.

D.  

The number of full-time employees as of each of last three fiscal years is as follows:
 
November 30 2009December 31, 2008December 31, 2007November 30, 2012November 30, 2011November 30, 2010
Research Employees162727302419
Administrative Employees766910
 
Our employees are not governed by a collective agreement.  We have not experienced a work stoppage and believe our employee relations are satisfactory. For each of the last three fiscal years, all employees of the Company were employed at the Company’s offices in Toronto. In February 2012, the Company appointed its first U.S. employee in its U.S. subsidiary, IPC Ltd. and this employee resigned in December 2012.
 
E.  
 
The following table states the names of the directors and officers of the Company, the positions within the Company now held by them, and the approximate number of common shares of the Company beneficially owned or over which control or direction is exercised by each of them as of May 21, 2010.January 31, 2013.
Name
Position with
the Company
Number of
Common
Shares
Owned
Percentage
of
Common
Shares
Owned
Number
of Stock
Options
Held(2)
Exercise
Price
Option
Expiry
dd/mm/yyyy
Number of
Currently
Exercisable
Options (4)
Number of
Common
Shares
Issuable on
Conversion
of
Convertible
Debt
Number
of
Deferred
Share
Units
Held
Number
of
Restricted
Share
Units
Held
 
Dr. Isa Odidi
 
 
Chief Executive Officer and Chairman of the Board and Director of the Company
5,997,751(1)
8,000
33.49%
0.04%
2,763,940
300,000
$3.62
C$3.27
10/09/2014
16/02/2022
1,381,970
300,000
500,000(3)
N/AN/A
Dr. Amina OdidiPresident, Chief Operating Officer and Director of the Company
5,997,751(1)
33.49%
2,763,940
300,000
$3.62
C$3.27
10/09/2014
16/02/2022
1,381,970
300,000
500,000(3)
N/AN/A
John N. AllportVice-President, Legal Affairs and Licensing and Director of the Company
110,558
 
0.62%
250,000
 
C$3.2716/02/2022250,000N/AN/ANil
Dr. Eldon R. SmithDirector of the Company21,7310.12%
10,000
5,000
25,000
C$2.88
C$2.88
C$3.25
 
22/10/2019
30/11/2016
30/11/2016
10,000
5,000
12,500
N/A27,060N/A
 
 
- 5259 -

 
NamePosition with the Company
Number of Shares Owned
Dr. Isa OdidiChief Executive Officer and Chairman of the Board and Director of the Company
5,997,751 (1)
Dr. Amina OdidiPresident, Chief Operating Officer and Director of the Company
5,997,751 (1)
John N. AllportVice-President, Legal Affairs and Licensing and Director of the Company110,558
Dr. Eldon R. SmithDirector of the Company17,692
Kenneth KeirsteadDirector of the CompanyNil
Bahadur MadhaniDirector of the CompanyNil
Dr. Patrick N. YatVice-President, Pharmaceutical Analysis and Chemistry of the Company27,668
Graham D. NeilVice President, Finance and Chief Financial Officer of the Company12

Kenneth KeirsteadDirector of the CompanyNil 
10,000
5,000
25,000
C$2.88
C$2.88
C$3.25
 
22/10/2019
30/11/2016
30/11/2016
10,000
5,000
12,500
N/ANilN/A
Bahadur MadhaniDirector of the Company4,0070.02%
10,000
5,000
25,000
C$2.88
C$2.88
C$3.25
 
22/10/2019
30/11/2016
30/11/2016
10,000
5,000
12,500
N/ANilN/A
Dr. Patrick YatVice-President Pharmaceutical Analysis and Chemistry of the Company26,0670.15%50,000C$3.8224/05/202133,333N/AN/ANil
Shameze RampertabVice President Finance and Chief Financial Officer of the Company5,0000.03%
60,000
40,000
C$2.62
C$3.27
29/11/2020
16/02/2017
 
45,000
13,334
N/AN/ANil
Totals 6,173,11434.47%3,833,940  2,706,137500,00027,060Nil
Notes:
(1)Held2,763,940 performance-based options held by Odidi Holdings Inc., a private company owned and controlled by Dr. Isa Odidi, Dr. Amina Odidi and their family trust.trust, 300,000 stock options held by each of Dr. Isa Odidi and Dr. Amina Odidi.
(2)For information regarding option expiration dates and exercise price refer to the tables included under Item 6.B.
(3)On January 10, 2013, the Company completed a private placement financing of a convertible debenture in the aggregate principal amount of $1.5 million, which will mature January 1, 2015. The debenture bears interest at a rate of 12% per annum, payable monthly, is pre-payable at any time at the option of the Company, and is convertible at any time into 500,000 common shares at a conversion price of US$3.00 per common share at the option of the holder. Drs. Isa and Amina Odidi, principal stockholders, directors and executive officers of the Company provided the Company with the $1.5 million of the proceeds for the debenture.
(4)Includes options exercisable within 60 days of the date of this filing.
 
As of May 21, 2010,January 31, 2013, the directors and executive officers of the Company as a group beneficially owned, directly or indirectly, or exercised control or direction over 6,153,6816,173,114 common shares, representing approximately 56%34.5% of the issued common shares of the Company.Company (and beneficially owned approximately 9,079,251 common shares representing 43.6% of our common shares including common shares issuable upon the exercise of outstanding options and the conversion of the convertible debenture that are exercisable or convertible within 60 days of the date hereof).
 
The Company has in place a stock option plan (the “Option Plan”) for the benefit of certain officers, directors, employees and consultants of the Company, including the Named Executive Officers (see below under “Employee Stock Option Plan”).  However, to date, theCertain Named Executive Officers have not been issued options under such plan.  Rather, theThe Company has also granted performance-based options to the Named Executive OfficersDr. Isa Odidi and Dr. Amina Odidi pursuant to a separate option agreement, which was negotiated with the Named Executive Officers at the same time as their employment agreements. These options vest upon the Company attaining certain milestones relating to FDA filings and approvals for company drugs, such th atthat 276,394 options vest in connection with each of the FDA filings for the first five Company drugs and 276,394 options vest in connection with each of the FDA approvals for the first five Company drugs. To date, the level of these performance-based options has been taken into account by the Board and impacted the Company’s decisions about base salary and option-based awards under the Option Plan for the Named Executive Officers. No other performance-based options have been granted to any other Named Executive Officer.
 
Employee Stock Option Plan]Plan
 
OurThe Option Plan was adopted effective October 22, 2009 as part of the IPC Arrangement AgreementTransaction approved by the shareholders of IntellipharmaceuticsIPC Ltd., our predecessor company, at the meeting of shareholders on October 19, 2009.  Subject to the requirements of the Option Plan, the Board, with the assistance of the CompanyCompensation Committee, has the authority to select those directors, officers, employees and consultants to whom options will be granted, the number of options to be granted to each person and the price at which common shares of the Company may be purchased.  Grants are determined based on individual and aggregate performance determined by the Board.
 
 
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The key features of the Option Plan are as follows:
 
·  The eligible participants are full-time and part-time employees, officers and directors of, or consultants to, the Company or its affiliates, which may be designated from time to time by the directors of the Company.Board.
 
·  The fixed maximum percentage of common shares issuable under the Option Plan is 10% of the issued and outstanding common shares from time to time. The Option Plan will automatically “reload” after the exercise of a an option provided that the number of common shares issuable under the Option Plan does not then exceed the maximum percentage of 10%.
 
·  There are no restrictions on the maximum number of options which may be granted to insiders of the Company other than not more than 1% of the total common shares outstanding on a non-diluted basis can be issued to non-executive directors of the Company pursuant to options granted under the Option Plan and the value of any options granted to any non-executive director of the Company, shall not, on an annual basis, exceed $100,000.
 
·  The directors of the CompanyBoard determine the exercise price of each option at the time the option is granted, provided that such price is not lower than the “market price” of common shares at the time the option is granted.  “Market price” means the volume weighted average trading price of common shares on the TSX, or another stock exchange where the majority of the trading volume and value of common shares occurs, for the five trading days immediately preceding the relevant date, calculated in accordance with the rules of such stock exchange.
 
·  Unless otherwise determined by the board of directors of the Company,Board, each option becomes exercisable as to 33⅓% on a cumulative basis, at the end of each of the first, second and third years following the date of grant.
 
·  The period of time during which a particular option may be exercised is determined by the board of directors of the Company,Board, subject to any Employment Contract or Consulting Contract (both as hereinafter defined), provided that no such option term shall exceed 10 years.
 
·  If an option expiration date falls within a “black-out period” (a period during which certain persons cannot trade common shares pursuant to a policy of the Company’s respecting restrictions on trading), or immediately following a black-out period, the expiration date is automatically extended to the date which is the tenth business day after the end of the black-out period.
 
·  Options may terminate prior to expiry of the option term in the following circumstances:
 
·  on death of an optionee, options vested as at the date of death are immediately exercisable until the earlier of 180 days from such date and expiry of the option term; and
 
·  if an optionee ceases to be a director, officer, employee andor consultant of the Company for any reason other than death, including receipt of notice from the Company of the termination of his, her or its Employment Contract or Consulting Contract (as defined below), options vested as at the date of termination are exercisable until the earlier of 120 days following such date and expiry of the option term,
 
subject however to any contract between the Company and any employee relating to, or entered into in connection with, the employment of the employee or between the Company and any director with respect to his or her directorship or resignation there from (an “Employment Contract”), any contract between the Company and any consultant relating to, or entered into in connection with, services to be provided to the Company (a “Consulting Contract”) or any other agreement to which the Company is a party with respect to the rights of such person upon termination or change in control of the Company.
 
·  Options and rights related thereto held by an optionee are not to be assignable or transferable except on the death of the optionee.
 
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·  
If there is a take-over bid (within the meaning of the Securities Act (Ontario)) made for all or any of the issued and outstanding common shares of the Company, then all options outstanding
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become immediately exercisable in order to permit common shares issuable under such options to be tendered to such bid.
 
·  If there is a consolidation, merger, amalgamation or statutory arrangement involving the Company, separation of the business of the Company into two or more entities or sale of all or substantially all of the assets of the Company to another entity, the optionees will receive, on exercise of their options, the consideration they would have received had they exercised their options immediately prior to such event.  In such event and in the event of a securities exchange take-over bid, the board of directors of the CompanyBoard may, in certain circumstances, require optionees to surrender their options if replacement options are provided. In the context of a cash take-over bid for 100% of the issued and outstanding common shares of the Company, optionees may elect to conditionally surrender their options or, if provided for in an agreement with the offeror, autom aticallyautomatically exchange their options for options of the offeror.
 
·  The board of directors of the CompanyBoard may from time to time in its absolute discretion amend, modify and change the provisions of the Option Plan or any options granted pursuant to the Option Plan, provided that any amendment, modification or change to the provisions of the Option Plan or any options granted pursuant to the Option Plan shall:
 
·  not adversely alter or impair any option previously granted;
 
·  be subject to any regulatory approvals, where required, including, where applicable, the approval of the TSX and/or such other exchange as may be required; and
 
·  not be subject to shareholder approval in any circumstances, except where the amendment, modification or change to the Option Plan or option would:
 
·(i)  reduce the exercise price of aan option held by an insider of the Company;
 
·(ii)  extend the term of aan option held by an insider beyond the original expiration date (subject to such date being extended in a black-out extension situation);
 
·(iii)  increase the fixed maximum percentage of common shares issuable under the Option Plan; or
 
·(iv)  amend the amendment provision of the Option Plan;
 
in which case the amendment, modification or change will be subject to shareholder approval in accordance with the rules of the TSX and/or such other exchange as may be required.  Amendments to the Option Plan not requiring shareholder approval may for example include, without limitation:
 
·  amendments of a “housekeeping nature”, including any amendment to the Option Plan or aan option that is necessary to comply with applicable law or the requirements of any regulatory authority or stock exchange;
 
·  changes to the exercise price of aan option to an exercise price not below the “market price” unless the change is a reduction in the exercise price of aan option held by an insider of the Company;
 
·  amendments altering, extending or accelerating any vesting terms or conditions in the Option Plan or any options;
 
·  changes amending or modifying any mechanics for exercising aan option;
 
·  amendments changing the expiration date (including acceleration thereof) or changing any  termination provision in any option, provided that such change
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does not entail an extension beyond the original expiration date of such option (subject to such date being extended in a black-out extension situation);
 
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·  amendments introducing a cashless exercise feature, payable in securities, whether or not such feature provides for a full deduction of the number of underlying securities from the Option Plan maximum;
 
·  amendments changing the application of the provisions of the Option Plan dealing with adjustments in the number of shares, consolidations and mergers and take-over bids;
 
·  amendments adding a form of financial assistance or amending a financial assistance provision which is adopted;
 
·  amendments changing the eligible participants of the Option Plan; and
 
·  amendments adding a deferred or restricted share unit provision or any other provision which results in participants receiving securities while no cash consideration is received by the Company.
 
·  The board 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 1,790,694 shares that are currently authorized for issuance under the Option Plan represent 10% of the common shares issued and outstanding as at January 31, 2013.  Of the options authorized for issuance under the Option Plan, a total of 1,330,119 have been issued, representing 7.4% of the shares issued and outstanding as of January 31, 2013.  As of January 31, 2013, 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.
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·  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:
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(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 1.8% of the Company’s common shares issued and outstanding as Appendix “P” to the joint management information circular Vasogen and IPC Ltd. dated September 16, 2009 filed with the Securities and Exchange Commission.at January 31, 2013. There are no RSUs outstanding as of January 31, 2013.
Deferred Share Unit Plan
 
Item 7.The Company established as of May 28, 2010 when it received shareholder approval, a deferred share unit plan (the “DSU PlanMajor Shareholders”) 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 Related Party Transactionsto 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.
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·  A participant is permitted to redeem his/her DSUs only following termination of Board service by way of retirement, non-re-election as a director, resignation or death. Upon redemption of DSUs, the Company will issue to the participant common shares of the Company equal to the number of DSUs to be redeemed.
·  A separate notional account is maintained for each participant under the DSU Plan. Each such account will be credited with DSUs issued to the participant from time to time by way of a bookkeeping entry in the books of the Company. The DSUs credited to the participant’s account will be cancelled as of the applicable redemption date and following redemption of all DSUs credited to the participant’s account, such participant’s account will be closed.
·  No rights under the DSU Plan and no DSUs credited pursuant to the provisions of the DSU Plan are assignable or transferable by any participant other than pursuant to a will or by the laws of descent and distribution.
·  Under the DSU Plan, the Board may from time to time in its absolute discretion amend, modify and change the provisions of the DSU Plan or any DSUs issued pursuant to the DSU Plan, provided that any amendment will:
·  not adversely alter or impair any DSU previously credited without such participant’s consent in writing except as permitted by the adjustment provisions in the DSU Plan; be subject to any regulatory approvals including, where required, the approval of the TSX; be subject to shareholder approval in accordance with the rules of the TSX in circumstances where the amendment, modification or change to the DSU Plan or DSU would:
(i)  allow for the assignment or transfer of any right under the DSU Plan or a DSU credited pursuant to the provisions of the DSU Plan other than as provided for under the assignability provisions in the DSU Plan;
(ii)  increase the fixed maximum number of common shares which may be issued pursuant to the DSU Plan; or
(iii)  amend the amendment provisions of the DSU Plan; and
·  not be subject to shareholder approval in circumstances (other than those listed in the paragraph immediately above), including, but not limited to, circumstances where the amendment, modification or change to the DSU Plan or DSU would:
(i)  be of a “housekeeping nature”, including any amendment to the DSU Plan or a DSU that is necessary to comply with applicable law or the requirements of any regulatory authority or stock exchange and any amendment to the DSU Plan or a DSU to correct or rectify any ambiguity, defective provision, error or omission therein, including any amendment to any definitions therein;
(ii)  introduce features to the DSU Plan that would permit the Company to, instead of issuing common shares from treasury upon the redemption of the DSUs, retain a broker and make payments for the benefit of participants to such broker who would purchase common shares through the facilities of the TSX for such participants;
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(iii)  introduce features to the DSU Plan that would permit the Company to, instead of issuing common shares from treasury upon the redemption of the DSUs, make lump sum cash payments to participants;
(iv)  change the application of the adjustment provisions of the DSU Plan; or
(v)  change the eligible participants under the DSU Plan.
A copy of the DSU Plan is available upon request in writing to the Chief Financial Officer of the Company at 30 Worcester Road, Toronto, Ontario, M9W 5X2.
The 110,000 common shares that are currently authorized under the DSU Plan represent approximately 0.6% of the Company’s common shares issued and outstanding as at January 31, 2013. The total of 22,449 DSUs that have been authorized for issuance for the period ended November 30, 2012 represent common share rights that comprise approximately 0.1% of the common shares issued and outstanding as at January 31, 2013. As at January 31, 2013, 27,060 DSUs have been issued under the DSU Plan.
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 isshareholders, Drs. Amina and Isa Odidi, our President and Chief Operating Officer and our Chairman and Chief Executive Officer, respectively, and Odidi Holdings Inc., a privateprivately-held company controlled by Drs. Amina and Isa Odidi (a decrease to approximately 33.8% of our then-issued and outstanding common shares of the Company subsequent to the offering). As of the date of this annual report, Drs. Amina and Isa Odidi, which owns 5,997,751 commonour President and Chief Operating Officer and our Chairman and Chief Executive Officer, respectively, and Odidi Holdings Inc., a privately-held company controlled by Drs. Amina and Isa Odidi, own in the aggregate directly and indirectly 6,005,751common shares, representing approximately 54.99%33.5% of our issued and outstanding common shares of the Company.  ThereCompany (and collectively beneficially owned in the aggregate approximately 8,187,721 common shares representing 40.8% of our common shares including common shares issuable upon the exercise of outstanding options and the conversion of the outstanding convertible debenture that are exercisable or convertible within 60 days of the date hereof).  (Reference is made to the section entitled “E. Share Ownership” under “Item 6. Directors, Senior Management and Employees” for additional information regarding the options to purchase common shares and the convertible debenture held by Drs. Amina and Isa Odidi.) As a result of the registered direct offering, Tekla Capital Management LLC we believe currently owns 1,735,000 common shares representing 9.7% of the issued and outstanding common shares as of the date of this annual report (and beneficially owned approximately 3,295,000 common shares representing 16.9% of our common shares including common shares issuable upon the exercise of outstanding warrants that are exercisable within 60 days of the date hereof). As a result of the registered direct offering, Broadfin Capital, LLC we believe currently owns 1,728,221 common shares representing 9.7% of the issued and outstanding common shares as of the date of this annual report (and beneficially owned approximately 2,498,221 common shares representing 13.4% of our common shares including common shares issuable upon the exercise of outstanding warrants that are exercisable within 60 days of the date hereof). 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.
 
No holder of common shares has different voting rights from any other holders of common shares.
As at December 31, 2012, there were a total of 375 holders of record of our common shares, of which 252 were registered with addresses in Canada holding in the aggregate approximately 39% of our outstanding common shares, 71 were registered with addresses in the United States holding in the aggregate approximately 60% of our outstanding common shares, and 52 were registered with addresses in other nations holding in the aggregate approximately 1% of our outstanding common shares. We believe that the number of beneficial owners of our common shares is substantially greater than the number of record holders, because a large portion of our common shares are held in broker “street names”.
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B.  
 
Certain directorsAs at November 30, 2012 and senior officers of the CompanyJanuary 31, 2013, 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 loan to Dr. Isa Odidi and Dr. Amina Odidi, pursuant toprincipal stockholders, directors and executive officers of the Company, in the amount of approximately $0.8 million. Repayments of this related party loan are restricted under the terms and conditions of the loan such that the principal amount thereof shall be payable when payment is required solely out of (i) revenues earned by IPC Arrangement Agreement.  The Company entered intoCorp. following the amended and restated promissory note datedeffective date of October 22, 2009 for up to Cdn$2,300,000 issued(“effective date”), and/or proceeds received by any Intellipharmaceutics Corp. to Dr. Isa Odidi and Dr. Amina Odidi for advances that may be made by themcompany from time to time toany offering of its securities, (other than 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 securitiestransaction completed on February 1, 2011 and on March 15, 2012) following the effective date and/or amounts received by us,IPC Corp. for scientific research tax credits received in cash by usafter the effective date for research expenses of IPC Corp. incurred before the effective date and (ii) up to a maximumC$800,000 of Cdn$800,000the Net Cash from proceeds received by usthe Vasogen transaction (as defined in the IPC Arrangement Agreement. Thus, our current cash reserves will not be used for such
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repayment other than toAgreement). During the limited extent described above.  Subsequent toyear ended November 30, 2009,2012, no related party loan principal repayment was made and interest payments of $39,173 (C$39,083) in respect of the Shareholder Loan was repaidpromissory note were made by C$800,000 from proceeds received by usthe Company in accordance with the IPC Arrangement Agreement.
In addition at January 10, 2013, the Company completed a private placement financing of a Debenture in the principal amount of $1.5 million, which will mature January 1, 2015. The Debenture bears interest at a rate of 12% per annum, payable monthly, is pre-payable at any time at the option of the Company, and is convertible at any time into 500,000 common shares at a conversion price of $3.00 per common share at the option of the holder. Drs. Isa and Amina Odidi, principal stockholders, directors and executive officers of the Company provided the Company with the $1.5 million of the proceeds for the Debenture.
 
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.
Item 8.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 January 31, 2013, there were no pending litigation or threatened claim that materially affectslitigation claims outstanding other than the operationsones described in the following paragraphs.
Pursuant to an arrangement agreement between Vasogen and Cervus dated August 14, 2009 (the "Cervus Agreement"), Vasogen and a Vasogen subsidiary (“New Vasogen”) entered into an indemnity agreement (the "Indemnity Agreement"), which became an obligation of the Company.Company as of October 22, 2009. 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's obligations under the Indemnity Agreement relating to the Tax pools defined in the Indemnity Agreement are limited to an aggregate of C$1,455,000 with a threshold amount of 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.
 
In February 2012, the Company filed an amendment to the ANDA for generic Focalin to include the 40 mg strength of dexmethylphenidate hydrochloride extended-release capsules. Celgene Corporation, Novartis Pharmaceuticals Corporation, and Novartis Pharma AG, have filed a Complaint against Intellipharmaceutics Corp. for alleged patent infringement in the United States District Court for the District of New Jersey. In addition, Alkermes Pharma Ireland Limited (successor in title to Elan Pharma International Limited) has filed a Complaint against Intellipharmaceutics Corp. and Intellipharmaceutics Ltd. for alleged patent infringement in the United States District Court for the District of Delaware. Both Complaints are in relation to Intellipharmaceutics’ generic version of 40 mg Focalin XR®.
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Both of these actions have been stayed on the consent of all parties pending ongoing settlement discussions. In view of the previous settlements related to five dosage strengths of the same drug product, the Company believes it is reasonable to expect that the litigation relating to the 40 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. Intellipharmaceutics remains confident that its generic version of 40 mg Focalin XR® does not in any event infringe the patents in issue.
In December 2010, we filed an amendment to the ANDA to include the 30 mg strength of dexmethylphenidate hydrochloride extended-release capsules. Elan Corporation, plc and Elan Pharma International Ltd., filed a Complaint against Intellipharmaceutics Corp., IPC Ltd., and Par 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®. 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 July 2012, the parties stipulated to a full and final dismissal of the pending patent litigation in the states of New Jersey and Delaware.
On or about May 25, 2011, AstraZeneca, the owners of the rights in the United States in Seroquel XR® tablets, 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®.  The Company 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.
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. 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®. On July 30, 2012, and pursuant to the settlement, AstraZeneca and the Company filed proposed Consent Judgments in the District Court for the Southern District of New York to conclude the litigation, subject to other regulatory review. There was no further regulatory comment or action, and the settlement is now final. The settlement provides, in part, that the Company is permitted to launch its generic versions of the 50, 150, 200, 300 and 400 mg strengths of Seroquel XR® on November 1, 2016, or earlier in certain circumstances, subject only to prior FDA approval of the Company's ANDA for those strengths. All other terms of the settlement are confidential. The Company's actual launch may also be subject to a six month statutory delay relating to a prior filer of a generic equivalent of the branded product, such delay to commence from the first date of commercialization by the prior filer.
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.
 
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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)9.A.4 and Item 9C.9.C.
 
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
DateHighLowCloseVolume Traded HighLowCloseVolume Traded
Oct-09 (partial)$6.10$2.37$2.4820,600 $5.00$2.15$2.20102,661
Nov-09$3.00$1.52$2.2199,200 $2.90$1.40$2.25311,429
  NASDAQ (U.S.$)  TSX (C$) 
Annual High  Low  High  Low 
2012  3.82   1.88   3.55   1.81 
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                
Fourth quarter  3.16   1.88   3.17   1.81 
Third quarter  3.49   2.40   3.54   2.49 
Second quarter  3.19   2.64   3.38   2.51 
First quarter  3.82   2.41   3.55   2.53 
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.$)  TSX (C$) 
Most recent 6 months High  Low  High  Low 
January 2013 (through to January 29, 2013)  2.56   2.19   2.43   2.11 
December 2012  2.59   2.15   2.56   2.06 
November 2012  3.00   1.88   2.90   1.81 
October  2012  3.16   2.82   3.17   2.72 
September  2012  3.02   2.76   2.92   2.69 
August 2012  3.00   2.40   2.90   2.49 
 
 
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·  113,962 warrants issued in exchange for former Vasogen warrants and exercisable at U.S.$95.51 until November 14, 2011.
·  243,275 warrants issued in exchange for former Vasogen warrants and exercisable at U.S.$47.91 until May 24, 2012.

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·  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.
Debenture.
 
 
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
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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
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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 beforetwo years immediately preceding the most recently completed financial year, but are still in effect,date of 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;conditions relating to the acceptance by the FDA of the filing of an application for approval of a drug product or the approval of such an application;
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·  the amended and restated promissory note dated October 22, 2009 for up to $2,300,000C$2,300,000 issued by Intellipharmaceutics Corp.the Company to Isa Odidi and Amina Odidi for advances that may be made by them from time to time to the Company;Company. As at November 30, 2012, an amount of $783,717 was outstanding; and
·  the escrow agreementDebenture dated October 22, 2009 betweenJanuary 10, 2013 for $1.5 million, which will mature January 1, 2015 issued by the Company CIBC Mellon Trust Company (as escrow agent)to Isa Odidi and Amina Odidi Holdings Inc. under whichfor the common sharesloan of the Company held$1.5 million made by Odidi Holdings Inc. are held in escrow pursuantthem to the TSX Escrow Policy Statement.Company.
 
 
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.
 
E.  Taxation
 
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
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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;
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(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”).
 
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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 2012 taxable year and expect that we will not be a PFIC during our 2013 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.
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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% or 20% rate, as applicable, 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.
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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 
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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.

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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.
 
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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.
 
Foreign Tax CreditsU.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 maximum long-term capital gains rate is 20%, although the actual rates may be higher due to the phase out of certain tax deductions, exemptions and credits. However, given the uncertain economic conditions in the United States and the size of the federal deficit, tax rates are subject to change and prospective U.S. Holders should consult their tax advisors.  The deductibility of losses may be subject to limitations.
Warrants
Generally, no U.S. federal income tax will be imposed upon the U.S. Holder of a warrant upon exercise of such warrant to acquire 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.
 
 
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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.
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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 the31%  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.
 
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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.
 
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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.
 
 
Not Applicable.
 
 
Not Applicable.
 
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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.
 
 
See Item 4.C of this annual report.
 
Item 11.
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.
 
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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 
  $   $  
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 
  
November 30,
2012
  
November 30,
2011
 
   $   $ 
         
Total accounts receivable  2,778   3,383 
Less: allowance for doubtful accounts  -   - 
Total accounts receivable, net  2,778   3,383 
         
Not past due  2,778   1,122 
Past due for more than 31 days but no more than 60 days  -   1,096 
Past due for more than 61 days but no more than 90 days  -   1,165 
Total accounts receivable, net  2,778   3,383 
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, 2012, one customer accounted for 100% of revenue of the Company and 100% of the accounts receivable of the Company. 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. For the year ended November 30, 2010, one customer accounted for 100% of revenue of the Company and 100% of the accounts receivable of the Company.

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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, 2012  November 30, 2011 
 USD Total  Canadian  Canadian  U.S.  Canadian  U.S. 
FX rates used to translate to USD  1.00   1.0556 
FX rates used to translate to U.S.  0.9936      1.0203    
 $   $    $  $   $  $ 
Assets                      
Cash  8,014,492   8,460,098   247,397   248,991   580,958   569,399 
Accounts receivable  5,427   5,729   -   -   -   - 
Investment tax credits  1,840,044   1,942,350   300,000   301,932   356,963   349,861 
          547,397   550,923   937,921   919,260 
Liabilities                        
Accounts payable  1,323,368   1,396,948   284,727   286,561   390,190   382,427 
Accrued liabilities  540,604   570,662   106,621   107,308   334,493   327,838 
Employee cost payable  501,114   528,976   189,383   190,603   264,588   259,324 
Capital lease  48,457   51,151   51,194   51,524   44,263   43,382 
Due to related party  2,360,181   2,491,407   778,701   783,716   772,496   757,126 
  1,410,626   1,419,712   1,806,030   1,770,097 
Net exposure  (863,229)  (868,789)  (868,109)  (850,837)
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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, 2009:2012:
 
 
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   -   -   -   -   512,360   -   -   -   - 
Accrued liabilities  540,604   -   -   -   -   224,797   -   -   -   - 
Employee cost payable  501,114                   663,222   -   -   -   - 
Lease obligations  9,941   8,544   8,560   8,550   12,862   12,188   12,638   13,591   13,106   46,243 
Due to related party  800,000   1,560,181   -   -   -   783,717   -   -   -   - 
  2,196,284   12,638   13,591   13,106   46,243 

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Limitations:
 
The above discussion includes only those exposures that existed as of November 30, 20092012 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.
 
A.
Debt Securities
B.Warrants and Rights
D.American Depositary Shares
Item 13.PART II.Defaults, Dividends
Item 13.
Defaults, Dividend 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.
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.
 
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Item 15.  
Item 15.
 
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.
- 85 -

Based on this assessment, management concluded that the Company’s internal control over financial reporting was effective as of November 30, 2012. 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.2012.
 
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 PROCEDURES
 
Disclosure controlsControls and procedures are designed to provide reasonable assurance that all material information required to be publicly disclosed by a public company is gatheredProcedures
Under the supervision 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, 2012. 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, 2012.
 
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

- 69 -

Item 16A.Audit Committee Financial Expert.
 
Our Audit Committee is comprised of Kenneth Keirstead, Bahadur Madhani and Dr. Eldon Smith, each of whom is considered independent and financially literate (as such terms are defined under National Instrument 52-110 – Audit Committee).  The members of the Audit Committee have selected a Chair from amongst themselves, being Mr. Madhani.
Under the SEC rules implementing the Sarbanes-Oxley Act of 2002, Canadian issuers filing reports in the United States must disclose whether their audit committees have at least one “audit committee financial expert”.  Additionally, under NASDAQ Listing Rule 5605(c)(3)(2)(A), 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.
Item 16B.Code of Ethics.
 
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, 2009,2012, no waivers or requests for exemptions from the Code of Ethics were either requested or granted.
 
- 86 -

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 meaningunder Rule 2-01 of the Rules of Professional Conduct of the Institute of Chartered Accountants of Ontario.Regulation S-X.
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, 20092012 and the year ended December 31, 20082011 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)
 2012  2011 
Audit Fees (1)
$115,0000 $C205,810  $C226,555 
Audit-Related Fees (2)
$205,7700  -   10,843 
Tax Fees(3)$23,2500  35,215   118,471 
All Other Fees(4)$9,6640  63,778    60,408 
  
Totals$353,6840
Total Fees $C304,803  $C416,277 

Notes:
(1)Audit fees consist of fees related to the audit of the Company’s consolidated financial statements and reviews of quarterly interim financial statements and auditor involvement with the joint management information circular for the IPC Arrangement Agreement completed during 2009.statements.
(2)Audit-related fees consist of consultation on accounting and disclosure matters.
(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.

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, 2012 and 2011, all of the non-audit services provided by the Company’s external auditor were approved by the Chairman of the Audit Committee.
 
Exemptions from the Listing Standards for Audit Committees.
 
Not Applicable.

 
- 70 -

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)4.A).
 
None.
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.
- 87 -

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.
 
PART III.
Item 16H.  
Not applicable.
 
Item 17. PART Financial StatementsIII.
 
See Item 18 below.
 
Item 18.
Item 18. Financial Statements.
 
 
 
- 88 -

 

Consolidated financial statements of
 
Intellipharmaceutics
International Inc.
 
November 30, 2009, December 31, 20082012, 2011, and 2007
2010
 
 

 
 

 
Intellipharmaceutics International Inc.
November 30, 2009, December 31, 20082012, 2011, and 20072010
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 sheetsfinancial statements of Intellipharmaceutics International Inc. and subsidiaries (the "Company"“Company”), which comprise the consolidated balance sheets as at November 30, 20092012 and December 31, 2008,November 30, 2011, and the related consolidated statements of operations and comprehensive loss, shareholders' equity (deficiency), and cash flows for each of the 11 monthyears in the three-year period ended November 30, 20092012 and year ended December 31, 2008.  Thesea summary of significant accounting policies and other explanatory information.

Management's Responsibility for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are the responsibility of the Company's management.  free from material misstatement, whether due to fraud or error.

Auditor's Responsibility

Our responsibility is to express an opinion on these consolidated 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 Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement.  The Company is not requiredmisstatement of the consolidated financial statements, whether due to have, nor were we engaged to perform, an audit of itsfraud or error. In making those risk assessments, the auditor considers internal control overrelevant to the entity's preparation and fair presentation of the consolidated financial reporting.  Our audit included consideration of internal control over financial reporting as a basis for designingstatements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting.  Accordingly, we express no such opinion.circumstances. An audit also includes examining, on a test basis, evidence supportingevaluating the amounts and disclosures in the financial statements, assessing theappropriateness of accounting principlespolicies used and significantthe reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statement presentation.  statements.

We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a reasonable basis for our audit opinion.


Deloitte LLP
5140 Yonge Street
Suite 1700
Toronto ON  M2N 6L7
Canada
Tel: 416-601-6150
Fax: 416-601-6151
www.deloitte.ca
Opinion

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as at November 30, 20092012 and December 31, 2008,2011, and the results of its operations and its cash flows for each of the 11 monthyears in the three-year period ended November 30, 2009 and the year ended December 31, 2008,2012 in conformityaccordance with accounting principles generally accepted in the United States of America.

Emphasis of Matter

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 operationsthe accumulated deficit 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 LLP


Independent Registered Chartered Accountants
Licensed Public Accountants
February 26, 2010 except for note 20, which is dated May 31, 2010

F-1

Intellipharmaceutics International Inc.
      
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

F-2

Intellipharmaceutics International Inc.
         
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

F-3

Intellipharmaceutics International Inc.
                      
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)                        
                        
          
 
     
Total
 
        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 statementsJanuary 29, 2013
 
 
F-4

 
Intellipharmaceutics International Inc.
Consolidated statements of cash flows
Intellipharmaceutics International Inc.
      
Consolidated balance sheets      
As at November 30, 2012 and 2011      
(Stated in U.S. dollars)
      
  2012  2011 
  $   $ 
        
Assets       
Current       
Cash and cash equivalents  497,016   4,817,088 
Accounts receivable  2,778   3,383 
Investment tax credits  301,932   349,861 
Prepaid expenses, sundry and other assets  137,449   124,982 
   939,175   5,295,314 
         
         
Property and equipment, net (Note 4)  1,535,703   951,914 
   2,474,878   6,247,228 
         
Liabilities        
Current        
Accounts payable  512,360   554,210 
Accrued liabilities (Note 5)  224,797   436,154 
Employee costs payable (Note 7)  663,222   736,073 
Current portion of capital lease obligations (Note 8)  51,524   43,383 
Due to related parties (Note 6)  783,717   757,126 
   2,235,620   2,526,946 
         
Deferred revenue  -   107,091 
Capital lease obligations (Note 8)  46,242   95,206 
Warrant liability (Note 13)  1,960,893   6,611,015 
   4,242,755   9,340,258 
         
Shareholders' deficiency        
Capital stock (Notes 9 and 10)        
Authorized        
Unlimited common shares without par value        
Unlimited preference shares        
Issued and outstanding        
17,906,937 common shares (2011 - 15,908,444)
  147,152   147,152 
Additional paid-in capital  28,409,665   20,822,672 
Accumulated other comprehensive loss  (240,010)  (115,035)
Accumulated deficit  (30,084,684)  (23,947,819)
   (1,767,877)  (3,093,030)
Contingencies (Note 15)        
   2,474,878   6,247,228 
 
for the 11 month period ended November 30, 2009 and years ended December 31, 2008 and 2007
(Stated in U.S. dollars)
On behalf of the Board:
/s/ Dr. Isa Odidi/s/ Bahadur Madhani
____________________________________________________________________
Dr. Isa Odidi, Chairman of the BoardBahadur Madhani, Director
See accompanying notes to consolidated financial statements
 
  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
 
F-5Page 2

 
Intellipharmaceutics International Inc.
         
Consolidated statements of operations and comprehensive loss       
for the years ended November 30, 2012, 2011 and 2010       
          
(Stated in U.S. dollars)         
          
  2012  2011  2010 
  $  $   $ 
           
           
Revenue          
Research and development  107,091   501,814   1,459,385 
   107,091   501,814   1,459,385 
             
Expenses            
Research and development  5,992,417   5,125,608   4,533,310 
Selling, general and administrative  3,672,313   2,925,454   2,699,204 
Depreciation (Note 4)  452,303   227,456   242,778 
Write-down on long lived assets (Note 4)  107,123   -   36,481 
   10,224,156   8,278,518   7,511,773 
             
Loss from operations  (10,117,065)  (7,776,704)  (6,052,388)
Fair value adjustment of derivative liabilty (Note 13)  3,841,233   5,346,878   223,782 
Financing expense (Note 9)  -   (2,357,732)  - 
Net foreign exchange gain (loss)  181,682   (70,036)  138,949 
Interest income  20,691   60,790   27,001 
Interest expense  (63,406)  (83,473)  (98,435)
Loss  (6,136,865)  (4,880,277)  (5,761,091)
Other comprehensive (loss) income            
Foreign exchange translation adjustment  (124,975)  110,441   116,368 
Comprehensive loss  (6,261,840)  (4,769,836)  (5,644,723)
             
Loss per common share, basic and diluted  (0.36)  (0.33)  (0.53)
             
Weighted average number of common shares outstanding, basic and diluted
  17,258,686   14,994,118   10,907,054 
See accompanying notes to consolidated financial statements
Page 3

Intellipharmaceutics International Inc.
                  
Consolidated statements of shareholders' equity (deficiency)                  
for the years ended November 30, 2012, 2011 and 2010                  
                   
(Stated in U.S. dollars)                  
  Number  
Common stock
Amount
  
Additional
paid-in
capital
  
Accumulated
other
comprehensive
(loss) income
  
Accumulated
Deficit
  
Total
shareholders'
equity
(deficiency)
 
     $  $  $  $   $ 
                    
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  -   -   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 9)  4,800,000   -   -   -   -   - 
Shares issued for options exercised (Note 10)  25,000   130,183   (37,018)  -   -   93,165 
Stock options to employees (Note 10)  -   -   674,746   -   -   674,746 
Stock options to non-management board members (Note 10)  -   -   27,714   -   -   27,714 
DSU's to non-management board members (Note 11)      -   33,101   -   -   33,101 
Issuance of shares on exercise of cashless warrants (Note 13)  176,469   -   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)
Issuance of common shares (Note 9)  1,818,182   -   5,000,000   -   -   5,000,000 
Share issuance cost (Note 9)  -   -   (779,271)  -   -   (779,271)
Stock options to employees (Note 10)  -   -   2,251,325   -   -   2,251,325 
Stock options to non-management board members (Note 10)  -   -   72,520   -   -   72,520 
DSU's to non-management board members (Note 11)  -   -   36,727   -   -   36,727 
Issuance of shares on exercise of cashless warrants (Note 13)  180,315   -   1,005,692   -   -   1,005,692 
Other comprehensive loss (net of tax - $Nil)  -   -   -   (124,975)  -   (124,975)
Loss  -   -   -   -   (6,136,865)  (6,136,865)
Cancellation on shares exchanged  (4)  -   -   -   -   - 
   1,998,493   -   7,586,993   (124,975)  (6,136,865)  1,325,153 
Balance, November 30, 2012  17,906,937   147,152   28,409,665   (240,010)  (30,084,684)  (1,767,877)
See accompanying notes to consolidated financial statements
Page 4

Intellipharmaceutics International Inc.
         
Consolidated statements of cash flows         
for the years ended November 30, 2012, 2011 and 2010         
(Stated in U.S. dollars)         
  2012  2011  2010 
  $  $   $ 
           
Loss  (6,136,865)  (4,880,277)  (5,761,091)
Items not affecting cash            
Depreciation  452,303   227,456   242,778 
Stock-based compensation (Note 10)  2,323,845   702,460   1,023,626 
Deferred share units (Note 11)  36,727   33,101   12,426 
Interest accrual  45,278   7,739   95,113 
Investment tax credit written off (Note 18)  39,170   -   26,832 
Fair value adjustment of derivative liability (Note 13)  (3,841,233)  (5,346,878)  (223,782)
Write-down on long lived assets (Note 4)  107,123   -   36,481 
Financing expense (Note 9)  -   884,587   - 
Unrealized foreign exchange (gain) loss  (145,724)  203,604   195,361 
             
Change in non-cash operating assets & liabilities            
Accounts receivable  605   (1,764)  3,808 
Investment tax credits  57,094   869,406   675,461 
Prepaid expenses and sundry assets  (10,206)  17,189   36,776 
Accounts payable and accrued liabilities  (475,387)  203,743   (1,117,563)
Deferred revenue  (107,091)  98,186   (1,440,421)
Cash flows used in operating activities  (7,654,361)  (6,981,448)  (6,194,195)
             
Financing activities            
Payments to related parties (Note 6)  -   (801,551)  (860,703)
Repayment of capital lease obligations  (44,364)  (22,452)  (36,317)
Deferred offering cost  -   -   (9,981)
Issuance of common shares on exercise of stock options (Note 10)  -   93,165   - 
Proceeds from issuance of shares and warrants, gross (Note 9)  -   12,000,000   - 
Proceeds from issuance of shares on exercise of warrants (Note 13)  187,500   -   - 
Proceeds from issuance of shares, gross (Note 9)  5,000,000   -   - 
Share issuance cost  (779,271)  -   - 
Cash flows provided from (used in) financing activities  4,363,865   11,269,162   (907,001)
             
Investing activity            
Purchase of property and equipment  (1,036,092)  (262,142)  (133,878)
             
Cash flows used in investing activities  (1,036,092)  (262,142)  (133,878)
             
             
Effect of foreign exchange gain on cash held in foreign currency  6,516   2,380   9,718 
             
(Decrease) increase in cash and cash equivalents  (4,320,072)  4,027,952   (7,225,356)
Cash and cash equivalents, beginning of period  4,817,088   789,136   8,014,492 
             
Cash and cash equivalents, end of period  497,016   4,817,088   789,136 
             
Supplemental cash flow information            
Interest paid (Note 6)  39,173   163,099   104,943 
Taxes paid  -   -   - 
See accompanying consolidated financial statements
Page 5

IntelliIntellipharmaceutics pharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2009, December 31, 20082012, 2011, and 20072010
(Stated in U.S. dollars)

1.Nature of operations
 
Intellipharmaceutics International Inc. (“IPC” or the “Company”) is a pharmaceutical company specializing in the research, development and manufacture of controllednovel and targeted once-a-day novelgeneric controlled-release and targeted-release oral solid dosedosage drugs.
 
The shareholders ofOn October 22, 2009, IntelliPharmaCeutics Ltd. (“IPC Ltd”),Ltd. “) and Vasogen Inc. (“Vasogen”) approvedcompleted 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(the “IPC Arrangement Agreement”)  at their respective shareholder meetings on October 19, 2009. All court and regulatory approvals required to effect the arrangement were received.  The arrangement resulted, resulting in essentially IPC Ltd. combining with 7231971 Canada Inc. (“New Vasogen”), a new Vasogen company, that acquired substantially all of the assets of Vasogen, including the proceeds from its non-dilutive financing transaction with Cervus LP as described further below.
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 $7.5 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, which is incorporated under the laws of Canada and whose shares are traded on the TSXToronto Stock Exchange 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.
2.Basis of presentation
(a)Basis of consolidation
These consolidated financial statements include the accounts of the Company and its wholly owned operating subsidiaries, IPC Ltd, Intellipharmaceutics Corp. (“IPC Corp”), 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.
F-6

2.Basis of presentation (continued)
(b)Going concern
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 controlled and targeted once-a-day oral dose solid 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$30,084,684 as at November 30, 2012 (November 30, 2011 and 2010 - $11,467,716). The$23,947,819 and $19,067,542) 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.
 
AsThe consolidated financial statements are prepared on a going concern basis and substantial doubt exists on the appropriateness of this.  In order for the Company has several projects into continue operations at existing levels, the research and development stage, itCompany expects that over the next twelve months the Company will require significant additional capital.  While the Company expects to incur additional losses and require additional financial resources to supportsatisfy 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 and finance its cash requirements for at least the next twelve months from cash on an ongoing basis. Management believeshand, collection of anticipated revenues resulting from future commercialization activities, development agreements or marketing license agreements, through managing operating expense levels, funds from senior management through the convertible debenture described elsewhere herein, equity and/or debt financings, and/or new strategic partners funding some or all costs of development, there can be no assurance that the Company will be able to obtain additionalany such capital on terms or in amounts sufficient to meet its 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 futureits research and development, activities.
Ifits ability to obtain regulatory approvals, the market acceptance of its products, the state of the capital markets generally, strategic alliance agreements, and other relevant commercial considerations.  In addition, if the Company is not able to raiseraises additional funds by issuing equity securities, its then existing security holders will likely experience dilution, and the incurring of indebtedness would result in increased debt service obligations and could require us to financeagree to operating and financial covenants that would restrict its operations foroperations.  In the foreseeable future,event that the Company does not obtain additional capital over the next twelve months, there ismay be substantial doubt about the Company’sits ability to continue as a going concern and realize its assets and pay its liabilities as they become due.  Any failure by the Company to raise additional funds on terms favorable to the Company, or at all, may require the Company to significantly change or curtail its current or planned operations in order to conserve cash until such time, if ever, that sufficient proceeds from operations are generated, and could result in its not taking advantage of business opportunities, in the termination or delay of clinical trials for one or more of its product candidates, in curtailment of its product development programs designed to identify new product candidates, in the sale or assignment of rights to its technologies, products or product candidates, and/or its inability to file abbreviated new drug applications (“ANDAs”) or New Drug Applications (“NDAs”) at all or in time to competitively market its products or product candidates.
The audited consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 
- 6 -

Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2012, 2011, and 2010
(Stated in U.S. dollars)

2.(c)
Basis of presentation
(a)  Basis of consolidation
These consolidated financial statements include the accounts of the Company and its wholly owned operating subsidiaries, IPC Ltd., Intellipharmaceutics Corp. (“IPC Corp”), and Vasogen Corp. These consolidated financial statements also include the results of Vasogen Ireland Ltd. up to June 27, 2012, the date of its dissolution.
All inter-company accounts and transactions have been eliminated on consolidation.
(b)  Use of estimates
 
The preparation of the consolidated financial statements in conformity with GAAPaccounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the year. Actual results could differ from those estimates.
 
Areas where significant judgment is involved in making estimates are: the determination of 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.
 
F-7

3.Significant accounting policies
 
(a)  (a)Cash and cash equivalents
The Company considers all highly liquid securities with an original maturity of three months or less to be cash equivalents. Cash equivalent balances consist of bankers acceptances and bank accounts with variable, market rates of interest.
The financial risks associated with these instruments are minimal and the Company has not experienced any losses from investments in these securities. The carrying amount of cash and cash equivalents approximates its fair value due to its short-term nature.
(b)  Financial Instruments
The Company evaluates all of its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are classified as liabilities, the derivative instrument is initially recorded at its fair value using the appropriate valuation methodology and is then re-valued at each reporting date, with changes in the fair value reported in the consolidated statements of operations and comprehensive loss.
(c)  Investment tax credits
 
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, 2012.
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.
 
- 7 -

Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2012, 2011, and 2010
(Stated in U.S. dollars)

3.(b)Significant accounting policies (continued)
(d)  
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:
 
AssetsBasisRate
Computer equipment
Declining balance30%
Computer software
Declining balance50%
Furniture and fixtures
Declining balance20%
Laboratory equipment
Declining balance20%
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.
 
(e)  
(c)
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 flowsinternal or internal/external appraisals, as applicable.appraisals.
 
(f) 
(d)
Warrants
 
As a result of the transactionThe Company issued warrants as described in Note 1, the Company acquired certain assetsNotes 9(b) and assumed liabilities including warrants.13.  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.
 
F-8

3.
(g) 
Significant accounting policies (continued)
Revenue recognition
 
(e)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.
 
- 8 -

Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2012, 2011, and 2010
(Stated in U.S. dollars)

3.Significant accounting policies (continued)
(g)  
Revenue recognition (continued)
Research and development
 
Under arrangements where the license fees and research and development activities can be accounted for as a separate unit of accounting, non-refundable upfront license fees are deferred and recognized as revenue on a straight-line basis over the expected term of the Company's continued involvement in the research and development process.
 
Deferred revenue 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.
 

F-9

3.Significant accounting policies (continued)
 (e)Revenue recognition (continued)Other services
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.
 
Royalties
 
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)(h)  Research and development costcosts
 
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.
 
(g)(i)   Income taxes
 
The Company uses the liability method of accounting for income taxes. Under the liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and for losses and tax credit carry forwards. Significant judgment is required in determining whether deferred tax assets will be realized in full or in part. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
- 9 -

Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2012, 2011, and 2010
(Stated in U.S. dollars)

3.Significant accounting policies (continued)
(i)   Income taxes (continued)
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.

F-10

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 13.14.
 
The Company records any interest related to income taxes in interest expense and penalties in selling, general and administrative expense.
 
(h)Share issue costs
Incremental costs incurred in respect of issuing capital stock are recorded as a reduction of additional paid-in capital.
(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 and comprehensive loss.
 
(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 and comprehensive loss under research and development expense and under selling, general and administration expense. Note 1110 provides supplemental disclosure of the Company's stock options.

F-11

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.
(l)Loss per share
 
Basic loss per share ("EPS"(“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.
- 10 -

Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2012, 2011, and 2010
(Stated in U.S. dollars)

3.Significant accounting policies (continued)
(l)   Loss per share (continued)
The dilutive effect of stock options is determined using the treasury stock method. Stock options and warrants to purchase 828,341, 312,6527,830,059, 7,876,229, and 476,7361,687,914 common shares of the Company during 2009, 2008fiscal 2012, 2011, and 2007,2010, respectively, were not included in the computation of diluted EPS because the Company has incurred a loss for the 11 month periodyears ended November 30, 20092012, 2011 and the years ended December 31, 2008 and 20072010 as the effect would have beenbe anti-dilutive.
 
(m)Comprehensive (loss) incomeloss
 
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 incomeloss is net incomeloss 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) incomeloss items.
 
(n)Fair value measurement
In September 2006, the FASB issued 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,ASC topic 820, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e., an exit price). 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.
liability
.
F-12

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 adopted accounting pronouncements
In November 2007, the EITF reached 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 to a collaborative agreement should account for costs incurred 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 years beginning after December 15, 2008 and interim periods within those fiscal years.  Upon becoming effective, FASB ASC Topic 808 did not have a material impact on the Company’s consolidated financial statements.
 
In December 2007,May 2011, the FASB issuedprovided 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 Business Combinations Topic (“Business Combinations”)following: a) application of the ASC.  Business Combinations replaces previously issued guidance with respect to business combinations.  It applies to all transactionshighest and events in which an entity obtains control over one or more other businesses.  Business Combinations substantially increasesbest use and valuation premise concepts, b) measurement of the use of fair value and makes significant changes to the way companies account for business combinations and noncontrolling interests.  Someof instruments classified in an entity’s shareholders’ equity, c) measurement 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 that are managed within a portfolio, d) application of premiums and discounts in a fair value measurement, and e) disclosures about fair value measurements. These amendments are effective prospectively for interim reportingand annual periods as well as in annual financial statements.beginning after December 15, 2011. 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.Company adopted ASU 2011-4 on March 1, 2012. The adoption did not have an impact on the Company 2009 consolidatedCompany’s 2012 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.

 
F-13- 11 -

 
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2012, 2011, and 2010
(Stated in U.S. dollars)

3.Significant accounting policies (continued)
 
(o)Recently adopted accounting pronouncements (continued)
 
In April 2009,June 2011, the FASB issued updated guidance relatedprovided amendments ASU 2011-05 “Presentation of Comprehensive Income” requiring an entity to business combinations, which is includedpresent 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 Codification in ASC 805-20, “Business Combinations — Identifiable Assets, Liabilities and Any Noncontrolling Interest” (ASC 805-20). ASC 805-20 amendsoption to present 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 805-20 is effective for contingent assets or contingent liabilities acquired in business combinations for which the acquisition date is on or after the beginningcomponents of other comprehensive income as part of the first annual reporting periodstatement 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 are effective retrospectively for fiscal years, and interim periods within those years, beginning on or after December 15, 2008.2011. The Company adopted ASU 2011-05 on March 1, 2012. The adoption did not have an impact on the Company’s 2009 consolidated2012 financial statements.statements, as the Company was already presenting its statement of comprehensive income in accordance with the guidelines above.
 
In May 2009,On December 23, 2011, the FASB issued ASU 2011-12, which defers certain provisions of ASU 2011-05. One of ASU 2011-05’s provisions required entities to present reclassification adjustments out of accumulated other comprehensive income by component in both the Subsequent Events Topic ofstatement in which net income is presented and 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 recognizedstatement in the financial statements, and requires disclosure of certain nonrecognized subsequent events.  It requires that management assess subsequent events forwhich other comprehensive income is presented (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 guidanceconstituents' 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 "[a]n entity may display reclassification adjustments on the face of the financial statement in which comprehensive income is similarreported, or it may disclose reclassification adjustments in the notes to the financial statements."  The effective date of ASU 2011-12 is the same as that for the unaffected provisions of ASU 2011-05 (i.e., those related to the requirement to report the components of comprehensive income in previously-existing U.S. auditing literatureeither (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements). Accordingly, for assessingpublic entities, the effective date is for fiscal years, and disclosing subsequent events.  0;Rather, it represents guidance directed specifically to management.interim periods within those fiscal years, beginning after December 15, 2011. The Company adopted ASU 2011-12 on March 1, 2012. The adoption did not have an impact on the Company’s 2009 consolidated2012 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 all of the content is considered authoritative.  As a result, 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 change to the Company’s financial statements upon its adoption.
In August 2009, the FASB issued Accounting Standards Update 2009-05, Fair Value Measurements and Disclosures (Topic 820) (“ASU 2009-05”).  ASU 2009-05 clarifies that in circumstances in which a quoted price in an active market for the identical liability 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 first interim or annual period after issuance, with early adoption permitted.  0;The adoption did not have an impact on the Company 2009 consolidated financial statements.

 
F-14- 12 -

 
3.Significant accounting policies (continued)
Intellipharmaceutics International Inc.
(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 performanceconsolidated financial statements
November 30, 2012, 2011, 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 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, 2010 and therefore will be adopted by the Company on December 1, 2010.
The FASB, the EITF and the SEC have issued other accounting pronouncements and regulations during 2009 and 2008 that will become effective 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.

F-15(Stated in U.S. dollars)

 
4.Acquisition
As disclosed in Note 1, 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 approximates fair value.  The excess of Vasogen assets acquired over liabilities assumed on the acquisition is recorded as a credit to the additional paid in capital of the Company as follows:
$
Assets
 Cash11,334,855
Investment tax credits and prepaid expenses and sundry assets489,255
Fixed assets11,406
11,835,516
Liabilities assumed
Accounts payable & accrued liabilities2,299,289
Warrant liability543,669
2,842,958
Additional paid in capital8,992,558
5.Property and equipment
 
       November 30, 
       2009 
    Accumulated  Net book        November 30, 2012 
 Cost  amortization  value  Cost  
Accumulated 
amortization
  
Net book
 value
 
  $   $   $   $   $   $ 
                        
Computer equipment  149,969   109,353   40,616   243,798   188,935   54,863 
Computer software  17,050   14,087   2,963   126,568   53,916   72,652 
Furniture and fixtures  85,149   59,301   25,848   140,829   98,091   42,738 
Laboratory equipment  1,808,372   910,055   898,317   2,602,478   1,383,709   1,218,769 
Leasehold improvements  895,511   895,511   -   1,108,246   1,108,246   - 
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  225,192   88,617   136,575 
Computer equipment under capital lease  84,990   74,884   10,106 
  3,094,683   2,048,562   1,046,121   4,532,101   2,996,398   1,535,703 
        November 30, 2011 
  Cost  
Accumulated
amortization
  
Carrying
value
 
   $   $   $ 
             
Computer equipment  185,662   145,070   40,592 
Computer software  39,355   27,808   11,547 
Furniture and fixtures  111,255   76,187   35,068 
Laboratory equipment  1,941,659   1,264,505   677,154 
Leasehold improvements  940,362   927,021   13,341 
Lab equipment under capital lease  201,622   44,128   157,494 
Computer under capital lease  76,093   59,375   16,718 
   3,496,008   2,544,094   951,914 
Depreciation for the year ended November 30, 2012 was $452,303 (November 30, 2011 - $227,456; November 30, 2010 - $242,778).

Property and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Impairment is assessed by comparing the carrying amount of an asset with the sum of the undiscounted cash flows expected from its use and disposal, and as such requires the Company to make significant estimates on expected revenues from the commercialization of its products and services and the related expenses. The Company records a write-down for long-lived assets which have been abandoned and do not have any residual value. For the year ended November 30, 2012, the Company recorded a $107,123 write-down of long-lived assets (2011 - $Nil; 2010 – $36,481). The Company performed an asset inspection at the end of the fiscal year and noted assets which were not in use or had nominal value. The fair value of these assets were determined based on internal appraisals as per the Company’s accounting policy.

5.Accrued liabilities
  
November 30,
2012
  
November 30,
2011
 
   $   $ 
         
Professional fees  116,179   307,465 
Other  108,618   128,689 
   224,797   436,154 
 
F-16- 13 -

 
5.Property and equipment (continued)
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
        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 period ended November 30, 2009 was $344,768 (December 31, 2008 - $574,851; December 31, 2007 - $399,160).
6.         Accrued liabilities
2012, 2011, and 2010
  November 30,     December 31, 
  2009     2008 
     $   $  
            
Professional fee  482,624       148,458 
Other  57,980       13,095 
   540,604       161,553 
7.Employee cost payable
As at November 30, 2009, the Company had $462,986 (December 31, 2008 - $142,000)(Stated 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.U.S. dollars)
F-17

8.6.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,
2012
  
November 30,
2011
 
   $   $ 
Promissory note payable to two directors and officers of the Company, unsecured 6% annual interest rate on the outstanding loan balance (i) (2012 - C$750,534; 2011 - C$774,330)
  755,368   729,520 
Note payable to an entity controlled by shareholders, officers and directors of the Company, unsecured, non-interest bearing with no fixed repayment terms. (2012 - C$28,167; 2011 - C$28,167)
  28,349   27,606 
   783,717   757,126 
 
Interest expense on the promissory note payable to related parties for the 11 month periodyear ended November 30, 20092012 is $85,113 (December 31, 2008$45,278 (November 30, 2011  - $65,750; December 31, 2007$73,011; November 30, 2010 - $99,090)$94,055) and has been included in the consolidated statement of operations.operations and comprehensive loss.
 
(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, 2012, no principal repayment was made (2011 - $801,551; 2010 - $755,760) and interest payment of $39,173 (C$39,083) (2011 – $163,099; 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.
 
As described in Note 7, the Company had salaries payable to the two principal shareholders.
7.Employee costs payable
As at November 30, 2012, the Company had $472,619 (November 30, 2011 - $472,619) salaries payable to Dr. Isa Odidi and Dr. Amina Odidi, principal shareholders, directors and executive officers of the Company and $190,603 (November 30, 2011 - $263,454) for other amounts payable to certain employees.  These transactionsbalances are due on demand and therefore presented as current in 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.nature.
 
 
F-18- 14 -

 
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2012, 2011, and 2010
(Stated in U.S. dollars)

9.8.Lease obligations
 
The Company leases facilities under an operating lease which expires on November 2010.2013, with an option to extend the lease on comparable terms for five additional years.  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, 2009:2012:
 
  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 
It is the Company’s present intension to renew the lease for its premises before the lease expires before November 2010.
Year ending November 30, 2012 
Capital
Lease
  
Operating
Lease
 
   $   $ 
         
2013  62,470   89,016 
2014  49,251   - 
   111,721   89,016 
Less: amounts representing interest at 14%  13,955   - 
   97,766   89,016 
Less: Current portion  51,524   - 
Balance, long-term portion  46,242   89,016 
 
 
10.9.Capital stock
 
 
Authorized, issued and outstanding
 
(a)  
The Company is authorized to issue an unlimited number of common shares, all without nominal or par value and an unlimited number of preference shares. As at November 30, 2009,2012 the Company has 10,907,05717,906,937 (2011 – 15,908,444) common shares issued and outstanding, and no preference shares issued and outstanding.outstanding.
 
A
(b)  Two officers and directors of IPC owned directly and through their family holding company (“Odidi Holdco”) 6,005,751 (2011 - 5,997,751) common shares or approximately 34% (2011 – 38%) owned by two officers and directors of the IPC own 5,997,751 common shares or approximately 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.
 
 
F-19- 15 -

 
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2012, 2011, and 2010
(Stated in U.S. dollars)

10.9.Capital stock  (continued)
 
 
Authorized, issued and outstanding (continued)
 
(b)  (a)(continued)
On 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 Series A common share purchase warrant to purchase 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 $12,000,000. 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 whole share. The holders of Series A and Series B common share purchase warrants and placement agents warrants are entitled to a cashless exercise under which the number of shares to be issued will be based on the number of shares for which warrants are exercised times the difference between market price of common 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 entity’s own stock, and would consequently be considered to be a derivative liability. Also under U.S. GAAP, warrants with the cashless exercise option satisfying the explicit net settlement criteria are considered a derivative liability.
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 Canadian 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 the statement of operations and comprehensive loss.
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 13). 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 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 described in note 2(a) the comparative share information have been amended to give effect of the transaction described in note 1.
As at December 31, 2008 and 2007, IPC Ltd 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 LTD issued an additional 52,356 common shares to a broker before all of the common shares outstanding of IPC Ltd were converted to common shares in the Company. As a result of the transactions, as described in note 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 Ltd 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 Ltd 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 Ltd 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”). As a result of the transactions, as described in Note 1, effective October 22, 2009 these non equity shares were cancelled and the holders of these shares received no shares in the Company. As a result of the transactions described in note 1 effective October 22, 2009 the 5,997,751 (10,850,00 0 prior to exchange described above) equity shares owned by Odidi Holdco, were exchanged for common shares in the Company.
(c)  (b)DuringOn March 15, 2012, the year ended December 31, 2007, IPC Ltd. issued 34,833Company completed a registered direct common shares to various investorsshare offering for gross proceeds of $220,545. Further, during the year ended December 31, 2007, IPC Ltd. entered into a private placement agreement and a revenue arrangement with a pharmaceutical company. IPC Ltd. issued 394,848 common$5,000,000. The Company sold an aggregate of 1,818,182 shares to this pharmaceutical company for gross proceedsU.S. institutional investors at a price of $4,999,995. IPC Ltd. allocated $2,500,000$2.75 per share. Professional, regulatory and other costs in the amount of $779,271 directly attributable to the common shares issued to this pharmaceutical company being the estimated fair value of the common shares, and the residual amount of $2,499,995 was allocatedshare offering have been recorded as a non-refundable upfront fee on the revenue agreement.share issuance costs in shareholders deficiency.
 
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.
F-20

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.
(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.
11.Options
 
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 Stock Option 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 1,090,7061,790,694 based on the number of issued and outstanding common shares as at November 30, 2009.2012. As at November 30, 2009 87,9912012, 1,375,119 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, 2009,2012, there were 1.0 million415,575 options available for grant under the Employee Stock Option Plan.
 
As a result of
- 16 -

Intellipharmaceutics International Inc.
Notes to the transactions, as describedconsolidated financial statements
November 30, 2012, 2011, and 2010
(Stated 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.U.S. dollars) 

10.Options (continued)
 
In August 2004, the Board of Directors of IPC LtdLtd. approved a grant of 2,763,9412,763,940 performance-based stock options, to two executives who were also the principal shareholders of IPC Ltd. The vesting of these options is contingent upon the achievement of certain performance milestones. A total of 1,381,970 performance-based stock options have been vested as of November 30, 2012. These options were still outstanding as at November 30, 2012 and will expire in 2014.
 
In addition to the Employee Stock Option Plan, in connection with the October 2009 transaction IPC Ltd issued an additional 87,256 brokeryear ended November 30, 2012, Nil (2011 – 120,000) stock options to purchase common sharesnon-management board members and a grant of IPC Ltd which upon completion of the acquisition transaction become955,000 (2011 – Nil) stock options to purchase common shares of IPC. The fair value of these broker options $161,833management were recorded as a charge to additional paid in Capital and a charge to share issuance costs in additional paid in capital.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.

718.
F-21

11.Options (continued)
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 three years the Company uses its own volatility.

The expected term, which represents the period of time that options granted are expected to be outstanding, is estimated based on 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 broker options granted in 2009 and the value ofemployee stock options granted in 20072012 and 2011 was estimated using the following assumptions.  In 2008 there were no stock options granted.assumptions:

  2012  2011 
       
Volatility  64.7%  63.8%
Risk-free interest rate  0.08%  0.02%
Expected life (in years)  10.00   7.77 
Dividend yield  -   - 
The weighted average grant date fair value per options granted
 $2.51  $1.86 
 
  2009  2007 
       
Volatility  142.3%  50%
Risk-free interest rate  1.5%  5%
Expected life (in years)  1   1 - 10 
Dividend yield  -   - 
The weighted average grant date        
fair value per options granted $1.85  $2.70 
- 17 -

Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2012, 2011, and 2010
(Stated in U.S. dollars)

10.Options (continued)
 
Details of Stockstock option transactions are as follows:
 
        November 30, 2012        November 30, 2011        November 30, 2010 
  
Number of 
options
  
Weighted
average
exercise
price per
share
  
Weighted 
average
grant date
fair value
  
Number of
 options
  
Weighted
average
exercise
price per
 share
  
Weighted
average
grant date
 fair value
  
Number of
options
  
Weighted
average
exercise
price per
share
  
Weighted
average
grant date
 fair value
 
      $  $       $  $       $   $ 
                                  
Outstanding, beginning of period,
  3,216,954   5.33   2.82   3,038,698   5.53   2.87   2,939,188   6.48   3.46 
Granted  955,000   3.27   2.51   328,000   3.51   1.84   152,722   3.36   1.59 
Exercised  -   -   -   (25,000)  3.73   1.55   -   -   - 
Forfeiture  (32,862)  -   -   (4,667)  -   -   (25,000)  -   - 
Expired  (33)  69.74   53.82   (120,077)  6.01   1.61   (28,212)  51.47   25.29 
Balance at end of period
  4,139,059   4.86   2.76   3,216,954   5.53   2.87   3,038,698   6.48   3.46 
                                     
Options exercisable, end of year
  2,286,589   5.94   3.55   1,585,816   7.11   4.03   1,328,667   8.00   4.45 
        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 

 
F-22

11.Options (continued)
As of November 30, 2009,2012, 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
Number
outstanding
Weighted
average
exercise
price per
share
Weighted
average
remaining
contract
life (years)
Weighted
average
grant
due
fair value
Number
exercisable
Weighted
average
exercise
price per
share
 
Weighted
average
grant
date
fair value
  $ $ $ $
           
Under 2.50------ -
2.51 - 5.004,094,8333.523.901.852,242,3633.48 1.89
5.01 - 7.50------ -
7.51 - 10.00------ -
10.01 - 100.0036,03239.524.8330.9936,03239.50 30.99
300.00 - 500.003,971331.153.30223.523,971331.15 223.52
500.01 - 1,000.004,190705.990.29435.714,190705.99 435.71
1,000.01 - 1,500.00331,149.131.45709.18331,149.13 709.18
   4,139,0594.86  2,286,5895.94  

Total unrecognized compensation cost relating to the unvested performance-based stock options at November 30, 20092012 is approximately $3,542,400 (December 31, 2008$2,214,000 (November 30, 2011 - 3,542,400)$2,214,000). Of the total stock options granted up to November 30, 2009, 2,763,940 stock options will vest upon the achievement of certain performance conditions. DuringFor 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 that 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 related to these options. As at December 31, 2008, 2,487,546 performance-based stock options remains unvested. No otherNovember 30, 2012, no 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 tooptions.  For the expiry ofyear ended November 30, 2011, the term of these options in 2014, a stock-basedCompany recorded stock based compensation expense of approximately $3,542,400 will be recognized.$442,800 related to meeting the performance criteria of 276,394 options.
- 18 -

Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2012, 2011, and 2010
(Stated in U.S. dollars)

10.Options (continued)
 
No options were exercised in the 11 month periodyear ended November 30, 2009,2012.  For the year ended November 30, 2011, 25,000 options were exercised for a cash consideration of $93,165 and yearsno options were exercised in the year ended December 31, 2008 and 2007.November 30, 2010.
During the year ended November 30, 2012, no stock options were granted to employees. For the fiscal year ended November 30, 2011, 208,000 stock options were granted.
 
The Company's total stock basedfollowing table summarizes the components of stock-based compensation for the 11 month period ended November 30, 2009 and years ended December 31, 2008 and 2007 was $18,529, $442,800 and $460,621 respectively.expense.
  November 30, 2012 November 30, 2011November 30, 2010
  $ $$
      
Research and development  1,505,061 601,423885,600
Selling, general and administrative  818,784 101,037138,026
   2,323,845 702,4601,023,626
 
The Company recorded stock-based compensation relatinghas estimated its stock option forfeitures to option grants amountingbe $Nil at November 30, 2012 (2011 - $7,302; 2010 - $Nil).

11.Deferred share units
Effective May 28, 2010, the Company’s shareholders approved a DSU Plan to $18,529 recordedgrant 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 selling, general and administrationthe 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 11 month periodCompany may determine.
During the year ended November 30, 2009,2012, one non-management board member elected to receive director fees in the form of DSUs under the Company’s DSU Plan. As at November 30, 2012, 22,449 DSUs are outstanding and $9,45087,551 DSUs are available for grant under the year ended December 31, 2007.DSU Plan.
 
   November 30, 2012   November 30, 2011 
   $  shares   $  shares 
               
Additional paid in capital  36,727   12,199   33,101   10,250 
Accrued liability  9,688   4,611   6,569   2,050 
12.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 recorded stock-based compensation expense relatingand its designated affiliates. An RSU is a unit equivalent in value to option grants amounting $442, 800 recorded in researchone common share of the Company. Upon vesting of the RSUs and development expenses for the year ended December 31, 2008corresponding issuance of common shares to the participant, or on the forfeiture and $451,171 forcancellation of the year ended December 31, 2007.RSUs, the RSUs credited to the participant’s account will be cancelled. No RSUs have been issued under the plan.

 
F-23- 19 -

 
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2012, 2011, and 2010
(Stated in U.S. dollars)

12.13.Warrants
 
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 9 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.
The following table provides information on the 376,699 7,286,000 warrants outstanding and exercisable as of November 30, 20122009::
 
   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.
WarrantExercise price
Number
 outstanding
 Expiry
Shares issuable
 upon exercise
Series B2.50      3,470,000February 1, 2013             1,735,000
Agent3.125           96,000March 30, 2014                  96,000
Series A2.50      3,720,000February 1, 2016             1,860,000
        7,286,000              3,691,000
 
During the year ended November 30, 2012, there were cash and cashless exercises in respect of 150,000 (2011 – Nil) and 1,300,000 (2011 – 960,000) warrants respectively, resulting in the issuance of 75,000 (2011 – Nil) and 105,315 (2011 – 176,469) common shares respectively. The fair value of $1,005,692 for these shares was recorded as a charge to additional paid-in capital.  Details of warrant transactions are as follows:
 
  
November 30,
2012
  
November 30,
2011
 
       
Outstanding, beginning of year  8,979,275   357,237 
Issued during the year  -   9,696,000 
Exercised during the year  (1,450,000)  (960,000)
Expired during the year  (243,275)  (113,962)
Outstanding, end of year  7,286,000   8,979,275 
2009
Outstanding in beginning of period-
IPC warrants issued in exchanged for Vasogen warrants393,583
Expired(16,884)
376,699
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 and comprehensive loss.
 
TheAccordingly, the fair value of the Series A and Series B warrants outstanding at November 30, 20092012 using the Black-Scholes Options Pricing Model was $226,268estimated to be $1,659,492 (2011 - $3,786,049) and $276,038 (2011 - $2,741,185) respectively, and the fair value of the agent warrants was estimated to be $25,363 (2011- $83,781), using the following assumptions:assumptions as of November 30, 2012:
 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

 
F-24- 20 -

 
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2012, 2011, and 2010
(Stated in U.S. dollars)  

13.Warrants (continued)
Warrant 
Warrants
outstanding
  Volatility  
Risk free
rate
  
Expected
life (years)
 
     %  %    
             
Series A  3,720,000   54.90   0.37%  3.1 
Series B  3,470,000   48.20   0.18%  0.2 
Agent  96,000   46.15   0.18%  1.1 
The change in the fair value of the warrants from the previously recorded amount to November 30, 2012 amounting to a gain of $3,841,233 (2011 - $5,346,878: 2010 - $223,782) has been recorded as fair value adjustment of derivative liability in the statement of operations and comprehensive loss.
14.Income taxes
 
The Company files Canadian income tax returns for its Canadian operations. Separate income tax returns are filed as locally required.
 
The total provision for income taxes differs from the amount which would be computed by applying the Canadian income tax rate to loss before income taxes. The reasons for these differences are as follows:
 
  November 30,  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 
   -   -   - 

F-25

13.Income taxes (continued)
  
November 30,
2012
  
November 30,
2011
  
November 30,
2010
 
  %  %  % 
          
Statutory income tax rate  27   28   31 
             
   $   $   $ 
             
Statutory income tax recovery  (1,632,406)  (1,366,478)  (1,785,938)
Increase (decrease) in income taxes            
Non-deductible expenses/ non-taxable income
  (399,748)  (1,324,979)  323,643 
Change in valuation allowance  3,217,198   2,452,926   1,782,583 
Investment tax credit  (561,988)  -   - 
Ontario tax rate change  (420,990)  -   - 
Foreign exchange change  (230,695)  -   - 
True up of tax returns, etc.  28,629   238,531   (320,288)
   -   -   - 
 
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  -   -   - 
 
- 21 -

Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2012, 2011, and 2010
(Stated in U.S. dollars)

14.Income taxes (continued)
  
November 30,
2012
  
November 30,
2011
  
November 30,
2010
 
  $  $   $ 
           
Deferred tax assets          
Non-capital loss carry-forwards  6,031,917   4,147,325   2,813,049 
Book and tax basis differences on assets and liabilities
  773,590   824,640   632,422 
Other  17,590   8,635   10,380 
Ontario harmonization tax credit  427,355   361,888   431,601 
Investment tax credit  2,089,238   1,351,859   740,213 
Undeducted research and development expenditures
  2,179,097   1,607,242   1,220,998 
   11,518,787   8,301,589   5,848,663 
Valuation allowances for deferred tax assets
  (11,518,787)  (8,301,589)  (5,848,663)
Net deferred tax assets  -   -   - 

At November 30, 2009,2012, 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 
Canadian income tax losses expiring in the year ended November 30,
 Federal 
  $ 
       
2014  1,682,382   (1,787,361)
2015  2,142,761   (2,276,467)
2026  516,589   (548,823)
2027  -   - 
2028  1,681,943   (1,467,117)
2029  1,916,677   (1,502,598)
2030  (3,879,335)
2031  (5,278,281)
2032  (5,923,991)
  7,940,352   (22,663,973)
 
United States Federal income tax losses expiring   
in the period ended November 30,   
    
2024  65,348 
2025  16,234 
2026  34,523 
   116,105 
F-26

13.Income taxes (continued)
United States Federal income tax losses expiring in the year ended November 30,
   
   $ 
     
2024  23,426 
2025  16,234 
2026  34,523 
   74,183 
 
At November 30, 20092012, the Company had a cumulative carry-forward pool of Federal SR&ED expenditures in the amount of $4,288,287 Federal,approximately $9,822,000 (2011 - $7,549,000) which can be carried forward indefinitely.
 
At November 30, 2009,2012, the Company had approximately $328,069$427,000 (2011 - $362,000) of Ontario harmonization credits, which will expire on the November 30, 20142015 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, 2009,2012, the Company had approximately $156,138 (December 31, 2008$2,089,000 (November 30, 2011 - 163,822; December 31, 20071,352,000; November 30, 2010 - $183,600)$740,200) of unclaimed Canadian investment tax credits (ITCs)ITCs which expire from 20242025 to 2029.2032. These credits are subject to a full valuation allowance as they doare not meet the more likely than not test.to be realized.
- 22 -

Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2012, 2011, and 2010
(Stated in U.S. dollars)  

14.Income taxes (continued)
 
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, 2008 and 2007.2012 or November 30, 2011.
 
The Company files unconsolidated federal income tax returns domestically and in foreign jurisdictions. The Company has open tax years from 20022006 to 20092012 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, 20082012, 2011 and 2007,2010 or any penalties in those years. The Company had no accrued interest and penalties as of November 30, 20092012 and December 31, 2008.2011.
 
14.Deferred revenue
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 fiscal2012, 2011 and 2010, thereforeand the Company does not anticipate recognizing any revenue under this agreement in 2010 and have recordedexpect that the entire amount as long term.
unrecognized tax benefit will increase within the next twelve months.
 
15.Contingencies
 
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,January 29, 2013, there were no pending litigation or threatened claim islitigation claims 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 LP (“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.
F-27

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.

In February 2012, the Company filed an amendment to the ANDA for generic Focalin to include the 40 mg strength of dexmethylphenidate hydrochloride extended-release capsules.  Celgene Corporation, Novartis Pharmaceuticals Corporation, and Novartis Pharma AG, have filed a Complaint against Intellipharmaceutics Corp. for alleged patent infringement in the United States District Court for the District of New Jersey. In addition, Alkermes Pharma Ireland Limited (successor in title to Elan Pharma International Limited) has filed a Complaint against Intellipharmaceutics Corp. and Intellipharmaceutics Ltd. for alleged patent infringement in the United States District Court for the District of Delaware. Both Complaints are in relation to Intellipharmaceutics’ generic version of 40 mg Focalin XR®.

Both of these actions have been stayed on the consent of all parties pending ongoing settlement discussions. In view of the previous settlements related to five dosage strengths of the same drug product, the Company believes it is reasonable to expect that the litigation relating to the 40 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. Intellipharmaceutics remains confident that its generic version of 40 mg Focalin XR® does not in any event infringe the patents in issue.

- 23 -

Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2012, 2011, and 2010
(Stated in U.S. dollars)

 
16.           Financial instruments
 
 (a)Fair values
 
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.
 
F-28

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, capital lease obligations 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.

 
F-29- 24 -

 
16.         
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2012, 2011, and 2010
(Stated in U.S. dollars)  

16.Financial instruments (continued)
 
 (b)Interest rate and credit risk (continued)
The following table sets forth details of the cash and cash equivalents:
  
November 30,
2012
  
November 30,
2011
 
  $   $ 
        
Cash  447,016   3,817,158 
Bankers acceptance  50,000   999,930 
(30 days maturity, interest 0.10%)        
Total cash and cash equivalents  497,016   4,817,088 
 
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 
  
November 30,
2012
  
November 30,
2011
 
  $   $ 
        
Total accounts receivable  2,778   3,383 
Less allowance for doubtful accounts  -   - 
Total accounts receivable, net  2,778   3,383 
         
Not past due  2,778   1,122 
Past due for more than 31 days but no more than 60 days
  -   1,096 
Past due for more than 61 days but no more than 90 days
  -   1,165 
Total accounts receivable, net  2,778   3,383 
 
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, 2012, one customer accounted for 100% of revenue of the Company and 100% of the accounts receivable of the Company. 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. For the year ended November 30, 2010, one customer accounted for 100% of revenue of the Company and 100% of the accounts receivable of the Company.
The Company is also exposed to credit risk at period end from the carrying value of its cash. The Company manages this risk by maintaining bank accounts with a Canadian charteredChartered Bank. The Company’s cash is not subject to any external restrictions.
 
 (c)Foreign exchange risk
 
The Company has balances in Canadian dollars that give rise to exposure to foreign exchange (“FX”) risk relating to the impact of 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.
 

 
F-30- 25 -

 
16.         
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2012, 2011, and 2010
(Stated in U.S. dollars)  

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 
     November 30, 2012     November 30, 2011 
  Canadian  U.S  Canadian  U.S 
FX rates used to translate to U.S.  0.9936      1.0203    
   $   $   $   $ 
                 
Assets                
Cash  247,397   248,991   580,958   569,399 
Investment tax credits  300,000   301,932   356,963   349,861 
   547,397   550,923   937,921   919,260 
Liabilities                
Accounts payable  284,727   286,561   390,190   382,427 
Accrued liabilities  106,621   107,308   334,493   327,838 
Employee cost payable  189,383   190,603   264,588   259,324 
Capital lease  51,194   51,524   44,263   43,382 
Due to related party  778,701   783,716   772,496   757,126 
   1,410,626   1,419,712   1,806,030   1,770,097 
Net exposure  (863,229)  (868,789)  (868,109)  (850,837)
 
 (d)Liquidity risk
 
Liquidity risk is the risk that the Company will encounter difficulty raising liquid funds to meet commitments as they fall due. In meeting its liquidity requirements, the Company closely monitors its 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, 2009:2012:
 
 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
  
9 months
 1 year
  
Greater than
 1 year
 
 $  $  $  $  $    $   $   $   $   $ 
                                    
Accounts payable  1,323,368   -   -   -   -   512,360   -   -   -   - 
Accrued liabilities  540,604   -   -   -   -   224,797   -   -   -   - 
Employee cost payable  501,114   -   -   -   -   663,222   -   -   -   - 
Lease obligations  9,941   8,544   8,560   8,550   12,862   12,188   12,638   13,591   13,107   46,242 
Due to related party  800,000   1,560,181   -   -   - 
Due to related parties  783,717   -   -   -   - 
  2,196,284   12,638   13,591   13,107   46,242 
 
 
F-31- 26 -

 
Intellipharmaceutics International Inc.
Notes to the consolidated financial statements
November 30, 2012, 2011, and 2010
(Stated in U.S. dollars)

17.Segmented information
 
The Company's operations comprise a single reporting segment engaged in the research, development licensing and marketingmanufacture of both newnovel and 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.Canada.
 
 November 30,  December 31,  December 31, 
 2009  2008  2007  
November 30,
2012
  
November 30,
2011
  
November 30,
2010
 
 $  $  $    $   $   $ 
                      
Revenue                      
Canada  62,615   21,574   158,638 
United States  567,564   1,256,130   2,138,678   107,091   501,814   1,459,385 
  630,179   1,277,704   2,297,316   107,091   501,814   1,459,385 
                        
Total assets                        
Canada  11,081,332   3,026,024       2,474,878   6,247,228   3,267,706 
                        
Total property and equipment                        
Canada  1,046,121   1,134,648       1,535,703   951,914   925,554 
 
18.Major customers and concentration of credit riskNon-cash transactions
 
Financial instruments that potentially subject the Company to concentrationIn fiscal 2012, 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$39,170 (2011 - $Nil; 2010 - $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.
 
19.Non cash transactions
In connection with the acquisition transaction 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 assets489,255
Accounts payable and assumed liabilities2,299,289
Warrant liability543,669
20.Subsequent events
 
The Company has evaluated its operations duringcompleted a private placement financing of an unsecured convertible debenture (the “Debenture”) in the period subsequent to November 30, 2009.  Duringprincipal amount of $1.5 million, which will mature January 1, 2015.  The Debenture will bear interest at a rate of 12% per annum, payable monthly, is pre-payable at any time at the subsequent period, a drug development agreement has been mutually terminated byoption of the Company, and is convertible at any time into 500,000 common shares at a conversion price of $3.00 per common share at the other party. Underoption of 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.holder.

 
F-32- 27 -

 
Item Item 19.               Exhibits
 

EXHIBIT INDEX
 
Number
 
 
Exhibit
 
 
Footnote
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)
4.56 12% convertible term debenture dated January 10, 2013 in principal amount of $1,500,000 (1)
4.57 Lease as amended between Finley W. McLachlan Ltd. and Intellipharmaceutics Corp. for premises at 30 Worcester Road, Toronto, Ontario, Canada. (1)
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, 2012, formatted in XBRL:
(i) Consolidated balance sheets as at November 30, 2012 and 2011
(ii) Consolidated statements of operations and comprehensive loss for the years ended November 30, 2012, 2011 and 2010
(iii) Consolidated statements of shareholders’ equity for the years ended November 30, 2012, 2011 and 2010
(iv) Consolidated statements of cash flows for the years ended November 30, 2012, 2011 and 2010
(v) Notes to the consolidated financial statements
 
 (5)
Number
(1)  
Filed as exhibits to this annual report on Form 20-F for the fiscal year ended November 30, 2012.
- 89 -

(2)  
Exhibit
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.
4.1(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.
(4)  IPC Arrangement Agreement*Incorporated herein by reference to the Company’s report on Form 6-K for the month of March 2012 as filed on March 9, 2012.
(5)  
4.2AcknowledgementXBRL 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
4.3Amended 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
4.4Escrow 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
10.1Articles of Incorporation of the Company and Amendments thereto
10.2By-laws of the Company
11.1Code of Business Conduct and Ethics
12.1Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)Section 18 of the Securities Exchange Act of 1934.
12.2Certification 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.
13.1Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
13.2Certification 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.
 
 
 
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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
January 31, 20102013
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