REGISTRATION NO. 333-128911
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
(Amendment-No. 2)
INTELLIPHARMACEUTICS LTD.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
DELAWARE 2834 05-0496586
(STATE OR JURISDICTION OF (PRIMARY STANDARD (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) INDUSTRIAL CLASSIFICATION IDENTIFICATION NO.)
CODE NUMBER)
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES)
DR. ISA ODIDI, CHIEF EXECUTIVE OFFICER
30 WORCESTER ROAD
TORONTO, ONTARIO, CANADA M9W 5X2
(416) 798-3001
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
CT CORPORATION SYSTEM
111 EIGHTH AVENUE, 13TH FLOOR
NEW YORK, NY 10011
(212) 590-9331
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As Soon As
Practicable After This Registration Statement Becomes Effective.
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If any of the securities being registered in this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
re-investment plans, check the following box. [INDICATE CHECK]
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering.
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.
If delivery of the prospectus is to be made pursuant to Rule 434, check the
following box.
CALCULATION OF REGISTRATION FEE
PROPOSED
MAXIMUM PROPOSED
OFFERING MAXIMUM
AMOUNT PRICE AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES TO BE TO BE PER OFFERING REGISTRATION
REGISTERED REGISTERED SECURITY(1) PRICE FEE
--------------------------------------- ---------- ----------- ----------- ------------
Common Stock, $.001 par value per share (2) 5,193,946 $2.00 $10,387,892 $1,111.50
Common Stock, $.001 par value per share (3) 10,850,000 $2.00 $21,700,000 $2,321.90
Common Stock, $.001 par value per share (4) 5,278,500 $2.00 $10,557,000 $1,129.60
Total (5) 21,322,446 $42,644,892 $4,563.00
(1) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457 under the Securities Act of 1933, as amended.
(2) Represents Common Stock held by Selling Securityholders.
(3) Represents Common Stock underlying IntelliPharmaCeutics Corp. Convertible
Voting Stock held by IntelliPharmaCeutics Inc. that may be converted into
the same number of shares of Exchangeable Stock of IntelliPharmaCeutics
Corp. which are exchangeable into the same number of shares of Common Stock
of IntelliPharmaCeutics Ltd.
(4) Represents Common Stock underlying warrants and options held by Selling
Securityholders.
(5) Fees of 5,001.65 were paid in connection with the filing of the original
Registration Statement on October 7, 2005 to register 21,247,446 shares.
The registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a)
may determine.
EXPLANATORY NOTE
In filing this registration statement, the Registrant is not relying in any way
on the filed reports, business or assets of Ready Capital Corp., a company with
which the Registrant entered into a share exchange agreement in 2004. Ready
Capital Corp. was a blank check corporation and did not at any time have an
active business. Ready Capital Corp., prior to the transaction, and
IntelliPharmaCeutics, after the transaction, from time to time filed certain
reports with the Securities and Exchange Commission. These reports were filed
on a voluntary basis. They do not contain any information that the Registrant
believes is relevant to an understanding of the Registrant's current business or
financial condition. Consequently, the Registrant encourages investors to rely
on the information in this registration statement and not in any earlier filings
that appear in the Registrant's EDGAR file with the SEC.
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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES
IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED APRIL 27, 2006
INTELLIPHARMACEUTICS LTD.
21,322,446 SHARES OF
COMMON STOCK
This prospectus relates to the public offering of an aggregate of 21,322,446
shares of common stock which may be sold from time to time by the selling
stockholders of IntelliPharmaCeutics Ltd. named in this prospectus. Of these
shares, 5,278,500 shares are issuable upon the exercise of options and warrants,
and 10,850,000 shares are issuable upon the (1) exchange by IntelliPharmaCeutics
Inc. of Exchangeable Stock in IntelliPharmaCeutics Corp. that it is entitled to
acquire, and (2) cancellation of 10,850,000 Special Voting Stock currently owned
by IntelliPharmaCeutics Inc. in IntelliPharmaCeutics Ltd. The Company receives
monies only upon sales from conversion of the warrants and options and not from
the sale of the offered shares.
The shares of common stock are being registered to permit the selling
stockholders to sell the shares from time to time in the public market. The
stockholders may sell the shares through ordinary brokerage transactions,
directly to market makers of our shares or through any other means described in
the section entitled "Plan of Distribution" beginning on page 19.
We have paid the expenses of preparing this prospectus and the related
registration expenses.
Our common stock is not traded on any exchange or market system. We intend to
apply to list our common stock on either the Nasdaq SmallCap Market, the
American Stock Exchange, or the OTC Bulletin Board.
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 2
We may amend or supplement this prospectus from time to time by filing
amendments or supplements as required. You should read the entire prospectus and
any amendments or supplements carefully before you make your investment
decision.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS APRIL 27, 2006
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TABLE OF CONTENTS
Page
----
PROSPECTUS SUMMARY....................................................... 1
RISK FACTORS............................................................. 2
USE OF PROCEEDS.......................................................... 15
SELLING STOCKHOLDERS..................................................... 15
PLAN OF DISTRIBUTION..................................................... 19
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS................. 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS................................................. 21
BUSINESS................................................................. 29
MANAGEMENT............................................................... 41
EXECUTIVE COMPENSATION................................................... 43
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................... 44
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT........... 45
DESCRIPTION OF SECURITIES................................................ 46
SHARES ELIGIBLE FOR FUTURE SALE.......................................... 47
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES........................... 48
LEGAL MATTERS............................................................ 48
EXPERTS.................................................................. 49
ADDITIONAL INFORMATION................................................... 49
FINANCIAL STATEMENTS..................................................... F-1
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDING
DECEMBER 31, 2005.................................................. F-1
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDING
DECEMBER 31, 2004.................................................. F-22
FINANCIAL STATEMENTS OF INTELLIPHARMACEUTICS CORP. FOR THE YEAR
ENDING DECEMBER 31, 2003........................................... F-40
FINANCIAL STATEMENTS OF READY CAPITAL CORP. FOR THE YEAR ENDING
DECEMBER 31, 2003.................................................. F-52
INFORMATION NOT REQUIRED IN PROSPECTUS................................... II-1
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PROSPECTUS SUMMARY
The following summary highlights selected information contained in this
prospectus. This summary does not contain all the information you should
consider before investing in the securities. Before making an investment
decision, you should read the entire prospectus carefully, including the "RISK
FACTORS" section, the financial statements and the notes to the financial
statements. Since we operate solely through our operating affiliate
IntelliPharmaCeutics Corp., as used throughout this prospectus, the terms the
"Company," "we," "us," and "our" refer to IntelliPharmaCeutics Ltd. or
IntelliPharmaCeutics Corp., as the case may be.
INTELLIPHARMACEUTICS LTD.
IntelliPharmaCeutics Ltd., through IntelliPharmaCeutics Corp., a Nova
Scotia corporation, develops, licenses, and markets both new and generic
controlled-release pharmaceutical products. Our principal executive offices are
located at 30 Worcester Road, Toronto, Ontario, Canada M9W 5X2 and our telephone
number is (416) 798-3001.
THE OFFERING
Common stock outstanding 5,193,946 shares.
before the offering
Common stock offered by Up to 21,322,446 shares, assuming full
selling stockholders conversion of our operating company's
Exchangeable Stock, and exercise of all
warrants and unvested options.
Common stock to be outstanding Up to 21,322,446 shares.
after the offering
Risk Factors See "Risk Factors," beginning on p.2 for a
description of certain factors you should
consider before making an investment in our
common stock.
Use of Proceeds We will not receive any proceeds from the sale
of the common stock issued upon conversion of
the Exchangeable Stock. We will receive
proceeds from the conversion of outstanding
warrants and options. See "Use of Proceeds" for
a complete description.
Forward-Looking Statements This prospectus contains forward-looking
statements that address, among other things,
our expansion and acquisition strategy,
business development, use of proceeds,
projected capital expenditures, liquidity, and
our development of additional revenue sources.
The forward-looking statements are based on our
current expectations and are subject to risks,
uncertainties and assumptions. We base these
forward-looking statements on information
currently available to us, and we assume no
obligation to update them. Our actual results
may differ materially from the results
anticipated in these forward-looking
statements, due to various factors.
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RISK FACTORS
CAUTIONARY STATEMENTS
This prospectus contains forward-looking statements that should be read in
the context of accompanying meaningful cautionary statements identifying
important factors that could cause actual results to differ materially from
those discussed in the forward-looking statement(s).
Except for historical information, this prospectus, the registration
statement on Form SB-2, of which this prospectus forms a part, our Annual
Reports on Form 10-KSB, our quarterly reports on Form 10-QSB, our current
reports on Form 8-K, periodic press releases, as well as other public documents
and statements, may contain forward-looking statements.
In addition, representatives of our Company may, from time to time,
participate in speeches and calls with market analysts, conferences with
investors and potential investors in our securities, and other meetings and
conferences. Some of the information presented in such speeches, calls, meetings
and conferences may be forward-looking and should be considered in the context
of the cautionary statements in such presentations and in this prospectus.
It is not reasonably possible to itemize all of the many factors and
specific events that could affect us and/or our industry as a whole. In some
cases, information regarding certain important factors that could cause actual
results to differ materially from those projected, forecasted, estimated,
budgeted or otherwise expressed in forward-looking statements made by or on
behalf of the Company may appear or be otherwise conveyed together with such
statements.
RISKS AND UNCERTAINTIES
The Company is subject to risks, events and uncertainties, or "risk factors",
associated with being both a publicly-traded company operating in the
biopharmaceutical industry, and as an enterprise with several projects in the
research and development stage. Such risk factors could cause reported financial
information to not necessarily be indicative of future operating results or of
future financial position. The Company cannot predict all of the risk factors,
nor can it assess the impact, if any, of such risk factors on the Company's
business or the extent to which any factor, or combination of factors, may cause
future results or financial position to differ materially from those reported or
those projected in any forward-looking statements. Accordingly, reported
financial information and forward-looking statements should not be relied upon
as a prediction of future actual results.
An investment in our common stock involves a high degree of risk. Before
deciding whether to invest, you should read and consider carefully the following
risk factors.
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RISKS RELATED TO OUR BUSINESS AND INDUSTRY
WE HAVE A LIMITED OPERATING HISTORY, WORKING CAPITAL, ACCUMULATED DEFICITS AND
LOSSES WHICH COULD HINDER OUR VALUE OR OUR ABILITY TO OBTAIN ADDITIONAL CAPITAL,
IF NEEDED.
Our operating company, IntelliPharmaCeutics Corp., commenced operations in
2002 and has incurred losses through December 31, 2005. For the years ended
December 31, 2005 2004, 2003 and 2002 we incurred losses of $2,452,865,
$1,662,352, $881,159 and $95,802, respectively. As at December 31, 2005, we had
an accumulated deficit of $5,092,179. These historical financial 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 stock. See
the Financial Statements commencing on page F-1.
WE WILL CONTINUE TO INCUR LOSSES AND WE MAY NEVER ACHIEVE PROFITABILITY.
We will continue to incur losses as we engage in the development of
products in our pipeline. 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 Food
and Drug Administration ("FDA") and we are 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 that we will reach the level of sales and
revenues necessary to achieve and sustain profitability. We may not be able to
execute our current business plan and fund business operations long enough to
achieve positive cash flow. Furthermore, we may be forced to reduce our expenses
and cash expenditures to a material extent, which would impair our ability to
execute our business plan.
WE WILL NEED ADDITIONAL CAPITAL, AND CANNOT ASSURE YOU THAT ADDITIONAL CAPITAL
WILL BE AVAILABLE TO US.
We plan to sell additional equity to raise additional capital in the very
near future to provide a more substantial base of working capital. While we will
seek to raise this capital at increasing valuations, no assurance can be given
that future investors will be willing to invest at any increased valuation
levels. We have no commitment for any such additional future capital, and we
cannot assure you that additional capital will be available to us on terms
acceptable to us, or at all. Any sale of equity in the future may be highly
dilutive or on terms disadvantageous to our present shareholders.
IF WE LOSE OUR KEY PERSONNEL, OR IF WE ARE UNABLE TO ATTRACT AND RETAIN
ADDITIONAL PERSONNEL, THEN WE MAY BE UNABLE TO SUCCESSFULLY DEVELOP OUR
BUSINESS.
We are dependent upon the scientific expertise of Dr. Isa Odidi, Chairman
and Chief Executive Officer, and Dr. Amina Odidi, President and Chief Operating
Officer. Although we now employ, and will in the future continue to employ,
other qualified scientists only Drs. Isa and Amina Odidi have the advanced
knowledge, knowhow and track record of having successfully developed
controlled-release products for other companies. Drs. Odidi have entered into
three-year employment agreements providing for annual compensations of $200,000
per year with 20% annual increases. See "Management, Page 41".
WE MAY BE UNABLE TO RETAIN SKILLED PERSONNEL AND MAINTAIN KEY RELATIONSHIPS.
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 of new employees into our corporate culture, and on our
ability to develop and maintain important relationships with leading research
and medical institutions and key
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distributors. Competition for these types of personnel and relationships is
intense, and the failure to obtain and retain such personnel could have material
adverse consequences.
AS AT DECEMBER 31, 2005, WE OWE DRS. ISA AND AMINA ODIDI AN AGGREGATE OF
$1,733,678 (CAN$2,016,267), AND WE ARE OBLIGATED TO SATISFY THIS DEBT FROM 25%
OF OUR GROSS REVENUES, IF ANY, WHICH COULD DRAIN OUR LIMITED RESOURCES.
As at December 31, 2005, owe Drs. Isa and Amina Odidi, our Chief Executive
Officer and Chief Operating Officer, respectively, $1,733,678 (CAN$2,016,267) in
connection with loans previously made by them to us. This obligation is payable
from 25% of gross revenues, until satisfied. The payment of this obligation
could restrict, or slow, the implementation of our business plan. See
"Management."
WE MAY NOT HAVE SUFFICIENT INTELLECTUAL PROPERTY PROTECTION. UNCERTAINTY CAN
ARISE REGARDING THE APPLICABILITY OF OUR PATENTS AND PROPRIETARY TECHNOLOGY AND
PATENT PROTECTION IS UNPREDICTABLE.
We hold numerous U.S. and foreign patents and have many pending
applications for additional patents. We intend to continue to seek patent
protection for, or maintain as trade secrets, all of the commercially promising
drug delivery platforms and technologies that we have discovered, developed or
acquired. 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 biotechnology and
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 identical products for
sale without incurring the sizeable development costs that we have incurred. Our
ability to recover these expenditures 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 issue 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 most U.S. patent
applications are confidential until a patent issues, and publications in the
scientific or patent literature lag behind actual discoveries. If our pending
patent applications are not approved for any reason, or if we are unable to
receive patent protection for additional proprietary technologies that we
develop, the degree of future protection for our proprietary rights 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 impair our ability to do business in a particular area. Our
success will depend, in part, on our ability to obtain patents, protect trade
secrets and other proprietary information and operate without infringing on the
proprietary rights of others.
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With respect to the segment of our business where we develop bio-equivalent
versions of existing drugs, 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 bio-equivalent 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 prevent 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 such challenges.
The expense of litigation, whether or not we are successful, could drain
limited financial resources, affecting our business, results of operations,
financial condition and cash flows. Such lawsuits may be brought and the
ultimate outcome of such litigation, if commenced, could materially affect our
business, results of operations, financial condition and cash flows. Regardless
of FDA approval, should anyone commence a lawsuit with respect to any alleged
patent infringement by us, whether because of the filing of an ANDA or
otherwise, the uncertainties inherent in patent litigation make the outcome of
such litigation difficult to predict.
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 we 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.
THE SUCCESSFUL DEVELOPMENT OF ANY OF THE COMPANY'S PRODUCTS IS HIGHLY
UNCERTAIN AND REQUIRES SIGNIFICANT EXPENDITURES.
Successful development of the Company's 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:
(a) For ANDA candidates, clinical trial results may not meet regulatory
requirements for the demonstration of bio-equivalence, or may show the
product to be less effective than desired (e.g., the trial failed to
meet its primary or secondary objectives) or to have harmful or
problematic side effects.
(b) For NDA candidates, a product may not demonstrate acceptable clinical
trial results, even though it demonstrated positive pre-clinical trial
results.
(c) For NDA candidates, a product may not be effective in treating a
specified condition or illness.
(d) A product may have harmful side effects on humans.
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(e) 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
preclinical or clinical data, or unexpected safety, efficacy or
manufacturing issues.
(f) Difficulties may be encountered in formulating products, scaling up
manufacturing processes or in getting approval for manufacturing.
(g) Manufacturing costs, pricing or reimbursement issues, other
competitive therapeutics, or other commercial factors may make the
product uneconomical.
(h) The proprietary rights of others, and their competing products and
technologies, may prevent the product from being developed or
commercialized.
Success in preclinical and early clinical trials does not ensure that
large-scale clinical trials will be successful. Clinical results are frequently
susceptible to varying interpretations that may delay, limit or prevent
regulatory approvals. The length of time necessary to complete 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.
Factors affecting our R&D expenses include, but are not limited to the
number of, and the outcomes of, clinical trials currently being conducted by us
and/or our collaborators. For example, our R&D expenses may increase based on
the number of late-stage clinical trials being conducted by us and/or our
collaborators.
As a result, there can be no assurance that any of our products
currently in development will ever be successfully commercialized.
BECAUSE WE HAVE LIMITED EXPERIENCE IN MARKETING OR SELLING OUR PROPOSED
PRODUCTS, THESE PRODUCTS MAY NEVER BE SUCCESSFUL.
Even if we are able to develop our products and obtain necessary regulatory
approvals, we have limited experience or capabilities in marketing or
commercializing any of our proposed products. We are dependent on our ability to
find marketing partners or contract sales companies for commercial sale of our
products. Even if we find a potential marketing partner, we may not be able to
negotiate a licensing contract on favorable terms to justify our investment or
achieve adequate revenues. In addition, a licensing transaction with a marketing
partner does not assure a product's success, which is dependent upon patients,
physicians or third-party payers' accepting the product.
Our products may prove to be unsuccessful if various parties, including
government health administration authorities, private health care insurers and
other health care payers, such as health maintenance organizations and
self-insured employee plans that determine reimbursement to the consumer, do not
accept our products. We cannot assure you that reimbursement will be available
at all or at levels sufficient to allow our marketing partners to achieve
profitable price levels for our products. If we fail to achieve adequate
reimbursement levels, patients may not purchase our products and sales of these
products will be reduced.
WE MAY BE UNABLE TO COMPETE SUCCESSFULLY AGAINST OUR CURRENT AND FUTURE
COMPETITORS.
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Our competitors are numerous and include, among others, major
pharmaceutical companies, biotechnology firms, universities and other research
institutions. Our competitors may succeed in developing technologies and
products that are more effective than drug delivery technology we are developing
or that will cause our technology or products to become obsolete or
noncompetitive. In addition, our potential products, if approved and
commercialized, will compete against well-established existing products.
Many of our competitors have substantially greater financial and technical
resources and production and marketing capabilities than we have. They also may
have greater experience in conducting preclinical testing and clinical trials of
pharmaceutical products and obtaining FDA and other regulatory approvals.
Therefore, our competitors may succeed in obtaining FDA approval for products
faster than we could. Even if we commence commercial sales of our products, we
will also be competing against their greater manufacturing efficiency and
marketing capabilities, areas in which we have limited or no experience. 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 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.
IF WE FAIL TO NEGOTIATE OR MAINTAIN SUCCESSFUL COLLABORATIVE ARRANGEMENTS WITH
THIRD PARTIES, OUR DEVELOPMENT AND COMMERCIALIZATION ACTIVITIES MAY BE DELAYED
OR REDUCED.
In the past, we have entered into, and expect to enter into in the future,
collaborative arrangements with third parties who provide us with funding and/or
who perform research, development, regulatory compliance, manufacturing or
commercialization activities relating to some or all of our product candidates.
If we fail to secure or maintain successful collaborative arrangements, our
development and commercialization activities may be delayed or reduced.
These collaborative agreements can be terminated under certain conditions
by our partners. Our partners may also under some circumstances independently
pursue competing products, delivery approaches or technologies. Even if our
partners continue their contributions to our collaborative arrangements, they
may nevertheless determine not to actively pursue the development or
commercialization of any resulting products. Also, our partners may fail to
perform their obligations under the collaborative arrangements or may be slow in
performing their obligations. In addition, our partners may experience financial
difficulties at any time that could prevent them from having available funds to
contribute to these collaborations. In these circumstances, our ability to
develop and market potential products could be severely limited.
DIFFICULTIES OR DELAYS IN PRODUCT MANUFACTURING COULD HARM OUR BUSINESS.
We currently do not produce any products, but plan to in the future, either
directly or via contractors. Problems with any of our facilities or
manufacturing processes, or our contractors' financial viability, facilities or
manufacturing processes could result in failure to produce adequate product
supplies or product defects, which could require us to delay shipment of
products, recall products previously shipped or to be unable to supply products
at all.
In addition, any prolonged interruption in the operations of our, or our
contractors', manufacturing facilities could result in cancellations of
shipments, loss of product in the process of being
7
manufactured, or a shortfall or stock-out of available product inventory, any of
which could have a material adverse impact on our business. A number of factors
could cause prolonged interruptions, including the inability of a supplier to
provide raw materials used for manufacture of our products, equipment
obsolescence, malfunctions or failures, product contamination problems, damage
to a facility, including future warehouses and distribution facilities, due to
natural disasters, changes in FDA regulatory requirements or standards that
require modifications to our manufacturing processes, action by the FDA or by us
that results in the halting or slowdown of production of one or more of our
products due to regulatory issues, a contract manufacturer going out of business
or failing to produce product as contractually required or other similar
factors.
WE ARE SUBJECT TO EXTENSIVE GOVERNMENT REGULATION THAT MAY CAUSE US TO CANCEL OR
DELAY THE INTRODUCTION OF OUR PRODUCTS TO MARKET.
The cost of complying with government regulation can be substantial.
Governmental authorities in the United States and Canada and comparable
authorities in foreign countries also regulate the research and development,
testing and safety of pharmaceutical products. The regulations applicable to our
existing and future products may change. There can be long delays in obtaining
required clearances from regulatory authorities in any country after
applications are filed. Government agencies in the United States, Canada and
other countries in which we carry on business regulate pharmaceutical products
intended for human use. Regulations require extensive clinical trials and other
testing and government review and final approval before we can market these
products.
Requirements for approval vary widely from country to country outside of
the United States and Canada. Whether or not 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. Any failure or delay in obtaining regulatory approvals could make us
unable to market any products we develop and therefore affect our business,
results of operations, financial condition and cash flows.
OTHER FACTORS COULD AFFECT OUR PRODUCT SALES.
Other factors that could affect our product sales include, but are not
limited to:
(a) The timing of FDA approval, if any, of competitive products.
(b) Pricing decisions, including decisions of our licensed distributors to
increase or decrease the price of a product, and the pricing decisions
of competitors.
(c) Government and third-party payor reimbursement and coverage decisions
that affect the utilization of our products and competing products.
(d) Negative safety or efficacy data from new clinical studies causing the
utilization and sales of our products to decrease.
(e) Negative safety or efficacy data from post-approval marketing
experience causing sales of our products to decrease or for a product
to be recalled.
(f) The degree of patent protection afforded our products by patents
granted to us, and by the outcome of litigation involving our patents.
8
(g) The outcome of litigation involving patents of other companies
concerning our products or processes related to production and
formulation of those products or uses of those products.
(h) The increasing use and development of alternate therapies.
(i) The rate of market penetration by competing products.
(j) The termination of an existing arrangement with any of the wholesalers
who may supply our products.
WE MAY BE REQUIRED TO INSTITUTE OR DEFEND LAWSUITS, POSSIBLY RESULTING IN
MONETARY DAMAGES THAT COULD DISRUPT OUR BUSINESS OPERATIONS.
There is currently no pending litigation or threatened claim against us;
however, the pharmaceutical industry is highly litigious. The cost of commencing
or defending litigation, if necessary, could be significant and could
significantly drain our resources and disrupt our business operations.
While there is no litigation pending or threatened against the Company,
litigation to which we may be subjected could relate to, among other things, our
patent and other intellectual property rights, licensing arrangements with other
persons, product liability and financing activities. Such litigation could
include an injunction against the manufacture or sale of a product or potential
product or a significant jury verdict or punitive damages award, or a judgment
that certain of our patent or other intellectual property rights are invalid or
unenforceable.
OUR BUSINESS MAY INCUR SUBSTANTIAL EXPENSE TO COMPLY WITH ENVIRONMENTAL LAWS AND
REGULATIONS.
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 EXPOSED TO FLUCTUATIONS IN EXCHANGE RATES AND EXCHANGE CONTROL
REGULATIONS, WHICH COULD ADVERSELY AFFECT OUR PROFIT MARGINS.
During the next twelve months, we expect to have more costs payable in
foreign currencies. There may be instances where we have net foreign currency
exposure. Although none of our current foreign operations have any such
restrictions, some of the foreign currencies in which we may be paid in the
future, might be subject to exchange control regulations or other impediments to
convertibility to U.S. dollars. We may not be able to hedge our currency risks.
To the extent that we are unable or choose not to convert these currencies to
U.S. dollars or utilize them to pay our expenses in-country, we might earn
revenues which we are unable to repatriate outside of the country in which they
are earned.
CHANGES IN THE HEALTHCARE INDUSTRY THAT ARE BEYOND OUR CONTROL MAY BE
DETRIMENTAL TO OUR BUSINESS.
The healthcare industry is changing rapidly as the public, government,
medical professionals and the pharmaceutical industry examine ways to broaden
medical coverage while controlling the increase in healthcare costs. Potential
changes could put pressure on the prices of prescription pharmaceutical
9
products and reduce our business or prospects. We cannot predict when, if any,
proposed healthcare reforms will be implemented, and these changes are beyond
our control.
WE MAY INCUR MATERIAL PRODUCT LIABILITY COSTS.
The testing and marketing of medical products entails an inherent risk of
product liability. While we work almost exclusively with active ingredients
which have been used safely in the marketplace for many years, liability
exposures for biotherapeutics can be extremely large and pose a material risk.
Our business may be materially and adversely affected by a successful product
liability claim or claims in excess of any insurance coverage that we may have.
INSURANCE COVERAGE IS INCREASINGLY MORE DIFFICULT TO OBTAIN OR MAINTAIN.
While we currently have insurance for our business, property and our
products as they are dosed in clinical trials, first- and third-party insurance
is increasingly more costly and narrower in scope, and 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.
THE COMPANY'S EFFECTIVE TAX RATE MAY VARY SIGNIFICANTLY.
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 R&D
spending, the availability of tax credit programs for the reimbursement of all
or a significant proportion of R&D spending, and changes in overall levels of
pretax earnings.
RECENT ACCOUNTING PRONOUNCEMENTS MAY IMPACT OUR FUTURE FINANCIAL POSITION AND
RESULTS OF OPERATIONS.
Under Financial Accounting Standards Board Interpretation No. 46R (FIN
46R), a revision to Interpretation 46, "Consolidation of Variable Interest
Entities," there is a requirement to assess new business development
collaborations as well as to reassess, upon certain events, the accounting
treatment of business development collaborations based on the nature and extent
of any interest we may have in such entities. Some of such events, as well as
the extent of our ability to exercise influence in the entities with which we
may have such collaborations with, maybe outside of our control. In future, if
and when we have collaborations, our compliance with FIN 46R may result in our
consolidation of companies or related entities with which we may have a
collaborative arrangement with and the lack of control may have a material
impact on our financial condition and/or results of operations in future
periods. Currently, the Company is not a party to any agreements to which FIN
46R would be applicable.
In December 2004, the FASB issued Statement No. 123 (revised 2004),
"Share-Based Payment," effective beginning after June 15, 2005. FAS 123R
supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees," and
will require companies to recognize compensation expense, using a fair-value
based method, for costs related to share-based payments including stock options
and stock issued under employee stock purchase plans. We will be required to
implement FAS 123R no later than the quarter that begins July 1, 2005. Our
adoption will be applied on a modified prospective basis and measured and
recognized on July 1, 2005. We expect that the adoption of FAS 123R will have a
material adverse impact on our consolidated results of operations and financial
position as we issue stock options to officers, directors, consultants etc. The
impact will depend primarily on such factors as interest rates, the volatility
of the stock and the number of stock options that are granted.
10
CONTINGENCIES AND LITIGATION.
There has been, and we expect there may be significant litigation in the
industry regarding commercial practices, regulatory issues, pricing, and patents
and other intellectual property rights. Certain adverse unfavorable rulings or
decisions in the future could create variability or have a material adverse
effect on our future results of operations and financial position.
RISKS RELATED TO THE SECURITIES
THERE IS NO MARKET FOR OUR COMMON STOCK.
We intend to apply for a listing of our common stock on either the Nasdaq
SmallCap Market, the American Stock Exchange ("AMEX"), or, in the alternative,
the OTC Bulletin Board, but have not yet done so. We may not meet the financial
or minimum capital requirements of the Nasdaq SmallCap Market or AMEX upon
completion of this offering, in which case, we will apply for listing on the
Bulletin Board. For listing on the Bulletin Board, we will not have to meet any
financial or minimum capital requirements, but will have to comply with Section
240.15c2-11 of the Code of Federal Regulations, which requires the provision of
material information concerning the issuer, including information regarding the
issuer's corporate structure, business, finances, and securities, as well as
other information. There can be no assurance that the application for our common
stock will be approved, or that if it is approved and listed, that a market will
ever develop.
FLUCTUATIONS IN OUR OPERATING RESULTS COULD AFFECT THE PRICE OF OUR COMMON
STOCK.
Our operating results may vary from period to period for several reasons
including:
(a) The overall competitive environment for our products.
(b) The amount and timing of sales to customers in the United States. For
example, sales of a product may increase or decrease due to pricing
changes, fluctuations in distributor buying patterns or sales
initiatives that our authorized distributors may undertake from time
to time.
(c) The timing and volume of bulk shipments to licensees.
(d) The availability and extent of government and private third-party
reimbursements for the cost of therapy.
(e) The extent of product discounts extended to customers.
(f) The effectiveness and safety of our various products as determined
both in clinical testing and by the accumulation of additional
information on each product after the FDA approves it for sale.
(g) The rate of adoption by physicians and the use of our products for
approved indications and additional indications. Among other things,
the rate of adoption by physicians and the use of our products may be
affected by results of clinical studies reporting on the benefits or
risks of a product.
(h) The potential introduction of new products and additional indications
for existing products.
11
(i) The ability to successfully manufacture sufficient quantities of any
particular marketed product.
(j) The number and size of any product price increases our authorized
distributors may issue.
OUR STOCK PRICE, LIKE THAT OF MANY BIOTECHNOLOGY COMPANIES, WILL LIKELY BE
HIGHLY VOLATILE.
The market prices for securities of biotechnology companies in general have
been highly volatile and may continue to be highly volatile in the future. At
such time as our securities are registered for trading, the market price of our
common stock may be highly volatile.
In addition, the following factors may have a significant impact on the
market price of our common stock:
(a) Announcements of technological innovations or new commercial products
by us or our competitors.
(b) Publicity regarding actual or potential medical results relating to
products under development or being commercialized by us or our
competitors.
(c) Litigation that might arise regarding proprietary and patent rights.
(d) Regulatory developments or delays concerning our products in the
United States and foreign countries.
(e) Issues concerning the safety of our products or of biotechnology
products generally.
(f) Economic and other external factors or a disaster or crisis.
(g) Period-to-period fluctuations in our financial results.
OUR CORPORATE AND CAPITAL STRUCTURE MAY BE CONFUSING TO PURCHASERS OF OUR COMMON
STOCK, WHICH MAY AFFECT THE MARKET FOR OUR COMMON STOCK.
For corporate and tax reasons that result in significant benefit for us, we
have a corporate and capital structure that may be confusing to purchasers of
our common stock. This could affect the market liquidity for our common stock,
could limit your ability to sell your securities in the secondary market, and
could inhibit our ability to raise future capital.
Our outstanding capital stock includes common stock and a preferred stock,
called Special Voting Stock. Our common stock has all the typical rights
associated with common stock, including equity and voting interests. Our Special
Voting Stock does not retain any equity interest, only voting rights. (See
"Description of Securities," p. 44).
IntelliPharmaCeutics Corp. ("IPC Corp.") has outstanding shares of
convertible voting stock that can be converted into stock (Exchangeable Stock)
that is exchangeable for our Common Stock (the Exchangeable Stock and
Convertible Voting Stock together, the "Convertible Securities"). We own all of
IPC Corp.'s common stock, which has all the typical rights associated with
common stock, including equity and voting interests. None of the Convertible
Securities retain any equity interest in IPC Corp., but rather, are economically
equivalent to our common stock. (See "Description of Securities," p. 44).
12
IntelliPharmaCeutics Inc., a Canadian holding company ("IPC Inc."), which
is controlled by Drs. Isa and Amina Odidi, our Chief Executive Officer and
President, respectively, holds all of our Special Voting Stock and all of the
Convertible Securities.
As a result, the holders of our common stock have an indirect equity
interest in IPC Corp. equivalent to the voting interest such shareholders hold
in us, approximately 34%. Similarly, IPC Inc., through its ownership of the
Convertible Securities in us, has an indirect equity interest in IPC Corp.
equivalent to the voting interest it holds in us, approximately 66%. We own
50% of the voting rights in IPC Corp., and IPC Inc. owns the other 50%.
13
(FLOW CHART)
(1) Each Convertible Voting Share is convertible into one Exchangeable Share
and is economically equivalent to one share of our common stock. Each
Exchangeable Share is exchangeable for one share of our common stock.
INTELLIPHARMACEUTICS INC. ("IPC INC."), A CANADIAN HOLDING CORPORATION
CONTROLLED BY DRS. ISA AND AMINA ODIDI, CONTROL US, AND YOU HAVE NO EFFECTIVE
VOICE IN OUR MANAGEMENT.
IPC Inc., a Canadian holding company owned by Drs. Isa and Amina Odidi, own
approximately 68% of our outstanding voting stock. Additionally, Drs. Isa and
Amina Odidi own 5,000,000 options to purchase our common stock, which vest upon
the achievement of certain milestones. Since the majority of outstanding voting
shares will be owned by Drs. Odidi, purchasers of the shares offered herein will
have no effective voice in our management. See "Principal Stockholders," and
"Executive Compensation."
THERE ARE A LARGE NUMBER OF SHARES UNDERLYING IPC CORP.'S EXCHANGEABLE STOCK,
OPTIONS AND WARRANTS THAT MAY BE AVAILABLE FOR FUTURE SALE AND THE SALE OF THESE
SHARES MAY DEPRESS THE MARKET PRICE OF OUR COMMON STOCK.
As of December 31, 2005, we have outstanding warrants to purchase 278,500
shares of our common stock at a price of $3.00 per share, outstanding options to
purchase 5,000,000 shares of our common stock at a price of $2.00 per share,
which vest only upon certain conditions, and 10,850,000 shares of common stock
issuable upon conversion of IPC Corp.'s Exchangeable Stock. This prospectus
relates to the resale of up to 16,322,446 shares of common stock underlying
convertible securities and warrants. Other than the 5,000,000 shares underlying
the unvested options, all of the shares will be freely tradable upon the
effective date of the registration statement, of which this prospectus forms a
part, and may be sold without restriction, except for any such shares held by
"affiliates" as that term is defined under Rule 144 of the Securities Act, which
shares will be subject to the resale limitations under Rule 144. The sale of
these shares may adversely affect the market price of our common stock.
OUR COMMON STOCK IS SUBJECT TO PENNY STOCK REGULATION THAT MAY AFFECT ITS
LIQUIDITY.
Our common stock is subject to regulations of the SEC relating to the
market for penny stocks. These regulations generally require that a disclosure
schedule explaining the penny stock market and the risks associated therewith be
delivered to purchasers of penny stocks and impose various sales practice
requirements on broker-dealers who sell penny stocks to persons other than
established customers and accredited investors. The regulations applicable to
penny stocks may severely affect the market liquidity for our common stock and
could limit your ability to sell your securities in the secondary market.
14
USE OF PROCEEDS
We will not receive proceeds from the resale of shares of common stock in
this offering. In the future, we may receive up to a maximum of $827,400 from
the exercise of the warrants, and up to $10,000,000 upon the exercise of stock
options. Such proceeds, if any, will be used for working capital.
SELLING STOCKHOLDERS
The following table sets forth the common stock ownership of the selling
stockholders as of April 17, 2006, including the number of shares of common
stock issuable upon the conversion of Exchangeable Stock and the exercise of
warrants held by the selling stockholders, and shares of common stock underlying
unvested options. Other than as set forth in the following table, the selling
stockholders have not held any position or office or had any other material
relationship with us or any of our predecessors or affiliates within the past
three years.
<Table>
<Caption>
Securities Owned Securities Owned
Prior to Offering Securities Offered (2) After Offering (3)
----------------------------- ------------------------------ -------------------
% Ownership
Name of Selling Security Holder Common Stock Warrants Common Stock Offered (4) Common Stock
- ------------------------------- ------------ -------- ------------ ----------- ------------
IntelliPharmaCeutics Inc. 10,850,000(1) 10,850,000(1) 66.47% 0.00
Aegis Capital Corp. 23,550 23,550 0.14% 0.00
John Allport (5) 200,000 200,000 1.23% 0.00
Murray Alon 100,000 100,000 0.61% 0.00
American Business Systems Inc. 22,675 22,675 0.14% 0.00
Christopher J. Bardsley 14,000 14,000 0.09% 0.00
Elliot Bauer 9,333 9,333 0.06% 0.00
Bear Stearns Securities Corp. 10,000 10,000 0.06% 0.00
Jerome Belson 232,410 232,410 1.42% 0.00
Gerald A. Brauser 496,665 496,665 3.04% 0.00
Bridge Ventures, Inc. 449,988 449,988 2.76% 0.00
Brino Investment Limited 20,000 20,000 0.12% 0.00
Urs Brunner 35,000 35,000 0.21% 0.00
Tex Caldarola 9,333 9,333 0.06% 0.00
Frank Carr 14,000 14,000 0.09% 0.00
Cede & Company (6) 170,779 170,779 1.05% 0.00
Leonard Cohen 50,000 50,000 0.31% 0.00
Robert Henry Cohen 25,000 25,000 0.15% 0.00
Abbas T Dahodwala 25,000 25,000 0.15% 0.00
Alan Davis 25,000 25,000 0.15% 0.00
Aruna A Desai, M.D. 13,000 13,000 0.08% 0.00
AmitDoshi 25,000 25,000 0.15% 0.00
Dutchess Foundation (7) 506,648 506,648 3.10% 0.00
Robert J. Eide 23,550 23,550 0.14% 0.00
Equity Trust Company 12,000 12,000 0.07% 0.00
F&M 18 Investment Partnership 25,000 25,000 0.15% 0.00
</Table>
15
<Table>
<Caption>
Securities Owned Securities Owned
Prior to Offering Securities Offered (2) After Offering (3)
----------------------------- ------------------------------ -------------------
% Ownership
Name of Selling Security Holder Common Stock Warrants Common Stock Offered (4) Common Stock
- ------------------------------- ------------ -------- ------------ ----------- ------------
Annelies Freedman 6,500 6,500 0.04% 0.00
Michael Freedman 23,333 75,000 98,333 0.60% 0.00
Susan Freedman 23,333 23,333 0.14% 0.00
Sharon Fuerst 23,333 23,333 0.14% 0.00
Joseph Giamanco 327,999 327,999 2.01% 0.00
Gilder Funding Corp. 50,000 50,000 0.31% 0.00
Eric Goldstein 23,333 23,333 0.14% 0.00
Norman Gottlieb 31,400 31,400 0.19% 0.00
Frank Grillo 14,316 14,316 0.09% 0.00
Hartzmank Investment, LLC 25,000 25,000 0.15% 0.00
HK Partners 5,000 5,000 0.03% 0.00
Carole Howard 23,333 23,333 0.14% 0.00
Robert Karsten 75,000 75,000 0.46% 0.00
Keys Foundation 150,000 150,000 0.92% 0.00
Marvin Kogod 25,000 25,000 0.15% 0.00
Henry Kramer 18,666 18,666 0.11% 0.00
Charles LaBella 20,000 20,000 0.12% 0.00
Herbert Lanzet 12,500 12,500 0.08% 0.00
Mak LLC 100,000 100,000 0.61% 0.00
Rose Mc Allister 14,085 14,085 0.09% 0.00
Ronald Menello 50,000 50,000 0.31% 0.00
Metropolitan Commercial 22,675 22,675 0.14% 0.00
John A. Moore 59,165 59,165 0.36% 0.00
Navaho Investment LP 50,000 50,000 0.31% 0.00
Patricia Marie Nugent (5) 300,000 300,000 1.84% 0.00
Daniel Orenstein 20,000 20,000 0.12% 0.00
Seymour Orenstein 15,000 15,000 0.09% 0.00
Gerald Ortsman 20,000 20,000 0.12% 0.00
Baji Palkhiwala 146,665 50,000 196,665 1.20% 0.00
Baji Palkhiwala &
Christine C. Palkhiwala, JT 20,000 20,000 0.12% 0.00
Christine C. Palkhiwala 20,000 20,000 0.12% 0.00
Rasik A Patel 10,000 10,000 0.06% 0.00
Shirish C Patrawalla 10,000 10,000 0.06% 0.00
Harold Paul 20,615 20,615 0.13%
Kenneth M Reichle, Jr 12,500 12,500 0.08% 0.00
Reva Enterprises 3,436 3,436 0.02%
Joseph C. Roselle 39,000 39,000 0.24% 0.00
Robert Rosenblum 12,500 12,500 0.08% 0.00
Lawrence Rubinstein 6,000 6,000 0.04% 0.00
S&Z Equity Group LLC 25,000 25,000 0.15% 0.00
Saphier Enterprises Ltd
a Partnership 12,500 12,500 0.08% 0.00
Albert L. Saphier IRA 25,000 25,000 0.15% 0.00
Victor J Scaravilli 12,500 12,500 0.08% 0.00
Adam C Schachter 15,000 15,000 0.09% 0.00
Nancy Schachter 15,000 15,000 0.09% 0.00
</Table>
16
<Table>
<Caption>
Securities Owned Securities Owned
Prior to Offering Securities Offered (2) After Offering (3)
----------------------------- ------------------------------ -------------------
% Ownership
Name of Selling Security Holder Common Stock Warrants Common Stock Offered (4) Common Stock
- ------------------------------- ------------ -------- ------------ ----------- ------------
Ronald Schaffer 12,500 12,500 0.08% 0.00
J. Douglas Schmidt 9,333 9,333 0.06% 0.00
Steve Schnipper 12,500 12,500 0.08% 0.00
Securities Settlement Corp. 20,999 20,999 0.13% 0.00
Ethan Seer 25,000 25,000 0.15% 0.00
Mehul Shah 10,000 10,000 0.06% 0.00
Marvin Sheeba 12,500 12,500 0.08% 0.00
Smacs Holding Corp. 93,330 93,330 0.57% 0.00
Joel A. Stone 12,500 12,500 0.08% 0.00
Leroy Strom 12,500 12,500 0.08% 0.00
The Gerald A Brauser
Irrevocable Trust 250,000 250,000 1.53% 0.00
The Sheth Living Trust 50,000 50,000 0.31% 0.00
Tisu Investment Limited 40,000 40,000 0.25% 0.00
Larry L. Weinman 37,500 37,500 0.23% 0.00
Alan J Werksmans TTEE 15,000 15,000 0.09% 0.00
Dianne Will (7) 48,666 48,666 0.30% 0.00
Willstar Consultants, Inc. (7) 25,000 25,000 0.15% 0.00
Allan Wolfson 75,000 75,000 0.46%
Patrick Yat (5) 50,000 50,000 0.31% 0.00
Z&K Consulting, LLC 50,000 50,000 0.31% 0.00
Oscar Zimmerman 12,500 12,500 0.08% 0.00
---------- ------- ---------- ------- ----
Sub-Total 16,043,946 278,500 16,322,446 100.00% 0.00
---------- ------- ---------- ------- ----
Securities
Issuable
Subject to
Conditions
-----------
Drs. Isa and Amina Odidi (1) 5,000,000 (1) 5,000,000 (1) 0.00% 0.00
---------- ------- ---------- ----- ----
Total 21,043,946 278,500 21,322,446 0.00
========== ======= ========== ===== ====
</Table>
(1) Represents common shares issuable on ultimate conversion of 10,850,000
shares of Special Voting Stock owned by IntelliPharmaCeutics Inc. (see Page
46). Drs Isa and Amina Odidi, our Chief Executive Officer and Chief
Financial Officer, respectively, control IntelliPharmaCeutics Inc. Does not
include 5,000,000 shares of common stock underlying unvested stock options,
which only vest upon certain conditions.
(2) Assumes that all shares of common stock underlying the Exchangeable Stock
and warrants will be issued.
(3) Assumes that all securities registered will be sold.
(4) Applicable percentage ownership is based on 16,043,946 shares of common
stock outstanding as of March 31, 2006, together with 278,500 warrants
exercisable or convertible into shares of common
17
stock within 60 days of the Effective Date. Beneficial ownership is
determined in accordance with the rules of the Securities and Exchange
Commission and generally includes voting or investment power with respect
to securities. Shares of common stock that are currently exercisable or
exercisable within 60 days of the Effective Date are deemed to be
beneficially owned by the person holding such securities for the purpose of
computing the percentage of ownership of such person, but are not treated
as outstanding for the purpose of computing the percentage ownership of any
other person.
(5) John Allport and Patrick Yat are officers of the Company. Patricia Marie
Nugent is the wife of John Allport.
(6) Represents shares of common stock held in street name by holders.
(7) Dutchess Foundation and Willstar Consultants, Inc. are entities controlled
by Sharon Will and Diane Will, respectively. Sharon Will and Diane Will are
former President and Secretary, respectively, of the Company.
18
PLAN OF DISTRIBUTION
We are registering the shares of common stock on behalf of the selling
stockholders. We are paying all costs, expenses and fees in connection with the
registration of shares offered by this prospectus. Brokerage commissions, if
any, attributable to the sale of shares will be borne by the selling
stockholders.
The selling stockholders and any pledgees, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of common stock on any stock exchange, market or trading facility on which the
shares are traded or in private transactions. These sales may be at fixed or
negotiated prices. The selling stockholders may use any one or more of the
following methods when selling shares:
(a) ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
(b) block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block as
principal to facilitate the transaction;
(c) purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
(d) an exchange distribution in accordance with the rules of the
applicable exchange;
(e) privately negotiated transactions; or
(f) any other method permitted pursuant to applicable law.
Broker-dealers engaged by the selling stockholders may arrange for other
brokers-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from the selling stockholders (or, if any broker-dealer acts as
agent for the purchaser of shares, from the purchaser) in amounts to be
negotiated. Each selling stockholder does not expect these commissions and
discounts relating to sales of shares to exceed what are customary in the types
of transactions involved. In connection with the sale of our common stock or
interests therein, the selling stockholders may enter into hedging transactions
with broker-dealers or other financial institutions, which may in turn engage in
short sales of the common stock in the course of hedging the positions they
assume. The selling stockholders may also sell shares of our common stock short
and deliver these securities to close out their short positions, or loan or
pledge the common stock to broker-dealers that in turn may sell these
securities. The selling stockholders may also enter into options or other
transactions with broker-dealers or other financial institutions or create one
or more derivative securities which require the delivery to such broker-dealer
or other financial institution of shares offered by this prospectus, which
shares such broker-dealer or other financial institution may resell pursuant to
this prospectus (as supplemented or amended to reflect such transaction).
The selling stockholders and any broker-dealers or agents that are involved
in selling the shares may be deemed to be "underwriters" within the meaning of
the Securities Act in connection with such sales. In such event, any commissions
received by such broker-dealers or agents and any profit on the resale of the
shares purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act. Each selling stockholder has informed us
that it does not have any agreement or understanding, directly or indirectly,
with any person to distribute the common stock.
Because the selling stockholders may be deemed to be "underwriters" within
the meaning of the Securities Act, they will be subject to the prospectus
delivery requirements of the Securities Act. In addition, any securities covered
by this prospectus which qualify for sale pursuant to Rule 144 under the
Securities Act may be sold under Rule 144 rather than under this prospectus. The
selling stockholders have advised us that they have not entered into any
agreements, understandings or arrangements with any underwriter or broker-dealer
regarding the sale of the shares. There is no underwriter or coordinating broker
acting in connection with the proposed sale of the shares by the selling
stockholders.
19
We are required to pay certain fees and expenses incurred incident to the
registration of the shares. We estimate that the total expenses of the offering
payable by us will be $65,000.00 . We have agreed to indemnify the selling
stockholders against certain losses, claims, damages and liabilities, including
liabilities under the Securities Act.
We agreed to keep this prospectus effective until the earlier of (i) the
date on which the shares may be resold by the selling stockholders without
registration and without regard to any volume limitations by reason of Rule
144(e) under the Securities Act or any other rule of similar effect or (ii) all
of the shares have been sold pursuant to the prospectus or Rule 144 under the
Securities Act or any other rule of similar effect. The shares will be sold only
through registered or licensed brokers or dealers if required under applicable
state securities laws. In addition, in certain states, the shares may not be
sold unless they have been registered or qualified for sale in the applicable
state or an exemption from the registration or qualification requirement is
available and is complied with.
Under applicable rules and regulations under the Exchange Act, any person
engaged in the distribution of the shares may not simultaneously engage in
market making activities with respect to our common stock for a period of two
business days prior to the commencement of the distribution. In addition, the
selling stockholders will be subject to applicable provisions of the Exchange
Act and the rules and regulations thereunder, including Regulation M, which may
limit the timing of purchases and sales of shares of our common stock by the
selling stockholders or any other person. WE WILL MAKE COPIES OF THIS PROSPECTUS
AVAILABLE TO THE SELLING STOCKHOLDERS AND HAVE INFORMED THEM OF THE NEED TO
DELIVER A COPY OF THIS PROSPECTUS TO EACH PURCHASER AT OR PRIOR TO THE TIME OF
THE SALE.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET FOR SECURITIES
There is currently no market for our common stock. We intend to apply
for a listing of our common stock on either the Nasdaq SmallCap Market, AMEX,
or, in the alternative, the OTC Bulletin Board, but have not yet done so. There
can be no assurance that the application for our common stock will be approved,
or that if it is approved and listed, that a market will ever develop.
As of April 17, 2006, there were approximately 90 stockholders of
record of the Company's common stock.
DIVIDEND POLICY
To date, we have not declared or paid any cash dividends on our common
stock. Any future determination to pay dividends on our common stock will depend
upon our results of operations, financial condition and capital requirements,
and such other factors deemed relevant by our Board of Directors.
20
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information in this prospectus contains certain forward-looking statements
regarding, among other things, the anticipated financial and operating results
of the Company and the prospects of the industry in which it operates. These
statements should be read in the context of accompanying meaningful cautionary
statements identifying important factors that could cause actual results to
differ from the projected results. All statements other than statements of
historical fact made in this prospectus are forward looking. The Company
undertakes no obligation to publicly release any modifications or revisions to
these forward-looking statements to reflect events or circumstances occurring
after the date hereof, or to reflect the occurrence of unanticipated events. The
Company cautions investors that actual financial and operating results and
industry conditions may differ materially from those projected in
forward-looking statements made by, or on behalf of, the Company. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the Company or its industry to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements.
The following discussion and analysis should be read in conjunction with the
audited annual consolidated financial statements of IntelliPharmaCeutics Ltd.,
included herewith, and the information under "Risk Factors". This discussion
should not be construed to imply that the results discussed herein will
necessarily continue into the future, or that any conclusion reached herein will
necessarily be indicative of actual operating results in the future. Such
discussion represents only the best present assessment of the Company by the
management of the Company.
Unless the context otherwise requires, the terms "we", "our" and "us" refer to
IntelliPharmaCeutics Ltd. or IntelliPharmaCeutics Corp. as the context requires.
Unless stated otherwise, all references to "$" are to the lawful currency of the
United States and all references to "C$" are to the lawful currency of Canada.
OVERVIEW
IntelliPharmaCeutics Ltd. ("IPC Ltd") formerly Ready Capital Corp. (Ready),
incorporated in New York on February 23, 1988 as a "blank check" corporation. On
February 23, 2004, Ready agreed to merge its wholly-owned Nova Scotia subsidiary
into IntelliPharmaCeutics Corp., a Canadian pharmaceutical company ("IPC
Corp."). On September 10, 2004, IPC Ltd. (the corporate successor of Ready)
completed the merger of its Nova Scotia subsidiary with IPC Corp. and, at the
same time, reincorporated itself in Delaware.
Since we operate solely through IPC Corp. the following discussion and analysis
relates to the financial condition of IPC Corp.
21
We apply our proprietary drug delivery technology in two ways: (1) developing
improved controlled-release versions of existing immediate-release branded drugs
(requiring new drug applications (NDA)), and (2) developing and commercializing
controlled-release generics (requiring abbreviated new drug applications
(ANDA)). 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. Generic drugs are bio-equivalent to existing controlled-release branded
products.
We operate in the niche market created by the expiration of drug product patents
and drug product exclusivity periods. To replace these revenues and lessen their
dependence on internal development programs, large pharmaceutical companies are
increasingly entering into strategic licensing arrangements with specialty
pharmaceutical companies like ours.
We believe that (a) our technologies can improve the therapeutic effectiveness
of successful drug compounds, with shortened development periods at reduced
cost, (b) large pharmaceutical manufacturers will license our technologies for
product life-cycle management and extension, and (c) manufacturers and
distributors of generic drugs will license our technologies, increasing their
portfolios of generic products.
We are currently focusing our efforts on the following areas:
(a) obtaining FDA approval for one or more of nine oral generic
controlled-release pharmaceutical products (ANDAs or equivalent)
currently in development, and four NDAs;
(b) commercial exploitation of the products in our pipeline either by the
collection of royalties or the sharing of profits from the manufacture
and sale of licensed products by third party licensees, or through our
own manufacture of tablets and capsules using our developed
formulations and their sale by third party distributors; and
(c) development of new products and the expansion of our licensing
agreements with other pharmaceutical companies, including contract
research and development projects, joint ventures and other
collaborations.
We intend to collaborate in the development of products with partners, when such
occasion may enhance the outcome of the project. We also plan to seek additional
collaborations to develop more 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.
22
RESULTS OF OPERATIONS
Year Ended December 31, 2005 Compared to the Year Ended December 31, 2004
Revenues. We recorded no revenues for the year ended December 31, 2005
compared with $102,332 for the year ended December 31, 2004. The revenue in 2004
was primarily attributable to initiation fees from a drug development contract
that we entered into in 2004.
Research and Development. Our expenditures for research and development
increased to $941,420 for the year ended December 31, 2005 compared to $485,638
for the year ended December 31, 2004, an increase of $455,782 or 93.9%. This
amount is in line with the continued investment in our product portfolio as we
execute our business plan. Compared to the corresponding period in 2004, we have
more research and development staff on payroll and generally more R&D activity.
From the end of 2004 we have advanced three projects to pilot studies in humans,
and most of the costs of these studies were absorbed during 2005
Wages and Benefits. Our expenditures for wages and benefits increased to
$230,690 for the year ended December 31, 2005 compared to $222,103 for the year
ended December 31, 2004, an increase of $8,587 or 3.9%. (This does not take into
account non-cash compensation expenditures in 2004 in the amount of $120,000
relating to the issuance of 60,000 common shares to employees for past
services.) The 3.9% increase is due to additional investment in administrative
and support staff during the period.
Administrative Costs. Our administrative expenditures was $443,260 for the
year ended December 31, 2005 compared to $173,509 foe the year ended December
31, 2004, an increase of $269,751 or 155.5%. The increase is primarily due to
larger expenditures on services related to regulatory filings, as well as more
expenses on general office supplies and services. Compared to 2004, we incurred
higher costs for accounting, auditing and other related professional services in
connection with the filing of a registration statement and other materials with
the Securities and Exchange Commission or SEC. Because of continued expansion
and ongoing SEC reporting and compliance obligations, management anticipates
maintaining or increasing this level for the foreseeable future.
Occupancy Costs. Our occupancy costs increased 79.1% or $84,298 to $190,837
for the year ended December 31, 2005 compared to $106,539 for the year ended
December 31, 2004. The increase is attributable to the fact that we relocated
our offices to permit us to develop a full research laboratory and manufacturing
scale-up facility as we pursue the development of our NDA and ANDA portfolio. We
moved from about a 10,000 sq ft facility to a 25,000 sq ft facility in November
2004, therefore our lease costs, utility bills, maintenance and general
23
upkeep increased substantially. It is anticipated that this amount will be
maintained at the current level through the four years remaining term of the
lease.
Marketing Costs. Our marketing costs, which include certain ongoing
consulting contracts, increased by $61,354 or 16.7% to $428,628 for the year
ended December 31, 2005 compared to $367,274 for the year ended December 31,
2004. We are actively pursuing procurement of licensing deals, co-development
and other collaborations in accordance with our business plan. The short term
goal will be to increase cash flow in order to further our product development
projects; in the longer term we expect this will generate revenues and enable us
to further develop and generate new technologies. It is anticipated that this
amount will be maintained at the current level.
Operating Loss. Our operating loss for the period was $2,234,835 for the
year ended December 31, 2005 compared to $1,252,731 for the year ended December
31, 2004, an increase of $982,104 or 78.4%. This increase is due to higher costs
of wages, administration, occupancy and marketing as identified above.
Management does not anticipate having an operating profit until after we have
obtained approval for one or more applications, which is not anticipated to
happen before late 2007.
Depreciation. Our depreciation expense increased by 17.8% or $25,825 to
$170,559 for the year ended December 31, 2005 compared to $144,734 for the year
ended December 31, 2004. This is attributable to the additional investment in
our property and equipment as well as leasehold improvements, which relates to
the relocation of our offices and our investment in the facility for research
and development.
Foreign Exchange. Our loss on foreign exchange was $21,979 for the year
ended December 31, 2005 compared to a loss of $247,327 for the year ended
December 31, 2004. Although, we have all of our activities in North America and
do not generally anticipate currency fluctuation having a significant impact on
our cash flow, recently there has been some significant fluctuation between the
Canadian and US Dollar. At present, we do not engage in any currency hedging
transactions.
Interest Income and Interest Expense: The interest income is a function of
our cash balance which is maintained in interest bearing short term financial
instruments. Any change in interest income will depend on our cash balance and
hence on source of funds going forward. The interest expense is related to funds
advanced from related parties which are now to be repaid at the rate of 25% of
gross revenues.
24
Net Loss. Our net loss was $2,452,865 for the year ended December 31, 2005
compared to $1,662,352 for the year ended December 31, 2004. The increase in the
net loss is attributable to the various increases in our operating expenses as
stated previously. The current period's net loss brings our accumulated deficit
to $5,092,179 from $2,639,314 at the beginning of the fiscal year.
Financial Condition, Liquidity and Capital Resources
The company had cash reserves of $2,078,009 as at December 31, 2005,
attributable to the company's private placement of common stock, which raised
$5,600,000 up to December 31, 2004 and $928,000 during the year ending December
31, 2005.
Net cash used by operating activities was $2,156,926 for the year ended December
31, 2005, as compared to net cash used in operating activities of $1,019,426 for
the period ended December 31, 2004. The cash used was primarily attributable to
the net loss of $2,452,865 adjusted for non cash items.
As a research and development company, we are eligible to receive investment tax
credits (ITCs) from the Government of Canada under the Scientific Research &
Experimental Development incentive program. Because a significant portion of our
total expenditure is R&D related, depending on the amount we spend on R&D during
a fiscal period, the ITC can be a major source of funds for financing operations
and building capital resources. Based on management's best estimate, we have
about $600,000 ITCs receivable from R&D activities performed during the year
ended December 31, 2005. However, realization of these credits is subject to
government approval.
Net source of funds for financing activities was $981,622 for the year ended
December 31, 2005 compared to $5,503,641 for the year ended December 31, 2004.
Financing sources are primarily from the issuance of capital stock; $928,000
during the year ended December 31, 2005 compared to approximately $5,600,000
during the year ended December 31, 2004.
Net cash used in investing activities was $1,020,945 for the year ended December
31, 2005, representing purchases of property and equipment, compared to $190,175
for the year ended December 31, 2004.
During the year ending December 31, 2005, the net decrease in the cash and cash
equivalent was $2,172,880.
25
Contractual Obligations
In the table below, we set forth our enforceable and legally binding obligations
and future commitments and obligations related to all contracts that we are
likely to continue regardless of the fact that they are cancelable as of
December 31, 2005. 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.
<Table>
<Caption>
Payments Due by Period
Contractual Obligations Total < 1 Year 1-3 Years 4-5 Years
Capital Lease Obligations 10,834 3,611 7,223 --
Operating Obligations 344,974 81,194 176,645 87,135
Purchase Obligations -- -- -- --
Other Long Term Obligations 3,878,847 745,720 1,513,999 1,619,128
Total Contractual Obligations 4,234,654 830,525 1,697,867 1,706,262
</Table>
Currently, we do not anticipate generating sufficient cash flows from operations
as we are pursuing the development of our portfolio of NDA and ANDA products.
Management believes that current cash reserves will be sufficient to meet our
capital expenditures and working capital needs for our operations as presently
conducted for twelve months. Our future liquidity and cash requirements will
depend on a wide range of factors, including the success of our development
programs, securing licensing contracts as well as procurement of co-development
or other collaborations, and possible acquisitions. Therefore, as we executes
our business plan, it may be necessary to raise capital or seek additional
financing. While there can be no assurance that such raising of capital or
seeking of additional financing would be available in amounts and on terms
acceptable to us, management currently believes that such financing would likely
be available on acceptable terms. However, there can be no assurance of this.
New Accounting Standards
In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS
123(R), "Share-Based Payments," which replaces SFAS No. 123, "Accounting for
Stock-Based Compensation," and supercedes APB Opinion No. 25, "Accounting for
Stock Issued to Employees." SFAS 123(R) will require all share-based payments to
employees, including grants of employee stock options, to be recognized in the
statement of operations based on their fair values. SFAS 123(R) will be
effective for public companies for fiscal periods beginning after June 15, 2005
and offers alternative methods for determining the fair value. We expect that
SFAS 123(R) will have a significant impact on our financial statements. At the
present time, we have not yet determined which valuation method we will use.
26
In November 2004, the FASB ratified the Emerging Issues Task Force ("EITF")
consensus on Issue 03-13, "applying the Conditions in Paragraph 42 of FASB
Statement No. 144, "Accounting for the impairment or Disposal of Long-Lived
Assets" in Determining Whether to Report Discontinued Operations. The adoption
of the new pronouncements will not have a material impact on our financial
position or results of operations.
In November 2004, the FASB issued SFAS 151, "Inventory Costs, an amendment of
ARB No. 43, Chapter 4," which amends the guidance in ARB No. 43, Chapter 4,
"Inventory Pricing," to clarify the accounting for abnormal amounts of idle
facility expense, freight, handling costs, and wasted material (spoilage). This
Statement amends ARB 43, Chapter 4, to clarify that abnormal amounts of idle
facility expense, freight, handling costs, and wasted materials (spoilage)
should be recognized as current-period charges. In addition, this Statement
requires that allocation of fixed production overheads to the costs of
conversion be based on the normal capacity of the production facilities. The
provisions of this Statement shall be effective for inventory costs incurred
during fiscal years beginning after June 15, 2005. We do not expect the
provisions of SFAS 151 will have a significant impact on our results of
operations.
In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets,
an amendment of APB Opinion No. 29 ("SFAS 153"). The amendments made by SFAS 153
are based on the principle that exchanges of nonmonetary assets should be
measured based on the fair value of the assets exchanged. Further, the
amendments broaden the exception for exchanges of nonmonetary assets that do not
have commercial substance. SFAS 153 is effective for nonmonetary asset exchanges
occurring in fiscal periods beginning after June 15, 2005. The adoption of SFAS
153 will not have a material impact on our financial position or results of
operations.
In March 2005, the FASB issued Financial Interpretation No. 47, Accounting for
Conditional Asset Retirement Obligations, an interpretation of FASB Statement
No. 143, ("FIN 47"). FIN 47 clarifies that an entity must record a liability for
a conditional asset retirement obligation if the fair value of the obligation
can be reasonably estimated. FIN 47 is effective no later than the end of fiscal
years ending after December 15, 2005. Therefore, FIN 47 is effective for the
year ending December 31, 2005. The adoption of FIN 47 did not have a material
impact on our financial position or results of operations.
In May 2005, the Financial Accounting Standards Board ("FASB") issued SFAS No.
154, Accounting Changes and Error Corrections ("SFAS 154"). SFAS 154 provides
guidance on accounting for and reporting of accounting changes and error
corrections. It requires changes in accounting principle to be applied
retroactively to prior periods as if the principle had always been used.
Previously, voluntary changes in accounting principle were required to be
recognized cumulatively in net income in the period of change. SFAS 154 is
effective for accounting changes and error corrections made in fiscal years
beginning after December 15, 2005 with early adoption encouraged. The Company
did not make any accounting changes or error corrections during the year ended
December 31, 2005 and therefore, the adoption of SFAS 154 did not have any
material impact on our financial position or results of operations.
27
Disclosure Controls and Procedures and Internal Control over Financial Reporting
Controls and Procedures
We have carried out an evaluation, under the supervision and the participation
of our management, including our principal executive officer and principal
financial officer, of the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended, or the Securities
Exchange Act), as of December 31, 2005. Based upon that evaluation, our
principal executive officer and principal financial officer concluded that, as
of the end of that period, our disclosure controls and procedures are effective
in providing reasonable assurance that (a) the information required to be
disclosed by us in the reports that we file or submit under the Securities
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms, and (b) such information is
accumulated and communicated to our management, including our principal
executive officer and principal financial officer, as appropriate to allow
timely decisions regarding required disclosure. In designing and evaluating our
disclosure controls and procedures, our management recognized that any controls
and procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and our
management necessarily was required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.
Contingencies and Litigation
There has been, and we expect there will continue to be significant litigation
in the industry regarding commercial practices, regulatory issues, pricing, and
patents and other intellectual property rights. Certain adverse unfavorable
rulings or decisions in the future could create variability or have a material
adverse effect on our future results of operations and financial position.
Off-Balance Sheet Arrangements
The Company, as part of its ongoing business, does not participate in
transactions that generate relationships with unconsolidated entities or
financial partnerships, such as entities often referred to as structured finance
or special purpose entities ("SPEs"), which would have been established for the
purpose of facilitating off-balance sheet arrangements or other contractually
narrow or limited purposes. As of December 31, 2005, the Company was not
involved in any material unconsolidated SPE transactions.
28
BUSINESS
BACKGROUND
We incorporated in New York on February 23, 1988 as a "blank check"
corporation. On February 23, 2004, we entered into a Share Exchange Agreement
with IntelliPharmaCeutics Corp., ("IPC Corp.") a Canadian pharmaceutical company
and agreed to merge our wholly-owned Canadian subsidiary into IPC Corp.
IPC Corp. incorporated in Ontario Canada on November 15, 2002 and was
wholly owned by IntelliPharmaCeutics Inc., a Canadian holding company ("IPC
Inc."), controlled by Drs. Isa and Amina Odidi, our Chief Executive Officer and
President, respectively.
From 1999 through 2002, IPC Inc., a predecessor company, engaged in the
research, development, licensing, and marketing of both new and generic
controlled-release pharmaceutical products. In 2002, IPC Corp. purchased IPC
Inc.'s assets, including its technology rights.
On September 10, 2004, we completed the merger with IPC Corp. and
reincorporated in Delaware (the "Merger").
As a result of the Merger, IPC Inc. acquired approximately 68% of our
voting stock. The effect of the Merger is that the holders of our common stock,
through their share ownership in us, have an indirect equity interest in IPC
Corp. that is equal to their voting interest in us, approximately 32%.
Similarly, IPC Inc. has a direct equity interest in IPC Corp. that is equal to
IPC Inc.'s percentage voting ownership in us, approximately 68%. The shares we
and IPC Inc. own give each of us, respectively, 50% of the voting rights in
IPC Corp.
EXPLANATORY NOTE REGARDING PRIOR FILINGS
In filing this registration statement, we are not relying in any way on the
filed reports, business or assets of Ready Capital Corp., the counterparty to
the Share Exchange Agreement dated February 23, 2004. Ready Capital Corp. was a
blank check corporation and did not at any time have an active business. Ready
Capital Corp., prior to the Merger, and IntelliPharmaCeutics, after the Merger,
from time to time filed certain reports with the Securities and Exchange
Commission. These reports were filed on a voluntary basis. They do not contain
any information that we believe is relevant to an understanding of our current
business or financial condition. Consequently, we encourage investors to rely on
the information in this registration statement and not in any earlier filings
that appear in our EDGAR file with the SEC.
BUSINESS OVERVIEW
IPC Corp. is engaged in research and development of controlled release
pharmaceutical products.
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 is both safer and more effective than conventional
immediate-release tablets and capsules in administering drugs.
We apply our proprietary technology in two ways: (1) developing improved
controlled-release versions of existing immediate-release branded drugs
(requiring new drug applications ("NDA")), and (2) developing and
commercializing generics (requiring abbreviated new drug applications ("ANDA")).
Generic drugs are bio-equivalent to existing controlled-release branded
products.
We operate in the niche market created by the expiration of drug product
patents and drug product exclusivity periods. It is estimated that by 2005,
name-brand drugs with combined annual sales of $100 billion will lose patent
protection and face generic competition A review of the portfolios of the top 40
pharmaceutical companies in a 2004 Reuters Business Insight report, Growth
Strategies in Generics, stated, "Products with total sales of $137 billion in
2002 will have lost primary US patent protection by 2008. This represents over
50% of the $235 billion in total product sales generated by these 40 companies
in 2002.". To replace these revenues and lessen their dependence on internal
development programs, large pharmaceutical companies are increasingly entering
into strategic licensing arrangements with specialty pharmaceutical companies
like ours.
29
Our scientists have developed drug delivery platforms that facilitate timed
release delivery of a wide range of pharmaceuticals (Drug Delivery Engine(TM)).
These systems include several core technologies which enable us to flexibly
respond to varying drug attributes, producing a desired controlled-release
effect. We believe these systems offer superior performance to traditional
polymeric matrix systems, while retaining simplicity and cost effectiveness
associated with their manufacture.
We believe that (a) our technologies can improve the therapeutic
effectiveness of successful drug compounds, with shortened development periods
at reduced cost, (b) large pharmaceutical manufacturers will license our
technologies for product life-cycle management and extension, and (c)
manufacturers and distributors of generic drugs will license our technologies,
increasing their portfolios of generic products.
We are currently focusing our efforts on the following areas:
a) obtaining FDA approval for one or more of several oral
controlled-release pharmaceutical products already in development,
including ANDAs (generics), and NDAs, either directly or through other
companies;
b) 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; and
c) development of new products and technologies, and the expansion of our
licensing agreements with other pharmaceutical companies, including
contract research and development projects, joint ventures and other
collaborations.
We intend to collaborate in the development of products with partners, when
prudent. We also plan to seek additional collaborations to develop more
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.
INDUSTRY OVERVIEW
The pharmaceutical industry has experienced significant growth over the
past several years. This has been impacted by factors such as: increasing
enrollment in Health Maintenance Organizations (HMOs) and growth in managed
care, an aging and more health-aware population, several major new drugs
bringing significant therapeutic benefits, and increasing use of novel marketing
approaches such as direct-to-consumer advertising.
A review of the portfolios of the top 40 pharmaceutical companies in a 2004
Reuters Business Insight report, Growth Strategies in Generics, stated,
"Products with total sales of $137 billion in 2002 will have lost primary US
patent protection by 2008. This represents over 50% of the $235 billion in total
product sales generated by these 40 companies in 2002."
The worldwide generics market will grow with a compound annual growth rate
(CAGR) of 13.3% from 2001 to 2007, and was worth $27 billion in 2001, estimates
Reuters. The US generics market alone is expected to grow to $28 billion by
2007.
30
U.S. pharmaceutical market for all forms of controlled-release drugs is
expected to grow. The oral dosage controlled-release segment of the market
generated approximately $16.3 billion of revenues in 2002, an increase of 21%
over the prior year. The impetus for growth in this segment comes from the
proliferation of branded drugs at or near patent expiration and new product
launches.
The larger companies are increasingly focusing their marketing resources on
large revenue drugs (generally in excess of $500 million) and accordingly are
increasingly willing to divest themselves of smaller, non-strategic products in
niche therapeutic areas. This affords a significant opportunity for smaller
companies to acquire, or license, valuable brand name drugs, and to revitalize
these franchises through application of novel delivery forms and technologies.
There are significant technical barriers to entry into the development of
controlled-release drugs, with only a limited number of companies possessing the
required expertise and technologies. Despite the therapeutic advantages of
controlled-release drugs versus their immediate-release counterparts, many
pharmaceutical companies have not made the additional investment to develop a
controlled-release version of a product while their immediate-release version is
under patent protection.
INDUSTRY TECHNOLOGY
Oral controlled-release technology permits the development of specialized
oral drug delivery systems that improve the absorption and utilization by the
human body of a variety of pharmaceutical compounds. Several drug delivery
systems are commonly used in the manufacturing of controlled-release oral drug
products. However, three technologies stand out as truly tried and tested. These
are the osmotic push-pull, or OROS(TM), system (used by ALZA), the core or
press-coated system (used by Bayer), and the sandwiched deposit platform, or
Geomatrix(TM), system (used by SkyePharma). These technologies are based on
physically compartmentalized structures, and, we believe, continue to be the
yardstick by which other controlled release drug delivery technology platforms
are measured.
OROS(TM) osmotic push-pull system
The OROS(TM) osmotic system is a reservoir system which is comprised of two
layers, one of drug and suspending/osmotic agent, and the other of a swelling
gel layer, pressed together as one tablet. Once inside the gastrointestinal
tract, meaning the human digestion system, including the stomach and intestines
("GIT"), fluids penetrate the outer membrane, the gel swells and gradually
expels the active drug through the tablet orifice(s). The rate of drug release
is the same in the presence or absence of food, a desirable property. Because of
its ideal release profile and lack of food effect, we believe it remains the
most sought after device for the controlled delivery of drugs, notwithstanding
the increased cost associated with its complex manufacture.
Core or press-coated system
The core or press-coated system is a two part structural system, comprised
of a rapid-dissolve drug-bearing core, embedded in drug-loaded hydrophillic
matrix applied to the tablet by press coating. Once inside the GIT, the
press-coated matrix swells and gradually releases the drug by a combination of
diffusion and erosion. Eventually, the drug-bearing tablet core is exposed and
rapidly dissolves in the GIT to provide a burst effect, and further extension in
drug release. Drug release is affected by the presence of food.
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Sandwiched deposit system
The sandwiched deposit system is comprised of a layered tablet in which a
drug layer is sandwiched between two layers or deposit platforms made of
polymeric materials. Once inside the GIT, the polymeric platforms and drug layer
erode, but at different rates. Drug release is affected by food.
Although all these systems have demonstrated ideal drug release
characteristics, we believe their manufacturing processes are cumbersome,
complex, expensive, and difficult to reproduce. There is also concern that,
being reservoir systems, they may not deliver their entire dose, or may deliver
the entire dose all at once due to the crushing action of peristalsis in the
GIT.
OUR TECHNOLOGY
Our scientists have developed proprietary controlled release drug delivery
technologies, branded Drug Delivery Engine(TM), of which one family of
technologies is that branded HyperMatrix(TM). Our controlled release
technologies consist of drug delivery platforms that facilitate timed release
delivery of a wide range of pharmaceuticals.
One family of technologies, the HyperMatrix(TM) family, includes several
core technologies which enable us to flexibly respond to varying drug
attributes, producing a desired controlled-release effect. The word matrix, in
general, refers to the structure of the tablet or capsule. HyperMatrix(TM)
relates to our already proven proprietary matrix design. We believe these
systems offer superior performance over traditional polymeric matrix systems,
while retaining the simplicity and cost effectiveness associated with their
manufacture.
Our present, expanding, pipeline of Hypermatrix technology platforms
includes IntelliMatrix(TM), IntelliOsmotics(TM), IntelliPellets(TM),
IntelliGIT(TM), IntelliShuttle(TM), NanoMatrix(TM) and SFT(TM).
These 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 ingredient in the GIT. One objective is to provide a delivery
system allowing for a single dose per 12 to 24 hour period, while assuring
gradual and controlled-release of the subject drug at a suitable location(s) in
the GIT. Another objective may be to provide rapid release or super
bioavailability of the drug.
THE HYPERMATRIX(TM) FAMILY OF DRUG DELIVERY ENGINE(TM) TECHNOLOGIES
IntelliGIT(TM)
The IntelliGIT(TM) technology consists of an active drug immobilized in a
non-compartmentalized matrix structure. A precise choice of mix ratios,
polymers, and other ingredients imparts stealth characteristics, and ensures
that this technology exhibits controlled-release or site-specific delivery
without significant food effect or dose dumping.
IntelliMatrix(TM)
The IntelliMatrix(TM) technology is a proprietary blend of several
polymers. Depending on the constituents of the blend and their interaction
parameters, the technology exhibits controlled-release or site specific
delivery, while imparting stealth characteristics. This results in
gastrointestinal protection from the delivered active drug, for the stomach, if
required.
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IntelliOsmotics(TM)
The IntelliOsmotics(TM) technology is based upon the inclusion of multiple
populations of covalently cross-linked, and non cross-linked polymers. These set
up a complex matrix of hydrophilic and hydrophobic domains.
IntelliPellets(TM)
The IntelliPellets(TM) technology consists of more than one type of
granule, bead, pellet, or tablet in a holding chamber or reservoir. Each type is
uniquely different from the other in that each may contain a different class or
combination of release controlling polymers, amino acids, and/or buffers. Our
IntelliPellets(TM) technology is designed to control, prolong, delay or modify
the release of drugs. It is particularly useful for the delivery of multiple
drugs, or chronotherapeutic drug delivery, designed to mimic our internal clocks
for therapeutic optimization during controlled-release administration.
IntelliShuttle(TM)
The IntelliShuttle(TM) 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.
SFT(TM)
The SFT(TM) technology is comprised of a syntactic foam composition,
combining homopolymer resins with prefabricated manufactured macro- and
micro-bubbles, which can act both as the scaffolding and the carrier for the
active drug.
NanoFoam(TM)
The NanoFoam(TM) technology is comprised of a syntactic foam composition,
combining homopolymer resins with prefabricated manufactured nanospheres, which
can act both as the scaffolding and the carrier for the active drug. This
technology allows the controlled delivery of nanoparticles. The prefix nano
means .000000001, which is extremely small.
RESEARCH AND DEVELOPMENT
During each of the last three fiscal years, we have focused on research and
development activities. We spent approximately $941,420 in the fiscal year ended
December 31, 2005, $485,638 in the fiscal year ended December 31, 2004 on
research and development activities, and $268,148 in the fiscal year ended
December 31, 2003.
MANUFACTURING AND RAW MATERIALS
We currently do not have any commercial manufacturing facilities. The
manufacture of our product candidates for clinical trials and commercial
purposes is subject to current good manufacturing practices ("cGMP") and other
agency regulations.
Certain raw materials necessary for the commercial manufacturing of our
products are proprietary products of other companies. We currently attempt to
manage the risk associated with such sole-sourced raw materials by active
inventory management and alternative source development, where feasible. We
attempt to remain apprised of the financial condition of our suppliers, their
ability to supply our needs and
33
the market conditions for these raw materials. A material shortage,
contamination, and/or recall could adversely affect the manufacturing of our
products.
GOVERNMENT REGULATION
We focus on the development of both branded drug products (which require
new drug applications ("NDA")) and generic drug products (which require
abbreviated new drug applications ("ANDA")). The research and development,
manufacture and marketing of controlled-release pharmaceuticals are subject to
regulation by U.S., Canadian and other governmental authorities and agencies.
Such national agencies and other federal, state, provincial and local entities
regulate the testing, manufacturing, safety and promotion of our products. The
regulations applicable to our products may change as the currently limited
number of approved controlled-release products increases and regulators acquire
additional experience in this area.
UNITED STATES REGULATION
New Drug Application
We will be required by the FDA to comply with NDA procedures for our
branded products prior to commencement of marketing by us, or our licensees. New
drug compounds and new formulations for existing drug compounds which cannot be
filed as ANDAs are subject to NDA procedures. These procedures include (a)
preclinical 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 an NDA to the FDA; and (f) FDA approval of an NDA prior to
any commercial sale or shipment of the product, including pre-approval and
post-approval inspections of its 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.
Preclinical laboratory and animal toxicology tests may have to be performed
to assess the safety and potential efficacy of the product. The results of these
preclinical tests, together with information regarding the methods of
manufacture of the products and quality control testing, are then submitted to
the FDA as part of an IND requesting authorization to initiate human clinical
trials. Once the IND notice period has expired, clinical trials may be
initiated, unless an FDA hold on clinical trials has been issued.
Clinical trials involve the administration of a pharmaceutical product to
individuals under the supervision of qualified medical investigators that are
experienced in conducting studies under "Good Clinical Practice" guidelines.
Clinical studies are conducted in accordance with protocols that detail the
objectives of a study, the parameters to be used to monitor safety and the
efficacy criteria to be evaluated. Each protocol is submitted to the FDA and to
an Institutional Review Board prior to the commencement of each clinical trial.
Clinical studies are typically conducted in three sequential phases, which may
overlap. In Phase I, the initial introduction of the product into human
subjects, the compound is tested for absorption, safety, dosage, tolerance,
metabolic interaction, distribution, and excretion. Phase II involves studies in
a limited patient population with the disease to be treated to (1) determine the
efficacy of the product for specific targeted indications, (2) determine optimal
dosage and (3) identify possible adverse effects and safety risks. In the event
Phase II evaluations demonstrate that a pharmaceutical product is effective and
has an acceptable safety profile, Phase III clinical trials are undertaken to
further evaluate clinical efficacy of the product and to further test its safety
within an expanded patient population at geographically dispersed clinical study
sites. Periodic reports on the clinical investigations are required.
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We, or the FDA, may suspend clinical trials at any time if either party
believes the clinical subjects are being exposed to unacceptable health risks.
The results of the product development, analytical laboratory studies and
clinical studies are submitted to the FDA as part of an NDA for approval of the
marketing and commercialization of a pharmaceutical product.
Abbreviated New Drug Application
In certain cases, where the objective is to develop a generic version of an
approved product already on the market in controlled-release dosages, an ANDA
may be filed in lieu of filing an NDA. Under the ANDA procedure, the FDA waives
the requirement to submit complete reports of preclinical and clinical studies
of safety and efficacy and instead requires the submission of bio-equivalency
data, that is, demonstration that the generic drug produces the same effect in
the body as its brand-name counterpart and has the same pharmacokinetic profile,
or change in blood concentration over time. The ANDA procedure would be
available to us for a generic version of a drug product approved by the FDA. In
certain cases, an ANDA applicant may submit a suitability petition to the FDA
requesting permission to submit an ANDA for a drug product that differs from a
previously approved reference drug product (the "Listed Drug ") when the change
is one authorized by statute. Permitted variations from the Listed Drug include
changes in: (1) route of administration, (2) dosage form, (3) strength and (4)
one of the active ingredients of the Listed Drug when the Listed Drug is a
combination product. The FDA must approve the petition before the ANDA may be
submitted. An applicant is not permitted to petition for any other kinds of
changes from listed drugs. The information in a suitability petition must
demonstrate that the change from the Listed Drug requested for the proposed drug
product may be adequately evaluated for approval without data from
investigations to show the proposed drug product's safety or effectiveness. The
advantages of an ANDA over an NDA include reduced research and development costs
associated with bringing a product to market, and generally a shorter review and
approval time at the FDA.
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 delayed 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.
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.
35
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 exclusivity, but only with respect to that indication or dosage strength.
Exclusivity only offers protection against a competitor entering the market via
the ANDA route, and does not operate against a competitor that generates all of
its own data and submits a full NDA.
If applicable regulatory criteria are not satisfied, the FDA may deny
approval of an NDA or an ANDA or may require additional testing. Product
approvals may be withdrawn if compliance with 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. Noncompliance with
applicable requirements can result in additional penalties, including product
seizures, injunction actions and criminal prosecutions.
CANADIAN REGULATION
The requirements for selling pharmaceutical drugs in Canada are
substantially similar to those of the United States described above.
Investigational New Drug Application
Before conducting clinical trials of a new drug in Canada, we must submit a
Clinical Trial Application ("CTA") to the Therapeutic Products Directorate
("TPD"). This application includes information about the proposed trial, the
methods of manufacture of the drug and controls, preclinical laboratory and
animal toxicology tests on the safety and potential efficacy of the drug, and
information on any previously executed clinical trials with the new drug. If,
within 30 days of receiving the application, the TPD does not notify us that our
application is unsatisfactory, we may proceed with clinical trials of the drug.
The phases of clinical trials are the same as those described above under
"United States Regulation -- New Drug Application."
New Drug Submission
Before selling a new drug in Canada, we must submit a New Drug Submission
("NDS") or Supplemental New Drug Submission ("sNDS") to the TPD and receive a
Notice of Compliance ("NOC") from the TPD to sell the drug. The submission
includes information describing the new drug, including its proper name, the
proposed name under which the new drug will be sold, a quantitative list of
ingredients in the new drug, the methods of manufacturing, processing, and
packaging the new drug, the controls applicable to these operations, the tests
conducted to establish the safety of the new drug, the tests to be applied to
control the potency, purity, stability and safety of the new drug, the results
of biopharmaceutics 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 bio-equivalent to the drug that has already been approved and marketed.
The TPD may deny approval or may require additional testing of a proposed
new drug if applicable regulatory criteria are not met. Product approvals may be
withdrawn if compliance with regulatory standards is not maintained or if
problems occur after the product reaches the market. Contravention of Canada's
Food and Drugs Act and Regulations can result in fines and other sanctions,
including product seizures and criminal prosecutions.
Proposals have recently been made that, if implemented, would significantly
change Canada's drug approval system. In general, the recommendations emphasize
the need for efficiency in Canadian drug review. Proposals include establishment
of a separate agency for drug regulation and modeling the approval system on
those found in European Union countries. There is no assurance, however, that
such changes will be implemented or, if implemented, will expedite the approval
of new drugs.
The Canadian government has regulations which can prohibit the issuance of
an NOC for a patented medicine to a generic competitor, provided that the
patentee or an exclusive licensee has filed a list of its Canadian patents
covering that medicine with the Minister of Health and Welfare. After submitting
the list, the patentee or an exclusive licensee can commence a proceeding to
obtain an order of prohibition directed to the Minister prohibiting him or her
from issuing an NOC. The minister may be prohibited from issuing an NOC
permitting the importation or sale of a patented medicine to a generic
competitor until patents on the medicine expire or the waiver of infringement
and/or validity of the patent(s) in question is resolved by litigation in the
manner set out in such regulations. There may be additional patents relating to
a company's proposed manufacture, use or sale of a product that could
potentially prohibit such company's proposed commercialization of a drug
compound.
Certain provincial regulatory authorities in Canada have the ability to
determine whether the consumers of a drug sold within such province will be
reimbursed by a provincial government health plan for that drug by listing drugs
on formularies. The listing or non-listing of a drug on provincial formularies
may affect the prices of drugs sold within provinces and the volume of drugs
sold within provinces.
Additional Regulatory Considerations
Sales of our products by our licensees outside the United States and Canada
are 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.
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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.
Environmental Laws
We are subject to comprehensive federal, state, and provincial
environmental laws and regulations that govern, among other things, air
polluting emissions, waste water discharges, solid and hazardous waste disposal,
and the remediation of contamination associated with current or past generation
handling and disposal activities, including the past practices of corporations
as to which we are the successor. We do not expect that compliance with such
environmental laws will have a material effect on our capital expenditures,
earnings or competitive position in the foreseeable future. There can be no
assurance, however, that future changes in environmental laws or regulations,
administrative actions or enforcement actions, or remediation obligations
arising under environmental laws will not drain our capital expenditures, and
affect our earnings or competitive position.
COMPETITION
We compete in two related but distinct areas: we perform contract research
and development work regarding controlled-release drug technology for other
pharmaceutical companies, and we seek to develop and market (either on our own
or by license to other companies) proprietary controlled-release pharmaceutical
products. In both areas, our competition consists of those companies which
develop controlled-release drugs and alternative drug delivery systems.
In recent years, an increasing number of pharmaceutical companies have
become interested in the development and commercialization of products
incorporating advanced or novel drug delivery systems. We expect that
competition in the field of drug delivery will significantly increase in the
future since smaller specialized research and development companies are
beginning to concentrate on this aspect of the business. Some of the major
pharmaceutical companies have invested and are continuing to invest significant
resources in the development of their own drug delivery systems and technologies
and some have invested funds in such specialized drug delivery companies. Other
companies may develop new drug formulations and products or may improve existing
drug formulations and products more efficiently than we can. In addition, almost
all of our competitors have vastly greater resources than we do. While our
product development capabilities and patent protection may help us maintain a
market position in the field of drug delivery, there can be no assurance that
others will not be able to develop these capabilities, or alternative
technologies outside the scope of our patents, if any, or that even if patent
protection is obtained, these patents will not be successfully challenged in the
future.
EMPLOYEES
As of December 31, 2005, we had 18 full-time employees. Our employees are
engaged in administration, research and development. None of our employees is
represented by a labor union and we have never experienced a work stoppage. We
believe relations with our employees are good.
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DESCRIPTION OF PROPERTY
On October 1, 2004, we entered into a 5 year lease agreement for a 25,000
square foot facility at 30 Worcester Road, Toronto, Ontario, Canada M9W 5X2, at
approximately $100,000 Canadian per year. The lease term expires on October 1,
2009. We use our facilities as a laboratory, office space, and current Good
Manufacturing Practices ("cGMP") scale-up and small to medium-scale
manufacturing.
We commenced construction of a cGMP manufacturing plant for solid oral
dosage form in the first quarter of 2005 at our 30 Worcester Road facility in
Toronto. We completed work on this site in the first quarter of 2006. Our
facility consists of approximately 4,900 ft(2) for administrative space,
4,300 ft(2) for R&D, 9,200 ft(2) for manufacturing, and 3,000 ft(2) for
warehousing.
LEGAL PROCEEDINGS
There is no pending litigation or claim threatened against us.
CONSULTING AGREEMENTS
On September 10, 2004, we entered into the following consulting agreements:
a) Carriages Consultant Group ("Carriages"), a company affiliated with
Baji Palkhiwala. The consulting agreement provides for Carriages to
perform banking, accounting and operational services on our behalf for
a period of three years. In consideration of the services performed by
Carriages, we agreed to pay a monthly consulting fee of $5,000 per
month, and issue to Carriages 100,000 share of common stock, and
warrants to purchase 50,000 shares of our common stock at $3.00 per
share. The agreement further provides that Carriages be reimbursed for
expenses incurred in connection with performance of its services;
b) Bridge Ventures, Inc. ("Bridge"). The consulting agreement provides
for Bridge to perform management advisory services on our behalf
including assisting in strategic planning, building a management team
and providing us with other managerial assistance as we deem necessary
and appropriate, for a period of three years. In consideration of the
services performed by Bridge, we agreed to pay a monthly consulting
fee of $5,000 per month, and reimbursement for expenses incurred in
connection with performance of its services;
c) Willstar Consultants, Inc. ("Willstar"). The consulting agreement
provides for Willstar to perform communication and shareholder
relation services, for a period of one year. In consideration of the
services performed by Willstar, we agreed to pay a monthly consulting
fee of $5,000 per month, and warrants to purchase 25,000 shares of our
common stock at $3.00 per share. The agreement further provides that
Willstar be reimbursed for expenses incurred in connection with
performance of its services;
d) Z & K Consulting LLC ("Z&K"). The consulting agreement provides for
Z&K to act as a liaison between us and the financial community, and to
provide an office in the United States on our behalf, for a period of
one year. In consideration of the services performed by Z&K, we agreed
to pay a monthly consulting fee of $7,000 per month, and warrants to
purchase 50,000 shares of our common stock at $3.00 per share. The
agreement further
39
provides that Z&K be reimbursed for expenses incurred in connection
with performance of its services; and
e) Saggi Capital Corp. ("Saggi"), a company affiliated with Sharon Will,
our former president and director. The consulting agreement provides
for Saggi to perform investor relation and strategic planning services
on our behalf, for a period of three years. In consideration of the
services performed by Saggi, we agreed to pay a monthly consulting fee
of $5,000 per month, and reimbursement for expenses incurred in
connection with performance of its services.
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MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS, AND KEY EMPLOYEES
The following are the names and certain information regarding our current
Directors and Executive Officers:
Name Age Position
- ---- --- --------
Isa Odidi 47 Chairman and Chief Executive Officer
Amina Odidi 45 President, Chief Operating Officer, Chief Financial
Officer, and Director
John N. Allport 59 Vice President, Legal Affairs and Licensing, and Director
Patrick N. Yat 47 Vice President, Pharmaceutical Analysis and Chemistry
Arnold Beckett 85 Director
Kenneth Kirstead 65 Director
Pursuant to our bylaws, each director holds office until the next annual
meeting of shareholders of the Company or until their successors are elected or
appointed. Officers are appointed annually by the Board of Directors (subject to
the terms of any employment agreement) to hold office until a successor has been
appointed. Drs. Isa and Amina Odidi are husband and wife.
BACKGROUND OF EXECUTIVE OFFICERS AND DIRECTORS
DR. ISA ODIDI has been the Chairman of the Board, Chief Executive Officer,
Co-Chief Scientific Officer, and Chair of Scientific Advisory of IPC Corp. and
IPC Inc. since their inception (2002 for IPC Corp. and 1998 for IPC Inc.). From
1995 to 1998, Dr. Odidi held several positions at Biovail Corporation
International (now Biovail Corporation), a Canadian drug delivery company,
including Vice President of Research, Drug Development and New Technologies.
During this time, he developed several drugs, including the generics of Adalat
CC (Bayer) and Procardia XL (Pfizer). Dr. Odidi's work has been cited in
textbooks and he has published over a hundred scientific and medical papers,
articles and textbooks. Prior to 1995, Dr. Odidi held senior positions in
academia and in the pharmaceutical and health care industries. He currently
holds a Chair as Professor of Pharmaceutical Technology at the Toronto Institute
of Pharmaceutical Technology in Canada, and is an Adjunct Professor at the
Institute for Molecular Medicine, California. Dr. Odidi received his B.S. degree
in Pharmacy, from Ahmadu Bello University, Nigeria, and his M.S., Pharmaceutical
Technology, and Ph.D Pharmaceutics degrees from the University of London,
England. He is also a graduate of the Western Executive Management Program at
the Ivey School of Business, University of Western Ontario.
DR. AMINA ODIDI, wife of Dr. Isa Odidi, has been President, Chief Operating
Officer, Co-Chief Scientific Officer, and a director of IPC since 2002. From
1998 to 2002, Dr. Odidi was CEO and President of IPC Inc. Since 1984, she has
been developing and applying proprietary technologies to the development of
controlled-release drug products for third-party pharmaceutical companies. Dr.
Odidi has invented or co-invented various proprietary controlled delivery
devices for the delivery of pharmaceutical, nutriceutical, biological,
agricultural and chemical agents. Dr. Odidi received her B.S. degree in
Pharmacy, from Ahmadu Bello University, Nigeria, and her M.S., Biopharmaceutics
and Ph.D Pharmaceutics degrees from the University of London, England.
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JOHN N. ALLPORT has been Vice President since 2005. He was Director of
Technology Licensing from 2001 to 2004. From 1997 to 2000, he served as counsel
to Drs. Odidi during their work with Biovail Corporation. Mr. Allport has in
excess of twenty years' experience in the field of intellectual property law.
From 1981 to 2000, he was an attorney with the international IP firm Messrs.
Sim, Hughes, Ashton & McKay of Toronto, and worked for and against many Fortune
100 companies. He has also been engaged to assist in the creation and
exploitation of the extensive IP licensing interests of such international
licensing giants as Walt Disney Corporation, the Canadian Olympic Association
and the World Wildlife Fund.
DR. PATRICK N. YAT has been Vice President since 2005. He was Director of
Pharmaceutical Analysis and Chemistry for IPC and its Parent from 2001 to 2004.
Dr. Yat's responsibilities include the development and validation of analytical
methods for drug compounds and drug delivery systems under development, and the
supervision and execution of all pre-formulation activities. From 2000 to 2001,
he was a senior scientist at Patheon Inc., a Canadian pharmaceutical company.
From 1997 to 2000, Dr. Yat was employed at Biovail Corporation, where he was
involved in analytical methods development and validation. From 1994 to 1997,
Dr. Yat was a Research Associate at the University of Ottawa.
ARNOLD BECKETT has been a director since October 2004. Dr. Beckett is a
preeminent scientist and academic in the pharmaceutical industry. He is regarded
as one of the founding fathers of the controlled drug delivery industry. He has
acted as a consultant during the past eight years for Smith, Kline and French
(U.S. and U.K.), Smith and Nephew (U.K.), Searle (U.S.), Alza (U.S.), Robins
(U.S.) and others. In 1977, he co-founded Biovail S.A., a pharmaceutical
company. He sold his interest in Biovail in 1991, and served as a consultant to
Biovail until 1996. He was a professor at Kings College (Chelsea College),
University of London from 1951 to 1985, serving as Head of Department of
Pharmaceutical Chemistry at University of London from 1951 to 1959, and Head of
School of Pharmacy and Director of Medicinal Chemistry from 1959 to 1985. Dr.
Beckett has published over 450 research papers, and has served as research
supervisor for more than 90 prospective Ph.D. candidates at the University of
London. He received his Ph.D., D.Sc., B.Sc., and F.R.Pharm.S. from the
University of London, and has received honorary degrees from universities in
Belgium, Sweden and Scotland. He was also involved in the founding of the
American Association of Pharmaceutical Scientists (AAPS), among other numerous
field memberships.
KENNETH KIRSTEAD has been a director since January, 2006. He is educated in
clinical biochemistry and business administration. He has worked in the health
care 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. Kirstead has published studies and
reports on health care and related services topics.
SCIENTIFIC ADVISORY BOARD
Our Scientific Advisors advise the company on developments relating to
controlled-release drug delivery technology. They have extensive experience in
all related areas of pharmaceutical chemistry and controlled-release formulation
development. The individuals listed below, together with Drs. Isa and Amina
Odidi, are members of the Scientific Advisory team.
DR. GARTH L. NICHOLSON is an internationally known scientist with a
distinguished career in medical research, and was nominated for the Nobel Prize
for his classical Fluid Mosaic Membrane Model. He is currently Chief Scientific
Officer and Research Professor at the Institute for Molecular Medicine,
California. He is also a Professor at the Department of Internal Medicine,
University of Texas Medical School. He has published over 470 medical and
scientific papers, edited 13 scientific books, served on the editorial board of
12 medical and scientific journals, and received several awards for his
research.
DR. JOHN M. NEWTON is an internationally renowned pharmaceutical scientist
with a distinguished career in pharmaceutical research. Dr. Newton was formerly
Professor and Head of Pharmaceutics, Department of Pharmaceutics, School of
Pharmacy, University of London. He was also former Professor, Department of
Pharmacy, Kings College, University of London.
42
DR. KANJI TAKADA is a highly regarded pharmaceutical scientist and inventor
with specialization in pharmacokinetics and biopharmaceutics. Dr. Takada is
currently Professor and Head, Department of Pharmaceutics and Pharmacokinetics,
Kyoto Pharmaceutical University, Kyoto, Japan.
EMPLOYMENT AGREEMENTS
Effective September 9, 2004, Drs. Odidi entered into three-year employment
agreements providing for annual compensation of $200,000 each per year with 20%
annual increases.
Drs. Isa and Amina Odidi have been issued stock options to purchase an
aggregate of 5,000,000 shares of our common stock at $2.00 per share. The
options vest as follows: (a) 500,000 upon acceptance of a drug filing by the
FDA, up to five drugs, and (b) 500,000 upon approval of a drug filing by the
FDA, up to five drugs.
EXECUTIVE COMPENSATION
The following table sets forth information concerning the total
compensation that we have paid or that has accrued on behalf of our chief
executive officer and chief operating officer. No other executive officer
received annual compensation exceeding $100,000 during the fiscal years ending
December 31, 2005, 2004 and 2003.
SUMMARY COMPENSATION TABLE (1)
Long-Term Compensation
-------------------------------------------------
Awards Payouts
Annual Compensation ----------------------- ----------------------
---------------------------------------------- Restricted Securities
Other Annual Stock Underlying LTIP All Other
Name and Principal Salary Compensation Award(s) Options/ Payouts Compensation
Position Year (Canadian $) Bonus ($) ($) ($) SARs (#) ($) ($)
- ------------------ ---- ------------ --------- ------------ ---------- ---------- ------- ------------
Isa Odidi, 2005 $213,140 -0- -0- -0- -0- -0- -0-
Chief Executive 2004 $118,774 -0- -0- -0- 5,000,000(2) -0- -0-
Officer(3) 2003 $ 85,659 -0- -0- -0- -0- -0- -0-
Amina Odidi, President 2005 $213,140 -0- -0- -0- -0- -0- -0-
and Chief Operating 2004 $118,774 -0- -0- -0- 5,000,000(2) -0- -0-
Officer (3) 2003 $ 85,659 -0- -0- -0- -0- -0- -0-
43
(1) The compensation described in this table does not include medical and
dental insurance benefits received by the named executive officers, if
applicable, which are available generally to all employees of the Company
and certain perquisites and other personal benefits received by the named
executive officers, the value of which does not exceed the lesser of
$50,000 and 10% of any such officer's total salary and bonus disclosed in
the table.
(2) Drs. Isa and Amina Odidi were issued an aggregate of 5,000,000 stock
options in September 2004. These stock options vest upon certain
conditions. (See "Employment Agreements," p. 41).
(3) As at December 31, 2005, we owed the Odidi's approximately $1,733,678
pursuant to an outstanding promissory note. This loan bears interest at the
rate of 6% per annum, and is repayable from 25% of our revenues.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As of December 31, 2005, we had an outstanding promissory note payable to
Dr. Isa Odidi and Dr. Amina Odidi, principal stockholders, directors and
executive officers, in the amount of $1,733,678, up from $1,679,532 as at
December 31, 2004.
The Promissory note was unsecured, and non-interest bearing, prior to
September 2004. As of September 10, 2004, the promissory note bears a 6% annual
interest rate on the outstanding loan balance and the loan is secured by and
repayable in any month at the rate of 25% of gross revenues.
We believe that material affiliated transactions and loans, and business
relationships entered into by us or our affiliates with certain of our officers,
directors and principal stockholders or their affiliates were on terms no less
favorable than we could have obtained from independent third parties. Any future
transactions between us and our officers, directors or affiliates will be
subject to approval by a majority of disinterested directors or stockholders in
accordance with Delaware law.
44
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of April 2006 with
respect to the beneficial ownership of the outstanding common stock by (i) any
holder of more than five (5%) percent; (ii) each of our executive officers and
directors; and (iii) our directors and executive officers as a group. Except as
otherwise indicated, each of the stockholders listed below has sole voting and
investment power over the shares beneficially owned.
PERCENTAGE BEFORE PERCENTAGE AFTER
NAME (1) SHARES (2) OFFERING (3) OFFERING (3)
- -------- ------------ ----------------- ----------------
Isa Odidi 10,850,000(4) 66.47% 0
Amina Odidi (4) --
John N. Allport 500,000(5) 3.06% 0
Patrick N. Yat 50,000 * 0
Arnold Beckett 0 0 0
All officers and directors as a
group 11,400,000 69.84% 0%
- ----------
* Less than 1%
(1) Except as otherwise indicated, the address of each beneficial owner is c/o
IntelliPharmaCeutics Ltd., 30 Worcester Road, Etobicoke, Ontario, Canada
M9W 5X2.
(2) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to the shares shown. Except where indicated
by footnote and subject to community property laws where applicable, the
persons named in the table have sole voting and investment power with
respect to all shares of voting securities shown as beneficially owned by
them.
(3) Based on 16,322,446 shares of common stock issued and outstanding. Assumes
the conversion of IPC Corp.'s Exchangeable Stock into our common stock, and
the exercise of outstanding warrants, and the subsequent sale of all common
stock.
(4) Represents 10,850,000 shares of Special Voting Stock in us held by
IntelliPharmaCeutics Inc., which is controlled by Drs. Isa and Amina Odidi,
and the Isa Odidi Family Trust, of which Drs. Isa and Amina Odidi are
Trustees. Excludes options held by Drs. Isa and Amina Odidi to purchase
5,000,000 shares of common stock, which will vest upon the achievement of
certain FDA milestones.
(5) Includes 300,000 shares of common stock owned by John Allport's wife,
Patricia Marie Nugent.
45
DESCRIPTION OF SECURITIES
Our authorized capital stock consists of 60,000,000 shares of capital
stock, par value $.001, of which 40,000,000 shares are common stock and
20,000,000 shares are preferred stock that may be issued in one or more series
at the discretion of the Board of Directors. 10,850,000 shares of our preferred
stock have been designated as Special Voting Stock, and the remaining 9,150,000
shares of preferred stock have not been designated. As of the date hereof,
5,472,446 shares of common stock and 10,850,000 shares of Special Voting Stock
were issued and outstanding.
COMMON STOCK
The holders of the common stock, along with holders of Special Voting Stock
as a single class, are entitled to one vote for each share held of record on all
matters submitted to a vote of the stockholders. We do not have cumulative
voting rights in the election of directors, and accordingly, holders of a
majority of the shares voting are able to elect all of the directors. Subject to
preferences that may be granted to any then outstanding preferred stock, holders
of common stock are entitled to receive dividends ratably, as may be declared by
the Board of Directors out of funds legally available, as well as any
distributions to the stockholders. In the event of our liquidation, dissolution
or winding up, holders of common stock are entitled to share ratably in all of
our assets remaining after payment of liabilities and the liquidation preference
of any then outstanding preferred stock. Holders of common stock have no
preemptive or other subscription or conversion rights. There are no redemption
or sinking fund provisions applicable to the common stock.
PREFERRED STOCK
Shares of preferred stock may be issued from time to time in one or more
series as may from time to time be determined by our Board of Directors. Our
Board of Directors has authority, without action by the stockholders, to
determine the voting rights, preferences as to dividends and liquidation,
conversion rights and any other rights of such series. Any preferred shares, if
and when issued in the discretion of the Board of Directors, may carry voting,
conversion or other rights superior to those of the shares of common stock and
may adversely affect the voting power and rights of the common stockholders.
There are no shares of preferred stock currently outstanding, except as set
forth below.
SPECIAL VOTING STOCK
As of the date of this prospectus, we have designated and issued 10,850,000
shares of Special Voting Stock, par value $.001 per share, held by IPC Inc. The
holder of Special Voting Stock, along with the holders of common stock as a
single class, are entitled to one vote for each share held of record on all
matters submitted to a vote of shareholders. In the event of our liquidation,
dissolution, or winding-up, holders of Special Voting Stock have no preemptive
or other subscription or conversion rights. There are no redemption or sinking
fund provisions applicable to the Special Voting Stock. Upon issuance of shares
of common stock to the holder of our IPC Corp.'s Exchangeable Stock, Special
Voting Stock shares shall automatically be redeemed and cancelled, without any
repayment of capital on the Special Voting Stock, on the basis of one share of
Special Voting Stock for each share of common stock issued. Shares of Special
Voting Stock are convertible at the sole option of the holder into shares of our
common stock.
46
IPC CORP. EXCHANGEABLE STOCK
We have reserved 10,850,000 shares of our common stock for issuance upon
exchange of IPC Corp.'s Exchangeable Stock, $.001 par value. Upon exchange of
the Exchangeable Stock, shares of our Special Voting Stock shall automatically
be redeemed and cancelled, without any repayment of capital on the Special
Voting Stock, on the basis of one share of Special Voting Stock for each share
of Exchangeable Stock exchanged. Each share of Exchangeable Stock, among other
things, (a) entitles the holder to voting rights in IPC Corp., (b) entitles the
holder to receive Canadian dollar equivalent dividends equal to dividends paid
on our common stock, (c) is exchangeable at the option of the holder, at his or
her election from time to time upon 30 days' written notice, for one share of
our common stock, plus an additional amount for declared and unpaid dividends;
and (d) entitles the holder, on our liquidation, or the liquidation of IPC
Corp., to receive in exchange for each share of Exchangeable Stock, one share of
our common stock, plus an amount for declared and unpaid dividends. Apart from
the right to be treated by IPC Corp. as being economically equivalent to our
common stock, the Exchangeable Stock does not have the right to receive any
additional amount from IPC Corp. by way of dividends, or upon liquidation,
dissolution, winding up or otherwise.
No shares shall be authorized or issued in IPC Corp., except solely the
shares of common stock that will all be owned by us, and the Exchangeable Stock
described above. Except solely for economic equivalence with our common stock,
the Exchangeable Stock has no right to share further in IPC Corp.'s assets, and
no further shares will be authorized or issued in IPC Corp. that will have any
preference or priority over the common stock to share in IPC Corp.'s assets.
Apart from the right to be treated by IPC Corp. as being economically equivalent
to our common stock, the Exchangeable Stock does not have the right to receive
any additional amount from IPC Corp. by way of dividends, or upon liquidation,
dissolution, winding up or otherwise.
OUTSTANDING WARRANTS AND OPTIONS
As of the date of this prospectus, there were outstanding warrants to
purchase 278,500 shares of common stock exercisable at $3.00 per share.
On September 10, 2004, we granted stock options to purchase 5,000,000
shares of our common stock to Drs. Isa and Amina Odidi. These options vest
pursuant to attaining certain milestones. The options are exercisable at a price
of $2.00 per share.
TRANSFER AGENT AND REGISTRAR
Jersey Transfer & Registrar Company, Verona, New Jersey, serves as transfer
agent and registrar for our common stock.
SHARES ELIGIBLE FOR FUTURE SALE
SHARES OUTSTANDING AND FREELY TRADABLE AFTER OFFERING
Upon completion of this offering, we will have up to 21,322,446 shares of
common stock outstanding or subject to issuance pursuant to the terms of the
outstanding warrants, options or Exchangeable Shares. The shares in this
offering will be freely tradable without restriction or limitation under the
Securities Act, except for any such shares held by "affiliates" as such term is
defined under Rule 144 of the Securities Act, which shares will be subject to
the resale limitations under Rule 144.
47
RULE 144
In general, under Rule 144, as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned shares for at least one
year, including an affiliate of the Company, would be entitled to sell, within
any three-month period, that number of shares that does not exceed the greater
of 1% of the then-outstanding shares of common stock and the average weekly
trading volume in the common stock during the four calendar weeks immediately
preceding the date on which the notice of sale is filed with the Commission,
provided certain manner of sale and notice requirements and requirements as to
the availability of current public information about the Company are satisfied.
In addition, affiliates of the Company must comply with the restrictions and
requirements of Rule 144, other than the one-year holding period requirement, in
order to sell shares of common stock. As defined in Rule 144, an "affiliate" of
an issuer is a person who, directly or indirectly, through the use of one or
more intermediaries controls, or is controlled by, or is under common control
with, such issuer. Under Rule 144(k), a holder of "restricted securities" who is
not deemed an affiliate of the issuer and who has beneficially owned shares for
at least two years would be entitled to sell shares under Rule 144(k) without
regard to the limitations described above.
EFFECT OF SUBSTANTIAL SALES ON MARKET PRICE OF COMMON STOCK
We are unable to estimate the number of shares that may be sold in the
future by our existing stockholders or the effect, if any, that such sales will
have on the market price of the common stock prevailing from time to time. Sales
of substantial amounts of common stock, or the prospect of such sales, could
adversely affect the market price of the common stock.
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
The laws of the State of Delaware provide for the indemnification of our
officers, directors and other eligible persons. We may enter into
indemnification agreements with each of our current directors and executive
officers which will provide for indemnification of, and advancement of expenses
to, such persons for expenses and liability incurred by them by reason of the
fact that they are or were a director, officer, or stockholder of
IntelliPharmaCeutics Ltd., including indemnification under circumstances in
which indemnification and advancement of expenses are discretionary under
Delaware law.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers or persons controlling us
pursuant to the foregoing provisions, or otherwise, we have been advised that in
the opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for
IntelliPharmaCeutics Ltd. by Michael H. Freedman, PLLC.
48
EXPERTS
IntelliPharmaCeutics Ltd.'s financial statements as of and for the years
ended December 31, 2003 and December 31, 2002 included in this prospectus, have
been audited by Kahn Boyd Levychin, LLP, independent public accountants, as
stated in their report appearing herein and are so included herein in reliance
upon the report of such firm given upon their authority as experts in accounting
and auditing. Pursuant to the Merger, Mintz & Partners, LLP became our
independent public accountants. IntelliPharmaCeutics Corp.'s financial
statements as of and for the years ended December 31, 2003 and our financial
statements for December 31, 2004 and December 31, 2005, included in this
prospectus, have been audited by Mintz & Partners LLP,independent public
accountants, as stated in their report appearing herein and are so included
herein in reliance upon the report of such firm given upon their authority as
experts in accounting and auditing. The financial statements as of and for the
year ended December 31, 2003 were prepared under Canadian generally accepted
accounting principles ("GAAP") and audited in accordance with Canadian generally
accepted auditing standards. The financial statements as of and for the years
ended December 31, 2004 and December 31, 2005 were prepared under US GAAP and
audited in accordance with Public Company Accounting Oversight Board (United
States)standards. Mintz & Partners LLP's authority as experts is in respect of
these respective standards for the indicated periods.
ADDITIONAL INFORMATION
Following the effective date of the registration statement, of which this
prospectus forms a part, IntelliPharmaCeutics Ltd. will be subject to the
informational requirements of the Securities Exchange Act of 1934, and in
accordance therewith will file reports, proxy or information statements and
other information with the Securities and Exchange Commission. Any such reports,
proxy statements and other information may be inspected and copied at the public
reference facilities maintained by the Commission at 100 F Street, N.E.,
Washington, D.C. 20549. Copies of such material may be obtained from the Public
Reference Section of the Commission at 100 F Street, N.E., Washington, D.C.
20549, at prescribed rates. In addition, the Commission maintains a web site
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission. The address
of the Commission's web site is http://www.sec.gov.
IntelliPharmaCeutics Ltd. has filed with the Commission, a registration
statement on Form SB-2 under the Securities Act of 1933 with respect to the
common stock being offered hereby. As permitted by the rules and regulations of
the Commission, this prospectus does not contain all the information set forth
in the registration statement and the exhibits and schedules thereto. For
further information with respect to the Company and the common stock offered
hereby, reference is made to the registration statement, and such exhibits and
schedules. A copy of the registration statement, and the exhibits and schedules
thereto, may be inspected without charge at the public reference facilities
maintained by the Commission at the addresses set forth above, and copies of all
or any part of the registration statement may be obtained from such offices upon
payment of the fees prescribed by the Commission. In addition, the registration
statement may be accessed at the Commission's web site. Statements contained in
this prospectus as to the contents of any contract or other document are not
necessarily complete and, in each instance, reference is made to the copy of
such contract or document filed as an exhibit to the registration statement,
each such statement being qualified in all respects by such reference.
49
================================================================================
INTELLIPHARMACEUTICS LTD.
(FORMERLY READY CAPITAL CORP.)
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDING DECEMBER 31, 2005
================================================================================
F-1
INTELLIPHARMACEUTICS LTD.
(FORMERLY READY CAPITAL CORP.)
DECEMBER 31, 2005
CONTENTS
PAGE
Consolidated Financial Statements:
Independent Registered Chartered Accountants' Report F-3
Consolidated Balance Sheet F-4
Consolidated Statements of Shareholders' Equity F-5
Consolidated Statements of Operations and Deficit F-6
Consolidated Statements of Cash Flows F-7
Notes to Consolidated Financial Statements F-8 - F-21
F-2
[MINTZ & PARTNERS LLP LETTERHEAD]
- INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS' REPORT -
To the shareholders of
IntelliPharmaCeutics Ltd.
We have audited the accompanying consolidated balance sheet of
IntelliPharmaCeutics Ltd. as at December 31, 2005 and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
years ended December 31, 2005 and December 31, 2004. These consolidated
financial statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform an audit to obtain reasonable assurance whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, these consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
IntelliPharmaCeutics Ltd. as at December 31, 2005 and the results of its
operations and the cash flows for each of the years ended December 31, 2005 and
2004 in conformity with generally accepted accounting principles in the United
States of America.
Toronto, Ontario /S/ MINTZ & PARTNERS LLP
------------------------
March 30, 2006 CHARTERED ACCOUNTANTS
A member of Collins Barrow Canada
[LOGO] and Moores Rowland International,
associations of independent
accounting firms throughout the
world
F-3
INTELLIPHARMACEUTICS LTD
(FORMERLY READY CAPITAL CORP.)
CONSOLIDATED BALANCE SHEET
AS AT DECEMBER 31, 2005
- --------------------------------------------------------------------------------
A S S E T S
CURRENT
Cash and cash equivalents $ 2,078,009
Investment tax credits 653,852
Prepaid expenses and sundry assets 89,573
-----------
2,821,434
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $505,029 (Note 4) 1,246,301
-----------
$ 4,067,735
===========
L I A B I L I T I E S
CURRENT
Accounts payable and accrued liabilities $ 750,163
Due to related parties (Note 5) 1,757,897
-----------
2,508,060
-----------
COMMITMENTS AND CONTINGENCIES (Note 10)
S H A R E H O L D E R S' E Q U I T Y
CAPITAL STOCK (Note 7)
Special Voting Shares -- 20,000,000 authorized
number of $0.001 par value shares: Issued and
Outstanding: 10,850,000 10,850
Common Stock -- 40,000,000 authorized number of
$0.001 par value:
Issued and Outstanding: 5,193,946 5,194
ADDITIONAL PAID IN CAPITAL 6,772,977
ACCUMULATED COMPREHENSIVE INCOME (137,167)
DEFICIT (5,092,179)
-----------
1,559,675
-----------
$ 4,067,735
===========
- --------------------------------------------------------------------------------
/See accompanying notes
F-4
INTELLIPHARMACEUTICS LTD.
(FORMERLY READY CAPITAL CORP.)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Quantity Amount of
of Special Special Quantity of Additional
Voting Voting Common Common Paid-In
Shares Shares Shares Shares Capital
----------- ---------- ----------- ---------- ----------
Balance, January 1, 2004 90,000,000 107
Issued in connection with reverse acquisition 1,745,000 1,745 22,715
Issuance of common shares 35,000 35 6,965
Issuance of common shares for services 20,000 20 3,980
Share Consolidation (1 : 1.42005) (532,405) (532) 532
Acquisition of shares of IntelliPharmaCeutics
Corp. (Note 3) 10,850,000 10,850 (90,000,000) (107) (10,743)
Issuance of Common Shares 2,112,500 2,113 4,222,887
Other share issued 250,000 250 499,750
Share issuance costs (274,546)
Adjustment shares issued 412,351 412 (412)
Proceeds from Private Placement 681,000 681 1,361,319
Shares subscribed 6,500 6 12,994
Foreign exchange translation gain (loss)
Net loss for the period
----------- ---------- ----------- ---------- ----------
Balance, December 31, 2004 10,850,000 10,850 4,729,946 4,730 5,845,441
Receipt of cash for shares previously subscribed for
Issuance of common shares 464,000 464 227,536
Foreign exchange translation gain (loss)
Net loss for the period
----------- ---------- ----------- ---------- ----------
Balance, December 31, 2005 10,850,000 10,850 5,193,946 5,194 6,772,977
=========== ========== =========== ========== ==========
Share Accumulated Retained Total
Subscriptions Comprehensive Earnings / Shareholders'
Received Income (loss) Deficit Equity
------------- ------------- ---------- -------------
Balance, January 1, 2004 (91,156) (976,962) (1,068,011)
Issued in connection with reverse acquisition 24,460
Issuance of common shares 7,000
Issuance of common shares for services 4,000
Share Consolidation (1 : 1.42005) 0
Acquisition of shares of IntelliPharmaCeutics
Corp. (Note 3) 0
Issuance of Common Shares 4,225,000
Other share issued 500,000
Share issuance costs (274,546)
Adjustment shares issued 0
Proceeds from Private Placement 1,362,000
Shares subscribed (13,000) 0
Foreign exchange translation gain (loss) (48,172) (48,172)
Net loss for the period (1,662,352) (1,662,352)
------- -------- ---------- ----------
Balance, December 31, 2004 (13,000) (139,328) (2,639,314) 3,069,379
Receipt of cash for shares previously subscribed for 13,000 13,000
Issuance of common shares 928,000
Foreign exchange translation gain (loss) 2,161 2,161
Net loss for the period (2,452,865) (2,452,865)
------- -------- ---------- ----------
Balance, December 31, 2005 -- (137,167) (5,092,179) 1,559,675
======= ======== ========== +=========
- --------------------------------------------------------------------------------
/See accompanying notes
F-5
INTELLIPHARMACEUTICS LTD.
(FORMERLY READY CAPITAL CORP.)
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
FOR THE FISCAL YEAR ENDING DECEMBER 31, 2005 2004
- --------------------------------------------------------------------------------
REVENUES $ -- $ 102,332
------------ ------------
EXPENSES
Research and development 941,420 485,638
Wages and benefits 230,690 222,103
Administrative costs 443,260 173,509
Occupancy costs 190,837 106,539
Marketing 428,628 367,274
------------ ------------
2,234,835 1,355,063
------------ ------------
LOSS BEFORE ITEMS NOTED BELOW (2,234,835) (1,252,731)
AMORTIZATION 170,559 144,734
FOREIGN EXCHANGE LOSS 21,979 247,327
INTEREST INCOME (70,317) (14,810)
INTEREST EXPENSE 95,809 32,370
------------ ------------
NET LOSS (2,452,865) (1,662,352)
DEFICIT - Beginning of Year (2,639,314) (976,962)
------------ ------------
DEFICIT - End of Year $ (5,092,179) $ (2,639,314)
============ ============
(LOSS) PER COMMON SHARE
Loss per Common Share $ (0.16) $ (0.14)
============ ============
Weighted average Common Shares
and Special Voting Shares outstanding 15,711,226 11,903,780
============ ============
- --------------------------------------------------------------------------------
/See accompanying notes
F-6
INTELLIPHARMACEUTICS LTD.
(FORMERLY READY CAPITAL CORP.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEAR ENDING DECEMBER 31, 2005 2004
- --------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Loss for the period $(2,452,865) $(1,662,352)
Items not affecting cash
Amortization 170,559 144,734
Non-cash expenditures (Note 6) -- 504,000
----------- -----------
(2,282,306) (1,013,618)
Net change in non-cash operating items
Investment tax credits (362,083) (60,377)
Prepaid expenses and sundry assets (39,922) (22,385)
Accounts payable and accrued liabilities 527,385 76,954
----------- -----------
CASH FLOWS USED IN
OPERATING ACTIVITIES (2,156,926) (1,019,426)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Funds from related parties 53,622 159,726
Reverse takeover and issuance costs -- (274,545)
Issuance of special voting shares -- 10,743
Issuance of capital stock 928,000 5,620,717
Issuance of share subscriptions receivable -- (13,000)
----------- -----------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES 981,622 5,503,641
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (1,020,945) (190,175)
----------- -----------
CASH FLOWS USED IN INVESTING ACTIVITIES (1,020,945) (190,175)
----------- -----------
EFFECT OF EXCHANGE RATE 23,369 (50,337)
----------- -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (2,172,880) 4,243,703
CASH AND CASH EQUIVALENTS
- Beginning of Period 4,250,889 7,186
----------- -----------
CASH AND CASH EQUIVALENTS
- End of Period $ 2,078,009 $ 4,250,889
=========== ===========
SUPPLEMENTAL INFORMATION
Interest paid $ -- $ --
Income taxes paid $ -- $ --
- --------------------------------------------------------------------------------
/See accompanying notes
F-7
INTELLIPHARMACEUTICS LTD.
(FORMERLY READY CAPITAL CORP.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
- --------------------------------------------------------------------------------
1. ORGANIZATION AND BASIS OF PRESENTATION
Description of the Business
IntelliPharmaCeutics Ltd. (the "Company") was incorporated under the
laws of the State of New York on February 23, 1988 with the name of
Ready Capital Corp. The Company did not commence principal operations
until 2004 when it reincorporated itself in the State of Delaware,
changed its name to IntelliPharmaCeutics Ltd. and acquired an interest
in IntelliPharmaCeutics Corp., a Nova Scotia company ("IPC Corp."). IPC
Corp. is engaged in the research, development, licensing and marketing
of both new and generic controlled release pharmaceutical products.
Basis of Consolidation
Effective September 10, 2004, the Company completed the transaction
with IPC Corp. This transaction was accounted for as a reverse
acquisition as the control of the Company was acquired by the former
shareholders of IPC Corp. After this transaction, the Company's name
was changed to IntelliPharmaCeutics Ltd. These consolidated financial
statements include the accounts of IPC Corp. as well as those of the
Company, as of September 10, 2004. Prior period results and
comparatives are those of IPC Corp. Although legally, the Company
(formerly Ready Capital Corp.) is regarded as the continuing company,
IPC Corp., whose shareholders now hold directly or indirectly more than
50% of the voting shares of the Company, is treated as the accounting
acquirer under generally accepted accounting principles. Consequently,
the Company (formerly Ready Capital Corp.) is deemed a continuation of
IPC Corp. and control of the assets and business of the Company
(formerly Ready Capital Corp.) is deemed to have been acquired in
consideration for the issued shares (Note 3).
All significant inter-company accounts and transactions have been
eliminated on consolidation. The accompanying consolidated financial
statements have been prepared in accordance with United States
generally accepted accounting principles.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
Cash and cash equivalents include demand deposits with banks, money
market accounts, and other short-term investments with original
maturities of 90 days or less. Balances of cash and cash equivalents in
financial institutions may at times exceed the government-insured
limits. Bank borrowings are considered to be financing activities.
Investment Tax Credits
The investment tax credits receivable are recoverable from the
Government of Canada under the Scientific Research & Experimental
Development incentive program. The amounts claimed under the program
represent management's best estimate based on research and development
costs incurred during the year. Realization is subject to government
approval. Any adjustment to the amounts claimed will be recognized in
the year in which the adjustment occurs. Investment tax credits (ITCs)
claimed relating to current expenditures are credited to the related
expense. ITCs claimed relating to capital expenditures are credited to
the capital assets.
- --------------------------------------------------------------------------------
F-8
INTELLIPHARMACEUTICS LTD.
(FORMERLY READY CAPITAL CORP.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- continued
Property and Equipment
Property and equipment are recorded at cost including interest
capitalized on assets under construction. Repairs and maintenance
expenditures are charged to income; major betterments and replacements
are capitalized. Depreciation and amortization rates are as follows:
Computer equipment 30% of the declining balance
Computer software 50% of the declining balance
Furniture and fixtures 20% of the declining balance
Laboratory equipment 20% of the declining balance
Leasehold improvements Straight line over the term of the lease
Revenue Recognition
Sales recognized to date represent services provided. In accordance
with guidance provided in Securities and Exchange Commission ("SEC")
Staff Accounting Bulletin No. 104, "Revenue Recognition in Financial
Statements" (SAB 104), the primary purpose of which is to expand on
accounting guidance contained in SAB 101, these revenues are recognized
upon completion of services on the percentage completion basis.
Research and Development
Research and development costs are expensed as incurred in accordance
with SFAS No. 2. However, materials and equipment are capitalized and
depreciated over their useful lives if they have alternative future
uses. Approved investment tax credits are netted against the related
expenses or capital property.
Income taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, Accounting for Income
Taxes. Under SFAS No. 109, deferred tax assets and liabilities are
determined based on temporary differences between the financial
statement and tax bases of assets and liabilities and net operating
loss and credit carry forwards, using enacted tax rates in effect for
the year in which the differences are expected to reverse. Valuation
allowances are established when necessary to reduce deferred tax assets
to the amounts expected to be realized. A provision for income tax
expense is recognized for income taxes payable for the current period,
plus the net changes in deferred tax amounts.
Use of Estimates
The preparation of consolidated financial statements in conformity with
U.S. generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the consolidated financial statements, and
the reported amounts of revenue and expenses for the periods reported.
Actual results could differ from those estimates.
Costs of Raising Capital
Incremental costs incurred in respect of raising capital are charged
against equity proceeds raised.
- --------------------------------------------------------------------------------
F-9
INTELLIPHARMACEUTICS LTD.
(FORMERLY READY CAPITAL CORP.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- continued
Translation of Foreign Currencies
In accordance with SFAS No.52, "Foreign Currency Translation", the
financial statements of certain affiliates of the Company are measured
using local currency (Canadian dollar) as the functional currency.
Assets and liabilities have been translated at year end exchange rates
and related revenue and expenses have been translated at average
exchange rate. Gains and losses resulting from the translation of
affiliates' financial statements are included as a separate component
of shareholders' equity.
Fair Value of Financial Instruments
The Company estimates the fair value of its financial instruments based
on current interest rates, quoted market values or the current price of
financial instruments with similar terms. Unless otherwise disclosed
herein, the carrying value of financial instruments, especially those
with current maturities such as cash and cash equivalents, short-term
deposits, investment tax credits, accounts payable and accrued
liabilities and due to related parties are considered to approximate
their fair values.
Stock-Based Compensation Plan
The Company accounts for employee stock options in accordance with
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock
Issued to Employees". Under APB No. 25, the Company applies the
intrinsic value method of accounting. SFAS No. 123, "Accounting for
Stock-Based Compensation", prescribes the recognition of compensation
expense based on fair value of options determined on the grant date.
However, SFAS No. 123 allows companies currently applying APB No. 25 to
continue applying the intrinsic value method under APB No. 25. For
companies that continue in applying the intrinsic value method, SFAS
No. 123 mandates certain pro forma disclosures as if the fair value
method had been utilized. The recently promulgated accounting standard,
FIN44 "Accounting for Certain Transactions involving Stock
Compensation", does not affect the financial statements of the Company.
Earnings (Loss) per Share
Net earnings (loss) per share is reported in accordance with SFAS No.
128, "Earnings Per Share". SFAS No. 128 requires dual presentation of
basic earnings per share ("EPS") and diluted EPS on the face of all
statements of earnings, for all entities with complex capital
structures. 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 these options,
warrants and convertible securities are excluded from diluted EPS if
the effect of such inclusion would be anti-dilutive. Fully diluted loss
per share is not provided, as the effect will be anti-dilutive.
Comprehensive Income
The Company follows Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income". This statement establishes
standards for reporting and display of comprehensive income and its
components. Comprehensive income is net income plus certain items that
are recorded directly to shareholders' equity bypassing net income.
Other than foreign exchange gains and losses, the Company has no other
comprehensive income (loss).
- --------------------------------------------------------------------------------
F-10
INTELLIPHARMACEUTICS LTD.
(FORMERLY READY CAPITAL CORP.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- continued
Segment Information
The Company follows SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information". SFAS No. 131 requires that the
Company disclose its operations in the business segment as viewed by
management.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 2004, the EITF reached a consensus on EITF Issue No. 03-1, The
Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments ("EITF No. 03-1"), which provides guidance on the
meaning of the phrase other-than-temporary impairment and its
applications to several types of investments including debt securities
classified as held-to-maturity and available-for-sale as well as
cost-method investments. Additional guidance on the evaluation of
whether the impairment on investments not accounted for using the
equity method is other then temporary and how to measure the investment
was provided in FSP FAS 115-1 / FAS 124-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain
Investments." The adoption of this statement had no effect on the
company's consolidated financial statement.
In September 2004, the Emerging Issue Task Force ("EITF") issued Topic
No. D-108, "Use of the Residual Method to Value Acquired Assets Other
than Goodwill" ("Topic D-108"). Topic D-108 requires the direct value
method, rather than the residual value method, be used to value
intangible assets other than goodwill for such assets acquired in
business combinations completed after September 29, 2004. Under the
residual value method, the fair value of the intangible asset is
determined to be the difference between the enterprise value and the
fair value of all other separately identifiable assets; whereas, under
the direct value method all intangible assets are valued separately and
directly. Topic D-108 also requires that registrants who have applied
the residual method to the valuation of intangible assets for purposes
of impairment testing shall perform an impairment test using the direct
value method on all intangible assets. The provisions of Topic D-108
did not affect the consolidated financial statements.
- --------------------------------------------------------------------------------
F-11
INTELLIPHARMACEUTICS LTD.
(FORMERLY READY CAPITAL CORP.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- continued
On October 22, 2004, Congress enacted the American Jobs Creation Act
(AJCA) which provided a temporary incentive for U.S. corporations to
repatriate earnings previously reinvested in foreign subsidiaries to
obtain an 85% dividends received deduction. In December 2004, FSP No.
109-2, Accounting and Disclosure Guidance for the Foreign Earnings
Repatriation Provision within the American Jobs Creation Act of 2004
was issued. This FSP provides accounting and disclosure guidance on how
to apply FASB Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes, to the repatriation provision of the AJCA.
The adoption of this policy should not have a material impact on the
Company's financial position or Results of Operations.
In November 2004, the FASB ratified the Emerging Issues Task Force
("EITF") consensus on Issue 03 -13, "Applying the Conditions in
Paragraph 42 of FASB Statement No 144, "Accounting for the impairment
or Disposal of Long -- Lived Assets," in Determining Whether to Report
Discontinued Operations. The adoption of the new pronouncements will
not have a material impact on our financial position or results of
operations.
In November 2004, the FASB issued Statement No. 151 Inventory costs, an
amendment of ARB No. 43, Chapter 4, to clarify that abnormal amounts of
idle facility expense, freight, handling costs and wasted material
(spoilage) should be recognized as current period charges, and that
fixed production overheads should be allocated to inventory based on
normal capacity of production facilities. The adoption of this policy
had no effect on the company's consolidated financial statement.
In December 2004, the FASB issued Revised Statement of Financial
Accounting Standards No. 123, Share-Based Payment (FAS 123R), an
amendment to FAS 123 and a replacement of APB Opinion No. 25,
Accounting for Stock Issued to Employees, and its related
implementation guidance. FAS 123R requires public entities to measure
the cost of employee services received in exchange for an award of
equity instruments based on the grant-date fair value of the award, and
to recognize that cost over the requisite service period.
FAS 123R, which became effective January 1, 2006, requires entities
that use the fair-value method of recognition under FAS 123, to apply a
modified version of the prospective application. Under modified
prospective application, compensation cost is recognized on or after
the effective date for all unvested awards, based on their grant-date
fair value as calculated under FAS 123 for recognition.
In addition, the accounting for certain grants of equity awards to
individuals who are retirement eligible on the date of grant has been
clarified. FAS 123R states that an employee's share-based award becomes
vested at the date that the employee's right to receive or retain
equity shares is no longer contingent on the satisfaction of a market,
performance or service condition. Accordingly, awards granted to
retirement eligible employees are not contingent on satisfying a
service condition and therefore are recognized at fair value on the
date of the grant. Additionally, the period over which cost is
recognized for awards granted to those who become retirement eligible
before the vesting date, will be from the grant date to the retirement
eligible date rather than to the vesting date. This guidance is to be
applied prospectively to new or modified awards granted upon adoption
of FAS 123R.
- --------------------------------------------------------------------------------
F-12
INTELLIPHARMACEUTICS LTD.
(FORMERLY READY CAPITAL CORP.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- continued
The Company will adopt SFAS 123(R) on January 1, 2006 using the
modified prospective approach. The Company expects to record
approximately $19,800 of stock-based compensation during the year
ending December 31, 2006 as a result of this adoption.
In December 2004, the FASB issued SFAS No. 153, Exchanges of
Nonmonetary Assets, an amendment of APB Opinion No. 29 ("SFAS 153").
The amendments made by SFAS 153 are based on the principle that
exchanges of nonmonetary assets should be measured based on the fair
value of the assets exchanged. Further, the amendments broaden the
exception for exchanges of nonmonetary assets that do not have
commercial substance. SFAS 153 is effective for nonmonetary asset
exchanges occurring in fiscal periods beginning after June 15, 2005.
The adoption of SFAS 153 will not have a material impact on our
financial position or results of operations.
In March 2005, the FASB issued Financial Interpretation No. 47,
Accounting for Conditional Asset Retirement Obligations, an
interpretation of FASB Statement No. 143, ("FIN 47"). FIN 47 clarifies
that an entity must record a liability for a conditional asset
retirement obligation if the fair value of the obligation can be
reasonably estimated. FIN 47 is effective no later than the end of
fiscal years ending after December 15, 2005. Therefore, FIN 47 is
effective for the year ending December 31, 2005. The adoption of FIN 47
did not have a material impact on our financial position or results of
operations.
In June 2005, the EITF reached a consensus on EITF No. 05-6,
Determining the Amortization Period for Leasehold Improvements
Purchased after Lease Inception or Acquired in a Business Combination
("EITF 05-6"), which was modified in September 2005. EITF 05-6 provides
guidance on whether a lease term should be re-evaluated at the time of
a purchase business combination or when leasehold improvements are
purchased after lease inception. EITF 05-6 is effective for leasehold
improvements that are purchased or acquired in reporting periods
beginning after June 29, 2005. The adoption of this standard did not
have a material impact on the Company's consolidated financial
statements.
In June 2005, the Emerging Issues Task Force ("EITF") reached a
consensus on EITF Issue No. 04-10, Determining Whether to Aggregate
Operating Segments That Do Not Meet the Quantitative Thresholds,("EITF
No. 04-10"). EITF 04-10 provides guidance on FAS 131, Disclosures about
Segments of an Enterprise and Related Information and how to determine
whether operating segments which do not meet certain quantitative
thresholds may be aggregated and reported as a single operating
segment. The EITF is effective for fiscal years ending after September
15, 2005, and corresponding information for earlier periods, including
interim periods, should be restated unless it is impractical to do so.
The Company has adopted the guidance as of the year ending December 31,
2005 and the adoption did not have a material impact on our financial
position or results of operations.
In October 2005, the Financial Accounting Standards Board ("FASB")
issued FASB Staff Position ("FSP") 13-1, "Accounting for Rental Costs
Incurred during a Construction Period" ("FSP 13-1"). FSP 13-1 requires
rental costs associated with ground or building operating leases that
are incurred during a construction period be recognized as rental
expense and included in income from continuing operations. FSP 13-1 is
effective for fiscal periods beginning after December 15, 2005. The
provisions of FSP 13-1 are not expected to have a material impact on
the Company's consolidated financial statements.
- --------------------------------------------------------------------------------
F-13
INTELLIPHARMACEUTICS LTD.
(FORMERLY READY CAPITAL CORP.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- continued
In May 2005, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 154, Accounting Changes and Error Corrections ("SFAS 154").
SFAS 154 provides guidance on accounting for and reporting of
accounting changes and error corrections. It requires changes in
accounting principle to be applied retroactively to prior periods as if
the principle had always been used. Previously, voluntary changes in
accounting principle were required to be recognized cumulatively in net
income in the period of change. SFAS 154 is effective for accounting
changes and error corrections made in fiscal years beginning after
December 15, 2005 with early adoption encouraged. The Company did not
make any accounting changes or error corrections during the year ended
December 31, 2005 and therefore, the adoption of SFAS 154 did not have
any material impact on our financial position or results of operations.
3. ACQUISITION -- REVERSE ACQUISITION
On September 10, 2004, pursuant to the Company's private placement
memorandum dated May 5, 2004 and the Share Exchange Agreement dated
February 23, 2004 (the "Share Agreement") the Company raised gross
proceeds of $4,225,000 by the issuance of 2,112,500 shares of its
common stock, effecting the merger of the Company's wholly owned
subsidiary with IPC Corp. and effected a 1 for 1.42005 reverse stock
split of its common stock. Then on December 30, 2004, the Company
issued an additional 687,500 shares of common stock for gross proceeds
of $1,375,000. As a result of these transactions ("Transactions") the
Company has 50% voting interest in IPC Corp. In addition, pursuant to
the Share Agreement, the Company issued 10,850,000 Special Voting
shares to the former shareholders of IPC Corp., resulting in the
previous owners of IPC Corp. owning approximately 69.6% of the
Company's voting capital stock.
As a result of the Transactions, IPC Corp.'s shareholder,
IntelliPharmaCeutics Inc. ("IPC Inc."), acquired 69.6% of the shares in
the Company. Other parties own the remaining approximately 30.4%. The
effect of the Transactions is that the shareholders of the Company,
through their ownership of common shares in the Company, have an
indirect equity interest in IPC Corp. that is equal to the percentage
that their common shares represent of all shares issued in the Company,
both common and voting. IPC Inc. has a direct equity interest in IPC
Corp. that is equal to the percentage that IPC Inc.'s voting shares
represent of all shares issued in the Company, both common and voting.
The shares owned by the Company and IPC Inc. in IPC Corp., give each of
the Company and IPC Inc. respectively, 50% of the voting rights in IPC
Corp.
Pursuant to the Share Exchange Agreement and the rights applicable to
its shares, IPC Inc. has the right to exchange its equity shares in IPC
Corp. for common shares of the Company on a share-for-share basis, that
ultimately provides IPC Inc. with the right to own the same percentage
of common shares of the Company that it would hold if its present
voting shares in the Company were common shares, this being
approximately 69.6% as at December 31, 2004 (and a corresponding number
of its voting shares in the Company are cancelled automatically on the
occurrence of any such exchange).
- --------------------------------------------------------------------------------
F-14
INTELLIPHARMACEUTICS LTD.
(FORMERLY READY CAPITAL CORP.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
- --------------------------------------------------------------------------------
3. ACQUISITION -- REVERSE ACQUISITION -- continued
Pending exercise of the exchange rights by IPC Inc., the Share Exchange
Agreement provides that the shares that IPC Inc. owns in IPC Corp. have
contractual rights that make them the economic equivalent of common
shares of the Company. These entitle IPC Inc. to receive from IPC
Corp., on an equal share for share basis with the Company's common
shares, all dividends and distributions of property made by the
Company.
In accordance with SFAS 141, "Accounting for Business Combination", the
reverse acquisition transaction has been accounted for using the
purchase method. The purchase value is based on the fair value of the
accounting acquiree's assets and liabilities. At the time of the
transaction, the net liabilities of IntelliPharmaCeutics Ltd. were as
follows:
<Table>
Cash $ 47,981
Accounts payable and accrued liabilities (21,745)
Transactional Costs (174,854)
----------
$(148,618)
==========
</Table>
4. PROPERTY AND EQUIPMENT
<Table>
<Caption>
2004 2005
---- ----
Accumulated Net carrying Accumulated Net Carrying
Cost amortization Value Cost amortization Value
--------- ------------ ------------ ---------- ------------ ------------
Computer equipment 67,330 30,043 37,287 86,438 46,530 39,908
Computer Software 2,984 2,984 0 3,085 3,085 0
Furniture and fixture 40,701 12,382 28,319 65,974 21,388 44,586
Laboratory equipment 353,193 156,760 196,433 754,031 215,068 538,963
Leasehold improvement 144,493 2,408 142,085 841,802 218,958 622,844
------- ------- ------- --------- ------- ---------
Total 608,701 204,577 404,124 1,751,330 505,029 1,246,301
------- ------- ------- --------- ------- ---------
</Table>
Depreciation during the year ending December 31, 2005 was $170,559
(2004 - $144,734)
5. RELATED PARTY TRANSACTIONS
Amounts due to the related parties are payable to entities controlled
by shareholders, officers or directors of the Company, as are
transactions with these related parties.
- --------------------------------------------------------------------------------
F-15
INTELLIPHARMACEUTICS LTD.
(FORMERLY READY CAPITAL CORP.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
- --------------------------------------------------------------------------------
5. RELATED PARTY TRANSACTIONS - continued
2005
----------
Promissory note payable to shareholders, unsecured, non-interest
bearing prior to September 2004. Starting in September 2004, the
promissory note bears a 6% annual interest rate on the outstanding
loan balance and the loan is secured by and repayable in any month at
the rate of greater of 25% of gross revenues or 100% of Scientific
Research & Experimental Development tax credits received in cash from
Canadian tax authorities in respect
of research carried out prior to September 10, 2004 (2005 - CA$ 2,016,267) $1,733,678
IntelliPharmaCeutics, Inc., an entity controlled by shareholders, officers
and directors, unsecured, non-interest bearing with no fixed
repayment terms (2005 - CA$28,167) 24,219
----------
$1,757,897
==========
Interest calculated on the promissory note payable to shareholders for
the year ended December 31, 2005 is $95,809 (2004 - $32,370). In the
event of default on the promissory notes, any amount unpaid from the
date of demand shall bear interest at the rate of 1%, compounded
monthly.
In addition, during the year ending December 31, 2004, the Company
issued 270,000 common shares to related parties (Note 6)
Subsequent to December 31, 2005, the Company paid $169,941 on the above
noted promissory note as the Company had earned approximately $507,954
and received approximately $42,953 in ITC credits.
6. NON CASH TRANSACTIONS
During the fiscal year ending December 31, 2004, the Company had the
following non cash transactions:
>> Issued 20,000 shares to its Corporate Secretary for past
services valued at $4,000;
>> Issued 50,000 shares to an employee for past services valued
at $100,000;
>> Issued 100,000 shares to an Officer of the Company for past
services valued at $200,000;
>> Issued 100,000 shares to an entity for services valued at
$200,000.
These transactions are in the normal course of operations and have been
valued at the exchange amount which is the amount of consideration
established and agreed to by the parties. (See Note 5)
7. CAPITAL STOCK
The Company is authorized to issue up to 40,000,000 common shares with
a par value of $0.001. Each common share entitles the holder to one
vote. In addition, the Company is authorized to issue up to 20,000,000
preferred shares ("Special Voting Shares") with a par value of $0.001.
The Special Voting Shares are not entitled to dividends or
distributions from the Company and have voting rights only. They are
redeemable without repayment of capital on a share-for-share basis,
automatically, upon an exchange being made of equity shares in IPC
Corp. for common shares of the Company on a share-for-share basis. See
also Note 3.
All reference to the common shares of the Company is after taking into
consideration the 1.42005 old common shares for one (1) new common
share consolidation, on a retroactive basis, including the weighted
average shares outstanding that took effect as of September 10, 2004.
- --------------------------------------------------------------------------------
F-16
INTELLIPHARMACEUTICS LTD.
(FORMERLY READY CAPITAL CORP.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
- --------------------------------------------------------------------------------
During the year ending December 31, 2004, the Company had the following
capital transactions:
a. issued 10,850,000 special voting shares for acquisition of
shares in IPC Corp.;
b. issued 2,800,000 common shares for gross proceeds of
$5,600,000, in addition 278,500 warrants were issued in
conjunction with this financing, where each warrant provides
the holder the option to acquire one (1) common share for a
price of $3.00 for period of up to 3 years; and
c. issued 270,000 common shares for past services valued at
$504,000. (Note 6)
During the year ending December 31, 2005, the Company issued 464,000
common shares for gross proceeds of $928,000.
The expiry date of the warrants, that are mentioned above which can be
exercised, have the following expiry dates:
<Table>
<Caption>
Number of Warrants Expiry Date
50,000 September 10, 2006
228,500 September 10, 2007
</Table>
No fair value was attributed to the warrants as at the time of issuance
as there was no market value of the common shares for which to base the
fair market value of the warrants.
8. OPTIONS AND WARRANTS
The Company currently issues stock options at the direction of the
Board of Directors. To date, non-qualified stock options have been
granted to select key employees under terms and conditions determined
by the Board of Directors at the time the options are issued. Presented
below is a summary of stock option plan activity:
Wt. Avg. Wt. Avg.
Exercise Options Exercise
Number Price Exercisable Price
--------- --------- ----------- ---------
Balance, January 1, 2004 Nil $ N/A Nil $ N/A
Issued in 2004 5,000,000 2.00 Nil 2.00
--------- --------- ----------- ---------
Balance, December 31, 2004 5,000,000 2.00 Nil 2.00
Issued in 2005 53,329 3.00 53,329 3.00
--------- --------- ----------- ---------
Balance, December 31, 2005 5,053,329 $ 2.00 53,329 $ 3.00
========= ========= =========== =========
- --------------------------------------------------------------------------------
F-17
INTELLIPHARMACEUTICS LTD.
(FORMERLY READY CAPITAL CORP.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
- --------------------------------------------------------------------------------
8. OPTIONS AND WARRANTS - continued
Options outstanding and exercisable at December 31, 2005 are as
follows:
Outstanding Exercisable
Wt. Avg. Wt. Avg. Wt. Avg.
Expiry Remaining Remaining Exercise
Price Number Date Life Exercise Price Number Price
----- ---------- ---------- --------- -------------- ------ ---------
$2.00 5,000,000 N/A Nil $2.00 Nil 2.00
2.00 10,000 2015-08-31 9.7 2.00 10,000 2.00
3.00 29,997 2008-08-31 2.7 3.00 29,997 3.00
3.00 3,333 2008-09-30 2.7 3.00 3,333 3.00
3.00 3,333 2008-10-31 2.8 3.00 3,333 3.00
3.00 3,333 2008-11-30 2.9 3.00 3,333 3.00
3.00 3,333 2008-12-31 3.0 3.00 3,333 3.00
SFAS No.123 requires entities that account for awards for stock-based
compensation to employees in accordance with APB No. 25 to present pro
forma disclosures of net income and earnings per share as if
compensation cost was measured at the date of grant based on fair value
of the award. The fair value for these options was estimated at the
date of grant using a Black-Scholes option-pricing model with the
following weighted-average assumptions:
2005
----------
Expected life of the option 3-10 years
Risk free interest rate 5.0%
Expected volatility 50.0%
Expected dividend yield 0.0%
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of
traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion,
the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
Of the options granted, 5,000,000 shall vest upon certain milestones
having been met. As no milestones have been met, these options remain
un-exercisable. On a Pro-forma basis, when the milestones are met, a
compensation expense of approximately $4,428,000 will be recognized.
For the options that have vested during the year, on a pro-forma basis,
the Company would have recognized a non cash compensation expense of
$34,899 (2004 - Nil) and disclosed the following information:
Actual Pro-Forma
Net Loss $2,452,865 $2,487,764
Loss per share 0.16 0.16
- --------------------------------------------------------------------------------
F-18
INTELLIPHARMACEUTICS LTD.
(FORMERLY READY CAPITAL CORP.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
- --------------------------------------------------------------------------------
9. PROVISION FOR INCOME TAX
The Company files US Federal income tax returns for its US operations.
Separate income tax returns are filed, as locally required.
No provision for income taxes was calculated for the years ended
December 31, 2005 and 2004.
The total provision for income taxes differs from that amount which
would be computed by applying the United States federal income tax rate
to income (loss) before provision for income taxes. The reasons for
these differences are as follows:
Year Ended December 31, 2005 2004
Amount % Amount %
---------- ----- --------- -----
Statutory income tax rate (recovery) $(858,503) (35.0) $(581,823) (35.0)
Benefit of tax loss and other temporary
differences not recognized 858,503 35.0 581,823 35.0
--------- ----- --------- -----
$ Nil 0.0 $ Nil 0.0
========= ===== ========= =====
The Company recognizes deferred tax liabilities and assets for the
expected future tax consequences of temporary differences between the
carrying amounts and the tax basis of assets and liabilities and net
operating loss carry-forwards. Significant temporary differences and
carry-forwards are as follows:
Year Ended December 31, 2005 2004
Component Tax Effect Component Tax Effect
----------- ----------- ----------- ----------
Tax loss benefit $ 5,943,000 $ 2,080,050 $ 2,668,048 $ 933,817
Less valuation allowance (5,943,000) (2,080,050) (2,668,048) (933,817)
----------- ----------- ----------- ----------
Net deferred tax assets $ Nil $ Nil $ Nil $ Nil
=========== =========== =========== ==========
At December 31, 2005, the Company had cumulative net operating losses
carried forward of approximately $490,000 and $5,453,000 in the United
States and Canada respectively. These amounts will expire in various
years through 2015. The related deferred tax assets have been
completely offset by a valuation allowance. The Company has no
significant deferred tax liabilities.
- --------------------------------------------------------------------------------
F-19
INTELLIPHARMACEUTICS LTD.
(FORMERLY READY CAPITAL CORP.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
- --------------------------------------------------------------------------------
10. COMMITMENTS AND CONTINGENCIES
a) Commitments
The Company has entered in to various contracts and operating leases.
The Company's minimum future payments as at December 31, 2005 are
approximately as follows:
2006 $ 830,525
2007 876,077
2008 821,790
2009 959,766
2010 746,496
Thereafter ---
----------
$4,234,654
==========
b) 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 December 31, 2005, no pending
litigation or threatened claim is outstanding.
11. FINANCIAL INSTRUMENTS
a) Fair Value
Fair value estimates of financial instruments are made at a specific
point in time, based on relevant information about financial markets
and specific financial instruments. As these estimates are subjective
in nature, involving uncertainties and matters of significant
judgement, they cannot be determined with precision. Changes in
assumptions can significantly affect estimated fair values.
The carrying value of cash and cash equivalents, accounts payable and
accrued liabilities and amounts due to related parties approximates
their fair value because of the short-term nature of these instruments.
b) Interest rate, currency and credit risk
The Company is not subject to significant credit, currency and interest
risks arising from these financial instruments.
- --------------------------------------------------------------------------------
F-20
INTELLIPHARMACEUTICS LTD.
(FORMERLY READY CAPITAL CORP.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
- --------------------------------------------------------------------------------
12. SEGMENTED INFORMATION
The Company's operations comprise of a single reporting segment engaged
in the research, development, licensing and marketing of both new and
generic controlled release pharmaceutical products. As the operations
comprise a single reporting segment, amounts disclosed in the financial
statements for sales, earnings before income tax, amortization and
total assets also represent segmented amounts. In addition, all of the
Company's assets are in North America.
13. COMPARATIVE FIGURES
Certain comparative figures have been reclassified to conform to
current year's presentation.
- --------------------------------------------------------------------------------
F-21
================================================================================
INTELLIPHARMACEUTICS LTD.
(FORMERLY READY CAPITAL CORP.)
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDING DECEMBER 31, 2004
================================================================================
F-22
INTELLIPHARMACEUTICS LTD.
(FORMERLY READY CAPITAL CORP.)
DECEMBER 31, 2004
CONTENTS
PAGE
Consolidated Financial Statements:
Independent Registered Chartered Accountants' Report F-24
Consolidated Balance Sheet F-25
Consolidated Statement of Shareholders' Equity F-26
Consolidated Statement of Operations and Deficit F-27
Consolidated Statement of Cash Flows F-28
Notes to Consolidated Financial Statements F-29 - F-38
F-23
- --------------------------------------------------------------------------------
- INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS' REPORT -
To The Directors Of
IntelliPharmaCeutics Ltd.
We have audited the accompanying consolidated balance sheet of
IntelliPharmaCeutics Ltd. as at December 31, 2004 and the related consolidated
statements of operations, shareholders' equity and cash flows for the year then
ended. These financial statements are the responsibility of the company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with standards of the Public Company
Accounting Oversight Board (PCAOB) (United States). Those standards require that
we plan and perform an audit to obtain reasonable assurance whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, these consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
IntelliPharmaCeutics Ltd. as at December 31, 2004 and the results of its
operations and the cash flows for the year then ended in conformity with
generally accepted accounting principles in the United States of America.
Toronto, Ontario /S/ MINTZ & PARTNERS LLP
------------------------
April 15, 2005 CHARTERED ACCOUNTANTS
- --------------------------------------------------------------------------------
F-24
INTELLIPHARMACEUTICS LTD
(FORMERLY READY CAPITAL CORP.)
CONSOLIDATED BALANCE SHEET
AS AT DECEMBER 31, 2004
- ---------------------------------------------------------------------------------------------
A S S E T S
CURRENT
Cash and cash equivalents $ 4,250,889
Investment tax credits 291,769
Prepaid expenses and sundry assets 49,651
-----------
4,592,309
PROPERTY AND EQUIPMENT, net of accumulated depreciation of $204,577 (Note 4) 404,124
-----------
$ 4,996,433
===========
L I A B I L I T I E S
CURRENT
Accounts payable and accrued liabilities (Note 5) $ 222,779
Due to related parties (Note 5) 1,704,275
-----------
1,927,054
-----------
COMMITMENTS AND CONTINGENCIES (Note 10)
S H A R E H O L D E R S' E Q U I T Y
CAPITAL STOCK (Note 7)
Special Voting Shares - 20,000,000 authorized number of $0.001 par value
shares: Issued and Outstanding: 10,850,000 10,850
Common Stock - 40,000,000 authorized number of $0.001 par value:
Issued and Outstanding: 4,729,946 4,730
ADDITIONAL PAID IN CAPITAL 5,845,441
SUBSCRIPTION RECEIVABLE (13,000)
-----------
5,848,021
ACCUMULATED COMPREHENSIVE INCOME (139,328)
DEFICIT (2,639,314)
-----------
3,069,379
-----------
$ 4,996,433
===========
- --------------------------------------------------------------------------------
F-25
INTELLIPHARMACEUTICS LTD.
(FORMERLY READY CAPITAL CORP.)
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Amount
Quantity of Quantity
of Special Special of Additional
Voting Voting Common Common Paid-In
Shares Shares Shares Shares Capital
------------ -------- ----------- ------- -----------
Balance, January 1,2003 90,000,000 107
Foreign exchange translation gain (loss)
Net loss for the period
----------- ------- ----------- ------ ----------
Balance, December 31, 2003 0 0 90,000,000 107 0
Issued in connection with reverse acquisition 1,745,000 1,745 22,715
Issuance of common shares 35,000 35 6,965
Issuance of common shares for services 20,000 20 3,980
Share Consolidation (1 : 1.42005) (532,405) (532) 532
Acquisition of shares of IntelliPharmaCeutics Corp.
(Note 3) 10,850,000 10,850 (90,000,000) (107) (10,743)
Issuance of Common Shares 2,112,500 2,113 4,222,887
Other share issued 250,000 250 499,750
Share issuance costs (274,546)
Adjustment shares issued 412,351 412 (412)
Proceeds from Private Placement 681,000 681 1,361,319
Shares subscribed 6,500 6 12,994
Foreign exchange translation gain (loss)
Net loss for the period
----------- ------- ----------- ------ ----------
Balance, December 31, 2004 10,850,000 10,850 4,729,946 4,730 5,845,441
=========== ======= =========== ====== ==========
Share Accumulated Retained Total
Subscriptions Comprehensive Earnings/ Shareholders'
Received Income (loss) Deficit Equity
------------- ------------- ---------- -------------
Balance, January 1,2003 449 (95,802) (95,246)
Foreign exchange translation gain (loss) (91,605) (91,605)
Net loss for the period (881,159) (881,159)
---------- ---------- ---------- ----------
Balance, December 31, 2003 0 (91,156) (976,962) (1,068,011)
Issued in connection with reverse acquisition 24,460
Issuance of common shares 7,000
Issuance of common shares for services 4,000
Share Consolidation (1 : 1.42005) 0
Acquisition of shares of IntelliPharmaCeutics Corp.
(Note 3) 0
Issuance of Common Shares 4,225,000
Other share issued 500,000
Share issuance costs (274,546)
Adjustment shares issued 0
Proceeds from Private Placement 1,362,000
Shares subscribed (13,000) 0
Foreign exchange translation gain (loss) (48,172) (48,172)
Net loss for the period (1,662,352) (1,662,352)
---------- ---------- ---------- ----------
Balance, December 31, 2004 (13,000) (139,328) (2,639,314) 3,069,379
========== ========== ========== ==========
- --------------------------------------------------------------------------------
F-26
INTELLIPHARMACEUTICS LTD.
(FORMERLY READY CAPITAL CORP.)
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
FOR THE FISCAL YEAR ENDING DECEMBER 31, 2004 2003
- --------------------------------------------------------------------------------
REVENUES $ 102,332 $ --
------------ ------------
EXPENSES
Research and development 485,638 268,148
Wages and benefits 222,103 173,280
Administrative costs 173,509 181,826
Occupancy costs 106,539 87,578
Marketing 367,274 50,584
------------ ------------
1,355,063 761,416
------------ ------------
LOSS FROM OPERATIONS (1,252,731) (761,416)
AMORTIZATION 144,734 119,743
INTEREST EXPENSE 32,370 --
INTEREST INCOME (14,810) --
FOREIGN EXCHANGE LOSS 247,327 --
------------ ------------
NET LOSS (1,662,352) (881,159)
DEFICIT - Beginning of Year (976,962) (95,802)
------------ ------------
DEFICIT - End of Year $ (2,639,314) $ (976,962)
============ ============
EARNINGS (LOSS) PER COMMON SHARE
Loss per Common Share $ (0.14) $ (0.08)
============ ============
Weighted average Common
Shares outstanding 11,903,780 10,850,000
============ ============
- --------------------------------------------------------------------------------
F-27
INTELLIPHARMACEUTICS LTD.
(FORMERLY READY CAPITAL CORP.)
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE FISCAL YEAR ENDING DECEMBER 31, 2004 2003
- --------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Loss for the period $(1,662,352) $(881,159)
Items not affecting cash
Amortization 144,734 119,743
Non-cash expenditures (Note 6) 504,000 --
----------- ---------
(1,013,618) (761,416)
Net change in non-cash operating items
Investment tax credits (60,377) 282,939
Prepaid and sundry assets (22,385) 138,730
Accounts payable and accrued liabilities 76,954 (248,488)
----------- ---------
CASH FLOWS USED IN
OPERATING ACTIVITIES (1,019,426) (588,235)
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Deferred costs -- 35,962
Funds from related parties 159,726 552,409
Reverse takeover and issuance costs (274,545) --
Issuance of special voting shares 10,743 --
Issuance of capital stock 5,620,717 --
Issuance of share subscriptions receivable (13,000) --
----------- ---------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES 5,503,641 588,371
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (190,175) (114,731)
----------- ---------
CASH FLOWS USED IN INVESTING ACTIVITIES (190,175) (114,731)
----------- ---------
EFFECT OF EXCHANGE RATE (50,337) (91,605)
----------- ---------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 4,243,703 (206,200)
CASH AND CASH EQUIVALENTS
- Beginning of Period 7,186 213,386
----------- ---------
CASH AND CASH EQUIVALENTS
- End of Period $ 4,250,889 $ 7,186
=========== =========
SUPPLEMENTAL INFORMATION
Interest paid $ -- $ --
Income taxes paid $ -- $ --
- --------------------------------------------------------------------------------
F-28
INTELLIPHARMACEUTICS LTD.
(FORMERLY READY CAPITAL CORP.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
- --------------------------------------------------------------------------------
1. ORGANIZATION AND BASIS OF PRESENTATION
Description of the Business
IntelliPharmaCeutics Ltd. (the "Company") was incorporated in the laws
of the State of New York on February 23, 1988 under the name of Ready
Capital Corp. The Company did not commence principal operations until
2004 when it reincorporated in the State of Delaware, changed its name
to IntelliPharmaCeutics Ltd. and acquired an interest in
IntelliPharmaCeutics Corp., a Nova Scotia company ("IPC Corp."). IPC
Corp. is engaged in the research, development, licensing and marketing
of both new and generic controlled release pharmaceutical products.
Basis of Consolidation
Effective September 10, 2004, the Company completed a transaction with
IPC Corp. This transaction was accounted for as a reverse takeover as
the control of the Company was acquired by the former shareholders of
IPC Corp. After this transaction, the Company's name was changed to
IntelliPharmaCeutics Ltd. These consolidated financial statements
include the accounts of IPC Corp. as well as those of the Company, as
of September 10, 2004. Prior period results and comparatives are those
of IPC Corp. Although legally, the Company (formerly Ready Capital
Corp.) is regarded as the continuing company, IPC Corp., whose
shareholders now hold more than 50% of the voting shares of the
Company, is treated as the accounting acquirer under generally accepted
accounting principles. Consequently, the Company (formerly Ready
Capital Corp.) is deemed a continuation of IPC Corp. and control of the
assets and business of the Company (formerly Ready Capital Corp.) is
deemed to have been acquired in consideration for the issued shares.
All significant inter-company accounts and transactions have been
eliminated on consolidation. The accompanying consolidated financial
statements have been prepared in accordance with U.S. generally
accepted accounting principles.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
Cash and cash equivalents include demand deposits with banks, money
market accounts, and other short-term investments with original
maturities of 90 days or less. Balances of cash and cash equivalents in
financial institutions may at times exceed the government-insured
limits. Bank borrowings are considered to be financing activities.
Investment Tax Credits
The investment tax credits receivable are recoverable from the
Government of Canada under the Scientific Research & Experimental
Development incentive program. The amounts claimed under the program
represent management's best estimate based on research and development
costs incurred during the year. Realization is subject to government
approval. Any adjustment to the amounts claimed will be recognized in
the year in which the adjustment occurs. Investment tax credits (ITCs)
claimed relating to current expenditures are credited to the related
expense. ITCs claimed relating to capital expenditures are credited to
the capital assets.
- --------------------------------------------------------------------------------
F-29
INTELLIPHARMACEUTICS LTD.
(FORMERLY READY CAPITAL CORP.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Property and Equipment
Property and equipment are recorded at cost including interest
capitalized on assets under construction. Repairs and maintenance
expenditures are charged to income; major betterments and replacements
are capitalized. Depreciation and amortization rates are as follows:
Computer equipment 30% of the declining balance
Computer software 50% of the declining balance
Furniture and fixtures 20% of the declining balance
Laboratory equipment 30% of the declining balance
Leasehold improvements Straight line over the term of the lease
Revenue Recognition
Sales recognized to date represent services provided. In accordance
with guidance provided in Securities and Exchange Commission ("SEC")
Staff Accounting Bulletin No. 104, "Revenue Recognition in Financial
Statements" (SAB 104), primary purpose of which is to expand on
accounting guidance contained in SAB 101, these revenues are recognized
upon completion of services on the percentage completion basis.
Research and Development
Research and development costs are expensed as incurred in accordance
with SFAS No. 2. However, materials and equipment are capitalized and
depreciated over their useful lives if they have alternative future
uses. Approved investment tax credits are netted against the related
expenses or capital property.
Income taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, Accounting for Income
Taxes. Under SFAS No. 109, deferred tax assets and liabilities are
determined based on temporary differences between the financial
statement and tax bases of assets and liabilities and net operating
loss and credit carry forwards, using enacted tax rates in effect for
the year in which the differences are expected to reverse. Valuation
allowances are established when necessary to reduce deferred tax assets
to the amounts expected to be realized. A provision for income tax
expense is recognized for income taxes payable for the current period,
plus the net changes in deferred tax amounts.
Use of Estimates
The preparation of consolidated financial statements in conformity with
U.S. generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the consolidated financial statements, and
the reported amounts of revenue and expenses for the periods reported.
Actual results could differ from those estimates.
Costs of Raising Capital
Incremental costs incurred in respect of raising capital are charged
against equity proceeds raised.
- --------------------------------------------------------------------------------
F-30
INTELLIPHARMACEUTICS LTD.
(FORMERLY READY CAPITAL CORP.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Translation of Foreign Currencies
In accordance with SFAS No.52, "Foreign Currency Translation", the
financial statements of certain affiliates of the Company are measured
using local currency (Canadian dollar) as the functional currency.
Assets and liabilities have been translated at current exchange rates
and related revenue and expenses have been translated at average
monthly exchange rates. Gains and losses resulting from the translation
of affiliates' financial statements are included as a separate
component of shareholders' equity.
Fair Value of Financial Instruments
The Company estimates the fair value of its financial instruments based
on current interest rates, quoted market values or the current price of
financial instruments with similar terms. Unless otherwise disclosed
herein, the carrying value of financial instruments, especially those
with current maturities such as cash and cash equivalents, short-term
deposits, accounts receivable, other receivables, prepaid expenses,
accounts payable, accrued liabilities and long-term liabilities are
considered to approximate their fair values.
Stock-Based Compensation Plan
The Company accounts for employee stock options in accordance with
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock
Issued to Employees". Under APB No. 25, the Company applies the
intrinsic value method of accounting. SFAS No. 123, "Accounting for
Stock-Based Compensation", prescribes the recognition of compensation
expense based on fair value of options determined on the grant date.
However, SFAS No. 123 allows companies currently applying APB No. 25 to
continue applying the intrinsic value method under APB No. 25. For
companies that continue in applying the intrinsic value method, SFAS
No. 123 mandates certain pro forma disclosures as if the fair value
method had been utilized. The recently promulgated accounting standard,
FIN44 "Accounting for Certain Transactions involving Stock
Compensation", does not affect the financial statements of the Company.
Earnings (Loss) per Share
Net earnings (loss) per share is reported in accordance with SFAS No.
128, "Earnings Per Share". SFAS No. 128 requires dual presentation of
basic earnings per share ("EPS") and diluted EPS on the face of all
statements of earnings, for all entities with complex capital
structures. 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 these options,
warrants and convertible securities are excluded from diluted EPS if
the effect of such inclusion would be anti-dilutive. Fully diluted loss
per share is not provided, as the effect will be anti-dilutive.
Comprehensive Income
The Company follows Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income". This statement establishes
standards for reporting and display of comprehensive income and its
components. Comprehensive income is net income plus certain items that
are recorded directly to shareholders' equity bypassing net income.
Other than foreign exchange gains and losses, the Company has no other
comprehensive income (loss).
- --------------------------------------------------------------------------------
F-31
INTELLIPHARMACEUTICS LTD.
(FORMERLY READY CAPITAL CORP.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Segment Information
The Company follows SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information". SFAS No. 131 requires that the
Company disclose its operations in the business segment as viewed by
management.
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46")
Consolidation of Variable Interest Entities, which addresses the
consolidation of variable interest entities ("VIEs") by business
enterprises that are the primary beneficiaries. A VIE is an entity that
does not have sufficient equity investment at risk to permit it to
finance its activities without additional subordinated financial
support, or whose equity investors lack the characteristics of a
controlling financial interest. The primary beneficiary of a VIE is the
enterprise that has the majority of the risks or rewards associated
with the VIE. In December 2003, the FASB issued a revision to FIN 46,
Interpretation No. 46R ("FIN 46R"), to clarify some of the provisions
of FIN 46, and to defer certain entities from adopting until the end of
the first interim or annual reporting period ending after March 15,
2004. Application of FIN 46R is required in financial statements of
public entities that have interests in structures that are commonly
referred to as special-purpose entities for periods ending after
December 15, 2003. Application for all other types of VIEs is required
in financial statements for periods ending after March 15, 2004. We
believe we have no arrangements that would require the application of
FIN 46R. We have no material off-balance sheet arrangements.
In April 2003, the Financial Accounting Standards Board ("FASB") issued
SFAS 149 "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities". This Statement improves and clarifies financial
reporting for derivative instruments and hedging activities under SFAS
133 "Accounting for Derivative Instruments and Hedging Activities".
Management does not expect that the adoption of SFAS 149 will have a
material effect on the Company's operations or financial position.
In May 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 150 "Accounting for
Certain Financial Instruments with Characteristics of both Liabilities
and Equity" (the "Statement"). The Statement establishes standards for
how an issuer classifies and measures certain financial instruments
with characteristics of both liabilities and equity. The Statement is
generally effective for financial instruments entered into or modified
after May 31, 2003, and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. The adoption of
this Statement had no effect on the Company's consolidated financial
statements.
In December 2004, the Financial Accounting Standard Boards ("FASB")
issues Statements No. 123 (R), Share - Based Payments which will
require compensation costs related to share based payment transactions
to be recognized in the financial statements. As permitted by the
predecessor Statement No. 123, we do not recognize compensation expense
with respect to stock options we have issued because the option price
was no greater than the market price at the time the option was issued.
Statement 123(R) will be effective for us in our fiscal quarter
beginning January 1, 2006. We have not completed an evaluation of the
impact of Adopting Statements 123 (R).
- --------------------------------------------------------------------------------
F-32
INTELLIPHARMACEUTICS LTD.
(FORMERLY READY CAPITAL CORP.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
In November 2004, the FASB ratified the Emerging Issues Task Force
("EITF") consensus on Issue 03 -13, "Applying the Conditions in
Paragraph 42 of FASB Statement No 144, "Accounting for the impairment
or Disposal of Long - Lived Assets," in Determining Whether to Report
Discontinued Operations. The adoption of the new pronouncements will
not have a material impact on our financial position or results of
operations.
In November 2004, the FASB issued Statement No. 151 Inventory costs, an
amendment of ARB No. 43, Chapter 4, to clarify that abnormal amounts of
idle facility expense, freight, handling costs and wasted material
(spoilage) should be recognized as current period charges, and that
fixed production overheads should be allocated to inventory based on
normal capacity of production facilities. Statement No. 151 will be
effective for our fiscal year beginning January 1,2006, and its
adoption will not have a material impact on our financial position or
Results of operations.
3. ACQUISITION - REVERSE ACQUISITION
On September 10, 2004, pursuant to the Company's private placement
memorandum dated May 5, 2004 and the Share Exchange Agreement dated
February 23, 2004 (the "Share Agreement") the Company raised gross
proceeds of $4,225,000 by the issuance of 2,112,500 shares of its
common stock, effecting the merger of the Company's wholly owned
subsidiary with IPC Corp. and effected a 1 for 1.42005 reverse stock
split of its common stock. Then on December 30, 2004, the Company
issued an additional 687,500 shares of common stock for gross proceeds
of $1,375,000. As a result of these transactions ("Transactions") the
Company has 50% voting interest in IPC Corp. In addition, pursuant to
the Share Agreement, the Company issued 10,850,000 Special Voting
shares to the former shareholders of IPC Corp., resulting in the
previous owners of IPC Corp. owning approximately 69.6% of the
Company's voting capital stock.
As a result of the Transactions, IPC Corp.'s shareholder,
IntelliPharmaCeutics Inc. ("IPC Inc."), acquired 69.6% of the shares in
the Company. Other parties own the remaining approximately 30.4%. The
effect of the Transactions is that the shareholders of the Company,
through their ownership of common shares in the Company, have an
indirect equity interest in IPC Corp. that is equal to the percentage
that their common shares represent of all shares issued in the Company,
both common and voting. IPC Inc. has a direct equity interest in IPC
Corp. that is equal to the percentage that IPC Inc.'s voting shares
represent of all shares issued in the Company, both common and voting.
The shares owned by the Company and IPC Inc. in IPC Corp., give each of
the Company and IPC Inc. respectively, 50% of the voting rights in IPC
Corp.
Pursuant to the Share Exchange Agreement and the rights applicable to
its shares, IPC Inc. has the right to exchange its equity shares in IPC
Corp. for common shares of the Company on a share-for-share basis, that
ultimately provides IPC Inc. with the right to own the same percentage
of common shares of the Company that it would hold if its present
voting shares in the Company were common shares, this being
approximately 69.6% as at December 31, 2004 (and a corresponding number
of its voting shares in the Company are cancelled automatically on the
occurrence of any such exchange).
Pending exercise of the exchange rights by IPC Inc., the Share Exchange
Agreement provides that the shares that IPC Inc. owns in IPC Corp. have
contractual rights that make them the economic equivalent of common
shares of the Company. These entitle IPC Inc. to receive from IPC
Corp., on an equal share for share basis with the Company's common
shares, all dividends and distributions of property made by the
Company.
- --------------------------------------------------------------------------------
F-33
INTELLIPHARMACEUTICS LTD.
(FORMERLY READY CAPITAL CORP.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
- --------------------------------------------------------------------------------
3. ACQUISITION - REVERSE ACQUISITION - continued
In accordance with SFAS 141, "Accounting for Business Combination", the
reverse acquisition transaction has been accounted for using the
purchase method. The purchase value is based on the fair value of the
accounting acquiree's assets and liabilities. At the time of the
transaction, the net liabilities of IntelliPharmaCeutics Ltd. was as
follows:
Cash $ 47,981
Accounts payable and accrued liabilities (21,745)
Transactional Costs (174,854)
-----------
$ (148,618)
==========
4. PROPERTY AND EQUIPMENT
Net
Accumulated Carrying
Cost Depreciation Value
------- ------------ --------
$ $ $
Computer equipment 67,330 30,043 37,287
Computer software 2,984 2,984 0
Furniture and fixtures 40,701 12,382 28,319
Laboratory equipment 353,193 156,760 196,433
Leasehold improvements 144,493 2,408 142,085
------- ------- -------
December 31, 2004 608,701 204,577 404,124
------- ------- -------
Depreciation during the year ending December 31, 2004 was $144,734
(2003 - $119,743)
5. RELATED PARTY TRANSACTIONS
Amounts due to the related parties are payable to entities controlled
by shareholders, officers or directors of the Company, as are
transactions with these related parties.
2004
----------
Promissory note payable to shareholders, unsecured,
non-interest bearing prior to September 2004.
Starting in September 2004, the promissory note
bears a 6% annual interest rate on the outstanding
loan balance and the loan is secured by and repayable
in any month at the rate of greater of 25% of gross
revenues or 100% of Scientific Research & Experimental
Development tax credits received in cash from Canadian
tax authorities in respect of research carried out
prior to September 10, 2004 (2004 - CA$ 2,018,797) $1,679,532
IntelliPharmaCeutics, Inc., an entity controlled by
shareholders, officers and directors, unsecured,
non-interest bearing with no fixed repayment
terms (2004 - CA$29,742) 24,744
----------
$1,704,275
==========
- --------------------------------------------------------------------------------
F-34
INTELLIPHARMACEUTICS LTD.
(FORMERLY READY CAPITAL CORP.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
- --------------------------------------------------------------------------------
5. RELATED PARTY TRANSACTIONS - continued
Interest calculated on the promissory note payable to shareholders for
the year ended December 31, 2004 in the amount of $32,370 is included
in accounts payable and accrued liabilities. In the event of default on
the promissory notes, any amount unpaid from the date of demand shall
bear interest at the rate of 1%, compounded monthly.
In addition, the Company issued 270,000 common shares to related
parties (Note 6)
6. NON CASH TRANSACTIONS
During the fiscal year ending December 31, 2004, the Company had the
following non cash transactions:
>> Issued 20,000 shares to its Corporate Secretary for past services
valued at $4,000;
>> Issued 50,000 shares to an employee for past services valued at
$100,000;
>> Issued 100,000 shares to an Officer of the Company for past
services valued at $200,000;
>> Issued 100,000 shares to an entity for services valued at
$200,000.
These transactions are in the normal course of operations and have been
valued at the exchange amount which is the amount of consideration
established and agreed to by the parties. (See Note 5)
7. CAPITAL STOCK
The Company is authorized to issue up to 40,000,000 common shares with
a par value of $0.001. Each common share entitles the holder to one
vote. In addition, the Company is authorized to issue up to 20,000,000
preferred shares ("Special Voting Shares") with a par value of $0.001.
All reference to the common shares of the Company is after taking into
consideration the 1.42005 old common shares for one (1) new common
share consolidation, on a retroactive basis, including the weighted
average shares outstanding that took effect as of September 10, 2004.
During the period, the Company had the following capital transactions:
1. issued 10,850,000 common shares for acquisition of shares in IPC
Corp.;
2. issued 2,800,000 common shares for gross proceeds of $5,600,000,
in addition 278,500 warrants were issued in conjunction with this
financing, where each warrant provides the holder the option to
acquire one (1) common share for a price of $3.00 for period of
up to 3 years; and
3. issued 270,000 common shares for past services valued at
$504,000. (Note 6)
The expiry date of the warrants, which can be exercised that are
mentioned above have the following expiry dates:
Number of Warrants Expiry Date
50,000 September 10, 2006
228,500 September 10, 2007
No fair value was attributed to the warrants as at the time of issuance
as there was no market value of the common shares for which to base the
fair market value of the warrants.
- --------------------------------------------------------------------------------
F-35
INTELLIPHARMACEUTICS LTD.
(FORMERLY READY CAPITAL CORP.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
- --------------------------------------------------------------------------------
8. OPTIONS AND WARRANTS
The Company currently issues stock options at the direction of the
Board of Directors. To date, non-qualified stock options have been
granted to select key employees under terms and conditions determined
by the Board of Directors at the time the options are issued. Presented
below is a summary of stock option plan activity:
Wt. Avg. Wt. Avg.
Exercise Options Exercise
Number Price Exercisable Price
---------- -------- ----------- ---------
Balance, January 1, 2003 Nil N/A Nil N/A
---------- -------- ----------- ---------
Balance, December 31, 2003 Nil N/A Nil N/A
Issued in 2004 5,000,000 $2.00 Nil 2.00
---------- -------- ----------- ---------
Balance, December 31, 2004 5,000,000 $2.00 Nil 2.00
========== ======== =========== =========
Options outstanding and exercisable at December 31, 2004 are as
follows:
Outstanding Exercisable
Wt. Avg. Wt. Avg. Wt. Avg.
Expiry Remaining Remaining Exercise
Price Number Date Life Exercise Price Number Price
----- --------- ------ --------- -------------- ------ --------
$2.00 5,000,000 N/A Nil $2.00 Nil 2.00
SFAS No.123 requires entities that account for awards for stock-based
compensation to employees in accordance with APB No. 25 to present pro
forma disclosures of net income and earnings per share as if
compensation cost was measured at the date of grant based on fair value
of the award. The fair value for these options was estimated at the
date of grant using a Black-Scholes option-pricing model with the
following weighted-average assumptions:
2004
--------
Expected life of the option 10 years
Risk free interest rate 3.0%
Expected volatility 50.0%
Expected dividend yield 0.0%
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of
traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion,
the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
- --------------------------------------------------------------------------------
F-36
INTELLIPHARMACEUTICS LTD.
(FORMERLY READY CAPITAL CORP.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
- --------------------------------------------------------------------------------
8. OPTIONS AND WARRANTS - continued
Based on the above information, the Company would disclose a
compensation expense on a pro-forma basis of approximately $4,428,000
when the options are vested. As no milestones were reached during the
year and no options vested, a pro-forma disclosure is not being made.
9. PROVISION FOR INCOME TAX
The Company files US Federal income tax returns for its US operations.
Separate income tax returns are filed, as locally required.
There was no provision for income taxes for the years ended December
31, 2004 and 2003.
The total provision for income taxes differs from that amount which
would be computed by applying the United States federal income tax rate
to income (loss) before provision for income taxes. The reasons for
these differences are as follows:
Year Ended December 31, 2004 2003
Amount % Amount %
--------- ----- --------- -----
Statutory income tax rate (recovery) $(600,109) (36.1) $(318,098) 36.1
Non deductible items 64,589 3.9 175,945 20.0
--------- ----- --------- -----
Net taxes and effective rate (535,520) (32.2) (142,103) (16.1)
Valuation allowance 535,520 32.2 142,103 16.1
--------- ----- --------- -----
$ Nil 0.0 $ Nil 0.0
========= ===== ========= =====
The Company recognizes deferred tax liabilities and assets for the
expected future tax consequences of temporary differences between the
carrying amounts and the tax basis of assets and liabilities and net
operating loss carry-forwards. Temporary differences and
carry-forwards, which give rise to deferred tax assets and liabilities,
are as follows:
Year Ended December 31, 2004 2003
Component Tax Effect Component Tax Effect
----------- ---------- --------- ----------
Tax loss benefit $ 1,662,352 $ 535,520 $ 881,159 $ 142,103
Less valuation allowance (1,662,352) (535,520) (881,159) (142,103)
----------- --------- --------- ---------
Net deferred tax assets $ Nil $ Nil $ Nil $ Nil
=========== ========= ========= =========
At December 31, 2004, the Company had cumulative net operating loss
carry-forwards of approximately $50,000 and $1,612,000 in the United
States and Canada respectively. These amounts will expire in various
years through 2011. The related deferred tax assets have been
completely offset by a valuation allowance. The Company has no
significant deferred tax liabilities.
- --------------------------------------------------------------------------------
F-37
INTELLIPHARMACEUTICS LTD.
(FORMERLY READY CAPITAL CORP.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
- --------------------------------------------------------------------------------
10. COMMITMENTS AND CONTINGENCIES
a) Commitments
The Company has entered in to various contracts and operating leases.
The Company's minimum future payments as at December 31, 2004 are
approximately as follows:
2005 $ 498,652
2006 318,751
2007 273,349
2008 87,948
2009 80,475
Thereafter ---
----------
$1,259,175
==========
b) 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 December 31, 2004, no pending
litigation or threatened claim is outstanding.
11. FINANCIAL INSTRUMENTS
a) Fair Value
Fair value estimates of financial instruments are made at a specific
point in time, based on relevant information about financial markets
and specific financial instruments. As these estimates are subjective
in nature, involving uncertainties and matters of significant
judgement, they cannot be determined with precision. Changes in
assumptions can significantly affect estimated fair values.
The carrying value of cash and cash equivalents, accounts payable and
accrued liabilities and amounts due to related parties approximates
their fair value because of the short-term nature of these instruments.
b) Interest rate, currency and credit risk
The Company is not subject to significant credit, currency and interest
risks arising from these financial instruments.
12. SEGMENTED INFORMATION
The Company's operations comprise of a single reporting segment engaged
in the research, development, licensing and marketing of both new and
generic controlled release pharmaceutical products. As the operations
comprise a single reporting segment, amounts disclosed in the financial
statements for sales, earnings before income tax, amortization and
total assets also represent segmented amounts. In addition, all of the
Company's assets are in North America.
- --------------------------------------------------------------------------------
F-38
INTELLIPHARMACEUTICS CORP.
FINANCIAL STATEMENTS
DECEMBER 31, 2003
F-40
INTELLIPHARMACEUTICS CORP.
CONTENTS
DECEMBER 31, 2003
Page
Auditors' Report F-42
Financial Statements
Balance Sheet F-43
Statement of Deficit F-44
Statement of Operations F-45
Statement of Cash Flows F-46
Notes to Financial Statements F-47 - F-51
F-41
AUDITORS' REPORT
To: The Shareholder of
IntelliPharmaCeutics Corp.
We have audited the balance sheet of IntelliPharmaCeutics Corp. as at December
31, 2003 and the statements of deficit, operations, and cash flows for the year
then ended. These financial statements are the responsibility of the company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with Canadian generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the company as at December 31, 2003, and the
results of its operations and its cash flows for the year then ended in
accordance with Canadian generally accepted accounting principles.
Toronto, Ontario MINTZ & PARTNERS LLP
--------------------
March 12, 2004 CHARTERED ACCOUNTANTS
F-42
INTELLIPHARMACEUTICS CORP.
BALANCE SHEET
AS AT DECEMBER 31 2003 2002
- ------------------------------------------------------- ------------ ------------
ASSETS
CURRENT
Cash $ 9,317 $ 336,638
Investment tax credits receivable 300,000 27,080
Inventory - 234,915
Prepaid expenses and sundry receivable 35,350 811,289
------------ ------------
344,667 1,409,922
PROPERTY AND EQUIPMENT (note 4) 462,227 570,351
GOODWILL AND INTANGIBLE ASSETS (note 5) 2 2
DEFERRED CHARGES - 56,733
------------ ------------
$ 806,896 $ 2,037,008
============ ============
LIABILITIES
CURRENT
Accounts payable and accrued liabilities $ 189,062 $ 622,066
Due to related parties (note 6) 2,002,508 1,565,200
------------ ------------
2,191,570 2,187,266
------------ ------------
SHAREHOLDER'S DEFICIT
CAPITAL STOCK (note 7) 169 169
DEFICIT (1,384,843) (150,427)
------------ ------------
(1,384,674) (150,258)
------------ ------------
$ 806,896 $ 2,037,008
============ ============
F-43
INTELLIPHARMACEUTICS CORP.
STATEMENT OF DEFICIT
FOR THE YEAR ENDED DECEMBER 31 2003 2002
(1 1/2 MONTH)
- ---------------------------------------------- ------------ ------------
(DEFICIT) RETAINED EARNINGS, beginning of year $ (150,427) $ -
Related party transaction adjustment - 92,609
Net loss (1,234,416) (243,036)
------------ ------------
DEFICIT, end of year $ (1,384,843) $ (150,427)
============ ============
F-44
INTELLIPHARMACEUTICS CORP.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31 2003 2002
(1 1/2 MONTH)
- -------------------------------------- ------------ ------------
EXPENSES
Research and development (note 12) $ 375,649 $ 133,801
Wages and benefits 143,364 16,526
Legal 135,167 -
Rent 109,851 13,822
Travel 63,299 8,646
Consulting fees 42,643 8,122
Automotive 56,741 3,264
Professional fees 46,342 5,600
Insurance (note 12) 36,716 6,501
Office and general 20,604 6,011
Telephone 10,754 1,437
Repairs and maintenance 8,835 1,341
Subscriptions and journals 4,481 7,474
Security 4,002 2,208
Advertising and promotion 3,768 2,668
Meals and entertainment 2,336 742
Donations 1,460 -
Memberships 1,153 -
Interest and bank charges (497) 266
Amortization 167,748 24,607
------------ ------------
NET LOSS $ (1,234,416) $ (243,036)
============ ============
F-45
INTELLIPHARMACEUTICS CORP.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31 2003 2002
(1 1/2 MONTH)
- ------------------------------------------------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (1,234,416) $ (243,036)
Item not affecting cash:
Amortization 167,748 24,607
------------ ------------
(1,066,668) (218,429)
Changes in non-cash working capital items (note 8) 742,239 1,113,981
------------ ------------
(324,429) 895,552
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Deferred financing costs 56,733 (56,733)
Purchases of property and equipment (59,625) (502,350)
------------ ------------
(2,892) (559,083)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITY
Issuance of capital stock - 169
------------ ------------
(DECREASE) INCREASE IN CASH (327,321) 336,638
CASH, beginning of year 336,638 -
------------ ------------
CASH, end of year $ 9,317 $ 336,638
============ ============
F-46
INTELLIPHARMACEUTICS CORP.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
1. NATURE OF ORGANIZATION
IntelliPharmaCeutics Corp. was incorporated under the Canada Corporation
Act on November 15, 2002.
2. GOING CONCERN
These financial statements have been prepared in accordance with Canadian
generally accepted accounting principles applicable to a going concern.
Accordingly, they do not give effect to adjustments that would be
necessary should the company be unable to continue as a going concern. In
other than the normal course of business, the company may be required to
realize its assets and liquidate its liabilities and commitments at
amounts different from those in the accompanying financial statements.
Because the company is in the development stage of research and
development on the technology of drug delivery systems, no revenue is
generated. The company has a need for equity capital and financing for
working capital requirements. No agreements with lenders or investors have
been reached and there is no assurance that such will take place.
3. SIGNIFICANT ACCOUNTING POLICIES
These financial statements are prepared in accordance with Canadian
generally accepted accounting principles. The significant policies are
detailed as follows:
(a) PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. The company provides for
amortization using the following methods at rates designed to amortize
the cost of the property and equipment over their estimated useful
lives. The annual amortization rates and methods are as follows:
Laboratory equipment 30%Declining balance
Furniture and fixtures 20%Declining balance
Computer equipment 30%Declining balance
Computer software 50%Declining balance
Amortization of leasehold improvements is recorded over the remaining
term of the lease.
(b) FUTURE INCOME TAXES
Future income tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial
statement carrying amount and their tax bases. Future income tax
assets are recognized for the benefit of any deductions or losses
available to be carried forward to future periods for tax purposes
that are likely to be realized. These amounts are measured using
enacted or substantively enacted tax rates and are re-measured
annually for changes in these rates. Any future income tax assets are
reassessed each year to determine if a valuation allowance is
required. Any effect of the re-measurement or reassessment is
recognized in the period of the change.
F-47
INTELLIPHARMACEUTICS CORP.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
3. SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(c) GOODWILL
Goodwill and intangible assets with an indefinite life are not
amortized, are reviewed for impairment annually.
(d) FOREIGN CURRENCY TRANSLATION
Monetary assets and liabilities of the Corporation which are
denominated in foreign currencies are translated at year-end exchange
rates. Other assets and liabilities are translated at rates in effect
at the date the assets were acquired and liabilities incurred. Revenue
and expenses are translated at the rates of exchange in effect at
their transaction dates. The resulting gains or losses are included in
operations.
(e) USE OF ESTIMATES
The preparation of financial statements in conformity with Canadian
generally accepted accounting principles 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 balance sheet date and the reported amounts of revenues and
expenses during the year. Actual results could differ from those
estimates.
(f) FINANCIAL INSTRUMENTS
The company's financial instruments consist of cash, investment tax
credits receivable, sundry receivable, accounts payable and accrued
liabilities and loan payable to related party. Unless otherwise noted
it is management's opinion that the company is not exposed to
significant interest, currency or credit risks.
(g) INVESTMENT TAX CREDITS RECEIVABLE
The investment tax credits receivable are recoverable from the
Government of Canada under the Scientific Research & Experimental
Development Incentive Program. The amounts claimed under the program
represent management's best Estimate based on research and development
costs incurred during the year. Realization is subject to government
approval. Any adjustment to the amounts claimed will be recognized in
the year in which the adjustment occurs.
F-48
INTELLIPHARMACEUTICS CORP.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
4. PROPERTY AND EQUIPMENT
2003 2002
--------------------------------------------------- -------------
ACCUMULATED NET CARRYING
COST AMORTIZATION NET CARRYING AMOUNT AMOUNT
---------- ------------ ------------------- -------------
Laboratory equipment $ 416,567 $ 129,397 $ 287,170 $ 381,375
Furniture and fixtures 28,887 6,373 22,514 28,143
Leasehold improvements 134,797 37,888 96,909 123,868
Computer equipment 70,744 16,904 53,840 33,378
Computer software 3,587 1,793 1,794 3,587
---------- ------------ ------------------- -------------
$ 654,582 $ 192,355 $ 462,227 $ 570,351
========== ============ =================== =============
5. GOODWILL AND INTANGIBLE ASSETS
2003 2002
---- ----
Goodwill and intangible assets $ 2 $ 2
==== ====
6. DUE TO RELATED PARTIES
2003 2002
------------ ------------
Promissory notes
Dr. Isa and Amina Odidi, unsecured,
non-interest bearing and repayable
immediately on demand $ 1,971,151 $ 1,565,200
Advances
IntelliPharmaCeutics Inc., unsecured,
non-interest bearing and with no fixed
repayment terms 31,357 -
------------ ------------
$ 2,002,508 $ 1,565,200
============ ============
In event of default on the promissory notes, any amount unpaid from the
date of demand shall bear interest at the rate of 1%, compounded monthly.
IntelliPharmaCeutics Inc. is the sole shareholder of the company. Dr. Isa
and Amina Odidi are shareholders of IntelliPharmaCeutics Inc.
F-49
INTELLIPHARMACEUTICS CORP.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
7. CAPITAL STOCK
2003 2002
------ ------
Authorized
Unlimited number of first preferred
shares, issuable in series
Unlimited number of common shares
Issued
90,000,000 common shares $ 169 $ 169
====== ======
8. CHANGES IN NON-CASH WORKING CAPITAL ITEMS
2003 2002
----------- -------------
Investment tax credits receivable $ (272,920) $ (27,080)
Inventory 234,915 (234,915)
Prepaid expenses and sundry receivable 775,939 (811,289)
Accounts payable and accrued liabilities (433,003) 622,065
Due to related parties 437,308 1,565,200
----------- -------------
$ 742,239 $ 1,113,981
=========== =============
9. NON-CAPITAL LOSS
The company has a non-capital loss carry-forward in the amount of $831,184
which may be applied against future years' taxable income, the benefits of
which have not been recognized in the accounts as the earning of future
taxable income is unsure. The losses expire as follows:
Year ending December 31, 2009 $ 113,524
Year ending December 31, 2010 717,660
----------
$ 831,184
==========
10. FINANCIAL INSTRUMENTS
Financial instruments consist of recorded amounts of sundry receivable
which will result in future cash receipts, as well as accounts payable and
accruals and loan payable to related party which will result in future
cash outlays.
The company is exposed to the following risks in respect of certain of the
financial instruments held:
(a) Fair value
The carrying values of the financial instruments noted above
approximate their fair values.
F-50
INTELLIPHARMACEUTICS CORP.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
10. FINANCIAL INSTRUMENTS, CONTINUED
(b) Currency risk
Currency risk is the risk to the company's earnings that arises from
fluctuations of foreign exchange rates and the degree of volatility of
these rates. The company does not use derivative instruments to reduce
its exposure to foreign currency risk.
11. LEASE COMMITMENT
The company's total commitment, under a property lease agreement,
exclusive of realty tax and occupancy costs, is as follows:
2004 $ 32,447
=========
12. RESEARCH AND DEVELOPMENT COSTS AND GOVERNMENT ASSISTANCE
Research and development costs of $705,139 less investment tax credits
earned of $329,490 were charged to research and development expense.
Included in insurance expense is $31,000 of insurance for clinical trails
related to the Company's research and development activities.
F-51
READY CAPITAL CORP.
(A Development Stage Enterprise)
INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Certified Public Accountants F-53
Financial Statements
Balance Sheets F-54
Statements of Operations F-55
Statement of Stockholders' Equity (Deficiency) F-56
Statements of Cash Flows F-57
Notes to Financial Statements F-58 to F-60
F-52
Kahn Boyd Levychin, LLP
Certified Public Accountants
70-20 Austin Street ~ Forest Hills, NY 11375
718.575.5750
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Ready Capital Corp.
We have audited the accompanying balance sheets of Ready Capital Corp. (a
development stage enterprise) as of December 31, 2003 and 2002, and the related
statements of operations, stockholders' equity (deficiency), and cash flows for
the years then ended and for the period from inception (February 23, 1988) to
December 31, 2003. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits in accordance
with auditing standards generally accepted in the United States of America.
Those standards require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Ready Capital Corp. as of
December 31, 2003 and 2002, and the results of its operations and its cash flows
for the years then ended and for the period from inception (February 23, 1988)
to December 31, 2003 in conformity with accounting principles generally accepted
in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note A to the
financial statements, the Company suffered losses from operations, has minimal
cash and otherwise limited financial resources, raising substantial doubt about
its ability to continue as a going concern. Management's plans in regard to
these matters are also described in Note A. The financial statements do not
include any adjustments relating to the recoverability and classification of
asset carrying amounts or the amounts and classifications of liabilities that
might result should the Company be unable to continue as a going concern.
KAHN BOYD LEVYCHIN, LLP
New York, New York
April 26, 2004, except as to Note H, which is dated as of June 22, 2004
F-53
READY CAPITAL CORP.
(A Development Stage Enterprise)
BALANCE SHEETS
December 31,
2003 2002
------------- -------------
ASSETS
CURRENT ASSETS
Cash $ 20,085 $ 10,155
Deferred offering costs 5,000 -
Other current assets 266 696
------------- -------------
Total current assets $ 25,351 $ 10,851
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES
Accrued expenses $ 3,100 $ 300
------------- -------------
Total current liabilities 3,100 300
Loans Payable - stockholders - non-interest bearing 17,791 17,791
------------- -------------
TOTAL LIABILITIES 20,891 18,091
------------- -------------
RELATED PARTY TRANSACTIONS - NOTE E
COMMITMENTS AND OTHER COMMENTS - NOTE G
SUBSEQUENT EVENTS - NOTE H
STOCKHOLDERS' EQUITY (DEFICIENCY)
Common stock - authorized, 25,000,000 shares of $.001 par value;
1,745,000 and 1,565,000 shares issued and outstanding at
December 31, 2003 and 2002, respectively 1,745 1,565
Additional paid-in capital 237,534 201,714
Less: subscriptions receivable for 100,000 shares (20,000) -
Accumulated deficit (214,819) (210,519)
------------- -------------
4,460 (7,240)
------------- -------------
$ 25,351 $ 10,851
============= =============
The accompanying notes are an integral part of these financial statements
F-54
READY CAPITAL CORP.
(A Development Stage Enterprise)
STATEMENTS OF OPERATIONS
Inception
February 23,
Year Ended 1988 to
December 31, December 31, December 31,
2003 2002 2003
------------ ------------ -------------
Income $ - $ - $ -
Operating expenses
General and administrative 4,300 299 138,632
----------- ------------ -------------
Operating loss (4,300) (299) (138,632)
Nonoperating (expenses)
Loss on sale of marketable securities - - (47,487)
Provision for write off of loans to former stockholders - - (28,700)
------------ ------------ -------------
NET LOSS $ (4,300) $ (299) $ (214,819)
============ ============ =============
Net loss per share - basic and diluted $ NIL $ NIL $ (0.20)
============ ============ =============
Weighted average number of shares outstanding 1,565,888 1,565,000 1,075,393
============ ============ =============
The accompanying notes are an integral part of these financial statements
F-55
READY CAPITAL CORP.
(A Development Stage Enterprise)
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
PERIOD FROM INCEPTION (FEBRUARY 23, 1988) TO DECEMBER 31, 2003
Deficit
Accumulated
Stock in the
Common Stock Additional Subscriptions Development
Shares Par Value Paid-In Capital Receivable Stage Total
--------- --------- --------------- ------------- ------------ ------
INCEPTION - FEBRUARY 23, 1988 - $ - $ - $ - $ - $ -
Issuance of common stock to officers, directors and
founders for cash 600,000 600 1,600 2,200
Proceeds from sale of common stock to the public,
less stock offering costs of $34,271 200,000 200 115,729 115,929
Net Income (Loss) (12,561) (12,561)
--------- --------- --------------- ------------ -------
BALANCE AT JANUARY 31, 1989 800,000 800 117,329 (12,561) 105,568
Net Income (Loss) (53,202) (53,202)
--------- --------- --------------- ------------ -------
BALANCE AT JANUARY 31, 1990 800,000 800 117,329 (65,763) 52,366
Net Income (Loss) (7,710) (7,710)
--------- --------- --------------- ------------ -------
BALANCE AT JANUARY 31, 1991 800,000 800 117,329 (73,473) 44,656
Net Income (Loss) (20,862) (20,862)
--------- --------- --------------- ------------ -------
BALANCE AT JANUARY 31, 1992 800,000 800 117,329 (94,335) 23,794
Net Income (Loss) (3,138) (3,138)
--------- --------- --------------- ------------ -------
BALANCE AT JANUARY 31, 1993 800,000 800 117,329 (97,473) 20,656
Net Income (Loss) (2,860) (2,860)
--------- --------- --------------- ------------ -------
BALANCE AT JANUARY 31, 1994 800,000 800 117,329 (100,333) 17,796
Net Income (Loss) (4,691) (4,691)
--------- --------- --------------- ------------ -------
BALANCE AT JANUARY 31, 1995 800,000 800 117,329 (105,024) 13,105
Net Income (Loss) (31,800) (31,800)
--------- --------- --------------- ------------ -------
BALANCE AT JANUARY 31, 1996 800,000 800 117,329 (136,824) (18,695)
Net Income (Loss) (3,943) (3,943)
--------- --------- --------------- ------------ -------
BALANCE AT JANUARY 31, 1997 800,000 800 117,329 (140,767) (22,638)
Net Income (Loss) (12,257) (12,257)
--------- --------- --------------- ------------ -------
BALANCE AT JANUARY 31, 1998 800,000 800 117,329 (153,024) (34,895)
Net Income (Loss) (2,150) (2,150)
--------- --------- --------------- ------------ -------
BALANCE AT JANUARY 31, 1999 800,000 800 117,329 (155,174) (37,045)
Net Income (Loss) - -
--------- --------- --------------- ------------ -------
BALANCE AT JANUARY 31, 2000 800,000 800 117,329 (155,174) (37,045)
Issuance of common stock for services 100,000 100 19,900 20,000
Net Income (Loss) (4,500) (4,500)
--------- --------- --------------- ------------ -------
BALANCE AT JANUARY 31, 2001 900,000 900 137,229 (159,674) (21,545)
Issuance of common stock for services 500,000 500 49,500 50,000
Issuance of common stock 165,000 165 14,985 15,150
Net Income (Loss) (50,546) (50,546)
--------- --------- --------------- ------------ -------
BALANCE AT JANUARY 31, 2002 1,565,000 1,565 201,714 (210,220) (6,941)
Net Income (Loss) - 11 months (299) (299)
--------- --------- --------------- ------------ -------
BALANCE AT DECEMBER 31, 2002 1,565,000 1,565 201,714 (210,519) (7,240)
Issuance of common stock 80,000 80 15,920 16,000
Common stock subscribed but not paid for 100,000 100 19,900 (20,000) -
Net Income (Loss) (4,300) (4,300)
--------- --------- --------------- ------------- ------------ -------
BALANCE AT DECEMBER 31, 2003 1,745,000 $ 1,745 $ 237,534 $ (20,000) $ (214,819) $ 4,460
========= ========= =============== ============= ============ =======
The accompanying notes are an integral part of these financial statements
F-56
READY CAPITAL CORP.
(A Development Stage Enterprise)
STATEMENTS OF CASH FLOWS
Inception
Year Ended February 23,
December December 1988 to
31, 31, December
2003 2002 31, 2003
---------- -------- --------------
Cash flows from operating activities:
Net Loss $ (4,300) $ (299) $ (214,819)
---------- -------- --------------
Adjustments to reconcile net loss to net cash used in operating activities
Expenses paid by issuance of common stock - - 70,000
Provision for write off of loans to former stockholders - - 28,700
Changes in assets and liabilities
Other current assets 430 - (266)
Accrued expenses 2,800 299 3,100
---------- -------- --------------
Total adjustments 3,230 299 101,534
---------- -------- --------------
Net cash used for operating activities (1,070) 0 (113,285)
---------- -------- --------------
Cash flows from investing activities:
Loans to former stockholders - - (28,700)
---------- -------- --------------
Net cash used for investing activities - - (28,700)
---------- -------- --------------
Cash flows from financing activities:
Payment of deferred offering costs (5,000) - (5,000)
Proceeds of loans from stockholders - - 17,791
Proceeds from sale of common stock, net of costs of $-0-
in 2003 and $34,271 since inception 16,000 - 149,279
---------- -------- --------------
Net cash provided by financing activities 11,000 - 162,070
---------- -------- --------------
NET INCREASE IN CASH 9,930 0 20,085
Cash at beginning year 10,155 10,155 0
---------- -------- --------------
Cash at end year $ 20,085 $ 10,155 $ 20,085
========== ======== ==============
Supplemental disclosures of cash flow information:
Cash paid for: Interest $ - $ - $ -
Income taxes $ - $ - $ 3,397
The accompanying notes are an integral part of these financial statements
F-57
READY CAPITAL CORP.
(A Development Stage Enterprise)
Note to Financial Statements
December 31, 2003
NOTE A - NATURE OF OPERATIONS
FORMATION AND OPERATIONS OF THE COMPANY -- The Company was incorporated under
the laws of the State of New New York, on February 23, 1988. The Company has not
commenced planned principal operations and is in the development stage. The
company has not paid any dividends and any dividends that may be paid in the
future will depend on the financial requirements of the Company and other
relevant factors. The Company intends to acquire interests in various business
opportunities with an emphasis on consumer-related services or products.
BASIS OF FINANCIAL STATEMENTS -- The accompanying financial statements have been
prepared on a going concern basis which contemplates the realization of assets
and satisfaction of liabilities and commitments in the normal course of
business. The Company is a development stage enterprise with insignificant
assets and no operating history. No assurance can be given that the Company will
be able to obtain adequate financing on acceptable terms or at all to fully
develop, put into operation and market products and / or services which will
generate profitability. Accordingly, there is substantial doubt as to the
Company's ability to continue as a going concern.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES -- In preparing financial statements in conformity with
accounting principles generally accepted in the United States of America,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
LOSS PER SHARE -- Statement of Financial Accounting Standards No.128 (SFAS No.
128), Earnings per Share, specifies the computation, presentation and disclosure
requirements for earnings per share for entities with publicly held common stock
or potential common stock. Net loss per common share - basic and diluted is
determined by dividing the net loss by the weighted average number of shares of
common stock outstanding. Net loss per common share - diluted would not include
potential common shares derived from stock options and warrants because they
would be antidilutive. There were no antidilutive securities excluded from the
dilutable loss per share calculation for the years ended December 31, 2003 and
2002, since warrants issued in connection with the public offering have expired.
NOTE C - PUBLIC OFFERING AND PRIVATE SALES OF COMMON STOCK
PUBLIC OFFERING -- In 1988, the Company sold 200,000 units to the public under a
self-underwriting program. A unit consisted of one share of common stock, $.001
par value, five "A" warrants to purchase five shares of common stock at $.75 per
share exercisable any time within three years of this offering, five "B"
warrants to purchase five shares of common stock at $1.00 per share exercisable
any time within three years of this offering, five "C" warrants to purchase five
shares of common stock at $1.50 per share exercisable any time within three
years of this offering and five "D" warrants to purchase five shares of common
stock at $2.00 per share exercisable any time within three years of this
offering. The warrants were detachable and transferable from the units
immediately after the Prospectus Date, and possessed no dividend, liquidation or
voting rights. As of December 31, 2003 all warrants have expired.
F-58
READY CAPITAL CORP.
(A Development Stage Enterprise)
Note to Financial Statements
December 31, 2003
PRIVATE SALES OF COMMON STOCK -- In 1988, the Company issued 600,000 shares of
its common stock to its founding shareholders for cash consideration,
aggregating $2,200 at a per share price of $.00367. In 2001 the Company issued
165,000 shares of its common stock to its founding shareholders for cash
consideration aggregating $15,150 at per share prices ranging from $.01 to $.15.
In December 2003 the Company issued 180,000 shares of its $.001 par value common
stock to seven (7) unrelated third parties for cash consideration aggregating
$36,000 at a per share price of $0.20, of which $20,000 was received in 2004.
These shares are restricted under Rule 144 of the Securities Act.
Of the 180,000 shares issued in December 2003, 50,000 were issued to a
consultant who will render (after the contemplated merger if the extended May 5,
2004 offering described below in Note H is successful) accounting and
operational services through a company affiliated with him. That offering
further provides that the fee for those services shall be $5,000 per month and
for the affiliated company to receive an additional 100,000 shares of Company
common stock, and warrants to purchase 50,000 shares of common stock at $3.00
per share. In addition, shareholders owning 90,000 shares of the Company's
issued common stock prior to the December 2003 issuance purchased 40,000 of
those shares.
NOTE D - COMMON STOCK ISSUED FOR SERVICES
In 2000, the Company issued 100,000 shares of its $.001 par value common for
stock to principal stockholders for services at per share prices ranging from
$.15 to $.63 per share, with an aggregate fair value of $20,000. In 2001, the
Company issued 500,000 shares of its $.001 par value common stock to principal
stockholders for services at a $.10 per share price, with an aggregate fair
value $50,000.
NOTE E - RELATED PARTY TRANSACTIONS
The Company presently uses office facilities of one of its officer/stockholders
at no cost.
During the fiscal year ended January 31, 1990 the Company made loans amounting
to $28,000 to certain former stockholders. These loans were not repaid, nor was
any interest paid. An additional loan of $700 was made during the fiscal year
ended January 31, 1992. These loans were considered uncollectible by management
and were written off during the year ended January 31, 1996.
NOTE F - INCOME TAXES
Since inception, the Company has reported net operating losses. The Company has
unused net operating loss carryovers aggregating approximately $189,000 and
expiring from 2004 through 2023.
NOTE G - MERGER AND RECISION
On March 3, 1997, a merger was consummated between Ready Capital Corp. and
Colorstone International, Inc. in accordance with the terms of a Plan of Merger.
On March 3, 1997, Ready Capital Corp. acquired all of the 6,674,000 common
shares issued and outstanding in Colorstone International, Inc. through the Plan
of Merger. On August 17, 1998, the parties to the merger agreed to rescind the
transaction and restore the status quo ante prior to closing. Therefore, these
financial statements are prepared on the basis that the merger never occurred.
F-59
READY CAPITAL CORP.
(A Development Stage Enterprise)
Note to Financial Statements
December 31, 2003
NOTE H - SUBSEQUENT EVENTS
PRIVATE SALES OF COMMON STOCK:
In March and April 2004, the Company issued 35,000 shares of its $.001 par value
common stock to two unrelated third parties for cash consideration at a per
share price $0.20 aggregating $7,000. These shares are restricted under Rule 144
of the Securities Act.
COMMON STOCK ISSUED FOR SERVICES:
In March 2004, the Company issued 20,000 shares of its $.001 par value common
stock to the Secretary of the Company for services rendered . These shares are
restricted under Rule 144 of the Securities Act.
PRIVATE PLACEMENT AND PLANNED REVERSE MERGER:
On May 5, 2004, the Company commenced a private placement of common stock under
Regulation D of Securities Act. The offering consists of a minimum of 2,000,000
shares of the Company's $.001 par value common stock to a maximum of 4,000,000
shares of the Company's common stock at a per share price of $2, with aggregate
net proceeds from $3,630,000 to $7,310,000. Broker dealers assisting in selling
the shares shall be compensated with commissions of up to 8% of the proceeds,
plus one non-redeemable common stock purchase warrant exercisable for a period
of three years at $3 per share. As of June 22, 2004, the escrow agent for the
offering has received $1,785,000 representing the sale of 892,500 shares. The
shares were to be offered during the 45 day period that commenced May 5, 2004
and which has expired. However, the offering has been extended according to its
terms until the minimum offering is achieved.
On February 23, 2004, in connection with the offering, the Company entered into
a Share Exchange Agreement with IntelliPharmaCeutics Corp. ("IPC"), a privately
held Canadian entity, whereby they agreed to be merged upon completion of the
minimum offering. If the maximum offering is completed, IPC's shareholders will
own approximately 65% of the Company's common stock, all of the original Company
stockholders will own approximately 11%, and the investors in the offering will
own approximately 24%. IPC's primary business is the research, development,
licensing, and marketing of both new and generic controlled-release
pharmaceutical products.
The merger agreement provides for the issuance of options to purchase 5,000,000
shares of common stock at $2 per share. The options are to be issued to the
Chairman and President of IPC and provide for vesting in stages as follows:
500,000 exercisable at $2 upon acceptance by the FDA of a drug filing and
500,000 exercisable at $2 upon approval of such drug by the FDA. This vesting
will continue for up to five (5) drugs until all 5,000,000 options vest. The
agreement does not provide any time limit for these events. Additionally, the
Company shall authorize and ratify a qualified incentive stock option plan,
reserving 1,500,000 shares for issuance under the plan.
Pursuant to the offering, the Company has agreed to file a registration
statement with the Securities and Exchange Commission within 90 days of
completion of the offering and to include the shares issued in the offering as
well as the shares underlying the Warrants.
F-60
Back Page
Until 90 days from the Effective Date hereof, namely ________________________,
all dealers that effect transactions in these securities, whether or not
participating in this offering, may be required to deliver a prospectus. This is
in addition to the dealer's obligation to deliver a prospectus when acting as
underwriters, and with respect to their unsold allotments or subscriptions.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Delaware General Corporation Law ("DGCL") permits a Delaware
corporation to indemnify a present or former director or officer of the
corporation (and certain other persons serving at the request of the corporation
in related capacities) for liabilities, including legal expenses, arising by
reason of service in such capacity if such person shall have acted in good faith
and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, and in any criminal proceeding if such person had
no reasonable cause to believe his conduct was unlawful. However, in the case of
actions brought by or in the right of the corporation, no indemnification may be
made with respect to any matter as to which such director or officer shall have
been adjudged liable, except in certain limited circumstances. In addition, we
may enter into Indemnification Agreements with our directors and executive
officers in which we have agreed to indemnify such persons to the fullest extent
now or hereafter permitted by the DGCL, including in circumstances in which
indemnification and advancement of expenses are discretionary under the DGCL.
The indemnification provided by the DGCL is not exclusive of any other rights to
which a director or officer may be entitled. The general effect of the foregoing
provisions may be to reduce the circumstances in which an officer or director
may be required to bear the economic burden of the foregoing liabilities and
expense. We intend to obtain a liability insurance policy for its directors and
officers as permitted by the DGCL, which may extend to, among other things,
liability arising under the Securities Act of 1933, as amended.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth an itemization of all estimated expenses,
all of which we will pay, in connection with the issuance and distribution of
the securities being registered:
NATURE OF EXPENSE AMOUNT
----------------- -------
SEC Registration fee $ 5000 *
Transfer Agent Fees $ 0 *
Accounting fees and expenses $ 5,000 *
Legal fees and expenses $35,000 *
Printing fees and expenses $20,000 *
Total $65,000 *
* Estimated
II-1
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
In October 2003, we issued 180,000 shares of common stock to seven
individuals and entities pursuant to Section 4(2) of the Securities Act of 1933,
as amended.
In March and April 2004, we issued 35,000 shares of common stock to two
entities pursuant to Section 4(2) of the Securities Act of 1933, as amended.
In March 2004, we issued 20,000 shares of common stock to a former officer
for services rendered pursuant to Section 4(2) of the Securities Act of 1933, as
amended.
In September 2004, we issued 250,000 share of common stock to
employees/officers/entities for past services (see Note 6 to the Financial
statements).
In September, 2004, we issued 10,850,000 Special Voting Shares at $0.001
per share to IPC Inc. in relation to the merger of IPC Corp. with our wholly
owned Nova Scotia subsidiary.
In September and December 2004, and September 2005, we issued 3,189,000
shares of common stock at $2.00 per share to accredited investors pursuant to
and Rule 506 of Regulation D and Section 4(2) of the Securities Act of 1933, as
amended.
On October 26, 2005, we issued 75,000 shares of common stock at $2.00 per
share to Alan D. Wolfson pursuant to Regulation S of the Securities Act.
ITEM 27 INDEX OF EXHIBITS
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ------- ----------------------
Corporate
3(i)+ Articles of Incorporation
3(ii)+ By-Laws
Shareholders Rights
4(i)+ Registration Rights Agreement
4(ii)+ Share Exchange Agreement
4(iii)+ Exchange and Support Agreement
4(iv)+ Voting and Support Agreement
4(v)+ Convertible Voting Share Provisions
4(vi)+ Exchangeable Share Provisions
5+ Opinion re: Legality
Material Contracts
10(i)+ Stock Option Plan
10(ii)+ Employment; Dr. Isa Odidi, Chairman/CEO
10(iii)+ Employment; Dr. Amina Odidi, President/CFO/Director
10(iv)*+ Development Agreement, Larasan Pharmaceutical Corp.
10(v)*+ Development Agreement, Elite Laboratories Inc.
10(vi)+ Lease of Premises
Consents of Experts and Counsel
II-2
23(i)# Auditors' Consent
23(ii)+ Attorney's Consent (included as part of Exhibit 5)
24+ Power of Attorney (included in signature page)
* CONFIDENTIAL TREATMENT REQUESTED. CONFIDENTIAL MATERIAL HAS BEEN REDACTED
AND HAS BEEN SEPARATELY FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.
+ Previously filed.
# Consent of Kahn Boyd Levychin LLP previously filed.
ITEM 28. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) To file a post-effective amendment to this Registration Statement during
any period in which offers or sales are being made:
(a) to include any Prospectus required by Section 10(a)(3) of the
Securities Act;
(b) to reflect in the Prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually, or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more than
a 20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective Registration
Statement; and
(c) to include any additional or changed material information on the plan
of distribution.
(2) That, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new
Registration Statement relating to the securities offered therein, and this
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) That, insofar as indemnification for liabilities arising from the
Securities Act may be permitted to directors, officers, and controlling
persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Commission such indemnification is against public policy as expressed in
the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment
by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification
II-3
by it is against public policy as expressed in the Securities Act and will
be governed by the final adjudication of such issue.
(4) That, for purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
Rule 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
II-4
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as
amended, the registrant certifies that it has reasonable grounds to believe that
it meets all of the requirements of filing on Form SB-2/A and authorized this
registration statement to be signed on its behalf by the undersigned in the city
of Toronto, province of Ontario, Canada, on April 27, 2006.
INTELLIPHARMACEUTICS LTD.
/s/ Dr. Isa Odidi
----------------------------------------
By: Dr. Isa Odidi, Chief Executive
Officer
*
----------------------------------------
By: Dr. Amina Odidi, Chief Financial
Officer and Director
*
----------------------------------------
By: John N. Allport, Director
/s/ Dr. Isa Odidi
----------------------------------------
By: Dr. Isa Odidi as Attorney-in-fact
* Attorney-in-fact pursuant to Power of Attorney previously provided as part
of the Registration Statement.
II-5